BPI Comments on Federal Banking Agencies’ Community Reinvestment Act Proposal

To Whom It May Concern:

The Bank Policy Institute[1] appreciates the opportunity to comment on the federal banking
agencies’ notice of proposed rulemaking to revise their Community Reinvestment Act (“CRA”)

BPI fully supports the longstanding goals of the CRA and believes that the Act has been an
effective force for strengthening the development of the communities that our member banks serve. We share with community advocates and other stakeholders the goal of continuing to promote and advance economic opportunity by building on the CRA’s foundations to ensure banks continue to provide loans, investments, and services broadly across the communities they serve, including low- and moderate-income (“LMI”) areas, small businesses, and communities in need of financial services to sustain economic development. We support efforts to ensure that the CRA remains an essential part of the framework for sustaining and revitalizing communities.

Unfortunately, parts of the Proposal would stray from these core values and from the agencies’
statutory mandate, resulting in a proposed framework that would be needlessly sweeping, complex, and punitive in its application:

  • First, the Retail Lending Test is proposed to be calibrated so stringently that it could transform the CRA from a framework for ensuring credit availability into a mechanism for credit allocation. Such a result would be inconsistent with the express purposes of the statute, as reinforced throughout the CRA’s legislative and regulatory history.[3] According to the agencies’ own calculations, the stringency of the Retail Lending Test would lead to widespread downgrades of large banks’ performance, a result that the agencies do not rationalize or adequately explain and that could therefore make the Proposal vulnerable to a challenge that it is arbitrary and capricious. These proposed downgrades appear to be based on the faulty premise that large banks are not currently doing enough to achieve the goals of the CRA, when in fact large banks’ existing ratings reflect the serious commitments they have made to fulfilling their CRA obligations – commitments that the agencies themselves highlight in the Proposal.[4] By placing seemingly insurmountable barriers to many large banks receiving Outstanding ratings, the proposed Retail Lending Test would actually reduce banks’ incentives to achieve such ratings. Adding to the problem is the fact that the Test would compare banks’ performance to benchmarks that they would never know in advance, raising due process concerns. The agencies should alleviate these issues by calibrating the final rule more reasonably and by providing for benchmarks that banks will know in advance of the applicable performance period.
  • Second, mandatory evaluation of banks’ retail lending distribution in areas outside their facility-based assessment areas would be inconsistent with the agencies’ statutory authority as evinced in the text, history, and purposes of the CRA. The text of the CRA requires the federal banking agencies to prepare written evaluations of banks’ CRA performance in geographies where banks have domestic branch offices, and does not refer to areas where banks provide loans.[5] The text is consistent with the underlying purposes of the CRA, which include ensuring that banks serve any community where they have branches that take deposits from that community.[6] Moreover, it takes time and dedicated resources to build meaningful CRA infrastructure in a given geography. If making retail loans outside a bank’s facility-based assessment areas could give rise to a stringent distribution analysis in new, separate geographies, banks would have a strong disincentive from offering lending products in many places outside their facility-based assessment areas where they lack these resources. As a result, underserved communities could suffer from a constriction in the availability of credit. The “retail lending assessment areas” and “outside retail lending area” concepts should therefore be optional in the final rule.
  • Third, several elements of the proposed Retail Services and Products Test would appear to serve as a de facto requirement to offer specific deposit services, products, and features, which indicates that the agencies have ventured far from their statutory mandate of encouraging a bank to meet the credit needs of its entire community. In particular, parts of this Test appear to have the effect of regulating the cost of deposit account fees. The agencies have no authority to impose price controls by capping these fees, much less indirect authority within the CRA. The final rule’s Retail Services and Products Test should therefore focus on credit delivery channels and credit programs responsive to LMI people and geographies, as is done today.
  • Fourth, the Proposal is unnecessarily complex. The Proposal’s multiple new tests, subtests, and factors would subject numerous discrete areas of a bank’s operation to evaluation, and the agencies have not explained why they did not offer more straightforward alternatives that would achieve similar objectives. This letter describes multiple ways in which the agencies could easily simplify and streamline the Proposal while still accomplishing their policy objectives and serving the statutory purposes of the CRA. As an example, rather than strain to create a regime in which as many as six different retail products and sub-products could be subject to evaluation depending on the specific geographic area being reviewed, the agencies should focus the Retail Lending Test on the loan types that Congress and the agencies have recognized are core to the CRA: home mortgages (separately analyzing closed-end and open-end home mortgage loans) and small business and small farm loans (analyzing both on a combined basis as a single category). These types of retail loans are core to the CRA because they are proven to help borrowers and their communities create and sustain wealth. The final rule should adopt these recommendations to simplify the evaluation process.
  • Fifth, the Proposal would take a rigid, “one-size-fits-all” approach to evaluating large bank performance and would lack the flexibility to accommodate large banks with less traditional business models. As an example, the Proposal would apply the same weighting to its four large bank tests regardless of how important retail banking is to the bank being evaluated, which could lead to a disproportionate emphasis on retail loans for banks that focus on other business lines and primarily serve LMI people through their community development activities. The Proposal’s lack of flexibility is compounded by its proposed changes to the requirements for strategic plans, which could be read to permit almost no deviation from the performance tests and standards that would apply in the absence of a strategic plan. The agencies should ensure that the final rule meets the their stated goal of tailoring evaluations to banks’ business models, including by preserving a strategic plan option that provides true flexibility.
  • Sixth, the proposed compliance period of just 12 months from the final rule’s effective date would be far too short to be workable in light of the Proposal’s complexity, the vast new data collection and reporting requirements that the Proposal would impose, and key ambiguities in and unintended consequences of the Proposal that the agencies will need to address. The agencies should streamline the data collection and reporting requirements and, to facilitate an orderly transition to the new framework, provide for a compliance period of at least 24 months for the date collection and reporting requirements and at least 48 months until the beginning of the first evaluation periods in which the new tests and standards would apply. The agencies could use this additional time to help clarify the new CRA framework in advance of its effectiveness through interpretive guidance, thus providing banks with timely advice on how to comply and shape their CRA strategies before they risk an adverse rating.
  • Seventh, the agencies have proposed to eliminate any reasonable constraints on their authority to downgrade a bank’s rating based on a compliance violation. The agencies propose to expand the existing standard, which permits a downgrade based on evidence of “discriminatory or other illegal credit practices,” to encompass “any discriminatory or illegal practice.” The proposed standard appears to stretch far beyond the statutory text and its core objectives. Not only could this standard reach consumer compliance violations that are unrelated to credit, it could even be understood to permit downgrades based on compliance violations that have no direct effect on consumers. The breadth of this language is especially concerning in light of the fact that the NPR’s stringent calibration would likely result in almost no large banks receiving an Outstanding rating on performance, meaning that most downgrades would be the difference between a Satisfactory rating and a Needs to Improve rating. Ratings of less than Satisfactory have serious negative repercussions for banks and the communities they serve, including by making it more difficult for a bank to open new branches to better reach customers.

