US banking authorities get criticism for their updated guidelines to assess retail lending

 US banking authorities get criticism for their updated guidelines to assess retail lending

To combat redlining and increase lending to low-income communities, top US banking authorities have amended decades-old regulations. 

The historic Community Reinvestment Act from 1977 would finally include internet and mobile banking services under Tuesday's proposal. This implies that authorities will no longer just base companies' ratings for lending to low- and moderate-income neighborhoods solely on the placement of their physical branches. The revamp would also tighten other requirements for large lenders. 

The modifications were accepted on Tuesday by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

Michael Barr, the Fed's vice chair for supervision, said in a statement that the regulation "maintains a focus on evaluating the financial institution's performance in areas wherein banks have deposit-taking facilities, but also facilitates evaluation of retail lending and charitable donations outside of branch networks." He noted that the adjustments will make the guidelines more uniform and clear in terms of their application.

The initiative has drawn criticism from both business and consumer activists since it was unveiled last year. The new loan rating standards, according to banking trade organizations, may make it too difficult to get a high grade. Meanwhile, detractors said the modifications weren't substantial enough. 

Dennis Kelleher, the head of the Better Markets organization in Washington, which often calls for more regulations, said that although the CRA amendments had good intentions, they were unlikely to succeed.

According to Kelleher, "it will probably continue to miss typical redlining cases and allow banks to maintain high, if not perfect CRA ratings while continuing to curtail lending to low- and moderate-income communities."

Bank oversight organizations assess how lenders serve populations of lower income where they operate, which may have an impact on their capacity to create new branches and undertake acquisitions. Weak ratings may prevent this growth, notwithstanding the claim of opponents that banks have long been given excessively favorable grades.

Numerous non-White areas are still neglected, according to data, over 50 years after the CRA's passage. For instance, Black borrowers in low- and moderate-income neighborhoods of the majority of the US's largest cities get disproportionately fewer loans.  

The regulation contains a new criteria to evaluate a bank's closed-end mortgages, car loans, small business loans, and small farm loans in an effort to remedy this. It also simplifies the standards. 

According to the Justice Department, redlining is a discriminatory practice when lenders refuse to give loans and mortgages in regions based on the race or national origins of the residents. This month, the agency said that a campaign against redlining has helped communities damaged by unfair lending practices by more than $100 million.

Provisions in the new regulation that broaden so-called "assessment areas" to concentrate more on lending activities outside of their physical presence in communities have been a source of debate in the CRA revision. According to the rule's detractors, the effect will be minimal because of the shift in retail lending to nonbanks.

Despite the fact that nonbank lenders account for 60% of all mortgage originations, including 75% of all mortgages issued by governments and government agencies, according to research by the Washington-based Urban Institute, the CRA does not apply to them.

Large banks would be required by the regulation to publish on their websites the breakdown of home mortgage loan applications and originations by income, race, and ethnicity for each assessment area using information made accessible to the public under the Home Mortgage Disclosure Act.

According to FDIC Chairman Martin Gruenberg, these reports would provide information about banks' lending in communities of color even though they wouldn't be included into CRA rankings.

Costs of Compliance

The effort's critic, Fed governor Michelle Bowman, said that the final product was an improvement above the original ideas. She said that the idea was too expensive and difficult for her to support, nevertheless. 

"It is entirely possible that companies will reduce their level of lending or operations within those areas if banks will be compelled to comply with new CRA requirements in new destinations, potentially untethered from their deposit-taking footprint," she said in a statement.

She objected to the plan's $2 billion asset threshold for determining which banks would be subject to the CRA. Bowman said that level was insufficient and failed to distinguish between the biggest institutions and smaller community banks. 

Some of the adjustments, according to the Consumer Bankers Association, "could unintentionally impact the consumers we are all trying to help."

The modifications, according to Mehrsa Baradaran, a law professor at the University of California, Irvine, have alerted banks. 

Updates are helpful in reminding banks that redlining is an issue, but the CRA has never been enough, according to the speaker. It had never been a strong reaction to the issue.

A proposal by the Fed, FDIC, and OCC that would require banks with $100 billion or more in assets to highlight their exposure to financial risk connected to climate change was approved on Tuesday. The authorities ask those lenders to think about how they would handle these risks in a variety of areas, including governance, strategic planning, reporting, and scenario analysis.