The U.S. Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC, and together with the OCC and the Board, the Agencies) share oversight responsibility for the implementation of the Community Reinvestment Act (CRA) with respect to the depository institutions under their respective supervision. Prior to this year, the Agencies issued joint rulemakings to align on consistent regulations implementing the CRA. In a departure from this tradition, the OCC issued a final rule on May 20, 2020 (the OCC Final Rule) fundamentally revising the CRA regulations for OCC-regulated institutions. On September 21, 2020, the Board issued its own Advance Notice of Proposed Rulemaking (ANPR) to solicit comments on a significantly different approach also to substantially overhaul the Board’s version of the CRA regulations. While the FDIC participated in the OCC’s notice of proposed rulemaking in December 2019, it has not joined either the OCC’s Final Rule or the Board’s ANPR, leaving the industry with uncertainty and the potential for three versions of CRA regulations.
It is not a foregone conclusion, however, that the ultimate result of the on-going CRA rulemaking process will be three inconsistent regulations. Brian Brooks, the Acting Comptroller of the Currency, released a statement in connection with the Board’s publication of the ANPR stating that the OCC will review the comments to the ANPR for “potential insight into our own rulemaking that applies to national banks and savings associations.”1 Further, in the Board’s press release on September 21 announcing the ANPR, the Board stated its intent that the banking agencies “come together on a consistent approach to the CRA.”2 Accordingly, industry commenters must assess the Board’s ANPR not just for the stand-alone impact on state member banks but also as an opportunity to influence the realignment of Agency supervision once again around a common set of standards.
The Board’s ANPR is a comprehensive document of nearly 200 pages and 99 questions posed to the public to solicit comments on its approach to implementing the CRA. Rather than attempt to summarize the entirety of a proposal that touches every aspect of CRA regulation, the following attempts to highlight some key aspects of the ANPR, including a few of the areas where it varies from the OCC’s Final Rule. In particular, as explained further below, key themes of the Board’s ANPR are (i) providing greater clarity and uniformity in CRA evaluations by using metrics-based approaches, (ii) relying on existing data and reporting where possible, (iii) modernizing the designation of assessment areas to take into account changes in technology and business models, (iv) expanding the geographic areas where CRA activities will receive credit (e.g., by giving credit to lending in so-called “Indian country” regardless of whether that lending is in a bank’s local assessment area), and (v) providing incentives to drive servicing of underserved communities, including through investments in or partnerships with minority-owned depository institutions, women-owned financial institutions, and low-income credit unions.
1. Modernizing Assessment Areas to Reflect Mobile and Internet Banking
The Agencies assess an institution’s CRA activities in relation to the credit needs of the institution’s designated assessment area. Under the current regulations, an institution’s community is generally defined in relation to that institution’s physical locations (e.g., branches, ATMs, or other physical facilities). Given the changes in the banking industry toward more mobile and online banking services, the Board is evaluating different approaches to determining an institution’s assessment area for purposes of the CRA. The ANPR considers and requests feedback on the following proposals: (1) a continuation of the current standards for determining an assessment area based on physical facilities to be tailored based on bank size, (2) potential expansion of assessment areas to include loan production offices, (3) alternative deposit-based and lending-based assessment areas for large banks, internet banks that do not have physical locations, banks that partner with online lenders that do not have physical loan-making locations, or hybrid banks, and (4) nationwide assessment areas for internet banks. Although the Board acknowledges the OCC’s creation of deposit-based assessment areas for institutions that derive the majority of retail deposits from outside of their facility-based assessment areas, the Board seems skeptical that a deposits-only approach could adequately address the reinvestment needs of affected communities. In the alternative, the Board asks whether internet, wholesale, and limited purpose banks could be adequately evaluated on the basis of a nationwide assessment area. Moreover, the Board suggests that such an approach would be required only for internet banks and banks that partner with online lenders that do not have physical loan-making locations, although it remains unclear why the use of a particular loan distribution channel should have such a dramatic impact on a bank’s designated assessment area.
