numerous weaknesses in OCC’s public service. Back in 2017, GAO, in another critical audit, recommended that the Federal Reserve collect employment data to effectively counteract the revolving door between banks and their regulator. The central bank has not done that.
Another factor is what motivates bank regulators. Yes, regulators are legally obliged to assess CRA adherence. But their job – and arguably reputations – hinges on preventing bank collapses.
“In the end, if a bank goes under, no one is going to praise regulators for having held them to a high CRA standard,” said Mark Willis, who spent 19 years overseeing the community development program at JPMorgan Chase .
The Federal Reserve’s funding structure is another clear-cut connection to the banking industry . The agency does not receive appropriations from Congress. Instead, it relies on fees from its investments , and fees from the services it provides to banks.
All excess income from those fees go to the U.S. Treasury . Thus, to do well, the Federal Reserve depends on banks doing well, too.
The Federal Reserve’s structure, which is intended to limit political interference that would disrupt its mission, may also limit disruptions to the financial institutions it regulates. David Dworkin, a former U.S. Treasury official and State Department veteran during the twilight of the Cold War, compared the Federal Reserve Board to the Soviet Politburo.
“A small group of independently powerful leaders who have risen through the ranks defers to a powerful chairman until they don’t,” said Dworkin, now president and CEO of The National Housing Conference , a D.C. nonprofit.
The Soviet Premier — the Fed Chair, in this metaphor — had enormous power. But he depended on maintaining strong support among the party bosses.
“Nearly all of that drama occurred behind the scenes, prompting an entire industry of ‘Kremlinologists’ who tried to figure out what happened in the inner sanctum of the Politburo,” said Dworkin. “Anyone who tries to predict the actions of the Fed today will find that quite familiar.”
Federal Reserve Board chairs, meanwhile, draw power from their relationships with the presidents of the regional Federal Reserve Banks, Dworkin noted.
Their boards are majority elected by representatives from banks.
Business expense
In January, the CEO of Indiana’s second largest bank, which had settled charges of redlining with the DOJ in 2019, assured investors that an upcoming acquisition would sail through regulatory review.
The reason? Instead of balking at the latest consolidation in the world of housing finance, community groups with a particular interest in advancing minority homeownership cheered the move.
Mark Hardwick, CEO of First Merchants Bank , bragged on an earnings call that he was “setting an example” of how to work with community groups, and it was already paying off. One such group, the National Minority Community Reinvestment Co-Operative, which bills itself as a coalition of organizations “committed to addressing the socio-economic needs of minority communities ,” had written to federal regulators in support of its December 2021 application to acquire Level One Bancorp .
“Al Pina, who leads the NMCRC, for the first time in his career endorsed a merger,” said Hardwick on a company earnings call in January.
Six months prior, opposition from Pina and other groups to a different bank merger had resulted in a $40 billion community benefits agreement . But the group voiced no such opposition to the First Merchants merger, for reasons that are unclear. (The NMCRC did not respond to requests for comment, and First Merchants declined to comment.)
Less than three months after it had applied for regulatory approval, the Chicago Federal Reserve and the FDIC gave their blessing, the bank told investors in February. Terry McEvoy, managing director at Stephens , who provides investors analysis of First Merchants, said that bank investors are taking more notice of community groups of late.
“Something has changed,” said McEvoy. “Will we get to a point where a specific bank merger is not approved because of this issue? I’m not sure. To date, we’ve only seen delays.”
Community groups often seize on the review process to negotiate concessions from banks. In numerous recent cases, they have accused banks of redlining, sometimes in the form of a lawsuit .
They have had some success. In the past year, community group opposition to mergers cost banks more than $100 billion dollars in community benefits agreements , according to an analysis of Home Mortgage Disclosure Act data. Top-10 mortgage lender US Bancorp , whose merger with MUFG Union Bank is now before the Federal Reserve, is currently in talks for a $100 billion, five-year community benefits agreement.
But none of the community groups’ efforts have yet killed a merger.
Take the case of WSFS Financial Corporation , a Delaware-based bank that sought to acquire Pennsylvania-based Bryn Mawr Bank Corporation .
