By Pete Schroeder
WASHINGTON U.S. banking regulators are set to adopt new rules to modernize fair lending standards for banks, requiring them to take into account more than their physical presence to ensure they are adequately servicing communities.
The Federal Reserve unveiled the final rules, which updates rules enforcing the 1977 Community Reinvestment Act, which ordered banks to service lower-income areas and grades them on their performance.
The new rules, which conclude a multiyear effort by regulators to rewrite regulations that had been in place since 1995, would expand areas where banks can be graded beyond just where they are physically located to include parts of the country where they engage in significant mortgage and small business lending.
The changes reflect the rise of online banking and the reduced role physical branches play in providing services. Previously, banks were expected to provide services around branches.
The prospect of added scrutiny from regulators was a concern for banks, which value high grades for reputational reasons, and because low grades can allow regulators to curb their growth and order them to address shortcomings.
However, regulators said they adjusted and simplified this new standard from a May 2022 proposal to make higher grades more achievable.
The updated rules also attempt to provide a more consistent process for grading banks' performance, after the industry complained the prior regime could be opaque and subjective. Now, regulators will maintain a list of the types of activities banks can do to receive credit under the CRA grading system, and allow them to seek feedback on if an activity would count beforehand.
Regulators also agreed to give banks more time to come into compliance with the new rules, with most requirements not taking effect until the beginning of 2026.
The Fed is set to vote on the proposal Tuesday morning. Two other regulators, the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, are expected to finalize identical rules later in the day.
The trio had been struggling to update the rules for years, as regulators could not agree under a common approach under the Trump administration.
(Reporting by Pete Schroeder; Editing by Andrea Ricci)