On December 12, 2019, the FDIC and OCC issued their long-awaited proposed regulations to Modernize the Community Reinvestment Act (the “Proposed Regulations”). The more complete version of the Proposed Regulations was published in the Federal Register on January 9, 2020, https://www.govinfo.gov/content/pkg/FR-2020-01-09/pdf/2019-27940.pdf. Prior to their issuance, the OCC engaged in outreach to CRA stakeholders that identified an extensive list of CRA problems, including:

  • ambiguities in CRA rules,
  • unclear definitions in the regulations that provided “little incentive for banks to engage in [offering] loan products, investments and services that could help [bank low- and moderate-income] communities,”
  • assessments limited to geographies around banks that have resulted in “CRA deserts” and little CRA activity in rural and other areas that “may be underserved by the current regulations,”
  • inconsistency with how some bank products and services delivered through electronic platforms are treated, and
  • subjective and inconsistent performance evaluations and ratings.

The Proposed Regulations purport to create a new CRA structure to:

(1) clarify and expand what may qualify for CRA credit;

(2) expand areas where CRA activity counts;

(3) provide more objective methodology to measure CRA loans, investments and services; and

(4) revise data collection, recordkeeping and reporting.

Strategic Objectives. The Proposed Regulations incorporate strategic objectives, in part, by adopting more complete and objective definitions. The Proposed Regulations preserve the connection between banks that engage at physical locations and their assessment area, for instance, by tracking the opening and closing of bank branches. But the Proposed Regulations seek to modernize CRA rules by recognizing non-traditional banking products and services, including Internet banking by, for instance, permitting banks (including Internet banks) to receive credit for CRA activities outside of assessment areas, with an eye to permitting non-traditional banking in rural areas and “CRA deserts” — those underserved or not served at all — and incenting CRA activity beyond CRA hot spots — those areas served by a cluster of institutions. The Proposed Regulations also incorporate concepts not covered in the current CRA regulations such as recognizing loans and investments in Indian country.

New Definitions and Expansion of Certain Terms. The Proposed Regulations provide new definitions. Illustratively, the term “home mortgage loans” will use data in Call Reports rather than a bank’s collected HMDA data. Community Development would now include an expanded definition of “affordable housing criterion,” expanding the activities and the location of the activities that may qualify as CRA activities. “Affordable housing” now includes rental housing that meets criteria to ensure that the rentals benefit low- and moderate-income individuals and families.

The Proposed Regulations require that the agencies publish and regularly update a non-exhaustive illustrative list of qualifying activities. Although the Section-by-Section Discussion contains a “qualifying list” of activities, it is not entirely clear whether that list will be part of the final regulations. The Proposed Regulations also establish a process for banks to seek agency confirmation that a proposed activity will be deemed a qualifying activity.

Empirical, Quantitative Approach; Shift to Call Reports. The Proposed Regulations adopt new objective methodologies, in part by applying “empirical benchmarks,” including charts, evaluation measures based on dollar amount of loans and a more quantitative analysis of lending and investment in assessment areas. The mathematical equations adopted include a Community Development definition that establishes minimums based on lending and investment compared to other retail domestic deposits and lending and investment statistics and that rely on Call Reports and FFIEC data lending and investments rather than pure HMDA figures. The standards include “comparator” thresholds to be applied to small loans to farms and businesses.[1]

Indian Country. The Proposed Regulations give particular recognition to loans and investments to individuals, businesses and essential community facilities (e.g. hospitals and schools) located in Indian country. Investments in rental housing that are undertaken in coordination with tribal government would now be included in qualifying activities.

Data and Recordkeeping Requirements. The Proposed Regulations amend data, collection, recordkeeping and reporting requirements. While permitting ongoing exemptions for smaller banks, the CRA requires detailed data in “machine readable form.” The Proposed Regulations recognize that these reporting requirements would result in increased costs, but state that the benefits would offset the costs of the proposals.

Strategic Plans. The proposed regulations would continue to permit banks to submit strategic plans that reflect alternative community investment and development and to present CRA performance approaches.

Fair Lending and Credit Practices. The Proposed Regulations continue the prior approach that the CRA performance review will be automatically “adversely affected by evidence of discriminatory or other illegal credit practices,” particularly violations of the Equal Credit Opportunity Act, the Fair Housing Act, the Truth in Lending Act, and other consumer credit laws and regulations.

CRA Ratings’ and Bank Applications. The Proposed Regulations continue the CRA ratings’ consideration in bank applications, including for charter or FDIC insurance,[2] mergers, acquisitions or opening branches or deposit-taking facilities, relocating main offices or domestic branches and conversions to national bank or savings association charters.

Comment Period. The comment period for the Proposed Regulations currently ends on March 9, 2020, and the Proposed Regulations provide for a transition period after the final regulations take effect. Given the anticipated response to the Proposed Regulations from stakeholders, that deadline may be extended.

The Federal Reserve Alternative. Because the Board of Governors of the Federal Reserve did not participate in the OCC and FDIC rule-making, finalizing the rules may be slowed by any attempt to coordinate with the Board. On January 8, 2020, Federal Reserve Governor Lael Brainard, one of the Board’s quarterbacks on CRA Modernization, addressed the Urban Institute and reflected what may be the Board’s likely approach to modernization.[3] Although she stated that the Federal Reserve still believes that an interagency approach is desirable, Governor Brainard presented several positions that appear at odds with the Proposed Regulations. In particular, Governor Brainard’s comments suggest that the Board is not open to all the quantitative approaches adopted in the Proposed Regulations.[4]

Partisan Reaction to Proposed Regulations. Some commentators have suggested that adoption of the Proposed Regulations may be complicated in a Presidential election year. The Proposed Regulations are already being debated by both Republican and Democratic partisans.

[1] The Proposed Regulations contemplate both a “geographic demographic comparator” and a “geographic peer comparator.”

[2] Both would require a “description of how [the bank or the prospective FDIC insured] will meet its CRA objectives.” Proposed 12 C.F.R. §§ 25.02, 345.02.

[3] Transcript at https://www.federalreserve.gov/newsevents/speech/brainard20200108a.htm.

[4] “CRA metrics tailored to local conditions and the different sizes and business models of banks would best serve the credit needs of the communities that are at the heart of the statute. This tailored approach using targeted metrics also yielded more consistent and predictable overall ratings than any comprehensive uniform metric. Our analysis did not find a consistent relationship between CRA ratings and a uniform comprehensive ratio that adds together all of a bank’s CRA-eligible activities in an area. …

“Stakeholder feedback emphasized banks’ unique advantages in evaluating [services to give emphasis to evaluating] community development projects in the states and territories where they operate and providing the smaller-scale, more complex, and often more impactful, investments overlooked by institutional investors.”

John Mussman is a leading banking and financial services lawyer. Mr. Mussman represents banks, mortgage lenders, and other financial services providers, focusing on banking and commercial and consumer credit law. He also represents bank affiliates and non-bank players in the commercial and consumer credit space. Read more about John here.

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