The Bank Board Role in Supporting Compliance with New CRA Regulations | Calling All Bank Directors Ep. 52

Welcome to Calling All Bank Directors. This is David Barris, President of the American Association of Bank Directors. Our topic today is the new CRA regulation. What role can bank boards play in support of their bank's obligations under the new rule?

This is the second of two podcast episodes on the new regulation. We're fortunate again to have Ken Thomas, President and CEO of Community Development Fund Advisors, to discuss the new rule. Ken is the author of the seminal work on CRA and is a leading national expert on the subject. He taught at Wharton Business School, 42 years, and serves on AABD's advisory board.

All right, let's call Ken. Hi, David. Hi, Ken. Thank you for joining us.

This is the second episode on the final CRA rule. And last time you addressed what the rule says, what the misconceptions are about it, and then finally the commentary on the assessment areas and the final rule. So today we're going to address what to do about the CRA final rule. And as you explained the last time, this is a very imperfect rule, and it creates a lot of difficulties for a lot of banks, especially the larger ones.

And so my first question would be, what should the compliance officers do now? And, of course, we're focused on the board, but the board needs to know what the compliance officers should be doing. So it's important for the board to be listening to this. Absolutely.

And, again, thank you for having me. And the fact that I've been involved in CRA is important, but more relevant is the fact that I've been on a community bank board for over 20 years. And I can tell you, you know, being on the bank board, we are always concerned about regulations, safety and soundness, of course, and compliance. But I would tell you from the perspective of compliance, It has never been this difficult, I would say, since the early 90s.

It's gotten so difficult not just with CRA enforcement, but in terms of fair lending enforcement. For example, I was at a recent conference where Kristen Clark, the head of the fair lending area at DOJ, she noted that they done about a dozen fair lending cases with two dozen more in the hopper ready to come down Now these are very serious cases of redlining racial discrimination and so forth And on top of that we got CRA Even though the new regs will not take effect until January of 26, the new tests, the examiners have already gotten tougher.

For example, most recent month ago, the FDIC only gave out 3% outstanding ratings, where they used to give out maybe 10%. And the percent of failing ratings was about 3%, which is growing and growing. Now, more recently, it went up to 4%. We believe that the percentage of failing ratings on CRA is going to inch up to 10%.

10%. That's the number that's in the final rule that they expect it to be. And the percentage of outstanding banks is going to shrink tremendously. Now, why is this important?

Board members must understand if there's a particular risk at their bank in terms of either getting A, a needs to improve rating, which would shut down all branching, all M&A activity, not to mention reputation risk, and B, especially if there's a potential for a fair lending violation. And if these violations, these complaints are all public. And compliance officers, risk officers, need to give a very objective assessment to each board as to where they believe the bank's going to fit in in terms of its rating under the new regs and where they believe there might be risk for fair lending.

I think that's one of the most important things that compliance officers must do now. The new regs don't go into effect until 26. That means if your bank has an exam in 24 or 25, this will be the last chance probably to get an outstanding rating under the current regs. And you must do everything you can to get that outstanding rating if possible.

Why outstanding? because if you do get a fair lending violation, you get knocked down one point, one rating level on your CRA. So you would go from outstanding to satisfactory and nobody would notice. But if you were only satisfactory, you would go to needs to improve.

The other reason is if you have an exam in 24 or 25 and you get outstanding rating, when the new regs come into effect in 26, the first thing examiners do is what's your current rating? And they make an attempt to try to keep you at that rating if possible. So if you're at the highest possible rating and they knocked you down under the new regs of satisfactory we can live with that But we cannot live via knockdown that needs to improve And that something that we must focus on.

And how do you do that? Obviously, by doing as much as you can in the way of investments, kind of late for loans or services if you have an exam coming up, but you can always buy CRA investments. So I just wanted to throw that out as a possibility for bank board directors to consider. Yeah, one point, Ken, I think is preparing an executive summary of the final rule by the compliance officer to the board so the board will have an objective assessment of the fair lending risk and anticipating what may be next.

And I think the other point, I think, might be to attend a CRA webinar and have an expert third-party lifeline contact to evaluate the new rule and guide both the compliance officers and the board. Absolutely. And the big questions you want answered is, number one, what are the chances that we could get a failing rating that needs to improve? Because that would shut down all expansion or M&A and have the reputation risk.

And number two, what are the chances that we could get a fair lending violation, a complaint by DOJ or even a complaint by one of our prudential regulators based upon our existing branching, our marketing, our networking, where we're making our HMDA loans and that sort of thing. So those assessments have to be done. And internal assessments are sometimes a little bit rosy. That's why it's always good to get an outside view, as you mentioned.

So finally, Ken, there has been some talk about a possible legal challenge to the final rule. What do you see happening there? You know, all of us in banking, we all believe in fair lending. We all believe in fair banking.

But there's also something very important in public policy that we call fair regulations. And if a regulation is not fair, whether it's CRA or the new capital rules, what is a bank supposed to do? They can't complain to the regulators because they'll just say, you know, it's our way or the highway. Well, this has changed.

We are in the midst of what I call a bank regulatory revolution, where bankers for the first time, particularly those in Texas, and I take my hat off to them, that are challenging the regulators. Now this started with the CFPB legal challenges that are ending up in the Supreme Court on the constitutionality of CFPB and on certain of their regulations And so the next step is why not legally challenge prudential regulators on an unfair regulation This regulation on CRA is totally unfair.

It's unfair to banks in terms of the burden, the fact that there'll be too many banks failing when it's not necessary, the fact that there'll be too few banks not getting outstanding, and it will be unfair to communities that lose a lot of community development investments, especially our most inner city communities, communities of color. I think they'll be hurt by the new rule. As a result, the ABA and the BPI, in their publicized comments to the rule, have indicated that the new rule and even the proposal could be challenged based upon the statute, based upon the Administrative Procedures Act and based upon due process.

And they are actively looking at that possibility. Such a claim would be filed most likely in, I think it's the 5th District of Texas, where the other CFPBs were filed. But the most important point is, if banks are concerned about the capital rule, they have to be concerned about the CRA rule. In my opinion, if you don't challenge the CRA rule, you're not going to have a chance challenging the capital rule.

If you challenge the CRA rule, you have a much better chance of winning. If you win on the CRA challenge, then you'll have a better chance of winning on the capital challenge. But if you don't challenge the CRA rule, or if you fail on that, then you're going to have a very bad, very poor chance of succeeding on the capital challenge. And so what are banks concerned about now?

the new capital rule. But they have to keep in mind, if you want success on a legal challenge in the capital rule, it starts with challenging the CRA rule, because that's where the regulators are very, very vulnerable, and that's where banks have a very good chance of winning and overturning the regs. And that'll be very helpful for the capital rule. Well, Ken, thank you again for your presentation and wisdom on the subject.

And we welcome, of course, any people listening to this to ask any questions, and I will pass them on to you. And I can be reached at dbaras at aabd.org. Thank you, Ken, for your time and your commitment, and we will talk again.