After five years of revising, redefining and modernizing various aspects of the regulatory framework used to assess a bank’s performance under the Community Reinvestment Act (CRA), the federal banking agencies finalized the first substantial changes to the rule in 25 years in October 2023.
One of the most expansive changes has to do with a concept that was not included in the original implementing regulations: community development. If the tremendous expansion of the defining qualities of this one term is any indication, compliance personnel would be well-advised not to take this component lightly in their CRA strategies.
The Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) crafted the final rule with insight gathered from a 2022 interagency notice of proposed rulemaking.
Perspectives on the revised CRA requirements vary dramatically depending on who you ask. Banking regulators tend to view the modernized CRA framework as a long-overdue necessity, given the sweeping advancements in technology since the statute was enacted in 1977.
The primary focus of the legislation was to address urban disinvestment through redlining, placing an obligation on federally insured depository institutions to meet the credit needs of local communities they serve, particularly lower-income and minority neighborhoods.
Implementation of the most recent CRA rule update has been at the forefront of the conversation about community reinvestment activities and compliance of late, despite being delayed due to a federal court injunction that could result in more changes to come.
CRA timeline
Since the best way to understand where we’re going is by taking stock of where we’ve been, let’s take a look at how these standards have changed over time before diving into the latest developments in the federal CRA regimen:
1977: Congress votes to enact the CRA, which was then signed into law by President Jimmy Carter on Oct. 12, 1977. The law followed the enactment of other historic legislative pieces aimed at promoting fair lending and credit practices, including the Fair Housing Act of 1968, the Equal Credit Opportunity Act (ECOA) of 1974 and the Home Mortgage Disclosure Act (HMDA) of 1975.
1989: Congress amends the CRA to provide for the public disclosure of lenders' CRA ratings and performance evaluations.
1995: Federal regulators added performance tests tailored for different institutions according to size and type. This was the last major set of comprehensive regulations implementing the CRA that remain in effect today.
2005: CRA standards concerning “community development” activities were updated to further reduce compliance for small- and intermediate-sized institutions and expanded the set of activities eligible to be considered community development.
2022: Federal agencies propose revisions intended to modernize the implementation of CRA standards and issue a notice of proposed rulemaking (NPR) asking the public for feedback on the proposal. The proposal aimed to update CRA assessment areas and adapt the existing framework to changes within the banking system related to the rise of Internet and mobile banking technologies while also expanding access to credit, investment and basic banking services in low-to-moderate-income (LMI) communities.
2023: After a half-decade of work, federal agencies publish a final rule to implement modernized CRA standards in October 2023, accounting for feedback received from public comments.
2024: Federal agencies issue a supplemental rule extending the implementation period for certain technical provisions of the modernized CRA final rule, giving covered entities until Jan. 1, 2026, to align their CRA compliance policies and procedures with the revised requirements, which had an original applicability date of April 1, 2024. Shortly after, the District Court for the Southern District of Texas issued an injunction enjoining regulators from enforcing the final rule against plaintiffs in a class action lawsuit filed by several trade groups representing banking institutions.
Categorical changes
During a panel discussion on community development at the 2024 Consumer Bankers Association’s annual conference, CBA Live, three federal regulators offered an overview of what the next evolution of CRA regulations may look like under the final rule.
The forum included OCC Director of Fair Lending and CRA Policy Vonda Eanes, FDIC CRA Program Manager Pamela Freeman and Federal Reserve Lead Supervisory Policy Analyst Lisa Robinson, with CBA Community Reinvestment Committee Chair Beth Trotter moderating the discussion.
The regulators started by describing how the final rule meaningfully changes the classifications for community development activities, more than doubling the number of categories encompassed under the term.
As it currently stands, the CRA rule describes four community development categories: affordable housing for LMI individuals; community services for LMI individuals; activities that promote economic development by providing financing for small businesses or small farms; activities that revitalize or stabilize LMI geographies, disaster designated areas, as well as distressed or underserved non-metropolitan middle-income geographies.
The final rule describes 11 categories intended to build on the existing definition of community development and provide greater clarity regarding qualifying activities: affordable housing; economic development; community supportive services; revitalization or stabilization; essential community facilities; essential community infrastructure; recovery of designated disaster areas; disaster preparedness and weather resiliency; activities in Native Land Areas; financial literacy; and activities with minority depository institutions (MDIs), women depository institutions (WDIs), low-income credit unions (LICUs) and U.S. Department of the Treasury-certified community development financial institutions (CDFIs).
Freeman called the audience’s attention to the new “disaster preparedness and weather resiliency” category and the category concerning partnerships with MDIs, WDIs, LICUs and CDFIs, noting that they could present potential new opportunities for institutions to factor into their CRA strategies.
The former of the two is intended to help communities prepare before natural disasters, such as hurricanes, earthquakes and other events that can cause major financial and economic distress within a community. The latter has drawn more attention, given the interest among institutions in CRA credit opportunities the final rule opens up for partnerships with the types of institutions listed.
“Another new category is activities in Native Land Areas,” Freeman said. “The provisions in this category reflect the unique economic, credit, and financial service needs of native and tribal communities.”
The expansion of eligible activities to include those that fit into these types of new categories under the revised Community Development Financing Test would reward banks for taking creative and proactive approaches to community investment.
Robinson noted the updated rules include several updated metrics and benchmarks for evaluating CRA performance in lending and CRA exams also will evaluate large banks on how well their online banking services serve LMI households, a major part of banking today that was nonexistent when the CRA was established.
With respect to current CRA regulations governing what qualifies as a community development loan, Eanes highlighted some points to address common concerns in this regard.
Responding to a question about qualifying loans under the current rule, Eanes explained that, generally, a loan, investment or service has to have a ‘‘primary purpose’’ of community development to qualify. However, an activity involving the provision of affordable housing also may be deemed to have a ‘‘primary purpose’’ of community development in certain other limited circumstances in which these criteria have not been met.
Specifically, she continued, activities related to the provision of mixed-income housing, such as in connection with a development that has a mixed-income housing component or an affordable housing set-aside required by federal, state, or local government, also would be eligible for consideration as an activity that has a “primary purpose” of community development at the election of the institution. In such cases, an institution may receive pro rata consideration for the portion of such activities that helps to provide affordable housing to low- or moderate-income individuals. Freeman added that this description would be true under the final rule as well.
The regulators made it clear that, until the final rule takes effect, covered entities will be expected to adhere to the legacy CRA framework, including its definitions pertaining to community development.
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