OCC, FDIC, and Federal Reserve Publish Final Community Reinvestment Act Rule

Advisory

On October 24, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board (Federal Reserve) (collectively, the Agencies) finalized the long-awaited revised Community Reinvestment Act (CRA) rule (the Final Rule).¹ The Final Rule, which spans nearly 1,500 pages, aims to, among other things, (1) encourage banks to expand access to credit, investment, and banking services in low- and moderate-income (LMI) communities; (2) adapt the CRA rules to meet changes in the banking industry, most notably the rise of mobile and online banking; (3) provide greater clarity and consistency in the regulations and application of the regulations by the Agencies; and (4) tailor performance evaluations and data collection to bank size and type.² The Final Rule officially goes into effect on April 1, 2024, but the applicable date for most provisions is January 1, 2026.³ In particular, data collection and maintenance requirements go into effect on January 1, 2026,⁴ while data reporting requirements go into effect on January 1, 2027.⁵

Background

The CRA was enacted in 1977 and was designed to ensure that banks meet the credit needs of all of the communities in which they do business. To that end, the CRA requires each of the Agencies to (1) assess whether each bank they regulate meets the credit needs of its entire community, including LMI neighborhoods, consistent with the safe and sound operation of the bank; (2) publish written evaluations of each bank’s performance; and (3) consider each bank’s CRA evaluation when assessing a bank’s “application for a deposit facility” (e.g., the establishment of a new branch, the relocation of a branch or home office, a merger or consolidation with another bank, etc.).⁶ The CRA empowers each of the Agencies to issue their own regulations to implement the requirements of the CRA.⁷ After a bumpy attempt by the OCC to update its CRA rule unilaterally, the Agencies announced on July 20, 2021, that they would pursue a joint update of the CRA.⁸ The last major interagency overhaul of the CRA regulations was in 1995.⁹

Overview of Final Rule

Bank Asset Categories

Like the current CRA regulations, the Final Rule tailors the CRA evaluations based on bank asset size and business model. In updating the existing regulations, the Final Rule adjusts the thresholds as follows:

Large Banks. Banks with at least US$2 billion in assets as of December 31 in the preceding two calendar years will be categorized as “Large Banks.” Moreover, Large Banks with more than US$10 billion in assets face even higher obligations, such as increased data collection, maintenance, and reporting requirements.
Intermediate Banks. Banks with at least US$600 million in assets but less than US$2 billion in assets will be “Intermediate Banks.”
Small Banks. Banks with less than US$600 million in assets in either of the preceding two calendar years will be categorized as “Small Banks.”
Limited Purpose Banks. “Limited Purpose Bank” refers to a bank that is not in the business of extending certain loans (i.e., close-end home mortgage loans, small business loans, small farm loans, or certain automobile loans) to retail customers, except on an incidental and accommodation basis, and for which a designation as a limited purpose bank is in effect.¹⁰ This definition combines the definition of “limited purpose bank” and “wholesale bank” in the Proposed Rule.¹¹

Evaluation Framework

Under the Agencies’ new evaluation framework, there are eight potential methods of evaluating banks’ CRA performance: (1) the Retail Lending Test, (2) the Retail Services and Products Test, (3) the Community Development Financing Test, (4) the Community Development Services Test, (5) the Intermediate Bank Community Development Test, (6) the Small Bank Lending Test, (7) the Community Development Financing Test for Limited Purpose Banks, or (8) the strategic plan option.¹²

Under the Final Rule, the relevant activities of a bank’s “operations subsidiaries or operating subsidiaries” will be included in the bank’s performance evaluation. The Agencies will consider the relevant activities of the bank’s other affiliates at the bank’s request.¹³

Tests by Bank Size

Large Banks will be subject to (1) the Retail Lending Test, (2) the Retail Services and Products Test, (3) the Community Development Financing Test, and (4) the Community Development Servicing Test. The bank’s overarching score will be based on a weighted average of these four tests: 40% for the Retail Lending Test, 10% for the Retail Services and Products Test, 40% for the Community Development Financing Test, and 10% for the Community Development Servicing Test. The weighted average proposed in the Final Rule reduces the percentage weights for the Retail Lending and Retail Services and Products Tests and increases the weight for the Community Development Financing Test.
Intermediate Banks will be subject to (1) the Retail Lending Test and (2) either the (A) current community development test (referred to as the “Intermediate Bank Community Development Test” in the Final Rule) or, at the bank’s discretion, (B) the Community Development Financing Test. The overarching score for Intermediate Banks will be equally weighted between the two tests.
Small Banks will be subject to either the current small bank test (referred to as the “Small Bank Lending Test” in the Final Rule) or, at the bank’s discretion, the Retail Lending Test.¹⁴
Limited Purpose Banks will be evaluated under the Community Development Financing Test for Limited Purpose Banks.

In addition, banks of all sizes may instead elect to be evaluated under an approved strategic plan, in which measurable, annual goals for lending, investment, and service activities are developed with community input and approved by the bank’s federal regulator.

