Fed Overhaul of Anti-Redlining Rules Focuses on Loan Output

(Bloomberg) -- The Federal Reserve set up a split among financial regulators on how to measure banks’ compliance with a key anti-redlining law by focusing on the number of loans that are made in low-to middle-income communities.

The proposal for revamping the Community Reinvestment Act, released by the Fed Monday, sets up a four-part test that would look at the total number of loans to low-income neighborhoods. Banks would get credit for smaller investments that can have a substantial community impact, according to a memorandum released alongside a 186-page advanced rulemaking proposal.

The Fed’s Board of Governors voted unanimously to put the plan out for comment. The proposal is based on the concept that “loans to the smallest businesses, smallest farms, and minority-owned small businesses might be considered impactful and responsive to community needs,” Fed Governor Lael Brainard said in a speech to the Urban Institute after the board meeting.

The plan contrasts with new rules from the Office of the Comptroller of the Currency that were criticized for emphasizing the total value of banks’ investments rather than lending to specific communities.

The 1977 Community Reinvestment Act is intended to address historic redlining that kept Black and Latino communities from getting access to mortgages and other loans. The law requires that regulators review banks’ CRA performance, with a poor grade potentially limiting bank mergers and branch growth. The last major rewrite of the CRA’s regulations came during the during the Clinton Administration.

Otting Priority

Former OCC chief Joseph Otting, who stepped down earlier this year, made revamping the CRA the central goal of his tenure. He’d had frustrations with the law while serving as chief executive officer of OneWest Bank under Chairman Steve Mnuchin, who’s now President Donald Trump’s Treasury Secretary. As soon as the OCC completed its CRA rewrite in May, Otting exited the agency.

Otting left behind a regulatory rift because his overhaul didn’t win the sign-off of the Fed and the Federal Deposit Insurance Corp. By moving ahead with its own proposal, the Fed is likely to create a chasm of two different CRA standards, meaning lenders could face two separate sets of requirements.

The Fed acknowledged the disagreement Monday, with Vice Chairman for Supervision Randal Quarles saying it’s “important to have consistency across the three banking agencies responsible for implementing the CRA regulations.”

Otting’s successor, acting Comptroller Brian Brooks, said in a statement that he was “encouraged” that the Fed’s plan included “many of the principles on which we worked together.”

One area of agreement is the treatment of housing in community investment reviews, with both agencies putting more emphasis on banks issuing new loans and direct investments rather than purchasing mortgage-backed securities.

Tailored Approach

The Fed’s proposal envisions a more tailored approach to CRA exams in which only the largest national banks would automatically face the four-part test on community lending.

The plan also addresses the growth of Internet banking, and how to treat banks that don’t have neighborhood branches. The Fed is seeking comments on a potential national assessment area for online banks.

The Fed’s framework would continue to rely on branch-based evaluations for most other banks. The plan seeks feedback on giving banks credit for lending outside of their assessment areas, particularly to so-called “CRA deserts” in rural and inner city communities.

The Fed is also exploring whether banks should get CRA credit for non-lending activities, such as offering checking and deposit accounts in low-income communities.

The comment period on the Fed’s proposal is 120 days.

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