Finextra spoke to Corey Carlisle, head of public policy at Varo Bank, to discuss how revising the CRA will prioritise financial health in the US in needed communities.

The CRA was initially enacted in 1977 and last updated in 1995. Carlisle highlights the need to revise the CRA for the legislation to keep up with significant changes within the sector, as well as becoming more inclusive and receptive to digital transformation in the financial industry.

Carlisle explains that the 1995 update to the Act added new types of examination for various sized banks to meet the credit needs of their local communities. Moving into the Clinton administration era, a growing non-profit sector was increasingly investing in communities and a new entity was created called Community Development Financial Institutions (CDFIs) which provided credit through certified credit unions, banks, and non-profit loan funds.

These changes raised questions about what investments would garner positive consideration under CRA, and the current proposed update by the regulators largely codifies how investments with CDFIs will be treated. Now, digital transformation has produced new non-bank entities that are not evaluated under the Act.

Carlisle poignantly asks a key question, “How can a digital-only bank, a national provider without any footprint, get a positive consideration procedure to meet the goals of communities and consumers?”

Varo Bank was the first nationally chartered fintech in the US, and as a digital bank is limited by the structure of the CRA. Carlisle uses Varo Bank as a case study of how the digital transformation of financial services indicates that the CRA needs to apply beyond geographic scopes of bank branches to reflect the activities of digital banks that serve customers across the country in a digital footprint.

Varo Bank is proposing to curate an exam that would apply to banks such as itself which are digital and do not necessarily fit into the traditional banking structures of the past. The goal that regulators set for the CRA was to ensure that banks were serving all customers, therefore to maintain that model, Varo Bank is proposing to go beyond counting deposits for regulators and for regulators to consider financial health of the consumer as part of the exam.

“We want to have a path under CRA to get the highest rating. Today, CRA doesn't apply to non-banks, credit unions, or other institutions. We really encourage the regulators to look at non-bank entities and behemoth credit unions that are in the space of providing credit to communities and think about how CRA can be applied to those institutions. None of these entities existed back in 1995, or they certainly don't exist in the same way today they did back then,” Carlisle says.

Since 1977, there has been a huge growth in non-bank entities that have no CRA obligation, but still provide lending credit to consumers. Carlisle explains that reforming the CRA to include large credit unions, non-bank mortgage originators, and other fintechs that are involved in consumer lending, would ensure that all consumers across the spectrum are being served.

“There are so many new entities that are in the provision of credit, but may only focus on a particular segment of consumers: the high network or the wealthy - they're not required to serve all consumers. Varo Bank’s mission is to serve all communities, so we're really following the spirit of CRA.”

On how the reform is critical in the current financial climate as the financial ecosystem is evolving and many non-bank entities are partnering with larger banks, Carlisle expands on how only banks are monitored under current CRA regulation, therefore the scope of the regulation should be extended to cover the activities of the entire partnership to keep up to date.

Carlisle keenly details how Varo Bank goes beyond offering valuable products and services and aims to incentivise consumers and communities to take action when it comes to their finances, to make steps towards bettering their financial health.

“Varo is the first fintech bank of its kind, and with a mission focused on creating a bank for everyone. I think people often think of financial inclusion as just counting how many folks go from unbanked or underbanked to fully banked. We're focused on not only getting people banked, but also having them thrive and build wealth within the system. Entities are starting to focus more about the financial health and wellbeing of consumers and communities, not just serving them, counting the number of loans they do, and their footprint.”

For the future of the CRA, Carlisle believes bank regulators shouldn’t wait another 10 or 25 years –as they did with this update– to make needed modifications to the regulatory framework. He names three government authorities: the FederalDeposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve, which need to harmonise in how the reform will be rolled out. He concludes that as more credit supplying non-bank entities emerge and cater to the financial needs of consumers across the country, the CRA will need to catch up to digital services being employed for consumer credit.