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Strategic Decision: Should I Adopt The New OCC CRA Framework?

Strategic Decision: Should I Adopt The New OCC CRA Framework?

Posted by Michael Berman on Jun 10, 2020 11:00:00 PM
Michael Berman

It’s always good to have options—even if new options require some strategic decision making. Such is the case for the Office of the Comptroller of the Currency’s new Community Reinvestment Act (CRA) framework.

Last month the OCC released its final CRA modernization rule, giving banks with less than $2.5 billion in assets the option of either adopting the new framework or continue to be evaluated with the old performance standards. It’s a decision that requires some analysis and an assessment of risk and strategy.

Key OCC CRA Framework Changes

Among the key changes, the new CRA framework:

  • Clarifies what qualifies for CRA consideration. The OCC now provides examples of qualifying CRA activities so banks have a better idea of what activity qualifies for credit.
  • Updates how banks define assessment areas. It establishes additional assessment areas for banks that don’t rely on branch networks to serve all their customers.
  • 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.

CRA Risks & Questions

Deciding to adopt the new CRA framework shouldn’t be a quick gut decision. A bank should take the time to evaluate potential risks and opportunities to understand how adopting the new guidelines would align with its existing strategic goals and risk appetite. These include strategic, compliance, operational, reputation, and financial risk.

Here are some questions to consider when assessing the risks and strategic advantages of adopting the new CRA framework:

How strong is the bank’s current CRA program? Does the bank usually pass its CRA exam with flying colors or has it been struggling? A bank with a strong CRA program may be reluctant to disrupt an effective system. It would need to see significant benefits and opportunities to make adopting the new framework worthwhile.

On the other hand, if the bank’s CRA exams haven’t gone well and the program needs an overhaul anyway, it may be worthwhile to consider the new regime. This is especially true if the bank’s reputation has suffered in the community. Adopting the new approach to CRA could potentially improve the bank’s reputation if the local community and activists view it as a benefit to the community.

How close is the bank to the $2.5 billion-asset threshold? Most of the new CRA framework doesn’t take effect until 2024. That gives banks a lot of time to prepare, but also a lot of time to grow. Does your bank expect to grow significantly, either organically or through acquisition, between now and 2024? If so, it might want to consider beginning to adopt the new CRA framework now so it doesn’t have to rush implementation down the road.

Could the bank benefit from quantitative measures? The new framework’s performance standards will eventually have quantitative measures, though there isn’t enough data yet to determine them. Would quantitative measures provide any value to the bank over the current qualitative measures? Could that viewpoint change once the OCC actually publishes thresholds and benchmarks? Does the expanded list of example CRA activities clarify quantitative measures enough that qualitative measures are less attractive?

How difficult would it be to adopt quantitative measures?  The new options come with the added complexity that would require an update to systems, reporting, and strategic decision making. How much would this cost the bank in time and resources and would it be worth the trade-off? Will it be hard to collect the needed data?

Would the bank benefit from being able to include qualifying activities conducted outside the current assessment area? Does the bank engage in activities beyond its assessment area that would qualify for CRA credit under the net framework? Has the bank been considering expanding activities beyond its current assessment area?


Related: What Is A Compliance Management System And Why Your FI Needs One

Topics: Fair Lending, Banks, Ncomply, Nfairlending, Product Insight, Risk & Compliance, Compliance, Regulatory Compliance Management,

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