Rules for Lending to the Poor Under Review

April 3, 2018

The Trump administration kicked off plans to revamp lending rules in lower-income communities with a proposal that would make it easier for banks to comply with a decades-old law that has long confounded the industry.

The Treasury Department, in a memo released Tuesday, said the 1977 Community Reinvestment Act hasn’t kept pace with the evolving banking sector. The law, which was passed to stop “redlining,” a form of lending discrimination, is enforced by a complicated series of regulations. Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting, who both dealt with the law as executives at OneWest Bank, now a part of CIT Group Inc., have said altering the rules is a priority.

Under the proposed changes, banks would be held to more objective, numbers-based standards for complying with the law, compared with the current approach where large parts of the exam hinge on regulators’ subjective judgments. The changes would also make it easier for banks to meet certain lending requirements and lower penalties for compliance problems.

Since its inception, regulators and Congress have turned the CRA into an extensive public test evaluating how many loans, branches and investments a bank has to serve the poor. The test uses complex formulas to grade banks, looking at mortgage data, branches in lower-income areas and loans to build apartments. Bad grades mean restrictions on banks’ activities, including mergers.

The report suggested broadening the loans and investments that count toward the exam, something bankers have requested. “Treasury believes that by expanding the types of loans, investments, and services eligible for CRA credit and clarifying the eligibility criteria, the timeliness of ratings can improve,” the report 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,” said Richard Hunt, head of the Consumer Bankers Association.

The OCC, Federal Reserve and Federal Deposit Insurance Corp. are involved in CRA oversight. Those agencies must now develop and release their own proposals to advance any changes to the rules.

Other proposed changes could free banks from some costly commitments they have had to make under the current CRA regime. For instance, banks often keep many branches open in poorer neighborhoods to get a good grade on the exam, even though these branches are far less lucrative than those in richer neighborhoods.

Treasury suggested making the evaluation of a bank’s branch locations a less important part of the test. “Advances in technology have reduced the need for branch-based services and have lessened community reliance upon traditional ‘brick and mortar’ branches,” said the report, which was written after consulting banks, trade groups and community groups.

Some of the suggested changes would also diminish the incentive for banks to enter into multibillion-dollar CRA plans with local community groups. These expensive plans, which include commitments to make a certain amount of loans or investments in poorer parts of a community, have come to be seen by many lenders as a necessary step to get a merger approved or improve a bad CRA rating. Treasury suggested that regulators clarify that such a plan is “just one tool for demonstrating how a bank will meet the convenience and needs of the community, but that it is not required.”

Some changes have already gone into effect. Last year the OCC made it harder for banks to be penalized for reasons not directly tied to lending under the law. It also suggested that in certain circumstances, banks with a bad community-reinvestment rating could still expand. The report proposed all banking regulators make similar changes.

Treasury also proposed that ratings are given out in a more timely manner. Out-of-date evaluations are seen as a problem by community groups and bankers. Many banks’ current ratings are based on data from many years ago.

In a small win for consumer advocates, the Treasury  also recommended that regulators review banks’ abilities to distance themselves from bad lending practices by their affiliates. Currently, banks can disavow the activities of an affiliate so that they don’t affect their overall community reinvestment grade.