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)
Good morning, and welcome to the Federal Reserve Bank of San Francisco’s virtual event on the advance notice of proposed rulemaking for the Community Reinvestment Act. My name is Jason Lew and I will be moderating today’s event. Our presenters today are Maria Villanueva and Stephanie Hanson, both of whom are examiners in our consumer compliance unit.
Before we kick things off, let me run through a few logistical items. First, with Zoom, you can enlarge the slides by dragging the center divider to the right. This will improve your viewing of some of the more text heavy slides. Second, as there is a lot of information in the slides, we recommend you download the slides using the link in the reminder email we sent on Friday. You may also access the slides through our website, www.frbsf.org. The downloaded slides will be useful, as they contain hyperlinks to additional resources. Next, if you encounter any issues during the webinar, please refer to the reminder email, which provides additional options for accessing this event. We will also be posting a transcript of this webinar as soon as it becomes available in case you miss any portion of this event. Last thing I will mention, logistically, if you would like to submit a question, please click on the Q&A icon at the bottom of your screen.
So with that, I’m going to move on to slide two, and we included some legal language on this slide. Today’s conversation is meant to provide an overview of the CRA ANPR. Since we are now in the open rulemaking process and must publicly list and summarize all substantive conversations about the ANPR, we will be limiting the Q&A segment to clarifying questions. If you would like to provide substantive feedback regarding the ANPR, we encourage you to submit a written comment. We included some additional details on how to submit comments on slide 25. Second, the opinions expressed in this presentation are intended for informational purposes and are not formal opinions of, nor binding on, the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of San Francisco.
And with that, the legal language out of the way, let’s get started. Maria, the floor is yours.
Thanks, Jason. I’m going to start with a brief discussion of the ANPR and resources that are available about the ANPR. I’m going to follow that with the CRA modernization objectives that guided us as we were drafting the ANPR. And then Stephanie and I will walk through some of the key proposals in the ANPR related to assessment areas; the evaluation framework, including the retail test and the community development test; qualifying activities and geographies; ratings; data collection; provisions impacting rural communities.
The ANPR was informed by extensive and robust outreach, including feedback from industry and community leaders, as well as ideas from the three banking agencies, and community development and supervision staff from across the Federal Reserve System. I encourage you to review the ANPR over the course of the next few months, and to note the areas where we are seeking feedback. I’ll mention a few of those as we go today, but there are many questions throughout the document, and we certainly look forward to hearing your thoughts. We’ll review the process for submitting comments at the close of this presentation. With that, let’s turn to the next slide.
The board published the Advance Notice of Proposed Rulemaking on September 21st. You’ll see this referred to as an ANPR. This is the very start of the rulemaking process, and it’s a way for the board to get feedback on proposed framework for CRA modernization before getting to the point of proposing new regulatory text. In addition to the ANPR itself, there’s a number of materials on the Federal Reserve’s website about the ANPR, and there are some links to those materials here. The comment deadline for the ANPR is February 16th, 2021. We’ll talk more in detail about the Fed’s objectives for CRA modernization in the next few slides. Slide five, please.
Our objectives with CRA modernization fall into several broad categories. First, we’re focused on strengthening the CRA to better meet its statutory purpose. As Governor Brainard had said in recent remarks, CRA is more important today than ever before, especially in light of COVID-19 and the national discussion around racial injustice. CRA was enacted in 1977 to address red lining, and it remains an important tool to address income inequality.
The CRA statute directed the relevant federal supervisor agencies to encourage the banks they supervise to safely and soundly meet the credit needs of the communities they serve, including low- and moderate-income neighborhoods, and evaluate the record of doing so. Research has shown that the CRA has positive impacts on access to capital and financial services, and that the law encourages banks to be important partners in broad efforts to revitalize communities across the country. However, even with the implementation of the CRA and other complimentary laws, the lasting impact of discriminatory lending and inequities in access to credit remain evident today. As a result, the ANPR includes proposals to address inequities in credit access, banking needs for low- and moderate-income communities, and other underserved communities, and financial inclusion for underserved communities.
