Bank Reinvestment At Risk: OCC’s CRA Rule Will Hinder Covid Recovery
ANHD produces an annual analysis of local bank reinvestment activity to help communities, legislators, and regulators understand the impact of the Community Reinvestment Act, a key civil rights era law that requires banks to direct money and investments to low-income communities. In light of the global health pandemic and economic crisis, ANHD decided to have this year’s report focus on a rule change to the CRA brought about by the Office of the Comptroller of the Currency (OCC), which creates a more complicated, less transparent system that will hinder the types of banking activities and reinvestment communities need in response to this pandemic and in addressing long-standing systemic income and racial disparities.
This year's State of Bank Reinvestment report from the Association for Neighborhood & Housing Development (ANHD) lays out the major aspects of the final CRA rule that would hinder COVID recovery using a well-researched and data-driven analysis. The report also offers ways for banks to help foster an equitable recovery and puts forth an equitable CRA reform framework for the three federal bank regulators, including the OCC, FDIC, and Federal Reserve Board.
To view the full report, click "Download" above or click here.
Executive Summary
The U.S. is in a global health pandemic and economic crisis right now that has claimed the lives of over 147,000 people nationwide and over 18,000 here in New York City. The economic and social consequences of the COVID-19 pandemic will persist long after the health crisis passes and require intervention at all levels of government. Black and Brown communities have suffered the most in illness, death, and economic hardship; if history is any guide, they will be the last to recover, if at all.
Financial institutions have a responsibility to aid in an equitable recovery through the Community Reinvestment Act (CRA). The CRA is one of the civil rights era laws passed in response to systemic racism, redlining, and discrimination. It requires banks to direct money and investments to low-income communities. The CRA has the potential to help address the persistent racial and income disparities this pandemic exposes and exacerbates and would help even more if it were updated thoughtfully. But despite this potential and in the middle of the pandemic, the Trump Administration finalized a rule that drastically weakens the CRA for the nation’s largest banks.
These are the major aspects of the final CRA rule that would hinder recovery:
- It prioritizes quantity over quality. The primary determinant of a bank’s rating will be a “one-ratio” metric of dollars reinvested divided by deposits, which prioritizes larger and simpler deals over smaller, more impactful activities. For example, rather than invest time and money providing small business loans to small and micro businesses, grants and investments in neighborhood based organizations on the front lines of COVID relief and recovery, or smaller home loans to lower-income borrowers, a bank can reach its targets more easily with fewer loans to larger businesses, large investments in self-storage facilities in opportunity zones, or roads passing through lower-income neighborhoods.
- It provides no way to downgrade for harm or displacement. The rule removes community input on bank performance and provides no systemic analysis of the impact of a bank’s activities. For example, under the new system, regulators will not downgrade a bank if its products are high cost or supporting developers who are engaging in speculative behavior that contributes to harassment and displacement.
- It minimizes the importance of bank branches and eliminates analysis of banking products. The rule eliminates the analysis of branches opened and closed and of products and practices that increase access to banking, such as low-cost accounts and waived fees, all of which are needed for COVID-impacted customers to have access to money for daily necessities. The rule simply adds a measure of branches in low- and moderate-income census tracts to the metric.
- It puts less focus on low-income, Black, and Brown communities. Under the final rule, banks will be able to close branches in communities of color, make fewer loans to lower-income borrowers and small businesses, and serve higher income people. The rule also expands the list of activities that count for CRA credit, allowing banks to divert resources to larger businesses and larger projects that do not benefit these communities.
- It takes the "community" out of the CRA by reducing local obligation and minimizing community input. The final rule puts community input and needs second to meeting the one-ratio targets. The targets are based on activities established without an analysis of local needs and communities can no longer comment on individual bank performance. The overarching one-ratio metric is calculated at the national level, and in many cases, banks can fail to meet targets in 20% - 50% of their assessment areas and still pass their exam.
ANHD developed the following COVID Recovery Recommendations for Banks, but as outlined above, the OCC’s final CRA rule minimizes or eliminates consideration of much of these.
