Community Reinvestment Act

AGENCY:

Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; and Federal Deposit Insurance Corporation.

ACTION:

Final rule.

SUMMARY:

The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) are adopting final amendments to their regulations implementing the Community Reinvestment Act of 1977 (CRA) to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated.

DATES:

Effective date: This rule is effective on April 1, 2024, except for amendment nos. 29, 52, and 75, which are effective April 1, 2024, through January 1, 2031, and amendment nos. 7, 11, 18, 20, 25, 35, 39, 43, 45, 49, 58, 62, 66, 68, and 72, which are delayed indefinitely. The agencies will publish a document in the Federal Register announcing an effective date for the delayed amendments.

Applicability date: Sections __.12 through __.15, __.17 through __.30, and __.42(a); the data collection and maintenance requirements in § __.42(c) through (f); and appendices A through F of the common rule text as adopted by the OCC, Board, and FDIC are applicable on January 1, 2026. Section __.42(b) and (g) through (i) and the reporting requirements in § __.42(c) through (f) of the common rule text as adopted by the OCC, Board, and FDIC are applicable on January 1, 2027.

FOR FURTHER INFORMATION CONTACT:

OCC: Heidi M. Thomas, Senior Counsel, or Emily Boyes, Counsel, Chief Counsel's Office, (202) 649–5490; or Vonda Eanes, Director for CRA and Fair Lending Policy, or Cassandra Remmenga, CRA Modernization Program Manager, Bank Supervision Policy, (202) 649–5470, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. If you are deaf, hard of hearing, or have a speech disability, please dial 7–1–1 to access telecommunications relay services.

Board: Taz George, Senior Supervisory Policy Analyst; Dorian Hawkins, Counsel; S. Caroline (Carrie) Johnson, Manager; Matthew Lambert, Senior Supervisory Analyst; Eric Lum, Senior Supervisory Analyst; Cayla Matsumoto, Supervisory Policy Analyst; or Lisa Robinson, Lead Supervisory Policy Analyst; Lorna Neill, Senior Counsel; Amal Patel, Senior Counsel; or Jaydee DiGiovanni, Counsel; Division of Consumer and Community Affairs or David Alexander, Special Counsel; Cody Gaffney, Senior Attorney; or Gavin Smith, Senior Counsel; Legal Division, Board of Governors of the Federal Reserve System at (202) 452–2412 or. For users of TDD–TYY, (202) 263–4869 or dial 711 from any telephone anywhere in the United States.

FDIC: Pamela A. Freeman, Senior Examination Specialist, Compliance and CRA Examinations Branch, Division of Depositor and Consumer Protection, (202) 898–3656; Patience R. Singleton, Senior Policy Analyst, Supervisory Policy Branch, Division of Depositor and Consumer Protection, (202) 898–6859; Sherry Ann Betancourt, Counsel, Legal Division, (202) 898– 6560; Alys V. Brown, Senior Attorney, Legal Division, (202) 898–3565, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of the Final Rule

II. Background

III. General Comments Received

IV. Section-by-Section Analysis

Section __.11 Authority, Purposes, and Scope

Section __.12 Definitions

Section __.13 Consideration of Community Development Loans, Community Development Investments, and Community Development Services

Section __.14 Community Development Illustrative List; Confirmation of Eligibility

Section __.15 Impact and Responsiveness Review of Community Development Loans, Community Development Investments, and Community Development Services

Section __.16 Facility-Based Assessment Areas

Section __.17 Retail Lending Assessment Areas

Section __.18 Outside Retail Lending Areas

Section __.19 Areas for Eligible Community Development Loans, Community Development Investments, and Community Development Services

Section __.21 Evaluation of CRA Performance in General

Section __.22 Retail Lending Test

Section __.23 Retail Services and Products Test

Section __.24 Community Development Financing Test

Section __.25 Community Development Services Test

Section __.26 Limited Purpose Banks

Section __.27 Strategic Plan

Section __.28 Assigned Conclusions and Ratings

Section __.29 Small Bank Performance Evaluation

Section __.30 Intermediate Bank Performance Evaluation

Section __.31 Effect of CRA Performance on Applications

Section __.42 Data Collection, Reporting, and Disclosure

Section __.43 Content and Availability of Public File

Section __.44 Public Notice by Banks

Section __.45 Publication of Planned Examination Schedule

Section __.46 Public Engagement

Section __.51 Applicability Dates and Transition Provisions

V. Regulatory Analysis

I. Summary of the Final Rule

The CRA is a seminal piece of legislation that requires the OCC, the Board, and the FDIC (together referred to as the agencies, and each, individually, the agency) to assess a bank's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the bank's safe and sound operation. Upon completing this examination, the statute requires the agencies to “prepare a written evaluation of the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods.” The statute further provides that each agency must consider a bank's CRA performance “in its evaluation of an application for a deposit facility by such institution.” The agencies implement the CRA and establish the framework and criteria by which the agencies assess a bank's performance through their individual CRA regulations, which are supplemented by supervisory guidance. Under the CRA regulations, the agencies apply different evaluation standards for banks of different asset sizes and types.

The agencies issued a notice of proposed rulemaking published in the Federal Register on June 3, 2022 (NPR, proposal, or the proposed rule), seeking comment on updates to their respective CRA regulations to achieve the following objectives:

• Strengthen the achievement of the core purpose of the statute;
• Adapt to changes in the banking industry, including the expanded role of mobile and online banking;
• Provide greater clarity and consistency in the application of the regulations;
• Tailor performance standards to account for differences in bank size and business models and local conditions;
• Tailor data collection and reporting requirements and use existing data whenever possible;
• Promote transparency and public engagement;
• Confirm that CRA and fair lending responsibilities are mutually reinforcing; and

• Promote a consistent regulatory approach that applies to banks regulated by all three agencies.

The agencies believe that each objective is met through the promulgation of this final rule. Additional discussion of, and commenter feedback received regarding, the agencies' objectives can be found in section III.B of this SUPPLEMENTARY INFORMATION .

This section provides a summary of the final rule and highlights certain key elements and changes as compared to the proposal. For a more detailed discussion, including the agencies' considerations of the comments received, see sections III and IV of this SUPPLEMENTARY INFORMATION .

Bank Asset Size Categories and Limited Purpose Banks

The final rule implements a revised regulatory framework for the CRA that, like the current framework, is based on bank asset size and business model. This tailoring of the framework recognizes the capacity and resource differences among banks. Under the final rule, banks are classified as either a large bank, an intermediate bank, a small bank, or a limited purpose bank. Pursuant to the final rule: large banks are those with assets of at least $2 billion as of December 31 in both of the prior two calendar years; intermediate banks are those with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years; and small banks are those with assets of less than $600 million as of December 31 in either of the prior two calendar years. These asset-size thresholds will be adjusted annually for inflation.

The final rule revises the definition of limited purpose bank to include both those banks currently considered “limited purpose banks” and those currently considered “wholesale banks,” as those terms are defined under the current regulation and were defined under the proposal. Specifically, the final rule defines a limited purpose bank as a bank that is not in the business of extending certain loans, except on an incidental and accommodation basis, and for which a designation as a limited purpose bank is in effect. The final rule therefore does not reference “wholesale banks” because a separate definition is no longer necessary. The agencies have also clarified that limited purpose banks are not evaluated as small, intermediate, or large banks.

Evaluation Framework

Overview. The final rule's performance evaluation framework utilizes performance tests to evaluate a bank's performance in meeting the credit needs of its entire community. In finalizing this evaluation framework, the agencies seek to meet the objectives described above, including: strengthening the achievement of the core purpose of the statute; tailoring to account for differences in bank size, business model, and local conditions; and adapting to changes in the banking industry, including the rise of mobile and online banking. Depending on a bank's asset size or limited purpose bank designation, the agencies will evaluate banks under one or a combination of the following seven performance tests: the Retail Lending Test; the Retail Services and Products Test; the Community Development Financing Test; the Community Development Services Test; the Intermediate Bank Community Development Test; the Small Bank Lending Test; and the Community Development Financing Test for Limited Purpose Banks. The agencies have also retained the strategic plan option, with revisions, as an alternative method for evaluation under the CRA.

The agencies will evaluate large banks under four performance tests: the Retail Lending Test, the Retail Services and Products Test, the Community Development Financing Test, and the Community Development Services Test. The agencies will evaluate intermediate banks under the Retail Lending Test and either the current community development test, referred to in the final rule as the Intermediate Bank Community Development Test, or, at the bank's option, the Community Development Financing Test. The agencies will evaluate small banks under either the current small bank test, referred to in the final rule as the Small Bank Lending Test or, at the bank's option, the Retail Lending Test. Finally, the agencies will evaluate limited purpose banks, under the Community Development Financing Test for Limited Purpose Banks.

The final rule also provides that relevant activities of a bank's operations subsidiaries or operating subsidiaries are included in a bank's performance evaluation. Relevant activities of other affiliates would be considered at a bank's option.

For each applicable performance test, the agencies will assign conclusions reflecting the bank's performance in its facility-based assessment areas, and in the case of the Retail Lending Test, certain other geographic areas. In most instances, including for small banks that opt to be evaluated under the Retail Lending Test, the agencies will assign one of five conclusions to the bank: “Outstanding”; “High Satisfactory”; “Low Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.” For small banks evaluated under the Small Bank Lending Test, the agencies will assign one of four conclusions: “Outstanding”; “Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.”

The conclusions assigned in connection with each of the applicable performance tests are combined to develop a bank's CRA ratings. The agencies may assign a bank one of the four ratings, as indicated in the statute: “Outstanding”; “Satisfactory”; “Needs to Improve”; or “Substantial Noncompliance.”

For banks that are evaluated under more than one performance test, specific weights are applied to each performance test conclusion, with weighting varying by bank asset size. For large banks: the Retail Lending Test is weighted at 40 percent; the Retail Services and Products Test is weighted at 10 percent; the Community Development Financing Test is weighted at 40 percent; and the Community Development Services Test is weighted at 10 percent. Relative to the proposal, this large bank weighting reflects a decrease in the percentages assigned to the Retail Lending Test and the Retail Services and Products Test and a resulting increase in the percentage assigned to the Community Development Financing Test. For intermediate banks, each applicable performance test is weighted at 50 percent.

As noted above, banks of all sizes will maintain the option to elect to be evaluated under an approved strategic plan. Among other revisions, the final rule updates the standards for obtaining approval for such plans. The final rule clarifies the proposal to explain the circumstances in which banks must include the performance tests that would apply in the absence of a strategic plan, the modifications and additions that banks may make to those tests, and the justifications that banks must provide for their draft plans.

Retail Lending Test. The Retail Lending Test evaluates a bank's record of helping to meet the credit needs of its entire community through the bank's origination and purchase of home mortgage loans, multifamily loans, small business loans, and small farm loans, as well as through automobile lending if the bank is a majority automobile lender. Specifically, the Retail Lending Test includes an evaluation of how banks are serving low- and moderate-income individuals, small businesses, small farms, and low- and moderate-income census tracts in the bank's facility-based assessment areas and, as applicable, retail lending assessment areas and outside retail lending areas. As noted above, under the final rule, intermediate and large banks are required to be evaluated under the Retail Lending Test, and small banks may opt to be evaluated under this performance test.

The Retail Lending Test includes two sets of metrics, as well as additional factors that are used to complement the use of metrics. First, the Retail Lending Volume Screen measures the volume of a bank's retail lending relative to its deposit base in a facility-based assessment area and compares that ratio to a Retail Lending Volume Threshold based on the aggregate ratio for all reporting banks with at least one branch in the same facility-based assessment area.

Second, the agencies evaluate the geographic distribution and borrower distribution of a bank's major product lines in its Retail Lending Test Areas (facility-based assessment areas, retail lending assessment areas, and outside retail lending area) using a series of metrics and benchmarks. For example, for a bank's closed-end home mortgage lending in a Retail Lending Test Area, the geographic distribution analysis evaluates the bank's percentage of lending (1) in low-income census tracts and (2) in moderate-income census tracts, while the borrower distribution analysis evaluates the bank's percentage of lending (3) to low-income borrowers and (4) to moderate-income borrowers. Under the final rule, the agencies evaluate the distribution of a large bank's major product lines in its facility-based assessment areas, any retail lending assessment areas the bank is required to delineate, and its outside retail lending area. For intermediate banks, and small banks that opt to be evaluated under the Retail Lending Test, the agencies evaluate the distribution of the bank's major product lines in its facility-based assessment areas and any outside retail lending area, if applicable. Regardless of the geographic area in which a bank is evaluated, for most major product lines, a bank's performance relative to the retail lending distribution benchmarks is translated into a recommended conclusion using performance ranges that establish the level of performance needed to achieve a particular conclusion, such as “High Satisfactory.”

In addition, in the final rule the agencies consider a list of additional factors that are intended to account for circumstances in which the retail lending distribution metrics and benchmarks may not accurately or fully reflect a bank's retail lending performance, or in which the benchmarks may not appropriately represent the credit needs and opportunities in an area.

In response to commenter feedback, the agencies sought ways to ensure that the final rule's Retail Lending Test appropriately balances the agencies' objectives. For example, the agencies adjusted some of the multipliers utilized as part of the Retail Lending Test to make “Outstanding” and “High Satisfactory” Retail Lending Test supporting conclusions more attainable relative to the proposal, while maintaining an appropriate degree of rigor. Moreover, as compared to the proposal, the final rule reduces the number of product lines potentially evaluated under the Retail Lending Test from six to three (closed-end home mortgage loans, small business loans, and small farm loans) for most banks. In addition, the agencies will only evaluate a bank's automobile loans if automobile loans represent a majority of the bank's retail lending, or if the bank opts to have its automobile loans evaluated under the Retail Lending Test.

Retail Services and Products Test. The Retail Services and Products Test utilizes a tailored approach to evaluate the availability of a bank's retail banking services and retail banking products and the responsiveness of those services and products to the credit needs of the bank's entire community, including low- and moderate-income individuals, low- and moderate-income census tracts, small businesses, and small farms. Under the final rule, this performance test maintains the overall approach set out in the NPR, with certain modifications, and incorporates benchmarks to evaluate the availability of a bank's branch and remote service facilities. In addition, the agencies will evaluate the digital and other delivery systems of some banks.

Evaluation of the retail banking services of a large bank with assets greater than $10 billion includes a review of the bank's branch availability and services, remote service facilities (including automated teller machines (ATMs)), and digital delivery systems and other delivery systems. The agencies will also consider the digital delivery systems and other delivery systems of large banks with assets less than or equal to $10 billion if the bank does not operate any branches or, for banks that operate at least one branch, at the bank's option.

Evaluation of a bank's retail banking products includes a review of the responsiveness of the bank's credit products and programs, and availability and usage of responsive deposit products. Both deposit products and credit products and programs are evaluated at the institution level and, in a change from the proposal, are given only positive consideration and may not negatively impact a bank's Retail Services and Products Test conclusion. This aspect of the performance test is designed to evaluate a bank's efforts to provide products that are responsive to the needs of low- and moderate-income communities. The agencies will not evaluate the availability and usage of responsive deposit products in connection with large banks with assets less than or equal to $10 billion, unless the bank opts in.

Community Development Financing Test. The Community Development Financing Test evaluates how well large banks and intermediate banks that opt into the performance test meet the community development financing needs in each facility-based assessment area, each State or multistate metropolitan statistical area (MSA), as applicable, and for the institution. The test is not assessed in retail lending assessment areas.

The Community Development Financing Test includes the following elements: (1) a community development financing metric used to evaluate the dollar volume of a bank's community development loans and investments relative to the bank's deposit base; (2) standardized benchmarks to aid in evaluating performance; and (3) an impact and responsiveness review to ensure consideration of community development loans and investments that are particularly impactful or responsive. The final rule also includes a metric for banks with assets greater than $10 billion to measure the bank's community development investments relative to deposits. This metric is intended to ensure a focus on certain bank community development investments (including Federal Low-Income Housing Tax Credit (LIHTC) and New Market Tax Credit (NMTC) investments). This metric is applied at the institution level and may only contribute positively to a bank's Community Development Financing Test conclusion.

Community Development Services Test. The Community Development Services Test considers the importance of community development services in fostering partnerships among different stakeholders, building capacity, and creating conditions for effective community development, including in rural areas. The agencies will evaluate large banks under this performance test in facility-based assessment areas, in States, multistate MSAs, and nationwide.

Under the final rule, the evaluation includes a qualitative review of relevant community development services data, and an impact and responsiveness review to assess services that are particularly responsive to community needs. After considering commenter feedback, the performance test does not require a metric of community development service hours per full-time employee for banks with assets greater than $10 billion. Moreover, the final rule maintains the existing requirement that volunteer services considered under this performance test must be related to the provision of financial services or the expertise of bank staff and must have a community development purpose. The performance test will provide consideration for activities that promote financial literacy for low- or moderate-income individuals, households, and families, even if the activities benefit individuals, households, and families of other income levels as well.

Geographic Areas in Which a Bank's Activities Are Considered

Facility-based assessment areas. As under the current CRA regulations, the final rule maintains facility-based assessment areas as the cornerstone of the CRA evaluation framework. The final rule adopts the delineation requirements for facility-based assessment areas mostly as set out in the proposal with clarifying changes. Specifically, banks will continue to delineate facility-based assessment areas in the MSAs or nonmetropolitan areas of States in which the following facilities are located: main offices, branches, and deposit-taking remote service facilities. As under the proposal, large banks are required to delineate facility-based assessment areas composed of whole counties, while intermediate and small banks will continue to be permitted to delineate facility-based assessment areas consisting of partial counties. The final rule continues to provide that facility-based assessment areas may not reflect illegal discrimination and may not arbitrarily exclude low- or moderate-income census tracts.

Retail lending assessment areas. The final rule requires a large bank to delineate a new type of assessment area, referred to as retail lending assessment areas, in an MSA or the nonmetropolitan area of a State in which the large bank has a concentration of closed-end home mortgage or small business lending outside of its facility-based assessment area(s). Large banks are evaluated under the Retail Lending Test, but not the other performance tests, in retail lending assessment areas. Relative to the proposal, the final rule tailors the retail lending assessment area requirement by exempting large banks that conduct more than 80 percent of their retail lending within facility-based assessment areas.

Upon consideration of commenter feedback regarding the retail lending assessment area proposal, the final rule increases, relative to the proposal, the loan count thresholds that trigger the retail lending assessment area delineation requirement to at least 150 closed-end home mortgage loans or at least 400 small business loans in each year of the prior two calendar years. The final rule also simplifies the evaluation of a large bank's retail lending performance by reducing the number of product lines potentially evaluated in a retail lending assessment area from six to two product lines, and only evaluating a product line if the bank exceeds the relevant loan count threshold.

Outside retail lending areas. Under the final rule, the agencies will evaluate the retail lending performance of all large banks, certain intermediate banks, and certain small banks that opt to be evaluated under the Retail Lending Test in the outside retail lending area, which consists of the nationwide area outside of the bank's facility-based assessment areas and applicable retail lending assessment areas, excluding certain nonmetropolitan counties. Evaluation in these areas is designed to facilitate a comprehensive evaluation of a bank's retail lending to low- and moderate-income individuals and communities under the Retail Lending Test, and to adapt to changes in the banking industry, such as mobile and online banking. For an intermediate bank or a small bank that opts to be evaluated under the Retail Lending Test, the agencies evaluate the bank's retail lending performance in the outside retail lending area on a mandatory basis if the bank conducts a majority of its retail lending outside of its facility-based assessment areas. If the intermediate or small bank does not conduct a majority of its retail lending outside of its facility-based assessment areas, the bank may opt to have its retail lending in its outside retail lending area evaluated.

Areas for eligible community development activities. Like the proposal, the final rule provides that all banks will receive consideration for any qualified community development loans, investments, or services, regardless of location. In assessing a large bank's Community Development Financing Test performance, the final rule includes a focus on performance within facility-based assessment areas. Specifically, when developing conclusions for a State, multistate MSA, or for the institution overall, the final rule combines two components through a weighted average calculation: (1) performance within the bank's facility-based assessment areas in the State, multistate MSA, or for the institution overall; and (2) performance across the entire State, multistate MSA, and for the institution. The weights of the two components are based on the percentage of a bank's retail lending and deposits inside its facility-based assessment areas. For example, for a bank with a relatively low percentage of retail lending and deposits inside its facility-based assessment areas, the bank's performance within its facility-based assessment areas receives less weight than its performance across the entire State, multistate MSA, or nationwide area. In this way, the Community Development Financing Test recognizes differences in bank business models.

Categories of Community Development

Updated community development definition. Under the current CRA regulations, in evaluating a bank's CRA performance, banks may receive community development consideration for community development loans, investments, and services under various tests. The final rule updates the definition of community development to provide banks with additional clarity regarding the loans, investments, and services that the agencies have determined support community development. The agencies believe these activities are responsive to the needs of low- and moderate-income individuals and communities, designated distressed or underserved nonmetropolitan areas, Native Land Areas, small businesses, and small farms. Specifically, the agencies have defined the following eleven community development categories in the final rule:

• Affordable housing, which has five components: (1) rental housing in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy; (2) multifamily rental housing with affordable rents; (3) one-to-four family rental housing with affordable rents in a nonmetropolitan area; (4) affordable owner-occupied housing for low- or moderate-income individuals; and (5) mortgage-backed securities.
• Economic development, which includes loans, investments, and services undertaken in conjunction or in syndication with government programs; loans, investments, and services provided to intermediaries; and other forms of assistance to small businesses and small farms. Unlike the proposal, this category includes direct loans to small businesses and small farms in conjunction or in syndication with government programs that meet a size and purpose test.
• Community supportive services, which includes activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals, and replaces the current rule's “community services targeted to low- or moderate-income individuals” category.
• Six categories of place-based activities, which replace the revitalization and stabilization activities component of the current rule. Each of the final place-based categories adopts a focus on targeted geographic areas and includes common place-based eligibility criteria that must be met. The six place-based categories are:

○ Revitalization or stabilization activities;

○ Essential community facilities;

○ Essential community infrastructure;

○ Recovery activities that promote the recovery of a designated disaster area;

○ Disaster preparedness and weather resiliency activities; and

○ Qualifying activities in Native Land Areas.

• Activities with minority depository institutions (MDIs), women's depository institutions (WDIs), low-income credit unions (LICUs), and community development financial institutions (CDFIs).
• Financial literacy, which retains the proposed approach of qualifying activities assisting individuals, families, and households of all income levels, including low- or moderate-income individuals, families, and households.

Illustrative list and confirmation process. To promote clarity and consistency, the final rule also provides that the agencies will issue, maintain, and periodically update a publicly available illustrative list of non-exhaustive examples of loans, investments, and services that qualify for community development consideration. In addition, the final rule includes a process through which banks can confirm with the appropriate Federal financial supervisory agency whether a particular loan, investment, or service is eligible for community development consideration.

Impact and responsiveness review. To promote clarity and consistency in the final rule, the agencies will evaluate the extent to which a bank's community development loans, investments, and services are impactful and responsive in meeting community development needs, through the application of a non-exhaustive list of review factors. Such factors were referred to as impact review factors in the agencies' proposal but are referred to as impact and responsiveness factors in the final rule.

Data Collection, Maintenance, and Reporting

Consistent with the proposal, the agencies are not imposing any new data collection and reporting requirements for small and intermediate banks. For large banks, the final rule leverages existing data where possible and introduces updated data collection, maintenance, and reporting requirements to fill gaps in the current regulation and facilitate implementation of the final rule. For example, the final rule requires certain large banks to collect, maintain, and report data that would enable the agencies both to implement the metrics and benchmarks included in the Retail Lending Test and Community Development Financing Test, and to evaluate activities under the Retail Services and Products Test. These data requirements are intended to support greater clarity and consistency in the application of the CRA regulations and are tailored by bank size, such as by introducing certain data requirements only for those large banks with assets over $10 billion dollars.

The final rule requires the agencies to publish on their respective websites certain information related to the distribution by borrower income level, race, and ethnicity of a large bank's home mortgage loan originations and applications in each of the bank's assessment areas. This disclosure would leverage existing data available under the Home Mortgage Disclosure Act (HMDA).

Transition

Although the effective date of the final rule is April 1, 2024, the applicability date for the majority of the provisions is January 1, 2026. Specifically, the following provisions of the final rule will become applicable on January 1, 2026: final §§ __.12 through __.15; final §§ __.17 through __.30; final § __.42(a); the data collection and maintenance requirements in final § __.42(c) through (f); and appendices A through F. Banks will have until January 1, 2027, to comply with the reporting requirements of § __.42(b) through (f), with data reporting requirements every April 1 beginning in 2027. In final § __.51, the agencies have also included transition provisions relating to: applicability of the current CRA regulations; HMDA data disclosures; CRA consideration of eligible loans, investments, services, or products; strategic plans; and a particular ratings standard relating to minimum performance requirements applicable to large banks. Until the applicability dates for these provisions, banks will follow the current CRA regulations, included as appendix G to the revised CRA regulations.

Transition to Section 1071 Data

As discussed in the section-by-section analysis of §§ __.12, __.22, and __.42, the agencies have included amendments to transition to the use of Consumer Financial Protection Bureau's (CFPB) final rule under section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (Section 1071 Final Rule) small business and small farm lending data (section 1071 data) once the data are available. The section 1071 data would replace CRA small business and small farm lending data required to be collected, maintained, and reported pursuant to final § __.42(a)(1) and (b)(1).

With respect to the agencies' transition to using section 1071 data, as indicated in the section-by-section analysis of § __.12, the agencies have removed proposed references to section 1071 data in the final rule's regulatory text. Instead, each agency is adopting separate agency-specific amendatory text that provides for a transition to section 1071 data. These transition amendments implement the intent of the agencies articulated in the proposal to leverage section 1071 data while accounting for the current uncertainty surrounding the availability of that data. Specifically, when effective, these transition amendments will add appropriate references to the section 1071 rulemaking, remove references to Call Report-based small business and small farm data, and make other corresponding changes to the final rule regulatory text.

The agencies are not including an effective date for these section 1071-related transition amendments in the final rule. Instead, once the availability of section 1071 data is clarified, the agencies will take steps to provide appropriate notice in the Federal Register of the effective date of the transition amendments. The agencies expect that the effective date will be on January 1 of the relevant year to align with the final rule's data collection and reporting, benchmark calculations, and performance analysis, which all are based on whole calendar years.

Implementation

The agencies expect to issue supervisory guidance, including examination procedures, to promote clarity and transparency regarding implementation of the final rule. In addition, the agencies will conduct outreach and training to facilitate implementation of the final rule. For instance, the agencies expect to develop data reporting guides and technical assistance materials to assist banks in understanding supervisory expectations with respect to the final rule's data reporting requirements. In addition, the agencies expect to develop templates, such as for the submission of digital and other delivery systems data as well as for responsive deposit products data, to increase consistency, and will continue to explore other tools to improve efficiency and reduce burden. The agencies are also planning to develop data tools for banks and the public that will increase familiarity with the operation of the performance tests and allow for monitoring of performance relative to benchmarks based on historical data.

Each of the topics highlighted through this Summary of the Final Rule are discussed in greater detail in the section-by-section analysis in section IV of this SUPPLEMENTARY INFORMATION . The agencies are setting forth in this SUPPLEMENTARY INFORMATION the final rule using common regulation text for ease of review. The agencies have also included agency-specific amendatory text where necessary to account for differing agency authority and terminology.

II. Background

A. General Statutory Background

The CRA was passed by Congress as part of the Housing and Community Development Act of 1977 and is designed to encourage regulated banks to help meet the credit needs of the communities in which they are chartered. Specifically, Congress found that (1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business; (2) the convenience and needs of communities include the need for credit services as well as deposit services; and (3) regulated financial institutions have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.

The CRA requires the agencies to “assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.” Upon completing this assessment, the statute requires the agencies to “prepare a written evaluation of the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods.” The statute further provides that each agency must consider a bank's CRA performance “in its evaluation of an application for a deposit facility by such institution.”

Since its enactment, Congress has amended the CRA several times, including through: the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (which required public disclosure of a bank's CRA written evaluation and rating); the Federal Deposit Insurance Corporation Improvement Act of 1991 (which required the inclusion of a bank's CRA examination data in the determination of its CRA rating); the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991 (which permits the agencies to provide favorable consideration where the bank has donated, sold on favorable terms, or made available rent-free any branch of the bank “located in any predominantly minority neighborhood to any minority depository institution or women's depository institution”); the Housing and Community Development Act of 1992 (which included assessment of the record of nonminority-owned and nonwomen-owned banks in cooperating with minority-owned and women-owned banks and LICUs); the Riegle-Neal Interstate-Banking and Branching Efficiency Act of 1994 (which (1) required an agency to consider an out-of-State national bank's or State bank's CRA rating when determining whether to allow interstate branches, and (2) prescribed certain requirements for the contents of the written CRA evaluation for banks with interstate branches); and the Gramm-Leach-Bliley Act of 1999 (which, among other things, provided regulatory relief for smaller banks by reducing the frequency of their CRA examinations).

Additionally, Congress directed the agencies to publish regulations to carry out the CRA's purposes. In 1978, the agencies promulgated the first CRA regulations, which included evidence of prohibited discriminatory or other illegal credit practices as a performance factor as discussed further in the next section. Since then, the agencies have together significantly revised and sought to clarify their CRA regulations twice—in 1995 and 2005 —with the most substantive interagency update occurring in 1995. In addition, the agencies have periodically jointly published the Interagency Questions and Answers Regarding Community Reinvestment (Interagency Questions and Answers) to provide guidance on the CRA regulations.

B. CRA, Illegal Discrimination, and Fair Lending

The CRA was one of several laws enacted in the 1960s and 1970s to address fairness and financial inclusion in access to housing and credit. During this period Congress passed the Fair Housing Act to prohibit discrimination in the sale or rental of housing, and the Equal Credit Opportunity Act (ECOA) in 1974 (amended in 1976), to prohibit creditors from discriminating against an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, and age, because all or part of the applicant's income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. These fair lending, fair housing, and other similar laws provide the legal basis under Federal law for prohibiting discriminatory lending practices by creditors based on race, ethnicity, and other protected characteristics.

The agencies have long recognized that CRA and fair lending are mutually reinforcing. For example, starting with the original CRA regulations issued in 1978, the agencies have taken evidence of discrimination or other illegal credit practices into account when evaluating a bank's CRA performance. Other provisions in the original 1978 regulations similarly expressed the agencies' view that the exclusion of certain segments of a bank's community is “contrary to” and “in conflict with” the CRA's purpose of requiring banks to meet the credit needs of their entire communities. Specifically, the agencies provided for “assessment of an institution's lending patterns to see if the institution discriminates between geographic areas or excludes qualified borrowers from low- and moderate-income neighborhoods.” Factors identified as warranting unfavorable treatment were “practices intended to discourage applications,” evidence of “violations of the Equal Credit Opportunity Act and the Fair Housing Act,” and “failure to provide usual services—such as not accepting mortgage applications—at certain branches.

C. Overview of Current CRA Regulations and Guidance for Performance Evaluations

CRA Performance Evaluations

The current CRA regulations provide different methods to evaluate a bank's CRA performance depending on the asset size and business strategy of the bank. Under the current framework:

○ Small banks—currently, those with assets of less than $376 million as of December 31 of either of the prior two calendar years—are evaluated under a lending test and may receive an “Outstanding” rating based only on their retail lending performance. Qualified investments, services, and delivery systems that enhance credit availability in a bank's assessment areas may be considered for an “Outstanding” rating, but only if the bank meets or exceeds the lending test criteria in the small bank performance standards.

○ Intermediate small banks—currently, those with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years—are evaluated under the lending test for small banks and a community development test. The intermediate small bank community development test evaluates all community development activities together.

○ Large banks—currently, those with assets of at least $1.503 billion as of December 31 of both of the prior two calendar years—are evaluated under separate lending, investment, and service tests. The lending and service tests consider both retail and community development activities, and the investment test focuses on qualified community development investments. To facilitate the agencies' CRA analysis, large banks are required to report annually certain data on community development loans, small business loans, and small farm loans (small banks and intermediate small banks are not required to report these data unless they opt into being evaluated under the large bank lending test).

○ Designated wholesale banks (those engaged in only incidental retail lending) and limited purposes banks (those offering a narrow product line to a regional or broader market) are evaluated under a standalone community development test.

○ Banks of any size may elect to be evaluated under a strategic plan that sets out measurable, annual goals for lending, investment, and service activities in order to achieve a “Satisfactory” or an “Outstanding” rating. A strategic plan must be developed with community input and approved by the appropriate Federal financial supervisory agency.

The agencies also consider applicable performance context information to develop their analysis and conclusions when conducting CRA examinations. Performance context comprises a broad range of economic, demographic, and bank- and community-specific information that examiners review to calibrate a bank's CRA evaluation to its communities.

Assessment Areas

The current CRA regulations require a bank to delineate one or more assessment areas in which the bank's record of meeting its CRA obligations is evaluated. The regulations require a bank to delineate assessment areas generally consisting of one or more MSAs or metropolitan divisions, or one or more contiguous political subdivisions in which the bank has its main office, branches, and deposit-taking ATMs, as well as the surrounding geographies ( i.e., census tracts) in which the bank has originated or purchased a substantial portion of its loans (including home mortgage loans, small business and small farm loans, and any other loans the bank chooses, such as consumer loans on which the bank elects to have its performance assessed).

The statute instructs the agencies to assess a bank's record of meeting the credit needs of its “entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution, and . . . [to] take such record into account in its evaluation of an application for a deposit facility by such institution.” The statute does not prescribe the delineation of assessment areas, but they are an important aspect of the regulation because the agencies use assessment areas to determine what constitutes a bank's “community” for purposes of the evaluation of a bank's CRA performance.

Qualifying Activities

The CRA regulations and the Interagency Questions and Answers provide detailed information, including applicable definitions and descriptions, respectively, regarding activities that are eligible for CRA consideration in the evaluation of a bank's CRA performance. Banks that are evaluated under a performance test that includes a review of their retail activities are assessed in connection with retail lending activity ( e.g., home mortgage loans, small business loans, small farm loans, and consumer loans) and, where applicable, retail banking service activities ( e.g., the current distribution of a bank's branches in geographies of different income levels, and the availability and effectiveness of the bank's alternative systems for delivering banking services to low- and moderate-income geographies and individuals).

Banks evaluated under a performance test that includes a review of their community development activities are assessed with respect to community development lending, qualified investments, and community development services, which must have a primary purpose of community development.

Guidance for Performance Evaluations

In addition to information included in their CRA regulations, the agencies also provide information to the public regarding how CRA performance tests are applied, where CRA activities are considered, and what activities are eligible through publicly available CRA performance evaluations, the Interagency Questions and Answers, interagency CRA examination procedures, and interagency instructions for writing performance evaluations.

D. Stakeholder Feedback and Recent Agency Rulemaking Efforts

The financial services industry has undergone transformative changes since the CRA was enacted, including the removal of national bank interstate branching restrictions and the expanded role of mobile and online banking. Prior to publishing the NPR, and to better understand how these developments impact both consumer access to banking products and services and a bank's CRA performance, the agencies sought, received, and reviewed feedback from the banking industry, community groups, academics, and other stakeholders on several occasions.

Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA)

From 2013 to 2016, the agencies solicited feedback on the CRA as part of the EGRPRA review process. Stakeholders raised issues related to: assessment area definitions; incentives for banks to serve low- and moderate-income, unbanked, underbanked, and rural communities; regulatory burdens associated with recordkeeping and reporting requirements, and asset thresholds for the various CRA examination methods; the need for clarity regarding performance measures and better examiner training to ensure consistency and rigor in examinations; and refinement of CRA ratings methodology.

OCC CRA Advance Notice of Proposed Rulemaking and OCC and Federal Reserve Outreach Sessions

On September 5, 2018, the OCC published an advance notice of proposed rulemaking (ANPR) to solicit ideas for a new CRA regulatory framework. More than 1,500 comment letters were submitted in response. The OCC held more than 40 meetings and outreach events after its ANPR. To augment that input, the Board and the Federal Reserve Banks held about 30 outreach meetings with representatives of banks, community organizations, and the FDIC and OCC.

OCC–FDIC CRA Notice of Proposed Rulemaking and OCC CRA Final Rule

On December 12, 2019, the FDIC and the OCC issued a joint notice of proposed rulemaking to revise and update their CRA regulations. In response, the FDIC and the OCC received over 7,500 comment letters.

On May 2020, the OCC issued a CRA final rule (OCC 2020 CRA Final Rule), retaining the most fundamental elements of the joint proposal but also making adjustments to reflect stakeholder input. The OCC deferred establishing the metrics-framework for evaluating banks' CRA performance until it was able to assess additional data, with the final rule having an October 1, 2020, effective date and January 1, 2023, and January 1, 2024, compliance dates for certain provisions.

Board CRA Advance Notice of Proposed Rulemaking

On September 21, 2020, the Board issued a CRA ANPR (Board CRA ANPR) requesting public comment on an approach to modernize the CRA regulations by strengthening, clarifying, and tailoring the regulations to reflect the current banking landscape and better meet the core purpose of the CRA. The Board CRA ANPR sought feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and address inequities in credit access. The Board received over 600 comment letters in response.

Interagency Statement and Other Developments

On July 20, 2021, the agencies issued an interagency statement indicating their commitment to work collectively to, in a consistent manner, strengthen and modernize their CRA regulations. On December 15, 2021, the OCC issued a final rule, effective January 1, 2022, to rescind the OCC 2020 CRA Final Rule and replace it with CRA regulations based on those that the agencies jointly issued in 1995, as amended. The OCC's final rule also integrated the OCC's CRA regulation for savings associations into its national bank CRA regulation at 12 CFR part 25.

E. The Agencies' Proposal

Community development definitions. The NPR included a proposal to revise the community development definitions to clarify eligibility criteria for a broad range of community development activities and incorporate certain guidance currently provided through the Interagency Questions and Answers. The agencies also proposed using a primary purpose standard for determining eligibility of community development activities, with pro rata consideration for certain affordable housing activities.

Qualifying activities confirmation and illustrative list of community development activities. The agencies proposed to maintain a publicly available illustrative, non-exhaustive list of community development activities eligible for CRA consideration, which the agencies would periodically update. In addition, the agencies proposed a process, open to banks, for confirming eligibility of community development activities in advance.

Impact review of community development activities. To promote clearer and more consistent evaluation procedures, the agencies proposed to include impact and responsiveness factors (referred to in the NPR as impact review factors) in the regulation. The impact review factors would inform the agencies' evaluation of the impact and responsiveness of a bank's activities under the proposed community development tests.

Assessment areas and areas for eligible community development activity. The agencies offered a series of proposals on delineating facility-based assessment areas for main offices, branches, and deposit-taking remote service facilities (to include ATMs). The NPR sought to maintain facility-based assessment areas as the cornerstone of the CRA evaluation framework. Under the proposal, large banks would delineate assessment areas comprised of full counties, metropolitan divisions, or MSAs. Intermediate and small banks could continue to delineate partial county facility-based assessment areas, consistent with current practice.

The agencies also proposed that large banks would delineate retail lending assessment areas where the bank has concentrations of home mortgage and/or small business lending outside of its facility-based assessment areas. Under that aspect of the proposal, a large bank would delineate retail lending assessment areas where it had an annual lending volume of at least 100 home mortgage loan originations or at least 250 small business loan originations in an MSA or nonmetropolitan area of a State for two consecutive years.

The agencies also proposed to allow banks to receive CRA credit for any qualified community development activity, regardless of location, although performance within facility-based assessment areas would be emphasized.

Performance tests, standards, and ratings in general. The agencies proposed an evaluation framework that would include a Retail Lending Test, a Retail Services and Products Test, a Community Development Financing Test, and a Community Development Services Test. Under the proposal, large banks would be evaluated under all four tests. Intermediate banks would be evaluated under the Retail Lending Test and the status quo community development test, unless they opted into the Community Development Financing Test. Small banks would be evaluated under the status quo small bank lending test, unless they opted into the Retail Lending Test. Wholesale and limited purpose banks would be evaluated under a tailored version of the Community Development Financing Test.

Under this proposed framework, large banks would be banks that had average quarterly assets, computed annually, of at least $2 billion in both of the prior two calendar years; intermediate banks would be banks that had average quarterly assets, computed annually, of at least $600 million in both of the prior two calendar years and less than $2 billion in either of the prior two calendar years; and small banks would be banks that had average quarterly assets, computed annually, of less than $600 million in either of the prior two calendar years. The agencies also proposed adding a new definition of “operations subsidiary” to the Board's CRA regulation and “operating subsidiary” to the FDIC's and OCC's CRA regulations to identify those bank affiliates whose activities would be required to be attributed to a bank's CRA performance (together, bank subsidiaries). The agencies proposed to maintain the current flexibilities that would allow a bank to choose to include or exclude the activities of other bank affiliates that are not considered bank subsidiaries. The NPR also discussed performance context, and the requirement for activity in accordance with safe and sound operations.

Retail Lending Test product categories and major product lines. The agencies proposed categories and standards for determining when a bank's retail lending product lines are evaluated under the proposed Retail Lending Test. The agencies proposed the following retail lending product line categories: closed-end home mortgage, open-end home mortgage, multifamily, small business, and small farm lending. The agencies also proposed including automobile lending as an eligible retail lending product line. In addition, the agencies proposed a 15 percent major product line standard to determine when a retail lending product line would be evaluated.

Retail Services and Products Test. The agencies proposed to evaluate large banks under the Retail Services and Products Test, which would use a predominantly qualitative approach, incorporating quantitative measures as guidelines, as applicable. The agencies proposed that the evaluation of digital and other delivery systems would be required for large banks with assets of over $10 billion, and not required for large banks with assets of $10 billion or less.

Furthermore, the credit products and deposit products part of the proposed Retail Services and Products Test aimed to evaluate a bank's efforts to offer products that are responsive to the needs of low- and moderate-income communities. The agencies proposed that the evaluation of deposit products responsive to the needs of low- or moderate-income individuals would be required for large banks with assets of over $10 billion, and not required for large banks with assets of $10 billion or less.

Community Development Financing Test. The agencies proposed to evaluate large banks as well as intermediate banks that opt into the test under the proposed Community Development Financing Test. As proposed, the Community Development Financing Test would consist of a Community Development Financing Metric, benchmarks, and an impact review. These components would be assessed at the facility-based assessment area, State, multistate MSA, and institution levels, and would inform conclusions at each of those levels.

Community Development Services Test. The agencies proposed to assess a large bank's community development services, underscoring the importance of these activities for fostering partnerships among different stakeholders, building capacity, and creating the conditions for effective community development. The agencies proposed that in nonmetropolitan areas, banks may receive community development services consideration for volunteer activities that meet an identified community development need, even if unrelated to the provision of financial services. The proposed test would consist of a primarily qualitative assessment of the bank's community development service activities. For large banks with assets of over $10 billion, the agencies proposed also using a metric to measure the hours of community development services activity per full time employee of a bank.

Wholesale and limited purpose banks. The agencies proposed a Community Development Financing Test for Wholesale and Limited Purpose Banks, which would include a qualitative review of a bank's community development lending and investments in each facility-based assessment area and an institution level-metric measuring a bank's volume of activities relative to its capacity. The agencies also proposed giving wholesale and limited purpose banks the option to have examiners consider community development service activities that would qualify under the Community Development Services Test.

Strategic plans. The agencies proposed to maintain a strategic plan option as an alternative method for evaluation. Banks that elect to be evaluated under a strategic plan would continue to request approval for the plan from their appropriate Federal financial supervisory agency. The agencies proposed more specific criteria to ensure that all banks meet their CRA obligation to serve low- and moderate-income individuals and communities. As proposed, banks approved to be evaluated under a strategic plan option would have the same assessment area requirements as other banks and would submit plans that include the same performance tests and standards that would otherwise apply unless the bank is substantially engaged in activities outside the scope of these performance tests. In seeking approval for a plan that does not adhere to requirements and standards that are applied to other banks, the plan would be required to include an explanation of why different standards would be more appropriate in meeting the credit needs of the bank's communities.

Assigned conclusions and ratings. The agencies proposed to provide greater transparency and consistency on assigning ratings for a bank's overall performance. The proposed approach would produce performance scores for each applicable test, at the State, multistate MSA, and institution levels based on a weighted average of assessment area conclusions, as well as consideration of additional test-specific factors at the State, multistate MSA, or institution level. These performance scores would be mapped to conclusion categories to assign test-specific conclusions at each level. The agencies further proposed to combine these performance scores across tests to assign ratings at each level.

The agencies proposed to determine a bank's overall rating by taking a weighted average of the applicable performance test scores. For large banks, the agencies proposed the following weights: 45 percent for Retail Lending Test performance score; 15 percent for Retail Services and Products Test performance score; 30 percent for Community Development Financing Test performance score; and 10 percent for Community Development Services Test performance score. For intermediate banks, the agencies proposed to weight the Retail Lending test at 50 percent and the community development test, or if the bank opted into the Community Development Financing Test, at 50 percent.

The agencies also proposed updating the criteria to determine how discriminatory and other illegal practices would adversely affect a rating, as well as what rating level (State, multistate MSA, and institution) would be affected.

Performance standards for small and intermediate banks. The agencies proposed to continue evaluating small banks under the small bank performance standards in the current CRA framework. However, under the proposal, small banks could opt into the Retail Lending Test and could continue to request additional consideration for other qualifying CRA activities. The agencies would evaluate intermediate banks under the proposed Retail Lending Test, and would evaluate an intermediate bank's community development activity pursuant to the criteria under the current intermediate small bank community development test. Intermediate banks could also opt to be evaluated under the proposed Community Development Financing Test.

Effect of CRA performance on applications. The agencies proposed no substantive changes to the regulatory provisions concerning the effect of CRA performance on bank applications, such as those for mergers, acquisitions, or consolidation of assets, deposit insurance requests, and the establishment of domestic branches.

Data collection, reporting, and disclosure. The agencies proposed to revise data collection and reporting requirements to increase the clarity, consistency, and transparency of the evaluation process through the use of standard metrics and benchmarks. The proposal recognized the importance of using existing data sources where possible, and tailoring data requirements, where appropriate.

In addition to leveraging existing data, however, the proposal would have required large banks to collect, maintain, and report additional data. The data requirements under the proposal for intermediate banks and small banks would remain the same as the current requirements. All large banks under the proposal would have new requirements for certain categories of data, (including community development financing data, branch location data, and remote service facility location data); however, some new data requirements would only apply to large banks with assets of over $10 billion. The agencies also proposed updated standards for all large banks to report the delineation of their assessment areas.

Content and availability of public file, public notice by banks, publication of planned examination schedule, and public engagement. The agencies proposed to provide more transparent information to the public on CRA examinations and encourage communication between members of the public and banks. The agencies proposed to make a bank's CRA public file more accessible to the public by allowing any bank with a public website to include its CRA public file on its website. The agencies also proposed publishing a list of banks scheduled for CRA examinations for the next two quarters at least 60 days in advance in order to provide additional notice to the public. Finally, the agencies proposed to establish a way for the public to provide feedback on community needs and opportunities in specific geographies.

Transition. The agencies proposed a phased-in timeline that would facilitate the transition from the current regulatory and supervisory framework to the updated CRA regulatory and supervisory framework.

III. General Comments Received

The agencies received approximately 950 unique comment letters regarding the proposal from a wide range of commenters, including: financial institutions; non-financial institution and financial institution trade associations; CDFIs; financial and non-financial businesses; community development organizations; consumer advocacy groups; civil rights groups; other nonprofit organizations; Federal, State, local, and tribal government commenters; tribal organizations; academics; individuals; and other interested parties. The agencies have carefully considered all the commenter feedback in developing the final rule.

Comments received by the agencies cover a wide-ranging set of topics across the entire proposal. General public comments on the NPR are summarized below. Comments relating to specific regulatory provisions of the agencies' proposal and the final rule are discussed in detail in the section-by-section analyses of the specific provisions on which commenters shared their views.

A. General Comments Regarding the NPR

Modernizing the CRA performance evaluation framework. Many commenters expressed appreciation for the agencies' unified efforts to modernize the CRA framework. Some commenters noted support for the objective of providing transparency and consistency for banks covered by CRA and the communities they serve. In addition, several commenters, expressed support for various aspects of the NPR, including the proposal's metrics-driven approach and attention to climate resiliency.

Some commenters stated that while the agencies' proposal is a step in the right direction, more could be done to improve the CRA regulations, such as requiring the agencies to consult with a diverse set of community representatives when evaluating an institution's CRA performance. A few commenters also suggested that the final rule should encourage both meaningful action to help low- and moderate-income communities and collaboration between banks and financial technology (fintech) companies. Another commenter recommended that the agencies view the military community as a community deserving of CRA support. The commenter further stated that bank activities that serve the military community should generally receive CRA credit.

Other commenters opposed or expressed concerns about the proposal for various reasons, asserting that aspects of the NPR could result in, for example: decreased bank competition; undue burden and costs; less credit availability; gentrification of urban Black neighborhoods; and fewer services in low- and moderate-income communities.

Complexity of the proposed rule. Numerous commenters expressed concern that the agencies' proposal was too complex and difficult to understand—primarily related to the proposed performance test measures and ratings methodology requiring significant resources and costs to implement—and recommended that the agencies develop a simpler final rule to avoid unintended negative consequences. Some commenters recommended the agencies develop tools, guidance, and training for examiners and allow banks to consult with the agencies as needed.

Coordination of the CRA regulations with State and Federal agencies. A few commenters expressed concerns regarding the lack of coordination between the agencies, the CFPB, and the States and suggested the agencies work together with these other entities to improve consistency and further the mission of CRA. Other commenters noted that given shifts in the banking industry, the agencies should extend CRA regulations to nonbank lenders and, some commenters recommended, work with the CFPB to do so.

Length of the comment period and other rulemakings. Several commenters objected to the length of the comment period stating that it was too short and did not provide sufficient time for analysis and comment, with some commenters recommending that the agencies withdraw the proposal, issue a revised set of proposed rules, or open a new comment period. A few commenters suggested that the agencies should delay issuance of a final rule given uncertainty in the industry and the status of other rulemakings such as the CFPB's Section 1071 Final Rule and the agencies' separate rulemaking on capital requirements for certain banks.

Application of the proposed regulations to different business models. Some commenters expressed concern that the agencies' proposal did not address the needs of different business models and could create a one-size-fits-all approach that favors particular business models, which would not reflect the ever-changing banking landscape. These commenters indicated that the final rule should do more to recognize the inherently diffuse nature of digital banking and that more flexibility is necessary to account for different business models.

Promoting activities in local communities, including rural and underserved areas. Some commenters asserted that the NPR would be more effective in boosting reinvestment activity in underserved areas if the evaluations and ratings were more rigorous. Other commenters expressed concerns regarding the proposed use of metrics and certain data, suggesting that they could lead to disinvestment in hard to serve areas and overinvestment in urban areas due to the use of census data.

The agencies also received comments outlining different methods of promoting activities and investments at the local level, including specific recommendations: on how to promote investments in underserved rural and native communities; that the agencies should incentivize affordable small dollar loans and other products; and that the agencies should seek to end “rent-a-bank” partnerships.

A few other commenters suggested that the final rule should address the issue of appraisal bias to ensure lenders are fulfilling the needs of the communities they serve, and recommended that bank lenders should complete additional due diligence on the appraisers they work with.

The agencies also received several comments regarding the importance of performance context, suggesting that performance context and examiner discretion is necessary to understand the metrics embedded in the CRA exam.

Legal issues. Some commenters provided general comments raising legal concerns with the proposal. For example, some commenters stated that if the proposal is finalized as proposed, the final rule could be challenged as arbitrary and capricious because it was not supported by a reasoned analysis. Several commenters expressed the view that the agencies lack the authority to adopt the proposal. Finally, a commenter questioned the FDIC Board's authority to issue the NPR and to adopt a final rule based on certain aspects of the FDIC's organic statute and the FDIC Board's composition at the time the NPR was issued.

Other comments. The agencies also received suggestions about how the agencies could evaluate the impact of the final rule, including five-year lookback reviews and an impact study. Commenter feedback also included noting that performance evaluations should be published as soon as reasonably possible. Some commenters urged the agencies to expand the coverage of CRA to credit unions to ensure low- and moderate-income communities are adequately served.

Final Rule

The agencies have carefully considered the general commenter feedback regarding ways in which the NPR could be improved and believe the final rule strikes the proper balance between the stated objectives, including to update the CRA regulations to strengthen the achievement of the core purpose of the statute and adapt to changes in the banking industry. For additional discussion regarding the agencies' objectives, see section III.B of this SUPPLEMENTARY INFORMATION . The agencies also carefully considered commenters' concerns regarding the complexity of the proposed rule and have made modifications to various aspects of the final rule to reduce complexity as explained in more detail in section IV of this SUPPLEMENTARY INFORMATION . In addition, with respect to the Retail Lending Test, the agencies believe that the final rule ensures that CRA evaluations of retail lending are appropriately robust and comprehensive, provides greater consistency and transparency, and reduces overall complexity relative to the approach set out in the NPR. The agencies note that any evaluation approach leveraging metrics and benchmarks that captures the different ways that banks may serve the credit needs of an area will necessarily entail a degree of complexity.

The agencies appreciate commenter feedback that the military community should be considered a community deserving of CRA support. The agencies believe that the final rule encourages banks to meet the credit needs of military communities. For example, the final rule codifies “military bank” as a defined term in final § __.12, and clarifies the assessment area and evaluation approach to military banks in final §§ __.16(d) and __.21(a)(5), respectively. In addition, the agencies are specifying in final § __.28(d) that violations of the Military Lending Act and Servicemembers Civil Relief Act may constitute discriminatory or other illegal credit practices that may adversely affect a bank's CRA performance. More generally, the agencies believe that many bank activities that serve the military community may receive community development consideration under the final rule. For further discussion of these provisions, see the section-by-section analyses of §§ __.12, __.16(d), __.21(a)(5), and __.28(d).

The agencies appreciate comments encouraging the agencies to coordinate with States, the CFPB, and other Federal regulators to improve consistency and efficiency of CRA examinations, and the agencies note that they currently, and will continue to, coordinate with other regulators when appropriate on CRA examinations. Further, the agencies are not able to extend the CRA regulations to cover nonbank lenders and credit unions. Such an expansion is outside the scope of this rulemaking and the agencies' current authority.

In response to comments regarding the length of the comment period, the agencies note that the NPR's comment period was 90 days, which is consistent with the requirements of the Administrative Procedure Act and provided sufficient time for public consideration and comment, as demonstrated by the number of detailed and thoughtful comments the agencies received on the proposal.

One of the objectives of the CRA proposal was to tailor performance standards to account for differences in bank size, business models, and local conditions. The agencies have carefully considered commenter feedback, and while the agencies believe the proposal provided flexibility to accommodate institutions with different business models, the agencies have made various changes in response to commenter feedback to provide additional flexibility in the final rule as outlined in the section-by-section analyses in section IV of this SUPPLEMENTARY INFORMATION . The agencies also note the final rule retains the strategic plan option for banks to adjust the performance tests or weighting based on their business model.

After carefully considering commenter suggestions on how to encourage reinvestment activity through rigorous evaluations and standards, the agencies are declining to adopt these specific commenter recommendations. The agencies believe the final rule's evaluation framework is appropriately rigorous and encourages reinvestment activity, while maintaining flexibility and allowing room for consideration of performance context. The agencies have considered the views from some commenters raising concerns on the potential negative impacts of the use of metrics and data in the proposal. As discussed further in section IV of this SUPPLEMENTARY INFORMATION , the agencies believe the use of metrics and data in the final rule is appropriately tailored to encourage, rather than deter, reinvestment in hard to serve areas. While the agencies appreciate commenters' suggestions on additional methods to encourage activities and investments at the local level, the agencies are declining to adopt these recommendations and believe the final rule adequately evaluates activities and investments in underserved and native communities. The agencies appreciate the comments highlighting the importance of performance context in CRA examinations, and the agencies are retaining the use of performance context in the final rule, as explained in the section-by-section analysis of § __.21(d).

The agencies appreciate commenters' suggestions to address appraisal bias, and the agencies note that if such bias were found to evidence discrimination by an institution evaluated under CRA, the agencies may consider this as the basis for a downgrade as discussed in the section-by-section analysis of § __.28.

The agencies believe that the NPR adequately explained the agencies' rationale for the proposed changes. The NPR contains detailed analysis of the current CRA regulations, the need for modernization, and an in-depth review of the proposed rule and alternatives the agencies considered, which are all supported by extensive data.

The agencies acknowledge that commenters provided general comments raising legal concerns with the proposal. The agencies note that the CRA authorizes the agencies to adopt regulations to carry out the purposes of the statute, and requires the agencies to assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the bank. The final rule furthers the purposes of the CRA and is consistent with the agencies' rulemaking authority. The agencies also considered the points raised by the commenter questioning the FDIC Board's authority but find no such impediment to adoption of the final rule. Legal issues concerning particular aspects of the proposal are discussed in the section-by-section analysis in section IV of this SUPPLEMENTARY INFORMATION .

In response to comments regarding lookback reviews, the agencies often do reviews of their examinations after implementation of revised or new rules. While the agencies will keep these recommendations in mind, the agencies are not committing to adopt such recommendations in a specific timeframe or through a specified method. Regarding the development of tools, including for small banks, as noted in section I of this SUPPLEMENTARY INFORMATION , the agencies expect to develop various materials for banks including data reporting guides, data reporting templates, and technical assistance to assist banks in understanding supervisory expectations with respect to the final rule's performance evaluation standards and data reporting requirements. The agencies will continue to explore other tools to provide transparent information to the public, improve efficiency, and reduce burden.

B. General Comments Regarding the Agencies' CRA Modernization Objectives

As noted in section I of this SUPPLEMENTARY INFORMATION , the agencies' updates to their CRA regulations in this final rule are guided by eight objectives. These objectives were set out in the NPR, and some general comments received on the objectives are summarized below. Throughout this SUPPLEMENTARY INFORMATION , the agencies provide additional information and discussion regarding the ways in which this final rule accomplishes the objectives, including in the section-by-section analysis in section IV.

The Agencies' Proposal, Comments Received, and the Final Rule

Strengthen the achievement of the core purpose of the statute. As provided for in the statute, the CRA states that “[i]t is the purpose of this chapter to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.” The CRA requires the agencies to “assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.”

Commenter feedback on this objective included: support for updating the CRA regulations to achieve this purpose; that CRA modernization should result in a net increase in the quantity and quality of financial products and services available in low- and moderate-income areas; and, that the burden is on the agencies to demonstrate that modernization efforts would meet these baseline goals for reform. Additional commenter feedback included: that the sole criterion for extending CRA consideration to a business activity should be its direct, significant, and exclusive benefit to low- and moderate-income individuals; that by ignoring race during CRA exams, the agencies' proposal falls far short of this objective; and that to achieve the goal of serving communities with the greatest needs, the agencies must maintain a balance between the qualitative and quantitative aspects of the tests and, specifically, to align the twin tracks of CRA compliance and CDFI certification.

The agencies believe that the final rule updates the CRA regulations to strengthen the achievement of the core purpose of the statute. The agencies believe the final rule accomplishes this in various ways, for example, by: establishing a tailored and rigorous approach for the performance tests used to assess a bank's record of meeting the credit needs of its entire community; evaluating the responsiveness of certain bank's credit products and deposit products, including an impact and responsiveness review for community development activities; and including community development definitions that reflect an emphasis on activities that are responsive to community needs, especially the needs of low- and moderate-income individuals and communities. With respect to a commenter's assertion that the agencies should not ignore race during CRA examinations, the agencies note that the final rule retains the conditions that facility-based assessment areas are prohibited from reflecting illegal discrimination and must not arbitrarily exclude low- or moderate-income census tracts. Additionally, banks' performance under the CRA can be adversely affected by evidence of discriminatory or other illegal credit practices, including violations of ECOA and the Fair Housing Act. The agencies also believe the final rule appropriately balances the qualitative and quantitative aspects of the performance tests by incorporating standardized metrics and benchmarks in several of the performance tests, and retaining the ability for the agencies to consider performance context.

Adapt to changes in the banking industry, including the expanded role of mobile and online banking. Many commenters expressed general support for this objective with several of these commenters noting that now is the time to update the CRA regulations, given advances in banking technology. A few of these commenters also stated that the CRA has not kept up with the way consumers expect to use technology to access financial products and services and that the current CRA regulations and guidance do not recognize the wide diversity in business practices of banks or the changes in the financial services industry that have occurred since the CRA was enacted in 1977.

While some commenters believed the agencies met this objective, particularly in response to the expanded role of mobile and online banking, other commenters did not believe the proposal sufficiently met the objective, noting: efforts to modernize the CRA regulations should account for current and future ranges of banking and financial service business models; the NPR emphasizes physical bank branches, which the commenter asserted will require the agencies to update the CRA rule once digital banking becomes more common; the proposal may adversely impact how banks are able to respond to innovations in the marketplace, explaining that banks should have the ability to comply with the letter and spirit of the CRA within their chosen business models; the agencies should request additional authority from Congress to maintain the integrity and vibrancy of the CRA; and, CRA modernization must recognize and address the critical importance of digital equity for creating opportunities and upward mobility for low- and moderate-income, minority, and rural communities. Also, a commenter stated that adapting to advances in banking technology should be the one and only objective of CRA reform, and that the other seven objectives can be accomplished within the current regulatory framework and through more effective examinations.

The agencies believe that the final rule takes into account changes in the banking industry. For example, evaluating retail lending outside of facility-based assessment areas accounts for current and future ranges of banking business models. The agencies also believe that the final rule strikes the appropriate balance by maintaining the importance of physical branches, while including consideration of digital and other delivery systems for large banks in recognition of the trend toward greater use of online and mobile banking. The section-by-section analysis provides additional discussion regarding the agencies' decision to maintain the importance of physical branches in this final rule. See section IV of this SUPPLEMENTARY INFORMATION .

Provide greater clarity and consistency in the application of the CRA regulations. Some commenters expressed general support for this objective, with a commenter stating, for example, that the CRA regulations and supervision have become overly complex and unpredictable. Another commenter asserted that the proposal promotes this objective by establishing a framework that would lead to many positive changes but asserted that certain revisions to the proposal are required to effectively meet the objective.

The agencies believe that the final rule meets this objective in several ways, including, for example, by clarifying eligibility requirements for community development activities, providing that the agencies will maintain a publicly available illustrative list of non-exhaustive examples of qualifying activities, and updating certain performance tests to incorporate standardized metrics, benchmarks, and thresholds and performance ranges, as applicable.

Better tailor performance standards to account for differences in bank size, business models, and local conditions, and better tailor data collection and reporting requirements and use existing data whenever possible. Commenter sentiments on this objective included support for tailoring the performance standards and data requirements of the final rule, as well as concerns that the agencies' proposal failed to meet these objectives. The agencies believe the final rule tailors the performance standards based on bank size, business models, and local conditions in multiple ways. For example, small banks may continue to be evaluated under the Small Bank Lending Test, unless they opt into the Retail Lending Test; and intermediate and large banks, which have more resources than small banks, will be evaluated under the Retail Lending Test. The final rule also tailors data collection and reporting requirements because, as further explained in the section-by-section analysis of § __.42, the new data collection and maintenance requirements in the final rule do not apply to small and intermediate banks, and certain new requirements apply only to large banks with more than $10 billion in assets.

Promote transparency and public engagement. Commenter feedback on this objective included statements that the CRA regulations must enhance community participation so that CRA activity is tied to community needs, and concerns that the proposal may not expand community participation. The agencies believe the final rule advances this objective. For example, as explained in more detail in the section-by-section analysis of § __.46, the final rule specifically provides a process whereby the public can provide input on community credit needs and opportunities in connection with a bank's next scheduled CRA examination. Further, the strategic plan provision provides an opportunity for the public to provide input on a bank's strategic plan. See the section-by-section analysis of § __.27.

Confirm that the CRA and fair lending responsibilities of banks are mutually reinforcing. The agencies received an array of comments on this objective. Some commenters, for example, asserted that robustly enforcing current and future CRA requirements relating to race and ethnicity, in addition to other relevant Federal, State, and local laws and regulations, is essential to addressing racial and ethnic inequality. Many commenters asserted that greater coordination between CRA examinations and fair lending examinations is needed, including, for example, through development of a CRA examination racial discrimination assessment that would identify disparate trends, such as in marketing, originations, pricing and terms, default rates, and collections. In turn, these commenters indicated that any adverse findings from this assessment should trigger and support fair lending examinations. A few commenters indicated that such CRA discrimination assessments should include an affordability analysis and an analysis of the quality of lending for all major product lines that includes, for example, a review of delinquency and default rates. Other commenters asserted that, in CRA examinations, the agencies should assess whether banks employ discriminatory algorithm-driven models or other assessment criteria that disproportionately screen out low- and moderate-income and minority consumers. Additional commenters indicated that, likewise, when a fair lending examination is pending, appropriate CRA follow-up activity and corrective action must ensue once it has concluded.

Several commenters suggested incorporating additional information related to discrimination into banks' CRA examinations. In this regard, a few commenters noted that public information about fair lending examinations included in CRA performance evaluations has typically been cursory. Several commenters specified that the agencies should use race-based HMDA data and, once available, race-based section 1071 data as a screen in CRA examinations for fair lending reviews. Some commenters suggested that the agencies should consider evidence of discrimination obtained by State and local agencies.

On fair lending examinations specifically, commenter feedback included: that the agencies should bolster fair lending reviews accompanying CRA exams for banks that perform poorly in the HMDA data analysis of lending by race; that fair lending examinations should solicit and rely on feedback from all relevant Federal and State agencies, as well as community group stakeholders; that both section 1071 data and HMDA data by race should be utilized in bank fair lending examinations; that fair lending examinations should include a quantitative analysis of lending to minority individuals and communities and incorporate an analysis of access to services; and that disparate impact related to climate change should be incorporated into the existing fair lending supervisory framework.

The agencies reiterate their view that CRA and fair lending requirements are mutually reinforcing. Both regimes recognize the importance of ensuring that the credit markets are inclusive. Accordingly, and as noted above and discussed further in the section-by-section analysis of § __.16, the final rule retains the provisions that delineations of a bank's facility-based assessment areas are prohibited from reflecting illegal discrimination and must not arbitrarily exclude low- and moderate-income census tracts. As discussed further in the section-by-section analysis of § __.23, the agencies are specifying in the final rule that all special purpose credit programs under ECOA can be a type of responsive credit program. As discussed further in the section-by-section analysis of § __.28, the agencies are also retaining the provision that allows downgrading a bank for discriminatory or other illegal credit practices. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in the final rule, see section III.C of this SUPPLEMENTARY INFORMATION . Moreover, although the agencies appreciate suggestions to enhance the rigor of fair lending examinations, such examinations are outside the scope of this rulemaking. The agencies are nevertheless committed to upholding their regulatory responsibilities for both fair lending and CRA examinations, and the agencies will seek to coordinate those examinations where practicable.

Additionally, and in furtherance of the agencies' objective to promote transparency, as discussed in the section-by-section analysis of § __.42(j), the final rule requires the agencies to provide additional information to the public for large banks related to the distribution by borrower income, race, and ethnicity of the bank's home mortgage loan originations and applications in each of the bank's assessment areas. This disclosure would leverage existing data available under HMDA. As discussed in the section-by-section analysis of § __.42(j), providing data about borrower and applicant race and ethnicity in this disclosure would have no independent impact on the conclusions or ratings of the bank and would not on its own reflect any fair lending finding or violation. Instead, this provision of the final rule is intended to enhance the transparency of information available to the public.

Promote a consistent regulatory approach that applies to banks regulated by all three agencies. Commenter feedback on this objective included support for a coordinated interagency approach to CRA modernization and a unified CRA rule, with a commenter stating that the CRA's purpose is more fully realized when the agencies work in concert. Some commenters expressed support for coordination between Federal and State CRA regulatory requirements and between Federal and State agencies for CRA exams.

The agencies appreciate these comments, believe the final rule meets this objective, and will continue to coordinate their implementation of the final rule as appropriate.

C. General Comments Regarding the Consideration of Race and Ethnicity in the CRA Regulatory Framework

Comments Received

The agencies received many comments regarding consideration of race and ethnicity in the CRA regulatory and supervisory framework from a wide range of commenters. General comments on this topic are summarized below, in this section of the SUPPLEMENTARY INFORMATION . Furthermore, the agencies received comments regarding the consideration of race and ethnicity with respect to the agencies' proposed approach to an array of specific topics, such as: bank size categories; assessment areas; the Retail Lending Test; the Retail Services and Products Test, including the consideration of special purpose credit programs; affordable housing; economic development; activities with MDIs and CDFIs; disaster preparedness and climate resiliency; impact factors; data on race and ethnicity in the CRA regulatory framework; discriminatory or other illegal practices; bank applications; public files; and public engagement. The agencies have carefully considered this commenter feedback in developing the final rule.

Comments relating to specific regulatory provisions of the agencies' proposal and the final rule, referenced above, are discussed in detail in the section-by-section analyses of the specific provisions on which commenters shared their views. Those discussions cross-reference this section of the SUPPLEMENTARY INFORMATION where appropriate.

General comments. Many commenters providing input on the consideration of race and ethnicity under the CRA asserted that the agencies' proposal represented a missed opportunity to make racial equity a central focus of the CRA and to maximize what some commenters viewed as the statute's potential impact on advancing minority access to lending, investment, and services through the mainstream financial system. Most of these commenters stated that the CRA was enacted as a response to the history of redlining, other systemic discrimination, and structural racism, and that the agencies' current and proposed CRA regulations do not adequately address the need to advance racial equality, reduce racial wealth and homeownership gaps, and address intergenerational poverty in minority communities. In this regard, commenter feedback included that there has been little progress in closing the racial wealth gap since the enactment of the CRA, and that the racial wealth gap has actually worsened since that time. Commenter feedback also included that approximately 98 percent of banks pass their CRA examinations and that expanded consideration of race and ethnicity would be appropriate to increase the rigor of CRA examinations. Additional views included that the agencies should use the CRA to broaden access to credit for racial and ethnic minorities in much the same way that the statute has broadened access to credit for low- and moderate-income individuals and communities.

Some of these commenters also urged greater consideration of race in a modernized CRA evaluation framework due to racial inequality related to land use policies, and unjust and inequitable lending practices, all of which, these commenters indicated, have contributed to persistent disparities in home ownership rates, wealth accumulation, and educational and health outcomes for racial and ethnic minorities. In this regard, some commenters drew attention particularly to the lack of affordable housing opportunities for racial and ethnic minorities in metropolitan and rural communities alike. For instance, one commenter asserted that racial and ethnic minorities who are more likely to live in low-cost neighborhoods as part of the legacy of historical residential segregation and decades of discriminatory real estate practices are not adequately served due to unmet demand for low-cost housing, including but not limited to small-dollar home mortgage loans. In addition to the housing concerns, another commenter asserted that low-income minority communities disproportionately do not have access to the banking services and products that they need to build wealth, and further stated that not requiring banks to better address these needs leads to increased potential for predatory lending and reduced wealth in these communities. Some commenters also asserted that robustly enforcing current and future CRA requirements relating to race and ethnicity, in addition to other relevant Federal, State, and local laws and regulations, is essential to addressing racial and ethnic inequality.

A few commenters asserted that explicit consideration of race and ethnicity in the CRA evaluation framework would provide a buffer against displacement of minority consumers, which these commenters indicated leads to the loss of important local resources, such as healthcare and social services. In this regard, commenter feedback included: advocating for a greater focus on loans to minority consumers and not simply loans in minority communities, where the loans might be made largely to white consumers; an assertion that banks' lending practices in connection with minority consumers and minority communities were impacted by the lack of diversity among bank employees, particularly at senior and executive levels; an assertion that all banks should be positioned to work with non-English speaking consumers; and a recommendation that banks be given consideration for offering linguistically and culturally appropriate services and resources to consumers with limited English proficiency so that such consumers may access safe and affordable credit.

Some commenters suggested that the agencies adopt forms of quantitative analyses to consider race and ethnicity as part of CRA evaluations. For example, a commenter recommended that the agencies conduct periodic statistical analyses to identify areas where discrimination or ethnic and racial disparities in credit access exist. This commenter further recommended that in areas where significant disparities exist, the agencies should incorporate performance measures based on race and ethnicity into bank performance evaluations, with separate race- and ethnicity-based performance measures contributing to bank ratings on individual performance tests and overall.

On the subject of terminology, a commenter urged the agencies not to use the term “minority” in the CRA regulations but rather to use the term BIPOC (Black, Indigenous, and People of Color), which the commenter asserted better acknowledges different types of prejudice and discrimination.

Comments on legal basis for express consideration of race and ethnicity in the CRA regulatory framework. Several commenters provided input supporting the permissibility of express consideration of race and ethnicity under the statute. Some of these commenters asserted that the CRA is a civil rights law and that, accordingly, the agencies have authority to expressly consider race and ethnicity in their CRA regulations to address redlining and other racial discrimination in banking. Moreover, several commenters stated that addressing racial inequities is a core “remedial” purpose of the CRA as part of a “suite” of laws enacted to address racial inequities in housing and credit. A few commenters pointed to the CRA's focus on encouraging banks to serve their “entire community” suggesting that the agencies should therefore focus specifically on the minority constituencies who are part of the entire community in evaluating each bank's CRA performance. Another commenter provided legal analysis arguing that the agencies could incorporate express consideration of race and ethnicity in CRA regulations in various ways that the commenter stated were consistent with requirements applicable to race-based government action under the Equal Protection Clause of the U.S. Constitution. Relatedly, the commenter indicated that, to satisfy constitutional requirements and appropriately target the effects of discrimination, the agencies should conduct and periodically update a study to determine with specificity where, and regarding which financial products, discrimination continues to have an impact. Other commenters asserted that express references to race in the statute, such as the provision allowing investments with MDIs to count for CRA, indicate that an explicit focus on race is within the purview of the CRA.

Conversely, a few commenters cautioned against expanding consideration of race and ethnicity in the CRA regulatory framework due to legal concerns. Some of these commenters expressed their perspective that the law is limited in its capacity to address racial equity, even though they view the CRA as a civil rights law and acknowledge that racial equity is central to equal opportunity, social cohesion, and prosperity. Another commenter suggested that the CRA is a race-neutral law designed to combat race-based discriminatory policies and practices. Additionally, commenter feedback included that, although structural racism is a reality, incorporating racial equity into the CRA evaluation process could lead to both legal and practical issues and undermine the valuable contribution that CRA can make to low- and moderate-income consumers and communities.

Low-and moderate-income status and race. Many commenters advocating for greater consideration of race and ethnicity under the CRA indicated that, in addition to focusing on low- and moderate-income consumers and communities, the agencies should explicitly focus on minority consumers and communities. For example, a commenter asserted that racial discrimination will persist if income categorizations continue to be used to rate bank performance without considering race. Some commenters also noted that low- and moderate-income communities and minority communities are not the same, so closing racial wealth gaps requires express consideration of race. To illustrate this point, a commenter stated that about two-thirds of low-income communities are predominantly minority, but only about one-third of moderate-income neighborhoods are predominantly minority. Another commenter similarly indicated that nearly two-thirds of low- and moderate-income households are White, while nearly 40 percent of Black households and more than half of Hispanic households are not low- or moderate-income.

Consequently, many commenters urged that racial equity should be incorporated comprehensively into the agencies' CRA regulations, including through both incentives and affirmative obligations for banks to serve racial and ethnic minority consumers, businesses, and communities. Many of these commenters asserted that doing so would have a direct, positive impact on such minorities' economic inclusion, quality of life, and health outcomes. Closing the racial wealth gap, a commenter stated, would also make the U.S. economy substantially stronger. To facilitate the incorporation of racial equity into the CRA regulations, a commenter asserted that the agencies could employ the “other targeted population” framework already provided for in the Riegle Community Development and Regulatory Improvement Act's definition of “targeted populations,” which the commenter explained can include either individuals who are low-income or others who “lack adequate access to Financial Products or Financial Services in the entity's Target Market,” to include certain minority groups.

Final Rule

The agencies have considered and appreciate the many comments asserting that the agencies should incorporate additional regulatory provisions regarding race and ethnicity into the CRA regulatory and supervisory framework. These comments raise important and significant considerations about financial inclusion, discrimination, and broader economic issues. The agencies have carefully considered these comments, including those summarized in this section and in the section-by-section analysis of the final rule ( see section IV of this SUPPLEMENTARY INFORMATION ), as well as the statutory purposes and text of the CRA. The agencies have also assessed other relevant legal and supervisory considerations, including, in particular, the constitutional considerations and implementation challenges associated with adopting regulatory provisions that expressly address race and ethnicity when implementing statutory text that does not expressly address race or ethnicity. Based upon these considerations, the agencies have determined not to include additional race- and ethnicity-related provisions other than what is adopted in this final rule and discussed in more detail throughout this Introduction and section IV of the SUPPLEMENTARY INFORMATION .

The agencies believe that the final rule strengthens the CRA's emphasis on encouraging banks to engage in activities that better achieve the core purpose of the CRA, and thereby meet the credit needs of their entire communities, including low- and moderate-income individuals and communities. Relatedly, the agencies continue to recognize that the CRA and fair lending requirements are mutually reinforcing, including by specifying in the final rule that special purpose credit programs under ECOA can be a type of responsive credit program, and by reaffirming that violations of the Fair Housing Act and ECOA can be the basis of a CRA rating downgrade. As noted, for example, in section III.B of this SUPPLEMENTARY INFORMATION , the final rule also retains the current rule's prohibition against banks delineating facility-based assessment areas in a manner that reflects illegal discrimination or arbitrarily excludes low- and moderate-income census tracts, and provides that the CRA performance of banks that engage in discriminatory or other illegal credit practices can be adversely affected by such practices. For more information and discussion regarding how the final rule strengthens the achievement of the core purpose of the statute, and confirms that CRA and fair lending responsibilities are mutually reinforcing ( see sections III.B and IV of this SUPPLEMENTARY INFORMATION ).

IV. Section-by-Section Analysis

Section __.11 Authority, Purposes, and Scope

Current Approach and the Agencies' Proposal

Current § __.11 sets forth the authority, purposes, and scope of the CRA regulations. Paragraphs (a) and (c) of the section are agency-specific regulatory text, with paragraph (a) outlining the legal authority for each agency to implement the CRA and paragraph (c) providing the scope of each agency's CRA regulations. Common rule text in § __.11(b) provides that this part implements the CRA by establishing the framework and criteria by which the agencies assess a bank's record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the bank; and providing that the agencies take that record into account in considering certain applications.

Consistent with the current rule, proposed § __.11 sets forth the authority, purposes, and scope of the CRA regulations, with the authority and scope paragraphs (proposed § __.11(a) and (c)) including agency-specific regulatory text. Proposed § __.11(b) included technical, non-substantive edits to the current regulatory text, such as adding CRA's legal citation.

The OCC proposed to amend its authority section, § 25.11(a) by referencing part 25 in its entirety instead of each subpart, and by removing paragraph (a)(2), Office of Management and Budget (OMB) control number, as such information is unnecessary for regulatory text. The OCC also proposed technical edits to its scope section, § 25.11(c), to reflect the organization of the proposed common rule text.

The Board did not propose any amendments to its authority section, § 228.11(a), and proposed to amend its scope section, proposed § 228.11(c), to replace references to “special purpose banks” with “exempt banks” to avoid any potential confusion with the OCC's special purpose bank charter.

The FDIC proposed to amend its authority section, § 345.11(a), by removing paragraph (a)(2), OMB control number, as such information is unnecessary for regulatory text. The FDIC did not propose any amendments to its scope section in § 345.11(c).

Comments Received and Final Rule

The agencies did not receive comments specific to the language in proposed § __.11(b) or the agency-specific language in proposed § __.11(a) and (c). Therefore, the agencies are adopting § __.11(b) as proposed, and the Board is adopting its agency-only provisions, paragraphs (a) and (c), as proposed.

The OCC adopts paragraph (a) as proposed, and paragraph (c) as proposed with technical edits. Specifically, the OCC has moved the definition of “appropriate Federal banking agency” in proposed § 25.11(c)(1)(iii) to final § 25.12 (Definitions), where it more appropriately belongs. As in the current rule and as proposed, “appropriate Federal banking agency” in the final rule means, with respect to subparts A (except in the definition of minority depository institution in § 25.12) through E and appendices A through G, the OCC with respect to a national bank or Federal savings association and the FDIC with respect to a State savings association. In addition, the OCC has added Federal branches of foreign banks to paragraph (c)(1)(i), which lists the types of entities for which the OCC has authority to prescribe CRA regulations, to more accurately describe this authority. The OCC has also made minor technical edits to the listing of part 25 subparts in final paragraph (c).

The FDIC is adopting paragraph (a) as proposed and paragraph (c) with technical edits. In the proposed rule, the FDIC's paragraph (c)(2) maintained references to current § 345.41. The FDIC is adopting paragraph (c)(2) to reflect the final rule's new assessment area provisions. Thus, final paragraph (c)(2) provides that, for insured State branches of a foreign bank established and operating under the laws of any State, their facility-based assessment area and, as applicable, retail lending assessment areas and outside retail lending assessment area, are the community or communities located within the United States, served by the branch as described in § 345.16 and, applicable, §§ 345.17 and 345.18.

Section __.12 Definitions

In proposed § __.12 (Definitions), the agencies proposed many terms defined in the current CRA regulations, some with substantive or technical revisions. The agencies also proposed new definitions that the agencies considered necessary to clarify and implement proposed revisions to the CRA evaluation framework, some of which reflect understandings of terms long used in the CRA evaluation framework or that are consistent with the Interagency Questions and Answers.

The agencies received numerous comments on some of these definitions. These comments and the definitions as included in the final rule are discussed below.

Affiliate

Under the current CRA regulations, the term “affiliate” means any company that controls, is controlled by, or is under common control with another company. The term “control” has the same meaning given to that term in section 2 of the Bank Holding Company Act, 12 U.S.C. 1841(a)(2), and a company is under common control with another company if both companies are directly or indirectly controlled by the same company. The agencies proposed to retain their current definitions of “affiliate,” with the Board including one technical change to the definition in its regulation to add a reference to its bank holding company regulations, Regulation Y, 12 CFR part 225. Specifically, the Board proposed to define affiliate as any company that controls, is controlled by, or is under common control with another company. The term “control” has the meaning given to that term in 12 U.S.C. 1841(a)(2), as implemented by the Board in 12 CFR part 225, and a company is under common control with another company if both companies are directly or indirectly controlled by the same company. The FDIC and the OCC did not propose any revisions to the definition of “affiliate” in the agencies' respective CRA regulations.

The agencies did not receive any comments on the proposed definitions of “affiliate” and adopt the definitions as proposed in the final rule. Accordingly, the Board is adopting the proposed definition of “affiliate” in the final rule, which will be contained solely in its CRA regulations. The FDIC and the OCC are retaining the current definition of “affiliate” in their respective CRA regulations, which define affiliate as any company that controls, is controlled by, or is under common control with another company. The term “control” has the same meaning given to that term in 12 U.S.C. 1841(a)(2), and a company is under common control with another company if both companies are directly or indirectly controlled by the same company.

Affordable Housing

The agencies proposed to add a definition of “affordable housing” to mean activities described in proposed § __.13(b). See the section-by-section analysis of § __.13(b) for a detailed discussion of affordable housing. The agencies did not receive any comments on the proposed “affordable housing” definition and adopt it as proposed in the final rule.

Area Median Income

The agencies proposed to retain the current definition of “area median income,” with one conforming change to replace the term “geography” with “census tract,” but keep the same meaning (see the discussion of “census tract” in § __.12 of this section-by-section analysis). Under the proposal, “area median income” would mean: (1) the median family income for the metropolitan statistical area (MSA), if a person or census tract is located in an MSA, or for the metropolitan division, if a person or census tract is located in an MSA that has been subdivided into metropolitan divisions; or (2) the statewide nonmetropolitan median family income, if a person or census tract is located outside an MSA.

The agencies did not receive any comments on the proposed “area median income” definition. However, the agencies are adopting the definition in the final rule as proposed with conforming and clarifying edits. First, in paragraph (1), the agencies have made a minor conforming change by replacing “metropolitan statistical area (MSA)” with “MSA.” Second, in paragraphs (1) and (2), the agencies have replaced the phrase “if a person” with “if an individual, family, household.” Third, in paragraph (1), the agencies have added the phrase “that has not been subdivided into metropolitan divisions” after “located in an MSA” to differentiate the first and second prongs of this paragraph. Fourth, in paragraph (2), as a conforming change, the agencies have replaced the phrase “outside an MSA” with “in a nonmetropolitan area.” Final § __.12 defines “nonmetropolitan area” to mean any area that is not located in an MSA.

Accordingly, the final rule defines “area median income” to mean: (1) the median family income for the MSA, if an individual, family, household, or census tract is located in an MSA that has not been subdivided into metropolitan divisions, or for the metropolitan division, if an individual, family, household, or census tract is located in an MSA that has been subdivided into metropolitan divisions; or (2) the statewide nonmetropolitan median family income, if an individual, family, household, or census tract is located in a nonmetropolitan area.

Assets

The final rule includes a new definition for “assets,” not included in the proposal. This term means total assets as reported in Schedule RC of the Consolidated Reports of Condition and Income as filed under 12 U.S.C. 161, 324, 1464, or 1817, as applicable (Call Report), or as reported in Schedule RAL of the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (Report of Assets and Liabilities), as filed under 12 U.S.C. 1817(a), 3102(b), or 3105(c)(2), as applicable. Although the agencies did not propose this definition, they have added it to the final rule to clarify the intended meaning of this term in the CRA regulations.

Assessment Area

The current CRA regulations define “assessment area” to mean a geographic area delineated in accordance with 12 CFR __.41. Current § __.41 sets out the criteria for banks to delineate assessment areas. The agencies proposed to replace “assessment area” with three new terms in proposed § __.12: “facility-based assessment area,” “retail lending assessment area,” and “outside retail lending area,” as these new terms are used in the proposal. These new definitions are discussed below. The agencies did not receive any comments concerning the removal of the “assessment area” definition and have removed this term in the final rule.

Bank

Under the current CRA regulations, the Board and FDIC have separate definitions for the term “bank.” Each agency defines “bank” to refer to the entities regulated by the agency for which the agency evaluates CRA performance. The FDIC and Board did not propose changes to the current definitions of “bank” in their respective CRA regulations and received no comments on their proposed definitions of “bank.” Accordingly, the final rule retains the current definitions of “bank” in the FDIC's and the Board's regulations.

As such, for the FDIC, the term “bank” means a State nonmember bank, as that term is defined in section 3(e)(2) of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1813(e)(2)), with federally insured deposits, except as defined in final § 345.11(c). The term “bank” also includes an insured State branch as defined in final § 345.11(c).

For the Board, the term “bank” means a State member bank as that term is defined in section 3(d)(2) of the FDIA (12 U.S.C. 1813(d)(2)), except as provided in final § 228.11(c)(3) and includes an uninsured State branch (other than a limited branch) of a foreign bank described in final § 228.11(c)(2). Accordingly, consistent with the Board's current CRA regulations, the term “bank” in final § 228.12 includes an uninsured State branch (other than a limited branch) of a foreign bank that results from an acquisition described in section 5(a)(8) of the International Banking Act of 1978 (12 U.S.C. 3103(a)(8)). Also, generally consistent with the current CRA regulations, “bank” in final § 228.12 does not include banks that do not perform commercial or retail banking services by granting credit to the public in the ordinary course of business, other than as incident to their specialized operations and done on an accommodation basis. This exception for banks that do not perform commercial or retail banking services aligns with the current CRA regulations, including that performing commercial and retail banking services solely “on an accommodation basis” will not qualify an entity as a “bank.”

The OCC's current CRA regulation provides that “bank or savings association” means, except as provided in § 25.11(c), a national bank (including a Federal branch as defined in part 28) with federally insured deposits or a savings association. Further, the OCC regulation provides that “bank and savings association” means, except as provided in § 25.11(c), a national bank (including a Federal branch as defined in part 28) with federally insured deposits and a savings association.

For clarity and conciseness, the OCC proposed separate definitions of “bank” and “savings association,” without changing the substance of the current definitions. The OCC received no comments on this technical change and adopts the definitions as proposed in the final rule. As a result, in the final rule, “bank” means a national bank (including a Federal branch as defined in part 28) with federally insured deposits, except as provided in § 25.11(c); and “savings association” means a Federal savings association or a State savings association.

Bank Asset-Size Definitions

Current Approach

Under the current CRA regulations, the agencies define “small bank” to mean “a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.503 billion.” The agencies defined “intermediate small bank” to mean “a small bank with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years.” The agencies adjust these terms annually for inflation based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI–W), not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million. The current CRA regulations do not define the term “large bank,” but any bank with assets exceeding those defining an “intermediate small bank” is understood to be a large bank (otherwise referred to as a “large institution”).

The Agencies' Proposal

The agencies proposed raising the asset-size threshold for the “small bank” definition to provide more clarity, consistency, and transparency in the evaluation process, and in recognition of the potential challenges associated with regulatory changes and data collection requirements for banks with more limited capacity. Under the proposal, a small bank would be a bank that had average assets of less than $600 million in either of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. The agencies also proposed to add a new definition for “intermediate bank” that would replace the current “intermediate small bank” definition. Under the proposal, intermediate bank would mean a bank that had average assets of at least $600 million in both of the prior two calendar years and less than $2 billion in either of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. The agencies intended the proposed “intermediate bank” definition to comprise a category of banks that have meaningful capacity to engage in CRA-related activities under the proposed Retail Lending Test and conduct community development activities, but that might have more limited capacity regarding data collection and reporting requirements than large banks.

Finally, the agencies proposed to add a new “large bank” definition that would mean a bank that had average assets of at least $2 billion in both of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. This proposed definition reflects the agencies' view that banks of this size generally have the capacity to conduct the range of activities that would be evaluated under each of the four performance tests proposed to apply to large banks.

The agencies proposed to make annual adjustments to the asset-size thresholds for all three categories of banks based on the same CPI–W inflation measure used in the current CRA regulations for small and intermediate banks.

As under the current CRA regulations, asset-size classification is relevant because it determines a bank's CRA evaluation framework. Consistent with the proposal, under the final rule, large banks are evaluated under the Retail Lending Test in final § __.22, the Retail Services and Products Test in final § __.23, the Community Development Financing Test in final § __.24, and the Community Development Services Test in final § __.25. Intermediate banks are evaluated under the Retail Lending Test in § __.22, and either the current Intermediate Bank Community Development Test, in final § __.30(a)(2), or, at the bank's option, the Community Development Financing Test in final § __.24. Small banks are evaluated under the small bank lending test, in final § __.29(a)(2), or, at the bank's option, the Retail Lending Test in final § __.22.

Comments Received

The agencies received numerous comments on the proposed “small bank,” “intermediate bank,” and “large bank” definitions. Given that the current and proposed definitions are interconnected, the agencies believe it is appropriate to discuss the comments collectively.

Many commenters expressed general support for the proposal to increase the asset-size thresholds for small, intermediate, and large banks. Many of these commenters indicated that the proposed thresholds are reasonable and would represent appropriate burden relief for banks that would qualify as small or intermediate banks under the proposed definitions. Several commenters stated that the proposed asset-size thresholds are appropriate to ensure that smaller banks with more limited staff and other resources are not subjected to the same performance expectations or data collection and reporting requirements as larger banks. Several other commenters supported the proposed asset-size thresholds based not only on other regulatory burden they anticipate under the proposal but also on the principle that community banks already experience significant regulatory burden unrelated to the CRA. Another commenter approved of the increased asset-size thresholds on the basis that they would permit smaller banks to expand to meet the needs of their communities without necessarily subjecting themselves to new CRA requirements that the commenter stated were likely to have onerous costs.

Many commenters specifically expressed support for increasing the asset-size threshold for a small bank to $600 million. These commenters noted that the asset-size threshold would apply to approximately the same percentage of banks as were classified as small banks when the agencies' amended their CRA regulations in 2005. Several other commenters explained that the asset-size threshold increases would be a timely and welcome adjustment because of changes in the banking industry and the unprecedented growth of bank balance sheets and excess liquidity that has resulted from Federal Government stimulus in response to the COVID–19 pandemic. Another commenter indicated that raising the asset-size threshold as proposed was a timely action on the part of the agencies due to recent trends in inflation that are beyond banks' control. One commenter stated that the current asset-size thresholds are too low and reflected prior conditions.

Many other commenters expressed opposition to the proposed asset-size threshold increases and advocated for the agencies to maintain the current thresholds. Some of these commenters stated that the proposed changes were inappropriate because reclassified banks would be subject to less rigorous performance standards and diminished agency oversight, which would minimize transparency and accountability and reduce those banks' CRA obligations and reinvestment. Other commenters noted that raising the asset-size thresholds would result in missed opportunities for reclassified banks to expand and improve their CRA activity under more rigorous performance standards. These commenters also asserted that the proposed changes to the asset-size thresholds are not justified because banks already perform successfully under the current, lower thresholds for small, intermediate small, and large banks.

Many commenters focused on the number of banks that would be reclassified into a smaller asset-size category and the adverse effect this reclassification could have on community development financing, with a few commenters stating that increasing the small bank asset-size threshold would reduce the amount of community development activity, especially in smaller and more rural communities. Some commenters highlighted the agencies' statement in the proposal that approximately 778 current intermediate small banks would be reclassified as small banks and 216 current large banks would be reclassified as intermediate banks. These commenters expressed their belief that the reclassified banks would no longer be held accountable (or would be held accountable to a lesser degree) for community development financing activity. Many of these commenters suggested that this loss of accountability would cause significant reductions in community development financing, with some commenters citing estimated annual losses of $1 billion to $1.2 billion. These commenters argued that, if these forecasted losses in community development financing are remotely accurate, the change in asset-size thresholds would amount to a significant failure on the part of the agencies. Many commenters indicated that although the impact of reduced community development financing would be experienced in low- and moderate-income communities nationwide, the losses are likely to be most acute in less populated communities, such as rural, micropolitan, and small-town areas, where a substantial number of the reclassified banks are located. A few commenters specified that any loss of community development financing could adversely affect the availability of affordable housing and bank responsiveness to other important community needs.

Several commenters explained that reductions in community development financing as a result of asset-size threshold changes could adversely affect CDFIs by diminishing bank-CDFI relationships, and the flow of capital from banks to CDFIs—especially CDFIs located in smaller or rural communities. Noting that the agencies stated in the proposal that raising the asset-size thresholds would impact only two percent of bank assets in the banking system, some commenters indicated that a reclassified bank may be the only lender or one of a small number of banks with any presence in a geographic area.

Some commenters stated that reclassifying some current large banks as intermediate banks could negatively impact the availability of banking services in low- and moderate-income and rural communities because the proposed Retail Services and Products Test and Community Development Services Test would only apply to large banks. Several other commenters stated that reclassifying a large bank as an intermediate bank would effectively eliminate agency evaluation of applicable service considerations such as the operation of bank branches in their communities.

A few commenters expressed concerns about the impact of the agencies' proposal to revise asset-size thresholds on racial or ethnic minority communities. A commenter stated that a number of Black communities would be significantly adversely impacted by the reclassification of certain large banks as intermediate banks and certain intermediate small banks as small banks. The commenter asserted that these changes would reduce these banks' incentives to engage with Black communities, given the specific performance tests that would be applicable to small banks and intermediate banks under the agencies' proposal. Another commenter raised concerns that small banks and intermediate banks would not be subject to a retail services test. In the commenter's view, an evaluation of retail services is critical to ensure that bank branches are located in both low- and moderate-income communities and minority communities.

A few commenters stated that raising the large bank asset-size threshold could result in diminished bank investment in New Markets Tax Credits (NMTC) and other community tax credit investments given that, under the proposal, intermediate and small banks would not have corresponding community development requirements. These commenters also indicated that relieving banks of these requirements could negatively impact overall demand for community tax credit investments, for which the majority of investors are CRA-motivated banks.

Many of the commenters opposing the proposed asset-size threshold increases asserted that regulatory relief for banks was not a sufficient justification for changes that would adversely impact local communities. Several commenters argued that the potential burden on banks from being classified as a larger institution would not outweigh the need for accountability and equity. Another commenter indicated that the agencies did not produce estimates or data indicating that the proposed regulatory approach would be so prohibitively burdensome that significant increases in asset-size thresholds were necessary.

Several other commenters stated that the agencies' proposal should, at a minimum, provide for the same range of community development financing activity for all current intermediate small banks and large banks as under the current CRA regulations. A commenter asserted that the proposal goes backwards with no justification for how the reduction in compliance burden for banks reclassified as smaller banks would offset the loss of reinvestment activity from a public benefits perspective. Some commenters added that the impacted banks are engaging in community development under the current asset-size thresholds without any apparent deleterious impacts. Other commenters asserted that maintaining the current asset-size thresholds would be more consistent with the agencies' goal of strengthening the CRA framework.

A few commenters suggested that the current asset-size thresholds could remain in place and continue to be adjusted for inflation. A commenter indicated that, based on the application of inflation adjustments to the current asset-size thresholds, the proposed small bank asset-size threshold was too large in comparison. The commenter explained that if the agencies' proposed asset-size thresholds for small, intermediate, and large banks were adjusted for inflation, the asset-size thresholds would be approximately $375 million for small banks and approximately $1.5 billion for large banks.

A commenter opposed the proposed asset-size threshold changes on the grounds that the thresholds for intermediate and large banks are arbitrary and not based on any relevant data or analysis. The commenter also asserted that the proposed intermediate bank threshold is similarly unsupported and would subject reclassified intermediate banks to considerably increased compliance costs without commensurate benefit. Another commenter stated that the agencies did not provide documentation supporting the increase in the proposed asset-size thresholds.

Alternate asset-size thresholds. Many commenters recommended that the agencies adopt asset-size thresholds for small, intermediate, and large banks that are higher than those proposed. These commenters suggested asset-size thresholds of $750 million to $5 billion for intermediate banks and from $2.5 billion to $20 billion for large banks. Commenters asserted that higher asset-size thresholds are necessary to provide regulatory relief and limit the significant compliance burdens that the agencies' proposal would otherwise impose on smaller banks. A commenter stated that increasing the small bank asset-size threshold to $750 million would avoid placing unnecessary regulatory burden on smaller mission-driven institutions. Another commenter stated that regulatory burden considerations justified a variety of small bank asset-size thresholds of up to $3 billion. Another commenter stated that it lacked the financial and human resources to monitor performance under the proposed Retail Lending Test and requested a significantly higher asset-size threshold for large banks. Other commenters suggested asset-size thresholds for large banks ranging from $3.3 billion to $20 billion, based on compliance burden as well as inflation adjustments.

A few commenters specifically drew attention to smaller banks' resource capacities in advocating for higher asset-size thresholds. A commenter suggested an asset-size threshold of $750 million for small banks and an asset-size threshold of $3 billion for large banks based on resource capacity. Another commenter expressed support for a large bank asset-size threshold of $3 billion. Several other commenters recommended an asset-size threshold of $1 billion for small banks and an asset-size threshold of $5 billion for large banks to better reflect resource capacity and the ability to comply with the proposed performance test requirements. A commenter suggested that a $1 billion asset-size threshold for small banks would prove beneficial to many community banks located in rural areas with few low- and moderate-income census tracts. A few commenters suggested that asset-size thresholds of $1 billion and $10 billion for small and large banks, respectively, would better reflect bank capacity and compliance resource availability. Another commenter stated that an asset-size threshold cap on intermediate banks of $3 billion would be a better representation of the median large bank in its State and region. One commenter argued that setting the asset-size thresholds for small banks and intermediate banks at $1 billion and $3 billion, respectively, would provide significant regulatory relief for smaller banks and free up resources for the agencies to focus on the largest banks and banks with poor CRA performance. Similarly, another commenter stated that any bank with assets between $1 billion and $15 billion should be classified as an intermediate bank to reduce regulatory burden.

A commenter cited rapid growth in bank balance sheets due to bank consolidation and monetary and fiscal policy as reasons to further raise the small and intermediate bank asset-size thresholds, to a small bank threshold of $750 million and a large bank threshold of $2.5 billion. Another commenter cited similar reasons in support of a $1 billion asset-size threshold for small banks. Another commenter suggested a small bank asset-size threshold ranging anywhere between $2 billion and $5 billion and a large bank asset-size threshold of $10 billion due to the growth in bank balance sheets.

Further, some commenters stated that the asset-size thresholds should better reflect the distribution of small, intermediate, and large banks when these categories were originally established. Many commenters stated that, to maintain a similar percentage distribution of banks in the intermediate bank category to the distribution of intermediate small banks when that category was established in 2005, an intermediate bank should be any bank with assets between $600 million and $3.3 billion. Another commenter agreed that the agencies should attempt to maintain a similar percentage distribution of intermediate-sized institutions as in 2005. The commenter also indicated that a large bank threshold of $5 billion would likewise achieve this outcome. A different commenter suggested that any bank with assets between $1 billion and $5 billion should be categorized as an intermediate bank to adjust for inflation since the asset-size thresholds were originally set.

Some commenters noted that setting the intermediate bank asset-size threshold at $10 billion would serve to eliminate the proposal's distinction between two tiers of large banks. For example, a commenter stated that a $10 billion asset-size threshold for large banks would eliminate the confusion associated with the agencies' proposal to designate two tiers of large banks in which only the largest large banks would have comprehensive data collection and reporting requirements. Another commenter suggested that the agencies create an additional “large community bank” evaluation tier for banks with $2 billion to $10 billion in assets; alternatively, the commenter suggested that the agencies expand the intermediate bank tier to banks with assets of $10 billion or less.

Similarly, several commenters stated that the agencies should consider raising the asset-size threshold for large banks because the proposal is based on an incorrect perception that a bank with assets slightly over $2 billion is the peer of a significantly larger regional bank with $50 billion in assets—or an even larger institution with a nationwide presence. A few commenters also noted that financial regulators often consider a bank with less than $10 billion in assets a “community bank” for supervisory purposes. A few other commenters concurred that banks with assets between $2 billion and $10 billion are typically considered to be community banks. Another commenter, recommending a large bank asset-size threshold of $5 billion, asserted that raising the asset-size threshold for large banks would minimize unfair comparison of larger intermediate-size institutions with significantly larger banks. One other commenter suggested raising the intermediate bank asset-size threshold so that more banks would have the option of being evaluated under the status quo community development test, as the agencies proposed for intermediate banks (referred to in the proposal as the intermediate bank community development evaluation).

A few commenters suggested that the agencies conform increased asset-size thresholds with other existing thresholds. A commenter stated that the agencies should set the asset-size threshold for small banks at $750 million to conform with the U.S. Small Business Administration's (SBA) size standard for small banks. The commenter also stated that the asset-size threshold for intermediate banks should be increased to $2.5 billion, an amount that would more closely approximate the Board's threshold of $3 billion to distinguish between small and large bank holding companies. Several commenters stated that the small bank asset-size threshold should be $1 billion, to be consistent with the proposed definition of “community bank” in the 2012 FDIC Community Banking Study. A few other commenters suggested that large banks should have assets of $10 billion or more to maintain consistency with regulatory definitions in the Dodd-Frank Act. Another commenter suggested that the agencies follow the National Credit Union Administration's (NCUA) position that institutions that it supervises are “large” when they have greater than $15 billion in assets.

Final Rule

The agencies considered commenters' concerns and recommendations related to the proposed asset-size thresholds. As a part of that process, the agencies observed that commenters did not coalesce around a particular asset-size framework that would address their respective concerns related to the proposed asset-size framework. In fact, the opposite was true, as commenters' recommendations as to how to structure the asset-size framework were varied and frequently unique. The agencies conclude that the myriad comments and recommendations reflect an absence of consensus around an asset-size framework that would address all, or a majority of, the commenters' concerns. The agencies continue to believe that the proposed framework strikes the appropriate balance between recognizing the capacity differences between banks of varying size and maintaining a strong CRA evaluation framework that benefits communities served by banks of all sizes and capacities.

The agencies also considered commenter input that the proposed asset-size thresholds are arbitrary and not based on relevant data analysis. The agencies believe increasing the asset-size threshold for small banks to $600 million is appropriate based on an analysis of industry asset data, current CRA asset-size thresholds, supervisory experience with those thresholds, and bank asset-size standards employed by other agencies. First, as discussed in the proposal, the agencies analyzed Call Report and the FDIC's Summary of Deposits data to estimate how the proposed asset-size thresholds would redistribute banks throughout the proposed categories. The agencies estimated that the proposed change to the small bank asset threshold would result in approximately 778 banks, representing two percent of all deposits, transitioning from the current intermediate-small bank category to the proposed small bank category. The agencies further estimated that the proposed increase in the large bank asset-size threshold would result in approximately 216 banks representing approximately two percent of all deposits transitioning from the current large bank category to the proposed intermediate bank category. The agencies communicated the findings of this analysis as a part of the proposal to ensure that the public was apprised of the potential redistribution of banks across the proposed framework. Second, the agencies, over the multi-decade period since the CRA was enacted, have developed supervisory experience related to the asset-size thresholds and an understanding of the capacity of banks in each class of bank to engage in CRA activity, and incorporated that understanding into the consideration of the proposed asset-size thresholds. Based on this supervisory experience, the agencies calibrated the level of CRA requirements to bank size, consistent with the statutory purpose and the agencies' objective of encouraging banks to meet the credit needs of their communities. Third, the agencies considered adopting the SBA's “small bank” definition, but ultimately elected to adopt the $600 million asset-size threshold because it is better aligned with the CRA's policy goals, and the agencies believe that banks with assets between $600 and $850 million have the capacity to engage in community development activity.

The agencies believe that the asset-size framework in the final rule strengthens the agencies' implementation of the CRA statute and furthers the CRA statute's emphasis on assessing the records of banks of all asset sizes in meeting the credit needs of their entire communities, including low- and moderate-income neighborhoods. The final rule also implements the CRA statutory provisions that focus specifically on MDIs, WDIs, and LICUs. As discussed above, CRA and fair lending laws such as ECOA and the Fair Housing Act are mutually reinforcing. Specifically, under the CRA, the agencies assess banks' records of helping meet the credit needs of the entire community, while fair lending laws serve to identify and address lending discrimination for protected classes, such as race and ethnicity.

Under the final rule, intermediate banks and small banks may receive additional consideration at the institution level for activities with MDIs, WDIs, and LICUs, which, as noted, reflects CRA statutory provisions. For example, under the final rule a small or intermediate bank can receive consideration for a capital investment, loan participation or other venture with an MDI. An intermediate bank or small bank that opts into the Retail Services and Products Test may receive CRA consideration for bank credit products and programs that are conducted in cooperation with MDIs and Special Purpose Credit Programs as examples of credit products and programs that are responsive to the needs of the communities in which the bank operates, including the needs of low- and moderate-income individuals, families, and households; small businesses; and small farms. The final rule also retains the current prohibition against banks, including intermediate banks and small banks, delineating facility-based assessment areas in a manner that reflects illegal discrimination or that arbitrarily excludes low- and moderate-income census tracts; and retains the current provision regarding discriminatory or other illegal credit practices that can adversely affect a bank's CRA performance.

Further, both intermediate banks and small banks continue to have retail lending requirements. Under the final rule, intermediate banks are evaluated under the Retail Lending Test in final § __.22, and either the Intermediate Bank Community Development Test in final § __.30(a)(2) or, at the bank's option, the Community Development Financing Test in final § __.24. Likewise, under the final rule, small banks are evaluated under the Small Bank Lending Test, in final § __.29(a)(2) or, at the bank's option, the Retail Lending Test in final § __.22.

Additional bank asset-size categories. A few commenters suggested that the agencies create a new category for banks with assets much higher than the proposed $2 billion large bank asset-size threshold and apply the most demanding performance tests or data reporting and collection requirements solely to those banks. According to commenters, including a category for the largest banks would help the agencies to better tailor CRA requirements for smaller large banks. A commenter explained that the agencies could impose the most demanding requirements on “super large” banks with greater than $50 billion in assets. Similarly, another commenter suggested the creation of a “mega bank” category for banks with assets greater than $100 billion on which the agencies could impose unique performance test structures and standards. Another commenter questioned why the agencies did not apply the large bank requirements exclusively to banks with greater than $100 billion in assets, a decision that according to the commenter, would capture 75 percent of total industry assets. One other commenter recommended that the agencies combine the proposed intermediate bank and large bank categories, so that there would only be categories for small and large banks in the final rule.

The agencies considered the commenters' concerns but are not adopting additional asset-size categories for banks with assets significantly greater than the proposed asset-size threshold for large banks— e.g., “super large” or “mega bank” categories for institutions with assets over $50 billion and $100 billion, respectively. Applying certain aspects of the large bank performance test only to very large banks in the manner suggested by commenters would reduce the number of banks subject to certain aspects of the performance tests and could thereby discourage CRA activity by some banks. Similarly, the agencies did not adopt commenters' suggestion to eliminate the intermediate bank category in the final rule. The agencies believe that the three size categories of banks in the final rule effectively balance bank capacity with the obligation of a bank to meet the needs of its community. Removing an asset-size category would reduce tailoring of the CRA performance tests based on bank capacity. Depending on which asset-size category were removed, for example, more banks might be classified as small banks, potentially countering the agencies' goal of encouraging banks with a meaningful capacity to engage in community development activities, or more performance tests would apply to banks that potentially lack the capacity to meet those tests' parameters, increasing regulatory burden.

SBA size standards for small banks. The agencies specifically requested feedback on whether they should adopt an asset-size threshold for small banks that differs from the SBA's then small bank asset-size standard of $750 million. Several commenters supported the agencies conforming to the SBA's small bank asset-size standard, with some specifically stating that consistency across Federal agencies should be maintained wherever possible. In contrast, some commenters found the SBA's small bank asset-size standard of $750 million too high, for the same reasons provided by commenters who found the proposed size standards of $600 million too high, as discussed above.

The agencies recognize that consistency across Federal agencies is generally desirable, but the agencies believe that deviating from the SBA's small bank asset-size standard is appropriate to meet the CRA's statutory purpose. In particular, applying the SBA's $850 million small bank asset-size standard in the CRA framework would significantly increase the number of banks that would be classified as small banks. This might, in turn, result in less community development activity relative to the current CRA regulations or proposal because fewer banks would be evaluated under the status quo community development test. Such a development would be counter to the CRA statute's purposes and the agencies' CRA modernization objectives.

Inflation adjustments to asset-size thresholds. Several commenters expressed support for the agencies' proposal to adjust the asset-size thresholds for small, intermediate, and large banks annually for inflation. However, a few commenters expressed concerns. A commenter stated that, although the proposed inflation adjustments may seem reasonable, they could have the unintended consequence of decreasing investments in low- and moderate-income communities when banks are reclassified to a smaller asset-size category. A few other commenters stated that inflation adjustments tied to the CPI–W do not take into account major changes, including consolidation, that have occurred in the banking industry over the past decade.

The agencies considered the commenters' feedback and elected to maintain the proposed annual inflation adjustment methodology in the final rule. The agencies believe the proposed methodology, whereby asset-size thresholds would be adjusted annually for inflation based on the annual percentage change in the CPI–W, is preferable due to its alignment with the current CRA regulations' annual inflation adjustments to the asset-size thresholds. With respect to commenters' concerns about unintended consequences associated with banks moving into lower asset-size categories, the agencies recognize that this is a potential outcome associated with employing an annual inflation adjustment to the asset-size thresholds. However, the agencies believe the benefits of employing an annual inflation adjustment mechanism outweigh this concern, because it mitigates the risk of needing to employ large or unpredictable increases to realign the asset-size thresholds with conditions in the banking industry. Further, utilizing ad hoc adjustments to the asset-size thresholds, which would be less predictable and less stable, could mean more movement of banks from one size category to another from year-to-year, which inherently creates uncertainty for banks and stakeholders. Moreover, if the agencies declined to include an annual inflation adjustment mechanism, a scenario could develop where institutions would graduate into higher size categories due to inflation regardless of whether their financial condition or capabilities to engage in CRA activity have changed. Finally, the agencies note that the annual asset-size threshold adjustment methodology is not designed to account for industry changes such as consolidation. Rather, the methodology is designed to ensure that the asset-size thresholds evolve with economic conditions.

Asset-size threshold alternatives. A few commenters cautioned against the agencies placing too much reliance on asset-size thresholds to determine which performance tests apply to a particular bank. These commenters stated that the agencies should consider various factors such as a bank's business model, risk profile, areas of specialization, communities served, assessment area sizes, presence in an assessment area, staffing levels, and technology limitations. A few other commenters suggested that, under an “alternate prong” in the large bank definition, the agencies should designate a bank as a large bank if it makes a certain amount of loans in an evaluation period, even if its asset size would otherwise qualify it as a small or intermediate bank. These commenters asserted that this alternate prong would account for situations where a bank claims to be the “true lender” for loans that it makes with support from a third party.

The agencies considered commenter feedback that the final rule should include alternative formulations to determine which performance tests apply to a bank. The agencies believe that alternative formulations for the baseline determination of which performance tests apply to a bank, including adding factors such as risk profile, areas of specialization, technology limitations, and others, would increase the complexity of the final rule and its administration without meaningfully furthering the agencies' CRA objectives. Therefore, the agencies are maintaining asset size as the sole factor for purposes of categorizing most institutions in the final rule. However, as discussed throughout this SUPPLEMENTARY INFORMATION , the agencies have incorporated performance context information into performance test metrics and benchmarks, as well as express consideration of qualitative factors in evaluating a bank's performance, which include, among others, business model. In addition, the agencies have retained a distinct evaluation approach for limited purpose banks, as well as the option for banks to be evaluated under a strategic plan.

Asset-size threshold calculations. A commenter requested clarification regarding how the agencies propose to determine a bank's asset size. The commenter noted that the proposal defines a small bank as a bank that had average assets of less than $600 million in either of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. The commenter requested that the agencies clarify whether a bank must have average assets of less than $600 million at each quarter-end versus the current method that considers year-end values.

After considering this comment, the agencies have decided to retain the asset-size calculation methodology in the current CRA regulations, which provides that asset size is calculated as of the end of a calendar year without reference to quarterly Call Report figures. This methodology is simpler than the proposed formula, it is widely understood, and retaining it will minimize complexity in the final rule.

For the reasons discussed above, the agencies are adopting the proposed definitions of “small bank,” “intermediate bank,” and “large bank” in the final rule, with two substantive changes. First, the agencies are adding the clause, “excluding a bank designated as a limited purpose bank pursuant to § __.26,” to each of the three definitions to clarify that a bank designated as a limited purpose bank that also falls into one of the asset-size categories is evaluated as a limited purpose bank and not a small, intermediate, or large bank, with the attendant requirements of the performance tests that would otherwise be applicable to such a bank. Second, the agencies have changed the asset-size calculation methodology to reflect assets held at year-end, instead of at each quarter-end, as proposed. The agencies have also made minor technical wording changes.

Accordingly, in the final rule, “small bank” means a bank, excluding a bank designated as a limited purpose bank pursuant to § __.26, that had assets of less than $600 million as of December 31 in either of the prior two calendar years. “Intermediate bank” means a bank, excluding a bank designated as a limited purpose bank pursuant to § __.26, that had assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years. “Large bank” means a bank, excluding a bank designated as a limited purpose bank pursuant to § __.26, that had assets of at least $2 billion as of December 31 in both of the prior two calendar years. For all three definitions, the agencies adjust and publish the asset-size thresholds annually, based on the year-to-year change in the average of the CPI–W, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million.

As indicated above, and in the proposal, the agencies believe that these asset-size thresholds appropriately balance the agencies' objectives of meeting the CRA's purpose of encouraging banks to meet the credit needs of their communities and recognizing differences in bank capacity based on asset size.

In accordance with the Small Business Act and its implementing regulations, the agencies sought and received approval from the SBA to deviate from the SBA's asset-size standard applicable to small depository institutions— i.e., small banks.

Branch

Current Approach and the Agencies' Proposal

The agencies proposed to update the current definition of “branch” without materially changing the substantive meaning of this term. The current CRA regulations define “branch” to mean a staffed banking facility authorized as a branch, whether shared or unshared, including, for example, a mini-branch in a grocery store or a branch operated in conjunction with any other local business or nonprofit organization. Under the proposal, “branch” would mean a staffed banking facility, whether shared or unshared, that is approved or authorized as a branch by the appropriate Federal financial supervisory agency and that is open to, and accepts deposits from, the general public.

As noted in the proposal, the agencies did not intend for the removal of the list of examples from the definition to change or narrow the meaning of the term “branch” and believed that these examples did not fully reflect the breadth of shared space locations that might exist, particularly as new bank business models emerge in the future. In addition, the agencies proposed to add the language “open to, and accepts deposits from, the general public” to the definition of “branch” to underscore that this definition would capture new bank business models, with different types of staffed physical locations, when those locations are open to the public and collect deposits from customers. Similarly, the agencies added that a branch must be approved or authorized as a branch by the agency to clarify that the agencies have varying processes for branch designation and that the name that a bank assigns to a facility is not determinative of whether an agency considers it a “branch” for CRA purposes. The agencies did not view these revisions as a change from the current standards.

For the reasons stated below, the agencies are adopting the proposed definition of “branch” in the final rule.

Comments Received

The agencies received several comments concerning the proposed definition of “branch.” A commenter recommended that the agencies adopt a flexible definition of “branch” that can adjust with changes in the industry. Other commenters offered views on what the agencies should and should not consider a branch for purposes of delineating a facility-based assessment area. A commenter requested that the agencies clarify whether the proposed definition of “branch” (and “remote service facility,” discussed below) would include a financial institution taking deposits at a school or community organization facility. Another commenter recommended stating explicitly, either in the regulation or in guidance, that a staffed physical location in a shared space in which a financial institution has partnered with a nonprofit organization is a branch. This commenter also suggested that the agencies specify that any examples of shared physical locations in the regulation are illustrative and not exhaustive. Another commenter requested that a trust office be specifically excluded from the definition of “branch” if the office is not open to or does not accept deposits from the general public.

Final Rule

After reviewing the comments received on this definition, the agencies are adopting the definition of “branch” as proposed. Accordingly, “branch” means a staffed banking facility, whether shared or unshared, that the appropriate Federal financial supervisory agency approved or authorized as a branch and that is open to, and accepts deposits from, the general public. The agencies believe the proposed definition of “branch” provides adequate flexibility to adapt to the continuous evolution of the banking industry by relying on the agencies' authority to approve and authorize branches. As the banking industry evolves, the agencies have the authority to adjust their rules, regulations, and guidance to accommodate industry developments.

The agencies decline to opine on whether the scenarios presented by the commenters would qualify as a branch under the definition, because branching decisions are analyzed on a case-by-case basis and subject to the agencies' respective statutory authority, regulations, and guidance, which may be modified in the future and render some or all of the examples contained in the list inaccurate.

The agencies do not believe that trust offices that are not open to the public or do not accept deposits from the general public need to be explicitly excluded from the definition of “branch,” because a trust office exhibiting those characteristics would likely not satisfy the elements of the definition of “branch” in the final rule. However, as discussed above, branching decisions are fact-specific inquiries, so the agencies are not opining on whether trust offices are generally excluded under the definition of “branch” in the final rule.

Census Tract

The current rule defines “geography” to mean a census tract delineated by the U.S. Bureau of the Census in the most recent decennial census. To simplify and clarify the CRA regulations, the agencies proposed to use the term “census tract” in place of the term “geography,” without changing the substantive meaning. As proposed, “census tract” would mean a census tract delineated by the U.S. Census Bureau in the most recent decennial census. In addition, the agencies proposed to substitute the word “census tract” for the word “geography” wherever “geography” appears in the regulatory text.

The agencies did not receive any comments concerning the proposed “census tract” definition and are adopting the definition as proposed with one change. The agencies are removing the phrase “in the most recent decennial census” from the definition in the final rule to conform this definition to current agency practice. The U.S. Census Bureau periodically updates census tract boundaries and numbering during the years between decennial censuses, and the Federal Financial Institutions Examination Council (FFIEC) compiles these changes to provide one update between decennial censuses, after five years. Under current practice, the agencies have been using the census tract boundaries and numbering posted on the FFIEC website. This practice balances between the benefit of using updated census tract definitions between decennial censuses and the benefit of having a substantial period of stability (five years) between adjustments to census tract delineations and numbering. The agencies believe that the revised definition would allow for the current practice of using inter-decennial changes to census tract delineations, which would not be possible under the proposed language because the definition would be confined to the census tract delineations included in the decennial census.

Accordingly, the final rule defines “census tract” to mean a census tract delineated by the U.S. Census Bureau.

The U.S. Census Bureau publishes census tract data and information at census.gov .

Closed-End Home Mortgage Loan

For a discussion of the definition of “closed-end home mortgage loan,” see the discussion below for Mortgage-Related Definitions.

Combination of Loan Dollars and Loan Count

To provide clarity and consistency, and to simplify the text of the CRA regulations, the agencies are adopting a new definition for “combination of loan dollars and loan count,” not included in the proposal, that means, when applied to a particular ratio, the average of: (1) the ratio calculated using loans measured in dollar volume; and (2) the ratio calculated using loans measured in number of loans. This term is employed in calculations for the Retail Lending Test in final § __.22, as provided in final appendix A; the calculations for the Community Development Financing Test in final § __.24, as provided in final sections II and IV of appendix B, and the Community Development Services Test in final § __.25, as provided in final section IV of appendix B; and the Retail Services and Products Test in final § __.23, as provided in final appendix C. These calculations are discussed in more detail in the section-by-section analysis of §§ __.22 through __.25.

For the Retail Lending Test in particular, the combined loan dollars and loan count approach for various calculations better tailors the Retail Lending Test to accommodate individual bank business models. The agencies determined that use of this combination helps to account for differences across product lines, bank strategies, and geographic areas, relative to an approach that uses only loan dollars or only loan count. Loan size can vary among different product lines ( e.g., home mortgage loans versus automobile loans), and this approach seeks to balance the value of dollars invested in a community with the number of borrowers served. In particular, the agencies believe that both loan dollars and loan count reflect different aspects of how a bank has served the credit needs of a community. For example, in the agencies' supervisory experience, employing a combination of loan dollars and loan count recognizes the continued importance of home mortgage lending to low-income and moderate-income communities, which has been a focus of the CRA, while also accounting for the importance of typically smaller dollar small business, small farm, and automobile lending to low- and moderate-income communities. The loan dollars represent the total amount of credit provided, while the loan count represents the number of borrowers served. The agencies believe this is a balanced approach that ensures consideration of lending that would be significant to the bank by either dollar or number.

Specifically, the agencies believe that use of this term will improve understanding and readability of the following calculations in the Retail Lending Test: (1) the retail lending assessment area 80 percent exemption threshold, as provided in final paragraph II.a.1 of appendix A; (2) the outside retail lending area 50 percent exemption threshold for intermediate banks, as provided in final paragraph II.a.2 of appendix A; (3) the 15 percent major product line threshold for facility-based assessment areas and outside retail lending areas, as provided in final paragraph II.b.1 of appendix A; (4) the standard for determining whether a bank is a majority automobile lender, as provided in final paragraph II.b.3 of appendix A; (5) weighted performance conclusions for major product lines in facility-based assessment areas, retail lending assessment areas, and outside retail lending areas to develop corresponding area performance conclusions, as provided in final paragraph VII.b of appendix A; and (6) weighted average performance scores for different areas in which banks are evaluated to develop performance test conclusions for States, multistate MSAs, and the institution, as provided in final paragraph VIII.b.2 of appendix A.

Similarly, the agencies believe that, for purposes of consistency throughout the final rule and to provide clarity, it is appropriate to incorporate the term into the calculations related to the Community Development Financing Test in final § __.24 and the Community Development Services Test in final § __.25, as provided in final appendix B, as well as the Retail Services and Products Test in final § __.23, as provided in final appendix C. As with the Retail Lending Test in final § __.22, this definition helps to improve understanding and readability in the calculations for the: (1) weighting of benchmarks in final paragraph II.o of appendix B; (2) combined score for facility-based assessment area conclusions and the metrics and benchmarks analyses and the impact and responsiveness reviews in final paragraph II.p of appendix B; (3) the weighting of conclusions in final section IV of appendix B; and (4) the weighting of conclusions in final paragraph c of appendix C.

Community Development

The current CRA regulations include a detailed definition of “community development.” The agencies proposed to move this definition, with substantive additions and clarifications, to a separate new section, proposed § __.13, Community Development Definitions, and to define this term in § __.12 by cross-referencing to proposed § __.13. The agencies did not receive any comments on the proposed definition of “community development” and adopt it as proposed in the final rule. Final § __.13, as discussed in the section-by-section analysis of § __.13, describes activities that constitute community development, as proposed, but is retitled “Consideration of community development loans, community development investments, and community development services.”

Community Development Financial Institution

The agencies proposed to add the definition of “Community Development Financial Institution (CDFI)” to the CRA regulations. This term would have the same meaning given to that term in section 103(5)(A) of the Riegle Community Development and Regulatory Improvement Act of 1994 (RCDRIA) (12 U.S.C. 4701 et seq. ). The agencies proposed this definition to promote clarity in the CRA regulations and consistency across Federal programs addressing CDFIs, particularly the CDFI Fund established by RCDRIA.

The agencies did not receive any comments concerning the proposed definition of “Community Development Financial Institution” and are adopting the definition as proposed in the final rule with several technical and clarifying edits. First, the agencies are replacing the phrase “has the same meaning given to that term” with “means an entity that satisfies the definition.” Second, the agencies are changing the cross-reference to the RCDRIA to the more specific “Community Development Banking and Financial Institutions Act of 1994,” which is title I, subtitle A of RCDRIA. Third, in conjunction with the revised cross-reference to the Community Development Banking and Financial Institutions Act of 1994, the agencies have revised the citation from “12 U.S.C. 4701 et seq.” to “12 U.S.C. 4702(5).” Finally, in order to clarify that references to CDFIs in the final rule pertain to those entities that are determined to be CDFIs by the U.S. Department of the Treasury's CDFI Fund, the definition has been amended by adding the clause “and is certified by the U.S. Department of the Treasury's Community Development Financial Institutions Fund as meeting the requirements set forth in 12 CFR 1805.201(b).” This definitional change affirms the agencies' intent to ensure that, beyond MDIs, WDIs, and LICUs, the entities with which a bank may engage for automatic consideration of loans, investments, and services have undergone the U.S. Department of the Treasury's CDFI certification process and meet requirements for maintaining that certification. The agencies consider this a critical guardrail to ensuring that community development on an inclusive community basis is the focus of bank loans, investments, and services in cooperation with these CDFIs. See discussion of CDFIs in the section-by-section analysis of § __.13.

Accordingly, the final rule defines “Community Development Financial Institution (CDFI)” to mean an entity that satisfies the definition in section 103(5)(A) of the Community Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 4702(5)) and is certified by the U.S. Department of the Treasury's Community Development Financial Institutions Fund as meeting the requirements set forth in 12 CFR 1805.201(b).

Community Development Investment

The agencies proposed to replace the term “qualified investment” in the current CRA regulations with the term “community development investment.” The current CRA regulations define “qualified investment” to mean “a lawful investment, deposit, membership share, or grant that has as its primary purpose community development.” The agencies believe the term “community development investment” is better aligned with the other types of community development activities discussed in the proposal— i.e., community development loans and community development services. (The definitions for these terms are discussed below). The agencies based the proposed “community development investment” definition on the current “qualified investment” definition and incorporated several additions. First, the proposed “community development investment” definition clarified that a lawful investment includes a legally binding commitment to invest that is reported on Schedule RC–L of the Call Report if its primary purpose is community development. Second, the proposed definition expressly included a “monetary or in-kind donation” if its primary purpose is community development in order to increase certainty and clarity as to what activities would qualify under the definition. Finally, the agencies added a cross-reference to proposed § __.13(a), Community Development Definitions.

The agencies did not receive any comments concerning the proposed definition of “community development investment” and are adopting the definition as proposed, with technical edits to conform to the changes made to § __.13 in the final rule and adjust punctuation. Specifically, the agencies are changing “has a primary purpose of community development” to “supports community development” and revising the cross-reference to “§ __.13(a)” to “§ __.13.” A payment to a third party that is not an affiliate to perform community development service hours qualifies as a “monetary or in-kind donation” under the definition of “community development investment” in § __.12.

Community Development Loan

The current CRA regulations define “community development loan” to mean a loan that: (1) has as its primary purpose community development; and (2) except in the case of a wholesale or limited purpose bank, has not been reported or collected by the bank or an affiliate for consideration in the bank's assessment as a home mortgage, small business, small farm, or consumer loan, unless the loan is for a multifamily dwelling (as defined in § 1003.2(n) of this title); and benefits the bank's assessment area(s) or a broader statewide or regional area(s) that includes the bank's assessment area(s).

The agencies proposed several revisions to this definition to add greater specificity and to reflect consideration of community development loans and retail loans under the proposed CRA evaluation framework. First, the proposed definition included the clause, “a legally binding commitment to extend credit, such as a standby letter of credit,” to clarify that these types of commitments could be considered “community development loans” if their primary purpose is community development pursuant to proposed § __.13(a). Second, the agencies removed the reference to assessment areas because this part of the current definition caused uncertainty as to whether an otherwise eligible activity would qualify. Finally, the proposed definition reflected the proposed CRA framework's consideration of certain loans solely under the proposed Retail Lending Test, with an option for certain intermediate banks to have a home mortgage loan, a small business loan, or a small farm loan considered as either a retail loan or a community development loan.

Specifically, the agencies proposed to define “community development loan” to mean a loan, including a legally binding commitment to extend credit, such as a standby letter of credit, that: (1) has a primary purpose of community development, as described in § __.13(a); and (2) has not been considered by the bank, an operations subsidiary or operating subsidiary of the bank or an affiliate of the bank under the Retail Lending Test as an automobile loan, closed-end home mortgage loan, open-end home mortgage loan, small business loan, or small farm loan unless (1) the loan is for a multifamily dwelling (as defined in 12 CFR 1003.2(n)); or (2) in the case of an intermediate bank that is not required to report a home mortgage loan, a small business loan, or a small farm loan, the bank may opt to have the loan considered under the Retail Lending Test in § __.22, or under the intermediate bank community development performance standards in § __.29(b)(2), or, if the bank opts in, the Community Development Financing Test in § __.24.

The agencies did not receive any comments concerning the proposed “community development loan” definition and are adopting the definition in the final rule with changes to reflect revisions to the final rule regarding consideration of certain home mortgage loans, small business loans, and small farm loans as community development loans. First, the agencies are changing “has a primary purpose of community development” to “supports community development” and revising the cross-reference from “§ __.13(a)” to “§ __.13” to conform to the changes made to § __.13 in the final rule. Next, the agencies removed proposed paragraph (2) and added text intended to clarify that a one-to-four family home mortgage loan for rental housing with affordable rents in nonmetropolitan areas under § __.13(b)(3) (as discussed in the section-by-section analysis of final § __.13(b)(3)) may be considered in a bank's CRA evaluation under both the Retail Lending Test in § __.22, if applicable, and under the applicable community development tests in the final rule. Under the final definition of “community development loan,” a small business loan or a small farm loan that has a community development purpose, as described in § __.13, may also be considered in a bank's CRA evaluation under both the Retail Lending Test in § __.22, if applicable, and under the applicable community development test in the final rule. For example, as discussed in the section-by-section analysis of final § __.13(c)(3), certain loans to small businesses and small farms may fall within the economic development category of community development.

The changes regarding consideration of certain home mortgage loans, small business loans, and small farm loans as community developments loans are discussed in more detail in the section-by-section analyses of § __.13(b) and (c).

Accordingly, the final rule defines “community development loan” as a loan, including a legally binding commitment to extend credit, such as a standby letter of credit, that supports community development, as described in § __.13. A community development loan does not include any home mortgage loan considered under the Retail Lending Test in § __.22, with the exception of one-to-four family home mortgage loans for rental housing with affordable rents in nonmetropolitan areas under § __.13(b)(3).

