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OCC, FDIC unveil highly anticipated update to Community Reinvestment Act

A long-awaited plan to revamp anti-redlining rules impacting low- and moderate-income communities has finally been revealed.

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. unveiled a proposed rule to modernize the Community Reinvestment Act, or CRA, in an effort to clarify rules and infuse less-wealthy neighborhoods with cash and investments.

The CRA is a 1977 law that requires banks to serve communities where they have a physical presence, striving to prevent banks from excluding low- and moderate-income neighborhoods and businesses from accessing financial services.

But the rule has not been significantly updated since the 1990s, meaning it does not account for the myriad technological innovations that have altered the industry and the way in which consumers interact with it.

Currently, over the course of three-year examination cycles, banks are rated on a four-tier scale based largely on subjective measures that are open to interpretation by examiners, rendering the exercise ineffective and inefficient, proponents of the update say.

In the proposal, regulators are seeking to answer three key questions that have weighed on banks and examiners alike in the modern banking era:

  1. What counts for CRA credit?
  2. Where does it count?
  3. How can CRA be measured more objectively?

What counts

For the first time, Joseph Otting, head of the OCC, said regulators have drawn up a list of items targeting low-to-moderate-income, or LMI, communities and businesses that count for CRA credit.

Most notably, the proposal specifically lists loans to small businesses, "family farm" loans up to $2 million, and banking activities in Native American reservations and areas as credit-worthy. Investments and deposits into minority-owned banks would also count for CRA credit under the new framework.

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Excluded, however, are home mortgages that have typically been bought or sold in mortgage-backed securities packages. Otting said, historically, banks would receive CRA credit for buying mortgages in LMI areas in MBS transactions while not "flowing a single dollar into LMI areas."

"We have, I think, closed the loopholes where people perhaps got credit for activities that didn't support low-to-moderate-income [communities]," Otting said in an interview. "And actually, now, we'll have the ability to unleash capital and lending to support low-to-moderate-income [areas]."

The proposal builds in a formal process to regularly update the list and continually solicit input from stakeholders to submit additional items to be included.

Where it counts

According to proponents of the updated rule, a major problem with the CRA's current framework is that examiners only assess banks' CRA activities in the physical locations around their headquarters, branches and deposit-taking ATMs, as well as areas where banks conduct high volumes of retail lending.

With modern technology, a bank could be nationally chartered but only have one physical location. It could draw deposits from many locations, yet only be evaluated by its single location.

"The current approach creates disincentives for banks to meet the needs of their entire communities or even their own customers if their communities or customers are located outside of the banks' assessment areas," the proposal states. "These disincentives serve to create CRA deserts and promote CRA hotspots."

The proposal preserves the provision of physical assessment areas, but it also requires banks to designate additional assessment areas where they draw a significant portion of deposits.

In addition, banks would be required to serve the surrounding geographies where they originated or purchased substantial portions of their loans.

Many ratios to measure CRA

A big concern during the rulemaking process was that regulators would use one ratio to measure CRA compliance. Community groups feared that a one-ratio policy, which would have measured a bank's total dollar amount of CRA activities divided by its total assets, would disincentivize banks from doing many small-dollar CRA activities.

The rule proposes a number of different "tests" that are open to adjustment by examiners if discrimination or illegal activity is found.

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The first test evaluates the overall dollar value of a bank's CRA-qualified activities, divided by its total bank retail deposits.

The second and third tests evaluate a bank's distribution of retail lending to ensure that a high amount of loans is not concentrated in a few areas or that a large amount of money is not spread among too few loans.

Another test would measure the dollar value of CRA-qualified activities in an assessment area divided by the dollar amount of bank retail deposits in that same area. This would be compared to a benchmark ratio that is being developed by regulators.

Also included in the proposal is a provision allowing banks with $500 million or less in assets to choose whether to stay under current rules or opt into the new framework.

The proposed rule is open for public comment for 60 days, and regulators hope to finalize the rule by the first half of 2020.