The Federal Reserve, FDIC and Office of the Comptroller of the Currency today released the final rule to modernize how they assess compliance with the Community Reinvestment Act. According to a Fed overview of the nearly 1,500-page document, the final rule leaves in place several aspects of the proposed rule unveiled last year, including flexibility in retail lending evaluations for banks with less than $600 million in assets, and new data collection and reporting requirements for banks over $2 billion. At the same time, the final version makes several American Bankers Association-recommended revisions to the proposal.
Among its provisions, the final rule would implement a new retail lending evaluation for banks with between $600 million and $2 billion in total assets and provide them the option of evaluation under a new test for community development financing. Banks over $2 billion would be evaluated under four tests: a retail lending test, a retail services and products test, a community development financing test and a community development services test. In addition, retail services and product evaluations for banks over $10 billion would include digital delivery systems. Banks with limited retail products and services, or “limited purpose banks,” will be evaluated exclusively on community development financing activities. In addition, the final rule retains the strategic plan option.
The final rule also creates new “retail lending assessment areas” for banks with more than $2 billion in assets where the bank makes more than 150 closed-end home mortgage loans or 400 small-business loans in each of the two prior calendar years. In a departure from the proposal, banks that conduct 80% or more of specified retail lending activity inside of their facility-based assessment areas are exempt from the retail lending assessment area requirements.
The final rule makes other modifications to the proposal, including giving equal weight to retail and community development activities and maintain the current standard for CRA downgrades for “discriminatory and other illegal credit practices” rather than adopting the proposed rule’s incorporation of illegal credit and noncredit practices. In addition, banks would be given more time to come into compliance compared to the 12 months proposed in the original version of the rule, with reporting requirements taking effect in 2027.
Fed, FDIC boards split on support for CRA rule
The Federal Reserve and FDIC boards voted in favor of the final CRA rule, although there were dissenting members on both boards who argued that the changes would do more harm than good.
The Fed board voted 6-1 to finalize the rule, with Governor Michelle Bowman casting the only opposing vote. Fed Chairman Jerome Powell said the final rule would better achieve the CRA’s goal by encouraging banks to expand to credit, investment and banking services in low- and moderate-income communities. Bowman countered that the law was overly prescriptive and would increase the number of banks rated “needs to improve” from 1% today to nearly 10%. “This seems like regulatory overreach, and as I have already noted, there is little evidence that banks are not currently meeting the credit needs of their communities,” she said.
The FDIC board voted 3-2 in favor, with Vice Chairman Travis Hill and board member Jonathan McKernan casting the opposing votes. Chairman Martin Gruenberg said the final rule will significantly expand the scope and rigor of the CRA “and ensure its relevance for the next generation.” However, Hill said the rule would create evaluation methodologies so complex that it would be hard for institutions to determine whether their actions would result in favorable assessments. He also said the new retail lending tests, in conjunction with the new retail assessment areas, would disincentivize banks from lending to certain communities.
ABA: CRA requirements need to be transparent, consistent
The test for a CRA modernization rule is whether it incentivizes investment in underserved communities with requirements that are transparent, promote consistency and align with congressional intent, ABA President and CEO Rob Nichols said.
In a statement, Nichols said that ABA and its members have long supported the CRA’s goal of ensuring that every person in the country has the chance to succeed, noting that banks invested $287 billion in capital in low- and moderate-income areas in 2021 alone. He also said the association and its members have strongly supported modernizing CRA rules to reflect the realities of modern-day banking.
“We are still reviewing the nearly 1,500-page final rule released today, including changes from the proposed rule, to assess whether it meets our criteria,” Nichols said. “We are also closely examining whether the final rule can be reconciled with other major regulatory changes in play including the Basel III capital proposal. Feedback from our members will guide us moving forward.”