Community Reinvestment Act Final Rule

The Community Reinvestment Act final rule is almost 1,500 pages and undoubtedly challenging to digest. As of the drafting of this article, the final rule has not been published in the Federal Register, and this article is based on the version published on the federal banking agencies’ websites on October 24, 2023. Because there are more topics than can be covered in a short summary, this article will discuss only the:

1. effective and applicability dates;
2. size or other coverage definitions;
3. basics of the tailored evaluation framework structure; and
4. basics of the new Retail Lending Test (RL Test), which could apply to small, intermediate, or large banks.

Effective Versus Applicability Dates

The provisions of the final rule are effective on April 1, 2024. However, most of the provisions are not applicable (read: enforceable) until January 1, 2026, and reporting requirements related to data on operations subsidiaries, affiliates, community development (CD) loans and investments, and assessment area (AA) data are not applicable until January 1, 2027. The reporting date is April 1 for subsequent years.

Small, Large, or Something Else?

The final rule, like the existing rule, does not apply equally to all banks. The final rule revised the thresholds for small, intermediate, and large banks, each of which is subject to different requirements under the final rule related to certain data collection and reporting and maintenance obligations, as well as different performance evaluation elements:

1. A small bank will be a bank that has less than $600 million in assets in each of the prior two calendar years;
2. An intermediate bank will be a bank that had $600 million or more in assets in each of the prior two calendar years, but less than $2 billion in assets in at least one of the prior two calendar years; and
3. A large bank will be a bank that has at least $2 billion in assets in each of the prior two calendar years.

“Something else” is any financial institution that either (1) is not a small, intermediate, or large bank, or (2) is a small, intermediate, or large bank but is subject to additional requirements or opts to use something other than the standard tests applicable to it. This article cannot cover all the variations in detail. Institutions in the three “something else” groups below should review the final rule carefully for either special provisions or additional requirements that may apply to them.

The first group includes limited purpose banks and those examined under a strategic plan. Any bank currently designated as a limited purpose or wholesale bank will continue to be considered a “limited purpose bank” under the new rule unless it (1) applies to revoke the designation or (2) is otherwise notified by its regulatory agency. Certain other banks could apply for such designation.

A bank may still apply to be examined under a strategic plan; however, the changes in the final rule likely will make it harder for a bank to demonstrate the need for a strategic plan evaluation. Banks currently operating under or considering a strategic plan should review the procedural and substantive changes to confirm their eligibility and determine the best option.

The second group is a special group of large banks. The agencies created two subsets of large banks which have more or different requirements under the final rule. In general, the subsets are large banks that had assets of more than $10 billion or large banks with $10 billion or less that do not have any branches. Examples of the additional requirements include, but are not limited to:

1. special deposit reporting;
2. providing information related to the digital and other delivery systems of the bank; and
3. additional data and reporting requirements necessary to evaluate the subsets of large banks slightly differently than the other large banks.

The third group is small, intermediate, or large banks that opt into some new requirements that may not otherwise apply to them. For example, a small bank can opt to be evaluated under the new RL Test, and an intermediate or small bank can opt to be evaluated outside its retail lending area for its major product lines, even if it originated 50% or less of its closed-end home mortgages, small business loans, small farm loans, and automobile loans (if applicable) in its facility-based AA(s).

They Want to Look at What?

Under the final rule, how an institution is evaluated depends mostly on its size. Large banks will be subject to an RL Test, a Retail Services and Products Test (RSP Test), a CD Financing (CDF) Test (which combines CD loans and CD investments), and a CD Services (CDS) Test, with different weighting assigned to each test (CDF and RL will each be 40% and RSP and CDS each 10%). In order to earn an overall rating of Satisfactory or Outstanding in any state, multistate MSA, or for the institution as a whole, large banks with ten or more facility-based or retail lending-based AAs must receive at least a “Low Satisfactory” rating in 60% or more of its total facility-based and retail lending-based AAs in such state, multistate MSA, or for the overall institution.

An intermediate bank will be evaluated under the RL Test and either the existing CD Test or, if they opt in, the new CDF Test. The RL Test will be weighted 50%, and the other test will be weighted 50%. A small bank will be evaluated under the “Lending Test” in the existing CRA regulations or, if they opt in, the RL Test. Either test will be weighted 100%. Limited purpose banks will be evaluated under the CDF Test, and those with a strategic plan will be evaluated under their approved strategic plan. There are many other options and choices depending on bank size and applicable tests, but the above are the main choices for banks related to evaluation.

Retail Lending Test

The new RL Test applies to large, intermediate, and, if they opt in, small banks (as each is defined under the new rule). As revised, the RL Test includes three different analyses: (i) a Retail Lending Volume Screen (RLVS), (ii) a determination of the Major Product Lines, and (iii) an evaluation of the distribution of its major product lines in each RL Test Area.

The RLVS is applied to the bank’s facility-based AAs. The evaluation includes home mortgage, multifamily loans, small business loans, and small farm loans. It will also include automobile loans if they are more than 50% of the total retail lending in each of the two years before the first year of the evaluation period or if the bank elects to have automobile loans evaluated. Home mortgage includes closed-end and open-end mortgage loans as defined in the rule. The evaluation sums the total dollar volume of this lending over the evaluation period and then divides it by a summed annual dollar amount of deposits for the AA (the source of the deposit data differs based on size of the bank). This is then compared to a market volume metric to determine whether it exceeds 30% of the market volume metric for the AA. If it does, it passes the screen. If it does not, then other factors are evaluated.

The Major Product Lines analysis determines which product lines will be evaluated to determine the number of loans to low- or moderate-income (LMI) borrowers, in LMI census tracts, or to small businesses or small farms.

Facility-based AA or outside retail lending areas: Closed-end home mortgage loans (note this does not include open-end mortgage loans), small business loans, small farm loans, and, if applicable, automobile loans constitute a “major” product line if the loans for each product equal 15% or more of the bank’s lending across all product lines in the area. The 15% considers loan count and loan volume and then averages the two. If a bank has no major products in a particular facility-based AA, the volume screen alone is used to determine the bank’s performance in that AA.

Retail lending AAs: A product is “major” if it was sufficient to warrant the AAs creation (e.g., 150 or more closed-end mortgage loans or 400 or more small business loans in two consecutive years). (Note that small farm lending, automobile lending, and other products are not major products for retail lending AAs.)

Distribution analysis is then performed on the bank’s major product lines in each AA for which there was a major product. The distribution analyses include LMI borrowers, loans to businesses with “low” ($250,000 or less) or “moderate” (greater than $250,000 but no more than $1 million) gross annual revenues, and loans in LMI census tracts (collectively, LMI Loans). Each of these is evaluated separately for each major product in each AA. The analyses evaluate loan counts (not dollar amounts) of the bank’s LMI Loans.

The results are then compared against a market benchmark and a community benchmark, providing agencies with a view of how the bank compares to its peers, as well as how well it helps the community (regardless of peers’ performance). The final rule establishes specific ranges for each of the potential performance ratings for each benchmark and requires the agency to multiply each of the benchmarks by specified multipliers to determine the performance ratings. The agency must use the lesser of the two benchmark multiplier results in the comparison for each facility-based AA.

Each product rated within each AA will receive a score for each part of the distribution analysis. The examiners then calculate a weighted average, based on demographics, to weight each score and calculate a final weighted score by product line for each AA. Those are further used to determine weighted scores by state, MSA, and for an overall rating.

Did you get all that? I warned you it was complicated. As indicated at the start, the final rule is long and complex. Banks should perform a careful review to establish precisely how the new rule will impact CRA planning and examinations going forward.