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Regulators may broaden some banks' CRA assessment areas

Federal regulators might add to how they assess banks' Community Reinvestment Act commitments, but physical branches would remain a critical component of CRA tests, Federal Reserve Governor Lael Brainard said March 12.

The new structure could see larger banks assessed using an additional area with the aim of encouraging them to pursue community development activities in larger areas "that may not neatly overlap" with their current assessment areas, she said. The more expansive definition could include CRA activities in states where banks have assessment areas.

Doing so would mark a shift from today's approach of gauging banks' performance under the CRA, a decades-old law that looks to ensure banks are serving low- and moderate-income communities. Right now, regulators rely on banks' branches and deposit-taking ATMs to define the geographic areas to be tested.

Regulators would continue using that approach when examining a bank's retail activities, Brainard said in a speech at a National Community Reinvestment Coalition conference. But the potential plan would use a broader assessment area for certain banks' community development activities, she added.

The current approach to scoring such activities has "proven challenging in practice," with banks making community development investments and later finding out they would not receive CRA credit because the activity was outside their assessment area, Brainard said.

The new possible structure could benefit "credit deserts — those perennially underserved rural areas or small metropolitan areas that may not have a bank branch or, if they do, may not constitute a major market for purposes of banks' CRA evaluations," she said.

She listed as an example her visit to the Pine Ridge Reservation in the southwest part of South Dakota. Right now, only one bank's assessment area may extend into Pine Ridge. But under regulators' potential plan, banks in Aberdeen, South Dakota, near the opposite corner of the state, may "be inclined to make such a community development loan with confidence it would get CRA consideration."

Brainard has been the Fed's point person in its interagency discussions on the CRA with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

The OCC took the first step last year toward changing the current CRA framework, seeking feedback from the public on potential adjustments regulators should make. The Fed and FDIC did not participate in the OCC's move, though they are reviewing the comments the OCC received and are talking with stakeholders about the issue.

The OCC's effort prompted some concerns that the agency would put out a plan on its own if the three agencies cannot agree to a joint proposal. Asked about that possibility, Brainard noted that one consistent message that regulators have heard is that the three agencies must all agree on any CRA proposal.

"We are very hopeful that we can move forward with one set of proposed changes," she said.