Fed, Biden Administration Float New Lending Rules for Lower-Income Areas

Fed, Biden Administration Float New Lending Rules for Lower-Income Areas

WASHINGTON—Top US regulators proposed overhauling how banks lend hundreds of billions of dollars annually in lower-income communities, the first major revamp to the standards in more than two decades as lenders increasingly offer financial services online.

The proposal to modernize rules for the 1977 Community Reinvestment Act was announced Thursday and could be finalized by the end of the year. It aims to ensure lending to lower-income individuals and small businesses is distributed more evenly where banks do business.

Existing rules focus on bank activities around their physical branches. Those rules are outdated in a world in which much financial activity happens over the Internet and with mobile phones, both bankers and community advocates say.

“Today’s proposal seeks to expand access to credit, investment, and banking services in [low- and middle-income] communities,” said incoming Federal Reserve Vice Chairwoman Lael Brainard, in a written statement. The Fed is one of three regulators rewriting the lending rules.

Federal Reserve Chairman Jerome Powell said Wednesday the central bank approved a half-percentage-point interest-rate increase in an effort to reduce inflation that is running at a four-decade high. Photo: Win McNamee/Getty Images

The other two, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., also signed off on the proposal Thursday. The regulators will collect public comment on the proposal through early August before writing final rules. Congressional approval isn’t needed.

The proposal doesn’t cover nonbank lenders, who write a large share of consumer loans. That change would require congressional approval.

Under the plan, large banks would face expanded scrutiny of their auto lending activities if such loans comprised a significant portion of their business, in addition to mortgages and small-business loans. Officials cited the importance of auto loans to lower-income borrowers in explaining the added scrutiny.

The proposed revamp comes as the Democratic Biden administration has pledged to do more to address disparities in wealth, incomes and access to financial services among Black Americans and other racial minority groups.

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

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The Biden administration last year scrapped a related Trump-era revamp that had divided regulators and industry officials. Democrats say the Trump changes, rescinded before banks had to comply, were rushed to completion and could have inadvertently reduced lower-income lending activities.

Still, some officials suggested they were unconvinced Thursday’s proposal would improve bank reinvestment activities.

Fed Governor Michelle Bowman, appointed by former Republican President

donald trump, said in a statement that it remained unclear if the overhaul’s costs will be greater than its benefits. “While I support issuing the proposed rule for public comment, there are significant unanswered issues posed by the proposal,” she said.

In recent years, the law has become a source of conflict between community groups that want the rules to be enforced more strongly and bankers who argue the regulations are too bureaucratic and haven’t kept up with technological changes, among other criticisms. Banks are typically examined every three years on their


efforts. A bad grade effectively prohibits mergers.

Thursday’s proposal aims to make rules more transparent and objective, potentially making it easier for banks to understand their regulatory requirements, though the firms could face heightened reporting mandates.

Under existing rules, banks must lend to lower-income communities in the area around their offices, even though they now accept deposits and make loans around the country via online accounts. This has led to a glut of reinvestment act spending in places such as Salt Lake City, where dozens of banks are headquartered but have no branches elsewhere.

If Thursday’s plan is finalized in the coming months, it would aim to spread online banks’ related activities nationally. Banks would generally be assessed for the CRA obligations in areas where they don’t have physical offices if they make 100 mortgage loans or 250 small business loans in a particular area for at least two years.

Incoming Fed Vice Chairwoman Lael Brainard is a supporter of the new plan.


Al Drago/Bloomberg News

At present, banks are evaluated on compliance with the act based on a complex formula that includes loans to home buyers and small businesses, as well as the number of branches in lower-income areas. Most banks get passing grades on their CRA examinations.

The Consumer Bankers Association said it welcomed Thursday’s proposal. “We’re pleased to see the proposal focus on providing banks with the clarity, consistency, and transparency necessary to continue delivering on CRA’s important mission for years to come,” said Richard Hunt, the industry group’s president and chief executive, in a written statement.

Consumer advocates said they hoped the proposal would boost banks’ obligations under the law. “The impact will be pretty clearly to raise the bar in terms of what’s expected from banks,” said Jesse Van Tol, president and chief executive of the National Community Reinvestment Coalition, a fair-lending advocacy group.

Mr. Van Tol said there is a major gap in one aspect of the proposal: It wouldn’t apply to the nonbank financial firms that now provide the bulk of the consumer loans in the US, such as in the mortgage market. Nonbanks originated about 75.5% of government-backed home loans as of March 2022, according to the Urban Institute.

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

“Like activities should have like regulation,” Mr. Powell said last May.


What would be the best way to modernize the Community Reinvestment Act? Join the conversation below.

Nonbank mortgage lenders say expanding CRA to cover their firms would be a mistake, arguing they have different business models that don’t involve taking deposits that are then reinvested into their communities.

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

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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