Community Development Services

Current Approach and the Agencies' Proposal

The agencies proposed to replace the current term “community development service,” with the term, “community development services,” and revise the definition. The current CRA regulations define “community development service” to mean a service that: (1) has as its primary purpose community development; (2) is related to the provision of financial services; and (3) has not been considered in the evaluation of the bank's retail banking services under § __.24(d). Under current guidance, activities related to the provision of financial services include services of the type generally provided by the financial services industry, which often involves informing community members about obtaining or using credit. Further, community development service includes, but is not limited to, serving on the board of directors for a community development organization, serving on a loan committee, developing or teaching financial literacy curricula for low- and moderate-income individuals, providing technical assistance on financial matters to a small business, and providing services reflecting a bank employee's professional expertise at the bank ( e.g., human resources, information technology, legal). Personal charitable activities provided by an employee or director outside the ordinary course of their employment do not qualify for community development consideration. Instead, services must be performed in the capacity of a representative of the bank.

The agencies proposed to replace the current term “community development service,” with the term, “community development services” and revise the definition. Specifically, the agencies proposed to define “community development services” to mean “activities described in § __.25(d).” The agencies, generally, proposed in § __.25(d) to incorporate the existing definition of community development services while codifying existing guidance on the meaning of “related to the provision of financial services.” Proposed § __.25(d) defined community development services as: (1) activities that have a primary purpose of community development, as defined in proposed § __.13(a)(1); (2) volunteer activities performed by bank board members or employees; and (3) activities related to the provision of financial services as described in proposed § __.25(d)(3), unless otherwise indicated in proposed § __.25(d)(4). Proposed § __.25(d)(2) excluded volunteer services performed by bank board members or employees of the bank who are not acting in their capacity as representatives of the bank. Proposed § __.25(d)(3) provided that activities related to the provision of financial services are generally activities that relate to credit, deposit, and other personal and business financial services, and included a non-exhaustive list of examples. Proposed § __.25(d)(4) provided that banks may receive community development services consideration for volunteer activities undertaken in nonmetropolitan areas that otherwise meet the criteria for one or more of the community development definitions, as described in § __.13, even if unrelated to financial services. The agencies reasoned that banks operating in nonmetropolitan areas may have fewer opportunities to provide community development services related to the provision of financial services. Proposed § __.25(d)(4) provided that examples of qualifying activities not related to financial services include, but are not limited, to assisting an affordable housing organization to construct homes; volunteering at an organization that provides community support such as a soup kitchen, a homeless shelter, or a shelter for victims of domestic violence; and organizing or otherwise assisting with a clothing drive or a food drive for a community service organization.

Comments Received

The agencies received numerous comments concerning the proposed definition of “community development services” that are discussed below.

Community development purpose for community development services. A few commenters stressed that the final rule should require community development services to have or be related to a community development purpose.

Related to the provision of financial services. As described above, proposed § __.25(d)(3) provided that “[a]ctivities related to the provision of financial services” are those that relate to credit, deposit, and other personal and business financial services and included the following non-exhaustive list of examples: serving on the board of directors of an organization that has a primary purpose of community development; providing technical assistance on financial matters to nonprofit, government, or tribal organizations or agencies supporting community development activities; providing support for fundraising to organizations that have a primary purpose of community development; providing financial literacy education as described in proposed § __.13(k); or providing services reflecting other areas of expertise at the bank, such as human resources, information technology, and legal services.

A few commenters supported the inclusion of volunteer activities reflecting expertise of the employee, such as human resources, legal services, and information technology. A few other commenters specifically noted that activities related to the provision of financial services should include financial literacy or financial education. One of these commenters also suggested the provision of financial services should include volunteering at Volunteer Income Tax Assistance sites managed by nonprofit organizations.

Performed on behalf of the bank. Regarding the proposed exclusion of volunteer activities by bank board members or employees of the bank who are not acting in their capacity as representatives of the bank, a commenter requested clarification that the proposed exclusion would not require the volunteer to act as an agent of the bank when serving on a community organization's board of directors. This commenter believed that if the volunteer must act as an agent, it could create a conflict of interest. Another commenter stated that banks should only receive CRA credit for volunteer activities performed during bank business hours.

Volunteer activities in nonmetropolitan areas. The agencies received many comments on the proposed expansion to allow CRA consideration for volunteer service hours in nonmetropolitan areas that are unrelated to the provision of financial services. Only a few commenters supported the provision as proposed. A majority of commenters on this topic opposed the inclusion of volunteer activities unrelated to the provision of financial services in any location. A few commenters disputed the premise stated in the proposal that there are insufficient volunteer opportunities in nonmetropolitan areas, and one commenter urged the agencies to collect data to verify the premise before expanding to include services unrelated to the provision of financial services in nonmetropolitan areas. Several other commenters stated that although nonfinancial volunteer activities benefit communities, the inclusion of such services loses sight of the CRA's intent to provide financial services to underserved communities. These commenters believed that the CRA should increase services related to the provision of financial services and should not include all types of volunteer activities.

A few commenters supported the provision to include volunteer activities unrelated to the provision of financial services in all areas, not just nonmetropolitan areas. These commenters highlighted the benefit general volunteerism provides to low- and moderate-income communities and stressed that there is need in both metropolitan and nonmetropolitan areas. A few commenters said that limiting the provision of services unrelated to financial services to only nonmetropolitan areas would restrict community organizations from directing the service hours where needed. Another commenter believed the restriction would be inappropriate at this time because community organizations continue to experience challenges in recruiting volunteers as a result of the COVID–19 pandemic. Other commenters said the expansion to consider volunteer activities unrelated to the provision of financial services in all communities could help reduce the number of CRA “hot spots.” A commenter conveyed that some bank employees are not well positioned for or comfortable providing services related to the provision of financial services. Another commenter questioned the delineation of nonmetropolitan versus metropolitan areas because the delineation would exclude certain rural areas that are on the outskirts of metropolitan areas.

A commenter stated bank employees volunteering services unrelated to financial services be given CRA consideration in all communities, at least in instances when it involves helping an affordable housing organization build homes for homeownership. In support of this position, the commenter highlighted the connection between the creation of affordable housing built for homeownership and expanding credit and homeownership opportunities for low- and moderate-income communities.

If the agencies allow CRA consideration for volunteer service hours in nonmetropolitan areas that are unrelated to the provision of financial services, a few commenters offered other requirements or limitations to the evaluation of these service hours, such as weighting the provision of financial services more heavily than those unrelated to financial services; granting pro rata consideration for services unrelated to the provision of financial services based on the percent of low- and moderate-income recipients; establishing a limit for receiving CRA consideration for services unrelated to financial services; establishing a separate metric; limiting the expansion to those community development services that satisfy basic needs like shelter, safety, and food; or requiring the bank to show it made a demonstrated effort to provide the provision of financial services before it may receive credit for services unrelated to financial services.

Final Rule

In response to commenter feedback and for the reasons described below, the agencies are adopting a definition of “community development services” in § __.12 that includes substantive changes as well as technical and conforming edits. Specifically, the final rule defines “community development services” to mean the performance of volunteer services by a bank's or affiliate's board members or employees, performed on behalf of the bank, where those services: (1) support community development, as described in § __.13; and (2) are related to the provision of financial services, which include credit, deposit, and other personal and business financial services, or services that reflect a board member's or employee's expertise at the bank or affiliate, such as human resources, information technology, and legal services. The agencies agree with commenters that a community development purpose is fundamental to eligibility as a community development service. Thus, with non-substantive conforming edits, the agencies are adopting the proposed requirement that a community development service must support community development as described in § __.13.

The agencies removed the examples of what qualifies as “related to the provision of financial services” from the final definition. Instead, the agencies believe the examples are more appropriate for future agency guidance. In addition, the agencies will consider these examples as they develop the illustrative list described in final § __.14. The agencies note that the removal of examples of community development services from the “community development services” definition in the final rule should not be interpreted as a statement on what qualifies or does not qualify as relating to the provision of financial services. The examples provided in the proposal and restated in the preceding discussion would still be considered “related to the provision of financial services.”

Further, the agencies determined that references to specific programs, like the suggestion to identify Volunteer Income Tax Assistance sites as related to the provision of financial services, in the text of the regulation could be overly limiting and possibly inconsistent with the durability of the rule over time. Free tax preparation is likely to qualify as “related to the provision of financial services” and may receive community development service consideration if it otherwise meets the definition of community development services.

In response to commenter feedback that the proposed exclusion—excluding volunteer services performed by bank board members or employees of the bank who are not acting in their capacity as representatives of the bank—could be misinterpreted to require or establish an agency relationship, the agencies removed the exclusion. Instead, the agencies require that the services must be “performed on behalf of the bank.” The agencies do not intend to require that an employee or director must be acting as a bank's agent in the legal sense of the term, nor do the agencies intend to suggest that volunteering on behalf of the bank necessarily creates an agency relationship.

The agencies also considered the comment that banks should only receive CRA credit for volunteer activities performed during bank business hours. The agencies believe that the nature of community development services may vary depending on community needs and seek to give banks flexibility to address those needs regardless of the timing of projects and other community development-related activities. Thus, consistent with the proposal, the final rule provides that a service may still qualify as “volunteer” where the service is performed during an employee's off-duty hours if that service otherwise meets the “community development services” definition. Conversely, volunteer activities conducted by an employee or board member in their personal capacity are generally not considered performed on behalf of the bank if the activity is not sponsored or organized by the bank.

A service can also be considered “volunteer” for purposes of the “community development services” definition even if an employee is paid in the normal course of employment. For example, volunteer hours could include those hours associated with a bank employee performing an economic development service activity, such as completing tax returns for small businesses, during the employee's work hours. Even though the bank pays the employee in the regular course of employment, the bank essentially donates those hours because the bank employee is performing economic development for the small business, rather than performing that employee's regular bank duties.

The agencies have not adopted the proposal to include volunteer activities unrelated to the provision of financial services in nonmetropolitan areas. The agencies believe that volunteer service hours, even if unrelated to financial services, can provide a meaningful benefit in nonmetropolitan areas, but have determined that, by focusing on activities related to the provision of financial services, this provision is more consistent with the CRA's statutory focus and also emphasizes activities that examiners have competency and expertise to evaluate. The removal of this proposed expansion in nonmetropolitan areas also is intended more generally to address commenter requests that the agencies reduce the final rule's complexity.

Finally, the agencies made conforming edits to clarify that service hours performed by the employees or board members of a bank's affiliate may qualify as community development services, as provided for in final § __.21(b).

Consumer Loan

Current Approach

The current CRA regulations define “consumer loan” to mean a loan to one or more individuals for household, family, or other personal expenditures, but does not include a home mortgage, small business, or small farm loan. Further, “consumer loan” includes the following categories of loans: (1) a motor vehicle loan, which is a consumer loan extended for the purchase of and secured by a motor vehicle; (2) a credit card loan, which is a line of credit for household, family, or other personal expenditures that is accessed by a borrower's use of a credit card, as this term is defined in 12 CFR 1026.2; (3) an other secured consumer loan, which is a secured consumer loan that is not included in one of the other categories of consumer loans; and (4) an other unsecured consumer loan, which is an unsecured consumer loan that is not included in one of the other categories of consumer loans.

The Agencies' Proposal

The agencies proposed to modify the “consumer loan” definition to refine its scope, simplify and clarify it, and align it with revisions to related Call Report definitions as well as proposed revisions to the CRA regulations. Specifically, the proposed definition replaced the term “home mortgage” with “home mortgage loan” (both a closed-end home mortgage loan, and an open-end home mortgage loan) and a “multifamily loan” to use terms included in the proposal, discussed below. The proposal also modified the reference to “motor vehicle loan” to “automobile loan,” and specified that an automobile loan includes new or used passenger cars or other vehicles, providing examples, such as a minivan, a pickup truck, a sport-utility vehicle, a van, or a similar light truck for personal use, as defined in Schedule RC–C of the Call Report. The agencies proposed this change to conform with the proposal to add a definition for “automobile loan” to the CRA regulations, discussed above, and to align the term with the definition of “automobile loan” in Schedule RC–C of the Call Report. The proposed “consumer loan” definition also added “other revolving credit plan,” to mean a revolving credit plan that is not accessed by credit card. This change conforms to Call Report revisions, which now distinguishes between revolving and non-revolving credit rather than secured and unsecured credit. The proposal also combined the “other secured consumer loan” and “other unsecured consumer loan” categories into the “other consumer loan” category to simplify the definition.

Comments Received

The agencies received several comments related to the proposed “consumer loan” definition. A commenter supported the agencies' inclusion of an automobile loan as a consumer loan. The commenter believed that including automobile loans as a type of consumer loan is important for areas where employment and economic opportunities are significant distances from where individuals reside, and public transportation may not be available or reliable. Another commenter supported the proposed definition of “automobile loan,” likewise in the definition of “consumer loan,” because it eliminates uncertainty around direct versus indirect loan inclusion.

A commenter suggested that the agencies define “unsecured personal loans,” as they do with credit cards, separately from the general category of “other secured and unsecured loans,” because unsecured personal loans are a fairly uniform credit class.

Final Rule

The agencies are adopting the proposed definition of “consumer loan” in the final rule with several edits designed to simplify the definition and avoid the possibility of future misalignment of the definition with the Call Report. Specifically, “consumer loan” in the final rule means a loan to one or more individuals for household, family, or other personal expenditures and that is one of the following types of loans: (1) automobile loan as reported in Schedule RC–C of the Call Report; (2) credit card loan, as reported as “credit card” in Schedule RC–C of the Call Report; (3) other revolving credit plan, as reported in Schedule RC–C of the Call Report; and (4) other consumer loan, as reported in Schedule RC–C of the Call Report.

For clarity, the agencies have elected to refer only to these loans as reported in Schedule RC–C of the Call Report for each category of loan covered in the definition. Referring only to loans reported in schedule RC–C of the Call Report better aligns the categories of loans with how banks report those classes of loans on the Call Report. As a result, “automobile loan,” “credit card loan,” “other revolving credit plan,” and “other consumer loan” are now described as those loans reported in Schedule RC–C of the Call Report and do not include specific examples. The agencies appreciate commenter concerns about any generality associated with the term “other secured and unsecured loans,” labeled “other consumer loans” in the proposal. The final definition of “consumer loan” is designed to address those concerns not only with the addition of the new category of “other revolving credit plan,” but also with references to the loans reported in Schedule RC–C. To provide additional clarity about the scope of the term “consumer loan,” the agencies also revised the definition to make the list of categories of loans considered consumer loans exhaustive. With this change, the agencies made a technical edit to no longer exclude home mortgage loans, multifamily loans, small business loans, and small farm loans because these loans would not otherwise fall within the final definition of “consumer loan.”

County

The agencies proposed adding a definition for “county” and defining it to mean any county or statistically equivalent entity as defined by the U.S. Census Bureau. The agencies proposed this definition to increase clarity and consistency in the CRA regulations by aligning the term with the scope of the applicable U.S. Census Bureau definition.

The agencies did not receive any comments concerning this proposed definition and are adopting the definition with one conforming change and one technical change. The agencies are revising the definition to include the phrase, “county equivalent,” to provide additional clarity and further align the definition of “county” in the CRA regulations with the applicable terms used by the U.S. Census Bureau. The U.S. Census Bureau utilizes the term “county equivalents” to refer to those geographic areas comparable to counties— i.e., parishes in Louisiana, boroughs, independent cities in certain States, Census Areas, cities in Alaska; municipios in Puerto Rico, districts and islands in American Samoa, municipalities in the Commonwealth of the Northern Mariana Islands, islands in the U.S. Virgin Islands, the District of Columbia, and Election Districts in Guam. The agencies believe the addition of “county equivalent” clarifies that the definition of “county” captures those areas that are geographically comparable to counties, but are not identified as such, and that these areas will receive the same treatment under the CRA regulations.

The agencies are also referring to these terms as used by the U.S. Census Bureau, instead of as defined, and including a cross-reference to the authority of the U.S. Census Bureau to more accurately provide a source for these terms.

Accordingly, the definition of “county” in the final rule means any county, county equivalent, or statistically equivalent entity as used by the U.S. Census Bureau pursuant to title 13 of the U.S. Code. The agencies have made conforming changes throughout the final rule to remove references to “county equivalent” that are now unnecessary.

Deposit Location

The agencies proposed to add a definition of “deposit location” to the CRA regulations as a clarifying corollary to the proposed definition of “deposits.” Specifically, the agencies proposed to define “deposit location” to mean: (1) for banks that collect and maintain deposits data as provided in proposed § __.42, the census tract or county, as applicable, in which the consumer resides, or the census tract or county, as applicable, in which the business is located if it has a local account; (2) for banks that collect and maintain, but that do not report, deposits data as provided in proposed § __.42, the census tract or county, as applicable, in which the consumer resides, or the census tract or county, as applicable, in which the business is located if it has a local account except that, for purposes of the Market Volume Benchmark and for all community development financing benchmarks, the county of the bank branch to which the deposits are assigned in the FDIC's Summary of Deposits data; and (3) for banks that do not collect and maintain deposits data as provided in proposed § __.42, the county of the bank branch to which the deposits are assigned in the Summary of Deposits.

Some commenters stated that the definition of “deposit location” for banks that collect and maintain deposits data under the proposal is vague. A commenter noted that the proposed definition would leave significant questions unresolved, including what it means for a business to be “located” in a place and whether a business can be “located” in multiple places.

The agencies are adopting the definition of “deposit location” with revisions consistent with the revisions to the definition of “deposits,” discussed below, as well as revisions to address commenter concerns. Specifically, the definition in the final rule removes the category of banks that collect and maintain, but do not report, deposits data. As explained in the discussion of the “deposits” definition, this category is no longer necessary. The agencies also agree with commenters' suggestions that the proposed definition could be clarified, and does not clearly indicate where deposits are located. Therefore, the agencies are removing the references to census tracts and counties from the part of the definition that applies to banks that collect, maintain, and report deposits data as provided in § __.42, and replacing them with “the address on file with the bank for purposes of the Customer Identification Program required by 31 CFR 1020.220 or another documented address at which the depositor resides or is located.” The agencies also made a clarifying change to replace the terms “consumer” and “business” used in the proposal with “depositor” and a technical change to replace “branch” with “facility” to refer to the term used in the FDIC's Summary of Deposits.

Accordingly, the final rule provides that “deposit location” means: (1) for banks that collect, maintain, and report deposits data as provided in § __.42, the address on file with the bank for purposes of the Customer Identification Program required by 31 CFR 1020.220 or another documented address at which the depositor resides or is located; and (2) for banks that do not collect, maintain, and report deposits data as provided in § __.42, the county of the bank facility to which the deposits are assigned in the FDIC's Summary of Deposits data.

Depository Institution

The final rule includes a new definition for “depository institution,” not included in the proposal, to mean any institution subject to CRA, as described in 12 CFR 25.11, 228.11, and 345.11. The agencies are adopting this definition as a technical clarification to effectuate their intent that “bank” or “banks” in certain provisions of the proposal was meant to include institutions evaluated by any of the agencies under part 25, 228, or 345. For example, in the Community Development Financing Test, the benchmarks would include the lending, investments, and deposits of all banks in the applicable geographic area regardless of regulator. The final rule replaces those references to the term “bank” with the term “depository institution” or “large depository institution,” discussed below. The agencies also made other conforming edits to integrate these terms into the final rule.

Deposits

The Agencies' Proposal

The agencies proposed to add a definition of “deposits” to the CRA regulations to support and clarify the proposal to use deposits data for several evaluation metrics, benchmarks, and weights under the proposed performance tests. This definition would be based on whether a bank had to collect, maintain, or report deposits data. As discussed further in the section-by-section analysis of § __.42, the agencies proposed to require large banks with assets greater than $10 billion to collect, maintain, and report county-level deposits data based on the county in which the depositor's address is located to allow for more precise measurement of a bank's local deposits by county. For these banks, the agencies proposed a definition of “deposits” based on deposits in domestic offices of individuals, partnerships, and corporations, and of commercial banks and other depository institutions in the United States as defined in Schedule RC–E of the Call Report, which constitute the majority of deposit dollars captured overall in the Call Report categories of Deposits in Domestic Offices. The proposed definition excluded U.S. Government deposits, State and local government deposits, domestically held deposits of foreign governments or official institutions, or domestically held deposits of foreign banks or other foreign financial institutions.

For banks that collect and maintain, but that do not report, deposits data as provided in proposed § __.42, the proposal provided that “deposits” would have the same meaning as for banks that must report deposits data except that, for purposes of the Retail Lending Test's Market Volume Benchmark and for all community development financing benchmarks, “deposits” would have the same meaning as in the FDIC's Summary of Deposits Reporting Instructions.

For banks that do not collect and maintain deposits data as provided in proposed § __.42, the proposal provided that “deposits” would have the same meaning as in the FDIC's Summary of Deposits Reporting Instructions.

Comments Received

Several commenters stated that the agencies should exclude corporate deposits from the definition of “deposits” and recommended defining “deposits” as the sum of total deposits intended primarily for personal, household, or family use, as reported on Schedule RC–E of the Call Report, items 6.a, 6.b, 7.a(1), and 7.b(1). One of the commenters made the same comment with specific reference to large banks. Another commenter explained that including corporate deposits in the proposed definition of “deposits” could reduce incentives for banks to address the community development needs of underserved communities, particularly rural communities, where few corporate deposits are attributed. This commenter also expressed concern that including corporate deposits could lead to distorted or inconsistent results due to fluctuations in corporate deposits that could in turn lead to CRA focus and resource challenges for banks. Another commenter explained that using the suggested items in the Call Report would more accurately reflect a bank's capacity to engage in qualifying activities for individuals, small businesses, and small farms, because the items collect information on deposits maintained primarily for personal, household, or family use. The commenter further explained that use of these suggested items would also eliminate the potential for large corporate deposits to skew the allocation of deposits across different geographies, thereby better capturing the amount of deposits collected from specific assessment areas. Another commenter supported this position, referencing the proposal's potential to exacerbate CRA hot spots in urban centers where deposits are concentrated, fluctuations in the working capital needs of corporate depositors, and the potential challenges of assigning a location for corporate deposits in locations spanning multiple geographies. If not removed, the commenter warned that corporate deposits could distort the calculation of the retail lending volume screen, the calculation of the Community Development Financing Metric, and the weighting of banks' performance conclusions across assessment areas.

Other commenters stated that the agencies should broaden the definition of “deposits” to include deposits from limited liability companies (LLCs) and trusts, and not just individuals, partnerships, and corporations. One of these commenters noted that LLC deposits are domestic deposits in substance and another commenter suggested that the definition be broadened to include deposits from all entities. The commenters stated that the agencies should specifically include these deposits in the final rule for clarification.

One of these commenters also requested the agencies clarify that the “deposits” definition does not include deposits from foreign persons or entities that are made in U.S. branches. The commenter explained that these deposits do not come from a bank's assessment area and are not related to the CRA's purpose of returning money to the community. The commenter also expressed concern that including these types of deposits in the definition may incentivize some banks to keep the funds outside of the United States entirely.

Another commenter indicated that the agencies should include State and local government deposits in the definition because banks can lend against these deposits and some State and local jurisdictions have developed public policies designed to promote reinvestment goals by tying their deposits to bank community performance. The organization stated that CRA rules should not undermine these local efforts by lowering the reinvestment bar for banks with which State and local governments do business.

Final Rule

The agencies are adopting the proposed definition of “deposits” in the final rule with substantive revisions and technical changes. Specifically, the agencies are collapsing the three categories of institutions under the proposed definition—(1) banks that collect, maintain, and report deposits data; (2) banks that collect and maintain, but do not report, deposits data; and (3) banks that do not collect and maintain deposits data—into two categories. Thus, under the final rule, the definition would address: (1) banks that collect, maintain, and report deposits data; and (2) banks that do not collect, maintain, and report that data. The agencies elected to simplify the definition of “deposits” in response to comments about both the overall complexity of the proposal and the complexity of the provisions related to deposits data collection and reporting. Further, because the final rule provides that institutions that collect and maintain deposits data, whether required or opting to do so, must also report deposits data, the category for banks that collect and maintain but do not report is unnecessary. By removing this category, the agencies believe the final rule provides a less complex and more workable definition. The agencies are also making a technical change to refer to deposits as reported in the FDIC's Summary of Deposits as required under 12 CFR 304.3(c), instead of referring to the instructions, to more accurately provide a source for this term. The agencies have also replaced “U.S.” with “United States.”

The agencies have declined to remove corporate deposits from the “deposits” definition because the agencies believe that utilizing both personal and corporate deposits results in a more comprehensive representation of the community that an institution serves. The agencies understand concerns that including corporate deposits in the proposed “deposits” definition could reduce incentives for banks to address the community development needs of underserved communities, because, for example, reporting banks could have higher proportions of their deposits in other areas and, under the Community Development Financing Test, commensurately higher expectations for activity in those areas. However, the agencies believe that other aspects of the rule will encourage banks to focus more on these areas. Specifically, under § __.15, the agencies consider whether an institution serves geographic areas with low levels of community development financing. Further, “targeted census tracts” are used in the final rule to consider whether certain place-based community development activities qualify, and the definition of this term, discussed below, includes underserved communities. Lastly, the agencies are addressing the concern related to CRA hot spots where deposits are concentrated by evaluating bank community development financing and retail lending outside of facility-based assessment areas.

The agencies also declined to modify the “deposits” definition to include deposits from LLCs and trusts. The agencies note that because LLCs are a form of corporation, they are captured under corporate deposits on the Call Report. Further, institutions holding trust account deposits have a fiduciary obligation to invest those deposits in accordance with the trust's instructions. As a result, those deposits are generally not available to be reinvested into the community and should not be included in “deposits.”

The agencies also decided not to exclude deposits from foreign persons or entities that are made in U.S. branches. The exclusions in the deposit definition are limited to whole categories in the Call Report definition of deposit. Excluding foreign individuals or companies would exclude only a partial category in the Call Report. This partial exclusion would increase burden because these categories are known and understood by the industry and, the agencies believe, would not offer significant benefit. Second, as explained in the proposal, the agencies elected to exclude State and local government deposits, along with foreign government deposits, because these deposits are sometimes subject to restrictions and may be periodically rotated among different banks causing fluctuations in the level of deposits over time. These government entities make up one whole category under the Call Report definition. This determination is based on the agencies' supervisory experience, which also considered that restricted funds may also misrepresent a bank's ability to reinvest funds in the local community.

The agencies have elected to maintain deposits data collection from banks with assets greater than $10 billion and decline to expand this collection requirement to other banks. The agencies believe the collection of deposits data is important, but that data collection should be limited to large banks with assets greater than $10 billion due to the burden associated with this requirement. Further, the agencies have declined to expand the use of the FDIC's Summary of Deposits data to all banks because of the limitations of Summary of Deposits data. In particular, Summary of Deposits data is tied to a bank's branches. As banks' business models continue to evolve, there is the possibility that branches will be less representative of the communities that banks serve. As a result, Summary of Deposits data may also be less representative of the communities a bank serves. The agencies note, however, that banks that opt into deposits data collection and maintenance must report these data.

Accordingly, the definition of “deposits” in the final rule provides that: (1) for banks that collect, maintain, and report deposits data as provided in § __.42, “deposits” means deposits in domestic offices of individuals, partnerships, and corporations, and of commercial banks and other depository institutions in the United States as defined in Schedule RC–E of the Call Report; deposits does not include U.S. Government deposits, State and local government deposits, domestically held deposits of foreign governments or official institutions, or domestically held deposits of foreign banks or other foreign financial institutions; and (2) for banks that do not collect, maintain, and report deposits data as provided in § __.42, “deposits” means a bank's deposits as reported in the FDIC's Summary of Deposits as required under 12 CFR 304.3(c).

Digital Delivery System

The final rule includes a new definition for “digital delivery systems,” not included in the proposal, to mean a channel through which banks offer retail banking services electronically, such as online banking or mobile banking. The agencies are adopting this definition to clarify the agencies' intended meaning of this term, which is to reflect the common understanding of this term. This term is used in § __.23, Retail Services and Products Test. For additional discussion of digital delivery systems, see the section-by-section analysis of § __.23.

Dispersion of Retail Lending

The agencies proposed to add a definition of “dispersion of retail lending” to § __.12 in support of the proposal to assess a bank's retail lending performance in a facility-based assessment area based not only on a bank's Retail Lending Volume Screen ( see proposed § __.22(c)) and geographic and borrower distribution metrics ( see proposed § __.22(d)), but also in consideration of several other factors, including the dispersion of retail lending in the facility-based assessment area to determine whether there are gaps in lending in the facility-based assessment area that are not explained by performance context. Specifically, the agencies proposed to define “dispersion of retail lending” to mean how geographically diffuse or widely spread such lending is across census tracts of different income levels within a facility-based assessment area, retail lending assessment area, or outside retail lending area.

The agencies did not receive any comments on this definition. However, after further review, the agencies have elected not to adopt a definition of “dispersion of retail lending” in § __.12 because this term is used only once, in § __.22. Instead, the agencies have incorporated this concept into § __.22(g) of the final rule.

Distressed or Underserved Nonmetropolitan Middle-Income Census Tract

In the current CRA regulations, the definition of “community development” includes activities that revitalize or stabilize “distressed or underserved nonmetropolitan middle-income geographies” as designated by the agencies based on: (1) rates of poverty, unemployment, and population loss; or (2) population size, density, and dispersion. Further, this provision states that activities revitalize and stabilize geographies designated based on population size, density, and dispersion if they help to meet essential community needs, including the needs of low- and moderate-income individuals.

The agencies proposed to include a definition of “distressed or underserved nonmetropolitan middle-income census tract” in § __.12, based on the language in the current definition of “community development,” with certain edits. Specifically, the agencies proposed to add clarity and consistency by incorporating additional detail from the Interagency Questions and Answers into the proposed definition. The agencies also proposed technical and conforming changes, such as replacing the term “geography” with the term “census tract,” reflecting the change to this term discussed above, and restructuring the definition. As proposed, “distressed or underserved nonmetropolitan middle-income census tract” would mean a census tract publicly designated as such by the agencies and compiled in a list published annually by the FFIEC. The agencies would designate a nonmetropolitan middle-income census tract as distressed if it is in a county that has: (1) an unemployment rate of at least 1.5 times the national average; (2) a poverty rate of 20 percent or more; or (3) a population loss of 10 percent or more between the previous and most recent decennial census or a net migration loss of five percent or more over the five-year period preceding the most recent census. The agencies would designate a nonmetropolitan middle-income census tract as underserved if it meets the criteria for population size, density, and dispersion that indicate the area's population is sufficiently small, thin, and distant from a population center that the census tract is likely to have difficulty financing the fixed costs of meeting essential community needs, based on the Urban Influence Codes established by the U.S. Department of Agriculture's (USDA) Economic Research Service numbered “7,” “10,” “11,” or “12.”

The agencies did not receive any comments on the proposed definition of “distressed or underserved nonmetropolitan middle-income census tract,” and are adopting the definition as proposed with two technical changes, referencing the official name of the Board, and replacing the word “migration” with “population.”

Distribution of Retail Lending

The agencies proposed to add a definition of “distribution of retail lending” to § __.12 to increase clarity and consistency regarding the evaluation of a bank's retail lending under the proposed Retail Lending Test. As proposed, “distribution of retail lending” would refer to how retail lending is apportioned among borrowers of different income levels, businesses or farms of different sizes, or census tracts of different income levels. The agencies did not receive any comments on this definition. However, after further review, the agencies have elected not to adopt this definition in the final rule because the distribution analysis is explained extensively in the Retail Lending Test in the final rule.

Evaluation Period

The agencies proposed to add a definition of “evaluation period” to increase clarity and consistency in the CRA regulations. Specifically, proposed § __.12 defined “evaluation period” to mean the period of time between CRA examinations, generally in calendar years, in accordance with the agency's guidelines and procedures. The agencies received no comments concerning the proposed definition of “evaluation period.” Accordingly, the agencies are adopting this term in the final rule with several technical changes designed to enhance the clarity and accuracy of the definition. Specifically, the agencies revised the phrase “period of time” to “the period” and moved the clause “generally in calendar years” so that it now follows “the period,” and replaced the phrase “time between CRA examinations” with “during which a bank conducted the activities that the [Agency] evaluates in a CRA examination.” Accordingly, “evaluation period,” in the final rule means the period, generally in calendar years, during which a bank conducted the activities that the agency evaluates in a CRA examination, in accordance with the agency's guidelines and procedures.

Facility-Based Assessment Area

As discussed above, the agencies proposed to replace the term “assessment area” in § __.12 with the terms “facility-based assessment area,” “retail lending assessment area,” and “outside retail lending area.” The agencies proposed to define “facility-based assessment area” to mean a geographic area delineated in accordance with § __.16. Section __.16 describes the bases for delineating this type of assessment area. For information regarding facility-based assessment area delineation requirements in the final rule, see the section-by-section analysis of § __.16.

A commenter suggested clarifying that an ATM not owned and operated exclusively by a bank would not trigger a new facility-based assessment area, consistent with the current regulation. The agencies agree that a non-proprietary remote service facility, such as a network ATM, does not constitute a bank facility because such ATMs are owned and operated by a third party and are not operated exclusively for the bank. Further, a bank participating in such an ATM network may have limited control over where an ATM is located. Therefore, such ATMs would not by themselves trigger a new facility-based assessment area.

For the reasons stated above, the agencies are adopting the “facility-based assessment area” definition as proposed in the final rule with a minor wording change. Specifically, the agencies replaced the phrase “in accordance with” with “pursuant to” in the final rule.

High Opportunity Area

The Agencies' Proposal

The agencies proposed to add a definition of “High Opportunity Area” to mean: (1) an area designated by the U.S. Department of Housing and Urban Development (HUD) as a “Difficult Development Area” (DDA); or (2) an area designated by a State or local Qualified Allocation Plan as a High Opportunity Area, and where the poverty rate falls below 10 percent (for metropolitan areas) or 15 percent (for nonmetropolitan areas).

As discussed further in the section-by-section analysis of § __.15, the agencies proposed to define “High Opportunity Area” in relation to the proposal to conduct an impact review of community development activities. One of the proposed factors that the agencies would consider in assessing the impact and responsiveness of a community development activity would be whether the activity “[d]irectly facilitate[s] the acquisition, construction, development, preservation, or improvement of affordable housing in High Opportunity Areas.” The proposed definition would align with the Federal Housing Finance Agency's (FHFA) definition of “High Opportunity Areas,” and was intended to demarcate areas where efforts to increase affordable housing could be especially beneficial for low- and moderate-income individuals.

The agencies solicited comment on whether the proposed approach to use the FHFA's definition of “High Opportunity Areas” is appropriate, and whether there are other options for defining High Opportunity Areas.

Comments Received

Most commenters that provided input on this definition supported the proposal to align the “High Opportunity Areas” definition with the FHFA's definition, for example, because the high cost of housing in otherwise low poverty areas can absorb significant resources from large portions of the population. A commenter observed that low poverty rates are an important component of identifying high opportunity areas. This commenter supported limiting the variability of definitions promulgated in State Qualified Allocation Plans but suggested there may also be other relevant opportunity or social vulnerability indices. Another commenter suggested the agencies clarify the definition to allow for variation in terminology used from State to State.

Some commenters offered various suggestions for expanding the “High Opportunity Areas” definition, such as to include Qualified Census Tracts to allow communities concerned about displacement of low- and moderate-income residents the ability to access CRA-motivated financing. Another commenter recommended expanding the definition to include Empowerment Zone and Enterprise Communities, transit-oriented areas, and census tracts where 40 percent or more of the homes meet the definition of affordable housing, and a different commenter suggested the definition should be expanded to include certain climate resilience factors. Another commenter stated that, in addition to aligning with the FHFA definition, the agencies should permit flexibility in how financial institutions identify affordable housing needs, gaps, and opportunities, utilizing data analytics tools.

A few commenters opposed the proposed “High Opportunity Areas” definition. Some of these commenters opposed using the FHFA's definition because it would include DDAs, which these commenters asserted were created to permit higher levels of housing tax credit subsidies in areas with high construction, land, and utility costs and are not directly related to higher income areas with low rates of poverty. Another commenter expressed some concern about including DDAs and suggested that the agencies consider eliminating DDAs or adding criteria to ensure that in-scope DDAs include features supporting economic mobility, such as strong transit connectivity of the housing to schools and childcare facilities, health facilities, employment centers, and green space. Similarly, another commenter stated that the proposed FHFA definition is limited to quantifiable poverty measures and State Qualification Allocation Plan definitions but may not address a more holistic view of “opportunity,” and suggested that incorporating service‐enriched housing could be a good counterbalance. A commenter also stated that the FHFA definition may be too restrictive for some communities and recommended that the agencies be open to other options where high cost of living relative to local wages and income demonstrates a need.

Final Rule

The agencies are adopting the definition of “High Opportunity Areas” in the final rule with substantive revisions. As discussed above, the agencies intended the proposed definition of “High Opportunity Area” to align with the FHFA's definition of “High Opportunity Area.” However, the FHFA maintains a “High Opportunity Areas File” that designates the specific census tracts that qualify as high opportunity areas for purposes of residential economic diversity activities. In consideration of the fact that the FHFA maintains a “High Opportunity Areas File,” the agencies believe it is prudent to defer to the FHFA's interpretation of its regulation and guidance in the identification of “High Opportunity Areas.” Further, the agencies believe reliance on the FHFA's identification of “High Opportunity Areas” will eliminate any potential ambiguity in the definition.

For these reasons, the agencies have modified the proposed definition of “High Opportunity Area” to mean an area identified by the FHFA for purposes of the Duty to Serve Underserved Markets regulation in 12 CFR part 1282, subpart C. This definition generally includes geographic areas where the cost of residential development is high and affordable housing opportunities can be limited.

While the agencies considered commenters' concerns about the definition and suggestions for alternatives, the agencies continue to believe the “High Opportunity Area” definition included in the final rule provides the best option for the purposes of the impact and responsiveness factor in § __.15(b)(7) because, as defined by FHFA, these areas are intended to capture areas that provide strong opportunities for low- and moderate-income individuals, families, and households. The definition captures both DDAs and also areas designated as High Opportunity Areas where the poverty rate is low. The agencies agree that increasing affordable housing opportunities in these areas helps to provide low- or moderate-income individuals, families, and households with more choices to live in neighborhoods with economic opportunities. The agencies considered various alternative options, including commenter suggestions to expand the definition to other types of geographic areas or exclude DDAs from the definition but continue to believe the definition provides a clear set of standards related to where additional affordable housing may be both needed and hard to develop and is in alignment with an already in-use Federal agency definition with readily available geographic classifications.

Home Mortgage Loan

For a discussion of the definition of “home mortgage loan,” see the discussion for Mortgage-Related Definitions in this section-by-section analysis of § __.12.

Income Level

To increase clarity, the agencies proposed non-substantive and minor structural revisions to the current definition of “income level” and, as in other definitions, to replace the term “geography” with the more precise term “census tract.” Specifically, the agencies proposed that “income level” include the following definitions:

• Low-income would mean: (1) for individuals within a census tract, an individual income that is less than 50 percent of the area median income; or (2) for a census tract, a median family income that is less than 50 percent of the area median income.

• Moderate-income would mean: (1) for individuals within a census tract, an individual income that is at least 50 percent and less than 80 percent of the area median income; or (2) for a census tract, a median family income that is at least 50 percent and less than 80 percent of the area median income.

• Middle-income would mean: (1) for individuals within a census tract, an individual income that is at least 80 percent and less than 120 percent of the area median income; or (2) for a census tract, a median family income that is at least 80 percent and less than 120 percent of the area median income.

• Upper-income would mean: (1) for individuals within a census tract, an individual income that is 120 percent or more of the area median income; or (2) for a census tract, a median family income that is 120 percent or more of the area median income.

Comments Received

The agencies received several comments on the proposed definition of “income level.” A commenter requested that the agencies include persons with vision loss—and persons with disabilities in general—in the CRA regulation's “low-income” population, explaining that persons with vision loss or other disabilities often experience high unemployment, average income that is lower than the general population, less access to technology and the internet, and are more likely to be persons of color. Another commenter suggested the agencies include persons with disabilities in the low- and moderate-income designation even if their incomes exceed that designation because of the financial vulnerabilities and high costs associated with living with a disability, such as the expenses of accessible van conversions, assistive technology, and home renovations.

Another commenter suggested that the agencies revise the income levels in an upward direction so that “low-income” is less than 60 percent of area median income, “moderate-income” is between 60 percent and 100 percent of area median income, “middle-income” is between 100 percent and 125 percent of area median income, and “upper-income” is more than 125 percent of area median income. The commenter stated that this upward revision of the income levels could provide additional support for middle-class home ownership and assist more middle-income households that have lost ground after the COVID–19 pandemic and due to high inflation and would be consistent with the change in the agencies' special designation of distressed or underserved nonmetropolitan middle-income census tracts (a designation referencing between 80 percent and 120 percent of area median income) and in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which defines low-income as 80 percent of area median income and moderate-income as income “not in excess of area median income.”

Another commenter stated that it welcomes the agencies providing more examples on how to identify low- and moderate-income individuals and families, and requested that the agencies consider a broader, more flexible framework that uses enrollment status in the USDA National School Lunch Program and Medicaid as part of the definition of low- and moderate-income.

Final Rule

The agencies are adopting the proposed definition of “income levels” in the final rule with several revisions to the first prong of each income level. Specifically, the agencies removed the reference to “census tracts” because inclusion of the term is unnecessary. The agencies also expanded the definition so that it applies to individuals, families, and households, instead of only individuals, as proposed. The agencies added families and households in recognition of the fact that the measurement of income would be incomplete if each income levels excluded families or households.

Accordingly, the agencies are adopting the following definition of “income levels”:

• “Low-income,” which means: (1) for individuals, families, or households, income that is less than 50 percent of the area median income; or (2) for a census tract, a median family income that is less than 50 percent of the area median income.
• “Moderate-income,” which means: (1) for individuals, families, or households, an income that is at least 50 percent and less than 80 percent of the area median income; or (2) for a census tract, a median family income that is at least 50 percent and less than 80 percent of the area median income.
• “Middle-income,” which means: (1) for individuals, families, or households, an income that is at least 80 percent and less than 120 percent of the area median income; or (2) for a census tract, a median family income that is at least 80 percent and less than 120 percent of the area median income.
• “Upper-income,” which means: (1) for individuals, families, or households, an income that is 120 percent or more of the area median income; or (2) for a census tract, a median family income that is 120 percent or more of the area median income.

The agencies considered the commenters' recommendations and suggestions to consider a broader and more flexible framework and to revise the income levels upwards but have elected to maintain the income levels as proposed in the final rule. The income levels in the proposed definition mirror the income levels in the current definition, so the income levels standards are well known and understood within the banking industry. Further, the agencies believe a framework that relies on quantitative income factors provides for the most workable definition and minimizes complexity.

Intermediate Bank

For a discussion of the definition of “intermediate bank,” see the discussion above for Bank Asset-Size Definitions.

Large Bank

For a discussion of the definition of “large bank,” see the discussion above for Bank Asset-Size Definitions.

Large Depository Institution

The final rule includes a new definition for “large depository institution,” not included in the proposal, to mean any depository institution, excluding depository institutions designated as limited purpose banks or savings associations pursuant to 12 CFR 25.26(a), or designated as limited purpose banks pursuant to 12 CFR 228.26(a) or 345.26(a), that meets the asset size threshold of a large bank. The agencies are adopting this definition as a technical clarification to effectuate their intent that “large bank” in certain proposed benchmarks in the Community Development Financing Test includes all large banks and savings associations evaluated under 12 CFR parts 25, 228, and 345. The agencies also made other conforming edits to integrate these terms into the final rule.

Limited Purpose Bank

The current CRA regulations define “limited purpose bank” to mean a bank that offers only a narrow product line (such as credit card or motor vehicle loans) to a regional or broader market and for which a designation as a limited purpose bank is in effect, in accordance with § __.25(b). The agencies proposed to revise the illustrative list of loan types from “credit card or motor vehicle loans” to “credit cards, other revolving consumer credit plans, other consumer loans, or other non-reported commercial and farm loans” and to change the cross-reference. The agencies proposed this change to more specifically identify the types of product lines that might be offered by a bank eligible for a “limited purpose bank” designation. Additionally, the agencies proposed to remove the reference to “motor vehicle loans” (replaced in the proposal by the proposed term “automobile loans,” as discussed above) as an illustrative type of a narrow retail product line, because the agencies proposed to evaluate automobile lending under the proposed Retail Lending Test.

In addition, the current CRA regulations define “wholesale bank” to mean a bank that is not in the business of extending home mortgage, small business, small farm, or consumer loans to retail customers, and for which a designation as a wholesale bank is in effect, in accordance with § __.25(b). To determine whether a bank meets this definition, the agencies consider whether a bank holds itself out to the retail public as providing such loans; and may consider the bank's revenues from extending such loans compared to its total revenue, including off-balance sheet activities. The proposal included the same definition as the current rule, with a technical change to the cross-reference.

Comments Received

The agencies received a number of comments concerning the proposed definitions of “limited purpose bank” and “wholesale bank.” A few commenters stated that these definitions should be reevaluated so that a bank without a material amount of its balance sheet loan originations or loan volume subject to the proposed major product line standard could qualify for the designation. A group of commenters supported maintaining existing guidance for wholesale and limited purpose banks from the Interagency Questions and Answers, with a commenter specifically identifying guidance addressing the amount of unrelated lending in which a bank may engage while retaining its designation. Other commenters expressed concern with designating banks that engage in extensive credit card lending as wholesale or limited purpose banks. These commenters asserted that the proposal to apply the Community Development Financing Test for Wholesale or Limited Purpose Banks to wholesale or limited purpose banks (discussed in greater detail in the section-by-section analysis of § __.26) would eliminate the possibility of these banks' credit card lending being evaluated; this raised concerns for these commenters, who noted that credit card lending is an important source of credit to individuals and small businesses. Instead, most of these commenters urged the agencies to exclude credit card banks from the option to seek a wholesale or limited purpose bank designation or otherwise ensure the distribution of credit card loans is evaluated pursuant to the proposed Retail Lending Test.

Final Rule

The agencies are adopting a revised “limited purpose bank” definition and eliminating the “wholesale bank” definition in the final rule. Specifically, the agencies have revised the “limited purpose bank” definition to be similar in structure to the current “wholesale bank” definition. To that end, the agencies are changing the definition of “limited purpose bank” from indicating that these banks offer only a narrow product line to indicating that these banks do not extend to retail customers the loan types evaluated under the final Retail Lending Test. Further, the agencies no longer believe it is necessary to impose the limitation that limited purpose banks may only operate in a “regional or broader market.” The removal of this language equips the definition with the ability to accommodate new or future market participants, such as fintech banks. Finally, the agencies are also adding language to indicate that these banks may extend to retail customers— i.e., the retail public, including, but not limited to, individuals and businesses —those loan types evaluated under the final Retail Lending Test on an incidental and an accommodation basis without losing the limited purpose bank designation, as requested by some commenters.

Therefore, the final rule defines a “limited purpose bank” as a bank that is not in the business of extending closed-end home mortgage loans, small business loans, small farm loans, or automobile loans evaluated under § __.22 to retail customers, except on an incidental and accommodation basis, and for which a designation as a limited purpose bank is in effect, in accordance with § __.26. Because this definition, generally, includes banks considered either “limited purpose banks” or “wholesale banks” under the current or proposed regulations, a separate definition of “wholesale bank” is not necessary. Overall, the changes to “limited purpose bank” in the final rule and the removal of the term “wholesale bank” in the CRA regulations, are intended to improve clarity, minimize complexity, and provide for new and future market participants.

Because the current and proposed CRA regulations apply the same performance test to each bank type, the change in nomenclature does not substantively affect the application of performance tests. In other words, a wholesale bank under the proposal would have been subject to proposed § __.26; a limited purpose bank (which includes wholesale banks under the proposed definition) under the final rule remains subject to the performance test in § __.26. The agencies believe that most banks that meet the current definition of a “wholesale bank” or “limited purpose bank” will continue to meet the “limited purpose bank” definition in the final rule. However, the agencies acknowledge that a bank that primarily offers automobile loans (and therefore meets the majority-automobile-lender standard discussed below) may have qualified as a limited purpose bank under the current rule or the proposal but will not qualify as a limited purpose bank under the final rule because they are in the business of extending loans evaluated under § __.22 to retail customers.

The agencies declined to revise the definition of “limited purpose bank” to exclude consumer credit card banks or evaluate credit card banks under the Retail Lending Test, as requested by some commenters. First, based on the agencies' supervisory experience, credit card banks often have unique business models and do not have extensive branch systems. Second, evaluating credit card banks under the Retail Lending Test would require significant additional data collection from these banks. Credit card underwriting may not rely on a customer's income, and banks do not have an obligation to collect and routinely update credit card customers' income data. As a result, credit card customer data collected from these banks would not be complete and could vary widely among banks, posing significant challenges to performing the borrower distributions that are central to the Retail Lending Test. The agencies recognize, however, the importance of credit card lending to low- and moderate-income individuals, small businesses, and small farms. For further discussion of the evaluation of credit card and other non-automobile consumer loans under the final rule, see the section-by-section analyses of §§ __.22(d) (Retail Lending Test; major product lines) and __.23 (Retail Services and Products Test). In this regard, for example, the agencies note that small business credit card lending is included in the small business loan product line evaluated under the final Retail Lending Test.

In response to some commenters' recommendations, the agencies note that guidance included in the Interagency Questions and Answers on wholesale and limited purpose banks will no longer be relevant guidance for the final rule, unless the agencies specifically include this guidance in subsequent issuances.

Loan Location

Under the current CRA regulation, the definition of “loan location” provides that a consumer loan is located in the geography where the borrower resides; a home mortgage loan is located in the geography where the property to which the loan relates is located; and a small business or small farm loan is located in the geography where the main business facility or farm is located or where the loan proceeds otherwise will be applied, as indicated by the borrower. The agencies proposed technical revisions to this definition to add greater precision and clarity. As discussed above, the agencies proposed a conforming change across many definitions to replace the term “geography” with the more precise term “census tract.” Additionally, to clarify the point in time when a consumer loan's location is assigned, the agencies proposed that the location of a consumer loan is based on where the borrower resides at the time the consumer submits the loan application. Further, the agencies proposed to clarify that a home mortgage loan's location is based on where the property securing the loan is located, instead of where the property related to the loan is located.

The agencies did not receive any comments concerning the proposed “loan location” definition and are adopting the definition as proposed with the following changes. First, the agencies have replaced the term “consumer” with the term “borrower” in the first prong, to conform with the reference to “borrower” earlier in the sentence. Second, the agencies have included multifamily loan in the second prong to clarify the location of multifamily loans, which the agencies recognize was not specified in the proposal. Third, the agencies made a non-substantive change to the sentence structure of the third prong to remove the passive tense in one clause.

As adopted, the definition of “loan location” in the final rule provides that: (1) a consumer loan is located in the census tract where the borrower resides at the time that the borrower submits the loan application; (2) a home mortgage loan or a multifamily loan is located in the census tract where the property securing the loan is located; and (3) a small business loan or small farm loan is located in the census tract where the main business facility or farm is located or where the borrower will otherwise apply the loan proceeds, as indicated by the borrower.

Loan Production Office

The current CRA regulations define “loan production office” to mean a staffed facility, other than a branch, that is open to the public and that provides lending-related services, such as loan information and applications. The agencies proposed to remove this definition given the limited focus on, and consideration of, loan production offices in the agencies' proposal. The agencies did not receive any comments concerning the removal of this definition, and the agencies are removing this definition in the final rule as proposed.

Low Branch Access Census Tract; Very Low Branch Access Census Tract

The agencies proposed to define “low branch access census tract” to mean a census tract with one bank, thrift, or credit union branch, and a “very low branch access census tract” to mean a census tract with no bank, thrift, or credit union branches, within: (1) 10 miles of the census tract center of population or within the census tract in nonmetropolitan areas; (2) five miles of the census tract center of population or within the census tract in a census tract located in an MSA but primarily outside of the principal city components of the MSA; or (3) two miles of the census tract center of population or within the census tract in a census tract located in an MSA and primarily within the principal city components of the MSA.

The agencies proposed to evaluate a bank's branch distribution in, among other geographic areas, “low branch access census tracts or very loan branch access census tracts.” Upon further consideration of comments received on this topic, the agencies have elected to not consider the availability of branches in low branch access census tracts or very low branch access census tracts in the Retail Services and Products Test. For additional discussion, see the section-by-section analysis of § __.23, Retail Services and Products Test. As a result, the CRA regulations no longer require definitions of “low branch access census tracts” or “very low branch access census tracts” and the agencies are adopting the final rule without them.

Low-Cost Education Loan

Current § __.21(e), Low-cost education loans provided to low-income borrowers, provides that, for purposes of that paragraph, “low-cost education loans” means any education loan, as defined in section 140(a)(7) of the Truth in Lending Act (15 U.S.C. 1650(a)(7)) (including a loan under a State or local education loan program), originated by the bank for a student at an “institution of higher education,” as that term is generally defined in sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001 and 1002) and the implementing regulations published by the U.S. Department of Education, with interest rates and fees no greater than those of comparable education loans offered directly by the U.S. Department of Education. It further provides that such rates and fees are specified in section 455 of the Higher Education Act of 1965 (20 U.S.C. 1087e).

The agencies proposed to add this definition of “low-cost education loan” to § __.12, with changes to update a citation, applying the definition only to private loans, as provided in section 140(a)(7) of the Truth in Lending Act (15 U.S.C. 1650(a)(8)), and other minor wording changes. This definition was needed for the proposal to consider the responsiveness of credit products and programs to the needs of low- and moderate-income individuals, including through low-cost education loans, in the proposed Retail and Products Service Test. As with the current rule, this proposed definition leveraged the statutory definitions of related terms.

Specifically, the agencies proposed to define “low-cost education loan” to mean any private education loan, as defined in section 140(a)(7) of the Truth in Lending Act (15 U.S.C. 1650(a)(8)) (including a loan under a State or local education loan program), originated by the bank for a student at an “institution of higher education,” as generally defined in sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001 and 1002) and the implementing regulations published by the U.S. Department of Education, with interest rates and fees no greater than those of comparable education loans offered directly by the U.S. Department of Education. Such rates and fees are specified in section 455 of the Higher Education Act of 1965 (20 U.S.C. 1087e). The agencies did not receive any comments concerning the proposed definition of “low-cost education loan” and adopt it as proposed in the final rule with one technical change to replace the reference to U.S. Department of Education regulations with the regulatory citation, 34 CFR part 600.

Low-Income Credit Union

The agencies proposed to add a definition for “low-income credit union (LICU)” in support of various proposed provisions related to community development. As discussed further in the section-by-section analysis of § __.13, Consideration of community development loans, investments, and services, the agencies proposed to create a category of “community development” that would comprise activities with MDIs, WDIs, LICUs, or CDFIs. In addition, the agencies proposed to consider, as a factor in evaluating the impact and responsiveness of any community development activity, whether the activity supports an MDI, WDI, LICU, or Treasury Department-certified CDFI.

The agencies proposed to define LICU as having the same meaning given to that term in NCUA's regulations, 12 CFR 701.34. The NCUA's regulations provide, in part, that based on data obtained through examinations, the NCUA will notify a Federal credit union that it qualifies for designation as a LICU if a majority of its membership qualify as low-income members.

The agencies did not receive any comments concerning the proposed definition of “LICU” and adopt it as proposed in the final rule.

Low-Income Housing Tax Credit

The final rule includes a new definition for “Low-Income Housing Tax Credit (LIHTC),” not included in the proposal, to clarify that “Low-Income Housing Tax Credit” in the CRA regulations is a reference to a Federal program. This term is utilized in §§ __.13, __.15, and __.42. Accordingly, the agencies are adopting a definition of “Low-Income Housing Tax Credit (LIHTC)” in the final rule to mean a Federal tax credit for housing persons of low income pursuant to section 42 of the Internal Revenue Code of 1986 (26 U.S.C. 42).

Major Product Line

The final rule includes a new definition for “major product line,” not included in § __.12 of the proposal. In the proposal, the agencies described the concept of major product line in § __.22. In the final rule, instead of including the concept solely in § __.22, the agencies are also adding a definition for “major product line” in § __.12 because the term is used outside of § __.22 and the agencies recognized it was more appropriate as a defined term. However, in the final rule the agencies are modifying what constitutes a “major product line.” The new definition explains that “major product line” means a product line that the appropriate Federal financial supervisory agency evaluates in a particular Retail Lending Test Area, pursuant to § __.22(d)(2) and paragraphs II.b.1 and II.b.2 to appendix A of the final rule. This definition is intended to identify the product lines with the greatest importance to the bank and its community and that, accordingly, are subject to evaluation under the Retail Lending Test. As described in the section-by-section analysis of § __.22, Retail Lending Test, closed-end home mortgage loans, small business loans, and small farm loans are major product lines in a facility-based assessment area or outside retail lending area if the bank's loans in the respective product line represent at least 15 percent of the bank's reported loans and other loans considered across all product lines in the same geographic area during the evaluation period. This 15 percent standard is calculated based on a combination of loan dollars and loan count (see above for a discussion of the definition of “combination of loan dollars and loan count”). The same 15 percent standard is used to determine whether automobile loans are a major product line in a facility-based assessment area or outside retail lending area, if the bank is a majority automobile lender for the institution as a whole or opts into having its automobile lending evaluated. In addition, closed-end home mortgage loans and small business loans are a major product line in a particular calendar year for a retail lending assessment area if the product line meets or exceeds the threshold requiring delineation of a retail lending assessment area pursuant to § __.17 ( i.e., 150 reported closed-end home mortgage loans, or 400 reported small business loans, in each of the prior two calendar years). As discussed in the section-by-section analysis of § __.22, the agencies determined that it was not appropriate to include open-end home mortgage loans or multifamily loans in the major product line definition in the final rule, as the agencies proposed.

Majority Automobile Lender

The final rule includes a new definition for “majority automobile lender,” not included in the proposal, defined to mean a bank for which more than 50 percent of its home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans were automobile loans, as determined pursuant to paragraph II.b.3 of appendix A. Paragraph II.b.3 of appendix A includes the provisions of the final rule that identify the banks for which evaluation of automobile lending is mandatory in each facility-based assessment area or in an outside retail lending area in which automobile lending represents a major product line.

As described in the section-by-section analysis of § __.22, a bank is considered a majority automobile lender if its automobile loans originated and purchased over the combined two-calendar-year period preceding the first year of the evaluation period exceeded 50 percent, based on a combination of loan dollars and loan count, of the bank's lending across specified categories. Specifically, the final rule calculates the 50 percent standard based on the following loan categories: home mortgage loans; multifamily loans; small business loans; small farm loans; and automobile loans originated and purchased overall.

The agencies intend this new definition to be a clarifying change and have added it to make the regulatory text in § __.22 and appendix A less complex and readable.

Metropolitan Area

The agencies proposed to add a definition of “metropolitan area” because the term is used throughout the rule to describe areas where the agencies will evaluate a bank. Specifically, the agencies proposed to define “metropolitan area” to mean any MSA, combined MSA, or metropolitan division as that term is defined by the Director of the Office of Management and Budget (Director of the OMB).

The agencies did not receive any comments related to the proposed “metropolitan area” definition. However, the agencies are adopting this definition with several revisions. First, the agencies are removing reference to “combined MSA” from the definition because “combined MSA” is not a term defined by the Director of the OMB. Second, the agencies are removing reference to “metropolitan division” from the definition. Metropolitan divisions are parts of certain populous MSAs, so the agencies determined that the term is not necessary and that it added complexity to separately list both terms in the “metropolitan area” definition. For example, any county in a metropolitan division would also be in an MSA. Finally, the agencies are removing the phrase “as defined by the Director of the Office of Management and Budget” from the definition. As discussed below, the term “MSA” is defined in the final rule to mean a metropolitan statistical area defined by the Director of the OMB. Accordingly, “metropolitan area” in the final rule means any MSA.

Metropolitan Division

The current CRA regulations define “metropolitan division” to mean a metropolitan division as defined by the Director of the OMB. The agencies proposed this same definition, with a minor technical change. Specifically, the agencies replaced the phrase “means a metropolitan division as defined” with the phrase “has the same meaning given to that term.” The agencies did not receive any comments related to the proposed definition of “metropolitan division,” and are adopting the definition as proposed in the final rule.

Military Bank

The agencies proposed to add a new definition of “military bank” in support of proposed § __.16, which would provide an exception to certain facility-based assessment area delineation requirements for military banks. Specifically, the agencies proposed to define “military bank” to mean a bank whose business predominately consists of serving the needs of military personnel who serve or have served in the Armed Forces (including the U.S. Air Force, U.S. Army, U.S. Coast Guard, U.S. Marine Corps, and U.S. Navy) or dependents of military personnel, basing this definition on language in the CRA statute. The agencies proposed this definition to increase clarity and consistency in the CRA regulations.

A commenter provided input on the proposed definition of “military bank.” Although expressing support for inclusion of a definition of “military bank,” the commenter expressed concern that the agencies' proposed definition is too narrow and recommended that the word “predominantly” be defined to include “a bank whose most important customer group is military personnel or their dependents,” as in the OCC 2020 CRA Final Rule. The commenter noted that this qualification should lead to the extension of the “military bank” definition to all financial institutions with a commitment, mission, or business model to serve the military community exclusive of all other communities. The commenter also suggested that the definition of “military bank” should include on-base branches of financial institutions that do not otherwise fit within the definition so that branches on military bases could benefit from the CRA's geographic assessment area exception without extending this treatment to the larger, non-military financial institution of which they are part. Further, this commenter expressed support for the proposed definition's inclusion of those who serve or have served in the Armed Forces or dependents of military personnel. Finally, the commenter noted that the definition of “military bank” should include the U.S. Space Force, established in 2019, in the definition's listing of military service branches.

The agencies have made substantive edits to the proposed definition of “military bank” in response to these comments. First, the agencies agree that “predominantly” should be defined to clarify that a “military bank” is a bank whose most important customer group is military personnel or their dependents. This added language is consistent with the interpretation of “predominantly” in the preamble to the 1979 CRA rulemaking and codifies a decades-old interpretation that “predominantly” is not based on a numerical standard. Additionally, the agencies believe this final rule regulatory text comports with the language in the CRA statute. Second, the agencies agree with the commenter that the new U.S. Space Force should be included in the definition as a branch of the U.S. Armed Forces.

The agencies, however, declined to adopt the commenter's suggestion that the definition should include on-base branches of financial institutions that do not otherwise fit within the definition. The agencies believe such revision would be inconsistent with the CRA statute's provision regarding military banks, which refers to the business of the financial institution as predominantly consisting of serving the needs of military personnel, and not branches of a financial institution.

For the reasons stated above, the agencies are adopting a definition of “military bank” to mean a bank whose business predominantly consists of serving the needs of military personnel who serve or have served in the U.S. Armed Forces (including the U.S. Air Force, U.S. Army, U.S. Coast Guard, U.S. Marine Corps, U.S. Navy, and U.S. Space Force) or their dependents. A bank whose business predominantly consists of serving the needs of military personnel or their dependents means a bank whose most important customer group is military personnel or their dependents.

Minority Depository Institution

Current Approach and the Agencies' Proposal

The agencies proposed to add a definition of “minority depository institution (MDI)” to support the provisions in the proposal related to community development. As discussed above, and further in the section-by-section analysis of § __.13(k), the agencies proposed to create a category of “community development” that would comprise activities with MDIs, WDIs, LICUs, or CDFIs. In addition, the agencies proposed to consider, as a factor in evaluating the impact and responsiveness of any community development activity, whether the activity supports an MDI, WDI, LICU, or Treasury Department-certified CDFI. The proposed definitions also account for a provision in the CRA statute providing that the amount of any bank contribution or loss in connection with donating, selling on favorable terms, or making available on a rent-free basis any branch of the bank located in a predominantly minority neighborhood to an MDI or WDI may be a factor in determining whether the bank is meeting the credit needs of its community, which includes specific definitions of MDI and WDI.

The agencies structured the proposed “MDI” definition to provide two avenues through which an institution may qualify as an MDI. The agencies pursued this dual track structure to both ensure consistency with the CRA statute and incorporate the agencies' current policies for determining what institutions qualify as “minority-owned financial institutions” under 12 U.S.C. 2903(b). First, the agencies determined that the proposed “MDI” definition should incorporate the statutory definition of “minority depository institution” to ensure consistency with the CRA statute, which applies to certain transactions involving branches. Specifically, under 12 U.S.C. 2907 ( i.e., the statutory provision concerning donating, selling on favorable terms, or making certain branches available on a rent-free basis to a minority depository institution), “minority depository institution” is defined as a depository institution (as defined in 12 U.S.C. 1813(c)): (1) more than 50 percent of the ownership or control of which is held by 1 or more minority individuals; and (2) more than 50 percent of the net profit or loss of which accrues to 1 or more minority individuals. The agencies note that this definition is required for the narrow set of branching activities referenced in 12 U.S.C. 2907.

More broadly, 12 U.S.C. 2903 states that, in assessing an institution's record of helping to meet the credit needs of the entire community, the agencies may consider, “as a factor capital investment, loan participation, and other ventures undertaken by the institution in cooperation with minority- and women-owned financial institutions and LICUs provided that these activities help meet the credit needs of local communities in which such institutions and credit unions are chartered.” Unlike 12 U.S.C. 2907, 12 U.S.C. 2903 does not define the terms “minority-owned financial institution” or “women-owned financial institution.” Given the absence of statutory definitions, the agencies, through their respective supervisory authority, have applied criteria for determining which institutions are considered minority- or women-owned financial institutions when interpreting CRA. Therefore, the second aspect of the proposed “MDI” definition was designed to capture those institutions that the agencies recognize as “minority-owned financial institutions” pursuant to their current policies.

Specifically, the agencies proposed to define an “MDI,” for purposes other than the specified branch-related transactions under 12 U.S.C. 2907, as a bank that: (1) meets the definition under 12 U.S.C. 2907(b)(1); (2) is a minority depository institution as defined in section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C. 1463 note); or (3) is considered to be a minority depository institution by the appropriate Federal banking agency. This proposed definition is derived in part from the definition of “minority depository institution” in the Emergency Capital Investment Program enacted as part of the Consolidated Appropriations Bill of 2021, revised to be appropriate for the CRA. The agencies stated that using this statutory-based definition for purposes of CRA promotes further consistency across government programs.

Comments Received

A number of commenters addressed the proposed “MDI” definition. For example, a commenter supported a definition that would include both banks owned by minority individuals and minority-operated banks. According to the commenter, successful and growing banks need to raise outside capital, which could result in the bank no longer meeting the minority-owned definition and would therefore have the unintended consequence of keeping minority banks small.

In response to the agencies' question on whether to include minority insured credit unions recognized by the NCUA in the “MDI” definition, most commenters stated that such credit unions should be included. In addition, some commenters recommended that State-insured MDI credit unions and Puerto Rico's cooperativas also be included in this category. Commenters generally noted that such credit unions and related entities share the same purpose as MDIs, are insured and supervised, and accordingly should be treated the same as MDI banks. A commenter stated that this addition could expand the number of MDIs available to partner with banks on CRA activities. Although no commenters expressed opposition to including MDI credit unions in the definition, a commenter did suggest that smaller credit union MDIs could be included, but those with more than 50,000 members or more should be subject to additional scrutiny to ensure that 51 percent of its owners are people of color.

Final Rule

The agencies are adopting the proposed “MDI” definition in the final rule with several technical edits. First, in paragraph (1), the agencies removed the parenthetical, “( i.e., donating, selling on favorable terms (as determined by the [Agency]), or making available on a rent-free basis any branch of the bank, which is located in a predominately minority neighborhood).” This language paraphrased the cited statute, 12 U.S.C. 2907(b)(1), and is therefore not necessary. Second, the agencies made non-substantive wording changes to the definition to improve its structure and readability and to promote consistency with the statutes cited in the definition. Accordingly, the final rule defines “minority depository institution (MDI)” to mean: (1) for purposes of activities conducted pursuant to 12 U.S.C. 2907(a), “minority depository institution” as defined in 12 U.S.C. 2907(b)(1); and (2) for all other purposes: (i) a “minority depository institution” as defined in 12 U.S.C. 2907(b)(1); (ii) a “minority depository institution” as defined in section 308 of the FIRREA (12 U.S.C. 1463 note); or (iii) a depository institution considered to be a minority depository institution by the appropriate Federal banking agency. For purposes of this definition, “appropriate Federal banking agency” has the meaning given to it in 12 U.S.C. 1813(q).

As also discussed in the section-by-section analysis of § __.13(k), the agencies considered but are not including minority credit unions in the “MDI” definition. Unlike MDIs, which are independently reviewed by each agencies' staff, credit unions self-certify MDI status and the NCUA does not verify or certify the accuracy of this status. The agencies also note that there is a large overlap between minority credit unions and LICUs. Thus, a large percentage of minority credit unions will be eligible under the rule for community development consideration based on their LICU status.

In response to comments about including banks that are owned by minority individuals and minority-operated banks in the “MDI” definition, the agencies recognize that banks have varied ownership structures and need to raise capital and have considered these issues when designating MDIs. The proposed and final rule both include as a component of the definition of “MDI” banks that are considered to be minority depository institutions by the appropriate Federal banking agency. This component of the definition provides flexibility and incorporates each agency's applicable policies regarding the designation of MDIs.

Mission-Driven Nonprofit Organization

The agencies are adding a new definition for “mission driven nonprofit organization,” not included in the proposal, to support this term's use in §§ __.13 and __.42 in the final rule. Specifically, the final rule defines “mission-driven nonprofit organization” to mean an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) and exempt from taxation under section 501(a) of such Code that benefits or serves primarily low- or moderate-income individuals or communities, small businesses, or small farms.

The agencies are adopting this definition primarily to support revisions made in the final rule, based on consideration of comments, to expand the government plan eligibility criteria in the place-based community development categories to include plans, programs, or initiatives of mission-driven nonprofit organizations. The final rule also provides services that are conducted with a mission-driven nonprofit organization as one example of a qualifying community supportive service in § __.13(d). These aspects of the final rule are discussed in greater detail in the section-by-section analysis of § __.13. The final rule also uses the term mission-driven nonprofit organization for consistency as an example of detail that could be provided about a community development loan or community development investment in final § __.42.

The agencies included the first part of this definition to explicitly state that an organization must be a 501(c)(3) organization to qualify as a mission-driven nonprofit organization. Further, the definition specifies that these organizations benefit or serve primarily low- or moderate-income individuals, small businesses, or small farms. The agencies believe that, with these two core components, the definition of mission-driven nonprofit organization is appropriately tailored to capture entities that are dedicated to benefiting and serving low- and moderate-income individuals or communities, small businesses, or small farms while being sufficiently narrow not to permit a broad expansion of eligibility criteria under the place-based community development categories. The agencies also believe that this definition is consistent with the types of organizations that the agencies proposed would be partners with banks in conducting community development. For example, the proposal included a discussion of nonprofit organizations in reference to the proposed affordable housing category of community development in proposed § __.13(b), as well as in relation to community supportive services in proposed § __.13(d).

MSA

Under the current CRA regulations, the agencies define “MSA” to mean a metropolitan statistical area as defined by the Director of the OMB. The agencies proposed maintaining this definition but changing the defined term from “MSA” to “metropolitan statistical area (MSA)” and with minor technical wording changes. The agencies did not receive any comments on this proposed definition. However, after further consideration, the agencies are reverting back to the current defined term “MSA” in the final rule because “MSA” is the term known and understood by the industry. The agencies are also reverting the wording of the definition back to its current form to be consistent with the wording of other definitions and making minor technical changes to reference OMB delineation and to add OMB authority citations. Accordingly, the agencies are defining “MSA” to mean a metropolitan statistical area delineated by the Director of the Office of Management and Budget, pursuant to 44 U.S.C. 3504(e)(3) and (10), 31 U.S.C. 1104(d), and Executive Order 10253 (June 11, 1951).

Mortgage-Related Definitions

Under the current CRA regulations, the agencies define “home mortgage loan” to mean a closed-end mortgage loan or an open-end line of credit as defined under 12 CFR 1003.2 (Regulation C), the CFPB's HMDA implementing regulations, that is not an excluded transaction under 12 CFR 1003.3(c)(1) through (10) and (13). The agencies proposed to amend the current “home mortgage loan” definition to refer to an “open-end home mortgage loan” rather than an “open-end line of credit,” with no intent to change the meaning. The agencies also proposed to remove the cross-reference to the CFPB's Regulation C and add new definitions for “closed-end home mortgage loan” and “open-end home mortgage loan,” which would have the same meanings given to “closed-end mortgage loan” and “open-end line of credit” in 12 CFR 1003.2(d) and (o), respectively, excluding multifamily loans as defined in proposed § __.12. “Closed-end home mortgage loan” is defined in 12 CFR 1003.2(d) to mean an extension of credit that is secured by a lien on a dwelling and that is not an open-end line of credit under the HMDA regulations. “Open-end line of credit” is defined in 12 CFR 1003.2(o) to mean an extension of credit that is secured by a lien on a dwelling and is an open-end credit plan as defined in CFPB's Regulation Z, 12 CFR 1026.2(a)(20), but without regard to whether the credit is consumer credit, as defined in 12 CFR 1026.2(a)(12), is extended by a creditor, as defined in 12 CFR 1026.2(a)(17), or is extended to a consumer, as defined in 12 CFR 1026.2(a)(11).

The agencies proposed to add separate definitions for “closed-end home mortgage loan” and “open-end home mortgage loan,” because, as discussed further in the section-by-section analysis of § __.22, given their distinct characteristics, these types of loans would be considered separately under the proposed Retail Lending Test. The agencies' proposed definitions of these terms are consistent with the current “home mortgage loan” definition, which cross-references 12 CFR 1003.2 to define closed-end home mortgage loans and open-end lines of credit. The agencies excluded multifamily loans from the definitions of “closed-end home mortgage loan” and “open-end home mortgage loan” because the proposal included a separate definition for “multifamily loan” that covers different transactions (as discussed below in the section-by-section analysis). This exclusion was necessary because, under the proposal, the agencies could consider multifamily loans, unlike other closed-end home mortgage loans, under the Community Development Financing Test in § __.24. The agencies also proposed this exclusion of multifamily loans because multifamily loans were a distinct category of retail loan which could qualify as a major product line under the Retail Lending Test in § __.22.

A commenter requested that the excluded transaction language in the definition of “home mortgage loan” referencing 12 CFR 1003.3(c)(1) through (10) and (13) be narrowed to 12 CFR 1003.3(c)(1), (5), (7) through (10), and (13). In particular, the commenter objected to the current definition's exclusion of loans secured by unimproved land (12 CFR 1003.3(c)(2)), expressing the view that this would penalize financial institutions for lending to builders or individuals seeking to build in low- and moderate-income communities. Similarly, the commenter objected to the exclusion of temporary financing (12 CFR 1003.3(c)(3)), such as bridge financing or a loan for home construction, asserting that this could undermine a financial institution's ability to finance the construction of homes in low- and moderate-income communities, even if the financing is only on a temporary basis. The commenter objected to excluding from the “home mortgage loan” definition purchased closed-end home mortgage loans and open-end lines of credit, whether as a pool of credits or through an acquisition or merger (12 CFR 1003.3(c)(4) and (6)), explaining that financial institutions are purchasing whole loans and servicing rights and not merely purchasing an investment vehicle, and that purchasing loan pools also permits financial institutions to meet the credit needs of their communities despite not having the resources to generate these loans one transaction at a time.

The agencies decline to revise the excluded transactions language. As under the current CRA regulations, the agencies intend to leverage HMDA data in the final rule, i.e., data reported pursuant to 12 CFR part 1003, which allows for sufficient data for analysis while not increasing the data collection or reporting burden on these banks, as part of the CRA evaluation framework. If the agencies narrowed the number of excluded transactions as requested by the commenter, HMDA reporters would be required to produce additional data that exceeds their current HMDA reporting obligations, which would both increase burden for banks and add complexity to CRA examinations.

Further, the agencies note that the exclusion of purchased closed-end home mortgage loans and open-end lines of credit from the “home mortgage loan” definition does not mean that they are not considered under the CRA regulations. For a more detailed discussion of the CRA regulations' consideration of purchased loans, see the section-by-section analysis of final § __.22, Retail Lending Test.

After consideration of commenters' concerns and recommendations and further review of the proposed definitions in light of other aspects of the final rule, the agencies are adopting the definitions of “home mortgage loan,” “closed-end home mortgage loan,” and “open-end home mortgage loan” with technical changes. First, the agencies have moved the HMDA exclusions from the definition of “home mortgage loan” to the definitions of “closed-end home mortgage loan” and “open-end home mortgage loan,” where the exclusions are more appropriately located. Second, the agencies have removed the specific paragraph designations in the cross-references to the HMDA definitions so that they now read “12 CFR 1003.2” instead of 12 CFR 1003.2(d) and (o) so that these cross-references remain accurate if the CFPB modifies this section in the future. Accordingly, under the final rule:

• “home mortgage loan” means a closed-end home mortgage loan or an open-end home mortgage loan as these terms are defined in final § __.12;
• “closed-end home mortgage loan” has the same meaning given to the term “closed-end mortgage loan” in 12 CFR 1003.2, excluding loan transactions set forth in 12 CFR 1003.3(c)(1) through (10) and (13) and multifamily loans as defined in final § __.12; and
• “open-end home mortgage loan” has the same meaning as given to the term “open-end line of credit” in 12 CFR 1003.2, excluding loan transactions set forth in 12 CFR 1003.3(c)(1) through (10) and (13) and multifamily loans as defined in final § __.12.

Multifamily Loan

The agencies proposed to add a new definition of “multifamily loan” and define it to mean a loan for a “multifamily dwelling” as defined in 12 CFR 1003.2(n) in the CFPB's Regulation C, which implements HMDA. Multifamily dwelling is defined in 12 CFR 1003.2(n) to mean a dwelling, regardless of construction method, that contains five or more individual dwelling units. The agencies intended the proposed definition to correspond to the proposal to treat multifamily loans separately from closed-end and open-end home mortgage loans, given their distinct characteristics. The proposal for considering “multifamily loans” is discussed in detail in the section-by-section analyses of §§ __.22 (Retail Lending Test) and __.13(b) (affordable housing category of community development).

The agencies did not receive any comments on this definition and are adopting it as proposed, with two changes. First, the agencies are replacing “loan” with “an extension of credit that is secured by a lien” in the final rule to make this term consistent with HMDA. Second, the agencies have removed the specific paragraph designations in the cross-references to the CFPB's definition so that it now reads “12 CFR 1003.2” instead of “12 CFR 1003.2(n).” Accordingly, “multifamily loan” is defined in the final rule to mean an extension of credit that is secured by a lien on a “multifamily dwelling” as defined in 12 CFR 1003.2.

Multistate MSA

The agencies proposed to add a new definition of “multistate metropolitan statistical area (multistate MSA)” and define it to have the same meaning given to that term by the Director of the OMB. As discussed in detail in the section-by-section analysis of § __.28, under the proposal, the agencies would assign conclusions for a bank's performance under each applicable performance test and ratings for a bank's overall CRA performance across performance tests at the State, multistate MSA, and institution levels. The agencies did not receive any comments related to the proposed “multistate metropolitan statistical area” definition.

The agencies are adopting a definition of this term in the final rule with technical changes. First the agencies revised the definition to remove the cross-reference to the OMB definition and instead are defining the term to mean an MSA that crosses a State boundary, which is the agencies' intended meaning of this term. The agencies made this revision to reflect the fact that “multistate metropolitan statistical area” is not a term defined by the Director of the OMB. Instead, the Director of OMB defines the term “MSA,” and the final rule defines “MSA” by cross-referencing to this OMB definition. Second, consistent with the change discussed above under the definition of “MSA,” the agencies are replacing “metropolitan statistical area” with “MSA.” Thus, the resulting defined term will be “multistate MSA” instead of “multistate metropolitan statistical area.” Accordingly, “multistate MSA” is defined in the final rule to mean an MSA that crosses a State boundary.

Nationwide Area

The agencies proposed to add a new definition for “nationwide area” to support the proposal to evaluate a bank's community development financing activities in a “nationwide area,” as discussed below in the section-by-section analyses of §§ __.24 through __.27; the proposal to evaluate large banks' and certain intermediate banks' retail lending performance in “outside retail lending areas,” as discussed in the section-by-section analysis of § __.18, which would include the “nationwide area” outside of a bank's assessment areas; the proposal's impact and responsiveness review, as discussed in the section-by-section analysis of § __.15; and the proposal's data collection, maintenance, and reporting requirements, as discussed in the section-by-section analysis of § __.42. Specifically, the agencies proposed that “nationwide area” would mean “the entire United States and its territories.”

The agencies received one comment requesting clarity on what the agencies meant by the term “nationwide area,” recommending that the agencies define this term to include the broader regional areas beyond defined multistate MSAs. In this way, the commenter theorized that banks could receive credit for financing activities like affordable housing in a particular region of the United States that cover multiple States but where that region is not a defined multistate MSA. This commenter misunderstands the scope of the proposed “nationwide area” definition. “Nationwide area” includes the entirety of the United States and its territories, and is not limited to multistate areas. The allocation of community development financing activities, including how an activity that benefits more than one State but not the entire nation will be attributed, is discussed in the section-by-section analysis of § __.24. Thus, the agencies are adopting the definition of “nationwide area” as proposed in the final rule.

Native Land Area

The Agencies' Proposal

The agencies proposed to add a new definition of “Native Land Area” to provide clarity in support of the proposal's encouragement of activities that address the significant and unique community development challenges in these areas. The proposal sought to encourage these activities through the proposed establishment of a category of community development for qualifying activities in Native Land Areas, discussed in the section-by-section analysis of § __.13(j), and by considering the impact and responsiveness of a bank's community development activities that benefit Native communities, such as community development activities in Native Land Areas under § __.13(j), discussed in the section-by-section analysis of § __.15(b)(8).

Native American land ownership is complex, and lands can have a complicated and intermingled mix of land ownership status involving various statutes, regulations, titles, and restrictions. The agencies intended the proposed “Native Land Area” definition to be responsive to stakeholder feedback provided during outreach prior to the issuance of the proposal indicating support for a geographic definition broader than the definition of Indian country under 18 U.S.C. 1151, and to include lands such as Hawaiian Home Lands, as well as other lands typically considered Native and tribal lands with unique political status under established Federal Indian law. The proposed “Native Land Area” definition leveraged other Federal and State designations of Native and tribal lands, as well as the OCC 2020 CRA Final Rule, and included areas typically considered by the Bureau of Indian Affairs (BIA) and the U.S. Census Bureau as Native geographic areas. Accordingly, the proposed “Native Land Area” definition included all geographic areas delineated as U.S. Census Bureau American Indian/Alaska Native/Native Hawaiian (AIANNH) Areas and/or BIA Land Area Representations. For example, the proposed definition included State American Indian reservations established through a governor-appointed State liaison that provides the names and boundaries for State-recognized American Indian reservations to the Census Bureau.

Specifically, under the proposal, “Native Land Area” would mean: (1) all land within the limits of any Indian reservation under the jurisdiction of the U.S. Government, as described in 18 U.S.C. 1151(a); (2) all dependent Indian communities within the borders of the United States whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a State, as described in 18 U.S.C. 1151(b); (3) all Indian allotments, the Indian titles to which have not been extinguished, including rights-of-way running through the same, as defined in 18 U.S.C. 1151(c); (4) any land held in trust by the United States for Native Americans, as described in 38 U.S.C. 3765(1)(A); (5) reservations established by a State government for a tribe or tribes recognized by the State; (6) any Alaska Native Village as defined in 43 U.S.C 1602(c); (7) lands that have the status of Hawaiian Home Lands as defined in section 204 of the Hawaiian Homes Commission Act, 1920 (42 Stat. 108), as amended; (8) areas defined by the U.S. Census Bureau as Alaska Native Village Statistical Areas, Oklahoma Tribal Statistical Areas, Tribal-Designated Statistical Areas, or American Indian Joint-Use Areas; and (9) land areas of State-recognized Indian tribes and heritage groups that are defined and recognized by individual States and included in the U.S. Census Bureau's annual Boundary and Annexation Survey.

Comments Received

The agencies received many comments concerning the proposed “Native Land Area” definition, discussed below.

Geographic areas included in the definition. Some commenters expressed support for the geographic areas included in the proposed definition. For example, a commenter supported such an inclusive list given the past and ongoing discrimination against Indigenous people and communities. Another commenter recognized the proposal's relatively comprehensive list of defined Native American lands, further indicating that accurately and comprehensively identifying Native lands is difficult because of the fragmented ownership of Native lands arising from historical Federal land allotment policies. This commenter also recommended that the agencies provide a single source file made available once the definition is agreed on. Another commenter expressed support for ensuring that all Native people in Alaska and Hawaii would be covered under the definition.

In contrast, some commenters recommended broadening the definition to include additional geographic areas. Several other commenters supported the ability for tribes to designate lands eligible for CRA qualification, with some supporting the inclusion of “unceded” lands, i.e., lands without a formal agreement with the government and controlled by non-tribal interests but that tribes consider historically Native lands, as part of the definition in light of prior Federal dispossession policies. Another commenter suggested that the definition should be connected to census geographies.

Several other comments recommended that the “Native Land Area” definition should include Native American Pacific Islands including Guam, American Samoa, and the Commonwealth of the Mariana Islands. A few commenters expressed support for adding tribal fee lands citing the loss of tribal lands due to earlier Federal policies aimed at dispossessing tribes, with one commenter stating that this would be consistent with the current Federal policy of encouraging tribal self-determination and with principles of tribal sovereignty. This commenter also noted that the process of gaining Federal trust status for tribal fee lands (which would then meet the definition of “Native Land Area” pursuant to proposed § __.12, addressing lands held in trust) is expensive and time consuming.

Geographic areas outside of the proposed definition. Many commenters supported broadening the “Native Land Area” definition to include activities benefiting Native individuals and communities outside of proposed geographic areas. Several commenters asserted that activities benefiting Native Americans should qualify anywhere and cited that the majority of American Indian, Alaska Native, and Native Hawaiian people live outside the Native Land Areas covered by the proposed definition. A group of commenters further stated that the proposed definition would limit the ability of Native CDFIs, tribal governments, and other entities to secure CRA-qualified investments to support Native communities residing within their respective service areas but outside of the proposed “Native Land Area” definition. A commenter supported including service areas adjacent to reservations, where a large number of tribal members live or tribal programs are distributed, to help facilitate better community revitalization activities. However, alternatively, a commenter asserted that qualification for activities should not extend past designated geographic areas.

Alternative approaches for designating geographic areas. A commenter suggested that, rather than focusing on activities in Native Land Areas, the agencies consider a metric-based determination for where activities could qualify, in conjunction with Native-led organizations and CDFIs, that would consider capital access in Native American communities. This commenter suggested that the agencies additionally include a weighting factor for banks investing in rural and remote Native American communities that might not have any credit or capital access. In support of these ideas, the commenter indicated that some populations covered in the “Native Land Area” definition have access to credit and successful economic development opportunities, while some Native American communities not in Native Land Areas as defined under the proposal do not. Another commenter asserted that the definition of “Native Land Area” should use an alternative geographic criterion for qualifying activities, instead including qualification for activities in census tracts with a greater than 40 percent Native American population and earning less than 100 percent of the average median family income.

Final Rule

The agencies are adopting the “Native Land Area” definition as proposed with a few technical changes. First, the agencies have revised paragraph (4) of the definition to include any land held in trust by the United States for tribes or Native Americans or tribally-held restricted fee land. This change more clearly effectuates the agencies' intent in the proposal to include in the definition both individually- and tribally-owned restricted fee lands as well as land held in trust by the United States for both tribes and individuals. This change also aligns the definition with available BIA data, which covers both individually-held and tribally-held restricted fee and trust lands. The agencies are also removing the cross-reference to “38 U.S.C. 3765(1)(A)” in paragraph (4) as redundant. Finally, the agencies are making a technical change to paragraph (6), which covers Alaska Native villages, to use the term defined in the cited statute; as a result, the final rule references “Any Native village, as defined in 43 U.S.C. 1602(c), in Alaska.”

The “Native Land Area” definition in the final rule is intended to align with existing and established Federal Indian law regarding lands and communities with unique political status. The final rule is also intended to be responsive to stakeholder feedback received at all stages of this rulemaking, indicating support for a comprehensive geographic definition of “Native Land Areas.” The final definition focuses on lands and communities that, as noted by commenters, have generally experienced little or no benefits from bank access or investments.

The agencies have carefully considered commenters' suggestions for expanding the geographic areas included in the definition, and are sensitive to the many complexities underlying the development of a “Native Land Area” definition, including the impacts of varying historical policies regarding land ownership and political status. However, the agencies are concerned that substantively expanding the “Native Land Area” definition could inadvertently create new precedent by incorporating lands without a similar unique political status as those lands included under the definition, and further could be impracticable where data is not currently collected, reported, or readily available. The agencies believe it is important for stakeholders and examiners to have access to and utilize a consistent and comparable data set.

The agencies also decline to expand the “Native Land Area” definition to incorporate areas outside of the proposed geographic areas where Native individuals may also reside, or to use alternative metrics for defining Native Land Areas. The agencies are concerned about precedential impact, as well as the practicality of implementation, such a change would have, particularly with a highly dispersed population. Further, complex land ownership structures associated with the lands falling within the final definition can make economic development in those lands particularly difficult, which the agencies believe support a more specific focus on those lands. The agencies note that activities benefiting Native individuals and communities outside a designated Native Land Area may qualify for CRA consideration under another community development purpose as provided in § __.13. (For a detailed discussion of these community development categories under the final rule, see the section-by-section analysis of § __.13.) For example, a loan to support the development of a multifamily housing project to benefit low- and moderate-income tribal individuals outside of a Native Land Area would qualify for consideration under § __.13(b) (affordable housing) if a portion of the project's housing units are affordable. The agencies also note that the final rule incorporates various impact and responsiveness review factors under § __.15 for examiners to consider in evaluating a bank's community development activities. This includes an impact and responsiveness factor for areas with low levels of community development financing and activities serving low-income individuals and families that may apply to activities benefiting Native Americans living adjacent to or otherwise outside a Native Land Area.

Finally, as noted in the proposal, robust, publicly available data files (“shapefiles”), defining the boundaries of the geographic areas adopted in the final rule are actively maintained by the U.S. Census Bureau and BIA, respectively. The agencies anticipate making this data readily available to stakeholders as part of the agencies' regulatory implementation efforts, which, among other benefits, the agencies anticipate will facilitate stakeholders' ability to engage with confidence in CRA-eligible activities and enhance the transparency of the agencies' consideration of those activities.

In adopting the “Native Land Area” definition, the agencies sought to maintain consistency with established categories of Native Land Areas. On balance, the agencies believe the final rule's definition is as comprehensive as feasible to ensure alignment with current Federal Indian law and to support the rule with durable, publicly available data sources. This, in turn, will make identifying Native Land Areas practicable for stakeholders and facilitate their ability to engage in and track CRA-eligible activities.

New Markets Tax Credit

As a clarification, the final rule includes a definition for “New Markets Tax Credit (NMTC),” not included in the proposed rule, to mean a Federal tax credit pursuant to section 45D of the Internal Revenue Code of 1986 (26 U.S.C. 45D). The final rule uses this term in § __.15(b)(10) as one of the impact and responsiveness factors and in § __.42(a)(5)(ii) as part of the data collection of community development loans and community development investments, including whether the community development loan or community development investment is an investment in a project financed by NMTCs. The proposal used this term in proposed § __.42 but did not define it.

Nonmetropolitan Area

The agencies proposed no changes to the current “nonmetropolitan area” definition, which would continue to mean any area that is not located in an MSA. The agencies did not receive any comments concerning the “nonmetropolitan area” definition and are adopting it as proposed in the final rule.

Open-End Home Mortgage Loan

For a discussion of the definition of “open-end mortgage loan,” see the discussion above for Mortgage-Related Definitions.

Operations Subsidiary or Operating Subsidiary

The Board proposed to add a definition of “operations subsidiary” to its CRA regulations, and the OCC and FDIC proposed to add a definition of “operating subsidiary” to their respective CRA regulations. The agencies each proposed their own definitions because of differences in their supervisory authority. The agencies proposed these changes to identify those bank affiliates whose activities would be required to be attributed to a bank's CRA performance pursuant to proposed § __.21, Performance Tests, standards, and ratings, and § __.28, Assigned conclusions and ratings.

Specifically, the Board proposed to define “operations subsidiary” to mean an organization designed to serve, in effect, as a separately incorporated department of the bank performing at locations at which the bank is authorized to engage in business, functions that the bank is empowered to perform directly.

The FDIC proposed to define “operating subsidiary” to mean an operating subsidiary as described in 12 CFR 5.34. The OCC proposed to define “operating subsidiary” to mean an operating subsidiary as described in 12 CFR 5.34 in the case of an operating subsidiary of a national bank or an operating subsidiary as described in 12 CFR 5.38 in the case of a savings association.

Regarding comments concerning the definitions of “operations subsidiary” and “operating subsidiary,” a commenter stated that the proposed definition of an “operations subsidiary” and “operating subsidiary” appear reasonable. The commenter stated that, generally, there should be uniformity in these and other definitions across all Federal agencies that receive financial institution data or reports. Another commenter recommended that the agencies avoid defining operations subsidiary and operating subsidiary too broadly. The commenter stated that it is not correct that financial institutions universally exercise “a high level of ownership, control, and management” of all affiliates, which in some circumstances may be considered as “subsidiaries.” As an example, the commenter stated that numerous CDFI banks have nonprofit affiliates that provide substantial mission support, but these nonprofit organizations often have their own boards of directors, have been capitalized in a variety of ways, and control is exercised in different manners as well.

For the reasons stated below, the Board is adopting the proposed definition of “operations subsidiary,” and the FDIC and OCC are adopting the proposed definitions of “operating subsidiary.” The agencies believe that the proposed definitions of “operations subsidiary” and “operating subsidiary” are sufficiently consistent based on the agencies' respective statutory authorities and mandates. In addition, the agencies do not believe these proposed definitions are too broad. If an entity meets the definition of affiliate, and not the definition of operation subsidiary or operating subsidiary, it will not be treated as an operations subsidiary or operating subsidiary under the CRA regulations. Further, the agencies elected not to change these definitions because the description of these terms in the agencies' CRA regulation should not differ from the description of these terms in other contexts.

Other Delivery System

The agencies are adopting a new definition of “other delivery system,” not included in the proposal, to mean a “channel, other than branches, remote services facilities, or digital delivery systems, through which banks offer retail banking services.” This may include telephone banking, bank-by-mail, or bank-at-work.

For a more detailed discussion of the meaning of other delivery system, see the section-by-section analysis of § __.23(b)(4).

Outside Retail Lending Area

As discussed above, the agencies proposed to replace the term “assessment area” in § __.12 with the terms “facility-based assessment area,” “retail lending assessment areas,” and “outside retail lending areas.” The agencies proposed to define the new term “outside retail lending area” to mean the nationwide area outside of a bank's facility-based assessment areas and, as applicable, retail lending assessment areas. The agencies proposed this new term as part of the proposed Retail Lending Test. In particular, under the proposed Retail Lending Test, the agencies would evaluate the retail lending performance of large banks and certain intermediate banks in areas outside of facility-based assessment areas and retail lending assessment areas, as applicable.

The final rule now includes a new section that describes the bases for delineating outside retail lending areas. Therefore, the more detailed proposed definition of outside retail lending areas is not necessary, and instead the final rule defines “outside retail lending area” to mean the area delineated pursuant to § __.18. Comments pertaining to the proposed outside retail lending area provisions, as well as detailed information regarding the final rule's outside retail lending area delineation requirements, are described in the section-by-section analysis of § __.18.

Persistent Poverty County

The agencies included in proposed § __.15(b)(1) a definition of “persistent poverty county” to mean a county or county-equivalent that had poverty rates of 20 percent or more for the past 30 years, as measured by the most recent decennial censuses. This definition appeared in proposed § __.15(b) in connection with a list of factors (termed “impact review” factors in the proposal) relevant for evaluating the impact and responsiveness of community development activities.

In the final rule, the agencies are moving the “persistent poverty county” definition to § __.12 for ease of reference, as the term appears in both final § __.15(b)(1) (finalized as an impact and responsiveness review factor) and the corresponding data collection provision in final § __.42(a)(5) and (6). Further, consistent with the revision to the definition of “county,” discussed above, “county-equivalents” has been removed from the definition of “persistent poverty county” in the final rule. Lastly, the agencies are replacing the phrase “as measured by the most recent decennial censuses” with reference to a list of counties designated by the Board, FDIC, and OCC and published by the FFIEC. Among other things, this change will provide for statistical reliability while also allowing for regular data updates as conditions change. For a more detailed discussion of the definition of “persistent poverty county,” comments received on the definition, and the final impact and responsiveness review factor associated with this term, see the section-by-section analysis of § __.15(b).

Accordingly, the agencies are adopting a definition of “persistent poverty county” in the final rule that means as a county that has had poverty rates of 20 percent or more for 30 years, as publicly designated by the Board, FDIC, and OCC, compiled in a list, and published annually by the FFIEC.

Product Line

The agencies are adopting a new definition of “product line” in the final rule, not included in the proposal. The final rule defines “product line” to mean a bank's loans in one of the following, separate categories in a particular Retail Lending Test Area: (1) closed-end home mortgage loans; (2) small business loans; (3) small farm loans; and (4) automobile loans, if a bank is a majority automobile lender or opts to have its automobile loans evaluated pursuant to § __.22. As discussed in greater detail in the section-by-section analysis of § __.22, the definition of “product line” is intended to increase clarity regarding identifying those bank product lines that may potentially be subject to evaluation under the Retail Lending Test, as applicable.

Remote Service Facility

The Board's and OCC's current CRA regulations define the term “automated teller machine (ATM)” to mean an automated, unstaffed banking facility owned or operated by, or operated exclusively for, the bank at which deposits are received, cash dispersed, or money lent. The FDIC's CRA regulation instead contains a definition for “remote service facility,” which has the same definition as the Board's and OCC's definition of ATM but also includes a list of examples, specifically, automated teller machine, cash dispensing machine, point-of-sale terminal, or other remote electronic facility. The proposal would replace the Board's and OCC's “ATM” definitions with a definition of “remote service facility” that would include ATMs and update the FDIC's existing definition of “remote service facility.

Specifically, the proposal defined “remote service facility” to mean an automated, virtually staffed, or unstaffed banking facility owned or operated by, or operated exclusively for, a bank, such as an ATM, interactive teller machine, cash dispensing machine, or other remote electronic facility at which deposits are received, cash dispersed, or money lent. The agencies believed the proposed definition better reflects changes in the way that banks deliver banking services.

The agencies requested feedback as to whether the proposed “remote service facility” definition includes sufficient specificity for the types of facilities and circumstances under which banks would be required to delineate facility-based assessment areas, or whether other changes to the CRA regulations are necessary to better clarify when the delineation of facility-based assessment areas would be required. A commenter suggested that the “remote service facility” definition should include ATMs that are not owned or operated by, or operated exclusively for financial institutions, noting the importance of low- and moderate-income individuals' access to independent ATMs. Several commenters recommended that deposit-taking remote service facilities should include any bank partnerships with third parties involving remote or virtual banking services, with another commenter suggesting ATM networks operated by a third party. The agencies have declined to explicitly incorporate remote services facilities that are not owned or operated by, or operated exclusively for, a bank into the “remote service facility” definition because of the tenuous connections of these ATMs to a bank. The agencies do not believe that a non-proprietary remote service facility, such as a network ATM, constitutes a bank facility because such ATMs are owned and operated by a third party. Further, a bank participating in such an ATM network may have limited control over where an ATM is located. The agencies note that the current definition of “ATM” requires that the ATM be owned or operated by, or operated exclusively for, the bank.

Therefore, the agencies are adopting the proposed definition of “remote service facility” in the final rule with two clarifying changes. First, the definition now provides that a remote service facility must be open to the general public. The agencies believe this substantive change clarifies that this definition only captures those remote deposit facilities that benefit the credit needs of the bank's local community by having a public facing presence. Second, the definition in the final rule now provides that deposits are “accepted” instead of “received.” This change was made to describe the facility's interaction more accurately with the public.

Accordingly, the final rule provides that “remote service facility” means an automated, virtually staffed, or unstaffed banking facility owned or operated by, or operated exclusively for, a bank, such as an automated teller machine (ATM), interactive teller machine, cash dispensing machine, or other remote electronic facility, that is open to the general public and at which deposits are accepted, cash dispersed, or money lent.

Reported Loan

To enhance clarity in the final rule, the agencies are adding a new definition of “reported loan,” not included in the proposal, defined to mean: (1) a home mortgage loan or a multifamily loan reported by a bank pursuant to HMDA, as implemented by 12 CFR part 1003; or (2) a small business loan or a small farm loan reported by a bank pursuant to § __.42. This term is primarily used in the Retail Lending Test (final § __.22 and appendix A) to specify where only reported loans are used in certain benchmarks. In addition, the term is used in defining when a retail lending assessment area must be delineated pursuant to final § __.17. For a detailed discussion of the Retail Lending Test, see the section-by-section analysis of final § __.22 (also addressing appendix A), and for a discussion of retail lending assessment areas, see the section-by-section analysis of § __.17.

The agencies have included an amendment to transition the definition of “reported loan” to reference small business loans and small farm loans reported by a bank pursuant to the CFPB Section 1071 Final Rule after the section 1071 data is available.

Retail Banking Products

The final rule includes a new definition of “retail banking products,” not included in the proposed rule, to clarify the agencies' intended meaning of the term in final § __.23 (Retail Services and Products Test). Specifically, the final rule defines “retail banking products” to mean credit and deposit products or programs that facilitate a lending or depository relationship between the bank and consumers, small businesses, or small farms. For additional discussion of retail banking products, see the section-by-section analysis of § __.23.

Retail Banking Services

The agencies proposed to add a new definition of “retail banking services” to increase clarity and consistency in the CRA regulations, particularly with respect to the proposed Retail Services and Products Test. The agencies proposed to define “retail banking services” to mean retail financial services provided by a bank to consumers, small businesses, and small farms, and to include a bank's systems for delivering retail financial services. The agencies did not receive any comments concerning the proposed “retail banking service” definition and are adopting the definition as proposed in the final rule with a non-substantive wording change.

Retail Lending Assessment Area

As discussed above, the agencies proposed to replace the term “assessment area” in § __.12 with the terms “facility-based assessment area,” “retail lending assessment areas,” and “outside retail lending areas.” The agencies proposed to define the term “retail lending assessment area” to mean a geographic area, separate and distinct from a facility-based assessment area, delineated in accordance with § __.17. The agencies proposed this new term as part of the proposed Retail Lending Test.

The agencies did not receive any comments specific to the proposed definition of “retail lending assessment area.” However, the agencies received numerous comments regarding the retail lending assessment area approach, which are discussed in the section-by-section analysis of § __.17. To be consistent with the “facility-based assessment area” and “outside retail lending area” definitions in the final rule, the agencies are revising the “retail lending assessment area” definition in the final rule. Specifically, the agencies are removing the phrase “separate and distinct from a facility-based assessment area” and replacing “in accordance with” with “pursuant to.” Accordingly, the final rule defines “retail lending assessment area” to mean “a geographic area delineated pursuant to § __.17.” Detailed information regarding the final rule's retail lending assessment area delineation requirements is included in the section-by-section analysis of § __.17.

Retail Lending Test Area

In the final rule, the agencies are adding a new definition of “Retail Lending Test Area,” not included in the proposal, to mean a facility-based assessment area, a retail lending assessment area, or an outside retail lending area. The agencies believe this definition will increase the final rule's consistency and improve its readability with respect to referencing retail lending assessment areas, facility-based assessment areas, and outside retail lending areas, both individually and collectively, for purposes of the Retail Lending Test.

Retail Loan

In relation to the proposed Retail Lending Test, the agencies proposed to add a new definition of “retail loan” to mean, for purposes of the Retail Lending Test in § __.22, an automobile loan, closed-end home mortgage loan, open-end home mortgage loan, multifamily loan, small business loan, or small farm loan. For all other purposes, retail loan would mean a consumer loan, home mortgage loan, small business loan, or small farm loan. The agencies did not receive any comments concerning this proposed definition. However, after further review, the agencies have elected not to adopt a definition of “retail loan” in § __.12 in the final rule. Instead, the agencies are adopting a definition of “product line” in the final rule, which references loan categories relevant to the Retail Lending Test.

Small Bank

For a discussion of the definition of “small bank,” see the discussion above for Bank Asset-Size Definitions.

Small Business and Small Farm

Current Approach and the Agencies' Proposal

The agencies proposed to add definitions of “small business” and “small farm,” as they are not defined in the current CRA regulations. Instead, the current CRA regulations define “community development” to be activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the SBA's Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less. The current regulations also consider the borrower distribution of small business loans and small farm loans to businesses and farms with gross annual revenues of $1 million or less.

The proposal would define “small business” to mean “a business that had gross annual revenues for its preceding fiscal year of $5 million or less” and “small farm” to mean “a farm that had gross annual revenues for its preceding fiscal year of $5 million or less.” The agencies proposed these definitions to support the evaluation of retail lending under the proposed Retail Lending Test and community development loans and investments supporting small businesses and small farms that would be evaluated under the proposed Community Development Financing Test. These proposed definitions were consistent with the definitions for “small business” proposed by the CFPB in its section 1071 rulemaking.

Comments Received

The agencies received numerous comments related to the proposed “small business” and “small farm” definitions. Some commenters expressed support for the proposed definitions, while other commenters recommended the agencies adopt the definitions with various changes or implement new definitions that incorporate different criteria.

Specifically, many commenters supported the proposal to adopt size standards for small businesses and small farms that would be consistent with the proposed small business size standard in the CFPB's section 1071 rulemaking ( i.e., gross annual revenues of $5 million or less for the preceding fiscal year). In general, these commenters asserted that consistent definitions across regulations and regulators would provide for reporting consistency and efficiency with less burden. Several other commenters stated that, although they believed that the gross annual revenues of $5 million or less proposed by the CFPB was too high, they supported aligning the definitions with the CFPB's section 1071 rulemaking even if the CFPB later adopted the larger size threshold in its Section 1071 Final Rule. Some commenters suggested that the small business size standard should be as consistent as possible with both the CFPB's section 1071 rulemaking and the SBA's small business size standards.

However, other commenters opposed the proposal to align the size standards for small businesses and small farms with the proposed small business size standard in the CFPB's section 1071 rulemaking. Many of these commenters generally stated that the proposed small business and small farm size standards are unusually high because the vast majority of small businesses have gross annual revenues significantly below $5 million. Moreover, a few of these commenters stated that CRA's focus should be on the credit needs of the smallest businesses, with some commenters expressing concern that the proposed $5 million threshold would result in capital being redirected to larger businesses. Several commenters also emphasized that aligning the “small business” and “small farm” definitions with the CFPB's size standard would be inappropriate because section 1071 serves a different purpose than the CRA; namely, the threshold proposed by the CFPB establishes reporting requirements that would facilitate enforcement of fair lending laws. A few commenters also stated that it was not prudent for the agencies to propose a size standard based on a proposed rule.

Many commenters that opposed aligning the small business and small farm size standards with the CFPB's section 1071 proposed small business size standard recommended a range of alternative thresholds for consideration. A commenter recommended that the agencies adopt the SBA's small business size standards. Another commenter recommended that a small business definition should encompass manufacturing businesses with 500 or fewer employees and other businesses with gross annual revenues up to $8 million. One other commenter argued in favor of an $8 million gross annual revenues threshold, asserting that this figure is the most common size standard threshold for average annual business receipts and would capture a majority of small businesses. Another commenter recommended that the agencies define “small business” and “small farm” based on loan size rather than gross annual revenues but did not specify an amount. One other commenter supported a threshold of gross annual revenues of $1 million or less because many large banks only have system codes for gross annual revenues that indicate whether a business is above or below $1 million, but not the actual threshold.

Other commenters requested clarifications of the definitions of “small business” and “small farm” or offered additional comments regarding these definitions. A commenter requested clarity on the treatment of revenues for affiliated businesses and guarantors, and how to calculate the revenues of small businesses or small farms when a line of credit is renewed (and updated revenue information is not collected). A few other commenters noted that defining small business and small farm by reference to gross annual revenues could create difficulty at the beginning of a calendar year, when borrowers may not have reliable revenue figures for the preceding year. Both commenters suggested that banks should be able to use prior-year revenue figures under these circumstances. Another commenter stated there should be clear guidance on how gross annual revenues should be determined to better provide reporting and examination consistency.

A commenter suggested that the agencies adopt a consistent definition of “small business” and “small farm” across the regulation, including for the borrower distribution metrics under the Retail Lending Test. A few commenters pointed out that even if the agencies align the “small business” and “small farm” definitions with the CFPB's size standard in its section 1071 rulemaking, there would still be opportunity to improve consistency across banking regulations because these definitions would not be reflected in Call Report requirements.

Final Rule

After considering the varied perspectives and recommendations on the proposed “small business” and “small farm” definitions, the agencies are adopting the definitions as proposed. The final rule defines “small business” to mean a business that had gross annual revenues for its preceding fiscal year of $5 million or less and “small farm” to mean a farm that had gross annual revenues for its preceding fiscal year of $5 million or less.

The agencies declined to use the SBA's small business size standards because they believe that these standards would not serve the CRA's purposes well. The SBA small business size standards are based on gross annual revenues or the average number of employees for a wide range of business entities, resulting in over 1,000 North American Industry Classification System (NAICS) codes. In addition, the agencies also considered the fact that the SBA has recently increased many of its size standards and no longer employs a $1 million average annual receipts size standard for any industry. In particular, many of the SBA's gross annual revenues standards are much larger than the gross annual revenues thresholds included in the proposed “small business” and “small farm” definitions. The SBA's size standards for agricultural industries now range from $2.25 million to $34 million, and the size standards for non-agricultural industries now range from $8 million to $47 million. Therefore, applying the SBA size standards under the CRA regulations would undermine the focus on smaller small businesses and farms.

Further, the agencies believe it is not appropriate to set a lower threshold, particularly when considering how the final rule will use the terms. A lower size standard may unduly restrict the type of lending and investment that the agencies have historically considered under economic development ( i.e., the current rule considers as loans and investments that support businesses and farms that meet the size eligibility standards of the SBA's Development Company or Small Business Investment Company programs (13 CFR 121.301)).

In addition, the agencies believe that size standards that draw on a single data point— i.e., gross annual revenues of $5 million or less in the preceding year—are easy for institutions to understand and implement and minimize the data banks are required to collect and report. If the agencies adopted definitions that introduced additional criteria, as suggested by some commenters— e.g., average number of employees, average revenue, or industry codes—institutions would be required to collect and report additional data points, which would increase banks' collection and reporting burden.

The agencies also believe that $5 million is the appropriate threshold for small businesses and small farms. As discussed above, commenters advocated for both lowering the threshold to focus the regulations on the smallest small business and raising the threshold to capture larger small businesses, but the agencies believe that the proposed “small business” and “small farm” definitions strike a proper balance. As such, the definitions in the final rule capture entities all along the small business spectrum, from the smallest small businesses and farms through larger small businesses and farms.

Further, a $5 million threshold is consistent with the definition of “small business” in the CFPB's section 1071 rulemaking. As explained in more detail below in the discussion of the definitions of “small business loans” and “small farm loans,” leveraging the CFPB's “small business” definition for purposes of the Retail Lending Test will reduce the data collection and reporting burden under the CRA regulations because banks will not have to report small business loan data to two different agencies with two different thresholds once the agencies transition to using section 1071 data. In addition, as also explained below, aligning the CRA's “small business” and “small farm” definitions with the CFPB's “small business” definition will enable the agencies to expand and improve the analysis of CRA small business and small farm lending for all banks subject to the Retail Lending Test.

The agencies understand that the CFPB's section 1071 rulemaking, although finalized, is not yet applicable, and, therefore, the agencies will not yet be able to leverage the CFPB's section 1071 rulemaking's “small business” definition for purposes of the Retail Lending Test at this time. However, the final rule's “small business” and “small farm” definitions are also necessary for determining which loans, investments, or services meet the community development criteria under final § __.13 for purposes of the Community Development Financing Test in § __.24, the Community Development Services Test in § __.25, and the Community Development Financing Test for Limited Purpose Banks in § __.25, and for evaluating a bank's retail banking services and retail banking products under the Retail Services and Products Test in final § __.23. As explained above, the current regulations do not explicitly define “small business” and “small farm,” and defining “small business” and “small farm” to mean those businesses and farms with $5 million or less in gross annual revenues is preferable to using the SBA's small business size standards, which can be significantly larger, and would undermine the CRA's focus on smaller small businesses and farms. Therefore, to be consistent throughout the CRA regulations, the agencies believe it is important to include this definition in the final rule.

With regard to commenters' concerns related to the treatment of revenues, the agencies anticipate updating the CRA data collection and reporting guidance to reflect the new collection and reporting obligations related to the reporting of gross annual revenues. In developing that guidance, the agencies will consider the commenters' suggestions and recommendations.

With respect to the commenter's concern regarding the agencies proposing a size standard based on the CFPB proposed rule under section 1071 of the Dodd-Frank Act (Section 1071 Proposed Rule), the agencies note that the $5 million size standard for a small business or small farm was included in the proposal; the agencies did not cross-reference to the CFPB section 1071 rulemaking. Therefore, commenters were able to comment on the exact threshold proposed.

The agencies appreciate commenters' concern that inconsistencies with respect to size standards for small businesses and small farms would remain because the CRA definitions would not be reflected in the Call Report. However, revisions to Call Report requirements are outside the scope of this rulemaking.

Small Business Loan and Small Farm Loan

Current Approach

The current CRA regulations define “small business loan” to mean “a loan included in `loans to small businesses,' as defined in the instructions for preparation of the Consolidated Report of Condition and Income.” Likewise, “small farm loan” means “a loan included in `loans to small farms,' as defined in the instructions for preparation of the Consolidated Report of Condition and Income.” The current approach captures loans of $1 million or less to businesses, and loans of $500,000 or less to farms, as reported in the Call Report.

The Agencies' Proposal

The agencies proposed to retain these definitions with two technical changes. First, the proposed “small business loan” and “small farm loan” definitions included a provision indicating that the proposed “small business loan” and “small farm loan” definitions should be read independently from the “small business” and “small farm” definitions. This distinction is relevant because, until the agencies transition to using small business lending data derived from the CFPB Section 1071 Final Rule, the CRA regulations need to continue to use the current rule's “small business loan” and “small farm loan” definitions in evaluating bank performance under the proposed Retail Lending Test in § __.22. The agencies indicated in the proposal that once section 1071 data on small business loans become available, the agencies will transition to “small business loan” and “small farm loan” definitions that are consistent with the definition of “small business” in the CFPB Section 1071 Final Rule.

Second, the agencies proposed to substitute “Consolidated Report of Condition and Income” in each definition for the shorter term, “Call Report,” which would have the same meaning and be established as the term used throughout the regulation earlier in the regulatory text. ( See the “assets” definition discussion above.)

With these technical changes, the agencies proposed to define “small business loan” to mean, notwithstanding the definition of “small business” in § __.12, a loan included in “loans to small businesses” as defined in the instructions for preparation of the Call Report, and “small farm loan” to mean notwithstanding the definition of “small farm” in § __.12, a loan included in “loans to small farms” as defined in the instructions for preparation of the Call Report.”

Comments Received

The agencies received numerous comments related to the proposed “small business loan” and “small farm loan” definitions. Some commenters expressed support for the proposed definitions and intended transition to the CFPB section 1071 rulemaking definition of “small business,” while other commenters recommended the agencies adopt definitions with various changes or implement entirely new definitions that incorporate different criteria.

Specifically, a few commenters stated that using the proposed small business size standard in the CFPB's section 1071 rulemaking will provide a more accurate picture of lending to small entities than the current threshold, which measures lending based on loan size as opposed to business revenue size.

However, other commenters opposed the proposed changes to the “small business loan” and “small farm loan” definitions and recommended continuing using the Call Report definitions, with a commenter stating that retaining these definitions is necessary to ensure that smaller dollar loans are targeted to businesses with capital gaps. Another commenter recommended continuing to use the current Call Report definitions of “loans to small businesses” and “loans to small farms,” and reevaluating after a full year of section 1071 data are available. Some commenters contended that the proposed threshold would impose considerable new data collection and reporting requirements for community banks that elect to be evaluated under the proposed Retail Lending Test.

Another commenter proposed a hybrid approach that would define “small business loan” to include both: (1) a loan to a business with gross annual revenues of $1 million or less; and (2) a commercial loan in an amount of $1 million or less. Some commenters suggested using certain size standards adopted by the SBA and USDA to encourage lending to socially disadvantaged businesses and farms owned by persons of color. Another commenter questioned whether the “small business loan” and “small farm loan” definitions include loans made to individuals because of the use of the term “revenue” as opposed to “income.” This commenter claimed that the exclusion of small business and small farm loans to individuals would cause underreporting and could negatively affect a bank's Retail Lending Test results, metrics, benchmarks, and possibly other areas. Further, the commenter suggested the “small business loan” and “small farm loan” definitions should include renewals and credit limit increases, as set forth in the Interagency Questions and Answers.

Another commenter suggested that the agencies should not give CRA consideration for all loans to businesses that meet the SBA standards for small businesses. This commenter reasoned that the SBA standards for employee size represent too high a threshold to meaningfully segment the small business lending market.

Final Rule

The agencies appreciate the commenters' varied perspectives and recommendations related to the proposed “small business loan” and “small farm loan” definitions. However, after consideration of these comments, the agencies are adopting the “small business loan” and “small farm loan” definitions as proposed in the final rule, with technical changes, and have included amendments to transition to “small business loan” and “small farm loan” definitions leveraged off of the CFPB section 1071 regulation's “small business” definition once section 1071 data is available. Specifically, the final rule provides that “small business loan” and “small farm loan” mean those loans included in “loans to small businesses” or “loans to small farms” as reported in Schedule RC–C of the Call Report. The agencies are referring to these terms as reported in the Call Report, instead of as defined in the instructions, to more accurately provide a source for these terms. As indicated above, maintaining the current rule's definitions of “small business loan” and “small farm loan” based on the Call Report is necessary until the agencies transition to using section 1071 data.

Further, transitioning to section 1071 data will enable the agencies to use borrower and geographic distribution metrics and benchmarks that provide more insight into banks' performance relative to the demand for small business loans in a given geographic area. It also will allow for an analysis that uses an expanded data set measuring loans to small businesses of different revenue sizes, including—importantly—to the businesses and farms with gross annual revenues of $250,000 or less, as discussed in the section-by-section analysis of § __.22, the Retail Lending Test. In sum, these definitions will enable the agencies to expand and improve the analysis of CRA small business and small farm lending for all banks, as applicable, since section 1071 data will also enable expanded analysis for intermediate and small banks that are subject to reporting pursuant to the CFPB's section 1071 rulemaking. Further, because a large business may obtain small dollar loans, and a small business may obtain large dollar loans, the agencies believe the size of a business obtaining the loan is a better factor than the size of the loan to a business for determining whether a loan is made to a small business that warrants CRA consideration.

For the same reasons as noted in the “small business” and “small farm” definitions discussion, the agencies do not find it appropriate to adopt definitions of “small business loan” or “small farm loan” based on the SBA's small business size standards. As noted above, the SBA currently employs varying small business standards which are based on various factors, including industry, average annual receipts, and average number of employees. As a result, capturing all loans to businesses that qualify as small businesses under the SBA's standards would necessitate the collection and reporting of additional data, including NAICS codes to determine the industry in which a business operates, average employee headcount, and average receipts over a multi-year period. This would impose increased compliance and operational burden and costs in negotiating what, for many or most banks, would be a complicated overlay on their lending activity ( e.g., use of NAICS codes) that could reduce efficiencies in their small business and small farm lending programs.

In response to comments about the inclusion of loans to individuals as small business loans or small farm loans based on income of the individual as opposed to business revenues and how renewals and other credit limit increases are considered, the agencies intend to continue historical practices with respect to these issues. Specifically, pursuant to Call Report instructions and certain limitations, loans to sole proprietorships for commercial or agricultural purposes are included in the “small business loan” and “small farm loan” definitions, respectively. Banks have historically reported the gross annual revenues relied on in making credit decisions. This reporting included affiliate revenues when relied on, but never combined individual income with business revenues even if the bank relied on the individual income of a sole proprietor in making the credit decision. The agencies continue to believe this is appropriate, because irrespective of whether the bank relied on individual income in making a credit decision, it keeps the focus on the size of the business for purposes of considering the loan under the performance tests. Therefore, under the final rule, banks will report only the gross annual revenues of the business benefiting from the loan proceeds.

It is also notable that once the transition to section 1071 data is complete, the small business loan data used for the Retail Lending Test will capture business credit transactions that are secured by real estate. For example, section 1071 data will capture business loans secured by an applicant's primary residence or residential investment property as collateral for inventory financing or working capital. Such loans would not be captured under HMDA because they do not involve a home purchase, home improvement, or refinancing and would not be captured in the Call Report definition of “loans to small businesses” because they are secured by residential real estate.

For the reasons discussed above, the agencies are adopting in the final rule a definition of “small business loan” that means, notwithstanding the definition of “small business” in this section, a loan included in “loans to small businesses” as defined in the instructions for preparation of the Call Report. Similarly, the agencies are adopting in the final rule a definition of “small farm loan” that means, notwithstanding the definition of “small farm” in this section, a loan included in “loans to small farms” as defined in the instructions for preparation of the Call Report. Amendments included in the final rule will transition these definitions to reflect the final rule's definitions of “small business” and “small farm,” which leverages the definition of “small business” in the CFPB's section 1071 rulemaking, once small business data reported pursuant to that rulemaking becomes available and the agencies announce an effective date for this transition in the Federal Register .

State

To increase clarity and consistency in the CRA regulations, the agencies proposed to add a definition of “State” to mean a U.S. State or territory, and the District of Columbia. The agencies did not receive any comments on this definition and are adopting the definition as proposed in the final rule.

Targeted Census Tract

The agencies proposed to add a definition of “targeted census tract” for purposes of certain community development categories in proposed § __.13. As proposed, this term would mean: (1) a low-income census tract or a moderate-income census tract; or (2) a distressed or underserved nonmetropolitan middle-income census tract. This definition was intended to reflect the current CRA regulations regarding community development activities now categorized as revitalization and stabilization activities, as well as accompanying guidance in the Interagency Questions and Answers regarding relevant geographic areas for these activities. The agencies did not receive any comments concerning the proposed definition of “targeted census tract” and adopt it as proposed in the final rule.

Tribal Government

The final rule includes a new definition for “tribal government,” not included in the proposal, to clarify the agencies' intended meaning of “tribal government” where referenced in the final rule ( see, e.g., community development categories in proposed and final § __.13 and the accompanying section-by-section analysis). As discussed above, the proposed and final community development place-based categories, including activities in Native Land Areas, include as eligibility criterion that activities be “conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative.” However, the proposal did not define “tribal government,” although the agencies sought feedback on various aspects of the government plan criterion. Some commenters addressed the types of entities that should be included in the government plan requirement, including tribal governments, associations, and other designees. A commenter expressed support for defining “tribal government” to mean the recognized governing body of any Indian, or Alaska Native tribe, band, nation, pueblo, village, community, component band, or component reservation, individually identified (including parenthetically) in the list most recently published pursuant to section 104 of the Federally Recognized Indian Tribe List Act of 1994.

Based on comments and on further consideration, the agencies believe that a definition of “tribal government” will provide needed clarity and certainty for banks and other stakeholders seeking to determine whether activities meet the required eligibility criterion. Accordingly, the final rule defines “tribal government” to mean the recognized governing body of any Indian, or Alaska Native tribe, band, nation, pueblo, village, community, component band, or component reservation, individually identified (including parenthetically) in the list most recently published pursuant to section 104 of the Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C. 5131). As with the definition of “Native Land Areas,” this definition is derived from and intended to align with existing Federal Indian law.

Wholesale Bank

As detailed in the “limited purpose bank” definition discussion above, the agencies are adopting the single term, “limited purpose bank,” and eliminating the “wholesale bank” definition in the final rule. This change is intended to improve clarity, minimize complexity, and provide for new and future market participants.

Women's Depository Institution

The agencies proposed to define “women's depository institution (WDI)” as having the same meaning given to that term in 12 U.S.C. 2907(b)(2). The cross-referenced provision of the CRA statute defines “WDI” to mean a depository institution, as defined in the FDI Act, with: (1) more than 50 percent of the ownership or control of which is held by 1 or more women; (2) more than 50 percent of the net profit or loss of which accrues to 1 or more women; and (3) a significant percentage of senior management positions of which are held by women. The agencies did not include an alternate definition of WDI because their policies with respect to designating WDI's vary. The FDIC does not specifically designate or define WDIs under its MDI policy statement, however, it does recognize WDIs for purposes of the CRA. The Board defines WDI consistent with the CRA statute and institutions that meet the definition are eligible to access resources under the Federal Reserve System's Partnership for Progress program. The OCC, in contrast, considers WDIs to be MDIs under its MDI Policy Statement, and, therefore, women-owned institutions that do not meet the statutory definition of WDI in section 2907 would be considered MDIs if the institution otherwise meets the requirements of the OCC's MDI Policy Statement.

The agencies did not receive any comments on the proposed definition of WDI and are adopting the definition as proposed with non-substantive revisions for conformity with the structure of other definitions in final § __.12. Accordingly, under the final rule, “Women's depository institution (WDI)” means “women's depository institution” as defined in 12 U.S.C. 2907(b)(2).

Section __.13 Consideration of Community Development Loans, Community Development Investments, and Community Development Services

Current Approach and the Agencies' Proposal

The current CRA regulations define “community development” as comprising four broad categories: affordable housing, community services, economic development, and revitalization and stabilization. The agencies proposed to update the community development definition in current § __.12 by creating a new § __.13 that would define community development as including eleven different categories of activities and would establish standards for when community development activities would receive full and partial consideration. Proposed § __.13 incorporated aspects of the current Interagency Questions and Answers into the regulation and established specific eligibility standards for a broad range of community development activities. Proposed § __.13 was also designed to provide more clarity regarding the kinds of activities the agencies consider to be community development, as well as regarding eligibility for community development consideration.

Comments Received

Commenters provided general feedback on the agencies' proposal to adopt a definition of community development with eleven categories of activities, as well as on the specific proposed categories (which are discussed in the section-by-section analysis of each individual category below). Many commenters were generally supportive of the proposal, with several noting that the proposed approach for defining community development would provide more clarity for all stakeholders on the types of activities that qualify and the eligibility requirements for different activity types. Several commenters were particularly supportive of adding new categories to the current community development definition, such as the proposed categories for disaster preparedness and climate resiliency activities, activities with MDIs, WDIs, LICUs, and CDFIs, and activities in Native Land Areas. Other commenters noted that proposed changes to the community development definition would increase the responsiveness of banks to community needs and expressed the view that the changes would help to more effectively target community development activities.

In contrast, a few commenters opposed the proposed changes to the community development definition. Commenter feedback included: that the activities that could be considered under the new categories could be considered under the four existing categories of community development; concern that the new community development categories were too rigid and complex, including that it would be difficult to obtain the data needed to show activities meet the new requirements; and that the definition of community development would lead to a narrowing of what could qualify, which might result in fewer or less impactful activities in low- and moderate-income communities. Additionally, several commenters provided suggestions for additional categories of activities that should be considered under community development, such as equitable media, activities focused on arts and culture, broadband and digital inclusion, activities benefiting military communities, and activities that are designed to support individuals with disabilities.

Final Rule

The agencies are adopting proposed § __.13, with revisions from the proposal and retitled as “Consideration of community development loans, community development investments, and community development services.” The final rule updates the current definition of community development to provide banks with additional clarity regarding the loans, investments, and services that the agencies have determined support community development that is responsive to the needs of low- and moderate-income individuals and communities, certain distressed or underserved nonmetropolitan areas, and small businesses and small farms.

Consistent with the structure of the proposal, final § __.13 adopts standards for when community development loans, community development investments, and community development services will receive full and partial consideration (final § __.13(a)), and replaces the current definition of community development with the following eleven categories:

Section __.13(b) Affordable housing;

Section __.13(c) Economic development;

Section __.13(d) Community supportive services;

Section __.13(e) Revitalization or stabilization;

Section __.13(f) Essential community facilities;

Section __.13(g) Essential community infrastructure;

Section __.13(h) Recovery of designated disaster areas;

Section __.13(i) Disaster preparedness and weather resiliency;

Section __.13(j) Revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency in Native Land Areas;

Section __.13(k) Activities with MDIs, WDIs, LICUs, or CDFIs; and

Section __.13(l) Financial literacy.

Final § __.13(a) has been revised to clarify the standards within each category for determining full or partial consideration. Final § __.13(b) through (l) have also been revised to address comments, improve clarity, and promote greater internal consistency. Revisions to these categories are discussed in greater detail in the corresponding section-by-section analyses below.

The final rule incorporates aspects of the guidance that is currently provided in the Interagency Questions and Answers and provides more specificity, relative to the current rule, on the kinds of activities that the agencies consider to be community development. By building on the current rule and expanding the categories of community development, the agencies believe that final § __.13 will emphasize activities that are responsive to community needs, and especially the needs of low- and moderate-income individuals, families, and households and small businesses and small farms. Further, the agencies believe that the final rule will provide increased transparency and consistency by providing stakeholders with a better upfront understanding how loans, investments, and services supporting community development can receive consideration. Overall, the agencies believe that the final rule will reduce uncertainty and facilitate banks' ability to identify community development opportunities.

In adopting final § __.13, the agencies considered comments regarding each proposed category of community development, and on appropriate standards for providing full and partial consideration for community development activities. These comments and the final rule are discussed below in the section-by-section analyses of § __.13(a) through (l). In addition, the agencies are adopting a variety of clarifying and conforming technical edits across final § __.13. For example, across all community development categories, the agencies are revising the term “low- and moderate-income individuals” to “low- and moderate-income individuals, families, and households” for consistency across the various paragraphs in § __.13, to provide more clarity and to comprehensively include the beneficiaries of different community development activities. Similarly, where appropriate, the final rule replaces “activities” with “loans, investments, and services,” consistent with revisions made elsewhere in the regulation to more accurately capture the distinction between community development activities, and a bank's loans, investments, and services that support those activities (for which CRA consideration is granted).

The agencies considered commenter feedback that revising community development to include eleven categories could be too rigid or complex, and comments that activities under proposed § __.13(b) through (l) could be included under the four existing community development categories. The agencies believe, however, that additional community development categories, with specific eligibility requirements for each, will provide stakeholders with better clarity. Additionally, as previously noted and consistent with the proposal, the final rule incorporates existing guidance into the definition, which represents an evolution towards a more comprehensive and transparent regulation. The agencies note that, while banks subject to the rule are permitted to qualify loans, investments, and services under any applicable community development category, and that some activities may meet the criteria of multiple categories, activities may count only once for the purposes of calculating the Community Development Financing Metric.

The agencies also appreciate comments suggesting additional categories for inclusion under community development and note that these are generally discussed in the section-by-section analyses of final § __.13(b) through (l). The agencies have considered these comments but believe that the adopted categories most clearly and specifically align with the scope of community development under the CRA regulations. The agencies note that loans, investments, and services supporting additional activities suggested by commenters could still receive consideration if they otherwise meet the required criteria under any category included in final § __.13.

Finally, the agencies believe that the establishment in final § __.14 of an illustrative list of qualifying community development activities and of a confirmation process, available if a bank wants to request review in advance, will help to provide additional clarity and transparency for banks regarding the consideration of community development loans, investments, and services. For more information, see the section-by-section analysis of § __.14.

Section __.13(a) Full and Partial Credit for Community Development Loans, Community Development Investments, and Community Development Services

Current Approach

Under the current CRA rule, a bank may, depending on its size and business model, be evaluated for its community development lending, investments, and services under the lending, investment, or service tests, as applicable. To be eligible for CRA community development consideration, a loan, service, or investment must have community development as its primary purpose.

The Interagency Questions and Answers explain that a loan, investment, or service is considered to have a primary purpose of community development “when it is designed for the express purpose of” the following:

• “Revitalizing or stabilizing low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas;”
• “Providing affordable housing for, or community services targeted to, low- or moderate-income persons;” or

• “Promoting economic development by financing small businesses or small farms that meet the requirements set forth in 12 CFR __.12(g).”

