A recent attempt to overhaul the Community Reinvestment Act could pose serious challenges for larger banks, which have used online lending to find business across a wide area.
A year-long effort to modernize the CRA now accommodates online banking and lending activity, but still keeps branch networks at the center of state CRA investigations into whether banks do not discriminate where they lend.
For smaller banks, the proposed CRA changes are likely to have little impact on how they define the geographic area that regulators will assess when determining whether they meet a community’s lending needs. But for larger banks, including those offering online lending outside of their branch networks, the proposed changes have raised concerns about the areas in which they will be assessed for CRA activity.
“While we agree that changes in valuation scopes are needed to adapt to the changing banking and technological environment of the financial industry, we do not believe that community banks that serve their customers outside of a geographic boundary, i.e. across Internet and other media were considered,” said Nicole Almeida, senior vice president, chief diversity officer and CRA officer at Swansea-based BayCoast Bank, in a letter to regulators.
Branches and ATMs remain indispensable
After the latest attempt to update the CRA ended with the three federal bank regulators failing to come up with a joint proposal, the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency worked together to develop new rules.
The proposed changes would represent the first significant update to the CRA since 1995, and have sparked a number of other controversies and criticisms by banking groups and community advocates alike.
The basis of the CRA exams is a bank’s assessment area, which is currently defined by banks based on areas surrounding physical branches and ATMs that accept deposits. To prevent redlining, current regulations prohibit banks from “arbitrarily excluding low- and middle-income census areas from their assessment areas,” and the areas must not reflect unlawful discrimination.
These anti-discrimination requirements remain in the proposed regulations. And audits will continue to assess a bank’s performance across its branch network, in what the proposal calls “facility-based assessment areas.”
“While the number of bank branches has declined in recent years, agencies believe branches remain an essential means of defining a bank’s local communities,” banking 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 maintains a physical location that accepts deposits from customers. Even though the location is only open by appointment, it still counts as a branch.
Other changes assume that business models or banking options could change. Instead of referring to deposit machines, the proposal now includes “remote service facilities” as part of the facilities-based assessment scope, a broader term that the agencies said encompasses other options like interactive ATMs.
Changes for big banks
Small banks, which would have less than $600 million in assets under the proposed rules, and intermediary banks, which would have less than $2 billion in assets, would continue to use the facility-based assessment scope under a similar approach as set now .
However, some medium-sized banks could be examined outside of their defined geographic region. Banks with more than 50 percent of their lending outside the facility-based rating range would also consider their lending in these other ranges.
For large banks — those with assets of $2 billion or more — the CRA proposal would bring more significant changes.
The proposed rules give big banks two options for their facility-based assessment scope. You could select an area with one or more statistical metropolitan areas or metropolitan areas. Or banks could select one or more contiguous counties within an MSA, a metropolitan area, or the non-metropolitan area of a state.
The agencies said this approach would create a more consistent standard for large banks in defining their rating ranges, while promoting fair lending and easier data reporting.
Different business models
For large banks with lending activities that result in lending outside of their typical geographic region, including online lending, CRA would include a second range of ratings called the “Retail Loan Ratings Range”.
This range would be required for large banks that had 100 mortgage loans or 250 small business loans in a geographic area outside of the facility-based lending range in the previous two calendar years.
“The proposed approach to determining rating ranges for retail loans aims to provide a way to rate banks in a way that establishes parity between banks that mainly lend through branches and banks with different business models,” the proposal reads. “Designating new retail loan rating ranges would ensure that large banks, regardless of delivery channel, have retail loan ratings in the local markets where they have significant retail lending business.”
These changes have raised some concerns among Massachusetts banks. The facility-based scope of assessment could mean that banks have their lending activities assessed for an entire district, even if they only have branches in part of the district.
“Just because you have a branch in northwestern Middlesex County — maybe you have seven or eight branches up there or in central Massachusetts — does that really mean your assessment area is all of Middlesex County?” Ben Craigie, vice president of government affairs at of the Massachusetts Bankers Association, versus Banker & Tradesman.
In a letter to regulators, Craigie noted that these types of geographic differences exist throughout Massachusetts and New England.
Banks also have concerns about the range of retail loan ratings and the potentially large areas in which banks need to engage in CRA activity.
“Not all major banks currently have the staff and technology to conduct extensive CRA activities in these new RLAAs,” Craigie wrote to regulators.