March 27th, 2024

Community lending changes offer hope of expanded credit

Deidre Montague

Banner Business sponsored by The Boston Foundation

Upcoming changes to federal community-lending regulations hold out the promise of expanding access to credit for Black businesses and potential homeowners, according to local bankers and lending experts.

Reforms scheduled to go into effect on Jan. 1, 2026 will make financial institutions more accountable for their lending practices under the Community Reinvestment Act, which for nearly a half-century has required banks to lend in the communities from which they take deposits.

Among other changes, the new rules will step up oversight over bank engagements with low-to-moderate-income individuals and communities and small businesses in the areas of retail lending, retail services and products, and community development financing.

The updated regulations, issued through an agreement between the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency and the Federal Reserve Board, are the first comprehensive interagency changes since 1995.

The shift in banking practices over the last 30 years to mobile banking is addressed by the reforms, requiring banks to demonstrate facility with internet and mobile models that combine physical footprints with online lending, according to the FDIC.

New rules governing transparency in data collection, particularly in the area of home mortgages, aFDICre designed to set clear benchmarks for lending practices, which, before the passage of Home Mortgage Disclosure Act requirements, were hidden from the public.

CRA laws were first passed by Congress and signed into law by President Jimmy Carter in 1977 to reverse the practice of redlining, broadly defined as denying credit to whole communities based on race. The lack of lending activity from banks taking deposits from those communities was a major factor in Black businesses being unable to expand or renters being unable to purchase homes.

Banks falling under CRA scrutiny must score passing CRA ratings to get benefits like access to the Federal Reserve’s lending window. But it wasn’t until Congress passed additional laws requiring public disclosure of lending data that banks were fully held accountable. Data released under those reforms in the early 1990s showed that banks were three times as likely to deny credit to a Black applicant as a white one, even when they were equally credit-worthy.

Public disclosure of lending data, particularly in mortgages, led to banks increasing CRA-qualified lending, which for some institutions became their biggest profit center, as pent-up demand for credit in communities of color resulted in billions of new dollars flowing into previously redlined neighborhoods.

Tom Golden, vice president and CRA officer of Rockland Trust, said the new rules will positively affect Black businesses, giving CRA credit, for example, to banks that finance Community Development Finance Institutions to work with small businesses owned by minority entrepreneurs. “It’s more explicitly stated that we would get credit for that. It is something that is required for us to do and document,” he said.

The Federal Financial Institutions Examination Council website states that the CRA requires that each insured depository institution meet the credit needs of its entire community and must be evaluated periodically. This record is taken into account when considering an institution’s application for deposit facilities, including mergers and acquisitions.

Those regulations include encouraging banks to expand access to credit, investment and banking services in low- and moderate-income communities; adapting to changes in the banking industry, including mobile and online banking; providing greater clarity and consistency in the application of the CRA regulations; and tailoring CRA evaluations and data collection to bank size and type.

Other objectives include creating custom reporting and data collection requirements, while using existing data when possible, promoting honesty and public engagement, confirming that the Act and fair-lending responsibilities are mutually reinforcing, and lastly, promoting a constant regulatory approach that applies to banks regulated by all three agencies.

These objectives are based on feedback from stakeholders and research that strengthen the core purpose of the CRA, provide greater clarity and consistency in applying for loans, and continue to collect data on fair lending practices.