Top U.S. regulators proposed overhauling how banks lend hundreds of billions of dollars annually in lower-income communities, after scrapping a Trump-era revamp that had divided regulators and industry officials.
The latest proposal to modernize rules for the 1977 Community Reinvestment Act, announced Thursday, aims to ensure lending to lower-income individuals and small businesses is distributed more evenly where banks do business. Existing rules focus on bank activities around their physical branches. Those rules are outdated in a world in which much financial activity happens online, both bankers and community advocates say.
“Today’s proposal seeks to expand access to credit, investment, and banking services in [low- and middle-income] communities,” said incoming Federal Reserve Vice Chairwoman Lael Brainard, in a written statement. The Fed is one of three regulators rewriting the lending rules.
The proposed revamp comes at a time when the Democratic Biden administration has pledged to do more to address disparities in wealth, incomes 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, frequently leading to stark economic disparities along racial lines. The law is one of the major 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 community groups that want the rules to be enforced more strongly and bankers who argue the regulations are too bureaucratic and haven’t kept up with technological changes, among other criticisms. Banks are typically examined 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 rules more transparent and objective, potentially making it easier for banks to understand their regulatory requirements, though the firms could face heightened reporting mandates.
Under existing rules, banks must lend to lower-income communities in the area around their offices, even though they now accept deposits and make loans around the country via online accounts. This has led to a glut of reinvestment act spending in places such as Salt Lake City, where dozens of banks are headquartered but have no branches elsewhere.
If Thursday’s plan is finalized in the coming months, it would aim to spread online banks’ related activities nationally. Banks would be assessed for the CRA obligations even in areas where they don’t have physical offices, if they make 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 to the proposal Thursday. All three bank regulators are charged with overseeing the 1977 law and pledged last year to move jointly to modernize their rules. Regulators will collect public comment on the proposal through Aug. 5 before it can be finalized.
Thursday’s proposal comes after the OCC, which oversees national banks and the bulk of the activity under the low-income lending rules, in December rescinded Trump administration rule changes before banks were required to comply. That plan came from former Comptroller Joseph Otting, an appointee of former Republican President Donald Trump, and wasn’t supported by the Fed and the FDIC.
Fed officials, led by Ms. Brainard, said the 2020 OCC plan was rushed and could inadvertently decrease lending to lower-income areas. Ms. Brainard, a Fed governor since 2014, led a competing Fed effort to rewrite its CRA rules while central bank officials pledged to work with the other banking agencies on a unified set of new standards.
Though the Fed approved Thursday’s proposal unanimously, Fed governor Michelle Bowman, appointed by Mr. Trump, said in a statement that it remained unclear if overhaul’s costs will be greater than its benefits. She asked community banks to comment on whether the proposal would result in more or better investments.
“While I support issuing the proposed rule for public comment, there are significant unanswered issues posed by the proposal,” she said.
At present, banks are evaluated on compliance with the act based on a complex formula that includes loans to home buyers and small businesses, as well as the number of branches in lower-income areas. Most banks get passing grades on their CRA examinations.
The Consumer Bankers Association said ahead of the proposal that it welcomed regulators modernizing rules that haven’t been updated in over two decades, since before the widespread adoption of smartphones and mobile banking. “For decades, banks have invested trillions of dollars into underserved communities,” said Richard Hunt, the industry group’s president and chief executive, in a written statement. The association hopes the plan “provides the clarity, certainty, and flexibility banks need.”
Consumer advocates said they hoped the proposal would boost banks’ obligations under the law. “The impact will be pretty clearly to raise the bar in terms of what’s expected from banks,” said Jesse Van Tol, president and chief executive of the National Community Reinvestment Coalition, a fair-lending advocacy group.
Mr. Van Tol said there is a major gap in one aspect of the proposal: It wouldn’t apply to the nonbank financial firms that now provide the bulk of the consumer loans in the U.S., such as in the mortgage market. Nonbanks originated about 75.5% of government-backed home loans as of March 2022, according to the Urban Institute.
Although some states like Illinois and New York have implemented their own reinvestment requirements that apply to nonbanks, Congress would need to act to expand federal requirements. Last year, Fed Chairman Jerome Powell suggested Congress should extend the rules to cover all firms providing consumer credit, not just banks.
“Like activities should have like regulation,” Mr. Powell said last May.
Nonbank mortgage lenders say expanding CRA to cover their firms would be a mistake, arguing they have different business models that don’t involve taking deposits that are then reinvested into their communities.
“The Community Reinvestment Act for independent mortgage bankers is nonsensical and a solution in search of a problem,” said Robert Broeksmit, president and chief executive of the Mortgage Bankers Association.