When the OCC issued its final Community Reinvestment Act (“CRA”) rule on May 20, 2020, the agency acted alone without waiting to achieve consensus with the FDIC, the agency with which the OCC had jointly issued its proposed rule. The FDIC declined to join the OCC’s CRA reform effort, despite seemingly being in lock-step with the OCC up until that point. As to the Federal Reserve Board (“FRB”), it had already bowed out of the CRA reform effort in 2019.

On the date the OCC issued its final rule, FDIC Chairman Jelena McWilliams issued a public statement indicating that “[w]hile the FDIC strongly supports the efforts to make the CRA rules clearer, more transparent, and less subjective, the agency is not prepared to finalize the CRA proposal at this time.” She went on to recognize the “herculean effort” community banks were making to help small businesses and families during the COVID-19 crisis, implying that the agency did not join the OCC in issuing the final rule because she did not want to add regulatory burden to FDIC-supervised banks during this challenging time. Chairman McWilliams did express support for the framework of the OCC’s CRA final rule, however, stating that she believed it would “greatly benefit” low- and moderate-income (“LMI”) communities and provide greater clarity to banks on CRA expectations.

In a later statement on June 26, 2020, Chairman McWilliams clarified that “the timing wasn’t right” for the FDIC to ask small community banks to meet new regulatory requirements and that her agency would wait until “peacetime” to finalize its CRA rule.

Because the FDIC was discussing the final rule with the OCC until shortly before the OCC issued it and appeared to agree on content but not timing of issuance of the final rule, we believe that it is likely that the FDIC will re-engage on CRA. That said, because of the criticism the OCC’s final rule has received, it is possible that the FDIC will assess that criticism before finalizing its rule. In any event, the FDIC could wait to act until the impacts of the COVID-19 pandemic are fully known and until after the presidential election in November.

With regard to the FRB, in testimony before the House Financial Services Committee on June 16, 2020, Fed Chairman Jerome Powell stated that his agency’s preliminary CRA reform work “won’t go to waste” because the FRB plans to move forward with its own proposal to update its CRA rules. He did not provide a time table for possible rulemaking activity, however. At this point, it seems likely that the FRB would defer any such efforts until after the presidential election.

For now, national banks must begin preparing to comply with the OCC’s final rule while state banks will continue to operate under the current rule until the FDIC determines whether it will adopt the OCC final rule and the FRB proceeds with its own proposed CRA reform. Currently, it seems possible that state member banks and non-member banks may operate under different CRA rules in the future. Although the FDIC is likely to adopt the OCC’s final rule for the reasons previously discussed, it is possible that each regulator will have its own CRA framework. While CRA modernization is called for, having two or three CRA regulatory frameworks creates uncertainty and may create competitive inequalities that could negatively impact the LMI customers the rule is designed to benefit. As noted in our most recent blog post, consumer advocacy and civil rights groups have argued that the OCC has now “fractured the interagency consensus around CRA enforcement,” and that appears to be true at this juncture.

This is the fourth in a series of five blog posts about the OCC’s CRA final rule. The first blog post described what changed from the OCC’s proposed rule to the final rule, and the second blog post explained differences among the OCC’s final rule, FDIC’s proposed rule and the FRB’s existing rule. Our third blog post described opposition to the OCC’s CRA final rule by consumer advocacy groups and Congress. Our next blog post will examine the impacts of CRA reform on community banks and how banks regulated by the FDIC and FRB should proceed in preparing for future CRA examinations.

Over the past six weeks, opposition to the OCC’s Community Reinvestment Act (“CRA”) final rule has hardened on two fronts.  The OCC’s decision to hurriedly issue the final rule on May 20, 2020 without achieving consensus with the FDIC, the agency with which the OCC had jointly issued the proposed rule, has drawn the ire of both consumer advocacy groups and Congress.

First, consumer advocates have vigorously opposed the rule. Within hours after the OCC issued its CRA final rule on May 20, a consortium of 15 consumer advocacy and civil rights groups issued a joint statement decrying the rule and calling on President Trump to immediately suspend it.  The groups argued that the OCC had “fractured the interagency consensus around CRA enforcement” by acting solo when CRA reform should be uniform for all depository institutions.  The groups also argued that the final rule had been hastily issued in the midst of a pandemic that was hitting lower-income communities and communities of color the hardest, which would be harmed by the rule at a time when the racial wealth gap is widening.

On May 21, 2020, the National Community Reinvestment Coalition (“NCRC”), the California Reinvestment Coalition (“CRC”), and Democracy Now announced their intent to sue the OCC, stating that the agency was “unlawfully gutting” the CRA and pointing out that the agency had issued the final rule just five weeks after the public comment period had closed on the proposed rule.  Citing the lack of a “fair and transparent” rulemaking process, the groups stated that they would see the OCC in court.

The NCRC and the CRC followed through on their promise by filing a lawsuit against the OCC and the Acting Comptroller Brian Brooks on June 25, 2020. Represented by Democracy Now, the two consumer advocacy groups filed suit in the U.S. District Court for the Northern District of California.  The plaintiffs’ complaint alleges that the OCC violated the Administrative Procedure Act in its haste to release the final and that the final rule lacks sufficient legal, analytical and public support.  In particular, the plaintiffs accuse the OCC of refusing to release the underlying data and analysis that went into the proposed rule and final rule, making it impossible for the groups to “fully and meaningfully” evaluate the new CRA framework due to the lack of a complete rulemaking record.  The plaintiffs also argue that the new rule would dilute bank investment in low- and moderate-income communities in ways that are “contrary to the letter and spirit” of the CRA.

