By Krista Shonk

The regulatory rule-making process in Washington is known to be thoughtful and deliberative. Some would call it bureaucratic and slow. After nearly two years of extensive contact with stakeholders, the OCC issued a final rule on May 20 that revises the agency’s regulations implementing the Community Reinvestment Act. For those outside the ring road, two years may seem like a leisurely pace. But this is chain speed for a regulatory overhaul. In fact, the OCC finalized the new rule just 41 days after the public comment period closed.

The staff of the OCC, led by former Controller Joseph Otting, is to be commended for this Herculean effort. Developing a new rule has not been easy: the needs of communities vary widely, the business models of banks are not monolithic, and technology has forever changed consumers’ preferences for access to products and services. financial services. These are complex questions, especially for such a correlative rule as the CRA. Moreover, ARC is not obscure banking regulation that only bankers, regulators, and lawyers care about and understand. Consumer and community advocates, academics, economic development and revitalization experts, and members of Congress are also interested in the public policy outcomes resulting from an updated CRA regulatory framework. This wide range of stakeholders makes the pace of OCC rule making all the more remarkable.

Speed ​​of rule-making is not the only defining characteristic of the new CRA rule of the OCC. Some aspects of the new rule have been well received, such as creating a publicly available list of eligible CRA activities and establishing a pre-approval process to confirm that a planned activity will receive credit. of the CRA. These arrangements will make the ARC review more consistent and predictable and have received broad support. Other parts of the rule, however, have been met with skepticism. In particular, banks and other ARC stakeholders have expressed doubts as to whether the creation of numerical benchmarks to measure banks’ performance in ARC will produce desirable policy outcomes for communities and banks that serve them.

This skepticism was compounded by the failure of bank branches to develop a modernized ARC framework on an interagency basis. In the end, the FDIC and Federal Reserve chose not to join in the making of the rules, which means the new regulatory framework will only apply to banks regulated by the OCC. The failure of the agencies to reach consensus has raised questions as to whether the new OCC rule will be lasting or whether it will be dismantled by a future administration or Congress.

In fact, on June 29, the House of Representatives passed a Congressional Review Act resolution disapproving of the OCC’s new ARC rule. Under the Congressional Review Act, a regulation can be struck down if Congress passes and the president signs (or does not veto) the joint resolution of disapproval. The measure now passes through the Senate, where it requires a simple majority to pass.

While events and politics surrounding the rule-making process have provided ample food for political experts and industry watchers, three important points have gone largely unnoticed.

1. New performance measures will affect a limited number of banks

First, the new OCC ARC performance standards will apply to a limited number of banks – approximately 120 institutions. This represents about 11% of institutions regulated by the OCC and 2.4% of the entire banking sector. Only banks with assets exceeding $ 2.5 billion will be subject to the new performance measures; banks with assets of $ 600 million or less will continue to be subject to the current small bank test. Banks with assets between $ 600 million and $ 2.5 billion will be subject to the existing intermediary bank test, although small and medium-sized banks will have the option of opting for the new performance measures if they choose to. to do. Wholesale and limited-purpose banks will continue to be tested for community development as they are today.

While the new performance measures will apply to a relatively small number of banks regulated by the OCC, other parts of the rule will apply to all national banks and federal savings associations, regardless of their size. . For example, all institutions will be required to collect and maintain data on the value of each national retail deposit account and the physical address of each depositor at the end of each quarter. (However, only banks with more than $ 2.5 billion in assets will be required to report this information to the OCC). Likewise, all banks will be required to demarcate deposit-based assessment zones if the bank receives more than 50 percent of its deposits from areas outside its facilities-based assessment zones. Finally, all banks in the OCC will be able to build on the new list of qualified CRA activities of the OCC and use the new agency process to obtain prior confirmation that a particular activity is eligible for CRA credit.

2. The performance references are to be determined

The second overlooked aspect of the OCC’s ARC rewrite is that the agency has paused in its adoption of the most controversial component of the new performance measurement system: the specific numerical benchmarks against which the ARC banking performance will be assessed. During the public consultation process on the OCC’s proposal, banks, community organizations and others stressed that any performance measurement of the CRA must be well data-driven.

For example, ABA underlined that regulators were limited in their ability to leverage existing data to test proposed performance measures, as the data required to calculate a bank’s ARC performance under the proposal was significantly different from the data that banks collect and report today for CRA purposes. The ABA urged the OCC to perform extensive analysis and testing to ensure that digital performance metrics are calibrated appropriately in light of the multiple changes being made to the ARC framework.

It is important to note that the OCC Final Rule adopts a general framework for evaluating the performance of rating agencies, but does not set out the specific parameters that a bank must meet in order to obtain an agency rating. of particular notation. Instead, the OCC plans to issue an additional regulatory proposal notice this summer that will solicit feedback on the process the agency will use to calibrate performance metrics for the new regulations. Following the collection and analysis of additional data, the OCC will establish the benchmarks, minimums and thresholds for the new rule. It is essential that the OCC fully understands and tests this data before incorporating specific measures into the regulations. This is not an exercise that should be rushed in the name of an artificial deadline that is not imposed by law.

In particular, once the number marks are established, they will not be set in stone. The OCC plans to review and adjust them periodically. The agency notes that common definitions and better data over time will allow it to adjust the performance levels needed to achieve a particular grade. In doing so, the OCC will take into account various factors, including the level of eligible activities carried out by all banks, market conditions and unmet needs and opportunities. Any adjustments will be subject to public notice and a comment period.

3. Much work remains to be done, for all agencies

Third, while it is true that the OCC has issued a final rule that revises the ARC regime for national banks and federal savings associations, the modernization of the ARC is far from complete, for all agencies. Even if the OCC survives a Congressional Review Act challenge and sets the CRA’s performance indicators in the coming months, the agency will also need to publish guidance on various aspects of the rule, including the necessary documentation. to demonstrate that a consumer loan qualifies for CRA credit. , as well as tips for standardizing how reviewers apply performance context in CRA assessments. Examination procedures and training of examiners will also be necessary.

It is important to note that it is not only the OCC that has more work to do on modernizing the RCAF. In deciding not to join in the making of the OCC rules, FDIC President Jelena McWilliams noted that his agency is not ready to issue a new CRA rule during the COVID-19 pandemic. However, she did not close the door on the reform effort, observing instead that “the final rule contains many provisions that will greatly benefit low and moderate income communities and provide greater clarity to banks on expectations of the CRA “.

Likewise, even though the Federal Reserve has pulled out of the OCC-led OCC rule-making effort, Chairman Jerome Powell told the House Financial Services Committee last week that the central bank had “done a lot of terrific work” in rethinking how it would assess banks’ ARC. performance and that the Fed would not “let this go to waste.” Powell did not provide a timeline for any possible rule-making activity, however.

Look ahead

The CRA modernization process has been anything but a typical rule-making exercise. Lately, when I was asked to make a prediction on CRA reform, I objected by pointing out that the crystal ball on my desk was broken. Even as the CRA modernization effort continues to take turns, one fact remains: unified, interagency regulation will be key to a CRA framework that stands the test of time and is not subject to change. to a continuous revision according to the political winds of the day. And, more importantly, consistent ARC regulations will encourage multi-bank lending and investment partnerships that will benefit communities as our country’s banks help cope with the widespread economic fallout from the COVID-19 pandemic.

Krista Shonk is vice president of regulatory compliance and policy at ABA.