The New CRA Rule: A Preliminary Look at Potential Implications for Bank Investment in Rural Community Development

On October 24, 2023, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC) issued a final rule overhauling the regulations that implement the Community Reinvestment Act (CRA), which encourages federally insured banks to meet the credit needs of the communities in which they do business, especially low- and moderate-income (LMI) communities. This is the most significant joint effort in over three decades to modernize the way regulators evaluate bank performance under the CRA.

HAC is committed to helping our partners understand the potential impact of this new CRA rule. The rule, however, is nearly 1,500 pages in length, is highly complex, and will take effect over a nearly three-year period. Accordingly, this and forthcoming analyses must be considered preliminary.

The Evaluation Framework

Banks receive CRA ratings of “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Non-Compliance.” The final rule continues the regulators’ longstanding approach of tailoring the CRA examination tests to bank size and type.[1] The final rule raises the current asset threshold for each of the bank size categories.

  • Large Banks (over $2 billion in assets) are subject to two tests of equal weight.
    • A Retail Lending Test evaluates a bank’s origination and purchase of loans, including home mortgage loans and multifamily loans if it offers them.
    • A Community Development (CD) Test consists of a CD Financing Subtest (40 percent of the total) and a CD Services Subtest (10 percent of the total).
    • A HAC analysis in 2016 found that 2.4 percent of banks headquartered in rural or small-town census tracts that consistently received “Outstanding” or “Satisfactory” ratings were subject to the large bank exam.
  • Intermediate Banks ($600 million-$2 billion in assets) are also subject to equally weighted Retail Lending and CD Tests.
    • The Retail Lending Test evaluates a bank’s origination and purchase of loans, including home mortgage loans and multifamily loans if it offers them.
    • Intermediate Banks may opt in or out of the new rule’s CD Test and CD Financing and CD Services Subtests.
    • Intermediate Banks that opt out are subject to the current CD Test, which has three subtests:
      • CD Lending
      • CD Investment
      • CD Services
    • HAC’s 2016 analysis found that 5.4 percent of banks headquartered in rural or small-town census tracts which consistently received “Outstanding” or “Satisfactory” ratings were subject to the intermediate bank exam (then known as the intermediate small bank exam).
  • Small Banks (less than $600 million in assets) may opt into the new rule’s Retail Lending Test – or may choose to continue to be evaluated under the current small bank test. They are not subject to a CD test.
    • HAC’s 2016 analysis found that 79.4 percent of banks headquartered in rural or small town census tracts that consistently received “Outstanding” or “Satisfactory” ratings were subject to the small bank exam.
  • Limited purpose banks—with just one primary product line such as credit cards (e.g., Amex Bank, Capital One)—are subject only to the CD Financing Subtest.
  • A Strategic Plan option allows banks of all sizes to choose to seek the regulators’ approval of a CRA strategic plan tailored to the bank’s lines of business and specific credit needs identified through a formal input process by the communities the bank serves.

Historically, bank examiners would conduct both quantitative and qualitative assessments of CRA performance under both the Retail Lending and CD Test and its subtests. Banks would be measured against benchmarks for lending and CD investment volume among other metrics relative to their size, business model, and comparable institutions. Quantitative ratings would be supplemented with qualitative assessments including taking account of the bank’s “performance context”—e.g., the economic conditions in the places it served—and determining whether a bank’s lending and CD investments were especially “responsive to a community’s credit and community development needs.” This qualitative element also allowed examiners to consider the terms and flexibility of bank CRA capital offered in particular LMI communities. Rural geographies benefitted especially from a qualitative component to CRA evaluation given their relatively greater capacity-constrained CD ecosystems and limited deal flow and transaction size.[2]

The final rule maintains the combined quantitative and qualitative CRA evaluation framework, but modifies and augments it in several important ways. The remainder of this analysis focuses on the rule’s approach to the new CD Test and Subtests and the potential ramifications for affordable housing and community development in rural America.

