Rep. Meeks and Colleagues Urge Federal Banking Agencies to Reform Community Reinvestment Act Guidance
Rep. Meeks and Colleagues Urge Federal Banking Agencies to Reform Community Reinvestment Act Guidance
Washington, D.C.— This week, senior Member of the House Financial Services Committee, Congressman Gregory W. Meeks (NY-05), led nearly 60 Democratic Members of the Congressional Black Caucus and the House Financial Services Committee on a letter (below) that urged the federal banking agencies to update their Community Reinvestment Act (CRA) guidance to comport with changes in the financial services industry.
The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the “federal banking agencies”) are currently undergoing a review pursuant to the Economic Growth and Regulatory Paperwork Reduction Act (“EGRPRA”) to identify outdated rules and regulations. Mr. Meeks’ letter recommends modernizing the current CRA regulatory framework, to increase access to credit in low- and moderate-income communities
“In the more than 40 years since the CRA was enacted, banks have changed significantly their provision of financial services to their customers, especially those in low- and moderate-income communities,” Congressman Gregory W. Meeks said. “That is why it is important for regulators to update and reform how the CRA is enforced. In doing so, regulators must ensure that this important law adequately serves low- and moderate-income communities, providing them with access to capital.”
The letter follows a June meeting Rep. Meeks had with U.S. Comptroller of the Currency Thomas J. Curry. Rep. Meeks and the Comptroller toured downtown Jamaica, Queens and observed ongoing CRA-related investment projects. They also spoke to community bankers. During the tour, both Rep. Meeks and the Comptroller broadly agreed that there have been significant changes in the banking sector since the CRA was enacted and that its framework needs to be modernized.
September 30, 2016
The Honorable Janet L. Yellen The Honorable Thomas J. Curry
Chair Comptroller of the Currency
Board of Governors of the Federal Reserve Office of the Comptroller of the
Constitution Avenue, NW 400 7th Street, SW
Washington, DC 20551 Washington, DC 20219
The Honorable Martin J. Gruenberg
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Dear Chair Yellen, Comptroller Curry and Chair Gruenberg:
As you review the substantial public feedback on the Community Reinvestment Act (CRA) as a part of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) process and consider additional upcoming guidance through your Interagency Questions & Answers Regarding Community Reinvestment, we wanted to express our concerns about the enforcement of CRA and urge you to undertake a broader modernization of the CRA regulations in order to improve credit access in low- and moderate-income communities.
The anti-discriminatory and fair lending requirements in U.S. law alone are insufficient to address the disparity of financial opportunity in underserved communities across the country. The affirmative obligation in CRA is intended to be broader. Under CRA, “regulated financial institutions have continuing and affirmative obligations to help meet the credit needs of the local communities in which they are chartered” and those obligations are to be met “consistent with the safe and sound operations of such institutions.” CRA requires banks to consistently and continually reach out and serve creditworthy borrowers and low- and moderate-income communities.
If it were enforced as intended, CRA would be a more powerful incentive for the nation’s banks to serve underserved communities across the country. The sizable segments of U.S. households going unbanked and under-banked and relying on alternative financial services; the wide swaths of communities in the U.S. that lack adequate small business lending; and the enforcement actions by the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) exposing on-going “redlining” all highlight the weaknesses in the CRA and its enforcement, including the CRA rating of banks.
The Problem of CRA Grade Inflation
Over 98 percent of banks examined by federal examiners from 2012 to 2014 received a passing grade on their CRA exams. By comparison, in the 1990s – a period of significant investment in low- and moderate-income communities – many more banks failed. When ratings first became public in 1990, around 10 percent of banks failed their CRA exams. During the first five years of the public availability of CRA ratings, more than five percent of banks failed their CRA exams every year. That number has steadily trended downward.
While adding more ratings might be an action Congress needs to take, we ask that you make public the point scale on CRA exams and that you reform the point scale. The current point scale of 1 to 24 does not make much sense and should be replaced by a point scale of 1 to 100, which is more intuitive. Publicly releasing the points awarded to banks would provide more nuance to the ratings, would help combat CRA grade inflation, and would hold banks more publicly accountable.
CRA Assessment Area Reform
As more and more banking occurs through non-branch means, including online or through correspondent lenders, the current assessment area definition based on bank branches no longer truly reflects where a bank does business. As a result, more and more lending is occurring outside banks’ CRA assessment areas. We therefore urge you to undertake meaningful assessment area reform to ensure that a bank’s CRA obligation does not exclude communities where banks have significant operations without physical branches.
An alternative to delineating new assessment areas would be to examine retail lending in areas without branches, and where lending is of a high volume. If the lending performance were worse outside of these assessment areas than inside the areas, the rating on the CRA exam would be downgraded. Conversely, if retail lending performance were better outside of the assessment areas, the rating could be upgraded.
Currently, banks receive favorable consideration for community development lending and investing outside of assessment areas, but there is no consideration (positive or negative) for retail lending outside of assessment areas. A consideration of retail lending outside of assessment areas should be undertaken by CRA examiners to more accurately assess bank CRA performance.
