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Community Reinvestment Act Changes and Financial Institution Impact

By Mallory Conway, on March 8th, 2024

This article was co-authored by Mallory Lidsky

Federal Reserve Governor Michelle Bowman recently criticized the Final Rule, expressing concerns about its complexity and regulatory burden on community banks. According to Governor Bowman, the Final Rule imposes the same regulatory standards on community banks as on the largest institutions, a departure from other regulations. Furthermore, she stated that this rule may require a recalibration as it increased regulatory requirements without a data supported analysis.

Trade associations have also raised concerns about the Final Rule, filing lawsuits against the federal regulators for allegedly exceeding their statutory authority.

Banks have been regulated by the Community Reinvestment Act (also referred to as CRA or Regulation BB) since its implementation in 1977. Its purpose – to meet consumer needs in all income levels of the bank’s community while maintaining safe and sound lending practices. This primary goal has not changed over the decades, but the measuring or evaluation guidelines set by regulators certainly have.

Most recently, the three regulating federal agencies responsible for overseeing this Act (FRB, FDIC, and OCC) have released a rare joint statement on newly approved changes which are aimed at a more consistent process for how they plan to periodically evaluate banks. These changes were made final on October 24, 2023, and will become effective April 1, 2024. (You can read all 1480 pages of the Final Rule here).

What are the challenges we see for financial institutions as they move forward with the implementation of the Final Rule?

  • The complexity of the rule changes may impose a compliance burden on financial institutions to ensure they are up to date with necessary requirements.
  • Financial institutions will need to update policies and procedures to incorporate the changes to the rule.
  • With the evolution of banking practices like online and mobile banking, Assessment Areas might require adjustments. The expansion of assessment areas nationwide could facilitate “community development” but might disadvantage smaller community banks lacking a significant digital presence.
  • There are concerns about distinguishing between “weblining” and “redlining” in light of changes to assessment areas and how such determinations will be made.
  • Understanding how to identify lending, investment, and service opportunities for Community Development under the expanded categories is crucial.
  • There’s apprehension about potential changes in overall CRA ratings and speculation on how this might affect future CRA exams.

To help guide financial institutions through the new process, the agencies have provided resources, including a key objectives document on the FRB’s website, which can be found here.

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Written By

Mallory Conway May 21 Web
Mallory Conway
Consulting – Executive Vice President

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