Jason Keller, associate director of U.S. Advisory Services with Wolters Kluwer Compliance Solutions, spoke with Dodd Frank Update about the upcoming Community Reinvestment Act (CRA) modernization rules and how lenders can prepare for any changes.
Before joining Wolters Kluwer, Keller spent over 20 years at the Federal Reserve Bank of Chicago. Most recently, he served at the Chicago Fed as a community and senior economic advisor responsible for overseeing and evaluating economic capacities and sustainable growth opportunities.
“Modernization, as others have publicly stated, is necessary,” Keller said. “It is a long time coming based on the fact that you are taking a regulation from 1977, when banking was only conducted in a brick-and-mortar environment where bankers literally sat in the community that they served. In today’s digital space and internet economy, financial institutions can still meet a CRA mandate, even if they’re not sitting in the community they serve.”
Though Keller was emphatic he had no insight into what a final modernization rule will or will not do, he did work on several of the Federal Reserve’s issues papers that framed the questions of the advanced notice of proposed rulemaking.
“As we were thinking about questions to ask the industry, it became evident that more transparency was necessary,” Keller continued. “Bankers wanted it; community groups wanted it; even regulators themselves wanted a better understanding of the metrics for success and the data points the industry should be relying upon to help determine whether an institution is meeting its CRA obligations.”
Though CRA modernization means new expectations and standards for banks to meet, Keller was confident they were up for the challenge.
“Banks want to comply,” Keller said. “Banks want to be good stewards of the community. Banks want to be strategic partners for the entities, the businesses, the homeowners, the nonprofits, the governments that live and work in the communities they serve.”
When asked if there was concern that those banks that recently fell below CRA standards might become victims of regulation changes, Keller was optimistic something like that was unlikely to occur.
“You can count on one hand, maybe two, how many true repeat offenders—i.e., banks rated ‘less than satisfactory’ or ‘substantial noncompliance’ multiple times—there are. When they get rated as such, they get it right. They bring in consultants; they bring in community groups; they work with the regulator; they fix their problems.”
While current CRA compliance is taken into consideration by regulators reviewing proposed bank mergers and acquisitions, Keller was not concerned modernized rules would make the mergers and acquisitions process more difficult. Instead, he thought there might be greater ease and clarity with new regulations. Keller opined banks would likely have a more transparent standard of what regulators expect when evaluating a merger or acquisition.
One of the most significant potential components Keller spoke of regarding a modernized CRA was the potential for a new impact test, which Keller stated he has been advocating for years.
“[If] there are new impact factors, banks will have to communicate with their regulator about their loans, their investments, their services, and how impactful they are to the market that they serve,” he said. “That’s a game changer because they’ve never been required to tell that story, which will be relied on by the examiner who either asked or inferred about what impact actually happened.”
Telling “the story,” Keller emphasized, is critical to providing the necessary context of an impact test, and modernization of the CRA rules will offer banks the clarity to tell their stories better.
“From an examiner’s mindset, there is nothing more important than the performance context of the numbers. Bankers have to be able to tell that story to an examiner who may or may not even live in that part of the country. If banks don't tell their own story, no one else will.”
The impact of plant closures, teacher strikes, or a global pandemic are all examples of stories banks can tell when CRA exams are being conducted.
Keller gave the hypothetical of a plant cutting its third shift, resulting in 75 people in the community suddenly becoming unemployed. If the bank steps in to offer relief to those community members suddenly without work, even if they aren’t necessarily “banking services,” they could help with things like credit counseling, workforce development, building their resume or LinkedIn profile, or connecting them with a new laptop so they could conduct better searches for jobs. If the bank hands over documents to CRA examiners which state it purchased 75 new laptops without the context or story, the bank is doing itself a disservice on any impact testing.
“Impact won’t be a score, but it will be taken into consideration through some level of bifurcating what is or is not impactful,” Keller concluded. “Performance context isn’t going away. I think it's going to become even more important.”