The below article is the Special Focus section of the January 2020 Compliance Journal. The full issue may be viewed by clicking here.

On January 9, 2020 the OCC, Treasury, and FDIC (agencies) issued a joint notice of proposed rulemaking (proposed rule) to modernize Community Reinvestment Act (CRA) regulations. The proposed rule contains four main elements designed to encourage banks to serve their communities by making the regulatory framework more objective, transparent, consistent, and easy to understand. Specifically, the agencies have proposed to (1) clarify which activities qualify for CRA credit, (2) update where activities count for CRA credit, (3) create a more transparent and objective method for measuring CRA performance, and (4) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. Comments on the proposed rule are due March 9, 2020. 

Background 

Congress enacted the CRA in 1977 with the purpose of encouraging sound lending to all areas of a bank’s community. The OCC, FDIC, and Board of Governors of the Federal Reserve have since issued regulations to implement the statute. The proposed rule presents the first major revisions to CRA regulation since 1995.  

The agencies have acknowledged that over the past 25 years, technology and the expansion of interstate banking have transformed the financial services industry, how banks deliver their services, and how customers choose to bank. Recognizing the need for modernization, the agencies issued an Advance Notice of Proposed Rulemaking (ANPR) in 2018. WBA, along with bankers, trade groups, and other industries, offered feedback on the CRA framework through comments on the ANPR. Comments discussed how current CRA framework has not kept pace with changes in banking or technology and that the CRA regulations and guidance has become cumbersome, outdated, and complex. WBA’s comment letter highlighted points received by member banks, specifically challenges presented when:  

  • An activity qualifies for CRA credit during one exam, but not the next, 
  • A bank believes that an activity will receive CRA credit, but does not, and 
  • A bank is unable to obtain confirmation in advance that an activity will receive credit.   

The proposed rule would address these comments by clarifying and expanding what qualifies for CRA credit. That aspect of the rule is discussed below, along with select provisions. Note that this article is intended to summarize key provisions of the proposed rule rather than provide a comprehensive overview. For the complete rule please see the link at the end of the article. This article covers the four main elements of the rule: what counts for CRA credit, where activities count for CRA credit, measuring CRA performance, and CRA-related data collection. 

Clarifying and Expanding What Qualifies for CRA Credit 

Under the current CRA framework, qualifying activities generally fall into the category of retail banking or community development (CD) activities, depending on various considerations. Most banks face uncertainty as to what types of activities meet those considerations and thus, qualify for CRA credit. The proposed rule aims to remedy this in a few ways. Two are presented below: an expansion upon the definition of “qualifying activities” and the creation of a qualifying activities confirmation process alongside an illustrative list of qualifying activities. 

Qualifying Activities Criteria 

The proposed rule would define a “qualifying activity” as an activity that helps meet the credit needs of a bank’s community, particularly those individuals, areas, and populations with needs. Those criteria generally include activities that currently qualify for CRA credit while establishing the following new categories: 

  • A retail loan provided to: 
    • A low or moderate-income (LMI) individual or family,
    • A small business, or 
    • A small farm. 
  • A retail loan provided in Indian country. 
  • A retail loan that is a small loan to a business or a small loan to a farm located in a low- or moderate-income census tract. 
  • A CD activity that provides financing for or supports certain criteria. Examples include: 
    • Essential community facilities that partially or primarily benefit or serve LMI individuals or areas of identified need, 
    • Family farms, 
    • Financial literacy programs or education or homebuyer counseling, 
    • See the proposed rule at the end of this article for the complete list. 

Qualifying Activities Confirmation and Illustrative List 

Under the proposed rule, the agencies would establish an online process for a bank to seek confirmation as to whether an activity qualifies for credit.1 The agencies would inform the bank whether the activity qualifies, or the activity does not qualify, and then place the activity on a publicly available list. Through this process, the list would contain examples of activities, submitted by banks, that the agencies have determined qualify or do not qualify for credit. 

The list would also be revised at least every three years, through a public notice and comment process, to add activities that meet the criteria and to remove activities that no longer meet the criteria (e.g., if broadband were universally available and no longer considered to be essential infrastructure). An initial proposed list is available on the agencies’ websites and in section IV of the proposed rule. 
 
