Overview
Title
To establish or modify requirements relating to minority depository institutions, community development financial institutions, and impact banks, and for other purposes.
ELI5 AI
H. R. 7420 is a bill that tries to help special banks that support communities who might need extra financial help. It wants big agencies to put money in these banks and make rules to help them be fair and give more loans to people and small businesses.
Summary AI
H. R. 7420, titled the “Ensuring Diversity in Community Banking Act,” aims to support minority depository institutions, community development financial institutions, and impact banks. It establishes several initiatives, including creating designations for "impact banks" that focus on lending to low-income borrowers, forming advisory committees to aid minority depositories, and enhancing the Minority Bank Deposit Program. The bill encourages federal agencies to prioritize deposits in these institutions and sets up a task force to improve relationships between these banks and the Small Business Administration to increase lending to small businesses.
Published
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AnalysisAI
The proposed legislation, known as the "Ensuring Diversity in Community Banking Act", aims to implement or adjust certain regulations associated with minority depository institutions, Community Development Financial Institutions (CDFIs), and impact banks. Introduced in the House of Representatives, the bill seeks to broaden the roles and support mechanisms for financial institutions that primarily serve minority and low-income communities.
General Summary of the Bill
The bill seeks to expand financial opportunities in underserved communities by supporting minority and women-owned banks, minority depository institutions, and communities with limited financial access. It introduces additional classifications and designations for banks that focus on extending loans to low-income borrowers. Among its broader goals, the bill aims to promote diversity within banking regulators, establish mentorship programs, and streamline processes for financial institutions to gain certifications that benefit community development.
Summary of Significant Issues
While the objectives of the bill are commendable, several significant issues may arise from its implementation:
Exclusivity and Fairness: There is concern that the focus on Community Development Financial Institutions (CDFIs) might inadvertently exclude other capable financial entities that could aid low-income communities. This focus could limit the pool of potential partners that can access funding and benefits.
Clarity and Consistency in Definitions: The definitions and processes, specifically around "impact banks," are not well articulated, which could lead to confusion and inconsistent application across different banking institutions and jurisdictions.
Inclusivity of Women's Banks: While the inclusion of women’s banks in the definition of minority depository institutions appears progressive, it may create an imbalance by favoring banks that already meet ownership and management criteria, potentially sidelining other banks that don't yet qualify.
Procedural Ambiguities: The lack of detailed procedures for applying, appealing, and granting designations like "impact bank" status can result in opaque processes and variability in enforcement, undermining transparency and fairness.
Discretion in Federal Deposits: The significant discretion granted to the Secretary of the Treasury for managing federal deposits in minority depository institutions may also raise concerns about transparency and effectiveness of these provisions.
Impact on the Public and Stakeholders
Overall, the bill seeks to have a positive impact on communities and financial institutions serving minority and low-income populations:
For Minority and Low-Income Communities: The bill could provide increased access to financial services and products, supporting economic activities and offering a pathway out of high-interest debt cycles. Small-dollar loan programs may serve as alternatives to predatory lending, potentially reducing the financial strain on individuals.
Financial Institutions: While institutions like minority-owned banks and CDFIs could benefit from increased support and recognition, other financial entities might feel excluded or face added competition without equal opportunities for participation.
Federal Agencies and Regulators: The need to report on diversity and adhere to new guidelines might increase administrative tasks for federal agencies, demanding a balance between managing oversight and actual inclusion efforts.
Potential Negatives: With new programs, there may be challenges in achieving desired outcomes due to procedural ambiguities and the wide discretionary powers granted, potentially leading to ineffective implementation or unintended discrimination among financial entities.
By focusing on supporting minority-owned and community-focused financial institutions, the bill aims to foster inclusivity and economic growth in underserved areas. However, ensuring clear guidelines, equitable participation, and transparency will be essential to maximize the success and acceptance of this legislation.
Financial Assessment
The H. R. 7420 bill, known as the “Ensuring Diversity in Community Banking Act,” proposes several financial measures aimed at supporting minority depository institutions, community development financial institutions (CDFIs), and impact banks. These measures include federal allocations, program funding, and financial incentives, which aim to bolster economic opportunities in underserved communities. However, several issues arise from the financial aspects of the bill, as highlighted below.
