As we previously reported, the Office of the Comptroller of the Currency (“OCC”) rescinded its 2020 Community Reinvestment Act (“CRA”) final rule (the “2020 CRA Final Rule” or the “Rescinded Rule”) in December 2021 and has since been operating under a CRA framework largely based on the OCC’s 1995 CRA rule (the “1995 Rule”), which was adopted jointly with the Federal Reserve and the FDIC. After announcing in 2021 their intent to work collaboratively to update the CRA regulations to achieve a more consistent framework, revisions to the CRA’s implementing regulations were recently proposed by the three U.S. banking regulators (the “2022 Joint Notice” or the “Proposal”). According to the regulators, the Proposal builds upon previous agency proposals, stakeholder feedback, and research to achieve certain core objectives, some of which include accomplishing the statutory purposes of the CRA, adapting to changes in the banking industry, promoting transparency and public engagement, and creating a consistent regulatory approach amongst the three banking agencies.
In this blog post, we continue to explore the Proposal in more detail by discussing some key differences between the Rescinded Rule and the Proposal, namely differences in(1) how banks delineate assessment areas; (2) the evaluation framework used; and (3) data collection and data retention requirements.
(1) Assessment Areas and Areas for Eligible Community Development Activity
2020 CRA Final Rule:
- Under the Rescinded Rule, the facility-based assessment area of a bank (other than a wholesale or limited purpose bank) included the location of a bank’s main office, branches, or a non-branch deposit-taking facility that was not an ATM, the surrounding locations in which the bank had originated or purchased a substantial portion of its qualifying retail loans, and, at a bank’s discretion, the location of the bank’s deposit-taking automated teller machines. The facility-based assessment area included a whole Metropolitan Statistical Area (“MSA”), the whole non-metropolitan area of the state, one or more whole, contiguous metropolitan divisions in a single MSA, or one or more whole, contiguous counties or county equivalents in a single metropolitan statistical area or nonmetropolitan area.
- The Rescinded Rule also included a deposit-based assessment area component that applied to banks with 50 percent or more of their retail domestic deposits outside of their facility-based assessment areas. Banks that met this threshold and had locations with a concentration of 5 percent or more of the bank’s retail domestic deposits would be required to include that area as part of its CRA assessment area.
2022 Joint Notice:
- Under the Proposal, banks would continue to utilize a facility-based delineation for assessment areas, but the geographic requirements for delineating these areas would be based on bank size. For large, wholesale, or limited purpose banks, this would include one or more MSAs or metropolitan divisions or one or more contiguous counties within an MSA, metropolitan division, or nonmetropolitan area of a state. Small and intermediate banks could delineate facility-based assessment areas that include a partial county.
- The Proposal does not include the Rescinded Rule’s 50 percent – 5 percent rule that required a bank that collects deposits above 50 percent of their total retail domestic deposits from outside of its physical branch to delineate additional assessment areas in those areas where they draw more than a certain percentage of deposits.
- Large banks would also be required to delineate retail lending assessment areas where a bank has concentrations of home mortgage and/or small business lending outside of its facility-based assessment areas.
- Retail loans located outside any facility-based assessment area or retail lending assessment area for large banks, and outside any facility-based assessment area for intermediate banks with substantial outside assessment area lending, would be evaluated on an aggregate basis at the institution level.
- Banks would also receive CRA credit for any qualified community development activity, regardless of location.
Performance Tests and Standards
2020 CRA Final Rule:
- While the OCC’s Rescinded Rule retained the performance standards under the 1995 Rule for small and intermediate banks, wholesale and limited purpose banks, and retained the option for banks to submit and be evaluated under a strategic plan, the framework under the Rescinded Rule also applied a general performance standard (“GPS”) for larger banks in an effort to create a more objective measure of CRA performance.
- Banks evaluated under the GPS standard would determine their CRA evaluation measure as the sum of (1) the bank’s annual qualified activities value (“QAV”) divided by the average quarterly value of the bank’s retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual QAV; and (2) the number of the bank’s branches located in or that serve Qualifying Areas (e.g., areas that include LMI census tracts, distressed areas, underserved areas, disaster areas or Indian country) divided by its total number of branches multiplied by .02. A bank’s assessment area CRA evaluation measure was determined in each assessment area and was the sum of (1) the bank’s annual assessment area QAV divided by the average quarterly value of the bank’s assessment area retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual assessment area QAV; and (2) the number of the bank’s branches located in or that serve Qualifying Areas divided by its total number of branches in the assessment area multiplied by .02.