In their complaint, the NCRC and the CRC seek declaratory and injunctive relief, specifically requesting that the court declare the OCC’s CRA final rule unlawful and set it aside. NCRC and CRC may have difficulty demonstrating the kind of injury needed to establish standing, however, so that could present a legal obstacle to the lawsuit proceeding.

Second, on June 11, House Democrats – led by Rep. Maxine Waters (D-CA) and Rep. Gregory Meeks (D-NY) – introduced a joint resolution to overturn the OCC’s CRA final rule (H.J. Res. 90).  The one paragraph resolution seeks Congressional disapproval of the OCC CRA final rule and to deem such rule of “no force or effect.”  The joint resolution introduced by Representatives Waters and Meeks was brought under the Congressional Review Act of 1996, which permits members of Congress to challenge an agency rule within 60 legislative days of publication.

On June 29, the House passed the joint resolution by a vote of 230 to 179, voting along party lines, and the resolution now goes to the Senate.  For the resolution to pass, it will require a majority vote of the Senate, as well as President Trump’s signature.  The joint resolution is unlikely to be passed by the Senate, much less reach the President’s desk, so steep hurdles remain.  But even though the joint resolution passed by the House is seen as largely symbolic, it could get traction in the current political and economic climate.

Senator Elizabeth Warren (D-MA), a strong voice in consumer protection, also opposes the CRA final rule.  On June 7, 2020, Senator Warren wrote a letter to Acting Comptroller Brian Brooks asking him to withdraw the CRA final rule immediately and to recuse himself from all future CRA rulemakings because of his previous work at OneWest Bank with former Comptroller Joseph Otting. OCC Acting Comptroller Brooks had served as Vice Chairman at OneWest Bank from 2011-2014, and the bank was sued in 2017 by community groups for alleged housing discrimination.  Senator Warren is among several contenders to be considered as a potential running mate for Democratic presidential candidate Joe Biden.

The NCRC, CRC and Democracy Now called the CRA a “civil rights law,” and Representatives Waters and Meeks also characterized the CRA as a civil rights law.  Although introduced in 1977 to address discriminatory lending practices in low- and moderate-income areas, including redlining, the CRA focuses not on civil rights, but on poverty and, in particular, the financial needs of low- and moderate-income individuals and their families.  This new development, while understandable following the nationwide protests against police violence arising following the deaths of George Floyd and Breonna Taylor, is noteworthy and focuses significant attention on the OCC’s final CRA rule.

With the upcoming presidential election and the way the New Civil Rights Movement is shaping public debate, it is possible that the OCC’s final rule could be either amended or withdrawn by the agency itself.  Alternatively, Democratic Senators may force a vote on the House’s Congressional Review Act resolution within the 60-day time table.  At a minimum, the Congressional Review Act resolution is a shot across the bow that should Democrats win back the White House, a new comptroller could rewrite the OCC’s CRA final rule.  Only time will tell as the consumer advocacy groups’ lawsuit gets underway and the politics in Washington unfold.

This is the third in a series of five blog posts about the OCC’s CRA final rule.  The first blog post described what changed from the OCC’s proposed rule to the final rule, and the second blog post explained differences among the OCC’s final rule, FDIC’s proposed rule and the Federal Reserve’s existing rule.

On May 20, 2020, the OCC issued a final rule to “strengthen and modernize” its existing Community Reinvestment Act (“CRA”) regulations.  This is the second in a series of five blog posts about the final rule.

The final CRA rule is an effort by the OCC to provide objective measures to evaluate the CRA performance of national banks and savings associations supervised by the OCC (including federal and state-chartered savings associations and uninsured federal branches of foreign banks).  These banks conduct a majority of all CRA activity in the United States.

The final rule is effective October 1, 2020 but sets mandatory compliance dates based on the applicable performance standards.  Banks subject to the general performance standards and banks subject to the wholesale and limited purpose bank performance standards must comply with the new CRA framework by January 1, 2023.  Small and intermediate banks must comply with the rule by January 1, 2024.  Until compliance with the final rule, national banks and federal savings banks must comply with the OCC’s current rule.  Until the FDIC and Board of Governors of the Federal Reserve System take action, state nonmember banks and state member banks will continue to comply with the current rule, as codified in 12 CFR Part 228 and Part 345.

The final rule establishes a series of metrics for evaluating CRA performance and utilizes call report data to determine the amount of qualifying activities (including mortgage, consumer, small business and small farm loans, community development lending and community development investments).  The OCC’s final rule diverges from the current rule in (a) its enumeration of qualifying activities; (b) how banks will delineate assessment areas; (c) the establishment of performance standards; and (d) data collection and data retention requirements.

