What is billed as an interagency Community Reinvestment Act reform proposal is really the heavy-handed handiwork of the Federal Reserve, which refused to work with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in their January 2020 joint reform effort under the Trump administration.
The politically savvy Fed issued a competing September 2020 version, hoping a new Biden administration would look more favorably on its approach to CRA reform. Their political bet paid off as their chair was not only reappointed, but their CRA reform architect was appointed as vice chair by the new president.
More important, the president tapped a former Fed chair as Treasury secretary who, in turn, tapped a Fed official as acting comptroller of the currency, resulting in his being an FDIC director. One of his first actions was to rescind the previous comptroller’s final rule on CRA and publicly support working with the Fed and FDIC on interagency reform.
This background is relevant, as this is the same Fed that tried to kill CRA during and prior to its establishment in 1977 and then did everything it could to undermine the 1993-1995 joint CRA reform efforts by the OCC, FDIC and Office of Thrift Supervision. Thus began the Jekyll and Hyde bank regulator that publicly put on a pro-CRA face but privately encouraged banks and others to lobby Congress to weaken the law.
The Fed fortunately kept its heavy hand off CRA since those 1995 regs. Banks, with their 98% CRA passing ratings and communities with their $500 billion of annual CRA benefits and $100 billion M&A community benefit agreements, are doing well with the existing regs.
Community groups, banks, and their regulators are comfortable with them, as they do not have to learn the complicated new procedures and formulae in the roughly 700-page proposal that looks hauntingly familiar to the Fed’s previous proposal. Yes, a Fed proposal in interagency clothing.
In fact, the FDIC’s acting director properly acknowledged the “leadership” of the Fed’s vice chair and staff in this reform effort. In fact, the Fed’s staff released an April 26 internal memo to the Fed’s board detailing the proposed reform a week before it was jointly announced by the agencies.
Everyone, including the Treasury Department, agrees CRA needs updating to account for branchless banks like credit card, fintech and internet banks. But it needs a tune-up, not a complex and costly overhaul that will result in reduced community development activities and an unnecessary bank regulatory burden.
The OCC’s rescinded final rule adopted the correct CRA modernization fix based on a simple 5% deposit reinvestment rule requiring a CRA responsibility in “deposit-based assessment areas” in distant markets sourcing 5% or more of deposits. This is consistent with the intent and middle name of the Community Reinvestment Act, namely reinvesting deposits via community development activities.
The giant branchless banks impacted by this 5% rule cleverly convinced friendly regulators, industry and community groups that it would increase CRA “hot spots” to the disadvantage of CRA “deserts,” since most of their deposits come from metro areas.
This is a blatant misrepresentation of this rule, which requires deposits from rich neighborhoods (or hot spots) in big cities be reinvested in poor neighborhoods (or deserts) in those same cities. Call it a Robin Hood Rule, where deposits from the rich in our big cities benefit their poor.
For example, the tens of billions of deposits in branchless banks coming from South Florida’s affluent hot spots like Coral Gables and Pinecrest would be reinvested in distressed deserts like Liberty City and Little Haiti. Who could argue with such needed reinvestment, other than “carpetbagger” banks and their home states like Delaware, South Dakota and Utah currently benefiting from South Florida’s deposits?
Branchless banks also disingenuously cited a data burden, even though they geocode deposits down to the ZIP code and smaller level. Deposits are the raw material of banking, and every good banker knows where their deposits come from.
The so-called joint reform proposal adopted the Fed’s previously suggested approach of essentially allowing branchless banks to place their CRA benefits anywhere in the nation. Even worse is the backward suggestion of evaluating branchless banks’ CRA performance in areas where they make loans rather than source deposits.
This perverted view of a retail lending assessment area (instead of the OCC’s deposit-based one) is contrary to the letter and intent of CRA. Also, it encourages bad public policy if a bank is only lending in affluent communities and redlining distressed ones.
Interagency CRA reform is an admirable goal. Interagency disagreement, however, may be better than an unnecessary major overhaul by a heavy-handed Fed with a tortuous CRA history cloaked as an interagency effort.
The ideal approach is to maintain the status quo and update it with the 5% rule and the best improvements from the OCC’s rescinded rule like the list of CRA eligible activities.