A Glimpse of the Newly Modernized CRA Framework
By Gina Omolon and Jonathan Sinaw
The Office of the Comptroller of the Currency (“OCC”) released final updates to the Community Reinvestment Act (“CRA”) in an effort to better reflect the current banking environment and make other general improvements.
The CRA was originally passed by Congress in 1977 to combat redlining – the discriminatory, systematic denial of credit and other services to low-income, racially-defined neighborhoods, by requiring banks to demonstrate that their credit services and deposit facilities serve the needs of the communities in which they are chartered to do business. Federal banking agencies are charged with examining and tracking each institution’s compliance with the CRA, the result of which are taken into consideration when institutions request regulatory approval for new branches or mergers and acquisitions.
Since its enactment, the CRA has been critiqued and adjusted amid ongoing scrutiny of its effectiveness and other stakeholder concerns in response to current events and shifting banking and regulatory landscapes. Central to most recent modernization effort, is the fact that the law does not state the criteria for evaluating performance of a financial institution’s compliance with the Act. This was by design, due to the variability of financial institutions’ size, complexity, risk profiles, situations and other contexts, giving regulators flexibility and judgment in their evaluations. Some stakeholders expressed frustration about the lack of clarity around which factors helped them toward a good grade.
The new version of the CRA, which was released on May 20, 2020, aims to improve this and other areas – as stated by the OCC, the four goals of the new standard are as follows:
- Qualifying Activities – clarify and expand the bank lending, investment and services that qualify for positive CRA consideration.
- Assessment Areas – update how banks delineate the assessment areas in which they are evaluated.
- Measurement – provide additional methods for evaluating CRA performance in a consistent and objective manner.
- Reporting – require reporting that is timely and transparent.
The new framework aims to clarify what activities qualify for CRA consideration by maintaining a publicly available, non-exhaustive list of examples of qualifying activities that meet the rule’s criteria, while expanding on what activities qualify for CRA credit. The new rule captures activities that may not have previously received credit such as those in identified areas of need beyond LMI (‘low- and moderate-income’) areas and a limited set of community development activities. It also excludes activities that may have qualified in the past, like loans to middle- and upper-income borrowers in LMI census tracts, so the rule focuses on activities that support LMI geographies and other areas of need.
The new framework aims to equalize the treatment between traditional branch-based banks and banks that gather deposits through the internet, and other banks that source deposits in geographical regions beyond where the main office is located.
Certain changes were introduced with the aim of creating a more objective method of measuring a bank’s CRA activity by setting thresholds and benchmarks, including assessments on (i) ratios of retail lending distribution to LMI population/census tracts; and (ii) the dollar value of all CRA activity. Qualitative considerations are also included, based on a bank’s performance context.
The OCC intends to set the objective thresholds and benchmarks in addition to guidance on qualitative performance context factors at a later date.
The final rule aims to provide systematic and standardized CRA performance evaluations so that banks, regulators and others have a better understanding of individual, local and industry-wide CRA activity levels and are better able to assess performance and progress.
The new CRA rule has not come without controversy. Critics have described it as rushed, and question if it will be effective at its goal of boosting lending and other financial services in underserved areas. It is also worth noting that the other two agencies that enforce the CRA, the Federal Reserve (the “Fed”) and the Federal Deposit Insurance Corporation (“FDIC”) were not included in the final ruling, which is extremely unusual.
Further, the Comptroller of the Currency, Joseph Otting, a primary champion of the new rule, resigned from the agency just days after the CRA issuance – a surprise to many, considering the current economic turmoil caused by COVID-19 and the fact that he was only halfway through his term. On June 29, 2020, the House of Representatives passed a joint resolution to nullify the OCC’s new rule. To ultimately become a law, the resolution will need to be voted on by the Senate and signed by the president, neither of which is definite.
In a recent American Banker interview with former Comptroller of the Currency, Eugene Ludwig, regarding his views on the rule, he said “the CRA is not the only tool, but it’s a proven tool, and it’s a tool that can be more expansive and do more good.” He is calling for lawmakers to go further and extend the CRA to include nonbank financial institutions (e.g. credit unions, mutual funds, hedge funds, student loan servicers and more), because of how their size and importance has increased since the CRA was initially enacted.
The effective date of the new rule will be October 1, 2020, with various deadlines for compliance up through January 2024, based on bank type and size, among other factors. The OCC having issued a CRA update without joint endorsement from the Fed and FDIC potentially also means diverging CRA standards based on an institution’s regulator, in addition to bank size and type, which is expected to create additional confusion. The full version of the OCC CRA final rule and the related list of qualifying activities can be found at the links below: