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Fed's Brainard lays out alternative CRA plan that nixes 'single ratio'

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Fed's Brainard lays out alternative CRA plan that nixes 'single ratio'

The Federal Reserve introduced its own plan to overhaul a civil rights era law that prevents banks from discriminating against low-income communities.

Fed Governor Lael Brainard laid out an alternative approach to reforming the Community Reinvestment Act in a Jan. 8 speech at the Urban Institute, a Washington, D.C.-based think tank. The plan diverged meaningfully from a proposed rule released jointly by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency near the end of 2019.

The agencies' December rule aims to clarify how banks comply with the law by establishing what counts for CRA credit and how to measure CRA. It also introduces new reporting and documentation protocols for banks and redefines what areas around bank branches count for CRA credit.

Central to the disagreement between the three agencies is whether regulators can compile banks' CRA activities into single ratios.

The OCC and FDIC proposal includes two tests: One measures retail lending activity per assessment area, and the other measures the number of CRA activities per assessment area. Under the rule, those two tests can be rolled into a single ratio that lets bank examiners quickly evaluate CRA activity.

Consumer groups and congressional Democrats immediately slammed the rule for undermining the intentions of the law. They said banks will be able to manipulate the rule in order to receive a more favorable rating. Brainard seemed to concur, saying the single ratio could be used by banks to sidestep the needs of local communities while introducing other "unintended consequences."

"In contrast, an approach that combines all activity together runs the risk of encouraging some institutions to meet expectations primarily through a few large community development loans or investments rather than meeting local needs," Brainard said.

Meanwhile, the Fed's tests — a retail lending test and a community development test — are similar in type to the other agencies' proposed tests, but they would be different in application, according to Brainard.

The Fed's proposed retail lending test would measure the number of retail loans a bank originates, while the FDIC/OCC retail lending test would measure those loans' total dollar value. Brainard said the change is necessary in order to "avoid inadvertent biases in favor of fewer, higher-dollar value loans."

The Fed's community development test would evaluate a bank's record of providing community development loans, qualified investments and services by comparing its community development financing in its local assessment area to both a local average and national averages that are different for rural and urban areas, Brainard said.

According to the Fed governor, the central bank's approach is backed by a database that includes the results of 6,000 written, public CRA evaluations from about 3,700 banks varying by asset size, business model, geographic area and bank regulator. Brainard said the database will soon be accessible to the public.

Brainard said she was "hopeful" the Fed's approach would be incorporated into the proposed rule to provide stakeholders with "a range of options," but she did not address why the central bank's ideas were excluded from the proposed rule in the first place.

Though the approaches are substantially different, Brainard said the Fed's objective is still to propose a single rule for public comment and that the central bank would continue to work to get its proposal added to the OCC and FDIC's proposed rule.

"We continue to believe that a strong common set of interagency standards is the best outcome," Brainard said. "By sharing our work publicly, we hope to solicit public input on a broader set of options for reform and find a way toward interagency agreement on the best approach."