Enacted in 1977, the Community Reinvestment Act (CRA) was designed to encourage certain depository institutions to help meet the credit needs of their communities, with a particular emphasis on low- and moderate-income (LMI) neighborhoods. In short, the CRA requires federal banking agencies to assess the extent to which an institution meets the credit needs of its community and take this into account when evaluating applications for new deposit facilities. After decades of stagnancy, though, the CRA had come under increasing criticism for being inconsistent, subjective, and complicated when considering what, where, and how activities “count” under its regulatory framework.
On May 20, 2020, the Office of the Comptroller of the Currency (OCC) adopted a Final Rule
to modernize the CRA for the first time in a quarter century. The culmination of multiple years of drafting and outreach, the Final Rule strives to make the CRA framework more “objective, transparent, consistent in application, and reflective of changes in banking.” In doing so, the OCC targets four key areas:
- Clarifying and expanding the activities that qualify for CRA credit;
- Updating where activities count for CRA credit;
- Creating a more consistent and objective method for evaluating CRA performance; and
- Providing for more timely and transparent CRA-related data collection, recordkeeping, and reporting.
What follows are ten of Grant Thornton’s key takeaways from the Final Rule, including major changes and critical implications, that will help your institution prepare well in advance for regulatory scrutiny under the new requirements.
1. Modernizes and expands the framework for “qualifying activities”
Since the legislation’s the introduction of the CRA, banks, regulators, community groups, public officials, and others have been tasked with evaluating activities in the absence of comprehensive and transparent criteria for which activities qualified for CRA consideration. (See, for example, this article in American Banker
.) Over time, the activities receiving CRA credit have varied among examiners, banks, and regions. The OCC’s modernized framework seeks to eliminate these variations in treatment by creating greater certainty and predictability regarding whether certain activities qualify for CRA credit. Banks subject to the general performance standards (required for those with greater than $2.5 billion in assets) will calculate their qualifying activities value annually based on all qualifying loans and community development investments during the year, aggregated with community development services, in-kind donations, and monetary donations. Only activities originated, made, or performed directly by the institution qualify, however, and any undertaken by affiliates will not.
2. Defines where qualifying activities will “count”
The location where the qualifying activities take place plays a significant role under the new framework. The revised criteria capture activities that are consistent with the statutory purpose of the CRA but that may not receive adequate consideration under the current framework, such as:
- Activities in areas of need beyond LMI areas (i.e., underserved areas, distressed areas, disaster areas, Indian country and other tribal and native lands); and
- A limited set of activities that benefit a whole community, while still maintaining a focus on LMI neighborhoods.
By the same token, the criteria exclude activities that may have qualified for CRA consideration in the past, like loans to middle- and upper-income borrowers in LMI census tracts, in order to focus on activities that support LMI and other communities of need. Qualifying retail loans also include small loans to businesses or farms in LMI tracts up to $1.6 million, in addition to all loans to CRA-eligible businesses and CRA-eligible farms (gross annual revenues of no more than $1.6 million). Further, qualifying activities that are not conducted within assessment areas will be counted in a bank’s qualifying activities value but not in the bank’s assessment-area qualifying-activities value. If a qualifying activity is only partially allocated to an assessment area, it may receive partial credit to the extent that the activity is not allocated to another assessment area.
3. Allows banks to apply multipliers to enhance valuation of qualifying activities
An important concept under the Final Rule is the implementation of multipliers when assessing a bank’s qualifying activities. Under the new rule, participating in certain types of activities or being involved in activities in certain areas would enable the bank to receive double or even quadruple weighting in its evaluation of qualifying activities. These can range from investments in affordable housing to lending in “CRA deserts,” a new concept introduced in the Final Rule. The hope is that through the use of multipliers, banks will be incentivized to engage in activities that are particularly valuable to community development.
On the other hand, in order to ensure that multipliers do not decrease overall CRA activity, a bank will not be eligible until the quantified dollar values of its current community development (CD) activities are approximately equal to those of its prior evaluation period. In addition, banks will be required to collect and maintain an indicator of whether a multiplier applies, providing stakeholders more transparency in assessing whether CRA activity is increasing and communities’ needs are being met.
4. Adds an illustrative list of qualifying activities, agency confirmation process
In conjunction with the modernized criteria for qualifying activities, the OCC has put forth a non-exhaustive, illustrative list of example activities that would meet the criteria and qualify for credit under the Final Rule. Although the list adds significant value, the OCC reiterates that it is illustrative only and not a complete list of activities that meet the regulatory criteria. Put another way, banks will receive CRA credit for any activity that satisfies the qualifying activities criteria, regardless of whether it is included in the CRA illustrative list.
Moreover, the OCC encourages banks to engage in innovative activities that are responsive to the needs of their communities and, in areas of uncertainty, to confirm with the agency that an activity qualifies. The Final Rule provides that the agency will respond directly to requests for confirmation and post its responses to its website. Banks can leverage these responses as interpretive guidance to determine whether particular activities meet the qualifying activities criteria. The OCC plans to update the CRA illustrative list on an annual basis with any activities determined to meet (or not meet) the qualifying activities criteria over the past year.