For example, we’re seeking to advance financial inclusion through a number of reforms, including providing additional incentives for bank investments in minority depository institutions and in geographic areas of need outside of assessment areas. Additionally, we are focused on updating standards in light of changes in banking over time, including mobile and internet banking. And separate proposals are focused on updating standards to reflect this change in banking. Turning to the next slide. So we’re on slide six now.
The second category of objectives include providing more certainty, tailoring, and minimizing burden. Specifically, this includes providing more certainty regarding what types of activities qualify and where those activities qualify. This also includes more transparency in how performance is evaluated and how ratings are assigned. Additionally, the board developed a proposed evaluation framework that can be tailored by bank size and business strategy and focus on minimizing additional burden. Slide seven, please.
CRA reform has been a key priority for the Federal Reserve System, and the board has worked extensively with the FDIC and OCC, with whom the Fed shares regulatory authority over CRA. The banking agencies share similar goals for CRA modernization, and the board has benefited from extensive public feedback on CRA modernization approaches. The ANPR seeks to provide a foundation for the banking agencies to converge on a consistent regulatory approach that has broad support among stakeholders, and the board is committed to getting CRA reform done right. Next slide, please.
Turning to assessment areas. The goal of our work was to modernize assessment areas to reflect changes in the baking industry, including internet and mobile banking, while maintaining a focus on branches. This was consistent with feedback we heard from both industry and community stakeholders. First, the ANPR asked for feedback on what’s referred to as facility-based assessment areas, focusing on the banks’ physical locations. The ANPR proposes keeping facility-based assessment areas around branches. The ANPR also proposes providing small banks with the flexibility to designate smaller assessment areas that are not a full county, while large banks could not have partial county assessment areas.
The ANPR also asked for feedback on whether loan production offices should be a new basis for assessment areas, and whether deposit taking ATMs should continue to be a basis for assessment areas. Second, the ANPR asked for feedback on options for new assessment areas that would not be based on a bank’s physical location. The ANPR also seeks feedback on new assessment areas based on concentrations of either deposits or lending that is not in their branch. The ANPR also seeks for feedback on establishing nationwide assessment areas for certain banks that have significant online activity. Next slide, please.
So a key goal of the ANPR proposed framework was to tailor evaluations to bank size and business model. Small retail banks would be evaluated under the current framework, unless they choose to opt in to the proposed framework. If small banks elect the new framework, they would be assessed solely under the Retail Lending Subtest, unless they opt in to have other activities considered as a possible enhancement to the Retail Lending Subtest rating. The ANPR seeks feedback on where to draw the line on the asset threshold between small and large banks. Specifically, the ANPR proposes $750 million or $1 billion as the appropriate threshold. Next slide, please.
Large retail banks will be evaluated under a Retail Test and a Community Development Test. We think having two tests recognizes the importance of both retail and community development in meeting community needs. Wholesale and limited purpose banks would be evaluated under the Community Development Test, and any bank could still continue to be evaluated under the strategic plan. Moving on to the next slide. We’re on slide 11 now.
So this slide provides a graphic showing the evaluation framework for large banks, and also has information about how those different tests and subtests would apply to other types of things. You’ll see those right under the two large boxes. Under the Retail Tests, there are two subtests, a Retail Lending Subtest and a Retail Service Test. The Community Development Test also includes two subtests, a Community Development Financing Subtest and a Community Development Services Subtest. It’s important to note that our approach uses metrics to evaluate assessment area performance, and not performance for the institution as a whole. And we’ll discuss this a bit more when we talk about rating shortly. The next few slides will cover each of these two tests in more detail. Next slide, please.
So let’s take a deeper dive into the Retail Lending Subtest. Next slide. The core part of the Retail Lending Subtest is a pair of metrics evaluating complimentary questions. The first question is, how well is a bank lending to borrowers in low and moderate income communities? The second question is, how well is a bank lending to low and moderate income individuals, small businesses, and small farms? These questions get at the heart of CRA’s core purposes, and the ANPR proposes metrics to measure this performance in every bank assessment area. Banks that pass thresholds for these metrics would receive a presumption of satisfactory in the Retail Lending Subtest in an assessment area. This is a key takeaway. The ANPR would provide greater certainty and clarity.
