These Proposed Rules Could Hurt the Community Reinvestment Act. Here’s Why It Matters, and What Real Reform Looks Like.

Why the Community Reinvestment Act Is Important

The Community Reinvestment Act (CRA) is a landmark piece of legislation adopted in 1977 to create a more inclusive banking system by combating systemic redlining—when banks fail to adequately serve lower-income communities and households of color through disinvestment and barriers to accessing quality financial products.

Through an assessment process, the CRA determines whether a bank is doing enough to address the financial needs of everyone living in the communities where its branches are open, not just certain privileged groups.

The CRA matters because access to traditional banking provides many important benefits, such as securing money against loss (bank guarantees), avoiding predatory financial products like payday loans, generating wealth through interest and investments, and building credit. Traditional banking is also the route to safe and affordable mortgage products, which opens access to the wealth-building potential of homeownership.

Unfortunately, Black, Hispanic and lower-income households are disproportionately unbanked or underbanked and live in underserved communities. Federal deregulation in the 1990s that allowed banks to expand their service footprint beyond a local focus, coupled with the rise of online banking, reduced the number of brick-and-mortar bank branches in the country, particularly in low-income communities and communities of color. But having an actual bank in a community still matters to the financial well-being of those who live there. The accountability provided by the CRA helps address these inequities, and is proof the law is still needed. 

Recent Proposals by the Office of the Comptroller of the Currency Would Undermine the CRA

The Office of the Comptroller of the Currency (OCC)—one of three banking agencies responsible for regulating the CRA—released a bulletin in June announcing changes to the CRA compliance process that are raising concerns about harm to consumers and communities.

First, the OCC is lengthening the time it take to determines whether larger banks (those with a presence in 30 markets or more) are satisfying the CRA from the current three years to four years. Second, they are allowing these compliance exams to close even if investigations into lending discrimination are underway, and the grade (satisfactory or not) given to a bank with a completed exam will not be lowered if it is found to be in violation of fair lending standards. A bank with a failing grade is prohibited from pursuing mergers and acquisitions with other financial institutions. These actions would water down the CRA and make low-income families and households of color less financially secure.

The OCC also expressed an interest in a full-scale reevaluation of the CRA, which could start as early as this month. This is the first step by a federal agency looking to overhaul rulemaking, and the OCC’s June bulletin is a red flag signaling other possible changes that could undermine the implementation of the CRA.  

The other two agencies overseeing the CRA—the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC)—are also interested in finding ways to reform the law, but they have not released similar bulletins, and the OCC has shown a willingness to move forward by itself and rewrite the law without coordinating with other regulators.

This is unacceptable. Any changes to regulating the CRA must be coordinated between all three agencies, not established by one while categorically ignoring the wishes and concerns of the others. Moreover, rules need to be consistent across different types of banks and should not vary depending on the regulator.

How Should the CRA Be Reformed?

While there is room for improving the CRA, the OCC’s go-it-alone approach is not the way forward. Instead, all three agencies should modernize and strengthen the CRA to keep it faithful to its original purpose: a more inclusive banking system that serves as many households as possible.

Prosperity Now signed onto a letter outlining ways Congress and agency regulators can make the CRA more effective (some are congressional actions and some are for the agencies). Key recommendations include:

  • Expand geographic “assessment areas” while recognizing the importance of bank branches. Many banks take online deposits and make commercial and other loans outside of bank branch locations. When the CRA was written, this type of banking didn’t exist, and the definition of “assessment area” reflects this. Any restructuring of the law should account for this shift and allow a more flexible definition of what counts as an assessment area. At the same time, brick-and-mortar branches are still important for underserved communities and remain central to understanding a bank’s footprint. Any changes to the law must continue to recognize the value of bank branches while making room for systemic changes in banking practices.
  • Improve the examination process. Ratings and lending tests should be more objective. For example, nonbank affiliates of banks are included in CRA exams at the bank’s discretion. Such inclusions should be mandatory. 
  • Reward banks that satisfy CRA goals. Discrimination should be punished and reflected in a bank rating. Increased service to local underserved markets should be rewarded. Banks with failed CRA ratings (just two percent) should continue to be prohibited from merging or acquiring other institutions.

Next Steps

When an Advanced Notice of Proposed Rulemaking is released, there is an opportunity for the public to provide feedback about reforming regulations. When the time comes, it will be important to weigh in and let the agencies know how to make the CRA better. We will make sure to keep you informed of developments going forward.

The Fed, the FDIC and the OCC should adopt an approach to CRA reform that honors the interagency coordination and cooperation that have been a hallmark of the law for over 40 years. It is also important that long-term improvements to the CRA take place at the congressional level. Banks should continue striving to invest in the financial futures of everyone who lives in the communities they serve.

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