Top 5 Takeaways from Our CRA Modernization Webinar

Note:  Under the interim final rule released by the agencies on March 21, 2024, CRA effective dates for the Facility Based Assessment Area provisions and the Public Notice provisions have been extended from April 1, 2024, to January 1, 2026.

We packed a lot of information into last month’s CRA modernization webinar. Whether you attended or not, we wanted to highlight our top 5 takeaways for banks. 

At close to 1,500 pages, the CRA modernization final rule is not a beach read. While you’ll want to take the time to read through the document, our top takeaways will point you in the right direction.

1. Your bank’s asset size determines CRA reform impact

Smaller banks – defined by the agencies as those with less than $600 million in assets – will have a lighter compliance lift than large banks (> $2 billion in assets) and intermediate banks (between $600 million and $2 billion).

The key difference: Banks with over $600 million in assets will be subject to the new Retail Lending Test, with small banks able to opt in. Regulators introduced the Retail Lending Test to make CRA compliance more quantitative.  

The lending test relies on your lending Volume threshold, a number calculated by dividing the number of loan originations relative to deposits of large banks in your assessment area. 

Under the Retail Volume Screen metric, large and intermediate banks must meet a 30% lending volume threshold in their facility-based assessment areas. If banks do not meet the 30% threshold, regulators will decide whether the institution has an acceptable basis for not meeting it, including:

• The dollar volume of consumer loans 
• Institutional capacity and constraints 
• Other lenders in the institution’s facility-based AA 
• Limitations due to safety and soundness 
• Bank business strategy 
• Other factors
  

While smaller banks must opt into the Retail Lending Test, they should still consider the impact of future growth. Smaller banks need a regulatory change management plan for CRA compliance as part of their strategic growth strategy. 

Intermediate banks will undergo two tests of equal weight, similar to the current CRA: the new Retail Lending Test and the same Community Development Test. They may opt into the new Community Development Financing Test. 

Large banks will encounter much more scrutiny under the final rule. Examiners will apply four tests to banks with greater than $2 billion in assets with the following weights:

• The Retail Lending Test (40%) 
• The Community Development Financing Test (40%) 
• The Retail Services and Products Test (10%) – This test will evaluate whether you’re meeting the banking needs of low-to-moderate (LMI) census tracts in your assessment area and includes branch availability and hours, remote services, and digital banking availability. 
• The Community Development Services Test (10%) – A qualitative review of relevant community development (CD) activities, measuring their impact and responsiveness to community needs.
  

CRA modernization places the most significant regulatory burdens on larger banks. But small and intermediate banks also need to understand their exposure, especially as they grow in asset size.

2. Let assessment area changes inform your CRA policy updates

Does your current CRA program align with the final rule? Hint: if you’re a bank with over $600 million in assets, the answer is not really. 

Large and certain intermediate banks must now consider three different assessment areas under the Retail Lending Test. 

Facility-Based Assessment Areas: Applies to all banks and is consistent with current CRA regulations. 

Retail Lending Assessment Areas (RLAAs): The agencies require large banks with at least 150 closed-end mortgages or 400 small business loans to account for CRA activity outside their facility-based assessment areas. The final rule makes an exception for large banks that originate 80% of loans within their facility-based assessment areas. 

Outside Retail Lending Areas (ORLAs): The 80% facility-based loan threshold for RLAAs appears to give large banks a break, but that’s not really the case. For large banks and certain intermediate banks, the agencies define ORLA as a nationwide area where financial institutions originate or offer loan products (mortgages, multifamily, small business, small farm, and potentially auto loans) for CRA compliance. 

With ORLAs, many banks will be required to break down lending activity by geographic areas outside their facility-based assessment area, regardless of whether they meet the 80% facility-based lending threshold. Banks will be exempt from ORLA if no loans were made in the major product lines listed above during the evaluation period. 

As banks review their current CRA program, they must account for the expansion of community development activities outside their facility-based assessment areas and update policies to reflect more rigorous testing.

3. Prioritize staff training for community investment compliance

Effective CRA regulatory change management is an institution-wide effort. Banks must avoid forming CRA compliance teams or working groups siloed from other business units. 

Staff involved in community development programs and volunteer service and activities need to understand what activities apply under CRA modernization. 

The final rule expands the four current Community Development (CD) categories into 11 categories, which include:

• Affordable Housing 
• Economic Development 
• Community Supportive Services
• Revitalization or Stabilization Activities
• Essential Community Facilities
• Essential Community Infrastructure
• Recovery of Designated Disaster Areas
• Financial Literacy
• Community Development in Native Land Areas
• Activities that Support Minority Deposit Institutions (MDIs), Women's Depository Institutions (WDIs), Low-Income Credit Unions (LCIs), and Community Development Financial Institutions (CDFIs)
• Disaster Preparedness and Weather Resiliency Activities
  

While the final rule promises to develop an illustrative list of activities that qualify for community development consideration under these categories, we recommend banks confirm the eligibility of CD activities with their supervisory agency.

4. Banks will face a torrent of new reporting requirements under CRA and 1071

With the passage of CRA reforms and the inevitability of 1071, banks should brace themselves for an onslaught of new compliance and reporting requirements. 

CRA compliance has been revamped to include loan products for large and intermediate banks outside their facility-based assessment areas. The products referenced in RLAA are mortgages and small business loans. 

How banks collect small business loan data for CRA and 1071 compliance is an open question. In the past, financial institutions have typically responded in an ad-hoc fashion to new regulations. But given the regulatory landscape of 2024, banks must now reassess how they collect, analyze, and report lending data on their loan products – particularly small business loans. 

They might reconsider their priorities in the coming year. Investing in compliance, including hiring additional personnel or implementing new technologies, may make more sense than a new product launch.

5. Remember to breathe

Now, it’s time for a pep talk. Your bank has handled regulatory changes before, and you will do it again. 

Take a deep breath and recognize that Ncontracts is here to help. We’re updating our CRA module Ncommunity as an add-on to our Nrelief suite or standalone product to help your bank successfully navigate the changes in the final rule. 

It’s easy to become overwhelmed by new regulations, but success in compliance management is often a matter of having the right tools.

Give your CRA analytics a boost