On July 31, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation released a proposed rulemaking to amend their Community Reinvestment Act (CRA) rules. Since its enactment in 1977, the CRA has encouraged banks to meet the credit and investment needs of low- and moderate-income communities.
The proposal includes four provisions that would affect how regulators evaluate banks’ community development (CD) activities:
- Raise the floor for bank size thresholds.
- Grant geographic flexibility for outside-assessment-area lending.
- Provide detailed definitions of what constitutes CD activity.
- Change how grants are considered under the act.
We find that these provisions, if enacted, could weaken incentives for banks to provide CD loans, investments, and grants, which accounted for approximately $138 billion of the $356 billion of CRA-reported loan volume in 2024, compared with $152 billion in small business lending, $10 billion in small farm lending, and $54 billion in single-family mortgage lending in low- and moderate-income communities and households. With evidence showing that CD activity plays such an important role in increasing investment flows to underinvested neighborhoods, any reduction in CD lending could disproportionately harm these communities.
In this article, we use historical data to examine how raising the floor for bank asset thresholds and granting geographic flexibility could affect CD activity, especially lending.
New bank size thresholds would reduce CD reporting and the scope of examinations
The CRA defines large banks as those with assets of $1.649 billion or more. The proposed rule would raise the floor to either $10 billion or $30 billion in assets. Of the 661 banks currently categorized as large, only 165 would still meet this designation at the $10 billion threshold and just 72 would do so at the $30 billion threshold, based on the most recent year of CRA data from the Federal Financial Institutions Examination Council (FFIEC).
Because large and intermediate banks have different examination criteria, the formerly large banks would no longer be required to report their aggregate CD lending and would no longer have their CD lending separately assessed from their CD investments. They would also be relieved of small business and small farm lending reporting requirements.
Of the $137.4 billion of CD lending that banks reported in 2024, $30.3 billion was reported by banks with assets between $1.65 billion and $10 billion and $51.9 billion was reported by banks with assets between $10 billion and $30 billion.
These changes have two main consequences:
- The loss of publicly reported CD lending data would reduce transparency in the CD evaluation process. Under the new thresholds, between 22 and 38 percent of 2024 CD lending activity would not be centrally reported. The FFIEC data show that the CD lending of the banks that would no longer fall in the large bank category looks similar to that of the remaining large banks.
- Lumping together CD lending and CD investments into a single test could reduce incentives for banks to make CD investments, including low-income housing tax credits and New Markets Tax Credits. These programs are collectively responsible for a significant amount of newly constructed or rehabilitated affordable housing and of commercial and industrial projects in low- and moderate-income communities. If reclassified banks reduce their purchases of these tax credits, the credits’ prices would fall.
The proposal also raises the small bank threshold from $412 million to $1 billion. Unlike intermediate and large banks, small banks are not required to have their CD lending or investing activity evaluated. More than 1,000 banks would be reclassified as small under the new threshold, meaning an additional 21 percent of all CRA banks would not receive any required assessment, according to 2024 call report data.
Finally, the proposal would allow intermediate banks to receive an overall satisfactory rating if they score a satisfactory lending test rating as opposed to needing both a satisfactory lending rating and a CD test rating. This change would diminish the CRA’s primary enforcement mechanism of conditional approval or denial of applications for mergers and acquisitions, which focuses on a bank’s overall rating. In addition, some state and local governments have a policy of not depositing public funds in banks with less than a satisfactory overall CRA rating. Under the new $10 billion large bank threshold, 496 banks would be subject to less stringent tests, while 589 banks would be subject to them under the $30 billion large bank threshold.
Introduction of a quantitative geographic flexibility test could create an easier path to a satisfactory rating
The regulators also proposed new numerical thresholds to determine when banks have the geographic flexibility to count community development activity in broader statewide and regional areas. The new thresholds would apply separately to each assessment area, with the regulators allocating a share of the bank’s Tier 1 capital based primarily on each area’s share of the bank’s deposits. The bank would then need to meet the applicable CD activity threshold in that assessment area during each year of the evaluation period.
The proposal sets the quantitative standard for this ratio at 0.625 percent of capital for CD lending, investments, and grants for large banks and 1.25 percent for intermediate banks. This threshold is described in the proposal as the minimum level of CD activity that a bank would be expected to conduct to not receive a “needs to improve” rating.
Having a specific threshold that triggers assessment of CD activities outside assessment areas is useful, but the data show that the proposed thresholds are far below most institutions’ current CD lending volume ratios.
In 2024, the large banks under the $10 billion threshold who did the least amount of CD lending compared with Tier 1 capital (10th percentile) still had a ratio of 1.2 percent, nearly 2 times the proposed threshold. Banks at the median had a ratio of 8.2 percent, nearly 20 times more than the proposal. Even large banks with assets closer to the $30 billion threshold are far over the ratio. For intermediate banks, the 1.25 percent threshold also falls far below current ratios, even before considering that these banks will get to combine lending, investment, and grants.
These new thresholds could allow banks to cut back on their CD lending. Because regulators equate these thresholds with “the minimum level of CD activity, absent consideration of other factors, that a bank would be expected to conduct to not receive a ‘needs to improve’ rating,” banks may reasonably assume that they can maintain a satisfactory or higher rating even with less CD lending. Some of these reductions could be quite large, given how far above the thresholds most banks already are.
Why these changes matter for community development
The regulators’ proposed rule changes could weaken examinations and reporting requirements for a significant amount of current community development activity. CD loans are one of the largest areas by dollar volume that the CRA considers, so any limitations on the evaluation of CD lending and investment would reduce the reach of the act.
The proposal states that decisions on options proposed are based on “supervisory experience” but provides few details on what that might entail. More information on the experiences and data undergirding these proposals would help inform public comment.
