The “Community Reinvestment Act” is on the block. Comments due tonight!

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21 mins read

Action –  As with all things Trump, the question is “Who profits?” Deadline March 10, 11:59 pm EST.

This is a short, but very informative video on why the Community Reinvestment Act is so important.

The Community Reinvestment Act (CRA) of 1977 is an important protection for low-income and minority populations. Congress passed the CRA following the Civil Rights Movement to redress banks’ history of racist redlining. It forced these institutions “to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure.”

The CRA regulations aren’t working as perfectly as intended. Historically, 98% of banks pass their CRA examinations, while research and reporting continue to show how banks still disproportionately deny borrowers of color access to credit.

However, under the guise of modernization, the administration, through the OCC and the FDIC, have proposed changes that would weaken the CRA and make it even more difficult to enforce the provision of equal service, while redistributing more money and privilege to corporations and the wealthy.

It’s every bit as bad as we thought, and then some. The proposed changes would weaken the focus of bank activities on low and moderate income (LMI) communities, while increasing the number of assessments banks could fail while still passing CRA requirements.” says Jane Weisberg, senior campaign analyst at the Association for Neighborhood & Housing Development, a coalition of community groups across New York City.”

How to comment

Today’s proposal is the “Community Reinvestment Act.”

Don’t worry. Just write what you can, and copy it to the other page. Talk about how investment is needed in your community, disparities you’ve seen, the need for transparency and bringing the most marginalized into the conversation.

  • Comment here for the 10th. Deadline is, as always, 11:59 pm EST.
  • Proposed regulation here.
  • Other comments to review for inspiration here and here. Please do not copy anything verbatim. All such comments will be removed. However, all that said, this is a great letter to read.

Deeper Dive and resources

This video was made BEFORE the age of Trump, to give you an idea of how the Community Reinvestment Act (CRA) is supposed to act….

Since 1977, the Community Reinvestment Act (CRA) has required banks to give up their discriminatory redlining practices and provide mortgages, small-business loans and other services in all areas where they have branches, including the low-income one. Not complying with CRA’s community protections could cause regulatory scrutiny and supposedly some difficulty in accomplishing mergers or expansions.

However, the regulatory oversight is split between three different federal agencies and is laxly enforced. Despite more than 97% of banks getting “passing” grades, those with poor records still merge and expand, many lower-income neighborhood remain “credit deserts, and minorities still struggle to get morgages and business loans. Interestingly, the agencies don’t agree on how to revise the CRA, with the OCC (Office of the Comptroller of the Currency) and FDIC, who control 85% of banks between them, wanting to turn this program into a piggy bank for the wealthy, while the Fed wants to strengthen the program’s original purpose.

Under the existing rules: Banks are supposed to be evaluated on the amount of money a bank pumps into the community, and separately evaluated on the services it provides, such as bank branches and low-cost checking accounts. Lending counts for 50% of the overall CRA examination; services, 25%; and investment, 25%. The current rules also define eligible areas narrowly, and emphasize the volume of lending; banks cannot meet the standards by investing in a few large projects.

What the Administration, OCC and the FDIC want: While the proposal does clarify some rules and gives double credit for affordable housing, equity investment and lending, it doesn’t increase community involvement or improve enforcement. More importantly, it removes the requirement that a bank offer a full variety of services. Trump appointee Joseph Otting in the OCC (Office of the Comptroller of the Currency) and the FDIC want a simple dollar target for community investment and the freedom for banks to use it in whatever way is convenient and profitable to themselves. “It could create an entirely skewed picture about the degree to which banks are responding to local community needs, which is the lynchpin of CRA. It encourages a financial institution to enter into the biggest and simplest deals, and in doing so entire communities could be neglected entirely.” (Brent Adams, Woodstock Institute in Chicago)

Where could the money go?: The administration’s “simplified” list would allow less money to go to low-income people living in low-income communities, and more to projects that are simply located in lower-income zones, which may benefit the wealthy, like stadium owners and big developers. Money might also flow to those who are only “low-income” in comparison to their neighbors. Some examples:

  • Banks that financed the new sound system at M&T Bank Stadium in Baltimore could claim credit for investing in the community.
  • The “non-exhaustive list” proposes infrastructure, transportation as well as stadiums and would no longer have to primarily benefit low and moderate communities.
  • $500,000 mortgage could be classified as low- or moderate-income in an area where the average mortgage size is $1 million.
  • Banks could also get credit for making loans to hospitals and other large institutions that do not currently qualify.
  • Banks could choose half of its assessment areas to serve, ignore the rest, and still receive an outstanding rating. Which half of a bank’s communities will get left out?

