October 30, 2023

By Sam Manas, Inside Mortgage Finance

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Neither consumer nor industry trade groups are fully satisfied with the final rule modernizing Community Reinvestment Act requirements.

Lindsey Johnson, president and CEO of the Consumer Bankers Association, said the new framework will make it harder for banks to achieve an outstanding rating and the parameters around facility-based assessment areas could result in banks being unfairly categorized as needing improvement.

She cited support for some of the changes, such as the formalization of metrics, clearer community development definitions and the exclusion of credit cards from the rule.

David Dworkin, president and CEO of the National Housing Conference, said the final rule succeeds in significantly improving the status quo, and leaves room for clarifications and adjustments during a 24-month implementation period.

He acknowledged several changes from the proposed provisions that the NHC had expressed concerns about, including the treatment of community development activities and the retention of consideration of the Low-Income Housing Tax Credit.

The new standards would allow lenders to earn CRA credit for creating special purpose credit programs, which Dworkin said created opportunities for banks to engage in racial equity initiatives.

Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, said encouraging SPCPs was a positive move. However, he said publishing data on race without factoring it into the exam “does nothing but remind us of how CRA’s colorblind nature makes it less effective.”

He said the most significant change from the proposed rule was altering the retail lending assessment areas to no longer apply to banks that are mostly branch-based, and raising the mortgage lending and small-business lending activity thresholds for creating an assessment area for a large bank.

“The previous threshold of 100 mortgages in the last two years would have captured 50% of mortgage lending done by large banks outside of their branch network, now only 25% because they moved the threshold up to 150 loans,” he said.

Still, Van Tol said the rule contained several improvements, such as altering sub-test scoring to make it easier to compare grade categories. He also expressed approval of the rule’s expansion of community development product categories to incentivize projects around healthcare and climate resilience, as well as the introduction of a pre-approval process for potential CRA-eligible activities.

Jaret Seiberg, an analyst at TD Cowen, said the final rule wouldn’t be a long-term drag for banks in terms of cost, in part because the most impactful provisions won’t go into effect until 2026 and because bank merger-and-acquisition demand is low given the interest rate environment.

But he cautioned the new requirements could create risk around CRA ratings and M&A activity once in effect. Institutions seeking to retain satisfactory CRA scores will have to invest in and adjust their systems to maintain those scores as the new rules will make it harder to score highly enough to secure approval of a merger.

The risks to banks, he said, are tied to the outcome of the 2024 presidential election. Should a Republican win, Seiberg said, regulators may be more open to modifying the new rule.

Buzz Roberts, president and CEO of the National Association of Affordable Housing Lenders, said the agencies put in work to strike a balance between encouraging lending and investment for low- and moderate-income communities, while not “making the performance standards unattainably high.”

He said that in the proposal the performance standards for retail lending were “so tough that it’d be very difficult for banks to achieve an outstanding performance.” Under the proposed rule, if a bank didn’t receive an outstanding retail performance rating it would have been impossible for them to achieve an overall outstanding rating, regardless of their community development activity.

The regulators, he said, responded to that concern by easing certain performance thresholds and weighting the sub-tests so that retail performance and community development are considered equally in that calculation. “The hope is that that standard will be attainable with extra effort,” he said.