2. Evaluation Tests
The Board proposes to change the CRA evaluation framework to include two tests — a Retail Test and a new Community Development Test. These tests would each have two subtests, one related to lending and financing, and another related to services. The Board proposes that the applicability of each test (and subtests) would be tailored based on bank asset size and other factors. Small retail banks would have the option of being evaluated solely on the basis of the Retail Lending subtest (or may opt out and continue to be examined under the current CRA regime), whereas large banks would be subject to all four subtests. Under the proposed framework, the category of “intermediate small bank” would be eliminated, and the Board is proposing setting the threshold for small banks at either $750 million or $1 billion (with those above these thresholds designated as “large banks”). For wholesale and limited purpose banks, the Board proposes to limit the evaluation tests to only the Community Development Test, tailored for such banks to consider alternative measures of capacity rather than the standard metric of deposits, such as total assets. This would separate the application of the standard from one of the fundamental justifications for the CRA, that is, that banks should “reinvest” deposits taken from local communities.
3. Evaluation Subtests
The Board proposes the following subtest approach:
Retail Lending Subtest. The Board proposes a metrics-based approach using existing CRA examination practices, focused on the institution’s services to low- to moderate-income (LMI) census tracts, LMI borrowers, small businesses, and small farms. The purpose of the new threshold and metric-based approach is to provide clarity to institutions on the level of retail lending activity that is necessary to achieve a particular rating. Nonsecuritized purchased loans would be considered together with originations, but only if purchased from the originating lender or its affiliate to prevent “churn” in resale of CRA loans for credit. Unlike in the existing CRA regulations, community development lending would be considered as part of the Community Development Test rather than the Retail Test.
This metrics-based approach includes a possibility for a presumptive “satisfactory” rating based on meeting certain thresholds in connection with evaluations of geographic (e.g., loans in LMI census tracts) and borrower (e.g., loans to LMI borrowers) distribution metrics in a bank’s major product lines.3 These thresholds would be based on the number of loans rather than their dollar value to better capture the importance of small-dollar loans to low-income borrowers.
Furthermore, thresholds would be set on the basis of the lower of a “community” benchmark (derived from data, e.g., regarding the proportion of the community that is LMI) and a “market” benchmark (derived from data regarding the general distribution in the community of specific forms of credit among borrowers with specified characteristics), each adjusted by a fixed percentage to avoid setting the standard for satisfactory performance at too high a level.4 All thresholds would need to be satisfied for the presumptive “satisfactory” rating to apply.
Retail Services Subtest. The Board proposes to use a qualitative approach in applying the Retail Services subtest, which is applicable only to large retail banks. The proposal consolidates the original four-prong approach to the Retail Services test down to a two-component test of delivery systems and deposit products. The Board would evaluate the bank’s branches, branch-based services, and nonbranch delivery channels under the first component and evaluate the bank’s deposit products, focusing on product availability and products that are tailored to meet the needs of LMI individuals. Under this new approach, there is increased focus on deposit products offered and how those products are responsive to the needs of LMI individuals and communities, although ultimately the delivery systems component would be given more weight than the deposit products component by examiners, and nowhere is there a reference to consideration of branch profitability when assessing retail delivery system distribution. The Board is also considering whether there should be a requirement for the largest banks (e.g., banks with assets over $10 billion or over $50 billion) to provide a statement regarding their approach to offering retail products for LMI individuals and communities in their assessment areas.
By contrast, the OCC Final Rule does not consider retail delivery systems and deposit products as a separate test. Where the Board proposes to have specific subtests for the services category, including potential quantitative and qualitative measures, as well as separate examiner conclusions for each service-related subtest, the OCC’s approach includes evaluation of these types of services within the performance context analysis. The Board’s ANPR provides an opportunity for stakeholders to advance their position on the inclusion of service-related tests and how such services should be included in the evaluation of CRA activities.
Community Development Financing Subtest. Here, the Board proposes to use a quantitative approach, measuring the ratio of the dollar amount of the bank’s qualifying community development financing activities compared with its deposits. Importantly, this revised test would take into account both new loans originated or purchased within each year of an evaluation period and loans and investments originated or purchased in a prior year and held on balance sheet to incentivize “patient capital.”
This test would apply only to large retail banks and wholesale and limited purpose banks. Wholesale and limited purpose banks that do not have retail deposits would have separate evaluation procedures. Both community development loans and qualified investments would be considered together under this subtest. The Board proposes to establish local and national benchmarks that the banks would be compared against and that would help guide examiners in making their conclusions for this subtest. Additional qualitative factors also would be taken into consideration via “impact scores” that would act as multipliers for financing considered particularly responsive to community needs.
