By mid-morning on Friday the 13th, Jaime Weisberg was about halfway through her read of the 239-page document that will be defining her professional life for at least the next two months, and she was beginning to believe Friday the 13th really was bad luck.
“It’s every bit as bad as we thought, and then some,” says Weisberg, senior campaign analyst at the Association for Neighborhood & Housing Development, a coalition of community groups across New York City.
The document at hand is a joint proposal to modernize regulations under the Community Reinvestment Act (CRA), the 1977 law requiring banks to meet the credit needs of all the communities where they do business. The last time CRA regulations were given a major overhaul like this was in 1995.
The proposal comes after 18 months of meetings, hearings, comment periods, tours and discussions between communities, advocates, the banking industry, and the three federal agencies charged with enforcing the CRA — the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). Only the latter two are participating in this joint proposal. The Federal Reserve is expected to issue its own proposal to modernize how it enforces the CRA.
The stated goal of the joint OCC-FDIC proposal is “to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure.”
No one believes CRA regulations are working perfectly as intended. Historically, 98 percent of banks pass their CRA examinations, while research and reporting continue to show how banks still disproportionately deny borrowers of color access to credit.
While advocates across the country agree that CRA regulations badly need improvement, they believe the approach taken in the joint proposal will do the opposite of what’s intended — that it will significantly reduce the incentive for banks to meet the credit needs of every low-income community where they take deposits. They are also worried that the joint proposal puts too much emphasis on dollar signs and not enough on identifying community needs and how banks are actually meeting them.
“There’s just this idea that more investment, period, is going to help, as opposed to looking at community needs and community context,” Weisberg says.
The CRA was born in Chicago. Based on the city’s West Side, activist Gail Cincotta was credited as being the “Mother of the CRA,” for the work she did rallying allies in Chicago and across the country against redlining, which eventually led to Congress passing the Home Mortgage Disclosure Act in 1975 and the CRA in 1977.
Chicago residents have a lot of pride in their 77 neighborhoods, each with its own history and context. So it’s fitting that some of the Chicago mindset shows up in CRA regulations, in the form of “assessment areas” — the counties, cities, metropolitan areas or states where banks have branches. CRA examiners evaluate banks for how they meet the credit needs of each assessment area they serve, assigning one of four CRA ratings — outstanding, satisfactory, needs to improve, or substantially non-compliant — for each of a bank’s assessment areas.
It’s not an exact science, but those assessment area ratings feed into the overall CRA rating for each bank. Outstanding or satisfactory are considered passing grades.
Under the proposed new rules, banks could get a failing grade in as many as 50 percent of their assessment areas and still get a passing grade on their overall CRA examination — something that isn’t possible under current CRA regulations. Such an overall passing grade would be based in part on banks getting credit for CRA-eligible activities outside of their assessment areas. The joint proposal justifies these changes as a response to the modern banking system being less dependent on physical presence of branches and more flexible geographically with depositors doing most of their banking digitally.
Advocates fear that this framework could result in dramatic shifts of capital away from some areas that still need it.
At the Woodstock Institute in Chicago, senior vice president for policy Brent Adams is worried that the proposed new rules pose an existential threat to the community development loan funds who he says have become a key intermediary between banks and low-income communities. Certified by the U.S. Treasury as community development financial institutions (CDFIs), those loan funds have come to depend on banks to make investments in them to meet their CRA obligations, allowing the CDFIs to make investments in low-income communities.
“The changes are dramatic, and correspondingly they could produce a dramatic shift in the flow of capital, and for some entities that could be devastating,” says Adams.
The joint proposal outlines a method to calculate a “CRA evaluation measure,” based primarily on the dollar value of CRA-eligible activities as a percentage of deposits. Over the past 18 months of discussions about the CRA, such a measure has been called “an objective measure of CRA performance,” or “the one ratio.” The joint-proposal itself acknowledges that, out of more than 1,500 public comments it has received over these past 18 months, of those that addressed the “one ratio,” a majority opposed using a single metric to objectively measure CRA performance.
“Just counting dollars overlooks the local community needs that are meant to dictate what banks do,” Adams says. “It could create an entirely skewed picture about the degree to which banks are responding to local community needs, which is the lynchpin of CRA. It encourages a financial institution to enter into the biggest and simplest deals, and in doing so entire communities could be neglected entirely.”
In response to those concerns, the joint proposal does contain a “distribution test,” a measure of whether a bank’s small business or small farm lending is reaching a substantial enough portion of the small businesses or small farms in an assessment area. It measures how many such loans are made relative to how many small businesses or small farms there are in the assessment area. A bank has to achieve a certain level of market penetration in the assessment area in order to get a passing grade for that assessment area.