5. Delineates assessment areas based on both facilities and deposits to reflect evolving business models
The ultimate purpose of the CRA is to encourage banks to engage in qualifying activities in areas where they collect deposits. Historically, brick-and-mortar branches were the primary means by which banks gathered deposits and, in turn, delivered financial products and services to their customers, so the placement of branches did in fact closely reflect where banks received deposits. However, a bank’s branch footprint as the sole basis of its assessment area delineation doesn’t align with newer business models, which often rely on significant deposits from areas far outside of the physical branch footprint.
To close this gap under the Final Rule, banks that collect 50% or more of their retail domestic deposits from outside of their physical branch footprint must delineate separate, non-overlapping assessment areas in any areas where they draw 5% or more of retail domestic deposits. These thresholds are intended to capture banks with non-traditional business models, such as internet banks, while not affecting the delineations of many traditional banks. On the other hand, the Final Rule maintains assessment areas around physical deposit-taking locations, recognizing the large and important role they play in meeting certain communities' needs. Importantly, banks may, but are not required to, delineate assessment areas around deposit-taking ATMs. Besides mergers and acquisitions, the Final Rule allows a bank to change its assessment area delineations once a year to account for changes in branching strategies or depositor concentrations.
6. May affect more than just CRA compliance, including your REMA
It is well known that CRA assessment areas are one of the tools under the “Fair Lending Umbrella” used to detect potential redlining violations. In the past few years, however, some regulators have increasingly focused their redlining enforcement on the Reasonably Expected Market Area (REMA). While still a nebulous concept, the REMA is generally understood to be the area where the bank markets and provides credit. The REMA does not necessarily include the same geographies as the bank’s CRA assessment areas—some of the areas may be beyond or otherwise shaped differently than the assessment areas. Nonetheless, the assessment area is a valuable starting point in determining where your regulator may consider your REMA to lie. If your assessment area delineation will undergo significant changes in response to this Final Rule, begin to consider how your REMA and other compliance considerations may be affected as a result.
7. Introduces new “presumptive ratings” for evaluating CRA performance
Because the CRA regulatory framework historically has not provided a transparent and objective means of measuring a bank's CRA activity, bank examiners have been left to apply their best subjective judgment to assess performance and assign ratings. The Final Rule attempts to correct this by introducing “presumptive” ratings of satisfactory or outstanding. These set high standards, however, requiring the bank to pass all applicable retail lending distribution tests in a given area in order to achieve the presumptive rating.
- For a bank with more than five assessment areas, the bank must receive at least the corresponding rating (satisfactory or outstanding) in: (1) 80% of its assessment areas, and (2) in assessment areas from which the bank receives at least 80% of the retail domestic deposits.
- For a bank with five or fewer assessment areas, the Final Rule provides additional flexibility and states that a bank must receive at least the corresponding rating (satisfactory or outstanding) in: (1) 50% of its assessment areas, and (2) in the assessment areas from which it receives at least 80% of its retail domestic deposits.
If a bank narrowly fails one of the tests, examiners still may consider that as a factor in the bank’s performance context in order to determine the bank’s final rating.
8. Makes data collection, retention, and reporting more standardized and transparent
Under the current framework, CRA performance evaluations can be complex and lengthy, making it challenging to draw comparisons from bank to bank. The Final Rule’s more systematic and standardized information will enable the OCC to assess the level of qualifying activities through more comparable and timely data. Common definitions and better data over time will allow the OCC to adjust the thresholds and benchmarks for delineating deposit-based assessment areas and the levels of performance necessary to achieve certain rating categories. Objective measures, when reported transparently, will allow banks and other stakeholders to assess performance and progress. While the OCC recognizes that there are costs associated with the Final Rule’s data requirements—both the upfront costs of developing and implementing new systems and the ongoing costs of data collection and maintenance—the agency is confident that the certainty the Final Rule provides will offset these costs in the long run.
9. Deviates from existing FDIC and Federal Reserve requirements
It is important to highlight that these changes apply only to nationally chartered banks and federal savings associations regulated by the OCC, which according to the Final Rule conduct the majority of all CRA activity. By way of background, the Federal Deposit Insurance Corporation (FDIC) joined the OCC in the initial proposal, but ultimately elected against joining in the OCC’s final rulemaking. Although FDIC Chairman Jelena McWilliams issued a statement expressing strong support for the OCC’s efforts in moving forward with a Final Rule, she made it clear
that the FDIC and its supervised banks should remain focused on helping small businesses and families overcome the challenges of the COVID-19 pandemic.
