Don’t Just “Modernize” Community Reinvestment Act, Repeal It

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On Thursday, financial regulators released a long-awaited reform proposal which would make substantial changes to the implementation and enforcement of the Community Reinvestment Act (CRA). The plan by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), if implemented, would be the most significant update to low-income lending requirements for U.S. banks in a quarter-century.

As interpreted currently, the CRA effectively mandates that banks “open new branches, provide expanded services, and make a variety of community development loans and investments” in low-income areas. Applicable to all FDIC-insured depository institutions, the CRA is overseen by three regulatory bodies which rate banks on their lending practices: the OCC, the FDIC, and the Federal Reserve. While the requirements for banks are often burdensome and impractical, banks take them seriously as regulators use their performance ratings when approving or denying a bank’s request for mergers, acquisitions, and expansions.

Provisions of note in the 239-page proposal that should be lauded include:

  • The requirement that regulators publish a non-exhaustive list of pre-approved CRA activities
  • The inclusion of CRA performance standards which would include the evaluation of retail lending, deposit-taking, and the overall impact of such activities
  • The simplification and increased transparency of CRA performance exams which would eliminate the old system of distinct tests for small, intermediate, and large banks
  • A provision for banks with below $500 million in assets to choose whether to opt into the new CRA regime

The changes above would help banks get the credit they deserve for lending activities which today go unacknowledged, while simultaneously helping “right-size” regulations for banks of various sizes. The OCC and the FDIC should also be applauded for choosing not to impose CRA requirements onto credit unions, a move which would ultimately complicate their operations and impose great costs on their thousands of member-owners.

However, complete elimination of the CRA would be a better outcome. As argued by CEI’s Michelle Minton over a decade ago, the CRA was passed in 1977 under the misguided notion that “banks contributed to the economic decline of inner cities,” and some felt this necessitated federal legislation to correct decades of redlining and thus ensure equal access to lending across communities of all incomes. While the practice of redlining was abhorrent, it has become abundantly clear in recent decades that the CRA has not resulted in higher rates of investment in low-income neighborhoods than would be seen had the law not existed. In fact, there is substantial research to show that the increases in low-income lending in the 1970s and 1980s can better be attributed to state efforts to deregulate intrastate and interstate banking—a policy later codified at the federal level in 1994 under the Riegle-Neal Act. Beyond that, there is evidence to show that the CRA actually contributed to the mortgage meltdown in 2008 and 2009.

Considering all this alongside the fact that the advent of online banking and fintech has greatly democratized access to loans, one is left questioning why the CRA is still in existence.

Interested parties and stakeholders have 60 days to weigh-in once the proposal is published in the Federal Register. The Federal Reserve didn’t sign on to the proposal, and may issue a separate one in the next few weeks.