A proposal from two federal banking regulators threatens the Community Reinvestment Act (CRA), enacted in 1977, by potentially reducing federal oversight. The CRA mandates that regulators assess whether banks meet the credit needs of all communities, including low- and moderate-income areas. This proposal, if implemented, could significantly diminish the act’s effectiveness in ensuring equitable lending practices.
On August 12, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) published a proposed rule that would dramatically weaken banks’ obligations to invest in working-class communities. The Federal Reserve, which administers CRA for the banks it supervises, did not join the proposal.
Changes to CRA Requirements
The proposal would raise the asset thresholds that determine which examinations and reporting rules banks face. Under current rules, banks with less than $412 million generally receive only the small-bank lending test. Banks with at least $412 million but less than $1.649 billion are classified as intermediate small banks and also receive a community development test.
The proposal would classify banks with less than $1 billion in assets as small, those with $1 billion to $10 billion as intermediate, and those with more than $10 billion as large. This reclassification would reduce scrutiny of community development, branch services, and lending data.
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The $1 billion threshold would eliminate community development evaluations for roughly 814 banks, or about 40 percent of banks now subject to those reviews. Raising the large-bank threshold above $10 billion would reclassify an additional 417 banks, ending their separate investment and service tests and their annual CRA reporting of small-business loans.
Impact on Community Development
The proposal would also remove deposit products from consideration under the service test, meaning examiners would no longer evaluate whether checking and savings accounts are affordable, accessible, or useful to low- and moderate-income customers. The proposal would limit retail lending reviews to a bank’s major product lines, which could leave weak performance in mortgage, small-business, or farm lending subject to little scrutiny.
According to the National Community Reinvestment Coalition (NCRC), the proposal would reduce CRA requirements for hundreds of banks and could lead to a significant decrease in community development financing. In a hypothetical scenario involving 69 banks, NCRC estimated that community development financing could fall by as much as $71 billion a year, a nearly 70 percent reduction.
The proposal would also reduce the number of banks required to report data on small-business, small-farm, and community development loans. NCRC estimates that this would eliminate 11 percent of CRA small-business lending data nationwide, which is vital to communities, researchers, and regulators.
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The OCC and FDIC are accepting comments on the proposal until October 13. Advocates can join NCRC in calling on the agencies to halt this rulemaking and submit comments to defend CRA. As part of the comment process, NCRC is calling on the agencies to extend the current comment period by at least 60 days.
A writer who serves as president and CEO of NCRC noted that the proposal would instead sharply weaken scrutiny of banks’ lending, services, and community development. The writer also noted that the proposal would encourage banks to use the “strategic plan” approach, which replaces standard CRA tests with tailored performance goals developed by the bank with community input. This approach can make sense when the business model does not fit easily within the standard CRA framework, but it also allows banks to propose their own, potentially weaker standards for compliance.
The proposal includes a section called “Request for Feedback,” which asks several questions about the proposed changes, including whether regulators should raise the large-bank threshold to $30 billion instead of $10 billion. The section also asks whether federal regulators should “eliminate all grants and donations from CRA consideration.” These questions suggest that the proposal could be even more far-reaching than initially thought, and it is essential that communities respond to the proposal and make their voices heard.
