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Political divide snags the digital update to anti-redlining law

New technology redefines where banks can do business

House Financial Services Chair Maxine Waters, D-Calif., said she was heartened that federal agencies are working together to modernize implementation of the Community Redevelopment Act.
House Financial Services Chair Maxine Waters, D-Calif., said she was heartened that federal agencies are working together to modernize implementation of the Community Redevelopment Act. (Tom Williams/CQ Roll Call file photo)

Federal bank regulators’ efforts to modernize the 45-year-old law known as the Community Reinvestment Act to reflect the rise of digital banking are raising accusations of partisanship, a claim that those digging into the details say is likely unfounded. 

The Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation are reviewing comments on a proposal this year to update the CRA rules for the first time in nearly 30 years. And just like a previous attempt under Republican President Donald Trump, this one is drawing complaints about a partisan process.

Some financial industry watchers say the divide is likely to unfairly cloud the rule-making.

Congressional Democrats welcomed the joint plan, seeing a vast improvement over rules adopted by the OCC alone during the Trump administration that Democrats said weakened civil rights protections. The Biden administration reversed those rules last year. This time, congressional Republicans suspect a move to advance liberal political and economic policies.

Some experts say the disagreements don’t appear rooted in the agencies’ plan to update the rules to reflect the technology-driven transformation of the industry as mobile, online and branchless banking expands. Such innovation allows banks to do business beyond the boundaries of the communities where they are physically located.

Sanford M. Brown, a former OCC official who’s now a partner in Dallas with the law firm Alston & Bird LLP, where he is co-chair of the financial services and products practice group, said the partisan reactions demonstrate “one of the things that are wrong in Washington these days.”

Brown said the OCC’s proposal “was floated from an agency with a single head who was appointed by a Republican president; therefore, it was automatically ‘bad’ in the opinion of the Democrats.” Similarly, the proposal under review “since the banking agencies are now run by people who were appointed by a Democratic President, the Republicans in Congress automatically assume the proposal is ‘bad,'” he said.

The CRA is a 1977 law aimed at ensuring that banks provide credit to the communities in which they do business, including to low- and moderate-income neighborhoods. The law seeks to address lending discrimination known as “redlining” against low- to middle-income families and minority neighborhoods.

Banking agencies regularly assess whether banks are complying with CRA obligations.

Starting over

The OCC, this time working with the FDIC and the Fed, unveiled a new plan in May that would reshape or replace the rules.

The agencies say their current proposal would update CRA assessment areas to include activities associated with online and mobile banking, branchless banking and hybrid models.  

CRA regulations require a bank to select one or more assessment areas in which its record of lending and other activities are evaluated by regulators. The agencies say that emphasis on branch locations made sense when the CRA was enacted in 1977, but electronic banking requires some changes.

The Fed, FDIC and OCC now propose to evaluate any qualifying community development financing and services that banks elect to conduct, including in areas beyond their branch-based assessment areas.

They say in the proposal that such an approach “may be especially beneficial for the community development activities that are conducted by banks that operate primarily or entirely without branches.”

“The agencies believe this approach is preferable to an alternative approach that would require evaluating community development activities specifically within retail lending assessment areas,” the regulators wrote in their nearly 200-page proposal.

Regulators say they are also considering a system for evaluating the proportion of a bank’s deposit accounts opened through online and mobile banking channels in low- or moderate-income census areas.

“The agencies recognize that changes in technology and in bank business models have resulted in banks serving local communities that may extend beyond the geographic footprint of the bank’s main office, branches, and other deposit-taking facilities,” the proposal says.

House Financial Services Chairwoman Maxine Waters, D-Calif., and 76 Democratic House colleagues said in a letter last month they were “heartened” by the joint agency efforts and applauded the OCC’s decision in 2021 to rescind the Trump-administration rules “that would have severely undermined the CRA.” 

Waters introduced legislation last week that would revise the 1977 law, whereas the agencies are looking to modify the regulations that implement the statute. Her bill would, in part, require CRA exams to evaluate bank lending done in partnership with non-bank fintech companies and mandate that CRA examiners consider all “unlawful activity” on banks’ CRA exams. 

House Financial Services ranking member Patrick T. McHenry of North Carolina said he feared the joint agency proposal was “yet another attempt to empower partisan activists to push their far-left agenda on our nation’s financial system.” His office declined to identify specific objections or concerns he and his fellow Republicans have to the plan.

Democrats said the OCC’s previous go-it-alone approach would have allowed banks to gain favorable CRA ratings by funding projects that do little to improve the lives of low- to middle income people and distressed minority neighborhoods, such as financing sports stadiums. Democrats wanted greater focus on smaller, consumer-facing transactions, such as mortgage loans, and community participation.

Senate Banking Chairman Sherrod Brown, D-Ohio, said Trump-appointed Comptroller of the Currency Joseph M. Otting had “ignored thousands of thoughtful comments from civil rights leaders, community development advocates, and local leaders and rammed through an overhaul to this key civil rights era law.”

Republicans, however, praised the Otting proposal, with McHenry saying then that the update “reflects the transformation of banking services.”

‘Knee-jerk’ reactions

Alston & Bird’s Brown says neither political party is focusing properly. “Both sides agree on the problem, but they have different ways of solving it; neither way is inherently good or bad.”

But Brown is pessimistic about a meeting of the minds. He said in an email he fears the nation will “continue to have this whipsaw effect of policy making where the party that controls the White House may be able to implement its one-sided approach for four (maybe eight) years, and then we’ll go back the other way. That is no way to run a country.”

Daniel Meade, a partner at the law firm Cadwalader, Wickersham & Taft LLP in Washington, said the differing reactions could be chalked up to a “knee-jerk partisan reaction that Democrats are going to instinctively be suspect of proposals by Republicans and vice versa.”

He noted, however, that many in the banking industry, such as the American Bankers Association, were also uncomfortable with the OCC’s solitary approach, fearing it would lead to inconsistent and contrasting compliance mandates by different regulators.

Meade said the Trump-administration update was simpler than the joint agency approach and that the Republican skepticism of the new plan might be attributed to this additional complexity.

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