The news: The Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp (FDIC) have collaborated on a proposed update of the Community Reinvestment Act (CRA).
The banking regulators will accept comments on their proposal until August 5, 2022.
What is the CRA? The CRA requires the Fed and other agencies to encourage banks to help meet the credit needs of their local communities, including low- and moderate-income (LMI) neighborhoods.
Enacted in 1977, along with other complementary federal civil rights laws, the CRA sought to address redlining and other systemic inequities in access to credit, investment, and banking services faced by LMI and minority communities.
The Fed oversees CRA compliance among state-chartered banks within the Federal Reserve System by:
What prompted this overhaul? Financial inclusion remains a work in progress. And the CRA, which was last updated in 1995, fails to reflect how technology has substantially changed the way banks do business. Banks’ branch footprints are still central to the metrics of CRA tests.
A look at the CRA proposal: Banks would be subject to up to four tests: 1) retail lending; 2) retail services and products; 3) community development financing; and 4) community development services.
CRA reviews would acknowledge the differences in bank sizes—which the proposal updates—and business models, and be tailored accordingly:
Large banks would face tougher examinations. The new metrics would be mandatory for large banks. Small and intermediate banks could choose to be measured by existing metrics, or a combination of new and old tests.
Michelle Bowman, one of the Fed’s governors, expressed concerns that banks with assets above $10 billion might find it onerous to gather and report extensive new information on assets, loans, channel usage, community development loans and services, and detailed information about branches.
New assessment criteria apply to some banks. Agencies would still use “facility-based assessment areas,” based on branch locations, to measure how banks are meeting CRA specifications.
Banks would have more clarity on how their activities would be credited. Agencies would create a list of community development activities that qualify for CRA consideration, letting banks know in advance whether engaging in those activities would be worthwhile.
The big takeaway: Expanding the CRA from a local service focus to a national one, when appropriate, is an effective step toward its modernization.
But to truly promote community reinvestment, the proposal also needs to address nonbanks that originate government-backed home loans—as Illinois, Massachusetts, and New York are already doing. Nonbanks now own roughly two-thirds market share, and have become the primary source of mortgage originations and a growing source of mortgage servicing.