WASHINGTON – As the Biden administration completes its roster of banking regulators, optimism grows that agencies that had diverged over how to reform the community reinvestment law could come together on a common framework.
During the Trump years, the Office of the Comptroller of the Currency finalized its own CRA rule without support from other regulators. Critics have warned that the agency’s radical overhaul could harm the very communities the anti-redlining law was meant to help. They supported a more sober and consensual approach proposed by the Federal Reserve.
The rule is not yet fully applied. Acting Supervisor Blake Paulson appeared willing last month to slow the process down, telling banks they no longer need to meet a May deadline to submit data intended to inform the creation of a new system. CRA rating. And analysts believe that the two candidates being considered by the Biden administration for the comptroller’s post are likely to press the pause button, opening the door for agencies to return to the negotiating table.
“The outlook is good for interagency collaboration on CRA reform,” said Quyen Truong, partner at Stroock & Stroock & Lavan.
This feeling was echoed last week by Fed Chairman Jerome Powell, who told House lawmakers he saw “an opportunity for a harmonized rule across agencies.”
The administration’s search for a new controller was reportedly limited to two candidates: Michael Barr, a former Obama administration official and law professor with long experience in favor of consumers; and Merhsa Baradaran, professor of law at the University of California at Irvine and author of books on social justice in the financial system.
Observers say either would likely reject ARC rule finalized under former Controller Joseph Otting, potentially shifting focus to the Fed alternative plan headed by Governor Lael Brainard. The Fed released a regulatory plan in September that, unlike the OCC rule, would build on existing data collection and reporting for CRA scoring, and preserve the tests that consumer advocates had criticized for the weakening of the OCC.
“We expect the rulemaking process to go more in line with the Fed’s proposal rather than the current OCC regulations,” said Peter Dugas, CEO of Capco. “We have not seen any significant complaints filed against this plan.”
The Federal Deposit Insurance Corp. has yet to come up with its own plan, but new leadership within the agencies could affect FDIC thinking as well. If the Senate confirms that Rohit Chopra will head the Consumer Financial Protection Bureau and a new comptroller, Democrats could hold a majority in the FDIC even if the board is chaired by a person appointed by Trump, Jelena McWilliams.
Truong expects the OCC to help lead a possible reform cadre, regardless of who becomes a controller. Banks supervised by the agency represent about 70% of the assets of the US financial system.
“The approach the OCC decides to take will carry great weight, given its importance to the industry,” Truong said. “Regulators place great importance on consensus within the ARC framework. It is not for one agency to dictate how it will work for everyone. But the OCC will play a very important role in driving this outcome. “
Although the OCC rule technically came into effect late last year, banks won’t have to comply with most of the changes until 2023 or later.
Despite some controversy over who the administration will finally choose to manage the OCC, many observers see relatively little daylight between Barr and Baradaran on CRA. Barr was a key architect of Dodd-Frank, while Baradaran has strong support among progressives for his positions on Postal bank and other consumer policy issues.
“Either one would be excellent controllers,” said Kevin Stein, deputy director of the California Reinvestment Coalition. “We look forward to one of them being put in place as soon as possible. “
In 2005, Barr defended the RCAF in the New York University Law Review, challenging conservative claims that the law was too expensive and inefficient to enforce.
“ARC does not appear to be a hindrance to the effectiveness of banks and savings banks or the financial sector as a whole,” Barr wrote at the time. “While the benefits and costs of ARC as we have them are not, strictly speaking, summable, even a rough idea of the costs and benefits of regulation suggests that it is, on the net, socially beneficial. and consistent with the underlying theories justifying ARC.
Baradaran also defended the CRA. In 2019, bear witness before the House Financial Services Committee, she argued that the law was “an endangered species.”
“It was once part of a coherent system of banking regulations and regulatory applications designed to ensure that banks play a role in public policy and meet their obligations to the public,” said Baradaran. “The CRA is the sole survivor of this regulatory tradition. Thus, the changes made to the ARC should avoid further eroding the public obligations of banks.
