The pressure to address racial inequity has reached the Federal Reserve. In the wake of COVID-19’s disparate impact on communities of color, and the wave of uprisings in response to police brutality, this institution that has often portrayed itself as above the fray now finds itself in the crosshairs of legislation requiring it to close racial employment and wage gaps.
As of last week, the Federal Reserve is attempting to push the reset button on what has been a multi-year process to update regulations around a decades-old piece of civil rights legislation, the Community Reinvestment Act. The process has the potential to affect hundreds of billions of dollars a year in credit to low and moderate income communities.
The CRA itself does not mention race. Passed by Congress in 1977, the law states that “banks have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.” A bank that wants to have branches in Harlem, for example, has to offer mortgages to people of all income levels living there, not just wealthy newcomers. But in its public statements and discussions in the past week, the central bank’s representatives have been unusually willing to reference the context in which it was drafted and passed.
“We very much keep at the forefront of our thinking the history of the CRA,” said Federal Reserve Governor Lael Brainard, in an online discussion last week hosted by the nonpartisan Urban Institute. “The CRA was enacted as one of several landmark civil rights laws that were designed to address systemic inequities in credit access, in particular a response to redlining.”
The upcoming election will have important implications for the future of regulations around the CRA. Bloomberg has reported that Brainard is at the top of the list for Treasury Secretary in a potential Biden administration. From that position, she would have even more influence over the regulatory process around the law.
Currently, there is no single agency that has complete purview over implementation and enforcement of the law. Instead, three agencies share duties to enforce the law — the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency, or OCC, which issues banking charters at the federal level. The three agencies have typically tried to stick with one shared set of regulations between them. But earlier this year, the OCC finalized its own set of new rules, which officially go into effect this October.
The FDIC and Federal Reserve, while they were earlier supportive of the OCC-led process, ultimately decided against adopting the rules that came out of that process. During the Urban Institute’s online forum last week, Brainard expressed optimism that there is a window for the three agencies to bring their regulations back into one set of rules.
“It’s important to recognize, with the path we’re on today, there are effectively two separate rules,” said Brainard. “We have heard from stakeholders one set of rules would be best, for both communities and banks.”
There is widespread consensus that CRA regulations needed an update. The last major overhaul of the regulations occurred in 1995. The banking industry has changed dramatically since then — there are half as many banks today as there were in 1995, and large banks have a much larger market share; online and mobile banking are much more prominent today, reducing foot traffic into bank branches; conventional banking has been overtaken by the shadow banking sector, completely outside the purview of the CRA.
But there has been widespread opposition to a core design feature of the OCC’s new rules, known as the “CRA evaluation measure” or “single metric.” It’s an attempt to boil down all of a bank’s CRA-qualifying activities into a single dollar value, from branch presence to lending. Each bank would have to hit a certain threshold on its CRA evaluation measure in order to get a passing grade on its CRA examination.
The OCC’s intent with the CRA evaluation measure is to give banks a clear way to monitor how they’re doing in between CRA exams, which occur every 3-5 years depending on the size of the bank and its past CRA performance. The agency believes that such a level of clarity would help encourage more lending to low- and moderate-income areas.
A majority of commenters during the OCC’s process opposed the single metric approach. Their concerns mainly centered on the potential for such an approach to encourage larger loans in order to hit the necessary threshold while disincentivizing the smaller loans that households and businesses in low- and moderate-income areas often need. The OCC included the single metric approach in its final rules anyway.
Otting left the OCC in May, shortly after announcing his agency’s finalized CRA regulations. Under a potential Biden administration, the Treasury Secretary would have a major hand in choosing Otting’s successor. The Trump administration has not yet named a permanent successor, whom the Senate would also need to confirm.
Last week, the Federal Reserve’s Board of Governors voted unanimously to initiate its own Advanced Notice of Proposed Rulemaking. It came with a 120-day deadline for comments — twice as long as the usual deadline for such notices.
