Will new CRA rules affect your community bank?

Maureen Busch of The Bank of Tampa notes her bank will need to change its processes to extract CRA data from its core. Photo by Jeremy Scott

In May, a trio of federal legislative groups proposed a series of updates to guidelines under the Community Reinvestment Act. How do CRA lenders feel about these proposed changes, and what will be the results when they take effect?

By Mary Thorson Wright

Forty-five years ago, the Community Reinvestment Act (CRA) was established to combat “redlining” in the banking industry. The aim was to ensure every depository institution in the U.S. served the needs of its entire community, especially low- and moderate-income (LMI) communities.

The last major regulatory overhaul of CRA occurred in 1995. The years following evidenced stops and starts by the federal bank regulatory agencies to revise CRA. Stand-alone rulemaking comes with risks such as inconsistent standards across the regulatory agencies and confusion for banks. The current joint proposal could benefit all community banks.

“A different model is required to evaluate today’s [increasingly digital] banking environment for CRA, as opposed to the branch-based … model.”
—Michael Marshall, ICBA

On May 5, the OCC, Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) jointly released a notice of proposed rulemaking (NPR) to strengthen and modernize CRA regulations to better achieve the purpose of the CRA. The comment period on the proposal ended Aug. 5. The proposal sets an effective date 60 days after final rules are published in the Federal Register.

“Since 1995, we have experienced an explosion in online banking and development of quite large banks that may have no physical offices at all,” says Michael Marshall, director of ICBA regulatory legal affairs. “A different model is required to evaluate today’s banking environment for CRA, as opposed to the branch-based assessment model.

“When the OCC pursued CRA rulemaking in 2020,” he continues, “it was an attempt to make CRA examination ratings more quantitative and less qualitative, and to do a better job of evaluating internet-based banks and activities that banks do outside of their assessment areas. Some of the OCC’s original provisions have been preserved in the NPR.”

What CRA program changes might community banks expect from the NPR if it is finalized as is?

New CRA specifics

  • Classification of banks by asset thresholds. The proposed rule raises the current asset thresholds for the Small Bank category to $600 million, the Intermediate Small Bank (ISB) category to $2 billion, and the Large Bank category to more than $10 billion. Also, small banks and ISBs would have options to retain the current applicable test(s) or choose from other designated test(s) for evaluation.
  • Assessment area rules. Small banks and ISBs would continue to be allowed to delineate assessment areas including the portion of a county that the bank can be reasonably expected to serve, provided they continue to include only whole census tracts. Large banks would be required to delineate assessment areas that consist of one or more MSAs or metropolitan divisions, or one or more contiguous counties within an MSA, a metropolitan division or the nonmetropolitan area of a state.
  • Out-of-area activities for CRA performance. Community banks have long recognized community needs that may have been centered outside of a delineated community for CRA. The agencies’ proposal offers credit for qualifying community development financing and services activities conducted beyond the boundaries of a bank’s facility-based assessment areas; describes qualifying activities eligible for CRA consideration; and offers a process for banks to receive a binding decision from regulators about whether a prospective loan or investment would be eligible for CRA credit.
  • Designated performance tests, standards and ratings. The proposal lays out the Small Bank and ISB processes and options for evaluating CRA performance as stated above. It also designated the performance testing framework for Large Banks, Large Banks more than $10 billion and banks using a Strategic Plan.
  • CRA ratings. The proposed rating categories are stated as “Outstanding,” “High Satisfactory,” “Low Satisfactory,” “Needs to Improve” and “Substantial Noncompliance.” Further, the proposal provides metrics for calculating a bank’s CRA performance by a combined score from evaluation tests.
  • Retail Lending Test. Several changes are proposed to the Retail Lending Test, like inclusion of credit cards and other consumer loan categories and the approach of the Retail Lending Test by volume screening, geographic distribution metrics to measure the level of bank lending in low- and moderate-income census tracts in an assessment area, and lending thresholds for ratings.
  • Retail Services and Products Test. This test would primarily evaluate branch distribution and the ability of low- and moderate-income customers to access bank branches, including extended business hours, providing bilingual or translation services, free or low-cost check cashing, reasonably priced international remittance services and electronic benefit transfer accounts.
  • Community Development Financing Test. The new Community Development Financing Test would apply to large banks and any intermediate bank that opts into it. The test will consist of a community development financing metric and benchmarks and an impact review.
  • Community Development Services Test. The new CD Services Test would assess a large bank’s record of helping to meet the community development services needs in the bank’s facility-based assessment areas, states, multistate MSAs and nationwide areas by qualitatively considering the extent to which a bank provides community development services and the impact and responsiveness of these activities.

The U.S. House of Representatives Committee on Financial Services has reviewed the recent CRA developments, including how the proposed rule will evaluate bank lending and financial services in the context of increasing digital banking relationships; whether it will lead to expanded access to financial services and credit to LMI communities and communities of color; and its potential in finally putting an end to modern-day redlining. Further developments are expected.

“CRA currently has some means to get at the racial wealth gap. The fair lending record is considered as part of the CRA examination,” observes Marshall. “There are provisions to give credit for partnerships with minority-owned depository institutions or loans and investments made through special purpose credit programs.”

“The two major pushes for CRA modernization have been how do we make a more transparent CRA rule and how do we evaluate new business models,” he adds. As ICBA advocates to help shape the direction of the CRA revisions, community banks should consider how the proposal might affect their CRA programs.

Community bank perspectives on CRA reform

“One thing that stands out is the change in data reporting,” says Maureen Busch, vice president and compliance and CRA officer for The Bank of Tampa, a $3.3 billion-asset community bank in Tampa, Fla. “We would need to revamp our processes to extract CRA data from our core system. The change from a bright line test of a transaction threshold and location in specific fields on the call report to gross annual revenues has the potential to be problematic.

“The NPR, in its current form, leaves room for more clarification,” she continues. “For instance, in the definitions of key terms and how certain activities like community development loans and investments will be weighted. While it may not cause any changes to our current program activities, we are encouraged to see some categories expanded, like community development activities.”

Busch expressed what she’d like to see for the NPR going forward. “Keeping some quantitative evaluation of CRA could be beneficial as metric-driven evaluation could miss some very important data.”

Quentin Leighty

Quentin Leighty, chief financial officer of $555 million-asset First National Bank of Las Animas and president of the community bank’s Monument and Flying Horse, Colo., offices, also sees some benefits and drawbacks to the NPR. “We believe the expansion of activities outside the designated assessment area is a positive change,” he says. “We welcome more clarity on that to be sure we are effectively devoting resources in our community. We have some concerns about a 60-day implementation period. Community banks would benefit from a longer period to implement the changes effectively.

“We’re in a somewhat unique position as we broke through the threshold and moved into the Intermediate Small Bank category a couple of years ago,” he adds. “Under the NPR and the $600 million threshold, we would actually now revert to a Small Bank for CRA. We think that’s appropriate for us because we haven’t changed much as an organization in that time period, but the pandemic caused dramatic increases in assets.”

Leighty says First National Bank of Las Animas plans to continue its good work. “CRA for us is ‘telling the story,’” he says. “We serve our entire community, including areas of low-to-moderate income, minority communities and businesses.”

Mary Thorson Wright is a writer in Virginia.