In October 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (collectively known as the “Agencies”) issued a final rule (the “Final Rule”) amending their regulations, implementing the Community Reinvestment Act (CRA). This "Final Rule" is pivotal as it signifies the most comprehensive overhaul of the CRA in nearly three decades. Its breadth and depth will have a profound impact on the CRA programs of banks of varying sizes, reshaping the landscape of community reinvestment and signaling a new era of regulatory expectations.
A notable change under the final rule is the redefinition of bank sizes. The asset thresholds that categorize banks into small, intermediate, and large have been raised, which will reclassify numerous banks and consequently alter their CRA obligations. The thresholds will:
This increase in asset-size thresholds will transition approximately 800 banks to small status and about 200 banks to intermediate status, reflecting the substantial growth in bank sizes since the last major CRA regulation revision.
These changes are set to take effect January 1, 2026, which offers a transition period for banks to adjust to the new framework. However, certain provisions, particularly related to facility-based assessment areas, will be introduced earlier, starting April 1, 2024. The rule's rollout is designed to give financial institutions adequate time to align their policies and procedures with the new requirements.
There are two main types of assessment areas in the Final Rule:
The Final Rule introduces four new tests to evaluate large banks' CRA performance: the Retail Lending Test, the Retail Services and Products Test, the Community Development Financing Test, and the Community Development Services Test. These tests represent a shift toward a more comprehensive and granular assessment of banks' activities, with a mix of qualitative and quantitative metrics.
Under the previous CRA regulations, community development performance was evaluated across four broad categories. The Final Rule expands this by introducing 11 new categories derived from past interagency Q&As to provide clearer guidance on community development activities. These activities are now more broadly defined to encompass a range of initiatives aimed at supporting LMI communities, distressed areas, and small businesses and farms.
The new rule also sets specific standards for when community development loans, investments, and services will receive full or partial consideration. The "primary purpose" terminology initially proposed has been replaced with a more structured framework. This includes a "majority standard," a "bona fide intent standard," and involvement with minority depository institutions (“MDIs”), women’s depository institutions (“WDIs”), low-income credit unions (“LICUs”), or community development financial institutions (“CDFIs”). Involvement with the Federal Low-Income Housing Tax Credit programis also recognized within these categories.
For activities supporting affordable housing, banks may receive partial credit even if they don't meet the "majority standard." This credit is proportionate to the percentage of total affordable housing units involved. However, this partial credit option does not extend to other community development categories.
For both the Community Development Financing and Services Tests, large banks will be evaluated at the facility-based assessment area level, the state level, and, if applicable, the multistate MSA and nationwide levels. This multi-tiered evaluation process ensures that banks' contributions to community development are assessed comprehensively, reflecting their impact across various geographic areas.
Under the Final Rule, evaluations of a large bank's CRA performance will be based on these tests at various levels. Facility-based assessment areas will be considered, as well as the bank's community development activities at the state and multistate MSA levels. A bank's performance will be weighted and combined across all tests to assign a comprehensive CRA rating.
Each bank will receive a performance score that reflects their efforts to meet the credit needs of their communities. The overall rating, ranging from "Outstanding" to "Substantial Noncompliance," will influence the bank's strategic planning and operational focus.
In summary, the Final Rule's changes represent a substantial evolution in the CRA's application, one that demands strategic reevaluation from large banks. With expanded definitions and new evaluation criteria, banks must adapt to fulfill their community reinvestment obligations while navigating the complexities of the modern financial landscape. For intermediate banks, the adjustments in asset thresholds and the introduction of new performance tests will require a reevaluation of lending and community development strategies. Small banks, while having the option to opt into certain aspects of the new framework, will need to assess the benefits of doing so against the potential increased regulatory burden.