Expanding Where CRA Activity Counts 

Assessment areas under current CRA rules depend on brick-and-mortar bank locations, creating difficulties for reaching outside that area. The agencies have proposed to address this by creating two categories of assessment areas: “facility-based” and “deposit-based.”  

Facility-Based Assessment Area 
 
The proposed rule requires banks to delineate an assessment area encompassing each location where the bank maintains a main office, a branch, or a non-branch deposit-taking facility as well as the surrounding locations in which the bank has originated or purchased a substantial portion of its qualifying retail loans. The area must consist of:  

  • One whole metropolitan statistical area (using the metropolitan statistical area boundaries that were in effect as of January 1 of the calendar year in which the delineation is made),  
  • The whole nonmetropolitan area of a state, 
  • One or more whole, contiguous metropolitan divisions in a single metropolitan statistical area (using the metropolitan division boundaries that were in effect as of January 1 of the calendar year in which the delineation is made), or  
  • One or more whole, contiguous counties or county equivalents in a single metropolitan statistical area or nonmetropolitan area.  

Deposit-Based Assessment Area 
 
The proposed rule would require banks that receive more than 50 percent of their retail domestic deposits from outside of their facility-based assessment areas to delineate separate, non-overlapping “deposit-based” assessment areas in the smallest geography where they receive five percent or more of their retail domestic deposits. These deposit-based assessment areas must be delineated to consist of: 

  • One whole state,  
  • One whole metropolitan statistical area (using the metropolitan statistical area boundaries that were in effect as of January 1 of the calendar year in which the delineation is made),  
  • The whole nonmetropolitan area of a state, 
  • One or more whole, contiguous metropolitan divisions in a single metropolitan statistical area (using the metropolitan division boundaries that were in effect as of January 1 of the calendar year in which the delineation is made),  
  • The remaining geographic area of a state, metropolitan statistical area, nonmetropolitan area, or metropolitan division other than where it has a facility-based assessment area, or  
  • One or more whole, contiguous counties or county equivalents in a single metropolitan statistical area or nonmetropolitan area. 

Activity Outside of Assessment Area 

The proposed rule would permit banks to receive CRA credit for qualifying activities conducted outside of their assessment areas at the bank level. Under this approach, banks would still be encouraged to meet local community needs where they have branches and depositors but would be given flexibility to serve other communities with distinct needs as these activities would be considered when calculating the overall dollar value of their qualifying activities under the proposed rule. The goal of this framework would be to reduce the number of areas where there are more banks that want to engage in CD activities than there is need for those activities (known as CD hot spots) and areas where there is a great need for CD activities but few banks that engage in those activities (known as CD deserts). 

Providing an Objective Method to Measure CRA Activity

Current CRA regulations evaluate a bank’s CRA performance on generally undefined terms through a relatively unspecified process. The proposed rule would attempt to provide a more objective, clear, and consistent assessment by establishing new, general performance standards for institutions that are not small banks. Small banks could opt into the general performance standards, while those that do not would be evaluated under the small bank performance standards consistent with current regulation. 

Under the general performance standards, banks would receive a presumptive rating based on what performance standards are met within a given category. Banks would be evaluated on CRA performance at a bank-level and in each assessment area. The bank-level performance standards are based upon: 

  • CRA evaluation measures, 
  • Assessment area ratings (see below), and 
  • Community development minimums.

The assessment area performance standards are based upon:  

  • Retail lending distribution tests, 
  • CRA evaluation measures, and 
  • Community development minimums. 

CRA Evaluation Measure 
 
A bank’s bank-level CRA evaluation measure is the sum of:  

  • The bank’s annual bank-level qualifying activities values2 divided by the average quarterly value of the bank’s retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual qualifying activities value, and  
  • The number of the bank’s branches located in low- or moderate-income census tracts, distressed areas, underserved areas, and Indian country divided by its total number of branches as of the close of business on the last day of the same period used to calculate the annual qualifying activities value multiplied by .01. 

