The CRA was passed nearly 50 years ago to redress the historical practice of redlining, when the government discouraged lenders from extending mortgage loans to Black borrowers — drawing a red line around neighborhoods that were to be avoided.
The flaws in the law’s current application are underscored by the fact that the racial homeownership gap is actually wider now than it was in 1968, when redlining was legal.
The new framework, which will go into effect starting in January 2026, requires banks to lend to lower-income communities in areas where they have a concentration of mortgage and small-business loans, rather than just where they have physical branches — a change meant to bring the CRA into the modern era of online banking. It assesses banks’ retail lending and community development financing with equal weight, using benchmarks based on peer and demographic data.
Banks have opposed the new loan-threshold test, which the Fed, the FDIC and the Office of the Comptroller of the Currency first proposed last year. Banking industry groups also argue that the requirement could result in lenders shuttering operations or restricting loans in more sparsely populated areas to avoid triggering CRA obligations for the broader region.
Fed Chair Jerome Powell defended the rule before the board’s vote.
It “will better achieve the purposes of the law by encouraging banks to expand access to credit, investment, and banking services in low- and moderate-income communities,” Powell said in a statement. He said it is adapted to “changes in the banking industry, such as mobile and online banking; providing greater clarity and consistency in the application of the CRA regulations; and tailoring to bank size and type.”
For large banks, the new retail-lending assessment areas would apply to areas where they originated more than 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years — an increase from the proposed rule’s 100-mortgage and 250-small-business-loan thresholds.
“The increased thresholds are helpful, but I still think they’re low,” said a bank lobbyist who asked to not be named to discuss his initial reactions to the rule before he finished reading it.
“If a bank is doing business in one part of a county, that county is now going to be assessed in its entirety, so you have to do a cost-benefit analysis of whether it even makes sense to do business in the area,” the lobbyist said.
Republican FDIC Board Member Jonathan McKernan also voiced concern about the “conflicting incentives” the rule will impose on banks in some cases.
“The bank could invest more resources to improve its CRA performance or, conversely, scale back its activities to avoid triggering” a CRA test, he said in a statement.
National Economic Council Director Lael Brainard praised the rule, saying it would “encourage affordable housing investments and small business credit in communities all around the country,” including places that don’t have bank branches.
Any bank with over $2 billion in assets is considered a “large bank” under the rule, with smaller banks exempt from new data requirements. For banks with more than $10 billion in assets, the evaluation of retail services and products would include online banking.
Still, community banks with over $600 million in assets would also have to comply with a new retail-lending test, expanded assessment areas and increased reporting requirements.
Under the new retail-lending test, nearly 10 percent of banks would score a “needs to improve” rating, according to an agency analysis of data from 2018 to 2020, compared with about 1 percent of banks getting that rating today.
Such a score would preclude those banks from getting an overall “satisfactory” CRA rating — below which banks are generally prohibited from merger and acquisition activity.
Fed Governor Michelle Bowman voted against the rule, saying the regulators “have arguably exceeded the authority granted by the CRA statute” by evaluating banks outside of their “deposit-taking footprint.”
Banks have made the same argument – that the original statute is limited to physical branches, rather than lending activity areas.
David Dworkin, president and CEO of the National Housing Conference, suggested the argument relies on a limited reading of the meaning of “branch.”
“Most of us, myself included, haven’t been inside of a branch in years — my app is my branch,” he said. “There’s nothing in the 1977 statute that says a branch has to be built with steel and brick rather than 0s and 1s.”
Dworkin called the final rule an “impressive achievement,” noting that it had picked up bipartisan support with the vote of Fed Governor Chris Waller.
Bank lobbyists’ early reactions to the final rule were mixed as they studied its nearly 1,500 pages.
One lobbyist said he had been “pleasantly surprised” by the changes regulators made since releasing the proposed version in April 2022 and that legal action was a more remote possibility as a result.
For instance, a key provision of the proposal that industry advocates had flagged as a potential source of litigation — stating that a bank could be downgraded even for unrelated compliance violations with other laws, rather than violations related to credit and discrimination — was withdrawn.
In her dissent, Bowman said the rule “is unnecessarily complex, overly prescriptive, and contains disproportionately greater costs than benefits, adding significantly greater regulatory burden for all banks, but especially for community banks.”
She also questioned why the agencies needed to update the rule in the first place.
“The premise of the changes being made in this rule is that banks are not doing enough to meet the credit needs of their communities,” she said. “Yet, there is no evidence provided to support this premise.”
Fair-lending and civil rights advocates say the current rules clearly aren’t working, noting the racial homeownership gap — 75 percent of white Americans own their homes, compared with 46 percent of Black Americans.
They had pushed the bank regulators to make race an explicit part of the rule.
“CRA was always intended to end racist practices and reverse their impacts on families and communities,” said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition.
“It is a deep disappointment that these new final rules still fail to make the racial wealth equity goals of the law explicit, even as the agencies appear to have made great strides in fixing a broken system that permitted blatantly discriminatory banks to receive ‘Outstanding’ grades for atrocious performance,” he added.
Dworkin said regulators made the right call in light of recent Supreme Court decisions on affirmative action.
“I know many activists will be disappointed that this did not go harder on race,” he said. “The problem is the Supreme Court has had a lot to say about that since this regulatory process began and the last thing we’d want is to put the statute at risk.”