- Banks can support small businesses with debt relief, waived fees, language access, technical support, affordable loans and financial support, and grants and capital to organizations that support small businesses. Banks that offer mortgage forbearance can pass on that relief to small business tenants who cannot afford their rent. Assist businesses with access to government relief, such as the Small Business Association (SBA)’s Payroll Protection Program (PPP).
- Banks can support tenants by ensuring borrowers respect the eviction moratorium, follow responsible multifamily lending principles, and fund tenant organizers. Banks that offer mortgage forbearance on rent-stabilized and unregulated buildings with residential and commercial tenants should add conditions to support tenants, including rent relief and proper maintenance. Banks should help transfer distressed assets to nonprofit preservation developers or tenant ownership.
- Banks can support consumers by waiving all banking fees; ensuring safe access to branches and ATMs; providing language access and accepting multiple forms of ID, including IDNYC; providing consumer debt relief; issuing a moratorium on debt collection; not allowing any negative credit reporting; and providing grants for financial empowerment and counseling.
- Banks can support homeowners with forbearance for up to a year with waived late fees and interest payments, access to permanent loan modifications based on ability to repay, and no negative credit reporting. This should be available to all struggling homeowners, even if they were behind on a mortgage pre-COVID. Banks can provide grants to housing counselors who help people navigate the system and prevent foreclosures.
- Banks can support nonprofit developers and organizations with loan forbearance and forgiveness, access to low-cost capital, additional grants for general operating support and operating subsidy, and by waiving or modifying grant requirements that could not be met due to COVID-19.
ANHD’s Recommendations for an Equitable CRA Reform Framework
The OCC’s CRA rule should be withdrawn. The three bank regulators at the OCC, FDIC, and Federal Reserve must come together with impacted communities to preserve and strengthen the law:
-
Banks should be evaluated on the quantity, quality, and impact of their activities within the local communities they serve and based on the needs of these local communities. Incentivize impactful, responsive activities that lift low-income, Black, and Brown people out of poverty, and help reduce wealth and income disparities. Downgrade banks that finance activities that cause displacement and harm.
- Community input and community needs must be at the heart of the CRA. Strong community needs assessment and community engagement should inform community needs and how examiners evaluate how well banks are meeting those needs.
- Maintain local obligations. The CRA must maintain the current place-based commitment banks have to local communities, with additional obligations where they do considerable business (make loans / take deposits) outside of their branch network. It must maintain or increase quality reinvestment where it is needed, both within “CRA hot spots” with many banks, such as New York City where capital is distributed inequitably, as well as under-banked regions.
Banks and regulators have an opportunity to respond to COVID in a meaningful way that will benefit the people most impacted by the pandemic, which are low-income, Black, and Brown communities. This report outlines how the OCC’s approach puts these communities at risk and ways banks and regulators can better respond, now, and in the future.
Conclusions & Recommendations
The CRA as it is today can be an integral component of COVID recovery. A stronger CRA would be even more impactful to recovery and helping address long-standing systemic income and racial disparities. It has the potential to boost lending and access to banking for underserved communities by incentivizing high quality, high impact activities based on local needs, while discouraging and downgrading for displacement and activities that cause harm. This final rule does the opposite. It creates a more complicated, less transparent system that will hinder the types of activities communities need in response to COVID and addressing long-standing disparities.
ANHD and our members have developed the following recommendations for banks to help with COVID recovery and following that, a set of principles that should inform any CRA reform. When CRA exams evaluate bank response to COVID, they should consider how well banks follow these recommendations.
Support for Affected Small Businesses & Their Employees
Small businesses are suffering because of COVID-19. Many small businesses, especially those led by people of color and immigrants, have long struggled to stay open considering rising costs and lack of access to financing. Many small businesses and their employees are now hit hard as they have had to reduce employees or shut down entirely. Banks should take the following actions to support small businesses:
Banks should suspend loan payments and commercial mortgage payments for businesses that are suffering a slowdown or closure due to COVID-19. Waive fees and interest accrued and extend the loan to reflect the amount due. They should also reduce the cost of banking by waiving monthly maintenance, overdraft, and transactional fees, forgiving past overdrafts, and waiving ATM fees for out-of-network banks and for customers of other banks. Banks should also ensure all outreach materials and customer services are in multiple languages.
