The CRA Debate Heats Up as Fed Gently Throws Shade at OCC/FDIC Proposal
The battle over Consumer Reinvestment Act (CRA) modernization is heating up as the Federal Reserve shared its plans for CRA reform and the House Financial Services Committee held a hearing assessing the potential winners and losers the OCC/FDIC CRA modernization proposal.
Spoiler alert: The OCC/FDIC plan was subject to a lot of criticism.
How the Fed Would Modernize CRA – aka CRA “Done Right”
The Fed sent out feelers for its CRA modernization plans last week with a speech by Fed Governor Lael Brainard at the Urban Institute. The Fed’s proposal would include two tests:
- A retail test. This would assess a bank's record of providing retail loans and retail banking services in its assessment areas. Lending would be measured in numbers of loan made instead of overall dollar amount.
- A community development test. Larger bank’s record of community development lending, qualified investments and services would be evaluated.
Brainard argued two tests were necessary to ensure lending expectations for underserved communities wouldn’t be met “primarily through a few large community development loans or investments rather than meeting local needs,” a subtle jab at the FDIC/OCC plan.
Brainard went on to say CRA services can’t always be accurately measured by their monetary value, a jab at the OCC/FDIC proposal. As a result, the Fed’s retail test would assess number of loans in each product line.
“We concluded that the value of retail services and community development services to a local community do not lend themselves easily to a monetary value metric comparable to the monetary value of loans and investments,” Brainard said. “The value of these services may vary greatly from community to community. It is difficult to monetize this value in a consistent way relative to the value of lending and investment, thus introducing the risk of skewing incentives inadvertently.”
Thresholds and metrics would be tailored to the local community and adjust with the local business cycle, otherwise there may be “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."
Other Fed Highlights
Staying true to its brand, Brainard emphasized the Fed is looking at CRA in a measured, deliberate way and taking its time. Among its key points:
Slow and steady wins the race. Noting how CRA is addressed only once every few decades, Brainard said, “It is much more important to get reform right than to do it quickly.”
Metrics that make sense. The Fed is all about data analysis, creating a database of 6,000 public CRA evaluations at 3,700 banks going back to 2005.
Sufficient time for comments. Brainard said the Fed wants to give “external stakeholders sufficient time and analysis to provide meaningful feedback,” likely a criticism of the unusually short 60-day comment period of the OCC/FDIC.
Can This Joint Proposal Be Saved?
Brainard reiterated that “a strong common set of interagency standards is the best outcome” and that the Fed is hoping that sharing its research and metrics will ultimately lead to interagency agreement on the best way forward.
So far the OCC has stayed mum on the Fed’s proposal while an FDIC statement said the agency "appreciates the contributions of the Federal Reserve throughout the extensive discussions that were incorporated heavily in the recently released proposal. We look forward to continuing those conversations as the process continues."
OCC’s Otting Defends CRA Plan Before House Financial Services Committee
The Fed isn’t the only one questioning the OCC/Fed plan. While the industry has largely supported the OCC/FDIC CRA modernization plan, the House Financial Services Committee Subcommittee on Consumer Protection and Financial Institutions held a hearing on the proposal on Tuesday.
Entitled, “The Community Reinvestment Act: Reviewing Who Wins and Who Loses with Comptroller Otting’s Proposal,” the hearing welcomes witnesses from five community and consumer advocacy groups, four of which argued that minority communities would lose under the proposals while large banks would win.
Critics, including those of the National Community Reinvestment Council and UnidosUS, expressed concern about the 60-day comment period, the proposal’s reliance on a single metric, limited data analysis, and “arbitrary” benchmarks. Others thought it would diminish the importance of branch banking and LMI branches and that expanding the list of credit-receiving activities will help banks but not the communities they serve. Many said they wanted to see the OCC, FDIC, and Fed work together.
Our Takeaway: It’s not known yet if the Fed is going to officially release its CRA plan or if/how the idea shared in Brainard’s speech could ultimately influence the OCC/FDIC proposal.
It seems likely that banks supervised by the Fed (which is responsible for about 15 percent of regulatory activity) will continue operating under current CRA requirements for some time to come. These banks should continue to analyze their CRA activities and ensure they remain compliant with the current rules.