Layla Zulfa
Federal banking regulators have put forth a revised proposal for the Community Reinvestment Act (CRA) that significantly alters how banks receive credit for community development activities and raises asset thresholds for smaller and mid-sized institutions. The plan, released Friday by the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC), aims to refocus on the core statutory objectives of the CRA, ensure that grants directly benefit communities, streamline compliance for financial institutions, and provide enhanced clarity regarding CRA evaluations. This proposed rule has immediately drawn sharp criticism from consumer and housing advocacy groups, who express concerns about its potential impact on vital community development initiatives. The agencies have opened a 60-day comment period following the proposal’s publication in the Federal Register.
The proposed framework outlines a shift in emphasis, moving away from credit for deposit products and centering evaluations more explicitly on lending activity. Regulators contend that lending is the most effective means by which banks can address a community’s credit needs. While banks will continue to be assessed through performance tests tailored to their size, business model, or an approved strategic plan, the updated approach seeks to prioritize direct financial investments and lending over other forms of engagement.
Lindsey Johnson, president and CEO of the Consumer Bankers Association (CBA), voiced her organization’s perspective, stating that banks should indeed receive CRA consideration for their multifaceted contributions. "Banks should receive CRA consideration for responsibly providing loans, investing in their communities, supporting affordable housing, financing small businesses, and helping consumers achieve financial security," Johnson remarked. She further emphasized the CBA’s belief in the necessity of a durable and objective regulatory regime. "The CBA firmly believes that any new CRA rule should be finalized with the intention of establishing a durable regime with objective approaches grounded in statute that will last through administration shifts," she added.
Scrutiny Over Community Development Grants and Operating Support
A central point of contention within the proposed rulemaking concerns how community development (CD) grants and operating support will be treated. The FDIC and OCC intend to tighten the criteria for CRA credit, ensuring that financial contributions are more directly linked to projects where community development is the primary objective. For larger banks, those with assets exceeding $10 billion, the proposal introduces a cap, limiting the portion of a grant or donation that can be allocated to indirect or administrative costs by the recipient organization to 15%.
This specific provision has raised significant alarms among housing and community development advocates. David M. Dworkin, president and CEO of the National Housing Conference (NHC), described the proposal’s approach to grants and operating support as "particularly concerning." He articulated that this tightening of criteria could restrict CRA consideration for private-sector operating support and, consequently, diminish funding for critical entities such as Community Development Financial Institutions (CDFIs), affordable housing organizations, homeownership counseling services, fair housing groups, and various other non-profit organizations.
"These organizations play an essential role in helping families achieve homeownership, expanding access to affordable housing, combating housing discrimination, and ensuring that community development investments deliver lasting results," Dworkin stated. His remarks underscore the vital, often multifaceted, role these organizations play in underserved communities, suggesting that a reduction in their financial support could have cascading negative effects.
Increased Asset Thresholds and Streamlined Evaluations
The proposal also introduces substantial adjustments to the asset thresholds that dictate how banks are evaluated under the CRA. For institutions with less than $10 billion in assets, the revised framework promises to reduce data collection, maintenance, and reporting burdens. Furthermore, regulators are considering evaluating only a bank’s "major product lines"—such as home mortgages, small-business loans, and consumer loans—rather than every single product category. This adjustment is intended to create a more tailored and efficient lending test.
Another notable aspect of the proposal is the potential codification of a preapproval process. This mechanism would allow financial institutions to seek advance confirmation from regulators that a specific community development program or initiative will qualify for CRA consideration before they commit their resources. Proponents suggest this could provide greater certainty for banks planning significant community investments.
However, these changes have been met with strong opposition from organizations dedicated to advocating for equitable access to credit and housing. Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition (NCRC), expressed deep reservations, asserting that the proposal "weakens banks’ obligations to invest in working-class communities and threatens to undermine the affordable housing gains in the 21st Century Road to Housing Act entirely."
Van Tol elaborated on the NCRC’s concerns: "Banks will face weaker exams, get credit for projects with little connection to low- and moderate-income communities and gain more control over where and how they are evaluated," he said. His assessment suggests a fundamental shift in the CRA’s intent. "CRA is supposed to put a thumb on the scale for working-class people; now it lets hundreds of banks off the hook, and dramatically reduces the obligation for others," Van Tol concluded, highlighting the potential for a significant reduction in the CRA’s impact on vulnerable populations.
A Shift from Recent Modernization Efforts
The current proposal represents a notable divergence from the comprehensive CRA modernization rule that the FDIC, OCC, and the Federal Reserve jointly finalized in October 2023. The 2023 rule was designed to modernize the CRA framework for the digital age, incorporating changes such as the inclusion of digital delivery channels in assessment areas, the introduction of new retail lending and community development tests, and the standardization of evaluation metrics across the three regulatory agencies.
This earlier modernization effort faced significant opposition from industry trade groups. They argued that the 2023 framework was overly complex, extended the scope of the CRA beyond its original statutory intent, and would impose substantial implementation costs.
The industry’s resistance culminated in legal action. In February 2024, the Texas Bankers Association and other plaintiffs filed a lawsuit seeking to block the 2023 rule, alleging that the regulators had exceeded their legal authority. A federal judge subsequently issued an injunction in March 2024, effectively halting the implementation of the 2023 rule and reverting CRA enforcement to the long-standing framework established in 1995. This judicial intervention created the context for the current regulatory agencies to revisit and propose a new approach to CRA modernization, leading to the recent proposal that is now open for public comment.
The Historical Context and Significance of CRA
The Community Reinvestment Act, enacted in 1977, was a landmark piece of legislation designed to combat redlining and encourage banks to meet the credit needs of the communities in which they operate, including low- and moderate-income (LMI) neighborhoods. The law requires federal banking regulators to assess a bank’s record in meeting these needs through regular examinations. Banks that fail to meet their CRA obligations can face restrictions on mergers, acquisitions, and branch expansions.
Over the decades, the CRA has been instrumental in driving billions of dollars in investments into underserved communities, supporting affordable housing development, small business growth, and essential community services. The interpretation and application of the CRA have evolved, with periodic updates by regulators to reflect changes in the financial landscape and community needs.
The banking industry, represented by groups like the CBA, has often argued for regulatory clarity and efficiency, emphasizing the importance of a predictable and manageable framework for compliance. They contend that overly complex rules can stifle innovation and impose undue burdens, particularly on smaller institutions.
Conversely, consumer and housing advocates, such as the NCRC and NHC, have consistently pushed for a robust CRA that ensures banks actively contribute to economic equity and opportunity. They view the CRA as a critical tool to address systemic inequalities and ensure that financial institutions serve all segments of society, not just profitable markets. Their advocacy often centers on the need for strong enforcement and broad credit for activities that directly benefit LMI individuals and communities.
The ongoing debate surrounding CRA modernization reflects these competing perspectives. The agencies’ latest proposal attempts to strike a balance, seeking to streamline processes and focus on lending while addressing concerns about the effectiveness and direct impact of community development investments. The 60-day public comment period will be crucial in shaping the final rule, as regulators weigh the feedback from industry, consumer groups, and the public. The outcome of this process will have significant implications for how banks fulfill their community obligations and for the economic vitality of neighborhoods across the nation.
