How Banks Can Prepare for CRA Modernization

After years of discussions and false starts, the Federal Reserve, FDIC, and OCC issued their final rule modernizing the Community Reinvestment Act (CRA) on October 24th, 2023. A 1977 anti-redlining law that has not been overhauled in decades, the ruling adopts new metrics and benchmarks used by the agencies to assess retail lending performance. Banks must comply with all the rule’s provisions by January 1, 2026, aside from certain requirements taking effect January 1, 2027.


In response, a group of banking trade associations, including the ICBA and ABA, filed suit against regulators earlier this month to challenge the final rule. Whether their efforts to block the CRA ruling works is unknown. Regardless, banks must prepare.


How will CRA modernization impact your bank? What do regulators hope to achieve? What are they looking for from banks? What should your bank do to prepare?


These are just some of the questions banks should be asking.


Understanding CRA Modernization


Before delving into what banks should do, it’s important to understand the specific key updates. 


The April 1, 2024, effective date applies provisions from the final rule similar to current CRA regulations, such as facility-based assessment area delineations, the effect of CRA compliance on applications, CRA exam schedule public notice provisions, and the new public engagement provision.


Most of the major provisions have an effective date of January 1, 2026, including changes in asset size for small, intermediate, and large banks; clarification of the investments and loans that count as CRA activities; expansion of assessment areas beyond a bank’s facility-based assessment area under certain conditions; and new tests for evaluating CRA performance. Reporting requirements become applicable on January 1, 2027.


Why did the agencies update existing CRA regulations? As part of the Housing and Community Development Act of 1977, CRA mandated that banks receiving FDIC insurance make loans and investments throughout the communities where they are located, particularly in low-to-moderate income (LMI) neighborhoods in their assessment areas.


However, the law didn’t list specific criteria for making interpretations more broad in certain aspects.Examiners consider a bank’s “performance context” to determine whether it satisfies CRA requirements. In the decades since its passage, bankers and examiners have struggled to understand what counts as CRA activities under this vague “performance context” standard.


The final rule offers greater clarity on this front. It revises the community development definition to offer banks guidance on the loans, investments, and services deemed beneficial through an updated list of 11 community development categories covering CRA activities; a publicly available list of illustrative CRA activities that the agencies will maintain; and a confirmation process for the eligibility of activities.


The agencies’ initial summary of the proposal for CRA modernization highlighted their intention to “clarify what counts” as CRA community development activity – and they followed through in the final rule.



Updated CRA Asset Thresholds for Banks


As part of these changes, the asset threshold for banks has changed, providing regulatory relief for roughly 800 smaller institutions while imposing new requirements on intermediate and larger banks.


The new threshold now categorizes small banks as those with less than $600 million in assets. Previously, that threshold was less than $376 million in assets.Intermediate banks are now those with over $600 million in assets but less than $2 billion. 


Large banks are those with more than $2 billion in assets, which is an increase from the current benchmark of $1.5 billion. There will be additional data requirements for banks with over $10 billion in assets.


These changes indicate that examiner expectations increase as banks grow from small to intermediate or intermediate to large, making it critical for banks to have a regulatory change management strategy long before they approach these thresholds.


Smaller and intermediate banks must plan for the much stricter CRA requirements as they grow and focus on compliance and risk management as part of that growth strategy rather than waiting until they find themselves subject to regulations they can’t satisfy.



Expansion of CRA Assessment Areas


In addition to updated thresholds, there are also changes to assessment areas.


Facility-based assessment areas remain the foundation of CRA and align with the current assessment area delineations that institutions have to set in place, but the final rule accounts for expanded lending activities with three distinct assessment areas: the facility-based assessment area, the retail lending assessment area, and outside retail lending.


Facility-based assessment area: According to the rule, “Banks will continue to delineate facility-based assessment areas in the MSAs or nonmetropolitan areas of states in which the following facilities are located: main offices, branches, and deposit-taking remote service facilities.” However, one change to note is that larger banks must consider their assessment area as whole counties, whereas small and intermediate banks have the capability to select partial counties.


Retail lending assessment areas: The final rule mandates that large banks must delineate a new retail lending assessment area in an MSA or nonmetropolitan area of the state where the bank has a large concentration of closed-end mortgages or small business loans. This includes where large banks had at least 150 closed-end mortgage loans or 400 small business loans over the previous two calendar years. Large banks that originate 80% or more of their loans inside their facility-based assessment area are exempt from having to delineate this area.


Outside retail lending assessment areas: The agencies will now evaluate large banks, some intermediate banks, and small banks that opt to be evaluated under the Retail Lending Test for compliance in an outside retail lending assessment area, which gives banks flexibility for CRA activities beyond their facility-based assessment area. With this provision, banks may also be evaluated for CRA activities nationwide, which the agencies justify through the widespread adoption of digital banking.

Areas for eligible community development: Recognizing that large banks have different business models, examiners will evaluate a bank’s facility-based performance and consider qualified CRA activities regardless of location.

By allowing small banks to opt into the Retail Lending Test, regulators want to give them more flexibility to satisfy CRA requirements outside their facility-based assessment area. Intermediate banks may also opt into the Retail Lending Test and face a mandatory evaluation in their outside retail lending assessment area if more than 50% of their loans originated there.

What exactly do these changes mean for banks? It means regulators want to see banks’ CRA compliance strategies. While a list of CRA-approved activities may prove helpful to institutions, the responsibility will still largely fall on the bank to identify gaps in lending based on borrower income and geography.

Ensuring CRA Compliance


Ensuring CRA compliance is challenging for many institutions to navigate and the changes in the CRA Modernization Rule adds more complexities from understanding the implications of these regulatory changes to implementing best practices for compliance, monitoring, and community engagement.


With the introduction of updated asset size thresholds, the redefinition of assessment areas, and the introduction of new evaluation tests, banks are faced with both challenges and opportunities to enhance their community lending and investment practices.


It goes beyond just lending and community engagement. Data analytics and monitoring are important parts of CRA compliance success, with an added layer for large banks when it comes to data reporting too, making it critical to implement a system for collecting and analyzing the data, and preparing for data submissions if subject to data reporting requirements.


Banks meeting certain conditions will be required to collect CRA data outside their facility-based assessment areas if they meet or exceed the loan origination thresholds, in addition to the data inside their facility-based assessment area, making it critical to implement a system for collecting and analyzing data.


Compliance with CRA depends on the story the bank tells examiners. Banks need a solution that determines LMI lending and investment ratios based on the defined assessment area to tell this story well.


First, data quality is critical. Many banks still rely on spreadsheets and Excel. Not only is this time-consuming, but human error can thwart efforts. Banks must prioritize technology and resources that support quality control for CRA compliance data.


Banks also need technology that helps them easily analyze data in geocoded maps and develop a narrative that conveys to regulators the bank’s lending commitment to the communities it serves. The analysis provided can also help uncover opportunities and competitive advantages.


And finally, technology can help make CRA exams easier and allow the bank to tell its story better. With the right technology and a clear process, banks can validate their CRA data and activities.


About Author:
Alesha Briley is a Regulatory Compliance Expert for 
Ncontracts, the leading provider of integrated compliance, risk, and vendor management solutions to the financial services industry. For more information, visit

Want to keep reading? This content is for subscribers only.

Login Subscribe