PCDC: Community Reinvestment Act Changes Can Undermine Community Health Investments

The Primary Care Development Corporation (PCDC) appreciates the opportunity to comment on the Joint Notice of Proposed Rulemaking pertaining to the Community Reinvestment Act (CRA). While we are supportive of targeted reforms to increase ease of operations and transparency in the CRA, we are deeply troubled by the joint notice of proposed rulemaking (NPR) and its broad stroke approach to reform which we believe will undermine investment in low- and moderate income (LMI) communities and the organizations that keep them healthy.

ABOUT PCDC

PCDC is a Community Development Financial Institution (CDFI) that invests in communities by providing flexible, affordable capital to community-based health providers to meet the primary health care needs in their communities. Nationally, PCDC has provided direct-financing and leveraged more than $1.2 billion across 130 primary care health center projects. These projects have provided primary care access for millions of patients, created more than 10,000 jobs in low-income communities, and transformed more than 1.8 million square feet of space.

The CRA is a critical foundation for PCDC to invest in underserved communities. Current CRA regulations enable us to finance and enhance primary care and other vital health services in underserved communities. Nearly 35 percent of PCDC’s current capital available for lending is from CRA-motivated financial institutions. These CRA obligations have enabled PCDC to provide low-wealth communities with capital to expand treatment services, recruit new health providers, upgrade new EHR systems, implement care coordination models, better integrate substance use disorder services, and more. We are deeply concerned the proposed rule undermines the spirit of the CRA to invest in underserved communities and render highly impactful activities that are complex, longer-term, or not maximally profitable such as community-based health care projects less attractive for CRA motivated investments.

CDFIS AND COMMUNITY HEALTH CENTERS

As the primary recipient of PCDC’s lending activity, Federally Qualified Health Centers (FQHCs) increase access to health care by reducing barriers such as cost, distance, lack of insurance, and language for their patients. Nationally, there are nearly 1,400 FQHCs serving over 29million patients in all fifty states and territories. FQHCs also provide highly efficient and cost-effective care, generating $24 billion in savings for the health care system annually and providing care for one-sixth the average cost of an emergency department visit.

The benefits of FQHCs transcend health. New and expanded health centers drive economic momentum by creating new jobs — construction jobs as well as permanent quality employment — for community residents. In 2018, health centers employed more than 236,000 people, many of whom come from the low-income communities served by these centers. To provide care to both the newly insured and those who are still without coverage over the next several years, FQHCs require financing to expand services, build facilities, and invest in critical infrastructure. Achieving this investment objective will require FQHCs’ access to low-cost, patient capital provided by CDFIs as well as additional investments by traditional lenders, whose support and resources are essential for these projects.

The CRA, and the support it gives to CDFIs, allows FQHCs to access affordable capital to best serve their patient populations, expand services, and plan for health emergencies. At this moment, we are deeply concerned with any changes that would limit investment from flowing through CDFIs to health care facilities when there is an overwhelming need for their services.

GOALS OF CRA MODERNIZATION

The CRA has become the foundation of financing for LMI communities in the United States. The joint NPR itself acknowledges that, “Congress enacted the CRA with the purpose of encouraging sound lending to all areas of a bank’s community.” This, along with several other laws enacted in the 1960s and 1970s, were created specifically to address discriminatory lending practices, often referred to as redlining, and to ensure depository institutions meet the credit needs of LMI communities. The CRA has helped historically marginalized communities see success through community development financing projects and equitably distributed consumer residential and small business loans.

Any reform to the CRA must advance the primary purpose of the statute: assuring that banks provide appropriate access to capital and credit to LMI people and places. Over the past 40 years, CRA has helped bring affordable housing, small businesses, jobs, and banking services to underserved communities. Modernization must move the CRA to increase access to affordable capital- not make it easier for these communities to be left behind.

CDFIS AND THE CRA

The CRA has been a primary factor enabling the CDFI industry to grow and deliver responsible financial services and products to low-wealth communities. Changes to the CRA regulatory framework could have a significant impact on the CDFI industry’s capacity to lend and invest in low-wealth markets and contribute to economic revitalization. There are currently more than 1,100 CDFIs certified by the Department of Treasury’s CDFI Fund with over $150 billion in total assets. With cumulative net charge-off rates of less than 1 percent, CDFIs lend prudently and productively in exactly the LMI communities that are the focus of CRA.

