There’s a very big inconsistency in the Community Reinvestment Act. The current CRA rule was passed in 1994 and requires every FDIC insured bank to meet the credit needs of the communities they serve. All “covered” banks are subject to CRA performance evaluations every 3-5 years. But although all covered lenders are required to fulfill their CRA responsibilities only a relatively small number, about 15%, of those institutions report their CRA-related lending activity annually. That’s because the regulation requires only “large banks” to report. The other banks may voluntarily report their lending, but only a very few (only 73) do so.
There are roughly 4,300 banks in the United States subject to the CRA but only 648 were required to report their lending activity under the CRA for 2023, the last year for which public CRA data is available as of the date of this article. The fact that nearly 85% of banks don’t report lending data on their CRA activities is bad public policy.
Ask a regulator to explain this incongruity, 100% of banks must meet their CRA responsibilities but only 15% report their CRA activities, and they will say either that was part of the political understanding in 1995 when the CRA was last substantially revised or that it is a form of “regulatory relief.”
Presenting the absence of a requirement to report community bank lending as a form of regulatory relief is very misleading. If a bank is required to perform under CRA it should be monitoring its lending activity to confirm that it is consistent with the requirements of the CRA. And if a bank is collecting and monitoring its CRA activities what’s the big deal about reporting those activities? Is it the “cost”?
The Federal Financial Institutions Examination Council (“FFIEC”) provides free software for the collection, compilation and reporting of CRA activity. Many community banks generate fewer than 100 small business loans annually. So, the data entry costs are minimal. Cost is simply not a legitimate reason for a bank not reporting its CRA activities.
The absence of the CRA activities of 85% of banks that are not required to report those activities is not only detrimental to the public and public officials, but also injurious to the banks themselves. Without that activity in the public database, it’s impossible to conduct “peer” analysis. A consequence is that the community bank’s CRA performance ratings are based on comparisons (during a CRA exam) of their lending activity to the largest banks. Is that a fair comparison? Not really, but It’s the only comparison possible for examiners who must determine if a bank is fulfilling its CRA responsibilities.
In our CRA consulting practice we have access to the lending data of non-reporting banks and what we have discovered is that the community banks frequently outperform the large banks when it comes to meeting the community’s need for credit services. What we routinely do is to interpolate our client’s activity into the public market data. We have found in many cases that the local banks beat the major banks in their local communities. Time and again we’ve seen community banks providing more credit to their local communities than their big brother competitors. But no one knows that.
The outstanding record of community banks providing credit services to their local communities is a big secret because the data is not publicly available. This is a disservice to the community banks. It also is conducive to the charge of “CRA grade inflation” by community activists who don’t have access to community bank lending. Hiding the CRA activity of community banks facilitates political demagoguery
The federal banking regulators have announced their intention to repeal the onerous (yes, it really was burdensome) 2023 CRA Rule. This is a great opportunity for regulators to reconsider the reporting requirements that exempt 85% of banks from reporting their CRA activities.
Given the Administration’s emphasis on “deregulation”, requiring community banks to annually report their CRA activities is not likely to be favorably received – even if it benefits the community banks. We suggest that the regulators consider a proposal that likely will be well received by the banking community.
The typical CRA exam cycle is 3 years if a bank has received at least a satisfactory composite performance evaluation on its last exam. Regulators should propose an exam cycle of 5 years for any bank that voluntarily reports its CRA data for at least the 2 years preceding any scheduled exam. Fewer exams would be very appealing to banks, and it would save exam expenses for federal banking regulators. The banking community, the public and the regulator community would all benefit from more complete market data from all segments of the banking community. This would be a winning public policy.
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