Tug of war brews over CRA reforms
After a year-long and oft-controversial effort by federal regulators to update the federal community reinvestment law, banks may only have a year before they must begin complying with new CRA rules. .
“[T]The speed at which this should be changed and implemented — 12 months — is unreasonable at best,” executives at North Adams-based MountainOne Bank said in a letter to federal regulators.
Stakeholders finished submitting comments earlier this month on a nearly 700-page proposal to modernize regulations implementing the anti-redlining law. And banks and community advocates are worried about proposed changes to regulations that haven’t been updated in more than 25 years.
On the one hand, banking trade groups say the reforms will disadvantage mid-sized banks with just a few billion dollars in assets as they try to compete with their big sisters. On the other hand, community and housing groups say the reform does not squarely address the decades of racial legacy of redlining.
The tense nature of the debate shows how long it took the three federal banking regulators to agree on joint reforms. An earlier effort did not result in a joint proposal; instead, the Office of the Comptroller of the Currency issued its own rule in May 2020, which some critics derided as a giveaway to elements in the banking industry. The OCC’s ARC rule was eventually overturned by the Biden administration, and the OCC, FDIC, and Federal Reserve agreed to work on a new proposal.
Some changes in the proposal include tailoring ARC assessments and data collection to different sizes and types of banks, expanding the types of banking services envisioned for ARC in low- and moderate-income communities , clarifying whether an activity counts for CRA purposes, and acknowledging changes. in the lenders’ customer base brought by online and mobile banking services.
Activists want more rigor, race considered
While the ARC is considered an anti-redlining law and part of the civil rights initiatives of the 1960s and 1970s, the law does not refer to race. Many Massachusetts advocacy groups say CRA reviews should include race and ethnicity when evaluating a bank’s lending activities to determine if it serves people of color and communities of color.
The Massachusetts Affordable Housing Alliance, in a letter to regulators, said Massachusetts has “one of the worst racial homeownership gaps in the country,” noting that more work is needed to eliminate persistent disparities in home ownership. loan.
“We hope regulators will recognize the long history and continued practice of racism in our financial systems and act decisively to explicitly include race and ethnicity (Hispanic/non-Hispanic) in future regulations,” MAHA said. .
NeighborWorks Housing Solutions, the Massachusetts Housing Partnership and the Massachusetts Association of Community Development Corporations also expressed support for the idea in their own comments.
“The CRA is a civil rights-era law that doesn’t mention race,” Tom Callahan, executive director of the Massachusetts Community & Banking Council, told Banker & Tradesman. “We have taken an organizational position that race should be explicitly included in ARC as a performance measure, not just low and moderate income.”
It was the first time that MCBC, whose members include banks and community organizations, endorsed the inclusion of race in ARC exams, Callahan said.
The National Community Reinvestment Council, whose members include several Massachusetts-based advocacy groups, said it wants a more rigorous review process that doesn’t inflate ratings, noting that most banks receive a “satisfactory” rating. “.
Although the ABA has said it agrees the test should be rigorous, the reformed ARC now includes a “low satisfactory” rating, raising concerns among bankers that new performance standards may be unachievable.
“It appears that these heightened performance standards were offered as an incentive for banks to increase lending to underserved communities,” Nicole Almeida, senior vice president, chief diversity officer and chief information officer, said in a letter. ARC of Swansea-based BayCoast Bank. “[H]However, the performance criteria proposed for testing retail loans may be unachievable for a significant number of banks.
Ben Craigie, vice president of government affairs for the Massachusetts Bankers Association, told Banker & Tradesman that an “unsatisfactory” rating could jeopardize a bank’s reputation. The trade group recommended regulators eliminate the ‘lowly satisfactory’ rating and instead mirror the Massachusetts state-level CRA system, which separates mid-level performance into ‘satisfactory’ and ‘highly satisfactory’ ratings. “.
Bankers say midsize lenders are hurting
Four tests have been created in the proposed rules – Retail Loan Test, Retail Services and Products Test, Community Development Funding Test, and Community Development Services Test. And new asset thresholds will determine the tests applicable to each bank.
Small banks with less than $600 million in assets could choose to retain the current ARC framework; intermediary banks with assets of less than $2 billion would be subject to the retail lending test and either retain the current community development framework or opt for the new community development finance test.
Large banks would be subject to all four tests.
For community organizations, increasing the asset thresholds for determining testing requirements would reduce the required activities that these banks would need for ARC purposes.
In a letter to regulators, Joseph Kriesberg, president of the MACDC, pointed out that the NCRC estimates that more than $1 billion in community development funding could be lost by adjusting these thresholds.
“If this estimate turns out to be close to accurate, it would be a significant failure for regulatory agencies,” Kriesberg said.
But for banking lobbies, those increases haven’t gone far enough.
The American Bankers Association said the threshold for intermediary banks should be capped at $3.3 billion. The Massachusetts Bankers Association signed the ABA’s letter, but the state trade group submitted a separate letter calling for a cap of $750 million for small banks and $3 billion for intermediary banks.
For banking groups, the complexity of the new retail credit test leads to the recommendation of higher asset thresholds.
Concerns about the retail loan test include the fairness of comparing banks with a few billion in assets to larger banks. Patrick Murray, president and CEO of Bristol County Savings Bank, said in a comment letter that having a heavily lending-focused test could make ARC more of a competition between banks for the same loan population.
“If we are striving to help our communities, why should we be penalized for making fewer loans than a much larger institution?” said Murray. “While we recognize that it is difficult at best to create complete fairness among all CRA-regulated institutions, this level of disparity is very concerning for community banks like ours.”
Rapid deployment of a concern
Banks also want more time to implement the rules.
“When we talk about a delayed implementation process, it’s not to avoid meeting regulations or avoiding things,” said Craigie, of Mass. Bankers. “It’s because we want to make sure the banks have adequate resources and enough time.”
Craigie pointed out that a two-year implementation would align with past regulatory changes, including the Truth in Lending Act and the Property Settlement Procedures Act.
The ABA said aggressive deadlines by banking regulators suggested they wanted to implement the rule before a possible change in administration in 2025.
“Regulators, banks, consumer and community advocates, and other stakeholders have gone too far and worked too hard to rush the final stage of this important work,” the ABA said.