The OCC Begins the CRA Modernization Process

On August 29, 2018, the Office of the Comptroller of the Currency (the OCC) published an advanced notice of proposed rulemaking (the ANPR) regarding reform of the regulatory framework implementing the Community Reinvestment Act of 1977 (the CRA).¹ Although the CRA and its implementing regulations have been updated on more than one occasion since the law's enactment, the regulatory requirements and performance expectations of the CRA regulatory framework are viewed by many industry participants as outdated and ineffective in achieving the objectives of the law. The OCC has now taken the first agency action toward modernizing this framework by soliciting public input on the ways in which the existing regulations can be revised to create greater clarity around banks' CRA performance expectations and to encourage banks to increase their lending and community development investment activities in low- and moderate-income (LMI) and other traditionally underserved communities.

This Advisory discusses the core aspects of the existing CRA regulatory framework, the apparent priorities of the OCC in updating this framework as reflected in the ANPR, as well as notable takeaways and next steps for industry participants and other interested parties.

The Current CRA Regulatory Framework

In brief, the existing CRA regulatory framework is structured as follows.

• CRA regulations are implemented uniformly with examination and enforcement authority being shared by the Board of Governors of the Federal Reserve System (the Federal Reserve) (with respect to state member banks), the OCC (with respect to national banks and federal savings associations), and the Federal Deposit Insurance Corporation (the FDIC) (with respect to state non-member banks and state savings associations).²
• Banks are evaluated under varying performance tests according to their size and status. Large banks (those with more than $1.252 billion in total assets) are evaluated under lending, investment, and service tests which, collectively, measure the availability and extent of a bank's product and service offerings in several areas, including mortgage, small business, small farm and consumer lending, community development investments, and retail services. Intermediate small banks (those with total assets of between $313 million and $1.252 billion) are subject to a more streamlined evaluation that is focused principally on the extent of a bank's retail lending and community development activities. Small banks (those with less than $313 million in total assets) are evaluated based on their retail lending activity, although community development loans and investments may also be considered. In addition, wholesale and limited purpose banks are evaluated based on their community development activities.
• As an alternative to the above evaluation processes, banks may elect to develop, and be evaluated pursuant to, a strategic plan that sets forth goals to be measured on an annual basis for meeting the credit, investment, and service needs of communities served by the bank.
• Banks must identify specific geographic areas within which "assessment areas" will be determined for CRA examination purposes. In general, a bank's assessment areas will include political subdivisions (e.g., towns, cities, or counties) or metropolitan statistical areas (MSAs) in which the bank maintains its main office, branch offices, or deposit-taking ATMs, and where a substantial portion of its loans are made. Assessment areas cannot reflect unlawful discrimination or exclude LMI communities arbitrarily.
• The federal banking agencies use a four-tiered rating system to grade banks' CRA performance ("Outstanding," "Satisfactory," "Needs to Improve," and "Substantial Noncompliance"). This system is used both for individual performance tests and to determine a bank's overall rating. A bank's overall rating may also be impacted by any findings that the bank has engaged in illegal or discriminatory lending activities under the fair lending laws or has violated laws prohibiting unfair, deceptive, or abusive acts and practices.

Summary of Key Provisions of the ANPR

The ANPR is focused on soliciting input from stakeholders on their historic experiences with the CRA regulatory framework as well as specific proposals for reform of discrete aspects of the existing regulations. The key provisions of the ANPR are summarized as follows.

• Experience with the Current CRA Regulations. The ANPR seeks input on the extent to which industry participants view the current CRA regulatory framework as clear and easy to understand and whether, in their experience, the regulations have been applied consistently with CRA ratings assigned in a fair, objective, and transparent manner. The ANPR also invites comments on whether the existing regulations are effective in encouraging banks to serve the convenience and needs of their communities in a way that fulfills the statutory objectives of the CRA. To the extent that the current framework is viewed as ineffective, commenters are encouraged to identify which provisions of the framework should be retained or modified.
• Modernizing the Performance Evaluation Method. The ANPR discusses the potential adoption of a more metric-based method for CRA performance evaluations pursuant to which the federal banking agencies would separately evaluate retail and community development activities using quantitative benchmarks to measure qualifying CRA activities and assign ratings. According to the OCC, such a method would be more transparent and dynamic than the existing performance evaluation method. Evaluations would be tailored to account for a variety of factors including a bank's size and business model, the demographic characteristics of a bank's customer base, and unique economic and financial conditions in certain communities served by the bank. Moreover, banks' geographic assessment areas and the scope of the banking activities that would receive CRA consideration would each be broadened to capture a fuller picture of the products and services being provided to LMI communities and individuals. The ANPR suggests that, under such a metric-based method, CRA-qualified activity could be represented as a dollar value and compared to several objective criteria, such as a bank's total domestic assets, deposits, or capital.
  
