Community Reinvestment Act

Federal RegisterOct 19, 2020

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FEDERAL RESERVE SYSTEM

12 CFR Part 228

[Regulation BB; Docket No. R-1723]

RIN 7100-AF94

Community Reinvestment Act

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Advance notice of proposed rulemaking; request for comment.

SUMMARY:

The Board of Governors of the Federal Reserve System (Board) is publishing for public comment an advance notice of proposed rulemaking (ANPR) to solicit public input regarding modernizing the Board's Community Reinvestment Act regulatory and supervisory framework. The Board is seeking comment on all aspects of the ANPR from all interested parties and also requests commenters to identify other issues that the Board should consider.

DATES:

Comments on this ANPR must be received on or before February 16, 2021.

ADDRESSES:

You may submit comments, identified by Docket No. R-1723 and RIN 7100-AF94, by any of the following methods:

•

Agency Website: http://www.federalreserve.gov.

Follow the instructions for submitting comments at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

•

Email: regs.comments@federalreserve.gov.

Include docket and RIN numbers in the subject line of the message.

•

FAX:

(202) 452-3819 or (202) 452-3102.

•

Mail:

Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551.

Instructions:

All public comments are available from the Board's website at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm

as submitted, unless modified for technical reasons or to remove personally identifiable information at the commenter's request. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, between 9:00 a.m. and 5:00 p.m. on weekdays. For security reasons, the Board requires that visitors make an appointment to inspect comments. You may do so by calling (202) 452-3684. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT:

S. Caroline (Carrie) Johnson, Manager, Division of Consumer and Community Affairs, (202) 452-2762; Catherine M.J. Gates, Senior Project Manager, Division of Consumer and Community Affairs, (202) 452-2099; Amal S. Patel, Counsel, Division of Consumer and Community Affairs, (202) 912-7879, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. For users of Telecommunication Device for Deaf (TDD) only, (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Introduction: Request for Feedback, Objectives, and Overview

In this ANPR, the Board requests feedback on different approaches to modernizing the regulatory and supervisory framework for the Community Reinvestment Act (CRA)

in order to more effectively meet the needs of low- and moderate-income (LMI) communities and address inequities in credit access. This includes seeking feedback from stakeholders regarding, among other things, accounting for changes in the banking system, applying metrics to certain CRA evaluation standards, and providing greater clarity regarding CRA-eligible activities. The Board is also mindful of the economic impact of the COVID-19 pandemic, particularly on LMI communities and households, and seeks feedback on how it should consider these impacts in CRA modernization.

12 U.S.C. 2901

et seq.

The Board implements the CRA through Regulation BB. 12 CFR part 228.

In addition to requesting comment on all topics raised below, this ANPR also includes specific questions that are numbered consecutively. Commenters are requested to refer to these question numbers in their submitted comments, which will assist the Board in its efforts as well as members of the public that review comments online.

The contemplated changes to Regulation BB are guided by the following objectives:

• More effectively meet the needs of LMI communities and address inequities in credit access, in furtherance of the CRA statute and its core purpose.

• Increase the clarity, consistency, and transparency of supervisory expectations and of standards regarding where activities are assessed, which activities are eligible for CRA purposes, and how eligible activities are evaluated and assessed, while seeking to minimize the associated data burden and to tailor collection and reporting requirements.

• Tailor CRA supervision of financial institutions (banks)

to reflect:

“Regulated financial institution” means an “insured depository institution” as defined in 12 U.S.C. 1813.

See

12 U.S.C. 2902(2). “Insured depository institution” means any bank or savings association whose deposits are insured by the Federal Deposit Insurance Corporation.

See

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

○ Differences in bank sizes and business models;

○ Differences in local markets, needs, and opportunities, including with respect to small banks serving rural markets; and

○ Expectations across business cycles.

• Update standards in light of changes to banking over time, particularly the increased use of mobile and internet delivery channels.

• Promote community engagement.

• Strengthen the special treatment of minority depository institutions (MDIs).

• Recognize that CRA and fair lending responsibilities are mutually reinforcing.

The Board seeks public input on different policy options to carry out the above objectives in several key areas and looks forward to assessing this input to advance the goal of strengthening the CRA regulation. The ANPR includes the below sections.

Background.

Section II discusses the CRA's statutory history and purpose, including a discussion of the historical practice of redlining on the basis of race and the enactment of the CRA and other complementary federal civil rights laws to address systemic inequities in access to credit and other financial services. The background section also provides an overview of the Board's existing Regulation BB and stakeholder feedback on CRA modernization.

Assessment Areas and Defining Local Communities for CRA Evaluations.

Section III addresses the issue of how to define a bank's local communities, which impacts where banks' CRA performance is evaluated and is critical for ensuring that the CRA fulfills its purpose of encouraging banks to meet the credit needs of their local communities. The Board seeks to more predictably delineate assessment areas around physical locations, such as bank branches, and to ensure that assessment areas are contiguous, do not reflect illegal discrimination, do not arbitrarily exclude LMI census tracts, and are tailored to bank size and performance context. For large banks that conduct a

significant amount of lending and deposit-based collection far from their branches, the Board seeks comment on deposit-based and lending-based alternative approaches to delineating assessment areas. For internet banks, the Board is also considering whether nationwide assessment areas could more holistically capture their banking activities.

Overview of Evaluation Framework.

Section IV provides an overview of the Board's proposed framework for evaluating banks' CRA performance with a Retail Test and a Community Development Test. The Retail Test would include two subtests: A Retail Lending Subtest and a Retail Services Subtest. The Community Development Test would also include two subtests: A Community Development Financing Subtest and a Community Development Services Subtest. This section proposes tailoring these tests based on differences in bank asset size and business models. The Board proposes an asset-size threshold of $750 million or $1 billion to distinguish between small and large retail banks. Small retail banks could continue to be evaluated under the current CRA framework, but would have the option to be evaluated under the Retail Lending Subtest alone and could also elect to have their retail services and community development activities evaluated. Large retail banks would be evaluated under all four subtests. Wholesale and limited purpose banks would be evaluated under the two community development subtests. Alternatively, any bank would have the option to be evaluated pursuant to an approved strategic plan.

Retail Test.

Section V describes the two subtests of the proposed Retail Test. For the Retail Lending Subtest, the Board proposes a metrics-based approach that is tailored based on a bank's major product lines and on the credit needs and opportunities within its assessment area(s). For the Retail Services Subtest, the Board proposes a qualitative approach that is intended to provide greater predictability and transparency for evaluating important aspects of retail banking services, including branches, other delivery systems, and deposit products. Section VI discusses updating and clarifying certain aspects of Retail Test qualifying activities, including the designation of major product lines, the evaluation of consumer loan products, the definitions of small business and small farm loans, and the consideration of retail activities conducted in Indian Country.

Community Development Test.

Section VII describes the two subtests of the proposed Community Development Test: A Community Development Financing Subtest and a Community Development Services Subtest. The Board proposes a metrics-based approach to evaluating community development financing activities that is transparent, predictable, and tailored to the community development needs and opportunities within an assessment area. For the Community Development Services Subtest, the Board proposes evaluating community development services in a way that better recognizes the value of qualifying volunteer activities, especially in rural communities.

Section VIII discusses proposals for clarifying and updating Community Development Test qualifying activities pertaining to affordable housing, community services, economic development, and revitalization and stabilization, and discusses updating how activities outside of a bank's assessment areas would be considered. The Board seeks to emphasize qualifying activities that support MDIs and Community Development Financial Institutions (CDFIs). In addition, the Board is considering how to treat community development activities outside of assessment areas to help address discrepancies between so-called CRA “hot spots”

and “deserts.”

The Board seeks feedback on defining designated areas of need—for example, in Indian Country or in areas that meet an “economically distressed” definition—where banks could conduct community development activity outside of an assessment area. The Board also seeks feedback on approaches to increase the upfront certainty about what activities qualify for CRA credit, including a process for banks and other stakeholders to obtain pre-approval that a particular activity qualifies for consideration and publication of illustrative lists of qualifying activities.

CRA hot spots are areas where large numbers of banks concentrate CRA and other banking activities in the same, relatively small number of localities.

CRA deserts are areas with little bank presence and corresponding lesser availability of banking products and services and community development activities.

Strategic Plans.

In Section IX, the Board seeks feedback on proposed revisions to the strategic plan option for CRA performance evaluations to provide more clarity and flexibility about establishing strategic plans and the standards used to assess activities.

Ratings.

In Section X, the Board discusses updating the way in which state, multistate metropolitan statistical area (MSA), and institution ratings are reached, basing these ratings in local assessment area conclusions for the different subtests, as applicable. For example, the Board proposes assigning a bank's overall rating on the Retail Test by using a weighted average of each of the bank's assessment area-level conclusions. The Board believes it is appropriate to anchor a bank's overall rating in its performance in all of its local communities, and therefore proposes to eliminate the designation of full- and limited-scope assessment areas in the evaluation process. Certain activities outside of a bank's assessment area(s) would also be considered in determining overall ratings, such as a partnership with an MDI, which could be considered as part of a pathway to an “outstanding” rating. The Board also seeks to update the consideration of discrimination and other illegal credit practices in determining CRA ratings by adding violations of new laws and regulations that are related to meeting community credit needs.

Data Collection and Reporting.

In Section XI, the Board solicits feedback on potential revisions to data collection and reporting requirements. The Board is mindful of the potential tradeoff between the expanded use of metrics to provide greater certainty and consistency and the expanded need for data collection and reporting, and has prioritized using existing data wherever possible. The Board has also prioritized approaches that would exempt small banks from new data collection requirements. In addition, the Board seeks feedback on deposits data options for large banks, and in particular for large banks with extensive deposit activity outside of the areas served by their physical branches. The Board seeks feedback on how to balance the certainty provided through the use of metrics in CRA performance evaluations with the potential data burden implications.

Request for Feedback:

Question 1.

Does the Board capture the most important CRA modernization objectives? Are there additional objectives that should be considered?

II. CRA Background

The Board implements the CRA through Regulation BB. The CRA is designed to encourage regulated financial institutions to help meet the credit needs of their entire communities, including LMI neighborhoods, in which they are chartered. Under Regulation BB, the Board applies different evaluation standards to banks of different asset sizes and types.

Together with the Federal Deposit Insurance Corporation (FDIC) and the

Office of the Comptroller of the Currency (OCC), the Board has also published Interagency Questions and Answers Regarding Community Reinvestment (Interagency Questions and Answers)

to provide guidance on the interpretation and application of the agencies' CRA regulations.

See

81 FR 48506 (July 25, 2016). “Interagency Questions and Answers” refers to the “Interagency Questions and Answers Regarding Community Reinvestment” in its entirety. “Q&A” refers to an individual question and answer within the Interagency Questions and Answers.

A. CRA Statutory Purpose and History

The CRA invests the Board, the FDIC, and the OCC with broad authority and responsibility for implementing the statute, which provides the agencies with a crucial mechanism for addressing persistent systemic inequity in the financial system for LMI and minority individuals and communities. In particular, the statute and its implementing regulations provide the agencies, regulated banks, and community organizations with the necessary framework to facilitate and support a vital financial ecosystem that supports LMI and minority access to credit and community development.

See, e.g.,

Chairman Ben S. Bernanke, Board of Governors of the Federal Reserve System, “The Community Reinvestment Act: Its Evolution and New Challenges” (March 30, 2007),

https://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm

(“After years of experimentation, the managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable. . . . Moreover, community groups and nonprofit organizations began to take a more businesslike, market-oriented approach to local economic development, leading them to establish more-formalized and more-productive partnerships with banks. Community groups provided information to financial institutions on the needs of lower-income communities for credit and services, offered financial education and counseling services to community members, and referred `bankable' customers to partner banks. Specialized community development banks and financial institutions with the mission of providing financial services and credit to lower-income communities and families emerged and grew.”).

Congress enacted the CRA in 1977 primarily to address economic challenges in predominantly minority urban neighborhoods that had suffered from decades of disinvestment and other inequities.

Many believed that systemic inequities in credit access—due in large part to a practice known as “redlining”—along with a lack of public and private investment, was at the root of these communities' economic distress.

Redlining occurred when banks refused outright to make loans or extend other financial services in neighborhoods comprised largely of African-American and other minority individuals, leading to discrimination in access to credit and less favorable financial outcomes even when they presented the same credit risk as others residing outside of those neighborhoods. The term is widely associated with the former federal Home Owners' Loan Corporation (HOLC), which employed color-coded maps

to designate its perception of the relative risk of lending in a range of neighborhoods, with “hazardous” (the highest risk) areas coded in red. Redlined neighborhoods typically had a high percentage of minority residents, were overwhelmingly poor, and had less desirable housing.

As Senator William Proxmire, who authored the CRA legislation, testified when discussing its purpose:

See

Bernanke, “The Community Reinvestment Act: Its Evolution and New Challenges” (“Public and congressional concerns about the deteriorating condition of America's cities, particularly lower-income and minority neighborhoods, led to the enactment of the Community Reinvestment Act. . . . Several social and economic factors help explain why credit to lower-income neighborhoods was limited at that time. First, racial discrimination in lending undoubtedly adversely affected local communities. Discriminatory lending practices had deep historical roots.”).

See, e.g.,

Michael Berry, Federal Reserve Bank of Chicago, and Jessie Romero, Federal Reserve Bank of Richmond, “Federal Reserve History: Community Reinvestment Act of 1977,”

https://www.federalreservehistory.org/essays/community_reinvestment_act

(also explaining that other federal and state policies likewise contributed to redlining and additional discriminatory practices).

See

“Mapping Inequality: Redlining in New Deal America,”

https://dsl.richmond.edu/panorama/redlining/#loc=5/39.1/-94.58

(archive of HOLC maps).

See, e.g.,

Daniel Aaronson, Daniel Hartley, and Bhashkar Mazumder, Federal Reserve Bank of Chicago, “The Effects of the 1930s HOLC `Redlining' Map” (Feb. 2019),

https://www.chicagofed.org/publications/working-papers/2017/wp2017-12,

p.1 (“Neighborhoods were classified based on detailed risk-based characteristics, including housing age, quality, occupancy, and prices. However, non-housing attributes such as race, ethnicity, and immigration status were influential factors as well. Since the lowest rated neighborhoods were drawn in red and often had the vast majority of African American residents, these maps have been associated with the so-called practice of `redlining' in which borrowers are denied access to credit due to the demographic composition of their neighborhood.”).

