The Final CRA Rule: Differences in the Proposed and the Final Rule

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As of May 20th, 2020, the Office of the Comptroller of the Currency has finalized a new rule to “strengthen and modernize” its regulations for the Community Reinvestment Act (“CRA”).

This final rule is designed to “increase bank CRA-related lending, investment, and services in low- and moderate-income communities where there is significant need for credit, more responsible lending, and greater access to banking services.” The rule is further intended to increase transparency and objectivity in evaluating national banks and federal savings associations with regard to CRA performance.

Originally, the Office of the Comptroller of the Currency and the FDIC had jointly created a proposal to revise and modernize the Community Reinvestment Act regulation, but the FDIC decided not to move forward with finalizing the proposal. The OCC subsequently opted to issue the rule without consensus from the FDIC.

Shaped by more than a decade of conversation on how to make the CRA work better, the rule is a culmination of a multiyear process. Stakeholders submitted more than 7,500 comments in response to the 2019 notice of the proposed rulemaking and the new rule reflects the changes and issues brought up in these comments. Additionally, it builds upon recommendations submitted to Congress in 2017 by federal banking agencies in their required decennial review of laws and regulations and recommendations released by the Treasury Department in April of 2018.

The Community Reinvestment Act received significant revision in the mid-1990’s. Changes were phased in over time from 1995 – 1997. Those who were working in this space back then remember the heart of the regulation from an evaluation standpoint were the “12 Assessment Factors” which included a variety of types of CRA activity. The changes were intended to make the regulation more data driven, and the final regulation had, and still has, different parameters based on the institution’s size.

The introduction of the lending test (for large institutions) comprises the chief data component although there is some quantification with respect to investments. However, today, the regulation and the application thereof remain subjective, despite the intended shift in emphasis.

From the onset of the process to revamp the CRA regs, the goal of the OCC has been to clarify: what counts; where it counts; how to count it; and to make recordkeeping and reporting more transparent and timelier. And, since its enactment in 1977, CRA was designed to help revitalize communities, strengthen and improve low and moderate income areas, and make capital and credit more accessible. Its existence has encouraged the flow of trillions of dollars into the communities that banks serve. The new rule encourages banks to offer even more support to their communities, which the OCC believes will help the CRA to remain a powerful tool.

Under the proposed rule, improvements generally fell into four categories: (1) providing clarity to which bank activities qualify for positive CRA consideration; (2) redefining how banks delineate assessment areas in which they are evaluated based on changes to banking business models over the past 25 years; (3) evaluation of bank CRA performance more objectively; and (4) providing more transparent and timely reporting.

Discussed below are six significant changes that were made to the proposed rule and are part of the final rule.

The final rule clarifies what qualifies for CRA consideration. This has and currently remains a very gray area in terms of types of activities fall into which categories under CRA. Containing an illustrative list of qualifying activities and a process that confirms whether an activity meets the qualifying activities criteria, the OCC believes the new rule will help improve consistent treatment of qualifying activities by examiners.  Based on comments received, the OCC changed its proposed qualifying activities criteria to emphasize low- and moderate-income activities, correcting the “inadvertent exclusions” that exist under the current framework.

The final rule will increase credit for mortgage origination to promote the availability of affordable housing in low- and moderate-income areas. After reviewing public comments, the OCC agreed that the CRA credit for affordable housing should remain centered on low- and moderate-income families and individuals. The rationale behind this decision was that including middle-income individuals and families, as originally proposed, could divert critical funding from low- and moderate-income communities. This will keep CRA focused on its original priorities, which has also been consistent since 1977 of investment into the areas that need it most.

The final rule clarifies credit for athletic facilities to ensure they benefit and support low and moderate income communities. In the proposed rule, an example was cited of an opportunity to finance improvements to an athletic stadium in an opportunity zone that is also a low and moderate income census tract. This led to some controversy, and as a result, the agency clarified that it will continue to review and give CRA credit for athletic facilities based on the facts and circumstances of specific projects – either in the context of a CRA evaluation or a request for confirmation that such lending is a qualified activity. Additionally, the OCC provided a response, noting that for decades banks have had the opportunity to receive CRA credit by financing athletic facilities that create opportunities for individuals in economically disadvantaged communities.

The final rule defers the establishment of thresholds for grading banksCRA performance until the OCC assesses improved data required by the final rule. In the proposed rule, an empirical benchmark would have been established for the average CRA measure associated with each category — a two percent minimum of retail domestic deposits for community development activities, and thresholds for passing the retail lending distribution tests. After commenters expressed that they found these rules unclear and inadequate, the OCC stated that its proposal was based upon analyses of available historical data, but conceded that the data was limited. Further, they indicated more data would need to be collected and analyzed before calibrating performance standards for each of the three components of the CRA’s framework. Because of this, the new rule does not contain benchmarks for the CRA evaluation measures, a specific community development minimum, or thresholds for the retail lending distribution tests.

The final rule preserves the intermediate small bank assessment category and raises the small bank asset size threshold. In the proposed rule, the intermediate small bank assessment category was eliminated and a small bank asset threshold of $500 million was created. This would have put any bank with assets over $500 million in the large bank assessment category. In the final rule, a $600 million threshold is included for small banks and the intermediate small bank category of the current rule for institutions that have assets between $600 million and $2.5 billion is retained.

The final rule gives CRA credit to legally binding commitments to lend (such as standby letters of credit) that provide credit enhancement for qualifying activities based on the dollar value of the commitment and gives credit for retail loans sold. The proposed rule did not provide credit to institutions with legally binding commitments to lend that otherwise met community reinvestment criteria if those commitments were unfunded. Under the new rule, credit is given to institutions that have unfunded standby letters of credit issued in connection with a low- and moderate-income housing development project. Additionally, the proposed rule primarily based quantified qualifying activities on average month-end on-balance sheet values. This would have required a bank to hold a qualifying residential mortgage loan for 90+ days before receiving credit. The new rule gives institutions credit for 100 percent of the origination value for any qualifying retail loan originations sold, provided it falls within 365 days.

The final rule will come into effect on October 1, 2020.

All OCC regulated institutions with assets over $2.5 billion, and therefore subject to the general performance standards, must comply by January 1, 2023. By January 1, 2024, all small and intermediate banks must comply with the rule’s assessment areas, data collection, and recordkeeping requirements.

(1) Comment

  • Daniel Wood August 18, 2020 @ 4:48 pm

    Profoundly articulate! Frames complex loan and credit policies in a digestible and satiable manner! Leaves the reader with few questions but budding interest. A delightful first touch point when discussing CRA revisions and impacts!

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