October 24, 2023

By Georgia Kromrei, Law360

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Banking regulators Tuesday approved a long-awaited regulatory overhaul of the Community Reinvestment Act, and although the federal anti-redlining statute was intended to correct past racist housing policies, the rule will not explicitly consider race in its assessment of bank lending practices.

The Federal Reserve Board approved the final rule in a 6-1 vote, while the other two federal agencies that regulate banks, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., are expected to follow suit.

Gold Federal Reserve Board seal

Among the 950 commenters who expressed their opinion during the agencies’ crafting of the regulation, many raised concerns that the regulation would not be able to close the racial homeownership gap — the difference between minority homeownership rates and the white homeownership rate — without expressly considering race.

Many commenters noted that the gap is wider now than it was before redlining was outlawed in 1968. That may be an understatement: According to the National Bureau of Economic Research, the racial homeownership gap is even greater now than it was in 1890.

But the agencies will not consider race or ethnicity in its examinations of banks’ lending practices, instead continuing to focus on low- and moderate-income communities. In assessments, banks are judged in comparison to their peer institutions. Regulators then take exam performance into consideration when banks apply for merger approval.

Redlining has also been brought to the fore by the U.S. Department of Justice’s efforts to combat modern-day redlining.

The agency this week reached a milestone of $107 million in settlements with financial institutions for redlining. Nikitra Bailey, executive vice president of the National Fair Housing Alliance, a trade association for fair housing organizations, said the anti-redlining statute needs to be interpreted more expansively, to craft regulations that serve “entire communities, not just some.” She also noted that many financial institutions made bold public statements to address racial equity in the wake of the protests surrounding George Floyd and Breonna Taylor’s deaths.

“This is a missed, once-in-a-generation opportunity,” said Bailey.

In a statement, Jesse Van Tol, CEO of the National Community Reinvestment Coalition, a group that has in recent years sought to block regulatory approval of bank mergers by raising claims of redlining, said it was a “deep disappointment” that the new CRA statute does not explicitly address race.

“CRA was always intended to end racist practices and reverse their impacts on families and communities,” Van Tol said.

Dennis Kelleher, the CEO of Better Markets, a nonprofit organization that pushes for financial reform, said the final rule is “well intentioned but is not likely to work.”

“It will likely continue to miss classic cases of redlining and enable banks to continue getting high if not perfect CRA ratings while continuing to reduce lending to low- and moderate-income communities,” Kelleher said.

Buzz Roberts, the CEO of the National Association of Affordable Home Lenders, said the agencies’ decision was “sensible, but regrettable.”

“It’s regrettable that a civil rights law can’t be used to advance civil rights in a direct way,” Roberts said. “Unfortunately, that’s probably the right conclusion in the context of recent Supreme Court rulings.”

In explaining their thinking on not adopting provisions that expressly address race or ethnicity, the agencies said the statute from which the regulation stems does not directly address race or ethnicity. There could be “constitutional considerations and implementation challenges” associated with straying from the statute, the agencies wrote.

“I can imagine being in one of those agencies and the lawyer saying, ‘It’s not happening,'” said Roberts. “I think a lot of people feel frustrated by this. I feel frustrated by it, but I can’t blame the banking agencies.”

Bailey, of the NFHA, disagreed with the assertion that the statute meant to elide race and ethnicity. Bailey pointed out that Sen. William Proxmire of Wisconsin, then chairman of the Senate Banking Committee and sponsor of the 1977 bill, was explicit about the impacts of redlining on minority communities.

“The idea that the CRA should not focus on race is unfounded,” said Bailey. She also cautioned against being overly cautious in light of the Supreme Court’s rulings on affirmative action.

“Clearly, the Supreme Court’s rulings have had a chilling effect, but we have to be careful not to overreact,” said Bailey.

The 1,500-page overhaul is the first major update of the statute since 1995, long before mobile banking became ubiquitous.

Rob Nichols, CEO of the American Banking Association, a trade group that represents banks, said in a statement that the lobby group has “strongly supported modernizing the Community Reinvestment Act rules to reflect the realities of modern-day banking.”

“The test for a CRA modernization rule is whether it incentivizes investment in underserved communities with requirements that are transparent, promote consistency and align with congressional intent,” said Nichols. The ABA said it is still reviewing the rule and soliciting feedback from its members to see whether it meets their expectations.

Other changes from the 2022 proposed rule include an adjustment to how community development activities and retail activities are weighted in bank assessments. In the proposal, retail activities — which include home mortgage and small business lending, as well as the other consumer services the bank provides — would have far outweighed community development. The threshold for the highest rating on retail activities was also out of reach for banks to be able to reasonably achieve it, Roberts said.

Together, the retail and community development weights and the high bar for retail performance would have disincentivized banks to strive for a high rating on community development activities.

The final rule “fixes that problem,” Roberts said, by lowering the standards for the retail lending test, and balancing the weights of the retail and community development components.

“The standards have been raised substantially from the status quo, but if you’re comparing it to the proposal, it’s less rigorous,” said Roberts. “The key here is striking the balance.”