- In each assessment area, the OCC applied a geographic distribution test and borrower distribution test on the CRA loans and evaluated whether the bank passed by looking at the demographics of the area or the activities of peer banks.
- A bank’s assigned CRA rating was determined based on the bank’s presumptive rating adjusted for performance context, which included (1) how the bank’s capacity to meet the performance standards was affected by its product offerings and business strategy, unique constraints, innovativeness, and the bank’s business infrastructure and staffing; (2) how the bank’s opportunity to engage in qualifying activities was affected by demand and demographic factors; (3) competitive environment (including peer performance); (4) comments submitted regarding needs and opportunities; and (5) other relevant information.
2022 Joint Notice:
- Instead of the Rescinded Rule’s GPS model, the evaluation framework under the Proposal would include four tests: a Retail Lending Test, a Retail Services and Products Test, a Community Development Financing Test, and a Community Development Services Test. (See our prior blog post for a detailed explanation and analysis of the four tests.) The framework is tailored for differences in bank size and business model (e.g., large banks would be subject to all four tests, whereas small banks could opt into the Retail Lending Test if they chose not to be evaluated under the current small bank lending test). Current lending tests for small banks and the community development test for intermediate banks are substantially retained under the Proposal. A bank’s rating would be based on combining scores from its performance test in, as applicable, states, multistate MSAs, and at the institution level.
Data Collection, Recordkeeping, and Reporting Requirements
2020 CRA Final Rule:
- The Rescinded Rule required all OCC-regulated banks to collect and maintain data and supporting information throughout the assessment period.
- GPS-evaluated banks or banks choosing to be evaluated under a strategic plan were required to collect and maintain (along with supporting information) retail lending test distribution ratios, CRA evaluation measures and assessment area CRA evaluation measures, community development minimums and assessment area level community development minimums, qualifying loan data, data on non-qualifying loans, community development investment data and community development services data, retail domestic deposit data, and assessment area information.
2022 Joint Notice
- Under the Proposal, large banks (i.e., banks with assets over $10 billion) would be required to collect, maintain, and report additional data, such as deposits data, automobile lending data, retail services data on digital delivery systems, retail services data on responsive deposit products, and community development services data.
- All large banks would be required to report the delineation of their assessment areas based on: (i) the locations of their facilities; and (ii) where the bank has concentrations of home mortgage and/or small business lending outside of its facility-based assessment areas. Large bank reporting of facility-based assessment areas would include a list for each assessment area showing the states, MSAs, metropolitan divisions, and nonmetropolitan counties within each facility-based assessment area. Under the proposal, large banks would be required to delineate at least full counties for facility-based assessment areas. Large banks would also be required to collect and report annually to the agencies a list showing the MSAs and counties within each retail lending assessment area. The agencies could verify retail lending assessment area designations using HMDA and CRA small business/small farm data, and the agencies could explore calculating retail lending assessment areas for banks.
- Data requirements for intermediate banks and small banks would remain unchanged from the current requirements.
The OCC’s 2020 CRA Final Rule represented an attempt by the OCC to modernize its existing CRA regulations. The current framework under which the U.S.banking regulators have continued to operate since the rescission of the 2020 CRA Final Rule has become increasingly outdated given the changes in the way banking is done and how financial products and services are offered. The Proposal, if adopted in substantially the form as proposed, differs in some key areas from the Rescinded Rule, but nonetheless stands to modernize the existing CRA framework and potentially create a more consistent regulatory approach among the U.S .banking regulators. The comment period remains open until August 5, 2022.
In our next blog posts, we will cover how assessment areas are delineated under the Proposal, the Community Development Test, and the impact of the Proposal on small, intermediate, and large banks.
Tomorrow, we will be releasing a new podcast episode in which we discuss the Proposal with Kenneth Thomas who is widely-viewed as the nation’s leading CRA expert and has advised federal regulators on CRA reform.