Community Development Services Subtest. This subtest would primarily be based on qualitative factors related to impact and responsiveness of community development activities in the assessment area. This test would apply only to large retail banks and wholesale and limited purpose banks. The Board is also considering whether quantitative measures may also be appropriate, such as the number of hours of community development services. The proposal includes potential changes to the definition of community development services to include more activities, such as volunteer activities in rural areas that are not related to financial services. It is unclear, however, why the same activities should not be given equal credit if performed in urban communities.
Contrast to the OCC Final Rule. As is evident from the foregoing, the ANPR consciously eschews the approach taken in the OCC’s Final Rule to making the CRA evaluation the measure of a single combined value. The Board’s Gov. Lael Brainard has suggested that with such an approach there is a “risk of encouraging some institutions to meet expectations primarily through a few large community development loans or investments rather than meeting local needs.” Perhaps predictably then, the Board’s ANPR, spearheaded by Gov. Brainard, separates the evaluation framework into four subtests discussed above, with each subject to its own separate metrics or evaluation criteria. Gov. Brainard states that the “separate assessments of each will support robust bank engagement with communities through a variety of channels” focusing on local data in the Retail Lending subtest, measurements of community development loans and investments relative to deposits in the assessment area, and generally tailoring the Community Development Financing subtest to account for local differences and differences on a national level between rural and urban areas.6 Stakeholders may consider the relative strengths and weaknesses of each approach and advance their position through comments to the ANPR.
4. Eligible CRA Activities — Illustrative List of Activities
The Board proposes to develop and publish an illustrative list of activities that would qualify as community development activities. This would not be an exhaustive list. Further, the Board is considering a formal preapproval process whereby stakeholders could get a response from the Board on whether the proposed activity would be eligible for CRA credit in advance.
5. Data Collection and Reporting
Generally, the Board has attempted to limit the number of new data collection requirements proposed in the ANPR and instead relies on existing data collection obligations, such as the FDIC summary of deposits. The Board seeks feedback on the various approaches it could take on collecting additional data points that would be necessary for certain aspects of its proposed subtests.
By contrast, the OCC Final Rule requires banks to collect and maintain new CRA-related data in a form and format to be provided by the OCC and provides additional guidance on the specific data that will be required. Overall, in attempting to draw a balance between use of quantitative measures and the burden of data collection necessary to implement such measures, the ANPR appears more sensitive to the latter than the OCC Final Rule. Accordingly, banks commenting on the ANPR may have the opportunity to compare and contrast to the OCC and Board approaches in a way that may encourage the OCC to revisit its proposed data collection obligations.
As indicated at the outset of this Update, there is a tremendous amount of detail contained in the ANPR that has only been touched on here. All depository institutions would be well advised to spend time reviewing the ANPR, even if their primary federal regulator is the OCC or the FDIC, because the results of the ANPR are likely to be influential in further modifications of the OCC’s Final Rule as well as any CRA proposal to be released by the FDIC.
1 Acting Comptroller of the Currency Statement on Federal Reserve Board’s Action to Modernize the Community Reinvestment Act, Office of the Comptroller of the Currency News Release 2020-123 (September 21, 2020) available at https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-123.html
2 Federal Reserve Board issues Advance Notice of Proposed Rulemaking on an approach to modernize regulations that implement the Community Reinvestment Act, Board of Governors of the Federal Reserve System Press Release (September 21, 2020) available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200921a.htm
3 Product lines (home mortgage, small business lending, and small farm lending) would be considered “major” if they constitute 15% or more of the dollar value of a bank’s retail lending. The Board also proposes evaluating a bank’s consumer lending if a “substantial majority” of the bank’s retail lending is consumer, although the Board requests comment on whether that standard should be assessed based on loan volume, dollar value, or some combination of the two. If assessed, consumer loans would be reviewed in separate categories (e.g., motor vehicle, credit card, other secured, and other unsecured).
4 Initially proposed thresholds adjustments are 65% of the community benchmark and 70% of the market benchmark.
5 Strengthening the Community Reinvestment Act by Staying True to Its Core Purpose, Board of Governors of the Federal Reserve System, Speech by Gov. Lael Brainard (January 8, 2020) available at https://www.federalreserve.gov/newsevents/speech/brainard20200108a.htm
6 Statement by Governor Lael Brainard, Board of Governors of the Federal Reserve System Press Release (September 1, 2020) available at https://www.federalreserve.gov/newsevents/pressreleases/brainard-statement-20200921.htm
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