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«1. Racial and Ethnic Employment Disparities: How have recent employment and workforce conditions for racial and ethnic minority groups differed from ...»

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May 13, 2016 Record of Meeting, CAC and Board of Governors While the Council recognizes that technology and data are changing lending practices, and that potential exists to improve credit access and services for certain groups that might not otherwise have received capital, there is a clear need for stronger regulation and examination of consumer lenders. We see examples of consumer lenders, and particularly online lenders, operating in ways that are producing risk (e.g., recent reports regarding Lending Club’s falsification of data) and consumer harm that are disturbingly similar to what occurred in the subprime mortgage market leading up to the recession. Given the target market for much consumer lending activity, this risk is particularly targeted and toxic for low-income people and small business owners, and is likely to manifest most dramatically in the next economic downturn.

Numerous organizations are piloting high-quality efforts designed to provide access to safe and affordable small-dollar loan products. The programs use features such as flexible repayment periods

and installment loan structure. Examples undertaken by Council members include:

 The California Pilot Program for Increased Access to Responsible Small-Dollar Loans:

Under this pilot, lenders like Oportun can charge marginally higher interest rates, as well as larger origination and delinquency fees, than those permitted for consumer loans of that size ($300–$2,500) made outside the program. In order to charge those marginally higher rates, the pilot provides significant additional consumer protections and benefits.

 Twin Accounts: Participants in LISC (Local Initiatives Support Corporation) Twin Accounts program receive a “loan” of $300, which is not drawn immediately, but rather deposited into a “locked” savings account. The participant pays back the loan in installments over a 12-month period. By the end of the program, participants have not only saved $300, but also have the opportunity to earn a 1:1 match on every on time payment, doubling their savings to $600. Just as importantly, their payments are reported to credit bureaus, enabling participants to build their credit scores or establish a credit history. Within six months, participants who are “unscored” at program entry typically generate credit scores in the high 600s. Those with low scores at program entry see an average increase of 30 to 60 points.

3. Community Reinvestment Act: What is the Council’s view on the key concerns with how the Community Reinvestment Act (CRA) is being implemented today? What areas may require further examination and analysis?

CRA remains one of the few and most important drivers of private financing for activities in lowincome communities. Most banks report that CRA is a threshold consideration in the volume and location of their community development financing. CRA is becoming an increasingly important tool for mitigating negative community impacts resulting from bank mergers, and financing activities in low-income communities as public subsidies that support these activities are on the decline. It is critical that we do all we can to strengthen and improve this essential source of financing support for underserved populations and neighborhoods, and to do so in a manner that reflects that the banking industry has evolved significantly in the close to 40 years since the enactment of CRA. The following issues are critical concerns to strengthen CRA. We appreciate that some of these concerns can be addressed through the ongoing process of updating the Interagency Questions and Answers Regarding Community Reinvestment, the document that provides additional guidance to the public and financial institutions on the agencies’ regulations (the CRA Qs &As), but the Council urges regulators to open a regulatory review process to address other issues as necessary.

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Assessment Areas The assessment area-driven approach to CRA, which may have served the program well in its early years, is not working well in local communities, and is becoming increasingly difficult to manage for banks and regulators. Two divergent trends are in play here. On the one hand, the mergers of institutions over time have created a situation where some national retail banks have hundreds of individual assessment areas that must be managed. Conversely, the rise of wholesale, limited purpose, and internet banks (WLPIBs) has created a situation where some institutions may only have one or two assigned assessment areas, even though they are serving a national market.

The reliance on assessment areas has led to a concentration of investment in “CRA-hot” markets at the expense of markets that are already suffering precisely because there is limited bank presence there.

While Council members appreciate recent revisions to the Interagency Qs & As clarifying when banks can get credit for investments outside their assessment areas, the regulators’ efforts to encourage a broader scope of investments will continue to be frustrated until they can develop an approach to CRA evaluation that is not so driven by geographic constraints. Additional geographical assessment areas need to be designated when banks are making considerable numbers of loans in areas where banks do not have branches. Alternately, it is well documented that branch closings often have a negative impact on access to financial services and access to credit. Research aimed at mapping of assessment areas and lending will give greater insight.





The geographical basis of CRA exams should not be ended because banks must continue to be held accountable for the communities in which they have branches and/or are making loans.

Quality of CRA Activities It is not always clear that even the banks receiving “outstanding” ratings based on their volume of activities are having a meaningful impact on the communities or the families being targeted with their activities. Regulators may want to consider whether more weight should be given to activities that are the most difficult to undertake and will have the greatest impact with respect to revitalizing lowincome communities, providing goods and services to community residents, or providing economic

opportunities to families. For example, some specific areas of focus could include:

1) Serving the underserved: CRA potentially could be leveraged in ways that better serve unbanked and underbanked consumers by promoting affordable transactions, encouraging savings, helping build individual wealth/assets, and increasing access to affordable smalldollar consumer loans and business loans. More analysis and better use of data around the underserved and access to financial services and credit, including the role of technology, will enhance the ability to precisely serve this market.

