The Community Reinvestment Act is experiencing a midlife crisis. The CRA – which Congress passed 40 years ago to encourage financial institutions to meet the needs of their physical communities – is at a crossroads between its core purposes of financial inclusion and an ever-changing financial industry.
The CRA's spirit is in dire need of reinvigoration in the digital age. A solution is potentially on its way via the Office of the Comptroller of the Currency.
In December, the OCC released its anticipated whitepaper that proposed applying CRA-like principles to its pending fintech charter. The idea is to incentivize chartered fintech companies to make financial inclusion commitments similar to those made by traditional banks under the CRA, but under a different framework. Since the CRA only applies to traditional banks, the OCC based its proposals on the agency's broad authority to ensure fair treatment and equal access in the financial market.
The OCC's plan to invoke the CRA's spirit is both timely and necessary but only if the OCC implements its new framework appropriately.
We firmly believe that America wins when the country's financial institutions meet the needs of all Americans, not just a few. Due to the OCC's positive overtures, we are cautiously optimistic about the agency's financial inclusion proposal, though more details are needed.
If the framework embraces the following three principles, we are confident that the CRA's spirit will be revived in a way that will ultimately improve the likelihood of every American enjoying equal, fair and safe access to the benefits of financial innovation.
Encourage innovations that expand access to financial services while discouraging those that are unfair to consumers.
As detailed in a 2016 White House report on big data and associated technologies, fintech firms are emerging as equalizers for those individuals historically shut out of the financial mainstream. In the report, the White House highlighted firms' use of social media data as opening doors for borrowers with little credit history. Nevertheless, as the report cautioned, use of new technologies in the underwriting process poses legitimate fair lending concerns. If one's ability to access credit is improperly influenced by their social networks, individuals – who already belong to financially marginalized communities – could find themselves pushed further away from the financial mainstream.
To prevent this outcome, the OCC's framework should encourage innovations while requiring firms to implement controls and processes against potential discriminatory effects caused by new technologies.
Encourage the use of technologies that promote financial health and stability.
According to the Center for Financial Services Innovation, 57% of American adults struggle financially due to high levels of debt, irregular income and inconsistent savings habits. Therefore, the OCC's financial inclusion framework should encourage firms to leverage technologies that help customers spend wisely, borrow responsibly, plan for the future and weather financial shocks.
Encourage use of technologies that transfer cost savings to consumers.
As novelist James Baldwin once wrote: "Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor." Decades later, Baldwin's words still ring true.
Low-income individuals – many of whom have no formal relationship with a bank – pay considerably more for basic financial services, like cashing checks.
New technologies present an opportunity to cut operating costs – savings that fintech companies can pass on to consumers. However, new technologies can also enable unsafe products and services.
As the agency sets high standards for fintech firms, the OCC should consider lessons learned from internet companies that were granted charters on both the federal and state levels in the late 1990s. A number of these limited-purpose institutions, including NextBank and NetBank, eventually failed. Their failures were a result of engaging in risky lending to cover the unique costs inherent in their online-only business models. The OCC should not repeat these mistakes.
While incorporating these three principles, the OCC will also have to ensure its financial inclusion framework is workable. In other words, the framework must ensure that chartered fintech companies comply with the financial inclusion requirements but still have enough space to continue to innovate.
Luckily, the OCC has old tools it can adapt to today's marketplace to ensure compliance and encourage innovation. In 1995, the OCC began allowing banks to submit strategic plans for meeting their CRA goals, an option that the agency should also provide to fintech firms, for instance.
These strategic plans would allow firms to tailor their CRA compliance to be consistent with their capabilities, business strategies, expertise and their communities' needs. These plans require public participation in their development. But the OCC should still enforce compliance through a series of sanctions. For firms that run afoul of their tailored plan, the OCC should consider remediation, restrictions on a fintech firm's growth, imposing civil money penalties, or, in the case of egregious financial inclusion failures, revoking charters. This would provide transparency and give teeth to the OCC's framework.
If the OCC requires fintech firms to set measurable and enforceable financial inclusion goals that leverage consumer-friendly technology, the agency will likely give new energy to the spirit of the CRA, albeit in a new regulatory framework.
Rep. Gregory W. Meeks, D-N.Y., is a senior member of the House Financial Services Committee. Rep. Cedric Richmond, D-La., is chair of Congressional Black Caucus.