Financial regulators propose new rules to expand and modernize law that targets inequities in bank lending.
The Community Reinvestment Act (CRA) originally signed into law in 1977, is a federal law that encourages financial institutions to meet the credit needs of all borrowers, including those in low-to-moderate income communities.
Throughout 2022, the Federal Reserve System, along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), hosted information sessions and solicited comments on a proposed rulemaking to update regulations stemming from the Community Reinvestment Act.
Together, the financial regulators proposed updates to CRA regulations that aim to strengthen the law by further promoting community engagement, financial inclusion, and adherence to modern banking practices.
“The last major revisions to the CRA regulations were made in 1995,” explained Lael Brainard, then-Vice Chair of the Board of Governors of the Federal Reserve System. Brainard maintained that “the CRA is one of our most important tools to improve financial inclusion in communities across America, so it is critical to get reform right.”
According to a summary of key objectives, the rules proposed by the Federal Reserve, FDIC, and OCC would update provisions of the Community Reinvestment Act to “strengthen the achievement of the core purpose of the statute, and to adapt to changes in the banking industry, including the expanded role of mobile and online banking.”
The interagency group also notes that its proposed rules would help to provide greater consistency and transparency in CRA bank evaluations, as well as tailor CRA evaluations to different bank sizes and types.
New regulations would strengthen the core purpose of the CRA by evaluating bank performance differently across various kinds of lending activities and conducting separate assessments for each activity. These assessments would test for equity in lending across four areas: retail lending, retail services and products, community development financing, and community development services.
The proposal would also promote community engagement and financial inclusion by encouraging smaller value loans and investments that can be more responsive to the needs of low-to-moderate income communities.
In addition, the proposal would encourage investing activities conducted in partnership with minority-owned and mission-driven financial institutions. Minority-owned financial institutions are those in which minority individuals own at least 51 percent of voting stock. Mission-driven financial institutions include minority depository institutions, women-owned depository institutions, low-income credit unions, and certified community development financial institutions.
The interagency proposal also recognizes that major changes to banking services, such as “internet and mobile banking and hybrid models that combine physical footprints with online lending,” have remodeled the entire banking industry. To bring the CRA regulations up to date with modern banking practices, the new rules introduce updated bank assessment areas. The rules also focus on sustaining branch-based banking activity given its importance to individuals and local communities.
Since the interagency group announced these proposed rules, several outside stakeholders have voiced support as well as concerns over the changes.
Supportive groups have noted that the proposed updates would make steps toward financial inclusion for minority and underserved populations. For example, the proposed rules would include additional definitions and more expansive criteria for banking activities that directly support underserved communities, such as low-to-moderate income neighborhoods, Native American areas, and small farms.
Meanwhile, other groups have criticized the proposed rules for not going far enough to strengthen the requirements of the CRA.
For example, Americans for Financial Reform, a financial reform advocacy organization, submitted a letter to the agencies that advocates several changes and additions. In particular, the group opposes the proposed rules’ expanded definitions of “small and intermediate banks,” calls for assessment downgrades for risky or adverse bank activity, and seeks to expand climate-related activities that would be eligible for positive consideration under the CRA.
The National Community Reinvestment Coalition (NCRC), a non-profit advocacy organization focused on fair housing and banking, also published a list of areas where the proposed updates to CRA regulations “fall far short.” According to the NCRC’s report, some of the proposed financial regulations will ultimately limit regulators’ abilities to “remedy the persisting legacy of discrimination in the areas covered by the CRA.”
The NCRC also argues that federal financial regulators missed the mark in deciding not to emphasize CRA performance in bank merger review processes and failing to incorporate the explicit consideration of race in CRA examinations.
The Community Reinvestment Act has also received considerable attention from legislators across the country. At the federal level, U.S. Representative Maxine Waters (D-Calif.) has proposed updating the CRA through legislative action that would take the interagency group’s proposed rules a step further. As Chair of the U.S. House Committee on Financial Services, U.S. Representative Waters has introduced a bill that would compel new CRA monitoring requirements, expand the types of legal violations that could affect CRA ratings, and create CRA advisory committees in bank assessment areas, among other provisions.
As of January 1, 2023, however, the first of several potential updates to CRA regulations has gone into effect via agency rulemaking as opposed to legislative action. Today, a bank that has assets of less than $1.503 billion – instead of $1.384 billion – is now a “small bank or savings association.”
This new rule, as well as other proposed updates to the Community Reinvestment Act’s swathe of rules, will affect different actors in different ways. Some stakeholders will be interested in monitoring how well new CRA rules incorporate modern banking practices, and others will be more interested in how well new regulations help in extending credit to low-and-moderate income communities.
Only more time will reveal, however, the proposed rules’ ultimate effects on fair lending practices, community investment financing, and the overall effectiveness of the Community Reinvestment Act.