“The time is ripe” for reforming federal rules mandating bank service to underserved areas, with goals of achieving better outcomes for banks covered by the rules and low- and moderate-income communities, a Federal Reserve governor said in remarks released Tuesday.
In remarks scheduled for the Federal Reserve Bank of Richmond Baltimore Community Development Gathering in Baltimore on Thursday, Gov. Lael Brainard said the time for modernizing Community Reinvestment Act (CRA) regulations to make them more effective in making credit available in low- and moderate-income areas is here. She said technological and structural changes in the banking industry now allow banks to serve customers outside of the areas with branches that have traditionally defined a bank’s community.
“As we update the rules, it should be possible to achieve better outcomes – both providing banks with the greater clarity and predictability they seek while also facilitating better provision of credit, investments, and banking services in low- and moderate-income areas,” according to the released remarks.
The Federal Reserve as well as other federal banking regulatory agencies (Office of the Comptroller of the Currency [OCC] and the Federal Deposit Insurance Corp. [FDIC]) are all considering updating CRA regulations. Earlier this month, the Treasury Department released its own recommendations for CRA overhaul.
Brainard outlined five outcomes for regulators to aim at as they re-write the rules:
- Modernization of the definition of assessment areas in such a way that the core focus remains the credit needs of local communities. Technological advances and changing consumer preferences have made it possible for banks to serve customers far outside of their physical branches – for example, online and on mobile devices, she said. “Clearly, it is time to find a way to expand the area in which the agencies evaluate a bank’s CRA activities,” she added.
- Encouragement for banks to seek opportunities in areas that are underserved. She said key priorities in any new set of regulations are to eliminate market distortions and to avoid creating new ones. “No matter how we define a bank’s assessment area in the future, new regulations need to be designed and implemented in a way that encourages banks to spread their community investment activities across the areas they serve,” she said.
- Revised regulations should be tailored, recognizing that banks vary widely in size and business strategy and serve communities with widely varying needs. “Banks seek clearer, simpler rules that result in more CRA activity with less burden,” she said. “We believe this can be done while retaining the flexibility to evaluate a bank’s CRA performance in light of its size, business strategy, capacity, and constraints as well as its community’s demographics, economic conditions, and credit needs and opportunities.”
- Greater consistency in examinations and ratings should be sought across the agencies as well as within each agency. She said clarity about the activities that qualify for CRA consideration, the area in which those activities will be considered, and the type of demographic and economic information examiners evaluate “will go a long way toward promoting consistency.”
- Revised regulations should support CRA’s position as one of several mutually reinforcing laws designed to promote an inclusive financial services industry. “As banks seek to meet the credit needs of their entire community, it is important to ensure against discriminatory or unfair and deceptive lending practices,” she said.
“The Federal Reserve is deeply committed to the Community Reinvestment Act’s goal of encouraging banks to meet their affirmative obligation to serve their entire community, and in particular the credit needs of low- and moderate-income communities,” she said in the released remarks. “As we have seen all over the country, when banks are inclusive in their lending, it helps low- and moderate-income communities to thrive by providing opportunities for community members to buy and improve their homes and to start and expand small businesses.”
Speech by Governor Brainard on community development in Baltimore and a few observations on Community Reinvestment Act modernization