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The new front in the battle over fair lending

Presented by Electronic Payments Coalition: Delivered daily by 8 a.m., Morning Money examines the latest news in finance politics and policy.
Oct 23, 2023 View in browser

By Katy O'Donnell

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Banking regulators will unveil their final Community Reinvestment Act regulations on Tuesday, the culmination of a five-year effort to overhaul the way the landmark 1977 anti-redlining law is applied. Neither banks nor civil rights advocates are likely to be satisfied.

It’s the most significant revision since 1995 to CRA rules, which require banks to lend to low- and moderate-income communities where they do business. The Federal Reserve, the Office of the Comptroller of the Currency and the FDIC last year proposed requiring large banks to lend to those communities not just in the vicinity of their physical branches but in areas where they have a concentration of mortgage and small-business loans – an effort to bring the law into the modern age as more people do their banking online.

Banks objected to the new loan-threshold test, arguing that the requirement could result in lenders shuttering operations or restricting loans in more sparsely populated areas to avoid triggering CRA obligations for the broader region.

Banks also say the CRA requires the regulators to look at where banks take deposits, not where they make loans, to determine assessment areas. The Bank Policy Institute, which represents large lenders, said in a comment letter that the potential for widespread downgrades makes the proposal “vulnerable to a challenge that it is arbitrary and capricious.”

Indeed, under the proposed version of the rule, 71 percent of banks would receive a grade of “low satisfactory” or “needs to improve” on the updated retail lending piece of the test, according to the agencies — an outcome that makes banks blanch, given the potential reputational harm and restrictions on growth that come with a bad CRA grade.

But fair-lending advocates say the current rules clearly aren’t working. The law was passed nearly 50 years ago to redress the historical practice of redlining, when the government — yes, it was official government policy — discouraged lenders from extending mortgage loans to Black borrowers. Today, the racial homeownership gap — 75 percent of white Americans own their homes, compared with 46 percent of Black Americans — is actually wider than it was in 1968, when redlining was legal.

“CRA has worked to expand credit opportunities for lower-income white consumers, but it has not been as impactful in helping to close the racial homeownership and wealth gaps,” said Lisa Rice, president and CEO of the National Fair Housing Alliance. Rice wants the new rule to include a focus on racial equity rather than just income.

So while banks have complained that the proposed rule would make it much harder for lenders to get a top CRA grade, regulators counter that that’s sort of the point. “What a bank did before to earn an ‘outstanding’ or ‘high satisfactory’ rating will not be sufficient,” FDIC Chair Martin Gruenberg said last year. “They’re going to have to engage in more lending activity to earn the recognition.”

Still, the final rule is expected to soften the more stringent requirements in the proposal by moderating the scope of the retail-lending assessment area while raising the threshold for the number of loans it takes to trigger CRA obligations.

Fair-lending advocates, meanwhile, fear the final rule may scrap some of the racial-equity provisions of the proposal, which would require banks to disclose information about the race and ethnicity of their mortgage loan borrowers and applications in various assessment areas.

“I’m most worried that the agencies will have weakened their approach to addressing racial equity in the context of CRA,” said Jesse Van Tol, head of the National Community Reinvestment Coalition. “We understand why the regulators have made the decisions they have in terms of not making it more explicitly race based, given recent court challenges…but if we’re going to address redlining it may be limited in what it can do if it’s not explicitly race-conscious.”


A message from Electronic Payments Coalition:

Don’t Let Durbin-Marshall Steal YOUR Data: Senators Dick Durbin and Roger Marshall introduced legislation allowing big-box retailers like Walmart and Target to process credit card transactions based solely on what is cheapest for them, disregarding YOUR data security. Durbin-Marshall would shift billions in consumer spending to higher-risk payment networks, weakening America’s payment system and putting consumers in a vulnerable position. Last year, Congress wisely rejected a similar Durbin-Marshall bill, and they must do so again.


Monday … The Peterson Institute for International Economics holds a virtual launch of the OECD’s 2023 “Going for Growth” report focusing on green investments at 9 a.m. … Assistant Treasury Secretary for International Finance Brent Neiman speaks at SAIS at noon …

Tuesday … Politico hosts a panel with the Commerce Department’s Adrienne Elrod on CHIPS implementation at 8 a.m. … the Fed board meets at 9:30 a.m. to consider the final revised CRA rule … the House Financial Services capital markets subcommittee holds a hearing on the SEC’s agenda at 10 a.m. … the HFSC financial institutions subcommittee holds a hearing on global financial regulation at 10 a.m…. the HFSC housing subcommittee holds a hearing on “the factors influencing the high cost of insurance” at 2 p.m. …

Wednesday … Senate Majority Leader Chuck Schumer and White House Office of Science and Technology Policy Director Arati Prabhakar speak at a Washington Post summit on the rise of AI, 9 a.m. … SEC Enforcement Director Gurbir Grewal speaks at 10 a.m. at the Securities Docket’s 2023 Enforcement Forum, where SEC Chair Gary Gensler speaks at 12:30 p.m. … the House Financial Services digital assets subcommittee holds a hearing on modernizing financial services at 10 a.m. … the Fed Bboard meets at 1 p.m. to consider proposed revisions to its debit interchange fee cap … Federal Housing Finance Agency Director Sandra Thompson speaks at the Bipartisan Policy Center at 1 p.m. … HFSC national security subcommittee holds a hearing on Hamas and Hezbollah sanctions at 2 p.m.

