OCC and FDIC Propose Sweeping Changes to Community Reinvestment Act Regulations
On December 12, 2019, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued a proposal to meaningfully overhaul the regulations that implement the Community Reinvestment Act (CRA).
The proposal follows a multi-year effort by the federal banking regulators to update the CRA regulations. Notably the Board of Governors of the Federal Reserve System did not join the OCC’s and FDIC’s joint proposal, creating the possibility that one set of rules could apply to state banks that are members of the Federal Reserve System, and another set of rules for national banks and state non-member banks. A more likely result is that the OCC’s and FDIC’s joint proposal will be followed by a Federal Reserve proposal. As a result, banks should anticipate further significant changes to the CRA proposals before final CRA regulations are approved by the federal banking regulators.
Key aspects of the proposal include the following:
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CRA Assessment Areas. In view of increasing separation between a bank’s deposit sources and a bank’s physical facilities, the proposal creates a “50%-5%” test for expanding a bank’s CRA assessment area beyond the bank’s physical assessment area. If 50% of a bank’s deposits are from areas not tied to the bank’s physical locations, any zone outside the physical assessment area contributing 5% or more of the bank’s deposits would become a new CRA assessment area. Banks would have some discretion in defining the physical assessment area and measuring any such new assessment areas.
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Earning CRA Credit Outside of Assessment Area. In certain circumstances, banks could receive CRA credit for investments in remote, low income areas of the U.S. with poor access to physical banking facilities.
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List of Commonly Approved CRA Activities. The proposal would require the FDIC and the OCC to develop and regularly update a non-exhaustive, illustrative list of commonly approved CRA activities.
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Pre-Approval for CRA Credit. The proposal would create a process for banks to submit a project for CRA approval before underwriting the project. This is a significant change from the current process where CRA credit is awarded after a loan is approved.
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Updated CRA Scoring. CRA investments would be evaluated based on both the number of CRA-eligible loans and the total dollars lent to projects that help low- and moderate-income communities.
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Streamlined Structure for CRA Exams. A new exam framework, with a single CRA test for all banks, would replace the current framework that imposes different CRA tests for small, medium and large banks. The proposal would allow banks with less than $500 million in assets to elect to remain in the old framework. Banks evaluated under the new framework would be subject to new data collection, maintenance and reporting requirements related to their qualifying activities, certain non-qualifying activities, retail domestic deposits and assessment areas.
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Increased Credit for Long-term Investments. CRA investment would be calculated on an average, ongoing basis. This means that CRA-eligible investments would receive CRA credit for as long as they remain on a bank’s balance sheet. The current rules evaluate CRA investment on a three-year basis, meaning that investments older than three years often do not count toward the CRA investment test.
The OCC’s and FDIC’s joint proposal represents a meaningful first step in updating the often outdated and overly-complex CRA regulations that create difficult compliance burdens for banks of all sizes. However, banks should expect further significant changes before a final CRA reform proposal is implemented, including in light of how the Federal Reserve proceeds with its CRA reform efforts and political input as the 2020 federal elections approach.
Comments on the proposal may be submitted to the OCC and the FDIC until 60 days after the proposal is published in the Federal Register, with both regulators requesting comment through the comment portal at www.regulations.gov.