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Will the CRA be able to Keep Up with Mobile Banking?

Adam Rust's picture

Posted July 29, 2009

Its a maxim that regulators can never quite catch up with the changes made by practitioners.  Mobile banking threatens to become the next example of that concept.  It very well could lead to undermine the Community Reinvestment Act (if unwittingly) unless some kind of regulatory fix occurs first.

The new Community Reinvestment Act Modernization bill (HR 1479) seeks to help that legislation catch up with the set of financial innovations that have occurred since the bill was last modified in 1993.  A lot has happened.  There is a lot of catching up to do.

That bill was drafted this spring.  Even now, though, it appears that the market is changing so fast that there could be a need for new amendments to the bill's language before it is heard by the House Financial Services committee in the fall.

Today, there is news out of Charlotte than Bank of America is going to close one out of every ten of

its branches.  In all, it will amount to more than 600 branches.  Bank of America has more than ten percent of the nation's deposits.  That is on top of the trend in closing branches in the last calendar year.  Another report shows that they closed 29 branches and 600 ATMs in the last eight months.

One analyst says that its the economics of branch banking that drive these decisions.  Well, of course its about money.

But, drilling down in the story, what emerges is that the "economics" are only partially about the broader economy. Part of the issue is that the banks have more deposits than they need to fund their reduced lending.

Its also a reflection of changes in how people interact with their banks. Now that people are banking electronically, the logic of a physical bricks and mortar building is losing its appeal and its value.

Most people that I know bank online.  Who uses stamps, right? Well, all of this e-banking doesn't just mean that you are less likely to write a paper check. It also means that you are probably depositing your paycheck through direct deposit.  I don't get a paycheck.  I get a deposit notice from my bank alerts.

Some of those electronic bill payers still have a relationship with a local branch in their neighborhood.  That said, there are many that have even given up on their local branch. I have more than a few friends who have signed up for those location-less deposit accounts with ING, HSBC, or E-Trade.

Now comes the next big thing - mobile banking.  If you have a phone with internet access, then you can sign up to transact all of your banking business with your cell.  This mode has great implications for the unbanked, as it represents one more way to reduce transactions cost and thus to compel banks to seek consumers with lower transactional activity.  Mobile banking is catching on in the US, but it already huge in places like India.

Let's go back to the CRA, though.  The CRA has historically applied its force where banks and thrifts take deposits.  That is why the CRA applies to Wells Fargo or Bank of America, N.A., but not to Option One or Mortgageit. The application is local - if a bank has deposits in a specific MSA, then it also has a CRA obligation.

That is why mobile banking, and even electronic banking, threatens to undermine the CRA.  A consumer's bank branch choice is becoming more and more abstract.  Again, going back to my own experience, I will say that my bank considers my branch to be in the town where I went to graduate school.  That is where I opened my account.  Now, six years later, I have moved.  My deposits still count for the college town branch.  The concept of a deposit having a location is an economic construct without much bearing.

That abstraction only becomes more so in an era of mobile banking.  Again, deposits flow from electronic funds transfers in this system.  A bank can declare those assets to reside anywhere.  Some put them all in one place.  E-Trade keeps all of its deposits in Northern Virginia.  Back when it stood on its own feet, Countrywide FSB insisted that it had just two branch offices.  One was in Virginia, the other in Texas.

If mobile banking flourishes, then, it will play the hand of existing CRA policy.  Moreover, the current set of CRA reforms won't account for this change, either.

One response that legislators could take would be to write in some kind of new basis for defining geography.  It sounds easy to say that the location of the consumer could determine CRA responsiblity.  That might not work, either, because banks might turn down applicants for accounts  in areas where they don't have a pre-existing deposit base.

The other policy option is to eliminate the geography criteria all together.  That is an idea favored by one of the heavyweights in the CRA debate - Lawrence White of NYU - but one that is not widely supported otherwise.  For now, White remains a provocateur, but it appears that mobile banking will make it harder and harder for his idea to be ignored.

White's idea is entirely bad.  Its just different.  As long as the underlying purpose of CRA remains in place, then the idea has merit.  Remember, banks still have only an affirmative obligation.  Removing geography expands the wiggle room that they have in making their decisions.  As long as those loans continue to go to targeted consumers (lmi borrowers, lmi neighborhoods) then the law is still working.

How about trading geography for a specific obligation to loan to underserve demographics (African-Americans, native Americans, and Latinos)?