US banks to face tighter online lending scrutiny under updated regulations


Regulators in the US are set to tighten the screws on banks regarding which communities they serve through online lending.

This move comes as part of a larger initiative to refresh the fair lending standards established under the 1977 Community Reinvestment Act (CRA). The updated regulations aim to prevent redlining, a discriminatory act where certain areas, primarily inhabited by minorities, are refused loans or are offered limited lending options by banks.

The CRA regulations are pivotal in assessing the overall performance of banks. A subpar grade can see a lender put into a penalty box, restricting them from participating in mergers and other significant transactions.

The modernised rules have broadened the geographical areas where lenders must extend their services, particularly focusing on low-income Americans. This move will inevitably make it more challenging for banks to score high marks during CRA compliance assessments. The essence of the act, designed to prevent redlining, is to ensure that banks do not discriminate in their lending practices. Federal Reserve Vice Chair for Supervision Michael Barr said, “The final rule takes a critical step forward in modernizing the CRA regulations to help ensure that banks meet the needs of all the communities they serve.”

Previously, the CRA grades were determined by how effectively banks catered to low-income communities where they had branches. However, with the onset of the digital age, this will now include how they service these communities through online and mobile lending, especially where they provide a significant number of mortgages and small business loans. There have been some simplifications in the final rule to make higher grades more achievable. The implementation date for most requirements has been set for 2026.

Randy Benjenk, a bank regulatory partner at law firm Covington & Burling, remarked, “The final rule includes some revisions to the proposal that industry commenters had called for, but still expands the CRA into geographies and areas of focus that have never been covered before.”

With an aim to bring more clarity and consistency to the grading process, the new rules will ensure a list of activities is provided for banks to know where they can earn credit under the CRA grading system. Feedback can also be sought to determine if an activity is counted.

Despite these clarifications, some banks expressed concerns. Lindsey Johnson, head of the Consumer Bankers Association, stated, “We urge regulators to take a hard look at compliance burdens that could lead to reduced lending and to extend the implementation time frame, given the significant time and resources required for banks to comply with a complex new rule.”

In related news, the Federal Deposit Insurance Corporation (FDIC) approved guidelines on how big banks should evaluate climate-related financial risks, echoing a proposal set forth in 2021.

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