In the previous articles of this 4-part series, I identified and explained three types of fatal flaws in the 2023 CRA rule and I presented 5 suggestions to improve the effectiveness of the legacy CRA rule. In this article I put forward another 3 potential improvements to the legacy rule. I suggest to the regulators that they not only repeal the 2023 rule, as they have announced but that in the NPR, they simultaneously propose simple improvements in the legacy CRA rule that can be put into effect before the 2025 year-end so that banks will have 3 years of experience with the “2025” CRA Rule before the next presidential administration. There are significant practical and political advantages to that approach. This would also demonstrate the Administration is not intent on destroying the CRA but rather focused on improving its effectiveness as a measure of community needs and banks’ record of responding to those needs. That’s a much more appealing approach.
Additional Proposed Changes to Improve the Effectiveness of the CRA
Require All Banks Covered by CRA to Report Under CRA
Of the roughly 4,200 banks subject to the Community Reinvestment Act, 721 banks reported their annual CRA activity for 2023 (and only 648 were mandated reporters). This means about 85% of lenders subject to CRA aren’t required to publicly disclose their activity. This supposedly is some form of “regulatory relief” for small banks. But does this reporting exemption really help small banks? I would argue that it actually hurts small banks.
If a bank is going to be accountable for performance under CRA (and virtually all FDIC-insured banks are covered under CRA), how can it be absolved of reporting under CRA? Any bank that adheres to prudent regulatory compliance risk management should be collecting the data needed to evaluate its compliance risk under CRA. If the data is being collected and scrubbed, reporting the data is no more complicated than clicking the "upload button" in its CRA software.
Would it be costly for small banks to collect and report their CRA lending activity? First, the FFIEC makes available free software for that purpose. Second, a small bank that originates a small volume of loans say, two small business loans per week, shouldn’t need more than 30-40 hours of data input and reporting annually. The cost would be negligible.
The benefits of mandating reporting for all lenders with a certain minimum annual volume (say, 100 loans as in Section 1071) would be significant. For the first time, true peer data would be available to small banks (now only the activity of large banks and voluntary reporters is available). This means that almost all CRA-related lending would be included in the “performance context” that is the basis for performance benchmarks and as the measurement of community needs. In the 30 years of my consulting on CRA only a very small number of banks voluntarily collect and report their CRA lending activity (73 for 2023). Unfortunately, this frequently means that a small bank does not know if it’s meeting its CRA responsibilities until examiners show up. In other words, the current CRA rule unintentionally causes negligence by non-mandated reporters.
Time and again, I’ve seen banks ask for help preparing for their impending CRA exam only to learn they never collected the data to evaluate their lending performance. Not only is this imprudent, but it’s also irresponsible. What message does this send to examiners and how will it affect their judgment about your commitment to your CRA responsibilities? When this happens, examiners will base their analysis on a “scientific” sampling of loans. But who knows how accurate that sampling is? After all, if a bank hasn’t collected the data, there is no way of knowing if the sample upon which their performance will be rated is accurate or not. I wouldn’t want to bet my performance evaluation on a sample and no banker should. Thus mandating reporting of CRA lending is in the best interest of banks with many benefits and very small costs.
Publish a List of Community Development Activities and Provide a Process for Approval of Potential CD Activities
Virtually everyone has acknowledged that qualifying a community development activity can be confusing. Two simple things can be done to address this problem. First, develop an expanded list of qualified Community Development activities. Second, provide a process whereby a bank can submit to its regulatory authority a potential community development loan or investment and request confirmation of the activity’s community development qualifications. The approval process for a potential community development loan or investment was included in the 2023 CRA rule. A version of that community development activity review and approval process would be welcomed by the banking community.
Fintech and Internet Banks
It’s been asserted that the Community Reinvestment Act needs to be “modernized”. What that means has never been clearly and explicitly stated, but reading between the lines advocates of modernization, have implied that the advent and spread of the Internet have expanded the communities served by banks way beyond the traditional branch system and assessment area borders. I have yet to see a study that can substantiate that assumption.
Yes, banks have expanded their lending reach as indicated in reported CRA loan data. But there is no readily available data that is based on the locations of depositors.
The best currently available deposit data is geocoded to the deposit location, i.e., the branch location, not the depositor location. The deposit data is reported annually in the Summary of Deposits Report published by the FDIC.
Wharton professor Ken Thomas, author of the CRA Handbook, has argued that assessment areas for Internet Banks should include markets where a bank has a concentration of deposits (based on deposits geocoded to the location of the depositor), even areas outside the traditional branch-based CRA assessment area. That approach would seem to be consistent with the spirit of the CRA which was intended to require banks to lend back to the communities where they derived their deposits. Professor Thomas has proposed that any MSA where a bank has derived 5% or more of its deposits should constitute a CRA assessment area. The 2020 CRA rule that had been adopted by the OCC before it was rescinded in 2021, adopted a version of that approach in which it measured lending in “deposit-based” assessment areas outside a bank’s facilities-based assessment areas.
Given that fintech institutions typically don’t have any physical branches open to the public, Professor Thomas’ idea could be appropriate. It would require geocoding of deposits, but that’s very simple and inexpensive to implement. This would impose a responsibility on Internet-based institutions to lend back to the communities where they are extracting deposits. However, any performance benchmarks for deposit-based assessment areas should also be adjusted to reflect the disadvantages of lenders without any local facilities competing with lenders who do maintain branches in the market. In other words, performance benchmarks should be “tailored” to adjust the competitive realities in such markets. If a fintech or internet bank has no concentration of deposits of 5% or more, then the alternative would be to mandate that the institution serves the MSA in which it is headquartered.
Summary
The foregoing suggestions, if adopted, would result in more realistic and more comprehensive CRA performance evaluations that would benefit banks and the communities they serve.
