Community groups and banks agree that the Community Reinvestment Act needs an update, but with regulators beginning an ambitious overhaul of the 1977 law there is little agreement on how that update should look.
The Trump administration has been targeting the CRA — which measures how well banks lend to low- to middle-income areas — for a rewrite since last June. Comptroller of the Currency Joseph Otting said March 28 that the first draft would be coming in early April.
Otting set out some broad ideas that his agency, the Office of the Comptroller of the Currency, and the other regulators that oversee the CRA will present to the public. The Federal Reserve and the Federal Deposit Insurance Corporation also have responsibility for measuring banks’ compliance with the law, and the OCC says that it hopes the two agencies will sign on to the coming advanced notice of proposed rulemaking.
Banking industry experts and community groups all said that the broad strokes of the regulators’ plan sound promising, but few expect that comity to continue when the details come more into view.
“I think you can assume that everybody is not going to be happy,” Laurence Platt, a partner at Mayer Brown LLP, told Bloomberg Law.
The Trump administration first put the CRA in its sights in a June 2017 Treasury Department report outlining its broader views on altering the rules banks operate under.
The law calls for the OCC, the Fed and the FDIC to periodically measure how much lending the banks they oversee do inside geographical assessment areas based on their branch and ATM locations. If banks are found not to do enough of such lending, regulators can stop some business activities or hold up branch expansions and mergers. But it hasn’t been updated for nearly two decades.
The Treasury Department followed up the June 2017 statement on the CRA with an April 3 report outlining its thinking on ways to modernize the law. The report largely aligns with the path laid out by Otting.
“Our recommendations will improve the effectiveness of CRA by enhancing the assessment and examination process, enhancing the ability of banks to deliver services in the communities they serve while considering technological advances in the financial industry,” Treasury Secretary Steven Mnuchin said in a statement accompanying the report.
Changes to the Community Reinvestment Act have already begun, with the OCC under former acting Comptroller of the Currency Keith Noreika in October declaring that the OCC examiners would no longer include enforcement actions that are not linked to a bank’s CRA compliance in their rating.
That change was minor, and affected only one of the three regulators responsible for the CRA. Otting on March 28 laid out a host of other changes likely coming in a new proposal.
The broad outline Otting provided on March 28 largely highlights the areas in the CRA that community activists and banks have said need to be addressed.
Among the changes Otting said will be put out for comment include expanding the types of lending that would be included in calculations of banks’ CRA compliance to encompass small business, student lending and other money going into a community.
“I think there’s a sense that community-based activities, beyond individual lending, should be given more credit, such as small business loans and infrastructure loans,” Mayer Brown’s Platt said.
Other areas that are going to be addressed in the proposal will touch on the way CRA information is calculated and reported to the public. Currently, banks are examined for compliance every three to five years, and the banks’ reviews take an additional year.
Overall, Otting said the changes would be significant.
“This is monumental change for America,” Otting said in an appearance March 28 at the Operation Hope Global Forum in Atlanta.
The changes Otting discussed all sound promising, but they are vague. So fights are likely to emerge when the details come out.
“The comments that were made were vague enough to give you both concern and possible joy,” Taylor said.
One other aspect of the CRA that is ripe for reform is the geographic assessment areas regulators use to evaluate banks’ lending efforts. Otting and other regulators have yet to specifically outline their ideas for making changes to that, but both the comptroller and Fed Vice Chair for Supervision Randal Quarles have discussed including mobile banking, online lending, and other financial technology tools into their reviews.
How they elect to make that change is likely to be contentious as well.
“If the assessment area is poorly defined, then the CRA will lose its teeth and that’s going to drive CRA policy for a long time to come,” said David Reiss, a professor at Brooklyn Law School.
The Community Reinvestment Act was a response to the problem of redlining, which began in the 1930s at the Federal Housing Administration and was continued by banks after that. Redlining involves either a failure to lend or discriminatory pricing on financial products offered to people in neighborhoods based on racial or ethnic grounds or other considerations.
Supporters of the CRA have long worried that Republican, and more centrist Democratic, administrations would use modernization of the CRA to weaken its impact.
“This is something that’s vulnerable under any business friendly, bank friendly administration,” said Mehrsa Baradaran, a professor at the University of Georgia School of Law.
But the Trump administration, and the personal histories of several of its appointees working on the CRA modernization project, has increased those worries.
Mnuchin has experience with the CRA from his time as chairman of OneWest Bank. Community activists in California challenged the 2015 sale of that bank to CIT Group due to lending activities they said violated the law.
Otting, who is leading the OCC’s efforts at rewriting the CRA and has become the public face of the effort, served as chief executive of OneWest at the time.
Those facts, plus a general perception that the Trump administration has pulled back on civil rights and anti-discrimination enforcement efforts of the previous administration, have led to a lack of trust in the efforts to reshape the CRA.
“Numerous people in the OCC tell me we’re likely to be pleased . So I guess I’m optimistic. I just don’t know why that would be the case given so many things that have happened in the Trump administration,” John Taylor, the president and CEO of the National Community Reinvestment Coalition, told Bloomberg Law.
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