Short Comment Letter

Docket Number R-1723 and RIN Number 7100-AF94

To Whom it May Concern:

The Federal Reserve Board (Fed) must strengthen CRA exams in order to promote recovery from the COVID-19 pandemic. The Fed has described approaches in its Advance Notice of Proposed Rulemaking (ANPR) on CRA that will make CRA exams more objective. Yet, questions remain about whether the Fed’s approach will make grading tougher. If nearly every bank continues to pass their CRA exams, banks will not engage in serious efforts to help communities of color and low- and moderate-income (LMI) neighborhoods recover from the pandemic.

[Provide sentences here about you and/or your organization, and how you or your organization engages in neighborhood development and/or is fighting COVID-19)]

NCRC recently released a report finding a strong relationship between redlining and susceptibility to COVID. Redlined neighborhoods have the highest levels of health conditions such as asthma, diabetes and kidney disease, which make residents more susceptible to COVID-19. Life expectancy is almost four years lower in the redlined communities.

Since the start of the pandemic, about 41% of African American businesses have been closed compared to just 17% of White-owned small businesses. Discrimination in lending contributes to these differences in survival rates. A NCRC investigation found that African Americans applying for Paycheck Protection Program (PPP) loans for their small businesses during the pandemic were likely to receive less information than Whites.

CRA must be strengthened in order to combat discrimination. The Fed emphasizes improving the performance measures on CRA exams including those used on the lending test that compare a bank’s percent of loans to LMI borrowers to other lenders. The Fed does not describe in detail the impact of its reforms on CRA ratings except to hint that banks may continue to receive the same grades.

Moreover, the Fed is proposing to reduce the number of ratings on a state level and on subtests from five to four. This proposal would result in fewer distinctions in performance whereas new CRA exams must reveal more distinctions in order to motivate banks to be more responsive to COVID-19 recovery needs. Five ratings must be retained on the state level and on subtests.

The Fed asks whether underserved areas should be designated based on high levels of poverty or low levels of retail lending. NCRC advocated an approach based on low levels of lending which would effectively target redlined neighborhoods and communities of color.

We also ask the Fed to consider explicitly including race on CRA exams. The agencies have hesitated to do so but we believe that the CRA statute allows this since the law emphasizes banks meeting credit needs in all communities, but particularly underserved ones. CRA exams could include performance measures assessing lending, investing, branching and services to people of color and communities of color. The Fed could also provide CRA consideration for lending and investing in majority minority census tracts outside of assessment areas just as the Fed is considering for Indian reservations and other underserved areas.

In the interest of reaching underserved areas, we strongly support the Fed’s proposals to improve data collection including community development financing data, which would better enable stakeholders to determine communities most in need.

We support the Fed’s proposals to expand assessment areas, which are geographical areas on CRA exams. In addition to areas around branches, assessment areas must also include areas outside of branches with significant amounts of bank lending or deposit taking.

We do not support expanding financial education to any income since LMI consumers and people of color are most likely to be unbanked as revealed by surveys of the Federal Deposit Insurance Corporation (FDIC). Likewise, the Fed should further develop its procedures for awarding CRA credit for financing affordable housing that is unsubsidized so that such financing actually serves LMI residents.

Finally, we applaud the Fed proposal to eliminate distinctions in the rigor of examination among assessment areas that have resulted in banks neglecting smaller cities, rural counties and Native American reservations.

We appreciate the direction the Fed has embarked upon but caution that it must not end up with proposals that replicate existing CRA ratings inflation as this will not help our communities devastated by COVID-19.

Sincerely,

Long Comment Letter

Docket Number R-1723 and RIN Number 7100-AF94

To Whom it May Concern:

The Federal Reserve Board (Fed) must strengthen the rigor of CRA exams in order to promote recovery from the COVID-19 pandemic. The Fed has described approaches in its Advance Notice of Proposed Rulemaking (ANPR) on CRA that will make CRA exams more objective and transparent. Yet, questions remain about whether the Fed’s approach will reduce the high rate of CRA inflation. If nearly every bank continues to pass their CRA exams, banks will not engage in strenuous efforts to help communities of color and low- and moderate-income (LMI) neighborhoods recover from the pandemic’s devastation.

