The Community Reinvestment Act (CRA) is one of the most consequential laws influencing the community development industry and the flow of capital into historically underinvested communities. CRA was created to specifically address racist policies in lending and banking, such as redlining. As a result of their CRA obligations, banks invest hundreds of billions of dollars annually in community development programs to finance affordable homes, schools, jobs, and more necessities. While directing billions of dollars into low-income neighborhoods and communities of color, the law has not fully lived up to its intended purpose. The current efforts to reform the regulations are a critical opportunity to more explicitly and directly achieve CRA’s original intent.
Reforming CRA would have a significant impact on the way capital flows into communities across the nation. Under their CRA obligations banks invest approximately $100 billion in community development loans annually, as well as billions in other community development financing products like the Low Income Housing Tax Credit (Housing Credit), New Markets Tax Credit (NMTC) and grants to nonprofit community organizations.
The community development sector has been actively organizing to advocate for more transparent and community-centered changes in CRA reform. LIIF, along with many in the field, opposed proposed changes by the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) citing concerns that the predominantly quantitative evaluation approach would undermine the importance of smaller and more complex community development activities—those that are often most impactful to underserved people and places. LIIF CEO Daniel A. Nissenbaum released a statement of opposition when the OCC ultimately chose to finalize the rule changes despite widespread opposition.
In fall 2020 the Federal Reserve Board—the third banking regulator that oversees CRA—put forward its own approach to CRA reform that centered data and racial equity as critical components of modernization. Now, the Board is seeking public comments on this proposal to inform a path forward for updating CRA regulations. Given the lasting implications of any changes to CRA, LIIF encourages stakeholders to submit comment letters by the Feb. 16, 2021 deadline.
CRA encompasses a broader array of issues beyond community development products, including retail lending and the geographic distribution of financial products and services. Given LIIF’s experience and expertise as a national community development financial institution (CDFI), we believe the following are critical to effectively reform the community development components of CRA to be more responsive to achieve its purpose:
- Proceed with the proposed Community Development Test and ensure appropriate guardrails are in place to incent ongoing investment in the full range of community development products and services.
- Enact the proposed provision that would offer automatic CRA consideration for community development activities conducted with certified CDFIs anywhere nationwide.
- Explicitly require banks to improve outcomes for people and communities of color in order to fulfill their CRA obligations on the Community development Test, including partnering with CDFIs who have developed specific products and services targeted to communities and borrowers of color.
- Collect and report comprehensive community development data—including community development loans, investments, and services—as well as overall CRA data disaggregated by race.
Community Development Test
One of the most notable shifts proposed by the Federal Reserve Board is the creation of a separate Community Development Test. Community development activities are a core component of CRA and are distinct from many of the retail products evaluated under CRA. However, the current system for large banks considers community development activities alongside retail products across three tests — Lending, Investments and Services.
A separate Community Development Test will combine all community development activities under one test and all retail activities under a separate Retail Test, allowing these distinct products and services to be evaluated on unique qualities like dollar amount, volume and distribution of activities.
However, shifting to this new Community Development Test and eliminating the existing Investment Test would eliminate any obligation for a bank to participate in community development equity investments, which includes the Housing Credit, NMTC and even grants to community-based organizations. Without the current obligation of the Investment Test, banks may instead favor community development debt products over community development equity products given that debt products are traditionally more attractive to lenders.
LIIF supports the Federal Reserve Board’s proposed Supplementary Metrics and Impact Scores as a method to guard against these potential unintended consequences:
- Supplementary Metrics: LIIF supports the Board’s proposal to provide examiners with data on the percentage and dollar amount of a bank’s community development activities that are loans, investments and contributions. These Supplementary Metrics could mimic the function of the current Investment and Lending test distinctions. We recommend that the Board commit to making the Supplementary Metrics publicly available for stakeholder evaluation and consider the extent to which a bank’s equity investments substantially decreased over prior exam periods when calculating an institution’s final rating.
- Impact Scores: LIIF supports the creation of Impact Scores, which would combine performance context and other local information to determine a community development product’s score on a scale of 1-3. We believe that this focus on impact can help build incentives for banks to participate in more innovative and complex community development activities. We also recommend that these Impact Scores be transparent and consistent so as not to introduce any unnecessary subjectivity into the evaluation process.
LIIF is also supportive of the Federal Reserve Board’s suggestion that banks receive automatic CRA consideration if they conduct community development activities with certified CDFIs anywhere nationwide. This reflects CDFIs’ status as proven community partners and would help introduce critical community development products in new geographies that may be overlooked by the current incentive structure. We strongly urge partners to share their support for this provision.
Racial Equity
CRA is a Civil Rights Era law created to address bank redlining activities, a discriminatory lending practice that disproportionately impacted Black households and has had lasting impacts on wealth and opportunity in Black communities. However, the law uses income as a proxy for race, which has proven insufficient to target deeply entrenched systems of racial inequity. Capital has repeatedly proven that it will follow the path of least resistance unless deliberately directed to address racial inequities.
Undoing decades of lending discrimination and racist practices in the financial services industry is difficult work and will not happen unless stakeholders are specifically required to do so. LIIF is incredibly encouraged to see the Federal Reserve Board explicitly consider its role in updating CRA to address systemic inequity, specifically for people and communities of color. The National Community Reinvestment Coalition (NCRC) has offered a proposal to designate underserved census tracts as a means of advancing racial equity, as well as other opportunities to consider race more explicitly in CRA.
On the Community Development Test, LIIF encourages the regulators to consider two specific recommendations to advance racial equity:
- Provide CRA credit for banks that invest in CDFI products designed to directly address racial inequity. Examples may include more flexible products that take steps to mitigate racialized perceptions of “risk” associated with borrowers of color; efforts that seek to remediate racialized disparities in application approvals and cost of capital; mixed-income housing developments with a focus on racial and income integration; diverse by design charter schools; and other products targeted specifically to people and communities of color and delivered through certified CDFIs.
- Include racial demographic data in Performance Context to explicitly require banks to consider measures of racial equity in their community development lending and investments and articulate efforts taken to improve outcomes for people or communities of color.
Data
One of the most consequential outcomes of the Board’s CRA modernization effort would be ensuring full community development data is collected and reported annually. Decades of critical investments in community development activities have gone under-reported and un-analyzed, posing serious consequences for stakeholders’ ability to analyze bank investment patterns and strengthen the system.
LIIF supports the Federal Reserve Board’s proposal to collect more and better community development data. We specifically urge the regulators to report community development data by the type of product — loans, investments, grants, etc., and by the category of activity, including affordable housing, community services, economic development and activities that revitalize and stabilize low- and moderate-income communities. This data should be made publicly available and reported at various geographic levels, including at census tract, county and metropolitan statistical area (MSA) level, to ensure the most effective analysis of data is possible.
There is tremendous value in building a comprehensive dataset of community development investment activity; this information will allow stakeholders to better target resources to underserved communities and communities of color, as well as identify efficiencies that strengthen the sector.
Next Steps
The three federal banking regulators have diverged on CRA modernization over the last few years, but stakeholders are optimistic that the OCC, FDIC and Federal Reserve Board will realign around an interagency process once President Biden nominates a new head of the OCC. Submitting public comments in response to the Federal Reserve Board’s ANPR is an important opportunity to inform the regulators’ approach to CRA. We urge all stakeholders to make their voices heard during this critical juncture.
The deadline to submit comments to the Federal Reserve Board is Feb. 16. Additional information on submitting comments is available on the Federal Register.