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Last week federal regulators issued the long-awaited final rule modernizing CRA regulations, with implications for CDFIs.
Last week, federal bank regulators released the final rule updating the Community Reinvestment Act (CRA) regulations, a landmark moment with big implications for the community development finance industry. The release of the rule is a culmination of a years-long process to modernize this critical civil rights legislation.
Over the past five years, OFN has worked closely with our members and partners to weigh in on several reform proposals to update CRA, advocating for changes that would direct more resources to underinvested communities. OFN is pleased that the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve worked together to put forth this joint rule, ensuring a consistent regulatory framework across federal agencies.
Why this matters for CDFIs
This new rule will reshape the way capital flows to low- and moderate-income people and places for decades to come. The updated regulations reflect changes to the financial system over the past few decades, like the growth in online banking.
The full implications of the final rule will take time to determine, as stakeholders digest the nearly 1,500 page regulation, but OFN has noted a few areas of interest to highlight:
- Partnerships with CDFIs – The rule provides automatic favorable consideration of bank loans, investments, and services in CDFIs that have undergone the U.S. Department of the Treasury’s certification process and meet requirements for maintaining CDFI certification. The agencies noted that they consider CDFI certification “a critical guardrail to ensuring that community development on an inclusive community basis is the focus of bank loans, investments, and services in cooperation with these CDFIs”.
- The Importance of Certification – For CDFI loan funds, CRA-motivated banks are a critical source of debt capital, accounting for more than half of all borrowed funds. Providing greater certainty that banks will receive automatic consideration for partnering with CDFIs was a top recommendation from OFN. The regulation’s explicit recognition of the importance of CDFI certification also underscores the significance of the CDFI Fund’s ongoing efforts to strengthen the certification process.
- Ensuring a Robust Focus on Community Development – The final rule addresses a concern from the previous proposal that would have diminished the importance of community development finance in a bank’s CRA rating. The final rule provides equal weight to a bank’s retail lending (mortgage, consumer, small business, and small farm lending) and community development activities. The rule also acknowledges the importance of encouraging banks to make both community development loans and investments.
- Consideration of Race – The CRA is a civil rights law created to address the redlining of low-wealth and minority communities. Disappointingly, the final rule does not include an explicit focus on race in evaluating a bank’s CRA activities, despite clearly defined gaps in racial wealth and homeownership. This was a missed opportunity to encourage banks to increase CRA activity in communities of color.
Stay tuned for more information in the coming months about the final rule and its impact on CDFIs. For any questions, contact Dafina Williams.
A statement from OFN’s president and CEO
“The modernization of the Community Reinvestment Act is not only long-awaited, but critical to addressing the most pervasive and persistent issues that remain in our banking system with addressing credit needs in our communities. While many changes to the regulation are welcome, there is still work to be done to address the lack of capital access to communities across the country, and specifically the growing racial wealth divide in communities of color. OFN will deepen its work with regulators and our bank partners to ensure that CRA drives greater investments through community development financial institutions into low- and moderate-income communities and communities of color across the country”- Harold Pettigrew, President and CEO
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