The ANPR provides a threshold approach that would be uniform across the country, but the result of the approach would be dynamic thresholds that vary across communities. As a result, thresholds would reflect different economic conditions and opportunities in different parts of the country. The ANPR suggests a potential level for these thresholds for public feedback, and this reflects extensive board analysis using the data set available on the board’s website. Next slide, please.
So we’ve heard feedback from banks that it would be helpful to have some type of dashboard that would enable them to track where they are in their performance relative to the performance thresholds. We think this is a good idea, and this slide provides an example of what this might look like. We think that using a dashboard would increase certainty and transparency. It would also help minimize burdens, as it would facilitate the bank’s tracking of how they are doing in each of their assessment areas. The board is exploring providing banks with an online portal with dashboards, as well as how this dashboard could be also available to the public. Next slide, please.
So let me next turn to the Retail Services Subtest and how the ANPR would evaluate banking services of large retail banks.
The ANPR proposes retaining the qualitative aspects of this evaluation while also including quantitative benchmarks to make this analysis more consistent and transparent. The first prong would evaluate how banks use branches as well as online and mobile banking platforms to serve low and moderate income individuals and communities. This responds to feedback from many stakeholders to retain a focus on the importance of branches while also responding to the way banking has changed with the rise of online banking.
The second prong will evaluate the focus on the availability and impact of checking accounts, savings accounts, and other deposit products for low and moderate income communities. We believe this would provide greater consistency in bank evaluations while also promoting the financial inclusion for low and moderate income communities. At this point, I’m going to turn it over to Stephanie to talk about the community development financing subtest. Stephanie.
Thanks Maria. I’m going to cover the community development test and I’ll first talk about the financing subtest that would apply to large retail banks. We are on slide 17 for those of you following along on the phone. So the ANPR proposes combining the evaluation of a bank’s community development loans and qualified investments and measuring that activity in dollars relative to banks deposits. The resulting metric would be used at assessment areas to evaluate a bank’s community development financing performance.
The ANPR proposes to include both new originations of community development loans and qualified investments, as well as those held on balance sheet from prior years. Capturing the book value of community development loans that remain on the balance sheet from prior evaluation periods similar to what currently happens with qualifying investments could help encourage banks to provide more patient capital.
Slide 18 please. The ANPR seeks feedback on two options for using this metric for evaluations. One would provide a presumption of a satisfactory similar to the retail lending subtest, and the other would serve as a starting point for an examiner’s review that would also focus on the responsiveness and impact of a bank’s community development activity.
The ANPR proposes several options to help evaluate impact and responsiveness, including impact scores and the use of supplementary metrics that could provide a more detailed picture of a bank’s community development financing activities. Additionally, performance context would still be an important consideration.
Slide 19. On the community development services subtest, the ANPR provides a framework for evaluating community development service activities in a more consistent way while still allowing examiners to reflect the unique circumstances in each assessment area. Like the retail services subtest, this evaluation would remain primarily qualitative, but the board seeks feedback on options for using more quantitative measures to analyze performance. The ANPR is also proposing the use of impact scores to more consistently assess the impact and responsiveness of community development service activities.
Next slide, please. The ANPR seeks to advance financial inclusion by proposing incentives for further bank investments in minority depository institutions, women-owned financial institutions, and low-income credit unions and community development financial institutions. For example, the ANPR proposes to make activities with MDIs as a factor to consider for an outstanding reading. Additionally, the ANPR proposes to automatically qualify activities with Treasury Certified CDFIs with the goal of increasing capital to these mission-oriented institutions that also serve the credit needs of low-and moderate-income communities, LMI, individuals and small businesses.
In the area of CRA qualifying activities, we have heard feedback from stakeholders that there is a lack of clarity on what activities are eligible for CRA credit. To address this feedback, the ANPR proposes to better define eligibility for qualifying activities, such as unsubsidized or naturally occurring affordable housing in the regulation. The ANPR also seeks feedback on designating certain community development activities as being responsive to community needs that are particularly impactful, including affordable housing for very low-income households or economic development activity with the smallest businesses, smallest farms and minority-owned small businesses.
Lastly, there was positive stakeholder feedback on the OCC proposal to offer a pre-approval process for banks to get an advanced read on whether a particular activity would count, as well as to provide an illustrative list of qualifying activities. As a result, the ANPR seeks feedback on how such approaches could be designed and how they would work in practice.
