Tweaks to CRA Q&A Document Miss the Larger Picture

Posted by Josh Silver on September 23, 2016

During the dog days of summer this July, the federal bank agencies decided to quietly bunt instead of swing for the fences when it came to the Community Reinvestment Act (CRA). The agencies made changes to an interagency Question and Answer (Q&A) document that were intended to address various unresolved issues such as the importance of bank branches and how to assess bank delivery of basic services. While the agencies provided some useful answers, they once again fell short of making long-needed reforms to CRA.

Three federal agencies–the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency–collaborate on developing and refining the interagency Q&A document. The Q&A document interprets the CRA regulation and explains to the public, banks, and CRA examiners how various aspects of the regulation are supposed to be implemented. By its very nature as an implementation document, the Q&A is useful but cannot be a tool used for far-ranging reforms to CRA. For example, it can explain the relative importance of various criteria of the service test of the CRA exam but it cannot change the criteria of the service test. Only changes to the regulation itself can change the criteria.

The service test for large banks assesses the quantity and quality of branches, deposit accounts, and other basic banking services offered to low- and moderate-income borrowers and communities. Two important criteria on the service test are the distribution of branches by income level of census tract and the availability and effectiveness of alternative systems for delivering services, such as ATMs and mobile banking. Two years ago, the agencies proposed changes to the Q&A that addressed the importance of these two criteria. After an outpouring of community group comments, the agencies reiterated that they will place primary importance on the number and percentage of bank branches in low- and moderate-income areas. The agencies correctly recognized that branches remain the basic means by which low- and moderate-income customers open accounts and obtain various loans such as home purchase and small business loans.

Regarding alternative delivery systems, the agencies adopted a new Q&A describing new measures evaluating the effectiveness of these systems. The measures include ease of access (particularly for physically challenged customers), the ease of use, and the rate of adoption and use. This suggests that more quantitative measures such as how many low- and moderate-income customers actually use the alternative systems and branches will be adopted in exams. However, the proof will be in the proverbial pudding to see how CRA examiners actually implement this new Q&A. The instructions to examiners allow too much discretion by saying that examiners will consider any information a bank provides, such as data on customer usage. This is a suggestion, not a mandate to either banks or examiners.

Likewise, another Q&A provides more detail about effective retail banking services. The Q&A provides a list of services such as low-cost deposit accounts, low-cost check cashing services, and reasonably priced remittance services. The emphasis on cost is important because banks need to be held accountable for offering affordable services so that they move away from abusive overdraft and other fees. Yet, the same question remains regarding the extent to which examiners will require banks to provide data on the number and cost of retail services offered to low- and moderate-income customers. Often, the service test on CRA exams will mention the existence of basic banking accounts but will have little data on the usage of the accounts or their affordability. This contributes to CRA grade inflation.

There are a number of other new and useful Q&As, including ones designed to encourage banks to make small dollar loans that are alternatives to high-cost payday loans, finance economic development activities that create good paying jobs, finance renewable energy and energy efficiency improvements that reduce costs for lower income households, and finance broadband internet access in rural areas. But by focusing on these new Q&As, the agencies continue to dodge the most pressing CRA issues needing reform.

In 2010, the agencies held public hearings and asked a series of questions indicating their intention to undertake significant reform. The agencies said the purpose of the hearings was to consider “how to update the regulations to reflect changes in the financial services industry [and] changes in how banking services are delivered to consumers…. The agencies also want to ensure that the CRA remains effective for encouraging institutions to meet the credit needs of communities.”

If the agencies believe that service delivery is changing, why wouldn’t they mandate more data collection and analysis of the number and cost of basic bank accounts, and how many of these accounts are delivered through traditional branches and alternative delivery systems? This way, the performance of banks with a focus on branches versus those more invested in alternative delivery systems can be compared rigorously. Also, the data could be used for more rigorous CRA exams. It is NCRC’s belief that bank branches remain vital for delivering services to low- and moderate-income customers, but why not put this to the test by collecting more and better data?

Better data is necessary but not sufficient for taking care of CRA grade inflation. The grading system itself also needs reform. For the last several years, 98 to 99 percent of banks have passed their CRA exams on an annual basis. The biggest problem may not be the percentage of banks that get “Outstanding” ratings but that 90 percent of banks get “Satisfactory” ratings. If the agencies introduced one more rating such as “Low Satisfactory,” it is likely that the 90 percent bucket would be split up, compelling a substantial portion of banks no longer receiving a “Satisfactory” to improve their performance. NCRC has also proposed assigning a range of points to each rating. Even if the agencies did not adopt a “Low Satisfactory” rating, the public could at least tell if a particular bank was at the low end of “Satisfactory,” as the bank would be on the low end of the range of points in the “Satisfactory” rating category.

A single blog post cannot describe the other large number of issues that the agencies have failed to address over the years, including the geographical areas on CRA exams and whether mortgage company affiliates of banks must be automatically included on CRA exams. While the Q&A changes have some positive aspects, incrementalism is no longer sufficient. The agencies need to discard their timidity and to take bold action to update CRA. Advocates will need to hold the agencies accountable.

(Photo credit: Makia Minich, via flickr, CC BY-SA 2.0)

About the author more »

Josh B. Silver is a senior advisor at NCRC, where he produces white papers on the Community Reinvestment Act and fair lending policy and issues. He also serves as an expert on affordable housing and community reinvestment. He returned to NCRC after serving as a development manager engaged in fundraising and research at Manna, Inc., a housing nonprofit developer and counseling agency serving the District of Columbia. He also previously served as Vice President of Research and Policy at NCRC for 19 years. In that capacity, Mr. Silver developed NCRC’s policy positions, produced various research studies, engaged in proposal writing and fundraising, and supervised a staff of research and policy analysts. He has written NCRC testimony submitted to Congress on topics including financial modernization, predatory lending, and the effectiveness of the Community Reinvestment Act (CRA) as well as numerous comment letters to federal banking agencies on subjects ranging from the merger application process and the content and accuracy of home and small business data. Prior to NCRC, Mr. Silver worked at the Urban Institute for five years, where he specialized in housing market analysis and program evaluation. He holds a Master’s degree in public affairs from the Lyndon Johnson School of Public Affairs at the University of Texas in Austin.

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