Complex, Sweeping CRA Proposal Would Undercut Law’s Mission of Serving Communities

Washington, D.C. – BPI today commented on the banking agencies’ joint Community Reinvestment Act proposal. BPI strongly supports the CRA and its core mission of supporting communities, including low- and moderate-income and underserved areas, and parts of the proposal would helpfully provide some certainty about what activities qualify for CRA credit, particularly with respect to banks’ partnerships with Minority Depository Institutions; however, the proposal in other respects would stray far beyond the agencies’ statutory mandate to the point of credit allocation, and would undermine the law’s core mission by allowing CRA ratings to be driven subjectively by behavior unrelated to community development.

What BPI is saying:

“The proposal presents the worst of two worlds:  its hundreds of pages of requirements dictate how banks are to allocate credit, yet at the end of the day the agencies reserve the right to downgrade a bank’s rating regardless of its compliance with the agencies’ dictates, based on any of a wide range of factors unrelated to community development.” 
Paige Pidano Paridon, BPI senior vice president and senior associate general counsel

Background: The Community Reinvestment Act, enacted in 1977, requires the federal banking regulators to evaluate banks on how they meet the credit needs of their communities, including low- and-moderate-income neighborhoods. On May 5, 2022, the agencies issued a joint proposal to modernize the rule. This effort follows a previous rulemaking effort by the OCC, which was abandoned in July 2021, and an advance notice of proposed rulemaking issued by the Federal Reserve in 2020.

Key issues:

  • Calibration: The proposal’s Retail Lending Test would be calibrated so stringently that it could render the CRA a tool for credit allocation, rather than for ensuring credit availability. This result would conflict with the purposes of the law. Further, this test would compare banks’ performance to benchmarks that they would never know in advance, raising due process and Administrative Procedure Act concerns. 
  • Geographical bounds: The CRA requires that regulators evaluate banks’ lending in places where banks have domestic branches, not where they provide loans. In the context of digital banking and innovation, banks may provide loans to customers outside where they have branches. Under the proposal, such lending could be penalized by prompting a stringent distribution analysis in that new geographical area.
  • Price controls: Some elements of the proposal could serve as a de facto requirement to offer specific deposit services, products and features – and could effectively impose price controls by capping deposit account fees. This would contradict the statutory mandate to encourage banks to meet the credit needs of their communities and would go beyond the agencies’ statutory authority.
  • Complexity: The proposal’s multiple new tests, subtests and factors would subject several separate parts of a bank’s operation to evaluation. More straightforward alternatives could achieve similar goals.
  • Mission creep: The proposal would authorize the agencies to downgrade a bank’s rating based on any consumer compliance violation, beyond the reach of the statute and with no standard for how significant a violation would have to be to merit a downgrade.  As such, the CRA would be inappropriately converted into a redundant consumer compliance enforcement regime, and lose its focus on community development.

The proposal’s other problems include a rigid, one-size-fits-all approach to large bank evaluations and an extremely short compliance period.

In light of these and other problems with the proposal, BPI has significant concerns that features of the agencies’ proposal exceed the statutory limitations of the CRA, the Administrative Procedure Act and the Constitution, and would thus render the proposal vulnerable to challenge if finalized without change.

What’s next: BPI’s comment letter offers key recommendations to simplify and streamline the proposal to make it consistent with the banking agencies’ statutory mandate and create a more sustainable and durable final rule.

Bottom line: “Straightforward rules that align with the underlying statute will further the CRA’s purpose of encouraging banks to serve their communities by meeting their credit needs. The current proposal’s breadth and complexity would instead compel banks to navigate a thicket of new requirements that stray from the law’s text and mission, ultimately undermining its focus on community development,” Paridon concludes. 


About Bank Policy Institute.

The Bank Policy Institute (BPI) 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 small business loans, and are an engine for financial innovation and economic growth.

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