Federal Regulators Issue Interagency Notice of Proposed Rulemaking to Amend the Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business, including low- and moderate-income ("LMI") neighborhoods. On May 5, 2022, the Board of Governors of the Federal Reserve System (“Board”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”) released a notice of proposed rulemaking (“NPR”) to overhaul the agencies’ regulatory framework for evaluating banks’ CRA performance.
The NPR created the following significant changes:
It establishes three size categories based on total assets. The three categories are as follows:
Large banks - Banks with average assets of at least $2 billion in both of the prior two calendar years;
Intermediate banks – Banks with average assets of at least $600 million for both of the past two calendar years but less than $2 billion in either calendar year, and;
Small banks – Banks with average assets of less than $600 million in either of two prior calendar years.
The thresholds for intermediate and small banks will be adjusted annually for inflation; however, the thresholds for large banks would not be adjusted annually for inflation.
The NPR would allow tailoring of the standards and requirements applicable to intermediate and small banks; however, large banks would be imposed with the most extensive standards and requirements (discussed more in the changes below).
Large banks would have four performance tests, each with several sub-tests/factors. The four tests are as follows:
Retail Lending Test – Evaluates whether the lending activities of a bank meet the needs of low- and moderate-income individuals, small businesses, farms and individuals and businesses in the low- and moderate-income census tracts.
Retail Services and Products Test – Evaluates a bank's delivery systems and the responsiveness of its credit and deposit products.
Community Development Financing Test – Evaluates whether a bank is meeting the community development financing needs in its assessment areas and institution-wide, through community development loans and community development investments.
Community Development Services Test – Reviews the extent to which a bank provides community development services and the impact of the services in satisfying community development needs.
The NPR would require evaluation of a large bank’s retail lending performance in “retail lending assessment areas,” which would include, two types of assessment areas in which the CRA evaluation would generally be focused on:
Facility based assessment area, encompassing any county where the bank has a main office, branch or other staffed or remote deposit taking facility, as well as surrounding geographies in which the bank has originated or purchased a substantial portion of loans.
Retail Lending assessment area, which includes (1) metropolitan statistical area, excluding counties already included within a facility-based assessment area or (2) aggregation of all the nonmetropolitan areas in a single state, excluding counties already in a facility-based assessment area, in which the bank has made at least 100 home mortgage originations or 250 small business lending originations for two consecutive calendar years.
The NPR revises the community development definitions to clarify the eligibility criteria for a wide list of community development activities.
The NPR would require “large” banks to collect voluminous data concerning deposits, retail loans, and community development activities, which would be used to evaluate their performance in parts of the four performance tests. Additionally, banks with more than $10 billion in assets would be subject to a granular version of data collection.
The NPR would make wholesale and limited purpose banks subject to a tailored version of the Community Development Financing Test.
The NPR would still allow a bank to opt to be evaluated under a strategic plan instead of a size-based test, but the bank would now be required to incorporate standards and metrics from its size group, unless the bank is substantially engaged in activities outside the scope of those tests.
The NPR would broaden the circumstances in which agencies would be allowed to downgrade a bank’s institution level CRA rating. Today, the agencies may downgrade a bank’s institution-level CRA rating due to evidence of discrimination or other illegal credit practices. This would be revised to extend to any discriminatory or illegal practice.
Under the NPR, expectations and requirements would differ for the following categories: (1) large banks with over $10 billion in assets, (2) large banks with no more than $10 billion in assets, (3) intermediate banks, and (4) small banks.
The effective date of each of the rules would be no more than one year for most of the proposed changes.
The final rule would become effective the first day of the first calendar quarter beginning at least 60 days after its publication in the Federal Register and would include a relatively brief transition period thereafter for its key requirements to become applicable.
Data collection requirements would become applicable 12 months after the final rule's publication, with annual reporting beginning by April 1st of the year following the first year of data collection. Banks would become subject to the new tests on the same timeframe. Specifically, CRA examinations under the new tests would begin two years after the publication of the final rule, evaluating activities conducted during the prior year.
The preamble to the NPR notes that modified procedures would apply for examinations immediately after the start date until the peer data and relevant benchmarks become available.
The deadline for comments on the Notice of Proposed Rulemaking is August 5, 2022. For instructions and to submit comments, click here: Federal Reserve Board - Proposals for Comment