Federal Banking Regulators Issue Final Rule Overhauling Community Reinvestment Act Regulations

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 assessing banks’ performance under the CRA: the OCC examines national banks, the FRB examines state-chartered banks that are members of the Federal Reserve System, and the FDIC examines state-chartered banks that are not members of the Federal Reserve System.

Under the current regulatory framework, the agencies assess CRA performance based on how well banks meet the credit needs of the communities in which they operate, which are known as “assessment areas.” The current regulations set forth a series of performance tests by which regulators measure banks’ residential mortgage and small business lending, investment in communities and retail services. Banks are grouped into one of several categories based on size or business model (small, intermediate, large or wholesale), with smaller banks subject to less strenuous and detailed tests than larger banks. Based on these tests, 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 are subject to significant restrictions on their operations, including limitations on mergers.

Critics of the current CRA framework have highlighted several areas in need of modernization. For example, the current CRA regulations were last significantly revised in 1995, before the widespread adoption of online and mobile banking, and do not have specific guidelines on how to address digital banking. Critics have also argued that there is too much ambiguity and subjectivity in the current regulations, including which activities qualify for CRA credit.

Although each agency has its own set of regulations, historically these regulations have been nearly identical. The agencies have been engaged in efforts to significantly overhaul and modernize the CRA regulations for several years, with varying levels of coordination. Most notably, in May 2020, the OCC separately promulgated new CRA regulations, which, for the first time, would have established different CRA standards for OCC-regulated national banks than those that apply to state-chartered banks regulated by the FDIC and FRB. However, in July 2021, following changes in presidential administration and OCC leadership, the agencies recommitted to a joint effort to overhaul the CRA regulations. The agencies have been working collaboratively since that time, and, in December 2021, the OCC formally rescinded its Trump-administration-era regulations.

As we discussed in our prior client alert, the agencies issued a joint Notice of Proposed Rulemaking (NPRM) on May 5, 2022 that proposed sweeping changes to the CRA regulatory framework, including by creating stringent new performance tests, expanding the geographic area in which the agencies would evaluate banks’ CRA performance, and significantly expanding the use of metrics and data in CRA 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. We discuss certain key differences between the Final Rule and NPRM in the next section.

Like the current CRA regulations and NPRM, 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 of $376 million for small banks, $376 million to $1.503 billion for intermediate small banks, and over $1.503 billion for large banks.

Large and intermediate banks will be subject to strict new performance tests that may make it more difficult for banks to achieve satisfactory or outstanding ratings. Banks with assets of at least $10 billion will also be subject to further requirements, including substantial new data collection and reporting obligations. 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 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. Under the current framework, banks are only evaluated in areas where they have physical locations. However, under the Final Rule, banks with at least $2 billion in assets and that have 80 percent or less of their lending in their traditional, local assessment areas will now be evaluated in newly created “retail lending assessment areas,” which are defined as any metropolitan statistical area or nonmetropolitan area of a state where a bank originated more than 150 closed-end home mortgage loans or 400 small business loans in each of the prior two years, regardless of whether the bank has a physical location in that area. The agencies will also continue to evaluate all banks in areas where they have branches and other facilities that accept deposits, which the Final Rule rebrands as “facility-based assessment areas.”

The Final Rule also establishes new standardized metrics and quantitative standards for evaluating banks’ CRA performance under various performance tests. The agencies stated that these metrics and standards are intended to help achieve greater clarity, consistency and transparency in CRA ratings. However, the agencies also deliberately calibrated the metrics and standards to make it more challenging for banks to achieve an outstanding or satisfactory rating.

The metrics and standards feature most prominently in a new Retail Lending Test that will apply to large and intermediate banks. The test includes a “retail lending volume screen” that would compare the volume of a bank’s lending in its facility-based assessment area to other banks’ in the same facility-based assessment area, as well as metrics to measure a bank’s distribution of loans within its assessment areas, within low- and moderate-income census tracts, and to low- and moderate-income borrowers. The volume screen serves as the initial measurement of a bank’s performance, and banks that do not perform well on this volume screen will have an uphill battle to achieve a satisfactory rating.

The Final Rule also includes complex metrics and benchmarks designed to evaluate banks’ community development activities. Large banks will be evaluated under a new Community Development Financing Test that includes a metric to evaluate the dollar amount of a bank’s community development loans and investments relative to its deposit base, standardized benchmarks and a qualitative impact review of community development financing. Intermediate banks may choose to be evaluated under this new test at their option.

Other key components of the Final Rule include the following:

• A Community Development Financing Test tailored to limited purpose and wholesale banks that do not provide significant retail products and services;
• A Retail Services and Products Test that evaluates a bank’s credit products and program’s responsiveness to the credit and deposit needs of the communities in which it operates;
• A Community Development Services Test that measures a bank’s record providing community development services in the communities in which it operates. This test is primarily qualitative but includes a metric to evaluate the community development services of large banks;
• The agencies will for the first time develop and maintain a publicly available illustrative list containing examples of activities that qualify for CRA credit and will also establish a process for banks to obtain confirmation of the eligibility of specific activities;
• The Final Rule adds additional detail to the eligibility criteria for banks’ community development activities, including by incorporating concepts currently set forth in interagency guidance directly in the Final Rule;
• All banks will receive consideration for any qualified community development loans, investments or services, regardless of location; and
• Banks with at least $10 billion in assets will be required to collect, maintain and report data for their retail deposits lending and services, community development loans, investments and services and assessment areas.

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 subject to analysis in the new Retail Lending Test. The NPRM would have included six categories: closed-end home mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, small farm loans and automobile loans. The Final Rule eliminates open-end home mortgages and multifamily loans, and will only require evaluation of a bank’s automobile lending if such loans represent a majority of the bank’s lending;
• The Final Rule limits the evaluation of mortgage and small business lending in retail lending assessment areas by increasing the applicable thresholds in the NPRM from 100 closed- and open-end mortgages to 150 closed-end mortgages and from 250 to 400 small business loans. The Final Rule also exempts from this new requirement banks that conduct 80% or more of their retail lending inside traditional, facility-based assessment areas;
• 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.

Effective Date

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.