Fed Provides Update on CRA Review

Financial Services Law

How is the Federal Reserve Board of Governors progressing with its critically important review of the Community Reinvestment Act (CRA)?

The agency released “Perspectives from Main Street: Stakeholder Feedback on Modernizing the Community Reinvestment Act,” summarizing the input it has received from bankers and community groups during a series of roundtable discussions on the CRA in recent months.

What happened

Recognizing that much has changed since the CRA was enacted in 1977, federal banking regulators have begun the process of reviewing the CRA in an effort to strengthen and modernize its applicability to the current financial landscape. Last year, the Treasury Department published recommendations for modernizing the CRA, followed by an advanced notice of proposed rulemaking from the Office of the Comptroller of the Currency seeking public comment on changes to the CRA.

To do its part, the Federal Reserve hosted 29 roundtables around the country between October 2018 and January 2019 to gather stakeholder feedback on the current state of the CRA and potential revisions to its implementing regulations. More than 400 bankers and community group members attended the events, which were held in both urban and rural geographies, from San Juan, Puerto Rico, to Rapid City, South Dakota. The Federal Reserve also invited representatives of the other bank regulatory agencies.

Hot topics included assessment areas, the CRA in underserved communities, performance test structure, performance evaluations and defining community development areas.

Discussing assessment areas, the Federal Reserve found “general agreement” among roundtable participants that the CRA regulations need to be updated as a result of the increase in the use of technology to deliver banking products and services.

Stakeholders had different opinions about how assessment areas should be defined, however. Some advocated for expanding assessment areas based on a combination of a bank’s lending activities, deposits and/or market share; other participants expressed concern with relying primarily on deposits to define assessment areas. Community groups told the Federal Reserve that maintaining a focus on physical branches remains important even as banks expand their online presence, emphasizing the needs of low-to-moderate-income (LMI) individuals, the elderly and rural populations.

While the threshold of loans or deposits to trigger the establishment of an assessment area received few specific suggestions, “nearly everyone” who commented agreed that the threshold should be specific and clear, the Federal Reserve reported.

Bank representatives also suggested that institutions could receive credit for activities that they were engaged in outside of their current geographic assessment area, noting that CRA investment “hotspots” and “deserts” occur because banks are currently only interested in activities within their assessment areas.

Roundtable participants offered ideas for how the CRA could be implemented more effectively to address the needs of all communities across the country, from the creation of specific “CRA zones” to the establishment of clear standards to determine whether a bank has satisfactorily met the needs within its assessment areas.

Community groups advocated for the selection of more rural assessment areas for full-scope reviews as well as an update on what constitutes LMI and underserved populations. Bank representatives pointed out that low population density and declining populations often mean rural branches are not profitable.

Both bankers and representatives from community groups agreed that the performance test structure for CRA evaluation “could use reform,” the Federal Reserve said, with “widespread agreement that different evaluation methods should be maintained.”

The asset thresholds used to determine whether a bank is a small bank, intermediate small bank (ISB) or a large bank are out of date, stakeholders told the agency, placing a significant regulatory burden on smaller institutions and creating compliance challenges for larger ones. Tweaking the thresholds would help (perhaps raising the ISB threshold to between $1 billion and $5 billion), although community groups cautioned that significant alterations to the ISB thresholds could have a negative impact on community development lending.

Nearly all of the participants stressed the need for “more clarity, consistency and timeliness with CRA examinations,” the Federal Reserve reported, with bankers emphasizing the need for greater clarity in exam expectations ahead of the review. Despite the fact that the use of metrics was discussed at all of the meetings, very few specific metrics were proposed to evaluate performance.

Community groups urged the Federal Reserve to evaluate bank performance on more than just the number and dollar amount of CRA activities, with measurement based on the impact of banks’ CRA activities. However, participants failed to reach consensus about how qualities such as “innovative, complex and responsive” should be measured.

Also discussed were improvements to the CRA ratings system (with suggestions to expand the ratings categories, perhaps splitting “satisfactory” into “high” and “low” ratings or using letter grade or numerical systems), strengthening public input, clarifying what qualifies as an eligible “community development” activity, and the expansion of eligible products and services for favorable CRA consideration.

To read “Perspectives from Main Street,” click here.

Why it matters

“Meeting with bankers and community group members in communities all around the country allowed us to hear nuanced perspectives about what works well and what could work better under the CRA,” Federal Reserve Board Governor Lael Brainard said in a statement. Banks and community groups recognize that compliance with CRA is a critical element in a bank’s ability to grow its franchise through mergers and acquisitions. Finding a path forward to modernize the CRA through clearly articulated goals and metrics which recognize that a bank’s footprint for lending and service is often not dependent on branch location has been a hot-button issue for bankers for many years. Input gathered from the more than 400 participants at the roundtables will allow the Federal Reserve to respond effectively to banker and community concerns to strengthen and modernize the CRA.