UPDATE 3/28/2025 – THE FEDERAL BANK AGENCIES JUST ANNOUNCED PLANS TO RESCIND THE CRA MODERNIZATION RULE AND REINSTATE THE PRIOR REGULATORY FRAMEWORK. INFORMATION CONTAINED BELOW IS SUBJECT TO CHANGE AND WILL BE UPDATED ACCORDINGLY.
On October 24, 2023, the regulatory agencies published the long-awaited Community Reinvestment Act (CRA) modernization rule, a 1500-page behemoth intended to clarify application of CRA requirements and better reflect how banks operate in the age of mobile and online banking. The new rule also radically changes how examiners will assess bank performance starting in 2026.
Are you ready? Well, that depends on your answers to the questions below.
1. What size bank are you? Are you a small bank (less than $600 million in assets as of December 31 in each of the two years preceding the exam) or intermediate bank (between $600 million and $2 billion in assets as of December 31 in each of the two years preceding the exam)? Good, you have fewer new requirements than large banks (those with $2 billion or more in assets). However, the changes to the CRA exam procedures are still substantial, especially for intermediate banks.
Please note, this questionnaire is intended for small and intermediate banks only and does not specifically cover requirements for large banks, wholesale and limited purpose banks, military banks, or banks operating under a CRA strategic plan.
2. What is your Facility-Based Assessment Area (or Areas)? Designation of at least one assessment area – the geographic area surrounding your physical branch location(s) – has long been part of CRA compliance. The new rules include minor but important changes to how banks must define a facility-based assessment area. If your CRA assessment area(s) includes whole or partial metropolitan statistical areas (MSA) where you do not have a branch presence, you will need to make some updates to your facility-based assessment area(s) designation.
3. Will you undergo the new Retail Lending Test? Intermediate banks will be subject to the new Retail Lending Test outlined in the updated CRA regulations. Small banks will be evaluated according to the legacy small bank lending exam procedures by default but may opt in for evaluation under the new Retail Lending Test.
Banks subject to this new testing framework – which will account for 50 percent of a bank’s overall CRA rating – should be prepared for some big changes.
- Retail Lending Volume Screen – This new testing component measures the volume of a bank’s retail lending relative to its deposit base in each facility-based assessment area (the Bank Volume Metric) as compared to other banks. A bank must meet or exceed 30 percent of the Retail Lending Volume Threshold, which is the aggregate ratio for all banks reporting a Bank Volume Metric in that facility-based assessment area, to satisfy the Retail Lending Volume Screen.
- Evaluation in an outside retail lending area – One of the more seismic changes in the CRA regulations is that bank performance can now be evaluated outside of areas anchored by a physical branch presence. While this change will mostly affect large banks, intermediate banks and small banks that opt into the Retail Lending Test that originate or purchase more than half of their combined mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans outside of a facility-based assessment area in the two calendar years before an exam will also be evaluated in an outside retail lending area. Small and intermediate banks that don’t meet that threshold can also opt in for testing in an outside retail lending area if they desire.
- Definition of major product lines – As before, the lending test will cover only in-scope loan products that represent a significant portion of a bank’s lending activities. However, the updated regulations now explicitly define a major product line – which includes only closed-end mortgage loans, small business loans, small farm loans, and automobile loans -to be a product line that accounts for 15 percent or more of loans across all the bank’s product lines in its facility-based assessment area (or outside retail lending area, if applicable).
- Geographic and borrower distribution benchmarks – The distribution of bank lending in low- and moderate-income (LMI) census tracts and to LMI borrowers, small business, and small farms will now be evaluated relative to new market and community benchmarks. Performance relative to those new metrics will be multiplied by specific multipliers to yield a rating for this portion of the exam, thereby increasing objectivity, predictability, and consistency in rating assignments.
There’s a lot to unpack in the calculation of various metrics and benchmarks contained in the Retail Lending Test, as well as how performance against those metrics will translate into exam ratings. If you’re not familiar with how those new examination procedures work or how your bank performance will look through that new lens, it’s time to prepare.
4. Will you undergo the new Community Development Financing Test? Intermediate banks can opt for either the new Community Development Financing Test or the Intermediate Bank Community Development Test, both of which will account for 50 percent of the bank’s overall exam rating. The latter option is the same as the legacy community development test for intermediate-small banks while the new Community Development Financing Test has some key new components:
- Assessment Area Benchmarks – The dollar amount of community development (CD) loans and investments benefiting the bank’s facility-based assessment evaluated relative to its deposit base in each facility-based assessment area (Bank Assessment Area Community Development Financing Metric) will be evaluated against the aggregate ratio for all banks reporting in that facility-based assessment area (the Assessment Area Community Development Financing Benchmark). Additionally, the Bank Assessment Area Development Financing Metric will be compared to an MSA Nationwide Community Development Financing Benchmark or Nonmetropolitan Nationwide Community Development Financing Benchmarks, depending on whether the bank’s facility-based assessment area is in an MSA or nonmetropolitan area.
- State Evaluation – In addition to calculating the bank’s state-level Community Development Financing Metric for comparison to a state-level benchmark, examiners will calculate a weighted average of a bank’s performance scores on the assessment area test described above to compare to the State Weighted Assessment Area Benchmark. For banks that operate in a multi-state MSA, the state evaluation will be replaced by a multistate MSA evaluation that operates similarly to the state evaluation.
- Nationwide Area Evaluation – The nationwide evaluation works like the state evaluation but at the national level.
Much like with the new Retail Lending Test, banks expecting to undergo the Community Development Financing Test should understand the construction of the new metrics and benchmarks and how they will influence performance evaluation. If not, now is the time to prepare.
On a related note, all banks, not just those subject to the Community Development Financing Test, will benefit from two additional changes to the CD CRA regulations. If you haven’t done so already, you should re-evaluate your bank’s lending and investment portfolios in light of the following:
- More CD purpose categories – Instead of the four long-standing CD purpose categories (affordable housing, community services, economic development, revitalization and stabilization), the updated CRA regulations feature 11 distinct categories. New CD purpose categories include support of essential community facilities and infrastructure; disaster preparedness, weather resiliency, and disaster area recovery; financial literacy; Native land areas; and activities undertaken with minority depository institutions (MDIs), women’s depository institutions (WDIs), low-income credit unions (LICUs), and community development financial institutions (CDFIs).
- No more geographic limits – Prior to CRA modernization, CD loans, investments, and services generally had to benefit a bank’s assessment area to receive full credit. The new CRA regulations lift that restriction, opening the door for banks to conduct CD activities nationwide and receive credit.
If you are unprepared or underprepared for the next exam, now is the time to take action. You can check out the forthcoming CRA series from the High Ground library for more detail on how to structure and test your CRA program, or you can contact us for expert consulting services. We are here to help you make sense of all the recent changes, update your CRA program, and hit your targets for the next exam.
