Fed proposing revamp of landmark law that aims to prevent discrimination in lending
Board leaning heavily on public input to shape Community Reinvestment Act modernization
The Federal Reserve System is aiming to significantly modernize the Community Reinvestment Act, a rule developed largely to combat racial discrimination in lending – or “redlining” – in low-to moderate-income communities.
For decades, the CRA has been essential to incentivizing urban investment by banks, its advocates say. As the Fed’s Board of Governors rework the law, they’re leaning on heavy input from the public and community and business groups to get it right. The outreach includes webinars, roundtable discussions, and a public comment period through Feb. 16.
“The Board is focused on updating and strengthening CRA regulations to better meet their core purpose,” Board of Governors member Lael Brainard said during a recent speech.
CRA enforcement has been periodically reviewed, but it hasn’t had major updates for more than two decades. The Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency regulate the CRA. The Fed and the OCC have proposed separate revisions to the rule, and advocates say they hope the proposals will be unified in the final updated rule.
The Fed’s proposal aims to promote financial inclusion, address systemic inequity in credit access, and adjust to increased banking consolidation and the rise of online and nationwide banks. The proposal also works to incentivize investment in CRA “deserts” and reduce banks’ administrative burdens.
Banking and lending have changed in big ways since the CRA was enacted, particularly with the shift to online banking, said Ryan Dominguez, policy analyst at Citizens’ Housing and Planning Association, an organization that advocates for diverse types of housing for low- to moderate-income individuals and families.
“As the CRA has become outdated, the impact it was supposed to have on community development activities and investments in low to moderate-income communities isn’t happening,” he said.
In the last two decades, banks have made nearly $2 trillion in small business and community development loans in working-class neighborhoods to meet the law’s requirements, according to a 2018 statement by the CEO of the National Reinvestment Community Coalition. But it hasn’t been enough to fully reverse the impacts or net effects of previous redlining.
The practice bred disinvestment and suppressed economic mobility, and those impacts linger, according to a study by the National Community Reinvestment Coalition. The study indicates neighborhoods redlined more than 80 years ago are more likely to be made up of lower-income residents today.
Prabal Chakrabarti, community affairs officer at Federal Reserve Bank of Boston, said the unfolding pandemic has highlighted persisting inequities in low to moderate-income neighborhoods, making this an urgent time to revisit the CRA.
"It's time to revise the CRA to reverse concerning levels of inequality by race and geography, and to be relevant for the economy that's going to emerge post-pandemic," Chakrabarti said.
So far, key objectives of the Fed’s plan include:
- Special provisions for financial institutions that offer new banking activities in underserved areas
- Investments in Minority Depository Institutions (banks and credit unions either owned or directed primarily by people of color) and Community Development Financial Institutions (organizations that provide financial services to low-income communities and people who lack access to financing)
- Recognizing the special circumstances of small banks in rural areas
- Bringing greater clarity and transparency to evaluations of bank compliance with the CRA
If it works as intended, the CRA could eventually help reduce the wealth divide by giving equitable access to credit, said Carmen Panacopoulos, senior business strategy manager at the Boston Fed. People in lower-income communities could own more homes and start or grow their businesses, and banks and developers could invest more in local retail, housing, and businesses like child care and health clinics.
But first, banks must fully understand the rule and how to meet its requirements as they grow, said the Boston Fed’s Matthew Holt, a senior examiner who evaluates whether regional banks are complying with the CRA.
Holt said an unsatisfactory rating can hurt a bank's growth and reputation and prevent it from opening new branches. But the current rule leaves gray areas between what a bank does to benefit a community – say, bank employees physically helping with the construction of affordable housing – and what it gets credit for under the CRA, he said.
"One goal of improving it would be to have clarity,” Holt said.
Some public commenters have asked the Fed to remedy the time-lag between the complicated process when banks are evaluated on CRA compliance and when their scores are published. Right now, it can take a year or more. One suggestion is a real-time dashboard to help depository institutions stay on track.
As the Fed’s proposed rule takes shape, Bank officials are asking community groups, nonprofits, bankers, developers, small business owners, entrepreneurs, and the general public to weigh in. The comments will be compiled and sent to the Board of Governors.
“Hopefully, the Fed’s rule is going to be the avenue that bridges the gap between the other regulatory agencies (like the OCC),” Dominguez said. “This would be a perfect time for us to get on the same page and come out with a rule that is really rigorous and that will be in place for years to come.”