Early in 2020, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) published their proposal for comprehensive amendments to the rules implementing the Community Reinvestment Act (CRA). The following statement is Reinvestment Fund’s response to the proposed changes and was submitted to the OCC as part of our comments.
Reinvestment Fund, like many organizations globally, has turned its attention to responding to the COVID-19 pandemic. As such, we are urging the Administration and all financial regulators to suspend all rulemaking unrelated to the virus response or other imminent health and safety concerns. However, with the deadline upon us, Reinvestment Fund is responding to the joint notice of proposed rulemaking on Community Reinvestment Act (CRA) Regulations in an effort to preserve the original intent of CRA, a product of the Civil Rights Act, to ensure equitable access and benefit to bank products and services by low- and moderate-income (LMI) communities. This comment details why Reinvestment Fund does not support the current modernization proposal represented in the notice of proposed rulemaking.
Reinvestment Fund is a certified Community Development Financial Institution (CDFI) committed to building strong, more equitable communities by making health, wellbeing, and financial security available and accessible to families, regardless of income or zip code. Over more than three decades, Reinvestment Fund has put $2.4 billion to work for low wealth communities across the country, resulting in the development of 23,456 housing units, 23.1 million square feet of retail space and community facilities, 35,127 jobs created or preserved, and 14,450 childcare and 64,868 charter school slots. The OCC and FDIC’s proposal would rob communities of billions—trillions, potentially— in critical funds for communities.
We have serious concerns that the proposed changes could not only reduce the overall amount of community development activity completed by CRA-motivated banks, but also dilute the quality and impact of the community development efforts that banks may continue to support.
In fact, CRA legislation has helped engineer a very productive relationship between CDFIs and banks. With capital from CRA-motivated banks, Reinvestment Fund combines debt capital, grants, data and technical assistance to support high impact projects for LMI communities. CRA is essential to the work of mission-driven CDFIs and its impact is substantial. In 2018, banks invested nearly $4 billion in CDFI loan funds who are members of the Opportunity Finance Network –an increase from less than $1 billion in 2005, and nearly half the debt capital collectively deployed to finance desperately needed affordable housing, small businesses and community facilities primarily benefiting low income communities. CRA capital has also allowed CDFIs like Reinvestment Fund to continually demonstrate our unique value proposition to the community development sector by:
- Taking more risks and driving innovation in community development financing.
- Effectively levering, scaling and pushing capital into hard-to-reach communities.
- Building the capacity of smaller CDFIs – and strengthening the CDFI industry nationally.
- Aligning capital, data, policy knowledge and execution ability with public policy goals.
The proposed rule would dilute any current incentive for banks to partner with CDFIs that have historically made high impact investments into LMI communities, posing a serious threat to the community development finance sector. Changes to CRA proposed by the OCC and FDIC are fundamentally flawed because they:
Gut Local Responsiveness – The proposed one-ratio measure and expanded list of CRA-qualifying activities would enable banks to shift away from responding to local needs. Instead, banks would receive credit for an expanded list of CRA-eligible investments in infrastructure, Opportunity Zones, and even sports stadiums. Such a framework gives banks little incentive to work with local CDFIs —undermining a quarter-century of effective Treasury Department investment in the sector– or invest in small high-impact projects that truly benefit low-and-moderate-income Americans.
Discount Social Impact – Impactful community development projects often require innovative and complex financing. This is especially true where CDFIs pioneer strategies to address community needs that banks are unwilling to explore—such as healthy food outlets, childcare facilities, and community health centers. The proposal removes any incentives for banks to provide this crucial, early-stage capital. The one-ratio framework makes even the proposal’s attempt to incentivize high impact investments—through a 2X multiplier—nearly certain to backfire: Banks could then simply receive the same CRA credit for half their current volume.
Divide Regulatory Agencies– While OCC and FDIC continue to advocate for an approach unmoored from market data, the Federal Reserve Governor Lael Brainerd has suggested a different way that could balance the need to modernize CRA while maintaining strong measures for local accountability and controls on maintaining current investment levels. The lack of alignment between the three regulatory agencies undermines the goal to improve CRA, and creates confusion for all stakeholders—banks, communities, CDFIs and others.
Reinvestment Fund is committed to working with all three regulators to reach consensus on a productive and effective CRA regulatory framework. We recognize the need to modernize CRA for efficiency and transparency but insist that this is done with LMI beneficiaries prioritized. To that end, we are urging the OCC to re-publish a proposed rule for public comment. The modernized proposed CRA rule should:
- Ensure that CRA valuations are not oversimplified;
- Specify eligible community development activities to ensure impactful outcomes for LMI communities and people;
- Retain a strong incentive for banks to participate in community development equity investments; and
- Make CRA credit contingent upon banks meeting the credit needs of most of its assessment areas.
CRA modernization should ensure that evaluation of a bank’s CRA activity is not oversimplified.
