The House Financial Services Committee recently held two hearings on the Office of the Comptroller of the Currency’s (OCC) and Federal Deposit Insurance Corporation’s (FDIC) proposed rulemaking to reform the Community Reinvestment Act (CRA). Both hearings — the first with five community groups and the second with the Comptroller of the Currency — appeared to be biased against the proposal and hostile to the comptroller. Rather than focusing on the message of reform, lawmakers and others at these hearings primarily attacked the messenger.
I had the honor of working with both Sen. William Proxmire, the “Father of CRA,” and Comptroller Eugene Ludwig during the 1995 CRA reform process. The most important thing we learned was that a major CRA reform process takes time and a lot of factual input from many stakeholders. It’s important to stay focused and be patient. Here are five things to keep in mind:
The proposal is not the final rule. Many critics, including community groups, journalists and most of the House committee, appeared to view the proposal as the end product of the reform process instead of the beginning. No one — including the heads of the FDIC or OCC — expects that all or even most of what’s proposed will be in the final regulations.
The proposal has many worthwhile ideas, such as the previously proposed 5 percent deposit reinvestment rule, which should result in tens of billions of dollars being reinvested in cities. But, there are many proposed recommendations that should be eliminated or significantly modified.
In fact, there is some support for maintaining existing regulations and modernizing them with the 5 percent deposit reinvestment rule and some of the best proposed ideas — including more clarity on what counts for CRA credit, benefits for banks with outstanding ratings, and focusing on low- and moderate-income borrowers v. areas.
There have been numerous proposed reforms to banking regulations (and even the regulators) in the past several decades. Some of them became regulations and law; others became history, nothing more than roadkill on the rocky road to regulatory reform. Each proposal, however, deserves to be evaluated with meaningful comments based on facts, rather than attacks on the proposal or the person who developed it.
CRA reform takes time. The last major reform discussions began shortly after CRA ratings and performance evaluations became public on July 1, 1990. The OCC spearheaded the first reform proposal in December 1993, and it was followed by a second, revised one in September 1994; the final joint rule was issued in April 1995. It became effective on July 1, 1995, with some provisions starting Jan. 1, 1996, and the remainder taking effect on July 1, 1997 — roughly seven years after the first discussions.
By comparison, the Treasury Department announced the current CRA reform in early 2017 and issued a first formal report in June 2017, so we are relatively early in this process. Because of the importance of getting this right, the formal comment period recently was extended for 30 days, and it should be extended another 30 days.
The Federal Reserve’s position will complicate the process. The fact that the Fed did not sign on to the notice of proposed rulemaking suggests uncertainty about their own reform proposals, if any. Neither the Fed nor the FDIC signed on to the OCC’s August 2018 advanced notice, but the FDIC signed on to the December 2019 notice, most likely with changes that made it palatable to the FDIC. The Fed likewise threw up a roadblock to the December 1993 proposal and did not sign on until July 1995.
If Fed Chairman Jerome Powell really believes what he says about the importance of CRA reform, he should get directly involved in the process instead of delegating it to a board member and making superfluous comments.
We are early in the public comment process. The 1995 CRA reform process involved over 14,000 comment letters, seven public hearings, and comments from over 250 bankers, community groups and local officials. By comparison, the August 2018 advance notice resulted in about 1,500 comments. We have had no public hearings on the current reform process. Thus, there is still much for all stakeholders to do.
CRA reform is becoming a political issue. This is not the bank community reinvestment issue of the early nineties. The current partisan political focus will further lengthen and complicate the reform process. Besides criticizing the comptroller, House members took the rare step of crashing the FDIC board meeting discussing CRA reform to “make sure Trump’s bank regulators know that we’re keeping a close eye on them.”
Both House and Senate Democrats inaccurately have referred to the Community Reinvestment Act as a “foundational civil rights law.” The more that the CRA is portrayed as something that it is not, and the more that its reform is politicized, the entire reform process will become more convoluted and take much longer to complete.
Kenneth H. Thomas, Ph.D., is president of Miami-based Community Development Fund Advisors, LLC. He taught finance at the University of Pennsylvania’s Wharton School for over 40 years, and is the author of “The CRA Handbook” and numerous other publications on the Community Reinvestment Act.