While banks, community groups, and regulators all seem to agree that there is a need to reform the Community Reinvestment Act (the “CRA”), which was signed into law by Jimmy Carter back in 1977 and hasn’t received a major update since the Clinton administration, there is significant disagreement over whether or not the recently proposed changes represent a path forward toward modernization and simplicity or a path backward toward discrimination and exclusion. The regulators themselves can’t even find their way to agreement. The Notice of Proposed Rulemaking was issued only by the OCC and the FDIC. Notably absent was the Federal Reserve, which did not join in on the proposal or offer a counter-proposal. If the OCC and FDIC move forward without agreement from the Federal Reserve, different banks could be faced with wildly different CRA regimes.
The reaction from community groups has been mostly negative with critiques focusing on three different aspects of the proposal: the new presumptive ratings, the inclusion of opportunity zones and the expansion of small business qualification, and the ability to neglect certain assessment areas and still receive a passing grade.
The proposed rulemaking would create presumptive ratings that banks could determine themselves by looking at the amount of CRA-eligible activities as compared to the amount of deposits. If CRA-eligible activities total 11% or more of deposits, the presumptive rating is “outstanding.” At least 6% would be “satisfactory,” and at least 3% would be “needs to improve.” Regulators would still have the discretion to alter these ratings based on the facts on the ground. Those who are supportive of the proposal argue that this improves clarity for banks, but community groups are concerned that these new target percentages will allow banks to do just enough to get the rating that they desire without putting in any effort beyond that.
While the opening summary of the proposed rulemaking suggests that these revisions “could encourage banks to provide billions more each year in CRA-qualified lending, investment, and services,” critics are arguing that this would only be achieved by lowering the bar for CRA qualification. Banks would be incentivized to invest in opportunity zones, which are communities the federal government has identified as needing economic development and job creation, but banks would be less restricted in the type of investment that they make in those opportunity zones. Multiple community groups have argued that banks could receive CRA credit for building a sports stadium as long as it was constructed in an opportunity zone. Along the same lines, under the proposed regulations, more businesses would qualify as small businesses because of an increase in the revenue threshold, and more loans would qualify as small business loans because of an increase in the loan size threshold.
Community groups also argue that the effort by the OCC and FDIC to modernize the CRA to take into account digital banking by allowing for CRA credit from outside of traditional assessment areas would enable banks to receive a passing grade on their overall CRA rating, even if they received a failing grade in as many as 50% of their assessment areas. Their stated fear is that banks could now safely ignore the areas that they’ve wanted to ignore since the signing of the CRA into law more than forty years ago.
We believe the presumptive ratings are more likely to spur additional CRA activities by depository institutions than limit those activities. As to expanding the list of CRA-eligible activities, the concern of community groups as to the inclusion of opportunity zones is understandable as institutions might focus on opportunity zones rather than more traditional activities. By contrast, we believe that an increase in the size of a loan that can be considered as a small business loan is necessary to counter inflation. Finally, we disagree with the concern of community groups that the modernization of the CRA to consider digital banking will allow banks to ignore significant portions of their assessment areas. We believe the intent of the CRA is to cause depository institutions to service the needs of low- and middle-income residents in areas where they source their deposits, and the focus should not in 2020 and thereafter only be where institutions have main offices, branches and ATMs.
The proposed changes will continue to be the object of discussion and debate over the coming months. Congresswoman Maxine Waters has summoned Joseph Otting, a former bank CEO and current Comptroller of the Currency, to appear before her House Financial Services Committee on January 29. On that same day, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “The FDIC’s and OCC’s Proposed CRA Reform: What You Need to Know.” Click here to register.