Financial Allocations and Spending
Loan-Loss Reserve Fund
The bill emphasizes the need for Congress to fund the loan-loss reserve fund for small-dollar loans through the Community Development Financial Institutions Fund (CDFI Fund). This fund aims to expand economic opportunities by supporting community lending and investments. The bill notes that some CDFI programs attract as much as $10 in private capital for every $1 invested. This high leverage ratio signifies the effectiveness and potential impact of appropriations to the CDFI Fund.
Impact Bank Designation
Section 5 introduces a financial threshold for banks to be eligible as impact banks. These are banks with less than $10 billion in assets and a portfolio where loans to low-income borrowers constitute at least 50% of their total assets. The absence of detailed guidelines on the application and designation process for these banks could result in inconsistencies, potentially discouraging some institutions from applying due to uncertainty.
Issues Related to Financial References
Exclusion of Other Financial Institutions
There is concern that focusing exclusively on CDFIs and CDEs could exclude other financial institutions capable of aiding low-income communities. Given the bill's funding recommendations for CDFIs, there might be a potential oversight in expanding opportunities for non-CDFI institutions that also serve underserved areas. This could affect the fairness and impact of congressional financial allocations.
Custodial Deposit Program Caps
Section 12 introduces a custodial deposit program for minority banks, detailing deposit caps: no more than 10% of the average amount of deposits held in the previous quarter or $100 million. These limitations could restrict smaller banks from fully benefiting from the program, as their capacity to accept substantial deposits is stifled by the legislative caps. This may inadvertently favor larger institutions, contrary to the bill's intent to support smaller, minority-focused banks.
Lack of Defined Guidelines
The bill highlights substantial discretion left to the Secretary of the Treasury regarding federal deposits into minority depository institutions (Section 7). Without stringent guidelines or transparency requirements, this could lead to arbitrary decision-making, affecting how financial resources are allocated. Similarly, the mentor-protege program in Section 11 lacks enforced consequences for non-compliance, potentially limiting the support for minority depository institutions.
Conclusion
While H. R. 7420 attempts to provide financial support and improve economic opportunities for minority and underserved communities through various programs and designations, the financial allocations and mechanisms described raise several concerns. These include potential exclusions, limitations imposed on institutional participation, and a need for clearer guidelines to ensure equitable distribution and effective use of resources. Addressing these concerns could strengthen the bill's impact and efficacy in achieving its inclusive financial objectives.
Issues
Section 2: The focus on Community Development Financial Institutions (CDFIs) and Community Development Entities (CDEs) for funding may be seen as excluding other financial institutions that could potentially aid low-income communities. This raises concerns about fairness and the effective use of resources.
Sections 5 and 10: The definition and designation process for 'impact banks' lacks clarity and specificity, which may lead to confusion or inconsistent interpretation across different institutions and regions.
Section 4: The inclusion of women's banks in the definition of minority depository institutions may create an imbalance by favoring banks that already meet ownership criteria without providing a pathway for others to qualify.
Section 5: The absence of defined procedures for application, designation, and appeals for impact bank status may result in inconsistent practices and lack of transparency in how these designations are applied across different agencies.
Section 7: The provision allowing significant discretion to the Secretary of the Treasury in determining how federal deposits in minority depository institutions are collateralized or insured could lead to a lack of transparency and accountability.
Sections 6 and 9: The lack of clear criteria for measuring diversity and the absence of consequences for failing to report or implement diversity practices may undermine efforts to enhance diversity among financial institutions and regulators.
Section 12: Caps on deposit amounts in the Custodial Deposit Program may disproportionately affect smaller banks, potentially limiting their ability to benefit from the program.
Section 11: The lack of clear guidelines for the mentor-protege programs, as well as the absence of enforced consequences for not establishing mentor relationships, could hinder the intended support for minority depository institutions.
Section 14: The Task Force on Lending to Small Business Concerns lacks specific goals, budget allocation, and clear methods for improving relations, which may affect its overall effectiveness.
Sections
Sections are presented as they are annotated in the original legislative text. Any missing headers, numbers, or non-consecutive order is due to the original text.
1. Short title; table of contents Read Opens in new tab
Summary AI
The "Ensuring Diversity in Community Banking Act" sets out its short title and table of contents. It outlines sections focusing on enhancing diversity in banking, including funding for small dollar loan reserves, defining minority depository institutions, supporting women-owned banks, and establishing programs for investment and development in minority and impact banks.
Money References
- Sec. 2. Sense of Congress on funding the loan-loss reserve fund for small dollar loans.
