CRA was passed nearly 50 years ago to redress the historical practice of redlining, when the government discouraged lenders from extending mortgage loans to Black borrowers — drawing a red line around neighborhoods that were to be avoided.
The flaws in the law’s current application are underscored by the fact that the racial homeownership gap is actually wider now than it was in 1968, when redlining was legal.
The new framework, which will go into effect starting in January 2026, requires banks to lend to lower-income communities in areas where they have a concentration of mortgage and small-business loans, rather than just where they have physical branches — a change meant to bring the CRA into the modern era of online banking. It assesses banks’ retail lending and community development financing with equal weight, using benchmarks based on peer and demographic data.
Banks oppose the new loan-threshold test, which the Fed, the FDIC and the Office of the Comptroller of the Currency first proposed last year. Banking industry groups argue that the requirement could result in lenders shuttering operations or restricting loans in more sparsely populated areas to avoid triggering CRA obligations for the broader region.
Fed Chair Jerome Powell defended the rule.
It “will better achieve the purposes of the law by encouraging banks to expand access to credit, investment, and banking services in low- and moderate-income communities,” Powell said in a statement. He said it is adapted to “changes in the banking industry, such as mobile and online banking; providing greater clarity and consistency in the application of the CRA regulations; and tailoring to bank size and type.”
For large banks, the new retail-lending assessment areas would apply to areas where they originated more than 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years — an increase from the proposed rule’s 100-mortgage and 250-small-business-loan thresholds.
Any bank with over $2 billion in assets is considered a “large bank” under the rule, with smaller banks exempt from new data requirements. For banks with more than $10 billion in assets, the evaluation of retail services and products would include online banking.
Still, community banks with over $600 million in assets would also have to comply with a new retail-lending test, expanded assessment areas and increased reporting requirements.
Under the new retail-lending test, nearly 10 percent of banks would score a “needs to improve” rating, according to an agency analysis of data from 2018 to 2020, compared with about 1 percent of banks getting that rating today.
Such a score on the retail lending test would preclude those banks from getting an overall “satisfactory” CRA rating under the final rule — below which banks are generally prohibited from merger and acquisition activity.
Fed Governor Michelle Bowman voiced opposition to the rule, saying the regulators “have arguably exceeded the authority granted by the CRA statute” by evaluating banks outside of their “deposit-taking footprint.”
“The final rule is unnecessarily complex, overly prescriptive, and contains disproportionately greater costs than benefits, adding significantly greater regulatory burden for all banks, but especially for community banks,” she said in a prepared statement.
Bowman also questioned why the agencies needed to update the rule in the first place.
“The premise of the changes being made in this rule is that banks are not doing enough to meet the credit needs of their communities,” she said. “Yet, there is no evidence provided to support this premise.”
Fair-lending and civil rights advocates say the current rules clearly aren’t working, noting the racial homeownership gap — 75 percent of white Americans own their homes, compared with 46 percent of Black Americans.