Banking agencies seek financial intermediaries’ feedback on CRA-modernization proposal

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have released a Notice of Proposed Rulemaking (NPR) to strengthen and modernize the regulations implementing the Community Reinvestment Act (CRA). The three banking agencies’ proposal updates how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. It seeks to address the significant changes in the banking industry since the last CRA updates in 1995 and 2005.

The proposal includes provisions to support financial intermediaries that primarily lend or facilitate lending to promote community development, including minority depository institutions (MDIs), women’s depository institutions (WDIs), low-income credit unions (LICUs), and U.S. Department of the Treasury-certified community development financial institutions (CDFIs).^* These provisions are responsive to feedback from external stakeholders supporting a stronger emphasis on community development financing and services that support MDIs, WDIs, LICUs, and CDFIs, including equity investments, long-term debt financing, technical assistance, and contributions to nonprofit affiliates. To ensure that the CRA-modernization process continues to reflect stakeholder needs, the three banking agencies now seek additional feedback on a number of points, including the following provisions.

Defining minority depository institution

In the current CRA regulations, financial institutions that are not minority- or women-owned can receive CRA credit for investments, loan participation, and other activities conducted in cooperation with financial intermediaries such as MDIs and WDIs, provided that these activities help meet the credit needs of communities in which such entities are chartered. The three banking agencies use a consistent definition of WDI but apply slightly different definitions of MDI. To add clarity, the agencies propose the following definition specific to MDIs:

A minority depository institution is a depository institution:

• In which (i) more than 50 percent of the ownership or control is held by one or more minority individuals and (ii) more than 50 percent of the net profit or loss of which accrues to one or more minority individuals,
• As defined in section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or
• Considered to be as such by the appropriate federal banking agency.

The agencies seek stakeholder feedback on the following related question (numbered as it appears in the NPR, which contains a total of 180 questions for consideration):

Q25. Should the agencies also include in the MDI definition insured credit unions considered to be MDIs by the National Credit Union Administration?

Increasing certainty about treatment of bank-intermediary partnerships

To increase certainty surrounding the treatment of activities that support financial intermediaries including MDIs, WDIs, LICUs, and CDFIs, the agencies propose two other changes:

• First, investments, loan participations, and other ventures undertaken by any bank, including by MDIs and WDIs, in cooperation with other MDIs, other WDIs, or LICUs, would be considered for CRA credit.
• Second, the agencies propose that all activities with CDFIs (referred to as Treasury Department-certified) would be eligible CRA activities. Specifically, lending, investment, and service activities by any bank undertaken in connection with CDFIs, at the time of the activity, would be presumed to qualify for CRA credit given that these organizations would need to meet specific criteria established by the Treasury Department.

Separately, the three banking agencies propose that activities undertaken by any bank in connection with a non-Treasury-Department-certified CDFI could also qualify for CRA consideration if the activity separately met the eligibility criteria specified in a different prong of the CRA’s community development definition. For example, a bank activity with a non-certified CDFI to finance a state-subsidized rental housing project that serves low- or moderate-income individuals would qualify by meeting a prong of the affordable housing definition.

Given the suggested changes, the three banking agencies seek stakeholder feedback on the following question:

Q26. Should the agencies consider activities undertaken by an MDI or WDI to promote its own sustainability and profitability? If so, should additional eligibility criteria be considered to ensure investments will more directly benefit low- and moderate-income and other underserved communities?

Encouraging CRA activities through an added impact-review factor

Current guidance allows examiners from the three banking agencies to determine whether a certain community development activity is highly responsive to meeting the credit needs of low- and moderate-income individuals, small businesses, and small farms. For consistency and transparency, the agencies now propose a list of impact-review factors for the qualitative evaluation of community development activities. They further propose that one of the impact-review factors pertain to activities that support or are conducted in partnership with MDIs, WDIs, LICUs, or CDFIs, since these financial intermediaries have missions highly aligned with CRA’s core purpose. By including activities connected to MDIs, WDIs, LICUs, and CDFIs, the agencies hope to further emphasize partnership with these entities. The agencies seek stakeholder feedback on the following related question:

Q35. Should the proposed factor focused on activities supporting MDIs, WDIs, LICUs, and Treasury Department-certified CDFIs exclude placements of short-term deposits, and should any other activities be excluded? Should the criterion specifically emphasize equity investments, long-term debt financing, donations, and services, and should other activities be emphasized?

Furthermore, under the retail services and product test of a large bank, the three banking agencies will consider credit products and programs that are conducted in cooperation with MDIs, WDIs, LICUs, or Treasury Department-certified CDFIs in a safe and sound manner as responsive in helping to meet the credit needs of low- and moderate-income individuals, small businesses, and small farms. For example, this would apply to home mortgage loans and small business loans that banks purchase from MDIs, WDIs, LICUs, and Treasury Department-certified CDFIs. These bank purchases can provide necessary liquidity to these financial intermediaries and extend their capability to originate loans to low- and moderate-income individuals, low- and moderate-income areas, small businesses, and small farms. Credit products and programs conducted in cooperation with these intermediaries are one of the three categories of responsive credit products and programs that are currently included in the proposal for qualitative consideration. The agencies seek feedback on a related question:

Q105. Should the agencies provide more specific guidance regarding what credit products and programs may be considered especially responsive, or is it preferable to provide general criteria so as not to discourage a bank from pursuing impactful and responsive activities that may deviate from the specific examples?

How to comment on these issues

The agencies seek comments about the current proposal, to help them refine its provisions to better serve low- and moderate-income communities. Interested parties should strongly consider submitting comments because the outcome of the NPR process will dictate the scope of CRA examinations for the foreseeable future. To provide feedback related to the questions detailed here, or on any other issues discussed in the NPR, submit a written comment on or before August 5, 2022. A comment-submission link and additional information on the NPR release are available on the Federal Reserve Board’s website.

Endnote

* MDIs are defined elsewhere in this article using language contained in the NPR. WDIs, as defined by the three banking agencies, are depository institutions in which (i) more than 50 percent of the ownership or control is held by one or more women; (ii) more than 50 percent of the net profit or loss of which accrues to one or more women; and (iii) a significant percentage of senior management positions are held by women. LICUs are credit unions in which a majority of members qualify as low-income. CDFIs are mission-driven financial intermediaries that promote community and economic development and provide financial products and services to low- or moderate-income individuals and communities.