Efforts begin to bring civil rights-era banking law into the digital age

The Community Reinvestment Act (CRA) represents a major effort by lawmakers to prevent banks from discriminatory lending in low-to-moderate income communities, but it was signed into law in 1977 and has not been updated since 1995.

Conceived in the era of civil rights and passed in the era of post-Watergate reform, the Community Reinvestment Act (CRA) marks a watershed moment in the fight to end a century of discrimination against communities in low to moderate income. It needs a facelift.

Much has changed in the banking system since the measure was last updated in 1995. Namely, more and more banking is taking place online and not in physical branches. Yet one of the CRA’s main criteria for measuring a bank’s fair lending practices was based on the location of its physical stores in disadvantaged neighborhoods.

In what would be first major overhaul CRA’s 27-year history unveiled on Wednesday, regulators would consider online banking, finally bringing the era of digital banking into the main device the government uses to encourage lending to low- and moderate-income communities .

“The proposal accommodates the expanded role of online and mobile banking in
update the approach to where banks are rated for their CRA performance,” said Fed Vice Chairman Lael Brainard.

“While maintaining the focus on branch banking, the proposal also assesses the performance of large banks in areas where they have a concentration of mortgages or small business lending. And it provides certainty that banks can receive ARC credit for eligible community development activities nationwide.

During times of economic stress, black families had one-fifth the wealth reserve compared to the average American family entering the pandemic and Latino families had less than one-third 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 ARC compliance, it could be prevented from merging with another bank.

The Fed has partnered with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to propose changes to the ARC. Agencies open public comment rules until August 5.

In addition to the impact of the internet, the settlement will also provide ARC banks with credit for lending activities related to weather disaster preparedness and climate change. This would update ARC activities by banks aimed at helping communities recover from natural disasters.

“There is growing evidence that low-income communities are more affected by weather disasters,” said a banking official. “Low-to-moderate income communities are more likely to be located in vulnerable areas, and affordable housing is older and of lower quality…We encourage banks to address these needs.”

Other key elements of the proposal include:

  • Promoting community engagement and financial inclusion, with a focus on lower value loans and potential high impact investments and being encouraged to be more responsive to the needs of low to moderate income communities.

  • Adopt a measures-based approach to CRA’s assessments of retail lending and community development funding, which includes public benchmarks, for greater clarity and consistency. It clarifies eligible CRA activities, such as a focus on affordable housing in rural and undeserved communities.

  • Smaller banks would continue to be assessed under the current regulatory framework for credit rating agencies, with the option of being assessed against aspects of the new regulations

  • Maintain a unified approach of banking regulators.

The proposal was greeted with some caution, especially by Fed Governor Michelle W. Bowman, who represents community banks in Fed deliberations. Under the new proposal, banks would have to collect and report new “comprehensive” information on deposit accounts, car loans, mobile and online banking usage, and community development loans and services, as well as branch details, Bowman said.

“Fundamentally, we don’t know if the costs imposed by the proposal will outweigh the benefits,” she added.

US Treasury Secretary Janet Yellen backed the proposed rules and said modernizing the CRA “will help financial institutions better meet the credit needs of the communities in which they do business.” She said the Treasury remained 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 question is whether compliance costs will increase and whether the proposal is reasonable,” Seiberg said. “While our initial review suggests reasons for optimism on both fronts, it will take months for the banks and their law firms to sift through the fine print to ensure this plan is workable.”

The proposal comes about five months after federal officials allowed a Trump administration proposal to update the ARC to expire at the end of the year.

The measure would have created a relationship between the CRA’s authorized activities and total assets or total deposits with an empirical measure of compliance.

“Our concern with the approach is that the required passing score would have been easy to change depending on which political party controlled the White House,” Seiberg said of Cowen.

Pat Toomey (R-Pa.) today expressed concern after the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Office of Comptroller of the Currency (OCC) released a proposed rule relating to the Community Reinvestment Act (CRA).

Pat Toomey, R, Pa., a ranking Republican member on the U.S. Senate Banking Committee, expressed concern about the new rules that add complexity and regulatory burdens with no benefit to economic growth.

“In addition to imposing onerous new data collection, reporting and disclosure requirements on lenders, the proposal also advances left-wing environmental goals, which is entirely outside the CRA’s mandate,” did he declare. “It may be time for Congress to consider statutory changes that end rent-seeking and the hijacking of otherwise valid bank mergers.”

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