Modernizing the Community Reinvestment Act: An Overview of the Federal Reserve Proposal
December 16, 2020
10–11 a.m. PST
Every community deserves the opportunity to thrive. Our economy depends on it. Modernizing the Community Reinvestment Act (CRA) is an opportunity to address systemic barriers to credit and financial services that continue to hold many communities back.
Join us to learn about the Fed’s proposed changes and how you can use your voice to shape the future of the CRA.
During this virtual event, bank examiners from the Federal Reserve Bank of San Francisco provided an overview of the Federal Reserve’s Advance Notice of Proposed Rulemaking (ANPR) on CRA regulations, explained how to submit public comments before the February 16 deadline, and answered questions.
Download the slides (pdf, 890 kb)
Additional Questions and Answers
There appears to be a focus on dollars rather than number of loans, is this correct? If so, this would encourage larger CD loans rather than smaller loans for things like affordable housing.
The Retail Lending subtest focuses on the number of loans rather than the dollar amount and the CD Financing subtest uses dollar amount. We have heard from stakeholders that a dollar-based metric may provide incentives for banks to seek larger dollar activities that may not be responsive to community needs. The Board evaluated different options for metrics in order to maintain an emphasis on LMI individuals and communities, such as using the number of community development financing activities rather than dollar amount. However, the Board determined that the overall dollar amount would more appropriately reflect the potential impact and scale of a bank’s community development activities. This also would be more consistent with the current evaluation approach. Nonetheless, to help give greater consideration to highly impactful, small dollar activities than the metric alone would reflect, the Board is also proposing to complement the use of the community development financing metric with a qualitative review of responsiveness and impact.
There was a question on slide 24. Can you expand upon and clarify what you said about interactions with nonprofits and boards on slide 24 [regarding Rural Areas]?
Slide 24 covered the ANPR proposals for rural areas. Based on stakeholder feedback, the Board has made a conscious effort to encourage bank activities in rural areas and to recognize the unique needs and opportunities in these areas. The ANPR proposes to consider a wider range of community development service activities in rural areas, such as volunteering to help build affordable housing, and serving on the board of impactful civic or non-profit organizations. Under the current rules community development services must be tied to the provision of financial services. As such, helping to build affordable housing would be an expansion of what is currently recognized as community development service.
Does the board anticipate eliminating any existing qualifying activities or, like the OCC rulemaking, is the board approach better viewed as additive?
Response: The ANPR proposes giving consideration for non-securitized home mortgage loans purchased directly from an originating lender (or affiliate), in order to strike a balance between recognizing the importance of first-time purchases for originating banks that rely on other lenders to directly provide liquidity and addressing concerns about loan churning. However, the ANPR also seeks to clarify the criteria under which banks can receive CRA consideration for investing in unsubsidized, or naturally occurring affordable housing, which would be an expansion of the current rules. The ANPR also proposes ways to add clarity on where banks can receive credit for community development activities outside of their assessment areas and within Indian County and in other designated areas of need. This would also be considered as an expansion for how banks can receive CRA credit while keeping the focus one LMI individuals and communities.
Why are small banks being exempted from the retail services sub test?
The ANPR provisions are tailored based on bank size, which is responsive to stakeholder feedback about capacity differences between small and large banks. Under the proposal, small banks would continue to be examined under the current small bank procedures, which is comprised of the retail lending test. Small banks would have the option to opt into the proposed Retail Lending Subtest that would be metrics-based and would also have the option to submit retail services and community development information as a possible enhancement to the Retail Lending Subtest conclusion.
As a large bank, can we still have partial assessment areas under the ANPR?
To meet the objective of tailoring based on bank size and capacity differences between small and large banks, the ANPR proposes assessment areas that are comprised of whole counties for large banks and smaller assessment areas (e.g., partial counties) for small banks.
Assessment areas can raise fair lending risk and uncertainty when they are not composed of portions of whole political subdivisions, e.g., whole counties. For assessment areas composed of portions of political subdivisions, examiners conduct a more rigorous review that includes a bank’s geographic lending patterns to ensure that LMI census tracts are not arbitrarily excluded. Consistent with the longstanding public policy to prevent redlining, examiners also validate that an assessment area does not reflect illegal discrimination. An assessment area that appears to have been drawn to exclude areas with a majority number of minority residents represents a higher risk of discriminatory redlining, as set forth in the FFIEC Interagency Fair Lending Examination Procedures. If LMI census tracts are found to be arbitrarily excluded or an assessment area reflects illegal discrimination, examiners work with a bank to delineate an assessment area that complies with the regulatory criteria, which in some cases could include the entire political subdivision. The revised assessment area is then used for the CRA evaluation. However, redrawing a bank’s assessment area during a CRA evaluation can result in uncertainty and possibly a lower rating, since the bank may not have engaged in CRA activities inside the portions of the political subdivision that were previously excluded. Excluding partial county assessment areas for large banks would streamline the assessment area review process, add additional predictability and consistency to CRA examinations, and may provide incentives for large banks to lend in a broader area.
In contrast, for small banks, the Board believes that defining assessment areas based on whole counties may not be appropriate. Smaller banks may not have the capacity and resources to serve the needs of a geographically large county, especially when a bank is situated near a county border, is otherwise geographically remote from an area where it may have some lending activity but no branches, or faces substantial competition from other financial institutions within the same geographies. Some small municipalities and community groups have also indicated that overly large assessment areas can mask poor performance in remote and underserved LMI areas. Therefore, small banks would continue to be allowed to define facility-based assessment areas that include partial counties or portions of smaller political subdivisions, including portions of cities or townships, as long as they are composed of at least whole census tracts.
For background, read Help Shape the Future of the Community Reinvestment Act.
This event was meant to provide you an overview of the ANPR and to answer clarifying questions. If you would like to provide substantive feedback on the ANPR, we encourage you to follow the instructions in the ANPR or visit the Proposals for Comment page on the website of the Board of Governors of the Federal Reserve System.