Next slide, please. The ANPR proposes ways to add clarity on where banks can receive credit for community development activities. For example, the ANPR proposes that banks will receive consideration for activities outside their assessment areas, but anywhere within an eligible state, territory, or region, defined as a state territory or region where the bank has a facility-based assessment area. This would also help to address CRA hotspots and deserts as banks might consider deploying resources more broadly to underserved areas outside of assessment areas if they were confident about the CRA eligibility. Additionally, the ANPR asks for feedback on treatment of activities within designated areas of need, including Indian country, The Delta or other areas that exhibit persistent economic distress.
Slide 22, please. The board’s proposed approach to developing ratings is grounded in performance in a bank’s local communities. The proposal assigns ratings for the retail and community development tests based on conclusions at the assessment area level. The proposal also eliminates the distinction between full-scope and limited-scope assessment areas and seeks feedback on options to ensure the ratings procedures are inclusive of all geographies, including smaller rural assessment areas.
The board is examining approaches to more consistently evaluate community development activities outside assessment areas when assigning the state, or institution rating, for the community development test. Given CRA’s emphasis on retail credit, the Board believes that the retail tests should be weighted slightly more than the community development test to determine overall institution ratings. Additionally, as discussed earlier, the board is proposing to make activities with MDIs, women-owned financial institutions, and low-income credit unions as consideration for an outstanding rating.
Finally, the ANPR proposes retaining the practice that if examiners determined that a bank has engaged in discriminatory or illegal credit practices – including violations of relevant consumer laws and regulations enacted or implemented since regulation BB was last substantively updated – a ratings downgrade could occur at the institution level.
Slide 23. With respect to minimizing data collection and reporting burden, the ANPR recognizes the potential trade off between additional data collection and reporting requirements on one hand and greater use of metrics to attain certainty on the other. It seeks feedback on the best way to balance these important objectives. The proposed metrics would rely to the greatest extent possible on existing data.
Small banks would be exempt from deposit data collection and reporting requirements, and data used for the lending analysis would be the same as is used for current examinations. Existing data sources would also be used when possible for large banks. New data collection and reporting on community development financing activities would be required to evaluate community development financing in a transparent and consistent manner. The ANPR is also seeking feedback on deposit data options for large banks, and in particular for large banks with extensive deposit activity outside of the areas served by their physical branches. Specifically, the board is evaluating the use of FDIC summary of deposits data versus new data collection and reporting.
Next slide, please. The board received significant feedback on addressing rural areas, both from banks and community groups, and has made a conscious effort to encourage bank activities in rural areas and to recognize the unique needs and opportunities in these areas. Rural areas often have less community development capacity and opportunities, so we think it’s important for banks to give back to their local communities in different ways. 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 nonprofit organizations.
Second, as discussed earlier, the ANPR proposes to designate geographic areas of need where banks could conduct activities outside of assessment areas. The board believes this could help encourage more activities in rural areas where there are unmet credit needs.
Third, the proposal includes the use of calibrated thresholds for both the retail lending and community development financing subtest. So performance standards better reflect the differing needs and opportunities in rural areas. Finally, the proposal includes several options to ensure that all assessment areas, including small rural assessment areas are factored into a bank’s overall ratings.
Slide 25, please. All stakeholders have expressed strong support for the agencies to work together to modernize CRA. By reflecting stakeholder views and providing an appropriately long period of 120 days for public comment, the ANPR advances the goal of building a foundation for the baking agencies to converge on a consistent approach that has the broad support of stakeholders.
The federal reserve will continue our ongoing analysis of issues, including in the ANPR and will seek the views of all stakeholders, including the other banking agencies throughout this process. We encourage you to review the ANPR and all of the additional supporting documents on the board’s public rulemaking page and submit a comment through the formal channel. We also anticipate organizing additional outreach opportunities within our district and look forward to hearing your comments. And that concludes our prepared remarks. So at this point, I’ll turn it over to Jason.
Great. Thanks, Stephanie. We received quite a few questions in advance of the event. So to everyone who submitted questions, thank you. We will cover the questions we received in advance first, but we will also try to leave room to answer questions submitted during the event, but keep in mind that we will most likely not be able to answer all questions. Also, we’ll be focusing our response to questions that help to clarify the ANPR. So with that, let’s get started.
