Modernization of the RCAF: a unique opportunity


For the first time in more than 20 years, the Community Reinvestment Act (CRA) is being amended and the result will have a major impact on all communities in America. If done right, banks will have a better incentive to make critical investments in communities that have long been underserved. Unfortunately, this does not happen.

The Trump administration is ignoring two years of its own consultations and recommendations and instead chooses to gut this historic and effective law. It doesn’t have to be that way.

Modernizing the CRA is by far the most effective regulatory action we will likely see this year. It is a unique opportunity. There is broad bipartite support for responsible modernization, including the largest banks in the country and the most progressive community advocates. Despite this agreement, the Office of the Comptroller of the Currency (OCC), the regulator responsible for enforcing the CRA among most of the larger new system this will reduce the effectiveness of the CRA for years.

Ironically, this approach will hurt the banks and the communities they serve. Without broad support from all walks of life, this is just another regulatory swing that will cost banks hundreds of millions of dollars as they retool compliance systems, and hundreds of millions of dollars. ‘others when the pendulum returns and they will readjust again. Worse yet, it would undermine efforts to help millions of low- and middle-income people in communities most in need of the CRA.

The worst aspect of the proposal is the creation of a single ratio to assess the bank’s performance, which will dominate the review process. By using the ratio-based approach, banks will be incentivized to make only the largest investments in communities that need them the least.

It should be mentioned that no one outside the OCC has advocated this approach, including the Secretary of the Treasury. Steven mnuchinSteven Mnuchin Democrats vindicated in GOP filibuster, says Schumer Yellen provides signature for paper money Biden name will not appear on stimulus checks, White House says READ MORE. His memorandum to regulators in April 2018, received positive feedback from all political circles. OCC’s final product received almost universal condemnation.

To ensure that the ratio approach is the most detrimental, the OCC made infrastructure projects and sports stadiums eligible for ARC credit. All major cities in America saw its quarters divided through federally funded highway dollars, many targeting areas that were home to the homes and businesses of people of color. Are we really going back?

Notably, the Federal Reserve Board, one of ARC’s other regulators, refused to endorse the OCC approach. As Fed Governor Lael Brainard Explain, “A uniform ratio that does not adjust to the local economic cycle may be too little incentive to make good loans during an expansion and induce unhealthy lending during a downturn, which could be incompatible with safe and sound practices. mandated by the CRA law. “She acknowledged that” industry commentators have also expressed concern that discretionary adjustments to the uniform measure are likely to lag the business cycle and undermine the certainty that a measure is deemed to provide. “

To mitigate this risk, the OCC approach significantly reduces the threshold required to pass the test. Although the FDIC has rallied around the OCC, Martin Gruenberg, a member of the FDIC board of directors, in his opposition pointed out that a bank could achieve an exceptional or satisfactory rating by serving just over half of its assessment areas at this level. In addition, the data needed to calculate the ratios have limitations, because the notice of proposed regulation (NPR) recognizes himself.

Gruenberg expressed concern that endorsing an approach that depends on future improvements in data collection and analysis is irresponsible. Like Governor Brainard, he also expressed concern that banks would be prompted to “focus their stronger community reinvestment efforts on only half of their assessment areas while minimizing their efforts elsewhere.”

The CRA was enacted in 1977 as it became clear that simply making discrimination illegal through the Fair Housing Act of 1968 was not enough to reverse the legacy of discrimination that permeated housing. and community investment. The ARC was supposed to encourage banks to reinvest in the communities where they had their headquarters and branches. Over the past 40 years, the ARC has become an important tool to encourage lending, investment and banking services in underserved communities.

If you build affordable housing, banks get credit from CRA to invest or lend to support it. If your community is underserved and a bank opens a branch, grants mortgages, or supports community groups, it also gets credit from the CRA. All of these activities support a bank’s efforts to achieve an “outstanding”, or at least “satisfactory”, CRA rating from its regulator. If not, it is more difficult for the bank to open or close branches, or to merge with other institutions. There are also reputational costs and benefits associated with the CRA.

The best banks are engaged in this work, regardless of the CRA. But they also compensate their employees based on a risk-weighted return on capital to ensure they make safe, strong and successful investments, which is in all of our interests. The CRA adds a favorable thumb to the community on the scale of competition on capital allocation that exists in each bank. Dilute ARC and you dilute the impact of ARC by allowing banks to focus on more difficult and smaller, but still profitable transactions, which often have a disproportionately positive impact on communities.

This is why, in more than 90 meetings the Treasury Department held with ARC stakeholders in 2017, not a single stakeholder, including dozens of banks and financial sector advocates, did not. advocated for the elimination of ARC. I know this because, as a senior advisor to the Treasury Department, I have been involved in over 80 of them. These stakeholders told us they wanted the CRA’s regulation to be more transparent and predictable, while retaining some flexibility to be clear about which investments get CRA credit. They didn’t tell us they wanted the ARC to be watered down or made less effective with the ratio-driven approach that is at the heart of the new RNP.

To provide comprehensive, detailed and useful feedback on the proposal, the National Housing Conference brought together dozens of our members, including some of the country’s largest banks, nonprofit real estate developers and community rights advocates. and civilians. Our work will be done on a very tight schedule, as the BCC and FDIC have only allowed a 60-day comment period, which ends on March 9, 2020. Our intention is to provide constructive and specific recommendations on the how the modernization of the CRA can be successful, whether for the current administration or for the future, if efforts to make the OCC approach acceptable fail. All communities and municipal governments should also participate in this feedback process.

The modernization of ARC is overdue and must be done so that banks and communities get the clarity and flexibility they need to ensure they have maximum positive impact. But no modernization effort is worth emptying ARC’s central purpose – constructive reinvestment in the communities that need it most, where most of us live and work.

David M. Dworkin is President and CEO of the National Housing Conference.


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