The OCC has proposed yet another data collection effort to develop thresholds for its flawed 2020 Community Reinvestment Act final rule. This is another tacit admission by the OCC that all along it has lacked the data and factual basis for developing its flawed revisions to CRA examination performance measures.
Instead of creating more consistency and transparency in CRA exams, the OCC’s final rule will decrease retail lending, investing and bank services in underserved communities. Throughout its process for developing its CRA final rule, the OCC disregarded the great majority of comments from community groups and banks that were opposed to the rule saying it would hurt underserved communities.[1]
The OCC also created a new CRA rule without the necessary data analysis to measure the impact of the rule.
NCRC has sought the data underlying OCC’s 2020 CRA changes in numerous Freedom of Information Act (FOIA) requests. In response, the OCC has not produced data adequate to evaluate the impacts of its new and ill-conceived evaluation measures. The OCC would need supplemental information, particularly regarding community development financing data that is not publicly available, to assess rigorously its new performance measures. From our review of available information, the OCC lacks such data.
The data collection effort proposed is unlikely to provide useful information
The OCC announced that it will be seeking data to further evaluate its new measures through an “Information Collection Survey” that it will ask banks to fill out. This is the second time the OCC has tried to collect data from banks for its new CRA measures. Like the first attempt that generated six responses from banks,[2] this one will likely fail to create a robust database.
The OCC would use data collected from the survey to develop thresholds for its CRA evaluation measure thresholds, retail lending distribution test thresholds, and community development minimums under the general performance standards. The thresholds would be set for achieving Satisfactory and Outstanding ratings for CRA exams.
The proposed thresholds do not address CRA grade inflation
The OCC took a timid approach that would reproduce the current ratings distribution in which 98% of the banks currently pass.[3] The OCC states that thresholds would “correspond to a proportion of banks that would have received a hypothetical bank-level presumptive CRA rating of outstanding and satisfactory that is no greater than the historical proportion of banks that have received a bank-level assigned CRA rating of outstanding and satisfactory.”[4] In other words, the OCC is reproducing a historically inflated CRA ratings distribution.
The OCC states that it would likely fail a bank whose performance deteriorates by 10% as measured by its performance measures. The OCC states that such a decline “may result in the bank receiving an assigned rating that is no higher than needs to improve at the assessment area level as well as at the overall bank level.”[5] It is hard to fathom a bank decreasing performance to such an extent in a regime in which passing would be no harder than it is currently.
The thresholds that the OCC had previously proposed would likely result in several banks decreasing their retail lending and community development financing to low- and moderate-income (LMI) borrowers and in LMI communities.[6] The previous thresholds were below the levels needed for passing ratings. However, in order to motivate banks to improve their CRA performance, thresholds should be set so it is harder to obtain passing ratings instead of replicating the high pass rate. In addition, more nuance in ratings such as five ratings for the component tests and the overall rating would more accurately reflect distinctions in CRA performance. The OCC’s decision not to propose thresholds now frustrates the public’s ability to evaluate the full magnitude of the OCC’s rule and highlights the lack of data OCC has to support its approach.
OCC Final Rule Would Divert CRA Activity Away from LMI Neighborhoods
Moreover, NCRC maintains that even if the OCC was more rigorous in establishing thresholds, the structure of their CRA evaluation measure as a ratio of CRA activity divided by deposits would distort CRA activity away from the most critical needs in underserved communities. Banks would seek the large deal, in particular large infrastructure projects, to boost their ratios and would ignore pressing needs for smaller dollar home and small business lending needed in LMI communities. This violates the intent and purpose of CRA to combat redlining and ensure that banks are meeting needs in LMI communities.
Conclusion
In the final analysis, the OCC reproduces current CRA inflation, which will result in stagnating CRA performance, exactly the opposite of increases in reinvestment needed by communities recovering from the pandemic. Moreover, the types of CRA activities would change in a detrimental manner. Previous NCRC analyses have concluded that the OCC performance measures would encourage banks to favor larger infrastructure projects that have little if no benefits for LMI neighborhoods.[7] At the same time, bank, home and small business lending is likely to drop significantly in these neighborhoods, creating yet another almost insurmountable barrier to economic equity and recovery from the pandemic.
[1] Josh Silver, Comments On Proposed CRA Rule: Pause And Go Back To Drawing Board, NCRC, April 2020, https://ncrc.org/comments-on-proposed-cra-rule-pause-and-go-back-to-drawing-board/
[2] Office of the Comptroller of the Currency, 12 CFR Parts 25 and 195, Docket ID OCC–2018–0008, RIN 1557–AE34 Community Reinvestment Act Regulations Federal Register, Vol. 85, No. 109, Friday, June 5, 2020, p. 34786
[3] Josh Silver and Jason Richardson, Do CRA Ratings Reflect Differences In Performance: An Examination Using Federal Reserve Data. NCRC, May 2020, https://www.ncrc.org/do-cra-ratings-reflect-differences-in-performance-an-examination-using-federal-reserve-data/
[4] Office of the Comptroller of the Currency, 12 CFR Part 25, Docket ID OCC-2020-0025, RIN 1557-AE96 Community Reinvestment Act Regulations, https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-160.html, p. 13.
[5] OCC, p. 18.
[6] Josh Silver, The CRA Evaluation Measures Would Allow Banks To Relax Their Retail Lending To LMI Borrowers And Communities, NCRC, February 2020, https://www.ncrc.org/the-cra-evaluation-measures-would-allow-banks-to-relax-their-retail-lending-to-lmi-borrowers-and-communities/ and NCRC Supplemental CRA Comment Using Federal Reserve CRA Data, April 2020, https://www.ncrc.org/ncrc-supplemental-cra-comment-using-federal-reserve-cra-data/
[7] NCRC, Analysis Of The OCC’s Final CRA Rule, June 2020, https://www.ncrc.org/analysis-of-the-occs-final-cra-rule/