Opportunities for Rural Community Development Under the New CD Test

CRA-motivated bank investments, loans, and services have always played a role in rural community development.[3] But it has been challenging under the current CRA framework to increase bank commitments in rural communities, for a number of reasons—some of which are unique to rural areas and some of which are shared with urban and suburban communities.

First, as noted above, the large majority of banks headquartered in rural areas and small towns—and most likely to have branch and ATM networks there—are small banks not subject to a community development test at all. Intermediate-small and large banks were evaluated under the current rule primarily on their CD investments, lending, and services within their Assessment Areas (AAs), selected by the banks themselves and defined as the geographic areas that could reasonably be served by each of a bank’s locations, including its main office, any branches, and deposit-taking ATMs. Relatively few of their AAs encompassed rural geographies. As HAC’s research highlighted, large and intermediate bank support for rural communities faced an obstacle in their uncertainty about whether they would receive CRA credit for work outside their AAs.

The final rule makes major progress on addressing this challenge. While the new CD Test requires large banks and opting-in intermediate banks to meet the CD Financing and Services needs of their facility-based AAs, it also creates a “nationwide AA” to ensure that all CD Financing and Services activities contribute to an institution’s CRA rating.[4]

Second, the final rule highlights several factors that examiners will specifically take into account when conducting the qualitative “impact and responsiveness review” of a bank’s CD Financing and Services. These include whether the investment, loan, or service benefits or serves:

  • one or more Persistent Poverty Counties (PPCs);
  • residents of Native Land Areas; or
  • one or more geographic areas with low levels of community development financing.

Each of these factors will tend to reward bank CD Financing and Services in rural areas given their 1) demonstrable overrepresentation among PPCs, and Native Land Areas; and 2) likely overrepresentation among geographic areas with low levels of community development financing given consistent findings of underinvestment from other sources, such as philanthropy.[5]

Additional impact and responsiveness review factors specifically mentioned by the rule include bank financing that:

  • supports a Community Development Financial Institution (CDFI);
  • takes the form of a grant or donation; or
  • invests in a Low Income Housing Tax Credit (LIHTC) or New Markets Tax Credit (NMTC) project.

Given the scarcity of other public and private sector community development resources in rural areas, coupled with often challenged local economies, rural communities especially need the patient, flexible capital provided by CDFIs. Similarly, they have a disproportionate demand for grant funding and equity investments in CD projects and organizations rather than loans. Accordingly, an evaluation framework that specifically recognizes the impact and responsiveness of these approaches has the potential to benefit rural America.

For rural places, these factors may also interact positively with the above-mentioned addition of a “nationwide AA.” For example, a bank that today might hesitate to invest in a LIHTC or NMTC project outside of its facility-based footprint may choose to do so under the final rule, leading to a more geographically equitable distribution of resources over the long term.[6]

Third, CRA-motivated investment in all communities—urban, suburban, rural and small town—suffered under the prior CD Test from a lack of clarity around what loans, investments, or services were eligible for CRA credit. Other than a few long-deemed eligible activities, such as LIHTC or NMTC investments, banks and their community partners were often uncertain about the CRA impact of a new, innovative, or complex CD or affordable housing activity—often the very kinds of financial products and services needed by the most distressed rural communities.

The final rule states that the regulators will jointly “maintain a publicly available, non-exhaustive illustrative list of examples of community development activities that qualify for CRA consideration, including examples of qualifying affordable housing activities. The list will be periodically updated.” Additionally, the rule sets forth a formal process by which a bank can seek advance confirmation that a community development will be considered CRA-eligible.

Conclusion

As previously noted, the new CRA rule is a massive and complex document, representing a major shift in the implementation of this landmark statute. HAC and others will continue to analyze the rule—as well as early feedback from our partners as the transition period begins—and provide periodic updates. In the meantime, we urge our partners to consider approaching current or potential CRA-motivated funders of your work to inquire whether the aspects of the final rule described here might provide incentives for them to begin, increase, or modify favorable their CD financing and services investments in rural communities.

