Two federal bank regulators released a proposal in mid-December to revamp the Community Reinvestment Act for the first time in 25 years.

But only the Office of the Comptroller of the Currency, which developed the proposal, and the FDIC have adopted it. The third bank regulator, the Federal Reserve, has not signed on, and housing advocates are raising alarms that it could reduce investment in lower-income communities.

“We acknowledge with many, many others that there is a need for some reform to CRA,” said Rex Fowler, CEO of the Hartford Community Loan Fund. “We do believe, from what we’ve read of the proposed revisions, that this is a step in the wrong direction.”

A Push to Modernize Regulations

The CRA, adopted in 1977, encourages financial institutions to meet community credit needs, including in low- and moderate-income neighborhoods, and prevent discrimination through redlining. It has led to trillions of dollars in investments and was last revised in 1995, before the onset of digital banking.

“[The] joint proposal will help ensure CRA remains an effective and relevant tool to encourage more lending, investment, and services in the communities banks serve, including low- and moderate-income neighborhoods,” Comptroller of the Currency Joseph Otting said in a Dec. 12 statement after releasing the proposal.

The OCC highlighted four areas it said would improve the CRA, including clarifying and expanding what qualifies for CRA credit. The proposed rules would require bank regulators to publish an illustrative list of these activities. While able to request guidance from the regulator, banks today often remain uncertain about whether any given activity qualifies until the CRA exam.

The proposal would also update the locations that count for CRA credit. Examiners currently look at activity in areas surrounding headquarters, branches, certain ATMs and places where banks conduct a significant volume of retail lending. Under the proposed regulations, banks would also designate assessment areas where they draw a significant portion of their deposits, such as through digital banking.

The OCC also said its proposal would result in more objective performance evaluations and more transparent and timely reporting of exam results.

CBA to Weigh In

With over 200 pages to review, stakeholders continue to read through the proposal. It was published in the Federal Register on Jan. 9, giving the public until March 9 to submit comments.

Thomas Mongellow, president, CEO and treasurer of the Connecticut Bankers Association, said in an email to The Commercial Record that the organization is currently reviewing the CRA proposal and discussing it with member banks.

“There are many positive aspects of the proposed changes, and we are delighted that the regulators have begun the process of modernizing their CRA rules,” Mongellow said. “However, we are wary of any potential negative impacts, such as increased compliance burden. We are reviewing the proposed changes carefully, including with our counterparts in other states through discussion groups organized by the American Bankers Association.”

After reviewing the proposal, the CBA will likely submit a comment letter to the regulators, Mongellow said, and incorporate the CBA’s thoughts and the feedback from member banks.

Frustration from Housing Advocates

One concern noted by housing advocates is that the proposed regulations call for assessing banks based on the amount of money being lent rather than the number of loans or their impact.

Fowler, with the HCLF, said the proposed measurement could favor large investments that don’t directly benefit low- and moderate-income, or LMI, residents such as a sports stadium or ballpark.

Banks already receive credit for these types of investments, as Otting noted in his testimony on Jan. 29 to the U.S. House Committee on Financial Services.

“What the proposal does is to clarify the current approach by providing 200 examples of community and economic development activities that would receive CRA credit,” Otting said in his testimony. “We expect this certainty would generate significant job growth in LMI neighborhoods, which is precisely the intent of the law.”

For Fowler, an emphasis on large-dollar-value activities could instead leave banks with less incentive to invest in other high-impact activities, such as community development financing, home mortgages and small business lending.

“The emphasis is being significantly reduced on activities that we think make a difference in LMI communities,” Fowler said.

The HCLF is a community development financial institution, and one of its primary activities is lending for affordable housing, including the purchase and rehabilitation of residential and mixed-use buildings. Banks receive CRA credit for investing in CDFIs, what Fowler calls a win-win partnership.

CDFIs also make smaller loans within low- and moderate-income communities, loans that banks often don’t offer. Fowler is concerned that CRA reform would give banks less incentive to invest with CDFIs.

“It seems like [the regulators] are trying to disconnect CRA from the LMI neighborhoods,” Fowler said. “They’re disconnecting the proposed revisions from the original purpose of CRA, from our perspective.”

Fed Still a Holdout

If only the OCC and FDIC adopt the proposal, banks – and communities – would face different standards. And in Connecticut, state-chartered banks would face more complications since the state is one of several that maintains its own, separate CRA examination.

A Jan. 8 speech about the CRA offered insight into the Fed’s position. Without naming the OCC and FDIC proposal, Fed Governor Lael Brainard said metrics should “rely on loan counts rather than dollar value in order to avoid inadvertent biases in favor of fewer, higher-dollar value loans.”

She also suggested CRA revisions should not be rushed.

“If the past is any guide, major updates to the CRA regulations happen once every few decades. So, it is much more important to get reform right than to do it quickly,” Brainard said, according to a transcript of her speech. “If we only have one opportunity for a few decades, I want to make sure CRA reform is based on the best analysis and ideas and the broadest input available.”