Wall Street May Have to Lend More in Poor Areas in New Rules

(Bloomberg) -- Wall Street banks and regional lenders could see an increase in the $250 billion they have to spend annually to meet U.S. requirements for doing business in lower-income communities as regulators prepare to overhaul the Community Reinvestment Act.

The changes proposed Thursday by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. would boost demand for lending by big banks, the regulators say, but they also would get pre-approved lists of qualifying activities that could eliminate a lot of the guesswork that is currently required.

“The larger banks should welcome this, and it should allow them to do more in the communities in which they operate,” said OCC chief Joseph Otting, a former banker who has made rewriting CRA his top agenda item at the agency.

The 1977 law, meant to encourage lenders to extend credit in lower-income areas, hasn’t been updated since the rise of the internet and online banking. Banks are graded on how well they’re meeting expectations, and those scores are considered by regulators when lenders seek to open new branches or make acquisitions.

Assessment Areas

The new proposal would test banks differently, requiring that they exceed goals both at the company level and in most of their geographic assessment areas. And the assessment areas would no longer be based just on physical location but also on concentrations of customers -- a major development for online lenders and those backing away from branch networks. A bank that has a lot of customers in an area far away from its physical location could also have to meet CRA requirements in that other area.

Otting said in an interview ahead of Thursday’s meeting that a lot of time has been devoted to the proposal, which he called a “good framework” that will increase credit opportunities for poor people, family farmers and residents of Indian reservations.

One potential complication is that the Federal Reserve isn’t expected to sign on to the proposal with the OCC and FDIC, leaving a potential split in how CRA would be overseen. Randal Quarles, the Fed’s vice chairman for supervision, was careful to underline in congressional testimony last week that his agency has contributed to the proposal effort, even if it doesn’t sign on, and it hopes to join in a final rule.

For his part, Otting shrugged off the Fed’s reticence, noting that about 85% of CRA investment and lending is done in banks overseen by the OCC and FDIC. The industry spent $482 billion to meet CRA demands in 2017, according to the OCC, with about half of that coming from the Wall Street and big regional banks.

‘Carefully Monitoring’

The overhaul effort drew controversy ahead of the proposal’s release, with Democratic lawmakers and consumer groups expressing concern that Trump-appointed regulators want to water down CRA requirements. House Financial Services Committee Chairwoman Maxine Waters brought a group of Democrat lawmakers to the FDIC meeting to show “we are very carefully monitoring their activities,” she’d said in a statement.

“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,” Waters said, citing a worry that the changes “will make it easier for banks to pass their CRA exams, weakening their obligation to responsibly serve communities across the country.”

FDIC Chairman Jelena McWilliams said the aim of the proposal is to increase lending to the affected communities. Her view was endorsed by Treasury Secretary Steven Mnuchin, who issued a statement lauding the FDIC and OCC “for developing much needed regulations to modernize and improve the effectiveness of the CRA.”

Martin Gruenberg, the only FDIC board member to vote against the overhaul, called it “a deeply misconceived proposal that would fundamentally undermine and weaken” CRA regulations. Gruenberg, who preceded McWilliams as chairman, said banks could game their results by ignoring some of their assessment areas and still get a good CRA score.

Under the proposal, which will be opened for a 60-day public comment period, banks would be given some time to transition to the new rules, and the smallest lenders would be able to opt out.

Also Thursday, the FDIC board approved a proposal to make sweeping changes to the oversight of brokered deposits, a topic especially relevant as fintech firms handle more and more of people’s money. The FDIC’s McWilliams said this week that the current system has left an inconsistent and uneven treatment of third-party deposits in U.S. banking, and that regulators’ sluggish response could get in the way of innovation.

©2019 Bloomberg L.P.

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