The Community Reinvestment Act (CRA) stands as a major effort by lawmakers to prevent banks from discriminatory lending practices in low-to-moderate income communities, but it was enacted in 1977 and hasn’t been updated since 1995.
Conceived in the civil rights era and passed in the post-Watergate reform era, the Community Reinvestment Act (CRA) stands as a watershed moment in the fight to end against a century of discrimination against low-to-moderate income communities. It needs a face-lift.
A lot has changed in the banking system since the measure was last updated in 1995. Namely, more and more banking takes place online and not at physical branches. Yet, one of the CRA’s main criteria for measuring a bank’s fair lending practices was based on locations of their brick and mortar stores in disadvantaged neighborhoods.
In what would be first major overhaul of the CRA in 27 years unveiled on Wednesday, regulators would take online banking into account and thereby finally weave the digital banking age into the main apparatus that the government uses for encouraging loans to low- and moderate-income communities.
“The proposal adapts to the expanded role of mobile and online banking by
updating the approach for where banks are evaluated for their CRA performance,” said Lael Brainard, the Fed’s vice chairman.
“While maintaining a focus on bank branches, the proposal also evaluates large bank performance in areas where they have a concentration of mortgage or small business lending. And it provides certainty that banks can receive CRA credit for eligible community development activities nationwide.”
In times of economic stress Black families had one-fifth the wealth buffer relative to the average American family going into the pandemic and Latino families had less than a third of the average, Brainard noted.
Typically, federal regulators assess banks based on their CRA performance once every three years. If a bank gets low marks for CRA compliance, it could be prevented from merging with another bank.
The Fed teamed up with The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to propose the CRA changes. The agencies are opening up the rules to public comment until Aug. 5.
Along with the impact of the internet, the regulations will also give banks CRA credit for lending activities related to preparation for weather disasters and climate change. This would update CRA activities by banks aimed at helping communities recover from natural disasters.
“There is growing evidence that low income communities are more impacted by weather disasters,” a banking official said. “Low-to-moderate income communities are more likely to be located in vulnerable areas, and affordable housing is older and poorer quality…We’re encouraging banks to meet those needs.”
Other key components of the proposal include:
- Promotion of community engagement and financial inclusion, with an emphasis on smaller value loans and investments with high potential impact and being encouraged to be more responsive to the needs of low-to-moderate income communities.
- Adopt a metrics-based approach to CRA evaluations of retail lending and community development financing, which includes public benchmarks, for greater clarity and consistency. It clarifies eligible CRA activities, such as affordable housing focus on undeserved and rural communities.
- Smaller banks would continue to be evaluated under the existing regulatory CRA framework, with the option to be evaluated under aspects of the new regulations
- Maintain a unified approach from the bank regulatory agencies.
The proposal was met with some caution, including from Fed Governor Michelle W. Bowman, who represents community banks in Fed deliberations. Under the new proposal, banks would have to collect and report “extensive” new information on deposit accounts, automobile loans, usage of mobile and online banking services, and community development loans and services, as well as details about branches, Bowman said.
“Fundamentally, we do not know if the costs imposed under the proposal will be greater than the benefits,” she added.
U.S. Treasury Secretary Janet Yellen supported the proposed rules and said modernizing the CRA “will help financial institutions to better meet the credit needs of the communities in which they do business.” She said the Treasury remains committed to working with the banking industry.
Cowen analyst Jaret Seiberg said the proposed rules appear to be “workable” and should not disrupt future bank mergers.
“As with any proposal of this size, the issue is whether compliance costs will rise and whether the proposal is reasonable,” Seiberg said. “While our initial review suggests reasons for optimism on both fronts, it will take the banks and their law firms months to wade through the fine print to ensure this plan is workable.”
The proposal comes about five months after federal officials allowed a proposed CRA update by the Trump administration to expire at the end of the year.
The measure would have created a ratio of allowable CRA activities to total assets or total deposits with an empirical measure for compliance.
“Our concern with the approach is that the passing score required would have been easy to change based on which political party controlled the White House,” Cowen’s Seiberg said.
Pat Toomey (R-Pa.) today voiced concerns after the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Office of Comptroller of the Currency (OCC) issued a proposed rule related to the Community Reinvestment Act (CRA).
Pat Toomey, R, Pa., ranking Republican member on U.S. Senate Banking Committee, said he’s concerned about the new rules added complexity and regulatory burdens with out any benefits to economic growth.
“In additional to imposing onerous new data collection, reporting and disclosure requirements on lenders, the proposal also advances left-wing environmental goals, something that is wholly outside the remit of the CRA,” he said. “It may be time for Congress to consider statutory changes that puts an end to rent seeking and the hostage taking over otherwise valid bank mergers.”
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