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Why This 1977 Anti-Discrimination Lending Law Still Matters to Us in 2018
The Department of Treasury has plans to relax the requirements of a decades-old rule created to ensure fair access to loans across all income brackets, The Wall Street Journal reported on Thursday.
The Community Reinvestment Act was created in 1977 to combat a practice called redlining. Redlining, a discriminatory lending practice that disproportionately impacted minority communities, allowed banks to refuse mortgages in certain neighborhoods based on income and race, even when those seeking the loans were likely to repay them.
Redlining made it nearly impossible for many qualified people living in communities banks deemed undesirable to get mortgages, small-business loans and other similar loans without paying exorbitant and often prohibitive fees.
The CRA requires banks to meet the lending needs of the communities they serve without excluding creditworthy people in low- and middle-income neighborhoods, according to the Federal Reserve Bank board of governors.
Essentially, the CRA is what stops banks from standing in the way of you and your dream of homeownership just because you don’t live in a swanky, upper-class neighborhood — assuming you have a decent credit score and make enough money to repay the loan.
So, Why Does the Treasury Want to Change the CRA?
According to The Wall Street Journal report, the Department of Treasury wants to change the CRA to make it easier for banks to comply with the rules.
Currently, banks are required to prove to that lending, investing, and retail- and community-development services are inclusive across all income brackets in the the neighborhoods they serve. Banks are also required to prove that lending in less-affluent communities is fair and not laden with unnecessary fees or risky loans.
Based on their compliance with the CRA, banks are given a range of grades from “outstanding” to “substantial noncompliance.”
The Federal Reserve Bank uses these designations when banks seek approval to open new branches, merge with other banks or relocate existing branches. “Substantial noncompliance” signifies discriminatory lending practices and could lead Federal Reserve regulators to deny a bank’s application for expansion.
The new rules, which are still being drafted, would make it easier for banks to qualify as “outstanding,” The Wall Street Journal reported.
The Treasury Department is not expected to repeal the act entirely, but it won’t be clear how the rules will impact creditworthy individuals in poor communities until the new rules are released later this year.
Desiree Stennett (@desi_stennett) is a staff writer at The Penny Hoarder.