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Amidst the Backdrop of Growing Concerns Over the Pandemic, Social Amidst the backdrop of growing concerns over the pandemic, social injustice, and racial inequality in the US, the FRB seeks to modernize CRA to better reflect the current banking landscape. On September 21, 2020, the Board of Governors of the Federal particularly notable because the FDIC joined the OCC in issuing the Reserve System (FRB) issued an advanced notice of proposed December 2019 proposed rule. The FRB’s comment period on the rulemaking (ANPR) to “strengthen, clarify, and tailor” the nearly three- ANPR is 120 days, twice the amount of time the OCC provided. The decades-old regulations implementing the Community Reinvestment FRB has stated that since reforms to the CRA regulations are likely to Act (CRA).1 The FRB’s announcement comes on the heels of an set expectations for the next few decades, “it is more important to updated CRA regulation finalized by the Office of the Comptroller of get the reforms done right than to do them quickly.”3 the Currency (OCC) in May 2020.2 Despite the lack of regulatory uniformity, the FRB stated that its Interagency divergence on CRA framework for overhauling CRA reflects interagency discussions and input. The goal of the FRB’s proposal is to build a foundation for a US financial regulators often announce rule changes together, but consistent, multi-agency approach to address inequities in access to neither the FRB nor the Federal Deposit Insurance Corporation credit and financial services for low- and moderate-income (LMI) and (FDIC) joined the OCC in its May 2020 final guidelines. This is minority communities. Amidst the backdrop of growing concerns over the pandemic, social injustice, and racial inequality in the US, the FRB seeks to modernize CRA to better reflect the current banking landscape. Past and present socioeconomic concerns provide a critical metrics into the examination process that can be tailored to context in the effort to modernize CRA local market conditions, including demand and needs, and that can be adjusted to structural economic and business cycle Passed by Congress in 1977, the CRA is part of several landmark changes.10 Additionally, the FRB seeks to strike an appropriate pieces of legislation enacted during the civil rights movement balance between greater certainty in how banks are assessed and intended to address inequities in the US financial system.4 The minimizing data collection and reporting burden. FRB, FDIC, and OCC have broad authority and responsibility for • Offering flexibility to smaller retail banks. As outlined in the implementing the statute and for ensuring that it continues to reflect FRB’s ANPR, small retail banks that elect the new framework would the modern banking landscape. According to one analysis, the OCC be assessed solely under a Retail Lending Subtest, unless they oversees about 70 percent of CRA activities, while the FDIC and FRB elect to have other activities considered. Wholesale and limited are responsible for banks making up the remaining 30 percent.5 purpose banks would be evaluated only on their community development activities. The FRB has devoted considerable attention to addressing social injustice and reducing racial inequalities that continue to impact • Similar goals, different approaches. While the FRB’s ANPR the US and its economy. FRB Governor Lael Brainard said in a and the OCC’s final rule share common goals and objectives, they statement that the CRA “remains as important as ever as the nation differ in approach in a few important areas. For example, the confronts challenges associated with racial equity and the COVID-19 OCC measures CRA performance via a single quantitative total pandemic.”6 of lending and investment dollars; however, the FRB proposes to measure quantitative and qualitative performance across retail and In a June 2020 speech, Federal Reserve Bank of Atlanta President community development lending and services via four subtests. Raphael Bostic identified several ways the Federal Reserve can bring For assessment area modernization, the OCC has decided upon a about a more inclusive financial system, noting that there is “a moral deposits-based approach, whereas the FRB is seeking comment and economic imperative to end[ing] racism.”7 Additionally, the on four different alternatives. And while the FRB seeks to rely on Federal Reserve Banks of Atlanta, Boston, and Minneapolis recently banks’ existing data and reporting infrastructure, the OCC will launched a multi-year series, entitled “Racism and the Economy,” to create its own new requirements. explore the “context and ways to address systemic racism in sectors including employment, housing, education, and criminal justice.”8 Key implications and considerations for financial firms: Within this context, modernizing CRA can be seen as an important • What will the FDIC do next? FDIC Chairwoman Jelena McWilliams part of the Federal Reserve System’s effort to address past and has noted that the FDIC engaged in a two-year process with the present socioeconomic