The Interagency CRA Proposal Redefines Financial Inclusion
BY TRACY BASINGER
Time is getting short for bankers to submit comments on the proposed interagency revamp of the Community Reinvestment Act (CRA). The joint proposal by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) is open for comments through Aug. 5.
The revamp is much needed, but if enacted, it will demand that banks make significant changes to their CRA programs. Banks, especially those with over $10 billion in assets, should not pass on the chance to comment, as this proposal represents a significant change that they will have to live with, potentially for decades. I recently had the opportunity to share some thoughts on this revamp with the Financial Brand. Here, I want to dive a bit deeper into some of the specifics banks should read carefully and consider commenting on.
The biggest changes that you’ll want to review closely and provide feedback on are:
Community Development purpose and impact criteria - 38 questions
New Retail Lending Test and proposed evaluation criteria - 32 questions
New Retail Services and Products Test and proposed evaluation criteria - 25 questions
Data collection requirements for large banks (i.e., those with $10 billion or more in total assets) - 25 questions
These four areas alone account for two-thirds of all questions requesting feedback.
But, don’t be limited to just the specific questions asked - curiously there are few questions in the proposal about new Assessment Area (AA) rules and whether or not they solve the existing problems with AAs, although the changes proposed are significant.
There are now three categories of AAs:
Facility based assessment areas
Retail lending assessment areas - based on the number of loans made, (not percentage) for Small Business and Mortgage, and a combination of number of loans and percentage for auto lending
Outside AA lending
The latter two are volume based and only for major product lines. You’ll want to look at the major product line definition options carefully, especially if you are a large auto lender, and determine if they adequately address existing pain points with the current assessment area criteria.
The implications of these changes are different for different types of entities. Here’s a breakdown of the key takeaways for large, intermediate, and small banks:
1. Large Banks - significant changes here, especially for those with over $10 billion in assets. Things to review closely include:
New community development (CD) definitions and impact criteria
New data collection and reporting requirements, especially if greater than $10 billion in assets
New AA requirements, especially the major product line rules
Retail lending test criteria, especially the metrics and benchmarks as this new test is intended to raise the bar for satisfactory performance
Retail products and services test evaluation criteria
2. Intermediate Banks - so long as you opt to stay with the existing CD test, the most significant change is the new retail lending test. Things to review closely include:
The retail lending test as well as the AA requirements, including major product line rules
Regardless of whether your institution opts for the existing CD test or new CD tests, you’ll want to also look at the new CD definitions and impact criteria
Before you decide, I’d encourage you to look at the new CD tests and decide if those might better meet your needs
3. Small Banks - not much changes here unless you elect a strategic plan or a test review, but you’ll want to look at the new AA requirements and decide if you need to comment.
There’s a lot to unpack with this proposal including 180 questions that explicitly ask for public feedback. The impact will vary depending on the entity: large banks (especially those with over $10 billion in assets) will face the most significant changes, but all institutions could feel some impact. Considering it’s been almost 30 years since the last CRA update, this proposal represents a significant change that banks will have to potentially live with for decades. For this reason, it’s important for all stakeholders to review the interagency proposal closely and provide comments by the Aug. 5th deadline to help ensure it meets the intended purpose of increasing financial inclusion in the least burdensome way possible.