- Wednesday, October 16, 2024
Federal banking regulators recently unveiled an extensive update to the 1997 Community Reinvestment Act (CRA), spanning nearly 1,500 pages. The aim of this update is to encourage banks to lend and offer services to lower-income areas, promoting financial inclusivity.
The U.S. Federal Reserve, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp, jointly released the revised guidelines. While banks will still be evaluated based on their compliance with the CRA, the rules and benchmarks have been recalibrated for enhanced clarity.
Effort to Modernize Civil-Rights Era Banking Law:
This finalized rule represents a significant achievement for Michael Barr, the Vice Chair for Supervision at the Federal Reserve Bank. Following a draft release for public comment in May 2022, the rule has now been officially published in the federal register.
In a prepared statement, Barr emphasized the importance of fair lending and stated that the new regulations will contribute to a safer and fairer financial system.
Updated Compliance Deadlines:
Beginning in January 2026, banks will be required to adhere to the revised guidelines. The regulatory agencies have allowed for a transition period of 12 months before full-scale enforcement begins.
Key Revisions within the Updated Rule:
The revised CRA incorporates several notable revisions:
Improving Financial Inclusion and Evaluating Bank Performance
Agencies responsible for overseeing the banking sector in the United States will now have a clearer framework for evaluating the performance of banks. These evaluations will consider the various activities conducted by banks as well as their impact on the communities in which they operate. The aim is to promote financial inclusion and support institutions that serve minority groups, community development organizations, and areas facing persistent poverty.
In an effort to provide greater clarity and consistency, the final regulation sets out specific metrics for evaluating banks' retail lending and community development financing. Public benchmarks and criteria for qualifying community development activities have also been established. To ensure transparency, a public list of qualifying activities will be maintained, and a process for confirming their eligibility will be put in place.
The revisions to the regulation introduce different tiers for evaluating banks and collecting data based on their size and type. Small banks will have the option to be evaluated under the existing rules or the new framework. Furthermore, small and intermediate banks will be exempt from certain new data requirements. On the other hand, banks with over $10 billion in assets will be subject to additional data requirements.
It is important to note that these updates were made to address significant changes in the banking sector since the last update of the rule in 1995. The rise of mobile and online banking, for example, required adjustments to ensure the regulation remains relevant and effective.
One of the key focuses of the law is to address the needs of low- and moderate-income communities. While officials are unable to overhaul the rule based on individuals' ethnic or racial backgrounds due to current U.S. law, they intend to incorporate fair-lending laws into the evaluations under the Community Reinvestment Act (CRA).
These updates to the regulation bring clarity, consistency, and modernization to the evaluation process for banks operating in the United States. It is a significant step towards promoting financial inclusion and supporting the growth and development of underserved communities.
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