Nearly every bank in the country has a positive Community Reinvestment Act rating, and some industry observers are not sure those ratings accurately reflect banks' lending practices.
As regulators begin the process of overhauling the CRA, they will consider whether the current four-tier rating system is still meaningful in evaluating banks. Banks who receive a CRA rating below satisfactory are anomalies under the current system — 99% of banks fall under either "satisfactory" or "outstanding" CRA ratings, with 90% categorized as satisfactory. The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve have hinted at a wide-ranging reform package for the law since mid-2018. FDIC Chair Jelena McWilliams said in May a draft of regulators' proposal could arrive within months.
"It's the satisfactory category that's baffling," said Josh Silver, senior adviser at the National Community Reinvestment Coalition, or NCRC. "The banks that are really performing at a high satisfactory level would say, 'It's not really fair to give us the same grade as someone who's really just barely passing.'"
The NCRC has been advocating for the use of a fifth rating — the distinction between "high" and "low" satisfactory — for years. Failing that, Silver said the NCRC would support a 100-point scale to accompany the ratings.
On the other hand, some argue the current rating system should remain but be implemented more consistently.
"Most institutions have worked very hard to achieve that [satisfactory] rating," said Barry Hester, a deposits and payments attorney at Bryan Cave Leighton Paisner LLP and a member of the American Bankers Association. "I don't think the ratings framework itself is near the issue that the subjectivity of the underlying analysis has been."
Banks that fall below "satisfactory" have historically been subject to constraints on growth or M&A. The threat of being denied access to dealmaking is sufficient incentive for banks to move beyond "needs to improve," according to Hester, the banking attorney. But incentives such as lower FDIC premiums are needed to encourage banks to aim for the "outstanding" rating, he said. More banks progressing to that tier would thin the overcrowded "satisfactory" category.
Wells Fargo & Co. is by far the largest bank to have a CRA rating of less than satisfactory — in 2012, the Office of the Comptroller of Currency dropped the bank's rating to "needs to improve" from "outstanding." Although the bank received a score of "outstanding" on its exam, the OCC issued the downgrade in response to previous regulatory consent orders, said Lynne Walters, a spokesperson for Wells Fargo, in an email.
The OCC no longer issues two-notch drops in CRA rating.
"We have appreciated the OCC's updated guidance and clarifications issued in recent years, such as a CRA rating downgrade must be aligned with the goal of CRA," Walters said.
Walters also said Wells Fargo has reflected "a tremendous amount of transformation within the company and continued support for low- and moderate-income communities" in the intervening seven years since the exam. The OCC began a CRA examination of Wells Fargo in February of this year.
Three banks are designated as in "substantial noncompliance" under the CRA. Reynolds State Bank received a rating of substantial noncompliance on its last five CRA evaluations. When reached, the Reynolds, Ill.-based bank declined to comment.
Lemont National Bank received a rating of substantial noncompliance for its two most recent CRA exams in 2018 and 2015. The Lemont, Ill.-based bank did not respond to requests for comment, nor did Union County Savings Bank. The Elizabeth, N.J.-based bank saw an improvement in its CRA rating, moving to "needs to improve" from "substantial noncompliance."
The third bank in substantial noncompliance is Second Federal Savings and Loan Association of Philadelphia, which received the rating in 2015 and in four out of its last five evaluations. The bank declined to comment.
Also on the table for the CRA's makeover is moving away from a focus on physical depository locations. The rise of online lending and banks lending outside of their local geographic area has thrown a wrench in the current system.
"NCRC's position is, use the data to identify geographical areas — states, metro areas, rural areas — where banks are doing a lot of lending but they don't necessarily have branches, and include those on CRA exams," Silver said.
The American Bankers Association believes banks should receive credit under the CRA for some projects that do not necessarily meet the strict criteria of making loans in LMI communities. Those investments could include water extension, public transportation or workforce development, ABA CEO Rob Nichols wrote in a 2018 op-ed.
"Banks too often do not receive credit under the law for loans and investments critical to the viability and vitality of communities," Nichols wrote.
Meanwhile, Silver said CRA credit should be focused on investments that improve access to credit and support distressed neighborhoods.
"If you try to use one law to solve all of the world's problems, you'll solve very few of the world's problems," Silver said.
Both sides agree that the updated policy should include greater clarity and consistency around what qualifies as CRA credit.
"That sort of predictability in regulation is what makes for effective policy," Hester said.