In a concerning move, Secretary of the US Treasury, Steven Mnuchin, has announced efforts to “modernize” the Community Reinvestment Act (CRA), potentially weakening the ability of community members and regulators to hold banks accountable.
“CRC appreciates that Treasury staff met with us and listened to our recommendations as they began this process. However, we remain concerned because the proposed report leaves too many questions unanswered. We are not convinced that the regulators share our concerns about the potential negative impact on communities from these proposed changes,” said Paulina Gonzalez, Executive Director of the California Reinvestment Coalition (CRC).
“The Community Reinvestment Act was created in 1977 in response to redlining to ensure that banks meet the credit needs of the communities in which they operate. We need to be certain that Treasury’s modernization efforts don’t gut the CRA’s provisions that address critical community needs that create a more just, equitable, and robust economy,” said Gonzalez.
Since 1996, banks covered by the CRA have invested more than $980 billion in historically disenfranchised neighborhoods. Without a strong CRA, banks simply would not make these investments; CRA’s requirements for community input is what ensures that these investments benefit, rather than harm, low- and moderate-income (LMI) communities. CRA also ensures that banks reinvest deposits from these communities back into those areas. In this era of record wealth inequality, diluting CRA is an upside-down economic approach that takes from the poor and gives to the rich. A recent CRC report showed that banks who responded to an annual survey reported over $31 billion in CRA activity in California in 2016 alone, and that community organizations highly value the policy for its ability to direct resources towards their needs.
The bankers who broke the rules are now the ones in charge of writing the rules.The current administration’s Wall Street-friendly regulators include several former bankers, including US Treasurer Steven Mnuchin, formerly of Goldman Sachs and OneWest Bank, as well as Joseph Otting, current Comptroller of the Currency and formerly of OneWest Bank. OneWest allegedly practiced redlining and had one of the worst CRA records of all banks operating in California according to CRC analysis. Mr. Otting will now be responsible for taking the Treasury’s guidance and writing CRA rules at the OCC.
“The Treasury’s efforts to modernize CRA raise serious questions about the real impetus behind the Treasury’s effort, which recommends making exams more flexible. After all, Secretary Mnuchin’s OneWest bank, under his tenure, was one of the worst performing banks in California and is being investigated for redlining,” said Gonzalez. “It is clear that bankers are now writing the rules in a system where banks already get a pass on bad behavior that does not serve communities.”
Treasury’s recommendations raise a number of questions:
● Treasury wishes to expand the “universe of CRA-eligible activities” which it claims will better align regulations with community needs. However, CRA guidelines already count significant types of activity as CRA-eligible and make it easy for banks to achieve high ratings. In fact, 96% of banks receive a “Satisfactory” or “Outstanding” grade on their CRA exams. Counting more activities may make it easier for banks to score higher while creating little benefit for communities and diluting the impact of CRA.
● Treasury also advocates for increased “clarity and flexibility” on CRA examinations. While CRC does agree that additional clarity is needed in the scoring process, it is concerning when bankers are writing the rules and scoring models by which to score themselves. Treasury addresses the recent OCC update in which discriminatory behavior or other illegal credit practices by a bank do not necessarily lead to downgrading, and recommends a principle they refer to as the “logical nexus” to determine if such behavior should result in downgrading. This response is insufficient; discriminatory behavior by banks should be punished and banks should see the results of such behavior in their CRA scores.
● The recommendations de-emphasize the importance of branches, especially in regards to the Service Test, which assesses a bank’s distribution of branches and services. Treasury wishes to change the Service Test to be more “modernized [and] forward-looking” which would “lessen the relevance of physical branches to all communities, including LMI communities, over time.” This is problematic because LMI communities already have less access to banking services and are more likely to be unbanked or underbanked. It is also concerning since CRA assessment areas are determined by branch locations, meaning that banks with fewer branches, and thus fewer assessment areas, will have less obligation to meet community credit needs.
Treasury’s recommendations discuss a number of points that advocates, including CRC, have been pushing for many years, including:
● Banks should have a CRA obligation in all areas where they accept deposits and have substantial business, regardless of whether that is within the bank’s branch footprint. Treasury’s recommendations allow for banks to receive extra CRA credit for investments outside of this footprint. However, CRC believes that banks must be required to fully meet community credit needs in those places as well, and be evaluated on this activity.
● Designation of more rural communities as full scope areas, rather than limited scope review will result in greater reinvestment in non-urban areas. CRA implementation should not allow banks to disregard rural communities. This point is touched on in Treasury’s report, but no recommendation is made.
● Measurement of CRA activity should be based more on clear and transparent metrics. CRC advocates for clear benchmarks for CRA performance, tied to a percentage of deposits devoted to reinvestment activity on an annual basis.
“This move is just another way in which the Trump Administration is trying to deregulate Wall Street at the expense of Main Street. CRA has resulted in billions of dollars invested in communities, homeownership dreams made possible in historically underserved communities, the growth of small businesses and local employment, and bank branches opened in unbanked areas,” says Gonzalez. “At this time, we should be seeking to strengthen the CRA, not dilute its regulatory powers.”