The current crisis caused by the COVID-19 pandemic has dramatically changed American society. The tragic loss of life and unparalleled social and economic disruption make it difficult to imagine any community and industry that will not face long-term effects.
More than a decade removed from the housing crisis and the resulting Great Recession, banks once again face a challenging environment. Stay-at-home orders forced the closure of branch offices throughout the country, fundamentally affecting how most banks interact with their customers. Business closures have led to massive layoffs and rising unemployment with unprecedented economic effects..
In the face of this challenging environment, banks must ensure compliance with requirements under the Community Reinvestment Act (CRA). Regulators may try to accommodate banks facing upcoming examinations. However, once the acute effects of the COVID-19 crisis have abated, regulators will be concerned with how banks helped low- and moderate income (LMI) individuals and families, LMI communities, small businesses, and small farms.
In this post, we review how COVID-19 will affect CRA compliance during the crisis and in the years ahead, due to its lingering effects. We also discuss what banks can do to meet the needs of the communities they serve while maintaining compliance.
Business continuity and performance context
Before it is able to assist its customers and communities it serves, a bank must first survive the crisis. A bank must develop and implement strategies necessary to maintain operations while providing essential services to customers. In addition to voluntary or mandatory branch closures, other cost-saving initiatives, and decisions to maintain the health of employees and the balance sheet may be necessary.
Under the CRA, a bank’s performance context is crucial to evaluating its CRA-related lending and other activities. CRA activities must be consistent with a bank’s lending strategy, capacity and constraints while maintaining safe and sound practices. Accordingly, business continuity decisions are legitimate performance context factors.
For CRA compliance, a bank must be prepared to explain its actions to examiners within this performance context. The bank should document the actions it has taken to ensure safe and sound business practice during the COVID-19 era. Further, the bank should be able to clearly link those actions to observed changes in CRA-related activities.
For example, a new policy that temporarily eliminates financial education seminars due to government mandate, or a business decision to minimize risk to employees, may lead to fewer services that would receive CRA credit for community development. In this scenario, the bank should document the rationale for the policy and how the policy reduced the frequency of this CRA-qualified activity.
Separately, as it relates to performance context, dramatic changes in the economic environment may lead to a reprioritization of community needs. Affordable housing, home purchase credit and LMI financial education may be displaced by factors like small business lending, economic development and neighborhood stabilization initiatives, as acute needs affect communities. Banks must monitor the housing and economic dynamics in their assessment areas to ensure they are meeting relevant, critical community needs while maintaining safety and soundness.
Small businesses and small farms support
The economic disruption of the crisis has had a dramatic effect on small businesses. As evidenced by passage of the Paycheck Protection Program (PPP), many small businesses and farms are in desperate need of credit to pay rents, avoid laying off and furloughing employees and continue business operations. Even though states will continue to gradually lift stay-at-home orders to reopen their economies, the crisis will likely continue to affect small businesses and small farms until consumer confidence is restored.
Banks that lend to small businesses and small farms have an important role to play in stabilizing local economies. Regulators have already signaled that participation in the PPP will be considered for CRA credit. Other flexible and innovative lending programs that enhance the availability of small business/farm credit – in particular, to those with revenues at or below $1 million and those located in LMI communities – will provide small business and small farm lenders opportunities to increase lending activity while meeting critical community needs.
Banks that lend to small businesses and farms should document the strategies and lending programs they implemented to address the effects of COVID-19 in their assessment areas as well as other areas in their geographic regions. The dollar amount, LMI tract designation, business revenue and bank decision (e.g., funded, denied, etc.) of each loan application under the PPP and other programs should be tracked for monitoring purposes.
Community development activities
CRA-covered banks examined under Intermediate Small Bank and Large Bank procedures are required to document loans, investments and services that meet a community development need (e.g., affordable housing, economic development, etc.) for LMI individuals, LMI communities, small businesses or small farms inside their assessment areas.
The extraordinary effects of the COVID-19 crisis create myriad opportunities for banks to satisfy these requirements and meet critical community development needs affecting their assessment areas. These include:
- Modifying loan terms and making payment accommodations for LMI, small business and small farm borrowers to help them deal with temporary hardships caused by the COVID-19 crisis;
- Increasing credit limits on existing borrowers and enhancing the availability of short-term credit to new borrowers based on their creditworthiness;
- Supporting community services that provide food, shelter, and health care services to LMI individuals affected by COVID-19;
- Making loans and investments to support access to health care and small business digital delivery systems (e.g., loans to local restaurants to invest in online ordering systems); and
- Waiving ATM withdrawal fees, late payment fees and other bank fees.
Such community development initiatives should be documented by recording, for each activity, the dollar amount (if applicable), the census tract in which the activity occurred, the extent to which the activity benefited LMI individuals, small business or small farms, and the community development need that was addressed by the activity. For some banks, this may require developing new monitoring procedures for activities that are not typically tracked for CRA purposes.
For instance, we have encountered banks with incomplete or nonexistent systematically-available data sets that would allow for the tracking of loss mitigation and loan modification requests that can be clearly linked to LMI borrowers, small businesses and small farms. To ensure they receive CRA credit for these important decisions, banks need to systematically record these requests and decisions to provide evidence that they assisted such in-need borrowers. Developing and implementing these necessary monitoring systems now will ease the burden of preparing for the next CRA examination while maximizing the potential for receiving CRA credit.
Pending CRA modernization
Despite challenges of the COVID-19 crisis, the Comptroller of the Currency signaled that his office will continue to pursue CRA modernization with a final rule expected during the summer of 2020. If this effort does continue, in the coming years many banks will be faced with a dramatically different CRA compliance picture while likely dealing with lingering effects of the pandemic.
Assuming a final modernization rule is implemented in the coming months, banks regulated by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) should be proactive. The degree of change the pending rule will be significant for covered institutions.
Consequently, a pragmatic approach for affected banks is to continue or begin planning for change. Banks should evaluate their CRA compliance management systems for gaps that will need to be addressed if a final rule is indeed implemented. Once these gaps have been identified, plans should be developed for closing those gaps once the final rule has been implemented. These plans will help banks manage the burden of transitioning into the new CRA compliance regime while handling the effects of the COVID-19 crisis.
CRA compliance is enduring
CRA examiners may accommodate the disrupted workflows of banks in current and upcoming examinations; however, institutions must continue to satisfy their CRA-related requirements. The COVID-19 crisis does not preclude CRA compliance obligations. Moreover, the crisis will create new, acute community development needs that will be top-of-mind among CRA examiners. These needs may yield new expectations of what banks should be doing to help their communities through the crisis. It is crucial, from a business and compliance standpoint, for banks to be proactive in this environment by seeking opportunities to extend credit and help the communities they serve, while ensuring they will be able to tell their CRA story to regulators.