Footnotes

[1] The current CRA examination process is described in Making CRA Work in Rural America: Finding “Outstanding” Financial Institutions, part of HAC’s three-part series of reports “CRA in Rural America” published in 2016.

[2] When in 2019-2020, then-Comptroller of the Currency Joseph Otting put forth a CRA modernization rule shifting CRA evaluation to an entirely metrics-based approach, HAC submitted comments (as did numerous other affordable housing groups) expressing concern about the negative impact removing the qualitative element would have on banks’ incentive to invest in the most distressed rural and urban LMI communities.

[3] Indeed, CRA-motivated investments are a major driver of affordable housing and community development investment in general. For example, CohnReznick estimates that approximately $24.5 billion of capital was committed to housing tax credit investments in 2022 and that the CRA-motivated capital was the source for approximately 82 percent of that amount.

[4] Large national banks play an outsized role in CRA-motivated affordable housing and community. National banks control about 70 percent of the banking systems total assets. Over 99 percent of investments in LIHTC in 2022 from national banks were made by banks with over $10 billion in assets.

[5] The regulators note that currently there is not sufficiently comprehensive local CD financing data to implement this review factor, but expect to be able to do so in the near future, aided in significant part by the more detailed and robust bank CD data reported under the final rule itself.

[6] It should be noted that HAC joined other commenters on the proposed rule expressing concern that collapsing the prior CD Investment and Lending Subtests into a single CD Financing test might incentivize banks to make loans rather than equity investments in LIHTC and NMTC. The final rule’s inclusion of the equity review factor was designed to address this concern. It remains to be seen if banks do in fact maintain their investments in the LIHTC and NMTC markets.

Policy News field

HAC Submits Community Reinvestment Act Comments

 

The Community Reinvestment Act is essential to communities across the nation. Through CRA, financial services have been made available to many places that might otherwise be overlooked. In spring 2022 the three federal agencies that regulate banks and other lenders – the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation – jointly issued a proposed new CRA rule. This proposal, and the many efforts which will follow, are critically important to ensure not only that current CRA-related activities and investments continue but that they expand to reach populations and communities for which access to affordable finance is still elusive.

This is especially important in rural communities across the country as many are considered high credit need areas. CRA modernization will help incentivize more lending in these areas and increase community development activities. As rural communities continue to change, the CRA must adjust as well to reflect modern lending practices. The proposed rule has the potential to further increase lending in high need rural areas, but HAC has a number of recommendations to optimize CRA’s impact.

HAC believes a final rule could further increase CRA’s impact on underserved rural communities if it:

  1. includes activities in rural communities as an additional impact factor, informed by the most precise, density-based definitions already used by policymakers and the research community;
  2. ensures uniform treatment of all CDFIs and supports the most transformative CDFI activities in underserved rural communities;
  3. modifies the definition of affordable housing to enable housing providers to respond effectively to the unique income demographics and constraints on government capacity of rural communities;
  4. clarifies how consequential the impact factors can be for a bank’s community development test performance and overall rating; and
  5. prevents banks with a substantial number of rural assessment areas from “gaming” the NPR’s performance benchmarks under the retail lending test.

To learn more about HAC’s full recommendations, read our full comment letter.

Other comments submitted to OCC are posted online and can be reviewed here.

Policy News from the Administration

HAC Applauds OCC Rescinding 2020 CRA Rule

HAC submitted comments in response to the Office of the Comptroller of the Currency’s (OCC) proposal to rescind its June 2020 Community Reinvestment Act (CRA) rule. HAC applauds the OCC’s move to rescind and replace this rule, and we look forward to working together in the future to improve and modernize the CRA in a way that equitably serves rural places. To explore HAC’s 2016 CRA research series, “The Community Reinvestment Act in Rural America,” click here [https://ruralhome.org/rural-cra-resources/].

