Community Reinvestment Act Regulations

Federal RegisterJan 9, 2020

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 25 and 195

[Docket ID OCC-2018-0008]

RIN 1557-AE34

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 345

RIN 3064-AF22

Community Reinvestment Act Regulations

AGENCY:

Office of the Comptroller of the Currency, Treasury and Federal Deposit Insurance Corporation.

ACTION:

Joint notice of proposed rulemaking; request for comment.

SUMMARY:

Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) propose regulations that could encourage banks to provide billions more each year in Community Reinvestment Act-qualified lending, investment, and services by modernizing the Community Reinvestment Act (CRA) regulations to better achieve the law's underlying statutory purpose of encouraging banks to serve their communities by making the regulatory framework more objective, transparent, consistent, and easy to understand. To accomplish these goals, this proposed rule would strengthen the CRA regulations by clarifying which activities qualify for CRA credit, updating where activities count for CRA credit, creating a more transparent and objective method for measuring CRA performance, and providing for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting.

DATES:

Comments must be received on or before March 9, 2020.

ADDRESSES:

Comments should be directed to:

OCC:

Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title “Community Reinvestment Act Regulations” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

•

Federal eRulemaking Portal—Regulations.gov Classic or Regulations.gov Beta:

Regulations.gov Classic:

Go to

https://www.regulations.gov/.

Enter “Docket ID OCC-2018-0008” in the Search Box and click “Search.” Click on “Comment Now” to submit public comments. For help with submitting effective comments please click on “View Commenter's Checklist.” Click on the “Help” tab on the

Regulations.gov

home page to get information on using

Regulations.gov,

including instructions for submitting public comments.

Regulations.gov Beta:

Go to

https://beta.regulations.gov/

or click “Visit New

Regulations.gov

Site” from the

Regulations.gov

Classic homepage. Enter “Docket ID OCC-2018-0008” in the Search Box and click “Search.” Public comments can be submitted via the “Comment” box below the displayed document information or by clicking on the document title and then clicking the “Comment” box on the top-left side of the screen. For help with submitting effective comments please click on “Commenter's Checklist.” For assistance with the

Regulations.gov

Beta site, please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9 a.m.-5 p.m. ET or email

regulations@erulemakinghelpdesk.com.

•

Email: cra.reg@occ.treas.gov.

•

Mail:

Chief Counsel's Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.

•

Hand Delivery/Courier:

400 7th Street SW, Suite 3E-218, Washington, DC 20219.

•

Fax:

(571) 465-4326.

Instructions:

You must include “OCC” as the agency name and “Docket ID OCC-2018-0008” in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the

Regulations.gov

website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this rulemaking action by any of the following methods:

•

Viewing Comments Electronically—Regulations.gov Classic or Regulations.gov Beta:

Regulations.gov Classic:

Go to

https://www.regulations.gov/.

Enter “Docket ID OCC-2018-0008” in the Search box and click “Search.” Click on “Open Docket Folder” on the right side of the screen. Comments and supporting materials can be viewed and filtered by clicking on “View all documents and comments in this docket” and then using the filtering tools on the left side of the screen. Click on the “Help” tab on the

Regulations.gov

home page to get information on using

Regulations.gov.

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

Regulations.gov Beta:

Go to

https://beta.regulations.gov/

or click “Visit New

Regulations.gov

Site” from the

Regulations.gov

Classic homepage. Enter “Docket ID OCC-2018-0008” in the Search Box and click “Search.” Click on the “Comments” tab. Comments can be viewed and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen. Supporting materials can be viewed by clicking on the “Documents” tab and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen.” For assistance with the

Regulations.gov

Beta site, please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9 a.m.-5 p.m. ET or email

regulations@erulemakinghelpdesk.com.

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

•

Viewing Comments Personally:

You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649-6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect comments.

FDIC:

You may submit comments, identified by RIN 3064-AF22, by any of the following methods:

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Agency Website: http://www.fdic.gov/regulations/laws/federal/propose.html.

Follow instructions for submitting comments on the Agency website.

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Email: Comments@fdic.gov.

Include the RIN 3064-AF22 on the subject line of the message.

•

Mail:

Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

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Hand Delivery:

Comments may be hand delivered to the guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m.

Instructions:

All comments received must include the agency name and RIN 3064-AF22 for this rulemaking. All comments received will be posted without change to

http://www.fdic.gov/regulations/laws/federal/propose.html,

including any personal information provided. Paper copies of public comments may be ordered from the FDIC Public Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington, VA 22226 by telephone at (877) 275-3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT:

OCC:

Vonda Eanes, Director for CRA and Fair Lending Policy, Bobbie K. Kennedy, Technical Expert for CRA and Fair Lending, or Karen Bellesi, Director for Community Development, Bank Supervision Policy, (202) 649-5470; or Allison Hester-Haddad, Counsel, Emily R. Boyes, Counsel, or Elizabeth Small, Senior Attorney, Chief Counsel's Office, (202) 649-5490, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. For persons who are deaf or hearing impaired, TTY users may contact (202) 649-5597.

FDIC:

Patience R. Singleton, Senior Policy Analyst, Supervisory Policy Branch, Division of Depositor and Consumer Protection, (202) 898-6859; Cassandra Duhaney, Senior Policy Analyst, Supervisory Policy Branch, Division of Depositor and Consumer Protection, (202) 898-6804; Pamela Freeman, Senior Examination Specialist, Examination Branch, Division of Depositor and Consumer Protection, (202) 898-3656; Jessica Thurman, Examination Specialist, Examination Branch, Division of Depositor and Consumer Protection, (202) 898-3578; Richard M. Schwartz, Counsel, Legal Division, (202) 898-7424; or Sherry Ann Betancourt, Counsel, Legal Division, (202) 898-6560, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

The Community Reinvestment Act of 1977 (CRA) encourages insured depository institutions

(banks)

to help meet the credit needs of the local communities in which they are chartered, consistent with banks' safe and sound operations, by requiring federal banking regulatory agencies to examine banks' records of meeting the credit needs of their entire community, including low- and moderate-income (LMI) neighborhoods.

The CRA was one of several laws enacted in the 1960s and 1970s to address fairness and access to housing and credit. During this period, Congress passed the Fair Housing Act in 1968,

to prohibit discrimination in renting or buying a home,

and the Equal Credit Opportunity Act in 1974

(amended in 1976), to prohibit creditors from discriminating against an applicant on the basis of race, color, religion, national origin, sex, marital status, or age. These fair lending laws provide the legal basis for prohibiting discriminatory lending practices, such as redlining.

12 U.S.C. 1813(c)(2).

As used throughout this notice, the term “bank” or “banks” also includes uninsured Federal branches that result from an acquisition described in section 5(a)(8) of the International Banking Act of 1978 (12 U.S.C. 3103(a)(8)).

Community Reinvestment Act of 1977, Public Law 95-128, 91 Stat. 1147 (1977),

codified at

12 U.S.C. 2901

et seq.

42 U.S.C. 3601

et seq.

42 U.S.C. 3604-3606.

15 U.S.C. 1691

et seq.

Interagency Fair Lending Examination Procedures,

p. iv (Aug. 2009),

available at https://www.ffiec.gov/pdf/fairlend.pdf.

Congress enacted the CRA with the purpose of encouraging sound lending to all areas of a bank's community. Specifically, in passing the CRA, Congress found that (1) banks are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business; (2) the convenience and needs of communities include the need for credit services as well as deposit services; and (3) banks have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.

12 U.S.C. 2901(a).

The Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) (together, the agencies)

as well as the Board of Governors of the Federal Reserve System (Board) previously issued regulations to implement the statute.

Since then, the agencies and the Board have issued, revised, and sought to clarify the CRA regulations several times. The last major revisions to the regulations were made in 1995.

The OCC is the primary regulator for national banks and federal savings associations. The FDIC is the primary Federal regulator for state-chartered non-member banks and savings associations.

12 CFR parts 25, 195, 228, and 345. The Office of Thrift Supervision and its predecessor agencies were also charged with implementing the CRA. Its powers and duties with respect to CRA were transferred to the OCC in Title III of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, 1520 (2010).

The agencies and the Board made additional substantive changes in 2005; however, those changes were not as transformative as the 1995 revisions.

During the past 25 years, technology and the expansion of interstate banking have transformed the financial services industry, how banks deliver their services, and how customers choose to bank. These changes affect banks of all sizes and are most evident in banks that have a limited physical presence or rely heavily on technology to deliver their products and services. As banking has evolved, banks' communities have evolved beyond those that are solely identifiable by the delineated areas surrounding banks' physical locations.

At the same time, communities' needs for community development (CD) lending and investment have evolved, and the agencies have gained a greater understanding of those needs, such as the need for CD investments and loans with maturities longer than the typical CRA evaluation period and the need for equity and capital in addition to credit. The current CRA regulatory framework has not kept pace with the transformation of banking and has had the unintended consequence of incentivizing banks to limit some of their CD loans and investments to shorter terms than otherwise may be best to meet the needs of their communities.

Over the last decade, stakeholders have called for comprehensive changes to the CRA regulatory framework to ensure that the CRA remains a relevant and powerful tool for encouraging banks to serve the needs of their entire communities, including LMI neighborhoods. In 2014, the agencies and the Board conducted a decennial review of their regulations, with input from the public, to identify outdated, unnecessary, or unduly burdensome regulations and consider how to reduce regulatory burden on insured depository institutions—while, at the same time, ensuring the safety and soundness of these institutions and of the financial system.

In 2017, the agencies and the Board issued a report to Congress that included a summary of the public comments and recommendations to improve the CRA regulatory framework gathered during the three-year review process. Among the most frequently raised issues were (1) the assessment

area definition; (2) incentives for banks to serve LMI, unbanked, underbanked, and rural communities; (3) regulatory burdens associated with the recordkeeping and reporting requirements and the asset thresholds for the various CRA examination methods; (4) the need for clarity regarding performance measures and better training to ensure consistency and rigor in CRA examinations; and (5) refinement of the CRA ratings methodology.

The review is required by section 2222 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, Public Law 104-208, 110 Stat. 3009, 3311 (1996),

codified at

12 U.S.C. 3311 (1996).

See

Federal Financial Institutions Examination Council,

Joint Report to Congress. Economic Growth and Regulatory Paperwork Reduction Act,

pp. 41-48 (March 2017),

available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.

On April 3, 2018, the U.S. Department of the Treasury (Treasury Department) also released recommendations based on stakeholder input to modernize the CRA regulations. These recommendations included updating the definition of assessment areas, increasing the clarity and transparency of CRA ratings, improving the timeliness of evaluations, and incorporating more effective incentives to encourage banks to meet the credit and deposit needs of their communities.

See

Memorandum from the U.S. Department of the Treasury to the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation,

Community Reinvestment Act—Findings and Recommendations

(April 3, 2018)

available at https://home.treasury.gov/sites/default/files/2018-04/4-3-18%20CRA%20memo.pdf.

Recognizing the need for modernization, the agencies began to assess and update the CRA regulatory framework in 2018 by working together on an Advance Notice of Proposed Rulemaking (ANPR). The OCC issued the ANPR in August 2018, which reflected feedback and input from the FDIC and the Board.

The OCC received more than 1,500 comments from stakeholders and shared these comments with the FDIC and the Board. Additionally, the OCC and the Board separately engaged with stakeholders, including civil rights organizations, community groups, members of Congress, academics, and banks to obtain their perspectives and feedback on all aspects of the CRA and potential improvements that could be made to the regulations. Many of those comments reflected the opinion that the current CRA regulatory framework lacks objectivity, transparency, and fairness. Numerous stakeholders also commented that the framework is applied inconsistently and is hard to understand.

See

OCC News Release 2018-87 (Aug. 28, 2018); 83 FR 45053 (Sept. 5, 2018).

The agencies' extensive engagement with stakeholders confirmed that the CRA remains a powerful tool for promoting community revitalization and increasing financial activity in neighborhoods across the country. However, stakeholders observed that the evaluation of banks' CRA-qualifying lending, investments, and services (collectively, qualifying activities or CRA activities) under the current CRA regulations—including what type of activities count, where they count, and how they count—is inconsistent, opaque, and complex.

In response to this feedback, the agencies propose to strengthen the CRA regulatory framework to better achieve the underlying statutory purpose of encouraging banks to help serve their communities by making the framework more objective, transparent, consistent, and easy to understand. To accomplish these goals, the proposal would clarify which activities qualify for CRA credit; update where activities count for CRA credit; create a more objective method for measuring CRA performance; and provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. These changes would encourage banks to serve their entire communities, including LMI neighborhoods, more effectively through a clearer set of CRA activities and would provide clarity for all stakeholders.

The agencies' proposal would establish a regulatory framework with the goal to encourage banks to conduct more CRA activities and to serve more of their communities, including those areas with the greatest need for economic development, investment, and financing needs, such as urban and rural areas and opportunity zones, that may be underserved by the current regulations.

II. Background

Prior to drafting this proposal, the agencies invited and considered input from a wide range of stakeholders, through a variety of channels. That input included the strengths, weaknesses, and challenges of the current framework, as well as ideas for, and the advantages and disadvantages of, alternative frameworks.

In 2018, the OCC held numerous meetings with community groups, non-profit and civil rights organizations, legislators, regulators, bankers, and other stakeholders to discuss and solicit input on how to improve the current framework. During this same period, the Treasury Department invited a diverse group of stakeholders to provide feedback on how the CRA regulations could more effectively encourage economic growth in the communities that banks serve. As discussed above, in April 2018, the Treasury Department released its findings and recommendations for how to modernize the CRA regulatory framework, which are consistent with the four components of modernization outlined in this proposal.

Press Release, U.S. Department of the Treasury, Treasury Releases Community Reinvestment Act Modernization Recommendations (April 3, 2018),

available at https://home.treasury.gov/news/press-releases/sm0336.