By redlining let me make it clear what I am talking about. I am talking about the fact that banks and savings and loans 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.

123 Cong. Rec. 17630 (June 6, 1977).

Against this backdrop, Congress passed the CRA, along with other complementary federal civil rights laws during the late 1960s and 1970s, to address systemic inequities in access to credit and other financial services that contributed to often dramatic differences in economic access and overall financial well-being.

In particular, the Equal Credit Opportunity Act (ECOA)

and the Fair Housing Act (FHA)

fair lending laws each include an explicit focus on discrimination on prohibited bases such as race, and the Home Mortgage Disclosure Act (HMDA)

is intended to bring greater transparency to mortgage lending practices. Even with the implementation of the CRA and the other complementary laws, the harmful legacy of redlining and other discriminatory practices too often continues to be felt. In 2016, the “wealth gap [was] roughly the same as it was in 1962, two years before the passage of the Civil Rights Act of 1964[.]”

See, e.g.,

Governor Lael Brainard, “Strengthening the Community Reinvestment Act by Staying True to Its Core Purpose” (Jan. 8, 2020),

https://www.federalreserve.gov/newsevents/speech/brainard20200108a.htm

(“The CRA was one of several landmark pieces of legislation enacted in the wake of the civil rights movement intended to address inequities in the credit markets.”).

15 U.S.C. 1691

et seq.

42 U.S.C. 3601

et seq.

12 U.S.C. 2801

et seq.

Dionissi Aliprantis and Daniel Carroll, Federal Reserve Bank of Cleveland, “What is Behind the Persistence of the Racial Wealth Gap” (Feb. 28, 2019),

https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2019-economic-commentaries/ec-201903-what-is-behind-the-persistence-of-the-racial-wealth-gap.aspx. See also, e.g.,

The New York Times, “How Redlining's Racist Effects Lasted for Decades” (Aug. 24, 2017),

https://www.nytimes.com/2017/08/24/upshot/how-redlinings-racist-effects-lasted-for-decades.html

(citing William J. Collins and Robert A. Margo, “Race and Home Ownership from the End of the Civil War to the Present” (Nov. 2010) in stating, “The black-white gap in homeownership in America has in fact changed little over the last century . . . . That pattern helps explain why, as the income gap between the two groups has persisted, the wealth gap has widened by much more.”).

In enacting the CRA, the Congress found that: (1) Banks and savings associations (collectively, 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.

The statute directed the relevant federal financial supervisory agencies to: Encourage the financial institutions they supervise to safely and soundly meet the credit needs of the communities they serve, including LMI

neighborhoods;

assess their record of doing so and take this record into account when evaluating banking applications for a deposit facility;

and report to Congress the actions they have taken to carry out their CRA responsibilities.

The CRA also directed each agency to publish regulations to carry out the statute's purposes.

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

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

12 U.S.C. 2903(a).

12 U.S.C. 2904.

12 U.S.C. 2905.

Since its enactment, Congress has amended the CRA several times, including through the Financial Institutions Reform, Recovery, and Enforcement Act of 1989

(which required public disclosure of a bank's CRA written evaluation and rating); the Federal Deposit Insurance Corporation Improvement Act of 1991

(which required the inclusion of a bank's CRA examination data in the determination of its CRA rating); the Housing and Community Development Act of 1992

(which included assessment of the record of nonminority-owned and nonwomen-owned banks in cooperating with minority-owned and women-owned banks and low-income credit unions); the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994

(which (1) required an agency to consider an out-of-state national bank's or state bank's CRA rating when determining whether to allow interstate branches, and (2) prescribed certain requirements for the contents of the written CRA evaluation for banks with interstate branches); and the Gramm-Leach-Bliley Act of 1999

(which, among other things, provided regulatory relief for smaller banks by reducing the frequency of their CRA examinations).

Public Law 101-73, 103 Stat. 183 (Aug. 9, 1989).

Public Law 102-242, 105 Stat. 2236 (Dec. 19, 1991).

Public Law 102-550, 106 Stat. 3874 (Oct. 28, 1992).

Public Law 103-328, 108 Stat. 2338 (Sept. 29, 1994).

Public Law 106-102, 113 Stat. 1338 (Nov. 12, 1999).

In 1978, consistent with Congress's statutory directive, the agencies promulgated the first CRA regulations, which included evidence of prohibited discriminatory or other illegal credit practices as a performance factor.

The agencies have since significantly amended these regulations twice, in 1995 and 2005.

In addition, the agencies have periodically published interpretations of the CRA regulations in the form of the Interagency Questions and Answers.

43 FR 47144 (Oct. 12, 1978).

See also

Governor Lael Brainard, “Strengthening the Community Reinvestment Act: What are We Learning?” (Feb. 1, 2019),

https://www.federalreserve.gov/newsevents/speech/brainard20190201a.htm

(“The central thrust of the CRA is to encourage banks to ensure that all creditworthy borrowers have fair access to credit, and, to do so successfully, it has long been recognized that they must guard against discriminatory or unfair and deceptive lending practices.”).

60 FR 22156 (May 4, 1995); 70 FR 44256 (Aug. 2, 2005). The CRA regulations have typically been adopted individually by each agency, but drafted on an interagency basis and released jointly.

The Federal Reserve has also developed significant supervisory and other infrastructure to support the CRA and its objectives. Starting in 1984, the Federal Reserve System, through the community development function at each Federal Reserve Bank, has engaged in outreach, educational, and technical assistance to help banks, community organizations, government entities, and the public understand and address financial services issues affecting LMI individuals and communities and to assist banks in meeting their affirmative obligations under the CRA.

See, e.g.,

Chairman Jerome H. Powell, Board of Governors of the Federal Reserve System, “Celebrating Excellence in Community Development” (Dec. 3, 2018),

https://www.federalreserve.gov/newsevents/speech/powell20181203a.htm

(“The Fed's community development function . . . advances our Community Reinvestment Act responsibilities by analyzing and disseminating information related to local financial needs and successful approaches for attracting and deploying capital. These efforts strengthen the capacity of both financial institutions and community organizations to meet the needs of the communities they serve.”).

The CRA requires each agency to prepare a written evaluation of a bank's record of meeting the credit needs of its entire community, including LMI neighborhoods, at the conclusion of its CRA examination.

This report, known as a performance evaluation, is required to be a public document that presents an agency's conclusions regarding a bank's overall performance for each “assessment factor” identified in the CRA regulations.

A performance evaluation must also present facts and data supporting the agency's conclusions and contain both the bank's CRA rating and a description of the basis for the rating.

A bank's CRA rating is considered, for example, in applications to merge with or acquire another bank, open a branch, or relocate a main office or branch.

A bank with a CRA rating below “satisfactory” may be restricted from certain activities until its next CRA examination.

12 U.S.C. 2906.

12 U.S.C. 2906(b)(1)(A)(i).

12 U.S.C. 2906(b)(1)(A)(ii) and (iii). There are four statutory rating categories: “outstanding,” “satisfactory,” “needs to improve,” and “substantial noncompliance.” 12 U.S.C. 2906(b)(2).

12 CFR 228.29.

Request for Feedback:

Question 2.

In considering how the CRA's history and purpose relate to the nation's current challenges, what modifications and approaches would strengthen CRA regulatory implementation in addressing ongoing systemic inequity in credit access for minority individuals and communities?

B. Regulation BB and Guidance for Performance Evaluations

1. CRA Performance Evaluations

Regulation BB provides different methods to evaluate a bank's CRA performance depending on its asset size and business strategy.

Under the current framework:

See generally

12 CFR 228.21-.27. The Board, the FDIC, and the OCC annually adjust the CRA asset-size thresholds based on inflation.

• Small banks—currently, those with assets of less than $326 million as of December 31 of either of the prior two calendar years—are evaluated under a retail lending test that may also consider community development lending. Community development investments and services may be considered for an “outstanding” rating at a bank's option, but only if the bank meets or exceeds the lending test criteria in the small bank performance standards.

• Intermediate small banks—currently, those with assets of at least $326 million as of December 31 of both of the prior two calendar years and less than $1.305 billion as of December 31 of either of the prior two calendar years—are evaluated under the retail lending test for small banks and a community development test. The intermediate small bank community development test evaluates all community development activities together.

• Large banks—currently, those with assets of more than $1.305 billion as of December 31 of both of the prior two calendar years—are evaluated under separate lending, investment, and service tests. The lending and service tests consider both retail and community development activities, and the investment test focuses on qualified community development investments. To facilitate the agencies' CRA analysis, large banks are required to report annually certain data on community development, small business, and small farm loans (small banks and intermediate small banks are not required to report these data).

• Designated wholesale banks (those engaged in only incidental retail lending) and limited purpose banks (those offering a narrow product line to

a regional or broader market) are evaluated under a standalone community development test.

• Banks may elect to be evaluated under a strategic plan that sets out measurable, annual goals for lending, investment, and service activities in order to achieve a “satisfactory” or an “outstanding” rating. A strategic plan must be developed with community input and approved by the bank's primary regulator.

The Board also considers applicable performance context information to inform its analysis and conclusions when conducting CRA examinations. Performance context comprises a broad range of economic, demographic, and institution- and community-specific information that examiners review to calibrate a bank's CRA evaluation to its local communities, including:

• Demographic data on median income levels, distribution of household income, nature of housing stock, housing costs, and other relevant assessment area-related data.

• Any information about lending, investment, and service opportunities in the bank's assessment area(s).

• The bank's product offerings and business strategy.

• Institutional capacity and constraints, including the size and financial condition of the bank, the economic climate, safety and soundness limitations, and any other factors that significantly affect the bank's ability to provide lending, investments, or services in its assessment area(s).

• The bank's past performance and the performance of similarly situated lenders.

• The bank's public file and any written comments about the bank's CRA performance submitted to the bank or to the Board, and any other information deemed relevant by the Board.

12 CFR 228.21(b).

2. Assessment Areas

Regulation BB requires a bank to delineate one or more assessment area(s) in which its record of meeting its CRA obligations will be evaluated.

The regulation requires a bank to delineate assessment areas consisting of metropolitan areas (MSAs or metropolitan divisions) or political subdivisions

in which its main office, branches, and deposit-taking automated teller machines (ATMs) are located, as well as the surrounding geographies (

i.e.,

census tracts)

where a substantial portion of its loans are originated or purchased.

12 CFR 228.41.

Political subdivisions include cities, counties, towns, townships, and Indian reservations. Q&A § __.41(c)(1)—1.

12 CFR 228.12(k).

The assessment area definition's emphasis on branches reflects the prevailing business model for financial service delivery when the CRA was enacted. The statute instructs the agencies to assess a bank's record of meeting the credit needs of its “entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution, and to take such record into account in its evaluation of an application for a deposit facility by such institution.”

The statute does not prescribe the delineation of assessment areas, but they are an important aspect of the regulation because they define “community” for purposes of the evaluation of a bank's CRA performance.

12 U.S.C. 2903(a).

3. Eligible Activities

Regulation BB and the Interagency Questions and Answers provides detailed information, including applicable definitions, regarding activities that are eligible for CRA consideration in an assessment of a bank's CRA performance. Banks that are subject to a performance test that includes a review of their retail activities are assessed in connection with retail lending activity (as applicable, home mortgage loans, small business loans, small farm loans, and consumer loans

) and, where applicable, retail banking service activities (

e.g.,

the current distribution of a bank's branches in geographies of different income levels, and the availability and effectiveness of the bank's alternative systems for delivering banking services to LMI geographies and individuals).

12 CFR 228.12(j), (l), (u), and (w).

See generally,

12 CFR 228.21-.27; 12 CFR 228.24(d).

Banks subject to a performance test that includes a review of their community development activities are assessed with respect to community development lending, qualified investments, and community development services, which by definition must have a primary purpose of community development.

See generally,

12 CFR 228.21-.27; 12 CFR 228.12(g), (h), (i), and (t).

4. Guidance for Performance Evaluations

In addition to information included in their CRA regulations, the Board and the other agencies also provide information to the public regarding how CRA performance tests are applied, where CRA activities are considered, and what activities are eligible through publicly available CRA performance evaluations,

the Interagency Questions and Answers, interagency CRA examination procedures,

and interagency instructions for writing performance evaluations.

See, e.g.,

Board of Governors of the Federal Reserve System, “Community Reinvestment Act (CRA), Search: Evaluations and Ratings (Federal Reserve Supervised Banks),”

https://www.federalreserve.gov/apps/CRAPubWeb/CRA/BankRating

See, e.g.,

FFIEC, “Community Reinvestment Act: CRA Examinations,”

https://www.ffiec.gov/cra/examinations.htm

Id.

C. Stakeholder Feedback and Recent Rulemaking

The financial services industry has undergone transformative changes since the CRA statute was introduced, including the removal of national bank interstate branching restrictions and the expanded role of mobile and online banking. To better understand how these developments impact both consumer access to banking products and services and a bank's CRA performance, the agencies have reviewed feedback from the banking industry, community groups, academics, and others stakeholders on several occasions.

From 2013 to 2016, the agencies solicited feedback on the CRA as part of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) review.

Commenters raised issues related to assessment area definitions; incentives for banks to serve LMI, unbanked, underbanked, and rural communities; recordkeeping and reporting requirements; need for clarity regarding performance measures and better examiner training to ensure consistency in examinations; and refinement of CRA ratings.

See, e.g.,

80 FR 7980 (Feb. 13, 2015).

1. OCC CRA Advance Notice of Proposed Rulemaking and Federal Reserve Outreach Sessions

On September 5, 2018, the OCC published an advance notice of proposed rulemaking to solicit ideas for a new CRA regulatory framework (OCC CRA advance notice of proposed rulemaking).

More than 1,500 comment letters were submitted in response. To augment that input, the Federal Reserve System held about 30 outreach meetings with representatives of banks, community organizations, and the other agencies.

83 FR 45053 (Sept. 5, 2018).

For a summary of the Federal Reserve outreach session feedback see:

https://www.federalreserve.gov/publications/files/stakeholder-feedback-on-modernizing-the-community-reinvestment-act-201906.pdf

Although commenters agreed that the regulations needed to be modernized to reflect the evolution of the banking industry, they expressed strong support for some elements of the current approach to CRA and noted the significant volume of loans and investments directed toward LMI consumers and communities that it has generated. There was substantial support for retaining CRA's focus on LMI consumers and communities, and many commenters urged the agencies to proceed with caution so as not to disturb the important collaborative environment that CRA has fostered among banks and community stakeholders in support of community development.

