CRA, The Regulatory Exam Process, & The Need For Change

Premier Insights - Industry Updates - CRA, The Regulatory Exam Process, & The Need For Change

On May 20th, FDIC Chairman Jelena McWilliams announced that the agency would not finalize the proposed rulemaking to modernize the Community Reinvestment Act at this time.  The joint proposal also included the Office of the Comptroller of the Currency (OCC) support.  The Federal Reserve has not signed on to the proposal.  There was not a new timeline for implementation offered.

The full text of the statement issued by the FDIC is below:

Federal Deposit Insurance Corporation (FDIC) Chairman Jelena McWilliams today released the following statement regarding the agency’s joint proposed rulemaking with the Office of the Comptroller of the Currency (OCC) to modernize the Community Reinvestment Act (CRA).

The CRA proposal the OCC and the FDIC issued last December was a culmination of a multi-year effort by the prudential banking regulators to modernize CRA regulations for the first time in a quarter of a century. I would like to commend the FDIC and OCC staff, and Comptroller Otting in particular, on the tremendous amount of work and outreach that went into this rulemaking. There are many provisions in the final rule that will greatly benefit low- and moderate-income communities, and provide greater clarity to banks on CRA expectations.

While the FDIC strongly supports the efforts to make the CRA rules clearer, more transparent, and less subjective, the agency is not prepared to finalize the CRA proposal at this time. The FDIC recognizes the herculean effort community banks are making to support America’s small businesses and families during this challenging time and encourages financial institutions to work constructively with borrowers affected by COVID-19.

The Community Reinvestment Act received significant revision in the mid-1990’s.  Changes were phased in over time from 1995 – 1997.  Those who were working in this space back then remember the heart of the regulation from an evaluation standpoint were the “12 Assessment Factors” which included a variety of types of CRA activity.  The changes were intended to make the regulation more data driven, and the final regulation had, and still has, different parameters based on the institution’s size.  The introduction of the lending test (for large institutions) comprises the chief data component although there is some quantification with respect to investments.  However, today, the regulation and the application thereof remain subjective, despite the intended shift in emphasis.

The OCC has released a summary of the newly proposed changes.  The statements by the agencies emphasize the need for modifications, noting the banking industry has changed and there needs to be modernization.  The proposal suggests there will be objective and specific published benchmarks with which banks will be able to accurately evaluate their own performance.  The published statements thus far have suggested that these would be the same thresholds and measures that examiners will apply in the examination process.  As with the previous revision of the CRA, the statement promises a more streamlined process.

It is impossible to predict what regulatory changes will look like once things are said and done and the agencies begin implementing changes.   That said, there are two things banks needs badly.

The first thing banks need is a level of certainty.

With very few exceptions, all of the regulations contain a degree of subjectivity.  This is probably no more pronounced than in the consumer compliance space.  Institutions are often faced with a moving goalpost, driven by shifting agency priorities and individual examiner discretion.  Having done everything they can to comply, many institutions find out too late that they have jumped the wrong hurdle.

Kind of like a game of Whack-a-Mole: trying to guess what the hot button is this time around.

This is extremely taxing for institutions in terms of time, resources, and energy.  It is also a highly ineffective means of regulation if the point of the regulation is to have institutions comply.

The second is modernization.

Yes, banks are badly in need of examination processes that take advantage of the efficiencies that now exist due to better technologies.  Think back to the last CRA change in 1995.  The length, depth, and breadth of the regulatory burden have increased exponentially.  Consider the addition of Dodd-Frank alone.  It is a completely different situation than it was 25 years ago.  The examination process, however, remains essentially the same.  It is extremely time-consuming and labor intensive for the institution.  Institutions are finding it harder to navigate the examination processes, simply due to the sheer amount of time required.  The irony is that the resources that have to be poured into the examination detract from critical day-to-day compliance operations.

The examination process today is extremely antiquated in light of new technologies, availability of data, and the proliferation of analytical tools to evaluate such data.  There is electronic information available to evaluate almost any facet of a bank’s operations.  Focusing on these types of technologies and designing an examination process around these would go a long way to bring both certainty and modernization.

This all seems timely and prudent, if not essential given the situation faced with COVID-19.  What will the post-Pandemic Era look like?  In many ways it is an invitation to become more agile, adaptive and resilient.

Hopefully, our legacy will be that we rose to the occasion.

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