This is our third blog post on the final rule issued on October 24, 2023 by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency amending their regulations implementing the Community Reinvestment Act (“CRA”) (the “Final Rule”).  Our first and second blog posts summarized the major changes impacting large and intermediate banks, respectively.  In this blog post, we summarize the major changes impacting small banks (those with assets of less than $600 million as of December 31 in either of the two prior calendar years).

The Final Rule is effective April 1, 2024; however, compliance dates for a large portion of the Final Rule’s provisions is January 1, 2026.  Until the January 1, 2026 compliance date, the current CRA regulations continue to apply.

Small Bank Asset Size.  The current CRA regulations define a “small bank” as a bank with assets of less than $376 million as of December 31 of each of the prior two calendar years and defines as “intermediate small banks” those banks with assets of at least $376 million on both of the prior two calendar years and less than $1.503 billion as of December 31 in either of the prior two calendar years.  (Current 12 CFR __.12(u).)  Under the Final Rule, banks (excluding limited purpose banks) with assets of less than $600 million as of December 31 in either of the two prior calendar years will now be defined as a “small bank.”  (Final § __.12.)

According to the joint notice of proposed rulemaking issued in May 2022, approximately 778 banks currently classified as intermediate small banks (those with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years) will be reclassified as small banks under the Final Rule.  As a reminder, banks with assets of at least $600 million as of December 31 in the two prior calendar years and less than $2 billion as of December 31 in either of the two prior calendar years will now be defined as an “intermediate bank.” 

Facility-Based Assessment Areas.  As with large and intermediate banks, small banks will continue to delineate their facility-based assessment areas (i.e., the areas where their main offices, branches, and deposit-taking remote service facilities are located) as part of their CRA evaluation framework.  As with intermediate banks, small banks may continue to delineate facility-based assessment areas composed of partial counties and adjust the boundaries of their facility-based assessment areas to include only the contiguous whole census tracts within a portion of a county that they can reasonably be expected to serve, subject to certain limitations.  (Final § __.16(b)(3) (limitations on the delineation of a facility-based assessment area include prohibitions on illegal discrimination and arbitrarily excluding low- or moderate-income census tracts).)

Additionally, facility-based assessment areas for all banks, regardless of size, may not extend beyond a metropolitan statistical area (“MSA”) boundary or state boundary unless located in a multistate MSA.

Outside Retail Lending Areas.  As discussed in our previous blog posts, the Final Rule implements a retail lending assessment area applicable only to large banks.  (Final § __.17(a).)  Small banks that opt to be evaluated under the Retail Lending Test (discussed below) and that conduct a majority of their retail lending (by a combination of loan dollars and loan count) outside of their facility-based assessment areas will have their retail lending performance evaluated in their “outside retail lending area” (i.e., the nationwide area outside of the small bank’s facility-based assessment areas, excluding certain nonmetropolitan counties).  (Final § __.18(a)(2) (any county in a nonmetropolitan area where the bank did not originate or purchase any closed-end home mortgage loans, small business loans, small farm loans, or automobile loans is excluded).)  Small banks may elect to have their major product lines evaluated in their outside retail lending area or, if they originated or purchased more than 50% of their home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans outside their facility-based assessment area in the prior two calendar years, will be required to do so.  (Final § __.18(a)(2).)

The CRA Tests.  Under the Final Rule, small banks will be evaluated either under the Small Bank Lending Test or, at the bank’s option, the Retail Lending Test.  (Final § __.29(a).)  The Final Rule maintains the criteria from the current CRA regulations to evaluate a small bank’s lending performance; specifically, a small bank’s retail lending performance will be evaluated based on its loan-to-deposit ratio (adjusted for seasonal variation and other retail and community-development lending activities), the percentage of loans and other retail and community-development lending activities in the bank’s facility-based assessment areas, its record of lending to borrowers and businesses and farms of differing income levels and sizes, its geographic loan distribution, and its record of responding to complaints regarding its performance of meeting credit needs.  (Final § __.29(a)(2).)  Additionally, small banks may request additional consideration for their community development investment and services activities and for providing branches, services, digital delivery systems, and deposit products that are responsive to certain low- and moderate-income (“LMI”) individuals, groups, and businesses within or outside of their facility-based assessment areas.  (Final § __.29(b)(1).)

Although intermediate small banks under current CRA regulations are evaluated under both a lending test for small banks and a community development test, the Final Rule only evaluates small banks under the Small Bank Lending Test or, at the bank’s option, the Retail Lending Test.  For banks classified as intermediate small banks under the current rule that will be deemed small banks under the Final Rule, CRA compliance has been simplified by the elimination of a community development test.  Small banks that opt to be evaluated under the Retail Lending Test will be evaluated using the same criteria used to evaluate intermediate banks (i.e., the geographic and borrower distributions of a small bank’s major product lines would be evaluated in its facility-based assessment areas and, where applicable, in its outside retail lending area against market and community benchmarks).  (Final § __.22.)  For further discussion of the Retail Lending Test provisions, see our second blog post here.

Small banks evaluated under the Small Bank Lending Test will be assigned conclusions of “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance” in each facility-based assessment area, in each State or multistate MSA, and for the institution.  (Final § __.29(c)(2), Final 12 CFR part 25, App. E.)  Under the Retail Lending Test, examiners will assign the aforementioned conclusions for each State or multistate MSA and for the institution based on the performance score for the small bank’s Retail Lending Test conclusions for the State, multistate MSA, or institution.  (Final § __.29(c)(2), Final 12 CFR part 25, App. D.)

In summary, although the changes under the Final Rule are even less impactful for small banks than intermediate banks (and those banks that will be classified as small banks that were formerly intermediate small banks will not be subject to a community development test), small banks still need to prepare for the Final Rule and, going forward, consider whether an evaluation of their lending performance makes sense under the Small Bank Lending Test or the Retail Lending Test. 

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