Both the FDIC and the Office of the Comptroller of the Currency have proposed bank regulatory changes to the Community Reinvestment Act, a landmark civil rights legislation enacted in the wake of redlining practices that worsened urban divestment and racial wealth inequalities. The CRA has been a tremendous tool for working to address this legacy through its continuing and affirmative obligation to help meet the credit needs of their local communities, including low- and moderate-income (LMI) neighborhoods.
Unfortunately, the changes proposed by the FDIC and OCC would divert billions of bank dollars from investment, loans, and critical financial services away from residents and small businesses in low- and moderate-income (LMI) communities . They will hamper work, like that carried out by the Inclusivity Institute to help LMI families access mobility and make pro-integrative moves, expand first-time homeownership opportunities, prevent gentrification from undermining balanced living patterns, and reduce exclusionary practices.
These decisions are even more critical now as racial and economic disparities are exacerbated by the emerging economic crisis in the fallout of the COVID-19 pandemic. We urged the regulators to step back from implementing this harmful proposal.
Read our full comments below
April 8, 2020
Office of General Counsel, Rules Docket Clerk
Office of the Comptroller of the Currency
400 Seventh Street SW
Washington, D.C. 20219
Chair Jelena McWilliams
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW
Washington, D.C. 20429
Re: Docket No. OCC-2018-0008, RIN: 1557-AE34 and RIN 3064-AF22
Dear Comptroller Otting and Chair McWilliams:
The Inclusivity Institute appreciates the opportunity to comment on the Office of the Comptroller of the Currency’s (OCC) and the Federal Deposit Insurance Corporation (FDIC) Joint Notice of Proposed Rulemaking (NPR) regarding the modernization of the Community Reinvestment Act (CRA).
We offer the following comments as a new organization formed a little less than a year ago, but one comprised of distinguished scholars, leading affordable housing developers and policy experts working collectively to implement concrete strategies to reduce intense racial and economic segregation in our nation’s housing markets. Our work is driven by our conviction that despite entrenched and extreme levels of segregation that persist and fuel deeply rooted inequalities, there are pragmatic policy and market-based solutions that can be readily deployed. We believe these solutions will make profound progress in creating more balanced and equitable living patterns.
These concrete strategies include helping families access mobility and make pro-integrative moves, expanding first-time homeownership opportunities, preventing gentrification from undermining balanced living patterns, and reducing exclusionary practices. In large part, the need for such strategies are tied to the legacy of redlining practices that intentionally stripped minorities of wealth building opportunities by limiting access to credit and homeownership in America. These practices intensified racial and economic segregation throughout the country. The Community Reinvestment Act, enacted in response to the urban divestment and racial wealth inequalities, has been a tremendous tool for working to address this legacy through its continuing and affirmative obligation to help meet the credit needs of their local communities, including low- and moderate-income (LMI) neighborhoods.
As the NPR affirms, “The agencies’ extensive engagement with stakeholders confirmed that the CRA remains a powerful tool for promoting community revitalization and increasing financial activity in neighborhoods across the country.”[i] There is also broad consensus that there is great need to modernize the CRA to account for market innovations and evolving conditions. However, our analysis suggests that the way in which the NPR proposes to reform the current regulatory structure undermines accountability in meeting reinvestment obligations. This proposal stands in contrast to more nuanced approaches like those considered by the Federal Reserve, for instance, which more effectively balance the interests of banks in a changing financial services landscape with the goal of preserving the integrity of the examination process in evaluating bank performance.
Below, we will outline the most critical areas of concern that we respectfully urge you to reconsider. These decisions are even more critical now as racial and economic disparities are exacerbated by the emerging economic crisis in the fallout of the COVID-19 pandemic.
Greater economic inclusion will not be adequately achieved or evaluated under the single metric test
In summarizing feedback provided during stakeholder meetings and public comments from the ANPR, the NPR concedes, “The majority support objective measurement of CRA performance, although they oppose a single metric.”[ii] And yet on page 1209 of the proposed rule in the Federal Register, the NPR outlines plans to move forward the single metric test, the CRA Evaluation Measure, that community development advocates, civil rights organizations and even some bank CRA officers have emphatically argued undermines the incentives to fulfill the core purpose of the act. Instead, nominal edits were made to the formula that do not substantively address the fact that when you measure compliance merely by adding the dollar amount of CRA activities divided by deposits, banks have far less incentive to pursue locally tailored, often more complex strategies to address credit needs of LMI individuals in communities. Many of these strategies and programs are developed in partnership with organizations who have expertise in providing services to LMI households and communities and have been key drivers of neighborhood quality of life improvements and greater economic empowerment. Under the single metric approach, banks will be incentivized to invest in larger projects and deals over smaller programs and loans.
