CRA: Too Important to Rush, Too Important to Wait
Federal bank regulators have been attempting to overhaul the 1977 Community Reinvestment Act (CRA) for a couple of years now. Since becoming law in 1977, CRA has been the impetus for trillions of dollars flowing into communities, many of which have low or moderate income levels. The regulations guiding CRA were revised in 1995 but have remained largely unchanged for the past 25 years.
The FDIC and the OCC have jointly proposed modernizing CRA in a way that they believe would encourage billions of dollars more to flow into neighborhoods. And while most people agree that modernization is in order, not all agree with their method. The FDIC/OCC plan would essentially gut the CRA as we know it and recreate it as a whole new animal. But is that really the answer?
Lael Brainard, Federal Reserve Board Governor, thinks not. Brainard would rather preserve what works while improving on the parts that do not. With all of the technological advances made in the past 25 years, it is easy to lose sight of the original intent of CRA, which was, and still is, to recognize and correct inequities in credit markets.
According to Brainard, revisions to CRA should:
- a)Reflect credit needs of local communities consistently through the business cycle;
- b)Be tailored to banks of different sizes and business models;
- c)Provide clarity in advance about how they will be evaluated;
- d)Encourage banks to seek opportunities in underserved and distressed areas;
- e)Recognize that CRA's purpose is to promote an inclusive environment.
Bauer agrees with Brainard that it is more important to get CRA reform right than fast. But the fact that the FDIC and OCC issued a joint proposal without the Federal Reserve on board is telling. Some observers believe the FDIC & OCC want to rush a rule change through Congress before the next election, fearing a Democratic sweep could derail their efforts. We don't know if that's true.
What we do know is that a) rushing something of this magnitude will never bring optimal results, and b) CRA modernization is far too important to let another 2 years pass (let alone 25) before it is updated.
Under current CRA guidelines, FDIC defines substantial noncompliance "SN" as a "substantially deficient record of helping to meet the credit needs of its assessment area, including low- and moderate-income neighborhoods, in a manner consistent with its resources and capabilities." There are currently three banks with this lowest rating:
3½-Star Lemont NB, IL has a loan to deposit ratio (LTD) of just 14% reflecting a poor level of lending and responsiveness to the credit needs of its assessment area (or any area for that matter). For comparison purposes, the LTD for similar banks during that time period was 76.42%. This indicates an opportunity to lend, but a lack of commitment to do so.
4-Star Reynolds State Bank, IL, which, after ten straight "SN" ratings, still has a loan to deposit ratio just slightly higher at 18%. The ratio is significantly lower than similar lenders in its area and is poor given the bank's size, and financial condition, not to mention the credit needs of its assessment area.
Another strike against Reynolds is that it eliminated Saturday hours, limiting customer access to the bank and its services.
Unlike the other two, 4-Star Second FS&LA of Philadelphia, PA, has a reasonable loan to deposit ratio of 92%. However, a substantial majority of its home loans were extended outside of its assessment area. Those that were extended within its area were distributed poorly, both geographically and across income levels. Second Federal does face stiff competition within its assessment area, but it must do better.
For the most recently released CRA Rating on any bank, either order Bauer's Due Diligence Bank Performance Report or visit: https://www.ffiec.gov/cra/default.htm. Community reinvestment should be everybody's concern.