On May 20, 2020, the OCC issued a final rule to “strengthen and modernize” its existing Community Reinvestment Act (“CRA”) regulations.  This is the second in a series of five blog posts about the final rule.

The final CRA rule is an effort by the OCC to provide objective measures to evaluate the CRA performance of national banks and savings associations supervised by the OCC (including federal and state-chartered savings associations and uninsured federal branches of foreign banks).  These banks conduct a majority of all CRA activity in the United States.

The final rule is effective October 1, 2020 but sets mandatory compliance dates based on the applicable performance standards.  Banks subject to the general performance standards and banks subject to the wholesale and limited purpose bank performance standards must comply with the new CRA framework by January 1, 2023.  Small and intermediate banks must comply with the rule by January 1, 2024.  Until compliance with the final rule, national banks and federal savings banks must comply with the OCC’s current rule.  Until the FDIC and Board of Governors of the Federal Reserve System take action, state nonmember banks and state member banks will continue to comply with the current rule, as codified in 12 CFR Part 228 and Part 345.

The final rule establishes a series of metrics for evaluating CRA performance and utilizes call report data to determine the amount of qualifying activities (including mortgage, consumer, small business and small farm loans, community development lending and community development investments).  The OCC’s final rule diverges from the current rule in (a) its enumeration of qualifying activities; (b) how banks will delineate assessment areas; (c) the establishment of performance standards; and (d) data collection and data retention requirements.

Qualifying Activities

The current rule applies: (a) a lending test to evaluate a bank’s record of helping to meet the credit needs of its assessment areas through its lending activities by considering a bank’s home mortgage, small business, small farm, and community development lending; (b) an investment test to assess a bank’s record of helping to meet the credit needs of its assessment areas through qualified investments that benefit its assessment areas or a broader statewide or regional area that includes the bank’s assessment areas; and (c) a service test that examines a bank’s record of helping to meet the credit needs of its assessment area by analyzing both the availability and effectiveness of a bank’s systems for delivering retail banking services and the extent and innovativeness of its community development services.

Although the current rule contains definitions of “community development” “community development loans” and “community development services” it lacks comprehensive criteria for what qualifies for CRA consideration or guidance as to activities that have previously received CRA credit.

The final rule defines a “qualifying activity” as an activity that helps meet the credit needs of a bank’s entire community, including low- and moderate income individuals (LMI) and communities.  Qualifying activities include retail loans, community development loans, community development investments or community development services.

Qualifying retail loans include home mortgage loans, small loans to a business, small loans to a farm and consumer loans if the loans are: (1) provided to an LMI individual or family, a CRA-eligible business or a CRA-eligible farm; (2) located in Indian country or other tribal and native lands; (3) a small loan to a business located in an LMI census tract; or (4) a small loan to a farm located in an LMI census tract.

A community development loan, community development investment, or community development service is a “qualifying activity” if it provides financing for or supports:

• affordable housing;
• another bank’s community development loan, community development investment, or community development service;
• community support services such as child care, education, workforce development, job training, health services or housing services that partially or primarily serves LMI individuals or families;
• economic development activities that provide financing or support for businesses or farms;
• essential community facilities that partially or primarily serve LMI individuals or families or “Qualifying Areas,” which include LMI census tracts, distressed areas, underserved areas, disaster areas or Indian country;
• essential infrastructure that partially or primarily serves LMI individuals or families or Qualifying Areas;
• a family’s farm;
• federal, state, local, or tribal government programs, projects, or initiatives that: partially or primarily serve LMI individuals or families or qualifying areas;
• financial literacy;
• owner-occupied and rental housing development, construction, rehabilitation, improvement, or maintenance in Indian country or other tribal and native lands; qualified opportunity funds that benefit LMI qualified opportunity zones; or
• other activities and ventures undertaken, including capital investments and loan participations, by a bank in cooperation with a minority depository institution, women’s depository institution, Community Development Financial Institution, or low-income credit union, if the activity helps to meet the credit needs of local communities in which these institutions are chartered.

To promote clarity, the final rule provides for the publication of a qualifying activities list that contains non-exhaustive examples of qualifying activities.  To promote innovation, any interested party (including a bank or community group) may request confirmation that an activity is a qualifying activity.  The final rule provides that the OCC will respond directly to requests for confirmation and post those responses to its website, which banks may use as interpretive guidance to determine whether particular activities meet the qualifying activities criteria.  The preamble notes that the OCC plans to publish the list of qualifying activities on its website in a searchable format and update it annually.

Under the final rule, a bank evaluated under the general performance standards will calculate a qualified activities value (“QAV”) annually.  The QAV is the sum of: (1) the quantified dollar value of qualifying loans and community development investments; and (2) the aggregate quantified dollar value of community development services, the quantified dollar value of in-kind donations made during the year and the quantified dollar value of monetary donations made during the year.  Multipliers are applied in calculating the QAV (provided the quantified dollar value of a bank’s current evaluation period community development loans, community development investments, and community development services is approximately equal to the quantified dollar value of these activities considered in the bank’s prior evaluation period) for (a) activities that support minority depository institutions, women’s depository institutions, CDFI’s and low income credit unions, community development investments, community development services, affordable housing and retail lending by branches located in LMI census tracts; and (b) activities in “CRA deserts.”  The OCC maintains a list of CRA deserts and banks may request confirmation of new CRA deserts.

