Low-income loan rules defined for a global overhaul

Major U.S. banking regulators said on Tuesday they would work jointly to modernize the rules governing how banks lend hundreds of billions of dollars a year to low-income communities.

At a time when many banking services have moved online, regulators have attempted to forge a consensus to update the rules of a law enacted over 40 years ago, when banking was mostly done in local offices. physical branches.

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

“While the OCC deserves credit for taking steps to modernize the CRA by adopting the 2020 rule, upon review, I think it was a false start,” Acting Controller Michael Hsu said in a statement. press release Tuesday.

ARC is one of the main tools the government uses to encourage banks to lend more to low and moderate income communities. The overhaul comes at a time when the Biden administration has pledged to do more to address disparities in wealth, income and access to financial services between blacks and other racial groups.

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

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

The Consumer Bankers Association, an industry group that pushed regulators to overhaul the CRA, welcomed Tuesday’s joint statement. “Any modernized ARC rule must be transparent, flexible and consistent across regulators to ensure that banks are able to optimize support for the communities they serve,” said Richard Hunt, President and CEO of the group.

Banks are assessed for ARC compliance based on a complex formula that includes loans to homebuyers and small businesses as well as the number of branches in low income areas. Bad grades can prevent banks from merging or opening new branches.

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

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

The OCC’s 2020 revisions aimed to expand online bank lending nationwide. They added areas where banks withdraw large volumes of deposits even though they do not have branches there. They would also provide clarification on the types of loans and investments required.

The Fed refused to back the Comptroller’s plan last year, with Federal Reserve Governor Lael Brainard suggesting it was rushed to completion and may inadvertently cut lending to low areas. returned. Ms. Brainard is leading the Fed’s work on the issue.

A primary criticism of the Supervisor Rule is that banks would fulfill their liability to the CRA through several large investments or loans, as opposed to many small loans to individuals.

“The deeply flawed OCC proposal, fiercely opposed by community advocates, has rightly been laid to rest,” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, an advocacy group fair loans.

The Fed launched its own framework last September. Similar to the controller’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 have suggested their approach would also offer more credit than the Monitor’s framework for the number of loans banks make to retail and small business customers. Banks would not get more credit for a smaller number of large loans, they said.

Although the CRA was designed largely as a civil rights law, its implementing rules only addressed race in a peripheral way. The Fed has signaled that it is considering changing that, and asked how to modernize the rules in a way that explicitly addresses racial equity in lending.

Write to Andrew Ackerman at [email protected]

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