Brainard urges retail, community development test as regulators revamp CRA

Lael Brainard
Federal Reserve Board Governor Lael Brainard seen giving a speech at the “Renewing the Promise of the Middle Class” 2019 Federal Reserve System Community Development Research Conference.

Federal Reserve governor Lael Brainard urged careful consideration of the Community Reinvestment Act proposal put forth by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency in a speech to the Urban Institute in Washington, D.C. on Jan. 8.

Brainard expressed concerns of the unintended consequences the proposal could have on credit analysis and community development for low to moderate income communities, as well as any additional reporting and procedural burdens for banks. 

“Revisions to the CRA regulations should reflect the credit needs of local communities and work consistently through the business cycle,” Brainard said. 

The Fed governor said the regulation should consider banks of all sizes and business strategies, encourage banks to seek opportunities in distressed and underserved areas, be clear about how activities will be evaluated, “And they should recognize that the CRA is one of several related laws to promote an inclusive financial sector.”

Brainard said that in order to provide greater clarity in the CRA evaluations, there should be both a retail test and a community development test. The retail banks would be evaluated under a retail test, which would assess the bank’s record of providing retail loans and services in its community. 

Brainard also suggested the metrics used to evaluate how well a bank is serving underserved communities should be based on loan counts rather than currently-proposed dollar values, she said, “in order to avoid inadvertent biases in favor of fewer, higher dollar-value loans.”

The large banks and limited purpose banks would be evaluated under the separate community development test, which would evaluate the bank’s record of providing community development loans and qualified investments and services. 

The separate tests, Brainard said, would ensure that expectations would be tailored to banks different sizes and business approaches. Otherwise, she said, “An approach that combines all activity runs the risk of encouraging some institutions to meet expectations primarily through a few large community development loans or investments rather than meeting local needs,” Brainard said.

The Fed governor said that stakeholders should be given “sufficient time and analysis to provide meaningful feedback on a range of options for modernizing the regulations.”

“Major updates to the CRA regulations happen once every few decades,” Brainard said. “So it is much more important to get the reform right than to do it quickly.”