A federal regulator’s efforts to simplify how banks are assessed for serving lower-income communities is off to a rocky start due to growing skepticism from consumer groups and even bankers themselves.
The Office of the Comptroller of the Currency’s initial effort to overhaul Community Reinvestment Act rules seeks public comment on potentially replacing the existing evaluation categories with a single metric that would combine all of a bank’s CRA-eligible activity together.
The OCC said in an Aug. 28 rulemaking notice that such a change would make CRA evaluations simpler and provide a more uniform look at the way banks are investing in the communities they serve. Other regulators and even the industry aren’t sold on the idea and community development advocates fear a single metric could prompt banks to forego local, labor-intensive consumer lending in favor of equity financing for bigger projects.
“If your big goal is to get to a big number, what are you going to do? The small, hard-to-do loans that require a lot of work? Or are you going to do something that’s big, flashy and easy?” Jaime Weisberg, the senior campaign analyst for the Association for Neighborhood Housing Development, said in an Oct. 30 phone interview.
The CRA, which the OCC oversees along with the Federal Reserve and the Federal Deposit Insurance Corp., requires federal regulators to examine banks’ lending, investment and services in low- to moderate-income neighborhoods they serve. The exams focus on “assessment areas” defined by the placement of bank branches, ATMs and offices.
Regulators then give banks ratings ranging from “outstanding, satisfactory, needs to improve or substantial noncompliance.” A bad grade can block mergers, branch expansions and other growth efforts.
Comptroller of the Currency Joseph Otting, the former CEO of OneWest Bank, has said that the current grading system is not sufficiently transparent and is based on too many subjective judgments from regulators. Another concern is that the current system makes the evaluation process take longer than it should.
Going to a single metric for CRA compliance would fix those problems, Otting said in an Aug. 30 American Banker Op-Ed.
Banks aren’t quite sold on Otting’s proposal.
A single CRA number may be difficult to attain, particularly for larger banks, because they operate in communities with different characteristics around the country. Each of those communities have different needs, and banks need to serve them differently.
“I still think we need to understand the communities and how [banks] serves them,” Sarah Brons, the First National Bank of Omaha’s director of Community Reinvestment Act compliance, said in an Oct. 30 phone interview.
While Brons had some concerns with the idea of a single, national grade for banks, she said that it could be useful as part of a broader evaluation of a bank’s CRA compliance. It could also serve as a way to provide a sort of interim grade, she added.
Otting’s support for such a single metric elides many of the complications that switching the CRA evaluation process would involve, according Craig Miller, a partner at Mannatt Phelps & Phillips LLP.
In order to get at a single metric, banks would still have to get much of, if not all, of the information they currently divulge to regulators, he said.
That means that the examinations will have to remain just as demanding, Miller said in an Oct. 31 phone interview.
“In order to understand how someone is doing, you do have to look underneath the hood,” he said.
Technical questions aside, community activists fear that pushing toward a single metric could mutate the CRA into something that does not adequately review banks’ lending and investments in neighborhoods. All of that data is intended to create a detailed picture of lending activity.
“The intent and purpose and the entire legislative history of the CRA has been responsiveness to local credit needs,” Jesse Van Tol, the chief executive of the National Community Reinvestment Coalition and a member of the Federal Reserve’s Community Advisory Council, told Bloomberg Law in an Oct. 30 phone interview.
Van Tol is also a newly-minted member of the Fed’s Consumer Advisory Council.
So far, Otting’s idea has received pushback from other regulators.
Former FDIC Chairman Martin Gruenberg, who currently serves on the agency’s board, said in an Oct. 29 speech that going to a single ratio would allow banks to “pick and choose” which services they provide in the neighborhoods they serve and could remove the CRA’s local focus.
Gruenberg added that moving in the direction Otting favors could be illegal because of the CRA’s focus on credit needs of communities.
FDIC Chair Jelena McWilliams’s views on the single metric are not known at this point.
Fed Chairman Jerome Powell has also said that he wants to maintain the CRA’s local focus.
The Fed and the FDIC notably did not sign on to the OCC’s advanced proposal.
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