Updated Community Reinvestment Act Key to Financial Inclusion

The Community Reinvestment Act (CRA) was last updated in 1995, and since then the way we invest, spend and save money has changed dramatically with technological advancements in the payments industry. The CRA has encouraged institutions covered by the Federal Deposit Insurance Corp. better serve their communities, including low- and moderate-income (LMI) neighborhoods, by increasing financial services in areas that need them most.

Fast forward to May 5 when the Federal Reserve, FDIC and Office of the Comptroller of the Currency (OCC) issued a joint proposal to “strengthen and modernize the regulations” implementing the CRA. The long-awaited proposed reform would finally give banks credit for online banking, adopt a metrics-based assessment approach, stratify the process of assessing a bank’s size and business, better define eligible CRA credit activities and significantly increase data collection and reporting requirements. of some banks.

Modernizing the law has been difficult

Congress passed the CRA in 1977 to prevent banks from denying loans or general banking services to people from low-income areas and/or associated with a certain racial or ethnic group, a practice known as “redlining”. “. Critics say the law forces banks to engage in risky lending practices, while supporters argue it is essential for financial access and inclusion for all Americans.

After a few false starts, the rulemaking process resumed under the Biden administration. Despite coordinated agency efforts, the main challenge remains how to reshape the obligations of the law to accommodate the rise of digital finance.

The CRA currently regulates banks based on their physical location, which has no relevance to electronic banking. With this new proposal, regulators have sought to introduce more flexibility in how banks can meet their obligations.

Public comments are due Aug. 5, with a final rule expected within the next six to nine months.

Moving from branch banking to digital banking

Allowing banks to receive ARC credit for activities outside of their branch-based assessment areas could open the door to historic investments in places largely without bank branches, including poor rural areas. which are primarily black, Hispanic and/or Native American communities. However, many also fear that too much flexibility will lead large swathes of industry to pursue ARC projects where they are most profitable.

Thanks to the internet and the rise of online banking, banks are much less dependent on branches. Customers can make electronic payments and apply for loans from virtually anywhere, while ARC monitoring remains frozen in time.

According to a FDIC report, 34% of people used smartphones as their primary method of accessing financial services, and a further 22.8% used a computer. Between 2010 and 2019, the number of full-service bank branches fell from nearly 95,000 to just over 83,000.

When choosing a new bank, only 30% of American adults cited having a nearby branch as a consideration, while mobile and online banking were cited by 48% and 36%, respectively.

ARC compliance assessments are based on services having physical locations, specifically defined as “the geographic areas where the bank has its head office, branches, ATMs, and surrounding geographic areas in which the bank has issued or purchased the majority of its loans”.

However, this rules out digital lending, leaving out banks with partial or full online lending practices. The new Retail Lending Rating Areas aim to address this scrutiny by rating banks only in the Retail Lending Test.

According to the proposal, if a bank’s performance was judged by where it lent, not branches, 32% of lenders surveyed would receive a “needs improvement” rating, compared to 16% receiving this rating for their retail business. performance.

Legal Implications and Takeaways

The modernization of the CRA could easily be the most impactful banking regulatory measure this year. The proposal represents a major and collaborative step forward for the modernization of existing ARC regulations by US banking regulators. Here are some tips for banks:

  • Express yourself. FDIC institutions and other stakeholders should carefully review the proposal. Affected individuals should consider answering the 180 proposed questions, either individually or through a representative such as a law firm or professional association to help shape these substantive reviews.
  • Size Matters: Banks would need to assess their size class as compliance obligations would vary based on revised asset size thresholds that would be adjusted for inflation each year.
  • Attention, big banks: The proposal could have a significant impact on the compliance obligations of large banks, while granting smaller banks the option of continuing to comply with the existing framework. Larger banks, especially those with limited branches, may want to review their loan data to identify areas that might be considered retail loan assessment areas and determine how well their major loan ranges products serve IMT individuals and communities. Large banks would be subject to additional reporting and record keeping requirements and may want to start assembling the tools necessary to meet these obligations.
  • More loans are small business loans: The proposal would increase the gross annual income threshold by $1 million or less to match the CFPB’s definition of “small business” by $5 million, which could result in significantly more small business lending.

Since 1995, the way we invest, spend and save money has changed dramatically with technological advances in payments. The CRA’s proposal could have a significant impact on the compliance obligations of large banks and others, while giving smaller banks the option of continuing to comply with the existing framework.

In light of the proposal, bank and non-bank lenders should begin to review their lending data and assess how they serve and provide access to low-to-moderate income communities, especially communities of color that continue to be affected by the effects of the global crisis. pandemic and have historically faced significant barriers to accessing credit.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Write for us: guidelines for authors

Author Information

Robin Nunn is a Partner and Co-Head of the Banking Industry Sector at Morgan, Lewis & Bockius LLP. She advises domestic and international banks, investment advisers, broker-dealers, mortgage managers and emerging financial services providers on complex litigation, regulatory, enforcement and transaction issues.

Comments are closed.