The latest attempt to revamp the Community Reinvestment Act could pose serious challenges for big banks that have used online lending to find business across a wide area.
A years-long effort to modernize the CRA now takes online banking and lending into account, while keeping branch networks at the center of CRA federal reviews to determine whether banks do not discriminate where they make their loans.
For smaller banks, the ARC’s proposed changes should have little impact on how they define the geographic area that regulators will assess to determine whether they meet a community’s credit needs. But for large banks, including those that offer online lending outside of their branch networks, the proposed changes have raised concerns about the areas in which they will be assessed for ARC activities.
“While we agree that a change is needed in the areas of assessment to adapt to the changing banking and technology environment of the financial industry, we do not believe that careful attention adequate has been given to community banks serving their customers across a geographical boundary, i.e. via the internet and other media,” said Nicole Almeida, Senior Vice President of Swansea-based BayCoast Bank , Director of Diversity and CRA Officer, in a letter to regulators.
Branches and ATMs remain essential
After the ARC’s latest attempt at an update ended with the three federal banking regulators failing to move forward with a joint proposal, the FDIC, Federal Reserve, and Office of the Comptroller of the Currency have come up with new rules together.
The proposed changes would represent the CRA’s first major update since 1995, and generated a series of other controversies and criticisms banking groups and community advocates.
The basis for ARC reviews is a bank’s rating area, currently defined by banks based on the areas surrounding physical branches and ATMs that accept deposits. To avoid redlining, banks cannot “arbitrarily exclude low- or moderate-income census tracts” from their rating areas, under current regulations, and the areas cannot reflect unlawful discrimination.
These anti-discriminatory requirements remain in the proposed regulations. And the reviews will continue to assess a bank’s performance across its branch network, what the proposal calls “facility-based assessment areas.”
“While the number of bank branches has declined in recent years, agencies believe that branches remain a key way of defining a bank’s local communities,” bank 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 has a physical location that takes deposits from customers. Even though the location is open by appointment only, it is still considered a branch.
Other changes anticipate that business models or banking options may change. Instead of referring to ATMs, the proposal now includes “remote service facilities” as part of the facilities-based assessment area, a broader term that the agencies say encompasses other options such as interactive bank machines.
Changes for large banks
Smaller banks, which under the proposed rule would have less than $600 million in assets, and intermediate banks, which would have less than $2 billion in assets, would continue to designate the assessment area based on facilities using a similar approach to what they currently use. .
But some middle-sized banks might be screened outside of their defined geographic area. Banks that make more than 50% of their lending outside of the facilities-based assessment zone would have their lending in these other areas also considered.
For large banks — those with $2 billion or more in assets — the CRA’s proposal would bring bigger changes.
The proposed rule provides large banks with two options for their facilities-based assessment area. They could choose a region with one or more metropolitan statistical areas or metropolitan divisions. Or, banks could choose one or more contiguous counties within an MSA, metropolitan division, or non-metropolitan area of a state.
The agencies said the approach would create a more consistent standard for large banks when defining their areas of assessment, while promoting fair lending and making it easier to report data.
Different business models
For large banks whose lending activities lead to lending outside of their typical geographic region, including online lending, ARC would include a second assessment area called the “retail lending assessment area.”
This zone would be required for large banks that had 100 mortgages or 250 small business loans in a geographic area outside the facility-based lending zone in the previous two calendar years.
“The proposed approach to designating retail lending rating zones is designed to provide a pathway for rating banks in a way that provides parity between banks that lend primarily through branches and banks with different business models,” the proposal reads. “The designation of new retail loan rating zones would ensure that, regardless of distribution channel, large banks would have their retail loan ratings in local markets where they have significant retail lending activity. .”
These changes have raised some concerns for Massachusetts banks. The facility-based assessment area could mean that banks would have their lending business assessed for an entire county, even if they only have branches in part of the county.
“Just because you have a branch in the northwest part of Middlesex County – maybe you have seven or eight branches up there or in central Massachusetts – does that really mean your area rating is the whole county of Middlesex? Ben Craigie, vice president of government affairs at the Massachusetts Bankers Association, told Banker & Tradesman.
In a letter to regulators, Craigie noted that these types of geographic differences occur throughout Massachusetts and New England.
Banks also have concerns about the retail lending assessment area and the potentially broad areas where banks will need to engage in ARC activities.
“Not all major banks currently have the personnel and technology equipment to engage in large-scale CRI activities in these new RLAAs,” Craigie wrote to regulators.