The OCC’s final CRA rule: what changed from the agency’s proposed rule?

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On May 20, 2020, the OCC issued a final rule to “strengthen and modernize” its existing Community Reinvestment Act (“CRA”) regulations.  According to the agency’s press release, the final rule is designed to increase CRA-related lending, investment and services in low- and moderate-income (“LMI”) communities where there is significant need for credit, responsible lending, and greater access to banking services.  This is the first in a series of five blog posts about the final rule and related topics that we will publish in the next few weeks.

The OCC acted alone in issuing the final CRA rule without waiting to achieve consensus with the FDIC, the agency with which the OCC had jointly issued the proposed rule. It is possible that Comptroller Joseph Otting wanted to see the final rule issued before he stepped down from his position just one week later.  In her public statement concerning the OCC’s final CRA rule, FDIC Chairman Jelena McWilliams appeared to indicate she did not want to add to state nonmember banks’ regulatory burdens during COVID-19 by adopting a final CRA rule at this time.

The preamble to the OCC’s final rule states that covered banks “conduct a majority of all CRA activity in the United States.”  Specifically, the final CRA rule applies to all national banks and savings associations supervised by the OCC, including federal and state-chartered savings associations, and uninsured federal branches of foreign banks.

The OCC’s proposed rule was generally designed to encourage banks to conduct more CRA activities in the communities they serve, including LMI areas, by clarifying and expanding the lending, investment and service tests.  Suggested improvements generally fell into four categories in the proposal: (1) clarifying which bank activities qualify for positive CRA consideration; (2) redefining how banks delineate assessment areas in which they are evaluated based on changes to banking business models over the past 25 years; (3) evaluating bank CRA performance more objectively; and (4) providing more transparent and timely reporting.  Importantly, the preamble to the final rule states the OCC’s goal, which is consistent with what the banking industry has sought in CRA reform for decades:

By moving from a system that is primarily subjective to one that is primarily objective and that increases clarity for all banks, CRA ratings will be more reliable, reproducible, and comparable over time.  Under the agency’s final rule, the same facts and circumstances will be evaluated in a similar manner regardless of the particular region or particular examiner.  CRA activities will be treated in a consistent manner from bank to bank.

The OCC received over 7,500 comment letters in response to its notice of proposed rulemaking (85 Fed. Reg. 1204, Jan. 9, 2020).  Based on comments from stakeholders, the OCC made many modifications to the proposed rule.  Set forth below are six changes from the proposed rule to the final rule that we would like to highlight:

