Battle lines harden over low income lending rules
House Democrats are mounting their first major challenge to an overhaul of the Trump administration’s rules that affect the way banks grant billions of dollars in loans, investments, and grants to customers in low- and moderate-income areas.
Even if successful in the House, any legislation faces an uphill battle in the GOP-controlled Senate. But the effort indicates Democrats may seek to undo the administration overhaul if the party wins major electoral victories in November.
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Last month, the Trump administration pushed through changes in the way banks operate under the Community Reinvestment Act, the first update of these rules in over two decades. Enacted in the late 1970s, the CRA was designed to combat redlining – the practice of banks avoiding lending in certain areas, often low-income and minority communities.
The changes in administration have sparked criticism from Democratic lawmakers and community groups who argue the overhaul is flawed. They say this could allow lenders to meet their obligations with a handful of high-value loans rather than many investments in low-income areas, reducing their responsiveness to community needs.
Supporters say the administration’s attempt to modernize CRA requirements will bring much-needed transparency to a system that is widely seen as outdated. The aim is to make it easier for regulators to see whether credits match deposits. They say the overhaul includes provisions to ensure banks are meeting the needs of their communities, including tests based on dollar volume and the number of loans they issue against their peers.
Many groups agree that the rules surrounding the CRA need to be updated, whether they support or oppose the current overhaul. This is true even for some groups that benefit from the existing rules.
“If a data movement works in everything we do, why wouldn’t we want a data-driven and transparent community reinvestment law,” said John Hope Bryant, President and CEO of Operation HOPE , Inc. The group operates financial coaching programs at approximately 150 locations, many of which are backed by banks.
Katina Johnson, a downtown Memphis hotel manager, was one of the beneficiaries of these programs. When she quit to devote full time to her restaurant business, her very low credit score of 452 became a problem.
The 30-year-old signed up for free classes sponsored by a Tennessee-based lender
First National Horizon Corp.
designed to teach fundamental financial concepts and build credit. It helped her get a business loan last fall.
It is not clear, however, whether such programs aimed at low-income people will fall out of favor under the new rules. It is the fear of criticism.
“Under this rule, banks have almost carte blanche to invest in the places and products that make them the most money, not where the community needs it most,” said Jesse Van Tol, Managing Director of the National Community Reinvestment Coalition. “It undermines the whole history and purpose of the RCAF. “
Mr Van Tol’s group challenged the overhaul in court on Thursday. The lawsuit, filed with the California Reinvestment Coalition, said the Comptroller of the Currency did not sufficiently consider public comments on the revised rules, violating federal law. The regulator completed the measure just six weeks after its official public comment period expired in April, speed of light compared to the typical pace of rule-making in Washington.
The OCC denies that its process was rushed. He says the final version of the rules reflects a process that began in 2017 and incorporates the changes sought by Van Tol and other community groups.
Last month’s overhaul further defines the types of loans and other investments in low-income communities for which banks would be credited under the law. A bad appraisal can prevent banks from merging or opening new branches.
Currently, banks are generally rated based on activities in the areas around their branches. The new rule takes into account banks that get most of their deposits outside their branch networks, a nod to the advent of internet banking.
“The status quo had to change if we hoped … to start tackling inequitable access to credit, capital and opportunities for these communities,” said Brian Brooks, the acting currency controller, whose agency wrote. the revised rules, in a letter to lawmakers last week.
Mr Brooks’ predecessor, Joseph Otting, had made completing the overhaul a priority. The final version of the redesign arrived the day before its announced last month that he was stepping down. Mr Otting has sought to accelerate completion of the change amid the coronavirus pandemic, telling lawmakers he will pump more dollars into low to moderate income communities.
The overhaul has divided the regulators responsible for overseeing the Community Reinvestment Act. The Federal Deposit Insurance Corp., which signed a December proposal, did not agree to the latest changes last month. And a third regulator, the Federal Reserve, declined to back the plan, citing a lack of clarity on how it would affect lending in poorer neighborhoods.
Critics say the rush is evident in the overhaul’s provisions. One complaint is that the December proposal would have inadvertently restricted mortgage lending in low-income areas by effectively penalizing banks for selling or securitizing mortgages rather than keeping them on their balance sheets.
To address that concern, the monitor said it would extend more credit to a bank that sells its mortgages in the secondary market, an effort to accommodate different types of lending models.
Yet the change in the OCC did not go far enough, critics accuse. This is because a bank would get about as much credit from the CRA for a mortgage held on its books for the expected life of the loan of about seven years as it does for making a loan every year for seven years. and quickly sell each loan in the secondary market. .
“Why would a bank give seven loans if it can get the same credit for one loan?” Said Buzz Roberts, President and CEO of the National Association of Affordable Housing Lenders.
Write to Andrew Ackerman at [email protected]
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