In August 2018, the OCC issued an ANPR inviting public input on how best to improve the CRA regulatory framework to generate more local and national CD and economic development activities—and thus promote economic opportunity—by encouraging banks to engage in more lending, investments, and services that benefit targeted populations (such as LMI individuals, small farms, and small businesses) and areas in need of financial services (including LMI communities, rural and urban areas, and areas targeted by a Federal, state, local, or tribal government for development). The ANPR sought comment on (1) clarifying, expanding, and listing the types of activities that qualify for CRA credit; (2) revisiting how to delineate the areas in which qualifying activities receive credit; (3) establishing objective ways to evaluate CRA performance; (4) improving the timeliness of regulatory decisions related to the CRA; and (5) reducing the cost and burden, and improving the timely completion, of CRA evaluations.

During the summer of 2019, the OCC engaged in nationwide outreach with community advocates, CD professionals, civil rights organizations, and bankers to discuss opportunities to bring more CRA investment, lending, and services to underserved areas. This outreach included visits to rural and urban areas and Indian country. The tours provided opportunities for the agency's senior leadership to hear CRA success stories and how the agencies could help CRA work better for everyone. While these conversations confirmed that CRA has been a force for good for the past 40 years, they also highlighted the need to strengthen the regulatory framework to encourage greater CRA activity and to more effectively reach underserved communities.

The most consistent feedback that the agencies and the Treasury Department have received in response to their outreach efforts is that the current CRA

framework has not kept pace with changes in banking or technology and that the CRA regulations and guidance have become cumbersome, outdated, and complex. Moreover, stakeholders conveyed that the lack of clarity and transparency of the current framework has restricted lending and investments in communities across America. For example, stakeholders expressed concern and frustration that under the current system:

• Ambiguity over what types of activities qualify for CRA consideration discourages certain types of CRA activity in high-need areas;

• “CD” and “economic development” are narrowly defined, and the current definitions provide little incentive for banks to engage in many of the loan products, investments, and services that could help their communities;

• Assessment areas that are only delineated around banks' physical locations result in geographies where banks do not engage in or engage in only limited CRA activities (CRA deserts) and fail to incentivize CRA activity in many rural areas;

• Assessment areas have not kept pace with how consumers bank and how banking services are delivered today;

• Performance evaluations and ratings are subjective and inconsistent; and

• Publication of a bank's CRA performance evaluation, following its CRA evaluation, is often delayed, which can result in a significant gap between publication of consecutive evaluations.

The feedback also provided valuable insight from stakeholders and revealed broad support for modernizing the CRA regulations by clarifying what type of activities count, updating where CRA activities count, making performance evaluations more objective, and improving reporting.

For example, of those ANPR commenters who addressed the issues below:

For example, comments on the ANPR came from a variety of stakeholders, including banks and banking industry trade associations; community, civil rights, and advocacy groups and community trade associations; CD funds and organizations; academia; CRA consultants; governmental entities; and the general public. The OCC also met with commenters to discuss issues related to the ANPR. Summaries of these meetings, as well as all comments received on the ANPR, are available at

https://www.regulations.gov/docket?D=OCC-2018-0008.

• The vast majority do not think the current framework is objective, fair, or transparent;

• The vast majority think the current framework is applied inconsistently;

• The vast majority say the current framework is hard to understand;

• The vast majority support publishing a list of eligible activities;

• The majority support objective measurement of CRA performance, although they oppose a single metric;

• Many support retaining performance context; and

• The majority support expanding assessment areas.

As discussed below, the changes outlined in this proposal focus on many of these stakeholders' concerns with the current framework. The proposed rule is designed to achieve the following positive outcomes desired by many stakeholders:

•

Create incentives to do more

—By establishing clear benchmarks based on historical performance, the proposed rule would allow regulators to set benchmarks at levels high enough to increase the level of qualifying lending, investment, and services and adjust those benchmarks on a periodic basis.

•

Reduce CRA deserts

—By clarifying how banks can achieve a satisfactory or an outstanding in their assessment areas and expanding when banks can receive credit beyond the immediate areas surrounding bank branches, the new rule would incent greater CRA activity in areas currently in need of financial resources, including rural areas, areas identified for aid, distressed areas, and Indian country.

•

Limit CRA hotspots

—By clarifying and expanding when banks can receive credit beyond the immediate areas surrounding bank branches, the proposed rule would relieve pressure in overheated markets where banks are already meeting community needs.

•

Reduce activity uncertainty

—By providing clear standards and an illustrative list of qualifying activities, the proposed rule would reduce uncertainty regarding what counts for CRA credit and give banks and stakeholders greater ability to plan reinvestment activities without the risk of activities not receiving credit. The rule would also provide processes for confirming an activity would receive CRA credit.

•

Reduce delays in Performance Evaluation (PE) publication

—By making the evaluation of CRA performance more objective and improving reporting, the revised rule would reduce the time required to conduct CRA evaluations and produce PEs, improving transparency and increasing regulatory efficiency.

•

Improve the quality of PEs

—By making evaluation of CRA performance more objective and standardized, the proposed rule would help make PEs more useful, comparable across banks, and meaningful for stakeholders.

•

Increase small business lending

—By increasing the loan size for small loans to business, which was last updated 25 years ago, and increasing the revenue size threshold for small businesses, the proposed rule would encourage economic development and job creation.

•

Increase small farm lending

—By increasing the loan size for small loans to farms, which was last updated 25 years ago, and increasing the revenue size threshold for small farms, the proposed rule would encourage economic development and job creation and help the U.S. agricultural industry survive.

•

Promote capital and investment in Indian country

—By providing credit for retail and community development activities in Indian country, the proposed rule would help incent more investment and lending in Indian country. This would help fight persistent poverty and support basic infrastructure and needs such as housing, technology, and healthcare.

•

Encourage long-term commitment to community reinvestment

—By refocusing on ongoing commitment to lending and investment through evaluating on-balance sheet activities, the proposed rule would reduce the current churn and short-term focus of CRA activities, providing banks more incentive to engage in long-term investments and loans, which would, in turn, provide community developers and advocates greater stability and more incentive to engage in longer term strategic initiatives.

•

Reduce displacement by refocusing on LMI individuals and activities

—By emphasizing lending and services provided to or benefiting LMI individuals, the proposed rule would avoid giving credit for activities that may contribute to displacement.

•

Preserve the importance of branches

—By requiring banks to designate assessment areas surrounding branches, headquarters, and deposit taking ATMs and including a measure of a bank's distribution of branches when assessing the impact of CRA activities, the proposed rule would maintain the importance of branches in assessing a bank's record of serving its communities.

•

Preserve community voices

—By retaining performance context and a means for community stakeholders to share comments and concerns with examiners about assessment area needs and opportunities, the proposed rule would preserve community voices and help encourage banks to meet the needs of their entire communities, including LMI neighborhoods.

•

Reduce inconsistent application of the rule

—By clarifying what counts and increasing the objectivity of CRA performance evaluations, the proposed rule would make performance evaluations more consistent over time and across regions.

•

Provide greater flexibility for community banks

—The proposed rule also would provide an opt in for small banks with assets of $500 million or less to allow the bank to determine whether to be evaluated under existing performance standards or the revised framework based on their unique business models.

III. Overview of Proposed Rule

The proposed rule builds upon the outreach efforts that have been underway for several years and reflects the agencies' collaborative process to find solutions to mutually recognized problems. To improve the current CRA regulatory framework and promote increased lending and investment consistent with stakeholder feedback, the agencies propose to make changes in four key areas: (1) Clarifying and expanding what qualifies for CRA credit; (2) expanding where CRA activity counts; (3) providing an objective method to measure CRA activity; and (4) revising data collection, recordkeeping, and reporting. The following sections provide a brief overview of the proposal's significant changes in those areas.

A. Clarifying and Expanding What Qualifies for CRA Credit

The proposal would (1) establish clear criteria for the type of activities that qualify for CRA credit, which generally would include activities that currently qualify for CRA credit and other activities that are consistent with the purpose of CRA but may not qualify under the current CRA framework; (2) require the agencies to publish periodically a non-exhaustive, illustrative list of examples of qualifying activities; and (3) establish a process for banks to seek agency confirmation that an activity is a qualifying activity.

As discussed below, the agencies are proposing to retain for certain banks the small bank performance standards applicable to small banks that are not intermediate small banks in the current regulations. 12 CFR 25.26, 195.26; 345.26. The agencies intend for these standards to be applied consistent with the current regulations except as discussed in this notice of proposed rulemaking.

These changes would address current impediments to engaging in CRA activities and provide banks with greater certainty and predictability regarding whether certain activities qualify for CRA credit. Specifically, by providing banks with greater confidence that activities qualify for CRA credit before they invest time and resources in those activities, the proposed rule would incentivize banks to more readily engage in innovative projects that have a significant impact on the community. Moreover, by allowing stakeholders to confirm that activities qualify, the proposal would eliminate the uncertainty in the current regulations that potentially limited the scope and type of banks' CRA activities that will benefit banks' communities, particularly LMI individuals and areas.

In addition to providing transparency, the proposed qualifying activities criteria would expand the types of activities that qualify for CRA credit to recognize that some banks are currently serving community needs in a manner that is consistent with the statutory purpose of CRA but are not receiving CRA credit for those activities. This expansion would ensure that banks help meet the needs of their entire communities, particularly LMI neighborhoods and other areas and populations of need. The expanded qualifying activities criteria would focus on economically disadvantaged individuals and areas in banks' communities. For example, the proposed qualifying activities criteria would expand the activities that qualify in areas that have traditionally lacked sufficient access to financial services, such as (1) distressed areas; (2) underserved areas, including areas where there is a great need for banking activities but few banks that engage in activities (known as banking deserts); and (3) Indian country. Moreover, to maintain a focus on LMI individuals, the proposal would, for example, no longer permit a mortgage loan to a high-income individual living in a low-income census tract to qualify for CRA credit.

B. Expanding Where CRA Activity Counts

The proposal would preserve assessment areas surrounding banks' facilities and expand where CRA activity counts to help banks meet the needs of their communities. To ensure that CRA activity continues to have a local community focus where banks maintain a physical presence and conduct a substantial portion of their lending activity, banks would still be required to delineate assessment areas around their main office, branches, or non-branch deposit-taking facilities as well as the surrounding areas where banks have originated or purchased a substantial portion of their loans. These areas would be identified as “facility-based” assessment areas. In addition, to recognize the evolution of modern banking (including the emergence of internet banks), the fact that many banks receive large portions of their deposits from outside their facilities-based assessment areas, and in conformity with the CRA's intent to ensure that banks help meet credit needs where they collect deposits,

the proposed rule would require banks to delineate additional, non-overlapping “deposit-based” assessment areas where they have significant concentrations of retail domestic deposits. Specifically, a bank that receives 50 percent or more of its retail domestic deposits from geographic areas outside of its facility-based assessment areas would be required to delineate deposit-based assessment areas where it receives five percent or more of its total retail domestic deposits, based on the physical addresses of its depositors.

See, e.g.,

123 Cong. Rec. 17630 (1977) (statement of Sen. William Proxmire, Chairman, S. Comm. on Banking, Housing, and Urban Affairs).

Banks would receive CRA credit for qualifying activities conducted in their facility-based assessment areas and deposit-based assessment areas at the assessment area level and at the bank level, consistent with the applicable performance standards discussed below. In addition, the proposal would permit banks to receive CRA credit for qualifying activities conducted outside of their assessment areas at the bank level. Under this approach, banks would still be encouraged to meet local community needs where they have branches and depositors but would be given flexibility to serve other communities with distinct needs as these activities would be considered when calculating the overall dollar value of their qualifying activities under the proposed rule. This flexible framework could reduce the number of areas where there are more banks that want to engage in CD activities than there is need for those activities (known as CD hot spots) and areas where there is a great need for CD activities but few banks that engage in those activities (known as CD deserts).

C. Providing an Objective Method To Measure CRA Activity

Consistent with the current CRA framework, the proposed rule would include different performance standards applicable to banks of different sizes. Small banks, as defined under the proposed rule, would continue to be evaluated under the small bank performance standards currently applicable to small banks that are not

intermediate small banks.

The proposed rule also would establish new general performance standards to evaluate other banks' CRA activities and the CRA activities of small banks that opt into these standards.

The proposed rule would define a small bank as a bank that had assets of $500 million or less in each of the previous four calendar quarters.

The new general performance standards would assess two fundamental components of a bank's CRA performance: (1) The distribution (

i.e.,

number) of qualifying retail loans to LMI individuals, small farms, small businesses, and LMI geographies and (2) the impact of a bank's qualifying activities, measured by the value of a bank's qualifying activities relative to its retail domestic deposits. Both components would be compared to specific benchmarks and thresholds that would be established prior to the beginning of a bank's evaluation period. Banks evaluated under the general performance standards would also be required to meet a minimum CD lending and investment requirement in each assessment area and at the bank level to achieve a satisfactory or outstanding rating.

The distribution component builds on ideas shared with the agencies by the Board that provide a quantifiable method to assess what portion of a bank's major retail lending activities are targeted to LMI individuals or in LMI areas. The impact component responds to stakeholder comments about the need for more lending and investment in areas served by CRA and provides a transparent means of evaluating those activities and setting benchmarks sufficiently high enough to incent more CRA activities.

By providing a transparent and objective way to evaluate a bank's CRA performance that banks would either be subject to or may opt into, the proposed rule would incentivize banks to engage in qualifying activities in their assessment areas and other communities with identified needs, such as distressed and underserved areas, including rural and urban areas and Indian country. Moreover, greater certainty about how engaging in specific qualifying activities would affect bank-level ratings would enable banks and other stakeholders to monitor CRA performance on an ongoing basis. It would also enable banks to target areas of need within their communities, potentially engage in more qualifying activities, and provide a positive benefit to more communities.

In addition, the proposal would preserve and standardize consideration of performance context, which would allow the agencies to recognize and account for specific facts and circumstances relating to a bank's CRA capacity and opportunities in a transparent manner.

Finally, the proposed regulations would include a strategic plan option for all banks. This option would address the unique needs of banks with business models that could not be effectively evaluated under the proposed objective framework reflected in the general performance standards or the small bank performance standards, such as banks that do not have retail domestic deposits or small banks that do not originate retail loans. Taken together, these features would appropriately differentiate banks based on their size, location, and business model.

