Powell sees new opportunity to reform low-income lending rule

Fed chairman hopeful about “harmonized rule” among regulators to modernize anti-redlining law

Jerome Powell (Getty)
Jerome Powell (Getty)

In September, an effort to update a rule encouraging lending in low-income communities turned into a faceoff among three major banking regulators with oversight on the matter.

The Federal Reserve’s proposed overhaul of the Community Reinvestment Act called on banks to provide more loans to individuals in low- and moderate-income neighborhoods. That bumped up against the Office of the Comptroller of the Currency — whose agency head was appointed by then-President Trump — which wanted banks to finance developments and projects in those areas. Meanwhile, the Federal Deposit Insurance Corporation said it was open to reform but wanted to wait until pandemic priorities had subsided.

Now, with a new president in office, a greater level of agreement may be at hand.

“There is an opportunity for a harmonized rule among the three agencies,” Federal Reserve Chairman Jerome Powell said during remarks to Congress on Wednesday. A new overhaul, he added, “will be one that will have broad support among the community of intended beneficiaries.”

Passed in 1977, the Community Reinvestment Act was a way to combat redlining and promote home and business lending in low-income and moderate-income communities and communities of color. Banks that don’t comply receive a low rating, which could complicate opening new branches or completing a merger.

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In the decades that followed, there has been a push to strengthen and modernize a law that came long before the advent of online banking.

Last May, the Office of the Comptroller of the Currency released its proposed overhaul. The agency’s plan drew frustration from bankers and community groups for giving financial institutions the ability to meet their community lending requirements by making loans to a few large projects. Comptroller Joseph Otting — whom Trump nominated and who was confirmed in 2017 — resigned a day after releasing the plan.

It was followed a few months later by the Fed’s proposed revamp. That included a four-part test for analyzing bank loans made to distressed neighborhoods with a focus on providing loans to individuals and small businesses not large projects. While a version of the OCC’s overhaul did take effect in October, it is not being enforced. Banks have until 2023 to comply and there were parts of the update that were not finalized. Now, changes are expected.

Blake Paulson is the new acting comptroller — he has worked there for 35 years — and President Biden has yet to appoint his replacement. Former Treasury Department official Michael Barr is the top contender for the job, according to a report in the Wall Street Journal.