OCC CRA modernization: An overview of the final regulations

The Community Reinvestment Act (CRA) was enacted by Congress in 1977. It encourages insured depository institutions covered by the Act to meet the credit needs of low- and moderate-income communities and individuals consistent with safe and sound operations and is intended to discourage redlining. The law is administered by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System (FRB), which are responsible for conducting periodic evaluations of the institutions they respectively supervise and take the records of those institutions into account when considering certain types of applications for expansion. In 1995 the agencies collectively adopted the last major set of comprehensive final regulations implementing the CRA that remain in effect today. In May 2020, the OCC issued its own new final regulations meant to strengthen and modernize the CRA regulations that apply only to the national banks and federal savings associations overseen by the OCC. The regulations contain a somewhat complex set of effective and mandatory compliance dates. The effective date is October 1, 2020 and mandatory compliance dates phase-in until January 1, 2024 depending on the size of institution and its evaluation method. Under the new final regulations issued by the OCC, there are four key areas of change in the CRA framework.

Key takeaways regarding the OCC’s CRA final rule

According to the OCC, the final rule:

• Fundamentally changes the measurement of a bank’s CRA compliance from subjective to objective by introducing new “general performance standards” that will be used to measure and evaluate a bank’s activities by:
  • building on the existing methods of assessing CRA performance, but establishing more explicit tests for measurement;
  • shifting from the determination of a bank’s rating based on comparison to specific peers to the achievement of specific performance goals;
  • assessing the impact of a bank’s qualifying activities by defining a method of measuring the impact of qualifying activities;
  • defining a major retail lending product line and detailing how the retail lending distribution test will be applied;
  • requiring the inclusion of the consumer product line for evaluation under the retail lending distribution test;
  • establishing a minimum level of CD activities that a bank must perform;
  • providing specific performance goals in terms of ratings benchmarks (not yet provided by the OCC), thresholds and minimums; and,
  • establishing an evaluation method that assesses a bank’s retail lending and CD activities by considering: (1) the distribution of retail lending activities relative to low- and moderate-income populations and related census tracts in the bank’s assessment areas; and (2) the impact of all CRA activity, measured in dollars.
• Clarifies and expands a bank’s lending, investment, and services that qualify for positive CRA consideration by:
  • providing a non-exhaustive illustrative list that sets forth examples of qualifying activities and a process for an institution to follow to seek confirmation about whether particular activities not included on the list are qualifying;
  • defining CRA deserts and requiring that an institution follow a process to obtain confirmation of an area as a CRA desert from the OCC in order for it to obtain CRA desert multiplier credit;
  • providing new specific rules detailing how certain qualifying activities, such as service hours, will be quantified;
  • valuing qualifying activities and setting forth rules under which the value of certain qualifying activities may receive additional credit under newly included “multipliers;” and,
  • expanding credit for activities that partially benefit low- and moderate-income persons.
• Updates how a bank will define, or delineate, the assessment areas in which they will be evaluated by:
  • defining assessment areas around deposit-based, facility-based and non-branch deposit taking facilities;
  • explaining how activities outside of assessment areas qualify;
  • explaining how often assessment areas can be changed;
  • favorably changing how deposit-taking ATM’s impact assessment areas; and,
  • defining a domestic retail deposit.
• Fundamentally changes the valuation measure for data away from HMDA data to balance sheet data and clarifies data collection, recordkeeping, and reporting by:
  • establishing specific data collection rules for grandfathered activities;
  • requiring the collection and maintenance of geocoded quarterly retail domestic deposit account data;
  • laying out the specifically required data elements concerning CRA qualified activities; and,
  • providing updated rules on how data will be kept and reported that are intended to make data requirements more objective.

Important pending OCC actions needed

Even though the OCC has issued final regulations, it has indicated in the preamble that it must promulgate additional guidance in order for banks to apply the rules of the final regulations. Here are key items that banks will need to apply the final regulations that the OCC has indicated it must still release:

• benchmarks defining how a bank can achieve a given rating based on the CRA Evaluation Measure;
• peer data and related thresholds needed to pass the Retail Lending Distribution Tests;
• the level of community development required to meet the CD Minimum; and,
• publishing a list of CRA desert areas and defining the process by which a bank can obtain confirmation of a CRA desert from the OCC (which is a prerequisite that must be met for the bank to obtain multiplier credit for qualifying activities within the CRA desert).

