Three Takeaways from CRA Modernization 

By Krista Shonk

The regulatory rulemaking process in Washington is known for being thoughtful and deliberative. Some would characterize it as bureaucratic and slow. After nearly two years of extensive stakeholder outreach, the OCC issued a final rule on May 20 that overhauls the agency’s regulations implementing the Community Reinvestment Act. To those outside of the Beltway, two years may seem like a leisurely pace. But it is warp speed for a regulatory revamp. In fact, the OCC finalized the new rule a mere 41 days after the close of the public comment period.

OCC staff, led by former Comptroller Joseph Otting, are to be commended for this herculean effort. Crafting a new rule was not easy—the needs of communities vary widely, bank business models are not monolithic and technology has forever changed consumer preferences for accessing financial products and services. These are complex issues, particularly for a rule as consequential as CRA. In addition, CRA is not an arcane banking regulation that only bankers, regulators and lawyers care about and understand. Consumer and community advocates, academics, economic development and revitalization experts and members of Congress also have a deep interest in the public policy outcomes resulting from an updated CRA regulatory framework. This wide range of stakeholders makes the pace of the OCC’s rulemaking all the more remarkable.

The speed of rulemaking isn’t the only defining feature of the OCC’s new CRA rule. Some aspects of the new rule have been well received, such as the creation of a publicly available list of CRA-qualifying activities and the establishment of a pre-approval process to confirm that a contemplated activity will receive CRA credit. These provisions will make CRA examination more consistent and predictable and have enjoyed widespread support. Other portions of the rule, however, have been met with skepticism. In particular, both banks and other CRA stakeholders have expressed doubt as to whether the creation of numerical benchmarks to measure banks’ CRA performance will yield desirable policy results for communities and the banks that serve them.

This skepticism has been compounded by the fact that the banking agencies were unable to develop a modernized CRA framework on an interagency basis. In the end, the FDIC and the Federal Reserve opted not to join the rulemaking, which means that the new regulatory framework will apply to only OCC-regulated banks. The fact that the agencies were unable to reach consensus has raised questions as to whether the new OCC rule will be long-lasting or whether it will be dismantled by a future administration or Congress.

In fact, on June 29, the House of Representatives passed a Congressional Review Act resolution disapproving the OCC’s new CRA rule. Under the Congressional Review Act, a rulemaking may be invalidated if Congress passes and the President signs (or does not veto) the joint resolution of disapproval. The measure now moves on to the Senate, where it requires a simple majority to pass.

While the events and the politics surrounding the rulemaking process have provided ample fodder for political pundits and industry observers, three important points have gone largely unnoticed.

1. New performance measures will affect a limited number of banks

First, the OCC’s new CRA performance standards will apply to a limited population of banks—approximately 120 institutions. This represents roughly 11 percent of OCC-regulated institutions and 2.4 percent of the banking industry overall. Only banks with assets of more than $2.5 billion will be subject to the new performance measures; banks with assets of $600 million or less will continue to be subject to the existing small bank test. Banks with assets between $600 million and $2.5 billion will be subject to the existing intermediate bank test, although small and intermediate banks will have the option to opt into the new performance measures if they choose to do so. Wholesale and limited-purpose banks will continue to be subject to a community development test as they are today.

While the new performance measures will apply to a relatively limited swath of OCC-regulated banks, other parts of the rule will apply to all national banks and federal savings associations regardless of size. For instance, all institutions will be required to collect and maintain data on the value of each retail domestic deposit account and the physical address of each depositor as of the close of each quarter. (However, only banks with more than $2.5 billion in assets will be required to report this information to the OCC). Similarly, all banks will be required to delineate deposit-based assessment areas if the bank receives more than 50 percent of its deposits from areas outside of its facility-based assessment areas. Finally, all OCC banks will be able to rely on the OCC’s new list of qualified CRA activities and use the agency’s new process for obtaining advance confirmation that a particular activity qualifies for CRA credit.

2. Performance benchmarks are TBD

The second overlooked aspect of the OCC’s CRA rewrite is that the agency paused in its adoption of the most controversial component of the new performance measurement system: the specific numeric benchmarks against which bank CRA performance will be graded. During the public comment process on the OCC’s proposal, banks, community organizations and others emphasized that any CRA performance measures must be well-grounded in data.

For example, ABA pointed out that regulators were limited in their ability to leverage existing data to test the proposed performance measures because the data required to calculate a bank’s CRA performance under the proposal was significantly different than the data that banks collect and report for CRA purposes today. ABA urged the OCC to conduct extensive analysis and testing to ensure that numerical performance measures are calibrated appropriately in light of the multiple changes to the CRA framework.

Importantly, the OCC’s final rule adopts a general framework for assessing CRA performance, but does not set forth the specific metrics that a bank must meet in order to obtain a particular CRA rating. Instead, the OCC plans to issue an additional notice of proposed rulemaking this summer that will seek input on the process that the agency will use to calibrate the new regulation’s performance metrics. Following additional data collection and analysis, the OCC will set the benchmarks, minimums, and thresholds for the new rule. It is critical that the OCC thoroughly understand and test this data prior to incorporating specific metrics into regulation. This is not an exercise that should be rushed for the sake of an artificial deadline that is not mandated by law.

Notably, once the numerical benchmarks are established, they will not be set in stone. The OCC expects to review and adjust them periodically. The agency notes that common definitions and better data over time will allow it to adjust levels of performance necessary to achieve a particular rating. When doing so, the OCC will consider a variety of factors, including the level of qualifying activities conducted by all banks, market conditions and unmet needs and opportunities. Any adjustments will be subject to a public notice and comment period.

3. Much work remains—for all agencies

Third, while it’s true that the OCC has issued a final rule that overhauls the CRA regime for national banks and federal savings associations, CRA modernization is far from complete—for all agencies. Even if the OCC survives a Congressional Review Act challenge and sets the CRA performance metrics in the coming months, the agency will also need to issue guidance on various aspects of the rule, including the documentation needed to demonstrate that a consumer loan qualifies for CRA credit, as well as guidance to standardize how examiners apply performance context in CRA evaluations. Examination procedures and examiner training will also be necessary.

Importantly, it’s not just the OCC that has more work to do on CRA modernization. In deciding not to join the OCC’s rulemaking, FDIC Chairman Jelena McWilliams said that her agency is not prepared to issue a new CRA rule during the COVID-19 pandemic. However, she did not close the door to the reform effort, instead observing that “there are many provisions in the final rule that will greatly benefit low- and moderate-income communities and provide greater clarity to banks on CRA expectations.”

Similarly, even though the Federal Reserve bowed out of the OCC-led CRA rulemaking effort, Chairman Jerome Powell told the House Financial Services committee last week that the central bank has “done a lot of great work” rethinking how it would evaluate banks’ CRA performance and that the Fed would not “let that go to waste.” Powell did not provide a timeline for any possible rulemaking activity, however.

 Looking ahead

The CRA modernization process has been anything but a typical rulemaking exercise. Lately, when asked to make a prediction about CRA reform, I’ve demurred by pointing out that the crystal ball on my desk is out of order. Even though the CRA modernization effort continues to take twists and turns, one fact remains: A unified, interagency regulation will be the key to a CRA framework that stands the test of time and is not subject to continual revision based on the political winds of the day. And, more importantly, consistent CRA regulations will encourage the multibank lending and investment partnerships that will benefit communities as our nation’s banks help address the wide-spread economic fallout from the COVID-19 pandemic.

Krista Shonk is VP for regulatory compliance and policy at ABA.