Housing Policy, Going Forward

Mark Calabria

The Hill published a column of mine, The Next Two Years of Federal Housing Policy Could Be Positive under Mark Calabria. it opens,

The Trump administration has been a nightmare for housing advocates. Housing and Urban Development Secretary Carson has stopped enforcing fair housing laws, with assists from Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting. Those two have been working to scale back fair lending enforcement and the Community Reinvestment Act.

Consumer Financial Protection Bureau Acting Director Mulvaney has gutted consumer protection in the mortgage market. I am more hopeful though when it comes to housing finance reform. The administration has nominated Mark Calabria to be the next director of the Federal Housing Finance Agency; the FHFA is Fannie Mae and Freddie Mac’s regulator.

There have been three types of leaders on Trump’s team that have been working on housing issues. First are those who seek to explicitly undermine the work of the agency they lead, like Mulvaney. Leaders like Mulvaney are generally proponents of a radical conservative ideology that has been way out of step with American political norms until the Tea Party movement swept through Congress. Second are those who pay some lip service to the agency’s mission, but work to undermine it, like Carson. And third are those who are clearly industry favorites, like Mnuchin and Otting. They primarily seek to address concerns of the industry they regulate at the expense of their agency’s broader public mission.

Calabria represents a fourth type of leader, one who is more likely to implement a more traditional Republican agenda for the housing sector. For the last couple of years, he has been serving as Vice President Pence’s chief economist.

Cutting Back on Community Reinvestment

Bloomberg Law quoted me in Banks Look to Narrow Exams Under Community Reinvestment Act. It opens,

Banks see an opening to limit the types of violations that could lead to a Community Reinvestment Act downgrade as federal regulators begin rewriting rules under the 1977 law.

Banks say regulators have improperly used consumer fair lending and other violations involving credit cards or other financial products to evaluate compliance with the law meant to increase lending and investment to lower-income communities.

“When a bank violates a consumer protection law, there is no shortage of enforcement agencies and legal regimes available to seek redress and punishment. Adding the CRA to that long list thus has little marginal benefit, and risks diluting and undermining the CRA’s core purpose of promoting community reinvestment,” the Bank Policy Institute, a leading bank lobbying group, said in a Nov. 19 comment letter to the Office of the Comptroller of the Currency.

The OCC set the stage for a CRA rewrite in August by releasing an advanced notice of proposed rulemaking. The Federal Reserve and Federal Deposit Insurance Corp. have signaled a desire to sign on to a joint proposal.

With that momentum building, banks are taking their shot to limit the types of enforcement actions included in CRA reviews. They want CRA reviews to focus on mortgages, small business and other community development investments.

The question of how non-CRA-related violations apply to banks’ community lending reviews is not merely a theoretical exercise.

Wells Fargo & Co. saw its CRA grade downgraded two levels to “needs to improve”in March 2017 following the revelation of the fake accounts it generated for consumers. Several states and municipalities cut off business with the bank in response.

CRA exam cycles run three years for large national banks and can run longer for smaller banks that perform well. Banks receive one of four grades—outstanding, satisfactory, needs to improve or substantial noncompliance—and a poor grade can restrict their merger and branch expansion plans.

OCC, Treasury Leading Push

The Trump administration, led by Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting, has been pushing for the latest CRA revision.

Both of those officials ran into CRA trouble when they tried to sell OneWest Bank to CIT Group Inc. Mnuchin was OneWest’s chairman and Otting its chief executive.

The Treasury Department released a report on “modernizing the CRA” in April. Included in that report is a call to not allow fair lending enforcement investigations from the Consumer Financial Protection Bureau and other regulators to slow down CRA reviews.

Otting went farther, issuing a bulletin on Aug. 15 highlighting that his agency’s examiners will no longer take into account non-CRA lending violations when assessing a bank’s CRA compliance.

The FDIC and the Fed have not yet followed suit. But banks want the three agencies to set a common policy on dealing with non-CRA related enforcement actions in their community lending reviews.

“Regulators should develop consistent policies clarifying that CRA will not be used as a general enforcement tool,” the American Bankers Association said in a Nov. 15 comment letter.