After hinting at its approach to modernized CRA regulations in January, the Federal Reserve’s proposed regulatory framework does not include a “single metric.”
“The biggest difference is there is no overall single dollar-denominated bogey for the bank to aim for and not go any higher than,” said Ellen Seidman, nonresident fellow at the Urban Institute, during the online forum last week.
Instead, the Federal Reserve analyzed previously reported data from thousands of CRA examinations to determine a set of tailored geographic benchmarks for CRA obligations based on each state or metropolitan area where a bank has branches. Rather than dollar amounts, the geographic benchmarks emphasize the number of loans made to borrowers in each area, so as to ensure banks aren’t incentivized to focus on larger loans. The central bank is looking for feedback on how it calculates those benchmarks.
“The Federal Reserve’s ANPR serves as a productive alternative to the OCC’s rushed, harmful update to the rules,” said the Association for Neighborhood and Housing Development, a coalition of community development groups and tenant organizations in New York City, in a statement last week.
There are some overlaps between the OCC’s new rules and the Federal Reserve’s framework. One major overlap is the idea of deposit-based assessment areas.
When defining the communities where banks do business and therefore are required to meet credit needs under the CRA, the older rules only take into account where banks have physical branches. Both the new OCC rules and the Federal Reserve’s proposed framework allow for deposit-based CRA assessment areas, meaning at least some banks would be required to identify where their depositors are located and they would have CRA obligations to areas where some minimum percentage of their deposits come from.
With the advent of fintech or internet banks, deposit-based assessment areas would be an important change. Payments giant Square, for example, is in the process of setting up its own bank. It would be chartered in Utah, meaning under older CRA rules it would only be required to meet the credit needs of low- and moderate-income communities in that state, even though its customers have a national footprint.
Since Square’s bank will not be federally chartered, it will not be subject to the new OCC rules for deposit-based assessment areas. As a state-chartered bank, Square’s CRA obligations will most likely fall under the purview of the FDIC, which initially joined the OCC but backed out of those new rules, and has yet to commit to the Federal Reserve’s new rules or announce its own process.
The OCC’s final rules contain a change that some advocates say amounts to re-legalizing of redlining. In addition to an overall CRA grade, banks get a CRA grade for each assessment area they have. Under the OCC’s rules, banks with six or more assessment areas would only need a passing grade in at least 80 percent of their assessment areas in order to qualify for a passing overall CRA grade. A large bank, such as JPMorgan Chase, with 200 state or metropolitan area assessment areas, could fail in up to 40 of those areas and still get an overall passing CRA grade.
The Federal Reserve’s proposed CRA regulatory framework does not propose any such threshold. It does, however, propose the idea of allowing internet-based banks to declare nationwide assessment areas. The Fed is looking for feedback on how to assess CRA obligations for internet banks that lack a meaningful physical presence using nationwide assessment areas.
Technically, the new OCC rules for CRA regulations go into effect in October, but the agency rushed through the new rules before it finalized the data collection process with the banking industry. So OCC-supervised banks actually have until 2023 or 2024 before they actually have to be in compliance with those new rules. So these new rules may not ever be enforced — not to mention, a coalition of civil rights and community development groups have filed a lawsuit to overturn them.
Observers shared Brainard’s hope that, no matter what happens in November, the banking industry would not have to face the unprecedented prospect of having two separate sets of rules for the landmark CRA.
“I think by having the 120-day comment period, given where we’re starting from, the hope is many of the comments will be about how to come to a convergence,” said Urban Institute’s Seidman last week. “Maybe that’s wishful thinking, but maybe the longer comment period provides a chance.”
Others expressed doubts about the current administration.
“This election matters a ton in what this rule is going to end up looking like,” said Noel Poyo, executive director for the National Association for Latino Community Asset Builders, during the Urban Institute forum last week.
Editor’s note: We’ve corrected the number of assessment areas that JPMorgan Chase has.
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.