The CRA Modernization Recommendations by Treasury Department Are Good, Bad, and Yet-to-be-Seen

On April 3^rd, the U.S. Department of Treasury released its long-awaited set of recommendations to modernize the Community Reinvestment Act (CRA). The Association for Neighborhood & Housing Development (ANHD) believes that the Treasury Department document has the potential to lay the ground work for a meaningful dialogue to address some areas of commonly-held concern about the CRA, and we are cautiously optimistic that the recommendations can lead to a productive outcome. But, we have some concerns, and in all cases, the details truly matter.

ANHD fundamentally believes the CRA works. We see its overwhelmingly positive impact on the community development environment in New York City every day. The CRA remains an essential law to leverage bank reinvestment and hold banks accountable to reinvest and serve equitably in the areas where they do business. ANHD appreciates the thought the Treasury put into drafting these recommendations, taking into account the many and varied viewpoints they heard from hundreds of stakeholders, including advocates, bank regulators, and financial institutions. Here are some of the good, bad, and unclear key areas of the recommendations.

We urge the federal regulators to now work closely with the community to craft concrete recommendations, and ultimately regulations, that preserve the core of the CRA and address areas of weakness to take it into the 21^st century.

Summary of Treasury Recommendations

1) Assessment Areas: The geographic areas where banks are assessed on their CRA activities are called “assessment areas”. The Treasury recommendation is to base assessment areas both on branches and where banks take deposits and do substantial business. This recommendation grapples with important changes in the banking world, as more banks do some or all activity online or through other channels outside of a physical branch network. Finding the balance of flexibility, while absolutely maintaining the bank’s commitment to place – which is at the heart of the CRA – and the bank’s commitment not just to the quantity of investment activity but also to the quality of the investment activity and its real impact on each local place must be the goal of this reform. We also are unclear about the intent of the recommendation to allow for investment in “other low- and moderate-income (LMI) communities and identified areas.” Depending upon how it is implemented, we are concerned it could take away from investment in the assessment area.

2) Branches and Services: The Treasury report recommends significantly de-emphasizing the importance of bank branches in CRA exams. We certainly understand that new technology is impacting branch use and appreciate the encouragement to use technology to get people into the banking system. However, branches still matter. Large areas of New York City have been unbanked and underbanked for decades, leading people to use higher cost financial services providers. The CRA must still encourage banks to open in these areas, and we encourage regulators to pay more attention to bank products and the effectiveness of moving people into the banking system. In that context, we are glad the report places a strong emphasis on financial education. The Treasury also recommends expanding the framework of CRA-eligible services. As in other areas, details matter in determining the impact. The focus must remain on services that target LMI people and communities and that are related to community development and financial access/wealth-building, utilizing the expertise of the bank.

3) Community Benefit at Times of Bank Mergers and Branch Openings: ANHD appreciates that the memo recognizes Community Benefits Agreements as a way to demonstrate how a bank will benefit the community, either in connection to a merger application or improving upon a poor CRA rating. There is some confusion as to whether this recommendation applies to all banks, or only to banks that have a less than a Satisfactory CRA rating. We ask the Treasury to clarify that it is a useful tool for all banks, regardless of rating. We are also concerned with the language that appears to discourage comments for banks that pass exams. Given how few banks fail their exams, community input can help assess the local record of the bank and how a merger can better meet the needs of the local community.

Having said that, we disagree that a bank should be able to expand or merge if they fail their CRA exam. As it is, communities struggle to get banks and regulators to commit to a set of activities that will benefit the community at the time of a merger. Overall, 98% of banks pass their CRA exam, and this is one of the only concrete penalties when a bank fails. Any exception to this rule should only be considered if it demonstrably opens up access to banking in underserved communities. Locally, that may mean a new bank in unbanked areas of the South Bronx or Cypress Hills of Brooklyn, for example, coupled with products and services tailored to that community. Absent such a commitment, the expansion should be denied until the bank passes its CRA exam and corrects the behavior.

4) Clarity and Consistency on Exams: Overall, we support the Treasury’s recommendations for greater clarity on qualifying activities, regular communication with examiners, increased examiner training, and more standardized and timely exams. We remain cautious about recommendations regarding expanding the pool of eligible activities, as we do not know which activities they are considering, and we call for room for actual evaluation so the process is not strictly formulaic.

5) Downgrade Policy: The Treasury supports the Office of the Comptroller of the Currency (OCC) memo on fair lending reviews. This would restrict the ability to “double-downgrade” a bank for fair lending or consumer law violations (eg: going from “Outstanding” to “Needs to Improve”), and specifies that downgrades must be related only to lending considered on the CRA exam. However, if a bank’s practices are negatively impacting consumers in the community they are meant to be serving, a bank cannot be considered to be serving the needs of that community. Illegal or abusive behaviors that impact consumer loans or products should be considered relevant to a CRA exam.

6) Performance Context: Currently examiners and banks prepare the performance context, which is drafted to make the case for local needs and is meant to be used to determine if a bank is actually meeting those needs. The Treasury recommends that central community development staff at the regulatory agencies write these. The Federal Reserve Bank of San Francisco set a great precedence for this, and the Federal Reserve Bank of New York is piloting a similar program. ANHD believes this is a strong idea, as long as community input is a key component.

6) Non-bank Lenders: We are very pleased to see the recommendation to include affiliates on bank exams. However, they only call for monitoring the impact of independent nonbank lenders, as opposed to covering it under CRA.

What’s Missing?

Some areas were not mentioned in the memo at all. We outline here a few areas that we hope are addressed in future rulemaking. First, the CRA should no longer be colorblind; it must include an affirmative obligation to equitably serve borrowers and neighborhoods of color. Second, there should be penalties for harmful behavior outside of a fair lending review. If a bank’s lending fuels displacement or hazardous conditions, that should have a negative impact on their CRA rating. Third, we appreciate the recommendation for expanding the definition of assessment areas to include where banks take deposits, or do substantial business, but it’s unclear what will happen with limited purpose banks that are not evaluated on their consumer products as we believe they should be. It could also be beneficial if regulators looked at other loans more consistently, such as consumer loans and non-business credit card loans.