By Andrew Ackerman 

WASHINGTON -- Federal banking regulators on Thursday proposed an overhaul of rules governing how banks lend hundreds of billions of dollars in low-income neighborhoods, a plan that is already generating criticism from community groups.

The overhaul is a priority for Comptroller of the Currency Joseph Otting, who says it will boost lending under the Community Reinvestment Act and make existing requirements more transparent and consistent. The act requires banks to serve borrowers of all income levels in their communities.

Advocacy groups and some congressional Democrats are raising objections to the plan, saying it could inadvertently curb lending to poorer neighborhoods. Some bank lobbyists have privately expressed concern the initiative will increase costs of compliance with the act.

Mr. Otting dismissed those concerns. "If you don't like this, you are either economically advantaged by the current structure or you don't understand it," he said in an interview this week. In discussions with major banks, "nine out of 10 are supportive of the direction we're heading."

The plan is backed by a second regulator, the Federal Deposit Insurance Corp., but not by the Federal Reserve. The Fed is considering a separate overhaul, according to people familiar with the central bank's thinking.

Officials at all three regulators say they hope they can ultimately agree on a plan. "We worked very hard to try to get aligned with the OCC on a proposal, and my hope is that we can still do that," Fed Chairman Jerome Powell said Wednesday. "I don't know whether that will be possible or not."

Friction over the proposal between the Fed and OCC has been palpable behind the scenes. In November, Mr. Otting sent an email to Fed governor Lael Brainard, who is leading Fed efforts on the issue, saying the central bank was slow-walking the overhaul, according to people familiar with the message. Fed officials objected to that characterization and said the OCC was moving forward with a plan that lacks analytical rigor, the people said.

In an acknowledgment that the proposed framework could be costly to banks, the OCC and FDIC said lenders with less than $500 million in assets could opt out. That threshold would cover about three-quarters of banks overseen by the FDIC, though the firms generate a fraction of the roughly $480 billion in annual CRA lending and investment.

Since its inception, regulators and Congress have turned the CRA into an extensive public test evaluating how many loans, branches and investments a bank has to serve the poor. Evaluations are based on a complex formula that includes loans to home buyers and small businesses and the number of branches in lower-income areas. Bad grades can result in restrictions on bank mergers and other activities.

The overhaul would more precisely define the types of lending and other activities that qualify under the act and redefine the geographic areas where they occur, known as assessment areas. If successful, it would allow regulators to see more easily if lending matches up with deposits.

Banks would still be required to lend in lower-income neighborhoods near their branches, but under the new rules they would also be examined based on areas where they have significant deposits.

Mr. Otting, a former bank executive who has made overhauling the regulations a top focus, once faced public pushback from community groups in the midst of a merger between his former firm, OneWest Bank, and CIT Group Inc.

The OCC and FDIC proposal will be subject to public comment before it can be completed as early as next year.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

(END) Dow Jones Newswires

December 12, 2019 14:18 ET (19:18 GMT)