After a long period of deliberation, the Federal Reserve released its highly anticipated Advanced Notice of Proposed Rulemaking (ANPR) for the Community Reinvestment Act this week. The 186-page proposal is the first major update to CRA, a landmark civil rights law to address inequities in credit and address redlining, in over 25 years.
When CRA was first introduced, lawmakers aimed to reverse years of government policies and market actions that deprived lower-income and predominantly minority areas of credit and investment. As we saw earlier this year with the release of the OCC’s CRA modernization updates, the financial regulatory agencies are now working to update the rule to align with a banking environment where markets and delivery methods have greatly expanded.
A review of the ANPR shows the Fed has incorporated ideas from previous public comments, research, and discussions with the other banking agencies. It was also informed by 29 CRA roundtables the Fed held with community and industry leaders across the U.S.
The Fed will continue to welcome feedback over a 120-day comment period.
Here’s a rundown of the CRA changes proposed by the Fed by objective:
- Promote financial inclusion. The Fed has proposed expanding and clarifying CRA-eligible activities that support minority depository institutions (MDIs), community development financial institutions (CDFIs), women-owned financial institutions, and low-income credit unions. It also includes possible credit for lending outside of a bank’s assessment areas, particularly to so-called “CRA deserts” in rural and inner-city communities.
- Focus on loan output (# of low-to-middle income communities). The Fed proposes a four-part test. Loans to the smallest businesses, smallest farms, and minority-owned small businesses might be considered impactful and responsive to community needs under the proposal, Fed Governor Lael Brainard said in a speech.
- Provide clarity, consistency, and transparency. The proposal would eliminate partial exams, replacing them with full scope exams with tailored performance evaluations. The Fed would use a metrics-based approach calibrated based on over 6,000 written public CRA evaluations.
There would be clear quantitative thresholds for the level of retail lending and community development financing needed to achieve a “satisfactory” CRA rating and clear threshold for lending to LMI borrowers and neighborhoods in each major product line. These thresholds would be:
- Tailored to local market conditions and adjust automatically to reflect changes over the business cycle.
- Based on local data reflective of the credit needs and opportunities among LMI individuals, communities, small businesses, and small farms and on market data that reflect the level of LMI lending in the area by all lenders.
The Fed would rely on a Community Development Financing Subtest calibrated using local and national data. Retail lending and community development financing thresholds would be available in simple, regularly updated dashboards that banks could use to compare their level of activity to the thresholds in each assessment area.
Other key changes include:
- Public data as a benchmark.
- More emphasis on banks issuing new loans and direct investments rather than purchasing mortgage-backed securities.
- Potential national assessment area for online banks.
- Potential for CRA credit for non-lending activities, such as offering checking and deposit accounts in low-income communities.
- Potential for large retail banks to have a separate Retail Test and a Community Development Test with separate financing and services subtests.
- A Retail Lending Test that stays true to the CRA's core focus on providing credit in underserved communities.
- Minimizing data collection and reporting burden by using existing data when possible.
- Clarifying and expanding eligible CRA activities to focus on communities.
Next week we’ll be hitting CRA again, breaking down the differences between the OCC’s new CRA rule and the Fed’s proposal.
If the Fed adopts these changes will you be ready? Please feel free to contact us and we’ll be glad help you understand how to navigate these new regulations with Ncontracts.