Will softer Community Reinvestment Act regulations harm communities of color?

On a chilly Tuesday morning, a few dozen gathered on a busy sidewalk in Midtown Manhattan, outside the field office of an obscure federal agency called the Office of the Comptroller of the Currency. They came from working-class communities of color such as Jamaica, Queens and Cypress Hills, Brooklyn. Some worked at community development corporations, others at fair housing organizations or small business lenders. Reps. Nydia Velazquez, Gregory Meeks and Carolyn Maloney were there, and delivered remarks.

They were there to express protest this federal agency’s plan to revise – critics say gut – federal regulations that incentivize banks to meet the credit needs of low and moderate-income households and neighborhoods. Other advocates across the state share their concerns. Some even believe it would re-legalize redlining, which is the practice of denying loans to neighborhoods considered too risky – often based historically on the proportion of African-Americans living there. “This morning we are sending a message to Donald Trump,” said Rep. Velazquez. “We are not going back to the days of discriminatory lending and redlining.”

The agency, which released its proposed regulatory rollback on December 12, disputes some of those concerns and it insists there is still ample opportunity for the public to weigh in before making the regulatory changes. 

The regulations in question stem from the Community Reinvestment Act of 1977. The law directs the Department of the Treasury to periodically evaluate each bank’s track record of fulfilling credit and banking needs in low and moderate-income areas. It directs the department to consider that track record when banks request approval to merge with another bank or to open, move or close a branch. Regulators can deny those applications on the basis of banks failing to comply with the law. 

But the Community Reinvestment Act did not stipulate how to evaluate banks’ track records of serving low and moderate income households and neighborhoods, leaving that up to federal banking regulators. Over the decades, those specifics have been a constant tug-of-war between the banking industry and bank watchdog groups, fair housing advocates and other community advocates like those who gathered on Tuesday. As just one part of its duties supervising federally-chartered banks across the country, the Office of the Comptroller of the Currency is one of three federal agencies tasked with enforcing regulations around the Community Reinvestment Act, along with the Federal Deposit Insurance Corporation and the Federal Reserve. Joseph Otting, the current Comptroller of the Currency, was appointed by President Donald Trump, and was previously the CEO of a bank that recently settled a federal lawsuit accusing the bank of redlining practices while he was CEO.

Under current Community Reinvestment Act regulations, every 3-5 years regulators evaluate banks under the law and assign one of four grades overall as well as a grade for each of the bank’s state or metropolitan area markets. In descending order, those rankings are “outstanding,” “satisfactory,” “needs to improve” and “substantially non-compliant.” The latter two are considered failing grades.

The consequences of a failing grade can be drastic. The Rules of the City of New York require city government deposits be deposited into banks that have a “satisfactory” or better grade on their most recent Community Reinvestment Act examination. Since federal regulators issued Wells Fargo a grade of “needs to improve” in its most recent Community Reinvestment Act examination, New York City had to terminate its relationships with Wells Fargo and move its bank accounts to other banks. 

The Office of the Comptroller of the Currency has proposed regulations it intends to provide more clarity and consistency for banks to understand what and how much they need to do in order to comply with the law. For example, the proposal sets dollar value benchmarks for measuring the extent of banks’ home lending, small business lending or community development activity that regulators would consider in support of a bank’s compliance with the law. The rules were proposed in December, after an 18-month preliminary process that included the agency conducting fact-finding tours around the country, including one tour in Jamaica, Queens.

Mark Willis who led Chase’s community development arm for 19 years, said that the changes will reduce incentives for banks to pursue the more complicated projects and smaller projects that often include state and city subsidies in support of low-income housing or economic revitalization. “I’m worried that over time, the specialized units that do community development work inside banks will gradually go away,” said Willis, now a senior policy fellow at New York University’s Furman Center. “Having specialized units who really understand the market and really do complicated development deals and better understand risks because they are closer to their customer is a very valuable tool for advancing the development of their communities.”

