The Treasury Department has given financial institutions an indication of what may change for the Community Reinvestment Act (CRA) under the Trump administration. Considering firms have not seen this level of proposed change to the CRA in a while, it suggests the Treasury Department (“Department”) is serious.
In an extensive report, Secretary Mnuchin describes the status quo of banks, their problems, and possible solutions. Updating the CRA is one solution that can be a “response to the real risks that American consumers and the American economy face.” While this report is not official, meaning it doesn’t change any laws or guidance, it provides touch-points that banks should already be on top of: streamlining examinations, leveraging technology and impact, and how banks can prepare.
The Department plans to change how regulators examine banks. The long stretches of time between bank examinations constrains banks’ abilities to grow, i.e., mergers and branch openings. Additionally, the standards and processes used by different regulators are not fully aligned. They are also outdated. Interagency guidance about the CRA, published in 2016, recognizes that technology can be a factor in evaluating retail banking services, and indicates that the agencies will consider “new methods as technology evolves.”
As a result, the Department seeks “improvement in the regulatory review and rating assessment process, which would consider the frequency of examinations, the ability of institutions to remediate ratings, and the transparency of how the overall CRA assessment rating is determined.”
Technology and Impact
Examinations should better consider technology as banks increasingly “use technology, such as automated and online offerings, to extend services outside of physical branches,” according to the Department. Particularly, the Department would like to consider assessment areas in communities based on “the changing nature of technology.”
Measurement of impact will be more of a factor as well. This is a sign that impact should not just be relegated to particular zip codes, counties, or areas. It should cross state and local borders. “While all three prudential regulators are involved in checking CRA compliance, none are responsible for evaluating how well the CRA accomplishes its mission.” This is a problem, as guidance indicates that “assessments will depend on the impact of a particular activity on community needs and the benefits received by a community.” Indeed, firms can get additional CRA credit for showing impact. This is likely why the Treasury Department wants CRA investments to be “measured to improve their benefit to communities.” If firms are not measuring the impact of their community development efforts, they should be.
It is unclear how fast the Department will move, as it may wait for approval by the President. At least, the Department “will include soliciting input from individual consumer advocates and other stakeholders.” So while the CRA will generally stay the same for the time being, EY warns the banking industry that uncertainty is no excuse for inaction. It suggests that banks “harness and embrace technology to meaningfully reduce costs and risks and improve agility.” Better yet, banks that incorporate responsible technology into their CRA programs can also help bring fintech, and their products, to the masses.