D. Revising Data Collection, Recordkeeping, and Reporting

The proposal would require banks evaluated under the small bank performance standards to collect and maintain, but not to report, data related to their retail domestic deposits so that the agencies could validate their deposit-based assessment area delineations, as applicable. Banks evaluated under the general performance standards would be required to collect, maintain, and report certain data related to their qualifying activities, certain non-qualifying activities, retail domestic deposits, and assessment areas. Those banks would also be required to use that information to make the calculations necessary to determine their ratings, based on the application of the performance standards in the proposal. Prior to a CRA performance evaluation, the evaluating agency would validate the data used in determining a bank's ratings. The agencies would provide additional guidance on the data that banks need to collect and maintain under the proposed rule that would standardize the information collected and help banks ensure that they meet the requirements of the rule.

The agencies believe that access to the standardized information required by the proposed rule would help them to better measure, assess, and understand CRA activity across various areas and across the industry and over time. The proposal's requirements also would provide the agencies with a better, more comprehensive understanding of an individual bank's CRA activity. In addition, industry-wide reporting would enable more effective stakeholder dialogue regarding the distribution and volume of CRA activity. The agencies expect that these changes would result in timelier and more efficient CRA evaluations, which, among other things, would bring greater predictability to agency actions that consider CRA performance. Moreover, the use of the objective measures described above would allow performance evaluations to be written in standardized forms and captured in shorter narratives, which would contribute to more timely and useful public reporting.

IV. Section-by-Section Discussion

A. Qualifying Activities

Overview.

Under the current regulatory framework, only certain—and relatively few—bank activities qualify for consideration in CRA performance evaluations. Whether a bank's activities qualify for consideration generally depends not only on the characteristics of the activities but also on where the activities took place. As a general matter, the types of activities that currently qualify for CRA consideration fall into two categories: (1) Retail banking activities and (2) CD activities.

Under the current framework, retail banking activities generally include (1) retail loans (

i.e.,

home mortgage loans, small business loans, small farm loans, and consumer loans) and (2) retail banking services (

i.e.,

the range of retail deposit services and credit services, branch distributions, the record of branch openings and closings, and the availability and the effectiveness of alternative delivery systems serving LMI individuals and areas). For retail lending, loan originations and purchases are considered. CD activities generally include those that finance or support (1) affordable housing for LMI individuals; (2) economic development by financing small businesses or small farms; (3) community services for LMI individuals; and (4) the revitalization or stabilization of LMI census tracts, distressed nonmetropolitan middle-income census tracts, underserved nonmetropolitan middle-income census tracts, and designated disaster areas. For CD activities, activities conducted or originated during the current evaluation period are considered. For CD investments, prior period outstanding investments are also considered. Banks also have the option of receiving consideration for retail and CD activities conducted by an affiliate, third party, or consortium. In evaluating a bank's CRA performance, the agencies assess certain factors including (1) the level of relevant retail lending activity and the geographic and borrower distribution of that retail lending activity and (2) the level, responsiveness, innovativeness, complexity, and flexibility of CD activities.

The feedback that the agencies received on the current framework demonstrates that banks often are uncertain about whether a CD activity will qualify for CRA consideration until their supervisory agency makes a determination in a CRA evaluation, often years after the banks engaged in the activities. Feedback also revealed that many banks and other stakeholders view the process by which the agencies decide whether a CD activity qualifies for CRA credit as opaque and inconsistent from evaluation-to-evaluation, agency-to-agency, and year-to-year. In addition, stakeholders expressed that the current definition of CD can be limiting and does not capture many activities that respond to community needs, including the needs of LMI individuals and neighborhoods. These concerns create a disincentive for banks to undertake certain activities or explore new and potentially beneficial activities, even when these activities would serve the needs of LMI populations and other communities with needs. The agencies propose to address these issues in four ways.

Qualifying activities criteria.

First, the proposal would clarify the activities that qualify for CRA credit. The clarifying criteria would generally apply to all banks subject to the agencies' CRA regulations. Consistent with the intent of the CRA statute, the proposed rule would define a “qualifying activity” as an activity that helps meet the credit needs of a bank's community, particularly those individuals, areas, and populations with needs. The proposal would also provide clearly defined qualifying activities criteria that identify the types of activities that meet the credit needs of banks' communities and, thus, would be considered qualifying activities. These criteria would both encompass the many activities that currently qualify for CRA consideration and include additional activities that meet the credit needs of economically disadvantaged individuals and areas in banks' communities.

Under the proposal, the qualifying activities criteria would include activities conducted by a bank. The agencies recognize that there are limited instances where the bank is substantively engaged in an activity, but the activity is done in the name of another party, such as an affiliate. In these situations, the bank provides the economic resources, and the agencies' current practice is to recognize these activities as being conducted by the bank, at the bank's option. Under the proposed rule, the agency would recognize activities substantively conducted by the bank. The proposed qualify activity criteria would be:

• A retail loan (defined to include home mortgage loans, small loans to businesses, small loans to farms, and consumer loans

) provided to:

Under the proposal, a “consumer loan” would be defined with reference to the Call Report and would include credit cards, other revolving credit plans, automobile loans, and other consumer loans.

○ An LMI individual;

○ A small business; or

○ A small farm;

• A retail loan provided in Indian country.

• A retail loan that is a small loan to a business or a small loan to a farm located in a low- or moderate-income census tract.

• A CD activity that provides financing for or supports:

○ Affordable housing that partially or primarily benefits

LMI individuals or families or middle-income individuals or families in high-cost areas;

Under the proposal, a bank would receive credit for the full dollar value of certain CD activities that primarily benefit a specified population or area. For those CD activities that only partially benefit a specified population or area, a bank would receive

pro-rata

credit for the dollar value of the activity equal to the portion that benefited the specified population or area.

○ Another bank's CD loan, CD investment, or CD service;

○ Community support services that partially or primarily serve LMI individuals or families;

○ Essential community facilities that partially or primarily benefit or serve LMI individuals or areas of identified need;

○ Essential infrastructure that benefits or serves LMI individuals or areas of identified need;

○ Family farms;

○ Government programs, projects, or initiatives that partially or primarily benefit LMI individuals (

e.g.,

a program that supports urban renewal), small businesses, small farms, and areas of identified need;

○ Financial literacy programs or education or homebuyer counseling;

○ Owner-occupied and rental housing development, construction, rehabilitation, improvement, or maintenance in Indian country;

○ Qualified opportunity funds that benefit LMI opportunity zones;

○ A Small Business Administration Certified Development Company (SBDC), Small Business Investment Company (SBIC), New Markets Venture Capital company, qualified Community Development Entity, or U.S. Department of Agriculture Rural Business Investment Company (RBIC);

○ Technical assistance and supportive services for small businesses or small farms; or

○ A capital investment, loan participation, or other venture undertaken by a bank in cooperation with a minority depository institution, women's depository institution, CDFI, or low-income credit union that helps to meet the credit needs of the institution's or credit union's local communities, including through activities that indirectly help to meet community credit needs by promoting the institution's or credit union's sustainability and profitability.

For example, a cooperative venture would include donating, selling on favorable terms, or making available on a rent-free basis a branch of a bank that is in a primarily minority census tract to a minority depository institution or women's depository institution. A cooperative venture would also include a bank that is not a minority depository institution, women's depository institution, CDFI, or low-income credit union making a deposit at one of these types of institutions.

Regarding CD activities, the phrase “provides financing for or supports” would be interpreted broadly to include all lending, investment, and service activities that are related to the CD qualifying activities criteria. For example, activities that finance the development, rehabilitation, improvement, or maintenance of affordable housing or essential community facilities, such as a public hospital that serves the entire community including the community's LMI residents, would be qualifying activities because the activities provide financing for or support the housing or hospital. The rehabilitation, improvement, or construction of affordable housing, essential community facilities, or essential infrastructure may include (1) renewable energy, energy-efficiency, or water conservation equipment or projects associated with affordable housing, essential community facilities, or essential infrastructure or (2) the abatement or remediation of, or other actions to correct, environmental hazards, such as lead-based paint, lead pipes (such as those used in antiquated water supply systems), asbestos, mold, or radon that is present in the housing, facilities, or site where the housing or facilities are located. An activity that meets more than one of the criteria would be treated as a single qualifying activity.

Scope of qualifying activities.

Second, the proposed criteria would expand the scope of the activities that qualify for CRA credit. This expansion is intended to recognize the many ways banks may meet the credit needs of their communities, particularly LMI communities, through activities that are consistent with the statutory purpose of the CRA. Under the proposal,

expansions to the retail lending criteria would include:

• Home mortgage loans and consumer loans provided in Indian country. The agencies received feedback from commenters on the ANPR and during outreach that emphasized the lack of access to cost-effective capital and banking services in Indian country. Providing CRA credit for home mortgage loans and consumer loans in Indian country helps to address these critical needs.

• Small loans to businesses and small loans to farms provided to (1) small businesses or small farms in census tracts of all income levels or (2) businesses or farms in LMI census tracts. The proposal would increase the size thresholds for a small loan to a business and a small loan to a farm to $2 million or less. Consistent with the current regulations' definitions of small business loan and small farm loan, the proposed definitions are based on the size of the loan to the business or farm. Loans of $2 million or less to a business or farm would be considered qualifying activities if they (1) are provided to small businesses or small farms or (2) are located in LMI census tracts. The increase would, in part, account for inflation since the $1 million loan limit for loans to small businesses and $500,000 for loans to small farms were established in 1995. The proposal would include a provision for adjusting these loan limits for inflation going forward.

The proposal would define home mortgage loans with reference to the Call Report instead of the Home Mortgage Disclosure Act (HMDA). As a result of this revision, construction loans for 1-4 family residential properties would be included as home mortgage loans. Consumer loans would also be defined with reference to the Call Report and included in all CRA evaluations. In addition, the small business and small farm revenue thresholds would be increased to $2 million in part to account for inflation since the revenue size limits were established. As with the size thresholds for a small loan to a business and a small loan to a farm, the proposal would include a provision for adjusting the revenue limits for inflation going forward.

Under the proposal, expansions to qualifying CD activities would include:

• Expanding the affordable housing criterion by clarifying that it:

○ Encompasses “naturally occurring affordable housing” (

e.g.,

unsubsidized rental housing with rents that are affordable to LMI individuals and families). The current regulations could be interpreted to provide consideration these types of activities; however, the regulations do not expressly include these activities as qualifying CD activities and the CRA guidance is not sufficiently clear about whether they receive CRA credit. The proposal would clarify the criteria to incentivize banks to meet the affordable housing needs of their communities through a variety of activities; and

○ Includes rental housing for low-, moderate-, and middle-income individuals in high-cost areas. The Interagency Questions and Answers Regarding Community Reinvestment (Interagency Questions & Answers)

explain that examiners can account for conditions in high-cost areas in banks' CRA evaluations. The proposal would clarify the criteria to incentivize banks to meet the affordable housing needs of their communities through a variety of activities including workforce housing that would allow public employees, such as teachers, police officers, and firefighters, to live close to the communities they serve.

The agencies have published the Interagency Questions and Answers Regarding Community Reinvestment in the

Federal Register

. 81 FR 48506 (July 25, 2016).

• Adding a criterion for activities that help finance or support another bank's CD loans, CD investments, or CD services. Including this criterion and expanding the definition of CD loan and investments to include certain commitments to lend and invest, discussed below, would address the fact that community banks understand community needs best but often are unable to provide the necessary funding or service alone. In these cases, large banks may finance the project, benefitting from community banks' efforts to identify areas of need. This criterion would address stakeholders' recommendations that the CRA regulatory framework do more to encourage inter-bank collaboration and allow community banks to remain involved in projects that they identified and enabled.

• Adding a criterion for essential community facilities, such as schools and hospitals, that benefit or serve LMI individuals, LMI census tracts, or other targeted areas of need, such as distressed areas or Indian country. Under the current regulation, the Interagency Questions & Answers regarding activities that revitalize or stabilize underserved nonmetropolitan middle-income census tracts reference essential community needs, which include certain essential community facilities or infrastructure projects; however, activities that finance or support these projects may also meet other CD definitions. By adding a criterion for essential community facilities, the proposal would also clarify when these activities receive credit and incentivize banks' lending and investment activities related to these facilities.

• Adding a criterion for essential infrastructure, such as roads, mass transit, or water supply and distribution, that benefits or serves LMI individuals, LMI census tracts, or other targeted areas, such as Indian country. As discussed above, certain essential infrastructure projects may receive credit under the current CRA regulations as CD activities. The addition of the essential infrastructure criterion would acknowledge the importance of these types of projects to communities by ensuring that essential infrastructure activities receive CRA credit if they include some benefit for LMI individuals, LMI census tracts, or other areas of need (

e.g.,

an investment in a mass transit project that serves the public, including LMI individuals, would be a qualifying activity).

The addition also would recognize that essential infrastructure projects are often community-wide projects for which it is not feasible to allocate the benefit to specific populations or areas.

In contrast, a loan supporting the infrastructure necessary to connect an upper-income housing development to a water main line would not meet this criterion, if there were no LMI residents in the development.

• Adding a criterion for federal, state, local, or tribal government programs, projects, or initiatives that partially or primarily benefit LMI individuals, small businesses, small farms, LMI census tracts, or other targeted areas of need, such as distressed or underserved areas. Although many programs, projects, or initiatives covered by this criterion would qualify under the current CD definitions, this new criterion would ensure that all activities that meet this definition receive CRA credit. As previously indicated, the agencies believe that, in many circumstances, communities are in the best position to identify their needs and design projects, programs, and initiatives that help to address those needs. This criterion would ensure that activities related to both existing and future programs that benefit certain populations and areas of need will receive CRA credit, even if the activities do not meet one of the other CD criteria, such as affordable housing. Including this criterion would reduce the circumstances in which sections or subsections of the regulations become obsolete due to the inclusion of specific

programs that expire or are repealed. For example, the CD definition in the CRA regulations previously included qualifying Neighborhood Stabilization Program (NSP)-related activities that benefit low-, moderate-, and middle-income individuals and geographies in NSP-target areas. These references have since been removed because, after March 2016, NSP-eligible activities no longer received consideration as CD activities under the CRA.

• Adding a criterion for family farm purchases or leases of farm land, equipment, and other inputs or the sale and trade of family farm products, as well as for technical assistance and supportive services. The agencies believe that this criterion would benefit communities that banks serve because a healthy farm economy supports many rural and regional economies.