So, on the first question, we received a number of questions on how the feds ANPR is similar and different from the OCC’s final rule. Can you elaborate on the similarities and differences?
I can take that one. So first, there’s broad agreement between the agencies on the goals and objectives of CRA modernization. While the differences exists, the federal reserve benefited from extensive inner agency discussions on CRA reform, both in discussing the stakeholder feedback on challenges with the current regulation, as well as specific reform ideas. The federal reserve included a number of ideas from the OCC and FDAC’s ANPR in the proposal, such as the pre-approval process and illustrative list of qualifying activities.
The ANPR puts forth a different and tailored test design, though with some similarities. While all agencies favor using metrics to increase upfront clarity and certainty on how banks will be evaluated, the board’s ANPR seeks to tailor credit evaluations to reflect differences in bank sizes and business models, as well as differences in community conditions across business cycles. The ANPR also takes additional steps to minimize data burden, particularly for small banks, which would not be required to collect or report additional data.
While both the board and the OCC seek to clarify CRA eligible activities, the Board’s ANPR seeks feedback on ways to increase certainty about what CD activities will qualify while retaining the regulation’s core focus on low- and moderate-income households and communities. Great question. Jason, I’ll give it back to you.
Okay, great. So the next question relates to affordable housing. How is affordable housing protected under the proposed rules?
I can take that one. So first, affordable housing will remain one of the four categories of community development. Those are affordable housing, economic development, community service, and revitalization and stabilization that benefit low and moderate income individuals and communities. Second, the ANPR recognizes the importance of subsidized and unsubsidized affordable housing to LMI individuals. It builds on what already works for CRA investments and affordable housing. So the ANPR maintains CRA credit for subsidized affordable housing and pro-rata consideration for bank investments in mixed-income housing developments. Additionally, the ANPR seeks to clarify the criteria under which banks can receive CRA consideration for investing in un-subsidized or naturally occurring affordable housing. Jason?
Okay, great. There were a few questions that asked about the process for the agencies to come together towards a rule that is adopted by each of the three banking agencies.
I can take that one, Jason. So the Federal Reserve is committed to converging on a consistent approach with the other agencies and that’s our goal in putting out this ANPR. The proposal reflects a broad set of stakeholder views, including ideas advanced by the OCC and FDIC. The ANPR seeks to build a foundation for the agencies to ultimately develop a consistent approach that has broad support. It also provides a long period for comment in the hopes of building a foundation for the agencies to ultimately work together. Jason?
Okay, great. So the next question is, how can the CRA do more to contribute to safer and thriving neighborhoods so that residents have better jobs and better health?
I’ll take this one. So the CRA invests the board, the FDIC and the OCC with broad authority and responsibility for implementing the statute, which provides the agencies with a crucial mechanism for addressing persistent systemic inequity in the financial systems for LMI and minority individuals and communities in particular, the statute and it’s implementing regulations, provide that agencies, regulated banks and community organizations with the necessary framework to facilitate and support a vital financial ecosystem that supports LMI and minority access to credit in community development.
In considering how serious purpose and history relate to the nation’s current challenges, Question 2 in the ANPR is seeking feedback on what modifications and approaches, would strengthen the CRA in addressing systemic inequities in credit access for minority individuals in communities. So to strengthen the CRA’s role in financial inclusion, the ANPR is proposing special provisions for minority depository institutions, as well as women-owned financial institutions, and low-income credit unions, seeks feedback on additional incentives for financing community development, financial institutions, and recognizes that fair lending is an important part of meeting community credit needs. It also specifies that banks could receive special CRA credit for activities in areas with unmet needs outside of assessment areas such as Indian country. Jason?
Okay. So the next question has to do with examiner flexibility. It reads, in my experience, examiner flexibility in interpreting whether an activity is qualifying is very important. Will this be lost under the new guidelines?
I can take that one, Jason. So the board believes that banks, examiners and the public should have clarity on how especially impactful activities are factored into performance conclusions. The performance context factors would continue to play an important role to help inform the examiners evaluation of the impact and the responsiveness of the bank’s activities. As such, examiner judgment will still play a key role in CRA performance evaluations. Jason?