The OCC has indicated that it will periodically review and adjust the general performance standard metrics specified above, taking into account factors such as market conditions, qualifying activities conducted by the banks and any remaining unmet needs. Banks will need to monitor and then adjust CRA evaluation processes when updated metrics are released.

In addition, the OCC must still issue several new forms that banks are required to complete and submit under the new final regulations, including the:

• qualifying activity confirmation request form (banks and other interested parties will use this form to confirm that an activity qualifies for CRA credit);
• CRA data reporting form (this form will be used by the OCC-supervised institutions, while the other banks will continue reporting data through the FRB); and,
• performance context form (banks other than small and intermediate banks will use this form to report performance context).

The preamble to the final regulations indicates that the OCC also plans to develop and release additional resources and guidance on a number of different topics. Such resources and guidance would help clarify the new requirements of the final regulations and assist banks as they revise and develop compliance systems and establish updated and new policies and procedures. Examples of future guidance include webinars on the following items and topics:

• specific data points, data sets and data format for data collection and recordkeeping purposes;
• guidance on applying various aspects of the final regulations (e.g., the new qualifying activities criteria requirements; documentation needed to sufficiently demonstrate that an activity is qualifying; and allocation of CRA credit across multiple areas);
• guidance on applying the qualifying activities rules of the final regulations and the applicable performance standards of the current framework to banks after the final regulations become effective but before the applicable mandatory effective dates; and,
• data collection requirements for community development activities serving more than one location.

Lastly, the OCC intends to create resources for its examiners, including examination procedures, examiner training, examination tools, and guidance to help standardize the application of performance context factors. Because these resources will be important for examiners, they will also be important to banks.

An overview of the four key areas of the final rule

The following provides an overview of the four key areas of the final regulations.

Qualifying Activities

Twelve supporting activities. The preamble to the final regulation notes that “[t]he lodestar for this new CRA framework [relating to qualifying activities] is increased transparency, objectivity, and consistency in application.” OCC’s rule establishes criteria to qualify an activity or loan for favorable CRA consideration. Generally, that activity must “help meet the credit needs of a bank’s entire community, including LMI individuals and communities.” In general, this determination is made at the time that the activity is originated, made or conducted. Each type of activity will have its own set of criteria. For example, a home mortgage or consumer loan qualifies if it is made to a low- or moderate-income individual or family and a small loan to a business qualifies if the business is in a low- or moderate-income census tract. Community development loans, investments and services have specific qualification criteria for twelve supporting activities:

• Affordable Housing;
• Another bank’s community development loan, investment or service;
• Community support services such as childcare, education, and health services that partially or primarily serve or assist low- or moderate-income individuals or families;
• Economic development that provide financing or support for businesses or farms, such as job creation/retention for low- or moderate-income individuals or families;
• Essential community facilities that partially or primarily serve low- or moderate-income individuals or families, low- or moderate-income census tracts, distressed areas, underserved areas, disaster areas, or Indian country (referenced herein as tribal and native lands);
• Essential infrastructure that partially or primarily serves low- or moderate-income individuals or families, low- or moderate-income census tracts, distressed areas, underserved areas, disaster areas, or tribal and native lands;
• A family farm’s purchase or lease of farmland, equipment or other farm-related inputs or receipt of technical assistance and supportive services for the family farm’s own production;
• Federal, state, local or tribal government programs, projects or initiatives that partially or primarily serve low- or moderate-income individuals or families, or are consistent with government revitalization, stabilization or recovery plans for low- or moderate-income census tracts, distressed areas, underserved areas, disaster areas, or tribal and native lands;
• Financial literacy programs or education or homebuyer counseling;
• Owner-occupied and rental housing development, construction, rehabilitation, improvement, or maintenance in tribal and native lands;
• Qualified opportunity funds that benefit low- or moderate-income qualified opportunity zones; or
• Other activities and ventures undertaken by a bank in cooperation with a minority depository institution, a women’s depository institution, a Community Development Financial Institution or a low-income credit union (if the activity meets certain specified conditions)

Illustrative list. The OCC has established a non-exhaustive illustrative list of qualifying activities as well as a process for adding activities to the list. A bank or other interested party may request that the OCC confirm an activity’s eligibility and ultimate placement on the illustrative list by submitting a complete “Qualifying Activity Confirmation Request Form” (Form). The OCC will consider information on the Form, whether the activity is consistent with safe and sound operation for a bank and any other information the OCC believes is relevant. The CRA final rule provides that the determination will be made within 60 days of the submission of the form, unless the OCC notifies the interested party of an extension to 90 days. If it is deemed a qualifying activity, the OCC will modify the illustrative list. The OCC will republish the illustrative list on a periodic basis.

