By: Brad Washburn, CRCM, CAMS
On December 13, 2019, the FDIC and OCC issued a joint Notice of Proposed Rulemaking (NPR) to comprehensively amend the Community Reinvestment Act's (CRA) implementing regulations, which have not been significantly changed in nearly 25 years. This proposal builds upon previous efforts by the U.S. Department of the Treasury who released recommendations on April 3, 2018 to modernize the CRA, and previous efforts by the OCC who released an Advanced Notice of Proposed Rule (ANPR) on August 28, 2018 seeking comment on the best ways to modernize the regulatory framework implementing the CRA.
Per the NPR, the proposed revisions would seek to modernize and update CRA regulations to better achieve the law's underlying purpose of encouraging banks to serve their communities and are intended to make the regulatory framework more objective, transparent, consistent, and easy to understand.
Consistent with the current CRA framework, the proposed rule would include different performance standards applicable to banks of different sizes by total assets. The proposal would also allow small banks, redefined as banks with $500 million or less in total assets, to continue to be evaluated under the current CRA small bank test or opt into the new general performance standards. Banks with total assets over $500 million would be evaluated under the new general performance standards and the proposed rule would not include a separate classification for intermediate small banks. Finally, the proposed regulations would include a strategic plan option available to address the unique needs of banks of any size with business models that could not be effectively evaluated under the proposed standards, such as banks that do not have retail domestic deposits or small banks that do not originate retail loans.
The NPR would seek to modernize the CRA regulations by:
Specifically, the proposal provides that the agencies would maintain a publicly available non-exhaustive, illustrative list of examples of qualifying activities that meet the criteria in the rule, as well as examples of activities that the agencies have determined, in response to specific inquiries, do not qualify. In addition, the proposal would establish a process for a bank to submit a form through the agency’s website to seek agency confirmation that an activity is a qualifying activity.
To ensure that CRA activity continues to have a local community focus where banks maintain a physical presence and conduct a substantial portion of their lending activity, the proposal would still require banks to delineate “facility based” assessment areas around their main office, branches, or non-branch deposit-taking facilities as well as the surrounding areas where banks have originated or purchased a substantial portion of their loans. However, to recognize the evolution of modern banking services (e.g. mobile banking, online banking, Internet banks, etc.) and the fact that many banks receive large portions of their deposits from outside their facilities-based assessment areas, the proposed rule would require some banks to delineate additional, non-overlapping “deposit-based” assessment areas where they have significant concentrations of retail domestic deposits as defined in the rule, if applicable.
The new general performance standards would assess two fundamental components of a bank’s CRA performance: (1) the distribution (i.e. number) of qualifying retail loans to low-to-moderate income (LMI) individuals, small farms, small businesses, and LMI geographies; and (2) the impact of a bank’s qualifying activities, measured by the value of a bank’s qualifying activities relative to its retail domestic deposits. Both components would be compared to specific benchmarks and thresholds that would be established prior to the beginning of a bank’s evaluation period. Banks evaluated under the general performance standards would also be required to meet a minimum community development lending and investment requirement in each assessment area and at the bank level to achieve a satisfactory or outstanding rating. The proposal would preserve and standardize consideration of performance context in concluding the overall rating, which would allow the agencies to recognize and account for specific facts and circumstances relating to a bank’s CRA capacity and opportunities in a transparent manner.
The proposal would require banks evaluated under the small bank performance standards to collect and maintain, but not to report, data related to their retail domestic deposits so that the agencies could validate their deposit-based assessment area delineations, as applicable. Banks evaluated under the general performance standards would be required to collect, maintain, and report certain data related to their qualifying activities, certain non-qualifying activities, retail domestic deposits, and assessment areas. Those banks would also be required to use that information to make the calculations necessary to determine their ratings, based on the application of the performance standards in the proposal. Prior to a CRA performance evaluation, the evaluating agency would validate the data used in determining a bank’s ratings. The agencies would provide additional guidance on the data that banks need to collect and maintain under the proposed rule that would standardize the information collected and help banks ensure that they meet the requirements of the rule. The agencies have also indicated that the data-based evaluation method would reduce the lag time in preparing CRA exam reports.
