Our overview of the Top 10 Considerations for Financial Institutions in 2020 series noted that financial institutions will continue to face challenges in a number of corporate, compliance, and risk areas, especially in light of COVID-19 and a potentially slowing economy in 2020. Our seventh consideration is the modernization of the Community Reinvestment Act (CRA).
On January 9, 2020, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) jointly published a proposed rule (Proposed Rule) in the Federal Register to modernize regulations implementing the CRA. Conspicuously absent from the Proposed Rule was the Board of Governors of the Federal Reserve System (FRB), who has traditionally joined the OCC and FDIC with respect to rulemaking under the CRA. On May 20, 2020, the OCC published a final rule (Final Rule) to “strengthen and modernize” the CRA framework without either the FDIC or the FRB signing on to the Final Rule.
According to the OCC, the Final Rule makes changes in four areas of the CRA framework. First, it clarifies those activities that qualify for positive CRA consideration. Second, it updates how banks delineate the assessment areas in which they are evaluated. Third, it provides additional methods for evaluating CRA performance. And fourth, it requires reporting that is timely and transparent.
One significant area of modernization in the Final Rule is the overall emphasis on its objective approach to CRA evaluations. The OCC notes that the previous approach was predominantly subjective in nature and not reflective of the actual volume of CRA activity for any particular bank; however, by moving to a predominantly objective system, the Final Rule will increase clarity for banks and provide more reliable, reproducible, and comparable CRA ratings. The objective nature of the CRA evaluations going forward should provide welcome consistency in the exam approach, regardless of the examiner or geographical region. One way the OCC is seeking to improve consistency is by providing an illustrative list of qualifying activities and a process to confirm that a particular activity satisfies the qualifying activities criteria.
For smaller community banks, the Final Rule retains the intermediate small bank assessment category and raises the asset threshold. Under the Final Rule, the threshold for a small bank is raised to $600 million, while the intermediate bank threshold will be set at $2.5 billion.
The Final Rule becomes effective on October 1, 2020. However, the Final Rule also contains staggered compliance dates of January 1, 2023 and January 1, 2024, based on the applicable performance standards. For example, banks subject to the small bank and intermediate bank performance standards must comply with the Final Rule’s amendments related to assessment areas, performance standards, retail domestic deposit data collection, and recordkeeping by January 1, 2024. All other requirements will be effective October 1, 2020.
1. National banks should begin planning for the compliance dates in the Final Rule as soon as possible given changes to the assessment area, qualifying activities, and reporting requirements. For state-chartered banks, we suggest reviewing the Final Rule for insights into where the FDIC and FRB may amend their CRA requirements in the future.
2. As we expect clarification and expansion of qualifying activities, consider whether there are pockets in your bank’s assessment area that may provide additional opportunities to serve the community.
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