This is our second 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”).  In this blog post, we summarize the major changes impacting intermediate banks (those 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).

In our first blog post, we summarized the major changes impacting large banks (those with assets of at least $2 billion as of December 31 in the two prior calendar years).  Our third and final blog post on the Final Rule will focus on the Final Rule’s impact on 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.

Intermediate Bank Asset Size.  Under the current CRA regulations, banks 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 are classified as “intermediate small banks.” (Current 12 C.F.R. __.12(u).)  Under the Final Rule, 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.”  (Final  §__.12.)  According to the joint notice of proposed rulemaking issued in May 2022, approximately 216 banks currently classified as large banks will be reclassified as intermediate banks under the Final Rule.

Facility-Based Assessment Areas.  The Final Rule maintains facility-based assessment areas as part of the CRA evaluation framework.  All banks, regardless of size, will continue to delineate the areas where their main offices, branches, and deposit-taking remote service facilities are located (“facility-based assessment areas”).  Unlike large banks, which must now delineate these areas based on whole counties, intermediate banks will continue to be allowed to delineate partial counties.  (Final  §__.16(b)(1),(2).)  Intermediate banks may adjust the boundaries of their facility-based assessment areas to include only the contiguous census tracts within a county that they can reasonably be expected to serve, subject to certain limitations.  (Final  §__.16(b)(3).)  Unless located in a multistate metropolitan statistical area (“MSA”), facility-based assessment areas may not extend beyond an MSA boundary or state boundary.

Outside Retail Lending Areas.  As noted previously, the Final Rule implements a new type of assessment area—the retail lending assessment area— that is only applicable to large banks. (Final  §__.16(b)(1)(includes the surrounding counties where the bank has originated a substantial portion of its loans and may include Loan Production Offices).)  Intermediate banks, by contrast, 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 an “outside retail lending area” (i.e., the nationwide area outside of the intermediate bank’s facility-based assessment areas, excluding certain nonmetropolitan counties).  (Final  §__.18(b).)  Unlike large banks that will not be evaluated in their outside retail lending area if they did not originate or purchase loans in any product lines in the outside retail lending area during the evaluation period, an intermediate bank that originated or purchased more than 50% of its home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans outside the bank’s facility-based assessment area in the prior two calendar years must be evaluated in its outside retail lending area. (Final  §__.18(a)(1), (2).)  Intermediate banks that do not meet the 50% standard may elect to have their retail lending in their outside retail lending area(s) evaluated.  (Id. at (2).)

The CRA Tests.  Under the Final Rule, intermediate banks will be evaluated under the Retail Lending Test and either the Intermediate Bank Community Development Test or, at the bank’s option, the Community Development Financing Test.  Under the Retail Lending Test, the geographic and borrower distributions of an intermediate 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.)

Regarding its community development services, an intermediate bank that chooses the Intermediate Bank Community Development Test would have its community development performance evaluated—either within or outside its facility-based assessment areas—based on the number and dollar amount of the bank’s community development loans and investments, the extent to which community development services are provided, and the bank’s responsiveness to community development needs.  (Final  §__.30(a)(2).)

For intermediate banks that elect to be evaluated under the Community Development Financing Test, examiners will qualitatively review intermediate banks’ community development activities using standardized metrics and benchmarks to evaluate both community development loans and investments in their facility-based assessment areas, states, and multistate MSAs.  A “Satisfactory” rating for intermediate banks evaluated under this test may be changed to “Outstanding” at the institution level if the bank receives additional consideration for community development activities that would qualify under the Retail Services and Products Test, the Community Development Services Test, or both.

In conclusion, although the changes under the final rule are less impactful for intermediate banks, 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 that would have previously been subject to the large bank standards will now be evaluated under the intermediate bank standards and will no longer be evaluated under all four CRA tests.  Rather, these banks will now only need to consider outside retail lending areas, the retail lending test, and, if so desired, the community development financing test.

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