The Tests

The Retail Lending Test evaluates a bank’s record of meeting the credit needs of its entire community through the bank’s origination and purchase of home mortgage loans, multifamily loans, small business loans, small farm loans, and, for majority auto lenders, auto loans.¹⁵
The Retail Services and Products Test evaluates the availability of a bank’s retail banking services and products and the responsiveness of those services and products to the credit needs of the bank’s entire community, including LMI individuals and census tracts and small businesses and farms.¹⁶
The Community Development Financing Test evaluates how well a bank meets the community development financing needs in each Facility-Based Assessment Area, each state or multistate metropolitan statistical area (MSA), and by bank.¹⁷
The Community Development Services Test evaluates a bank’s community development services in fostering partnerships among different stakeholders, building capacity, and creating conditions for effective community development.¹⁸

Scoring

In most cases, the Agencies will assign “conclusions” for each bank’s performance in the relevant geographic areas. For most banks, the five possible conclusions will be Outstanding, High Satisfactory, Low Satisfactory, Needs to Improve, or Substantial Noncompliance. For small banks evaluated under the Small Bank Lending Test, the Agencies will assign one of four conclusions: Outstanding, High Satisfactory, Needs to Improve, or Substantial Noncompliance.

Geographic Areas Considered

Facility-Based Assessment Areas. Under the Final Rule, Facility-Based Assessment Areas will remain the “cornerstone” of the CRA evaluation process. Banks will be required to delineate Facility-Based Assessment Areas in the MSAs or non-metro areas of states in which the bank has its main offices, branches, and deposit-taking remote service facilities. The Facility-Based Assessment Areas of Large Banks must be whole counties; Intermediate and Small Banks can delineate Facility-Based Assessment Areas as partial counties, assuming such delineation has no discriminatory purpose.¹⁹
Retail Lending Assessment Areas. Large Banks will be required to delineate Retail Lending Assessment Areas in the MSAs or non-metro areas of a state in which the bank has a concentration of closed-end home-mortgage or small-business lending outside of the bank’s Facility-Based Assessment Area. The Retail Lending Assessment Areas will only be used for the purposes of the Retail Lending Test. Notably, unlike the Proposed Rule, the Final Rule exempts Large Banks from needing to delineate Retail Lending Assessment Areas if they conduct more than 80% of their retail lending in Facility-Based Assessment Areas. Additionally, in response to public comment, the Agencies have raised the threshold that triggers Retail Lending Assessment Area delineation to at least 150 closed-end home-mortgage loans or at least 400 small-business loans in each of the two prior calendar years.²⁰
Outside Retail Lending Areas. Large Banks and certain Intermediate and Small Banks that are evaluated under the Retail Lending Test will also be evaluated in the Outside Retail Lending Areas, which cover the nationwide area outside of the bank’s Facility-Based Assessment Areas and Retail Lending Assessment Areas, excluding certain non-metropolitan counties. A review of these areas is meant to facilitate a “comprehensive” evaluation of the bank’s retail lending to LMI individuals and communities and to adapt the CRA to account for the rise in mobile and online banking.²¹
Areas for Eligible Community Development Activities. Under the Final Rule, all banks will receive consideration for any qualified community development loan, investment, or service, regardless of location. However, the Agencies will focus on performance within Facility-Based Assessment Areas for Large Bank’s Community Development Financing Test performance.²²

Data Collection and Reporting Requirements

Under the Final Rule, there will be no new data collection and reporting requirements for small and intermediate banks. The data collection and reporting requirements for other institutions will be tailored according to bank size, with several requirements applying only to banks with over US$10 billion in assets. Notably, the Agencies intend to publish on their respective websites information about the distribution by borrower income level, race, and ethnicity for each bank’s home-mortgage loan originations and applications in each of the bank’s assessment areas.²³

Categories of Community Development

The Final Rule updates the definition of “Community Development” to refer to 11 community development categories:

Affordable Housing
Economic Development
Community Support Services
Revitalization or Stabilization Activities
Essential Community Facilities
Essential Community Infrastructure
Recovery Activities That Promote the Recovery of a Designated Disaster Area
Disaster Preparedness and Weather Resiliency
Qualifying Activities in Native Land Areas
Activities with minority depository institutions (MDIs), women’s depository institutions (WDIs), low-income credit unions (LICUs), and community development financial institutions (CDFIs)
Financial Literacy

Additionally, the Agencies will provide an illustrative list of Community Development activities, and the Final Rule includes a process by which banks can confirm with the relevant Agency whether a particular loan, investment, or service is eligible for community development consideration. The goal of the new framework is to provide banks additional clarity regarding loans, investments, and services that support community development.²⁴

Takeaways

Changes From the Proposed Rule. Portions of the Final Rule have been changed to respond to industry criticism, though perhaps not as much as industry participants would have liked. We have described some important changes above, but a list of key changes can be found in the Interagency Overview.²⁵
Concerns With Compliance Burdens. Industry participants²⁶ and high-level regulators raised concerns that the Final Rule carried high compliance burdens at a time when the banking industry is facing headwinds from “an uncertain economic environment with high inflation and high interest rates.”²⁷ The oft-cited concern is that the so-called “Large Banks” with more than US$2 billion in assets may be over-burdened by the changes in the Final Rule.
Litigation Rumors. There has been a recent trend in challenging agency rulemaking, and while no suits have been filed as of the time of publication, there are rumblings in the industry that a challenge is possible, particularly in the Fifth Circuit.²⁸ Such challenges have been outlined by dissenters to the Final Rule including Governor Bowman and FDIC Board Members Travis Hill and Jonathan McKernan.²⁹

For questions about how the new Final Rule may affect your business, please reach out to any of the authors or your usual Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.