WASHINGTON — Regulators are working intently on a proposal to reform how they apply the Community Reinvestment Act after previous attempts to modernize CRA policy drew mixed reviews.
The Office of the Comptroller of the Currency appears to be taking the lead on an effort to release a proposal within weeks, according to sources familiar with the matter. The goal is to revamp a CRA supervision and enforcement process that critics say has become too complex and outdated.
Specifically, regulators are considering new metrics for CRA's four grading categories — which are now "outstanding," "satisfactory," "needs to improve" and "substantial noncompliance" — as well as whether to expand the CRA assessment area and the types of loans that count toward a bank’s CRA score, these sources said.
Both industry representatives and advocacy groups are hopeful that this effort finally succeeds in bringing CRA policy more in line with business practices and community needs. Previous efforts in the last several years to improve CRA enforcement were seen by some as too timid. The last major reforms of the 40-year-old law were in 1995.
“We need a structured [CRA] system that is going to evolve as the customer needs have evolved,” said Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association.
Abernathy said enforcement of CRA in recent years has focused too heavily on mortgage lending for low-to-moderate-income borrowers, rather than all lending in the broader community.
“Say, for example, a bank is involved in funding a local hospital. ... It may only get credit if it does a financial analysis in terms of how the hospital will help low-to-moderate incomes,” he said. “It should look at the whole community that the hospital serves.”
While a reform effort will likely trigger a prolonged debate between the various stakeholders, community advocacy groups are equally on board with producing a better CRA regulatory framework.
“CRA needs to be modernized to better meet the needs of underserved communities," said Faith Bautista, president of the National Diversity Coalition. "We are hopeful the OCC’s new CRA proposals will allow banks more flexibility in how to meet their obligations, including by expanding the types of loans that qualify for CRA credit, while eliminating existing loopholes that don’t truly further community needs.”
Any final CRA changes would likely need to be produced in collaboration with the Federal Deposit Insurance Corp. and the Federal Reserve Board, which could also complicate the effort. One potential issue that could delay the release of a proposal is that President Trump's nominee to lead the FDIC, Jelena McWilliams, is still awaiting confirmation.
Both banks and community groups agree that CRA is in need of a reboot, although they often have differing opinions on exactly how regulators should determine scores for individual banks. Another potential area for debate is how regulators define a bank's CRA assessment area. Many say the traditional boundaries tied to a bank's physical branch network are no longer sufficient since internet banking and other digital technologies are redrawing that map.
At a conference last month, Comptroller of the Currency Joseph Otting said the OCC was working with other bank regulators to release “an interagency redo of regulations” for CRA by the end of March. He noted that one priority was a clearer system to judge whether a bank is meeting CRA criteria.
“We want to have a ... measuring system so that there is no doubt about whether banks are in compliance,” Otting said during a securitization industry conference in Las Vegas on Feb. 27.
The regulators will specifically ask the public for what types of activities and products should qualify for a CRA credit, said a source familiar with the matter. They will also look at how to evaluate all qualifying activities, regardless of location, and create a metric-based threshold for all four of the CRA rating categories.
Many groups have long complained that CRA is not being applied consistently and clearly, and that the reliance on geographic footprints and physical branches ignores the mobile products offered to communities today.
“There are banks with almost no geographic footprint” and the “regulators are struggling with” how to apply CRA to that, Abernathy said.
The Treasury Department is also expected to soon release recommendations for changes to CRA, to follow up on an earlier report saying CRA policy is "in need of modernization.”
"Aligning the regulatory oversight of CRA activities with a heightened focus on community investments is a high priority for" Treasury Secretary Steven Mnuchin, the June report said.
Community groups like the National Community Reinvestment Coalition have asked regulators to redefine assessment areas, and to broaden CRA policy beyond the banking industry to include mortgage companies, investment banks, credit unions and online lenders.
“The CRA regulation defines assessment areas on CRA exams as geographical areas where a bank’s branches are located,” the coalition said in a Jan. 11 web post outlining recommended changes to CRA. “This needs to change to include also geographical areas where banks make substantial numbers of loans via non-branch means such as by loan officers or brokers.”
The Comptroller's Office had started in 2016 to assess how it applies the Community Reinvestment Act, and to work through a massive backlog of CRA exams, under then-Comptroller Thomas Curry. Banks are supposed to be examined for CRA every three years, but Wells Fargo received a downgrade on its CRA score in March 2017, almost eight years after its last score in 2009.
“Like any set of rules, it is wise to study from time to time how to make them more effective and relevant on the one hand and less burdensome on the other,” said Gene Ludwig, the chief executive of Promontory Financial Group and a former comptroller of the currency. “It’s also important that we consider ways to expand the CRA approach to nonbanking organizations, particularly nonbank financials.”