CDFIs rely on the CRA to incentivize banks to make credit and capital available to underinvested communities. Banks typically meet their CRA obligations through their own direct lending however in recent years, CDFI-bank partnerships have flourished because banks recognize the CDFI industry’s strong track record. Under current CRA regulations and guidance, banks are assured CRA consideration for community development lending including loans and investments to CDFIs. Existing guidance from the OCC, Federal Reserve Board of Governors and Federal Deposit Insurance Corporation regarding treatment of CDFIs should be retained and strengthened in any modernization of CRA regulations.

The burden is on the OCC-FDIC to show that the proposed modernization of the CRA would not harm LMI communities seeking access to capital. At this time, it seems the proposed joint rule would divert money away from these communities and stymie long term growth. We encourage OCC and FDIC to work in concert with the Federal Reserve to come up with recommendations that increase the financial resources of LMI communities, rather than increase the ability of large financial institutions to check the CRA requirement box without providing real benefit.

We offer the following comments to specific sections of the proposed rule.

PERFORMANCE AND EVALUATION FRAMEWORK

Questions referenced: 14-19

We are deeply concerned that a single metric “evaluation measure” remains a core feature of the evaluation framework proposed in this rule. The preamble to the proposed rule itself points out that commenters on the Advanced Notice of Proposed Rulemaking (ANPR), “support objective measurement of CRA performance, although they oppose a single metric.” Yet a single metric is the foundation of the proposed performance measurement framework despite wide ranging opposition.

We acknowledge that creating separate tests for retail and community development activities is likely a net positive for LMI communities. An approach combining all activity runs the risk of banks seeking fewer, larger deals rather than smaller ones that truly adhere to a community’s credit needs. The value of services to a community doesn’t lend itself to a monetary value measurement. A small bank’s leadership and services may be vital to the success of that small community even if the dollar value is smaller than that of a larger bank’s services in a large city. We appreciate the attempt to structure the retail distribution test in a way that measures how well the activity serves LMI farms, small businesses and neighborhoods by focusing on loan counts rather than value to avoid bias toward fewer, larger investments.

The proposed metric would aggregate the dollar value of all qualifying activities into a single metric and divide that sum by the average of its quarterly retail domestic deposits. This would drive a presumptive CRA rating. The problem is adding up the dollar value of qualifying activities does not account for the quality and character of the bank’s activities and its responsiveness to local needs. Further, the joint NPR acknowledges that deposit data (the denominator in the proposed metric) has “limitations” due to the current reporting framework. The proposed rule does outline changes that hope to address these challenges in reporting: “Over time, the data collection, recordkeeping, and reporting requirements in this proposal would remedy the current limitations.” An assumption that data and reporting will improve in the future should not warrant such a significant change in evaluation measurement based on problematic data.

Finally, the benchmarks for evaluation proposed in the rule are vague and unfounded. The rule states, “…by using all the sources together…and making a limited number of assumptions, the agencies were able to estimate what each bank’s average CRA evaluation measure would have been from 2011-2018 under the framework in the proposal.” The rule goes on to list numerical values for outstanding, satisfactory, needs to improve and substantial noncompliance evaluation categories. However, no explanation is given for how these specific benchmarks were determined. This lack of transparency is concerning as the basis for establishing new presumptive standards for CRA performance.

These presumptive standards undermine one of the most important benefits of CRA – the incentive for banks to develop partnerships with local organizations to address community needs – because the banks can satisfy their CRA obligations by simply hitting the metric. Further, the single, dollar value-based metrics favor large, easy-to- accomplish investments and loans over more complex and innovative activities that may take longer to develop but have a higher impact on the community. Additionally, the single metric is not sensitive to the economic cycle. This is inconsistent with the safe and sound standards set out by the CRA.

