Treasury proposes updates to law meant to boost lending in poor communities

The Treasury Department on Monday called on federal regulators to update a 1977 law meant to prevent mortgage discrimination and encourage banks to invest in struggling areas in which they operate.

Treasury released close to a dozen recommendations of ways federal regulators could update the Community Reinvestment Act (CRA) to reflect the fundamental changes in banking seen since its passage more than 40 years ago. The department said the law is too rigid and outdated.

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“Treasury believes it is important that a bank’s CRA activity align with the needs of the communities that it serves, is made in a manner consistent with a bank’s safety and soundness, and is subject to efficient and effective supervision that does not create unintended disincentives to serving communities as intended by the statute,” the department wrote.

Under the CRA, federal regulators judge banks on what proportion of their lending and investments go toward low-income customers and neighborhoods. Banks are graded on a subjective scale by inspectors and repeated shortcomings could lead to imposed growth restrictions or other penalties.

Regulators appointed by President Trump have pledged to change the way the law is enforced by setting clear standards and expectations for banks and broadening the types of financial products that count toward CRA compliance.

Democrats and groups supportive of strong CRA enforcement on banks have expressed concerns about the administration’s plans and fear a weakening of the law. 

Treasury’s proposal of changes, released in a Tuesday memo to the Office of the Comptroller of the Currency (OCC), is the latest step in that process.

Comptroller of the Currency Joseph Otting, a former bank president, said the OCC is working the formal process of revamping the CRA, while Randal Quarles, the Federal Reserve Board’s vice chair of supervision, spoke out in favor of updates in a speech last week.

The recommendations focus on four goals: improving assessment areas (the geographic regions each bank is supposed to serve), expanding the types of bank activity that count toward the CRA, bringing CRA reviews in line with other regulatory inspections and clarifying how banks are graded on compliance.

Treasury called on regulators to broaden the assessment areas where banks are graded on their prominence to reflect massive changes in the industry. The department argues that the CRA, written when most banks were primarily local institutions, doesn’t fit an era dominated by national retail banking giants and other regional powerhouses.

Treasury said regulators should focus less on the number of branches a bank has in low-income areas and more on the ways they serve vulnerable consumers beyond brick-and-mortar operations. Such changes could give banks more credit for lending to and investing in struggling consumers and businesses through online platforms and other technology.

“CRA’s concept of community should account for the current range of alternative channels that exist for accepting deposits and providing services arising from the ongoing evolution of digital banking,” Treasury wrote.

“Treasury believes that such an approach could be applied effectively to traditional banking organizations using alternative delivery channels, wholesale and limited purpose banks, and emerging ‘branchless’ banks.”

Treasury also asked regulators to consider a bank’s efforts to extend “more complex, innovative, or infrequent types of products and services,” such as letters of credit and loans to infrastructure projects, in their CRA assessments of banks. It also asked agencies to shift away from subjective analyses of a bank’s CRA-related activity and impose more consistent statistical standards.

Bank trade groups that advised Treasury on the recommendations praised the report as providing much-needed updates.

Rob Nichols, president and CEO of the American Bankers Association — the top lobbying group for the U.S. banking industry — said he’s “pleased that this report recognizes changes in mobile technology and the many innovations banks have developed to serve their customers.”

Richard Hunt, president and CEO of the Consumer Bankers Association, said “bringing the law into the 21st century would allow banks greater flexibility to use mobile, online and other digital technologies to better interact with and serve consumers in their local communities.”