Although there was general openness to considering a more quantitative CRA framework, commenters raised concerns about a “single metric” approach, noting that setting a threshold for the ratio of CRA activity relative to deposits associated with each performance rating could incentivize banks to focus on high-value markets or activities without assessing their impact.

Many stakeholders suggested that deposit-taking physical facility-based (“branch-based”) assessment areas serve many banks well, but additional or different assessment areas may be appropriate for other banks, such as internet banks.

2. OCC-FDIC CRA Notice of Proposed Rulemaking and OCC CRA Final Rule

On December 12, 2019, the FDIC and the OCC issued a joint notice of proposed rulemaking (FDIC-OCC CRA notice of proposed rulemaking).

In response, the agencies received over 7,500 comment letters.

85 FR 1204 (Jan. 9, 2020).

85 FR 34734, 34734 and 34737 (June 5, 2020).

On May 20, 2020, the OCC issued a CRA final rule (OCC CRA final rule), retaining the most fundamental elements of the proposal but also making adjustments to reflect stakeholder input.

The agency deferred establishing metrics-based thresholds for evaluating banks' CRA performance until it is able to assess additional data,

with the final rule having an October 1, 2020 effective date and January 1, 2023 and January 1, 2024 compliance dates.

Additionally, the final rule retains the proposal's approach of allowing smaller banks (including renaming and adjusting the current intermediate small bank category as “intermediate banks”)

to continue to have their CRA performance evaluated in a manner comparable to the current CRA framework.

The OCC CRA final rule also provides that wholesale and limited purpose banks will be reviewed in a manner similar to the current approach.

The final rule's revised qualifying activities criteria are applicable to all bank types.

85 FR 34734 (June 5, 2020).

See

OCC, News Release 2020-63, “OCC Finalizes Rule to Strengthen and Modernize Community Reinvestment Act Regulations” (May 20, 2020),

https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-63.html; see also

85 FR at 34736.

85 FR at 34784.

The OCC CRA final rule defines small banks as those with total assets of $600 million or less and intermediate banks as those with total assets of over $600 million but less than $2.5 billion.

See, e.g.,

85 FR at 34780.

See, e.g.,

id.

See, e.g., id.

at 34764, 34780.

III. Assessment Areas

In the current regulation, the definition of assessment areas reflects a time when banks delivered products and services almost exclusively through physical facilities, primarily branches. Banks now increasingly deliver financial products and services to consumers through online or mobile banking, which results in a broader geographic reach for some banks, especially large banks. Although the CRA statute does not expressly define “communities” or “local communities,” the statute provides the Board with broad authority to define these terms by regulation. This authority includes amending Regulation BB to incorporate, in the consideration of a bank's “community,” assessment areas that are not geographically local to its main office, branches, or deposit-taking ATMs, as currently defined.

The Board is considering how best to define the local communities where banks' CRA activities are assessed to both reflect changes in the banking industry and to retain CRA's nexus with fair lending requirements. This includes evaluating changes to a bank's facility-based assessment areas, as well as different approaches for defining assessment areas for certain large banks based on concentrations of deposits or lending that are geographically distant from the banks' facilities or that are primarily provided through non-branch means.

A. Current Approach for Designating Assessment Areas

Pursuant to the CRA statute, banks have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.

In their CRA regulations, the agencies have interpreted local communities to include the areas surrounding a bank's main office, branches, and deposit-taking ATMs. Accordingly, one of Regulation BB's core requirements is that each bank delineate areas representing the main geographic basis upon which their CRA performance is assessed—referred to as assessment areas—in keeping with this interpretation of local communities.

12 U.S.C. 2901.

As noted previously, the CRA was one of several groundbreaking pieces of legislation enacted to address economic and financial inequity with respect to LMI individuals and communities and systemic disinvestment in LMI areas. Among other things, Regulation BB requires that assessment areas not reflect illegal discrimination and not arbitrarily exclude LMI geographies; these elements represent links to ECOA and the FHA, which work congruently with the CRA to combat redlining.

Consequently, it is crucial that banks appropriately delineate their assessment areas.

Importantly, a redlining violation under ECOA or the FHA may be based on a number of factors, including inappropriate delineation of an assessment area, lending disparities, and branching patterns or marketing practices that have the effect of providing unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the property will be located.

See

FFIEC Interagency Fair Lending Examination Procedures (Aug. 2009),

https://www.ffiec.gov/PDF/fairlend.pdf

Regulation BB currently defines assessment areas for banks (other than wholesale and limited purpose banks) in connection with a bank's deposit-taking physical locations and the surrounding areas in which it has originated or purchased a substantial portion of its loans.

Assessment areas for wholesale and limited purpose banks consist generally of one or more MSAs or metropolitan divisions or one or more contiguous political subdivisions, such as counties, cities, or towns in which the bank has its main office, branches, and deposit-taking ATMs.

Banks whose business models predominantly focus upon serving the needs of military personnel or their dependents who are not located within a defined geographic area may delineate their entire deposit customer base as their assessment area.

12 CFR 228.41(c).

12 CFR 228.41(b).

12 U.S.C. 2902(4); 12 CFR 228.41(f).

B. Stakeholder Feedback on Assessment Areas

Stakeholder input has generally indicated that branch-based assessment areas should be retained. Community

groups and research organizations have also indicated that, for banks without branch-centric business models, deposit or lending data, or both, should be used to delineate additional assessment areas for banks with considerable deposits or lending volumes outside of their assessment areas. Industry stakeholders have expressed some reservations about deposit-based assessment areas, citing concerns that the associated data collection and reporting for many large banks would be costly and burdensome. Relatedly, community groups and research organizations have advised against comprehensive changes to assessment area delineation without data-driven analysis regarding their potential impact. And both industry and community group stakeholders have expressed concern that deposit-based assessment areas could result in additional assessment areas in wealthier and metropolitan areas, exacerbating the CRA hot spot dynamic.

Industry stakeholders have also expressed concern about being required to delineate large assessment areas (

e.g.,

whole counties) when a bank serves only a portion of an area and/or when other banks already serve that area. These stakeholders have also noted uncertainty whether their lending in a geography would constitute a substantial portion and, as a result, would trigger an expectation to include that geography as part of their assessment area.

Some industry stakeholders have also noted that internet banks lacking a physical presence in any market should have nationwide assessment areas. For example, some stakeholders have suggested that internet banks could be defined as those deriving no more than 20 percent of their deposits from branch-based assessment areas.

C. Facility-Based Assessment Area Delineation Options

To continue encouraging banks to meet the credit and community development needs of their local communities, the Board proposes continuing to delineate assessment areas where banks have a physical presence and seeks feedback on options to better tailor assessment areas around branches, loan production offices, and deposit-taking ATMs based on bank size, business model, and capacity.

1. Branch-Based Assessment Areas

Branches have traditionally been the primary means through which banks connect with and serve their communities. In addition to providing a channel for delivering banking products and services, branches are frequently the places where individuals develop personal banking relationships and obtain financial education. Branches are particularly important in this regard to LMI consumers and small business owners.

Because of these ancillary activities, branches are also essential to low-income communities, including many rural communities

and low-income metropolitan neighborhoods where there is often a shortage of bank branches.

See,

Lei Ding, Federal Reserve Bank of Philadelphia, and Carolina K. Reid, University of California, Berkeley, “The Community Reinvestment Act (CRA) and Bank Branching Patterns” (Sept. 2019),

https://www.philadelphiafed.org/-/media/community-development/publications/discussion-papers/discussion-paper_cra-and-bank-branching-patterns.pdf?la=en

Board of Governors of the Federal Reserve System, “Perspectives from Main Street: Bank Branch Access in Rural Communities” (Nov. 2019),

https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf

See

Ding and Reid, “The Community Reinvestment Act (CRA) and Bank Branching Patterns.”

Branch-based assessment areas can raise fair lending risk and uncertainty when they are not composed of whole political subdivisions,

e.g.,

whole counties. For assessment areas composed of portions of political subdivisions, examiners conduct a more rigorous review that includes a bank's geographic lending patterns to ensure that LMI census tracts are not arbitrarily excluded. Consistent with the longstanding public policy to prevent redlining, examiners also validate that an assessment area does not reflect illegal discrimination. An assessment area that appears to have been drawn to exclude areas with a majority number of minority residents represents a higher risk of discriminatory redlining, as set forth in the FFIEC Interagency Fair Lending Examination Procedures.

If LMI census tracts are found to be arbitrarily excluded or an assessment area reflects illegal discrimination, examiners work with a bank to delineate an assessment area that complies with the regulatory criteria, which in some cases could include the entire political subdivision. The revised assessment area is then used for the CRA evaluation. However, redrawing a bank's assessment area during a CRA evaluation can result in uncertainty and possibly a lower rating, since the bank may not have engaged in CRA activities inside the portions of the political subdivision that were previously excluded.

See

OCC, FDIC, Board, Office of Thrift Supervision, National Credit Union Association, “Interagency Fair Lending Examination Procedures” (Aug. 2009),

www.ffiec.gov/PDF/fairlend.pdf

The Board is proposing to tailor the facility-based assessment area definition based on bank size. To address the uncertainty commenters noted when banks take assessment areas composed of partial political subdivisions, this approach would require facility-based assessment areas for large banks to consist of whole counties. Excluding partial county assessment areas for large banks would streamline the assessment area review process, add additional predictability and consistency to CRA examinations, and may provide incentives for large banks to lend in a broader area.

In contrast, for small banks, the Board believes that defining assessment areas based on whole counties may not be appropriate. Smaller banks may not have the capacity and resources to serve the needs of a geographically large county, especially when a bank is situated near a county border, is otherwise geographically remote from an area where it may have some lending activity but no branches, or faces substantial competition from other financial institutions within the same geographies. Some small municipalities and community groups have also indicated that overly large assessment areas can mask poor performance in remote and underserved LMI areas. Therefore, small banks would continue to be allowed to define facility-based assessment areas that include partial counties or portions of smaller political subdivisions, including portions of cities or townships, as long as they are composed of at least whole census tracts.

The Board proposes to provide greater clarity that a small bank would not be required to expand the delineation of an assessment area to include parts of counties where it does not have a physical presence and where it either engages in a

de minimis

amount of lending or there is substantial competition from other institutions, except in limited circumstances. Pursuant to this, it would clarify the limited circumstances under which a small bank would be asked to broaden the delineation of its assessment area beyond where it has branches, such as where an assessment area is drawn in a discriminatory manner or arbitrarily excludes LMI areas.

Under this tailored approach, both large and small banks would still be required to delineate assessment areas to include the geographies in which a bank has its main office and its branches, as well as the surrounding geographies in which the bank has

originated or purchased a substantial portion of its loans, and may not extend substantially beyond an MSA boundary or beyond a state boundary unless the assessment area is located in a multistate MSA. The Board proposes a technical update to Regulation BB to also include a combined statistical area, in addition to MSAs, as a limitation to branch-based assessment areas. Similarly, the regulatory requirements that assessment area delineations may not reflect illegal discrimination and may not arbitrarily exclude LMI geographies would continue to apply.

2. Loan Production Office-Based and Deposit-Taking ATM-Based Assessment Areas

The Board is considering whether assessment areas should be expanded to include loan production offices (LPOs). Certain banks source loans and other services through LPOs, which are non-depository lending facilities that extend retail lending products to the public and are frequently located outside of branch-based assessment areas. CRA performance associated with these facilities could be evaluated based on bank business models, capacities, and constraints, as well as community needs. For example, if a bank extends only small business or consumer loans from its LPOs and those products constitute a major product line as discussed in Section VI, only those types of loans would be subject to evaluation. Similarly, community development expectations could also be based on the bank's capacity to engage in community development financing and community development services. This approach could provide banks with CRA consideration for, and thereby incentivize, retail lending and community development activity potentially without some of the complexity associated with deposit- or lending-based assessment areas discussed below.

Additionally, the Board is proposing to give banks the option of delineating facility-based assessment areas around deposit-taking ATMs, but they would not be required to do so. Some stakeholders have expressed the view that the current requirement for banks to delineate an assessment area around a deposit-taking ATM is outdated now that customers can use smartphones and other technologies to make deposits. However, if deposits from deposit-taking ATMs generate considerable bank deposits or comprise a comparatively large market share within a community, it may still be appropriate to delineate assessment areas around them.

Request for Feedback:

Question 3.

Given the CRA's purpose and its nexus with fair lending laws, what changes to Regulation BB would reaffirm the practice of ensuring that assessment areas do not reflect illegal discrimination and do not arbitrarily exclude LMI census tracts?

Question 4.

How should the Board provide more clarity that a small bank would not be required to expand the delineation of assessment area(s) in parts of counties where it does not have a physical presence and where it either engages in a

de minimis

amount of lending or there is substantial competition from other institutions, except in limited circumstances?

Question 5.

Should facility-based assessment area delineation requirements be tailored based on bank size, with large banks being required to delineate facility-based assessment areas as, at least, one or more contiguous counties and smaller banks being able to delineate smaller political subdivisions, such as portions of cities or townships, as long as they consist of whole census tracts?

Question 6.

Would delineating facility-based assessment areas that surround LPOs support the policy objective of assessing CRA performance where banks conduct their banking business?

Question 7.

Should banks have the option of delineating assessment areas around deposit-taking ATMs or should this remain a requirement?

D. Deposit-Based or Lending-Based Assessment Areas for Certain Large Banks

For certain large banks that engage in considerable business beyond their branch-based assessment areas, the Board is exploring alternative deposit-based and lending-based ways to delineate additional assessment areas. In considering options for creating new assessment areas that are not facility-based, the Board is also considering the types of banks to which these additional assessment area requirements should apply. The Board would be inclined to require such an approach only for internet banks that do not have physical locations and banks that partner with online lenders that do not have physical loan-making locations. The Board is also considering which approaches should apply to hybrid banks that have traditional branch-based assessment areas but also conduct a substantial majority of lending and deposit-taking beyond their assessment areas. For these banks, the Board is considering whether there is a certain threshold of outside activity that would prompt new assessment areas.

