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After a yearslong and often controversial effort by federal regulators to update the Community Reinvestment Act, banks could have just one year before they have to start complying with new CRA rules.

“Ion Bank views a 12-month timeframe as insufficient to implement the proposed changes for a rulemaking this comprehensive and complex,” David Rotatori, president and CEO of Naugatuck-based Ion Bank, said in a letter to federal regulators. “As the proposal is currently written, Ion will need substantial time to effectively deal with the new rule.”

Stakeholders finished submitting feedback earlier this month on a nearly 700-page proposal aimed at modernizing the anti-redlining law. While both banks and community groups have already achieved one goal – having the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency develop new rules together – both banks and community groups have concerns about the proposed changes to a law which has not been updated in more than 25 years.

On one hand, banking trade groups say the reforms will put medium-sized banks with only a few billion dollars in assets at a disadvantage as they try to compete with their larger brethren. On the other hand, community and housing groups say the reform doesn’t do enough to deal squarely with the legacy of decades of redlining and racial discrimination.

What’s Changing

Some states, like Connecticut, have state-level evaluations as well, but the federal CRA law has not been significantly revamped since 1995.

The three federal bank regulators spent several years attempting to reform the CRA, but the effort failed to produce a joint proposal. Instead, the OCC in May 2020 issued its own rule. The FDIC had initially planned to support the OCC’s proposal but decided against finalizing the rule following the start of the pandemic. The OCC’s CRA rule was eventually rescinded by the Biden administration, and the OCC, FDIC and Fed agreed to work on a new proposal.

Some changes in the proposal include tailoring CRA evaluations and data collection to the size and type of the bank, expanding the types of banking services considered for CRA in low- and moderate-income communities, clarifying whether an activity counts for CRA purposes and recognizing the changes brought on by online and mobile banking.

Activists Want More Rigor, Race Considered

While CRA is considered an anti-redlining law and part of the civil rights initiatives of the 1960s and 1970s, the law does not reference race. For the NCRC and other community organizations, CRA exams should include race and ethnicity when evaluating a bank’s lending activities to determine whether it serves people of color and communities of color.

“[The CRA] was passed as a measure to remedy and prevent racial discrimination,” Jesse Van Tol, president and CEO of the National Community Reinvestment Council, said in the NCRC’s 129-page comment letter. “It required banks to serve all communities, which provides room for the federal bank agencies to incorporate race in CRA exams in order to ensure this end is met.”

The NCRC, whose membership includes several Connecticut-based community organizations, said it wants a more rigorous exam process that does not inflate ratings, noting that most banks receive a “satisfactory” rating. With assessment areas now accounting for online lending, the NCRC said the agencies also need to improve their measurement of whether banks have met the credit needs of segments within the assessment area, such as small metropolitan or rural areas.

Four tests have been created in the proposed rules – retail lending test, retail services and products test, community development financing test, and community development services test. And new asset thresholds will determine the tests applicable at each bank.

Small banks with assets under $600 million could choose to keep the current CRA framework; intermediate banks with assets under $2 billion would be subject to the retail lending test and either keep the current framework for community development or opt into the new community development financing test.

Large banks would be subject to all four tests.

Bankers Say Medium-Sized Banks Hurt

For the NCRC, increasing the asset thresholds for determining the testing requirements would reduce the required activities these banks would need for CRA purposes.

“These changes lack justification since these banks have been successfully performing these activities for several years,” Van Tol said.

But for banking trade groups, these increases did not go far enough.

The Independent Community Bankers of America said in its comment letter that the small bank threshold should be increased to $750 million for small banks and $2.5 billion for intermediate banks to keep pace with inflation and industry consolidation.

While the American Bankers Association accepted the $600 million threshold for small banks, the trade group said the threshold for intermediate banks should be capped at $3.3 billion.

The ABA’s 43-page letter references several times the complexity of the new retail lending test, part of the reason for recommending a higher threshold for intermediate banks. Rotatori, with Ion Bank, also pointed to this test in his comment letter.

“Of particular concern to Ion Bank, the Retail Lending Test includes highly complex performance metrics that we assert should only be applied to Large Banks of a much higher asset size than the $2 billion threshold in the proposal,” Rotatori said. “Ion Bank simply does not possess the level of resources in the form of personnel and systems needed to effectively monitor and respond to the results of a Retail Lending Test.”

He added that holding Ion Bank to the same performance standards as larger institutions with greater resources and systems capabilities would be unfair.

Fear of ‘Unsafe and Unsound’ Lending

The ABA’s letter, which was signed by the Connecticut Bankers Association and the other state trade groups, included concerns about guidelines for the assessment area and performance expectations under new metrics that now include a “low satisfactory” rating.

“The proposed Retail Lending benchmarks may be unachievable and could incentivize unsafe and unsound risk taking,” the ABA said. The trade group added: “In the limited amount of time that we had to review the proposal, it appears that the proposed performance standards could create an unrealistic target, whereby it will be mathematically impossible for all banks in an assessment area to meet the proposed thresholds.”

Assessment areas for large banks would have an assessment area no smaller than a county, an approach that the ABA said would be “overly standardized,” present hardships for banks and provide no benefits to low- and moderate-income communities. Rotatori said this approach would put Ion Bank at a “tremendous disadvantage”

“An artificially derived [assessment area] encompassing whole counties under the proposed rule would produce dangerously misleading results,” Rotatori said. “Specifically, the comparisons that will be done to market benchmarks would not reflect the fact that a bank of Ion’s size does not possess the capacity in terms of its branch network and other resources to effectively serve entire counties when compared to much larger institutions.”

Ion Bank and the bank trade groups requested two years instead of one year to implement the new rules. The ABA also pointed out that the bank regulators aggressive time frames have suggested that they want to implement the rule before a possible change in the administration in 2025.

“Regulators, banks, consumer and community advocates, and other stakeholders have come too far and worked too hard to rush the final stage of this important work,” the ABA said.