August 5th is an important date that all community development stakeholders should have marked on their calendars — the deadline to submit public comment letters in response to the banking regulators’ proposed rule on the Community Reinvestment Act (CRA). CRA is one of the most important drivers of bank investments in community development and this reform period may set the rules governing our community development finance ecosystem for the next decade or more.
The proposed rule reflects several years of work and iterations of public feedback, and importantly acknowledges that a quantitative metric alone cannot sufficiently measure the complexities of our work; we are in a far better place in this conversation than we were a year or two ago.
The comment period is an opportunity to share support for the several positive proposals impacting Community Development Financial Institutions (CDFIs) while also urging the agencies to better emphasize community development in the overall CRA examination and more directly support racial equity initiatives in this anti-redlining law.
My perspective comes from over 25 years of leading and advising community development teams, at private financial institutions, on the boards of community development organizations, and now as CEO of the Low Income Investment Fund (LIIF). I know firsthand the opportunities and challenges associated with the current CRA rules. While this important law has delivered billions of dollars into underserved communities, disparities by income and by race are increasing. In the face of challenging times ahead, we need to ensure that banks are both obligated and incentivized to deepen their investments in the communities they serve.
To achieve this goal, our comments will reflect the following suggestions:
- Require a minimum amount of community development finance activity be in the form of equity investments in order for a bank to achieve a passing rating. The proposed rule makes a major structural shift by combining community development loans (debt) and investments (equity) under one Community Development Financing Test. This removes the longstanding precedent where equity investments comprise 25% of a bank’s overall CRA rating. Equity investments can be costlier and more time-consuming activities than loans but are also a critical form of capital in the community development finance ecosystem that must be intentionally retained. LIIF is deeply familiar with the importance and impact of community development equity investments as both a leading recipient of New Markets Tax Credits as well as part owner of the National Affordable Housing Trust (NAHT), a leading nonprofit Low Income Housing Tax Credit syndicator.
- Ensure community development activities meaningfully count towards a bank’s overall rating. The proposed rule reduces a bank’s incentive to achieve a strong rating on its Community Development Test by setting a disproportionately low weight for community development activities compared to retail lending activities. The Community Development Test and the Retail Lending Test should receive equal weighting – each 50% of a bank’s overall CRA rating – to ensure consistent emphasis on diverse community credit needs. While home mortgages and small business loans are absolutely core to bank’s responsiveness to local credit conditions, so too are the affordable housing developments, child care programs, health clinics, community centers and other local assets, services and amenities that make up neighborhoods. These resources provide an outsized impact in communities but tend to receive less focus from the financial sector.
- Meaningfully incorporate demographic data in a bank’s CRA evaluation to determine whether a bank is meeting the credit needs of the entire community. Although the CRA statute directs the agencies to evaluate how banks meet the credit needs of their entire communities, the proposed rule maintains its current emphasis on serving low- and moderate-income communities and neglects to collect, track, or incorporate racial demographic data in the examination process. Without data disaggregated by race and ethnicity, the regulators will not be able to fully assess a bank’s track record of meeting the credit needs of its entire community, nor can the industry begin to more directly consider or craft products and services focused on racial equity. Ideally, racial demographic data is needed across CRA activities, including community development, so that the agencies can capture an accurate and complete picture of how banks are meeting the credit needs of their entire communities – including communities of color.
- Incorporate Special Purpose Credit Programs (SPCPs) as an Impact Review Factor on the Community Development Finance Test. SPCPs are a critical tool allowing lenders to create credit products with favorable terms that are targeted to historically underserved classes — including by race. The proposed rule takes a positive step by proposing to provide CRA credit for SPCPs that focus on consumer products and home mortgage lending. However, the rule is silent on SPCPs under the Community Development Test, which would omit credit for banks that establish targeted lending programs for important activities such as affordable rental housing developments, child care programs and other community development projects. SPCPs are one of the most important tools available to affirmatively invest in racial equity and should be eligible for CRA credit on both the retail and community development tests.
- Commit to ongoing public engagement around the newly proposed Impact Review Factors. Effective implementation of Impact Review Factors will largely determine the success of the CRA rule; communities cannot afford for the regulators to miscalculate or underemphasize this component of the rule. It will take several years before the regulators have sufficient data to incorporate the Impact Review as a quantitative element of the exam process, and until then the Impact Review will largely be a qualitative consideration. The regulators should commit to seeking additional public input as they consider incorporating a quantitative approach to Impact Review Factors.
It will be important for CDFIs and other community development stakeholders to submit comment letters amplifying these points, as well as to express strong support for many positive aspects in the proposed regulation, including:
- Providing automatic credit for activities conducted in partnership with or in conjunction with CDFIs. This acknowledges the important role of Treasury-certified CDFIs in providing mission-based capital to underserved communities and will help streamline the credit process for both banks and CDFIs.
- Including CDFIs on the proposed list of Impact Review Factors. Impact Review Factors would capture activities that are particularly impactful and responsive to community credit needs. Including activities that support CDFIs on this list acknowledges the role that we play in providing tailored, flexible, affordable and accessible capital to community partners.
- Evaluating community development activities conducted anywhere in the country, rather than in the places where banks have branch locations. Bank branch locations do not always align with the neighborhoods most in need of investment, and this is particularly true for the communities many CDFIs serve. The proposed geographic flexibility can help bring community development capital to more neighborhoods.
These changes can meaningfully expand CDFIs’ reach and capacity, as well as increase the emphasis on some of the most impactful products that we offer.
The proposed rule put forth by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, and Office of the Comptroller of the Currency (OCC) in May is an impactful step forward for the communities we serve. But there remains room for improvement and now is the time to ensure community development voices are heard.
This is a once-in-a-generation opportunity to improve our nation’s most consequential anti-redlining law. Submit your comment by August 5, 2022.