Qualifying Activities

The current rule applies: (a) a lending test to evaluate a bank’s record of helping to meet the credit needs of its assessment areas through its lending activities by considering a bank’s home mortgage, small business, small farm, and community development lending; (b) an investment test to assess a bank’s record of helping to meet the credit needs of its assessment areas through qualified investments that benefit its assessment areas or a broader statewide or regional area that includes the bank’s assessment areas; and (c) a service test that examines a bank’s record of helping to meet the credit needs of its assessment area by analyzing both the availability and effectiveness of a bank’s systems for delivering retail banking services and the extent and innovativeness of its community development services.

Although the current rule contains definitions of “community development” “community development loans” and “community development services” it lacks comprehensive criteria for what qualifies for CRA consideration or guidance as to activities that have previously received CRA credit.

The final rule defines a “qualifying activity” as an activity that helps meet the credit needs of a bank’s entire community, including low- and moderate income individuals (LMI) and communities.  Qualifying activities include retail loans, community development loans, community development investments or community development services.

Qualifying retail loans include home mortgage loans, small loans to a business, small loans to a farm and consumer loans if the loans are: (1) provided to an LMI individual or family, a CRA-eligible business or a CRA-eligible farm; (2) located in Indian country or other tribal and native lands; (3) a small loan to a business located in an LMI census tract; or (4) a small loan to a farm located in an LMI census tract.

A community development loan, community development investment, or community development service is a “qualifying activity” if it provides financing for or supports:

  • affordable housing;
  • another bank’s community development loan, community development investment, or community development service;
  • community support services such as child care, education, workforce development, job training, health services or housing services that partially or primarily serves LMI individuals or families;
  • economic development activities that provide financing or support for businesses or farms;
  • essential community facilities that partially or primarily serve LMI individuals or families or “Qualifying Areas,” which include LMI census tracts, distressed areas, underserved areas, disaster areas or Indian country;
  • essential infrastructure that partially or primarily serves LMI individuals or families or Qualifying Areas;
  • a family’s farm;
  • federal, state, local, or tribal government programs, projects, or initiatives that: partially or primarily serve LMI individuals or families or qualifying areas;
  • financial literacy;
  • owner-occupied and rental housing development, construction, rehabilitation, improvement, or maintenance in Indian country or other tribal and native lands; qualified opportunity funds that benefit LMI qualified opportunity zones; or
  • other activities and ventures undertaken, including capital investments and loan participations, by a bank in cooperation with a minority depository institution, women’s depository institution, Community Development Financial Institution, or low-income credit union, if the activity helps to meet the credit needs of local communities in which these institutions are chartered.

To promote clarity, the final rule provides for the publication of a qualifying activities list that contains non-exhaustive examples of qualifying activities.  To promote innovation, any interested party (including a bank or community group) may request confirmation that an activity is a qualifying activity.  The final rule provides that the OCC will respond directly to requests for confirmation and post those responses to its website, which banks may use as interpretive guidance to determine whether particular activities meet the qualifying activities criteria.  The preamble notes that the OCC plans to publish the list of qualifying activities on its website in a searchable format and update it annually.

Under the final rule, a bank evaluated under the general performance standards will calculate a qualified activities value (“QAV”) annually.  The QAV is the sum of: (1) the quantified dollar value of qualifying loans and community development investments; and (2) the aggregate quantified dollar value of community development services, the quantified dollar value of in-kind donations made during the year and the quantified dollar value of monetary donations made during the year.  Multipliers are applied in calculating the QAV (provided the quantified dollar value of a bank’s current evaluation period community development loans, community development investments, and community development services is approximately equal to the quantified dollar value of these activities considered in the bank’s prior evaluation period) for (a) activities that support minority depository institutions, women’s depository institutions, CDFI’s and low income credit unions, community development investments, community development services, affordable housing and retail lending by branches located in LMI census tracts; and (b) activities in “CRA deserts.”  The OCC maintains a list of CRA deserts and banks may request confirmation of new CRA deserts.

Assessment Areas

Under the current rule, a bank other than a wholesale or limited purpose bank must delineate an assessment area that includes the geographies in which the bank has its main office, its branches, and its deposit-taking ATMs, as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans.

With one exception, the final rule maintains a facilities-based approach to the delineation of CRA assessment areas. Under the final rule, a bank’s assessment areas include each location where the bank maintains a main office, a branch, or a non-branch deposit-taking facility that is not an ATM and the surrounding locations in which the bank has originated or purchased a substantial portion of its qualifying retail loans.  Although the final rule does not require a bank to delineate an assessment area where it maintains only a deposit-taking ATM, the final rule permits a bank to do so.  The facility-based assessment area must include a whole MSA; the whole non-metropolitan area of the state; one or more whole, contiguous metropolitan divisions in a single metropolitan statistical area; or one or more whole, contiguous counties or county equivalents in a single metropolitan statistical area or nonmetropolitan area.

Although the final rule generally employs a facilities-based approach to the delineation of CRA assessment areas, the final rule does provide that a bank that receives 50 percent or more of its retail domestic deposits from geographic areas outside of its facility-based assessment areas must delineate separate, non-overlapping assessment areas where it receives 5 percent or more of its retail domestic deposits.  Practically, this will require all institutions to geocode deposits and this will significantly impact branchless banks which will have to delineate as CRA assessment areas geographies that they have previously ignored.

