The Community Reinvestment Act in the Age of Disruption


Last month I read an article in S&P Global that regulatory compliance, or lack thereof, was one root cause for the delay for several notable banking M&A deals—and sometimes preventing them from closing altogether.

The list of regulations under the microscope included expected appearances by Anti-Money Laundering (AML) and the Bank Secrecy Act (BSA). But it also highlighted the lesser known Community Reinvestment Act of 1977 (CRA).

After delving into the CRA failures that led to these merger deals, it became apparent that the fintech disruption has created new challenges for financial institutions to navigate the CRA landscape. In this blog post, we’ll explore the historical context and evolving landscape of the CRA in the era of large-scale change in the financial services sector, with specific focus on the importance of remote identification verification (IDV).

Gonna be alright

It was the year 1977, with Rod Stewart owning the #1 spot on US Billboard hits with “Tonight’s the Night (Gonna be Alright)”. Congress passed the CRA to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining. The purpose was present and easily apparent: to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.

The law did not set out defined criteria for evaluating the performance of financial institutions (FIs). Instead, through the passage of time, it directed that the evaluation process should consider the situation and context of each individual FI. The authorized federal agencies—notably the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC)—were directed to work with FIs and the public to identify credit needs within the community and ways to address those needs. 

On a technical level, the conduct in evaluating an FI’s compliance was assessed in five performance areas, comprising twelve assessment factors. This examination culminated in a rating and a written report that became part of the supervisory record for that particular FI.

Heat waves

Fast forward to 2022. The Billboard #1 is “Heatwaves” by Glass Animals. And the FRB, FDIC, and OCC jointly released a notice of proposed rulemaking to strengthen and modernize the CRA regulations to better achieve the Act’s original purpose.

Unsurprisingly, the agencies mention the following as key elements behind the release:

  • Expand access to credit, investment, and basic banking services in low- and moderate-income communities, including promoting community engagement and financial inclusion.
  • Adapt to changes in the banking industry, including internet and mobile banking, to include activities associated with online and mobile banking, branchless banking, and hybrid models.

The changing face of IDV

Traditionally, FIs relied on in-person visits and paper documentation for identification verification. However, the advent of digital banking and remote transactions created a need for more convenient and efficient methods. This shift presented challenges, including the need for secure and reliable identification verification processes in the absence of face-to-face interactions. 

As it relates to the CRA, this landscape was evolving against the backdrop of bias that would impact those in the redline areas. Firstly, with bias of AI systems that were imbalanced in assessing skin tone (not to mention age and gender), and also with technology bias, where end users could, depending on the tech stack, receive nuanced results if their mobile device was an older model (and we’re talking a 2015 release, not 2022).

Enter remote identification verification, a solution that bridges the gap between compliance and convenience in the digital era.

IDV & CRA compliance

Remote IDV has the potential to not only address the challenges posed by digital banking but also align with CRA requirements, especially as contemplated by the 2022 notice. The technology ensures equal access to credit and financial services by streamlining the verification process and reducing barriers for individuals in underserved communities (including in the aforementioned bias scenarios). 

By leveraging remote IDV, FIs can expand their reach and fulfill their CRA obligations more effectively. Moreover, the adoption of this technology brings additional benefits such as increased efficiency, enhanced security, reduced costs, and an improved customer experience—for all users.

The conclusion is inclusion

As fintech continues to evolve, its impact on CRA compliance is likely to grow. FIs need to stay abreast of emerging trends and technologies that can enhance the synergy between CRA requirements and the rollout of tech innovations.

Remote IDV has emerged as one specific (and powerful) tool for FIs to navigate the CRA. By embracing best-in-class technology, institutions can ensure CRA compliance (as it is now evolving) and expand their reach into underserved communities. More importantly, outside of the regulations that are imposed by the federal government, FIs can be leaders in driving positive change, promoting fair lending practices, and fostering financial inclusion in our digital age.

About the post:
Images are generative AI-created. Prompt: Photorealistic 4k image of a punk rock band of different forest animals performing a concert formatted. Each animal has orange elements on their jackets. Tool: Midjourney.

About the author:
Terry Brenner is the Head of Legal, Risk, and Compliance for IDVerse’s North American operations. He oversees the company’s foray into this new market, heeding to the sensitivities around data protection, biometrics, and privacy. With over two decades of legal experience, Brenner has served in a variety of roles across a diverse range of sectors.

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