There is some merit to the idea, according to David Reiss, a professor at Brooklyn Law School and the research director at the Center for Urban Business Entrepreneurship.

“It’s delinking fair lending concerns, which are regulated elsewhere, from CRA concerns. From an industry perspective that may make a lot of sense,” he said in a Nov. 30 phone interview.

The proposal, taken in a vacuum, may be reasonable. But in the context of broader attempts to weaken the CRA, it should be viewed more skeptically.

Fight Over The Community Reinvestment Act

Bloomberg BNA quoted me in Community Investment Revamp for Banks Likely To Spark Fight (behind a paywall). It opens,

Community groups and banks agree that the Community Reinvestment Act needs an update, but with regulators beginning an ambitious overhaul of the 1977 law there is little agreement on how that update should look.

The Trump administration has been targeting the CRA — which measures how well banks lend to low- to middle-income areas — for a rewrite since last June. Comptroller of the Currency Joseph Otting said March 28 that the first draft would be coming in early April.

Otting set out some broad ideas that his agency, the Office of the Comptroller of the Currency, and the other regulators that oversee the CRA will present to the public. The Federal Reserve and the Federal Deposit Insurance Corporation also have responsibility for measuring banks’ compliance with the law, and the OCC says that it hopes the two agencies will sign on to the coming advanced notice of proposed rulemaking.

Banking industry experts and community groups all said that the broad strokes of the regulators’ plan sound promising, but few expect that comity to continue when the details come more into view.

“I think you can assume that everybody is not going to be happy,” Laurence Platt, a partner at Mayer Brown LLP, told Bloomberg Law.

The CRA’s Present

The Trump administration first put the CRA in its sights in a June 2017 Treasury Department report outlining its broader views on altering the rules banks operate under.

The law calls for the OCC, the Fed and the FDIC to periodically measure how much lending the banks they oversee do inside geographical assessment areas based on their branch and ATM locations. If banks are found not to do enough of such lending, regulators can stop some business activities or hold up branch expansions and mergers. But it hasn’t been updated for nearly two decades.

The Treasury Department followed up the June 2017 statement on the CRA with an April 3 report outlining its thinking on ways to modernize the law. The report largely aligns with the path laid out by Otting.

“Our recommendations will improve the effectiveness of CRA by enhancing the assessment and examination process, enhancing the ability of banks to deliver services in the communities they serve while considering technological advances in the financial industry,” Treasury Secretary Steven Mnuchin said in a statement accompanying the report.

Changes to the Community Reinvestment Act have already begun, with the OCC under former acting Comptroller of the Currency Keith Noreika in October declaring that the OCC examiners would no longer include enforcement actions that are not linked to a bank’s CRA compliance in their rating.

That change was minor, and affected only one of the three regulators responsible for the CRA. Otting on March 28 laid out a host of other changes likely coming in a new proposal.

The CRA’s Future?

The broad outline Otting provided on March 28 largely highlights the areas in the CRA that community activists and banks have said need to be addressed.

Among the changes Otting said will be put out for comment include expanding the types of lending that would be included in calculations of banks’ CRA compliance to encompass small business, student lending and other money going into a community.

“I think there’s a sense that community-based activities, beyond individual lending, should be given more credit, such as small business loans and infrastructure loans,” Mayer Brown’s Platt said.

Other areas that are going to be addressed in the proposal will touch on the way CRA information is calculated and reported to the public. Currently, banks are examined for compliance every three to five years, and the banks’ reviews take an additional year.

Overall, Otting said the changes would be significant.

“This is monumental change for America,” Otting said in an appearance March 28 at the Operation Hope Global Forum in Atlanta.

The changes Otting discussed all sound promising, but they are vague. So fights are likely to emerge when the details come out.

“The comments that were made were vague enough to give you both concern and possible joy,” Taylor said.

One other aspect of the CRA that is ripe for reform is the geographic assessment areas regulators use to evaluate banks’ lending efforts. Otting and other regulators have yet to specifically outline their ideas for making changes to that, but both the comptroller and Fed Vice Chair for Supervision Randal Quarles have discussed including mobile banking, online lending, and other financial technology tools into their reviews.

