Proposed banking rule change threatens city and small town lending, advocates warn

Kenneth Bigos’ day job is running the Affordable Housing Coalition of Pennsylvania, which helps people buy their first homes. That puts him arm-in-arm with a lot of Philadelphia’s bankers.

He serves on TD Bank’s Community Advisory Council. Citizens Bank helps train his group’s housing counselors. He credits Wells Fargo’s NeighborhoodLift program with finding down-payment assistance for first-time borrowers. And he cites WSFS as a major lender in the city’s Turn the Key and Philly First Home grant programs.

But Bigos is worried that federal bank regulators’ pending plan to streamline the Community Reinvestment Act (CRA) endangers that community-bank energy. Regulators have used this 49-year-old law to set targets for banks so they offer loans and services throughout their market areas, including in lower-income neighborhoods. Bigos and other advocates say the regulators’ plans cuts those targets so banks can do less.

“All of this good work is because of CRA,” Bigos said. “My concern is that the rollback of the CRA will result in having fewer banks accountable to the communities,” slowing bank-financed improvements to the region’s working-class neighborhoods.

The CRA was intended to curb redlining policies from when banks refused to lend in certain sections of Philadelphia and other cities. Regulators are now considering changes, with the public comment period drawing to a close.

Rules added in 1995 obliged banks to document their loan approval, equity investments, branch networks, and service levels in working-class and low-income neighborhoods. It helped spawn a network of nonprofits that helps banks meet their CRA targets by recruiting local projects, developers, and borrowers.

Regulators rank banks’ CRA performance. Banks that seek to expand need good CRA ratings or risk regulators’ refusal.

Some banks made a virtue of necessity.

PNC, the biggest bank in Pennsylvania, scored an “outstanding” in every inspection and has won approval for mergers, which made it the fifth-largest in the U.S. The Pittsburgh-based company regularly highlighted its CRA lending along the way.

Big lenders that missed targets, like Wells Fargo, were rated “needs to improve,” and they were blocked from deals until they did better. Underlining the narrow line banks may walk between changing regulatory currents, the Wall Street Journal recently reported that the Trump administration is investigating whether Wells Fargo is violating the Fair Housing Act in its efforts to boost Black homeownership.

Two suburban Philly institutions, Parke Bank and Penn Community Bank, are currently laboring under low ratings.

Banker groups have long lobbied for relief from CRA rules and compliance work.

Proposals put forward earlier this year by the Federal Deposit Insurance Corp. (FDIC) and the Treasury Department’s Office of the Comptroller of the Currency (OCC) would enable banks to ease CRA targets by at least two-thirds, advocates say.

In Pennsylvania the annual CRA targets would drop from $3 billion to $1.1 billion, according to estimates by the National Community Reinvestment Coalition (NCRC), which represents nonprofit housing and lending groups.

The American Bankers Association says it’s “pleased” that the proposal focuses CRA more narrowly on loans and community projects, not broader programs or organization funding, and eases targets especially for small banks.

Banks covered by CRA would see the rules eased in two ways, says NCRC director Kevin Hill.

Under the proposal, banks would be able to comply with the law by issuing strategic plans with a lower total CRA loan and investment total — a 64% reduction, by Hill’s calculation — or they could lend a percentage of their capital in low-income areas, with a much lower minimum commitment required.

The proposals would also raise the definitions of large and midsized banks so that hundreds of banks would move into categories with lower CRA targets. Banks including Mid Penn Bank, which has recently opened offices in Philadelphia, and family-owned Firstrust Savings Bank of Conshohocken would be among those reclassified from large to midsized banks with fewer CRA obligations.

Hill says banks in some cases would be able to close urban branches without suffering a loss in CRA standing. And they would be able to stop compiling data on their small-business loan applications, a key credit measure.

Local and national community-lending groups are sounding warnings and urging members and supporters to write to regulators during the public comment period, which ends Oct. 13.

Nonprofit lenders who have worked with banks for years say they’re scared banks will retreat from the communities meant to benefit from CRA.

“This is particularly going to affect small towns and rural areas with small banks. They won’t have to adhere to CRA rules so closely,” said Dan Betancourt, president and CEO of Finanta credit union, which has offices in primarily Latino communities of Philadelphia, Lancaster, and other eastern Pennsylvania communities.

“They will now be able to meet their CRA requirements by lending to large infrastructure projects and stop focusing as much on small mortgages and small-business lending,” Betancourt said. “It will be easier for them to meet the tests, to get a satisfactory rating. I definitely would rather they keep the [current] rules in place.”

Betancourt cited projects that have been built to meet CRA requirements — mortgages and small-business loans in Frankford and Northeast Philadelphia, projects like Xiente’s rental unit construction at the former St. Boniface property on Norris Square, ACANA’s Africa Center in Southwest Philadelphia, Taller Puertorriqueno on the Bloque de Oro.

Bigos, of the Affordable Housing Coalition of Pennsylvania, said he worries about inner-city bank-branch closings and that banks will make fewer, larger loans to richer borrowers, if they no longer get credit for making lots of small ones, which costs more.

“Philly is a tough city to do business in,” said Abe Ibrahim, head of Mid Penn Bank’s Philadelphia region. “You can’t just open a branch” and expect to profit, he said. There are a lot of banks chasing attractive borrowers.

“People want to see that you’re from here and you want to add value,” Ibrahim said. “That opens the door.”

Because it’s so difficult to find solid customers in competitive markets, Ibrahim says he is hopeful the banks won’t cut and run just because the law no longer obliges them to maintain their current loans and grants.

He said Philadelphia programs like Turn the Key, which gives city land cheap in exchange for selling houses at below-market prices, will remain attractive to lenders even if CRA requirements are reduced.

“There’s a waiting list for these programs,” which come with income qualifications and other pre-approval requirements. Ibrahim said his bank would back solid city projects, such as a recent Turn the Key development Mid Penn helped fund, “even if there were no CRA consideration.”

“We don’t use CRA as a box to check off. It’s a leadership philosophy. A good project benefits the community and makes families better, smarter, wealthier,” Ibrahim said.

At Northern Liberties-based Hyperion Bank, “we will, of course, evaluate any (CRA) changes in requirements,” said CEO Charles B. Crawford, a former chair of the Pennsylvania Association of Community Banks. But those changes alone won’t “change Hyperion’s commitment to the communities we serve.”

“Regardless of how CRA regulations evolve,” Wilmington-based WSFS will focus on “meaningful, sustainable investments that strength the communities we serve,” said Justin Dunn, WSFS’s chief community impact officer.

Wells Fargo, with 4,000 local branches across the U.S., is “evaluating the proposed changes,” said spokesperson Shea Leordeanu.