The proposal would also retain many of the current regulation’s provisions related to the public file, planned examination schedules, public notice by banks, and the CRA notice. Banks would still need to provide public notice to the communities they serve that community members are entitled to CRA-related information. Banks would also need to provide the requested CRA-related information to the community members. CRA-related information would still include information about banks’ branches, locations, and services, comments received from the public related to assessment area needs and opportunities, and responses to those comments. However, banks would not have to provide data reported through HMDA in the public file because the proposal would collect home mortgage data directly instead of relying on HMDA data. Additionally, recognizing the advances in technology over the past couple of decades, banks would no longer be limited to providing public notice or making available the CRA information through physical means. Instead, banks would have the option to provide public notice or make available CRA-related information on their websites. If a community member who has requested CRA-related information does not have access to the Internet, banks could offer to print out the information at that person’s expense, instead of copying the information from a physical file.
Many stakeholders agree the CRA rules need to be modernized to continue working intended, but there have been differences on the recommendations on exactly how to change the rules. Noticeably absent from the joint proposal is the Federal Reserve who has not yet weighed in on CRA reform by joining this proposal or issuing its own proposal. If the OCC and FDIC move forward without agreement from the Federal Reserve, banks could be faced with different rules to achieve CRA compliance depending on their primary federal regulator. However, there is still the possibility that a final interagency rule that includes the Federal Reserve can be achieved, which would provide a consistent regulatory framework for all banks.
All financial institutions should carefully review the proposal and begin planning for potential significant impacts to compliance programs and strategic direction stemming from CRA regulatory reform rule changes. Financial institutions should also consider issuing comments to the regulators to consider improving the rules before finalizing the proposal. Comments on the NPR must be received no later than 60 days after publication in the Federal Register.
We will closely monitor for additional developments in the CRA reform efforts and will issue an updated newsletter addressing this topic in the future as necessary.
View the entire notice at the following link:
https://www.fdic.gov/news/board/2019/2019-12-12-notice-dis-a-fr.pdf
On December 13, 2019, the FDIC and OCC issued a joint Notice of Proposed Rulemaking (NPR) to comprehensively amend the Community Reinvestment Act's (CRA) implementing regulations, which have not been significantly changed in nearly 25 years. This proposal builds upon previous efforts by the U.S. Department of the Treasury who released recommendations on April 3, 2018 to modernize the CRA, and previous efforts by the OCC who released an Advanced Notice of Proposed Rule (ANPR) on August 28, 2018 seeking comment on the best ways to modernize the regulatory framework implementing the CRA.
Per the NPR, the proposed revisions would seek to modernize and update CRA regulations to better achieve the law's underlying purpose of encouraging banks to serve their communities and are intended to make the regulatory framework more objective, transparent, consistent, and easy to understand.
Consistent with the current CRA framework, the proposed rule would include different performance standards applicable to banks of different sizes by total assets. The proposal would also allow small banks, redefined as banks with $500 million or less in total assets, to continue to be evaluated under the current CRA small bank test or opt into the new general performance standards. Banks with total assets over $500 million would be evaluated under the new general performance standards and the proposed rule would not include a separate classification for intermediate small banks. Finally, the proposed regulations would include a strategic plan option available to address the unique needs of banks of any size with business models that could not be effectively evaluated under the proposed standards, such as banks that do not have retail domestic deposits or small banks that do not originate retail loans.
The NPR would seek to modernize the CRA regulations by:
- Clarifying and expanding what qualifies for CRA credit
Specifically, the proposal provides that the agencies would maintain a publicly available non-exhaustive, illustrative list of examples of qualifying activities that meet the criteria in the rule, as well as examples of activities that the agencies have determined, in response to specific inquiries, do not qualify. In addition, the proposal would establish a process for a bank to submit a form through the agency’s website to seek agency confirmation that an activity is a qualifying activity.
