April 4, 2018

Treasury Releases Findings and Recommendations for Reforming the Community Reinvestment Act

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Yesterday the Treasury Department released a report with findings and recommendations related to the Community Reinvestment Act (CRA). The report is targeted at the primary CRA regulators – the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC) – and provides recommendations for regulatory and administrative reforms intended to reduce CRA complexity and burden and expand its impact.

CRA was enacted in 1977 with the goal of encouraging banks and other depository institutions to meet the credit needs of the communities in which they operate, including low- and moderate-income (LMI) neighborhoods. CRA requires that financial institutions lend to LMI communities within their assessment area – the geographic area surrounding an institution’s depository locations. In addition to getting credit for mortgage and small business lending, banks can receive positive CRA credit for investing in the Low-Income Housing Tax Credit (Housing Credit), the New Markets Tax Credit (NMTC) and the historic rehabilitation tax credit.

In June 2017, Treasury sent a report to the President committing to a comprehensive analysis of CRA, including how it can be improved to align with the needs of communities in a manner consistent with safe and sound lending practices. Treasury met with community and consumer advocates, financial institutions and the three CRA regulators to develop the following recommendations, which focus on four main areas: assessments areas, examination clarity and flexibility, examination process, and performance.

Assessment Areas
Significant changes in the banking industry have occurred since 1977 –  including interstate banking and online banking – that have expanded banks’ reach beyond the scope that was originally targeted by CRA. As a result, Treasury notes that communities being served by a bank may still be excluded from CRA-eligibility. 

Treasury recommends that the definition of assessment areas be updated to include LMI communities outside of the bank’s physical footprint and where the bank does substantial business, enabling banks to receive credit for investments in these LMI communities and other identified areas.

Examination Clarity and Flexibility
Treasury notes that “successful administration of CRA depends on consistent and clear guidance for both banks and examiners,” but the agency found subjective variations in the way each of the CRA regulators carries out the CRA examination process. This lack of predictability and clarity across the three regulators makes it difficult to determine whether a loan or investment will qualify for CRA credit.

Treasury recommends establishing clearer standards around what is eligible for CRA credit, less subjective evaluation techniques, and greater consistency and predictability across the three regulators. 

Examination Process
Treasury found that there are significant timing delays in the examination processes across the three CRA regulators and no set timeframe in which they must publish performance evaluations. This creates outdated CRA ratings and does not provide sufficient time for banks to correct their performance for their next evaluation cycle. 

To address these identified burdens, Treasury recommends that CRA regulators standardize CRA exam schedules across the three agencies. Treasury also supports statutory changes to improve the timeliness of evaluations and ratings. 

Performance
Banks are incentivized to comply with CRA because regulators consider a bank’s CRA rating when approving applications for mergers and acquisitions. Further, CRA performance evaluations are made publicly available, which can incentivize banks to stay in compliance.

Because a bank’s CRA rating is adversely affected by evidence of discriminatory or other illegal credit practices in any location, Treasury identified a need for uniform guidance across the CRA regulators that considers the connection between the CRA rating and the evidence of discriminatory or illegal credit practices. Treasury recommends that consideration be given to any remediation efforts that the bank has taken, and that CRA performance evaluations not be delayed due to pending consumer protection law investigations or enforcement actions. 

Additional Items
In addition to the primary issues raised by CRA stakeholders, Treasury also provided findings and recommendations around: the disparate treatment of debt and equity investments; the inclusion of affiliates in CRA assessments; the impact of the Comprehensive Capital Analysis and Review (CCAR) process on CRA investments; and the treatment of nonbanks in CRA requirements. 

Next Steps
Treasury’s recommendations will be reviewed by the banking regulators, who are responsible for carrying out any proposed reforms. Comptroller of the Currency Joseph Otting has expressed commitment to modernizing CRA, and OCC is expected to release an advanced notice of proposed rulemaking on CRA in the coming weeks. 

Typically, all three banking regulators would sign on to a notice of proposed rulemaking since the regulations fall under their combined jurisdiction, but it is unclear at this point if the Federal Reserve and FDIC will sign on to the OCC’s notice.

Enterprise has previously submitted comments in response to CRA regulations and we remain committed to advocating for LMI communities throughout the CRA reform process. Stay tuned to the Enterprise blog for more information as additional CRA recommendations and reform proposals are introduced.