  The ANPR solicits comments on how an alternative evaluation method should be designed and applied. Among other items, the OCC seeks input on the appropriate bank- and market-specific factors to consider under a metric-based evaluation method, how quantitative benchmarks should be calculated, and how much weight should be given to certain categories of CRA-qualifying activities.
• Redefining Communities and Assessment Areas. The ANPR solicits input on how a bank's communities should be interpreted and assessed under a modernized CRA regulatory framework. Of note, the ANPR suggests that under an updated framework, banks would continue to receive CRA consideration for qualifying activities within their branch and deposit-taking footprint, but could also receive consideration for providing services to LMI communities and individuals in other underserved areas outside of that footprint. For example, banks could include within their assessment areas those areas in which a bank has a concentration of loans or deposits, non-depository affiliate offices, or loan production offices. The OCC indicates that updating the approach to determining a bank's assessment areas could address the criticism that the current framework restricts banks' lending and investment activities in areas of need that are within the reach of a bank's operations, but outside of delineated CRA assessment areas. In addition, the ANPR notes that an updated approach would be more accommodating for banks with no physical branches or with business models that involve providing a variety of services, including through electronic banking and other means, to customers well beyond the locations of a bank's physical branch offices.
• Expanding CRA-Qualifying Activities. The ANPR states that industry participants have expressed concerns to the OCC over the need for increased clarity and certainty regarding the specific types of community development, small business, lending, and retail service activities that will receive CRA consideration. Accordingly, the ANPR invites comments on potential changes to the existing framework that could ensure CRA consideration for a broad range of activities that support economic and community development within LMI populations. The OCC is particularly interested in the role of small business credit in LMI communities and under what circumstances a "small business loan" should receive CRA consideration.³ The ANPR also includes a number of specific questions regarding potential updates to the scope of CRA-qualifying activities, including, for example: whether certain categories of loans and investments should qualify for CRA consideration presumptively or whether such consideration should be granted only if loans and investments facilitate "community and economic development" as established under applicable federal, state, and local laws; whether banks' use of small and disadvantaged service providers should qualify as community development activity; the circumstances under which various forms of consumer lending should receive CRA consideration; and the extent to which purchased loans and portfolio loans (as opposed to loans originated for subsequent sale) should be weighted for CRA purposes.
• Recordkeeping and Reporting. The ANPR indicates that a modernized CRA regulatory framework could facilitate better tracking and monitoring by banks of their CRA performance on a regular basis and that higher-quality reporting would allow for greater comparison and trend analysis of banks' CRA performances by peer groups and across the industry. The ANPR invites comments on the extent to which recordkeeping and reporting standards should be modified and whether the economic cost-benefit analysis of any potential changes would justify their implementation.

Takeaways and Next Steps

The ANPR addresses a number of significant concerns about the existing CRA regulatory framework that have been raised in recent years by industry participants; however, several issues, including those omitted from or not discussed in detail in the ANPR, will merit further consideration by the OCC and the other federal banking agencies prior to the publication of any notice of proposed rulemaking (NPR). For example, as discussed in our recent Advisory, the OCC has announced that it will begin accepting applications for special-purpose national bank charters from financial technology (or "fintech") companies that are conducting banking activities other than taking deposits. At present, special-purpose national banks that are not insured depository institutions are not subject to the CRA; however, the OCC has indicated that fintech companies will be subject to tailored standards for "financial inclusion" similar to those established under the CRA. Given the proliferation of nonbank lending in recent years, the OCC will likely be encouraged by commenters to address its expectations for fintech companies; however, it is not clear whether the OCC will seek to develop a distinct set of standards for chartered fintech companies or whether the federal banking agencies will seek to address the obligations of such companies within a revised CRA regulatory framework.

In addition, there are a number of potential reforms to the existing framework, some of which were proposed by the Treasury Department earlier this year, that the federal banking agencies may consider as the rulemaking process continues.⁴ These would include, for example: adopting procedural improvements to CRA examinations to address certain practical problems that have been identified to date (such as the significant time lag between examinations and the assignment of CRA ratings); clarifying to what extent a bank's CRA rating will be impacted by allegations or findings of illegal or discriminatory credit practices by the bank; and reevaluating the treatment of bank affiliates under the current regulations. Accordingly, the content and scope of a future NPR may deviate to some degree from the ANPR.

Interested parties, of which there are likely to be many, must provide comments to the OCC within 75 days of publication of the ANPR in the Federal Register. However, although the ANPR has been published solely by the OCC, it is anticipated that any subsequent NPR will be published jointly by the OCC, the Federal Reserve, and the FDIC, as any revisions to the current CRA regulatory framework will need to be implemented uniformly. Accordingly, the OCC has indicated that it will likely take an additional 100 days to evaluate comments received in response to the ANPR in coordination with the Federal Reserve and the FDIC. It is possible, therefore, that an interagency NPR could be published within the next six to eight months, with the rulemaking process being completed within the next year.

Arnold & Porter will be closely monitoring the public comment process on behalf of our clients. Arnold & Porter's Financial Services practice group has extensive experience in counseling banks on CRA compliance matters as well as with enforcement, supervision, litigation, governance, and compliance matters in related areas, such as fair lending and unfair, deceptive or abusive acts and practices, and represents these clients before the federal banking agencies and other regulatory and law enforcement agencies on a regular basis.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.