Overview of CRA Proposal
In this Compliance Clip (video), Adam briefly discusses the recent CRA proposal by providing an overview of the goals of the proposal. Adam also discusses how, if passed as proposed, this new rule would have some major changes to Assessment Areas that may have negative effects on banks.
This topic is actually just one of many included in our new Winter 2020 Quarterly Compliance Update. This clip provides a sample of the types of information included in our quarterly program. The full curriculum for the Winter 2020 Quarterly Compliance Update can be found at www.compliancecohort.com/winter-2020-quarterly-compliance-update.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to briefly talk about the new CRA proposal that was released recently by the OCC and the FDIC.
On December 12, 2019, the FDIC and the OCC jointly announced a long awaited to proposal to modernize CRA rules. This proposal was finally published in the Federal Register in 2020, and the comments are actually due by March 9, 2020. As of the time of publication in this video, there is a little bit time to submit comment, and I challenge all banks to submit comments on this because this will affect you as a financial institution when it comes to CRA. Now, if this is finalized, this would be the first change that has taken place in nearly 25 years to the Community Reinvestment Act rules. The proposal is good-natured by the OCC and the FDIC. The proposals intended to do a number of things: they're intending to increase bank activity and low and moderate communities; they're trying to encourage more responsible lending; they're trying to provide greater access to banking services; and they're trying to make improvements to critical infrastructure like the examination process.
What's interesting here is that the FDIC and the OCC have joined in for this proposal. This was really spearheaded by the Comptroller of the Currency. So the OCC's director has really spearheaded this and one of the priorities of the OCC is to modernize CRA rules, The FDIC has gotten on board and is doing this jointly. However, the Federal Reserve has taken a wait-and-see approach on this as they have not jumped in on this proposal. They have said they may jump in on the final rule, which would be fantastic because it would be unfair to have one regulatory agency under a different set of rules than other regulatory agencies, but we'll see what happens there. The Federal Reserve has said they'll take a wait-and-see approach, but they have said they may jump in on the final rule. So it'll be interesting to see.
I do encourage all financial institutions, whether you're regulated by the FDIC or OCC or the Federal Reserve to comment, especially you Federal Reserve banks, even though this isn't a proposal by the Federal Reserve Board, there's a good chance the Federal Reserve could adopt this as a final rule. So now is your time to comment and there are some good things, there are a lot of good intentions here as you can see to make things better and to modernize it. But what often happens with rules and regulations is they get complex. So there are quite a few challenges that could come with this rule, and I wanted to talk about just one of those challenges in this Compliance Clip. We actually talk about quite a few more challenges in our full Winter 2020 Quarterly Compliance Update, and I just wanted to give you kind of an example of what we do in our Winter 2020 Quarterly Compliance Update and really make sure that everybody is able to see what's in this proposal and some of the challenges with this.
Just one of the topics that is in the CRA proposal is changes to how the assessment area would work under the new proposed CRA rule. The assessment area would have several changes and they would essentially redefine the rules for assessment areas to be deposit based rather than based on where the branch locations are physically located. Now, this doesn't really address internet based banks at all, and I think there would, those internet based banks would still be operating under strategic plans like they currently are. But they are redefining the rules on making this or wanting this to be deposit based.
Another thing they would do related to assessment areas is they would make assessment areas include full counties rather than areas a bank can reasonably be expected to serve. This has been a trend we've seen with regulators, or at least some of the regulators, over the last several years where they're wanting full counties to be taken in the assessment area of a financial institution. For larger financial institutions, that's completely understandable. Larger financial institutions like Chases and Bank of America Should have to do this and can do this. However, when we're talking about smaller financial institutions like community banks, there's many community banks who are members of the Compliance Cohort who have just three or five branches. We have a lot of those community banks.
When you're talking about a community bank of maybe five, three or even one branch, this could be extremely challenging. For example, if you had a community bank with just, let's say, three branches in rural Florida, but one of their branches actually started to go into the county where Jacksonville, Florida is located. If you think about Jacksonville, Florida, that county is over 900 square miles wide, and most metropolitan areas are just like this, and my question to you is how could a three-branch community bank that's headquartered in a rural area that started to go towards the big city and has one branch in the big city, just barely there, how would that financial institution be able to serve the entire metropolitan area that's over 900 plus square miles, depending on where you're talking about? So it would cause some major challenges for those smaller community banks.
Again, I believe this is probably a good idea for the largest banks. However, I'm just not sure how smaller community banks could take entire counties and how this would play out with the examination process because clearly what happens at current CRA exams is financial institutions serve the areas that are geographically located close to them because those areas on the other side of the county, in order for a customer to get over to that bank, they would literally have to pass dozens and dozens and dozens of other bank branches in order to get to that bank. And it's just not feasible to expect that that bank would have to be able to serve that entire county. So that would be a change.
Also, another interesting change that would affect the larger banks would be that the proposed rule would only allow assessment areas to be changed once during the exam cycle. Now, if you're a larger financial institution, you may be acquiring financial institutions on a yearly basis, and we've seen some financial institutions doing that where they're acquiring other banks on a yearly basis. Well, if you can only change your assessment area once during an exam cycle, some exam cycles go up to five or more years depending on the regulator, this could be problematic.
Also, there's some banks who have a branching strategy where they're building one branch or more per year and they're not sure five years in advance where they're going to be able to put branches or and this could change things and make it challenging for them as well.
These are some very interesting changes and this is again, just one of the things that's coming out of the CRA proposal. There's quite a few and we cover several more pieces in our Winter 2020 Quarterly Compliance Update. Now again, this is just a really good overview for all of you to understand what's coming with this proposed rule.
Typically, I don't like to spend a lot of time with proposals, but if there's something that I think is important for bankers to comment on while the comment period is open, we will cover it briefly. So we didn't do a deep dive in our Winter 2020 quarterly compliance update, but we provided a summary just like this and actually added several more points on what some of the concerns, for specially community banks, would be.