Banking Agencies Finalize Community Reinvestment Act Rules

Banking Agencies Finalize Community Reinvestment Act Rules

On October 24, 2023, the Board of Governors of the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, the Agencies) approved long-awaited final rules to modernize the Community Reinvestment Act (CRA) regulations. The CRA was enacted to address illegal redlining and evaluate banks’ performance in serving the credit needs of their entire communities, including low- and moderate-income (LMI) people and neighborhoods. The new regulations maintain the existing CRA ratings (Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance) but completely overhaul the evaluation framework and potentially make the achievement of Satisfactory and Outstanding ratings more difficult. This client alert provides a summary of the most significant changes.

Size Thresholds

The CRA regulations generally apply different performance standards to banks depending on their size. Under the new requirements, the thresholds for sized-based classifications applicable to banks other than limited purpose banks are revised as follows:

• Small banks are those with total assets less than $600 million (up from less than $376 million).
• Intermediate banks are those with total assets between $600 million and less than $2 billion (up from $376 million to less than $1.503 billion for an “intermediate small bank” classification).
• Large banks are those with total assets of at least $2 billion (up from at least $1.503 billion).

Performance Standards

The new CRA regulations completely revamp the existing performance standards. They place much more emphasis on quantifiable metrics, and the geographic areas in scope for assessment are greatly expanded. The result is a complex set of metrics and benchmark comparisons. Other qualitative factors are also relevant, including indications of “loan churning” solely or primarily for CRA rating purposes and missing or faulty data.

Geographic Considerations

Instead of delineating “assessment areas” where the bank’s branches and deposit-taking ATMs are located, most banks will delineate “facility-based assessment areas” or FBAAs (similar to “assessment areas” under the current rules) and “retail lending assessment areas” or RLAAs, where the bank originates at least 150 closed-end home mortgage loans or at least 400 small business loans. A bank’s “outside retail lending area” consists of the nationwide area excluding its FBAAs, its RLAAs, and any county in a nonmetropolitan area in which the bank did not originate or purchase retail lending products. A bank’s FBAAs, RLAAs, and outside retail lending areas are its “Retail Lending Test Areas.”

Banks that originate more than 80% of their retail lending products within their FBAAs are not required to delineate RLAAs. Military banks¹ whose customers are not located within a defined geographic area will have the option to designate the entire United States and its territories as their FBAA, as they currently may do in delineating their assessment areas.

Large Bank Tests

The existing tests generally applicable to large banks (the Lending, Investment, and Services Tests) are replaced with four new tests and associated performance metrics.

• Retail Lending. Under this test, originations and purchases of closed-end home mortgage, multifamily, small business, and small farm loans are evaluated. Auto loans are also considered if the bank is a majority auto lender. Other banks can opt to include auto loans. Ratings are based on a formulaic evaluation of the bank’s lending volume, geographic distribution, and borrower distribution compared to certain benchmarks.
  
  Originations are considered if they are a “major product line,” i.e., (1) in an FBAA or outside retail lending area, loans in that product line represent at least 15% of the bank’s loans across all of the bank’s product lines in that FBAA or outside retail lending area, and (2) in an RLAA, the bank originated at least 150 closed-end home mortgage loans in any calendar year in the evaluation period (in which case closed-end mortgage loans are a major product line) and/or the bank originated at least 400 small business loans in any calendar year in the evaluation period (in which case small business loans are a major product line).
  
  
• Retail Services and Products. Under this test, the Agencies will evaluate the following within banks’ FBAAs: branch availability and services provided at branches; remote service facilities, such as ATMs; and digital and other delivery systems for all large banks with more than $10 billion in total assets, as well as large banks with up to $10 billion in assets that have no branches. These smaller large banks can opt into evaluation of their digital and other delivery systems if they have at least one branch. The Agencies will also perform an evaluation of the responsiveness of a bank’s retail banking credit products within its FBAAs and nationwide, but such evaluation may only positively contribute to the Retail Services and Products rating conclusion. Deposit products will be considered for large banks with more than $10 billion in total assets, as well as large banks with up to $10 billion in assets that opt in.
  
  
• Community Development (CD) Financing. Under this test, the Agencies will evaluate CD loans and investments based on certain metrics and benchmarks as well as their impact and responsiveness. The revised CD standards provide more flexibility than existing rules for investments in housing with affordable rents without requiring income documentation and expressly confirm that a bank can receive partial credit for a CD loan or investment that does not meet the “majority” standard in proportion to the percentage of total housing units in any development that are affordable to low- or moderate-income individuals.
  
  
• CD Services. The data evaluated under this test include the number of CD services provided, the capacity in which the bank’s or its affiliates’ board members or employees serve, the number of hours of CD services performed, any other relevant evidence, and impact and responsiveness.
  
