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A Community Reinvestment Act for the 21st Century

Last week, the three principal banking regulators approved a Final Rule to modernize the Community Reinvestment Act (CRA). This 1500-page regulation is the product of more than a decade of consultations with community and banking groups and years of work by regulators to get it right. They got it right. While not everyone is going to like everything in the final rule, it succeeds in significantly improving the status quo, and leaves room for ongoing clarification and adjustment over a 24-month implementation period.

One of the longstanding concerns with the existing CRA regime was the lack of transparency regarding which investments would qualify for CRA treatment. Clarity and consistency are crucial, but they must be achieved thoughtfully to avoid unintended consequences. The current regime is also built on the foundation of a 28-year-old rule that was written before the rise of interstate banking and the invention of internet and mobile banking. The new final rule makes the evaluation process less opaque and expands the coverage of the regulations to include the modern banking system.

On Friday, November 3, NHC will host Breakfast with Barr: A conversation about CRA in the 21st century,” an online convening with Federal Reserve Board Vice Chair for Supervision Michael Barr. The regulatory process that led to this new rule was led by former Federal Reserve Board Vice Chair Lael Brainard prior to her leaving the Fed to take on her current role as Director of the National Economic Council at the White House. Vice Chair Barr took over the CRA process last year and led negotiations to work out critical details with the two other principal banking regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

Vice Chair Barr and I will discuss the new rule and the key factors essential for a successful implementation as the agencies begin a two-year long implementation period that will further clarify the regulation through “Q and A’s” and other regulatory guidance.

Following the discussion, I’ll participate in a panel with Lindsey Johnson, President and CEO of the Consumer Bankers Association, Michael J. Novogradac, Managing Partner of Novogradac, and Lisa Rice, President and CEO of the National Fair Housing Alliance. They will share their insights on the CRA rule and what they perceive as the next steps and opportunities moving forward.  The event will begin promptly at 8:00 AM ET and be livestreamed from the National Press Club in Washington, DC. You can register here.

CRA stands at the intersection of geography and race. When enacted in 1977, the CRA responded to persistent concerns over disinvestment in low-income communities and the tenacious legacy of “redlining,” the practice of literally drawing red lines on maps to prevent investment in minority neighborhoods codified by the Home Owners’ Loan Corporation (HOLC) in 1933 and the Federal Housing Administration in 1934. While the Fair Housing Act of 1968 prohibited redlining and other forms of housing discrimination, these practices proved difficult to reverse. Forms of redlining continue today, both formerly and informally, and remain the subject of enforcement actions to this day. In one stunning case brought by the U.S. Department of Housing and Urban Development (HUD) against Facebook (now Meta), HUD charged that the Facebook website and app uses its enormous database of user data to control who sees housing-related ads in their Facebook “feed.” Facebook offered advertisers the ability to choose or exclude attributes like “foreigners,” “Puerto Rico Islanders,” or people interested in “accessibility,” “Hijab Fashion,” or “Hispanic Culture.” Advertisers were required to draw red lines around geographies that would be excluded from seeing their ads. Facebook also offered advertisers the ability to target customers using a tool called “Lookalike Audiences.” “Even if an advertiser tries to target an audience that broadly spans protected class groups, [Facebook’s] ad delivery system will not show the ad to a diverse audience if the system considers users with particular characteristics most likely to engage with the ad,” according to HUD. The Justice Department settled the case with Meta on June 21, 2022.

CRA has exceeded the expectations of its authors and early advocates, building a nationwide infrastructure of banking officers dedicated to community development in underserved areas. And CRA is empowering hundreds of major national organizations committed to investing in America’s low- and moderate-income people and communities.

Over the past five years, NHC has insisted that any new CRA regulation meet four fundamental tests:

  1. Increase investment in communities that are currently underserved;
  2. Benefit more low- and moderate-income (LMI) people, particularly people of color, who live in those communities;
  3. Ensure that CRA lending and investment do not lead to the displacement of the very people it is meant to help; and
  4. Make both bank performance and government enforcement more transparent and predictable.

I’m confident that the new rule meets all these tests, while residing well within the four corners of the original statute.

NHC’s 2022 comment letter urged regulators to explicitly address the issue of race in the final rule. While the final rule avoided running afoul of recent Supreme Court decisions, it embraces earning CRA credit for Special Purpose Credit Programs (SPCPs), even when there is no nexus to income, opening doors for banks to engage in initiatives that promote racial equity, as SPCPs are explicitly allowed under the Equal Credit Opportunity Act. The final rule encourages the use of Special Purpose Credit Programs as a tool for increasing access to credit for communities of color. However, it fell short of the hopes of many civil rights and fair housing advocates. Ultimately, the prospect of a reversal of the regulation, and potentially the statute itself, proved too much for the banking agencies to risk. The National Fair Housing Alliance issued a statement expressing their deep disappointment over the failure to explicitly address race.

NHC supports the rule’s treatment of internet banking, an important advancement of the regulations that is fully consistent with the statute’s emphasis on branches. Many areas not currently covered by CRA assessment areas, so called CRA deserts, will benefit from the new rule. I haven’t been into a physical bank branch in years, but I visit my bank’s app on my mobile phone every week to make deposits or withdrawals. The original statute in 1977 doesn’t require that branches be constructed out of bricks and mortar. Branches today are often constructed out of 0s and 1s instead but serve the same purpose. My app is my branch, and the final regulation acknowledges this transformation, aligning the CRA with the 21st century.

Another area NHC and our members were concerned about was how the proposed rule treated community development (CD). In our comment letter, we noted that CD performance would not affect most large banks’ overall CRA rating because retail test performance weighs heavier (60 percent) than CD performance (40 percent). A bank that is Satisfactory on retail is likely to receive an overall Satisfactory rating regardless of whether its CD performance is Outstanding or even Needs to Improve. If a bank cannot reasonably expect to achieve an Outstanding retail performance, CRA will provide little motivation for CD activity. Especially because CRA drives so much CD activity, such an outcome would be a major setback. Regulators heard our concerns, also expressed by many of our members, and reversed their position to make CD performance count the same as the retail test.

Although some regulators raised concerns the regulation’s implementation should be rushed so it would conclude before the end of the Biden Administration, they ultimately agreed to a longer implementation period. The 24-month implementation period, and broad support among the Federal Reserve Board of Governors, is a clear indication that regulators have found the right balance, making the final rule durable and sustainable.

NHC argued in our letter that “only a non-partisan CRA ensures long-term success. If the regulation fails to meet this standard, embracing well-intentioned but essentially partisan priorities, we will be forced into a process of updating CRA through a multiyear regulatory rewrite or even risk repeal of the CRA statute altogether,” we wrote. A “nonpartisan CRA regulation will have enough bipartisan support to last well beyond the inevitable swings of the political pendulum. We have a historic opportunity to write a new CRA regulation built to last and serve 21st Century communities.”

NHC looks forward to working with the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency to ensure a smooth and effective implementation of this pivotal rule. And we hope that you will join us online for the November 3 convening with Vice Chair Barr.

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