The Federal Reserve Board is standing firm in its goal of ensuring any reform of rules governing banks’ Community Reinvestment Act (CRA) requirements remains true to the statute, and it’s banking on input from the public to help ensure the best outcome possible for any final rule, according to remarks Wednesday by Fed Board Gov. Lael Brainard before the Urban Institute in Washington.
The board’s point person on CRA, Brainard delivered her remarks on the eve of publication in the Federal Register of the proposed CRA rule revision issued jointly by the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corp. (FDIC). In her speech, she summed up the Fed’s analysis, data, and proposals on CRA reform and said this information was shared in greater detail with the other agencies “in an effort to forge a common approach.” She said the Fed is continuing to support such an approach.
The Fed, in addition to its activities to generate stakeholder input, performed research based on past CRA evaluation findings. Noting that consistent data on CRA-eligible activity was not readily available, she said Fed researchers instead built a database drawing from 6,000 written public CRA evaluations going back to 2005 from a sample of some 3,700 banks of varying asset sizes, business models, geographic areas, and bank regulators.
Detailing the Fed’s findings, Brainard presented an approach to reform that uses separate retail and community development tests.
She said evaluating all retail banks under a stand-alone retail test “is important to stay true to the CRA’s core focus on providing credit in underserved communities in an assessment area.” An approach that combines all activity together “runs the risk of encouraging some institutions to meet expectations primarily through a few large community development loans or investments rather than meeting local needs,” she said.
Brainard also said having separate tests ensures that expectations are tailored for banks of different sizes and business models. “Only larger banks would be expected to meet the community development test along with the full retail test. Similar to today, smaller banks would have the option of having their retail banking services and community development activities evaluated in order to achieve an ‘Outstanding’ rating, but it would not be required,” she said. “Moreover, small banks below some threshold might have the option to be evaluated under the existing methodology.”
Additionally, she said, separate retail and community development tests provide greater scope to calibrate the evaluation metrics to the opportunities available in the market, which can differ for retail lending and community development financing.
Brainard said the Fed concluded that CRA metrics tailored to local conditions and the different sizes and business models of banks would do the most to meet the credit needs of the communities targeted by the CRA, and it would offer more consistent, predictable ratings than any comprehensive uniform metric. “Our analysis did not find a consistent relationship between CRA ratings and a uniform comprehensive ratio that adds together all of a bank’s CRA-eligible activities in an area,” she said.
She reiterated the Fed’s desire for a strong, common set of interagency standards. “By sharing our work publicly, we hope to solicit public input on a broader set of options for reform and find a way toward interagency agreement on the best approach.” Given that such reform “will likely set expectations for decades, it is more important to get the reforms done right than to do them quickly.”
The joint proposal from the OCC and FDIC is slated for publication in the Federal Register Thursday and will be out for a 60-day public comment period.
Reg Lookup: Community Reinvestment Act Regulations (OCC-FDIC proposed rule)