By: Murray Silverstein and Jacob Boehner
The Trump Administration has plans to facilitate major changes to the regulations implementing the Community Reinvestment Act of 1977 (the “CRA”), which mandates bank lending to poor borrowers. The CRA was originally passed to combat “redlining,” which is the practice of banks drawing a “red line” around certain poor neighborhoods and refusing to lend to individuals living in those neighborhoods. Since the CRA’s passage, it has been utilized to evaluate how banks serve the poor, assessing many factors such as how many loans and investments are made by banks to benefit the poor and how many branches each bank has in poor neighborhoods. This test employs complex formulas to grade each bank, considering a variety of the bank’s activities including mortgage data and loans to build apartments. Where this test results in bad grades, restrictions are placed on the poorly graded bank’s activity, such as constraints on mergers.
A significant part of the CRA exam is to count the number of “community development” loans, services, and investments made by a bank, focusing on benefits to poor individuals where the bank operates. Comptroller of the Currency Joseph Otting has considered expanding the activities falling under the “community development” umbrella to include small business loans. Mr. Otting has discussed other potential changes to the CRA, including revising the test’s grading system as, in the current system, the majority of banks receive a “satisfactory” rating while fewer receive “outstanding” or “unsatisfactory” grades. Treasury Department officials reportedly plan to suggest revisions to the CRA that make this complicated test more transparent and consistent. Mr. Otting expressed his intention to circulate rule changes to regulators within the coming month or so and hopes to make a formal proposal in 2018.
Although the revisions are in the early stages, the Trump administration’s anticipated changes to the CRA are a significant departure from the enforcement of the CRA during the Obama administration, where banks’ CRA grades took hits for a broad range of misconduct and several banks were stripped of “outstanding” CRA ratings. Some bankers were critical of these penalties, arguing that any alleged wrongdoing happened years prior and was since resolved. The CRA has come under even more scrutiny recently, with the Treasury Department, in a statement to CNN Money , referring to the CRA as “outdated” and needing “modernization,” reiterating the sentiments of the American Bankers Association. Last June, during a congressional hearing, Treasury Secretary Steven Mnuchin drew attention to the billions of dollars spent by banks to comply with their CRA obligations and emphasized that these expenditures should truly be used to help poor individuals and not to simply “check the box” in order to satisfy regulators.
Banks believe the CRA should be made more flexible so they can spend more focus and more resources on helping individuals in need and less on “checking boxes” to satisfy bureaucratic requirements implemented by the CRA and its related regulations. Conversely, community groups believe the law should be expanded even further to help low-income communities. Considering the potential revisions indicated by both the Treasury Department and Mr. Otting, it seems likely that the banks will get their wish. Lenders and borrowers alike should stay tuned to see the extent and impact of these changes.
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