Improving the CRA Service Test
The reliance on high-cost alternative financial services in low- and moderate income communities, in our view, highlights enforcement weaknesses of CRA’s service test, which is designed to ensure that bank branches provide basic banking services. In fact, the CRA service test is often the grade-inflator on bank examinations. We believe that the CRA service test should be improved to:
o Enhance the collection of data on the number and percent of deposit accounts and basic banking services that are offered to low- and moderate-income customers;
o Increase the rigor of its examination of branching in low- and moderate-income communities, and give negative marks on the service test in assessment areas for banks that mainly pull out of low- and moderate-income neighborhoods through branch closures when no viable alternative service delivery method exists there;
o Examine for loss mitigation practices, particularly with the expiration HAMP and HARP;
o Encourage creativity and innovation among financial institutions in serving low-and moderate-income areas to actually deliver products as verified through CRA exams.
Public Benefits Claimed by Banks in Mergers and Acquisitions
For 50 years, the law has required federal regulators to consider the public’s interest when approving bank mergers and acquisitions. Both the Bank Holding Company Act and the Bank Merger Act require regulators to consider the “the convenience and needs of the community to be served.” We urge you to assess if mergers provide public benefits beyond the gains for financial institutions through increased profits and market power. If mergers only benefit financial companies while devastating communities through plummeting loan levels, branch closures, and increased prices, then society has been made worse off since inequality will increase, employment will decrease, and economic activity in communities will be depressed.
The only way to assess the potential public benefits of a merger is through a specific and concrete plan described in the bank’s application regarding future levels of lending, investments, and services in low- and moderate-income communities. We applaud the Office of the Comptroller of the Currency for recently issuing conditional merger approvals requiring the public review and input of CRA plans outlining specific public benefits. The other agencies should follow suit and an interagency template for public benefit or CRA plans should be developed.
In conclusion, we ask you to reexamine your enforcement practices around CRA and improve them in all of these aspects. We believe that these improvements would go a long way in ensuring that CRA remains a powerful incentive for the nation’s banks to serve underserved communities across the country.
The following Members of the Congressional Black Caucus and the House Financial Services Committee signed onto the letter: Reps. Gregory W. Meeks, Maxine Waters, Jan Schakowsky, Juan Vargas, Frederica S. Wilson, G. K. Butterfield, Eleanor Holmes Norton, Bobby L. Rush, Bonnie Watson Coleman, Frank Pallone Jr., Louise M. Slaughter, Joseph P. Kennedy III, Donna F. Edwards, Charles B. Rangel, John C. Carney Jr., Joseph Crowley, José E. Serrano, Stacey Plaskett, Al Green, Eddie Bernice Johnson, Michael M. Honda, Cedric Richmond, Robert C. “Bobby” Scott, Gwen Moore, Elijah E. Cummings, Hakeem Jeffries, Donald M. Payne Jr., Mark Pocan, Bill Pascrell Jr., Bennie G. Thompson, Sheila Jackson Lee, Marcy Kaptur, Corrine Brown, Bill Foster, Eliot L. Engel, William “Lacy” Clay Jr., Emanuel Cleaver, Yvette D. Clarke, Alma Adams, Karen Bass, Henry C. “Hank” Johnson Jr., Sanford D. Bishop Jr., Marcia L. Fudge, Keith Ellison, Carolyn B. Maloney, Nydia M. Velázquez, Ed Perlmutter, Michael E. Capuano, Joyce Beatty, Terri A. Sewell, Rubén Hinojosa, Daniel T. Kildee, Danny K. Davis, Alcee L. Hastings, Robin Kelly, James E. Clyburn, John Conyers Jr., Stephen F. Lynch, Alan Lowenthal, and Luis V. Gutiérrez.
 2013 FDIC National Survey of Unbanked and Underbanked Households, FDIC (2014)
 Small Business Lending Deserts & Oases, NCRC (September 2014); Home Mortgage and Small Business Lending in Baltimore and Surrounding Areas, NCRC (November 2015);
 CFPB and DOJ ordered Hudson City Savings Bank to pay $27 million for discriminatory redlining practices after the bank excluded most majority-Black-and-Hispanic neighborhoods from its’ CRA assessment areas. Hudson City had a Satisfactory CRA Rating; Evans Bancorp agreed to $825,000 to mortgage redlining lawsuit brought by the New York Attorney General. Evans Bancorp had a Satisfactory CRA Rating.
 How Well Are Regulators Evaluating Banks Under the Community Reinvestment Act? NCRC (May 2015).
 The Community Reinvestment Act: 30 Years of Wealth Building and What We Must Do to Finish the Job, NCRC (2009)
 The CRA Within A Changing Financial Landscape, Federal Reserve Banks of San Francisco and Boston (2007).
 Creating a Scorecard for the CRA Service Test: Strengthening Basic Banking Services under the Community Reinvestment Act, Center for Community Capital, University of North Carolina. (2001). Measuring the Provision of Banking Services for the Underbanked: Recommendations for a More Effective Community Reinvestment Act Service Test, Woodstock Institute (March 2007).
 “In every case, the responsible agency shall take into consideration…the convenience and needs of the community to be served.” 12 U.S.C. 1283(c)(5)(B). Anticompetitive effects must be “…clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.” 12 U.S.C. 1842(c)(2). See more at: Protecting the Public’s Interests: A Consumer-Focused Reassessment of the Standard for Bank Mergers and Acquisitions, Banking Law Journal, Vol. 130, No. 4, April 2013.