Last month, the Office of the Comptroller of the Currency (OCC), an independent bureau within the U.S. Department of the Treasury, along with the Federal Deposit Insurance Corporation (FDIC), proposed rules that would considerably weaken the regulations governing the Community Reinvestment Act (CRA).

The CRA, first enacted into law in 1977, was created to combat redlining – a practice started in the 1930s to describe the discriminatory act of marking off neighborhoods where banks would deliberately avoid lending based on race, ethnicity, or religion.  The CRA requires banks to affirmatively and continually meet community needs for credit and banking services in low- and moderate-income (LMI) communities.

In the years since the CRA was enacted, lenders have made billions of dollars in loans and investments in underserved communities, supporting affordable housing, small businesses, and economic development. An analysis of the CRA by the Federal Reserve found that the CRA led to a 20 percent increase in lending to minorities and LMI borrowers.

While it is common practice for rules governing programs like CRA to be updated from time to time (the CRA rules have not been updated in nearly 25 years), the rules that have been proposed by the OCC and FDIC aim to lessen the public accountability of banks to their communities. The rules, as proposed,  enact performance measures on CRA exams that would simultaneously be complex and muddy while at the same time over-simplifying how to measure banks responsiveness to local needs. The results will be significantly fewer loans, investments, and services to LMI communities most in need of more credit and capital. 

The rules are divided into various sections which cover what activities are counted, where activities are counted, and how activities are counted.

How is Counts: Banks are currently assessed on the goal of serving all communities where they do business. The proposed rules would institute an overly simplified scoring system, called the single metric, that would disregard whether the lending needs of the local community are being served by the banks. This would incentivize large deals over access to loans for LMI mortgages and small businesses.

Where it Counts: The new rating system would allow banks to disregard up-to 50% of their assessment areas and still receive an overall passing grade. This is an invitation to a modern form of redlining where one can envision bank investments deployed in gentrifying neighborhoods while disinvesting in historically disenfranchised neighborhoods.

What Counts: The rules expand what activities would be eligible for CRA credit to investments that are unrelated to the intent of CRA. The definition of community development under the rules is relaxed in such a way as to permit funding for luxury condominiums instead of affordable housing, and would permit funding for athletic stadiums financed in LMI tracts to count towards CRA.

These proposed changes run counter to the purpose for which the CRA was created; to overcome the market failures caused by discrimination. By requiring banks to seek out business in LMI communities, CRA sought to break down barriers to information that contributed to a scarcity of lending. Instead of building on the progress that has been made, the proposed rules will reverse if not completely put an end to this progress by permitting banks to turn attention away from LMI communities.

Should these changes be implemented as proposed, it will have an adverse impact on the CRA and will represent a major setback after years of progress being made in providing financial access to LMI populations and communities. While the CRA rules are long overdue for an update, these changes are a step too far and will have a negative effect on a program that has represented meaningful progress for LMI communities.

Without access to capital, millions of people will miss-out on the opportunity to own a home, opportunities to create small businesses will evaporate, and Main Streets in cities across Ohio will deteriorate. The National Community Reinvestment Coalition estimates that even a modest decrease in CRA investment (10 percent) would result in nearly $1 billion lost in home and small business lending in just 5 years.

The 90-day comment period on the proposed rules ends on April 8. If you have not already done so, please review the full proposed rules and then submit comments outlining your concerns and urging the OCC and FDIC to reconsider the proposed rules and keep the CRA as a important and valuable tool in the toolbox towards ensuring LMI communities have access to banking and bank-lending.  

(Update: This blog has been updated to reflect that the OCC and FDIC have extended the comment period by 30 days. The new deadline for comment submission is now April 8, 2020.)