• Adding a criterion for financial literacy programs or education or homebuyer counseling that benefits individuals of all income levels. The agencies believe that financial literacy is an important issue irrespective of income level. Moreover, some stakeholders expressed support for providing CRA credit for financial literacy programs for all individuals. These stakeholders cited high levels of student and credit card debt and a lack of retirement and other savings as reasons for providing broader consideration of financial literacy-related activities.

• Adding a criterion for owner-occupied and rental housing development, construction, rehabilitation, improvement, or maintenance in Indian country. This criterion would address concerns expressed by stakeholders about the significant housing needs in Indian country that affect individuals of all income levels.

• Adding a criterion for qualified opportunity funds, as defined in 26 U.S.C. 1400Z-2(d)(1), that benefit qualified opportunity zones in LMI tracts, as defined in 26 U.S.C. 1400Z-1(a). This criterion would incentivize banks to help meet the needs of LMI individuals and tracts located in opportunity zones, which are communities the federal government has identified as needing economic development and job creation.

• Adding CDFIs to the criterion for ventures undertaken by a bank in cooperation with a minority depository institution, women's depository institution, or low-income credit union. The proposal would include CDFIs in this criterion to recognize that the goal of these institutions is to expand economic opportunities in low-income communities by providing access to financial products and services for local residents and businesses.

In addition to these expansions, the affordable housing criterion would include activities that finance or support owner-occupied housing purchased, refinanced, or improved by LMI individuals or families, except for home mortgage loans provided directly to LMI individuals or families. This aspect of the criterion would encompass, for example, an investment provided to a non-profit that constructs or rehabilitates affordable housing for purchase by LMI individuals. In addition, this aspect of the criterion would capture mortgage-backed securities (MBS) while excluding retail home mortgage loans. Although these activities receive credit under the current regulation, this aspect of the criterion would ensure that they continue to receive credit under the more detailed qualifying activities criteria in the proposal.

Furthermore, the proposal would clarify and expand the type of activities that qualify for CRA credit through revisions to the definitions used in the qualifying activities criteria. The proposal would revise the definitions of CD loans and CD investments

to include commitments to lend and invest, respectively, that are reported on the Call Report, Schedule RC-L, and meet the CD activities criteria.

The proposal would replace the term “qualified investment” in the current regulation with the term “CD investment.”

The Call Report, Schedule RC-L, covers contingent and legally binding commitments to lend and invest, respectively.

Loan participations that have a primary purpose of CD currently qualify and would continue to qualify. To further support collaboration between large banks and community banks, the proposal would provide credit for a bank's allowance for credit losses that are reported on the Call Report, Schedule RC-G, if the bank commits to provide additional funding as required in certain contingencies. For example, a large bank would receive credit if it committed to financing potential cost overruns, the threat of which could cause the community bank to avoid the project entirely.

Similarly, a project may require a bank to commit funds in advance but because banks face investment limitations,

advance commitments, though often necessary to a project, can be restrictive, particularly for community banks. The proposal would provide credit for the dollar value of legally-binding commitments to invest that meet the CD criteria.

Banks would continue to receive CRA credit for the funded portions of lines of credit but generally would not receive CRA credit for other legally-binding commitments to lend, such as revolving credit lines and letters of credit.

See, e.g.,

12 CFR part 24.

The proposal also would revise the definitions of distressed nonmetropolitan middle-income area and underserved nonmetropolitan middle-income area to include additional census tracts where there are unmet financial needs. Specifically, the requirement that a distressed area be a nonmetropolitan area would be removed to recognize that there may be urban areas that experience high rates of poverty, unemployment, or population loss and need financial resources. Although the agencies also considered lowering the poverty threshold in the definition of distressed area to as low as 15 percent, they decided to retain the 20 percent threshold because it is consistent with the threshold used in some other Federal programs that are intended to benefit low-income communities, such as the New Markets Tax Credit program. The proposal also would revise the definition of underserved area to remove the requirement that these census tracts be nonmetropolitan areas; this change would address urban banking deserts that lack access to financial services. Under the proposal, an underserved area would be a census tract with:

• A population size, density, and dispersion that indicate the area's population is sufficiently small, thin, and distant from a population center that the tract is likely to have difficulty financing the fixed costs of meeting essential community needs; or

• a census tract that does not have a bank branch in the tract and does not have a bank branch within:

○ Two miles of the center of the census tract if it contains only urban census blocks;

○ five miles of the center of the census tract if it contains urban and rural census blocks;

○ ten miles of the center of the census tract if it contains only rural census blocks; or

○ five miles of the center of the census tract if it is an island area, as defined by the Federal Financial Institutions Examination Council (FFIEC) Census data.

Due to the lack of banking and other services in underserved areas, the agencies believe that the CRA regulations should incentivize banks to meet the retail lending and CD needs of the residents in these geographies.

In addition, under the proposal, the CRA regulations would no longer require that CD services be related to the

provision of financial services (

i.e.,

banks would receive credit for all volunteer hours, including manual labor, provided to a CD project). This expansion recognizes that support for a CD project may take many forms, all of which are required for the project to meet the needs of a community, and that all these forms of support should qualify for CRA credit, consistent with the goals of CRA. Under the proposed general performance standards, all activities conducted by the bank—including those engaged in by another party, such as an affiliate—would be considered, as opposed to at a bank's option as is done under the current framework. Banks evaluated under the small bank performance standards would continue to have the option of requesting consideration for these qualifying activities.

The proposal also would expand the circumstances in which banks receive

pro-rata

credit for qualifying activities. Under the current regulations, banks receive credit for the

pro-rata

share of a loan or investment in mixed-income housing that includes a set-aside required by Federal, state, or local government for affordable housing for LMI individuals. Under the proposal, all CD activities that provide some benefit to, but do not primarily benefit, specified populations, entities, or areas would receive

pro-rata

credit equal to the partial benefit provided. This change recognizes that 100 percent of the portion of an activity that benefits LMI individuals and families, small businesses, small farms, or identified geographies would meet the CD criteria in the proposal (

i.e.,

a bank would receive credit for 40 percent of the dollar value of a grant that supports a non-profit organization which provides after care and activities to a school where 40 percent of the students are eligible for free or reduced price school lunches).

Further, as stated above, the intended effect of the proposal is to expand the type of activities that qualify for CRA credit. Although the agencies chose not to include in the proposal certain ambiguous or unclear terms used in the current regulations, the agencies do not intend to reduce the activities that qualify for CRA credit. For example, the qualifying activities criteria would no longer use the current regulatory phrase “revitalize and stabilize” to describe the activities that would qualify in targeted areas, such as distressed or underserved areas; instead, the proposal describes in greater detail the criteria for activities that would qualify in these locations. Similarly, rather than including the term “economic development,” the proposal employs more detailed CD criteria to capture the type of activities that currently qualify as economic development activities, such as activities that finance (1) SBDCs, SBICs, New Markets Venture Capital companies, qualified Community Development Entities, or RBICs; (2) businesses or farms that meet the size-eligibility standards of the SBDC or SBIC by providing technical assistance and supportive services; or (3) Federal, state, local, or tribal government programs, projects, or initiatives that partially or primarily benefit small businesses, or small farms. The proposal does not include the more general aspect of economic development that involved a bank having to demonstrate that its activities that finance businesses or farms that met the size test

support job creation, retention, and improvement for LMI individuals, LMI census tracts, and other areas targeted for redevelopment by Federal, state, local, or tribal governments. This aspect of the economic development component of the current CD definition was not retained because the agencies could not identify an objective method for demonstrating job creation, retention, or improvement for LMI individuals or census tracts or other targeted geographies, other than by determining if the activity would create additional low-wage jobs.

Under the current regulations, as interpreted in the Interagency Questions & Answers, a business or farm meets the size test if it finances, either directly, or through an intermediary, businesses or farms that either meet the size eligibility standards of the SBDC or SBIC programs or have gross annual revenues of $1 million or less.

See

Interagency Questions and Answers, Q&A _.12(g)(3)-1, 81 FR 48506, (July 25, 2016).

Focus on ongoing commitment.

Third, the proposal seeks to address the concern that the current framework gives too much CRA credit to certain activities, such as credit for the full value of frequently traded MBS, regardless of how long they remain on a bank's balance sheet and even when they do not result in new qualifying activities. The proposal would ensure that a bank's balance sheet reflects its ongoing commitment to CRA. To accomplish this goal, the proposal would give a bank CRA credit for the average month-end outstanding amount on a bank's balance sheet (on-balance sheet) of any qualifying loan or CD investment. The proposal would credit the bank for the amount of CD services and monetary and in-kind donations made during the period. This approach would help to eliminate the apparent inflation of the level of a bank's CRA activity that results from banks purchasing loans or investments just prior to a CRA evaluation and then selling those loans and investments when the evaluation is complete.

Qualifying activities list.

Finally, the proposal provides that the agencies would maintain a publicly available non-exhaustive, illustrative list of examples of qualifying activities that meet the criteria in the rule, as well as examples of activities that the agencies have determined, in response to specific inquiries, do not qualify. The proposal would also establish a process for a bank to submit a form through the agency's website to seek agency confirmation that an activity is a qualifying activity.

The agencies expect to treat the information provided to them through this process as nonpublic and to maintain the confidentiality of that information subject to applicable law. Banks and interested parties may designate information as confidential or request confidential treatment. The OCC will treat confidential commercial information submitted to the agency in accordance with 12 CFR 4.16. The FDIC will treat confidential commercial information submitted to the agency in accordance with 12 CFR 309.6.

The illustrative list generally would be updated each time an activity is confirmed to be or determined not to be a qualifying activity; however, depending on the circumstances, an activity may not be added to the list (

e.g.,

if it presents circumstances unique to the requesting bank or would be duplicative of an activity already on the list). If it is determined that an activity would not be added to the list, this determination would be made available to the public. The agencies anticipate that banks would use this qualifying activities confirmation process sparingly and that it would not replace a bank's ability to discuss whether an activity qualifies with its examiners or making its own determination, by applying the proposed qualifying activities criteria, that an activity qualifies for CRA credit. Banks would not be required to obtain confirmation from its appropriate Federal regulatory agency for each CRA activity, and qualifying activities would not be limited to those on the illustrative list.

In addition to updating the illustrative list on an ongoing basis, the proposal provides that the list would also be revised at least every three years, through a public notice and comment process, to add activities that meet the criteria and to remove activities that no longer meet the criteria (

e.g.,

if broadband were universally available and no longer considered to be essential infrastructure). If it were determined that an activity no longer meets the criteria, a bank with that activity on-balance sheet would continue to receive

credit if the obligation remains on-balance sheet; however, that activity would not be considered a qualifying activity for any subsequent purchasers. The agencies would consult and coordinate with each other on the content of the proposed list. The initial proposed illustrative list is available for review on the agencies' websites and in section V of this proposal.

Summary of objectives.

Together, the proposed rule's qualifying activities provisions are intended to provide certainty and transparency about whether an activity qualifies for CRA credit prior to a bank engaging in the activity, and to ensure consistent treatment of activities across and within the agencies. By increasing the specificity used to describe qualifying activities and predictability about whether specific activities would count, these proposed provisions are also intended to encourage banks to undertake more CRA activities—including novel, complex, and innovative activities—that help meet local community needs. In particular, the qualifying activities provisions would incentivize banks to commit more financial resources to the populations and areas that need them most, such as LMI individuals, distressed areas, underserved areas, and Indian country. The agencies expect that banks would only conduct qualifying activities that are consistent with safe and sound banking practices.

Calculating the qualifying activities value.

The current framework includes a qualitative and quantitative assessment of the dollar value and number of CRA activities, but it does not set a threshold for the total dollar volume of CRA activities in evaluating CRA performance nor does it provide a uniform method for assessing banks' performance context. Under the proposal, banks evaluated under the general performance standards would determine their presumptive ratings at the bank level and in each assessment area by first calculating their

qualifying activities values,

which are the sum of the quantified dollar value of qualifying activities that receive credit (after being adjusted by multipliers, as explained below). Qualifying activities would be quantified as follows:

• Qualifying loans and CD investments would be valued based on their average month-end on-balance sheet dollar value, except that qualifying retail loans originated and sold within 90 days of their origination date would be valued at 25 percent of their origination value.

• Legally-binding commitments to invest that are reported on the Call Report, Schedule RC-L, would be valued based on their average month-end dollar value.

• Qualifying commitments to lend would be valued based on the average month-end dollar value of the allowance for credit losses on those commitments that are reported on the Call Report, Schedule RC-G.

• CD services and monetary or in-kind donations would be credited at the value of the monetary donation or in-kind activity or at the hourly salary as estimated by the Bureau of Labor Statistics for the job category of the service provided for the number of hours provided.

If a CD activity partially benefits the intended population or area, then the quantified value would be a

pro-rata

share of the full quantified dollar value of the activity, as described above, equal to the percentage of partial benefit.

The quantified value of qualifying activities to CDFIs, other CD investments (not including MBS and municipal bonds), and other affordable-housing related CD loans would be adjusted upward by a multiple of two to provide an incentive for banks to engage in these activities. In addition to these activities, the agencies are also considering whether to apply multipliers to smaller CD loans, such as two, which may be particularly important to small non-profits with a CD purpose.

A bank would calculate its bank-level and assessment area qualifying activities values by taking the sum of the quantified values of all qualifying activities, adjusted by any applicable multiplier, as follows:

EP09JA20.002

Although banks would still be able to make large investments in MBS under the proposal, concerns related to frequent trading of MBS under the current regulations are mitigated because banks evaluated under the proposed general performance standards would only receive credit in the calculation of their CRA evaluation measure, described below, for the dollar value of MBS for the period that the investment remains on-balance sheet. For example, if a bank purchased a qualifying MBS on January 1, 2019 and sold the MBS on February 1, 2019, the bank would receive one twelfth of the value of the MBS when it calculated its annual qualifying activities value.

Alternatives considered.