How they elect to make that change is likely to be contentious as well.

“If the assessment area is poorly defined, then the CRA will lose its teeth and that’s going to drive CRA policy for a long time to come,” said David Reiss, a professor at Brooklyn Law School.

“Modernizing” the Community Reinvestment Act

President Carter signs the Housing and Community Development Act of 1977, which contains the Community Reinvestment Act

The Trump Administration has been signaling its intent to do a makeover of the Community Reinvestment Act of 1977 (CRA) for quite a while, describing it as a much needed update.  Last June, Treasury stated in its Banks and Credit Unions report (one of a series of reports on A Financial System That Creates Economic Opportunities which I discuss here),

The CRA statute is in need of modernization, regulatory oversight must be harmonized, and greater clarity in remediating deficiencies is called for. It is very important to better align the benefits arising from banks’ CRA investments with the interest and needs of the communities that they serve and to improve the current supervisory and regulatory framework for CRA. . . . Aligning the regulatory oversight of CRA activities with a heightened focus on community investments is a high priority for the Secretary. (9)

Well, the modernization effort has now taken off with a Treasury Memorandum for The Office of The Comptroller of the Currency, The Board of Governors of The Federal Reserve System, The Federal Deposit Insurance Corporation. By way of background, the memorandum notes that

The Community Reinvestment Act (CRA) of 1977 was enacted to encourage banks to meet the credit and deposit needs of communities that they serve, including low- and moderate-income (LMI) communities, consistent with safe and sound operations. Banks are periodically assigned a CRA rating by one of the primary regulators – the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC), collectively the CRA regulators – based on the bank’s performance under the appropriate CRA tests or approved Strategic Plan. CRA was enacted in response to concerns about disinvestment and redlining as well as a desire to have financial institutions “play the leading role” in providing the “capital required for local housing and economic development needs.”

The U.S. banking industry has experienced substantial organizational and technological changes; however, the regulatory and performance expectations under CRA have not kept pace. Interstate banking, mortgage securitization, and internet and mobile banking are just a few of the major changes that have come about in the past four decades. In this evolving banking environment, changes should be made to the administration of CRA in order for it to achieve its intended purpose. (1, footnotes omitted)

The bank that Treasury Secretary Mnuchin used to head up, OneWest, had its own run-ins with CRA compliance. As a result, we should look carefully at how Treasury seeks to “modernize” the CRA. The Treasury memo has four recommendations:

  • Assessment Areas. The concept of assessment areas originated within the banking environment that existed in 1977, when there was no interstate banking and deposits almost always came from the community surrounding a branch. Treasury offers recommendations for updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors.
  • Examination Clarity and Flexibility. Both banks and communities would benefit from additional flexibility in the CRA performance evaluation process, including increasing clarity in the examination guidance. Treasury recommends improvements that could be made to CRA performance evaluation criteria that would increase the transparency and effectiveness of CRA rating determinations.
  • Examination Process. Certain aspects of the examination process need to be addressed in order to improve the timeliness of performance evaluations and to allow banks to be more accountable in planning their CRA activity. Treasury recommends improvements that could be made with respect to the timing of CRA examinations and issuance of performance evaluations, and to the consistent use of census data throughout an assessment period.
  • Performance. The purpose of CRA is to encourage banks to meet the credit and deposit needs of their entire community. The law does not have explicit penalties for nonperformance. However, performance is incentivized as regulators must consider CRA ratings as a part of various bank application processes and performance evaluation reports are made available to the public. Treasury offers recommendations as to how the current regulatory approach to downgrades for violations of consumer protection laws and various applications from banks with less than a Satisfactory rating could be improved to incentivize CRA performance. (2, footnotes omitted)

While there is lot to chew on here, I think a key issue will be the scope of the Assessment Areas. As banks move from straight ‘bricks and mortar’ to ‘bricks and clicks’ or even to pure clicks, it is harder to identify the community each bank serves.

While the memo does not offer a new definition for Assessment Areas, one could imagine alternative definitions that are either loose or stringent as far as CRA compliance is concerned. Because the CRA was intended to ensure that low and moderate-income communities had access to mortgage credit after years of redlining, any new definition of Assessment Areas should be designed to support that goal. We’ll have to see how the Trump Administration proceeds in this regard, but given its attitudes toward fair housing enforcement, I am not hopeful that the Administration will take the CRA’s goals seriously.

