The Office of the Comptroller of the Currency (OCC) on May 20 approved a final rule substantially amending its Community Reinvestment Act (CRA) regulations. The final rule is generally consistent with the proposed rule OCC released late last year but includes some changes in response to public comments.
The rule seeks to simplify OCC’s CRA rules and encourage further CRA activity by changing how banks’ CRA compliance is measured, clarifying what lending and investment activities are eligible for CRA credit, and requiring online banks to finance CRA eligible activities in areas with a substantial number of customer deposits. The new regulations will likely impact banks’ affordable housing investment activities, including Housing Credits and Housing Bonds.
The new rule applies only to those banks supervised by OCC, which oversees all nationally chartered banks. According to OCC, the banks it regulates account for a majority of total CRA activity. The other federal banking regulators, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, did not join the final rule. While FDIC joined the OCC in issuing a proposed rule in December, Chair Jelena McWilliams has said the agency is not ready to move forward with final CRA changes while it and the banks it regulates focus on COVID-related issues. The Federal Reserve has not proposed any changes to its CRA guidance.
On the same day the rule was approved, OCC confirmed media reports that Comptroller Joseph Otting will leave the agency on May 21. Otting, who was first appointed in 2017 and was deeply committed to reforming the CRA regulations, is leaving before his five-year term expires. No announcement has been made as to the reason for his departure.
The final rule goes into effect on October 20, but banks will have until 2023 before they are evaluated under the new standards. Some provisions of the rule do not go into effect until January 1, 2024.
NCSHA is still analyzing the final rule and the impact it could have on HFA programs and affordable housing investments. Some of the rule’s major provisions are summarized below.
“Single-Ratio” Test for Compliance
Under current CRA regulations, large banks must meet three tests to comply with CRA guidelines: the “lending test,” the “service test,” and the “investment test.” The new rule replaces that system with a “single-ratio” test, which measures the total dollar volume of a bank’s CRA activity compared to the bank’s total assets. OCC argues that this approach will greatly streamline the CRA exam process and make it more objective and transparent.
In its comments on the proposed rule, NCSHA raised strong concerns about the single-ratio test and the elimination of the investment test. Without the investment test, NCSHA argued, banks would have substantially less incentive to make affordable housing investments, including Housing Credit and Housing Bond purchases, because they would be able to meet their CRA requirements solely through lending. While equity investments have a much bigger community impact, they are also more expensive and less profitable than lending activities. NCSHA specifically asked OCC and FDIC to retain the separate investment test, as did many other affordable housing advocates.
To offset concerns the single-family ratio test would reduce banks’ CRA investments, the rule allows banks to receive “double credit,” in dollar terms, for certain investments. The list of activities eligible for double credit expressly includes investments in Housing Credits but does not include Housing Bonds (or any municipal bonds). In its comments, NCSHA urged the agencies to include Housing Bonds and HFA mortgage-backed securities in the list of investments eligible for double credit.
Some advocates have raised concerns that the double credit will lower bank investment activities by effectively enabling them to meet their CRA obligations by investing less in dollar terms. To address these objections, the final rule will only allow banks to receive double credit for eligible investments after the quantifiable dollar amount of their eligible investment activities for the applicable evaluation period matches the dollar amount of such activities for their prior evaluation period. For example, if a bank made $100 million in investments eligible for double credit in its previous CRA evaluation period, it will not be able to claim double credit for such investments in its next evaluation period until after it has made at least $100 million worth of such investments.
List of Eligible Activities
OCC also released concurrently with the final rule a comprehensive list of activities for which banks are eligible to receive CRA credit. The list includes Housing Credit investments and Housing Bond purchases, common CRA activities for banks. The final rule also makes eligible for CRA credit any standby letters of credit banks offer as credit enhancements for eligible activities, such as Housing Bonds. NCSHA requested that Housing Bonds and bank letters of credit for HFA programs be included as eligible activities. The final rule will also allow banks to get credit for acting as syndicators and/or sponsors of Housing Credit deals (as well as New Markets Tax Credit deals).
Other notable eligible activities include financing for naturally occurring affordable housing and for targeted activities in Opportunity Zones, both of which NCSHA supports. In its comment letter, NCSHA suggested investments in Opportunity Zones should get CRA credit only if they have a demonstrable benefit to low- and moderate-income (LMI) individuals and communities. In the final rule, OCC says banks should only receive CRA credit for Opportunity Zone investments that benefit LMI individuals and communities, and each investment’s eligibility will depend on its circumstances.
The list of eligible activities is not intended to be exhaustive. OCC also encourages banks to reach out to the agency to determine whether any other activities may be CRA-eligible.
OCC is generally keeping its current approach of evaluating bank CRA activity predominately in geographically defined “assessment areas” surrounding a bank headquarters, its branches, and deposit-taking ATMs, as well as areas where a bank conducts a significant volume of retail lending (though the final rule will give the banks the option of not basing assessment areas around deposit-taking ATMs if they so choose). To address the rise in online banking, and ensure banks support those areas in which they do business, the new rule requires banks receiving half or more of their deposits from outside their current assessment areas to make areas generating at least five percent of each bank’s deposits a new CRA assessment area.