On March 19, 2020, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) published a Joint Statement of Policy (SOP) promising favorable consideration of retail banking services and retail lending activities in a financial institution’s assessment areas that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by COVID-19 and that are consistent with safe and sound banking practices.
The SOP:
- Included examples of services and activities that would receive favorable treatment, such as:
- Working with existing customers on modifications;
- Making new loans to existing or new customers;
- Waiving certain fees, such as:
- Easing restrictions on cashing out-of-state and non-customer checks;
- Increasing credit card limits for creditworthy borrowers;
- Providing alternative service options to customers in light of limited ability to access branches;
- Qualifying activities include those that help to revitalize or stabilize low- or moderate-income geographies as well as distressed or underserved non metropolitan middle-income geographies, and that support community services targeted to low- or moderate-income individuals.
- Did not provide guidance on the conditions under which favorable treatment would be granted or the impact of the favorable treatment.
While relief was promised for activities in a Designated Disaster Area, how does that work when the entire United States is a disaster area? Not every loan and service earns CRA credit at the bank’s next examination. It is imperative that the activities that a bank wishes to consider for CRA-eligibility related to the disaster declaration are responsive to the community needs resulting from the related disaster.
In the case of our current pandemic, the community needs are wide and varied. They include measures to support individuals experiencing job loss and financial hardship; they also include supporting community infrastructure, supply chains, essential services, and disaster response. Additionally, efforts to support small businesses, small farms, and nonprofits that are providing community support services are critical to this unique disaster response. Unfortunately, in many cases, justifying and documenting how a loan or service will assist in pandemic disaster recovery will be easy. This is a disaster more widespread than most of us have known in our lifetimes.
Naturally, the most immediate CRA response can be providing loans, investments, and services to organizations and programs that are addressing emergency needs within the community. CRA clearly states that efforts undertaken to provide community services to low- and moderate-income individuals are considered community development activities. In an article authored by the Federal Reserve Bank of Dallas on March 27, some specific examples of community services are provided, including activities that provide food supplies and services, access to health care, access to digital services, and economic development activities to sustain small businesses.
Of course, food pantries, food distribution services to the elderly and health care supportive services spring to mind. In addition, programs to support the homeless, emergency financial assistance, housing preservation, utility assistance and more will be critical during this time. Other services, while used as CRA-qualified examples in previous guidance, may not immediately be apparent, but are important as well. For example, supporting child care facilities that remain open for essential workers is particularly responsive to community needs. Identifying key resources that coordinate efforts and technical assistance within the local small business, small farm, or startup communities also helps and qualifies under CRA.
Additionally, closing the digital divide has never been a more critical need, as work, education, healthcare and other services move to a virtual environment. Programs that provide for digital literacy, assistance in navigating digital services, access to broadband internet, or donation of computers to homes in need also provide a needed service for individuals to access information and resources from the safety of their home.
As a result of the Pandemic, unemployment numbers are elevated. As unemployment claims rise, banks are faced with a mounting crisis. In this current pandemic, many of the newly unemployed were previously at work in service, hospitality, and manufacturing jobs. Without an end to quarantine measures in sight, the best option for these individuals is to file for unemployment. However, with reduced or no income, the ability to service debt and pay mortgage loans becomes increasingly doubtful.
The regulators have encouraged banks to explore alternative delivery channels and easing terms on new loans. Banks are uniquely positioned to provide financial relief to affected individuals. Flexibility in loan servicing, delivery of retail services, and support for small businesses and consumers affected by the pandemic will be a key component of CRA programs going forward.
Savvy CRA professionals have utilized financial literacy as a key community development service for many years. The need to adjust the delivery and focus of that financial literacy in response to the current financial climate is critical. The first step is getting the word out to consumers about the options that banks have created to assist them in deferring payments, modifying loans and avoiding negative credit reporting. Social media is an important way to introduce this message.
But for affected borrowers, more direct action and education will be needed. Some borrowers who always had a strong payment history may now be faced with late payments and are afraid, or unsure of how, to ask for guidance. Now is the time to reach out proactively to consumers, to walk them through options available from the bank to help.
Additionally, the idea of a skipped payment or payment deferral can seem very attractive when money is tight. Even for individuals who are still employed, the desire to save cash by skipping payments or only paying minimum balances can be tempting. However, many consumers may not realize that a skipped payment is not a forgiven or forgotten payment. Financial education around the impact of skipped and deferred payments and the resulting impacts to credit scores and payment histories has never been more crucial.
The new final CRA modernization rule adopted by the Office of the Comptroller of the Currency (OCC), and proposed by the Federal Deposit Insurance Corporation (FDIC) state that financial education is a need that affects all income levels. They have proposed that any financial literacy actions undertaken by a bank should be considered as community development. In this time of mounting financial uncertainty, CRA professionals can calm some fears simply by communicating with and educating consumers on these key financial concepts.
All of the above is solid advice. Most banks have stepped up and have offered most if not all of these services and activities. Now it is time for the regulators to grant the special consideration they promised.
In a program we offered in March, we predicted, and unfortunately we were absolutely correct, that examiners would initially be dazzled by the volume of pandemic activities offered by financial institutions. But that very quickly the extraordinary effort becomes commonplace. Everyone is making an extraordinary effort, so that effort is no longer special, it is expected. Banks are just satisfactory, they are not outstanding.
New CRA will help cure this frustrating flaw in the current regulation. Under new CRA each financial institution calculates a Qualifying Activities Value. That number is included in a formula entitled the CRA Evaluation Measure. If the Measure exceeds an established threshold the bank gets an outstanding rating even if the examiner is no longer dazzled by the effort made by the bank during the Pandemic.
Until new CRA is fully implemented, which will be 2024 or later, banks will have to deal with the vagaries of a system that is very subjective, and were the primary determinate of your rating is not what you have done, but who shows up to do the examination.
CRA examination results are trickling in. Banks previously rated satisfactory are still rated satisfactory even though they have mountains of documentation that reflect loans and other activities for which special consideration was promised. It does not appear that the agencies have provided either guidance or training related to the promised special treatment.
Promises made, now appear to promises broken. We are early in the pandemic game. The agencies still have time to provide the guidance and training to examiners that will assure that banks receive the promised favorable treatment.