As we previously discussed in our 4-part series on the fatal flaws in the 2023 CRA rule, the rule faces significant challenges in measuring the credit needs of communities and banks’ record of meeting those needs. To address these issues, regulators should consider proposing simple changes to the legacy CRA rule that could dramatically impact its effectiveness and benefit everyone involved.
Proposed Changes to Improve the Effectiveness of the CRA
- Provide an alternative to the Assessment Area Ratio Test to Determine Loan Volume Adequacy
- Geocode community development loans and report the purpose classified and reported
- Streamline the evaluation of CRA-related lending to make it more efficient and effective
Alternative to the Assessment Area Ratio Test
The Assessment Area Ratio Test is a flawed measure of loan volume adequacy based on a zero-sum game assumption that lending outside the community reduces a bank’s ability to lend inside its assessment areas. However, this assumption no longer holds true in today’s market with the expansion of secondary markets and the adoption of broader markets by community banks.
As an example, banks with assessment area ratios below 10% are now using secondary markets to fund lending outside their communities. When we compared their CRA-related lending to deposits ratios with other depository institutions within the defined community, we found that these banks consistently ranked highly for lending inside their communities. This demonstrated that the Assessment Area Ratio Test provides a misleading picture of the adequacy of their lending inside their assessment areas.
A more effective measure of loan volume adequacy would be to compare an institution’s CRA-related lending volume in its Facility-based assessment areas to its deposits, as reported in the annual Summary of Deposits, and then compute the same ratio for all lenders with depository facilities within the same area. This approach is similar to the Retail Lending Screen Test adopted in the 2023 CRA rule.
Geocoding Community Development Loans
Community development lending is a critical aspect of the CRA, as it addresses the specific needs of the community. However, the legacy CRA only reports community development lending as a summary of total CD loans and their values, making it difficult to measure and identify the CD loan market data as a benchmark for CD lending.
By geocoding community development loans and reporting the purpose classified and reported, banks can provide valuable information about the needs of the community and how banks are meeting those needs. This information would be essential for regulators, community leaders, and banks themselves to assess the effectiveness of the CRA.
Although the 2023 CRA rule requires large banks to geocode community development loans at the county level, we suggest that the agencies incorporate a requirement to geocode all community development loans and identify the CD purpose associated with each CD loan in the NPR regarding the repeal of the 2023 Rule.
Benefits of the Proposed Changes
The proposed changes to the legacy CRA rule would have numerous benefits for everyone involved. Banks would receive recognition for their community development lending activities, and community leaders would gain valuable insights into the needs of their community and how banks are meeting those needs.
The added burden of geocoding community development loans and reporting the purpose would be negligible, and the benefits would far outweigh the costs.
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