Revising CRA: Recommendations to facilitate change

Editor’s Note: This is part two of a two-part opinion on reforming the Community Reinvestment Act, which includes considerations for both bankers and regulators. Read part one here.


One of the unintended consequences of efforts to establish compliance with the Community Reinvestment Act is the tendency for examiners to lose focus on the intention of the regulation.  Examiners began by asking for loan-to-deposit ratio as “substantial evidence of compliance,” and now have institutionalized that statistic. In part one of my evaluation of CRA, I asked regulators to consider an alternative model for structuring CRA. Here, I offer recommendations both bankers and examiners might consider as they pursue needed reforms.

Is it enough to object to the current method by which banks’ CRA activities are audited and evaluated, without first offering a viable alternative based in objective industry knowledge, market demographics, and needs of each local community?

It is always fair to seek an understanding of the extent to which an organization has a role in creating the world in which it wishes to operate. One size that fits all just doesn’t seem to make sense in banking markets; so why would one set of criteria be expected to fulfill all compliance requirements?  Is replacing one set of rules, with another set of rules, without examining and improving the process an adequate approach to reform? That approach has the likelihood of perpetuating the same top-down rulemaking that has forced the current need for CRA reform. Good regulations meet the needs of their users, while guiding them to the objective outcomes they intend.

It is clear that community bankers have an opinion on the criteria and future of CRA compliance in their individual markets; but simply giving voice to those opinions may not be enough. It does not facilitate change.  Change is not driven by a list of specific objections; but with broad consensus on how change will be designed and implemented to satisfy the intention of the regulation.

In that way, my recommendations for an approach that community bankers might adopt to bring reform to the CRA are these:

Interpret the Act for your bank.  That interpretation must identify the reinvestment commitment your bank will use to qualify for CRA credit, and state your commitment to those activities.  Create the “how.”

Identify and establish the criteria.  Enable alternatives.  Don’t wait to be told what the “new set” of reform criteria is; establish measurable criteria, and be prepared to explain and demonstrate to regulators how it meets both the requirements and intention of the Act. Compliance criteria should contain the option of either direct lending (where it reasonably occurs) or real-world alternatives that meet the purpose and intention of the Act.

Make partners of regulators.  Enter the reform arena within an arm’s-length of a handshake. Require regulators to be specific in their objections to reformed programs; then analyze their objections and concerns. Be specific.  Transparency has become a buzzword that lacks substance — strive for clarity, if not certainty. It is hard to resolve a dispute if the parties do not understand and focus on the possible points of view. Productive conflict leads to mutual accountability. This should be the goal. Do not allow the failures of the old system to perpetuate into the new system only because it is easier.  Do not fall prey to “we want everything to change, as long as it all remains the same.” The best form of compliance arises from the honesty of shared accountability.

Restructure how your bank will make CRA eligible financial commitments. Loans should not be the only form of community reinvestment.  Identify and create a list of all equivalent managed commitments within the assessment area. It may be beneficial for example, for your bank to both coordinate and partner with other banks in the assessment area — a reinvestment consortium, to build capacity, and orchestrate economies of scale. This is an opportunity for banks with exemplary programs to not only validate their approach, but also to benchmark across industry to create best practices, to share them and become best in industry.  These types of partnerships can only help banks that are currently in need of improvement.

This approach will change the competitive nature of community reinvestment into a cooperative effort to pool resources, reduce individual risks, while effectively supporting investment in underserved markets. This is an arena in which banks could minimize competition and support cooperation.

Encourage and reward honest partnerships. This suggests that banks not only support each other in an aggregated commitment and participation to alternative compliance programs and measures; it also requires a working partnership with regulators. Topical work-groups have worked well in other regulated industries to resolve disputes and clarify interpretations. Bankers could benefit from being the first to this table.  It is well understood that “it’s all about the rating;” but a rating is an outcome, not a program, nor a flexible set of criteria. The ability of banks to take full credit for alternative solutions must be resolved. Become a proponent for the velocity of money — when one business is successful, other businesses are successful.

A reasonable expectation is that bankers and regulators encourage and reward each other with a kaizen-style relationship that is flexible in determining substantial compliance. This method improves with use, and is portable across the regions and states.

Actively seek businesses that arise from incubator and accelerators.  Alternatives are opportunities. Consider that incubator programs are associated with good business practices that in the end will produce bankable customers. Inside of an incubator model, community bankers will have supported new businesses during their development. The recommendation is to support this model by aggregating and committing both real dollars, and payments-in-kind to support the incubator and accelerator systems.  

Nobody says that underrepresented businesses should receive an advantage in the marketplace, only an opportunity.  Providing measurable business opportunity using the incubator system is not only innovative, but is a demonstration of substantive CRA compliance.  Obtain concurrence from regulators on the components that are required to take full CRA credit for these activities that are directly associated with the bank’s commitment and program.  The intention of compliance is not to check boxes, but to create a meaningful dialog on how your bank provides and supports opportunity in underserved neighborhoods.

Meanwhile, incubator development programs do two things:  they reduce the lending risks that any one bank will bear, and they support development of banking customers that are on their way to obtaining performance data, sustainability, and bankability – it allows the marketplace to do what it is intended to do.

It may, for example, be a first step to transfer your bank’s development executive’s role, salary and benefit allocations directly to an incubator or accelerator management team — let developers do what they do best, in the place where development is supposed to take place. Hold developers accountable for the stewardship of contributed funding, while rewarding successful new businesses with the benefits of bankability.  The opportunity for success does not need to be a direct line — the support of many partners increases the prospect of success.

Provide a system of evaluation and evidence of successful performance.  Negotiate and resolve across the industry; include regulators.  Partner with regulators and auditors for the expectation of equitable interpretation of compliance. In a market environment where most loans are high risk and outside the current requirements of the Act, direct contribution to alternative programs, with the competitive opportunity to harvest bankable businesses in the future, is a definition of intentionality and compliance.

Reform is neither static, nor a one-time event; it requires continuous evaluation and improvement. It is a reasonable assertion to believe that compliance improves with the ability for community banks to exercise flexibility in program choice. When bankers are allowed the opportunity to pursue choices, the intention and objectives of the CRA are enhanced, and custom-fitted to the local needs and resources. Compliance is a ticket to the dance — bankers should take the lead when the music starts.


Michael L. Kiella, Ph.D., owns Great Lakes Compliance Group, LLC, Allegan, Mich. He can be reached at [email protected] and at (269) 650-6963. He is a frequent editorial contributor to BankBeat.