On February 14, 2022, the appearing comptroller of the US Workplace of the Comptroller of the Forex (“OCC”), Michael Hsu, unveiled the idea of local weather redlining1 as a brand new facet of his company’s initiative for addressing climate-related monetary dangers. Particularly, in response to questions following a speech on the pending interagency rulemaking on the Group Reinvestment Act, he acknowledged an inherent stress between the objectives of lending to underserved communities and managing climate-related monetary dangers.2 As banks proceed to develop local weather danger administration capabilities, they need to perceive the dangers and alternatives introduced by this stress and interact with regulators and native communities on potential options.
Group Reinvestment Act
Since 1977, the Group Reinvestment Act (“CRA”) has sought to encourage insured depository establishments to lend in and in any other case meet the credit score wants of the communities during which they do enterprise.
The CRA’s implementing rules had been final revised in 1995 and don’t replicate the growth of on-line banking and contraction of bodily department networks. The OCC revised its CRA rules between 2018 and 2020, however these revisions had been repealed in December 2021.3 The Federal Deposit Insurance coverage Company (“FDIC”) joined the OCC in its proposed revisions to the CRA rules however didn’t be part of within the finalization of that proposal.4 The Board of Governors of the Federal Reserve System (“Federal Reserve”) issued an advance discover of proposed rulemaking on the CRA in 2020 however has not issued a proposal or taken additional motion.5 Nevertheless, the entire regulators have indicated that their staffs are engaged on revisions to the CRA’s implementing rules.6
Local weather Danger Administration
As we’ve got mentioned in an earlier Authorized Replace, in 2021, the OCC launched a wide-ranging initiative to deal with climate-related monetary dangers. Underneath this initiative, OCC-regulated banks are anticipated to promptly implement enhanced governance, strategic planning, danger administration, oversight and knowledge reporting practices for local weather change. This contains contemplating the climate-related monetary dangers in credit score choices and the pricing of economic merchandise. It additionally signifies that banks shall be anticipated to watch climate-related credit score dangers by utilizing analyses that contemplate sectoral, geographic and single-name concentrations, together with credit score danger concentrations stemming from the bodily and transition dangers of local weather change.
Inherent Rigidity
In his February 14 remark, Performing Comptroller Hsu acknowledged that he’s involved that inadequate consideration is being paid to the inherent stress between the objectives of lending to underserved communities and managing climate-related monetary dangers. He acknowledged that this stress arises as a result of local weather danger administration practices which might be being inspired by the OCC may result in a discount in lending and funding in underserved communities which might be or shall be affected by local weather change.
Particularly, he mentioned that the OCC should be cautious that its local weather danger administration initiative doesn’t create a “local weather redline map that impacts [low- and moderate-income (“LMI”) communities] adversely.” Nevertheless, he went on to clarify that in his conversations with different stakeholders, “everybody says we’re not fairly positive but” tips on how to deal with the priority that banks searching for to handle their climate-related credit score dangers may find yourself decreasing lending inside geographies which might be or shall be affected by local weather change or growing the price of loans for debtors in these geographies. He indicated that this is a matter that “we gotta begin speaking about.”
Takeaways
The Nationwide Group Reinvestment Coalition has advised that regulators may deal with the inherent stress between these two regulatory priorities by offering CRA credit score for “precovery” efforts in LMI neighborhoods, whereby banks would obtain credit score for loans or investments which might be used to guard in opposition to local weather dangers, similar to upgrades to buildings in flood- or fire-prone areas.7 It will be just like the strategy that the New York Division of Monetary Providers (“NYDFS”) has taken underneath its model of the CRA.8 Banks ought to contemplate whether or not this strategy would permit them to proceed lending in LMI communities which might be or shall be affected by local weather change.
Moreover, banks may contemplate requesting that regulators present CRA credit score extra broadly to tasks that deal with local weather change, no matter location, underneath the argument that sustainability actions in a single location (e.g., growing renewable power manufacturing in California) might present advantages to LMI people in different places. Whereas the regulators haven’t accepted this argument in different related settings (e.g., photo voltaic tasks), the crucial to handle climate-related monetary danger at an institution- and system-wide degree might current a possibility to revisit offering CRA credit score as an answer. Additional, the Federal Reserve’s advance discover of proposed rulemaking means that regulators could also be prepared to contemplate non-LMI investments and actions that obtain particular coverage objectives (e.g., investments in women-owned monetary establishments) as a think about assigning an “excellent” score.9
Lastly, whatever the pending revisions to the CRA rules, banks ought to be certain that their local weather danger administration actions adjust to truthful lending necessities. Local weather redlining shouldn’t be explicitly prohibited, however banks ought to be certain that their climate-related lending choices are pushed by goal enterprise elements that don’t function to improperly cut back entry to credit score for candidates and communities of coloration. For instance, a local weather danger coverage that prohibits lending in sure hearth zones may draw scrutiny if exceptions are routinely made for bigger greenback worth loans as a result of that apply might disproportionately favor non-Hispanic white candidates and disproportionately exclude minority candidates from consideration. These truthful lending necessities usually are not new to banks however are one of many many concerns that needs to be evaluated by these chargeable for addressing climate-related monetary dangers.
1 “Redlining” historically has referred to the apply whereby lending establishments refused to supply house loans in sure neighborhoods based mostly on the earnings, racial or ethnic composition of the realm. The time period “redlining” stems the apply of utilizing a crimson pencil to stipulate such areas. See OCC, Reality Sheet on the Group Reinvestment Act (Mar. 10, 2014).
2 See NCRC, A Dialog With OCC Performing Comptroller Hsu (Feb. 14, 2022), https://ncrc.org/ncrc-hosts-a-conversation-with-occ-acting-comptroller-hsu/.
3 See OCC, Bull. 2021-61 (Dec. 15, 2021).
4 85 Fed. Reg. 1204 (Mar. 9, 2020).
5 85 Fed. Reg. 66,410 (Oct. 19, 2020).
6 E.g., OCC, Performing Comptroller Discusses Modernization of the Group Reinvestment Act (Feb. 14, 2022); FDIC, Performing Chairman Martin J. Gruenberg Publicizes FDIC Priorities for 2022 (Feb. 7, 2022); Federal Reserve, Federal Reserve Board assertion on the Group Reinvestment Act (July 20, 2021).
7 Evan Weinberger, Local weather Danger Stumps Financial institution Regulators Updating Anti-Redlining Plan, BLOOMBERG LAW (Feb. 22, 2022).
8 See NYDFS, CRA Consideration for Actions that Contribute to Local weather Mitigation and Adaptation (Feb. 9, 2021).
9 85 Fed. Reg. at 66,449.