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Community bank experts respond positively to 'overdue' CRA reforms

Community bank experts are reacting positively to proposed changes to the Community Reinvestment Act.

The proposal from federal bank regulators attempts to clarify activities that qualify for CRA credit, expands assessment areas for banks outside of their brick-and-mortar branch footprints and uses a ratio-based approach to determine a bank's score.

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"Our biggest takeaway is that it's a net positive," Keefe Bruyette & Woods analyst Catherine Mealor said in an interview. The new rule decreases the confusion around CRA, making it easier to quantify and understand for banks, analysts and investors, she said.

Several analysts said the increased clarity in the proposal is a positive. "There's going to be more transparency...banks are going to be able to better understand how their CRA investments are stacking up relative to what regulators want to see," said Nathan Race, a Midwest bank analyst with Piper Jaffray.

The CRA is a 1977 law that requires banks to serve communities where they have a physical presence, striving to prevent banks from excluding low- and moderate-income neighborhoods and businesses from accessing financial services. It has not been updated since the 1990s, leaving many parts of the exam and how to fulfill requirements "opaque," said Race.

The banking industry also responded positively to the proposed changes, which some said are needed in an era when banks increasingly use technology to serve customers outside their traditional footprints.

"It really looks like the regulators have made every effort here," said Susan Janson, chief risk officer at Wilmington, N.C.-based Live Oak Bancshares Inc.

Live Oak operates throughout the United States on a digital platform and focuses on Small Business Administration loans. The bank stands to benefit from the increased assessment areas.

"It extends our community to where our small business customers are, without limit across the country, and we feel that this is a real positive step for us," Janson said.

The new proposal will provide more credit for small business lending, which most consider to be positive for community banks. "We've always supported providing small business loans and small farm loans and advocated that they receive additional CRA credit," said Lilly Thomas, senior regulatory counsel at the Independent Community Bankers of America, a trade group.

Community banks and rural markets also stand to benefit from the proposal’s increased emphasis on serving rural areas, KBW’s Mealor said. Banks can get CRA credit for expanding into adjacent rural markets that do not currently have a branch, which may be easier for local lenders that are familiar with the area than for larger competitors.

"This will give some communities in more rural markets an opportunity to qualify for CRA credit, which should help lending," said Mealor.

The proposal did raise concerns for some. Sandler O'Neill analyst Stephen Scouten warned that the changes could have unintended consequences for mergers. He also noted that under the new rule banks could expand into new lending types or new geographic areas to get higher-quality CRA loans than are available in their current footprint.

"There's a lot of bad economic decisions that have be to made to fill these requirements sometimes. If they can find ways around making what they would consider a 'sub-optimal loan' just to meet a regulatory guideline, I'm sure that they will," said Scouten.

Still, many in the industry view the proposal as a positive step toward modernizing CRA.

"The time for CRA reform is really overdue," said Janson.