Is this the regulatory cousin of the 2017 tax-scam?: The “low-income investment” portion of the 2017 tax scam not only allowed wealthy people to avoid capital gains taxation by investing in “opportunity zones” or “investment deserts”, but also allowed the inclusion of high-end projects in wealthy areas. Opportunity zone investments funded by the new tax break are not required to produce housing that’s affordable to low and moderate income residents, or create jobs that are accessible and pay living wages for Opportunity Zone (OZ) residents. However, a new sound system for a stadium to get CRA points for a bank isn’t going to help someone buy a house either. In both the proposed CRA rules changes and in the OZ legislation, money which is supposed to help low-income communities could wind up in already overstuffed pockets.

Other advantages for banks: “Small” banks” ($500 million or less in assets) would have an option for a streamlined exam. This “exception” would actually affect about 84% of all banks, which they shouldn’t need if they’re meeting their community’s lending needs. Banks that achieve an Outstanding rating would be examined once every five years under the new proposal, an increase from the two to three year cycle today, giving them even less incentive to perform well in the early years of a new exam cycle.

OCC Fox in the Chicken Coop: The OCC supervises most large banks, which make about 70% of the loans covered by the law. Its comptroller of the OCC is Joseph Otting, a Trump appointee who previously worked as chief executive of OneWest Bank, a California bank that was owned by an investment group led by Steven Mnuchin, now the treasury secretary. Under Otting, OneWest was accused of failing to meet community lending obligations, while participating in predatory foreclosures and illegal tactics like “robo-signing” in the wake of the financial crisis. The bank eventually agreed to an $89 million settlement with the Justice Department. “The president’s choice for watchdog of America’s largest banks is someone who signed a consent order — over shady foreclosure practices — with the very agency he’s been selected to run. If Mr. Otting didn’t deal fairly with the customers at his own bank, it’s difficult to see why he’s the best choice to look out for the interests of customers at more than 1,400 banks and thrifts across the country,”” said Senator Sherrod Brown, (D-OH) top Democrat on the Senate Banking Committee.

The Federal Reserve disagrees with the OCC: The Fed splits the remaining 30% of banks with the FDIC.  Lael Brainard, a Federal Reserve governor, laid out the Fed’s alternative proposal for updating the Community Reinvestment Act, specifically disallowing large banks from satisfying requirements simply by funding a few big-dollar projects. Instead, they would require retail banks to be tested on their record of providing loans and retail banking services in their area,  while larger banks would have to pass both the retail test and a separate evaluation of their of record of providing community development loans, qualified investments and services.

Resource for your comments: 

Template language to the OCC and FDIC on proposed changes to CRA here.
(This is from SPARCC)

  1. Create a separate, meaningful community development test.
  • The agencies should create a separate Community Development (CD) test, in addition to the retail test, that acknowledges the distinct benefits and financing challenges associated with CD activities. The CD test should:
    • Include all rating categories (outstanding, satisfactory, needs to improve, etc.) rather than a pass-fail test.
    • Include quantitative and qualitative factors, as well as performance context.
    • Consider news loans and investments, as well as activity retained from prior exam periods.
    • Narrow the eligibility of CD activities to the truly impactful activities that meet CRA’s primary purpose.
    • Require both debt and equity activities.
  • Banks should also receive additional geographic flexibility when meeting CD obligations.
    • The CD test should provide CRA credit for CD activities in any state where a bank has at least one assessment area. This more appropriately reflects variations in local markets as well as the disperse need and opportunities for CD investments.

2. Provide an opportunity for additional public comment prior to publishing a final rule.

  • Given the additional data and information that stakeholders need in order to effectively evaluate the proposed rule’s potential impacts, we ask that the agencies make their data publicly available and provide an additional public comment period prior to implementing a final rule.

3. Ensure coordination among the three agencies on any final rule.

  • A joint rulemaking process ensures the greatest chance for consistency and stability, two critical components in the federal regulatory process. We ask that the agencies only move forward on a final rule if there is consensus among all three agencies.

