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Katelyn Crowley, CPA
Risk Advisory Services Manager
What is the Community Reinvestment Act?
The Community Reinvestment Act (CRA) was first enacted in 1977. CRA requires federal banking regulators to encourage financial institutions to help meet credit needs of the communities in which they do business, including low- and moderate-income (LMI) neighborhoods. There are three federal banking regulators that are responsible for CRA:
- Federal Deposit Insurance Corporation (FDIC)
- Federal Reserve Board (FRB)
- Office of the Comptroller of the Currency (OCC)
Implementation of the New CRA Rule in 2024 and Beyond
Provisions of the new rule that reflect the current CRA regulations will become effective on April 1, 2024. This includes facility-based assessment area delineations (FBAAs), effect of CRA on applications, public file, bank public notice, CRA examination schedule public notice provisions, and new public engagement provisions.
Banks will be required to comply with all other provisions of the final rule, except certain reporting requirements, as of January 1, 2026. Reporting requirements will require compliance as of January 1, 2027.
Of course, as with any new regulation, there will be winners and losers. Banks of certain asset sizes will get some relief as they move down to the Intermediate size classification. If you are a $600 million bank, your life just got harder. As usual, everyone will have more work to do.
New Community Reinvestment Act Requirements: Changes to Asset Thresholds
As recently as January 1, 2023, the small bank designation was reserved for banks with assets of less than $1.503 billion, with a subcategory of banks with assets of at least $376 million and less than $1.503 billion categorized as intermediate small banks.
With the new rule, there are modifications with regard to the asset thresholds for the bank’s size determination. Small banks are those with assets less than $600 million, intermediate banks are those with assets of at least $600 million to $2 billion, and large banks are those with assets greater than $2 billion. As part of the new asset thresholds, there are different requirements for retail lending and community development.
Small banks may continue to use the existing retail lending test or can opt-in to the new retail lending test. Intermediate and large banks are required to perform the new retail lending test, with large banks also being required to perform the new retail products and services test.
As for community development, small banks can continue to request credit for community development under the existing community development test though not required. Intermediate banks may opt-in to the new community development financing test or continue to use the existing test. Large banks however are required to perform the new community development financing and services tests.
Facility-Based Assessment Areas and Retail Lending Assessment Areas Requirements
As part of the current CRA provisions, all banks are required to delineate an assessment area in locations where they have a main office, a branch, or a deposit-taking remote service facility, as well as the surrounding counties in which the bank has originated or purchased a substantial portion of its loans. These assessment areas are called Facility-Based Assessment Areas (FBAAs). As for large banks, they may also be required to delineate retail lending assessment areas, or RLAAs, in geographic areas where they do not have a branch. The exception to this requirement is if, within the prior two years, the large bank originated or purchased within its FBAA more than 80% of its loans, then RLAAs are not required.
New Community Reinvestment Act Retail Lending Test
The new retail lending test is designed to ensure the bank is making sufficient loans in its assessment areas, such as home mortgages, small farms, and small businesses. There are three general steps to this test:
- Retail Lending Volume screen is applied to assess a bank’s volume of retail lending relative to its deposit base, compared to other banks in each FBAA;
- Next, metrics and benchmarks are used to evaluate the following four categories of lending for each of a bank’s major product lines in each Retail Lending Test Area:
- Loans in low-income census tracts
- Loans in moderate-income census tracts
- Loans to low-income borrowers/ businesses and farms with gross annual revenues of up to $250,000
- Loans to moderate-income borrowers/ businesses and farms with gross annual revenues greater than $250,000 up to $1 million
- Conclusions assigned to each Retail Lending Test Area, and a weighted average approach to determine Retail Lending Test conclusions at the state, multistate MSA, and institution levels, are computed to create a final Retail Lending Test Score.
Each of these steps includes benchmarks as inputs for the Retail Lending Test. The benchmarks include bank market, market volume, geographic market, and geographic community. Additionally, there are pieces of the test that involve additional analyses of the geographic distribution and borrower distribution. Altogether, the test enables the bank to understand its overall score on retail lending using a weighted scale. The weighting is done by dollar volume by assessment area, with the higher dollar volume areas accounting for a greater portion of the bank’s overall rating.
New Community Reinvestment Act Retail Products and Services Test
As described above, there is a new Retail Products and Services Test that is only applicable for large banks and accounts for 10% of the bank’s overall rating. This test is designed to evaluate the availability of a bank’s retail banking services and retail banking products, and the responsiveness of those services and products to the credit needs of the bank’s entire community. Banks with assets greater than $10 billion will have an additional review of digital delivery systems as part of this test. Agencies will consider the number and percentage of the bank’s branches and remote services facilities within low-, moderate-, middle-, and upper-income census tracts compared to the percentage of census tracts, percentage of households, percentage of total businesses, and percentage of all full-service depository institution branches in the bank’s FBAA.
Community Development Financing Test
The Community Development Financing test is calculated in each of the bank’s FBAAs, states, multistate MSAs, and nationwide. It is a quantitative test and does not include benchmarks for establishing presumptive conclusions as in the Retail Lending Test.
- For each FBAA, state, multistate MSA, and nationwide, a bank community development financing metric is calculated.
- Then the bank metric is compared to a peer comparator calculated in each relevant FBAA, state, multistate MSA, and nationwide.
- If the assessment area is in a metropolitan area, it is also compared to the nationwide metropolitan benchmark. If it is not a metropolitan area, it will be compared to the nationwide non-metropolitan benchmark.
The community development scores are weighted similarly to the retail lending test. The weights use a blend of loan count, dollar volume, and deposits of that assessment area.
Community Development Service Test
This test is also only for large banks and counts for 10% of the large bank’s overall rating. The Community Development Services Test evaluates a bank’s record of helping to meet the community development service needs of its entire community. The test includes an evaluation of the number of community organizations served by staff, including the capacity of service and hours served.
Final Thoughts on the Community Reinvestment Act New Rules
This new CRA rule will require banks to spend additional time and resources to ensure compliance. The good news is that the regulatory provisions will be phased in, so you do have some time to get this right. It’s never too late to start reading as there are 1,500 pages (what Paper Reduction Act) awaiting you.
I think it is worth noting that several Reserve board members voted against the new rule. Most egregious for Community Banks is the large bank designation of $2 billion. Even the CFPB defines a large bank as $10 billion. One of the Reserve board members also commented on the Board’s authority and whether some provisions are within their scope. We know that the CFPB’s authority is being challenged in the courts and I wonder if the same will happen with all or parts of the new CRA regulation.
Some additional Community Reinvestment Act resources to check out:
ICBA Webinars for Final CRA Rule for the three bank sizes – occurring in January 2024
Federal Reserve Board has published notices, fact sheet, and summary of key objectives
FDIC Press Release from October 24, 2023
Have questions regarding the changes to the Community Reinvestment Act?, Don't hesitate to reach out to Katelyn Crowley with Freed Maxick Risk Advisory Services at Katelyn.Crowley@freedmaxick.com or at 716.362.6281.