Low-income communities depend on sound, thoughtful investment to expand and thrive. The primary purpose of CRA is to ensure that banks meet the credit and financial services needs of LMI communities. Ten years after the Great Recession, credit standards remain tight and some borrowers still face significant challenges accessing capital. In the grips of global pandemic and economic downturn, there will be greater barriers for LMI borrowers in

the months and years to come. Now more than ever, there is a need for a CRA that is focused on connecting low- and moderate-income places and people with the financial mainstream, and ensuring access to fair, affordable financial products and services.

CRA-QUALIFYING ACTIVITIES

Questions Referenced: 1-10

We applaud the attempt at transparency signaled in the joint NPR by providing and updating an illustrative list of CRA qualifying activities. A public list of CRA eligible activities offers clarity and certainty, helping banks make better investment decisions without waiting years after engaging in a transaction to find out if an activity qualifies for CRA credit.

However, just because an activity may appear on a list of CRA eligible activities does not guarantee any bank will chose to conduct that activity. Highly impactful community development activities such as investments in community health centers will be competing against much larger deals that may allow the bank to meet its dollar volume ratio more quickly and simply. The agencies must act to continue to incent the collaboration with CDFIs over less impactful, but more expeditious activities. As experts in community development financing, CDFIs have the ability to direct lending activity to areas where it will be most impactful for the community and its residents.

ASSESMENT AREAS

Questions referenced: 11-13

The NPR recommends the creation of a new type of assessment area to complement the existing “facility-based” assessment areas in effect under current CRA regulations. Under the proposal, markets where a bank collects 5% of its deposits would become “deposit-based” assessment areas. This reform is aimed at addressing how the banking industry has evolved to include banks with no or limited “bricks & mortar” presence. It is unlikely that the creation of “deposit-based” assessment areas will do enough to address the “CRA deserts” problem facing rural, Native and other low-wealth markets today. Communities with high concentrations of low-income residents are unlikely to generate the level of bank deposits to trigger the creation of a deposit-based assessment area. Similarly, low population communities are also likely to be missed.

Under the proposal, a bank cannot receive a Satisfactory or an Outstanding rating unless it also receives that rating in a “significant portion” of its assessment areas. The NPR proposes that 50% be the threshold used to determine a “significant” portion of a bank’s assessment area. A bank should not be able to obtain a Satisfactory or Outstanding rating in a CRA exam if CRA activities meet the performance evaluation measures in only half of the bank’s assessment areas.

Despite many of our concerns, PCDC is pleased the joint NPR explicitly affords CDFIs the same status as current law provides for minority- and women-owned depository institutions and low-income credit unions (MWLI). The CRA provides that, in assessing the CRA performance of banks, examiners may consider capital investments, loan participations, and other ventures undertaken in cooperation with MWLIs, provided that these activities help meet the credit needs of local communities in which the MWLIs are chartered. Banks receive CRA consideration for said ventures regardless of whether these communities overlap with the bank’s CRA assessment areas.

We hope the final rule will progress even further and offer equal treatment to banks for making loans to CDFIs as they currently receive for investments. Bank loans to CDFIs should receive CRA credit for each year the loan is outstanding. Currently, investments made in prior exam periods generate CRA credit but loans do not. This policy incents banks to make short-term loans that correspond to their exam cycle rather than longer-term loans that better meet the needs of CDFI borrowers.

POSTPONE MODERNIZATION DUE TO COVID-19

We are specifically concerned about any reforms to the CRA at a time when its power to encourage investment in LMI communities will be needed most. In light of the ongoing global pandemic caused by the novel coronavirus (COVID-19), we strongly encourage the regulatory agencies to suspend the CRA rulemaking process indefinitely, or at least until after the states of emergency are lifted to allow the industry to focus efforts where they are needed most. While the CRA continues to play a critical role in banks meeting the credit needs of the communities they serve, it is too soon to tell what the economic impacts of this pandemic will be, and if any changes to the proposed CRA rules may be needed as a result of this global crisis.

CONCLUSION

PCDC appreciates the opportunity to comment on potential changes to the CRA regulatory framework. We also ask you to consider the comments of CDFI membership organizations including the Lenders Coalition for Community Health Centers, the CDFI Coalition, and the Opportunity Finance Network. There is unified voice within the CDFI community for pause in regulation and greater transparency of measures which we hope will be heard.

Sincerely,

Louise Cohen
CEO, Primary Care Development Corporation