CRA desert. The CRA final rule includes new special provisions relating to “CRA deserts.” A CRA desert is defined as an area the OCC has confirmed to have significant unmet community development or retail lending needs and has few banks with branches, less than expected retail or community development lending based on demographics or lacks community development organizations or infrastructure. To encourage banks to engage in activities in these areas, the CRA final rule provides that the OCC will create a CRA desert list and establish a confirmation process a bank may follow to request the OCC to confirm an area as a CRA desert. If a bank engages in qualifying activities in a CRA desert, the quantified value of the activity for purposes of applying the general performance standards to the bank’s activities will be increased by a multiplier during the evaluation period but only if the bank has properly obtained confirmation by the OCC. The multiplier essentially increases the dollar value of the activity by two in most cases. As of this writing, the details of the required confirmation process or related form are not yet available.

Quantification of qualifying activities. For community development services, the OCC’s rule creates a method to quantify the service to a dollar value. The CRA final rule provides that this “is the [related employees’ hourly] compensation multiplied by the total number of hours one or more employees spent performing the service”, with adjustments if the activity partially qualifies. If a qualifying activity provides only partial benefit (defined under the final rule as 50 percent or less of: (1) the dollar value of the activity; or (2) of the individuals or census tracts that are served by the activity), then it is necessary to multiply the percentage of the activity that is qualifying by the full dollar value of the qualifying activity in order to compute the quantified amount that can be taken into account under the general performance standards. There was commentary questioning the proposed methodology for determining the appropriate hourly compensation rate and in response, the preamble to the final rule indicates that “[t]he final rule quantifies CD services based on the standard figure for the median hourly compensation value for the banking industry calculated using Call Report data, which is $38 per hour based on 2019 Call Report data.”

In-kind donations will be quantified at their fair market value and monetary donations will be quantified at their actual dollar value. Both in-kind and monetary donations can partially qualify as well.

Qualifying community development investments and certain loans will be typically quantified at the average dollar value as of the close of business on the last day of the month, also with the partial adjustment, if applicable. Qualifying retail loans generally quantify at the full dollar value of the loan at origination if sold within 365 days of origination.

Value of qualifying activities. A bank that will be evaluated under the general performance standards will calculate its qualifying activities value annually based on the quantified dollar value of all qualifying activities originated, made, performed, or included on its balance sheet during the year. The final rule provides that the quantified dollar values of qualified loans and CD investments are added to the aggregated quantified dollar value of community development services, quantified dollar value of in-kind donations and quantified dollar value of monetary donations (subject to any multiplier adjustments as discussed below).

In certain cases, the CRA final rule provides that the quantified value of a qualifying activity is increased by a “multiplier.” The final regulations include several. In order for activities to be eligible for a multiplier, two important requirements under the final regulations must be met: (1) requirements relating to the nature of the activity must be met (as described hereafter); and (2) a requirement that the quantified dollar value of community development loans, investments and services during the current evaluation period must be approximately equal to the quantified dollar value of these activities considered in the prior evaluation period. The CRA final rule provides that multipliers will be available for qualifying activities that: (1) support minority or women’s depository institutions; (2) provide community development services; (3) engage in certain community development investments; (4) provide affordable housing-related community development loans; and (5) generate retail loans by branches in low- and moderate-income census tracts. Multipliers relating to these specified qualifying activities generally increase the quantified dollar value of eligible activities by a value of two. There is an additional multiplier (by a value of two) for qualifying activities in CRA deserts (other than with respect to qualifying activities related to certain community development investment funds). However, the OCC may apply an increase to the multiplier for either specified qualifying activities or qualifying activities taking place in properly confirmed CRA deserts from two to as high as four if the OCC determines that the activity’s responsiveness, innovativeness or complexity warrants increasing the multiplier. The final rule does not provide any clarity regarding how “responsiveness, innovativeness or complexity” will be determined. Note that the final rule further provides that a bank calculates its assessment area qualifying activities value for each assessment area using a similar standard previously described for the bank level.

There is industry concern related to the October 1, 2020 effective date for qualifying activities and how it will relate to CRA evaluations under the current framework. More broadly, there are similar concerns relating to the current framework’s evaluation standards that may overlap with components of the final rule that will be effective October 1, 2020. For example, the ceilings applicable in defining qualifying small business and small farm loans’ size changes from $1 million and $500,000, respectively, to $1.6 million (for both small business and small farm loans) effective October 1, 2020. It is not clear how that change impacts ongoing data collection and reporting requirements or evaluations under the current framework. Note, however, that the preamble does include statements that appear to suggest that the OCC may provide guidance and intends to provide an orderly transition between the different frameworks.

