The proposal is another big win for the banking industry, which has argued for years that 1977’s Community Reinvestment Act was outdated and didn’t account for the popularity of online banking. Under the proposal, the industry would gain new flexibility when attempting to comply with the law aimed at stamping out redlining, in which banks either refused to lend to people in minority neighborhoods or charge those borrowers more.
Democrats and consumer groups warn the most recent proposal would make it easier for banks to comply with a law meant to stamp out decades of redlining. “This is a major transformation of the law. It upends how the CRA works,” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition.
The proposal was unveiled by Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. It has sparked a rare split between financial regulators: The Federal Reserve, which also regulates some banks’ compliance with the law, has yet to sign off.
The Federal Reserve still hopes to reach an agreement with the other regulators to support the proposal, Chair Jerome Powell said at a press conference Wednesday. “I don’t know whether that will be possible or not. We’ll just have to see,” he said. “We would certainly not want to create confusion or a sort of tension between the regimes if they do turn out to be slightly different regimes.”
Powell said the Fed is “strongly committed to the mission of ensuring that banks provide credit through their communities, particularly addressing the needs of low- and moderate-income households and neighborhoods. We also think it’s time for modernization."
The public will have 60 days to comment on the proposal.
“We are concerned that the changes … will make it easier for banks to pass their CRA exams, weakening their obligation to responsibly serve communities across the country," Rep. Maxine Waters (D-Calif.), chair of the Financial Services Committee, said in a statement before the proposal was officially released. “It is critical that the banking regulators do not jam through their proposal without giving the public ample time to weigh in, or without coordinating with the Federal Reserve.”
Under the Community Reinvestment Act, or CRA, regulators periodically examine banks lending practices for low- and moderate-income borrowers. A bank may get CRA credit, for example, for issuing a mortgage to a black borrower, financing an affordable housing project or a small business loan. Banks given a low rating can be hit with sanctions.
Banks have complained that they are judged too subjectively and don’t often know what types of loans would qualify for credit under the law. The proposal would clarify what would qualify for CRA credit and potentially give banks more flexibility around what parts of the country the lending would be done in. Banks would also be encouraged to make loans to lower-income borrowers based on where their customers are rather than where the bank has physical branches.
But Van Tol warned that broadening the definition of what counts toward compliance with CRA could allow banks to focus on projects with the most profit. They “would rather finance a billion-dollar hospital facility than make mortgage loans to low- and moderate-income people,” he said. “The motivations and incentives are going to go places where you can make the most money.”
The existing law should be modernized and simplified, consumer advocates say. But the Trump administration’s proposal would only benefit banks and dilutes the original intention of the law to address redlining, they say.
Redlining persists in 61 metro areas — including Detroit, Philadelphia, Little Rock and Tacoma, Wash., according to the Center for Investigative Reporting. The proposal also comes at a time when research shows that banks are closing down physical branches in black neighborhoods — including high-income ones — faster than in the rest of the country.
Since 2010, the number of bank branches in majority-black areas has shrunk 14.6 percent compared with 9.7 percent in all other communities, according to an analysis by S&P Global Market
Intelligence. At JPMorgan Chase, the country’s largest bank, the number of bank branches in majority-black areas fell by 22.8 percent compared with an overall decline of less than 1 percent, the data showed.