Legislation introduced on September 15, 2022 by Maxine Waters (D-Cal.), chair of the House Financial Services Committee, would significantly overhaul the Community Reinvestment Act (CRA), adding a number of new substantive requirements and procedure.
If signed into law, House Resolution 8833, the “Strengthening communities through the Community Reinvestment Actwould represent the most significant revisions to the ARC in more than a decade. These changes include:
- new data collection requirements;
- the expansion of the types of legal violations that could affect ARC ratings;
- mandatory advisory committees in each market where the bank operates; and
- additional requirements for receiving community service and charitable work credits.
The legislation could delay pending proposals from financial authorities to update current CRA regulations.
Purpose and main provisions
The text of the bill and statements by Chairman Waters make it clear that one of the main purposes of the bill is to address perceived redlining by financial institutions. In A press releasePresident Waters said the bill is part of:
continue efforts to eradicate discrimination in our modern banking system and close the racial wealth and home ownership gaps…. Congress passed the CRA in 1977, but after nearly 45 years the law has not kept up with changes in the banking system and needs reform to ensure banks serve communities that have historically been marked and left behind by our financial system.
The purpose of the bill is further reflected in its first section, which cites the testimony of the author of the Community Reinvestment Act of 1977 on redlining (the practice of lenders providing unequal access to credit because of racial composition or ethnicity of an area).
The bill’s changes to the CRA would include:
- Legal offenses. Evidence of “any violation” of federal or state law. “regardless of whether the breach is credit-related or not,” would result in a negative credit on the bank’s ARC performance rating. Current CRA regulations provide that proof of “discrimination or other unlawful acts” credit practices” would receive negative consideration.
- Community Advisory Committees. Banks would be required to form separate Community Advisory Committees in the markets. Banks with assets of at least $2 billion must establish committees in each Metropolitan Statistical Area (MSA) where the bank or one of its subsidiaries has a branch or other facility (including an ATM), or where the bank has a “substantial number of customers” with depository accounts. Banks below the $2 billion threshold must establish community advisory boards in each MSA where the bank or any of its subsidiaries is” located”. A bank’s leaders should meet with Community Advisory Committees quarterly and when certain transactions are proposed by a bank. Topics discussed at meetings should include meeting the credit and deposit needs of low- and middle-income people. and underserved communities, people with disabilities, LGBTQ+ communities, and 27 specified racial and ethnic communities.
- Community service and charity work. Institutions with assets of $2 billion or more would not be eligible to receive consideration for community service and charitable work unless (a) they collect and report information regarding community service and charitable work in a format prescribed by regulators; and (b) the institution “demonstrates the impact of community service or charitable work on low- and middle-income neighborhoods”, with 10 specified criteria for doing so.
- Partnerships with non-custodial lenders. Regulators would be required to consider a bank’s performance in granting specific types of loans “in partnership with one or more non-custodial lenders”.
- Small Home Mortgages. Regulators would be required to consider a bank’s performance to facilitate lending to low- and middle-income borrowers, including “small dollars”, first mortgages of $100,000 or less and certain other types of loans.
- Data report. “Big” banks (a category that would be defined in the development of the rules) would be required to disclose information relating to borrower demographics, including income as well as “gender identity” and “sexual orientation and whether the institution has a special purpose credit program for certain categories of borrowers.
- Discrimination study. Every two years, the appropriate federal financial monitoring agencies would be required to conduct an “interagency statistical study” to identify MSAs and rural counties that “either experience ongoing discrimination or exhibit significant racial disparities in access to credit”.
The bill provides minimal detail on how a number of these provisions would be implemented, and so the subsequent rulemaking process would be key to determining more precisely what would be expected of financial institutions.
Looking ahead and key takeaways
The chances of the bill becoming law are uncertain. If Democrats retain control of the House of Representatives next year, the bill could become a top legislative priority for the Financial Services Committee. However, if Republicans were to take control of either house of Congress after the midterm elections, the bill is highly unlikely to pass. Nevertheless, the bill is important for several reasons.
First, if the bill becomes law or appears likely to pass, it could further delay or influence the finalization of revised CRA regulations proposed by federal banking regulators in May 2022. Efforts to modernize and revise CRA regulations ARC have been underway for several years, and it wasn’t until this year that regulators were able to come up with a unified proposal. As regulators appear poised to enact significant ARC changes in the near term, HR 8833 may delay this process as regulators assess whether the legislation is likely to pass and whether any of the concepts that it contains would be appropriate for inclusion in the ongoing regulatory process.
Second, the legislation would directly inject several fair lending concepts into the ARC. There has always been a connection between the CRA and loan fairness, and redlining issues were an aspect of the CRA’s legislative history as set out in the bill. In addition, fair credit violations can cause a lower rating that an institution would otherwise receive. However, regulators have traditionally focused on bank performance measured against income levels of areas or individuals. The bill would put redlining and other fair lending issues at the forefront of the CRA’s concerns with its many provisions that explicitly address discrimination based on a long list of prohibited factors.
Thirdthe legislation represents a continued federal focus on redlining, which is likely to continue and intensify under the current administration.
In sum, the bill serves as an important reminder of the interaction between Fair Lending and the CRA. In addition to monitoring and preparing for the potential implementation of major ARC changes in the near term based on current regulatory proposals, banks may wish to examine their risk of redlining through data analysis and by reviewing compliance and risk management policies and procedures.