Performance Standards

The current rule does not contain objective performance standards to evaluate CRA performance.

The final rule maintains small bank and intermediate bank performance standards, which was a major victory for the banking industry.  It also retains wholesale and limited purpose bank performance standards and retains the option for banks to submit and be evaluated under a strategic plan, which are also beneficial for the industry.

For banks evaluated under the general performance standards pursuant to the final rule, the OCC will assess, in applying the final rule, the CRA performance based upon an application of the general performance standards and determination of its presumptive ratings.

A bank evaluated under the general performance standards will determine its bank CRA evaluation measure and its assessment area CRA evaluation measures annually.  A bank’s CRA evaluation measure is the sum of: (1) the bank’s annual 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 divided by its total number of branches multiplied by .02.  A bank’s assessment area CRA evaluation measure is determined in each assessment area and is 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 will apply a geographic distribution test and borrower distribution test on the CRA loans and evaluate whether the bank passes the test by looking at the demographics of the area or activities of peer banks.  By way of example, the OCC will compare a bank’s whole mortgage loans originated in LMI tracts to either (a) the percentage of owner-occupied housing units in the area; or (b) peer home mortgage loans originated in the area.  This activity will be repeated for other product lines.

The OCC will adjust performance standards periodically, considering factors such as the level of qualifying activities conducted by all banks, market conditions, and unmet needs and opportunities

A bank’s assigned CRA rating will be determined based on the bank’s presumptive rating adjusted for performance context. Performance context is also considered under the current rule and the factors are similar, including: (1) how the Bank’s capacity to meet the performance standards was effected by its product offerings and business strategy, unique constraints (including financial condition), 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.

Data Collection and Retention

Although the current rule requires a bank to collect, maintain and report certain loan information, consumer loan data was optional, deposit data is not reported and, in general, the data collection and reporting requirements are less burdensome than under the final rule.

The final rule requires all OCC-regulated banks to collect and maintain data and supporting information throughout the assessment period.  Banks evaluated under the general performance standards or a strategic plan must 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.

Importantly, the OCC deferred setting benchmarks in the final rule, indicating an intention to gather more data to calibrate benchmarks, thresholds and minimums in a future Notice of Proposed Rulemaking.  Those benchmarks, in addition to changes made regarding qualifying activities, delineation of assessment areas, the performance standards and data collection and data retention, will significantly impact banks subject to the final rule.

To read our first blog post in which we discussed key differences between the OCC’s proposed rule and its final rule, click here.

The CFPB has entered into a consent order with three companies to settle the Bureau’s claims that the companies violated the Dodd-Frank UDAAP prohibition and the FCRA in connection with contracts for deeds that they issued and serviced.  The settlement requires one of the companies to pay a $25,000 civil money penalty and the two other companies to jointly pay a $10,000 civil money penalty.

The consent order includes the following findings and conclusions of law:

  • Because the contracts for deeds required consumers to repay a fixed principal amount over a term of years with interest, they constituted “credit” and the company that issued the contracts (Harbour Portfolio Advisors) was a “covered person” subject to the Bureau’s jurisdiction.
  • The other two companies (National Asset Advisors and National Asset Mortgage (NAM)) were “covered persons” subject to the Bureau’s jurisdiction because they serviced the contracts by collecting payments, handled consumer disputes, and spoke with consumers about the contracts’ terms.
  • In carrying out its business to acquire foreclosed properties in bulk, at auction, from entities such as Fannie Mae and Freddie Mac, and resell them to individual consumers, Harbour typically targeted potential buyers who were unable to obtain conventional financing.
  • NAM furnished information about consumers’ payment histories to consumer reporting agencies.
  • The companies engaged in deceptive acts and practices by telling consumers complaining about credit report information that they could only initiate a credit dispute by filing a dispute with a consumer reporting agency.
  • NAM violated the FCRA and Regulation V by failing to establish and implement adequate policies and procedures regarding the accuracy and integrity of information furnished to consumer reporting agencies.

In addition to imposing civil money penalties, the consent order prohibits the companies from misrepresenting or assisting others in misrepresenting, expressly or impliedly, how consumers can initiate consumer report disputes or any other material fact concerning their consumer reports, requires NAM to establish and implement reasonable written policies and procedures as required by the FCRA and Regulation V regarding the accuracy and integrity of information furnished to consumer reporting agencies and to implement a compliance plan, and requires Harbour to register for the Bureau’s consumer complaint portal.

On May 20, 2020, the OCC issued a final rule to “strengthen and modernize” its existing Community Reinvestment Act (“CRA”) regulations.  According to the agency’s press release, the final rule is designed to increase CRA-related lending, investment and services in low- and moderate-income (“LMI”) communities where there is significant need for credit, responsible lending, and greater access to banking services.  This is the first in a series of five blog posts about the final rule and related topics that we will publish in the next few weeks.

On June 22, 2020, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The OCC Issues Final CRA Rule – What Changed and What’s Next?”  In the webinar, we will be joined by special guest Kenneth H. Thomas, Ph.D.,  of Community Development Fund Advisors.  Click here for more information and to register.