Okay. So the next question is will low-income housing tax credits still be an acceptable way for a bank to obtain CRA credit? Are there any fundamental changes to the relationship between low income housing tax credits and bank investment in these projects?
I’ll take that one. So investing in low-income housing tax credits would definitely continue to be an eligible activity. An important goal is to ensure strong incentives for banks to provide community development loans and investments for the creation and preservation of affordable housing, both rental and owner occupied. Jason?
Okay. So the next question gets into the nitty gritty of the ANPR. It asks, the ANPR appears to be silent on the topic of loan purchases and participations counting towards a bank’s lending test. Can we assume that silence means they are proposed to be treated the same in the future?
I’ll take this one, Jason. So both originated and purchase loans would still qualify and be included in the retail lending subtests. In addition, question 38 in the NPR seeks feedback on whether and how purchase retail loans should be included as part of the retail lending subtests. Jason?
Great. Thanks Maria. So the next question relates to asset size. It asks will the asset size thresholds be the same for community based financial institutions, banks that operate on a nationwide basis, and internet based banks?
I can take this one. So the board is proposing an asset threshold of $750 million or $1billion to distinguish between small and large retail banks. There is no different asset size threshold specifically for internet banks. Keep in mind that the board proposes retaining the wholesale and limited-purpose institution designation, and any bank can still be evaluated under the CRA strategic plan option. These options are available to banks of any asset size. Jason?
Okay, so we received a few questions on climate. Specifically, how will climate change considerations factor into CRA modernization?
I’ll take that one, Jason. The board is considering whether codifying the treatment of the qualifying activities specific to designated disaster areas would help provide stakeholders with additional clarity. With regard to climate change, in Question 62 of the ANPR, the board is considering whether the list of relevant activities related to disaster recovery should be expanded to include disaster preparedness and climate resilience in certain targeted geographies. Jason?
Okay, great. So the next question relates to the dashboards. It asks, can you expand on how the dashboards would work logistically and whether we would upload our data pre submission?
I’ll take this one too. So the proposed approach is intended to help advance the objectives of certainty and transparency in setting CRA performance expectations for retail lending. The board is interested in ways to make this approach easy to adopt for banks and for the public. The board is exploring providing banks with an online portal with dashboards. The dashboard would show thresholds for each major product line for a specific assessment area with updates made on a quarterly or annual basis as applicable. This would enable banks to track their own performance throughout an evaluation period against the relevant thresholds. For HMDA and or CRA reporters, the dashboards could display a bank’s metrics calculations to date, in addition to the applicable thresholds. The idea is for banks to be able to check their performance for greater certainty and clarity, including prior to submitting your data. Jason?
Okay. Thanks Maria. So the next question asks if the Fed’s approach sees the inclusion of the disability community as part of the modernization of the CRA?
I’ll take this one. So within the ANPR, there are two sections that cover disability. In the proposed retail services test framework for the delivery system component, the board proposes evaluating the distribution of a bank’s branches and branch based services, including disability accommodation. In addition, for community services, the board is considering expanding the list of qualified activities list to include activities targeted to recipients of federal disability programs. Jason?
Okay, great. Thanks Stephanie. So the next question is how can the community reinvestment act do more to protect low-income neighborhood residents from extractive and exploitative lending, including from alternative financial sources?
I can take this one, Jason. The ANPR emphasizes the importance of fair lending and similar protections to ensure that the CRA continues to reinforce financial inclusion laws. As such, the proposal would continue to consider fair lending and illegal credit violations in determining overall CRA ratings for all institutions. Jason?
Okay. Thanks Maria. So the next question has to do with loans to minority-owned businesses. It asks, how are the rules around commercial loans to minority owned businesses going to be updated?
I’ll take this one. The ANPR proposes several ways for supporting small businesses and farms. For example, the proposed retail lending metric focuses on the number of loans to small businesses rather than the dollar amount, reducing incentives to focus on larger loans to larger businesses or farms. In addition, Question 57 of the ANPR seeks feedback on what options should the board consider for advising the economic development definition to provide incentives for engaging in activity with smaller businesses and farms and minority owned businesses. Jason?
Great. Great. Thanks Stephanie. So the next question is a follow-up to the previous one. The participant asks, what rules, if any, are going to be included about the relationship between commercial banks and MDIs and CDFIs.
