Proposed CRA changes could reshape bank investment in local communities

Key Takeaways

On August 12, the U.S. Department of the Treasury’s Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) announced a Notice of Proposed Rulemaking (NPRM) exploring changes to obligations under the Community Reinvestment Act (CRA) (P.L. 104-121). 
The NPRM proposed to raise the asset thresholds used to classify banks, effectively determining their specific obligations under the CRA. Institutions that qualify for a lower threshold would be subject to a less comprehensive compliance framework, forgoing certain community development requirements.
Counties frequently rely on partnerships with CRA-motivated banks to finance affordable housing, community facilities and economic development projects benefiting low- and moderate-income (LMI) communities.

What is the Community Reinvestment Act?

Enacted in 1977, the CRA encourages banks to meet the service needs of the communities they serve, particularly in LMI neighborhoods. Federal regulators periodically evaluate banks based on their size, grouping them into three tiers - small, intermediate and large. Large banks are evaluated most thoroughly using a three-pronged test covering lending, investment and services, while smaller banks are subject to a more streamlined evaluation.  Banks are compelled to meet these requirements, as a poor compliance score impacts their ability to expand, conduct mergers/acquisitions or receive accreditation. 

What’s in the proposed rule?

The NPRM would raise the asset thresholds used to classify banks for CRA purposes. A bank’s classification determines the requirements it must meet when being evaluated for compliance. The proposed changes include:

• Small banks: The threshold would increase from less than $412 million in assets to less than $1 billion.
• Intermediate banks: The current “intermediate small bank” category, which includes banks with assets between $412 million and $1 billion, would be replaced by a new intermediate bank category covering institutions with assets between $1 billion and $10 billion.
• Large banks: The threshold for classification as a large bank would increase from approximately $1.46 billion in assets to $10 billion and above.

These changes would significantly reduce the number of banks classified as large banks subject to the CRA’s most comprehensive requirements. At the same time, more banks would be classified as small banks and face fewer requirements for community development lending, investments and services.

The NPRM would also remove the “purpose test” used to evaluate certain economic development activities. Under this change, banks could receive CRA credit for financing businesses without having to demonstrate that the activity creates, preserves or improves jobs for LMI individuals and communities.

What does this mean for counties? 

Counties frequently rely on partnerships with banks to finance local priorities, particularly large capital projects. CRA-motivated lending and investment attracts capital to projects that may otherwise struggle to secure financing, particularly in affordable housing and projects serving LMI communities. CRA-motivated financial institutions contribute more than 80 percent of annual low-income housing tax credit (LIHTC) and new markets tax credit (NMTC) equity, underscoring the CRA’s significant role in financing affordable housing and community development.

Under the proposed asset thresholds, some banks may have less incentive under the CRA to make investments or provide financing that directly supports local community development priorities. In communities with only a small number of banks, changes in the lending and investment activity can have an outsized effect on local development.

As federal regulators consider changes to the CRA framework, counties should assess how local banks currently support affordable housing, small business and economic development projects and consider how the proposed changes could affect these partnerships. NACo continues to monitor the NPRM to ensure that changes to the CRA do not weaken the law’s mission of supporting investment and expanding access to capital for LMI communities.