Governor Michael Barr requires no introduction. I'm sure all of you know him as one of the most important economic policy makers in the country. He plays a critical role in setting interest rate policy and as a regulator. But we know Governor Barr as a champion of CRA, not just for his work championing the 2023 CRA rule, but before that as an academic, for his work at the Treasury Department in the Obama administration championing financial inclusion. So a friend of the coalition, and I'm pleased to welcome you to the stage.
Thank you, Jesse. It's really just a great pleasure to be with you, Jesse, such a wonderful leader of this coalition. And I have worked with NCRC now for 30 years. And I've just seen over the decades the incredible work that all of your members do all over the country in making our country a better place. So, it's just delightful to be here.
Thank you. We're going to cover a number of topics today, starting with our favorite topic, the Community Reinvestment Act. Obviously that's an issue that's near and dear to our heart, critical to our members. We've been on sort of a roller coaster ride, not just with respect to CRA, but obviously a lot going on in the world today. But looking to the future, we could rehash sort of what happened with the 23 rule, the OCC's proposal to rescind to the 95 rule, but as you sort of look ahead, the Federal Reserve was pretty clear, both yourself, Chairman Powell, who articulated that really the goal and the necessary outcome of CRA reform was an outcome that resulted in more not less investment in low and moderate income communities. So as you look to the future, what do you think are the key things the Federal Reserve is watching for now? What do modern CRA obligations look like a few years from now, a decade from now?
Well, you know, it's a great question. I do think it makes sense to spend a little time on the history and then move forward. You know, when I was at Treasury in 1995, the agencies reformed the CRA rules to really focus more on outcomes and less on kind of process and paperwork. And that had a real effect of increasing access to capital around the country. But over time, as the financial services industry changed, those rules did not keep up with the kind of changes we had seen or the kind of great work that was going around in the country that needed more support. And so the 2023 rule was really designed to reflect those changes, to take care of issues around online banking, to provide clarity to community development financial institutions that they didn't have to go through extra hoops to be qualified under CRA so banks could count on that kind of clarity, to provide clarity on community development activities that qualified so more work could be done and less time was spent documenting that the work actually did what the local partners said it would do. Investments in rural areas were clarified. Investments in native lands were clarified so there could be more access to capital in native communities. And a whole set of reforms that were really designed to reflect these changes in the financial services sector. And as all of you know, unfortunately the banking trade sued to block that rule. So, we're now in the process of going back to the 95 rule, but it doesn't mean that we're not thinking about what the kind of support that communities around the country need. That 2023 rule, I should say, had on the Federal Reserve Board broad support. So, what are the kinds of things that are important going forward? Well, one is making sure that banks and community groups can work together in a way that makes sense in their local community. So staying attentive to the importance of local context in evaluating CRA. We don't want to have an approach that is a one-size-fits-all approach. Every community works together in different ways. We want to make sure CRA is an effective tool for that. As more and more lending is happening not in the banking system, it's important to think about the role of non-banks in all of your communities. The Federal Reserve and the banking agencies don't have the ability to change the application of CRA, but I think that's an appropriate topic for Congress to think about. How should CRA obligations look in a world where there's lots of non-bank lending, lots of fintech lending going on? These are just some of the examples, but I would say, you know, the most important thing is the intentionality about it. That is we can't rest on the past. We can't say CRA has done enough. All of you know that there are capital access needs in your communities that are not being met. And so I think, you know, it's most important that we as a country agree that the goals that we have, the shared goals we should have would be to making sure that homeowners have a chance to buy their first home, that small businesses have a chance to grow, that community development organizations have the capital they need to revive their communities. And if we can kind of work on building that shared goal as a society, maybe then we can start to think about the technical work that has to happen under CRA.
Governor Barr, as we see sort of an evolving financial services landscape, and this is not new. We've seen obviously over time different segments of the banking sector have been disintermediated, new companies, new types of structures, money market mutual funds, fintechs and the like. But today we see more and more credit flowing through fintechs, crypto companies, private funds. Understanding that Congress would have to act to do something like applying CRA to different types of companies, how do you think about regulatory parity? How do you think about how we maintain sort of fair and equal standards as the financial services industry evolves? How do we avoid sort of a race to the bottom? You know, Chairman Powell said at this very conference that like activities should have like regulation, and yet we're often sort of behind the curve. And you run the risk that a certain sector of credit sort of balloons and experiences difficulty and collapses necessitating reform. How do you think about that? What's the role of the Federal Reserve?
