Federal agencies propose ‘long overdue’ changes to fair lending rules as banking goes virtual

A proposal from a trio of federal agencies would bring key banking regulations into the modern digital age, as banking is increasingly done electronically rather than in branches.

Bankers say the 679-page proposed rule change to the federal Community Reinvestment Act (CRA) of 1977 will take some time to fully digest, although initial reactions have generally been positive, as experts say the update is absolutely necessary.

“An update to the Community Reinvestment Act is long overdue. The banking industry has fundamentally changed since the law was put in place 45 years ago with improved technology and changes in consumer behavior,” as fewer and fewer people bank at a branch, said Kelly Potes, president and CEO of Sparta. ChoiceOne Financial Services Inc.the parent company of ChoiceOne Bank.

“When it was written, banks were very active in branching and branching was on the rise,” said Potes, who considers the regulatory change “being done in the right spirit.”

“I’m going in with a positive mindset,” he said.

The CRA encourages banks to invest and lend in low- and moderate-income communities where they take deposits. Congress enacted the law in 1977 to mitigate discriminatory credit practices against low-income neighborhoods, a practice known as red-lining. The last major changes to the law date back to 1995.

Federal regulators regularly review how well banks are complying with CRA requirements “in a safe and sound manner.” Regulators will consider a bank’s CRA score when deciding whether to approve proposed mergers.

The Federal Reserve Board, the Federal Deposit Insurance Corp. and the U.S. Treasury Department’s Office of the Comptroller of the Currency released proposed rules on May 5 to update the ARC and launch a public comment period that will continue through August 5.

According to the three agencies, one of the proposed rule changes is to “include activities associated with online and mobile banking, branchless banking and hybrid models” when regulators assess CRA on a bank.

“Substantial and significant”

While financial institutions have invested heavily in digital technologies in recent years to keep up with changing consumers and continue to separate low-volume offices from branch networks, CRA’s modernization proposal “is substantial and significant” , said attorney Michael Bell, co-chairman. of the Financial Institutions Practice Group at Hongman LLP.

Banks today operate with “an outdated CRA that doesn’t reflect their real business today,” Bell said.

“These changes, 100%, will affect the daily, weekly (and) monthly operations of banks,” he said.

Bell raised the question of whether today’s banks can adequately serve low- and moderate-income markets through digital banking without the type of physical branch presence of the past.

“There is a question: is it possible to do it well with mobile banking, hybrid models and branchless banking?” Bell said. “How should these communities be served? »

By issuing the proposed updated rules, the trio of federal agencies also seeks to ensure that the CRA is a “robust and effective tool to address inequities in access to credit,” according to a joint statement.

The proposed rules update would “promote community engagement and financial inclusion” and also “emphasize lower-value loans and investments that can have high impact and be more responsive to community needs ( low and moderate income),” the statement adds.

The proposed rule change would also adopt what federal agencies call a “metrics-based approach to CRA assessments of retail loans and community development funding, which includes public benchmarks, for greater clarity and consistency”.

If passed, the new rules would allow regulators to tailor ratings from credit rating agencies to a bank’s size and business model.

The tiered approach by bank size “gives more leeway and a bit less of a burden” on small and medium-sized banks, said Mike Tierney, president and chief executive of the Michigan Community Bankers.

“We are encouraged that the proposal would adapt ARC’s assessments and data collection for community banks, regulators should ensure the plan meets the needs of all community banks and the communities they serve.” serve and do not impose excessive burdens on banks for data collection and reporting,” Tierney wrote in an email to MiBiz.

However, Tierney disagrees with proposed rule change language that puts banks with more than $2 billion in assets “in the same pool” for CRA review with the largest. banks in the country, such as JP Morgan, Bank of America and Wells Fargo. He calls this “grossly unfair and far too burdensome for too many Michigan banks,” adding that the association will “reject this.”

Proposed changes to CRA rules could also provide banks with greater flexibility to devise creative ways to serve low-to-moderate income neighborhoods, said Patricia Herdon, executive vice president of government relations at the Michigan Bankers Association.

Herndon welcomes the unified approach the three regulators that oversee the CRA are taking in proposing the rule changes, saying it could lead to greater predictability in interpretation and application.

“We can’t have three different regulators offering three different approaches to ARC,” Herndon said. “We want consistency, so if we invest in ARC and know it’s something innovative, we’re going to be recognized for doing something good in the community. If it’s something that’s maybe a small dollar but has a big impact…we need to know that we’re going to get credit for those things.

Tierney and Herdon would also like to see the CRA requirements extended to other types of lenders, namely credit unions which are tax-exempt as well as agricultural credit lenders and fintechs.

Tierney cites data showing that more than 95% of federal Paycheck Protection Program loans made in Michigan to help small businesses in the first year of the COVID-19 pandemic went through banks.

“If you were in a low-to-moderate income community in an urban or rural area and needed a PPP loan, you really had only one place to turn – your local bank,” Tierney wrote in his email.

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