Small Lenders Alarmed at Their Inclusion in Anti-Redlining Rule

Federal banking regulators’ rewrite of anti-redlining rules is intended to bring heightened scrutiny to big banks, but community lenders say they will get caught in the crossfire.

The Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency on Tuesday approved a sweeping overhaul of the rules governing the Community Reinvestment Act, a 1977 law enacted to address discriminatory lending practices by banks and federal housing agencies. Among the raft of changes in the 1,494-page document is a recalibration of which banks are subject to the toughest requirements.

Banks with at least $2 billion in total assets will now be considered large and forced to comply with the tightest CRA standards. That’s a slight increase from the big-bank threshold under current Community Reinvestment Act rules, but significantly less than the $10 billion minimum set in other banking laws and regulations.

Critics of the rule say they’re concerned community banks are going to be held to the same standards as global banks like JPMorgan Chase & Co. or Bank of America Corp., forcing them to comply with more onerous exams that could make it harder for them to expand operations. Those concerns could eventually become a key part of any legal challenge to the rule.

“The lack of recognition that these banks are fundamentally different, with different balance sheets and business models, misses an important opportunity to appropriately tailor CRA expectations to a bank’s size, risk, service area, and business model,” Federal Reserve Governor Michelle Bowman said in a statement.

Bowman was the only member of the Fed’s board of governors to vote against the final rule. The FDIC voted 3-2 to approve the rule, with Vice Chairman Travis Hill and Director Jonathan McKernan—both former Republican Senate Banking Committee staffers—opposing it.

Other regulatory leaders said the final rule accounts for banks of different sizes.

“All banks are not the same, and all communities are not the same. The final rule tailors the CRA tests and data collection to each bank size category—small, intermediate, and large,” FDIC Chairman Martin Gruenberg said in a statement supporting the rule.

Big Changes

The CRA rewrite unveiled Tuesday is the first major revision to the rules since 1995.

The new standards account for mortgages and small business loans issued through mobile banking apps—not just physical branch activities—to evaluate banks’ lending and investing in low- to moderate-income communities.

The final rule also includes bank-friendly changes such as pushing back the date when lenders are required to comply and easing some standards so that banks have a better chance of succeeding on their CRA reviews.

But banks classified as large will still be on the hook to lend and invest more in eligible neighborhoods. Those with poor scores on CRA exams can face regulatory holdups for mergers and other expansion plans.

Community bankers say the new rule puts them at a significant disadvantage, treating a lender with $2 billion in assets the same as a $2 trillion giant.

“By classifying all banks over $2 billion in assets as large banks, we are very concerned that the rule does not sufficiently differentiate between community banks and the nation’s largest banks,” Independent Community Bankers of America President and CEO Rebeca Romero Rainey said in a statement.

Bowman noted that most banking regulations apply tougher standards at the $10 billion asset level. For example, only banks of that size are subject to Consumer Financial Protection Bureau supervision, cutting out most community lenders.

Tailored Approach

The Fed, FDIC, and OCC may have been hesitant to make major changes to what constitutes a large bank.

The current CRA threshold is around $1.5 billion in bank assets. A jump to $10 billion would have risked exempting too many banks from the toughest standards, said Peter Dugas, an executive director at financial consultancy firm Capco.

“Their policy goal is to serve as many communities as possible in a meaningful way. Focusing on banks of $10 billion or more would restrict regulators’ ability to assess the data collection,” he said in an email.

The regulators found other ways to tailor the rule.

Banks making fewer than 150 mortgages or 400 small business loans in an eligible neighborhood, for instance, won’t be subject to retail lending assessments in those areas. The Fed estimated that change would halve the number of banks subject to the test.

In addition, banks with less than $10 billion in assets won’t be subject to enhanced data requirements under the new rule.

National Community Reinvestment Coalition President and CEO Jesse Van Tol said those exemptions should mitigate concerns expressed by Bowman and community bankers.

“She’s arguing that some of the other things that are in the rule that are tiered aren’t really tiered,” he said. “I’m not sure that she’s right.”

Despite regulators’ efforts to tailor the rule, banks ultimately will be measured against their peer institutions operating in the same neighborhoods. And a bank with trillions of dollars in assets is going to have an easier time performing well on CRA exams than a bank with only $2 billion, said Randy Benjenk, a partner in Covington & Burling LLP’s financial services group.

“There’s a little bit of tailoring of the requirements and the costs, but in terms of the bread-and-butter core evaluations that large banks are going to be subjected to, the 2s to 10s are going to be right there in the same waters as the 10-pluses,” he said.