In May, the Federal Reserve, the OCC and the FDIC issued a joint proposed rule to revamp the way the agencies implement the Community Reinvestment Act, a landmark 1977 law that requires banks to offer loans, accounts and services to low- and moderate-income customers in the communities they serve.
This proposal is a long time coming. Treasury Secretary Janet Yellen — who was chair of the Federal Reserve at the time — said in 2015 that the agency was looking for ways to improve CRA implementation, but ultimately never issued a proposal. The Trump-appointed OCC chief Joseph Otting put forward his own proposal in 2018, which was finalized in 2020 and more recently rescinded by acting Comptroller Michael Hsu in favor of the joint proposal.
Through all of these iterations, the fundamental issues have remained consistent — community advocates want the CRA to be a policy lever that results in more investment in underprivileged neighborhoods, while banks want the test to be more consistent over time.
There are other issues that need to be addressed as well. One of them is accounting for the rise of mobile banking, which allows banks to serve customers in areas far removed from their branch network. Another is deciding what kinds of lending and services qualify for CRA credit.
And still another is deciding how rigorous the CRA review process ought to be and what a bank should have to do to earn a satisfactory rating — or, for that matter, an outstanding one.
The most recent proposal from the banking regulators threads these needles in various ways. Bank branches remain the central aspect of determining banks’ service areas, but the proposal also would apply CRA requirements to large banks with significant loan and service market shares. The proposal also would consider community development projects outside of bank service areas and would require banks to disclose the racial and ethnic backgrounds of its customers to better ensure that banks are serving underserved communities.
Under the existing CRA rules, banks are subject to three tests to determine their CRA rating: lending, investment and services, which are weighted as 50%, 25% and 25% of the rating respectively. The revised framework instead would use four tests: a retail lending test, a retail services and products test, a community development financing test and a community development services test. Small and intermediate banks would have the option of being tested under a combination of new and/or existing tests, while large banks would be subject to all four new tests. Banks with more than $10 billion of assets would have to collect and report additional data for each test.
The proposal also includes a holdover from Otting’s foray into CRA reform: the promise of a codified list of the types of services, investments and activities that would qualify for CRA credit.
While public comments on the proposal will likely not be issued until closer to the end of the public comment period on Aug. 5, early results suggest regulators are getting close to a deal that everyone can live with.
David Dworkin, president and chief executive of the National Housing Conference, a coalition of industry and advocacy interests, said making the tests tougher is a good start. The FDIC estimated that under the new framework, 9% of banks with assets of $10 billion to $50 billion and 4% of banks with more than $50 billion of assets would receive a “needs to improve” rating. By contrast, no bank with more than $10 billion of assets received that rating in 2021.
“Sure, I want to encourage everyone to succeed, but the idea that no one ever fails is not credible,” Dworkin said. “What they’ve done now is said that’s not going to be the case anymore; this is now going to be real grading.”