The Interagency Questions and Answers explain that the agencies use one of two approaches to determine whether an activity is “designed for an express community development purpose.” An activity meets the primary purpose standard, and the entire activity may be eligible for CRA considerations if:

• “[A] majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes;” or

• Less than a majority of the dollars or benefits is identifiable to one or more community development purposes, but: (1) “the express, bona fide intent of the activity . . . is primarily one or more of the enumerated community development purposes”; (2) “the activity is specifically structured . . . to achieve the expressed community development purpose”; and (3) the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved.”

Even where those standards have not been met, loans, investments, or services involving the provision of mixed-income housing that incudes affordable housing may be deemed to have a primary purpose of community development as specified in the Interagency Questions and Answers. Specifically, at a bank's option, these activities may be considered to have a primary purpose of community development and be eligible for CRA credit on a pro rata basis; a bank may receive pro rata consideration for the portion of the activity that helps to provide affordable housing to low- or moderate-income individuals. For example, a bank could receive CRA consideration for 20 percent of the dollar amount of a loan or investment for a mixed-income development, if 20 percent of the units are set aside for affordable housing for low- or moderate-income individuals.

The Agencies' Proposal

The agencies proposed to define the standards for determining whether a community development activity has a “primary purpose” of community development to clarify eligibility criteria for different community development loans, investments, or services (proposed § __.13(a)). To this end, proposed § __.13(a)(1) established specific standards based on the interagency guidance described above for eleven categories of community development. These categories were listed in proposed § __.13(a)(2) and described in detail in proposed § __.13(b) through (l). With the proposed categories, the agencies intended to reflect an emphasis on activities that are responsive to community needs, especially the needs of low- and moderate-income individuals and communities and small businesses and small farms.

Specifically, proposed § __.13(a) stated that “[a] bank may receive community development consideration for a loan, investment, or service that has a primary purpose of community development.” The agencies proposed several ways in which an activity could be determined to have a primary purpose of community development. First, under proposed § __.13(a)(1)(i), if a majority of the dollars, applicable beneficiaries, or housing units of the activity were identifiable to one or more of the community development purposes listed in proposed § __.13(a)(2), then the activity would meet the requisite primary purpose standard and would receive full CRA credit.

Second, and alternatively, under proposed § __.13(a)(1)(i)(A), where an activity supported rental housing purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government ( see proposed § __.13(b)(1)), and fewer than 50 percent of the housing units supported by that activity were affordable, the activity would be considered to have a primary purpose of community development only in proportion to the percentage of total housing units in the development that were affordable.

Third, under proposed § __.13(a)(1)(i)(B), where an activity involved low-income housing tax credits to support affordable housing under proposed § __.13(b), the activity would be considered to have a primary purpose of community development for the full value of the investment, even if fewer than 50 percent of the housing units supported by that activity were affordable.

Finally, under proposed § __.13(a)(1)(ii), a loan, investment, or service would be considered to have a primary purpose of community development if the express bona fide intent of the activity was one or more of the proposed community development purposes and the activity was specifically structured to achieve, or was reasonably certain to accomplish, the community development purpose.

Pro rata consideration for other community development activities. Although the proposal did not specify any other application of partial credit, the agencies sought feedback on whether such consideration would be appropriate for other community development activities (for example, financing broadband infrastructure, health care facilities, or other essential infrastructure and community facilities). If so, the agencies also sought feedback on whether the activity should be eligible for partial consideration only if a minimum percentage of the community development purpose it supported served low- or moderate-income individuals or census tracts or small businesses and small farms, such as 25 percent. Further, if partial consideration were provided for certain types of community development activities, the agencies sought feedback on whether to require a minimum percentage standard greater than 51 percent to receive full consideration—such as a threshold between 60 and 90 percent.

Comments Received

The agencies received several comments generally supporting the proposed standard for determining whether an activity has a “primary purpose” of community development. For example, one commenter offered the general comment that it found the proposed clarifications to the primary purpose standard to be helpful and clear. As discussed in this section, many comments focused on the specific components of the proposed primary purpose standard and provided responses to the questions on which the agencies requested feedback.

A majority of dollars, applicable beneficiaries or housing units are identifiable to one or more of the community development categories (proposed § __.13(a)(1)(i)). Many commenters supported the agencies' proposal to determine that an activity has a primary purpose of community development if a majority of dollars, applicable beneficiaries or housing units of the activity are identifiable to one or more community development purposes set out in proposed § __.13(a)(2). A few commenters supported this aspect of the proposal without changes, while others asserted that CRA credit generally should not be granted unless the majority of beneficiaries are low- or moderate-income people and communities, or people and communities of color and indigenous people and communities.

The express, bona fide intent of the activity is one or more of the community development categories and the activity is specifically structured to achieve, or is reasonably certain to accomplish, the community development purpose (proposed § __.13(a)(1)(ii)). A few commenters expressed concern with the agencies' proposal to determine that an activity has a primary purpose of community development if the express, bona fide intent of the activity is one or more of the community development categories or the activity is specifically structured to achieve, or is reasonably certain to accomplish, the community development purpose. One of these commenters suggested that this could lead to abuses where only a small percentage of dollars are dedicated to community development. To mitigate this potential problem, the commenter suggested eliminating this basis for determining whether an activity has a primary purpose of community development or, alternatively, pairing this consideration with a minimum threshold for the percentage of the activity that corresponds with community development, such as 40 percent, below which no consideration would be available.

Another commenter asserted that the agencies should revise this prong to retain only the proposed language regarding whether “[t]he express, bona fide intent of the activity is one or more of the community development purposes.” This commenter stated that that language regarding the activity being “specifically structured to achieve” the community development purpose was redundant in light of the “intent” requirement. The commenter further expressed the view that determining whether an activity is “reasonably certain to accomplish” a community development purpose would result in bank and examiner speculation regarding the results of an activity. According to this commenter, the resulting uncertainty of both the “specifically structured to achieve” and “reasonably certain to accomplish” components of this proposed standard could be confusing and discourage innovative community development activities.

Affordable housing-related provisions (proposed § __.13(a)(1)(i)(A) and (B)). Many commenters addressed the two proposed clarifications to the primary purpose standard for affordable rental housing. As described above, these included: (1) a provision allowing for pro rata consideration of activities in conjunction with a Federal, State, local, or tribal government plan, program, initiative, tax credit, or subsidy, when fewer than 50 percent of housing units supported by the activity are affordable (proposed § __.13(a)(1)(i)(A)); and (2) a provision allowing for full consideration of any affordable housing activity involving low-income housing tax credits (proposed § __.13(a)(1)(i)(B)).

Subsidized affordable rental housing (proposed § __.13(a)(1)(i)(A)). Many commenters supported providing pro rata consideration for affordable rental housing activities based on the percentage of housing units that are affordable. Several commenters supporting pro rata consideration for affordable housing cited the benefits of mixed-income housing for sustaining needed services and amenities in low- and moderate-income communities and for low- and moderate-income residents, as well as for promoting economic stability for low- and moderate-income individuals and communities. A commenter also noted that in rural areas, mixed-income housing is needed to accommodate projects of a sufficient scale to achieve development and operating efficiencies.

Some commenters expressed the view that the pro rata consideration proposal was too narrow. In this regard, commenter suggestions included changes to the proposal to enhance incentives for investments and loans in affordable housing, e.g., that the agencies should afford full credit for subsidized affordable housing if 20 percent of the units were affordable, a level some commenters stated would align with the eligibility thresholds of certain other Federal affordable housing programs. A few commenters noted, however that, when less than 20 percent of the units are affordable, affordability may be incidental to the project and immaterial to financing. Commenter feedback also included the view that properties developed without government funding should receive pro rata consideration if the percentage of units affordable to low- or moderate-income households were 50 percent or lower, and full consideration if the percentage of units affordable to low- or moderate-income households were greater than 50 percent.

A few commenters conveyed that the proposal for pro rata consideration was too broad. In this regard, for example, a commenter expressed concern that the proposal could lead to providing CRA consideration for projects that do not preserve long-term affordability for low- or moderate-income individuals. Instead, the commenter stated that pro rata consideration should be limited to affordable housing projects that are: (1) owned by mission-driven affordable housing nonprofit organizations or public entities; (2) restricted to remain affordable at the lesser of 80 percent of area median income or HUD's Small Area Fair Market Rent; and (3) subject to compliance monitoring by a public entity. One commenter urged caution with pro rata consideration for affordable housing, stating that displacement pressure associated with new market rate housing in a low- and moderate-income community could offset the benefit of providing the additional affordable units. Another commenter suggested that banks should not receive credit for affordable housing lending if the percentage of affordable units falls meets only the minimum required under a local inclusionary ordinance.

LIHTCs (proposed § __.13(a)(1)(i)(B)). Many of the commenters addressing the affordable housing component of the primary purpose standard strongly supported the proposal to provide full consideration for activities that involve LIHTCs to support affordable housing. A few commenters referenced the important role that LIHTC-financed projects have in addressing the need for affordable housing and noted that the LIHTC program drives most privately financed construction and rehabilitation of affordable housing. Other commenters asserted that the statutory and regulatory restrictions of the LIHTC program ensured that these activities were in the interest of public welfare.

Several commenters, however, suggested changes to this component. Some commenters stated that banks should receive full consideration for investments in mixed-income LIHTC projects, noting that the tax credits for investments under the LIHTC program is already prorated based on the percentage of units that are affordable. However, these commenters urged that lending to these projects should be prorated, asserting that lending to mixed-income LIHTC projects could include significant financing for market-rate housing, and expressed the view that banks should not get community development credit for this portion.

Several commenters suggested that full consideration for affordable housing projects should apply more broadly to include other types of affordable housing, in addition to LIHTC projects. A few commenters recommended that full consideration be given for investments through nonprofit organizations with a mission or primary purpose of providing affordable housing, regardless of the purpose of the underlying collateral. One of these commenters asserted that bank investments supporting affordable housing projects through community-based development organizations (CBDOs) with a history of serving the needs of low- and moderate-income people and communities should also receive full consideration. This commenter maintained that full consideration for these projects would be warranted regardless of the income levels targeted by the project because CBDOs have the “mission and experience” to consider community mixed-income housing needs. Another commenter questioned why full consideration would not also be extended to all affordable housing developed with Federal housing subsidies, such as HUD's HOME Investment Partnerships Program (HOME) or project-based section 8 rental assistance.

Pro rata consideration for other community development categories. As noted previously, the agencies sought commenter perspectives on whether a partial consideration framework should be extended to some, or all, community development categories, in addition to affordable rental housing. Some commenters supported limiting partial consideration to only affordable housing. These commenters noted several common reasons for this, including the documented benefits of mixed-income housing for low- and moderate-income individuals and communities; the additional financing challenges for affordable housing compared to other types of projects; and the concern that expanding partial consideration beyond housing could divert limited resources away from projects that target low- and moderate-income individuals or communities. One commenter stated that approximately one-third of the national population is low- and moderate-income, so many activities could receive approximately that amount of credit if pro rata consideration were based on the population of low- and moderate-income individuals, without specifically targeting this population. This commenter asserted that any percentage of low- and moderate-income beneficiaries set for pro rata consideration would have therefore have to be substantially higher than the share of the low- and moderate-income population to demonstrate that the activity had the actual intent of serving that population, at which point the level would approach the existing 50 percent threshold. Thus, the commenter believed that there is little to be gained and much to be lost in offering partial consideration outside of affordable housing activities, where income mixing is often part of an intentional strategy or necessary condition for creating new affordable homes.

Other commenters supported allowing partial credit for certain types of larger-scale community development projects that might benefit low- or moderate-income individuals and communities. In general, these commenters noted that some projects might not be limited to a specific geographic area and would still benefit low- and moderate-income people and communities within the area affected. One commenter suggested that providing pro rata credit for a wider range of community development activities would acknowledge the complexities of delivering services to a large geographic area and could incentivize more financing in economically struggling or rural areas.

The community development activity most often cited by commenters urging more extensive partial consideration was expanding access to broadband, with commenters noting the critical need for these services that are lacking in many rural and low- and moderate-income communities. Examples of other community development activities referenced by commenters for partial credit included: (1) infrastructure and community facilities; (2) projects that increase access to transportation, health care or renewable energy; or (3) projects that help to revitalize vacant and abandoned land or buildings. One commenter expressed general opposition to partial consideration but conveyed support for exceptions for projects in rural areas, using access to broadband as an example.

Several commenters suggested that, if partial consideration is provided, certain guardrails should be in place to ensure that low- or moderate-income individuals and communities benefit. One commenter stated that partial consideration should be allowed only for activities that specifically target low- and moderate-income areas, and that merely benefiting these areas was not sufficient. A few commenters similarly expressed concerns about granting partial credit for activities that support community development but do not intentionally target benefits to low- and moderate-income people and communities; specifically they recommended that, for activities supporting community facilities and essential infrastructure to qualify for partial credit, the primary beneficiaries of the project should be low- and moderate-income persons or residents of low- and moderate-income communities. Another commenter supported partial credit for infrastructure projects that benefit “rural and other socially disadvantaged communities,” citing as an example the educational benefits to low- and moderate-income populations afforded by access to broadband. However, this commenter stated that no credit should be given to projects that would happen even without the incentive of CRA credit and that do not have a demonstrable benefit for low- or moderate-income communities. This commenter further recommended that partial CRA credit be given in proportion with the demonstrated impact on low- and moderate-income communities, suggesting that this might be based on the income levels of the census tracts a project spans. Finally, a commenter suggested that partial consideration could be warranted for community development activities other than support for affordable housing, as communities might have other community development needs but recommended, however, that the community development activities, among other criteria: (1) “significantly improve” factors impacting the health of residents in low- and moderate-income communities; (2) be undertaken with a U.S. Treasury-certified CDFI; (3) be widely supported by the community; and (4) “contribute directly” to a range of potential community benefits.

Numerous other commenters favored expansion of partial consideration for all community development categories. Several commenters asserted that partial consideration would encourage banks to expand the geographic reach of their community development activities and encourage more community development activity that benefits low- and moderate-income individuals and communities. One commenter expressed the view that extending partial consideration to all community development categories would not dilute community development resources for low- or moderate-income communities and asserted that partial credit could incentivize more large-scale projects addressing infrastructure needs beyond affordable housing. Another commenter added that a partial credit framework would appropriately account for the complexities that can be associated with bringing services to geographically dispersed populations. Similarly, several commenters stated that partial consideration of community development activities would be particularly beneficial in rural areas, where the population is more widely dispersed and there are fewer low- or moderate-income tracts and individuals. One commenter expressed support for partial consideration for all community development activities but indicated that the “majority” standard for primary purpose should also be retained, since some banks might not have the capacity to document partial consideration levels with more specificity.

Threshold for partial consideration. Many commenters who supported partial consideration for activities in some or all community development categories also thought that a minimum threshold for the percentage of the activity that serves low- or moderate-income individuals and geographic areas or small businesses and small farms should apply for a bank to be eligible to receive partial consideration for the activity. Numerous commenters suggested a minimum threshold ranging from 10 percent to over 50 percent for partial consideration eligibility, with a minimum of 25 percent being the threshold most frequently suggested. For example, a commenter suggested that a threshold of 10 percent would be appropriate, allowing for projects with complex development and construction markets, including higher-income markets.

A number of commenters asserted that no minimum threshold should be required for partial consideration eligibility, as long as some benefit of the activity to low- or moderate-income individuals or communities or small businesses or small farms could be documented. For example, a commenter stated that excluding loans or investments that do not meet a 50 percent threshold presents an incomplete picture of a bank's overall community development activities. This commenter further asserted that a pro rata framework for all community development activities would further the CRA goals of expanding lending and investment in low- and moderate-income communities because all of a bank's community development efforts would count.

Finally, regarding when full consideration of an activity should be given, some commenters expressed the view that, for an activity to receive full credit, the percentage of benefits to low- or moderate-income individuals or communities or small businesses and small farms should be higher than 51 percent ( see discussion of comments on the “majority” standard above). The thresholds suggested by these commenters ranged from 60 percent to 80 percent for full consideration. For example, one commenter recommended a 75 percent threshold and cautioned against activities that do not in fact serve communities but sustain poverty over the long term, such as, among other examples, infrastructure projects that cause affordable housing losses. This commenter also urged the agencies to consider a standard based on whether the activity is supported or requested by the community itself. Another commenter suggested that a 60 percent threshold would strike an appropriate balance between incentivizing a focus on low- and moderate-income needs and allowing for a range of projects that could benefit a wider range of residents, such as in a mixed-income community.

Final Rule

The agencies are finalizing the proposal to clarify eligibility criteria for different community development activities, with several changes and restructuring. The agencies carefully considered comments received regarding standards for determining whether an activity has the primary purpose of a community development. Based on the agencies' review of the comments and supervisory experience, the agencies concluded that “primary purpose” does not accurately describe when a bank will receive full or partial credit and resulted in some confusion in this regard. Thus, under the final rule, the agencies are modifying the proposal that focused on a primary purpose standard by adopting specific standards for full and partial consideration of community development activities, to clarify when activities will receive such consideration. To streamline the regulation, the agencies are eliminating the list of community development categories in proposed § __.13(a)(2) and instead adding new language in final § __.13(a) that a bank may receive community development consideration for a loan, investment, or service that supports one of eleven categories of community development described in final § __.13(b) through (l), as outlined above. The agencies also reorganized proposed § __.13(a) into two distinct sections: final § __.13(a)(1), which details the circumstances in which a bank receives full credit; and final § __.13(a)(2), which details the circumstances in which a bank receives partial credit for a community development loan, investment, or service.

Also as noted above, the agencies are replacing “primary purpose” terminology and setting forth a framework consistent with the current and proposed primary purpose standard, but delineated for each category of community development to convey more clearly and transparently the parameters for community development loans, investments, and services to receive full or partial credit, as discussed in more detail below in the section-by-section analysis of final § __.13(a)(1) and (2).

Overall, the agencies believe that the final rule provides meaningful clarification of the standards for consideration of community development loans, investments, and services, in response to comments and on further deliberation by the agencies. The section-by-section analysis below provides additional detail.

Section __.13(a)(1) Full credit

The agencies are adopting final § __.13(a)(1) to identify four circumstances under which a bank will receive credit for the entire community development loan, investment, or service. More specifically, banks will receive full credit for these types of activities if they:

• Meet the majority standard in § __.13(a)(1)(i);
• Meet the bona fide intent standard in § __.13(a)(1)(ii);
• Involve an MDI, WDI, LICU, or CDFI as provided in § __.13(a)(1)(iii); or
• Involve LIHTCs as provided in § __.13(a)(1)(iv).

The agencies intend with this reorganization to address comments seeking clarification about standards for community development consideration. By categorizing and clarifying the types of community development activities that receive full credit, the agencies are emphasizing activities that are responsive to community needs.

Section __.13(a)(1)(i) Majority Standard

Similar to proposed § __.13(a)(1)(i), the agencies are finalizing a majority standard with additional criteria that more specifically address how the standard is applied with respect to each of the community development categories. Final § __.13(a)(1)(i)(A), states that any loan, investment, or service must support community development under one or more of the categories outlined in final § __.13(b) through (l). Further, final § __.13(a)(1)(i)(B) provides that the loan, investment, or service must meet one or more of the other criteria established under the majority standard that correspond to each of the community development purposes. Specifically, under § __.13(a)(1)(i)(B)( 1), for a community development loan, investment or service that supports any of the categories of affordable housing under final § __.13(b)(1) through (3) to meet the majority standard, the majority of the housing units supported by the bank's loan, investment or service must be affordable to low- or moderate-income individuals. The agencies believe that, for these categories of community development, the housing unit standard for measuring whether the majority standard is met (or the appropriate proportion of partial credit) is objective and consistent with the impact that the project will have on the community. Regarding other categories of community development, final § __.13(a)(1)(i)(B)( 2) through ( 6) provide that a loan, investment, or service meets the majority standard if the majority of beneficiaries are, or the majority of dollars benefit or serve, the following:

• Low- and moderate-income individuals, with respect to affordable housing and community supportive services pursuant to final § __.13(b)(4) and (5) and (d), respectively;

• Small businesses and small farms, with respect to economic development pursuant to final § __.13(c);

• Residents of targeted census tracts, with respect to revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency pursuant to final § __.13(e) through (g) and (i);

• Residents of designated disaster areas with respect to recovery of designated disaster areas pursuant to final § __.13(h);

• Residents of Native Land Areas, with respect to revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency in Native Land Areas pursuant to final § __.13(j).

Lastly, final § __.13(a)(1)(i)(B)( 7) provides that loans, investments, and services supporting community development under final § __.13(b)(l) meet the majority standard if they primarily support financial literacy.

The agencies considered comments that suggested establishing a threshold greater than a majority ( i.e., over 50 percent) (ranging from 60 to 80 percent) to receive full credit for a community development activity. However, the agencies believe that the majority standard, which has a longstanding history in the current rule, appropriately identifies those activities that primarily have a community development purpose, while acknowledging that many important community development initiatives and projects are not solely dedicated to the community development purposes in final § __.13(b) through (l).

While a few commenters suggested that the majority standard should be applied to beneficiaries that are racial and ethnic minorities in addition to those elements that were identified in the proposal, the agencies did not add these beneficiaries to the majority standard, although the agencies expect that the clarified majority standard will better facilitate banks meeting the community development needs of their entire communities. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

Section __.13(a)(1)(ii) Bona Fide Intent Standard

Consistent with proposed § __.13(a)(l)(ii), the agencies are adopting final § __.13(a)(l)(ii), with restructuring and a technical change from the proposal. The final rule confirms loans, investments, and services that meet the bona fide intent standard receive full community development credit. A loan, investment, or service meets the bona fide intent standard if:

• The housing units, beneficiaries, or proportion of dollars necessary to meet the majority standard are not reasonably quantifiable;

• The loan, investment, or service has the express, bona fide intent of one or more of the community development purposes in final § __.13(b) through (l); and

• The loan, investment, or service is specifically structured to achieve one or more of the community development purposes in final § __.13(b) through (l).

In addition to reorganizing final § __.13(a)(l)(ii) from the proposal for clarity and to confirm that a bank may receive full credit for meeting the bona fide intent standard, the agencies are clarifying that the bona fide intent standard applies when the “housing units, beneficiaries, or proportion of dollars necessary to meet the majority standard are not reasonably quantifiable.” For example, this standard could be appropriate when considering a loan to an organization that has a bona fide intent of serving low- or moderate-income individuals but does not track data on the income of every individual served, such that demonstrating an activity meets the majority standard would be highly challenging. Additionally, the agencies removed the language in the proposal that the activity must also be “reasonably certain to accomplish” a community development purpose. The agencies appreciated the commenter concern that the “reasonably certain to accomplish” criterion could produce uncertainty and inconsistency in application, based on conjectures regarding the outcomes of the activity. However, the agencies are retaining the criterion that an activity must be “specifically structured to achieve” a community development purpose, which the agencies believe helps to ensure that any activities that do not meet the majority standard appropriately receive consideration under the bona fide intent standard, as an activity focused on a community development purpose.

The agencies also considered the commenter suggestion that the bona fide intent standard should be removed from the final rule, but based on supervisory experience, believe that this would eliminate from consideration numerous beneficial initiatives that have a community development purpose, but do not meet the majority standard in final § __.13(a)(l)(i). Further, the agencies believe the three required criteria for the bona fide intent standard will help to eliminate any potential abuse in the application of this standard. With the revisions to the language regarding the bona fide intent standard, the agencies believe that the standard is a balanced approach to encouraging community development activities, while eliminating from consideration any activities that are not predominantly focused on a community development purpose.

Section __.13(a)(1)(iii) Community Development Related to MDIs, WDIs, LICUs, and CDFIs

As the proposal did not specifically address how the primary purpose consideration would be applied with respect to a loan, investment, or service to an MDI, WDI, LICU, or CDFI that supports community development under proposed § __.13(a)(2)(ix) and (j), the agencies added and are finalizing § __.13(a)(l)(iii) to clarify that activities conducted in conjunction with these four types of entities are eligible for full credit. As discussed in more detail in the section-by-section analysis of final § __.13(k), community development under final § __.13(k) (renumbered from proposed § __.13(j)) differs somewhat from the other types of community development under final § __.13(b) through (j) and (l) in that the credit a bank receives is based exclusively on the entity to which the bank is providing the loan, investment, or service, rather than looking at a measurable benefit using the corresponding dollars, beneficiaries, or housing units associated with the activity. The provision of full credit to these types of activities is also consistent with how the agencies currently consider loans, investments, and services that support MDIs, WDIs, and LICUs.

Section __.13(a)(1)(iv) Community Development Related to LIHTC-Financed Projects

The agencies are adopting proposed § __.13(a)(1)(i)(B), renumbered as final § __.13(a)(1)(iv), with certain revisions for clarity. This provision clarifies the agencies' intent, consistent with the current CRA framework, that a loan, investment or service involving a project financed by LIHTCs under final § __.13(b)(1) will receive full community development credit. Under proposed § __.13(a)(1)(i)(B), full consideration was limited to only investments in projects financed by LIHTCs. Many commenters supported providing full community development credit for all activities that involve LIHTCs to finance affordable housing. Therefore, in response to these commenters and considering past supervisory practice, the agencies adopted final § __.13(a)(1)(iv), to state that a loan, investment or service involving LIHTCs to finance the development of affordable housing under final § __.13(b)(1) will receive full community development credit.

The agencies considered commenter concerns that lending to mixed income housing projects that include units financed by LIHTCs could also include financing for market-rate housing that does not benefit or serve low- and moderate-income individuals. However, the agencies determined that granting full credit for these loans under § __.13(a)(1)(iv) is appropriate for ensuring certainty regarding existing approaches to financing LIHTC projects, as full credit for these loans is consistent with current guidance. The agencies also considered that projects developed with LIHTCs have the expressed intent of providing affordable housing, regardless of the percentage of affordable units that are supported, and believe that providing credit for LIHTC-related lending aligns with the statutory purpose of encouraging banks to meet the credit needs of their communities, including low- and moderate-income populations.

The agencies also considered comments suggesting that full credit for loans, investments, or services should be extended to all affordable housing developed with Federal housing subsidies or to all affordable housing projects developed through CBDOs with a history of serving low- and moderate-income populations. The agencies recognize the importance of all Federal housing programs in financing affordable housing and the important role that CBDOs play in developing affordable housing. However, on further review of these suggestions, the agencies have determined that loans, investments, and services for projects financed by Federal housing subsidies or developed by CBDOs should not automatically receive full consideration because the scope and target of these subsidies and projects may vary greatly. While the agencies believe that most of the affordable housing projects developed in conjunction with Federal subsidies and CBDOs will likely warrant consideration as a community development activity, the agencies believe that they should be considered individually, and not universally provided full credit; rather, given the wide variety of subsidies and projects, the corresponding loans, investments, and services will be more appropriately considered under the full or partial credit criteria in final § __.13(a)(1) and (2), as applicable to these types of projects.

Section __.13(a)(2) Partial Credit

Partial consideration for affordable housing. A second category implemented as part of the restructuring reflected in final § __.13(a) includes loans, investments, and services that will receive partial credit. The agencies are adopting proposed § __.13(a)(l)(i)(A), renumbered as final § __.13(a)(2), and reworded for clarity. Final § __.13(a)(2) memorializes current interagency guidance related to the provision of mixed-income housing with an affordable housing set-aside required by a Federal, State, or local government. Under this construct, a bank will receive partial credit for any loan, investment, or service that supports affordable housing under final § __.13(b)(1) and does not meet the majority standard under final § __.13(a)(1)(i). This partial credit will be calculated in proportion to the percentage of total housing units in any development that are affordable to low- or moderate-income individuals. For example, if a bank makes a $10 million loan to finance a mixed-income housing development in which 10 percent of the units will be set aside as affordable housing for low- and moderate-income individuals according to a local government set-aside requirement, the bank may elect to treat $1 million of such loan as a community development loan. This provision will provide flexibility for banks to engage in affordable housing even if rental housing purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government affordable housing plan, program, initiative, tax credit, or subsidy does not include a majority of housing units that are affordable to low- or moderate-income individuals.

The final rule is intended to be responsive to the numerous commenters that supported the proposal to provide pro rata consideration for affordable rental housing based on the percentage of housing units that are affordable. While commenter suggestions included that banks receive full credit for subsidized affordable housing that represented at least 20 percent of the bank's financing, the agencies believe that such treatment could inappropriately dilute the consideration of community development loans and investments by providing significant amounts of credit for housing that is not affordable to low- and moderate-income people. The agencies have also decided not to provide partial credit to loans or investments in affordable housing projects that are developed without government support if less than 50 percent of the units are affordable. This type of affordable housing may not have protections to preserve the housing as affordable to low- and moderate-income individuals during the term of the loan or investment, which are typical of government-supported affordable housing.

As mentioned previously, the agencies considered comments suggesting that partial credit for affordable housing was too broad and should be limited to provide partial credit only for those projects that maintain at least 20 percent of the units as affordable. However, the agencies do not believe that such a limitation is necessary. The final rule restricts partial consideration to only rental housing in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy pursuant to § __.13(b)(1), which will help ensure that there is an intent of providing affordable housing and will limit the consideration of housing units that may be incidental. The agencies believe it is appropriate to defer to the Federal, State, local, or tribal government to set minimum standards for participating in affordable housing programs, plans, initiatives, tax credits, or subsidies that are responsive to their respective communities.

The agencies also contemplated the suggestion that banks should not receive credit for lending for affordable housing if the housing is associated with a local inclusionary zoning ordinance and provides only the minimum amount of affordable housing required. While the agencies acknowledge the compulsory nature of these ordinances and concerns with providing community development credit for loans and investments that support this housing, the agencies believe that affordable housing associated with inclusionary zoning should be included. The agencies recognize that inclusionary zoning represents an important tool utilized by local jurisdictions to create and preserve affordable housing for low- and moderate-income individuals, especially in higher-income areas. In addition, under the final rule, if affordable housing provided through these programs does not meet the majority standard, the credit afforded to a bank is limited to only the percentage of units that are considered affordable.

Partial consideration for other community development categories. As discussed above, the agencies received a wide range of comments in response to the request for feedback on whether partial credit should be extended to some, or all, community development categories, in addition to affordable housing. After consideration of these comments, the agencies are adopting final § __.13(a)(2) without extending partial credit to other categories of community development. The agencies share commenter concerns that expanding partial consideration beyond mixed-income rental housing could divert limited community development resources away from the projects that target low- or moderate-income people and communities, as well as small businesses and small farms. To this end, the agencies are not adopting suggestions that the final rule provide partial credit for certain larger-scale community development projects that have the potential to impact low- or moderate-income individuals and communities but are not primarily targeted to these populations. Unless these projects are associated with LIHTCs or are conducted with MDIs, WDIs, LICUs, or CDFIs, the agencies believe that these projects should receive credit only when they meet the majority or bona fide intent standards. The full and partial credit criteria in § __.13(a) serve as sufficient guardrails to ensure that low- or moderate-income individuals and communities, as well as other underserved segments of the community identified in community development categories in § __.13(b) through (l), benefit.

The agencies also considered feedback from some commenters that supported some degree of expansion of the partial credit standard with certain qualifications, limitations, and additional criteria. However, the agencies determined that the consistent and transparent application of an expansion with these qualifications would be untenable, such as limiting partial credit to projects that would only happen without CRA recognition or that are widely supported by the community. The agencies also considered suggestions to allow partial consideration with a minimum threshold for the percentage (ranging from 10 to 50 percent and most often cited as 25 percent) of the activity that served low- or moderate-income individuals and geographic areas, small businesses, and small farms. The agencies carefully considered the many varying views on extending a partial credit framework to other community development categories, and the suggested thresholds for doing so. On balance, the agencies believe that applying the majority and bona fide intent standards to other categories of community development affords the consistency and clarity that can foster a predictable and transparent framework for bank partnerships and engagement in community development within the communities they serve. For the reasons discussed above, the agencies believe that government-related mixed-income affordable housing is distinguishable from other types of community development in ways that make a partial credit framework appropriate for facilitating bank involvement in these projects, consistent with government assessments of the affordable housing needs of their communities. Further, the agencies note that banks will receive full credit for any loan, investment, or service that is not entirely dedicated to a community development purpose, as long as it meets the majority or bona fide intent standard pursuant to § __.13(a)(1).

As mentioned previously, several commenters suggested the expansion of partial credit consideration for broadband, noting that the need for this infrastructure is particularly critical in many rural and low- and moderate-income communities. The agencies have considered these comments but determined that outside of affordable housing, it is difficult to single out unique treatment for specific activities. Therefore, the agencies have decided to retain the final rule as proposed, and all activities beyond affordable housing will have to meet the majority or bona fide intent standard pursuant to pursuant to § __.13(a)(1). The agencies recognize that a need for broadband exists in rural and low- or moderate-income communities and seek to address this need under § __.13(g), the community development category for essential community infrastructure, which allows consideration for infrastructure activities, including those expanding broadband access, that benefit or serve targeted census tracts (which includes low-income, moderate-income, or distressed or underserved middle-income nonmetropolitan tracts) and meets other specified criteria. For further discussion, including additional comments on broadband access and other types of essential community infrastructure, see the section-by-section analysis of § __.13(g). The agencies intend that consideration for activities under several community development categories, including revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency that benefit or serve residents of targeted census tracts, including distressed and underserved nonmetropolitan middle-income census tracts, will help to address commenters' concern that partial credit is necessary to ensure that the community development needs of rural areas, which are often more widely dispersed and have fewer low- or moderate-income tracts and individuals, are met.

Section __.13(b) Affordable Housing

In proposed § __.13(b), the agencies proposed a definition for affordable housing that included four components: (1) affordable rental housing developed in conjunction with Federal, State, local, and tribal government programs; (2) multifamily rental housing with affordable rents; (3) activities supporting affordable low- or moderate-income homeownership; and (4) purchases of mortgage-backed securities that finance affordable housing. The agencies intended the proposed definition to clarify the eligibility of affordable housing as well as to recognize the importance of promoting affordable housing for low- or moderate-income individuals. Specifically, the agencies stated their belief that the proposal would, first, add greater clarity around the many types of subsidized activities that currently qualify for CRA consideration. Second, the agencies sought to provide clear and consistent criteria in order to qualify affordable low- or moderate-income multifamily rental housing that does not involve a government plan, program, initiative, tax credit, or subsidy (also referred to in the agencies' proposal as “naturally occurring affordable housing” or “affordable multifamily rental housing”). Third, the agencies stated their intention to ensure that activities that support affordable low- and moderate-income homeownership are sustainable and beneficial to low- or moderate-income individuals and communities. Finally, the agencies, through the proposal, sought to appropriately consider qualifying mortgage-backed security investments, so as to emphasize community development financing activities that are most responsive to low- or moderate-income community needs.

Comments on the overall structure of the agencies' affordable housing proposal varied, with some commenters commending the breadth of housing activities included in the proposal, while others viewed the proposal as too narrow or rigid, or questioned whether the proposal would add burden on banks that may constrain banks' capacities to meet affordable housing needs.

Commenters also provided feedback on specific aspects of the affordable housing community development category proposal, including feedback on which affordable housing activities should be required to meet an agency-determined affordability standard, which affordability standard or standards the agencies should adopt, and what, if any, geographical considerations should be factored in when determining whether affordable housing activities should be eligible for community development consideration.

For the reasons discussed in this section, the agencies have adopted an approach to defining the affordable housing category of community development that aligns closely with the agencies' proposal, as well as key aspects of current practice and interpretations under the CRA. Importantly, in response to commenter feedback, the agencies are adopting modifications to the affordable housing community development category to ensure that the criteria are sufficiently flexible to account for a variety of housing models that address community needs. The final rule adds a component for consideration of activities that finance one-to-four family rental housing with affordable rents in nonmetropolitan areas. In addition, the final rule incorporates revisions designed to clarify the eligibility of rental housing in conjunction with a government affordable housing program, initiative, tax credit or subsidy. The final rule also revises and clarifies the affordability standard for naturally occurring affordable housing, clarifies the requirements for affordable owner-occupied housing activity, and revises and clarifies the requirements for purchases of mortgage-backed securities.

Current Approach

The current CRA regulations define “community development” to include “affordable housing (including multifamily rental housing) for low- or moderate-income individuals.” The agencies have stated in the Interagency Questions and Answers that, for housing to be considered community development, low- or moderate-income individuals must benefit or be likely to benefit from the housing. In this regard, the Interagency Questions and Answers provide that, for example, consideration for a “project that exclusively or predominately houses families that are not low- or moderate-income simply because the rents or housing prices are set according to a particular formula” would not be appropriate.

Under the current regulation, single-family ( i.e., one-to-four family) home mortgage loans are generally considered as part of the large bank and small bank lending tests, but may be considered as community development loans under the community development test for intermediate small banks that do not report such loans under HMDA (at the bank's option and if for affordable housing). Multifamily affordable housing loans may qualify for both retail lending and community development consideration if those loans also meet the definition of a “community development loan.” Housing that is financed or supported by a government affordable housing program or a government subsidy is considered subsidized affordable housing and is generally viewed as qualifying under affordable housing if the government program or subsidy has a stated purpose of providing affordable housing to low- or moderate-income individuals. Multifamily housing with affordable rents that is not financed or supported by a government affordable housing program or a government subsidy, is generally considered unsubsidized affordable housing (and is also referred to in this SUPPLEMENTARY INFORMATION as naturally occurring affordable housing). Such housing can qualify as affordable housing under the current definition of “community development” if the rents are affordable to low- or moderate-income individuals, and if low- or moderate-income individuals benefit, or are likely to benefit, from this housing. Current interagency guidance mentions certain information that examiners may consider in making this determination.

Regarding affordability, no specific standard exists under the current regulatory framework for determining when a property or unit is considered affordable to low- or moderate-income individuals, for either multifamily or single-family housing. One approach used by some examiners is to calculate an affordable rent based on what a moderate-income renter could pay if they allocated 30 percent of their income to rent. Alternatively, some examiners use HUD's Fair Market Rents as a standard for measuring affordability.

Purchases of mortgage-backed securities qualify as affordable housing activity if they demonstrate a primary purpose of community development. Specifically, the security must contain a majority of single-family mortgage loans to low- or moderate-income borrowers, or of loans financing multifamily affordable housing, to qualify as an investment with a primary purpose of affordable housing.

Overall Affordable Housing Category Structure

The Agencies' Proposal

The NPR stated in proposed § __.13(a)(2)(i) that loans, investments, or services that “promote . . . [a]ffordable housing that benefits low- or moderate-income individuals” would have the requisite community development purpose for CRA consideration. This provision cross-referenced proposed § __.13(b) for greater detail about which activities qualify as “affordable housing that benefits low- or moderate-income individuals.” To this end, the agencies proposed four types of activities that would qualify under the affordable housing category of community development: (1) affordable rental housing developed in conjunction with Federal, State, local, and tribal government programs; (2) multifamily rental housing with affordable rents; (3) activities supporting affordable low- or moderate-income homeownership; and (4) purchases of mortgage-backed securities that finance affordable housing.

The agencies sought feedback on what changes, if any, should be made to ensure that the proposed affordable housing category is clearly defined and appropriately inclusive of activities that support affordable housing for low- or moderate-income individuals, including activities that involve complex or novel solutions such as community land trusts, shared equity models, and manufactured housing.

Comments Received

Structure of affordable housing category. Many commenters provided feedback on the overall structure of the proposed affordable housing category of community development. Several commenters suggested that the agencies should not distinguish between government-subsidized and naturally occurring affordable housing. These commenters supported combining the first and second components of the proposed affordable housing category into one, with a universally applied affordability standard. In this regard, some commenters suggested that creating separate affordable housing standards based on the presence or absence of government support would be mistaken and urged the agencies to establish a uniform standard that would apply to all affordable multifamily housing—other than housing financed with LIHTCs—regardless of whether it has government support. These commenters proposed focusing on rent affordability as a percent of area median income, or the HUD Fair Market Rents standard, and a combination of other criteria such as: location in low- or moderate-income census tracts or in census tracts where the median renter is low- or moderate-income; nonprofit or CDFI ownership or control; documented occupancy by low- or moderate-income individuals; or an owner commitment to maintain the affordability of housing units for low- or moderate-income individuals for at least five years. These commenters also asserted that the agencies should include a requirement to periodically confirm the continued affordability of housing activities that receive community development consideration.

Scope of affordable housing category. Many commenters urged the agencies to provide additional support for difficult-to-finance housing projects by narrowing the agencies' proposal. For example, one commenter expressed the view that, by incorporating a wide variety of housing models, the proposed affordable housing category could reward banks that gravitate to easier-to-finance projects, versus projects for which banks may need further incentives to provide financing. Other commenters, for example, suggested that the agencies should prioritize consideration of activities that finance owner-occupied homes over investor-owned housing, with one of these commenters conveying that the agencies should evaluate any investor-related lending to determine whether it helps to build wealth for minority consumers or, alternatively, displaces them. This commenter also asserted that the agencies needed to comprehensively analyze banks' multifamily lending to provide consideration for beneficial activities and to impose sanctions for adverse behavior, such as financing landlords who are harassing and displacing tenants. Along those same lines, several commenters emphasized that the agencies should scrutinize banks' multifamily lending programs, including those conducted in partnership with third-party non-bank institutions, for illegal practices. Another commenter asserted that insufficient regulation of low-income housing tax credit investments has contributed, nationally, to over- concentration and racial and ethnic segregation of low-income housing tax credit projects in minority communities, and that the agencies should address this dynamic in the final rule.

A variety of commenters addressed the agencies' request for feedback on what changes, if any, the agencies should consider to ensure that the proposed affordable housing category of community development is clearly and appropriately inclusive of activities that support affordable housing for low- or moderate-income individuals. Many commenters requested that the agencies add provisions specific to community land trusts, shared equity models, land banks, accessory dwelling units (ADUs), and manufactured housing to the proposed affordable housing category. In support of this view, a commenter asserted that adding these housing initiatives would help strengthen communities and reduce social barriers such as unemployment, lack of education, and limited transportation. Another commenter recommended that the agencies specifically include supportive housing that provides both affordable housing and wrap-around services for people with complex medical needs. Commenters further requested that the agencies allow a guidance line of credit, which is a form of credit pre-approval from a lender, to be eligible for CRA consideration, as this financing method is used by nonprofit organizations in the affordable housing space.

Other general comments on affordable housing category. Some comments touched on affordable housing in conjunction with other community development activities. Commenter feedback included requests that the agencies: promote co-development of disaster preparedness and climate resiliency activities with affordable housing and other activities to mitigate the risk of displacement; provide more support specifically for government-subsidized housing; and provide more quantitative and qualitative consideration of the value of low-income housing tax credit and NMTC syndications and sponsorship activities.

Final Rule

The agencies are adopting final § __.13(b), which establishes criteria for consideration of affordable housing activities, substantially as proposed but with targeted revisions discussed in the section-by-section analysis that follows. Overall, the agencies are adopting a final rule that maintains the multi-pronged approach to the affordable housing category. As part of this, the agencies have decided to retain in the final rule separate prongs for government-related programs, including subsidized affordable housing, and naturally occurring affordable housing. Under this approach, the agencies can better tailor the standards for each affordable housing prong. Moreover, for information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

Section __.13(b)(1) Rental Housing in Conjunction With a Government Affordable Housing Plan, Program, Initiative, Tax Credit, or Subsidy

The Agencies' Proposal

In proposed § __.13(b)(1), the agencies proposed that a rental housing unit be considered affordable housing if it is purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government affordable housing plan, program, initiative, tax credit, or subsidy with a stated purpose or the bona fide intent of providing affordable housing for low- or moderate-income individuals. The agencies intended this proposed provision to cover a broad range of government-related affordable multifamily and single-family rental housing activities for low- or moderate-income individuals, including low-income housing tax credits.

To qualify under this component of the affordable housing category, a government-related affordable housing plan, program, initiative, tax credit, or subsidy would have needed “a stated purpose or bona fide intent of supporting affordable rental housing for low- or moderate-income individuals.” The agencies did not propose a separate affordability standard for this prong and would rely upon the affordability standards set in each respective government affordable housing plan or program.

The agencies sought feedback on whether additional requirements should be included to ensure that activities qualifying under this category of community development support housing that is both affordable to and occupied by low- or moderate-income individuals. In this regard, the agencies sought feedback on whether to include in this component a specific rent affordability standard based on 30 percent of 80 percent of area median income, or a requirement that programs must verify that occupants of affordable units are low- or moderate-income individuals or families. The agencies also sought feedback on whether activities involving government-sponsored programs that have a stated purpose or bona fide intent to provide affordable housing that serves middle-income individuals, in addition to low- or moderate-income individuals, should qualify under this prong in certain circumstances. For example, the agencies sought feedback on government-sponsored programs that support housing affordable to middle-income individuals if the housing is located in nonmetropolitan counties or in high opportunity areas.

Comments Received

Many commenters offered general views on the proposed standards of the first component of the affordable housing category. Some commenters believed the proposed component was overly broad, expressing concerns: that government programs and tax credits do not always benefit low-income individuals and people of color and, therefore, the agencies should reconsider the presumption that any government plan benefits local communities; that the agencies should address the over-concentration and racial and ethnic segregation of low-income housing tax credit projects in minority communities by imposing additional requirements for low-income housing tax credit investments to be eligible for community development consideration; that it is not clear how a plan can require and enforce affordable housing; and that the component should be removed entirely, asserting that it is overly restrictive and could hinder bank investments.

Several commenters asked the agencies to broaden the proposed government-related rental housing standard by permitting activities that are “consistent with” or “in alignment with” government program guidelines, so that such guidelines could be considered but not required. Other commenter feedback included: support for an automatic presumption that activities with State or Federal low-income housing tax credits or other affordable housing tax credits or incentives qualify for community development consideration; and requests that the agencies recognize activities undertaken in conjunction with additional program sponsors such as community-focused entities with a stated mission and record of providing affordable housing and Tribally Designated Housing Entities (TDHEs).

Stated purpose or bona fide intent of providing affordable housing for low- or moderate-income individuals. Some commenters supported the agencies' proposal to require that government plans, programs, initiatives, tax credits, or subsidies must have a “stated purpose or bona fide intent” of providing affordable housing for low- or moderate-income individuals in order for associated bank activities to receive community development consideration. In this regard, a commenter noted that the proposal allows State and local governments to tailor their affordable housing programs to meet the specific needs of their constituents.

Other commenters expressed a variety of concerns about the “stated purpose or bona fide intent” standard, including: that the standard would not adequately target activities that benefit low- or moderate-income households; and that government programs should not need to have a stated purpose or bona fide intent of providing affordable housing to low- or moderate-income individuals.

Affordability standard. Some commenters supported the agencies' proposal to not include an affordability standard in proposed § __.13(b)(1) and recommended that the agencies refrain from establishing any affordability standards for this component.

However, the majority of commenters that addressed this component of the proposal supported establishing an affordability standard that would be based on 30 percent of 80 percent of area median income for rents. This affordability standard would be separate from the affordability standard proposed for naturally occurring affordable housing (which is addressed in the section-by-section analysis of final § __.13(b)(2)). Commenter feedback also included suggestions that the agencies: establish a lower affordability threshold in order to serve a lower income population; utilize hybrid approaches whereby the agencies adopt an area median income-based threshold for all units and require that a portion of the units serve lower income populations, such as very low-income individuals; and use the HUD Fair Market Rents standard to establish affordability standards.

Verification of low- or moderate-income status. Commenters expressed differing views about the use of verification measures to ensure the low- and moderate-income status of renter occupants of housing units. Some commenters supported the inclusion of verification measures in the government-related rental housing component of the final rule to ensure that low- and moderate-income individuals occupy a majority of the affordable units in government-related housing. For example, several commenters suggested that a majority standard was not enough, and that 100 percent of the units should be occupied by low- or moderate-income individuals in order to qualify under § __.13(b)(1). A different commenter supported verifying the income of occupants in circumstances where funding did not occur under government housing programs with income guidelines. However, several other commenters stated that additional verification of occupant income would be unnecessary, given that it is reasonable to assume government programs would collect and verify this information.

Expanding the proposal to cover certain affordable housing to middle-income individuals. Many commenters expressed views regarding whether the agencies should expand CRA consideration in the affordable housing category to include activities in conjunction with government-related rental housing in certain geographic areas that is affordable to middle-income individuals. Some commenters opposed such an expansion, indicating that CRA resources should be targeted to low- or moderate-income families, not middle-income families. For example, a few commenters opposed providing consideration for middle-income housing, noting that the low- or moderate-income housing needs in high opportunity areas are immense and raised a concern that giving consideration for middle-income housing in such areas would dilute the incentive to meet those needs. Some commenters expressed concern that consideration in the affordable housing category for lending that benefits middle- or high-income households would result in banks receiving CRA consideration for financing developments that could price low- and moderate-income families out of their current communities.

Among the commenters that supported expanding CRA consideration to government-related rental housing activities that provide affordable housing to middle-income individuals, most qualified their recommendation by stating that such activities should be limited to high opportunity areas, rural and nonmetropolitan counties, high-cost markets, or a combination thereof. Citing the need for rental housing affordable to middle-income individuals in high opportunity areas and nonmetropolitan areas, one commenter urged the agencies to further explore and consider providing CRA consideration for affordable housing that serves individuals and families with a range of incomes. Another commenter suggested that government programs serving middle-income—as well as low- and moderate-income—individuals in rural and nonmetropolitan areas should be included. A different commenter suggested that CRA consideration may be appropriate in nonmetropolitan and rural areas where median income measurements can distort market characteristics in a way that is unique to rural areas, and that partial credit could be considered for housing benefiting middle-income people if the housing is developed or maintained by a CBDO with a history of serving the needs of low- and moderate-income people and places.

Some commenters urged consideration for housing where the cost of rent is up to HUD's Fair Market Rents standard in the relatively few, particularly unaffordable markets where Fair Market Rents exceeds the affordability standard of 30 percent of 80 percent of area median income. One commenter suggested that housing for middle-income individuals should be considered where there is a documented need by the local government or housing agencies due to the high cost of housing in the area compared to local wages. Another commenter suggested that activities in middle-income census tracts and low- to moderate-income adjacent tracts should be considered. Other commenters recommended that the agencies use a high-cost areas standard rather than a high opportunity areas criterion.

Final Rule

The agencies are adopting final § __.13(b)(1) with some substantive and technical revisions. Under final § __.13(b)(1), rental housing for low- or moderate-income individuals that is purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government affordable housing plan, program, initiative, tax credit, or subsidy will receive consideration under the affordable housing category. This component is intended to enable consideration of the full range of government-related affordable rental housing activities for low- and moderate-income individuals, including programs, plans, initiatives, tax credits, and subsidies pertaining to both multifamily and single-family properties. The examples in the following discussion demonstrate how this affordable housing component is designed to add greater clarity concerning the many types of government-related rental housing activities that qualify for consideration.

The final rule retains the requirement set out in the NPR that an activity be conducted “in conjunction with” a government plan, program, initiative, tax credit, or subsidy to ensure that there is a direct link between activities that are given consideration under this affordable housing prong and government-sponsored programs or initiatives. While the agencies have not adjusted the “in conjunction with” language in the final rule to expand the proposed standard as requested by some commenters, the agencies believe that the range of covered activities is broad. For example, consistent with the agencies' proposal, qualification under this component of the final rule includes activities with rental properties receiving low-income housing tax credits or subsidized by government programs that provide affordable rental housing for low- or moderate-income individuals, such as project-based section 8 rental assistance and the HOME Investment Partnerships Program. In addition, this component includes Federal, State, local, and tribal government affordable housing plans, programs, initiatives, tax credits, or subsidies that support affordable housing for low- or moderate-income individuals. Examples include affordable multifamily housing programs offered by State housing finance agencies and affordable housing trust funds managed by a local government to support the development of affordable housing for low- or moderate-income individuals. Qualification under this component also includes affordable rental units for low- or moderate-income individuals created as a result of local government inclusionary zoning programs, which often provide requirements or incentives for developers to set aside a portion of housing units within a property for occupancy by low- or moderate-income individuals.

Stated purpose or bona fide intent of providing affordable housing for low- or moderate-income individuals. As also discussed in the section-by-section analysis of final § __.13(a), the final rule removes the specific requirement within proposed § __.13(b)(1) that a government plan, program, initiative, tax credit, or subsidy must have a “stated purpose or bona fide intent of providing affordable housing for low- or moderate-income individuals.” The agencies are making this change in part to avoid potential confusion regarding how the activities eligible for consideration under this component differ from activities that qualify for consideration under the bona fide intent standard in final § __.13(a)(1)(ii). Additionally, the agencies have considered commenter feedback that there are government plans, programs, initiatives, tax credits, and subsidies that provide access to rental housing for low- and moderate-income individuals but that do not have a stated mission of providing affordable housing for low- and moderate-income individuals. Removal of this specific requirement is intended to affirm that activities conducted in conjunction with such government plans, programs, initiatives, tax credits, or subsidies nonetheless may be considered under this component of the affordable housing category. Regarding commenter suggestions that certain government programs, including a low-income housing tax credit program, may not benefit, or may negatively affect, low-income or minority communities, the agencies believe that it is appropriate to recognize and defer to the expertise and priorities of Federal, State, and local government entities responsible for the design and implementation of affordable housing programs, plans, initiatives, tax credits, and subsidies. For more information and discussion regarding the agencies' consideration of comments recommending adoption of race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

Affordability standard. While the NPR sought feedback on whether to include an affordability standard for activities under § __.13(b)(1), the final rule implements the proposed approach without applying a uniform affordability standard. Instead, the final rule accommodates the various affordability standards across government affordable housing plans, programs, and initiatives. Consistent with concerns expressed by many commenters, the agencies are of the view that assessing affordability using the standards set in the applicable government program helps to ensure that the affordability determination reflects local needs and priorities that accommodate unique economic conditions, particularly in high-cost and rural areas. In addition, the agencies believe that adopting a uniform affordability standard in this context could create undue complexity by requiring additional evaluation to determine whether some loans, investments, or services supporting rental housing in connection with government programs could receive consideration under other components of the affordable housing category. Accordingly, under final § __.13(b)(1), any loan, investment, or service supporting rental housing in conjunction with a government program will be eligible for consideration. The agencies note that in determining the amount of credit the bank will receive under final § __.13(a), the agencies will defer to the government program's affordability standard. To illustrate, if a government program defines affordability as rent that does not exceed 40 percent of a low- or moderate-income renter's income, the agencies would consider the percentage of units with rents that do not exceed 40 percent of a low- or moderate-income renter's income to determine under final § __.13(a) whether the project meets the majority standard. For more information on the majority standard and partial credit under CRA, see the section-by-section analysis of § __.13(a).

Verification of low- or moderate-income status. As with the proposal, the final rule does not require, for activities under final § __.13(b)(1), verification that a majority of occupants of affordable units are low- or moderate-income individuals. The agencies considered feedback on this issue and note that community development consideration will be based on the pro rata share of affordable units pursuant to final § __.13(a) unless a majority of the units are affordable to low- or moderate-income individuals. See the section-by-section analysis of § __.13(a). Ultimately, the agencies will be able to determine eligibility under final § __.13(b)(1) by leveraging information demonstrating that the housing is in conjunction with a government plan, program, initiative, tax credit, or subsidy, and the rent amounts being charged to renters.

Housing affordable to middle-income individuals. As previously stated, the agencies sought feedback on whether activities involving government programs that have a stated purpose or bona fide intent to provide affordable housing serving low-, moderate-, and middle-income individuals should qualify for affordable housing consideration in certain circumstances, such as when these activities are located in high opportunity areas or nonmetropolitan geographic areas. While the agencies recognize that there are government programs that target affordable housing for middle-income individuals, the agencies have decided not to adopt a provision that would extend § __.13(b)(1) to include housing affordable solely to middle-income individuals in certain geographic areas. Consistent with the proposal, and as discussed further in the section-by-section analysis of final § __.13(a)(2), bank support for projects and programs that include housing that is affordable to low-, moderate-, and middle-income individuals would be eligible for pro rata consideration based on the portion of the project affordable to low- and moderate-income individuals.

The agencies acknowledge feedback from some commenters raising concerns about the limited supply of affordable housing in high opportunity areas and nonmetropolitan areas and expressing the view that consideration of support for housing affordable to middle-income individuals could provide additional flexibility for banks to identify opportunities to address community needs. However, the agencies are persuaded by commenter concerns that broadening this category could reduce the emphasis on activities that directly contribute to housing for low- and moderate-income individuals, for whom housing options in high opportunity areas and nonmetropolitan areas are equally important and may be more difficult to attain.

Under current CRA interagency guidance, examiners have flexibility to consider a bank's lending and investments in high-cost areas, including those activities that address the housing needs of middle-income individuals in addition to low- or moderate-income individuals. In developing the final rule, the agencies considered whether this flexibility should be incorporated into the evaluation of multifamily rental housing activities in conjunction with a government plan, but decided to retain the proposed rule's focus on housing units that are affordable to low- and moderate-income individuals. The agencies considered that additional regulatory provisions would be needed to designate high-cost markets and to ensure that low- and moderate-income individuals are also likely to benefit from the housing (generally consistent with standards for affordable housing in high-cost market under current guidance) and found these requirements would add undue complexity to the final rule while also adding significant uncertainty in terms of how this would impact affordable housing opportunities for low- and moderate-income individuals. Relatedly, the agencies considered that the structure of the Community Development Financing Metric would not distinguish between housing affordable to low- and moderate-income individuals, as opposed to middle-income households in high-cost markets, and have considered concerns that including all of these activities in the metric could impact the degree to which activities focus on housing affordable to low- and moderate-income individuals who likely also face acute housing needs in such high-cost areas. The agencies further considered the role of the impact and responsiveness review and whether it could address such complexities; however, the agencies determined that such an approach would be uncertain and that the more appropriate approach, on balance, was to focus this component on housing affordable to low- and moderate-income households. The agencies note that government affordable housing programs may benefit low-, moderate-, and middle-income individuals, even in high-cost markets. Accordingly, for an activity to receive full consideration under the final rule, the majority of the housing units must be affordable to low- or moderate-income individuals. If the housing units that are affordable to low- and moderate-income individuals represent less than a majority of the housing units, then the activity will receive pro rata consideration under the final rule.

For nonmetropolitan areas, the agencies considered—as expressed by some commenters—that these geographies may have limited opportunities for affordable housing. However, the agencies have determined that, as in other geographies, the best approach in nonmetropolitan areas is to focus on units affordable to low- or moderate-income individuals under this component of affordable housing. As discussed above, under the alternative approach of allowing housing affordable to middle-income individuals in nonmetropolitan areas, bank activities for affordable housing could consist of activities solely or mostly focused on housing affordable to middle-income individuals, with an eliminated or reduced focus on housing affordable to low- or moderate-income individuals in these communities. Accordingly, under the final rule, activities in conjunction with government programs in nonmetropolitan areas that may include middle-income renters such as the USDA Section 515 Rural Rental Housing or Multifamily Guaranteed Rural Rental Housing programs could be eligible for consideration to the extent such activities create units affordable to low- and moderate-income individuals. In addition, the agencies note the addition of a component focused on affordable single-family rental housing in nonmetropolitan census areas, as discussed further in the section-by-section analysis of § __.13(b)(3).

While the agencies have declined to expand consideration of rental housing activities in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy that targets middle-income individuals, the agencies believe that including an impact and responsiveness factor that supports affordable housing in High Opportunity Areas in final § __.15(b)(7) will support encouragement of affordable housing in geographic areas where the cost of residential development is high and affordable housing opportunities can be limited. Additional impact and responsiveness factors, such as the geographic impact and responsiveness factors discussed in the section-by-section analysis of § __.15(b)(1) through (3), may also help encourage more affordable housing in nonmetropolitan areas. These and other impact and responsiveness factors are discussed further in the section-by-section analysis of final § __.15.

Section __.13(b)(2) Multifamily Rental Housing With Affordable Rents

The Agencies' Proposal

Proposed § __.13(b)(2) provided criteria to define affordable low- or moderate-income multifamily rental housing that does not involve a government program, initiative, tax credit, or subsidy (also referred to as naturally occurring affordable housing in this SUPPLEMENTARY INFORMATION ). With the proposed criteria in § __.13(b)(2), the agencies sought to provide clear and consistent standards to identify naturally occurring affordable housing that may receive affordable housing consideration under the CRA. First, under this component, the agencies proposed that the rent for the majority of the units in a multifamily property could not exceed 30 percent of 60 percent of the area median income for the metropolitan area or nonmetropolitan county. Second, the agencies proposed that naturally occurring affordable housing would also be required to satisfy one or more of the following additional eligibility criteria in order to increase the likelihood that units benefit low- or moderate-income individuals: (1) the housing is located in a low- or moderate-income census tract; (2) the housing is purchased, developed, financed, rehabilitated, improved, or preserved by a nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing; (3) there is an explicit written pledge by the property owner to maintain rents affordable to low- or moderate-income individuals for at least five years or the length of the financing, whichever is shorter; or (4) the bank provides documentation that a majority of the residents of the housing units are low- or moderate-income individuals or families.

Comments Received

Overall, commenters supported the inclusion of naturally occurring affordable housing in the affordable housing category. Many commenters generally expressed the view that naturally occurring affordable housing is an important part of the affordable housing ecosystem and serves many low- or moderate-income individuals.

Several commenters supported the inclusion of naturally occurring affordable housing-related activity but expressed concerns that the proposal as written would be either too restrictive or too lenient to provide assurance that the activity would actually support affordable housing for low- or moderate-income individuals. One commenter that opposed the inclusion of naturally occurring affordable housing in the affordable housing category asserted that doing so would divert CRA-eligible capital from traditional income-restricted, subsidized affordable housing that provides permanently affordable apartments to low- or moderate-income families, while another expressed concern that the proposal would not provide sufficient protection to residents in gentrifying areas and suggested additional affordability restrictions. Commenters who were concerned with the requirements being too restrictive expressed, for example, that the proposed standards would not account for any of the naturally occurring affordable housing in their local markets.

Final Rule

The agencies are adopting in final § __.13(b)(2) a component for naturally occurring affordable housing with some substantive revisions. Specifically, as described in detail in the section-by-section analyses that follow, the final rule recognizes that multifamily rental housing purchased, developed, financed, rehabilitated, improved, or preserved can be considered under final § __.13(b)(2) if for the majority of units, the monthly rent as underwritten by the bank, reflecting post-construction or post-renovation changes, does not exceed 30 percent of 80 percent of the area median income and if the housing also meets one or more of the criteria in final § __.13(b)(2)(ii). The agencies believe that naturally occurring affordable housing provides a meaningful contribution to the stock of available affordable housing and believe that the criteria discussed in more detail below will help to address commenter concerns that including consideration for such housing will divert resources from other types of affordable housing projects.

As noted previously, some commenters urged the agencies to implement a single category for all affordable rental housing, including housing that is developed in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy and naturally occurring affordable housing. Upon consideration of commenter feedback, the agencies have determined to retain a separate component in the final rule for multifamily rental housing that has rents affordable to low- and moderate-income individuals. Naturally occurring affordable housing is not already subject to the requirements of a government plan, program, initiative, tax credit, or subsidy, and the agencies believe that by including adequate affordability criteria and the additional criteria in § __.13(b)(2)(ii), the final rule will help to ensure that activities qualifying under this prong will meaningfully benefit low- and moderate-income individuals.

Section __.13(b)(2)(i) Affordability Standard for Multifamily Rental Housing With Affordable Rents

The Agencies' Proposal

The agencies proposed an affordability standard to determine if multifamily rental housing had affordable rents and therefore would be considered naturally occurring affordable housing. The agencies proposed that rents would be considered affordable if the rent for the majority of the units in a multifamily property did not exceed 30 percent of 60 percent of the area median income for the metropolitan area or nonmetropolitan county. This proposed standard would have established narrower affordability criteria than what is often used today to determine whether rents are affordable for low- or moderate-income individuals, which is 30 percent of 80 percent of the area median income.

Under the agencies' proposal, the rent amount used to determine whether the affordability standard is met would be the monthly rental amounts as underwritten by the bank, reflecting any post-construction or post-renovation rents considered as part of the bank's underwriting for financing. The agencies' objective in including this provision was to target community development consideration to properties that are likely to remain affordable and to minimize the likelihood of providing consideration for activities that may result in displacement of low- or moderate-income individuals. The agencies intended to reinforce these objectives by requiring that a majority of the units meet the affordability standard. The agencies sought feedback on whether there were alternative ways to ensure that CRA consideration for support of naturally occurring affordable housing is targeted to properties where rents remain affordable for low- or moderate-income individuals.

Comments Received

Many commenters addressed the affordability threshold for naturally occurring affordable housing under proposed § __.13(b)(2). The majority of commenters on the issue opposed the proposed affordability threshold of 30 percent of 60 percent of area median income and supported raising the affordability threshold to 30 percent of 80 percent of area median income. Commenters cited several reasons for adopting a higher affordability standard, including that doing so would align with other affordable housing programs and would better account for affordable housing needed to address housing shortages and provide workforce housing. Some commenters expressed concern that a 30 percent of 60 percent of area median income affordability standard could have a negative impact on the availability of debt financing for affordable rental housing. Other commenters supported the proposed 30 percent of 60 percent of area median income affordability threshold, citing that it would preserve resources for low- or moderate-income renters who are most in need of housing support. Other commenters suggested that the affordability standard should be closer to 30 percent of 30 to 50 percent of area median income in high-cost areas. In contrast, some commenters asserted that the affordability threshold should be higher and more flexible in high-cost markets. Lastly, a few commenters recommended that the agencies adopt the HUD Fair Market Rents standard to determine rental affordability for naturally occurring affordable housing.

Several commenters expressed support for the proposal that monthly rents, for the purposes of determining affordability, be determined as underwritten by the bank, reflecting post-construction or post-renovation changes, as applicable. However, these same commenters noted that, to ensure continuing affordability, consideration for prior-year financings should be conditioned on periodic documentation that the units remain affordable. For example, one commenter suggested that examiners should evaluate rent rolls annually to confirm ongoing affordability of properties financed in prior years and examination cycles.

The agencies received comments supporting the requirement that a majority of units in a naturally occurring affordable housing property must meet the affordability standard. One commenter suggested that the agencies consider a higher standard for the percent of units that must meet the affordability criteria to ensure long term affordability of most units. Another commenter expressed concerns that the proposed requirement does not adequately incentivize mixed income and inclusionary housing. Rather, the commenter suggested the final rule should provide pro rata credit based on the percentage of affordable units among market rate units in a property.

Final Rule

Final § __.13(b)(2)(i) is revised from the proposal and adopts an affordability standard stating that naturally occurring affordable housing purchased, developed, financed, rehabilitated, improved, or preserved will be considered affordable housing under final § __.13(b) if, for the majority of the units, the monthly rent as underwritten by the bank, reflecting post-construction or post-renovation changes as applicable does not exceed 30 percent of 80 percent of the area median income. The affordability standard adopted in the final rule does not include the proposed 30 percent of 60 percent of the area median income affordability standard, which the agencies proposed in recognition that, historically, a substantial percentage of occupied rental units with affordability between 61 and 80 percent of area median income were occupied by middle- or upper-income households. However, the agencies have determined that the proposed affordability standard would have restricted eligibility for properties with affordability levels at 80 percent of area median income even in cases where many of the units are occupied by low- or moderate-income households. Additionally, the agencies are sensitive to the concerns expressed by some commenters that the proposed affordability standard could have had a negative impact on the availability of debt financing for this type of affordable housing. The overwhelming majority of commenters favored the adoption of a more flexible affordability standard than the proposal, with most commenters supporting the use of the 30 percent of 80 percent of area median income affordability standard adopted in final § __.13(b)(2)(i).

The final rule retains the agencies' proposal to use the monthly rental amounts as underwritten by the bank to determine whether the rental housing meets the affordability standard. The prong further specifies that rent amounts should reflect any post-construction or post-renovation changes considered as part of the bank's underwriting for providing financing. The agencies' objective in including this provision is to target community development consideration to properties that are likely to remain affordable and to avoid providing consideration for activities that may result in displacement of low- or moderate-income individuals.

Though some commenters suggested that the agencies require documentation (such as rent rolls or an annual review of rents) to confirm ongoing affordability, the agencies are not adopting an annual verification process as part of the final rule. In this context, the agencies view evaluation of the loan underwriting, which contains a forward-looking assessment of projected rent amounts and rental income, along with the requirement to meet one of the four additional criteria, described below, as sufficient to promote the agencies' objective of ensuring that a bank intends to finance properties where rent remains affordable to low- or moderate-income individuals.

Final § __.13(b)(2)(i) requires the majority of units in naturally occurring affordable housing to meet the affordability standard. The prong does not award pro rata consideration for activities related to properties in which fewer than 50 percent of housing units are affordable. The agencies believe that this requirement will help to ensure activities that qualify under this prong support housing that is both affordable and likely to be occupied by low- and moderate-income individuals. As discussed further in the section-by-section analysis of final § __.13(a) above, this majority standard in § __.13(b)(2) is consistent with similar majority criteria for other categories of community development in § __.13(a), which are intended to emphasize activities that are responsive to community needs, especially the needs of low- and moderate-income individuals and communities.

Section __.13(b)(2)(ii) Additional Eligibility Standards for Multifamily Rental Housing With Affordable Rents

The Agencies' Proposal

The agencies proposed that one of four additional criteria would have to be met for multifamily housing to qualify as naturally occurring affordable housing under proposed § __.13(b)(2). These criteria were intended to increase the likelihood that multifamily housing under this component of affordable housing would benefit low- or moderate-income individuals and that the rents would likely remain affordable for low- or moderate-income individuals. Specifically, in addition to the requirement that rents for a majority of the units meet the affordability standard, multifamily housing would have to meet at least one of the following criteria:

(1) The housing is located in a low- or moderate-income census tract;

(2) The housing is purchased, developed, financed, rehabilitated, improved, or preserved by any nonprofit organization with a stated mission of, or that otherwise directly supports, affordable housing;

(3) The property owner has made an explicit written pledge to maintain affordable rents for low- or moderate-income individuals for at least five years or the length of the financing, whichever is shorter; or

(4) The bank provides documentation that the majority of the housing units are occupied by low- or moderate-income individuals or families.

Comments Received

The agencies received a number of comments on this aspect of the proposal, with some commenters objecting generally to the proposed additional criteria, suggesting that naturally occurring affordable housing should be simplified into a single requirement that the housing meet an affordability standard. Comments specific to each of the additional eligibility criteria are discussed in the respective section-by-section analyses for those sections.

Final Rule

The agencies are adopting proposed § __.13(b)(2)(i) through (iv) in a revised and reorganized final § __.13(b)(2)(ii), which requires naturally occurring affordable housing to meet one or more eligibility criteria in addition to the affordability standard in § __.13(b)(2)(i). Specifically, the final rule requires that a project meet at least one of the following eligibility criteria: (1) the housing is located in a low- or moderate-income census tract; (2) the housing is located in a census tract in which the median income of renters is low- or moderate-income and the median rent does not exceed 30 percent of 80 percent of the area median income; (3) the housing is purchased, developed, financed, rehabilitated, improved, or preserved by any nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing; or (4) the bank provides documentation that a majority of the housing units are occupied by low- or moderate-income individuals or families.

The agencies have adopted several changes to the proposed eligibility criteria based on commenter feedback, as described below. The agencies believe that the eligibility criteria adopted in the final rule will ensure that naturally occurring affordable housing is likely to benefit low- or moderate-income individuals and increase the likelihood that rents will remain affordable for low- or moderate-income individuals. By offering multiple criteria to demonstrate that rental housing with affordable rents is likely to benefit low- and moderate-income individuals, the agencies sought to provide flexibility and balance the objectives of encouraging banks to support naturally occurring affordable housing with ensuring that this housing is likely to benefit low- and moderate-income individuals.

Section __.13(b)(2)(ii)(A) and (B) Low- or Moderate-Income Census Tracts and Low- and Moderate-Renter Median Income Census Tracts

The Agencies' Proposal

The first proposed additional criterion was that the location of the multifamily housing be in a low- or moderate-income census tract. This criterion was based in part on the agencies' recognition that verifying tenant income might be infeasible for many property owners or developers, whereas median census tract income is readily available. This criterion is also consistent with current guidance providing that examiners may consider economic and related factors associated with a particular geographic area to determine whether the housing is likely to benefit low- or moderate-income individuals.

The agencies also sought feedback on whether to include a geographic criterion to encompass middle- and upper-income census tracts in which at least 50 percent of renters are low- or moderate-income. The agencies considered that affordable rental housing in a neighborhood in which the majority of renters are low- or moderate-income would also be likely to benefit low- or moderate-income individuals. Incorporating this standard into the CRA regulation could result in multifamily housing in certain middle- and upper-income census tracts qualifying as naturally occurring affordable housing under proposed § __.13(b)(2).

Further, the agencies sought feedback on not including a geographic criterion. Under this option, to qualify under this component of affordable housing, the multifamily housing would have had to meet one of the other criteria in addition to the proposed affordability standard of rents not exceeding 30 percent of 60 percent of the area median income.

Comments Received

The agencies received some comments that supported requiring all naturally occurring affordable housing to be located in a low- or moderate-income census tract. Alternatively, some commenters urged the agencies to eliminate this criterion, with viewpoints including: that multifamily loans should be evaluated on the affordability of the housing and not simply the location of the housing; that this criterion could present a risk of providing consideration for units that are not serving low- or moderate-income residents soon after the financing occurs; and that this criterion could incentivize concentrating affordable housing in low- or moderate-income areas.

Some commenters addressed the agencies' request for comment on whether to expand this proposed geographic criterion. Of these, several commenters indicated a preference to prioritize other criteria ( e.g., affordability and low- or moderate-income occupancy) over the location of a property. However, other commenters supported qualifying naturally occurring affordable housing specifically in census tracts in which the majority of renters were low- or moderate-income. One commenter supported expansion of the geographic criteria into census tracts in which the majority of renters were low- or moderate-income if the agencies also increased the required percentage of units in naturally occurring affordable housing properties from the proposed 50 percent to 60 or 67 percent. Some commenters supported qualifying naturally occurring affordable housing in other geographic areas, including distressed and underserved census tracts, and others supported expansion of the geographic criteria to nonmetropolitan and rural census tracts.

Final Rule

In final § __.13(b)(2)(ii)(A), the agencies are adopting the proposed geographic criterion ( see proposed § __.13(b)(2)(i)), that the housing be located in a low- or moderate-income census tract, as one of the ways of demonstrating that naturally occurring affordable housing is likely to benefit low- and moderate-income individuals. This approach is consistent with existing guidance, under which examiners may review factors such as demographic, economic, and market data in surrounding geographies to determine the likelihood that housing will “primarily” accommodate low- or moderate-income individuals. For example, examiners look at median rents of the assessment area and the project; the median home value of either the assessment area, and the project; the median home value of either the assessment area, low- or moderate-income geographies, or the project; the low- or moderate-income population in the area of the project; or the past performance record of the organization(s) undertaking the project. In addition, retaining the geographic criterion provides a streamlined option for determining whether housing qualifies as naturally occurring affordable housing that is likely to benefit low- and moderate-income individuals or families, as census tract income data is readily available and verifiable information.

The final rule also adopts a new geographic criterion in final § __.13(b)(2)(ii)(B), indicating that naturally occurring affordable housing may qualify for consideration if it is located in a census tract in which the median income of renters is low or moderate, and the median rent does not exceed 30 percent of 80 percent of the area median income. In doing so, the agencies intend to help address the concern commenters noted, that restricting naturally occurring affordable housing to low- and moderate-income census tracts could promote geographic concentrations of poverty, and the agencies recognize the importance of locating affordable housing in communities of all income levels.

The agencies acknowledge concern expressed by some commenters that naturally occurring affordable housing in middle- and upper-income tracts could be more likely to attract higher-income renters and could contribute to the involuntary displacement of lower-income renters. The agencies evaluated several alternatives to this geographic criterion to better ensure that low- and moderate-income renters were likely to benefit from this housing and determined that adding the requirement that the median rent in the census tracts must not exceed 30 percent of 80 percent of the area median income would increase the likelihood that low- and moderate-income individuals would benefit from the housing. Moreover, adding these census tracts increases the number of qualifying census tracts (compared to only low- and moderate-income tracts) by over 100 percent—adding about 23,000 middle- and upper-income census tracts—in addition to the approximately 22,500 low- and moderate-income census tracts that would be eligible currently. This criterion also aligns with current guidance in the Interagency Questions and Answers on the information that may be considered when determining the likelihood that the housing will primarily accommodate low- or moderate-income individuals or families.

Section __.13(b)(2)(ii)(C) Nonprofit Organizations With a Stated Mission of, or That Otherwise Directly Support, Providing Affordable Housing

The Agencies' Proposal

The agencies proposed a second criterion for determining whether multifamily housing qualifies as naturally occurring affordable housing under proposed § __.13(b)(2). Specifically, the agencies proposed that if housing is purchased, developed, financed, rehabilitated, improved, or preserved by any “nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing,” then the activity could be considered naturally occurring affordable housing. The agencies intended this provision to encompass organizations that have a mission to serve individuals and communities especially vulnerable to housing instability or that otherwise target services to low- or moderate-income individuals and communities. Multifamily housing that met this criterion in addition to the affordability standard in proposed § __.13(b)(2)(i) would qualify as naturally occurring affordable housing under proposed § __.13(b)(2) in any census tract, including middle- and upper-income census tracts.

Comments Received

Most of the commenters who commented on the second proposed criterion for naturally occurring affordable housing supported its inclusion and stated that it was well tailored to providing CRA consideration for units that meet the purposes of the CRA. A few commenters suggested that this criterion should be a requirement for CRA consideration for naturally occurring affordable housing. In addition, some commenters recommended additional requirements—for example, that the nonprofits should be led by people of color, a majority of residents should be low- or moderate-income, or the property must be compliant with anti-displacement principles.

Several other commenters opposed the proposed criterion. For example, a commenter opposing this criterion stated that it would impede banks from garnering community development financing consideration because affordable housing often comes from partnerships with small developers, as well as nonprofit organizations.

Final Rule

Under final § __.13(b)(2)(ii)(C), the agencies are adopting the proposed additional eligibility criterion for affordable multifamily housing activity in conjunction with a nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing substantially as proposed ( see proposed § __.13(b)(2)(ii)). The agencies observe that many of these nonprofit organizations serve individuals and communities that are especially vulnerable to housing instability or otherwise target services to low- or moderate-income individuals and communities. The agencies do not anticipate that this criterion will impede community development financing consideration for banks working with small property developers that are not nonprofit organizations, as this criterion is only one of four criteria for qualifying naturally occurring affordable housing activities. The agencies also considered commenter recommendations for additional requirements, and the agencies do not believe such additional requirements are necessary given the agencies' view that the proposed criterion is adequate to provide consideration for loans, investments, and services supporting housing units that are likely to be occupied by low- or moderate-income individuals.

Proposed § __.13(b)(2)(iii) Written Affordability Pledge

The Agencies' Proposal

The agencies proposed a third criterion for determining whether multifamily housing would qualify as naturally occurring affordable housing under proposed § __.13(b)(2). This criterion would have required the property owner's explicit written pledge to maintain rents that are affordable for at least five years or for the length of the financing, whichever is shorter, and was intended to address concerns about the likelihood of rents in an eligible property increasing in the future and potentially displacing low- or moderate-income households. Multifamily housing that met this criterion in addition to the baseline affordable rent standard discussed above would qualify as naturally occurring affordable housing under proposed § __.13(b)(2) in any census tract, including middle- and upper-income census tracts.

Comments Received

Several commenters supported this proposed criterion. Of those commenters, a few supported the proposed five-year time period for the affordability pledge. Most commenters addressing this aspect of the proposal suggested extending the duration of the pledge—to 10, 15, or 20 years—or ensuring that the pledge is binding. Other commenter sentiment included: that the effectiveness of the criterion would depend on the legal enforceability of such a written pledge and the ability of an entity to monitor compliance; that this criterion should be required of all naturally occurring affordable housing lending and should not be optional; and that the pledge should be to keep the rents affordable for low- and moderate-income renters for the life of the investment or loan. Another commenter suggested that the agencies should publish best-practice examples of documents that outline the affordability restrictions, time period for those restrictions, and applicable tenant protections.

Some commenters, however, opposed the additional criterion for an owner's explicit written pledge altogether on the grounds that it would be unappealing to property owners and unrealistic in many markets.

Final Rule

In the final rule, the agencies have determined to not adopt the proposed additional eligibility criterion that would allow consideration based on an explicit written pledge by the property owner to maintain affordable rents for low- or moderate-income individuals for at least five years or the length of the financing, whichever is shorter. In proposing this additional eligibility criterion, the agencies sought to increase the number of options for demonstrating the likelihood that housing will benefit low- and moderate-income persons, while recognizing that requiring such a pledge would necessitate additional documentation.

In determining not to adopt this part of the proposal, the agencies considered the views of many commenters who supported the written affordability pledge proposal, a longer affordability period, or a mandatory pledge on the belief that such requirements would help to ensure that housing remains affordable and would limit the risk of renter displacement due to increasing rents. The agencies also considered feedback that the effectiveness of such a pledge would depend on its legal enforceability and that enforcing the pledge could be impracticable and potentially require an entity to monitor compliance.

The agencies evaluated the proposed additional criterion in light of feedback from commenters and determined that, because neither the agencies nor the banks would be in a position to effectively oversee the enforceability of these pledges, which may not be recorded in the public record, the impact of these pledges could be limited. In addition, the proposed criterion would have required the pledge to be in effect for either five years or the length of the financing, which could have had the unintended result of providing consideration for, and possibly unintentionally encouraging, one-year loans that would not contribute to ongoing affordability. Finally, by retaining the criterion that naturally occurring affordable housing be purchased, developed, financed, rehabilitated, improved, or preserved by any nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing, the agencies believe that including a pledge criterion would likely be superfluous for nonprofit owners, and not a clear means to capture activity that is outside other criteria that would apply to naturally occurring affordable housing.

Section __.13(b)(2)(ii)(D) Tenant Income Documentation

The Agencies' Proposal

A fourth additional criterion proposed by the agencies for determining whether multifamily housing would qualify as naturally occurring affordable housing under proposed § __.13(b)(2) was that the bank provided documentation that the majority of the housing units were occupied by low- or moderate-income individuals or households. Multifamily housing that met this criterion in addition to the affordability standard in § __.13(b)(2)(i) would qualify as naturally occurring affordable housing under proposed § __.13(b)(2) in any census tract, including middle- and upper-income census tracts.

Comments Received

Of those commenters who weighed in on the criterion that the bank provide documentation that the majority of the housing units were occupied by low- or moderate-income individuals or households, most supported retaining it as a criterion in the final rule and suggested ways that the criterion could be successfully implemented. However, one commenter asserted that banks do not have the authority to collect tenant income information, while another indicated that the documentation could be impossible to obtain if units remain vacant after the project is completed. Another commenter suggested that the acceptance of Housing Choice Vouchers should be included as a way of demonstrating that rents will be affordable for low- and moderate-income individuals. A few commenters raised objections, stating that the proposed criterion is unnecessary, overreaching, and impractical as proposed and could lead banks that seek CRA consideration to impose new burdensome administrative requirements on multifamily borrowers.

Final Rule

The final rule adopts § __.13(b)(2)(iv) as proposed, renumbered as final § __.13(b)(2)(ii)(D), which allows a bank to demonstrate the eligibility of multifamily housing by, in addition to meeting the affordability standard, providing documentation that a majority of the housing units in an unsubsidized multifamily affordable housing project are occupied by low- or moderate-income individuals or families. For example, in the case of a multifamily rental property with a majority of rents set at 30 percent of 80 percent of area median income, the activity could receive consideration under this additional criterion where the bank can document that the majority of occupants receive Housing Choice Vouchers. ³¹⁶ The agencies observe that such documentation would demonstrate that the activity was benefiting low- or moderate-income individuals. The agencies acknowledge commenters' assertion that tenant income documentation might be unobtainable, unnecessary, or impractical. However, the agencies ultimately believe this criterion provides a useful alternative for banks that are able to obtain such documentation through the process of originating or renewing a loan. Banks retain the flexibility to demonstrate eligibility using the other criteria in final § __.13(b)(2)(ii)

Other Comments on Naturally Occurring Affordable Housing

Commenters offered a variety of suggestions for alternative ways to ensure that CRA consideration for naturally occurring affordable housing would be targeted to properties where rents remain affordable for low- or moderate-income individuals. Some commenters indicated that the rule should emphasize one or more of the proposed criteria in different combinations, while other commenters offered suggestions for criteria that were not expressly contemplated in the proposal. A few commenters asserted that the agencies should take steps to limit consideration for financing that may not provide long-term affordable housing, citing, for example, concern regarding the long-term intentions of certain institutional investors and private developers. Several commenters requested that the agencies require contracts or land use agreements that ensure a specific level and length of affordability, especially, at least one commenter noted, for properties where a renovation is occurring.

Some commenters suggested that the agencies create anti-displacement requirements, quality of housing requirements, or both, in order for activities supporting naturally occurring affordable housing properties to qualify for CRA consideration. Commenter feedback along these lines included: that the agencies should require banks to demonstrate that landlord borrowers are complying with tenant protection, habitability, local health code, civil rights, credit reporting act, unfair, deceptive, or abusive acts and practices, and other laws; that the agencies should give credit to banks for adopting and adhering to anti-displacement and responsible lending best practices in their CRA activities, and downgrade banks for incidents of harm and displacement of low- or moderate-income and racial and ethnic minority tenants; that incentivizing mixed‐income housing developments with a focus on racial and income integration would help address displacement concerns; and that loans to finance rental housing should only receive consideration if they are structured to tangibly improve the lives of tenants and do not permit landlords to pull money away from operations to pay for greater debt service.

Final Rule

For the reasons stated in the preceding discussion of the affordability standard and additional eligibility requirements, the agencies are adopting the component for naturally occurring affordable housing under final § __.13(b)(2) with revisions. The agencies are not adopting commenter suggestions to restrict CRA consideration for financing provided to institutional investors and private developers, because the basis for doing so is not clear, especially if the affordability requirements of this section are met, and because such parties play an important role in adding to the overall supply of needed affordable housing. Instead, the agencies are relying on the criteria adopted to ensure that the multifamily housing with affordable rents is likely to benefit low- or moderate-income individuals. Similarly, the agencies considered, but are not requiring contracts or land use agreements that ensure a specific level and period of affordability, as these would be challenging for a bank to enforce efficiently. Additionally, the agencies are not including an additional criterion in this component regarding resident displacement and responsible lending best practices. The agencies believe that such a criterion is less needed in the naturally occurring affordable housing context given that such activities will create units or facilitate maintenance of existing units of affordable housing, and examiners will retain the discretion to consider whether an activity reduces the number of housing units affordable to low- or moderate-income individuals. The agencies believe the adopted criteria will appropriately encourage activities beneficial to low- and moderate-income individuals and families.

Section __.13(b)(3) One-to-Four Family Rental Housing With Affordable Rents in Nonmetropolitan Census Tracts

The Agencies' Proposal

In the NPR, the agencies sought feedback on whether single-family rental housing should be considered under the naturally occurring affordable housing category, provided that it meets the same combination of criteria proposed for multifamily rental housing. This alternative would have expanded the affordable housing category to include single-family rental housing that meets the affordability threshold and the additional eligibility criteria under proposed § __.13(b)(2)(i) and (ii), respectively. The agencies also sought feedback on whether such an alternative should be limited to rural geographies, or eligible in all geographies. In seeking feedback on the potential expansion to include unsubsidized single-family affordable rental housing, the agencies acknowledged that single-family rental housing can be an important source of affordable housing, especially in geographies, such as rural communities, where multifamily housing is less common.

Comments Received

Many commenters offered views on whether single-family rental housing should be considered under the naturally occurring affordable housing category, provided such housing meets the requirements of proposed § __.13(b)(2). Some commenters generally opposed expanding the naturally occurring affordable housing proposal to include single-family homes, noting: that this expansion could incentivize investors buying single-family homes to serve as investment properties rather than encouraging homeownership amongst low- or moderate-income individuals and families; that such an expansion could inadvertently reinforce racial segregation and concentrated poverty; and that permanent home mortgage loans for single-family rental housing were already covered as part of the proposed Retail Lending Test.

Most of the commenters that remarked on this alternative supported broadening the eligibility of naturally occurring affordable housing to include single-family rental housing in some or all geographies. For example, one commenter noted that affordable single-family rentals are a critical part of the multipronged approach to address affordable housing in this country and should be included in the affordable housing category.

Imposing higher standards for single-family rental housing. Although several commenters suggested applying the exact same naturally occurring affordable housing criteria to both multifamily and single-family housing, some commenters suggested that activities relating to single-family rentals be held to a higher standard or subject to additional restrictions as compared to activities relating to multifamily naturally occurring affordable housing. Commenters supporting higher standards raised a number of considerations including: that single-family rental housing should be limited to homes that either are eligible for purchase ( e.g., lease-to-own), are prioritized for low- or moderate-income families enrolled in first-time homeowner programs through HUD, or are part of a State program that will remain permanently affordable through a community land trust or other vehicle to sustain affordability; that single-family rental housing should be limited to housing owned or developed by a nonprofit organization; and that, if for-profit ownership and development is allowed, there should be mechanisms to ensure that the property is in decent physical condition and that bank financing is not supporting abusive property owners, landlords, management companies, or investors.

Other commenters expressed concerns about investor activity. For example, a commenter suggested that the agencies restrict CRA consideration to properties whose owners own fewer than 50 single-family rental units unless the owner is a nonprofit with a bona fide mission of providing affordable housing. Another commenter recommended that, to prevent speculative activity or corporate ownership, the agencies could exclude from consideration single-family rental housing in any low- or moderate-income or predominantly minority census tract in which more than one-third of the single-family housing stock became rental housing in last five years.

Geographic considerations in recognizing affordable single-family rental activity. A few commenters addressed the agencies' request for comment on whether to limit any inclusion of single-family rental properties in the proposed naturally occurring affordable housing component to properties located in rural areas. The majority of these commenters opposed limiting single-family rentals to rural areas. In this regard, a commenter stated that affordable housing is needed everywhere and, therefore, the category should not be limited to rural communities. A few commenters supported limiting single-family rentals to rural areas, noting the large percentage of occupied rental units in rural areas that are single-family homes. Another commenter suggested eliminating all geographic criteria and allowing single-family rentals to receive CRA consideration anywhere.

Final Rule

The final rule adopts as final § __.13(b)(3) a component in the affordable housing category for single-family rental housing in nonmetropolitan areas. The component applies in instances where such housing is purchased, developed, financed, rehabilitated, improved, or preserved, and the housing meets the affordability criterion in final § __.13(b)(2)(i) and at least one of the additional eligibility criteria in final § __.13(b)(2)(ii). This component is intended to address single-family rental housing with affordable rents in nonmetropolitan areas. As previously noted, the agencies inquired whether the proposed approach to considering naturally occurring affordable housing should be broadened to include single-family rental housing that meets the requirements in proposed § __.13(b)(2), and if so, whether consideration of single-family rental housing should be limited to rural geographies, or eligible in all geographies. In making this determination, the agencies have considered the views from commenters on this request for feedback.

Standards for single-family rental housing. Currently, the lack of a consistent standard for affordability, combined with unclear methods for determining whether low- or moderate-income individuals are likely to benefit, leads to inconsistent consideration of unsubsidized affordable housing, including single-family rental housing. The agencies sought feedback on the potential application of the criteria in proposed § __.13(b)(2)(i) and (ii) to single-family rental housing because those criteria aim to provide a consistent methodology for determining benefit for low- or moderate-income individuals. After considering commenter feedback, the agencies believe that the revised criteria for naturally occurring affordable housing for multifamily rental housing under § __.13(b)(2), which include a defined affordability standard and a requirement that rents be determined based on the amounts used by the bank for purposes of underwriting, are suitable for adoption in the single-family nonmetropolitan area rental housing context. The agencies carefully considered commenter suggestions for a more stringent or more lenient affordability standard, and determined that adopting the criteria in final § __.13(b)(2) for both multifamily rental housing and single-family rental housing in nonmetropolitan areas will provide a clear and consistent option that is likely to benefit low- and moderate-income individuals and families.

Geographic considerations in recognizing affordable single-family rental activity. Although the agencies considered the assertion by some commenters that affordable rental housing is needed in all geographic areas, as noted previously, this component supports consideration only for single-family rental housing in nonmetropolitan areas. The agencies also considered that the composition of the housing stock varies across geographies, and that in some areas, such as in certain nonmetropolitan areas, it may be difficult to develop affordable multifamily rental housing at scale, either in conjunction with a government program or as naturally occurring affordable housing. An agency analysis of data from the 2016–2020 American Community Survey showed that 22 percent of occupied rental units in nonmetropolitan areas are structures with more than 4 units, compared to 47 percent of occupied rental units in metropolitan areas. In reaching their determination, the agencies believe that the final rule approach appropriately balances adding a component specific to affordable single-family rental housing and tailoring it to the unique affordable housing needs in nonmetropolitan areas. The agencies also considered that not including this component could otherwise limit opportunities for affordable housing in nonmetropolitan areas.

This component is designed to address the single-family affordable housing needs in nonmetropolitan areas, including the particular needs in rural areas. Accordingly, although the agencies recognize that single-family affordable housing is important to addressing the affordable housing needs for low- and moderate-income individuals in metropolitan areas, the agencies have determined not to expand this component to apply to single-family rental housing in metropolitan areas. Such units may still be eligible for consideration under final § __.13(b)(1) to the extent that the unit(s) and associated loan, investment, or service meet the requirements under that component.

Section __.13(b)(4) Affordable Owner-Occupied Housing for Low- or Moderate-Income Individuals

The Agencies' Proposal

Proposed § __.13(b)(3) provided a component for the affordable housing category of community development for “activities that support affordable owner-occupied housing for low- or moderate-income individuals.” This component included activities that: (1) “directly assist low- or moderate-income individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing”; or (2) “support programs, projects, or initiatives that assist low- or moderate-income individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing.” Owner-occupied housing referenced in the agencies' proposal included both single-family and multifamily owner-occupied housing.

Activities under proposed § __.13(b)(3) would have expressly excluded single-family home mortgage loans considered under the Retail Lending Test in proposed § __.22. Instead, as discussed in the agencies' proposal, activities eligible for consideration under proposed § __.13(b)(3) included, for example, construction loan financing for a nonprofit housing developer building single-family owner-occupied homes affordable to low- or moderate-income individuals; financing or a grant provided to a nonprofit community land trust focused on providing affordable housing to low- or moderate-income individuals; a loan to a resident-owned manufactured housing community with homes that are affordable to low- or moderate-income individuals; a shared-equity program operated by a nonprofit organization to provide long-term affordable homeownership; and financing or grants for organizations that provide down payment assistance to low- or moderate-income homebuyers. Other activities eligible for consideration under this proposed component include: activities with a governmental or nonprofit organization with a stated purpose of, or that otherwise directly supports, providing affordable housing; and activities conducted by the bank itself, or with other for-profit partners, provided that the activity directly supports affordable homeownership for low- or moderate-income individuals.

The agencies sought feedback on what conditions or terms, if any, should be added to this component to ensure that qualifying activities are affordable, sustainable, and beneficial for low- or moderate-income individuals and communities.

Comments Received

Nearly all commenters that commented on the affordable homeownership component of the NPR expressed support for CRA consideration for such activities. Some of the commenters suggested a different definition for this component under which the financing, construction, or rehabilitation of owner-occupied homes would qualify if: (1) the homes are located in a low- or moderate-income census tract or a distressed or underserved middle-income nonmetropolitan census tract; and (2) the sales price does not exceed four times the area median income. One commenter noted that this definition should explicitly include government programs with a “stated purpose or bona fide intent” of providing affordable housing or housing assistance for low-, moderate-, or middle-income individuals.

Many commenters offered specific suggestions regarding the activities that should be eligible for consideration under this component. Commenter suggestions included: that the agencies should explicitly include financing for the rehabilitation or reconstruction of an already owner-occupied home if the owner is a low- or moderate-income individual; that investments and interests in early buyout loans should receive CRA consideration because they enable servicers to work with and buy delinquent loans with government insurance or guarantees without foreclosing on the properties, thereby allowing residents to remain in their homes; and that the agencies should provide CRA consideration for the costs of transporting housing materials to remote areas.

A few commenters encouraged the agencies to use this component to encourage affordable homeownership for specific populations. For example, a commenter suggested that the agencies increase and preserve affordable homeownership for low- or moderate-income individuals from racial and ethnic groups that were subjected to redlining and other discriminatory practices. Similarly, a commenter recommended that the agencies emphasize activities that expand homeownership for first-time buyers who are individuals with disabilities or represent other underserved populations.

Some commenters encouraged the agencies to include specific products or programs in this component of affordable housing. These suggestions include first-look homebuyer programs, home repair programs that help homeowners bring homes into building code compliance, participation in specific pilot programs offered by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Government-sponsored enterprises or the GSEs), real estate-owned note sales, education on and resolution of heirs' property titles, low balance loans for homeowners, use of alternative credit models, limited equity housing cooperatives, and property tax abatements to assist low- or moderate-income owners whose taxes have risen rapidly. Other commenters suggested that the agencies provide CRA consideration for activities related to lender fee-for-service payments, investment, grants, and developing fees for service programming by HUD-certified housing counseling agencies. Lastly, some commenters recommended that the agencies encourage banks to partner with nonprofit affordable housing groups to provide or support affordable homeownership options. These commenters explained that nonprofit affordable housing groups—including developers, owners, counselors, and others—provide products and services that are appropriately tailored to low- and moderate-income borrowers and help guard against predatory or unsustainable homeownership activities.

Final Rule

The agencies are adopting proposed § __.13(b)(3), renumbered as final § __.13(b)(4), with clarifying revisions to provide community development consideration for activities that support affordable owner-occupied housing for low- and moderate-income individuals. Specifically, in final § __.13(b)(4), affordable housing includes “assistance for low- or moderate-income individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing, excluding loans by a bank directly to one or more owner-occupants of such housing.” The agencies believe that adopting this component facilitates consideration of a variety of the affordable housing models suggested by commenters. The agencies also note that some of the activities suggested by commenters, such as use of alternative credit scores, special purpose credit programs, and use of other credit products that assist low- or moderate-income individuals with purchasing a home could be considered responsive credit products under the Retail Services and Products Test, described in the section-by-section analysis of § __.23. Owner-occupied one-to-four-family home mortgage loans, including but not limited to owner-occupied one-to-four-family home mortgage loans considered under the Retail Lending Test in § __.22, are excluded from consideration under this component.

Relative to the agencies' proposal, the final rule combines the two prongs (“direct” support and support for “plans, programs, and initiatives”) into a single component that covers all forms of assistance for affordable homeownership. By creating a single component, the agencies seek to streamline the requirement and clarify that a bank may receive community development consideration for activities that support any qualifying assistance under the component regardless of whether the support is provided directly to a low- or moderate-income individual or indirectly, through a third-party organization. As a result, under the final rule, a down payment grant provided by a bank to a low- or moderate-income individual is evaluated using the same standards as those standards that apply to a down payment grant to a nonprofit organization that provides affordable housing assistance to low- or moderate-income individuals. This parallel treatment is consistent with the agencies' objectives, including the objective seeking to provide greater clarity and consistency in the application of the regulations, and the criteria in the proposal.

Assistance for low- or moderate-income individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing. Under final § __.13(b)(4), activities that assist low- or moderate-income individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing are considered. The proposal would have recognized activity that “directly” assists with these functions. The agencies removed “directly” to better align this component with the majority standard outlined in final § __.13(a)(1)(i)(B)( 1).

As noted in the proposal, activities under this component could be conducted in conjunction with a variety of financing types. For example, this component would include activities such as construction loan financing for a nonprofit housing developer constructing single-family owner-occupied homes affordable to low- or moderate-income individuals; a grant to a nonprofit organization that provides home rehabilitation and weatherization improvements for low- and moderate-income homeowners; financing or a grant to a nonprofit community land trust focused on providing affordable housing to low- or moderate-income individuals; a loan to a resident-owned manufactured housing community with homes that are affordable to low- or moderate-income individuals; a shared-equity program operated by a nonprofit organization to provide long-term affordable homeownership; and financing or grants for organizations that provide down payment assistance to low- or moderate-income homebuyers.

Furthermore, under this component, eligible activities may include those involving assistance to a government agency or nonprofit organization that provides access to affordable homeownership, and assistance provided by the bank itself, or by other for-profit entities. Accordingly, each of the following may qualify for consideration under final § __.13(b): participation in first-look homebuyer programs or home repair programs that help homeowners bring homes into building code compliance; a down payment grant offered directly by a bank to help low- or moderate-income individuals purchase a home; an investment in a government bond that finances home mortgage loans for low- or moderate-income borrowers; and activities supporting a program that conducts free home repairs or maintenance for low- or moderate-income homeowners.

Exclusion of loans by a bank directly to owner-occupants. The proposal specifically excluded any home mortgage loans considered under the Retail Lending Test in § __.22. The agencies were concerned that, as written, the requirement could suggest that a bank might receive consideration for such loans under either performance test, but not both. To minimize confusion and to clarify the agencies' intent, final § __.13(b)(4) replaces the reference to the Retail Lending Test with language that excludes any loan directly to an owner-occupant, regardless of whether the loan is considered under the Retail Lending Test. Consistent with the proposal, this clarification ensures that banks will not receive CRA consideration under both final § __.13(b)(4) and final § __.22 for a single loan.

Section __.13(b)(5) Mortgage-Backed Securities

The Agencies' Proposal

Under proposed § __.13(b)(4), the agencies proposed to define standards for investments in mortgage-backed securities related to affordable housing that qualify for community development consideration. Specifically, the agencies proposed that mortgage-backed securities would qualify as affordable housing when the security contained “a majority of either loans financing housing for low- or moderate-income individuals or loans financing housing that otherwise qualifies as affordable housing under [proposed § __.13(b)].” This proposed component of affordable housing was intended to be generally consistent with current practice and to recognize that purchases of qualifying mortgage-backed securities that contain home mortgage loans to low- or moderate-income borrowers or that otherwise contain loans that qualify as affordable housing are investments in affordable housing.

The agencies sought feedback on alternative approaches that would create a more targeted definition of qualifying mortgage-backed securities. One alternative approach would be to consider investments in mortgage- backed securities only in proportion to the percentage of loans in the security secured by affordable properties. For example, if 60 percent of a qualifying mortgage-backed security consists of single-family home mortgage loans to low- or moderate-income borrowers, and 40 percent of the security consists of loans to middle- or upper-income borrowers, the mortgage-backed security would receive consideration only for the dollar value of the loans to low– or moderate-income borrowers. Additionally, the agencies sought feedback on whether to limit consideration of mortgage-backed securities to the initial purchase of a mortgage-backed security from the issuer, and not to consider subsequent purchases of the security. This change would have been intended to reduce the possibility of multiple banks receiving CRA consideration for purchasing the same security.

Comments Received

The majority of commenters recognized the important role mortgage-backed security purchases play in creating liquidity for the mortgage market and enabling banks to originate more loans and favored retaining this component of affordable housing. However, many of these commenters supported restrictions on the types of eligible securities as well as the amount of CRA consideration received relative to other activities. Other commenters suggested eliminating consideration for purchases of mortgage-backed securities altogether because of the view that such investments are low impact or add little value to communities.

Scope. Some commenters requested that the agencies clarify or modify the scope of this component. For example, a commenter sought clarification regarding the treatment of purchases of securities collateralized by mortgage loans in low- and moderate-income census tracts. Separately, several commenters recommended that the proposed mortgage-backed securities component include purchases of other affordable housing investment vehicles issued by State housing finance authorities or municipalities, such as mortgage revenue bonds. In contrast, other commenters supported restricting consideration to certain types of purchases of mortgage-backed securities, such as loans or mortgage-backed securities purchased from a certified CDFI, or loans or mortgage-backed securities that meet certain requirements but that are not guaranteed by the Federal Government. Other commenters proposed limitations that would provide CRA consideration only for the first or second purchase of a mortgage-backed security.

Amount of consideration for mortgage-backed securities. The majority of commenters addressing the agencies' request for comment on whether to consider investment in mortgage-backed securities only in proportion to the percentage of loans in the security secured by affordable properties favored the proportional consideration alternative. In contrast, a couple of commenters addressing this alternative opposed using proportional consideration, asserting that it would increase complexity without material benefit to the volume and scope of affordable housing activities in low- or moderate-income communities. Other commenters suggested a hybrid approach whereby full CRA consideration would be granted for investments in mortgage-backed securities comprised of 50 percent or more affordable housing loans and pro rata credit would be granted for investments in mortgage-backed securities comprised of less than 50 percent affordable housing loans. Another commenter suggested that the full value of a mortgage-backed security only be considered when at least 50 percent of the underlying loans were used to finance supportive affordable housing developments.

Other commenters recommended that CRA consideration for purchases of mortgage-backed securities be discounted relative to other community development investments. These commenters suggested that mortgage-backed securities investments be discounted by 50 percent in comparison to more traditional lending or investment in qualified CRA activities because these securities remain liquid and provide comparably less public benefit than other qualifying CRA activities. Similarly, some commenters suggested that the agencies limit consideration for mortgage-backed securities investments to a percentage of a bank's nationwide community development activity, with some of these commenters suggesting either a 20 or 25 percent cap. Other commenters requested that consideration be limited to the percentage of loans to low- or moderate-income individuals.

Other restrictions or limitations. Finally, several commenters suggested that the agencies consider or set a minimum threshold for the time period that a bank must hold the mortgage-backed securities on its books, such as two or more years. Some commenters also opposed limiting mortgage-backed securities consideration to only the initial purchase from the issuer, citing that this limitation would add complexity and could negatively impact the market for mortgage-backed securities.

Final Rule

In the final rule, the agencies are adopting the proposal related to mortgage-backed securities, renumbered as final § __.13(b)(5) and reorganized to include final § __.13(b)(5)(i) and (ii), with both substantive and clarifying edits. Specifically, the final rule includes as a component of affordable housing purchases of mortgage-backed securities that are collateralized by loans, a majority of which are not loans that the bank originated or purchased, and which are either home mortgage loans made to low- or moderate-income individuals or loans financing multifamily affordable housing that meets the requirements of final § __.13(b)(1). For clarity, the two subcategories (home mortgage loans to low- or moderate-income individuals and loans secured by multifamily affordable housing) form two separate prongs under the overall mortgage-backed security component.

The agencies are also revising final § __.13(b)(5) to confirm that the component only applies to mortgage-backed securities where a majority of the underlying loans are not loans that the bank originated or purchased. This limitation is consistent with current interagency guidance and ensures that banks are not likely to receive consideration under both final § __.13(b)(5) and the Retail Lending Test in final § __.22 for the same loan(s).

Section __.13(b)(5)(i)

Section __.13(b)(5)(i). Final § __.13(b)(5)(i) specifies that affordable housing includes purchases of mortgage-backed securities where a majority of the underlying loans are not loans that the bank originated or purchased and “[a]re home mortgage loans made to low- or moderate-income individuals.” This provision adopts the proposal to consider purchases of mortgage-backed securities that contain a majority of “loans financing housing for low- or -moderate income individuals” (proposed § __.13(b)(4)). On further review, the agencies determined that “loans financing housing for low- or -moderate income individuals” could be read broadly to include single-family loans and multifamily loans. The agencies intended, however, to refer with this language solely to loans secured by single-family homes. Thus, final § __.13(b)(5)(i) refers more specifically to “home mortgage loans made to low- or moderate-income individuals.” As discussed further in the section-by-section analysis of § __.12, “home mortgage loan” is defined to mean a “closed-end home mortgage loan” or an “open-end home mortgage loan,” which are in turn defined to exclude multifamily loans.

The agencies also note that final § __.13(b)(5)(i) only allows consideration based on the income of the individuals to whom the loans are made and does not allow consideration for mortgage-backed securities solely because the underlying loans are secured by property in low- and moderate-income census tracts. This approach, which is consistent with the agencies' proposal, is intended to maintain the component's focus on low- or moderate-income individuals. The agencies do not believe that providing consideration for mortgage-backed securities where the underlying loans are made to middle- or upper-income individuals residing in low- or moderate-income census tracts is likely to further the agencies' goal of encouraging affordable housing lending to low- and moderate-income individuals.

Section __.13(b)(5)(ii)

Under final § __.13(b)(5)(ii), the agencies replaced phrasing that referred to loans that finance housing that “otherwise qualifies” as affordable housing with a direct reference to final § __.13(b)(1). This revision clarifies that, as it relates to multifamily housing, the agencies intend to provide community development consideration only for those mortgage-backed securities where a majority of the underlying loans are secured by multifamily rental housing purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with government affordable housing plans, programs, initiatives, tax credits, and subsidies. The agencies believe that this clarification will facilitate consistency in evaluating mortgage-backed securities. The agencies note that purchases of tax-exempt bonds issued by Freddie Mac and Fannie Mae, which finance affordable housing projects, and tax-exempt bond issuances that finance affordable housing projects sponsored by State housing authorities or municipalities, may be eligible for community development consideration under the final rule, provided that the bond is a mortgage-backed security that meets the requirements in final § __.13(b)(5)(ii).

Amount of consideration for mortgage-backed securities. Under final § __.13(a) mortgage-backed securities that meet the requirements in final § __.13(b)(5) ( i.e., a majority of the underlying loans are not loans that the bank originated or purchased, and are either home mortgage loans made to low- or moderate-income individuals or loans financing multifamily affordable housing that meets the requirements of final § __.13(b)(1)) will be eligible to receive consideration for the full value of the security. The agencies carefully considered commenter feedback regarding the amount of consideration that mortgage-backed securities should be eligible to receive under CRA, including ideas for partial consideration of bank investments in mortgage-backed securities. On further deliberation, the agencies are not adopting a partial consideration framework for bank investments in mortgage-backed securities. The agencies believe that the final rule's majority approach for mortgage-backed securities will facilitate compliance and supervision, as it is less complex than other alternatives suggested and considered, and consistent with the majority standard employed in most other categories of community development. While generally aligned with current guidance on bank investments in mortgage-backed securities noted earlier, the final rule will provide greater clarity, transparency, and uniformity in how bank investments in mortgage-backed securities are considered under CRA.

The agencies believe that the requirements in final § __.13(b)(5), including the majority requirement, the home mortgage loan limitation, and the express tie to final § __.13(b)(1) for multifamily affordable housing, appropriately balance considerations of current guidance; the benefits of greater consistency and clarity in the treatment of investments in mortgage-backed securities under CRA; and the recognition that purchases of mortgage-backed securities containing home mortgage loans to low- or moderate-income borrowers or loans that finance multifamily affordable housing can improve liquidity, in turn supporting more loans to low- and moderate-income borrowers and more affordable housing development. The agencies remain sensitive to commenter views that mortgage-backed securities are lower in impact and responsiveness to community credit needs than other qualifying affordable housing activities more directly supporting housing for low- or moderate-income individuals. Accordingly, the agencies will continue to monitor the impact of including mortgage-backed securities in the affordable housing category.

Other restrictions or limitations. After carefully considering commenter feedback, the agencies have decided not to limit consideration of mortgage-backed securities to the initial purchase of a mortgage-backed security from the issuer under this component. The agencies sought feedback on limiting consideration to the initial purchase in order to emphasize activities that may more directly serve low- or moderate-income individuals and communities and to reduce the possibility of multiple banks receiving CRA consideration for purchasing the same security. However, the agencies believe that this potential limitation is mitigated as examiners will be able to use information regarding the amount of time a mortgage-backed security was owned by the bank to determine the appropriate amount of consideration. For more information regarding the agencies' use of performance context, see the section-by-section analysis of § __.21(d).

Complex, Specialized, and Novel Topics in Affordable Housing

As previously noted, the agencies sought feedback on how to ensure that the proposed affordable housing category is clearly defined and appropriately inclusive of activities that support affordable housing for low- or moderate-income individuals, including activities that involve complex, specialized, or novel solutions, such as community land trusts, shared equity models, and manufactured housing. The agencies considered the wide array of commenter responses that identified particular activities that help to further access to affordable housing for low- and moderate-income individuals. However, the agencies have declined to revise the affordable housing category to explicitly list such activities, because the agencies believe that many of the activities identified in comments would be eligible for community development consideration under the various components of the affordable housing category. This outcome is consistent with the agencies' objective for the affordable housing category, which is to create standards and identify characteristics that may be used to evaluate a broad range of affordable housing activities and programs, both current and future, and identify those that meet the standards for consideration. The following is a discussion of the ways in which several activities cited by commenters are captured within the various affordable housing components or may otherwise receive consideration under the final rule.

Manufactured housing. In the NPR, the agencies stated that a loan to a resident-owned manufactured housing community with homes that are affordable to low- or moderate-income individuals could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderate-income individuals. As noted previously, the agencies also requested feedback about the inclusion of manufactured housing in the proposed affordable housing category.

The agencies received several comments related to manufactured housing, and commenters provided feedback on a variety of approaches for affordable manufactured housing eligibility. For example, some commenters supported special consideration of financing for affordable manufactured housing that is on tribal land, while other commenters supported a broader approach to include all loans that finance affordable manufactured housing. Some commenters urged the agencies to provide consideration only for resident-owned manufactured housing communities or to nonprofit organizations that provide land for manufactured housing. In contrast, other commenters urged the agencies to include consideration for for-profit manufactured home communities, with one commenter suggesting that loans to manufactured housing communities with homes that are affordable to low- or moderate-income individuals should not be restricted to only resident-owned communities, because for-profit entities play an essential role in purchasing older communities and making significant infrastructure repairs, such as roads, sewer, and water. Another commenter suggested that community development consideration should be extended for loans to manufactured home dealers that commit to providing more favorable financing terms to low- or moderate-income buyers.

The agencies have considered these comments and recognize that manufactured housing can provide important affordable housing options for low- and moderate-income individuals and families. Nonetheless, the agencies intend and expect that some manufactured housing activity will meet the requirements under a component of affordable housing adopted in the final rule. For example, an acquisition loan made to a manufactured housing community with homes that are affordable to low- or moderate-income individuals could help fill a housing gap and may qualify under final § __.13(b)(4) as assistance supportive of affordable owner-occupied housing for low- or moderate-income individuals. Alternatively, financing provided to a nonprofit, in conjunction with a government program, to develop manufactured housing and buy land for use as affordable rental housing for low- and moderate-income individuals and families could qualify under final § __.13(b)(1) (rental housing in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy). As discussed further in the section-by-section analysis of final § __.22(d)(1), below, single-family home mortgage loans meeting the HUD code for manufactured housing are generally reportable under HMDA, and will therefore receive consideration under the Retail Lending Test in final § __.22.

Shared equity housing programs and community land trusts. In the NPR, the agencies stated that a shared-equity program operated by a nonprofit organization to provide long-term affordable homeownership could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderate-income individuals. In addition, the agencies stated that an activity that provides financing for the acquisition of land for a shared equity housing project that brings permanent affordable housing to a community could meet the impact review factor for activities that result in a new community development financing product or service under the Community Development Financing Test or the Community Development Financing Test for Limited Purpose Banks, to the extent that it involves a new strategy to meet a community development need.

The NPR also specifically addressed community land trusts, which typically operate a specific type of shared-equity program. The agencies stated that providing financing to, or a grant for a nonprofit community land trust focused on providing affordable owner-occupied housing to low- or moderate-income individuals could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderate-income individuals. Several commenters noted that activities, such as those conducted in coordination with community land trusts, can prevent displacement of vulnerable residents.

It is the agencies' view that shared equity housing programs, including but not limited to community land trust activities, provide opportunities to support long-term affordable housing. Commenters generally supported qualification of these activities under the affordable housing category, with some commenters noting that such activities can make homeownership affordable for low- or moderate-income individuals who might be otherwise unable to afford to purchase a home. The agencies agree that shared equity housing and community land trusts are important tools to promote homeownership. Although the final rule does not create a separate component or prong for qualification of shared equity housing as affordable housing, the agencies highlight that loans, investments, and services involving shared equity programs and community land trusts may be eligible for consideration under final § __.13(b)(4), when they involve assistance for low- or moderate-income individuals to obtain affordable owner-occupied housing. As another example, to the extent that a community land trust operates rental housing meeting the requirements under final § __.13(b)(1) or (2), loans, investments, and services to support such housing would qualify for consideration under the applicable component. Moreover, mortgage loans that allow homeowners to purchase a home through these programs may be considered under the Retail Lending Test in final § __.22, or under the responsive credit product evaluation in the Retail Services and Products Test in final § __.23.

Accessory dwelling units (ADUs). Several commenters requested consideration for banks supporting development of ADUs under the affordable housing category. For example, commenters requested consideration for loans extended to finance ADUs that are intended to help low- and moderate-income homeowners develop an income-producing property that could offset the cost of a mortgage or rising property taxes, or to encourage affordability by creating additional housing supply. One commenter suggested that the agencies provide community development consideration to ADUs and small multifamily buildings and asked the agencies to clarify that banks can receive consideration for loans to support improvements and repairs to existing dwellings, including for small dollar loans and to install accessibility features.

As adopted under final § __.13(b), certain activities related to ADUs could be considered affordable housing, such as those that contribute to the provision of housing affordable to low- and moderate-income individuals and families. For example, a loan to a nonprofit organization that supports the creation of an ADU on the property of a low- or moderate-income homeowner could qualify under final § __.13(b)(4). Alternatively, a loan or investment in a fund operated in conjunction with a government program to support the construction of ADUs could qualify under final § __.13(b)(1), if the resulting ADUs were rental housing for low- or moderate-income individuals (and not considered under the Retail Lending Test).

Land banks. The NPR did not specifically address the consideration of land banks under the various prongs of the affordable housing category, and a number of commenters requested that the agencies explicitly address land banks and land bank-related activities in the final rule. Commenters stated that land bank-related activities often help to address the need for affordable housing for low- and moderate-income individuals and in low- and moderate-income communities. The agencies recognize that land banks, which are typically established by a government entity or a nonprofit organization, can help to facilitate the development of affordable housing by acquiring and holding land until some future time when it can be developed as affordable housing. The agencies acknowledge that many of these activities could be considered under the affordable housing category if they have the bona fide intent and are specifically structured to provide affordable housing for low- and moderate-income individuals, and the agencies believe that these activities could qualify under several components of the affordable housing category under the final rule. For example, a loan to a land bank created by a government entity to hold land for the development of affordable rental housing could qualify under final § __.13(b)(1). Alternatively, a loan to a land bank operated by a nonprofit organization for the purpose of acquiring land on which to develop and sell single-family housing to low- and moderate-income individuals could qualify under final § __.13(b)(4).

Special purpose credit programs. In the proposal, the agencies sought feedback on whether special purpose credit programs should be listed as an example of a responsive credit product or program that facilitates mortgage and consumer lending targeted to low- or moderate-income borrowers under the Retail Services and Products Test. Several commenters instead recommended qualification for these activities under the affordable housing category of community development. In response to these comments, the agencies note that under the final rule, special purpose credit programs can be considered in the evaluation of responsive credit products and services pursuant to final § __.23(c)(2)(v). In addition, although specific special purpose credit programs are not expressly listed as qualifying programs under the affordable housing category in final § __.13(b), the agencies recognize that it would be possible for the objectives of specific special purpose credit programs to align with one or more affordable housing category components, and in such cases, these activities may be eligible for consideration within the affordable housing category of community development. For example, a grant to a nonprofit who is implementing a special purpose credit program that provides down payment assistance to low- or moderate-income individuals may qualify for consideration under final § __.13(b)(4).

Down payment assistance. In the NPR, the agencies stated that financing or grants for organizations that provide down payment assistance to low- or moderate-income homebuyers could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderate-income individuals under proposed § __.13(b)(3). Several commenters suggested that the agencies provide consideration for activities that provide down payment assistance to low- and moderate-income individuals. Nonetheless, the agencies note that direct grants and other programs offered by banks that help low- and moderate-income homebuyers make a down payment are eligible for consideration as an activity that supports affordable homeownership for low- and moderate-income individuals under final § __.13(b)(4), as long as the down payment assistance is not provided as a loan by the bank directly to the owner-occupant of the home.

Other suggested housing programs. Commenters requested that the agencies explicitly address many additional activities, including but not limited to home repair for low- and moderate-income individuals and families, supportive housing models, and first-look homebuyer programs. The agencies have considered these recommendations and acknowledge that there are many types of investments, loans, and services provided by banks in connection with such activities that may qualify under the affordable housing category of community development. As previously noted, many activities recommended by commenters would qualify under one or more of the five affordable housing components adopted in final § __.13(b), when the activity meets the qualifying criteria and thereby supports affordable housing for low- and moderate-income individuals and families. In addition, to provide increased certainty on what community development activities will qualify for CRA consideration, pursuant to final § __.14, the agencies will maintain a publicly available, non-exhaustive illustrative list of examples of community development activities that qualify for CRA consideration, including examples of qualifying affordable housing activities. The list will be periodically updated. Final § __.14 also provides a formal confirmation process through which any bank could request a determination as to whether a proposed community development activity would be eligible for CRA consideration.

Section __.13(c) Economic Development

Current Approach

Under the current regulation, community development is defined to include “[a]ctivities that promote economic development by financing businesses or farms that meet the size eligibility standards of the U.S. Small Business Administration Development Company (SBDC) or Small Business Investment Company (SBIC) programs or have gross annual revenues of $1 million or less.” Under the current Interagency Questions and Answers, activities qualify as economic development if they meet both a “size” test and a “purpose” test.

Size test. An institution's loan, investment, or service meets the “size” test if it finances, directly or through an intermediary, businesses or farms that either meet, as noted, the size eligibility standards of the SBDC or SBIC programs, or have gross annual revenues of $1 million or less. The term “financing” is considered broadly and includes technical assistance that readies a business that meets the size eligibility standards to obtain financing.

Currently, small business loans and small farm loans that meet the definition of “loans to small businesses” or “loans to small farms,” based on the Call Report definitions—loans with original amounts of $1 million or less to businesses and loans with original amounts of $500,000 or less to farms —are generally evaluated as retail loans and not as community development loans. Loans that exceed these amounts, as applicable, can be considered as community development loans if the business or farm borrower either meets the size eligibility standards of the SBDC or SBIC programs or has gross annual revenues of $1 million or less.

Purpose test. A bank's loans, investments, or services can meet the “purpose” test if they “promote economic development” by supporting either:

(1) Permanent job creation, retention, and/or improvement:

• For low- or moderate-income persons, in low- or moderate-income census tracts, in areas targeted for redevelopment by Federal, State, local, or tribal governments;
• By financing intermediaries that lend to, invest in, or provide technical assistance to start-ups or recently formed small businesses or small farms; or

• Through technical assistance or supportive services for small businesses or farms, such as shared space, technology, or administrative assistance; or

(2) Federal, State, local, or tribal economic development initiatives that include provisions for creating jobs or improving access by low- or moderate-income persons to jobs or to job training or workforce development programs.

The agencies will presume that loans, investments, or services in connection with the following specific government programs promote economic development, thereby satisfying the purpose test: SBDCs, SBICs, USDA Rural Business Investment Companies (RBICs), New Markets Venture Capital Companies, NMTC-eligible Community Development Entities (CDEs), or CDFIs that finance small businesses or small farms.

Currently, an intermediate small bank that is not required to report small business or small farm loans may opt to have its small business and small farm loans considered as community development loans, as long as they meet the definition of community development. An intermediate small bank that opts to have such small business and small farm loans considered as community development loans cannot also choose to have these loans evaluated under the current lending test.

The Agencies' Proposal

The agencies proposed several revisions to the economic development category of community development that were intended to provide clarity to stakeholders about the activities that qualify under this category and to encourage activities supportive of small businesses and small farms. Specifically, the agencies proposed that the economic development category of community development would comprise three types of activities:

• Activities undertaken consistent with Federal, State, local, or tribal government plans, programs, or initiatives that support small businesses, as defined in the plans, programs, or initiatives. This prong expressly included lending to, investing in, or providing services to an SBDC, SBIC, New Markets Venture Capital Company, qualified CDE, or RBIC (proposed § __.13(c)(1)).
• Support for financial intermediaries that lend to, invest in, or provide technical assistance to businesses or farms with gross annual revenues of $5 million or less (proposed § __.13(c)(2)); or
• Providing technical assistance to support businesses or farms with gross annual revenues of $5 million or less, or providing services such as shared space, technology, or administrative assistance to such businesses or farms or to organizations that have a primary purpose of supporting such businesses or farms (proposed § __.13(c)(3)).

Gross annual revenue threshold for small businesses and small farms under economic development. The agencies proposed alternative size standards for defining small businesses and small farms, as discussed in the section-by-section analysis of § __.12. Specifically, the agencies proposed a gross annual revenue threshold for the businesses and farms supported under proposed § __.13(c)(2) and (3) of $5 million or less. For government-related support of small businesses and small farms, the size standards of the relevant government plan, program, or initiative would apply, with the proposed $5 million gross annual revenue threshold applying in the absence of a definition in the plan, program, or initiative. As discussed in the proposal, the $5 million size standard was intended in part to align the meaning of small business and small farm across the CRA regulation, including under the proposed Retail Lending Test, with the definition of small business under the CFPB's Section 1071 Proposed Rule, subsequently adopted in the Section 1071 Final Rule.

Purpose of job creation, retention, and improvement for low- and moderate- income individuals under economic development. Under the proposal, the current purpose test described above would not be required for loans, investments, and services to qualify as supporting economic development, as long as the proposed criteria in proposed § __.13(c)(1), (2), or (3) were met. The agencies requested feedback on whether the proposed economic development category should retain a separate component of economic development to consider activities that support job creation, retention, and improvement for low- and moderate-income individuals. Moreover, the agencies sought feedback on whether activities conducted with businesses or farms of any size and that create or retain jobs for low- or moderate-income individuals should be considered. Additionally, the agencies requested feedback on criteria that could be included to demonstrate that the activities satisfied this component and that ensure activities are not qualified solely because they offer low wage jobs.

Evaluation of direct loans to small businesses and small farms. As discussed in greater detail in the section-by-section analysis of § __.22, the agencies proposed that a bank's reported loans to small businesses and small farms, regardless of the loan amount, generally would be evaluated under the proposed Retail Lending Test. Relatedly, under proposed § __.13(c), the agencies proposed that reported loans directly to small businesses and small farms would not be included in the economic development category of community development and, therefore, would not be considered in the proposed Community Development Financing Test. Consistent with current guidance, the agencies proposed that intermediate banks would retain flexibility to have certain retail loans—small business, small farm, and home mortgage loans—be considered as community development loans. This option was proposed to be available to an intermediate bank if those loans have a primary purpose of community development and are not required to be reported by the bank (under HMDA or CRA).

The agencies proposed this approach to reflect the agencies' belief that loans to small businesses and small farms are primarily retail lending products for banks, and therefore would be more appropriately considered under the proposed Retail Lending Test. Under the proposed Retail Lending Test, described in detail in the section-by-section analysis of § __.22 below, small business loans and small farm loans would be evaluated based on the distribution metrics and would not be subject to additional requirements such as the current community development criterion for economic development. Accordingly, the proposed revisions to the economic development category of community development were designed to emphasize other activities that would promote access to financing for small businesses and small farms, as discussed in greater detail below. However, as also discussed further below, the agencies also sought feedback on whether the proposed approach to evaluating direct small business and small farm lending solely under the Retail Lending Test would sufficiently recognize activities that support job creation, retention, and improvement for low- or moderate-income individuals and communities.

Under the proposal, for retail loans evaluated under the proposed Retail Lending Test, the agencies proposed to transition from the current CRA definitions of small business loans and small farm loans to the definitions of loans to small businesses and small farms with gross annual revenues of $5 million or less—with the focus on the size of the small business or small farm, not the size of the loan. Hence, whereas currently, as noted, small business and small farm loans are generally evaluated under the lending test if they are loans with origination amounts of $1 million or less to a business (of any size) and loans with origination amounts of $500,000 or less to a farm (of any size), small business and small farm lending evaluated under the proposed Retail Lending Test would consider loans of any size, as long as they were to businesses or farms with gross annual revenues of $5 million or less.

As proposed, the transition to this evaluation approach for small business and small farm lending would be based on the availability of data under the CFPB Section 1071 Final Rule on small business loan data collection. In the interim, to evaluate small business and small farm loans under the Retail Lending Test, the agencies proposed to use the current definitions of small business loan and small farm loan. The agencies sought feedback on this aspect of the proposal and on whether to continue considering bank loans to small businesses and small farms that currently qualify under the economic development criteria as community development loans during the period between when the final rule becomes applicable and when the agencies begin to use section 1071 data for bank CRA evaluations.

Comments Received

Many commenters provided a variety of views on the proposal overall and offered feedback on the issues on which the agencies specifically requested comment, as discussed in further detail below. Several commenters expressed general support for the proposed changes to the economic development category and the proposed components. Many commenters expressed concerns, however, that the proposed changes to the economic development category would limit the activities that would have qualified under the current rule for this category and/or limit the range of small businesses that could be supported. Generally regarding a “size” and “purpose” test for the economic development category of community development, multiple commenters supported retaining the current size and purpose tests because, in these commenters' view, these tests highlight women- and minority-owned businesses. A commenter suggested that the “size” test and “purpose” test be retained but that a qualifying activity under the economic development category should be required to satisfy only one of these tests, not both.

Comments discussed below address the following topics regarding the proposed economic development category of community development: (1) proposed size standards for small businesses and small farms; (2) the proposal to eliminate the existing “purpose” test for qualifying economic development activities; (3) criteria to demonstrate job creation, retention, and improvement; and (4) the proposed evaluation of direct loans to small businesses and small farms. As relevant, comments on these topics are also included in the section-by-section analysis of the individual components of the final rule (final § __.13(c)(1) through (3)).

Gross annual revenue threshold for small businesses and small farms under economic development. Numerous commenters addressed the proposal to include a gross annual revenue threshold for businesses and farms that could be considered under the economic development category. Some commenters generally supported the proposed size threshold of gross annual revenues of $5 million or less for businesses and farms, with some asserting the proposed size threshold would allow a greater number of small businesses to be supported under this category. A few commenters supported the $5 million gross annual revenue threshold but suggested that support for intermediaries that target the smallest businesses (with gross annual revenues of $1 million or less) should receive enhanced credit, while another commenter expressly supported using the $5 million gross annual revenue threshold for the intermediary prong (proposed § __.13(c)(2)).

On the other hand, many commenters opposed or expressed concerns about the proposed size thresholds for small businesses and small farms. Commenters generally expressed concerns that the proposed approach would eliminate credit or stifle growth for many businesses, including minority-owned businesses and mid-sized companies, and would limit or omit many projects that impact low- and moderate-income areas or individuals. A commenter asserted that the proposed $5 million gross annual revenue threshold failed to account for the significant positive impact larger businesses have on job creation, retention, and improvement. Some commenters suggested maintaining the current “size” standards to qualify activities that support small businesses and small farms under the economic development category, with some expressing concerns that activities directly supporting small businesses that meet the size eligibility standards established by the SBA and affiliated programs (but that have gross annual revenues of greater than $5 million), as well as support for the financial intermediaries assisting these businesses, would no longer qualify under this proposed economic development category. A commenter asserted that setting a specific revenue threshold for small businesses fails to recognize differences among businesses across different industries and suggested that the agencies adopt a business size index and standard like the one used by the SBA. A few commenters asserted that the proposed threshold of $5 million in gross annual revenues would be too low. A few other commenters expressed concern that the proposal did not provide a clear rationale for the proposal to use a $5 million gross annual revenues threshold for small businesses and farms supported under the proposed economic development category. One commenter recommended that banks of any size should be allowed to receive consideration for loans to any small business or small farm loan, regardless of gross annual revenue, under any category of community development.