(Provide sentences here about your organization and how your organization engages in neighborhood revitalization and is fighting COVID-19).

Strengthening CRA is a critical component of a just recovery

The National Community Reinvestment Coalition (NCRC) recently released a major report finding significant correlations between redlining and susceptibility to COVID. In the 1930s, the Home Owners Loan Corporation (HOLC) commissioned the production of maps that rated neighborhoods based on the risk of lending in them. Working class and minority neighborhoods usually received the riskiest designation of hazardous. The designations subsequently facilitated redlining and discrimination against these neighborhoods, which remain starved of credit and are predominantly lower-income and minority. These neighborhoods also have the highest incidence of health conditions such as asthma, diabetes, kidney disease and stroke, which make residents more susceptible to COVID-19. Life expectancy is almost four years lower in the redlined communities than the neighborhoods not designated as hazardous by HOLC.

Since the start of the pandemic, more than 440,000 African American businesses have been closed or 41% compared to just 17% of White-owned small businesses. Discrimination in lending contributes significantly to racial disparities in small business survival rates. A NCRC investigation found that African American testers applying for Paycheck Protection Program (PPP) loans for their small businesses during the pandemic were likely to receive less information or encouragement to apply than White testers. CRA must be strengthened considerably in order to combat discrimination and help our communities recover from the pandemic.

The Federal Reserve proposal must be strengthened to prevent grade inflation
However, it is unclear if the Fed’s ANPR proposals will address CRA ratings inflation. The Fed emphasizes improving the performance measures on CRA exams including those used on the lending test that compare a bank’s percent of loans to LMI borrowers and communities to other lenders. However, the Fed proposes thresholds that appear to replicate the high ratings on CRA exams. The Fed does not describe in any detail the impact of its initial thresholds on CRA ratings and hints the thresholds replicate the current CRA ratings distribution.

Moreover, the Fed is proposing to reduce the number of ratings on a state level and on subtests from five to four. This proposal would result in fewer distinctions in performance whereas a new CRA exam system must reveal more distinctions in performance in order to motivate banks to be more responsive to COVID-19 recovery needs. Five ratings must be retained on the state level and on subtests.

The Federal Reserve proposal should be strengthened to increase lending to people of color

The Fed recognizes the importance of addressing racial inequities. It asks the public whether underserved areas should be designated based on high levels of poverty or low levels of retail lending. We support NCRC’s designation of underserved census tracts based on low levels of lending which would effectively target neighborhoods redlined because of the HOLC classifications.

We also ask the Fed to consider explicitly including race on CRA exams. The agencies have hesitated to do so but we believe that the CRA statute allows this since the law emphasizes banks meeting credit needs in all communities, but particularly underserved ones. CRA exams could include performance measures assessing lending, investing, branching and services to people of color and communities of color. In addition, CRA exams can include racial and ethnic demographic data in performance context analysis and require banks to affirmatively include communities of color in their assessment areas (geographical areas on CRA exams). The Fed could also provide CRA consideration for lending and investing in majority minority census tracts outside of assessment areas just as the Fed is considering for Indian reservations and other underserved areas.

Assessment areas must support and reflect a commitment to local lending, investments and services

We support the Fed’s proposals to expand assessment areas on CRA exams. In addition to areas around branches, assessment areas must also include areas outside of branches with significant amounts of bank lending or deposit-taking. We do not support the idea of a national assessment area for internet banks that the Fed discusses. Instead, we believe that data analysis can designate areas where high numbers of retail loans or deposits are located.

We applaud the Fed proposal to eliminate distinctions between full-scope and limited-scope assessment areas. Full-scope assessment areas, which are usually the largest cities, count more on current CRA exams than limited-scope areas that generally are smaller cities and rural counties. Often, communities of color, Native American reservations and other underserved communities continue to receive less CRA-related loans and investments because they are in limited-scope areas.

