On February 14, 2022, the acting comptroller of the US 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 for addressing climate-related financial risks. Specifically, in response to questions following a speech on the pending interagency rulemaking on the Community Reinvestment Act, he recognized an inherent tension between the goals of lending to underserved communities and managing climate-related financial risks.2 As banks continue to develop climate risk management capabilities, they should 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 sought to encourage insured depository institutions to lend in and otherwise meet the credit needs of the communities in which they do business.
The CRA’s implementing regulations were last revised in 1995 and do not reflect the expansion of online banking and contraction of physical branch networks. The OCC revised its CRA regulations between 2018 and 2020, but those revisions were repealed in December 2021.3 The Federal Deposit Insurance Corporation (“FDIC”) joined the OCC in its proposed revisions to the CRA regulations but did not join in the finalization of that proposal.4 The Board of Governors of the Federal Reserve System (“Federal Reserve”) issued an advance notice of proposed rulemaking on the CRA in 2020 but has not issued a proposal or taken further action.5 However, all of the regulators have indicated that their staffs are working on revisions to the CRA’s implementing regulations.6
Climate Risk Management
As we have discussed in an earlier Legal Update, in 2021, the OCC launched a wide-ranging initiative to address climate-related financial risks. Under this initiative, OCC-regulated banks are expected to promptly implement enhanced governance, strategic planning, risk management, oversight and data reporting practices for climate change. This includes considering the climate-related financial risks in credit decisions and the pricing of financial products. It also means that banks will be expected to monitor climate-related credit risks by using analyses that consider sectoral, geographic and single-name concentrations, including credit risk concentrations stemming from the physical and transition risks of climate change.
In his February 14 comment, Acting Comptroller Hsu stated that he is concerned that insufficient attention is being paid to the inherent tension between the goals of lending to underserved communities and managing climate-related financial risks. He stated that this tension arises because climate risk management practices that are being encouraged by the OCC could lead to a reduction in lending and investment in underserved communities that are or will be affected by climate change.
In particular, he said that the OCC must be careful that its climate risk management initiative does not create a “climate redline map that impacts [low- and moderate-income (“LMI”) communities] adversely.” 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 concern that banks seeking to manage their climate-related credit risks might end up reducing lending within geographies that are or will be affected by climate change or increasing the cost of loans for borrowers in those geographies. He indicated that this is an issue that “we gotta start talking about.”
The National Community Reinvestment Coalition has suggested that regulators could address the inherent tension between these two regulatory priorities by providing CRA credit for “precovery” efforts in LMI neighborhoods, whereby banks would receive credit for loans or investments that are used to protect against climate risks, such as upgrades to buildings in flood- or fire-prone areas.7 It would be similar to the approach that the New York Department of Financial Services (“NYDFS”) has taken under its version of the CRA.8 Banks should consider whether this approach would allow them to continue lending in LMI communities that are or will be affected by climate change.
Additionally, banks might consider requesting that regulators provide CRA credit more broadly to projects that address climate change, regardless of location, under the argument that sustainability activities in one location (e.g., increasing renewable energy production in California) may provide benefits to LMI individuals in other locations. While the regulators have not accepted this argument in other similar settings (e.g., solar projects), the imperative to manage climate-related financial risk at an institution- and system-wide level may present an opportunity to revisit providing CRA credit as a solution. Further, the Federal Reserve’s advance notice of proposed rulemaking suggests that regulators may be willing to consider non-LMI investments and activities that achieve specific policy goals (e.g., investments in women-owned financial institutions) as a factor in assigning an “outstanding” rating.9
Finally, regardless of the pending revisions to the CRA regulations, banks should ensure that their climate risk management activities comply with fair lending requirements. Climate redlining is not explicitly prohibited, but banks should ensure that their climate-related lending decisions are driven by objective business factors that do not operate to improperly reduce access to credit for applicants and communities of color. For example, a climate risk policy that prohibits lending in certain fire zones could draw scrutiny if exceptions are routinely made for larger dollar value loans because that practice may disproportionately favor non-Hispanic white applicants and disproportionately exclude minority applicants from consideration. These fair lending requirements are not new to banks but are one of the many considerations that should be evaluated by those responsible for addressing climate-related financial risks.
1 “Redlining” traditionally has referred to the practice whereby lending institutions refused to offer home loans in certain neighborhoods based on the income, racial or ethnic composition of the area. The term “redlining” stems the practice of using a red pencil to outline such areas. See OCC, Fact Sheet on the Community Reinvestment Act (Mar. 10, 2014).
2 See NCRC, A Conversation With OCC Acting Comptroller Hsu (Feb. 14, 2022), https://ncrc.org/ncrc-hosts-a-conversation-with-occ-acting-comptroller-hsu/.
6 E.g., OCC, Acting Comptroller Discusses Modernization of the Community Reinvestment Act (Feb. 14, 2022); FDIC, Acting Chairman Martin J. Gruenberg Announces FDIC Priorities for 2022 (Feb. 7, 2022); Federal Reserve, Federal Reserve Board statement on the Community Reinvestment Act (July 20, 2021).