The OCC acted alone in issuing the final CRA rule without waiting to achieve consensus with the FDIC, the agency with which the OCC had jointly issued the proposed rule. It is possible that Comptroller Joseph Otting wanted to see the final rule issued before he stepped down from his position just one week later.  In her public statement concerning the OCC’s final CRA rule, FDIC Chairman Jelena McWilliams appeared to indicate she did not want to add to state nonmember banks’ regulatory burdens during COVID-19 by adopting a final CRA rule at this time.

The preamble to the OCC’s final rule states that covered banks “conduct a majority of all CRA activity in the United States.”  Specifically, the final CRA rule applies to all national banks and savings associations supervised by the OCC, including federal and state-chartered savings associations, and uninsured federal branches of foreign banks.

The OCC’s proposed rule was generally designed to encourage banks to conduct more CRA activities in the communities they serve, including LMI areas, by clarifying and expanding the lending, investment and service tests.  Suggested improvements generally fell into four categories in the proposal: (1) clarifying which bank activities qualify for positive CRA consideration; (2) redefining how banks delineate assessment areas in which they are evaluated based on changes to banking business models over the past 25 years; (3) evaluating bank CRA performance more objectively; and (4) providing more transparent and timely reporting.  Importantly, the preamble to the final rule states the OCC’s goal, which is consistent with what the banking industry has sought in CRA reform for decades:

By moving from a system that is primarily subjective to one that is primarily objective and that increases clarity for all banks, CRA ratings will be more reliable, reproducible, and comparable over time.  Under the agency’s final rule, the same facts and circumstances will be evaluated in a similar manner regardless of the particular region or particular examiner.  CRA activities will be treated in a consistent manner from bank to bank.

The OCC received over 7,500 comment letters in response to its notice of proposed rulemaking (85 Fed. Reg. 1204, Jan. 9, 2020).  Based on comments from stakeholders, the OCC made many modifications to the proposed rule.  Set forth below are six changes from the proposed rule to the final rule that we would like to highlight:

  • Clarifying the importance of the quantity and quality of activities as well as their value. 
    • The final rule contains an illustrative list of qualifying activities and a process for confirming that a particular activity meets the qualifying activities criteria, which the OCC believes will help improve consistent treatment of qualifying activities by examiners.
    • Based on public comments, the OCC made changes to its proposed qualifying activities criteria to emphasize LMI activities in appropriate circumstances and to correct the “inadvertent exclusion” in the proposal of certain activities that qualify for CRA credit under the current framework.  An example is clarifying that, under the final rule, “community development investments” will receive the same CRA consideration as “qualified investments” receive under the current rule.  Equity equivalent investments that meet the definition of a “community development investment” and one of the qualifying activities criteria will also receive CRA credit as a qualifying investment under the final rule because they add value to LMI communities.  Another example is to continue to include consumer loans provided to LMI individuals to incentivize banks to offer such products but removing credit cards and overdraft products from the definition of “consumer loan” to reduce information gathering burden.
  • Increasing credit for mortgage origination to promote availability of affordable housing in low- and moderate-income areas.   
    • In response to public comments, the OCC agreed that CRA credit for affordable housing should remain focused on LMI individual and families and that the proposed inclusion of middle-income rental housing in the affordable housing criterion could divert critical resources from LMI communities.  Therefore, the final rule does not include middle-income rental housing in high-cost areas components of the affordable housing criterion or the definition of high-cost area.
    • The proposed rule defined home mortgage loans with reference to call reports but generally limited CRA credit to home mortgage loans made to LMI individuals and families to give proper emphasis to LMI lending activities.  Specifically, the proposed qualifying activities criteria included home mortgage loans to LMI individuals and families and Indian country borrowers.  Although the OCC adopted the qualifying criteria related to home mortgage loans as proposed, it added a geographic distribution test of home mortgage loans in response to public comments to promote lending in LMI census tracts.  The OCC also revised its examples in the CRA illustrative list of qualifying activities to clarify that FHA-guaranteed loans to LMI individuals or families will qualify for CRA consideration.
  • Clarifying credit for athletic facilities to ensure they benefit and support low and moderate-income communities.
    • The proposed rule included an example on the CRA illustrative list of an investment in a qualified opportunity fund established to finance improvements to an athletic stadium in an opportunity zone that is also an LMI census tract.  The example proved to be controversial, with commenters expressing concern that the proposal would create a new incentive by giving banks CRA credit for financing athletic facilities.  In response to these comments, the OCC noted that banks have received CRA credit for decades by financing athletic facilities that increase opportunities for economically disadvantaged individuals and areas.  Nonetheless, the OCC replaced the stadium example with an example that better reflects the type of athletic facilities that have been approved for CRA credit historically.  In addition, the agency clarified that it will continue to review and give CRA credit for athletic facilities based on the facts and circumstances of specific projects, either in the context of a CRA evaluation or a request for confirmation that such lending is a qualified activity.
  •  Deferring establishment of thresholds for grading banks’ CRA performance until the OCC assesses improved data required by the final rule.
    • Under the proposed rule, the OCC would have established empirical benchmarks for the average CRA evaluation measure associated with each rating category, thresholds for passing the retail lending distribution tests, and a two percent minimum for community development activities as a percentage of retail domestic deposits.  Commenters found these standards unclear and inadequate.  The OCC explained that the proposed performance standards were based on analyses of currently available historical data and its use of assumptions to estimate how banks would have performed from 2011-2017 under the proposed framework.  However, the agency conceded that the existing data was limited and indicated that it would gather more data and conduct further analysis to calibrate the performance standards for each of the three components of the CRA framework.
    • As a result, the final rule does not contain benchmarks for the CRA evaluation measures, a specific community development minimum, or thresholds for the retail lending distribution tests.  The OCC intends to issue a near-term notice of proposed rulemaking to solicit public comment on these performance standards and then set specific benchmarks, thresholds and minimums.
  • Preserving the intermediate small bank assessment category and raising the small bank asset size threshold.
    • The proposed rule had eliminated the intermediate small bank assessment category and created a small bank asset threshold of $500 million.  Any bank above $500 million in total assets would have been evaluated under the large bank assessment category.  The final rule includes a $600 million threshold for small banks and retains the intermediate small bank category of the current rule for institutions between $600 million and $2.5 billion in total assets.
  • Giving CRA credit to legally binding commitments to lend (such as standby letters of credit) that provide credit enhancement for qualifying activities based on the dollar value of the commitment and giving credit for retail loans sold.
    • The proposed rule did not provide an institution with CRA credit for legally binding (but unfunded) commitments to lend that otherwise met community reinvestment criteria.  The final rule gives credit, for example, to unfunded standby letters of credit issued in connection with a LMI housing development project.  Further, except for retail loans sold within 90 days of origination, the proposed rule generally quantified qualifying activities based on average month-end on-balance sheet values.  This meant that to receive credit for a qualifying residential mortgage loan, a bank would have had to hold the loan for more than 90 days.  The final rule provides that retail loan originations sold at any time within 365 days will receive credit for 100 percent of the origination value.  For example, a $100,000 mortgage loan held for 90 days before being sold on the secondary market would receive $100,000 credit for a 12-month period rather than a $25,000 credit for its on-balance sheet period.

