Treasury Department: Bringing the CRA Into the 21st Century

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

The U.S. Department of the Treasury has published recommendations for modernizing the Community Reinvestment Act (CRA), offering proposals to the Federal Reserve Board of Governors, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) to better align CRA activity with the needs of the communities that banks serve, while being conducted in a manner consistent with a bank’s safety and soundness.

But are the other CRA regulators on board?

What happened

“Forty years since the passage of the CRA, it is time for modernization to fit today’s banking landscape and community needs,” Treasury Secretary Steven T. Mnuchin said in a statement about the new report. “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.”

After meeting with close to 100 stakeholders, Treasury issued recommendations focused on four areas of improvement.

  • Assessment Areas. When the concept of assessment areas originated in 1977, most banks were local businesses that collected deposits through a finite number of branches, Treasury noted. Today, banks often have extensive interstate operations—as well as alternative delivery channels for providing services and accepting deposits—and many wholesale and limited purpose banks have emerged. To reflect these changes, the report recommends revisiting the approach of determining assessment areas. “CRA’s concept of community should account for the current range of alternative channels that exist for accepting deposits and providing services arising from the ongoing evolution of digital banking,” according to the report. “Treasury advocates for a framework that not only includes areas where the bank is physically located, but also [low- and moderate-income (LMI)] communities outside of where the bank has its physical footprint, and in areas where the bank accepts deposits and does substantial business. Treasury believes that an approach that would allow banks to address needs that overlap with their entire customer base would improve the effectiveness of the CRA statute.”
  • Examination Clarity and Flexibility. Successful administration of the CRA depends on “consistent and clear” guidance for both banks and examiners, Treasury said, but variations are found between regulators as well as individual examiners. The result: CRA eligibility determinations are subject to vague and inconsistent interpretations, with a long time lag between the examination period and the receipt of CRA ratings under the current process. Seeking to improve performance evaluation criteria to increase the transparency and effectiveness of CRA ratings determinations, the report said a framework for reform should consider several key elements, including expansion of the types of loans, investments and services eligible for CRA credit; establishment of clearer standards for eligibility for CRA credit, with greater consistency and predictability across each of the regulators; and simplified record-keeping procedures, designed to make eligibility updates more regular and timely. Banks should be allowed to obtain a limited number of eligibility determinations in advance on specific loans, investments or services, Treasury said, and any decisions requiring extensive regulatory consultation should then prove to be the exception to the rule. To reduce the number of subjective elements in CRA regulation—which “creates significant compliance burdens and related costs, without any commensurate gain in quality of execution of banks’ CRA activity in the communities they are aiming to serve—the report pushed for changes. “Establishing clear criteria for grading CRA loans, investments, and services will lead to more accountable outcomes, result in more consistent, timely, and understandable ratings, and establish a basis against which banks can gauge their performance,” Treasury said.
  • Examination Process. Although there is just one set of CRA regulations, each CRA regulator follows a different examination schedule. As a result, banks may face unnecessary burdens when preparing for exams because of timing delays or changes in census data mid-review, Treasury said. “Treasury concluded that the extended period of time between CRA examination periods is not constructive and should be addressed,” according to the report. “Treasury found that, in practice, delays in the completion of examinations are longer than the indicated examination cycles of all three of the CRA regulators, and across banks of all sizes.” The report further recommended that CRA regulators standardize examination schedules, even if statutory changes are necessary to do so, and that census data should be used consistently throughout an assessment period.
  • Performance. The report expressed concern that CRA is not a consumer protection law, but in recent years, an increasing number of large banks have received downgrades of CRA ratings due to violations of consumer protection laws. In some cases, banks were “double downgraded” for violations related to products that are not part of their CRA performance evaluations (such as indirect auto lending). To address this problem, “Treasury recommends that the CRA regulators adopt uniform guidance that considers whether there is a logical nexus between the CRA rating and evidence of discriminatory or illegal credit practices in the bank’s CRA lending activities while also giving consideration to the remediation efforts undertaken by the bank,” the report stated. “The logical nexus principle should evaluate whether the violation would adversely impact the appropriate CRA examination or Strategic Plan, while also considering whether it would have a material impact on the bank’s ability to serve its entire community.” Treasury also suggested that CRA performance evaluations not be delayed due to pending consumer protection law investigations or enforcement actions.

To read the Treasury report, click here.

Why it matters

The Treasury report made headlines for its recommendations on modernizing the CRA, and any changes that make it easier to get solid CRA ratings could in turn make life easier for banks, providing more certainty of examination criteria and examination cycles while also facilitating merger and acquisition activity, which can be significantly impeded for an acquirer with a poor CRA rating. Industry members expressed approval of the proposals, with the American Bankers Association issuing a statement that “[a]djustments that enhance the transparency, consistency and predictability of the supervisory process—and that recognize the many ways banks meet the credit needs of the communities they support—will help institutions better serve their customers and promote economic growth.” But it remains to be seen whether all CRA regulators will speak with one voice when it comes to making changes. The OCC has reportedly been working on its own version of updates to the CRA, with indications the agency will be releasing an advance notice of proposed rulemaking in the near future.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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