The Honorable John Otting
Comptroller of the Currency
Office of the Comptroller of the Currency
400 7th Street, SW., Suite 3E-218,
Washington, DC 20219
The Honorable Jelena McWilliams
Chairman, Board of Directors
Federal Deposit Insurance Corporation
550 17th Street NW
Washington, DC 20429
RE: Community Reinvestment Act Regulations
OCC Docket ID OCC-2018-0008
FDIC RIN 3064-AF22
Dear Comptroller Otting and Chairman McWilliams:
IFF appreciates the opportunity to comment on this Notice of Proposed Rulemaking (NPR) concerning the Community Reinvestment Act’s (CRA’s) regulatory framework. Like the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), we believe that CRA regulation can be modernized in a manner that promotes even more bank investment in low- and moderate-income communities (LMI), and we thank you for your consideration of our views.
For your background, IFF is a U.S. Department of the Treasury-certified Community Development Financial Institution (CDFI). Our core business is to help nonprofits and certain businesses that serve low-income communities and persons with disabilities to plan, finance and build the facilities and housing they depend on to provide essential health and human services; quality child care and K-12 education; job training; affordable and accessible housing; and increased access to fresh food. We serve a 10-state region that includes Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio, Wisconsin, and Northern Kentucky. Since our founding in 1988, we have made over 1,800 loans for more than $1 billion – leveraging a total investment in communities of $3 billion and supporting tens of thousands of jobs.
None of this community impact would have been possible without CRA. Through it, we have been able raise substantial private capital to meet the specific credit needs of a broad range of nonprofits in communities across the Midwest – financing quality charter schools in Kansas City, MO and Indianapolis, IN; state-of-the-art early education facilities in Flint, MI and St. Louis, MO; new food business incubators and arts and recreation facilities in Chicago, IL; and full-service grocery stores in Des Moines, IA and Rockford, IL, as well as in rural towns across Kansas. Fully two-thirds of our debt capital comes from banks that invest in IFF, not only to meet their CRA obligations, but to fund the high-impact community development loans we make to address the deep and too often overlooked need for critical human services and essential community infrastructure in LMI communities in the Midwest.
Given the importance of CRA to IFF’s work, we know that it can be both streamlined and strengthened, so that together – banks, regulators and community stakeholders – can do even more to better understand and meet the credit needs of LMI individuals and communities. Regrettably, in our opinion, the NPR misses the mark on both these counts – neither streamlining nor strengthening CRA.
Here is why we think so:
1. The NPR further fragments and complicates CRA’s regulatory framework.
Although a stated goal of the NPR is to make the current framework more “objective, transparent, consistent, and easy to understand,” in reality the NPR adds one more layer to the current regulations that – while proposing to simplify compliance for a group of larger banks that are regulated by the OCC and FDIC – further complicates the overall system for everyone else. Thus, under the NPR, smaller banks regulated by the OCC and FDIC (those with $500 million or less in assets) could continue under the current CRA framework, as would banks under the supervision of the Federal Reserve System, which are not covered by the NPR. For a regional CDFI like IFF that partners with banks of every type and size, working under two sets of CRA regulations – one established and well known to us and our investors and the other an entirely new system still in the works and dependent on data yet to be collected – is confusing and disruptive to us and the entire community development ecosystem in which we work.
Recommendation: To streamline the CRA regulatory framework, first and foremost, we need a consensus regulatory framework from all three bank regulators. The OCC and FDIC should reconvene their meetings with the Federal Reserve System and republish a proposed final rule that represents a unified CRA regulatory framework.
2. The NPR threatens to de-emphasize core community development activities that primarily benefit low-income communities.
Although in principle we support the NPR’s proposal to promote more certainty and transparency over what activities are CRA-eligible by regularly publishing and updating an illustrative list, we have serious concerns with the very expansive nature of the NPR’s initial list. For instance, the NPR includes larger essential infrastructure projects that provide some benefit to LMI individuals. While we understand from Chairman Otting’s public comments that these and other items on the list are meant to be codifications or minor expansions of activities that are or were once CRA-eligible, it is fair to say that such investments are more of an exception than the rule, and that by giving them equal billing with more time-honored community development activities – such as investments in small business, CDFIs, affordable housing and community facilities – the NPR is proposing a shift from CRA’s historic emphasis on locally responsive community development activities that primarily benefit LMI communities to new and larger scale investments with less direct benefits for these communities.
Recommendation: The OCC and FDIC’s initial list of CRA-eligible activities should be pared down to focus on core community development activities that primarily benefit LMI communities. New qualifying activities could be considered on a case-by-case basis by regulators, but only added to the list of approved activities after data collection and analysis confirm their benefit to LMI communities – and after a process of public comment (as provided for in the NPR).
3. The NPR sets too low a bar for an “Outstanding” or “Satisfactory” rating.
According to the NPR, to achieve an “Outstanding” or “Satisfactory” rating a bank would respectively need to achieve each those ratings in a “significant portion” of its assessment areas as well as at the bank level, with significant defined as at least 50 percent. This is too low a standard – making it possible for banks to pass or achieve the highest CRA rating without having to do well – or even pass, for that matter – in nearly half of their assessment areas. Moreover, only holding banks accountable in about half of their assessment areas directly undermines two other stated goals of the NPR – requiring certain banks to establish new assessment areas where they have at least a 5 percent concentration of deposits, and doing more to incent banks to invest in and better serve “CRA deserts.” As a minimum, we would argue, banks should have to earn a “Satisfactory” or “Outstanding” rating in at least 80 percent of their assessment areas and at full the bank level to achieve these respective ratings.
Recommendation: Instead of the pass-fail threshold proposed by the NPR, whether that threshold be the 50 percent proposed by the NPR or the 80 percent suggested above, we believe banks would have a much stronger incentive to do their best in each and every assessment area if their CRA rating was based on their average performance across all assessment areas.
4. The NPR’s primary evaluation measure – its ratio of qualified activities divided by retail domestic deposits – remains fundamentally flawed.
Simply put, we do not believe that the NPR’s reliance on a balance-sheet-driven metric that rewards quantity (dollar volume of CRA activities) over quality (specific CRA activities undertaken) is sufficiently responsive to the affirmative obligation that CRA places on banks to meet local credit needs. The total dollar volume of a bank’s CRA qualifying activities does not fully capture hard-earned community partnerships; innovation and flexibility on the part of banks; the complex nature and long time horizons of many community development projects; the differences between scarce equity, flexible debt and a bank’s staff volunteering for a day; and – importantly to us – the very high impact often associated with relatively small projects that directly respond to a community’s needs and that would never be financed but for CRA. The NPR’s failure to capture and account for the intrinsic value of these community development activities is its fatal flaw, overshadowing any of the potential benefits from its many other provisions.
Recommendation: As it considers a more metric-based approach to CRA evaluation, the OCC and FDIC should resist aggregating and converting all community development activities into dollar amounts, which can render local community needs practically irrelevant. Instead, we recommend that the OCC and FDIC consider more qualitative standards that can be tailored to local areas, such as those outlined by the Federal Reserve System.
Again, IFF appreciates the opportunity to comment on the NPR. If you have any questions, please do not hesitate to contact me at gro.ffi@adrecj. Thank you for your consideration of our views.
Jose Cerda III
Vice President of Public Policy