CRA modernization: A once-in-a-generation opportunity
For the first time in over 20 years, the Community Reinvestment Act (CRA) is being changed and the result will have a major impact on every community in America. If done right, banks will be better incented to make critical investments in communities that have long been underserved. Unfortunately, that is not happening.
The Trump administration is ignoring two years of its own consultations and recommendations, and instead opting to gut this historic and effective law. It doesn’t have to be this way.
CRA modernization is easily the most impactful regulatory action we are likely to see this year. It’s a once-in-a-generation opportunity. There is broad bipartisan support for responsible modernization, including the nation’s largest banks and most progressive community advocates. Despite this agreement, the Office of the Comptroller of the Currency (OCC), the regulator responsible for enforcing CRA among most of the largest banks, is pushing through an entirely new system that will cripple CRA’s effectiveness for years.
Ironically, this approach will hurt banks as well as the communities they serve. Without broad support across the political spectrum, it’s just another swing of the regulatory pendulum that will cost banks hundreds of millions as they retool compliance systems, and hundreds of millions more when the pendulum swings back and they readjust again. Worse, however, it will undercut efforts to help millions of low- and moderate-income people in the communities that need CRA the most.
The worst aspect of the proposal is the creation of a single ratio to assess bank performance, which will dominate the examination process. Using the ratio-driven approach, banks will be incented to do only the largest investments in communities that need it the least.
It’s worth mentioning no one outside of the OCC advocated for this approach, including Treasury Secretary Steven Mnuchin. His memorandum to regulators in April 2018 received positive feedback from across the political spectrum. The OCC’s final product has received nearly universal condemnation.
To ensure the ratio approach is most harmful, OCC has made infrastructure projects and sports stadiums eligible for CRA credit. Every major city in America has seen its neighborhoods divided by federally-funded highway dollars, many targeting areas that housed the homes and businesses of people of color. Are we really going to go back there?
Notably, the Federal Reserve Board, one of the other CRA regulators, refused to sign on to the OCC approach. As Fed Governor Lael Brainard explained, “a uniform ratio that does not adjust with the local business cycle could provide too little incentive to make good loans during an expansion and incentives to make unsound loans during a downturn, which could be inconsistent with the safe and sound practices mandated by the CRA statute.” She recognized that “industry commenters also expressed concern that discretionary adjustments to the uniform metric are likely to lag behind the economic cycle and undermine the certainty a metric purports to provide.”
To mitigate this risk, the OCC approach dramatically reduces the threshold necessary to meet the test. Although the FDIC went along with the OCC, FDIC Board member Martin Gruenberg in his opposition stressed that a bank could gain an outstanding or satisfactory rating by serving little more than half of its assessment areas at that level. Further, the data necessary to calculate the ratios has limitations, as the Notice of Proposed Rulemaking (NPR) itself acknowledges.
Gruenberg has expressed concern that approving an approach that is dependent on future improvements in data collection and analysis is irresponsible. Like Governor Brainard, he has also expressed concern that banks would be incented to “focus their stronger community reinvestment-qualifying efforts on as few as half of their assessment areas while minimizing their efforts elsewhere.”
CRA was enacted in 1977 as it became clear that simply making discrimination illegal through the Fair Housing Act of 1968 was not sufficient to reverse the legacy of discrimination that permeated housing and community investment. CRA was meant to be an incentive for banks to reinvest in the communities where they were headquartered and had branches. Over the past 40 years, CRA has become an important tool to encourage bank lending, investment and services in underserved communities.
If you build affordable housing, banks get CRA credit for investing or lending to support it. If your community is underserved and a bank opens a branch, or makes mortgage loans, or supports community groups, they also get CRA credit. All of that activity supports a bank’s effort to get an “Outstanding,” or at least a “Satisfactory,” CRA rating from their regulator. If they don’t, it is harder for the bank to open or close branches, or merge with other institutions. There are also reputational costs and benefits associated with CRA.
The best banks are committed to this work, regardless of CRA. But they also compensate their employees on a risk-weighted return on capital to ensure they make safe, sound and successful investments, which is in all of our interest. CRA adds a community-friendly thumb on the scale in the competition over capital allocation that exists at every bank. Water down CRA and you dilute the impact that CRA has in empowering banks to focus on the harder and smaller, but still profitable, deals that often have disproportionately positive impact on communities.
That’s why in over 90 meetings that the Treasury Department held with CRA stakeholders in 2017, not a single stakeholder, including dozens of banks and financial industry advocates, argued for the elimination of CRA. I know because as a Treasury Department senior advisor, I participated in over 80 of them. These stakeholders told us they wanted CRA regulation to be more transparent and predictable, while retaining flexibility so they had clarity around what investments get CRA credit. They did not tell us they wanted CRA to be watered down or made less impactful with the ratio-driven approach that is the core of the new NPR.
To provide comprehensive, detailed, and useful comments on the proposal, the National Housing Conference has convened dozens of our members, including some of the nation’s largest banks, nonprofit housing developers and community and civil rights advocates. Our work will be done under a very tight timeline, as the OCC and FDIC have only allowed for a 60-day comment period, which ends on March 9, 2020. Our intention is to provide constructive and specific recommendations on how CRA modernization can be successful, either for the current administration or future ones, should efforts to make the OCC’s approach acceptable fail. Every community and municipal government should also take part in this comment process.
CRA modernization is overdue and needs to be done so banks and communities get the clarity and flexibility they need to ensure they have maximum positive impact. But no modernization effort is worth gutting the central purpose of CRA – constructive reinvestment in the communities that need it most, where most of us live and work.
David M. Dworkin is president and CEO of the National Housing Conference.