New CRA rule could redefine geography of where banks lend

Rise of mobile banking leads regulators to redefine criteria to curb discriminatory lending and redlining

Federal regulators paved the way on Tuesday for large-scale reform of retail bank lending with the issuance of a draft final rule to modernize the Community Investment Act (CRA).

First enacted in 1977, the CRA is a federal law aimed at encouraging banks to meet the needs of a full spectrum of borrowers, including those in low- and moderate-income areas. Among other things, the act, originally passed to curb discriminatory lending and redlining, mandated that institutions insured by the Federal Deposit Insurance Corp. (FDIC) receive evaluations from federal regulators on whether they offer nondiscriminatory credit services in all communities where they do business. Unsatisfactory evaluations may cause lenders to receive a poor CRA rating, which could bar them from certain corporate activities, including mergers and acquisitions.

The CRA currently defines the area in which banks do business via their physical footprint, taking into account the locations of branches and deposit-taking facilities. But with the rise of online and mobile banking (and the dwindling use of physical depositories), the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency sought to update that definition, initiating the reform proposal last year.

The new rule, which is set to take effect in January 2026, will extend the evaluation areas where lenders have concentrations of mortgages and small-business loans, which will be labeled as “Retail Lending Assessment Areas.”

That’s the biggest change in the new framework, and it’s a potentially seismic shift. Banks and industry groups spoke out against when it was first proposed, arguing that it could cause institutions to avoid lending in low-income or lightly populated areas to dodge wider assessment zones.

But David M. Dworkin, president and CEO of the National Housing Conference, applauded the shift.

“I haven’t been into a physical bank branch in years, but I visit my bank’s app on my mobile phone every week to make deposits or withdrawals,” Dworkin said. “The original statute in 1977 doesn’t require that branches be constructed out of bricks and steel. Branches today are often constructed out of ‘0s and 1s’ instead but serve the same purpose. My app is my branch, and the final regulation acknowledges this transformation, aligning the CRA with the 21st century.”

Dworkin called the regulation “the result of more than a decade of consultations with community and banking groups and years of work by regulators to get it right.”

“They got it right,” Dworkin quipped. “While not everyone is going to like everything in the final rule, it succeeds in significantly improving the status quo, and leaves room for ongoing clarification and adjustment over a 24-month implementation period [before the final rule is officially enacted in 2026].”

Other reforms in the new framework include tiered evaluation standards based on bank size; upgraded support to institutions geared toward minority lending and community development; and greater transparency and clearer metrics in the application of CRA regulations.

“To help ensure that the CRA can continue to play its vital role in supporting economic opportunity in low- and moderate-income and other underserved communities, the agencies have worked together to modernize the framework and I am pleased that those efforts have culminated today,” Federal Reserve Chair Jerome Powell said in a prepared statement.

“The final rule 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; adapting 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.”

Rob Nichols, president of the American Banking Association (ABA), also released a statement. He praised the intent of the new rule while reserving judgment on whether his organization agrees on its implementation.

“ABA and our members have long supported the goals of the Community Reinvestment Act to make sure people in every corner of the country have the chance to succeed,” Nichols said. “In demonstration of that commitment, banks of all sizes invested $287 billion in capital in low- and moderate-income areas in 2021 alone. We have also strongly supported modernizing the Community Reinvestment Act rules to reflect the realities of modern-day banking. The test for a CRA modernization rule is whether it incentivizes investment in underserved communities with requirements that are transparent, promote consistency and align with Congressional intent.

“We are still reviewing the nearly 1,500-page final rule released today, including changes from the proposed rule, to assess whether it meets our criteria. We are also closely examining whether the final rule can be reconciled with other major regulatory changes in play, including the Basel III capital proposal. Feedback from our members will guide us moving forward.”


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