On May 5, 2022, the US banking regulators1 proposed revisions to the regulations implementing the Community Reinvestment Act (the “Proposal”).2 The Proposal is a comprehensive interagency effort that would change both the process and substantive tests that the regulators use to assess the record of each bank in fulfilling its obligation to the community.
The Proposal is the next step in a closely watched rulemaking process that has lumbered forward since 2018. Comments on the Proposal must be submitted to the regulators by August 5, 2022. Already, many commentators have begun expressing views, and we expect a robust comment letter file to be created by the stakeholders in this rulemaking. In this Legal Update, we provide background on the rulemaking process and a high-level summary of the Proposal.
The Community Reinvestment Act (“CRA”) was passed in 1977 and generally requires insured depository institutions to participate in investment, lending and service activities that help meet the credit needs of their assessment areas, particularly low- and moderate-income (“LMI”) communities and small businesses and farms. Insured depository institutions receive a rating from the banking regulators based on their performance. The CRA also requires the US banking regulators to:
- Encourage banks to meet the credit needs of the communities that they serve in a safe and sound manner and evaluate their record of doing so;
- Take that record into account when evaluating certain banking applications; and
- Report to Congress the actions they have taken to carry out their CRA responsibilities.
The US banking regulators issued the first set of regulations to implement the CRA in 1978 and revised them in 1995 and 2005, with the most substantive interagency update occurring in 1995. In addition, the regulators have periodically published Interagency Questions and Answers Regarding Community Reinvestment to provide guidance on the CRA regulations, with the most recent guidance being issued in 2016.
Given the significant changes to the business of banking and the methods of offering financial products and services (e.g., less reliance on physical locations for certain banks) since the substantive changes in 1995, the CRA regulations had become outdated. While the US banking regulators recognized the need to update the CRA regulators, there was no consensus regarding the best way to accomplish these updates.
In recent years, the regulators have taken divergent approaches to revising the CRA regulations.
On September 5, 2018, the OCC published an advance notice of proposed rulemaking to solicit ideas for building a new CRA framework. On December 12, 2019, the FDIC and the OCC issued a proposal to revise and update their CRA regulations. Subsequently, on May 20, 2020, the OCC unilaterally issued a final rule that amended its CRA regulations.3 On September 21, 2020, the Federal Reserve individually issued an advance notice of proposed rulemaking to obtain public comment on ways to reform its CRA regulations. Then, in an about-face, on July 20, 2021, the regulators announced their commitment to work together to strengthen and update the CRA regulations and achieve a more consistent framework across all banks. On December 15, 2021, the OCC rescinded and replaced its 2020 final rule with a final rule based on the version adopted jointly by the regulators in 1995, as revised.
The Proposal contemplates a comprehensive revision of the CRA regulations that is intended to achieve the following objectives:
- Strengthen the achievement of the purpose of the CRA;
- Adapt to changes in the banking industry, including the expanded role of mobile and online banking;
- Provide greater clarity and consistency in the application of the regulations;
- Tailor performance standards to account for differences in bank size, business model and local conditions;
- Tailor data collection and reporting requirements and use existing data whenever possible;
- Promote transparency and public engagement;
- Confirm that community reinvestment and fair lending are mutually reinforcing; and
- Create a consistent regulatory approach for banks.
Scope of Community Development
The Proposal would revise the community development definitions to clarify eligibility criteria for a broad range of community development activities (including disaster preparedness and climate resiliency activities), incorporate certain guidance currently provided through the Interagency Questions and Answers and include factors for considering the impact of a bank’s community development activities. The regulators also would develop and maintain a publicly available illustrative and non-exhaustive list of examples of activities that qualify for CRA consideration and establish an interagency process for considering the eligibility of activities.
Geographic Assessment Focus
The Proposal maintains facility-based assessment areas as the cornerstone of the CRA evaluation framework but tailors the geographic requirements for delineating facility-based assessment areas by bank size. For the Retail Lending Test, large banks would be required to establish retail lending assessment areas where a bank has concentrations of home mortgage or small business lending outside of its facility-based assessment areas. Further, for large banks and certain intermediate banks, the Retail Lending Test would include an evaluation of lending outside a bank’s facility-based assessment areas or retail lending assessment areas. A bank also would receive consideration for any qualified community development activity, regardless of location, in its overall rating while separately having its performance assessed in each of its facility-based assessment areas.
With respect to bank size, regulators would apply the following tests under the Proposal:
- Large banks with $10 billion or more in assets would be evaluated under the Retail Lending Test, a Retail Services and Products Test, a Community Development Financing Test, and a Community Development Services Test (discussed below). Such banks also would need to collect and report additional data for each test.
- Large banks with assets of at least $2 billion and less than $10 billion also would be evaluated under the same four tests. But such banks would not be required to collect and report additional data for each test.
- Intermediate banks (those with assets of at least $600 million and less than $2 billion) would be evaluated under the Retail Lending Test and under either the current community development test or, at the bank’s option, the proposed Community Development Financing Test.
- Small banks (those with assets of less than $600 million) would be evaluated under the current small bank lending test or, at the bank’s option, the proposed Retail Lending Test.
- Wholesale and limited purpose banks would be evaluated under a modified Community Development Financing Test.