Some commenters asserted that the proposed threshold of $5 million in gross annual revenues for small businesses and small farms would be too high. A commenter suggested that the size standard should be $1 million gross annual revenues or less, consistent with current CRA small business loan reporting, without consideration for the size standards established by the SBA and affiliated programs and noted that most small, minority-owned, and women-owned businesses have gross annual revenues of $1 million or lower. Several commenters indicated that a $5 million gross annual revenue threshold would create a disincentive for banks to support very small businesses and minority-owned businesses. Another commenter suggested that a size standard of $750,000 in gross annual revenues would target an appropriate business size, particularly in rural areas, but also supported retaining the flexibility to use the size standards established by the SBA for economic development loans.

A few commenters suggested that, if the agencies adopt the small business and small farm gross annual revenue threshold as proposed, exceptions should also be adopted. A commenter suggested that activities that support minority-owned businesses, including those with more than $5 million in gross annual revenues, should also qualify without having to document job creation, retention, or improvement. Another commenter similarly suggested that any loan or investment in a certified minority business enterprise should qualify.

Purpose of job creation, retention, and improvement for low- and moderate- income individuals under economic development. The agencies received many comments related to the proposal to eliminate the “purpose” test from the economic development category of community development. Some commenters supported the expansion of possible eligible loan purposes; for example, a commenter favorable noted that the removal of the jobs-focused “purpose” test would enable banks to receive CRA consideration for making loans to small businesses or farms for new equipment or facilities that could support their growth. Another commenter asserted that the proposal would allow a greater number of small businesses to be supported, expressing the view that the “purpose” test required by current CRA regulations under the economic development definition limited support for some small businesses, particularly sole proprietors that generally do not create jobs for low- and moderate-income individuals, and therefore do not meet the current “purpose” test standard. A commenter stressed that an important reason to retain the existing “purpose” test is that it provides consideration for jobs to low- and moderate-income individuals and communities as well as areas targeted for revitalization.

Many commenters supported retaining job creation, retention, and improvement as a component of the economic development category. Some commenters raised concerns that the proposed approach to evaluate loans to small businesses and farms under the Retail Lending Test would not sufficiently recognize job creation, retention, and improvement benefits for low- and moderate-income individuals. Commenters expressed concern that eliminating the current purpose test focused on job creation, retention or improvement for low- and moderate-income individuals and would disincentivize banks from investing in certain funds, programs, and other activities that focus on these objectives. A commenter noted that retaining the purpose requirement would improve transparency and noted that they did not believe demonstrating that a loan's purpose is to create, retain, or improve jobs is difficult. Several commenters highlighted that the requirements for qualifying a Public Welfare Investment (PWI) include demonstrating that the investment is designed “primarily” to promote the public welfare, including the welfare of low- or moderate-income communities or families (such as by providing housing, services, or jobs) and that the emphasis on job creation should be similarly retained in the economic development category of community development under CRA. A few commenters expressed concerns about the possibility of materially different standards for community development investments versus permissible PWIs.

Many commenters also suggested that the economic development category include consideration for loans and investments to small businesses and small farms that demonstrate job creation, retention, and improvement not only for low- and moderate-income individuals, but also in low- and moderate-income areas and areas targeted for redevelopment by Federal, State, local, or tribal governments, consistent with current guidance. Several commenters suggested that loans to or investments in any size small business or small farm that could demonstrate job creation, retention, or improvement for low- and moderate-income individuals should be considered. One of these commenters also suggested that additional consideration should be given to activities that support businesses owned by persons of color, women or veterans, and small family-owned farms. Finally, a commenter suggested that if the jobs-focused requirement were not included in the economic development category, then it should be considered as part of the impact review for the Community Development Financing Test.

In contrast, some commenters viewed a separate component for activities supporting job creation, retention, or improvement as unnecessary. For example, a commenter thought that the proposed approach for considering direct loans to small businesses and small farms under the Retail Lending Test was simpler and that other proposed components for the economic development category would support job creation and retention.

Criteria to demonstrate job creation, retention, and/or improvement for low- or moderate-income individuals. Commenters also provided input on criteria that could be included to demonstrate that the purpose of an activity is job creation, retention, or improvement for low- or moderate-income individuals. Many commenters highlighted the CRA Interagency Questions and Answers and noted that banks have successfully followed this guidance to provide examiners with information that demonstrates the purpose of the activity to be job creation, improvement, or retention and that this approach should be sufficient. A commenter suggested any documentation about the type of job, training offered or outreach to low- and moderate-income individuals or areas should be considered.

Commenters provided suggestions on resources that a bank can use to demonstrate that the purpose of an activity is for job creation, retention, or improvement for low- or moderate-income individuals. For example, suggestions included relying on the recipient's credit profile, public websites, such as glassdoor.com, and criteria established by the HUD Community Development Block Grant Program. A commenter suggested that if the anticipated or documented wages exceed 80 percent of area median income, the location of the job should be considered, particularly if the company has committed to hire from a low- or moderate-income or underserved area. This commenter did not support the development of a prescriptive standard or requirement for documentation, however, and suggested that a bank should be allowed to demonstrate, with or without documentation from the business, that the activity is likely to create or retain jobs.

Many commenters on this topic offered specific views on criteria that could be considered to evaluate the quality of the job. Commenters offered suggestions examiners should consider, such as the type of job, compensation, access to job training and other support for career advancement as well as quality specific factors, such as whether the job provides at least three employee benefits including health insurance, dental insurance, 401(k) or other retirement plan, sick leave, vacation leave, and disability, as well as consideration of whether the job offers at least a living wage and cited the “living wage calculator” developed by the Massachusetts Institute of Technology. A commenter suggested using the same standards for assessing job quality as the Community Economic Development Program within the Office of Community Services at the U.S. Department of Health and Human Services to ensure that activities are not given credit if they offer only low wage jobs.

Several commenters did not support considering wages provided by the job as a measure of job quality. These commenters asserted that all jobs are valuable and should be considered regardless of the wages offered and indicated that jobs that offer lower wages may still be important entry level jobs. Additionally, a commenter noted that jobs created by small businesses provide important opportunities in historically marginalized communities and stated that the importance of creating jobs of all salary levels should be recognized.

Evaluation of direct loans to small businesses and small farms. Commenters had differing views on whether loans made by banks directly to small businesses and small farms should be considered under the economic development category of community development or should only be considered under the Retail Lending Test, as proposed. Some commenters raised concerns that the proposed approach to evaluate loans to small businesses and farms under the Retail Lending Test would not sufficiently recognize job creation, retention, and improvement benefits for low- to moderate-income individuals. For example, a commenter supported continuing to include loans to small businesses and small farms that satisfy the size and purpose tests as community development loans, asserting that considering them under the Retail Lending Test would fail to incentivize small business lending. Another commenter expressed concerns that this approach would limit community development activities not associated with government programs, such as activities undertaken through nonprofit affiliates of CDFIs, that CDFIs can leverage to meet economic development goals without some of the challenges of participating in a government program.

On the other hand, some commenters suggested that a bank should have the option of choosing whether to have a loan to a small business or small farm considered either under the proposed Community Development Financing Test or the proposed Retail Lending Test. A commenter recommended that the proposed flexibility for intermediate banks to have certain retail loans considered community development loans should be extended to large banks with under $10 billion in assets. A few commenters suggested that, in general, loans to small businesses or small farms should be considered under the proposed Community Development Financing Test if they have a purpose of community development.

Some commenters asserted that the proposed approach would sufficiently recognize loans to small businesses and small farms and that may also support job creation, retention, and improvement for low- or moderate-income individuals or communities. A commenter asserted that the proposed approach would be more inclusive of all small business lending compared to the current approach, noting that only loans to small businesses that are greater than $1 million and that also satisfy the size and purpose test qualify as community development loans. Another commenter expressed the view that removing the requirement that activities demonstrate job creation, retention, and improvement for low- and moderate-income individuals would incentivize banks to provide more support to micro-businesses.

Commenters provided several other suggestions for how direct lending to small businesses and small farms that demonstrates job creation, retention or improvement for low- and moderate-income individual could be considered if not included in the economic development category. A few commenters suggested that the agencies include a qualitative review of loans considered under the Retail Lending Test to determine whether they demonstrate job creation, retention, or improvement for low- and moderate-income individuals and communities. Another commenter suggested that only loans to small businesses and small farms that demonstrate job creation, retention, or improvement for low- and moderate-income individuals or areas should be considered under the proposed Retail Lending Test. This commenter further recommended that, of those loans, only loans that can demonstrate the creation of “good jobs,” supporting economic mobility, such as those that provide apprenticeships or shared equity, should qualify.

A few commenters suggested that the agencies eliminate the exclusion set forth in proposed § __.24(a)(2)(i) for considering retail loans with a community development purpose under the Community Development Financing Test with commenters suggesting that this could produce unintended results once the agencies replace the CRA definition of “small business loan” with a definition based on the CFPB's Section 1071 Final Rule. One of the commenters explained that many community development loans are made to special purpose, startup, or nonprofit entities that do not have gross annual revenues of more than $5 million. The commenter suggested that the proposed Retail Lending Test would incentivize banks to distribute their small business loans in a particular way but would not provide incentives for banks to make small business loans that satisfy the community development definition, which can be especially impactful loans. The commenter further explained that there would be no “double counting” of small business loans if the Community Development Financing Test allowed for certain small business loans to qualify as community development loans, since the Retail Lending Test and the Community Development Financing Test would evaluate different aspects of the same qualifying small business loan.

A commenter suggested that, for direct loans to small businesses and small farms, job creation, retention, or improvement should be considered as part of a qualitative review under the proposed Retail Services and Products Test for large and intermediate banks and suggested that for small banks, this criterion could be considered as part of the qualitative review under the Retail Lending Test. Another commenter also suggested that for large banks, job creation, retention, and improvement could be considered as part of a qualitative review under the proposed Retail Services and Products Test, but for intermediate and small banks it could be considered as part of a qualitative review under the Retail Lending Test.

Final Rule

Overview

The agencies are adopting, with revisions, the proposed economic development category in § __.13(c). As finalized, the provisions for this category are intended to provide greater clarity, to promote activities that support small businesses and small farms, and to recognize the role of intermediaries that provide assistance to small businesses and small farms.

Final § __.13(c) establishes three components for the economic development category. For clarity and overall organization of this section, the final rule includes section headers for each of these three components. Under the final rule, the three components are:

• Government-related support for small businesses and small farms (final § __.13(c)(1)), which includes activities undertaken in conjunction or in syndication with Federal, State, local, or tribal governments and comprises two subcomponents:

○ Loans, investments, and services other than direct loans to small businesses and small farms (final § __.13(c)(1)(i)); and

○ Direct loans to small businesses and small farm (final § __.13(c)(1)(ii)).

• Intermediary support for small businesses and small farms (final § __.13(c)(2)), which provides for support to small businesses or small farms through intermediaries.

• Other support for small businesses and small farms (final § __.13(c)(3)), which addresses for other assistance to small businesses or small farms, such as financial counseling, shared space, technology, or administrative assistance, to small businesses or small farms.

Relative to the proposal, the final rule broadens the scope of eligible activities under the economic development category and expands the range of small businesses and small farms that could be supported, while providing greater clarity to stakeholders regarding the economic development category. Each component of the final rule is discussed in turn in the section-by-section analysis below.

Section __.13(c)(1) Government-Related Support for Small Businesses and Small Farms

The Agencies' Proposal

Under proposed § __.13(c)(1), activities “undertaken consistent with Federal, [S]tate, local, or tribal government plans, programs, or initiatives that support small businesses or small farms as those entities are defined in the plans, programs, or initiatives” would be considered community development loans as discussed in greater detail below. Consistent with current interagency guidance, this proposed provision was intended to encourage support for highly responsive activities that are relevant to small businesses and small farms, as well as coordination among banks, government agencies, and other program participants. The proposed gross annual revenue threshold of $5 million or less for qualifying businesses or farms would not be required for activities that support business or farms through these government plans, programs, or initiatives, or through the specified entities. Instead, the size standards used by the respective government plans, programs, or initiatives to qualify business or farms as small would apply.

The agencies also proposed to specify that lending to, investing in, or providing services to an SBDC, SBIC, New Markets Venture Capital Company, qualified CDE, or RBIC would qualify as economic development. With certain technical differences, this aspect of the proposal generally would memorialize existing guidance which presumes that activities with these entities promote economic development. By including this list in the proposed regulation, the agencies intended to provide greater clarity and encourage the continued participation in, and support of, programs offered through these key providers of small business and small farm financing.

Comments Received

Several commenters supported § __.13(c)(1) as proposed, with multiple commenters specifically supporting the agencies' inclusion of SBDCs in this component of the economic development category. A few commenters supported relying on the size standards used by the respective government programs to qualify activities, with a commenter noting that the proposal to allow consideration for activities that meet the size standards of the applicable government program would allow support for some larger businesses and would accommodate some level of intentional job creation. Commenter feedback also included a suggestion that the agencies include an express “presumption” of qualification for CRA credit for activities in connection with SBDCs, SBICs, RBICs, New Markets Venture Capital Companies, as well as Federal, State, local, or tribal government plans or programs. Commenters also suggested that loans and investments should be considered if they finance, either directly or through an intermediary, businesses or farms that either meet the size eligibility standards of the SBDC or SBIC programs or have $5 million in gross annual revenues or less.

On the other hand, a commenter objected to the proposal to rely on the small business and small farm size standards of the applicable government plan, program, or initiative, asserting that government programs often do a poor job of targeting businesses owned by low- and moderate-income individuals. This commenter urged the agencies to adopt a $5 million maximum gross annual revenue threshold for small businesses and farms under this component, asserting that this would be important for consistency in small business and small farm size standards across the regulation.

A few commenters expressed concerns about the presumption of qualifications for SBICs. For example, one of these commenters raised doubts as to how well SBICs serve targeted groups and suggested that SBICs should not automatically garner CRA credit.

Final Rule

The agencies are finalizing proposed § __.13(c)(1) with revisions to the proposed activities undertaken with government plans, programs or initiatives for specificity and clarity. Final § __.13(c)(1) adopts “Government-related support for small businesses and small farms” as the paragraph header for this component; this provision encompasses loans, investments, or services that are undertaken in conjunction or in syndication with Federal, State, local, or tribal government plans, programs, or initiatives. Such loans, investments, or services can be made or provided directly or indirectly to or in small businesses or small farms, as described below.

The final rule under § __.13(c)(1) replaces the proposed rule text referencing activities undertaken “consistent with” Federal, State, local, or tribal government, plans, programs, or initiatives with the phrase “in conjunction or in syndication with” these plans, programs, or initiatives. In this way, the final rule emphasizes the intended link between loans, investments, or services that will qualify as economic development under this prong with Federal, State, local, or tribal government, plans, programs, or initiatives. The final rule adds “in syndication with” for clarity, to refer to those loans extended to a single borrower by a group of entities. The agencies believe that qualifying activities in conjunction with or in syndication with government plans, programs, or initiatives helps ensure that activities are responsive to the credit needs of small businesses and small farms, in alignment with the goals of CRA. In this regard, the agencies believe that government plans, programs, or initiatives are general indicators of community needs, and thus provide a mechanism for ensuring that activities are intentional and support the needs of small businesses and small farms. In addition, the nexus to government plans, programs, and initiatives provides transparency regarding program requirements and certainty for qualification, which the agencies believe is important for all stakeholders.

As noted above and as described below, final § __.13(c)(1) is organized into two subcomponents: loans, investments, and services other than direct loans to small businesses and small farms (final § __.13(c)(1)(i)); and direct loans to small businesses and small farms (final § __.13(c)(1)(ii)).

Section __.13(c)(1)(i) Loans, Investments, and Services Other Than Direct Loans to Small Businesses and Small Farms

The final rule in § __.13(c)(1)(i) provides that loans, investments, and services, excluding direct loans to small businesses and small farms, that are undertaken in conjunction or in syndication with Federal, State, local, or tribal governments are eligible for consideration as economic development. Consistent with the proposal, under final § __.13(c)(1)(i), loans, investments, and services may support small businesses or small farms in accordance with how small businesses and small farms are defined in the applicable plan, program, or initiative. If the government plan, program, or initiative does not identify a standard for the size of the small businesses or small farms supported by the plan, program, or initiative, the small businesses or small farms supported must meet the definition of small business or small farm in final § __.12. Also consistent with the proposal, loans to, investments in, or services provided to the following are presumed to meet the criteria of final § __.13(c)(1)(i): SBICs; New Markets Venture Capital Companies; qualified CDEs; and RBICs.

Under final § __.13(c)(1)(i), for example, an investment in a microloan program operated by a local government could be considered provided that this activity met the required criteria. The agencies are finalizing the provision regarding certain Federal programs to memorialize current interagency guidance and, as noted in the proposal, provide greater clarity and encourage the continued participation in, and support of, plans, programs or initiatives offered through these key providers of small business and small farm financing.

The agencies understand that some commenters oppose the express presumption of qualification for activities in connection with SBICs because of concerns regarding how well SBICs serve certain groups of business owners, but the agencies believe that it is important to recognize them in the final rule because they offer an opportunity for banks to provide an important source of capital to grow small businesses. The agencies note that specifying SBICs and other entities in the final rule provides greater clarity and certainty about the types of loans, investments and services that may receive consideration under this subcomponent.

The final rule also provides consistency for stakeholders with the current framework. As noted, this subcomponent of the economic development final rule generally memorializes current interagency guidance, which provides that any loan or service to or investment in an SBDC, SBIC, RBIC, New Markets Venture Capital Company, NMTC-eligible CDE, or CDFI that finances small businesses or small farms, is presumed to promote economic development. As the proposal, final § __.13(c)(1)(i) does not mention CDFIs, as activities with CDFIs are considered under a separate category of community development in the final rule.

Size eligibility standard under final § __.13(c)(1)(i). As noted, for this subcomponent of economic development, the agencies are adopting a size standard for businesses or farms that are supported by government plans, programs, or initiatives that aligns with relevant size standards for small businesses and small farms intended to be the beneficiaries of the applicable government plan, program, or initiative. The size standard could be lower or higher than the $5 million gross annual revenue threshold that would otherwise apply under the category, or it could be expressed in terms of employee size or some other measure. However, if the government plan, program, or initiative does not define a size standard for small businesses or small farms that it supports then the gross annual revenue consistent with the small business and small farm definitions in § __.12 (gross annual revenue of $5 million or less), would apply.

The agencies are not adopting a maximum gross annual revenue threshold of $5 million for all small businesses and small farms under § __.13(c)(1)(i) because the agencies believe that standards vary across different government plans, programs, and initiatives to address various community development and small business or farm needs; the standards in the final rule are designed to accommodate the ways in which these plans, programs, and initiatives may be tailored to respond to community needs. The agencies understand that government plans, programs, and initiatives will likely identify the standard for the size of business or farm supported and believe it is appropriate to maintain flexibility. However, for clarity, the final rule provides that, in the absence of a size standard established by the government program, plan, or initiative, the business or farm supported by the government program, plan, or initiative must meet the definition of “small business” or “small farm” as defined in § __.12.

The agencies considered the feedback provided by commenters advocating for a higher or lower threshold for various reasons, including views that the proposed approach would eliminate credit or stifle growth for many businesses or would create a disincentive for banks to support very small businesses and minority-owned businesses. The agencies, however, believe the size standards established by the government program or as provided in the definition for small business and small farms in § __.12 will capture activities that support a broad range of small businesses and small farms, while providing clarity. The agencies also note that support for small businesses and small farms under final § __.13(c)(2) and (3) is more targeted, to small businesses and small farms with gross annual revenues of $5 million or less, which the agencies believe will appropriately focus those activities on smaller businesses. In addition, the impact and responsiveness review under final § __.15 includes as a review factor support for small businesses or small farms with gross annual revenues of $250,000 or less.

Section __.13(c)(1)(ii) Direct Loans to Small Businesses and Small Farms

The agencies are adopting a second subcomponent in final § _.13(c)(1)(ii) to provide consideration of certain direct loans to small businesses and small farms. Specifically, under final § __.13(c)(1)(ii), the economic development category of community development would include loans by a bank directly to businesses or farms, including, but not limited to, loans in conjunction or syndicated with an SBDC or SBIC, that meet the following size and purpose criteria:

• Size eligibility standard. The loans must be to businesses and farms that meet the size eligibility standards of the SBDC or SBIC programs or that meet the definition of small business or small farm in § __.12 (final § __.13(c)(1)(ii)(A)).

• Purpose test. The loans must have the purpose of promoting permanent job creation or retention for low- or moderate-income individuals or in low- or moderate-income census tracts (final § __.13(c)(1)(ii)(B)).

The agencies considered broad commenter feedback that loans made to small businesses and small farms should be considered under economic development and that a “size” and “purpose” test should be retained for various reasons. The agencies understand commenter concerns that certain loans to small businesses do have a community development purpose and should be considered as community development loans. The agencies are also sensitive to expressed concerns about the potential reduction in qualifying loans if direct lending to small businesses is not included in the economic development category of the final rule. As stated in the proposal, the agencies believe that loans to small business and small farm are generally more suitable for consideration under the Retail Lending Test. However, the agencies have carefully considered the many comments on this issue, and believe there are certain loans to small businesses and small farms that would align with the goals of community development.

The first eligibility criterion—that the loans are made in conjunction or in syndication with a government plan, program, or initiative—is the same standard that applies to activities under final § __.13(c)(1)(i) that are not direct loans to small businesses and small farms. As stated previously, the agencies believe that this criterion helps to demonstrate that the loans are responsive to identified community needs and support articulated community development goals. In addition, this criterion will increase certainty and transparency by setting a clear standard for determining that an activity qualifies as community development. This provision further specifies that loans in conjunction or syndication with SBDCs and SBICs, and that meet the size and purpose criteria, are considered to qualify as economic development under final § __.13(c)(1)(ii). As similarly discussed in the section-by-section analysis of final § __.13(c)(1)(i), the agencies believe that noting these programs in the rule text provides helpful clarity and transparency, as well as assurance that loans in conjunction or syndication with these programs, which serve an important role within the ecosystem of small business and small farm lending, will continue to qualify as economic development under the final rule.

Size eligibility standard. On consideration of the comments on a size eligibility standard for economic development and further deliberation, the agencies are adopting a size eligibility standard for direct loans to small businesses or small farms that aligns with the current CRA framework's size standard, discussed above—namely, the size standards of the SBDC or SBIC programs—in addition to including loans supporting businesses of gross annual revenues of $5 million or less. The agencies believe that adopting these size standards for direct lending to small businesses under the economic development category of community development will provide consistency with the current CRA framework, which will foster certainty and predictability for banks engaging in this lending.

Purpose test. The agencies are also adopting a purpose test to qualify certain direct loans to small businesses and small farms under final § __.13(c)(1)(ii)(B). As previously noted, loans that may be considered to be economic development under final § __.13(c)(1)(ii) must have the purpose of promoting permanent job creation or retention for low- or moderate-income individuals or in low- or moderate-income census tracts. The agencies carefully considered commenter feedback on a purpose test for qualifying economic development activities. As discussed above, many commenters supported retaining job creation, retention, and improvement as a component of the economic development category. The agencies acknowledge feedback indicating that the current purpose test is helpful for encouraging jobs-focused activities, and have deliberated further on commenter concerns that the proposed approach to evaluate loans to small businesses and farms under the Retail Lending Test might not sufficiently recognize job-related activities benefiting low- and moderate-income individuals and communities. At the same time, the agencies have considered feedback that elimination of the purpose test provides greater flexibility and opens up the possibility of more activities meeting a wider range of small business and small farm credit needs to qualify as economic development.

On balance, the agencies determined it appropriate to retain consideration of direct loans to small businesses and small farms, in conjunction or syndication with a government plan, program, or initiative, and to apply a purpose test to this subcomponent of economic development, which is intended generally to align with the current purpose test and to be responsive to suggestions and concerns raised by commenters. Recognizing the benefits that commenters have noted of removing the purpose test from the economic development category of community development, however, the agencies are not applying the purpose test to final § __.13(c)(1)(i) or (c)(2) or (3).

In adopting the purpose test for permanent job creation and retention for final § __.13(c)(1)(ii)(B), the agencies sought to recognize the contributions of small businesses and small farms in communities, particularly with respect to long-term job opportunities for low- or moderate-income individuals. In addition to considering prior stakeholder feedback and comments on the proposal, the agencies considered their own supervisory experience regarding the complexities involved under the current purpose test in determining whether small business and small farm loans support permanent job creation, retention, or improvement for low- or moderate-income individuals and low- or moderate-income census tracts. In addition, the agencies considered feedback that eliminating the purpose test from the final rule on economic development entirely could result in different standards for community development investments versus PWIs.

The purpose test adopted in final § __.13(c)(1)(ii)(A) requires that the loan proceeds are applied for the purpose of promoting permanent job creation or retention for low- or moderate-income individuals or in low- or moderate-income census tracts. As noted, loans that are made by a bank directly to small businesses or small farms in conjunction or in syndication with an SBDC or SBIC presumptively qualify under this prong but are not the exclusive loans that qualify; other loans that are made in conjunction or in syndication with other government programs, plans, or initiatives and that meet the size and purpose criteria could also qualify. For example, an SBA 7(a) loan extended for the purpose of purchasing new long-term machinery and that would allow a small business to hire additional employees could qualify, provided it also met other required criteria. A loan to support a facility improvement in conjunction with a State loan guarantee program associated with the State Small Business Credit Initiative could qualify provide it met all necessary criteria. A working capital loan in conjunction with a State program that is for the purpose of retaining employees could qualify provided other required criteria are met. However, loans that fund general business operations would be less likely to qualify without additional information on whether the loan proceeds would be applied for the purpose of job creation or retention. The agencies believe that the purpose test under the final rule aligns appropriately with the current purpose test, with clarifying modifications discussed below, to provide continued encouragement of banks in extending loans to small businesses and small farms as a community development activity.

In keeping with current guidance, the purpose test in the final rule focuses on job-related benefits for low- or moderate-income individuals and low- or moderate-income census tracts. Other items mentioned in the guidance—areas targeted for redevelopment by Federal, State, local, or tribal governments; intermediaries supporting small businesses and small farms; and technical assistance to small business and small farms—are incorporated elsewhere in the final rule provisions regarding community development.

As explained above, under the current purpose test, a loan for the purpose of job improvement could qualify under economic development as long the loan met other criteria. The agencies are not adopting “job improvement” as a factor under the purpose test in this final rule. Although the agencies did not receive comments specific only to “job improvement” in feedback concerning the purpose test or economic development in general, based on supervisory experience, the agencies believe that difficulties arise in demonstrating and determining whether a loan promotes job improvement, presenting challenges to establishing predictable and workable standards for both compliance and supervision. In addition, the amount of time, resources, and expertise needed to fairly evaluate the quality of jobs could be overly burdensome for both the bank and examiners. However, job improvement is closely tied to workforce development and training programs and the agencies believe in the importance of the contributions these programs make into communities. Therefore, the final rule provides that workforce development or training programs can be considered community development as a community supportive service pursuant to § __.13(d), discussed in more detail in the section-by-section analysis of § __.13(d).

Relatedly, the final rule does not incorporate particular standards regarding the quality of jobs for low- and moderate-income individuals, including wage levels and other wage-related considerations. The agencies considered views and suggestions offered by commenters on this topic, and have determined that it would be difficult to address job quality in the rule in a manner that would effectively and consistently account for the many diverse types of small businesses and small farms in different industry sectors.

The agencies believe that the final rule's purpose test, focused on job creation and retention, will provide greater clarity relative to the current purpose test, thereby facilitating bank lending under this subcomponent of the final rule on economic development, and improved consistency and transparency in the agencies' evaluations of this lending.

Consideration of Loans to Small Businesses and Small Farms Under the Retail Lending Test and Community Development Financing Test

Final § __.13(c)(1)(ii) recognizes certain direct loans to small businesses and small farms that benefit local communities and have specific community development goals, but that are not evaluated under the Retail Lending Test. In addition, the final rule provides that certain direct loans by banks to small businesses or small farms may be considered under both the Community Development Financing Test and the Retail Lending Test, if they qualify for consideration under both tests. This approach is a change from the current rule where, as discussed above, loans to businesses with an origination amount of $1 million or less and loans to farms with an origination amount of $500,000 or less generally are evaluated only under the lending test, while loans that exceed the applicable loan amount can be considered as a community development loan if they meet the current size and purpose test. However, unlike under the current rule, which provides that the same loan cannot be counted as both a retail loan and a community development loan, the final rule allows small business and small farm loans to qualify under both the Retail Lending Test and Community Development Financing Test. This is also different from the agencies' proposal, which would have considered reported loans made directly to small businesses and small farms under the Retail Lending Test.

The agencies believe that this approach is appropriate because the Retail Lending Test and Community Development Financing Test generally focus on a different aspect of a bank's direct lending to small businesses and small farms: in general, under the Retail Lending Test's distribution analysis, the share of loans (based on loan count) to small businesses and small farms at different revenue levels is considered, while under the Community Development Financing Test, the dollar volume of loans is considered, as well as their impact and responsiveness. With respect to direct loans to small businesses and small farms that qualify as economic development under final § __.13(c)(1)(ii), the agencies believe that this approach allows for a holistic evaluation of bank engagement in this lending.

Section __.13(c)(2) Intermediary Support for Small Businesses and Small Farms

The Agencies' Proposal

Under proposed § __.13(c)(2), the second component of the proposed economic development category would comprise “[s]upport for financial intermediaries that lend to, invest in, or provide technical assistance to businesses or farms with gross annual revenues of $5 million or less.” This provision was intended to promote and facilitate access to capital for smaller businesses and farms. The agencies proposed to use the same gross annual revenue standard for small businesses and farms in this provision as in other parts of the proposal for simplicity and consistency.

The current regulation and interagency guidance on community development activities does not specifically address financial intermediaries that increase access to capital for small businesses and small farms; proposed § __.13(c)(2) was intended to respond to stakeholder feedback emphasizing, and the agencies' recognition of, the importance of these intermediaries. Examples of financial intermediaries that the agencies intended this provision to cover included a Community Development Corporation that provides technical assistance to recently formed small businesses, or a CDFI that provides lending to support sustainability of small farms.

Comments Received

Many commenters provided a range of views on proposed § __.13(c)(2), including a variety of suggestions for revisions. Some commenters expressly supported proposed § __.13(c)(2) without any further suggestions for additions or clarifications. Several commenters suggested that CDFIs be considered an eligible financial intermediary under this component. Several other commenters raised concerns that the removal of the current “size” test and “purpose” test would result in certain financial intermediaries being excluded from the economic development category and that this would limit access to capital for small businesses. Some of these commenters suggested including support for financial intermediaries or loan funds that are not licensed or certified by the SBA but that lend to or invest in small businesses that meet the size eligibility standards of the SBA's SBIC or SBDC programs (which might exceed $5 million in gross annual revenues). Another commenter similarly and more specifically requested that the agencies include in the definition of economic development financial intermediaries that lend to, invest in, or provide technical assistance to businesses that: (1) have more than $5 million in gross annual revenues but still meet the size eligibility standards of the SBDC or SBIC Programs; and (2) support permanent job creation, retention, and/or improvement for low- and moderate-income individuals, in low- and moderate-income areas, or in areas targeted for redevelopment.

Some commenters who supported retaining job creation, retention, or improvement suggested that the final rule should clearly include consideration of investments and loans to financial intermediaries that support small business and small farms for the demonstrable purposes of job creation, retention, or improvement for low- and moderate-income individuals. Another commenter suggested that this component should also consider loans and investments made to CDFIs to support small businesses with less than $5 million gross annual revenues, as these also help to create jobs. A commenter suggested that consideration for loans and investments to Community Action Agencies be presumed to advance economic development through workforce development, indicating that workforce development has been central to the creation and function of these entities. Another commenter suggested that the proposal for financial intermediary support should also recognize loans and investments made to support projects using NMTCs, as well as activities that support economic development initiatives of universities and local chambers of commerce.

Some commenters emphasized that many financial intermediaries that are not certified SBICs, are minority-led and women-led and that such entities play an important role in providing access to capital for minority- and women-owned businesses. One of these commenters noted that many of these companies that fund small businesses in underserved communities face challenges becoming SBICs and suggested that the agencies provide consideration for non-SBICs that are owned by minorities and women as long as these companies adhere to SBIC net worth and after-tax income size limits. Another commenter suggested that loans to minority-owned small businesses should be presumed to promote economic development and receive CRA credit.

An additional commenter similarly suggested that the agencies should clarify that banks can receive credit for economic development activities that include investments and loans in a minority-owned small business or minority-owned financial intermediaries and that, at a minimum, these activities should count for credit if they achieve impact outcomes like job creation, retention, or improvement for low- to moderate-income persons or areas. Other feedback included concerns that, without more clarifications about the intended coverage of proposed § __.13(c)(2), banks would tend to favor activities with SBICs under proposed § __.13(c)(1), and that this would disadvantage minority-owned enterprises and first-time fund managers. At least one commenter supported coverage of activities with financial intermediaries that are not SBICs in the economic development category if these activities create, retain or improve jobs. A commenter suggested that this prong also include investments in Qualified Opportunity Funds that include low- and moderate-income census tracts in designated Opportunity Zones.

On a technical note, a commenter requested that the term “support” in the proposed regulatory text be further clarified to mean loans, investments, and services to financial intermediaries. Another commenter stated that the proposal did not specifically address financial intermediaries that increase access to capital for small businesses, asserting that determining business size later in the process would be inappropriate. Both industry and community group stakeholders have stressed the importance of financial intermediaries, such as loan funds, in providing access to financing for small businesses that are not ready for traditional bank financing. In addition, some commenters recommended clarifying that the size of the small business or small farm be determined at the time of the investment by the financial intermediary, noting that because the purpose of these investments is to support the growth of the business.

Final Rule

For the reasons discussed below, the agencies are finalizing proposed § __.13(c)(2) to include in the economic development category intermediaries that support small businesses and small farms; however, the final rule expands the type of intermediaries considered under this component and adopts several revisions for clarity and consistency with other prongs in the economic development category. Additionally, the final rule provides examples of the types of support an intermediary can provide to a small business or small farm. Specifically, final § __.13(c)(2) provides that loans, investments, or services provided to intermediaries that lend to, invest in, or provide assistance, such as financial counseling, shared space, technology, or administrative assistance, to small businesses or small farms can be considered under economic development.

The final rule broadens the types of intermediaries that may be considered under this category beyond financial intermediaries, by removing the word “financial” from the description of this category. Instead, under the final rule, non-financial intermediaries such as business incubators and small business assistance providers can be considered along with financial intermediaries such as nonprofit revolving loan funds. The agencies intend that the expansion of the types of intermediaries that can be included under this component will help address commenter concerns about some intermediaries that could be covered under the current rule potentially being excluded under the proposal, such as those that support primarily support businesses with gross annual revenue above $5 million, and better ensure recognition of the range of intermediaries providing support for small businesses and small farms. The agencies intend that many of the intermediaries that could be considered under the current rule would continue to qualify under this component if they support small businesses and farms through loans, services, and investments. The agencies recognize that there are many types of intermediaries, including those that support minority-owned small businesses, as mentioned by commenters, and that financial intermediaries play a critical role in providing access to capital for small businesses and small farms when traditional bank financing might not be possible. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

To address commenter requests for clarification regarding the coverage of the proposed financial intermediary prong, the agencies note that, consistent with the proposal, the intermediaries under final § __.13(c)(2) are distinct from intermediaries that provide government-related support to small businesses and small farms under final § __.13(c)(1)(i); this allows for non-SBIC and other non-government-related intermediaries to be included in the economic development category. The agencies also recognize that intermediaries can provide support to businesses or farms of all sizes; however, consistent with the proposal, support for intermediaries under final § __.13(c)(2) is focused on intermediary lending to, investments in, and services to businesses and farms with gross annual revenues of $5 million or less. The agencies believe that, for non-government-related aspects of economic development, a gross annual revenue threshold of $5 million for supported businesses and farms will foster clarity regarding the availability and consistency in application. The agencies also believe that this size standard will allow support for a wide range of financing, including the smallest businesses. For further discussion of the definition of the definition of small business and small farm in the final rule, see final § __.12 (“small business” and “small farm”) and accompanying section-by-section analysis.

The final rule also clarifies that “support” for intermediaries means loans, investments, or services provided to intermediaries that lend to, invest in, or provide assistance to small businesses or small farms. As noted, in response to commenter concern that the term “support” in the proposal was not clear. Examples of activities that could be considered under this category are provided in the final rule and include financial counseling, shared space, technology, or administrative assistance.

The agencies did not adopt in the final rule a specific criterion for the point in time when the size of the small business or small farm should be determined, as suggested by some commenters. However, the agencies generally believe that this determination should be based on the size of the small business or small farm at the time of the activity undertaken by the intermediary.

The agencies also decline to specify that CDFIs are considered an eligible financial intermediary under this prong. The agencies recognize that CDFIs are important financial intermediaries, but rather than list them as qualified intermediaries for multiple community development categories, the agencies have adopted in the final rule that a bank will receive community development consideration if a loan, investment, or service involves a CDFI as specified under final § __.13(k). In addition, the final rule establishes, as an impact and responsiveness review factor, consideration of whether a loan, investment, or services supports a CDFI.

The agencies decline to include in this prong investments in Qualified Opportunity Funds that support projects in designated Opportunity Zones. The agencies do not believe that such activities are specifically designed or structured to support small businesses and small farms and therefore, loans or investments in Qualified Opportunity Funds would not likely meet criteria for economic development. However, the activity may qualify for community development credit under other categories of community development, such as revitalization and stabilization under § __.13(e), so long as the activity meets the criteria for the relevant community development category.

Section __.13(c)(3) Other Support for Small Businesses and Small Farms

The Agencies' Proposal

Proposed § __.13(c)(3) would have established a third prong of the economic development category: “[p]roviding technical assistance to support businesses or farms with gross annual revenues of $5 million or less, or providing services such as shared space, technology, or administrative assistance to such businesses or farms or to organizations that have a primary purpose of supporting such businesses or farms.” This provision would have included services such as “shared space, technology, or administrative assistance” and codified current guidance highlighting these services. The agencies proposed this provision in recognition that some small businesses and small farms might not be prepared to obtain traditional bank financing and might need technical assistance and other services, including technical assistance and services provided directly by a bank, to obtain credit in the future.

Comments Received

Commenters on proposed § __.13(c)(3) broadly supported it. A commenter asserted that this component would fill a gap in needed services for small businesses and small farms and play a critical role in helping a small business and small farm grow and thrive. Another commenter suggested including consideration in this economic development category for financial literacy training, community-owned real estate financing, and financial products and programs for immigrant and immigrant-owned businesses.

Final Rule

For the reasons discussed below, the final rule adopts, with clarifying edits, proposed § __.13(c)(3) to provide clarity regarding support for small businesses and small farms that is not provided through intermediaries. Specifically, final § __.13(c)(3) states that assistance, such as financial counseling, shared space, technology, or administrative assistance, provided to small businesses and small farms can be considered economic development. To distinguish these activities from government-related support and intermediary support, these activities are referred to as “other support for small businesses and small farms” under the final rule, and are intended to include such services that are provided directly by a bank.

The agencies made several clarifying edits to the proposal for this component in the final rule. First, the agencies removed “technical” from the rule text out of recognition that providing access to space or technology goes beyond technical assistance and that this term might be applied and understood inconsistently. Second, the agencies removed the $5 million gross annual revenues when referring to small businesses and small farms because these terms are defined in final § __.12 (discussed further in the section-by-section analysis of final § __.12). Finally, the agencies removed “primary purpose” to reference the level of support to businesses or farms to be consistent with the majority standard as described in final § __.13(a), discussed further in the section-by-section analysis of final § __.13(a).

The agencies acknowledge commenter feedback that some small businesses and small farms may not be in a position to obtain traditional bank financing and, as such, may need assistance to obtain credit in the future. The agencies believe that providing CRA consideration for assistance that supports small businesses and small farms will afford banks with recognition for the positive role they play in facilitating small business and small farm credit access. The agencies have noted through past experience that banks can play an important role in supporting, and directly providing the types of assistance that help small businesses and small farms obtain financing, which in turn strengthens small businesses and small farms, fostering their growth and durability.

In response a commenter's suggestion that banks should receive consideration for providing financial literacy training, community-owned real estate financing, and financial products and programs for immigrant and immigrant-owned businesses, the agencies note that financial counseling is specified as an example of the type of assistance that could be considered under final § __.13(c)(3). Additionally, the final rule provides that banks may receive community development consideration for other types of financial literacy programs under final § __.13(l), discussed further in the section-by-section analysis of § __.13(l). The other items suggested by the commenter could also be considered under the economic development category, or other community development categories, assuming that the activities meet the appropriate criteria.

Evaluation Approach Prior to Section 1071 Data Availability

The Agencies' Proposal and Comments Received

The agencies sought feedback on whether loans made directly by banks to small businesses and small farms that are currently evaluated as community development loans should continue to be considered community development loans until these loans are assessed as reported loans under the Retail Lending Test. Most commenters who opined on this question asserted that loans to small businesses and small farms should be considered community development loans during this transition period. For example, a commenter suggested that current guidance should be used to qualify loans to small businesses and small farms under the Community Development Finance Test until loans are evaluated as reported loans under the proposed Retail Lending Test. Similarly, a few commenters suggested that loans larger than $1 million to small businesses and small farms should be considered community development loans, as they are currently, until section 1071 data are available, and these loans are evaluated as reported loans under the proposed Retail Lending Test. A few commenters suggested that during the transition period, banks should have the option of having loans evaluated under the proposed Community Development Financing Test or under the proposed Retail Lending Test. Another commenter suggested that banks should always have the option to report small business loans as community development loans if the economic development criteria are met.

Other commenters expressed concern with allowing banks to receive community development credit for loans that will be considered under the Retail Lending Test once section 1071 data are available and used in CRA evaluations. A commenter suggested that a bank should not be allowed to have these loans considered as community development loans only if the majority of the bank's examination cycle took place before the final rule was implemented. Along the same lines, a commenter expressed concern that evaluating loans to small businesses and small farms as community development activities until they are assessed as reported loans under the Retail Lending Test could allow banks to receive credit for the same activity multiple times, and suggested that the loans should count only once, unless there is some change or expansion of the activity, such as an increased loan amount or new loan payment deferment option.

Final Rule

The agencies appreciate feedback from commenters regarding whether to continue to evaluate loans to small businesses and small farms as community development loans, if such loans meet the current specified criteria, prior to the availability of section 1071 data. The agencies considered the comments, including those that suggested providing banks the option to select consideration for these loans under either the proposed Community Development Financing Test or proposed Retail Lending Test during this interim period, or continuing to evaluate the loans under current interagency guidance until the CFPB section 1071 data are available and the reported loans can be evaluated under the proposed Retail Lending Test. On further consideration of this issue, the agencies have determined that continuing with the current evaluation approach or developing an interim approach for evaluating loans to small businesses and small farms loans during the interim period between the applicability date for final § __.13(c) and availability and use in CRA evaluations of section 1071 data is not necessary. As discussed above regarding final § __.13(c)(1)(ii), the final rule provides consideration of certain direct loans to small businesses and small farms as community development loans. This approach would enable certain government-related direct loans to businesses and farms that meet the criteria in final § __.13(c)(1)(ii) considered under economic development as soon as this provision of the final rule becomes effective. The agencies believe that this approach will provide greater clarity and reduce potential confusion and complexity during the interim period rather than continuing to apply current standards for considering loans to small businesses and small farms to be community development loans. The agencies note that, except for certain loans to small businesses and small farms as explained above, most lending to small businesses and small farms will be evaluated under the Retail Lending Test, and that the definitions for small business and small farm loans are subject to the final rule's transition amendments.

Regarding the concern expressed by a commenter that evaluating loans to small businesses and small farms as community development until such loans are assessed under the Retail Lending Test would allow banks to get credit for the same activity multiple times, the agencies acknowledge, as discussed above, that some loans to small businesses and small farms that meet the criteria under final § __.13(c)(1)(ii) will be considered under both the Retail Lending Test and Community Development Financing Test. However, the agencies do not believe that this would result in double counting because the final rule provides that different aspects of such loans would be considered under the applicable test.

Workforce Development and Job Training

The current regulations do not mention workforce development and training programs in the definition of community development (including the economic development category of that definition ), but the Interagency Questions and Answers provide that loans, investments, and services supporting these activities for businesses and farms that meet the “size” test discussed above are considered to “promote economic development.” The agencies proposed to consider workforce development and job training program activities under the community supportive services category of community development and this was generally supported by commenters who opined on this issue. Therefore, the agencies are adopting workforce development and job training as proposed as a community supportive services category under final § __.13(d). See the section-by-section analysis of community supportive services in final § __.13(d) below for additional discussion of the comments received and final rule.

Additional Issues

The agencies received other comments related to the economic development category. A few commenters suggested adding certain types of activities to those that could be considered for CRA credit under the economic development category. For example, a commenter suggested that loan referrals made by banks to CDFIs for small business loans should qualify and also suggested that loan referrals made by banks to non-bank lenders or fintech companies that have a mission of economic development that is consistent with the goals of the CRA should also qualify as economic development; this commenter asserted that partnerships between traditional and non-traditional lenders could increase access to capital for low-income geographic areas.

A few commenters suggested that if loans to small business and small farms are considered under the proposed Retail Lending Test, loans to minority-owned small businesses should nonetheless be considered separately as a qualifying activity under the economic development category of community development. Lastly, a commenter stated that the agencies' proposal was innovative but suggested that training for nonprofit organizations could be needed, as activities that are currently considered as community development might be considered under different performance tests.

The agencies decline to add a prong to the economic development category under final § __.13(c) to provide specific consideration for additional types of activities, such as loan referrals made by banks to CDFIs or those made by banks to nonbank lenders, as suggested by commenters. The agencies understand from commenters that partnerships between traditional and nontraditional lenders are important because of the potential to increase capital to small businesses and small farms. As discussed further in the section-by-section analysis of final § __.23(c), such activities may qualify for consideration under the Retail Services and Products Test as such activities may help facilitate responsive credit products and programs.

Regarding commenter suggestions that loans to minority-owned small businesses should be considered separately as a qualifying activity under the economic development category of community development, the agencies note that the final rule adopts a provision that certain direct loans to small businesses and small farms, which includes direct loans made to minority-owned small businesses, will be considered under the economic development category. See the section-by-section analysis of final § __.13(c)(1)(ii) above. Additionally, the agencies have adopted an impact factor described in final § __.15 for activities that benefit small businesses with gross annual revenue under $250,000, which will serve to highlight activities with smaller businesses, which would include minority-owned businesses with gross annual revenue under $250,000. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

The agencies appreciate commenter feedback regarding the potential need for examiner training as the proposed approach to the evaluation of certain activities that would currently be considered only under community development may be considered under a different test or multiple tests. The agencies will take this feedback under advisement as the agencies develop implementation plans.

Section __.13(d) Community Supportive Services

Current Approach

The CRA regulations currently define community development to include “community services targeted to low- or moderate-income individuals,” but the regulations do not further define community services. The Interagency Questions and Answers provide several examples of community services and characteristics of those services to assist institutions in determining whether the service is “targeted to low- or moderate-income individuals.” Interagency guidance also clarifies that “investments, grants, deposits, or shares in or to . . . [f]acilities that . . . provid[e] community services for low- and moderate-income individuals, such as youth programs, homeless centers, soup kitchens, health care facilities, battered women's shelters, and alcohol and drug recovery centers” are considered community development investments eligible for CRA credit.

The Agencies' Proposal

In proposed § __.13(d), the agencies replaced the current community development category of “community services targeted to low- or moderate-income individuals” with “community supportive services.” Specifically, incorporating and building on aspects of current guidance noted above, proposed § __.13(d) defined community supportive services as “general welfare services that serve or assist low- or moderate-income individuals, including, but not limited to, childcare, education, workforce development and job training programs, and health services and housing services programs.”

The agencies proposed to consider workforce development and job training program activities under the community supportive services category of community development, rather than under economic development (where workforce development and job training programs are generally considered today). Existing guidance regarding economic development generally limits what can be considered an economic development activity (including workforce development and job training) to support for small businesses meeting certain size standards. Under the proposal to consider these activities under the reconfigured “community supportive services” category, activities that support workforce development and job training programs would receive consideration if the program's participants are low- or moderate-income individuals, without regard to the size of any business associated with the activity.

The agencies also proposed to build on current guidance by both clarifying and expanding upon a non-exclusive list of examples of community services and characteristics of those services that banks can use to demonstrate that a program or organization primarily serves low- or-moderate income individuals. Seven of the eight examples in proposed § __.13(d) reflected current guidance with certain technical edits, as follows:

• Activities conducted with a nonprofit organization that has a defined mission or purpose of serving low- or moderate-income individuals or is limited to offering community supportive services exclusively to low- or moderate-income individuals (proposed § __.13(d)(1));
• Activities conducted with a nonprofit organization located in and serving low- or moderate-income census tracts (proposed § __.13(d)(2));
• Activities conducted in low- or moderate-income census tracts and targeted to the residents of the census tract (proposed § __.13(d)(3));
• Activities offered to individuals at a workplace where the majority of employees are low- or moderate-income, based on readily available U.S. Bureau of Labor Statistics data for the average wage for workers in that particular occupation or industry (proposed § __.13(d)(4));
• Services provided to students or their families through a school at which the majority of students qualify for free or reduced-price meals under the USDA's National School Lunch Program (proposed § __.13(d)(5));
• Services that have a primary purpose of benefiting or serving individuals who receive or are eligible to receive Medicaid (proposed § __.13(d)(6)); and

• Activities that benefit or serve recipients of government assistance plans, programs, or initiatives that have income qualifications equivalent to, or stricter than, the definitions of low- and moderate-income (as defined in the proposed rule). Examples include, but are not limited to, HUD's section 8, 202, 515, and 811 programs or the USDA's section 514, 516, and Supplemental Nutrition Assistance programs (proposed § __.13(d)(8)).

The agencies also proposed an additional example not reflected in current guidance: activities that benefit or serve individuals who receive or are eligible to receive Federal Supplemental Security Income, Social Security Disability Insurance, or support through other Federal disability assistance programs. This proposed example reflected a suggested additional example raised in the Board CRA ANPR that received wide stakeholder support.

Comments Received

The agencies received comments on the community supportive services proposal from many different commenter types, raising a wide range of issues. Most of these commenters generally supported the agencies' proposal. A few commenters, for example, expressed that the community development services proposal would elevate the importance of community services and provide more clarity about what types of activities are included. In contrast, a commenter that disagreed with the proposal stated that the proposal would create unnecessary confusion and complexity and limit flexibility. This commenter expressed the view that the current community services definition should be retained, asserting that it better allows banks to tailor the provision of services to the specific needs of each community.

Regarding the general definition of community supportive services in proposed § __.13(d), many commenters expressed their support for including “health” or “healthcare services.” Several commenters also expressed support for the proposal to include workforce development and job training as community supportive services. A few of these commenters noted that doing so could allow banks to receive credit for supporting activities in connection with a wider range of businesses than under the current CRA framework.

Commenters also shared views on the list of examples in proposed § __.13(d)(1) through (8). For example, a commenter that expressed support for the proposal to include “[a]ctivities conducted with a nonprofit organization located in and serving low- or moderate-income census tracts,” noted that these types of organizations often serve the community in which they are located. With respect to proposed § __.13(d)(7), regarding activities that benefit or serve individuals who receive or are eligible to receive Federal disability assistance, many civil rights and consumer advocacy groups for individuals with disabilities requested that the agencies also explicitly include vocational rehabilitation services and Medicaid-waiver funded home and community-based services. One commenter stated that, as not all individuals with disabilities receive Federal benefits, the agencies should consider including other activities that support individuals with disabilities, such as a loan to upgrade equipment in a public library to accommodate low- and moderate-income disabled individual patrons.

Commenters also encouraged the agencies to add a variety of examples to the list in § __.13(d)(1) through (8). For instance, a few commenters suggested adding activities that promote digital inclusion or digital literacy, indicating that those activities can improve access to important community services. Additional examples suggested included, among others: food access and sustainability projects; activities that house the homeless; higher education career courses or programming; activities that support service members, veterans, and their families; and activities that support consumers with limited English proficiency.

Final Rule

As discussed in more detail below, the final rule revises the general definition of “community supportive services” in proposed § __.13(d) to provide greater clarity about the meaning of this community development category. The final rule also adopts the non-exhaustive list of examples in § __.13(d)(1) through (8) generally as proposed, with certain technical revisions.

Specifically, the final rule defines “community supportive services” as activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals, such as childcare, education, workforce development and job training programs, health services programs, and housing services programs. The definition in proposed § __.13(d) is thus revised by replacing the phrase “general welfare activities that serve or assist low- or moderate-income individuals” with “activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals.” As noted in the proposal, the agencies believe that adopting a community supportive services category that revises the existing “community services” category and associated guidance will provide clearer standards in the regulation for identifying the kind of activities that qualify as community development. Upon further consideration and in light of comments received, the agencies are concerned about potential confusion as to what constitutes “general welfare activities” in the proposed provision. The final rule's revised language focusing on the “health, stability, or well-being” of low- or moderate-income individuals is intended to better achieve the agencies' goal of providing clarity in outlining the kinds of activities that are eligible for consideration under this category, accounting for the types of benefits and services that many commenters highlighted.

The agencies are adopting as proposed the community supportive services listed in the proposed general definition—childcare, education, workforce development and job training programs, health services programs, and housing services programs; these are intended to be illustrative of the kinds of services that can meet the criterion of assisting, benefiting, or contributing to the health, stability, or well-being of low- or moderate-income individuals and, as noted above, were generally supported by commenters. As also discussed above, considering workforce development and job training activities under the community supportive services category of community development clarifies that bank support for workforce development and job training, whose participants are low- or moderate-income individuals, is eligible for CRA consideration, regardless of the size of the businesses that may be associated with those activities.

The final rule also adopts the non-exclusive list of examples of community supportive services in § __.13(d)(1) through (8), generally as proposed, with certain revisions as follows:

• Proposed § __.13(d)(1) is revised to refer to activities that are “conducted with a mission-driven nonprofit organization.” This change in final § __.13(d)(1) reflects that the final rule adopts a new definition of “mission-driven nonprofit organization” in § __.12, in order to support the term's use across multiple provisions in § __.13. As noted in the section-by-section analysis of § __.12 above, the final definition is intended to be consistent with the types of organizations that the agencies proposed would be partners with banks in conducting community development.
• Proposed § __.13(d)(2) through (5) are adopted generally as proposed, with non-substantive technical edits to align the regulatory text structure.

• Proposed § __.13(d)(6), referencing activities that “ have a primary purpose of benefiting or serving individuals who receive or are eligible to receive Medicaid” (emphasis added) is revised to reference activities that “ Primarily benefit or serve individuals who receive or are eligible to receive Medicaid” (emphasis added), with no substantive change intended. This revision is a conforming change consistent with proposed § __.13(a) that eliminates proposed references to the phrase “primary purpose of community development,” as discussed in the section-by-section analysis of § __.13(a).

• Proposed § __.13(d)(7) and (8) are revised to add the term “primarily,” so that, as adopted, they refer to activities that “Primarily benefit or serve individuals who receive or are eligible to receive” Federal disability assistance (final § __.13(d)(7)) and “Primarily benefit or serve recipients of government assistance plans, programs, or initiatives . . . .” (final § __.13(d)(8)). This addition is intended to provide consistency with the language in final § __.13(d)(6) described above, and to align with the agencies' intent to provide examples of activities that are specifically focused on benefiting or serving the individuals described in these examples.

As discussed above, the examples in § __.13(d)(1) through (6) and (8) are adapted from existing guidance to promote clarity and consistency regarding the types of services that could be considered to be targeted to low- or moderate-income individuals. The agencies believe that the adopted examples will facilitate banks' ability to document and demonstrate that a program or organization assists, benefits, or contributes to the health, stability, or well-being of low- or moderate-income individuals as set forth in § __.13(d). For example, with respect to § __.13(d)(2), the agencies believe that qualified activities performed in conjunction with “a nonprofit organization located in and serving low- or moderate-income census tracts” are likely to assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals due to the geographic location and service-orientation of the nonprofit organization on low- or moderate-income census tracts. Accordingly, the agencies believe that this example will facilitate banks' identification of qualified community supportive services and opportunities to serve needs in their communities.

In adopting the example in proposed § __.13(d)(7), related to activities for individuals receiving or eligible to receive Federal disability assistance, the agencies understand that many disability programs are means-tested, and that and research has found that households that include any working-age people with disabilities are more likely to have substantially lower incomes than those without any disabilities. Accordingly, the agencies believe that the example in § __.13(d)(7) will serve as another key proxy for activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals, and will facilitate banks' ability to identify clear and consistent examples of community supportive services.

The agencies also considered and appreciate additional examples of community supportive services offered by commenters, including additional suggestions noted above to supplement § __.13(d)(7) regarding other activities that benefit or serve individuals with disabilities. As discussed above, the list of examples in § __.13(d)(1) through (8) is non-exclusive. The agencies believe that the list of examples adopted in the final rule address a wide range of qualified community supportive services and do not believe that it would be possible or practicable to capture every kind of community supportive service in the regulation. The agencies note that, to the extent that any other activity meets the general definition set forth in § __.13(d), it would be considered a community supportive service. While the agencies are not adding mention of specific additional community supportive services activities to the final rule, the agencies will take commenters' recommended examples under advisement as the agencies develop the illustrative list anticipated by § __.14(a).

Section __.13(e) Through (j) Place-Based Community Development

Current Approach

The current regulation defines “community development” to include “activities that revitalize or stabilize” the following four types of geographic areas:

• Low- or moderate-income census tracts;
• Designated disaster areas;
• Distressed nonmetropolitan middle-income census tracts; and

• Underserved nonmetropolitan middle-income census tracts.

The Interagency Questions and Answers further elaborate on revitalization and stabilization activities in these geographic areas. With respect to low- and moderate-income census tracts, designated disaster areas, and distressed nonmetropolitan middle-income census tracts, current guidance states that revitalization and stabilization activities are those that help to “attract new, or retain existing, businesses or residents” in that geographic area. Current guidance for the same three targeted geographic areas also states that an activity will be presumed to revitalize or stabilize a geographic area if the activity is consistent with a government plan for the revitalization or stabilization of the area.

Further, in designated disaster areas and distressed nonmetropolitan middle-income census tracts, current guidance specifies that examiners will consider all activities that revitalize or stabilize a census tract but give greater weight to those activities that are most responsive to community needs, including the needs of low- or moderate-income individuals or neighborhoods. In determining whether an activity revitalizes or stabilizes a low- or moderate-income census tract, in the absence of a Federal, State, local, or tribal government plan, guidance instructs examiners to evaluate activities based on the actual impact on the census tract, if that information is available. If not, examiners will determine whether the activity is consistent with the community's formal or informal plans for the revitalization and stabilization of the low- or moderate-income census tract.

Regarding underserved nonmetropolitan middle-income census tracts, current guidance focuses on clarifying the regulatory provision stating that activities in census tracts designated by the agencies as underserved based on “population size, density, and dispersion” are considered to be revitalization and stabilization activities “if they help to meet essential community needs, including needs of low- and moderate-income individuals.” To this end, the Interagency Questions and Answers state that activities such as “financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks, affordable housing, or communication services” in underserved nonmetropolitan middle-income census tracts will be evaluated to determine whether they meet essential community needs. The guidance also provides several examples of projects that may be considered to meet essential community needs, such as hospitals, industrial parks, rehabilitated sewer lines, mixed-income housing, and renovated schools—as long as the population served includes low- and moderate-income individuals.

Overview of the Proposal

The agencies' proposal replaced the current revitalization and stabilization activities component of the community development definition with six separate categories of activities:

• Revitalization activities undertaken in conjunction with a government plan, program, or initiative;

• Essential community facilities activities;

• Essential community infrastructure activities;

• Recovery activities in designated disaster areas;

• Disaster preparedness and climate resiliency activities; and

• Qualifying activities in Native Land Areas.

Each of the proposed categories included requirements to benefit residents of targeted geographic areas, as discussed in more detail below, and thus are referred to as “place-based categories” (and the activities defined within the categories as “place-based activities”) throughout this SUPPLEMENTARY INFORMATION . Each of the proposed place-based categories also generally shared three other common required eligibility criteria (with adjustments specific to certain categories). Specifically, relevant activities must:

• Benefit or serve residents of the targeted geographic area, including low- or moderate-income individuals;
• Not displace or exclude low- or moderate-income individuals; and
• Be conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative that includes an explicit focus on benefiting or serving the targeted geographic area.

These criteria are generally referred to as “place-based criteria” throughout this SUPPLEMENTARY INFORMATION . By refining and further clarifying the current regulation and guidance regarding the revitalization and stabilization category of community development, the agencies intended to provide greater certainty about what activities are considered to revitalize and stabilize communities, and thus be considered community development.

This section-by-section analysis first discusses the three place-based criteria noted above, including general comments received and general revisions made in the final rule. An analysis of each of the six place-based community development categories follows, under which specific final place-based criteria provisions and revisions are discussed. As will be discussed below, the final rule generally retains the three common place-based criteria proposed for each of the six place-based categories, with some modifications. The analysis of the place-based criteria below generally follows the order of the proposal; as discussed under the analysis of each of the specific place-based categories, the final rule reorganizes the common place-based criteria to establish a consistent parallel structure across the categories.

Benefits or Serves Residents, Including Low- or Moderate-Income Individuals, of Targeted Geographic Areas

The Agencies' Proposal

Across all place-based categories, the agencies proposed that activities supported by a bank's loans, investments, or services would be considered community development only in relation to particular geographic areas. Specifically, revitalization activities in conjunction with a government plan, program or initiative, essential infrastructure activities, essential community facilities activities, and disaster preparedness and climate resiliency activities would be community development under the proposal if they benefited or served residents, including low- or moderate-income residents, of one or more “targeted census tracts,” defined in proposed § __.12 to mean low- or moderate-income census tracts and distressed or underserved nonmetropolitan middle-income census tracts. Similarly, essential community facilities, essential infrastructure, and disaster preparedness and climate resiliency activities would also be required to be “conducted in” targeted census tracts.

Under the proposal, recovery activities in designated disaster areas qualified in census tracts of all income levels, provided that the activities benefited or served residents, including low- or moderate-income residents, in an area subject to a Federal Major Disaster Declaration (excluding Major Disaster Categories A and B). Activities in Native Land Areas would qualify as community development if they were “specifically targeted to and conducted in Native Land Areas” and “benefited residents of Native Land Areas, including low- or moderate-income residents.”

The agencies also proposed requirements regarding the beneficiaries of place-based activities—specifically, that they benefit or serve residents of the relevant targeted geographic area, including low- or moderate-income residents. The express inclusion of “low- or moderate-income residents” incorporated an emphasis on benefits for low- and moderate-income individuals reflected in the current regulation and guidance on revitalization and stabilization activities, as well as the CRA statute. The agencies sought feedback on how place-based activities can focus on benefiting residents in targeted census tracts and ensure that the activities benefit low- or moderate-income residents.

Comments Received

Commenters offered various views on how to focus place-based activities on benefiting residents in targeted geographic areas, and how to ensure that the activities benefit low- or moderate-income residents. Comments specific to whether activities should be directly conducted in targeted geographic areas are generally discussed under the section-by-section analyses for the respective place-based categories, where applicable. Several commenters suggested that the agencies adopt quantitative measures for evaluating benefits, such as requiring a majority of the beneficiaries to be low- or moderate-income in the targeted geographic area, or requiring a majority of beneficiaries to be low- or moderate-income minorities. Some commenters recommended that data on benefits to low- and moderate-income residents should be part of community development data submissions, such as documentation regarding the number and percent of low- and moderate-income persons in the census tract(s) of the target area and a narrative explaining how the activity would benefit them, or other evidence of community benefit such as job creation, living wages, fair lease payments, or sound land-use planning practices. In contrast, a commenter suggested that the agencies also allow for consideration of activities where benefits to low- or moderate-income individuals are not readily quantifiable, but otherwise demonstrable. This commenter cautioned that “means testing” would complicate community development financing and might not be possible, potentially discouraging bank investment, but suggested that projects located in low- and moderate-income or distressed census tracts were likely to serve residents of those tracts and others in the area.

Some commenters suggested requiring community input to demonstrate that activities benefit residents, including low- or moderate-income residents, of targeted census tracts. For instance, commenters recommended that banks document (and the agencies consider) public feedback provided by community groups; public attestations; or community benefit agreements (CBAs). Several commenters recommended that examiners use their judgment to determine whether qualifying activities benefit low- and moderate-income residents, indicating, for example, that different types of activities will warrant different types of evidence to demonstrate benefit to low- and moderate-income residents. Other commenters suggested that a statement from a bank's public or nonprofit organization partners could provide evidence of a place-based activity's impact on low- and moderate-income communities.

Final Rule

The final rule generally retains the three common place-based criteria proposed for each of the six place-based categories, with some modifications. Generally applicable language and revisions are addressed here, with category-specific language described under each category below in this section-by-section analysis.

Consistent with the proposal, each of the final place-based categories adopts a specific focus on targeted geographic areas, discussed in each of the section-by-section analyses of the place-based categories below. Under the final rule, the geographic area focus for each category is as follows:

• For revitalization or stabilization (§ __.13(e)), essential community facilities (§ __.13(f)), essential community infrastructure (§ __.13(g)), and disaster preparedness and weather resiliency (§ __.13(i)): “targeted census tracts.” Consistent with the proposal, targeted census tracts are defined in final § __.12 as low- and moderate-income census tracts, as well as distressed or underserved nonmetropolitan middle-income census tracts;
• For recovery of designated disaster areas (§ __.13(h)): “areas subject to a Federal Major Disaster Declaration, excluding Major Disaster Categories A and B”; and

• For qualified activities in Native Land Areas (§ __.13(j)): “residents of Native Land Areas.”

For each place-based category, the final rule also adopts substantially as proposed the place-based criterion that activities benefit or serve residents, including low- or moderate-income individuals, in the targeted geographic areas, including the proposed criterion that revitalization activities in Native Land Areas must have “substantial benefits for low- and moderate-income residents.” The final rule revises the proposed language of this criterion, with no substantive change intended, to reference “low- or moderate-income individuals” rather than “low- or moderate-income residents,” which aligns with usage of the word “individuals” in the definitions of low-income and moderate-income in final § __.12 and is generally consistent with usage of the term “low- or moderate-income individuals” throughout the rule. As discussed in the proposal, this criterion establishes a consistent expectation that residents in the relevant targeted geographic areas will benefit from the qualifying activity and that the residents benefiting from the activity will include low- and moderate-income individuals. To further the purposes of CRA, the agencies believe it important that loans, investments, and services considered in a bank's community development performance evaluation support place-based activities that provide direct benefit to the people living in targeted geographic areas rather than solely supporting redevelopment these geographic areas more generally. Together with the other common place-based criteria discussed in more detail below, the agencies believe that this criterion will ensure a strong connection between activities and community needs.

The agencies have considered, but are not adopting, additional quantitative standards or criteria in final § __.13(e) through (j), including a requirement that a majority of the beneficiaries of a qualifying activity in the proposed (and final) targeted geographic areas be low- or moderate-income individuals, minorities, or other underserved individuals. The agencies understand and appreciate the concerns giving rise to commenter suggestions for more precisely defining qualifying community development activities to focus on these individuals and communities. For this reason, as noted in the proposal, the agencies also considered a criterion that place-based activities benefit or serve solely low- or moderate-income individuals.

On further consideration, however, the agencies believe that the final criterion (“benefits or serves residents, including low- or moderate-income residents” ) is appropriately adaptable, providing needed flexibility to address the wide range of community development needs that may exist in the areas targeted in the proposed and final rule's place-based community development categories. Rather than adding quantitative limitations or other parameters to this proposed criterion, the agencies intend, in adopting this criterion generally as proposed, to maintain flexibility for activities to meet multiple types of community needs in the areas targeted by place-based activities—while also requiring the inclusion of low- or moderate-income individuals as beneficiaries. This flexibility remains particularly important in distressed and underserved nonmetropolitan middle-income census tracts, which can have fewer low- or moderate-income residents. The agencies further believe that this criterion, as adopted, is consistent with the CRA statute, which is focused on meeting the credit needs of an entire community, including low- and moderate-income needs. In addition, the agencies note that, under the majority standard discussed in the section-by-section analysis of § __.13(a), loans, investments, or services supporting placed-based community development may receive community development consideration only if the majority of the beneficiaries are, or the majority of the dollars benefit or serve, residents of the targeted geographic areas.

The agencies are also not adopting additional criteria, recommended by some commenters, for demonstrating and evaluating the benefits of place-based activities, such as through suggested data points or requiring community input. On further deliberation, the agencies are concerned that requiring specific ways of demonstrating benefits to residents could add complexity and burden, potentially dissuading banks from supporting place-based activities. The agencies further believe that maintaining some flexibility in the regulation is necessary to accommodate varying community needs and relationships that banks have with communities. At the same time, the agencies recognize that data and community input could be helpful in demonstrating and evaluating benefits of activities to residents of targeted geographic areas, including low- and moderate-income individuals; the final rule does not preclude banks and examiners from using an array of useful information in this regard.

As was noted by commenters, examiner judgment will continue to have a role in agency determinations regarding whether activities benefit residents of targeted geographic areas, including low- or moderate-income individuals. However, by adopting the criterion requiring activities to benefit or serve residents, including low- or moderate-income individuals, in combination with other place-based criteria, the agencies intend to clarify expectations and to promote consistency in application across place-based categories of community development.

Prohibits Displacement or Exclusion of Low- or Moderate-Income Individuals

The Agencies' Proposal

The agencies proposed that eligible place-based activities could not lead to the displacement or exclusion of low- or moderate-income residents in relevant geographic areas. For example, the proposal noted that, if a project to build commercial development to revitalize an area involved demolishing housing occupied by low- or moderate-income individuals, then the project would not meet this criterion and loans, investments, or services supporting it would be ineligible for CRA credit. In proposing this criterion, the agencies sought to ensure that qualifying activities do not have a detrimental effect on low- or moderate-income individuals or communities or on other underserved communities. The agencies sought feedback on how considerations about whether an activity would displace or exclude low- or moderate-income residents should be reflected in the rule.

Comments Received

Most commenters supported requiring that qualifying place-based activities not displace or exclude low- and moderate-income residents. Many of these commenters asserted that the anti-displacement and anti-exclusion criterion should be extended to other categories of community development, with a number of commenters advocating for an extension of the criterion to the proposed category for affordable housing under proposed § __.13(b), including the naturally occurring affordable housing prong in proposed § __.13(b)(2).

A variety of commenters asserted that the criterion should be strengthened, and offered suggestions for demonstrating or measuring non-displacement and non-exclusion for activities supported by a bank's loans, investments, or services. Suggestions included, for example, that a bank:

• Demonstrate compliance with tenant protections, local health and habitability codes, civil rights and other relevant laws;
• Conduct due diligence to determine whether a project involves any concerns relating to eviction, harassment, complaints, rent increases, or habitability violations;
• Demonstrate that projects did not reduce affordable housing units or displace small businesses or farms;
• Evidence support for resident retention through lending in low- and moderate-income communities or minority communities to ensure non-displacement of those communities; or
• Provide attestations from public sector or nonprofit partners that displacement did not occur, or require other documentation of the community engagement process.

Other commenters focused on gentrification concerns more expressly. For example, commenters recommended that the agencies: (1) consider whether an activity would promote gentrification and displacement of existing low- and moderate-income residents through increased rents.; (2) recognize both physical displacement, such as in the proposal's example of affordable housing being demolished to create housing serving higher-income households, and more general displacement from inflationary pressures caused by rapid growth or gentrification; and (3) closely evaluate the demographics of financial institutions' financing practices in relation to gentrification. Other commenters indicated that impact on minorities within identified census tracts should be accounted for, or that the agencies should expand CRA discrimination downgrade criteria to include incidents of displacement of, or harm to, low- and moderate-income communities and/or minorities.

Some commenters supported the goal of preventing displacement but suggested that the proposed criterion was too broad and thus might inadvertently disqualify activities that would otherwise align with community development goals. Accordingly, some commenters recommended that the criterion be revised to, for instance: (1) allow for activities that result in displacement, if mitigation of displacement is incorporated into the project, such as voluntary agreements that provide for compensation, alternative housing in or near the relevant community, or other similar benefits to displaced residents; (2) provide other carve-outs from the criterion, such as for temporary relocations or limited displacement; or (3) include only involuntary or forced displacement, to permit, for example, voluntary relocation from climate-impacted areas.

Other commenters opposed the proposal to include an anti-displacement or anti-exclusion criterion as part of place-based community development activities, with some explicitly opposed to a criterion disallowing exclusion of low- and moderate-income individuals. Some of these commenters expressed concern about an undefined, overbroad, or subjective standard, with some suggesting that the proposed criterion would be difficult to demonstrate and for examiners to evaluate. A commenter suggested that meeting this criterion would be especially difficult in advance of, or shortly after the completion of, the activity, and indicated that banks might not be able to predict or control the long-term effects of projects. This commenter asserted that the proposal would add inconsistency and uncertainty to CRA evaluations and potentially chill beneficial community development projects in low- or moderate-income communities.

Several commenters suggested that the agencies omit the displacement and exclusion prohibition and instead weigh the overall impact of activities on targeted census tracts (and other relevant geographic areas, as applicable). For example, commenters suggested that activities could have larger community benefits even if some displacement results, such as a commercial mixed-use project that results in some displacement of low- and moderate-income residents but includes housing for low- and moderate-income residents. A commenter also suggested that the proposed anti-displacement criterion was inconsistent with the criterion that a project be “in conjunction with” a government plan, indicating that government revitalization plans sometimes involve the removal of apartment buildings that have sub-standard units.

Final Rule

In the final rule, the agencies are adopting a revised version of the proposal to include a place-based criterion that activities may not “directly result in the forced or involuntary relocation of low- or moderate-income individuals” in the targeted geographic areas. This criterion is designed to ensure that qualifying activities do not have a direct detrimental effect on low- or moderate-income individuals or communities in the relevant targeted geographic areas. The agencies believe that qualifying place-based community development activities that deny such populations the benefits of those activities through forced or involuntary relocation out of the targeted geographic area would be inconsistent with the purpose of the CRA to encourage banks to help serve the credit needs of their communities, including low- or moderate-income populations.

The agencies have considered and are persuaded by comments that refinements to the proposed criterion are appropriate so as not to disqualify responsive community development activities that align with the purpose of the CRA. In particular, the agencies have considered concerns raised by some commenters based on their view of the breadth of the proposed standard. The agencies recognize, for example, that otherwise qualifying disaster recovery or disaster preparedness activities with widespread benefits for a community could involve voluntary relocation residents due to environmental conditions such as an increased risk of significant flooding. Therefore, the agencies have revised the proposal to focus the final rule's criterion on prohibiting activities that would result in the forced or involuntary physical displacement of low- or moderate-income individuals as a direct result of the activity.

The final rule's criterion on displacement does not include the proposal's specific prohibition on “exclud[ing]” low- and moderate-income residents. As noted above, the final rule includes a criterion that place-based activities must benefit or serve residents of a targeted geographic area, including low- or moderate-income individuals (with revitalization or stabilization activities in Native Land Areas requiring “substantial benefits for low- or moderate-income individuals” ). Given that the requirement to benefit or serve a targeted geographic area must include low- or moderate-income individuals (and therefore cannot exclude those individuals), on further consideration, the agencies believe that the exclusion language is redundant. However, the agencies do not intend a substantive change relative to the proposal. Thus, if low- or moderate-income individuals were not able to access or benefit from an activity, then the activity would not include low- or moderate-income individuals and therefore would not qualify as community development under the final rule.

Under the final rule, “forced or involuntary relocation” could encompass both overt activities such as demolishing a building, as well as actions directly resulting in conditions for remaining in place being infeasible or undesirable, such as uninhabitable conditions. Accordingly, under the final rule, a project that involves demolishing a multifamily building in which low- or moderate-income individuals reside, thereby forcibly removing residents, would not qualify as community development under the place-based categories. In contrast, projects involving relocation of individuals could conceivably qualify as community development where residents agree to voluntary relocation. Regarding the concern that the proposed anti-displacement standard could conflict with government plans, the agencies believe that the revisions to the proposal—to focus on “forced or involuntary relocation”—will help mitigate this concern by adding greater specificity to the provision. For example, if a government plan involves demolishing a building that has suffered substantial hurricane damage, and all tenants are willing to relocate, the relocation of those tenants would not be disqualifying under this place-based criterion.

Additionally, the final rule states that activities may not “directly” result in forced or involuntary relocation. Accordingly, to be disqualified, an activity must directly relate to the involuntary relocation. For example, if a commercial development project to revitalize an area involved demolishing housing occupied by low- or moderate-income individuals, this project would directly result in the relocation of those occupants. Depending on the facts and circumstances, if the relocation were forced or involuntary, then the loans, investments, or services supporting the project would be ineligible for CRA consideration. In contrast, while the agencies note commenter feedback regarding future market pressures on rents and other costs resulting from neighborhood redevelopment and share these concerns, the agencies do not believe such pressures generally would directly result in forced or involuntary relocation, and thus generally would not be disqualifying under the final criterion. Further, the agencies believe that evaluating the impact of a particular project on the broader market in the future, such as the possibility of general rent increases across the market, could be challenging or speculative, resulting in inconsistencies in application and decreased certainty as to which projects may qualify as community development.

For similar reasons, the agencies are not incorporating specific displacement and relocation mitigation options as part of this criterion in the final rule. The agencies are concerned that doing so could create a need for a complex set of parameters regarding appropriate mitigation for otherwise qualifying activities. Further, determining when mitigation efforts are sufficient in all cases could be difficult or impracticable, as facts and circumstances can vary widely.

Likewise, on further consideration, the agencies are not adopting additional commenter-recommended standards or criteria to measure or otherwise demonstrate or determine whether an activity displaces residents. As with the above place-based criterion to benefit or serve residents of a targeted geographic area, including low- and moderate-income individuals, the agencies are concerned that specific evidentiary requirements or required methods to demonstrate or determine whether an activity displaces residents could add complexity and burden, potentially dissuading banks from engaging in place-based activities. The agencies further recognize that the range of circumstances and contexts of potentially qualifying projects could have implications for whether specific measures pertaining to displacement determinations are appropriate, and might not be foreseeable.

The agencies have also considered commenter suggestions to incorporate this particular criterion into other community development categories, but believe that this criterion is most appropriate for place-based activities. The agencies believe that the criterion is appropriate specifically for place-based activities to ensure that activities designed to benefit a targeted geographic area do not have direct detrimental impacts on the residents the activities are intended to serve. Further, the relocation impacts of a particular activity can be more easily identified relative to a particular targeted geographic area, which are well-defined in, and the focus of, place-based community development activities in the final rule. Regarding comments encouraging expansion of the criterion to the affordable housing category, particularly naturally occurring affordable housing in § __.13(b)(2), the agencies note that, under the final rule, this type of affordable housing is designed to create units or facilitate maintenance of existing units of affordable housing, and examiners will retain discretion to consider whether an activity reduces the number of housing units affordable to low- or moderate-income individuals. This design thus indirectly includes anti-displacement guardrails. The criterion is also less appropriate for other community development categories, such as community supportive services and financial literacy, that are unlikely to result in the direct relocation of residents.

Regarding comments that the rule should permit downgrades for activities that result in displacement, the agencies note that under the final rule, as currently, evidence of illegal credit practices is the basis of a rating downgrade. The agencies have given serious consideration to the types of practices that should result in a ratings downgrade, in light of significant comments on this topic. For further discussion of the types of practices that can lead to a ratings downgrade under the final rule, see the section-by-section analysis of final § __.28(d). The agencies also emphasize that, under the final rule, no place-based activity directly resulting in forced or involuntary relocation of low- or moderate-income individuals will qualify as community development, so no bank may receive community development consideration for loans, investments, or services supporting those activities.

Finally, the agencies are not removing this criterion from the final rule or revising the rule to weigh overall impacts to a market, such as net benefits of an activity to a particular market, accounting for displacement. The agencies have considered comments suggesting removal or revision in this regard, but believe that granting consideration for loans, investments, or services that support projects directly resulting in forced or involuntary relocation of low- or moderate-income residents of targeted geographic areas, even in conjunction with a government plan, would be inconsistent with the express focus of the CRA on the needs of low- or moderate-income populations.

Overall, the agencies believe that the final criterion as adopted offers a more precise standard relative to the proposal that appropriately balances encouraging activities that provide community benefits to residents of a targeted geographic area, including low- and moderate-income residents of targeted geographic areas, while discouraging activities that have detrimental effects on the residents of those targeted geographic areas, including low- or moderate-income individuals. The agencies recognize commenter concerns that the proposed rule was overbroad or could be difficult to evaluate, and believe that the final rule regulatory text on this criterion more accurately expresses the intent of the proposal and will be more practicable to establish than the proposed language.

Conducted in Conjunction With a Government Plan, Program, or Initiative

The Agencies' Proposal

The agencies proposed that activities eligible under the place-based community development categories would need to be undertaken “in conjunction with a [F]ederal, [S]tate, local, or tribal government plan, program, or initiative” that, for most proposed placed-based activities, would have to include “an explicit focus” on benefiting the relevant targeted geographic area. The agencies sought feedback on whether any or all place-based definition activities should be required to be conducted in conjunction with a government plan, program, or initiative and include an explicit focus of benefiting the targeted geographic area. In addition, the agencies sought feedback on appropriate standards for government plans, programs, or initiatives and asked about alternative options for determining whether place-based activities meet identified community needs.

Comments Received

Some commenters supported the proposed common criterion to require that place-based community development be conducted in conjunction with a government plan, program, or initiative. These comments included, for example, a commenter asserting that banks' lending should be aligned with government efforts to ensure investments reach underserved communities and have the highest impact, and expressing the view that the proposed language “in conjunction with” would ensure that alignment. Several commenters supportive of the proposed criterion suggested adding other criteria as well, such as showing that a plan, program, or initiative has broad community support, to ensure that the government plan, program or initiative is responsive to community needs, or involves consultation and partnership with community- and faith-based organizations in targeted communities to determine how best to tailor activities. Commenter recommendations also included that banks should have to demonstrate that the underlying government plan or program includes goals and standards appropriately aligned with a community development category under CRA; and that qualifying plans should be included in an official government document that is readily available to the public and has been subject to a formal community review process.

However, a majority of commenters opposed or expressed concerns about requiring place-based activities to be conducted in conjunction with a government plan, program, or initiative as proposed, with some commenters suggesting eliminating the requirement altogether, or expanding the government plan, program, or initiative criteria to include other options for defining eligible activities. Some commenters viewed the criterion as too limiting, given that communities do not always have government plans, programs, or initiatives in place for community development. Commenters stated, for example, that: local governments in areas most in need of stabilization and revitalization, including small towns and rural areas, might not always have a plan, program, or initiative for the targeted census tract; consolidated plans developed at the State level often do not target rural areas at the census tract level; the requirement could prevent activities where banks are unable to find a government partner or to know in advance if one will be available for a prospective project; and, more generally, the requirement could lead to a contraction rather than an expansion of community development activities. A few commenters expressed concern that the proposed criterion would exclude impactful activities with nonprofit organizations or in the private sector that are not associated with a formal government plan but could effectuate the same community development purposes. A commenter expressed concern that banks could be penalized for supporting activities in areas without a plan and suggested that, at a minimum, the agencies should instead require only that an activity be conducted “consistent with” such a government plan, program, or initiative. Particularly regarding the proposed disaster preparedness and climate resiliency category of community development, a commenter suggested that if the government plan requirement were retained, the final rule should clarify that plans developed by local utilities are included.

Other commenters asserted that government plans that do exist do not always match community goals or, similar to comments mentioned above, may unevenly address community needs. For instance, a commenter suggested that a local agency plan or initiative might not be responsive to needs of modest-income residents or minorities, or might be harmful to their interests. With respect to climate activities, a number of commenters argued that government plans may be inadequate or slow to respond to community needs. A few commenters noted that government programs regarding climate change often lack a racial justice focus.

Some commenters supported broadening this criterion to include place-based activities in partnership with not only governments, but also local community organizations with plans, programs, or initiatives, particularly organizations that have knowledge of, and a successful record of working within, the relevant community; or, similarly, community-led plans and plans conducted in conjunction with community development organizations and nonprofit organizations that benefit low- and moderate-income individuals and communities. For example, a commenter recommended that bank lending and investment in low- and moderate-income communities working with mission-driven lenders should receive community development consideration. Another commenter emphasized the importance of including in any criterion the activities of Black developers or community organizers that engage in place-based activities outside of government plans—as long as such activities still meet the explicit focus of benefiting the targeted census tract, including low- and moderate-income residents.

Other commenters suggested that place-based activities should instead simply qualify as community development if clearly supported by documentation that the activity meets a need in the community. For example, a commenter expressing concern regarding the level of required government engagement advocated for giving banks more flexibility to engage with non-government partners in projects that also met community needs, without the need to have a government plan in place. Several commenters suggested that the key qualification standard for place-based activities should be whether intended beneficiaries are low- and moderate-income census tract residents or other low- and moderate-income individuals.

Some commenters supported the agencies' goals to create clear standards for qualification of place-based activities, but recommended alternatives to a requirement that place-based activities be conducted in conjunction with a government plan, program, or initiative. For example, several commenters suggested that, rather than requiring a nexus to a government, plan, program, or initiative, the final rule should incorporate impact scoring to boost consideration of activities undertaken in conjunction with a government plan, or that government plans should serve as evidence that an activity is responsive to local needs.

A few commenters recommended a qualitative approach to assessing the value of place-based activities to the community, such as through examiner analysis of performance context or a CBA to determine community needs and whether activities respond to them. Additionally, a few commenters suggested that the agencies consider activities with a race-conscious objective or develop a ranking of activities that emphasize working in conjunction with government plans, programs, and initiatives that have a race conscious objective.

Final Rule

The final rule adopts the proposed criterion that activities be conducted in conjunction with a government plan, program, or initiative, with revisions to: (1) broaden the criterion to include activities undertaken in conjunction with a mission-driven nonprofit organization; and (2) to generally delete the word “explicit” where applicable when referencing the focus of the government plan on the relevant community development activity in a particular geographic area. Accordingly, the final rule generally adopts as a criterion that activities be undertaken in conjunction with a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on, for example, “revitalizing or stabilizing targeted census tracts.”

In general. As discussed in the proposal, the agencies intend this criterion to achieve several objectives. First, the criterion will help ensure that place-based activities are responsive to identified community needs. Government plans, programs, or initiatives provide a mechanism for ensuring that activities are intentional and support articulated community development goals, with a specific tie to the relevant geographic areas. The agencies believe that these plans, programs, and initiatives are general indicators of community needs. As discussed in more detail below, expanding the criterion to plans, programs, and initiatives of mission-driven nonprofit organizations will provide another mechanism to ensure a nexus between an activity and community needs in a particular geographic area, given these organizations' knowledge and record of working within, and with residents of, targeted geographic areas. Including mission-driven nonprofit organizations in the criterion also will help address commenter feedback that government plans, programs, and initiatives are not always available or are not always responsive to or inclusive of all of the needs in a particular geographic area.

Second, the final rule is intended to improve consistency, certainty, and transparency, which will give banks and other stakeholders more upfront clarity on how activities may qualify, prior to banks engaging in those activities. The criterion will increase consistency relative to current practice, where standards are complex and vary across geographic areas, including related to how banks can rely on a government plan to demonstrate qualification. The rule will also increase certainty and transparency in that this criterion sets forth a clear standard for determining whether a place-based activity qualifies as community development and a bank's community development loans, investments, or services supporting it could receive community development consideration.

Finally, the agencies believe that the final rule will provide additional clarity relative to current guidance by permitting consideration for activities in conjunction with a program or initiative, even if not part of a plan. The agencies believe that the adopted criterion will allow for consideration of activities related to a wide range of government plans, programs, and initiatives, including those found in all types of communities within the targeted geographic areas of the place-based community development categories. For example, a grant to support a park in a low-income census tract could qualify if undertaken in conjunction with a citywide government program or initiative to expand green space in low- or moderate-income areas, even if support for that park is not outlined in a particular plan. The final rule does not further specify the kinds of plans, programs, or initiatives that meet the criterion, nor the types of government entities, as these can vary by community and Federal, State, or local law.

Mission-driven nonprofit organization plan, program, or initiative. The final rule broadens the proposed criterion to include activities undertaken in conjunction with plans, programs, or initiatives of not only governments, but also mission-driven nonprofit organizations. (For a more detailed discussion of the definition of mission-driven nonprofit organization, see the section-by-section analysis of § __.12 (“mission-driven nonprofit organization”)). In reaching a determination on this final rule provision, the agencies considered commenter views that the proposed government plan, program, or initiative criterion is too narrow or limited. The agencies are persuaded by points raised by some commenters that not all communities have government plans, programs, or initiatives in place or that plans may vary in their level of application to different geographic areas. The agencies also considered comments that government plans do not always match the goals of all members of the community. Further, the agencies considered commenter views that the proposed requirement for activities to be conducted in conjunction with a government plan, program, or initiative could exclude impactful activities that are not associated with a formal government plan but that could also bring benefits to residents of a targeted geographic area.

As defined in the final rule, mission-driven nonprofit organizations have knowledge of geographic areas that are the focus of place-based activities under the final rule, and a successful record of working within and with residents of these areas to meet community needs. Further, these organizations can be identified and evaluated through demonstrable and consistent standards (as discussed in more detail in the section-by-section analysis of § __.12).

The agencies believe that expanding this criterion to include mission-driven nonprofit organizations will facilitate community partnerships between banks and these organizations. Moreover, the agencies believe that this expansion is consistent with ensuring that activities remain place-based and benefit or serve residents of targeted census tracts, designated disaster areas, and Native Land Areas, as applicable. In addition, the agencies believe that many commenters' specific suggestions will be addressed through this revision, such as suggestions to broaden the rule to allow for qualifying activities in connection with community organizations or community plans, programs, or initiatives.

The agencies also recognize commenter suggestions to include activities with a range of organizations and entities, such as Black developers, community organizers, or other specific groups other than government entities, for determining qualification under the place-based categories. While not specifically included in the final rule, the agencies believe that the revised adopted criterion will both allow for and encourage partnerships with many such organizations. The final rule does not expand this criterion to include all private sector partners, as the agencies believe that these entities can have varying goals and missions that do not always align with the goals of CRA. Instead, by adding mission-driven nonprofit organizations as defined in the final rule, the agencies believe that the final rule will appropriately broaden the kinds of plans, programs, and initiatives that can count for place-based activities, while continuing to ensure a focus on activities that are aligned with the goals of CRA.

Additional considerations. The agencies have carefully considered but are not adopting further revisions related to commenter feedback regarding whether to require this criterion; the appropriate standards for this criterion; and alternative options. This includes comments suggesting additional requirements for this criterion such as demonstrations related to formal community review; advocating for a more qualitative approach emphasizing examiner judgment for assessing the value of place-based activities to the community in lieu of this criterion; or suggesting that proposed government plans, programs, or initiatives be a method for demonstrating that an activity meets community needs rather than a requirement.

Regarding comments that any plan be included in a publicly available document and/or be subject to formal community review process, or requiring community inputs as an additional criterion, the agencies are concerned that specific requirements of these types could be overly burdensome and limiting, and dissuade banks from engaging in place-based activities. However, the agencies expect that many government plans, programs, and initiatives will involve a public input process.

Regarding comments advocating for a more qualitative approach or that a government plan, program, or initiative be considered on an evidentiary rather than a mandatory basis, the agencies believe that including the adopted criterion—expanded to allow for activities in conjunction with mission-driven nonprofit organization plans, programs, and initiatives—is important to ensuring that activities qualifying under place-based community development categories are strongly linked to relevant local community needs in the targeted geographic areas.

In addition, as noted regarding other place-based criteria discussed above, the agencies recognize commenter feedback to consider activities with a race-conscious objective or to develop a ranking that favors encouraging work in conjunction with government plans, programs, and initiatives that are “racially-conscious.” While these provisions are not included in the final rule, the agencies intend that the revised adopted criterion provides standards for ensuring that a broad range of residents in targeted geographic areas benefit and are served by place-based activities. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION . On balance, the agencies believe the adopted criterion achieves an appropriate balance between a flexible standard that will ensure that place-based activities are designed to benefit or serve residents of targeted geographic areas, while also promoting clarity and consistency about eligible place-based activities.

“Explicit focus” and “in conjunction with”—in relation to a plan, program, or initiative. Other than for plans, programs, or initiatives related to activities in Native Land Areas, the final rule removes the term “explicit” from the proposed regulatory text, which would have required that the “explicit focus” of the government plan, program, or initiative be on, for example, revitalizing targeted census tracts. The agencies recognize that plans, programs, or initiatives may cover broader range of community development needs than those related to a specific category of place-based activities. In addition, the agencies are concerned that too narrow a focus on the specific wording in the type of plan, program, or initiative could potentially and inadvertently disqualify otherwise eligible activities that align with the community development goals of CRA. The agencies do not intend that removal of the word “explicit” has any substantive implications for the requirement that a plan, program, or initiative under this criterion include a focus on, for example, revitalizing or stabilizing a targeted census tract, or on disaster preparedness or weather resiliency activities in a targeted census tract. For further discussion of the inclusion of “explicit focus” in the final rule provisions on activities in Native Land Areas, see the section-by-section analysis of § __.13(j).

Finally, the agencies considered feedback to change the proposed requirement that an activity be “in conjunction with” a government plan, program, or initiative, to “consistent with” a plan, program, or initiative, but determined that “consistent with” would not provide sufficient clarity in determining when an activity meets the required standard. The agencies believe that finalizing a requirement for activities to be “in conjunction with” a government or mission-driven nonprofit organization plan, program, or initiative will provide greater clarity relative to current guidance by expressly connecting the eligible activity to the applicable plan, program, or initiative. Currently, as noted, standards are complex and vary across the targeted geographic areas, including guidance related to how banks can rely on a government plan to demonstrate that an activity helps to attract or retain residents. Under the final rule, a uniform standard will apply to all activities, with flexibility to cover a range of government and nonprofit entities, as well as varying types of plans, programs, and initiatives.

Regarding comments that any plan be included in a publicly available document and/or be subject to formal community review process, or requiring community inputs as an additional criterion, the agencies are concerned that a specific requirement in the regulation could be overly burdensome and limiting, and dissuade banks from engaging in place-based activities. However, the agencies expect that many government plans, programs, and initiatives will involve a public input process.

Section __.13(e) Revitalization or Stabilization Activities

The Agencies' Proposal

In proposed § __.13(e), the agencies proposed a category of community development for revitalization activities undertaken in conjunction with a Federal, State, local, or tribal government plan, program, or initiative that includes an explicit focus on revitalizing or stabilizing targeted census tracts. The plan, program, or initiative would also specifically need to include the targeted census tracts, although the goals of a plan, program or initiative could include stabilization or revitalization of other geographic areas.

In addition to the targeted geographic focus and government plan, program, or initiative common criterion, the agencies proposed that activities under this category would need to meet the two other common place-based elements: proposed § __.13(e)(1) required activities to benefit or serve residents, including low- or moderate-income residents, in one or more of the targeted census tracts, while proposed § __.13(e)(2) required that activities not displace or exclude low- or moderate-income residents in the targeted census tracts. Proposed § __.13(e) also provided several representative examples to clarify the type of activities that could be considered under this category, including adaptive reuse of vacant or blighted buildings, brownfield redevelopment, or activities consistent with a plan for a business improvement district or main street program.

The agencies proposed to exclude housing-related activities from the category of revitalization activities in proposed § __.13(e). Currently, pursuant to interagency guidance, activities that support housing for middle- and upper-income residents can receive community development credit if they revitalize or stabilize a distressed nonmetropolitan middle-income census tract or a designated disaster area, with greater weight given to activities that are most responsive to community needs, including needs of low- or moderate-income individuals or neighborhoods. Based in part on prior stakeholder feedback that housing that benefits middle- or upper-income individuals, particularly in a low- or moderate-income census tract, can lead to displacement of existing residents, the agencies proposed that, under the “affordable housing” category of community development in § __.13(b), as discussed above, activities that promote housing exclusively for middle- or upper-income residents would not be eligible for CRA credit as affordable housing, regardless of the type of geographic area benefited. The agencies considered that additional clarity could come from qualifying most housing-related community development activities under the affordable housing category. The agencies also recognized that affordable housing activities are often components of government plans, programs, and initiatives to revitalize communities, and therefore sought feedback on whether housing-related revitalization activities should be considered under the affordable housing category or the revitalization activities category, and under what circumstances.

Comments Received

Comments regarding the three common place-based criteria are discussed above. Remaining comments on proposed § __.13(e) primarily focused on the agencies' request for feedback on whether certain housing activities should be considered eligible under the revitalization category of community development. Many commenters supported including consideration for housing activities under § __.13(e), consistent with current guidance. Some commenters asserted that these activities are central to overall community revitalization efforts, without specifying which housing activities should be included. A commenter suggested that limiting housing activities to the affordable housing category would create uncertainty for banks considering mixed-use revitalization projects that include both affordable housing and commercial revitalization. A few commenters suggested that affordable housing should be allowed to count under categories such as revitalization and climate resiliency, but should not be double-counted, as counting twice could lead to decreases in investment. A commenter suggested that housing should be included as an eligible revitalization activity and should be counted in all geographic areas, while another commenter stated that limiting consideration of housing activities under the revitalization category to activities serving high poverty or high vacancy geographic areas may not be necessary, as pockets of distress exist in otherwise prosperous communities.

Some commenters seeking to include housing under § __.13(e) expressed support for including a variety of types of housing activities under the revitalization category as a crucial component of comprehensive, equitable neighborhood revitalization. Suggestions included, for example, eligibility for activities that support: (1) the construction or rehabilitation of owner-occupied homes (including condominiums and cooperatives), if the homes are in certain census tracts and the sales price is capped; (2) rehabilitation or reconstruction of owner-occupied homes if the owner is low-, moderate-, or middle-income; (3) the disposition, rehabilitation, or replacement of vacant and foreclosed homes, to create new opportunities for affordable homeownership for low- and moderate-income households; (4) supportive housing development, operation, and services in any geographic area, because the need for supportive housing outweighs supply (citing the impact of supportive housing due to lack of stable affordable housing with wrap-around services); and (5) home repair and mitigation activities for low- and moderate-income homeowners.

Other commenters supported including mixed-income or mixed-used housing under the revitalization category. For example, a commenter suggested that mixed-income and mixed-use housing developments should qualify: (1) if in low- and moderate-income census tracts, and (2) if in higher-cost areas, and rent is limited to 60 percent of the area median income. This commenter suggested that high-cost neighborhoods are often the least accessible to low- and moderate-income individuals, but because these neighborhoods often offer the greatest access to jobs, higher performing schools, transportation, and other necessities, increasing access to these neighborhoods should be considered a revitalization activity. A few commenters recommended including housing developments that have onsite or co-located childcare and early education programs as eligible revitalization activities.

Alternatively, several commenters stated that place-based revitalization activities and housing activities should be separately considered under the rule, or with limited exceptions. For example, a commenter suggested that considering housing activities solely as part of the affordable housing category would help clarify whether disparities in non-housing resources and investments are being adequately addressed, which this commenter asserted is particularly important because affordable and subsidized housing is often concentrated in low-resourced areas. A few commenters similarly indicated that areas targeted for revitalization activities are often areas where low-income housing is already concentrated, and housing activities undertaken as part of revitalization efforts can risk perpetuating economic and racial segregation. A commenter generally supportive of qualifying housing activities outside of the revitalization category also supported an exception for housing being removed or demolished as part of a broader community revitalization effort.

Commenters also addressed proposed § __.13(e) beyond the question of whether to include housing. For example, a commenter expressed the view that the proposed rule's definitions of revitalization and stabilization activities would help direct more of the benefits of CRA-focused investment to low- and moderate-income communities and individuals. Another commenter suggested that any community revitalization plan or activity should include assurances that low- and moderate-income households will be able to remain in the neighborhood and enjoy the benefits of revitalization (through CBAs, support of community land trusts, or inclusionary zoning).

A few commenters suggested certain activities that should be considered revitalization activities, such as broadband; sustainability projects including those related to food access, food and water source protection; renewable energy investments; and private investment in land banking activities.

Final Rule

The agencies are adopting proposed § __.13(e), reorganized for clarity and consistency with the structures of other place-based categories, and further modified as described below. The final rule makes a technical revision to the name of the proposed community development category from “revitalization” to “revitalization or stabilization” for consistency with the current regulation and to reflect the agencies' intent to retain the concept of “stabilization” in this community development category. Final § __.13(e)(1) provides the general definition of the types of activities included in this category of community development. These activities must also meet specific place-based eligibility criteria in § __.13(e)(i) through (iii). Final § __.13(e)(2) adds a new provision for mixed-use revitalization or stabilization projects.

Section __.13(e)(1) In General

Similar to the proposal, under final § __.13(e)(1), revitalization or stabilization comprises activities that support revitalization or stabilization of targeted census tracts, including adaptive reuse of vacant or blighted buildings, brownfield redevelopment, support of a plan for a business improvement district or main street program, or any other activity that supports revitalization or stabilization. Final § __.13(e)(1) incorporates the technical revision from “revitalization” to “revitalization or stabilization” and other non-substantive edits.

Consistent with the proposal, the final rule incorporates some aspects of existing guidance for revitalization and stabilization, but no longer focuses eligibility of activities on the extent to which an activity helps to attract or retain residents or businesses in targeted geographic areas. Consistent with prior stakeholder feedback and as noted in the proposal, the agencies have determined that the standard in current interagency guidance that an activity “attract new, or retain existing, businesses or residents” has proven difficult for banks, community groups, and the agencies to apply, resulting in inconsistent outcomes. Under the “attract or retain” standard, banks and other stakeholders lacked upfront clarity about which loans, services, or investments would be eligible for consideration, and the standard also sometimes allowed for development that did not align with the purpose of the CRA, such as housing for higher-income individuals, without benefits to low- or moderate-income individuals. Thus, the final rule focuses instead on revitalization and stabilization activities benefiting or serving targeted census tracts, and includes the other place-based criterion discussed in detail above. As further discussed below, the agencies believe that final § __.13(e) will provide stakeholders with a better upfront understanding of the types of activities that will qualify as revitalization and stabilization, and result in more consistency in community development consideration for loans, investments, and services supporting these activities.

The final rule adopts the proposed focus on activities in targeted census tracts, in alignment with current guidance. The agencies considered commenter suggestions to qualify revitalization or stabilization activities in all geographic areas, but believe that the geographic nexus to targeted census tracts—defined in final § __.12 to include low-income census tracts, moderate-income census tracts, or distressed or underserved nonmetropolitan middle-income census tracts—is an important standard to align the final rule with a longstanding geographic focus of CRA implementation, consistent with the CRA's emphasis on communities of need. The agencies believe that final § __.13(e) will allow activities to qualify across a range of community types with varying needs, including distressed and underserved nonmetropolitan middle-income census tracts without significant low- or moderate-income populations, as well as more densely populated metropolitan census tracts with a greater concentration of low- or moderate-income individuals.

The examples of revitalization or stabilization in the final rule (as described above, adaptive reuse of vacant or blighted buildings, brownfield redevelopment, and support of a plan for a business improvement district or main street program) are drawn from current guidance and intended to clarify the types of activities that might be considered eligible under this category. However, these illustrative examples are intended to be non-exhaustive; the final rule clarifies that eligible activities include “any other activity that supports revitalization or stabilization.” The agencies recognize commenter suggestions to include specific activities under the revitalization or stabilization category, such as food access, renewable energy projects, or other sustainability projects, and believe that many of these types of projects could be included for consideration within this category upon meeting the required criteria. For example, a project to build a new supermarket within a low- or moderate-income census tract of a small town would qualify as a revitalization or stabilization activity if the activity met the required criteria. Similarly, the agencies recognize commenter support for including land banking and disposition of vacant or foreclosed land under revitalization, and believe that these activities would qualify provided they met other criteria in § __.13(e), as these are often central elements of neighborhood redevelopment efforts.

The agencies note that some activities raised by commenters might qualify in other categories; for example, broadband is provided as an example under final § __.13(g) regarding essential community infrastructure. Other activities suggested by commenters might qualify under final § __.13(b) regarding affordable housing, such as financing that assists low- or moderate-income individuals to rehabilitate or reconstruct their owner-occupied homes (excluding loans by a bank directly to one or more owner-occupants of such housing), or alternatively, the financing of a supportive housing development and operation that meets applicable requirements in § __.13(b). In response to comments suggesting co-located childcare and early education should qualify, the agencies believe this activity may, depending on the circumstances, qualify as a community supportive service (final § __.13(d)) or an essential community facility (final § __.13(f)), provided the activity meets all relevant criteria.

Section __.13(e)(1)(i) Through (iii) Place-Based Criteria

The final rule adopts the three proposed common place-based eligibility criteria for revitalization or stabilization activities, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Accordingly, under the final rule, revitalization or stabilization activities are those that: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on revitalizing or stabilizing targeted census tracts (final § __.13(e)(1)(i)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § __.13(e)(1)(ii)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in targeted census tracts (final § __.13(e)(1)(iii)).

As noted, the reasons for adopting these final criteria, and for revisions to the proposed criteria, are collectively discussed above in this section-by-section analysis. With respect to the revitalization or stabilization category in particular, the agencies note that final § __.13(e)(1)(iii) is revised from the proposal to prohibit activities that directly result in forced or involuntary relocation of low- and moderate-income individuals in targeted census tracts. Accordingly, the agencies are not incorporating into the final rule a commenter suggestion that community revitalization plans include assurances that low- and moderate-income households will not be displaced. The agencies believe that adopting the common place-based criteria, combined with the majority standard set forth in § __.13(a), will adequately ensure that qualifying revitalization or stabilization activities benefit and serve the residents of targeted tracts, including low- and moderate-income individuals.

Section __.13(e)(2) Mixed Use Revitalization or Stabilization Project

On consideration of feedback regarding whether housing-related revitalization activities should be considered under the revitalization category, the agencies are adopting a provision that brings certain mixed-used revitalization or stabilization projects under the revitalization and stabilization category of community development. Specifically, § __.13(e)(2) incorporates into this community development category projects to revitalize or stabilize targeted census tracts that include both commercial and residential components, if: (1) the project meets all other criteria in § __.13(e)(1), including all place-based criteria (final § __.13(e)(2)(i)); and (2) more than 50 percent of the project is non-residential, as measured by the percentage of total square footage or dollar amount of the project (final § __.13(e)(2)(i)).

The final rule is designed to take into account some commenters' views that mixed-use housing can be central to revitalization projects. However, the agencies do not intend to include in this category projects that are primarily comprised of housing, particularly mixed-use developments with housing that is targeted to middle- or upper-income individuals, including such projects in low- or moderate-income census tracts. The agencies have considered that this type of development might not clearly benefit existing residents of the targeted census tracts, particularly low- or moderate-income residents, and can sometimes lead to displacement of existing residents. On further consideration of comments, the agencies are adopting this revision to better allow for needed comprehensive redevelopment efforts in targeted census tracts that involve mixed-use properties comprised of some, but not primarily, housing.

The agencies considered several alternative thresholds for the percentage of a mixed-use comprehensive redevelopment project that can be residential for the project to qualify as under § __.13(e), and are adopting a threshold requiring that more than 50 percent of the project must be non-residential as measured by the percentage of total square footage or dollar amount of the project (corresponding to a threshold of 50 percent or lower for the residential component of the project). The agencies believe that the adopted percentage threshold provides appropriate additional flexibility for mixed-use development under the final rule's revitalization and stabilization category. In this regard, the agencies considered that a lower residential percentage threshold would exclude several types of mixed-use projects central to overall community revitalization efforts. On the other hand, the agencies believe that activities inclusive of a higher percentage threshold of housing within a project ( i.e., above 50 percent) are more appropriately considered under the affordable housing category in section § __.13(b), as those projects are primarily housing.

An example of housing activity that could qualify under final § __.13(e)(2), as long as all criteria are met, would be a main street mixed-use project to revitalize a series of vacant buildings to include 60 percent commercial space and 40 percent apartments serving middle-income residents. An example that would not qualify under § __.13(e)(2) would include a condominium project that is 100 percent apartments that are affordable exclusively to higher-income residents in a targeted census tract. Likewise, the agencies recognize comments regarding supportive housing in any geographic area, and reconstruction or rehabilitation of owner-occupied homes in low- or moderate-income census tracts or distressed or underserved middle-income census tracts. These activities may qualify as affordable housing (final § __.13(b)) and would qualify under § __.13(e) if they meet criteria as part of a comprehensive mixed-use revitalization project. Banks subject to the rule are permitted to qualify activities under any applicable category, but those activities may count only once for the purposes of calculating the Community Development Financing Metric.

Section __.13(f) Essential Community Facilities

Current Approach and the Agencies' Proposal

Currently, in low- or moderate-income census tracts, distressed nonmetropolitan middle-income census tracts, and designated disaster areas, bank support for community facilities and infrastructure generally can receive community development consideration to the extent that these activities help to attract or retain residents or businesses. However, among these three geographic areas, these activities are only explicitly mentioned in current guidance for distressed nonmetropolitan middle-income areas (with guidance on designated disaster areas mentioning “essential community-wide infrastructure” but not facilities ). Regarding underserved nonmetropolitan middle-income census tracts, as noted earlier, the current CRA regulation provides that activities qualify for community development consideration in these areas “if they help to meet essential community needs, including needs of low- and moderate-income individuals.” To clarify this provision, the Interagency Questions and Answers states that activities such as “financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks, affordable housing, or communication services” in underserved nonmetropolitan middle-income census tracts will be evaluated to determine whether they meet essential community needs.

The agencies' proposal aimed to provide more clarity, certainty, and consistency regarding CRA consideration for activities that support essential community facilities and infrastructure. To this end, proposed § __.13(f) (essential community facilities) and proposed § __.13(g) (essential community infrastructure, discussed further below in this section-by-section analysis) built on the current Interagency Questions and Answers to clarify that essential community facilities and essential community infrastructure would be considered community development if they were conducted in and benefit or serve residents of targeted census tracts, defined in proposed § __.12 to mean low- or moderate-income census tracts, as well as distressed or underserved nonmetropolitan middle-income census tracts.

Specifically, the agencies proposed a category of community development for essential community facilities, defined as activities that provide financing or other support for public facilities that provide essential services generally accessible by a local community. Proposed § __.13(f) included the following non-exhaustive examples of the types of facilities that would fall into this category: schools, libraries, childcare facilities, parks, hospitals, healthcare facilities, and community centers. The proposal further defined essential community facilities as activities conducted in targeted census tracts (as defined in proposed § __.12) that also meet the other place-based criteria discussed above: that activities benefit or serve residents, including low- or moderate-income residents (proposed § __.13(f)(1)); that activities do not displace or exclude low- or moderate-income residents in the targeted census tracts (proposed § __.13(f)(2)); and that an activity that finances or supports essential community facilities must be conducted in conjunction with a Federal, State, local, or tribal government plan that includes an explicit focus on benefiting or serving the targeted census tracts (proposed § __.13(f)(3)).

Comments Received

Most commenters offering feedback on the agencies' proposal regarding essential community facilities were generally supportive. A few commenters supported the agencies' decision not to propose the current requirement that community facilities must also attract or retain businesses and residents.

Commenters offered different views on the examples in the proposed essential community facilities category. Some commenters expressly supported the proposed examples of essential community facilities. Others sought clarity on the types of activities that would qualify under this community development category, or advocated for including additional types of activities in the regulation. For example, a number of commenters highlighted the proposed examples of hospitals and other healthcare-related facilities, noting this may encourage new investment in healthcare access, while others noted the inclusion of childcare facilities, citing a wide variety of community benefits.

Others sought clarity on the types of activities that would qualify under this community development category, or advocated for including additional types of activities in the regulation. Several commenters suggested that the agencies add supermarkets and other food-related facilities to the proposed list of examples, including because low- and moderate-income communities are disproportionately more likely to be food deserts. Other comments included: a suggestion to clarify that the financing of retail service businesses, including grocery stores, pharmacies, and other neighborhood-scale services, are eligible facilities, regardless of the size of the occupant business, as these facilities bring convenience, jobs, physical revitalization, and lower prices for consumers; and suggested eligibility for financing grocery stores larger than the size standards in the proposed Retail Lending Test or proposed economic development category of community development. Another commenter cautioned the agencies against defining all examples of essential community facilities and essential community infrastructure in the regulation, stating that doing so could cause banks to limit activities based on the list and limit creativity in responding to local needs.

A number of commenters also responded to the agencies' request for feedback regarding whether the proposed category should incorporate additional requirements to help ensure that essential community facilities activities include a benefit to low- or moderate-income residents in the communities served by these projects. Several commenters asserted that CRA credit should be given only to essential community facilities activities that serve critical community needs directly in low- and moderate-income areas that are otherwise unable to attract funding. One of these commenters stated that CRA credit should be limited if the market is already fully able to serve such needs. Another commenter recognized the challenges of determining the specific population of people who benefit from a public investment, but argued for identifying a set of characteristics or parameters to distinguish certain projects beneficial to low- and moderate-income residents from those where financing would be readily available at reasonable terms notwithstanding CRA eligibility.

Other commenters emphasized that the goal for qualifying activities under this category should be to provide benefits to low- and moderate-income residents. Commenter recommendations in support of this goal included, among others, that the final rule should: require banks to explain how low- and moderate-income residents benefit from an activity; include a primary purpose standard for qualifying bank support for essential community facilities under which a majority of the dollars invested by the bank would have to be directed toward supporting low- and moderate-income residents; and establish guardrails to ensure financing goes directly to low- and moderate-income communities, including metrics to measure benefits of these projects, such as jobs created for low- and moderate-income individuals and contracts with local companies, and growth in median income for census tract residents. A commenter recommended that any facility be presumed to serve low- and moderate-income residents if it is open to all residents of a targeted census tract, with fees (if any) that are affordable to low- and moderate-income persons.

A few commenters opposed adding other criteria to the essential community facilities category to ensure that low- and moderate-income communities and residents benefit. These commenters asserted that activities should qualify if they benefit the entire community, including but without a specific focus on low- and moderate-income residents. A commenter recommended that essential community facilities should qualify, at least for partial credit, if located outside of targeted census tracts, if and to the extent they benefit low- and moderate residents of the targeted geographic areas.

Final Rule

The agencies are adopting proposed § __.13(f), reorganized for clarity and consistency with the structures of other place-based categories and modified as described below. Consistent with the proposal, final § __.13(f) provides the general definition of the types of activities included in this category of community development, and requires that these activities must also meet specific place-based eligibility criteria in final § __.13(f)(1) through (3).

Section __.13(f) In General

Under final § __.13(f), essential community facilities are public facilities that provide essential services generally accessible by a local community, including, but not limited to, schools, libraries, childcare facilities, parks, hospitals, healthcare facilities, and community centers that benefit or serve targeted census tracts. The final rule reflects technical edits for readability, but is substantively consistent with the proposal. As noted in the discussion of the revitalization or stabilization category in § __.13(e) above, the agencies believe that the final rule, with the common place-based criteria discussed throughout the section-by-section analysis of § __.13(e) through (j), will provide stakeholders with a better upfront understanding of the types of essential community facilities that will qualify as community development relative to an “attract or retain” standard, resulting in more consistency in application. Further, the agencies believe that, relative to current practice, the final rule will better ensure that loans, investments, and services support activities aligned with the purposes of CRA to meet the credit needs of entire communities, including low- or moderate-income individuals.

The proposed rule defined essential community facilities as those that are “conducted in” targeted census tracts; the final rule revises the proposal to define essential community facilities as those that “benefit or serve” residents of targeted census tracts, including low- and moderate-income individuals. The agencies proposed the “conducted in” standard to facilitate a bank's demonstration that activities are benefiting and serving the residents of a targeted census tract. Based on comments and on further consideration, however, the agencies believe that the “conducted in” standard could exclude facilities located in close proximity to a targeted census tract that nonetheless benefit and serve residents of that census tract, including low- and moderate-income individuals. For example, under the proposal, a construction loan to build a fire station located just outside but primarily serving residents of a targeted census tract would have not qualified for consideration. Under the final rule, that construction loan could be considered, provided the rule's other criteria are met. The agencies believe that the requirement as revised—to require that essential community facilities benefit or serve targeted census tracts—will ensure a strong connection between essential community facilities and community needs in targeted census tracts, and that this connection will be further bolstered by the other two place-based criteria ( e.g., undertaken with a plan, program, or initiative that includes a focus on benefiting or serving the targeted census tract and not directly resulting in the forced or involuntary displacement of low- or moderate-income individuals in the targeted census tract). The agencies note that banks will be expected to be able to demonstrate that a project benefits the targeted census tracts in accordance with the rule.

The agencies considered but are not adopting the suggestion for a presumption that any facility open to all residents of targeted census tracts with affordable fees serves low- and moderate residents, given the variety of potential facts and circumstances. The agencies believe, however, that a facility will qualify for consideration if a bank demonstrates that the facility is public and provides essential services, serves low- or moderate-income residents in the targeted census tract, and meets the rule's other required criteria. Similarly, the agencies are not adopting the commenter suggestion that activities qualify if they benefit the entire community without specific inclusion of low- and moderate-income individuals. The agencies believe that qualifying essential community facility activities should be demonstrably inclusive of low- and moderate-income individuals, in alignment with the CRA's express focus on encouraging banks to meet low- and moderate-income community needs in the communities they serve.

Final § __.13(f) adopts the proposed list of examples of essential community facilities: schools, libraries, childcare facilities, parks, hospitals, healthcare facilities, and community centers, which are generally consistent with examples found in current guidance. The agencies believe that these examples provide adequate clarity to illustrate the types of activities that may qualify under this category. The list is intended to help clarify, for instance, that a loan to help build a public school or a community center that serves residents of a targeted census tract would qualify for community development consideration, provided all other criteria of § __.13(f) are met. While the final rule does not adopt other examples raised by commenters, the agencies note that the list of examples is illustrative and non-exhaustive. The final rule does not preclude agency consideration of investments, loans, or services supporting other types of essential community facilities meeting the criteria set forth in § __.13(f). The agencies do not believe that identifying every kind of essential community facility in the regulation is practicable or possible. However, the agencies will take commenters' suggestions under advisement as the agencies develop the illustrative list contemplated by § __.14(a).

Additionally, activities mentioned by commenters that might not qualify as essential community facilities under the final rule might qualify under other categories of community development. For example, a loan to finance a public road or sewer could qualify for consideration as supportive of essential community infrastructure under § __.13(g), if all of the rule's criteria were met, while a grant to support a food bank that opens a food pantry could qualify under § __.13(d) as supportive of a community supportive service. Financing of retail service businesses such as grocery stores, retail pharmacies, and other neighborhood-scale services are generally private sector facilities, and thus are not considered essential community facilities, which are defined as public facilities. However, these retail services may qualify as revitalization or stabilization activities under § __.13(e), should they meet the criteria of that provision.

On consideration of the comments and further deliberation, the agencies are not adopting additional or alternative requirements to help ensure that essential community facilities include a benefit to low- or moderate-income residents in the communities served by these projects. For example, regarding comments that the rule should qualify only activities supporting critical community needs, the agencies believe that this approach could be overly limiting in light of communities' varying needs and different views about which needs are critical. The agencies intend the final rule to maintain sufficient flexibility for banks and communities to address a wide range of needs that communities consider important.

Regarding comments that the rule should require activities to have a primary purpose of serving low- and moderate-income residents in targeted census tracts, the final rule seeks to maintain flexibility for activities to meet a range of community needs, while also requiring the inclusion of low- or moderate-income individuals as beneficiaries. As noted, this flexibility remains particularly important in distressed and underserved nonmetropolitan middle-income census tracts, which can have fewer low- or moderate-income residents. On the other hand, the agencies are also not adopting the suggestion to qualify facilities open to the entire community without specific inclusion of low- and moderate-income individuals. The agencies believe that the final criterion, as adopted, is tailored and consistent with the CRA statute, which focuses on benefits to communities, including to low- or moderate-income populations. The agencies believe that the rule as finalized, combined with the majority standard set forth in § __.13(a), appropriately ensures inclusion of low- or moderate-income residents.

For similar reasons, the agencies are also not incorporating into final § __.13(f) metrics for measuring the benefits of essential community facility activities to low- and moderate-income individuals. The agencies are concerned that specific metrics-related requirements or methodologies for demonstrating low- or moderate-income benefits of essential community facilities could be overly burdensome and complex to apply, potentially dissuading banks from supporting essential community facilities and limiting the adaptability of the rule to accommodate a variety of activities over time. However, banks will be expected to demonstrate that essential community facilities benefit or serve residents of targeted census tracts, including low- and moderate-income individuals. Finally, as discussed further in the section-by-section analysis of § __.13(a), the agencies are not adopting a partial consideration option in § __.13(f). The agencies believe the primary focus of activities should be to benefit or serve residents of targeted tracts and an alternative option providing partial consideration would allow for qualification of activities that do not share this focus as an intentional goal.

Section __.13(f)(1) Through (3) Place-Based Criteria

The final rule adopts the three common place-based eligibility criteria for essential community facilities, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Accordingly, under the final rule, essential community facilities are public facilities that: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving targeted census tracts (final § __.13(f)(1)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § __.13(f)(2)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in targeted census tracts (final § __.13(f)(3)). As noted, the reasons for adopting these final criteria, and for revisions to the proposed criteria, are collectively discussed above in this section-by-section analysis.

Section __.13(g) Essential Community Infrastructure

The Agencies' Proposal

In proposed § __.13(g), the agencies proposed a category of community development for essential community infrastructure activities, defined as activities that provide financing and other support for infrastructure, including, but not limited to broadband, telecommunications, mass transit, water supply and distribution, and sewage treatment and collection systems. The proposal further defined essential community infrastructure as activities conducted in targeted census tracts (as defined in proposed § __.12 and discussed above) that also meet the other place-based criteria discussed above: that activities benefit or serve residents, including low- or moderate-income residents (proposed § __.13(g)(1)); that activities do not displace or exclude low- or moderate-income residents in the targeted census tracts (proposed § __.13(g)(2)); and that an activity that finances or supports essential community infrastructure must be conducted in conjunction with a Federal, State, local, or tribal government plan that includes an explicit focus on benefiting or serving the targeted census tracts (proposed § __.13(g)(3)). Thus, under the proposal, support for larger infrastructure projects could be eligible for community development consideration if the project is conducted in relevant targeted census tracts, demonstrably benefits the residents of the targeted census tracts, and it is evident that, in particular, low- or moderate-income residents, of the targeted census tracts would benefit and not be excluded from the larger-scale improvements.

Comments Received

Many comments on proposed § __.13(g) provided feedback on the types of infrastructure that should be considered essential community infrastructure, with a number requesting clarification about specific types of infrastructure projects. Many commenters expressly supported the proposed consideration for broadband activities, emphasizing, among other things, the importance of broadband access in community resilience, closing the digital divide, and creating access to financial services, jobs, healthcare, and education, and noting the role of CRA in overcoming broadband investment costs. Additional commenter feedback included support for qualification of broadband infrastructure only if reliable, affordable, and locally controlled; and support for qualifying only the infrastructure examples included as part of the proposal. Other commenters generally highlighted the importance of investments made in functioning roadways, internet, health, and safety, with additional suggestions that the regulation specify a range of activities that qualify as essential community infrastructure, including renewable energy projects; transit-oriented infrastructure, including road and technology infrastructure; hospital construction; jail renovations; and refuse services.

The agencies also received a number of comments in response to the agencies' request for feedback regarding whether the proposed category should incorporate additional criteria to help ensure that essential community infrastructure activities include a benefit to low- or moderate-income residents in the communities served by these projects. Some commenters opposed additional criteria for community development consideration of infrastructure projects (or community facilities), indicating that activities benefiting all residents, including persons of any income level, should qualify. As discussed in more detail below, other commenters on this aspect of the proposal supported an emphasis on benefits to low- and moderate-income residents, with some suggesting additional criteria for ensuring that community infrastructure projects qualifying as community development under the CRA benefit low- and moderate-income residents.

Some commenters asserted that essential community infrastructure activities should be focused on benefiting low- and moderate-income residents of targeted census tracts (or other relevant geographic areas). For example, a commenter expressed concerns about certain proposed infrastructure examples such as broadband, water, and sewage, as greatly expanding the number and types of eligible activities without a clear benefit to low- and moderate-income people and places. A few commenters recommended that essential community infrastructure be limited to activities with a clear and demonstrable benefit to, or primary purpose of serving, low- and moderate-income people and geographic areas. Several commenters suggested that CRA credit for infrastructure should be limited based on a strong correlation with benefits to low- and moderate-income individuals and families because reasonable financing is already available for most essential infrastructure projects. Commenters also asserted that CRA credit should be given only to essential community infrastructure activities that serve critical community needs directly in low- and moderate-income areas and are otherwise unable to attract funding. A few commenters recommended that essential community infrastructure be limited to activities with a clear and demonstrable benefit to, or primary purpose of serving, low- and moderate-income people and geographies. Another commenter emphasized that qualifying activities in this category should have a clear objective of meeting needs in targeted communities.

Other comments on ensuring benefits for ensuring benefit for low- and moderate-income individuals and communities included support for limiting CRA consideration to those activities with a strong correlation to benefits for low- and moderate-income individuals and families, such as a project in a majority low- and moderate-income population census tract. Suggestions for measuring the benefits of infrastructure projects to low- and moderate-income communities included considering jobs created for low- and moderate-income individuals; contracts with local companies; economic growth-related metrics such as growth in median income for census tract residents; and environmental improvements, such as greenhouse gas emissions and/or pollution reductions, increases in the amount of greenspace, community health benefits, and climate adaptation strategies.

Citing the impact of historical disinvestment in basic infrastructure on many low- and moderate-income communities, particularly minority communities, a commenter suggested that the CRA framework should prioritize ensuring that all communities have a minimum standard of infrastructure, including protective infrastructure, over enhancing infrastructure in areas that already have a standard level of investment. Another commenter suggestion was that the agencies consider a bank's activities supporting essential community infrastructure in light of the overall balance of activities that comprise a bank's portfolio, to ensure that a significant portion of the bank's community development activities are targeting places and populations of high need with products that are not otherwise likely to be offered by the bank. This commenter further suggested that that agencies cap the volume of essential community infrastructure that could be included in the proposed Community Development Financing Metric, asserting that essential community infrastructure projects are often relatively safe investments to make but might not necessarily be directly targeted to low- and moderate-income persons or communities.

As also discussed above in the section-by-section analysis of § __.13(a), a few commenters expressed support for giving partial credit for essential community infrastructure activities. Citing the large-scale nature of many infrastructure projects and concerns about the potential difficulty of applying the proposed primary purpose standard, commenters recommended various approaches to a partial credit framework for essential community infrastructure. These included partial credit based on the percentage of low- and moderate-income census tracts served by the activity, or based on whether the infrastructure project meets or exceeds a minimum threshold of serving low- and moderate-income census tracts, residents, or small businesses or farms. A commenter separately suggested granting at least partial credit for infrastructure (and facilities) located outside of targeted census tracts, as long as the infrastructure benefits residents of those census tracts. In contrast, at least one commenter expressly opposed providing partial credit for bank support of essential community infrastructure, noting concerns that these activities tend to be large dollar transactions that are not necessarily targeted at low- and moderate-income residents with intentionality, and thus partial credit could allow for more projects to qualify and potentially comprise a significant portion of a bank's community development finance metric numerator at the expense of smaller, more impactful investments. However, this commenter recommended an exception for partial credit for activities in rural communities and cities with low bond ratings and thus that might not otherwise receive financing support.

Final Rule

The agencies are adopting proposed § __.13(g), reorganized for clarity and consistency with the structures of other place-based categories and modified as described below. Consistent with the proposal, final § __.13(g) provides the general definition of the types of activities included in this category of community development, and requires that they meet specific place-based eligibility criteria in final § __.13(g)(1) through (3).

Section __.13(g) In General

Under final § __.13(g), essential community infrastructure comprises activities benefiting or serving targeted census tracts, including but not limited to broadband, telecommunications, mass transit, water supply and distribution, and sewage treatment and collection systems. Thus, final § __.13(g) makes no substantive changes to the proposal other than technical edits for readability. As with other place-based categories, the agencies believe that final § __.13(g), with the common place-based criteria discussed in more detail elsewhere in the section-by-section analysis of § __.13, will provide stakeholders with a better upfront understanding of the types of essential community infrastructure that will qualify as community development relative to the current approach based on an “attract or retain” standard. Additionally, consistent with the proposal, the final rule clarifies that essential community infrastructure is a community development category that applies across all targeted census tracts ( i.e., low-income, moderate-income, distressed or underserved middle- income census tracts), whereas, as noted, current guidance explicitly references infrastructure only in the context of distressed or underserved nonmetropolitan middle-income census tracts. Further, the agencies believe that, relative to current practice, the final rule will better ensure that loans, investments, and services support activities that align with the purposes of CRA to meet the credit needs of entire communities, including low- or moderate-income individuals.

As noted, proposed § __.13(g) defined essential community infrastructure as those that are “conducted in” targeted census tracts; the final rule revises the proposal to define essential community infrastructure activities as those that “benefit or serve” residents of targeted census tracts, including low- or moderate-income individuals, similar to revisions made with respect to the essential community facilities category under § __.13(f). As with proposed § __.13(f), the agencies proposed the “conducted in” standard to facilitate a bank's demonstration that essential community infrastructure activities are benefiting and serving the residents of a targeted census tract. Based on comments and on further consideration, the agencies believe that the “conducted in” standard could exclude infrastructure projects located in close proximity to a targeted census tract that nonetheless benefit and serve residents of that tract, including low- and moderate-income individuals. The agencies also intend this revision to strengthen the emphasis on benefits to residents of targeted census tracts, including low- or moderate-income individuals, in the event that infrastructure projects “conducted in” a targeted census tract might have only ancillary if any benefits for the targeted census tract. For example, a project to build a sewer line that connects services to a middle- or upper-income housing development but passes through a low- or moderate-income census tract without connecting needed sewer services to that community generally would not qualify as essential community infrastructure under the final rule. In contrast, a project to improve water supply to residents of targeted census tracts could qualify as community development even if the water supply improvements were made outside of those census tracts, provided that the bank could demonstrate the project benefits the targeted census tracts in accordance with the rule. The agencies believe that the requirement as revised—to require that essential community infrastructure benefit or serve targeted census tracts—will ensure a strong connection between essential community infrastructure and community needs in targeted census tracts, and that this connection will be further bolstered by the other two common place-based criteria. The agencies further note that banks will be expected to be able to demonstrate that a project benefits the targeted census tracts in accordance with the rule.

As noted above, the final rule adopts the proposed non-exhaustive list of examples of essential community infrastructure: broadband, telecommunications, mass transit, water supply and distribution, and sewage treatment and collection systems. On consideration of the comments and further review, the agencies continue to believe that the proposed examples provide adequate clarity for the types of activities that could be considered essential community infrastructure under final § __.13(g), and also note that they generally align with current guidance, discussed above. Accordingly, examples of the types of loans, investments, and services that support essential community infrastructure under § __.13(g) could include a municipal bond to help fund a transit improvement within targeted census tracts, or financing of a project to provide residents of targeted census tracts access to broadband, subject to the other criteria being met.

Regarding other examples raised by commenters, the agencies note that the list of examples is illustrative and non-exhaustive. Thus, the final rule does not preclude agency consideration of investments, loans, or services supporting other types of essential community infrastructure that meet the criteria set forth in § __.13(g). The agencies do not believe that identifying every kind of essential community infrastructure in the regulation is practicable or possible. However, the agencies will take commenters' suggestions under advisement as the agencies develop the illustrative list contemplated by § __.14(a).

The agencies also considered the suggestion to limit the provision to only those activities listed in § __.13(g), but believe that this approach would be too restrictive; communities may have differing infrastructure needs, and limitations could deter new or innovative essential community infrastructure projects. Additionally, activities that are not essential community infrastructure may qualify under other categories of community development. For example, a project to redevelop vacant brownfield lots into buildable land would not qualify as essential community infrastructure in section § __.13(g), but might qualify as a revitalization or stabilization activity pursuant to section § __.13(e).