The agencies considered additional ways to expand credit for retail lending and CD activities to individuals who, although not designated as low- or moderate-income, nonetheless have objectively low incomes. These included providing CRA credit for retail loans and CD activities to middle-income individuals in (1) distressed areas; (2) underserved areas; (3) persistent poverty counties, which have a poverty rate of 20 percent or more over the last 30 years; and (4) any census tract where the area median income is less than the national median income. To retain the focus on LMI individuals, however, the proposal does not include these revisions.

The agencies also considered limiting the dollar value that any single transaction could contribute to the qualifying activities value to address concerns that measuring performance based on the dollar value of banks' qualifying activities could incentivize banks to engage in a small number of large dollar activities that may be less responsive to community needs than other activities. Because the proposal assesses the performance of banks that are subject to the general performance standards by considering the distribution of retail lending activities and the dollar value of qualifying activities, as discussed below, the agencies do not believe that a single transaction limit is necessary. Moreover, a single transaction limit could have unintended consequences and discourage banks from conducting activities that would help meet the needs of a specific community. For example, competition and capacity constraints may limit the number and type of qualifying activities available to a bank.

The agencies invite comment on all aspects of the proposal related to establishing clear criteria for the type of activities that would qualify for CRA credit and determining the dollar value of qualifying activities, including with respect to the following questions:

1. Are the proposed criteria for determining which activities would qualify for credit under the CRA sufficiently clear and consistent with the CRA's objective of encouraging banks to conduct CRA activities in the communities they serve?

2. Are there other criteria for determining which activities would qualify for CRA credit that the agencies should consider?

3. Under the proposal, CD activities conducted in targeted areas, such as Indian country or distressed areas, would qualify for CRA credit. Should there be any additional criteria applicable to the types of CD activities that qualify for CRA credit in these areas? If so, what should those criteria be?

4. Under the proposal, the small business and small farm revenue thresholds and the size thresholds for a small loan to a business and a small loan to a farm would increase to $2 million. Do these increases appropriately incentivize banks to engage in small business and small farm lending activities, or should other changes be made to the revenue and loan size thresholds?

5. The agencies plan to publish the illustrative list on their websites and to update the list both on an ongoing basis and through a notice and comment process. Should the list instead be published as an Appendix to the final rule or be otherwise published in the

Federal Register

? In addition, how often should the list be updated?

6. The proposal includes a process for updating the illustrative list on an ongoing basis through submission of a form to seek agency confirmation. The agencies considered an alternative process where an agency would accept all requests from banks for confirmation that an activity is a qualifying activity, aggregate these requests, publish the list of requested items in the

Federal Register

for public comment and feedback, and update the list following this process once every six months. What process, including any alternative process, should the agencies adopt to update the illustrative list of qualifying activities?

7. Are certain types of retail loans more valuable to LMI individuals and geographies than other types? If so, which types? Should the regulations recognize those differences? If so, how? For example, could multipliers be used to recognize those differences and provide incentives for banks to engage in activities that are scarce but highly needed?

8. The use of multipliers is intended to incentivize banks to engage in activities that benefit LMI individuals and areas and to other areas of need; however, multipliers may cause banks to conduct a smaller dollar value of impactful activities because they will receive additional credit for those activities. Are there ways the agencies can ensure that multipliers encourage activities that benefit LMI individuals and areas while limiting or preventing the potential for decreasing the dollar volume of activities (e.g., establishing a minimum floor for activities before a multiplier would be applied)?

9. The proposal quantifies the value of CD services based on the compensation for the type of work engaged in by the employees providing the services as reflected in the Bureau of Labor Statistics calculation of the hourly wage for that type of work. Alternatively, CD services could be valued based on a standardized compensation value for the banking industry or occupation type. For example, the median hourly compensation value for the banking industry is approximately $36, when calculated using Bureau of Labor Statistics data. Would using standardized compensation values reduce the burden associated with tracking CD services while still appropriately valuing CD services? If so, how should the agencies establish the standardized compensation values?

10. Should the range of retail banking services provided—such as checking accounts, savings accounts, and certificates of deposit—be considered under this proposal? If so, how could retail banking services be quantified? For example, could the types of checking and savings accounts that are offered by a bank (e.g., no fee, fixed fee, low interest-bearing, high interest-bearing) be considered in performance context?

B. Assessment Areas

Under the current framework, a bank's CRA performance is measured within the bank's assessment areas or the greater statewide or regional area(s) that includes the bank's assessment areas. With limited exceptions, a bank is required to delineate assessment areas consisting of one metropolitan statistical area (MSA), one or more metropolitan divisions (MD), or one or more contiguous political subdivisions (

e.g.,

counties, cities, or towns). Assessment areas must include any census tract where a bank has its main office and any census tract where it has one or more branches or deposit-taking automated teller machines (ATMs), as well as the surrounding census tracts in which the bank has originated or purchased a substantial portion of its loans. A bank may adjust the boundaries of an assessment area to include only the portion of a political subdivision that it reasonably can be expected to serve. Finally, an assessment area must consist only of whole census tracts and not reflect illegal discrimination, arbitrarily exclude LMI census tracts, or extend substantially beyond an MSA or state boundary unless the assessment area is in a multistate MSA (MMSA).

Wholesale banks, which are banks without retail customers (

e.g.,

home mortgage and small business customers), and limited purpose banks, which are banks that offer limited products (

e.g.,

credit cards or automobile loans), have these same rules for delineating assessment areas, except that their assessment area delineations only include the MSAs, MDs, or whole political subdivisions that contain these banks' main office, branches, and deposit-taking ATMs. Military banks, whose business predominately consists of serving the needs of military personnel or their dependents, are not required to have geographic assessment areas and may delineate their entire deposit customer base as their assessment area.

The current method for delineating a bank's assessment areas, which is focused on the areas surrounding brick-and-mortar bank locations, is challenged by how today's consumers meet their banking needs and banks provide services. The current approach creates disincentives for banks to meet the needs of their

entire

communities or even their own customers if their communities or customers are located outside of the banks' assessment areas. These disincentives serve to create CRA deserts and promote CRA hotspots.

To address this, the proposed rule would establish a modernized and standardized process for identifying where a bank's qualifying activities receive credit that would apply to banks subject to the agencies' CRA regulations. Under the proposal, banks (except for military banks)

would be required to serve the communities where they have a physical presence and would also be required to serve the surrounding geographies where they originated or purchased a substantial portion of their loans (consistent with the current rules). In addition, to recognize changes in the banking industry—including the increasing number of banks that operate primarily through the internet or

otherwise serve customers located far from the banks' physical locations—and the statutory purpose of the CRA to help ensure that banks reinvest in the communities where they collect deposits,

the proposal would also require a bank with a significant portion of its retail domestic deposits outside of its facility-based assessment areas, such as 50 percent or more, to delineate additional assessment areas wherever it has a concentration of retail domestic deposits.

The proposal would retain the requirement that a military bank be evaluated based on its entire deposit customer base, regardless of geographic location.

See, e.g.,

123 Cong. Rec. 17630 (1977).

Regarding assessment areas based on physical presence, a bank would delineate a “facility-based” assessment area where it has its main office, a branch, or a deposit-taking facility, as well as any surrounding geographies where the bank has originated or purchased a substantial portion of its loans. The proposal would require a bank to delineate these facility-based assessment areas in any of the following areas: (1) An MSA; (2) the whole nonmetropolitan area of a state; (3) one or more whole, contiguous MDs in a single MSA; or (4) one or more whole contiguous counties or county equivalents in a single MSA or non-MSA area. The agencies would provide banks the option to choose the geographic level at which to delineate their facility-based assessment areas because the agencies believe that banks are in the best position to determine the areas that their facilities serve.

Beyond their brick-and-mortar locations, the proposal would require banks that receive more than 50 percent of their retail domestic deposits from outside of their facility-based assessment areas to delineate separate, non-overlapping “deposit-based” assessment areas in the smallest geography where they receive five percent or more of their retail domestic deposits. These deposit-based assessment areas would capture banks' evolving business models, address the increasing competition for deposits outside of banks' current assessment areas, and encourage banks to serve their entire communities—including where they take deposits—in harmony with the CRA statute. These deposit-based assessment areas would consist of (1) a state; (2) a whole MSA; (3) the whole nonmetropolitan area of a state; (4) one or more whole, contiguous MDs in a single MSA; (5) the remaining geographic area of a state, MSA, nonmetropolitan area, or MD other than where it has a facility-based assessment area; or (6) one or more whole, contiguous counties or county equivalents in a single MSA or non-MSA. Unlike facility-based assessment areas where banks may choose the geographic level where they delineate their assessment areas, the agencies believe that banks should be required to delineate deposit-based assessment areas at the smallest geographic level where they receive five percent or more of their retail domestic deposits to help ensure that banks' deposit-based assessment area ratings reflect their qualifying activities in the same areas as their concentrations of deposits. For example, if a bank receives 60 percent of its retail domestic deposits from outside of its facility-based assessment area and 5 percent of these deposits come from Cook County, Illinois, which is not in a facility-based assessment area, it must delineate Cook County as a deposit-based assessment area.

In addition, the agencies recognize that there are certain communities of need where banks have a limited physical or deposit-taking presence. To help ensure that these areas are served, the proposed rule would allow banks to receive credit for qualifying activities conducted outside of their assessment areas in determining their bank-level ratings.

The proposal would allow a bank to change its assessment area delineation once during each evaluation period and would no longer permit a bank to adjust an assessment area's boundaries to include only the portion of a political subdivision that it reasonably can be expected to serve. The proposal would, however, retain the requirements that a bank's assessment areas must not reflect illegal discrimination or arbitrarily exclude low- or moderate-income geographies.

Summary of objectives.

Taken together, the proposal's assessment area provisions would create an affirmative obligation for banks to conduct CRA activity in the communities where they operate (determined by where they have a physical presence), conduct a substantial portion of their lending, or collect a substantial portion of their deposits. Through these changes, the proposed rule would both (1) preserve the important connection between a bank's physical locations and the surrounding community by addressing the CRA obligations of traditional banks, which engage in most of their business at their physical locations and (2) reflect critical changes to how customers bank in the 21st century by considering the activity of nontraditional banks, including internet banks. In addition, allowing banks to receive credit for CRA activities outside of their assessment areas when determining bank-level ratings would help to eliminate CRA hot spots and banking deserts and incentivize investment and lending to all communities served by the bank.

Alternatives Considered.

In developing this proposed rule, the agencies considered alternative approaches for delineating assessment areas where banks conduct a significant amount of business outside of their physical locations. For example, the agencies considered requiring banks to delineate additional assessment areas only where they have a concentration of deposits. The agencies also considered adopting a hybrid approach that would have required delineation of assessment areas where banks derive a significant concentration of deposits and conduct a significant amount of lending. Because a deposit-based approach closely aligns with the CRA statute—to address the harm caused by banks taking deposits from certain communities and investing them elsewhere—the proposal includes the approach based on deposits.

However, to maintain consistency with the current framework and recognize the importance of evaluating a bank's lending in the areas surrounding its facilities where it has originated or purchased a substantial portion of its retail lending, the proposal also would require a bank to delineate a facility-based assessment area around areas where it has a main office, a branch, or a deposit-taking facility

as well as

the surrounding areas where it has originated or purchased a substantial portion of its retail lending.

See, e.g.,

123 Cong. Rec. 17630 (1977) (statement of Sen. William Proxmire, Chairman, S. Comm. on Banking, Housing, and Urban Affairs) (“I am talking about the fact that banks . . . will take their deposits from a community and instead of reinvesting them in that community . . . they will actually or figuratively draw a red line on a map around the areas of their city, sometimes in the inner city, sometimes in the older neighborhoods, sometimes ethnic and sometimes black, but often encompassing a great area of their neighborhood.”)

Regarding the assessment area thresholds, the proposed rule requires banks that receive 50 percent or more of their retail domestic deposits from outside of their facility-based assessment areas to delineate deposit-based assessment areas where they receive five percent or more of their retail domestic deposits. The agencies are considering a range around those thresholds; specifically, the agencies are considering a range between 40 and 60 percent for the percentage of retail domestic deposits outside of banks' facilities-based assessment areas and between two and eight percent for the percentage that determines where banks would delineate their deposit-based assessment areas.

The agencies invite comment on all aspects of the proposal related to establishing a modernized and standardized process for identifying a bank's community—

i.e.,

assessment area(s)—in which the bank's qualifying activities receive credit, including with respect to the following questions:

11. Are the proposed methods for delineating assessment areas clear, simple, and transparent?

12. The proposal would allow banks to choose how broadly to delineate their facility-based assessment areas, but it would require banks with a significant portion, such as 50 percent or more, of their retail domestic deposits outside of their facility-based assessment areas to delineate their deposit-based assessment areas at the smallest geographic area where they receive five percent or more of their retail domestic deposits. The requirement to designate deposit-based assessment areas would impact internet banks that do not rely on branches or ATM facilities to collect deposits as well as traditional banks that, in addition to their branches and ATM facilities, collect a significant portion of their deposits online outside of their branch and ATM footprint. Do these approaches strike the right balance between allowing flexibility and ensuring that banks serve their communities? If not 50 percent, what threshold should be used to determine if a bank has a significant portion of its deposits outside of its facility-based assessment areas and why? In addition, is receiving at least five percent of domestic retail deposits from a given area the appropriate threshold for requiring a bank to delineate a deposit-based assessment in that area, or should some other threshold be implemented? If so, why?

13. The deposit-based assessment area delineation requirements are intended to ensure that banks serve the communities in which they operate. However, under the proposed regulation, it is possible that few banks would be required to delineate a deposit-based assessment area in less populous areas or states, despite having a significant market share in those areas (although banks with branches in those areas would be required to delineate facility-based assessment areas and banks may receive credit for qualifying activities outside of their assessment areas conducted in these areas or states). Does this framework provide sufficient incentives for banks to conduct qualifying activities in these less populous areas? Alternatively, should banks be required to delineate separate, non-overlapping assessment areas in each state, MSA, MD, or county or county equivalent in which they have at least a certain percentage of the deposit market share—regardless of what percentage of the bank's retail domestic deposits are derived from a given area—and, if so, what should the percentage of the deposit market share be?

C. Objective Method To Measure CRA Performance

Overview.

