On January 8, 2020, Federal Reserve Board (“FRB”) Governor Lael Brainard delivered remarks on the state of Community Reinvestment Act (“CRA”) reform before an audience at the Urban Institute. As we summarized in a client alert, last month, the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) released a proposed overhaul of the regulations implementing the CRA, which the FRB declined to join. While Governor Brainard’s speech made clear that she was not speaking on behalf of the FRB, her remarks provided insight into FRB decision-making on CRA reform and possible avenues to consensus among the agencies.
In her speech, Governor Brainard referred to an ultimately unsuccessful effort among the three federal banking regulators to produce a single proposal revising the CRA. While the OCC and FDIC have expressed interest in finalizing a rule sometime in 2020, Governor Brainard suggested that a slower approach would be acceptable in order to “get the reforms done right.” She noted that major revisions to the CRA rarely occur, and that stakeholders should carefully evaluate any revisions to ensure that they comport with the core purposes of the statute. She also responded to an audience question by noting that stakeholders are generally satisfied with the current CRA rules, so a rush to revise them is unnecessary.
The FRB has not released a formal proposal revising the CRA, and Governor Brainard declined to say whether one was forthcoming. However, her remarks gave a broad overview of how she would approach revisions to the CRA.
Governor Brainard first described internal FRB’s methodology in formulating a possible approach to CRA reform. According to Governor Brainard, the FRB has compiled and analyzed a large database of banking statistics and CRA ratings from 2005-2017, chiefly drawing on publicly available data, such as retail lending metrics and past CRA ratings. She indicated that the FRB plans to make its analysis of that data available at some point in the future.
Governor Brainard then described a proposed framework that has broad similarities to that contained in the OCC and FDIC proposal. Under both approaches, the distribution of a bank’s retail lending within an assessment area would be evaluated through the lenses of borrowers’ income levels and neighborhoods, its community development activity would be evaluated separately, and the resulting presumptive rating would be adjustable based on performance factors.
However, Governor Brainard’s proposed framework is different from the approach contained in the OCC and FDIC proposal in the following notable respects:
- The OCC and FDIC proposal would assign a bank’s overall rating primarily based on a single ratio that evaluates all CRA activity (the “CRA Evaluation Measure”), whereas the approach Governor Brainard described would assign separate ratings for retail lending and community development activity. It is not clear how or if the approach she described would reconcile those separate ratings into a single bank-level rating.
- The OCC and FDIC proposal would establish quantitative metrics for its evaluations. Governor Brainard voiced a strong belief that qualitative measures are necessary in evaluating retail services and community development activity, and that the FRB’s data show that relying only on quantitative measures can create outcomes that diverge with the aims of the statute.
- The OCC and FDIC proposal would eliminate the limited purpose and wholesale bank designations contained in the current rules, with the result that currently-designated banks would become subject to a retail lending distribution test. The approach Governor Brainard described would maintain these designations and subject designated banks only to a community development test (and not a retail lending distribution test).
- For a bank that receives 50 percent or more of its retail domestic deposits from outside its physical branch footprint, the OCC and FDIC proposal would create additional assessment areas in geographies where it receives 5 percent or more of retail domestic deposits. Governor Brainard did not discuss any changes to the delineation of assessment areas.
- Governor Brainard’s approach would set different performance benchmarks for community development activities in different assessment areas. The OCC and FDIC proposal’s CRA Evaluation Measure would impose uniform ratings benchmarks across all assessment areas.
- The OCC and FDIC proposal would establish a detailed, public list of activities qualifying for CRA credit. Under Governor Brainard’s approach, banks could petition their examiners in advance for a determination of whether activities would qualify for CRA credit, and there is no indication that these determinations would be made public and generally applicable.
- Governor Brainard’s community development test would consider activity outside of the bank’s assessment areas, so long as it is in the same state. The OCC and FDIC proposal’s bank-level CRA Evaluation measure and Community Development Minimum would consider a bank’s activity both within and outside its assessment areas without requiring that activity to be in the same state.
- Under the CRA Evaluation Measure and Community Development Minimum set forth in the OCC and FDIC proposal, a bank would generally receive CRA credit for loans and investments based on the dollar value of the loans or investments held on the bank’s balance sheet, calculated on a monthly average basis. Governor Brainard did not describe whether she would endorse a similar approach in the community development test.
Governor Brainard welcomed public feedback on the approach she described, but did not provide a specific timeline or formal procedures for doing so. Comments on the OCC and FDIC proposal are due March 9, 2020.
Video of Governor Brainard’s remarks is available here. The remarks begin approximately 25 minutes into the video. A transcript of her planned remarks (which does not include the subsequent question-and-answer session) is available here.