The FDIC voted Thursday to propose a sweeping overhaul of a landmark law designed to prevent banks from discriminatory lending, triggering intense opposition from Rep. Maxine Waters and other Democrats, who say the plan deprives local communities of a say in how such loans are measured.
The proposed revision, spearheaded by Comptroller of the Currency Joseph Otting, is aimed at ensuring that more of the bank loans supplied under the Community Reinvestment Act go to lower-income borrowers and to more neighborhoods. But Democratic officials slammed the rule as achieving just the opposite.
“The [revision] before the FDIC board today is a deeply misconceived proposal that would fundamentally undermine and weaken the Community Reinvestment Act,” FDIC board member Martin Gruenberg said in his dissent.
Waters, who chairs the House Financial Services Committee, was agitated enough by the plan that she led a group of fellow lawmakers to watch the vote — a highly unusual move that underscores the significance of CRA, which was passed in 1977 to combat discrimination against poor and minority communities, a historic practice known as redlining.
Speaking to reporters after the meeting, Waters laid out a number of criticisms of the proposal and blasted Otting — a former banker who also sits on the FDIC board — for not appearing before her committee alongside other regulators at a hearing last week.
“We have tried to work out a time for Mr. Otting to come over to and testify, but he has been absolutely too busy, so we thought we’d come to see him,” she said. Among other demands, Democrats want the 60-day comment period to be extended to 120 days.
In barreling ahead with the proposal, Otting is seeking to address longtime complaints by banks that the law is outdated given the advent of the Internet and that regulators have tended to focus too heavily on mortgages rather than other ways they can serve their communities. They have also sought more certainty as to what will count for CRA credit, saying the criteria are often arbitrary and sometime decided long after loans are made.
He approved the rule on behalf of his own agency on Thursday morning, but the third federal bank regulator — the Federal Reserve — did not sign on.
“I don’t think that Mr. Otting has been willing to have anybody else involved in the proposal,” Waters said. “He thinks that he has the authority to do this without having to interact with us and no matter what he thinks, we think we have a responsibility to make sure that CRA is doing what it was intended to do.”
At the heart of the concern for Democrats and some community groups is that the proposal would use broad measures of how many loans a bank has made to low-income borrowers and how much it has invested in poorer areas to determine a bank’s CRA grade, rather than placing an emphasis on getting a community’s input on what it needs.
One metric would examine, for each of the bank’s “assessment areas,” the distribution of loans within its major retail business lines.
Another would look at the ratio of CRA-qualifying dollars invested in each assessment area compared with retail deposits, as well as the same measure at the overall bank level. But to get a satisfactory rating, banks would have to have a certain amount of dollars in a “significant portion” of its communities, which the proposal suggests could mean at least 50 percent.
These metrics will help determine a bank’s “presumptive” rating, which could then be modified based on regulators’ judgment and any illegal or discriminatory practices.
Otting, who had extensive experience in CRA compliance during his career as a banker, including as CEO of OneWest, gave a spirited defense of the measures outlined in the proposal, and bristled at the suggestion that only the simple performance ratio at the overall bank level would matter.
“The proposal would evaluate CRA performance more objectively by assessing what portion of a bank’s retail lending is targeted to [low- and moderate-income] individuals and areas, as well as measuring the impact of that activity,” he said.
“This is more than a one single metric that you heard [Gruenberg] mention,” he said. “Effectively there are three key measurements we would be using in the proposal.”
But opponents of the proposal, including Waters, complained that banks could have insufficient investments in half of their assessment areas and still get a passing grade.
“The Trump administration seems determined to radically overhaul and water down the compliance system by introducing a numerical measure of performance that has been widely criticized, by bankers as well as community advocates, as overly simplistic,” said Jesse Van Tol, CEO of the National Community Reinvestment Coalition.
The proposal received praise from top Republicans in Congress for making implementation of CRA more objective and transparent.
“The proposed rule encourages more investment, lending and services in the communities that need it most, recognizes the importance of bank branches, and supports small businesses and America’s farmers,” Senate Banking Chairman Mike Crapo said in a statement.
Beyond establishing new metrics, the proposal would only count loans to low- and moderate-income people for the purposes of CRA, a shift from current regulations that are targeted to lower-income neighborhoods, an attempt to stop encouraging gentrification. However, a loan under $2 million to any small business in a poorer area would qualify for CRA credit.
It would also expand the number of communities served by certain banks, particularly lenders that operate only on the Internet. A bank’s assessment areas are currently determined by the location of its branches. Under the proposed rule, if at least 50 percent of its deposits come from outside of those communities, it would have new assessment areas based around where 5 percent of its deposits originate.
Those assessment areas, which will be determined by the bank and validated by the regulator, should be the smallest possible area where 5 percent of deposits originate.
The proposed rule includes an extensive, non-exhaustive list of activities that count for CRA credit and also says regulators intend to set up a process by which banks can ask whether an activity will qualify. An activity is often deemed as qualified or not under CRA after it is carried out, which banks say creates uncertainty.
Loans to people living on tribal lands would count regardless of the borrower’s income, a move Waters said she supported.
The proposal would also allow small banks — those with $500 million in assets or less — the ability to continue operating under the current framework unless they opt in to the new one. The Independent Community Bankers of America praised this aspect of the regulation.
In general, bank trade groups gave vague but supportive statements after the proposal was released, saying they were studying the details of the proposal.
“Increasing transparency, reducing subjectivity and ensuring timely examination results are all important issues addressed in the proposal,” Consumer Bankers Association President Richard Hunt said in a statement.
But he said the organization “interested in learning more."
The FDIC also approved a proposed rule on brokered deposits, a class of funding where a third party is responsible for directing deposits to a bank. The proposal would clarify and narrow the scope of companies that would be counted as deposit brokers.
It would focus on whether the third party plays an active role in the deposit placement, such as negotiating on behalf of customers or passing along information of customers, as well as whether the company maintains some influence after the deposits are placed.