Yeah, I agree that we should have a system where similar risks are policed and regulated in similar ways. It shouldn't matter whether you're a fintech or a bank, you shouldn't violate the fair lending laws, right? So there's some pretty basic things. And the Federal Reserve has authority of two types in this area and then I'll talk about other agencies. The Federal Reserve obviously enforces consumer laws for financial institutions that we supervise under 10 billion in size and we also do risk-based assessments of the largest banks to make sure that their risk practices for both safety and soundness and consumer protection are consistent with our standards. So that's for banks. Then we also look at bank relationships with fintechs. So if a bank partners with a fintech, they have to comply with third-party risk management guidelines. What does that mean? They can't just say, 'Oh, the fintech made me do it.' The bank has direct responsibility for ensuring that if they have a fintech partnership that the fintech is also complying with the law, is not marketing on a discriminatory basis or is not failing to disclose information about terms of deposit account or a loan. So that's a second important way that we have a role. Now the third thing to think about is well what if you just have a fintech operating not in partnership with a bank. Well the Consumer Financial Protection Bureau was created to create that level playing field between banks and non-banks. The CFPB is the only federal agency that has the ability to supervise non-bank entities and it's the primary entity that has enforcement authority over non-bank entities. So to avoid the kind of race to the bottom that you're talking about, we need a strong partner in the Consumer Financial Protection Bureau to do that. That's sort of the system that was set up. And that's, you know, pretty essential, I think, to having a level playing field so that banks and non-banks alike compete not on trying to trick customers in some way or not trying to avoid their obligations, but compete based on the quality of their product and their ability to reach new markets. That's the kind of competition I think we want in our society. And so I think it's important that we have that strong partner to work with from a supervisory perspective.
Governor Barr, you know, there's been a lot of consolidation within the banking industry. But we've also seen companies coming in for charters certainly at the OCC, the trend of stable coin companies obtaining trust charters. We've seen a number of bank mergers. What kinds of community level risks concern you the most when banks merge? We know that there are negative impacts. I think the Federal Reserve's own research has shown that historically some of the types of benefits that have been claimed by banks as a positive outcome of mergers have not necessarily come to fruition. That sort of economies of scale don't necessarily produce better pricing for the customer and for the community. How do you think about the public interest? How do you think about measuring how the community benefits and how to protect against harm in either the context of a merger or a charter?
Yeah. So, let me address each of those areas in turn. You know, on the merger front, we have a statutory lens that we have to look through for any merger. That's competition, financial and managerial resources, convenience and need. So, how are they affecting the community? And of course, competition. So, we looked at all those things. If you have two entities merging, there's always a risk that you're going to lower competition in the market. And if you lower competition in that market, there's a risk that prices will go up and the quality of services will go down. So competition is actually an important element in assessing whether a merger is going to actually help a local community or not. On the convenience and needs front, we're looking at a couple different kinds of things. One is the record of serving the community in the past. So the most important thing there for us is what's the CRA record of that institution and it's not just the information that we get from CRA exams but also importantly the input that we get from community-based organizations that tell us what's been going on in that community and that are important inputs into the CRA evaluation itself. So the work that you all do around the country, making sure that you know what's going on in the banking sector and letting us know about it is critical to that. And then we also look at the kind of performance that might be expected in the future. And there I think we have a much harder time. So we don't really know how the bank is going to act. And as you point out there are examples where the result of the merger is less access than has been promoted. So one area for example where there's quite good research is on access to small business lending. So one of the things that local banks do really effectively is relationship small business lending. They know their customer really well. They're able to make loans that institutions that are more distant may not be able to make. And so one of the risks when you have a merger is that that local connection to the small business community is lost or diminished and you might get less access to small business credit where there might be less competition for that. So that's an important area to be concerned about. And also if you lose that local connection, you might get less support for the local community development activity that's happening in that area as opposed to the broader reach of the institution. So that's an area that we look at, but I'd say we have less insight into what the future's going to look like than the past performance where we can say, okay, this institution had an outstanding record of serving its community. That means it's more likely to continue to do that in the future. If it has a record that was unsatisfactory, you know, I don't know of a case where we've approved that kind of merger. On the charter front, one of the things that I worry about when the agencies provide additional kinds of charter types is that not all the charters have the same regulatory and supervisory oversight. And so, as we were talking about with respect to a race to the bottom before, you can get a race to the bottom because there's different oversight of different kinds of charter types. And that, you know, that to me is worrisome in the context of the expansion of crypto activity. You want to be especially careful that the same risks in a bank that is chartered one way and a bank that's chartered the other way are handled the same way. And if you get lower standards for different charter types, that can provide less consumer protection. It can provide less prudential supervision. And so you might get new risk developing in the system that we're not all ready for.