The Federal Reserve, on the other hand, declined to join the original OCC and FDIC proposal in 2019 and instead announced its own Advance Notice of Proposed Rulemaking
(ANPR) on September 21, 2020. As of yet, there has been no official decision for any of the agencies to join in a unified rulemaking, so the possibility of three separate new CRA frameworks persists. Before his January 2021 resignation, Acting Comptroller of the Currency Brian Brooks stated that he was open to the idea of working with the Federal Reserve given the “significant amount of overlap” between the ANPR and the OCC’s Final Rule. McWilliams poetically echoed
this sentiment, saying, “It would be optimal [for the FDIC] to have two dance partners and one set of music playing.” And Federal Reserve Chairman Jerome Powell recently jumped in the mix
by saying, “I think there is an opportunity for a harmonized rule among the agencies.”
Given Acting Comptroller Brook’s resignation, the change of administrations, and a pending federal lawsuit
which seeks to invalidate the Act on Administrative Procedure Act grounds, the new rule’s fate is uncertain. But for the time being, we advise OCC-supervised banks to conservatively proceed with the understanding that this new rule is final. State-chartered institutions, however, should continue abiding by the existing CRA framework in 12 CFR 228 for those regulated by the Federal Reserve and 12 CFR 345 for those regulated by the FDIC.
The table below summarizes the key changes in the OCC’s Final Rule and the corresponding requirements in the existing CRA regulations.
10. Encourages banks to prepare early for phased-in compliance
While the Final Rule became effective on October 1, 2020, the mandatory compliance dates vary based on bank type. Until the mandatory compliance dates arrive, banks may voluntarily comply, in whole or in part, with the new amendments. In fact, the OCC emphasizes that these timelines were designed as a transition period for banks to begin implementing new or enhanced processes to properly collect, retain, and report based on the new framework. Although the mandatory compliance dates below may seem far off, banks should already be in the preparation stages for what is sure to be an intensive path to full execution of the new requirements.
With respect to the effect of COVID-19 on the compliance dates, the OCC notes that the economic challenges experienced in LMI communities as a result of the pandemic make it critical that implementation not be delayed so that the benefits of the new rule can reach communities as soon as possible. As such, some commentators suggest
banks will be expected to put forth their best efforts to timely comply with the new CRA framework, perhaps now more than ever.
For provisions effective October 1, 2020, there are questions regarding how these will interact with the current framework. For example, qualifying small business loans (currently subject to a $1 million threshold) and small farm loans (currently subject to a $500,000 threshold) both increased significantly to a $1.6 million threshold as of October 1, 2020. Banks will have to consider these nuanced challenges and how they will affect data collection and reporting during the transition period.
Also, banks should keep in mind that this is not all of the OCC’s planned rulemaking. Late last year, on November 25, 2020, the OCC issued another proposed rule
regarding its approach to determine evaluation measure benchmarks, retail lending distribution test thresholds, and community development minimums. Under the Final Rule, banks subject to the general performance standards are evaluated based on (1) the distribution of their retail loans; (2) the quantified dollar value of their qualifying activities and the distribution of their branches in each assessment area and at the bank level; and (3) the level of their community development activities in each assessment area and at the bank level.
In addition to seeking comment on these objective benchmarks, thresholds, and minimums, the OCC planned to obtain data through a separate information collection survey
from banks subject to the general performance standards. This data would help calibrate the CRA evaluation measure benchmarks, retail lending distribution test thresholds, and community development minimums. After strong urging by various trade associations, however, the OCC announced that it was changing course and pausing the information collection survey—at least for the time being. The Agency indicated
that it would consider additional comments before determining whether to proceed with information collection in this area.
How should institutions prepare for implementing the new CRA requirements?
There are a number of measures that financial institutions can take to prepare for the new CRA framework. Specifically, we recommend the following:
- Conduct a CRA self-assessment in accordance with the updated rule;
- Assess current systems to pinpoint transition challenges;
- Perform CRA community-needs assessments to bolster compliance with the final rule;
- Develop new or enhanced systems for ongoing collection and reporting of data for qualifying activities;
- Evaluate policies and procedures to ensure they are adequately updated to reflect the bank’s transition strategy;
- Identify new qualifying activities that may be considered for credit under the alternative compliance option;
- Implement appropriate processes and controls for timely and accurate data collection and reporting;
- Review assessment-area delineations for compliance with new regulatory constraints and individual growth and expansion opportunities;
- Determine whether CRA credit may now be allocated beyond existing assessment-area delineations;
- Assess the impact of the bank’s performance context by considering loan product demand, financial condition, and demographic conditions to ensure qualifying activities are being carried out in a safe and sound manner;
- Create project plans to help with CRA regulatory change implementation;
- Develop a unique and optimized strategy for implementing changes throughout the transition period;
- Ensure strict adherence to relevant provisions according to transition strategy;
- Monitor and adjusting CRA evaluation processes as updated metrics are released;
- Apply to the OCC for confirmation of new qualifying activities;
- Develop and deliver training for any of the areas described above;
- Perform ongoing internal testing and audits; and
- Provide cost-effective services to help meet new data-related requirements.
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