FDIC and OCC Propose Extensive Changes to Community Reinvestment Act Regulations

The purpose of the Proposal articulated by the Agencies is (1) to make the administration of the CRA more objective, predictable and consistent and (2) to account for technological innovations in the business of banking since 1995, the last time the CRA regulations were substantially revised.³ While the early industry reactions to the Proposal have generally been favorable, the devil remains in the details. In contrast to express legislative intent from the original enactment of the CRA — clarifying that the CRA not act as a credit allocation measure and that it not impose new reporting requirements or administrative costs — the new numerical evaluation scheme at the core of the Proposal risks doing just that. Thus, although many institutions have long sought clear standards to understand “how much” CRA lending, investment and service is actually required of them, they will need to further assess the tradeoffs from that clarity.

Banks will want to pay particular attention to two significant changes. First, under the proposed “general performance standards,” the Agencies propose to establish concrete quantitative benchmarks to determine a bank’s presumptive CRA rating in each assessment area in which they operate and for the bank overall. By default, small banks are not subject to the general performance standards unless they choose to opt in. Second, the delineation of assessment areas no longer would be determined solely by reference to the bank’s branches and physical footprint. Rather, areas where a bank has significant deposits based on depositor address will form separate “deposit-based” assessment areas.

We note that the Board of Governors of the Federal Reserve System (Fed) did not join the Proposal. If the Proposal were adopted without the Fed’s participation, it would raise questions as to whether the federal banking agencies would rely on the ratings issued by a sister agency under a different standard in connection with applications and other matters where they are required to take bank CRA ratings into account, such as qualification for financial holding company status under the Bank Holding Company Act, which is administered by the Fed.

Background. The CRA requires that depository institutions undergo periodic evaluations to ensure that they are helping to meet the credit needs of the communities in which they accept deposits, including low- and moderate-income (LMI) neighborhoods, and that they do so in a way that is consistent with safe and sound banking principles. The Proposal follows an August 2018 notice of proposed rulemaking from the OCC and feedback from stakeholders that sought ways to clarify CRA examination requirements, modernize the regulations and reduce regulatory burdens.⁴

Key Takeaways. Depository institutions have a number of strategic and practical factors to consider in light of the Proposal. As the Agencies acknowledge, the Proposal will require “upfront changes that will result in increased costs, particularly for smaller banks.”⁵

• Small banks must analyze whether, based on their particular business, the long-term savings of opting in would justify the upfront costs.
• Banks for which a substantial amount of deposit business takes place online must consider how they would meet the Proposal’s requirements in geographic areas where they accept a significant number of deposits.
• Institutions should review the list of qualifying activities and consider whether to comment or propose additional activities.
• Banks that would become subject to general performance standards should assess the costs and burdens of changes to their compliance infrastructure that will be necessary to accommodate the new approaches.
• Because the ratios proposed by the Agencies to gauge effectiveness of CRA activity all use a balance sheet metric in the denominator, institutions should evaluate whether their level of off-balance-sheet activity should be adjusted accordingly (particularly with respect to securitization).
• Because it is highly unlikely that the standard metrics for performance will decrease in the future, banks should carefully assess how they would be rated under the presumptive metrics in the Proposal.
• Comments are due within 60 days of publication in the Federal Register. Affected stakeholders are well advised to watch for the Fed’s response and whether it will seek changes in the next iteration of rulemaking.

Generally. The Agencies articulated four key categories of revisions to the CRA’s implementing regulations. In the Agencies’ words:

The [A]gencies propose to strengthen the CRA regulatory framework to better achieve the underlying statutory purpose of encouraging banks to help serve their communities by making the framework more objective, transparent, consistent, and easy to understand.... [T]he proposal [1] would clarify which activities qualify for CRA credit; [2] update where activities count for CRA credit; [3] create a more objective method for measuring CRA performance; and [4] provide for more transparent, consistent and timely CRA-related data collection, recordkeeping and reporting. These changes would encourage banks to serve their entire communities, including LMI neighborhoods, more effectively through a clearer set of CRA activities and would provide clarity for all stakeholders.⁶

