LISC’s Matt Josephs takes a close look at proposed changes to the Community Reinvestment Act—warning that, as written, they could restrict the flow of high-impact community investments and weaken efforts to recover from COVID-19. "While we share [the] sentiment that the nation’s distressed communities are going to be the hardest hit by the crisis and in desperate need of capital and services, the proposed regulations will, in fact, have the opposite effect,” he writes.
It might seem odd to be conducting normal policy debates in the midst of a devastating global pandemic. But, when it comes to modifications to the Community Reinvestment Act (CRA), the decisions that will be made in the coming weeks could directly impact the nation’s long-term recovery from the crisis—especially in communities that were already economically vulnerable.
CRA has been one of the most effective tools for encouraging banks to provide capital in distressed communities. In December of 2019, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) released proposed regulations that would overhaul the CRA examination and evaluation procedures. The regulations are both comprehensive and controversial. The principal evaluation metric proposed in the regulations is one that was universally criticized by banks and community stakeholders alike when first proposed as part of an Advance Notice of Proposed Rulemaking in 2018, and which prompted the Federal Reserve Board not to join the OCC and the FDIC on this proposed rule.
Of further concern, public comments were due to regulators on April 8th despite calls from stakeholders and Democratic members of the House Financial Services Committee and the Senate to pause these efforts so that banks and community development organizations could focus on economic recovery in the wake of COVID-19. Even worse, it appears as though regulators are now using the crisis to justify their attempts to push through the regulations on an expedited timeline. As noted by Comptroller Otting in a statement released on Friday, April 10th:
“Over the last month, as the nation has managed its response to COVID-19, it has become even clearer to me that communities need even more access to lending, capital, and services during this difficult time. . . We will work toward issuing a final rule during the first half of this year. Further delay would only prevent these valuable resources from reaching those who need them most in this time of national emergency.”
While we share the Comptroller’s sentiment that the nation’s distressed communities are going to be the hardest hit by the crisis and in desperate need of capital and services, the proposed regulations will, in fact, have the opposite effect.
As noted by LISC in its submitted comments, the changes contemplated in the regulations will lead to a decline in lending to small businesses and homebuyers in low- and moderate-income (LMI) communities. They will divert capital from high-impact activities like grants and in-kind services to non-profits in favor of large-dollar investments in activities with marginal, if any, benefits to LMI communities and families. They will devalue critical tools like the Low Income Housing Tax Credit and the New Markets Tax Credit, which spur tens of billions of dollars in business activity every year. And they will mostly leave rural communities behind, ignoring an opportunity to encourage more lending and investing in markets where major banks have no physical presence.
LISC is encouraging regulators to use alternative approaches that would make CRA more efficient and effective, including:
- Circumscribing the list of activities that qualify as community development loans and investments to include only those that principally serve LMI communities or populations;
- Requiring that a minimum amount of bank investment supports truly impactful activities, including community development investments, loans for affordable housing, and loans and grants to CDFIs and nonprofits;
- Providing more guidance as to how banks will be evaluated under the “performance context” review, so that banks can be rewarded for making complex and innovative investments and providing critical services in LMI communities; and
- Expanding CRA assessment areas beyond those already saturated with heavy concentrations of banks and depositors so that more capital can flow to distressed rural communities.
Given the large disconnect between what is proposed in the regulations and what is truly needed in the communities, as well as the daunting challenges posed by COVID-19, we are strongly urging that regulators not move forward with further rulemaking right now. The community development arms of banks should be focused squarely on delivering capital and services to support recovery in communities devastated by COVID-19, and should not be simultaneously burdened with developing new CRA plans and compliance and monitoring systems.
Changes to CRA will affect the quality of life in our communities for decades to come. It is vital that regulators not rush this process, not with so much at stake. The well-being of tens of millions of people and the communities in which they live depend on it.
Matt Josephs is the senior vice president for policy at the Local Initiatives Support Corporation (LISC).