Fed Finalizes CRA Modernization Rule

Banks will be subject to stricter rules regarding community funding accessibility under proposed changes to the Community Reinvestment Act (CRA).

US regulators set out their final plan for strengthening the CRA, in force since 1977, in a 1,500-page document published on Tuesday.

Among the new requirements is an expansion of the geographical areas covered by the CRA, which would mean banks have to invest in a wider local area. It will also take into account loans and other financial services provided via online channels.

Michael Barr, the Federal Reserve’s vice chair for supervision, said in a statement reported by Reuters: “The final rule takes a critical step forward in modernizing the CRA regulations to help ensure that banks meet the needs of all the communities they serve.”

However, trade body Independent Community Bankers of America (ICBA) warned of expensive repercussions for smaller banks if the rule is enacted in its current form.

“While ICBA and the nation’s community banks support agency efforts to modernize the CRA’s implementing regulations, regulators must recognize that a regulatory change of the length and complexity of this rule will create disproportionate implementation costs for community banks,” said Rebeca Romero Rainey, CEO of the ICBA.

The new version of the CRA classifies all banks with more than $2 billion in total assets as ‘large banks’, which may “not sufficiently differentiate between community banks and the nation’s largest banks”, she added.

“ICBA has long advocated for a uniform rule that minimizes new data collection and reporting burdens for community banks and increases transparency into how ratings are established,” Rainey continued. She said community banks and ICBA would review the text of the rule to “ensure it is tailored, simplifies compliance for community banks, and meets the needs of all community banks and the communities they serve”.

Rob Nichols, president and CEO of the American Bankers Association, said his organization was still reviewing the final rule to ensure it fitted with other rules currently being developed, such as the Basel III capital proposals.

He highlighted that banks were long-term supporters of the CRA and had invested $287 billion into low- and moderate-income areas in 2021 alone.

“We have also strongly supported modernizing the Community Reinvestment Act rules to reflect the realities of modern-day banking,” Nichols said. “The test for a CRA modernization rule is whether it incentivizes investment in underserved communities with requirements that are transparent, promote consistency and align with Congressional intent.”

ICBA’s Rainey acknowledged “some beneficial changes” for banks and their customers within the revised CRA rule. These included raising the qualifying level for ‘small bank’ to $600 million in assets, and the creation of a list of “qualifying activities” and a preapproval process to improve the assessment of CRA loans.