Final CRA Rule Remains the Wrong Approach at the Wrong Time

Donna Gambrell & Daniel A. NissenbaumMay 28, 20200 Comments

We are two community development professionals who have dedicated much of our professional lives to investing in underserved communities. Our roles over the last several decades have included leading commercial bank Community Reinvestment Act (CRA) investing teams, managing community development-focused government agencies, and now leading Community Development Financial Institutions (CDFIs).

As a result of our vantage points across the community development sector, we agreed with an April 2018 report by the Department of Treasury and then-Comptroller of the Currency Joseph Otting that the regulatory framework governing CRA needs updating. Our CDFIs represent a diverse geographic footprint, from rural areas and small towns in Appalachia to suburbs and large urban centers across the country, so we are intimately familiar with the disconnect between where CRA currently incents banks to invest and where community need is concentrated. We have also observed growing challenges in how CRA bank exams are administered, such as issues around consistency, timeliness of exam results and ambiguity around how CRA credit is allocated for specific loans and investments.

Unfortunately, as the Office of the Comptroller of the Currency (OCC) has proceeded with CRA rulemaking over the last couple of years – including an advanced notice of proposed rulemaking (ANPR) in 2018, a notice of proposed rulemaking in early 2020, and now a final rule issued on May 20, 2020 – we have consistently shared our concerns that the changes could skew incentives away from impactful community development activities.

We remain deeply concerned that the OCC is pursuing the wrong approach at the wrong time. Contrary to Comptroller Otting’s stated intentions, the OCC’s final rule threatens to over-emphasize the size of investments rather than impact, skew investments away from impactful community development activities, continue to misalign need and investment incentives, and increase compliance costs.

  • The OCC’s final rule creates a ratio test that focuses primarily on the dollar volume of a bank’s CRA activities rather than considering an important mix of both quantitative and qualitative elements. The numerator of this ratio would include an expanded list of eligible activities that banks may have already completed in the normal course of business. For instance, purchasing general obligation bonds for large infrastructure projects or mortgage-backed securities would be included in the numerator. The denominator of the ratio, which tracks a bank’s deposits, would carve out sources of deposits formerly used in examination computations. Larger numerator, smaller denominator, easier pass.

The OCC’s rule also envisions a minimum community development threshold, which threatens to function essentially as a cap on the amount of community development activity a bank completes. The OCC’s final rule did acknowledge that the agency requires more comprehensive data before it can set the threshold ratios for different CRA rating levels and thresholds. This is a positive shift from the proposed rule but ultimately retains an exceptionally fraught approach given the reliance on dollar volume above impact.

  • The OCC’s final rule would eliminate the investment test, which has been a major driver of bank investment in affordable housing and other community development equity investments, including the Low Income Housing Tax Credit, the New Markets Tax Credit and the Small Business Administration’s Small Business Investment Company programs. While reducing investor appetite for these critical programs is not Comptroller Otting’s intent, the proposal creates an incentive that tips the scales significantly toward more conventional securities over today’s community development investments, which are deeply mission-oriented.

As an example, LIIF secured CRA-motivated investors to fund the renovation and expansion of the Lafayette Family YMCA in Lafayette, Indiana. Amid the COVID-19 crisis, the YMCA has transitioned operations and is now providing child care for medical professionals and essential staff. They are also considering additional efforts that would allow their facility to support the community as it responds to this emergency.

The OCC’s final rule threatens to reduce the emphasis on the programs that made the Lafayette Family YMCA possible. Even the multipliers that provide additional credit for especially innovative or responsive community development activities are unlikely to overcome the overwhelming advantage held by conventional securities and infrastructure projects of enormous size and rapid deal velocity.

  • The final rule does not solve the geographic misalignment between need and investment under CRA. The OCC has consistently emphasized its desire for CRA reform to improve upon the current patchwork of CRA investment ‘deserts’ and ‘hotspots’ created by the skewed distribution of bank headquarters. CRA deserts are a particularly potent issue in rural America. Appalachian Community Capital (ACC), a CDFI loan fund, has struggled to attract investments from large banks that are uncertain if their regulators will count the activity for CRA credit outside of their assessment areas. But the few large banks that have made commitments to ACC have made it possible to finance exceptionally impactful investments in rural communities across the Appalachian Region – from health care centers to support for small businesses and family farms.

These investments should be encouraged, yet the OCC’s rule does not sufficiently provide incentives for banks to invest in rural communities outside of their assessment areas. Although the final rule does include multipliers for investing in CRA deserts, these multipliers will be applied in the context of a ratio that emphasizes deal size over impact. And absent a CRA evaluation framework that demands a bank meet its obligations in all of its assessment areas (not just 80%), rural America is likely to experience a continued dearth of investment activity.

  • Certain costs of CRA compliance are likely to increase substantially given the new requirements to trace the source of deposits. Even before the pandemic, traditional banks sought to cut costs to address challenges in their business models, such as increased online competitors. An estimated 7,000 branches closed between 2012-2017. The new data reporting and compliance requirements associated with implementing the OCC’s rule will only increase the incentive for banks to pursue greater deal size and velocity rather than the smaller, more labor-intensive community development investments that can be game changing for local communities.

Finally, it is worth noting the unprecedented process by which the OCC has issued this final rule. The OCC, Federal Deposit Insurance Corporation (FDIC), and Federal Reserve have typically undertaken a joint rulemaking process on CRA regulations. The Federal Reserve has signaled their differences throughout the process by not joining their counterparts on the proposed changes, and it is particularly notable that the FDIC did not join the OCC in issuing a final rule despite signing on to the proposed changes. The OCC also moved forward with incredible speed. The agency issued a final rule merely six weeks after more than 7,500 public comment letters were submitted in response to the proposed rule.

At a time when fewer Americans can afford to rent or own a home and disinvested communities fall further behind on measures of education, health and employment, any changes to CRA should be undertaken thoughtfully and with appropriate caution to “do no harm.” The OCC’s decision to move forward with rulemaking on CRA without consensus among all three regulators would be ill-advised in the best of economic times. To do so during the throes of this pandemic is deeply concerning.

Donna Gambrell is the President & CEO of Appalachian Community Capital and a member of the Board of Directors of the Low Income Investment Fund. Daniel A. Nissenbaum is the CEO of the Low Income Investment Fund.