On consideration of the comments and further deliberation, the agencies believe that final § __.13(g), combined with the majority standard set forth in § __.13(a), appropriately ensures a focus on low- or moderate-income residents of targeted census tracts. Accordingly, the agencies have determined not to adopt additional or alternative requirements to help ensure that essential community infrastructure activities include a benefit to low- or moderate-income residents in the communities served by these projects. Having carefully reviewed commenter suggestions, the agencies are concerned that additional criteria might be overly limiting, such as qualifying only activities supporting critical community needs, or particular activities only under specified conditions, such as limited costs or local control. The agencies recognize that community needs can vary widely across communities, and therefore intend the final rule to be sufficiently adaptable for banks and communities to address those needs. While the agencies note that infrastructure projects in higher income areas tend to be sufficiently resourced, the agencies believe that the final rule will provide recognition of bank support for a variety of needed activities in targeted census tracts, including those projects that would be less likely to be funded otherwise.

In addition, the agencies are not adopting comments suggesting that the rule should require activities to primarily serve low- and moderate-income residents in targeted census tracts; to strongly correlate to the benefit to low- and moderate-income individuals; or to limit eligible activities to census tracts with majority low- or moderate-income populations. The final rule seeks to maintain flexibility for activities to meet a range of community needs, while also requiring the inclusion of low- or moderate-income individuals as beneficiaries. As noted in the discussion of essential community facilities (final § __.13(f)), the agencies believe that this flexibility remains particularly important in distressed or underserved nonmetropolitan middle-income census tracts, which can have fewer low- or moderate-income residents. Thus, the final rule is intended to balance a number of considerations by specifically requiring that essential community infrastructure under § __.13(g) benefit or serve residents of these census tracts, or low- or moderate-income census tracts, but also requiring that low- or moderate-income individuals within those census tracts benefit from the project. At the same time, the agencies are declining to expand the rule to qualify activities benefiting all residents without regard to income level, as the agencies believe it is important that there be some demonstrated benefit to low- and moderate-income individuals.

For similar reasons, the agencies are also not adopting in the regulation recommended methods for measuring the benefits of these projects to low- and moderate-income individuals. The agencies are concerned that specific requirements in this regard could be overly burdensome and add a level of complexity to the rule that could run counter to facilitating partnerships between banks and communities to meet essential community infrastructure needs. The agencies further believe that there is a need to maintain flexibility in the rule, as noted above, for qualifying a range of infrastructure projects that meet varying community needs. However, banks will be expected to demonstrate that all of the criteria in § __.13(g) have been met, notably the criterion in § __.13(g)(2) that essential community infrastructure benefits or serves residents of targeted census tracts, including low- and moderate-income individuals.

The agencies have also considered comments suggesting an option to provide partial credit for activities under § __.13(g), but continue to believe that not including a partial credit option for essential community infrastructure will better facilitate clarity and consistency in the consideration of essential community infrastructure. In addition, the agencies are concerned that providing partial credit could allow for qualification of projects without a specific focus on benefiting and serving residents of targeted census tracts, and might allow for activities with only tangential benefits to the targeted census tracts. The agencies recognize commenter concerns that the criteria for essential community infrastructure could result in support for larger infrastructure projects not qualifying for CRA credit, but believe that these larger projects are likely to have financing options even if they have only ancillary benefits to residents of targeted census tracts. The place-based criteria adopted under the final rule thus are designed to help ensure that community development under the CRA includes larger infrastructure projects that provide clear and meaningful benefits to residents of targeted census tracts, and that smaller projects benefiting residents of targeted census tracts have needed financial support. Larger scale infrastructure projects will qualify if they meet all required criteria, including that there is a demonstrated majority benefit for residents of targeted census tracts. Thus, a bank could purchase a bond to fund improvements for a citywide water treatment project that is consistent with a city's capital improvement plan; this bond purchase would qualify if the majority of the project benefits or serves residents in the eligible census tracts, includes low- or moderate-income residents, and meets the other criteria of § __.13(g).

Section __.13(g)(1) Through (3) Place-Based Criteria

The final rule adopts the three common place-based eligibility criteria for essential community infrastructure, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Accordingly, under the final rule, essential community infrastructure are activities that: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving targeted census tracts (final § __.13(g)(1)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § __.13(g)(2)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in targeted census tracts (final § __.13(g)(3)). As noted, the reasons for adopting these final criteria, and for revisions to the proposed criteria, are collectively discussed above in this section-by-section analysis.

Section __.13(h) Recovery Activities in Designated Disaster Areas

Current Approach and the Agencies' Proposal

Similar to the current CRA regulations and guidance regarding support for designated disaster areas, proposed § __.13(h) would establish recovery activities in designated disaster areas as a category of community development. Specifically, proposed § __.13(h)(1) stated that these recovery activities comprised activities that revitalize or stabilize geographic areas subject to a Major Disaster Declaration administered by the Federal Emergency Management Agency (FEMA). Consistent with current guidance, the proposed provision expressly excluded activities that revitalize or stabilize counties designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures), but modified the exclusion by providing that the agencies may determine to grant a temporary exception for these areas. Also aligned with current guidance, the proposal provided that activities promoting the revitalization or stabilization of designated disaster areas would be eligible for CRA consideration for 36 months after a Major Disaster Declaration unless that period is extended by the agencies.

The proposal further defined recovery activities in designated disaster areas as activities that also meet the other place-based criteria discussed above: that activities benefit or serve residents, including low- or moderate-income residents (proposed § __.13(h)(2)); not displace or exclude low- or moderate-income residents, of these geographic areas (proposed § __.13(h)(2)); be conducted in conjunction with a Federal, State, local, or tribal government disaster plan that includes an explicit focus on benefiting the designated disaster area (proposed § __.13(h)(3)). Under the proposal, activities in designated disaster areas that meet these eligibility standards could be considered regardless of the income level of the designated census tracts.

Comments Received

Comments on the proposal regarding recovery activities in designated disaster areas generally focused on the agencies' specific request for feedback on whether they should consider any additional criteria to ensure that activities in this category benefit low- or moderate-income individuals and communities. Some commenters, for example, indicated support for additional criteria for this category to focus the benefits of recovery activities in disaster areas on low- and moderate-income individuals and communities and to avoid recovery efforts being concentrated in higher-income areas. Commenters noted that disasters disproportionately impact low-income communities, and pointed to the inequitable distribution of recovery resources following a disaster. Several of these commenters recommended metrics to help ensure low- and moderate-income community benefit of disaster recovery activities, such as: (1) requiring that a specific percentage of benefits inure to low- and moderate-income residents; (2) use of a Social Vulnerability Index to help determine and assess low- and moderate-income benefit; or (3) consideration of criteria used in the Census Bureau's Community Resilience Estimates, which focus on various factors that could impact a community's ability to survive and rebound from declared disasters. A few commenters further suggested that the agencies give credit for activities that serve displaced residents who were forced to migrate, as well as the census tracts that receive those displaced residents; or require that recovery activities in designated disaster areas benefit low- and moderate-income communities, minority communities, or both, in order to be eligible for CRA consideration. Another commenter similarly suggested that the focus of disaster recovery should be expanded to include minority communities, to ensure the agencies are fulfilling their obligation under the Fair Housing Act's affirmatively furthering fair housing provision. This commenter suggested that minority individuals and communities are especially vulnerable to disasters and are also the least likely to have access to the resources needed to recover from disasters. Commenter feedback also included a recommendation to qualify activities that primarily benefit low- and moderate-income communities affected by a natural disaster without requiring a FEMA declaration or disaster plan for that community.

In lieu of additional criteria, a few commenters advocated for using the proposed impact review to give positive treatment for bank financing activities for disaster recovery based on the extent to which low- and moderate-income individuals or neighborhoods benefit. For instance, a commenter suggested that CRA performance evaluations should specifically factor in the degree to which these activities benefit low- and moderate-income populations, with higher scores assigned to projects benefiting low- and moderate-income residents than other projects.

Some commenters supported qualifying recovery activities in designated disaster areas, regardless of income level, or otherwise opposed additional criteria to ensure benefits for low- and moderate-income individuals and communities in designated disaster areas. For example, a commenter supported considering disaster recovery activities as responsive to community needs and suggested that such activities in middle- and upper-income areas can benefit low- and moderate-income persons. A few commenters suggested that the agencies rely on the expertise of the bank's CRA professional to create a case for the activity and demonstrate that the activity is in direct response to a natural disaster. Another commenter referenced current guidance on disaster recovery activities under the CRA that are not income-limited, and asserted that, to ensure that disaster recovery efforts are effective, all members of any community who have experienced economic dislocation due to a disaster must continue to be able to benefit from the community development activities undertaken by the financial institution, regardless of income.

Final Rule

Final § __.13(h) adopts proposed § __.13(h), reorganized for clarity and consistency with the structures of other place-based categories, and modified as described below. Consistent with the proposal, final § __.13(h)(1) provides the general definition of the types of activities included in this category of community development and specifies that they must also meet the common place-based eligibility criteria (final § __.13(h)(1)(i) through (iii)). Final § __.13(h)(2) contains the proposed exclusion from consideration for loans, investments, and services supporting disaster recovery in counties designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures), and the timeframe for eligibility for consideration.

Section __.13(h)(1) Recovery of Designated Disaster Areas

Under final § __.13(h)(1), activities that promote recovery of a designated disaster area are those that revitalize or stabilize geographic areas subject to a Major Disaster Declaration administered by FEMA. The final rule relocates the proposed additional parameters for qualification from proposed § __.13(h)(1) to final § __.13(h)(2), described below. The final rule is intended to describe eligible disaster recovery activities more clearly, as a stand-alone community development category of community development in the regulation, rather than including disaster recovery activities as a subcategory of revitalization and stabilization. Examples of bank activities for CRA credit as supportive of disaster recovery activities under final § __.13(h) include, but are not limited to, assistance with rebuilding infrastructure; financing to retain businesses that employ local residents; and recovery-related housing or financial assistance to individuals in the designated disaster areas. As with the other place-based categories, the agencies believe that the final rule on disaster recovery activities, with the common place-based criteria discussed in more detail above, will provide stakeholders with a better upfront understanding of the types of disaster recovery activities that will qualify as community development relative to the current “attract or retain” standard.

The agencies have considered commenter suggestions for additional or alternative criteria to help ensure that designated disaster recovery activities include a benefit to low- or moderate-income residents in the communities served by these projects. In particular, the agencies are sensitive to commenter concerns that disasters can often more severely impact low- and moderate-income individuals. At the same time, given the disparate and widespread impacts that major disasters can involve, the agencies are concerned about unduly limiting qualification of activities under this category and possibly qualifying fewer disaster recovery activities than under the current rule. Thus, the agencies are not adopting commenter suggestions that the rule should require that a majority of, or all, of disaster recovery activity benefits go to low- or moderate-income residents and communities, or other similar limitations noted in the summary of comments above. The agencies continue to believe that activities that promote the recovery of designated disaster areas should benefit the entire community, including, but not limited to, low- or moderate-income individuals and communities, consistent with the purposes of CRA. Further, the agencies believe that the common place-based criteria adopted under the final rule will ensure a strong connection to community needs in designated disaster areas. Specifically, while activities in all census tract income levels may be considered, these activities must benefit or serve residents of the census tracts included in the designated disaster area, including low- or moderate-income individuals, and must not directly result in forced or involuntary relocation of individuals in designated disaster areas.

The agencies are also not adopting the suggestion to include under disaster recovery those activities that are not tied to specific FEMA Major Disaster Declarations or disaster recovery plans. The agencies believe that revising the current (and proposed) rule to take a more expansive approach to designating eligibility under the disaster recovery category would be overbroad and could require supplemental eligibility criteria that would add complexity to the final rule, potentially detracting from the increased clarity and transparency for stakeholders and examiners that the final rule is designed to achieve. Incorporating State disaster declarations, for example, would pose compliance and implementation challenges due to varying standards and the large volume of such declarations.

The agencies believe that generally retaining current and proposed parameters related to disaster recovery activities, including the focus on federally designated disaster areas and a nexus to a plan, program, or initiative, benefits stakeholders by providing consistency and predictability. The agencies also believe that the final rule's tie to geographic areas subject to a FEMA Major Disaster Area Declaration will provide recognition for a wide range of projects benefiting communities in crisis across the United States within appropriately far-reaching, yet clearly defined, geographic areas. The agencies also note that there have been a significant number of FEMA Major Disaster Declarations in recent years, further indicating that the final rule approach has an appropriate scope for considering a wide range of activities assisting many specifically impacted communities.

Finally, the agencies are declining to adopt specific methods to measure benefits as suggested by some commenters. As with similar suggestions for other place-based categories, the agencies are concerned that specific requirements could be difficult to implement and dissuade banks from engaging in these activities. The agencies further aim to support adaptability of the rule and recognize that different facts and circumstances could give rise to a wide range of appropriate ways to demonstrate that an activity meets the disaster recovery standards in final § __.13(h). As noted elsewhere, however, banks will be expected to demonstrate that they have met all of the criteria in § __.13(h) for activities in designated disaster areas, notably that the activities benefit residents, including low- or moderate-income individuals, of designated disaster areas.

Section __.13(h)(1)(i) Through (iii) Place-Based Criteria

The final rule adopts the three common place-based eligibility criteria for disaster recovery activities, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Under the final rule, activities that promote recovery from a designated disaster are activities that: are undertaken in conjunction with a disaster plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving the designated disaster area (final § __.13(h)(1)(i)); benefit or serve residents, including low- or moderate-income individuals, of the designated disaster area (final § __.13(h)(1)(ii)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in the designated disaster area (final § __.13(h)(1)(iii)). As noted, the reasons for adopting these final criteria, and for revisions to the proposed criteria, are collectively discussed above in this section-by-section analysis.

Section __.13(h)(2) Eligibility Limitations for Loans, Investments, or Services Supporting Recovery of a Designated Disaster Area

Final § __.13(h)(2) relocates and adopts, with non-substantive clarifications, the additional eligibility parameters in proposed § __.13(h)(1). Specifically, under § __.13(h)(2)(i), loans, investments, or services that support activities promoting recovery from a designated disaster in counties designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures) are not eligible for consideration under § __.13(h), unless the agencies announce a temporary exception. Section __.13(h)(2)(ii) states that loans, investments, and services that support activities under § __.13(h) are eligible for consideration up to 36 months after a Major Disaster Declaration, unless that time period is extended by the agencies.

The agencies continue to believe that activities covered under Categories A and B are generally short-term recovery activities that would significantly expand the number of designated disaster areas, and that longer-term activities are more likely to provide sustained benefits to impacted communities and thus are a more appropriate focus under the CRA. The agencies are therefore generally adopting the definition of designated disaster areas included in the Interagency Questions and Answers, and permitting the agencies to consider exceptions on a case-by-case basis, such as disaster declarations for the COVID–19 pandemic. Similarly, consistent with the proposal and current guidance, the agencies are adopting a time frame in § __.13(h)(2)(ii) making loans, investments, and services that support activities under § __.13(h) eligible for consideration up to 36 months after a Major Disaster Declaration. Thus, for example, providing a loan for rebuilding a commercial property 24 months after a declaration could qualify, even if the project continues to be financed past 36 months. Overall, the agencies believe that adopting these criteria will recognize comments that supported a continuance of current practice for this category and provide clarity for banks on the qualification of activities.

Section __.13(i) Disaster Preparedness and Weather Resiliency Activities

Current Approach

The agencies' CRA regulations have allowed CRA consideration for certain activities that help communities recover from natural disasters, including activities that help to revitalize and stabilize designated disaster areas, as discussed above. On a limited basis, activities that help designated disaster areas mitigate the impact of future disasters may be considered under CRA if Hazard Mitigation Assistance is included in the FEMA disaster declaration. Outside of activities related to disaster recovery, the Interagency Questions and Answers provide examples of “community development loans” that include loans financing “renewable energy, energy-efficient, or water conservation equipment or projects that support the development, rehabilitation, improvement, or maintenance of affordable housing or community facilities.” However, the current regulations and guidance do not expressly identify as eligible for CRA credit activities related to helping low- or moderate-income individuals, low- or moderate-income communities, small businesses, or small farms prepare for disasters or build resilience to future weather-related events.

The Agencies' Proposal

In proposed § __.13(i), the agencies proposed to establish a separate category of community development for activities that assist individuals and communities to prepare for, adapt to, and withstand natural disasters, weather-related disasters, or climate-related risks. As with other proposed place-based categories of community development, eligibility under this category would be conditioned on meeting the proposed common place-based criteria. Specifically, the proposal stated that disaster preparedness and climate resiliency activities are those conducted in targeted census tracts and that: benefit or serve residents, including low- or moderate-income residents, in one or more of the targeted census tracts (proposed § __.13(i)(1)); do not displace or exclude low- or moderate-income residents in the targeted census tracts (proposed § __.13(i)(2)); and are conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative focused on disaster preparedness or climate resiliency that includes an explicit focus on benefiting a geographic area that includes the targeted census tracts (proposed § __.13(i)(3)).

Comments Received

General comments. Most commenters addressing proposed § __.13(i) generally supported adding this category of activities under the community development definition, as an appropriate step to encourage financial institutions to support disaster preparedness and climate resilience activities. A number of commenters asserted that these activities can mitigate risks that disproportionately impact low- and moderate-income communities, as well as indigenous communities and communities of color. For example, a commenter stated that low- and moderate-income communities are particularly vulnerable to extreme weather and other natural disasters because they are more likely to be sited in locations that have not benefited from investment in hazard mitigation. A few commenters highlighted the importance of proactive investment in communities as consistent with mission of the CRA, in addition to post-disaster funding. A few commenters asserted that climate resilience is a critical foundation for community health and economic stability and growth, while another noted that the proposed category could help communities understand what kinds of climate-related investments they can seek financing for, and help financial institutions understand which activities can receive CRA credit. In contrast, a commenter opposed the proposal to include this category of activities in the community development definition, arguing that such activities are inconsistent with the CRA.

As discussed in more detail below, while most commenters expressed general support for proposed § __.13(i), many of these commenters urged the agencies to clarify or broaden the scope and types of activities that would qualify under the proposed category as a way to strengthen the rule. Commenters also offered suggestions for revising the proposed category's required elements for place-based activities under proposed § __.13(i)(1) through (3), described in more detail below. Commenters also addressed miscellaneous topics outside the scope of the proposed provisions, discussed at the end of this section-by-section analysis.

Qualifying activities: scope and examples. The agencies requested comment on whether the proposed disaster preparedness and climate resiliency category appropriately defined qualifying activities in proposed § __.13(i) as those that assist individuals and communities to prepare for, adapt to, and withstand natural disasters, weather-related disasters, or climate-related risks. The proposal also provided various examples of eligible activities contemplated by this proposed provision. While commenters generally supported proposed § __.13(i), many of those commenters requested the agencies provide additional clarity; provide additional, non-exhaustive examples of eligible qualifying activities; and/or broaden the types of eligible activities.

For example, some commenters supported the term “climate-related risks,” but asserted that the agencies should interpret the term to include not only natural hazards or weather-related risks, but also environmental health and other risks exacerbated by climate change, such as those related to air quality, pest increases, and warming waters. A few commenters suggested State law climate mitigation frameworks as reference points. Other commenters suggested that the final rule specify, or provide as examples, a variety of activities they recommended should qualify, such as development of community solar and microgrids, battery storage, residential electrification, energy and water efficiency measures, green technology, broad environmental initiatives such as the creation and expansion of green jobs, greenhouse emission mitigation and decarbonization, and toxic waste and industrial site clean-up, among others. One commenter cautioned the agencies against being overly prescriptive, recommending that the final rule maintain definitions broadly associated with essential infrastructure, rather than list specific activities that could become obsolete.

Categorizing activities that promote energy efficiency. The agencies sought comment on whether activities that promote energy efficiency should be included as a component of the disaster preparedness and climate resiliency category, or whether those activities should be considered under other categories, such as affordable housing (§ __.13(b)) and essential community facilities (§ __.13(f)). The agencies also sought feedback on whether certain activities that support energy efficiency should be included as an explicit component of the definition. Most commenters addressing the question supported the agencies' inclusion of energy efficiency-promoting activities as a component of the disaster preparedness and climate resiliency category. For example, a commenter stated that energy efficiency activities can insulate low-income individuals from price inflation and fluctuations resulting from disasters and climate change impacts. Another commenter noted that in addition to decreased utility costs, many energy-efficient techniques support climate resiliency because they help maintain habitable conditions when power is disrupted. A commenter recommended that energy efficiency promoting activities be included as a component of the rule, but consideration for the activities should be conditioned on whether the activities benefited low- or moderate-income individuals or communities. In contrast, one commenter expressed that the agencies should not include activities that promote energy efficiency as a component of disaster preparedness and climate resiliency, asserting that these activities are outside the scope of the CRA and are more appropriate for environmental, social, and corporate governance guidance.

Several commenters also suggested that the agencies should take a broad view of what constitutes an eligible energy efficiency-promoting activity, with some suggesting mitigation efforts be considered. Examples include, among others: energy-efficient upgrades (or new installation) for residential and commercial buildings, such as appliance and fixture replacements, weatherization, improved insulation, window replacements, heat pump and HVAC system purchase and installation; and electrification or decarbonization measures that would help stabilize home energy costs; and water efficiency measures.

A number of commenters suggested that energy efficiency-promoting activities should be considered a component of other proposed community development categories, such as affordable housing, community facilities, and/or community infrastructure. For example, several commenters observed that there will be circumstances where energy efficiency improvements can benefit affordable housing and community facilities and this approach would ensure such activities are targeted to the most underserved populations.

In contrast, a few commenters supported including energy efficiency-promoting activities only under the proposed disaster preparedness and resiliency category, to facilitate initiatives that co-optimize the use of energy efficiency and weatherization with other related activities, to reduce confusion, or to prevent double-counting.

Other energy-related activities. The agencies sought comment on whether, distinct from energy efficiency improvements, other energy-related activities should be included in the disaster preparedness and climate resiliency category. Of those that responded, many commenters supported including other energy-related activities as activities that assist individuals and communities in preparing for, adapting to, and withstanding weather, natural disasters, and climate-related risks. Commenters offered various examples of such activities including, among others: renewable energy (including financing of solar panels in low- and moderate-income census tracts or on homes for low- and moderate-income homeowners, community solar installation, or a neighborhood-wide microgrid or district energy system); flood control and water run-off measures; decarbonization activities; energy storage systems; distribution grid modernization; and electric vehicle charging infrastructure. A commenter suggested that the CRA should prioritize clean energy related lending and investment and do so in a manner akin to how LIHTCs are prioritized under the current rule.

Utility-scale projects. While the agencies noted in the proposal that proposed § __.13(i) was not intended to include utility-scale projects, the agencies also sought comment on whether to include utility-scale projects, such as certain solar projects, that would benefit residents in targeted census tracts.

Some commenters asserted that utility-scale projects could benefit low- and moderate-income areas through expanded capital investment and likely displacement of fossil fuel burning plants, which are more likely to be located in such areas; or to give clean energy options to residents who cannot install renewable energy on their homes ( e.g., due to cost or because they are renters). A few commenters asserted that utility-scale projects such, as renewable energy plants developed outside of a targeted geography, should still be eligible for credit, if benefits accrue to residents of targeted census tracts. A commenter suggested that by definition, utility-scale clean energy should be considered to benefit residents in targeted census tracts, noting that clean energy, regardless of location, benefits the climate everywhere and that even utility-scale clean energy projects located physically outside the geographical borders of a low- and moderate-income community still benefits the environment, health, and welfare of low- and moderate-income persons and communities.

Other commenters supported including utility-scale projects, conditioned on criteria such as a certain percentage of benefits accruing to low- and moderate-income census tracts; physical location in low- and moderate-income communities; or if documentation showed specific benefits to targeted geographies or to low- or moderate-income individuals. A few commenters raised offering partial credit for dollars going to low- or moderate-income neighborhoods or benefiting low- or moderate-income individuals, or for projects providing demonstrable financial benefits to those communities.

In contrast, some commenters responded that utility-scale projects should not be included as eligible activities. These commenters offered various reasons for this view, including that the benefits of utility-scale projects are not sufficiently directed to low- and moderate-income communities and conventional financing is more likely to be available for these projects ( i.e., these projects would occur without a CRA incentive). Another commenter expressed the view that including utility-scale projects would dilute the intended core focus of the CRA, due to the broad application of such projects, and the large dollar amounts involved.

Final Rule

Section __.13(i) In General

The final rule adopts proposed § __.13(i), renamed and reorganized from the proposal for clarity, including for consistency with the structure of other place-based categories, and with other modifications discussed below. Final § __.13(i) uses the term “weather resiliency” instead of “climate resiliency” to clarify the types of activities that qualify under this category of community development. Under final § __.13(i), disaster preparedness and weather resiliency activities are defined as those that assist individuals and communities to prepare for, adapt to, and withstand natural disasters or weather-related risks or disasters. As discussed below, final § __.13(i) is revised to state that disaster preparedness and weather resiliency activities benefit or serve targeted census tracts and meet the common place-based criteria in § __.13(i)(1) through (3).

As noted by commenters and highlighted in a growing body of literature, lower-income households and communities are especially vulnerable to the impact of natural disasters and weather-related risks and disasters. Low- and moderate-income communities are more likely to be located in areas or buildings that are particularly vulnerable to disasters or weather-related risks, such as storm shocks or drought. Because residents of affordable housing are more likely to be low-income, and affordable housing tends to be older and of poorer quality, low- and moderate-income households are more likely to have housing that is susceptible to disaster-related damage. Additionally, lower-income households tend to have fewer financial resources, making them less resilient to the temporary loss of income, property damage, displacement costs, and health challenges they face from disasters. Finally, low- and moderate-income communities are often disproportionately affected by the health impacts associated with natural disasters and weather-related events. For these reasons, the agencies believe adding a disaster preparedness and weather resiliency category furthers the purpose of the CRA.

While the proposed rule defined disaster preparedness and climate resiliency activities as those that are “conducted in” targeted census tracts, final § __.13(i) is revised to define “disaster preparedness and weather resiliency” activities as those that “benefit or serve” targeted census tracts. The agencies recognize that while a “conducted in” standard could facilitate a bank's demonstration that activities are benefiting and serving the residents of targeted census tracts, it could exclude disaster preparedness and weather resiliency activities located in close proximity to a targeted census tract that nonetheless are demonstrably designed to benefit and serve residents of that census tract, including low- or moderate-income individuals. Thus, under the final rule, a project to finance a levee specifically intended to prevent flooding in a targeted census tract could qualify for consideration, even if the levee were not located directly within the census tract, presuming all criteria of the rule were met.

Qualifying activities under the final rule; examples; additional criteria. The agencies have considered commenter feedback on the scope and types of activities that might qualify under this category, and commenter responses to whether activities that promote energy-efficiency and other energy-related activities should be explicitly included in the definition. For the reasons discussed below, the agencies are finalizing the proposal's high-level, comprehensive approach regarding the scope and types of activities that qualify under this category, such as activities that assist individuals and communities to prepare for, adapt to, and withstand natural disasters or weather-related risks or disasters. The agencies believe the final rule will encompass a wide variety of activities that help low- or moderate-income individuals and communities proactively prepare for, adapt to, or withstand the effect of natural disasters or weather-related risks or disasters, such as earthquakes, severe storms, droughts, flooding, and forest fires. For example, potentially eligible activities under the final rule, include, but are not limited to, the construction of flood control systems in a flood prone low- or moderate-income or underserved or distressed nonmetropolitan middle-income census tract; and retrofitting multifamily affordable housing to withstand future disasters or weather-related events. Additional examples of potentially eligible qualifying activities include, but are not limited to: promoting green space in targeted census tracts in order to mitigate the effects of extreme heat, particularly in urban areas; weatherization upgrades to affordable housing such as more efficient heating and air-cooling systems or more energy-efficient appliances; community solar projects, microgrid and battery projects that could help ensure access to power to an affordable housing project in the event of severe storms; financing community centers that serve as cooling or warming centers in low- or moderate-income census tracts that are more vulnerable to extreme temperatures; and assistance to small farms to adapt to drought challenges.

The agencies believe that the final definition provides banks the flexibility needed to encourage investments in a range of activities that promote disaster preparedness and weather resiliency, particularly given that communities face different types of risks across the country. To the extent that activities meet the definition and the common place-based criteria in final § __.13(i), as well as meet the majority standard in final § __.13(a), such activities would qualify for community development consideration. For this reason, while the agencies intend that the final rule will encompass some energy-efficiency and other energy-related activities ( e.g., those mentioned above), the agencies believe it is unnecessary to more specifically reference those activities in the final rule. With respect to these and other activities raised by commenters, the agencies are concerned that a more prescriptive rule that either designates or provides examples of precise qualifying activities could be overly limiting for this category, become obsolete, or discourage innovative activities in an evolving area of community development. However, the agencies will take commenters' suggestions under advisement as the agencies develop the illustrative list contemplated by § __.14.

While the agencies believe the final rule provides broad flexibility, the agencies are also declining to further expand community development under this category, for example, to incorporate all environmental health threats and other risks that could be exacerbated by climate conditions, all activities to mitigate climate risks, such as those that promote decarbonization, or activities that facilitate the transition to clean energy generally. The agencies believe it is important that the final rule clearly link qualifying disaster preparedness and weather resiliency activities to those activities that benefit or serve residents of a targeted census tract, to ensure that these activities provide the community benefit in alignment with the CRA. The agencies are concerned that broadening the rule as suggested by some commenters would make it difficult for banks to demonstrate that nexus, as well as to meet the majority standard in § __.13(a).

Energy efficiency activities and other community development categories. The agencies have also considered comments on whether to include activities that promote energy efficiency in the disaster preparedness and weather resiliency category, or under other community development categories, such as affordable housing or essential community facilities. On further consideration, the agencies believe that energy efficiency-promoting activities are generally consistent with the final definition of disaster preparedness and weather resiliency, and therefore should be included within this category. However, the agencies do recognize that some energy efficiency-promoting activities could potentially be considered under other community development categories. For example, and as discussed in more detail in the proposal, certain weatherization improvements might also benefit affordable housing or essential community facilities. Banks subject to the rule are permitted to qualify activities under any applicable community development category, but those activities may count only once for the purposes of calculating the Community Development Financing Metric.

Utility-scale projects. Relatedly, the agencies appreciate the varying views on whether to include utility-scale projects that benefit residents of targeted census tracts within the scope of the rule. After considering the comments, the agencies reaffirm that final § __.13(i) is not intended to include utility-scale projects. Utility-scale projects tend to be large, even regional projects. In addition, given their nature and function, the agencies believe it would be difficult for utility-scale projects to meet the definition and place-based criteria described below; in particular, the agencies believe it would be difficult for banks to clearly demonstrate such projects benefit or serve specific groups of residents in targeted census tracts. The agencies further believe it would be difficult for utility-scale projects to meet the majority standard described in § __.13(a).

The agencies also considered comments suggesting partial consideration be available for those utility-scale activities benefiting low- or moderate-income individuals or communities, but are not revising the rule in that regard. The agencies believe that partial consideration could allow for qualification of activities that are not primarily focused on benefiting or serving residents of targeted census tracts, and could allow for activities with only accessory benefits to targeted census tracts.

Section __.13(i)(1) Through (3) Placed-Based Criteria

The Agencies' Proposal

The proposal defined disaster preparedness and climate resiliency activities as those conducted in targeted census tracts and that: benefit or serve residents, including low- or moderate-income residents, in one or more of the targeted census tracts (proposed § __.13(i)(1)); do not displace or exclude low- or moderate-income residents in the targeted census tracts (proposed § __.13(i)(2)); and are conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative focused on disaster preparedness or climate resiliency that includes an explicit focus on benefiting a geographic area that includes the targeted census tracts (proposed § __.13(i)(3)).

Comments Received

Comments regarding the common place-based criteria are generally discussed in the introduction to this section-by-section analysis. The agencies additionally sought comment on questions specific to this category, as noted below.

Criteria to ensure targeted benefits. The agencies sought feedback on other options for determining whether disaster preparedness and climate resiliency activities are appropriately targeted; how qualifying activities should be tailored to directly benefit low- or moderate-income communities and distressed or underserved nonmetropolitan middle-income areas; and whether other criteria are needed to ensure those activities benefit low- or moderate-income individuals and communities. Additionally, the agencies sought feedback on whether energy efficiency standards should be used to determine if an activity provides sufficient benefit to targeted census tracts, including low- and moderate-income residents. Several commenters concurred that the proposal would appropriately require activities to be targeted to ensure benefits to low- and moderate-income individuals and communities. Some commenters further recommended that qualifying activities be evaluated to ensure that they provide clear, direct, targeted, meaningful, and/or proven benefit to low- and moderate-income and historically disinvested individuals or communities. Other commenters expressed concern that the proposal was not sufficiently targeted, and urged the rule be revised to state that activities must directly benefit low- and moderate-income communities, Native communities, and minority communities to be eligible for CRA consideration, to prevent funding from going to higher-income areas.

Some commenters offered specific views on whether additional tailoring is needed for eligible activities that benefit or serve low- and moderate-income individuals. A commenter encouraged the agencies to consider socially and environmentally beneficial activities even if the transaction does not directly involve a low- and moderate-income party, such as investments in broad environmental initiatives, green technology, and State programs to combat climate change. The commenter asserted that this would allow for financial institutions to more holistically serve low- and moderate-income communities. Another commenter noted that, as disasters do not target low- and moderate-income communities and impact all income levels, further tailoring is unnecessary. In contrast, a commenter stated that activities that are generically responsive to climate change such as wind farms or carbon capture efforts should not be eligible for CRA consideration as they lack the targeted benefit.

Commenters also suggested various criteria for the agencies to consider including in the final rule to ensure disaster preparedness and climate resiliency activities benefit low- or moderate-income individuals and communities. Examples of criteria suggested included, among others, considering the mission or focus of the organization owning or controlling the project and whether they have a focus on serving residents of low- and moderate-income communities; whether a project leads to expected energy reduction for low- and moderate-income individuals and communities; or whether a project expands low- and moderate-income household access to renewable energy. Other commenters suggested eligibility criteria, such as requiring renewable energy projects to have a certain percentage of low- and moderate-income subscribers, or prorating CRA credit for activities based on the portion of funds dedicated to low- and moderate-income individuals and communities.

Additional prong for activities benefiting low- and moderate-income individuals regardless of geographic location. The agencies also sought comment on whether to include a separate prong of the disaster preparedness and climate resiliency category for activities that benefit low- and moderate-income individuals, regardless of whether they reside in one of the targeted census tracts; and if so, what types of activities should be included in this component. In response, commenters generally supported including a prong to qualify activities that benefit low- and moderate-income individuals, regardless of where they live, if there is a clear benefit to low- and moderate-income individuals or communities or minority communities. Various commenters noted that not all low- and moderate-income individuals live in low- and moderate-income areas and so may be subject to increased displacement risk or physical and financial impacts. Another commenter observed that poverty is not concentrated in rural regions in the same way as in metropolitan areas. In contrast, a commenter suggested that fewer and more inclusive prongs would avoid confusion.

Examples of activities that might fit under such a prong submitted by commenters included, among others: activities that promote energy efficiency activities for low- or moderate-income individuals, regardless of where they live, and activities that facilitate improvements and recovery assistance for homes owned or rented by low- and moderate-income households.

Consideration of activities in designated disaster areas. The agencies also requested feedback on whether to qualify activities related to disaster preparedness and climate resiliency in designated disaster areas, and if so, whether additional criteria are needed to ensure benefits accrue to communities with fewest resources to address the impacts of future disasters and climate-related risks. Most commenters addressing this question opposed including designated disaster areas as targeted geographic areas for these activities. These commenters noted that Federal disaster areas often include higher-income census tracts that have access to greater resources to finance activities that promote disaster preparedness and climate resiliency, and that CRA should encourage resources to go to communities with limited resources and greater needs. A few commenters offered support, but only if low- and moderate-income individuals or targeted census tracts would be the beneficiaries, with defined constraints, such as demonstrable requirements to have low- and moderate-income census tracts comprise a high percentage of the total geography for the project financed. A few commenters offered support for specified activities in designated disaster areas (such as emergency protective measures), and one commenter suggested that credit could be pro-rated based on the portion of low- and moderate-income census tracts that benefit.

Final Rule

The final rule adopts the common place-based eligibility criteria, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Under the final rule, disaster preparedness and weather resiliency activities benefit or serve targeted census tracts and: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving targeted census tracts (final § __.13(i)(1)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § __.13(i)(2)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals residing in targeted census tracts (final § __.13(i)(3)).

As discussed in more detail above, the final rule expands the government plan criterion adopted in § __.13(i)(1) to include mission-driven nonprofit organizations and deletes “explicit” from the requirement for the plan, program, or initiative to have a focus on benefiting or serving targeted census tracts. In particular, the agencies recognize that, consistent with feedback from some commenters, the Federal, State or local governments may not have disaster preparedness or weather resiliency plans or programs currently in place for some targeted census tracts. Additionally, some government plans may not be specifically focused on, or described as, disaster preparation or weather resiliency. The agencies also note that the Federal Government as well as more State and local governments are developing disaster preparedness or weather resiliency-related plans, and the agencies anticipate these plans will become more widespread over time.

The criterion adopted in § __.13(i)(2) is substantially similar to the proposed criterion, with a revision from “low- or moderate-income residents” to “low- or moderate-income individuals.” The criterion adopted in § __.13(i)(3) is revised to prohibit activities that directly result in forced or involuntary relocation of low- and moderate-income individuals residing in the targeted census tracts. The agencies believe that the common place-based criteria, combined with the majority standard set forth in § __.13(a), will adequately ensure that disaster preparedness and weather resiliency activities benefit and serve the residents of targeted census tracts, including low- and moderate-income individuals. Reasons for adopting these final criteria, and for the revisions made, are generally discussed above in this section-by-section analysis. Responses to comments on specific questions asked regarding this community development category follow below.

Criteria to ensure targeted benefits. The agencies appreciate commenters' thoughtful responses on potential additional eligibility criteria to ensure targeted benefits to low- or moderate-income individuals and communities of activities under this category of community development. The agencies have considered the suggestions and believe the adopted standard is adequately calibrated to provide needed flexibility for qualifying activities to support varying community development needs across different types of communities. In addition, the agencies are concerned that it may be burdensome to have to demonstrate that a project meets suggested criteria and could deter investments under this category. Therefore, the agencies are not adopting additional eligibility criteria. The agencies believe that the final rule is appropriately tailored to ensure a focus on low- and moderate-income residents in targeted census tracts and will facilitate banks' ability to find opportunities to serve targeted communities.

The agencies are also not adopting the suggestion to condition consideration of energy efficiency activities under the rule on specific benefits to low- or moderate-income individuals or communities, or specific energy efficiency standards. The agencies have considered that such standards are continuously evolving and believe it would be impracticable to incorporate and enforce such standards in the final rule over time. In addition, the agencies have considered that, given the many different types of activities that could qualify, setting energy efficiency standards could result in standards that are not calibrated to the full breadth of qualifying activities. However, banks may find information showing that activities meet energy efficiency standards to be helpful in demonstrating that a particular activity meets the relevant criteria in § __.13(i).

Additional prong for targeted activities, regardless of geographic location. Similarly, the agencies are declining to expand the proposed rule to adopt an additional prong for activities directed to low- or moderate-income individuals, regardless of geographic location. Although the agencies recognize that not all low- and moderate-income individuals live in targeted census tracts, as discussed above, the agencies believe that this category should remain place-based and thus focused on activities that benefit or serve targeted census tracts. Adopting an additional basis for qualifying activities in this category would also reduce consistency across the place-based categories and in that regard could increase the final rule's complexity.

Consideration of activities in designated disaster areas. The agencies are also declining to expand the criterion in final § __.13(i)(2) to include activities in designated disaster areas. In response to commenter concerns and upon further consideration, the agencies believe that the rule as finalized, combined with the majority standard in § __.13(a), will appropriately help ensure a focus on low- or moderate-income residents and targeted census tracts. The agencies also note that, to the extent a designated disaster area already encompasses one or more targeted census tracts, that area would already be eligible under final § __.13(i)(2). The agencies are concerned that expanding this category beyond targeted census tracts to include designated disaster areas would detract from ensuring that these activities continue to have a benefit for all residents, including low- and moderate-income residents, since designated disaster areas often include higher-income census tracts. The agencies also believe that many activities with long-term benefits for designated disaster areas could qualify under the separate category of community development focused on recovery for designated disaster areas. The agencies believe the rule as finalized, combined with the majority standard set forth in § __.13(a), sufficiently and appropriately ensures a focus on low- or moderate-income residents.

Additional comments. Beyond the specific elements of proposed § __.13(i), commenters also offered a variety of other suggestions related to the proposed disaster preparedness and climate resiliency category of community development. For example, a few commenters suggested the final rule should indicate the kinds of public data and tools available for banks to identify and/or quantify climate vulnerable communities and risks, to assess whether proposed investments align with known demographic and environmental conditions, and to prioritize investments to maximize benefits to targeted communities. For example, some commenters suggested leveraging the U.S. EPA's Environmental Justice Screening and Mapping Tool (EJScreen) and White House Council on Environmental Quality's Climate and Economic Justice Screening Tool (CEJST). While the agencies appreciate these suggestions, the agencies are aware that public data and tools are continuously evolving, and therefore are declining to adopt or reference specific tools in the final rule. As the agencies note in the section-by-section analysis of § __.21, the agencies intend to make tools and information available to banks and the public on performance context related information and will take these comments into consideration as the agencies implement the final rule.

Commenters also addressed topics such as how the climate impacts of a bank's activities should be factored into a bank's CRA performance evaluation. For example, some commenters stated that banks should be scrutinized and/or downgraded for financing activities that increase greenhouse gas emissions, asserting that such activities disproportionately impact low- and moderate-income communities or minority communities, while at least one commenter expressed concern about such an approach. A few commenters suggested that the agencies should avoid awarding CRA credit to programs or products that may take advantage of or otherwise be unaffordable to low- and moderate-income or other underserved homeowners or consumers. In this regard, the agencies note that under the final rule, as currently, evidence of illegal credit practices can be the basis of a rating downgrade. For more information on the final rule's approach to rating downgrades, see the section-by-section analysis of § __.28.

Several commenters suggested that the final rule encourage banks to provide financial services for climate resiliency activities in low-income, indigenous, and minority communities. Specifically, one commenter suggested that the agencies develop a race and ethnicity disclosure framework for community development activities, similar to the proposed disclosure of race and ethnicity data for mortgage lending under the Retail Lending Test. Another commenter asserted that race should be explicitly used as a metric to ensure that climate vulnerable communities receive improved access to credit and services. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

A few commenters suggested that an impact factor for climate resiliency-related activities could be developed, to recognize, among others, activities such as energy efficiency improvements that also benefit affordable housing and essential community facilities (if not explicitly eligible under those categories); decarbonization features of otherwise qualified activities; or activities undertaken in line with community-based plans or in collaboration with public agencies. For example, a commenter suggested that the final rule offer additional CRA credit specifically for making investments in CDFIs or other institutions that directly invest in rural-based resilience and adaptation programs or projects. The commenter observed that rural communities, particularly rural coastal regions, face a greater threat from climate change than more-urbanized areas because they often lack the resources, infrastructure and adaptive capacity of city centers.

While the final rule does not adopt a specific impact factor for these types of activities, as suggested above, the agencies note that certain activities associated with commenter-recommended impact factors could potentially already be counted under one of the twelve impact and responsiveness factors adopted in final § __.15(b). These could include, for example, factors for community development loans, investments, and services in specific geographic areas with significant community development needs (§ __.15(b)(1) through (3)), that support an MDI, WDI, LICU, or CDFI (§ __.15(b)(4)), or that serve low-income individuals or families (§ __.15(b)(5)). Impact and responsiveness factors are discussed in more detail in the section-by-section analysis of § __.15.

Section __.13(j) Revitalization or Stabilization, Essential Community Facilities, Essential Community Infrastructure, and Disaster Preparedness and Weather Resiliency in Native Land Areas

Current Approach

The current CRA regulations do not include a specific category of community development for activities in Native or tribal lands, although current guidance encompasses “revitalization and stabilization” activities consistent with a tribal government plan if the activities are located in low- or moderate-income census tracts. The OCC 2020 CRA Final Rule adopted definitions of both “Indian country” and “other tribal and Native lands,” and designated certain activities as qualifying for consideration in these geographic areas.

Discussed in greater detail below, to help address challenges specific to Native lands, the agencies proposed in § __.13(l), a new category of qualifying community development activities related to revitalization, essential community facilities, essential community infrastructure, and disaster preparedness and climate resiliency that are specifically targeted to and conducted in Native Land Areas (as defined in § __.12, discussed in the corresponding section-by-section analysis above). The final rule renumbers proposed § __.13(l) as § __.13(j), revises and reorganizes the section for clarity, and makes other modifications described below.

The Agencies' Proposal

Under proposed § __.13(l), activities in Native Land Areas related to the following would comprise a distinct category of community development: revitalization, essential community facilities; essential community infrastructure; and disaster preparedness and climate resiliency. Consistent with other proposed place-based categories of community development, the agencies proposed that essential community facilities, essential community infrastructure, and disaster preparedness and climate resiliency activities in Native Land Areas must: benefit or serve residents of Native Land Areas, including low- or moderate-income residents of Native Land Areas; not displace or exclude low- or moderate-income residents of Native Land Areas; and be conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative that benefits or serves residents of Native Land Areas.

Separately, the agencies proposed that revitalization activities in Native Land Areas have a more specific focus on low- and moderate-income individuals. Specifically, the agencies proposed that revitalization activities must benefit or serve residents of Native Land Areas, with substantial benefits for low- or moderate-income residents; and must not displace or exclude low- or moderate-income residents. Revitalization activities in Native Land Areas also would need to be undertaken in conjunction with a Federal, State, local, or tribal government plan, program, or initiative with “an explicit focus on revitalizing or stabilizing Native Land Areas and a particular focus on low- or moderate-income households.”

Comments Received

Commenters offered views on establishing a category of community development for activities in Native Land Areas, as well as feedback on the types of activities that would qualify for CRA consideration under the Native Land Areas category of community development and additional ways to facilitate activities in Native Land Areas. Comments on the proposed definition of Native Land Areas are discussed in the section-by-section analysis of that definition in § __.12.

General comments. Overall, commenters generally expressed wide support for including a new community development category for activities in Native Land Areas, with some indicating that the proposal would facilitate addressing unmet credit needs in geographical areas that have traditionally lacked access to CRA loans and investments, as well as bank branches in those areas. Comments included that the CRA should ensure capital is deployed to Native Land Areas, given persistent lending gaps in these areas; that the proposal could be an important step toward addressing housing needs and persistent poverty in these communities; and that a strengthened and targeted provision would incentivize banks to do more to promote prosperity in rural and Native communities throughout the country.

Additional eligibility requirements. Commenters expressed a range of views in response to the agencies' request for feedback on whether the agencies should consider additional eligibility requirements for activities in Native Land Areas to ensure that community development activities benefit or serves low- or moderate-income residents of Native Land Areas. A few commenters expressed general support for additional criteria to ensure that community development benefits accrue to low- and moderate-income residents of Native Land Areas. One such commenter, however, also wanted to ensure that CRA requirements do not place more burden on Native persons than others. Another commenter expressed support for focusing activities on low- and moderate-income residents, but asserted that low- and moderate-income resident benefit should not be a requirement for qualification.

A number of commenters more specifically objected to including income limits on beneficiaries for activities to receive CRA consideration in Native Land Areas. Reasons offered included, among others, that: (1) AMI in these areas is often very low and credit challenges are not limited to those with below 80 percent AMI; (2) middle-income Native communities often experience gaps in services and funding opportunities; (3) income limits could deter investments; and (4) revitalization across the income spectrum can have far-reaching positive community impacts across Native communities. Additional commenter feedback included: urging the agencies to make eligibility requirements as inclusive as possible, with various commenters noting the Federal Government's trust and treaty obligations or the historic underinvestment in tribal communities; stating that consideration of activities should focus on how an investment benefits the tribal community, and expressing concern that additional requirements would add to the complexity of determining whether a project would qualify prior to a CRA examination; and emphasizing that investments in businesses owned by higher-income Native individuals with a broader impact on tribal community and economic development can help avoid an unintended consequence of maintaining islands of poverty without amenities.

Finally, on the topic of requirements for qualifying activities on Native Land Areas more generally, a commenter asserted that tribal organizations are best positioned to determine community development needs of their communities and advocated that the agencies incorporate into the CRA framework the ability for tribal nations to determine what constitutes a qualifying community development activity in tribal communities. This commenter also recommended that the rule focus on loans to individuals as well as investments in tribal nations, as individual tribal citizens residing on tribal lands have difficulty obtaining lines of credit, loans, and other financial services.

Tribal association or tribal designee plans, programs, or initiatives. As discussed in the proposal, tribal government designees such as tribal housing authorities, tribal associations and intertribal consortiums are central to economic development and community planning efforts in many Native Land Areas. Accordingly, the agencies sought feedback on whether to expand the government plan eligibility criteria to activities in Native Land Areas undertaken in conjunction with tribal association or tribal designee plans, programs, or initiatives. Most commenters on this topic expressed support for broadening qualification to include an option for activities in conjunction with tribal associations or designees. For example, a commenter stated that tribal associations and tribal designees offer and manage many services and programs on tribal lands and for tribal members. Another commenter noted the lack of capacity of tribal governments and indicated that full consent to these proposed activities may therefore be unreasonable; this commenter suggested that broader investment opportunities would be possible if they did not have to be undertaken in conjunction with an explicitly established tribal government initiative.

Commenters also offered views on how the rule could define what tribal associations or designees would be included in an expanded government plan eligibility criterion. Some suggested requiring that a tribal designee be led by or work closely with tribal members, or requiring that tribal association and designee plans be majority Native-led and endorsed by the tribal government or at least not actively opposed by a tribal government. A few commenters asserted that consortia should be included, while other commenters suggested that tribal charters, other Native-led organizations, Native CDFIs and TDHEs could fall within this category, with a commenter noting that tribes rely on federally funded TDHEs to drive housing development. One commenter suggested that regulators should be prepared to allow banks to invest in the activities of Native organizations even though the organizations may have an unfamiliar legal structure.

Other recommendations for Native Land Area activities. Commenters also requested various clarifications or additions to the proposed rule. Suggestions included ensuring consideration for (1) activities that impactfully improve access to Native business loans, mortgage loans, and disaster loans; (2) investments in Native CDFIs to help make more micro loans and provide financing for larger, more complex development projects; and (3) high impact activities in Native Land Areas, such as bond and debt issuances for tribal government entities. Other recommendations included emphasizing climate resiliency or renewable energy with regard to activities in Native communities, as well as broadband and digital equity access for Native Americans.

A few commenters suggested that the agencies provide express presumptions of eligibility for activities such as those carried out by or in conjunction with a tribal government or its agencies, tribal associations or designee plans, or where the primary beneficiaries are members of a federally or State-recognized Indian tribe. Several commenters, including tribal commenters, further asserted that the agencies should consult with tribes to exchange information, build relationships, and receive guidance and recommendations on reforming and implementing the CRA framework. Other commenters addressed tribal consultations with respect to activities that potentially would qualify under proposed § __.13(l). Comments included, for example, a suggestion that the agencies explicitly state that meaningful consultation should always be undertaken with the goal of obtaining tribal informed consent when a project would have an impact on tribal lands or resources, either on or off the reservation.

Final Rule

General Rule (§ __.13(j)(1))

The agencies are adopting proposed § __.13(l), renumbered as § __.13(j), with revisions as follows. The final rule is reorganized for clarity and consistency with the structures of other place-based categories. Final § __.13(j)(1) sets forth the types of activities included in this category of community development: generally consistent with the proposal, this provision states that revitalization or stabilization (termed “revitalization” in the proposal), essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency activities in Native Land areas are activities specifically targeted to and conducted in Native Land Areas. The final rule also adopts a conforming change from “climate resiliency” to “weather resiliency” for consistency with final § __.13(i).These activities must also meet specific place-based eligibility criteria in § __.13(j)(2) or (3), as applicable: final § __.13(j)(2) describes place-based eligibility criteria for revitalization or stabilization activities in Native Land Areas, while final § __.13(j)(3) collectively describes place-based eligibility criteria for essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency in Native Land Areas. These place-based eligibility criteria are discussed in more detail below.

The final rule also makes other technical edits. Section __.13(j)(1) and (2) now reference “revitalization or stabilization,” instead of “revitalization” as proposed, for consistency with revisions to § __.13(e). Further, for clarity and to simplify the regulatory text, § __.13(j)(3) now cross-references the definitions of essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency found in final § __.13(f), (g), and (i), respectively.

The agencies believe that adopting a community development category for specified activities in Native Land Areas will further the purpose of the CRA to encourage banks to meet the credit needs of their entire communities, including those of low- and moderate-income communities. Available data indicate that Native and tribal communities face significant and unique community development challenges. For example, the poverty rate among Native individuals on reservations is 35 percent, and exceeds 50 percent in some communities. Banking and credit access remains a chronic barrier for tribal economic inclusion. Seven percent of American Indian or Alaska Native households were unbanked in 2021, much higher than the 2.1 percent among White, non-Hispanic households. Majority-Native American counties have an average of two bank branches compared to the nine-branch average in nonmetropolitan counties and well below the 27-branch overall average for all counties. In addition, basic infrastructure in tribal areas significantly lags behind that of the rest of the country, with over one-third of Native households in tribal areas affected by major physical problems with their housing, including deficiencies with plumbing, heating, or electric—a share nearly five times greater than for the United States population as a whole. In addition, rates of broadband and cellular access are low in many tribal lands, with 21 percent of all tribal lands and 35 percent of rural tribal lands lacking broadband and cellular access. Given these challenges, and as noted in more detail in the place-based criteria discussion, the agencies believe it is particularly important that community development consideration under this category be directly linked to Native Land Areas. For this reason, the agencies are finalizing in § __.13(j)(1) the proposed requirement that all qualifying activities under § __.13(j) be “targeted to and conducted in” Native Land Areas, even where the cross-referenced community development category ( e.g., essential community facilities in § __.13(f)) does not itself have a “targeted to and conducted in” requirement.

Based on comments received and upon further consideration, the agencies are not adopting additional eligibility requirements for activities in Native Land Areas to ensure that community development activities benefit or serve low- or moderate-income individuals residing in those areas, beyond those proposed and finalized. As discussed above, tribal communities in Native Land Areas face particular challenges related to access to credit. The agencies are concerned that additional income limitations or requirements could deter investments under this category. The agencies further believe that the rule as finalized is sufficiently tailored to ensure a focus on low- and moderate-income residents in Native Land Areas, and will accordingly encourage banks to find opportunities to serve low- and moderate-income communities in areas that can be more difficult to serve.

The agencies are also not expanding the regulation to address commenter suggestions that tribal organizations determine what constitutes qualifying community development activities in Native Land Areas. The final rule is intended in part to ensure that stakeholders have a clear upfront understanding of what constitutes a qualifying activity, in order to encourage investment and greater certainty for banks and those they serve in undertaking community development. However, the final rule incorporates as an eligibility criterion that activities must be undertaken in conjunction with plans, programs, or initiatives of governments (including tribal governments) or mission-driven nonprofit organizations, as discussed further below, and in the section-by-section analysis of the common criteria for placed-based activities, above. In this way, the final rule better incorporates recognition of the importance of tribal government and tribal nonprofit organizations in identifying, understanding, and addressing the needs of their communities, relative to the proposal.

The agencies have also considered comments recommending additions or clarifications to the rule, such as to provide additional emphasis on various specific impactful activities or to provide presumptions of eligibility as described above. The agencies have decided not to adopt these recommendations specifically, but note that activities meeting the eligibility criteria in the full range of community development categories adopted in final § __.13, and that meet the majority standard in § __.13(a), would qualify for community development consideration. For the reasons explained in this section-by-section analysis, the agencies believe that the common place-based criteria are all important to ensuring that the place-based categories provide the intended community benefit, and thus are not adopting presumptions of eligibility in final § __.13(j) for select activities on Native Land Areas that might not satisfy those criteria. The agencies also emphasize that the final rule adopts twelve impact and responsiveness factors under § __.15 that highlight key areas of concern raised by stakeholders, including an impact and responsiveness factor expressly focused on activities that benefit or serve residents of Native Land Areas (final § __.15(b)(8), discussed in the accompanying section-by-section analysis below).

Regarding comments seeking consultation with tribal stakeholders, the agencies engaged in significant outreach prior to issuing the NPR and received feedback from many stakeholders that informed the proposal and final rule, including from those that would be affected by the inclusion of activities in Native Land Areas. Moreover, ongoing engagement with the wide range of stakeholders, including tribes, related to community reinvestment and community development is a central element of agency practice and will continue to be over the course of CRA implementation. Further, the agencies continue to believe that limiting qualification under § __.13(j) to only those activities where tribal governments had been consulted could be overly restrictive and impractical to implement, and could diminish the scope of the activities that would qualify as community development, due to the time and resource constraints of tribal governments. However, as discussed in more detail below, the final rule recognizes the importance of tribal governments and other tribal organizations; in particular, and as discussed below, the agencies are adopting the proposal to require that activities in Native Land Areas must be conducted in conjunction with a government plans, programs, and initiatives, including a tribal government plan, program, or initiative, as well as by expanding the ways that this requirement can be met by allowing for activities undertaken in conjunction with a mission-based nonprofit organization.

Definitions and place-based criteria (§ __.13(j)(2) (revitalization or stabilization activities) and (3) (essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency)). The final rule adopts place-based eligibility criteria for the community development category focused on activities in Native Land Areas in § __.13(j)(2) (revitalization or stabilization activities) and (3) (essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency). These sections are reorganized from the proposal to be in a consistent parallel order with other place-based categories, with certain features specific to the Native Land Areas category that are substantially similar to those in the proposal.

Government plan, program, or initiative (§ __.13(j)(2)(i) and (j)(3)(i)). Consistent with other place-based community development categories, the final rule adopts a criterion in each of § __.13(j)(2)(i) and (j)(3)(i) requiring an activity to be undertaken “in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization.” For clarity, and as described in the section-by-section analysis for § __.12, the final rule adopts a definition of “tribal government.” The agencies believe that including a government plan criterion in each of § __.13(j)(2)(i) and (j)(3)(i) will help ensure that community development activities under § __.13(j) remain responsive to identified community needs, and that the addition of allowing activities with mission-driven nonprofit organizations will appropriately allow for and recognize the value and importance of targeted non-government-related activities that can serve communities in Native Land Areas.

Final § __.13(j)(2)(i) adopts the proposed requirement that the relevant plan, program, or initiative include an “explicit focus” on revitalizing or stabilizing Native Land Areas, while final § __.13(j)(3)(i) is revised to include the requirement that the relevant plan, program, or initiative include an “explicit focus” on benefiting or serving Native Land Areas. While other final place-based categories are adopted without an “explicit focus” requirement (as described elsewhere in the section-by-section analysis of § __.13), the agencies believe this standard is important for this category of community development, to establish that plans, programs, or initiatives have an intentional link to Native Land Areas, which as discussed above are particularly underserved geographic areas. Thus, for example, this category would qualify a flood mitigation project that is specifically designed to benefit residents of a Native Land Area (presuming all other criteria are met).

Regarding revitalization or stabilization activities, final § __.13(j)(2)(i) further requires that the plan, program, or initiative include “a particular focus on low- or moderate-income households.” As discussed in the proposal, the agencies are adopting a more targeted criterion for revitalization or stabilization activities, because Native Land Areas include some middle- and upper-income census tracts that are not designated as distressed or underserved nonmetropolitan middle-income census tracts. This criterion allows consideration for activities conducted in geographic areas that include middle- and upper-income census tracts, but retains the focus on low- and moderate-income households. Based on supervisory experience, the agencies believe that the types of projects that could qualify as revitalization and stabilization activities are more feasibly and likely to be developed to target specific income levels than other categories of place-based activities covered in final § __.13(j) ( i.e., community facilities, infrastructure, and disaster preparedness and weather resiliency activities), which are more likely to be utilized by the community as a whole. Therefore, the agencies believe that it is appropriate to establish an express nexus between these activities and benefits to low- and moderate-income households in Native Land Areas, to better ensure direct benefits to low- and moderate-income components of the community.

As discussed above, the final rule expands the government plan criterion in each of § __.13(j)(2)(i) and (j)(3)(i) from the proposal to include plans, programs, or initiatives of mission-driven nonprofit organizations. Regarding the Native Land Area category of community development in particular, the agencies believe that this expanded government plan criterion will generally capture plans, programs, and initiatives of qualifying Native CFDIs, Native Hawaiian organizations, TDHEs, Indian Health Centers, consortia, and other key Native designees focused on low- and moderate-income individuals and communities. For this reason, the agencies do not believe that expanding this criterion to include tribal associations or designees specifically is necessary. Further, based on the agencies' research and commenter views on the proposal, the agencies are concerned that defining qualifying tribal associations or designees appropriately for the rule would be difficult. Rather, the agencies believe that defining and adding to this criterion mission-driven nonprofit organizations will remove potential ambiguity regarding which organizations would be eligible tribal associations or designees under this criterion, increasing clarity and transparency for stakeholders.

Benefit or serve residents, including low- or moderate-income individuals ( § __. 13(j)(2)(ii) and (j)(3)(ii)). Final § __.13(j)(2)(ii) and (j)(3)(ii) each contain the place-based criterion generally requiring benefits to residents in Native Land Areas. For the same reasons discussed above with respect to the government plan criterion, the agencies are adopting a more targeted criterion for revitalization or stabilization activities. Specifically, under § __.13(j)(2)(ii), revitalization or stabilization activities “must benefit or serve residents of Native Land Areas and must include substantial benefits for low- or moderate-income residents.” For example, a bank's purchase of a bond to fund a distribution center in a Native Land Area, where a substantial number of employment opportunities are expected to be filled by low- or moderate-income residents of the Native Land Area, may qualify for consideration if the activity met other required criteria.

Under final § __.13(j)(3)(ii), essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency activities in Native Land Areas must benefit or serve residents, including low- or moderate-income individuals, in Native Land Areas. The reasons for adopting this criterion and general revisions from the proposal are discussed above in this section-by-section analysis regarding the common place-based criteria.

Forced or involuntary relocation (§ __.13(j)(2)(iii) and (j)(3)(iii)). Final § __.13(j)(2)(iii) and (j)(3)(iii) require that revitalization or stabilization activities and essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency activities in Native Land Areas, respectively, do not directly result in the forced or involuntary relocation of low- or moderate-income individuals residing in Native Land Areas. The reasons for adopting this criterion and general revisions from the proposal are discussed above in this section-by-section analysis regarding the common place-based criteria.

Section __.13(k) Activities With MDIs, WDIs, LICUs, or CDFIs

Current Approach

Under the CRA statute and current regulations, nonminority- and nonwomen-owned banks can receive CRA credit for “capital investment, loan participation, and other ventures” undertaken in cooperation with MDIs, WDIs, and LICUs, provided that these activities help meet the credit needs of local communities in which the MDIs, WDIs, and LICUs are chartered. These activities need not also benefit the bank's assessment areas or the broader statewide or regional area that includes the bank's assessment areas. While CDFIs are not separately highlighted in the statute or regulations, activities with CDFIs can qualify as community development under various provisions of the current regulations pursuant to current guidance.

The Agencies' Proposal

The agencies proposed to establish a category of community development for activities with MDIs, WDIs, LICUs, and U.S. Treasury Department-certified CDFIs. Specifically, a community development category in proposed § __.13(j) included:

• Investments, loan participations, and other ventures undertaken by any bank, including by MDIs and WDIs, in cooperation with other MDIs, other WDIs, or LICUs; and

• Lending, investment, and service activities undertaken in connection with a U.S. Treasury Department-certified CDFI, which the proposed rule expressly indicated would be presumed to qualify for favorable community development consideration.

As discussed above in the section-by-section analysis of § __.12, the proposal defined the term MDI to ensure consistency with the CRA statute and incorporate existing flexibility for each agency to define MDI as it determines appropriate. In this way, the agencies intended the proposal to ensure that activities conducted in cooperation with banks owned by minority individuals would receive consideration, and also provided consideration for activities conducted in cooperation with banks that the agencies have long considered to be MDIs. The agencies sought comment on whether the MDI definition should include insured credit unions considered to be MDIs by the NCUA. As also discussed in the section-by-section analysis of § __.12, the proposal defined WDI by cross-reference to the definition of the term in the CRA.

In the proposal, the agencies noted stakeholder feedback indicating support for a stronger emphasis on community development financing and services that support these institutions, including equity investments, long-term debt financing, technical assistance, and contributions to nonprofit affiliates. Some stakeholders previously suggested the need to increase certainty surrounding the treatment of activities in partnership with MDIs, WDIs, LICUs, and CDFIs. For example, stakeholders noted that examiners might require extensive documentation that a CDFI assists low-income populations, even though CDFI certification by the U.S. Treasury Department's Community Development Financial Institutions Fund is an indication of having a mission of community development. In the proposal, the agencies also noted stakeholder support for conferring automatic CRA community development consideration for community development activities with U.S. Treasury Department-certified CDFIs, to provide a stronger incentive and reduce burden.

The proposal clarified that investments, loan participations, and other ventures undertaken not only by nonminority institutions, but also by MDIs and WDIs, in cooperation with other MDIs, WDIs, and LICUs, would qualify for consideration under this category. This would expand on the current rule, which focuses on providing consideration for these activities when conducted by nonminority institutions.

The agencies also sought feedback on whether activities undertaken by an MDI or WDI to promote its own sustainability and profitability should qualify for consideration. The agencies considered that allowing these activities to qualify could encourage new investments to bolster the financial positions of these banks, allowing them to deploy additional resources to help meet the credit needs of their communities. The agencies further sought comment on whether additional eligibility criteria should be considered to ensure investments by MDIs or WDIs in themselves would ultimately benefit low- and moderate-income and other underserved communities.

The proposal to provide a presumption of favorable CRA consideration for lending, investment, and service activities with U.S. Treasury Department-certified CDFIs was based on the agencies' recognition that these CDFIs already undergo specific certification processes and evaluations of CDFIs' ongoing outputs and outcome goals in award-making processes to demonstrate that they have a mission of promoting community development and providing financial products and services to low- or moderate-income individuals and communities.

Comments Received

General. The agencies received comments on proposed § __.13(j) from a wide range of commenters. Overall, most commenters addressing proposed § __.13(j) supported including this category of community development under proposed § __.13, and most commenters supported both prongs of the proposal. Commenters noted, for example, that these organizations' missions to serve (and record of serving) underserved or historically disadvantaged communities, is consistent with the goals of CRA; that the proposed category would provide clarity regarding the treatment of bank activities with MDIs, WDIs, LICUs, and CDFIs under the CRA; and that the proposal would encourage activities that would reinforce and build the capacity of these entities. As discussed in more detail below, some commenters recommended that the agencies apply additional eligibility criteria to proposed § __.13(j), while others suggested that additional entities be included within the scope of proposed § __.13(j). As discussed in more detail below, some commenters sought additional clarity on the types of activities included in the rule.

Comments regarding MDIs, WDIs, and LICUs (proposed § __.13(j)(1)). Most commenters addressing proposed § __.13(j)(1) supported recognizing “investments, loan participations, and other ventures” undertaken by any bank, including by MDIs and WDIs, in cooperation with other MDIs, other WDIs, or LICUs, as community development. Similarly, several commenters noted that these entities are mission-driven and share a focus consistent with the purpose of CRA. For example, a commenter stated that MDIs have proven to advance economic mobility in Black communities, citing an FDIC study that included findings that an estimated 6 out of 10 people living in the service area of Black-owned banks are Black, and that MDIs originate a greater share of mortgage loans than non-MDIs to borrowers in low- and moderate-income census tracts and in census tracts with larger shares of minority populations. Another commenter stated that in many minority communities, MDIs offer safe and affordable banking services where other institutions may not, and that most MDIs provide vital deposit and credit access services in communities that large financial institutions avoid.

Commenters asserted that MDIs need increased capital investments to serve their communities and that the agencies should incentivize bank activities with MDIs that have a proven record of lending to minority consumers and in low- and moderate-income and minority communities. In this regard, a few commenters asserted that the agencies should specifically encourage activities with MDIs and minority-led or minority-owned CDFIs and credit unions in order to increase racial equity in historically underserved communities.

Several commenters suggested additional eligibility criteria for activities with MDIs and WDIs, based on concerns that MDIs and WDIs might not always serve low- or moderate-income individuals or communities. A few commenters suggested that CRA credit for activities with MDIs be connected to the MDI's record of serving borrowers in minority communities. For example, to ensure that minority communities are served, a commenter suggested that activities with MDIs or WDIs with assets over $1 billion be subject to additional data requirements for transparency, as well as other guardrails. Another commenter suggested incorporating into the CRA regulations a Federal statutory definition of “minority lending institution,” requiring that a majority of both the number and dollar volume of arm's-length, on-balance sheet financial products be directed at minorities or majority minority census tracts or equivalents. Another commenter asserted that activities with CDFIs are more responsive and impactful than deposits or investments into MDIs and WDIs, and that automatic consideration should not be conferred for activities with MDIs or WDIs; instead, examiners should consider what the MDI or WDI does with a deposit or investment prior to granting CRA credit.

Commenters separately addressed the proposed definition of MDI, including in response to the agencies' question on whether to include in the definition minority insured credit unions recognized by the NCUA. These comments and the agencies' response are addressed in the section-by-section analysis for the MDI definition in § __.12.

Comments regarding CDFIs (proposed § __.13(j)(2)). Most commenters addressing proposed § __.13(j)(2) supported qualifying “lending, investment, and service activities” undertaken in connection with a U.S. Treasury Department-certified CDFI as community development under the rule, including the proposed presumption that such activities qualify for favorable community development consideration. Commenters supporting the provision noted that CDFIs are responsible, mission-based lenders and investors. For example, a commenter stated that CDFIs are very active in the NMTC program and work closely with banks to produce the thoughtful and impactful revitalization efforts. Some commenters emphasized that CDFIs can help support small businesses, especially minority- and women-owned small businesses, and continue to partner with banks to make credit accessible in low- and moderate-income communities across the country.

Some commenters sought clarifications in the final rule related to CDFIs. Several commenters recommended that the final rule clarify that a bank's activities with CDFIs would receive equal consideration to activities with MDIs, WDIs and LICUs, with some noting that this should apply regardless of a CDFI's location relative to a bank's assessment area. As noted above, one commenter suggested CDFIs are more impactful than MDIs, WDIs, or LICUs, and, accordingly, that only activities with CDFIs should receive automatic consideration. Some commenters also suggested that the final rule ensure uniform treatment of all kinds of CDFIs ( e.g., loan funds, banks, and credit unions). A number of commenters suggested that the final rule explicitly include “CDFI banks,” based on concerns that the proposal was not clear that CDFI banks were “banks” and that activities between CDFI banks and MDIs, WDIs, and LICUs would be covered for CRA consideration under this category. Other commenters raised concerns about the potential impact of giving similar community development consideration to all CDFIs. For example, a few commenters expressed concern that allowing CRA consideration for bank activities in conjunction with a CDFI regardless of where the CDFI exists could have the effect of encouraging bank activities with only the largest CDFIs, thus redirecting capital resources away from smaller CDFIs with a primary mission of serving local communities. Thus, a commenter recommended that regulators should incentivize substantial participation with local CDFIs, as a condition precedent to an “Outstanding” rating.

Activities undertaken by an MDI or WDI to promote its own sustainability and profitability; eligibility criteria. Most commenters responding to the question of whether the agencies should consider activities undertaken by an MDI or WDI to promote its own sustainability and profitability stated that these activities should be considered. Commenters cited the importance of keeping these institutions in business so that they may better serve their communities. Commenters further suggested clear language expressly allowing CDFI banks to receive CRA consideration for activities that promote their own sustainability and profitability.

A few commenters responded to a related question posed by the agencies on whether additional eligibility criteria should be considered to ensure that investments by an MDI or WDI in itself provide benefit to low- and moderate-income and other underserved communities. A commenter stated that the investments should show an ancillary benefit to low- and moderate-income populations or low- and moderate-income areas served by the institution. Some commenters stated that no additional eligibility criteria should apply to WDI and MDI investments in themselves, but suggested that enhanced consideration should be given to investments that directly benefit low- and moderate-income and underserved communities.

A few commenters opposed giving CRA consideration to activities undertaken by an MDI or WDI to promote its own sustainability and profitability, or suggested limits on consideration of these types of investments. For example, a commenter stated that MDIs or WDIs that are small or intermediate banks should receive CRA consideration for well-defined investments in building their capacity, but that this should not extend to large banks that are MDIs or WDIs.

Other requests for clarification. Commenters also sought clarification on various other aspects of the rule. A commenter suggested that the proposal generally did not clearly articulate what activities would be eligible for consideration under proposed § __.13(j), and thus would not provide sufficient incentive for banks to engage in these partnerships. Some commenters sought clarity on whether specific types of activities would qualify, such as, among others, CDFI products designed to address racial inequity, or loan participations that banks sold to or purchased from MDIs and CDFIs. Some commenters suggested that all bank investments or loans, including equity investments in or to certified CDFIs be eligible to receive CRA credit, and that the final rule provide full CRA credit for loans originated to unbanked and underbanked borrowers that are originated by nonbank CDFIs (even if sold immediately to third-party investors). Commenters also recommended clarifying that investments, loans, or grants, and other support to subsidiaries or entities controlled or wholly-owned by U.S. Treasury Department-certified CDFIs be given the same CRA consideration as those supporting the CDFI.

Additional entities. Some commenters recommended that community development consideration under proposed § __.13(j) be extended to activities with other entities, such as those undertaken with chartered NeighborWorks organizations, HUD-designated Community Housing Development Organizations, HUD-approved Housing Counseling Organizations, and Certified Development Companies (CDCs). In particular, commenters highlighted the rigor required for entities to maintain these certifications. Commenters also suggested adding a wide range of other entities that offer important community supports, such as Community Action Agencies (CAAs), Housing Partnership Network partners, Mutual Self-Help Housing grantees under the USDA Rural Development section 523 program, and other community-based organizations. Some commenters expressed concern that the proposal to grant automatic consideration to CDFIs could discourage similar support to CDCs and other non-CDFI-certified community-based organizations. A commenter suggested that providing CRA consideration for activities with community development venture capital funds and formative funds or entities seeking certified CDFI status would encourage bank support of valuable CDEs prior to certification, while another expressed support for the agencies' clarification in the proposal that non-CDFI certified activities could be considered under another community development category (assuming criteria are met).

Final Rule

The final rule renumbers proposed § __.13(j) as § __.13(k) and revises it as discussed below. Under the final rule, activities with MDIs, WDIs, LICUs, or CDFIs are “loans, investments, or services undertaken by any bank, including by an MDI, WDI, or CDFI bank evaluated under [the agencies' CRA regulations], in cooperation with an MDI, WDI, LICU, or CDFI.” Final § __.13(k) covers activities with the same types of entities as those proposed, but the language referencing eligible types of activities with those entities is revised and simplified, with no substantive change intended, to refer to “loans, investments, and services.” This change is a clarification for consistency with the activities considered under the Community Development Financing Test in final § __.24, the Community Development Services Test in final § __.25, and the Community Development Financing Test for Limited Purpose Banks in final § __.26. Additionally, the final rule states that these activities do not include investments by an MDI, WDI, or CDFI bank in itself.

The final rule is intended to build on and clarify important community development financing and services through MDIs, WDIs, LICUs, and CDFIs that qualify under the current CRA framework. The agencies believe that, by establishing a clear and straightforward standard that allows a bank's loans, investments, and services with MDIs, WDIs, LICUs, and CDFIs to receive community development consideration, the final rule will increase certainty and transparency concerning treatment of activities in partnership with these entities relative to current practice. The final rule is also expected to reduce documentation burden associated with demonstrating, for example, that CDFIs serve low- and moderate-income populations or otherwise have a community development mission, as commenters noted this can create challenges in engaging in these activities. Instead, the final rule is intended to streamline banks' engagement with MDIs, WDIs, LICUs, and CDFIs by providing automatic community development consideration for loans, investment, and services with these entities.

The agencies believe that the mission of MDIs, WDIs, LICUs, and CDFIs in meeting the credit needs of low- and moderate-income and other underserved individuals, communities, and small businesses is highly aligned with CRA's core purpose of encouraging banks to meet the credit needs of their entire community, including low- and moderate-income populations. Emphasizing partnerships with MDIs, WDI, and LICUs in the final rule is consistent with the CRA's express provision highlighting “capital investment, loan participation, and other ventures” by banks in cooperation with MDIs, WDIs and LICUs. As reflected in the current CRA framework, CDFIs have long been recognized by the agencies as financial institutions that, like MDIs, WDIs, and LICUs, are critical to the lending and capital access ecosystem of low- or moderate-income communities. Based on the agencies' supervisory experience, stakeholder feedback over the years of rulemaking leading to this final rule, and other relevant sources, the agencies believe that MDIs, WDIs, LICUs, and CDFIs often have intimate knowledge of local community development needs and opportunities, allowing them to conduct highly responsive activities. These entities also generally undergo rigorous and verifiable certification processes.

Loans, investments, or services include, for instance, equity investments in and loan participations with MDIs, WDIs, and LICUs, and CDFIs. Consistent with current guidance, this would include, for example, loan participations that a bank purchased from a CDFI, loaning an officer or providing other technical expertise to assist an MDI in improving its lending policies and practices, or providing financial support for a WDI to partner with a local educational institution to provide financial literacy programming. The rule takes this broad approach in order to provide flexibility for banks to engage in a range of activities that will meet differing local needs across communities.

Inclusion of CDFIs. The agencies have also considered comments regarding how CDFIs should be considered relative to MDIs, WDIs, and LICUs. The agencies believe that creating a single standard for CDFIs, MDIs, WDIs, and LICUs is not only simpler, but also serves to acknowledge the importance of CDFIs as critical providers of capital to low- or moderate-income communities. The agencies also believe that the construction of the final rule as it relates to activities with CDFIs is preferable since it more directly states that these activities are eligible under final § __.13(k), as compared to the proposed rule's approach of providing a presumption of credit for CDFIs in proposed § __.13(j)(2). The agencies determined that the presumption language raised unintended uncertainty about whether activities with CDFIs would actually count for community development consideration.

The final rule also references CDFIs instead of U.S. Treasury Department-certified CDFIs, as the definition of CDFI in the final rule is clarified to mean U.S. Treasury Department-certified CDFIs. See the section-by section analysis of § __.12 for discussion of the definition of “Community Development Financial Institution (CDFI)”. This definitional change affirms the agencies' intent to ensure that, beyond MDIs, WDIs, and LICUs, the entities with which a bank may engage for automatic consideration of loans, investments, and services have undergone the U.S. Treasury Department's CDFI certification process and meet requirements for maintaining that certification. The agencies consider this a critical guardrail to ensuring that community development on an inclusive community basis is the focus of bank loans, investments, and services in cooperation with these CDFIs.

Activities conducted by MDIs, WDIs, and CDFI banks with other MDIs, WDIs, LICUs, and CDFIs. Under final § __.13(k), any loans, investments, or services undertaken by any bank, including by an MDI, WDI, or CDFI bank, in cooperation with an MDI, WDI, LICU, or CDFI will qualify as community development. As noted in the proposal, in this regard the final rule expands on the current rule, which focuses on crediting these activities when conducted by nonminority institutions. As MDI, WDI, and CDFI banks are themselves subject to CRA evaluations, the agencies believe that this expansion is appropriate to ensure that the loans, investments, and services of these institutions receive the same treatment as nonminority institutions. CDFI banks. The final rule also clarifies that loans, investments, and services by “any bank” include not only majority institutions, but also those by an MDI, WDI, or “CDFI bank” that is evaluated under the CRA. The definition of “CDFI” in final (and proposed) § __.12 is general and thus includes both depository and non-depository CDFIs; however, the agencies intend with the reference to a “CDFI bank” in final § __.13(k) to address commenter concerns that the proposal was not clear that CDFI bank loans, investments, and services in cooperation with MDIs, WDIs, LICUs, and other CDFIs could qualify for consideration under this provision.

Additional eligibility criteria. The agencies have considered commenter suggestions to add additional eligibility criteria for MDIs and WDIs under the final rule, such as criteria concerning how investments in MDIs and WDIs are used, or an MDI's record of service to minority communities. On further deliberation, the agencies believe that an additional layer of criteria would be overly complex to define and apply, potentially dampening the range and quantity of activities beneficial to communities that could otherwise qualify under this provision. For similar reasons, the agencies also are using their statutory authority not to include in final § __.13(k) the reference in the statute and current regulation to activities that help meet the credit needs of “local communities in which [MDIs, WDIs, and LICUs] are chartered.” As discussed above, based on the agencies' supervisory experience, stakeholder feedback over the years of rulemaking leading to this final rule, and other relevant sources, MDIs, WDIs, LICUs, and CDFIs have robust knowledge about the needs of their local communities and records of serving these needs. The agencies believe that the structure and orientation of these entities provide needed guardrails to ensure that activities in cooperation with them will be consistent with the CRA's community focus in the final regulation.

Relatedly, under the final rule, activities with CDFIs are treated similarly to those with MDIs, WDIs, and LICUs, regardless of a CDFI's location or size. The agencies are mindful of concerns expressed by some commenters that this approach could direct bank investment away from smaller, local CDFIs in favor of larger CDFIs. On further consideration, the agencies believe that adding size or location criteria regarding CDFIs with which banks may engage for CRA credit under this provision would diminish the flexibility needed for a range of activities meeting differing local needs across communities. The agencies also note the final rule's adoption of an impact and responsiveness review under § __.15, including an impact and responsiveness factor under § __.15(b)(4) for loans, investments, and services that support an MDI, WDI, LICU, or CDFI (excluding certificates of deposit with a term of less than one year) will allow the agencies to consider the extent to which such activities are highly impactful or responsive to the needs of underserved areas and populations.

Activities undertaken by an MDI or WDI to promote its own sustainability and profitability. The agencies have considered comments responding to the question on whether an MDI or WDI should receive consideration for activities that promote an MDI's or WDI's own sustainability and profitability, and are adopting a final rule that excludes investments by MDIs, WDIs, or CDFI banks in themselves. The agencies appreciate commenter views on the importance of investment support for these entities to bolster their financial position so that they can better serve their communities, as well as the need to consider ways to ensure that these investments benefit low- and moderate-income and underserved communities. On further consideration, the agencies are concerned that the linkage between such investments and benefits to low- or moderate-income communities may be attenuated and thus difficult to determine, in turn making establishment and application of clear and consistent guardrails to ensure benefits to low- and moderate-income communities unduly challenging. At the same time, the agencies believe that the final rule provides robust avenues of support for the sustainability and profitability of MDIs and WDIs through other CRA-evaluated banks, including other MDIs and WDIs.

Definition of MDIs; minority credit unions. The agencies considered comments in response to the agencies' request for feedback regarding whether minority credit unions should be included in the definition of MDI for the final rule and conducted further research on this matter. The agencies note that there is a large overlap between minority credit unions and LICUs. Thus, a bank's loans, investments, and services with a large percentage of minority credit unions will be eligible for community development consideration under final § __.13(k), based on the minority credit union's LICU status. For this and other reasons, the agencies have decided not to add minority credit unions to the proposed definition of MDI. The question of whether to include minority credit unions in the final rule's definition of MDI, as well as other aspects of the final rule's definition of MDI, is discussed in more detail in the section-by-section analysis of § __.12 (“minority-depository institution (MDI)”).

Additional entities. The agencies have also considered comments recommending that the final rule include additional types of entities with which banks could collaborate in order to receive community development consideration, and have decided not to include additional entities in § __.13(k). The agencies have considered that entities such as NeighborWorks America's network organizations, HUD's Community Housing Development Organizations, and other community-based organizations perform important functions in communities, as do community development venture funds and formative funds, or other entities seeking certified CDFI status. However, because qualifying activities under § __.13(k) are eligible for community development consideration without additional eligibility criteria, the agencies believe that narrowly tailoring the entities considered under the final rule is especially important and, accordingly, that focusing final § __.13(k) on MDIs, WDIs, LICUs, and CDFIs is appropriate. As outlined above, MDIs, WDIs, LICUs, and CDFIs generally have missions and track records that directly align with the CRA's mandate of providing credit to entire communities, including to low- or moderate-income communities; undergo rigorous and verifiable certification processes; and are financial institutions that provide critical capital access and credit to underserved communities. The agencies further believe that emphasizing partnerships with the entities covered by final § __.13(k) is consistent with the CRA's express emphasis on cooperation with MDIs, WDIs and LICUs, as well as with the key role CDFIs play in the capital and financial ecosystem in low- or moderate-income communities. The agencies also note and expect that loans, investments, and services supporting activities performed by other entities suggested by commenters may be eligible for community development consideration under other provisions in § __.13.

The agencies have also considered comments that activities with subsidiaries or entities controlled or wholly-owned by CDFIs be eligible for community development consideration under § __.13(k). The agencies note that subsidiaries or entities controlled or wholly-owned by MDIs, WDIs, or LICUs are not referenced in current § __.21(f) or proposed § __.13(j) Similarly, final § __.13(k) does not include activities with these subsidiaries or affiliates, as the agencies believe an automatic grant of community development consideration should remain narrowly tailored. However, activities with subsidiaries or affiliates could be considered under other categories of community development, to the extent they would meet the criteria of those categories.

Section __.13(l) Financial Literacy

Current Approach

Currently, activities related to financial literacy may qualify for CRA credit as “community development services.” These activities must be targeted to low- or moderate-income individuals. Examples of community development services provided in current guidance include, among others: (1) “[p]roviding credit counseling, home-buyer and home maintenance counseling, financial planning or other financial services education to promote community development and affordable housing, including credit counseling to assist low- or moderate-income borrowers in avoiding foreclosure on their homes,” as well as (2) “[e]stablishing school savings programs or developing or teaching financial education or literacy curricula for low- or moderate-income individuals.”

The Agencies' Proposal

Proposed § __.13(k) established a separate category of community development for “[a]ctivities that promote financial literacy,” defined as activities that “assist individuals and families, including low- or moderate-income individuals and families, to make informed financial decisions regarding managing income, savings, credit, and expenses, including with respect to homeownership.” Under the proposed rule, a bank would receive consideration for these activities without requiring them to focus specifically on low- and moderate-income beneficiaries. The proposed approach was intended to encourage investments that have broad benefits across income levels and that support the economic well-being of entire communities, as well as to simplify qualification by limiting the need for banks to obtain documentation to demonstrate that the activity is targeted to low- or moderate-income individuals or families, which can be particularly difficult to obtain for non-customers. However, proposed § __.13(k) specified that the individuals and families assisted by financial literacy activities must “includ[e] low- or moderate-income individuals and families.” The agencies requested comment on whether CRA consideration of financial literacy activities should be expanded from current practice to include activities that benefit individuals and families of all income levels, or be limited to activities that have a primary purpose of benefiting low- or moderate-income individuals or families.

Comments Received

The agencies received many comments on the proposed financial literacy category of community development from a variety of commenters, as discussed in more detail below.

Financial literacy activities that benefit individuals and families of all income levels, including low- and moderate-income. Commenters generally supported creating a community development category for financial literacy activities. In response to the agencies' request for comment on whether the financial literacy category should apply to all income levels or only to low- and moderate-income individuals and families, some commenters supported applying the community development category to all income levels as proposed. Commenters asserted, for example, that financial literacy is useful and important to peoples of all income levels; that the proposed approach would ensure that other underserved populations, including seniors, veterans, and rural communities, would benefit from financial literacy activities; and that the proposed approach would allow banks to expand financial literacy activities more broadly and efficiently to schools and students, without restricting activities to only those students that are low- or moderate-income. In this regard, one commenter asserted that targeting financial literacy activities to only low- or moderate-income students can be difficult in rural areas because there are very few schools with a majority of students that meet this criterion. A few commenters also noted that expanding the provision to all income levels would allow banks to better reach low- or moderate-income populations, including by providing an incentive for bank employees to offer financial literacy sessions to mixed-income groups, and by reducing burden for banks by streamlining the process for determining whether financial literacy activities qualify.

In contrast, other commenters raised a range of concerns regarding the proposed approach to consider financial literacy activities that benefit individuals and families of all income levels. Of those commenters, many asserted that there is a scarcity of resources and support for financial literacy activities, and expressed concern that expanding eligible financial literacy activities to include those for all income levels would divert resources from low- and moderate-income individuals and families that are in greater need. Commenter feedback included, for example: that the proposed approach would not be aligned with the intention and goals of the CRA to ensure that low- and moderate-income consumers are adequately served by the banking system; disagreement with assertions that income level documentation is a significant burden to financial institutions, noting that nonprofit organizations track the income level of their clientele; and that banks should be required to demonstrate that the primary purpose of the financial literacy activities it supports is benefiting low- and moderate-income individuals or families.

Some commenters suggested that financial literacy activities for other populations or in other specific areas should qualify. Suggestions included financial literacy activities serving underserved populations, first-time homebuyers, small businesses, minorities or minority-owned businesses of all income levels, Native communities, or activities in and around Native Land Areas. A commenter suggested that the agencies consider any financial literacy activity provided by a HUD-approved housing counseling agency or intermediary, as a way to address concerns about income verification burden on banks.

Financial literacy activities. While many commenters supported the proposal without suggested changes or revisions to the activities indicated as qualifying under this category, other commenters suggested the agencies clarify or add a range of other activities considered eligible under this category, such as financial coaching, various digital education products, and other specific financial literacy education programs, products, and services. For example, a commenter suggested that the agencies clarify that credit counseling is an eligible activity under the financial literacy category, asserting that nonprofit credit counseling and debt management counseling are critical to support low- and moderate-income consumers. A few commenters suggested that the agencies specify that grants and loans made to nonprofit organizations that support eligible activities under the proposed financial literacy category qualify for consideration.

Housing-related comments. A number of commenters had suggestions regarding consideration for housing and homeownership-related counseling activities. In particular, several commenters suggested that additional emphasis be given to activities that focus on housing counseling. Commenters generally noted the unique, vital, and effective role housing counseling can play in helping consumers meet their financial goals. A few commenters noted that HUD-certified housing counselors provide several critical services to renters and first-time homebuyers that help mitigate barriers related to income, race, and ethnicity, and asserted that the agencies should recognize and provide additional credit for activities that support those counselors. A group of commenters separately suggested that housing counseling should be recognized as a community development activity distinct from the financial literacy category. These commenters expressed concern that including activities related to housing counseling along with other activities in a single financial literacy category could result in banks focusing on non-housing activities in that category.

Some commenters recommended that the final rule specifically recognize lender fee-for-service payments for housing counseling services by HUD-approved housing counseling agencies as an eligible activity, with some commenters recommending recognition of fee-for-service payments for housing counseling services specifically assisting low- and moderate-income borrowers. For example, one commenter asserted that consideration for lender fee-for-service payments to housing counseling providers serving low- or moderate-income clientele would help ensure that those organizations would be able to continue providing housing counseling services. This commenter indicated that such organizations traditionally rely on grants to fund those activities, which can present a challenge for their long-term stability. Another commenter suggested that fee-for-service payments for housing counseling services should be recognized as an eligible activity if the bank can demonstrate that this service is being offered to low- or moderate-income borrowers.

Additional approaches to qualifying eligible financial literacy activities. Several commenters emphasized that the rule should encourage banks to partner with nonprofit organizations to ensure that financial literacy activities are relevant to the community and marketed successfully, and suggested that qualifying programs or activities should have a stated purpose of engaging low- and moderate-income residents. A few commenters suggested that banks should receive enhanced credit for supporting financial literacy activities targeted to low- and moderate-income individuals and families, including through a multiplier scoring system correlated to the percentage of low- and moderate-income beneficiaries supported by an eligible activity.

Final Rule

The final rule adopts the proposal on financial literacy substantially as proposed, renumbered as § __.13(l). Under the final rule, activities that promote financial literacy are those that “assist individuals, families, and households, including low- or moderate-income individuals, families, and households, to make informed financial decisions regarding managing income, savings, credit, and expenses, including with respect to homeownership.” The final rule makes technical edits from the proposal by adding “and households” as a conforming edit consistent with edits made in other community provisions in final § __.13. The agencies that believe incorporating financial literacy activities into the regulation as a separate regulatory category of community development will provide banks with certainty and clarity regarding how these activities will qualify for CRA consideration, and that this, in turn, will benefit a wide range of individuals and families in need of financial literacy services.

The agencies have carefully considered commenter views on whether the financial literacy category should be limited to activities targeted to low- and moderate-income individuals and families. On balance, for the reasons discussed below, the agencies believe that the rule as finalized, without such limitation, will ensure low- and moderate-income individuals, families, and households benefit from financial literacy activities, while further encouraging banks' involvement in such activities. The final rule will reduce barriers to offering financial literacy activities by permitting a broader range of mixed-income activities to qualify relative to current practice, and will reduce burden by limiting the need for banks to track income levels of participants (which, as noted above, can be particularly difficult with respect to non-customers). As discussed in the proposal, prior stakeholder feedback also has suggested that financial literacy activities are, in practice, primarily delivered to low- or moderate-income individuals, which may be another factor that reduces the need to obtain income documentation. The language of the final rule providing that individuals, families, and households assisted by financial literacy activities must include low- or moderate-income individuals, families, and households will also ensure that financial literacy activities will not be eligible for CRA credit if they solely benefit middle- and upper-income individuals, families, or households.

The agencies further believe that financial literacy can build economic resilience at all income levels, particularly where there may be evidence that financial literacy is lacking, or financial instability exists. The agencies are sensitive to concerns about the scarcity of available resources for financial literacy activities, and believe that the final rule's approach will more broadly share the benefits of these activities across communities and open up greater opportunities for underserved populations, including seniors, students, veterans, and rural communities to benefit from financial literacy activities. In the agencies' experience, financial literacy activities can provide important tools for all individuals and families to maintain or improve upon their financial status, which benefit communities as a whole. As such, the agencies believe that the final rule is consistent with the intent of CRA to serve the credit needs of a bank's entire community, including low- and moderate-income communities.

Regarding commenters' suggestions that the agencies revise the regulation to explicitly qualify specific activities, the agencies believe that the broader approach in the final rule will allow banks more flexibility, as any activities meeting the criteria in § __.13(l) will qualify. Activities that the agencies view as consistent with the language in § __.13(l) will generally include activities such as financial education, financial coaching and counseling, small business education, and housing counseling. For example, a financial planning seminar with senior citizens, including low- and moderate-income seniors, or a financial education program for children in a middle-income school district would both be activities that would qualify for consideration. Similarly, credit counseling for residents of a rural area or grants and loans to nonprofits related to financial literacy would generally qualify for consideration. The agencies will take commenters' recommended examples under advisement as the agencies develop the illustrative list anticipated by § __.14(a), discussed below.

The agencies do not believe that direct marketing of specific bank products alone would constitute a financial literacy activity that “assist[s] individuals, families, and households, including low- or moderate-income individuals, families, and households, to make informed financial decisions,” and therefore would not meet the criteria for qualification in § __.13(l). However, a lender fee-for-service financial education program focused on savings and the benefits of savings, through which a bank provides information on its low-cost savings accounts (such as through a BankOn program ) or allows participants to prepare for and access a sustainable home mortgage, as is done in many homebuyer programs with HUD-certified housing counselors, would likely qualify for consideration under § __.13(l). The agencies note that when engaging in activities under § __.13(l), banks are expected to comply with all applicable laws, including, among others, section 8 of the Real Estate Settlement Procedures Act of 1974.

The agencies have also considered commenter suggestions that various specific activities related to housing counseling should be recognized within a separate category of qualifying activities or that they should otherwise be given extra emphasis on examinations, including suggestions to give enhanced credit for activities targeted to low- and moderate-income individuals. The agencies understand the importance of housing-related financial literacy activities and, on further deliberation, believe that the final rule appropriately recognizes housing counseling activities by expressly identifying activities that assist individuals, families, and households to making informed financial decisions regarding “homeownership” as one key type of qualifying activity within a new, separate community development category for financial literacy overall. The agencies note that activities that assist individuals, families, and households to make informed financial decisions about homeownership are part of a wide range of available qualifying financial literacy activities that offer critical support for the economic well-being of communities. With respect to comments suggesting extra emphasis, the agencies also note that the final rule creates a non-exhaustive list of specific impact and responsiveness factors that will recognize certain activities, including factors for activities serving persistent poverty counties and higher poverty census tracts (§ __.15(b)(1) and (2)), low-income individuals, families, and households (§ __.15(b)(5)), and affordable housing in High Opportunity Areas (§ __.15(b)(7)). See the section-by-section analysis of § __.15, below.

Section __.14 Community Development Illustrative List; Confirmation of Eligibility

Current Approach

Under the current regulations, the agencies do not jointly maintain a standalone list of examples of loans, investments, and services that qualify for CRA community development consideration. However, the OCC maintains an illustrative list of activities as a reference for determining whether activities conducted while the OCC 2020 CRA Final Rule was in effect were eligible for consideration under that rule. The Interagency Questions and Answers also include certain examples of eligible community development loans, investments, and services.

Relatedly, the OCC previously established a confirmation process, not currently codified in its CRA regulation, through which national banks, Federal savings associations, and other interested parties may request confirmation that a loan, investment, or service qualifies for CRA consideration. The Board and the FDIC do not currently have similar mechanisms for State banks or State savings associations. Currently, as part of their CRA examinations, banks submit community development activities that were undertaken without an assurance these activities are eligible. Knowing that an activity previously qualified can frequently provide banks with some confidence that the same types of activities are likely to receive consideration in the future. However, banks assessing a new, less common, more complex, or innovative activity may not know whether that activity is eligible for CRA consideration until a determination is made by an examiner as part of the bank's CRA examination—after the bank has made a decision about whether to provide a loan, investment, or service. The determination requires examiner judgment and the use of performance context, which may further complicate a bank's ability to predict what activities could qualify.

Section __.14(a) Illustrative List

Section __.14(a)(1) Issuing and Maintaining The Illustrative List

The Agencies' Proposal

To provide increased certainty regarding what community development activities qualify for CRA consideration, the agencies proposed in § __.14(a) to maintain a publicly available, non-exhaustive illustrative list of examples of community development activities that qualify for CRA consideration. As noted in the proposal, prior stakeholders had indicated broad support for an illustrative list similar to the list associated with the OCC 2020 CRA Final Rule. In the proposal, the agencies indicated that stakeholders supported this approach as a way to highlight loans, investments, and services that meet the CRA community development criteria, while also noting that those criteria remain the determinative factors in qualifying community development activities (as opposed to whether a particular activity appears on the illustrative list). The agencies sought feedback on whether the benefit of greater certainty would outweigh the potential that the list might limit innovation by unintentionally leading banks to focus primarily on activities on the list. The agencies sought comment on whether, in addition to maintaining an illustrative list of qualifying activities under § __.14(a), the agencies should also maintain a non-exhaustive list of activities that do not qualify for CRA consideration as a community development activity.

Comments Received

General. Most commenters on this aspect of the proposal expressed support for the agencies maintaining a non-exhaustive illustrative list of qualifying activities, as set forth in proposed § __.14(a). In general, commenters stated that an illustrative list would simplify compliance, and provide more regulatory certainty regarding community development activities that meet the requirements for CRA credit. Commenters also generally stated that an illustrative list would promote consistency among agencies and examiners, with at least one commenter stating that the list should be universally accepted across all agencies and deployed consistently across examiners. Other commenters highlighted the benefits of an illustrative list in connection with a timely pre-approval process. For example, a commenter indicated that a clearly-articulated illustrative list could allow transactions to be structured between banks and partner organizations with more information earlier in the process. Commenters also suggested that the agencies clarify further that the list is not exhaustive.

Some commenters expressed concerns about the potential breadth and impact of the proposed illustrative list. For instance, some commenters stated their concern that a lengthy list of qualifying activities could encourage banks to participate in the easiest and least impactful community development activities. Accordingly, commenters emphasized that the list should be focused on those activities that are most impactful to low- and moderate-income communities or closely tied to local needs, or that a listed activity would not automatically qualify if it resulted in displacement of low- and moderate-income individuals or minorities. Several commenters raised concerns that providing an illustrative list could stifle innovation to the extent that banks default to engaging only in listed activities. Another commenter stated that examiner judgment and the use of performance context would still be warranted as new, innovative activities arise. Several other commenters proposed that the agencies instead adopt a principles-based list, with a few raising concerns that an extensive list could evolve into an overwhelming ad hoc list.

Many commenters offered a variety of suggestions regarding how the agencies should develop, issue, and maintain an illustrative list. For example, a few commenters recommended that the list be published in the Federal Register . In addition, several commenters recommended that the agencies maintain an interactive database with various features, including, among others, topical organization and searchability; case studies; or guidance and examples of documentation. Several commenters suggested that any list be developed and updated in coordination with relevant stakeholders.

Finally, commenters also offered a variety of suggestions on specific activities that should be included or expanded upon in an illustrative list. Several commenters recommended that the agencies adopt the list of qualifying activities found in the OCC 2020 CRA Final Rule. Other commenters offered specific suggested activities, including, among many others, various activities pertaining to environmental and climate resilience; impacting disabled persons, as relevant to the community supportive services category; and promoting digital inclusion. At least one commenter suggested that an illustrative list be expanded to include innovative and responsive retail product and service offerings in addition to community development activities.

List of activities that do not qualify for CRA consideration. As noted above, the agencies sought comment on whether, in addition to maintaining an illustrative list of qualifying activities under § __.14(a), the agencies should also maintain a non-exhaustive list of activities that do not qualify for CRA consideration as a community development activity. Many commenters supported maintaining a non-exhaustive illustrative list of activities that do not qualify for CRA consideration, with several arguing, for example, that a list of non-qualifying activities would provide increased transparency and prevent banks from allocating time to non-qualifying activities. Commenters also shared suggestions on how the agencies might develop a non-qualifying illustrative list. However, other commenters opposed or expressed concerns about maintaining a non-exhaustive list of non-qualifying activities. For example, one commenter cautioned that a list of ineligible activities could be misinterpreted, causing banks to avoid partnerships with entire entities instead of certain activities. Another commenter noted that eligibility for CRA consideration can depend on specific circumstances and unique facts, detracting from the usefulness of maintaining a list of non-qualifying activities.

Final Rule

The final rule renumbers proposed § __.14(a) as § __.14(a)(1), and reflects the technical edits and revisions from the proposal discussed below. The final rule clarifies that the agencies not only will maintain, but will jointly issue a publicly available illustrative list of non-exhaustive examples of loans, investments, and services that qualify for community development consideration as provided in § __.13. For the reasons stated in the proposal and on consideration of comments, the agencies believe that establishing an illustrative list will promote transparency and consistency, provide banks and other stakeholders with greater certainty, and help clarify the application of criteria for community development categories. These examples are intended to help banks make more informed decisions regarding what loans, investments, and services would qualify for community development consideration.

The revision in the final rule confirming that the list will be jointly issued by the OCC, Board, and FDIC is partly intended to support commenters' interest in consistency across agencies and examinations. Whether to include (or add under final § __.14(a)(2), discussed below) an activity to the illustrative list is subject to the agencies' discretion. The final rule also makes conforming edits to replace “community development activities that qualify for CRA consideration” with “loans, investments, and services that qualify for community development consideration,” consistent with other revisions in the final rule, and edits to clarify that § __.14(a) is specifically applicable to the types of activities that are described in § __.13.

In adopting the final rule, the agencies considered feedback on whether the benefit of greater certainty would outweigh the potential that the list might limit innovation by unintentionally leading banks to focus primarily on examples on the list. The agencies believe that, on balance, the benefit of greater certainty, transparency, and clarity outweigh this potential concern. The agencies also believe that updating the illustrative list periodically pursuant to final § __.14(a)(2)(i), described below, will further mitigate concerns by allowing for new, innovative examples to be added over time.

The agencies similarly considered commenter concerns and recommendations related to the potential breadth of the illustrative list. The agencies are concerned that adopting a principles-based list as suggested would not provide sufficient clarity or specificity, which would limit the informational benefits of an illustrative list for banks regarding what kinds of loans, investments, and services would qualify as community development. In developing the illustrative list, the agencies expect to consider what steps the agencies can take to promote ease of use by banks and the public, and to provide context to complex issues as feasible. Regarding the suggestion that the agencies clarify further that the list is not exclusive, the agencies reaffirm that the illustrative list is intended to be non-exhaustive; accordingly, the final rule retains proposed language expressly stating that the illustrative examples are non-exhaustive.

The agencies also appreciate commenters' thoughtful views on how the agencies should develop and issue an illustrative list, as well as the types of activities that should populate the list. Subsequent to this rulemaking, the agencies expect to jointly develop the process for issuing, maintaining, and updating the illustrative list. The agencies will continue to take all of these comments under advisement as this process moves forward.

The agencies are not adopting suggested revisions to final § __.14(a)(1), as follows. Regarding commenter concerns that activities on the list be focused on particular community needs and not result in displacement, the agencies note that, as a threshold matter, any activity on the illustrative list would still need to qualify under the relevant criteria of a particular community development category in § __.13, including any applicable criteria for any place-based community development activity. As discussed in the section-by-section analyses of § __.13(e) through (j), above, one placed-based criteria is that the activity “not directly result in the forced or involuntary relocation of low- or moderate-income individuals” in the relevant geographic area. Further, as needed, examiners will still exercise judgment and review performance context in evaluating an activity under the applicable facts and circumstances.

The agencies also considered the suggestion to expand the illustrative list to include innovative and responsive retail services and products offerings, in addition to community development activities. The agencies are not expanding the illustrative list in this manner, as the agencies have not observed as many questions necessitating upfront clarification regarding eligible retail services and products. In deliberating further on this matter in light of the comments, the agencies determined that, at this time, the illustrative list will best serve the purpose of clarity and transparency by being focused on community development activities as the area in which the agencies observe and hear from stakeholders there is the most need for clarity.

Finally, the agencies considered commenter feedback on whether to maintain a separate list of activities that do not qualify for community development consideration. Upon further consideration of comments received, the agencies are concerned that such a list might inadvertently deter banks from pursuing eligible loans, investments, and services, and accordingly, the agencies are not adopting a provision to maintain a list of non-qualifying activities. The agencies also believe that resources will be more effectively and efficiently deployed if focused on providing a resource for banks seeking new opportunities to serve community needs. Nonetheless, the agencies note that the confirmation process adopted in final § __.14(b), discussed below, will provide a related venue for confirming eligibility, which should help banks reduce unintended allocation of time and resources to non-qualifying loans, investments, and services.

Section __.14(a)(2) Modifying the Illustrative List

The Agencies' Proposal

To ensure flexibility and incorporation of new activities, the agencies proposed in § __.14(b)(1) to update the illustrative list periodically. The agencies also proposed in § __.14(b)(2) that, if the agencies determine that an activity on the illustrative list is no longer eligible for CRA community development consideration, the owner of the loan or investment at the time of the determination would continue to receive CRA consideration for the remaining term or period of the loan or investment. However, the loan or investment would not be eligible for consideration for any purchasers of that loan or investment post-determination.

Comments Received and Final Rule

Commenters provided views on various aspects of proposed § __.14(b), addressing how the agencies might update and remove items from the illustrative list, and the timeline for doing so. Commenters generally suggested regular monitoring and updating, with several offering suggested timelines (for example: as new innovations arise and circumstances warrant; biannually; or triennially). Commenter feedback included that: the agencies should regularly seek public comment as the most transparent and fair way to update the illustrative list; all stakeholders should be permitted to submit suggestions for issuing and modifying the illustrative list; banks should work with their primary regulator to provide submissions to the illustrative list, and agency staff should also be allowed to submit activities to the list arising through outreach or the examination process; and banks should still receive consideration for any previous investment that remains on the bank's books even if the activity is deemed ineligible later.

The final rule adopts § __.14(b) substantially as proposed, renumbered as § __.14(a)(2), with technical edits to replace “activities” with “loans, investments, or services” and other conforming edits. Final § __.14(a)(2)(i) provides that the agencies will periodically update the illustrative list in § __.14(a)(1). Consistent with the proposal, final § __.14(a)(2)(ii) states that, in the event the agencies determine that a loan or investment on the illustrative list is no longer eligible for community development consideration, the owner of the loan or investment at the time of the determination will continue to receive community development consideration for the remaining term or period of the loan or investment. However, these loans or investments will not be considered eligible for community development consideration for any purchasers of that loan or investment after the determination.

The agencies believe that providing for periodic updates to the illustrative list under § __.14(a)(2)(i) offers the agencies flexibility and will promote innovation by allowing the agencies to add new and innovative examples over time. This provision also will allow the agencies' understanding of community development activities to evolve as banks' activities and community development needs shift. The agencies' ability to update the list periodically is also intended to help address some commenter concerns regarding § __.14(a)(1), that an illustrative list could limit innovation by leading banks to focus primarily on examples found on the list.

As noted above, subsequent to this rulemaking, the agencies expect to jointly develop the process for issuing, maintaining, and updating the illustrative list, and will consider commenter suggestions for that process, including those regarding modifying and removing items from the illustrative list, and the timeline for doing so. Regarding commenter concerns about treatment of loans and investments later removed from the list, the agencies note that final § __.14(a)(2)(ii) is intended to provide certainty that a bank (albeit not subsequent purchasers) will continue to receive consideration for their loans and investments even if those examples are later removed from the list. Accordingly, in circumstances where examples are later removed from the list, a bank's credit for those loans and investments would not be retroactively impacted.

Section __.14(b) Confirmation of Eligibility

The Agencies' Proposal

The agencies proposed in § __.14(c) and (d) a formal mechanism for banks subject to the CRA regulations to request confirmation that an activity is eligible for CRA consideration. Under proposed § __.14(c), a bank could submit a request to its appropriate Federal financial supervisory agency for confirmation that an activity is eligible for CRA consideration. When the agencies confirmed that an activity is or is not eligible for CRA consideration, the supervisory agency would notify the requestor, and the agencies might add the activity to the publicly available illustrative list of activities, incorporating any conditions imposed, if applicable.

Proposed § __.14(d)(1) provided that a bank could request that the appropriate Federal financial supervisory agency confirm that an activity is eligible for CRA consideration by submitting a request to its Federal financial supervisory, in a format prescribed by the agency. Proposed § __.14(d)(2) provided that, in responding to a confirmation request, the agencies would consider: (1) the information provided to describe and support the request; (2) whether the activity is consistent with the safe and sound operation of the bank; and (3) any other information that the agencies deem relevant. The agencies further proposed in § __.14(d)(3) that the agencies may impose any conditions on that confirmation, in order to ensure consistency with the requirements of the CRA and the CRA regulations. The agencies solicited comment on the process for accepting submissions for confirming qualifying community development activities, and on establishing a timeline for review. The agencies also solicited comment on processes involving joint actions by the agencies, as well as alternative processes and actions, such as consultation among the agencies, that would be consistent with the purposes of the CRA.

Comments Received

Commenters generally supported the agencies' proposal in § __.14(c) and (d) to create an established process for banks to request confirmation that an activity is eligible for CRA consideration. Commenters noted that such a process could help banks focus their community development activities, increase clarity, reduce uncertainty, improve transparency, and offer a centralized resource for vetting projects. For example, a commenter noted that an illustrative list, coupled with a confirmation process, would give banks the tools to plan community development activities and still be innovative when warranted. Some commenters stated that the agencies should expand the scope of proposed § __.14(c) and (d)(1) to permit submissions by stakeholders other than banks, so as not to deter the development of qualified, responsive, and innovative activities. Another commenter suggested that financial institutions should be allowed to request confirmation of activities that may have been presented to them by other stakeholders.

Commenters shared a variety of suggestions in response to the agencies' request for feedback on the process for accepting submissions for confirming qualifying community development activities. For example, a commenter emphasized the importance of a confirmation process that is published and public, while another recommended that the agencies adopt a clear process for frequency of updates, factors considered in adding new activities, and the process for alerting banks to any modifications. Another commenter recommended that there be a process for confirming eligibility of qualifying activities both in advance and after an activity is completed.

Commenters further offered feedback on processes involving joint actions by the agencies. Several commenters offered ideas for the review process, including establishing a joint interagency review and determination process; involving stakeholders ( e.g., through a stakeholder advisory board or through a joint agency and stakeholder committee); and/or an automated review and approval process. A few commenters suggested coordination with State agencies or consideration of State CRA frameworks in the confirmation process. Several other commenters underscored the need for consistency among regulators' approval or denial for similar opportunities. A commenter that encouraged interagency coordination also recommended that only a requestor's primary Federal regulator should make the determination, rather than the feedback being a joint undertaking of the three agencies.

Commenters also addressed timelines for the review and confirmation process. Some commenters stated that the process would need to be timely to be helpful, including because competition and customer expectations require institutions to move quickly, and because slow feedback can hinder projects and investments. A few commenters cautioned that a preapproval process should not require major investments of time or effort.

Commenters suggested different review timeline ranges. Many commenters recommended a maximum 30-day timeframe for answering preapproval requests, with some noting this timeframe would allow for dialogue between the agency and financial institution, as well as time for regulators to coordinate with one another for purposes of consistency. Another group of commenters suggested that a 60-day timeframe would be appropriate. Other suggested timelines generally ranged from 24 hours to six months, with a commenter suggesting that a lack of response from the agency within a standard time should be taken as an approval of the activity.

Commenters also addressed technical aspects of the submission process, such as submission through an email system, portal, and/or template, with details regarding acknowledgment and response times. Some commenters offered ideas to increase transparency, including, for example, making requests and decisions public, and implementing technology such as an online request tracking system. Among other process-related topics, commenters encouraged training and expectation-setting for agency staff to promote expertise and consistency, and suggested documentation of the structure and flow of the confirmation process.

Final Rule

Consistent with the proposal, the final rule establishes a formal mechanism for banks to submit a request for confirmation that an activity is eligible for community development consideration. Proposed § __.14(c) and (d) are renumbered as § __.14(b)(1) through (3), reflecting reorganization of the proposed regulatory text to follow a more chronological order of the confirmation process. As described more specifically below, final § __.14(b)(1) describes how banks subject to the CRA regulations may request a confirmation of eligibility from the appropriate Federal financial supervisory agency. Final § __.14(b)(2) describes the process for determining eligibility of an activity, which includes the types of information the appropriate Federal financial supervisory agency will consider and a statement that the appropriate Federal financial supervisory agency will work in close coordination with the other agencies to make eligibility determinations. Final § __.14(b)(2) also includes the proposal clarifying that the supervisory agency may impose limitations or requirements on a determination for consistency with the requirements of the CRA final rule. Final § __.14(b)(3) reflects proposed § __.14(c), stating that the appropriate Federal financial supervisory agency will notify the requestor and other agencies of its determination.

The agencies believe that establishing a confirmation process as set forth in final § __.14(b) will accomplish the desired goal of increased certainty and clarity for banks by allowing them to seek an upfront determination that a loan, investment, or service will be eligible for community development consideration (subject to limitations or conditions set by agencies in the confirmation process, such as the legality of the activity). Together with the illustrative list process in § __.14(a), the agencies believe that the confirmation process in § __.14(b) will assist banks with planning and will facilitate banks' support of newer, less common, more complex, or innovative activities. The agencies further believe that the confirmation process will improve a bank's transparency into its supervisory agency's views on a particular request, and will help banks focus their community development resources and engagements. The agencies have considered comments on the confirmation submission and review process, including views on joint confirmation determinations, and have adopted a revised rule taking that feedback into account, as described in more detail below.

The agencies note that the confirmation process anticipated by § __.14(b) is an optional tool designed to provide more upfront certainty to banks. However, the final rule does not prevent banks from seeking informal, nonbinding feedback from the appropriate Federal financial supervisory agency on particular activities, or prevent an examiner from affirming in the normal course of an examination that an activity does or does not qualify for community development consideration based upon review of all facts and circumstances.

Section __.14(b)(1) Request for confirmation of eligibility. As noted, final § __.14(b)(1) provides that a bank subject to the CRA regulations may request that the appropriate Federal financial supervisory agency confirm that a loan, investment, or service is eligible for community development consideration by submitting a request to, and in a format prescribed by, that agency. To streamline the regulation and reduce redundancy, the final rule combines proposed § __.14(c) and (d) in final § __.14(b)(1) through (3). Final § __.14(b) does not include the reference in proposed § __.14(c) to updating the illustrative list, as duplicative of final § __.14(a)(2). The agencies expect to consider whether to add confirmed eligible loans, investments, and services to the illustrative list as part of the periodic list update process.

The agencies are declining to expand the confirmation process to permit stakeholders beyond banks subject to the CRA regulations to submit confirmation requests to the agencies, as suggested by some commenters. The agencies appreciate the strong interest that other stakeholders such as community groups may have in confirming whether particular activities qualify for CRA consideration; at the same time, they are not subject to CRA examinations. The agencies believe that limiting the confirmation submission process to banks will ensure that agency resources are most efficiently deployed to considering eligibility for activities with confirmed interest from the banks that would be seeking CRA consideration. Additionally, the agencies emphasize that public input, including community contacts, and other tools for stakeholder involvement remain a key part of the CRA examination process.

Section __.14(b)(2) Determination of eligibility. Final § __.14(b)(2) describes the eligibility determination process, which has been revised from proposed § __.14(d)(2). Final § __.14(b)(2)(i) provides the criteria the agencies will use in determining the eligibility of a loan, investment, or service for a request submitted under § __.14(b)(1). Specifically, the appropriate Federal financial supervisory agency will consider information that describes and supports the bank's request (final § __.14(b)(2)(i)(A)) and any other information that the agency deems relevant (final § __.14(b)(2)(i)(B)).

Final § __.14(b)(2)(i) clarifies proposed § __.14(d)(2) by stating that the appropriate Federal financial supervisory agency will consider these factors “[t]o determine the eligibility of a loan, investment, or service for which a request has been submitted under paragraph (b)(1)” (as opposed to considering these factors “[i]n response to a request for confirmation” ). In final § __.14(b)(2)(i)(A) and (B), the agencies are adopting provisions proposed regarding information that the appropriate Federal financial supervisory agency will consider in determining whether an activity is eligible for CRA consideration under the individualized confirmation process. Final § __.14(b)(2)(i) does not incorporate the proposed provision stating that the agencies will consider “[w]hether the activity is consistent with the safe and sound operation of the bank.” On further consideration, the agencies believe that information in relation to the safe and sound operation of the bank is covered under the language “any other information that the [Agency] deems relevant” in final § __.14(b)(2)(i)(B), so is unnecessary. However, the agencies do not intend to substantively change the final rule in this regard, and note that the CRA emphasizes meeting community credit needs “consistent with the safe and sound operation of such institutions.”

Final § __.14(b)(2)(ii) states that the agencies expect and are presumed to jointly determine eligibility of a loan, investment, or service to promote consistency across the agencies. This provision further states that, before making a determination of eligibility, the appropriate Federal financial supervisory agency will consult with the other agencies regarding the eligibility of a loan, investment, or service. On further deliberation, the agencies determined that it was important to clarify the provisions regarding confirmation of eligibility to reflect each agency's authority to make decisions about its own supervised entities. At the same time, the final rule incorporates the agencies' obligation to consult with one another and work together in making eligibility determinations.

Proposed § __.14(d)(3) is finalized as § __.14(b)(2)(iii), with technical edits and revisions to clarify that the appropriate Federal financial supervisory agency (rather than all three agencies) may impose limitations or requirements on a determination of the eligibility of a loan, investment, or service of its regulated bank, to ensure consistency with the CRA regulations.

In considering the appropriate provisions for final § __.14(b)(2), the agencies particularly noted commenters' views on the importance of an efficient, timely confirmation process, as well as commenters' interest in promoting consistency across the agencies concerning similar opportunities. The agencies also considered that confirmation requests may be highly varied by type, complexity, and scope. The final rule thus emphasizes the agencies' commitment to jointly consider and make decisions on confirmation requests in consultation with one another, while allowing the Federal financial supervisory agency to consider relevant factors and make a final determination based on its particular supervisory knowledge of the requesting bank and the agency's supervisory experience with the CRA. Based on that knowledge and experience, the agencies believe it appropriate to clarify that the appropriate Federal financial supervisory agency (as opposed to all three agencies together, as proposed) may impose limitations or requirements on any determination. The agencies believe that the final rule thus appropriately balances commenters' interests in efficiency and consistency.

The agencies note that any determination of eligibility under final § __.14(b) is not a determination of legal permissibility or compliance with applicable laws and regulations. A bank requesting a determination remains responsible for ensuring that the loan, investment, or service is legally permissible and complies with applicable laws and regulations.

Section __.14(b)(3) Notification of eligibility. Final § __.14(b)(3) states that the Federal financial supervisory agency will provide a written notification to the requestor and to the other agencies of any eligibility determination, as well as the rationale for such determination. The final rule expands on the proposal (proposed § __.14(c)) to clarify that a requestor can expect to receive the rationale for an agency's determination, and to ensure that the agencies remain collectively informed of the final dispensation of requests, which will help promote interagency consistency and support future confirmation request determinations. As each confirmation request is dependent on individual facts and circumstances, and could contain confidential information from the requesting bank, the agencies do not intend to make their confirmation decisions public. However, as noted above, the agencies will consider confirmation decisions when periodically updating the illustrative list contemplated by § __.14(a).

Additional process issues. The final rule does not adopt specific timelines or other more detailed points of process at this time. The agencies appreciate commenters' additional feedback in response to questions on the confirmation submission process and timelines, including regarding process development, stakeholder engagement, and technical suggestions. As with the illustrative list in § __.14(a), subsequent to this rulemaking, the agencies expect to jointly develop the confirmation process in connection with final § __.14(b). The agencies in particular recognize commenter feedback on timelines, and intend to implement a timely and efficient process. The agencies will take these comments under advisement as that process development moves forward.

Section __.15 Impact and Responsiveness Review of Community Development Loans, Community Development Investments, and Community Development Services

Current Approach

Currently, the agencies' qualitative assessment of a bank's community development performance takes into account the responsiveness of the bank's activities to credit and community development needs and, if applicable, the innovativeness and complexity of the activities. As part of these considerations, examiners also consider the degree to which the activities serve as a catalyst for other community development activities.

The terms “responsiveness” and “innovativeness” are generally described in the Interagency Questions and Answers. Regarding “responsiveness,” for example, the Interagency Questions and Answers explains that an examiner will consider both quantitative and qualitative aspects of a bank's community development activities. Thus, in addition to considering the volume and type of activities, examiners may consider some activities to be more responsive than others if an activity effectively meets identified credit and community development needs. “Innovativeness” takes into account, for example, whether a bank implements meaningful improvements to products, services, or delivery systems to respond to community needs. These qualitative aspects of the bank's community development activities can be assessed based on information provided by the bank and other sources about the performance context and information about credit and community development needs and opportunities.

While current guidance emphasizes the importance of a qualitative review of a bank's community development activities and recognizes that certain activities are more responsive than others, there are no clear standards for how these factors are identified or measured. As a result, the qualitative evaluation currently relies heavily on examiner judgment.

As the agencies discussed in the proposal, some stakeholders have suggested that the current approach for the qualitative evaluation of community development activities could be more transparent and consistent, and stakeholders have expressed that the qualitative assessment could have a stronger focus on the impact and responsiveness of a bank's community development activities and, relatedly, that it could be more clearly linked to CRA's core purpose of serving low- and moderate-income individuals and communities.

Section __.15(a) Impact and Responsiveness Review, in General

The Agencies' Proposal

Proposed § __.15(a) would incorporate into the regulation an impact review of community development activities under the Community Development Financing Test, the Community Development Services Test, and the Community Development Financing Test for Wholesale or Limited Purpose Banks. The impact review would qualitatively evaluate the impact and responsiveness of qualifying activities with respect to community credit needs and opportunities through the application of a series of review factors. Specifically, as proposed in § __.15(b) and discussed below, the evaluation of a community development activity's impact and responsiveness would include, but would not be limited to, a set of ten specific qualitative factors. In addition, proposed § __.15(a) stated that the agencies would consider, as applicable, performance context information set forth in proposed § __.21(e), which would include information demonstrating an activity's impact on and responsiveness to local community development needs, such as detailed information about a bank's activities, local data regarding community needs, and input from community stakeholders. The impact and responsiveness review would provide appropriate community development recognition for loans, investments, and services that are considered to be especially impactful and responsive to community needs, including loans and investments that may be relatively small in dollar amount.

Comments Received

Commenters on the proposed community development impact review generally supported adding an impact review as proposed in § __.15(a). As discussed in more detail below, commenters also generally favored adopting the proposed impact review factors in proposed § __.15(b), while expressing a range of views regarding how particular proposed impact factors should be implemented. Numerous commenters also recommended that the agencies adopt a variety of additional impact factors.

Scope of impact factor review. Several commenters urged the agencies to expand the scope of the impact factor review to include activities under the proposed Retail Lending Test and Retail Services and Product Test. These comments are discussed in the section-by-section analysis of final §§ __.22 and __.23.

Clarifications and impact factor review process. Some commenters recommended that the agencies provide further clarity and processes concerning how the agencies would review, weigh, and apply impact factors in examinations and ratings determinations. A number of commenters highlighted the need for a clear and transparent impact factor review process, with commenters offering a range of suggestions, including recommending additional public engagement, such as a public comment process. Some commenters expressed concern about what they viewed as a lack of specificity, regulatory uncertainty, and the risk of examination inconsistency in the proposed impact factor review process, while others emphasized the need for examiner training to promote rigorous analysis, development of requisite expertise, and consistency. A number of commenters also offered views on whether the agencies also should permit activities with harmful features to be evaluated negatively. Other commenters suggested that the impact review also consider the impact of a bank's historical discriminatory practices. A few commenters recommended that the agencies clarify that institutions would not be penalized if they do not conduct a sufficient number of activities associated with an enumerated impact factor.

Some commenters suggested that the agencies consider a quantitative, metrics-based approach to an impact review in addition to a qualitative review. Various commenters suggested that impact factor reviews include points, weighting, and ratings, such as score weighting for the most impactful investments, and a few commenters provided examples of potential metrics for consideration. A few commenters, in suggesting an analytical framework for evaluating the impact factors in proposed § __.15(b)(1) and (2) relating to persistent poverty areas and areas with low levels of community development financing (discussed below), noted that it would take several years before the agencies would have sufficient data to incorporate impact factors as a quantitative element of the examination process. Separately, another commenter cautioned that a quantitative approach could lead to unrealistic activity targets in some instances.

Final Rule

The final rule adopts proposed § __.15(a) with clarifying and technical revisions. The final rule states that, under the Community Development Financing Test in § __.24, the Community Development Services Test in § __.25, and the Community Development Financing Test for Limited Purpose Banks in § __.26, the relevant agency evaluates the extent to which a bank's community development loans, investments, and services are impactful and responsive in meeting community development needs in each facility-based assessment area and, as applicable, each State, multistate MSA, and the nationwide area. The final rule renames the review as the “impact and responsiveness review” to clarify the agencies' intent that impact should be considered in conjunction with how responsive an activity is to community needs. As discussed below, the final rule is further revised from the proposal to clarify the agencies' intent for the impact and responsiveness review and associated factors. Additionally, the final rule makes technical edits to: (1) remove the reference to “Wholesale Banks” to conform with revisions made elsewhere in the regulation; (2) replace “activities” with “loans, investments, and services,” consistent with revisions made elsewhere in the regulation (with parallel edits made in § __.15(b)); and (3) update the performance context cross-reference to § __.21(d).

As discussed in more detail in the section-by-section analysis of § __.24, the approach of identifying specific impact and responsiveness review factors as part of the qualitative evaluation is intended to promote clear and consistent criteria. As a result, the agencies believe that providing the impact and responsiveness review factors in final § __.15(b) will result in a more standardized qualitative evaluation relative to current practices, in combination with the standardized Community Development Financing Metrics and benchmarks adopted in the final rule. In addition, this approach is intended to foster transparency by providing the categories the agencies will consistently review in considering the impact and responsiveness of a bank's community development loans, investments, and services. The agencies believe that this approach will advance the purpose of the CRA by ensuring a strong emphasis on the impact and responsiveness of community development loans, investments, and services in meeting community needs, including loans and investments that may be relatively small in dollar amount.

Consistent with the proposal, the final rule also states that the relevant agency evaluates the impact and responsiveness of a bank's community development loans, investments, or services based on § __.15(b), discussed in detail below, and may also take into account performance context information pursuant to § __.21(d). The agencies recognize that assessing the impact and responsiveness of a bank's community development loans, investments, and services may necessitate considering activities and factors outside of § __.15(b), and the agencies have provided for this through the reference to § __.21(d). Accordingly, the final rule's approach of considering the standardized categories in § __.15(b) in conjunction with the ability to consider broader performance context information pursuant to § __.21(d) is intended to help ensure recognition of activities with a high degree of impact on and responsiveness to the needs of low- or moderate-income communities. Consistent with the proposal, the final list of impact and responsiveness factors in § __.15(b) is non-exhaustive, which will also allow examiners to consider other highly impactful or responsive loans, investments, or services that support community development under § __.13.

The agencies have considered comments requesting additional detail on the impact review process, various specific suggestions for the process, and how the impact review might enhance or lower the bank's performance conclusion. The final rule clarifies the agencies' intent that, for purposes of the community development tests in §§ __.24 through __.26, the relevant agency will evaluate the extent to which a bank's community development loans, investments, and services are impactful and responsive in meeting community development needs. As part of this evaluation, the agencies may consider the volume and type of activities undertaken by a bank, applying the factors in § __.15(b) and performance context considerations. However, the agencies also recognize that some community development activities that are considered especially impactful and responsive to community needs may be comparatively smaller in dollar amount. As such, the agencies may consider more than the dollar volume or percentage of activities meeting an impact and responsiveness factor category in § __.15(b) when assessing the extent to which a bank's community development activities are impactful and responsive. The agencies will provide a summary of a bank's impact and responsiveness review data, such as the volume of activities by impact and responsiveness review category, and incorporate the impact and responsiveness review into the performance conclusions and the written performance evaluation.

The agencies view the impact and responsiveness review as one component of a comprehensive evaluation in the community development tests under §§ __.24 through __.26. Under the final rule, metrics, benchmarks, and impact and responsiveness reviews are considered, as applicable, holistically in arriving at a performance conclusion for each of these community development-focused tests. As a result, the impact and responsiveness evaluation is not designed to raise or lower a conclusion that is based solely on other components of the performance tests under §§ __.24 through __.26, such as the bank's Community Development Financing Metric under § __.24. Rather, pursuant to the final rule, the impact and responsiveness evaluation is one of several components of the applicable tests, and all of these components are considered together to result in any of the five conclusion categories.

The agencies have considered, but decline to adopt, an approach that would assign a separate impact score. The agencies believe that developing a consistent and consistently applied method of scoring the impact and responsiveness of a bank's community development activities factors could be particularly challenging without additional data, as also noted below, and given that the list of factors in § __.15(b) is non-exhaustive. When considering a bank's performance under the Community Development Financing Test in § __.24, the final rule specifies that the agency must consider the applicable Community Development Financing Metric, benchmark(s), and impact and responsiveness review. As a result, the impact and responsiveness review is directly incorporated into a Community Development Financing Test conclusion, which reflects the agencies' view that it is important to consider both quantitative data points and more qualitative considerations in assessing a bank's community development performance. See the section-by-section analysis of § __.24 for additional discussion regarding the overall qualitative nature of the Community Development Financing Test evaluation.

The agencies also considered commenter suggestions to implement a quantitative, metrics-based approach to conducting an impact review. The agencies are not in this final rule adding any specific impact and responsiveness metrics, thresholds, or multipliers for community development financing or services activity due to a lack of relevant community development data. The agencies will continue to consider what additional guidance may be provided in the future regarding the impact and responsiveness review, and will take these comments under advisement.

The agencies have considered, but are not adopting, a commenter recommendation to include in the impact and responsiveness review an assessment of a bank's historical discriminatory practices on the communities that it serves. In making this determination, the agencies considered that, under the final rule, as currently, evidence of discrimination and other illegal credit practices can be the basis of a rating downgrade.

