Three of the top agencies responsible for regulating banks in the United States are looking to make changes to the Community Reinvestment Act. What exactly are the planned changes, and how will they affect the way banks are run?
What is the Community Reinvestment Act?
The Community Reinvestment Act was a bill first passed into law in 1977. It was designed to help alleviate the symptoms of a decades-long practice known as “Redlining”. Redlining was a discriminatory practice banking institutions engaged in whereby they would mark specific neighborhoods, generally those with large amounts of either racial or ethnic minorities, in red to denote that they were “Hazardous” to investment. This resulted in banks allowing members of a community to open accounts and deposit their money, but disallowing them access to loans. Through this process, historically black and brown areas lacked access to the same tools that the majority areas used to prosper.
What Does the Community Reinvestment Act Do?
In the modern-day, the Community Reinvestment Act helps to make sure that banks operating and accepting deposits in these areas are also giving out loans to the communities they serve. This law also helps to encourage both mortgages and small-business loans into account when assessing these institutions for new branches, mergers, or acquisitions.
How is Compliance Achieved?
Under the law, each bank that falls under the purview of the Community Reinvestment Act is supervised by one of 3 agencies. The Federal Deposit Insurance Corporation, the Federal Reserve Board, or the Office of the Comptroller of the Currency. These agencies generally assess the institutions every 3 years to make sure that they are complying with the law. Unfortunately, the law hasn’t kept up with the growth of modern technology. That’s where the new changes are meant to come in.
What Are the Changes?
In the modern age, there has been an explosive growth of institutions doing most of, if not all, of their business online. This leaves them without a physical location and allows them to avoid compliance with the Community Reinvestment Act. This allows a bank without a physical location to both take and make money off of an area without actually investing in the growth of that community. A major thrust of the proposed changes is to bring these online banking institutions in line with their brick-and-mortar counterparts.
Strengthening the Achievement of the Bill’s Purpose
Outlined in the OCC’s proposal is the desire to implement changes to better achieve the outcomes the bill was initially meant to create. To this end, the proposal seeks to open up more avenues institutions can use to address the growing inequality in lending practices. This includes giving particular deference to smaller-value loans and loans that are considered to be of “High-impact” in the low to moderate-income areas these institutions serve.
Another major goal outlined in the proposal is creating more clarity so institutions are more capable of adjusting their practices to fall within compliance with the law. The proposal would help to create a publicly accessible outline of specific metrics that these institutions could compare themselves to, and accordingly, increase or decrease specific lending strategies. The proposal also seeks to help clarify what specific investment activities would be eligible for consideration under this act. Currently, however, the proposal is still in its early stages and will likely be subject to change and further clarification of its specific changes.