As I continue to review the 2022 CRA NPR I am recognizing more and more potential problems for bankers if the Rule is adopted as proposed. Today I am going to briefly comment on what I call the "Double Whammy" for banks subject to the new proposed Retail Lending Test. What do I mean?


The NPR proposes that banks be evaluated under the Retail Lending Test not only in their traditional "Facility-Based Assessment Areas" but in new "Retail Lending Assessment Areas" and "Outside Areas" too. This is one of the most radical provisions in the NPR. It means that bank lending outside of the branch assessment areas will be subject to scrutiny for the first time ever - and it can apply to communities thousands of miles removed from a bank's branch system!


The NPR makes it clear that the performance benchmarks will be local to the Retail Lending Assessment Areas and Outside Areas too. That sounds fair until you think about it. Market- and community-based standards will be derived in areas where local-based competition knows the market and enjoys significant competitive advantages compared to a bank without a branch within a thousand miles. The Agencies don't propose adjusting the locally-based benchmarks to reflect this competitive disadvantage.


So the CRA NPR is a "Double Whammy" for banks whose lending activity (1) will be subject to examination on a far broader basis than ever before in the 45-year history of the CRA - and (2) there will be no adjustment to the performance standards to reflect the huge difference between being a hometown lender with local branches and a bank that takes applications over the Internet with no offices anywhere near the market.


This is a very important part of the NPR that banks should express concerns, if not objections to. Remember, the NPR shows that the bank CRA exam failure rate would have been 500% greater if the new assessment areas and the new Retail Lending Test were in effect since 2005! That should be motive enough to speak up!

Because we are a large bank less than $10 billion, we will only have a facility-based assessment area. We currently have a high inside/outside AA ratio (92% inside), so I don't understand how this "double whammy" will impact us. Will our outside concentration ratio (8%) be compared to other large banks?

All Large Banks are subject to the Retail Lending Test and also subject to being tested in "Retail Lending Areas" (where you originated either 100 residential mortgages or 250 small business loans) and "Outside Retail Lending Areas".

For large banks (assets =>$2 billion), all your lending everywhere inside and outside your AA will be subject to performance tests and the performance standards outside your AA are not subject to adjustment to reflect the competitive disadvantages you will have when being examined in communities where you extended loans far removed from your AA.

If you are a large bank, even with only 8% of your loans outside your AA, those loans will be subject to performance evaluation whereas now they are not subject to evaluation. And the locally-driven performance standards will be applied. How do you like the idea of being evaluated for lending outside your community by standards derived from those remote communities?

§ __.22 Retail lending test.
(a) Retail Lending Test—scope. (1) General. The Retail Lending Test evaluates a bank’s record of helping to meet the credit needs of its facility-based assessment areas through a bank’s origination and purchase of retail loans in each facility-based assessment area.
(2) Large banks. For large banks, the Retail Lending Test also evaluates a bank’s record of helping to meet credit needs, through the bank’s origination and purchase of retail loans, as applicable:
(i) In each retail lending assessment area; and
(ii) In its outside retail lending area, at the institution level.

Mel - it's not a question of your AA ratio. It's the fact that your lending outside your defined community will be subject to evaluation using the same "Retail Lending Tests" metrics as applied to your facility-based AA's. All large banks are subject to this, not just those over $10 billion which seems to be your understanding. You not only have to worry how you are doing inside your traditional AA's, you also need to be concerned about lending in LMI tracts and to LMI borrowers outside your community. The only saving aspect of this is that in your situation the impact will be minimal. Nevertheless, you will be accountable for lending activity that was never the subject of a CRA exam before.

That just doesn't make a lot of sense for community banks with a limited digital presence and a business model of lending within our facility-based AA. What if you provide performance context that supports your facility-based AA is also your REMA?

REMA is a Fair Lending concept - not CRA, so I am not sure what you are asking.

REMA is definitely related to CRA. While it's defined in the Fair Lending section of the FFIEC manual, for CRA it's often utilized to determine if red lining is taking place.

Agreed fmissle. It's typically part of our redlining discussions.

Diamond Poster
Joined: Oct 2004
Posts: 1,914
Connecticut
REMA's are related to Fair lending although there is no regulatory REMA definition anywhere in any regulations. It's just a practice initiated by the Agencies sometime around 2009. In the field examiners will look at things like your marketing programs and media advertising to determine if your REMA is consistent with your AA. One of the problems is your REMA can extend over MSA boundaries which is not permitted by CRA. Many times a REMA must be different than an AA. So they are related but very different issues.

The issue at hand is not REMA's. It's Assessment Areas which are formally defined in the Regulation. Moreover, even without REMA's CRA is concerned with redlining. But for CRA purposes, the Assessment Area rules are incredibly important, and too few banks really pay attention to the impact of a casually defined AA on their performance requirements.

The change in AA delineations and the vast expansion of the geographies of loans to be subject to CRA examination should be of concern to every banker. It's one of the big reasons the proposed Rule may lead to a 500% increase in CRA exam failures as calculated in the NPR. If that doesn't get the hair on the back of your neck to stand up nothing will.