Since 1977, the Community Reinvestment Act (CRA) has driven billions of dollars in bank lending and investment in affordable housing, small business and other community amenities to low and moderate income neighborhoods. CRA requires banks “to help meet the credit needs of the entire community”. It is enforced by challenges from community groups and by CRA examinations conducted by the banking agencies.
In a very unusual move, on May 20th, the Office of the Comptroller of the Currency (OCC) released a final rule revising the Community Reinvestment Act (CRA) regulations without the other two banking agencies joining in. The OCC’s unilateral action is the culmination of a long regulatory process in which the OCC tried and failed to get the other agencies to endorse a radical revision of how banks are evaluated on their CRA lending, investments and services in low and moderate income neighborhoods.
It is one of the peculiarities of the U.S. system that banks can choose whether they want to be regulated as national banks under the Office of the Comptroller of the Currency or as state chartered banks under the Federal Reserve or Federal Deposit Insurance Corporation. In order to avoid the danger that banks will use this system to their advantage, the banking agencies usually issue major regulations jointly so there is no advantage for a bank to change its charter to get more favorable treatment. For the time being, however, national banks above a certain size could have different CRA exams than banks regulated by the FDIC or the Federal Reserve.
The OCC issued the final CRA rule just six weeks after receiving over 7500 letters commenting on a proposed rule that the agency issued with the Federal Deposit Insurance Corporation in December. Most of the letters opposed the proposal. The final rule noted, “Although commenters disagreed with the approach outlined in the proposal, the agency ultimately agreed with the minority of commenters who expressed support for the proposed framework.” After reviewing the flood of comments, the FDIC failed to endorse the OCC’s final rule.
What the OCC proposed that aroused so much opposition was to change how banks are evaluated under CRA. They changed where banks would be evaluated, what activities count for CRA credit, and how ratings would be calculated. A controversial piece of the OCC proposal was to create a ratio of qualified CRA activities divided by bank deposits as the basis for a bank’s CRA rating. The proposal included other features that attempted to ameliorate the myriad problems with reducing CRA compliance to one simple ratio. Most commenters noted that the proposal was not notably simpler or fairer than the current system which has been criticized for being opaque and overly complex.
NCST commented on many of the destructive aspects of the proposal in our comment letter. We pointed out that communities with low property values would be disadvantaged by rolling up all CRA activities into one ratio. The OCC’s proposal also included CRA credit for activities like financing stadiums or infrastructure in the CRA ratio. These expensive activities could displace low value mortgage lending and thus allow banks to pass CRA exams while neglecting communities.
There were some improvements in the final rule that reflected some of the points that NCST made in our letter. For example, we pointed out that the numerical targets of 6% to get a satisfactory rating and 11% to get an outstanding rating were not backed up by any data. The final rule deleted these targets and stated that the OCC would do more research before publishing the rating thresholds. In addition, the OCC initially proposed that banks needed to pass a retail lending distribution test in only 50% of assessment areas. NCST proposed that 80% was a more meaningful test and the final proposal included the 80% requirement for banks with more than five assessment areas. The final rule also reflected NCST comments with some restrictions on how stadiums and infrastructure would count for CRA.
While the final rule is troubling and counterproductive, there are reasons to think that it may never go into effect. The final rule exempts banks with less than $2.5 billion in assets from the new system, so 89% of OCC banks will not be covered in any case. Furthermore, the new evaluation system will not be fully implemented until 2023. In addition, it is likely that there will be legal challenges to the hasty way the agency drafted the final rule. The courts may well invalidate the rule because the agency violated federal rulemaking procedures. Finally, the House of Representatives has passed a resolution of disapproval of the CRA rule by a vote of 230-178.
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