Proposed banking rules need to be amended

A proposal by federal regulators updates but weakens the rules that are used to evaluate whether banks and credit unions discriminate in lending in low-income communities. It needs to be amended before it is adopted.

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. propose to revamp the regulations behind the Community Reinvestment Act of 1977.

Under the changes, banks would be encouraged to make loans to lower-income borrowers based on geographic concentrations of their deposits, a change from a current requirement that banks meet lending rules for all income levels of residents near their branches.

This modification would make it easier for banks to comply with the CRA. Banks contend the existing regulations are too burdensome and haven’t kept up with technological advances, such as online banking and lending. Community groups, however, want the current rules enforced better.

Oddly, the two regulators released the proposal without the agreement of a third regulator, the Federal Reserve Bank.

And the Fed, which oversees 15% of CRA lending activity — compared with 70% under the OCC — released its own rules, seeking to encourage large lenders to make a lot of loans in low-income areas, rather than a small number of big loans, as under the OCC and FDIC’s new guidelines.

The CRA was enacted to confront redlining, a discriminatory practice in which banks refuse to extend loans in poor neighborhoods or offer loans at higher interest rates.

Federal regulators assess every three years what types of loans and other business banks do in places where they have branches and ATMs.

If a bank gets a bad assessment, the rules effectively prohibit the bank from mergers and could result in a prescribed course of action for it to improve its lending practices to lower-income communities.

The National Community Reinvestment Coalition told The Washington Post that banks approved an average of $78 billion a year between 2012 and 2017 in community development loans and $55 billion a year in small business loans in low-income areas.

The proposed changes by the OCC and FDIC would still require banks to lend in lower-income areas near branches, but the institutions would be judged on all of their activities including in other areas where they have significant customer deposits.

Regulators are to develop a list of approved activities under the new regulation, and banks would be able to get preapproval from regulators for CRA projects.

The new OCC and FDIC proposal could allow banks to get credit for activities that the rules so far have disallowed, including offering mortgages in high-cost areas, outside of traditional CRA areas.

Critics think this change will divert regulators’ attention from initially intended CRA duties.

The public has until mid-February to comment on the changes, which later could be revised by regulators.

The regulations need to be updated, but the proposed changes need to focus on fairness in lower-income lending and not allow unrelated factors to be included in CRA assessments.