Cheat sheet: Hopes and hang-ups on CRA reform

One of the biggest debates across all parties is how to expand the geographic areas that examiners use to grade banks for CRA scores. The CRA was written before online banking and currently looks at communities where the bank serves, largely based on branch and headquarter locations.

But over time, that assessment strategy has become increasingly outdated and there are communities in need of lending that do not fall in an assessment area because it has no bank branches, called “CRA deserts.”

“I have also seen how the limitations of these regulations can restrict lending and lead to investment deserts that CRA activity often fails to reach by preventing banks from receiving consideration when they want to lend and invest in communities with a need for capital,” Comptroller Joseph Otting wrote in an Aug. 30 op-ed in American Banker.

Most community groups and banks generally support expanding the assessment area but are at odds when it comes to how much credit should be given to areas outside of branch locations. Community groups, state regulators and some banks have cautioned the OCC not to undermine the importance of branch locations by giving banks an incentive to pursue CRA credit elsewhere.

“The definition of assessment area could also be revised. ... However, any revisions to the regulations should not alter the CRA's intentional focus on local communities,” Maria Vullo, superintendent of the New York State Department of Financial Service, wrote in a comment letter to the Comptroller's Office. And it “should not, directly or indirectly, lead to LMI communities within banks' footprints becoming even more underserved,” she added.

Some banks, as well as Otting, have suggest keeping the reinvestment act focused on branch locations but offering an additional CRA credit multiplier for other areas in need of lending.

“Activities outside of Assessment Areas should be considered as an additive to a bank’s overall CRA rating,” wrote Clara Mullins, vice president and CRA officer at City National Bank of West Virginia. “This concept would address uncertainty associated with whether a bank knows that it has ‘adequately’ met its community’s needs and can begin counting regional activities and could be a solution to helping other areas in need of an economic boost.”

However, community groups have also raised concerns with this strategy over fear that it would simply make it easier for banks to pass CRA exams.

“In general, we’ve been supportive of changing the assessment areas to account for today’s technology and banking system but we have not been in favor of allowing more banks to get more CRA credit,” Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, said in an interview.

A redefinition of assessment areas is of particular interest in states like Utah, which has an abundant amount of financial institutions that are effectively "branchless," operating out of a local headquarters but providing services on a larger technological platform.

There’s broad agreement for regulators to include branchless banking and online loans in various ways. This includes support from the banking regulator for Utah, one of the most popular states for branchless banks and unique charters like industrial loan companies.

“The current approach of defining CRA assessment areas should be updated to reflect the increasing amount of activity taking place outside of physical branches. In other words, the regulators should consider de-emphasizing physical branches,” G. Edward Leary, commissioner of Utah’s Department of Financial Institutions, wrote in a comment letter. “In addition, CRA assessment areas should be defined to accommodate the difficulties presented to traditional banks operating primarily in areas in which large ‘branchless’ banks also operate.”

Among the ideas that the OCC floated in its list of questions was creating a simplified single-metric system for grading banks on their CRA peformance.

For example, Otting is open to that metric being based on CRA activity relative to total assets, insured deposits or capital.

A single CRA ratio would address complaints from consumer groups and bankers alike that CRA exams and results are inconsistent and unclear. But many banks disagree over what threshold to use for the metric and have raised concerns about how to apply that metric to the various business models at each bank.

“Different banks may prefer to have different tests, depending on their business models or markets. There is precedent for this approach,” wrote Steven Zeisel, executive vice president and general counsel at the Consumer Bankers Association.

“In addition to the strategic plan, there are different evaluations for different size banks (Small Bank, Intermediate Small Bank, and Large Bank) and for different banking models (Wholesale and Limited Purpose banks),” he added. “We believe these should be retained.”

Other regulators, including Vullo of the New York State Department of Financial Services and former Federal Deposit Insurance Corp. Chairman Martin Gruenberg, have also raised concerns with the single metric approach.

“A reliance on a single ratio of CRA performance could allow banks to pick and choose which communities to serve and which products and services to offer in those communities,” Gruenberg, who is still an FDIC board member, said in a speech in New York on Oct. 29. “Such an approach could also undermine the incentive that banks currently have to develop constructive partnerships with community organizations.”

A coalition of 14 state attorneys general submitted a harshly critical letter in response to the advance notice of proposed rulemaking, saying the OCC has signaled a reform effort that could reduce oversight of discriminatory lending practices and eliminate penalties for all but the most egregious violators.

“There is broad agreement among financial institutions, advocates, and elected officials that the CRA should be modernized to reflect new consumer banking habits and changes in technology,” said the attorneys general, including Xavier Becerra of California, Barbara Uunderwood of New York and Lisa Madigan of Illinois.

“However, many of the OCC proposals would weaken, rather than modernize, CRA enforcement. They will undermine the core purposes of the CRA—namely, ending redlining and requiring banks to be responsive to the needs of [low and moderate income] individuals and communities.”

The AGs also expressed concern that a CRA reform plan could fail to recognize the importance of so-called “community benefits agreements” with community groups that demonstrate how a bank will meet local credit needs after a merger or acquisition.

“Community benefit agreements include specific lending and investment goals in designated [low- and moderate-income] communities or commitments to not close certain branch locations, and are highly useful means of injecting local public input into the CRA process,” the letter stated. “Unfortunately, in a recent guidance document, the OCC failed to recognize the importance of these agreements, allowing banks with failing CRA ratings to merge, acquire, or grow their business without any requirement or incentive to enter into community benefits agreements or otherwise respond to local community concerns.”

The states also want the OCC to rescind recently issued guidance that will weaken enforcement of credit discrimination.

The OCC recently adopted a “general policy” that only allows for downgrades of one CRA rating level for violations of credit discrimination and consumer protection laws unless illegal practices are found to be particularly egregious.

“A bank with substantial, non-technical violations that are not 'egregious' could be, for example, only downgraded from 'Outstanding' to 'Satisfactory,' " the state attorneys general said in their joint comment letter. “Such a minor downgrade will not impact regulators’ review of their mergers and acquisitions—the only real 'stick' for CRA compliance.”

In addition, the states want federal regulators to be able to retroactively downgrade a bank’s last CRA rating.