To rebuild economy, strengthen community banking
Banks, especially local community banks, have been true heroes in the COVID-19 crisis. As small businesses faced insolvency, community banks processed millions of Paycheck Protection Program loans that are saving millions of American jobs.
As we start gradually reopening our economy, updating a key regulatory framework for community banking, the Community Reinvestment Act (CRA), would help steer banking services and capital to underserved communities that have been devastated by this crisis.
Over the past two years, U.S. Comptroller of theCurrency Joseph Otting has lead an effort to modernize the CRA to ensure that it is both more transparent and applied equally across all communities.
Since its passage in 1977, the CRA has required banks to provide access to credit to people, and encouraged development, in rural and low- and moderate-income (LMI) areas. However, confusing standards and politicization has caused the CRA to fail many communities and entire segments of our economy. Further, it has not been updated since 1995, and it is not keeping up with modern technology or the changing needs of many communities.
Many CRA loans are intended for activities benefiting communities. However, the lack of transparency on the application forces community banks to guess which activities qualify. Even more troubling, under the past administration, regulators abused CRA through politicized lending. We need to update the CRA to get politics out of lending and clearly define activities that are proven to help communities.
We should also increase the caps on loans which small enterprises can receive while ensuring theCRA’s safety and soundness requirements are maintained. Right now, family farms can only borrow up to $500,000 from the CRA. Small businesses can only borrow $1 million. Even before the COVID-19 crisis, these amounts barely scratched the surface of what small farms and businesses need.
Considering roughly half of all American workers are employed by small businesses, it is critical that CRA loans caps be increased to ensure small enterprises can thrive after this crisis passes.
The CRA should also be updated to reflect thechanging nature of banking. Right now, the CRA only evaluates the service a branch provides in a certain geographic assessment area. However, many people now bank digitally, and some banks exist entirely online. This has created a major gap for people who are outside of a branch’s assessment area but still need access to credit.
The CRA should take this into account. Following theCOVID-19 crisis, customer preferences will likely shift towards online banking. We should be encouraging lenders to provide access to credit to underserved communities, not just those who live within a certain distance of a branch. No one should lack access to credit based on their zip code.
Further, increasing bank loan diversification reduces risk to a bank’s safety and soundness, a problem that we saw when the previous administration forced banks into making risky loans in specific regional and economic concentrations.
As we update the CRA, we must be careful not to repeat the mistakes of the past. Until we eliminated some of its most onerous parts with the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, the Dodd-Frank Act and its compliance costs had killed nearly 4,000 community banks. We need to make sure that the CRA’s rules and evaluation measures are clear and easy to follow. We also should include certain exemptions for the smallest banks where necessary.
Right now, we have the opportunity to bring theCRA into the 21st century. The Office of theComptroller of the Currency is about to finalize their proposed modernization of the CRA that will make these and other critical changes to the law. It is imperative that we get this right.
The COVID-19 crisis has been devastating for our entire economy, but its impact is brutal in rural and LMI areas. Updating the Community Reinvestment Act will give these communities a critical lifeline to not only recover from this crisis, but come out even stronger than they were before.