WASHINGTON — The Board of Governors of the Federal Reserve System voted to issue a final rule revamping the Community Reinvestment Act Tuesday morning, redefining the criteria for small, intermediate and large banks; introducing new evaluation tests based on loan activity rather than branch location; and incentivizing banks to conduct more community development activities.
"[It] will better achieve the purposes of the law by encouraging banks to expand access to credit, investment and banking services in low- and moderate-income communities," Fed Chair Jerome Powell said in a statement. He said it is adapted to "changes in the banking industry, such as mobile and online banking; providing greater clarity and consistency in the application of the CRA regulations; and tailoring to bank size and type."
The new rule, jointly released by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. will go into effect on Jan. 1, 2026. The final rule redefines the asset size thresholds and methods with which regulators evaluate lenders. Small banks will be defined as having total assets of less than $600 million, an increase from the $376 million threshold under the current framework. Intermediate banks are defined as having total assets between $600 million to $2 billion and large banks as those having assets of $2 billion or greater.
Large banks will face four tests: a retail lending test, a community development finance test, a retail services and products test and a community development services test. Intermediate banks would be evaluated under only the new retail lending test and the existing community development evaluation test, but will have the option to be evaluated under the community development financing test. The final rule would maintain the current CRA evaluation for small banks, unless a small bank opts into the retail lending test.
The new rule requires banks to lend to lower-income communities in areas where they have a concentration of mortgage and small-business loans, rather than just where they have physical branches — a change regulators say is meant to bring the CRA into an increasingly mobile banking ecosystem. The draft final rule would include a new requirement that large banks have their retail lending evaluated in an area outside of the bank's branch network if the bank originated a large enough number of closed-end home mortgage or small-business loans in that area. These areas are referred to as retail lending assessment areas, and would only be evaluated under the retail lending test.
Deviating from the proposal, the final rule will give equal weight to large banks' retail lending and community development financing activities.
The rule also makes some significant changes to the May 2022 proposed rule, primarily in ways that will reduce the rule's impact on banks. For example, the draft final rule exempts predominantly branch-based banks from the requirement to delineate their retail lending assessment areas. The draft final rule would also allow banks to gain CRA credit for retail lending that occurs outside of a bank's assessment areas at the institution level. That provision would apply to all large banks and to certain intermediate banks.
The updated retail lending test would include two different sets of metrics to evaluate retail lending in each community: The first metric would evaluate the dollar amount of a bank's retail lending relative to its deposits in a community, the other would evaluate the bank's percentage of loans from each of its product lines allocated to low- and moderate-income neighborhoods in an area. The metrics would also evaluate the percentage of loans to low- and moderate-income individual borrowers and to small businesses of different sizes. The draft final rule would also set thresholds to help develop conclusions about a bank's performance, for example: the percentage of mortgage lending to moderate-income borrowers that would correspond with a high satisfactory rating — a change relative to current evaluations, which do not provide guidelines on the percentage of lending that generally corresponds with different levels of performance.
"Staff believes that the metrics in the draft final rule would help to provide more consistency and transparency relative to the status quo," Fed staff noted. "In addition, the agencies would consider qualitative factors such as the bank's business model and information about the community when evaluating a bank's retail lending."
Deviating from the proposed rule's initial draft, the final rule reduces the number of product lines likely to be included for some of the metrics. Fed officials said under the draft final rule, most banks would be evaluated on no more than three product lines: closed-end home mortgage loans, small-business loans and small farm loans. Only banks whose loans are a majority of automobile loans or opt-into evaluations would be subject to evaluations of their auto lending.
As in the proposal, the second evaluation — known as the Community Development Finance Test — would assess banks' community development loans as well as their community development investments. This test contains a standardized metric to calculate the ratio of dollars of a bank's community development loans and investments in an area relative to its deposits. The test also designates impact and responsiveness factors to acknowledge activities that can create a particularly high impact, such as loans and investments in persistent poverty counties and native land areas.
The third retail services and products test would include two parts: It would evaluate bank branches, ATMs and online and mobile banking platforms serving LMI communities. This test would also evaluate the availability and responsiveness of bank credit and deposit products — an evaluation that would only positively contribute to a bank's performance. The draft rule would include special purpose credit programs, as an example of responsive credit products, and only banks with assets of $10 billion or more would be evaluated for responsive checking and savings accounts.
The community development services test — only applicable to large banks — focuses on volunteer activities supporting community development, such as board service or community financial literacy activities. Regulators will consider the impact and responsiveness of such services when evaluating under this test.
"Banks would be able to submit a strategic plan to their regulator, which the agency would review and approve," Fed staff noted. "This would continue to provide flexibility for banks with unique business models."