CRA assessment area

The CRA encourages banks to engage in qualifying activities in areas where they collect deposits. In 1995, when the CRA regulations were last comprehensively updated, physical branches were the main source of deposit collection and customer receipt of products and services. The location and number of branches reflected the areas where banks received deposits. Today, many customers bank electronically and visit physical branches less frequently. Technology used by banks, other businesses and customers has evolved significantly since 1995, and banks have updated business models and collect a considerable amount of deposits from outside the physical branch footprint.

Facility-based assessment areas. The OCC’s final rule acknowledges the significance of branches and the delineation of assessment areas around physical locations. The physical branch footprint continues as a substantial source of meeting community needs and serving populations. However, the updated framework set forth in the final regulations is intended to balance the treatment of traditional branch-based banks and deposit collection through the Internet and other non-branch channels. The final rule maintains the delineation of facility-based assessment areas around physical deposit-taking locations, with the option to also delineate assessment areas around deposit-taking ATM's. Facility-based assessment areas are generally described for purposes of the final regulations as “each location where the bank maintains a main office, a branch, or a non-branch deposit-taking facility that is not an ATM as well as the surrounding locations in which the bank has originated or purchased a substantial portion of its qualifying retail loans.” Assessment areas must not reflect illegal discrimination or, given a bank’s size and financial condition, arbitrarily exclude LMI census tracts.

Deposit-based assessment areas. A bank that receives 50 percent or more of its retail domestic deposits from geographic areas outside its facility-based assessment areas (the 50 percent threshold) must delineate separate, nonoverlapping deposit-based assessment areas where it receives five percent or more of its retail domestic deposits. A bank may delineate its deposit-based assessment area in the smallest geographic area where the bank receives five percent or more of retail domestic deposits (five percent threshold). Banks may delineate deposit-based assessment areas at any geographical area up to the state level.

Retail domestic deposits are deposits of individuals, partnerships, corporations, trusts and other legal entities. Retail domestic deposits include sent, but not received, non-brokered reciprocal deposits, listed deposits, and municipal deposits. Retail domestic deposits exclude prepaid card funding, HSA deposits, sweep deposits, and brokered deposits, which are not included in the definition of retail domestic deposits as they are not associated with any individual or community.

Thresholds for deposit-based assessment areas. According to the OCC, the 50 percent and five percent thresholds are established at levels intended to ensure internet banks engage in CRA activities in areas where the banks are familiar based on the banks’ concentration of deposits, to engage in lending, investment, and other activities in a safe and sound manner. The OCC states that the thresholds are designed to consider the potential expanded use of technology to generate deposits outside of a bank’s principal market and not creating numerous smaller assessment areas. In addition, the OCC believes the thresholds are high enough to not require traditional branch-based banks to designate additional deposit-based assessment areas in the near or medium term. Accelerated movement to online banking due in part to the COVID-19 pandemic could result in additional deposit-based assessment areas in the near or medium term that the OCC did not anticipate.

Changes to assessment area delineations. The final rule allows banks to change their assessment area delineations once per year (notwithstanding, for example, a corporate restructuring due to merger or acquisition) and specifies that banks must not change any assessment area delineation within the annual period used to determine an assessment area CRA evaluation measure. Additionally, a bank may change assessment area delineations following an approved application for a merger or consolidation.

Size of assessment area delineations. The OCC requires that a bank’s assessment area or areas be at least a whole county or county equivalent, unlike under the current framework which provides that a bank may include only the portion of a political subdivision that it reasonably can be expected to serve. In addition, the OCC provides a method for a bank to allocate credit for CD activities that serve a larger area than assessment areas within the larger area served by the activity. For instance, a bank may “allocate credit for CD activities: (1) to an assessment area within a broader area served by an activity if the bank can document that the services or funding it provided was allocated to a particular project that is in or that serves the assessment area; or (2) across all of the areas served by the activity, including any assessment areas if that cannot be documented.” The OCC plans to issue guidance to explain or clarify the method for the allocation process.

