WASHINGTON, April 3 (Reuters) - U.S. regulators should relax penalties for banks that fail to meet their obligation to lend to low-income communities, according to recommendations released by the Treasury Department on Tuesday.
Under the decades-old Community Reinvestment Act (CRA), banks must promote financial inclusion by extending mortgages and other types of credit to low-income communities where they take deposits. Lenders that fall short face limits on opening new branches and otherwise growing their business.
The Treasury Department said in a report that bank regulators should ease those penalties, such as restrictions on new branch applications, if the lender promises to fix its shortcomings.
"A bank with a less than satisfactory CRA rating should continue to receive enhanced scrutiny, but more consideration should be given to the banks remediation efforts to date and whether approving the application would benefit the communities served by the bank," it adds.
The Treasury Department recommendations are not binding but will shape the debate on future reforms of the CRA, conceived in 1977 to combat racial discrimination and unfair lending. Treasury Secretary Steve Mnuchin said in a statement that he viewed the law as outdated due to changes in technology and market structure.
The report forms part of a broader effort by the Treasury to fulfill President Donald Trump's pledge to cut red tape across the financial sector in hopes of stimulating economic growth.
The Office of the Comptroller of the Currency (OCC), which regulates national banks day-to-day, has said it plans to issue a consultation on reforming the CRA. The Federal Reserve has also said it is open to changing the rules.
Other Treasury recommendations include expanding the definition of "geographic assessment area" to include communities far from where a bank has its physical footprint and where the bank accepts deposits to reflect the rise of digital banking.
CRA exams can take years and the Treasury report recommends that work should happen faster. (Reporting by Katanga Johnson and Patrick Rucker Editing by Michelle Price and David Gregorio)