2. Sense of Congress on funding the loan-loss reserve fund for small dollar loans Read Opens in new tab
Summary AI
Congress emphasizes the importance of funding a loan-loss reserve fund to support small-dollar loans, primarily through programs managed by the Community Development Financial Institutions Fund (CDFI Fund). These programs aim to provide financial assistance to underserved communities, facilitate access to banking services, and offer low-cost loan alternatives to avoid high-interest debt traps, by collaborating with eligible institutions like nonprofit organizations, banks, and government entities.
Money References
- SEC. 2. Sense of Congress on funding the loan-loss reserve fund for small dollar loans.
- (5) According to the CDFI Fund, some programs attract as much as $10 in private capital for every $1 invested by the CDFI Fund.
3. Definitions Read Opens in new tab
Summary AI
The section defines key terms used in the Act. It explains that a "community development financial institution" is defined according to another law from 1994, and a "minority depository institution" is defined by a law from 1989, as updated by this Act.
4. Inclusion of women’s banks in the definition of minority depository institution Read Opens in new tab
Summary AI
The section updates the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to include women’s banks in the definition of minority depository institutions. It specifies that a women's bank is one where more than half the shares are owned by women and the majority of the board members are women.
5. Establishment of impact bank designation Read Opens in new tab
Summary AI
The section establishes a program where eligible small banks can choose to be recognized as "impact banks" by having at least half of their loans go to low-income borrowers. It details how banks are informed about eligibility, how they can apply for the designation, rules on additional data requirements, procedures for removing or reconsidering designations, and mandates that banking agencies issue guidelines and report on their actions to Congress.
Money References
- (a) In general.—Each Federal banking agency shall establish a program under which a depository institution with total consolidated assets of less than $10,000,000,000 may elect to be designated as an impact bank if the total dollar value of the loans extended by such depository institution to low-income borrowers is greater than or equal to 50 percent of the assets of such bank.
6. Minority Depositories Advisory Committees Read Opens in new tab
Summary AI
Each financial regulator is required to form a "Minority Depositories Advisory Committee" to offer guidance on supporting minority-owned financial institutions, assessing their status, advising on regulatory changes, and encouraging the creation of new ones. These committees consist of diverse members serving two-year terms, meet at least twice a year, and include involvement from Congressional members, but do not receive pay for their service.
7. Federal deposits in minority depository institutions Read Opens in new tab
Summary AI
The section mandates that the Secretary of the Treasury ensures federal deposits in minority depository institutions and impact banks are either insured or secured. It also defines an "impact bank" as a special kind of bank recognized by the proper federal agency, as per a certain act. Additionally, it includes minor wording adjustments in the related law.
8. Minority Bank Deposit Program Read Opens in new tab
Summary AI
The Minority Bank Deposit Program expands the use of minority-owned banks by having the Treasury Department certify and list them, which is then shared with government agencies and private companies. It encourages federal departments to prioritize using these banks for their deposits and requires them to report to Congress on their efforts to support minority depository institutions.
1204. Expansion of use of minority depository institutions Read Opens in new tab
Summary AI
The section establishes the Minority Bank Deposit Program to promote the use of minority depository institutions by certifying and listing eligible institutions. It requires federal departments and agencies to prioritize these institutions for holding deposits and mandates regular reporting to Congress on these efforts. Definitions for key terms like "credit union," "depository institution," and "minority depository institution" are also provided.
9. Diversity report and best practices Read Opens in new tab
Summary AI
Congress requires each financial regulator to submit an annual report detailing the racial, ethnic, and gender diversity of their examiners and to disclose if they have initiatives to improve diversity. Regulators must also share best practices for recruiting and retaining diverse candidates in examiner positions.
10. Investments in minority depository institutions and impact banks Read Opens in new tab
Summary AI
The section focuses on changes to rules for control of certain banks, particularly minority depository institutions and impact banks, by defining the term "control" as the ability to influence management or have significant voting power. It also mandates the drafting of rules to assist new minority and impact banks in meeting capital requirements and requires a report to Congress on the challenges faced by these banks within a year.
11. Report on covered mentor-protege programs Read Opens in new tab
Summary AI
The section requires the Secretary of the Treasury to submit annual reports to Congress about participants in a mentor-protégé program for minority depository institutions, including analysis and recommendations for pairing them with large financial institution mentors. It also defines a "covered mentor-protégé program" and specifies what qualifies as a "large financial institution."
