NEW YORK (AP) — The three major U.S. banking regulators on Thursday announced plans to rewrite much of the outdated regulations tied to a decades-old banking law designed to encourage lending to the poor and racial minorities in areas where banks have branches.
The stated purpose of the overhaul of the Community Reinvestment Act by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. is to “strengthen and modernize” the law and end years of uncertainty about its regulation for both. the banking sector and advocates for traditionally underserved communities.
The Community Reinvestment Act was passed in 1977 to combat redlining – a racist practice used by the financial industry to avoid lending to certain neighborhoods. Redlining still occurs to this day, with banks large and small avoiding lending to low-income areas, even as they take money from these neighborhoods through deposits.
When the CRA was enacted, bank branches were one of the few ways to measure a bank’s presence in a community. The law was last revised in the mid-1990s when online banking was in its infancy. But there are now banks that have no physical branches, making it harder to measure what constitutes a bank’s presence in a community under the law.
Under current law, banks are assessed on the quality of their loans where they are physically located. This has led to a large amount of community reinvestment dollars in places like Salt Lake City, a popular place for digital banks to headquarter their operations, while neglecting the cities where these banks might actually lend.
Additionally, the law rewards banks for providing mortgages and loans to small businesses in their communities, but remains unclear as to what other types of loans or activities can be considered community reinvestment.
“It’s been 27 years since the government made a significant effort to keep the Community Reinvestment Act rules up to date with convulsions in technology, consolidation in the financial industry and other key changes in the way Americans work and live,” said Jesse Van Tol, president of the National Community Reinvestment Coalition, an umbrella group for local groups that use ARC to push banks to provide more types of loans to low-income people.
“We have seen how such mismatches can hurt as the economic chasms of race and class have persisted and even widened,” he said in a statement.
While banks and community groups agreed an overhaul was needed, the three banking regulators were unable to agree on how to overhaul the regulations. Under the Trump administration, the Comptroller of the Currency make their own proposal on how to rewrite the CRA. The proposal was not accepted by the Fed or the FDIC and was dropped early in the Biden administration.
“The CRA is one of our most important tools for improving financial inclusion in communities across America, so getting it right is critical,” Federal Reserve Governor Lael Brainard said in a statement. a statement.
The main focus of the new CRA regulations would be to target banks that lend nationally but do not have branches, such as SoFi or the Marcus division of Goldman Sachs. These companies would now have to comply with ARC regulations even though they generally do not accept deposits from local communities.
Traditional banks, which have long been under competitive pressure from branchless banks and non-bank mortgage lenders, have welcomed the new proposal. The increased certainty about what will and will not count for CRA compliance is also seen as a positive development.
“We are delighted to see that the proposal is focused on providing banks with the clarity, consistency and transparency needed to continue to fulfill the important mission of ARC for years to come,” said Richard. Hunt, president of the Community Bankers Association, an industry and lobby. group for large retail banks.
Banks are tested on how well they comply with the CRA every three years. Although banks do not incur stiff fines for failing an CRA exam, a bank that does not pass will generally not be granted permission to merge or further expand its operations.
The new proposal will go through a public comment period this summer, will be reviewed and will likely be finalized later this year.
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