Background and Summary of Regulation BB

BACKGROUND AND PURPOSE
IMPLEMENTATION OF THE CRA
REGULATORY FRAMEWORK
PERFORMANCE EVALUATION

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BACKGROUND AND PURPOSE

The Community Reinvestment Act of 1977 (CRA) is part of a series of legislation intended to address problems that certain groups in our society have had in obtaining credit. The earliest piece of legislation in this series was the Fair Housing Act of 1968, which in general prohibits discrimination on the basis of race, color, religion, sex, or national origin in the purchase, sale, rental, and financing of housing. In 1974, the original Equal Credit Opportunity Act was passed, prohibiting discrimination against a credit applicant on the basis of sex or marital status in any credit transaction, not just one relating to housing. Two years later, the ECOA was amended to bar discrimination on the additional bases of race, color, religion, national origin, age (with certain exceptions), receipt of public assistance, and good faith exercise of federally guaranteed consumer protection rights.

This legislative activity focuses on the individual applicant, barring, in most instances, consideration of personal characteristics in determining creditworthiness. Having addressed the issue of equal credit opportunity regardless of an applicant’s race, sex, or other listed personal characteristics, the Congress turned its attention to what is considered the arbitrary consideration of geographic factors—where a person resided, wished to reside, or had a place of business—in determining creditworthiness.

The Congress found that commercial banks and thrifts (mutual savings banks, savings and loan associations, and credit unions) at times had contributed to the decline of certain neighborhoods by failing to provide qualified applicants with financing for homes in those areas. In response, the Congress passed the Home Mortgage Disclosure Act of 1975 (HMDA), which requires those institutions with more than $10 million in assets and an office in a metropolitan area to compile and disclose data on where their mortgage and home improvement loans are being made.

Although the HMDA requires the compilation and disclosure of certain data on housing loans, it does not provide for any governmental assessment, rewards, or sanctions for any particular lending practices. The purpose of the HMDA is to combat arbitrary, unjustified underwriting and appraisal based on geographical factors by providing information to depositors, local citizens, and public officials. The act depends upon public scrutiny for its effect.

The CRA, on the other hand, provides for assessments in connection with examinations and rewards and sanctions in connection with applications for the creation and expansion of banks and thrifts (in this context, excluding credit unions). The CRA is part of the Housing and Community Development Act of 1977. Thus, many of the concerns that prompted passage of the HMDA underlie the enactment of the CRA. However, the focus of the CRA extends beyond housing to all of the credit needs of local communities in which banks and thrifts operate.

The CRA is premised on the finding that banks and thrifts have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered. This finding stems from the view that the government has granted these institutions special privileges:

charters to do business
deposit insurance
access to the Federal Reserve discount window

Because these benefits and privileges are granted to banks and thrifts by society through the government, the Congress believes that those institutions have the obligation to serve the public, particularly in the communities in which the institutions are chartered.

Furthermore, the Congress recognizes that government alone cannot resolve the problems of neighborhood deterioration. As stated by Senator Proxmire, Chairman of the Senate Banking, Housing, and Urban Affairs Committee and the principal sponsor of the legislation:

Government through tax revenues and public debt cannot and should not provide more than a limited part of the capital required for local housing and economic development needs. Financial institutions in our free economic system must play the leading role. What this bill would do would be to try to make the banks more sensitive than they have been in the past to their responsibilities to provide for local community needs.¹

In his remarks to the Senate regarding the intent of the bill, Senator Proxmire pointed out:

The bill would not inject any significantly new element into the deposit facility application approval process already in place. Instead, it merely amplifies the “community need” criteria already contained in existing law and regulation and provides a more explicit statutory statement of what constitutes “community need” to make clear that it includes credit needs . . . . The bill is not intended to force financial institutions into making high risk loans that would jeopardize their safety . . . . [T]here is no reason to assume that a higher degree of community reinvestment is incompatible with bank safety. Rebuilding and revitalizing communities threatened by decline is good for the communities and good for banking.²

Community Credit Needs, Hearings before the Senate Committee on Banking, Housing and Urban Affairs, 95 Cong. 1 Sess. (Government Printing Office, 1977), pp. 1 and 154.

