The Guru Is In
Blueprint for a CRA-evolution
By David A. Smith
10 min read
So powerful is the fear of the devil we don’t know that though everyone who works in affordable housing will admit privately that, as currently regulated, the Community Reinvestment Act (CRA) is broken in a policy sense, few will voice this publicly. Now we could—and even more, we should—propose regulatory ways to fix it.
The CRA’s lead regulator, the OCC, is pointedly asking us what the CRA’s Three Fates (OCC, FDIC and FRB) should measure, what they should cut, via a newly published Advance Notice of Proposed rulemaking (ANPR) “to solicit ideas for building a new framework to transform or modernize the regulations that implement” the CRA. To prompt comments in a structured way, the OCC posed its invitation to comment via 31 questions, and from what it has chosen to ask, we can discern much about where the OCC itself sees the current regulations as obsolete, and six macro-goals it hopes to elicit stakeholder help in achieving.
- Reflect the reality of twenty-first century banking. The current regulations are obsolete, “developed when banking was based largely on physical branch locations,” whereas now money can come from anywhere and go anywhere. For instance, “in light of how banks and consumers now engage in banking,” (Question 4), the ANPR invites commentary on, “delivery channels, branching patterns and LMI branches,” (Q 27), “ventures undertaken in cooperation with minority-owned and women-owned banks or low-income credit unions (MWLIs),” (Q 28), and “small and disadvantaged service providers,” (Q 20).
Where the industry needs to go. Even as four decades of CRA-motivated bank innovation has proved the statute’s policy value, the rising scale, speed and complexity of banking means it’s critical that the CRA as regulated keeps up with the pace of change in a globally revolutionizing banking system. Because the private sector will innovate faster than a government can regulate, the regulatory structure should incentivize industry-leading financial institutions to propose their own scorekeeping systems and put the government in its more natural role of strategically evaluating and choosing the soundest technical solutions put forward by others.
- Give credit to five capital vectors. Although ‘community’ is place-based, capital is not, and the ANPR recognizes that the value impact of CRA capital can be visible in five different ways:
- Place. Money flows to under-invested in locations.
- People. Those excluded from credit access capital they then repay.
- Risk. Money finds its way to borrowers and ventures whose perceived risk is greater than real risk.
- Innovation. Small capital to show a paradigm has levering change-making impact.
- In-kind outreach. For every loan, there must be a borrower, and prospective borrowers often require education and training.
For instance, stakeholders are invited to comment generally on how to regulate so that banks, “effectively serve the convenience and needs of their entire communities,” (Question 4), to propose means of valuing, “hours of volunteer work [as part of] the aggregate total of CRA activity,” (Q 12), or to concur that, “financial education or literacy programs, including digital literacy,” (Q 19) should be valued as well.
Where the industry needs to go. Not only is a bank regulator that values innovation and outreach to be cherished and rewarded, but also the CRA’s true purpose is served only if the evaluation rewards are constantly adjusted to reflect continuous stretching. The current strategic plan approach gives banks flexibility to be collaboratively competitive in setting stretch goals, and the ANPR is clearly inviting banks to propose broadening the ways of achieving them.
- See the whole value chain and reward activities wherever they expand credit access. Throughout the ANPR, the OCC advances the concept of a ‘metric-based framework’ where one mega-formula or algorithm (to be invented) yields a numerical score (think Qualified Allocation Plan, Real Estate Assessment Center or Public Housing Management Assessment Program) that is then compared against preset targets to give the bank’s rating. Further, comments are invited on weighting as a conceptual tool (Question 10), for community involvement (Q 11), securitization (Q 18), loan originations versus loan purchases (Q 25), and loans held in portfolio versus originated for sale (Q 26).
Where the industry needs to go. Though to ordinary people a loan is simply money they get and then spend for a worthy purpose, in fact a housing or community development loan is actually a manufactured financial product output of a demand-side housing value chain encompassing eight links: eligibility, application, subsidy, underwriting/credit, closing, funding, servicing and enforcement. If any of these links is broken or too costly, capital does not flow to individual customers or markets, and often in under-served markets several links are weak or broken simultaneously.
Because the CRA is regulatory assessment of the effectiveness of assuring continuous capital flow to places beyond natural market economics, it is at its foundation all about making demand-side value chains work, and to that end, the new revised regulations should embrace any innovation that significantly improves any under-performing link, with special bonus credit for initiatives that strategically and simultaneously address multiple links together.
