Just as social distancing turned our world turned upside down, bankers likewise practiced what I call “regulatory distancing,” criticizing their regulators from a safe distance, on the recent notice of proposed rulemaking on reforming the 1977 Community Reinvestment Act (CRA), which has not been updated since 1995.
Banking is a heavily regulated industry, and bankers obviously are careful when it comes to criticizing their regulators — especially on reforming a lending law that requires banks to consider their entire community, including low- and moderate-income neighborhoods and people.
After the Treasury Department recommended CRA modernization in April 2018, its Office of the Comptroller of the Currency proposed an advance notice in August 2018. Noticeably absent were the FDIC and Federal Reserve, the other two bank regulators.
About 78 percent of the 1,500 advance comments were from the public, mainly community groups; 18 percent were from individual banks, and 4 percent from their trade groups.
After reviewing them, the comptroller, this time with the FDIC (but not the Fed), proposed a joint notice in January. Nearly 2,000 comments were submitted, but only 7 percent came from banks and 2 percent from trade groups.
With 238 pages of specific proposals reforming a major compliance law — the first time in 25 years — just 9 percent of comments about that notice were from the industry, compared to the advance notice’s 22 percent. Several big banks that had submitted advance comments were silent.
Why this unprecedented regulatory distancing?
Most banks chose to avoid directly criticizing the notice and indirectly its FDIC and comptroller’s authors that regulate 85 percent of all banks, since they are content with the status quo: CRA exams have a 98 percent pass rate, with relatively low compliance costs, compared to more costly regs such as the Bank Secrecy Act. Except for some needed modernizing and tune-ups, most banks do not want a major overhaul that is widely perceived as complex and excessively burdensome.
Also, many bankers did not fully understand the notice and avoided commenting on it. For example, its most innovative proposal to modernize the CRA requires giant credit card banks to reinvest some of their internet deposits in low- and moderate-income neighborhoods and people in the big cities sourcing their deposits. Those deposits currently benefit cities in their home-office credit card friendly states of Delaware, South Dakota and Utah.
The branchless banks and their trade associations incorrectly argued that this proposal would exacerbate “CRA deserts.” The opposite is true, since it requires some of the internet deposits coming from affluent neighborhoods and people of New York City to be reinvested into community development loans, investments and services benefiting low- and moderate-income neighborhoods and people there — including many of our pandemic first responders, hospital workers and other front-line heroes. Almost like a “Robin Hood” proposal, CRA benefits of deposits from the rich would be used to help the poor. This reinvestment proposal is consistent with the CRA’s intent and, in fact, its middle name.
The industry’s regulatory distancing adopted several innovative “safety in numbers” strategies.
First, they had their main trade group, the American Bankers Association (ABA), submit criticisms in a jointly signed comment by all 50 state bankers associations. By comparison, an ABA employee signed their advance comment. The Independent Community Bankers of America (ICBA), mainly representing small banks, proposed exempting virtually all (95 percent) banks from the proposed rule by increasing the current “small bank” definition from $326 million to $5 billion — twice the $2.5 billion ABA proposal. Rather than being criticized for such extreme proposals, bankers had their trade groups do their bidding.
Second, a comment submitted by the National Association of Affordable Housing Lenders, a “national alliance of major banks,” said it “regretfully” opposed many of the notice’s key items. Many of these banks did not submit their own comments.
Third, the Consumer Bankers Association, mainly representing large banks, and the ABA and ICBA separately arranged several group meetings, webinars or conference calls with the comptroller’s office to make them aware of their constituents’ criticisms.
A fourth strategy saw some state bank trade associations, which submitted separate advance comments, prepare joint comments criticizing the proposal. This cooperative approach under an unusual shared letterhead was the case with the bankers associations in Idaho, Oregon and Washington.
A fifth and even more unusual strategy had some of the biggest rival banks jointly criticize the proposal on equally rare dual letterheads, certainly a collector’s item for antitrust economists. This extraordinary collaborating strategy among direct competitors was separately employed by BONY Mellon/State Street. and Ally/Goldman Sachs banks. The most expensive regulatory distancing strategy had several banks and banking associations retaining premier law firms to criticize the notice for them.
This unprecedented regulatory distancing — with less than half the relative number of industry comments on the proposal, compared to the advance notice — is unfortunate. Both regulators and the public, especially bank customers and shareholders, have a right to know where their CEOs stand on CRA reform, instead of hearing from their trade associations or law firms.
Kenneth H. Thomas, Ph.D., is president of Miami-based Community Development Fund Advisors, LLC. He taught finance at the University of Pennsylvania’s Wharton School for more than 40 years and is the author of “The CRA Handbook.”