WASHINGTON -- A Federal Reserve governor on Wednesday outlined the central bank's approach for rewriting rules that govern lending to poor communities, laying out a plan that differs significantly from one floated by fellow industry overseers last month.
The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued a joint proposal in December for the first major revamp in a quarter-century of the 1977 Community Reinvestment Act. The Fed, concerned about the changes and the rushed process, declined to sign on.
Instead, a Fed governor, Lael Brainard, set out the institution's own alternative -- one that would explicitly prevent big banks from satisfying requirements simply by funding a few big-dollar projects, a point of concern community groups have raised about the other regulators' proposal. In a speech delivered in Washington, Brainard voiced hope that the Fed's design would be included alongside the one already aired, "in order to seek public comment on a range of options."
She made a veiled allusion to the other agencies' process, noting that "major updates to the regulations happen once every few decades."
"So it is much more important to get reform right than to do it quickly," she said.
The act was designed to prevent "redlining," systematically refusing to offer credit or insurance in an area on a discriminatory basis, such as the race or ethnicity of its residents.
Under the act, regulators periodically examine banks' lending practices for low- and moderate-income borrowers. A bank may get Community Reinvestment Act credit, for example, for issuing a mortgage to a black borrower, financing an affordable housing project or offering a small-business loan. Banks given a low rating can be sanctioned.
The banking industry has long complained that the law hasn't kept up with the industry's evolution as more customers have shifted online and the number of bank branches has dwindled across the country.
Banks have called the act's requirements burdensome. Banks that do not meet the requirements face heavy regulatory scrutiny and can have difficulty getting approval for mergers or expansions.
The FDIC and Comptroller of the Currency's December proposal would give banks credit for making loans to hospitals and other large institutions that do not currently qualify. It also would do away with a detailed metric for assessing banks' activities, instead taking their total Community Reinvestment Act-related spending amounts as the starting point for evaluation.
Brainard said that approach "runs the risk of encouraging some institutions to meet expectations primarily through a few large community development loans or investments rather than meeting local needs."
The Fed's approach differs substantially. Retail banks would be evaluated under one test that would assess a bank's record of providing loans and retail banking services in its area.
Brainard said that the Fed wants to "ensure that small-scale, high-impact community development activities are rewarded, along with a bank's responsiveness to local needs and priorities."
The Federal Reserve's approach also emphasizes how many loans banks make, not just their dollar value. "The value of these services may vary greatly from community to community," Brainard said.
Should the Comptroller of the Currency and FDIC's changes be enacted without the Fed's support, they would create two sets of rules: one for those overseen by the central bank and one for those overseen by the other two agencies -- an outcome regulators at the central bank hope to avoid.
Information for this article was contributed by Jeanna Smialek and Emily Flitter of The New York Times and by Renae Merle of The Washington Post.
Business on 01/09/2020