FDIC, OCC Propose Changes to Community Reinvestment Act Rules

Two U.S. bank regulators on Friday proposed an update to the rules governing the Community Reinvestment Act (CRA), a landmark 1977 law designed to combat discriminatory lending practices.

The proposal, issued by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), aims to revise how banks' community support activities are evaluated.

Key Provisions of the Proposal

The proposed changes introduce a two-pronged approach. First, they would place additional scrutiny on "community development" grants, requiring banks to demonstrate that a majority of the funds are spent within the intended communities. The rules would also require verification that the organizations receiving the grants do not have excessive overhead costs.

Second, the proposal would expand exemptions for smaller financial institutions. It would raise the asset threshold for exemption from certain data collection and reporting requirements to $10 billion, a significant increase from the previous level of $1.65 billion. The agencies stated the goal is to reduce the regulatory burden on smaller banks.

Political and Regulatory Division

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The plan drew immediate criticism from Democratic lawmakers. In a statement, Senator Elizabeth Warren and other Democrats on the Senate Banking Committee said the proposal would "gut" a critical tool for community investment and "make America's housing crisis worse."

Adding to the uncertainty, the Federal Reserve, which shares responsibility for enforcing the CRA, did not issue a corresponding proposal. Bank regulators typically coordinate to create uniform rules, and the Fed's absence raises the possibility of patchwork requirements for the industry. A Federal Reserve spokesperson declined to comment on the matter, according to Reuters.

Background on the CRA

The Community Reinvestment Act is a crucial component of U.S. banking supervision. It was enacted to prevent "redlining," a practice where banks deny or limit financial services to residents of specific, often minority, neighborhoods.

A bank's performance under the CRA is graded by regulators, and a poor rating can place a lender in a so-called "penalty box." This status can bar a bank from pursuing mergers, acquisitions, or other business expansions, making CRA compliance a high-stakes issue for the financial industry.