concerns. FRB and OCC to develop a mutual proposal.11 In May 2020, the FDIC chose not to finalize the proposal with the OCC because the agency Key aspects of the FRB’s ANPR felt that the finalization came at an inopportune time amidst the • Strengthening the regulations in alignment with the CRA ongoing pandemic when banks needed to be more flexible with statute to promote financial inclusion. The FRB wants to their customers to stabilize the economy. Much like the FRB’s ensure that a wide range of LMI banking needs are being met. It stance on the CRA, the FDIC seeks to allow small banks to opt-in or also wants to promote financial inclusion by, among other items, opt-out of the new system if it does not work for their communities providing credit for activities in areas with unmet needs outside of and their ability to implement a new framework for compliance with assessment areas, such as Indian Country.9 the CRA. • Providing greater certainty, tailoring regulations, and The FDIC plans to continue visiting its CRA proposal each quarter minimizing burden. The FRB’s ANPR seeks feedback on several depending on how the economy and banking systems are doing approaches designed to make the rules clearer, more transparent, and if the COVID-19 pandemic has subsided. The FDIC has and less subjective. For example, the FRB believes that its suggested that the best outcome is a uniform proposal amongst proposed metrics for the retail and community development the regulatory bodies. tests would provide more clarity and transparency on how bank ratings are determined. The FRB seeks to incorporate standardized 2 Amidst the backdrop of growing concerns over the pandemic, social injustice, and racial inequality in the US, the FRB seeks to modernize CRA to better reflect the current banking landscape. • What does this mean for joint regulatory action on a major regulatory matter? Will there ultimately be uniformity across the agencies? While two or three different CRA regulations may result, arguably, there is time, opportunity, and hopefully resolve for the regulators to converge toward a common CRA rule. Governor Lael Brainard has said, “ It has been 25 years since the last significant revision to the CRA regulation, so it is important to get reform right. Stakeholders have expressed strong support for the agencies to work together to modernize the CRA. ” Acting Comptroller of the Currency Brian P. Brooks also released a statement at the time of the FRB’s ANPR saying: “Public input and discourse fuels continuous improvement, we look forward to reviewing the comments for potential insight into our own rulemaking that applies to national banks and savings associations.” What’s Next? Once the FRB and/or the FDIC issue their final rules, either together or respectively, it will provide a better comparison to the OCC’s and greater understanding of the path toward regulatory alignment on a critical matter to the US banking system and broader socioeconomic equity. With our deep bench of regulatory professionals and practical experience working with financial institutions, Deloitte can help banks effectively assess their CRA programs relative to the new or proposed requirements and help the institution position its CRA program and plan for future success. This publication is part of an ongoing effort to closely monitor and assess how the regulators have responded to continued modernization efforts. Like you, we will continue to follow developments in this area and issue additional updates and analysis. Contacts John Graetz Austin Tuell Principal | Deloitte Risk & Financial Advisory Manager| Deloitte Risk & Financial Advisory Deloitte & Touche LLP Deloitte & Touche LLP Deloitte Center for Regulatory Strategy Kyle Cooke Senior Consultant | Deloitte Risk & Financial Advisory Irena Gecas-McCarthy Deloitte & Touche LLP FSI Director, Deloitte Center for Regulatory Strategy, Americas Principal | Deloitte Risk & Financial Advisory Deloitte & Touche LLP 3 Amidst the backdrop of growing concerns over the pandemic, social injustice, and racial inequality in the US, the FRB seeks to modernize CRA to better reflect the current banking landscape. Endnotes 1. FRB, “Federal Reserve Board issues Advance Notice of Proposed Rulemaking on an approach to modernize regulations that implement the Community Reinvestment Act,” accessed on October 12, 2020; FRB, “Community Reinvestment Act,” Federal Register Notice. September 21, 2020. 2. OCC, “OCC Finalizes Rule to Strengthen and Modernize Community Reinvestment Act Regulations,” accessed on October 13, 2020. The OCC said its final rule “reflects careful consideration of the more than 7,500 comments stakeholders submitted in response to the notice of proposed rulemaking announced on December 12, 2019.” 3. FRB, “Lael Brainard on Strengthening the Community Reinvestment Act by Staying True to Its Core Purpose,” accessed on October 13, 2020. 4. Ibid. 5. Claire Williams, “FDIC Won’t Join OCC’s Revamped Anti-Redlining Rule, Sources Say,” Morning Consult, June 15, 2020, accessed on October 14, 2020.
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