The final rule is effective on October 1, 2020.  All banks subject to the general performance standards (banks over $2.5 billion in assets) must comply by January 1, 2023, and all small and intermediate banks must comply with the rules’ assessment areas, data collection and recordkeeping requirements (as applicable) by January 1, 2024.  Until the compliance date is reached, banks must continue to comply with parts 25 and 195 of the OCC’s regulations (12 C.F.R. parts 25 and 195) that are in effect on September 30, 2020.

The OCC’s “go it alone” approach will certainly set up a dichotomy among the prudential regulators’ CRA rules going forward, and it remains to be seen when (or if) the FDIC will finalize its proposed CRA rule.  Our next blog post will address differences among the OCC’s final rule and the Federal Reserve’s existing regulations.

 

 

 

 

 

The OCC has issued a final rule revising its regulation implementing the Community Reinvestment Act (CRA).  The final rule applies to national banks and federal savings associations.

Although the OCC’s proposed revisions were issued jointly with the FDIC, the FDIC did not join in the final rule.  FDIC Chairman Jelena McWilliams issued a statement in which she indicated that although the FDIC continues to support CRA reform, “the agency is not prepared to finalize the CRA proposal at this time.”  The Fed has not yet issued a separate proposal.  Accordingly, Fed-member state banks supervised by the Fed and non-member state banks and savings associations supervised by the FDIC will be subject to different CRA compliance frameworks than national banks and federal savings associations supervised by the OCC.

The final rule is effective October 1, 2020 but sets mandatory compliance dates based on the applicable performance standards.  Banks subject to the general performance standards and banks subject to the wholesale and limited purpose bank performance standards must comply with the new CRA framework by January 1, 2023.  Banks subject to the small and intermediate bank performance standards must comply with the new CRA framework by January 1, 2024.  During the period between October 1, 2020 and the 2023 or 2024 compliance dates, the provisions of the current CRA regulation will remain in effect but the OCC may permit a bank to voluntarily comply, in whole or in part, with the new framework as an alternative compliance option.

While the final rule substantially tracks the OCC’s proposal, it does make some significant changes to the proposal that include:

Qualifying activities.  The final rule removes credit cards and overdraft products from the “consumer loans” for which banks can receive CRA credit.  It increases the loan size threshold for small loans to businesses and farms to loans of up to $1.6 million and increases the business and farm revenue thresholds to gross annual revenues of up to $1.6 million (with both thresholds to be adjusted for inflation every five years).  The “affordable housing” activities that receive CRA credit under the final rule do not include activities that finance or support middle-income rental housing in high-cost areas and the “essential infrastructure” activities that receive CRA credit under the final rule are limited to those that partially or primarily serve low- and moderate-income (LMI) individuals or families or LMI areas or other identified areas of need.  The final rule also adds a definition of “CRA desert” (underserved areas) and provides multipliers to increase the amount of CRA credit a bank receives for qualifying activities in these areas.  It also limits the qualifying activities that receive CRA credit to those conducted directly by a bank and does not provide credit for activities undertaken by bank affiliates as proposed.  For qualifying retail loans, the final rule quantifies originations sold at any time within 365 days at 100 percent of the origination value (in contrast to the proposal’s quantification of loans sold within 90 days of origination at 25 percent).

