A summary of feedback from 29 roundtable discussions on Community Reinvestment Act (CRA) modernization, hosted by the Federal Reserve System between last October and this January, shows interest among banks and community stakeholders in updates to the definition of a CRA assessment area, CRA recognition of mobile and online activities, and, among other things, an expansion of CRA to entities such as credit unions, insurance companies, financial technology companies, mortgage brokers, and other non-regulated and/or non-depository institutions.
The summary report, released Thursday by the Fed, comes amid growing discussion among regulators and interest groups about what will follow the advanced notice of proposed rulemaking (ANPR) issued last August by the Office of the Comptroller of the Currency (OCC) on how to update current CRA requirements for federally insured banks and savings institutions. Neither the Fed nor the Federal Deposit Insurance Corp. (FDIC) was a party to that ANPR, but regulators indicate that a proposal for CRA rule changes is expected by late summer. The Fed says the CRA roundtable feedback will factor into its own consideration of any proposals.
The anti-redlining CRA, enacted in 1977, obligates federally insured banks to serve low- and moderate-income areas (within the bounds of safety and soundness). The Fed-hosted roundtable discussions centered on five key areas. The below information is excerpted and summarized from the feedback reported:
- Assessment areas: Currently under the CRA, a bank’s assessment area is based on geography – where a financial institution has its main office, branches, and deposit-taking automated teller machines (ATMs), the report notes. Roundtable participants generally agreed on the need for an update here in light of the changing landscape of financial services and the growing use of technology in delivering them. On the other hand, participants said the current definition, based on geography, generally works well for smaller community banks that operate primarily through retail branches. Theyalso said banks with a significant online or digital presence find the current assessment area requirements challenging.
- CRA in underserved communities: Several roundtable respondents recommended creating specific “CRA zones” and providing CRA credit for any qualified CRA activity in that zone, but they differed on how to do this and who should designate them (for example, the federal government or local authorities). “Regardless of how these zones could be designated, many participants stated that these areas should be clearly defined, and banks should know exactly how their activities in these zones will be evaluated and what documentation (if any) would be required to show how area lending, investment, or service needs were met,” the report says. Generally, participants said they wanted clearer standards for meeting needs within assessment areas. Some community groups urged the regulators to select more rural assessment areas for full-scope review to discourage banks from concentrating their CRA activity in one area (a bank may have more than one assessment area; the examiner decides which ones get full-scope vs. limited-scope reviews); they also suggested updates to what constitutes low- and moderate-income (LMI) and underserved populations.
- Performance test structure: The report notes that there are five different CRA evaluation methods tailored to a bank’s size and business model. Bankers and community group representatives agreed on the need for reform of the performance test structure; there was widespread agreement that different evaluation methods should be maintained. Banks are now sorted into three categories for CRA evaluation: small bank, intermediate small bank, and large bank. Some participants suggested updates to the asset thresholds for these categories; one idea was to raise the asset size of an intermediate small bank to somewhere between $1 billion and $5 billion; another was to split the large bank category into two levels. In both cases, there were concerns about a bank’s capacity to serve in a way that meets CRA standards. Banks and community representatives both expressed concern about the idea of a single metric being used to evaluate community development activities.
- Evaluating performance: Nearly all meeting participants stressed the need for more clarity, consistency, and timeliness with CRA examinations, the report said. Bankers wanted more clarity and uniformity, but others noted concerns that setting specific activity thresholds for a certain rating could encourage banks to focus on high-value markets or the highest-value activities. Few specific metrics were proposed, though there was discussion of how to construct the metrics and how to measure bank capacity. Many stated that if metrics are used in examinations, they need to be transparent and utilized consistently across agencies. Other comments included that banks should be evaluated not just on numbers, but on community impact. Some participants also suggested updating the rating system itself – going to a letter grade system; splitting the “satisfactory” rating into “high satisfactory” and “low satisfactory”; giving banks incentives, such as discounting the cost of deposit insurance for those achieving the “outstanding” rating.
- Defining community development activities: Both banks and community groups emphasized the need to more clearly define what qualifies as an eligible “community development” activity. Bankers generally wanted to know in advance whether they will get credit for a community development loan, investment, or service in advance; one banker suggested a “hotline” banks could call ahead to see if an activity might be counted. Several of the participants stressed the need for transparency about what activities are eligible, while others noted the benefit of having a national registry or “menu” of eligible activities. Representatives from community development financial institutions (CDFIs) also suggested ways to make loans to CDFIs count toward CRA credit the way investments do; and, among other things, that activities with CDFIs as well as disaster relief efforts automatically qualify for favorable CRA consideration, or qualify without burdensome documentation.
The above comments were in response to specific questions the Fed representatives posed to roundtable participants. Others, however, came up when respondents were asked if they had other input. The notion about expanding CRA coverage itself to include credit unions, insurance companies, fintech companies, etc., was among that other input. Others suggested that privately negotiated “community benefit agreements” be overseen and enforced by regulators; called for more timely examinations; and said regulators should improve and standardize examiner training across agencies for exam consistency.