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Putting the Community Reinvestment Back Into CRA

September 25, 2019

After more than 40 years since its enactment, and 24 years since its last revision, federal regulatory agencies have begun the process of reforming the Community Reinvestment Act (CRA). As part of this reform, the federal agencies are reassessing their inefficient quantitative approach for evaluating a financial institution’s CRA performance. Critics of the current examination process argue that the regulatory criteria do not effectively measure the qualitative impacts of investments for low and moderate-income (LMI) communities. Regulations have not adequately addressed the evolution of banking in recent years, nor have they accounted for advancements in technology that further enhance the ability to provide LMI communities with access to a full-range of traditional banking services.

Today, CRA exams are known to be tedious, exhausting, and frustrating. Regulator’s implementation of CRA has created an arbitrary metric that compels banks to check items off a list in order to demonstrate community engagement. However, banks consistently ask regulators to clarify what activities and investments qualify for CRA credit and receive inconsistent answers. What activity may benefit one community may not benefit another; while banks understand the workings of their communities, the regulatory agencies tend to make their determinations based on market data and share. Ultimately, what the data does not show is the true impact of CRA on communities. Simply providing data on the number of loans or investments made by the institution does not demonstrate the continued qualitative impact CRA activities have on the communities. It is time to put the Community Reinvestment back into CRA.

Modernized CRA reform should focus on the qualitative benefits that investments have for recipients. We need to work with communities to ask questions and understand which policies have worked, and which have fallen short. For example, how has increasing the number of affordable housing units in a given area helped residents? Has there been sufficient job creation that allows those at risk of homelessness to attain employment and housing? Have small business loans been made to existing, local businesses in lower income neighborhoods to help them continue to operate, or are they being made to new businesses in upper income neighborhoods?  How is technology being utilized to expand access to banking services and credit?  Prioritizing qualitative outcomes will ensure more meaningful and powerful impact for communities. Modernizing regulations to reflect advancements in technology will also help to optimize the impact investments have on communities.

Given this digital age, banks can now expand their reach without being limited by geographic location. Tech enabled products are allowing banks, especially community banks, to reach underserved and unbanked communities. Institutions now have a greater bandwidth to expand access and create a more inclusive financial system, regardless of the presence of a physical branch. Innovation empowers banks to offer the same personalized services of a branch even without physical presence in the neighborhood. Technology has expanded a banks’ ability to connect to and serve a greater number of communities, not taken away from it.

The objective of CRA is determining the needs of an institution’s community and delivering within the safe and sound operation of the bank. Being responsive to a community’s needs isn’t always measurable with a checklist, or by comparison to market peers. It is about rolling up one’s sleeves and doing the work – meeting with the residents, with the community leaders, the business owners, the ones that shape communities to understand their specific needs. It is up to the regulators to provide clearer guidance for financial institutions to ensure concrete and tangible impacts are being made in their communities.  

The OCC has recently published a brochure shedding light on some of the agency’s initial ideas for reform. While more concrete metrics are needed to understand the practical applicability of the OCC’s proposal, it is a step in the right direction to facilitate dialogue amongst the regulators, policymakers and the industry-at-large. We commend the federal agencies for their efforts thus far and stress the need for ongoing cooperation. A fractured regulatory framework will only perpetuate the issues of ineffective metrics and regulations, leading to reform only in name and not actuality. Continued coordination between the federal agencies to reform CRA is crucial in ensuring a meaningful outcome.

A bank should be a key player, not just the entity that writes the checks. That is the true measure of CRA. Demonstrating the impact of all the lending and investments and activities is what counts the most for those who receive the benefits – they don’t care about checking boxes. They want an active member of their community, a neighbor, an ally they can count on in times of need.