1. Deposit-Based Assessment Areas

The Board is considering the option of establishing deposit-based assessment areas for large banks that provide all or a substantial majority of their products and services entirely via mobile and internet channels. There are currently deposits data gaps that make it difficult to understand how this option would affect banks with different business models and asset sizes and which communities it would impact. Additionally, deposit-based assessment areas also raise considerations of how much burden would be associated with deposits data collection, as discussed in Section XI. Subject to the deposits data limitations discussed above, one option for deposit-based assessment areas would be to trigger the delineation of additional assessment areas when a large bank exceeds a certain threshold of deposits outside of its facility-based assessment areas.

However, based on stakeholder feedback that deposit-based assessment areas could exacerbate CRA hot spots and deserts, it would be important to evaluate the impact of this approach on LMI and other underserved communities.

A deposit-based approach was proposed in the FDIC-OCC CRA notice of proposed rulemaking and adopted in the OCC CRA final rule. The OCC CRA final rule provides, in relevant part, that if a majority of a bank's deposits come from depositors located outside of its branch-based assessment area(s) additional assessment areas would be delineated in areas where a certain percentage of deposits are located.

2. Lending-Based Assessment Areas

Given some of the data challenges with adding deposit-based assessment areas, an alternative approach could be to base additional assessment areas for large banks on concentrations of lending activity. One advantage of lending-based assessment areas is that it is possible to analyze their impact given the availability of HMDA and CRA reporter data, reflecting home mortgage, small business, and small farm lending activity. The Board conducted two separate analyses of possible approaches to delineating additional assessment areas based on concentrations of lending activity outside of branches.

The first used a business model approach based on banks having a substantial majority of lending outside of their branch-based assessment areas plus a concentration of lending at the county level. The second utilized the concentration of lending outside of banks' branch-based assessment areas.

The data used in the various analyses to support the Board's ANPR reflect information that was available at the time that the analyses were conducted.

a. Lending-Based Approach for Large Banks With a Substantial Majority of Lending Outside of Branches

The Board analyzed how lending-based assessment areas might work for large banks that conduct a substantial majority (75 percent or greater) of their lending outside of their facility-based assessment areas. Such an approach would be intended to capture a subset of bank business models, including banks that do not rely principally on branches for extending loans.

The Board's analysis reviewed 2017 HMDA, small business, and small farm data from CRA-reporting banks. The analysis indicated that this approach for delineating lending-based assessment areas may not meet the Board's policy objectives for defining additional assessment areas. The analysis revealed that additional assessment areas would be required for only 33 banks across all three lending categories.

The small number of affected banks reflects two key findings of the analysis: (i) The vast majority of banks make less than a substantial majority of retail loans outside of their assessment areas, and (ii) for the banks that make more than a substantial majority of retail loans outside of their assessment areas, their lending is relatively dispersed rather than concentrated in particular geographic areas. Additionally, as with deposit-based assessment areas, this approach may exacerbate the discrepancies in CRA activity between CRA hot spots and deserts, because the new assessment areas identified under this approach tended to be located in high-density metropolitan areas with multiple active banks. Finally, the analysis indicates that this approach may not substantially increase banks' lending to LMI borrowers in the new assessment areas because the percentage of LMI borrowers is similar between banks that would add new lending-based assessment areas and banks that already have existing facility-based assessment areas.

The Board defined a minimum concentration of lending at the county level needed to delineate a new assessment area in the following way. First, the Board identified banks making 75 percent or more of their retail loans outside of their assessment areas in 2017, by product line. Next, the Board sought to delineate new assessment areas for these banks such that a substantial share of the lending currently outside of branch-based assessment areas would be newly included in lending-based assessment areas. To do so, by product line, the Board calculated a minimum concentration of loans at the county level that would capture approximately 50 percent of the loans outside of branch-based assessment areas that are not currently assessed for CRA within this group of banks. For home mortgage lending, this minimum concentration is 88 loans. Note that this calculation is based on lending of the group of banks making 75 percent or more of their loans outside of branch-based assessment areas and not all lending outside of branch-based assessment areas.

b. Lending-Based Approach for Large Banks With a Concentration of Lending Outside of Their Assessment Areas

The second lending-based approach analyzed by the Board would require a bank to delineate additional assessment areas in counties with sufficient concentrations of lending, regardless of how many loans it makes outside of its branch-based assessment areas. Using 2017 data, the Board examined all banks that are both HMDA reporters and included in FDIC Summary of Deposits (SOD) data.

The analysis examined HMDA mortgage lending only and used two illustrative thresholds of 100 and 250 home mortgage loans, respectively, within a county as a trigger to delineate additional assessment areas. This analysis revealed that of 3,160 banks analyzed, only 167 banks would be required to delineate at least one additional assessment area using a threshold of 100 mortgages loans and only 65 banks would be required to delineate at least one additional assessment area using a threshold of 250 mortgage loans. It is important to recognize that these numbers could increase over time as banks expand their reliance on mobile and online platforms.

In this analysis, a proxy measure was used to determine banks' assessment areas using bank branch location data from the FDIC SOD. If a bank had a branch in a county in 2017, then that county was counted as part of the bank's assessment area(s).

Request for Feedback:

Question 8.

Should delineation of new deposit- or lending-based assessment areas apply only to internet banks that do not have physical locations or should it also apply more broadly to other large banks with substantial activity beyond their branch-based assessment areas? Is there a certain threshold of such activity that should trigger additional assessment areas?

E. Nationwide Assessment Areas for internet Banks

The Board is considering whether to allow internet banks to delineate nationwide assessment areas. Currently, these banks' assessment areas are based on the location of the bank's solitary main office. This results in assessment areas that are much smaller than the bank's actual business footprint. Additionally, the number of new assessment areas triggered for internet banks using the deposit-based or lending-based assessment area approach would vary and, for some of these banks, could be limited. The Board's above-referenced lending-based assessment area analysis indicated that many banks' dispersion of lending activity would make it challenging to delineate additional assessment areas in specific counties. In contrast, nationwide assessment areas would be based holistically on an internet bank's overall business activity.

The designation of a nationwide assessment area would require determining how to conduct performance evaluations for this approach, including for retail and community development activities. Such an approach would also require defining an internet bank for CRA purposes. In the extreme, the definition of internet bank could be limited to banks that exclusively use an online business model to deliver products and services. A hybrid definition might instead allow limited branch-related activity in combination with a substantial majority of activity conducted through online channels.

Request for Feedback:

Question 9.

Should nationwide assessment areas apply only to internet banks? If so, should internet banks be defined as banks deriving no more than 20 percent of their deposits from branch-based assessment areas or by using some other threshold? Should wholesale and limited purpose banks, and industrial loan companies, also have the option to be evaluated under a nationwide assessment area approach?

Question 10.

How should retail lending and community development activities in potential nationwide assessment areas be considered when evaluating an internet bank's overall CRA performance?

IV. Tailoring Evaluations Based on Bank Size and Business Model

The Board is proposing a revised CRA evaluation framework that would consist of two separate tests: A Retail Test and a Community Development Test. Within these tests would be the following four subtests: Retail Lending Subtest, Retail Services Subtest, Community Development Financing Subtest, and Community Development Services Subtest. Retail and community development activities are both fundamental to CRA and essential for meeting the core purpose of the statute. Separately evaluating these activities in a Retail Test and a Community Development Test helps ensure that these activities are appropriately taken into consideration. Having a separate Retail Test and Community Development Test also provides the ability to tailor which tests and subtests

apply to banks based on asset size and other factors. Finally, separate tests facilitate using metrics and benchmarks that are customized to different activities, which allows the use of available data to the greatest extent possible and thereby minimizes burden.

Treatment of Small and Large Retail Banks.

The Board proposes giving small retail banks the option to be evaluated solely under the Retail Lending Subtest, while applying all four subtests to larger retail banks. A bank would receive a conclusion for each applicable subtest in each of its assessment areas. Accordingly, a small bank that chooses to opt in would receive a Retail Lending Subtest conclusion in each assessment area, and a large bank would receive four subtest conclusions in each assessment area. These subtest conclusions in assessment areas would form the foundation for state, multistate MSA, and institution CRA ratings.

Defining Small and Large Banks for CRA Purposes.

The approach described above would establish small bank and large bank categories of retail banks based on institution asset size, and would eliminate the current intermediate small bank category to reduce complexity and create more consistent evaluation standards. Currently, the asset threshold between small and intermediate small banks is $326 million, and the threshold between intermediate small and large banks is $1.305 billion. The Board is seeking feedback on whether to set the asset threshold differentiating between small and large banks at either $750 million or $1 billion, designating banks below this level as small banks and banks above this level as large banks.

Under the proposed test structure, increasing a small bank threshold above the existing $326 million limit would reduce the scope of activities evaluated under CRA for some banks compared to the approach used today. Currently, small banks with assets below $326 million are evaluated on retail lending performance alone, while intermediate small banks with assets between $326 million and $1.305 billion are also evaluated on their community development activities. Although increasing the small bank threshold above the existing limit might result in fewer banks' community development activities evaluated for purposes of CRA, it would also better tailor the compliance and data implications of the proposed Community Development Test only to banks with substantial community development activity.

Small Bank Considerations.

The Board proposes that small retail banks under the Board's proposed threshold would, by default, have their retail lending activities evaluated under the qualitative approach used in the current examination procedures for small banks, rather than the metrics-based approach proposed in Section V. Small banks would also have the ability to opt in to the metrics-based approach at their choosing. The default approach of evaluation under the current qualitative framework would allow for continuity of examination procedures and would more fully account for qualitative performance context factors that may be especially relevant for smaller banks, such as capacity constraints. However, the default option would not deliver the consistency and predictability of the evaluation process desired by many banks and other stakeholders and would increase overall complexity because it requires multiple performance evaluation frameworks.

Another consideration is allowing small banks to have the option of requesting that retail services, community development activities, or both, be considered in addition to the Retail Lending Subtest conclusions when developing CRA ratings. Small banks could opt to have these activities evaluated on a qualitative basis to improve their overall ratings and would not be required to collect the data necessary to be evaluated under the Retail Services Subtest and the Community Development Test. The Board believes that a small retail bank should also continue to be able to achieve any rating, including an “outstanding,” based on its retail lending performance alone, and should not be required to be evaluated on other activities. Section X discusses ratings for small banks in greater detail.

Wholesale and Limited Purpose Banks.

The Board has also considered how to tailor evaluation standards to wholesale and limited purpose banks. Because these banks, by definition, do not conduct retail lending as a significant part of their business, the Board proposes evaluating these banks using only the Community Development Test. The Board anticipates that the evaluation approach used for the Community Development Test, however, would be applied differently to wholesale and limited purpose banks than retail banks. Specifically, although the Board is proposing a community development financing metric that incorporates deposits as a measure of a large retail bank's capacity within an assessment area, the Board is considering alternate measures of capacity for wholesale and limited purpose banks, such as total assets. In addition, as with any bank, wholesale and limited purpose banks would continue to have the option to be evaluated under an approved strategic plan, which allows for tailoring to their unique business models and strategies.

Request for Feedback:

Question 11.

Is it preferable to make the default approach for small banks the current framework, with the ability to opt in to the metrics-based approach, as proposed, or instead the metrics-based approach, with the ability to opt out and remain in the current framework?

Question 12.

Should small retail banks that opt in to the proposed framework be evaluated under only the Retail Lending Subtest? Should large retail banks be evaluated under all four subtests: Retail Lending Subtest, Retail Services Subtest, Community Development Financing Subtest, and Community Development Services Subtest?

Question 13.

Is $750 million or $1 billion an appropriate asset threshold to distinguish between small and large retail banks? Or should this threshold be lower so that it is closer to the current small bank threshold of $326 million? Should the regulation contain an automatic mechanism for allowing that threshold to adjust with aggregate national inflation over time?

V. Retail Test: Evaluation of Retail Lending and Retail Services Performance

The Board proposes using a Retail Lending Subtest—utilizing a metrics-based approach—to evaluate retail lending performance for all large retail banks and small retail banks that opt into the new framework. This approach would result in a small retail bank receiving a Retail Lending Subtest conclusion in each of its assessment areas. The Board also seeks feedback on a Retail Services Subtest, which would apply only to large banks above a specified asset threshold. A large bank would receive separate Retail Lending Subtest and Retail Services Subtest conclusions in each of its assessment areas.

A. Retail Lending Subtest Evaluation Approach

This section proposes a metrics-based approach to a Retail Lending Subtest that leverages practices currently used in CRA examinations combined with more transparent performance expectations. At the heart of this analysis would be evaluating how well a bank serves LMI census tracts, LMI borrowers, small businesses, and small farms. This approach is intended to strengthen CRA's focus on how banks serve the retail credit needs of LMI

communities, and to improve the clarity and consistency of CRA examinations.

First, the Board proposes using a retail lending screen that would determine whether a bank should be eligible for a metrics-based evaluation of retail lending that could result in a presumption of “satisfactory,” or that should instead be evaluated subject to examiner discretion as a result of having relatively low levels of retail lending in an assessment area.

Second, for banks that pass the simple screen, the Board proposes using retail lending distribution metrics to determine whether a bank is eligible for a presumption of “satisfactory” on the Retail Lending Subtest in a specific assessment area. The retail lending distribution metrics comprises two metrics: (a) A

geographic distribution

metric that would evaluate how well a bank is serving LMI census tracts; and (b) a

borrower distribution

metric that would evaluate how well a bank is serving LMI borrowers, small businesses, and small farms in their assessment area overall, regardless of geography. To determine which banks are eligible for a presumption of “satisfactory,” this approach would use tailored, dynamic thresholds that adjust across different communities and that reflect changes in the local business cycle. The Board believes that providing a dashboard—using data through the previous quarter or year, depending on the data source—to show the thresholds for specific assessment areas would facilitate ease of use and enable banks to track their performance over the course of an evaluation period.

To complement the presumption of “satisfactory” approach, the Board is also considering a third step using the same distribution metrics relative to performance ranges set for each Retail Lending Subtest conclusion: “outstanding,” “satisfactory,” “needs to improve,” and “substantial noncompliance.” This would produce a

recommended

Retail Lending Subtest conclusion that an examiner would consider in addition to certain, targeted performance context and qualitative information to reach a

final

Retail Lending Subtest conclusion.

1. Current Structure for Evaluating Retail Lending Activity

In current CRA examinations, retail lending performance is examined under a lending test that differs based on a bank's asset size category (small, intermediate small, and large). The lending test includes quantitative and qualitative criteria, and does not specify what level of lending is needed to achieve “satisfactory” or “outstanding” performance.