1. Clarifying and Expanding What Qualifies for CRA Credit. Activities that qualified for CRA credit before the Proposal would continue to qualify. In addition, “other activities that are consistent with the purpose of CRA, but may not qualify under the current CRA framework” also would qualify under the Proposal.⁷ The Agencies propose a list of criteria to identify activities that would qualify. Proposed qualifying activity criteria include

• home mortgage loans and consumer loans to LMI individuals, small loans to small businesses or small farms, but in contrast to the current CRA regulations, not retail loans in LMI geographies, which might capture loans to higher-income borrowers.
• small loans to businesses or farms (that are not necessarily small businesses or small farms) located in LMI census tracts.
• retail loans in Indian country.
• loans that support “naturally occurring affordable housing,” for example unsubsidized rental housing at rates affordable to LMI individuals and families, as well as “workforce” and related housing for low-, moderate- and middle-income individuals in high-cost areas.
• community development (CD) activities that finance or support services that partially or primarily benefit LMI individuals (e.g., “essential community facilities” such as schools or hospitals, “community support services” such as child care or housing, and “essential infrastructure” such as roads, electricity or sewage), including the CD activities of another bank. The term “finance or support” will be interpreted broadly under the Proposal.⁸

The expansion to cover essential community facilities and essential infrastructure more comprehensively than the current regulations and to cover all community development activities as long as they at least “partially” benefit LMI individuals or families, and in some cases LMI geographies, will significantly expand opportunities for banks to receive credit for loans, investments and services that are not completely targeted toward LMI benefits. While credit will be proportionate to the benefit for the targeted individuals, families and communities, this recognition that projects that benefit an entire service area are relevant to CRA performance will bring regulation back closer to its original intent.

In addition to expanding the general criteria for qualifying activity criteria, the Agencies propose to list a number of representative examples of specific activities that will qualify for credit, including

• activities related to affordable housing, included even if the housing is unsubsidized.
• financial literacy programs “that benefit[] individuals of all income levels.”
• qualified opportunity funds that benefit qualified opportunity zones in LMI tracts (“qualified opportunity funds” and “qualified opportunity zones” are defined in the tax code, at 26 U.S.C. 1400Z-2(d)(1)).⁹

The Proposal will amend key definitions with the effect of picking up additional activities. For example, the definitions of CD loans and CD investments will be revised to include commitments to lend and invest, and provide credit for certain allowances for credit losses by the bank.¹⁰ The definitions of “distressed nonmetropolitan middle-income area” and “underserved nonmetropolitan middle-income area” will be amended to include additional census tracts where there are unmet financial needs. The requirement that a distressed area be a nonmetropolitan area would be removed.¹¹

In addition, the Proposal sets forth a method for assessing the value of qualifying activities subject to certain multipliers. These values will be used as part of the determination of a bank’s presumptive CRA rating in connection with the application of the “general performance standards” explored below.¹²

Finally, under the Proposal, the Agencies will publish and keep up to date the nonexhaustive, illustrative list of qualifying activities referred to above. The initial list is included in the Proposal.¹³ The Agencies propose to have a formal process for advance approval of activities as qualifying activities, which would be significantly different from the current approach and would provide helpful clarity to institutions seeking to comply with the CRA.

2. Expanding Where CRA Activity Counts. Assessment areas as currently defined will become known as “facilities-based” assessment areas. In addition to facilities-based assessment areas, a bank that receives 50 percent or more of its retail domestic deposits from geographic areas outside of the facility-based assessment areas would be required to delineate “deposit-based assessment areas” where the bank receives 5 percent or more of its total retail domestic deposits, based on the physical addresses of its depositors.¹⁴

The Agencies state their purpose in establishing the new deposit-based assessment areas as follows:

[T]o recognize the evolution of modern banking (including the emergence of Internet banks), the fact that many banks receive large portions of their deposits from outside their facilities-based assessment areas, and in conformity with the CRA’s intent to ensure that banks help meet credit needs where they collect deposits, the proposed rule would require banks to delineate additional, non-overlapping “deposit-based” assessment areas where they have significant concentrations of retail domestic deposits.¹⁵

Moreover, the Proposal would allow bank-level CRA credit for qualifying activities conducted outside of a bank’s assessment areas.¹⁶ This is a significant expansion of the geographic reach of bank-level CRA activities, although the requirement to also satisfy assessment-area evaluation measure would mitigate its impact.

