Better For Banks? Proposed Community Reinvestment Act Regulations Would Mean Big Changes

On December 12, 2019, the US Federal Deposit Insurance Corporation ("FDIC") and the Office of the Comptroller of the Currency ("OCC") together proposed extensive updates to their Community Reinvestment Act ("CRA") regulations (85 Fed. Reg. 1204 (Jan. 9, 2020)). In their joint notice of proposed rulemaking ("Proposal"), the agencies identified four objectives: (1) clarify and expand the types of activities that qualify for CRA credit; (2) update and expand the areas in which qualifying activities receive credit; (3) provide a more objective and transparent method to measure and evaluate CRA performance; and (4) revise data collection, recordkeeping, and reporting requirements to improve consistency. With these goals in mind, the agencies propose to maintain and publish a running list of the types of activities that qualify for CRA credit. They would also modernize the CRA by redefining bank "assessment areas," getting away from a strictly brick-and-mortar focus to account for advancements in technology and changes in how consumers choose to bank.

Previously, the OCC, FDIC and the Board of Governors of the Federal Reserve System ("Federal Reserve") have issued regulations to implement the CRA. While the agencies have more recently issued frequently asked questions, the last major revisions to the regulations were made in 1995. At this point, the Federal Reserve has declined to join the Proposal and is hoping to solicit public comment on a broader set of options. (See Lael Brainard, "Strengthening the Community Reinvestment Act by Staying True to its Core Purposes" at Urban Institute (Jan. 8, 2020).) Unless resolved, the lack of agreement among the OCC, FDIC and the Federal Reserve could create different standards for depository institutions based on their primary regulators. This could complicate compliance with the CRA for many institutions and cause confusion among the various stakeholders.

In this Legal Update, we expand on our earlier blog post by describing the changes the Proposal would make to CRA qualifying activities, explaining how the Proposal changes a bank's assessment areas and CRA performance measurements and identifying key changes to data collection and reporting requirements.

Qualifying Activities

The agencies explained that the Proposal's qualifying activities provisions are meant to provide certainty, transparency and consistency, with the goal of encouraging banks to undertake more CRA activities and incentivize them to commit more financial resources to populations and areas that need them most, such as low- to moderate-income ("LMI") individuals, distressed areas, underserved areas and Indian country.

Under the current regulatory framework, it may take years for a bank to receive the results of a CRA examination, which are unpredictable due to inconsistencies from one evaluation to the next. The current framework leaves banks uncertain about whether a community development ("CD") activity will qualify, resulting in a disincentive for banks to explore new activities. The Proposal attempts to address this concern by clarifying and expanding the activities that qualify for CRA credit, focusing on a bank's ongoing commitment to CRA and publishing a list of examples of qualifying activities.

1. Clarifying and expanding the activities that qualify for credit

   A "qualifying activity" is any activity that meets the credit needs of a bank's community, particularly those individuals, areas and populations with needs. These include all of the activities that currently qualify for CRA credit, as well as additional activities that meet the credit needs of economically disadvantaged individuals and areas in banks' communities.

   The intended effect of the Proposal is to expand the type of activities that qualify for CRA credit; the agencies make clear in the Proposal that they do not intend to reduce the activities that qualify. For example, activities where a bank provides the economic resources and is substantively engaged in the activity would qualify for credit. Current practice is to recognize these activities as being conducted by the bank, at the bank's option. Under the Proposal, the agency would automatically recognize activities substantively conducted by the bank.

   To this end, the Proposal eliminates certain ambiguous or unclear terms such as "economic development" and "revitalize and stabilize" in favor of describing in greater detail the activities that would qualify. The existing regulations include a general aspect of economic development that requires a bank to demonstrate that its activities supporting small businesses or farms support job creation, retention and improvement for LMI individuals, LMI census tracts and other targeted areas. But the agencies were never able to identify an objective method for demonstrating how to satisfy this requirement other than by determining if the activity would create additional low-wage jobs. Under the Proposal, this economic development concept would be eliminated entirely and replaced with specific illustrations of the kinds of activities that currently qualify as economic development activities.

   The Proposal also would revise the definition of "distressed area," which is currently limited to nonmetropolitan areas, to recognize that urban areas may also experience high rates of poverty, unemployment or population loss and need financial resources. Similarly, the Proposal would revise the definition of "underserved area" to remove the requirement that these census tracts be nonmetropolitan areas. Instead, underserved areas may include metropolitan census tracts with a lack of banking and other services as defined in the Proposal.

   RETAIL LENDING

   The Proposal would expand the retail lending criteria to include home mortgage loans and consumer loans provided in Indian country and loans of $2 million or less to a business or farm that either (i) has annual revenue of $2 million or less, adjusted annually for inflation, or (ii) is located in an LMI census tract. These increases to the revenue and size thresholds are intended to account for inflation since the current thresholds were established in 1995 and to incentivize banks to engage in small business and farm lending. Under the Proposal, qualifying retail loans include:

   A retail loan (defined to include home mortgage loans, small loans to businesses, small loans to farms and consumer loans) provided to: An LMI individual, A small business or A small farm. A retail loan provided in Indian country. A retail loan that is a small loan to a business or a small loan to a farm located in a low- or moderate-income census tract. CD ACTIVITIES

   Qualifying CD activities include a CD...