Banking regulators revise rules on low-income and racial lending | Economic news

By KEN SWEET, AP Business Writer

NEW YORK (AP) — The three major U.S. banking regulators on Thursday announced plans to rewrite much of the outdated regulations tied to a decades-old banking law designed to encourage lending to the poor and racial minorities in areas where banks have branches.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 Community Reinvestment Act overhaul 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.

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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.

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 made his 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 biggest thrust of the new CRA regulations would be to target banks that lend nationally but don’t have many branches. The part of the financial sector likely to be most affected by this situation are non-bank mortgage lenders like Quicken Loans, SoFi and LoanDepot. These companies would now have to comply with ARC regulations even though they generally do not accept deposits from local communities.

But traditional banks, which have long been under competitive pressure from non-branch banks and non-bank mortgage lenders, have welcomed the new proposal.

“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.

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