FDIC Balks As OCC Announces Redlining Rule Update

The Federal Deposit Insurance Corporation said Wednesday it will not move forward with revisions to the nation’s anti-redlining law announced moments earlier by the Comptroller of the Currency.

Comptroller of the Currency Joseph M. Otting announced the finalization of a rule to “strengthen and modernize Community Reinvestment Act (CRA) regulations,” saying the rule would make “CRA work better for everyone.”

But the FDIC – which has joint rulemaking authority with the OCC over the law – responded from Chairman Jelena McWilliams moments later, telling banks its focus is on the coronavirus response and not changes to the CRA.

 “While the FDIC strongly supports the efforts to make the CRA rules clearer, more transparent, and less subjective, the agency is not prepared to finalize the CRA proposal at this time,” McWilliams said. “The FDIC recognizes the herculean effort community banks are making to support America’s small businesses and families during this challenging time and encourages financial institutions to work constructively with borrowers affected by COVID-19.”

Community Reinvestment Act

The CRA was enacted in 1977 with the goal of fighting redlining, which is the practice of refusing to issue loans to people based on where they live. Advocates for the new rule say the CRA has not kept pace with the times and no technologies, with updates needed to better support investment in low- and moderate-income communities.

The rule announced by Otting on Wednesday is the culmination of years of work.

“By finalizing the rule to improve the regulatory framework, we will make CRA work better for everyone and are encouraging banks and savings associations to lend, invest, and provide more services in the communities they serve, including low- and moderate-income neighborhoods across our country,” Otting said.

Otting said the rule clarifies “what qualifies for CRA consideration, updating how banks define their assessment areas, evaluating bank CRA performance more objectively, and making the entire process more transparent and timelier. The final rule’s framework will increase support to small business, small and family-owned farms, Indian Country, and distressed areas, and it accommodates banks of all sizes and business models.”

But critics of the proposed rule – led by community groups and Rep. Maxine Waters of California, the chairwoman of the House Financial Services Committee – say it will undermine the CRA by focusing too much on how much money a bank invests in a community over all other factors, including what members of the community say is needed. For example, banks could receive credit for investing in infrastructure projects – and not just homes for low-income individuals.

Getting Credit

At issue is how banks get credit for meeting the lending standards required by the CRA. Otting said the rule will push more money into low-income communities and closing a loophole that gives banks credit for loans to wealthy borrowers who buy homes in those communitites.

But Fed Governor Lael Brainard warned that the OCC 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.”

Otting noted in his statement Wednesday that the rule gives an ample phase-in period and clearly defines the data needed to measure whether banks are complying.

“I want to make clear that the final rule makes no change to our commitment and obligation to fight discrimination and redlining,” he said. “We will continue to address these illegal practices through our fair lending examinations and, when necessary, enforcement authority under applicable laws.”

The American Bankers Association was not pleased that OCC opted to go it alone.

“Stakeholders on all sides have acknowledged that the current CRA regime has failed to keep pace with the evolution of banking and community needs,” ABA President and CEO Rob Nichols said. “We appreciate that today’s final rule identifies a list of activities that qualify for CRA credit that will be effective immediately. Banks and the communities they serve will benefit from this certainty.”

“We have consistently advocated for CRA modernization that encourages banks to invest efficiently and effectively in every neighborhood they serve,” Nichols said. “As the only banking trade association that represents banks of all sizes and charters, we have also advocated for clear and consistent rules for all banks. The fact that only one of the three federal banking regulators overseeing CRA has adopted this final rule means it does not meet that goal.”

The Consumer Bankers Association applauded the OCC for “attempting to bring an analog regulation into a digital world. … The end result lays out a more transparent and objective process for measuring banks’ continued service to their communities.”

“Now that the OCC has issued its proposal, we hope the FDIC and Fed will finish their work and issue a modernized rule consistent with modern banking practices and the needs of today’s consumers.”