Bank Regulator Pitches Low-Income Lending Rule Changes on U.S. Road Trip

ATLANTA—A Trump-appointed bank regulator is touring the country trying to sell his plans to modify lower-income lending requirements and overcome resistance from other regulators, banks and community advocates.

Comptroller of the Currency

Joseph Otting,

who took office in 2017, has made it his top priority to revamp rules implementing the 1977 Community Reinvestment Act, which requires banks to serve borrowers of all income levels who reside near their branches.

The law was intended to combat the practice of redlining, or banks carving out poor and minority neighborhoods from their lending and investment plans. But at a time when many banking services are provided online, there is growing consensus that the rules implementing CRA should be updated.

Mr. Otting is seeking to judge banks’ CRA performance by giving them dollar targets based on how many deposits they hold in different areas. Currently, banks are graded on the amount and quality of loans, investments and services they provide to poorer neighborhoods near their branches. Bad performance can bar banks from merging with or acquiring other banks.

“We believe that moving to a more objective measure is helpful for everybody,” Mr. Otting said, adding that he wanted CRA grades to be as clear-cut as capital and liquidity requirements. “If need be,” he added, “I would go alone in this, but that is not my preference.”

Mr. Otting has sought to change the rules jointly with the Federal Reserve and Federal Deposit Insurance Corp., the two other agencies that implement CRA, but expressed frustration with the pace of the process.

The numbers-based approach has been criticized by

Federal Reserve Gov. Lael Brainard,

an Obama appointee in charge of the CRA effort.

“Regulatory revisions that do not contemplate evaluating CRA performance in context risk undermining CRA’s greatest attribute,” Ms. Brainard said in a speech in Baltimore last year. That attribute, she added, is “recognition that banks are uniquely situated to be responsive to the most impactful community and economic development needs in communities.”

The OCC estimates that banks made $482 billion in CRA loans in 2017, amounting to 4.1% of deposits that year, down from 4.6% in 2016.

Mr. Otting said he has presented his proposals in a draft to the other agencies and is waiting for the Fed to present a competing approach to overhauling CRA evaluations. Either way, he said he wants to move forward with a formal proposal in the fall.

Armed with thick fliers, he has launched a roadshow in various cities across the U.S. to outline his vision.

After a recent bus tour of community development projects in Atlanta, he sat down for a roundtable with dozens of local lenders, community advocates and dignitaries including Ambassador

Andrew Young,

a former diplomat and civil rights activists.

The comptroller, a former bank executive who once faced public pushback from community groups in the midst of a merger between his former firm OneWest Bank and CIT Group Inc., listened for hours to their comments, answered questions about CRA and recommended a funny video of carp jumping out of the water.

“It’s one of the most amazing YouTubes you’ve ever seen,” he said, and then launched into a history of the Community Reinvestment Act. 

Under Mr. Otting’s plan, banks would still be required to lend in lower-income neighborhoods near their branches and examiners would have discretion to interpret the numbers based on local conditions.

He also wants to require banks to make CRA loans or investments in any area where they hold more than 5% of their overall deposits. And banks would have to ensure their loans aren’t only made in poorer neighborhoods, but that they go to lower-income borrowers.

Bank representatives say they support the intent of Mr. Otting’s plan but worry that the quantitative approach might be too rigid.

“We want to be very supportive of a more predictable, less subjective process,”

Howard Headlee,

chief executive of the Utah Bankers Association, said. “But the idea that you could accomplish that with a single metric is challenging.”

Community groups are also skeptical of the proposals. Many of them raised concerns about his numbers-focused approach in private meetings with him last week, according to people in the room.

Such a system could open “a big loophole where banks can run up a dollar figure to hit some metric in one area of need, but largely ignore others,”

Jesse Van Tol,

chief executive of fair-lending advocacy group the National Community Reinvestment Coalition said. “That could have a very negative impact on communities.”

Share your thoughts

What benefits or drawbacks do you see to the modification of lower-income lending requirements? Join the conversation below.

Write to Lalita Clozel at lalita.clozel.@wsj.com

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