The OCC and FDIC have issued a joint proposal to revise their regulations implementing the Community Reinvestment Act (CRA). Although the Federal Reserve, OCC and FDIC, are the primary CRA regulators, the Fed did not join the proposal and presumably will issue a separate proposal. Comments on the proposal will be due no later than 60 days after it is published in the Federal Register.

In their joint press release announcing the proposal, the OCC and FDIC stated that the proposal is intended to address the dramatic changes that have occurred in the banking industry since the CRA’s enactment in 1977 and the last round of extensive regulatory revisions in 1995. According to the agencies, “the current CRA framework has not kept pace with such changes” and the proposals “are intended to address digital banking changes and to further encourage lending to low- and moderate- income borrowers living in underserved communities, such as rural areas and tribal lands far removed from urban centers where bank branches are concentrated.” The key areas and issues addressed by the proposals are described below.

Activities that qualify for CRA credit.

• Clarification and expansion of activities. Under the current rules, the activities that qualify for CRA consideration generally fall into two categories: retail banking activities and community development (CD) activities. To clarify which activities qualify for CRA credit, the proposal includes “qualifying activities criteria” that identify “the types of activities that meet the credit needs of banks’ communities and, thus, would be considered qualifying activities.” Such criteria cover “many activities that currently qualify for CRA consideration and include additional activities that meet the credit needs of economically disadvantaged individuals and areas in banks’ communities.” For example, expansions to the retail loan criteria include home mortgage loans and consumer loans provided in Indian country and small business loans of $2 million or less. A CD activity is an activity that “provides financing for or supports” specified types of programs, projects, services, facilities, or other needs. The proposal interprets the phrase “provides financing for or supports” broadly “to include all lending, investment, and service activities that are related to CD qualifying activities criteria.” Expansions to qualifying CD activities include adding a criterion for (1) activities that help finance or support another bank’s CD loans, CD investments, or CD services, (2) essential community facilities, such as schools and hospitals, that benefit or serve low- and middle-income (LMI) individuals, LMI census tracts, or other targeted areas of need, (3) essential infrastructure that benefits or serve LMI individuals, LMI census tracts, or other targeted areas of need, and (4) financial literacy programs or education or homebuyer counseling that benefits individuals of all income levels. The proposal removes the requirement that a distressed area or an underserved area be nonmetropolitan areas so that urban areas are included.
• Qualifying activities list. The proposal provides that the agencies would maintain a publicly-available, non-exhaustive, illustrative list of qualifying activities that meet the criteria, as well as examples of activities that the agencies, in response to specific inquiries, have determined do not meet the criteria. The proposal establishes 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.

Delineation of assessment areas. The current method for delineating a bank’s assessment areas is focused on the areas surrounding brick and mortar locations. Consistent with current rules, the proposal requires banks (except for military banks) to serve the communities where they have a physical presence and surrounding geographies where they originated or purchased a substantial portion of their loans. To recognize the increasing number of banks that operate primarily through the Internet or otherwise serve customers not located near the bank’s physical locations, the proposal also requires a bank with a significant portion of its retail domestic deposits outside of its facility-based assessment areas, such as 50 percent or more, to delineate additional assessment areas wherever it has a concentration of retail domestic deposits. Banks receive CRA credit for qualifying activities conducted in their facility-based and deposit-based assessment areas at the assessment area level and bank level, consistent with the proposal’s performance standards. Banks can also receive CRA credit for qualifying activities conducted outside of their assessment areas at the bank level.

Measuring CRA performance. Under the proposal, small banks continue to be evaluated under the current small bank performance standards. New general performance standards are used to evaluate other banks’ CRA activities and the CRA activities of small banks that opt into those standards. The proposal also includes a strategic plan option for all banks. This option is intended to address the unique needs of banks with business models that could not be effectively evaluated under the objective framework reflected in the general performance standards or the small bank performance standards, such as banks that do not have retail domestic deposits or small banks that do not originate retail loans.

The new general performance standards assess two components of a bank’s CRA performance: (1) the distribution (i.e. number) of qualifying loans to LMI individuals, small farms, small businesses, and LMI geographies and (2) the impact of the bank’s qualifying activities, measured by the value of such activities relative to the bank’s retail domestic deposits. Under the proposal, both components are compared to specific benchmarks and thresholds that are established prior to the start of a bank’s evaluation period based, in part, on the agencies’ analysis of historical data. Banks must also meet a minimum CD lending and investment requirement in each assessment area and at the bank level to achieve a satisfactory or outstanding rating.

Presumptive ratings are determined at the assessment area and bank levels. The proposal uses the word “presumptive” to describe the ratings resulting from the benchmark comparisons because the rating can be adjusted based on considerations of performance context and discriminatory or other illegal credit practices. Performance context refers to information about a bank that relates to its capacity to engage in qualifying activities and the demand for, and the bank’s opportunity to engage in, qualifying activities in the communities served by the bank. The proposal includes performance context factors that the agencies would consider in determining a bank’s ratings in each assessment area and at the bank level.

Data collection, recordkeeping, and reporting. The current CRA framework requires banks to collect and report a variety of data but generally exempts small banks. It also does not require data to be collected and reported on all CRA activity. The proposal includes 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 subject to the general performance standards are required to collect and report data on certain CRA activities not subject to current data collection and reporting requirements. The proposal requires such banks to collect and report data not only related to qualifying CRA activities but also on certain non-qualifying activities, retail domestic deposits, and assessment areas. The banks must use this data to make the calculations necessary to determine their ratings based on the proposal’s performance standards. While the proposal generally exempts banks evaluated under the small bank performance standards from most data collection requirements, they are required to collect and maintain information on retail domestic deposits based on the depositor’s physical address, which will be used by the agencies to validate the banks’ deposit-area assessment area delineations.

Our thoughts. It is unfortunate that the Federal Reserve did not join the FDIC and OCC in the proposed rulemaking, which could result in different compliance frameworks for Fed-member state banks and for non-member banks and national banks. We also find perplexing the 50% – 5% threshold for delineating an assessment area. A depository institution may source a significant portion of its deposits from an area and be unable to include CRA activities in that area in demonstrating compliance with the CRA because over 50% of its deposits come from areas tied to its physical locations. Finally, although the industry will benefit from clarification of activities that qualify for CRA credit, the emphasis on not only the number of qualifying loans, but also the dollar amount of those loans relative to deposits may have unintended consequences. For example, the industry may see increased competition for high dollar CRA projects even if the projects benefit fewer LMI individuals.