The Office of the Comptroller of the Currency got the ball rolling on revamping rules for banks’ investments in low- to middle-income communities, but further progress depends on whether two other regulators sign on to the effort in 2019.
The OCC made clear in an August proposal that it envisioned potentially radical changes to the way regulators rate banks’ compliance with the 1977 Community Reinvestment Act (CRA). Among the ideas the OCC sought comment on were a potential single metric to determine a bank’s lending and investment in relevant neighborhoods nationwide and sweeping changes to the areas that banks are expected to lend into.
The two other agencies that oversee the law, the Federal Deposit Insurance Corp. and the Federal Reserve, did not sign on to the OCC’s initial CRA overhaul proposal. Leaders at both agencies have said they want to sign on to a joint proposal to overhaul the CRA. Whether the three agencies can bridge potentially serious policy disagreements will be a key question to watch out for in 2019.
“It’ll be interesting to see what the next step is in the rulemaking process, and that will reveal whether there are these differences,” Michael Nonaka, the co-chair of Covington & Burling LLP’s financial services group, said in a Dec. 13 phone interview.
Congress passed the CRA in 1977 with the aim of addressing redlining, the process by which the Federal Housing Administration and private banks avoided lending into black and other minority communities.
A poor grade can result in regulators putting a halt to bank mergers, branch expansions and other growth.
But the CRA’s rules have not been significantly updated since the mid-1990s. Since then the growth of interstate and online banking and other financial technology developments have made those rules somewhat outdated, according to Aaron Klein of the Brookings Institution.
“CRA is an old statute written in a world where there really wasn’t interstate banking,” Klein, who served in the Treasury Department during the Obama administration and as a Senate Banking Committee staffer, said in a Dec. 7 phone interview.
What The OCC Wants
Comptroller of the Currency Joseph Otting made overhauling the CRA a top priority upon taking the national bank regulator’s reins in December 2017.
Among the major changes that the OCC is considering is the creation of a single metric for a bank’s overall CRA performance. Currently banks are graded on a more subjective basis that includes a four-tier final grade ranging from “outstanding” to “substantial noncompliance.”
So far, banks and community groups have pushed back against the single metric idea. Former FDIC Chairman Martin Gruenberg, who is still a board member and would vote on any future proposal, has also said the single metric would not work.
FDIC Chair Jelena McWilliams and Fed Chair Jerome Powell have not spoken about the single metric or any other CRA overhaul specifics, but have indicated that there are some unnamed potential policy differences that need to be addressed before they sign on to a CRA revision proposal.
Nonaka said the agencies are likely to come together on some sort of a revision on measuring CRA compliance.
“Some of the sanding down of the rougher edges would happen in the rulemaking process anyway,” he said.
The same likely holds true for how the three regulators change the way bank assessment areas are defined and how fintech, which can greatly expand a bank’s reach, is accommodated in reviews are also likely to be subjects for dispute.
There is also a question of how high a priority CRA reform is for the Fed and the FDIC.
So far, the FDIC has not done much to gear up for a major review. The Fed has done some listening sessions around the country. It also has other pressing issues on its plate, including speeding up the nation’s payments system, Jesse Van Tol, CEO of the National Community Reinvestment Coalition, told Bloomberg Law in a Dec. 12 phone interview.
“This might be more of a priority for the Fed or the FDIC if the process had gone in a different way. In a way, they’ve been on the defensive and responsive to what’s been Otting’s push to do something in particular,” he said.
‘Is It Worth It?’
The incoming House Democratic majority, including presumptive Financial Services Committee Chair Maxine Waters, D-Calif., promises to bring extensive oversight to the CRA review process.
While that majority would be unable to stop any changes, preparing for likely hearings takes time. The potential for tough hearings may also cause regulators to ease more aggressive proposals, according to Hogan Lovells LLP partner Aaron Cutler.
Regulators may think, “I know that these members drew a line in the sand on this issue, and if I go over the line I’m going to have a real storm on my hands. Is it worth it?” Cutler, who was an aide to former House Minority Leader Eric Cantor, R-Va., said in a Dec. 12 phone interview.
All of those complications add up to the likelihood that the CRA rewrite will not be finished in 2019.
Whether the FDIC and the Fed sign on to either a formal proposal or even a new advanced notice of proposed rulemaking could determine whether the OCC goes it alone and different banks have different CRA rules, Chris Lewis, who was a member of the OCC’s team in the last CRA rewrite in the 1990s, said in a Dec. 12 phone interview.
“A proposal by the end of 2019 is doable, but I would expect it to be less aggressive than the scope” of the OCC’s August proposal, Lewis, now a director at Promontory Financial Group, said.