The Community Reinvestment Act (CRA) is a critical source of financing for Community Development Financial Institutions (CDFIs). The federal banking regulators are currently considering changes to CRA regulations, which will have widespread impacts on the entire community development ecosystem. LIIF urges community development stakeholders to stay engaged in the CRA modernization conversation and look to the LIIF blog for further information and recommendations as the process moves forward.
CRA was enacted in 1977 largely as a response to redlining, a discriminatory practice in which banks would deny loans to entire communities they deemed “hazardous” based on the race or ethnicity of persons living in the neighborhood. CRA encourages federally-insured depository institutions to meet the credit needs of the communities in which they operate by requiring financial institutions to lend and invest where they accept deposits, including in low- and moderate-income (LMI) communities.
CRA has been remarkably successful as an incentive for banks to provide mortgage lending and other financial services to LMI communities and individuals. CRA also underpins a large portion of private-sector financing in the community development industry and is a critical source of capital for CDFIs. The CDFI industry’s ability to grow to scale over the past few decades is largely tied to the availability of capital from CRA-motivated investors, who can receive positive CRA credit for lending to and investing directly in CDFIs, as well as in the projects we support.
While CRA has been invaluable to LMI communities and individuals over the more than 40 years since it was enacted, technological advancements and shifting patterns in the banking industry have left CRA regulations – last substantially updated in 1995 – outdated and inefficient. For instance, a bank’s CRA-qualifying activity is tied to the geographic area surrounding its branches – known as its Assessment Area. As customers increasingly access financial services online or through alternative channels, Assessment Areas wholly based on brick and mortar branch locations no longer accurately capture a bank’s responsiveness to the communities’ needs. Additionally, banks often find it difficult to support national CDFIs like LIIF when our work spans well beyond their Assessment Areas because it is unclear whether they will receive CRA credit for their investments. Updated regulations that reflect banks’ national lending and investment activity would help CDFIs better match investor capital with local community needs.
CRA Modernization – 2018 Regulatory Activity
The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve – together, the federal banking regulators – are responsible for examining CRA-regulated banks and rating their performance. The OCC took the first step in updating the performance evaluation process by releasing an advance notice of proposed rulemaking (ANPR) in 2018 detailing potential changes to the rules and regulations surrounding the law.
Notable in the OCC’s proposal was the concept of implementing a “single-ratio” to rate banks’ CRA activity by comparing a bank’s total CRA-qualified investments against a measure of the bank’s capacity to lend (such as domestic assets, deposits or capital from its balance sheet). LIIF joined many stakeholders last year to oppose the single-ratio concept. Such a framework would convert a well-established system, comprised of a three-part rating and a qualitative assessment, to a system primarily focused on a numerical metric that favors larger and less complex deals. This would ultimately create further complexity as the numeric benchmark is calibrated across a range of banks with many different types of business models serving communities with varying credit needs.
LIIF submitted a comment letter to the OCC in November 2018 supporting updated CRA regulations that more appropriately account for a modern banking system while also ensuring CRA continues to serve the needs of LMI communities and individuals.
LIIF has long relationships with many banking partners who want to continue doing the hard work of delivering truly impactful financing to LMI communities, but this work is inherently complex and requires flexibility. The single ratio would hinder LIIF and our bank partners’ ability to meet community needs, which is contrary to statutory intent. In lieu of a single-ratio approach, LIIF recommends that the regulators:
- Establish a separate, national community development test. Federal Reserve Governor Lael Brainard acknowledged the benefits of such a test in her March 2019 speech, in which she stated, “A separate, comprehensive community development test could encourage banks to provide the patient, committed financing–in the form of loans as well as investments–that community development organizations value the most.” LIIF supports Governor Brainard’s remarks and believes that a national community development test would promote: clearer focus on community development activities; greater responsiveness to communities; more flexibility for banks to address community needs; and a focus on the substance of activities over their volume.
- Retain performance context and qualitative factors in assessing community development activities. Current qualitative evaluation criteria such as whether a particular investment is “innovative,” “complex,” or especially “responsive to community needs” encourages banks to support projects where patient, flexible capital – often coupled with intensive technical and capacity-building assistance – is required. LIIF noted that this motivation is especially critical when CDFIs pioneer and begin to scale strategies to address the facilities needs of a new sector.
- For example, LIIF chairs the Charter Schools Lender’s Coalition, a field that would not have reached scale without CRA financing. LIIF is also a pioneering leader in the early care and education (ECE) industry — having created 271,000 child care slots — and we hope to advance the ECE facilities financing industry alongside our bank partners, which will only be possible if this financing is acknowledged for its complexity and innovation.
LIIF and our bank partners also need certainty that they will receive CRA credit for activities outside their Assessment Areas. LIIF recommends that banks receive full credit for community development activities nationwide if it has served its Assessment Areas, in the aggregate, at a Satisfactory level based on its most recent exam.
The OCC’s ANPR received more than 1,500 public comments, indicating serious interest and engagement among a diverse array of stakeholders. The OCC, FDIC and Federal Reserve have spent the past several months reviewing the public comments and have indicated their desire to collectively move forward with a proposed rule this year. LIIF strongly supports an interagency CRA modernization process because joint rulemaking provides the greatest clarity, consistency, and potential for long-term impact.
Once a proposed rule is published in the Federal Register – either independently by the OCC or jointly by all three regulators – the public will have a set window to submit comments, after which the regulator(s) will publish a final rule. LIIF plans to submit a comment letter to the federal banking regulators in response to any forthcoming proposed changes to CRA.
As the nation continues to grapple with the lasting impacts of redlining, retaining a strong CRA regulatory framework is foundational to creating pathways of opportunity for low-income people and communities.