It is also the Trump administration’s latest effort to radically transform the housing market, including a massive plan released this year to shrink the government’s role in making mortgages.
Modernizing CRA will enhance “the ability of banks to deliver services in low- and moderate-income communities consistent with safe and sound operations,” Treasury Secretary Steven Mnuchin said in a statement.
Added Rep. Patrick McHenry (R-NC), the ranking Republican on the Financial Services Committee, “The way Americans save, access, and monitor their money has been revolutionized. ... This update reflects the transformation of banking services.”
Democrats and consumer groups warned the most recent proposal would make it easier for banks to comply with a law meant to stamp out decades of redlining while sapping investment in poorer communities. “This is a major transformation of the law. It upends how the CRA works,” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition.
The proposal was unveiled by Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., which approved moving forward on the proposal at a board meeting Thursday afternoon. “The business of banking has changed dramatically in recent years, and regulations must evolve with the industry,” said FDIC Chairman Jelena McWilliams.
The measure was opposed by a single FDIC board member, Martin J. Gruenberg. The proposal is “deeply misguided” and will “fundamentally undermine and weaken the Community Reinvestment Act,” he said.
Several Democratic lawmakers, including Rep. Maxine Waters (D-Calif.), chair of the Financial Services Committee, organized a caravan to the FDIC board meeting Thursday. The lawmakers wanted “to make sure Trump’s bank regulators know that we’re keeping a close eye on them. They won’t let the banks off the hook on my watch,” Waters said on Twitter.
The effort has also sparked a rare split between financial regulators: The Federal Reserve, which also regulates some banks’ compliance with the law, has yet to sign off.
The Federal Reserve still hopes to reach an agreement with the other regulators to support the proposal, Chair Jerome H. Powell said at a news conference Wednesday. “I don’t know whether that will be possible or not. We’ll just have to see,” he said. “We would certainly not want to create confusion or a sort of tension between the regimes if they do turn out to be slightly different regimes.”
Powell said the Fed is “strongly committed to the mission of ensuring that banks provide credit through their communities, particularly addressing the needs of low- and moderate-income households and neighborhoods. We also think it’s time for modernization."
The public will have 60 days to comment on the proposal.
Under the Community Reinvestment Act, or CRA, regulators periodically examine banks’ lending practices for low- and moderate-income borrowers. A bank may get CRA credit, for example, for issuing a mortgage to a black borrower, financing an affordable-housing project or a small-business loan. Banks given a low rating can be hit with sanctions.
Banks have complained that they are judged too subjectively and don’t often know what types of activities would qualify for credit under the law. The proposal would clarify what would qualify for CRA credit, expand the potential options and potentially give banks more flexibility around what parts of the country the lending would be done in. Banks would also be encouraged to make loans to lower-income borrowers based on where their customers are rather than where the bank has physical branches.
Modernizing the CRA “will enable banks to invest more in communities across the country,” Richard Hunt, chief executive of the Consumer Bankers Association, said in statement. “Increasing transparency, reducing subjectivity and ensuring timely examination results are all important issues addressed in the proposal.”
But Van Tol warned that broadening the definition of what counts toward compliance with CRA could allow banks to focus on projects with the most profit. They “would rather finance a billion-dollar hospital facility than make mortgage loans to low- and moderate-income people,” he said. “The motivations and incentives are going to go places where you can make the most money.”
The existing law should be modernized and simplified, consumer advocates say. But the new proposal would only benefit banks and dilutes the original intention of the law to address redlining, they say.
Redlining persists in 61 metro areas — including Detroit, Philadelphia, Little Rock and Tacoma, Wash., according to the Center for Investigative Reporting. The proposal also comes at a time when research shows that banks are closing down physical branches in black neighborhoods — including high-income ones — faster than in the rest of the country.
Since 2010, the number of bank branches in majority-black areas has shrunk 14.6 percent compared with 9.7 percent in all other communities, according to an analysis by S&P Global Market Intelligence. At JPMorgan Chase, the country’s largest bank, the number of bank branches in majority-black areas fell by 22.8 percent compared with an overall decline of less than 1 percent, the data showed.
The proposal was spearheaded by Joseph M. Otting, the comptroller of the currency, who said Thursday that it would “help ensure CRA remains an effective and relevant tool to encourage more lending, investment, and services in the communities banks serve.”
Otting has previously cited his experience as a banker for prioritizing a remake of the CRA. During the global financial crisis, Mnuchin, a former Goldman Sachs banker, led a team of investors that purchased IndyBank and hired Otting to lead it. But when they tried to sell the bank, which had been renamed OneWest, community groups questioned its CRA compliance, hampering the regulatory approval process.
“I went through a very difficult period with some community groups that didn’t support our community, who came in at the bottom of the ninth inning, that tried to change the direction of our merger,” he said at a banking conference in 2018, according to the Wall Street Journal.