When looking at modernizing/improving the Community Reinvestment Act of 1977 (CRA), regulators need to take a look back to the past to see how we got to where we are. This look backward, while disconcerting, is not that difficult. Redlining was (is) real. Historically, it was an accepted and documented way to let lenders know which neighborhoods were “credit-worthy”, and more precisely, which were not.
Lenders extending credit to a person or business within the red lines would charge higher interest rates to compensate for the perceived risk. Used in a similar way that credit reports are used today, redlining was anything but colorblind.
The 1977 Act put an end to the “documented” practice of redlining and instituted periodic exams designed to ensure banks were meeting the credit needs of the entire community, including the low and moderate income neighbor-hoods and individuals (LMI).
Of course banks were expected to do this without compromising their own safety and soundness. The CRA exam grade they receive can (and should) be used to influence decisions on mergers, acquisitions and even new branch openings.
Success of the 1977 Act is difficult to measure. Proponents will say that since some loans were made in LMI neighborhoods that otherwise would not have been, it was a success. In addition, certain charities (like Habitat for Humanity) attract big bank donors to gain CRA credit. Wells Fargo and BofA, for example, have been big partners of Habitat for Humanity for years. Yet, it’s impossible to know if they would be so committed absent the law.
Results are hard to quantify. That may be the biggest problem, but it’s certainly not the only problem. Exams are inconsistent—from regulator to regulator and even from one examiner to another within the same agency. Now there’s a bigger problem: How to determine an assessment area in the digital age.
Last May regulators issued a joint proposal to strengthen and modernize the 1977 law. Michael Barr, Vice Chair for Supervision of the Federal Reserve, just expounded on that proposal this week at the National Community Reinvestment Coalition Just Economy Conference in Washington.
He broke it down into four goals:
1) The Original: To address inequities in access to credit and promote community engagement and financial inclusion in low- and moderate-income communities. (i.e., the original goal.)
2) Modernization: to address the significant changes in the banking sector since the regulations were last substantially revised more than a quarter century ago. This involves evaluation of online and mobile banking, branchless banking, and hybrid models.
3) Transparency: provide greater clarity, consistency, and transparency so that everyone—the public, community groups, and banks—understands what counts for CRA consideration and how a bank's rating is determined.
4) Fairness: must accommodate banks of different sizes and business models and ensure that smaller banks do not have the same requirements as large banks with much greater capacity.
(The current CRA does allow for banks of different sizes and does not rate them the same as the Big banks. In fact, there are several levels: large bank, small bank, intermediate small bank, wholesale, hybrid, etc., but it’s always good to readdress.)
The last time CRA was overhauled was 25 years ago. The internet was in its infancy and we loved hearing, “You’ve Got Mail”. Yes, it is well past time to readdress, but better late than never.
While we wait for this new and improved CRA, exams continue the old way. The 37 banks listed on page 5 each have work to do on their CRA endeavors, even using the old standards. Most banks easily sail through their CRA exams with either an Outstanding or Satisfactory rating, but these 37 missed the mark, some by a wide margin (notice the three “Substantial Noncompliance” at the top).
Typically, banks are evaluated every three years, but smaller banks may be evaluated less frequently. 5-Star Liberty SB, FSB, Wilmington, OH, which is now a $1.1 billion bank, had its last evaluation completed in 2017. At that time, its assets were just $624 million and its evaluation type was “intermediate small institution”. Liberty Bank is on the OCC schedule for later this year.
Larger banks and/or banks with work to do on their previous exam, may have their CRA evaluation performed more frequently. Large banks and branchless banks will be the most troublesome in determining the new CRA rules because a CRA assessment area is (and should be) determined by where the bank’s deposits come from. Some attempts have been made to change the assessment area to where a bank makes loans instead. If that happens, it would fly in the face of the very name: Community Reinvestment.