On February 14, 2022, the acting Comptroller of the United States Office of the Comptroller of the Currency (“OCC”), Michael Hsu, unveiled the concept of climate redlining1 as a new aspect of his agency’s initiative to address climate-related financial risks. Specifically, in response to questions following a speech on the development of pending interagency rules on the Community Reinvestment Act, he acknowledged an inherent tension between the goals of lending to underserved communities and the management of climate-related financial risks.2 As banks continue to develop their capacity to manage climate risks, they need to understand the risks and opportunities presented by this tension and engage with regulators and local communities on potential solutions.
Community Reinvestment Act
Since 1977, the Community Reinvestment Act (“CRA”) has been intended to encourage insured deposit-taking institutions to lend and otherwise meet the credit needs of the communities in which they operate.
The CRA’s implementing regulations were last revised in 1995 and do not reflect the expansion of online banking services and the contraction of physical branch networks. The OCC revised its CRA regulations between 2018 and 2020, but these revisions were repealed in December 2021.3 The Federal Deposit Insurance Corporation (“FDIC”) joined the OCC in its proposed revisions to CRA regulations, but did not join in the finalization of this proposal.4 The Board of Governors of the Federal Reserve System (“Federal Reserve”) issued a notice of proposed CRA rulemaking in 2020, but has not issued a proposal or taken any other action.5 However, all regulators indicated that their staff are working on revising the CRA’s implementing regulations.6
Climate risk management
As we mentioned in a previous legal update, in 2021 the OCC launched a far-reaching initiative to address climate-related financial risks. As part of this initiative, banks regulated by the OCC must rapidly implement improved governance, strategic planning, risk management, monitoring and reporting practices on climate change. This includes factoring climate-related financial risks into credit decisions and the pricing of financial products. It also means that banks will need to monitor climate-related credit risks using analyzes that take into account sector, geographic and single name concentrations, including credit risk concentrations arising from physical and transition risks of climate change. .
In his February 14 commentary, Acting Comptroller Hsu said he was concerned that insufficient attention was being given to the inherent tension between lending to underserved communities and managing climate-related financial risks. He said this tension arises because the climate risk management practices that are promoted by the OCC could lead to reduced lending and investment in underserved communities that are or will be affected by climate change.
In particular, he said the OCC must ensure that its climate risk management initiative does not create a “climate red line map that impacts [low- and moderate-income (“LMI”) communities] unfavorably. However, he went on to explain that in his conversations with other stakeholders, “everyone says we’re not quite sure yet” how to address the fear that banks seeking to manage their climate-related credit risks end up reducing lending in geographies that are or will be affected by climate change or increasing the cost of lending to borrowers in those geographies. He said it was an issue that “we have to start talking about”.
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The National Community Reinvestment Coalition has suggested that regulators could resolve the inherent tension between these two regulatory priorities by providing credit to the ARC for “pre-recovery” efforts in LMI neighborhoods, under which banks would receive a credit for loans or investments that are used to protect against climate risks, such as retrofitting buildings located in areas prone to flooding or fire.7 This would be similar to the approach taken by the New York Department of Financial Services (“NYDFS”) in its version of ARC.8 Banks should consider whether this approach would allow them to continue lending to LMI communities that are or will be affected by climate change.
Additionally, banks could consider asking regulators to extend ARC credits more broadly to projects that address climate change, regardless of location, on the grounds that sustainability activities in one location (e.g. , increasing renewable energy generation in California) may provide benefits to IMT individuals in other locations. Although regulators have not accepted this argument in other similar contexts (e.g. solar projects), the imperative to manage climate-related financial risk at the institution and system level may present an opportunity to review the provision of credit to the ARC as a solution. In addition, the Federal Reserve’s advance notice of regulatory proposals suggests that regulators may be willing to consider non-IMT investments and activities that achieve specific policy objectives (for example, investments in women-owned financial institutions) as a factor in assigning an “outstanding” rating. .9
Finally, regardless of ongoing revisions to CRA regulations, banks need to ensure that their climate risk management activities comply with fair lending requirements. Climate redlining is not explicitly prohibited, but banks must ensure that their climate-related lending decisions are driven by objective business factors that do not unduly reduce access to credit for applicants and communities of color . For example, a climate risk policy that prohibits lending in certain fire zones could come under scrutiny if exceptions are routinely made for higher dollar value loans, as this practice can disproportionately favor non-Hispanic white applicants and disproportionately exclude minority applicants. These fair lending requirements are not new to banks but are among many considerations that should be assessed by those responsible for managing climate-related financial risks.
1 “Redlining” traditionally refers to the practice of lending institutions refusing to offer home loans in certain neighborhoods based on income, racial or ethnic makeup of the area. The term “redlining” derives from the practice of using a red pencil to outline these areas. To see OCC, Community Reinvestment Act Fact Sheet (March 10, 2014).
2 To see NRC, A Conversation with Acting OCC Controller Hsu (February 14, 2022), https://ncrc.org/ncrc-hosts-a-conversation-with-occ-acting-comptroller-hsu/.
3 To see OCC, Bull. 2021-61 (December 15, 2021).
4 85 Fed. Reg. 1204 (9 March 2020).
5 85 Fed. Reg. 66,410 (October 19, 2020).
6 For example.,OCC, Acting Comptroller Discusses Community Reinvestment Act Modernization (February 14, 2022); FDIC, Acting Chairman Martin J. Gruenberg Announces FDIC Priorities for 2022 (February 7, 2022); Federal Reserve, Federal Reserve Board Statement on the Community Reinvestment Act (July 20, 2021).
7 Evan Weinberger, Climate risk prevents banking regulators from updating anti-redlining planBLOOMBERG LAW (February 22, 2022).
8 To see NYDFS, ARC consideration for activities that contribute to climate change mitigation and adaptation (February 9, 2021).
9 85 Fed. Reg. at 66,449.