Even moderate-sized banks with more than 50 percent of their lending outside areas where they have branches will have their lending in those other areas considered as well.

The latest attempt to renovate the Community Reinvestment Act could pose serious challenges for larger banks that have used online lending to find business over a wide area. 

A yearslong effort to modernize CRA now accounts for online banking and lending activities, yet still keeps branch networks at the center of federal CRA examinations of whether banks are not discriminating in where they make their loans. 

For smaller banks, the proposed CRA changes should have little impact on how they define the geographical area that regulators will assess when determining whether they meet a community’s credit needs. But for larger banks, including those that offer online loans outside their branch networks, the proposed changes have raised concerns about the areas where they will be assessed for CRA activities. 

“While we agree that change is needed regarding assessment areas to adapt to the changing banking and technological environment of the financial industry, we do not believe that adequate consideration has been provided to community banks servicing their customers outside of a geographical boundary, i.e., via the internet and other mediums,” Nicole Almeida, Swansea-based BayCoast Bank’s senior vice president, chief diversity officer and CRA officer, said in a letter to regulators. 

Branches and ATMs Remain Essential  

After the last attempt to update CRA ended with the three federal bank regulators failing to move forward together with a joint proposal, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have developed new rules together. 

The proposed changes would represent the first significant update to CRA since 1995, and have generated a range of other controversies and critiques from banking groups and community advocates alike.  

The foundation of CRA exams is a bank’s assessment area, currently defined by banks based on areas surrounding physical branches and ATMs that accept deposits. To prevent redlining, banks cannot “arbitrarily exclude low- or moderate-income Census tracts” from their assessment areas, according to current regulations, and the areas cannot reflect illegal discrimination.  

These anti-discrimination requirements remain in the proposed regulations. And exams will continue to evaluate a bank’s performance in its branch network, what the proposal calls the “facilities-based assessment areas.” 

“While the number of bank branches has declined in recent years, the agencies believe that branches remain an essential way of defining a bank’s local communities,” bank regulators said. 

Even if a bank does not use the word “branch” to describe a location, it would be considered a branch for CRA purposes if the bank staffs a physical location that collects deposits from customers. Even if the location is open by appointment only, it is still considered a branch. 

Other changes anticipate that business models or banking options could change. Instead of referring to deposit-taking ATMs, the proposal now includes “remote service facilities” as part of the facilities-based assessment area, a broader term that the agencies said encompasses other options such as interactive teller machines. 

Changes for Large Banks 

Small banks, which under the proposed regulations would have less than $600 million in assets, and intermediate banks, which would have less than $2 billion in assets, would continue to designate the facilities-based assessment area using an approach similar to what they use now. 

But some intermediate-sized banks might get examined outside their defined geographic region. Banks with more than 50 percent of their lending outside the facilities-based assessment area would have their lending in those other areas considered as well.  

For large banks – those with $2 billion in assets or more – the CRA proposal would bring more significant changes. 

The proposed regulations give large banks two options for their facilities-based assessment area. They could select an area with one or more metropolitan statistical areas or metropolitan divisions. Or, banks could choose one or more contiguous counties within an MSA, a metropolitan division or the nonmetropolitan area of a state. 

The agencies said this approach would create a more consistent standard for large banks as they define their assessment areas, while also promoting fair lending and bringing about easier data reporting.  

Different Business Models 

For large banks with lending activities that lead to lending outside their typical geographic region, including online lending, CRA would include a second assessment area called the “retail lending assessment area.”  

This area would be required for large banks that had 100 mortgage loans or 250 small business loans in a geographic area outside the facility-based lending area during the preceding two calendar years.  

“The proposed approach of designating retail lending assessment areas is designed to provide a pathway to evaluate banks in a way that provides parity between banks that lend primarily through branches and those banks with different business models,” the proposal said. “Designating new retail lending assessment areas would ensure that, regardless of delivery channel, large banks would have evaluations of their retail lending in the local markets where they conduct significant retail lending business.” 

These changes have raised some concerns for Massachusetts banks. The facilities-based assessment area could mean banks would have their lending activities evaluated for an entire county even if they have branches in only a section of the county.  

Diane McLaughlin

“Simply because you have a branch in the northwest part of Middlesex County – maybe you have seven or eight branches up there or in Central Massachusetts – does that really mean that your assessment area is the whole of Middlesex County?” Ben Craigie, vice president of government affairs at the Massachusetts Bankers Association, told Banker & Tradesman. 

In a letter to regulators, Craigie noted that these types of geographical differences happen throughout Massachusetts and New England.  

Banks also have concerns about the retail lending assessment area and the potentially large areas where banks will need to engage in CRA activities.  

“Not all large banks are presently staffed and equipped technologically to engage in full-scale CRA activities in these new RLAAs,” Craigie wrote to regulators. 

CRA Reform Could Bring Bigger Assessment Areas

by Diane McLaughlin time to read: 4 min