WASHINGTON (Reuters) - A more flexible evaluation of banks under the Community Reinvestment Act could unlock capital for credit “deserts” outside the usual lending and investment areas of financial institutions, a key Fed official said on Tuesday in remarks laying out reform ideas for the fair lending law.
Federal Reserve Governor Lael Brainard, responding to suggestions that digital technology had rendered the CRA’s focus on bank branches obsolete, said that to the contrary it was important to keep a central focus on local lending — particularly for retail services like home mortgages.
But, in reviewing a slate of ideas to overhaul a law that holds bank accountable for their lending to less advantaged communities, she said it was possible to allow broader definitions that would encourage banks to lend “in a more expansive area” when it comes to community development projects.
Rather than banks in a geographic center competing to fund projects to meet their CRA obligations, some could fund deals in rural areas starved of capital but outside the bank’s usual community reinvestment “assessment area.”
“This could be to the benefit of credit deserts —
those perennially underserved rural areas or small metropolitan areas that may not have a bank branch or, if they do, may not constitute a major market for purposes of banks’ CRA evaluations,” Brainard said in prepared remarks to the National Community Reinvestment Coalition.
Brainard also said focusing on the stock of a bank’s outstanding CRA loans, rather than the new loans initiated each year, could encourage longer-term and possibly more productive project financing. The current law may steer banks toward short term loans that can be rolled over and inflate their community reinvestment scores.
“All types of community development finance, whether in the
form of a loan or an investment, have greater impact when they serve as patient, reliable, committed sources of financing,” Brainard said.
Brainard is spearheading the Fed’s response to a push by banks to overhaul the 1977 CRA, passed as a follow-on to civil rights era laws meant to prevent racial discrimination in lending, and to end practices like “redlining” in which banks effectively refused to lend in certain neighborhoods.
The Office of the Comptroller of the Currency is also looking at possible changes. Community groups are worried that the reform process could undermine a statute they regard as important in providing credit and capital access for poorer neighborhoods and small businesses.
Brainard said she agreed it was important that the process strengthen the CRA’s impact, while adapting to changes in how banking works.
Reporting by Howard Schneider; Editing by Chizu Nomiyama