On May 20, 2020, the Office of the Comptroller of the Currency (“OCC”) published a final rule (“Final Rule”) intended to modernize the rules implementing the Community Reinvestment Act (“CRA”). While the CRA is administered jointly by the OCC, the Federal Deposit Insurance Corporation (“FDIC”), and the Board of Governors of the Federal Reserve System (the Federal Reserve Board, or “FRB”), the OCC alone is moving forward with the regulatory overhaul. As a result, the Final Rule’s changes apply only to national banks and thrifts.
The CRA was initially passed in the 1970s to combat redlining practices that purportedly resulted in a shortage of investments in low- and moderate-income communities. The CRA’s regulations, which largely require banks to invest in low- and moderate-income populations in geographic areas surrounding the banks’ physical locations, have been criticized as banks’ online presence has grown. While the proposed version of the Final Rule had been the OCC’s and FDIC’s joint response to alleged problems resulting from the outdated nature of the regulations, the FDIC decided not to participate in the promulgation of the Final Rule. For its part, the FRB has not released a proposal to revise the CRA and has not commented on the Final Rule – though earlier this year, one FRB Governor had stressed that it is “much more important to get [CRA] reform right than to do it quickly.”
The Final Rule will take effect on October 1, 2020, but will be implemented in phases. Larger wholesale and limited purpose banks are required to comply with the Final Rule’s new provisions by January 1, 2023. Small and intermediate banks must comply by January 1, 2024.
Efforts toward Modernization
According to the OCC, the Final Rule will provide banks with an incentive to invest in low- and moderate-income communities by achieving specific performance goals which account for the unique characteristics of the populations served by each bank. In contrast, under the current rule, banks received CRA performance ratings based primarily on a curve compared to the performance of their geographic peers–a benchmarking model which has become less useful as banking shifts online.
At a high level, the Final Rule:
- Establishes clear criteria for the type of activities that qualify for CRA credit. Specifically, the Final Rule requires the OCC to periodically publish a non-exhaustive, illustrative list of examples of qualifying activities (the first such list is available here). The Final Rule also establishes a process for banks to seek agency confirmation that an activity is a qualifying activity by submitting a “Qualifying Activity Confirmation Request Form.”
- Expands where CRA activity counts. The Final Rule requires that a bank that receives 50 percent or more of its retail domestic deposits from geographic areas outside of its deposit-based assessment area must delineate assessment areas where it receives 5 percent or more of its total retail domestic deposits. In response to commenters’ concerns around flexibility in defining an assessment area, the Final Rule allows banks to delineate a “deposit-based assessment area” to consist of a geographic area as large as an entire state. This approach is intended to encourage banks to provide much-needed banking services to distressed and disaster areas, including areas with a significant underbanked population.
- Establishes new quantifiable CRA performance standards based on the dollar value of legally binding commitments to qualifying activity. The new performance standards measure the quantified value of qualifying community development, retail loans, and community development investments. Additionally, the Final Rule allows CRA assessors to consider performance context and evidence of discrimination or other illegal practices when evaluating banks.
- Requires banks to collect and maintain, but not to report, data related to their retail domestic deposits. This data would be collected in order to make calculations to determine their ratings.
- Defers numerical targets until the OCC collects more data. The Final Rule makes an important change from its proposed version by providing that the establishment of thresholds for grading banks’ CRA performance and delineating banks’ deposit-based assessment areas will be deferred until the OCC assesses improved data that will be gathered as required by the Final Rule.
FDIC Chairman Jelena McWilliams praised the Final Rule, commending Comptroller Joseph Otting and his staff on “the tremendous amount of work and outreach” that went into the Final Rule. Chairman McWilliams stated that many provisions in the final rule will benefit low- and moderate-income communities and provide greater clarity to banks on CRA expectations.
Notwithstanding the Chairman’s support of efforts to make the CRA rules clearer, more transparent, and less subjective, Chairman McWilliams indicated that the FDIC “is not prepared to finalize the CRA proposal at this time.”
The Federal Reserve did not join the FDIC and the OCC in their initial proposal to reform the CRA rules, and it did not comment on the Final Rule. In January, one Federal Reserve Governor had emphasized that CRA reform should be accomplished more slowly in order to get it done correctly. Specifically, FRB Governor Brainard criticized the proposal for consolidating several aspects of CRA evaluation into a single, final score based on dollar value, since “the value of retail services and community development services to a local community do not lend themselves easily to a monetary value metric comparable to the monetary value of loans and investments.” She also argued that a uniform ratio for determining CRA evaluations that does not adjust with the local business cycle would provide “too little incentive to make good loans during an expansion and incentives to make unsound loans during a downturn.”
FRB Governor Brainard instead argued for a set of standards more closely matching existing CRA exams. Such standards would measure retail lending and services under a “retail test,” along with a community development test that would apply only to large banks. Additionally, FRB Governor Brainard indicated that greater focus should be placed on a bank’s distribution of branches, an element that has less emphasis in the Final Rule.
Community Group Lawsuits
Two days following the OCC’s announcement of the Final Rule, three community groups declared their intent to sue the OCC. Specifically, the community groups alleged that the OCC “denied the public a fair and transparent process” by moving forward with the Final Rule despite public feedback opposing the Final Rule’s framework, and that the Final Rule “erected a significant roadblock” to the financial recovery of communities affected by the COVID-19 health and economic crisis. According to these groups, the Final Rule will allow banks to reduce their focus on investing in low- and moderate-income communities, thus contravening the original intent of the CRA.
The Final Rule will shift emphasis from ensuring low- and moderate-income investments within a certain geographic area, but for OCC-supervised banks only. Importantly, the Final Rule creates a regulatory split, where agencies may use different metrics and methods for evaluating compliance under the same statutory scheme, and perhaps in the same geographic areas. Industry stakeholders should watch for developments relating to the Final Rule over the coming months as the new scheme is phased in.