The most immediate concern is that stakeholders do not have adequate data to determine whether the proposed thresholds – 11 percent and 6 percent for Outstanding and Satisfactory ratings, respectively– are appropriately calibrated. We are also concerned that the structure of this evaluation measure could have negative impacts on the community development programs and services that communities rely on. Allowing the metric to be calculated based on community development and/or retail activities will likely skew incentives for banks to engage in the largest, quickest community development activities without regard for the impact of the activity on the ground. This oversimplification in evaluation undermines one of the most important benefits of CRA – the incentive for banks to develop partnerships with local community organizations and other stakeholders to address community needs. Further, a single, dollar value-based metrics will no doubt favor large, easy-to-accomplish investments and loans over more complex and innovative activities that may take longer to develop but have a higher impact on LMI communities.
Of course, we want to ensure CRA investments are informed by the needs and opportunities of the communities they serve. We believe the community’s investment context should be considered for CRA evaluation; however, the proposed rule suggests only referencing this context in instances it aims to justify underperformance of a bank’s investment expectations. To address these concerns regarding evaluation, Reinvestment Fund strongly urges the regulatory agencies to jointly publish the full data and analysis that justified the development of the proposed CRA rating thresholds. This should be subject to another public comment period prior to implementing any such thresholds. We also urge the agencies to rethink community development as a critical variable in CRA credit to ensure that it is not superseded by retail activity.
CRA modernization should specify eligible community development activities to ensure meaningful impact for LMI communities and people.
We agree that modernization should prioritize clarity to guide informed decisions regarding CRA investments. However, the proposed rule dramatically and irresponsibly expands what activities would be eligible for CRA credit. The proposed “non-exhaustive list” of eligible activities now includes infrastructure, transportation, and even sports stadiums. Eligible investments would no longer be required to primarily benefit LMI communities which is contrary to the spirit of the rule.
We are especially concerned that including mortgage-backed securities (MBS) as an eligible community development activity could crowd out more impactful community development activities. MBSs are a relatively simple and liquid investment that banks can complete in large quantities. The list should be reissued to include a proposed list of limited and clearly defined outcomes for CRA credit. This will help ensure that the modernization does not minimize or eliminate the intended benefits to LMI individuals and communities.
CRA modernization should retain a strong incentive for banks to participate in community development equity investments.
The proposed list of eligible activities also fails to distinguish between debt and equity community development products, which are distinct and should be evaluated separately. The current investment test has been a significant motivating force for investments in some of the nation’s most successful and impactful community development equity products, like the Low-Income Housing Tax Credit and New Markets Tax Credit. CRA modernization should only seek to strengthen these programs, yet the proposed changes would allow a bank to pass its CRA exam without completing any equity investments.
Debt and equity community development products should be evaluated separately. This should be in place of the proposed multiplier, which is not enough to attract investment in critical community development programs. Recognizing that opportunities for community development equity investments are not always readily available or easy to identify, we recommend a smaller equity requirement at the assessment area level – such as 20 percent – and a larger percentage at the bank level – such as 50 percent.
CRA modernization should make CRA credit contingent upon banks meeting the credit needs of at least 80% of its assessment areas.
Regulations dictating where banks have CRA obligations are particularly critical to 1) uphold the statutory obligation for banks to reinvest in the communities where they take deposits, and 2) ensure capital is not being artificially concentrated in a few geographies with favorable banking laws. Reinvestment Fund is committed to ensuring that CRA regulations provide banks greater flexibility to receive credit for community development activities nationally. As lenders, we are well aware of the impact we can have when our capital is not geographically constrained.
We are pleased to see the OCC and FDIC attempt to alleviate the oversaturation of CRA-motivated investments in certain places with a large concentration of bank headquarters by creating new deposit-based assessment areas where banks receive more than five percent of their deposits. However, we are concerned about the potentially new concentration of capital these deposit-based assessment areas could create given that most banks will have deposits concentrated in large urban areas that tend to be better served by financial institutions. This will steer CRA-motivated capital away from places experiencing serious disinvestment, such as rural areas, persistent poverty counties and credit deserts.
Finally, we are greatly concerned by the potential for banks to receive a passing rating even if they only meet the credit needs in 50 percent of their assessment areas. While we understand that the intent of this proposal was not to condone banks ignoring the credit needs in half of their assessment areas, we do fear that this could be the practical outcome of such a proposal. Reinvestment Fund recommends that banks should be required to meet the credit needs in a large majority of their assessment areas – at least 80 percent – in order to achieve a passing rating.
CRA is foundational to the entire community development ecosystem. Any changes to this critical tool should at a minimum seek to maintain the critical partnerships and practices that have supported community development in LMI communities across the country. Ideally, it should seek to strengthen our collective ability to deliver impactful products and services to communities in need. The proposed measures instead allow banks to receive CRA credit for doing the bare minimum through the largest and fastest deals, to the detriment of LMI communities. The proposed rule decouples CRA from outcomes for intended communities, will cut out community organizations that work directly with these targeted communities, and lacks transparency. As such, Reinvestment Fund opposes the rule as proposed and urges the agencies to re-publish a proposed rule for further public comment prior to proceeding with a final rule.