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CRA modernization proposal: What you need to know

Sep 19, 2022

The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, Treasury issued a joint proposal on May 5, 2022, that modernizes the Community Reinvestment Act (CRA) to encourage banks to better meet the needs of people in low- and moderate-income communities.

Here’s a rundown of the regulatory changes and how they may apply to your institution.

Ratings and asset size thresholds

Ratings would be determined through a weighted average approach that would translate performance in all assessment areas into ratings. Banks would be assigned a rating of outstanding, high satisfactory, low satisfactory, needs improvement or substantial noncompliance.

The proposal would change the asset size thresholds as follows (adjusted annually for inflation):

  • Small bank: Average assets of less than $600 million in both of the two prior calendar years
  • Intermediate bank: Average assets of at least $600 million in both of the two prior calendar years and less than $2 billion in either of the two prior calendar years
  • Large bank: Average assets of at least $2 billion in both of the two prior calendar years

Assessment areas

All banks would have facility-based assessment areas, which would be those areas established around a bank’s main office, branches and deposit-taking remote service facilities, such as an ATM. Large banks, wholesale banks and limited purpose bank assessment areas would be required to be one or more MSAs or metropolitan divisions or one or more contiguous counties. Intermediate and small banks could designate partial counties. 

Large banks would have a retail lending assessment area that would be based on concentrations of home mortgage or small business lending outside of facility-based assessment areas. Intermediate banks have the option to opt into the retail lending test.

In addition, large banks and certain intermediate banks would be evaluated on retail lending outside of the facility based and retail lending assessment area using a tailored benchmark.

Overall evaluation framework

Small banks Intermediate banks Large banks Wholesale and limited purpose banks
Existing lending test or retail lending test Retail lending test Retail lending test
Retail services and products test
Existing community development (CD) test Or CD financing test CD financing test and CD services test CD financing test

Retail lending test: Applies to intermediate and large banks; optional for small banks 

The retail lending test would apply to intermediate and large banks. Small banks would have the option to opt in to the testing or be tested based on the existing lending test. There would be a major product line standard when a bank is evaluated on a specific retail lending product (i.e., home mortgage, small business, small farm, automobile). Major product lines would be separately determined in each assessment area and outside of the retail lending area. 

Retail lending metrics would include retail lending volume screening, geographic distribution metric and borrower distribution metric and will be compared to measurable criteria to provide an objective rating.

Retail services and products test: Applies to large banks 

The retail services and products test would apply to large banks. It includes delivery systems related to branch availability and services and remote service facility (e.g., ATM) availability. In addition, for large banks with assets over $10 billion, the test would cover digital and other delivery systems (e.g., mobile and online banking).  

Responsiveness of credit products and programs would be considered for large banks, and availability and usage of responsive deposit products would also be considered for large banks with assets over $10 billion. 

Testing would include quantitative benchmarks to evaluate branch and ATM distribution and to identify areas with lower access to bank branches. Tests would also include a  qualitative evaluation of responsiveness of credit and deposit products to the needs of low-to-moderate income individuals, small businesses and small farms. 

Community development, general: Applies to intermediate and large banks 

The proposal included 11 community development categories that would build on the existing community development definition and are intended to provide greater clarity on the activities that would qualify as community development. 

For large banks (and intermediate banks opting into the community development financing test), credit would be available for all eligible community development loans, investments and services conducted anywhere (nationwide), including those areas outside of the bank’s facility-based assessment area. Consideration would be given at the state, multistate MSA and institution levels (as applicable) when being evaluated under the community development financing test and the community development services test. 

Community development financing test: Applies to large banks; optional for intermediate banks 

The community development financing test would apply to large banks. Intermediate banks would have the option to opt in to the testing or be tested based on the existing community development test. Testing would determine whether the bank met the community development financing needs in the bank’s facility-based assessment areas, and at the state, multistate MSA and institution levels (as applicable). 

Testing would include a community development financing metric, standardized benchmarks for evaluating the metric, and the use of an impact review to encourage activities that are particularly impactful or responsive. The metric would evaluate the dollar amount of a bank’s community development financing (loans and investments) relative to the bank’s deposit base. 

Community development services test: Applies to large banks 

The community development services test would apply to large banks. Testing would evaluate the extent of community development services by the bank, as well as the impact and responsiveness of those activities. Community development services in nonmetropolitan areas would also include activities unrelated to the provision of financial services. 

Testing would include a qualitative review of relevant community development service data (e.g., number of activities, total service hours) and an impact review to encourage services that are particularly responsive. In addition, for large banks with over $10 billion in assets, the evaluation would include a quantitative review using a standardized metric (i.e., community development service hours per full-time employee).

Data collection and reporting for intermediate and large banks 

Small and intermediate banks would have no new data requirements, unless the intermediate bank opts into the community development financing test.

Large banks would have to document assessment area delineations, plus collect small business and small farm data, data for HMDA reporters, retail services and product data for branch and remote service facilities, and community development financing data.

Large banks with assets over $10 billion would also have to collect automobile lending data, deposit data by county, retail services and product data for digital and other delivery systems and responsive deposit products, and community development services data.

Wholesale and limited purpose banks would have to document assessment area delineations, automobile lending data if they have assets over $10 billion, and community development financing data.

How Wipfli can help 

Wipfli specialists can help prepare your financial institution so you can feel confident in your compliance. Understanding the proposed changes and their impact on your CRA program can go a long way in in boosting your performance and producing excellent results. Contact us to learn more.  

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Author(s)

Tracy Bush, CRCM
Senior Manager
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