Money References
- (2) LARGE FINANCIAL INSTITUTION.—The term “large financial institution” means any entity— (A) regulated by the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, or the National Credit Union Administration; and (B) that has total consolidated assets greater than or equal to $50,000,000,000. ---
12. Custodial deposit program for covered minority depository institutions and impact banks Read Opens in new tab
Summary AI
The bill section establishes a custodial deposit program where certain minority depository institutions and impact banks, referred to as "covered banks," can receive deposits from specific Treasury accounts. The program has rules to ensure these banks are well-managed and legally compliant, with deposit limits in place to protect the funds, and requires regular reports to Congress about the program's operations and participants.
Money References
- (b) Requirements.—In issuing rules under subsection (a), the Secretary of the Treasury shall— (1) consult with the Federal banking agencies; (2) ensure each covered bank participating in the program established under this section— (A) has appropriate policies relating to management of assets, including measures to ensure the safety and soundness of each such covered bank; and (B) is compliant with applicable law; and (3) ensure, to the extent practicable that the rules do not conflict with goals described in section 308(a) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 1463 note). (c) Limitations.— (1) DEPOSITS.—With respect to the funds of an individual qualifying account, an entity may not deposit an amount greater than the insured amount in a single covered bank. (2) TOTAL DEPOSITS.—The total amount of funds deposited in a covered bank under the custodial deposit program described under this section may not exceed the lesser of— (A) 10 percent of the average amount of deposits held by such covered bank in the previous quarter; or (B) $100,000,000 (as adjusted for inflation). (d) Report.—Each quarter, the Secretary of the Treasury shall submit to Congress a report on the implementation of the program established under this section including information identifying participating covered banks and the total amount of deposits received by covered banks under the program.
- (e) Definitions.—In this section: (1) COVERED BANK.—The term “covered bank” means— (A) a minority depository institution that is well capitalized, as defined by the appropriate Federal banking agency; or (B) a depository institution designated pursuant to section 5 of the Ensuring Diversity in Community Banking Act that is well capitalized, as defined by the appropriate Federal banking agency. (2) INSURED AMOUNT.—The term “insured amount” means the amount that is the greater of— (A) the standard maximum deposit insurance amount (as defined in section 11(a)(1)(E) of the Federal Deposit Insurance Act (12 U.S.C. 1821(a)(1)(E))); or (B) such higher amount negotiated between the Secretary of the Treasury and the Federal Deposit Insurance Corporation under which the Corporation will insure all deposits of such higher amount. (3) FEDERAL BANKING AGENCIES.—The terms “appropriate Federal banking agency” and “Federal banking agencies” have the meaning given those terms, respectively, under section 3 of the Federal Deposit Insurance Act. (4) QUALIFYING ACCOUNT.—The term “qualifying account” means any account established in the Department of the Treasury that— (A) is controlled by the Secretary; and (B) is expected to maintain a balance greater than $200,000,000 for the following 24-month period.
13. Streamlined community development financial institution applications and reporting Read Opens in new tab
Summary AI
The bill section aims to simplify the application process for institutions with less than $3 billion in assets seeking both deposit insurance with the Federal Deposit Insurance Corporation (FDIC) and certification as a community development financial institution (CDFI). It requires the FDIC to create systems and procedures for this purpose, report on their implementation to Congress, and amend reporting requirements to include such applicants.
Money References
- (a) Application processes.—Not later than 12 months after the date of the enactment of this Act and with respect to any person having assets under $3,000,000,000 that submits an application for deposit insurance with the Federal Deposit Insurance Corporation that could also become a community development financial institution, the Federal Deposit Insurance Corporation, in consultation with the Administrator of the Community Development Financial Institutions Fund, shall— (1) develop systems and procedures to record necessary information to allow the Administrator to conduct preliminary analysis for such person to also become a community development financial institution; and (2) develop procedures to streamline the application and annual certification processes and to reduce costs for such person to become, and maintain certification as, a community development financial institution.
14. Task force on lending to small business concerns Read Opens in new tab
Summary AI
The text describes that within 6 months of the law being enacted, the head of the Small Business Administration must create a task force to explore ways to boost the number of loans given to small businesses by certain financial institutions. This task force must present a report to Congress within 18 months of its formation, detailing its findings.