The Federal Reserve Board Makes a Strong Statement on Bank Reinvestment

Federal Reserve Board Governor Lael Brainard made a bold statement about bank reinvestment with a speech this week that focused on specific, constructive ideas about how to modernize and strengthen the Community Reinvestment Act (CRA). The law, which is designed to incentivize banks to invest in low-income communities and people, has been the subject of a disjointed Washington “modernization” process. Governor Brainard’s speech is significant, not only because of the ideas it presented, but also because she offered a framework for all three federal regulators to act together on any reforms moving forward. 

The speech given at the National Community Reinvestment Coalition’s Annual Conference is the Fed’s first detailed public response to the proposals laid out by the Office of the Comptroller of the Currency (OCC) last year. The OCC regulates many of the largest banks in the country, including the ones that serve the most individual customers. The OCC has, unusually, been acting alone in their CRA modernization effort, without the other two federal regulators at the Federal Deposit Insurance Corporation and Federal Reserve Board. 

With its proposal, the OCC sought the first major overhaul of the CRA in 20 years. However, ANHD and our members were deeply concerned that the ideas laid out had the potential to significantly weaken the CRA. We were among the 1,500+ banks, community organizations, municipalities, and individuals that submitted comments to the OCC, the majority of which echoed these concerns. The Federal Reserve Board reviewed the comments and held over 25 outreach sessions with multiple stakeholders to solicit feedback on ways to improve the CRA.  Based on Governor Brainard’s comments, the Fed heard loud and clear that while the CRA is highly valued by bankers and community groups alike, it could be even more effective in mobilizing community and economic development.

The framework for reform presented by Governor Brainard offers a new and better starting point than the OCC. As Governor Brainard said, “It is important that we retain the CRA's core focus on place while improving upon the regulation's flexibility in order to provide meaningful CRA evaluations of banks that largely deliver their products and services digitally…If we can address these suggestions effectively, banks will be more effective in addressing the needs of their local communities and in some cases extend their activities to benefit chronically underserved communities.”

ANHD is in the process of reviewing the Governor’s proposals with our members and we are eager to engage with bank regulators to find the most effective solutions.

We offer a summary and preliminary analysis here:

Branches Are Important: The Fed recognizes the importance of physical branches for low-income communities, and that the CRA must maintain this as an emphasis. In fact, 45% of seniors, 38% of low-income households, and 41% of monolingual Spanish-speaking households use a teller as their primary method of access to banking. Technology should complement, not replace branches. The Governor emphasized that branches are still unique in their effectiveness in providing services to individuals and small businesses, and that they also provide a venue to engage with the community and better understand local community credit needs. ANHD agrees with this analysis and we encourage regulators to do all they can to promote maintaining and increasing branches in under-served communities, along with bank products that are affordable and accessible.

Updated Assessment Areas: Updating assessment areas is one of the trickiest areas to deal with in CRA modernization, especially given the rise in online banks and traditional banks conducting more business online and through other channels outside of their branch networks. Meanwhile, so called “CRA hot spots” and “CRA deserts” persist, resulting in different levels of CRA obligations. 

• The Fed is proposing a dual assessment area system for large banks: (1) use the current assessment area system based on branches and ATMs to evaluate a bank’s delivery of retail lending and services; and (2) designate a broader, more expansive area to evaluate a bank’s community development activities, in order to drive dollars to smaller metropolitan and rural underserved areas.  
• The proposal would allow credit for investments in CDFIs, regardless of their location.

ANHD appreciates the thought that went into this proposal and is still evaluating the potential impact.While there are so-called “CRA hot spots,” the need in some of those areas is still great. In New York City, for example, more than half of neighborhoods in the Bronx alone are high or extreme poverty areas. And the private investment leveraged throughout the City by the CRA is critical to the construction and preservation of affordable housing in high-cost cities like New York City, where nearly half of all families are rent-burdened, and half of those are severely rent burdened, paying over 50% of their income on rent. Thus, however assessment areas get redefined, it must increase – not reduce – the size of the pie so as to maintain or increase quality reinvestment where it is needed in high-need CRA hot spots.

Comprehensive Community Development Test: Rather than evaluating separately community development lending under the lending test and CRA-qualified investments and grants under the investment test, the Fed is proposing to:

• create one community development test that evaluates loans and investments together; and
• allow portions of loans from prior CRA periods to count on a CRA exam, as they do for outstanding portions of investments, in order to incentivize longer-term, patient capital.

Similar to the assessment area proposals, we believe this concept has merit; but we are still evaluating it and are eager to engage in the conversation. However the test is designed, the CRA must also strongly discourage any activities that lead to displacement. The CRA should give credit for loans and investments that stem the tide of displacement and penalize banks that demonstrate a business model or practices that contribute to the displacement of tenants, homeowners, or small businesses.

Tailoring: The Fed wants the flexibility to apply the CRA appropriately to banks of different sizes and business models. One part of this proposal is to allow online banks to create assessment areas based on where they do business. The Fed also appears to be proposing to eliminate the intermediate small bank (ISB) test and examine all banks under either the small bank test (only retail lending) or large bank test (retail and community development). We recognize the need for flexibility based on bank size and business model, but we caution against reducing the obligation for any banks. If more banks are designated as small banks, for example, that could dramatically decrease or eliminate the estimated $3 billion in annual community development financing by ISBs that currently have a community development test.

Transparency, Consistency, Metrics: The Fed recognizes the need for more consistent CRA examinations among and within agencies. This means joint rulemaking, clear rules and guidance, and improved examiner training so the rules are applied consistently. They also recognize the need for additional metrics on examinations and improved public data so all stakeholders can evaluate CRA data and understand how the metrics are used to come to a final rating. We wholeheartedly support this proposal and are eager to engage in dialogue over the specific details of what is evaluated and made public.

We appreciate the thought that went into these proposals and the Fed’s openness to hearing feedback and engaging with communities in the process. ANHD and our members look forward to responding to the proposals in detail and engaging with regulators as they move forward in the process, ideally across all three agencies. We also encourage them to find ways to evaluate how CRA activities impact people and communities of color.

Let’s Continue the Conversation at Our #BuildCommunityPower Conference

We had the pleasure of having Governor Lael Brainard at our Annual Community Development Conference last year. This year, we’re excited to hear from John C. Williams, the 11^th president and chief executive officer of the New York Fed.

Get your ticket today!

Stay Tuned for the 2018 State of New Reinvestment in NYC Report

Every year, we put out an annual analysis of local bank reinvestment activity and the impact of the CRA. This year’s report will be released at our Annual Conference. In the meantime, check out reports from the last eight years here and learn why this work is so important.