Non-branch deposit-taking facility. The OCC has defined a facility-based assessment area to encompass areas where the bank maintains a main office, a branch or a non-branch deposit-taking facility that is not an ATM. Some industry commenters requested the OCC define, or clarify, what constitutes a non-branch deposit-taking facility. The OCC defines this type of facility as a banking facility other than a branch, that is owned or operated by, or operated exclusively for, the bank that is authorized to take deposits that is located in any state or territory of the United States of America. Additionally, the facility must be made available to the general public and does not include facilities for personal use or located in an area not available to the general public.

Qualifying activities that are outside of an assessment area. In assessing a bank’s CRA evaluation measure, the OCC provides a method in which banks receive CRA consideration for all qualifying activities, including activities conducted outside of a bank’s assessment areas. A bank may not receive a satisfactory or outstanding presumptive CRA rating “unless the bank received a satisfactory or outstanding rating in a significant portion of its assessment areas that accounted for a significant amount of the bank’s retail deposits.” However, the CRA evaluation measure includes both a bank level test and a test applicable to each of the bank’s assessment areas. In many cases a bank may collect deposits from areas outside of facility- and deposit-based assessment areas. Therefore, the preamble to the final regulation indicates that the inclusion of such activities outside of delineated assessment areas under the bank level component of the CRA evaluation measure is intended to provide a bank with CRA evaluation measure credit relating to its activities to serve the broader community.

Objective method to measure performance

General Performance Standards
The OCC has sought to establish an objective method to measure CRA performance. These rules are called the “general performance standards." The new general performance standards include the following separate tests that are generally applied at both the bank and the assessment area level: the CRA evaluation measure; the retail lending distribution test; and, the community development minimum. Performance ratings are generally determined by comparing the results against benchmarks that have not yet been provided by the OCC and that are expected to be updated over time. There are separate rules for banks that have opted for and are evaluated under strategic plans. Note that a bank’s performance is adversely affected by discrimination and other illegal credit practices.

CRA Evaluation Measure. In an effort to provide clarity and consistency, the OCC set out to provide a uniform method of measuring the impact of a bank’s qualifying activities and specify clear benchmarks required to achieve specific ratings categories. As previously noted, the final rule does not contain benchmarks, although the OCC anticipates issuing another Notice of Proposed Rulemaking shortly. As referenced earlier, the evaluation measure is analyzed at both the bank level and for each assessment area. Further, the evaluation measure at each level is comprised of two components: (1) a measurement of a bank’s qualifying activities compared to retail domestic deposits; and (2) a measurement of a bank’s branch distribution. For each evaluation period, average values of these measures based on the annual computations described must be computed. A bank will calculate the average of its: (1) annual CRA evaluation measures for each year in the evaluation period; and (2) annual assessment area CRA evaluation measures for each year in the evaluation period, separately for each assessment area.

Qualifying activities value. On an annual basis a bank will first calculate its CRA evaluation measure by taking the sum of its qualifying activities value as a proportion of the average of its quarterly retail domestic deposits. The preamble indicates the OCC believes that aggregating different types of qualifying activities will not dictate a bank’s business model or strategy, but rather evaluate the impact of the full scope of a bank’s qualifying activities.

As previously stated, the qualifying activities value during a given annual period is the sum of: (1) the quantified originated dollar value of qualifying loans and investments; and (2) the aggregate quantified dollar value of community development services, in-kind donations and monetary donations made during the year and as adjusted by multipliers, if applicable.

Measurement of branch distribution. The second component of the CRA evaluation measure is calculating a bank’s distribution of branches located in LMI census tracts, tribal and native lands, underserved areas, and distressed areas within an assessment area during the same annual period used to calculate the qualifying activities value. The number of branches located in these areas will be compared to the bank’s total number of branches in that assessment area during that annual period and multiplied by .02. If this measurement exceeds .01, then the bank’s CRA evaluation measure is the sum of the value of the bank’s qualifying activities value and .01. In addition, if a bank does not have branches in the listed areas, the bank must demonstrate that nearby branches serve a sizable portion of individuals from those communities to receive CRA consideration.

The Retail Lending Distribution Test
For banks evaluated under the general performance standards, the OCC will assess whether the bank’s retail loan originations are serving the needs of LMI individuals and communities. The tests will be conducted on a bank’s major retail lending product lines. The following describes the process that will be followed in selecting major retail lending products along with the tests that will determine if a bank passes the geographic and borrower distribution tests.

