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Fed Overhauls Community Reinvestment Act to Adapt to Online Banking

Federal Reserve building

The Federal Reserve has reportedly finalized a revamp of the Community Reinvestment Act (CRA) rules, which were enacted in 1977 to combat discriminatory lending practices in minority neighborhoods.

The updated rules aim to address the challenges posed by the rise of online banking and mobile transactions, shifting the focus from physical branch locations to where banks conduct their business, The Wall Street Journal (WSJ) reported Tuesday (Oct. 24).

Two other agencies — the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) — are expected to sign off on the rules, according to the report.

The CRA has long been an important tool for encouraging banks to provide financial services to low- and moderate-income communities, the report said. However, with the advent of online banking, the existing regulations became outdated. Banks can now conduct nationwide transactions through online accounts, necessitating a modernization of the rules.

The updated CRA rules recognize the changing landscape of financial services and focus on where banks conduct their business, rather than just their physical branches, per the report. Regulators argue that this shift is necessary to ensure that banks are meeting the needs of the communities they serve, regardless of their physical presence.

One significant change is that banks will now be evaluated based on their lending activities where they make a certain volume of mortgage and other loans, rather than solely based on the areas surrounding their branches, according to the report.

Initially, banks had concerns that the proposed version of the new rules would make it difficult for them to achieve the highest compliance rating, the report said. However, adjustments were made to the final version to address these concerns, ensuring that banks can still obtain outstanding ratings. Industry officials have welcomed the changes, saying they are likely to address some of the criticisms raised by lenders.

Some advocacy groups believe that the updated CRA rules will drive billions of additional loans and investments to underserved communities, per the report. Others remain cautious and emphasize the need for further analysis to determine the true impact of the new rules.

The Federal Reserve and other regulators announced their intentions to update the CRA lending rules in May 2022, saying they aimed to make sure lending is more evenly distributed to low-income consumers and small businesses. They also wanted to adapt the rules to a world in which so much financial activity happens over digital channels.