CRA Modernization Rule, Part II: Why the Agencies Updated CRA Regulations
Written by: Bill Dolan, CMB, AMP
Since the inception of the Housing and Community Development Act of 1977, which the Community Reinvestment Act (CRA) was part of, banks insured by FDIC were mandated to make loans and investments, especially in low-to-moderate income communities within their assessed areas.
However, the law made no mention nor listed any type of compliance criteria and both banks and their examiners have coped with understanding as to just what their examiner’s consider a bank’s “performance context” to determine what satisfies CRA requirements. Performance context is essentially defined as the unique economic and demographic conditions along with the community and bank-specific outlook in which your bank operates.
The final rule provides for greater clarity by revising the Community Development definition and offers the banks guidance needed on loans, investments, and services, deemed beneficial through the following:
An updated list of 11 community development categories covering CRA activities.
A publicly available list of illustrative CRA activities that the agencies maintain, and:
A confirmation process for the eligibility of activities.
The last time the CRA Act was updated was 2005 and the regulators noted that many financial institutions have expanded their lending activities outside of their main facility-based assessment areas. In the final rule, the rule accounts for this by identifying 3 distinct assessment areas: the facility-based assessment area, the retail lending assessment area, and outside retail lending.
The facility-based assessment area has not really changed for banks regarding CRA requirements. Banks will continue to define facility-based assessment areas in the MSAs or non-metropolitan areas of states in which the following facilities are located: main offices, branches, and deposit-taking remote service facilities. The final rule maintains that lending practices in facility-based assessment areas must not reflect illegal discrimination or avoid LMI census tracts.
Retail lending assessment areas in the final rule mandate that “large” banks must delineate a new assessment area – the retail lending assessment area – in an MSA or non-metropolitan area of the state where the bank has a large concentration of closed-end mortgages or small business loans. Retail lending assessment areas are those where large banks had at least 150 closed-end mortgage loans or 400 small business loans over the previous two calendar years.
>> Large banks who originate 80% or more of their loans inside their facility-based assessment area will be “exempt” from this rule.Outside retail lending assessment areas will now have the agencies evaluate large banks, some intermediate banks, and small banks that opt to be evaluated under the Retail Lending Test for compliance in an outside retail lending assessment area. The outside retail lending assessment area gives banks flexibility for CRA activities beyond their facility-based assessment area. With this provision, banks may be evaluated for CRA activities nationwide, which the agencies maintain adapts to the reality of digital banking.
For intermediate and small banks that opt to be evaluated under the Retail Lending Test, the regulators will evaluate CRA performance in outside retail lending assessment areas on a mandatory basis if more than 50% of lending originated there.
Intermediate and small banks may also opt to have their outside retail lending assessment area evaluated even when a majority of loans originated inside their facility-based assessment area. This gives banks the needed flexibility in meeting CRA requirements if they don’t satisfy the facility-based lending volume ratios under the Retail Lending Test.
SCA knows that regulators want to see your bank’s activities and strategy plan for CRA compliance, and it will be up to you to identify gaps in lending based on borrower income and geography. Banks meeting certain conditions must collect CRA data outside their facility-based assessment areas if they meet or exceed the loan originations thresholds that were described above. Implementing a system for collecting and analyzing data will become increasingly important as banks plan to comply with CRA requirements both inside and outside their assessment areas.
If you aren’t sure how to begin your CRA strategy plan or have serious concerns over your next upcoming CRA exam and not feeling as prepared as you know you should be, now is the time to contact Spillane Consulting Associates to help guide you through on a path with a CRA strategy that will demonstrate to examiners the accountability and responsibility that you and your bank have taken for CRA compliance.
Contact Bill Dolan, Director, at (617) 694-2617 or by email at: Wdolan@scapartnering.com to begin managing your CRA strategy today!
Coming Up Next Week: The Retail Lending Test explained and Additional Tests for Intermediate and Large Banks.
