CRA reform could bring larger assessment areas
The latest attempt to renew the Community Reinvestment Act could pose serious challenges for the largest banks that have used online lending to find business across a wide area.
A year-long effort to modernize the CRA now accounts for online banking and lending, but still keeps branch networks at the center of federal CRA tests to determine whether banks don’t discriminate in where they make their loans. loans.
For smaller banks, the proposed changes to the CRA should have little impact on how they define the geographic area that regulators will assess when determining whether they meet a community’s credit needs. But for the largest banks, including those that offer online lending outside of their branch networks, the proposed changes have raised concerns about the areas in which they will be tested for CRA activities.
“While we agree that a change in assessment areas is needed to accommodate the financial industry’s changing banking and technology environment, we do not believe adequate consideration has been given to community banks serving their customers. outside a geographical boundary, that is, via the internet and other means,” Nicole Almeida, senior vice president, chief diversity officer and head of CRA at Swansea-based BayCoast Bank, said in a letter to regulators.
Branches and ATMs remain essential
After the latest attempt to update the CRA ended with the three federal banking regulators unable to move forward together on a joint proposal, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have developed new rules together.
The proposed changes would represent the first significant update to the CRA since 1995, and have generated a number of other controversies and criticisms from banking groups and community advocates alike.
The basis of the CRA exams is a bank’s assessment area, currently defined by banks based on the areas surrounding physical branches and ATMs that accept deposits. To avoid the red line, banks cannot “arbitrarily exclude low- and moderate-income census tracts” from their assessment areas, under current regulations, and the areas cannot reflect unlawful discrimination.
These anti-discrimination requirements are maintained in the proposed regulations. And the tests will continue to assess a bank’s performance in its branch network, what the proposal calls “facility-based test areas.”
“While the number of bank branches has decreased in recent years, the agencies believe that branches remain an essential way of defining a bank’s local communities,” banking regulators said.
Even if a bank does not use the word “branch” to describe a location, it would still be considered a branch for CRA purposes if the bank has a physical location that collects deposits from customers. Even if the location is open by appointment only, it is still considered a branch.
Other changes anticipate that business models or banking options could change. Instead of referring to ATMs that accept deposits, the proposal now includes “remote service facilities” as part of the facility-based assessment area, a broader term that the agencies say encompasses other options, such as ATMs. interactive.
Changes for Big Banks
Small banks, which under the proposed regulations would have less than $600 million in assets, and intermediate banks, which would have less than $2 billion in assets, would continue to designate the facility-based assessment area using an approach similar to the one they use now. . .
But some intermediate-sized banks could be examined outside of their defined geographic region. Banks with more than 50 percent of their loans outside the facilities-based assessment area would also consider their loans in those other areas.
For large banks, those with $2 billion or more in assets, the CRA proposal would bring more significant changes.
The proposed regulations give large banks two options for their facility-based assessment area. They could select an area with one or more metropolitan statistical areas or metropolitan divisions. Or, banks can choose one or more contiguous counties within an MSA, a metropolitan division, or the non-metropolitan area of a state.
The agencies said this approach would create a more consistent standard for large banks as they define their areas of assessment, while also promoting fair lending and making data reporting easier.
Different business models
For large banks with lending activities that lead to lending outside of their typical geographic region, including online lending, the CRA would include a second assessment area called the “retail lending assessment area.”
This area would be required for large banks that had 100 home loans or 250 small business loans in a geographic area outside of the facility-based lending area during the previous two calendar years.
“The proposed approach of designating retail lending assessment areas is designed to provide a path to assess banks in a manner that provides parity between banks that lend primarily through branches and those banks with different business models,” the proposal said. . “The designation of new retail loan testing areas would ensure that, regardless of delivery channel, large banks have their retail lending tested in the local markets where they do significant retail lending business.”
These changes have raised some concerns for Massachusetts banks. The facility-based assessment area could mean that banks would assess their lending activities for an entire county, even if they have branches in only one section of the county.
“Just because you have a branch in the northwestern part of Middlesex County, maybe you have seven or eight branches there or in central Massachusetts, does that really mean your testing area is all of Middlesex County?” Ben Craigie, vice president of government affairs for the Massachusetts Bankers Association, told Banker & Tradesman.
In a letter to regulators, Craigie noted that these types of geographic differences occur in Massachusetts and New England.
Banks are also concerned about the area of retail loan evaluation and the potentially large areas where banks will need to engage in CRA activities.
“Currently, not all large banks are staffed and technologically equipped to engage in large-scale CRA activities in these new RLAAs,” Craigie wrote to regulators.