2) Product standards: CRA examiners could potentially consider whether the products being offered are truly customized to best serve low-income borrowers, and could also reward banks that are providing more flexible and innovative criteria in their underwriting.

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3) Equitable economic development: Regulators could consider providing more scrutiny of loans that automatically get CRA credit to ensure they are truly creating quality jobs and economic opportunities for the people and communities that most need them.

4) Small business lending: More attention should be given to lending that is truly benefitting small businesses in underserved communities, especially as more data is likely to become available in the wake of new regulations. Regulators should amend the rules to clarify that small business lending, for the purpose of the CRA, means loans to businesses that are small, not small loans to businesses of any size. Efforts should be made to support Community Development Financial Institutions (CDFIs) and other non-traditional lenders lending in underserved areas and to underserved populations.

5) Re-examine the service test: The efficacy of the service test as a method for producing impact in LMI communities should be reviewed for improvement. The service test lacks data on how many LMI consumers banks are serving with basic deposit accounts and savings accounts.

6) Capacity building for emerging CDFIs: The CRA gives specific benefit to banks that invest through a CDFI. Capacity-building efforts with mission-focused lenders that have not yet achieved CDFI status should also be recognized.

CRA Examinations CRA enforcement is not nearly as strong as it could be, and a big cause of the problem is that there are insufficient nuances in the current grading system. Across all of the regulatory agencies, the vast majority of banks are falling into a satisfactory rating, which is so broad and covers so many institutions that it has no real value as an assessment measure. Regulators should consider whether there would be value in creating a more nuanced rating scale as a way to incentivize more CRA activities across the board. There is a current point scale from 1 to 24. Points are never shown on CRA exams with ranges of points corresponding to the various ratings. Regulators need to establish a new point scale from 1 to 100, which would allow regulators and the public to clearly see which banks had satisfactory ratings (over 90 percent have satisfactory ratings) and to distinguish a range of performance within the satisfactory classification as revealed by the score.

More guidance and training is needed to improve the consistency and the depth of understanding brought by the examiners. There is a widespread belief that CRA is applied differently depending on the examiner. Regulators may wish to consider whether this concern can be addressed through a combination of interagency training, development of a new training curriculum, documentation, and dissemination of best practices, or other similar activities that include exposure to practitioners and models for effective community reinvestment.

One element critical to the success of CRA is the ability for banks to collect and disseminate data with respect to where they are making loans, investments, and otherwise engaging in activities and for regulators and the public to be able to review that data to be able to make determinations as to whether the banks are fulfilling their obligations to serve LMI communities. Ready access to meaningful, accurate, and timely data is critical to assess a bank and the industry, and regulators should consider whether it would be a worthwhile endeavor to standardize data (such as HMDA, small business,

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community development lending, and investments) and make it available to the public on an annual basis.

Similarly, regulators should encourage more public participation in the CRA evaluation process.

Currently, there is too much reliance on waiting until a merger or acquisition is planned, and then inviting the community to react. Regulators may want to consider ways to proactively solicit community input from a wide variety of stakeholders throughout the exam cycle. In addition, regulators may want to consider whether it would be appropriate to require banks to develop and submit for public comment forward looking, multiyear “CRA Plans” that outline the bank’s strategy for meeting its CRA obligations.

4. Current Lending Conditions: Please describe any significant changes since the November 2015 meeting in the overall availability or terms of credit in the following areas of lending, focusing on the impact to consumers and communities.

a. Small Business Lending Small businesses are essential economic drivers, and are often especially critical drivers of economic opportunity in low-income and immigrant-dense neighborhoods. But credit availability from banks continues to be tight. Traditional lenders do not have the right mix or size of products that are flexible for local small businesses. In contrast to national banks, community bank approval rates are significantly higher. As community banks are sold, access to local credit could be adversely impacted.

It is also increasingly the case that traditional banks are moving out of the business of making small business loans based on actual cash-flow-based underwriting. This drives small businesses to either treat their credit cards as a vehicle for regular loans, or pushes small businesses toward the higher-cost marketplace lenders. Both options are higher cost and greater risk to the borrower.

Bankers, lenders, and consumers have brought up concerns about alternative lenders, as we discussed more fully in our response to question 2 on small-dollar lending. There are some new efforts by mission-driven lenders that can provide useful lending models, although they will not be at the scale that can replace the banks that are leaving the space or that can compete with the high-cost, nonregulated lenders. For example, CDFIs are responsible, non-traditional lenders blending rigorous due diligence with flexible and creative underwriting, making credit available to businesses not served by traditional lenders.

The increasing proliferation of merchant cash-advance products by online and other alternative lenders is causing great harm to small businesses nationally and requires review, and potentially regulatory oversight, to avoid the sector turning to payday-lender-like abusive practices. Minimally, this sector should be held to an “ability to repay” standard, such as that promulgated by the CFPB for home mortgage lending.

The livelihoods of small businesses in many urban areas are threatened due to rising commercial rents and the lack of stable leases. In rural areas where agriculture is the main business, there has been a decline in commodity prices and deflation of farmland values, which results in a decrease of economic

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activity. The volatility of prices and uncertainty have negatively affected the ability of small businesses to sustain or expand.



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