LISC’s Matt Josephs takes a look at the long-awaited modernization of the Community Reinvestment Act (CRA), calling it "fair, workable and strong." But he also warns of the chilling effects of uncertainty, as a legal challenge stalls implementation of the final rule, and offers a series of next steps for banks, regulators and community development practitioners. "Right now, it is critical that we maintain the momentum around CRA,” he writes.
When it comes to mobilizing private capital, uncertainty is never a good thing. And yet, that is where we are right now with the Community Reinvestment Act (CRA), a law that has incentivized banks to make tens of billions of dollars in community investments since CRA was enacted in 1977, while also striving to reverse some of the most pernicious effects of redlining.
Over the years, the results have been good for underserved and underbanked communities, spurring development of much-needed housing, businesses and jobs. And they have been good for banks as well. Lenders have been able to connect with profitable investment opportunities that would not otherwise exist—investments that have delivered in terms of both financial performance and local impact.
But rules related to CRA have not been updated since 1995 and no longer reflect the way the banking system operates. The banking industry, consumer advocates and community development practitioners have long been aligned in their calls for an updated approach. In response, regulators from the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) spent the last several years working to modernize how CRA would be applied, factoring in multiple sets of public comments from lenders, community organizations, researchers and public officials on how to do so.
This culminated in the release of final regulations in October of 2023, which addressed some significant gaps in the existing approach. For example, the legacy CRA rules credited banks mainly for activity in their physical footprints, focusing on census tracts near their branches and ATMs. But this approach failed to recognize the increasing prevalence of online banking, and also left many underbanked communities, including small towns and rural areas, without the community development capital they need to grow. The final regulations clarified how banks can get CRA credit outside of their assessment areas, prioritizing activities that serve underbanked communities, including rural and Native communities.
The final regulations also provided much needed clarity on which activities are deemed to be “innovative and responsive” to the communities, providing a clear list of such activities, but also allowing banks to provide supportive information so that other activities could qualify as well. And, importantly, the new regulations allow banks to seek advance clarification from the regulators, so they know if they might receive credit for activities in advance of their exam period.
These are but two of many provisions in the final rule that provide the certainty and consistency that banks and community development advocates have been seeking for years. The changes will help align the entire community development financing ecosystem with even more impactful investments in the coming decades—but only if they take effect as planned. Unfortunately, the rules are in limbo right now, and so too are their benefits.
A Texas judge issued an injunction this spring to halt implementation after banking trade organizations filed suit to block the changes. And, if banks aren’t sure how their investments will be evaluated under CRA, they are less likely to make significant new commitments until they have more clarity. The uncertainty, regardless of the ultimate outcome, can be chilling.
We understand initial trepidation in the industry, given the significant overhaul of the regulations. We certainly had concerns early on in the process. For instance, we wanted to make sure the changes did not unintentionally disadvantage economically vulnerable people and communities, as some early language might have. We urged regulators to recognize the value of smaller investments so that banks wouldn’t concentrate capital on just a handful of large opportunities. And we wanted the rules to recognize the value of investments, particularly equity investments, in affordable housing and community development projects.
But the regulators did their jobs. They combed through more than 6,000 comments and made adjustments to reflect many of the suggestions—including comments from banks. No one, including LISC, got everything they wanted in the new rules, but the updated approach is fair, workable and strong. It should move forward.
In the meantime, there is still much that banks, regulators and community development practitioners can do to prepare for implementation while we await the legal process to play itself out, including:
- Weighing in with regulators on implementation: While the final rules provide an excellent framework for implementation, there are still many areas where the regulators will need to provide clarity on a sub-regulatory level, which they have traditionally done through an Interagency Questions and Answers document. Banks and community development organizations should weigh in with questions and recommendations now, with the expectation that the regulators are already giving consideration to these issues, as they likely are in the process now of developing examiner guidance and training materials.
- Moving forward with data collection and sharing: The agencies intend to develop data reporting guides, technical assistance materials, templates and data tools for banks and the public to increase familiarity with performance tests and allow for monitoring of performance relative to benchmarks, based on historical data. We strongly urge regulators to move forward with these efforts, so the market better understands the metrics of the new rules and is ready for implementation. Similarly, if regulators are collecting data that is not already made available to the public and that may be part of the new assessment protocols (e.g., data on bank equity investments in Low-Income Housing Tax Credits and New Markets Tax Credits), then it should release that data as soon as practicable.
- Communicating with bank partners: In conversations with lenders and investors, community development organizations should highlight the myriad activities that are relevant to both the legacy CRA law and the new rules. That includes investments in Low-Income Housing Tax Credit projects, for instance, and lending and investing to support community development financial institutions (CDFIs). These community investment activities are valued under either approach, which means those investments can continue to move forward, regardless of what is happening in the courts.
Right now, it is critical that we maintain the momentum around CRA. CDFIs like LISC have seen a tremendous increase in the demand for capital in recent years—which means the conventional financial system has not been able to meet local needs. Strong regulatory action is absolutely critical if we are to bridge those gaps and support widespread economic opportunity. With their revised CRA rules, regulators have given us just that.
About the Author
Matt Josephs, Senior Vice President, LISC Policy
Matt manages the team that is responsible for developing LISC’s federal policy agenda; communicating this agenda to LISC employees, board members, funders and other stakeholders; and pursuing this agenda through engagement with members of Congress and other federal officials.
@LISC_policy