Staying Ahead of the Curve: How to Navigate Community Reinvestment Act Changes

North Highland has a strong track record of helping banks proactively enhance their risk and control initiatives. As a trusted advisor to industry leaders, we have extensive experience assisting financial organizations in preparing for regulatory changes, including through specialized services such as gap analyses and mock examinations. Our team of consultants are experts in risk and control programs within the banking industry and bring a deep understanding of complex banking products and services to help you navigate the ever-evolving regulatory landscape. Let's explore the most recent regulatory change that you, a financial services leader, need to proactively address: the Community Reinvestment Act.

On October 24, 2023, federal bank regulatory agencies – including the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) – announced the release of a finalized rule designed to enhance and update the Community Reinvestment Act (CRA) regulations. 

The CRA – originally enacted in 1977 – encourages banks to responsibly address the credit requirements of all communities, with a particular focus on low- and moderate-income (LMI) neighborhoods.

In this blog, we unpack the new rule’s scope, key tenets, and, critically, your next steps toward compliance.

What to know

From timing to key changes, below we explain everything you need to know about the updated rule. 

The timing

The new rule will go into effect on April 1, 2024. However, banks will have until January 1, 2026, to comply with most of its provisions. The reporting requirements will take effect on January 1, 2027, and banks will need to submit the required data and information by April 1, 2027 for the first reporting period. 

The “why”

The updates to the rule are designed to achieve eight key objectives:

  1. Strengthen the core purpose of the statute and its effectiveness.
  2. Adapt to the changing landscape of the banking industry, including the rise of mobile and online banking.
  3. Provide greater clarity and consistency in the application of the CRA regulations.
  4. Tailor performance standards to account for differences in bank size, business models, and local conditions.
  5. Customize data collection and reporting requirements, while leveraging existing data where possible.
  6. Promote transparency and public engagement.
  7. Confirm that CRA and fair lending responsibilities are mutually reinforcing
  8. Promote a consistent regulatory approach that applies to banks regulated by the OCC, FDIC, and Board of Governors of the Federal Reserve System.

The key changes

The final rule outlines several amendments, including:

  • Introducing new tests that evaluate loan activities, rather than branch location, to better measure a bank's engagement with a community.
  • Providing incentives for a bank to conduct more community development activities.  
  • Defining 11 specific community development categories to guide banks on the types of activities that support community development. These include Affordable Housing, Economic Development, Community Supportive Services, six categories of place-based activities, activities with certain institutions, and Financial Literacy.
  • Reducing the number of product lines included in some metrics, with most banks being evaluated on no more than three product lines, including closed-end home mortgage loans, small business loans, and small farm loans. 
  • Grouping banks based on their asset size: 
    • Small Banks: Total assets of less than $600 million.
    • Intermediate Banks: Total assets between $600 million to $2 billion.
    • Large Banks: Total assets of $2 billion or greater.
  • Limited Purpose Banks: Includes both "limited purpose banks" and "wholesale banks" as currently defined.  
  • Requiring that large banks evaluate their retail lending outside their branch network if they have originated enough closed-end home mortgages or small-business loans in that area.

How banks will be evaluated going forward

For large banks, the updated rule applies Performance Evaluation Framework tests. These are designed to assess CRA performance based on four components:

  1. Retail Lending Test: This test evaluates a bank’s retail lending practices in each community. It includes two sets of metrics: the dollar amount of a bank’s retail lending relative to its deposits in a community, and the percentage of loans from each of its product lines allocated to LMI neighborhoods in an area.
  2. Retail Services and Products Test: This test looks at a bank’s branches, ATMs, and online/mobile banking platforms serving LMI communities. It also reviews the availability and responsiveness of bank credit and deposit products, including special-purpose credit programs and responsive checking and savings accounts. This test only applies to banks with assets of $10 billion or more.
  3. Community Development Financing Test: This test assesses a bank’s community development loans and investments. It measures a bank’s ratio of community development loans and investments in an area relative to its deposits. The test also acknowledges impact and responsiveness factors for activities that create a particularly high impact, such as loans and investments in persistent poverty counties and native land areas.
  4. Community Development Services Test: This test focuses on volunteer activities that a financial institution performs to support community development, such as financial literacy activities or board service.

Under the new regulations, intermediate banks will undergo evaluation in the Retail Lending Test. Additionally, they will either be assessed in the current rule’s Community Development Test or, based on the bank’s preference, in the new Community Development Financing Test. 

Small banks will be evaluated in accordance with the current rule’s Small Bank Performance Test unless the bank opts into the new Retail Lending Test. 

Limited purpose banks, which include banks designated as wholesale banks under the current rule, will be evaluated under the Community Development Financing Test for Limited Purpose Banks

Your next steps

As with any rule change, amendments to the CRA have sparked debate within the industry. While some are satisfied with the progress made, others have expressed concerns over its complexity and claim the costs outweigh the benefits, resulting in additional regulatory burdens for banks of all sizes. Regardless of your position, North Highland’s experienced strategists are ready to help you navigate the changes ahead in the CRA landscape. 

You can learn more here to get started.