Key takeaways:

  • Support the CRA

    HAC unequivocally supports the Community Reinvestment Act

  • Opposed June 2020 Rule

    For numerous reasons, HAC did not support the OCC’s June 2020 rule and is glad to see this proposed rescinding

  • CRA Modernization

    OCC should work together with the Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation (FDIC) to thoughtfully modernize CRA

  • Promote Equity

    Any CRA modernizations should seek to equitably serves rural places

HAC OCC CRA Rule Rescinded Comment
Policy News from Congress

HAC Weighs In on The Federal Reserve’s CRA Plan

The Community Reinvestment Act (CRA) is vitally important to communities across the nation. Through CRA, financial services have been made available to many neighborhoods that would otherwise be overlooked. In speaking of the importance of the CRA, Chairman Powell said, “The CRA plays a vital role in supporting economic opportunity in low-income and minority communities, in both rural and urban areas, and is a top priority for the Federal Reserve.”

The Housing Assistance Council responded to the Federal Reserve System’s Advanced Notice of Proposed Rulemaking on the Community Reinvestment Act to lend our voice to the process and help ensure rural community concerns are included in the discussion. HAC’s comments in response to the ANPR are focused on making sure CRA fulfills its yet unrealized potential in rural communities currently, and in any modernization effort.

HAC’s Response to CRA Modernization Plan

The Housing Assistance Council submitted comments to the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) on their proposal to modernize the Community Reinvestment Act.

For numerous reasons, The Housing Assistance Council does not support the OCC and FDIC’s proposal. HAC appreciates efforts and ideas in the plan to improve CRA’s reach and effectiveness in rural communities. These proposed improvements, however, are far outweighed by a considerable number of ill-conceived and unsubstantiated aspects of the plan that run counter to the intent, value, and effectiveness of CRA. Furthermore, the Housing Assistance Council is disappointed that the OCC and FDIC did not include the Federal Reserve as part of this proposal. Uniform implementation and oversight is critical for an effort as far reaching and important as CRA. Additionally, with the health and economic catastrophe created by the COVID-19 pandemic, there should be an indefinite suspension of the CRA comment period. The comment period deadline, which was initially proposed for only 60 days, should have been at least 120 days even under the best of circumstances.

The Housing Assistance Council unequivocally supports the Community Reinvestment Act and what it stands for. In any effort to modernize or modify CRA, it is imperative to fully consider the impact of those modifications and to ensure that CRA continues to build upon its unparalleled legacy of expanding access to financial products and services. HAC believes CRA can be modernized and improved, but it is important to acknowledge that CRA has been responsible for more than $1.5 trillion in capital investments to underserved communities. Without CRA, many communities would lack access to capital, revitalization efforts would have not occurred, and disinvestment would be more common. CRA should build upon its established platform for improving communities’ access to credit, not jeopardize the ethos, intent, and effectiveness of this vital institution.

HAC Shares Comments on OCC's "Reforming the Community Reinvestment Act Regulatory Framework" ANPR

The Housing Assistance Council (HAC) is presenting its comments to the Office of the Comptroller of Currency (OCC) on its “Reforming the Community Reinvestment Act Regulatory Framework” Advanced Notice of Proposed Rulemaking (ANPR). Through this ANPR, the OCC is seeking stakeholder comments on avenues to modernize CRA and increase lending and investment where it is needed most, reduce reporting burden, and assess performance, all in a manner consistent with the statute’s original purpose. Given its organizational focus on rural housing, HAC has prioritized its remarks related to questions and issues that most impact rural communities and consumers. 

Download HAC’s Comments: PDF

Materials Posted: Proposed Changes to CRA – What Does It Mean for Rural America?

Materials Posted

PowerPoint Presentation | Webinar Recording | HAC Reports on CRA in Rural America

The Office of the Comptroller of the Currency (OCC) recently issued a call for input on its regulations implementing the Community Reinvestment Act, which requires banks to help meet the credit needs of the communities they serve. OCC’s notice says it is building a new framework to transform and modernize its CRA rules.

Please Join the Housing Assistance Council (HAC) for an overview of the proposed changes and a discussion on how rural communities can weigh in on the proposal.

