The Federal Reserve Advances a New CRA Rulemaking

The U.S. Federal Reserve yesterday voted unanimously to issue an Advance Notice of Proposed Rulemaking (ANPR) seeking comments on possible amendments to its Community Reinvestment Act (CRA) regulations. Interested parties will have 120 days to comment after the ANPR is published in the Federal Register, which is expected shortly.

The Federal Reserve is one of three federal banking agencies, along with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), that oversee CRA compliance for the banks they regulate. OCC in May issued a final rule substantially revising its CRA regulations (NCSHA summarized the final rule here). The FDIC initially joined OCC in proposing changes to its CRA regulations in December but chose not to go ahead with a final rule in order to focus more on COVID-19-related issues.

While the Federal Reserve’s ANPR differs from OCC’s final rule in several critical ways, the agency says it hopes it can work with OCC and FDIC to develop a set of common CRA regulations. Because the OCC’s rule does not fully take effect until 2023, there still might be time for the agencies to come together on a framework.

Below is a summary of some of the ANPR’s key provisions.

“Retail” and “Community Development” Tests
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 ANPR seeks comment on whether the Fed should instead implement a “retail test” and a separate “community development” test. Both tests would feature two separate subtests for lending/financing and services.

Under the “financing” subtest for community development, the ANPR would provide equal credit for community development loans and qualified investments. The Federal Reserve argues this approach would allow banks to get credit for extending and maintaining long-term financing activities, regardless of whether they are debt or equity, but notes there are concerns that such an approach could reduce bank interest in Housing Credit investments. NCSHA expressed opposition to a similar proposal from OCC, which we believe will disincentivize banks to make equity investments in affordable housing, including Housing Bonds and Housing Credits.

Assessment Areas
In general, the ANPR maintains the Federal Reserve’s current approach of measuring banks’ CRA activity on geographically-defined “assessment areas” surrounding a bank’s headquarters, branches, and deposit-taking ATMs, as well as areas where a bank conducts a significant volume of retail lending. However, the ANPR proposes that the Federal Reserve be able to tailor each bank’s facility-based assessment areas to account for the size of the bank. Specifically, smaller banks would have the ability to narrow their assessment areas to focus on smaller portions of counties or other political subdivisions within which they operate, if such areas are not smaller than a federal census tract.

Metrics
The ANPR seeks to establish clear, measurable metrics to evaluate a bank’s CRA compliance. Specifically, a bank would be measured based on a quantitative analysis of the percentage of low-income loans in low-income areas the bank made within its assessment areas. If the bank exceeds the threshold for this test, it will be assumed to have achieved at least a “Satisfactory” CRA rating, provided it has not engaged in any fair housing violations or other discriminatory practices.

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