- Expanding where CRA activity counts by creating additional "assessment areas" tied to where deposits originate
To ensure that CRA activity continues to have a local community focus where banks maintain a physical presence and conduct a substantial portion of their lending activity, the proposal would still require banks to delineate “facility based” assessment areas around their main office, branches, or non-branch deposit-taking facilities as well as the surrounding areas where banks have originated or purchased a substantial portion of their loans. However, to recognize the evolution of modern banking services (e.g. mobile banking, online banking, Internet banks, etc.) and the fact that many banks receive large portions of their deposits from outside their facilities-based assessment areas, the proposed rule would require some banks to delineate additional, non-overlapping “deposit-based” assessment areas where they have significant concentrations of retail domestic deposits as defined in the rule, if applicable.
- Providing a more objective method to measure CRA performance by establishing activity thresholds as a percentage of domestic deposits
The new general performance standards would assess two fundamental components of a bank’s CRA performance: (1) the distribution (i.e. number) of qualifying retail loans to low-to-moderate income (LMI) individuals, small farms, small businesses, and LMI geographies; and (2) the impact of a bank’s qualifying activities, measured by the value of a bank’s qualifying activities relative to its retail domestic deposits. Both components would be compared to specific benchmarks and thresholds that would be established prior to the beginning of a bank’s evaluation period. Banks evaluated under the general performance standards would also be required to meet a minimum community development lending and investment requirement in each assessment area and at the bank level to achieve a satisfactory or outstanding rating. The proposal would preserve and standardize consideration of performance context in concluding the overall rating, which would allow the agencies to recognize and account for specific facts and circumstances relating to a bank’s CRA capacity and opportunities in a transparent manner.
- Revising data collection, recordkeeping, and reporting requirements
The proposal would require banks evaluated under the small bank performance standards to collect and maintain, but not to report, data related to their retail domestic deposits so that the agencies could validate their deposit-based assessment area delineations, as applicable. Banks evaluated under the general performance standards would be required to collect, maintain, and report certain data related to their qualifying activities, certain non-qualifying activities, retail domestic deposits, and assessment areas. Those banks would also be required to use that information to make the calculations necessary to determine their ratings, based on the application of the performance standards in the proposal. Prior to a CRA performance evaluation, the evaluating agency would validate the data used in determining a bank’s ratings. The agencies would provide additional guidance on the data that banks need to collect and maintain under the proposed rule that would standardize the information collected and help banks ensure that they meet the requirements of the rule. The agencies have also indicated that the data-based evaluation method would reduce the lag time in preparing CRA exam reports.
The proposal would also retain many of the current regulation’s provisions related to the public file, planned examination schedules, public notice by banks, and the CRA notice. Banks would still need to provide public notice to the communities they serve that community members are entitled to CRA-related information. Banks would also need to provide the requested CRA-related information to the community members. CRA-related information would still include information about banks’ branches, locations, and services, comments received from the public related to assessment area needs and opportunities, and responses to those comments. However, banks would not have to provide data reported through HMDA in the public file because the proposal would collect home mortgage data directly instead of relying on HMDA data. Additionally, recognizing the advances in technology over the past couple of decades, banks would no longer be limited to providing public notice or making available the CRA information through physical means. Instead, banks would have the option to provide public notice or make available CRA-related information on their websites. If a community member who has requested CRA-related information does not have access to the Internet, banks could offer to print out the information at that person’s expense, instead of copying the information from a physical file.
Many stakeholders agree the CRA rules need to be modernized to continue working intended, but there have been differences on the recommendations on exactly how to change the rules. Noticeably absent from the joint proposal is the Federal Reserve who has not yet weighed in on CRA reform by joining this proposal or issuing its own proposal. If the OCC and FDIC move forward without agreement from the Federal Reserve, banks could be faced with different rules to achieve CRA compliance depending on their primary federal regulator. However, there is still the possibility that a final interagency rule that includes the Federal Reserve can be achieved, which would provide a consistent regulatory framework for all banks.
All financial institutions should carefully review the proposal and begin planning for potential significant impacts to compliance programs and strategic direction stemming from CRA regulatory reform rule changes. Financial institutions should also consider issuing comments to the regulators to consider improving the rules before finalizing the proposal. Comments on the NPR must be received no later than 60 days after publication in the Federal Register.
We will closely monitor for additional developments in the CRA reform efforts and will issue an updated newsletter addressing this topic in the future as necessary.
View the entire notice at the following link:
https://www.fdic.gov/news/board/2019/2019-12-12-notice-dis-a-fr.pdf
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