Continuing its industry-supported efforts to modernize the Community Reinvestment Act (CRA), the Treasury Department recently issued a formal memorandum to the federal banking agencies recommending updates to four main elements of the statute.
The Treasury noted that it conducted a review of the 40-year-old CRA framework, examining: how CRA activity is measured among banks; the harmonization of CRA supervision among multiple regulators; the distribution of CRA geographic assessment areas; and the regulatory review and examination process.
“The U.S. banking industry has experienced substantial organizational and technological changes; however, the regulatory and performance expectations under CRA have not kept pace,” the memo states. “Interstate banking, mortgage securitization, and internet and mobile banking are just a few of the major changes that have come about in the past four decades. In this evolving banking environment, changes should be made to the administration of CRA in order for it to achieve its intended purpose.”
Acknowledging the various changes in banking law and technology since CRA’s enactment in 1977, the Treasury recommended that the agencies exercise increased flexibility when determining CRA assessment areas. The Treasury also recommended an expansion in the range of products eligible for CRA credit and that the agencies consider new avenues for CRA reporting when conducting evaluations.
The Treasury’s recommendations entail redefining geographic assessment areas, increasing transparency around the rating process, improving the examination process and creating CRA performance incentives. To accomplish those tasks, the memo states the following:
Assessment areas – “The concept of assessment areas originated within the banking environment that existed in 1977, when there was no interstate banking and deposits almost always came from the community surrounding a branch. Treasury offers recommendations for updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors.”
Examination clarity and flexibility – “Both banks and communities would benefit from additional flexibility in the CRA performance evaluation process, including increasing clarity in the examination guidance. Treasury recommends improvements that could be made to CRA performance evaluation criteria that would increase the transparency and effectiveness of CRA rating determinations.”
Examination process – “Certain aspects of the examination process need to be addressed in order to improve the timeliness of performance evaluations and to allow banks to be more accountable in planning their CRA activity. Treasury recommends improvements that could be made with respect to the timing of CRA examinations and issuance of performance evaluations, and to the consistent use of census data throughout an assessment period.”
Performance – “The purpose of CRA is to encourage banks to meet the credit and deposit needs of their entire community. The law does not have explicit penalties for nonperformance. However, performance is incentivized as regulators must consider CRA ratings as a part of various bank application processes and performance evaluation reports are made available to the public. Treasury offers recommendations as to how the current regulatory approach to downgrades for violations of consumer protection laws and various applications from banks with less than a satisfactory rating could be improved to incentivize CRA performance.”
Trade organizations representing the banks have noted their support for the Treasury’s recommendations.
“We welcome the Department of Treasury’s recommendations for modernizing a decades old law, last revised when mobile phones and digital technologies were in their infancy,” Consumer Bankers Association (CBA) President and CEO Richard Hunt said in a statement. “The Community Reinvestment Act has long benefited low-and-moderate income consumers and families across the country, and CBA’s membership is fully committed to continuing to serve their local communities.
“However, bringing the law into the 21st century would allow banks greater flexibility to use mobile, online and other digital technologies to better interact with and serve consumers in their local communities,” he added.
“We look forward to working alongside Treasury as well as the OCC and other bank regulatory agencies to streamline and modernize the Community Reinvestment Act to ensure the law remains meaningful for future generations.”
The American Bankers Association (ABA), which has been actively engaged with the agencies about CRA modernization, noted in a press release that the association agrees with many of the Treasury’s recommendations.
“Adjustments that enhance the transparency, consistency and predictability of the supervisory process — and that recognize the many ways banks meet the credit needs of the communities they support — will help institutions better serve all customers and promote economic growth,” ABA President and CEO Rob Nichols said in a press release. “We’re pleased that this report recognizes changes in mobile technology and the many innovations banks have developed to serve their customers.”
ABA noted that its members are concerned that some of the recommendations could restrict how banks serve their respective communities by imposing numerical performance metrics and frequent reporting requirements. Such metrics, the association fears, could result in inadequate recognition of banks’ financial education work.
ABA also pointed out that the Treasury report reflects multiple issues its staffers have brought up in meetings with Treasury officials, and that many of the recommendations reflect ideas highlighted in the association’s whitepaper, “CRA Modernization: Meeting Community Needs and Increasing Transparency,” which was released in December 2017.