A Federal Reserve official on Wednesday laid out an alternative vision for overhauling the Community Reinvestment Act, criticizing a proposal by two other bank regulators and complicating the move to rewrite the historic anti-redlining law.
The comments by Governor Lael Brainard, an appointee of President Barack Obama and the lone Democrat on the Fed board, are significant because she has taken the lead at the central bank on revising the four-decade-old law, which is designed to encourage banks to lend to low-income neighborhoods.
“It is much more important to get reform right than to do it quickly,” Brainard said in a speech at the Urban Institute. “If we only have one opportunity for a few decades, I want to make sure CRA reform is based on the best analysis and ideas and the broadest input available.”
The Fed under Brainard didn’t sign on to the December proposal from Comptroller of the Currency Joseph Otting and the FDIC. To join its fellow agencies in a final CRA rule, the Fed would have to propose its own rule, although Brainard gave no indication that was imminent.
Without agreement among all three agencies, different rules would apply to different banks, depending on their primary regulator, a situation that could roil the industry.
Brainard echoed concerns put forward by community groups and Democrats that the proposal spearheaded by Otting would focus too much on the dollar amount of how much a bank has invested in poorer areas to determine its CRA grade, rather than relying on local residents' input to determine their specific needs.
“After analyzing ways to use metrics across the board, we concluded that the value of retail services and community development services to a local community do not lend themselves easily to a monetary value metric comparable to the monetary value of loans and investments,” she said.
“The value of these services may vary greatly from community to community,” she added. “It is difficult to monetize this value in a consistent way relative to the value of lending and investment, thus introducing the risk of skewing incentives inadvertently.”
Brainard argued instead for a set of standards that more closely match existing CRA exams — measuring retail lending and services, along with a community development test that applies only to large banks.
In a question-and-answer session after her remarks, Brainard said the Fed board was still deliberating its next steps. She also didn’t commit to adhering to a schedule laid out by Otting, a Trump appointee who has said he hopes to finalize CRA reform by May.
She said most institutions are familiar with CRA and believe it is working well. “So, we don’t have that same kind of sense that there’s a time deadline here,” she said. “What we are focused on is making sure we are true to the core purpose of CRA, and if that takes a little longer to get the necessary input, what matters is the quality of the rulemaking.”
One of the complaints about CRA is that there's not enough hard data to measure its impact, thus making the process of reforming the 1977 law that much more difficult.
Emphasizing the need for more evidence-based analysis of the consequences of any proposal, Brainard said the Fed has developed a database, going back to 2005, that includes the “location, number, and amount of CRA-eligible loans and investments and the ratings associated with each bank's performance.”
She said the Fed hopes to make that database public and would be sharing its analysis.
“That’s the kind of database that I think you need to construct in order to provide the kind of analytical foundations for a major rulemaking so that, again, we can be confident that there wouldn’t be unintended consequences,” she said.
Her approach is similar to Otting's plan in some respects, particularly with regard to its retail lending test, an area where Otting has said the Fed had considerable input. It would look at the distribution of a bank’s loans that go to lower-income borrowers, like the OCC-FDIC proposal, as well as to lower-income neighborhoods within its assessment areas.
“A bank that meets or exceeds both the [low- and moderate-income] borrower and LMI neighborhood thresholds for each of its major product lines would be presumed to have a satisfactory-or-better level of retail lending performance in that assessment area,” she said in her speech of her proposed approach.
But Brainard called for more flexibility in this metric, saying it should be tailored to the needs of the local community, which is “not possible with a uniform benchmark that applies to all banks and all communities.”
She also said the level of required lending should change based on the business cycle, to make sure the regulation doesn’t provide “too little incentive to make good loans during an expansion and incentives to make unsound loans during a downturn.”
Her retail service test would also place particular focus on a bank’s distribution of branches, an element that has less emphasis in the OCC-FDIC proposal.
Brainard said the community development test, which would measure investments by larger banks in their assessment areas, should consider not just loan and investment dollars originated or purchased during the evaluation period but also all community development loans and investments on the bank’s balance sheet.
“Reflecting input from banks and community organizations that patient, committed funding has the greatest effect, this approach avoids the incentives under current practice to provide financing in the form of short-term renewable loans in order to receive CRA credit,” she said.
She also said regulators should give consideration to “all of a bank’s community development activities in a state or territory where it has an assessment area.”
“However, we also want to make sure that these metrics are supplemented with clear, qualitative standards to ensure that small-scale, high-impact community development activities are rewarded, along with a bank’s responsiveness to local needs and priorities,” she added.
“Based on the best available data, we concluded that CRA metrics tailored to local conditions and the different sizes and business models of banks would best serve the credit needs of the communities that are at the heart of the statute,” she said. “This tailored approach using targeted metrics also yielded more consistent and predictable overall ratings than any comprehensive uniform metric.”