The current CRA regulations provide different methods to evaluate a bank's CRA performance depending on the bank's asset size and business strategy. For each type of bank, the agencies evaluate all or a portion of its retail and CD activities. For example, in 2019, banks with less than $321 million in assets in either of the two prior calendar years were evaluated under a retail lending test, and various types of CD activities also may be considered. For banks evaluated in 2019 with $1.284 billion or more in assets in 2017 or 2018, all CD lending and investments and all retail and CD services are evaluated. Based on the agency's evaluation of the bank's relevant qualifying activities, its performance context, and evidence of discriminatory and other illegal credit practices, a bank receives a rating of outstanding, satisfactory, needs to improve, or substantial noncompliance.

Because of the subjective nature of the current framework, exactly how an agency determines the appropriate rating is at times opaque, complex, and inconsistent. Although the current framework describes in general terms the parameters that an agency uses to weigh and score a bank's relevant qualifying activities, important terms in the parameters are undefined and the processes are unspecified. For example, the agencies are required to assess the geographic distributions of loans. For banks other than small banks and intermediate small banks, as those terms are defined under the current regulations, an “excellent” geographic distribution correlates with an “outstanding” rating, and a “good” distribution correlates with a “satisfactory” rating—but both “excellent” and “good” are undefined. Similarly, under the current regulations, the undefined term “reasonable geographic distribution” equates to satisfactory performance for small banks and intermediate small banks. Furthermore, there is no stated quantity of CRA activities that correlates to a particular rating category. With respect to qualifying services, the current framework does not quantify their value, and the agencies undertake a qualitative analysis of the range of such services.

To achieve the goal of providing a method of assessing CRA performance that would be more objective, clear, and consistent and facilitate banks' ability to engage in qualifying activities in communities that need it the most, the proposed rule would establish new general performance standards used to evaluate banks that are not small banks. The proposal would allow small banks to opt into the general performance standards as described below; those that do not opt in would be evaluated under small bank performance standards consistent with the current regulations. The new general performance standards would evaluate banks' CRA activities by assessing two fundamental components: (1) The appropriate distribution (

i.e.,

number) of qualifying retail loans to LMI individuals, small farms, small businesses, and LMI geographies in a community and (2) the impact (

i.e.,

quantified value) of a bank's qualifying activities.

To ensure that the distribution of the number of CRA retail loans and the total value of qualifying activities would be captured and assessed, the proposed rule would provide that the ratings for a bank evaluated under the general performance standards would be based on a combination of approaches. Specifically, to receive a presumptive rating of satisfactory or outstanding at the assessment area level, (1) banks would be required to meet the minimum thresholds for performance on the applicable retail lending distribution tests in that assessment area for each major retail lending product line with at least 20 loans in that assessment area and (2) the average of banks' CRA evaluation measures (described in more detail below) for an evaluation period would have to meet the associated empirical benchmark. By only evaluating a bank's distribution of retail loans in areas where the bank has at least 20 loans in a major retail lending product line, this approach would be tailored to a bank's business strategy and product offerings at the bank and assessment area level.

At the bank level, a bank's presumptive rating would be based on the comparison of its average bank-level CRA evaluation measure to the established empirical benchmark, except that a bank could not receive a satisfactory or an outstanding unless it also received that rating in a significant portion, such as more than 50 percent, of its assessment areas and in those assessment areas where it holds a significant amount of deposits, such as more than 50 percent. At both the bank

and assessment area level, banks evaluated under the general performance standards would also be required to meet minimum CD lending and investment requirements to achieve a satisfactory or outstanding rating. This method of evaluation would incentivize banks to increase the dollar volume of their CRA activities, ensure that banks that are retail lenders are distributing their retail loans to LMI individuals, small farms, small businesses, and farms and business in LMI communities, and recognize the importance of CD lending and investments to LMI individuals and communities.

The proposal would define retail domestic deposits as total domestic deposits of individuals, partnerships, and corporations, as reported on Schedule RC-E, item 1, of the Call Report, but exclude brokered deposits. This proposed definition would exclude municipal deposits and deposits from foreign governments or entities and thus would be more reflective of a bank's capacity to engage in CRA-qualifying activities. By further excluding brokered deposits, which are not associated with any individual or community, this definition would refine the Call Report definition to more accurately reflect the deposits a bank collects from identifiable individuals and communities. Additionally, this definition would leverage an existing Call Report definition of deposits to lessen associated data collection, recordkeeping, and reporting burdens.

Under this proposal, for a bank evaluated under the general performance standards to meet the outstanding or satisfactory presumptive rating categories in an assessment area: (1) Its performance on the geographic and borrower lending distribution tests would have to meet or exceed the established thresholds for performance for each of its major retail lending product lines with at least 20 loans in that assessment area and (2) the average of its annual assessment area CRA evaluation measures would have to meet or exceed the established benchmarks.

The chart below illustrates possible ways to achieve each presumptive ratings category associated with the statutory rating categories in a given assessment area. The agencies included specific empirical benchmarks for each rating category in the proposed rule that they believe would help achieve the positive outcomes intended by this rulemaking (

i.e.,

an empirical benchmark of (1) 11 percent for outstanding, (2) six percent for satisfactory, (3) three percent for needs to improve, and (4) less than three percent for substantial noncompliance). The agencies selected the specific empirical benchmarks from within ranges for each rating category that reflect the agencies' analysis of the available lending and investment data, discussed below.

CRA evaluation

Retail lending distribution tests

CD minimums

Presumptive rating

category

The average of a bank's annual assessment area CRA evaluation measures meets or exceeds 11 percent (selected from a range of 10 to 15 percent)

A bank meets the established thresholds for all the retail lending distribution tests for its major retail lending product lines in that assessment area

The quantified value of community development loans and community development investments in the assessment area,

divided by

the average of the bank's assessment area retail domestic deposits must meet or exceed 2 percent

Outstanding.

The average of a bank's annual assessment area CRA evaluation measures meets or exceeds 6 percent (selected from a range of 5 to 10 percent)

A bank meets the established thresholds for all the retail lending distribution tests for its major retail lending product lines in that assessment area

The quantified value of community development loans and community development investments in the assessment area,

divided by

the average of the bank's assessment area retail domestic deposits must meet or exceed 2 percent

Satisfactory.

The average of a bank's annual assessment area CRA evaluation measures meets or exceeds 3 percent (selected from a range of 2 to 5 percent)

Needs Improvement.

The average of a bank's annual assessment area CRA evaluation measures is less than 3 percent (selected from a range of 0 to 5 percent)

Substantial Non-compliance.

The bank-level presumptive rating under the general performance standards would be determined by comparing the average of a bank's average bank-level annual CRA evaluation measures to the established empirical benchmarks for the statutory rating categories and determining if the bank had a satisfactory or outstanding in a significant portion, such as more than 50 percent, of its assessment areas, and in those assessment areas where it holds a significant amount of deposits, such as more than 50 percent. In addition, the bank would be required to meet the minimum requirements for CD lending and investment at the bank level.

As discussed below, the proposed rule would establish empirical benchmarks for the average of a bank's annual CRA evaluation measures for each rating category and the thresholds for the retail lending distribution tests. A bank would use the empirical benchmarks and thresholds in effect on the first day of its evaluation period for the duration of its evaluation period. Because the proposed evaluation method would be sufficiently flexible to account for different bank sizes and business models, it would not include different tests for different types and sizes of banks.

The proposal identifies the rating resulting from the comparison of the bank's CRA evaluation measure to the corresponding empirical benchmarks and geographic and borrower distribution tests as “presumptive” because this rating could be adjusted based on consideration of performance context and discriminatory or other illegal credit practices. These possible adjustments are discussed below. Following any adjustments, the agency

would determine a bank's assigned rating in each of its assessment areas and at the bank level.

Twelve U.S.C. 2906(d) of the CRA statute requires the agencies to provide a written evaluation, including a rating, for banks with interstate branches at the state level, MMSA level, or both, as applicable. The content of that written evaluation must (1) state conclusions for each assessment factor (

i.e.,

the small bank performance standards for small banks and the borrower and geographic distribution tests, CRA evaluation measure comparison, and CD minimums for banks subject to the general performance standards); (2) discuss the facts and data supporting conclusions; and (3) contain the rating and a statement describing the basis for the rating.

For these banks, the state or MMSA level rating is the lowest rating assigned to a significant number of its assessment areas within that state or MMSA.

The CRA statute provides:

States: For a bank that maintains domestic branches in 2 or more states, the appropriate Federal financial supervisory agency must prepare—(A) a written evaluation of the entire bank's record of CRA performance, as required by subsections (a), (b), and (c) of 12 U.S.C. 2906 and (B) for each State in which the institution maintains 1 or more domestic branches, a separate written evaluation of the bank's record of CRA performance within such state, as required by subsections (a), (b), and (c) of 12 U.S.C. 2906.

See

12 U.S.C. 2906(d)(1).

MMSAs: For a bank that maintains domestic branches in 2 or more states within an MMSA, the appropriate Federal financial supervisory agency must prepare a separate written evaluation of the bank's record of CRA performance within such MMSA, as required by subsections (a), (b), and (c) of 12 U.S.C. 2906.

See

12 U.S.C. 2906(d)(2).

Section 2906(b)(1)(B) of the CRA statute also requires the agencies to conclude, but not rate, at the MSA and nonmetropolitan area level. Under this proposal, the agencies' conclusion at these levels would be the lowest rating assigned to a substantial portion of assessment areas in that MSA or nonmetropolitan area.

Applying the retail lending distribution tests.

The retail lending distribution tests would apply to banks evaluated under the general performance standards. The retail lending distribution tests would be applied at the assessment area level to a bank's major retail lending product lines with at least 20 originations in the assessment area during the evaluation period. A major retail lending product line is defined at the bank level and is any retail lending product line that composes at least 15 percent of the bank's overall dollar volume of retail loan originations during the evaluation period. The agencies would require at least 20 originations in an assessment area before applying a retail lending distribution test to ensure that the rule only evaluates a bank's retail lending distribution in markets where it is engaged in retail lending beyond lending done on an accommodation basis. Under the proposal, banks would apply the retail lending distribution tests, and the agencies would validate their performance.

The retail lending distribution tests would evaluate the bank's originations in each assessment area during the review period using both a geographic distribution test and a borrower distribution test for small loans to businesses and small loans to farms and a borrower distribution test for home mortgage and consumer lending. The geographic distribution test assesses a bank's distribution of lending in LMI areas while the borrower distribution test assesses a bank's distribution of lending to LMI borrowers or small businesses or small farms. A bank can pass either test by meeting or exceeding a threshold associated with the demographic comparator, which is based on the demographics of the given assessment area, or a threshold associated with the peer comparator, which is based on peers' performance in the given assessment area.

Although the agencies remain committed to encouraging banks to meet the credit needs in LMI areas, for banks evaluated under the general performance standards, the proposal would not apply a geographic distribution test to a bank's consumer and home mortgage product lines. Under the geographic distribution test in the current CRA framework, banks receive positive consideration for home mortgage and consumer loans made in LMI areas, even if they are made to middle- or upper-income individuals or families. Unlike small loans to businesses and small loans to farms in LMI areas that may result in additional job creation or other positive effects for the larger community, home mortgage and consumer loans to middle- or upper-income individuals and families in LMI areas are generally not as beneficial to LMI communities and may result in displacement. Accordingly, this proposal would not apply the geographic distribution test to these banks' home mortgage and consumer product lines. The result of this is that under the proposal, a mortgage loan to a high-income individual living in a low-income census tract would no longer qualify for CRA credit. The agencies' commitment to encouraging banks to meet the credit needs in LMI communities and neighborhoods is reflected in the proposal's retention of the geographic distribution test for small business and small farm product lines. However, because the agencies would apply the small bank performance standards consistent with the current regulations, small banks would continue to be evaluated based on the geographic distribution of their home mortgage loans and consumer loans, as applicable.

Under the proposal, a bank subject to the retail lending distribution tests would not be able to achieve a presumptive rating of satisfactory or outstanding without passing all applicable distribution tests for all major retail lending product lines in that assessment area. To pass a distribution test, a bank would have to meet or exceed the minimum thresholds for either the demographic comparator or the peer comparator. For example, if the threshold for the demographic comparator is set at 55 percent of the relevant demographic comparator and the threshold for the peer comparator is set at 65 percent of the relevant peer comparator, a bank would be required to meet either the 55 percent demographic comparator threshold or the 65 percent peer comparator threshold to pass the distribution test. In other words, to pass the geographic distribution test using the demographic comparator, the percentage of a bank's small loans to businesses (SLB) that are in LMI census tracts in the assessment area (AA)

divided by

the percentage of businesses in LMI census tracts in the assessment area would have to be

greater than

equal to

55 percent, which would be calculated as follows:

EP09JA20.000

The agencies would collect and provide public data that would allow banks to apply the borrower distribution tests for home mortgage and consumer loans, small loans to businesses, and small loans to farms, and the geographic distribution test for small loans to farms and small loans to businesses. However, the agencies recognize that, even if the proposal were implemented, the available data for the small loans to businesses and small loans to farms borrower distribution tests may be insufficient and, therefore, banks may need to rely on private datasets. Because banks may have to purchase access to these datasets, the agencies invite comment on options for tailoring this requirement by, for example, allowing banks below a certain asset size to use publicly available data as a proxy.

Calculating the CRA evaluation measure.

The CRA evaluation measure would be applicable to banks subject to the general performance standards. The CRA evaluation measure would be an objective measure of a bank's ongoing commitment to CRA and would be determined annually at the bank level and for each of its delineated assessment areas, as defined above.

A bank would initially calculate its CRA evaluation measure by taking the sum of (1) a bank's qualifying activities value, as described above,

divided by

the average of its quarterly retail domestic deposits and (2) a calculation that accounts for a bank's branch distribution. The agencies would validate that calculation.

A bank's assessment area CRA evaluation measures are used to reach a conclusion in each MSA where the bank has deposit-taking facility or main office, as required by the CRA statute.

