The federal bank regulatory agencies adopted revisions to the interagency guidance on the Community Reinvestment Act, focusing on alternative systems for delivering retail banking services, innovative or flexible lending practices and community development-related activities.

What happened

The Community Reinvestment Act (CRA) requires the federal banking agencies to assess the record of financial institutions in meeting the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. First published in 1996, the agencies' Interagency Questions and Answers Regarding Community Reinvestment offer guidance to financial institutions, bank examiners and the public about agencies' implementation of the CRA.

After reviewing 126 comment letters and more than 900 form letter submissions based on a 2014 proposal, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency adopted revisions and additions to the CRA Q&A addressing alternative systems for delivering retail banking services, community development-related issues, innovative or flexible lending practices and the responsiveness and innovativeness of an institution's loans, qualified investments, and community development services. The updates include six new questions and answers, nine substantive changes to existing questions and answers and an array of technical revisions.

One major area of focus was the role of financial institutions' "innovativeness" in CRA assessments. The Q&A describes how innovativeness is considered in the CRA rating process. Innovative practices may "be responsive to community needs but are not required if existing products, services, or delivery systems effectively address the needs of all segments of the community." The use of innovative lending practices, innovative or complex qualified investments, and innovative community development services may augment the consideration given to an institution's performance, resulting in a higher CRA rating. Smaller institutions or those institutions that have historically offered only traditional products, services, or delivery systems may be viewed as "innovative" by adopting innovative products and services already in the market. The Q&A clarifies, however, that a lack of innovative lending practices or innovative community development services alone will not result in a "needs to improve" CRA rating.

Also on the radar of the Federal Reserve, OCC, and FDIC: community development-related issues. In particular, the new Q&A attempts to address "inconsistencies in how community development services have been evaluated quantitatively" and concerns that "qualitative factors, such as whether community development services are effective or responsive to community needs, receive inadequate consideration."

The Q&A explains that agencies will evaluate community development-related activities both quantitatively and qualitatively, although without a specific formula.

With regard to qualitative factors, the finalized guidance states that examiners will assess the degree to which community development services are innovative or responsive to community needs. Qualitative evaluation criteria will include an assessment of the impact of a particular activity on community needs and the benefits received by a community.

For quantitative factors, the guidance offers examples of measures that examiners may assess to determine the extent to which community development services are offered and used, such as the number of low- and moderate-income individuals participating in a community development activity, the number of organizations served by a community development activity, and the number of sessions of a community development service activity.

To read the final revisions to the Interagency Questions and Answers Regarding Community Reinvestment, click here.

Why it matters

Financial institutions should review the revised interagency guidance, paying particular attention to "innovativeness" in the ratings process and community development-related issues, both the qualitative aspects of performance as well as the quantitative factors to be considered by examiners.