As with current practice, agencies would assign to each bank an overall CRA rating of outstanding, satisfactory, needs to improve or substantially noncompliant. For large banks, ratings would average together the bank's performance on its four tests. Regulators could also downgrade a bank's performance if it engages in discriminatory or illegal credit practices.
There would be no new data reporting requirements for small banks and immediate banks.
The draft final rule would continue the current approach of requiring banks to delineate specific assessment areas which comprise the areas around a bank's branches, main office and deposit-taking ATMs where the bank's CRA evaluations are focused and referred to as facility-based assessment areas. Large banks would be required to delineate facility-based assessment areas based on one or more entire counties, while intermediate and small banks could include a partial county. In addition, the draft final rule would continue the current prohibition on banks delineating facility-based assessment areas that reflect illegal discrimination, or that arbitrarily exclude LMI census tracts. All performance tests would be applied when conducting the bank CRA evaluation of areas that are within a bank's branch network.
Banks would also now receive consideration for all eligible community development activities conducted anywhere nationwide, including outside of the bank's branch network.
The agencies say they will publish an illustrative list of community development activities that are eligible for CRA credit, and the final rule would create a preapproval process, in which banks could confirm with the agencies whether a particular activity qualifies as eligible for consideration.
The draft final rule would provide a transition period of more than 24 months from issuance, meaning the strengthened provisions would not apply until Jan. 1, 2026.
All Fed governors voted to approve the draft final rule with the exception of Trump appointee Michelle W. Bowman, who characterized the rule as unjustifiably onerous for firms.
"The final rule is unnecessarily complex, overly prescriptive and contains disproportionately greater costs than benefits, adding significantly greater regulatory burden for all banks, but especially for community banks," she said in a prepared statement. "The premise of the changes being made in this rule is that banks are not doing enough to meet the credit needs of their communities. Yet, there is no evidence provided to support this premise."
Later Tuesday the FDIC board approved the CRA final rule by a 3-2 vote. While Chairman Martin Gruenberg expressed optimism about its impact on the next generation, republican appointed members Vice Chairman Travis Hill and board member Jonathan McKernan expressed concerns that led them to dissent. Hill had a number of concerns, including the sheer length of the final rule.
"This is by far the longest rulemaking the FDIC has ever issued … more than 75,000 words longer than double the length of the capital proposal approved over the summer," he said. "The more complex a rule is, the less likely it is that bankers, the public, and examiners fully understand it; the more time and cost is spent on training, consultants, vendors, lawyers, compliance systems, IT tools, and more training; and the less likely it is that the rule is applied in a consistent and intended manner over time."
McKernan said he rejected the rules' premise that banks needed to do more to adequately serve LMI communities. He noted that a large number of banks would be graded less than stellar under the new rule.
"The agencies have not made a case for the rule's unspoken premise that a significant portion of banks are not doing enough to meet the credit needs of their entire community," he said. "The agencies estimate that almost half of banks would have received a bank-level "low satisfactory" under the retail lending test over the 2018-2020 evaluation period."
Community group leaders like Jesse Van Tol, CEO and president of the National Community Reinvestment Coalition, praised the final rule, saying that persistent inequalities in bank lending and services justify the changes outlined in the rule.
"This update is both long overdue and essential," Van Tol said in a release. "Marginalized communities still suffer from a variety of inequities in mortgage and small-business lending, and from the enduring effects of historic financial discrimination [and] CRA is one of the most powerful and important tools the government has to ensure that banks meet the credit needs of all Americans and in all communities."
Banking trade groups reacted to the final rule with greater caution. American Bankers Association President and CEO Rob Nichols said he supported the agency's effort to modernize the outdated law, but that his organization needed to do more analysis to determine if the law truly incentivized banks to lend more to LMI communities and honored the original congressional intent of the CRA.
"The test for a CRA modernization rule is whether it incentivizes investment in underserved communities with requirements that are transparent, promote consistency and align with congressional intent," Nichols wrote in a release. "We are still reviewing the nearly 1,500-page final rule released today, including changes from the proposed rule, to assess whether it meets our criteria."
Independent Community Bankers of America President and CEO Rebeca Romero Rainey indicated the asset size regulators established for classifying large firms was still too low in her view.
"While ICBA and the nation's community banks support agency efforts to modernize the CRA's implementing regulations, regulators must recognize that a regulatory change of the length and complexity of this rule will create disproportionate implementation costs for community banks," Rainey said in a statement. "The final rule includes some beneficial changes for community banks and the customers they serve, including raising the small bank asset threshold from its current level of $357 million in assets to $600 million in assets and creating a qualifying activities list and preapproval process that will increase certainty about whether prospective loans or investments count for CRA credit. However, by classifying all banks over $2 billion in assets as large banks, we are very concerned that the rule does not sufficiently differentiate between community banks and the nation's largest banks."