Currently, the purpose of evaluating lending activity for both small and large banks is the same—to determine whether a bank has a sufficient aggregate value of lending in its assessment area(s) in light of a bank's performance context, including its capacity and the lending opportunities available in its assessment area(s). For small banks, examiners make a loan-to-deposit calculation based on the balance sheet dollar values at the institution level, and review the number of loans made inside and outside of assessment area(s). For large banks, examiners consider the number and dollar amount of loans in assessment area(s) and the number of loans inside and outside of assessment area(s). These approaches rely on examiner judgment to draw a conclusion about a bank's level of lending.

Pursuant to Regulation BB, CRA examinations today also include an evaluation of the geographic distribution and borrower distribution of a bank's retail lending.

This evaluation leverages a set of local data points referred to as comparators—both demographic comparators and aggregate comparators—that are tailored to each assessment area in which the bank operates.

See

12 CFR 228.22(b).

For the geographic distribution analysis, examiners evaluate the distribution of a bank's retail loans in low-income, moderate-income, middle-income, and upper-income census tracts. Examiners review the geographic distribution of home mortgage loans by income category and compare the percentage distribution of lending to the percentage of owner-occupied housing units in the census tracts. Similarly, in each income category of census tract, examiners compare small business lending to the percentage distribution of small businesses; small farm lending to the percentage distribution of small farms; and consumer lending to the percentage distribution of households in each category of census tract, as applicable.

For the borrower distribution analysis, examiners evaluate the distribution of a bank's retail loans based on specified borrower characteristics, such as the income level of borrowers for home mortgage lending. The comparators used to inform the borrower distribution analysis are families by income level for home mortgage lending; businesses with gross annual revenues of $1 million or less for small business lending; farms with gross annual revenues of $1 million or less for small farm lending; and households by income level for consumer lending.

Examiners complement these distribution analyses by also reviewing the dispersion of a bank's loans throughout census tracts of different income levels in its assessment area(s) to determine if there are conspicuous lending gaps.

2. Stakeholder Feedback on Evaluating Retail Lending

Although many stakeholders expressed support for the consideration of performance context and the qualitative aspects of CRA performance, they raised concerns about a lack of transparency and predictability regarding the amount and nature of retail lending activity required to achieve a particular rating. As explained above, Regulation BB and the related examination procedures require evaluations based on the number and dollar amount of loans, but without a formalized way of translating that analysis into performance expectations.

Stakeholders have also expressed the need for greater consistency across CRA performance standards. CRA evaluations are tailored based on bank size and business strategy; however, these differences can be confusing as banks cross asset thresholds and are subject to different examination procedures. For example, as noted, overall lending activity is evaluated using a loan-to-deposit ratio criterion for small banks and by reviewing the number and amount of loans in a bank's assessment area(s) for large banks.

3. Potential Retail Lending Screen

As a first step to evaluating a bank's retail lending, the Board proposes using a retail lending screen. The screen would measure a bank's retail lending relative to its capacity to lend in an assessment area to determine whether the bank is eligible for a presumption of “satisfactory” using the retail lending distribution metrics, or whether it should instead be more closely evaluated by an examiner.

Using the retail lending screen would ensure that a bank does not receive a presumption of “satisfactory” in assessment areas where it has overall low levels of retail lending relative to deposits, compared to other banks in the assessment area. Without such a screen, a bank with high levels of deposits that originated a very low number of retail loans during an evaluation period might otherwise appear to merit a “satisfactory” conclusion simply because, for example, those loans

happened to be concentrated among LMI borrowers and LMI census tracts.

In each assessment area, the retail lending screen would measure the average annual dollar amount of a bank's originations and purchases of retail loans in the numerator—including home mortgage, small business, and small farm loans—relative to its deposits in the denominator. Both the numerator and denominator of the retail lending screen would be measured in dollars.

The retail lending screen would be measured against a market benchmark that reflects the level of retail lending by other banks in the same assessment area, indicating the aggregate dollar amount of lending a typical bank might be expected to engage in given its level of retail deposits. Specifically, the proposed market benchmark for the retail lending screen would be the percentage of retail lending (in dollars) by all HMDA and CRA reporter banks in an assessment area compared to the aggregate amount of deposits for those banks in that same assessment area. The use of HMDA and CRA reporter data would minimize the data reporting requirements for small banks. To ensure that banks' ability to pass this retail lending screen would not depend on their business strategy (

e.g.,

banks that hold their loans in portfolio rather than sell them into the secondary market), the threshold for this screen would be set at a low level, such as 30 percent of the market benchmark.

The intent would be to focus examiner attention on banks that are significantly underperforming relative to the market benchmark.

The analysis of performance evaluation data, using the Board's publicly available CRA Analytics Data Tables, showed that the frequency of ratings below “satisfactory” increased substantially relative to “high satisfactory” or “outstanding” ratings when a bank's average annual loan-to-deposit ratio fell below 30 percent of the market benchmark. In 2017, the median market benchmark loan-to-deposit ratio for entire MSAs and for non-MSA counties were both approximately 9 percent. The proposed loan-to-deposit ratio is based on the dollar amount of a bank's originations and purchases during the evaluation period. In contrast, the loan-to-deposit ratio used under current small bank examination procedures is based on the dollar amount of loans and purchases on a bank's balance sheet.

Under this approach, banks not meeting the retail lending screen threshold would not be eligible for a metrics-based presumption of “satisfactory” on the Retail Lending Subtest in an assessment area. Instead, examiners would review the bank's aggregate lending, geographic distribution, and borrower distribution in combination with performance context and qualitative aspects of performance.

Request for Feedback:

Question 14.

Is the retail lending screen an appropriate metric for assessing the level of a bank's lending?

4. Retail Lending Distribution Metrics for a Presumption of “Satisfactory”

For banks that pass the retail lending screen, the Board proposes comparing a pair of retail lending distribution metrics against local quantitative thresholds to determine whether a bank is eligible for a presumption of “satisfactory” on the Retail Lending Subtest in an assessment area. For each product line evaluated under the Retail Lending Subtest, the Board proposes evaluating bank activity using

both

a geographic distribution metric and a borrower distribution metric, with each designed to evaluate different but complementary aspects of a bank's retail lending performance, similar to the focus of current examinations.

If a bank's geographic distribution metric and borrower distribution metric both met or exceeded the relevant thresholds, then a bank would receive a presumption of “satisfactory” performance and would be eligible for a “satisfactory” or an “outstanding” conclusion in a specific assessment area.

a. Calculation of Retail Lending Distribution Metrics

The geographic distribution metric would measure the number of a bank's loans in LMI census tracts within an assessment area. For each of the bank's major product lines, the geographic distribution metric would calculate the total number of the bank's originated or purchased loans in LMI census tracts (numerator) relative to the total number of the bank's originated or purchased loans in the assessment area overall (denominator). For mortgage and consumer loans, this would include loans to borrowers of any income level but located within an LMI census tract. For instance, assuming that a bank originated or purchased 25 home mortgage loans in one of its assessment areas during the evaluation period and that five of these were located in LMI census tracts, the geographic distribution metric for home mortgage loans would be:

EP19OC20.000

The borrower distribution metric would measure a bank's loans to LMI individuals (for home mortgages or consumer loans, respectively) or to small businesses (for small business loans) or small farms (for small farm loans) within an assessment area relative to the total number of the bank's corresponding loans in that category in the assessment area overall. For each of the bank's major product lines, the borrower distribution metric would be calculated separately. Options for revising the thresholds for small business lending and small farm lending are discussed in Section VI.

Assuming that a bank originated or purchased 100 home mortgage loans in one of its assessment areas during the evaluation period, and that 20 of these went to LMI borrowers, the borrower distribution metric would be:

EP19OC20.001

To calculate the retail lending distribution metrics, the Board's proposed approach would use the number of a bank's loans, not the dollar amount of those loans, in order to treat different-sized loans equally within product categories. For example, using an approach based on the number of loans, a $250,000 mortgage to a

moderate-income household would count the same as an $80,000 mortgage to a low-income household. This approach emphasizes the number of households, small businesses, and small farms served, and avoids weighting larger loans more heavily than smaller loans, as would occur when using dollar amounts. This better captures the importance and responsiveness of smaller dollar loans to the needs of lower-income borrowers and smaller businesses and farms, and does not provide an incentive to make larger loans to reach performance levels.

For each product line evaluated using the retail lending distribution metrics, the Board proposes aggregating the calculation of the retail lending distribution metrics in certain aspects for simplicity and clarity. This would be a change from current practice, whereby examiners separately evaluate a bank's performance in each income category (low-, moderate-, middle-, and upper-); each loan category within a product line (

e.g.,

home purchase loans, home refinance loans); and each year. The proposed approach would combine low- and moderate-income categories under a single metric calculation. The proposed approach would also aggregate all categories of home mortgage loans together when evaluating home mortgage lending, all categories of small business loans together when evaluating small business lending, and all types of small farm loans together when evaluating small farm lending. By comparison, the Board believes that there could be different considerations for evaluating consumer loan categories separately (

e.g.,

motor vehicle lending separately from credit card lending) rather than as one consumer product line. Lastly, the Board proposes to combine all years of the evaluation period together under a single metric calculation.

Calculating the retail lending distribution metrics on a more aggregated basis for each product line would simplify the number of calculations needed to determine whether a bank qualified for the presumption of “satisfactory.” This approach would result in only one calculation needed for each distribution metric for each product line during an evaluation period. Another benefit of aggregating the metrics in this manner is that, for small banks and rural banks with relatively fewer retail loan originations, this approach would more likely capture a sufficient number of loans for use in the metrics.

The greater simplicity would also have some drawbacks. Combining low- and moderate-income categories together could potentially reduce the focus on lending in low-income census tracts and to low-income borrowers relative to lending to moderate-income tracts and moderate-income borrowers. A potential drawback to combining all home mortgage lending products into one category is that the evaluation of home purchase lending could be obscured when combined with home refinance loans, particularly when levels of home mortgage refinancing increase.

Complicating this decision further is that, for loans originated in 2018, HMDA reporting requirements for home mortgage loans changed and now include, for certain reporters, home equity lines of credit (HELOCs) that are secured by a dwelling, regardless of loan purpose (unless otherwise exempt).

See, e.g.,

12 CFR 1003.2(e); 82 FR 43088 (Sept. 13, 2017); 85 FR 28364 (May 12, 2020). As such, HELOCs reported in HMDA data may include loans secured by a dwelling but not connected to a dwelling-related purpose (

i.e.,

home purchase, home refinance, or home improvement).

b. Benchmarks for the Retail Lending Distribution Metrics

The Board proposes using two different kinds of benchmarks for each distribution metric as the building blocks for setting quantitative thresholds for the retail lending distribution metrics. First, a community benchmark would reflect the demographics of an assessment area, such as the number of owner-occupied units, the percentage of low-income families, or the percentage of small businesses or small farms. Second, a market benchmark would reflect the aggregate lending to targeted areas or targeted borrowers by all lenders operating in the same assessment area. Using these two kinds of benchmarks will help tailor the Retail Lending Subtest to the lending opportunities, needs, and overall lending taking place in an assessment area. Importantly, the Board believes that these benchmarks will focus CRA evaluations on the local communities being served by banks and will incorporate aspects of performance context directly into the metrics.

Benchmarks grounded in local data are used today in CRA examinations, and the Board's approach seeks to translate these comparators into performance expectations in a consistent and transparent way. As discussed above, in current CRA performance evaluations, the benchmarks are referred to as “comparators.” The community benchmark is currently referred to as the demographic comparator. The market benchmark is currently referred to as the aggregate comparator.

Within each retail lending product line evaluated under the Retail Lending Subtest, the geographic distribution metric would be compared to a community benchmark and a market benchmark, and the borrower distribution metric would be compared to a community benchmark and a market benchmark. Table 1 provides an overview of the benchmarks under consideration by the Board and their respective data sources.

Table 1—List of Benchmarks for Retail Lending Distribution Metrics and Data Sources

Distribution metric

Community benchmark

Market benchmark

Mortgage

Geographic:

Data Point

Percentage of owner-occupied residential units in LMI census tracts in assessment area

Percentage of home mortgages in LMI census tracts by all lender-reporters in assessment area.

Data Source

American Community Survey (Census)

HMDA Data.

Borrower:

Data Point

Percentage of LMI families in assessment area

Percentage of home mortgages to LMI borrowers by all lender-reporters in assessment area.

Data Source

American Community Survey (Census)

HMDA Data.

Small Business

Geographic:

Data Point

Percentage of small businesses with gross annual revenue less than $1M in LMI census tracts in assessment area

Percentage of small business loans in LMI census tracts by all lender-reporters in assessment area.

Data Source

Dun & Bradstreet

CRA Data.

Borrower:

Data Point

Percentage of small businesses with gross annual revenue less than $1M in assessment area

Percentage of small business loans to small businesses with gross annual revenue less than $1M by all lender-reporters in assessment area.

Data Source

Dun & Bradstreet

CRA Data.

Small Farm

Geographic:

Data Point

Percentage of small farms with gross annual revenue less than $1M in LMI census tracts in assessment area

Percentage of small farm loans in LMI census tracts by all lender-reporters in assessment area.

Data Source

Dun & Bradstreet

CRA Data.

Borrower:

Data Point

Percentage of small farms with gross annual revenue less than $1M in assessment area

Percentage of small farm loans to small farms with gross annual revenue less than $1M by all lender-reporters in assessment area.

Data Source

Dun & Bradstreet

CRA Data.

Consumer

Geographic:

Data Point

Percentage of households in LMI census tracts in assessment area

Percentage of consumer loans in LMI census tracts by all lender-reporters in assessment area.

Data Source

American Community Survey (Census)

To be determined.

Borrower:

Data Point

Percentage of LMI households in assessment area

Percentage of consumer loans to LMI borrowers by all lender-reporters in assessment area.

Data Source

American Community Survey (Census)

To be determined.

To limit data burden for small banks that opt in to the metrics-based approach, the Board proposes using HMDA and CRA reporter data to construct the market benchmark for mortgage, small business, and small farm product lines. In calculating the market benchmark for mortgage lending, the Board also proposes including all mortgage lenders, not just depository institutions. This is intended to capture the full breadth of lending to LMI borrowers in constructing the benchmark.

As noted in Table 1, the Board has not yet identified a data source for the market benchmark for consumer loans due to the lack of consistent data collection on consumer lending.

