Last month, the bank regulatory agencies issued a joint notice of proposed rulemaking to update the Community Reinvestment Act. Enacted in 1977, the law was last updated in 1995. Comments on the proposal, which is nearly 700 pages long, are due August 5. I encourage you to wade through the document and either comment directly or work with your trade group to make your voice heard.
One of the five goals the Fed, FDIC and OCC articulate for the proposal is updating the law to reflect technology, which is now integral to banking. CRA assessment areas, which previously have been defined around the location of branches, may be redefined according to activities associated with online and mobile banking. No question this goal is at the heart of the need for reform.
Forty-five years ago, the goal was to make sure credit was being allocated in the same areas from which deposits were being gathered. The branch was the focal point of banking back then and it was fairly easy to plot the location of loan customers with the location of deposit customers. Any misalignment of those two data sets triggered red flags. Technology, of course, has mooted such methodology.
It wasn’t that long ago that the U.S. Justice Department slammed a venerable Minnesota bank because of where it decided to locate its branches. Will such criticism now go away if CRA renders branch location irrelevant? I hope so.
If technology requires regulators to remove location from CRA assessment criteria, then it seems to me you end up with a quota system where banks will be expected to allocate certain portions of their lendable dollars to people in key groups, which could be defined according to any number of factors. The proposal, however, specifically avoids the implementation of quotas. So, not really sure how this is going to work!
Regulators are proposing three sets of CRA assessment criteria with expectations growing according to bank size. Most of our readers can consider it a victory that regulators recognize the impact of asset size on a bank’s ability to meet policymaker goals for CRA.
I think the most important thing regulators can do to maintain the relevancy of CRA is to broaden its application beyond the commercial banking industry. Once credit unions, mortgage companies and fintech lenders are subject to CRA, the number of potential beneficiaries from reform will grow substantially. It could be a whole new world for credit allocation.