WASHINGTON—Top U.S. banking regulators have been struggling for more than five years to update anti-redlining rules aimed at making banks lend more in lower-income communities. On Tuesday, they plan to complete a revamp of them for the era of online banking.
The 1977 Community Reinvestment Act sought to end banks’ historical practice of denying or limiting financial services in minority neighborhoods. The current rules—which are nearly 30 years old—generally require banks to serve everyone in the communities surrounding their branches, including lower-income people.
Regulators say those requirements are outdated in a world in which much financial activity happens over the Internet and with mobile phones, so they are updating them to focus more on where banks do business, rather than their physical locations.
“The final rule takes a critical step forward in modernizing the CRA regulations,” Michael Barr, the Federal Reserve’s vice chair for banking supervision, said in a statement.
Banks said a 2022 proposed version of the new rules would have made it too challenging to get the highest rating when regulators assess banks for their compliance with the requirements, potentially leading firms to pull back on their investments in low-income communities. Industry lawyers have compared the dynamic to a professor telling a class that nobody will likely get a perfect test score, leading students to try less to do well in class.
Agency officials told reporters on Tuesday that they had made adjustments to the final version of the rules and that it will be possible for banks to get outstanding ratings.
Fed governor Michelle Bowman said she would vote against the final rules, saying regulators hadn’t proved that banks aren’t doing enough to meet the credit needs of their communities.
“There is no evidence provided to support this premise,” she said in a statement.
The Fed, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are expected to sign off on the requirements on Tuesday. Banks would have until January 2026 to comply with most of the new provisions.
The regulators don’t need congressional approval to rewrite the requirements for banks, but they would for nonbank lenders that aren’t covered by the new rules. Nonbanks offer lots of consumer lending, including mortgages.
The Community Reinvestment Act is one of the top tools the government uses to encourage banks to lend more to low- and moderate-income communities. Banks are typically examined every three years, and a bad grade effectively prohibits mergers. At present, most banks get passing grades on their CRA examinations.
Agency officials told reporters they couldn’t immediately estimate how many would win satisfactory ratings or higher under the new requirements.
The revamp comes as the Biden administration has pledged to do more to address gaps in wealth, incomes and access to financial services between white and Black Americans and other racial minority groups.
Attorney General Merrick Garland last week announced the Justice Department’s 10th settlement since 2021 over discriminatory lending against minority communities. The $9 million settlement with Ameris Bank came over allegations that it avoided underwriting mortgages in predominantly Black and Latino communities in Jacksonville, Fla., and discouraged people from getting home loans there. The bank in a statement said it denied violating fair lending laws and agreed to the settlement to “avoid the distraction of litigation.”
In recent years, the CRA rules have become a source of conflict between community groups that want the rules to be enforced strictly and bankers, who argue the regulations are too bureaucratic and haven’t kept up with technological changes, among other criticisms.
Under existing rules last updated in 1995, banks must lend to lower-income communities in the area around their offices, even though they now accept deposits and make loans around the country via online accounts. This has led to a glut of spending in places such as Salt Lake City, where dozens of banks are based that have no branches elsewhere.
Affordable housing advocates said Monday, ahead of the new rules’ release, that it is unclear if the revamp would increase low-income lending, and that it might take a while to absorb the details of Tuesday’s plan.
“We don’t know if this will be a big step forward or a big step backward, said Benson Roberts, president and chief executive of the National Association of Affordable Housing Lenders.
Tuesday’s plan comes after years of efforts to overhaul the rules.
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In the Trump administration, the Comptroller of the Currency completed a revamp that also sought to modernize the rules for the era of online banking. Critics at the Fed and at other agencies said those changes were rushed and favored large, one-time projects with little benefit to lower-income borrowers or neighborhoods, such as stadium financing, over lots of smaller community development projects. Industry groups also pushed back on the plan, including its data collection requirements.
Those rules were rescinded before banks had to comply, and the Biden administration launched a new rewrite. In 2022, regulators proposed a new version, which aimed to impose requirements on banks where they make a certain amount of mortgage and other loans.
Banks pushed back on the proposal, questioning the complexity of the plan and whether the regulators had the legal authority to impose the requirements away from banks’ branches in places where they make loans but don’t bring in any deposits to “reinvest.”
Agency officials said that the final version includes some changes from the proposal and that they believe they are on solid legal footing with the overhaul.
