Community banks seek broader exemption from CRA changes

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WASHINGTON — Community banks are asking regulators to broaden the scope of institutions that would be granted regulatory relief from a new Community Reinvestment Act framework.

The CRA reform plan proposed by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. would allow banks with under $500 million of assets to stick with the old regime.

But community banks and industry representatives say that threshold should be closer to $1 billion to relieve smaller banks of the compliance ordeal of transitioning to a new framework.

"We want the asset threshold to be raised,” said Lilly Thomas, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “We’re still talking to our bankers about where exactly it should be, but at a minimum, we believe it should be $1.3 billion at least."

Under the current regime, banks with assets of $326 million to $1.305 billion are considered "intermediate small" for the purposes of CRA exams, while banks below $326 million are just considered "small." Banks in either category enjoy varying degrees of relief from CRA reporting requirements. The thresholds are adjusted annually for inflation.

The proposal would remove the "intermediate small" category and raise the threshold for "small" to $500 million. But the more significant step would be to allow institutions below $500 million of assets to opt in to the new framework or have their CRA performance measured under the current system.

Yet bankers say the agencies should allow more institutions to get relief.

"We believe that removal of the Intermediary Small Bank status would create undue burden for a Bank of our size. Operationally, a Bank with $720 million in assets functions much more similarly to an average 'Small Bank' than to the multi-billion dollar institutions we would be compared to under the proposed rule," Kevin Phillips, vice president and compliance manager for the $720 million-asset Sound Community Bank in Seattle, wrote in a comment letter on the proposal.

"Data collection and reporting does not come at the same proportionate cost to Banks of all sizes," Phillips said. "Alternatively, if the Intermediary Small Bank status is removed, we believe a threshold of $1 billion is more appropriate.

Patrick Thomas, senior vice president and CRA officer of the $664 million-asset Bank of Labor in Kansas City, Kan., similarly said the "small bank opt-in threshold should be raised to include banks with assets under $1 billion."

“The proposed data collection, recordkeeping and reporting are substantial and will require the bank to invest in a software program specific to CRA data collection,” Thomas wrote, adding that the combined costs of new systems, staffing and training “will cause a negative impact to the bank's earnings.”

Still, the proposed threshold would benefit a significant portion of the industry.

Roughly 73% banks supervised by the OCC or FDIC fall under the $500 million threshold, as of the fourth quarter of 2019. Raising that threshold to $1 billion would expand that figure to 86%.

And a great many more banks stand to be released effectively from the new regime since the Federal Reserve has balked at signing on to the OCC and FDIC's proposal, meaning banks supervised by the central bank would still follow the old CRA regime.

Responding to concerns about inconsistency between the agencies, Fed Chairman Jerome Powell recently told senators that giving small OCC and FDIC banks the opportunity to opt in to reforms could bring some degree of parity to CRA requirements across the industry.

"There are going to be two standards anyway," Powell said at a Senate hearing in February. "Under the FDIC OCC proposal, about 70% of their institutions will be able to opt out of that standard. So there's going to be the existing standard, and ... there will be the new standard assuming that they go forward with it. So there will be two systems, and ... if we don't do anything, then we'll just be like the 70% of the institutions that they supervise."

Thomas cited conversations with the ICBA’s members, who have chafed at the sheer amount of change and cost the proposal would require, despite arguments from regulators that the proposal would simplify and clarify banks’ requirements under the CRA.

“The primary reason is the cost of implementing an entirely new framework, and the complexity and difficulty of the new metrics, especially for small and community banks,” Thomas said. “As written, it would be difficult for them to implement this."

While the banking industry has generally lauded efforts to modernize the CRA, some observers said the costs of the new system could persuade community banks to keep the current regime if they can.

“I don’t think community banks are enthusiastic about the proposed revisions as they stand,” said Camden Fine, former head of the ICBA and now president and CEO of Calvert Advisors. “The record-keeping requirements as written — although it could change — is a lot of burden. It may be as bad or worse as under the current regulation.”

Thomas, however, emphasized that community banks are not entirely averse to reforming the rules.

“Regardless of where the asset threshold for small banks is, a higher threshold gives small banks time to let a larger system develop around a new CRA framework,” Thomas said. “It gives the cores and other service providers a chance to develop new systems, and community banks can use the new framework with less burden once those are actually in place.”

Most bank trade associations, including the ICBA, have not yet filed a public comment on the proposal and are not expected to do so until April, closer to the now-extended deadline.

Among the many proposed changes, regulators also asked the public dozens of questions about the proposal, including whether or not the asset threshold for the small-bank opt-in should be raised to $1 billion.

“The OCC is encouraged by the number of thoughtful comments it has received so far to improve the proposal to strengthen the Community Reinvestment Act regulation,” OCC spokesperson Bryan Hubbard said in a statement. “Specific suggestions, like those regarding the threshold for smaller banks to opt-in to the proposed evaluation framework, are very helpful as we consider all of the comments in developing a final rule.”

Asked about the threshold at a recent press conference, FDIC Chair Jelena McWilliams said that, while she believed the $500 million threshold had been “positively received,” she had heard that “some banks would like a higher threshold so that they will have a choice between the old and, eventually, the new framework.”

Meanwhile, community reinvestment advocates, who assert the OCC and FDIC's plan would hurt key groups that rely on the CRA, say a broad exemption for small banks raises further doubts about the overall proposal.

“If you raise the exemption threshold, you end up in a situation where the vast majority of FDIC banks are exempt from the new system, which begs the question — why sign on to the proposal at all if you’re preserving the way CRA is now for most banks?” said Jesse Van Tol, CEO of the National Community Reinvestment Coalition.

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CRA FDIC OCC ICBA Jelena McWilliams Joseph Otting Community banking Regulatory relief