September 5, 2018

OCC Requests Public Comments on Overhauling the Community Reinvestment Act

Last week the Office of the Comptroller of the Currency (OCC) released an advance notice of proposed rulemaking (ANPR) seeking public comment on reforming the Community Reinvestment Act (CRA). The ANPR seeks stakeholder input on: increasing lending and services to low- and moderate-income communities; clarifying and expanding the types of CRA-eligible activities; defining assessment areas; making CRA evaluation more transparent; improving the timeliness of CRA regulations; and reducing the regulatory burden of CRA performance evaluations. 

The CRA was enacted in 1977 largely as a response to “redlining,” a discriminatory practice in which banks would deny loans to residents living in neighborhoods, often those with large minority populations, that they deemed hazardous. The law requires that financial institutions lend to creditworthy borrowers in low- and moderate-income communities within their assessment area – the geographic area surrounding an institution’s depository locations. In addition to receiving positive CRA credit for mortgage and small business lending, banks can also receive credit for investing in certain affordable housing and community development programs and incentives, including the Low-Income Housing Tax Credit (Housing Credit), the New Markets Tax Credit (NMTC) and the historic rehabilitation tax credit.

Metrics-Based Assessments – Including the “Simple Ratio”

The OCC seeks public input on establishing a metrics-based framework for evaluating a bank’s CRA performance with the goal of reducing regulatory burden on banks, providing greater transparency to the rating process, and allowing regulators to better track the impact and effectiveness of the CRA going forward. 

A critical proposal in the ANPR involves creating a ratio test to rate banks’ CRA activity by comparing a bank’s total CRA-qualified investments against a measure of the bank’s capacity to lend (for example, total assets). This “simple ratio” proposal could have significant implications on the amount and type of investment in affordable housing and community development programs. If banks are provided with an exact threshold, they may be less likely to engage in innovative activities or go beyond what is necessary to meet their CRA requirements. 

The ANPR also seeks feedback on providing additional weight to certain categories of activities, asking whether a $1 loan product should count as $1 in the aggregate, while a $1 community development equity investment counts as $2 in the aggregate. When combining this concept with the simple ratio proposal, which would establish a set threshold of investment, there is a concern that total community development equity investments would ultimately be reduced. This includes investments in the Housing Credit, New Markets Tax Credit, and other affordable housing and community development incentives.

Defining Assessment Areas

CRA investments are currently evaluated based on a bank’s assessment area – the geographic area surrounding an institution’s depository locations. Because CRA was a direct response to discrimination against whole neighborhoods, i.e. redlining, the law is explicitly tied to physical bank branches as a means of countering this geographic inequity. Banks can also receive positive CRA credit for investments made in designated disaster areas (DDAs) outside of their assessment area, providing that the qualified investment is made within 36 months of the designation.

In the more than 40 years since CRA became law, though, technological advances have significantly changed banking operations, shifting the focus from purely physical bank branches to more online services.

Citing concern that current regulations may be limiting or restricting investments in some areas of need that do not currently qualify for CRA credit, the OCC is seeking input on ways in which banks could expand their assessment areas beyond their brick-and-mortar branch and deposit-taking ATM footprint. This could allow banks to receive CRA credit in areas where they are engaging in CRA-qualifying activities but that do not fall within their assessment area. 

Qualified CRA Activities

The OCC is also seeking to provide increased certainty and clarity on CRA-eligible activities and investments. Current regulations broadly categorize CRA activities as either retail or community development investments, but the OCC notes that stakeholders have expressed confusion about which investments qualify for CRA credit.

The ANPR requests comments on changes that would ensure a broad range of community and economic development activities are considered for CRA credit, with a focus on serving low- and moderate-income populations and areas, and an emphasis on setting clear standards for determining CRA eligibility. For example, it requests comments on better defining “community and economic development,” and whether there needs to be specific standards for determining which activities qualify.

Reporting Requirements

Finally, the ANPR asks several questions about the bureaucratic burden associated with the current CRA reporting requirements and whether the process could be streamlined through the adoption of a more standardized metrics-based evaluation framework. In an op-ed, Comptroller Otting wrote, “Transparent and objective metrics would support more timely regulatory decisions that rely on CRA performance ratings. Such metrics would also make institution and industry comparisons more possible and allow regulators to aggregate data in meaningful ways that are impossible today.” 

Next Steps

The CRA is regulated by the three primary banking regulators – the OCC, the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC). The OCC supervises national banks and federal savings associations; the Federal Reserve Board examines state member banks; and the FDIC examines state-chartered banks that are not members of the Federal Reserve System.

The three banking regulators typically all coordinate on plans to reform regulations. While the OCC is moving forward alone on the ANPR to seek public feedback, Comptroller Otting has stated that this does not “restrict or prohibit [them] from partnering” with the other regulators in the future. 

Comments on the OCC’s ANPR are due on November 19, 2018.

Enterprise is committed to ensuring that any reforms to CRA retain a robust affordable housing and community development delivery system. Stay tuned to our blog for more information.

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