WASHINGTON – Top US regulators have proposed revising how banks lend hundreds of billions of dollars annually to low-income communities, after scrapping a Trump-era renewal that had divided regulators and industry officials.
The latest proposal to modernize the rules for the 1977 Community Reinvestment Act, announced on Thursday, aims to ensure that lending to low-income individuals and small businesses is more evenly distributed where banks conduct business. Existing rules focus on banking activities around their physical branches. These rules are outdated in a world where a lot of financial activity takes place online, say both bankers and social activists.
“Today’s proposal seeks to expand access to credit, investment and banking services in [low- and middle-income] society, “said incoming central bank governor Lael Brainard in a written statement. The Fed is one of three regulators that rewrite the lending rules.
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The proposed renewal comes at a time when the Democratic Biden administration has promised to do more to address wealth inequality, income and access to financial services among black Americans and other racial minority groups.
The Community Reinvestment Act is designed to end “redlining” – banks’ historical practice of avoiding lending in certain areas, often lower-income communities, which often leads to strong economic disparities along racial lines. The law is one of the most important tools the government uses to encourage banks to lend more to low- and moderate-income communities.
In recent years, the law has become a source of conflict between social groups who want the rules to be enforced more strongly and bankers who claim that the regulations are too bureaucratic and have not kept pace with technological changes, including criticism. Banks are usually surveyed every three years on their CRA efforts. A bad grade effectively prohibits mergers.
Thursday’s proposal, released Thursday by the Federal Reserve and two other banking regulators, aims to make the rules more transparent and objective, potentially making it easier for banks to understand their regulatory requirements, although firms may face increased reporting mandates.
Under existing rules, banks must lend to low-income communities in the area around their offices, even though they now accept deposits and provide loans around the country via online accounts. This has led to an abundance of reinvestment spending in places like Salt Lake City, where dozens of banks are headquartered but have no branches elsewhere.
If Thursday’s plan is completed in the coming months, it will aim to spread the online banks’ related activities nationally. Banks will be assessed for CRA liabilities even in areas where they do not have physical offices, if they provide a certain number of loans in a particular area.
In addition to the Fed, two other top bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., signed on. on the proposal Thursday. All three bank regulators are accused of supervising the 1977 law and last year promised to join forces to modernize their rules. Regulators will collect public comments on the proposal until 5 August before it can be finalized.
Thursday’s proposal comes after the OCC, which oversees national banks and the bulk of activity under the low-income lending rules, in December repealed changes to the Trump administration before banks were required to comply. That plan came from former Gov. Joseph Otting, a former Republican President Donald Trump, and was not supported by the Fed and FDIC.
Fed officials, led by Brainard, said the 2020 OCC plan was premature and could inadvertently reduce lending to lower-income areas. Brainard, a Fed governor since 2014, led a competitive Fed effort to rewrite its CRA rules, while central bank officials promised to work with other banking agencies on a unified set of new standards.
Although the Fed unanimously approved Thursday’s proposal, Fed Gov. Michelle Bowman, appointed by Mr. Trump, said in a statement that it was still unclear whether the cost of the overhaul would outweigh the benefits. She asked social banks to comment on whether the proposal would result in more or better investments.
“Although I support the issuance of the proposed rule for public comment, there are significant unanswered questions that the proposal poses,” she said.
Banks are currently being evaluated for compliance with the law based on a complex formula that includes loans to home buyers and small businesses, as well as the number of branches in areas with lower incomes. Most banks pass their CRA exams.
The Consumer Bankers Association said in advance of the proposal that they welcomed regulators who modernize rules that have not been updated in over two decades, since before the widespread use of smartphones and mobile banking services. “For decades, banks have invested trillions of dollars in underserved communities,” Richard Hunt, the industry group’s president and CEO, said in a written statement. The association hopes the plan “provides the clarity, security and flexibility the banks need.”
Consumer lawyers said they hoped the proposal would increase banks’ obligations under the law. “The consequence will clearly be to raise the standard of what is expected of banks,” said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, a fair lending group.
Mr. Van Tol said that there is a large gap in one aspect of the proposal: It will not apply to financial institutions other than banks that now provide the majority of consumer loans in the United States, for example in the mortgage market. Non-banks accounted for around 75.5% of government-backed mortgages in March 2022, according to the Urban Institute.
Although some states such as Illinois and New York have implemented their own non-bank reinvestment requirements, Congress must act to expand federal requirements. Last year, Fed Chairman Jerome Powell proposed that Congress extend the rules to cover all companies that offer consumer credit, not just banks.
“As activities should have the same regulation,” Mr. Powell said in May last year.
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Non-bank lenders say that expanding the CRA to cover their companies would be a mistake, claiming that they have different business models that do not involve taking deposits which are then reinvested in their communities.
“The Community Reinvestment Act for independent mortgage lenders is junk and a solution to a problem,” said Robert Broeksmit, president and CEO of the Mortgage Bankers Association.
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