Federal Reserve proposes overhaul of community reinvestment rules on heels of OCC changes

Last modified September 21, 2020. Published September 21, 2020.

The proposed an overhaul of Community Reinvestment Act rules on Monday, following closely behind a separate set of new regulations that may complicate compliance for banks.

The Fed’s proposed rules seek to clarify and expand types of activities that are credited under the Community Reinvestment Act, which helps to direct money toward minority-owned and women-owned banks and financial institutions, community development institutions and credit unions serving low-income communities.

Recently, the U.S. Office of the imposed its own new set of community lending regulations, which are set to take effect in October. It is unclear how the two new regulatory schemes would operate together and whether they might create conflicts for financial institutions.

In proposing its new community investment rules, the Fed was interested in addressing banks that may have operations and accounts across the country despite a limited physical office and branch presence.

The proposed rules “designate certain areas, based on persistent inequities, where banks could receive credit for community development activities that often lie beyond the boundaries of a bank's branches,” said Fed Governor Lael Brainard in a speech on Monday. 

“For instance, many of the places that I have visited, such as in the colonias, the Mississippi Delta, Appalachia and Indian Country, have few bank branches and are located outside of branch-based assessment areas. Banks need to be confident about receiving CRA credit to seek out activities and investments in these areas,” she explained.

Similarly, the OCC’s new rules also seek to better address underserved areas. That agency oversees roughly 70% of the banking activity governed by the Community Reinvestment Act, including that of major banks like JPMorgan Chase and Wells Fargo. The U.S. Federal Reserve and U.S. Federal Deposit Insurance Corporation each oversee around 15% of covered banking activity.

The Community Reinvestment Act, signed into law by President Jimmy Carter in 1977, aimed to address lending inequities and discrimination toward low-income communities, particularly redlining, a practice in which lenders actively avoided low- and middle-income communities. 

The act directs certain federal agencies to create compliance rules and regulations on lending practices where the bank is chartered. A bank’s status regarding these rules is factored into applications for mergers and acquisitions, as well as new branch openings.

In May, the OCC finalized a slew of changes without the buy-in of the other agencies. The rules, which go into effect on Oct. 1, broaden the range of activities for which banks can receive credit for community reinvestment. 

This drew pushback from Democratic and housing advocates, who claimed that the OCC’s rules would allow banks to satisfy requirements with a small number of large investments. The House of Representatives passed a law blocking the rules, and the National Community Reinvestment Coalition sued the Office of the Comptroller of the Currency over the changes in June.

“I’m deeply concerned that the OCC’s final rule will harm low-income and minority communities that are disproportionately suffering during this [COVID-19] crisis, effectively turning the Community Reinvestment Act into the Community Divestment Act,” said Chair Maxine Waters (D-Calif.).

Joseph Otting, who championed the rule updates, stepped down as comptroller of the currency shortly after the rules were finalized.

The Federal Reserve’s proposal differs from the OCC’s by apportioning credit to lenders based more on the quantity of loans to covered communities and institutions, rather than the size of the loans, with an eye toward retail lending.

The Fed proposed separate retail and community development tests for large retail banks, to shine a light on how banks are addressing each of these goals of the act. It also sought to expand credit access to minority communities, which are disproportionately unbanked and underbanked, and to create special provisions for minority- and women-owned banks, and low-income credit unions.

Acting Comptroller of the Currency Brian Brooks welcomed the Fed’s proposed changes.

“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,” he said, noting that the two sets of rules share many of the same principles. 

Federal Reserve Chair Jerome Powell indicated that the rules from the two agencies could be harmonized at some point.

“This proposal is an important step forward in laying a foundation for the agencies to build a shared, modernized CRA framework that has broad support,” said Powell on Monday. 

The Fed will accept comments on the proposed changes for 120 days.