The OCC released its final Community Reinvestment Act (CRA) rule last week, shortly before Comptroller Joseph Otting stepped down. The agency pushed ahead without the FDIC, which had been part of the original rulemaking proposal, since the FDIC was focused on dealing with the ongoing COVID-19 pandemic.
The framework remains largely unchanged from the OCC’s December proposal with a few exceptions:
- Holds off on quantitative standards. The OCC responded to criticism it didn’t have sufficient data to set hard and fast percentages for some exam scores. It’s postponing quantitative standards until the agency has gathered more CRA data from banks. The requirement for banks to collect and turn in the data to the OCC will not take effect until January 2024.
- Preserves examiner judgment. The final rule requires examiners to “consider performance context and evidence of discrimination and illegal credit activity before assigning final ratings.”
- Banks under $2.5 billion in assets can keep the old CRA standards or adopt the new one. This is up from $500 million in assets under the proposal.
- Intermediate-size banks are still recognized as having a simpler CRA burden. They include banks between $600 million and $2.5 billion in assets.
The OCC’s new CRA rules take effect in October 2020, but many of the changes will not be phased in until January 2024. The first exams under the new regime will begin in two years.
“The final rule achieves our original goals of strengthening the CRA regulatory framework by clarifying what qualifies for CRA consideration, updating how banks define their assessment areas, evaluating bank CRA performance more objectively, and making the entire process more transparent and timelier.”
What Changes with the OCC’s New CRA Framework?
The OCC’s framework for CRA modernization makes several key changes. Among them, it:
- Clarifies what qualifies for CRA consideration. The OCC published a non-exhaustive list of qualifying CRA activities to give banks more clear examples of what activities, including bank lending, investment, and services qualify for credit (although it warns that not every activity is suitable or legal for every bank). This list is longer than the one in the proposal.
- Updates how banks define assessment areas. The new CRA framework retains immediate geographies around branches and establishes additional assessment areas for banks that do not rely on branch networks to serve their customers. If banks collect 50 percent of deposits from outside of their physical branch footprint, any geographic area that provides 5 percent or more of the bank’s retail deposits will be delineated as an additional assessment area.
- Evaluates CRA performance with quantitative measures that assess the volume and value of activity. The updated framework provides examiners with new performance standards for distribution and impact analysis. This includes:
- the distribution of retail lending activities relative to LMI populations and LMI census tracts in a bank’s assessment areas.
- the impact of all CRA activity, measured in dollars.
- quantitative credit for branches in, or that serve, LMI census tracts or other identified areas of need.
- consideration of the qualitative aspects of CRA activities by including an assessment of a bank’s performance context.
As mentioned earlier, the OCC will set thresholds and benchmarks later.
- Making reporting more transparent and timelier. Examiners will be able to produce more consistent, useful, and timely CRA performance evaluations (PEs).
What Does the OCC CRA Framework Mean for Fair Lending?
For many banks, the CRA rules they follow today will remain in effect for the foreseeable future. Banks under $2.5 billion in assets will have the choice to adopt the new framework or continue with the existing regime. Examiners will continue to examine banks to ensure CRA is being followed. Banks need to have a good working CRA program and regularly analyze CRA data to understand and manage CRA compliance risk.
As with any strategic decision, banks need to think about the risks of adopting the new CRA framework vs. the risks of sticking with the tried-and-true. The decision will be different for each bank, depending on their size, location, business model, and other circumstances. Apply basic risk management to find out if the changes present new opportunities worth pursuing or if it makes more sense to stay the course.
For larger banks, it means reviewing the new rules to see how modernization will impact their CRA program. From assessment areas to activities, there will be new rules to follow, but also the potential to innovate new CRA solutions. As banks begin to incorporate the new framework, Fair Lending analytics will be critical to ensuring program changes are having the intended impact and are compliant.