Major retail lending product line. A bank’s performance under the retail lending distribution test will be assessed based on its major retail lending product line or lines. A major retail lending product line is defined as a product line comprised of at least 15 percent of a bank’s overall dollar volume of retail loan originations during the evaluation period (purchased loan activity is not included in the determination) provided it was the first or second largest retail lending product line by dollar volume, or at the bank’s option, if it composed at least 15 percent of the bank’s dollar volume of total retail loan originations. Retail loan originations are defined as a bank’s dollar volume of total retail loan originations, which is the sum of the origination value of all the bank’s qualifying and non-qualifying retail loans. If more than two retail lending product lines comprise more than 15 percent of a bank’s retail lending, the two largest retail lending product lines will be considered major retail lending product lines. The final rule allows a bank to select more than two retail lending product lines, at their option.

Retail lending distribution test details. The retail lending distribution test will be performed on a bank’s major retail lending product line (or lines if more than two retail lending product lines comprise more than 15 percent of a bank’s retail lending). Once a major retail lending product line is identified, the OCC will conduct the distribution test on an assessment area having at least 20 loans in each year of the evaluation period, represented by originations (purchased loans are not included in the retail lending distribution test). The tests will assess the number of qualifying retail loans in LMI geographies and to LMI individuals, CRA-eligible businesses, and CRA-eligible farms.

• Geographic test. To determine if a bank is meeting the credit needs of its communities, the OCC will conduct a geographic test on the bank’s major product line or lines. The comparators are as follows:
  • mortgage – percent of owner-occupied housing units and the percent of peer mortgage loans in the assessment area’s LMI geographies (a bank’s lending in LMI geographies is specific to only LMI individuals and does not include loans made to middle- or upper-income borrowers);
  • small loan to a business (defined as a loan no greater than $1.6 million) – percent of businesses and the percent of peer business loans in the assessment area’s LMI geographies; and,
  • small loan to a farm (defined as a loan no greater than $1.6 million) – percent of farms and the percent of peer farm loans in the assessment area’s LMI geographies.
• Borrower test. To determine if a bank is meeting the needs of LMI borrowers, the OCC will conduct a borrower test on the bank’s major product line or lines. The comparators are as follows:
  • mortgage – percent of LMI families and the percent of peer mortgage loans in the assessment area to LMI borrowers;
  • loans to CRA-eligible businesses – percent of CRA-eligible businesses (defined as having gross annual revenue no more than $1.6 million) and percent of peer loans in the assessment area to CRA-eligible businesses;
  • loans to CRA-eligible farms – percent of CRA-eligible farms (defined as having gross annual revenue no more than $1.6 million) and percent of peer loans in the assessment area to CRA-eligible farms; and,
  • consumer – percent of LMI households in the assessment area, defined as
    • A revolving credit plan, other than credit cards;
    • An automobile loan; or
    • Any other consumer loan, which is a loan to an individual for household, family, and other personal expenditures.

The Community Development Minimum. The community development minimum is computed by determining the total quantified dollar value of community development loans and community development investments conducted during the evaluation period (adjusted for multipliers if applicable as discussed regarding qualifying activities above), and dividing by the average quarterly value of the bank’s total retail domestic deposits as of the close of business on the last day of each quarter of the evaluation period. In addition, the final rule clarifies that unless a bank’s quantified dollar value of its current period CD activities approximately equals the quantified dollar value of its prior period CD activities, a bank would not receive a multiplier for those activities. The computed CRA evaluation measure is then compared to the minimums (to be provided by the OCC) applicable for the various performance rating standards.

The OCC notes that banks subject to the general performance standards must meet a minimum level of community development (“CD”) activities, and at this time, has not set a specific level of activity for the CD minimum.

Assessing the impact of a bank’s qualifying activities. The OCC will use performance context as necessary to address factors such as financial condition, loan product demand, or relevant demographic conditions that may affect a bank’s ability to engage in CRA activities in a safe and sound manner. The OCC has provided examples of sources banks may use to assess local needs and opportunities. Two examples include the Federal Home Loan Banks’ Targeted Community Lending Plans (FHLB TCLPs) and local or state Consolidated Plans submitted to Department of Housing and Urban Development (HUD).

Ensuring banks are responsive to local needs. To receive a bank presumptive rating of satisfactory or outstanding under the GPS, a bank must receive at least a satisfactory or outstanding, respectively, in its assessment areas as follows:

• banks with more than five assessment areas must receive at least the corresponding rating in 80 percent of its assessment areas in assessment areas from which the bank receives at least 80 percent of the retail domestic deposits it receives from its assessment areas; and,
• banks with five or fewer assessment areas must receive at least the corresponding rating in 50 percent of its assessment areas in assessment areas from which the bank receives at least 80 percent of the retail domestic deposits it receives from its assessment areas.

