The Community Reinvestment Act needs to be updated to reflect changes in technology and encourage investment in underserved communities, Federal Reserve Board Governor Lael Brainard told an audience at a Baltimore Community Development Gathering. “I have seen the value of the [CRA] as a vital tool to address the credit needs of low- and moderate-income communities, and I believe the time is ripe for a refresh to make it even more relevant to today’s challenges,” she said in her speech.
The Treasury Department has already begun outreach efforts to update CRA regulations with a report providing recommendations to modernize the law that was sent to the Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corporation and the Fed.
Technology was the first focus of Brainard’s comments, particularly its impact on defining a bank’s reach for CRA-eligible activities. She pointed out that when the regulations first came about in 1995, physical branches were required in order for banks to serve any community. Today, she said, banks can reach customer much farther away than their local branch, including through websites and mobile applications. Such clients, she implied, may not always qualify for CRA consideration.
Brainard also emphasized the need to eliminate credit “hot spots” that have resulted in the CRA’s emphasis on major markets. The major market emphasis has led banks to concentrate efforts, at the cost of smaller markets. She called on new regulations to open up capital for areas that have become underserved. “No matter how we define a bank’s assessment area in the future, new regulations need to be designed and implemented in a way that encourages banks to spread their community investment activities across the areas they serve,” said Brainard.
Updates to the law also need to reflect both nuance in determining what qualifies for CRA credit, and consistency in how those activities are evaluated. Though Brainard called for greater consistency in evaluation criteria, she also advocated for evaluating financial institutions within the context of their size and mission. Failing to do so, she said, risked "undermining CRA’s greatest attribute—its recognition that banks are uniquely situated to be responsive to … community and economic development needs in communities."
Any revision, Brainard said, should reinforce CRA roles along with other laws in creating an “inclusive” financial system. She warned that any changes should not open up the possibility for discriminatory lending practices, though she did not cite any specific proposal or existing regulation that might create that situation.
Treasury revamp. The Treasury Department report explained that regulatory and performance expectations under the CRA have not kept pace with the organizational and technological changes in the banking industry over the past four decades. Treasury reviewed the CRA, with the focus on identifying modifications to align banks’ CRA activities with the needs of the communities they serve.
“Forty years since the passage of CRA, it is time for modernization to fit today’s banking landscape and community needs,” said Treasury Secretary Steven T. Mnuchin. “Our recommendations will improve the effectiveness of CRA by enhancing the assessment and examination process, enhancing the ability of banks to deliver services in the communities they serve while considering technological advances in the financial industry.”
The recommendations are based on meetings with close to 100 stakeholders representing community and consumer advocates, academics and think tanks, financial institutions, trade associations, and law firms, all three CRA regulators, and a review of a wide range of data, research, and published material from both public and private sector sources.
The recommendations are focused in four major areas:
- updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors;
- increasing clarity and flexibility of CRA examinations to increase transparency and effectiveness of CRA rating determinations;
- improving the examination process to increase timeliness of evaluations and increasing accountability for banks’ planning of their CRA activity; and
- incorporating performance incentives to better serve the CRA’s intended purpose of encouraging banks to meet the credit and deposit needs of their communities.
Trade associations approve. A number of groups weighed in. The American Bankers Association noted with approval that Treasury recognized that the CRA needs to be updated to reflect mobile technology and other modern banking methods. The Consumer Bankers Association welcomed the recommendations, again focusing on the need for banks to have the flexibility to use mobile, online, and other digital technologies to serve communities. The Financial Services Roundtable also welcomed the report, stating that it includes common-sense recommendations that should allow financial institutions to more easily serve low to moderate income customers. The FSR also urged the OCC, FRB, and FDIC to pursue a unified interagency initiative to achieve the goals specified in the report.
For more information about CRA requirements, subscribe to the Banking and Finance Law Daily.
