Our office has been inundated with inquiries about an aspect of the impact of the impending new CRA rule. As we have noted in previous articles there are mistakes and inconsistencies in the new CRA Rule, and some of these mistakes and inconsistencies will have immediate consequences for about 200 US banks. What we are referring to is the implementation of the new Facility-based assessment area (“FBAA”) section (§_.16) of the new CRA rule which becomes effective on April 1, 2024.
Under §_.16 a “large” bank will no longer be afforded the flexibility of delineating a FBAA that it “reasonably can be expected to serve”. Rather the new CRA rule coerces banks into annexing entire counties no matter how impractical it may be to expect a bank to serve an entire county given the bank’s branch network and resources. So, a bank with a single branch to serve millions of people in nearly 2,500 census tracts in Los Angeles County will have to designate the entire county as a CRA assessment area if it is a “large” bank.
“Reasonableness” is no longer an acceptable criteria for a bank to designate its market.
Many people may not understand the ramifications, but they are significant because the standards for judging a bank’s CRA performance are based on “performance context”, the demographics and the credit markets in the communities the bank serves. If an assessment area is unrealistically defined, the performance standards themselves will be meaningless, if not misleading. The “objective” and “tailored” performance benchmarks will be worthless and dangerously misleading. And that is a direct contradiction of one of the main goals of the new “modern” CRA.
For the very largest banks with thousands of branches the restrictions on assessment area configurations may be largely inconsequential in most (but not all) circumstances. But for the smaller “large” banks the adverse consequences could be significant. And the number of banks about to be adversely affected has been inflated by an inconsistency in the implementation schedule of the new rule.
As noted above, the new assessment area restrictions will be effective on April 1, 2024. The new rule defines a large bank to be a bank with assets of $2 billion or greater. However, the definitions section (§_.12) of the new rule doesn’t take effect until January 2026. This means the current rule’s definition of a large bank will continue to apply until January 1, 2026. The current rule’s definition of a large bank is a bank that had assets of $1.564 billion or greater in each of the 2 previous calendar years.
The consequence of this timing inconsistency is that about 200 banks that have assets below the $2 billion threshold will be qualified as “large banks” until January 2026 when they will be reclassified as “Intermediate Banks” under the new rule and therefore regain the flexibility to delineate their assessment areas based on reasonable considerations.
It’s clear that the regulators did not intend this. It makes no sense to temporarily regard a bank as a large bank only to reclassify it as an “Intermediate bank” two years later. But that’s the reality and our understanding was confirmed by regulators in a recent meeting.Banks in this regulatory twilight zone (those with assets between $1.564 billion to $2 billion) should make it a priority to determine how they will configure their CRA Assessment Areas as soon as possible. Should they annex the county that is adjacent to where they maintain a branch, or should they leave it out of their defined community? Neither choice may be a good choice, but it is a choice that must be made in the very near future.