- Use big data. Big data has come to every other aspect of American commerce, and it should come to capital flows, since capital is data in its purest form (numbers that denote value only because people believe they have value), and big-data granularity can reach to the level of household or micro-neighborhood. The OCC questions invite stakeholders to replace the current big broad bland assessment–area boundaries with much more precise targeting (Question 7), either by household or by location, both of which are well within banks’ technical capacity; with regular (Q 29), potentially more frequent reporting (Q 30); and all on a basis that, “attempts to minimize regulatory burden [and] the costs and benefits…in dollars or staff hours,” of that reporting (Q 31).
Where the industry needs to go. In today’s global finance, financial technology (or FinTech as it’s been branded) is hot. Spurred by Amazon and Facebook, both of which have barely-concealed designs on the banking industry, financial institutions are pouring huge sums into developing their scalable back-office analytical capacity to optimize their symbiosis with our wallets and our paychecks. In the interest of not crippling smaller or more local banks, adopting a big-data/high-granularity modality for self-reporting CRA performance against a strategic-plan-designed scorecard should be optional to the financial institutions. Even if it is, I expect that the largest institutions will want to embrace such an approach, because they’ll be able to analyze both their current book and their anticipated lending trends and propose new boundaries that are both more fractal and more impactful.
- Broaden the range of CRA-qualifying affordable housing and community development activities. Long, long ago in a galaxy far, far away, job creation was local, tangible and fixed in place, so community economic development was simple and easy to measure: lend to or invest in a corner store, and voila! In today’s world, with dematerialized value chains, entrepreneurs whose products originate in coffee shops and are bought, sold and installed in mobile devices, and electronic money in its myriad forms mutating monthly, how money gets into disadvantaged places and people is more abstract than ever. The ANPR devotes more than half a dozen questions to expanding the CRA’s conception of CED to include “those that support projects, programs or organizations with a mission, purpose or intent of community or economic development,” (Question 15), targeted and even transitory needs including, “designated major disaster areas,” (Q 16), double-bottom-line initiatives, “such as credit and financial services,” to, “other identified populations, such as the disabled,” (Q 17), and “small and disadvantaged service providers,” (Q 20). Warming to its subject, the ANPR then tosses up trial balloons about, “student, auto, credit card or affordably priced small-dollar loans,” (Q 22), small business loans (Q 23) and small business loans with a CD purpose (Q 24).
Where the industry should go. As an industry, we should wholeheartedly embrace the more sophisticated, complicated, interconnected models of community and economic development. Today’s cities are an order of magnitude more socially and economically complex than they were four decades ago, and the anti-poverty ecosystems of for-profits, nonprofits, government agencies and capital providers is much more sophisticated, variegated and flexibly adaptive than the CRA’s original authors could have imagined. Complexity is reality and if regulation is to add value, then the regulation has to allow those who are complex to score well.
Further, in terms of fuel for sustainable urban development, residential mortgages may be the carbohydrates —tasty and easy to bulk up on—but CED loans are the vitamins – smaller, essential, take them every day. Using a sub-allocation, set-aside, or innovation/economic development bonus weighting are all means of making sure that we build strong communities 12 ways.
- Think big. Emanating from the penumbra of the ANPR is an open invitation to the industry. You know more about this than we do. Show us how to write a regulation that, in working better for you, works better for us. Help us think big.
Where the industry needs to go. When it comes to CRA, our industry should chase two big prizes:
- Expand CRA’s ambit and reshape the global capital environment. CRA’s reach is by statute limited to, “insured depository institutions,” but Congress will soon want to expand it to capture inflowing foreign capital and institutions, vendor-financing money, and mobile money. We who’ve been effectively CRA-motivated for decades want regulations that not only work well for us but also can be readily extended by statute to these capital interlopers and work as well and fairly on them.
- Tie CRA into Basel III risk-weighted capital. No longer national, capital is global, with International Financial Reporting Standards overtaking generally accepted accounting principles, and Basel III becoming the global standard of bank safety and soundness. Under Basel III, risk-weighted capital ratios are global in a unified metric-based system (shades of the ANPR’s trial balloon), and risk-weighted capital is becoming a core driver of bank lending and investing strategy. Aligning CRA so that a higher Basel III risk rating gave a ‘safe harbor’ CRA top-tier credit for that capital would create a nice offset benefit and bring to all forms of CRA activity the same type of market-adjusting ‘invisible regulatory subsidy’ that LIHTC enjoys from its favored status under the CRA investment test.
We want OCC to promulgate regulations to make it easy for Congress to connect CRA ever more broadly into the global financial system because that will benefit the United States by increasing the totality of CRA-motivated capital we will be able to shape, tap and target.
We who make our living in a complex and technical field owe a duty to use our knowledge and insight to make the system work better. If we don’t, we not only miss the chance to make the system work better, we forfeit any legitimacy to complain if it does not.
Comments are due November 19. Email them to [email protected], captioned “OCC Docket ID OCC-2018-0008.”
