BPI and ABA to Regulators: Capital Increases, Court Uncertainty Could Complicate Banks’ CRA Programs
Mortgage and small business lending – lines of business central to CRA – are subject to major legal and regulatory policy changes
August 22, 2023 — Two recent policy developments could fundamentally alter banks’ Community Reinvestment Act programs, and policymakers should avoid finalizing proposed changes to the CRA rules until these issues are resolved, the Bank Policy Institute and American Bankers Association told regulators in a letter today. The recent Basel capital proposal would dramatically raise capital requirements for large and midsize banks, directly undermining bank lending efforts related to CRA, particularly mortgages. In addition, a federal court recently halted the CFPB’s enforcement of a key small-business lending data rule while the regulator awaits a Supreme Court ruling on its funding structure’s constitutionality. The agencies should not finalize the CRA rules until the Supreme Court determines the constitutionality of the CFPB’s funding structure and the implications of that decision on the implementation of a new CRA rule are understood, BPI and ABA assert in the letter.
What we are saying: “We do not believe that the agencies or the public fully understand the impacts that the proposed capital changes would have on banks’ CRA programs, which must be considered, both by the agencies and the public, before any new CRA rules are finalized. The agencies should consider whether changes to the CRA proposal are warranted in light of the proposed changes to the capital rules, and, if so, the agencies must seek comment on any such changes. Should the agencies finalize the CRA rules before the capital rules are finalized, the agencies will not have provided the public with a meaningful opportunity to comment on the proposed CRA amendments in light of the changes banks are likely to make to their CRA programs due to revisions to the capital rules.” – BPI and ABA
Capital costs: The banking agencies’ Basel capital proposal would reduce incentives for banks to engage in mortgage lending – a business that was once the heart of Main Street banking and is increasingly the province of nonbank lenders. Proposed capital changes could significantly affect the regulatory capital treatment of certain elements of banks’ CRA-related lending, such as mortgages to lower-income families.
- Down payments: Many banks offer low down-payment mortgages to serve the needs of low- and moderate-income homebuyers. The capital proposal would render these options significantly more expensive for banks to offer by increasing the risk weight – the percentage that determines how much capital banks must maintain for a certain asset on their books, like a loan – for loans with higher loan-to-value ratios, i.e., those with lower down payments.
- Banks’ shrinking presence: This and other provisions of the capital proposal could make banks an even smaller participant in the mortgage lending market – for example, a lower cap on mortgage servicing assets that can be deducted from many larger banks’ regulatory capital. Other aspects of the proposal could also drive changes in banks’ mortgage lending and affect their CRA programs.
- Unintended consequences: The proposed CRA rules would change how the banking agencies evaluate banks’ CRA performance, including by assessing large banks’ retail lending in areas where they make a minor volume of mortgage or small business loans. The regulators estimated that 73 percent of banks would either fail or obtain only a low satisfactory rating in those new assessment areas. The prospect of failing CRA grades coupled with higher capital requirements could drive banks to reduce or eliminate certain loan products, undermining the very mission of the CRA.
Key legal question: A federal court recently ordered the CFPB to stop enforcing its small business lending data-gathering rule (Section 1071) for banks that are members of the ABA or the Texas Bankers Association until the Supreme Court decides if the Bureau’s funding structure is constitutional. The proposed CRA rules are intertwined with the 1071 rule, which may be stayed for a significant period of time. This will delay the establishment of benchmarks for small business lending without the full 1071 data set. As a result, the agencies will not have the data they need to fully implement the CRA proposal as intended. The possible impact of the 1071 litigation on CRA modernization is one more reason that the agencies should refrain from finalizing the CRA rules until that impact is understood.
Bottom line: These two policy challenges could change how banks make loans that are central to the CRA, and how banking regulators evaluate such lending. The public should be afforded the opportunity to comment on the CRA proposal in light of the revised capital framework. The agencies should then reevaluate the proposed CRA rules and consider proposing changes for public comment. If the agencies finalize the CRA rules before the outcome of these recent developments is clear, the public will not have had a meaningful opportunity to respond to the full range of regulatory effects. The agencies should also delay finalization of the CRA rules until a final determination is made regarding the status of CFPB small business lending data rules and the impact on the proposed CRA rules of that outcome becomes clear.