On April 3, 2018, the Department of the Treasury (“Treasury”) released its much-anticipated recommendations to reform the Community Reinvestment Act (“CRA”). The report, which is addressed to the federal banking agencies, outlines a number of proposed regulatory and administrative changes to (i) the CRA’s performance evaluation criteria, and (ii) the federal banking agencies’ approach to examining banks’ CRA performance. Treasury’s recommendations focus on four “key areas”:
- Assessment Areas: Treasury recommends expanding the definitions of geographic assessment areas to extend beyond a financial institution’s physical footprint and account for areas where the financial institution “accepts deposits and does substantial business.” According to Treasury, this expansion would account for “the changing nature of banking arising from changing technology, customer behavior, and other factors.”
- Examination Clarity and Flexibility: Treasury also recommends enhancing flexibility in the CRA performance evaluation process, including by establishing clearer CRA examination guidance and streamlining recordkeeping procedures. According to Treasury, if implemented, these recommendations would “increase the transparency and effectiveness of CRA rating determinations,” and would result in more consistent application of the CRA framework across regulators. In addition, these recommendations, if implemented, would expand the types of products eligible for CRA credit.
- Examination Process: Relatedly, Treasury recommends improving the federal banking agencies’ examination processes. For example, Treasury found that the CRA examination process, including the process for drafting and publishing a performance evaluation, has become “excessively long.” To shorten the time between examination periods, Treasury recommends that the federal banking agencies standardize CRA examination schedules. Treasury also calls for statutory changes, if necessary, that would enable more timely performance evaluations and ratings.
- Performance: Finally, Treasury recommends several improvements to CRA performance evaluation ratings. Most notably, Treasury recommends that the federal banking agencies implement uniform guidance to determine if there is a “logical nexus” between a CRA rating and evidence of discriminatory or other illegal credit practices. In the report, Treasury states that “a UDAP violation for a credit product that was not considered as part of a bank’s CRA performance” would not meet the logical nexus test, and therefore should not negatively impact a financial institution’s CRA rating. In contrast, Treasury states that the federal banking agencies should consider a violation of consumer law involving substantial evidence of redlining. As discussed in a prior post, the Office of the Comptroller of the Currency (“OCC”) has already implemented guidance on CRA rating downgrades for consumer compliance violations.
In the coming months, we expect the OCC to release an advanced notice of proposed rulemaking (“ANPR”) that will propose potential reforms to the CRA. This ANPR may be issued jointly along with the Board of Governors of the Federal Reserve (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”). Because Treasury’s recommendations are largely in line with the Comptroller of the Currency Joseph Otting’s public statements on CRA reform, we expect significant overlap between the forthcoming ANPR and Treasury’s recommendations. When the OCC releases the ANPR, financial institutions and other industry leaders will have the opportunity to comment on these recommendations and provide suggestions for additional improvements to the CRA framework.