Absolutely. One of our concerns as well I think in this conversation about sort of stable coin usage, the Genius Act, some of the framework that's developing around cryptocurrencies is this question of yield that you could see a flight of deposits out of the banking industry which could either result in less lending or certainly it could result in less of a CRA obligation if we see that kind of flight. So something that NCRC obviously we don't always align with the banking industry but we align on that concern. Shifting gears a little bit, you know, Congressman Foster laid out a number of pretty interesting issues with respect to AI, and as we start to see AI's use expand in the banking sector and we start to think about the potential for its use in credit underwriting, what sort of opportunities and risks do you see with respect to fair lending and how do you think about your role?
Well, let me just say first it was wonderful to see Congressman Foster here to open up the morning. He's been a great friend of community development and I personally always learn a lot when I listen to Congressman Foster. He's got just such a fascinating background and set of interests. I think artificial intelligence, generative artificial intelligence is likely to be a significant force in our economy in the coming years. And so I think it's absolutely critical that we grapple with its effects that could be quite broad. I think in the long run AI like other technologies is likely over time to make us a more productive society and therefore allow us to have higher wages for people. And if it's handled properly to bring everybody along on that journey, but you have to do it with intentionality. You can't just assume that because there's a cool technology, it's going to help everybody. You have to upfront be worried about and be focused on how is AI going to affect the labor force. How is AI going to affect the financial sector? And focus your energy on making sure that it doesn't push people back or just leave them behind. So that's just big picture sense. So on the labor market side, we need to be investing. I think this is beyond our focus. But as a society, we need to think about investments in training, investments in education, investments in job creation that help people through what could be quite a disruptive transition. And on the financial services side, we need to make sure that the technology is used to promote access to credit and access to financial services. It could help in that regard in terms of things like right now people are using alternative cash flows as a way to improve access to credit. So generative AI might help in that regard. But you also have to be worried about the risk that generative AI because it's soaked up all of the knowledge in our society is also soaking up all of the bias in our society. And so generative AI might spit out outcomes that are just mimicking, reinforcing false claims about associative relationships that we have spent many of you in this room, you know, a lifetime fighting against. And again, you can't take for granted that it's going to be okay. We have to make sure that the models that are being trained are being trained on good data. We need to make sure that the models are not spitting out bad outcomes by looking at the outcome data. We need to make sure that when models are used, they can be explained. So we don't get an outcome that people say, well, the model said, you know, this is just the model said it. That's not a legitimate basis for making a decision under our fair lending laws. You're not allowed to do that. So, you know, we need to be sure as regulators that there's really strong model risk management going on in the banks. My experience thus far is banks have been very cautious about using AI other than traditional machine learning for consumer-facing kind of decisional metrics. But we have to make sure that that caution stays the same. And then when AI is deployed, it's deployed with these clear guardrails in place. And if it's done with the guardrails, as I said, it might be a way of enhancing access. We should be open to the idea that you can serve more people more cheaply, for example, using generative AI, and that might improve access for people who banks saw before as not profitable enough. So there's real opportunity, but you have to be careful and do it with intentionality.
You know, one of the things really interesting things that Congressman said is, you know, potentially every consumer now has the smartest consumer attorney, smartest financial advisor in their pocket. And one of the issues I'm not sure the banks are really thinking through is that now in real time, today we attempt to detect fair lending and bias by sending in mystery shoppers and testers and we look at data but potentially every consumer could in real time be sitting interacting with a loan officer recording it feeding it into the AI and being told, you know, you're being offered not the best loan, you're being asked questions that are indicative of bias and could draft and file the lawsuit or alert someone to that effect. And so we also think there's potentially that kind of effect and that kind of thing to look out for. And then I think on the other hand it speaks to the need to have some standards around sort of the public interest in AI. You know, in the early days of the internet, everybody thought it would be revolutionary and sort of in the ways of creating more freedom for everybody. But as we saw over the course of the internet, the ways in which it was monetized became sort of less and less free and less and less open. And while today many of the AI models are not fully monetized, you know what happens in the future when the AI is not giving you an objective answer but steering you to a product because it's a paid offering and so something we think about and worry about quite a bit.
