US banking regulators have recently modernized long-standing regulations designed to address redlining and promote increased lending in lower-income areas. The 1977 Community Reinvestment Act (CRA) will now encompass online and mobile banking services for the first time, marking a significant departure from the previous assessment criteria, which predominantly relied on the physical locations of bank branches. These changes have been approved by the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency.
According to Michael Barr, the Fed’s Vice Chair for Supervision, the revised rule retains its focus on assessing bank performance in areas where they have deposit-taking facilities, while also extending the evaluation to encompass retail lending and community development activities beyond the scope of traditional branch networks. These amendments aim to enhance clarity and consistency in the evaluation process. Since their introduction, these changes have faced criticism from both the banking industry and consumer advocates. Banking trade associations have expressed concerns that the new lending rating criteria might make it more difficult to achieve high scores, whereas critics argue that the reforms do not go far enough.
Dennis Kelleher, who leads the Washington-based Better Markets group, an advocate for more stringent regulations, acknowledged the well-intentioned nature of the CRA reforms but expressed skepticism about their effectiveness. Kelleher believes that the reforms might still fall short of addressing classic cases of redlining and could allow banks to maintain high, if not perfect, CRA ratings while reducing lending to low- and moderate-income communities. Banking regulators evaluate how financial institutions serve lower-income communities within their operational areas, and this assessment can impact the banks’ ability to expand by opening new branches or pursuing acquisitions. Weak assessment scores could impede such expansion, although critics argue that banks have historically received overly lenient ratings.