Pandemic makes CRA reform more urgent, not less

The proposal to modernize the Community Reinvestment Act would help low- and moderate-income neighborhoods in New York and our other major cities recover from the coronavirus pandemic.

Unfortunately, the proposal was misunderstood as doing the opposite by a New York congressman, the Consumer Bankers Association and other trade groups and community leaders in the roughly 2,000 comments recently submitted as part of the rulemaking process.

Everyone agreed that the 1977 CRA should be modernized to account for digital banking. The proposed reforms adopted an innovative solution requiring branchless banks to reinvest some of their billions of internet deposits back into the big cities sourcing them, rather than benefiting their credit card friendly “hot spot” home-office cities in Delaware, South Dakota and Utah.

Critics of the proposal wrongly assume the reinvested internet deposits will benefit the affluent people sourcing them in New York and other big cities. The reform, however, would require some of the internet deposits coming from the affluent people and neighborhoods of New York to be reinvested back into community development loans, investments and services benefiting low- and moderate-income (LMI) people and neighborhoods there.

Consider it a CRA “Robin Hood” proposal, where the CRA benefits of deposits from the rich are being used to help the poor. This proposal is consistent with CRA’s intent and, in fact, its middle name of "reinvestment."

With this in mind, consider how those internet deposits would benefit the most distressed communities and people in New York, including first responders, hospital workers and other front-line heroes in this pandemic.

Furthermore, under this flexible proposal, those same branchless banks, once they have met their LMI reinvestment obligations in New York, have the option of providing CRA benefits to other distressed communities, rural areas and Indian country.

The proposal, however, would expand the original CRA modernization mission, which was remedied with this reinvestment rule, to a total overhaul of the law. That is why most community groups and banks criticized the proposal for not only being unnecessarily complex and costly, but also failing to account for banks of different types and sizes.

It’s also a reason that the Federal Reserve did not join the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. in their joint notice of proposed rulemaking.

The current regulation already allows for six different CRA exam procedures for the nation’s more than 5,000 banks. There is a four-ratio streamlined lending test for thousands of small banks; a dual-lending and community-development test for intermediate-sized banks; and separate lending, investment and service tests for hundreds of large banks.

The current CRA requirements also have a straightforward community-development test for limited-purpose and wholesale banks of any size, in addition to an effectively self-regulating “strategic plan” option for any size or type of bank.

The proposal would keep the latter option but eliminate intermediate, limited-purpose and wholesale bank exams. The small bank definition would increase by asset size, and the remaining large banks would be subject to the new formulaic approach.

The Independent Community Bankers of America asked regulators to increase the “small bank” definition from the current $326 million to $5 billion, which is 10 times higher than the $500 million ceiling regulators proposed.

While their proposal would exempt about 600 banks, the ICBA proposal would exempt roughly 1,200 more intermediate and large banks. These exempt banks would no longer be required to provide upward of $50 billion of annual CRA benefits to their local communities, based on past estimates of CRA benefits.

As a CRA bank consultant and having helped work on the 1995 reforms with the OCC, there is a better option called the “75% solution” to CRA reform that should satisfy community groups, the industry and even the regulators.

It provides 75% of all the benefits envisioned by the proposal without incurring any new regulatory burden on 99% of banks, which would continue under the six existing exam procedures. The only banks subject to the proposal would be the 1% of “very large banks,” namely 43 banks with $50 billion or more of assets, plus branchless banks subject to the proposed reinvestment rule. Those two groups, representing 75% of bank assets, would have the resources to comply with the new requirements.

The costs and benefits of such a proposal on those very large banks will be evaluated after three years — roughly one examination cycle — to determine the feasibility of applying it to other banks, or reverting to the existing requirements.

Community groups under this proposed concept would continue to benefit from the CRA efforts of the 99% of other banks in their local communities, and should not be concerned with the additional regulatory burden on the too-big-to-fail banks.

In addition, most examiners will not need retraining, since the largest banks already have separate exam teams. The Fed should be willing to accept this compromise, since it is the primary regulator for only 10 of the 43 impacted banks, and just four would have retail operations impacted by the new requirements.

The banking industry should likewise be supportive of this proposal, since 99% of banks continue the status quo, which has a 98% pass rate and a relatively low regulatory burden, ranking just sixth in compliance costs. Also, there would be no disruption to their community development efforts, as there would be under the current regulatory proposal.

Most significantly, with the CRA reform debate off the table, community groups, regulators and especially banks would be able to focus on the critical task of helping communities recover from the coronavirus pandemic, which must remain a top priority.