Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Advanced Search Go
Free Newsletter Sign Up

Banks Fear Top Grades Out of Reach in Community Lending Rewrite

Aug. 9, 2022, 9:00 AM

Banks are firing warning shots that their lending to low-to-moderate income neighborhoods may suffer if federal anti-redlining rule change proposals make passing grades too hard to achieve.

A proposed rewrite of the Community Reinvestment Act would make it nearly impossible for banks to receive an “outstanding” grade on federal regulators’ lending performance reviews, according comment letters submitted last week by three major banking trade groups.

An outstanding grade is the highest a bank can receive for CRA compliance, while poor grades can stymie banks’ growth through expansion or mergers.

If achieving the highest grades is impossible, banks will likely just accept lower grades and not strive to increase lending into underserved communities the CRA is meant to benefit, the American Bankers Association said in its letter.

“The increased stringency may result in some banks accepting a low rating because achieving High satisfactory or outstanding ratings is impracticable,” according to ABA’s letter sent to the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

The three banking regulators released a proposal to update the CRA, a 1977 law aimed at increasing the flow of money, including mortgage credit and other investment dollars, into underserved communities. One of the agencies’ goals in their proposal is to make compliance exams more rigorous.

The law allows regulators to give grades of outstanding, satisfactory, needs to improve or substantial noncompliance. Critics say that the current CRA exam process is too easy to pass.

Around 90% of banks receive a satisfactory grade and another 10% get outstanding grades, according to a comment letter from the National Community Reinvestment Coalition, an organization that advocates for fairness in lending.

The law would be more effective if the Fed, FDIC and OCC ushered in a new exam process that “more accurately revealed distinctions in performance,” the NCRC said.

“More banks would be identified as significantly lagging their peers, which would motivate them to improve their ratings and increase their reinvestment activity,” the community group said in its letter.

New Test

The Fed, FDIC and OCC propose to toughen up the exam by strengthening a retail lending test in relevant communities. The revised test would measure a bank’s closed-end and open-end mortgage, including home equity lines of credit, multifamily housing lending, automobile loans, small business and small farm loans. The agencies also proposed creating a high satisfactory and low satisfactory grade.

The retail test would account for around 60% of a bank’s overall CRA grade, according to the proposal. In order to receive an outstanding grade, a bank would have to make loans equal to 125% of the market benchmark.

Banks, particularly large banks, are unlikely to reach those levels, making an outstanding grade nearly impossible to attain and potentially leading to widespread downgrades for big banks, the Bank Policy Institute said in its letter.

“These proposed downgrades appear to be based on the faulty premise that large banks are not currently doing enough to achieve the goals of the CRA,” BPI said in its letter.

The Center for Responsible Lending said in its comment letter that the current grading system wasn’t rigorous enough. But the advocacy organization also agreed with the bank groups that the proposal was too tough, noting that “no bank with $50 billion in assets would currently achieve” an outstanding score under the proposal.

The community group offered several fixes, including increasing the value of the CRA’s Community Development Financing Test and removing automobile and open-ended mortgages from the calculation.

Banking trade groups said they may sue if the proposed CRA update is finalized without changes.

“A legal challenge will ultimately sow confusion, further delay modernization, and possibly delay implementation of the provisions all stakeholders agree will advance certainty and consistency for industry and communities alike. These results serve no one,” the ABA said.

To contact the reporter on this story: Evan Weinberger in New York at

To contact the editor responsible for this story: Roger Yu at; Maria Chutchian at;