Qualifying activities list.  The final rule is accompanied by an illustrative list of qualifying activities.  It provides that the OCC will review the list every five years rather than every three years as proposed but will update the list annually to reflect requests from banks for confirmation that an activity qualifies for CRA credit.  The final rule shortens the approval process for such requests from six months to 60 days with the option of a 30-day extension.

Delineation of assessment areas.  The final rule adopts the proposal’s requirement that a bank that receives more than 50 percent of its retail domestic deposits from outside of its facility-based assessment areas must delineate separate deposit-based assessment areas where it receives 5 percent or more of its retail domestic deposits.  Unlike the proposal which would have required a bank to delineate such areas at the smallest geographic area where it receives 5 percent or more of its retail domestic deposits, the final rule gives a bank the option of delineating its deposit-based assessment areas at a larger area that includes such smaller areas, up to an entire state.  The final rules allows a bank to change its assessment area designations once a year.

Measuring CRA performance.  The final rule:

  • Raises the asset threshold for “small banks”  and “intermediate banks” that continue to be evaluated under the current small and intermediate bank performance standards (unless they opt into the new general performance standards) to, respectively, $600 million and $2.5 billion.
  • Instead of evaluating wholesale and limited purpose banks under the general performance standards or a strategic plan as proposed, evaluates such banks under the current performance standards applicable to them.
  • Provides that in applying the retail lending distribution tests, whether a product line qualifies as a “major retail lending product line” will be based on a bank’s originations in the two years preceding the beginning of the evaluation period rather than on originations during the evaluation period as proposed.  The final rule also (1) clarifies that when determining which product lines qualify as a “major retail product line,” each of the three consumer lending product lines (considered in the tests) will be treated as a separate product line for purposes of reaching the 15 percent threshold, and (2) provides that a bank will be required to have at most two major retail product lines and if more than two product lines comprise more than 15 percent of a bank’s retail lending, the two largest retail product lines will be considered a “major retail product line.”
  • While only counting home mortgages to LMI individuals for purpose of a bank’s CRA evaluation measure, applies a geographic distribution test to a bank’s home mortgage loan product line even though it will result in positive consideration to loans provided to middle- or high-income borrowers in LMI areas.
  • Unlike the proposal, does not contain benchmarks for the CRA evaluation measure, a specific community development lending and investment minimum, or thresholds for the retail lending distribution tests.  In the Supplementary Information accompanying the final rule, the OCC indicates that these items were not included in the final rule because “the data that the OCC gathered in response [to its RFI to gather additional data] was too limited to reliably calibrate these measures for all banks subject to the general performance standards.”  The OCC states that it will “shortly” issue another Notice of Proposed Rulemaking “that will explain the process the agency will engage in to calibrate more precisely the requirements for each of three components of the objective evaluation framework” and will set specific measures once it considers comments and analyzes additional data.
  • For banks that use the strategic plan option for their CRA evaluations, shortens the time frame for approval of a plan from the proposed nine months to 90 days with a potential 30-day extension.

Data collection, recordkeeping, and reporting.  The final rule requires banks to report the results of their retail lending distribution tests and their presumptive ratings at the end of the evaluation period instead of annually as proposed.  The final rule does not specify the length of an evaluation period but the OCC indicates in the Supplementary Information that it expects that, in general, evaluation periods will be between three and five years in length.

We will share our reactions to the final rule in subsequent blog posts.

Twenty-one state attorneys general and the District of Columbia attorney general have sent a letter to the three nationwide consumer reporting agencies (CRAs) “to remind them” of their legal obligations under federal and state law as well as under agreements between the AGs and the CRAs entered into in 2015.

The letter appears intended to serve as a warning to the CRAs that they should not take comfort from the CFPB’s “recent announcement suggest[ing] that it will not enforce the FCRA’s 30- or 45-day deadline to investigate consumer disputes requirements during the COVID-19 crisis.”  The AGs reference the April 13 letter that they sent to CFPB Director Kraninger asking the CFPB to immediately withdraw its guidance regarding credit reporting during the COVID-19 pandemic and “resum[e] vigorous oversight of consumer reporting agencies and enforcement of the FCRA.”  The CFPB stated in the guidance that it “will consider a consumer reporting agency’s or furnisher’s individual circumstances and does not intend to cite in an examination or bring an enforcement action against a consumer reporting agency or furnisher making good faith efforts to investigate disputes as quickly as possible, even if dispute investigations take longer than the statutory framework.”

In their letter to Director Kraninger, as they do in their letter to the CRAs, the AGs mischaracterize the CFPB’s statement in the guidance, claiming that the CFPB suggested it will no longer take enforcement or supervisory actions against CRAs for failing to investigate consumer disputes in a timely fashion.  Their letter to the CRAs also mischaracterizes Director Kraninger’s response to their April 13 letter as not giving any assurances regarding the CFPB’s intent to enforce the FCRA’s dispute investigation deadlines.  In fact, Director Kraninger specifically refuted the AGs’ characterization of the CFPB’s statement and indicated that while the Bureau will consider an entity’s good faith compliance efforts, it “will not hesitate to take public enforcement action when appropriate against companies or individuals that violate FCRA or any other law under our jurisdiction.”

