Federal Reserve Report Signals Progress on CRA Reform

Published by Brad Stanhope on Monday, August 5, 2019
Journal cover thumb August 2019

Clarity may be coming for the Community Reinvestment Act (CRA).

“I think there’s a little bit more clarity than there was several months ago,” said Buzz Roberts, president and CEO of the National Association of Affordable Housing Lenders. “It appears that the principals at the federal banking agencies are talking regularly and the staff are working hard to find common ground.”

That could be good news for those involved in community development activities and banks in general, as years of talk about CRA revisions come to a head.

The most recent progress came in mid-June, when the Federal Reserve Board–one of three federal agencies that oversee and enforce the CRA–published a report that summarized feedback from 29 roundtable discussions about the CRA from October 2018 through January 2019. The report was called, “Perspectives from Main Street: Stakeholder Feedback on Modernizing the Community Reinvestment Act.”

“There was nothing earth-shattering,” Roberts said of the report. “They seemed to take a fairly straight-forward approach.”

The report summarized the views of the 400-plus participants who shared their views during those discussions, which were part of the Fed’s plan to move toward CRA reform.

CRA Basics

The CRA was enacted in 1977 to affirm the obligation of federally insured depository institutions to help meet the credit needs of low- and moderate-income communities in which they are chartered. The act charged federal banking regulatory agencies–the Fed, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Investment Corporation (FDIC)–to implement the CRA through regulations and evaluations of banks performances.

One of the biggest factors in evaluating CRA performance is affordable housing, which has increasingly been defined by investment in low-income housing tax credit (LIHTC) equity. New markets tax credit (NMTC) and historic tax credit (HTC) investment are also key factors.

The last major update to the CRA regulations was in 1995 and all three agencies have moved toward serious CRA reform in the past few years, including when the OCC issued an advanced notice of proposed rulemaking (ANPR) in August 2018. That notice received more than 1,500 comments and further action from all three agencies is expected this year.

Roberts said the Fed report was as expected–which in itself is a positive.

“I couldn’t find anything particularly surprising,” Roberts said. “There is apparent consensus on some of our concerns. It’s interesting that there are a lot of issues that we identified that were reflected by these comments. We were pleased that many concerns we raised were echoed in the meetings. It’s not a big surprise, because [the concerns have] been around for years.”

Policymaking Process

The fact that the Fed report included a variety of issues and little specific consensus was expected by Roberts.

“This is a normal part of the process,” Roberts said. “A lot of people see problems. Even though they may agree on what they are, there are different ideas [on how to fix them]. That’s part of the policymaking process.”

Roberts said each of the agencies involved has made progress.

“It’s extremely helpful to have so many forums for agencies to hear the stakeholder perspective,” Roberts said. “The OCC had its ANPR, the Fed had meetings and the FDIC had a number of meetings as well. It’s important that they hear from so many stakeholders.”

Feedback to the Fed

The Fed report highlighted key areas of discussion, including:

Assessment areas. Currently, a bank’s assessment area is based on geography–where it has main office, branches and ATMs. Most observers said regulations need to be updated, due to the changing landscape of financial services, including technology. The question was how those areas should be defined.

Many participants, according to the Fed report, said that a combination of the bank’s lending activities, deposits and or market shares should determine the area. Others questioned the reliance on deposits to define the areas. Some community groups, meanwhile, stressed the importance of physical branches.

Another key issue was the perception that assessment areas create confusion about the significance of community development activities outside the bank’s assessment area.

“There were no real conclusions on how to deal with assessment areas,” Roberts said. “There’s a broad desire to account for the practice of banks’ lending and investing outside their areas, but no real consensus on how.”

Underserved communities. Another area of discussion was how to maximize benefits in underserved communities. Among the ideas was to create “CRA zones” where banks receive credit for any qualified CRA activity. A crucial question was how to designate those areas and under whose authority.

Banks also asked for clear standards to determine whether they have met the CRA needs within their assessment area, so they can engage in activities outside that area. There were several suggestions of how to do that. Rural communities were a focus of the discussion, with attendees pointing out that investments in those areas are often more impactful.

Performance test structure. Some attendees pointed out that the asset thresholds used to determine the definition of the bank (small, intermediate small or large) are outdated and create regulatory challenges, making it tough to meet the CRA-related expectations. A big issue is how to evaluate community development work, with many observers expressing concern over the adoption of a single metric to do so.

Performance evaluation. There was strong agreement in the Fed report on the need for clarity, consistency and timeliness with CRA examinations. Bankers were particularly concerned with clarity and uniformity among regulators. There were, according to the Fed report, few specific metrics suggested to evaluate performance.

The current rating system, which provides ratings of “outstanding,” “satisfactory,” “needs to improve” and “substantial noncompliance” came under some criticism. Some participants suggested a school-style letter grade system or a numerical rating.

Data collection and reporting. “Banks are different and communities are different,” Roberts said. “You can’t have a one-size-fits-all answer. We’re not trying to oversimplify, but to add clarity and get rid of unnecessary complexity.”

Defining community development activities. Banks and community groups sought clearer definitions for what qualifies as an eligible “community development” activity.

“One of the interesting things is how you handle community development with flexibility without losing some of the focus,” Roberts said. “Gov. [Lael] Brainard of the Fed floated the idea of a community development test and I think the Fed listening sessions showed the advantage of that, while also preserving banks’ focus on things like the LIHTC, NMTC and HTC.”

Next Steps

Roberts said making changes in the CRA is complicated, but expressed hope for progress.

“My hope is that we’ll have a proposed rule this year,” Roberts said. “I think agencies seem very committed to doing that. Grovetta Gardineer [senior deputy comptroller at the OCC] made a comment that they were aiming for sometime this summer. It’s good if people have a sense of urgency.”

Roberts added that stakeholders were vocal in what they want is important.

“Every interest group is going to say that what they do is most important and the CRA should be supporting that,” Roberts said. “That’s totally understandable.”