The first portion of the CRA evaluation measure reflects a bank's ongoing commitment to CRA by measuring the value of qualifying activities as a proportion of total retail domestic deposits. The second portion of the CRA evaluation measure accounts for the social value and economic impact of bank branches in LMI areas, Indian country, underserved areas, and distressed areas by measuring a bank's proportion of branches in those areas. Specifically, the number of the bank's branches located in LMI census tracts, Indian country, underserved areas, and distressed areas during the same annual period used to calculate the qualifying activities value would be

divided by

the bank's total number of branches in that annual period and

multiplied by

.01.

This calculation would quantify a bank's distribution of branches and increase a bank's CRA evaluation measure by up to one percentage point based on the proportion of a bank's branches in those specified areas. The agencies believe that valuing branch distribution at up to one percentage point of the CRA evaluation measure accounts for the significance of branches to these areas while placing primary emphasis on the qualifying activities that banks conduct in their communities. The CRA evaluation measure would be calculated as follows:

EP09JA20.001

Empirical benchmarks, thresholds, and the definition of a major retail lending product line.

The proposal would establish the thresholds for the demographic and peer comparators for each of the geographic distribution and borrower distribution tests. The proposal would also establish the empirical benchmarks for the average CRA evaluation measure

associated with each rating category. These empirical benchmarks and thresholds are, and would be, based, in part, on the agencies' analysis of the currently available historical data. Specifically, the agencies reviewed the FFIEC CRA data, HMDA data on home mortgages to LMI borrowers, Call Report data on-balance sheet value of home mortgages, consumer loans, small business and small farm loans, and credit bureau data on the outstanding balances of consumer loans. Although these data sources have some limitations,

by using all the sources together, collecting additional information about CD investments from historical performance evaluations,

and making a limited number of assumptions (described below), the agencies were able to estimate what each bank's average CRA evaluation measure would have been from 2011-2017 under the framework in the proposal for all banks that filed a Call Report.

The “average CRA evaluation measure” generally refers to the average of the annual assessment area or bank-level CRA evaluation measures for an evaluation period.

For example, under the current CRA regulations, only banks that are above the small bank asset size threshold, which is $1.284 billion for 2019, are required to report CRA data to the FFIEC and not all banks are HMDA reporters. 12 CFR 25.12(u)(1), 195.12(u)(1), 345.12(u)(1). Additionally, both the CRA FFIEC data and the HMDA data look at originations and purchases and not the on-balance sheet value of loans or investments. Although the Call Report and credit bureau data do provide the outstanding amount of loans and investments, those data sources do not identify which balances are related qualifying activities. Moreover, the proposal would expand the criteria for qualifying activities in a number of ways, including by increasing the loan size threshold for small loans to businesses and small loans to farms from $1 million to $2 million. Accordingly, the currently available data on CRA qualifying activities would not fully capture all activities that would be qualifying under the proposal.

The agencies used a sample of performance evaluations completed between 2011 and 2018. The sample contained data from over 200 exams for banks above the small bank asset size threshold, which adjusts yearly and is $1.284 billion for 2019.

Since the CRA evaluation measure would generally focus on the on-balance sheet value of qualifying loans and investments, the agencies first identified the categories on the Call Report that could include qualifying loans and investments and then used additional data sources such as the existing FFIEC CRA, HMDA, and credit bureau data to estimate what portion of the activity reported on the Call Report would be qualifying activities under the proposal. To estimate the dollar volume of on-balance sheet activity that would be qualifying activity the agencies did the following:

• For home mortgage loans, by bank and year, the agencies identified all HMDA reportable loans originated and held within the calendar year to LMI individuals,

and then divided the sum of the dollar volume of those loans by the bank's total dollar volume of loans originated and not sold within that calendar year. This provides an estimate of a bank- year-specific proportion of identified qualifying loans that was used to calculate the bank's proportion of on-balance sheet qualified home mortgage loans. For banks that are not HMDA filers, the agencies used the median proportion of qualifying home mortgage loans of all HMDA filers for that year.

Note that the estimated proportions are based on the proportion of qualifying originations, not on the proportions of qualifying on-balance sheet loans. As such, to the extent that these proportions differ, the estimate of the on-balance sheet value of qualifying mortgage loans may be an over- or underestimate.

Excluded from this are home mortgage loans in disaster areas and in Indian country.

This was applied to about 40 percent of the banks.

• For small business and small farm loans, as defined under the current regulations, the agencies used the FFIEC CRA data to estimate the proportion of the bank's on-balance sheet small business and small farm loans that qualify for CRA credit because they are originated to businesses or farms with revenues of less than $1 million or in LMI census tracts that are less than $1 million . Because the proposal would increase the size of small loans to businesses and small loans to farms that would be qualifying from the current small business loan threshold of $1 million and small farm loan threshold of $500,000 to $2 million and banks do not separately report the on-balance sheet value of loans between the existing thresholds and $2 million, the agencies used, based on additional data sources, a fraction of the dollar volume of loans that were reported on the Call Report as less than $500,000 or $1 million to estimate the dollar volume of loans that were less than $2 million.

• For credit card,

automobile loan, and other consumer loan

balances, to estimate the proportion of a bank's on-balance sheet consumer loans that are qualifying, the agencies used credit bureau data.

The agencies combined the credit bureau data with FFIEC's demographic information at the census tract level

to identify whether a given account holder resides in an LMI census tract. Since the credit bureau data does not include income level, the agencies calculated the proportion of credit card loan balances attributable to residents of LMI tracts and used that proportion to represent the proportion of balances attributable to LMI borrowers.

The agencies included the following credit bureau debt categories in the credit card definition: Credit card, bank card, flexible spending card, retail lending card, and line of credit.

The credit bureau loan categories included are: Other, personal finance, and student loan.

The credit bureau data contain balances by debt category, along with census tract location of the borrower.

For the period 2005-2011, FFIEC uses Census 2000 census tract definitions and demographic information based on Census 2000. For the period 2012-2016, FFIEC uses Census 2010 census tract definitions and American Community Survey (ACS) 2006-2010 data. For the period 2017-2018, FFIEC uses census tract definitions and demographics from 2011-2015 ACS. Note that this method introduces some error due to the fact that the credit bureau uses Census 2000 census tract definitions, while FFIEC uses Census 2000 or Census 2010 census tract definitions depending on the year.

The agencies do not believe this method significantly overestimates the proportion of LMI borrowers or share of balances attributed to them because while this methodology incorrectly

includes middle- and upper-income borrowers in LMI census tracts, it also incorrectly excludes LMI borrowers in middle- and upper-income census tracts. Because the two sources of error work in opposite directions, the agencies expect them to cancel each other out to a significant extent.

• For CD Investments, the agencies relied on a sample of performance evaluations completed between 2011 and 2018. The sample contains over 200 exams for banks above the small bank asset size threshold, which adjusts yearly and is $1.284 billion for 2019. The agencies approximated the value of investments on a bank's balance sheet by calculating the sum of the balances of prior investments as of the beginning of the evaluation period plus the average annual new investments over the evaluation period. The agencies then calculated the median investments-to-domestic-deposits ratio by asset size bucket (

i.e.,

assets greater than $100 billion, $5 to $100 billion, and less than or equal to $5 billion) for the performance evaluation sample.

This median ratio was then used to impute CD investments for all institutions subject to CRA, by multiplying a bank's deposits in a given year with the ratio corresponding to its asset size bucket. A limitation of this approach is that the median ratio by asset size used for imputation is only based on banks above the small bank asset size threshold, and it is possible that this ratio differs for smaller banks.

Asset size buckets were determined by data explorations of the relationship between the investments-to-deposits ratio and asset size, in conjunction with sample size considerations.

• For CD loans, the agencies relied on the FFIEC CRA data that contains information on the dollar amount of CD loans originated that year.

By using these estimates, the agencies were able to approximate what the CRA evaluation measure under the proposed framework would have been for all banks from 2011-2018. In addition to the data, to set the initial benchmarks for the average CRA evaluation measure and the thresholds for the retail lending distribution tests, the agencies analyzed banks' past performance evaluations, which provide qualitative information to help inform what level of performance should be required for each rating category. The agencies also considered unmet needs and opportunities, such as those in banking and CD deserts, market conditions, and the overall policy goal of increasing CRA activities. The agencies would publish the empirical benchmarks for the average CRA evaluation measures that correspond with each rating category and the thresholds for the retail lending distribution test with the final rule.

Based on the agencies' review of these factors thus far, the agencies believe that the average CRA evaluation measure benchmarks associated with each rating category should be set at between ten and 15 percent for outstanding, five and ten percent for satisfactory, and two and five percent for needs to improve. As discussed above, the proposal would set 11 percent as the initial benchmark for outstanding, six percent as the initial benchmark for satisfactory, and three percent as the initial benchmark for needs to improve. An average CRA evaluation measure of less than three percent would be associated with the substantial noncompliance rating category.

The agencies are aware, however, that there are some limitations in the data currently available including that available data do not currently include, for example, the dollar volume of CD investments or a quantification of the dollar value of CD services. In addition, available data do not necessarily map perfectly to the configuration of assessment areas specified in this proposal. Deposit data also have limitations because the current reporting framework records deposits by attributing them to a branch location, rather than the account holder's address and uses a different definition of deposits than the proposed rule. The proposed rule would remedy these deficiencies by leveraging data that are readily available but not currently reported in an integrated and accessible manner. Over time, the data collection, recordkeeping, and reporting requirements in this proposal would remedy the current data limitations. Further, after the issuance of this notice of proposed rulemaking and prior to the issuance of any final rule, the agencies plan to request additional data through a public request for information from banks and other interested parties to supplement the currently available data.

Until the data limitations are addressed, the agencies would consider the historical data of reported lending and compare it to historical levels of total domestic deposits to determine the specific empirical benchmarks for CRA evaluation measures that are applicable at the bank and assessment area levels within the ranges set forth in the proposal. The agencies would then review and adjust these empirical benchmarks and make them available publicly to promote transparency and predictability. The agencies expect to adjust these empirical benchmarks every three years, or sooner if warranted.

The proposal also defines major retail lending product lines as any retail lending product line that composes at least 15 percent of the bank's overall dollar volume of retail loan originations during the evaluation period. Regarding this definition, the agencies reviewed HMDA and FFIEC CRA data on the dollar volume of retail loan originations along with Call Report data on the on-balance sheet value of consumer loans. Because the Call Report only includes on-balance sheet values, the agencies assumed that the quarterly change in the on-balance sheet value of consumer loans reflects new consumer loan originations.

CD minimums.

The general performance standards would establish minimums for a bank's quantified value of CD lending and investment as compared to retail domestic deposits at both the assessment area and bank level to achieve a satisfactory or an outstanding rating. The CD minimums included in the proposal were informed by the analysis of the currently available historical data, described above. To achieve a presumptive rating of satisfactory or outstanding, the sum of the quantified value of community development loans and community development investments,

divided by

the average of the bank's retail domestic deposits would need to meet or exceed two percent. The CD minimums would apply at both the assessment area and bank level. These minimums reflect the agencies' judgment that CD lending and investment are critically important to serving banks' local communities.

Performance context.

Under the current framework, a bank's CRA performance is judged in the context of information about a bank and its assessment area(s), including (1) relevant demographic data (

e.g.,

median income levels, distribution of household income, nature of housing stock, housing costs); (2) lending, investment, and service opportunities; and (3) the bank's product offerings and business strategy, capacity and constraints, past performance, and performance of similarly situated lenders. Under the proposed framework, performance context would remain important. The proposal sets forth performance context factors that the agencies would consider in determining a bank's assigned ratings in each assessment area and at the bank level. Banks subject to the general performance standards would submit performance context information in a standardized format using a form on the agency's website that relies on the performance context factors, discussed below. In addition, the agencies would establish examination procedures to

help ensure that examiners apply performance context consistently.

The performance context factors focus on the capacity of the bank to engage in qualifying activities and the demand for and opportunity to engage in qualifying activities in the communities that the bank serves. In considering a bank's capacity, the agencies would assess its business strategy, size, and other factors that affect its engagement in qualifying activities, including structural or other constraints on a bank's ability to engage in the volume of CD lending and investment required to meet the CD minimums, if applicable. Regarding the demand for and opportunity to engage in qualifying activities in a bank's community, the agencies would consider public comments related to community needs and opportunities and assess the characteristics of the community served by the bank, such as economic conditions and demographics, as these factors relate to the demand for and the opportunity to engage in qualifying activities. The agencies would consider how differences between actual and expected levels in qualifying activities were affected by a bank's capacity and opportunity, including local market conditions and events during the relevant period, or bank characteristics, such as product offerings and business strategy, changes in the assessment area needs and opportunities, and bank-specific constraints such as financial condition or safety and soundness considerations. For example, consideration of performance context could be particularly important for a bank that does not engage in retail lending activities because its business model limits the range of qualifying activities in which the bank may engage. The agencies could also consider innovativeness, complexity, difficulty, or positive impact on the bank's assessment areas or significant qualifying activities, as well as differences in banks' business models that affected the volume and types of qualifying activities. Finally, the agencies could consider a bank's investments in promoting and supporting the community reinvestment expertise of its staff and the development of products and services that benefit LMI communities.

Discriminatory or other illegal credit practices.

Under the proposal, an agency's evaluation of a bank's CRA performance would be adversely affected by evidence of discriminatory or other illegal credit practices. Specifically, in assigning a CRA rating, an agency would first evaluate a bank's performance for the applicable time period and then make any adjustments to the presumptive rating that would be warranted based on evidence of discriminatory or other illegal credit practices, consistent with the relevant agency's policies and procedures.

Strategic plans.

The proposal retains the option for a bank to develop a strategic plan for addressing its CRA responsibilities and to be evaluated based on its performance under the plan. Under the proposal, a bank's strategic plan would be developed with public participation and would demonstrate how the bank would help meet the credit needs—particularly the needs of LMI census tracts and individuals—of its assessment area(s) and at the bank level through qualifying activities. Today, although any bank may request to be evaluated under a strategic plan, only a limited number of banks with unique business models or other unique circumstances use them. Because the proposal would not add additional eligibility requirements for strategic plans, the agencies expect that strategic plans would continue to be used in a similar manner. For example, a de novo bank could develop goals under a strategic plan that reflect its projected branch footprint and deposit growth, its planned lending activities, and its anticipated capacity to engage in qualifying activities. Additionally, banks with no retail domestic deposits and banks evaluated under the small bank performance standards that do not originate retail loans would be required to submit a strategic plan.

