On Thursday, the three largest U.S. banking regulators shared that they are planning a major rewrite of racist regulations attached to the Community Reinvestment Act. The law, which was passed in 1977, was used to combat the racist practices used in finance to avoid lending to certain neighborhoods.
This was also known as redlining, where lenders would draw a “red line” around neighborhoods categorized as hazardous for federal mortgage loans based on demographics. It ultimately forced Black homeowners to seek out more expensive loans. However, the CRA promoted predatory lending practices to low-income and minority neighborhoods.
It was last revised in the 90s, meaning it doesn’t acknowledge the creation of mobile and online banking with its guidelines. The proposal would update rules around lending to take these changes into account. Currently under the law, banks are evaluated on how much they lend to the neighborhoods in which they are located. It also rewards banks that make small-business loans and mortgages in their communities.
A low CRA rating can prevent a bank from opening new branches or completing a merger. With prompting from the Biden administration, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are working together to reassess the fairness of the law its concerning vulnerable populations.
“Today’s proposal seeks to expand access to credit, investment, and banking services in [low- and middle-income] communities,” said soon-to-be Federal Reserve Vice Chairwoman Lael Brainard in a statement. It would also implement four new performance tests to assess large bank CRA performance: the Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test
The proposal seeks public comment through August 5. It is scheduled to take effect a few months after publication in the Federal Register.