Dear Senators,
I have been a consultant regarding the Community Reinvestment Act since 1994 and have advised hundreds of banks and occasionally a community group about an institution’s CRA responsibilities. I am one of the few people in the country who thoroughly read and understood the 2023 rule, and I developed a 5-hour webinar series to help banks understand their obligations under the 2023 rule. It is my contention that the 2023 rule would do far more harm than good. And when I say “harm” I am not just referring to the banking community. I am referring to everyone: banks, regulators, all communities but particularly the low- and moderate-income community, and examiners who would have to apply the new rule.
So, what is so bad about the 2023 rule that everyone should applaud its demise?
First, the rule is so complicated it would be difficult to understand the resulting performance ratings. We determined that, for banks with 2 major product lines, for every assessment area to be evaluated, a minimum of 160 calculations, involving comparisons to “calibrated benchmarks”, data conversions based on those comparisons, weighting of the results, determination of supporting conclusions and recommended conclusions, and finally a performance rating. That is for the Lending Test itself. The Community Development Finance test adds many more computations. Even for someone like me who has had 31 years of CRA experience, trying to figure out the dynamics driving the performance ratings would be a challenge. It’s so complicated I was contacted by one of the leading bank associations asking me to explain to them my understanding of what the regulation said! If understanding the 2023 rule was difficult for experts, for the public it would be impossible. What good is it to have a performance rating system that most people won’t understand? The purpose of CRA should be to have a meaningful system of measuring and evaluating a bank’s performance meeting the community’s need for credit services.
Second, the departure from almost 50 years of CRA enforcement based on facility-based assessment areas is extremely radical and inconsistent with one of the concerns of Senator Proxmire, the “Father of CRA.” Senator Proxmire wanted to stop banks from taking deposits out of their local communities and lending the money elsewhere. The 2023 Rule actually encourages that practice by instituting “Retail Lending Assessment Areas” and the so-called “ORLA” or Outside Retail Lending Area and the “Retail Lending Screen”. Anyone concerned about helping local underserved communities would be alarmed by how the 2023 rule allows banks to lend more of their deposits from inside their local communities to markets far outside those communities. These new assessment areas effectively contradict the fundamental premise of the CRA, that banks have an affirmative obligation to reinvest money back to the communities where they have obtained deposits. By the way, these new areas could exponentially increase the computations for CRA performance ratings even if the activity is de minimis.
Another aspect of the 2023 rule is its omission of critical types of mortgage lending, especially mortgages in America’s cities. What I am referring to is multifamily mortgage lending which is excluded from the Lending Test. In cities like New York, multifamily housing accounts for almost two-thirds of the housing stock in the city’s five boroughs. We know that multifamily housing in the cities is predominately occupied by low- and moderate-income tenants. If the fundamental purpose of CRA is to ascertain how banks are meeting the community’s needs, how can the fundamental need for adequate housing be overlooked? Yes, a very small segment of multifamily mortgages is counted in the 2023 rule Community Development Financing Test, but why ignore how lenders are helping communities fulfill their housing needs by omitting multifamily mortgages for CRA performance examinations? Advocates for adequate housing should be alarmed by how the 2023 rule ignores this very important type of lending that is especially depended on by the working poor. The 1995 rule does include multifamily mortgage lending. So, reversion to the 1995 rule is a big improvement for the low- and moderate-income communities.
What can improve the Community Reinvestment Act?
There are a number of simple changes that could dramatically improve the efficacy of the CRA.
First, adopt a simplified version of the “calibrated benchmarks” in the 2023 rule. Banks have long been frustrated by the lack of any guidance regarding how performance comparisons translate into performance ratings. The 2023 rule for the first time provided explicit correlations but unfortunately required too many calculations, too many weightings, too many data conversions and too many rating aggregations. Keep it simple.
Second, be sure to include renewals of secured revolving lines of credit extended to small businesses. These loans are excluded from the 1995 rule because of a technicality regarding the definition of a “renewal” within the CRA. As a result, many small business loans are excluded from consideration in CRA performance evaluations even though these revolving lines of credit are a common form of financing for small businesses.
Third, a big problem with the 1995 rule is that only about 600-700 of the 4,300 banks subject to CRA are required to report under CRA. That means the performance of 85% of the institutions subject to CRA is not readily available. This is supposed to be a form of regulatory relief. In reality, it is a big handicap for non-CRA reporters because there is no peer data available to help judge their performance. Regulators should offer an inducement for those lenders to voluntarily report their annual data by extending the normal 3-year exam cycle to 5 years for voluntary reporters who have a record of satisfactory performance.
Fourth, require CRA lenders to report more details about their community development lending activities. Currently, a bank reports only the number and value of community development loans. This leaves an enormous gap in potentially valuable performance context data that would provide invaluable insight into the community development needs of communities and how banks are financing those needs. Ironically, to receive credit in a CRA exam for their CD activities banks must provide information on the community development “purpose” and the location of CD loans. Since this information must be collected and compiled to receive credit during a CRA exam, it would be no burden to mandate the reporting of such valuable data.
Fifth, retain the 2023 CRA rule’s “Retail Lending Screen Test” that measures the adequacy of a bank’s loan volume within its CRA assessment areas. The “Assessment Area Concentration Ratio Test” has become outdated and fails to reflect developments in the secondary markets and the impact of the Internet.
It is a virtual certainty that, your protests notwithstanding, regulators under the Trump Administration will repeal the 2023 rule. But they may be open to bipartisan suggestions that do more than protest the repeal. They may be very receptive to real improvements to the legacy rule. A letter from Democratic legislators addressing the problems in the 2023 rule that I have cited (and there are more) would go a long way to softening the intense partisan atmosphere in DC and may be positively received by the Administration.
Wow, Democrats and Republicans working together for the good of the country and its communities, that would be a novelty!
