The Fed’s ‘mission creep’ on community reinvestment is unwise

The Fed was criticized recently for “mission creep” by engaging in research on “social policy topics” such as climate change and racial justice, reflecting political and normative views of unelected officials in what is supposed to be an independent government agency.  

That research is nothing compared to their recent Advance Notice on Proposed Rulemaking (ANPR) on the Community Reinvestment Act (CRA), designed to benefit low- and moderate-Income areas and households. Instead of focusing on their stated mission of modernizing the CRA for internet banking, they proposed a complex and costly overhaul that would result in reduced community development activities and an unnecessary bank regulatory burden. 

Banks with 98 percent CRA passing ratings and communities with $500 billion of annual CRA benefits are doing well with the existing regulations, although most everyone agrees these regs need to be updated to account for branchless banks. It’s simple: The CRA needs a tune-up, not a massive overhaul. 

CRA mission creep also was evident in the Office of the Comptroller of the Currency’s (OCC) Final Rule on CRA, contrary to the modernization purpose of both that agency and its parent, the Treasury Department. Although the OCC formulated even more complex and costly CRA rules, at least they came up with the correct modernization fix.

It is based on a simple deposit reinvestment rule requiring banks to have a CRA responsibility in distant markets sourcing 5 percent or more of deposits. This is totally consistent with the intent and middle name of the Community Reinvestment Act. 

The giant credit card, internet and fin-tech banks that would be impacted by this rule cleverly convinced friendly industry and community groups that it would increase CRA “hot spots” to the disadvantage of CRA “deserts,” since most of their deposits come from metro areas.  

This is a blatant misrepresentation of this rule, which requires deposits from rich neighborhoods (or hot spots) in big cities to be reinvested in poor neighborhoods (or deserts) in those same cities. Call it a “Robin Hood rule,” where deposits from the rich in big cities benefit the poor. 

Critics of this rule likewise ignore the fact that there are hundreds of CRA deserts in America’s big cities. Rural areas represent 97 percent of our land area but just 20 percent of the U.S. population, so most lower-income households, including people of color, live in cities rather than rural areas.

For example, the tens of billions of dollars in deposits coming from South Florida’s affluent hot spots such as Coral Gables and Pinecrest will be reinvested in its deserts such as Liberty City and Little Haiti. Who could argue with such needed reinvestment, other than branchless banks and their home states such as Delaware, South Dakota and Utah currently benefiting from South Florida’s deposits?

Branchless banks also disingenuously cited a data burden, even though they all precisely geocode deposits down to the zip code and even smaller level. Deposits are the raw material of banking, and all good bankers know from where their deposits come. 

The mission-creeping Fed, apparently influenced by big branchless banks, suggested they could place their CRA benefits anywhere in the nation, which is totally inconsistent with community reinvestment, or perhaps where they make loans, which could encourage bad lending habits.

Many of these same big branchless banks take advantage of the self-regulating strategic plan loophole, where they concoct their own underachieving goals for an “outstanding” rating. They likewise convinced industry groups to not only defend but further liberalize this “get out of CRA jail free” card. While most community groups complain about “CRA grade inflation,” few have criticized strategic plans, with roughly three times the percentage of “outstanding” ratings.

The industry was responsible for just 10 percent of the 615 comments to the Fed’s September 2020 ANPR, compared to about 22 percent of the 1,500 comments to the OCC’s August 2018 ANPR. That’s about 0.8 comments per Fed-regulated bank for its 120-day comment period v. nearly twice the number, or 1.4, per OCC-regulated bank for its 75-day ANPR comment period.  Could CRA reform fatigue be setting in?

Most community groups had serious issues with former bankers appointed by former President Trump to head the Treasury and OCC and therefore preferred the Fed’s proposal over that of the OCC. Instead of this binary view, the preferred approach is an independent cost-benefit analysis that most likely would conclude that a radical overhaul of CRA is unnecessary.

Most community groups failed to comment on the significant reduction in community development resulting from the Fed’s proposal to eliminate intermediate small banks and substantially increase asset size thresholds. The industry typically pushes the CRA envelope to increase the number of banks safe-harbored with the relatively easy small-bank lending test, which has no community development requirement.

Community groups, with the Fed’s implicit encouragement, were most vocal insisting that the CRA be expanded to include race, rather than its historic low- and moderate-income focus. This was not a key issue with the OCC’s ANPR, which was before recent incidents across the country highlighting racial discrimination and injustice.

Virtually all commenters agree on the need for interagency CRA reform. Interagency disagreement, however, may be better than agreement on an unnecessary major overhaul. This suggests the Federal Deposit Insurance Corporation (FDIC) got it right by passing on CRA reform for the time being. They are wisely having banks focus on rebuilding communities from the pandemic-related recession with Paycheck Protection Program loans, instead of spending time and money learning a new and complex CRA infrastructure.

I am hopeful the Biden administration and Congress will take a fresh, objective look at the CRA and encourage regulators, especially the new comptroller, to agree to a “CRA reform lite” package. This optimal reform would maintain status quo but modernize the program with the 5 percent deposit rule and improve it with the best Fed and OCC ideas, such as a list of eligible community development activities. 

The Fed has enough on its plate with America’s economic recovery and should avoid mission creep, especially when it potentially results in a costly, complex and unnecessary overhaul of the CRA. They are one of the biggest, most powerful vehicles inside the beltway and should stay in their lane.

Kenneth H. Thomas, Ph.D., president of Miami-based Community Development Fund Advisors, LLC, taught finance at the University of Pennsylvania’s Wharton School for over 40 years. He is the author of “The CRA Handbook.”