Strengthen, Not Destroy The Community Reinvestment Act (CRA)
“The CRA plays a vital role in bringing banks together with community members, small businesses, local officials, and community groups to make investments in their community’s future.”
– Governor Lael Brainard, Federal Reserve Board of Governors
The Community Reinvestment Act – the nation’s anti-redlining law – is under attack!
The Office of the Comptroller of the Currency (OCC) is proposing to weaken important Community Reinvestment Act (CRA) rules, which will result in fewer first time homebuyers, less ability for small businesses to grow and hire locally, a reduction in the development and preservation of critically needed affordable housing, and decreased consumer access to bank branches and affordable banking products; all the while allowing Banks to meet their reinvestment obligations, while ignoring low income communities and communities of color vulnerable.
The Community Reinvestment Act creates an affirmative and continuing obligation of banks to meet local community credit needs, particularly the needs of low and moderate (LMI) communities. CRA has resulted in trillions of dollars in loans and investments in LMI communities for homeownership, affordable rental housing, small business ownership and expansion, job creation, philanthropic support for local nonprofits, and branches and affordable bank accounts that can keep families away from predatory check cashers and payday lenders. CCEDA and our members meet with banks to help identify community needs, and design programs and investments to revitalize neighborhoods. In the last few years, our partner, the Community Reinvestment Coalition (CRC), has negotiated Community Benefits Agreements with banks that total billions of dollars in local reinvestment for California communities.
What exactly is happening?
The national bank regulator, the OCC, along with the FDIC, is proposing to weaken CRA rules in alarming ways:
- Breaking with precedent and creating an uneven playing field: In charging ahead without the Federal Reserve, the OCC and FDIC are creating a 2-tiered system of oversight where the rules of the game will not be the same for all banks. Even within this new tier, certain small banks can opt out of the new rules and reduce their existing community development obligations. This also presents the opportunity for larger banks to shift bank charters to benefit from easier OCC rules.
- Allowing banks to get credit for serving higher income people and neighborhoods retreating from a core CRA principle to serve LMI people and communities:
- Small business loan thresholds double – banks would get credit for larger loans (up to $2 million) and for lending to larger businesses (with up to $2 million in revenue in wealthy neighborhoods). Entrepreneurs and most small businesses, including family-owned mom and pop businesses, will lose out as banks migrate to the more profitable larger loans.
- Projects that only partially benefit LMI people, such as large infrastructure and energy projects, would get credit for that portion, even if the project would have no trouble getting financing and would only minimally benefit LMI people.
- Banks could get credit for financing rental housing with affordable rents, even if the units were occupied by wealthy tenants in wealthy neighborhoods.
- Allowing banks to get credit outside local communities: retreating from a core CRA principle to meet local credit needs:
- Creates a new bank level evaluation where ALL qualified activity gets credit, regardless of whether it’s near local bank branches or meets local needs.
- Creates a new process for fintech and non-retail banks (on-line banks) to have some reinvestment obligation where they take deposits, but does so in a way that it will likely not capture many banks, and does not require reinvestment where these banks lend and profit. CRA obligations would only exist when over 50% of bank deposits are from outside a bank’s headquarters, and obligations would be only where 5% of deposits come from. Much of the data behind these calculations is not readily available to the public.
- Failing to downgrade for harm inflicted by banks:
- The OCC still allows passing CRA grades even where there is evidence of discrimination.
- Devaluing bank activity that is important to local communities:
- Almost no credit for branches in LMI communities and no analysis of branches that are opened or closed in such neighborhoods, reducing the incentive for banks to keep them open.
- No consideration would be given to whether banks open accounts or have products that serve LMI consumers. This has been a key feature of CRA.
- No consideration of whether bank services and products are accessible to immigrant families through inclusive translation, interpretation, hiring and product offerings.
- No analysis of smaller loan sizes (under $100K, $100K – $250K) for small businesses.
- No consideration for whether economic development leads to job creation
- Dollar cap on economic development real-estate loans, which discriminates against high costs states like California.
- New grading system lowers the bar and undermines the anti-redlining intent of CRA:
- The current exam has a lending, investment, and service test that evaluates distribution of retail lending; number and dollars to finance community development; and analysis of bank branches, products, and volunteer activities. All activities must demonstrate how they benefit LMI people or neighborhoods.
- The new “one ratio” approach (even though the NPR acknowledges that majority of comments did not favor one-ratio) essentially evaluates the dollar amount of qualified activities in all three categories together, excluding anything that can’t be monetized, and compares it to a measure of deposits. This calculation is done at the assessment areas and then with a true one-ratio calculation at the bank-level, including activities both inside and outside of assessment-areas.
- This “Son of One Ratio” approach will incentivize banks to do the largest and easiest deals and emphasize quantity over quality at the expense of small nonprofits, small projects, and local impact. Overall bank level evaluation will consider all qualified activity anywhere, which will lead to further CRA grade inflation. For example, banks could count credit card and auto lending far from branches and without regard to local community needs. Currently, 97% of banks pass CRA exams. The proposal will make an easy test even easier.
- Assessment area evaluation allows banks to fail to serve up to half of their assessment areas and still pass overall. This will likely hurt rural areas and possibly increase redlining since banks can ignore areas perceived as harder to serve, which are more likely to be rural areas and LMI neighborhoods of color.
- The retail evaluation is graded pass/fail and only requires banks to lend at 55% of area demographics OR 65% of what their peers are doing. This is a low bar.
- The proposal to double credit given for certain community development (CD) financing could lead to LESS CD activity as banks could do half as much and get the same credit. This, coupled with less of an obligation to lend and invest locally, is almost certain to lower competition for, and thus, reduce the dollar value of, LIHTC investments. This will lead to LESS equity for affordable housing projects.
- All of the banks that get an outstanding rating under the new system won’t face a new exam for 5 years. Without more frequent oversight, what happens to the community in the interim?
- Importantly, the proposal threatens to reduce the critical role of community input in CRA:
- Banks will focus on large and simple deals and will not invest the time to talk to communities and potential partners to understand and better address local needs.
- The proposal creates an evaluation system that would be based on data not readily available to the public (or the banks!), which will make it much harder for the public to evaluate how well banks are serving the community.
- The proposal sets bank targets and a “presumptive rating” before even considering community input. Community input and community context will likely have little impact.
- The OCC and FDIC even propose to take away one the public’s right to walk into a bank and ask for a copy of a Bank’s CRA Public File to see how well it serves the community.
How you can take action:
- Submit a detailed letter describing the importance of CRA to your community and your organization. Instructions for submitting your comment letters, are available on CRC’s website at http://calreinvest.org/about/cra/.
- Get 3 other people to submit letters denouncing OCC’s proposal.
- Contact your congressman urging them to take action (i.e. issue a statement, submit a comment, and/or introduce a resolution.)
CCEDA is committed to supporting advocacy efforts to strengthen the Community Reinvestment Act, and is working with CRC and others to encourage its members to submit comment letters.
It is vital to defend the Community Reinvestment Act, a Civil Rights law passed in 1977 to address redlining and systemic lending discrimination. The OCC’s proposal to weaken the CRA is an attack on our communities