Regarding comments recommending that the impact and responsiveness review be expanded to the proposed Retail Lending Test and Retail Services and Products Test, the agencies are not revising the final rule in that regard. As is discussed in the section-by-section analyses of §§ __.22 and __.23, the Retail Lending Test and the Retail Services and Products Test, taken together, have other mechanisms in place to evaluate qualitative aspects of responsive products and programs and incorporate factors appropriate for those evaluations.

Section __.15(b) Impact and Responsiveness Review Factors

Section __.15(b)(1) Benefits or Serves One or More Persistent Poverty Counties

Section __.15(b)(2) Benefits or Serves One or More Census Tracts With a Poverty Rate of 40 Percent or Higher

Section __.15(b)(3) Benefits or Serves One or More Geographic Areas With Low Levels of Community Development Financing

The Agencies' Proposal

In § __.15(b)(1) and (2), the agencies proposed impact factors for activities serving specific geographic areas with significant community development needs: “persistent poverty counties,” (proposed § __.15(b)(1)); and “areas with low levels of community development financing” (proposed § __.15(b)(2)). The agencies considered that serving these geographic areas would reflect a high level of responsiveness because the activities could increase economic opportunity in areas with high needs and such activities may involve a high degree of complexity and more intensive engagement on the part of the bank.

Under proposed § __.15(b)(1), whether an activity serves “persistent poverty counties” would be an impact factor. The agencies proposed to define persistent poverty counties as counties or county-equivalents with a poverty rate of at least 20 percent for the past 30 years as measured by the most recent decennial censuses. Under proposed § __.15(b)(2), whether an activity serves “areas with low levels of community development financing” would be an impact factor. By incorporating local CRA community development financing data into the designation, this approach would highlight areas where CRA capital is most limited. Because comprehensive CRA community development financing data is not currently available at local levels, the proposal noted that the agencies would first collect and analyze data under a revised CRA regulation and would then determine the appropriate approach for identifying areas with low levels of qualified community development activities. The agencies also sought feedback on whether to include activities in census tracts with a current poverty rate of at least 40 percent (as referenced in the proposal, a “high poverty census tract”) as an impact factor. As noted in the proposal, the agencies considered that this approach would draw attention to economically distressed geographic areas that are smaller than an entire county and not located in a persistent poverty county, such as high poverty neighborhoods in densely populated urban areas. The agencies noted that a census tract approach would offer the advantage of emphasizing activities that specifically serve communities, including individual neighborhoods, with significant community development needs, and where barriers to credit access and opportunity are often the greatest.

The agencies sought feedback on whether the proposed impact review factors for activities serving geographic areas with high community development needs should include persistent poverty counties, high poverty census tracts, areas with low levels of community development financing, or some combination thereof. The agencies also sought feedback on what considerations should be taken in defining these categories and in updating a list of geographic areas for these categories. The agencies indicated in the proposal that expressly highlighting both persistent poverty counties and high poverty census tracts may be appropriate to capture a balance of high needs areas in both metropolitan and nonmetropolitan areas.

Comments Received

Commenters on this aspect of the proposal generally supported proposed § __.15(b)(1) and (2), and offered views on whether to include high poverty census tracts as an impact factor. Several commenters argued that all three areas have significant needs and would benefit from community development activities. Other commenters emphasized the importance of including both persistent poverty counties and high poverty census tracts, asserting that persistent poverty counties are largely rural, and that focusing only on such counties would neglect many urban and suburban neighborhoods. Another commenter stated that the inclusion of an impact factor for both persistent poverty counties and high poverty census tracts might help address racial and ethnic inequities. One commenter raised concerns that a high poverty census tract approach focused on a 40 percent poverty rate might not encourage activities in less dense rural areas where poverty is diluted in census tracts.

Some commenters recommended alternative geographic impact factors to those proposed. For example, commenters suggested that income-based measures for delineating geographic areas for impact factors might be a more equitable and consistent approach than poverty-based measures. These commenters explained that focusing on “low-income” geographic areas would result in investment opportunities that are more equally spread out across the nation because income levels are set relative to the area median income of each geographic area, whereas poverty levels are based on a nationwide standard. Thus, these commenters asserted that areas with lower area median incomes would have greater shares of high-poverty census tracts than areas with higher area median incomes, and investments in high-cost areas (that nonetheless might have high community development needs) would not be incentivized. In this regard, commenters recommended that the agencies recognize activities serving low-income census tracts, which the commenters stated are more challenging to serve than moderate-income census tracts.

Other commenters proposed that the agencies expand on or add to the geographic areas included under proposed § __.15(b)(1) and (2), or select alternative definitions. Commenters recommended, for example, that the agencies include or give more emphasis to activities in particular communities, regardless of assessment area, such as activities in majority-minority geographic areas, or activities in the following areas with persistent poverty: Native communities, the Mississippi Delta, Central Appalachia, and the Texas/Mexico Border. Several other commenters recommended that “rural” communities be a separate impact category, and emphasized that “rural” is not synonymous with “nonmetropolitan areas.” These commenters noted that some experts are turning to alternative density-based measures like population per square mile to better identify communities.

Commenters also provided other suggestions related to proposed § __.15(b)(1) and (2). Comments included, for instance, that: counties in all U.S. territories, such as Puerto Rico and the U.S. Virgin Islands, be included on a list of persistent poverty counties; high poverty census tracts, areas of low community development financing, and persistent poverty counties should all be evaluated separately so that projects that meet multiple criteria receive more credit; and the agencies should consider giving additional consideration for grants and donations to CDCs in persistent poverty counties.

Lastly, commenter feedback regarding the inclusion of areas with low levels of community development financing in proposed § __.15(b)(2) included, for example: opposing or expressing concern, in part because these low levels may be related to extenuating factors; suggesting that a demonstration of responsiveness to unmet needs should also be required; and encouraging the agencies to provide additional credit for community development activities in especially vulnerable census tracts, such as those that are low income, highly segregated, have distressed housing stock, or have significantly lower levels of community development financing than other areas within designated areas of need.

Final Rule

For the reasons discussed below, the agencies are adopting in the final rule:

• Proposed § __.15(b)(1), with revisions discussed below, providing as an impact and responsiveness factor whether a bank's qualifying community development loan, investment, or service benefits or serves one or more persistent poverty counties. The definition of persistent poverty counties has been revised and relocated to the definitions section § __.12, as discussed below;

• A new impact and responsiveness factor in § __.15(b)(2) for whether a loan, investment, or service benefits or serves one or more census tracts with a poverty rate of 40 percent or higher; and
• Proposed § __.15(b)(2) substantially as proposed, renumbered as final § __.15(b)(3), providing as an impact and responsiveness factor whether a loan, investment, or service benefits or serves one or more geographic areas with low levels of community development financing.

The final rule makes technical revisions from “serves” to “benefits or serves” in each of final § __.15(b)(1) through (3) for consistency with the language used in the community development categories under § __.13. Each of these factors is discussed in more detail below.

The agencies believe that these factors capture three distinct, though interrelated, aspects of unmet community development needs. The impact and responsiveness factors in final § __.15(b)(1) and (2) in the final rule cover different dimensions of poverty, as discussed in more detail in each section below. Persistent poverty counties, as covered under § __.15(b)(1), represent more dispersed, often nonmetropolitan areas where a substantial share of residents have experienced poverty over many years. Census tracts with a poverty rate of 40 percent or higher, as covered under § __.15(b)(2), are disproportionately located in metropolitan areas. These census tracts also represent areas with highly concentrated poverty within a more recent timeframe that might not otherwise be captured by the persistent poverty county definition. The agencies believe that expressly adopting impact and responsiveness factors regarding both persistent poverty counties and census tracts with a poverty rate of 40 percent or higher appropriately captures a balance of high need areas in both metropolitan and nonmetropolitan areas, as well as a balance of more long-standing and more recent, higher levels of economic hardship.

Additionally, the impact and responsiveness factor in final § __.15(b)(3) highlights areas where there is a low level of community development financing, which could be found in both metropolitan and nonmetropolitan areas. Collectively, the agencies believe the final impact and responsiveness factors in § __.15(b)(1) through (3) will recognize loans, investments, and services in communities with significant community development needs. The agencies have considered comments, but for the reasons discussed below, are not adopting additional or alternative geographic designations, such as an impact and responsiveness factor based on area median income.

Benefits or serves one or more persistent poverty counties (§ __.15(b)(1)). With respect to persistent poverty counties under final § __.15(b)(1), final § __.12 defines the term as meaning a county that has had poverty rates of 20 percent or more for 30 years, as publicly designated by the Board, FDIC, and OCC, compiled in a list, and published annually by the FFIEC. Under the final rule, the agencies are adopting a standard for measuring persistent poverty counties that is consistent with common practice at other Federal agencies, and that is designed to provide for statistical reliability while also allowing for regular data updates as conditions change. The final rule has been revised from the proposal (referencing the decennial census) to provide the agencies additional flexibility to adapt to changing or new data sources, including the ability to recognize how data on poverty rates may change over time, without having to modify the regulation. Doing so will also allow the agencies to adapt to a more standardized Federal agency definition of persistent poverty county over time, as recommended by the Government Accountability Office. The agencies intend to base an initial standard on data from the U.S. Census Bureau's American Community Survey and decennial censuses. In addition, the agencies expect to use equivalent statistical products to measure persistent poverty in areas not covered by both the American Community Survey and decennial census, such as Puerto Rico, the U.S. Virgin Islands, Guam, the Marshall Islands, and American Samoa, which should address the commenter recommendation to include U.S. territories in the definition.

Currently, the agencies estimate that 5.6 percent of the U.S. population lives in persistent poverty counties. Persistent poverty counties are disproportionately nonmetropolitan, with an estimated 13.6 percent of the population of nonmetropolitan areas living in persistent poverty counties. Mapping of persistent poverty counties shows that many are in the Mississippi Delta, Appalachia, “colonias” in the Rio Grande River valley, and American Indian and Alaska Native Areas as designated by the U.S. Census Bureau. As noted in the proposal, Congress has directed other agencies, including the U.S. Department of the Treasury's Community Development Financial Institutions Fund, the USDA, the U.S. Economic Development Administration, and the U.S. Environmental Protection Agency, to allocate funding to persistent poverty counties.

The agencies continue to believe that the impact and responsiveness factor for persistent poverty counties as adopted will recognize and encourage loans, investments, and services in areas that have experienced high levels of economic hardship over many years, and where community development needs can be significant. Additionally, the agencies believe that designating geographic areas at the county level offers a high degree of clarity and simplicity regarding which qualifying activities would meet the criterion.

Benefits or serves one or more census tracts with a poverty rate of 40 percent or higher (§ __.15(b)(2)). For the reasons noted above and upon consideration of comments received, the agencies are adopting as an additional impact and responsiveness factor in final § __.15(b)(2) to consider whether a loan, investment, or service benefits or serves one or more census tract with a poverty rate of 40 percent or higher. This impact and responsiveness factor is intended to complement the impact and responsiveness factor regarding persistent poverty counties. The agencies believe that expressly including census tracts with a poverty rate of 40 percent or higher captures high need areas with particularly high levels of spatially concentrated poverty. Census tracts covered by this factor might not be captured by the persistent poverty definition for various reasons. For example, these census tracts might have experienced high levels of poverty only in more recent years rather than over the past 30 years; or these census tracts might experience high poverty levels but are located in a county that is not a persistent poverty county, such as a high poverty neighborhood in a densely populated urban area. Census tracts with a poverty rate of 40 percent or higher are severely disadvantaged to a degree that is reflected in several outcomes, even when compared with persistent poverty counties. The agencies estimate that employment rates are lower, a higher share of housing units are vacant, and median household incomes are lower than they are in persistent poverty counties, on average. The agencies further believe 40 percent is an appropriate benchmark for the impact and responsiveness factor, as it is double the 20 percent threshold used in the persistent poverty definition in § __.15(b)(1), is consistent with readily available statistical measures, and has been used in research on the effects of concentrated poverty.

Adopting an impact and responsiveness factor for census tracts with more than 40 percent poverty is intended in part to help address commenter concerns that persistent poverty counties are disproportionately nonmetropolitan. Relative to persistent poverty counties, which as noted above are disproportionately nonmetropolitan, agency staff estimate that census tracts with a poverty rate of 40 percent or higher are disproportionately metropolitan; 3.1 percent of the population of metropolitan areas lives in one of these extreme poverty census tracts, compared with 2.4 percent of the population of nonmetropolitan areas. Overall, 3.0 percent of the population lives in census tracts with a poverty rate of 40 percent or higher.

The agencies acknowledge that there is some overlap between persistent poverty counties and census tracts with a poverty rate of 40 percent or higher. Accounting for this overlap, 7.8 percent of the U.S. population lives in either a persistent poverty county or a census tract with a poverty rate of 40 percent or higher. Thus, the agencies believe that adopting both of these impact and responsiveness review factors will more comprehensively recognize activities in areas of economic distress where loans, investments, or services will be particularly impactful or responsive.

Benefits or serves one or more geographic areas with low levels of community development financing (§ __.15(b)(3)). Finally, to highlight areas where CRA community development capital is more limited, the agencies are adopting the proposed impact and responsiveness factor for areas with low levels of community development financing, renumbered from the proposal as § __.15(b)(3). As discussed in the proposal, because comprehensive CRA community development financing data is not currently available at local levels, the agencies expect first to analyze data collected pursuant to the final rule, and will then determine the appropriate approach for identifying areas with low levels of community development loans, investments, and services, and making that information available. The agencies acknowledge commenter views that extenuating circumstances may contribute to low levels of community development financing, such as limited opportunities or few organizations actively engaged in community development. Additionally, some areas could be areas with few needs. However, the agencies believe it is important to highlight these geographic areas as areas where there may be opportunities to try to develop the community development ecosystem needed to effectively deploy community development financing resources when appropriate.

Additional commenter suggestions on geographic designations. The agencies have considered comments suggesting additional or alternative geographic designations, but are not adopting alternative or expanded definitions such as those based on incomes relative to area median income, or adopting alternative impact and responsiveness factors such as a separate factor for rural communities. The agencies believe that the impact and responsiveness factors adopted in § __.15(b)(1) through (3) appropriately capture high needs areas taking into account both areas with either high and persistent or exceptionally high levels of poverty and areas with low levels of community development financing activity.

The agencies believe that using poverty rates appropriately captures areas where incomes are low, since poverty is itself defined based on household incomes. As census tracts with a poverty rate of 40 percent or higher contain a substantial share of households earning low incomes, the agencies believe that adopting this impact and responsiveness factor is responsive to comments emphasizing that it is more challenging to serve areas where incomes are generally low. Furthermore, area median incomes may be depressed across broad areas with high levels of need.

On balance, the agencies believe that poverty measures are a useful and appropriate measure, as shown by their widespread use. At the same time, the agencies acknowledge commenter concerns about high needs areas in higher income areas. The agencies believe that the inclusion of an impact and responsiveness factor for areas with low levels of community development financing activity also should mitigate commenter concerns about a lack of incentives in high cost areas, because this impact and responsiveness factor is not tied to determinations of income or poverty levels, and a low level of community development financing could be a reflection of its high cost in a particular area. As relevant data will inform the identification of these areas, the agencies believe that a separate demonstration that activities in these areas meet unmet needs should not be necessary.

With respect to rural areas, the agencies believe that the approach adopted in the final rule multiple impact and responsiveness factors addressing community development needs on a geographic and demographic basis recognizes activities benefiting many rural areas. As discussed above and below, these include factors focusing on areas where there is a demonstrated high level of need, such as persistent poverty counties. The agencies recognize that there are many ways to define “rural,” and are sensitive to the diversity of experiences in rural areas. However, the agencies do not believe that an impact and responsiveness factor for activities in all rural areas would be appropriate, since a designation as rural is not necessarily synonymous with having a high level of need.

The agencies have determined not to adopt an impact factor for activities in majority-minority census tracts as suggested by commenters. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

Additionally, to the extent that community development loans, investments, and services in a particular geographic area do not fall under one of the adopted geographic-based impact and responsiveness factors, the agencies note that those activities could potentially be considered under other impact and responsiveness factors, such as those serving low-income individuals, families, or households (§ __.15(b)(5)) or supporting small businesses or small farms (§ __.15(b)(6)). Finally, as noted above, the list of impact and responsiveness factors is non-exhaustive. To the extent that an activity in a particular geographic area is not directly covered by one of the adopted impact and responsiveness factors, yet is still highly impactful or responsive, it could still be considered as such under § __.15.

Section __.15(b)(4) Supports an MDI, WDI, LICU, or CDFI, Excluding Certificates of Deposit With a Term of Less Than One Year

The Agencies' Proposal

In § __.15(b)(3), the agencies proposed an impact factor for bank activities that support MDIs, WDIs, LICUs, and U.S. Treasury Department-certified CDFIs. The agencies highlighted in the proposal these organizations' missions of meeting the credit needs of low- and moderate-income and other underserved individuals, communities, and small businesses; the community development needs and communities served by these organizations; as well as the statute's express emphasis on cooperation with MDIs, WDIs, and LICUs.

The agencies solicited comment on whether proposed § __.15(b)(3) should exclude placements of short-term deposits or other activities. The agencies also solicited feedback on whether criteria for review under this proposed impact factor should specifically emphasize equity investments, long-term debt financing, donations, and services, and whether other activities should be emphasized.

Comments Received

Commenters generally supported the proposed impact factor for activities supporting MDIs, WDIs, LICUs, and CDFIs. A number of commenters emphasized their support for including CDFIs, highlighting the critical role that these institutions play in meeting the unique credit and capital needs of underserved communities, and emphasizing the need for CDFIs to raise capital for community development projects. A few commenters stated that the rule should incentivize investments into CDFIs that are minority lending institutions.

Additional entities in scope. Some commenters suggested that additional entities be included in the proposed impact factor, given the communities and needs served by some other entities. Commenter suggestions included, for example, extending eligibility in this impact factor for activities supporting or in partnership with nonprofit organizations holding a NeighborWorks charter, land banks and land banking activities, minority credit unions, community development credit unions, cooperatives with a focus on revenue share or dividend-based equity investments, SBICs, and RBICs.

Activities in scope. Commenters offered varying views on whether proposed § __.15(b)(3) should exclude placements of short-term deposits or other activities. Several commenters supported including short-term deposits, asserting, for example, that short-term deposits can offer important and needed liquidity to lend, maintain asset size, and represent a commitment of capital to under-resourced institutions that can have a positive community benefit. In contrast, other commenters asserted that short-term deposits should not be considered in the impact factor, in part because underwriting community development activities often requires long-term and patient debt capital, and projects can take several years to become economically viable. Further, these commenters asserted that short-term deposits do not add as much value to communities compared to equity and equity-like investments. Many commenters stated that all types of investments should be considered as part of the proposed impact factor, although some of these commenters suggested that long-term investments, including long-term deposits, should receive greater impact consideration.

A number of commenters supported an emphasis on equity investments, and long-term debt financing, donations, and services as particularly responsive, noting the greater impact of these forms of support on low- and moderate-income individuals and communities. Some commenters also suggested that particular activities within the proposed impact factor should receive more emphasis to recognize their impact and value, such as investments in smaller MDIs, WDIs, LICUs, and CDFIs, equity investments in MDIs and equity investments in LICUs serving low-income minority communities or communities with significant unmet community development needs.

Final Rule

The final rule adopts proposed § __.15(b)(3), renumbered as § __.15(b)(4), as an impact and responsiveness factor considering whether loans, investments, and services support an MDI, WDI, LICU, or CDFI, but revised from the proposal to exclude certificates of deposit with a term of less than one year. The final rule also makes a conforming edit to eliminate the express reference to “Treasury Department-certified” CDFIs, because CDFI is now defined in final § __.12, meaning a U.S. Treasury Department-certified CDFI. As noted in the proposal, and as also discussed in the section-by-section analysis of final § __.13(k), the agencies believe that these organizations' missions of and track record in meeting the credit needs of low- or moderate-income and other underserved individuals and communities, as well as small businesses, are highly aligned with CRA's core purpose of encouraging banks to meet the credit needs of their entire community, including low- and moderate-income populations. These organizations often also have intimate knowledge of local community development needs and opportunities, allowing them to conduct highly responsive activities.

The agencies have considered comments but are not adding additional entities to the final impact and responsiveness factor, for reasons also discussed in the section-by-section analysis to § __.13(k). In addition to their mission and track record, noted above, MDIs, WDIs, LICUs, and CDFIs generally undergo rigorous and verifiable certification processes and are financial institutions that provide critical capital access and credit to underserved communities. The agencies further believe that emphasizing partnerships with the entities covered by § __.15(b)(4) is consistent with the CRA's express emphasis on cooperation with MDIs, WDIs and LICUs, as well as with the key role that CDFIs—like MDIs, WDIs, and LICUs—play in the capital and financial ecosystem in low- or moderate-income communities.

The agencies also considered comments received that discussed whether to exclude short-term deposits from this impact and responsiveness factor. On consideration of the comments and further deliberation, the agencies are excluding certificates of deposit with terms of less than one year from this impact and responsiveness review factor in the final rule. The agencies recognize that certificates of deposit with terms of less than one year may provide less benefit for community development projects financed by CDFIs, MDIs, WDIs and LICUs than do other types of capital investment structures, as some commenters noted. Limiting consideration under the impact and responsiveness review factor in this manner is intended to recognize activities that are more impactful and responsive to community credit needs, including other types of certificates of deposit that provide more stable, longer-term funding to CDFIs, MDIs, WDIs and LICUs. In addition, the agencies believe that, as some commenters noted, certain short-term deposits can provide important needed liquidity to lend and maintain asset size, and can represent a commitment of capital to under-resourced institutions that can have a positive community benefit. Accordingly, the final rule provides the flexibility to provide recognition under the impact and responsiveness review factor for other forms of short-term deposits. The agencies also note that exclusion from this impact and responsiveness factor does not preclude certificates of deposits with a term of less than one year that support a MDI, WDI, LICU, or CDFI from qualifying for community development consideration under § __.13(k).

Further, the agencies considered commenter feedback regarding adopting specific criteria within § __.15(b)(4) to further emphasize equity investments, long-term debt financing, donations, and services. The agencies appreciate that these types of activities can be important to community development efforts; on balance, however, the agencies believe that the final rule should provide flexibility to encourage a range of activities that will meet differing local needs across communities. In addition, the final rule emphasizes some of these community development loans, investments, and services in other parts of the CRA evaluation. For example, the Community Development Financing Test (§ __.24) is adopting a Bank Nationwide Community Development Investment Metric for large banks with assets over $10 billion, which will specifically measure the dollar volume of the bank's community development investments, excluding mortgage-backed securities, that benefit or serve all or part of the nationwide area compared to the deposits located in the nationwide area for the bank.

Section __. 15(b)(5) Benefits or Serves Low-Income Individuals, Families, or Households

The Agencies' Proposal

Proposed § __.15(b)(4) established an impact factor for activities that serve low-income individuals and families, generally defined under proposed § __.12 as those with an income of less than 50 percent of the area median income in a census tract. The agencies sought feedback on an alternative approach of defining this factor to include only those activities that serve individuals with an income of less than 30 percent of the area median income. The alternative would have been intended to ensure that the focus of this factor is on activities that serve the individuals that are most vulnerable to the challenges described above, such as housing instability and unemployment.

Comments Received

Of those commenting on this aspect of the proposal, some supported the impact factor as proposed, including because households with incomes below 50 percent of the area median income are harder to serve and, relatedly, the 50 percent threshold fills a gap that is often unmet by the market. A few commenters expressed concern with the proposed 50 percent threshold and the 30 percent alternative as both being potentially too low, with a commenter suggesting a multiplier to recognize activities reaching individuals or families with incomes at 30 percent of the area median income or below. Relatedly, a few other commenters noted that the thresholds could exclude the share of units within a LIHTC property that are affordable at 60 percent or 80 percent of the area median income. Some commenters stated that the agencies should not lower the threshold to 30 percent of area median income because providing affordable housing opportunities to very low-income families is especially difficult in high-cost markets.

Final Rule

The final rule adopts proposed § __.15(b)(4), renumbered as § __.15(b)(5), and revised to state that the agencies consider whether a community development loan, investment, or service “benefits or serves low-income individuals, families, or households.” The final rule makes technical edits from the proposal from “serves” to “benefits or serves” for consistency with the language used in the community development categories under § __.13, and adds “or households” for clarity, to conform with edits made to other community development provisions in the final rule. The definition of “low-income” has been revised, as discussed in the section-by-section analysis of § __.12, but still generally references an income that is less than 50 percent of the area median income.

The agencies note that, by focusing on low-income individuals, families, and households, final § __.15(b)(5) is intended to be consistent with the Retail Lending Test approach, in that the Retail Lending Test evaluates closed-end home mortgage lending and automobile lending using borrower distribution metrics that separately consider lending to low-income individuals. The agencies are also adopting this impact and responsiveness factor in order to take into account that low-income individuals, families, and households have high community development needs and can experience challenges obtaining basic financial products and services, securing stable employment opportunities, finding affordable housing, and accessing digital infrastructure. The agencies also recognize that community development loans, investments, and services supporting activities that serve low-income individuals, families, or households often entail a high level of effort and complexity on the part of the bank and community partners.

The agencies have considered comments that the 50 percent area median income threshold used for this impact and responsiveness factor in the final rule will exclude some impactful and responsive activities from consideration under this provision, including certain LIHTC activity designed for affordability at 60 percent or 80 percent of the area median income. However, the agencies continue to believe that using a 50 percent area median income standard for low-income throughout the regulation is important to reduce complexity and confusion, and that a 50 percent of area median income appropriately tailors the impact and responsiveness factor to address hard-to-serve community development needs, as discussed above. Additionally, the agencies note that such activities may be included under other impact and responsiveness factors, such as the added impact and responsiveness factor in § __.15(b)(10) regarding projects financed with LIHTCs and NMTCs.

The agencies have also considered the alternative approach of setting an income threshold of less than 30 percent of the area median income. In determining not to adopt this approach, the agencies have considered that, while a lower threshold could put more of a focus on the activities that serve the most vulnerable, there also might be comparatively fewer community development opportunities for banks that would primarily serve individuals, families, or households in this income category. The agencies have also considered that a lower threshold could exclude from consideration under this impact and responsiveness factor activities that are responsive to needs of low-income communities, such as affordable housing opportunities to low-income (30–50 percent area median income) families in high-cost markets. Similar to the discussion above, such activities may be included under other impact and responsiveness factors, such as the impact and responsiveness factor addressing High Opportunity Areas in § __.15(b)(7) and discussed further below.

Section __.15(b)(6) Supports Small Businesses or Small Farms with Gross Annual Revenues of $250,000 or Less

The Agencies' Proposal

Proposed § __.15(b)(5) set forth an impact factor for activities that support small businesses or small farms with gross annual revenues of $250,000 or less. This factor was intended to recognize bank activities that address the unique credit needs of the smallest businesses and farms, in alignment with the Retail Lending Test approach in proposed § __.22(d)(2)(iii), which would separately evaluate a bank's distribution of loans to small businesses and small farms with gross annual revenues of $250,000 or less. The agencies sought feedback on whether this impact factor should instead be set at a higher gross annual revenue threshold, for example at $500,000; or lower, for example at $100,000. The agencies also solicited comment on how to weigh the importance of using a consistent threshold for identifying smaller businesses and smaller farms both for the Retail Lending Test and for this proposed impact factor.

Comments Received

Commenters generally supported including an impact factor for activities supporting small businesses or small farms, but commenters provided a variety of views on the proposed gross annual revenue threshold. Some commenters expressed support for the proposed standard of gross annual revenue of $250,000 or less because, for instance, the threshold would incorporate many family care and childcare businesses into this impact factor. Other commenters expressed support for the proposed standard, but urged the agencies to consider a tiered approach under which the agencies would separately evaluate activities that support businesses with revenues less than $100,000 and that support businesses with revenues between $100,000 to $250,000 in order to help ensure that the smallest businesses are served, an approach they favored as consistent with current CRA small business lending reporting requirements. Several commenters noted that businesses with revenues under $100,000 are more likely to be startups and owned by women or people of color.

A few commenters expressed support for the lower alternative threshold of $100,000 or less, to allow the agencies to better target very small businesses and small farms. One commenter recommended the proposed standard align with SBA criteria for Small Disadvantaged Businesses and the USDA definition for socially disadvantaged farm or farmer.

Some commenters expressed support for higher thresholds, such as the alternative contemplated in the proposal of $500,000 gross annual revenues or less, or higher thresholds ranging from $1 million to $5 million. In this regard, one commenter stated, for example, that a higher threshold would be more appropriate from the standpoint of risk to the bank.

Finally, a commenter urged consistency between the impact factor threshold and the threshold used in the Retail Lending Test, stating there would be no discernable benefit from having different thresholds, and that consistency would promote compliance. More generally, a commenter suggested that small business-related provisions should focus on the number of small business loans made, rather than the total dollar volume.

Final Rule

The final rule adopts proposed § __.15(b)(5), renumbered as § __.15(b)(6), establishing an impact and responsiveness factor for loans, investments, or services that support small businesses or small farms with gross annual revenues of $250,000 or less. In deliberating on whether to finalize this impact and responsiveness factor, the agencies considered commenter feedback regarding the appropriate threshold as well as the feedback on the threshold used in the Retail Lending Test. As is also discussed in the section-by-section analysis of § __.22, on balance, the agencies believe that the $250,000 gross annual revenue threshold adopted under the final rule will recognize activities that are particularly responsive and impactful to smaller businesses and farms. The impact and responsiveness factor under final § __.15(b)(6) will apply to a small business loan or small farm loan that qualifies as a community development loan under § __.13 (which could include a loan that is also separately considered under the Retail Lending Test).

The adopted threshold is intended to recognize a focus on the small business and small farm borrowers with high credit needs and that can be the most difficult to serve. The agencies believe that a higher threshold might not sufficiently encourage banks to seek out activities serving smaller businesses or farms. At the same time, the agencies considered that, while a lower gross annual revenue threshold might focus on businesses and farms with the greatest unmet credit needs, the adopted threshold will encourage banks to help meet the credit needs of a larger share and greater diversity of small businesses with significant credit needs in their communities.

The agencies also considered commenter feedback suggesting alternative criteria or a tiered evaluation approach for this impact and responsiveness factor, but, on further deliberation, decided not to adopt these suggestions. The agencies believe that uniform thresholds across the final rule will promote clarity, align bank data requirements, and facilitate identifying opportunities and needs for CRA activity. The impact and responsiveness factor in final § __.15(b)(6) will help accomplish these objectives by aligning with the lowest tier threshold adopted under the Retail Lending Test, evaluating bank lending to smaller businesses and smaller farms, identified as those having gross annual revenues of $250,000 or less. The agencies also believe that the final rule's simple and straightforward impact and responsiveness factor regarding smaller businesses and farms will support greater certainty and transparency for banks and other stakeholders.

Section __.15(b)(7) Directly Facilitates the Acquisition, Construction, Development, Preservation, or Improvement of Affordable Housing in High Opportunity Areas

The Agencies' Proposal

The agencies also proposed an impact factor for activities that directly facilitate the acquisition, construction, development, preservation, or improvement of affordable housing in High Opportunity Areas (proposed § __.15(b)(6)). The proposal defined High Opportunity Areas to align with the FHFA definition of High Opportunity Areas, including: (1) areas designated by HUD as a “Difficult Development Area” (DDA); or (2) areas designated by a State or local Qualified Allocation Plan as High Opportunity Areas, and where the poverty rate falls below 10 percent (for metropolitan areas) or 15 percent (for nonmetropolitan areas). The agencies also solicited comment on whether the proposed approach to use the FHFA definition of “High Opportunity Areas” is appropriate, and whether there are other options for defining High Opportunity Areas. Responsive comments are discussed in the section-by-section analysis of final § __.12 regarding the definition of High Opportunity Area.

Comments Received

Commenters addressing this aspect of the proposed rule generally supported it, with feedback including that High Opportunity Areas feature better schools, jobs, and opportunities, and that affordable housing in such areas represents an important step in addressing neighborhood segregation. One commenter supportive of the proposal nonetheless cautioned against designing the CRA final rule in a way that diminishes support for housing developments in areas that are not designated as high opportunity, but that are typically in dire need of investments.

Various commenters also suggested that specific activities be given increased consideration under the proposed impact factor, including, among others, homeownership opportunities for low- and moderate-income individuals in High Opportunity Areas and financing that supports units with higher percentages of low-income tenants in high-cost-burdened geographic areas and areas with low vacancy rates. Some commenters offered suggestions for additional impact factors related to affordable housing, such as projects that are especially affordable or have longer affordability terms and covenants; and housing counseling and mobility counseling designed to connect consumers with these housing opportunities, among others.

Final Rule

The final rule adopts proposed § __.15(b)(6), renumbered as § __.15(b)(7), which provides an impact and responsiveness review factor that considers whether loans, investments, or services directly facilitate the acquisition, construction, development, preservation, or improvement of affordable housing in High Opportunity Areas. As explained in more detail in the section-by-section analysis of § __.12, under the final rule, a High Opportunity Area is defined as an area identified by the FHFA for purposes of the Duty to Serve Underserved Markets regulation in 12 CFR part 1282, subpart C. This definition generally includes geographic areas where the cost of residential development is high and affordable housing opportunities may be limited.

As noted by the agencies in the proposal, the agencies consider affordable housing in High Opportunity Areas to have a high level of impact and responsiveness. This impact and responsiveness factor is intended to recognize qualifying homeownership opportunities for low- and moderate-income individuals in High Opportunity Areas and also to include qualifying loans, investments, and services that support projects with high percentages of low-income tenants in high-cost-burdened geographic areas or areas with low vacancy rates in High Opportunity Areas.

The agencies do not believe that inclusion of this impact and responsiveness factor diminishes support for housing developments in areas that are not designated as High Opportunity Areas, particularly in light of other aspects of the proposal. The final rule includes a separate category of community development focused more broadly on loans, investments, and services that support affordable housing, discussed in detail in the section-by-section analysis of final § __.13(b). In addition, the agencies believe that other impact and responsiveness factors will recognize affordable housing in other ways, such as the impact and responsiveness factor adopted in § __.15(b)(10) regarding investments in projects financed with LIHTCs or NMTCs, and the impact and responsiveness factors in § __.15(b)(1) through (3) for loans, investments, and services in specific geographic areas with significant community development needs. The agencies also believe that these aspects of the proposal may help to address suggestions by other commenters for additional impact factors related to affordable housing.

Section __.15(b)(8) Benefits or Serves Residents of Native Land Areas

The Agencies' Proposal

Under § __.15(b)(7), the agencies proposed as an impact factor whether bank activities “[b]enefit Native communities, such as qualifying activities in Native Land Areas under [proposed] § __.13(l).” This factor was intended to recognize the credit and community development needs of Native and tribal communities as discussed in the proposal, which make bank activities that serve these communities especially responsive.

This proposed impact factor would include all eligible community development activities taking place in Native Land Areas. This includes activities as defined under proposed § __.13(l) (finalized as § __.13(j)), as well as other eligible community development activities that benefit or serve Native Land Areas and meet other eligibility criteria in § __.13. For example, an affordable housing project that is located in a Native Land Area or an activity in a Native Land Area undertaken with a CDFI would be included under this proposed impact factor.

The agencies sought feedback on whether this proposed impact factor should be defined to include activities benefiting Native communities not located in Native Land Areas, and if so, how to define those activities. Such an approach would be intended to recognize that many tribal members reside in areas outside of the proposed definition of Native Land Areas, as a result of a number of factors, including past Federal policies.

Comments Received

Commenters generally supported proposed § __.15(b)(7). Commenters noted, among other reasons, that Native communities and tribal lands are consistently underserved and have unique priorities and needs, which can make lenders more reluctant to serve those areas. Commenters also generally supported including activities benefiting Native and tribal communities that are not located in Native Land Areas. For example, a commenter stated that the proposed approach is an effective way to provide certainty to lenders in the evaluation and “scoring” process, while encouraging projects that may require investments both on and off Native Land Areas. Another commenter observed that some tribal citizens reside in areas outside of Tribal Nation jurisdictional boundaries, but still receive essential services provided by the commenter, and that tribal governments, businesses, or corporations are the main employers of those residents not living in Native Land Areas.

A few commenters suggested other ways to provide an increased emphasis for activities benefiting Native Land Areas, as defined in the proposed rule. For instance, a commenter suggested that in order to incentivize projects in Native Land Areas, activities that benefit Native Land Areas should be given greater weight than those that benefit Native communities. Other commenters suggested alternative ways to define activities that could be considered under the impact factor, such as activities that primarily benefit low- or moderate-income Native individuals; or that primarily benefit tribal members in general (in that regardless of income, activities should be considered high-impact and responsive). Other commenters suggested partial consideration be provided for activities provided to Native communities and Black Native Freemen, regardless of residence, even if less than 50 percent of beneficiaries are low- and moderate-income; or greater emphasis for activities in hard-to-reach areas, given barriers to entry due to land ownership, tax status, and other constraints.

Some commenters gave suggestions on how to define “Native communities.” Among suggestions, commenters suggested defining “community” to include membership in a government-recognized Native or tribal community, and/or otherwise qualifying for government resources; organizations that are recipients of Federal funds intended to enroll Natives in urban areas; or U.S. territories.

Final Rule

The final rule, renumbered as § __.15(b)(8), adopts as an impact and responsiveness factor whether loans, investments, and services benefit or serve residents of Native Land Areas. The final rule revises the proposed impact factor from “Native communities” to “residents of Native Land Areas,” (as defined in § __.12), and does not adopt the cross-reference to § __.13(j).

In arriving at the final rule, the agencies considered the unique status of and credit and community development needs in Native Land Areas. As discussed in more detail elsewhere in this SUPPLEMENTARY INFORMATION , Native Land Areas in particular have often experienced limited benefits from bank access or investments, which the agencies believe make bank loans, investments, and services in these geographic areas particularly impactful and responsive. For example, complex land ownership structures associated with Native Land Areas can make economic development in those lands particularly difficult, which the agencies believe supports incorporating a more specific focus and emphasis on those geographic areas in modernized CRA regulations. For further discussion on these challenges, see the section-by-section analysis of the Native Land Areas category of community development in § __.13(j). The final rule is thus revised to clarify and strengthen the nexus to residents of Native Land Areas.

Additionally, as discussed in more detail in the section-by-section analysis of § __.12 (“Native Land Area”), the Native Land Area definition is designed to be comprehensive, to align with existing Federal Indian Law regarding lands and communities with unique political status, and to support application of the rule with durable, publicly available data sources. The proposed impact factor contained an undefined term (“Native communities”), which comments suggested could have different meanings. Rather than defining “Native communities” in one or a combination of several ways some commenters suggested, the agencies believe that revising the final rule with reference to Native Land Areas, a term used elsewhere in the rule consistent with existing law, will facilitate compliance and supervision and make banks' ability to engage in and track activities that might be considered under this impact and responsiveness factor more practicable.

The final rule also no longer cross-references the Native Land Areas community development category finalized in § __.13(j), for simplicity and to ensure clarity that the impact and responsiveness review factor is available with respect to any community development loan, investment, or service that qualifies under § __.13, provided that the loan, investment, or service benefits or serves residents of Native Land Areas. Examples of activities that might be considered under this impact factor include: a project to finance a tribal health care facility that qualifies as an essential community facility under § __.13(f) and that benefits or serves residents of a Native Land Area, or a housing project financed with a Native CDFI that qualifies under § __.13(k) and that benefits or serves residents of a Native Land Area.

The agencies have carefully considered comments suggesting that the proposed impact and responsiveness factor be defined in the final rule to include loans, investments, or services benefiting or serving Native communities located outside of Native Land Areas. The agencies recognize that many Native communities live outside of Native Land Areas, and are sensitive to the many complexities and needs underlying and associated with these communities. However, for the reasons discussed above, the agencies believe that adopting an impact and responsiveness factor recognizing loans, investments, and services addressing the particular and significant community development needs in Native Land Areas is appropriate and will provide a greater degree of clarity and consistency across the rule and in its application. Relatedly, the agencies have taken into account potentially considerable practical challenges of implementing a broader impact and responsiveness factor focused on a highly dispersed population.

The agencies believe that other impact and responsiveness factors adopted under the final rule will recognize activities that benefit or serve Native communities more broadly. These include impact and responsiveness factors discussed above focused on activities in other geographic areas with high community development needs (final § __.15(b)(1) through (3)); low-income individuals, families, and households (final § __.15(b)(5)); and businesses and farms with gross annual revenues of $250,000 or less (final § __.15(b)(6)). These also include the impact and responsiveness factor adopted in § __.15(b)(4) regarding loans, investments, and services supporting an MDI, WDI, LICU, or CDFI, a subset of which are focused on serving Native communities, such as Native MDIs or Native CDFIs as designated by the CDFI Fund.

The agencies have also considered comments encouraging additional emphasis for other particular activities within this impact and responsiveness factor, but are not otherwise revising the rule. The agencies believe that the combination of the new community development category for loans, investments, and services in Native Land Areas in final § __.13(j) and the final impact and responsiveness factor in § __.15(b)(8), along with other provisions in the final rule that would recognize bank investments benefiting Native communities, such as the impact and responsiveness factors noted above, appropriately help encourage banks to meet credit needs in these harder to serve parts of banks' communities. The agencies believe that these components of the final rule facilitate flexibility to address the diverse and myriad needs of Native communities.

Section __.15(b)(9) Is a Grant or Donation

The Agencies' Proposal

Proposed § __.15(b)(8) included qualifying grants or contributions as an impact factor. As noted in the proposal, the Community Development Financing Metric in proposed § __.24(b) would be based on the dollar amount of financing activities (including loans, investments, and grants or contributions) relative to deposits, and thus would not account for the fact that a grant has no repayment obligation, unlike a typical community development loan or qualifying investment. The impact factor was designed to account for high-impact, smaller dollar transactions to complement their inclusion in the Community Development Financing Metric, recognizing that grants or donations are often smaller dollar volumes than community development loans or investments. Additionally, the impact factor was intended to recognize banks that provide important sources of capital that help community development organizations to build capacity and maintain sustainability.

Comments Received

Commenters offered varying views on the agencies' proposal to include as an impact factor activities that are a qualifying grant or donation. Some commenters supported including qualifying grant contributions as an impact factor. A few commenters noted that grants are especially impactful, while another highlighted the importance of grant capital for funding CDFIs. One commenter noted that grant interventions can be particularly effective during crises for small businesses. Other commenters, however, raised questions about the proposed impact factor. For example, one commenter expressed concern about an over-emphasis on grants, asserting that grants do not directly expand access to credit, while loans are directly related to credit.

Some commenters also offered suggested modifications or clarifications to the proposal. A few commenters remarked that the current CRA framework values loans over grants and donations and suggested additional emphasis, an outcome-based metric, or multipliers that would better account for the impact of grants to the organizations that depend on them. Commenters further suggested that to best encourage making grants, separate impact factors should be created for grants to nonprofit organizations, community-based organizations, CDFIs, and grant investments that serve low- or moderate-income households.

Final Rule

For the reasons described in the proposal and as noted above, the final rule adopts proposed § __.15(b)(8), renumbered as § __.15(b)(9), generally as proposed, to recognize whether a loan, investment, or service is a grant or donation. As noted above and consistent with comments received, this final rule impact and responsiveness factor is intended to recognize that grants or donations tend to be smaller in dollar amount relative to larger-dollar volume financing activities, but often are particularly impactful. The agencies believe that an impact and responsiveness factor is appropriate to ensure grants continue to receive appropriate recognition when considered along with all other community development financing activities. The final rule deletes the word “qualifying” from the proposal as superfluous, as the impact and responsiveness review only considers grants or donations that qualify as community development under § __.13.

The agencies have considered comments suggesting modifications or clarifications to the proposed rule, including that the rule should give special emphasis to or create separate impact factors for various kinds of grants or donations. The agencies believe that the broader impact and responsiveness factor in the final rule is appropriate to afford flexibility needed to address the different needs of various communities. On balance, the agencies believe that the simplicity of the final impact and responsiveness factor for grants or donations will better foster clarity and certainty than alternatives suggested. The agencies have also considered that identifying for special emphasis grants or donations to specific types of organizations or that meet specific community development categories would be challenging or impracticable, noting that different stakeholders may have varying and equally valid views on which grants or donations, organizations, or community development categories are more impactful than others.

Section __.15(b)(10) Is an Investment in Projects Financed With LIHTCs or NMTCs

Comments Received

As discussed in more detail below, commenters suggested a wide variety of additional types of activities that should be included as impact factors. Among these, a number of commenters recommended adding investments in LIHTCs and NMTCs. Among other points, commenters asserted that the LIHTC program is one of the most important policy tools for creating affordable rental housing. Commenters noted that LIHTCs are distributed through a highly competitive process to the most impactful properties meeting the State or locality's affordable housing needs. One commenter raised concerns that insufficient CRA credit has deterred investors from LIHTC investments. A few commenters stated that creating a separate impact factor recognizing LIHTC investments would increase investor demand for these investments and thus increase equity yield for projects to offset rising construction costs. Other commenters noted that including an impact factor focused on LIHTC and NMTC investments could also be an important mitigating factor to counteract removal of the separate investment test or lack of a Community Development Financing Investment subtest for investments.

Several commenters stated that banks should receive extra consideration for syndicating and/or sponsoring funds supporting LIHTC and NMTC projects, consistent with the OCC 2020 CRA Final Rule. Commenters also suggested other types of investments designed to meet community needs for inclusion as impact factor categories, including Opportunity Zone investments and Historic Tax Credits.

Final Rule

Upon consideration of commenter feedback, the final rule adopts a new impact and responsiveness review factor in § __.15(b)(10) for an investment in projects financed with LIHTCs or NMTCs. The agencies believe that adding an impact and responsiveness factor for these investments will mitigate commenter concerns about the final rule potentially discouraging tax credit transactions relative to the current CRA regulations, by eliminating the separate investment test in the current CRA evaluation framework for large banks, in favor of evaluating community development loans and investments together in the Community Development Financing Metric. As discussed further in the section-by-section analysis of § __.24, the agencies appreciate concerns about the importance of and need for community development investments. In addition, the agencies understand that, as some commenters suggested, CRA-motivated capital is one of the primary sources of funding for LIHTC and NMTC transactions. Accordingly, the agencies are adopting an impact and responsiveness factor for these project types to recognize these investments. This impact and responsiveness factor is part of a holistic consideration of a bank's community development financing performance, which also includes, for banks with assets greater than $10 billion, a Bank Nationwide Community Development Investment Metric and a Nationwide Community Development Benchmark. The investment metric and benchmark are designed to better understand the level of community development investments that banks are making, as discussed further in the section-by-section analysis of § __.24.

The agencies have considered but are not adopting commenter suggestions to adopt an impact and responsiveness factor addressing tax credits and investments other than LIHTCs and NMTCs. LIHTCs and NMTCs, as defined in final § __.12, are Federal programs that the agencies believe are clearly aligned with the intent of the CRA, and have a demonstrated impact in providing affordable housing and encouraging community development and economic growth. While other types of tax credits or investments, such as Historic Tax Credits or investments in Opportunity Zone funds can help finance projects that have important community benefits, these programs have varying criteria that may not always align with the intent of CRA. For example, Historic Tax Credits can be used to finance the renovation of historic properties in any community, and there is no requirement that these projects be located in low- or moderate-income tracts or benefit low- or moderate-income individuals or small businesses. However, the agencies note that projects financed by other types of tax credits or investments might be covered by other impact and responsiveness factors, depending on the geographic area in which they are located and the purpose of the project or the population served. For example, a community development project financed with Historic Tax Credits located in a census tract with greater than 40 percent poverty could be covered by § __.15(b)(3) if it otherwise met the criteria in § __.13, such as if the project is done in conjunction with LIHTCs under § __.13(b)(1) or if it is a revitalization or stabilization project that meets the criteria of § __.13(e).

Section __.15(b)(11) Reflects Bank Leadership Through Multi-Faceted or Instrumental Support

The Agencies' Proposal

The agencies proposed to consider as an impact factor whether bank activities reflect bank leadership through multi-faceted or instrumental support (proposed § __.15(b)(9)). The agencies explained that multi-faceted support would include activities that entail multiple forms of support provided by the bank for a particular program or initiative, such as a loan to a community-based organization that serves low- or moderate-income individuals, coupled with a service supporting that organization in the form of technical assistance that leverages the bank's financial expertise. Instrumental support would include activities that involve a level of support or engagement on the part of the bank such that a program or project would not have come to fruition, or the intended outcomes would not have occurred, without the bank's involvement.

Comments Received

Commenters offering views on proposed § __.15(b)(9) supported this impact factor. For example, one commenter emphasized the role that deeper technical assistance and capacity building can play for organizations that serve low- or moderate-income communities, and that these efforts cannot be adequately captured by looking solely at the associated dollar value. The commenter asserted that an impact factor is critical to ensuring that financial institutions are adequately incentivized. Another commenter stated that emphasizing multi-faceted support would help encourage financial institutions to engage in activities that can make a lasting impact on a community's development and affordable homeownership opportunities. A separate commenter stated that an impact review should recognize activities that reflect multi-faceted partnerships, leadership, and innovation, based on data relating to whether the activity involved one or more forms of financing or technical assistance, whether the bank was in a leadership position, or whether the activity was innovative for the bank or geographic area.

Final Rule

The final rule, renumbered as § __.15(b)(11), adopts as proposed an impact and responsiveness factor for loans, investments, and services that reflect bank leadership through multi-faceted or instrumental support. In adopting this impact and responsiveness factor, the agencies intend to incorporate into the final rule considerations regarding complexity and leadership under the current CRA regulations, but with greater specificity and a more direct tie to impact and responsiveness. The agencies note that activities involving multi-faceted or instrumental support often require significant efforts by the bank, reflect a high degree of engagement with community partners, and are highly responsive to community needs. Further, as noted by a commenter, bank efforts cannot always be adequately captured by looking solely at the associated dollar value of an activity.

Section __.15(b)(12) Is a New Community Development Financing Product or Service That Addresses Community Development Needs for Low- or Moderate-Income Individuals, Families, or Households

The Agencies' Proposal

Under proposed § __.15(b)(10), the agencies would consider whether an activity results in a new community development financing product or service that addresses community development needs for low- or moderate-income individuals and families. This proposed impact factor built upon the emphasis on the innovativeness of activities under the current community development evaluation framework, and was intended to ensure that bank activities are also impactful and responsive to the needs of low- and moderate-income populations. Consideration afforded under this proposed impact factor would help to encourage banks and community partners to conceive of new strategies for addressing community development needs, especially needs that existing products and services do not adequately address. The proposed emphasis on activities that support developing new products and services was intended to ensure that the CRA continually improves the landscape of product offerings for low- or moderate-income individuals and families.

Comments Received

Commenters that addressed proposed § __.15(b)(10) generally supported the proposal, but suggested modifications. For example, one commenter stated that the proposed impact factor would encourage innovation and solution-oriented CRA activities, and suggested that financial institutions helping to create or commit to a new fund or activity, with greater risks and benefits, should receive more favorable CRA consideration. Another commenter suggested that the agencies clarify that activities currently considered to be “innovative,” “complex,” or “flexible” under the existing CRA regulations would receive a greater impact score even though the proposal used different terminology. On the other hand, one commenter cautioned that the proposed review factor should include safeguards to ensure that predatory or usurious products are not given consideration, while another commenter stated that consideration should be explicitly granted for products that assist low- and moderate-income borrowers to reduce their reliance on predatory products.

Final Rule

The final rule adopts proposed § __.15(b)(10), renumbered as § __.15(b)(12), to establish an impact and responsiveness factor for loans, investments, and services that result in a new community development financing product or service that addresses community development needs for low- or moderate-income individuals, families, or households. The final rule makes technical edits from the proposal by adding “or households” for clarity, to conform with edits made to other community development provisions in the final rule. The agencies believe that the impact and responsiveness factor as adopted will appropriately help encourage banks to meet the credit needs of their entire communities by continually improving the landscape of product offerings for low- or moderate-income individuals, families, and households that are new to the bank or to a particular market. Further, the agencies believe that this impact and responsiveness factor will facilitate bank-community partnerships to identify new strategies for addressing community development needs, especially those not adequately addressed by existing products. For example, a loan or investment that provides financing for the acquisition of land for a shared equity housing project that brings permanent affordable housing to a community could meet this impact and responsiveness factor, to the extent that it involves a new strategy to meet a community development need. The final rule is also consistent with the current CRA framework to provide consideration for activities that are innovative.

The agencies intend for this particular impact and responsiveness factor to recognize innovation broadly, but are sensitive to commenter concerns regarding predatory or usurious products. Under the final rule, the agencies determine whether a loan or investment supports community development when the loan or investment is originated, made, or purchased. If the agencies later identify that the community development loan or investment involves evidence of discriminatory or other illegal credit practices pursuant to § __.28(d), the agencies will consider that information in the bank's CRA evaluation. Further, loans, investments, or services that assist low- and moderate-income borrowers in reducing reliance on predatory products could qualify under this impact and responsiveness factor if such products are new and meet community needs.

Additional Comments on Proposed § __.15

In addition to the impact and responsiveness factors discussed above, commenters recommended that the agencies adopt a wide range of additional factors. For example, a number of commenters recommended adding an impact factor for special purpose credit programs, such as those that focus on consumer or home mortgage lending, and community development special purpose credit programs. The agencies note that special purpose credit programs are largely covered under the Retail Services and Products Test in § __.23(c)(2)(v) in the evaluation of credit products and programs, as discussed in greater detail in the section-by-section analysis of § __.23(c)(2).

Other commenter recommendations included adding an impact factor for activities benefiting low- or moderate-income individuals with disabilities, with commenters offering this idea also suggesting that specific weighting of the impact factors analysis in comparison to community development metrics would be helpful; an impact factor related to health initiatives, with the agencies encouraged to improve data collection and pursue routine partnerships with healthcare and public health entities to obtain data; and an impact factor for activities that support increasing the supply of high quality, affordable early childhood education and care facilities, which were emphasized as having compounding consequences for family stability, economic opportunity, and child health and development.

Regarding these recommendations from commenters, the agencies note that many of these activities may qualify for CRA consideration under § __.13, to the extent that they meet the relevant eligibility criteria. For instance, the above-noted activities benefiting low- or moderate-income individuals with disabilities may qualify under the community supportive services category in § __.13(d), and healthcare and childcare facilities may qualify under the essential community facilities category in § __.13(f). Additionally, depending on the particular facts and circumstances, other impact and responsiveness factors adopted under the final rule may already cover these kinds of activities, such as § __.15(b)(5) for loans, investments, and services that serve low-income individuals, families, or households, and § __.15(b)(9) for grants or donations.

Similar considerations apply to other potential impact factors recommended by commenters. These include, among others, impact factors recognizing: land bank investments; disaster preparedness and climate resiliency activities (including those in the most vulnerable low- and moderate-income minority communities); local community needs; deep impact lending; military communities and qualifying activities on military installations; collaboration with public agencies; broadband and digital inclusion projects; community engagement strategies; activities that support mission-driven nonprofit developers; loans for first generation homebuyers; and particularly responsive community development activities that fight involuntary relocation. Some commenters recommended impact factors for activities that close wealth gaps and promote economic activities, with suggestions including, among others, impact factors for engaging in activities that are particularly impactful for borrowers and minorities; for investments in historically redlined communities or that impact racial segregation; and for activities that close wealth gaps for racial, ethnic, national origin, limited English proficiency, lesbian, gay, bisexual, transgender, and queer (LGBTQ), or other underserved groups.

The agencies have considered these recommendations from commenters and acknowledge that there are many types of loans, investments, or services that may be responsive or impactful to a community. As suggested above, many activities associated with commenter-recommended impact factors could potentially already be recognized under one of the twelve impact and responsiveness factors adopted in final § __.15(b). In addition, the agencies believe that the impact and responsiveness factor categories specified in § __.15(b) reflect an appropriate set of categories to consider as part of evaluating a bank's community development performance, in furtherance of the purpose of the CRA. The adopted factors are ones that are supported by clear standards, tend to involve a higher degree of complexity and effort by a bank, and as noted above, tend to be particularly responsive and impactful. For more information and discussion regarding the agencies' consideration of comments recommending adoption of additional race- and ethnicity-specific provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION .

The list of impact and responsiveness factors adopted in the final rule covers a wide range of potentially impactful and responsive activities but, as noted above, is not intended to be exhaustive. The agencies do not believe that identifying every kind of impactful and responsive activity in this section of the regulation is practicable or possible. The adopted impact and responsiveness factors are intended to standardize a set of categories that will be consistently reviewed as a part of an impact and responsiveness review, but they do not preclude agency consideration of other factors and activities.

Sections __.16 Through __.19 Assessment Areas and Areas for Eligible Community Development Activity

Current Approach

Under the CRA, banks have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered, and the agencies are required to assess a bank's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. Accordingly, one of the CRA regulations' core requirements is that each bank delineate areas within which its CRA performance will be assessed, referred to in the current CRA regulations as the bank's assessment areas.

Current CRA regulations require a bank, other than a wholesale or limited purpose bank, to delineate one or more assessment areas that include the geographies in which the bank's main office, branches, and deposit-taking ATMs are located, as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans. These assessment areas are generally required to consist of one or more MSAs or metropolitan divisions, or one or more contiguous political subdivisions, such as counties, cities, or towns.

For a wholesale or limited purpose bank, the current CRA regulations require such a bank to delineate assessment areas generally consisting of one or more MSAs or metropolitan divisions or one or more contiguous political subdivisions, such as counties, cities, or towns, in which the bank has its main office, branches, and deposit-taking ATMs.

Within certain limitations, a bank may adjust the boundaries of an assessment area to include only the portion of a political subdivision that it reasonably can be expected to serve. Limitations applicable to the delineation of assessment areas include that each bank assessment area: (1) must consist only of whole geographies ( i.e., census tracts), and (2) may not extend substantially beyond an MSA boundary or beyond a State boundary unless the assessment area is located in a multistate MSA. Further, the current CRA regulations provide that each assessment area may not reflect illegal discrimination and may not arbitrarily exclude low- or moderate-income census tracts. These provisions work congruently with ECOA and the Fair Housing Act, to combat redlining. Consequently, it is crucial that a bank delineate assessment areas that accurately reflect the communities it serves.

As an exception to these requirements, a bank whose business model predominantly consists of serving the needs of military personnel or their dependents who are not located within a defined geographic area may delineate its entire deposit customer base as its assessment area.

The agencies use the assessment areas delineated by a bank in the evaluation of the bank's performance unless the agencies determine that the assessment areas do not comply with the requirements of the current regulation.

Currently, assessment areas are used in different ways in CRA examinations. Examiners evaluate a bank's retail lending and retail services performance within assessment areas under the lending test; retail lending outside of a bank's assessment areas is not evaluated using the lending test criteria. However, under existing guidance, examiners will give consideration for loans to low- and moderate-income persons and small business and farm loans outside of a bank's assessment area(s) provided that the bank has adequately addressed the needs of borrowers within its assessment area(s). Pursuant to the guidance, such loans will not compensate for poor lending performance within the bank's assessment areas. With respect to the evaluation of a bank's community development performance—including community development loans, investments, and services—examiners consider a bank's activities within its assessment area(s) or within the broader statewide or regional area that includes the bank's assessment area(s). Broader consideration of a bank's community development performance reflects the agencies' view that community development organizations and programs are efficient and effective ways for banks to promote community development, and that these organizations and programs often operate on a statewide or even multistate basis. For this reason, the bank's assessment area(s) need not receive an immediate or direct benefit from the bank's participation in the organization or activity, provided that the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the bank's assessment area(s). In addition, the agencies may consider community development activities in broader statewide or regional areas that do not benefit the assessment area if the bank has been responsive to community development needs and opportunities in its assessment area(s).

The agencies proposed to revise the current assessment area framework by requiring all banks evaluated under the CRA to continue to delineate facility-based assessment area(s) as discussed in the section-by-section analysis of final § __.16, and requiring large banks to delineate a new type of assessment area referred to as retail lending assessment area(s), as discussed in the section-by-section analysis of final § __.17. In addition, the agencies proposed to evaluate the retail lending performance of large banks, and certain intermediate banks, in their outside retail lending areas, as discussed in the section-by-section analysis of final § __.18. The agencies also proposed to consider qualifying community development loans, investments, and services outside of a bank's facility-based assessment areas within the states and multistate MSAs in which the bank has a facility-based assessment area, and in the nationwide area, as discussed in the section-by-section analysis of final § __.19.

Section __.16 Facility-Based Assessment Areas

The agencies proposed generally to maintain the current requirement that a bank delineate assessment areas where the bank has its main office, branches, and deposit-taking ATMs, with certain modifications. The agencies intended the proposal to reflect the fact that a bank's facilities remain an essential way of defining the local communities that are part of a bank's entire community. Accordingly, the agencies referred to these assessment areas in the proposal as “facility-based assessment areas,” distinguishing them from the retail lending assessment areas in proposed § __.17.

Relative to the current rule, the modifications proposed by the agencies included: (1) replacing the term “deposit-taking ATM” with “deposit-taking remote service facility;” and (2) requiring a large bank to delineate a facility-based assessment area consisting of a single MSA, one or more contiguous counties within an MSA, or one or more contiguous counties within the nonmetropolitan area of a State, but consistent with the current rule, permitting a small or intermediate bank to delineate a facility-based assessment area that includes part of, but not the entirety of, one or more counties.

The agencies received numerous comments on the facility-based assessment area proposal from many different types of commenters. As discussed in greater detail below, many commenters supported the facility-based assessment area proposal, including the modifications relative to the current rule. However, other commenters expressed concerns, especially regarding the types of bank facilities that would trigger the facility-based assessment area requirement, and the requirement for large banks to delineate facility-based assessment areas composed of whole counties.

The agencies are adopting the facility-based assessment area proposal with certain changes, as discussed below.

Section __.16(a) In General

As under the current rule, proposed § __.16(a) required that a bank delineate one or more facility-based assessment areas within which the agencies evaluate the bank's record of helping to meet the credit needs of its community pursuant to the standards in the proposed rule. Further, proposed § __.16(a) stated that the agencies do not evaluate the bank's delineation of its facility-based assessment areas as a separate performance criterion, but the agencies review the delineation for compliance with the requirements of this section.

A number of commenters expressed general support for the agencies' facility-based assessment area proposal. However, the agencies generally did not receive comments on the specific language of § __.16(a).

The agencies are finalizing the first sentence of § __.16(a) substantially as proposed, with some technical changes. Specifically, final § __.16(a) refers to a bank's record of helping to meet the credit needs of its entire community (rather than just its “community” as proposed) to better track the language of the statute. In addition, final § __.16(a) states more precisely that the agencies evaluate a bank within in its facility-based assessment areas pursuant to the performance tests and strategic plan described in § __.21 (rather than pursuant to “the standards in this part” as proposed).

The agencies determined that the second sentence of proposed § __.16(a) is not necessary because, as discussed below, final § __.16(e) specifies that the agencies use the facility-based assessment areas delineated by a bank in its evaluation of the bank's CRA performance unless the agencies determine that a facility-based assessment areas does not comply with the requirements of § __.16. For this reason, the agencies are not adopting the second sentence of proposed § __.16(a). The agencies note that this change is not intended to alter any requirement pertaining to facility-based assessment areas or how these areas are used in CRA evaluations.

Section __.16(b)(1) Geographic Requirements for Facility-Based Assessment Areas—Facilities Triggering Delineation

The Agencies' Proposal

Proposed § __.16(b)(1) provided that banks must delineate facility-based assessment areas that include each county in which a bank has a main office, a branch, any other staffed bank facility that accepts deposits, or a deposit-taking remote service facility, as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans (including home mortgage loans, small business loans, small farm loans, and automobile loans). In addition, the proposal specified that facilities in paragraph (b) refers to those that are open to the general public and excludes nonpublic facilities. The agencies stated that the addition of other staffed bank facilities, together with proposed changes to the “branch” definition, were intended to capture new bank business models, regardless of how the bank refers to such staffed physical locations, when those locations are open to the public and collect deposits from customers. The agencies requested comment on how to treat bank business models where staff assist customers to make deposits on their phone or mobile device while the customer is onsite.

The proposal did not require delineation of a facility-based assessment area based solely on the existence of a loan production office.

Comments Received

A number of commenters provided feedback on the types of facilities that should trigger the facility-based assessment area requirement.

Main office and branches. Several commenters expressed support for retaining the current rule's requirement that a bank must delineate facility-based assessment areas based on the location of its main office and branches. In addition, several commenters addressed what should constitute a branch for purposes of the CRA regulations. These comments are discussed in the section-by-section analysis of § __.12.

Any other staffed bank facilities that accept deposits. In general, commenters who addressed this aspect of the proposal supported the proposal to require banks to delineate facility-based assessment areas in counties in which the bank has any other staffed bank facility that accepts deposits, other than a main office, branch, or deposit-taking remote service facility. Commenters that supported this aspect of the proposal noted that requiring banks to delineate facility-based assessment areas based on the location of other staffed bank facilities that accept deposits aligns with the premise of the CRA that a bank absorbing deposits from a community has certain obligations to serve that community.

A number of commenters responded to the agencies' request for comment on the treatment of business models where bank staff assist customers with making deposits on their phones or mobile devices while customers are onsite at a staffed physical location. A few commenters noted generally that this business model represents an innovation in banking that allows bank employees to spend more time on customer services (such as financial education, consulting, and investment services) rather than engaged in transactions.

Many of the commenters that addressed this issue stated that the agencies should require a bank to delineate a facility-based assessment area around locations where bank staff assist on-site customers with making deposits on the customers' phones or mobile devices. For example, a few commenters emphasized that bank staff at such locations acquire knowledge of community needs, and thus that the bank should be held accountable for serving those needs. At least one commenter went further, stating that any remote location at which bank staff offer products and services available at a branch should be considered a branch for purposes of delineating facility- based assessment areas. On the other hand, a commenter warned against strictly construing any requirement to delineate a facility-based assessment area where bank staff assist on-site customers with making deposits on the customers' mobile devices so as not to discourage community development activities, such as mobile branches on wheels.

However, many other commenters opposed requiring delineation of a facility-based assessment area where bank staff assist on-site customers with making deposits on the customers' phones or mobile devices. For example, one commenter noted that it was not aware of any instances of bank staff assisting a customer with making a deposit on a customer-owned mobile device while the customer is on-site, and thus believed that requiring the delineation of facility-based assessment areas on this basis was unnecessary. Other commenters that opposed requiring delineation of a facility-based assessment area in this situation stated that if bank staff assist customers in making deposits on their mobile devices, these deposits should be treated as originating from the customer's home or business address if the deposits are sent electronically.

Deposit-taking remote service facility. A number of commenters addressed the proposed requirement to delineate facility-based assessment areas based on the location of deposit-taking remote service facilities. Some of these commenters expressed support for the agencies' proposal to require banks to delineate facility-based assessment areas around deposit-taking remote services facilities. A few commenters recommended that, for purposes of delineating facility-based assessment areas, the definition of remote service facility should be sufficiently broad to capture innovations in banking services traditionally offered through physical branches.

However, a few commenters opposed requiring a bank to delineate a facility-based assessment area based solely on the location of its deposit-taking remote service facilities. A few commenters asserted that a deposit-taking remote service facilities should not trigger the full lending, service, and community development obligations of a facility-based assessment area because, among other reasons, banks typically do not have staff physically present in those areas to be able to generate loans or carry out community development financing activities or services. A commenter noted that requiring delineation of a facility-based assessment area based solely on a remote service facility would limit a bank's ability to place a deposit-taking remote service facility in a market as part of a strategy to transition toward a broader range of services in that market, or to serve only a specific market segment, such as business customers at a loan production office.

Other commenters suggested placing certain limitations on when a remote service facility would trigger a facility-based assessment area. For example, a few commenters recommended that a deposit-taking remote service facility in a county that is immediately adjacent to a county where the bank already has a branch presence should not require the delineation of a new facility-based assessment area because the remote service facility was likely placed there in order to serve existing bank customers who work in or travel to the neighboring county. However, these commenters noted that where a bank establishes deposit-taking remote service facilities in a county that is not adjacent to the county where the bank has an existing facility-based assessment area, then the bank should be required to delineate a facility-based assessment area in that county based solely on the presence of deposit-taking remote service facilities.

A few commenters recommended that a bank should have the option, rather than be required, to delineate a facility-based assessment area based on the location of its deposit-taking remote service facilities. At least one of these commenters reasoned that requiring delineation of a facility-based assessment area provides a strong disincentive against establishing temporary remote deposit facilities, such as in the case of a natural disaster or a special event.

Non-proprietary remote service facilities. As discussed in the section-by-section analysis of § __.12, commenters disagreed on whether the proposed requirement to delineate facility-based assessments areas based on where a bank maintains deposit-taking remote service facilities should extend to remote service facilities not owned or operated by, or operated exclusive for, a bank, such as third-party ATM networks.

Loan production offices. Several commenters noted that the proposal for delineating facility-based assessment areas would generally exclude loan production offices, insofar as such facilities do not accept deposits or are not open to the general public. A majority of these commenters recommended including loan production offices as a facility for purposes of delineating facility-based assessment areas. These commenters noted that loan production offices factor into a bank's overall lending performance in low- or moderate-income communities. These commenters also noted that loan production offices are often the only lending or banking-related presence in rural areas and small towns, suggesting their presence should confer a CRA obligation. Some of these commenters argued that, alternatively, if loan production offices do not trigger the delineation of a facility-based assessment area, the presence of loan production offices should trigger the delineation of at least a retail lending assessment area.

However, a few commenters supported the agencies' proposal not to include loan production offices as a facility for purposes of delineating a facility-based assessment area. At least one of these commenters noted that loan production offices are not branches and are sometimes used by a bank to help determine whether a branch should be established in a new area.

Final Rule

The agencies are adopting a modified version of proposed § __.16(b)(1). Final § __.16(b)(1) provides that, except as provided in paragraph (b)(3), a bank's facility-based assessment areas must include each county in which a bank has a main office, a branch, or a deposit-taking remote service facility, as well as the surrounding counties in which the bank has originated a substantial portion of its loans (including home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans). Unlike under the proposal, final § __.16(b)(1) does not require a bank to delineate a facility-based assessment area based on the location of any other staffed bank facility that accepts deposits (other than a main office, branch, or deposit-taking remote service facility).

In addition to this substantive change, final § __.16(b)(1) incorporates several technical changes relative to the proposal. Specifically, final § __.16(b)(1) clarifies that paragraph (b)(3) (which, as discussed below, permits small and intermediate banks to delineate facility-based assessment areas composed of partial counties) is an exception to the “each county” requirement. Further, the final rule adds multifamily loans to the parenthetical list of loan types so that this list includes all of the product lines included in the retail lending volume screen portion of the Retail Lending Test; these same types of loans may also be considered under the Small Bank Lending Test. Finally, the final rule refers to “surrounding counties,” rather than “surrounding geographies” as proposed, consistent with the county-based geographic requirements described below.

Any other staffed bank facilities that accept deposits. The final rule does not include the proposed requirement that a bank's facility-based assessment areas include each county in which the bank has any other staffed bank facility that accepts deposits (other than a main office, branch, or deposit-taking remote service facility). The agencies believe that the remaining list of bank facilities that trigger facility-based assessment area delineation requirements ( i.e., main office, branch, deposit-taking remote service facility) is sufficiently comprehensive that it is not necessary to include other staffed bank facilities that accept deposits. In particular, the agencies are not aware of the existence of a staffed bank facility that accepts deposits that would not qualify as a main office or branch. The agencies will continue to monitor whether other types of deposit-taking facilities emerge in the future that do not qualify as a main office, branch, or deposit-taking remote service facility, and that may warrant addition to the list of facilities that trigger the facility-based assessment area delineation requirement.

For similar reasons, the agencies are declining to specify whether a facility where bank staff assist customers with making a deposit on a mobile phone or other mobile device triggers the facility-based assessment area delineation requirement. The agencies believe that, depending on the facts and circumstances, such a facility may qualify as a branch pursuant to the appropriate agency's licensing policies. Further, to the extent that such a facility does not qualify as a branch, the agencies do not want to disincentive bank staff from providing incidental support to customers at non-branch facilities. The agencies will continue to monitor banking developments and provide additional guidance as appropriate.

Deposit-taking remote service facilities. The final rule also retains the proposed requirement that a bank's facility-based assessment areas include each county in which the bank has a deposit-taking remote service facility. The agencies believe that requiring a bank to delineate a facility-based assessment area based on where it maintains a deposit-taking remote service facility is consistent with the statute because of the statutory definition of “domestic branch,” discussed above, which includes other deposit-taking facilities.

The agencies have considered concerns raised by some commenters that a bank may need to delineate two separate facility-based assessment areas if it maintains, for example, a branch in one county and a deposit-taking remote service facility in an adjacent county. However, under the geographic requirements of the final rule discussed below, this result would be required only in cases where (1) one county is a metropolitan county ( i.e., located within an MSA) and the other county is a nonmetropolitan county, or (2) the counties are nonmetropolitan counties in adjoining states. By contrast, if both counties are located in the same MSA, or if both counties are located in the nonmetropolitan area of the same State, then the bank could delineate a single facility-based assessment area that includes both counties. The agencies note that the CRA statute requires the agencies, in the written evaluation of a bank for each State in which it maintains one or more branches, to separately present conclusions for each metropolitan area in which the bank maintains a branch, and conclusions for the nonmetropolitan area of the State if the bank maintains a branch in such nonmetropolitan area. The agencies believe that allowing a single facility-based assessment area to consist of both metropolitan and nonmetropolitan areas, as in the case described above, would create challenges in assigning conclusions consistent with this statutory requirement because the agencies would not be able to distinguish between a bank's metropolitan area and nonmetropolitan area performance within a State.

Non-proprietary remote service facilities. As discussed in the section-by-section analysis of § __.12, the term “remote service facility” includes only those remote service facilities that are owned or operated by, or operated exclusively for, a bank. As such, the final rule does not require a bank to delineate a facility-based assessment area based on the location of other remote service facilities, such as a network ATM operated by third party.

Loan production offices. The final rule does not require banks to delineate facility-based assessment areas based solely on the location of loan production offices. The agencies considered commenter feedback that indicated a loan production office should trigger a facility-based assessment area delineation because it is a bank facility and may be part of the bank's strategy to meet the credit needs of the community it serves. However, based on the agencies' supervisory experience, the agencies believe that loan production offices vary widely in terms of service and product offerings, the number of customers served, and the capacity and resources to meet community credit needs. For example, a loan production office may not offer the types of loans evaluated under the Retail Lending Test, may not accept deposits, and may not be open to the public. For this reason, the agencies are declining to apply the facility-based assessment area requirement based solely on the location of a loan production office. However, under the final rule Retail Lending Test, the agencies will evaluate the major product lines of certain large banks in retail lending assessment areas where they have concentrations of closed-end home mortgage and small business loans. Similarly, the agencies will evaluate the major product lines of large and certain intermediate and small banks in the bank's outside retail lending area ( i.e., the nationwide area outside of the bank's facility-based assessment areas and retail lending assessment areas). Thus, under the final rule, a geographic area in which a bank maintains loan production offices may be delineated as a retail lending assessment or included in the bank's outside retail lending area, as applicable.

Section __.16(b)(2) and (3) Geographic Requirements for Facility-Based Assessment Areas—Boundaries

The Agencies' Proposal

Proposed § __.16(b)(2) required that a bank's facility-based assessment area consist of one or more MSAs or metropolitan divisions or one or more contiguous counties within an MSA, a metropolitan division, or the nonmetropolitan area of a State. In addition, consistent with current guidance, proposed § __.16(b)(2) specified that a facility-based assessment area may not extend beyond an MSA boundary or beyond a State boundary unless the facility-based assessment area is located in a multistate MSA or combined statistical area.

However, proposed § __.16(b)(3) provided an exception for an intermediate or small bank by which such a bank may adjust the boundaries of its facility-based assessment areas to include only the portion of a county that it reasonably can be expected to serve, provided that a facility-based assessment area that includes a partial county consists only of whole census tracts, and complies with the limitations discussed below in § __.16(c). As a result, under the proposal, large banks would no longer be allowed to delineate a partial county for facility-based assessment areas, as under the current rule. The agencies reasoned that this change would create a more consistent delineation standard for the delineation of assessment areas for large banks; encourage these banks to serve low- or moderate-income individuals and census tracts in counties where their deposit-taking facilities are located; help safeguard and support fair lending; and support the proposed use of metrics and associated data to evaluate bank performance. The agencies requested feedback on whether both small and intermediate banks should continue to have the option of delineating partial counties or whether they should be required to delineate whole counties as facility-based assessment areas to increase consistency across banks.

Comments Received

Numerous commenters offered views on the proposed geographic requirements that would apply to the delineation of facility-based assessment areas.

Whole-county requirement for large banks. Many commenters addressing the proposed geographic requirements for large banks' facility-based assessment areas supported this aspect of the proposal, including the proposed requirement that large banks' facility-based assessment areas consist of one or more MSAs, metropolitan divisions, or contiguous counties within an MSA, metropolitan division, or the nonmetropolitan area of a State. In general, these commenters expressed that partial-county delineations may result in the geographic scope of a bank's CRA evaluation not accurately reflecting the area that a large bank can reasonably be expected to serve, and that partial-county delineations could allow a large bank to reduce its lending in low- or moderate- income and majority-minority census tracts. A commenter stated that requiring large banks to delineate facility-based assessment areas composed of whole counties would facilitate peer comparison and simplify analysis from a metrics standpoint.

However, most commenters that addressed the proposed geographic requirement for large banks' facility-based assessment areas opposed this aspect of the proposal, with some suggesting that some or all large banks should continue to have the option to delineate facility-based assessment areas composed of partial counties. These commenters pointed to a variety of reasons supporting the view that large banks should retain the ability to delineate a facility-based assessment area composed of partial counties. For example, some commenters noted that certain bank characteristics, including a limited capacity to serve an entire county, a limited branch network in a county, and the location of the bank's branch or branches, could make it challenging to serve an entire county. In another example, a commenter suggested that serving a facility-based assessment area composed of whole counties would be so challenging that it would require the bank to divert resources from other programs, including those that serve low- or moderate-income communities.

Commenters also noted that characteristics of a county could make it challenging to serve the entirety of that county, including the geographic size or other geographic characteristics, economic characteristics, the population and population density, and the level of competition among other banks in the county. A commenter described the proposed whole-county delineation requirement for large banks as mandating an unrealistic facility-based assessment area, which would lead to unrealistic benchmarks and conclusions. Specifically, the commenter cited the example of Los Angeles County, stating that several large banks operate three or fewer branches in the county, and that those banks would be required to delineate the whole county as a facility-based assessment area. The commenter stated that the county consists of approximately 2,500 census tracts, and questioned how these large banks can be asked to serve a whole county of this size with so few branches.

Some commenters that criticized the proposed whole-county delineation requirement for large banks suggested that the whole-county requirement could be appropriate for large banks of a higher asset threshold, but that large banks of a smaller asset size, such as those below $5 billion or $10 billion in assets, should have the flexibility to define assessment area using partial counties.

Partial-county allowance for small and intermediate banks. A majority of commenters that addressed the proposed geographic requirements for facility-based assessment areas of small and intermediate banks supported the proposal to continue to allow these banks to delineate facility-based assessment areas that include only the portion of a county that such a bank reasonably can be expected to serve. These commenters generally noted that small and intermediate banks are less likely to have the capacity and resources to serve an entire county.

However, many other commenters recommended that small and intermediate banks be held to the same whole-county delineation standard for facility-based assessment area delineation as proposed for large banks. In general, these commenters expressed that partial-county delineations may result in the geographic scope of the bank's CRA evaluation not accurately reflecting the area the bank can reasonably be expected to serve. In addition, some commenters expressed concerns that partial-county delineations could result in redlining by allowing a bank to exclude low- or moderate-income and majority-minority census tracts. In addition, a few commenters noted that small and intermediate banks are often the only banks present in rural counties, and that partial-county delineations for these banks could result in underserved rural areas being excluded from facility-based assessment areas.

Final Rule

The agencies are adopting the geographic requirements for facility-based assessment areas in proposed § __.16(b)(2) and (3) with some modifications. Final § __.16(b)(2) provides that, except as provided in paragraph (b)(3), each of a bank's facility-based assessment areas must consist of a single MSA, one or more contiguous counties within an MSA, or one or more contiguous counties within the nonmetropolitan area of a State.

Relative to the proposal, final § __.16(b)(2) incorporates some clarifications and non-substantive changes to streamline the drafting of proposed § __.16(b)(2). First, the final rule specifies that the geographic requirements of this paragraph apply to each of a bank's facility-based assessment areas. Second, the final rule omits the proposed references to metropolitan divisions; the agencies believe these references are superfluous because metropolitan divisions consist of whole counties, and banks are not required to follow metropolitan division boundaries when delineating facility-based assessment areas. Third, and as discussed below, the final rule eliminates the proposed language concerning the circumstances under which a facility-based assessment area is permitted to extend beyond an MSA boundary or a State boundary. As a result, under the final rule, a facility-based assessment may not extend beyond an MSA boundary and may not extend beyond a State boundary unless the facility-based assessment area is located within a multistate MSA.

Final § __.16(b)(3) provides that an intermediate or a small bank may adjust the boundaries of its facility-based assessment areas to include only the portion of a county that it reasonably can be expected to serve, subject to the limitations in paragraph (c). Final § __.16(b)(3) also provides that a facility-based assessment area that includes a partial county must consist of contiguous whole census tracts. The agencies believe that the requirement that partial-county delineations must consist of contiguous census tracts was implicit in the proposal, but that it is appropriate to make this requirement explicit in the final rule, paralleling the contiguous county requirement in final § __.16(b)(2).

MSA and State boundaries. Under the final rule, a bank may not delineate a facility-based assessment area that extends beyond an MSA boundary, and a bank may not delineate a facility-based assessment area that extends beyond a State boundary unless the facility-based assessment area is located in a multistate MSA. By contrast, the proposal would have permitted facility-based assessment areas located in combined statistical areas to extend beyond an MSA or State boundary. The agencies have reconsidered the issue and, for the reasons discussed below, are adopting a final rule that is consistent with current § __.41(e)(4), which provides that an assessment area may not extend substantially beyond an MSA boundary or beyond a State boundary unless the assessment area is located in a multistate MSA.

The agencies believe that allowing a facility-based assessment area to consist of an entire combined statistical area would create challenges in assigning conclusions consistent with statutory requirements. Specifically, the statute requires the agencies, in the written evaluation of a bank, to present conclusions separately for each metropolitan area in which the bank maintains a branch. Further, the statute requires the agencies to present, in the written evaluation of an interstate bank's performance within a State, conclusions separately for each metropolitan area in which the bank maintains a branch, and for the remainder of the nonmetropolitan area of the State if the bank maintains one or more branches in such nonmetropolitan area. Because a combined statistical area may include a combination of metropolitan and nonmetropolitan counties, or may contain multiple distinct MSAs, the agencies would need to assign conclusions to one or more subparts of a facility-based assessment area consisting of a combined statistical area. For similar reasons, the agencies believe that applying the Community Development Financing Test in a facility-based assessment area consisting of a combined statistical area would be challenging because the Community Development Financing Test involves separate benchmarks for metropolitan and nonmetropolitan areas.

Whole- and partial-county delineations. Under the final rule, large banks must delineate facility-based assessment areas composed of whole counties, but small and intermediate banks are permitted to adjust the boundaries of their facility-based assessment areas to include only those contiguous census tracts within a county that such banks can reasonably be expected to serve. The agencies' determination that large banks, but not small and intermediate banks, should be required to delineate facility-based assessment areas composed of whole counties balances multiple competing considerations.

On the one hand, the agencies believe that requiring large banks to delineate facility-based assessment areas composed of whole counties helps to encourage those banks to serve low- or moderate-income individuals and census tracts in counties where the bank's deposit-taking facilities are located and helps to safeguard and support fair lending. In particular, requiring a bank to delineate facility-based assessment areas composed of whole counties could reduce the risk that a facility-based assessment area may exclude low- or moderate-income or majority-minority census tracts from the facility-based assessment area. In addition, and as discussed in greater detail in the section-by-section analysis of final § __.24, whole-county delineations facilitate the application of the Community Development Financing Test because the relevant metrics and benchmarks are calculated at the county level, and cannot be calculated at the census tract level without increasing the reporting burden on banks. Similarly, and as discussed in the section-by-section analysis of § __.28, whole-county delineations for large banks facilitate the final rule's approach to weighting facility-based assessment area conclusions because these weights are based on a combination of a bank's retail loan and deposits data, and deposits data are reported at the county level for large banks with assets of over $10 billion, pursuant to final § __.42(b)(3). Under an alternative approach in which large banks are able to delineate partial-county facility-based assessment areas, to calculate a weight for each area, large banks with assets over $10 billion would need to report deposits data at a more granular geographic level, such as census tracts, which the agencies believe would increase burden and privacy concerns.

On the other hand, the agencies have considered that requiring banks to delineate facility-based assessment areas composed of whole counties could result in facility-based assessment areas that are challenging for some large banks to serve, and may have an impact on compliance burden, such as costs associated with monitoring the bank's performance in and relevant benchmarks across the entire county, rather than a smaller geographic area. This is particularly the case with very large counties or counties with dividing geographic features ( e.g., a large body of water that divides the county in two) in which a bank has a limited presence.

The agencies believe that the final rule strikes an appropriate balance between these competing considerations. In circumstances in which large banks cannot serve their whole counties due to geographic barriers, limited presence, or other factors, the agencies would take these factors into consideration as performance context when evaluating a large bank's performance in such a facility-based assessment area, as is generally the case under existing standards. Accordingly, the agencies believe that the application of performance context appropriately mitigates these concerns with respect to this final rule's whole-county delineation requirement for large banks, while retaining the benefits of the overall approach as described above. For these reasons, final § __.16(b)(2) requires large banks to delineate facility-based assessment areas composed of whole counties.

By contrast, final § __.16(b)(3) allows small and intermediate banks to delineate partial-county facility-based assessment areas, as under the current rule, because these banks generally have less capacity than large banks to serve whole counties and to adapt to new regulatory requirements. The agencies have considered commenters' concerns that allowing partial-county delineations could result in the exclusion of low- or moderate-income, majority-minority, underserved, or rural census tracts from a facility-based assessment area. However, the agencies believe that other provisions of the final rule, including the limitations in final § __.16(c), discussed below, sufficiently address this risk.

Section __.16(c) Other Limitations on the Delineation of a Facility-Based Assessment Area

The Agencies' Proposal

Proposed § __.16(c) would retain the current rule that a bank's facility-based assessment areas may not reflect illegal discrimination and may not arbitrarily exclude low- or moderate-income census tracts, taking into account the bank's size and financial condition. The agencies stated in the proposal that these prohibitions affirm a bank's CRA obligation to serve its entire community, including low- or moderate-income individuals and census tracts, and should remain a vital component of the assessment area framework.

Comments Received

Several commenters provided feedback regarding the proposed limitations on the delineation of facility-based assessment areas in proposed § __.16(c). These commenters generally recommended that the agencies strengthen the prohibitions that a bank's facility-based assessment areas may not reflect illegal discrimination and may not arbitrarily exclude low- or moderate-income census tracts. For example, a commenter recommended clarifying under what circumstances a bank's assessment areas would be deemed to reflect illegal discrimination and suggested that the agencies establish a rebuttable presumption that a bank's facility-based assessment area reflects illegal discrimination where its facility-based assessment area consists of a partial political subdivision that excludes contiguous neighborhoods of color. Many commenters stated that racial demographics should be considered when delineating facility-based assessment areas, emphasizing that minority communities should not be arbitrarily excluded. For example, a commenter suggested that where a small or intermediate bank delineates a facility-based assessment areas containing part of a county, examiners should review the partial-county delineation to ensure that it does not unreasonably exclude minority communities; if examiners determine the bank has unreasonably excluded minority communities, this finding should adversely impact the bank's CRA rating.

Final Rule

The agencies are adopting the limitations on the delineation of facility-based assessment areas in proposed § __.16(c) substantially as proposed. Relative to the proposal, the final rule includes drafting changes to clarify that the bank's capacity and constraints, including its size and financial condition, are considerations that the agencies will take into account in determining whether a facility-based assessment area arbitrarily excludes low- or moderate-income census tracts.

The agencies acknowledge comments that recommended more specific and stringent standards to safeguard against illegal discrimination and arbitrary exclusion. Whether a facility-based assessment area reflects illegal discrimination is a fact-and-circumstances-specific determination, and for this reason, the agencies are not adopting more specific standards, such as the rebuttable presumption suggested by some commenters, within the regulatory text. The agencies note that other parts of the final rule, such as the adverse effect of discriminatory or other illegal credit practices provided in final § __.28(d), help safeguard and support fair lending, consistent with the agencies' goal of confirming that CRA and fair lending responsibilities are mutually reinforcing. Moreover, consistent with current CRA examination procedures, examiners will continue to review a bank's delineation of any facility-based assessment areas, whether composed of partial or whole counties, for compliance with the requirements of § __.16, which includes ensuring that the facility-based assessment area does not reflect illegal discrimination and does not arbitrarily exclude any low- or moderate-income areas.

Section __.16(d) Military Banks

The Agencies' Proposal

Proposed § __.16(d) would retain the flexibility in the current rule afforded to a military bank whose customers are not located within a defined geographic area to delineate its entire deposit customer base as its assessment area, consistent with the CRA statute.

Comments Received

As discussed in the section-by-section analysis of § __.12, a commenter recommended expanding the proposed definition of “military bank” to include a branch located on a military installation so that such a branch could delineate its entire deposit customer base as an assessment area, as provided in proposed § __.16(d), regardless of whether the bank as a whole qualifies as a military bank. As an alternative to expanding the “military bank” definition in this way, the commenter suggested allowing a bank that operates a branch on a military installation to delineate a geographic-based facility-based assessment area defined by the boundaries of the military installation. The commenter explained that one of these alternatives is necessary because it can be challenging for a branch located on a military installation to serve a broader geographic area given restrictions on public access to military installations.

Final Rule

The agencies are finalizing a modified version of proposed § __.16(d). The final rule provides that, notwithstanding the other requirements of § __.16, a military bank whose customers are not located within a defined geographic area may delineate the entire United States and its territories as its sole facility-based assessment area. The final rule uses the defined term “facility-based assessment area,” rather than “assessment area” as proposed, to clarify that the area is not a retail lending assessment area or outside retail lending area, which would be evaluated only under the Retail Lending Test. In addition, the agencies believe that the term “sole” clarifies that a military bank that elects to delineate its facility-based assessment area pursuant to § __.16(d) would have only one facility-based assessment area, and would not delineate other geographic areas for evaluation.

The agencies considered the challenges identified by commenters regarding the operation of branches on military installations. However, the agencies have determined not to modify the facility-based assessment area delineation requirements for these branches. The agencies believe that the final rule approach is sufficiently flexible such that banks that operate branches on military installations, or in other areas where public access is restricted, would not be penalized for doing so. In particular, the agencies expect that examiners would consider the public accessibility of a branch as performance context when evaluating the bank's performance in the facility-based assessment area surrounding the branch. Other areas of the final rule also permit examiners the flexibility to consider the unique circumstances of branches on military installations. For example, pursuant to final § __.22(c), in the case of a bank that operates a branch on a military installation but that does not meet or surpass the Retail Lending Volume Screen threshold in the facility-based assessment area, examiners could consider the restrictions on public access to the branch as part of the bank's institutional capacity and constraints.

Section __.16(e) Use of Facility-Based Assessments Areas

As under the current rule, proposed § __.16(e) stated that the agencies use the facility-based assessment areas delineated by a bank in their evaluation of the bank's CRA performance unless the agencies determine that the facility-based assessment areas do not comply with the requirements of proposed § __.16.

The agencies did not receive any comments on this aspect of the proposal. As such, the agencies are finalizing § __.16(e) as proposed.

Section __.17 Retail Lending Assessment Areas

In proposed § __.17, the agencies proposed a new requirement for large banks to delineate retail lending assessment areas where a large bank has concentrations of home mortgage or small business loans outside of its facility-based assessment areas. The agencies proposed to evaluate a large bank's performance in retail lending assessment areas under the proposed Retail Lending Test, but not under other performance tests. As stated in the proposal, the agencies intended the proposed retail lending assessment area approach, as with facility-based assessment areas, to establish local communities in which a bank is evaluated for its CRA performance, and to reflect ongoing changes in the banking industry. The agencies further stated in the proposal that evaluating large banks' retail lending performance on a local basis in retail lending assessment areas would accord with CRA's focus on a bank's local performance in helping to meet community credit needs, promote transparency by providing useful information to the public and banks regarding their performance in specific markets, and improve parity between banks that lend primarily through branches and those banks with different business models.

The agencies received a significant amount of feedback related to the retail lending assessment area proposal from a wide array of commenters. Commenters expressed a range of views regarding the overall retail lending assessment area approach, with many commenters supporting the proposal, and many other commenters opposing it, especially due to concerns about the compliance burden of the proposal. Commenters also provided feedback on specific aspects of the retail lending assessment area proposal, including which large banks should be required to delineate retail lending assessment areas, geographic requirements for retail lending assessment areas, and the number and types of retail loans that would trigger the retail lending assessment area requirement.

For the reasons discussed below, the agencies are including the retail lending assessment area approach in the final rule. However, in response to commenter feedback, the agencies are adopting several modifications to the retail lending assessment area proposal to better align the retail lending assessment area approach with the agencies' policy objectives. In particular, and as described below, the final rule (1) tailors the retail lending assessment area requirement by exempting large banks that conduct more than 80 percent of their retail lending in facility-based assessment areas from the retail lending assessment area requirement; (2) reduces the number of retail lending assessment areas that affected large banks will need to delineate by increasing the proposed home mortgage loan and small business loan count thresholds for triggering retail lending assessment areas; (3) reduces the number of product lines evaluated in retail lending assessment areas by modifying the evaluation of a large bank's retail lending performance in retail lending assessment areas so that only closed-end home mortgage loans and small business loans are evaluated, and only if they exceed the applicable loan count threshold; and (4) narrows the geographic scope of certain retail lending assessment areas by tailoring the proposed geographic requirements for retail lending assessment areas in the nonmetropolitan area of a State to exclude any counties in which a large bank did not originate any reported closed-end home mortgage loans or small business loans.

Overall Retail Lending Assessment Area Approach

The Agencies' Proposal

To facilitate evaluation of whether and to what extent banks are meeting the credit needs of their entire communities, proposed § __.17 complemented the existing framework for evaluating large banks' retail lending in facility-based assessment areas by requiring large banks to delineate retail lending assessment areas where they have concentrations of certain retail loans ( i.e., home mortgage loans or small business loans) outside of facility-based assessment areas. The agencies proposed to evaluate a large bank's performance in retail lending assessment areas under the proposed Retail Lending Test, but not under other performance tests.

Comments Received

Numerous commenters addressed the overall retail lending assessment area approach. Many commenters expressed support for establishing retail lending assessment areas, but many others either opposed the concept altogether or recommended changes to reduce the compliance burden associated with retail lending assessment areas. Additionally, some commenters offered views on alternative ways to evaluate retail lending outside of facility-based assessment areas.

Support for retail lending assessment areas. A number of commenters expressed support for the agencies' proposal to require retail lending assessment areas where large banks do not maintain deposit-taking facilities but have concentrations of home mortgage loans and/or small business loans. Many of these commenters asserted that the agencies' proposal represents an appropriate response to changes in banking over time, such as the increase in retail lending offered via non-branch-based delivery channels and would improve parity in the same geographic area between banks that operate via branches and banks that begin to make loans in the same market without establishing a branch. For example, some commenters stated that the proliferation of online lending and other non-branch-based delivery channels increasingly allows for a bank to serve a local community without the presence of a deposit-taking facility located within the community, and that the CRA evaluation framework should evolve to reflect this development. Other commenters noted that the retail lending assessment area approach would ensure that a large bank that closes its deposit-taking facilities in a geographic area but continues to conduct a significant volume of retail lending through online or other channels in that area, would continue to have that retail lending evaluated on a local basis. A few commenters also stated that evaluating banks in retail lending assessment areas would be consistent with the purpose and principles of the CRA statute.

Commenters that supported the overall retail lending assessment area approach also pointed to various benefits that they believe would follow from the approach. For example, some commenters noted that the proposed retail lending assessment area approach, together with the proposed outside retail lending area approach, would result in the majority of bank retail lending being evaluated under the CRA, and would increase bank accountability for serving low- and moderate-income communities as a result. A number of commenters stated that the proposed retail lending assessment area approach would improve CRA coverage in underserved geographic areas, with various commenters suggesting that rural areas, banking deserts, impoverished communities, majority-minority communities, and Native Land areas would particularly benefit from the proposed approach. A few commenters stated that expanding assessment areas beyond facility-based assessment areas would likely result in more lending to low- and moderate-income borrowers and communities, noting that research demonstrates that banks make a higher percentage of their loans to low- and moderate-income borrowers and in low- and moderate-income census tracts in their assessment areas compared to areas not designated as assessment areas.

Policy concerns with retail lending assessment areas. Conversely, many commenters opposed or raised significant concerns with the proposed retail lending assessment area approach.

First, many of the commenters that opposed or expressed concerns with the proposed retail lending assessment area approach asserted that the addition of retail lending assessment areas would introduce significant complexity into CRA evaluations and impose substantial compliance burdens on banks. Several of these commenters estimated that, under the proposal, some banks would be required to delineate large numbers of new retail lending assessment areas and expressed that monitoring where a bank might trigger retail lending assessment areas, including retail lending performance metrics and performance ranges in those areas, would entail significant compliance costs. A few commenters stated that the compliance burden associated with the retail lending assessment area proposal would be particularly acute for smaller large banks ( e.g., large banks with assets under $10 billion), which these commenters said are not currently staffed or equipped with appropriate technology to satisfy CRA requirements in retail lending assessment areas. At least one commenter stated that the compliance burden of the proposed retail lending assessment area approach was not worth the relatively low weight that retail lending assessment areas would typically receive under the proposed Retail Lending Test, based on lower levels of bank retail lending and deposit dollar volumes in these markets.

Some commenters that emphasized the compliance burdens associated with the retail lending assessment area proposal offered suggestions for how the agencies could modify the proposal to reduce the compliance impact. For example, many of these commenters supported an exemption from the retail lending assessment area requirements for primarily branch-based banks and increased loan count thresholds for triggering retail lending assessment areas, as described below. At least one commenter suggested including a cap on the number of retail lending assessment areas that a large bank must delineate to mitigate concerns that some banks would be required to delineate a large number of retail lending assessment areas. At least one other commenter suggested that the agencies should create data and mapping tools to assist banks with delineating assessment areas.

Second, some commenters that opposed or expressed concerns with the proposed retail lending assessment area approach warned of unintended consequences that they believed would result from retail lending assessment areas. For example, many commenters expressed concerns that the proposed retail lending assessment areas could result in banks limiting retail lending activity, which some of these commenters asserted would be contrary to the intent of the CRA and the agencies' proposal. In particular, commenters warned that banks might curtail their retail lending outside of facility-based assessment areas, such as by closing loan production offices and reducing indirect lending, to avoid surpassing the loan count thresholds that would trigger the delineation of retail lending assessment areas. Further, commenters warned that banks that have already surpassed the loan count thresholds and would therefore be required to delineate retail lending assessment areas might withdraw from these geographic areas, particularly if it would be too challenging to meet performance standards in a retail lending assessment area without a physical presence or local community knowledge or expertise.

Other commenters identified other potential unintended consequences of retail lending assessment areas. For example, several commenters asserted that the addition of retail lending assessment areas would competitively disadvantage banks relative to nonbank lenders and credit unions who are not subject to the CRA, thereby exacerbating trends of home mortgage and small business lending shifting outside the regulated banking system. A few commenters stated that as banks dedicate more resources to serve retail lending assessment areas, banks' capacity to be responsive to community needs within facility-based assessment areas would necessarily be reduced. A few commenters suggested that the proposed retail lending assessment area approach could cause banks to rethink their business models, including by slowing their deposit and loan growth through digital channels. Another commenter stated that expanding assessment areas would make it even harder for low-income areas that need banking services to be served, noting that many low-income individuals are disadvantaged when relying on online services.

Third, some commenters expressed concerns that the retail lending assessment area proposal would not target geographic areas with the greatest needs and would not benefit low- or moderate-income and underserved communities. For example, a few commenters made the point that subjecting digital banks to retail lending assessment areas would not target underserved geographies with the greatest credit needs, with at least one such commenter recommending that the agencies focus on incentivizing digital lenders to conduct CRA activities where there is the most need. Other commenters asserted that retail lending assessment areas would be located predominantly in large cities and would not benefit underserved areas outside of these cities. At least one commenter indicated that retail lending assessment areas would not address the problem of a bank taking deposits from a market but not lending in that market, and would not prevent a bank from engaging in redlining.

Legal concerns regarding retail lending assessment area proposal. Some commenters opposed to the proposed retail lending assessment area approach raised legal concerns regarding this aspect of the proposal. First, some commenters questioned whether the agencies' analysis supporting the retail lending assessment area proposal was legally adequate under the Administrative Procedure Act. Several commenters suggested that the agencies' justification for the retail lending assessment area proposal did not demonstrate that the agencies engaged in reasoned decision-making, for example, stating that the agencies failed to demonstrate the potential benefits of retail lending assessment areas would exceed the significant burden they would impose on banks or otherwise did not provide an adequate rationale for specific aspects of the retail lending assessment area proposal. A few commenters stated that the proposal did not include enough information for commenters to be able to assess the impact of the retail lending assessment area proposal, such as where particular retail lending assessment areas would be located.

Second, some commenters questioned whether the agencies have the legal authority under the CRA to evaluate banks' retail lending in geographic areas where they do not maintain deposit-taking facilities. For example, these commenters pointed to certain provisions of the statute to support the proposition that a bank's community refers only to the geographic areas around deposit-taking facilities, including references to banks' local communities in the findings and purpose section of the statute, the provisions of the statute regarding written evaluations, and the provision concerning banks that serve military personnel.

Alternatives to retail lending assessment areas. Some commenters that opposed or expressed concerns with retail lending assessment areas suggested a variety of alternative approaches for evaluating banks' retail lending outside of facility-based assessment area.

First, some commenters suggested evaluating all of a large bank's retail lending outside of its facility-based assessment areas at a broader geographic level, such as at the State or institution level only. In general, these commenters stated that an institution-wide evaluation would: (1) provide a more complete view of a bank's retail lending distributions; (2) maximize geographic coverage; and (3) afford neutral treatment to a bank's business model, consistent with the agencies' goals for CRA modernization. At least one of these commenters suggested that an institution-level evaluation could be supplemented by providing banks positive consideration for strong lending performance in underserved geographic areas.

Second, other commenters suggested evaluating large banks in retail lending assessment areas only at a bank's option, emphasizing the compliance burden of the retail lending assessment area proposal.

Third, some commenters suggested that banks should be required to delineate assessment areas in geographic areas with the greatest need, such as rural areas, majority-minority areas, and Native Land areas. These commenters generally expressed concerns that, under the proposed approach, retail lending assessment areas would not necessarily cover these geographic areas, and thus would not necessarily incentivize banks to increase lending in the areas of greatest need.

Finally, many commenters recommended requiring banks to delineate an assessment area where they have concentrations of deposits outside of facility-based assessment areas, either as an alternative or in addition to the agencies' proposed retail lending assessment areas. Some of these commenters provided the view that, compared to retail lending assessment areas, deposit-based assessment areas would be more consistent with the CRA's emphasis on banks' reinvesting in the communities from which they draw deposits. Some commenters added that deposit-based assessment areas would be especially important for capturing banks whose business models involve collecting deposits through non-branch channels, but that do not necessarily engage in lending in the communities from which those deposits are drawn. A few commenters suggested that the agencies could wait until the proposed deposit data collection and reporting provisions are implemented, and then revisit the issue of whether to require delineation of deposit-based assessment areas. In contrast, another commenter opposed establishing deposit-based assessment areas because it would require deposit data collection and reporting requirements for all large banks.

Final Rule

For the reasons discussed below, the agencies are including the retail lending assessment area approach in the final rule. However, in response to commenter feedback and in consideration of the agencies' policy objectives, the agencies are also adopting several modifications to the retail lending assessment area proposal. Specifically, the final rule: (1) tailors the retail lending assessment area requirement to a narrower subset of large banks by exempting large banks that conduct more than 80 percent of their retail lending in facility-based assessment areas from the retail lending assessment area requirement; (2) reduces the number of retail lending assessment areas that affected large banks will need to delineate by increasing the proposed home mortgage loan and small business loan count thresholds for triggering retail lending assessment areas; (3) reduces the number of product lines evaluated in retail lending assessment areas by modifying the evaluation of a large bank's retail lending performance in retail lending assessment areas so that only closed-end home mortgage loans and small business loans are evaluated, and only if they exceed the applicable loan count threshold; and (4) narrows the geographic scope of certain retail lending assessment areas by tailoring the proposed geographic requirements for retail lending assessment areas in the nonmetropolitan area of a State to exclude any counties in which a large bank did not originate any reported closed-end home mortgage loans or small business loans. These modifications to the proposal are discussed in detail below.

Legal authority. The agencies have considered all of the issues raised by commenters regarding their legal authority to require large banks to delineate retail lending assessment areas and to evaluate the retail lending performance of large banks in those areas. Consistent with the agencies' views stated in the proposal, and upon further deliberation and consideration, the agencies have concluded that the CRA authorizes the agencies to evaluate large banks' retail lending performance in geographic areas where banks have concentrations of retail loans. In particular, the CRA requires the agencies to assess a bank's record of meeting the credit needs of its entire community, without defining what constitutes a bank's entire community. Further, the references to a bank's local communities in the congressional findings and purpose section of the statute do not define what geographic areas constitute a bank's local communities.

The CRA includes provisions that specifically relate to the preparation of written evaluations that support the conclusion that the geographic areas where a bank maintains deposit-taking facilities are considered part of the bank's entire community. However, nothing in these provisions indicates that a bank's entire community consists of only these geographic areas. Similarly, the provision of the statute concerning banks that serve the needs of military personnel, also cited by some commenters, does not support the view that other types of banks' local communities or entire communities are limited to areas with geographic proximity to a deposit-taking facility.

The CRA delegates authority to the agencies to prescribe regulations to carry out the purposes of the CRA. To achieve its purposes, the CRA requires the agencies to assess whether a bank is meeting the credit needs of all parts of the communities it serves, without excluding the low- and moderate-income neighborhoods in those communities. The agencies have determined, based on their supervisory experience and expertise, that a large bank's “entire community” can reasonably be considered to include areas where the bank is conducting meaningful banking activity by making a substantial number of retail loans. The agencies have concluded that retail lending assessment areas fall within the requirements imposed on the agencies by the CRA to assess a bank's record of meeting the credit needs of its entire community, and properly further the purpose of the statute to encourage banks to meet the credit needs of all parts of communities in which they meaningfully operate and that they serve.

Policy objectives of retail lending assessment areas. In developing the overall retail lending assessment area approach in the proposed and final rules, the agencies seek to achieve several different policy objectives.

First, the overall retail lending assessment area approach adapts to ongoing changes to the banking industry. The current CRA regulations generally define assessment areas in connection with a bank's main office, branches, and deposit-taking ATMs. However, the agencies recognize that changes in technology and in bank business models have resulted in banks' entire communities extending beyond the geographic footprint of the bank's main office, branches, and other deposit-taking facilities. To reflect these changes in banking, and to make the assessment area framework more durable over time, the agencies are complementing the existing facility-based assessment area framework in the final rule with a retail lending assessment area requirement tailored to certain large banks.

Second, the retail lending assessment area approach improves parity in the evaluation framework for large banks with different business models. For example, under the current approach, a bank that maintains branches in multiple States and conducts retail lending in the geographic areas served by those branches would have its retail lending evaluated in multiple assessment areas based on the location of its branches; however, an online bank that conducts a similar amount of retail lending in the same geographic areas would not be required to delineate assessment areas in these areas under current standards, and would only be evaluated in one assessment area based on the location of the bank's main office. Under the retail lending assessment area approach of the final rule, however, the online bank may be required to delineate retail lending assessment areas in the geographic areas where it makes a concentration of retail loans, or these loans may be included in the bank's outside retail lending area evaluation, resulting in more comparable CRA evaluations for both banks despite their different business models.

Third, in accounting for ongoing changes to the banking industry and improving parity in the evaluation framework for large banks with different business models, the agencies also seek to retain an emphasis on a large bank's performance in meeting the credit needs of the local communities it serves, consistent with the focus of the CRA. Specifically, the agencies seek to emphasize performance in specific geographic areas by assigning conclusions that reflect the large bank's retail lending performance in those areas, rather than only assigning conclusions at an aggregate level. For example, under the retail lending assessment area approach, a bank that is not meeting the retail credit needs of a specific geographic area in which it has made a significant volume of retail loans will receive a conclusion of “Needs to Improve” or “Substantial Noncompliance” in that retail lending assessment area, reflecting the bank's performance in that specific geographic area. As discussed below, the agencies considered an alternative approach in which all of a large bank's retail lending outside of its facility-based assessment areas would only be evaluated in the aggregate ( i.e., assigning a single conclusion that reflects the bank's performance with respect to all of its retail lending outside of its facility-based assessment areas), rather than assigning conclusions that reflect the bank's performance in specific geographic areas outside of the bank's facility-based assessment areas where the bank has concentrations of retail lending. For the reasons discussed below, the agencies are not adopting this alternative approach.

Fourth, the retail lending assessment area approach, in combination with the outside retail lending area approach discussed in the section-by-section analysis of final § __.18, increases the share of retail lending by large banks that is considered in CRA evaluations. Under the current approach, retail lending conducted outside of a bank's assessment areas is not evaluated using the Lending Test criteria; this lending is only considered if the bank has adequately addressed the needs of borrowers within its assessment areas, and does not compensate for poor lending performance within the bank's assessment areas. The retail lending assessment area approach in the final rule applies a metrics-based evaluation approach to retail loans in retail lending assessment areas (and outside retail lending areas) and generally increases the share of retail lending by banks that is evaluated in this manner.

Finally, the agencies seek to achieve the policy objectives described above while also appropriately adjusting for the level of complexity and impact on large banks that would have new retail lending assessment area evaluations. The agencies acknowledge that the retail lending assessment area approach may result in additional compliance costs for large banks; in particular, the agencies have considered feedback from industry commenters that the compliance costs related to the retail lending assessment area approach include costs associated with identifying and delineating retail lending assessment areas, costs associated with reporting the location of retail lending assessment areas, potential costs associated with monitoring performance in retail lending assessment areas, and potential costs associated with meeting performance standards in retail lending assessment areas. The agencies believe that aggregate compliance costs related to the retail lending assessment area approach is correlated with the number of large banks that are required to delineate one or more retail lending assessment areas, the total number of retail lending assessment areas overall, and the number of product lines evaluated within retail lending assessment areas. The retail lending assessment area approach in the final rule is intended to address compliance cost concerns, while simultaneously ensuring that the agencies' other objectives, described above, are achieved.

Modifications to the proposed retail lending assessment area approach. In developing the final rule, the agencies have considered the proposed retail lending assessment area approach in light of the policy objectives described above and public comments on this aspect of the proposal. The agencies continue to believe that evaluating the retail lending performance of certain large banks in geographic areas where they have concentrations of retail loans accomplishes the agencies' policy objectives; accordingly, the final rule includes a retail lending assessment area approach. However, as noted above, the final rule includes several modifications to the retail lending assessment area proposal to better align the retail lending assessment area approach with the agencies' policy objectives.

First, and as described below in the section-by-section analysis of final § __.17(a), the agencies are adopting the alternative approach discussed in the proposal of exempting from the retail lending assessment area requirement large banks that conduct more than 80 percent of their retail lending in facility-based assessment areas. The agencies believe that this exemption appropriately narrows the scope of the retail lending assessment area requirement to large banks that conduct a significant portion ( i.e., 20 percent or more) of their retail lending outside of facility-based assessment areas. This exemption further recognizes that conclusions assigned to the retail lending performance of predominantly branch-based banks in their facility-based assessment areas typically already capture a large majority of these banks' retail lending. In addition, the agencies believe this exemption aligns with the other objectives of adapting to changes in the banking landscape, improving parity in the evaluation framework for branch-based and non-branch based large banks, and minimizing the number of retail lending assessment areas and the number of affected large banks while still achieving the agencies' other policy objectives.

Second, and as described below in the section-by-section analysis of final § __.17(c), the agencies are increasing, relative to the proposal, the respective loan count thresholds in the final rule for triggering the requirement to delineate retail lending assessment areas from the proposed levels to 150 closed-end home mortgage loans and 400 small business loans. In response to changes to the major product lines evaluated under the Retail Lending Test discussed in the section-by-section analysis of final § __.22(d), the agencies are also limiting the proposed home mortgage loan count threshold to closed-end home mortgage loans only. In comparison to the proposal, which would have required a large bank to delineate a retail lending assessment area if it originated at least 100 home mortgage loans ( i.e., open-end home mortgage loans or closed-end home mortgage loans) or 250 small business loans in a geographic area, the final rule increases these loan count thresholds by 50 percent (for closed-end home mortgage loans only) and 60 percent for small business loans. The agencies believe that these revised loan count thresholds in the final rule strike an appropriate balance between, on the one hand, increasing the share of retail lending that is considered in CRA evaluations and the share of retail lending with respect to which a bank's performance is assigned a conclusion in a specific geographic area, and on the other hand, minimizing the number of retail lending assessment areas and affected large banks while still achieving the agencies' other policy objectives.

Third, and as described below in connection with the section-by-section analysis of final § __.17(d), the agencies are modifying the evaluation of a large bank's retail lending performance in retail lending assessment areas so that the only retail product lines that may evaluated as a major product line in a retail lending assessment area are closed-end home mortgage loans and small business loans. Further, closed-end home mortgage loans or small business loans are major product lines in a retail lending assessment area only if the product line exceeds the applicable loan count threshold in the retail lending assessment area ( i.e., 150 closed-end home mortgage loans, and 400 small business loans). As a result, the number of product lines evaluated in retail lending assessment areas will decrease relative to the proposed approach. The agencies believe that this modification will appropriately focus the retail lending evaluation in retail lending assessment areas on the particular concentration of retail loans responsible for triggering the retail lending assessment area and, in so doing, will reduce the potential compliance costs associated with monitoring performance in these areas.

Finally, and as described below with the section-by-section analysis of final § __.17(b), the agencies are tailoring the geographic requirements for retail lending assessment areas located in the nonmetropolitan area of a State to exclude any counties in which a large bank did not originate any reported closed-end home mortgage loans or small business loans during the calendar year. As a result, the geographic scope of these retail lending assessment areas will be more focused in comparison to the proposed approach and will limit the evaluation of a large bank's performance in these retail lending assessment areas to the counties in which a bank has conducted retail lending.

Impact of modifications to the proposed retail lending assessment area approach. To assess the cumulative impact of the modifications to the proposed retail lending assessment area approach, the agencies conducted an analysis of the proposed retail lending assessment area approach and the final rule approach using data from the 2018, 2019, and 2020 calendar years. Specifically, assuming that the proposed approach and the final rule approach had been in effect during those years, the agencies calculated the number and share of large banks that would have had to delineate one or more retail lending assessment areas in any of those three years (“affected large banks”), and the number of retail lending assessment areas that would have been delineated in aggregate across all affected large banks under the proposed and final rule approaches, respectively. This analysis, shown in Table 1, showed that the modifications adopted in the final rule, relative to the proposal, would have reduced the number and percentage of affected large banks by about half, from 125 to 63 large banks, and from 33.5 percent to 16.9 percent of large banks in the sample. In addition, the modifications adopted in the final rule approach would have reduced the number of retail lending assessment areas delineated across all affected large banks by almost half, from 1,591 to 863 retail lending assessment areas.

The agencies also analyzed the distribution of the number of retail lending assessment areas across affected large banks that would have been delineated had the proposed approach and the final rule approach been in effect during the 2018, 2019, and 2020 calendar years. As shown in Table 2, among large banks that would have had been required to delineate one or more retail lending assessment areas during the period from 2018 to 2020, most affected large banks would have been required to delineate five or fewer retail lending assessment areas. Under the final rule approach, 24 affected large banks would have been required to delineate more than five retail lending assessment areas, compared to 38 affected large banks under the proposed approach.

Availability of data tools. The agencies recognize that large banks that are not exempt from the requirement to delineate retail lending assessment areas will bear some compliance costs, such as costs associated with identifying and delineating retail lending assessment areas, and the costs associated with reporting the location of retail lending assessment areas. In addition, large banks may expend further resources to monitor their performance and meet performance standards in retail lending assessment areas. The agencies will develop and make freely available tools that would leverage reported loan data to help banks identify geographic areas where retail lending assessment areas may be required, and to calculate the retail lending distribution benchmarks that applied to those retail lending assessment areas in recent years. The agencies believe that such tools would also be responsive to some commenters' concerns that large banks may lack the technology and staffing necessary to satisfy CRA requirements in retail lending assessment areas.

Impact of retail lending assessment areas on retail lending outside of facility-based assessment areas. The agencies acknowledge that commenters disagreed on the likely impact of the proposed overall retail lending assessment area approach. In particular, some commenters stated that the approach would incentivize banks to improve their retail lending performance in retail lending assessment areas. Other commenters predicted that banks would reduce their retail lending outside of facility-based assessment areas to avoid the requirement to delineate retail lending assessment areas.

As further described in the section-by-section analysis of final § __.22, the agencies conducted an analysis using historical data to estimate the recommended conclusions that banks would have received had the final rule Retail Lending Test been in effect in 2018–2020. Regarding large banks' performance in retail lending assessment areas, the agencies estimate that 77.7 percent of retail lending assessment areas delineated by large banks included in the analysis would have received either a “Low Satisfactory,” “High Satisfactory,” or “Outstanding” recommended conclusion, which the agencies believe demonstrates that a “Low Satisfactory” or higher conclusion is generally attainable for large banks in retail lending assessment areas. The agencies further note that, while an estimated 20.6 percent of retail lending assessment areas would have received recommended conclusions of “Needs to Improve,” and 1.8 percent would have received a recommended conclusion of “Substantial Noncompliance,” only approximately 7 percent of large banks included in the analysis would have received a “Needs to Improve” Retail Lending Test conclusion when overall retail lending performance is calculated at the institution level (and no large banks included in the analysis would have received a “Substantial Noncompliance” conclusion at the institution level). This analysis informs the agencies' belief that the retail lending assessment area approach is reasonable and not unduly burdensome, because the retail lending of a significant majority of affected banks in this analysis is consistent with a “Low Satisfactory,” “High Satisfactory,” or “Outstanding” estimated conclusion, both for retail lending assessment areas, and at the institution level.

Alternatives to retail lending assessment areas. In developing the overall retail lending assessment area approach in the proposed and final rules, the agencies considered alternative ways of modernizing the CRA evaluation framework to provide a more comprehensive evaluation of a large bank's retail lending, including in areas outside of facility-based assessment areas.

First, as suggested by some commenters, the agencies considered an approach under which a large bank's retail lending outside of its facility-based assessment areas would be evaluated only at a broader geographic level, such as at the State or institution level. The agencies decided not to adopt this approach for large banks for several reasons. Under this approach, a bank would not receive a conclusion reflecting its retail lending performance in any specific geographic area outside of its facility-based assessment areas, including specific geographic areas in which it originated a significant number of loans. Compared to such an aggregate approach, the agencies believe that assigning conclusions that reflect a large bank's retail lending performance in retail lending assessments area comports with the CRA's focus on a bank meeting the credit needs of the local communities it serves. Further, assigning conclusions that reflect a large bank's performance in geographic areas where it has concentrations of retail loans provides more specific information to the bank and the public regarding the bank's performance particular geographic areas. Additionally, an institution-level only approach to evaluating a large bank's retail lending outside of its facility-based assessment areas would not achieve the agencies' objective of improving parity in the CRA evaluation framework for large banks with different business models. For example, under the institution-level only approach, a large branch-based bank would have much of its retail lending evaluated within its facility-based assessment areas, and would be assigned conclusions reflecting the bank's retail lending performance in those areas, with only its remaining retail lending evaluated on an aggregate basis at the institution level. By contrast, a large online bank with a similar volume and geographic dispersion of retail lending would have most of its retail lending ( i.e., all of its retail lending outside the sole assessment area around the bank's main office) evaluated on an aggregate basis, with no conclusions that reflect performance in specific areas. Under the retail lending assessment area approach of the final rule, however, the large online bank may be required to delineate retail lending assessment areas, and the agencies would assign conclusions reflecting the large bank's retail lending performance in these retail lending assessment areas, resulting in more comparable CRA evaluations for both banks despite their different business models.

Second, the agencies considered making retail lending assessment areas optional but not required, as some commenters requested. However, the agencies believe that an optional evaluation approach would not achieve the agencies' policy objectives since banks could opt out of retail lending assessment areas entirely under this alternative. The agencies are concerned that over time, an optional retail lending assessment area approach would make the assessment area framework less durable to ongoing changes in the banking industry, particularly with any expansion of digital banking. Specifically, if an increasing share of large bank retail lending occurs outside of facility-based assessment areas, and if the agencies could evaluate that lending in retail lending assessment areas only at a bank's option, the policy objectives of increasing the share of retail lending that is considered in CRA evaluations and that is evaluated in specific geographic areas would be undermined. Further, the policy objective of improving parity in the evaluation framework for banks with different business models would be undermined if, for example, non-branch-based banks could opt out of the retail lending assessment area approach.

Third, as suggested by some commenters, the agencies considered requiring large banks to delineate assessment areas in geographic areas with the greatest credit needs, rather than delineating retail lending assessment areas. However, the agencies note that CRA encourages banks to help meet the credit needs of the local communities they serve, and does not require banks to begin serving communities they do not already serve. In addition, the agencies believe it is appropriate to evaluate banks' retail lending performance in the communities it serves, regardless of the presence of other banks in those communities. Further, regarding the concern expressed by commenters that retail lending assessment areas would only be located in large cities, the agencies' analysis of the impact of the final rule Retail Lending Test using historical data indicates that there would have been a mixture of both metropolitan and nonmetropolitan areas in which one or more retail lending assessment areas were located.

Finally, the agencies considered requiring large banks to delineate deposit-based assessment areas in geographic areas outside of facility-based assessment areas where the bank draws a certain volume of deposits. The agencies have considered that there may be benefits to deposit-based assessment areas. However, the deposits data necessary to assess the potential impact of a potential deposit-based assessment area approach are not currently available because the FDIC's Summary of Deposits, which is the only source of information available on the geographic dispersion of bank deposits, apportions each bank's total deposits across its main office and its branches, all of which are located within its facility-based assessment areas, even when the deposits are collected from depositors outside of the bank's facility-based assessment areas. As a result, deposits collected from beyond a bank's facility-based assessment areas are assigned in the Summary of Deposits to branches within its facility-based assessment areas, making it impossible to determine how much of a bank's deposits were sourced outside of its facility-based assessment areas or from where those deposits were collected. Without such data, the agencies cannot determine, under various potential thresholds, the number of deposit-based assessment areas, the number of affected large banks, or the degree to which deposit-based assessment areas may capture retail lending outside of facility-based assessment areas. In addition, due to the lack of deposits data, the agencies are not able to analyze different policy options related to deposit-based assessment areas, such as whether the threshold for requiring delineation of a deposit-based assessment area should be a certain percentage of a large bank's total deposits in a geographic area, a certain dollar volume of deposits in a geographic area, a certain number of depositors in a geographic area, or based on other factors. For these reasons, the agencies did not adopt the deposit-based assessment area approach.

Section __.17(a) In General—Banks Subject to the Retail Lending Assessment Area Requirement

The Agencies' Proposal

The agencies proposed to apply the retail lending assessment area requirement solely to large banks, including large banks that elect to be evaluated under an approved strategic plan. In addition, the agencies also sought feedback on an alternative approach that would tailor the retail lending assessment area requirement by exempting large banks from the requirement to delineate retail lending assessment areas if such banks conduct a significant majority of their retail lending, such as more than 80 or 90 percent of their retail loans, inside their facility-based assessment areas. This exemption would exclude banks that are primarily branch-based from the retail lending assessment area requirement, reflecting the view that such banks' overall Retail Lending Test conclusion could be reasonably derived by focusing on the activity within their facility-based assessment areas. Under this alternative, the retail loans of an exempt bank outside of the bank's facility-based assessment areas would not be evaluated within a retail lending assessment area, but the agencies would evaluate this lending under the proposed outside retail lending area approach discussed in the section-by-section analysis of final § __.18.

Comments Received

Numerous commenters addressed the types of banks that should be subject to the proposed requirement to delineate retail lending assessment areas.

Tailoring of retail lending assessment area requirement by bank size. Some commenters supported the proposal not to apply the retail lending assessment area requirement to small and intermediate banks. As noted previously, a few commenters stated that the compliance burden associated with the retail lending assessment area proposal would be particularly acute for smaller large banks, with at least one such commenter recommending that the retail lending assessment area requirement should apply only to large banks with at least $10 billion in assets.

Conversely, a few commenters suggested expanding the universe of banks subject to retail lending assessment area requirement. Some of these commenters favored requiring at least some intermediate banks to delineate retail lending assessment areas. For example, at least one commenter asserted that intermediate banks, especially those with over $1 billion in assets, have sufficient capacity and knowledge of local markets to serve retail lending assessment areas. A few other commenters suggested that intermediate banks should be required to delineate retail lending assessment areas if they are not primarily branch-based. A few commenters asserted that all banks, including small banks and intermediate banks, should be evaluated in retail lending assessment areas because banks of any size may conduct a significant amount of lending activity outside of their facility-based assessment areas.

Tailoring of retail lending assessment area requirement by business model. Many commenters favored some form of an exemption from the requirement to delineate retail lending assessment areas for large banks that lend primarily within their facility-based assessment areas. In general, these commenters stated that it is not necessary to evaluate primarily branch-based banks in retail lending assessment areas because their retail lending is already concentrated in facility-based assessment areas. These commenters also stated that the retail lending assessment area requirement is appropriately applied to online banks but should not impose additional burden on traditional branch-based banks. These commenters offered various suggestions in terms of the percentage of retail lending that a large bank must conduct within its facility-based assessment areas to benefit from any exemption, with commenter suggestions generally ranging from 50 to 90 percent.

However, several other commenters opposed providing any exemption from the retail lending assessment area requirement for large banks that primarily lend within facility-based assessment areas. These commenters generally stated that large banks should be evaluated for their retail lending performance in all areas where they conduct a meaningful amount of lending, and that an exemption could result in substantial amounts of retail lending for which a conclusion is not assigned in a specific geographic area, especially in rural areas. At least one commenter stated that it is not necessary to exempt primarily branch-based banks from the retail lending assessment area requirement because the proposed approach would appropriately account for differences in bank business models by giving more weight to those assessment areas where a bank's retail lending is concentrated, while still holding banks accountable for performance wherever they conduct retail lending business.

Beyond an exemption for primarily branch-based banks, a few commenters offered alternative approaches for tailoring the retail lending assessment area requirement based on a large bank's business model. A few commenters suggested that the agencies should qualitatively assess a large bank's business model and practices to identify and exempt those banks whose lending and account-opening activities are not conducted through a branch network. At least one commenter asserted that the agencies should exempt strategic plan banks from the retail lending assessment area requirement to preserve the flexibility of the strategic plan option.

Final Rule

The agencies are adopting a modified version of proposed § __.17(a). Similar to the proposal, final § __.17(a)(1) provides that, based upon the criteria described in § __.17(b) and (c), a large bank must delineate retail lending assessment areas within which the agencies evaluate the bank's record of helping to meet the credit needs of its entire community pursuant to the Retail Lending Test.

However, as discussed below, the agencies are adopting an exemption from the retail lending assessment area requirement for large banks that conduct a substantial majority of their retail lending in facility-based assessment areas. Specifically, final § __.17(a)(2) provides that a large bank is not required to delineate retail lending assessment areas for a particular calendar year if, in the prior two calendar years, the large bank originated or purchased within its facility-based assessment areas more than 80 percent of its home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans (if automobile loans are a product line for the large bank), as described in paragraph II.a.1 of final appendix A.

In addition, final § __.17(a)(3) provides that if, in a retail lending assessment area delineated pursuant to § __.17(c), the large bank did not originate or purchase any reported loans in any of the product lines that formed the basis of the retail lending assessment area delineation pursuant to § __.17(c)(1) or (2) ( i.e., the closed-home mortgage loan and small business loan count thresholds), the agencies will not consider the retail lending assessment area to have been delineated for that calendar year. The agencies believe this limitation was implicit in the proposal, but that it is helpful for the final rule to explicitly state that the agencies will not evaluate a bank's retail lending performance in a retail lending assessment area in which a large bank did not originate or purchase any reported closed-end home mortgage loans or small business loans, as applicable, in the calendar year.

Application to large banks. The agencies continue to believe that it is appropriate to apply the retail lending assessment area requirement to large banks, but not small or intermediate banks. The agencies see significant benefits to increasing the share of retail lending for which a conclusion is assigned reflecting the bank's performance in a specific geographic area. However, the agencies believe that these benefits must be weighed against the potential additional compliance burden of the approach, such as compliance costs associated with identifying and delineating retail lending assessment areas, and reporting the location of retail lending assessment areas. On balance, the agencies believe it is appropriate to tailor the retail lending assessment area requirement to large banks, recognizing that large banks generally have more resources and therefore greater capacity than small and intermediate banks to adapt to new regulatory provisions such as retail lending assessment areas. The agencies note that, as discussed in the section-by-section analysis of final § __.18, under the final rule, the agencies will evaluate the retail lending performance of an intermediate bank, and a small bank that opts to be evaluated under the Retail Lending Test, in its outside retail lending area if the bank conducts a majority of its retail lending outside of its facility-based assessment areas.

The agencies have carefully considered comments regarding the potential burden that the retail lending assessment area approach may impose on large banks, including specific commenter suggestions for further tailoring the proposed requirement to a narrower subset of large banks. The agencies appreciate these concerns and suggestions and, as described below, are adopting an exemption to the retail lending assessment area requirements for primarily branch-based large banks.

Exemption for primarily branch-based large banks. To further tailor the application of the retail lending assessment area requirement, final § __.17(a)(2) sets forth an exemption from the retail lending assessment area requirement for certain large banks. Specifically, a large bank is not required to delineate retail lending assessment areas in a particular calendar year if, in the previous two calendar years, the large bank originated or purchased within its facility-based assessment areas more than 80 percent of its home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans (if automobile loans are a product line for the large bank). The 80 percent calculation is further described in paragraph II.a.1 of final appendix A.

The agencies believe that it is appropriate to exempt primarily branch-based large banks from the retail lending assessment area requirement for two main reasons. First, such an exemption would tailor the approach by focusing the retail lending assessment area framework on those large banks for which facility-based assessment area evaluations alone do not capture the vast majority of the bank's retail lending. For large banks conducting 80 percent or less of their retail lending within facility-based assessment areas, the agencies believe that evaluating retail lending performance in retail lending assessment areas is an appropriate way to update where large banks are locally evaluated for their retail lending performance. For large banks that conduct more than 80 percent of their retail lending within facility-based assessment areas, the agencies believe that a sufficient share of the bank's retail lending is already evaluated, and conclusions are already assigned reflecting the bank's retail lending performance, in specific geographic areas. The agencies note that, under the final rule, large banks that are exempt from the retail lending assessment area requirement will still be evaluated for their retail lending performance outside of their facility-based assessment areas through the outside retail lending area evaluation, as discussed in the section-by-section analysis of final § __.18.

Second, such an exemption would have the benefit of resulting in a significant number of large banks no longer having any retail lending assessment area requirement, compared to the proposed approach. The agencies believe this will reduce the aggregate compliance burden associated with the retail lending assessment area approach, as discussed above.

