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Bank regulators aim to narrow gaps in access to loans

Policymakers are proposing updates to the historic Community Reinvestment Act, which aims to encourage banks to lend in low-income neighborhoods.

Federal Reserve Board Governor Lael Brainard testifies on Jan. 13, 2022, at a confirmation hearing. The Fed and other banking regulators are proposing reforms to a 1977 law designed to encourage banks to lend to low- and middle-income borrowers. (Elizabeth Frantz/Reuters)
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The Federal Reserve and other top banking regulators are moving to revamp an anti-redlining law to help expand access to credit, investment and banking services, especially for communities of color.

The action comes as the Fed is under growing pressure to foster an economy that works for all Americans. The Fed’s blunt tools, such as interest rates, can’t narrow specific racial and economic gaps. But a historic 1977 law known as the Community Reinvestment Act gives the Fed some crucial tools to address gaps in the banking sphere, especially for low- and moderate-income households and businesses.

The proposal — released jointly Thursday by the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation — would refine rules that make sure banks are carrying out their responsibilities in all parts of the country, including in rural areas or in Native American communities.

Fed aims to revamp laws ensuring access to credit for low- and moderate-income families

The long-awaited changes would also modernize the 45-year-old law. The last major revisions to these regulations were made in 1995, and changes to the law are considered long overdue since the rise of online banking and closures of physical bank branches, which disproportionally leave lower-income Americans with less access to financial services.

The proposal tweaks standards for larger banks vs. smaller ones and looks at how fairly larger banks, in particular, conduct business in mortgage and small-business lending.

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The law was originally intended to encourage banks to lend in low-income neighborhoods. It requires regulators to look routinely at banks’ lending practices for low- and moderate-income borrowers, so that people with less money still have access to loans to buy houses and cars and make other purchases.

The Fed’s new efforts to refine the law come in the wake of the pandemic, when Americans’ ability to get stimulus payments or unemployment benefits often depended on their ability to access financial services. In a statement, Fed Governor Lael Brainard noted that most Americans received stimulus payments through direct deposit. But people without bank accounts had to wait for debit cards or paper checks to come through the mail, and they often paid hefty fees to cash those checks once they arrived.

And, when it came to accessing credit, small businesses generally had an easier time accessing loans from the Paycheck Protection Program — a multibillion-dollar government effort to help small businesses survive temporary closures and layoffs at the height of the pandemic — if they already had relationships with banks, Brainard said.

“The pandemic demonstrated clearly the importance of access to financial services for low and moderate income households,” her statement said.

Agency officials emphasized the benefit of having each of the regulators unveil a proposal together, so that the rules can apply across the entire banking industry. Officials are accepting public comment on the proposal through Aug. 5. It is unclear what parts of the framework could change, but one top Fed official already noted some hopes for improvement.

Fed Governor Michelle Bowman said “several provisions” would impose higher costs on banks with assets above $10 billion by requiring them to collect and report extensive new information on deposit accounts, car loans, banking services and branches.

“While I support issuing the proposed rule for public comment, there are significant unanswered issues posed by the proposal. Fundamentally, we do not know if the costs imposed under the proposal will be greater than the benefits,” Bowman said in a statement.