Divisions Between Bank Regulators Over Fair-Lending Revamp Highlight the Need for Outright Repeal

Despite hesitation from the Federal Reserve, the Office of the Comptroller of the Currency (OCC) has made clear that they plan to push forward with their revamp of the Community Reinvestment Act (CRA). The plan which was jointly proposed with the Federal Deposit Insurance Corporation (FDIC) late last year, if implemented, would be the most significant update to low-income lending rules in nearly a quarter-century.

Talking to reporters yesterday, Comptroller Joseph Otting defended the OCC and FDIC’s proposal, noting that it “takes into account 18 months of work and 18 months of feedback from people on how to structure this.” Otting’s remarks come in response to a speech offered earlier this month by Obama-appointed Federal Reserve Governor Lael Brainard where she appeared to implicitly criticize the proposal, arguing that any revision to the CRA should be “tailored to banks of different sizes and business strategies” – an implication that the OCC/FDIC proposal fails to do so.

On the contrary, the OCC/FDIC proposal would do much to “right-size” regulations for banks of varying sizes as it would require regulators to publish a non-exhaustive list of pre-approved CRA activities. By delineating these activities, a bank of limited means can better shape their business around practices that will help them more easily meet their CRA lending obligations. It would also change CRA performance standards to evaluate retail lending, deposit-taking, and the impact of these activities, which would give credit to small banks that might not be able to do as much as a big bank with more resources. Beyond this, the proposal even includes a provision for banks below $500 million in assets to choose whether or not they want to opt into this new CRA regime. Well-tailored regulation, no?

Besides Brainard’s unfounded criticism of the proposal, her indication that the Fed may move forward with a proposal of their own is concerning for a number of reasons. Firstly, it may create a scenario where there are two sets of CRA regulations – one for banks regulated by the OCC or FDIC and those regulated by the Fed. This would only further complicate compliance to the law, something CRA reform champions were hoping to improve upon in their efforts. Additionally, this whole situation gives the impression that one single member of the Fed is dictating the entire way in which the central bank chooses to weigh-in on this issue. While Brainard serves on the Fed’s Committee on Consumer and Community Affairs, she isn’t the Chair of the Committee, Vice Chair for Supervision, or let alone Chairman of the Fed itself.

Taking all this into account, while the OCC/FDIC proposal would do much to better the CRA, it remains the case that we’d be better off without it. As past CEI research has shown, “the Community Reinvestment Act does not appear to have had any positive effect on lending to residents of LMI neighborhoods” and that “if anything, LMI neighborhoods have too much access to the wrong kind of credit, a problem that the CRA has helped exacerbate.” It isn’t 1977 anymore, redlining doesn’t exist today, and there remains substantial evidence to show that the CRA has actually had a negative effect on the poorer communities it was meant to help. This political showdown between bank regulators shows us that it’s time to get government out of this entirely and instead leave banking and lending to the free market.

Here’s a line from 1995 by the late, great William Niskanen that remains as true today as it was then: “Don’t try to fix the Community Reinvestment Act. It can’t be done. Repeal it.”