A chance to significantly overhaul banking regulations comes around once in a generation — or maybe twice.
Today, the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency released a proposed set of overhauled regulations under the Community Reinvestment Act, the 1977 law intended as a countermeasure against discriminatory lending, also known as redlining.
As Next City has covered previously, the Trump administration attempted to gut those regulations, proposing and adopting new rules covering most but not all of the banking system — in the midst of a pandemic that saw massive upheavals in the economy.
Acting Comptroller of the Currency Michael Hsu’s first big move after the Biden-Harris administration came into office and appointed him to his current role was to rescind those changes. Although Hsu’s office only supervises around one in four banks across the country, that includes the largest banks, adding up to around 70% of all outstanding bank loans and investments.
Today’s announcement means all three agencies — and thus the entire banking industry — now faces one updated set of Community Reinvestment Act regulations, as they have been since the law was first implemented. The public comment period for those regulations is currently set to end on August 5.
The three agencies didn’t have to go all the way back to the drawing board. At the tail-end of the Trump administration, the Federal Reserve initiated a separate rulemaking process to come up with a modernized set of CRA regulations. All sides agree they need a major update — the last time CRA regulations were given a major update was 1995, before the advent of mobile and online banking, and before the massive growth of consumer-focused non-bank lenders for home mortgages and other retail lending products.
One veteran in the banking industry told Next City the Fed’s proposal was much more sensible than the regulations established under the Trump Administration. In making today’s announcement, acting FDIC board chair Martin Gruenberg said that proposal, “served as the blueprint for today’s rulemaking, and that leadership was carried forward in developing [these proposed rules].”
One of the most significant changes is the addition of a new method to evaluate banks’ CRA obligations that isn’t tied to branch networks. The rise of mobile and online banking has lessened the value of branches to traditional banks, while some newer banks are entirely online, with no physical presence.
The proposed regulations keep the branch- and office-based assessment area evaluations, called “facilities-based assessment areas,” but would also require large banks (those with at least $10 billion in assets) to also report on lending in “retail lending assessment areas” where they don’t have branches but do make a certain minimum number of loans. Retail lending assessment areas may include metropolitan areas or all of a state’s rural areas combined. The idea is if a bank is making loans in a certain market, its lending distribution should reflect the demographics of that entire market.
“This will help make CRA a business model-neutral regulation,” said Jonathan Miller, FDIC deputy director of consumer policy & research, when unveiling the new regulations during the May 5 FDIC board meeting.
A few other seemingly small but potentially groundbreaking changes focus on increasing more direct engagement with community members in determining community development needs.
The proposed regulations would create an evolving list of qualifying community development loans and investments for which a bank might receive CRA credit, but also would subject those activities to more qualitative assessment. This change appears to be a response to the concern from bank watchdog groups that over-emphasizing dollar volumes for community development can incentivize banks to get CRA credit by backing mostly large dollar projects in low-to-moderate income areas that don’t actually produce benefits for residents of those areas.
“Examiners would also conduct an impact review to evaluate the impact and responsiveness of a bank’s qualifying [community development] loans and investments,” Pamela Freeman, FDIC chief of fair lending & CRA, said at the board meeting. “The impact review provides qualitative consideration under the community development financing test, a factor especially effective to help meet community needs so even if there are relatively small dollar amounts involved, taking note of rural, underserved and persistent poverty areas.”
Freeman also brought up proposed changes to banks that chose to file for CRA evaluation using a “strategic plan” rather than the conventional geographic-based evaluation rubric. While there are only around 60 such banks around the country, they include some very large and well-known banks like Morgan Stanley, Charles Schwab, Discover, UBS, the U.S.-based subsidiary of Barclays, or USAA; other industry leaders like Regions Bank, Silicon Valley Bank, Stifel Bank and Trust; and also some of the newer “neobanks” that started out as online-only banks like Ally Bank and Varo Bank.
While all three CRA regulators post a list of each strategic plan for banks that choose to be regulated as such, only the Federal Reserve currently has the strategic plans available to the public to download.
“With respect to community input, the proposal would require the strategic plan be shared more broadly, and would require additional information regarding community engagement [in developing strategic plans],” Freeman said.
One concern that has yet to be addressed under CRA is the rise of non-bank lenders, particularly in the home mortgage market and other consumer-facing loan markets. It would require an act of Congress to expand true CRA authority beyond “regulated financial institutions” i.e. FDIC-insured banks. But as FDIC board member and current Consumer Financial Protection Bureau Director Rohit Chopra noted, non-bank lenders today receive significant public support through federal mortgage insurance and government-sponsored enterprises Fannie Mae and Freddie Mac, which could be the basis for expanding CRA to cover their work.
“Banks have obligations under the Community Reinvestment Act because of the significant public benefits they receive,” Chopra said in his remarks at the May 5 FDIC board meeting. “Given that the public subsidizes mortgage lending by these nonbanks, federal policymakers should continue to consider ways to ensure all mortgage lenders are serving all qualified applicants, especially in neighborhoods that have been historically excluded.”
Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.