A bank’s assessment area CRA evaluation measure is determined in each assessment area and is the sum of:  

  • The bank’s annual assessment area qualifying activities value divided by the average quarterly value of the bank’s assessment area retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual assessment area qualifying activities value,  
  • The number of the bank’s branches located in low- or moderate-income census tracts in the assessment area divided by its total number of branches in the assessment area as of the close of business on the last day of the same period used to calculate the annual assessment area qualifying activities value multiplied by .01, and 
  • Annual assessment area CRA evaluation measures for each year in the evaluation period, separately for each assessment area. 

Retail Lending Distribution Tests 

The retail lending distribution tests would evaluate a bank’s originations in each assessment area using both a geographic distribution test and a borrower distribution test. Both the geographic distribution test and the borrower distribution test would apply for small loans to businesses and farms. The borrower distribution test would apply, in addition, for home mortgage and consumer lending. 

To pass the geographic distribution test for both the small loan to a business product line and the small loan to a farm product line, a bank’s percentage of such loans in low- or moderate income census tracts originated during the evaluation period in the assessment area must meet or exceed the threshold established for either the associated geographic demographic comparator or the associated geographic peer comparator.  

  • The geographic demographic comparator threshold is 55 percent of the percentage of businesses or farms in low- and moderate-income census tracts in the assessment area.  
  • The geographic peer comparator threshold is 65 percent of the percentage of small loans to businesses or farms in low- and moderate income census tracts originated by all banks evaluated under the general performance standards. 

To pass the borrower distribution test for the home mortgage lending product line, a bank’s percentage of home mortgage loans to low- and moderate income individuals and families originated during the evaluation period in the assessment area must meet or exceed the threshold established for either the associated borrower demographic comparator or the associated borrower peer comparator.  

  • The borrower demographic comparator threshold is 55 percent of the percentage of low- and moderate income families in the assessment area.  
  • The demographic peer comparator threshold is 65 percent of the percentage of home mortgage loans to low- or moderate-income individuals and families originated by all banks evaluated under the general performance standards. 

Community Development Minimum 

The community development minimum would be determined by taking the quantified value of community development loans and community development investments in the assessment area during the evaluation period, divided by the average quarterly value of the bank’s assessment area retail domestic deposits as of the close of business on the last day of each quarter of the evaluation period. To achieve a rating of outstanding or satisfactory, this value must meet or exceed 2 percent. 

Data Collection, Recordkeeping, and Reporting 

Reporting The current CRA framework requires banks to collect and report a variety of data on loans. However, small banks, as defined under the current rule, generally are exempt from these requirements. The current framework also does not collect data on all CRA activity. Under the proposed rule, there would be separate data collection and reporting requirements for banks subject to the general performance standards and for banks subject to the small bank performance standards. Banks evaluated under the general performance standards would be required to collect and maintain extensive information such as retail lending distribution tests results, CRA evaluation measures calculations, and presumptive ratings determinations. Banks would also be required to collect and maintain records of all qualifying and non-qualifying retail loans, assessment area lists, qualifying activities data, and the location of retail loans, and retail domestic deposit data.  

Conclusion 

The proposed rule is the industry’s opportunity to comment on its experiences under current CRA, and what it would like to see in a new rule. The Federal Reserve did not join on the proposed rule, but has indicated its own plans to update its CRA regulations. As the process continues, with House Financial Services hearings being conducted in January of 2020, WBA will continue to monitor all activity on CRA reform to keep its membership informed. WBA plans to submit comments on the proposed rule. To craft a meaningful comment letter, WBA encourages banks to provide us with their thoughts and concerns. In addition, WBA encourages all members to consider writing comments on the proposed rule their own.  

The proposed rule can be found by clicking here.
 
To assist WBA in crafting a meaningful comment letter, reach out to WBA’s Scott Birrenkott at: sbirrenkott@wisbank.com

  1. This process would be optional, and banks would not be required to use this process.
  2. To better understand “bank-level qualifying activities” the proposed rule provides an example: [qualifying loans on balance sheet for at least 90 days and CD investments] + [twenty five percent of the origination value of qualifying loans sold within 90 days of origination] = [CD services and monetary and in-kind donations].