There appears to be broad consensus that the Community Reinvestment Act could use what the Treasury Department refers to as “modernization.” The big question is whether such future-proofing proves to be just a politically palatable way of embracing the tilt toward deregulation.
The CRA, enacted by Congress in 1977, was created 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 that time, 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. The recommendations were issued to the primary CRA regulators, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation.
“Forty years since the passage of CRA, it is time for modernization to fit today’s banking landscape and community needs,” said Treasury Secretary Steven Mnuchin. “Our recommendations will improve the effectiveness of CRA by enhancing the assessment and examination process, enhancing the ability of banks to deliver services in the communities they serve while considering technological advances in the financial industry.”
Treasury’s recommendations include:
Updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors.
Increasing clarity and flexibility of CRA examinations to increase transparency and effectiveness of CRA rating determinations.
Improving the examination process to increase timeliness of evaluations and increasing accountability for banks’ planning of their CRA activity.
Incorporating performance incentives to better serve the CRA’s intended purpose of encouraging banks to meet the credit and deposit needs of their communities.
Treasury’s recommendations “will incentivize bankers to do more for low- and moderate-income communities, especially in cases where the bank has underperformed in prior assessment periods,” the accompanying report says. “The U.S. banking industry has experienced substantial organizational and technological changes; however, the regulatory and performance expectations under CRA have not kept pace. Interstate banking, mortgage securitization, and internet and mobile banking are just a few of the major changes that have come about in the past four decades. In this evolving banking environment, changes should be made to the administration of CRA in order for it to achieve its intended purpose.”
In a June 2017 report to the White House, the Treasury Department said it was committed to “comprehensively assess how the CRA could be improved” through solicitation of input from stakeholders, including banks, regulators, and consumer and community advocates. That review, the basis of the new recommendations, included:
How banks’ CRA activity is measured.
Harmonization of CRA supervision (given the oversight by multiple regulators).
Distribution of CRA geographic assessment areas.
The regulatory review and examination process.
“All the regulators have been very open about wanting to reexplore the CRA,” says Doug Landy, a leading financial services regulation attorney at the law firm Milbank. “But it is a tricky rule in the sense that, to really change it, one would need Congress to say something like, ‘OK, let’s expand it to all credit providers, like insurance companies and asset managers because it is too narrowly focused on banks.’ That seems unlikely.”
Landy, however, thinks that aside from a radical overhaul there is still “a lot that could be done, because the CRA is notoriously difficult to comply with.”
“There are a lot of ways to make it clearer,” he says. “As time goes on, there will be types of financial products that act as loans but are not traditional loans and it is always unclear whether those count for credits under CRA.”
One example of how the evolution of banking services could affect the CRA is the rise of FinTech firms, especially as the OCC weighs granting some of those firm’s bank charters. Where CRA compliance demands would fit within those charters and their compliance obligations is unclear.
The proposed changes to the CRA would make it easier to get a solid rating and in turn, make life easier for banks, providing more certainty of examination criteria and examination cycles, says Craig Miller, a partner at law firm Manatt, Phelps, & Phillips.
In his assessment, changes in the law should include an approach that would allow banks to address needs that overlap with their entire customer base.
A framework for reform should also consider several key elements, including expansion of the types of loans, investments, and services eligible for CRA credit; establishment of clearer standards for eligibility for CRA credit; and simplified record-keeping procedures, designed to make eligibility updates more regular and timely.
“The CRA has been a source of angst for a lot of banks for a long time,” Miller says. “Banks don’t feel like they necessarily have as much direction from regulators as they would like and there is not necessarily the consistency they would like.”
“I think all the regulators will eventually come bring consistency across their regulated entities, so that banks feel they are getting good, sound advice and consistent treatment,” he adds. “CRA is one of those issues where there is a lot of common ground, so I think they should be able to come together in a cohesive fashion. We are all trying to address the same issues. It doesn’t matter if you are a state bank or a national bank, the CRA implementation should be consistent.”
Failing a uniform approach by regulators, there could be discussions along the lines of, “I’m going to convert my charter because the OCC is more favorable than the FDIC.”
“The FDIC doesn’t want that and I don’t think the OCC necessarily wants that either,” Miller says.
Why is the Treasury Department choosing CRA reform now? In part, it may indeed tie in to the deregulatory zeal sweeping Washington. “No question, I think the general move to de-regulation is an important impetus,” Miller says. “It is a combination of deregulation plus regulators really hearing banks on this issue, being responsive, and finally pushing the needle forward on CRA issues. Regulators may feel they can be more accommodating and address the needs of CRA. Banks feel that they are in a better position to address those lending needs if they are provided with regulations they can really understand and be responsive to.”
Beyond streamlining regulatory burden, there are also areas in which the rule may truly need modernization.
“I don’t think the law has caught up to the way that banks are currently lending because it doesn’t really take into account the advent of technology and the fact that customers may not be contiguous to a bank’s branches. Branches have become less en vogue for many banks,” Miller says. “There needs to be another look at what banks are doing to meet the needs of their communities, and defining what those communities actually are. You have banks that are operating almost exclusively on a mobile basis and their customers may be far and wide from what their traditional branch network may be.”
“The most important thing is for the legislation to catch up with the modern methods of banking and really looking at the way that financial services are now delivered,” Miller adds. “Another important thing is for there to be clear communication with banks about how to meet their CRA obligations. You don’t want any sense of mystery. There is a lot of squishiness with CRA. [Enforcement and ratings] may depend on who your reviewer is and who your examiner is. There is a lot of flexibility.”
“Flexibility can be great in some ways but it can also make things very cloudy for banks in terms of how they know whether they are meeting their CRA obligations,” he says, adding that the rule is especially important “because a negative CRA rating can restrict and complicate a bank’s expansion plans.”