Improvements to the CRA need to be made, but in favor of its original intent:

The following from “The Community Reinvestment Act: Outstanding, and Needs to Improve” (frbsf.org)

  • Keep the act fundamentally intact, and seek to build on its strengths. Low-income communities need more capital, and the CRA helps move billions of dollars in capital a year to low-income communities — and that it could help move even more capital. Enforce the passing rules more strictly.
  • Level the regulatory playing held by expanding the scope of activities considered to include affiliates and certain activities outside of the assessment area construct.
  • Fine-tune the measurements to remain in step with shifting markets. Extending credit that undermines financial security should receive negative (and certainly not positive) consideration. Enhancing the range of possible sanctions to include both positive and punitive consequences will give regulators greater exibility to implement the act. 
    • CRA needs to actively discourage counter-productive behaviors by covered institutions. “Free checking” accounts, which can receive favorable CRA consideration, frequently feature extremely costly courtesy overdraft “protection” or high ATM fees. In fact, depository institutions charged consumers billions in fees for savings and checking accounts and government investigation documented difficulties obtaining fee disclosures at many banks’ branches and internet sites. 
    • In 2018, an estimated 55 million adult Americans (22%) are classified as un- or underbanked. These individuals are disproportionately minority, lower income, and renting. Neighborhood characteristics also play a role, with researchers finding that areas with a greater minority share of population and/or lower income are relatively underserved by bank branches and overserved by check cashers and/or payday lenders. In this alternative market, the costs to consumers are high. A Brookings Institution study calculates that lower-income families may spend up to several thousand extra dollars annually for basic financial services.
    • These predatory services do not offer opportunities for low and moderate income individuals and households to save money, develop their credit, or create financial stability for themselves, which is something that banks could do if designed to serve these individuals and households better. Furthermore, many banks provide capital to support these high-cost services, acting as wholesale providers of funding, money management services, etc. As Howard Karger attests, “Today’s fringe economy is heavily dependent on mainstream financial institutions.
  • Strengthen the Service Test by evaluating delivery channels based on measures of effectiveness; assessing the quality of outreach and disclosure; incorporating more quantitative measures and benchmarks; and restoring coverage of the Service Test to more institutions.
    • Wells Fargo, JPMorgan Chase and other big banks have been abandoning lower-income areas and shifting their services to wealthier neighborhoods, according to a new report. There has been a trend among larger banks to trim their branch networks and instead rely on cheaper ATMs and online banking to serve customers. According to data analyzed by Bloomberg, lower-income areas are bearing the brunt of that trend. Between 2014 and 2018, banks have shut down 1,915 more branches in lower-income areas than they opened. On a visit to a predominantly African American community in Atlanta, a Federal Reserve Governor noted that “not a single financial institution was within view,” a situation that “occurs far too frequently in predominantly minority communities.”
    • Shuttering a neighborhood bank can have far-reaching effects, according to a report in Fortune magazine. It can mean fewer banking choices and potentially higher costs. A 2014 study by economist Hoia-luu Q. Nquyen found that a branch closure can cause a 13% drop in the number of small-business loans made in the area – a drop that lasts several years and isn’t offset even when other banks enter the neighborhood.
  • Revitalize the public’s role. Particularly in light of the current priorities of regulatory agencies, the public can play an important and cost-effective part in advancing the act. This will require that institutions and regulators provide deeper data on a broader set of activities. “There ought to be community roundtables where people in the community are talking directly to banks about what they need, not the bank just looking at some menu of items in the Federal Register and just picking open land to build on.” – Brent Adams, Woodstock Institute in Chicago

Reading

  • FCIS and OCC propose to modernize Community Reinvestment Act Regulations (occ.gov)
  • Changing Rules to Help Bankers and Hurt Poor Neighborhoods (NYTimes)
  • The Community Reinvestment Act: Outstanding and Needs to Improve (frbsf.org)
  • Bank Regulators Disagree on Changes to Rules for Poor Communities (NYTimes)
  • Community Advocates Break Down Proposed Changes to Community Reinvestment Act Regs (next city.org)
    CRA cheat sheet: New regime would look very different (americanbanker.com)
  • Proposed CRA Regulations Greeted with Great Concern: Aggregate Balance Sheet Ratio Could Overwhelm Other Changes (novoco.com)
  • Protecting the Community Reinvestment Act Is an Investment in Economic Justice (shelterforce.org)
  • Redlining Would Be Relegalized by CRA Reform Proposal (shelterforce.org)
  • Initial NCRC Analysis Of The FDIC And OCC Notice Of Proposed Rulemaking Concerning The Community Reinvestment Act (NCRC)
  • SPARCC.

Originally posted on Indivisible Ventura. Re-posted with permission.


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