Bank regulators disagree on rule changes for poor communities


Banks that have long lamented rules requiring them to do part of their business in less affluent areas would benefit from a hiatus under a proposal released Thursday by two regulators.

But the industry’s most important regulator, the Federal Reserve, is not on board.

The central bank did not join a proposal from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation that would give the Community Reinvestment Act its first major overhaul in a quarter of a century.

Joseph Otting, the comptroller of the currency, who led the effort, said regulators had worked for 18 months on a plan, “but the three agencies couldn’t move forward together just yet.”

Federal Reserve Chairman Jerome Powell expressed his disapproval on Wednesday, saying the central bank had worked hard to be on the same page. “My hope is that we can still do it. I don’t know if it will be possible or not, ”he said. “If we can’t, I don’t know what the way forward would be. “

If the changes were enacted without Fed support, it would create two sets of rules: one for those overseen by the central bank and one for those overseen by the other two agencies.

Banks have long called the Community Reinvestment Act requirements onerous and impractical, but sidestepping them is not an option. Banks that do not meet the requirements are subject to rigorous regulatory control and may have difficulty obtaining approval for mergers or expansions.

The proposal, which covers more than 200 pages, would make a number of changes, including allowing banks to take out credit for loans to relatively poor individuals, small businesses and rural areas, even when they do not. ‘have no branch nearby. And even large loans – like a $ 500,000 mortgage in an area where the average mortgage size is $ 1 million – could be classified as low or moderate income. Banks could also obtain credit to provide loans to hospitals and other large institutions that are currently ineligible.

But there was contention even among regulators who released the new proposal: Martin Gruenberg, an FDIC commissioner, voted against the plan, calling it a “deeply flawed proposal.”

Progressive lawmakers, including House Financial Services Committee chairperson Maxine Waters, Democrat of California, and other critics began to voice concerns about the plan long before it was made public. They fear the changes will weaken the law’s ability to prevent banks from freezing minority customers.

In a letter Wednesday, 45 members of Congress urged regulators to give the public more time to read and respond to the regulators’ proposal before finalizing the changes.

Federal Reserve employees, under the leadership of Lael Brainard, the last Fed governor appointed by President Barack Obama, have been working on an alternative approach, according to a person familiar with the process who spoke under the guise of anonymity. Their efforts did not result in an agreement with the other regulators. It is possible that the Fed will issue its own rule proposal, although it is not clear whether it will.

A Fed spokeswoman said the central bank would consider public comments on Thursday’s proposal and no decision has been made on how to proceed. She reiterated that any revision must promote the objective of the law: to encourage banks to serve low and moderate income communities.

Critics said the proposed changes appeared to put those communities in the backseat.

“I am very concerned that this proposal distracts the CRA’s attention from providing mortgages and small business loans to low-income people towards a range of financial activities with higher profit margins.” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, a nonprofit that seeks to help poor communities build wealth.

But the banks adopted the proposal.

Greg Baer, ​​managing director of the Bank Policy Institute, a business group, said the changes would help banks know whether loans or investments are eligible for the program before they make them. This would allow banks to “work more closely with their communities to identify and seek creative ways to better meet the financing needs of the communities,” he said.

But Mr. Baer’s group and the American Bankers Association have stressed the need for the Fed to support any final rule, giving all banks a cohesive framework.

“The nation would be better served by a final interagency rule that also includes the Federal Reserve,” said association chief executive Rob Nichols said.

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