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House Financial Services Committee Hearing on the Community Reinvestment Act

House Financial Services Committee

“The Community Reinvestment Act: Is the OCC Undermining the Law’s Purpose and Intent?”

Wednesday, January 29, 2020

Key Topics & Takeaways

  • Qualifying Activities: Asked how the proposal expands activities that qualify for CRA credit, Otting replied that there has never been a comprehensive list, and that creating one will give clarity to both communities and banks. He added that in addition to defining activities that qualify, the proposal also clarifies that loans to high-income individuals in LMI areas no longer would.
  • Mortgage Lending: Asked how the proposal would affect mortgage lending, Otting replied that it would not disincentivize mortgage lending but would rather increase it as banks that previously only traded mortgage-backed securities (MBS) or mortgage pools and received 100 percent-on-the-dollar credit will no longer be able to do so. In response to a question from Rep. French Hill (R-Ark.), Otting added that the MBS arena is one the OCC will be looking at further before it issues a final rule.
  • Volcker Covered Funds: Rep. Bryan Steil (R-Wis.) said the Volcker rule covered funds provision was overly broad and unnecessarily included venture capital and other long-term funds. He added that exempting venture and growth funds from the covered funds definition would spur increased investment in innovation companies across country. Otting agreed with these comments, adding that there has been a high-priority amount of work done at the OCC on this issue. He would not comment publicly on changes but said the agencies are close to accomplishing modification, implying that these could be made public within a week.

Witness

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters called the Community Reinvestment Act (CRA) an important law enacted to combat redlining and ensure banks make responsible investments in the communities where they are chartered. She explained that the Office of the Comptroller of the Currency (OCC) has put forth a CRA rule proposal that runs contrary to purpose of the CRA and would lead to widespread disinvestment in low- and moderate-income (LMI) communities throughout the country. Waters said the proposal would allow banks to “skate by” and do the “bare minimum” for a passing CRA grade, noting that under the proposal, banks could earn a failing grades in half of their CRA assessment areas and still pass their overall CRA exam. She said such a radical change to the CRA demands a heightened level of public scrutiny, criticizing Otting for the proposal’s 60-day comment period.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry applauded Otting and Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams for their efforts to reform and modernize the CRA, noting that in the 40 years since the CRA was enacted, much has changed in the banking industry. McHenry pointed to the rise of mobile and online banking as one such development, saying these advances help more consumers in communities the CRA was intended to serve. McHenry said that proposal takes those developments into account, adding that the current CRA regulations are outdated and technologically ineffective. He continued that the proposal “moves us in the right direction” as it seeks to modernize the CRA to ensure it meets the needs of both communities and financial institutions. McHenry said the proposal will increase the transparency and objectivity that CRA exams currently lack and will generally increase the effectiveness of the statute. He noted that while branch banking remains an important part of serving customers, there has been a significant increase in the demand for digital services and the number of physical bank branches is no longer a measure of a bank’s commitment to its community and that regulation must therefore evolve.

Rep. Gregory Meeks (D-N.Y.)

In his opening statement, Meeks said the CRA was a civil rights bill meant to address the legacy of redlining and discrimination in banking, adding that there is still ample evidence today of continued redlining, banking deserts and asymmetrical access to mortgages and loans in LMI communities and communities of color. He said that the OCC proposal decouples the CRA from its intended outcomes in these communities, discounts the value of mortgage and direct lending, cuts out community organization, and is not supported by data.

Testimony

The Honorable Joseph M. Otting, Comptroller of the Currency, Office of the Comptroller of the Currency

In his testimony, Otting said his intent is to strengthen the CRA and encourage banks to do more in their communities through four basic improvements: 1) clarifying what counts; 2) clarifying where it counts; 3) measuring CRA performance objectively; and 4) making reporting transparent and timely. He said the proposal process was informed by the various agencies, public hearings, recommendations published by the Department of the Treasury, extensive feedback gathered through meetings and tours, and 1,500 comments received following the Advanced Notice of Proposed Rulemaking (ANPR). Otting refuted a number of claims about the proposal, saying it does not permit redlining, faithfully implements the CRA statute, does not create a single metric, does not disincentivize maintaining bank branches, and does not allow banks to pass their CRA exam if they fail in 50 percent of their assessment areas.

