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.”