Regulators propose overhaul to law governing how banks lend to low-and-middle income communities

NEW YORK (AP) — The Trump Administration has announced an overhaul to the rules governing a critical piece of Civil Rights-era legislation, most notably a reduction in the number of banks that will need to fully comply with the law.

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation on Friday jointly announced the proposed changes to the Community Reinvestment Act, a law that requires regulators to document how well banks do in lending to low-to-middle income neighborhoods. It would be the first major revision of the law’s rules and regulations in nearly three decades.

Under the proposed revisions, bank examiners would put more weight on the lending banks do in certain communities and geographies, and less on how many branches they open or how much in deposits they take in from a local community.

The number of banks that would need to comply with the law would be reduced as well. The definition of a small bank will increase from banks with under $412 million in assets to banks with $1 billion in assets. Banks between $1 billion and $10 billion in assets will now be classified as an intermediate bank.

This would reduce the number of banks who need to comply with parts of the CRA by 800 banks. Only 86 banks, or roughly 3% of all institutions, would be subject to the full extent of CRA under the new regulations.

Another change that is likely to be fought over relates to how banks give money to community development groups. Under the CRA, banks can donate money to local organizations that do poverty or low-income housing work in their communities to show they are providing resources to a local community. The new regulations could narrow the groups and programs that banks could donate to in order to meet those obligations.

In a summary of the changes, the bank regulators said these changes would ensure community development grants “are not diverted to activist causes or consumed by excessive operating costs.” Banks would also need to collect more detailed information on who gets their community grants, including addresses, which would give more transparency to who is receiving grants from banks.

That change could negatively impact groups like the National Community Reinvestment Coalition, an umbrella group for community development groups that often receive money from banks under the CRA. The new rules discourage banks making grants to national organizations and instead focus their grants on local groups.

Jesse Van Tol, the CEO of NCRC, said that it was “unfortunate” that the bank regulators were politicizing grant making under the CRA.

“CRA was created to work for low-to-middle income people. A lot of these changes are going to discourage banks from making grants, particularly in rural areas, where I expect there will be significant drops in activity,” Van Tol said.

The proposal announced Friday by the OCC and FDIC did not include the other major bank regulator, the Federal Reserve. Banking groups had been pushing for a joint proposal from all three regulators, to make sure all three were aligned on the same requirements under the CRA.

The CRA was passed in 1977 to combat redlining, a practice whereby banks would discriminate against the poor and minorities by choosing not to lend or open branches in minority-majority neighborhoods or in poor neighborhoods.

The law is complex, requiring banks to document how they do business in the cities and areas they operate in. Banks must sit for regular examinations to see whether they are complying with the law. A bad CRA examination could restrict a bank’s ability to open new branches or merge with another bank or have other consequences. The data collected through CRA is also used by the Department of Justice in redlining cases.

The last major revision of the CRA’s regulations happened in 1995, and there have been repeated attempts by administrations of both parties to update the rules to reflect how banking and financial services have changed in the past 30 years. But those revisions have repeatedly failed, either due to opposition from other regulators, the banks, or community groups, or have been blocked by courts. The Biden administration tried its own revisions of the CRA rules but those changes were blocked by courts in Texas.

The proposed rules will now go out for a 60-day comment period where they will be finalized after banks, community groups and other parties have a chance to weigh in on the changes.