Assessment Areas

Under the current rule, a bank other than a wholesale or limited purpose bank must delineate an assessment area that includes the geographies in which the bank has its main office, its branches, and its deposit-taking ATMs, as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans.

With one exception, the final rule maintains a facilities-based approach to the delineation of CRA assessment areas. Under the final rule, a bank’s assessment areas include each location where the bank maintains a main office, a branch, or a non-branch deposit-taking facility that is not an ATM and the surrounding locations in which the bank has originated or purchased a substantial portion of its qualifying retail loans.  Although the final rule does not require a bank to delineate an assessment area where it maintains only a deposit-taking ATM, the final rule permits a bank to do so.  The facility-based assessment area must include a whole MSA; the whole non-metropolitan area of the state; one or more whole, contiguous metropolitan divisions in a single metropolitan statistical area; or one or more whole, contiguous counties or county equivalents in a single metropolitan statistical area or nonmetropolitan area.

Although the final rule generally employs a facilities-based approach to the delineation of CRA assessment areas, the final rule does provide that a bank that receives 50 percent or more of its retail domestic deposits from geographic areas outside of its facility-based assessment areas must delineate separate, non-overlapping assessment areas where it receives 5 percent or more of its retail domestic deposits.  Practically, this will require all institutions to geocode deposits and this will significantly impact branchless banks which will have to delineate as CRA assessment areas geographies that they have previously ignored.

Performance Standards

The current rule does not contain objective performance standards to evaluate CRA performance.

The final rule maintains small bank and intermediate bank performance standards, which was a major victory for the banking industry.  It also retains wholesale and limited purpose bank performance standards and retains the option for banks to submit and be evaluated under a strategic plan, which are also beneficial for the industry.

For banks evaluated under the general performance standards pursuant to the final rule, the OCC will assess, in applying the final rule, the CRA performance based upon an application of the general performance standards and determination of its presumptive ratings.

A bank evaluated under the general performance standards will determine its bank CRA evaluation measure and its assessment area CRA evaluation measures annually.  A bank’s CRA evaluation measure is the sum of: (1) the bank’s annual QAV divided by the average quarterly value of the bank’s retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual QAV; and (2) the number of the bank’s branches located in or that serve Qualifying Areas multiplied by .02.  A bank’s assessment area CRA evaluation measure is determined in each assessment area and is the sum of: (1) the bank’s annual assessment area QAV divided by the average quarterly value of the bank’s assessment area retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual assessment area QAV; and (2) the number of the bank’s branches located in or that serve Qualifying Areas multiplied by .02.

In each assessment area, the OCC will apply a geographic distribution test and borrower distribution test on the CRA loans and evaluate whether the bank passes the test by looking at the demographics of the area or activities of peer banks.  By way of example, the OCC will compare a bank’s whole mortgage loans originated in LMI tracts to either (a) the percentage of owner-occupied housing units in the area; or (b) peer home mortgage loans originated in the area.  This activity will be repeated for other product lines.

The OCC will adjust performance standards periodically, considering factors such as the level of qualifying activities conducted by all banks, market conditions, and unmet needs and opportunities

A bank’s assigned CRA rating will be determined based on the bank’s presumptive rating adjusted for performance context. Performance context is also considered under the current rule and the factors are similar, including: (1) how the Bank’s capacity to meet the performance standards was effected by its product offerings and business strategy, unique constraints (including financial condition), innovativeness and the bank’s business infrastructure and staffing; (2) how the bank’s opportunity to engage in qualifying activities was affected by demand and demographic factors; (3) competitive environment (including peer performance); (4) comments submitted regarding needs and opportunities; and (5) other relevant information.

Data Collection and Retention

Although the current rule requires a bank to collect, maintain and report certain loan information, consumer loan data was optional, deposit data is not reported and, in general, the data collection and reporting requirements are less burdensome than under the final rule.

The final rule requires all OCC-regulated banks to collect and maintain data and supporting information throughout the assessment period.  Banks evaluated under the general performance standards or a strategic plan must collect and maintain (along with supporting information) retail lending test distribution ratios, CRA evaluation measures and assessment area CRA evaluation measures, community development minimums and assessment area level community development minimums, qualifying loan data, data on non-qualifying loans, community development investment data and community development services data, retail domestic deposit data and assessment area information.

Importantly, the OCC deferred setting benchmarks in the final rule, indicating an intention to gather more data to calibrate benchmarks, thresholds and minimums in a future Notice of Proposed Rulemaking.  Those benchmarks, in addition to changes made regarding qualifying activities, delineation of assessment areas, the performance standards and data collection and data retention, will significantly impact banks subject to the final rule.

To read our first blog post in which we discussed key differences between the OCC’s proposed rule and its final rule, click here.