U.S. banking regulators unveil proposal to update low-income lending standards

By Pete Schroeder

WASHINGTON, Dec 12 (Reuters) - A pair of U.S. banking regulators unveiled a proposed overhaul to community lending standards on Thursday, kicking off a contentious policy fight over the proper way to ensure banks are supporting lower-income borrowers where they do business.

The proposal would offer banks more specific examples of what sort of activity qualifies for credit under the Community Reinvestment Act and give them more flexibility in terms of where they engage in that type of lending.

Rules around the CRA, a 1977 law which requires regulators to assess how well banks are serving the needs of lower-income communities, were last updated in 1995. The new proposal from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation is aimed in large part at accommodating how banks do business now.

However, the rule-writing effort is likely to face opposition from Democrats in Congress and community groups who worry the update could make it easier for banks to pass their exams, leading to fewer loans made in low-income communities.

Banks are regularly graded by their regulators on CRA compliance, and if they come up short they can face restrictions on business activity, such as potential mergers.

Despite drafting a proposed rewrite, the path forward for finalizing any new rules is unclear. The Federal Reserve, which shares responsibility for enforcing CRA rules with the other two regulators, declined to join the rule proposal.

Fed officials have said they are still working on updating the rules themselves but were unable to agree to Thursday's proposal. The absence of the central bank raises the potential that different banks may have to adhere to different sets of rules depending on who is responsible for directly monitoring them.

(Reporting by Pete Schroeder Editing by Nick Zieminski)