I was traveling out of town recently to conduct a training session on the Community Reinvestment Act (CRA) for bankers. At the airport, I heard an exasperated parent telling his toddler, “If you keep playing with that, you will break it.”
It seems that both community groups and bankers have been telling the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) the same thing. If they keep playing with CRA without assessing the impact of their proposed changes, they will break it.
A critical element of any rulemaking is that a federal agency must use data and analysis to assess the impact of its proposed changes to a regulation. So far, based on the analysis of the National Community Reinvestment Coalition, where I work, it appears that the OCC and FDIC have flagrantly violated this fundamental rule.
A CRA regulation essentially establishes an exam for evaluating the extent to which a bank is serving people and communities with low and moderate incomes (LMI). A rigorous exam will motivate increases in lending, investing, and services for LMI areas. While shortcomings exist in the current exams, the public accountability imposed by the exams and accompanying data has motivated banks to provide more than $2 trillion in community development and small business lending in LMI communities since 1996. Federal Reserve research has concluded that home mortgage lending in LMI tracts would drop by up to 20 percent in the absence of CRA. With data like this, common sense would dictate a careful reform proposal that would take pains to avoid harm. But instead of trying to plug the holes in CRA’s examination regime, the agencies propose to turn the system upside down.
CRA exams now use separate performance measures for home, small business, community development lending, investing, and services. The FDIC and OCC thought this was too complex and instead proposed to boil down CRA to one dominant measure. They called this the CRA evaluation measure in their recent proposal. It is also known as the one ratio.
The one ratio would tally the dollar amount of CRA activities and divide it by the dollar amount of deposits. An immediate problem arises: Wouldn’t banks seek to engage in the easiest and largest-scale financing instead of focusing on the variety of activities ranging from home to small business lending that are needed by communities? Exams have had separate measures to make sure banks pursue a variety of activities. Communities, including formerly redlined communities, have a multitude of financing needs that banks must address in any successful comprehensive revitalization effort.
In the fall of 2018, the OCC asked stakeholders in an Advance Notice of Proposed Rulemaking (ANPR) what the public thought of CRA reform ideas, including the one ratio concept. Most of the commenters, including banks and community groups, opposed it. Yet the OCC and FDIC saw fit to make it the dominant measure in their new proposal.
Do the agencies really know what its impact would be? It is not clear in the proposal and some of the narrative is worrisome. For example, writing about smaller banks, the FDIC says:
“If the proposed general performance standards are less stringent for some institutions than the current parameters, the proposed rule could benefit covered institutions by potentially increasing their CRA examination rating. It is difficult to accurately quantify these aspects of the proposed rule with the information currently available to the FDIC.”
This astonishing admission indicates that the agencies do not have a clear sense of whether their proposal would further inflate ratings, thereby leading to stagnant or decreasing levels of loans and investments for LMI communities.
To further understand the potential harm of the one ratio, an analysis must consider how it would interact with other aspects of the proposal. For example, the FDIC and OCC would expand CRA activities to include affordable housing for middle-income families. But doing this will create an incentive to favor middle-income affordable housing over lower-income affordable housing, since it is more profitable to finance middle-income housing. It would be unsurprising for banks to seek the easier and larger deals to meet the one-ratio benchmarks.
The agencies somehow concluded that a continued focus on people and communities with low to moderate incomes was not desirable; as if middle- and upper-income communities were the victims of redlining, not working class people and communities of color. They somehow reached this conclusion despite the historical record of redlining as documented by Richard Rothstein and others, and the extensive amount of research documenting the persistence of racial and income disparities in lending (there has been significant progress in serving formerly redlined communities, but the damage to lending and housing markets due to widespread discrimination will take decades to correct).
The newfound concern for middle-income populations manifests itself in a proposal to redefine affordable housing as housing that primarily or partially benefits middle-income households in high-cost counties (defined as counties in which more than 40 percent of households pay 30 percent of their monthly income for housing). NCRC found that this would apply to 32 counties with 43 million people, or 13 percent of the total United States population. The proposal would cover almost all of metropolitan New York and several large counties in California, including San Diego and Orange. And while it is undisputed that middle-income people are squeezed in these areas, LMI families surely experience the greatest housing cost burdens overall. Moreover, counties in California like Humboldt and Tulare experience widespread housing cost burdens not only because of the high cost of housing, but the persistence of poverty and low incomes. A generous allowance for middle-income housing in these areas would not be the best prescription to mitigate the cost crunch for lower-income households.
Spatial Impacts of the CRA Reform Proposal
The FDIC and OCC’s proposal did not discuss the spatial impacts of their middle-income housing proposal. If the agencies had engaged in data and spatial impact analysis, they would have seen the potential damage of this idea and would have abandoned or at least modified it.
Another wrongheaded FDIC and OCC proposal is to provide CRA credit for financing improvements in sports stadiums in LMI census tracts in Opportunity Zones. Sports stadiums tend to provide short-term construction jobs and then seasonal and low-paid employment. In contrast, successful community revitalization involves more sustained and comprehensive affordable housing, small business development, and community facilities at the neighborhood level. The allure of stadium financing would distract banker attention from the sustained community development financing needed at the neighborhood level. In addition, stadium deals are larger-scale financing, which again would be excellent for pumping up the numerator of the one ratio.
How much of a distraction would stadium financing present? NCRC examined the location of 37 recently constructed or proposed stadiums across the country. Nearly half would fully satisfy the proposed criteria. A further 12 are either in an LMI area or a designated Opportunity Zone, and it is plausible to expect that the CRA criteria could be expanded to include these as well. Moreover, this would not be confined to professional sports stadiums, but could include scores of college, high school, and other sports facilities.
Again, if the agencies had conducted some data analysis, they would have seen the absurdity of this proposal and how it would conflict with the best practices of community development.
CRA is not a toy that we can afford to let be broken. Our communities depend on a vibrant CRA to lead the task of rebuilding and revitalization. We cannot let proposals stand that have not stood the test of rigorous analysis. NCRC will continue to analyze the impacts of the proposal, which clearly the agencies have not done. In addition, we need community voices commenting on the proposal. Community organizations can explain clearly how the one ratio and moving away from a focus on LMI communities would thwart their work in revitalizing communities. Visit the website TreasureCRA to learn more about the agencies’ proposal and how to submit a comment.