A proposal by a trio of federal agencies would bring major banking industry regulations into the modern digital age as banking is increasingly done electronically instead of in branch offices.
Bankers say the proposed 679-page rule change to the federal Community Reinvestment Act (CRA) of 1977 will take some time to fully digest, although early reaction has generally been positive as experts say the update is sorely needed.
“A refresh of the Community Reinvestment Act is long overdue. Banking has fundamentally changed since the Act was put in place 45 years ago with improved technology and changes in consumer behavior,” as fewer people do their banking in a branch, said Kelly Potes, president and CEO of Sparta-based ChoiceOne Financial Services Inc., the parent corporation of ChoiceOne Bank.
“When it was written, banks were big into branching and branching was on the rise,” said Potes, who sees the regulatory change as “being done in the right spirit.”
“I’m going into it with a positive mindset,” he said.
The CRA encourages banks to invest and lend in low- and moderate-income communities where they draw deposits. Congress enacted the law in 1977 to alleviate discriminatory credit practices against low-income neighborhoods, a practice known as red-lining. The last significant changes to the law were made in 1995.
Federal regulators routinely review how well banks comply with CRA requirements “in a safe and sound manner.” Regulators will consider a bank’s CRA score when considering whether to approve proposed mergers.
The Federal Reserve Board, Federal Deposit Insurance Corp. and the U.S. Department of Treasury’s Office of the Comptroller of the Currency issued proposed rules on May 5 to update the CRA and start a public comment period that runs until Aug. 5.
Among the rule changes proposed is to “include activities associated with online and mobile banking, branchless banking, and hybrid models” when regulators conduct a CRA assessment on a bank, according to the three agencies.
‘Substantial and significant’
As financial institutions in recent years invested heavily in digital technologies to keep up with consumer changes and continue to pare low-volume offices from branch networks, the proposal to modernize the CRA “is substantial and significant,” said attorney Michael Bell, co-chair of the Financial Institutions Practice Group at Honigman LLP.
Banks today operate with “an antiquated CRA that doesn’t reflect their actual business today,” Bell said.
“These changes, 100 percent, will affect the daily, weekly (and) monthly operations of banks,” he said.
Bell raised the question of whether banks today can adequately serve low- and moderate-income markets through digital banking without the kind of physical branch presence of the past.
“There’s a question: Can it be done properly with mobile banking, hybrid models and branchless banking?” Bell said. “How do these communities need to be served?”
In issuing the proposed updated rules, the trio of federal agencies also seek to ensure the CRA is a “strong and effective tool to address inequities in access to credit,” according to a joint statement.
The proposed rules update “would promote community engagement and financial inclusion” and would also “emphasize smaller-value loans and investments that can have high impact and be more responsive to the needs of (low- and moderate-income) communities,” the statement adds.
The proposed rule change also would enact what the federal agencies call a “metrics-based approach to CRA evaluations of retail lending and community development financing, which includes public benchmarks, for greater clarity and consistency.”
If adopted, the new rules would enable regulators to tailor CRA assessments to a bank’s size and business model.
The tiered approach by bank size “does give some more leeway and a bit less burden” to small and mid-sized banks, said Mike Tierney, president and CEO of the Community Bankers of Michigan.
“We are encouraged that the proposal would tailor CRA evaluations and data collection for community banks, regulators should ensure the plan meets the needs of all community banks and the communities they serve and do not place undue burdens on banks for data collection and reporting,” Tierney wrote in an email to MiBiz.
However, Tierney disagrees with proposed rule change language that puts banks with more than $2 billion in assets “into the same pool” for CRA review with the nation’s largest banks, such as JP Morgan, Bank of America and Wells Fargo. He calls that “patently unfair and way too burdensome for too many Michigan banks,” adding that the association “will be pushing back on this.”
The proposed changes to CRA rules also could provide banks greater flexibility to craft creative ways to serve low- to moderate-income neighborhoods, said Patricia Herdon, executive vice president of government relations at the Michigan Bankers Association.
Herndon welcomes the unified approach that the three regulatory agencies overseeing the CRA are taking in proposing the rule changes, saying it could lead to greater predictability in interpretation and enforcement.
“We can’t have three different regulatory agencies coming up with three different takes on CRA,” Herndon said. “We want consistency so if we’re making investments in CRA and we know it’s something that’s innovative, we’re going to get credit for doing something good in the community. If it’s something that’s maybe a small dollar but a big impact … we need to know we’re going to get credit for those things.”
Both Tierney and Herdon also would like to see CRA requirements extended to other types of lenders, namely credit unions that are tax exempt as well as farm credit lenders and fintechs.
Tierney cites data showing that more than 95 percent of federal Paycheck Protection Program loans made in Michigan to aid small businesses in the first year of the COVID-19 pandemic came through banks.
“If you were in a low- to moderate-income community in an urban or rural area, and you needed a PPP loan, you effectively had only one place to turn to — your local bank,” Tierney wrote in his email.