The Federal Reserve has issued a proposed update to its regulations implementing the country’s core anti-redlining statute after disagreeing with other regulators on an earlier reform plan.
Another attempt to overhaul the Community Reinvestment Act moved forward last week as the Federal Reserve released its proposal to modernize the legislation that encourages financial institutions to meet community credit needs.
The Fed has issued an Advance Notice of Proposed Rulemaking for its CRA proposal, and the public will have 120 days to comment on the proposal. The Fed’s five governors voted unanimously to move the proposal forward for public comment.
The Fed’s proposal comes four months after another bank regulator, the Office of the Comptroller of the Currency, finalized its own CRA overhaul.
A years–long effort by the Fed, the OCC and the FDIC to create a joint proposal ended late last year when the OCC issued its own proposal. The FDIC initially supported the OCC’s proposal but then in May decided not to move forward with it. The Fed had declined to support the OCC’s proposal last year. Several banks and many community development groups criticized the OCC proposal, saying it would make it easy for banks to avoid investing in minority communities and could create the potential for a modern version of redlining.
Adopted in 1977, the CRA aims to prevent the discrimination in lending and encourages financial institutions to meet community credit needs, including in low- and moderate-income neighborhoods. The CRA had not been significantly revamped in 25 years, and stakeholders agreed that the regulations needed to be modernized, in part because of the growth of online banking.
Board Governor Lael Brainard led the Fed’s initiative to create its own CRA proposal.
“The CRA is a seminal statute that remains as important as ever as the nation confronts challenges associated with racial equity and the COVID-19 pandemic,” Brainard said in a statement. “We must ensure that CRA is a strong and effective tool to address ongoing systemic inequities in access to credit and financial services for low- and moderate-income [LMI] and minority individuals and communities.”
Two Tests
Under the Fed’s proposal, banks would face two tests: a retail test and a community development test. The retail test would have subtests for lending and services. The lending subtest would evaluate banks with a metrics-based approach tailored to the bank’s main products, as well as the credit needs and opportunities within its assessment areas.
The services subtest would take a qualitative approach to evaluating retail banking services, including branches, other delivery systems and deposit products. The services subtest “is intended to provide greater predictability and transparency for evaluating important aspects of retail banking services,” the Fed said.
The community development test would also have two subtests: one for financing and another for services. The financing subset would use a metrics-based approach to evaluate community development financing activities, while the services subtest uses an approach that “better recognizes the value of qualifying volunteer activities, especially in rural communities.”
Financial institutions have said that they often would not know whether an activity would receive CRA credit until the examination. The Fed said in its proposal that it wanted to “increase the clarity, consistency, and transparency of supervisory expectations and of standards regarding where activities are assessed, which activities are eligible for CRA purposes, and how eligible activities are evaluated and assessed.”
The Fed plans to allow small retail banks to remain under the current CRA framework, though they could choose to be evaluated under the retail lending subtest alone and also have their retail services and community development activities evaluated. The Fed is proposing an asset-size threshold of either $750 million or $1 billion to identify small banks.
Large retail banks would be evaluated under all four subtests.
The proposal also looks “to more predictably delineate assessment areas around physical locations, such as bank branches,” while also considering alternatives to define assessment areas, including for large banks with online deposits.
Teaming with MDIs
Another focus in the new proposal is the role of minority depository institutions (MDIs), including ways that banks can support MDIs outside their assessment areas with community development activities that address discrepancies between areas with extensive CRA focus and those with limited activity.
The Fed said it wanted feedback on how to balance the use of metrics in CRA performance evaluations with the potential burden of collecting more data.
“The Board is mindful of the potential tradeoff between the expanded use of metrics to provide greater certainty and consistency and the expanded need for data collection and reporting, and has prioritized using existing data wherever possible,” the proposal said. “The Board has also prioritized approaches that would exempt small banks from new data collection requirements.”
Rob Nichols, president and CEO of the American Bankers Association, said in a statement that the organization was still reviewing the proposal, noting that it was an important step toward modernizing the CRA “in a manner that benefits communities and provides banks with regulatory clarity going forward.”
“As the process moves forward, it is our hope that all three federal banking agencies will work toward a unified CRA framework featuring clear and concise rules for all banks that will stand the test of time,” Nichols said. “Joint regulatory action will prevent confusion and avoid unintended consequences for banks and the communities they serve. This is critically important as the banking industry works to meet the needs of low- and moderate-income communities and address inequities in access to credit. We look forward to joining other stakeholders in providing constructive input on this proposal.”
