On May 20, 2020, the Office of the Comptroller of the Currency (OCC) announced the release of final rule designed to modernize its regulations regarding the Community Reinvestment Act (CRA). The final CRA modernization rule makes the following changes in the CRA compliance framework:
- Clarifies and expands the types of lending, investments and services activities that qualify for CRA credit;
- Revises how banks delineate assessment areas;
- Provides new methods for consistent and objective assessments of CRA performance; and
- Requires timely and transparent reporting.
An overriding goal of the new rule is to transition from a system that was primarily subjective to a system that will be primarily objective. This will be a welcome change for many banks. In our experience working with many clients, benchmarking against other banks was often a challenge in understanding performance standards for a particular CRA performance criterion. The OCC contends that under the new rule “the same facts and circumstances will be evaluated in a similar manner regardless of the particular region or particular examiner.”
The rule is effective on October 1, 2020 with transition periods lasting from two to four years depending on the size of the institution. Thus, while figuring out how to compete in the COVID-19 era, OCC-regulated banks will have to begin updating their compliance management systems in earnest. This will include:
- Making deposit data systematically available to identify potential deposit-based AAs as defined in the rule;
- Identifying major retail lending product lines (i.e., 15 percent or more of retail dollar amount or originations);
- Analyzing CRA-qualified activity under the new empirical performance standards (e.g., dollar amount of community development lending as a percentage of deposits in the assessment area);
- Conducting CRA distribution testing (i.e., distribution of retail lending by geography and borrower profile) under the new empirical performance standards);
- Quantifying the amount of CRA-qualified lending and investment activity needed to achieve satisfactory or higher performance standards in any facility- or deposit-based AAs;
- Quantifying the in-kind dollar value of non-monetary community development services;
- Establishing procedures for requesting CRA-qualification opinions from the OCC; and
- Establishing procedures to systematically report performance context factors to the OCC.
An interesting dynamic regarding the context of the new OCC rule is the fact that neither the Federal Deposit Insurance Corporation (FDIC) nor the Federal Reserve System (FRS) have joined the OCC in issuing the final CRA modernization rule. The FDIC did partner with the OCC in announcing the proposed rulemaking in December 2019, however, it declined to issue a final rule at this time to avoid distracting banks trying to assist borrowers affected by COVID-19. This suggests the FDIC may join the OCC in the future once the societal effects of COVID-19 have been alleviated. The FRS, in contrast, has not participated in this CRA modernization rulemaking process. It is unclear whether it intends to join the OCC and FDIC or if it will go its own way. Regardless, we can expect to see diverging CRA requirements between agencies for a potentially lengthy period of time.