  Banks will be able to receive credit for CD activities within their FBAAs and nationwide. The revised CD standard also includes broader consideration of investments that revitalize or stabilize targeted census tracts that may not qualify for consideration under the current rules. The new rules provide a list of CD categories, which includes traditional CD (e.g., affordable housing) as well as new areas such as disaster preparedness and weather resiliency. The Agencies will provide a list of illustrative qualifying CD activities.

Intermediate Bank Tests

Intermediate banks will be subject to (1) the Retail Lending Test, and (2) either the new Intermediate Bank CD Financing Test or the existing CD test applicable to small intermediate banks, at the bank’s option. These banks will also have the option to request additional consideration for activities that would qualify under the large bank Retail Services and Products and CD Services Tests (which could only result in a rating adjustment from Satisfactory to Outstanding), as well as of low-cost education loans to low-income borrowers.

Small Bank Tests

Small banks will be able to choose between the new Retail Lending Test that applies to large and intermediate banks or the existing Lending Test that currently applies to small banks. If a bank chooses to be evaluated under the current small bank Lending Test, it will have the option to request additional consideration for CD activities and providing branches and other services, digital delivery systems and other delivery systems, and deposit products responsive to the needs of LMI individuals, families, and communities, as well as to small businesses and small farms. If the bank chooses to be evaluated under the Retail Lending Test, the bank will also be able to request consideration of activities that qualify under the Retail Services and Products, CD Financing, and CD Services Tests. In either case, such consideration could only result in a rating adjustment from Satisfactory to Outstanding. However, banks can seek additional consideration regardless of rating for activities with minority depository institutions, women’s depository institutions, and low-income credit unions, and providing low-cost education loans to low-income borrowers.

Limited Purpose Bank Tests

The option to request a limited purpose bank designation will continue to be available, subject to significantly revised requirements. Limited purpose banks will be evaluated based on a special CD Financing Test for Limited Purpose Banks, which will include an evaluation of the dollar volume of CD loans and investments based on certain metrics and benchmarks, as well as the impact and responsiveness of those loans and investments. Limited purpose banks will also have the option to request consideration of services that would qualify under the CD Services Test (which could only result in a rating adjustment from Satisfactory to Outstanding) as well as of low-cost education loans to low-income borrowers.

Evaluation Under a Strategic Plan

The option to apply for evaluation under a strategic plan based on a nontraditional business model will continue to be available. However, the scope of eligible modifications of the standard tests will be significantly restricted, and the data collection and reporting requirements described below would continue to apply.

Weightings of Ratings for Large and Intermediate Banks

For large banks, the overall CRA rating will be determined based on the individual test ratings, as follows:

• Retail Lending Test – 40% and at least a Low Satisfactory rating required to achieve an overall Satisfactory or Outstanding rating
• Retail Services and Products Test – 10%
• CD Financing Test – 40%
• CD Services Test – 10%

For intermediate banks:

• Retail Lending Test – 50% and at least a Low Satisfactory rating required to achieve an overall Satisfactory or Outstanding rating
• Intermediate Bank CD Test or CD Financing Test, as applicable – 50%

Data Collection and Reporting

Large banks will be required to meet new annual data collection and reporting requirements, with the full set of requirements applying only to large banks with more than $10 billion in total assets. Banks not subject to a particular data reporting requirement may collect and report that data at their option if they are seeking additional performance consideration based on that information. Reporting will be required by April 1 annually. The Agencies will annually publish on the FFIEC website an individual CRA Disclosure Statement for each reporting bank, as well as aggregate disclosure statements that include data derived from the information reported. For large banks subject to Home Mortgage Disclosure Act (HMDA) reporting requirements, the Agencies will also publish on their websites certain bank-specific HMDA data for each of the bank’s FBAAs and RLAAs.

State Community Reinvestment Laws

Some states, including Massachusetts, Connecticut, and New York, have enacted laws similar to the federal CRA that require state banking regulators to evaluate the performance of the institutions they supervise. It remains to be seen whether and how state legislatures and banking regulators may revise state community reinvestment laws and regulations in response to changes to the regulations implementing the federal law.

Effective Date and Transition

The new regulations will be effective on January 1, 2026, with reporting requirements beginning in 2027.

 

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^[1] Notably, the new regulations provide a definition of “military bank” that includes banks whose business models focus on serving military personnel “who serve or have served” and their dependents. The current rules do not define “military bank” but refer to “a bank or savings association whose business predominantly consists of serving the needs of military personnel or their dependents,” without an explicit reference to veterans.

 

 

We Can Help

Goodwin’s Financial Services Industry team has significant experience assisting clients with their CRA needs. For advice on specific impacts of the new regulations, or for additional information about any of the issues discussed in this client alert, please contact Danielle Reyes, William Stern, or Nico Ramos.