As is always the case, July brings the distraction of long-awaited summer vacations. This year in particular, there has been much talk about how (or if) Congress will balance summer recess and their pressing responsibilities related to changing legislation. Though media has zeroed in on the important Healthcare Reform bill, other topics—notably, the Financial Reform bill and its keystone Community Reinvestment Act (CRA)—also are demanding attention from Congressional agendas.
In mid-June, the U.S. Department of the Treasury released the first of four reports ordered by the Trump Administration. A Financial System That Creates Economic Opportunities makes a case for easing the regulatory burden on financial institutions. Emphasizing that the economic recovery has been slower than anticipated, it proposes that the increase in banking regulations has not aided in the process, particularly for small and mid-sized financial institutions. The report urges the administration to revisit numerous pieces of legislation with a goal of identifying practical methods for maintaining efficient, effective financial institutions while enabling growth.
The Time has Come to Update the CRA
The CRA is one of the key recommendations included. Passed in 1977, the CRA encouraged financial institutions to invest in their local community by meeting the credit needs of its citizens, including low and moderate income neighborhoods. CRA compliance requirements demand that a bank participates in an examination every three to five years. Regulators rate the institution based on local credit decisions specific to designated deposit-taking operations. If CRA regulators determine that an institution warrants a below satisfactory rating on an exam, they can inflict many penalties. They also can restrict their participation in business transactions like mergers and acquisitions. Often, the restriction ultimately stifles growth in the community.
The legislation has endured numerous revisions since its introduction 40 years ago. Recent publications are hinting at a renewed focus on modifying the CRA in conjunction with other changes to legislation intended to strengthen the economy and create opportunities for employment. It may be time. A revision could open up a host of timely opportunities that would inject health into important sources of community financial health. Some of these opportunities include:
- Factor in the increased use of technology and automatic teller machines into the CRA exam ratings. Consider the degree to which these modern channels equip a bank to serve its community, compared to traditional physical branches.
- In today’s financial market, if a creditworthy customer is denied a loan from their bank, they almost certainly can obtain credit from an online credit provider. Ultimately, that can be a loss for the bank. Implement measures like satisfaction surveys to gather more well-rounded insights into the customer profile and perspective than can be offered by purely hard data, as has been the case for most loan decisions.
- Extending credit to individuals only to meet a certain threshold might cause more harm for communities in the long run, due to payment delinquency and lack of maintenance. The CRA could help a bank to inject financial health into its community through involvement in community-based organizations.
As noted, A Financial System That Creates Economic Opportunities is the first in a series of Treasury reports. We're confident that additional specifics will come to light in subsequent reports. Financial reform is no small task. It will take time and focus—even in a season when vacations seem to distract even the most focused professionals. The current administration continues to move forward. The HORNE team does as well! We will continue to monitor the progress over the coming months and share our findings and perspectives with you. If you haven't yet subscribed to the HORNE Banking blog, now would be a very good time to do so. We will deliver the news, observations, and insights that impact your financial institution directly to your inbox so you can stay informed.
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