Ambitious plans are afoot to modernize the Community Reinvestment Act and requirements under the Bank Secrecy Act, both of which date back to the 1970s. That’s the word from Comptroller of the Currency Joseph Otting during testimony last week before the Senate Banking Committee and House Financial Services Committee.
The CRA was created by Congress to encourage banks to meet the credit and deposit needs of customers that they serve, including low- and moderate-income communities, while maintaining safe and sound operations. It was, in large part, intended as a response to concerns that financial institutions were “redlining” less affluent neighborhoods and zip codes.
Since its enactment in 1977, very little has changed. Banks are periodically assigned a CRA rating by one of their primary regulators based on their performance under the appropriate CRA tests or approved Strategic Plan. In April, the Treasury Department released recommendations to modernize the CRA to the laws’ primary regulators: the Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corporation.
While Otting would get the chance to outline his vision for what CRA changes could entail, he was dogged by critical questioning about whether his personal views should be a cause for concern. At the heart of the matter was his answers to a rather mundane query about lending discrimination by Rep. Michael Capuano (D-Mass.).
“I, personally, have never observed it, but many of my friends in the inner-city across America tell me they believe it. I have never personally observed it, but people tell me it exists and I trust those people,” Otting said.
When pushed, he added: “Yes, I have read about it … but my experience with writers is that they are right half the time.”
“Jeez, I don’t know how to even respond to that,” Capuano said, turning to ask Otting about matters of economic disparity, evidenced by a shrinking middle class and racial issues.
Otting told the congressman that he does believe economic disparities exist, but, “I do not believe we are seeing it now with employment and economic opportunities in America.”
“You do not believe that the rich are getting richer and the poor are getting poorer” Capuano shot back.
“I don’t have those statistics in front of me,” Otting replied, promoting Capuano to declare: “I really think you need to get out a little bit more.”
That exchange proved to be a major distraction as Otting detailed his CRA reform wish list before the Senate Banking Committee.
“With your insensitivity, fundamentally why should the public trust you to overhaul the Community Reinvestment Act, a product of the civil rights movement, meant to address generations of segregation and exclusion if you don’t even seem certain that discrimination exists?” asked Sen. Sherrod Brown (D-Ohio).
Sen. Elizabeth Warren expressed similar concerns. In exchange for the benefits of a national banking charter, banks are expected to meet the credit needs of the communities in which they operate, she explained. It doesn’t always work that way.
“With your insensitivity, fundamentally why should the public trust you to overhaul the Community Reinvestment Act, a product of the civil rights movement, meant to address generations of segregation and exclusion if you don’t even seem certain that discrimination exists?”
Sen. Sherrod Brown (D-Ohio).
“Last year, JPMorgan Chase admitted that its African American and Hispanic borrowers systematically received mortgages with higher rates and fees than comparable white borrowers,” Warren said. “And, according to a new report, African Americans make up 47.7 percent of the population of Washington D.C., but they received only 2 percent of JPMorgan Chase’s mortgage loans in the city in 2015 and 2016. They were still rated ‘satisfactory’ or ‘outstanding’ in CRA evaluations. So, you get a satisfactory rating even if you are engaging in those behaviors.”
“The CRA needs to be a lot tougher than it is today. The standards need to be higher. The enforcement needs to be more rigorous,” Warren added.
For his part, Otting said that, as a banker for more than 30 years, he “saw firsthand the benefit of CRA activities and how they make communities more vibrant.”
“I want financial institutions to do more in the communities across America that need it,” he said during his House testimony. “I think, in some regards, we haven’t built the onramp for them to do that.”
“I want to expand the types of activities eligible for CRA consideration to include more small-business lending and community development activities and strengthen the CRA regulatory framework to benefit future generations,” he added.
Otting added that many have voiced frustration with some of the CRA regulatory framework’s current limitations. Most frequently heard, he said, are complaints that the current approach to evaluating CRA performance is too subjective and costly.
To begin the process of modernizing the CRA, Otting said the federal banking agencies are discussing the issuance of an Advanced Notice of Proposed Rulemaking to solicit comments from stakeholders on how best to modernize the CRA regulatory framework.
Otting’s suggestions include expanding the types of activities that qualify for CRA consideration.
“Over the years, opportunities for CRA consideration have focused heavily on single- and multi-family residential lending,” he said. “Residential lending is not the only activity that can have a meaningful impact in these communities. Communities also need more small business lending, student lending, economic development and, in some cases, additional opportunities for consumers to access credit including responsible, short-term, small-dollar consumer loans.”
Otting also plans to revisit the concept of assessment areas. “Limiting assessment areas to a bank’s branch-based footprint has become an impediment to investment and providing capital in areas of need that the bank may serve,” he said. “I have seen situations where projects have not received CRA consideration merely because they were on the wrong side of a street. We need to broaden our thinking to include all areas where institutions provide their services rather than only narrow geographies defined by branches and deposit-taking automated tellers.”
