A look at the CRA proposal: Banks would be subject to up to four tests: 1) retail lending; 2) retail services and products; 3) community development financing; and 4) community development services.
CRA reviews would acknowledge the differences in bank sizes—which the proposal updates—and business models, and be tailored accordingly:
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Small banks: Less than $600 million in assets.
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Intermediate banks: Between $600 million and $2 billion in assets.
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Large banks: More than $2 billion in assets.
Large banks would face tougher examinations. The new metrics would be mandatory for large banks. Small and intermediate banks could choose to be measured by existing metrics, or a combination of new and old tests.
Michelle Bowman, one of the Fed’s governors, expressed concerns that banks with assets above $10 billion might find it onerous to gather and report extensive new information on assets, loans, channel usage, community development loans and services, and detailed information about branches.
New assessment criteria apply to some banks. Agencies would still use “facility-based assessment areas,” based on branch locations, to measure how banks are meeting CRA specifications.
- But the proposed changes add new assessment areas based on where some banks lend, instead of where they have physical branches, regulators said.
- Large banks must also consider areas with concentrations of mortgage and small-business lending.
Banks would have more clarity on how their activities would be credited. Agencies would create a list of community development activities that qualify for CRA consideration, letting banks know in advance whether engaging in those activities would be worthwhile.
- Credited activities would include investments in childcare, education, workforce development, job training, health services, financial literacy efforts and revised parameters for affordable housing.
- Smaller-value loans and investments that would have a “high impact” on poor neighborhoods would be emphasized, rather than just a few large-scale projects.
- Large banks could consider community development activities nationwide as a separate metric.
The big takeaway: Expanding the CRA from a local service focus to a national one, when appropriate, is an effective step toward its modernization.
But to truly promote community reinvestment, the proposal also needs to address nonbanks that originate government-backed home loans—as Illinois, Massachusetts, and New York are already doing. Nonbanks now own roughly two-thirds market share, and have become the primary source of mortgage originations and a growing source of mortgage servicing.