If Willis is right, in New York City, that would mean fewer projects like the $28.6 million new headquarters in Queens for Make the Road New York, a left-leaning immigrant-led membership organization that works with immigrant communities across the state. The nonprofit’s financing sources for the project included philanthropic donations, a capital grant from the city, federal New Markets Tax Credits, three loan funds and two banks. In Rochester, it would mean fewer deals like the $200 million makeover of the historic Sibley Building, which used New Markets Tax Credits, Low-Income Housing Tax Credits and historic preservation tax credits. Banks typically purchase those three kinds of tax credits from projects, and they report those deals to regulators in support of their compliance with the Community Reinvestment Act.

Jaime Weisberg, a senior campaign analyst at the Association for Neighborhood and Housing Development – a coalition of community development corporations and tenant groups in New York City that organized Tuesday’s protest – said many of the ways that banks have fulfilled their obligations under the Community Reinvestment Act are now taken for granted. “A lot of programs that rely on public-private partnerships are at risk, particularly in New York City where there’s a whole ecosystem that [the Community Reinvestment Act] has helped foster, between the public sector, nonprofits and banks,” Weisberg told City & State. “Not everybody may understand exactly why banks do this, but they know they do, and they know they should. If a legislator puts in capital dollars for a project, I’m sure they understand there’s a bank financing piece of it.”

Every year, Weisberg compiles the State of Bank Reinvestment in New York City report. In the most recent edition, Weisberg found that banks in 2017 made $9.3 billion in home mortgage loans, small business loans and community development deals as part of meeting their obligations under the Community Reinvestment Act.

Weisberg and others are concerned that, in lieu of more complicated deals with many layers of public and private financing, banks would seek credit under the proposed regulations for larger projects that don’t require as much time and effort to put together but don’t necessarily provide much direct benefit to low and moderate-income communities. “I think that will really hurt mid-sized areas like Rochester and rural areas where it takes a lot more work to do more deals,” said Barbara van Kerkhove, a researcher and policy analyst at Empire Justice, a legal aid group based in Rochester.

One of the biggest concerns that van Kerkhove, Weisberg, and Willis all cited was the proposal to evaluate banks on the basis of a single dollar amount adding up all the home mortgages, small business loans and community development deals and other qualified activities, and dividing that into the total deposits. Under current regulations, banks get evaluated separately for each of those activities.

Under the new proposed rules, each bank would get an overall ratio as well as a ratio for each of its state or metropolitan area markets, and regulators would use those ratios in determining a grade for the bank. The agency’s own proposal, however, notes that since first suggesting the idea in 2018, a majority of public comments it has received have opposed the use of a ratio-based analysis. 

It’s this ratio-based analysis that lies at the root of concerns that under the proposed regulations, banks would be less inclined to work on the more complicated deals or smaller dollar loans.“What gets measured gets done,” van Kerkhove said. “When you have the dollar sign being measured, banks are going to focus on bigger projects. But how are those investments impacting the community, does it address the needs of the community, or is it just a big development investment that a bank uses to increase its numerator?”

Reached via email, spokesperson for the Office of the Comptroller of the Currency Bryan Hubbard said that it is a misperception that his agency is proposing to rely only on a ratio-based analysis to grade banks under the Community Reinvestment Act. He points to his agency’s proposal to measure both the number and distribution of retail loans made to low and moderate-income people and areas.

But in Rochester, van Kerkhove is concerned that the agency’s proposed method of evaluating home mortgage lending would re-legalize redlining. The proposed method would no longer require banks to make a sufficient volume of home loans to low and moderate-income neighborhoods. Instead, the agency proposes giving banks credit for making home loans to low and moderate-income people, regardless of whether they live in a low or moderate income neighborhood.

So banks could potentially focus on loans to low or moderate-income white households in the Rochester suburbs, and spend less effort making loans to borrowers of similar income inside Rochester city limits, especially in historically under-served communities of color. 

“It’s going to encourage banks to take the easier, larger loans to get more credit versus doing more work for homeowners in the city on smaller loans (who) might need counseling and down payment assistance,” van Kerkhove said. “That is redlining,” Weisberg added.

Pressed for a response to concerns about incentivizing banks to reduce home lending to some low-income neighborhoods, Hubbard said, “We encourage stakeholders provide specific suggestions that can improve the proposed approach. We welcome that input.”