Congressional Record, vol. 123 (1977), pp. 1202-3.

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IMPLEMENTATION OF THE CRA

The Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) share authority to implement the Community Reinvestment Act. Each agency is responsible for writing and implementing regulations for banks³ under its jurisdiction. To carry out the purposes of the act, the Federal Reserve Board has issued Regulation BB, which applies to state-chartered banks that are members of the System. The remainder of this discussion will focus on the Board, state member banks, and Regulation BB, even though the other agencies have the same responsibilities under the act and have adopted substantially similar regulations.

The general purpose of the act is to encourage banks, while operating safely and soundly, to help meet the credit needs of their communities. The act specifically directs the Board, in examining a bank, to assess the bank’s record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods.

The act further requires the Board to take the bank’s record of meeting its community’s credit needs into account when evaluating that bank’s applications for creation or relocation of a domestic branch (including branches in Puerto Rico, the Virgin Islands, Guam, and American Samoa) or merger with another bank. In addition, when a bank holding company seeks to acquire a bank or to merge with another bank holding company, the Board must evaluate the record of the holding company’s subsidiary banks.

The term “bank” includes insured national and state banks, federal and state savings associations, federal branches as defined in 12 CFR part 28, insured state branches as defined in 12 CFR 345.11(c), and state member banks as defined in 12 CFR part 208, except as provided in 12 CFR 228.11(c).

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REGULATORY FRAMEWORK

Regulation BB implements a regulatory framework for the CRA that is based on bank asset size and business model. This tailoring of the framework recognizes the capacity and resource differences among banks. The banks are classified as either a large bank, an intermediate bank, a small bank, or a limited purpose bank. Large banks are those with assets of at least $2 billion as of December 31 in both of the prior two calendar years; intermediate banks are those with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years; and small banks are those with assets of less than $600 million as of December 31 in either of the prior two calendar years. These asset-size thresholds are adjusted annually for inflation.

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PERFORMANCE EVALUATION

Regulation BB’s performance evaluation framework utilizes performance tests to evaluate a bank’s performance in meeting the credit needs of its entire community. The evaluation framework was designed to meet the following objectives: strengthening the achievement of the core purpose of the statute; tailoring to account for differences in bank size, business model, and local conditions; and adapting to changes in the banking industry, including the rise of mobile and online banking. Depending on a bank’s asset size or limited purpose bank designation, the Board evaluates banks under one or a combination of the following seven performance tests: the Retail Lending Test; the Retail Services and Products Test; the Community Development Financing Test; the Community Development Services Test; the Intermediate Bank Community Development Test; the Small Bank Lending Test; and the Community Development Financing Test for Limited Purpose Banks. The Board also has a strategic plan option as an alternative method for evaluation under the CRA.

The Board evaluates large banks under four performance tests: the Retail Lending Test, the Retail Services and Products Test, the Community Development Financing Test, and the Community Development Services Test. The Board evaluates intermediate banks under the Retail Lending Test and either the Intermediate Bank Community Development Test, or, at the bank’s option, the Community Development Financing Test. The Board evaluates small banks under either the Small Bank Lending Test or, at the bank’s option, the Retail Lending Test. Finally, the Board evaluates limited purpose banks under the Community Development Financing Test for Limited Purpose Banks.

Regulation BB also provides that relevant activities of a bank’s operations subsidiaries are included in a bank’s performance evaluation. Relevant activities of other affiliates would be considered at a bank’s option.

For each applicable performance test, the Board assigns conclusions reflecting the bank’s performance in its facility-based assessment areas, and in the case of the Retail Lending Test, certain other geographic areas. In most instances, including for small banks that opt to be evaluated under the Retail Lending Test, the Board assigns one of five conclusions to the bank: “Outstanding”; “High Satisfactory”; “Low Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.” For small banks evaluated under the Small Bank Lending Test, the Board assigns one of four conclusions: “Outstanding”; “Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.”

The conclusions assigned in connection with each of the applicable performance tests are combined to develop a bank’s CRA ratings. The Board may assign a bank one of the four ratings, as indicated in the statute: “Outstanding”; “Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.”