Getting CAMELS Past Regulators

photo by Max Pixel

Bloomberg BNA Banking Daily quoted me in Court Asked to Second-Guess Bank Capital, Earnings, Risk Ratings (behind a paywall). It reads, in part,

A now-shuttered Chicago bank is taking on the proverbial giant in a fight to give banks the right to challenge safety and soundness ratings by federal regulators.
Builders Bank, an Illinois-chartered community bank that technically closed its doors in April, wants a federal judge to review a so-called CAMELS rating of 4 it got from the Federal Deposit Insurance Corporation, a rating it said triggered higher costs for insurance premiums (Builders Bank v. Federal Dep. Ins. Corp., N.D. Ill., 15-cv-06033, response 9/13/17). The rating should be reviewed by a court, it said, because it didn’t accurately reflect the bank’s risk profile. A 3 rating would have been more appropriate, it said.
It’s hard to exaggerate the importance of the awkwardly-named CAMELS ratings, which also are used by the Federal Reserve and the Office of the Comptroller of the Currency. The ratings — which measure capital, assets, management, earnings, liquidity, and sensitivity to market risk on a range of 1 to 5, with 1 being the best rating — can mean thumbs-up or thumbs-down on business plans by banks and affiliates.
Want to merge with or buy another bank? Don’t bet on it if your bank has a low CAMELS rating. Want to pay lower premiums for federal deposit insurance? A high rating may mean yes, a low rating probably not. Want to lower your capital costs? Endure fewer examinations? Open new branches? Hold on to a profitable business unit or face regulatory demands to divest it? All of those business decisions and others can turn on how well a bank scores under the CAMELS system.
Pinchus D. Raice, a partner with Pryor Cashman LLP in New York who represents the New York League of Independent Bankers, said judges should be able to look over those rating decisions.
Judicial review would enhance the integrity of bank examinations, he said. “I think it would increase confidence in the process,” Raice told Bloomberg BNA. “Somebody should be looking over the shoulders of the agency, because CAMELS ratings are critical to the life of an institution.” The New York trade group has filed a brief in the suit urging the court to rule against the FDIC.
FDIC Rating Challenged
The FDIC has asked Judge Sharon J. Coleman of the U.S. District Court for the Northern District of Illinois to dismiss the case on several grounds.
For one, the FDIC said, Builders Bank no longer exists. It voluntarily dissolved itself earlier this year and in April transferred its assets to Builders NAB LLC, a nonbank limited liability company in Evanston, Ill., that couldn’t be reached for comment. In a Sept. 13 filing, the bank said Illinois law allows it to continue the suit even though it’s now merged with the LCC, and that it’s seeking damages in the amount of the excessive deposit insurance premiums it says were paid.
Bank Groups Join
The next likely step is a ruling on the FDIC’s motion to dismiss, though it’s not clear when the court might make a decision. Meanwhile, the case has attracted briefs from several banking groups — a joint brief filed in August by the Clearing House Association, the American Bankers Association, and the Independent Community Bankers of America, and a separate brief a few weeks later by the New York League of Independent Bankers.
None of the four groups is wading into the actual dispute between Builders Bank and the FDIC, and their briefs explicitly said they’re not supporting either party. However, all four groups urged the court not to issue a sweeping decision that says CAMELS ratings are exempt from outside review.
According to the Clearing House, the ABA, and the ICBA, banks should be able to seek judicial review in exceptional cases “where such review is necessary and appropriate,” such as if regulators get their calculations wrong, or if regulators use ratings to retaliate against banks that criticize FDIC policies or personnel.
“At a minimum, given the complexity of the CAMELS rating system and the consequences of CAMELS ratings, this court should not issue a ruling that is broader than necessary to decide this dispute and that may undermine the ability of other banks to obtain judicial review,” the brief said.
*     *      *
David Reiss, professor of finance law at Brooklyn Law School in Brooklyn, N.Y., called the case a signal that the banking industry believes a range of agency actions might be held to be unreviewable. “As a general philosophy, unless Congress has made unreviewability crystal clear, I think we want to be careful,” Reiss told Bloomberg BNA. “This does seem intuitively overbroad to me.”
He also said the case, because it involves a bank that no longer exists, raises the possibility of a result that might not be welcomed by the banking industry. “The bank groups may be somewhat worried that a now-dissolved bank may get a court ruling that could have unintended consequences for banks still doing business,” he said.

