The roughly 1,500 pages of new Community Reinvestment Act rules are set to add new administrative costs to banks, but many lenders are still coming to grips with the changes. iStock illustration

As Massachusetts banks wait to see how a lawsuit by national banking trade groups over changes to federal Community Reinvestment Act rules will turn out, they’re facing a large number of additional unknowns.

Some bankers say they are overwhelmed with absorbing and understanding the 1,500-page CRA proposal, some which takes in effect as early as April 1. The changes are the first update to CRA rules since the 1990s and were intended to account for the digitally-powered rise in banks’ lending in areas outside their branch networks.

Len Suzio, president of GeoDataVision, a consulting firm guiding small and mid-sized banks on CRA compliance, said if the new rules were in force from 2018 to 2020, 44.4 percent of banks would have scored “low satisfactory,” “needs to improve” or “substantial noncompliance” – 10.3 percent of which will fail compared to the 1.2 percent historical rate at which banks have failed their CRA exams.

“Since the regulation was implemented in 1977, a bank had to declare its assessment areas…and if you are a Massachusetts bank that doesn’t have any deposit-taking facilities in Connecticut, then you can’t declare Connecticut as part of your assessment area because that does not reflect the real market for the bank,” Suzio told Banker and Tradesman in an interview. “And this is really important because we need to see that [banks] are lending back to the communities – mostly the poor neighborhoods – where they got their deposits, and that’s why it was called the ‘Reinvestment’ Act.”

In the proposed rules, a bank can be subjected to the new retail lending assessment areas – areas that the bank lends to even when they do not have a deposit-taking branch – and outside retail lending assessment areas (ORLA), which are areas where a bank has done lending in any part of the country.

Using the formulas indicated in the proposed rules, Suzio calculated that a bank needs to collect 114 data points and 166 calculations in only one assessment area, which can be a big administrative burden to a bank.

“The administrative burden is going to be imposed on banks because of these formulas,” Suzio said. “It is a very big burden on banks in terms of the paperwork and the processing of the data because your software vendors need to develop software to collect the data, consolidate it and then manipulate it to do all of these calculations and determinations about what your performance rating is.”

A small bank, categorized as having assets of under $600 million, will “get away with minimal damage” by only having to check for one or two assessment areas, and is not subjected to the new retail lending tests. Intermediate banks with $600 million to below $2 billion in assets will usually have three to four assessment areas, while the biggest banks classified as $2 billion and up can have assessment areas that number in the hundreds, Suzio said.

Under the current CRA rules, Suzio said that if a one-branch bank has expanded on the border of another county, the bank has the right to delineate its assessment area to only a few census tracts within the new county covered, near its established branch.

In the planned changes, he said, that bank is now required to delineate the whole county as an assessment area and be responsible for helping meet the lending needs of the communities in the county.

“Even let’s say for a Massachusetts bank lending to a wealthy individual for a mortgage in Los Angeles, the area will automatically be included in the bank’s ORLA,” Suzio said.

The length of the new rules package is also causing confusion among some banks, he said.

“I don’t know how many times I read [the 1,500-page rules], re-read it again, and I still didn’t get it. I had to think about it, come back to it, and after reading it four or five times, and maybe over a few days, it started coming together in my head. I’m a consultant who does this full-time, but I feel bad for banks because nobody understands the new rule,” he said.

Before the new CRA rules are scheduled to take effect April 1, Suzio advises bankers to be clear in determining what bank size category they belong to, identify their branch facility-based assessment areas, re-evaluate their market strategy in different geographic markets, avoid lending outside facility-based assessment areas and retail lending assessment areas and strengthen their compliance monitoring program with special focus on potential redlining.