The fight over CRA reform just got more complicated

Buried in the bipartisan vituperation, insults, accusations and inaccuracies during last week’s House Financial Services hearing with Comptroller of the Currency Joseph Otting was a stunning announcement.

It was widely overlooked and bears repeating: Otting said that the Community Reinvestment Act requires banks to lend to anyone in their community who wants money and seems to be able to pay it back. Guidance may follow instructing banks that they cannot deny loans to gun stores, fossil-fuel entities, or presumably even a white-supremacy group seeking a new headquarters if evidence suggests that whoever is under the robes can meet the mortgage.

We shall see if the OCC acts on Otting’s comments. These may well have been sparked by the attacks he took from Democrats, many of whom appear convinced that the recent CRA proposal is an intentional evisceration of what has long been considered the meaning of community reinvestment: a mandate that banks lend to low- and moderate-income households and the communities in which deposits are gathered.

While there is much to debate in the joint proposal from the OCC and Federal Deposit Insurance Corp., it isn’t all that far from much also in the Federal Reserve’s counteroffer. What divides the two sides and their allies on the Hill seems far less substance than cynicism that anyone “on the other side” could share a common goal when it’s reached by another route.

But, so much for bemoaning the polarized nature of American politics. It is what it is and on full display in the unalterable divide between those who think reinvestment means poor people, and those who think it means gun stores.

Several recent commentators have argued that the plain letter of the CRA requires banks to lend to firearms purveyors, fossil-fuel providers and anyone who should be able to pay his or her obligations.

Senate legislation doesn’t cite CRA as its rationale, but it too would mandate that banks lend to anyone who passes credit-underwriting muster no matter the social opprobrium in which a banker, or his or her community, may hold the borrower. Calls have also gone out for an executive order from President Trump requiring that banks honor all comers who can come up with a repayment.

Although the view that CRA requires lending is novel, the political animus behind demands for it is not. It is the natural evolution of cases going back to Operation Choke Point under the Obama administration and the fervor of many, including global regulators, for green finance. Last week, I raised the risk of proposals for a “brown-penalizing factor.” Now, they are upon us.

Looking forward, if the OCC really goes through with guidance stipulating that national banks must lend to anyone who wants a loan that can be repaid, the onus will be on the FDIC and Fed to match this demand or refute it.

Any agency worth its political salt will rue efforts such as this to call them out, and I would expect the other banking agencies to hide in plain sight for as long as Congress or the White House allows them to do so.

That, though, might not be all that long — this is an ugly election, one that increasingly makes the accusations about CRA seem like a fuss over little more than a bit of spilled milk.

If the administration’s base continues to press for its version of CRA, then the White House may either give them their order — Trump will lambaste a few Wall Street banks just for fun — or a really meaningful grassroots campaign will grow to give banks a new CRA mandate: no more butter, just lots of guns.

Editor's note: This article originally appeared, in slightly different form, in an email to Federal Financial Analytics’ clients.