CRA modernization must maintain its focus on lower-income communities and communities of color

Unlike the Office of the Comptroller (OCC), the Fed generally does not stray away from the focus on LMI communities in its ANPR proposals. However, we do not support expanding financial education to any income since LMI consumers and people of color are most likely to be unbanked or underbanked as revealed by surveys conducted by the Federal Deposit Insurance Corporation (FDIC). The Fed can designate additional subgroups in the population such as people of color, people with disabilities or older adults for whom CRA credit for financial education or other community development activity can be earned instead of opening it up to everyone regardless of need. Likewise, the Fed should further develop its procedures for awarding CRA credit for financing affordable housing that is not subsidized so that such financing actually serves LMI tenants.

Collecting improved community development and deposit data

Finally, the Fed should pursue its proposals to collect improved community development and deposit data. Community development and deposit data should be collected on a census tract level or at least on a county level so that CRA exams can better target community development financing to areas of need.

Conclusion

We appreciate the direction the Fed has embarked in its ANPR but caution that it must not end up with a set of proposals that replicate existing CRA ratings inflation as this will not help our communities devastated by COVID-19. We believe that this proposal serves as an important starting point for an interagency rulemaking that will strengthen CRA and take a critical step towards more financially resilient communities and an equitable recovery.

RESOLUTION TO PROTECT THE COMMUNITY REINVESTMENT ACT -TO ENSURE THAT EFFORTS TO MODERNIZE REGULATIONS DO NOT UNDERMINE THE INTENT OF THE LAW

WHEREAS, the Community Reinvestment Act (CRA) was enacted on October 12, 1977 to end the practice of “redlining” by financial institutions where they would draw a red line on a map around the neighborhoods they did not want to offer financial services; before the enactment of the CRA, redlining made it near impossible for low- and moderate-income Americans, racial and ethnic minorities, and their neighborhoods to access credit services, such as mortgages and business loans, regardless of their qualifications or creditworthiness; and

WHEREAS, CRA was a landmark civil rights law passed in 1977 to end discrimination that was once common in America’s banking and housing markets; and

WHEREAS, discrimination in lending is still a problem; and

WHEREAS, the CRA states that “regulated financial institutions have continuing and affirmative obligations to help meet the credit needs of the local communities in which they are chartered”; and

WHEREAS, the CRA establishes a regulatory regime for monitoring the level of lending, investments, and services in low- and moderate-income neighborhoods traditionally underserved by lending institutions; examiners from three federal agencies assess and “grade” a lending institution’s activities in low- and moderate-income neighborhoods; and
WHEREAS, the federal agencies conducting CRA examinations are: the Office of the Comptroller of the Currency (OCC), which examines nationally chartered banks and the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board – both of whom examine state-chartered banks; and

WHEREAS, if a regulatory agency finds a financial institution not serving these neighborhoods, it can delay or deny that institution’s request to merge with another lender or to open a branch or expand any of its other services; the financial institution regulatory agency can also approve the merger application subject to specific improvements in a bank’s lending or investment record in low- and moderate-income neighborhoods; and

WHEREAS, a financial institution’s CRA grade can be downgraded if a federal agency uncovers evidence of illegal, abusive or discriminatory lending on their fair lending exams that occur at about the same time as CRA exams; and

WHEREAS, since 1996, according to analysis of bank lending data by the National Community Reinvestment Coalition (NCRC), CRA-covered banks issued almost 29 million small business loans in low- and moderate-income tracts, totaling $1.156 trillion, and $1.179 trillion in community development loans that support affordable housing and economic development projects benefiting low- and moderate-income communities; and

WHEREAS, a 2016 review of the CRA examinations of intermediate small banks(ISBs)/mid-sized banks (banks with asset sizes today between $313 million and $1.252 billion) found that ISBs produced over $9.3 billion of community development (CD) loans and grants; and

WHEREAS, studies have found that CRA-covered home lending is safer and sounder than non-CRA covered lending; when a larger share of lending is issued by CRA-covered banks than by independent mortgage companies, a neighborhood experiences lower delinquency rates and less risky lending; and

WHEREAS, despite the tremendous benefits of CRA to communities, the full potential of CRA has not been realized because it has not been updated to take into account changes in the banking industry and the economy; independent mortgage companies not covered by CRA now make more than 50 percent of the home mortgage loans in America and financial technology companies (“Fintech”) not covered by CRA operating via the internet are rapidly increasing their lending; and