Banks should provide grants and capital to Community Development Financial Institutions (CDFIs) that serve small businesses. CDFIs need resources to provide grants, zero-interest loans, technical support, and other affordable loan products. It is also important for banks to lend directly with affordable loans to small businesses of all sizes. Banks should also make PPP loans to businesses and facilitate the forgiveness process, regardless of whether they are customers.
Banks should continue and expand grants for nonprofits serving small business owners and employees affected by COVID-19, particularly those providing financial relief and assistance to low-income and immigrant small business owners. Businesses may also need support to operate remotely, including but not limited to technical support and equipment to work remotely, support to conduct banking online, and assistance creating an online presence. Lastly, the high cost of rent has long been a challenge for small businesses and is even more so now. Banks that offer mortgage forbearance can pass on that relief to small business tenants that cannot afford their rent.
Protection for Tenants in Multifamily Buildings
Low-income tenants have long been vulnerable to displacement by landlords looking to bring in higher-paying tenants. During this period of extreme financial duress, that pressure is sure to increase. The state’s recent eviction moratorium is a positive step, but will require additional response by banks, especially when the moratorium expires:
Banks should ensure all borrowers know about and follow the eviction moratorium and prevent evictions when it expires. One way to do so would be to monitor vacancies that take place during the COVID-19 crisis and report to the Department of Financial Services (DFS) if a landlord is evicting tenants. New York State DFS must also ensure banks continue to follow the full responsible multifamily lending guidelines for CRA loans and lending in general with responsible underwriting, proper vetting of landlords, and responding when issues arise. They should update the guidance to include a mandate that their borrowers respect the eviction moratorium and protect tenants from eviction. Banks should also fund organizations that are working with tenants to respond to the crisis through direct tenant support and advocacy.
Banks that offer mortgage forbearance on rent-stabilized and unregulated buildings should add conditions to support tenants, including full support of eviction moratorium, rent relief for residential and commercial tenants, commitment to maintain building and respond promptly to tenant needs, and referrals to city agencies and nonprofits who can support tenants during this crisis.
Lastly, banks should institute and finance programs that help transfer distressed properties to tenant ownership or preservation-minded developers, with an emphasis on nonprofit CDCs with a track record of providing deep affordability and permanent affordability.
Access to Basic Banking Services
Banks make tens of billions each year in monthly maintenance, overdraft, and ATM fees. During normal times, this is a hardship for low-income clients, and the situation has only gotten worse with COVID, where it is even harder for people to make ends meet. Banks should respond swiftly:
Banks should reduce the cost of banking by waiving all monthly maintenance fees, providing free money orders and remittances, and waiving outstanding overdrafts and any overdraft fees moving forward. They should also waive all out-of-network ATM fees and check-cashing fees for customers and non-customers to allow people to bank closer to home. They should ensure immigrants can access affordable banking by providing adequate language access and accepting alternate forms of ID, including the IDNYC, for all transactions.
Banks should take additional steps to ensure people have access to cash and credit and are not penalized for failure to make payments due to a pandemic. They should refuse to garnish wages or freeze bank accounts, cease repossessions and debt collection, and not report late payments to credit bureaus. They should waive late fees and interest payments on credit cards for anyone who cannot pay all or some due to COVID-19. For longer-term loans like auto or personal loans, implement loan forbearance, which means to extend the loan, suspend payment and interest due, and add the outstanding loan amount to the end of the loan.
Lastly, banks should continue and expand grants, and refer customers, to nonprofits serving consumers affected by COVID-19, particularly those working with low-income, immigrant, and limited English proficient populations. Financial counselors can help people transition to online banking and navigate the system to resolve banking issues. Banks can also provide or connect to additional financial supports.
Support for Low-Income Homeowners
In order to prevent displacement and further financial hardship for low-income, Black, and Brown homeowners during this economic crisis, banks should be doing everything possible to ensure homeowners and tenants can remain in their homes without fear of eviction or further financial hardship:
Banks should allow COVID-impacted homeowners who cannot pay their mortgages to defer the payments for up to a year and have any late fees and interest payments waived with no negative credit reporting. At the end of the forbearance, servicers should instead extend loan terms and provide permanent loan modifications as needed. This should apply to all home loans, regardless of which investor owns the loan.