Perhaps more alarming, van Kerkhove also believes the proposed regulations could result in redlining of entire metropolitan areas. Citing the rise of online and mobile banking that create banking models that can be challenging to analyze on a geographic basis, the proposed regulations suggest a bank could get a failing grade in as many as 50 percent of its geographic markets and yet still get a passing overall grade. But van Kerkhove worries that would favor larger, hotter real estate markets. “There’s a lot of problems with how banks are going to be incentivized to focus on larger assessment areas which are likely to be in larger metro areas, and that’s going to really hurt cities that are about the size of Rochester and rural areas,” van Kerkhove said.

“This is a perception of the proposal that should be corrected. The proposal sets no such threshold and specifically asks for input whether that threshold should be as high as 80 percent,” Hubbard wrote in response. “We look forward to comments on this issue to help us determine a threshold and will revisit this issue after considering comments.”

Under the proposed regulations, financing sports stadiums, hotels, or luxury housing would also automatically count toward banks’ compliance with the Community Reinvestment Act — as long as those projects are using the controversial new Opportunity Zone tax break and are located inside a low or moderate income census tract.

“Including Opportunity Zone deals, which have no specific requirements of being of benefit to low and moderate income communities, doesn’t really make sense to include as an eligible qualified activity under [the Community Reinvestment Act],” said Willis.

The FDIC signed on to the current proposal, but the Federal Reserve did not. Lael Brainard, a member of the Federal Reserve Board of Governors, outlined her institution’s sharply differing vision for modernizing Community Reinvestment Act regulations in a speech at the Urban Institute in Washington, D.C. on January 8. “The thinking of the Federal Reserve Board is much more cognizant of local conditions than I think this proposal is,” van Kerkhove in Rochester said. “I think it does a better job of taking that into account. It’s more in alignment with the intent of the Community Reinvestment Act.”

In a statement provided to City & State NY, Michael P. Smith, president and CEO of the New York Bankers Association, encouraged harmony among the three regulators. The association declined to comment on any of the other concerns. “While we agree that the Community Reinvestment Act should be modernized to align with the vast changes the banking industry has undergone over the past few decades, the process is proving to be a complex undertaking,” Smith said. “Currently, two federal banking agencies have proposed one approach, with another offering a differing plan. At the state level, New York has its own vigorously enforced Community Reinvestment Act. The effort to improve the current [federal Community Reinvestment Act] is well-intentioned and timely, but the banking industry is asking for harmony among these proposals to facilitate compliance.”

The FDIC-Office of the Comptroller of the Currency joint proposal is open for comments until March 9. If those two agencies decide, they can move forward with their own regulations while the Federal Reserve has its own, separate version. Some banks may face compliance with two clashing sets of regulations, as the Federal Reserve oversees bank holding companies that may own one or more banks that are overseen by the FDIC or Comptroller of the Currency. 

Not all at the FDIC agree with the joint proposal. Martin Gruenberg, former director of the agency and current board member, appointed under President Barack Obama, gave a scathing speech on the joint proposal during the meeting where the board members voted to join the Comptroller of the Currency’s proposal. Obama also appointed Lael Brainard to the Federal Reserve Board of Governors, and she has used her lone vote to push back against other regulatory changes, since it is the custom of the Federal Reserve Board to operate on consensus.

On Wednesday, the House Financial Services Committee is holding a hearing on this issue, the second this month. A spokesperson for Rep. Velazquez, who sits on the committee, said, “All options are on the table and Nydia is committed to stopping the Administration from gutting this important civil rights rule. The OCC is testifying before the Financial Services Committee and you can be sure she’ll be asking some very direct questions.”

The administration is on a tight timeline to push through its desired changes to the Community Reinvestment Act before the end of this summer, after which any regulatory changes might be subject to the potential authority of a Democratic-controlled Congress and White House – should there be one next year – via the Congressional Review Act, which gives Congress the ability to overturn regulations issued within the previous 60 legislative session days. 

Correction: The State of Bank Reinvestment in New York City report was about 2017. It came out in 2018.