“If the past is any guide, major updates to the CRA regulations happen once every few decades. So it is much more important to get reform right than to do it quickly,” Brainard said.
The comment appeared aimed at a rival proposal unveiled last month by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. that sparked a rare public rift between financial regulators. The OCC and the FDIC moved forward with their proposal without reaching consensus with the Federal Reserve and is giving the public 60 days to comment on their plan, rather than the typical 90 days.
Under the Community Reinvestment Act, 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 offering a small business loan. Banks given a low rating can be hit with sanctions.
The banking industry has long complained that the law hasn’t kept up with the industry’s evolution as more of their customers have shifted online and the number of bank branches has dwindled across the country.
Under the overhaul proposed last month by the OCC and the FDIC, regulators would clarify and expand what qualifies for CRA credit and give banks more flexibility in deciding where to invest. The regulators called their proposal a needed modernization of the law that would make it easier for banks to expand lending in low- and moderate-income neighborhoods.
But Brainard said the OCC and FDIC approach “runs the risk of encouraging some institutions to meet expectations primarily through a few large community development loans or investments rather than meeting local needs."
The Federal Reserve’s approach would establish more-qualitative standards and be tailored to local conditions, Brainard said. It also emphasizes how many loans banks make and not just their dollar value. “The value of these services may vary greatly from community to community,” she said.
Brainard said the Federal Reserve is still deciding whether to formally introduce its alternative proposal, which could leave banks complying with different sets of rules. It publicly laid out its approach so that it could be considered as the OCC and the FDIC moved forward with their proposal, she said.
“It’s important to eventually find common ground,” Brainard said. “But I think we want to make sure that any [rules further] the core purposes of the statute.”
The OCC declined to comment on the Fed proposal. In a statement, the FDIC said the agency “appreciates the contributions of the Federal Reserve throughout the extensive discussions that were incorporated heavily in the recently released proposal. We look forward to continuing those conversations as the process continues.”