  • Clarifying the importance of the quantity and quality of activities as well as their value. 
    • The final rule contains an illustrative list of qualifying activities and a process for confirming that a particular activity meets the qualifying activities criteria, which the OCC believes will help improve consistent treatment of qualifying activities by examiners.
    • Based on public comments, the OCC made changes to its proposed qualifying activities criteria to emphasize LMI activities in appropriate circumstances and to correct the “inadvertent exclusion” in the proposal of certain activities that qualify for CRA credit under the current framework.  An example is clarifying that, under the final rule, “community development investments” will receive the same CRA consideration as “qualified investments” receive under the current rule.  Equity equivalent investments that meet the definition of a “community development investment” and one of the qualifying activities criteria will also receive CRA credit as a qualifying investment under the final rule because they add value to LMI communities.  Another example is to continue to include consumer loans provided to LMI individuals to incentivize banks to offer such products but removing credit cards and overdraft products from the definition of “consumer loan” to reduce information gathering burden.
  • Increasing credit for mortgage origination to promote availability of affordable housing in low- and moderate-income areas.   
    • In response to public comments, the OCC agreed that CRA credit for affordable housing should remain focused on LMI individual and families and that the proposed inclusion of middle-income rental housing in the affordable housing criterion could divert critical resources from LMI communities.  Therefore, the final rule does not include middle-income rental housing in high-cost areas components of the affordable housing criterion or the definition of high-cost area.
    • The proposed rule defined home mortgage loans with reference to call reports but generally limited CRA credit to home mortgage loans made to LMI individuals and families to give proper emphasis to LMI lending activities.  Specifically, the proposed qualifying activities criteria included home mortgage loans to LMI individuals and families and Indian country borrowers.  Although the OCC adopted the qualifying criteria related to home mortgage loans as proposed, it added a geographic distribution test of home mortgage loans in response to public comments to promote lending in LMI census tracts.  The OCC also revised its examples in the CRA illustrative list of qualifying activities to clarify that FHA-guaranteed loans to LMI individuals or families will qualify for CRA consideration.
  • Clarifying credit for athletic facilities to ensure they benefit and support low and moderate-income communities.
    • The proposed rule included an example on the CRA illustrative list of an investment in a qualified opportunity fund established to finance improvements to an athletic stadium in an opportunity zone that is also an LMI census tract.  The example proved to be controversial, with commenters expressing concern that the proposal would create a new incentive by giving banks CRA credit for financing athletic facilities.  In response to these comments, the OCC noted that banks have received CRA credit for decades by financing athletic facilities that increase opportunities for economically disadvantaged individuals and areas.  Nonetheless, the OCC replaced the stadium example with an example that better reflects the type of athletic facilities that have been approved for CRA credit historically.  In addition, the agency clarified that it will continue to review and give CRA credit for athletic facilities based on the facts and circumstances of specific projects, either in the context of a CRA evaluation or a request for confirmation that such lending is a qualified activity.
  •  Deferring establishment of thresholds for grading banks’ CRA performance until the OCC assesses improved data required by the final rule.
    • Under the proposed rule, the OCC would have established empirical benchmarks for the average CRA evaluation measure associated with each rating category, thresholds for passing the retail lending distribution tests, and a two percent minimum for community development activities as a percentage of retail domestic deposits.  Commenters found these standards unclear and inadequate.  The OCC explained that the proposed performance standards were based on analyses of currently available historical data and its use of assumptions to estimate how banks would have performed from 2011-2017 under the proposed framework.  However, the agency conceded that the existing data was limited and indicated that it would gather more data and conduct further analysis to calibrate the performance standards for each of the three components of the CRA framework.
    • As a result, the final rule does not contain benchmarks for the CRA evaluation measures, a specific community development minimum, or thresholds for the retail lending distribution tests.  The OCC intends to issue a near-term notice of proposed rulemaking to solicit public comment on these performance standards and then set specific benchmarks, thresholds and minimums.
  • Preserving the intermediate small bank assessment category and raising the small bank asset size threshold.
    • The proposed rule had eliminated the intermediate small bank assessment category and created a small bank asset threshold of $500 million.  Any bank above $500 million in total assets would have been evaluated under the large bank assessment category.  The final rule includes a $600 million threshold for small banks and retains the intermediate small bank category of the current rule for institutions between $600 million and $2.5 billion in total assets.
  • Giving CRA credit to legally binding commitments to lend (such as standby letters of credit) that provide credit enhancement for qualifying activities based on the dollar value of the commitment and giving credit for retail loans sold.
    • The proposed rule did not provide an institution with CRA credit for legally binding (but unfunded) commitments to lend that otherwise met community reinvestment criteria.  The final rule gives credit, for example, to unfunded standby letters of credit issued in connection with a LMI housing development project.  Further, except for retail loans sold within 90 days of origination, the proposed rule generally quantified qualifying activities based on average month-end on-balance sheet values.  This meant that to receive credit for a qualifying residential mortgage loan, a bank would have had to hold the loan for more than 90 days.  The final rule provides that retail loan originations sold at any time within 365 days will receive credit for 100 percent of the origination value.  For example, a $100,000 mortgage loan held for 90 days before being sold on the secondary market would receive $100,000 credit for a 12-month period rather than a $25,000 credit for its on-balance sheet period.

The final rule is effective on October 1, 2020.  All banks subject to the general performance standards (banks over $2.5 billion in assets) must comply by January 1, 2023, and all small and intermediate banks must comply with the rules’ assessment areas, data collection and recordkeeping requirements (as applicable) by January 1, 2024.  Until the compliance date is reached, banks must continue to comply with parts 25 and 195 of the OCC’s regulations (12 C.F.R. parts 25 and 195) that are in effect on September 30, 2020.

The OCC’s “go it alone” approach will certainly set up a dichotomy among the prudential regulators’ CRA rules going forward, and it remains to be seen when (or if) the FDIC will finalize its proposed CRA rule.  Our next blog post will address differences among the OCC’s final rule, the FDIC’s proposed rule, and the Federal Reserve’s existing regulations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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