Regulators Narrow CRA, Sparking Advocate Criticism

Federal banking regulators, specifically the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC), released a proposal on Friday aimed at modifying the Community Reinvestment Act (CRA). This proposed rule narrows the criteria by which banks can receive credit for community development activities and increases asset thresholds for smaller and mid-sized financial institutions. The agencies stated their intention is to refocus on the original statutory objectives of the CRA, ensure that grants effectively reach intended communities, reduce compliance burdens for banks, and provide clearer guidelines for CRA evaluations. The public will have 60 days to submit comments following the proposal's publication in the Federal Register.

Under the proposed framework, banks will continue to be assessed based on performance tests that consider their size, business model, or an approved strategic plan. However, the revised structure would place a stronger emphasis on lending activities, which the agencies believe are the most effective means of meeting a community's credit needs, while de-emphasizing credit for deposit products. Lindsey Johnson, president and CEO of the Consumer Bankers Association (CBA), expressed that banks should be recognized for "responsibly providing loans, investing in their communities, supporting affordable housing, financing small businesses, and helping consumers achieve financial security." Johnson further emphasized the CBA's belief that any finalized CRA rule should establish a "durable regime with objective approaches grounded in statute that will last through administration shifts."

A significant point of contention within the proposal concerns the treatment of community development (CD) grants and operating support. The FDIC and OCC intend to tighten the criteria for CRA credit, ensuring that financial contributions are more directly linked to projects where community development is the primary objective. For large banks, defined as those with more than $10 billion in assets, the proposal includes a cap. This cap would limit the portion of a grant or donation that can be allocated to indirect or administrative costs to 15%. This specific measure aims to ensure that the majority of funds are utilized for direct community development impact rather than overhead expenses. The proposal's focus on lending and stricter grant criteria has raised concerns among advocates who fear it may reduce the scope of activities banks can undertake to support community needs, potentially impacting affordable housing initiatives and small business financing.