Bankers aren’t exactly thrilled with the current proposal to reform the Community Reinvestment Act. They’ve publicly criticized much of it, from the examinations that would likely become more stringent; to online lending changes that could harm low- and moderate-income communities; to the timeline for finalizing and implementing the rule. Trade groups have even warned about filing a lawsuit if the proposal is passed in its current form.

To better understand the proposal and how it could be modified to better suit the industry, I sat down with Eugene Ludwig for an episode of Banking with Interest. Gene led the last successful effort to reform the CRA as comptroller of the currency under President Clinton. He explains why the current proposal should be reproposed – and dramatically simplified. He also talks crypto, how to prepare for a possible recession, and more.
What follows is our conversation, edited for length and clarity.

What’s your view of the current CRA reform proposal?

It’s well-intentioned, but long, complex, and hard to understand. It should be simplified materially and kept broad. This is a complex country, and different geographic areas need different forms of assistance. A one-size-fits-all approach won’t work. Another issue is that CRA is oriented toward good economic times. But institutions face difficult circumstances all the time that aren’t their fault. Additionally, low- and moderate-income communities typically have more problems in bad times than other communities, and they emerge from those bad times more slowly. Bankers should get credit for assisting during these periods (and for anticipating them). Under the current law, they don’t.

Some industry players are so angry about the proposal, they’ve threatened to file a lawsuit.

It’s tragic. Regulators take pride in what they do – these are good people – but when you bring the OCC, Fed, and FDIC together, each agency has its own proposal. Then they start to negotiate, and before long, each agency needs to accept the other agencies’ proposals if it wants the others to accept theirs. So they end up mashing three proposals together.

When I was comptroller, I simply called Larry Lindsey at the Federal Reserve and invited him to my office to write the rule. When we were done, we had a rule that was relatively brief and easy to comprehend. The current proposal seems like an attempt to give everybody what they want, but it’s too long and complex.

Do you think they need to repropose it?

I do.

What are some nonobvious things banks should be doing to prepare for a recession?

First, determine which borrowers to work with. Community bankers have a lot of authority. People listen to them. If they tell a borrower to dial things back and ensure they have enough cash to pay their loans on time, the borrower will listen in most cases. Bankers know better than anyone how to manage through these periods.

Second, avoid any undue conflict with regulators. When regulators ask questions, banks should think hard about their answers. They should be honest, of course, but thoughtful. Regulators too often aren’t clear in written communications, and that lack of clarity can lead bankers to interpret things in an overly rosy manner. But when regulators write things, they don’t intend to be rosy. Any time there’s ambiguity, banks should clarify what the regulator wants.

Third, clean up any outstanding MRAs and MRIAs. Letting them drag on won’t make them go away, and as the pile gets bigger, it becomes harder to deal with – especially during down cycles, when bankers have more to do. It could also make the regulators come out with public orders and cease-and-desist and all the things that make life more difficult.

Crypto markets are in turmoil. Democrats say the instability supports why U.S. regulators have been skeptical of the relationship between banking and crypto. Republicans say that if regulators were less skeptical and offered guidance on relationships between banks and crypto firms, the crypto markets would have more oversight and be safer. What’s your take?

Crypto isn’t going away. The two big questions are: 1) how big is it going to be? and 2) what are the functionalities that will genuinely be beneficial to end-use consumers and financial institutions? Crypto may be faster for certain types of transfers, but maybe traditional money-transfer mechanisms used by the Fed and others can adapt to compete. Regulators should begin crafting rules for crypto firms, but keeping banks out of crypto altogether is a bad idea. Banks should be able to experiment with it. Otherwise, nonbank players will end up dominating the market. We ought to watch the space closely and be flexible, and we need sensible standards that apply to banks and nonbanks alike.

What should banks be doing as calls for a CDBC get louder? Is it possible to have a CBDC that doesn’t lead to disintermediation?

A CBDC would be very bad. What banks should do – and I think the trade associations are already moving in this direction – is to come up with standards that have no give. They should be clear that they don’t want the Federal Reserve or another federal entity to become a bank. It’ll never work, it’ll be inefficient, it’ll create unfair competition, and it’ll be terrible for the country. It’s also unnecessary because banks are already performing the intermediation function just fine.

Over the years, you’ve talked a lot about right-sizing regulations. But many small banks contend that rules created for bigger players are drifting down to them.

It’s true, and if you look at the bank rulebook, it’s enormous! Many of the rules are out of date and so complex a normal person can’t understand them. Yet they’re still applied. Federal regulatory agencies should be spending as much time trying to simplify the rules as they do adding new ones. They should draft rules that anybody can read and understand and eliminate redundant rules that make life unnecessarily difficult, particularly for community and regional banks.