Now that the Trump Administration has announced its intention to repeal the 2023 CRA rule many bankers are way too eager to move on and forget about the soon-to-be-repealed rule. It was unbelievably complex, confusing and intimidating, and it excluded certain critical types of credit needed by communities. “Good riddance to bad rubbish” some would say.

But it would be a mistake to overlook some valuable insights hidden in the 2023 rule. Those valuable insights can be applied to the continuation of the legacy rule and to CRA generally for future use. What I am referring to are how regulators value lending activity and convert it to performance ratings and the surprising approach to consumer loans buried in the 2023 CRA rule. I consider the answer provided to the first question in the 2023 CRA rule a “breakthrough” in understanding CRA performance evaluation. The answer to the second question is surprising.

How regulators value CRA lending activity

Ever since the CRA was revised in 1995 from a focus on lending processes to lending activity bankers have been asking the $60 million question: “OK, I know that examiners are comparing our bank’s lending performance to the lending activity of other lenders in our community as well as to certain demographic variables, but how do they translate those comparisons to performance ratings?” That question is quickly followed by, “What do we need to do to attain at least a satisfactory performance rating?”

Adding to the frustration about these questions, ask an examiner and you will never get a straightforward answer. Time and again I’ve heard bankers ask me, “Why won’t the examiners tell us what they expect our bank to do so we can achieve at least a ‘satisfactory’ performance rating?”

For example, a bank extends 5% of its mortgages in the Assessment Area low-income census tracts and the average low-income tract penetration rate of competing lenders in the community is 7%. Is that enough to be rated as “satisfactory”? The agencies have never declared specific numerical standards. Adding to the confusion, we know that examiners also compare a bank’s lending in the AA low-income tracts to a demographic variable, the relative distribution of owner-occupied housing in the AA low-income tracts. In our example let’s say that number is 3%. So, the bank underperforms relative to “market” average low-income tract penetration rate but outperforms the “community” demographic. What happens then?

In the legacy CRA, to which we will apparently return by the end of the year, the answers are unclear. But in the 2023 CRA rule the answers to both questions are explicit.

The 2023 rule contains a performance rating system predicated on quantitative “calibrated” performance benchmarks that can be translated into any of the 5 potential performance ratings under the CRA Lending Tests: (1) “Outstanding”, (2) “High Satisfactory”, (3) “Low Satisfactory”, (4) “Needs to Improve”, and (5) "Substantial Non-compliance”. In other words, the 2023 CRA performance rating system allows a bank to compute not just if its performance is satisfactory. It can determine exactly which rating would apply.

The 2023 CRA rule also explicitly addresses conflicting ratings generated by market and community comparisons. The 2023 rule says that the best result would determine a bank’s “supporting conclusion" (translated: a bank’s performance rating).

Some might be inclined to say, “So what. The 2023 rule is about to be repealed.” My response is that the regulators would not have proposed calibrated benchmarks and ratings that are not what they are already doing or that they consider unreasonable. Until the 2023 rule, regulators had never announced any specific quantitative benchmarks. So, they can effectively implement the 2023 benchmarks without fanfare (if they haven’t already done so) by advising examiners to use the calibration points as a guideline for CRA performance ratings.

But even if regulators don’t officially or unofficially implement the rating system everyone now (thanks to the 2023 calibrated benchmarks) knows how regulators think performance comparisons correlate with performance ratings. Absent an official declaration by regulators after the 2023 CRA rule is rescinded bankers should consider using the 2023 ratings system for self-assessment purposes. How far off can that approximation be? As the old saying goes, “Something is better than nothing”.

Given the Trump Administration’s intentions to relax regulatory enforcement, it may be that the 2023 calibration points are somewhat less challenging for the next 4 years. But keep in mind that, since regulatory enforcement is retrospective, bank performance now and for the next 4 years will be subject to scrutiny during the next presidential administration. A prudent approach would be to monitor CRA performance using the 2023 CRA benchmarks in order to conservatively monitor CRA performance. My rule of thumb for regulatory compliance is this, “If you’re going to have surprises during a compliance examination, make them good surprises, not bad ones.”

Consumer loans

The CRA focuses on residential mortgage lending and small business and small farm loans. But, since 1995 banks have been allowed to present certain consumer loans for consideration in a CRA exam. Additionally, if consumer loans are a large part of bank’s lending to its community, examiners may mandate their inclusion in a CRA exam, especially if their omission would distort a bank’s record of meeting the community’s need for credit services.

We have always recommended to our bank clients that if they engage in a relatively large volume of consumer loans (say 20% or more compared to their HMDA and small business and small farm loans) they should collect the consumer loan data and evaluate how they may affect a bank’s CRA performance rating. If internal analysis indicates those consumer loans could augment the performance of the mandatory portfolios they should consider submitting the detailed activity to examiners.

The treatment of consumer loans in the 2023 CRA rule would suggest that, except for automobile loans, regulators don’t consider the analysis of consumer loans as effective or even feasible for CRA purposes given the lack of usable market data for comparison. Within the 2023 rule, consumer loans (except auto loans) were to be excluded from consideration under the Lending Test but could be considered under the Retail Products and Services Test from a “qualitative” perspective. In light of this viewpoint expressed within the 2023 rule we no longer recommend to banks that they collect any consumer loan data for voluntary submission to examiners, except for automobile loans.