Feds wrap up overhaul of Community Reinvestment Act and give banks more time to comply

Also read: Effort to bring civil-rights era banking law into digital age begins

The updated CRA rules were jointly released by the U.S. Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

Seen as a victory for Federal Reserve Bank Vice Chair for Supervision Michael Barr, the rules were released in their final form on Tuesday for publication in the federal register, after a draft was made available for comment in May 2022.

“Fair lending is safe and sound lending, and the CRA regulations we promulgate today will help make the financial system safer and fairer,” Barr said in a prepared statement.

Banks will have to start complying with the new rules in January 2026. Agency officials said they provided an additional 12 months for a transition period.

The two Fed governors who were appointed by President Donald Trump also released statements. Christopher Waller said he supports the final rule update that “continues to support community reinvestment as required by law while providing more clarity to banks on the criteria needed to comply with the CRA.”

Michelle Bowman said she opposes the the rule because it oversteps the authority of the law, although she said the underlying intent and goals of the CRA to improve equal lending have merit.

“Regulators must implement this rule in a way that is transparent and fair,” she said.

Some of the key revisions in the rule include:

• Agencies will evaluate the performance of banks across the varied activities they conduct and in the communities in which they operate.

• The rule is also aimed at improving financial inclusion by supporting Minority Depository Institutions and Community Development Financial Institutions, Native Land Areas, persistent poverty areas and “high-need rural and urban areas” in the U.S., Barr said.

• The final regulation “provides greater clarity and consistency” in application of the regulations, including metrics for evaluating retail lending and community-development financing and public benchmarks and consistency. It also sets clear criteria for community-development activities that qualify for CRA credit, and it adopts a public list of qualifying activities and sets up a process to confirm an activity’s eligibility.

• The revisions establish tiers for CRA evaluations and data collection based on bank size and type. Small banks would continue to be evaluated under the existing rules, with the option to be evaluated under the new framework. Small and intermediate banks will be exempt from new data requirements, while other new data requirements will apply to banks with more than $10 billion in assets.

• The final updates are around major changes that have occurred in the banking sector, including mobile and online banking, since the rule was last updated in 1995.

The law specifically focuses on low- and moderate-income communities.

Officials said that their interpretation of U.S. law prevented them from overhauling the rule based on individuals’ ethnic or racial background, but that performance of fair-lending laws will be woven into CRA reviews.

Covington partner Randy Benjenk, who works with banks and financial-technology companies on regulatory matters, said the rules will present a challenge to lenders, as well as additional costs.

“What started out as an exercise of attempting to update the CRA to make it more transparent has turned into a sprawling new regulatory regime,” Benjenk told MarketWatch.

Banks are now going to need to keep track of — and perform well on — metrics that they haven’t in the past, including how well they’re reaching low- and moderate-income people through mobile-banking applications outside of areas where banks have physical branches, he said.

In the past, if a bank knew its performance was lacking, it would turn to community lending officers who know how to market in a neighborhood and talk to people and find the right community-development institutions to partner with, Benjenk said.

If a bank is being evaluated where it doesn’t have people on the ground, it will be a challenge to improve the numbers, he said.

The rules could create a competitive dynamic where banks in major metropolitan markets are plowing resources into pursuing the same group of creditworthy low- and moderate-income people.

“Banks could reduce their lending outside their physical footprint so they don’t get tested in those places,” Benjenk said. “This could make lack of available credit worse in [some] areas.”

Banks at the lower end of the $2 billion cutoff for the CRA rule to apply will have fewer resources to deploy than larger banks, he said.

The CRA changes drew criticism from the banking industry for going too far, and from consumer advocates for doing too little to help low- and moderate-income people get loans.

“The final rule ignores a robust data analysis that reveals egregious blind spots and provisions that will artificially inflate banks’ scores without any benefit to low- to moderate-income communities,” said Dennis Kelleher, co-founder and chief executive of Better Markets, a nonprofit based in Washington, D.C.

The Consumer Bankers Association said banks have already been reinvesting nearly $1 trillion every two years as part of their CRA efforts.

“Some of the updates to the CRA could unintentionally impact the consumers we are all trying to help,” said CBA Chief Executive Lindsey Johnson. “We urge regulators to take a hard look at compliance burdens that could lead to reduced lending.”

Along with the CRA measures, the Fed’s Barr has been working with banks on a proposed set of capital requirements, which would apply to regional banks with $100 billion or more in assets, a lower threshold than in the past.

Also read: Fed cop Michael Barr defends higher capital requirements as bankers bristle

Gregg Robb contributed.