US Bank Regulators Updates Rules to Consider Retail Lending

By Consultants Review Team Wednesday, 25 October 2023

The landmark Community Reinvestment Act of 1977 will be extended to embrace internet and mobile banking services for the first time under Tuesday's plan. This means that regulators' grades for lending to low- and moderate-income communities will no longer be based solely on physical branch locations. Other criteria for large lenders will be tightened as part of the revamp. 

The Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency on Tuesday approved the changes. “The rule maintains a focus on evaluating bank performance in areas where banks have deposit-taking facilities, but also enables evaluation of retail lending and community development activities outside of branch networks," Michael Barr, the Fed’s vice chair for supervision, said in a statement. He added that the changes will clarify how the rules apply and make them more consistent.

Since its introduction last year, the effort has faced criticism from both industry and consumer advocates. Banking trade groups have argued the new criteria for rating lending could make it too hard to achieve a high score. Meanwhile, critics have said the changes didn’t go far enough. Dennis Kelleher, who leads the Washington-based Better Markets group that often advocates for tougher rules, said the CRA reforms are well-intentioned but unlikely to work. “It will likely continue to miss classic cases of redlining and enable banks to continue getting high if not perfect CRA ratings while continuing to reduce lending to low- and moderate-income communities," Kelleher said.

Bank watchdogs evaluate the way lenders service lower-income communities where they operate, which in turn can affect their ability to open new branches and make acquisitions. Weak scores could hamstring such expansion, though critics say banks have long been graded too easily.

Data show that many non-White communities remain underserved almost half a century after the passage of the CRA. For example, Black borrowers in low- and moderate-income areas in most major US cities receive disproportionately fewer loans. In a bid to address that, the rule includes a revised test to measure a bank’s closed-end mortgages, automobile loans, small business and small farm loans. It also streamlines the criteria.

Redlining is a discriminatory practice where lenders avoid offering mortgages and loans in areas based on the race or national origins of people who live there, according to the Justice Department. The agency announced this month that an initiative to combat redlining had secured more than $100 million in relief for communities harmed by discriminatory lending practices.

Provisions in the new regulation that broaden so-called "assessment areas" to focus more on lending activities beyond their physical presence in communities have been a source of dispute in the CRA revision. According to critics of the law, the impact would be mitigated by the move in retail lending to nonbanks.

According to studies conducted by the Washington-based Urban Institute, nonbank lenders account for 60% of all mortgage originations, including 75% of all government and government agency mortgages.

The rule would require large banks to publish on their websites the distribution of home mortgage loan originations and applications by income, race, and ethnicity in each assessment area, based on publicly accessible data from the Home Mortgage Disclosure Act.

Although these reports would not be factored into CRA scores, FDIC Chairman Martin Gruenberg stated during his agency's open meeting that they would provide insight into banks' lending in communities of color.


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