The U.S. Federal Reserve caught the attention of the financial services market this week with Fed Governor Lael Brainard’s speech Wednesday (Oct. 3) on the rising demand for faster and real-time payments. But, the Fed also touched on another aspect of the finserv market: small business banking and lending.
Reports in Reuters said President Loretta Mester of the Cleaveland Federal Reserve urged an overhaul and update of decades-old regulations on small business banking that would make a significantly large impact on the nation’s community banks.
The remarks, made at a community banking conference held in St. Louis this week, highlighted the Fed’s support of White House interest in exploring regulatory updates to support small businesses and increase SMB lending. While current regulations under the Community Reinvestment Act (CRA) have boosted small business lending in poorer communities in the country, regulations must reflect modern-day technological advancements and banking practices, Mester said.
The CRA, which came into effect in 1977, “has provided tangible benefits to low- and moderate-income neighborhoods,” she stated. “On the margin, bank lending in these areas is higher than it otherwise would be.” The regulations require officials to assess community banks based on their lending practices and release data about small business loan applications, including geography and other demographics.
According to reports, the most recent review of the law occurred 20 years ago. Mester noted that banking practices and finserv technologies have now forced officials to reexamine the rules, which are already being examined by the U.S. Treasury Department.
“Banks come in different sizes, serve areas with different needs, and use different business models,” said Mester, who added that regulations must be more flexible and address the needs of “different kinds of banks” so they can remain compliant with CRA rules while still bolstering their communities.
A U.S. Government Accountability Office report recently found an uptick in small business lending among community banks between 2001 and 2017. Analysts from the Office, as well as from an FDIC report published earlier this month, found community banks’ contributions to small business loan volumes may be significantly underestimated.