There has been much understandable confusion about many aspects of the new CRA rule. But perhaps there’s been no greater confusion and anxiety than about the Assessment Areas. And this anxiety has become more acute the closer we get to April 1, 2024, the effective date for the new rule and the “applicable” date for Section 16, the new Facility-based Assessment Areas (“FBAAs”). This article addresses the new FBAAs to help banks understand the implications as they apply to them.
To begin with, all banks will be subject to the new FBAAs, even small banks. Essentially, the FBAAs are a continuation of the traditional assessment areas wherein regulators insisted that a bank had to have at least one deposit-taking branch.
But there are some big differences based on bank size. Small banks and Intermediate banks retain the flexibility to delineate assessment areas that reflect the markets they “reasonably can be expected to serve.” This means they can annex some tracts in counties that make up their assessment area. But they don’t have to annex entire counties.
On the other hand, large banks must annex entire counties within their assessment area(s). As I explained in a previous article, this will create unrealistic assessment areas that large banks may not be reasonably able to serve in some circumstances. This will negatively affect large banks under 2 circumstances.
First, when a county is extremely large, and the bank has only 1 or 2 branches to serve that county it can be substantially affected by the new requirements. Under such circumstances, a bank won’t be able to serve the entire county, but the new rule mandates that entire counties be incorporated into the CRA assessment areas, nevertheless. This will lead to unrealistic benchmarks which means either meaningless standards or worse, misleading benchmarks.
Second, a large bank may be faced with a difficult decision about whether to annex an entire contiguous county where it maintains no deposit-taking branches but does a reasonably significant volume of lending in part of that nearby county. The only way to approach this is to calculate how the annexation of that nearby county affects the bank’s performance under the Retail Lending Tests versus the bank’s performance without annexing the nearby county. Many large banks are now confronting that difficult choice and they must make their decisions by April 1, 2024.
Exacerbating the challenge is the fact that the new rule does not permit any incursion across a MSA border. Since 1995 banks have been able to annex tracts in a nearby MSA as long as the overlap wasn’t “substantial”. In the MSA restrictions, a bank would have no choice (unlike in example 1 above) but to keep the assessment area boundary within the MSA boundary. This can lead to banks with branches on the border of a MSA omitting their lending in the nearby MSA even though that lending was generated by the bank’s branches in its FBAA. While that lending in the nearby MSA may be included in a bank’s Retail Lending Assessment Area or its Outside Retail Lending Assessment Area, those new assessment areas mandate entire MSAs or statewide non-MSAs (excluding any FBAAs and any ORLA “component geographic area”) be the basis for establishing the performance benchmarks thereby distorting the performance standards. Once again, however, small banks and intermediate banks retain the right to cross a MSA border as long as the overlap is not substantial.
GeoDataVision is about to publish a list of the estimated calibrated benchmarks for each and every county in the USA on a state-by-state basis. We expect to announce the availability of that data no later than March 6, 2024. This data will allow banks to approximate the standards they will be expected to meet when the new Retail Lending Test becomes applicable, on January 1, 2026. Stay tuned for more information.