80 percent threshold. Under the final rule, as discussed above, large banks that conduct more than 80 percent of their retail lending, based on a combination of loan dollars and loan count as defined in § __.12, within their facility-based assessment areas are exempt from the retail lending assessment area requirement. In determining the level of the 80 percent threshold, the agencies considered a number of factors. The agencies considered commenter suggestions for lower thresholds and, as a preliminary matter, considered that a threshold below 50 percent would mean that, for up to half of a large bank's retail lending, the bank would not be assigned any conclusions that reflect the bank's retail lending performance in specific geographic areas. The agencies believe that evaluating up to half of a large bank's retail lending ( i.e., the retail lending outside of the large bank's facility-based assessment areas) only in the aggregate through the outside retail lending area evaluation could provide a misleading picture of the large bank's overall retail lending performance if, for example, strong performance in parts of the outside retail lending area obscured poor performance in other parts of the outside retail lending area. For this reason, the agencies are adopting a heightened standard rather than a simple majority standard.

In addition, the agencies believe that the 80 percent threshold, compared to other potential threshold levels, achieves an appropriate balance of increasing the share of a large bank's retail lending for which a conclusion is assigned reflecting the bank's performance in a specific geographic area while limiting the number of large banks required to delineate retail lending assessment areas. In making this determination, the agencies considered, for a range of potential thresholds, the number of large banks that would be required to delineate at least one retail lending assessment area, the total share of retail lending across large banks that would have been evaluated within retail lending assessment areas, and the share of closed-end home mortgage and small business lending across large banks outside of their facility-based assessment areas that would have been evaluated in retail lending assessment areas had the final rule retail lending assessment area approach been in effect in the 2018, 2019, and 2020 calendar years. The agencies noted that a 90 percent threshold, relative to an approach with no exemption, only slightly reduced the number of affected large banks, from 88 to 83 large banks, while an 80 percent threshold provided a more significant reduction to 63 large banks. The agencies further noted that the 80 percent threshold reduced the percentage of closed-end home mortgage lending outside of facility-based assessment areas that would have been evaluated within retail lending assessment areas from 35.9 to 23.0 percent, and for small business lending, a more modest reduction from 45.3 to 39.3 percent. While threshold options of 50, 60, and 70 percent would have further reduced the number of affected banks, these thresholds would also have resulted in lower percentages of closed-end home mortgage and small business lending outside of facility-based assessment areas being evaluated within retail lending assessment areas.

Calculation of 80 percent threshold. Under the final rule, and as specified in paragraph II.a.1 of final appendix A, the 80 percent threshold is calculated based on the share of a large bank's retail loans originated or purchased in its facility-based assessment areas, out of the bank's retail loans originated and purchased overall over the prior two calendar years. The retail loans included in this calculation are the large bank's originated and purchased home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans if automobile loans are a product line for the large bank. The retail loans included in the calculation of the 80 percent threshold are thus identical to the loans included in the numerator of the Bank Volume Metric calculated for purposes of the Retail Lending Volume Screen in final § __.22(c). The agencies believe that it is important to harmonize the measures of a bank's retail lending used for various calculations where appropriate to simplify the final rule to the extent possible. Further, the agencies believe that these retail product lines can be viewed as a reasonable reflection of a bank's overall business model for a bank that is not a limited-purpose bank, and thus, it is appropriate to look to these loans for purposes of determining whether a large bank is primarily branch-based.

Under the final rule, the 80 percent threshold is calculated over the two calendar years preceding each calendar year. The agencies believe that calculating the 80 percent threshold over the two preceding calendar years will provide greater certainty to large banks regarding whether they qualify for the exemption, compared to a calculation based on a one-year lookback period.

The 80 percent threshold is calculated based on a combination of loan dollars and loan count as defined in final § __.12. Specifically, the agencies calculate the share of the large bank's retail lending within its facility-based assessment areas based on loan dollars, and the same percentage based on loan count, then take the simple average of the two percentages. Using a combination of loan dollars and loan count is consistent with various other calculations in the final rule, and is intended to reflect both the total dollars of loans originated and purchased as well as the number of borrowers served, which the agencies believe appropriately reflects the degree to which a bank is serving a geographic area.

Alternative methods of identifying primarily branch-based banks. The agencies considered the alternative methods suggested by commenters for identifying primarily branch-based large banks. In particular, the agencies considered adopting a qualitative approach to identifying large banks that rely on non-branch delivery channels. However, the agencies believe that such an approach would be inconsistent with the agencies' goal of providing greater clarity and consistency in the application of the CRA regulations.

The agencies also considered exempting strategic plan banks from the retail lending assessment area requirement but decline to do so in the final rule. As discussed above, the agencies intend the retail lending assessment area approach, together with facility-based assessment areas, to establish the local communities in which a large bank is evaluated for its CRA performance, and the agencies believe that inconsistency with respect to such a core aspect of the CRA evaluation framework would not be desirable. The agencies do not believe it would be appropriate to create an incentive for banks to seek approval under a strategic plan to avoid otherwise applicable requirements to delineate retail lending assessment areas. As described in the section-by-section analysis of final § __.27, the final rule includes other provisions that facilitate a customized approach to evaluating strategic plan banks; however, the retail lending performance of strategic plan banks will still be evaluated in retail lending assessment areas where applicable.

Section __.17(b) Geographic Requirements for Retail Lending Assessment Areas

The Agencies' Proposal

Under proposed § __.17(b)(1), large banks would be required to delineate retail lending assessment areas consisting of either: (1) the entirety of a single MSA, excluding counties inside their facility-based assessment areas; or (2) all of the counties in a single State that are not included in an MSA, excluding counties inside their facility-based assessment areas, aggregated into a single retail lending assessment area. Similar to the proposal for facility-based assessment areas, and consistent with the current regulations, proposed § __.17(b)(2) specified that a retail lending assessment area may not extend beyond an MSA boundary or beyond a State boundary unless the assessment area is located in a multistate MSA or combined statistical area.

The agencies sought feedback on what should happen if a bank's retail lending assessment area is located in the same MSA (or nonmetropolitan area of a State) where a smaller facility-based assessment area is located. Specifically, the agencies asked whether a bank in this case should be required to expand its facility-based assessment area to the whole MSA (or nonmetropolitan area of a State), or whether the bank should have the option to designate the portion of the MSA that excludes the facility-based assessment area as a new retail lending assessment area.

Comments Received

Geographic requirements. Some commenters expressed concerns that the proposed geographic requirements for retail lending assessment areas may not accurately reflect where a bank conducts retail lending business, potentially leading to unrealistic and misleading performance conclusion. For example, a few commenters recommended that only those counties within which a bank has a certain minimum number or percentage of retail loans should be included in a retail lending assessment area.

Several commenters provided views specific to retail lending assessment areas located in the nonmetropolitan area of a State. For example, at least one commenter expressed support for the proposed requirement that a retail lending assessment area in the nonmetropolitan area of a State must consist of that entire area, noting that this approach would help capture underserved nonmetropolitan areas. However, a few commenters suggested that the entire nonmetropolitan area of a State would often be too large for a bank to serve, especially in states with large rural geographic areas, due to limited bank capacity. At least one commenter indicated that it would be challenging for the agencies to consider performance context for an entire nonmetropolitan area of a State because these areas may vary considerably.

Retail lending assessment areas and facility-based assessment areas in the same MSA or nonmetropolitan area of a State. Some commenters addressed what should happen if a large bank's retail lending assessment area is located in the same MSA or the nonmetropolitan area of a State where a facility-based assessment area is located. Some of these commenters supported allowing banks to designate the portion of the MSA or the nonmetropolitan area of the State that is not part of the bank's existing facility-based assessment area as a new retail lending assessment area, consistent with the proposal. Other commenters supported the alternative approach of requiring banks that maintain a facility-based assessment area in the same MSA or nonmetropolitan area of a State where a retail lending assessment area is located to expand their facility-based assessment areas to encompass the entire MSA or nonmetropolitan area of a State. Some of these commenters favorably noted that the alternative approach would mean that a large bank would be evaluated under all four applicable performance tests in the entire MSA or nonmetropolitan area of the State due to expansion of its facility-based assessment area, rather than only evaluating the large bank in the retail lending assessment area under the proposed Retail Lending Test. At least one commenter recommended that the agencies apply either the proposed or the alternative approach depending, in each case, on which option would increase retail lending to underserved communities.

Legal concerns regarding geographic requirements. Some commenters raised legal concerns that the geographic requirements for retail lending assessment areas may not be consistent with the CRA. For example, at least one commenter stated that the agencies did not explain in the proposal how an MSA or the nonmetropolitan area of a State would constitute a “local community.” Commenter feedback included the observation that these retail lending assessment areas often cover relatively large geographic areas. The commenter also noted that the agencies did not discuss why smaller geographic base units for retail lending assessment areas were not considered.

Final Rule

The agencies are adopting, with revisions, the proposed geographic requirements for retail lending assessment areas. Specifically, final § __.17(b)(1) provides that a retail lending assessment area must consist of either:

1. The entirety of a single MSA (using the MSA boundaries that were in effect as of January 1 of the calendar year in which the delineation applies), excluding any counties inside the large bank's facility-based assessment areas, or

2. All of the counties in the nonmetropolitan area of a State (using the MSA boundaries that were in effect as of January 1 of the calendar year in which the delineation applies), excluding any counties included in the large bank's facility-based assessment areas, and excluding any counties in which the large bank did not originate any closed-end home mortgage loans or small business loans that are reported loans during that calendar year.

In addition, the agencies are modifying the proposed prohibition on retail lending assessment areas extending beyond a State boundary. Specifically, final § __.17(b)(2) provides that a retail lending assessment area may not extend beyond a State boundary unless the retail lending assessment area consists of counties in a multistate MSA. Final § __.17(b)(2) does not permit a retail lending assessment area to extend beyond a State boundary on the basis that the retail lending assessment area consists of counties located in a combined statistical area.

Legal considerations. The agencies considered commenter feedback that requiring retail lending assessment areas to consist of an entire MSA or the entire nonmetropolitan area of a State may not be consistent with the statute. However, the agencies concluded that the geographic requirements for retail lending assessment areas in the final rule are within the scope of authority granted to the agencies under the CRA. As noted above, the CRA requires the agencies to assess a bank's record of meeting the credit need of its entire community, without defining what geographic areas constitute a bank's “entire community.” The statute further does not define what geographic units the agencies should use in assessing a bank's record of meeting the credit needs of its entire community. References to a bank's local communities in the congressional findings and purpose section of the statute, cited by some commenters, similarly do not specify what geographic area or geographic units constitute a local community.

Accordingly, the agencies conclude that it is reasonable to interpret “entire community” for a large bank to include retail lending assessment areas consisting of an entire MSA or the nonmetropolitan area of a State. The agencies note that the statute clearly demonstrates that Congress intended the agencies to distinguish between a bank's performance in metropolitan areas and nonmetropolitan areas. Further, Congress explicitly contemplated assigning conclusions that reflect a bank's performance in an entire MSA or in the entire nonmetropolitan area of a State, notwithstanding that the geographic scope of these areas. As such, the agencies believe that using MSAs and the nonmetropolitan areas of States as the geographic base units for delineating retail lending assessment areas is consistent with the statute.

Geographic base units. In addition to these legal considerations, the agencies believe that using MSAs and nonmetropolitan areas of States as the geographic base units for delineating retail lending assessment areas is appropriate for other reasons. Using MSAs and the nonmetropolitan area of a State as geographic base units avoids having multiple retail lending assessment areas in a single MSA or in the nonmetropolitan area of a single State, which the agencies believe would add complexity. Further, and particularly in the case of the nonmetropolitan area of a State, using larger geographic base units (as opposed to counties or census tracts) ensures that a larger number of retail loans, including loans across multiple counties, are captured in a retail lending assessment area and helps to ensure that credit needs and opportunities in nonmetropolitan areas are taken into account when the agencies evaluate a bank's retail lending performance. Relatedly, the agencies considered that larger geographic base units may provide banks with greater flexibility and more opportunities to originate and purchase small business loans and small farm loans, and loans made to low- and moderate-income borrowers and in low- and moderate-income census tracts.

Entire-MSA retail lending assessment areas. The agencies believe it is appropriate to require retail lending assessment areas to consist of an entire MSA, excluding any counties inside facility-based assessment areas. Although some commenters expressed concern that a retail lending assessment area consisting of an entire MSA may not accurately reflect where a bank conducts retail lending business, the agencies believe that the benchmarks used to evaluate a large bank's retail lending performance should reflect the lending opportunities and credit needs of the entire MSA. For example, if a large bank makes loans only in an upper-income portion of an MSA, then excluding other portions of the MSA from the retail lending assessment area would result in relatively low benchmarks, even if the remainder of the MSA has significant lending opportunities and credit needs. Further, the agencies note that unlike in facility-based assessment areas (which are evaluated using the Retail Lending Volume Screen), a large bank is not required to conduct a certain amount of lending in a retail lending assessment area to achieve a particular performance conclusion, and the agencies will not consider as an additional factor the dispersion of a bank's closed-end home mortgage or small business lending within the retail lending assessment area. Thus, requiring a retail lending assessment area to consist of an entire MSA should not result in a requirement for a large bank to serve an area larger than its capacity to serve. Finally, the agencies note that the entire MSA approach for retail lending assessment areas is analogous to the approach under the current CRA regulations that permit assessment areas to consist of an entire MSA.

Retail lending assessment areas in the nonmetropolitan area of a State. Upon consideration of the comments, the agencies have decided in the final rule to exclude from all retail lending assessment areas in the nonmetropolitan area of a State any counties in which a large bank did not originate any reported closed-end home mortgage loans or small business loans during that calendar year. As a result, retail lending assessment areas in the nonmetropolitan area of a State will be more targeted, relative to the proposal, to where a large bank conducts retail lending business in nonmetropolitan areas. In making this change, the agencies have considered feedback from some commenters that the proposed requirement to delineate a retail lending assessment area consisting of the entire nonmetropolitan area of a State may result in retail lending assessment areas that are very expansive, particularly in geographically large states. The agencies have also considered commenter feedback that the proposed approach could result in benchmarks that are based on an entire nonmetropolitan area of a State that is not aligned with the actual geographies served by the bank. For example, the agencies considered that a bank might have a retail lending assessment area in the nonmetropolitan area of a State due to lending across two counties where it does not maintain deposit-taking facilities and that are adjacent to a facility-based assessment area of the bank. In this example, the agencies believe that benchmarks based on the entire nonmetropolitan area of the State would not accurately reflect the lending opportunities reasonably available to the bank, and that setting benchmarks based on only the counties in which the bank made loans is more appropriate. Further, the agencies have also considered that it could be challenging for the agencies to consider performance context in evaluating a large bank's retail lending performance in the entire nonmetropolitan area of a State. In light of these considerations, the agencies believe it may not be reasonable to evaluate a bank's retail lending performance in nonmetropolitan counties in which it did not originate any reported closed-end home mortgage loans or small business loans in a retail lending assessment area.

Combined statistical area retail lending assessment areas. Unlike under the proposal, the final rule does not permit a large bank to delineate a retail lending assessment area consisting of a combined statistical area. As with the proposal regarding retail lending assessment areas in the nonmetropolitan area of a State, the agencies have determined that retail lending assessment areas consisting of a combined statistical area may be too expansive—both for the appropriateness of the benchmarks used to evaluate the bank, and for the agencies to appropriately consider performance context. Further, evaluating a large bank's performance at the combined statistical area level may not provide as useful information regarding the bank's performance in specific geographic areas if, for example, the combined statistical area included multiple distinct MSAs. Finally, and as described in the section-by-section analysis of final § __.16(b), allowing a retail lending assessment area to extend beyond an MSA boundary in a combined statistical area would create challenges in assigning conclusions consistent with statutory requirements.

Retail lending assessment areas and facility-based assessment areas in the same MSA or nonmetropolitan area of a State. Where a large bank's retail lending assessment area is located in the same MSA or nonmetropolitan area of a State where a smaller facility-based assessment area is located, the agencies considered requiring the large bank to expand its facility-based assessment area to include the entire MSA or entire nonmetropolitan area of the State. However, the final rule retains the proposed approach of allowing the large bank to designate the portion of the MSA or nonmetropolitan area of the State that excludes the facility-based assessment area as a retail lending assessment area. The agencies believe that this approach adequately captures the bank's retail lending performance in the MSA or nonmetropolitan area of a State. Further, in retaining the proposed approach, the agencies sought to preserve the current standard for delineating assessment areas around a bank's deposit-taking facilities, under which standard a bank must include the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans. In particular, a bank might originate or purchase a substantial portion of its loans around a deposit-taking facility located in an MSA or the nonmetropolitan area of a State, and also originate or purchase a significant, but comparably smaller, portion of its loans in the remaining portion of the MSA or nonmetropolitan area of a State. Requiring such a large bank to expand its facility-based assessment area to include these remaining portions of the MSA or the nonmetropolitan area of the State would result in the large bank becoming subject to all four large bank performance tests in the entire MSA or nonmetropolitan area of the State, including in geographic areas where the large bank does not maintain deposit-taking facilities. The agencies believe this may result in additional burden, and that the final rule approach adequately captures a large share of retail lending within CRA evaluations without imposing this additional burden.

Section __.17(c) Delineation of Retail Lending Assessment Areas

The Agencies' Proposal

Under proposed § __.17(c), a large bank would be required to delineate a retail lending assessment area in any MSA or in the nonmetropolitan area of any State in which it originated, as of December 31 of each of the two preceding calendar years, in that geographic area: (1) at least 100 home mortgage loans outside of its facility-based assessment areas; or (2) at least 250 small business loans outside of its facility-based assessment areas. In proposing these loan count thresholds, the agencies considered what thresholds would appropriately align with the amount of lending typically evaluated in a facility-based assessment area. The agencies also considered what loan count thresholds would result in a substantial percentage of loans that a bank makes outside of facility-based assessment areas being evaluated within a retail lending assessment area. The agencies stated that retail lending should be evaluated within a local context wherever feasible, based on a sufficient volume of loans and the size and business model of the bank.

Comments Received

A number of commenters provided feedback on whether the requirement to delineate a retail lending assessment area should be triggered by loan count thresholds or an alternative type of trigger. In addition, with respect to the proposed loan count thresholds, numerous commenters discussed the number and types of loans that should trigger the retail lending assessment area.

Use of loan count thresholds. Several commenters supported the proposed use of loan counts thresholds to trigger the retail lending assessment area requirement. However, numerous commenters opposed using loan count thresholds to trigger the retail lending assessment area requirement. For example, a few commenters stated that loan count thresholds could be manipulated and that large banks would cap their lending just below these thresholds to avoid triggering a retail lending assessment area. At least one commenter recommended that, if the final rule retains the use of loan count thresholds, the agencies should penalize banks that manipulate their retail lending activity to avoid triggering retail lending assessment areas. A few commenters asserted that using loan count thresholds could make it challenging for banks to identify which markets might trigger retail lending assessment areas due to fluctuations in retail lending volume.

Many commenters opposed to using loan count threshold offered alternative approaches for consideration, with some such commenters advocating for hybrid versions of the alternative approaches described below.

First, a number of commenters recommended a market share approach to triggering the retail lending assessment area requirement. These commenters suggested requiring delineation of a retail lending assessment area only when a bank's market share of retail lending surpasses a certain percentage, with some commenters suggesting 1 or 2 percent of aggregate lending. Arguments supporting this approach centered on eliminating retail lending assessment areas where a bank's lending was not material to the local market and decreasing the number of retail lending assessment areas required and the associated compliance burden for banks. Some commenters that supported the market share approach asserted that using a market share measure instead of the proposed loan count thresholds to trigger retail lending assessment area delineation would help to create retail lending assessment areas in smaller communities. At least one commenter stated that the market share approach is preferable to using loan count threshold because the latter might trigger retail lending assessment areas in areas that are already well-served by other lenders.

Second, some commenters suggested requiring a retail lending assessment area only when a bank's retail lending in the geographic area constitutes a certain minimum percentage of the bank's overall retail lending nationwide, with commenter suggestions ranging from 0.5 percent to 10 percent. In general, these commenters emphasized that such an approach would appropriately target retail lending assessment areas to those geographic areas where banks conduct material levels of lending activity. In addition, some of these commenters indicated that this approach would eliminate retail lending assessment areas where a bank's retail lending volume was not high enough to impact the bank's overall CRA retail lending performance, which would in turn reduce associated compliance burden for banks.

Finally, some commenters suggested other alternative standards for requiring delineation of retail lending assessment areas. For example, at least one commenter suggested that a threshold based on the dollar amount of retail lending, would better ensure that retail lending assessment areas were delineated in areas where banks have a material level of activity. At least one other commenter suggested that a bank should not be required to delineate a retail lending assessment area unless it draws a certain level of deposits from the geography, pointing to the CRA's focus on banks reinvesting in communities from which banks draw deposits. A few commenters suggested replacing the loan count thresholds with what they described as a clearer and more stable indicator of a bank's relevant activity, such as the presence of a loan production office. Similarly, some commenters recommended that if the agencies do not require a facility-based assessment area based on the presence of a loan production office then, at a minimum, the presence of a loan production office should trigger delineation of a retail lending assessment area.

Loan types considered in loan count thresholds. A number of commenters expressed views about the types of loans that should be included in or excluded from the proposed loan counts thresholds used to trigger retail lending assessment areas. For example, many commenters requested that the agencies count loans made by non-bank partners of the bank toward the proposed loan counts thresholds to hold banks more accountable for serving low- and moderate-income borrowers. A few commenters similarly recommended that loans of bank affiliates should count toward the loan count thresholds for triggering a retail lending assessment area.

With respect to the proposed home mortgage loan count threshold, a few commenters recommended excluding certain types of home mortgage loans from the threshold. For example, at least one commenter stated that counting second mortgage loans toward the loan count threshold for triggering a retail lending assessment area could discourage banks from engaging in this activity, which would be detrimental because many banks offer second mortgages to cover down payment and closing costs in conjunction with affordable home mortgage programs, such as State housing finance agency programs. A few commenters noted that home mortgage refinance lending volume is highly sensitive to interest rates and cannot reasonably be controlled by a bank, making these loans unsuitable for counting toward the home mortgage loan count threshold. At least one of these commenters stated that the lower interest rates of recent years have resulted in significant refinance activity, which could result in more banks being required to delineate retail lending assessment areas.

With respect to the proposed small business loan count threshold, a few commenters suggested not counting indirect small business loans. These commenters stated that delineating a retail lending assessment area based on a loan count threshold that includes indirect small business loans would be inappropriate because a third-party dealer or seller markets and originates these loans. Further, at least one of these commenters asserted that banks do not have control over the geographic distribution of these borrowers, nor are they in a position to conduct outreach to low- or moderate-income borrowers in the areas where the dealers are located. At least one other commenter recommended that the agencies consider whether to count small business credit card loans toward the small business loan count threshold, cautioning that this type of lending can be predatory and that distinguishing small business credit card accounts from personal credit card accounts may be difficult.

Some commenters suggested that the loan count thresholds for triggering retail lending assessment requirement should include other types of loans beyond home mortgage and small business loans. A few commenters recommended that the agencies adopt a consumer loan count threshold for triggering retail lending assessment areas (in addition to the proposed home mortgage and small business loan count thresholds), with one such commenter stating that 100 consumer loans should trigger the retail lending assessment area requirement. In general, these commenters asserted that adopting a consumer loan count threshold would result in retail lending assessment areas that more accurately reflect where a bank conducts business. Another commenter stated that the agencies should adopt separate loan count thresholds for credit card loans and non-credit card consumer loans. At least one commenter stated that the agencies did not provide sufficient justification in the proposal as to why home mortgage and small business loans, but not other types of retail loans, were appropriate for triggering retail lending assessment areas.

Loan count threshold levels. A number of commenters discussed the level of home mortgage and small business lending that should trigger the retail lending assessment area requirement. A few commenters asserted that the agencies did not provide sufficient rationale for why the proposed loan count thresholds were set at 100 home mortgage loans and 250 small business loans, and requested that the agencies provide more supporting data and analysis.

A few commenters suggested that the proposed loan count thresholds of 100 home mortgage loans and 250 small business loans were too high. Some of these commenters suggested lower loan count thresholds, such as 50 home mortgage loans and 100 small business loans, stating that lower thresholds would incorporate more rural geographic areas into retail lending assessment areas. Other commenters suggested that large banks should be evaluated in every geographic area in which they conduct any volume of retail lending and that, accordingly, no loan count thresholds are necessary.

However, many commenters recommended increasing the proposed home mortgage and small business loan count thresholds to decrease the number of retail lending assessment areas required, and to ensure that retail lending assessment areas reflect those geographic areas where a bank conducts a meaningful amount of retail lending. Most of these commenters suggested alternative loan count thresholds ranging from 250 to 500 home mortgage loans, and 350 to 750 small business loans.

Final Rule

Section __.17(c) of the final rule provides that, subject to the geographic requirements in § __.17(b), a large bank must delineate, for a particular calendar year, a retail lending assessment area in any MSA or the nonmetropolitan area of any State in which it originated at least 150 closed-end home mortgage loans that are reported loans in each year of the prior two calendar years, or at least 400 small business loans that are reported loans in each year of the prior two calendar years. The final rule thus differs from the proposal in that it: (1) includes only closed-end home mortgage loans in, excludes open-end home mortgage loans from, the home mortgage loan count threshold; and (2) increases the loan count thresholds from the proposed loan count thresholds of 100 home mortgage loans and 250 small business loans.

Use of loan count thresholds. After considering public comments, the agencies believe that it is appropriate to use loan count thresholds to trigger the retail lending assessment area requirement. The agencies believe that loan count thresholds remain the most transparent and straightforward approach to identifying geographic areas in which a large bank has concentrations of closed-end home mortgage and small business lending outside of its facility-based assessment areas. The number of loans is a reasonable proxy for a large bank's presence in a particular market, as each loan generally corresponds to one or more borrowers served by the bank.

The agencies considered comments about the potential variability of retail lending assessment area delineations over time. However, the agencies believe that the proposed approach of requiring a large bank to delineate a retail lending assessment area only when it has met the applicable loan count threshold in each year of the two prior calendar years will generally provide greater certainty and reduce variability, relative to an approach in which a single year of lending is sufficient to trigger a retail lending assessment area. In addition, the agencies intend to explore the development of data tools to help large banks monitor those geographic areas where they may be required to delineate a retail lending assessment area and monitor the retail lending distribution benchmarks for such geographic areas.

The agencies considered several alternatives to the use of loan count thresholds suggested by commenters. First, the agencies considered, but did not adopt, a market share approach in place of or in combination with the proposed loan count thresholds. Under such an approach, a large bank would be required to delineate a retail lending assessment area only if the bank's market share of retail lending in the geographic area met a certain threshold. The agencies believe that such an approach would be more complex to administer relative to the loan count threshold approach. In addition, under a market share approach, whether a bank is required to delineate a retail lending assessment area would depend on factors outside of the bank's control, namely the activity of other lenders in the market. Further, the threshold for triggering delineation of a retail lending assessment area could vary considerably from year to year depending on the total number of loans in the market, making retail lending assessment area delineations less predictable. Finally, under the market share approach, the number of loans that would be sufficient to trigger the retail lending assessment area requirement in particular MSAs or the nonmetropolitan areas of States could differ drastically depending on the total number of loans in the market. As a result, the retail lending performance of a large bank could be assigned a conclusion in one specific geographic area, but not another geographic area, despite having a similar number of loans in both geographic areas. The agencies believe that it is more desirable to have consistency in the number of loans used to designate retail lending assessment areas. For these reasons, the agencies have decided to not adopt a market share approach to delineating retail lending assessment areas.

Second, the agencies considered, but are not adopting, a bank-specific lending share approach in place of or in combination with the proposed loan count thresholds. Under such an approach, a large bank would be required to delineate a retail lending assessment area only if the bank's loans in the geographic area represented a certain percentage of the bank's overall retail lending nationwide. The agencies believe that the lending share approach would be somewhat more complex than using loan count thresholds, and would result in inconsistent standards for different banks. For example, under the lending share approach, two large banks could make the same number of closed-end home mortgage or small business loans within the same geographic area, but only one such bank could be required to delineate a retail lending assessment area. The agencies believe that banks engaged in a similar volume of lending in the same market should generally be evaluated in a consistent manner. For these reasons, the agencies have decided not to adopt the lending share approach.

Third, the agencies considered, but are not adopting, a deposit share approach in combination with the proposed loan count thresholds. Under such an approach, a large bank would be required to delineate a retail lending assessment area only if it meets an applicable loan count threshold and has a certain number of depositors in or draws a certain volume of deposits from a geographic area. However, as discussed above in connection with the potential deposit-based assessment area approach, the full range of deposits data needed to assess the potential impact of a deposit share approach to triggering the retail lending assessment area requirement is not currently available. However, the agencies note that, under the final rule, for large banks over $10 billion in assets and other banks that elect to report deposits data, the amount of the bank's deposits in a retail lending assessment area will affect the weighting of the retail lending assessment area in assigning conclusions at the State, multistate MSA, and institution levels, pursuant to section VIII of final appendix A. As a result, the weight assigned to each retail lending assessment area will reflect the volume of deposits that the bank draws from the geographic area.

Finally, the agencies considered requiring a large bank to delineate a retail lending assessment area in geographic areas where it maintains loan production offices. The final rule does not adopt this approach. The agencies believe that the products and services offered in, and the number of borrowers served by, a bank's loan production offices vary widely, and as such, it is preferable to use established loan count thresholds to delineate retail lending assessment areas. For example, the agencies note that a bank may establish a loan production office as an initial step to gain a foothold in a new market where the bank has made few or no loans. The agencies also note that, once a loan production office outside of a bank's facility-based assessment area becomes established and the office originates closed-end home mortgage loans or small business loans in a particular area, the final rule loan count thresholds will ultimately capture the loans originated from the office in a retail lending assessment area if the loan count thresholds are met.

Loan types considered. Under the final rule, only a large bank's closed-end home mortgage and small business loans would be considered for purposes of determining whether the retail lending assessment area requirement is triggered. Regarding feedback from some commenters that additional types of loans, particularly consumer loans, should count toward the loan count thresholds, the agencies have considered this feedback and determined that adopting additional loan count thresholds would necessitate additional data collection and reporting requirements. For example, the agencies believe that individual loan data collection and reporting for consumer loans, or potentially only automobile loans, would be necessary in order to use those product lines to establish loan count thresholds for the purposes of establishing retail lending assessment areas. As discussed further in the section-by-section analysis of final § __.42, the agencies have determined to only require automobile lending data collection and maintenance, but not reporting, for large banks for which automobile loans are a product line ( i.e., majority automobile lenders, and banks that opt to have their automobile loans evaluated pursuant to the Retail Lending Test). Further, the agencies believe that the focus on closed-end home mortgage and small business lending is appropriate given the central importance of these products to meeting community credit needs and given the agencies' objective to minimize compliance costs by limiting data collection and reporting requirements. The agencies also note that consumer loans other than automobile loans will generally not be evaluated under the Retail Lending Test, but rather, will be considered under the responsive credit products component of the Retail Services and Products Test, as discussed in the section-by-section analysis of final § __.23(c).

With respect to the home mortgage loan count threshold, the final rule would only consider a bank's closed-end home mortgage loans, and not open-end home mortgage loans as proposed. As discussed in the section-by-section analysis of final § __.22(d), under the final rule, the geographic and borrower distributions of a bank's open-end home mortgage loans will not be evaluated under the Retail Lending Test. For this reason, the agencies removed open-end home mortgage loans from the home mortgage loan count threshold for purposes of triggering the retail lending assessment area requirement. For a large bank that originates open-end home mortgage loans, this change has the effect of making it less likely that the large bank's home mortgage lending meets any particular loan count threshold triggering the retail lending assessment area delineation requirement. For example, a large bank that originated 150 home mortgage loans in an MSA in each year of the prior two calendar years, 100 of which were open-end home mortgage loans and 50 of which were closed-end home mortgage loans, would have been required to delineate a retail lending assessment area under the proposed approach, but would not be required to delineate a retail lending assessment area under the final rule approach due to the exclusion of open-end home mortgage loans from the final rule loan count thresholds.

However, beyond the exclusion of open-end home mortgage loans, the agencies are not excluding other types of home mortgage or small business loans from the respective loan count thresholds, as some commenters suggested. The agencies believe that excluding certain types of loans—such as affordable housing loans, home mortgage refinance loans, indirect small business loans, or small business credit card loans—from the loan count thresholds would produce a less comprehensive picture of a large bank's lending in a particular geographic area. Finally, the agencies believe that aligning the closed-end home mortgage and small business loans considered in the loan count thresholds with reported loan data simplifies the loan count threshold calculation.

The agencies are also not adopting the suggestions by some commenters to require that loans originated by a large bank's affiliates or non-bank partners, other than a bank's operations subsidiaries or operating subsidiaries, count toward the loan count thresholds in final § __.17(c). However, as discussed further in the section-by-section analysis of final § __.21(b), the final rule does include the activities of a bank's operations subsidiaries or operating subsidiaries in a bank's evaluation, including with respect to loan counts for determining a large bank's retail lending assessment area delineations.

In addition, final § __.21(b)(3)(iv) provides that if a large bank opts to have the agencies consider the closed-end home mortgage loans or small business loans that are originated or purchased by any of the bank's affiliates in any Retail Lending Test Area, the agencies will consider the closed-end home mortgage loans or small business loans originated by all of the bank's affiliates in the nationwide area toward the loan count thresholds in final § __.17(c). The agencies believe that this approach affords an appropriate degree of flexibility for bank business models that involve affiliates other than operations subsidiaries or operating subsidiaries, as discussed in the section-by-section analysis of § __.21(b).

Loan count threshold levels. Under the final rule, a large bank that is not exempt from the retail lending assessment area requirement must delineate a retail lending assessment area in an MSA or the nonmetropolitan area of a State in which it has originated at least 150 closed-end home mortgage loans that are reported loans or at least 400 small business loans that are reported loans in each year of the prior two calendar years. The loan count thresholds in the final rule represent an increase from the proposed loan count thresholds of 100 home mortgage loans and 250 small business loans.

As discussed above, in determining the loan count thresholds in the final rule, the agencies considered commenter feedback as well as different objectives. Specifically, the agencies considered how to balance the objective of increasing the share of retail lending outside of facility-based assessment areas that would be evaluated within retail lending assessment areas, with the objective of limiting the number of retail lending assessment areas and the number of affected large banks. The agencies also considered that retail lending assessment areas would help to adapt the CRA evaluation framework to changes in the banking landscape, and noted the potential challenges associated with monitoring where retail lending assessment areas are required, and monitoring performance within those areas.

The agencies also analyzed data from the 2018, 2019, and 2020 calendar years, summarized in Table 4, to assess how different loan count thresholds would have impacted (1) the number and percentage of affected large banks, (2) the number of retail lending assessment areas, (3) the percentage of lending outside of facility-based assessment areas that would have been evaluated within retail lending assessment areas, and (4) the number of large banks that would have had to delineate at least 100 retail lending assessment areas over the three calendar years. For all threshold options included in Table 4, the analysis assumed that the final rule retail lending assessment area approach had been in effect during those calendar years, including the exemption for large banks that conduct more than 80 percent of their retail lending within their facility-based assessment areas, the inclusion of only closed-end home mortgage loans (and not open-end home mortgage loans), and the final rule approach to identifying major product lines in retail lending assessment areas.

Based on this analysis, the agencies believe that the increased loan count thresholds in the final rule appropriately tailor the retail lending assessment area requirement while also ensuring that the overall retail lending assessment area approach continues to cover a meaningful percentage of retail lending taking place outside of facility-based assessment areas. Relative to an alternative approach that retained the proposed loan count threshold levels but incorporated the final rule's other modifications to the retail lending assessment area proposal, the final rule loan count thresholds would have significantly decreased the number of affected large banks, from 81 to 63, and the total number of retail lending assessment areas, from 1,301 to 863. In addition, relative to the proposed loan count threshold levels, the historical analysis shows that the final rule loan count thresholds would have decreased the percentage of retail lending outside of facility-based assessment areas that is evaluated in retail lending assessment areas by about 4 percentage points for closed-end home mortgage lending, and by about 5 percentage points for small business lending. The agencies note that, under the final rule, a large bank's retail lending outside of its facility-based assessment areas and retail lending assessment areas is evaluated on an aggregate basis through the outside retail lending area evaluation, discussed in the section-by-section analysis of final § __.18.

Table 4 also includes the loan count threshold option of 50 closed-end home mortgages and 100 small business loans, as suggested by some commenters. The agencies note that while these decreased thresholds would have increased the share of retail lending outside of facility-based assessment areas that is captured in retail lending assessment areas, they also would have significantly increased the number of affected banks relative to the proposed threshold levels, from 81 to 114, and the total number of retail lending assessment areas, from 1,301 to 2,421. Based on the results of this analysis, and in light of comments regarding the compliance burden associated with retail lending assessment areas, the agencies do not believe that these lower loan count thresholds would appropriately balance the agencies' objectives.

In addition, Table 4 includes two loan threshold options higher than the ones adopted in the final rule. For the potential loan count thresholds of 250 closed-end home mortgage loans or 500 small business loans, the agencies' historical analysis found that, compared to the final rule thresholds, these thresholds would have further decreased the number of affected large banks, from 63 to 50, and the total number of retail lending assessment areas, from 863 to 629. Furthermore, these thresholds would have resulted in a decrease in the percentage of closed-end home mortgage lending outside of facility-based assessment areas that would have been evaluated within retail lending assessment areas, from 23.0 percent to 17.2 percent, relative to the proposed levels, and would have decreased to a lesser extent the percentage of small business lending outside of facility-based assessment areas that would have been evaluated within retail lending assessment areas, from 39.3 percent to 37.3 percent, relative to the proposed levels. While on the one hand, these loan count thresholds would have further reduced the number of affected large banks and the total number of retail lending assessment areas, the agencies do not believe that these thresholds would evaluate a sufficient share of large banks' retail lending outside of facility-based assessment areas in specific geographic areas.

Finally, Table 4 also included loan thresholds of 500 closed-end home mortgage loans or 750 small business loans. The agencies' historical analysis indicates that these loan count thresholds would have resulted in only 10.7 percent of large banks' closed-end home mortgage lending outside of facility-based assessment areas being evaluated in retail lending assessment areas, and only 32.7 percent of small business lending. As with the higher potential loan count threshold discussed above, the agencies do not believe that these threshold levels, or any higher threshold levels, would achieve the objective of modernizing the assessment area framework to account for changes in banking.

Section __.17(d) Use of Retail Lending Assessments Areas

The Agencies' Proposal

The agencies proposed in § __.17(d) to use retail lending assessment areas delineated by a large bank in the evaluation of the bank's retail lending performance unless the agencies determine that the retail lending assessment areas do not comply with requirements of § __.17. The agencies did not propose to evaluate other aspects of a bank's performance, including its community development activities, in retail lending assessment areas.

To create parity between the evaluation of a large bank's major product lines in facility-based assessment areas and retail lending assessment areas, the agencies proposed to use the same approach to identify major product lines in both geographic areas, as discussed in the section-by-section analysis of final § __.22(d). The agencies intended for this approach to ensure that the retail loans that would be evaluated under the distribution analysis component of the Retail Lending Test in both facility-based assessment areas and retail lending assessment areas are those product lines in which the bank specialized locally.

However, the agencies sought feedback on alternative approaches to evaluating a large bank's retail lending performance in retail lending assessment areas. Specifically, the agencies suggested an alternative approach under which the retail lending performance of large banks would be evaluated in retail lending assessment areas with respect to home mortgage lending only if the bank met the proposed 100 home mortgage loans threshold, and with respect to small business lending only if the bank met the proposed 250 small business loans threshold. This alternative approach would differ from the proposed approach in that, under the proposed approach, all of a bank's major product lines would be evaluated under the distribution analysis component of the Retail Lending Test in a retail lending assessment area if the bank surpassed at least one of the proposed loan count thresholds. The agencies explained that the alternative approach would more narrowly tailor the evaluation of a large bank's retail lending performance in retail lending assessment areas.

Comments Received

Product lines evaluated in retail lending assessment areas. Numerous commenters addressed the product lines that should be evaluated in retail lending assessment areas under the distribution analysis component of the Retail Lending Test.

A few commenters supported the proposal to evaluate the geographic and borrower distributions of all of a large bank's major product lines in retail lending assessment areas. In general, these commenters stated that a large bank that meets either of the proposed loan count thresholds would be a major lender in the particular market, and that evaluating all of the bank's major product lines would be necessary to fully assess the bank's retail lending impact. At least one commenter, noted that the proposed approach to weighting different major product lines would ensure that there is an appropriate emphasis on a bank's most relevant product lines in CRA evaluations.

However, most commenters on this topic recommended evaluating the geographic and borrower distributions a more limited set of product lines in retail lending assessment areas. Of these commenters, most recommended only evaluating home mortgage loans or small business loans in a retail lending assessment area, and only if the bank met the relevant loan count threshold, as contemplated as an alternative in the proposal.

Some commenters suggested other approaches for determining which of a large bank's product lines should be evaluated under the distribution analysis component of the Retail Lending Test in a retail lending assessment area. For example, one commenter suggested evaluating the geographic and borrower distributions of only the top two product lines in each retail lending assessment area. Many of the commenters that recommended using a market share or lending share approach for triggering the retail lending assessment area requirement also recommended applying the same standard for purposes of determining what product lines are evaluated in a retail lending assessment area.

Evaluation of activities beyond retail lending. A number of commenters recommended that CRA evaluations in retail lending assessment areas should go further than the proposal by including an assessment of not only retail lending activities evaluated under the proposed Retail Lending Test, but also other types of bank activities, particularly community development lending. Several of these commenters stated that evaluating a bank's community development activities in retail lending assessment areas would improve bank responsiveness to the needs of rural communities. At least one commenter stated that banks acquire knowledge of the markets and needs of their retail lending assessments by virtue of doing business there, and thus, it would be appropriate to evaluate a large bank's community development activities in these areas. At least one other commenter stated that banks should not be required to conduct community development activities in retail lending assessment areas, but should receive CRA credit if they do conduct activities in these areas.

Final Rule

The agencies are adopting with revisions, the proposed use of retail lending assessment areas in final § __.17(d). As under the proposal, the final rule states that the agencies use the retail lending assessment areas delineated by a large bank, unless the agencies determine that a retail lending assessment area does not comply with the requirements of final § __.17. However, the agencies are narrowing the scope of the evaluation of a large bank's retail lending performance in retail lending assessment areas, relative to the proposal. Specifically, under the final rule approach, only a large bank's closed-end home mortgage loans and small business loans could be evaluated under the distribution analysis component of the Retail Lending Test in a retail lending assessment area. Further, under the final rule approach, the agencies will evaluate these product lines in a retail lending assessment area only to the extent that the large bank meets the applicable loan count thresholds in the retail lending assessment area.

Product lines evaluated. The agencies proposed to evaluate the geographic and borrower distributions of all of a large bank's major product lines in retail lending assessment areas to comprehensively assess whether a bank is meeting the credit needs of the entirety of its retail lending assessment areas. As discussed above, the agencies are persuaded that the benefits of the retail lending assessment approach are outweighed by the complexity of, and compliance burden associated with, the approach as proposed. To simplify the retail lending assessment area framework and reduce the compliance burden associated with retail lending assessment areas, the final rule adopts the alternative approach contemplated in the proposal under which only a large bank's closed-end home mortgage lending and small business lending could be evaluated under the distribution analysis component of the Retail Lending Test in a retail lending assessment area, and only to the extent that the large bank meets the applicable loan count threshold for triggering the retail lending assessment area requirement. In other words, if a large bank meets the loan count thresholds for either or both closed-end home mortgage loans or small business loans and thus must delineate a retail lending assessment area, the product lines responsible for triggering the retail lending assessment area are automatically considered a major product line in the retail lending assessment area.

The agencies also considered alternative approaches suggested by commenters. In particular, the agencies considered only evaluating the geographic and borrower distributions of a large bank's top two product lines in a retail lending assessment area, but determined that this approach would add complexity and could undermine predictability, particularly if a large bank has several product lines of a similar size in a retail lending assessment area. The agencies also considered using a market share or lending share threshold to determine which of a large bank's product lines to evaluate under the distribution analysis component of the Retail Lending Test in a retail lending assessment area. However, as discussed above in connection with the use of loan count thresholds, the agencies determined these approaches would add complexity and may fail to capture product lines consisting of a significant number of loans in a retail lending assessment area.

In determining whether to apply the same major product line standard for facility-based assessment areas and outside retail lending areas to retail lending assessment areas as proposed, or whether to adopt the alternative approach of evaluating the geographic and borrower distributions of only the product line or product lines that triggered the retail lending assessment area requirement, the agencies analyzed data from the 2018, 2019, and 2020 calendar years, summarized in Table 5, to assess the percentage of large banks' retail lending outside of facility-based assessment areas that would have been evaluated within retail lending assessment areas, and the average number of major product lines per retail lending assessment area, had either approach been in effect during those calendar years. In comparing the options, the agencies note that the final rule approach of evaluating only the product line or product lines that triggered the retail lending assessment area would have resulted in a small reduction in the percentage of closed-end home mortgage lending outside of facility-based assessment areas that would have been evaluated within retail lending assessment areas from 27.5 to 23.0 percent. The final rule approach would have resulted in the same percentage of small business lending outside of facility-based assessment areas that would have been evaluated in retail lending assessment areas (39.3 percent) but a decrease in the share of small farm lending that would have been evaluated, from 0.7 to 0 percent. Finally, the final rule approach would have resulted in a significant decrease in the average number of product lines that would have been evaluated in a retail lending assessment area, from 1.4 to 1.1. The agencies believe that lowering the number of product lines evaluated in retail lending assessment areas will decrease the potential complexity and burden of the retail lending assessment area approach, and that this decreased complexity and burden outweighs the potential loss of coverage for closed-end home mortgage, small business, and small farm lending evaluated within retail lending assessment areas.

Performance tests applied in retail lending assessment areas. The agencies acknowledge comments that CRA evaluations in retail lending assessment areas should not be limited to the Retail Lending Test, and that evaluations in these areas should also consider large banks' community development activities. However, the agencies believe that retail lending assessment area evaluations should be specific to retail lending, and that the proposed Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test appropriately consider other large bank activities outside of facility-based assessment areas. Under the final rule, and as discussed in the section-by-section analysis of final § __.19, a large bank will receive consideration for community development loans, community development investments, and community development services outside of the facility-based assessment areas when determining the bank's conclusion at the State, multistate MSA, and institution levels. In addition, and as discussed in the section-by-section analysis of final § _.23, a large bank may receive consideration for applicable retail banking services outside of its facility-based assessment areas as certain components of the Retail Services and Products Test are not restricted to a bank's facility-based assessment areas. Specifically, in the case of a large bank with assets greater than $10 billion in both of the prior two calendar years, a large bank with assets less than or equal to $10 billion in either of the prior two calendar years and that does not operate branches, or any other large bank at the bank's option, the agencies will evaluate the large bank's digital and other delivery systems at the institution level. In addition, at the institution level, a large bank may receive positive consideration for its credit products and programs, and a large bank with assets of $10 billion or more in both of the prior two calendar years, or any other large bank at the bank's option, may receive positive consideration for its responsive deposit products. The agencies believe that it is appropriate to consider these activities at the State, multistate MSA, and institution levels rather than within specific retail lending assessment areas because it provides greater flexibility for a large bank to identify areas with unmet community development and retail services needs that the bank has the capacity and expertise to address. In contrast, a large bank conducting retail lending in a retail lending assessment area has demonstrated capacity to lend in that geographic area, and therefore, the agencies believe that it is appropriate to evaluate the extent to which the bank is meeting the credit needs of the entirety of its retail lending assessment areas.

Section __.18 Outside Retail Lending Areas

In proposed § __.22(a)(2)(ii) and (a)(3), respectively, the agencies proposed to evaluate large banks and certain intermediate banks under the Retail Lending Test in “outside retail lending areas.” Under the proposal, a bank's outside retail lending area would consist of the nationwide area outside of the bank's facility-based assessment areas and, as applicable, retail lending assessment areas. In proposing the outside retail lending area approach, the agencies intended to comprehensively assess large banks' and certain intermediate banks' lending to low- and moderate-income census tracts and borrowers, and small businesses and small farms, by ensuring that retail lending that is too geographically dispersed to be evaluated within a facility-based assessment area or retail lending assessment area would still be considered under the Retail Lending Test.

Numerous commenters provided feedback on the proposed outside retail lending area approach. Commenters expressed a variety of views regarding the outside retail lending area proposal, with some commenters supporting the proposed approach and others opposing the proposed approach. Commenters also provided feedback on specific aspects of the outside retail lending area proposal, especially views on which banks should be evaluated under the outside retail lending area approach.

For the reasons discussed below, the final rule adopts the proposed outside retail lending area approach with some modifications. Consistent with the proposal, the final rule provides that the agencies evaluate on a mandatory basis the retail lending performance of a large bank, and certain other banks, in the bank's outside retail lending area. The final rule also provides that the outside retail lending area generally consists of the nationwide area outside of the bank's facility-based assessment areas and retail lending assessment areas. However, in a change from the proposal, and as described below, the final rule: (1) adjusts the standard used to determine when an intermediate bank's outside retail lending area is evaluated on a mandatory basis, and applies the same standard to a small bank that opts to be evaluated under the Retail Lending Test; (2) permits an intermediate bank or small bank that does not meet this standard to opt to have its outside retail lending area evaluated; and (3) tailors the proposed geographic standard for outside retail lending areas to exclude those nonmetropolitan counties in which a bank did not originate or purchase any closed-end home mortgage loan, small business loan, small farm loan, or automobile loan (if automobile loans are a product line for the bank). In addition, the agencies are codifying the outside retail lending area approach is new § __.18 for better clarity and organization.

Overall Outside Retail Lending Area Approach

The Agencies' Proposal

To complement the agencies' evaluation of a bank's retail lending in its facility-based assessment areas and retail lending assessment areas, as applicable, the agencies proposed in § __.22(a) to evaluate the retail lending performance of large banks and certain intermediate banks in the bank's outside retail lending area. As defined in proposed § __.12, the bank's outside retail lending area would be the nationwide area outside of the bank's facility-based assessment areas and retail lending assessment area.

Comments Received

Several commenters supported the agencies' proposal to evaluate the retail lending of certain banks in their outside retail lending areas as an appropriate complement to the proposed facility-based assessment area and retail lending assessment area frameworks. At least one of these commenters stated that evaluating a bank's retail lending in its outside retail lending area was necessary to develop a complete picture of the bank's retail lending performance. Another commenter favorably noted that the outside retail lending area approach would increase CRA coverage of rural lending activity outside of a bank's facility-based assessment areas.

Some commenters opposed or expressed significant concerns with the proposed outside retail lending area approach. These commenters opposed the outside retail lending area proposal for several reasons, including commenter views that: the outside retail lending area approach is not aligned with the CRA statute's purpose of encouraging reinvestment of deposits in local communities where banks are chartered to do business; evaluation of a bank's retail lending performance in its outside retail lending area could offset or distract from the bank's retail lending performance in its facility-based assessment areas; and the benefits of evaluating a bank's retail lending in its outside retail lending area would not outweigh the complexity and compliance burden associated with the outside retail lending area evaluation, particularly because the share of the bank's retail loans originated outside of facility-based assessment areas or retail lending assessment areas is small for most banks.

At least one commenter stated that the outside retail lending area evaluation should include not only a bank's retail loans made outside of its facility-based assessment areas and retail lending assessment areas, but also retail loans made within its facility-based assessment areas and retail lending assessment areas that are not evaluated as major product lines.

A few commenters recommended that the evaluation of a bank's retail lending performance in its outside retail lending area include consideration of qualitative factors and performance context, including the bank's ability and opportunities to serve the markets in this area.

Final Rule

For the reasons discussed below, the agencies are adopting the outside retail lending area approach in the final rule. However, in response to commenter feedback and in consideration of the agencies' policy objectives, the agencies are also adopting several modifications to the outside retail lending area proposal. Specifically, the final rule (1) adjusts the calculation of the 50 percent standard used to determine when an intermediate bank's outside retail lending area is evaluated on a mandatory basis, and applies the same standard to a small bank that opts to be evaluated under the Retail Lending Test; (2) permits an intermediate bank or small bank that does not meet this standard to opt to have its outside retail lending area evaluated; and (3) tailors the proposed geographic standard for outside retail lending areas to exclude those nonmetropolitan counties in which a bank did not originate or purchase any closed-end home mortgage loan, small business loan, small farm loan, or automobile loan (if automobile loans are a product line for the bank). In addition, the agencies are codifying the outside retail lending area approach is new § __.18 for better clarity and organization. These modifications to the proposal are discussed throughout this section-by-section analysis of § __.18.

Legal authority. The agencies have considered all of the issues raised by commenters regarding their legal authority to evaluate the retail lending performance of certain banks in their outside retail lending areas. Consistent with the agencies' views stated in the proposal, and upon further deliberation and consideration, the agencies have concluded that the CRA authorizes the agencies to evaluate at least certain banks' retail lending performance in their outside retail lending areas. As discussed above in the section-by-section analysis of § __.17, the CRA requires the agencies to assess a bank's record of meeting the credit needs of its entire community, without defining what constitutes a bank's “entire community.” Moreover, as described in the section-by-section analysis of § __.17, although the CRA includes provisions that specifically relate to the preparation of written evaluations that support the conclusion that the geographic areas where a bank maintains deposit-taking facilities are considered part of the bank's entire community, the statute does not indicate that a bank's entire community consists of only these geographic areas.

The CRA delegates authority to the agencies to prescribe regulations to carry out the purposes of the CRA. To achieve its purposes, the CRA requires the agencies to assess whether a bank is meeting the credit needs of all parts of the communities it serves, without excluding the low- and moderate-income neighborhoods in those communities. The agencies have determined, based on their supervisory experience and expertise, that for at least certain banks, the bank's “entire community” can reasonably be considered to include those geographic areas where the bank's retail loan borrowers are located. The agencies have concluded that evaluating the retail lending performance of such banks in their outside retail lending areas falls within the requirements imposed on the agencies by the CRA to assess a bank's record of meeting the credit needs of its entire community, and properly furthers the purpose of the statute to encourage banks to meet the credit needs of all parts of the communities they serve. In addition, the agencies believe that the combination of facility-based assessment areas, retail lending assessment areas, and outside retail lending areas will allow the agencies to achieve a more comprehensive evaluation of the bank's performance across its entire community.

Policy objectives of outside retail lending areas. In developing the overall outside retail lending area approach in the proposed and final rules, the agencies seek to achieve several different policy objectives. First, the outside retail lending area approach adapts to ongoing changes to the banking industry. The current CRA regulations generally define assessment areas in connection with a bank's main office, branches, and deposit-taking ATMs. However, the agencies recognize that changes in technology and in bank business models have resulted in banks' entire communities extending beyond the geographic footprint of the bank's main office, branches, and other deposit-taking facilities. To reflect these changes in banking, and to make the assessment area framework more durable over time, the agencies are complementing the existing facility-based assessment area framework in the final rule with a retail lending assessment area and outside retail lending area requirements tailored to certain banks.

Second, the outside retail lending area approach improves parity in the evaluation framework for banks with different business models. For example, under the current approach, a bank that maintains branches in multiple States and conducts retail lending in the geographic areas served by those branches would have its retail lending evaluated in multiple assessment areas based on the location of its branches; however, a bank that operates exclusively online would only have its retail lending performance evaluated in one assessment area based on the location of the bank's main office, which may not be representative of the bank's overall retail lending performance. Under the final rule approach, however, the online bank's retail lending performance in other areas may be evaluated as part of the retail lending assessment area evaluation or outside retail lending area evaluation, resulting in more comparable CRA evaluations for both banks despite their different business models.

Third, the outside retail lending area approach, in combination with the retail lending assessment area approach for large banks discussed in the section-by-section analysis of final § __.17, increases the share of retail lending that is considered in CRA evaluations for certain banks. Under the current approach, retail lending conducted outside of a bank's assessment areas is not evaluated using the lending test criteria; this lending is only considered if the bank has adequately addressed the needs of borrowers within its assessment areas, and does not compensate for poor lending performance within the bank's assessment areas. The outside retail lending area approach in the final rule applies a metrics-based evaluation approach to retail loans in certain banks' outside retail lending areas, and generally increases the share of retail lending by banks that is evaluated in this manner.

Finally, the agencies seek to achieve the policy objectives described above while also appropriately adjusting for the level of complexity and impact on banks that would be evaluated in new outside retail lending areas. The outside retail lending area approach in the final rule is intended to address compliance cost concerns, while simultaneously ensuring that the agencies' other objectives, described above, are achieved.

The agencies have considered comments that the outside retail lending area approach will add complexity and compliance burden to CRA evaluations, as well as commenter views that the outside retail lending area approach may result in banks redirecting resources from serving their facility-based assessment areas. The agencies recognize that banks that are evaluated in outside retail lending areas under the final rule approach may bear some potential compliance costs, such as the potential costs associated with monitoring their performance and meeting performance standards in outside retail lending areas. However, the agencies believe that the final rule outside retail lending area approach is appropriately calibrated to achieve the agencies' policy objectives described above. In addition, the agencies believe that the compliance costs associated with the final rule outside retail lending area approach are reasonable because the outside retail lending area evaluation consolidates all of a bank's retail lending outside of its facility-based assessment areas and retail lending assessment areas into one evaluation area, such that there is one set of metrics and benchmarks for the entire outside retail lending area. Further, because the outside retail lending area does not assign conclusions to specific areas, the agencies believe that this approach provides flexibility by allowing a bank to compensate for relatively lower performance in one component geographic area with stronger performance in another component geographic area, without receiving a conclusion that reflects poor performance in any specific area.

As discussed further in the section-by-section analysis of § __.17, the agencies will develop and make freely available tools that would leverage reported loan data to calculate the retail lending distribution benchmarks that applied to a bank's outside retail lending area in recent years. The agencies believe that these data tools will help to address commenter concerns regarding the potential complexity and compliance burden associated with the outside retail lending area approach.

Retail loans included in the outside retail lending area. The agencies considered, but have determined not to adopt, the alternative suggested by at least one commenter of including additional retail loans in the outside retail lending area. Specifically, in addition to the retail lending conducted outside of facility-based assessment areas and retail lending assessment areas, the agencies considered including in the outside retail lending area those retail loans within facility-based assessment areas and retail lending assessment areas that are not evaluated as a major product line. Although the agencies have considered that such an approach would increase the total amount of retail lending that is evaluated under the Retail Lending Test, the agencies believe the increase in coverage is likely to be minimal in comparison to the final rule approach. In addition, the agencies believe that such an approach would add complexity because it would result in distinct outside retail lending areas for each product line ( i.e., closed-end home mortgage loans, small business loans, small farm loans, and automobile loans if automobile loans are a product line for the bank). Instead, the agencies believe that a single outside retail lending area for all product lines would be reduce complexity for both the agencies and affected banks and potential compliance burden for affected banks, while still achieving the agencies' policy objectives.

Codification in § __.18. The agencies determined that it is appropriate to codify the outside retail lending area approach in new § __.18 to increase clarity and improve organization of the final rule. Describing the details of the outside retail lending area approach in a separate section of regulatory text reflects that the outside retail lending area is one type of Retail Lending Test Area that is used in the Retail Lending Test evaluation, alongside facility-based assessment areas (as described in § __.16) and retail lending assessment areas (as described in § __.17).

Section __.18(a) In General—Banks Evaluated in Outside Retail Lending Areas

The Agencies' Proposal

In proposed § __.22(a)(2)(ii), the agencies proposed to evaluate the retail lending performance of all large banks in their outside retail lending areas. The agencies sought feedback on whether all large banks should have their retail lending in their outside retail lending areas evaluated, or whether the agencies should exempt large banks that make more than a certain percentage, such as 80 percent, of their retail loans within facility-based assessment areas and retail lending assessment areas.

In proposed § __.22(a)(3), the agencies proposed to evaluate the retail lending performance of certain intermediate banks in their outside retail lending areas. Specifically, the agencies proposed to evaluate an intermediate bank's retail lending performance in its outside retail lending area if the intermediate bank originated and purchased over 50 percent of its retail loans, by dollar amount, outside of its facility-based assessment areas over the relevant evaluation period.

Comments Received

Application to large banks. Some commenters addressed the applicability of the outside retail lending area approach to large banks. For example, at least one commenter suggested only evaluating a large bank on a mandatory basis in its outside retail lending area if the large bank has at least $10 billion in assets, but that a large bank with less than $10 billion in assets should have the option to have its outside retail lending area evaluated. Another commenter stated that the outside retail lending area evaluation should be optional for all banks.

Several commenters recommended exempting large banks that lend primarily or predominantly within their facility-based assessment areas, or within their facility-based assessment areas and retail lending assessment areas, from evaluation in their outside retail lending areas. These commenters offered a range of suggestions regarding the percentage at which such an exemption should apply (measured in terms of the percentage of the bank's retail loans that must be within facility-based assessment areas, or within their facility-based assessment areas and retail lending assessment areas), ranging from 50 to 98 percent. Some of these commenters emphasized that if the majority or substantial majority of a bank's retail lending is within its facility-based assessment areas, the evaluation of retail lending in outside retail lending areas would have little bearing on the bank's overall evaluation, and yet would require the bank to spread its CRA resources outside of its local footprint.

In contrast, several commenters opposed providing large banks that lend primarily within their facility-based assessment areas, or within their facility-based assessment areas and retail lending assessment areas, an exemption from being evaluated on their retail lending in outside retail lending areas. Commenters opposed to exempting banks from the outside retail lending area evaluation asserted that the proposal would not be unduly burdensome because the agencies' proposed approach for weighting assessment area and outside retail lending area retail lending performance to determine institution-level performance would appropriately tailor the outside retail lending area evaluation to different business models. These commenters further noted that banks that make significant numbers of home mortgage or small business loans outside of their facility-based assessment areas and/or retail lending assessment areas should have an obligation to low- and moderate-income communities in those areas.

Application to intermediate banks. A commenter recommended that all intermediate banks should be evaluated in outside retail lending areas, rather than limiting the outside retail lending area evaluation to those intermediate banks that originate or purchase at least 50 percent of their retail loans outside of their facility-based assessment areas. Another commenter stated that the outside retail lending area evaluation should be optional for all banks.

Final Rule

Overview. With respect to large banks, the agencies are adopting the proposal to evaluate the retail lending performance of all large banks in their outside retail lending area. As such, final § __.18(a)(1) provides that the agencies evaluate a large bank's record of helping to meet the credit needs of its entire community in its outside retail lending area pursuant to § __.22. Final § __.18(a)(1) clarifies that the agencies will not evaluate a large bank in its outside retail lending area if it did not originate or purchase loans in any products lines in the outside retail lending area during the evaluation period. The agencies believe that this limitation was implicit in the proposal, but believe that it is appropriate to make this limitation explicit in the final rule to promote clarity and transparency.

With respect to other banks, the agencies are adjusting the standard used to determine when an intermediate bank's outside retail lending area is evaluated on a mandatory basis, and are applying this same standard to a small bank that opts to be evaluated under the Retail Lending Test. In addition, the agencies are permitting an intermediate bank or small bank that does not meet this standard to opt to have its outside retail lending area evaluated. As such, final § __.18(a)(2) provides that the agencies evaluate the record of an intermediate bank, or a small bank that opts to be evaluated under the Retail Lending Test, of helping to meet the credit needs of its entire community in its outside retail lending area pursuant to § __.22, for a particular calendar year, if either (1) the bank opts to have its major product lines evaluated in its outside retail lending area, or (2) in the prior two calendar years, the bank originated or purchased outside the bank's facility-based assessment areas more than 50 percent of the bank's home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans if automobile loans are a product line for the bank, as described in paragraph II.a.2 of final appendix A.

Application to large banks. The agencies continue to believe that it is appropriate to evaluate the retail lending performance of all large banks in their outside retail lending areas. The agencies believe that evaluating large banks in their outside retail lending areas is important to achieving the agencies' policy objectives of adapting to ongoing changes to the banking industry, improving parity in the evaluation framework for banks with different business models, and increasing the share of retail lending that is considered in CRA evaluations, discussed above. Further, the agencies believe that the final rule outside retail lending area approach is appropriately calibrated to achieve the agencies' policy objectives while minimizing the additional complexity and compliance burden associated with outside retail lending areas. On balance, the agencies believe it is appropriate to tailor the outside retail lending area requirement to all large banks, but only certain other banks, recognizing that large banks generally have more resources and therefore greater capacity than small and intermediate banks to adapt to new regulatory provisions such as outside retail lending areas.

To complement the facility-based assessment area approach and retail lending assessment area approach, the outside retail lending area approach would evaluate a large bank's retail lending that is too dispersed to be evaluated within a specific geographic area ( i.e., in a facility-based assessment area or outside retail lending area). For example, if a large bank originated 50 closed-end home mortgages and 300 small business loans in an MSA in each year of the prior two years, the large bank would not be required to delineate a retail lending assessment area in the MSA pursuant to the loan count thresholds in final § __.17(c), but the MSA would be included in the large bank's outside retail lending area. As a result, this lending would be considered as part of the large bank's Retail Lending Test evaluation. However, a conclusion would be assigned to the entirety of the bank's outside retail lending area, rather than for the specific MSA. The agencies believe that this approach is appropriate because, the sum of the large bank's retail lending outside of its facility-based assessment areas and retail lending assessment areas may constitute a significant percentage of a bank's overall lending, and that this retail lending should be considered under the Retail Lending Test to ensure a comprehensive evaluation of a large bank's retail lending performance. The agencies emphasize that the outside retail lending area approach is especially important for comprehensively evaluating the retail lending performance of predominantly branch-based large banks that qualify for the exemption from the retail lending assessment area requirement pursuant to final § __.17(a)(2).

The agencies considered, but are not adopting, the alternative approach suggested by commenters to exempt large banks that conduct at least a certain percentage, such as 50 percent, of their retail lending within their facility-based assessment areas, or within their facility-based assessment areas and retail lending assessment areas, from the outside retail lending area evaluation. For the reasons stated above, the agencies believe it is appropriate to evaluate the retail lending performance of all large banks in their outside retail lending areas. The agencies note that the final rule approach accounts for cases where a bank has only a small amount of retail lending in its outside retail lending area, because the amount of retail lending in the bank's outside retail lending area is one component of the weighting that the outside retail lending area performance conclusion receives in determining the bank's overall Retail Lending Test conclusion, as discussed in the section-by-section analysis of § __.22(h). Finally, the agencies note that a large bank with a relatively small share of lending in its outside retail lending area overall could still have a significant number of loans in one or more component geographic areas of its outside retail lending area; the agencies believe that it is important to evaluate the extent to which the bank has met the retail lending credit needs of those areas.

The agencies also considered, but are not adopting, the alternative approach suggested by commenters to make the evaluation of all or certain large banks in their outside retail lending areas optional. However, the agencies believe that an optional evaluation approach would not achieve the agencies' policy objectives since some or all large banks could opt out of outside retail lending areas entirely under this alternative. The agencies are concerned that over time, an optional outside retail lending area approach would make the assessment area framework less durable to ongoing changes in the banking industry, particularly with any expansion of digital banking. Specifically, if an increasing share of large bank retail lending occurs outside of facility-based assessment areas and retail lending assessment areas, and if the agencies could evaluate that lending in outside retail lending areas only at a bank's option, the policy objectives of increasing the share of retail lending that is considered in CRA evaluations and would be undermined.

Application to intermediate banks and small banks. The final rule retains the proposed approach evaluating intermediate banks in their outside retail lending areas on a mandatory basis if the intermediate bank conducts a majority of its retail lending outside of its facility-based assessment areas. This tailored approach recognizes that intermediate banks generally have fewer resources and therefore less capacity than large banks to adapt to new regulatory provisions such as a Retail Lending Test evaluation in outside retail lending areas. At the same time, the agencies believe that evaluating certain intermediate banks in their outside retail lending areas is important to achieving the agencies' policy objectives of adapting to ongoing changes to the banking industry, improving parity in the evaluation framework for banks with different business models, and increasing the share of retail lending that is considered in CRA evaluations, discussed above.

The final rule's 50 percent threshold, the calculation of which is discussed below, reflects the agencies' belief that an intermediate bank's CRA evaluation should capture at least a majority of the bank's retail lending. The agencies believe that evaluating less than a majority of an intermediate bank's retail lending could result in Retail Lending Test conclusions that are not representative of the intermediate bank's overall retail lending performance. The agencies also considered that a threshold level higher than 50 percent would result in more comprehensive evaluations for more intermediate banks; however, a higher exemption threshold level would also increase the number of affected intermediate banks, including intermediate banks that already have a majority of their retail lending evaluated within facility-based assessment areas. In addition, the agencies considered that for these intermediate banks, the outside retail lending area evaluation would generally carry less weight in determining the intermediate bank's overall Retail Lending Test conclusion.

While the proposed rule did not provide that a small bank would be evaluated in its outside retail lending area, the agencies determined that it is appropriate to treat small banks that opt into the Retail Lending Test consistently with intermediate banks under the final rule. In reaching this determination, the agencies considered that it is important that the Retail Lending Test evaluation capture at least a majority of a bank's lending. If a small bank that opts into the Retail Lending Test conducts a majority of its retail lending outside of its facility-based assessment areas, the agencies believe that the outside retail lending area evaluation should apply to the small bank to ensure that the Retail Lending Test conclusion for the institution is representative of the bank's overall retail lending performance. The agencies do not believe that this approach should significantly increase the compliance burden of the final rule on small banks because the Retail Lending Test evaluation remains optional for these banks.

Finally, the agencies determined that intermediate banks, and small banks that opt into the Retail Lending Test, should have the option to be evaluated in their outside retail lending areas even if they do not conduct a majority of their retail lending outside their facility-based assessment areas. The agencies believe this option provides flexibility for an intermediate bank or small bank to consider the potential complexity and compliance burden associated with the outside retail lending area evaluation, and the impact on the bank's retail lending performance. The agencies also considered that without providing this option, an intermediate bank, or a small bank that opts into the Retail Lending Test, that does not conduct a majority of its retail lending outside of its facility-based assessment areas that prefers to have its outside retail lending area evaluated could need to seek approval of a strategic plan, which could increase the complexity of the final rule approach. In addition, the agencies considered that making the outside retail lending area evaluation optional for these banks would be consistent with current evaluation practices, whereby banks may receive consideration for retail lending outside of their assessment areas.

Calculation of 50 percent standard. The final rule adopts a modified version of the proposed 50 percent standard used to determine when an intermediate bank (or a small bank that opts into the Retail Lending Test) is evaluated on a mandatory basis in its outside retail lending area. As specified in paragraph II.a.2 of final appendix A, the 50 percent threshold is calculated over the prior two calendar years, and is based on a combination of loan dollars and loan count, as defined in final § __.12. The agencies are adopting these changes to conform the calculation of the 50 percent outside retail lending area standard to the calculation approach used for the 80 percent threshold to identify those predominantly branch-based large banks that are exempt from the retail lending assessment area requirement. In addition, the agencies note that the calculation of the 50 percent standard, like the calculation of the 80 percent standard for retail lending assessment areas, includes originated or purchased home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans if automobile loans are a product line for the bank. The agencies' rationale for this calculation is further described in the section-by-section analysis of final § __.17(a).

Section __.18(b) Geographic Requirements of Outside Retail Lending Areas

The Agencies' Proposal

In proposed § __.12, the agencies defined the outside retail lending area as the nationwide area outside of a bank's facility-based assessment areas and, as applicable, retail lending assessment areas. To evaluate a bank's retail lending performance in its outside retail lending area, and as discussed further in the section-by-section analysis of § __.22(e), the agencies proposed in § __.22(b)(2)(ii) and paragraphs III.2.c and d and IV.2.c and d of proposed appendix A, to calculate tailored retail lending distribution benchmarks for a bank's outside retail lending area, by taking a weighted average of the benchmarks calculated for each MSA and the nonmetropolitan area of each State included in the bank's outside retail lending area.

Comments Received

The agencies did not receive comments that specifically discussed the geographic requirements for outside retail lending areas. However, as discussed above, the agencies received a number of comments on the overall outside retail lending area approach. In addition, the agencies received comments on the proposed approach to calculating tailored distribution benchmarks for a bank's outside retail lending area; these comments are discussed further in the section-by-section analysis of final § __.22(e).

Final Rule

For the reasons discussed below, the agencies are adopting a tailored version of the proposed geographic requirements for outside retail lending areas. Specifically, relative to the proposal, a bank's outside retail lending area no longer includes nonmetropolitan counties in which the bank did not conduct any retail lending. As such, final § __.18(b)(1) provides that a bank's outside retail lending area consists of the nationwide area, excluding (1) the bank's facility-based assessment areas and retail lending assessment areas; and (2) any county in a nonmetropolitan area in which the bank did not originate or purchase any closed-end home mortgage loans, small business loans, small farm loans, or automobile loans (if automobile loans are a product line for the bank). In addition, the agencies are specifying in final § __.18(b)(2) that the outside retail lending area is comprised of component geographic areas, and that a component geographic area is any MSA or the nonmetropolitan area of any State, or portion thereof, included within the outside retail lending area.

Exclusion of certain nonmetropolitan counties. Upon consideration of commenter feedback, the agencies believe it is appropriate to exclude nonmetropolitan counties in which a bank did not originate or purchase any retail loans from the bank's outside retail lending area. As a result, outside retail lending areas are more targeted, relative to the proposal, to where a bank conducts retail lending business in nonmetropolitan areas. The agencies note that the final rule adopts a similar exclusion of these counties from retail lending assessment areas located in the nonmetropolitan area of a State, and that the agencies' rationale for the retail lending assessment area exclusion, described further in the section-by-section analysis of final § __.17(b), generally also applies to outside retail lending areas.

Component geographic areas. The agencies determine that specifying the component geographic areas of the outside retail lending area in regulatory text in final § __.18(b)(2) provides clarity. The agencies note that sections III and IV of final appendix A consistently use the term “component geographic areas” in describing the calculation of the retail lending distribution benchmarks for a bank's outside retail lending area. This calculation is discussed further in the section-by-section analysis of final § __.22(e).

Section __.19 Areas for Eligible Community Development Loans, Community Development Investments, and Community Development Services

Current Approach

Under the current rule, in addition to considering a bank's community development loans, investments, and services conducted within the bank's assessment areas, the agencies may provide consideration for loans, investments, and services conducted in a broader statewide or regional area that includes one or more assessment areas. Whether an activity receives consideration and the geographic level to which the activity is allocated depends on whether the organization or activity has a purpose, mandate, or function of serving one or more assessment areas. Specifically, an activity that has a purpose, mandate, or function that includes serving one or more assessment areas is considered as part of the evaluation of: (1) one assessment area, when it benefits and is targeted to a single assessment area; (2) the State or multistate MSA, when the activity benefits or is targeted to two or more assessment areas, or the State or multistate MSA; and (3) the institution level, when the activity benefits or is targeted to a regional area of two or more States not in a multistate MSA or a regional area that includes but is larger than one multistate MSA. An activity that does not have a purpose, mandate, or function that includes serving an assessment area may enhance performance at the State, multistate MSA, or institution level if: (1) the bank has been responsive to community development needs and opportunities in its assessment areas; and (2) the activity benefits census tracts or individuals located in a State, multistate MSA, or broader regional area that includes one or more of a bank's assessment areas (even though the activity does not benefit, and is not targeted to, one or more assessment areas).

The Agencies' Proposal

Under proposed § __.18, a bank would receive consideration for community development loans, community development investments, and community development services (which the proposal referred to collectively as “community development activities”) conducted in its facility-based assessment areas. In addition, proposed § __.18 provided that a bank would also receive consideration for community development loans, community development investments, and community development services provided outside of its facility-based assessment areas within the States and multistate MSAs in which the bank has a facility-based assessment area and in a nationwide area, as provided in proposed §§ __.21, __.24 through __.26, and __.28 and proposed appendices C and D. The cross-references in proposed § __.18 did not include proposed § __.29; as a result, the consideration of community development activities outside of facility-based assessment areas would not have applied to small banks or intermediate banks that did not opt into the Community Development Financing Test. Under the proposal, community development loans, community development investments, and community development services conducted outside of a bank's facility-based assessment areas would be considered to inform conclusions for the State, multistate MSA, and institution.

Recognizing that the current approach to considering community development loans, investments, and services in broader statewide and regional areas has afforded banks flexibility but sometimes contributed to uncertainty about whether such loans, investments, or services will qualify, the agencies aimed with the proposal to retain and enhance this flexibility while also providing greater certainty. To this end, the agencies included a clear statement in proposed § __.18 that a bank will also receive consideration for community development loans, investments, and services conducted outside of a bank's facility-based assessment areas—not only within the States and multistate MSAs in which the bank has a facility- based assessment area, but also in the nationwide area.

The agencies sought feedback on the proposed approach, and on alternative approaches that would encourage banks that choose to conduct community development activities outside of their facility-based assessment areas, such as requiring banks to delineate specific geographic areas where they would focus their community development outside of facility-based assessment areas. The agencies also asked whether all banks, including all intermediate banks, small banks, and banks that elect to be evaluated under an approved strategic plan, should have the option to have community development activities outside of facility-based assessment areas considered.

Comments Received

General feedback. The agencies received numerous comments on the proposal regarding the areas eligible for community development loans, investments, or services outside of facility-based assessment areas, under proposed § __.18. Many commenters supported the proposal. In general, these commenters expressed that broadening the geographic eligibility of community development activities will allow banks to target community development loans, investments, and services to areas with the greatest community development needs, regardless of whether they are in proximity to a bank branch. For example, a number of commenters stated that the proposal would increase community development activities in underserved areas such as economically distressed areas, rural areas, and Native lands where there are few banks. Similarly, some commenters supported the proposal because they noted that bank branches do not always align with the neighborhoods in need of investment and that the flexibility of the proposal can help bring community development capital to these neighborhoods. Another commenter suggested that consideration of community development activities anywhere in the United States would allow banks to conduct community development activities that best align with the bank's mission, and to seek out the most advantageous financial investments.

Other commenters supported the proposal because it provided flexibility for banks that have limited control over the availability of community development projects in their facility-based assessment areas. For example, commenters noted that in some areas, opportunities to conduct community development loans, investments, and services are subject to intense competition between lenders and investors.

Commenters also described other benefits of the proposed approach. Some commenters noted that credit for community development activities outside of facility-based assessment areas would be particularly helpful for the growing number of banks with a limited number of branches. One of these commenters also noted that smaller State and regional development organizations would also benefit from this aspect of the proposal. Other commenters indicated that the proposal provides much-needed certainty to banks because it allows banks to get credit for community development activities outside of their facility-based assessment areas without first having to demonstrate that they have been responsive to the needs of their assessment areas.

Other commenters suggested additional analysis or other modifications to the approach. A commenter requested that the agencies track banks' community development activities conducted outside of its assessment area to see if banks take advantage of the proposed changes. Another commenter indicated that community development activities outside of assessment areas should be optional for positive consideration.

Other commenters expressed concerns regarding the proposal, with some suggesting alternatives that would limit or give less emphasis to community development activities outside of facility-based assessment areas relative to activities within facility-based assessment areas. These commenters generally stated that it would be important to maintain a focus on banks meeting local community needs. Commenters provided a range of specific recommendations including that: (1) community development activities should receive CRA credit only in facility-based assessment areas and anywhere the bank has a CRA obligation to serve a local community under an applicable performance test; (2) the agencies should provide only partial credit for community development activities conducted outside of a bank's assessment areas; (3) credit for outside facility-based assessment area community development activities should be weighted or emphasized less than what is provided inside facility-based assessment areas; and (4) consideration should be given only for community development activities outside of a bank's assessment areas if the bank received a certain rating, such as “Satisfactory” or “Low Satisfactory,” on its previous CRA exam. Some commenters expressed the sentiment that to receive any credit for community development activities outside of a bank's assessment areas, banks should be required to first meet the credit needs of their assessment areas. For example, a commenter suggested that banks provide evidence to the agencies that they had unsuccessfully bid on multiple community development financing activities within their facility-based assessment areas before receiving consideration for their community development activities outside of its facility-based assessment areas.

Consideration of specific types of community development loans, community development investments, or community development services. A few commenters stated that allowing banks to receive CRA consideration for investments outside of facility-based assessment areas would support and expand affordable housing investments in underserved CRA markets. Some commenters pointed out that expanding consideration for community development financing outside of facility-based assessment areas would help smooth existing LIHTC pricing discrepancies between CRA hotspots and CRA deserts. A commenter further recommended that credit for LIHTC investments outside of assessment areas should be limited to the greater statewide or regional area in which the bank has an assessment area.

Other commenters requested that the agencies support CRA credit for investments or loans with multistate CDFIs, with CDFI loan funds, or generally with CDFIs or MDIs outside of a bank's assessment areas. However, another commenter voiced concern that full consideration of investments with CDFIs regardless of geographic location could drain capital away from local CDFIs to large national CDFIs. Other activities that commenters suggested should receive CRA community development credit include lending outside of assessment areas conducted through a fintech partnership, activities relating to digital inclusion that target or benefit underserved urban and rural communities, and bank employee volunteer activities unrelated to the provision of financial services if the services are provided in any low- or moderate-income area.

Geographic areas in which community development loans, investments, and services are considered. Some commenters recommended specific geographic areas in which a bank's community development activities should be considered. Some commenters suggested limiting consideration of community development activities that are beyond facility-based assessment areas to low- and moderate-income communities where a bank conducts business, or to four categories of geographic areas where commenters stated that community development needs are greater: Native lands, the Mississippi Delta, Central Appalachia, and the Texas-Mexico border.

Several commenters also stated that consideration of a bank's community development activities should be restricted to specific geographic areas identified under the proposed community development impact and responsiveness review factors. One of these commenters further suggested that the agencies should apply this restriction specifically to branch-based banks when they seek to invest outside of a State where they have branches. Conversely, another commenter noted that the community development impact and responsiveness factors would incentivize banks to focus on underserved and other high-priority communities, so any geographic restriction on making community development loans, investments, and services outside of facility-based assessment areas would be unnecessary and counterproductive.

Delineation of specific geographic areas outside of facility-based assessment areas for community development loans, investments, and services. Some commenters addressed the agencies' request for views on whether banks should be required to delineate specific geographic areas where they will focus their outside facility-based assessment area community development loans, investments, and services. A few commenters stated that banks should not be required to delineate specific geographic areas because it would reduce flexibility for banks and it may not be feasible for banks to anticipate where there will be community development opportunities. In addition, some commenters raised concerns that requiring banks to designate areas for community development loans, investments, and services outside of facility-based assessment areas could give banks too much latitude to designate easy-to-invest areas.

However, some commenters supported the idea of requiring banks to delineate specific geographic areas for community development activities. For example, a commenter supported the delineation of geographic areas for community development activities as an alternative to providing full consideration for activities in the entire statewide area for States in which a bank has one or more branches. This commenter further recommended that community development areas, if adopted, should be composed primarily of distressed, underserved, or low- or moderate-income census tracts. Another commenter stated generally that the approval of such community development geographic areas should be public, consistent, and transparent across banks, and that an impact review process should be developed that identifies a specific community need and requires banks to explain how they plan to meet those needs. Yet another commenter suggested that the agencies develop a way to define “credit deserts” where banks can receive extra credit even if the bank does not maintain a branch office in that community.

Credit for outside assessment area community development loans, investments, and services—small banks, intermediate banks, and strategic plan banks. Commenters also responded to the agencies' request for comment on whether all banks should have the option to have community development loans, investments, and services outside of facility-based assessment areas considered, including intermediate banks, small banks, and banks that elect to be evaluated under a strategic plan. All commenters addressing this question supported giving banks the option to have CRA consideration outside of facility-based assessment areas regardless of a bank's size or whether the bank elects to be evaluated under a strategic plan. Many of these commenters stated that the final rule should encourage as much community development activity as possible, indicating that there is little or no reason to limit consideration of community development activities outside of assessment areas only to large, wholesale, and limited purpose banks.

A few commenters emphasized that consideration of community development activities outside of a bank's assessment areas would be beneficial to small banks. A commenter indicated that small lenders are often in the best position to engage in loans, investments, or services in underserved areas. Another commenter stated that smaller banks may struggle to find community development opportunities, particularly when they have smaller assessment areas.

Final Rule

The agencies are adopting proposed § __.18, renumbered as final § __.19, with certain revisions discussed below. Final § __.19 states that the agencies may consider a bank's community development loans, community development investments, and community development services provided outside of its facility-based assessment areas, as provided in the agencies' CRA regulations. Relative to the proposal, the final rule expands application of this provision to include small and intermediate banks that do not opt into the Community Development Financing Test. With this expanded eligibility, the final rule in § __.19 eliminates the proposed cross references to proposed §§ __.21, __.24 through __.26, and __.28 and proposed appendices C and D in proposed § __.18. This change, which is also discussed in the section-by-section analysis of § __.29 (regarding small bank performance evaluation) and the section-by-section analysis of § __.30 (regarding intermediate bank performance evaluation), allows any bank the ability to receive consideration for qualifying community development activities outside of its facility-based assessment areas without regard to asset size or business model.

In adopting the final rule approach, the agencies considered several potential benefits of broadening the geographic scope of community development loans, investments, and services relative to the current approach. As noted by some commenters, the agencies are aware that community development opportunities in certain areas may be limited or subject to competition among banks. Principally, the agencies believe that the final rule approach will: (1) allow appropriate flexibility for banks to conduct community development loans, investments, and services in a variety of geographic areas; (2) help banks receive consideration for community development activities in areas with significant unmet credit needs, including areas where few banks maintain deposit-taking facilities; and (3) allow banks to identify community development opportunities that align with their business model and expertise, including opportunities outside of a bank's facility-based assessment areas.

The final rule approach builds on and provides greater certainty than the current approach, which, as noted, considers a bank's community development activities outside of facility-based assessment areas only for activities with a purpose, mandate, or function that includes serving geographic areas or individuals in the bank's assessment areas; or if activities benefit a broader statewide or regional area and the bank has been responsive to community development needs and opportunities in its assessment areas. Under the final rule approach, banks evaluated under the Community Development Financing Test in § __.24 or Community Development Financing Test for Limited Purpose Banks in § __.26 will receive consideration for eligible community development activities, regardless of the geographic scope of the activities. These performance tests emphasize meeting the community development needs of facility-based assessment areas while also considering activities outside of these areas. Thus, the agencies do not believe that a condition of having met the needs of facility-based assessment areas is necessary because a bank's performance within facility-based assessment areas will always be separately taken into account under the Community Development Financing Test and Community Development Financing Test for Limited Purpose Banks. In contrast, for small banks, the final rule retains conditions on the consideration of community development activities outside of facility-based assessment areas that are similar to the current approach, as discussed further below. Under the final rule, community development activities for intermediate banks will also be considered regardless of the geographic scope of the activities. However, the extent of that consideration will depend on how well the intermediate bank has met the needs of their facility-based assessment areas.

The agencies also considered the benefits of the final rule approach of considering community development activities outside of facility-based assessment areas for banks with a variety of business models. For example, the agencies believe that expanded geographic eligibility of community development activities will support banks that operate primarily or entirely without branches since these banks may have fewer community development opportunities within their facility-based assessment areas.

The final rule approach revises the proposed language from stating that a bank “will” receive consideration for activities outside of its facility-based assessment areas in proposed § __.18 to instead stating that a bank “may” receive consideration for these activities in final § __.19. This change reflects the consideration of community development activities for small banks. For these banks, consideration of community development loans, investments, and services outside of facility-based assessment areas is dependent on other factors. Under § __.29(b), the agencies may adjust the rating of a small bank evaluated under the Small Bank Lending Test from “Satisfactory” to “Outstanding” at the institution level based on making community development investments and providing community development services without regard to whether the activity is in one or more of the bank's facility-based assessment areas. Thus, in effect, the small bank would have to perform well in serving community credit needs in its facility-based assessment areas before receiving additional credit for community development activities irrespective of geographic location. Accordingly, for a small bank with an institution rating of “Needs to Improve,” community development investments and services would not be considered, including those outside of the bank's facility-based assessment areas. Moreover, as detailed in § __.30(a)(2)(ii) of the final rule for intermediate banks evaluated under the Intermediate Bank Community Development Test, the extent of the consideration of community development activities outside of the bank's facility-based assessment area(s) will depend on the adequacy of the bank's responsiveness to the needs and opportunities for community development activities within the bank's facility-based assessment areas and applicable performance context information.

Final § __.19 does not limit the geographic areas outside of facility-based assessment areas in which community development loans, investments, and services can receive consideration, as suggested by some commenters noted above. For example, final § __.19 does not restrict consideration for community development to only specific geographic areas identified under the proposed community development impact and responsiveness review factors, or to only Native lands, the Mississippi Delta, Central Appalachia, and the Texas-Mexico border, as some commenters suggested. The agencies believe that this suggested approach would limit community development opportunities, particularly for banks without access or relationships with community development providers in these areas. More generally, the agencies believe that limiting consideration of community development loans, investments, and services outside of facility-based assessment areas to any geographic areas could restrict the flow of community development financing to any area that has not been designated as eligible to receive consideration for community development.

Relatedly, under final § __.19 banks will not be required to delineate specific geographic areas outside facility-based assessment areas in which to make community development loans, investments, and services, as suggested by some commenters. The agencies believe that prescriptive delineated areas would inappropriately constrain bank flexibility to pursue community development activities where the need is greatest. In determining not to adopt this suggestion, the agencies also weighed the comments that banks may not be able to fully anticipate in advance where community development needs and opportunities may be available.

Under final § __.19, the agencies are also not establishing restrictions on the consideration of community development loans, investments, or services conducted outside of facility-based assessment areas for certain types of activities, as suggested by some commenters. For example, the final rule does not limit credit for LIHTC investments outside of facility-based assessment areas to the greater statewide or regional area in which the bank has a presence, and does not limit consideration of activities outside of facility-based assessment areas to those that expand affordable housing investments in underserved CRA markets. The agencies believe that the final rule approach allows banks to identify community development opportunities where its business model, strategy, and expertise are well aligned with a community need.

The agencies considered, but are not adopting, commenter suggestions to allow consideration of activities outside of facility-based assessment areas only if the bank provides evidence to the agencies that the bank had unsuccessfully bid on multiple community development financing activities within their facility-based assessment areas. The agencies considered that this approach may help to encourage banks to prioritize seeking out opportunities within their facility-based assessment areas. However, the agencies determined that the approach might be difficult to enforce and increase burden as a result of additional documentation requirements, and may result in banks expending resources pursuing community development opportunities that are already being met by other banks in the area.

The agencies also considered suggestions to limit consideration of community development activities outside of facility-based assessment areas to instances in which a bank received a certain overall rating, or Community Development Financing Test conclusion on its previous CRA examination, such as “Satisfactory” or “Low Satisfactory.” As noted above and in the section-by-section analyses of §§ __.29 and __.30, the final rule includes similar provisions for evaluating community development performance under the small and intermediate bank performance evaluations, but applied to the bank's current, rather than prior, evaluation period. Specifically, for a small bank, community development investments and services inside or outside of a bank's facility-based assessment area are considered only for potentially enhancing the bank's overall rating from a “Satisfactory” to an “Outstanding.” For intermediate banks evaluated under the Intermediate Bank Community Development Test, community development activities outside of facility-based assessment areas are considered without regard to whether the activity is made in one or more of the bank's facility-based assessment areas; any additional consideration to adjust a bank's rating will depend on the adequacy of the bank's responsiveness to community development needs and opportunities within its facility-based assessment areas and applicable performance context information. The agencies believe that it is preferable to apply these conditions to the current evaluation period, rather than the prior evaluation period, to ensure that a bank's community development activities are evaluated in relation to the needs and opportunities that existed when the bank conducted these activities.

The final rule approach does not adopt alternative suggestions to assign only partial credit for community development activities conducted outside of a bank's facility-based assessment areas, or to weight such activities less than activities inside facility-based assessment areas. However, the final rule includes specific weighting of facility-based assessment area conclusions on the Community Development Financing Test, the Community Development Financing Test for Limited Purpose Banks, and the Community Development Services Test, as described further in the section-by-section analysis of final § __.28.

Section __.21 Evaluation of CRA Performance in General

Under the current CRA regulations, the examination process is tailored to a bank's asset size and business model. Large banks are evaluated under three performance tests: a lending test, which assesses retail and community development loans; an investment test, which assesses community development investments; and a service test, which assesses retail services and community development services. Intermediate small banks are evaluated under a lending test and a community development test, which assesses community development loans, community development investments, and community development services. Small banks are evaluated under a single lending test. Both intermediate small banks and small banks may elect to be evaluated under the large bank performance tests if they collect and report the CRA data required of large banks. Wholesale and limited purpose banks are evaluated under a single community development test, which assesses community development loans, community development investments, and community development services. In addition, any bank may seek agency approval to be evaluated under a strategic plan.

In recognition of the importance that bank size, business model, and local conditions play when evaluating a bank's CRA performance, the agencies proposed tailoring the CRA evaluation framework based on three updated bank size categories for large banks, intermediate banks, and small banks. The agencies also proposed a tailored approach to evaluations for wholesale banks, limited purpose banks, and banks operating under an approved strategic plan. Overall, proposed § __.21 described the following: performance standards for each bank category; treatment of bank subsidiaries, affiliates, consortia, and third parties; performance context information that would be considered in CRA evaluations; categories for bank conclusions and ratings; and the requirement that bank CRA activities be conducted in a safe and sound manner.

The agencies are finalizing § __.21 with non-substantive changes. Specifically, the agencies are: revising the section heading and, as necessary, paragraph headings; streamlining the regulation text, including removing proposed § __.21(a) from the final rule as duplicative; removing duplicative information from final § __21(e); adding section headings and cross-references for clarity and ease of reference; and making other clarifying and conforming changes.

Section __.21(a) Application of Performance Tests and Strategic Plans

Current Approach

Similar to the current CRA regulations, the agencies set out an evaluation framework in proposed § __.21(a) and (b) that is tailored to a bank's asset size and business model. As explained below, the agencies are finalizing the broader evaluation framework as proposed, with modifications to the individual performance tests and standards.

Section __.21(a)(1) Large Banks

The Agencies' Proposal

In § __.21(b)(1), the agencies proposed to apply four performance tests to large banks: the Retail Lending Test in proposed § __.22; the Retail Services and Products Test in proposed § __.23; the Community Development Financing Test in proposed § __.24; and the Community Development Services Test in proposed § __.25. The agencies intended that each of these performance tests would measure a different aspect of how responsive a bank's retail and community development activities are to the credit needs of the bank's communities.

As discussed in more detail in the section-by-section analysis of the Retail Lending Test in § __.22, the agencies proposed that the Retail Lending Test rely on a set of metrics and community and market benchmarks grounded in local data to measure how well a bank's retail lending meets the credit needs of low- and moderate-income individuals, small businesses and small farms, and low- and moderate-income geographies through an analysis of lending volume and geographic and borrower lending distributions. More specifically, the agencies proposed that the bank's retail lending distribution metrics, calculated using the bank's number of loans, be compared to community and market benchmarks. The agencies also proposed that additional factors be considered when evaluating a bank's retail lending performance. The agencies proposed that conclusions for the Retail Lending Test be assigned for each of a large bank's facility-based assessment areas, retail lending assessment areas, and outside retail lending area, as well as at the State, multistate MSA, and institution levels, as applicable.

The agencies proposed that the Community Development Financing Test assess how well a bank meets community development financing needs, using dollar-based metrics and benchmarks to standardize the review of community development loans and community development investments, while also incorporating a qualitative impact review of community development financing activities to complement the metrics and benchmarks. Conclusions would reflect the agencies' qualitative assessments of a bank's community development financing metric relative to the benchmarks and the impact review. The proposed conclusions for the Community Development Financing Test would be assigned for each of a bank's facility-based assessment areas, States, and multistate MSAs, and at the institution level, as applicable.

The agencies' proposed Retail Services and Products Test and Community Development Services Test would evaluate how well a bank's products and services, respectively, meet community credit and community development needs. The agencies proposed revised standards for these performance tests to reflect changes in banking over time and to introduce standardized metrics, as well as benchmarks for the Retail Services and Products Test, to allow a more consistent evaluation approach. For both performance tests, the proposed conclusions would be assigned for each of a bank's facility-based assessment areas, States, and multistate MSAs, and at the institution level, as applicable.

To reflect the increased resources and capacity of large banks that had assets greater than $10 billion, the agencies proposed additional tailoring of the Retail Services and Products Test, the Community Development Services Test, and the data collection and reporting requirements. For large banks that had assets greater than $10 billion, the agencies proposed requiring a full evaluation under the Retail Services and Products Test, including the bank's digital and other delivery systems and deposit products responsive to the needs of low- and moderate-income individuals. Similarly, for the Community Development Services Test, the agencies proposed that only large banks that had assets of more than $10 billion would be required to be evaluated under a community development service hours metric.

In addition to requiring large banks that had assets greater than $10 billion to collect and maintain data for digital and other delivery systems and responsive deposit products, the agencies also proposed that these banks collect, maintain, and report deposits, community development services, and automobile lending data.

Comments Received

The agencies received numerous comments on the application of the four proposed tests to large banks. Many commenters offered general support for the proposed four-test framework, with reasons for support including increased test rigor, additional quantitative standards for assessing performance, and permitting a more comprehensive evaluation of CRA activities.

Many commenters also stated that the proposed four-performance test framework for large banks offered significant improvements in performance test rigor, but that the improvements are not consistent. In particular, some commenters were concerned that the Retail Services and Products Test, the Community Development Financing Test, and the Community Development Services Test may replicate the high pass rates and ratings that banks currently receive, leading to “grade inflation,” and may not necessarily reveal significant distinctions in performance. These commenters suggested that the agencies extend the rigor of the Retail Lending Test to the other three performance tests. To guard against ratings inflation and ensure test rigor, several commenters recommended that the agencies develop guidelines for examiners on how to use the performance measures for some of the large bank performance tests such as the Community Development Financing Test and the Community Development Services Test.

Some commenters made recommendations to the agencies to revise the proposed large bank framework of performance tests by adding to, eliminating, or reconfiguring one or more of the four performance tests. A commenter expressed support for the current large bank three-performance-test evaluation regime with distinct lending, investment, and service tests, stating that this three-performance-test regime is a more equitable method to measure CRA performance; prevents bank lending, investment, and services from competing against each other for supremacy; and ensures that banks continue to have a focused incentive to meet the needs of low- and moderate-income communities.

Some commenters suggested that the agencies eliminate the Community Development Services Test after combining it with the Retail Lending Test, the Community Development Financing Test, the Retail Services and Products Test, or a combination of the performance tests. These commenters explained that: the proposed Community Development Services Test was not sufficiently weighted by itself to incentivize bank performance; the proposed eligible service activities are limited and had minimal impacts; and the activities that would be evaluated under the performance test would be better allocated to either the Community Development Financing Test or the Retail Services and Products Test. For large banks, a commenter suggested that the agencies should consider combining the Community Development Financing Test and the Community Development Services Test, and separately combining the Retail Lending Test and the Retail Services and Products Test, with each combined performance test having a 50 percent weight.

Another commenter suggested that the agencies make the Community Development Services Test more of a “tie-breaker” by providing minimal credit for community development services. Another commenter suggested that the agencies eliminate the Community Development Services Test in full and instead evaluate these services as an impact review factor.

A few commenters suggested that the agencies maintain separate evaluations for community development lending and community development investments. The commenters stated that, by combining community development lending and community development investment into a single performance test, banks may retreat from investments because they can be more complex and provide a lower rate of return than community development lending. For similar reasons, a commenter recommended that the agencies create a lending subtest and an equity investment subtest within the Community Development Financing Test with equal weighting for both subtests.

Many commenters offered suggestions on additional tailoring for the large bank performance test framework. For example, a few commenters suggested that large banks that had less than $10 billion in assets should have the ability to choose an evaluation under the proposal or under the current examination framework.

Many commenters objected to the fact that, under the proposal, large banks that had assets between $2 billion and $10 billion would have different and lesser obligations compared to banks that had over $10 billion in assets. These differences existed within: (1) the Retail Services and Products Test with respect to the evaluation of digital and other delivery systems and the evaluation of deposit products responsive to the needs of low- and moderate-income individuals; (2) the Community Development Services Test with respect to the metric for community development services hours; and (3) the related data requirements for retail services and products, community development services, and deposits. These commenters stated that financial institutions classified as a large bank should have all the CRA responsibilities of a large bank with no differential treatment.

Final Rule

After considering these comments, the agencies are finalizing the overall evaluation framework for large banks as proposed with the four performance tests described above. Under § __.21(a)(1) of the final rule, large banks are subject to: the Retail Lending Test in final § __.22; the Retail Services and Products Test in final § __.23; the Community Development Financing Test in final § __.24; and the Community Development Services Test in final § __.25. However, as discussed in the section-by-section analysis to final § __.28, “Assigned Conclusions and Ratings,” the agencies are revising the weight of each of the four performance tests so that the two retail performance tests and the two community development performance tests collectively each have a respective weight of 50 percent.

The agencies note that, rather than three performance tests under the current rule, they proposed the four performance tests for large banks to more easily tailor examinations by bank asset size and business model. This tailoring allows the agencies to use specific data for each performance test, including data which are already available. Further, the agencies believe that each individual performance test measures a unique aspect of how responsive a bank's retail and community development activities are to the credit needs of their communities, and that collapsing one or more of the performance tests to evaluate lending, investment, and services would result in a less robust large bank evaluation framework. Retaining the Community Development Services Test and the Retail Services and Products Test as separate performance tests for large banks appropriately emphasizes large bank service performance under each respective performance test. Maintaining the Community Development Financing Test and Community Development Services Test as separate performance tests underscores the importance of community development services for fostering partnerships among different stakeholders, building capacity, and creating the conditions for effective community development, including in rural areas. Further, the Community Development Financing Test and the Community Development Services Test each evaluate different aspects of the responsiveness of a bank's community development activities to the credit needs of its local communities. Maintaining two separate community development performance tests in the final rule emphasizes the benefits and importance of community development financing activities and community development services and acknowledges that, in comparison to smaller banks, large banks have additional capacity to conduct both types of activities.

The agencies are not adopting the suggestions to make the Community Development Services Test more of a “tie-breaker” or to instead evaluate community development services as an impact review factor because these suggestions are inconsistent with the agencies' intent to emphasize the significance of community development service activities, as noted above.

The agencies are keeping the evaluation of both community development lending and community development investments activities under the Community Development Financing Test. The agencies acknowledge the importance of investments, such as the LIHTC, to help support the creation of affordable rental housing. For that reason, as discussed in the section-by-section analysis of § __.24, the final rule establishes a separate community development investment metric in § __.24(e)(2)(iii) and (iv) to identify and consider these types of investment activities within the broader performance test. With this addition, the agencies believe that these activities can be evaluated in a single performance test without a diminution of either lending or investments. In addition, if the agencies observe any developments in which banks favor community lending or community investments to a point where there is an appreciable decline in one type of activity in favor of the other, the agencies will reevaluate whether any additional measures are needed, such as separate tests or distinct evaluations of each activity under the same test. However, agency experience does not indicate that the de-emphasis of community development lending or community investment under a single test is likely to be a significant concern as evidenced by the current intermediate small bank community development test which evaluates both loans and investments.

Further, the agencies believe that the proposed four performance test framework for large banks, which uses objective and quantitative measures to inform bank performance conclusions and ratings and reduces potential opportunities for subjective judgment, is appropriately calibrated to evaluate the performance of large banks. Specifically, the framework uses metrics and benchmarks to evaluate community development loans and investments under the Community Development Financing Test and bank delivery systems under the Retail Services and Products Test. The Retail Lending Test uses distribution metrics and benchmarks to make evaluations more transparent, including by specifying quantitative standards for lending consistent with achieving, for example, a “Low Satisfactory” or “Outstanding” conclusion in a Retail Lending Test Area. Although the Community Development Services Test adopted in the final rule does not include any metrics or benchmarks, the agencies' supervisory experience will permit the use of the information and data evaluated under the performance test to make meaningful distinctions in bank performance. Further explanation of this change is discussed in the section-by-section analysis of § __.25.

The agencies agree with commenters' perspective with respect to developing guidelines for examiners on how to use the performance measures for some of the large bank performance tests. As the agencies implement the final rule, they will consider what internal guidance will be helpful for agency staff to accurately evaluate bank performance.

In connection with each applicable performance test, the agencies considered the possibility of fully eliminating the proposed distinctions between large banks that had assets greater than $10 billion and large banks that had assets between $2 billion and $10 billion in the final rule, as requested by some commenters. While all of these proposed distinctions are not finalized, the agencies are adopting some of the proposed distinctions in the final rule because the agencies find that, although it is appropriate to apply all four performance tests to large banks that had assets less than $10 billion in assets, large banks that had assets between $2 billion and $10 billion have a more limited capacity to comply with some requirements and data provisions in comparison to their counterparts that had assets greater than $10 billion. These provisions include the consideration of digital delivery systems, other delivery systems, and deposit products responsive to the needs of low and moderate-income individuals under the Retail Services and Products Test as well as the data requirements with respect to digital delivery systems, other delivery systems, and deposits. Further, the agencies believe that large banks that had assets greater than $10 billion is an appropriate threshold at which to apply the additional requirements described above. All three of the agencies have considerable experience in using $10 billion in bank assets as a demarcating boundary for heightened supervisory expectations or additional requirements. Furthermore, the agencies note that Federal legislation also uses $10 billion in bank assets on a frequent basis as a threshold for making certain requirements applicable to financial institutions. Finally, the agencies note that, under the final rule, large banks that had assets between $2 billion and $10 billion may opt into any of the proposed requirements applicable to large banks that had assets greater than $10 billion. For example, a large bank with assets between $2 billion and $10 billion may opt to collect and maintain deposits data that is required for large banks that had assets greater than $10 billion.

The agencies also considered the suggestion that large banks that had assets less than $10 billion should have the ability to choose an evaluation under the proposal or under the current examination framework. However, implementing this suggestion could remove a significant number of large banks that play a significant role in fulfilling low- and moderate-income credit needs in local areas from the more comprehensive evaluation included in the final rule's large bank evaluation approach. The agencies estimate that there are approximately 372 banks that had assets between $2 billion and $10 billion, representing approximately 8.0 percent of all banks with CRA obligations and 7.3 percent of deposits. In addition, the agencies continue to believe that, with appropriate tailoring incorporated in the final rule for large banks that had assets between $2 billion and $10 billion, these banks otherwise have the requisite capacity to engage in the range of activities that will be evaluated under the proposed four performance test framework.

Section __.21(a)(2) Intermediate Banks

The Agencies' Proposal

In § __.21(b)(2), the agencies proposed that intermediate banks be evaluated under the following tests: (1) the Retail Lending Test applicable to all intermediate banks; and (2) either the current intermediate small bank community development test in proposed § __.29(b)(2) as a default or, at the bank's option, the Community Development Financing Test. The agencies explained in the proposal that intermediate banks would be evaluated under the Retail Lending Test to improve clarity, consistency, and transparency in the evaluation of retail lending, and provided options for community development evaluation in recognition of the fact that, in comparison to large banks, intermediate banks have a relatively more limited capacity to conduct community development activities.

Under proposed § __.21(b)(2)(ii)(A), if an intermediate bank chose to be evaluated under the Community Development Financing Test, the agencies would continue to evaluate the bank under the performance test until the bank opted out. Proposed § __.21(b)(2)(ii)(B) provided that the agencies may adjust an intermediate bank's institution rating from “Satisfactory” to “Outstanding” if the bank: (1) chose to be evaluated under the Community Development Financing Test; (2) requested additional consideration for activities that qualify under the Retail Services and Products Test or the Community Development Services Test; and (3) the bank would have received a “Satisfactory” before the additional consideration.

Similar to the current CRA requirements, the proposal would not have required intermediate banks to collect or report any additional data. However, when an intermediate bank chose to be evaluated under the Community Development Financing Test, it would be required to collect and maintain the same data required of large banks for community development loans and community development investments, but in the format used by the bank in the normal course of business, until the completion of the bank's next CRA examination.

Comments Received

The agencies received numerous comments on the application of the tests to intermediate banks. Some commenters supported the agencies' proposal for intermediate banks because it provided important flexibilities, specifically stating that the ability to opt into the Community Development Financing Test appropriately balances regulatory burden.

Other commenters suggested additional changes for the intermediate bank performance evaluation framework. A few commenters requested that the final rule give intermediate banks the ability to also opt into the Retail Lending Test. Some commenters recommended that intermediate banks should have the option to continue to be evaluated under all of the current standards applicable to intermediate small banks, including the current small bank lending test.

With respect to the evaluation of intermediate bank community development loans, investments, and services, commenters offered a variety of perspectives. A few commenters stated that community development services should be a mandatory part of the intermediate bank community development evaluation. Some commenters stated that the same community development obligations that apply to large banks should apply to all banks, an approach that would include all intermediate banks under the Community Development Financing Test and Community Development Services Test. A commenter suggested that intermediate banks should be required to be evaluated under a Community Development Financing Test and a Community Development Services Test that are customized for intermediate banks.

A commenter stated that all banks, including intermediate banks, should have essential retail service activities reviewed, including but not limited to the accessibility of their products, services, and branch network for low- and moderate-income individuals and communities.

Another commenter recommended that the agencies provide more guidance on how community development services could optionally be incorporated into the evaluations of intermediate banks.

Final Rule

After considering the comments, the agencies are adopting the evaluation framework for intermediate banks as proposed. Specifically, § __.21(a)(2)(i) of the final rule provides that the agencies will evaluate intermediate banks under the Retail Lending Test in § __.22 and the Intermediate Bank Community Development Test in § __.30(a)(2) (renamed from the “intermediate bank community development evaluation” in the proposal), unless an intermediate bank chooses to have its community development loans and investments evaluated under the Community Development Financing Test in § __.24. Final § __.21(a)(2)(ii) provides that, if an intermediate bank opts to be evaluated under the Community Development Financing Test, the agencies will continue to evaluate the bank under the performance test until the bank opts out; if the intermediate bank opts out of the Community Development Financing Test, the agency reverts to evaluating the bank pursuant to the Intermediate Bank Community Development Test, starting with the evaluation period preceding the bank's next CRA examination. Furthermore, final § __.21(a)(2)(iii) provides that, pursuant to final § __.30(b), intermediate banks may request additional consideration for the services and products that qualify under the Retail Services and Products Test or the Community Development Services Test. In contrast to proposed § __.21(b)(2)(ii)(B), which provided additional consideration only to intermediate banks choosing an evaluation under the Community Development Financing Test, final § __.21(a)(2)(iii) permits additional consideration for any intermediate bank and references the substantive provisions concerning the evaluation of intermediate banks.

As proposed, intermediate banks generally do not have any required data collection, maintenance, or reporting requirements under the final rule.

The agencies believe that applying the Retail Lending Test to intermediate banks will improve the clarity, consistency, and transparency of retail lending evaluations. Further, the agencies believe it is appropriate to apply the Retail Lending Test to intermediate banks because they generally have fewer capacity constraints than small banks, putting them in a better position to comply with Retail Lending Test requirements.

The agencies also note that various aspects of the Retail Lending Test are tailored in the final rule to accommodate intermediate banks. For example, relative to large banks, the final rule minimizes the data intermediate banks must collect and maintain for evaluation under the Retail Lending Test; limits the geographic scope in which the performance test applies; and provides additional accommodations for intermediate banks on various components of the test, such as the Retail Lending Volume Screen.

Commenters noted that the proposed the Retail Lending Test would apply to some intermediate small banks that are currently evaluated under the small bank lending test. However, the agencies are finalizing the proposal to apply the Retail Lending to all intermediate banks to confer greater clarity, consistency, and transparency to evaluations of retail lending. The agencies believe this approach is appropriate considering that some aspects of the Retail Lending Test are tailored to intermediate banks. In making this decision, the agencies considered whether banks with assets of more than $600 million in assets but less than $1.503 billion could reasonably be expected to transition from the status quo small bank lending test to the Retail Lending Test and have determined that, based on supervisory experience, these banks have the capacity and resources to comply with all applicable aspects of the test.

The agencies considered whether they should require intermediate banks to be evaluated under the Community Development Financing Test as suggested by commenters. Although the agencies concluded that requiring intermediate banks to participate in the Community Development Financing Test provided the added benefit of metrics and benchmarks for community development activities, the agencies also believe that the additional burden from requiring the transition to the Community Development Financing Test could not be justified for all intermediate banks, some of which have more limited capacity.

The agencies also considered whether, similar to the approach taken for the Retail Lending Test, they could tailor the Community Development Financing Test for intermediate banks so that the performance test could be applied to all intermediate banks. Although the agencies saw potential in this approach, they were unable to make modifications to the point that could simultaneously accommodate the capacity constraints of some intermediate banks and maintain a set of metrics and benchmarks that permitted a meaningful comparison amongst all banks under the test. The agencies believe that the more prudent approach in the final rule is to retain the Intermediate Bank Community Development Test as the default evaluation method for intermediate banks.

The agencies also considered whether the Community Development Services Test should apply to intermediate banks as a required part of their CRA performance evaluation. The agencies decided that the application was not necessary. For intermediate banks subject to the default Intermediate Bank Community Development Test, “community development services” is already one of the four criteria described in final § __.30(a)(2), making simultaneous evaluation under the Community Development Services Test redundant. The agencies also explained in the proposal that, for the default evaluation, they would retain the expectation that intermediate banks may not ignore one or more of the categories of community development activities covered by the criteria, such as community development services, and that the appropriate levels of each activity would depend on the bank's capacity and business strategy, along with community development needs and opportunities that are identified by the bank. This expectation also applies under the final rule.

For intermediate banks choosing an evaluation under the Community Development Financing Test, although community development services are not evaluated under the performance test, the final rule permits these banks to submit activities that qualify under the Community Development Services Test for additional consideration if the bank has an overall institution rating of “Satisfactory.” Although this does not make the evaluation of community development services mandatory, the agencies have decided that this tailoring is appropriate to avoid the application of an additional new performance test for intermediate banks with more pronounced capacity constraints than their large bank counterparts. The agencies agree that additional guidance on how community development services could optionally be incorporated into the evaluations of intermediate banks may be appropriate, and will consider issuing such guidance in the future.

Although the agencies do not believe that the Retail Services and Products Test should be applied to all intermediate banks because of capacity constraints, the agencies have created an evaluation framework that allows the agencies to consider any retail services an intermediate bank may conduct when certain conditions are met. An intermediate bank evaluated under either the Intermediate Bank Community Development Test or the Community Development Financing Test may request additional consideration for retail banking services and retail products and programs that qualify under the Retail Services and Products Test, provided the bank achieves an overall institution rating of at least “Satisfactory.”

Section __.21(a)(3) Small Banks

The Agencies' Proposal

In § __.21(b)(3)(i), the agencies proposed to evaluate small banks under the current lending test for small banks as the default evaluation method; however, small banks could opt instead to be evaluated under the Retail Lending Test. The agencies explained in the preamble to the proposed rule that this approach not only recognized that small banks have capacity constraints and a more targeted focus on retail lending than larger banks, but it also made a metrics-based approach available to small banks as an option to increase the clarity, consistency, and transparency of how their retail lending is evaluated.

If a small bank chose to be evaluated under the Retail Lending Test, the agencies proposed in § __.21(b)(3)(ii)(A) to evaluate the small bank under all Retail Lending Test provisions applicable to an intermediate bank, with the exception that no small bank would be evaluated on its retail lending outside of its facility-based assessment areas. This exception was intended by the agencies to tailor the Retail Lending Test to small banks' more limited capacities. Proposed § __.21(b)(3)(ii)(B) provided that the agencies would continue to evaluate a small bank that chose to be evaluated under the Retail Lending Test under that performance test until the bank opted out. If a small bank opted out of the Retail Lending Test, the agency would revert to evaluating the bank under the small bank performance standards as provided in proposed § __.29(a), starting with the entire evaluation period preceding the bank's next CRA examination.

In addition, proposed § __.21(b)(3)(ii)(C) provided that a small bank that chose to be evaluated under the Retail Lending Test may request additional consideration for activities that qualify under the Retail Services and Products Test, the Community Development Financing Test, or the Community Development Services Test and, after considering the activities, the agencies may adjust the bank's rating from “Satisfactory” to “Outstanding” at the institution level. Guidance for the current regulations contains a similar provision with respect to community development activities or retail services activities.

Similar to current CRA requirements, the agencies proposed that small banks would have no prescribed data collection or reporting requirements.

Comments Received

The agencies received many comments on the application of the proposed test to small banks. Although some commenters supported the proposed evaluation framework for small banks, other commenters suggested alternative or additional performance tests. A commenter suggested that the agencies apply the Retail Lending Test to all small banks and, if necessary, provide accommodations, such as a longer transition period. Another commenter suggested that the final rule require the evaluation of small bank retail service activities. A commenter requested that the final rule apply the same community development obligations to small banks as to large banks. Another commenter stated that the agencies should scale community development activities appropriately for small banks, which should not be totally exempt from having these activities evaluated. A commenter recommended that the agencies provide more guidance on how community development services could optionally be incorporated into the evaluations of small banks. A commenter suggested that all banks, including small banks, should have incentives to engage in community development financing. Another commenter suggested that, at a minimum, intermediate small banks under the current CRA regulations that become small banks under the proposal should continue to have their community development activities evaluated.

Final Rule

After considering the comments, the agencies are adopting the performance test framework for small banks with some modifications to accommodate other changes in the final rule. Specifically, § __.21(a)(3)(i) of the final rule provides that the agencies apply the Small Bank Lending Test (renamed from the “small bank performance standards” in the proposal) in final § __.29(a)(2), unless the bank opts to be evaluated under the Retail Lending Test in final § __.22. If a small bank opts to be evaluated under the Retail Lending Test, final § __.21(a)(3)(ii)(A) specifies that the agencies use the same provisions used to evaluate intermediate banks pursuant to the Retail Lending Test. As discussed further in the section-by-section analysis of § __.18 and, in comparison to the proposal, this provision modifies the treatment of small banks evaluated under the Retail Lending Test by extending uniform treatment to small banks and intermediate banks with respect to the bank's outside retail lending area. This modification ensures that small banks with significant concentrations of home mortgage loans, multifamily loans, small business loans, small farm loans, or automobile loans outside of their facility-based assessment areas are subject to evaluation of any product lines which meet the major product line standards, described further in the section-by-section analysis of § __.22.

Final § __.21(a)(3)(ii)(B) indicates that small banks that opt to be evaluated under the Retail Lending Test will be evaluated under this test for the evaluation period preceding the bank's next CRA examination and will continue to be evaluated under that performance test until the bank opts out; if the small bank opts out, the bank will be evaluated under the Small Bank Lending Test, starting with the evaluation period preceding the bank's next CRA examination.

In addition, final § __.21(a)(3)(iii) provides that, pursuant to final § __.29(b), a small bank may request additional consideration for loans, investments, services, products, and other activities described in that paragraph. In contrast to proposed § __.21(b)(3)(ii)(C), which would have provided additional consideration only to small banks choosing an evaluation under the Retail Lending Test, final § __.21(a)(3)(iii) permits additional consideration for any small bank and references the substantive provisions concerning the evaluation of small banks.

As proposed, and similar to the current CRA requirements, small banks have no required data collection, maintenance, or reporting requirements under the final rule.

The agencies decline to apply the Retail Lending Test to all small banks because the agencies believe that providing small banks the option to have their retail lending evaluated under either the Retail Lending Test or the Small Bank Lending Test better recognizes the capacity constraints of small banks. If a particular small bank prefers to be evaluated under the Retail Lending Test's metrics-based approach, the final rule provides the flexibility for that bank to be evaluated under that performance test in a manner which accommodates the bank's asset size.

The agencies also decline to apply the Community Development Financing Test and the Community Development Services Test to small banks because these performance tests are specifically tailored to evaluate the community development loans, investments, and services of larger banks. The Community Development Financing Test in the final rule includes metrics and benchmarks primarily focused on the performance of large banks; and both the Community Development Financing Test and the Community Development Services Test require banks to collect, maintain, or report data to assess bank performance. The agencies do not believe that the benefit of imposing new community development investment or community development service requirements on small banks outweighs the potential burden that this change would impose on those banks. However, in recognition of their limited capacities, the agencies continue to believe that any considerations of small bank community development loans, investments, or services should be optional and that the better approach is to allow small banks the ability to request additional consideration for any community development loans, investments, or services they conduct. As described in final § __.29, the optional consideration of these community development loans, community development investments, and community development services will result in positive consideration only, so that small banks that do not engage in (or do not receive additional consideration for) these activities will not experience an adverse assessment of their CRA performance.

The agencies note that they will consider providing guidance with respect to how community development services could optionally be incorporated into the evaluations of small banks, as recommended by a commenter.

For similar reasons, the final rule does not require the evaluation of a small bank's retail banking services or retail banking products. Instead, small banks may request that the agencies consider retail banking services or retail banking products that they provide. However, given the limited capacity of small banks the agencies believe that it would not be appropriate to impose a mandatory evaluation with respect to small bank retail banking services or retail banking products performance.

Section __.21(a)(4) Limited Purpose Banks

The Agencies' Proposal

The agencies proposed in § __.21(b)(4)(i) to evaluate wholesale and limited purpose banks under a Community Development Financing Test for Wholesale and Limited Purpose Banks. The agencies proposed in § __.21(b)(4)(ii) to give wholesale and limited purpose banks the option to have activities that qualify under the Community Development Services Test considered for a possible adjustment from “Satisfactory” to “Outstanding” for the bank's overall institution rating.

Comments Received

The agencies received many comments on the application of the proposed test to wholesale and limited purpose banks. Commenters expressed a variety of views on whether the wholesale and limited purpose bank designations should continue with an independent test. Several commenters expressed support for continued designations and evaluations under a Community Development Financing Test for Wholesale and Limited Purpose Banks because some banks have business models that do not align with the proposal's otherwise generally applicable performance tests based on asset size. These commenters also explained that they supported continuation of the wholesale and limited purpose bank category because these types of banks frequently have retail products that represent minimal amounts in comparison to the bank's loans or assets. Other commenters expressed concern that the proposed wholesale and limited purpose bank designation and proposed performance test could permit some banks to avoid evaluation of retail products, such as credit cards.

Final Rule

After considering the comments, the agencies are adopting as proposed the limited purpose bank provision in § __.21(a)(4)(i) of the final rule, with technical edits. As noted in the section-by-section analysis to § __.12, the agencies have combined the “wholesale bank” definition with the “limited purpose bank” definition and eliminated the former definition. Final § __.21(a)(4)(i) provides that limited purpose banks are evaluated pursuant to the Community Development Financing Test for Limited Purpose Banks in § __.26. In § __.21(a)(4)(ii), the final rule provides that, pursuant to § __.26(b)(2), a limited purpose bank may request additional consideration for low-cost education loans and services described in that paragraph. In contrast to proposed § __.21(b)(4)(ii), which provided additional consideration for wholesale or limited purpose bank activities qualifying under the community development services test, final § __.21(a)(4)(ii) references the substantive provisions concerning the evaluation of limited purpose banks.

The agencies believe the limited purpose bank category and test appropriately accommodates banks with unique business models and the particular products they offer under those models by accurately measuring a bank's volume of community development loans and investments relative to its capacity. Because limited purpose banks do not typically offer the loans evaluated under the Retail Lending Test, the evaluation of the bank focused primarily on community development loans and community development investments represents an effective means to assess the bank's record of serving the credit needs of its communities.

The agencies are sensitive to commenter concerns that the Community Development Financing Test for Limited Purpose Banks should not become a means for banks to avoid an evaluation of their retail lending products that would otherwise be subject to an evaluation under the Retail Lending Test. For that reason, the agencies have revised the definition of “Limited purpose bank” in § __.12 to only include banks that do not offer the types of loans evaluated under the Retail Lending Test or otherwise provide the loans solely on an incidental and accommodation basis.

Section __.21(a)(5) Military Banks

The Agencies' Proposal

In addition to proposing a definition for the term “military bank” in § __.12, the agencies proposed in § __.16(d) that they would continue the practice of allowing a bank to delineate its entire customer deposit base as its assessment area, provided that the bank's business predominantly consists of serving the needs of military personnel or their dependents who are not located within a defined geographic area. While this aspect of the proposal preserved a flexibility available to these banks that exists in the current CRA regulations and is required by CRA statute, the agencies did not comprehensively explain how this option would be operationalized with respect to the applicable performance tests and standards. The agencies also did not describe how they would approach the evaluation of a military bank with a single assessment area.

Comments Received

On the issue of military banks as they relate to the overall evaluation framework, a commenter stated that while military banks should not necessarily be given a distinct bank classification, such as was done in the proposal for wholesale and limited purpose banks, the agencies should clarify that, in comparison to other banks, the military banks' business models may be significantly more narrow in scope. The commenter also indicated that the agencies should accommodate the unique business models of military banks that are often tailored to the specific needs of military and veteran communities.

Final Rule

In response to this comment, and to provide additional clarity regarding the treatment of military banks in the final rule, the agencies are adopting a new paragraph (a)(5) in § __.21 of the final rule. First, to clarify that military banks are not a distinct bank category with their own unique set of performance tests, final § __.21(a)(5)(i) provides that the agencies evaluate a military bank pursuant to the applicable performance tests described in § __.21(a); military banks are evaluated as a large bank, intermediate bank, small bank, or limited purpose bank, as appropriate. The agencies also note that, as with other banks, a military bank may be evaluated pursuant to an approved strategic plan. Second, if a military bank delineates the entire United States and its territories as its sole facility-based assessment area pursuant to final § __.16(d), final § __.21(a)(5)(ii) provides that the agencies evaluate the bank exclusively at the institution level based on its performance in its sole facility-based assessment area. This provision is intended by the agencies to minimize potential ambiguity regarding how the performance evaluation is conducted.

The agencies considered commenter suggestions to accommodate military bank business models. The agencies believe that by permitting military banks to continue to designate a single facility-based assessment area when their customer base is dispersed accommodates the unique business model of these banks that is primarily focused on meeting the credit needs of servicemembers, veterans, or their dependents. In addition, the agencies believe that the performance tests applicable to military banks permit a comprehensive evaluation of the military bank's record of serving its communities. The agencies' approach in the final rule also accommodates the ability of military banks to designate a single facility-based assessment area.

Section __.21(a)(6) Banks Operating Under a Strategic Plan

The Agencies' Proposal

Proposed § __.21(b)(5) retained the current rule's strategic plan option by providing that the agencies would evaluate the CRA performance of a bank that chooses to be evaluated under a CRA strategic plan approved under § __.27 in accordance with the goals set forth in such plan. The agencies explained that retaining this alternative evaluation method would give banks flexibility to meet their CRA obligations in a manner that is tailored to community needs and opportunities as well as to their own capacities, business strategies, and expertise. To ensure that banks evaluated under a strategic plan meet their CRA obligations, the agencies proposed that the plans: (1) in most circumstances, incorporate the metrics-based analysis of all of the performance tests that would otherwise apply without a plan; (2) include the same geographic areas that would be included in the absence of a plan; and (3) require banks to report the same data required in § __.42 as would be required in the absence of a plan.

Comments Received

Many commenters provided feedback on the proposed framework for strategic plans. Almost all of these commenters expressed support for the strategic plan option and recommended that the option remain available to banks in a final rule. These commenters believed that the strategic plan could be useful for many banks, especially banks with unique business models or particular business strategies.

Another commenter, however, suggested that the agencies fully eliminate the strategic plan option because it adds complexity to the evaluation framework. This commenter questioned whether the option should be kept if banks must keep the same assessment areas and performance test requirements that would otherwise apply without a strategic plan. Another commenter suggested that the strategic plan option should only be made available to banks that persuade their regulator that they would fail the traditional examination process through no fault of their own.

Final Rule

After considering comments on the proposed strategic plan framework, the agencies are retaining the option for banks to be evaluated under an approved strategic plan in § __.21(a)(6) of the final rule. The agencies believe this approach provides banks additional flexibility to meet their CRA obligations in a manner that is tailored to community credit needs and opportunities and the bank's own capacity, business strategy, and expertise. The agencies believe that retaining this flexibility outweighs any concern regarding potential complexity associated with an additional performance standard. The agencies note that they have revised the strategic plan provision in the final rule based on comments received, as discussed in the section-by-section analysis to § __.27, Strategic Plans.

The agencies have made clarifying and technical changes to final § __.21(a)(6) to conform with the strategic plan provisions in final § __.27. Specifically, the agencies are indicating that they evaluate the performance of a bank that has an approved strategic plan as provided in § __.27. The agencies have also removed references to strategic plan goals that were previously included because, under final § __.27, although a bank may include goals in its plan, goals are not required in plans.

Additional Comments on the Evaluation Framework

A few commenters suggested that the final rule evaluation framework should be further tailored to account for other types of financial institutions.

A commenter recommended that the agencies consider the business model of CDFI banks in the CRA framework, stating that it would be appropriate to tailor evaluation aspects for CDFI banks given the complementary goals of CRA and the CDFI program. Although the agencies agree that the CRA and CDFI program have complementary goals, they also believe that the applicable performance tests and strategic plan in the final rule are drafted to apply appropriately to CDFI banks that provide financial services in low- and moderate-income communities and to persons with limited access to financing. Consequently, the agencies anticipate minimal benefits from introducing additional complexity in the form of provisions specific to CDFI banks.

Another commenter suggested that specific CRA consideration should be given for banks organized under mutual holding companies because their depositors are ultimately the members or owners of the bank, and these institutions provide unique services for their customers and communities. As with CDFI banks, the agencies do not believe that tailored evaluations are required for these banks. Instead, the final rule performance tests and standards are appropriate for evaluating whether these institutions meet the credit needs of their communities.

Section __.21(b) Loans, Investments, Services, and Products of [Operations Subsidiaries or Operating Subsidiaries] and Other Affiliates

Current Approach

Under the current CRA regulations, the agencies define an “affiliate” as a company that controls, is controlled by, or is under common control with another company. In subsequent guidance, the agencies have clarified that bank subsidiaries are a type of affiliate.

The current evaluation framework provides large banks the option to include affiliate lending, community development investments, and community development services, as applicable, in the bank's evaluation. Similar options to include affiliate loans, investments, and services are also available for wholesale and limited purpose banks, banks evaluated under an approved strategic plan, and small and intermediate small banks. If a bank elects to include affiliate lending, investments, or services in its evaluation, the bank must collect, maintain, and report the affiliate data if the bank is subject to the data collection and reporting requirements, or maintain sufficient information for examiners to evaluate the activity if it is not subject to those requirements.

The Agencies' Proposal

The agencies proposed in § __.21(c) to require the inclusion of relevant activities of a State member bank's “operations subsidiaries” and the “operating subsidiaries” of a national bank, Federal savings association, State non-member bank, or State savings association in the evaluation of the relevant bank's CRA performance, unless the bank subsidiary is independently subject to its own CRA requirements or another bank claims, for purposes of CRA, the same qualifying activity. The agencies explained that because banks exercise a high level of ownership, control, and management of their subsidiaries, the activities of those subsidiaries should reasonably be attributable to the bank.

The agencies also proposed to maintain the current flexibility for banks to choose to include the relevant activities of other bank affiliates that are not operations subsidiaries or other subsidiaries unless the affiliate is independently subject to its own CRA requirements or another bank claims, for purposes of CRA, the same qualifying activity. The agencies also proposed that, with respect to the activities of other bank affiliates, if a bank elected to have the agencies consider retail loans within a particular retail loan category made by one or more of the bank's affiliates in a particular facility-based assessment area, retail lending assessment area, or its outside retail lending area, the bank must elect to have the agencies consider all of the retail loans within that loan category made by all of the bank's affiliates in that particular facility-based assessment area, retail lending assessment area, or in its outside retail lending area.

The proposal also required banks to collect, maintain, and report data on the activities of operations subsidiaries and operating subsidiaries and pursuant to proposed § __.42. Pursuant to proposed § __.42, if the bank chose to include other affiliate activity in its evaluation, the proposal required banks to collect, maintain, and report data on the activities of the other affiliate.

The agencies sought feedback on what other factors, if any, the agencies should consider with respect to requiring the inclusion of activities of a bank's operations subsidiaries and operating subsidiaries as part of its CRA evaluation. The agencies also requested feedback regarding whether, when a bank chooses to have the agencies consider retail loans within a retail loan category that are made or purchased by one or more of the bank's affiliates in a particular assessment area, the agencies should consider: (1) all of the retail loans within that retail loan category made by all of the bank's affiliates only in that particular assessment area; or (2) all of the retail loans made by all of the bank's affiliates within that retail loan category in all of the bank's assessment areas.

