Members of Congress should voice support for a strong CRA Rulemaking.

On May 5, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Commission (FDIC) and the Federal Reserve Board issued a Notice of Proposed Rulemaking (NPR) regarding CRA (comments on the NPR are due on August 5).[3] The voices of members of Congress will be vital in this next phase of CRA reform and the CRA regulatory agencies need to hear from them. Congress should urge regulators to ensure that the interagency rulemaking provides for fair and flexible local lending and investments, a commitment to racial equity, improved data on deposits and lending and an end to CRA grade inflation, leading to nearly all banks receiving a satisfactory grade.

The proposed NPR is a good start. The proposed regulation will adhere to the CRA’s statutory approach to rectify the redlining experienced by LMI neighborhoods and communities of color by designing tests that focus on numbers of loans, branches and services in LMI and underserved communities. It has the potential to significantly reduce grade inflation in the lending test but should improve the rigor of the other subtests including services and community development. Bolstering the overall rigor of the tests will result in more reinvestment activity in formerly redlined communities.

NCRC has urged the agencies to explicitly consider and rate lending, investing and services to people and communities of color in CRA evaluations. The agencies did not adopt this recommendation but will include data in exams on lending by race and ethnicity. We urge the agencies to use this new exam data analysis to identify banks that significantly lag their peers in lending to people of color and communities of color. For these banks, the agencies must conduct more comprehensive fair lending reviews probing for discrimination.

NCRC and our members advocate for increasing assessment areas or geographical areas on CRA exams to not only include areas with bank branches but also areas with substantial volumes of bank loans or deposits. This enhancement will better equip CRA exams in the future to assess bank performance as many banks have increased their lending and bank services via brokers, the internet and other non-branch channels.[4] The agencies appropriately expanded assessment areas to take into account lending beyond branches but did not consider doing so in case of significant deposit collection beyond branches.

The agencies should improve the rigor of the fair lending reviews that accompany CRA exams to ensure that banks are not discriminating or violating consumer protection laws. The agencies did add the Military Lending Act to the list of statutes considered by the fair lending review but did not add the Americans with Disabilities Act as urged by NCRC. The agencies should conduct more transparent fair lending reviews, including better coordination with the CFPB. Lastly, the agencies indicated that discrimination in all aspects of banking, not just in the provision of credit, will be considered by the fair lending review.

Regulators should also address the gap in CRA coverage for a new breed of digital banks that partner with non-bank fintechs to offer demand deposit FDIC-insured accounts and consumer credit. In a 2020 report, the Federal Reserve Bank of Kansas City identified twelve chartered institutions providing “banking as a service,” each with multiple non-bank fintechs.[5] In some instances, partner banks hold hundreds of thousands, if not millions, of accounts through these relationships.

In spite of that, CRA exams do not consider these activities. Notably, some of these partnerships provide loans at interest rates of more than 36 percent and sometimes as high as 400 percent. The prudential regulators should clarify that when banks partner with non-banks to use their chartered status to hold deposits, then those banks should have deposit-based assessment areas and those assessment areas should be located in the states that hold the largest shares of their deposits. They should also clarify that when chartered institutions partner with non-bank lenders to make loans at rates greater than what is legally permissible under state laws, those institutions should suffer downgrades to their CRA performance evaluations. The NPR did not address this important issue.

Congress should also urge regulators to consider the quality of credit in examinations. Traditionally, CRA has emphasized access to credit above considerations of the suitability of credit. Working from the assumption that credit was a uniform “good” was consistent with lending practices in the marketplace at the time of the last significant rulemaking. However, since that time the proliferation of suboptimal credit has become commonplace. Financial institutions charged consumers $15.5 billion in overdraft fees in 2021.[6] Regulators should empower examiners to penalize banks when evidence exists to show that they have offered unsuitable credit to consumers, if they use their charter to make loans at rates above state interest rate caps, orif a disproportionately high share of their deposit account revenues derive from overdraft and insufficient funds fees. The NPR did not address the affordability and sustainability of credit although the proposed retail service and credit products test could incorporate this type of review.

Congress should act to modernize the CRA to cover the broader financial industry.

CRA must be applied broadly throughout the financial industry to overcome decades of redlining and to narrow widespread wealth and income disparities by stimulating reinvestment into underserved communities.[7] While many agents (public and private sector) have practiced invidious discrimination, the financial industry has had a unique impact on discrimination and disparate treatment over the decades.

In 2019, Senator Elizabeth Warren (D-MA) and Rep. Cedric Richardson (D-LA) introduced the American Housing and Economic Mobility Act. Section 203 of the bill called for reforms that would strengthen the Community Reinvestment Act. In addition to updating CRA as applied to banks, the bill would extend CRA to mortgage companies and required an evaluation of their retail lending, community development lending and investments and community development services.[8]

Given the scale of the nation’s equity challenge, banks – with a declining share of the market and the financial assets – cannot be the only financial institutions with an affirmative obligation to serve lower income people and people of color. Examinations are not as difficult for non-banks as some might imagine. Many non-bank activities, such as making loans or offering insurance policies, are amenable to data collection and analysis, including assessing the percentage of LMI customers and communities served. Massachusetts’ CRA exams scrutinize the lending of mortgage companies and credit unions.[9] For several years, private mortgage insurance companies voluntarily and publicly reported data on their insurance activities to the federal government.[10] In addition, a community development test for non-banks would evaluate the types and levels of affordable housing and economic development loans and investments.

Further, bank coverage should itself be strengthened. The American Housing and Economic Mobility Act would combat CRA grade inflation by adding more ratings categories, expand the geographical coverage of CRA exams to include areas where banks lend but do not have branches, require affiliates of banks to be included on CRA exams and improve data collection regarding deposits and community development financing in LMI communities. The bill would apply similar requirements to mortgage companies and would improve the merger application process by mandating banks and other financial companies to submit community benefit plans specifying increases in loans, investments, and services in underserved communities.