Concerns about the lack of regulatory consensus are almost separate from the debate on the substance of CRA reform. Banks and community reinvestment advocates fear that a fragmented, two-tier system – one developed by OCC and another for banks overseen by other agencies – could create confusion and ultimately fail. ‘worsens the performance of the industry under the law.
But banks have also raised concerns over the need for the OCC to collect new CRA-related data from industry. After finalizing its rule in May, the agency released a follow-up proposal in May providing more details on its rating methodology and asked institutions to submit new data needed to build the rating system.
However, after President Biden was sworn in in January, Paulson announced that banks would no longer be required to participate in the data collection survey before the May 31 deadline. He did not provide a new deadline.
“The OCC will provide more guidance if new information collection or new information collection is released,” Paulson wrote in a February 9 letter to numerous business groups.
Dugas said the industry’s biggest complaint about the OCC’s ARC rule “so far is the complexity.”
“Especially around the data collection requirements – it’s a huge challenge, a huge lift, for institutions to be able to understand how important data collection requirements would be implemented from a reporting perspective,” he said. -he declares.
A Democratic comptroller would have the option to suspend implementation of the CRA reform framework and possibly release a new proposal after consulting with the Fed and OCC.
“Whether by a change of administration or by litigation, we hope to see the end of this nefarious rule – and when I say ‘we’ I think that’s a pretty big group, ”said Stein. “A lot of people are waiting for her to disappear.”
While some analysts see some significant overlap areas between the OCC and the Fed approaches, the latter may be more acceptable to community groups and banks.
“Nothing comes to mind about the Fed’s proposal that is worse than the OCC’s, from our point of view,” Stein said.
Community groups hailed the Fed’s plan to avoid the OCC’s approach to rating metrics, which would combine retail lending and community development tests into a single final score based in part on value in CRA project dollars. Instead, the Fed would separately assess the performance of retail lending and community development.
In a working paper released by the University of Pennsylvania in 2019, Barr appeared to take direct aim at the OCC’s approach, writing that a “single measure wouldn’t do a good job of capturing the wide variety of business strategies of banks. in the service [low- and moderate-income] communities and households, and the wide variety of local contexts in which they operate.
“A single measure would likely induce banks to make the easiest loans to the better-off communities, without focusing on financing that is more complex and harder to serve communities,” Barr wrote. “Such a measure would end up with too little activity in some contexts, could encourage uneconomic activity in other contexts, and become obsolete over time.”
In testimony to Congress in 2019, Baradaran said banks should be required to develop longer-term plans regarding their CRA compliance strategy.
Strategic plans “should be required of all banks,” Baradaran wrote. “These strategic plans need to be linked to specific measurable results and not just actions taken. A bank would spell out the needs or issues in its region, develop a plan with specific parameters to meet those needs, including community partners involved in setting and achieving those goals, and make annual public reports on their progress. .
Meanwhile, some observers say the Fed’s plan appears to focus more on the role race plays in community divestment.
“The companies of [Black, Indigenous, and people of color] communities are less capitalized, ”said Hope Knight, CEO of Greater Jamaica Development Corp. in New York, adding that the pandemic has left those communities at greater risk. “When something like this happens, it devastates businesses.”
In the Fed’s CRA plan, Knight said she saw “a little more thought” in how regulators would assess the needs of communities affected by racism. “It is recognized that communities of color need to be valued in a more meaningful way – that there always needs to be some context around what makes us up,” she said.
In the Fed’s advance notice of the proposed rule-making, the agency said it was considering “how best to define local communities where CRA activities of banks are assessed for both to reflect changes in the banking industry and to maintain the CRA’s link with fair loan requirements.
In the 2019 discussion paper, Barr also highlighted the need for CRA reform to “recall the legacies of racial discrimination and redlining that underpin the law.”
“Compliance with fair loan laws should be included in CRA reviews and ratings, for the bank holding company as a whole,” he wrote.