3. Providing an Objective Method to Measure CRA Activity. The Proposal would establish ex ante benchmarks known as “general performance standards” for the CRA evaluation measure and the retail lending distribution test. According to the Agencies, the general performance standards would focus on the value of on-balance-sheet loans and investments, encourage stable commitments to communities by focusing on average month-end balance sheet values over time and disincentivize churning of activities that may not provide long-term stability by discounting qualifying retail loans sold within 90 days of origination.¹⁷ The proposed general performance standards are intended to address perceived deficiencies in the current approach, which the Agencies acknowledged at times may appear subjective, opaque, complex or inconsistent, and can lead to uncertainty in the industry.¹⁸

Small banks may opt into the general performance standards, or continue to be evaluated under standards consistent with the current regulations.¹⁹

The general performance standards assess two components of a bank’s CRA performance:

(1) the distribution (i.e., number) of qualifying retail loans to LMI individuals, small farms and small businesses, and small loans to farms and business in LMI geographies; and

(2) the impact (i.e., quantified value) of a bank’s qualifying activities, measured by the value of a bank’s qualifying activities relative to its retail domestic deposits.²⁰

Note that the Proposal would amend the definition of “retail domestic deposits” to exclude certain types of deposits, such as brokered deposits, in order to “be more reflective of a bank’s capacity to engage in CRA-qualifying activities.”²¹ The effect is to reduce the denominator for purposes of determining the impact of qualifying activities.

At the bank level, the average of the bank’s annual bank-level “evaluation measures” for the period must meet or exceed an established empirical benchmark. This is intended as “an objective measure of a bank’s ongoing commitment to CRA.” The evaluation measure is the sum of two ratios: the bank’s qualifying activities value divided by the average of its quarterly retail domestic deposits plus a ratio that accounts for a bank’s branch distribution, normalized to add up to 1 percent to the first ratio.²² The bank’s overall rating also depends on achieving the specified rating in a “significant portion,” that is, 50 percent of its assessment areas, as well as assessment areas where the bank holds a “significant portion,” that is, 50 percent of its deposits, and on satisfying a minimum ratio of CD loans and investments to retail domestic deposits bank-wide.

The following table illustrates ways to achieve each presumptive rating category at the bank level consistent with the Proposal:

At the level of each assessment area, a bank also must meet the “evaluation measures” standard for each assessment area, calculated on the basis of an attribution of qualifying activities and deposits to the respective assessment area. In addition, a bank must meet minimum thresholds for geographic and borrower retail lending distribution tests, for each “major retail lending product line”²³ with at least 20 loans in that assessment area. The thresholds are established at the start of the evaluation period, for each bank. At the bank’s option, the bank’s rating may be determined by formulas that look at the demographics of the assessment area (with the standard set at 55 percent of the geographic demographic comparator) or the performance of the bank’s peers (with the standard set at 65 percent of geographic competitive peer comparator).²⁴ The Proposal also requires that banks meet a minimum ratio of CD loans and investments to retail domestic deposits in each assessment area.²⁵

The following table provided in the Proposal illustrates ways to achieve each presumptive ratings category in a given assessment area:²⁶

The Agencies advise that the data available to compute the various benchmarks and thresholds are somewhat limited and, therefore, are based in part on assumptions and approximations. However, the Agencies believe that “[o]ver time, the data collection, recordkeeping, and reporting requirements in this proposal would remedy the current data limitations,” and they “plan to request additional data through a public request for information from banks and other interested parties to supplement the currently available data.”²⁷ The benchmarks would be updated every three years, or sooner if warranted.

