Three federal agencies are proposing major changes to the Community Reinvestment Act, a law that encourages banks to meet the needs of the low- and moderate-income neighborhoods where they do business.

The joint proposal aims to expand access to credit and banking services and promotes transparency and public engagement. It also seeks to provide banks with more clarity and consistency around CRA regulations, and to help them invest in communities more effectively.

The last significant updates to the CRA occurred in 1995. Prabal Chakrabarti, community affairs officer at the Federal Reserve Bank of Boston, said the law needs to be modernized.

“The CRA is so vital to investment in low- and moderate-income communities,” he said. “But … it hasn’t kept up with the times. The (banking) industry and technology have changed, along with the needs of these communities.”

COVID-19 highlighted growing wealth disparities and the need for innovation to ensure low- and moderate-income individuals are not “left behind in banking,” said Carmen Panacopoulos, a senior business strategy manager in the Boston Fed’s Regional & Community Outreach department.

“There's an opportunity here for community organizations to build relationships with banks,” she said. “That way, … banks can (tailor) their product offerings to match community members’ needs.”

The CRA helps “shine some light” on banks’ community development work

Lawmakers enacted the CRA in 1977 to address unequal access to credit and other financial services largely caused by “redlining,” a discriminatory lending practice that targets communities of color and lower-income communities. While most regulator reports are confidential, CRA reports are public, said Andrew Olszowy, a vice president in the Boston Fed’s Supervision, Regulation & Credit department.

“These reports shine some light on how banks are meeting the credit needs of people and small businesses within all areas of their market, what services they’re providing, and what their community development activities are,” he said.

In the last three decades, the banking industry has changed drastically, especially with the rise in online and mobile banking. At the same time, some banks have spread across the country. Olszowy said that even with these changes, people see real value in having a local, neighborhood banking presence. The proposed revisions to the CRA aim to update the law, while maintaining its connection to the needs of low- and moderate-income communities.

“We’ve heard from community groups that brick-and-mortar bank locations can provide a stabilizing effect in vulnerable areas,” Olszowy said.

The Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency published the joint proposal to change the CRA in May, but discussions around updating the law started long before then. The Federal Reserve began public outreach on the topic more than a year ago.

“We’ve been engaging with both community groups and bankers from the onset, … and we want to be as transparent as possible,” Panacopoulos said.

Proposal emphasizes regulation clarity, public transparency

Matthew Holt, a supervisory bank examiner at the Boston Fed, said CRA enforcement typically involves more examiner discretion and “gray areas” than other financial regulations. To help provide banks with more clarity, the proposal would create a consistent regulatory approach across the three agencies with standard metrics used to evaluate banks’ CRA compliance.

He added that examiners manually sorted through paper files in the past. But now they can organize large volumes of data with “a few clicks of a button,” and the proposal reflects this shift.

The updates also acknowledge that banks of different sizes have different capacities and resources, and it aims to avoid overburdening smaller banks.

For instance, banks are evaluated in areas including retail lending (such has home mortgages and car loans), services and products, and community development activities. Under the proposal, evaluations – as well as data collection and reporting requirements – depend on bank size.

More evaluations apply to large banks (those with more than $2 billion in assets). For certain evaluations, intermediate and small banks can choose to opt into updated tests or continue with existing versions.

Chakrabarti said the updates also assess where large banks lend, including their activity in areas where they don’t have physical branches. That could lead to more CRA investment in places that have community development needs but don’t have a lot of banks, he said.

One goal: help community groups take advantage of new access to data

The proposal expands the list of community development activities that banks can participate in to comply with CRA requirements. Holt said it would also require large banks to publicly share raw data on their community development activities.

“For years, community groups across the country were hampered by a lack of data,” he said. “But with this new reporting, they could identify high-need areas where there’s no capital flowing (from banks’ qualified community development activities).”

The window for public comment on the joint proposal closed on Aug. 5, and the three agencies are working together to review every submission, Holt said.

Learn more about the joint proposal here.