Low-Income Lending Rules Set for Broad Overhaul

Top U.S. banking regulators on Tuesday said they would work jointly to modernize rules governing how banks lend hundreds of billions of dollars annually in lower-income communities.

At a time when many banking services have moved online, regulators have been trying to forge a consensus for updating rules from a law enacted more than 40 years ago when banking largely took place at physical branches.

The Office of the Comptroller of the Currency, which oversees national banks and the bulk of the activity under the low-income lending rules, said it would propose withdrawing controversial changes it pushed through last year without the support of the Federal Reserve and the Federal Deposit Insurance Corp., two other bank regulators responsible for overseeing the Community Reinvestment Act.

“While the OCC deserves credit for taking action to modernize the CRA through adoption of the 2020 rule, upon review I believe it was a false start,” Acting Comptroller Michael Hsu said in a statement Tuesday.

The CRA is one of the major tools the government uses to encourage banks to lend more to low- and moderate-income communities. The revamp comes at a time when the Biden administration has pledged to do more to address disparities in wealth, incomes and access to financial services among Blacks and other racial groups.

In a separate statement, all three regulators said they plan to jointly modernize the rules in question. A formal joint proposal isn’t expected for several more months, likely not until 2022, people familiar with the matter said.

“Joint agency action will best achieve a consistent, modernized framework across all banks to help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods,” the agencies said in the statement. The Wall Street Journal reported earlier Tuesday on the joint approach.

Banks are evaluated on compliance with the CRA 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. Bad grades can restrict banks from merging or opening new branches.

Last year’s regulatory split could have led to an unusual situation in which some U.S. banks would have to follow one set of rules to comply with the law while others would have to abide by a different set of rules. The FDIC has also sought to allow most of the community banks it regulates to follow the existing rules, raising the prospect of three different regulatory regimes for a single law.

Under existing rules, banks must lend to lower-income communities in the area around their offices, even though they now accept deposits from around the country via online accounts. This has led to a glut of CRA spending in places such as Salt Lake City, where more than two dozen banks are located.

The OCC’s 2020 revisions aimed to spread online banks’ lending out nationally. They added areas where banks draw large amounts of deposits even if they have no branches there. They would also provide clarity on the types of loans and investments that are required.

The Fed declined to support the comptroller’s plan last year, with Federal Reserve Governor

Lael Brainard

suggesting it was rushed to completion and could inadvertently decrease lending to lower-income areas. Ms. Brainard is leading the Fed’s work on the issue.

A primary criticism of the comptroller’s rule is that banks would satisfy their CRA responsibility through several large investments or loans as opposed to many small-dollar loans to individuals.

The Fed floated its own framework last September. As with the comptroller’s approach, the Fed said it would include a more standardized way to test banks for compliance and modernize the rule’s geographic constraints to account for banks without physical branches.

Fed officials suggested their approach would also offer more credit than the comptroller’s framework for the number of loans that banks provide to retail customers and smaller businesses. Banks wouldn’t get more credit for providing a smaller number of large loans, they said.

Though the CRA was intended largely as a civil rights law, its implementing rules have addressed race only peripherally. The Fed signaled it is considering changing that, and it has sought input on how to modernize the rules in a way that would explicitly address racial equity in lending.

Write to Andrew Ackerman at [email protected]

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