An aging banking law gets an internet overhaul
Good morning, and welcome to Protocol Fintech. This Monday: rethinking the Community Reinvestment Act, Stripe vs. Plaid, and the earnings to watch, including Coinbase and Marqeta.
Written by the Fintech Team
Since 1995, the internet, smartphones and even social media have upended the way we save, spend and invest. That’s also the year the Community Reinvestment Act, which is meant to encourage fair lending in low- and middle-income communities and was first passed in 1977, was last updated. Finance looks a lot different today.
The OCC, Federal Reserve and FDIC issued a joint proposal Thursday for revamping the law, which was structured around the idea of banks with branches, to take into account new realities like mobile and internet banking. People are already starting to ask how it will affect neobanks — and the small banks that have a thriving business catering to them.
The CRA has been a charged issue for decades. Critics say it limits financial institutions without bringing forth the equity it promises, while supporters say it’s essential in making sure all Americans can generate wealth over time.
The act primarily targets redlining, or the systemic denial of financial services to people of color and low-income households. Most of the time, the term “redlining” is used in the context of home mortgages.
Some banks and academics say that the act requires banks to engage in risky lending practices. Under the Trump administration, the OCC unilaterally changed its rules to allow banks to qualify for the CRA by investing in broad community initiatives like road- and bridge-building projects, but the agency rescinded those rules in early 2021 before they took effect.
Some studies show the CRA reduced economic and racial residential segregation in American cities, while others suggest it’s been a vehicle for gentrification.
The OCC tried to go it alone, but now agencies are showing a coordinated front to force CRA regulations on neobanks and fintechs. CRA as it currently stands regulates banks by where their physical branches are located, which doesn’t make a lot of sense in the internet age.
34% of people used their phones as a primary method of accessing financial services in 2019, according to the FDIC, while another 22.8% primarily used the computer.
The OCC has been approving fintechs to pursue national banking charters since late last year, while companies like Better.com and LendingClub allow people to apply for mortgage loans online. Block, SoFi and LendingClub are among the fintechs that have added bank charters, putting them directly under the CRA, rather than relying on bank partners for compliance.
Whether these companies need to comply with the CRA has been a legal gray area, with many fintechs saying that they, like credit unions, already serve low- and moderate-income households. Most follow requirements for “strategic plans,” which are vague and which critics say allow them to set their own metrics for success.
Block got a bank charter for an industrial loan company. Critics have called the FDIC’s recently revised CRA compliance rules for industrial loan companies inadequate, only requiring lending in the ILC’s headquarters city. That’s just one example of the ways CRA rules don’t fit well with the modern way financial firms operate.
The proposal suggests that lenders should face increased scrutiny, particularly in cases of auto lending. Previously, most of the focus was on mortgages and small business loans.
The reforms promise to prioritize small loans with high impact, with clear definitions of other potential programs. Consumer Bankers Association president and CEO Richard Hunt said he appreciated that the proposal offered more “clarity” in a statement.
It’s still early days, but some people have begun to weigh in. Fellow regulators support the proposal (no shock there), while some think tanks and fintechs are concerned that added regulation could either be too restrictive or encourage risky loans.
Consumer Financial Protection Bureau director Rohit Chopra thinks it’s common sense. “Banks receive a range of benefits from the public. In exchange, they are obligated to adequately serve the banking and credit needs of their community,” he said in a tweet.
But others aren’t so happy. “The Community Reinvestment Act for independent mortgage bankers is nonsensical and a solution in search of a problem,” Mortgage Bankers Association CEO Robert Broeksmit told the Wall Street Journal.
Fintech analyst Alex Johnson points out that banks with under $10 million in assets, including a lot of the banks fintechs work with, might be exempt from the CRA updates. “I'd like to see a revised CRA that requires banks that provide banking-as-a-service to fintech companies to report on how those fintech companies' activities are supporting CRA objectives,” he said.
It’s also safe to assume that conservative policy analysts will continue to worry about banks granting people loans that customers simply can’t afford in the name of compliance. “Empirical research also shows that banks’ risk-taking increases ahead of their CRA evaluations,” reads a 2019 Cato Institute report.
Whatever the outcome, it looks like the country’s top banking regulators will be exerting more control over an area of the industry that has, up until this point, been mostly free to roam. The agencies are accepting comments on the proposal until August 5. — Veronica Irwin (email | twitter)
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