Modernizing Community Reinvestment Act Regulations

by | Oct 26, 2023 | Business Finance, Business Strategy, Resources | 0 comments

Modernizing Community Reinvestment Act Regulations

The U.S. financial regulatory landscape is witnessing a significant shift. The regulators are introducing stricter rules to modernize fair lending standards, specifically focusing on online lending.

The New Era of CRA Compliance

The 1977 Community Reinvestment Act (CRA) regulations have undergone an overhaul. This change marks the end of a contentious multi-year effort that saw delays due to intensive lobbying by community groups, lenders, and changes in the presidential administration. The updated CRA regulations will broaden the geographies where lenders are required to extend loans and other services to low-income Americans. This means it will be more challenging for banks to receive top marks for CRA compliance.

The CRA was initially conceived to prevent redlining, a discriminatory practice where banks limit or refuse lending to certain areas or populations, primarily minorities. The CRA regulations are a central part of a bank’s overall supervisory performance, and poor CRA grades can land lenders in a so-called penalty box, barring them from conducting mergers and other deals.

A Step Towards Inclusive Banking

“The final rule takes a critical step forward in modernizing the CRA regulations to help ensure that banks meet the needs of all the communities they serve,” said Federal Reserve Vice Chair for Supervision Michael Barr. This sentiment was echoed by the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, which approved the proposal on the same day.

Historically, CRA grades focused on how well banks serviced low-income communities where they have branches. Now, banks will also be graded on how well they service low-income communities where they provide many mortgages and small business loans through online and mobile lending.

Streamlining the Grading Process

The final rule simplifies the grading process to make higher grades more achievable. The implementation date has been extended, with most requirements becoming effective in 2026.

The updated rules aim to provide a more consistent process for grading banks’ performance, addressing industry complaints that the previous regime could be opaque and subjective. Regulators will now provide a list of activities for which banks can receive credit under the CRA grading system and allow them to seek feedback on whether an action would count.

However, banks have expressed concerns about the final rule, urging regulators to consider the compliance burdens that could lead to reduced lending.

In a separate development, the FDIC approved new guidance on how large banks should consider climate-related financial risks, a proposal first put forward by regulators in 2021.

In conclusion, these changes to the CRA regulations signify a move towards more inclusive banking, with an increased emphasis on serving low-income communities and a more transparent grading process. However, the industry awaits to see how these changes will be implemented.

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