Thursday … Fed Governor Christopher Waller delivers opening remarks at the central bank’s Economics of Payments Conference at 9 a.m. … the House Financial Services oversight subcommittee holds a hearing on “the Iranian Regime's Access to Money Around the World and How They Use It to Support Terrorism” at 9 a.m. … The SEC’s Gensler speaks at the Chamber of Commerce on climate disclosures at 9:15 a.m. … Senate Banking holds a hearing on "Combating the Networks of Illicit Finance and Terrorism” at 10 a.m. …

Friday … Fed Vice Chair for Supervision Michael Barr delivers opening remarks at the Fed’s Economics of Payments Conference at 9 a.m … Goldman Sachs CEO David Solomon and Arkansas GOP Sens. Tom Cotton and John Boozman speak at a Punchbowl News discussion on small businesses in Little Rock.


WSF 2023 will discuss ‘Mastering the New Economy’, examining the ways in which business and society can thrive despite current economic and environmental challenges. The conference will gather 100+ speakers from companies including Volkswagen, Siemens and, as well as U.S. Senator for Tennessee Bill Hagerty; Florida’s Chief Financial Officer Jimmy Patronis; Former President of Colombia Iván Duque Márquez and Former President of Ecuador Jamil Mahuad. Learn more and register now at

Driving the day

Big bank CEOs to launch ad campaign — The Financial Services Forum, a group representing chief executives at eight of the biggest U.S. banks, is kicking off a seven-figure ad campaign today that will try to rally Americans against a planned hike in bank capital requirements by warning about the potential economic impact. Regulators drafted the rules in a bid to safeguard against large bank failures and potential bailouts.

The digital, TV and out-of-home advertising will highlight how, in the Forum's view, the planned rules will hit underserved communities, an inflation-riddled economy and U.S. business competitiveness internationally. The theme: "Another Bill Americans Can't Afford."

The group's members are the CEOs of JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley, BNY Mellon and State Street.

NYT: Investors fret as daunting bond market milestone comes into view: “One of the most important interest rates in the world this week flirted with a level it hadn’t reached in more than 16 years, putting pressure on the economy and the stock market.”

As U.S. debt surges, Europe brings its own under control: “Throughout the Covid-19 pandemic and then Russia’s invasion of Ukraine, both the U.S. and Europe borrowed heavily. Now with those emergencies in the rearview mirror, a divergence has emerged: Even as the U.S. continues to let deficits rip, Europe’s are on track to narrow significantly,” WSJ reports.

Housing's other threat to the economy: WSJ: “The Commerce Department’s report on gross domestic product on Thursday will probably show that housing helped boost economic growth in the third quarter. That shouldn’t mask the fact that what is happening in the housing market is utterly and horribly bad and that the economy is worse off for it.”


A message from Electronic Payments Coalition:

Regulatory Corner

Agencies allow more time for input on bank capital proposal: Bank regulators on Friday announced they will give the public more time to provide input on the proposal that would raise capital requirements for the biggest banks, as the draft faces intense pushback from the industry, Victoria Guida reports.

IRS puts large companies in crosshairs: The IRS has launched new initiatives to increase audits of large companies that may not be paying their fair share of taxes, which will include scrutinizing subsidiaries of foreign corporations that shift profits to other countries to lower their tax bills.


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Fly Around

Central banks search for lessons from the great inflation outbreak: “After the most aggressive monetary-tightening campaign in four decades, academics and economic practitioners are running autopsies on what could have prevented the cost-of-living crisis and how to ensure the same mistakes won’t be repeated,” Bloomberg reports.

Bloomberg: Deals rebound crashes into a new world of risk: “Just when it looked like Wall Street was seeing a rebound in equity fundraising, bankers and would-be issuers are pumping the brakes.”

Judge approves Deutsche Bank settlement with Epstein accusers: “Deutsche Bank on Friday won final approval from a U.S. judge for a $75 million settlement it reached with victims of Jeffrey Epstein who had accused the German company of facilitating the late financier's alleged sex trafficking.” Reuters reports.

WSJ: Will Sam Bankman-Fried bet on his own testimony? “FTX founder Sam Bankman-Fried, known for his appetite for risky bets, is mulling perhaps his biggest gamble yet: testifying in his own defense.”


A message from Electronic Payments Coalition:

CONGRESS: Don’t Let Durbin-Marshall Steal YOUR Data:
Cyber-attacks against consumers are on the rise, with large retailers like Target falling victim to breaches that expose customer information to hackers and foreign countries.

Now, mega-retailers like Walmart and Target want to leave you even more vulnerable to credit card cyber-attacks so they can pocket billions of dollars in additional profits.

After Senator Dick Durbin passed similar routing mandates for debit cards in 2010, the fraud rate for debit cards increased by NEARLY 60%. A similar outcome for credit cards would likely cost OVER $6 BILLION in additional fraud and likely require passing much of the bill onto consumers.

Last year, Congress wisely rejected a similar Durbin-Marshall bill, and they should do so again. Congress must protect consumers, preserve the integrity of the payment ecosystem, and reject this detrimental and unnecessary government intervention into the U.S. payment system.


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Katy O'Donnell @katyodonnell_

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The new front in the battle over fair lending


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