Question & Answer

Assessment Areas

Waters expressed concern that under the proposal a bank with a failing CRA grade in 50 percent of its assessment areas could still receive a passing overall grade. Otting refuted this assertion, explaining that currently only 15 percent of assessments areas are evaluated as compared to 100 percent under the proposal, adding that the OCC is accepting public input on whether the threshold should be 50 percent or as high as 80 percent.

Rep. Nydia Velázquez (D-N.Y.) asked what safeguards will be put in place to ensure banks do not focus on only a small number of large, easy projects. Otting replied that in every individual assessment area, the OCC will look at the actual volume of units an institution completed, not just the dollar value. Otting added that the proposal will increase the number of assessment areas, which will increase investments in those areas.

Rep. Cindy Axne (D-Iowa) asked about the proposed deposit-based assessment areas. Otting explained that banks do not receive credit outside of where they are physically located, and the proposal would deem places where a bank receives five percent or more of their deposits an additional assessment area.

Qualifying Activities

Reps. John Rose (R-Tenn.), Lance Gooden (R-Texas) and McHenry asked how the proposal expands activities that qualify for CRA credit. Otting replied that there has never been a comprehensive list, and that creating one will give clarity to both communities and banks. He added that in addition to defining activities that qualify, the proposal also clarifies that loans to high-income individuals in LMI areas no longer would.

Rep. Andy Barr (R-Ky.) asked whether projects can be approved for CRA credit before being underwritten under this proposal, rather than after the fact. Otting said that banks have been concerned about activities qualifying, so were only undertaking the most conservative projects. He continued that the OCC wants banks to “stretch” and think about new ways to invest in communities.

In response to a question from Rep. Scott Tipton (R-Colo.), Otting said that qualifying activities can be added to or subtracted from the list depending on the needs of communities.

Mortgage Lending

Reps. Blaine Luetkemeyer (R-Mo.) and Brad Sherman (D-Calif.) asked how the proposal would affect mortgage lending. Otting replied that it would not disincentivize mortgage lending but would rather increase it as banks that previously only traded mortgage-backed securities (MBS) or mortgage pools and received 100 percent-on-the-dollar credit will no longer be able to do so. In response to a question from Rep. French Hill (R-Ark.), Otting added that the MBS arena is one the OCC will be looking at further before it issues a final rule.

In response to a question from Rep. Roger Williams (R-Texas), Otting said that under the proposal, both the area and the borrower would have to be designated as LMI in order to receive CRA credit.

Modernization of the Banking Industry and Importance of Bank Branches

In response to questions from Reps. Bill Huizenga (R-Mich.) and McHenry about how the banking industry has changed since the CRA was last modernized, Otting said it has changed significantly, particularly noting the development of interstate banking and mobile and digital banking. He said that although a branch network is still a critical component of the U.S. banking system, revising how it is measured will help evaluate how banks are supporting communities.

Volcker Covered Funds

Rep. Bryan Steil (R-Wis.) said the Volcker rule covered funds provision was overly broad and unnecessarily included venture capital and other long-term funds. He added that exempting venture and growth funds from the covered funds definition would spur increased investment in innovation companies across country. Otting agreed with these comments, adding that there has been a high-priority amount of work done at the OCC on this issue. He would not comment publicly on changes but said the agencies are close to accomplishing modification, implying that these could be made public within a week.

Interagency Coordination

Waters, McHenry, Sherman, Huizenga and Barr asked about coordination between the OCC, FDIC, and Federal Reserve on the proposal. Otting said the OCC and FDIC have not been able to reconcile their differences with the Federal Reserve but highlighted that the Federal Reserve only covers 15 percent of CRA activity in the industry today. Asked if he is concerned about regulatory arbitrage and competing regulations, Otting said he is not, and that the proposal will bring more clarity than confusion.

Comment Period

Rep. Madeleine Dean (D-Pa.), Waters, Velázquez and Meeks criticized the short length of the proposal’s 60-day comment period. Otting said that the OCC is examining the comments they have received and will not extend the date.

For more information on this hearing, please click here.

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