HAC's Analysis of CRA in Rural America

HAC Provides Analysis of CRA in Rural America

The Housing Assistance Council is pleased to present a series to resources related to the Community Reinvestment Act (CRA) and its application in Rural America. The Community Reinvestment Act (CRA), adopted in 1977, requires federally-insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. Assessments of CRA’s scope and effectiveness are typically conducted at a market-specific level, and those markets analyzed are almost exclusively metropolitan or urban in nature. Very little is known about the implementation of CRA in the rural context.

Reports

alt CRA in Rural America:The Housing Assistance Council (HAC) conducted a general assessment to provide a better understanding of CRA’s implementation in rural communities. The report focuses on mortgage lending and CRA.
alt Making CRA Work in Rural America: Partnerships and Opportunities for Rural Community Reinvestment This report serves to increase our knowledge of how CRA can work in rural areas by focusing on four successful rural community development projects. The case studies in this report explore a preschool expansion in Maine, construction of rental housing for farmworkers in Colorado, construction of low- and moderate income housing in Minnesota, and the donation of a bank branch to a local credit union in Mississippi.
alt Making CRA Work in Rural America: Finding “Outstanding” Financial Institutions This report takes a closer look at lenders who consistently excel in meeting their CRA obligations. Is this a common phenomenon? Are there things which these lenders have in common? This research begins a discussion about how we can learn from those lenders which already do an outstanding job of providing credit to all of their service areas.

“The CRA will make a good project better, but not a bad project good”
– Greg Hohlen, Bremer Bank

CRA Webinar Series

alt CRA in Rural America: The Housing Assistance Council (HAC) conducted a general assessment to provide a better understanding of CRA’s implementation in rural communities. The report focuses on mortgage lending and CRA.

alt CRA Investments in Rural Communities: Successful Uses: This webinar explores two successful rural development projects that earned CRA credit for the lenders involved. The discussion includes parties involved with a preschool project. In each case, the participants will briefly describe the CRA’s role in their project.

alt CRA in Rural America Part III: Investments in Rural Communities: This webinar examines CRA rated outstanding lenders. The webinar includes an evaluation of lenders that consistently earn CRA outstanding ratings. The presentation identify consistently rated outstanding lenders, describe their characteristics, and identify key aspects that are related to their outstanding performance. The webinar includes a panel to discuss the CRA and rural communities.

Materials Posted: CRA Investments in Rural Communities: Successful Uses

Materials Posted

Introduction | Presentation | Recording | Report

This webinar, the second in a series of three, will explore two successful rural development projects that earned CRA credit for the lenders involved. The discussion will include parties involved with a farmworker housing and a preschool project. In each case, the participants will briefly describe the CRA’s role in their project. The participants will also, in a discussion panel format, note challenges related to the CRA in rural communities and how these challenges can potentially be addressed to develop a successful project.

The CRA is implemented by the three federal bank regulators through periodic lender examinations of all Federally insured depository institutions. These CRA examinations vary in occurrence and detail based on lender asset size with small lenders being evaluated less frequently (usually, once every five years) and less thoroughly (one test area instead of the three applied to large banks). Upon completion of the examination, regulators’ award banks ratings based on their compliance with the CRA. Regulators can then use a poor rating to deny lender applications for such things as opening a new office or acquiring another bank.

In complying with the CRA requirements banks in turn need to ensure they make their services available to all parts of their service areas. In some cases this means providing assistance to local community development projects, through loans, grants, etc., for which they lender can earn credit as fulfilling their CRA obligation when they are evaluated. The degree to which this occurs in rural communities is limited and there is the potential for more.

This webinar, the second in a series of three, will explore two successful rural development projects that earned CRA credit for the lenders involved. The discussion will include parties involved with a farmworker housing and a preschool project. In each case, the participants will briefly describe the CRA’s role in their project. The participants will also, in a discussion panel format, note challenges related to the CRA in rural communities and how these challenges can potentially be addressed to develop a successful project.