‘Tailoring’ one of 5 key principles needed for CRA ‘refresh,’ says Fed Gov. Brainard

Fed Gov. Lael Brainard speaking May 18

Five principles to guide banking regulators in their coming refresh of Community Reinvestment Act (CRA) rules were outlined Friday by Federal Reserve Board Gov. Lael Brainard during a speech before a community development conference in New York.

Brainard discussed how technology, consumer preferences and technology have affected the way banks operate and provide services, but she said the rules implementing the CRA – a law created to end “redlining” and ensure banks provide credit services in the areas they’re chartered to serve – can be modernized while continuing to focus on “place.”

The Fed, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corp. (FDIC) are reviewing the CRA rules and have had input from Treasury as well. Comptroller of the Currency Joseph Otting has said proposed rule changes are expected to be issued this month.

The five principles for a CRA “refresh” offered in Brainard’s speech Friday – given before the Association of Neighborhood and Housing Development’s Eighth Annual Community Development Conference – are recapped briefly below:

The importance of place: Brainard noted the shift to more online and mobile platforms that have made it possible for banks to serve customers “far beyond their physical branches.” Still, she said this shift has not eliminated the need for branches. “Recent studies measuring the impact of branch closures on credit availability in neighborhoods demonstrate that branches still matter, particularly with respect to accessing small business credit,” she said. That research found impacts on small business credit and showed that people in low-income census tracts “were more than twice as likely to live in a banking desert – an area without a branch within 10 miles – than those in higher-income tracts,” leading some people to “rely on more expensive alternatives that include payday loans, auto title loans, pawn shops, and check cashing services.”

Opportunities in underserved areas: CRA should be updated “in ways that reduce the distortions that lead to some areas becoming credit ‘hot spots’ and others credit deserts,” she said. “Where there is a high density of banks relative to investment opportunities, the result of too many banks competing for too few CRA-qualified investments can be declining returns. Meanwhile, other areas have a difficult time attracting capital not because the social return on investment is low, but rather because they are not in a bank’s major market, if they are served by a bank at all.” She said that however bank assessment areas are defined, “the regulations need to be designed and implemented in a way that encourages banks to direct their community investment activities productively.”

Tailoring: Brainard said the CRA regulations should be tailored according to differences in banks’ size and business model. “We should set standards that are flexible enough to evaluate the CRA performance of a $100 million bank no less effectively than a $2 trillion bank.” She noted banks’ desire for clearer, simpler rules that lead to “more CRA activity with less burden,” and she said regulators think this can be done “while retaining the flexibility to evaluate a bank’s CRA performance in light of its size, business model, capacity, and constraints as well as its community’s demographics, economic conditions, and credit needs and opportunities.”

Consistency and flexibility: The revised regulations “should promote greater consistency and predictability in evaluations and ratings, both within and across the agencies.” Brainard said members of the Fed Board’s Federal Advisory Council – bank industry representatives from the Fed’s 12 districts – recommend that regulations “need to be consistent across the [a]gencies and provide for all regulated financial institutions to be subject to the same CRA ‘crediting’, examination, and remedial standards.” She said banks seek clarity, and the community organizations and local governments that want their investment need it as well. “Regulatory streamlining can help to promote consistency, as would regular examiner training,” she said.

Fair credit access: Revised CRA regulations “should support [the underlying statute’s] position as one of several mutually reinforcing laws designed to promote an inclusive financial services industry,” she said. “The central thrust of the CRA is to encourage banks to ensure that all creditworthy borrowers have fair access to credit. For banks to be successful in meeting the credit needs of their entire community, it follows that they must guard against discriminatory or unfair and deceptive lending practices.”

Brainard also drew a connection between the need for a strong CRA “and the pressing challenge of affordable housing that is a key focus of the work that you all do.”

Fed Gov. Brainard’s Speech: Keeping Community at the Heart of the Community Reinvestment Act (May 18, 2018)