Fed wants banks to step up lending in low-income areas

Proposal to overhaul Community Reinvestment Act meant to modernize and strengthen 43-year-old law

National /
Sep.September 21, 2020 07:20 PM
Fed Board Governor Lael Brainard (Getty, iStock)

Fed Board Governor Lael Brainard (Getty, iStock)

The Federal Reserve has proposed modernizing and strengthening a 43-year-old law aimed at encouraging banks to provide loans in low- and moderate-income communities, where homeowners had been subject to the practice of redlining.

Part of the Fed’s proposal to overhaul the Community Reinvestment Act includes creating a four-part test for analyzing bank loans made to those neighborhoods. The plan calls on banks to provide more loans to individuals in low- and moderate-income communities, rather than one-time large investments to these areas.

With its proposal, the Fed is pitting itself against another major banking regulator, the Office of the Comptroller of the Currency.

The OCC released its own overhaul of the Community Reinvestment Act in May, which encourages banks to provide larger investments to projects and developments in distressed areas.

“We must ensure that CRA continues to be a strong and effective tool to address systemic inequities in access to credit and financial services for [low- to moderate-income] and minority individuals and communities,” said Fed board governor Lael Brainard in a statement on Monday announcing the proposed rule changes. The Fed has opened up a 120-day public comment period.

In neighborhoods where redlining was practiced, lenders would draw a “red line” around neighborhoods that, based on demographics, were deemed too risky for federal mortgage loans. Instead of the cheap federal financing available to white families, black homeowners had to seek more expensive loans.

Though the practice was formally outlawed in 1968, its effects are still felt today, where a recent study by Redfin found that homeowners in historically redlined neighborhoods gained less than half as much home equity.

The Fed’s proposed reform comes at a time of heightened awareness around systemic racism and inequality.

Bankers have become increasingly frustrated with the Community Reinvestment Act — which passed in 1977 — arguing the rules should account for an uptick in online banking, and fewer brick-and-mortar bank branches. A poor CRA rating can prevent a bank from opening new branches or completing a merger.

Meanwhile, the Federal Deposit Insurance Corporation has not released its own proposed rule changes yet. The agency said it does not support the final proposal by the OCC — made in May — arguing it could not finalize the rules during a pandemic.

Different plans could mean banks would have to abide by competing rules. Banks under the OCC’s supervision will have to comply with its new rules by Jan. 1, 2023; smaller banks would have another year to comply.





    Related Articles

    arrow_forward_ios
    Census tract 135 and Stellar Management's Larry Gluck (Credit: Getty Images and Stellar Management)
    How a small stretch of land on the Far West Side became an Opportunity Zone
    How a small stretch of land on the Far West Side became an Opportunity Zone
    CrowdStreet CEO Tore Steen and vice president Darren Powderly (Credit: CrowdStreet and iStock)
    Crowdfunding platform launches $20M Opportunity Zone fund
    Crowdfunding platform launches $20M Opportunity Zone fund
    From left: New York Governor Andrew Cuomo, New York State senator James Sanders Jr., and New York City Mayor Bill de Blasio (Credit: Getty Images, iStock, and NY Senate)
    “This program will either be a boom or a bust:” State senator has plans to redesign Opportunity Zones
    “This program will either be a boom or a bust:” State senator has plans to redesign Opportunity Zones
    In 2018, a Brookings Institution study found homes in majority-Black neighborhoods were undervalued by $48,000 on average. (iStock)
    Appraisal Institute taking steps to root out racial bias
    Appraisal Institute taking steps to root out racial bias
    (iStock/Illustration by Kevin Rebong for The Real Deal)
    January home prices up 10% in biggest annual gain in 7 years
    January home prices up 10% in biggest annual gain in 7 years
    (iStock/Illustration by Alexis Manrodt for The Real Deal)
    Mortgage rates surge — and refinance applications sink
    Mortgage rates surge — and refinance applications sink
    (iStock/Illustration by Kevin Rebong for The Real Deal)
    State will use undercover testers to combat housing discrimination
    State will use undercover testers to combat housing discrimination
    Jerome Powell (Getty)
    Powell sees new opportunity to reform low-income lending rule
    Powell sees new opportunity to reform low-income lending rule
    arrow_forward_ios

    The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

    Loading...