In order to better align with how the nation and the banking industry have changed, on May 5th 2022 the federal bank regulatory agencies overhauled the Community Reinvestment Act (CRA) and jointly issued a proposal to strengthen and modernize regulations implementing the CRA.
During the comment period on the 619-page proposal, which ended August 5th, 2022, the agencies received 567 responses and the industry’s reactions were both positive and negative. Considering that it has been at least three decades since the rules were first introduced, the industry’s responses were to be expected.
The proposed regulations included major changes from the current regulation and will be effective on the first day of the first calendar quarter that begins at least 60 days after the publication date of the final rules.
The new rules are set to:
- Provide expanded access to credit, investment, and basic banking services in low- and moderate-income communities.
- Address changes in the banking industry, including internet and mobile banking.
- Yield greater clarity, consistency, and transparency.
- Tailor CRA evaluations and data collection to bank size and type.
- Maintain a unified approach amongst the regulating bodies.
The History
The CRA followed similar laws passed to reduce discrimination in the credit and housing markets including the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974 and the Home Mortgage Disclosure Act of 1975 (HMDA). The Fair Housing Act and the Equal Credit Opportunity Act prohibit discrimination on the basis of race, sex, or other personal characteristics. The Home Mortgage Disclosure Act requires that financial institutions publicly disclose mortgage lending and application data. In contrast with those acts, the CRA seeks to ensure the provision of credit to all parts of a community, regardless of the relative wealth of a neighborhood.
At the time CRA was first introduced, lawmakers aimed to reverse years of government policies and market actions that deprived lower-income and predominantly minority areas of credit and investment. They were attempting to eliminate redlining and discriminatory credit practices against low-income neighborhoods. The CRA has always been based on geography, focusing on individuals and businesses from low and moderate-income neighborhoods.
The proposed CRA rule addresses key standards focused on:
- Bank size categories, with no overlapping criteria.
- Assessment areas and how they will be defined using a facility–based assessment area (similar to the current method), a new retail lending assessment area (for large banks), and areas for eligible community development activity.
- 11 standards for community development activity.
- Expanded standards and definitions for Native Land.
- Delivery system and product and service considerations.
- Data collection and reporting continues to be required for large banks.
In addition, the proposed rule outlines that the agencies will…
- Maintain a publicly available illustrative list of non-exhaustive examples of community development activities that qualify for CRA consideration.
- Employ the Use different performance tests and standards to assess a bank’s CRA performance:
- The Retail Lending Test for large and intermediate banks. The test also includes screens and metrics.
- Impact Review Factors.
- The Retail Services and Products Test for large and intermediate banks.
- The Community Development Financing Test for large and intermediate banks. The test includes metrics and benchmarks.
- The Community Development Services Test for large banks. The test includes metrics.
- The Community Development Financing Test for Wholesale or Limited Purpose Banks.
- The small bank performance standards.
- The intermediate bank community development performance standards.
- Standards in a strategic plan.
Looking Ahead
The agencies have indicated that the final rule may come down this year. With that in mind, it is critical to get a plan in place for these proposed changes so your bank is prepared when the final rules are released.
First, get familiar with the proposed changes. Once you are, you’ll have a better understanding of how they’ll impact your bank.
Second, be proactive in outlining how your institution can achieve compliance. Even if the proposed rules differ from the final ruling, the proposal is still a useful guide for what to expect.
And lastly, start to raise awareness about changes to CRA within your organization. Be sure your Board of Directors and senior leadership teams are aware of the basic proposed requirements, the impact on your bank, and your plan to address that impact.
Knowledge and preparedness are your two strongest allies when managing this type of regulatory change.
Designed to arm you with the knowledge you’ll need, we’ve developed Prepping for the Proposed Interagency CRA Rule. Taking place February 8th, this two-hour webinar examines the agencies’ proposed rules and provides a framework for you to begin planning for the CRA final rule.