Outdated bank law getting update for modern era

NEW YORK — The three major U.S. banking regulators said Thursday they plan to rewrite much of the outdated regulations tied to a decadesold banking law designed to encourage lending to the poor and racial minorities in the areas where banks have branches.

The stated aim of the overhaul of the Community Reinvestment Act by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. is to “strengthen and modernize” the law and end years of uncertainty about its regulations for both the banking industry and advocates for traditionally underserved communities.

The Community Reinvestment Act was passed in 1977 to address redlining — a racist practice used by the financial industry to avoid lending to certain neighborhoods. Redlining still happens to this day, with banks large and small avoiding lending to low-income areas, even though they take money from those neighborhoods through deposits.

When the CRA was enacted, bank branches were one of the few ways to measure a bank’s presence in a community. The law was last revised in the mid-1990s, when online banking was in its infancy. But there are now banks that have zero physical branches, making it more difficult to measure what constitutes a bank’s presence.

Under the current law, banks are assessed on how well they lend where they are physically located. That has led to a large amount of community reinvestment dollars flowing into places like Salt Lake City, a popular place for digital banks to headquarter their operations, while neglecting cities where these banks might actually be making their loans.

In addition, the law rewards banks that make mortgages and small-business loans in their communities but is murky about what other types of loans or activities can count as community reinvestment.