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Proposed Regulatory Changes to CRA Threaten Decades of Community Development Advancements

Written by Low Income Investment Fund

The end of 2019 brought with it a flurry of activity in the federal community development (CD) policy space. Congress passed a record $262 million for the Treasury Department’s Community Development Financial Institution (CDFI) Fund in fiscal year (FY) 2020 appropriations, in addition to a one-year extension of the New Markets Tax Credit (NMTC) at $5 billion – an increase of $1.5 billion, the program’s first funding increase in over a decade.

The industry was also rocked by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) releasing a joint notice of proposed rulemaking on changes to the Community Reinvestment Act (CRA). The proposed changes have the potential to drastically alter the current state of financial institution investments in CD activities, including those carried out by CDFIs and through some of the industry’s most successful programs, like the NMTC and Low Income Housing Tax Credit (Housing Credit).

Proposed Changes – What’s at Risk?

CRA is an anti-redlining law enacted in 1977 to encourage banks to meet the credit needs of communities in which they operate. The law is implemented by the three federal banking regulators – the OCC, FDIC, and Federal Reserve.

The OCC and FDIC’s proposed rule fundamentally misunderstands and undermines CRA’s emphasis on CD activities. The proposal is based on the establishment of a “CRA evaluation measure,” which is a single ratio that intends to capture the value of a bank’s CRA activity. The numerator would include the dollar volume of all CRA-eligible activities and the denominator would be comprised of the bank’s total domestic retail deposits. The calculation would arrive at a bank’s CRA evaluation measure.

Such a metric is ill-conceived for several reasons.

First, evaluating all CRA activities based on their dollar volume fundamentally misunderstands the value of different kinds of capital in a community. CDFIs like LIIF may take a bank’s $1 million investment and leverage it four times in projects on the ground, financing things like affordable housing, federally-qualified health centers, affordable grocery stores, high-quality child care centers, and other critical community assets. This bank’s $1 million investment in a CDFI would be highly impactful and responsive to local community needs, but when only evaluated on its dollar volume, may no longer be a worthwhile investment for a bank looking to quickly meet its CD obligations under the OCC and FDIC’s proposal.

Second, the CRA evaluation measure lumps all CRA-eligible activities together, including debt and equity products. Current CRA regulations consider CD activities as part of the bank’s lending test (50% of a large bank’s total CRA rating) and investment test (25% of a large bank’s total CRA rating). Instead, the proposed rule would require 2% of a bank’s CRA investments to be CD activities, a significant de-emphasis on CD that also threatens to pit debt and equity products against one another.

Third, even within the 2% threshold for CD activity the proposed rule would so significantly expand the universe of eligible CD activities that it would weaken the incentive for banks to participate in truly impactful CD activities like the NMTC, Housing Credit, and CDFIs. An illustrative example is the proposal’s inclusion of ‘essential infrastructure’ as an eligible CD activity. These investments – which include large-scale projects like roads and mass transit – would not need to primarily serve low-income people in order to receive CRA credit. Even financing sports stadiums would be an eligible CRA activity.

As Federal Reserve Governor Lael Brainard recently stated in her speech on Strengthening the Community Reinvestment Act by Staying True to Its Core Purpose, “an approach that combines all activity together runs the risk of encouraging some institutions to meet expectations primarily through a few large community development loans or investments rather than meeting local needs.”

The Federal Reserve – An Alternative Approach

Notably, the third federal banking regulator – the Federal Reserve – did not join the OCC and FDIC in issuing the proposed rule last month, a significant departure for CRA which has traditionally been regulated under a joint rulemaking process. On January 8, Governor Brainard spoke at an Urban Institute event, In Conversation with Lael Brainard: Modernizing the Community Reinvestment Act, where she laid out her own approach to CRA reform that differs markedly from the OCC and FDIC.

To understand the impacts of a metrics-driven CRA evaluation process, the Federal Reserve created a database based on more than 6,000 public CRA evaluations since 2005. An analysis of the data led to the conclusion that the value of retail services and CD services to a community are not easily captured by a monetary value metric, especially because of the variation in local needs and priorities.

To account for these variations, Governor Brainard proposes to develop CRA metrics that are tailored to local conditions, fluctuations in the business cycle, and a bank’s size. This would include creating a separate retail test and CD test, with qualitative standards to assess retail services and CD services respectively. In addition, the Federal Reserve would create a customized dashboard for each bank that would allow it to track its activity against the relevant threshold on an ongoing basis.

Although Governor Brainard did not indicate if the Federal Reserve will move forward with their own NPR on this proposed approach, she did state that the Federal Reserve will release its recently developed CRA database and encourage the public to consider this evidence when submitting comments to the OCC and FDIC.

Advocacy – How is LIIF Responding?

At face value, the OCC and FDIC proposal may appear to increase CRA investment activity, but in reality, the changes threaten to dilute the role of the very programs and entities that have proven to be most impactful for communities – several of which Congress has recently chosen to expand. We will not know the full scope of impacts from CRA rule changes until new rules have been implemented, but there are clear and immediate threats in the proposal that necessitate a strong response from CD stakeholders.

LIIF will be submitting a comment letter to the OCC and FDIC by the March 9 deadline expressing our serious concerns over the proposed changes, particularly the dilution of impactful CD activities. We will also be sharing our support for the creation of a separate CD test, as outlined in Governor Brainard’s January 8, 2020 speech and highlighted in FDIC Board Member Martin Gruenberg’s comments at the December 12, 2019 FDIC Board meeting.

Any changes to CRA will implicitly create ripple effects across the entire industry. LIIF is committed to safeguarding CRA’s influence on impactful CD activities and ensuring that any changes to CRA regulations build on the successes in the CD industry over the past few decades.