Garnet Capital Advisors Blog

EXCERPT:  Upcoming rule changes in December will impact banks that lend to lower-income borrowers in terms of meeting CRA requirements. This could potentially change how lenders profit from loans in lower-income communities.

The OCC is proposing changes that would impact how banks loan to lower-income communities.

Proposed changes to how banks lend could change how lenders earn CRA credit from loans made in lower-income communities.

The Office of the Comptroller of the Currency (OCC) is proposing to transform regulations of the Community Reinvestment Act (CRA) by making requirements in how banks serve borrowers of all income levels who live nearby more transparent. Such changes are said to help banks more easily meet lending requirements, especially in lower-income communities. The proposed changes are expected to be published at some point in December.

What Impact Will the Proposed Changes Have on Banks?

The new OCC proposal would encourage banks to make loans to lower-income borrowers based on where the borrowers are located relative to the bank branches in hopes of generating more loans into communities that need it most. Approximately 1,200 banks would be subject to the new proposal, including some of the largest banks in the country, such as JPMorgan Chase and Wells Fargo.

Industry insiders believe that changing the rules in such a way would not only be beneficial for these areas, but also for banks, because the new rules would be clear and measurable. But it is not yet known whether the modifications would be applied uniformly across all regulators that manage the CRA. The OCC oversees about 70 percent of community lending activity.

It's estimated that banks made $482 billion in loans to lower-income borrowers in 2017, comprising 4.1 percent of deposits.

CRA Rules Designed to Combat "Redlining"

The CRA was first enacted in 1977 in an effort to deal with practices that involved not lending in specific low-income, minority communities, a practice known as "redlining." But considering the way the banking sphere has changed since then - namely, when it comes to technology - there is growing agreement among policymakers that changes and updates to the rules are warranted.

There is speculation that talks between the OCC and the Federal Reserve regarding the proposed changes may break down. 

Over the recent past, the law has caused conflict between various community groups and banks. While community groups fight to have the rules more strongly enforced, banks argue that the rules are too full of red tape, hard to follow and outdated.

Further, the Federal Reserve and OCC are not on the same page when it comes to how to revamp the regulations. As such, the central bank is not expected to join in on the overhaul. Regardless, the OCC will still move forward without the Fed if talks between the two entities end, which would be rather unusual, particularly when it comes to such high-profile regulation changes. If the agencies - along with the Federal Deposit Insurance Corporation (FDIC) - are not all on board with the changes, this could potentially create a situation where pushback may occur in the industry.

Before the new OCC proposal is completed, it will be subject to public comment.

Banks and Lenders Are Encouraged to Hedge Against Potential Future Risk

While the agencies hash out the proposed changes to how banks and lenders lend to lower-income communities, financial institutions are encouraged to revisit their loan portfolios and ensure that they are filled with the right types of assets that are low-risk, short-term, and high-yielding.

Not only will this help to maintain profitability and competitiveness in the industry, but it will also help hedge against risk. And Garnet Capital can help with that. With the upcoming rule change proposed by the OCC and its impact on banks and lenders when meeting CRA requirements, Garnet can help fill this need by offering portfolios being sold by other banks or pairing banks with specialty finance companies or fintechs.

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