Further Comments on Proposed Community Reinvestment Act regulations
I previously posted comments on December 13, 2019 on the Proposed CRA revision by the OCC and the FDIC. I am providing further comments in this posting and I would not rule out additional comments in a future posting. In short, the Proposed CRA revision is that complicated. Also, it lacks a certain intuitive "feel" to it. For example, when the OCC as led by then Comptroller Ludwig revised/revamped CRA in the Clinton years, the measurement guideposts were reasonably easy to understand as heavier weighting towards lending of 50% and 25% weighting towards each of investment and services in reviewing the 100% of CRA activities.
That measurement system had a certain intuitive appeal to it and it was relatively easy to comprehend and I daresay administer although there are many who disagree with me on the administration point.
In connection with the current CRA revision led by Comptroller Otting, there is clearly a great deal of emphasis placed on quantitative measures and less use, or consideration of, qualitative measures and the qualitative impact of a bank's CRA activities. In my view, the Otting proposal makes some significant improvements in the status quo structure of CRA and undoubtedly it will lead to greater investments by banks in CRA qualifying activities. The weaknesses of the current qualified investment test are revealed in the Otting proposal in several areas and the new proposal seeks to bring a "laundry list" of permissible investment activities to the forefront and to improve procedures for banks to obtain confirmation that proposed investments will "count" for CRA credit. No doubt the outcome of this increased transparency and clarification will be an uptick in investments made by banks in the near term and in the longer term which will be granted CRA credit assuming that the Otting CRA proposal is implemented.
There are some fundamental criticisms and flaws in the Otting CRA proposal with respect to the investments qualifying for CRA credit. These include the following:
1. Opportunity zones. It appears that all proposed bank investments in opportunity zones likely will receive CRA credit. The external critics of the Otting proposal are fearful that banks would receive credit for making investments in a sports stadium built in an opportunity zone and they question the merit of allowing CRA credit in that instance. I can see the point of the critics and there is a "bread and circus" aspect to the criticism of building modern day sports palaces to placate the masses. However, in all fairness, the likelihood of numerous new stadiums being built in opportunity zones across the country seems to be an exaggerated concern. Given the other political and economic forces involved with building such stadiums, it hardly seems to be of a great concern that there will be a runaway level of new stadiums being built and chased after by banks with their CRA investments. Nonetheless, in any specific case, it is a fair question to ask whether the impact of the bank investments is stronger through the investment in an opportunity zone stadium deal versus being used to support inner city redevelopment efforts for low income residents.
2. Not quantifying the level of CRA credit if there is a partial benefit from the investment involved. In short, the Otting proposal states that pro rata credit will be given to a bank for an investment that generates a benefit to low and moderate income ("LMI") individuals including if the project only partially benefits LMI individuals. So, for example, if there is a $100 investment but only 40% of the proposed investment project benefits LMI individuals, then the investing bank would receive a pro rata investment credit of $40 out of the $100 investment. One issue with the proposal is that there is no floor or minimum amount stated. Thus, theoretically, there could be a pro rata share of 1% or less attributed under this methodology. That does not seem to be the intent of the proposal and it is not likely to be administered in that fashion, but it is a point requiring further clarification. A second issue is that the Otting proposal proudly lists a "laundry list" of prior bank investments which have received CRA credit. In some instances, it would appear that a pro rata share limitation was applied or should have been applied due to the benefit derived by LMI individuals or others qualifying for CRA credit. The Otting proposal, however, does not consistently list the pro rata limitation--sometimes it is included, but in other instances it likely should have been included but it is missing. This is another point requiring further clarification in connection with the Otting proposal.
3. There are certain infrastructure investments which are very broad in scope and impact and may not be as important to LMI individuals as would more direct neighborhood/community lending or investment. For example, the Otting proposal is referencing various roads, bridges, water facilities, mass transit which are undoubtedly all worthy projects but the impact on LMI individuals may be more attenuated as compared to the general impact in a metro area which may help high income commuters more than LMI commuters and communities.
