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Proposed Revisions to CRA Regulations Strike a Balance between Bankers and Community Groups

Friday, July 1, 2005

Federal banking agencies released a joint notice on March 11, 2005, with proposed rulemaking designed to improve the effectiveness of the Community Reinvestment Act (CRA) and reduce the compliance burden for financial institutions. A number of changes are proposed.

The first change raises the asset threshold for "small banks" from $250 million to $1 billion and eliminates the holding company asset test. In addition, banks with assets of $250 million but less than $1 billion ("intermediate small banks") will no longer have to collect data and submit aggregate lending data on small business, small farm and community development loan activity.

Under the proposal, intermediate small banks will face a two-part test. The first test focuses on retail lending and assesses the bank's CRA performance using the five criteria under which small banks are currently evaluated. The second test will focus on community development activity, including loans, investments and services. In order to achieve an overall satisfactory rating, a bank must achieve at least a satisfactory rating on both tests.

Similar to the current large-bank examination procedures, examiners will evaluate the number and amount of community development loans and qualified investments, as well as the provision of community development services, against the:

  • bank's capacities and business strategy,
  • needs of the local community, and
  • number and types of opportunities for community development activities.

The proposed community development test is intended to provide greater flexibility than the current large-bank tests for intermediate small banks. Small banks will be able to allocate their resources among community development loans, investments or services based on the needs of their communities.

This increased flexibility should increase the effectiveness of the CRA by encouraging only meaningful loans, investments and services. For example, intermediate small banks often face intense competition in some markets for the limited supply of qualified investments that are safe and sound, yielding an acceptable return. In order to fulfill their responsibilities under the current investment test, intermediate small banks will often purchase and sell the same pool of investments among themselves, failing to increase the net amount of investments in a market.

Another important aspect of the proposed revision to CRA is a new definition of "community development" for all banks—regardless of asset size—to include activities targeted in rural areas. One significant criticism from both community banks and community organizations is that the current definition of community development fails to recognize the unique community development needs of rural communities because they often are not designated as low- or moderate-income. Consequently, the proposed definition will not only cover community development activities targeting low- and moderate-income individuals or census tracts, but also activities in "underserved rural areas" and "designated disaster areas."

Finally, the proposal outlines instances when a bank's CRA rating may be adversely affected when examiners find evidence of discrimination or other illegal credit practices. Specifically, these practices will include:

  • credit discrimination, in violation of the Equal Credit Opportunity or Fair Housing Acts;
  • illegal referral practices, in violation of Section 8 of the Real Estate Settlement Procedures Act;
  • violations of the Truth in Lending Act, concerning a consumer's right to rescind a credit transaction secured by a principal residence;
  • violations of the Home Ownership and Equity Protection Act; and
  • any evidence of unfair or deceptive acts or practices in violation of Section 5 of the Federal Trade Commission Act.

A bank's CRA evaluation also can be adversely affected by illegal practices of any affiliate, if affiliate loans are considered in the bank's CRA evaluation.

The proposed changes to CRA are designed to strike a balance between the concerns of bankers and community groups. The public comment period closed May 10, and the federal agencies are reviewing the comments they have received. For a complete copy of the joint notice of proposed rule-making, visit