Under the Proposal, presumptive ratings based on Agency benchmarks may be adjusted based on a bank’s “performance context,” whereby the Agencies take into account various factors before assigning the ultimate rating, including business strategy and size among others.²⁸ In addition, a bank’s rating would be adversely affected by evidence of discriminatory or other illegal credit practices.²⁹ The Proposal retains the option for a bank to develop a CRA strategic plan and be evaluated based on its performance under the plan.³⁰ Banks that receive an “outstanding” rating would be moved to a five-year examination cycle.

4. Data Collection, Recordkeeping and Reporting. Separate data collection and reporting requirements would apply to banks subject to the general performance standards, including small banks that opt in. The data relates to each bank’s qualifying activities, certain nonqualifying activities, retail domestic deposits and assessment rates³¹ and may impose significant burdens on reporting institutions. Banks also would be required to collect and maintain certifications from each relevant party in those situations where the bank is substantively conducting qualifying activities, but the activity is nominally done by another party, such as an affiliate. The information would be used to make the calculations necessary to determine each bank’s presumptive rating based on the performance standards established in the Proposal.

The Proposal retains many of the current regulation’s provisions related to the public file, planned examination schedules, public notice by banks and the CRA notice.³² However, banks will have the option to provide public notice and make other information available via their websites.³³

Small banks (that do not opt into the general performance standards) would be required to collect and maintain information on retail domestic deposits, based on the physical address of the depositor, as necessary for the designation of deposit-based assessment areas.³⁴

Conclusion. There is significant detail in the 240-page proposal that cannot be adequately covered in this brief update. Because the Proposal, if adopted, would substantially change CRA compliance obligations for years into the future, banks should carefully review all aspects of the Proposal and offer comments where the Proposal could be further improved.

¹ OCC and FDIC, Community Reinvestment Act Regulations, https://www.fdic.gov/news/board/2019/2019-12-12-notice-dis-a-fr.pdf (Dec. 12, 2019).

² See 12 U.S.C. §§ 2901 et seq.; 12 C.F.R. pts. 25, 195, 345. 

³ See Proposal at 7–8.

⁴ See OCC, Reforming the Community Reinvestment Act Regulatory Framework, 83 Fed. Reg. 45,053 (Sept. 5, 2018).

⁵ Id. at 81.

⁶ Proposal at 10.

⁷ Id. at 15. 

⁸ Id. at 23–25.

⁹ Id. at 26–29.

¹⁰ Id. at 36.

¹¹ Id. at 30.

¹² Id. at 36.

¹³ Id. at 87.

¹⁴ Id. at 43.

¹⁵ Id. at 17 (footnote omitted).

¹⁶ Id. at 18.

¹⁷ Id. at 71.

¹⁸ Id. at 48.

¹⁹ Id. at 49. The Proposal would reduce the asset threshold to qualify as a “small bank” to $500 million in assets, adjusted annually based on the Consumer Price Index. It also would eliminate the separate category for “intermediate small banks.” Id. at 69.

²⁰ Id. at 19.

²¹ Id. at 50.

²² Id. at 57.

²³ A retail lending product line that composes at least 15 percent of the bank’s overall dollar volume of retail loan originations during the evaluation period. Id. at 54.

²⁴ Id. at 56–57.

²⁵ Id. at 63–64. This requirement would apply to all banks, including small banks that do not opt in to the general performance standards.

²⁶ See id. at 51–52.

²⁷ Id. at 62–63.

²⁸ Id. at 64–65.

²⁹ Id. at 65.

³⁰ Id. at 66. Banks with no retail domestic deposits and banks evaluated under the small bank performance standards that do not originate retail loans would be required to submit a strategic plan. Id.

³¹ Id. at 77–79.

³² Id. at 83.

³³ Id.

³⁴ Id. at 20.