Banking & Finance  April 1, 2020

Regulation changes draw mixed reviews

The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency have proposed changes to the Community Reinvestment Act that are getting mixed reviews from the organizations governed by the document.

The FDIC and OCC hope that the proposed changes will increase bank activity in low- and moderate-income communities where there is a huge need for lending and banking services. They also clarify what qualifies for credit under the CRA, enabling banks and their partners to better implement reinvestment activities that can benefit communities.

Don Childears

“I know the reaction to the proposal has been mixed. A little bit of that comes from the fact that the Fed [Federal Reserve Bank] didn’t join the comptroller and FDIC in making the proposal. It has slightly different views,” said Don Childears, CEO of the Colorado Bankers Association.

SPONSORED CONTENT

Solar Operations and Maintenance for Commercial Properties

One key qualification to consider when selecting a solar partner to install your system is whether they have an Operations and Maintenance (O&M) or service department. Since solar is a long-term asset with an expected lifecycle of 30 plus years, ongoing O&M should be considered up front. A trusted O&M partner will maximize your system’s energy output and therefor the return on your investment.

The Fed has been mum about its reasons for not joining the other two organizations in updating the CRA but has said it is watching the comments from interested parties closely.

Sean Doherty, executive director of Loveland-based Impact Development Fund, a community development financial institution, said he isn’t sure how the proposed changes will work since only two out of the three regulatory agencies are adopting them.

“I don’t see that as workable. You can’t have one agency monitoring and scoring the CRA vastly different than the two others,” he said. “It is an impossible state of affairs. What gets lost in all of this is that everyone, absolutely everyone, understands and, prior to this end result, agreed that the CRA regulation had to change. It is way too subjective and way too labor intensive for everyone involved. Everyone agreed on it.”

The Community Reinvestment Act was enacted in 1977. Its intent was to encourage depository institutions to help meet the credit needs of low- and moderate-income neighborhoods, said Childears. That could come in the form of charitable contributions to nonprofits or in the form of actual investments, such as affordable housing projects.

“The bank will say, we’ll buy the bonds this project is issuing so it has money to build this building,” he said. The project will then be paid off through rents over time.

The CRA has been updated and amended over time. What used to be one page of paperwork now requires a team of people dedicated to that function “making sure the bank does a good job with those groups and documenting it to the satisfaction of the regulators,” he said. Lending institutions have to go through a community reinvestment exam to prove they are serving the needs of their communities. That has become a little more difficult as banking evolves, Childears said.

When the Community Reinvestment Act was first adopted, banks served specific geographic areas. They didn’t have the Internet, telephone or mobile banking.

“Now, banks can have customers all over the country,” he said. And even if banking customers move away, they will likely keep the banks they always had and just access their money in different ways.

So how do banks and regulators determine a banking institution’s service area for the purpose of the Community Reinvestment Act? That’s part of what the FDIC and OCC proposal is attempting to figure out.

The proposed CRA rules would help preserve branches in low- and moderate-income areas by providing more credit for branches and evaluating CRA activity around branches, according to the OCC’s fact sheet about the proposed rule changes. The new general performance standards would assess two areas of a bank’s CRA performance: the distribution of qualifying retail loans to low- and moderate-income  individuals, small farms, small businesses and geographies; and the impact of a bank’s qualifying activities, measured by the value of a bank’s qualifying activities relative to its retail domestic deposits, according to the OCC and FDIC’s notice of proposed rulemaking.

Doherty, whose organization lends money to support affordable housing in the state, said that he is “definitely concerned [about the proposed changes to the CRA], especially for groups like ours.”

Under the CRA’s current form, commercial banks are “motivated to partner with CDFIs like us. They get tremendous regulatory kudos and checkmarks when they do that. It is a wonderful thing,” he said. “Under the current regulatory regime, banks get credit not for the money they put out but the volume of activities and products they offer,” he said.

The proposed regulation is going to a single metric that is just “simplistic. How much money have you put out divided by how much total retail deposits you have in your bank. Simplistically what that does is it motivates the banks to not do the labor-intensive quirky partnering with disparate smaller transactions in communities,” Doherty said. “It motivates them to go to easy transactions in big areas with big dollar amounts.”

If they are going to get the same credit for making a $5 million loan to a very well established, easy to underwrite recipient as they would from making 10, $500,000 loans to smaller entities, they will choose the easiest option, he said.

The current regulation says that the primary purpose of community development funding is to benefit low- to moderate-income populations. The new language says it can partially benefit low- to moderate-income entities and includes new types of projects that can qualify, such as infrastructure projects or investments in opportunity zones. The proposal also expanded to include residential affordable housing to benefit middle-income people in high cost areas, he said.

There is already so much competition in low-income housing and in the low spectrum of low- and moderate-income levels for funding that including these new types of projects will add to the competition for funds.

“Banks left to their own devices will go with the most cost efficient,” Doherty said.

He added that his CDFI, with $50 million, is fairly large.

“I don’t have a tremendous amount of concern today for my particular organization that I run. My concern is for peer organizations that are smaller, in the rural areas, and their balance sheets aren’t as strong,” he said.

Childears pointed out that some small local banks are focused solely on one small geographic area, while others, like Bank of America, have branches nationwide. But some newer banks are Internet only. They don’t have a physical office or branch anywhere so “how do you define that one? How do you serve low- to moderate-income when basically you are operating nationwide? I don’t know how they do that. They have to come up with a way to show they are serving the need of low- to moderate-income customers. That means they’ve probably developed certain products that are especially good for low- to moderate-income customers.”

The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency have proposed changes to the Community Reinvestment Act that are getting mixed reviews from the organizations governed by the document.

The FDIC and OCC hope that the proposed changes will increase bank activity in low- and moderate-income communities where there is a huge need for lending and banking services. They also clarify what qualifies for credit under the CRA, enabling banks and their partners to better implement reinvestment activities that can benefit communities.

Sign up for BizWest Daily Alerts