He also wants to see “a metrics-driven approach to evaluating CRA performance using clear thresholds.”
OCC ISSUES CRA EXAMINATION BULLETIN
On June 15, the Office of the comptroller of the Currency issued a new bulletin for the financial institutions it oversees, “Supervisory Policy and Processes for Community Reinvestment Act Performance Evaluations.”
“The Office of the Comptroller of the Currency is fully committed to an effort to modernize the Community Reinvestment Act,” it says. “While modernization efforts are proceeding, the OCC is issuing this bulletin to inform national banks, federal savings associations, and federal branches and agencies about clarifications to OCC supervisory policies and processes regarding how examiners evaluate and communicate bank performance under the CRA. The OCC has clarified and simplified these policies and processes to promote the consistency and effectiveness of CRA performance evaluations. These supervisory policies and processes apply to each bank CRA evaluation.”
The CRA supervisory policy addresses the following areas for all CRA evaluations. These policy clarifications, which are effective immediately, address:
implementation of full-scope and limited-scope reviews;
consideration of activities that promote economic development;
use of demographic, aggregate, and market share data;
evaluation of the borrower distribution of loans outside bank assessment areas (AA);
evaluation frequency and timing;
the CRA performance evaluation period; and
evaluation of home mortgage loans.
The CRA requires the OCC to assess each bank’s record of helping to meet the credit needs of its entire community, including low- and moderate-income (LMI) neighborhoods, consistent with safe and sound operations. The CRA also requires the OCC to consider a bank’s CRA performance when reviewing the bank’s applications for branches, relocations, conversions, acquisitions, assumptions, and mergers.
The full, detailed bulletin can be found on the OCC’s website.
“Clear thresholds would minimize subjectivity, encourage consistency, and promote transparency in contrast with today’s evaluations that may rate similar activities differently from bank to bank and make comparisons across institutions difficult and less meaningful,” Otting explained.
To simplify and expedite bank’s CRA Otting wants to “simplify the measurement method.”
“We are proposing a framework where you either take deposits, Tier 1 capital, or total assets, and then you take all the CRA activities that an institution is doing, and you just divide that,” Otting explained. “If you have $100 million in CRA activities, and a $1 billion balance sheet, that’s means you have 10 percent of activity committed and we can take either a small community bank or a large JPMorgan and be able to make a determination. I could do that in an hour. Instead we spend 120 days doing these CRA exams that are very complex, very subjective and, are relative, as opposed to absolute, in their ability to define what a company is doing in terms of CRA.”
Otting also offered a way to extend CRA benefits to more community members: ending legal restrictions on cooperation and facilitation with religious organizations. “My observation is that in the black and Latino communities most of the families go to those church organizations for their financial counseling,” he said.
Bank Secrecy Act
Otting also discussed ideas for streamlining Bank Secrecy Act and anti-money laundering requirements in his House and Senate testimony.
In May, the federal banking regulators met to discuss ideas on how to improve our approach to implementing BSA/AML laws and regulations. Among the recommendations were allowing regulators to schedule and scope BSA/AML examinations on a risk basis, while identifying ways to conduct associated examinations in a more efficient manner.
A major point of contention among banks is not only the time and cost needed to compile Cash Transaction Reports and Suspicious Activity Reports, even if those filings are rarely ever reviewed by regulators.
With a reporting threshold of $10,000, banks file roughly 9 million CTRs a year and 1 million SARs. “We produce a lot of paper, and I’m not sure we get to the point where we are catching the right people,” Otting said. “Often, businesses get caught restructuring at that lower dollar amount. About 20-25 percent of them are good American citizens with businesses trying to move money back into the system legally, but they get caught by that lower [transaction] level of CTRs.”
Otting pitched the idea that a risk-based approach could alleviate the compliance burden. Regulators are also considering changes to the threshold requiring mandatory reporting of SARs and currency transaction reports and simplifying reporting forms and requirements.
“With SARs today, we do not have a risk-based examination process. It is one-size-fits-all. If you have a management team that is highly rated, with a very strong compliance department, and a very safe customer base, we examine that entity the same as we do a bank with weak management, weak compliance, and a high-risk clientele.”
Rep. Stephen Lynch (D-Boston) cautioned, however, that regulators, notably the Treasury Department’s Financial Crimes Enforcement Network, may still benefit from having too much data, rather than not enough. “If you are looking for a needle in a haystack, you need the haystack,” he said.
Otting expressed hope that emerging technologies, like artificial intelligence and machine learning, may eventually streamline the BSA compliance burden and ensure its effectiveness.