These and other problems detailed in BPI’s comments would subject the Proposal to significant
risk of legal challenge if finalized in its current form. But all of the shortcomings we describe are
avoidable, and this letter focuses on specific, actionable changes that the agencies could make to create a more sustainable and durable final rule. Our comments are organized as follows. To guide the agencies to our specific suggestions, Part I includes an executive summary of our recommended changes to the Proposal. Part II highlights the legal requirements that govern CRA rulemaking, describes BPI’s suggested changes to the Proposal in greater detail, and provides supporting legal and policy reasons for why the agencies should adopt these changes. Finally, the Annex to this letter contains a list of provisions in the Proposal that are unclear and the agencies should clarify in the final rule.

We appreciate the opportunity to provide our views and look forward to continued engagement
with the agencies on this important initiative.

To read the full comment letter, click here, or click on the download button below.

[1] The Bank Policy Institute is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s bank-originated small business loans, and are an engine for financial innovation and economic growth.

[2] Community Reinvestment Act, 87 Fed. Reg. 33,884 (June 3, 2022).

[3] According to Federal Reserve Vice Chair for Supervision Michael Barr, the agencies have historically eschewed a prescriptive, quotas-based approach to CRA evaluations specifically to avoid criticism that the CRA results in government-imposed credit allocation. See Michael S. Barr, Credit Where It Counts: The Community Reinvestment Act and its Critics, 80 N.Y. Univ. L. Rev. 513, 600 (2005) [Hereinafter “Credit Where It Counts”]; see also Federal Reserve Chairman Alan Greenspan, Economic Development in Low- and Moderate-Income Communities, Remarks at a
Community Forum on Community Reinvestment and Access to Credit: California’s Challenge (Jan. 12, 1998), at http://www.federalreserve.gov/boarddocs/speeches/1998/19980112.htm (last visited July 17, 2022) (“’The legislative history indicates that the Congress did not intend for the CRA to result in government-imposed credit allocation.’”). With its rigid proposed approach to evaluating retail lending distribution, the NPR abandons that caution.

[4] See, e.g., 87 Fed. Reg. at 33,945 (“The agencies recognize that many banks, especially large banks, frequently employ dedicated CRA teams with strong relationships to the community to ensure that the bank appropriately identifies and helps to meet community credit and community development needs.”).

[5] See, e.g., 12 U.S.C. § 2906(b)(1)(B).

[6] See, e.g., 123 Cong. Reg. S8932 (daily ed. June 6, 1977) (Senator William Proxmire, the bill’s sponsor in the Senate, stating in floor debate that the statute was intended to solve the problem that “banks and savings and loans will take their deposits from a community and instead of reinvesting them in that community, they will invest them elsewhere . . . .”).