Fed, Biden administration launch new lending rules for low-income areas

WASHINGTON — Top U.S. banking regulators are set to overhaul how banks lend hundreds of billions of dollars a year to low-income communities, after scrapping a Trump-era overhaul that had divided regulators and banks. industry officials.

The latest proposal to modernize the rules of the Community Reinvestment Act 1977 is due to be announced on Thursday and aims to ensure that loans to low-income individuals and small businesses are spread more evenly where banks do business. The existing rules focus on banking activities around their physical branches. Those rules are outdated in a world where much financial activity takes place online, both bankers and community advocates say.

The proposed overhaul comes at a time when the Democratic Biden administration has pledged to do more to address disparities in wealth, income and access to financial services among Black Americans and other racial minority groups.

Federal Reserve Chairman Jerome Powell said on Wednesday the central bank had approved a half-percentage-point hike in interest rates in a bid to curb inflation that is at an all-time high for four decades. Photo: Win McNamee/Getty Images

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The Community Reinvestment Act is designed to end “redlining” — the historic practice of banks avoiding lending to certain areas, often low-income communities, frequently resulting in stark economic disparities along racial lines. The law is one of the main tools the government uses to encourage banks to lend more to low- and middle-income communities.

In recent years, the law has become a source of conflict between community groups who want the rules enforced more firmly and bankers who argue the regulations are too bureaucratic and have not kept up with technological changes, among other criticisms. Banks are typically reviewed every three years on their ARC efforts. A bad rating effectively prohibits mergers.

Thursday’s proposal, to be unveiled by the Federal Reserve and two other banking regulators, aims to make the rules more transparent and objective, which could give banks a better understanding of their regulatory requirements, even though companies could face challenges. enhanced reporting mandates.

Under existing rules, banks must lend to low-income communities in the area around their offices, although they now take deposits and make loans nationwide through online accounts. This has led to a glut of reinvestment spending in places like Salt Lake City, where dozens of banks are headquartered but have no branches elsewhere.

If Thursday’s plan is finalized in the next few months, it would aim to expand related activities of online banks nationwide. Banks would be assessed for ARC obligations even in regions where they do not have physical offices, if they make a certain number of loans in a particular region, according to people familiar with the proposal.

“I hope they remove some of the guesswork while encouraging creativity and innovation, and recognize that the impact of everything cannot be measured in dollars alone,” said Warren Traiger, senior counsel at the firm. Buckley LLP attorneys, who advises clients on compliance with the law.

In addition to the Federal Reserve, two other top banking regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., are expected to sign off on the proposal. The three banking regulators are responsible for overseeing the 1977 law and pledged last year to act jointly to modernize their rules. Regulators will need to gather public comment on the proposal before it can be finalized.

Thursday’s proposal comes after the OCC, which oversees domestic banks and most activity under low-income lending rules, in December rolled back rule changes made by the Trump administration before banks are required to comply. This plan came from former Comptroller Joseph Otting, appointed by former Republican President Donald Trump, and was not supported by the Fed and FDIC.

Incoming Fed Vice Chair Lael Brainard criticizes a Trump administration plan that was later canceled by President Biden.


Photo:

Al Drago/Bloomberg News

Fed officials, led by incoming Vice Chair Lael Brainard, said the OCC 2020 plan was rushed and could inadvertently reduce lending to low-income areas. Ms Brainard, Fed governor since 2014, led a competing Fed effort to rewrite its ARC rules while central bank officials pledged to work with other bank agencies on a unified set of new standards.

Currently, banks are rated on their compliance with the law based on a complex formula that includes loans to homebuyers and small businesses, as well as the number of branches in low-income areas. revenue. Most banks get passing grades on their CRA exams.

The Consumer Bankers Association said it welcomes regulators’ modernization of rules that haven’t been updated in more than two decades, since before the widespread adoption of smartphones and mobile banking. “For decades, banks have invested trillions of dollars in underserved communities,” said Richard Hunt, chairman and chief executive of the industry group, 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 strengthen banks’ obligations under the law. “The impact will be quite clearly to raise the bar in terms of what is expected of banks,” said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, a fair lending advocacy group.

Mr Van Tol said there was a major flaw in one aspect of the proposal: it would not apply to non-bank financial companies that currently provide the bulk of consumer lending in the United States, such as on the mortgage market. Non-banks originated about 75.5% of government-backed home loans in March 2022, according to the Urban Institute.

Although some states like Illinois and New York have implemented their own reinvestment requirements that apply to non-banks, Congress should act to extend the federal requirements. Last year, Fed Chairman Jerome Powell suggested Congress act to expand the rules to cover all companies providing consumer credit, not just banks.

“As activities should have the same regulations,” Powell said last May.

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Non-bank mortgage lenders say expanding ARC to cover their businesses would be a mistake, arguing they have different business models that don’t involve taking deposits that are then reinvested in their communities.

“The Community Reinvestment Act for independent mortgage bankers is nonsense and a solution in search of a problem,” said Robert Broeksmit, president and CEO of the Mortgage Bankers Association.

Write to Andrew Ackerman at [email protected]

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