Community Reinvestment Act: Interagency Final Rule

Regulatory Insights

• Unified Approach: After nearly 30 years and 1500 pages, FRB, FDIC, and OCC adopt the long-awaited Community Reinvestment Act (CRA) final rule.
• Continued LMI Focus: Continuing focus on credit, investment and banking in low- and moderate-income (LMI) communities, consistent with safe and sound operations.
• Adapt to Industry Changes: Substantive changes reflect growth of online, mobile, and branchless banking and hybrid models.
• Intended to introduce greater clarity and consistency:
  • Metrics-based approaches to evaluate retail and community development financing (using peer and demographic data)
  • Clarification and expansion of CRA-eligible activities
• Community development categories to include:
  • “Place-based activities” such as investment in disaster preparedness and “weather resiliency”
  • Large focus on affordable housing and affordable rental
• Effective Dates: The final rule is effective April 1, 2024, but banks have until January 1, 2026, to comply with most provisions; reporting requirements will become applicable January 1, 2027, with data to be reported by April 1.

 __________________________________________________________________________________________________________________________________________________

October 2023

The Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, “federal banking agencies”) issue a final rule amending the regulations that implement the Community Reinvestment Act of 1977 (CRA).

The agencies state the amendments update the regulatory framework for assessing banks' performance in meeting the credit needs of their communities to achieve the following “key goals:”

• Encouraging banks to expand access to credit, investment, and banking services in low- or moderate-income (LMI) communities.
• Adapting to changes in the banking industry, including mobile and online banking.
•  Providing greater clarity and consistency in the application of CRA regulations.
• Tailoring CRA evaluations and data collection to bank size and business model.

The final rule (highlights detailed below) includes amendments that introduce new categories of qualifying community development activities, assessment area delineation requirements, and a performance evaluation framework that includes two new performance tests and evaluation options for certain banks.

Application and Scope. The final rule applies to banks that are regulated by the federal banking agencies. It utilizes four tiers for CRA evaluations based on asset size and business model:

• Small Banks: Assets below $600 million in either of the prior two calendar years.
• Intermediate Banks: Assets between $600 million and $2 billion in both of the prior two calendar years.
• Large Banks: Assets above $2 billion in both of the prior two calendar years.
• Limited Purpose Banks: Includes both "limited purpose banks" and "wholesale banks" as currently defined.

Community Development Activities. The final rule defines eleven (11) community development categories to provide banks guidance on the activities that support community development.

The final rule requires the federal banking agencies to issue, maintain, and periodically update a publicly available illustrative list of non-exhaustive examples of loans, investments, and services that qualify for community development consideration.

Geographic Areas. The final rule will retain “facility-based assessment areas” (FBAAs) and adopts the proposed requirements that banks delineate FBAAs where main offices, branches, and deposit-taking remote service facilities are located.

• Large banks will be required to delineate FBAAs that comprise whole counties, while intermediate and small banks will be allowed to delineate partial counties.
• "Retail lending assessment areas" (RLAAs) will also be evaluated for large banks in Metropolitan Statistical Areas (MSAs) or nonmetropolitan areas outside of the bank’s FBAAs where the bank has originated over 150 home mortgages or 400 small business loans in each of the preceding two years. (Note: these thresholds were increased from the proposed 100 home mortgages and 250 small business loans.)
  • However, in a change from the proposal, large banks that conduct more than 80 percent of retail lending within FBAAs will be exempt from these requirements.
• Both large banks and certain intermediate banks will also be evaluated on retail lending performance in “outside retail lending areas,” or nationwide areas outside of FBAAs and any RLAAs. Note: This evaluation is intended to adapt to changes in the banking industry and account for mobile and online banking.
• In assessing large banks’ Community Development Financing Test performance, as proposed, banks will receive consideration for any qualified community development loans, investments, or services, regardless of location.

Performance Evaluation Framework. The final rule utilizes the tiers for CRA evaluation and introduces a performance evaluation framework that includes the seven performance tests outlined in the table below.

The performance evaluation framework is intended to account for differences in bank size and business model. Under the final rule, small and intermediate banks will be provided the option of evaluation under the new tests. Depending on a bank’s tier for CRA evaluation, it will be subject to the performance test(s) outlined in the table below.

Performance Weighting. For banks that will be evaluated under more than one of the performance tests, specific weights will be applied to each performance test conclusion, with such weighting varying by asset size:

• Large Banks:
  • Retail Lending Test will be weighted at 40 percent (Note: reduced from the proposed 45 percent).
  • Retail Services and Products Test will be weighted at 10 percent (Note: reduced  from the proposed 15 percent).
  • Community Development Financing Test will be weighted at 40 percent (Note: increased from the proposed 30 percent).
  • Community Development Services Test will be weighted at 10 percent (as proposed).
• Intermediate Banks: Each applicable performance test will be weighted at 50 percent (as proposed).

Conclusions and Ratings. For each applicable performance test, the agencies will assign one of the following five conclusions reflecting the bank’s performance in its FBAAs and other geographic areas:

•  “Outstanding”
• “High Satisfactory”
•  “Low Satisfactory”
• “Needs to Improve”
•  “Substantial Noncompliance”

The conclusions assigned in each performance test will be combined to develop a bank’s overall CRA rating of “Outstanding”, “Satisfactory”, “Needs to Improve”, or “Substantial Noncompliance.”

Note:

• Adverse Impacts. The final rule adopts provisions stating a bank’s CRA performance would be adversely affected by evidence of discriminatory or other illegal credit practices, which would include violations of the fair lending laws and other consumer protection laws (e.g., ECOA, RESPA, TILA, MLA). In making a determination, the agencies would consider several factors (e.g., root cause, severity of harm).
• Consideration of Past Performance. Separately the final rule also provides that “if a bank’s prior rating was “Needs to Improve,” the [Agency] may determine that a “Substantial Noncompliance” rating is appropriate where the bank failed to improve its performance since the previous evaluation period, with no acceptable basis for such failure.”
• CRA Performance and Applications. The final rule reiterates that a bank’s record of performance under the CRA examination may be the basis for denying or conditioning approval of an application. The agencies add further, that a bank’s CRA performance is often a controlling factor in the consideration of a bank’s record when reviewing applications in which CRA performance is a relevant factor.

Strategic Plan Option. Banks of any tier may opt to be evaluated based on the submission of a draft strategic plan. Under this option, the agencies will consider banks’ capacities, business strategies, and expertise, as well as their record of helping to meet the credit needs in its FBAAs, and if applicable, RLAAs and other geographic areas served.

Data Collection, Maintenance, and Reporting. The final rule does not include new data collection and reporting requirements for small and intermediate banks. Large banks, however, will be required to collect, maintain, and report data on their retail lending, community development financing, and retail banking services and products to facilitate implementation of metrics and benchmarks included in the performance tests.

Transition and Compliance. The final rule is effective April 1, 2024, but banks have until January 1, 2026, to comply with most provisions (e.g., definitions, data collection); reporting requirements will become applicable January 1, 2027, with data to be reported by April 1.

The final rule includes amendments to transition to the CFPB’s Section 1071 Final Rule on Small Business Lending once the data become available. At present there is no effective date attributable to these specific provisions. Once the availability of Section 1071 data is clarified, the agencies intend to take steps to provide notice in the Federal Register regarding the effective date of the transition amendments.