Presumptive ratings benchmarks, thresholds, and minimums. At this time, the final rule does not contain the necessary benchmarks for the CRA evaluation measure, a specific CD minimum, or thresholds for the retail lending distribution tests. The OCC will issue another Notice of Proposed Rulemaking at an undisclosed time (as of this writing). After receipt and consideration of comments and assessing additional data collection and the analysis of that data, the OCC will set specific benchmarks, thresholds, and minimums. The OCC expects to periodically review and adjust the benchmarks.

Under the general performance standards, the OCC has outlined presumptive ratings at both the bank level and the assessment area level. A bank will use the performance standards in effect on the first day of its evaluation period to assess its performance for the duration of the evaluation period. The OCC will periodically adjust the performance standards based on factors such as the level of qualifying activities conducted by all banks, market conditions, and unmet needs and opportunities. A bank can obtain a rating of outstanding, satisfactory, needs to improve, or substantial noncompliance at both the bank and assessment area level.

Small Bank and Intermediate Bank Performance Standards
Under the current framework, a bank having assets less than $1.305 billion (as of December 31, 2019) is classified as a small bank while an intermediate small bank has assets of at least $326 million and no more than $1.305 billion. Both have modified exam procedures from the large bank exam procedures. Under the final rule, the definition of a small bank is revised and is identified as having assets no more than $600 million. The more significant change affects banks classified as intermediate. In addition to a name change to intermediate bank (the word small has been removed), assets range between greater than $600 million to no more than $2.5 billion identifying a bank as an intermediate bank. Small and intermediate banks can opt-in to the general performance standards at their election.

For evaluation purposes, a small bank and an intermediate bank (as defined above), will continue to be evaluated under the current performance standards, unless the bank decides to opt-in to the GPS or is evaluated under an approved strategic plan. Performance context factors and discriminatory and other illegal credit practices will continue to be considered in evaluating a small (and intermediate) bank’s performance. Although small and intermediate banks will not be evaluated under the GPS unless they elect to do so, OCC regulated small and intermediate banks will nevertheless be subject to the final regulations including importantly the assessment area delineation requirements. Thus, small and intermediate banks will also be required to delineate deposit-based assessment areas to the same extent as other banks. Additionally, the OCC has revised the final rule to change lending-related activities to retail and community development lending-related activities.

Wholesale and Limited Purpose Bank Performance Standards
Wholesale and limited purpose banks are unique in that their business models differ markedly from other banks. A wholesale bank is not in the business of extending home mortgages, CRA-eligible business loans, CRA-eligible farm loans, or consumer loans to retail customers, although a wholesale bank may engage in limited retail lending on an accommodation basis. To be designated as a limited purpose bank, an institution must offer only a narrow product line (such as credit card or motor vehicle loans) to a regional or broader market. In assessing the performance measurement of wholesale and limited purpose banks, the preamble to the final regulations provides that the OCC believes that the current framework is an effective way to measure performance of those banks and exempts those banks from the GPS.

Data Collection, Recordkeeping and Reporting

Data collection for banks evaluated under the general performance standards or a strategic plan. Banks evaluated under the general performance standards will be required to collect and maintain a variety of data about its qualifying activities and where each activity took place. To assess a bank’s CRA performance in serving their entire community, the OCC requires banks to provide, as of the end of each quarter, the value of its retail deposits and the physical address of each depositor, geocoded to the county level, which is the smallest permissible assessment area under the final rule. The OCC plans to provide further detail on the data that banks must collect and maintain. These recordkeeping requirements also apply to banks evaluated under a strategic plan. There are different recordkeeping requirements applicable to small and intermediate banks as well as wholesale and limited purpose banks.

An important aspect of the final rule that is a significant change from the prior regulations is that it requires banks to collect and maintain the on-balance sheet value of a bank’s qualifying activities. Banks may be challenged in collecting and maintaining the quarterly values of retail domestic deposit account data and geocoding such data. Banks subject to the general performance standard must also collect, maintain, and report their presumptive ratings and the results of their CRA evaluation measure calculations and retail lending distribution tests. In addition, the final rule also requires banks to collect and maintain the CD minimum calculations and the supporting documentation associated with the calculations. Banks are also required to collect and maintain the quantified dollar value of activities before applying multipliers along with an indicator of whether a multiplier applies.