Groups including the National Community Reinvestment Coalition , a Washington, D.C.-based nonprofit that has negotiated some of the largest agreements in recent years, accused WSFS of being behind its peers in minority mortgage lending.
In Philadelphia, public mortgage data showed 26% of all mortgages went to people of color. But only 13% of those WSFS originated went to people of color, NCRC wrote to the Federal Reserve and the OCC.
an additional 168 days of review, on average. But none of those reviews lead to a scotched merger.
“The fact that the bank responds … means almost nothing to us,” said Kevin Stein, deputy director of the California Reinvestment Coalition . “Conceptually it’s a good thing. But it’s not like we can’t wait to see what they say.”
Reboot the CRA
Banking regulators are aware that redlining is festering, they say, and are working on it.
“We are evaluating how public comments are addressed, including any allegations of redlining, as part of the OCC’s current comprehensive review of the Bank Merger Act,” an OCC spokesperson said.
resigned.
At the same time, CRA may finally directly address race. An advanced notice of public rulemaking , spearheaded by Federal Reserve Governor Lael Brainard in October 2020, included a pointed question on racial inequality.
“In considering how the CRA’s history and purpose relate to the nation’s current challenges,” the notice read, “What modifications and approaches would strengthen CRA regulatory implementation in addressing ongoing systemic inequity in credit access for minority individuals and communities ?”
Brainard said the notice would “build a foundation for the banking agencies to converge on a consistent approach that has broad support.” Brainard’s notice, in turn, gave mortgage lenders clarity and predictability, according to trade associations representing them.
But the notice also came amid squabbles among banking agencies over CRA revision. In 2019, the FDIC and the OCC proposed its own revised CRA rule, under the leadership of then-Comptroller Joseph Otting, but without the support of the Federal Reserve.
Brainard sharply criticized the proposed rule. She said it was “more important to get the reforms done right than to do them quickly.”
(Brainard is consistent in her deliberate approach. There has not been an update issued on Brainard’s 18-month-old advanced notice.)
According to Hsu, the acting OCC comptroller, “in the not-too-distant future,” federal banking agencies will take the iterative but significant step of a joint CRA notice of proposed rulemaking.
“It will reflect the herculean efforts of staff from all three banking agencies, who have been working around the clock for months, building off each of their many years of practical experience with the CRA and thinking about how to make it better,” Hsu said.
Something’s better than nothing
Few community groups have the firepower of NCRC, which brought in nearly $40 million in revenue in 2020, in part from renting out two office buildings in downtown Washington, D.C..
But NCRC acknowledges it can only make a limited mark on combating lending discrimination. One challenge: The terms of the community benefit agreements obtained from banks are frequently not public .
reported.
“What we’ve always argued is that these community benefits agreements should be bigger than they are, but we are constrained by the regulatory landscape,” said Jesse Van Tol, CEO of NCRC. “Look, what the bank regulators have done has been bullshit, but I wouldn’t want them to take over and say, ‘We know what the community needs are.’”
But for NCRC, a flawed community benefits agreement is better than none at all.
Let’s return to Delaware. WSFS refused to meet with the NCRC to negotiate, the community group said. Despite their opposition, the Federal Reserve unanimously approved the WSFS merger eight months after its application. There were no public conditions for the approval, and no community benefits agreement. One factor in the application sailing through was the bank’s outstanding CRA rating.
It was WSFS’s ninth acquisition in 10 years.
Horacio Mendez, a former banker who is now CEO of the Woodstock Institute , an affordable housing advocacy group in Chicago, is waiting to see if the CRA is strengthened to mention race. But Mendez wonders if even efforts within government to strengthen the anti-redlining law’s teeth matter – whether the OCC, FDIC, and Federal Reserve civil servants who review bank mergers “take this seriously at all.”
“It’s been my experience during the last CRA reform process that the agencies do not see themselves as social justice warriors,” Mendez said. “They see their role as being the guardians of the safety and soundness of the financial system. By both word and action, it’s been clear that making the financial system work for everyone is a side project.”
Source: housingwire.com
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Amanda
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