U.S. regulators are set to crack down on banks over the communities they serve through online lending.
The measure is part of a broader effort to update fair lending standards established by the Community Reinvestment Act of 1977 (CRA). The updated regulations aim to prevent redlining, a discriminatory act in which certain areas, primarily populated by minorities, are denied loans or offered limited lending options by banks.
CRA regulations are critical in assessing banks’ overall performance. A below-average score can cause a lender to fail, preventing it from participating in mergers and other major transactions.
The modernized rules expanded the geographic areas in which lenders must extend their services, with a particular focus on low-income Americans. That will inevitably make it harder for banks to earn high marks in CRA compliance assessments. The essence of the law, designed to prevent redlining, is to ensure that banks do not discriminate in their lending practices. Federal Reserve Vice Chairman for Supervision Michael Barr said, “The final rule is a critical step in modernizing CRA regulations to help ensure that banks meet the needs of all the communities they serve.”
Previously, CRA scores were determined based on how well banks served the low-income communities in which they had branches. However, with the advent of the digital age, this will now include how well they serve these communities through online and mobile lending, particularly when they offer a significant number of mortgages and small business loans. Some simplifications have been made in the final rule to make the higher scores more achievable. The implementation date for most of the requirements has been set for 2026.
Randy Benjenk, a partner in banking regulation at law firm Covington & Burling, said, “The final rule includes some revisions to the proposal that industry commenters had requested, but still expands the CRA to geographies and areas of interest that have never been covered before.”
In an effort to bring greater clarity and consistency to the scoring process, the new rules will ensure that a list of activities is provided to banks to enable them to understand where they can obtain credit under the CRA scoring system. Comments may also be sought on whether an activity is counted.
Despite the clarification, some banks have expressed concerns. Lindsey Johnson, executive director of the Consumer Bankers Association, said: “We urge regulators to carefully consider compliance constraints that could lead to reduced lending and extend the implementation deadline, given the significant time and resources required for banks to comply with a complex new rule.”
In related news, the Federal Deposit Insurance Corporation (FDIC) approved guidelines on how large banks should assess climate-related financial risks, echoing a proposal introduced in 2021.
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