Author: W. Brad Washburn, CRCM, CAMS
On October 24, 2023, the OCC, the Federal Reserve Board, and the FDIC (the agencies) issued a final rule to strengthen and modernize regulations implementing the Community Reinvestment Act (CRA) to better achieve the purposes of the law which for years has required federally insured banks to help meet the credit needs of the communities in which they do business, especially low- and moderate-income (LMI) communities.
The final rule is based upon the joint agency proposed rule issued on May 5, 2022, and consideration of approximately 950 unique comments received from stakeholders. The last major interagency update to CRA was completed in 1995.
The final rule will implement a revised regulatory framework for the CRA that, like the current framework, is based on bank asset size and business model that recognizes the capacity and resource differences among banks.
Several areas impacted by the new rule include:
New asset size classifications effective January 1, 2026, are:
Small banks will be allowed to continue under the current Small Bank Lending Test and are able to opt-in to the new Retail Lending test if they choose; however, Intermediate and Large banks and Small bank’s that opt-in to the new Retail Lending Test will be subject to the new performance tests. The Retail Lending Test not only will evaluate lending activity for major product lines in the facilities-based assessment areas but will also include evaluation of lending in areas including certain parts of nationwide areas outside of the bank’s facility-based assessment areas. Under the new testing rules, performance will be measured by complex metrics as well as market and community-based benchmarks.
In developing the final rule, the agencies’ stated objectives included updating the CRA regulations to strengthen the achievement of the core purpose of the statute and adapting to changes in the banking industry including the expanded role of mobile and online banking. However, one key objective that is evident but not being publicly acknowledged is that the standards for obtaining a satisfactory rating under the new tests will be much more difficult to achieve for banks subject to the new performance standards. The final rule and preamble are over two thousand pages long and includes numerous technical and complex calculations for determining metrics, benchmarks, and ratings for determining bank performance under the new tests. New standards for ratings can also make it more difficult as applicable banks must receive at least a “Low satisfactory” component rating in the Retail Lending Test to achieve an overall satisfactory rating for the institution. In addition, the agencies published data in the final rule that shows when lending activity from 2018-2020 is applied to the new standards, overall unsatisfactory ratings would increase to 10% which has historically been only 1%.
One positive aspect of the new rule would be that all banks will receive consideration for any qualified Community Development (CD) loans, investments, or services, regardless of location. The final rule also provides additional certainty on eligible CD activities and recognizes activities that are responsive to community needs by:
The final rule is effective and limited provisions are applicable April 1, 2024. Most provisions such as definitions, new performance tests, new asset-size thresholds, and data collection are applicable January 1, 2026. Large bank data reporting requirements are effective January 1, 2027, with annual data reporting required every April 1st, starting April 1, 2027.
The key provisions that are effective April 1, 2024, include:
Banks of all asset sizes should now begin planning and implementing a strategy to comply with the new CRA standards to ensure it can be successful in the years to come. We are committed to being a valuable resource to our clients in preparing for these changes and will be offering training opportunities, review, and consulting on the new CRA rules in the future. If there are any ways that we can assist your institution, please reach out to Brad Washburn at [email protected].
On October 24, 2023, the OCC, the Federal Reserve Board, and the FDIC (the agencies) issued a final rule to strengthen and modernize regulations implementing the Community Reinvestment Act (CRA) to better achieve the purposes of the law which for years has required federally insured banks to help meet the credit needs of the communities in which they do business, especially low- and moderate-income (LMI) communities.
The final rule is based upon the joint agency proposed rule issued on May 5, 2022, and consideration of approximately 950 unique comments received from stakeholders. The last major interagency update to CRA was completed in 1995.
The final rule will implement a revised regulatory framework for the CRA that, like the current framework, is based on bank asset size and business model that recognizes the capacity and resource differences among banks.
Several areas impacted by the new rule include:
- New asset classifications for determining Small bank, Intermediate bank, and Large bank CRA performance standards.
- New rules regarding assessment areas where performance is evaluated, including traditional facilities-based assessment areas, new Retail Lending Assessment areas (large banks only) and outside retail lending areas comprised of nationwide component geographic areas.
