WASHINGTON – Top US regulators have proposed a reform of how banks lend hundreds of billions of dollars a year to low-income communities, after scrapping a Trump-era renewal that divided regulators and industry officials.
The latest proposal to update the rules for the Community Reinvestment Act of 1977, announced Thursday, aims to ensure that lending to low-income individuals and small businesses is more evenly distributed in places where banks do business. The current rules focus on the activities of banks around their physical branches. Bankers and community advocates say these rules are outdated in a world where so much financial activity takes place online.
Today’s proposal seeks to expand access to credit, investment and banking services in [low- and middle-income] communities,” incoming Federal Reserve Vice Chair Lyle Brainard said, in a written statement. The Fed is one of three regulators that are rewriting lending rules.
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The proposed renewal comes at a time when the Biden Democratic administration has pledged to do more to address disparities in wealth, income and access to financial services among black Americans and other racial minorities.
The Community Reinvestment Act is designed to end “redlining” – the historical practice of banks of avoiding lending in certain regions, often low-income communities, often resulting in stark economic disparities along racial lines. The law is one of the main tools the government uses to encourage banks to lend more to low- and middle-income communities.
In recent years, the law has become a source of contention between groups of society who want to enforce the rules more aggressively and bankers who argue that regulations are too bureaucratic and have not kept pace with technological changes, among other criticisms. Banks are usually checked every three years on
efforts. Bad grade effectively prevents mergers.
Thursday’s proposal, released Thursday by the Federal Reserve and two other banking regulators, aims to make the rules more transparent and objective, making it easier for banks to understand their regulatory requirements, even though companies may face reporting mandates.
Under current rules, banks must lend to low-income communities in the area around their offices, although they now accept deposits and make loans across the country via online accounts. This has led to a glut of reinvestment law spending in places like Salt Lake City, where dozens of banks are headquartered but no branches elsewhere.
If the plan is finalized on Thursday in the coming months, it will aim to spread online banking-related activities nationwide. Banks will be assessed for CRA obligations even in areas that do not have physical offices, if they provide a certain number of loans in a particular area.
In addition to the Fed, two other major bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, signed the proposal on Thursday. All three bank regulators are tasked with overseeing the 1977 law and pledged last year to act jointly to modernize their rules. Organizers will be collecting public comment on the proposal until August 5 before it is finalised.
Thursday’s proposal comes after the OCC, which oversees national banks and the bulk of activity under low-income lending rules, in December rescinded Trump administration rule changes before banks were required to comply. That plan It came from former Comptroller Joseph Otting, appointed by the former Republican president
Donald TrumpIt was not backed by the Federal Reserve and the FDIC.
Fed officials, led by Ms Brainard, said the OCC’s 2020 plan has been expedited and could inadvertently reduce lending to lower-income areas. Ms Brainard, the Fed’s governor since 2014, led a rival Fed effort to rewrite its CRA rules while central bank officials pledged to work with other banking agencies on a unified set of new standards.
Although the Federal Reserve approved the proposal Thursday unanimously, Fed Governor Michelle Bowman, who is appointed by Mr. Trump, said in a statement that it remains unclear whether the costs of the reform will be greater than the benefits. She asked community banks to comment on whether the proposal would lead to more or better investments.
“While I support the release of the proposed rule for public comment, there are significant unanswered issues that the proposal poses,” she said.
At the moment, banks are evaluated for compliance with the law based on a complex formula that includes loans for home buyers and small businesses, as well as the number of branches in low-income areas. Most banks get passing scores on their CRA exams.
The Consumer Bankers Association said before the proposal it would welcome regulators updating rules that have not been updated in more than two decades, since before the widespread adoption of smartphones and mobile banking. “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 will provide “the clarity, certainty and flexibility that banks need.”
Consumer advocates said they hoped the proposal would strengthen banks’ obligations under the law. “The impact will be very clear to scale in terms of what is expected of banks,” said Jesse van Toll, president and CEO of the National Community Reinvestment Coalition, an advocacy group for fair lending.
Mr. Van Toll said there was a big gap in one side of the proposal: It wouldn’t apply to non-bank financial firms that now provide the bulk of consumer loans in the US, as it does in the mortgage market. Non-bank institutions originated about 75.5% of government-backed home loans as of March 2022, According to the Urban Institute.
Although some states such as Illinois and New York have implemented their own reinvestment requirements that apply to non-bank institutions, Congress will need to work to expand the federal requirements. Last year, Federal Reserve Chairman Jerome Powell suggested that Congress expand the rules to include all companies that provide consumer credit, not just banks.
“Like activities should be like organization,” Mr. Powell said last May.
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Non-bank mortgage lenders say it would be a mistake to expand the CRA to cover their companies, arguing that they have different business models that do not include accepting deposits that are then invested in their communities.
“The Community Reinvestment Act for Independent Mortgage Bankers is meaningless and a solution looking for a problem,” said Robert Broxsmith, president and CEO of the Mortgage Bankers Association.
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