4. The methodology used in the Otting proposal combines the lending and the investment CRA activities into "one bucket" of qualifying CRA activities and then various quantitative tests are applied to determine what the final CRA rating for the bank should be. There are distribution tests included in the methodology at several levels in the Otting proposal to obligate the banks to perform in a demographic and geographic manner which does not lead to just a few "big" investments being made to pass the CRA test. And, that methodology may be well intentioned but it does make it more difficult to break out the amount of lending and the amount of investment being done by a bank governed by CRA in LMI communities. There are extensive recordkeeping and reporting requirements, but none of those requirements would appear to simplify the ability for a non-regulator to take a "quick look" at a bank's CRA rating and understand if the bank has a balanced approach to providing community development lending and investment in its assessment areas, or according to its strategic plan.
5. Comptroller Otting is human and the proposal would appear to reflect his personal background and experience in some of its policy choices. Otting is from Iowa and was educated in northern Iowa. He presumably is familiar with family farming and rural America, as well as nearby "Indian country" locales. The Otting proposal tilts favorably in several instances towards valuing investments and other community development efforts in Indian country as well as towards investments and lending for family farms and rural America. In a world of limited resources, this is clearly an important policy choice.
Incentives for banks to invest in Indian country may be social goods but that choice may be a trade off and banks may invest less in inner cities or communities of color. The Indian country definition is expected to benefit impoverished or neglected areas but there does not seem to be a clear limitation on supporting casino/entertainment or other recently successful sovereign businesses located on Indian reservation areas. That is a point that requires further clarification in the proposal.
Additionally, there needs to be a broader consideration of whether the additional incentive to invest in such areas is a sensible policy choice. Indeed, there is already a process under the status quo CRA rules for banks to invest for CRA credit in areas outside of their assessment area if the bank is meeting the CRA needs in its assessment area. The bank can gain additional CRA credit for investments in adjacent county areas or elsewhere on a state or regional basis. Indeed, the CRA Q&A is crafted so that the entire U.S. continent could be divided up into 4 regions such as North, South, West and MidWest for making such qualifying investments. The Otting proposal does not attempt to reconcile the existing CRA guidance on obtaining additional CRA credit outside the assessment area of the bank with its proposal for investments in CRA "desert" areas and the related policy incentives supporting such investments.
6. Nixon goes to China move. Otting's proposal expands CRA in some significant ways including with the deposit assessment areas. Hold to the side the question of the feasibility of fintech entities using the deposit assessment areas. What's left is likely the single largest expansion in CRA probably since its inception because CRA did not reflect the scope and range of the national marketplaces facilitated by the credit modernization supported by the Fair Credit Reporting Act ("FCRA"). FCRA created a national credit market in the U.S. and moved the country away from the historic regional credit markets. FCRA is a pivotal change in U.S. consumer credit history, as was the FCRA reauthorization. Again, hold to the side the use of nationwide credit availability in connection with fintech/ecommerce platforms. Instead, focus on the breadth of the expansion of the large regional banks and the large nationwide, "big" banks which conduct business throughout the whole country. As a result of the Otting proposal--led by a Republican who comes from the banking industry--CRA will be expanded to deposit assessment areas that previously large regional banks or nationwide, big banks were not including in their assessment areas. It is likely that the community investment in those deposit assessment areas will increase as a result of the Otting CRA proposal because of its impact on large and big banks. It is less clear, due to the lack of data included in the proposal applying the new quantitative measures to existing banks, how the overall proposal will impact community lending by all types of banks and whether the quantitative measures proposed in the Otting CRA proposal makes it easier, harder or about the same for banks to meet their CRA community activity obligations.
7. Last point. There are some other technical drafting glitches that could be smoothed out in the proposal. Additionally, the idea of the published investment permissibility list and procedural update only being used by industry sparingly seems off base to me and I predict that the demand on agency resources for that endeavor will be significantly higher than is presently understood.
By Tim McTaggart. December 30,2019