- New performance tests and data collection requirements for Large banks including the Retal Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test.
- New performance tests for Intermediate banks include the Retail Lending Test, and the option to continue being evaluated under the current Community Development Test or opt-in to the new Community Development Financing Test.
- New guidance and methods for confirming Community Development activities.
New asset size classifications effective January 1, 2026, are:
- Small banks: Assets of less than $600 million as of December 31 in either of the prior two calendar years;
- Intermediate banks: Assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion in either of the prior two calendar years; and
- Large banks: Assets of at least $2 billion as of December 31 in both of the prior two calendar years.
Small banks will be allowed to continue under the current Small Bank Lending Test and are able to opt-in to the new Retail Lending test if they choose; however, Intermediate and Large banks and Small bank’s that opt-in to the new Retail Lending Test will be subject to the new performance tests. The Retail Lending Test not only will evaluate lending activity for major product lines in the facilities-based assessment areas but will also include evaluation of lending in areas including certain parts of nationwide areas outside of the bank’s facility-based assessment areas. Under the new testing rules, performance will be measured by complex metrics as well as market and community-based benchmarks.
In developing the final rule, the agencies’ stated objectives included updating the CRA regulations to strengthen the achievement of the core purpose of the statute and adapting to changes in the banking industry including the expanded role of mobile and online banking. However, one key objective that is evident but not being publicly acknowledged is that the standards for obtaining a satisfactory rating under the new tests will be much more difficult to achieve for banks subject to the new performance standards. The final rule and preamble are over two thousand pages long and includes numerous technical and complex calculations for determining metrics, benchmarks, and ratings for determining bank performance under the new tests. New standards for ratings can also make it more difficult as applicable banks must receive at least a “Low satisfactory” component rating in the Retail Lending Test to achieve an overall satisfactory rating for the institution. In addition, the agencies published data in the final rule that shows when lending activity from 2018-2020 is applied to the new standards, overall unsatisfactory ratings would increase to 10% which has historically been only 1%.
One positive aspect of the new rule would be that all banks will receive consideration for any qualified Community Development (CD) loans, investments, or services, regardless of location. The final rule also provides additional certainty on eligible CD activities and recognizes activities that are responsive to community needs by:
- Defining standards for receiving full and partial credit for CD activities;
- Maintaining and periodically updating a publicly available illustrative list of qualified CD activities;
- Developing a process for a bank to request confirmation of an activity’s CD eligibility with its regulatory agency; and
- Defining standards for an activity’s impact and responsiveness.
The final rule is effective and limited provisions are applicable April 1, 2024. Most provisions such as definitions, new performance tests, new asset-size thresholds, and data collection are applicable January 1, 2026. Large bank data reporting requirements are effective January 1, 2027, with annual data reporting required every April 1st, starting April 1, 2027.
The key provisions that are effective April 1, 2024, include:
- Facility-based assessment areas
- Large banks assessment areas are limited to whole counties, including a single MSA, one or more counties within an MSA, or one or more contiguous counties within nonmetropolitan areas of a state.
- Intermediate banks and Small banks will have continued flexibility to use partial county designations to include only the portion of a county that it can reasonably be expected to serve, consistent with current practice and reflecting their smaller service areas.
- Large banks assessment areas are limited to whole counties, including a single MSA, one or more counties within an MSA, or one or more contiguous counties within nonmetropolitan areas of a state.
- Content and availability of public file
- For banks that maintain a website, all information required for the public file must be maintained on the bank’s website.
- Quarterly updates will be required for certain current year elements (e.g., written comments, branches opened or closed, etc.).
- For banks that maintain a website, all information required for the public file must be maintained on the bank’s website.
- Public Notice by banks
- Banks may continue to post the notice in the current rule until January 1, 2026, when Appendix F is applicable.
Banks of all asset sizes should now begin planning and implementing a strategy to comply with the new CRA standards to ensure it can be successful in the years to come. We are committed to being a valuable resource to our clients in preparing for these changes and will be offering training opportunities, review, and consulting on the new CRA rules in the future. If there are any ways that we can assist your institution, please reach out to Brad Washburn at [email protected].
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