Foreclosures should not be started, continued, or completed and foreclosure sales should both be put on hold during this period. The process must be simple and swift for any homeowner who requests it and outreach and materials must be provided in multiple languages and promote widely. Banks should provide a single point of contact to navigate the system and refer borrowers to HUD-approved housing counselors.
Banks should continue and expand grants for nonprofit organizations serving homeowners affected by COVID-19, particularly HUD-approved counselors and service providers working with low-income people, people of color, and limited English proficient homeowners. Housing counselors are critical to helping borrowers navigate the new programs being put in place by lenders and government agencies as well as regulations around foreclosures and evictions.
Support for Non-Profit Affordable Housing Providers & Nonprofit Community Organizations
Nonprofits are always on the front lines, serving the most vulnerable populations. ANHD members serve low-income people of color who are the hardest hit by this financial crisis. These organizations are now simultaneously having to attend to internal work and staff needs, while also continuing to serve impacted communities with housing, loans, services, and supports.
Nonprofit developers do not have the same financial cushion as for-profit developers, as they put more of the money they receive back into their buildings in maintenance and services. With many tenants out of work and unable to pay the rent, they are left with a huge cash flow crisis, meaning they have few resources remaining to maintain the buildings while also meeting their expenses and debt obligations. It is critical that banks provide additional supports for nonprofit housing providers and other CDCs:
Banks should provide loan forbearance and forgiveness for nonprofit developers impacted by the COVID-19. This may be for projects in progress that are halted or delayed, multifamily buildings they manage, buildings they occupy, or loans, lines of credit, and investments used to serve their clients and members. Banks should waive or modify grant requirements that could not be met due to COVID-19. They should also provide additional grants that are flexible and can be used for general operating support or operating subsidies.
Recommendations for an Equitable CRA Reform Framework
The OCC’s final CRA rule should be withdrawn entirely. The three bank regulators at the OCC, FDIC, and Federal Reserve must go back to the table to reform the CRA together. They must collaborate with the communities impacted by an inequitable banking system to come up with an approach that maintains the core of the law and strengthens it to address longstanding shortcomings, evaluate newer banking models, and incorporate principles of racial equity throughout.
Any CRA reform must reflect the following community priorities:
The CRA must evaluate the quantity, quality and impact of a bank’s activities. This means banks should get credit for impactful activities that help lift historically redlined people out of poverty. The CRA was passed in response to redlining and disinvestment in low-income communities of color. Low- and moderate-income people and people of color continue to suffer the impact of disinvestment and irresponsible investment and products. In New York City, quality community development activities include loans and investments that support deeply, permanently affordable housing; mission-driven developers, neighborhood-based community organizations, and CDFIs; and quality jobs in sectors that pay well and are accessible to underserved populations. Quality retail activities include maintaining and expanding bank branches and providing affordable loans and banking products to underserved small businesses; first-time homebuyers and existing homeowners; and consumers.
CRA examiners should specifically evaluate the impact of activities on people of color in addition to lower-income people. As part of this evaluation, they must downgrade banks for harmful behavior, including patterns of lending that lead to harassment, displacement and harm.
Community input and community needs must be at the heart of the CRA. Strong community needs assessment and community engagement should inform community needs and how examiners evaluate how well banks are meeting those needs. Community input must be a key component of the CRA process to help evaluate how well banks are meeting local needs. This applies to CRA exams, and applications where a bank’s CRA record is considered, including bank mergers and branch openings and closings. The CRA can and should foster collaboration with community organizations and lead to more investment and more impactful investment.
Assessment areas must maintain local obligations. The CRA must maintain the placed-based commitment banks have to local communities. Regulators should maintain assessment areas where banks have branches and ATMs and expand to other areas where banks also do considerable business, such as lending and deposit-taking. Any assessment area reform must increase the size of the pie: maintain or increase quality reinvestment where it is needed, including high need “CRA hot spots” such as New York City, while also directing capital to under-banked regions.
Banks and regulators have an opportunity to respond to COVID through implementing and modernizing the CRA in a meaningful way that will benefit the people most impacted by the pandemic, which are low-income, Black and Brown communities. The OCC’s approach puts these communities at risk and must be repealed. Our communities deserve better.