Small bank performance standards.

The current CRA regulations include specific performance evaluation standards for small banks and intermediate small banks.

Specifically, a small bank is evaluated pursuant to a lending test that considers the bank's:

12 CFR 25.26, 195.26, 345.26.

• Loan-to-deposit ratio, adjusted for seasonal variation, and, as appropriate, other lending-related activities, such as loan originations for sale to the secondary markets, community development loans, or qualified investments;

• The percentage of loans and, as appropriate, other lending-related activity in the bank's assessment area(s);

• The bank's record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and businesses and farms of different sizes;

• The geographic distribution of the bank's loans; and

• The bank's record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment area(s).

12 CFR 25.26(b), 195.26(b), 345.26(b).

The current regulations assign small bank ratings based on the lending test. A small bank is eligible for a “satisfactory” rating under the lending test if it demonstrates a:

• Reasonable loan-to-deposit ratio;

• Majority of its loans in its assessment area(s);

• Distribution of loans to businesses and farms of different sizes that is reasonable given the demographics of its assessment area(s);

• Record of taking appropriate action in response to written complaints, and

• Reasonable geographic distribution of loans given the bank's assessment area(s).

12 CFR part 25, Appendix A, paragraph (d)(1)(i), part 195, Appendix A, paragraph (d)(1)(i), part 345, Appendix A, paragraph (d)(1)(i).

A small bank that meets all of those standards and exceeds some or all of them may warrant consideration for a lending test rating of “outstanding.”

To determine whether the overall performance of a small bank that is not an intermediate small bank warrants a rating of outstanding, the agency carrying out the evaluation considers the extent to which the bank exceeds the performance standards for a rating of “satisfactory” and its performance in making qualified investments and providing branches and other services and delivery systems that enhance credit availability in its assessment area(s).

A small bank may receive an overall rating of “needs to improve” or “substantial noncompliance” depending on the degree to which its performance has failed to meet the standards for a “satisfactory” rating.

12 CFR part 25, Appendix A, paragraph (d)(1)(ii), part 195, Appendix A, paragraph (d)(1)(ii), part 345, Appendix A, paragraph (d)(1)(ii).

12 CFR part 25, Appendix A, paragraph (d)(3)(ii)(B), part 195, Appendix A, paragraph (d)(3)(ii)(B), part 345, Appendix A, paragraph (d)(3)(ii)(B).

12 CFR part 25, Appendix A, paragraph (d)(3)(iii), part 195, Appendix A, paragraph (d)(3)(iii), part 345, Appendix A, paragraph (d)(3)(iii).

Under the proposal, small banks would not be evaluated pursuant to the general performance standards that consider a bank's CRA evaluation measure and the retail lending distribution tests. Instead, small banks would continue to be evaluated according to the small bank performance standards applicable to small banks that are not intermediate small banks in the current CRA regulations, unless they are evaluated under an approved strategic plan or

elect to opt into the general performance standards. Performance context and discriminatory and other illegal credit practices would continue to be considered in evaluating a small bank's performance. In addition, under the proposed framework, small banks would continue to refer to relevant guidance in the Interagency Questions & Answers and existing policies and procedures, including with respect to state and MMSA ratings. As proposed, a small bank may choose to exercise an opt in to the proposed general performance standards and must do so at least six months before the start of its next exam cycle. Once a small bank opts in, it would be subject to the general performance standards outlined in the proposed rule for its next CRA evaluation. A small bank that has opted in may exercise a one-time opt out at the end of any CRA evaluation following the opt in and must do so six months before the start of its next exam cycle. Small banks that opt out would revert to being evaluated according to the small bank performance standards applicable to small banks that are not intermediate small banks in the current CRA regulations, unless they are evaluated under an approved strategic plan, until such time that they cease to be small banks based on their assets size.

The proposal would also revise the definition of a “small bank.” Under the current regulations, in 2019, a small bank is a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.284 billion, and an intermediate small bank is a small bank that had assets of at least $321 million as of December 31 of both of the prior two calendar years and assets of less than $1.284 billion as of December 31 of either of the prior two calendar years.

These thresholds are adjusted annually based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

12 CFR 25.12(u)(1), 195.12(u)(1), 345.12(u)(1).

12 CFR 25.12(u)(2), 195.12(u)(2), 345.12(u)(2).

Under the proposal, a small bank would be a bank that had assets of $500 million or less in each of the previous four calendar quarters. Like the current asset-size thresholds, the $500 million threshold would be adjusted annually based on changes in the CPI-W. Unlike the current CRA regulations, the proposal would not include a separate category for intermediate small banks.

Although the proposed small bank performance standards would not include a CD test and small banks would not be required to engage in CD activities, lending-related activities, including CD loans, and CD investments and services may be considered as described above. The proposal would replace references to “qualified investments” in the applicable small bank provisions of the current CRA regulations with references to “community development investments.” The proposal's definitions of qualifying loans and CD services also would apply to small banks. Small banks that engage in qualifying activities as described under proposed 12 CFR 25.04 and 345.04 would receive consideration for those activities to the extent that they were consistent with the small bank performance standards and appendix A. The agencies also recognize that because the small bank performance standards would be applied consistent with the current regulatory framework, certain activities that do not meet the qualifying activities criteria in §§ 25.04 and 345.04 would receive positive consideration. In addition to the revised qualifying activities criteria, small banks also would be subject to the proposal's changes to the assessment area delineation requirements and would be required to delineate deposit-based assessment areas to the same extent as other banks.

The proposed small bank asset-size threshold and the lower burdens imposed by the small bank performance standards recognize that complying with the data collection, recordkeeping, and reporting requirements under the new general performance standards may impose a disproportionate burden on these banks. The agencies note, however, that the available data indicates that small banks may outperform larger banks if they were subject to the general performance standards.

Summary of objectives.

Taken together, the proposed changes to how a bank's CRA activity is evaluated would reduce the subjectivity and inconsistencies in the current framework. The two components of the proposal's CRA evaluation under the new general performance standards—the CRA evaluation measure and the retail lending distribution test—would work together to encourage banks to engage in a variety of activities that provide credit to LMI individuals, small business, small farms, and in areas of need, as well as to incentivize long-term investments in these communities. The retail lending distribution tests would help ensure that banks' retail loans are appropriately distributed to areas and people in need of credit in the local areas where banks have a concentration of depositors or in the areas surrounding bank branches. And the CRA evaluation measure's focus on the value of on-balance sheet loans and investments would encourage stable commitments to communities and disincentivize churning of activities that may not provide long-term stability.

The proposed combined objective method for measuring CRA performance and activity in conjunction with the establishment of transparent benchmarks and thresholds would reduce inconsistency and subjectivity in the current CRA framework and could incentivize more CRA activity. For example, by selecting sufficiently high empirical benchmarks for the average CRA evaluation measure—informed by historical performance levels—under the new general performance standards, the agencies could encourage more qualifying activities. The CD lending and investment minimums would recognize the importance of CD activities to serving a community's needs. Similarly, the small bank performance standards would continue to ensure that small banks' lending and lending-related activities are responsive to the needs of their communities. Furthermore, by preserving a role for performance context, the agencies would continue to consider the specific facts and circumstances that affect a bank's CRA capacity and opportunities and account for them through the consistent and transparent exercise of judgment.

In addition, the proposal would account for differences in bank size, location, and business model in several ways. As an initial matter, small banks would continue to be evaluated pursuant to performance standards designed specifically for small banks that consider their lending opportunities and business model. For banks that are not evaluated as small banks, the retail lending distribution test component of the general performance standards would account for bank size, location, and business model in two ways while assessing whether a bank is adequately serving the LMI individuals and areas in its assessment area. First, the retail lending geographic distribution test and borrower distribution test would look at a bank's geographic and borrower distributions of retail lending activities in LMI areas and to LMI individuals, small farms, or small businesses in its assessment areas, as applicable. For each type of retail activity, the distribution test would look at a bank's qualifying activities conducted as a percentage of a bank's lending in that area and, accordingly, would be scaled

automatically to a bank's presence in that market, its location, and its chosen business model. Second, a bank's retail lending geographic distribution and borrower distribution would be evaluated based on its best performance under either a demographic or peer comparator, both of which would incorporate information about a bank's location. This flexibility and focus on the distribution of the number of qualifying retail loans would help to ensure that the retail lending distribution test accounts for bank size, location, and business model. The CRA evaluation measures also would account for differences in bank size, location, and business model because these differences would be reflected in the volume of a bank's retail domestic deposits at the bank level and in each assessment area.

Alternatives considered.

The agencies also considered other approaches to evaluating CRA performance for banks other than small banks. The agencies first considered having a performance test that would have been based solely on the total dollar volume of spending on qualifying activities. Specifically, this approach would have relied solely on a calculation that compares a bank's average CRA evaluation measure—calculated by

dividing

its yearly qualifying activities value by its average retail domestic deposits—to empirical benchmarks to evaluate a bank's CRA performance, without overlaying a retail lending distribution test. This method would have clarified how banks' CRA performance is evaluated and provided additional consistency that would have enabled banks to predict and track their performance throughout the review period. Further, this method of evaluating CRA performance could have directly achieved more CRA spending and investment in communities that need it most. However, this approach would not have accounted for a bank's distribution of the number of retail loans, which is currently an important part of evaluating a bank's CRA performance. In addition, without limits on the credit received for a single transaction, this method of evaluating CRA performance could have encouraged banks to meet their CRA obligations through a small number of large dollar retail or CD activities.

Second, the agencies considered retaining a separate CD and retail lending test. For the CD test, the agencies considered establishing empirical benchmarks for assessing performance related to a bank's on-balance sheet dollar volume of CD activities as compared to the dollar value of its retail domestic deposits. A bank's performance on the retail lending test would have been based on its performance on geographic and borrower distribution tests in each assessment area for all major retail lending product lines. The agencies would have developed thresholds, corresponding to statutory rating categories, for a bank's performance on the retail lending distribution tests and the bank would have been required to meet the thresholds for all tests for each major retail lending product line to achieve the corresponding rating. This method of evaluating a bank's CRA performance would also have provided certainty and clarity and enabled a bank to monitor its performance throughout its review period. However, this method would not have focused on increasing the overall dollar volume of qualifying activities in the areas that need it most and would not have helped address CRA deserts and hotspots. Accordingly, to ensure that the distribution of the number of CRA retail loans and the total volume of spending on qualifying activities would be captured and assessed, the proposed rule would provide that the ratings for a bank evaluated under the general performance standards would be based on both the distribution of retail loans and impact, measured in dollars, of the bank's qualifying activities.

Further, while developing this proposal, the agencies considered several possible definitions of retail domestic deposits to determine which definition would best reflect a bank's capacity to engage in qualifying activities. First, the agencies considered using total domestic deposits, as reported on Schedule RC, item 13.a, of the Call Report, which is the definition of deposits currently used in the FDIC Summary of Deposits report. This definition includes deposits from individuals, partnerships, and corporations, the U.S. government, states and political subdivisions in the United States, commercial banks and other depository institutions in the United States, banks in foreign countries, foreign governments, and official institutions, including foreign central banks. After considering this definition, the agencies determined that it could overestimate a bank's capacity to engage in qualifying activities by including municipal deposits and deposits from foreign governments and entities.

The agencies also considered using the sum of total deposits intended primarily for personal, household, or family use, as reported on Schedule RC-E, items 6.a, 6.b, 7.a(1), and 7.b(1). This could more accurately reflect a bank's capacity to engage in qualifying activities for individuals, small businesses, and small farms; however, currently, only institutions over $1 billion in total assets that offer one or more consumer deposit account products are required to report that information. Accordingly, the agencies did not use this definition in the proposal because using it would have created additional reporting requirements for banks not currently required to report this information. In addition, the agencies considered scaling the empirical benchmarks for the average CRA evaluation measure at the assessment area level but determined that by relying on the volume of a bank's retail domestic deposits in each assessment area, the measure already accounts for differences in bank size, location, and business model.

The agencies also considered developing a method for evaluating a bank's use of alternative delivery systems and mechanisms, such as mobile banking, for meeting the needs of LMI customers. For example, the agencies considered adding a performance standard that accounts for a bank's use of alternative delivery systems that serve LMI individuals, such as the number of a bank's LMI customers that used an alternative delivery system divided by the number of the bank's LMI customers.

The agencies invite comment on all aspects of the proposal related to the proposed method and process for objectively measuring bank CRA performance, including with respect to the following questions:

14. The proposed rule would define retail domestic deposits as total domestic deposits of individuals, partnerships, and corporations, as reported on Schedule RC-E, item 1, of the Call Report, excluding brokered deposits. Is there another definition—including the alternatives described above—that would better reflect a bank's capacity to engage in CRA qualifying activities?

15. The proposal focuses on quantifying qualifying activities that benefit LMI individuals and areas and quantifies a bank's distribution of branches by increasing a bank's quantified value of qualifying activities divided by retail domestic deposits (a bank's CRA evaluation measure), expressed as a percentage, by up to one percentage point based on the percent of a bank's branches that are in specified areas of need. Banks with no branches in these areas will not receive any CRA credit for their branch distribution under this method, even if

there are very few specified areas of need in the areas they serve. Does this appropriately incentivize banks to place or retain branches in specified areas of need, including LMI areas? Does it appropriately account for the value of branches in these areas?

16. Under the retail lending distribution tests, the proposal would consider the borrower distribution of any consumer loan product line that is a major retail lending product line for the bank. The agencies defined a major retail lending product line as a retail lending product line that comprises at least 15 percent of the bank-level dollar volume of total retail loan originations during the evaluation period, but also considered setting the threshold between 10 and 30 percent. Should the agencies consider a different threshold? Additionally, applying the retail lending distribution test to only major retail lending product lines means that not all retail lending product lines will be evaluated for every bank. Are there any circumstances in which applying the retail lending distribution test to a consumer lending product line should be mandatory, even if it is not a major retail lending product line (e.g., if the consumer lending product line constitutes the majority of a bank's retail lending in number of originations)? Additionally, the proposal would only apply the retail lending distribution tests in assessment areas with at

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