While conceding in their letter to the CRAs that the CFPB intends to enforce the CARES Act provision that requires lenders to continue reporting loans as current if they were current before a forbearance or other accommodation, the AGs indicate that they “will actively monitor for and enforce” compliance with this provision.  With regard to dispute investigations, the AGs similarly indicate that they “will actively monitor for and enforce CRAs’ compliance” with their obligations “to conduct meaningful and timely investigations of consumer disputes of credit information” and “will not hesitate to hold CRAs accountable if they fail to meet these obligations.”  The AGs also include a warning that that intend to “monitor furnishers to ensure that they do not improperly report negative credit information.”

 

Senator Elizabeth Warren, joined by a group of other Democratic Senators and Senator Bernie Sanders, sent a series of letters to companies that service private student loans requesting “a detailed report of the steps your company is taking in response to the COVID-19 pandemic and economic emergency to mitigate the financial burden facing your student loan borrowers.”

The Senators urge the companies to immediately take the following steps “to ensure that your private student loan borrowers are best positioned to weather the economic fallout of the coronavirus pandemic”:

  • Allow borrowers to suspend payments without fees or consequence. Companies should suspend payments without fees, restrictions, or consequences to borrowers’ credit, and make this relief automatic for all borrowers, but at a minimum, for all delinquent borrowers, to ensure that interest does not accrue or capitalize, and provide notice and guidance to borrowers to help them resume repayment once the pandemic subsides.
  • Ensure that payment suspension does not trigger cosigner consequences. Companies should suspend monthly payments for borrowers without any penalties (financial or otherwise), payment obligations, or credit consequences for cosigners (who tend to be older Americans most vulnerable to COVID-19).
  • Immediately halt all involuntary collection efforts. Companies should immediately halt all involuntary debt collections efforts, including any lawsuits against borrowers who have defaulted or are delinquent on their loans.
  • Cancel or discharge loans of distressed borrowers. Companies should cancel or discharge as many delinquent loans as possible during the pandemic, and especially the loans of borrowers who have filed for bankruptcy or who are otherwise in clear financial distress that will inhibit their ability to ever fully repay their loans.
  • Expand loan modification and affordable repayment options. Companies should permanently provide additional, affordable repayment and loan modification options for private student loan borrowers, including options for borrowers who see long-term changes in their income.

While the Senators point to the protections provided by the CARES Act for federal student loan borrowers, the ability of servicers to provide similar protections in the private student loan context is more complicated due to securitizations, bond issuances, and the need to get consent from trustees, investors, and bondholders,

The Senators ask the companies to provide their reports by April 20, 2020 and to include in the reports details about a company’s “specific plans” to address each of the steps that the Senators are urging companies to take.

 

The CFPB announced that it has entered into a settlement with Cottonwood Financial, Ltd., to resolve alleged violations by Cottonwood of the CFPA, FCRA, and TILA  in the course of marketing, servicing, and collecting on payday, auto title, and unsecured consumer installment loans.  Cottonwood operates approximately 340 retail lending outlets in Idaho, Illinois, Michigan, New Mexico, Texas, Utah, and Wisconsin under the name Cash Store.  The consent order requires Cottonwood to pay a civil money penalty of $1.1 million and $286,675.64 in consumer redress.

According to the findings and conclusions in the Consent Order, Cottonwood engaged in the following unlawful activities:

  • Collection activities.  Cottonwood engaged in unfair practices in violation of the CFPA by: routinely calling consumers’ employers, references, and other third parties to obtain payments from the consumer rather than to locate the consumer and frequently disclosed to such third parties the existence of the consumer’s debts; calling consumers’ workplaces multiple times a day despite being told that the consumers were not allowed to receive calls at work; and calling consumers’ references or other third parties even after being asked to stop making such calls.
  • Marketing.  Cottonwood engaged in deceptive practices in violation of the CFPA by falsely representing in television advertisements and telemarketing that consumers could “save 50%” on finance charges when it did not in fact provide that discount.  Cottonwood also violated TILA by failing to provide the annual percentage rate to consumers when they inquired over the phone about the cost of credit.
  • Credit reporting.  Cottonwood violated the FCRA by failing to maintain adequate policies and procedures concerning the accuracy and integrity of the information it furnished to consumer reporting agencies.

The $286,675.64 in consumer redress is intended to provide restitution of the difference between the amount of the discount actually received by consumers who used the discount code associated with Cottonwood’s advertisements offering a 50% discount and the full amount of a 50% discount on finance charges.  The consent order also prohibits Cottonwood from engaging in the practices that were the basis for the alleged violations.

 

The OCC and FDIC announced yesterday that they have extended the 60-day comment period for their joint proposal to revise their regulations implementing the Community Reinvestment Act that was published in the Federal Register on January 8, 2020.  As extended by 30 days, the comment period ends on April 8, 2020.

The California Reinvestment Coalition, which opposes the proposal, issued a statement responding to the agencies’ announcement in which it called the extension “a big win.”  The Coalition claimed that the extension “is a direct result of intense pressure from our members, allies and community groups nationally, as well as Congressional representatives, who recognized that more time is needed to review a proposal that will have profound impacts on communities of color.”