Regulators Issue Final Rule Overhauling Community Reinvestment Act Regulations

Payments Report: News from Washington, Brought to you by NEACH
VOLUME 2023-9 (DEC 23)

Overview: On October 24, 2023, the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (FRB), and Office of the Comptroller of the Currency (OCC) issued a joint final rule (the Final Rule) that makes extensive amendments to the regulations that implement the Community Reinvestment Act (CRA). This is the agencies’ first significant revision to the CRA rules in nearly three decades and will particularly affect banks focused on mobile and digital banking.

Background  

Congress enacted the CRA in 1977 in an attempt to increase banks’ lending and investment in the communities they serve, with a particular focus on low- and moderate-income residents and neighborhoods. The FDIC, FRB, and OCC share responsibility for evaluating banks’ performance under the CRA depending on whether the bank holds a federal or state charter and whether the bank is a member of the Federal Reserve System. 

Under the current framework, the agencies evaluate CRA performance based on how well banks meet the credit needs of the communities in which they have branches and other brick-and-mortar locations, known as “assessment areas.” The current regulations set forth a series of tests by which regulators measure banks’ residential mortgage and small business lending, investment in communities, and retail services. Regulators assign banks a rating of either outstanding, satisfactory, needs to improve or substantial noncompliance; banks that do not receive a rating of satisfactory or outstanding may be subject to significant restrictions on their operations, including limitations on mergers.

Although each agency has its own set of regulations, historically these regulations have been nearly identical. The agencies issued a joint Notice of Proposed Rulemaking (NPRM) on May 5, 2022 that proposed sweeping changes to the current framework, including by creating stringent new performance tests, expanding the geographic area in which the agencies would evaluate banks’ performance, and significantly expanding the use of metrics and data in examinations.

The Final Rule

The Final Rule adopts the most significant aspects of the NPRM as proposed, including by adopting stringent data-driven performance tests and expanding the geographic areas in which banks’ CRA performance may be evaluated beyond areas in which banks have physical locations.

Like the current regulations, the Final Rule establishes a tiered evaluation framework based on bank asset size. “Small” banks are defined as those with assets of up to $600 million, “intermediate” banks are those with assets of at least $600 million but less than $2 billion, and “large” banks are those with assets of at least $2 billion. Each of these figures marginally increases the current asset size thresholds for these categories.

Large and intermediate banks will be subject to strict new performance tests that incorporate a variety of benchmarks and metrics. Although the agencies stated that these metrics and standards are intended to help achieve greater clarity, consistency and transparency in CRA ratings, the agencies also acknowledged that they deliberately calibrated the metrics and standards to make it more challenging for banks to achieve an outstanding or satisfactory rating. Small banks will be evaluated under the existing CRA regulatory framework but will have the option to be evaluated under aspects of the new framework.

The Final Rule’s most significant departure from the existing regulatory framework is the expansion of the geographic areas in which banks may be evaluated for CRA performance. This new requirement will particularly affect banks focused on nationwide digital banking that have a small number of brick-and-mortar branches. The Final Rule creates new “retail lending assessment areas” for large banks that have 80 percent or less of their lending in their traditional assessment areas. Such banks will be evaluated for CRA performance in any area where the bank originated more than 150 closed-end mortgage loans or 400 small business loans in each of the prior two years, regardless of whether the bank has a physical location in the area.

Other key components of the Final Rule include:

• A new retail lending test that will apply to large and intermediate banks and will measure banks’ mortgage and small business lending based on complex metrics;
• A new community development financing test that evaluates banks’ community development loans and investments based on complex metrics;
• The agencies will for the first time maintain a publicly available illustrative list containing examples of activities that qualify for CRA credit, and establish a process for banks to obtain confirmation of the eligibility of specific activities; and
• Banks with at least $10 billion in assets will be required to collect, maintain, and report detailed data concerning retail lending, deposits, and community development activities.

Key Differences between the Final Rule and NPRM

Although the Final Rule generally adopts the framework the agencies proposed in the NPRM, it makes certain important changes. These include the following:

• The Final Rule reduces the number of product lines that the NPRM would have included in the new retail lending test by eliminating open-end home mortgages and multifamily loans from the analysis, and substantially limiting when a bank’s automobile lending will be evaluated;
• The Final Rule does not adopt the NPRM’s controversial proposal to permit downgrades of a bank’s CRA rating based on virtually any illegal practice, even those unrelated to credit and the core purposes of the CRA. The Final Rule instead generally retains the existing regulatory standard that permits a downgrade only for discriminatory or other illegal credit practices; and
• The Final Rule also makes certain adjustments to the metrics and benchmarks in the NPRM that the agencies state will make achieving a satisfactory or outstanding rating for retail lending performance more achievable than under the NPRM.

Criticism of the Final Rule

Federal Reserve Governor Michelle Bowman, FDIC Vice Chairman Travis Hill and FDIC Director Jonathan McKernan voted against adopting the Final Rule. In a statement describing her decision not to support the Final Rule, Governor Bowman highlighted the increased burdens the Final Rule will impose on community and regional banks. She also stated that the Final Rule is unnecessarily long and complex, and it will be a significant challenge for smaller banks to understand their obligations. Vice Chairman Hill and Director McKernan cited similar concerns in statements describing why they could not support the Final Rule.  The concerns Governor Bowman, Vice Chairman Hill, and Director McKernan expressed echo similar concerns expressed by the banking industry.

Outlook: Most of the Final Rule’s requirements will be effective beginning January 1, 2026. Additional requirements, including new data reporting requirements, will be applicable on January 1, 2027. However, given the complexity of the Final Rule—which, together with explanatory text, is nearly 1,500 pages—and likelihood that implementation will require significant overhauls of banks’ policies, procedures and systems, banks should begin compliance planning immediately.