Regulators Finalize CRA Guidelines: Strong Emphasis on Economic Development

August 3, 2016

ANHD congratulates the federal bank regulators for elevating economic development as an important area of banks’ Community Reinvestment Act (CRA) obligations. For the past two years, ANHD has been advocating for the regulators and examiners to place more emphasis on this category and for banks to increase their CRA activity towards equitable economic development.

The Community Reinvestment Act (CRA) is one of the most important laws we have to hold banks accountable to our communities to lend and serve equitably and finance community development. Thanks to the CRA, trillions of dollars in lending has made its way into the communities most in need. In NYC alone, over 300,000 units of affordable housing have been built over the past 30 years that would not have been possible without private investment leveraged by the CRA.

Regulators just completed the second of two rounds of revisions to the CRA Question & Answer (Q&A) publication that guides banks and examiners in determining which loans, investments, and services are eligible for CRA credit and how they impact their rating. While this doesn’t take the place of true CRA reform that would come through regulatory and legislative changes, we are pleased with many aspects of revisions to this document. We also appreciate the thoughtfulness with which the regulators approached the process in soliciting and incorporating feedback throughout the entire process.

We outline our analysis of three areas the Q&A changes addressed:

Economic Development

We are pleased with a number of changes. For one thing, the Q&A broadens the definition of “financing” to include technical assistance that helps a business access financing and adds CDFIs that finance small businesses to the list of entities that automatically qualify under economic development. This brings such activities into the economic development category and has the potential to increase investments in local organizations that have long been supporting small businesses. It emphasizes the importance of intermediaries that support new businesses and adds examples of additional technical assistance activities that qualify, including shared space, technology, and administrative assistance. It also qualifies investments that support government economic development initiatives that incorporate job training and workforce development. In response to criticism that the regulation was encouraging low-wage jobs, we appreciate that regulators removed the reference to “currently” LMI people and will consider an activity to be more responsive if it benefits LMI people or neighborhoods. But, as discussed below, this may not be enough.

In addition to the changes within the economic development section, the document explicitly lists workforce development and job training programs as qualifying community development activities. While they may not fall specifically under economic development, we believe this elevates the importance of these activities, however they are categorized.

That being said, we are concerned about the potential impact of some changes. For one thing, despite removing the word “currently”, a bank could still get credit for supporting low-wage jobs. More concerning, however, is the fact that two major areas of the “purpose test” – investments in intermediaries supporting new businesses and the additional technical supports – do not require any benefit to LMI people or geographies. This could open the door to a broad range of CRA qualifying activities that have no benefit to underserved populations.

We urge regulators to place the highest importance on activities that benefit lower-income workers and neighborhoods. As discussed further below, a new Q&A outlines specific ways regulators will evaluate how responsive a bank is to local needs. Those principles should be directly connected to this expanded economic development Q&A. The performance context in this case is critical to ensure that the activities are responsive to local credit and job needs, be it through wages, benefits, local hiring/training, supporting specific industries, etc. Activities that do not benefit underserved populations, or worse, lead to their displacement, should not get CRA credit.

Access to Banking

This is an area where Q&A revisions cannot have the impact we need under current laws and regulations. Thus, we are pleased with some of the improvements made and critical of others, but broader changes to assessment areas and how banks are regulated would have a much bigger impact.

First and foremost, we are pleased that the emphasis on branches remained. The document retains the line stating that “the service test performance standards place primary emphasis on full service branches while still considering alternative systems.” Branches remain a critical point of access for many underserved populations and are currently how assessment areas are defined, thus anything that supports branch closures would be damaging to the CRA. With regards to how alternative delivery systems are evaluated, we appreciate the addition of factors related to their “ease of use” and “rate of adoption and use.” It’s not enough to just offer a product.

The Q&A’s now differentiate between retail services related to access to banking and community development services that encompass other areas of community development (community services, affordable housing, economic development, revitalization). Ideally this will place more emphasis on the availability and quality of retail services such as low-cost accounts, deposit services, remittances, etc. The retail services Q&A also says examiners will “consider the availability and effectiveness of an institution’s systems for delivering banking services.” The regulators went further to add an additional Q&A as to how they will determine how well products are tailored to meet local needs. We are very encouraged by this and hope it places more emphasis on the effectiveness of branch products and services used by underserved populations, which are just as important as branch distribution.

Innovativeness and Responsiveness

The new and modified Q&A’s do a good job in clarifying and expanding activities considered to be innovative and responsive. The new responsiveness Q&A makes it clear that a bank’s activities will be evaluated on quantity, quality and performance context and that all three factors matter. The expanded data source examples are also helpful by specifically referencing community groups, academic studies, and consumer complaint information. Examiners should be paying close attention to information beyond simple demographics and community comments. We are pleased to see new examples on responsible small dollar loans that consider the borrower’s ability to repay and the use of alternative credit scores. The new Q&A on innovativeness clarifies what is considered innovative, encourages innovation, but only when it enhances a bank’s response to community need. It is not necessary to be innovative. That being said, it doesn’t make sense that a bank can be considered innovative for bringing an existing innovative product to their bank. That could be very responsive, complex, and/or flexible but it’s not innovative.

Again, we appreciate the thought that went into these changes and look forward to seeing them implemented. We also urge the regulators to now address the broader CRA reforms needed, including assessment area reform, affiliate lending, fair lending provisions, and combating grade inflation. Blogger: Jaime Weisberg, Senior Campaign Analyst, ANHD