ComplianceDecember 13, 2019

Regulatory efforts to modernize the Community Reinvestment Act (CRA): what you need to know

On December 12, 2019, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) approved for publication in the Federal Register a joint Notice of Proposed Rulemaking (NPR) to modernize the regulations that implement the Community Reinvestment Act of 1977. The comment period will run for 60 days from publication.

The OCC, FDIC, and Federal Reserve have responsibility for administering the CRA. Usually, all three agencies participate in CRA rule writing efforts together. In this case, the OCC and FDIC acted without the Federal Reserve. The Federal Reserve may move forward on its own at some point as the regulatory process unfolds.

What is the objective of CRA regulatory modernization effort and what are the key features of the NPR?

The objective of the NPR is to better achieve the law’s underlying purpose of encouraging banks to serve their communities by making the regulatory framework more objective, transparent, consistent, and easy to understand. The regulation was last substantively updated in 1995 and there have been significant changes in the banking industry since that time.

The primary goals of the NPR are to:

  1. Clarify what activities count under the CRA by articulating clear standards and publishing an illustrative list of those activities that qualify;
  2. Address where that activity counts by updating how banks define their assessment areas;
  3. Revise the methodology and standards used by examiners to evaluate CRA performance and provide presumptive benchmarks for what levels of CRA activity constitute Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance ratings; and,
  4. Improve the transparency and timeliness of reporting information about CRA activity to better allow stakeholders and bankers to gauge CRA performance throughout the evaluation cycle and speed up regulatory decision making.

The agencies are soliciting comments on all aspects of the NPR and specifically seeking input on an extensive set of 22 questions, some with multiple subparts, about the approaches taken in the NPR on each of the aforementioned primary goals.

The content and structure of the proposed regulation are much different than the current rule, although many key features of the current rule are retained. For example, Strategic Plans and the provisions relating to how evidence of discrimination or other illegal credit practices can adversely affect a bank’s performance rating remain in the proposed rule. 

Among the many notable changes in the NPR, the agencies are proposing to revise the distinctions in the current regulation for small, intermediate small, and large banks. Under the proposal, the agencies establish new performance standards to evaluate banks other than small banks. Small banks would be defined as those with assets of $500 million or less in each of the previous four calendar quarters. That figure would be increased annually for inflation. Small banks could choose to be evaluated under the current small bank performance standards unless they are evaluated under an approved strategic plan or opt-in to be evaluated under the new performance standards The proposed performance standards applicable to banks and those small banks that opt-in to be evaluated under them assess two fundamental components: (1) the distribution of qualifying retail loans (including home mortgage, small loans to businesses, small loans to farms, and consumer loans); and, (2) the impact of a bank’s qualifying activities measured by the value of those activities relative to its retail domestic deposits. Presumptive ratings would be based on performance at the bank and assessment area levels under these standards, as well as certain minimum CD lending and investment requirements. The proposed regulation would also impose both new and revised data collection, retention, and reporting requirements for CRA activities as well as retail domestic deposits. Finally, the proposed rule makes substantial changes to the current assessment area construct by introducing the concept of “deposit-based assessment areas” applicable to banks that meet certain tests regarding deposit levels outside their “facility-based assessment areas.”

What is the impact of the NPR on a bank’s CRA program?

For the immediate future, and until a final rule is issued, there is no direct impact on day-to-day operations. However, over the longer term, CRA regulatory modernization is expected to have significant implications for the industry. For example, CRA compliance strategies, policies and procedures, analysis of CRA performance, examination preparation efforts, the designation of assessment areas, and the collection, maintenance and reporting of certain data are expected to change. Banks will no doubt realize this as they evaluate the NPR and plan for the future.

In the coming months, Wolters Kluwer experts will provide instruction on how the new rule will likely impact (or not impact) institutions regulated by the OCC and FDIC. Should the Federal Reserve follow with a proposed rule of its own, we will provide guidance on that NPR as well.

How is Wolters Kluwer preparing for future changes to the CRA regulation?

Wolters Kluwer vigilantly monitors the regulatory landscape and oversight trends to determine how changes or developments could impact our banking customers. Regarding CRA regulatory modernization, our Advisory Services and Compliance Analytics product teams have always monitored CRA activity and industry conversations related to updating the CRA regulation and are actively preparing for the future impact of a final rule.

How does Wolters Kluwer help with CRA compliance?

Wolters Kluwer provides CRA Wiz, a leading technology solution that helps U.S. banks manage their CRA obligations and assess their CRA performance. CRA Wiz has continued to be the industry standard for more than two decades. Wolters Kluwer also hosts an annual CRA & and Fair Lending Colloquium, a three-day conference that brings together CRA professionals to intensively focus on this area. Given our prominent role in helping advance and facilitate CRA compliance through technology and our consulting services, Wolters Kluwer has long anticipated the NPR and is actively evaluating its potential impact on the industry and our CRA Wiz clients.