John Heasley

John Heasley
TBA General Counsel

CRA reform: A better way or just more reg burden?

CRA reformThe Community Reinvestment Act was passed in 1977 in a decade of congressional efforts to deal with fairness and access to housing and credit. The act required regulatory agencies to examine bank records for efforts to meet the credit needs of local communities, including low- and moderate-income neighborhoods.

It has since morphed into a more results-oriented process involving investment tests and has been complicated by fair lending issues involving disparate impact evaluations. The lack of transparency in the CRA process is something that has concerned many bankers.

Joseph Otting was sworn in as Comptroller of the Currency in 2017. He is the first banker in a generation to head the OCC and most recently had been running a multi-billion dollar bank in California. An investment group purchased the failed IndyMac Bank, renamed it OneWest Bank and made Otting the CEO.

Once Otting came to the OCC, he announced his intention to reform CRA, making its application more transparent and objective. It appears that he wants to make this effort his signature achievement as Comptroller.

The OCC and FDIC rolled out the CRA reform proposal, all 200 pages of it, in December. (The Federal Reserve has not endorsed the proposal.) What it offers in transparency is far outweighed by what it will cost community banks in compliance burdens.

The good part of the proposal allows banks to get pre-approval of activities that could qualify as CRA credit. The agencies would have up to six months, arguably too long, to okay, deny or modify the request. The current system keeps bankers in the dark until after they have made investments, only to be told, in many cases, that they are not CRA-eligible. The rule also requires the agencies to maintain a website of the types of activities that have been approved for other banks.

The biggest headaches in the new regulation are the recordkeeping and reporting mandates placed on all banks over $500 million in assets. Ten to 20 new data points will be required to be collected and reported for bank products that are CRA-qualified and for those that are not. For a number of Texas community banks this will require additional employees, training, software and help from third-party providers.

Texas community banks are already laboring under enough regulatory pressure thanks to the Dodd-Frank Act. The modification of an existing regulation that adds even more costs is not welcome. We have asked the agencies to raise the $500 million threshold to $10 billion. TBA has already sent its comment letter to the OCC/FDIC.

Consumer groups and Congressional Democrats have also weighed in against CRA changes. The head of the National Housing Conference said it “creates a perverse incentive for investments to target the highest, largest-dollar volume, which could ultimately add to gentrification and displacement in many of these communities.” (Because it equally weighs the number of qualifying loans with the total dollar amount of loans.) House Financial Services Committee Chair Maxine Waters showed up with some of her committee Democrats at the FDIC Board meeting on the new CRA changes as a symbolic protest.

If this regulation is finalized, expect consumer groups to immediately challenge it in federal court. They have already filed a Freedom of Information Act request asking what data was used to formulate the new regs. This is often the first step prior to seeking an injunction.

Why are consumer groups so adamantly against this? After 30 years of following CRA matters, I believe it is because the current system works so well for them as a funding source for their projects and their organizations that they don’t like any changes. They don’t want anybody messing with their gravy train.