Banking and Finance Law Daily Fed starts process to modernize its CRA framework
Monday, September 21, 2020

Fed starts process to modernize its CRA framework

By John M. Pachkowski, J.D.

The Fed seeks comments on how to modernize its Community Reinvestment Act supervisory framework.

At its latest open meeting, the Federal Reserve Board approved an Advance Notice of Proposed Rulemaking (ANPR) that seeks public comment on an approach to modernize the regulations that implement the Community Reinvestment Act (CRA). The Fed last revised its CRA regulations about 25 years ago. Comments on the ANPR must be received with 120 days after publication in the Federal Register.

Credit access inequities. The ANPR seeks feedback on ways to evaluate how banks meet the needs of low- and moderate-income (LMI) communities and address inequities in credit access. For example, the ANPR proposes assessing large retail banks using a Retail Test and a Community Development Test with separate financing and services subtests. To strengthen the CRA’s role in financial inclusion, the ANPR proposes special provisions for minority depository institutions as well as women-owned financial institutions and low-income credit unions, and it seeks feedback on additional incentives for financing community development financial institutions.

Tailored regulations. The ANPR would also introduce a metrics-based approach to respond to calls for greater certainty regarding how banks are assessed and rated. These metrics would be tailored to local market conditions and adjust automatically to reflect structural economic differences and changes over the business cycle. Also, the ANPR would minimize data collection and reporting burden by relying, to the greatest extent possible, on existing data and exempt small banks from deposit and certain other data collection requirements.

Consistent approach. Finally, the ANPR would seek to provide a foundation for the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation to converge on a consistent approach to modernize their CRA frameworks that has the broad support of stakeholders.

Both the OCC and FDIC proposed changes to their CRA regulations in December 2019 (see Banking and Finance Law Daily, Dec. 12, 2019). The OCC subsequently issued revisions to its CRA regulations in May 2020, and the FDIC declined to follow suit. At that time, FDIC Chair Jelena McWilliams stated that, "While the FDIC strongly supports the efforts to make the CRA rules clearer, more transparent, and less subjective," it was not prepared to finalize its CRA proposal at that time (see Banking and Finance Law Daily, May 20, 2020).

Board comments. During the open meeting, Fed Chair Jerome H. Powell stated, "Given changes in the banking industry since the regulations implementing the CRA were last substantially revised, the measure before us proposes ways to modernize CRA assessment areas while maintaining a focus on more traditional means to provide banking services, like branches, given their importance to individuals and communities."

Fed Governor Lael Brainard observed, "The CRA is a seminal statute that remains as important as ever as the nation confronts challenges associated with racial equity and the COVID-19 pandemic." She added, "We must ensure that CRA is a strong and effective tool to address ongoing systemic inequities in access to credit and financial services for low- and moderate-income (LMI) and minority individuals and communities."

Fed Vice Chair Richard H. Clarida noted, the ANPR is "a thoughtfully crafted proposal that is based on significant stakeholder feedback from bankers, community groups, civil rights organizations, and academics." He added, "Nonetheless, this regulation is complex, so the ANPR poses a number of questions to seek additional feedback on how it can be improved. This proposal is a solid step toward updating the regulation to better reflect the current banking landscape while continuing to meet the core purpose of the CRA."

Randal K. Quarles, Fed Vice Chair for Supervision, said, "It is important to have consistency across the three banking agencies responsible for implementing the CRA regulations." He added, "I am hopeful issuance of this ANPR will be an important step toward achieving consistency across the three banking agencies."

Finally, Fed Governor Michelle W. Bowman, who served as state bank commissioner of Kansas, noted, the ANPR "offers a foundation to develop performance standards that could provide greater transparency and consistency as banks plan and execute CRA initiatives." She added, "For community banks, I also appreciate efforts to develop clearer standards and boundaries in defining assessment areas—especially for small banks operating in a small portion of a large county or only making a few loans in a limited area of a county. I also look forward to public comments on how best to capture activities in rural areas. This is an important focus since CRA investments in rural areas can significantly strengthen support for community and economic development."

Industry reaction. Following approval of the ANPR, Jesse Van Tol, CEO of the National Community Reinvestment Coalition, issued a statement noting that the ANPR is "an encouraging step toward thoughtful updates to CRA rules, which are essential to ensure loans and investments from banks reach underserved minority and lower-income communities that have been especially hard hit by the coronavirus pandemic." He added, "Unlike the OCC, which earlier this year enacted an unworkable update to its CRA rules, the Fed has focused on transparent data analysis and qualitative measures of impact on communities, rather than on simplistic formulas that are easy to manipulate."

Rob Nichols, President and CEO of the American Bankers Association stated, "As the process moves forward, it is our hope that all three federal banking agencies will work toward a unified CRA framework featuring clear and concise rules for all banks that will stand the test of time. Joint regulatory action will prevent confusion and avoid unintended consequences for banks and the communities they serve. This is critically important as the banking industry works to meet the needs of low- and moderate-income communities and address inequities in access to credit. We look forward to joining other stakeholders in providing constructive input on this proposal."

Companies: American Bankers Association; National Community Reinvestment Coalition

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