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 22, 2020 04:30 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
    Sola Impact's Martin Muoto and 11001 Vermont (LinkedIn, The Architects Collective)
    Sola Impact plans another 80-unit Opportunity Zone project
    Sola Impact plans another 80-unit Opportunity Zone project
    Cityview CEO Sean Burton, Acore's Anthony Marconi and a rendering of the project (Cityview, Humphreys & Partners Architects, Google Maps)
    Acore behind $81M loan on Cityview resi project near USC
    Acore behind $81M loan on Cityview resi project near USC
    Sola CEO and founder Martin Muoto. (Google Maps)
    Sola Impact plans 84-unit apartment project in South LA
    Sola Impact plans 84-unit apartment project in South LA
    Rendering of 1411 South Flower Street (Housing Diversity Corporation)
    Micro-housing to rise in DTLA Opportunity Zone
    Micro-housing to rise in DTLA Opportunity Zone
    Sean Burton and a rendering of the project (Cityview, Humphreys & Partners Architects)
    Cityview secures funding for nearly 300-unit complex near USC
    Cityview secures funding for nearly 300-unit complex near USC
    The lots of land to be developed to affordable housing (Google Maps, Los Angeles Transit)
    Developer plans 75-unit affordable complex in Pico-Union
    Developer plans 75-unit affordable complex in Pico-Union
    Ben and Jonathan Rocca (Google Maps)
    Rocca Development plans 81-unit rental complex in Hyde Park
    Rocca Development plans 81-unit rental complex in Hyde Park
    Martin Muoto and 4238 S. Western Ave. (Credit: Google Maps)
    Opportunity Zones developer files for South LA resi project
    Opportunity Zones developer files for South LA resi project
    arrow_forward_ios

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

    Loading...