Dear Banker,

The new CRA Rule contains a "break" for Large banks that would exempt them from having to declare Retail Lending Assessment Areas ("RLAAs") for any calendar year in which the bank lends more than 80% of its home mortgages, multifamily loans, small business loans, small farm loans, and automobile loans (if auto loans are part of the product line for a large bank) within the bank's Facility-based assessment areas.

At first glance, this Retail Lending Assessment Area exemption may appear to be a break for banks that might be spared from having to designate dozens, if not potentially hundreds of RLLAs. After all, being relieved of the computations and comparisons involved with each RLAA sounds like a lot less work.

But a closer look reveals that just the opposite may be true. Why?

The reason the RLAA exemption may not spell regulatory relief is a corollary consequence of the exemption. What we are referring to is the Outside Retail Lending Area ("ORLA") and the evaluation of a large bank's lending in that area. Under the Retail Lending Test there are 3 different types of assessment areas in which the Retail Lending Tests are imposed and evaluated. These are the Facility-based Assessment Areas, the Retail Lending Assessment Areas, and the Outside Retail Lending Area. By definition the ORLA is a nationwide area that includes anywhere a large bank or certain intermediate banks have originated or purchased a major product line loan and excludes any Facility-based assessment area and any Retail Lending Assessment Area.

What this means is that the exclusion of all those RLAAs will result in all a bank's lending activity in those RLAAs will now be included in the nationwide ORLA!

So the exemption doesn't provide any relief from having lending activity in a RLAA examined. It merely transfers that activity to a nationwide area.

Any major product line lending in the ORLA must be analyzed by breaking the geographic distribution of that lending into "component geographic areas". So all those RLAAs that a large bank has been spared from delineating - guess what? They will be exchanged with an exactly matching number of "component geographic areas" in the ORLA.

But even worse, the proliferation of component geographic areas in the ORLA will necessitate an exponential increase in the "weighted computations" for the tests and comparisons required in the "Borrower Distribution" and the "Geographic Distribution" tests within the ORLA. The explosion of the weighted calculations in the ORLA will offset any potential savings associated with the RLAA exemption.

So the RLAA exemption provided in the new CRA Rule will not be a form of regulatory relief at all. If anything, it will make CRA Performance Evaluations even more complicated and confusing.