More than 40 years ago, Congress passed the Community Reinvestment Act with the goal of encouraging banks to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, without compromising safety and soundness. While I may question whether the law has always worked as intended since its passage in 1977, I do not question its goal. Every American deserves to have access to the financial products they want and need.
Unfortunately, outdated rules, a lack of transparency and inconsistent examinations are preventing the Community Reinvestment Act from fully meeting that mission today. Instead, its regulations are holding back investment in the very communities the law is intended to serve, while imposing unnecessary compliance burdens on banks.
So why does the Community Reinvestment Act need an update? The rules surrounding it simply have not kept up with the times. Currently, it requires regulators to periodically review how each depository institution helps meet the credit needs of its entire community. In particular, a bank is evaluated based on the loans, services, and investments that it provides within its “assessment area.” This is generally the area where a bank is headquartered and has branches and automated teller machines.
This sounds like a reasonable test until you start to factor in how technology has changed banking. In our digital era, regulations are not accurately measuring banking activity. Mobile and online banking are rapidly becoming the primary channels for day to day transactions, and some institutions have no physical branch network. Surveys consistently show Americans of all income levels like the convenience of these platforms. The Community Reinvestment Act needs to reflect this new reality and encourage banks to invest in even more innovation.
More broadly, the criteria for earning credit under the Community Reinvestment Act needs to be expanded and made more transparent. Over time, the application of this law, which requires banks to file extensive documentation that may not be available, has become so rigid that many banks find themselves unable to get credit for projects that clearly meet the original spirit of the Community Reinvestment Act.
We agree that banks should serve the financial services needs of all demographics within their communities and should be intentional about doing so. Banks too often do not receive credit under the law for loans and investments critical to the viability and vitality of communities because these projects do not meet the rigid requirements of being “targeted” to low and moderate income populations. These projects include water extension, public transportation, workforce development, and hospital construction. This narrow thinking is detrimental to areas that need access to better services, infrastructure, and transportation.
Banks around the country have a long list of specific examples that defy logic. One bank made loans to a company providing public transportation in a small city. The bank gave regulators maps of the bus routes showing that the company provided transportation services to low and moderate income areas and shopping centers serving those populations. The company also provided a ride program for seniors who are unable to afford transportation to medical appointments. That documentation was still not sufficient for examiners to give the bank credit under the law because the lender could not provide income data on all bus riders.
Another bank provided credit to a business that was going to create an estimated 40 jobs for low to moderate income earners in the area. While the project was located in a middle income census tract, it was bordered on both sides by affordable housing complexes and was located in close proximity to the only low to moderate income area nearby. The bank provided regulators with additional documentation describing the potential benefits of the project to low to moderate income earners.
Even though the project clearly met the spirit of the Community Reinvestment Act, examiners disqualified the loan based on technical requirements. Yet another banker described a project to build a sewer line in a rural area that had many low to moderate income residents. But because the project was not “targeted” to these residents, even though it benefited them along with their neighbors, it would not count for purposes under the law. This just does not make any sense.
All of this uncertainty hurts more than just banks. Because banks have limited capital to deploy, it means that some worthwhile projects that benefit entire communities, including low to moderate income residents, go underfunded, while others that do qualify can trigger bidding wars between banks simply trying to satisfy their legal obligations. That cannot be what lawmakers intended back in 1977. Instead, regulators should update and clarify Community Reinvestment Act criteria to open the door to more investment that benefits low to moderate income populations.
As the modernization effort moves forward, I urge banks and community groups across the nation to consider how much common ground we share. We all want changes that will allow every American community to succeed. By standing together for Community Reinvestment Act reform, we can all make that happen sooner rather than later.
Rob Nichols is president and CEO of the American Bankers Association.