Regulators Must Unite to Modernize Banking Rules
Remember the hassle of trying to get across town to cash a check at the bank before closing? Thankfully, the advent of online banking services in recent decades has virtually eliminated this stress — you can now conduct most of your banking from the comfort of your home. However, a 40-year-old law is keeping banks from expanding these services.
Looking to change this, the Office of the Comptroller of the Currency (OCC) sent out a request last Tuesday for the public to weigh in on proposed updates to the Community Reinvestment Act (CRA).
Enacted in 1977, the CRA encourages banks to meet the financial needs of the low- and middle-income communities, discouraging discriminatory banking practices known as “redlining.” As part of the law, the government assesses a bank’s servicing of loans, investments, and deposits in poorer areas. Ultimately, it gives the bank a point-based rating that is used by regulators when reviewing requests for future mergers and acquisitions.
While the CRA has been a pivotal tool in ensuring Americans from all backgrounds have a fair shot at financial independence, the law has simply failed to keep pace with innovations in banking and financial services.
Written at a time when interstate banking was still illegal, the CRA was tailored to smaller community and regional banks that had few branches. The last significant update was made in 1995 and only went so far as to include a bank’s size and performance when rating their loan practices. This has created a poor regulatory environment for modern banking, forcing banks with no physical branches to comply with rules that do not fit their business model.
Under provisions of the CRA, evaluations are contingent on servicers having physical bank branches as their nexus. For instance, Ally, a totally branchless bank, is only assessed for its lending and servicing at its headquarters in Salt Lake City, Utah — despite doing business throughout the country.
When Ally serves underbanked customers in, for example, Baltimore or Chicago, it gets no credit under the geography-based assessment of community reinvestment. In some instances, this can mean a bank is labeled “less than satisfactory” under the CRA rating scale for no good reason, leaving little incentive for that bank to continue to offer needed online services, or engage in low- and middle-income lending.
In an era marked by the proliferation of branchless banking, it’s become clear that the CRA is in deep need of reform.
Implementation of the CRA is divvied up among three regulators, the OCC, the Federal Reserve, and the Federal Deposit Insurance Corporation. Without a uniform and concerted effort by these three regulators, banks could face an even more complicated mess of compliance and guidance that could magnify the preexisting problems of the CRA.
By actively engaging both lenders and borrowers, Chairman Comptroller of the Currency Joseph Otting is taking positive steps toward redefining assessment areas in a way that accounts for new types of banking. If the Fed and FDIC follow Otting’s approach, online banks can get the credit they deserve and consumers can get the access to capital they need.
Matthew Adams is a senior at American University in Washington, D.C. and a contributor for Young Voices.