CRA Modernization and Community Development: Banking Agencies Seek Feedback by August 5

The Community Reinvestment Act (CRA) became law in 1977 and remains one of the seminal pieces of legislation to address systemic inequities in access to credit for low- and moderate-income (LMI) communities. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (together, the “agencies”) recently issued a Notice of Proposed Rulemaking (NPR) that proposes to update regulations implementing the CRA.

The agencies invite public comment on the NPR through August 5, 2022. This post encourages all stakeholders to comment on any and all aspects of the NPR, briefly explains how to do so most effectively, and highlights some aspects of the NPR that may be relevant to community development stakeholders in our region. Given the prevalence of lead service lines in our upper Midwest region, this post also highlights aspects of the NPR that involve water infrastructure.

Submitting an effective comment letter by August 5

• August 5 deadline. Each of the three agencies will accept comments received on or before August 5, 2022.
• Effective comments. A comment is most effective when it is submitted as a comment letter pursuant to the instructions, describes a concern the regulations can address, and analyzes the pros and cons of different policy options for addressing that concern.
• Instructions for submitting comments. The NPR describes how to submit a comment to each of the three agencies. Comments can be submitted to any of the three agencies and all comments will be shared among the agencies.
• Learn more. The agencies released a Community Reinvestment Act Proposal Fact Sheet, which lists key elements of the NPR, including to provide greater clarity, consistency, and transparency. They also released a Summary of Key Objectives, which lists eight key objectives and describes how the NPR achieves each one. The agencies held a webinar, “Ask the Regulators: CRA Reform Update: Overview of the Interagency CRA Notice of Proposed Rulemaking,” that provides an overview of the entire NPR.

The agencies seek feedback on any and all aspects of the NPR, including the following issues that may be relevant to community development stakeholders in our region.

Agencies seek comments on community development financing

• Community development financing test. Under the current and proposed CRA regulations, a bank may, depending on its size, be evaluated for its community development lending, investments, and/or services under various tests. The NPR includes a community development financing test, which would assess a bank’s record of helping to meet community development financing needs through its provision of community development loans and community development investments.
• Primary purpose standard. In general, loans and investments with a primary purpose of community development would receive full CRA credit for the Community Development Financing Test. This primary purpose standard has two overall prongs and, generally, all activities would need to meet the criteria of one of these prongs to be eligible for CRA credit:
• The first prong’s criteria would consider whether a majority of dollars, beneficiaries, or housing units would go to one of the enumerated community development purposes; or
• In cases where the majority standard isn’t met, the second prong’s criteria would consider whether the “express bona fide intent” of the activity meets the community development standard.
• One exception to this primary purpose standard is that mixed-income housing would qualify for partial CRA credit based on the portion of housing that is affordable to low- and moderate-income households.
• Illustrative list of community development activities. The agencies state that, among other key objectives, the NPR seeks to provide greater certainty about which loans and investments may receive CRA consideration as community development activity, including through the proposed publication of an illustrative and non-exhaustive list of activities eligible for CRA consideration as community development activities.
• NPR includes specific requests for feedback. The NPR includes 180 requests for feedback. On community development issues, these include, but are not limited to, the following:
  • Should the agencies consider partial consideration for any other community development activities (for example, financing broadband infrastructure, health care facilities, or other essential infrastructure and community facilities), or should partial consideration be limited to only affordable housing? (Question 1)
  • Should the agencies also maintain a non-exhaustive list of activities that do not qualify for CRA consideration as community development activity? (Question 31)

Place-based activities can include investments in water infrastructure

• Place-based community development activities. The agencies propose clarifying eligibility criteria for different community development activities by including 11 categories that establish specific eligibility standards for a broad range of community development activities. Among these are six new place-based categories: (i) revitalization; (ii) essential community facilities; (iii) essential community infrastructure; (iv) recovery activities in designated disaster areas; (v) disaster preparedness and climate resiliency activities; and (vi) qualifying activities in Native Land Areas.
• Essential community infrastructure. Under the NPR, “activities that qualify as essential community infrastructure are those that provide financing or other support for such items as broadband, telecommunications, mass transit, water supply and distribution, and sewage treatment and collection systems.” Under the proposal, essential infrastructure activities would be eligible for CRA consideration if they benefit residents of targeted census tracts, which include low- and moderate-income census tracts, as well as distressed or underserved non-metropolitan middle-income census tracts.
• NPR includes water infrastructure example. Under the proposal, larger scale infrastructure projects are eligible for consideration if there is a demonstrated benefit for the residents of targeted census tracts and it is evident that low- or moderate-income residents would be beneficiaries of the activity and not be excluded from the larger-scale improvements. The NPR provides an example where a bank purchases a bond to fund improvements for a city-wide water treatment project that is consistent with a city’s capital improvement plan. The agencies conclude that this project would qualify if it benefits or serves residents in the eligible census tracts to a degree sufficient to meet the primary purpose standard and does not exclude low- or moderate-income residents.
• Feedback requested on place-based community development activities. In questions 14 through 24 in the NPR, the agencies seek specific feedback on place-based community development activities. These questions include, but are not limited to, the following:
• How should the proposals for place-based definitions focus on benefiting residents in targeted census tracts and also ensure that the activities benefit low- or moderate-income residents? How should considerations about whether an activity would displace or exclude low- or moderate-income residents be reflected in the proposed definitions? (Question 15)
• Should the agencies consider additional requirements for essential community infrastructure projects and essential community facilities to ensure that activities include a benefit to low- or moderate-income residents in the communities served by these projects? (Question 17)
• Should the agencies include activities that promote energy efficiency as a component of the disaster preparedness and climate resiliency definition? Or should these activities be considered under other definitions, such as affordable housing and community facilities? (Question 20)

Conclusion

In conclusion, we encourage stakeholders to take advantage of this rare opportunity to contribute to CRA reform by submitting a comment letter to the agencies. Lael Brainard, vice chair of the Board of Governors of the Federal Reserve, emphasized this opportunity in her statement on the NPR: “The last major revisions to the CRA regulations were made in 1995. The CRA is one of our most important tools to improve financial inclusion in communities across America, so it is critical to get reform right,” said Brainard.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.