CRA Reform: What Retail Bankers Must Know Now

How regulators evaluate banks for Community Reinvestment Act compliance would change significantly under a major proposal. However, in some cases a strong emphasis on branches will continue, in spite of banking digitization.

In 1995, Bill Clinton was President, O.J. Simpson was acquitted of murder, and the first consumer-oriented computer operating system, Windows 95, was released by Microsoft. That year was also the last time the Community Reinvestment Act was substantively updated.

CRA enacted in 1977 to combat redlining and a lack of investment in communities. It requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business, including low- and moderate-income (LMI) neighborhoods.

The financial services industry has changed dramatically in the past three decades, leading to the increasingly online and mobile banking landscape we know today. However, the original CRA uses bank branch footprints as its central metrics, even though many Americans haven’t set foot in one in years. CRA is also fraught with challenges in determining not only what activities qualify for CRA recognition in exams, but also how much they should receive. This lack of clarity has hamstrung bankers and examiners as they try to implement and oversee the act and its implementing regulations.

For these reasons, regulators are proposing an interagency revamp of CRA. The joint Community Reinvestment Act proposal by the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and FDIC is open for comments at least through Aug. 5. The revamp is much needed and promising. However, if enacted it will demand that banks make significant changes to their CRA programs. Credit unions and nonbank providers of financial services are not subject to CRA.

Shape of Things to Come:

Large banks would essentially be trading the burden of significant data collection and reporting for more transparency and predictability in their CRA performance reviews.

Banks, especially those with over $10 billion in assets, should not pass on the chance to comment, as this proposal represents a significant change that they will have to live with, potentially for decades.

Financial Inclusion for Credit and Deposit Products

This proposal is much more explicitly focused on financial inclusion than the current rules. It aims to achieve this goal in two key ways:

  • First, through new requirements in terms of access to and responsiveness of both credit and deposit products/services, to make sure they meet the needs of LMI communities and small businesses.
  • Second, through the expansion of the community development definition that includes new criteria specifically aimed at serving the most underserved.

For example, the proposed new Retail Services and Products Test, which measures financial services usage by vulnerable populations, would include criteria for banks’ delivery systems and responsiveness. For consumers who still prefer getting their financial services and/or products in person, banks will have to adhere to quantitative benchmarks in terms of branch availability. The proposal will also provide more favorable consideration for branches in areas designated as low or very low in terms of branch access. For consumers who prefer getting financial services and/or products remotely, there will also be established benchmarks in terms of availability and responsiveness.

The proposal would also create a new Retail Lending Test, which refers to a bank’s record of helping meet the credit needs of all consumers, including LMI communities, and underscores the new focus on financial inclusion.

The proposal suggests using two sets of metrics: one that benchmarks the bank against peers and another that evaluates the way lending is distributed among borrowers and geographies, based on local and market data. In order to develop all of the new benchmarks and metrics envisioned in the proposal, a new data collection system with reporting and disclosure requirements would be implemented.

My read of the proposal is that the agencies are asking for analog data reporting in a digital environment. I’d suggest that banks take a close look and offer comments about how this might work better with the new technologies that exist today.

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Proposed CRA Rules Would Enhance Community Development Criteria

The proposed community development sections would change things significantly, with lending and investing being combined into a new Community Development Financing Test and creating a new standalone Community Development Services Test.

However, the most significant changes to the community development section are an expanded definition of “primary purpose” for community development that will increase the number of projects that qualify as serving that purpose.

Under the current CRA regulations, primary purpose community development includes programs for affordable housing, economic development, community support services and revitalization and stabilization activities.

Under the new proposal, it would also include such items as disaster preparedness and climate resilience activities; financial literacy programs; activities with community development financial institutions, minority- and women-owned financial institutions; and in Native Land Areas.

And, once qualified as a community development activity, each initiative would be further reviewed to determine its impact, with criteria that evaluates whether the programs are actually reaching the most underserved.

Proposed CRA Could Mean Less Guesswork:

The proposed revamp of community development activity is designed to bring more clarity to what qualifies and how much weight qualified activities will carry in the overall evaluation.

Banks should review this section closely to determine if the proposed changes address historical pain points.

CRA Rules Rewrite Comes at a Watershed Moment

CRA has been modestly effective, at best, in the almost half century since it was enacted. At the same time, broader social and economic inequities in our country have worsened. While this new proposal will not be a silver bullet to address all of these inequities, CRA was never intended to do that on its own. On the whole, the thrust of the proposed revisions seem like a step in the right direction that has the potential to result in more impactful investment and more financial services offerings in communities most in need, provided that bankers approach it from the spirit and intent of the rule and don’t look for what is that bare minimum needed to “pass” a CRA exam.

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