To use the same kind of benchmarks for consumer loans as for other product lines, market benchmarks would be needed that measure: (1) The percentage of consumer lending in LMI census tracts as a comparison point for the geographic distribution metric; and (2) the percentage of consumer lending to LMI borrowers as a comparison point for the borrower distribution metric.

Regulation BB provides large banks with the option to collect and maintain consumer loan data for one or more categories of consumer loans in the event that a bank opts to have its consumer lending evaluated.

See

12 CFR 228.42(c)(1). Regulation BB does not require small banks or intermediate small banks to collect, maintain, or report loan data. Instead, examiners evaluate these banks using information maintained in a bank's internal operating systems or gathered from individual loan files.

The Board is considering the use of commercially available data from one or more of the nationwide credit reporting agencies to establish a market benchmark for the geographic distribution metric based on the rate of new account openings in LMI census tracts. This could facilitate a metrics-based approach to evaluate consumer lending without additional data reporting requirements. A downside of this approach is that it would not provide a measure of consumer lending to LMI borrowers that is necessary to create a market benchmark for the borrower distribution metric for consumer lending. However, it could be used to create a market benchmark for the geographic distribution metric for certain consumer lending products, such as motor vehicle loans and credit cards. Alternatively, consumer lending could continue to be evaluated under current examination procedures, which do not incorporate a standardized benchmark, or the Board could consider other data sources to develop benchmarks for consumer lending.

c. Establishing Quantitative Thresholds Based on Community and Market Benchmarks

The Board proposes using the community and market benchmarks to set the quantitative thresholds used for determining whether a bank receives the presumption of “satisfactory.” Through this process, the Board believes that the quantitative thresholds in place for a presumption of “satisfactory” will directly incorporate aspects of performance context.

The approach for setting thresholds would involve first calibrating each benchmark to align with the Board's expectations for “satisfactory” performance sufficient to obtain the certainty of a presumption. This calibration would involve multiplying each benchmark by a fixed percentage. The Board would then refer to the calibrated benchmarks as the community threshold and market threshold, respectively. While the same fixed percentage would be used to calibrate each benchmark in each assessment area, the resulting thresholds would, in fact, be tailored for local community and market conditions

because the benchmarks are based on local data specific to each assessment area.

For each distribution metric, the lower of the community threshold or market threshold would be selected as the binding threshold. For example, for the geographic distribution metric, if the community threshold was 30 percent and the market threshold was 35 percent, then the community threshold of 30 percent would be used as the binding threshold for this metric.

There are several benefits of the proposed approach to setting quantitative thresholds for a presumption of “satisfactory” on the Retail Lending Subtest as described above. One benefit would be providing a bank with greater certainty about CRA performance expectations in an assessment area because the thresholds would be tailored to the different conditions in different local communities across the country. Rather than setting a static threshold level across the country that might be too high or too low in certain areas, this customized approach would facilitate a bank's ability to rely on the thresholds in each of its assessment areas.

Another benefit is that the Board's approach would automatically adjust the threshold levels over time in a way that reflects changes in the business cycle because the market benchmarks reflect overall lending activity in each assessment area. This approach could reduce the instances in which the Board would need to adjust the threshold levels through a rulemaking or other regulatory action. If, for example, a market downturn affected an assessment area by making LMI lending more difficult, the downturn would likely have a similar effect on all lenders in an area, thereby causing the market benchmark to decline. Because the proposed approach would set a threshold by selecting the lower of the community threshold or market threshold, the decline in the market threshold itself during a downturn could have the effect of lowering the applicable threshold. Conversely, if overall LMI lending opportunities expanded, the threshold associated with the lower of the community threshold or market threshold may increase, creating greater expectations of local banks to make loans in LMI tracts, to LMI borrowers, and to small businesses and small farms.

On the other hand, thresholds could be set low in areas where credit markets as a whole are underserving LMI census tracts, LMI borrowers, or both, which could have the effect of providing the presumption of “satisfactory” too often in communities with significant unmet credit needs. An approach that set performance standards too low could fail to fulfill one of the core purposes of CRA, which is to encourage banks to serve LMI communities. Additionally, given CRA's nexus with fair lending laws and the broader context of CRA as one of several complementary laws that address inequities in credit access, the Board is also mindful of analyzing how the proposed approach to setting thresholds would impact majority-minority assessment areas relative to other assessment areas. As part of its ongoing analysis of threshold options, the Board intends to closely analyze these issues.

d. Meeting Quantitative Thresholds Across Retail Product Lines

In addition to requiring that a bank meet the binding thresholds for both distribution metrics for a specific product line, the Board also proposes that banks should meet the binding thresholds across all retail lending product lines evaluated under the Retail Lending Subtest in order to receive a presumption of “satisfactory.” For example, if a bank were evaluated based on its home mortgage and small business lending in an assessment area, the bank would need to meet or exceed both distribution metric thresholds for its mortgage lending

and

both distribution metric thresholds for its small business lending—overall, a set of four thresholds. An approach that allowed such a bank to receive the presumption based on only one of its retail lending product lines could result in overlooking major product lines where the bank failed to serve LMI communities or LMI borrowers.

Some stakeholders have expressed concern that requiring banks to pass a series of thresholds in an assessment area could be onerous and complex for banks evaluated under multiple retail lending product lines. The Board seeks to lessen this concern by only evaluating major product lines under the Retail Lending Subtest, which is discussed in more detail in Section VI. The Board also seeks to mitigate this concern by using the same metrics for the presumption of “satisfactory” approach and the performance ranges approach described in Section V, and by providing simple dashboards to reduce complexity and make the thresholds transparent.

e. Ease of Use: Providing Dashboards To Track Progress

The proposed approach is intended to help advance the objectives of certainty and transparency in setting CRA performance expectations for retail lending, and the Board is interested in ways to make the approach easy to adopt for banks and for the public. To this end, the Board is exploring providing banks with an online portal with dashboards, as shown in Figure 1, that would show thresholds for each major product line for a specific assessment area, with updates made on a quarterly or annual basis, as applicable. This would enable banks to track their own performance throughout an evaluation period against the relevant standards. For HMDA and/or CRA reporters, the dashboards could display a bank's metrics calculations to date in addition to the applicable thresholds.

EP19OC20.002

f. Limited Circumstances To Rebut the Presumption

The Board believes that granting a presumption of “satisfactory” can provide banks with greater certainty about performance expectations and their results on the Retail Lending Subtest. To preserve this certainty, the Board is considering allowing examiners to rebut a “satisfactory” presumption in a specific assessment area only in cases of consumer compliance violations involving discrimination and other illegal credit practices, as specified in Section X. Discrimination and other illegal credit practices can be indicative of performance that is lower than the metrics and quantitative thresholds would otherwise indicate. The process for rebutting a presumption in an assessment area would not change the process for potentially downgrading a rating for an institution overall. Discrimination and other illegal credit practices would also be considered separately under the ratings provisions, as discussed in Section X.

Request for Feedback:

Question 15.

Are the retail lending distribution metrics appropriate for all retail banks, or are there adjustments that should be made for small banks?

Question 16.

Should the presumption of “satisfactory” approach combine low- and moderate-income categories when calculating the retail lending distribution metrics in order to reduce overall complexity, or should they be reviewed separately to emphasize performance within each category?

Question 17.

Is it preferable to retain the current approach of evaluating consumer lending levels without the use of standardized community and market benchmarks, or to use credit bureau data or other sources to create benchmarks for consumer lending?

Question 18.

How can the Board mitigate concerns that the threshold for a presumption of “satisfactory” could be set too low in communities underserved by all lenders?

5. Threshold Levels for Presumption of “Satisfactory”

A foundational part of the presumption of “satisfactory” approach is determining where to set the threshold level for this presumption. Threshold levels that are set too low could provide a presumption of “satisfactory” for too many banks and potentially erode CRA performance over time due to inadequate incentives. Threshold levels that are set too high could be seen as unachievable and provide few banks with the certainty of obtaining a presumption.

a. Overview of Proposed Threshold Levels

The Board has conducted an analysis of potential threshold levels for a presumption of “satisfactory,” and this section suggests a threshold level for the retail lending distribution metrics. This threshold level would establish the fixed percentages for calibrating the community benchmarks and market benchmarks for purposes of identifying the level of performance necessary to obtain a presumption of “satisfactory.”

Specifically, the threshold level would set the “satisfactory” presumption level at 65 percent of the community benchmark and 70 percent of the market benchmark. An example illustrates this approach using the borrower distribution metric for mortgage lending. If the community benchmark shows that 30 percent of families in an assessment area are LMI, then the community threshold would be 19.5 percent (30 percent times 65 percent). If the market benchmark shows that 35 percent of mortgage originations in the assessment area are to LMI borrowers, then the market threshold would be 24.5 percent (35 percent times 70 percent). Because the community threshold is lower than the market threshold, a bank's performance on the borrower distribution metric for mortgage lending (which measures the percentage of a bank's mortgage lending to LMI borrowers) would need to meet or exceed the binding threshold of 19.5 percent in order to earn the presumption of “satisfactory.”

b. Analysis of Proposed Threshold Level Using CRA Analytics Data Tables

To understand the impact of different threshold levels for the retail lending distribution metrics using past CRA examinations, the Board used the CRA Analytics Data Tables. These data tables combine publicly available information, proprietary data, and data that the Board compiled from past CRA performance evaluations. In total, the CRA Data Analytics Tables include data from a stratified random sample of approximately 6,300 performance evaluations from 2004 to 2017, with the sampling designed to capture the range of bank sizes, regulatory agencies, stages of the business cycle, and performance ratings.

The Board used the CRA Analytics Data Tables to evaluate two related issues. First, the data were used to identify threshold options that would

likely provide a presumption of “satisfactory” performance for banks that had received assessment area conclusions or ratings of “high satisfactory” or “outstanding” on the lending test in their past examinations. Second, the data were used to identify options that were not likely to provide a presumption for banks that had received assessment area conclusions or ratings of “needs to improve” or “substantial noncompliance” lending performance on past examinations. In this way, the Board's analysis sought to identify the level of performance on the proposed Retail Lending Subtest that would be strongly associated with a conclusion of “satisfactory” or better based on past performance evaluations.

Based on this analysis of past examinations using the CRA Analytics Data Tables, the Board identified the threshold level that separates “high satisfactory” or “outstanding” performance from “needs to improve” or “substantial noncompliance” performance on past examinations. The Board first analyzed how many individual assessment areas would have received the presumption of “satisfactory” using the threshold level set at 65 percent of the community benchmark and at 70 percent of the market benchmark. This analysis showed a presumption of “satisfactory” performance being granted to over 70 percent of assessment areas with a “high satisfactory” or “outstanding” on a past examination and less than 15 percent of the assessment areas with a “needs to improve” or “substantial noncompliance” on a past examination.

The sample used to conduct this analysis was limited to assessment areas for which the bank in question: (1) Passed the retail lending screen (limiting the sample to large banks, for which the necessary data was available); and (2) had some amount of community development lending reported in its performance evaluation. These restrictions were imposed so that the sample would be limited to banks whose lending test performance conclusions were most tightly tied to the borrower income and geographic distribution of their loans. Banks with low levels of retail or community development lending could have received a “needs to improve” or “substantial noncompliance” conclusion or rating on the lending test despite a good distribution of retail lending due to this low level of lending, so these observations were dropped from this analysis, which was intended to focus solely on the distribution metrics.

To understand instances where threshold levels would have provided a different result compared to past examinations, the Board also undertook a review of a sample of performance evaluations where the CRA examination conclusions on past examinations did not match the presumption approach using the retail lending distribution metrics. For banks that received a “needs to improve” in an assessment area on the existing lending test but would have passed the distribution metric based on the threshold level described above, the review found that the most common reason given in the performance evaluation was a low absolute level of either retail or community development lending. Substantive fair lending or unfair or deceptive acts or practices violations also explained some of these outliers. The Board's proposals to use a retail lending screen and to allow discrimination or other illegal credit practices to rebut the presumption of “satisfactory” are intended to address these kinds of situations.

Conversely, where applying the distribution metrics would not have resulted in the bank receiving a presumption of “satisfactory” performance in an assessment area but the assessment area conclusion recorded in the past performance evaluation was “satisfactory” or better, the conclusion frequently was justified in the performance evaluation by a perceived compensating factor. For example, in some cases, a high percentage of loans in LMI geographies was viewed as making up for a low percentage of loans to LMI borrowers. Another common reason was the examiner making use of different comparators, or making adjustments to the comparators, relative to the presumption of “satisfactory” approach discussed above. The presumption of “satisfactory” proposal would increase rigor and consistency, and reduce uncertainty caused by examiner discretion. This analysis supports the conclusion that the proposed approach, in combination with the retail lending screen and the limited rebuttals of a presumption, would follow the same criteria and guidelines that banks would have been evaluated under in the past, but would do so with improved clarity, transparency and consistency.

To better understand the potential impact of a threshold level set at 65 percent of the community benchmark and 70 percent of the market benchmark, the Board also analyzed how the proposed threshold level would perform for banks of different sizes, locations, and market conditions. To this end, using a sample of 7,067 assessment areas from the CRA Analytics Data Tables, the Board determined how frequently banks would obtain a presumption of “satisfactory” performance in an assessment area at different points in the market cycle, in metropolitan and nonmetropolitan areas, and for different bank asset sizes.

For each assessment area in the publicly available merged data table, the analysis used the available data to calculate each component necessary to retroactively apply the retail lending distribution metrics to banks' home mortgage and small business lending activities in individual assessment areas for a given examination. To be included in this analysis, a loan product had to constitute a major product line, as described in Section VI, in that assessment area. Loan counts were used to approximate the major product line threshold to account for the lack of loan dollar amount data for small banks in the merged data table. The banks' geographic and borrower distribution metrics, as well as the community and market benchmarks, were calculated for each assessment area, using HMDA and CRA small business reported data or loan data extracted from performance evaluations for small banks where applicable. If all of the data necessary to calculate the retail distribution metrics and benchmarks were available then each major product line was tested using the thresholds of 65 percent for the community benchmark and 70 percent for the market benchmark. Some assessment areas were not scored due to lack of data or other data quality issues, but of the 7,069 assessment areas that were scored, 63 percent received the presumption.

