Overhaul of anti-redlining law proposed
Trump administration’s latest effort to transform bank loans, housing market
Financial regulators appointed by the Trump administration proposed Thursday an overhaul of a 40-year-old antidiscrimination law, potentially upending the way banks make loans to low-income communities.
The proposal is another big win for the banking industry, which has argued for years that 1977’s Community Reinvestment Act was outdated and didn’t account for the popularity of online banking. Under the proposal, the industry would gain new flexibility when attempting to comply with the law aimed at stamping out redlining, in which banks either refused to lend to people in minority neighborhoods or charge those borrowers more.
The proposal is the Trump administration’s latest effort to radically transform the housing market, including a massive plan released earlier this year to shrink the government’s role in making mortgages.
Democrats and consumer groups warn the most recent proposal would make it easier for banks to comply with a law meant to stamp out decades of redlining. “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. It has 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, Chairman Jerome Powell said at a press 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.”
After the proposal was released Thursday, a spokesperson for the Fed said: “Any modernization of the Community Reinvestment Act must further the goal at the heart of the statute — encouraging banks to meet the credit needs of local low- and moderate-income communities. We look forward to studying the public comments on the rule proposed by the OCC and FDIC. At this time, no decisions have been made about how the Federal Reserve will proceed.”
The public will have 60 days to comment on the proposal.
Rep. Maxine Waters, DCalif., chair of the Financial Services Committee, said in a statement before the proposal was officially released: “We are concerned that the changes … will make it easier for banks to pass their CRA exams, weakening their obligation to responsibly serve communities across the country. It is critical that the banking regulators do not jam through their proposal without giving the public ample time to weigh in, or without coordinating with the Federal Reserve.”
Under the Community Reinvestment Act, or CRA, regulators periodically examine banks’ lending practices for low- and moderateincome borrowers. A bank may get CRA credit, for example, for issuing a mortgage to a black borrower, financing an affordablehousing project or a smallbusiness 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 loans would qualify for credit under the law. The proposal would clarify what would qualify for CRA credit 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 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.”
Joseph Otting, comptroller of the currency, said the proposal will “help ensure CRA remains an effective and relevant tool to encourage more lending, investment, and services in the communities banks serve.”
He noted the agency had worked on the issue for more than 18 months. “Today’s proposal is an important step toward making CRA work better for everyone.”
Treasury Secretary Steven Mnuchin echoed those comments in a statement. “Today’s announcement by the OCC and the FDIC is an important step in improving the CRA and enhancing the ability of banks to deliver services in low- and moderate-income communities consistent with safe and sound operations. Community needs and the banking landscape have changed dramatically since the CRA was passed more than forty years ago.”
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 moderateincome 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, Arkansas; and Tacoma, Washington, 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% compared with 9.7% in all other communities, according to an analysis by S&P Global Market Intelligence. At JP Morgan Chase, the country’s largest bank, the number of bank branches in majority-black areas fell by 22.8% compared with an overall decline of less than 1%, the data showed.
Otting has cited his experience as a banker for prioritizing a remake of 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.