Updated Bank Regs Proposed for Internet Services
On May 5, 2022, three federal agencies—the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve Board) and the Federal Deposit Insurance Corporation (FDIC)—issued a joint notice of proposed rule-making to update regulations issued under the Community Reinvestment Act (CRA) enacted in 1977.
The proposed regulations are intended to address changes in the banking industry since the 1995 and 2005 regulatory updates of the CRA. In particular, the proposed revisions would take into account the industry’s evolution from exclusively facility-based services to one that also operates through the internet.
- The Community Reinvestment Act (CRA) enacted in 1977 authorized federal bank regulators to develop regulations to increase bank investment in low- and moderate-income (LMI) communities.
- Current CRA regulations evaluate banks’ LMI community development performance in the geographic areas where the banks’ branch networks are located and operate.
- The federal agencies responsible for the CRA have proposed revised, well-received regulations to add coverage for banks’ internet services that reach beyond their facilities.
- The CRA does not apply to non-banks, i.e., non-depository financial companies that issue a major portion of consumer auto loans and home mortgages; covering non-banks would require enacting new legislation.
CRA Goals Emerged From Civil Rights Era
The CRA was enacted following the Civil Rights movement to reverse disinvestment attributable to government and private redlining of neighborhoods deemed too risky for investment. This practice resulted in depriving lower-income areas of credit and associated development, particularly for housing and small business.
The CRA was designed to address inequities in access to credit among different communities and populations. The law requires federally insured banks to meet local credit needs in the areas where their branches are located, particularly by focusing on investment in low- and moderate-income (LMI) communities while maintaining safe and sound operations. Today, banks subject to the CRA continue to serve the geographic areas where they are located. However, the advent and growth of mobile and online banking has expanded banks’ markets beyond their branch networks. This expansion through the internet to markets far from their facilities' geographic locations is not covered by the current regulations.
Reasons for CRA Regulatory Revisions
Federal regulators and many in the banking industry have acknowledged the need to update CRA regulations for a number of years. Between 2018 and 2020, rulemaking was announced and regulations proposed by one or more of the three agencies and then withdrawn separately several times. A proposed revision issued near the end of the Trump Administration—which was criticized by both regulators and the industry—was withdrawn by the Biden Administration in 2021.
Recognizing the gaps in the current regulations, the three agencies responsible for the CRA produced the unified, consistent set of proposed regulations now under consideration. Their goals: to establish a single set of rules relevant to the current banking industry and community development needs and to provide consistent implementation across the banking agencies.
The requirements of the proposed regulations vary to some extent, depending on the size of the bank. They define banks as large, intermediate, and small, based on their assets. Large banks are ones with assets exceeding $2 billion; intermediate banks have assets of at least $600 million, but less than $2 billion, while small banks have assets under $600 million.
In addition, the metrics used in evaluating banks would be clarified and standardized to account for differences in size, business model, and local conditions. The proposed revisions would continue the regulations’ application to both wholesale banks and limited purpose banks. Banks can seek designation from regulators as a wholesale bank or a limited purpose bank. Banks that do not offer home mortgage, small business, small farm, or consumer loans to retail customers can be designated as wholesale banks. A bank designated as a limited purpose bank is one that offers only a narrow line of products (such as credit cards or motor vehicle loans) to a regional or broader market.
Several current evaluation tests would be revised. The proposed regulations would revise the geographic assessment areas for large banks and some intermediate-size ones under the Retail Lending Test to reflect both their physical branch locations, as the current regulations provide, and add evaluation of their expanded, internet-supported markets. The revision would examine their services to LMI borrowers, small businesses and small farms. The Retail Services and Products Test would look at banks' delivery systems, including digital ones, and their deposit products for LMI communities.
Banks’ community development loans and investments would be tested by a new metric and reviewed in comparison to other banks for their lending and investment effect on community development. A new qualitative test of banks’ community development services is proposed; banks with assets over $10 billion would be subject to a test on the basis of community development services per full-time employee.
Regulators would determine banks’ ratings both for their overall performance and for the separate tests. If examiners discover discriminatory or illegal practices in a banking organization, the bank’s rating would be lowered.
Data Collection and Transparency
The agencies’ proposal also would create new data-collection requirements for large banks, that is, banks with assets of at least $2 billion. The regulations would use existing data to the extent possible. Additional categories of data collection—requiring significant information on deposits, retail services, and digital systems—would apply to banks with assets exceeding $10 billion. However, the new data collection requirements would not apply to small banks,
The agencies intend to promote transparency and public engagement by seeking the views of the public in specific geographic areas on their communities’ credit needs and opportunities. Public comments received by the agencies will be shared with the banks. The proposal also seeks comments on publishing bank metrics on retail lending and community development financing, as well as branch distribution information for the public prior to conducting bank examinations.
The proposed regulations have drawn general approval from both the banking industry and community development advocates. However, both regulators and policy advocates acknowledge that the constrained scope of the CRA, which applies only to banks, as well as the role of nonbanks in the financial services sector, will limit the regulatory impact.
Even for banks, current lending for business, community development, and even multifamily housing dominate their efforts to fulfill CRA goals. Moreover, more than 60% of CRA-qualifying loans in LMI areas are made to middle- and upper-income borrowers; 29% are made to higher income borrowers. Non-depository financial institutions, which are not subject to the CRA, currently make the vast majority of LMI home mortgage loans, particularly government-backed loans.
Recognizing the scope of nonbanks’ activities, particularly with respect to consumer
lending, Federal Reserve Chair Jerome Powell suggested in May 2021 that the CRA
be amended to cover non-depository institutions. Because the Congress must enact any changes to the CRA, the executive department agencies cannot extend the regulations to nonbanks.
What is the Community Reinvestment Act?
The Community Reinvestment Act, or CRA, is a law enacted in 1977 to address in equities in access to credit by requiring federally insured banks to invest in low- and moderate-income communities.
Which agencies are responsible for implementing the CRA?
The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve Board) and the Federal Deposit Insurance Corporation (FDIC) are responsible for interpreting
the CRA, issuing regulations for its implementation, compliance, and enforcement, and proposing regulatory updates to meet changing conditions in banking.
Why have the federal agencies published proposals to revise the CRA regulations?
Since the CRA was enacted and its regulations last updated substantively, the banking industry, particularly with respect to consumer services, has evolved from an industry providing facility-based services through its branches to an industry that now offers internet as well as branch banking services. The proposed regulations published on May 5, 2022, deal with these new conditions. They also revise regulations for the evaluation of banks' performance that vary according to the size of the institutions and the products that they offer.
Will the proposed regulations apply to all credit and lending activities?
The CRA applies only to federally insured, deposit-collecting banks; it does not apply to nonbanks, i.e., non-depository institutions, for example, financial companies that issue only auto loans and home mortgages. Extending the CRA to non-banks would require the enactment of legislative amendments to the law.
The Bottom Line
The proposed regulations, which include significant updates to the current rules, have garnered broad support. They are likely to be finalized by regulators and become effective later in 2022.
Legislation to extend the CRA coverage to nonbanks probably would provoke a serious conflict pitting regulators and banks against nonbank interests. Such a conflict between financial sector political heavyweights seems unlikely to overcome a Senate filibuster, especially in an election season.
Comments on the proposed regulations must be submitted to the agencies on or before August 5, 2022.