Results of these comparisons are shown in Table 2. Examination years from 2005 through 2009 are defined as falling in a boom period, from 2010 through 2013 are defined as falling in a downturn period, and from 2014 through 2017 are defined as falling in a recovery period. Performance evaluations generally cover lending over a period of years prior to the actual examination date, so performance evaluations even into 2009 were covering loans made prior to the financial crisis. Assessment areas were defined as metropolitan if they were located in a metropolitan statistical area and as nonmetropolitan if they were not. Finally, banks were divided into categories of less than $300 million in assets, between $300 million and $1 billion, between $1 billion and $50 billion, and greater than $50 billion.

Table 2—Percent of Assessment Areas Obtaining Presumption Across Different Business Cycles, Locations, and Banks of Different Asset Sizes

Scenario

Category

Result

Number of

assessment areas

Percent

Market Cycle

Boom

Pass

871

Not Pass

444

Downturn

Pass

1,755

Not Pass

970

Recovery

Pass

1,836

Not Pass

1,191

Assessment Area Location

Nonmetropolitan

Pass

1,389

Not Pass

840

Metropolitan

Pass

3,073

Not Pass

1,765

Asset Category

<$300 Million

Pass

423

Not Pass

288

$300 Million to $1 Billion

Pass

901

Not Pass

467

$1 to $50 Billion

Pass

2,118

Not Pass

1,324

>$50 Billion

Pass

1,020

Not Pass

526

Under the proposed threshold levels, the retail lending distribution metrics grant the presumption of “satisfactory” to similar percentages of assessment areas across the three phases of the market cycle, metropolitan and nonmetropolitan areas, and bank asset sizes. The share of assessment areas meeting this potential presumption standard falls slightly over the course of the previous economic cycle from boom, to downturn, to recovery period, starting at 66 percent and falling to 61 percent. Metropolitan and nonmetropolitan bank assessment areas met the potential presumption standard in 64 and 62 percent of cases, respectively. Finally, there was some variation in the share of assessment areas meeting the standard across bank sizes, without a clear pattern by size. For banks with less than $300 million in assets, 59 percent of assessment areas would meet the presumption, compared to 66 percent of the largest bank assessment areas.

Overall, this analysis suggests that the proposed metrics-based approach appropriately tailors for different economic circumstances, geographies, and bank sizes.

Data constraints make it difficult to precisely estimate the figure for the smallest banks because the data are neither as complete nor as precise as the data for large banks. For example, although large banks report assessment area boundaries at the census tract level, small and intermediate small bank assessment areas (derived from extracting data from performance evaluations) are generally recorded only at the county level. In cases when a small or intermediate small bank took only part of a county in its assessment area, the Board was not able to identify which census tracts within that county were included. As a result, the Board's analysis calculated the presumption of “satisfactory” performance thresholds for specific assessment areas based on benchmarks for the full county, even when the bank took a partial county. The Board also analyzed how the retail lending screen would work in conjunction with the retail lending distribution metrics by comparing bank performances using

both

metrics approaches for large retail banks, because the data to assess the impact of the screen on small banks and intermediate small banks is not currently available. This analysis found that the retail lending screen slightly decreased the share of large bank assessment areas receiving the presumption, to about 58 percent for banks above $1 billion in asset size.

Request for Feedback:

Question 19.

Would the proposed presumption of “satisfactory” approach for the Retail Lending Subtest be an appropriate way to increase clarity, consistency, and transparency?

Question 20.

Is the approach to setting the threshold levels and a potential threshold level set at 65 percent of the community benchmark and at 70 percent of the market benchmark appropriate?

Question 21.

Will the approach for setting the presumption for “satisfactory” work for all categories of banks, including small banks and those in rural communities?

6. Using “Performance Ranges” to Complement the Presumption of “Satisfactory”

To provide additional certainty, the Board proposes using the retail lending distribution metrics and benchmarks to establish performance ranges for each recommended conclusion—“outstanding,” “satisfactory,” “needs to improve,” and “substantial noncompliance.”

a. Overview of Performance Ranges Approach

Performance ranges could be used to help reach Retail Lending Subtest conclusions in two ways. First, when a bank receives the presumption of “satisfactory,” this approach would provide transparency and consistency about the level of performance that would merit upgrading to an “outstanding.” Second, when a bank does not receive the presumption of “satisfactory,” the performance ranges could help provide greater consistency and predictability on which of the four possible conclusions the bank receives on the Retail Lending Subtest. In these two situations, the

recommended

conclusions developed through the performance ranges approach could be combined with an examiner's review of specific performance context factors along with any details about the bank's specific activities to reach a

final

conclusion for the Retail Lending Subtest.

For each product line evaluated under the Retail Lending Subtest in an assessment area, the Board would derive performance ranges from community benchmarks and market benchmarks, similar to the approach to calculate the threshold for a presumption of “satisfactory.” The Board would then compare how well a bank performed on the retail lending distribution metrics relative to these performance ranges. However, while the presumption test would combine low- and moderate-income groups for each distribution metric, the performance ranges would assess performance separately for low-income and moderate-income

borrowers. This would focus more attention (that of banks, examiners, and interested members of the community) on how a bank is serving the low-income segment of the population, in addition to the broader LMI category.

The Board would compute a weighted average to determine how well the bank performed on different components of the retail lending distribution metrics relative to the performance ranges in order to reach an overall recommended assessment area conclusion on the Retail Lending Subtest.

Averaging the different components of the retail lending distribution metrics would allow excellent performance in one part of a bank's retail lending to potentially offset lower performance in another aspect of that lending. This approach could address feedback from some stakeholders that raised concerns about the presumption of “satisfactory” approach reducing the retail lending evaluation to a pass-fail test.

The different components (geographic and borrower distribution metrics, low-income and moderate-income categories, and each major product line) could be weighted by the amount of business that the bank conducts in each product line, and, within each product line, by the value of the community benchmark. The proposed community benchmarks are the share of LMI households, small businesses or farms, or households or establishments in LMI neighborhoods, as applicable, in the assessment area. The weighting would be intended to ensure that the bank's recommended conclusion based on the performance ranges appropriately reflects both the bank's business model (giving more weight to products the bank specializes in for each assessment area) and the credit opportunities and needs in that assessment area.

Another benefit of using the performance ranges approach in addition to a presumption of “satisfactory” approach would be to encourage excellent performance by providing clear ranges for an “outstanding.” This is intended to address concerns that banks currently outperforming the threshold for a presumption of “satisfactory” could reduce their levels of performance closer to the threshold level.

b. Incorporating Targeted Performance Context and Qualitative Aspects of Performance Into the Performance Ranges Approach

In addition to seeking greater clarity in CRA performance evaluations, stakeholders have also expressed support for considering performance context and other qualitative aspects in CRA examinations. Although the approach to setting thresholds described in this section already incorporates key aspects of performance context information through the use of the quantitative benchmarks for each assessment area that are calibrated to local data, it is also important to consider the limited aspects of performance context not considered in the metrics, including qualitative information about performance. For example, a bank with capacity and constraint issues may deserve a “satisfactory” conclusion instead of “needs to improve” if additional lending would not be consistent with safety and soundness considerations. Further, performance context and qualitative aspects of lending could merit an increase from “satisfactory” to “outstanding” when considered cumulatively.

Under the proposed approach, examiners would consider a combination of factors showing responsiveness, such as the margin by which a bank surpasses the thresholds applicable to the retail lending distribution metrics, flexible or innovative lending products and programs, activities undertaken in cooperation with MDIs, women-owned financial institutions, or low-income credit unions that help meet the credit needs of local communities in which these institutions are respectively chartered,

and the bank's record of taking action, if warranted, in response to written comments submitted to the bank about its performance in responding to the credit needs in its assessment area(s).

12 U.S.C. 2903(b).

For example, a bank that falls within the “satisfactory” range of performance could be considered to have an “outstanding” retail lending record by forming lending consortiums with, or purchasing loans originated by, MDIs. Providing a list of these kinds of activities related to “outstanding” performance could provide additional transparency and consistency when considering performance context and qualitative information.

Unlike current examination procedures, this approach would specifically exclude using performance context based on economic or other conditions affecting the assessment area as a whole. Any such factors that would either limit or bolster lending in LMI tracts, or to LMI borrowers or small businesses or farms, would generally already be reflected in the benchmarks. As a result, examiners would be restricted to using bank-specific performance context factors that affect the bank being evaluated differently than its in-market peers.

Request for Feedback:

Question 22.

Does the performance ranges approach complement the use of a presumption of “satisfactory”? How should the Board determine the performance range for a “satisfactory” in conjunction with the threshold for a presumption of “satisfactory”? How should the Board also determine the performance ranges for “outstanding,” “needs to improve,” and “substantial noncompliance”?

Question 23.

Should adjustments to the recommended conclusion under the performance ranges approach be incorporated based on examiner judgment, a predetermined list of performance context factors, specific activities, or other means to ensure qualitative aspects and performance context are taken into account in a limited manner? If specific kinds of activities are listed as being related to “outstanding” performance, what activities should be included?

B. Retail Services Subtest Evaluation Approach

The Board proposes a Retail Services Subtest that would use a predominately qualitative approach, while incorporating new quantitative measures, and that would apply only to large retail banks. In contemplating how to evaluate retail services, the Board seeks to encourage banks to offer important services in LMI communities; to increase transparency of evaluation criteria; and to account for changes in the way some customers interact with their banks, including the widespread use of mobile or online banking and the declining number of bank branches. As many banks nationwide closed their branch lobbies in response to the COVID-19 pandemic, consumers have relied more on self-service delivery channels such as ATMs, online banking, and mobile banking services. At the same time, branches remain a vital component of providing banking services to many LMI communities, as well as many rural communities.

1. Current Structure for Evaluating Retail Services Activity

Retail services are currently evaluated only for large retail banks under the large bank service test. The evaluation of retail services incorporates quantitative and qualitative criteria, but does not specify a level of retail services activity that is tied to certain performance conclusions.

Under Regulation BB, examiners review the following four factors when evaluating a bank's retail services activity: (1) The distribution of branches among low-, moderate-, middle-, and upper-income census tracts; (2) an institution's record of opening and closing branches and its effects,

particularly regarding those branches located in LMI census tracts or primarily serving LMI individuals; (3) the availability and effectiveness of alternative (subsequently to be referred to as non-branch) delivery systems

for delivering retail banking services in LMI census tracts and to LMI individuals; and (4) the range of services provided in low-, moderate-, middle-, and upper-income census tracts and the degree to which the services are tailored to meet the needs of those census tracts.

Regulation BB provides a non-exhaustive list of “alternative (non-branch) delivery systems” which include: “ATMs, ATMs not owned or operated by or exclusively for the bank, banking by telephone or computer, loan production offices, and bank-at-work or bank-by-mail programs.” 12 CFR 228.24(d)(3).

See

12 CFR 228.24(d).

The primary emphasis for the large bank retail services test is on branches. Examiners evaluate the distribution of branches by comparing the percentage of branches and ATMs among low-, moderate-, middle-, and upper-income census tracts to the percentage of the population that resides in these tracts, particularly LMI tracts. Examiners also consider the reasonableness of business hours and services offered at branches and whether there is any notable difference between hours of operation and services offered at branches in LMI tracts compared to branches in middle- and upper-income tracts. Lastly, examiners analyze a bank's record of opening and closing branches relative to its current branch distribution and the impact of branch openings and closings, particularly on LMI census tracts or individuals.

See

12 CFR 228.24(d)(2); Q&A § __0;.24(d)—1.

The evaluation of retail banking services relies on quantitative data from the bank's public file to assess the number of branches in an assessment area and the banking services provided, including the hours of operation and available products at each branch. Examiners have discretion to review these data in light of performance context, but there is little guidance on the factors that should be considered. Under current examination procedures, non-branch delivery channels are considered only to the extent that these channels are effective alternatives in providing services to LMI individuals and to LMI census tracts.

See

Q&A § __.24(d)—1.

In addition to delivery systems, examiners consider any other information provided by a bank related to both retail products and services, such as the range of products and services generally offered at their branches, transaction fees, and the degree to which services are tailored to meet the needs of particular geographies.

Current guidance explains that examiners will consider products and services that improve access to financial services, or decrease costs, for LMI individuals. Examiners will also review data regarding the costs and features of deposit products, account usage and retention, geographic location of accountholders, and any other relevant information available demonstrating that a bank's services are tailored to meet the convenience and needs of its assessment area(s), particularly LMI geographies or LMI individuals.

However, there is no guidance on how products and services activities will be weighed in deriving retail test conclusions or the data used to evaluate performance. Additionally, banks typically collect this type of information on products and services at the institution level. As a result, examiners do not typically have the data needed to evaluate differences in products and services across assessment areas and this component receives minimal weight in determining assessment area conclusions for the service test.

See Q&A § __.24(a)—1.

See

Q&A § __.24(d)(4)—1.

2. Stakeholder Feedback on Retail Services

Some community group stakeholders expressed support for CRA's role in encouraging banks to maintain branches in LMI communities and for the current structure of the retail services evaluation. Community group and industry stakeholders expressed support for clearer standards for evaluating products and a more robust analysis of products, and advocated for an approach to evaluating retail services that relies on more data and standard measures of performance.

Community group stakeholders have expressed a range of opinions regarding the primary emphasis on branches in the current retail services evaluation based on their historic importance in providing consumers, particularly LMI individuals, with home mortgage loans and basic banking services and providing credit to small businesses.

Some community group stakeholders worry that removing the primary emphasis on the location of branches in the evaluation of retail services could hasten the pace of branch closures. This is supported by research findings that current CRA requirements are associated with a lower risk of branch closure, particularly in neighborhoods with fewer branches and in major metropolitan areas.

See

Ding and Reid, “The Community Reinvestment Act (CRA) and Bank Branching Patterns.”

See id.

Industry stakeholders have suggested that greater weight should be placed on the evaluation of non-branch delivery channels given ongoing trends in the banking industry. Although branches were still the most widely used bank channel prior to the COVID-19 pandemic, branch usage overall has declined in recent years. Community group stakeholders expressed support for giving a bank more credit for non-branch delivery channels if the bank maintains data demonstrating corresponding benefits to LMI consumers.

Community group stakeholders have also expressed concern that a reduced focus on retail services could result in banks offering fewer products and services to LMI individuals and in LMI census tracts. These stakeholders expressed support for an enhanced evaluation of banking products that places greater emphasis on assessing deposit account features and their usage, with a particular focus on products and services for LMI individuals. Some community group stakeholders also suggested that banks should be assessed on the impact of their products, not simply upon usage.