Treasury’s Trojan Horse for The CFPB

The Procession of the Trojan Horse in Troy by Giovanni Domenico Tiepolo

The Hill posted my latest column, Americans Are Better off with Consumer Protection in Place. It opens,

This month, the Treasury Department issued a report to President Trump in response to his executive order on regulation of the U.S. financial system. While the report does not seek to do as much damage to consumer protection as the House’s Financial Choice Act, it proposes a dramatic weakening of the federal government’s role in the consumer financial services market. In particular, the report advocates that the Consumer Financial Protection Bureau’s mandate be radically constrained.

Republicans have been seeking to weaken the CFPB since it was created as part of the Dodd-Frank Act. The bureau took over responsibility for consumer protection regulation from seven federal agencies. Republicans have been far more antagonistic to the bureau than many of the lenders it regulates. Lenders have seen the value in consolidating much of their regulatory compliance into one agency.

To keep reading, click here.

Fox in The CRA Henhouse

Law360 quoted me in Treasury’s Fair Lending Review Worries Advocates (behind a paywall). It reads, in part,

President Donald Trump’s Treasury Department said Monday that revisiting a 1977 law aimed at boosting bank lending and branches in poor neighborhoods was a “high priority,” but backers of the Community Reinvestment Act fear that any move by this administration would be aimed at weakening, not modernizing, the law.

Critics and some backers of the Community Reinvestment Act say that the law does not take into account mobile banking and the decline of branch networks among a host of other updates needed to meet the realities of banking in 2017.

While there is some agreement on policy, the politics of reworking the CRA are always difficult. Those politics will be even more difficult with the Trump administration and Treasury Secretary Steven Mnuchin, who ran into problems with the CRA when he was the chairman of OneWest Bank, leading the review, said David Reiss, a professor at Brooklyn Law School.

“A team at Treasury led by the OneWest leadership should give consumer advocates pause,” he said.

*   *   *

Across the administration, from the U.S. Department of Education to the Department of Justice, civil rights enforcement has taken a back seat to other concerns. And Mnuchin is in the process of populating the Treasury Department with former colleagues from OneWest.

Trump nominated former OneWest CEO Joseph Otting to be comptroller of the currency earlier this month and is reportedly close to nominating former OneWest Vice Chairman and Chief Legal Officer Brian Brooks as deputy Treasury secretary. Brooks is currently the general counsel at Fannie Mae.

Activists who fought the CIT-OneWest merger on CRA grounds say that the placement of those former OneWest executives in positions of authority over the law should raise alarms.

“[Mnuchin’s] bank, OneWest, also had one of the worst community reinvestment records of all the banks that CRC analyzes in California, which raises questions about his motivation in ‘reforming’ the Community Reinvestment Act. Is he interested in reforming it to help communities, or to help the industry do even less?” said Paulina Gonzalez of the California Reinvestment Coalition.

The Treasury secretary has defended his bank’s foreclosure practices and others that drew fair lending advocates’ ire, saying that most of the problems at OneWest were holdovers from IndyMac, the failed subprime lender OneWest’s investors purchased after it failed.

Discussing reforms to the CRA under any administration, particularly a typical Republican administration, would be difficult on its own for lawmakers and inside regulatory agencies, Schaberg said.

“Anybody down in the middle-management tier of any of the banking agencies, they’re not going to touch this because it’s so politically charged,” he said.

The added distrust of the Trump administration and Mnuchin among fair housing advocates makes the prospect of any legislation to reshape even harder to imagine. Even without legislation, new leadership at the regulatory agencies that monitor for CRA compliance could take a lighter touch. And that has fair housing backers on edge.

“In my mind, there’s a fox-in-the-henhouse mentality,” Reiss said.