As bank regulators take another crack at updating a critical anti-redlining rule, they will seek to answer two key questions: What matters more, the amount a bank lends or the quantity and quality of its loans? And is a bank's physical location more important than its digital footprint?
The Office of the Comptroller of the Currency recently said it would propose yanking a controversial update to the Community Reinvestment Act and work with the Federal Reserve and the Federal Deposit Insurance Corp. on a new one.
The rule, which was enacted in 1977, seeks to ensure that banks are doing business in low- and moderate-income communities.
Whether a new rule should continue to focus on physical bank branches or the emerging electronic banking world remains a pivotal issue, stakeholders said.
Determining assessment areas should take into account that many banks are doing huge amounts of business online, are entirely online, or are hybrid entities that do much of their business digitally, the American Bankers Association said in a February comment letter.
"[The] CRA cannot be truly modernized without addressing the digital revolution and reframing how and where banks are evaluated for CRA compliance," the ABA said. The previous rule, finalized by then-Comptroller Joseph Otting in May 2020, expanded bank assessment areas to reflect the growth of online banking.
Taking a different approach on this issue, Mickey Marshall, director of regulatory legal affairs at the Independent Community Bankers of America, said a physical network of branches should remain important under any forthcoming guidance.
For smaller banks, "the vast majority of your customers are going to be in very close proximity," and those banks tend to invest in their surrounding communities, Marshall said in an interview.
Another major issue for banks is whether loans should be evaluated by dollar amount or the number of loans granted in assessment areas. In September 2020, the Fed laid out its own, separate CRA proposal, which suggested that loan numbers should determine compliance, rather than the dollar amount approach taken in the OCC rule.
The ICBA's Marshall said he prefers the Fed's approach to the OCC's because the latter "doesn't give credit to things that are more impactful. It doesn't give credit to, 'How many loans did you give to small businesses? How many mortgage loans did you make?"
Tom Feltner, policy director at the National Community Reinvestment Coalition, also praised the Fed's approach, stating that it "should be the starting point" for broad changes to investment evaluations. Any pathway taken by the three agencies should look at whether loans are being granted in low-income Black and Latino communities, Feltner said in an interview.
Bank size
One aspect of the Fed's 2020 proposal that might draw the ire of financial institutions is its asset cutoff for banks to be considered smaller and subject to fewer compliance requirements.
The Fed's proposal suggests establishing the threshold for Intermediate Small Banks at either $750 million or $1 billion — a change from the current cutoff of $1.32 billion.
The Fed plan would create enormous regulatory burdens for institutions with assets between $1 billion and $1.32 billion, according to the ABA.
"These banks are examined under the Intermediate Small Bank test today, yet they suddenly would be subject to the Large Bank test due to regulatory change, not because of asset growth," the ABA said.
Within the retail test, banks would be subject to a retail lending subtest and a retail services subtest. The lending subtest would focus on the number of loans banks make within their communities rather than the total dollar values of their loans. Meanwhile, the services subtest would look at banks' branches and deposit products.
The community development test would feature two subtests as well: the community development financing subtest and a community development services subtest. Unlike the OCC's rule, the Fed plan would not compile banks' performances in the tests into a single ratio.
In a separate data issue, the ICBA's Marshall praised the Fed for easing the previous OCC rule requiring banks to "geocode" deposits to show customers' locations.
"This is an additional data collection item that banks don't have to do right now," he said. "We felt that it was burdensome. How often do you want to reach out to customers to find out what their new address is?"
Timeline
Acting Comptroller Michael Hsu said at a recent Senate Banking Committee hearing that the agencies have aggressive internal deadlines and are working quickly, but "it's hard to give an exact set of dates … There is a lot of urgency."
