Several community groups have expressed opposition to the proposed rewrite of the Community Reinvestment Act, potentially setting up a lengthy process to finalize the modernization effort.
On Dec. 13, nine groups co-signed a letter to banking regulators that called for the dissolution of a rulemaking process launched the day prior by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Consumer advocacy groups are arguing the proposed rewrite undercuts the central purpose of the Civil Rights-era law that was enacted in 1977 to prevent the discriminatory lending practice known as redlining. The groups expressed concern about the proposal's aim to broaden the scope of activities that qualify for CRA credit and change how regulators test those activities.
Regulators have said they see the proposed rewrite as a way to increase incentives for banks to lend to low- and moderate-income communities. OCC Comptroller Joseph Otting said the proposed rule closed loopholes and will lead to greater investment in lower-income communities. FDIC Chairman Jelena McWilliams said the rewrite modernizes the CRA while preserving the core tenets that were working well.
Consumer advocates have not yet been convinced, nor have certain liberal politicians. Top Democratic members of Congress attended the Dec. 12 unveiling to voice concerns that the modernization process would abandon low-income communities. The congressional showing and the Federal Reserve's refusal to sign onto the process suggest the proposed rule could change before finalization, said Jesse Van Tol, CEO of the National Community Reinvestment Coalition, a nonprofit that advocates for investment in underserved communities.
"There is some countervailing pressure here," he said in an interview. "You could very well see that it [won't be] implemented by the time of the next election. And, depending on that result, you could see it stopped or revised significantly."
Consumer advocates say the proposed rewrite is overly reliant on a general performance metric that measures the sum of qualifying activities divided by retail domestic deposits.
"It really appears that the federal agencies are letting go of some of the core requirements of Community Reinvestment Act that ensured banks met the community needs of low- to moderate-income families and families of color," said Nikitra Bailey, executive vice president of the Center for Responsible Lending, a consumer advocacy nonprofit.
When the OCC issued the advanced notice for proposed rulemaking more than a year ago, it included questions about a metric-based approach that drew objections from community advocates and industry groups.
Since then, community groups have derided the general performance measure as a "one ratio" test that can be easily manipulated by banks. OCC's Otting rejects the framing, calling it "a rallying cry by people who don't support modernization." He said the CRA proposal has 40 to 50 measurements for the average bank, a far cry from one ratio.
The proposed rule does outline two tests separate from the "general performance" metric: retail lending distribution tests and community development minimums. The retail lending tests measure the number and volume of banks' lending products and require meeting established thresholds for any product with at least 20 loans in an assessment area. The community development minimum requires the total value of community development loans and investments exceeds at least 2% of the average retail domestic deposits in the assessment area.
While the proposed rule clearly details more than one metric, consumer advocates still think the single general performance ratio carries too much weight.
"You have one ratio at the bank enterprise level that determines the grade and creates a presumption of compliance," Van Tol said in an interview. He said the retail lending and community development minimum tests are "check the box" tests since banks are graded as either passing or failing, and banks have historically had little trouble passing their tests — more than 99% of banks currently have passing CRA grades.
"I went to a pass/fail high school," Van Tol said. "No one ever got the fail."
Consumer advocates are also concerned the CRA rewrite does not sufficiently protect the incentives banks had to maintain physical branches in low- to moderate-income communities. Van Tol and CRL's Bailey both said the proposal virtually eliminates the "service test," one of three tests under the existing CRA framework. Banks have been shedding physical branches over the last 10 years, and there is evidence that rural communities, particularly ones with significant minority populations, have suffered more closures. The FDIC and OCC rewrite could exacerbate that trend, said Stella Adams, CEO of SJ Adams Consulting, a fair-housing-focused consulting firm.
"I certainly think it will accelerate closures in low- to moderate-income communities as well as mid-sized and smaller [metro areas]," Adams said in an interview.