In a speech before the Urban Institute, Dr. Lael Brainard, a member of the Board of Governors of the Federal Reserve System, referred to this approach, stating outlined this very concern in discussing that agency’s approach to CRA reform, “The retail lending metrics would be tailored to the needs of the local community. This tailoring is not possible with a uniform benchmark that applies to all banks and all communities. The large differences between assessment areas illustrate the importance of tailoring thresholds.”[iii] She also noted unintended consequences that are possible with one metric approach. “Because a uniform comprehensive ratio would not reflect local conditions, which can vary greatly between communities and over the cycle, a bank could exert the same amount of effort in different areas or different points in the economic cycle with very different outcomes.”[iv]
Instead, the Federal Reserve sought to create a quantitative process by which metrics accounted for variations in banking size and business strategies. As Brainard describes, the Federal Research went about “creating a database based on over 6,000 written public CRA evaluations from a sample of some 3,700 banks of varying asset sizes, business models, geographic areas, and bank regulators.8 The database includes the location, number, and amount of CRA-eligible loans and investments and the ratings associated with each bank's performance.”[v] They derived from that research, in addition to substantial public engagement, a data-driven model that more effectively provides clarity in CRA regulation without reducing accountability.
The NPR revisions to tests and eligible activities reduce accountability and may exacerbate racial wealth disparities
The Inclusivity Institute supports the goal of providing greater clarity in the eligible activities and the ability to have a list that can evolve along with markets needs and realities, but the NPR’s proposal to include infrastructure as an eligible activity, using the example that “stadium in an opportunity zone that is also an LMI census tract”[vi] is a key illustration of how this NPR diminishes CRA’s ability to meet the specific credit needs of LMI communities. Instead, it incentivizes larger deals without criteria to show direct benefit to LMI individuals over targeted investments, such as small business lending for minorities.
Another key concern is the mismatch between the agencies’ assertions and the NPR’s application is related to retail branch locations. The FDIC and OCC assert that branch locations are still important and retain their assessment areas under this new structure, stating “that the CRA regulations should incentivize banks to meet the retail lending and CD needs of the residents in these geographies.”[vii] Unfortunately, the NPR actually eliminates the large bank service test that places significant weight on the number of branch locations in LMI communities in measuring a bank’s performance. Instead, the NPR would factor in branch locations as a minor consideration within the new CRA Evaluation Measure and undermine their importance in determining a bank’s overall performance. This lays the groundwork for worsening banking deserts and wealth disparities based on race and income.
In the state in which we are headquartered alone, Indiana, there are 262 storefront locations across the state that have drained more than $300 million in finance charges from borrowers in the state in the last five years alone.[viii] As a report released just last year finds, “A more in-depth analysis of storefront locations finds that these are disproportionately located in low-income communities and communities with higher concentrations of Black and Latinx Hoosiers.”[ix] Further, the report notes that census tracts with median household incomes at or below 80% of the state median have substantially more payday loan storefronts per 100,000 residents than those tracts with household incomes at or above the state median.[x]
The proliferation of subprime, predatory lending coincides with the loss of retail branches. A report from the National Community Reinvestment Coalition shows, “6,008 of 95,018 branches were lost between 2008 and 2016. This represents over 6% of branches nationally. Of the losses, 4,941 (82%) were in urban zip codes and 1,067 (18%) were in rural areas.”[xi] Retail bank locations and deposit services are critical to preserving assets among LMI households, especially as we know that payday borrowing is associated with bank account closures, credit card defaults and bankruptcies. The FDIC National Survey of Unbanked and Underbanked Households regularly highlights the fact that families without access to retail bank branches are far more to utilize more expensive alternatives, such as check cashers and payday lenders.[xii] The OCC and FDIC should continue to emphasize the importance and examination of retail branch location and deposit accounts in a meaningful way in determining CRA compliance.
While well-intentioned, the exclusion of middle- and upper- income lending in LMI communities as an eligible activity is another concern within the NPR could exacerbate economic stratification. Concerns about gentrification and displacement are essential considerations in lending and efforts to combat them are a core component of our work, but lasting community revitalization and integration is not possible where concentrations of poverty persist. Certainly, redevelopment in divested communities should be part of a comprehensive strategy with a plan to prevent displacement while bringing in resources and services to communities previously deprived of them. By removing mortgage and consumer loans to high-income individuals in LMI geographies as an eligible activity, the NPR could have the unintended consequence of reducing access to quality jobs, transportation, services and housing in LMI communities. Refining this activity to cut off eligibility geographies no longer qualify as LMI is a far better approach to achieving the intended goal.