“As proposed, the strengthened rule would measure units and dollars and put equal emphasis on both,” says OCC spokesperson Bryan Hubbard, in an email. “The approach would assess how much of bank’s lending is targeted to low- and moderate-income people and areas and would also assess the impact of that lending and investment in every one of the bank’s assessment areas. On top of these measures, examiners would consider performance context in assigning a final rating.”
The proposed new rules also set specific targets for the CRA evaluation measure — if the dollar value of CRA-eligible activities as a percentage of deposits is 11 percent, it’s presumed the CRA rating for that assessment area or overall is “outstanding”; at least six percent would be “satisfactory”; at least three percent would be “needs to improve.”
Weisberg is concerned that the target percentages aren’t helpful. It might be helpful to have a list of what qualifies and what doesn’t, as a matter of transparency and certainty over what counts, but having a target percentage puts communities at a disadvantage, she says.
“If banks aren’t quite sure, they sometimes want to do a little more or be a little more innovative. So I don’t mind uncertainty if banks are kinda worried if they’re going to pass. That gives you some healthy anxiety,” Weisberg says. “We don’t need banks to be sure. Sometimes that is the only thing we have.”
There’s also a list of more than 170 activities that qualify for CRA credit, a list meant to grow and evolve over time, so that banks can have more transparency over what would count toward those percentages.
Advocates, the banking industry, and regulators all agree that low-income communities need more capital, and they agree that the CRA helps move billions of dollars in capital a year to low-income communities — and that it could help move even more capital. But they disagree over how much more capital and to what specific ends.
“You could get your 11 percent even though the communities in your areas are still starving for investment or for different kinds of investments,” Adams says. “There ought to be community roundtables where people in the community are talking directly to banks about what they need, not the bank just looking at some menu of items in the Federal Register and just picking open land to build on.”
The joint proposal states that it would reduce displacement of low and moderate income communities, because the new rules would take away CRA credit for a mortgage loan to a high-income individual buying a home in a low-income census tract. However, advocates have raised concerns about how banks can finance displacement caused by speculative landlords acquiring rent-stabilized or low-income housing and jacking up rents — and the proposed regulations don’t address that concern..
“The rules seem to do nothing to address the concerns we and others have raised about multi-family financing that is leading to the displacement of low-income people,” says Kevin Stein , deputy director at the California Reinvestment Coalition.
Stein is concerned the proposed new rules would fuel displacement further, especially in hot markets like the Bay Area or Los Angeles, because the list of activities eligible for CRA credit includes investments in Opportunity Zone projects — including stadiums.
There’s nothing in the Opportunity Zones legislation that says the investments funded by the new tax break have to produce housing that’s affordable to low and moderate income residents, or create jobs that are accessible and pay living wages for Opportunity Zone residents. But the new rules would give banks CRA credit for investing in Opportunity Zone projects anyhow.
“The qualitative evaluation of Opportunity Zone investments themselves is not part of the system,” Adams says. “It’s location and money based. As long as you spend the money and do it in the correct location, you’re going to get credit for it. This is saying the same thing to banks.”
The proposed new rules also lift the cap on what size small business loans would qualify for CRA-credit, from the current $1 million to $2 million, and would adjust that cap for inflation over time. The proposal also lifts the cap on what qualifies as a small business, from $1 million in revenues currently to $2 million in revenues. Banks would be able to count more small business loans as eligible for CRA credit just by these changes in what counts as a “small” business. The joint proposal justifies these changes by saying these limits haven’t been raised since 1995, but advocates worry the higher limits will reduce the incentive for banks to make the smaller loan sizes that entrepreneurs from low-income communities often need.
“A bank’s small business lending by dollar amount may seem low or inadequate in some way, but if they are targeting entrepreneurs who need loans of $25,000 or less, that is a community that needs that size capital,” Adams says. “A lesser amount can have a bigger impact given what the community or the borrower needs.”
Under the proposed new framework, banks could end up getting CRA credit for financing Opportunity Zone projects that displace low-income people and for loans to larger businesses that didn’t qualify for CRA credit before, all while neglecting up to half their CRA assessment areas.
“This is the wrong approach. There’s so much bad about it,” Weisberg says. “It takes away from the impact and the intent of encouraging local partnerships that banks are meant to have in their assessment areas. When you’re just racing to get high volumes, there’s less incentive to do that.”
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.