Fed aims to revamp laws ensuring access to credit for low and moderate income families

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Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

The Federal Reserve on Monday took steps toward revamping a 40-year-old law intended to ensure low and moderate income Americans have access to credit and banking services.

The move comes as the Fed is under urgent pressure to craft policies that lift all Americans, and in particular, reduce the long-standing racial gaps that are only widening in the current recession. Apart from setting monetary policy, economists and lawmakers say the Fed could go further in building a more fair economy through its supervision of banks, which includes the Community Reinvestment Act, known as the CRA.

The CRA was crafted to encourage banks to lend to low-income neighborhoods. Under the CRA, regulators routinely look at banks’ lending practices for low- and moderate-income borrowers, so that those with less money also have access to loans to buy houses, cars and make other purchases.

“The CRA is a seminal statute that remains as important as ever as the nation confronts challenges associated with racial equity and the covid-19 pandemic,” Fed Gov. Lael Brainard wrote in a statement. “We must ensure that CRA is a strong and effective tool to address ongoing systemic inequities in access to credit and financial services for low- and moderate-income and minority individuals and communities. ”

Changes to the CRA laws are considered long overdue among banking experts, especially given the rise of online banking. The banking industry has argued that the CRA hasn’t been revised since more customers have shifted to mobile or Internet banking and the number of physical bank branches have been cut back.

Starting with Monday’s early proposal, the Fed is looking for feedback on how to strengthen retail lending to low- and moderate- income communities, where banks can get credit for community development activities and how online banks should be assessed.

The proposal considers ways to tailor rules based on bank size and business model, differentiating large retail banks from smaller rural banks, for example. Brainard, the Fed’s leader on issues related to the CRA, wrote that changes could also clarify that banks can receive credit for partnerships with minority depository institutions and that doing so could be one avenue to getting a top rating.

The Fed is also looking for feedback on to designating certain areas, based on persistent inequities, where banks could get credit for community development activities that may lie beyond the boundaries of a bank’s branches, helping to address needs in “credit desserts.”

For internet banks, which can lend across broad areas without physical locations, Brainard wrote that “a nationwide assessment area” may better fit the CRA’s goals than the current practice of assessing banks based on where they have a headquarters.

Fed board members will vote on the preliminary proposal at a live-streamed meeting starting at 10 a.m. If approved, Board members would seeking feedback and provide a 120-day period for public comment.

The Fed’s main policy action rests in setting interest rates, which are already at zero, and many of the Fed’s moves to rescue the economy involve propping up the stock market and ramping up asset purchases. That leaves open questions over how inclusive the Fed’s tool kit is, and how creative its leaders are willing to be. Whether it’s examining the Black unemployment rate or reexamining the CRA, the recession has exerted fresh focus on how the Fed can fill holes in the economy that have historically left low-income communities, and particularly communities of color, behind.

There’s agreement among three different financial regulators – the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation – that the CRA should be revised to keep apace with online banking. But there’s plenty of disagreement over how to do so.

In May, the OCC moved to overhaul the anti-redlining law by putting out a rule that would create a more objective framework for grading banks. The rule was swiftly criticized by Democrats and community groups that argued that the rule’s measures were too broad and did not give enough weigh to what individual communities need.

The Fed has not joined the Office of the Comptroller of the Currency.

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