October 28, 2023 / VOLUME NO. 285

When $2 Billion Is a ‘Large’ Bank

On Oct. 24, the prudential regulators released their final rule to modernize the Community Reinvestment Act, which aims to encourage lending to low- and moderate-income communities. Passed in 1977, the CRA was last updated in 1995 — almost three decades ago — and a lot has changed in banking, not least the rise of digital financial services.

Federal Reserve Vice Chair for Supervision Michael Barr led the efforts to update the regulation. In prepared remarks, he called the final rule — clocking in at 1,494 pages — a “win-win” for financial institutions and community groups. In addition to providing clarity in bank supervisors’ assessment of retail loans and the community development activities that are eligible for CRA credit, the rule also aims to make it more transparent when loans and investments get credit outside the bank’s geographic footprint.

The Fed noted several shifts from the August 2022 proposal that should ease banks’ compliance with the new rule. That includes simplifying the retail lending test and adjusting performance standards to make a higher rating more achievable. Banks also have more time to comply.  

But not everyone’s happy with the new CRA. 

The most onerous requirements fall to large institutions, which the rule defines as any bank above $2 billion in assets. That means the same evaluation criteria that would be employed for $1.9 trillion Wells Fargo & Co. would also be used for a $2 billion community institution with hardly the same level of complexity. 

That disparity informed the dissent from Fed Governor Michelle Bowman. She applauded some of the changes in the final rule, including a preapproval process for CRA activities and the ability to count any community development loans or investments that stay on the balance sheet from one evaluation period to another. But the asset threshold for the most stringent tests is simply too low.

“In no other provision of the regulatory framework is a bank with $2 billion in assets considered a ‘large’ bank,” said Bowman. “For well over a decade, community banks have been defined to include banks with up to $10 billion in total assets.” 

Bowman added that when she agreed to the initial proposal, she understood that banks below $10 billion in assets would have the option to choose the new framework or comply with existing rules. Instead, the rule “materially changes requirements for these banks including mandating compliance with a new retail lending test, significantly altering and expanding assessment areas, and increasing data and reporting obligations.”

The original goal of CRA was ostensibly to expand credit access to low- and moderate-income communities. Bowman’s concern is that the cost of compliance could lead community banks to instead reduce lending to the groups it was intended to help. 

• Emily McCormick, vice president of editorial & research for Bank Director

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