Modernization and the evovling market
The Inclusivity Institute believes this is a critical time to explore new, innovative multi-sector strategies to address residential and economic segregation and CRA investment supporting this work is a critical support for the solutions we are pursuing. We have seen the success of partnerships between banking institutions who are dedicated to fulfilling the mission of the CRA and work with non-profits to develop strategies that improve access to economic opportunity and reduce racial disparities. In terms of reforms needed, we agree there is a tremendous need for modernization given the proliferation of fintech and the changing nature of consumer lending and institutions originating mortgages. We do not agree, however, that the changes within the NPR adequately respond to that concern while maintaining the integrity of the Act.
Instead, we recommend, like Eugene A. Ludwig, chairman and chief executive officer of Promontory Interfinancial Network, and former U.S. Comptroller of the Currency, that modernization should require more businesses to comply with CRA requirements. In a paper entitled, “The Community Reinvestment Act: Past Successes and Future Opportunities,” Ludwig states:
“The obvious response to the changes in the financial services business would be to apply the CRA to all service providers who benefit from the federal safety net or who are government chartered and regulated. Besides banks and thrifts, this would include broker-dealers, insurance companies, and credit unions, at a minimum. It ideally would also include all other major financial institutions important to a stable economy, such as hedge funds and private equity funds with more than $250 million in assets, consistent with the GLBA’s Small Bank size cut-off.”[xiii]
We would argue even more non-bank institutions should be included as well to provide greater accountability in the current lending environment in line with the examinations with which banks must comply. Both the FDIC and OCC should consider more tailored metrics in lending tests and examine the unintended consequences that may come from the implementation of the NPR in the interest of clarity and streamlining. The proposed measures in many ways could undermine the goals of accountability and local impact for LMI communities and borrowers within the Community Reinvestment Act. We appreciate the opportunity to comment and hope you will consider these concerns before issuing a final rule.
Kathleen Lara Policy and Staff Director, Inclusivity Institute
Richard Sander Vice-Chair of the Inclusivity Institute Dukeminier Distinguished Professor of Law, University of California, Los Angeles
- [i] Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, “Joint notice of proposed rulemaking: Community Reinvestment Act Regulations,” Federal Register (Volume 85, Issue 6) (Jan.9, 2020) page 1206 (see: https://www.govinfo.gov/content/pkg/FR-2020-01-09/pdf/2019-27940.pdf)
- [ii] Ibid, page 1207
- [iii] Governor Lael Brainard, “Strengthening the Community Reinvestment Act by Staying True to Its Core Purpose”, Speech at the Urban Institute, Washington, D.C., Jan. 8, 2020. (see: https://www.federalreserve.gov/newsevents/speech/brainard20200108a.htm)
- [iv] Ibid
- [v] Ibid
- [vi] Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, “Joint notice of proposed rulemaking: Community Reinvestment Act Regulations,” Federal Register (Volume 85, Issue 6) (Jan.9, 2020) page 1234 (see: https://www.govinfo.gov/content/pkg/FR-2020-01-09/pdf/2019-27940.pdf)
- [vii] Ibid, page 1212
- [viii]Macey, E., Charlesworth, L. Indiana Institute for Working Families and the Indiana Assets and Opportunity Network, (2019). “Financial Drain: Payday Lenders Extract Millions from Hoosier Communities,” see: http://www.incap.org/documents/Financial_Drain_Report2019.pdf
- [ix] Ibid
- [x] Ibid
- [xi] Richarson, J., Mtichell, B., Franco, J. Yichen, Xu. National Community Reinvestment Coalition, (2017). “Bank Branch Closures from 2008-2016: Unequal Impact in America’s Heartland,” see: https://ncrc.org/wp-content/uploads/2017/05/NCRC_Branch_Deserts_Research_Memo_050517_2.pdf
- [xii] Burhouse, S., Chu, K., Ernst, K., Goodstein, R., Lloro, A., Lyons, G., Northwood, J., Osaki, Y., Rhine, S., Sharma, D., & Weinstein, J., “FDIC Survey of Unbanked and Underbanked Households,” see: https://www.fdic.gov/householdsurvey/2015/2015execsumm.pdf
- [xiii] Ludwig, E., Kamihachi, J., Toh, L., “The Community Reinvestment Act: Past Successes and Future Opportunities,” see: https://www.frbsf.org/community-development/files/cra_past_successes_future_opportunities1.pdf