Federal Banking Regulators Propose Overhaul of Community Reinvestment Act

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.

The agencies assess banks’ CRA performance based on complex regulations designed to evaluate how well banks meet the credit needs of the communities in which they operate, which are known as assessment areas. The regulations set forth a series of tests by which regulators measure banks’ CRA performance. These tests include evaluations of banks’ residential mortgage and small business lending, investments in communities, and the number of branches and retail services provided. Each test includes a particular focus on how banks serve low- and moderate- income residents and communities. Banks are grouped into one of several categories based on size or business model: small, intermediate, large or wholesale. Smaller banks are 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 maintain a satisfactory or outstanding CRA rating are subject to significant restrictions on their operations, including limitations on mergers. Even banks that do maintain satisfactory or outstanding CRA ratings may nevertheless be subject regulatory scrutiny, and face criticism from community advocates, if they do not proactively plan for meeting community credit needs as set forth in the CRA following a proposed merger or acquisition. This can result in regulators placing conditions on mergers or acquisitions and in certain cases blocking mergers or acquisitions entirely.

Although each agency has its own set of CRA 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 promulgated new CRA regulations that the FDIC and FRB did not join, which would have for the first time established different CRA standards for OCC-regulated national banks and state-chartered banks regulated by the FDIC and FRB. The substantive sections of those OCC regulations were scheduled to become effective on a rolling basis beginning in 2023. 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 the OCC formally rescinded its new regulations in December 2021 and replaced those regulations with the prior version, effectively realigning the OCC’s regulations with the FDIC’s and FRB’s regulations.

Critics of the current CRA framework have consistently highlighted several areas that need 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. This can result in different outcomes for similar activities based on which examiner or agency is interpreting the rules. Both the banking industry and community organizations have advocated for the agencies to modernize the CRA regulations to reflect the current banking environment, and to provide greater clarity to CRA evaluations and ratings.

The Joint NPR Proposal
The agencies’ joint announcement of the NPR states that the proposed rules are intended to strengthen and modernize the CRA by providing greater clarity, consistency and transparency in the application of the regulations. The NPR would add more standardized metrics for regulators’ CRA examinations and more clearly delineate activities that will qualify for CRA credit.

Key components of the NPR include:

• While maintaining “facility-based” CRA assessment areas as a baseline, expanding the scope of assessment areas beyond locations in which banks maintain offices, branches and other facilities to include activities associated with online and mobile banking, branchless banking and hybrid models;
• Developing and maintaining a publicly available list of examples of activities that qualify for CRA credit, as well as establishing a process for banks to obtain confirmation of the eligibility of certain activities;
• Clarifying eligibility criteria for community development activities, and incorporating concepts currently set forth in interagency guidance directly in the regulations;
• Expanding activities that qualify for CRA credit, including for mission–based entities that serve minority groups, women and low-income consumers and Native Land Areas;
• Emphasizing smaller value loans and investments;
• Setting higher asset size thresholds for small, intermediate and large banks—small banks would be defined as those with assets of up to $600 million, intermediate banks would be those with assets of at least $600 million but less than $2 billion, and large banks would be those with assets of at least $2 billion;
• Permitting small banks to continue to be evaluated under the existing CRA regulatory framework, with the option to be evaluated under aspects of the new proposed framework;
• Establishing four tests for large banks, and applying more detailed versions of those tests to large banks with assets of at least $10 billion; and
• Requiring large banks with at least $10 billion in assets to collect, maintain and report data for their retail deposits lending and services, community development loans, investments and services and assessment areas.

Federal Reserve Governor Michelle Bowman specifically highlighted the potential burden of the new requirements that would apply only to banks with at least $10 billion in assets in a statement issued in connection with the NPR. Although Governor Bowman supported issuing the NPR, she specifically solicited comments from both banks and community groups on these new requirements for the largest banks, as well as other core issues.

Consumer Financial Protection Bureau Director Rohit Chopra, who is a member of the FDIC Board, also issued a statement in support of the NPR. Director Chopra noted that nearly every bank receives at least a satisfactory CRA rating and stated that a key goal of the NPR is to reduce CRA “grade inflation” to ensure that banks, particularly large banks, are held to a high standard to receive satisfactory ratings. Acting FDIC Chairman Martin Gruenberg similarly noted in a statement that the NPR would expand the “rigor” of the CRA. It appears that one of the overriding goals of the NPR is to make it more challenging for banks to receive passing CRA grades.

One significant area the NPR does not address is the application of the CRA to non-bank financial institutions. Some commenters have called for extending the CRA to these institutions as they gain an increasing percentage of the financial services market. Several states, including Massachusetts, New York and Illinois, have enacted statutes that specifically extend their states’ version of the CRA to such institutions. Because the federal CRA statute applies only to banks, extending the federal CRA regulations to non-bank financial institutions would also likely require legislation. Of course, a major justification for the CRA’s application to FDIC-insured depository institutions is the fact that the federal guarantee of deposits up to specified limits greatly facilitates the funding of banks. This rationale is not applicable to non-bank financial institutions.

The agencies will accept public comments on the NPR through August 5, 2022. This rulemaking will likely result in the first wholesale overhaul of the CRA regulations in nearly three decades. Interested parties should strongly consider submitting comments because the outcome of the rulemaking will dictate the scope of CRA examinations for the foreseeable future. Banks should also consider developing new compliance policies that generally meet the standards set forth in the NPR, recognizing that those policies may need to be refined when a final rule become effective.