by Kendra Garrett, TAAHP Policy & Regulatory Manager
Most agree the Community Reinvestment Act (CRA) reform is needed, but the latest proposal is causing concern. The new rule could leave developers looking for new funding sources and residents with even less affordable housing inventory. The proposed rule broadens the definition of what finance activities qualify as a community benefit. It also streamlines the new performance metric, which may not reflect the true investment in low- and moderate-income communities.
Why Does the CRA Matter?
To combat racial and economic discrimination in the housing and finance sector, the CRA was established to regulate financial institutions to serve the needs of local communities. Since its passage, the CRA has leveraged trillions of dollars in loans, investments and services for low- and moderate-income borrowers. Additionally, partnerships between banks and community groups have formed to promote access to credit for residents to obtain a mortgage, start businesses, and foster development in struggling communities.
CRA Reform: Time for Change?
In 2018, the Trump administration announced plans to modernize the CRA, arguing that the law has not kept up with technological change to serve the needs of today’s personal banking needs. Many stakeholders have criticized whether the regulation is too restrictive or argued that it is not holding banks accountable enough. Recently, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) unveiled their proposal to the CRA.
Current CRA Framework
Banks are currently evaluated in three primary areas. These areas include their activities to provide credit and services as well as the degree to which they make investments in low- and moderate-income (LMI) communities where they operate or in designated assessment areas. The framework is as follows:
- Lending – consider lending activities to LMI communities, including loan to deposit ratios, geographical distribution of loans, lending to borrowers of different incomes and in different amounts.
- Investment – direct lending and investments that qualify as public welfare investments (PWI) or community development investments (CDI) such as Affordable Housing.
- Service – a service that’s primary purpose is community development.
Banks are graded on a uniform, four-tiered rating system. and the performance rating they receive may affect an institution’s ability to expand its operations and risks its reputation in the community. To comply with the federal rule, banks must receive at least a satisfactory rating to maintain the ability to expand operations and avoid risks its reputation in the community.
Proposed New Framework
The CRA rule hasn’t been updated since 1995 and is due for changes to reflect how people and businesses bank. However, there is contention on how best to improve this rule to adjust to technological change while ensuring its effectiveness according to its original intent while maintaining proper accountability and enforcement for financial institutions.
The major changes to the proposed rule include:
- Establishing a single metric CRA ratio, or “CRA evaluation measure”, at the bank and the assessment level: ,
- Expanding the list qualifying activities that count towards a bank’s CRA requirements, and
- Creating two new types of Assessment Areas (AA):
- Facility-Based AA – includes branches, offices, and other physical locations used for deposits
- Deposit Based AA – includes geographies where the bank sources 5% or more of its domestic retail deposits.
Industry and Community Leaders Raise Concerns
The Federal Reserve, indicating disapproval of the new rule, did not join the OCC and the FDIC on the proposal. Federal Reserve Governor Lael Brainard, stated, “The value of these services may vary greatly from community to community. It is difficult to monetize this value in a consistent way relative to the value of lending and investment, thus introducing the risk of skewing incentives inadvertently.”
Concerns from community advocates include:
- The new rule takes a “count the widgets” approach that does account for the quality and character of the bank’s activities and its responsiveness to local needs.
- For example, the rule would prioritize larger, simpler deals over smaller and more complex deals that might have a more positive effect.
- It would broaden what bank activities are CRA-qualifying so that CRA dollars may look like they are increasing but may actually decrease for LMI consumers/communities (i.e. essential infrastructure, sports stadiums,… etc.)
- It would create loopholes around the use of assessment areas, allowing outside investment and diminishing their importance, significantly diluting the focus of bank activities on LMI consumers and communities.
Industry experts are asking if the proposed CRA rule will disincentivize banks from investing in affordable housing or community development. In addition to the possibility of less affordable housing lending, loosened requirements could result in LMI and high-opportunity areas receiving less affordable housing than the market demands. The national housing crisis indicates the importance of maintaining financial investment in local communities.