The board recognizes the importance of MDIs in providing equitable financial access to low-income and minority consumers and communities. The board has proposed a number of ways to provide incentives for majority-owned institutions to capitalize and to partner with these institutions. The board believes that MDIs, will receive greater support by highlighting these special provisions and by clearly defining them in a revised regulation, examination guidance, and other public documentation. The board is also proposing in the ANPR to apply the two definitions for MDIs that it currently uses per 2013 guidance. In that definition, MDIs are banks that are owned by or that predominantly serve and have a board composed of a majority of African-Americans, Native Americans, Hispanic Americans, or Asian Americans, specifically the ANPR proposes designating investments in and activity with MDIs, women-owned financial institutions and low-income credit unions as a factor in achieving an outstanding rating. And, MDI activities outside of assessment areas and outside of States or multi-state MSAs where a bank is evaluated, will be considered when assigning an institution rating. Jason?
Okay. So the next question asks, many rural areas are underserved or outside of many CRA footprints for regulated financial institutions. How can these areas be better served and what modifications to CRA can encourage those efforts?
I’ll take this one, Jason. So the ANPR includes a number of proposals to provide incentives for activities in rural areas and to recognize the unique needs and opportunities in those areas. The definition of community development services would be revised to include a wider range of volunteer activities, to address the particular needs of rural areas.
For example, certain bank volunteer activities, such as building affordable housing, could be considered in rural areas. This approach is intended to provide incentives for additional civic and non-profit volunteer activity in places with limited community development capacity, and it could encourage banks to take a leadership role in developing solutions to address unmet community needs.
Next, the ANPR proposes to designate geographic areas of need where banks could conduct activities outside of assessment areas, and this could help alleviate the CRA hotspots and deserts dynamic and increase community development lending and investment in the areas where it’s needed the most. Examples of areas of need that overlap with rural communities might include economically distressed areas with an unemployment rate that’s 1.5 times the national average, or a persistent poverty rate of 20%.
Also, the use of calibrated thresholds in assessment areas for both the retail lending sub tests and the community development financing sub tests are also intended to ensure that the thresholds are set appropriately in different assessment areas, including in rural areas. And lastly, the ANPR also considers several options to ensure that all assessment areas, including smaller rural assessment areas, are appropriately factored into the retail and community development test ratings. Jason?
Great. Thanks, Maria. So the next question has to do with CRA strategic plans. The question is, what types of changes are expected to be included in a strategic plan under the proposed changes in the modernization efforts?
I can take that one. The board is considering amending the strategic plan option to provide more clarity and transparency about evaluation standards and where performance will be assessed.
Some of the proposed changes include updating the public input process by posting the plan on a bank’s website, the board’s website, or both. With regards to assessment areas, the board is considering allowing banks greater flexibility in defining assessment areas that would capture areas in which the bank has a significant proportion of its business consistent with its capacity and constraints.
On evaluations, the ANPR contemplates allowing banks that operate under a serious strategic plan to opt to be evaluated under the metrics approach. The idea behind the CRA strategic plan is to incite banks to engage with their local communities. To that end, Question 74 of the ANPR requests feedback on how should banks demonstrate that they have had a meaningful engagement with their community in developing their plan and once the plan has been completed. Jason?
Okay, great. Looking at the questions queue, there were a number of questions regarding the presentation availability after the webinar, and wanted to give everyone the heads up that the slides are available right now, and the transcript and the recording will be posted after the event, likely sometime next week. With regards to where it’s at on the website, if you just go to our website, www.frbsf.org, there is posting there with a link directly to this webinar page, so it should be readily accessible.
With regards to that, let me just do a double-check to see if there are any questions that we can answer that we had just received, just to confirm before we close up the meeting. I believe that is it for now.
And so in closing, I’d like to thank our presenters, both Maria and Stephanie today, and I’d also like to thank our community development team for their assistance in helping to host this event. As a quick reminder, again, check out our website for the archive and transcript for this event. I would like to, again, encourage you to submit your comments regarding the CRA ANPR to ensure that your feedback is considered in the rural banking process. So that concludes our event, enjoy the rest of your day. Thank you.
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.