WHEREAS, notwithstanding the need to modernize CRA, we are concerned about ideas from some federal regulators that would substantially weaken the law; and

WHEREAS, geographic assessment areas must remain the focus of CRA exams for all banks; banks should continue to be graded based on every geography where they lend or receive a significant percentage of their deposits; banks cannot be allowed to cherry-pick where they lend – and where they don’t lend at all or to ignore the credit needs of distressed and vulnerable communities; and

WHEREAS, regulators review of a bank’s CRA commitment should not be consumed by an approach that is primarily driven by dollar amount. In May of 2020, the OCC finalized changes to its CRA regulations and implemented a presumptive rating which would mainly consist of the dollar amount of a bank’s total CRA activities divided by the bank’s deposits. CRA was designed to encourage the financial system to meet the credit and capital needs of people with low and moderate incomes and small businesses who frequently have a need for relatively smaller sized loans. Moving to a dollar volume approach would encourage larger deals at the expense of underserved borrowers the law was designed to protect; and

WHEREAS, the new OCC rule will allow 89% of the banks they regulate to opt for easier exams that will start right away and will result in more banks not having a service test that looks at their branching in lower income neighborhoods and in more banks not being evaluated for their community development financing;

WHEREAS, the OCC’s rule of 2020 would also move CRA away from its focus on low- and moderate-income families and communities and count the financing of large infrastructure projects and financial education for middle- and upper-income consumers; and

WHEREAS, CRA should explicitly state the law’s obligation to fairly serve all races and ethnicities; banks that engage in large-scale illegal and harmful activities should fail their CRA exams.

WHEREAS, replacing a lending test for large banks that counted for 50% of the overall rating with a pass/fail lending test will encourage banks to decrease their home and small business lending in communities of color and modest income communities;

WHEREAS, the new scoring system will radically devalue the importance of maintaining branches in neighborhoods with low- and moderate-incomes, despite strong evidence that branches are still heavily used by households with lower incomes; and

WHEREAS, the rule allows examiners at their discretion to grant multipliers of up to four times for activities that they consider innovative will result in inconsistent exams, inflated ratings, and reductions in in actual community development financing; and

WHEREAS, basing new assessment areas off of physical addresses of depositors is problematic since this information is not currently collected, and if collected would likely not be shared with the public, leaving cities to guess whether a bank has an obligation to serve their community; and

THEREFORE BE IT RESOLVED, that the (organization’s name), will support efforts to modernize CRA, but not relax or undermine the law’s goal and intent; and

BE IT FURTHER RESOLVED, that the (organization’s name), opposes the OCC’s changes to CRA and urges the Federal Reserve Board and FDIC to refrain from these harmful changes that will thwart the economic recovery from COVOID and will divert resources from recovery efforts in low- and moderate-income neighborhoods and communities of color that have been disproportionately harmed by COVID;

BE IT FURTHER RESOLVED, that the (organization’s name), will support modernizing CRA to apply it to non-bank institutions including mortgage companies, financial technology companies, and credit unions; and

BE IT FURTHER RESOLVED, that the (organization’s name), will opposes the OCC’s changes that also efforts to watered down the penalties under CRA for discrimination, and urges the Federal Reserve Board and FDIC to increase penalties for discrimination; and

BE IT FURTHER RESOLVED, that the (organization’s name), believes that banks should also be examined for how they are lending, serving and investing in underserved neighborhoods that have high minority populations, low capital flows and have had a history of redlining. While the Administration’s new CRA rules may give credit for bank activities in these neighborhoods, the OCC’s changes will not actively hold banks accountable for expanding opportunities for wealth building in communities of color; and

BE IT FURTHER RESOLVED, that the (organization’s name), will support a CRA with a clearly-defined grading system that emphasizes lending, bank branches, fair lending performance, and responsible loan products for working class families; and

BE IT FINALLY RESOLVED, that the (organization’s name), will support efforts to hold a bank accountable if it fails its CRA exam, or wishes to acquire a bank with a better CRA grade, and urge agencies to recognize and encourage community benefit agreements and efforts that motivate banks to make more loans, investments, and services available to traditionally underserved communities.

Respectfully submitted on ___________________,