3. Proposed Retail Services Subtest Framework

The Board proposes a Retail Services Subtest for large banks that would evaluate retail services under two components: (1) Delivery systems; and (2) deposit products. For the delivery systems component, the Board proposes evaluating the distribution of a bank's branches, branch-based services (

e.g.,

hours of operation, bilingual services, disability accommodation, payroll and check cashing services, remittance services), and non-branch delivery channels. This approach is intended to recognize the importance of branches, particularly for LMI individuals and LMI communities, while also ensuring that CRA is flexible enough to give credit to other delivery channels and services that promote accessibility and usage.

For the deposit products component, the Board proposes evaluating a bank's deposit products, including checking and savings accounts, focusing on those tailored to meet the needs of LMI individuals. Compared to how evaluations are currently conducted, this proposed approach would elevate

the focus on deposit products offered and the degree to which these products are available and responsive to the needs of LMI individuals and LMI communities. The Board is also exploring the option of requiring the very largest banks to provide a strategic statement in advance of their CRA examinations outlining their business strategy for offering deposit products that are responsive to the needs of LMI and other underserved communities.

The approach of dividing the Retail Services Subtest into delivery systems and deposit products would more clearly articulate the different components of the evaluation of retail services and how they relate to one another. Additionally, the proposed approach would leverage quantitative benchmarks to evaluate a bank's branch distribution. Lastly, the Board is considering what additional quantitative information could best facilitate transparent and meaningful evaluations of delivery systems and deposit products, while taking into account the objective of minimizing data burden for institutions where possible.

a. Delivery Systems

The Board proposes evaluating the full breadth of bank delivery systems by maintaining the emphasis on the importance of branches and increasing the focus on non-branch delivery channels. The proposed approach would evaluate all four current branch-related evaluation factors (branch distribution, the record of opening and closing branches, branch-related services, and non-branch delivery systems) under the delivery systems component of the retail services evaluation. The proposal also would leverage quantitative benchmarks to inform the branch distribution analysis. Additionally, the Board is exploring whether banks should receive additional consideration for operating branches in banking deserts. As part of modernizing the CRA framework, the Board also proposes more fully evaluating non-branch delivery systems to address the trend toward greater use of online and mobile banking.

i. Branch Distribution

Under the proposed Retail Services Subtest, analyzing the distribution of bank branches across census tracts of different income levels would continue to be a core part of evaluating delivery systems. The Board is considering incorporating several quantitative benchmarks that would complement a qualitative evaluation in order to provide greater transparency in evaluations and to provide a more comprehensive picture of the physical distribution of branches in assessment areas. The record of opening and closing branches would continue to rely on examiner judgment to determine whether changes in branch locations affected the accessibility of branch delivery channels, particularly in LMI areas or to LMI individuals.

Branch Distribution Benchmarks.

The Board is proposing using data specific to individual assessment areas, referred to as benchmarks, as points of comparison for examiners when evaluating a bank's branch distribution. Building on current practice, three community benchmarks and one market benchmark would be used in conjunction with examiner judgment and performance context information to assess a bank's branch distribution.

Table 3 describes the proposed community benchmarks and their respective data sources. These benchmarks would allow examiners to compare a bank's branch distribution to local data to help determine whether branches are accessible in LMI communities, to individuals of different income levels, and to businesses in the assessment area, and would standardize examiner practice that is used today in some evaluations.

Table 3—Community Benchmarks for Retail Services—Branch Distribution

Benchmark(s)

Data source

Percentage of census tracts in an assessment area by tract income level

American Community Survey (Census).

Percentage of households in an assessment area by tract income level

American Community Survey (Census).

Percentage of total businesses in an assessment area by tract income level

Dun & Bradstreet.

The Board is also considering a new aggregate measurement of branch distribution—referred to as a market benchmark—that would measure the distribution of all bank branches in the same assessment area by tract income. Table 4 provides an overview of the proposed market benchmark and the associated data source.

Table 4—Market Benchmark for Retail Services—Branch Distribution

Benchmark

Data source

Percentage of all bank branches

in an assessment area by tract income level

FDIC SOD Survey

The use of a market

benchmark could improve the branch distribution analysis in several ways. First, making such a comparison could give examiners more context for determining how much opportunity exists for providing retail services in tracts of different income levels. Second, examiners may be able to identify assessment areas with a relatively low concentration of branches in LMI areas, which could be indicative of a banking desert. If a bank has a branch in a low-income or moderate-income census tract where few other lenders have branches, this could indicate particularly responsive or meaningful branch activity for the bank.

The aggregate number of branches in an assessment area figure includes full-service and limited-service branch types as defined in the FDIC SOD.

Table 5 provides an example of how the community and market benchmarks could be used in evaluating a bank's branch distribution.

Table 5:

Geographic Branch Distribution

EP19OC20.013

In the example above, the bank has eight total branches in an assessment area, with none of those branches in low-income tracts and two in moderate-income tracts. An examiner could compare the fact that the bank has no branches in low-income tracts with the above community benchmarks. For example, as shown in the table above, 8.5 percent of all census tracts in the assessment area are low-income census tracts. The examiner could also compare the bank's lack of branches in low-income census tracts with the market benchmark showing that 4.9 percent of branches for all banks in the assessment area are in low-income census tracts.

Similarly, the examiner could also compare the fact that 25.0 percent of the bank's branches are located in moderate-income tracts in the assessment area with the above community benchmarks. For example, 25.7 percent of all households in the assessment area are moderate-income households. The examiner could also compare the bank's distribution of branches in moderate-income census tracts with the market benchmark showing that 22.0 percent of branches for all banks in the assessment area are in moderate-income census tracts.

An examiner could evaluate these data in different ways based on performance context. For example, examiners could give more weight to the bank's lack of branches in low-income census tracts combined with the fact that community benchmarks demonstrate there may be additional opportunity to provide banking services in these tracts. Alternatively, an examiner could consider performance context indicating that existing bank branches in low-income census tracts are adequately serving the needs of low-income households, particularly in light of the percentage of branches the bank has in moderate-income census tracts. As part of this performance context, an examiner might consider the proximity of the bank's branches in moderate-income census tracts to the low-income census tracts in the assessment area.

Formalizing the use of benchmarks would promote transparency in the evaluation process, but given the importance of the branch distribution analysis, the Board does not believe setting thresholds to inform recommendations is appropriate.

Minimum Number of Branches for Branch Distribution Analysis.

When a bank has a limited number of branches in an assessment area, the Board is also considering whether the branch distribution analysis should be done qualitatively without the use of the community and market benchmarks described above. Currently, examiners review branch distribution for each assessment area, regardless of the bank's number of branches or the income distribution of census tracts in the assessment area. As a result, a branch distribution analysis is conducted even when a bank has only one branch in an assessment area. Instead, the Board is considering whether a minimum number of branches should be established in order to use the community and market benchmarks.

Assessing Branches in Banking Deserts.

The Board is also exploring whether to give additional consideration if a bank operates a branch in a designated banking desert within its assessment area(s). Creating such a standard would involve determining

how to define banking deserts, including the appropriate geographic standards and whether standards should be different for urban and rural areas. Examiners could consider any information an institution provides to determine the degree to which delivery systems are tailored to the convenience and needs of banking deserts in the assessment area.

ii. Branch-Related Services

As part of evaluating delivery systems, the Board proposes clarifying that the evaluation of branch-related services would assess services that are not covered in the branch distribution analysis and that could improve access to financial services, or decrease costs, for LMI individuals. Examples of such services include:

• Extended business hours, including weekends, evenings, or by appointment;

• Providing bilingual/translation services in specific geographies and disability accommodations;

• Free or low-cost government, payroll, or other check cashing services; and

• Reasonably priced international remittance services.

The Board is exploring how these services could be evaluated more consistently and what data could inform an analysis of how these services are meeting the needs of the assessment area, particularly in LMI areas.

Consideration of Branches in Middle-Income and Upper-Income Tracts.

Some industry stakeholders have suggested that branches located in middle- and upper-income census tracts and adjacent to LMI tracts can provide needed financial services to residents in the LMI tracts. Some stakeholders have raised concerns about inconsistencies in the treatment and criteria that are currently used to evaluate these branches and have suggested that common guidelines should be developed to ensure a more consistent evaluation. The Board is considering whether and how these branches should be incorporated into the analysis of branch-related services. On one hand, incorporating these branches into the analysis could capture more of the banking services banks are providing to meet the needs of LMI areas. Additionally, providing standard guidelines would ensure that examiners are treating these branches consistently. On the other hand, including these branches could de-emphasize the importance of branches in LMI areas.

To balance these objectives, the Board believes that if a bank requests consideration of branches in middle- and upper-income census tracts as a means for delivering services to LMI individuals or areas, the Board would consider information provided by the bank demonstrating that LMI consumers use the branches. A review of this information would inform the qualitative review of branch-related services and would not be incorporated into the branch distribution analysis described above. The Board is exploring what type of data banks could provide to demonstrate that branches located in middle- and upper-income census tracts serve LMI individuals or areas.

iii. Non-Branch Delivery Channels

In light of the growing use of online and mobile banking services, the proposed Retail Services Subtest would enhance the approach to evaluating the availability and effectiveness of non-branch delivery channels in helping to meet the needs of LMI census tracts and individuals. An important consideration in establishing a strengthened non-branch delivery channels evaluation is grounding this analysis in better and more consistent data, while also being mindful of the objective to minimize the burden for banks in providing additional data.

Under current guidance, examiners consider a variety of factors to determine whether a bank's non-branch delivery channels (ATMs, mobile, and internet) are an effective means of delivering retail banking services in LMI areas and to LMI individuals. For example, this includes the ease of access, cost to consumers, and rate of adoption and use of these delivery channels. However, the type of data that banks provide to examiners is inconsistent and, as a result, consideration of non-branch delivery channels is uneven. Furthermore, there are no clear standards on how data are to be used to determine what constitutes a specific level of performance.

Incorporating data on non-branch delivery channels would enhance the evaluation of non-branch delivery channels. However, there are questions about how to measure non-branch delivery channels consistently and what data points could be considered to demonstrate usage by LMI individuals. Possible data that could be considered include rates of usage of online and mobile services by customers (grouped by census tract) and rates of usage by customers (grouped by census tract) for the different types of ATMs offered by a bank. One challenge, however, is that usage data is proprietary and varies widely by bank. Due to proprietary business considerations, the data might be available only to examiners and may not enhance public insight.

Request for Feedback:

Question 24.

In addition to the number of branches and the community and market quantitative benchmarks discussed above, how should examiners evaluate a bank's branch distribution?

Question 25.

How should banking deserts be defined, and should the definition be different in urban and rural areas?

Question 26.

What are the appropriate data points to determine accessibility of delivery systems, including non-branch delivery channel usage data? Should the Board require certain specified information in order for a bank to receive consideration for non-branch delivery channels?

Question 27.

Should a bank receive consideration for delivering services to LMI consumers from branches located in middle- and upper-income census tracts? What types of data could banks provide to demonstrate that branches located in middle- and upper-income tracts primarily serve LMI individuals or areas?

Question 28.

Would establishing quantitative benchmarks for evaluating non-branch delivery channels be beneficial? If so, what benchmarks would be appropriate?

b. Deposit Products

The Board is considering creating a second prong of the Retail Services Subtest that focuses specifically on the degree to which deposit products are responsive to the needs of LMI consumers. Given the number of LMI individuals who are unbanked or underbanked,

deposit products that are tailored to meet the needs of LMI consumers could be considered to be responsive under the Retail Services Subtest. Examples of such products include:

See

Board of Governors of the Federal Reserve System, “Report on the Economic Well-Being of U.S. Households in 2018—May 2019,”

https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-banking-and-credit.htm

• Low-cost transaction accounts which are accessible through debit cards or general-purpose reloadable prepaid cards;

• Individual development accounts;

• Accounts with low or no monthly opening deposit or balance fees;

• Accounts with low or no overdraft and insufficient funds fees;

• Free or low-cost government, payroll, or other check cashing services; and

• Reasonably priced remittance services.

As noted, under current examination procedures, examiners review deposit

products on a limited basis when considering the full range of services offered by a bank in census tracts of different income levels.

One key reason the review of deposit products is generally given minimal weight is that data provided by banks to examiners on deposit accounts are generally limited and often provided only for the institution overall, rather than at the assessment area level.

See

Q&A § __.24(d)(3)—1.

The Board proposes to elevate and strengthen the evaluation of deposit products that are responsive to the needs of assessment areas, and particularly LMI communities and consumers. In addition to assessing the

availability

of deposit products and the degree to which these products are tailored to meet the needs of LMI consumers, the Board is also considering how to evaluate the

usage

and

impact

of such products. To accomplish these objectives, the Board is exploring whether it would be beneficial to have additional data to inform the analysis of deposit products, such as the types of deposit products offered, product costs, account features tailored for needs of LMI consumers, and product usage by LMI consumers versus usage by all consumers. Access to this type of data could help examiners determine whether the bank offers deposit products that are responsive to the needs of LMI consumers and the usage of such products by LMI consumers. Additionally, presenting relevant data on the availability and usage of deposit products in performance evaluations would increase transparency and provide more information to all stakeholders on the types of deposit products that are most responsive to the needs of LMI consumers.

The Board recognizes that evaluating deposit products presents challenges. First, expanding the focus on deposit products would require banks to provide new information for CRA evaluations, as well as the establishment of new supervisory standards for evaluating deposit products. Additionally, due to proprietary business considerations, data on deposit products and customer usage might be available only to examiners and may not enhance public insight.

Despite these challenges, the Board believes that the review of deposit products is an important component of CRA modernization given the critical role of these products in providing an entry point to the banking system for LMI consumers, as well as a pathway for these individuals to obtain access to credit.

Other Revisions to Retail Services Evaluation.

The Board is also contemplating whether additional clarity and transparency could be gained by requiring a subset of the largest banks (

e.g.,

banks with assets over $10 billion or banks with assets over of $50 billion) subject to the Retail Services Subtest to provide a statement articulating their approach to offering retail banking products for serving LMI individuals and communities across their assessment area(s). Such statements would allow examiners and stakeholders to understand how the largest banks—which serve a unique role in providing financial services to a large percentage of the population—identify, monitor, track, and serve the needs of LMI communities and individuals through their product offerings. A consideration with this approach would be assessing the potential benefits of requiring these strategic statements relative to any burden associated with preparing them. Another consideration is whether this strategic statement w

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