The legal landscape for prominent US banks has shifted significantly as top regulators upgrade rules initially established to counteract redlining and promote lending to lower-income territories. In a move initiated on Tuesday, key regulators have announced significant alterations to the landmark 1977 Community Reinvestment Act. Now, for the first time, online and mobile banking will fall under its purview.
This means that the assessments regulators undertake to gauge firms’ commitment to loaning to low- and moderate-income communities will no longer rely solely on the positions of physical branches. Other important factors will now receive consideration. In addition to widening the range of services falling within its scope, the revision also introduces stricter standards for major lenders.
These crucial modifications received approval on Tuesday from the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency. Michael Barr, Vice Chair for Supervision at the Federal Reserve, stated that these changes would create clarity about the rule’s application and lead to more consistency in its interpretation and enforcement.
Although this reformation was designed to promote fairness, it has not been without criticism. Banking industry groups argue that achieving a high score will be too difficult under the new rating system for lending criteria, while other critics say the changes are too minimal.
As a part of addressing these issues, the new rule incorporates a revised test for a bank’s lending activities, including closed-end mortgages, auto loans, and small farm loans. Simultaneously, the rule streamlines the criteria to remove any redundant, unclear, or unnecessary elements.
Notably, the term ‘redlining’ refers to a discriminatory practice where lenders avoid extending loans, particularly mortgages, in areas mainly based on the race or national origin of its residents. The Justice Department defines the practice as such. The proposed changes aim to provide over $100 million in relief for communities affected by discriminatory lending standards.
However, controversy continues to revolve around provisions in the new rule that expand “assessment areas” to focus more on lending activities beyond physical branches. Critics argue that the effect of these adjustments may be constrained by a simultaneous shift in retail lending towards nonbank institutions.
The Community Reinvestment Act (CRA) currently does not extend to nonbank lenders. It’s important to note that these institutions account for 60% of all mortgage originations, including government and government agency mortgages.
It remains to be seen whether these changes will provide a more robust response to the issue of redlining, as the ever-evolving legal and regulatory framework continues to challenge traditional banking norms.