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Federal Reserve Approves Major CRA Overhaul After Nearly Three Decades

Ryan Kingsley
Oct 24, 2023
Federal Reserve Bank

Final rule for CRA modernization promises more flexibility, 2-year implementation, and a nod to digital banking.

The Federal Reserve Board approved a draft final rule Tuesday containing proposed amendments to the Community Reinvestment Act (CRA). “This final rule is a win-win for everyone involved,” Michael Barr, vice chair of supervision for the Federal Reserve, said. 

The CRA was first enacted by Congress in 1977 to address discriminatory lending practices, such as redlining, and limited access to credit in low- and moderate-income (LMI) communities. 

Federal banking regulators have been in the process of updating the landmark fair housing legislation for several years, leading Federal Reserve Chairman Jerome Powell to joke in his closing remarks that it took almost as long to achieve today’s vote as it did to complete renovations to the Martin Building, where the morning’s meeting was held, which began in 2014. 

Of the Federal Reserve board members present at this morning’s meeting, only Governor Michelle Bowman voted to reject the draft final rule, describing it as “unnecessarily complex, overly prescriptive,” and containing “disproportionately greater costs than benefits.” In prepared remarks, Bowman also cited a lack of evidence demonstrating that banks are not already doing enough to meet the credit needs of their communities.

Timothy Burniston, senior advisor, regulatory strategy at Wolters Kluwer, an information services provider, was not surprised that the vote was not unanimous. “Every bank is going to be touched by this in some way, no matter the size of the bank. This changes the status quo for everybody,” he says. 

Proponents of modernization argue that the ways and means of mortgage lending have dramatically changed since the CRA was last updated in 1995. Notably, nonbank lenders such as independent mortgage banks (IMBs) and credit unions far outperform traditional depositories in residential lending, especially to LMI and minority borrowers. The disruption of branch-based banking models, the expanded role of mobile and online banking, and a lack of consistency and transparency surrounding CRA-eligible activities have made compliance with the Act more costly than constructive to banks and the communities they serve.

Despite the rise of IMBs and credit unions in residential lending, nonbanks have vehemently protested CRA oversight. Even the Urban Institute, a Washington, D.C.–based think tank that seeks to expand housing opportunities for LMI and minority borrowers, has questioned the wisdom of subjecting nonbanks to the strictures of the CRA. IMBs do not take deposits; in fact, they import credit to the communities they serve. Though credit unions do collect member funds, the National Association of Federally-Insured Credit Unions (NAFCU) argues that, “whereas CRA compliance relates to a bank's lending activities within a given geographic region, the common bond that credit union members share under the FCUA [Federal Credit Union Act] may be professional, social, or demographic instead of geographic.”

Applauding the work of federal regulators, David Dworkin, president and CEO of the National Housing Conference, an industry non-profit, said in a statement: “While not everyone is going to like everything in the final rule, it succeeds in significantly improving the status quo, and leaves room for ongoing clarification and adjustment over a 24-month implementation period.”

The extension of the implementation period from one year to two years was one surprising outcome of the final rule unveiled in this morning’s meeting. As the implementation process moves forward, Burniston says it will be important for regulators to keep the CRA responsive to short- and long-term disruptions within the banking industry.

Other major reforms address the lack of clarity surrounding CRA-eligible activities and the historically retroactive nature of CRA evaluation. Not only will banks be able to receive CRA credit through an expanded set of eligible activities, a new confirmation process allows institutions to seek credit approval from regulators in advance of performing CRA-related activities. The pre-approval process will help institutions build CRA-eligible activities, such as special purpose credit programs (SPCP) or financial literacy programs, into those institutions’ overall banking strategies.

As banks rethink their CRA strategies, Burniston recommends that in addition to carefully reading the final rule and supplemental information, banks first consider how the updates impact their assessment areas and eligible activities. “Understanding geographically where you’re going to be evaluated and determining if there are areas where you are not currently being evaluated is an essential first step in trying to understand how this rule will impact your bank most,” he says.

That being said, the difficulties banks face in implementing these changes will probably be greater for larger institutions with assets greater than $10 billion, for whom there will be new data collection requirements. The Federal Reserve highlighted the fact that there are no new data collection requirements for small banks (those with assets less than $600 million) and intermediate banks (those with assets greater than $600 million and less than $2 billion).

The Federal Reserve also highlighted how large banks (those with assets greater than $2 billion) will be evaluated using four new performance tests: the Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test. Intermediate banks will be evaluated using the new Retail Lending Test and either the current community development (CD) test or, by election, the new Community Development Financing Test. Small banks can choose to be evaluated under the current CRA performance standards or opt into the new Retail Lending Test.  

The draft final rule still awaits approval by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), who with the Federal Reserve are responsible for overseeing CRA implementation and compliance. From an initial proposed rule, each regulating agency drafts its own final rule for approval by its board members. The FDIC is expected to approve the draft final rule at today’s 3 p.m. board meeting. 

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