To ensure that the OCC can validate a bank’s retail lending distribution tests, CRA evaluation measures, and presumptive ratings, banks must collect and maintain supporting documentation related to these calculations. The final rule also requires that banks collect, maintain and report information on the number of home mortgage loans originated in LMI census tracts. The final rule reduces the length of time that banks must maintain data by providing that data must be maintained until the completion of the relevant CRA evaluation.

The final rule intends to revise the treatment of CD services by using a standard for the median hourly compensation value for the banking industry based on Call Report data for: (1) median salaries and employee benefits from Schedule RI, Item 7.a; and (2) the median number of full-time equivalent employees from Schedule RI Memorandum Item 5. The OCC notes that banks must bear the burden of establishing that qualifying activities are eligible for CRA credit and the information they collect will permit the OCC to confirm the activities’ eligibility.

The OCC has indicated that it intends to provide additional guidance on the final rule’s data collection requirements related to the general performance standards and the other performance standards.

Data collection for grandfathered activities. The final rule includes only the data collection requirements necessary to determine the quantified dollar value of a bank’s existing on-balance sheet activities. The OCC expects that banks will identify on-balance sheet activities that would not qualify under the current CRA framework but qualify under the final rule based on the information that was or would have been gathered at the time of origination. The OCC anticipates that a look back on grandfathered activities will not be overly burdensome because full compliance with the new regulation will not be required until January 1, 2023 and that the number of such grandfathered activities at that time will likely be very small.

Activity location. The final rule explains that qualifying activities that are not conducted within an assessment area will receive favorable consideration in a bank’s qualifying activities value and not in any bank assessment area quantifying activities value. Qualifying activities that are partially allocated to an assessment area will receive CRA consideration in the bank’s qualifying activities for the amount of the activity that is not allocated to another assessment area.

Although the OCC does not specify how a bank should geocode its loans or other activities, the OCC does require banks to identify the location of their loans and other activities. If a bank is not able to identify the location of its qualifying activities, specific to an assessment area, the bank will receive consideration for those qualifying activities in its bank CRA evaluation measure. In addition, the OCC has confirmed that it will evaluate aggregate data collected for LMI census tracts (or borrowers) because the rule does not separately evaluate low-income and moderate-income tracts (or borrowers) for performance standards purposes. The OCC has also clarified that banks are expected to record the location of a consumer loan at the time of origination. The preamble to the final regulations further provides that a bank would not be expected to track, over time, the borrower’s income or other qualifying criteria or re-classify qualifying activities as non-qualifying if income or other qualifying criteria change.

Recordkeeping. The final rule will require a bank to collect and maintain all necessary data in machine readable form. The OCC will provide additional guidance on the specific data points that a bank will need to collect and maintain and the format in which the data will need to be recorded.

Data reporting. The agency notes that all facts and data supporting the agency’s conclusions and ratings will continue to be available in banks’ publicly available CRA performance evaluations (PE). In addition, the final rule requires reporting of the quantified dollar value of qualifying loans and CD investments. The final rule requires banks to report the results of their retail lending distribution tests and their presumptive ratings at the end of the evaluation period, not annually as proposed. The final rule also clarifies that banks will only have to report performance context information prior to their CRA evaluations.

Looking ahead

It is important to note that on October 1, 2020, several key provisions of the final rule go into effect for all OCC-regulated banks including qualifying activities criteria, qualifying activities confirmation and illustrative list, and CRA desert confirmation requirements. And although mandatory compliance dates for other provisions of the new CRA final rule vary based on bank size and other factors, the transition period between the effective date and the applicable mandatory compliance date is intended to allow banks to revise or implement additional systems that may be needed for collecting, maintaining and reporting the required data elements. In turn, this transition period is intended to provide all banks the opportunity to enhance or establish a process for calculating the value of their qualifying activities.

The OCC’s stated intent of issuing the new CRA final rule was to provide a more objective and consistent means for evaluating CRA-related activities. Hopefully, this will be the outcome and the costs of execution and transition will be worthwhile. However, the final regulations and related preamble make it clear that there are critical items that the OCC must still provide guidance on in order for banks to implement these new rules. In addition, it is imperative during this period of transition that an OCC regulated bank continues to monitor and adhere to all currently applicable CRA rules and regulations until specific aspects of the new CRA final rule take effect for it. Evidence of discriminatory or other illegal credit practices will continue to be assessed and can adversely affect a bank’s CRA performance evaluation outcome.

Although this article covers only key points of the final rule, additional information will be forthcoming in future articles covering various provisions of the new CRA rule in greater detail.