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

The Community Reinvestment Act, known as the CRA, was crafted to encourage banks to lend in low-income neighborhoods. Under the CRA, regulators routinely look at banks’ lending practices for low- and moderate-income borrowers, so that those with less money also have access to loans to buy houses, cars and make other purchases.

“The CRA is a seminal statute that remains as important as ever as the nation confronts challenges associated with racial equity and the covid-19 pandemic,” Fed Gov. Lael Brainard wrote in a statement. “We must ensure that CRA is a strong and effective tool to address ongoing systemic inequities in access to credit and financial services for low- and moderate-income and minority individuals and communities. ”

Changes to the CRA laws are considered long overdue among banking experts, especially given the rise of online banking. The banking industry has argued that the CRA hasn’t been revised since more customers have shifted to mobile or Internet banking and the number of physical bank branches has been cut back.

Starting with Monday’s early proposal, the Fed is looking for feedback on how to strengthen retail lending to low- and moderate- income communities, where banks can get credit for community development activities and how online banks should be assessed.

The proposal considers ways to assess banks based on size and business model, differentiating large retail banks from smaller rural banks, for example. Brainard, the Fed’s leader on issues related to the CRA, wrote that changes could also clarify that banks can receive credit for partnerships with minority depository institutions and that doing so could be one avenue to getting a top rating.

The Fed is also looking for feedback on ways of designating certain areas, based on persistent inequities, where banks could get credit for community development activities that may lie beyond the boundaries of a bank’s branches, helping to address needs in “credit desserts.”

For Internet banks, which can lend across broad areas without physical locations, Brainard wrote that “a nationwide assessment area” may better fit the CRA’s goals than the current practice of assessing banks based on where they have a headquarters.

Fed board members approved the preliminary proposal at a live-streamed meeting Monday morning. Board members are seeking feedback and providing a 120-day period for public comment.

The Fed’s main policy action rests in setting interest rates, which are already at zero, and many of the Fed’s moves to rescue the economy involve propping up the stock market and ramping up asset purchases. That leaves open questions over how inclusive the Fed’s tool kit is, and how creative its leaders are willing to be. The recession has exerted fresh focus — both from outside the Fed and among its leaders — on how the central bank can fill holes in the economy that have historically left behind low-income communities, and particularly communities of color. That extends to debates over whether the Fed can or should examine the Black unemployment rate or reexamine the CRA.

“We seek to modernize the CRA in a way that significantly expands financial inclusion,” Brainard said in a speech to the Urban Institute on Monday. “By being inclusive in their lending and investing, banks help their local communities to thrive, which in turn benefits their core business.”

There’s agreement among three different financial regulators — the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation — that the CRA should be revised to keep pace with online banking. But there’s plenty of disagreement over how to do so.

In May, the OCC moved to overhaul the anti-redlining law by putting out a rule that would create a more objective framework for grading banks. The rule was swiftly criticized by Democrats and community groups that argued that the rule’s measures were too broad and did not give enough weight to what individual communities need. The Fed has not joined the Office of the Comptroller of the Currency.

“We are encouraged by our fellow regulators joining us in recognizing that we need to act to improve upon a system that was not working and to encourage banks to do more to support the communities they serve,” Acting Comptroller of the Currency Brian P. Brooks wrote in a statement Monday.

Discord over how financial regulators are tackling updates to the CRA has been a point of contention for lawmakers and industry groups alike. In a statement, the American Bankers Association said a unified framework was crucial to addressing credit gaps.

“Joint regulatory action will prevent confusion and avoid unintended consequences for banks and the communities they serve,” ABA president and chief executive Rob Nichols said in a statement.