US Banking Regulators Update Rules To Evaluate Retail Lending

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.

Data indicates that numerous non-White communities continue to be underserved, even after almost fifty years since the Community Reinvestment Act (CRA) was enacted. For instance, Black borrowers in low- and moderate-income areas across most major US cities still receive significantly fewer loans. To address this issue, the revised rule includes an updated test for assessing a bank’s closed-end mortgages, automobile loans, small business loans, and small farm loans while also simplifying the assessment criteria.

Redlining, as defined by the Justice Department, is a discriminatory practice in which lenders refrain from offering mortgages and loans in specific areas based on the race or national origin of the residents. The agency recently announced that its initiative to combat redlining has secured over $100 million in relief for communities that have been negatively impacted by discriminatory lending practices. One contentious aspect of the CRA overhaul is related to provisions in the new rule that expand the scope of “assessment areas” to focus more on lending activity beyond the physical presence of banks in communities. Critics of the rule argue that the shift of retail lending to nonbank entities will dilute its impact.