- Banks of all sizes would retain the option to request to be evaluated under an approved strategic plan.
The Proposal would require inclusion of a bank’s “operations subsidiaries” or “operating subsidiaries” (referred to collectively as “bank subsidiaries”) in the evaluation of the institution’s CRA performance and maintain the current flexibility for banks to choose to include or exclude the relevant activities of other bank affiliates.
The Proposal would create or revise several tests under the CRA regulations:
1. Retail Lending Test. The Proposal would revise the existing Retail Lending Test to evaluate how banks are serving low- and -moderate income (“LMI”) borrowers, small businesses and small farms in their assessment areas and (for large banks and certain intermediate banks) outside of assessment areas at the institution level. It would standardize retail lending evaluations through retail lending metrics and establish performance standards based on local and tailored benchmarks.
2. Retail Services and Products Test. At large banks, this new test would evaluate delivery systems (including digital) and credit and deposit products responsive to LMI communities. This test would use a predominantly qualitative approach, incorporating quantitative measures as guidelines.
3. Community Development Financing Test. This new test would combine the current evaluation of community development loans and investments in a community development financing metric. It also would include benchmarks comparing an individual bank’s performance to other banks and an impact review evaluating the impact and responsiveness of a bank’s community development loan and investment activities through the application of a series of specific qualitative factors.
Wholesale and limited purpose banks would be evaluated under a modified Community Development Financing Test, which would include an institution level-metric that measures a bank’s volume of activities relative to its capacity.
4. Community Development Services Test. This new test would consist of a primarily qualitative assessment of the bank’s community development service activities. However, for large banks with assets over $10 billion, it would include a metric of the hours of community development services activity per full-time equivalent employee of a bank.
Wholesale and limited purpose banks would have the option to have examiners consider community development service activities that would qualify under the Community Development Services Test.
Performance Score and Assigned Ratings
The Proposal would revise the process for assigning ratings for a bank’s overall performance. The proposed approach would produce performance scores for each applicable test at the state, multistate MSA and institution levels based on a weighted average of assessment area conclusions as well as consideration of other additional test-specific factors. These performance scores would be mapped to conclusion categories to provide test-specific conclusions for the state, multistate MSA and institution levels. The five possible performance conclusions would be “Outstanding,” “High Satisfactory,” “Low Satisfactory,” “Needs to Improve” and “Substantial Noncompliance.” Conclusions would be assigned for each applicable performance test at the assessment area level as well as at the state, multistate MSA, and institution levels.
Regulators also would assign ratings that would reflect a bank’s record of helping to meet the credit needs of its community, including LMI neighborhoods, consistent with the safe and sound operation of a bank. A bank’s ratings would be based on combining the conclusions from its performance tests in, as applicable, the state, multistate MSA and institution levels. The combination would reflect specific weights attributed to each performance test that vary depending on the asset size of the bank:
- For large banks, the heaviest weight would be allocated to the Retail Lending Test (45 percent), with different weights attributed to the Retail Services and Products Test (15 percent), Community Development Financing Test (30 percent) and the Community Development Services Test (10 percent).
- For intermediate banks, tests would be weighted equally between the Retail Lending Test and the status quo community development test (or Community Development Financing Test, when selected by the bank).
As required by the CRA, the four possible ratings would be “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.”
Evidence of discriminatory or illegal practices by bank subsidiaries would continue to be factored into a bank’s rating. In the past, this has caused certain banks to have their rating dropped one or, in certain extreme situations, two notches, Also, regulators would continue to take into account a bank’s CRA performance when considering certain applications, including those for a branch opening; a merger, consolidation or acquisition; a main office or branch relocation; a deposit insurance request; and transactions subject to the Bank Merger Act and Bank Holding Company Act. Notably, an institution with a CRA rating below “Satisfactory” could be restricted from certain activities until its next CRA examination.
Data Collection and Reporting
The Proposal includes extensive data collection and reporting requirements that vary depending on a bank's size. Most notably, the Proposal would temporarily retain the existing large bank data requirements for small business and small farm lending and then replace them with section 1071 data once it is available.4 Further, large banks with more than $10 billion in assets would be subject to extensive data requirements for deposits data, retail services data on digital delivery systems, retail services data on responsive deposit products, community development services data, and automobile lending data.
The Proposal represents a major step forward for modernizing existing CRA regulations after what has been a long and contentious process among the US banking regulators. If the banking regulators continue working together to finalize new, uniform regulations, these will be the most substantive updates to the CRA in over 25 years. Insured depository institutions and other stakeholders should carefully review the Proposal and provide their comments to help shape these substantial revisions to the CRA regulations.
1 The US banking regulators consist of the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC”).
2 Press Release, Agencies Issue Joint Proposal to Strengthen and Modernize Community Reinvestment Act Regulations (May 5, 2022), https://www.fdic.gov/news/press-releases/2022/pr22039.html.
3 See our Legal Update on the OCC’s action: https://www.mayerbrown.com/en/perspectives-events/publications/2020/06/occ-goes-its-own-way-on-new-community-reinvestment-act-regulations.
4 Please see our Legal Update on Section 1071: https://www.mayerbrown.com/en/perspectives-events/blogs/2021/09/cfpb-issues-proposed-small-business-lending-rule.