Community Reinvestment Act Strengthening: What it means for community banks

On October 24, 2023, the three agencies responsible for the CRA; the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency, issued a final rulemaking to revise the Community Reinvestment Act for the purposes of strengthening and modernizing the legislation.

As this final rule applies to all banks subject to the CRA, community banks must be prepared for the rule to take effect on April 1, 2024, in addition to staggered compliance dates of January 1, 2026, and January 1, 2027. Let us delve into each of the major changes, and review their impact on community banks.

Application of new performance tests

Final rule includes the implementation of four (4) new performances tests to evaluate the CRA performance of banks: the Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test.

The final rule breaks down the application of these tests into three (3) different bank sizes, large (assets of $2 billion or more), intermediate (assets of $600 million or more but less than $2 billion), and small (assets less than $600 million).

Community banks can prepare for these new performance tests by reviewing their record of serving low- and moderate-income members of their community, specifically through the origination and purchase of home mortgage loans, multifamily loans, small business loans, small farm loans, and availability of the bank’s retail services and products. An analysis of these areas can provide community banks with an idea of where their strength and weaknesses are with regard to serving LMI members of their community.

Clarification of community development activities

The agencies have expanded the definition of community development to include the following categories:

• Affordable housing
• Economic development
• Community supportive services
• Place-based activities, which includes the following:
  • Revitalization or stabilization activities
  • Essential community facilities
  • Essential community infrastructure
  • Recovery activities that promote the recovery of a designated disaster area
  • Disaster preparedness and weather resiliency activities
  • Qualifying activities in Native Land Areas
• Activities with minority depository institutions (MDIs), women’s depository institutions (WDIs), low-income credit unions (LICUs), and community development financial institutions (CDFIs).
• Financial literacy

When having their CRA performance evaluated, community banks may receive community development consideration for engaging in the categories listed above. This expanded definition, paired with the agencies’ support of confirming community development activities provides community banks with a more detailed objective with respect to supporting their community.

Feedback from the community

Transparency and public engagement are essential pillars of the Community Reinvestment Act. Without feedback from the community they are serving, banks will never truly grasp the impact of their CRA related actions. The agencies are encouraging the community to provide them with comments regarding their credit needs and their bank’s CRA performance.

Even though the purpose of a community bank is to serve the community they are based in, this added emphasis on public feedback from the agencies should encourage these banks to address the needs of their customers, especially those of the LMI demographic. By appropriately listening and addressing the comments of their community, community banks can prepare themselves for a successful CRA examination.

The final rule of the Community Reinvestment Act impacts community banks through enhanced testing of their CRA performance, improved definition of what constitutes community development activities, and the encouragement of feedback from the bank’s community. These aspects of the final rule should encourage community banks to evaluate their current CRA position and make the appropriate changes for the upcoming compliance dates.

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