Reconceiving the Community Reinvestment Act

August 1, 2019


An unfavorable Community Reinvestment Act (CRA) rating from the Federal Reserve Bank of Atlanta led to improved operations at BBVA (formerly BBVA Compass Bank).

The year was 2013, and the Atlanta Fed was evaluating the Alabama-based bank's performance with the CRA, a 1977 law intended to encourage banks to meet the credit needs of local communities, including low- and moderate-income communities, while remaining consistent with safe and sound operations. Concerned about low levels of community development loans and services, the Atlanta Fed designated BBVA as "Needs to Improve" (NTI), a designation not often used.

BBVA responded by stepping up its home mortgage and small business lending along with its community development activities. It pledged $11 billion to aid lower-income communities in its assessment areas. It bolstered its staff in an effort to better understand the credit needs of the neighborhoods it serves, established relationships with local community development financial institutions, boosted lending to small businesses, and provided tax credits and construction loans to support housing for low-income families and veterans.

The changes made a difference. During its most recent examination period, covering the years 2015 to 2017, the Atlanta Fed rated BBVA Compass as "Outstanding," citing the bank's responsiveness to credit needs and loans made to borrowers of varying income levels and businesses of different sizes.

The roots of the CRA

The federal law was designed to prevent illegal redlining and make loans more accessible to poorer communities. Three regulatory organizations—the Office of Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve—have the responsibility to periodically review banks to ensure that they are meeting their obligations under the CRA.

As banking has evolved, calls for modernizing the 42-year-old law have increased, and regulators have begun working to align the law with a changing industry. The OCC sought public comment on CRA reform last year, resulting in more than 1,500 responses. In mid-June, the Fed published a report on nationwide roundtable discussions it held to hear from stakeholders including bankers and community groups on potential revisions to the law. What shape CRA reform might take, and what its effects on banking might be, is an ongoing discussion.

With the dramatic changes over the years in how banks deliver financial services, any CRA overhaul will acknowledge the different ways that banks serve customers and the variety of business models firms use, said Jessica Farr, a Nashville-based subject matter expert on the consumer affairs staff of the Atlanta Fed's Supervision, Regulation, and Credit Division. "The way we transact financial services has changed so much," said Farr, who is part of the Federal Reserve Board's working group that is contributing to the modernization efforts.

The current CRA modernization effort could produce clarity on a number of fronts, Farr said. The banking industry, for example, has cited a need for more precise information and certainty on expectations for CRA reviews, including what will qualify as CRA activities.

Also, the forms of banking are evolving, Farr said. For instance, interstate banking wasn't allowed when the law was passed, and online and digital banking didn't exist. "The modernization process needs to account for these changes, and specifically consider how these changes affect how and where banks are conducting their business and the definition of their assessment areas," Farr said.

Mapping the geography of reinvestment

Current CRA regulations define a bank's geographic assessment area as one that includes the main office, branches, and deposit-taking automated teller machines, and any regions where the institution has had substantial loan activity, and low- and moderate-income geographies must be included in the assessment area. Many stakeholders would like to see the assessment area definition updated so that it not only includes a bank's physical location, but also where it is capturing significant deposits or making loans through digital channels.

Banks would like to receive credit from regulators for performing CRA-qualified community development work that currently might be considered outside their assessment areas, Farr adds. She notes that in regions like the Mississippi Delta region—an impoverished area that could benefit from community development investment—few banks have both a physical presence in the region and significant resources for CRA-related activities. The CRA reform effort could provide incentives for banks to engage in communities that have significant needs even if such involvement is technically outside the banks' current areas of responsibility, she said. "It's about revising the assessment area and determining where activities count."

The Fed noted in the recent report on the nationwide roundtables that some stakeholders want to expand the CRA to apply to credit unions, insurance companies, mortgage brokers, and certain institutions that deal with consumers but are not currently regulated.

An eye on rural communities

Another potential area of focus in CRA modernization involves ensuring that rural areas aren't overlooked, said Jared Yarsevich, an examiner with the Supervision, Regulation, and Credit Division's consumer affairs team at the Atlanta Fed. Rural communities can have particular needs that limit the effectiveness of typical community development efforts.

"The rural divide is a problem," Yarsevich said. "The CRA doesn't highly incentivize banks to make loans in the rural areas. Where the CRA regulation doesn't provide that incentive, we actually see less activity," he said.

Any potential focus on rural markets will have implications for the Atlanta Fed's coverage area, which includes Georgia, Alabama, and Florida and parts of Mississippi, Tennessee, and Louisiana, said Rachel Webster, who heads a team of bank examiners at the Atlanta Fed. She added that cities such as Birmingham, Atlanta, Nashville, and Miami tend to get more community development investment than less populous—and poorer—areas in the region do. "The [lower- and middle-income] constituency is there in those rural markets, and they tend to not get the same level of attention for community development from the banks as the large markets do," Webster added.

In Fed public roundtables, community groups stressed the importance of physical branches to rural areas and people with low and moderate incomes. "Many community groups urged the regulators to discourage banks from only using mobile and online banking as a means to reach underserved populations," due to the lack of reliable cellular or internet access, the Fed's report stated.

The possibility of using a single metric to measure bank performance has also been raised in the CRA reform debate. Although a metric-based approach could add clarity, a uniform and unvarying approach could limit the ways banks tailor their approaches to meet the credit needs of diverse markets, Yarsevich said.

Farr said CRA reform needs to be the result of a well-researched and thought-out effort, and she added this process will likely take some time.

"People are pretty clear on what the issues are, but the potential solutions are vast," Farr said. "There really need to be time and commitment of resources to try to understand the best possible solution so that we make sure that whatever we come up with is not diluting the CRA and is not hurting local communities."

photo of Karen Jacobs
Karen Jacobs

Staff writer for Economy Matters

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