The New Community Reinvestment Act:
Understanding the Final Modernization Rule and Its Impact

In October 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (collectively known as the “Agencies”) issued a final rule (the “Final Rule”) amending their regulations, implementing the Community Reinvestment Act (CRA). This "Final Rule" is pivotal as it signifies the most comprehensive overhaul of the CRA in nearly three decades. Its breadth and depth will have a profound impact on the CRA programs of banks of varying sizes, reshaping the landscape of community reinvestment and signaling a new era of regulatory expectations.

Asset-Size Thresholds and Phased Implementation

A notable change under the final rule is the redefinition of bank sizes. The asset thresholds that categorize banks into small, intermediate, and large have been raised, which will reclassify numerous banks and consequently alter their CRA obligations. The thresholds will:

• Increase from $376 million (as of 2023) to under $600 million for small banks
• Increase from between $376 and $1.503 billion to between $600 million and $2 billion for intermediate banks
• Increase from $1.503 billion to $2 billion or more for large banks

This increase in asset-size thresholds will transition approximately 800 banks to small status and about 200 banks to intermediate status, reflecting the substantial growth in bank sizes since the last major CRA regulation revision.

These changes are set to take effect January 1, 2026, which offers a transition period for banks to adjust to the new framework. However, certain provisions, particularly related to facility-based assessment areas, will be introduced earlier, starting April 1, 2024. The rule's rollout is designed to give financial institutions adequate time to align their policies and procedures with the new requirements.

Assessment Areas

There are two main types of assessment areas in the Final Rule:

• Facility-Based Assessment Area
  It is defined by the locations of a bank’s main office, branches, and deposit-taking ATMs. These areas generally must encompass entire counties or equivalent regions. However, there's a notable exception: small and intermediate banks are not required to include full counties in their facility-based assessment areas as long as the areas consist of contiguous whole census tracts. This flexibility allows smaller banks to focus their community development efforts more locally, reflecting their specific operational capacities and the realities of serving distinct community profiles.
  
  
• Retail Lending Assessment Areas
  A new concept introduced in the Final Rule, applicable only to large banks. These areas are delineated based on where a substantial portion of the bank's loans are originated or purchased, extending beyond the locations of their physical branches. If less than 80% of a large bank's retail lending occurs within its facility-based assessment areas, it must then establish retail lending assessment areas in regions where it has originated or purchased a significant number of loans. This innovation in the regulation is a response to the evolution of banking practices, particularly the rise of online and mobile banking, which has enabled banks to engage in significant lending activities outside their traditional branch network.
  
  

The CRA Tests

The Final Rule introduces four new tests to evaluate large banks' CRA performance: the Retail Lending Test, the Retail Services and Products Test, the Community Development Financing Test, and the Community Development Services Test. These tests represent a shift toward a more comprehensive and granular assessment of banks' activities, with a mix of qualitative and quantitative metrics.

• The Retail Lending Test: This test is designed to assess how large banks are meeting the credit needs of low- or moderate-income (“LMI”) borrowers, small businesses, and small farms. It employs a set of metrics that scrutinize a bank's lending volume relative to a market benchmark and the distribution of its lending across various demographic categories.
  
  
• The Retail Services and Products Test: This qualitative test evaluates the availability and accessibility of a large bank's retail banking services and products, taking into account the bank's branch distribution, the services provided by remote facilities, and the responsiveness of digital delivery systems to the needs of the community, including LMI individuals and communities.
  
  

Community Development Loans, Investments, and Services

Under the previous CRA regulations, community development performance was evaluated across four broad categories. The Final Rule expands this by introducing 11 new categories derived from past interagency Q&As to provide clearer guidance on community development activities. These activities are now more broadly defined to encompass a range of initiatives aimed at supporting LMI communities, distressed areas, and small businesses and farms.

The new rule also sets specific standards for when community development loans, investments, and services will receive full or partial consideration. The "primary purpose" terminology initially proposed has been replaced with a more structured framework. This includes a "majority standard," a "bona fide intent standard," and involvement with minority depository institutions (“MDIs”), women’s depository institutions (“WDIs”), low-income credit unions (“LICUs”), or community development financial institutions (“CDFIs”). Involvement with the Federal Low-Income Housing Tax Credit programis also recognized within these categories.

For activities supporting affordable housing, banks may receive partial credit even if they don't meet the "majority standard." This credit is proportionate to the percentage of total affordable housing units involved. However, this partial credit option does not extend to other community development categories.

• Community Development Financing Test: The Community Development Financing Test is designed to quantitatively and qualitatively measure a large bank's contribution to community development through loans and investments. The test evaluates the dollar value of these efforts relative to the bank’s deposits, considering both local and national benchmarks. This comprehensive assessment aims to encourage banks to increase their involvement in projects that yield substantial community benefits, from affordable housing initiatives to investments in small businesses and revitalization projects.
  
  
• Community Development Services Test: This qualitative test examines a large bank's record of providing non-lending-related services that support community development. The focus is on the impact and responsiveness of the bank’s activities, such as financial literacy programs, economic development projects, and other services that benefit LMI areas. The Final Rule emphasizes the bank's employees' and board members' involvement in providing these services, highlighting the importance of direct engagement in community development.
  
  

For both the Community Development Financing and Services Tests, large banks will be evaluated at the facility-based assessment area level, the state level, and, if applicable, the multistate MSA and nationwide levels. This multi-tiered evaluation process ensures that banks' contributions to community development are assessed comprehensively, reflecting their impact across various geographic areas.

Evaluations and Ratings

Under the Final Rule, evaluations of a large bank's CRA performance will be based on these tests at various levels. Facility-based assessment areas will be considered, as well as the bank's community development activities at the state and multistate MSA levels. A bank's performance will be weighted and combined across all tests to assign a comprehensive CRA rating.

Each bank will receive a performance score that reflects their efforts to meet the credit needs of their communities. The overall rating, ranging from "Outstanding" to "Substantial Noncompliance," will influence the bank's strategic planning and operational focus.

In summary, the Final Rule's changes represent a substantial evolution in the CRA's application, one that demands strategic reevaluation from large banks. With expanded definitions and new evaluation criteria, banks must adapt to fulfill their community reinvestment obligations while navigating the complexities of the modern financial landscape. For intermediate banks, the adjustments in asset thresholds and the introduction of new performance tests will require a reevaluation of lending and community development strategies. Small banks, while having the option to opt into certain aspects of the new framework, will need to assess the benefits of doing so against the potential increased regulatory burden.