Comments Received

The agencies received numerous comments addressing the proposed treatment of operations subsidiaries, operating subsidiaries, and other affiliates.

Operations Subsidiaries and Operating Subsidiaries. Some commenters supported the proposal's automatic inclusion of the activities of bank operations subsidiaries and operating subsidiaries in CRA examinations. A commenter stated that when the degree of separation between banks and their subsidiaries is nonexistent, the activities of the subsidiary should be considered activities of the bank. Another commenter suggested that the agencies should allow the subsidiaries sufficient time to obtain a level of operating efficiency with respect to new products and services before including them in a bank's performance evaluation. The commenter indicated that it takes a bank about two years to achieve efficient, mature operations for new products and markets. A commenter recommended that loans made or purchased via subsidiaries should automatically count towards the major product line calculations and towards the delineation of retail lending assessment areas. Another commenter recommended that, when multiple options are available, banks should retain the flexibility to elect which performance test applies to the activities of an evaluated subsidiary.

A few commenters did not support the mandatory inclusion of activities conducted by a bank's applicable subsidiaries because, from their perspective, it reduces flexibility in comparison to the current regulations. Another commenter argued that the agencies should exempt functionally regulated subsidiaries from the mandatory inclusion of operating or operations subsidiary activities in a bank's performance evaluation and data collection and reporting requirements because the mandatory inclusion of these subsidiaries within CRA examinations would exceed the agencies' statutory authority under 12 U.S.C. 1831v(a). A commenter suggested that the final rule should not expand data collection and reporting requirements to operations subsidiaries or operating subsidiaries that are required by other regulations. Another commenter stated that it was not clear in the proposal how community development financing would be considered in the context of subsidiaries.

Other Affiliates. A few commenters expressed support for the agencies' proposal to continue the current practice of providing banks with the option to have the CRA activities of other affiliates (that are not operations subsidiaries or operating subsidiaries) considered because it provides banks with flexibility and accommodates different bank business models. However, other commenters stated that the agencies should require all bank affiliates to be subject to CRA evaluations, with no optionality, because the affiliates are engaging in particular types of activities on behalf of the bank and banks should not be able to choose which affiliate activities they include or exclude from an evaluation.

A few commenters stated that, when a bank chooses to have the agencies consider qualifying retail loans by one or more of a bank's affiliates, loans purchased by the affiliate should not be able to compensate for the absence of bank loan origination activity. The commenters suggested that these loans purchased by an affiliate should have less relevance in evaluating a bank's CRA performance than loans that were actually made by its affiliates. A commenter suggested that a bank's affiliate's loans should be given a lower qualitative weight in the CRA evaluation. Some commenters noted that because the agencies did not propose evaluating limited purpose credit card banks on the distribution or impact of their credit card loans, these banks should not be allowed to exclude those activities by affiliate lenders. Another commenter stated that it is not clear in the proposal how community development financing would be considered in the context of affiliates and recommended that any community development financing activity engaged in by an affiliate should be included at the bank's request.

Some commenters supported the alternative suggested by the agencies that would consider all of the retail loans within a particular retail loan category made by all bank affiliates within all of the bank's assessment areas, if a bank elects to have an affiliate's retail lending considered. Commenters stated that this alternative would include a more comprehensive evaluation of retail lending activity and would limit opportunities for banks to conceal poor performance. Another commenter stated that it preferred the agencies' proposal to consider all of an affiliate's retail loans within a particular retail loan category made in specific assessment areas. Another commenter recommended that loans made or purchased via subsidiaries and affiliates should automatically count towards the major product line calculations and towards the delineation of retail lending assessment areas.

Some commenters addressed third-party activities with respect to affiliates. A commenter suggested that the agencies clarify that their proposal does not prohibit consideration for a loan that an affiliate originates and a third party purchases, or vice versa, consistent with the treatment of activities conducted directly by the bank. A number of commenters stated that the agencies should extend CRA requirements to third-party partnerships, such as those between banks and non-bank entities to make loans and offer other services. Other commenters similarly stated that CRA requirements should extend to any retail lending that uses the bank's underwriting or benefits from use of the bank's charter. Other commenters stated that considering third-party bank lending relationships could help to address “rent-a-bank” schemes or situations where a lender collaborates with a bank to offer products or services in order to avoid State interest rate limits.

Final Rule

Operations Subsidiaries and Operating Subsidiaries. The agencies are adopting the proposal's approach to operations subsidiaries and operating subsidiaries in paragraphs (b)(1) and (2) of § __.21 of the final rule with technical and conforming changes. For example, the agencies are referring to the loans, investments, services, and products of subsidiaries to conform to paragraphs (c) and (d) of final § __.42 and more precisely describe the “qualifying activities” the agencies indicated that they would consider under the proposal. The agencies are also adding an “as applicable” indicator after the first reference to operations subsidiaries, operating subsidiaries, and other affiliates in final § __.21(b)(1) to indicate that the substantive provisions apply to either subsidiaries or other affiliates that are not subsidiaries. Furthermore, the agencies are integrating the definition of “depository institution” in final § __.21(b)(1) so that a bank does not receive consideration for loans, investments, services, or products if they are already claimed by another depository institution. Additional discussion of “depository institution” is included in the section-by-section analysis of § __.12.

In final § __.21(b)(2), the agencies provide that they will consider the loans, investments, services, and products of a bank's operations subsidiaries or operating subsidiaries unless the bank's subsidiary is independently subject to the CRA. To prevent the simultaneous allocation of a particular loan, investment, service, or product across multiple bank charters, the agencies specify in final § __.21(b)(1) that this consideration does not apply if a different bank, operations subsidiary, operating subsidiary, or other affiliate already claims the loan, investment, service, or product in a CRA performance evaluation. In final § __.21(b)(2), the bank must collect, maintain, and report data on the loans, investments, services, and products of its operations subsidiaries or operating subsidiaries, as provided in final § __.42(c) so that relevant loans, investments, services, and products of the subsidiaries are included in the CRA evaluation.

In a technical edit to final § __.21(b)(2), the agencies are correcting the second reference to operations subsidiaries and operating subsidiaries to read as “[operations subsidiary or operating subsidiary].” The proposed regulation text in § __.21(c)(1) errantly referred to “operations subsidiary” twice.

The agencies believe that their final rule approach appropriately captures the activities of bank operations subsidiaries and operating subsidiaries over which the bank exerts a significant degree of ownership, control, and management. The agencies acknowledge that evaluating the loans, investments, services, and products of an operations subsidiary or an operating subsidiary in a bank's performance evaluation reduces some flexibilities available to banks relative to the current CRA regulations, which permit banks to optionally include the activities under the affiliate activities provisions. However, the agencies believe that this concern is outweighed by the benefits of including these subsidiaries as part of a more comprehensive review of a bank's record of serving the credit needs of its communities through both activities conducted by the bank and activities that are appropriately ascribed to the bank.

The agencies disagree with commenter suggestions to provide subsidiaries more time to become operationally familiar with new products and services before including them in a bank's CRA evaluation. The agencies believe that this would be inconsistent with the final rule's approach to evaluating loans, investments, services, and products conducted during an evaluation period and would delay a more holistic consideration of a bank's activities. The agencies also believe that, as appropriate, they may consider through performance context the concerns identified by the commenter, such as information that a subsidiary has recently entered a market or is offering a new product or service.

The agencies agree with commenter recommendations that, for banks subject to the Retail Lending Test, loans made or purchased by an operations subsidiary or operating subsidiary should count towards the thresholds for delineation of retail lending assessment areas and identifying major product lines. Subject to the requirements of the regulation text in paragraphs (b)(1) and (2) in final § __.21, as well as § __.17 and appendix A, the closed-end home mortgage loans and small business loans of a bank's operations subsidiary or operating subsidiary are considered in the delineation of Retail Lending Assessment Areas. And subject to the requirements of paragraphs (b)(1) and (2) in final § __.21, as well as the § __.12 definition of “product line”, § __.22, and appendix A, the closed-end home mortgage loans, small business loans, small farm loans, and automobile loans of a bank's operations subsidiary or operating subsidiary are considered in determining a bank's major product lines in a Retail Lending Test Area.

Regarding commenter input that the agencies lack statutory authority under 12 U.S.C. 1831v(a) to include the CRA activities of functionally regulated subsidiaries in a bank's evaluation, the agencies note that as written, 12 U.S.C. 1831v(a) makes the provisions of 12 U.S.C. 1844(c) applicable to the Board, the FDIC, and the OCC with respect to functionally regulated subsidiaries. While 12 U.S.C. 1844(c) limits the authority of the Board “to require reports, make examinations, impose capital requirements, or take any other direct or indirect action with respect to any functionally regulated affiliate of a depository institution, subject to the same standards and requirements as are applicable to the Board under those provisions,” section 1844(c) itself does not prohibit the Board from examining functionally regulated subsidiaries. Instead, the statute requires the Board to, whenever possible, minimize the duplication of efforts with other relevant State and Federal regulators by using existing reports and other supervisory information. Section 1844(c) also provides that the Board must coordinate with the appropriate State and Federal regulators by providing notice to, and consulting with, them before beginning an examination of an entity that is a functionally regulated subsidiary. Because the requirements applicable to the Board in section 1844(c) also apply to the FDIC and the OCC due to the requirements of section 1831v(a), all three agencies will comply with these statutory requirements when considering the loans, investments, services, and products provided by operations subsidiaries and operating subsidiaries that are functionally regulated subsidiaries.

The agencies note that final § __.21(b) does not expand the data collection, maintenance, or reporting requirements for operations subsidiaries or operating subsidiaries by imposing requirements that are required by other regulations. The final rule only imposes parallel data requirements in § __.42(c) that align with the data requirements applicable to banks under § __.42(a) and (b).

With respect to commenter uncertainty regarding how community development financing will be considered in the context of operations subsidiaries or operating subsidiaries, the agencies' position is that because all of their relevant activities are attributed to the bank itself, they will be considered in the bank's performance evaluation, pursuant to final § __.21(b)(2). Specifically, community development loans and community development investments made by a bank's operations subsidiary or operating subsidiary would be combined and collectively evaluated with the bank's loans and investments pursuant to the community development performance test applicable to the bank.

With respect to commenter concerns regarding the need for flexibility in the application of performances tests to a bank's operations subsidiary or operating subsidiary, the agencies believe that the final rule approach that applies the same performance tests which apply to the bank is the better approach. The significant degree of ownership, control, and management a bank exerts over an operations subsidiary or operating subsidiary makes the inclusion of the subsidiary's loans, investments, services or products under the bank's applicable performance tests a reasonable requirement. For that reason, the agencies do not believe the usage of alternative performance tests is warranted to evaluate the loans, investments, services, or products conducted in the subsidiary.

Other Affiliates. The agencies are finalizing the proposed provisions regarding the optional evaluation of a bank's other affiliates that are not operations subsidiaries or operating subsidiaries in the bank's evaluation, with some technical and conforming changes noted below. As with paragraphs (b)(1) and (2) of final § __.21, the agencies are referring to the loans, investments, services, and products of affiliates in final § __.21(b)(3) to conform with final § __.42(d) and more precisely describe the “qualifying activities” the agencies indicated that they would consider under the proposal.

Pursuant to final § __.21(b)(3), the agencies will consider the loans investments, services, and products of affiliates of a bank that are not operations subsidiaries or operating subsidiaries, at the bank's option. This optional consideration is subject to three primary requirements applicable to the loans, investments, services, and products. First, as required by final § __.21(b)(1), a different depository institution may not claim the loan, investment, service, or product in a CRA evaluation. This requirement prevents the simultaneous allocation of a particular loan, investment, service, or product across multiple bank charters. Second, as required by final § __.21(b)(3)(i), the affiliate may not be independently subject to the CRA. Third, as required by final § __.21(b)(3)(ii), the bank must collect, maintain, and report data on the loans, investments, services, and products of its affiliate, as provided in § __.42(d).

For banks that opt to have affiliate loans that are closed-end home mortgage loans, small business loans, small farm loans, or automobile loans considered under the Retail Lending Test, the agencies are adopting final § __.21(b)(3)(iii) with conforming changes to maintain consistency with the Retail Lending Test. Final § __.21(b)(3)(iii) provides that, under the Retail Lending Test, a bank may opt to have an agency consider closed-end home mortgage loans, small business loans, small farm loans, or automobile loans that the bank's affiliate originated or purchased. When a bank opts for this consideration, the particular loans are included in all aspects of the Retail Lending Test.

More specifically, final § __.21(b)(3)(iii) provides that the agencies consider the loans in the bank's particular Retail Lending Test Area, as defined in final § __.12, that potentially includes a bank's facility-based assessment areas, and, as applicable, retail lending assessment areas and outside retail lending area. Furthermore, as proposed, final § __.21(b)(3)(iii) specifies that for a given bank product line (closed-end home mortgage loans, small business loans, small farm loans, or automobile loans) in a particular Retail Lending Test Area, the agencies will consider all of the loans made by all of the bank's affiliates in that product line and in that particular Retail Lending Test Area.

Based on commenter input, the agencies are making an additional substantive and clarifying change by adding final § __.21(b)(3)(iv). The agencies are specifying that, if a large bank opts to have an affiliate's closed-end home mortgage loans or small business loans considered in any Retail Lending Test Area, the agencies will consider all of the closed-end home mortgage loans or small business loans originated by all of the bank's affiliates in the nationwide area when delineating retail lending assessment areas pursuant to final § __.17(c). This change ensures that, if a bank opts to have an affiliate's closed-end home mortgage loans or small business loans considered, then the closed-end home mortgage loans or small business loans of all of its affiliates are also attributed to the bank and are used to determine the bank's obligations to delineate retail lending assessment areas.

The agencies also considered the commenter suggestion that affiliate loans considered by the agencies should be used to determine the bank's major product lines in the geographic area evaluated. The agencies note that because major product line determinations are part of the Retail Lending Test, § __.21(b)(3)(iii) of the final rule incorporates affiliate loans in those determinations.

Further, in response to commenter input requesting additional clarity regarding consideration of affiliate community development financing activity, the agencies are adding § __.21(b)(3)(v) to the final rule, which specifies that, at the bank's option, the agencies will consider community development loans or investments that are originated, purchased, refinanced, or renewed by one or more of the bank's affiliates in the bank's evaluation pursuant to the community development performance test or strategic plan applicable to the bank. This provision also indicates that the consideration only applies if the affiliate is not independently subject to the CRA and the bank collects, maintains, and reports the data as provided in § __.42(d).

The agencies believe the final rule approach regarding affiliates preserves important flexibility for banks that is available under the current CRA rule. The agencies do not believe a mandatory approach to considering affiliate loans, investments, services, and products is appropriate because, relative to operations subsidiaries and operating subsidiaries, a bank may have a lesser degree of ownership, control, and management over a non-subsidiary affiliate. Requiring mandatory evaluation of every affiliate loan, investment, service, or product could also potentially include activities that cannot reasonably be attributed to the bank in every circumstance. The agencies believe that, as under the current CRA regulations, banks should continue to have the ability to determine whether affiliate loans, investments, services, and products are evaluated, in order to accommodate diverse bank corporate structures and business models.

The agencies considered, but are not adopting, the more stringent alternative described in the proposal that would consider all affiliate retail loans for a select product line within all of the bank's Retail Lending Test Areas if a bank elects to have an affiliate's retail lending considered. The agencies believe the proposed approach to include all affiliate loans for a select product line within a selected facility-based assessment area, retail lending assessment area, or outside retail lending area provides banks with appropriate flexibility while safeguarding against a bank “cherry-picking” affiliate loans for consideration.

The agencies also decline to alter the weight attributed to loans evaluated under the Retail Lending Test on the basis of whether they were originated or purchased by a bank or an affiliate. The agencies believe that such an approach would introduce unnecessary complexity into the evaluation process. Further, the agencies do not agree with altering the weight of an otherwise identical loan, investment, service, or product solely on the basis that it was conducted by the bank itself or by an affiliate; the agencies do not believe alteration of the weights is warranted in the situation described because the loan, investment, service, or product has an equivalent impact, regardless which entity originated or purchased the loan or investment or performed the service. Likewise, the agencies do not agree with commenter input that loans purchased by an affiliate are less relevant to evaluating a bank's CRA performance than loans that were originated by that or another bank affiliate. An affiliate's purchased loans, like any institution's purchased loans, can provide liquidity to banks and other lenders and increase their ability to originate additional retail loans. In addition, the agencies believe that they have established adequate safeguards in the final rule to discourage “loan churning” and similar practices that could manipulate Retail Lending Test conclusions. The final rule allows for consideration of retail loans purchased by a bank affiliate.

Further, while the agencies understand commenter suggestions that it would be preferable to evaluate all or most of the loans, investments, services, and products in a bank's affiliates to the fullest extent possible (such as the consideration of affiliate credit card loans in the context of a limited purpose bank), the final rule does not except affiliates' relevant loans, investments, services, or products from consideration under any applicable performance tests or otherwise treat the activity differently than it would be considered if the bank had performed the same activity. The agencies believe that a simplified approach where all relevant affiliate loans, investment, services, or products may be considered at a bank's option is preferable to a more complex approach where some affiliate activities receive differential treatment based on a particular bank type, applicable performance test or standard, or affiliate activity.

In response to commenter input, the agencies are confirming that the final rule does not prohibit consideration for a loan that an affiliate originates and a third party purchases, or vice versa, provided that no other bank claims that loan for CRA consideration. Additionally, with respect to comment sentiment regarding third-party relationships, the agencies note that although third-party risk management is outside the scope of this rulemaking, they do expect banks to have an appropriate third-party risk management compliance framework and controls.

Section __.21(c) Community Development Lending and Community Development Investment by a Consortium or a Third Party

Current Approach

Under the current CRA regulations, community development loans originated or purchased by a consortium in which the bank participates or by a third party in which the bank has invested are considered at the bank's option. If the bank requests consideration for these activities, the bank must report the data pertaining to these loans.

The Agencies' Proposal

The agencies proposed to retain the current flexibility regarding consideration for community development loans and investments by a consortium in which the bank participates or by a third party in which the bank has invested. Consistent with current regulations, the agencies proposed that a bank's community development loans or community development investments as part of a consortium or by a third party in which the bank invests may be considered, at a bank's option, subject to the following requirements: (1) the activity may not be claimed by another participant or investor; (2) the bank may claim only its percentage share of the total activity made by the consortium or third party; and (3) the bank must collect, maintain, and report the lending and investments data.

Comments Received

The agencies received several comments on the treatment of community development loans and community development investments by a consortium or a third party. A number of commenters supported the agencies' proposed approach to community development financing by a consortium or a third party. A commenter specifically stated that it supported the aspect of the proposal that provides banks the option to choose to take pro rata credit for the investments or loans of a fund into underlying portfolio companies or projects. Another commenter stated that it supported retaining CRA consideration on a pro rata basis according to a bank's percentage share of community development loans and investments made by third-party entities.

Some commenters suggested that the agencies clarify certain issues surrounding community development financing by a consortium or a third party. A few commenters recommended that the agencies permit the bank or recipient to identify a reasonable geographic allocation for the loan or investment such as location of the recipient, where the recipient has historically worked, or where the recipient intends to work. Some commenters recommended that, for community development financing by a consortium or third party, the agencies preserve the practice of allowing banks to rely on the use of side letters from the CDFI, consortium, or fund sponsor to provide additional detail on the geographic distribution of activities allocated to the bank.

A commenter suggested that, when banks provide working capital to CDFIs through a consortium or third party, the working capital provided to the CDFI should count at the point in time when the commitment of funds to the recipient is made, irrespective of when the funds are deployed. The commenter explained that their suggested approach would give banks certainty that they will receive CRA consideration and provide CDFIs with flexibility to use funds consistent with business needs and avoid pressure to draw on specific lines by specific dates.

Another commenter suggested that the agencies clarify that, in relation to consortia and third parties, the agencies are not restricting two financial institutions from receiving CRA consideration for the same loan or investment if the loan or investment is sold from one institution to the other.

Final Rule

The agencies are finalizing as proposed the provisions on the consideration of community development loans and investments by a consortium in which the bank participates or by a third party in which the bank has invested, with technical and conforming changes. In final § __.21(c), the agencies are adding “invests in” to the regulation text in recognition that a bank may invest in a consortium that engages in community development loans or community development investments. Similarly, the agencies are revising “makes” in § __.21(c) to “originates, purchases, refinances, or renews” to conform with the applicable community development financing performance tests and more precisely indicate that a consortium or a third party that a bank invests in or participates in may originate, purchase, refinance, or renew community development loans or community development investments.

Accordingly, final § __.21(c) provides that if a bank invests in or participates in a consortium that originates, purchases, refinances, or renews community development loans or community development investments, or if a bank invests in a third party that originates, purchases, refinances, or renews such loans or investments, either those loans or investments may be considered, at the bank's option. The consideration is subject to certain limitations: (1) the bank must collect, maintain, and report the data pertaining to these community development loans and community development investments pursuant to § __.42(e), as applicable; (2) if the participants or investors choose to allocate the community development loans or community development investments among themselves for consideration under this section, no participant or investor may claim a loan origination, loan purchase, or investment for community development consideration if another participant or investor claims the same loan origination, loan purchase, or investment; and (3) the bank may not claim community development loans or community development investments accounting for more than its percentage share, based on the level of its participation or investment, of the total loans or investments made by the consortium or third party. Under final § __.21(c), the agencies do not intend to provide CRA consideration for particular community development loans or community development investments in a manner that would consider the same loan or investment more than once or provide consideration in excess of the bank's share or level of participation in the consortium or third party.

The agencies believe that this approach, as with the current regulations, provides banks with flexibility to make community development loans and community development investments while maintaining the safeguards against more than one institution claiming CRA consideration for the same loan or investment at the same time.

The agencies are not adding specific provisions regarding the allocation of community development financing activities in § __.21(c) of the final rule, as requested by a commenter, because the allocation of these loans and investments is already addressed in appendix B of the final rule. Further, the agencies do not believe that it is appropriate to make alternative provisions that depart from the uniform rules of allocation for community development loans or investments. The agencies believe that the methodology described in appendix B provides a reasonable methodology for the geographic allocation of community development loans or investments by a consortium or a third party.

With respect to commenter input regarding side letters, the agencies are maintaining their current practice with respect to side letters, which are not required but remain a permissible means through which to facilitate receiving CRA consideration for a loan or investment. The agencies also note that allocations made via side letters must conform with the allocation requirements for community development loans or investments described in appendix B of this final rule.

Regarding input on timing considerations around commitment of funds to a recipient, the agencies agree with commenter sentiment that working capital provided to a CDFI by a bank through a consortium or third party should count at the point in time when the commitment of funds to the recipient is made, irrespective of when the funds are deployed. This is why final appendix B includes a reference to legally binding commitments to extend credit or to invest. The definitions of “community development investment” and “community development loan” in the final rule also leverage the concept of a legally binding commitment to determine whether a particular loan or investment qualifies for CRA consideration.

Regarding commenter concerns about the agencies restricting two or more financial institutions from receiving CRA consideration for the same community development loan or community development investment if the loan or investment is sold from one institution to the other, the agencies' intent in the proposal was to prevent banks from simultaneously claiming and receiving credit for the same loan or investment. The agencies did not intend to eliminate CRA credit for sequential transactions in such a way that one bank could not receive any CRA credit for a loan or investment if the loan or investment was purchased from another bank. Final § __.21(c)(2) provides that, if participants or investors choose to allocate loans or investments among themselves for consideration, no participant or investor may claim a loan origination, loan purchase, or investment for community development consideration if another participant or investor claims the same loan or investment. However, if one participant or investor transfers the loan or investment to another participant or investor and relinquishes any ongoing claim to the loan or investment for CRA purposes, the participant to which the loan or investment is transferred may then receive agency consideration of the loan or investment. As with other types of loans or investments, the agencies may consider whether loans and investments are purchased or sold a number of times for purposes of artificially inflating CRA performance.

Section __.21(d) Performance Context Information Considered

Current Approach

Under the current CRA regulations, the agencies consider specific performance context factors in the application of relevant performance tests and standards and in the decision to approve a bank's strategic plan. The factors encompass a broad range of economic, demographic, and institution- and community-specific information that an examiner reviews to understand the context in which a bank's record of performance should be evaluated.

The Agencies' Proposal

In proposed § __.21(e), the agencies identified the performance context information that they would consider in applying performance tests and standards, as well as in determining whether to approve a strategic plan. Consistent with performance context information considered under the current CRA framework, the agencies proposed that consideration may be given to: (1) a bank's institutional capacity and constraints; (2) a bank's past performance; (3) demographic data pertaining to the geographic areas in which the bank is evaluated; (4) retail banking and community development needs in the geographic area in which the bank is evaluated; (5) the bank's business strategy and product offerings; (6) information in the bank's public file, including oral and written comments submitted to the bank or the agency; and (7) any other information deemed relevant by the agency. Given that the proposed performance tests, including relevant metrics and benchmarks, were designed to incorporate certain key performance context considerations, the agencies expressly proposed to consider performance context information to the extent that it is not otherwise considered as part of a proposed performance test. For example, the proposed community benchmarks for the Retail Lending Test metrics, as described in section IX of the preamble to the proposed rule, would reflect information about an assessment area, such as the percentage of owner-occupied housing units, the percentage of low-income families, and the percentage of small businesses or small farms. Similarly, the proposed market benchmarks for the Retail Lending Test would reflect the aggregate lending to targeted geographic areas or targeted borrowers by all lenders operating in the same assessment area.

The agencies requested feedback on the performance context factors in proposed § __.21(e), including ways to bring greater clarity to the use of performance context factors as applied to different performance tests.

Comments Received

The agencies received many comments with respect to the agencies' proposal to consider performance context information. Many of these commenters expressed general support for the agencies' proposal to apply performance context information in performance tests, standards, and strategic plan approval determinations.

A commenter stated that the agencies should not direct examiners to consider performance context information only to the extent that it is not otherwise considered as part of a proposed performance test. The commenter indicated that this approach appears to deemphasize performance context by implying that a broad range of information and circumstances are already covered by the applicable performance tests and standards; to address this issue, the commenter recommended removing this language from the proposal and clarifying that performance context factors are considered in addition to the proposed performance tests and standards, consistent with the current regulations. Other commenters made related suggestions, stating that the proposal's emphasis on quantitative factors such as metrics and thresholds deemphasized performance context in potentially undesirable ways.

A commenter suggested that the agencies should fully integrate performance context into all bank conclusions and ratings.

Some commenters offered suggestions on additional performance context factors that the agencies could potentially add to proposed § __.21(d). For example, a commenter requested that the agencies allow examiners to consider innovative and responsive credit products and programs as beneficial performance context across any of the performance tests to which they are relevant. Another commenter requested that the agencies incorporate a measure of the availability and affordability of childcare facilities as performance context. A commenter stated that a final rule should explicitly document that CDFI certification must be considered as a fundamental and essential element of CRA performance context for a CDFI bank and the factor should be considered before and after the application of performance tests. Another commenter suggested that the agencies use performance context to determine whether an activity qualifies for CRA purposes, especially for newer, less common, more complex, or innovative activities. The commenter also suggested that examiner judgment and performance context could be helpful when a bank engages in an activity that is not already on the agencies' proposed illustrative list of activities eligible for CRA consideration.

A commenter recommended that the agencies apply the following performance context factors: whether a substantial majority or a significant portion of the bank's retail activities are loan products and services not defined as major product lines for purposes of the Retail Lending Test and, therefore, not included in the quantitative metrics and benchmarks; the bank's business strategy; geographic dispersion of retail loan products and services; data anomalies; and institutional capacity and constraints.

Some commenters requested that the agencies leverage performance context data that succinctly summarizes conditions in localities and suggested these could include measures such as: housing vacancy rates; housing cost burden ratios; unemployment levels; poverty rates; levels of segregation; and measures of health and environmental quality standards. Similarly, to clarify the use of performance context factors, a commenter suggested that the agencies implement models that measure a community's capacity and demand for investment, financial services, and financial products and publish the results in banks' performance evaluations.

A number of commenters suggested that performance context should be used by the agencies as an additional means to encourage stakeholder participation in CRA examinations and that the agencies could solicit comment from local stakeholders, including historically underserved groups, on local community needs and whether banks are meeting those needs. The commenters noted that responses to those questions could then be considered by the agencies as additional performance context information that enables examiners to conduct additional analysis if significant concerns are raised that impact a bank's ratings.

A commenter stated that performance context should be defined and updated in real time in conjunction with banks, with a particular emphasis on research-based understanding of the credit and community development needs and opportunities. The commenter stated this could help banks evaluate their own performance and tailor their services.

Some commenters noted that the agencies will need dedicated staff with specific training to correctly apply performance context. A few commenters stated that trained experienced staff would be able to consider performance context and evaluate CRA performance relative to a bank's size, business strategy, and other relevant information. Another of these commenters asked the agencies to centralize performance context with a comprehensive community needs assessment; the commenter also suggested that the agencies could have dedicated staff to analyze public input, local data, and local studies.

A commenter requested that the agencies limit examiner discretion to adjust scores downward based on performance context factors, such as by requiring the agencies to provide a bank with prior notice and the opportunity to respond if such downward adjustments would adversely affect the bank's institution rating.

A commenter expressed concern that the proposed performance context factors do not offer assurances that banks with unique business models will be able to pass their CRA examinations under the proposed framework.

A commenter indicated that it supported the creation of a data-driven performance context dashboard.

Final Rule

After considering the comments, the agencies are adopting the proposed performance context factors in the final rule, with technical and conforming changes. In final § __.21(d), the agencies are clarifying that performance context may be considered when applying the performance tests or strategic plans pursuant to final § __.21(a) and when determining whether to approve a strategic plan pursuant to final § __.27(h). In final § __.21(d)(1), the agencies are also clarifying that the “retail banking or community development activities” described in the proposal include “retail lending, retail banking services and retail banking products, community development loans, community development investments, or community development services.”

In final § __.21(d)(1), the agencies are removing the reference to “facility-based assessment areas” that was included in the proposal. Similarly, in paragraphs (d)(3) and (4) of final § __.21, the agencies are removing the references to “the geographic areas in which the bank is evaluated.” By removing all three of these references to specific geographic areas, the agencies' intention is to permit the consideration of all of the performance factors in any relevant geographic area. Similar to the current CRA regulations, this approach allows the consideration of performance context factors where a bank's actual performance is evaluated. The agencies believe that this approach preserves important flexibility for the agencies to consider relevant performance context as needed.

In final § __.21(d)(6), with respect to performance context related to the bank's public file, the agencies are removing the reference to “oral” comments that was included in the proposal. After further consideration, the agencies have decided that, consistent with the current CRA regulations, it is preferable to only accept written comments submitted to the bank or the agency for the bank's public file. The agencies believe that use of written comments in relation to the public file better ensures the accuracy of the comments and eliminates additional processing steps associated with oral comments. The agencies note that this change from the proposal does not affect the use of community contacts and other oral sources of public feedback used in CRA examinations.

With these changes, final § __.21(d) provides that, when applying performance tests and strategic plans pursuant to final § __.21(a), and when determining whether to approve a strategic plan pursuant to final § __.27(h), the agencies may consider the following performance context information to the extent that it is not considered as part of the tests and standards: (1) a bank's institutional capacity and constraints, including the size and financial condition of the bank, safety and soundness limitations, or any other bank-specific factors that significantly affect the bank's ability to provide retail lending, retail banking services and retail banking products, community development loans, community development investments, or community development services; (2) the bank's past performance; (3) demographic data on income levels and income distribution, nature of housing stock, housing costs, economic climate, or other relevant data; (4) any information about retail banking and community development needs and opportunities provided by the bank or other relevant sources, including but not limited to members of the community, community organizations, State, local, and tribal governments, and economic development agencies; (5) the bank's business strategy and product offerings; (6) the bank's public file, including any written comments about the bank's CRA performance submitted to the bank or appropriate agency and the bank's responses to those comments; and (7) any other information deemed relevant by the agency.

The agencies have considered commenter suggestions to remove proposed language stating that the agencies will consider performance context factors to the extent they are not already considered as part of performance tests or standards. The agencies are retaining this language in the final rule because certain performance context information is now incorporated in the tests and standards, and the agencies believe that this practice places an appropriate emphasis on performance context information. For example, the Retail Lending Test metrics and benchmarks incorporate data on income levels and income distribution, as is also noted in § __.21(d)(3). The agencies emphasize, however, that performance context will continue to be considered by the agencies in evaluating all banks, as the agencies recognize that diverse banks operate in a wide variety of circumstances that quantitative measures alone might not capture. Similarly, while data about an economic downturn or economic conditions precipitating a decline in lending would fall within the scope of § __.21(d)(3), the agencies anticipate that this information would usually not be used to adjust a Retail Lending Test conclusion because it generally would already be reflected in the relevant Retail Lending Test market benchmarks; however, the agencies also believe there might be some unique circumstances in which data about economic conditions are not fully reflected in the relevant Retail Lending Test market benchmarks.

The agencies acknowledge that the current CRA regulations consider performance context in addition to the applicable performance tests and standards. However, to accommodate new aspects of the final rule framework, such as the quantitative approach implemented through standardized metrics and benchmarks, the agencies believe that performance context should fully yield to an applicable performance test when a performance context factor considers the same information that is incorporated in the performance test or standard. This approach ensures that performance context and the applicable tests function in a complementary and consistent manner. The agencies believe that this approach better maintains the integrity of the performance tests and standards and prevents similar or even redundant information from obfuscating analysis included in the performance tests or standards.

Regarding commenter sentiment that performance context should be fully integrated into conclusions and ratings, the agencies agree with this suggestion and have integrated the consideration of final § __.21(d) performance context factors in each applicable performance test. To accomplish this, the agencies have expressly described the role that the final § __.21(d) performance context factors play in the “conclusions and ratings” paragraph of each respective performance test adopted under the final rule framework.

Regarding commenter suggestions that innovative and responsive credit products should be considered under performance context considerations, the agencies note that the final rule incorporates assessments of responsiveness in the Retail Services and Products Test, the Community Development Financing Test, the Community Development Financing Test for Limited Purpose Banks and the Community Development Services Test. Specifically, the final Retail Services and Products Test considers the responsiveness of a bank's credit products and programs. For this reason, the final Retail Lending Test does not also consider the responsiveness of a bank's credit products. Similarly, an impact and responsiveness review pursuant to final § __.15 is captured in the evaluations of the Community Development Financing Test in final § __.24, the Community Development Services Test in final § __.25, and the Community Development Financing Test for Limited Purpose Banks in final § __.26. As discussed elsewhere in this SUPPLEMENTARY INFORMATION , the final rule does not adopt the term “innovative” or otherwise use the term.

The agencies have considered commenter feedback with respect to including the availability and affordability of childcare facilities as performance context, and the agencies have determined not to adopt this suggestion because bank activities that support childcare or childcare facilities qualify as community development activities, as described in the section-by-section analysis of § __.13. Similarly, the agencies believe that it is not necessary to make CDFI certification a performance context factor because final § __.21(d)(5) considers the business strategy and product offerings of a bank.

The agencies also decline to adopt commenter suggestions to use performance context to determine whether an activity qualifies for CRA purposes, especially for newer, less common, more complex, or innovative activities that may not be already on the agencies' proposed illustrative list of activities eligible for CRA consideration. The agencies note that other final rule provisions specify the particular retail and community development activities that qualify for CRA consideration. The agencies believe that the use of performance context to create exceptions to these requirements for qualifying activities would compromise the clarity and transparency of the framework, introduce additional complexity, and potentially minimize the incentive for banks to meet the requirements of the regulations.

However, the agencies agree with commenter sentiment that if a significant portion of a bank's retail lending activities are loan products that are potentially evaluated under the Retail Lending Test but that do not qualify as major product lines, the loan products could be considered as part of performance context information under § __.21(d)(5) of the final rule.

With respect to commenter suggestions that the agencies consider a bank's business strategy and a bank's institutional capacity and constraints as performance context, the agencies note that these considerations are included as performance context factors under paragraphs (d)(1) and (5) of final § __.21.

The agencies considered whether they should add performance context factors for the geographic dispersion of retail loan products and data anomalies. The agencies are not adding a performance context factor for the geographic dispersion of retail loans and products because the Retail Lending Test and Small Bank Lending Test already evaluate the distribution of the loan products under each respective test. With respect to data anomalies, the Retail Lending Test already considers missing or faulty data as an additional factor under § __.22(g)(4). With respect to other applicable tests, data anomalies may be considered as other potentially relevant information under § __.21(d)(7) of the final rule.

In response to commenter suggestions that the agencies should consider localized data focused on particular community needs, the agencies note that under final § __.21(d)(4), State, local, and tribal governments, and economic development agencies may submit any information regarding retail banking and community development needs and opportunities. Under this approach, the agencies would consider this variety of information to the extent that it is not already considered in relevant performance tests.

After considering comments on the importance of stakeholder feedback, the agencies have decided to preserve feedback from stakeholders as part of a bank's relevant performance context as proposed. To achieve this, paragraphs (d)(4) and (6) of final § __.21 permit the agencies to consider relevant stakeholder feedback submitted: directly to the agencies on retail banking and community development needs and opportunities; directly to the agencies via written comments on the bank's CRA performance; indirectly via comments included in the bank's public file; or indirectly via bank response to a written comment.

With respect to commenter suggestions that the performance context should be updated with the most recent information possible, the agencies note that they intend to apply the most recent performance context information that is available at the time of the examination.

In relation to suggestions that the agencies should have dedicated staff with specific training on applying performance context, the agencies plan to provide dedicated training to supervisory staff on all aspects of the final rule, including performance context. As the final rule is implemented, the agencies will make determinations as to which particular staff are best situated to consider and apply performance context information and what specific, additional training would be helpful to achieve agency objectives.

The agencies also expect that their quantitative approach to assessing bank performance will provide additional transparency and consistency in the examination process. To provide further predictability and transparency, the agencies will consider the possibility of additional interagency guidance with respect to their discretion to adjust a bank's conclusions or ratings through performance context consistent with § __.21(d). However, at this time, the agencies do not find it appropriate to limit examiner discretion in the final rule to adjust scores downward. In relation to a comment that the proposed performance context factors do not offer assurances that banks with unique business models will be able to pass their CRA examinations under the proposed framework, the agencies note that the proposed performance context factors were not intended to provide assurances of how a bank will perform in a CRA examination. In addition, the final rule also provides banks with the option to seek approval to be evaluated under a strategic plan, and the option to seek limited purpose bank designations, both of which are a means of accommodating banks with unique business models that might otherwise experience challenges with being evaluated under otherwise applicable performance tests or standards.

The agencies will work together to provide greater performance context information to the public, including to banks. This will include tools to provide information on factors that may impact community credit needs. As noted in the SUPPLEMENTARY INFORMATION of the agencies' proposal, the agencies believe that this information will help provide greater consistency and transparency, while also enhancing public participation. In addition, as noted elsewhere, the agencies will provide online tools that will leverage reported data and provide information related to metrics and benchmarks.

Section __.21(e) Conclusions and Ratings

Current Approach

Pursuant to the CRA statute, the current CRA regulations provide that a bank is assigned a rating of “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance” at the institution level. The assigned rating reflects the bank's record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods.

The Agencies' Proposal

In proposed § __.21(f), the agencies proposed to assign banks conclusions, ratings, and performance scores. Specifically, pursuant to § __.21(f)(1), the agencies would assign conclusions to banks for the bank's performance on applicable performance tests and standards. For large banks, intermediate banks, and wholesale and limited purpose banks, these conclusions would be “Outstanding,” “High Satisfactory,” “Low Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” For small banks, these conclusions would be “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.”

Pursuant to proposed § __.21(f)(2), the agencies would assign a bank a rating of “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance” regarding its overall CRA performance, as applicable, in each State, in each multistate MSA, and for the institution that reflected the bank's record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the bank. This paragraph retained existing language from the current CRA rule.

Proposed § __.21(f)(3) provided that the agencies would develop performance scores in connection with assigning conclusions and ratings for a bank, other than a small bank evaluated under the small bank performance standards, a wholesale or limited purpose bank evaluated under the Community Development Financing Test for Wholesale or Limited Purpose Banks, or a bank evaluated based on an approved strategic plan. As described further in appendices C and D of the proposal, the agencies proposed a scoring system based on the following 10-point scale: “Outstanding” (10 points); “High Satisfactory” (7 points); “Low Satisfactory” (6 points); “Needs to Improve” (3 points); or “Substantial Noncompliance” (0 points). The agencies intended for the performance scores to provide greater transparency regarding a bank's overall performance.

Comments Received

The agencies received many comments on the agencies' proposal with respect to conclusions, ratings, and performance scores. Some commenters supported the conclusions, ratings, and performance score approach in the proposed rule. A few commenters stated that they appreciated the additional transparency and precision that the agencies proposed regarding ratings by assigning both a conclusion and a score for each performance test at the assessment area level, with one of these commenters noting that the change will provide additional clarity as to how well banks are performing. A commenter supported the proposal's increased rigor in the form of assigning points to the ratings in the CRA's subtests, as detailed in the proposed appendices C and D. Another commenter stated that it would welcome clearer expectations for each of the four proposed ratings.

Some commenters expressed support for the proposed 10-point performance scoring system but also suggested changes to point values corresponding to various ratings. For example, a few commenters suggested that, to provide more distinction between the conclusions, the agencies could adopt an alternative scale where an “Outstanding” receives 10 points, a “High Satisfactory” receives 8 points, a “Low Satisfactory” receives 5 points, and a “Needs to Improve” receives 2 points. Similarly, some commenters encouraged the agencies to otherwise make a greater distinction between the “Low Satisfactory” and “High Satisfactory” conclusions to incentivize better bank performance and to ensure poor bank performance does not result in a rating above “Needs to Improve.” Some commenters requested that the agencies adopt a point system that better reveals distinctions in performance and minimizes the potential for CRA grade inflation. For example, a commenter suggested an approach where the agencies would assign a numeric score between 1 and 100 and assign ratings relative to the scale.

Another commenter recommended that the agencies separate banks into one of the following three equally weighted categories for CRA scores: “below average,” “average,” and “above average.” From there, the commenter suggested that the agencies could identify a subset of banks from the below average category for “Needs to Improve” results and a subset of banks from the above average category for “Outstanding” results. A few commenters recommended a scoring system that makes receiving an “Outstanding” rating more easily achievable under the applicable performance tests.

Final Rule

After reviewing and considering the comments, the agencies are adopting the proposed approach to conclusions and ratings. As described in further detail in the section-by-section analysis of § __.28 (“Assigned conclusions and ratings”) the agencies believe that the final rule approach creates a consistent and quantifiable framework for assigning conclusions for bank performance and State, multistate MSA, and institution ratings. The agencies believe that their adopted approach will increase transparency and provide clarity regarding a bank's CRA performance.

To streamline the regulation text of the final rule, the agencies are making a series of technical edits to § __.21(e). With respect to conclusions in final § __.21(e)(1), the agencies are specifying that, for all banks, conclusions are assigned pursuant to final § __.28. The agencies are also indicating in final § __.21(e)(1) that: for large banks and limited purpose banks, conclusions are assigned pursuant to final appendix C; for intermediate banks and small banks, conclusions are assigned pursuant to final appendices C and E; and for banks with a strategic plan, conclusions are assigned pursuant to paragraph g of final appendix C. Furthermore, because the information is also covered in final § __.28(a)(1), the agencies are not including references to specific conclusions such as “Outstanding” and “Needs to Improve.”

In final § __.21(e)(2), the agencies are indicating that, as provided in final § __.28 and final appendices D and E, they assign an overall CRA institution performance rating to a bank. As applicable, overall CRA performance ratings are also assigned for each State and each multistate MSA. Because the information is already included in final § __.28, the agencies have removed the reference to the specific ratings that may be assigned to a bank, as well as the statement that the ratings reflect the bank's record of helping to meet the credit needs of the bank's entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the bank.

The agencies are not adopting proposed § __.21(f)(3) in final § __.21 pertaining to performance scores. The agencies believe that the performance scores are appropriately described in paragraphs (a) and (b) of final § __.28 and additional discussion in final § __.21 would be duplicative.

The agencies have considered the performance scoring system alternatives suggested by commenters involving more granular scoring systems or systems that would lend themselves to more distinct gradations. However, the agencies are adopting the proposed 10-point scale in the final rule because the agencies believe it provides appropriate transparency and facilitates a greater understanding of bank performance in comparison to other alternatives. With specific reference to commenter input suggesting the need for a more detailed performance scoring approach, such as a 100-point scale, the agencies believe that doing so would provide at best a limited benefit because both the proposal and final rule approach involve translating performance scores into an “Outstanding,” “High Satisfactory,” “Low Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance” conclusion or rating. In addition, the agencies believe that the potential for CRA grade inflation with respect to performance scores is minimized with established performance thresholds in the Retail Lending Test and by the direct roll-up of assessment area performance scores to conclusions at the State level, multistate MSA level, and for the institution in all large bank performance tests. To the extent examiner judgment is involved in assigning a performance score, the agencies also believe that examiner training and guidance will minimize potential “grade inflation” risks.

The agencies have also considered alternatives suggested by commenters to assign different point values within the 10-point performance scoring system to correspond with a particular conclusion or rating. However, the agencies believe that finalizing the point value as proposed is preferable because it produces a more accurate overall score when there are variations in subcomponent performance. Additionally, these point values result in appropriate aggregation of geographic area conclusions into State, multistate MSA, and institution conclusions and ratings. Regarding comments to develop a scale with a greater difference in the number of points assigned to “Low Satisfactory” and “High Satisfactory,” the agencies believe that the proposed approach is appropriate. Specifically, the agencies consider “Low Satisfactory” and “High Satisfactory” performance to be less distinct from one another than other neighboring categories, such as “Needs to Improve” and “Low Satisfactory.” Further, the agencies do not agree with commenter input that the 10-point system inhibits strong performance by banks. Instead, the agencies believe that the 10-point scoring methodology appropriately identifies distinctions in bank performance and assists the agencies in assigning corresponding conclusions and ratings.

Section __.21(f) Safe and Sound Operations

Current Approach

Pursuant to the CRA statute and the current CRA regulations, a bank is not required to make loans or investments or to provide services that are inconsistent with the safe and sound operation of the bank. Instead, current CRA regulations specify that banks are expected by the agencies to provide safe and sound loans, investments, and services on which they expect to make a profit. Furthermore, banks may only develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals if the standards are consistent with safe and sound operations.

The Agencies' Proposal

In proposed § __.21(g), the agencies retained the current regulatory provision that provides that neither the CRA statute nor the CRA regulations require a bank to make loans or investments or to provide services that are inconsistent with safe and sound banking practices, with the proposed clarification that this includes the bank's underwriting standards. Similarly, the agencies also proposed to retain the language in that provision indicating that, although banks may employ flexible underwriting standards for lending that benefits low- or moderate-income individuals and low- or moderate- income census tracts, they must also be consistent with safe and sound operations. The agencies proposed certain revisions to the language in this section for clarity, including an express statement that banks may employ flexible underwriting standards for not only loans that benefit low- or moderate-income individuals and low- or moderate-income census tracts, but also for loans that benefit small businesses or small farms, if consistent with safe and sound operations. The agencies proposed to eliminate the statement that they anticipate that banks will provide safe and sound loans, investments, and services on which they expect to make a profit because they deemed this to be redundant to include.

Comments Received

The agencies received a few comments that offered general support for the agencies' proposed safety and soundness requirements. A commenter stated that because operating in a safe and sound manner is a prudent business practice and a regulatory requirement, a final CRA rule should not lose sight of, or compromise, the ability of banks to operate in such a manner. Another commenter stated that the agencies should not abandon safe and sound safeguards against systemic risk.

Final Rule

The agencies are adopting the safe and sound operations requirement in § __.21(f) of the final rule with a single technical change. The agencies are revising “make” in the first sentence to “originate or purchase” in order to more precisely indicate that banks originate or purchase loans or investments. The requirements in final § __.21(f) reinforces the statutory requirement that banks meet the credit needs of their communities in a manner that is consistent with the safe and sound operation of the bank. This requirement has general applicability to the entire CRA framework.

Section __.22 Retail Lending Test

Section __.22 Overview of the Retail Lending Test Approach

Current Approach

Under the current CRA regulations, the large bank lending test includes both quantitative and qualitative criteria. The agencies consider originations and purchases of loans in the following categories of retail lending: home mortgage loans; small business loans; and small farm loans. These categories of retail lending are generally evaluated if the bank has originated or purchased loans in the category. In addition, consumer loans, which include motor vehicle loans, credit card loans, other secured consumer loans, or other unsecured consumer loans, are considered at the bank's option, or if these loans constitute a substantial majority of the bank's business.

The agencies evaluate large banks' retail lending based on three primary criteria: lending activity; geographic distribution; and borrower characteristics. The lending activity criterion considers the volume of retail lending, in terms of the number and dollar amount of home mortgage loans, small business loans, small farm loans, and consumer loans, as applicable, within a bank's assessment areas. The agencies identify the number and dollar amount of loans in assessment areas and evaluate the bank's lending volume considering the bank's resources, business strategy, and other performance context information.

In addition, to consider whether the bank is helping to meet the credit needs of low- and moderate-income census tracts, and of low- and moderate- income individuals, small businesses, and small farms, the agencies review the geographic distribution and borrower distribution of those loans.

For the geographic distribution criterion, the agencies evaluate the proportion of the bank's lending in the bank's assessment areas, the dispersion of lending in the bank's assessment areas, and the number and amount of a bank's retail loans in low-, moderate-, middle-, and upper-income geographies in the bank's assessment areas. The agencies review the geographic distribution of home mortgage loans by income category and compare the percentage distribution of lending to the percentage of owner-occupied housing units in the census tracts. Similarly, in each geographic income category, the agencies compare: small business lending to the percentage distribution of businesses; small farm lending to the percentage distribution of farms; and consumer lending to the percentage distribution of households in each geographic income category, as applicable. The agencies supplement these distribution analyses by also reviewing the dispersion of a bank's loans throughout geographies of different income levels in its assessment areas to determine if there are unexplained conspicuous lending gaps.

For the borrower distribution criterion, the agencies evaluate the distribution of a bank's retail loans across borrower incomes or gross annual revenues of small businesses and small farms. The agencies use the following demographic comparators to inform the borrower distribution analysis: for home mortgage lending, families by income level; for small business lending, businesses with gross annual revenues of $1 million or less; for small farm lending, farms with gross annual revenues of $1 million or less; and for consumer lending, households by income level.

The agencies evaluate small banks and intermediate small banks using similar, but simplified, standards that do not rely on required data collection or reporting. Specifically, a small bank or an intermediate small bank is evaluated on: the bank's loan-to-deposit ratio (based on the balance sheet dollar values at the institution level); the percentage of its loans and lending-related activities within the bank's assessment areas; the bank's record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of the bank's loans; and the bank's record of taking action in response to written complaints about its performance in helping to meet credit needs in its assessment areas. The geographic and borrower distribution evaluation for small banks and intermediate small banks is similar to that of large banks, but may use bank data collected in the ordinary course of business or information obtained through loan samples. For small banks, the agencies evaluate the same categories of retail lending as for other banks, except that only those consumer loan categories that are considered primary products are evaluated.

The purpose of evaluating lending activity for small banks, intermediate small banks, and large banks is the same—to determine whether a bank has a sufficient volume and distribution of lending in its assessment areas in light of a bank's performance context, including its capacity and the lending opportunities in its assessment areas. The current approach, however, does not specify what level, or percentage, of lending is sufficient to achieve “Outstanding” or “Satisfactory” performance, for example, and relies on examiner discretion to draw a conclusion about a bank's level of lending using the descriptions of performance under each of the criteria and ratings categories.

Retail lending conducted outside of assessment areas is not evaluated using the lending test criteria. However, the Interagency Questions and Answers allow for consideration of loans to low- and moderate-income individuals, small business loans, and small farm loans outside of a bank's assessment areas.

The Agencies' Proposal—Overview

The agencies proposed a Retail Lending Test in § __.22 to measure how well a bank's retail lending meets the credit needs of its facility-based assessment areas, retail lending assessment areas, and outside retail lending area, as applicable, through an analysis of the bank's retail lending volume and retail lending distribution. The proposed Retail Lending Test used a metrics-based approach that incorporated specific quantitative standards in order to increase consistency in evaluations and provide improved transparency and predictability regarding the retail lending performance needed to achieve a particular conclusion, ranging from “Outstanding” to “Substantial Noncompliance.”

Under the proposed Retail Lending Test, the agencies would apply two sets of metrics. First, in facility-based assessment areas, the agencies proposed to apply a retail lending volume screen to assess a bank's retail lending volume, calculated as a bank volume metric, relative to peer banks in the facility-based assessment area, calculated as a market volume benchmark. Specifically, the agencies proposed a bank volume metric calculated as the ratio of a bank's total dollars of closed-end home mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans compared to the bank's dollars of deposits in the facility-based assessment area. The proposed market volume benchmark was the aggregate ratio of retail lending compared to deposits among all large banks that operated a branch in the facility-based assessment area.

Under the proposal, a bank with a bank volume metric that met or surpassed the Retail Lending Volume Threshold—30 percent of the market volume benchmark—would be assigned a recommended conclusion for the facility-based assessment area based on the proposed distribution analysis described below. For a bank with a bank volume metric that did not meet or surpass the threshold, the agencies proposed to consider a set of factors to determine whether the bank had an acceptable basis for not meeting or surpassing the threshold. Under the proposed approach, a large bank that lacked an acceptable basis for not meeting or surpassing the threshold would be limited to receiving a Retail Lending Test conclusion of “Needs to Improve” or “Substantial Noncompliance” for that facility-based assessment area.

Second, the agencies proposed to evaluate the geographic and borrower distributions of a bank's major product lines in its facility-based assessment areas, retail lending assessment areas, and outside retail lending area, as applicable. Under the proposal, a bank's originated and purchased closed-end home mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, and small farm loans would qualify as a major product line in a particular area if the loans in the product line comprised 15 percent or more, by dollar amount, of the bank's retail lending in the area. In addition, a bank's originated and purchased automobile loans would qualify as a major product line in a particular area if the bank's automobile loans comprised 15 percent or more of the bank's retail lending in the area, based on a combination of the dollar amount and number of loans.

For a large bank, the agencies proposed to evaluate the geographic and borrower distributions of the bank's major product lines in its facility-based assessment areas, retail lending assessment areas, and outside retail lending area. For an intermediate bank, or a small bank that opted to be evaluated under the Retail Lending Test, the agencies proposed to evaluate the geographic and borrower distributions of the intermediate bank's or small bank's major product lines in its facility-based assessment areas. In addition, if an intermediate bank conducted a majority of its retail lending, by dollar amount, outside of its facility-based assessment areas, the agencies would evaluate the intermediate bank's geographic and borrower distributions in its outside retail lending area.

To evaluate the geographic and borrower distributions of a bank's major product lines, the agencies proposed a series of bank metrics and benchmarks covering a total of four categories of lending for each major product line: low-income census tracts; moderate-income census tracts; low-income borrowers (or small businesses or small farms with gross annual revenues of less than $250,000); and moderate-income borrowers (or small businesses or small farms with gross annual revenues of greater than $250,000 but less than or equal to $1 million). For the geographic distribution analysis, the proposed bank metrics would measure the level of the bank's lending in low- and moderate-income census tracts in the facility-based assessment area, retail lending assessment area, or outside retail lending area, as applicable. For the borrower distribution analysis, the proposed bank metrics would measure the level of the bank's lending to low- and moderate-income borrowers, respectively, and to lower-revenue small businesses and small farms, respectively, in the area. The proposed geographic and borrower bank metrics would be compared to:

• Market benchmarks that reflect the aggregate lending to low- and moderate-income census tracts or low- and moderate-income borrowers and lower-revenue small businesses and small farms in the area by reporting lenders; and
• Community benchmarks that reflect local demographic data.

Under the proposal, a bank's geographic and borrower distribution analyses (evaluating the four categories of lending described above for each major product line) would be translated into a performance conclusion using multipliers and performance ranges. Specifically, for each distribution with respect to each major product line evaluated in a facility-based assessment area, retail lending assessment area, or outside retail lending area, the agencies proposed to assign the performance conclusion that corresponds to:

• The relevant market benchmark, multiplied by a specified multiplier; or
• The relevant community benchmark, multiplied by a specified multiplier, whichever is lower.

For example, under the proposal, if the geographic bank metric for closed-end home mortgage loans in low-income census tracts in a particular facility-based assessment area just exceeded (1) 110 percent of the corresponding geographic market benchmark or (2) 90 percent of the corresponding geographic community benchmark, whichever is lower, then the agencies would assign a “High Satisfactory” conclusion to the bank's performance on the particular geographic distribution in the facility-based assessment area.

The agencies proposed a transparent approach for combining the four performance conclusions assigned to each of a bank's major product lines in an area pursuant to the geographic and borrower distribution analyses. Under the proposed approach, for a particular major product line, the two geographic distribution performance conclusions would be combined using a weighted average calculation to determine a geographic performance score and the two borrower distribution performance conclusions would be combined using a weighted average calculation to determine a borrower performance score. Then, these geographic and borrower performance scores would be averaged to develop a product line average for each major product line.

Next, the agencies would develop a recommended conclusion for the Retail Lending Test for each facility-based assessment area, retail lending assessment area, and outside retail lending area. This recommended conclusion would be developed by combining the product line averages for all of a bank's major product lines in the facility-based assessment area, retail lending assessment area, or outside retail lending area. For purposes of combining the product line averages, the agencies proposed to weight each of a bank's major product lines by the dollar volume of lending the bank engaged in for the product line in the area. The resulting recommended conclusion would serve as the basis for the performance conclusion on the Retail Lending Test in the particular facility-based assessment area, retail lending assessment area, or outside retail lending area under the proposed approach.

Recognizing that the proposed distribution metrics and benchmarks may not capture all factors that should be considered when evaluating a bank's retail lending performance, the agencies proposed a set of additional factors that examiners may consider with respect to a bank's retail lending performance in a particular area. Based on the Retail Lending Test recommended conclusion, the additional factors, and the bank's performance on the retail lending volume screen (in the case of a facility-based assessment area), examiners would assign a Retail Lending Test conclusion to each of a bank's facility-based assessment areas, retail lending assessment areas, and its outside retail lending area, as applicable, under the proposed approach. The agencies would also consider applicable performance context factors not included in the metrics-based framework.

Finally, the agencies proposed a transparent and standardized approach for combining Retail Lending Test conclusions assigned to a bank's facility-based assessment areas, retail lending assessment areas, and outside retail lending areas, as applicable, to calculate Retail Lending Test conclusions for the bank at the State, multistate MSA, and institution levels. For example, to calculate a large bank's Retail Lending Test conclusion for a particular State, the agencies proposed to combine the Retail Lending Test conclusions for each of the large bank's facility-based assessment areas and retail lending assessment areas in the State, weighting each assessment area conclusion based on a combination of the percentage of the large bank's retail loans made in the particular facility-based assessment area or retail lending assessment area and the percentage of the bank's deposits sourced from the particular facility-based assessment area or retail lending assessment area.

Summary of Final Rule Retail Lending Test

Overview. The agencies are finalizing the proposed Retail Lending Test, with substantive modifications, clarifications, and technical revisions, as described throughout the section-by-section analysis of final § __.22. The final rule retains the overall structure and key features of the proposed Retail Lending Test, including:

• A Retail Lending Volume Screen applied to facility-based assessment areas, pursuant to final § __.22(c);
• A major product line standard to identify a bank's most significant retail product lines in its facility-based assessment areas, retail lending assessment areas, and outside retail lending area—individually and collectively referred to as “Retail Lending Test Areas” in the final rule—pursuant to final § __.22(d);
• Metrics and benchmarks, drawn from the current approach, used to evaluate the following four categories of lending for each of a bank's major product lines in each Retail Lending Test Area, pursuant to final § __.22(e):

○ Loans in low-income census tracts;

○ Loans in moderate-income census tracts;

○ Loans to low-income borrowers (or to businesses or farms with gross annual revenues of $250,000 or less); and

○ Loans to moderate-income borrowers (or to businesses or farms with gross annual revenues greater than $250,000 but less than or equal to $1 million).

• Multipliers and performance ranges, based on the benchmarks described above, that determine a bank's supporting conclusion for each of the four categories of lending for certain major product lines, pursuant to final § __.22(f);
• Product line scores for a bank's performance on each major product line—by averaging together the supporting conclusions for each of the four categories of lending for a major product line—in a Retail Lending Test Area;
• A recommended conclusion for each Retail Lending Test Area based on the bank's product line scores on all major product lines in that area, pursuant to final § __.22(f);
• Additional factors that the agencies consider to supplement the geographic and borrower distribution analyses, pursuant to final § __.22(g); and
• Conclusions assigned to each Retail Lending Test Area, and a weighted average approach to determine Retail Lending Test conclusions at the State, multistate MSA, and institution levels, pursuant to final § __.22(h).

The final rule also includes key modifications from the proposed Retail Lending Test, discussed in further detail below, including:

• A reduction in the number of major product lines by removing multifamily loans and open-end home mortgage loans from the distribution analysis and by narrowing the standard for when automobile loans are evaluated;
• Changes to the methodology for determining a bank's major product lines in its facility-based assessment areas and outside retail lending area, namely by considering a combination of loan dollars and loan count, as defined in final § __.12;
• Changes to the methodology for determining a large bank's major product lines in retail lending assessment areas, based on whether the large bank made a sufficient number of closed-end home mortgage loans or small business loans to trigger the retail lending assessment area delineation requirement, as described further in the section-by-section analysis of final § __.17;
• For automobile lending, limiting the evaluation to majority automobile lenders, as described below, and to banks that opt to have their automobile lending evaluated, and eliminating the proposed data reporting requirements, market benchmarks, and performance ranges;

• A reduction in several of the multiplier values used to calculate performance ranges, to ensure that the performance ranges are generally attainable and appropriately aligned with the conclusion categories;

• Changes to the methodology for combining performance in each major product line to determine the recommended conclusion in each Retail Lending Test Area, namely by considering a combination of loan dollars and loan count;
• Additions and revisions to the proposed additional factors to account for more circumstances in which adjustments to the recommended conclusion for a Retail Lending Test Area may be warranted; and
• Changes to the approach for calculating a weighted average of Retail Lending Test Area conclusions to determine conclusions at the State, multistate MSA, and institution levels.

In addition to these substantive changes, the final rule adopts non-substantive clarifications and technical revisions to the regulatory text, including final appendix A, to improve readability and enhance clarity.

Retail lending volume screen. As under the proposal, the final rule Retail Lending Test applies two sets of metrics. First, in facility-based assessment areas only, the agencies will apply the Retail Lending Volume Screen to assess a bank's retail lending volume relative to its volume of deposits compared to peer lenders in the area. Specifically, under the final rule, a bank's Bank Volume Metric is the ratio of the bank's total dollars of lending in specified categories (closed-end home mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans, as applicable), compared to the bank's dollars of deposits in the facility-based assessment area. The Bank Volume Metric is compared to the aggregate ratio of retail lending to deposits among all banks that operated a branch in the area, as measured by a Market Volume Benchmark. The Bank Volume Metric and Market Volume Benchmark under the final rule are substantially similar to the proposal, except that: (1) a bank's automobile loans are only included in the Bank Volume Metric if the bank is a majority automobile lender or opts to have its automobile loans evaluated under the Retail Lending Test; and (2) automobile lending is not included in the Market Volume Benchmark.

As under the proposal, the final rule provides that a bank with a Bank Volume Metric that meets or surpasses a Retail Lending Volume Threshold of 30 percent of the Market Volume Benchmark will be assigned a recommended conclusion for the facility-based assessment area based on the distribution analysis described below. With respect to a bank with a Bank Volume Metric that does not meet the Retail Lending Volume Threshold in a facility-based assessment area, the agencies will consider a set of factors to determine whether the bank has an acceptable basis for not meeting the threshold. As under the proposal, under the final rule a large bank that lacks an acceptable basis for not meeting the threshold is limited to receiving a Retail Lending Test conclusion of “Needs to Improve” or “Substantial Noncompliance” for the facility-based assessment area. An intermediate bank, or a small bank that opted into being evaluated under the Retail Lending Test, that lacks an acceptable basis for not meeting the threshold would remain eligible for all possible conclusion categories.

Geographic and borrower distribution analysis. Consistent with the proposal, the agencies will next evaluate the geographic and borrower distributions of a bank's major product lines in its Retail Lending Test Areas. The final rule adopts a revised approach to determine what is a major product line for facility-based assessment areas and outside retail lending areas. In a facility-based assessment area or outside retail lending area, a bank's originated and purchased closed-end home mortgage loans, small business loans, small farm loans, and automobile loans, as applicable, would qualify as a major product line if the loans in the product line comprise 15 percent or more, based on a combination of loan dollars and loan count, of the bank's lending across all these product lines in the area. The final rule also adopts a revised approach for determining what is a major product line for retail lending assessment areas. In a retail lending assessment area, a large bank's originated and purchased closed-end home mortgage loans or small business loans, respectively, would qualify as a major product line if the large bank originated a sufficient number of closed-end home mortgage loans or small business loans to require delineation of a retail lending assessment area pursuant to final § __.17 ( i.e., at least 150 reported closed-end home mortgage loans or at least 400 reported small business loans in each year of the prior two calendar years). As noted above, unlike in the proposal, the distribution of a bank's open-end home mortgage loans and multifamily loans are not evaluated under the final Retail Lending Test.

As under the proposal, the agencies will evaluate the geographic and borrower distributions of a large bank's major product lines in its facility-based assessment areas, retail lending assessment areas, and outside retail lending area. For an intermediate bank, or a small bank that opts to be evaluated under the Retail Lending Test, the agencies evaluate the geographic and borrower distributions of the bank's major product lines in its facility-based assessment areas. Furthermore, an intermediate bank or a small bank is evaluated in its outside retail lending area if the bank conducts a majority of its retail lending, by a combination of loan dollars and loan count outside of its facility-based assessment areas, or at the bank's option. For a small bank that opts to be evaluated under the Retail Lending Test, the final rule treats these small banks the same as intermediate banks with respect to the Retail Lending Test Areas in which the small bank's major product lines are evaluated.

As under the proposal, the agencies will calculate a series of bank metrics and benchmarks to evaluate the geographic and borrower distributions of a bank's major product lines. The final rule generally adopts the geographic and borrower distribution metrics and benchmarks as proposed, evaluating four separate categories of lending for each major product line in each Retail Lending Test Area:

• Low-income census tracts;
• Moderate-income census tracts;
• Low-income borrowers or businesses or farms with gross annual revenues of less than $250,000; and
• Moderate-income borrowers or businesses or farms with gross annual revenues of greater than $250,000 but less than or equal to $1 million.

The bank's metrics are compared to:

• Market benchmarks that reflect the aggregate lending to low- and moderate-income census tracts or low- and moderate-income borrowers or lower-revenue small businesses or small farms in the Retail Lending Test Area by reporting lenders; and
• Community benchmarks that reflect local demographic data.

As in the proposal, the final rule evaluates a bank's performance on the geographic and borrower distribution analyses for closed-end home mortgage loans, small business loans, and small farm loans using performance ranges calculated with benchmarks and multipliers. Specifically, for each category of lending that is evaluated as part of a major product line in a Retail Lending Test Area, the agencies assign a supporting conclusion that corresponds to a performance range determined by: (1) the relevant market benchmark, multiplied by a specified multiplier; and (2) the relevant community benchmark, multiplied by a specified multiplier, whichever is lower.

Relative to the proposal, the final rule adjusts several of the proposed multiplier values downward; the agencies believe that the final rule multipliers are appropriately aligned with supporting conclusions, and that supporting conclusions of “Outstanding,” “High Satisfactory,” and “Low Satisfactory” are generally attainable. For example, the market multiplier for a “High Satisfactory” was adjusted from the proposed value of 110 percent to 105 percent, and the community multiplier for a “High Satisfactory” was adjusted from the proposed value of 90 percent to 80 percent. As a result, under the final rule, if the Geographic Bank Metric for closed-end home mortgage loans in low-income census tracts in a particular facility-based assessment area just exceeded (1) 105 percent of the corresponding Geographic Market Benchmark or (2) 80 percent of the corresponding Geographic Community Benchmark, whichever is lower, then the agencies would assign a “High Satisfactory” supporting conclusion to the bank's performance on closed-end home mortgage lending to low-income census tracts in the facility-based assessment area.

Product line score. The final rule generally adopts the proposed approach to combining the four supporting conclusions assigned to each of a bank's major product lines in a Retail Lending Test Area pursuant to the geographic and borrower distribution analyses. For each major product line, the agencies will combine these four supporting conclusions as follows. First, the agencies will determine a geographic distribution average using a weighted average calculation of the performance scores associated with the two geographic distribution supporting conclusions. For example, the agencies would combine a bank's closed-end home mortgage lending performance in low-income census tracts and moderate-income census tracts. Second, the agencies will determine a borrower distribution average using a weighted average of performance scores associated with the two borrower distribution supporting conclusions. For example, the agencies would combine a bank's closed-end home mortgage lending performance to low-income borrowers and moderate-income borrowers. Lastly, the agencies will average together the geographic and borrower distribution averages to arrive at a product line score (renamed from the proposed term “product line average”).

Recommended conclusion for a Retail Lending Test Area. Next, the product line scores for all of a bank's major product lines in a Retail Lending Test Area are combined to produce a recommended conclusion for the Retail Lending Test Area. For purposes of combining product line scores, under the final rule, a bank's major product lines are weighted based on a combination of loan dollars and loan count in the product line, rather than by the volume of loan dollars alone, as under the proposal. The resulting Retail Lending Test recommended conclusion serves as the basis for the conclusion on the Retail Lending Test in the particular Retail Lending Test Area.

Additional factors and performance context. As in the proposal, the final rule recognizes that the distribution metrics and benchmarks may not capture all factors that should be considered when evaluating a bank's retail lending performance. For this reason, the final rule adopts an expanded set of additional factors in final § __.22(g) relative to the proposal that the agencies may consider with respect to a bank's retail lending performance in a particular Retail Lending Test Area. The agencies will assign a Retail Lending Test conclusion to each of a bank's Retail Lending Test Areas based on the bank's performance on the Retail Lending Volume Screen (in the case of a facility-based assessment area), the Retail Lending Test recommended conclusion, performance context factors provided in final § __.21(d), and these additional factors.

Retail Lending Test conclusions for a State, multistate MSA, and institution. Lastly, the final rule generally adopts the proposed approach for combining Retail Lending Test conclusions assigned to a bank's Retail Lending Test Areas using a weighted average calculation to develop conclusions for the bank at the State, multistate MSA, and institution levels. For example, to calculate a large bank's Retail Lending Test conclusion for a particular State, the agencies will combine the Retail Lending Test conclusions for each of the large bank's facility-based assessment areas and retail lending assessment areas in the State. Each Retail Lending Test Area's conclusion will be weighted using a combination of the percentage of the large bank's product line loans (using a combination of loan dollars and loan count) in the area and deposits in the area. Under this example for a conclusion in a State, the percentages of the bank's product line loans and deposits in each area are calculated relative to the bank's total product line loans and deposits sourced from facility-based assessment areas and retail lending assessment areas in the State.

Retail Lending Test—General Topics

This section discusses topics that relate to the Retail Lending Test as a whole or to multiple aspects of the Retail Lending Test. Topics specific to a particular aspect of the Retail Lending Test are discussed in more detail in the section-by-section analysis below.

Overall Metrics-Based Approach

Comments Received

Metrics-Based Approach Generally. The agencies received numerous comments supportive of the proposed metrics-based approach to evaluating banks' retail lending performance. Many of these commenters indicated that the retail lending metrics would provide rigor on the proposed Retail Lending Test, address what some commenters referred to as CRA grade inflation, and incentivize banks to increase lending to underserved communities.

Conversely, many other commenters raised concerns about the proposed metrics-based approach to evaluating retail lending. As described below, these commenters stated that the Retail Lending Test was overly complex, did not sufficiently account for differences in bank business models, was overly stringent, and did not incorporate qualitative factors that should be considered in connection with a bank's retail lending performance.

Complexity of the metrics-based approach. Some commenters stated that the metrics-based Retail Lending Test approach was overly complex, with feedback including the recommendation that the agencies instead consider a less complicated approach with thresholds that can be modified by examiners based on performance context. Some commenters noted that the complexity of the proposed Retail Lending Test necessitated a more extended comment period to allow commenters time to fully understand the approach and its potential impact.

In addition to comments concerning the complexity of the Retail Lending Test as a whole, the agencies received numerous comments concerning the complexity of particular aspects of the performance test, such as the retail lending distribution metrics and benchmarks. These comments are discussed in the section-by-section analysis of final § __.22(e) below.

Application of metrics-based approach to different bank business models. Other commenters stated that the Retail Lending Test did not sufficiently account for differences in banks' business models. For example, a commenter asserted that a bank primarily focused on commercial lending and with little retail lending would be unable to perform well on the Retail Lending Test.

Retail Lending Test stringency. Many commenters stated that banks would have difficulty achieving an “Outstanding” conclusion on the Retail Lending Test due to the performance test's stringency. In addition to comments concerning the stringency of the Retail Lending Test as a whole, the agencies received numerous comments concerning the stringency of particular aspects of the performance test, such as the multipliers used to establish performance ranges. These comments are discussed in the section-by-section analysis of final § __.22(f) below.

Inclusion of qualitative factors. Some commenters suggested that the proposed Retail Lending Test lacked sufficient consideration of qualitative factors, including performance context, that should be considered in connection with a bank's retail lending performance. In this regard, a commenter asserted that the agencies' proposed metrics-based approach was too heavy on quantitative metrics and left little room for necessary qualitative analysis. Relatedly, other commenters conveyed that the proposed metrics-based approach would overshadow the qualitative aspects of retail lending that are beneficial to low- and moderate-income individuals and communities. Likewise, a commenter warned against overly standardizing the evaluation process with quantitative measurements at the expense of capturing more qualitative impacts, which could stifle creativity and diversity in the CRA market.

Several commenters recommended that the agencies incorporate impact factor reviews proposed for use with the Community Development Financing Test and the Community Development Services Test into the Retail Lending Test (as well as the Retail Services and Products Test). Relatedly, a commenter suggested that, to increase the incentive for banks to engage in community development financing activities, the agencies should provide banks with the option of receiving qualitative consideration for community development lending under the Retail Lending Test.

Numerous commenters asserted that the agencies' evaluation of home mortgage loans should not be a purely quantitative evaluation, and should consider qualitative factors related to the responsiveness of a bank's lending. Some commenters advocated for an impact review of home mortgage lending, with some of these commenters expressing the view that home purchase loans should receive more credit than other types of home mortgage lending. A few commenters urged the agencies to continue to evaluate a bank's use of innovative or flexible lending practices to address credit needs of low- and moderate-income individuals and geographic areas. Several commenters opined on the importance of home mortgage loans, particularly to minority, low-, moderate-, and middle-income individuals, and first-generation homebuyers, with a few commenters asserting that loans to these borrowers should receive extra consideration. A commenter stated that the agencies should award “extra credit” to banks for originating home mortgages involving community land trusts because such programs are designed to preserve affordable housing and prevent displacement. Another commenter suggested that banks should receive consideration for home mortgage products that address barriers to homeownership for underserved communities, such as appraisal bias and lack of down payment assistance. A commenter suggested that certain income-restricted mortgage assistance loans, including those made to middle-income borrowers, should receive positive consideration to incentivize banks to continue participating in these programs.

Some commenters asserted that the agencies should employ analysis of loan pricing and product terms to ensure that products are meeting local needs instead of extracting wealth. These commenters further recommended that the agencies evaluate how well loan products match local needs. Some commenters also suggested that the agencies should review the affordability and quality of loan terms in Retail Lending Test evaluations. Several of these commenters noted that banks should be penalized for offering high-cost loans that exceed State usury caps and borrowers' abilities to repay. A commenter emphasized that the agencies should review banks' small business lending and small farm lending qualitatively for predatory characteristics such as exorbitant interest rates or prepayment penalties.

Final Rule

The agencies are finalizing the proposed Retail Lending Test, with substantive modifications, clarifications, and technical revisions as described throughout the section-by-section analysis of final § __.22. As in the proposal, the Retail Lending Test adopted in the final rule generally incorporates metrics, but also includes qualitative aspects. Under the final rule, this metrics-based approach is supplemented with consideration of qualitative factors that are relevant to evaluating a bank's lending performance or lending opportunities, but that are not captured in the metrics, including the performance context factors in final § __.21(d) and the additional factors in final § __.22(g). In addition, as discussed in the section-by-section analysis of final § __.23, the agencies note that the responsiveness of a bank's credit products and programs is considered under the Retail Services and Products Test.

Metrics-based Approach Generally. The agencies believe that it is appropriate to adopt a Retail Lending Test that leverages metrics. In particular, the agencies believe that the approach adopted in the final rule will facilitate robust examinations and positively increase transparency and consistency in retail lending evaluations compared to the current regulations. For example, the final rule sets clearer retail lending performance expectations by incorporating performance ranges for evaluating the distribution of a bank's closed-end home mortgage loans, small business loans, and small farm loans. These performance ranges incorporate market and community benchmarks to set thresholds for conclusion categories. Although this approach to use performance ranges represents a change from the current regulations, the agencies note that the final rule distribution metrics and benchmarks closely resemble the metrics and benchmarks used in CRA evaluations today.

Complexity of the metrics-based approach. The agencies have considered concerns expressed by a number of commenters regarding the complexity of the proposed Retail Lending Test. The agencies believe that the final rule Retail Lending Test appropriately balances the agencies' objectives of ensuring that CRA evaluations of retail lending performance are robust and comprehensive, providing greater consistency and transparency, and limiting overall complexity. As discussed throughout the section-by-section analysis of final § __.22, the final rule includes various changes, relative to the proposal, to simplify the Retail Lending Test while still achieving the agencies' objectives. For example, the final rule reduces the number of product lines considered under the Retail Lending Test and, for large banks, the number of product lines that would be evaluated in any retail lending assessment area. However, the agencies believe that certain aspects of the Retail Lending Test that were viewed by some commenters as complex are necessary to advance the agencies' objectives of increasing the consistency and transparency of CRA evaluations and maintaining robust evaluation standards that take into account the performance context of an area, including the local credit needs and opportunities. In particular, these aspects include the evaluation of the geographic and borrower distributions of a bank's major product lines, the use of performance ranges to translate the bank's performance with respect to certain major product lines into supporting conclusions, and a standardized approach to developing Retail Lending Test conclusions for each Retail Lending Test Area and at the State, multistate MSA, and institution levels.

To further address concerns regarding the complexity of the Retail Lending Test, the agencies intend to develop data tools that will provide banks and the public with CRA information on specific Retail Lending Test Areas, including Retail Lending Test metrics, benchmarks, and performance ranges based on recent data. The agencies believe that these data tools will help banks monitor their retail lending performance relative to benchmarks and increase their familiarity with operation of the Retail Lending Test.

Application of metrics-based approach to different bank business models. The agencies have also considered feedback from some commenters that the proposed Retail Lending Test does not sufficiently account for differences in banks' business models. The agencies believe that the final rule Retail Lending Test approach appropriately accounts for differences in bank business models while also affirming the statute's focus on banks helping to meet the credit needs of their entire communities. In particular, the agencies believe that multiple elements of the final rule Retail Lending Test help to account for differences in bank business models, such as the following:

• Tailored approaches to delineating retail lending assessment areas for large banks and to evaluating small banks and intermediate banks in their outside retail lending areas, depending on a bank's asset size and percentage of lending within its facility-based assessment areas, as discussed in the section-by-section analyses of final §§ __.16 through __.18;
• Tailored evaluation of automobile loans for banks that are majority automobile lenders or that opt to have their automobile loans evaluated under the Retail Lending Test, as discussed below;
• Consideration of all of a bank's home mortgage loans, multifamily loans, small business loans, small farms loans, and automobile loans, as applicable, under the Retail Lending Volume Screen, as discussed in the section-by-section analysis of final § __.22(c);
• For a bank that does not meet or surpass the Retail Lending Volume Threshold in a facility-based assessment area, consideration of the bank's business strategy as one of several “acceptable basis” factors, as discussed in the section-by-section analysis of final § __.22(c)(3);
• Major product line standards that identify a bank's most significant product lines in a Retail Lending Test Area for evaluation under the distribution analysis, as discussed in the section-by-section analysis of final § __.22(d);

• Calculation of bank distribution metrics based on the percentage, rather than the absolute number, of the bank's loans in a major product line in categories of designated census tracts and to categories of designated borrowers, as discussed in the section-by-section analysis of final § __.22(e);

• Weighting a bank's performance on each of its major product lines based on a combination of loan dollars and loan count, as discussed in the section-by-section analysis of final § __.22(f);
• Consideration of performance context and additional factors in assigning Retail Lending Test conclusions, as discussed in the section-by-section analyses of final § __.22(g) and (h); and
• Retention of the strategic plan option, which could result in appropriate modifications to the Retail Lending Test, as discussed in the section-by-section analysis of final § __.27.

Retail Lending Test stringency. The agencies have considered commenters' concerns that the proposed Retail Lending Test as a whole was overly stringent and that achieving Retail Lending Test conclusions of “Outstanding,” “High Satisfactory,” or “Low Satisfactory” would be overly difficult. The agencies analyzed historical CRA data to estimate the distribution of institution-level Retail Lending Test conclusions across banks, as well as recommended conclusions for different Retail Lending Test areas. A large majority of banks included in the historical analysis are estimated to have performed at a level consistent with an institution-level conclusion of “Outstanding,” “High Satisfactory,” or “Low Satisfactory” based on the final rule provisions. The analysis informed the agencies' determination that the performance ranges for a “Low Satisfactory” or higher conclusion are generally attainable across a variety of circumstances, such as different Retail Lending Test Areas, bank asset-size categories, metropolitan and nonmetropolitan areas, and time periods. This analysis and results are discussed further in the historical analysis subsection of this section of this SUPPLEMENTARY INFORMATION . In addition, the agencies have considered the stringency of particular aspects of the Retail Lending Test, such as the Retail Lending Volume Screen, discussed further in the section-by-section analysis of final § __.22(c), and the multipliers used to establish performance ranges, discussed further in the section-by-section analysis of final § __.22(f).

Inclusion of qualitative factors. Although the agencies believe the Retail Lending Test should generally be informed by metrics, they also believe that a purely metrics-based approach to evaluating a bank's retail lending performance could be inflexible and provide an incomplete picture of a bank's retail lending performance. For this reason, the final rule supplements the use of metrics with consideration of qualitative additional factors that are relevant to evaluating a bank's lending performance or lending opportunities, but that are not captured in the metrics or benchmarks, as discussed in the section-by-section analyses of final § __.22(c)(3) and (g). Additionally, the final rule specifies that the agencies will consider applicable performance context factors included in final § __.21(d) when assigning Retail Lending Test conclusions, as discussed in the section-by-section analysis of final § __.22(h). Together, the agencies believe that these qualitative aspects of the Retail Lending Test will enhance examiners' evaluation of a bank's performance as captured by the Retail Lending Test's metrics and provide a more accurate picture of the bank's overall retail lending performance.

The agencies considered commenter suggestions that specific qualitative factors, such as impact factors, should be incorporated into the Retail Lending Test, such as consideration of retail loan pricing and product terms and accounting for retail loans with predatory lending characteristics. The agencies believe that these considerations are appropriately addressed in other parts of the final rule. For example, the final rule includes a qualitative evaluation of a bank's responsive credit products and programs under the Retail Services and Products Test. In addition, examiners may consider the affordability and quality of retail loan terms in consumer compliance examinations, and discriminatory or other illegal credit practices identified in these examinations would be taken into consideration in assigning a bank's CRA ratings, as discussed in the section-by-section analysis of final § __.28(d).

In addition, the agencies considered commenter feedback to provide banks with the option of receiving qualitative consideration for community development lending under the Retail Lending Test. However, the agencies believe that community development lending is appropriately, and comprehensively, considered under the Community Development Financing Test, the Community Development Financing Test for Limited Purpose Banks, the Intermediate Bank Community Development Test, and the Small Bank Lending Test, as applicable. For this reason, the final rule does not include qualitative consideration of community development loans under the Retail Lending Test. However, under the final rule, certain home mortgage loans, small business loans, and small farm loans considered under the distribution analysis of the Retail Lending Test may also be considered under the Community Development Financing Test or the Intermediate Bank Community Development Financing Test, as discussed in the section-by-section analyses of final §§ __.24 and __.30.

Banks Evaluated for Automobile Lending

The Agencies' Proposal

The agencies proposed to evaluate automobile lending for banks evaluated under the proposed Retail Lending Test. Specifically, under the proposed Retail Lending Volume Screen, discussed further in the section-by-section analysis of final § __.22(c), a bank's originated and purchased automobile loans in a facility-based assessment area would have been included in the Bank Volume Metric, which would be compared to a Market Volume Benchmark that would have included all originated automobile loans in counties wholly or partially within the facility-based assessment area reported by large banks that operated a branch in those counties. In addition, under the proposed retail lending distribution analysis, discussed further in the section-by-section analysis of final § __.22(d) through (f), the agencies would have evaluated the geographic and borrower distributions of a bank's automobile loans in a facility-based assessment area, retail lending assessment area, or outside retail lending area in which the bank's automobile loans constituted a major product line.

Comments Received

As discussed further in the section-by-section analysis of final § __.22(d), the agencies received numerous comments concerning the proposed evaluation approach for automobile lending under the Retail Lending Test, with some commenters supporting the evaluation of automobile loans using the proposed metrics-based approach but with most commenters opposing or expressing significant concerns with the proposed approach.

A few commenters specifically addressed the applicability of the proposed Retail Lending Test evaluation approach for automobile loans to different types of banks. These commenters stated that the metrics-based approach should only apply to automobile loans at a bank's option or, according to one commenter, if automobile loans constituted a majority of a bank's retail lending.

Final Rule

The agencies are finalizing the proposal to evaluate banks' automobile lending under the Retail Lending Test, with substantive modifications including a narrower standard for when a bank is required to be evaluated for automobile lending relative to the proposed approach. Specifically, under the final rule, the agencies will evaluate automobile loans under the Retail Lending Test only if the bank is a majority automobile lender, or the bank opts to have its automobile loans evaluated. For banks that meet these criteria, automobile loans are included in their Bank Volume Metric in a facility-based assessment area, as discussed further in the section-by-section analysis of final § __.22(c). In addition, the agencies will evaluate the distribution of these banks' automobile loans in a facility-based assessment area or outside retail lending area in which automobile loans are a major product line, as discussed further in the section-by-section analysis of final § __.22(d).

Majority automobile lenders. As discussed further in the section-by-section analysis of final § __.12, the agencies have decided that the Retail Lending Test evaluation of automobile lending will be mandatory for banks that are majority automobile lenders. In incorporating the majority automobile lending standard, the agencies considered that the “substantial majority” standard in the current regulations applies to all consumer loans for large banks and that a majority standard is, therefore, appropriate for evaluating automobile loans, which are a component of consumer loans. In addition, in deciding on a majority standard for when an evaluation of a bank's automobile lending is required, the agencies sought to balance the benefits of achieving a more comprehensive evaluation of a bank's retail lending, recognizing that adding automobile lending as a major product line would require an affected bank to collect and maintain automobile lending data, and considering that evaluations of consumer lending are currently only required for banks that meet a substantial majority standard. As a result of employing a majority standard, relative to a lower standard and to the proposed approach, the agencies believe that the final rule approach will reduce complexity because the automobile lending evaluation and related data requirements will apply to a smaller number of banks. Furthermore, the agencies further believe that the final rule provision to allow banks that are not a majority automobile lender to opt into the evaluation automobile loans appropriately increases flexibility for banks.

The agencies considered, but are not adopting, an alternative approach to remove automobile lending entirely from the Retail Lending Test, or to make evaluation of automobile lending optional for all banks. The agencies believe that while this alternative approach would even further reduce complexity and data requirements for certain banks compared to the final rule approach, it could also result in evaluating a majority automobile lender under the Retail Lending Test without considering the bank's automobile loans. The agencies determined that evaluating the automobile lending of a majority automobile lender is important for an accurate and comprehensive evaluation of these banks, and that this approach appropriately takes into consideration the different tradeoffs discussed above.

Based on supervisory experience and analysis of available data, the agencies anticipate that only a small number of banks are majority automobile lenders that would be required to have this product line evaluated under the Retail Lending Test.

As discussed further in the section-by-section analysis of final § __.12, the agencies will consider a bank to be a majority automobile lender if the following ratio, calculated at the institution level, exceeds 50 percent, based on a combination of loan dollars and loan count:

• The sum, over the two calendar years preceding the first year of the evaluation period, of the bank's automobile loans originated or purchased overall; divided by
• The sum, over the two calendar years preceding the first year of the evaluation period, of the bank's automobile loans, home mortgage loans, multifamily loans, small business loans, and small farm loans originated or purchased overall.

The agencies believe that this approach should promote consistency and predictability by ensuring that a bank with an anomalously high volume of automobile loans in a single year is not automatically considered a majority automobile lender.

Banks that opt to have their automobile lending evaluated. The agencies believe it is appropriate to provide banks that are not majority automobile lenders the flexibility to opt to have their automobile loans evaluated because this product line can meaningfully serve low- and moderate-income individuals and communities and may be an important part of a bank's strategy for meeting community credit needs. Further, the agencies believe that providing this option will help tailor examinations to account for differences in bank business models, consistent with the agencies' objectives for CRA modernization.

Exclusion of Consumer Loans Other Than Automobile Loans

The Agencies' Proposal

The agencies did not include consumer loans other than automobile loans as a major product line on the Retail Lending Test in proposed § __.22(a)(4)(i). Specifically, consumer credit card loans and other types of consumer loans that are not automobile loans would not be evaluated under the proposed Retail Lending Test, neither as part of the Retail Lending Volume Screen in facility-based assessment areas, nor within the distribution analysis of each of a bank's major product lines in a facility-based assessment area, retail lending assessment area, or outside retail lending area. The agencies explained in the preamble to the proposed rule that consumer loans other than automobile loans span several product categories that are heterogeneous in meeting low- or moderate-income credit needs and are difficult to evaluate on a consistent quantitative basis under the Retail Lending Test. Further, the agencies stated that credit card lending is concentrated among a relatively small number of lenders (with many currently designated as limited purpose banks), and that evaluating consumer credit card loans using a metrics-based approach under the Retail Lending Test may require new data collection and reporting requirements because banks may not currently retain or have the capability to capture borrower income (at origination or subsequently as cardholders maintain their accounts), location, or other data fields relevant to constructing appropriate benchmarks for credit card lending. For these reasons, the agencies proposed to consider consumer loans other than automobile loans only under the responsive credit products and programs evaluation of the Retail Services and Products Test; this evaluation would assess whether a bank's credit products and programs are, in a safe and sound manner, responsive to the needs of low- and moderate-income individuals, and would not include a distribution analysis.

The agencies requested feedback on whether consumer credit card loans should be included in CRA evaluations, whether those credit card loans should be evaluated quantitatively under the proposed Retail Lending Test or only qualitatively under the proposed Retail Services and Products Test, and whether data collection and reporting challenges for consumer credit card loans could adversely affect the accuracy of metrics. The agencies also sought feedback on whether they should adopt a qualitative approach to evaluate consumer loans and whether the qualitative evaluation should be limited to certain consumer loan categories or types.

Comments Received

General comments on the evaluation of consumer loans other than automobile loans. Many commenters opined generally on the importance of consumer loans to low- and moderate-income individuals and communities, with several commenters suggesting that responsible consumer lending by banks can be a valuable alternative to predatory lending (such as payday loans, pawn shop loans, and high-cost credit card loans) and can help borrowers build credit. For example, a commenter stated that consumer loans can provide a record of payment-reporting to credit bureaus and can be an introduction to the banking system for the unbanked, benefitting low- and moderate-income borrowers. A commenter recommended consideration for consumer loan products that help low- and moderate-income borrowers refinance high-cost or predatory consumer loans. Another commenter stated that consumer loan products that banks develop collaboratively with MDIs, WDIs, LICUs, and CDFIs should receive full consideration, whereas consumer loan products developed in collaboration with fintechs should receive credit only if the borrower is low- or moderate-income or is located in a low- or moderate-income or underserved geographic area.

Other commenters expressed general concerns with consumer loan programs offered by banks in cooperation with third parties. For example, several commenters stated that the agencies should scrutinize consumer loans that banks offer through partnerships with fintechs, especially so-called “rent-a-bank” partnerships, which commenters said could be used to evade interest rate caps and consumer protections established under State laws. Some of these commenters stated that such partnerships should be banned, while another commenter characterized these partnerships as wealth-stripping. A commenter also recommended that intermediate bank consumer lending should be evaluated, because many banks that partner with non-banks to engage in indirect consumer lending would fall into the new intermediate bank asset-size category.

Support for a quantitative evaluation of consumer loans. Some commenters supported consideration of consumer loans under the Retail Lending Test, and addressed how one or more of these loan categories should be evaluated as a major product line under the Retail Lending Test. For example, recommendations included: evaluating consumer loans and a category for small-dollar loans; combining automobile loans, credit card loans, and other consumer loans into a single major product line; evaluating automobile loans, credit card loans, and small-dollar loans each as a separate product line; evaluating direct and indirect consumer loans as a major product line under the Retail Lending Test; and including only direct consumer loans as a major product line. In addition, a commenter stated that, to incentivize banks to provide small-dollar loans to low- and moderate-income borrowers, the agencies should allow a bank to elect which subset of its consumer loans in any category are evaluated, without requiring the bank to have all loans in that category evaluated. A commenter stated that the agencies should ensure that small-dollar loans with interest rates above 36 percent are included in CRA evaluations and offered the view that examiners exclude these loans under the current rule, thus discouraging banks from offering these products. Conversely, another commenter recommended adding unsecured personal loans as a distinct major product line on the Retail Lending Test (separate from automobile loans, credit card loans, and other secured or unsecured loans), but defining this category to exclude “covered loans” under the CFPB's Payday Lending Rule to avoid incentivizing high-cost personal loans with annual percentage rates above 36 percent. This commenter also offered the perspective that automobile loans and personal loans have similarities, and that both should be evaluated under the Retail Lending Test using a distribution analysis; the commenter further stated that the proposal represented a step backward compared to the current rule under which consumer loans are evaluated under the lending test if consumer lending constitutes a substantial majority of a bank's business or at the bank's option.

With respect to factors that should trigger an evaluation of consumer loan products as a major product line under the Retail Lending Test, commenters generally recommended a number of options. First, some commenters suggested that consumer loans should be evaluated only at the bank's option. For example, a commenter stated that making the evaluation of consumer loans optional would keep the focus of the Retail Lending Test on products that have been historically underrepresented in low- and moderate-income communities (namely, home mortgage loans, small business loans, and small farm loans). Second, some commenters stated that consumer loans should be automatically evaluated if they constitute a substantial portion or a majority of a bank's business, with a few commenters recommending retaining the current practice of evaluating consumer loans when they constitute a substantial majority or if a bank elects to have consumer loans considered and has collected and maintained the data. Third, some commenters recommended applying a version of the proposed approach for other product lines tailored specifically to consumer loans. For example, a commenter recommended that consumer loans should trigger a major product line if they represent at least 30 percent of a bank's retail loans by number and 15 percent by dollar volume within an assessment area. A group of commenters suggested that the major product line standard for consumer loans should be the lesser of 15 percent by lending dollars or 50 loans. Another commenter recommended using an average of loan count and lending dollars in light of the fact that consumer loans tend to be smaller in loan amount.

Support for a qualitative evaluation of consumer loans other than automobile loans. Some commenters supported the proposal to qualitatively evaluate consumer loans other than automobile loans only under the Retail Services and Products Test, rather than also evaluating these loans quantitatively under the Retail Lending Test. For example, a commenter specified that consumer loans should be evaluated under the Retail Services and Products Test because that performance test allows for greater consideration of performance context, such as whether a bank ensures that a student loan borrower has exhausted any available Federal funds before taking out private loans. A few commenters also stated that evaluating consumer loans qualitatively allows the agencies to ascertain the purpose of consumer loans, emphasizing that minority business owners are more likely to request personal lines of credit and consumer loans for small business purposes and more likely to own businesses without employees.

Support for an evaluation of consumer loans under both the Retail Lending Test and the Retail Services and Products Test. Some commenters supported the evaluation of consumer loans other than automobile loans under both the Retail Lending Test and the Retail Services and Products Test. These commenters recommended a quantitative evaluation for consumer loans under the Retail Lending Test in combination with a qualitative evaluation under the proposed Retail Services and Products Test. These commenters offered a variety of rationales in support of this approach. For example, a few commenters stated that evaluating consumer loans under both performance tests would increase competition in the market for consumer loans to low- and moderate-income consumers and communities. Another commenter stated that the number and volume of consumer loans is considerable and that the importance of well-designed consumer loans to low- and moderate-income communities is substantial, making a qualitative-only evaluation of these loans inappropriate. A commenter expressed concern that evaluating consumer loans only under the Retail Services and Products Test, and not also under the Retail Lending Test, would result in insufficient consideration of these loans, particularly given the low proposed weighting assigned to that performance test. Another commenter reasoned that a quantitative analysis would help determine whether a bank is making consumer loans equitably in terms of geography and borrower income level, whereas a qualitative analysis would reveal whether the bank offers consumer loans that are accessible and affordable to low- and moderate-income borrowers and responsive to their credit needs.

Most commenters responding to the agencies' request for feedback specifically on how to evaluate consumer credit card loans also recommended that the agencies evaluate consumer credit card loans under both the Retail Services and Products Tests and, when credit card loans constitute a major product line, under the proposed Retail Lending Test. In general, these commenters stated that a purely quantitative evaluation of consumer credit card loans would be insufficient and could encourage unaffordable and abusive high-interest credit card lending. As such, some commenters that supported the hybrid evaluation of consumer credit card loans identified specific factors that should be included in the qualitative evaluation, including repayment rates, the affordability of terms ( e.g., interest rates, fees, and penalties), and safeguards or features that minimize adverse credit outcomes. Another commenter identified difficulties in obtaining information that the commenter viewed as necessary for evaluating the responsiveness of a consumer credit card loan, such as how and why a consumer is using a credit card loan (as opposed to another loan product), whether the credit card loan terms are responsive to the consumer's needs, and how equitable the terms are for low- and moderate-income and minority consumers compared to other consumers.

A few commenters that supported evaluation of consumer credit card loans under the Retail Lending Test and Retail Services and Product Test addressed the agencies' request for feedback on what data collection and reporting challenges, if any, might exist for credit cards that could adversely affect the accuracy of metrics and benchmarks. These commenters disputed the proposal's suggestion that banks may not currently retain or have the capability to capture credit card borrower income, at origination or subsequently, as the reason not to evaluate this product line under the Retail Lending Test. These commenters asserted that banks generally collect borrower income information on consumer credit card applications or at the time a credit card is issued, and suggested that the benefits of a metrics-based approach to evaluating consumer credit card lending (including more competition and better rates for low- and moderate-income consumers) would outweigh the modest cost of requiring banks to report this data. However, a commenter, opposing credit card lending in CRA evaluations altogether, expressed a different view that banks make underwriting decisions primarily based on an applicant's creditworthiness as revealed through credit bureaus, and borrower income information is not usually validated by banks; this commenter further stated that the operational nature of credit card lending would not easily support the need for data collection and reporting.

Opposition to CRA evaluation of consumer lending. There were also commenters that expressed opposition to the consideration of consumer loans under either the Retail Lending Test or the Retail Services and Products Test. For example, a few commenters opposed the proposal to qualitatively evaluate consumer loans and suggested that consumer loans should not be evaluated in CRA examinations. These commenters emphasized that a bank's consumer loans are already subject to examination under consumer lending laws, and asserted that evaluating these same loans under the CRA would be duplicative and cause inefficiencies for both bank staff and the agencies. Additionally, a few commenters specifically advocated for the exclusion of consumer credit card lending from CRA evaluations. These commenters argued that including consumer credit card loans in CRA evaluations could incentivize banks to provide this high-cost form of financing to consumers. One of these commenters additionally stated that including consumer credit card loans would distract from more important wealth-building credit products, such as home mortgage loans, small business loans, and small farm loans. Relatedly, a commenter advised that the agencies should carefully assess whether to include consumer credit card loans in CRA evaluations, weighing the desire for a comprehensive evaluation of a bank's lending performance against the risk of supporting lending that may be harmful to households.

Final Rule

For the reasons discussed below, final § __.22(d)(1) retains the proposed approach of not including consumer loans other than automobile loans as a major product line for evaluation using distribution metrics in the Retail Lending Test. Under the final rule, as under the proposal, consumer loans other than automobile loans by large banks will be evaluated under the Retail Services and Products Test ( see the section-by-section analysis of final § __.23(c)(2)). Also, as proposed, intermediate banks, and small banks that opt into the Retail Lending Test, may seek additional consideration for consumer lending products and programs that qualify for evaluation under the Retail Services and Products Test. Additionally, these loans are not quantitatively considered in the Retail Lending Volume Screen, although they may be considered as an acceptable basis for not meeting the Retail Lending Volume Threshold pursuant to final § __.22(c)(3)(i)(A).

The agencies have considered, but decline to adopt, commenter feedback either to evaluate consumer loans other than automobile loans only under the Retail Lending Test or to evaluate these loans under both the Retail Lending Test and the Retail Services and Products Test. In determining that consumer loans other than automobile loans should be evaluated only under the Retail Services and Products Test, the agencies considered challenges and downsides of a quantitative distribution analysis of these loans under the Retail Lending Test. The agencies continue to believe that the heterogeneity of consumer loan products other than automobile loans would make these products challenging to evaluate appropriately under a distribution analysis. In particular, to evaluate consumer loans other than automobile loans under the Retail Lending Test, the agencies would need to define one or more categories of consumer loan products that may be reasonably compared across banks, so that bank metrics and corresponding benchmarks are sufficiently comparable. The agencies believe that the diversity of consumer product line delineations suggested by commenters illustrates the challenge of this approach. In addition, even if consumer loan products other than automobile loans could be reasonably disaggregated into discrete categories, doing so may introduce multiple new product lines into the Retail Lending Test, with the possibility that the bank has too few loans of any specific category to evaluate as a major product line. The additional product lines would involve additional metrics, benchmarks, and weights, thereby increasing the complexity of the evaluation. The agencies considered that including consumer loans other than automobile loans as a major product line under the Retail Lending Test would impose additional data collection and maintenance requirements on banks. Specifically, for the agencies to evaluate these loans using a distribution analysis, banks would need to collect and maintain data including borrower income and census tract, among other indicators, for each loan. The agencies also considered the potential unintended effects of a distribution analysis if these loans were evaluated under the Retail Lending Test—for example, evaluation under a distribution analysis could inadvertently encourage a bank to issue credit cards to customers who already have access to a consumer credit card, which may not be responsive to community credit needs. In addition, the agencies considered that a distribution analysis would not account for any fees or interest rates associated with these products, which the agencies believe is important to determining whether the products are serving the credit needs of the community.

In determining to evaluate consumer loans other than automobile loans under the Retail Services and Products Test, rather than excluding these loans entirely from the CRA evaluation, the agencies have considered the importance of these loans to consumers. Specifically, the agencies have considered feedback from some commenters noting the importance of credit card and personal loans, including that these loans can represent a foundational credit product that serves as a point of access to the banking system, by which consumers can build a positive credit history and that these loans can further serve as an alternative to higher-priced financing options provided by non-banks. Conversely, the agencies have also considered that some commenters disagreed with evaluating these loans under the Retail Services and Products Test, with a few suggesting that other consumer lending laws are sufficient and that an evaluation would be duplicative, that providing small-dollar and personal loans would not be incentivized, and that evaluating credit cards would distract from more wealth-building products ( e.g., home mortgage loans, small business loans, and small farm loans). However, the agencies believe that a qualitative evaluation of consumer lending, including consumer loans other than automobile loans, would contribute to an evaluation of whether a bank is meeting the credit needs of its entire community.

In adopting the final rule approach, the agencies have also determined that the responsive credit product evaluation in the Retail Services and Products Test is well suited to consider the different aspects of a bank's consumer loans other than automobile loans, including aspects of these loans raised by commenters. The final rule approach in the Retail Service and Products Test includes a responsive credit products and programs evaluation that qualitatively reviews a bank's responsiveness to community credit needs, including low- and moderate-income individuals and communities; this provision is discussed in more detail in the section-by-section analysis of final § __.23(c)(2). For example, under the Retail Services and Products Test, the agencies will review the responsiveness of a bank's consumer loans, which may include the type of consumer product offered, the number of low- and moderate-income customers served, and whether the loan product has any accommodative features such as alternative credit scoring or underwriting. The responsive credit products evaluation could also consider other factors, such as whether the bank offers small-dollar loans with reasonable terms, offers credit-building opportunities via secured credit cards or secured personal loans, or engages in responsible cash flow-based underwriting for customers with thin or no credit files. The agencies have considered commenter feedback that there will not be adequate information to assess the responsiveness of a consumer credit product or program. However, the agencies expect that examiners will have the necessary information for this evaluation, including by obtaining information from banks at the time of their examination, as is the case in examinations today, as well as considering public feedback and other available information.

The agencies have also considered commenter feedback that the final rule approach for consumer loans that are not automobile loans is a step backward, as well as commenter feedback that there will be insufficient consideration of consumer loans with a 15 percent weight assigned to the proposed Retail Services and Products Test. The agencies believe that the final rule takes an appropriate approach to evaluating consumer loans that are not automobile loans, as discussed above. In addition to the points raised above, the agencies have also considered that banks with a sizeable consumer lending portfolio that would meet the agencies' substantial majority standard under current guidance may elect an alternative evaluation under the final rule. For example, a bank that does a significant amount of consumer lending could seek approval under the strategic plan option. Under an approved strategic plan, a bank may add additional product lines outside those that are considered under the Retail Lending Test, in its plan, such as consumer lending products other than automobile loans. Alternatively, a bank, such as a credit card lender may request designation as a limited purpose bank as provided in final § __.26(a), the Community Development Financing Test for Limited Purpose Banks. If approved, the bank would only be evaluated under the Community Development Financing Test for Limited Purpose Banks and consumer lending would not be considered in evaluating the bank's performance. For further discussion of this aspect of the final rule, see the section-by-section analyses of final §§ __.12 (definition of “limited purpose bank”) and __.26.

The agencies have considered commenter concerns about requiring the evaluation of an intermediate bank's consumer lending, citing that many banks that partner with non-banks to engage in indirect consumer lending would fall into the new intermediate bank asset-size category. The agencies note that, under final § __.21(a)(2)(i), intermediate banks will be evaluated under Retail Lending Test and the Intermediate Bank Community Development Test, unless an intermediate bank chooses to have its community development loans and investments evaluated under the Community Development Financing Test. Therefore, consumer lending other than automobile lending will only be evaluated if an intermediate bank opts for additional consideration ⁸¹⁹ under the Retail Services and Products Test as this test does not apply to intermediate banks. The agencies believe that the final rule approach for intermediate banks balances the agencies' objectives of tailoring performance standards for banks of different sizes while still allowing appropriate consideration of consumer loans, other than automobile loans, under the Retail Services and Products Test.

The agencies have also considered commenter sentiment to limit consideration provided for consumer loan programs offered in cooperation with third parties, specifically with fintechs, when there is not an explicit purpose to serve low- and moderate-income census tracts and borrowers or if the third party provides loans at rates higher than State laws allow. The agencies note that, as part of evaluating credit product and programs as responsive under the Retail Services and Products Test, examiners would consider whether loan terms are affordable for low-and moderate-income consumers. The agencies also note that evaluation of banks' third-party risk management is outside the scope of this rulemaking.

Inclusion of Purchased Loans

The Agencies' Proposal

The agencies proposed to include a bank's purchased loans in a bank's metrics for purposes of the Retail Lending Test. Specifically, under the proposal, a bank's purchased loans would be included in the bank volume metric used in the retail lending volume screen and the retail lending distribution metrics used to evaluate a bank's major product lines.

In proposing to include purchased loans in a bank's Retail Lending Test metrics, the agencies explained that purchased loans can provide liquidity to banks and other lenders, such as CDFIs, and extend their capacity to originate loans to low- and moderate-income individuals and in low- and moderate-income areas. The agencies noted that banks may also purchase loans to develop business opportunities in markets where they otherwise lack the physical presence to originate loans.

At the same time, the agencies acknowledged stakeholder concerns that purchased loans should not receive the same consideration as originated loans under the Retail Lending Test, because purchases require fewer business development and borrower outreach resources than originations. In addition, the agencies noted that despite their potential value in increasing secondary market liquidity, loan purchases may do less to extend the availability of credit than new originations, especially where loan purchases do not directly provide liquidity to the originator.

The agencies sought feedback on whether retail loan purchases should be treated as equivalent to loan originations in a bank's metrics for purposes of the Retail Lending Test. If so, the agencies asked whether only certain loan purchases should be included, such as loans purchased from a CDFI or directly purchased from the originator, and whether other restrictions should be placed on the inclusion of purchased loans in a bank's Retail Lending Test metrics.

Comments Received

The agencies received feedback on the proposed inclusion of purchased loans in a bank's Retail Lending Test metrics from a variety of commenters, summarized below.

Support for including purchased loans in a bank's Retail Lending Test metrics. Many commenters generally supported including purchased loans in a bank's metrics for purposes of the retail lending volume screen and the distribution analysis component of the Retail Lending Test. These commenters pointed to various reasons why purchased loans should be included in a bank's Retail Lending Test metrics, including that: purchased loans provide essential liquidity to the affordable housing finance ecosystem and extend the capacity of mission-driven lenders; including purchased loans encourages banks to serve as correspondent lenders and allows banks to test and learn about business opportunities in markets where they lack on-the-ground resources to originate loans, ultimately increasing credit availability; and banks purchasing seasoned delinquent loans from other lenders and acting as loan servicers can help borrowers maintain homeownership. A few commenters suggested that excluding purchased loans from a bank's metrics would force some banks to alter their safe and sound business plans because they have few options other than to purchase loans to obtain CRA credit. Commenters also indicated that originating CRA-qualifying loans ( e.g., loans to low-income borrowers) in certain high-cost areas can be difficult for some banks due to significant market competition for those loans.

Some commenters stressed the importance of including particular types of purchased loans in a bank's metrics for purposes of the Retail Lending Test, especially home mortgage loans. For example, a commenter warned that banks would exit the home mortgage market if purchased home mortgage loans do not receive positive CRA credit. A commenter noted that excluding purchased small business loans from a bank's metrics would punish certain banks that provide indirect commercial automobile loans, which are categorized as purchased loans.

Limitations on the inclusion of purchased loans in a bank's Retail Lending Test metrics. Many commenters stated that the inclusion of purchased loans in a bank's Retail Lending Test metrics should be subject to limitations. In general, these commenters stated that only certain purchased loans should be included in a bank's metrics, depending on characteristics of the purchased loan, including its impact, or the originating lender.

Several commenters stated generally that the Retail Lending Test should prioritize loan originations over loan purchases. A few commenters recommended weighting purchased loans less than originations in a bank's metrics for purposes of the Retail Lending Test, with some of these commenters emphasizing that originating a loan requires more time and effort than purchasing a loan, particularly in the case of low-income borrowers and minority borrowers. Additionally, one of these commenters pointed out that purchased loans have lower upfront investment costs. A few commenters recommended evaluating purchased loans separately from originations under the Retail Lending Test, with one of these commenters stating that purchased loans should be a separate major product line under the distribution analysis component and receive less weight than originations in determining a bank's Retail Lending Test conclusions.

Some commenters stated that any evaluation of purchased loans under the Retail Lending Test should focus on their impact on communities, including how purchased loans facilitate wealth-building and increase access to credit for low- and moderate-income and minority borrowers. Some commenters expressed the view that most purchased loans should be excluded from a bank's Retail Lending Test metrics, but that an exception should be made for purchased loans that result in a demonstrable benefit to low- and moderate-income borrowers, such as more favorable loan terms or a reduction in loan principal.

Other commenters suggested different treatment of purchased loans based on the extent of secondary market access of the originating lender. For example, a commenter suggested that loans purchased from an originator with limited access to the secondary market should be weighted equally to a bank's originations for purposes of a bank's Retail Lending Test metrics, while loans purchased from an originator with access to the secondary markets should be weighted less than loans originated by the bank.

A number of commenters recommended that only retail loans purchased from mission-driven lenders, such as CDFIs, MDIs, and WDIs, should be included in a bank's metrics for purposes of the Retail Lending Test. One of these commenters stated that mission-driven lenders face liquidity challenges that inhibit their ability to make non-housing loans, given the lack of maturity and smaller scale of these markets, and that giving banks CRA credit for the purchase of such loans would free up balance sheet space for mission-driven lenders to make additional housing loans. A commenter explained that including loans purchased from CDFIs in a bank's metrics would be appropriate because CDFIs are certified for their ability to reach underserved borrowers, while another commenter suggested that including such purchased loans in a bank's metrics would encourage banks to enter into broader partnerships with mission-driven lenders that support small businesses where they operate.

Some commenters recommended that only retail loans purchased from the originator, but not subsequent purchases, should be included in a bank's Retail Lending Test metrics, with a commenter noting that this treatment would ensure a sufficient level of liquidity without inappropriately promoting loan purchases. A few commenters stated that including the initial purchase of a retail loan in a bank's metrics would benefit banks that serve as master servicer to state housing finance programs, which commenters indicated is a vital service for low- and moderate-income areas. In a similar vein, a few commenters suggested that initial loan purchases should be included in a bank's Retail Lending Test metrics as equivalent to loan originations, but subsequent purchases should receive less credit in order to eliminate the incentive to continually resell the same loans. For example, a commenter stated that retail loans should not be included in a bank's Retail Lending Test metrics beyond the second purchase (excluding any initial, contractually required purchase by the bank from a vendor-originator), stating that this limit would accommodate intermediaries that frequently purchase loans to enhance the liquidity of the originator. Another commenter stated that the agencies should establish a reasonable limit on the number of times a loan could be sold before the loan would cease to be included in a purchasing bank's Retail Lending Test metrics.

Finally, other commenters suggested different parameters regarding the inclusion of purchased loans in a bank's metrics for purposes of the Retail Lending Test, including a recommendation to exclude loans purchased from nonbank originators. For example, a commenter noted that including purchased loans with excessively high interest rates in a bank's metrics would undermine the goals of the CRA, citing as an example small business loans with extremely high annual percentage rates purchased by banks from fintech companies. The same commenter also suggested excluding purchased loans for which the risk of loss is effectively maintained at the originating lender, such as when the purchasing bank has the right to request a substitution of the loan if the borrower defaults without providing any additional capital to the originating lender.

Opposition to including purchased loans in a bank's Retail Lending Test metrics. A few commenters opposed including any purchased loans in a bank's metrics for purposes of the Retail Lending Test, with some of these commenters stating that a bank should not be allowed to buy its way to a passing CRA rating, and that by including both loan originations and loan purchases in the Retail Lending Test metrics, the agencies would be double counting the same loans. Commenters also indicated that purchased loans are generally less responsive to the credit needs of low- and moderate-income areas than originations. For example, a commenter pointed to a research paper indicating that the inclusion of purchased loans in CRA examinations did not increase access to credit for low- and moderate-income borrowers and communities. Another commenter similarly stated that purchased loans originated by another bank are low-impact activities that should be ineligible for CRA credit.

Treatment of purchased small business loans. Several commenters requested clarification regarding whether purchased small business loans would be included in a bank's Retail Lending Test metrics following the transition to using section 1071 data because the CFPB Section 1071 Proposed Rule stated that purchased loans would not be reported. A few of these commenters suggested that the agencies should give banks the option to report purchased small business loans for inclusion in the bank's Retail Lending Test metrics if the CFPB's final rule does not include purchased loans.

Final Rule

For the reasons discussed below, the agencies are finalizing the proposal to include purchased loans in a bank's metrics for purposes of the Retail Lending Test. Specifically, under the final rule, a bank's purchased loans are included in the Bank Volume Metric used in the Retail Lending Volume Screen as well as in the bank's metrics used in the distribution analysis of the bank's major product lines.

Including purchased loans in a bank's metrics for purposes of the Retail Lending Test reflects the agencies' belief that purchased loans can support originations of loans to low- and moderate-income individuals and in low- and moderate-income census tracts. Specifically, loan purchases can enhance the liquidity of originated loans and thereby make capital available for lenders that are actively originating loans to low- and moderate-income borrowers and in low- and moderate-income census tracts, when their capacity to originate additional loans might otherwise be constrained. The agencies believe that excluding purchased loans from a bank's metrics could potentially disadvantage originating lenders that have limited access to the secondary market, such as a lender that is not an approved seller or servicer with Fannie Mae or Freddie Mac. In addition, the agencies considered that including purchased loans in evaluating retail lending performance is consistent with the current lending test evaluation approach.

As in the proposal, the final rule includes both originated loans and purchased loans in a bank's metrics without assigning greater weight to loan originations. In reaching this determination, the agencies considered commenter sentiment that purchased loans should receive a lower weight than originations because of the viewpoint that they require less effort and upfront investment costs compared to originations and that they may be less impactful than originated loans. However, the agencies also considered that weighting loan originations and purchases differently would make the Retail Lending Test metrics more complex and may have unintended consequences of reducing liquidity for loans to low- and moderate-income borrowers and communities, as noted above. The agencies also considered that it would be challenging to determine a fixed weight to assign to purchased loans that appropriately reflects the impact of those purchases relative to originated loans because the impact of a bank's originations and purchases of loans could vary based on a number of factors, including the credit needs and opportunities of the community. Furthermore, to address the potential downsides of including purchased loans in the Retail Lending Test metrics used to evaluate a bank, the agencies have included an additional factor in final § __.22(g)(1), which is discussed in the section-by-section analysis of final § __.22(g).

In addition, the agencies have also considered the impact of including purchased loans in a bank's metrics for purposes of the Retail Lending Test (and weighting loan purchases equal to loan originations) using historical data from 2018–2020. In this analysis, the agencies compared the distribution of estimated Retail Lending Test conclusions across facility-based assessment areas that would have resulted had the final rule approach been in effect during those years to the distribution of estimated conclusions that would have resulted from including only loan originations in a bank's distribution metrics. Based on the agencies' estimates, roughly similar percentages of facility-based assessment areas for banks included in the analysis would have received higher recommended conclusions (6.5 percent) or lower recommended conclusions (8.2 percent) if loan purchases were not included in the bank's metrics. Given these results, the agencies have concluded that the impact of removing purchased loans from the Retail Lending Test bank metrics could have different impacts on different banks. As discussed above, the agencies have determined to include purchased loans in bank metrics, coupled with the additional factor in final § __.22(g)(1). The agencies believe that this approach strikes an appropriate balance of avoiding unintended consequences of reducing liquidity for loans to low- and moderate-income borrowers and communities while also putting in place provisions to help ensure that loan purchases are not used for the purpose of inappropriately enhancing a bank's retail lending performance.

The agencies considered, but are not adopting, a commenter suggestion to disaggregate loan originations from loan purchases by evaluating purchased loans as a separate major product line under the distribution analysis component of the Retail Lending Test. The agencies believe that disaggregating originations from purchases is contrary to the intent discussed above in deciding to evaluate a bank's originations and purchased loans as part of the same analysis. In addition, the agencies believe that evaluating purchased loans as a separate product line would add to the complexity of the distribution analysis without sufficiently compensating benefits. The agencies also considered that there may not be sufficient data to construct robust market benchmarks based on only purchased small business and small farm loans once the agencies transition to using section 1071 data, which will not include purchased loans.

The agencies also considered, but are not adopting, alternative approaches suggested by commenters of including only certain purchased loans in a bank's Retail Lending Test metrics, or excluding certain purchased loans from a bank's Retail Lending Test metrics. The agencies believe that identifying particular types of purchased loans and either including or excluding these loan purchases from the banks' metrics adds a level of complexity to the Retail Lending Test and the reporting of purchased loans, and presents implementation challenges due to data availability. For example, loans originated or purchased by a financial institution that is not a HMDA reporter are not captured in HMDA data, and as a result, it is not possible to consistently identify how many times a purchased loan has been purchased since its origination, or identify the initial originator of the loan. Similarly, HMDA data do not identify the extent of access to the secondary market for all originating lenders that banks may be purchasing loans from. CRA small business and small farm data are even more limited in that these data do not identify the originating lender of a small business loan that is purchased by a bank, and do not indicate the number of times a loan has been sold.

With respect to comments suggesting that any evaluation of purchased loans should focus on community impact, such as increasing access to credit for low- and moderate-income and minority borrowers, or increasing loans purchased from mission-driven lenders, the agencies recognize the importance of supporting such institutions in their efforts to provide access to credit and other financial services in traditionally underserved communities. The agencies note that the final rule includes as part of the Retail Services and Products Test an evaluation of whether a bank's credit products and programs—including loans purchased from MDIs, WDIs, LICUs, and CDFIs—are, in a safe and sound manner, responsive to the needs of low- and moderate-income individuals, residents of low- and moderate-income census tracts, small businesses, and small farms. This provision is discussed further in the section-by-section analysis of final § __.23(c). In addition to considering the responsiveness of a bank's purchased loans qualitatively under the Retail Services and Products Test, the agencies believe that it is also important to evaluate a bank's purchased loans quantitatively under the Retail Lending Test because loan purchases may help to meet the credit needs of low- and moderate-income borrowers, small businesses and small farms, and low- and moderate-income census tracts.

Treatment of purchased small business loans and small farm loans. As discussed further in the section-by-section analysis of final § __.42, the final rule provides that once section 1071 data is used in CRA evaluations, a bank may, at its option, have purchased small business loans included in its Retail Lending Test metrics if the bank collects and maintains data on these loans. The agencies have considered that the CFPB Section 1071 Final Rule does not require the reporting of purchased loans. However, the agencies determined that it is appropriate to provide banks with the option to collect and maintain data on their purchased small business loans and small farm loans for consideration in Retail Lending Test metrics once the agencies transition to using section 1071 data for CRA evaluations. The agencies believe that the optional inclusion of purchased small business loans and small farm loans in a bank's metrics appropriately tailors the evaluation approach to different bank business models, including those that involve purchases of these loan types as part of the bank's strategy for meeting the credit needs of the community. In addition, the agencies believe the final rule approach of allowing banks to continue to include purchased small business and small farm loans in the bank's metrics once the agencies transition to using section 1071 data will provide continuity with the current approach, which includes purchased small business loans in a bank's distribution metrics.

Section __.22(a) and (b) Retail Lending Test—In General and Methodology Overview

The Agencies' Proposal

Proposed § __.22(a) addressed the scope of the Retail Lending Test. Proposed § __.22(a)(1) provided that the Retail Lending Test would evaluate a bank's record of helping to meet the credit needs of its facility-based assessment areas through a bank's origination and purchase of retail loans in each facility-based assessment area. In addition, proposed § __.22(a) set forth the geographic areas in which large banks and intermediate banks would be evaluated under the proposed Retail Lending Test and the major product lines that would have been evaluated under the distribution analysis. The proposed major product line standard is discussed in the section-by-section analysis of final § __.22(d).

Proposed § __.22(b) described the methodology of the proposed Retail Lending Test. Specifically, proposed § __.22(b)(1) provided that the agencies would first review numerical metrics, developed under proposed § __.22(c), regarding a bank's retail lending volume in each facility-based assessment area. Proposed § __.22(b)(2) provided that the agencies would also employ numerical metrics, developed under proposed § __.22(d), to evaluate the geographic and borrower distribution of a bank's major product lines in each facility-based assessment area, retail lending assessment area, and outside retail lending area, as applicable. Proposed § __.22(b)(3) provided that the agencies would also use the additional factors described in proposed § __.22(e) to evaluate a bank's retail lending performance in its facility-based assessment areas.

Comments Received

Although the agencies received numerous comments, discussed above, on the overall Retail Lending Test framework, including the use of a metrics-based approach in general, the agencies did not receive comments on the specific language of proposed § __.22(a) and(b).

Final Rule

The agencies are finalizing a modified version of proposed § __.22(a) and (b). Similar to the proposal, final § __.22(a) and (b) address the general scope and methodology of the Retail Lending Test. However, the agencies have modified final § __.22(a) and (b) from the proposal to reflect changes to the Retail Lending Test framework discussed throughout the section-by-section analysis of final § __.22.

• Final § __.22(a)— Retail Lending Test —clarifies which product lines will be evaluated pursuant to the Retail Lending Test and further clarifies when automobile loans will be evaluated. Specifically, final § __.22(a)(1)— In general —provides generally that the Retail Lending Test evaluates a bank's record of helping to meet the credit needs of its entire community through the bank's origination and purchase of home mortgage loans, multifamily loans, small business loans, and small farm loans.

• Final § __.22(a)(2)— Automobile loans —provides that the Retail Lending Test also evaluates a bank's record of helping to meet the credit needs of its entire community through the bank's origination and purchase of automobile loans if the bank is a majority automobile lender or if the bank opts to have it automobile loans evaluated under the Retail Lending Test.

• Final § __.22(b)— Methodology overview— describes the Retail Lending Test's methodology with additional detail than provided in proposed § __.22(b) in order to increase clarity.

• Final § __.22(b)(1)— Retail Lending Volume Screen —provides that the agencies consider whether a bank meets or surpasses the Retail Lending Volume Threshold in each facility-based assessment area pursuant to the Retail Lending Volume Screen in final § __.22(c).

• Final § __.22(b)(2)— Retail lending distribution analysis —provides that except as provided in final § __.22(b)(5), the agencies evaluate the geographic and borrower distributions of each of a bank's major product lines in each Retail Lending Test Area, as provided in final § __.22(d) and (e).

• Final § __.22(b)(3)— Retail Lending Test recommended conclusions —provides that except as provided in final § __.22(b)(5), the agencies develop a Retail Lending Test recommended conclusion pursuant to final § __.22(f) for each Retail Lending Test Area.

• Final § __.22(b)(4)— Retail Lending Test conclusions —provides that the agencies' determination of a bank's Retail Lending Test conclusion for a Retail Lending Test Area is informed by the bank's Retail Lending Test recommended conclusion for the Retail Lending Test Area, performance context factors as provided in final § __.21(d), and the additional factors provided in final § __.22(g).

• Final § __.22(b)(5)— Exceptions —describes two exceptions to the general four-step methodology discussed above.

• Final § __.22(b)(5)(i)— No major product line — provides that if a bank has no major product line in a facility-based assessment area, the agencies assign the bank a Retail Lending Test conclusion for that facility-based assessment area based upon the bank's performance on the Retail Lending Volume Screen pursuant to final § __.22(c), the performance context factors provided in final § __.21(d), and the additional factors provided in final § __.22(g). This final rule provision specifies that the distribution analysis in final § __.22(d) through (f) does not apply to a facility-based assessment area in which there are no major product lines. There may not be a major product line, for example, where a bank maintains a deposit-taking facility and only conducts consumer lending other than automobile lending. The agencies determined that this provision adds clarity regarding evaluation procedures in cases where the proposed distribution analysis does not apply to a bank's business model in a facility-based assessment area.

• Final § __.22(b)(5)(ii)— Banks that lack an acceptable basis for not meeting the Retail Lending Volume Threshold —provides how the agencies assign a Retail Lending Test conclusion for a facility-based assessment area in which a bank lacks an acceptable basis for not meeting the Retail Volume Threshold. Consistent with the proposed approach, these facility-based assessment areas do not receive a Retail Lending Test recommended conclusion based on a distribution analysis. The agencies have revised the final's rule regulatory text relative to the proposal to make more clear that, as described in the section-by-section analysis of final § __.22(c)(3)(iii), the agencies will instead consider such a bank's performance on the Retail Lending Volume Screen, the distribution analysis, the performance context factors in final § __.21(d), and the additional factors in final § __.22(g) in assigning a conclusion. As discussed in the section-by-section analysis of § __.22(c), and consistent with the proposed approach, a large bank that lacks an acceptable basis for not meeting the screen is limited to a Retail Lending Test conclusion of either “Needs to Improve” or “Substantial Noncompliance” in that facility-based assessment area. An intermediate bank, or a small bank that opts to be evaluated under the Retail Lending Test, that lacks an acceptable basis for not meeting the screen is eligible for any Retail Lending Test conclusion in that facility-based assessment area.

Section __.22(c) Retail Lending Volume Screen

In final § __.22(c) and section I of final appendix A, the agencies are adopting the proposal to incorporate in the evaluation of a bank's retail lending performance a Retail Lending Volume Screen, which will measure the total dollar amount of a bank's retail lending relative to its presence and capacity to lend, based on deposits, in a facility-based assessment area compared to other lenders. The agencies developed the Retail Lending Volume Screen to provide more rigor, clarity, consistency, and transparency in the evaluation of retail lending for banks evaluated under the final Retail Lending Test.

The final rule's Retail Lending Volume Screen reflects certain substantive, technical, and clarifying revisions to the proposed Retail Lending Volume Screen, as discussed below. The agencies have also reorganized the proposed regulatory text to provide additional clarity and consistency by: (1) in final § __.22(c)(1), defining the volume screen components; (2) in final § __.22(c)(2), outlining the agencies' approach regarding banks that meet or surpass the volume screen's threshold; and (3) in final § __.22(c)(3), outlining the agencies' approach regarding banks that do not meet the screen's threshold.

Consistent with the proposal, final § __.22(c)(1) provides that, for a bank evaluated under to the Retail Lending Test, the Retail Lending Volume Screen will measure the bank's lending volume relative to its deposits in a facility-based assessment area, calculated as a Bank Volume Metric, and compare the Bank Volume Metric to a Market Volume Metric, which measures the lending of all banks in the facility-based assessment area relative to their deposits. The bank will meet the Retail Lending Volume Threshold in that facility-based assessment area if the bank has a Bank Volume Metric of 30 percent or greater of the Market Volume Benchmark.

Final § __.22(c)(2) and (c)(3)(ii) provide that, for a bank that meets or surpasses the Retail Lending Volume Threshold in a facility-based assessment area, or that has an acceptable basis for not meeting or surpassing the threshold—as provided in final § __.22(c)(3)(i) and discussed further below— the agencies will develop a Retail Lending Test recommended conclusion for the facility-based assessment area, which could range from “Outstanding” to “Substantial Noncompliance.”

Additionally, final § __.22(c)(3)(iii)(A) provides that large banks that lack an acceptable basis for not meeting the Retail Lending Volume Threshold will be limited to receiving a “Needs to Improve” or “Substantial Noncompliance” Retail Lending Test conclusion in a facility-based assessment area, determined based upon: the large bank's retail lending volume and the extent by which it did not meet the threshold; the distribution analysis in final § __.22(d) and (f); the performance context factors in final § __.21(d); and consideration of the additional factors in final § __.22(g).

Final § __.22(c)(3)(iii)(B) provides that for intermediate banks, and small banks that opt to be evaluated under the Retail Lending Test, which lack an acceptable basis for not meeting the Retail Lending Volume Threshold, the agencies will consider a bank's performance under the lending distribution analysis in final § __.22(d) and (f) before assigning a Retail Lending Test recommended conclusion—which could range from “Outstanding” to “Substantial Noncompliance.” The agencies will also consider a bank's retail lending volume and the extent by which it did not meet the threshold, along with performance context factors and the additional factors, before assigning a Retail Lending Test conclusion.

Overall Retail Lending Volume Screen Approach

The Agencies' Proposal

In proposed § __.22(c), the agencies provided for a retail lending volume screen that would measure the total dollar volume of a bank's retail lending relative to its presence and capacity to lend in a facility-based assessment area compared to peer banks. The agencies indicated that the screen would serve to ensure that a bank's performance evaluation reflects the amount of a bank's retail lending relative to its presence and lending capacity in an assessment area. They also indicated that a bank would fail to meet the credit needs of its entire community if it makes too few loans relative to its community presence, capacity, and local opportunities, even if those loans happened to be concentrated among, for example, low- and moderate-income borrowers and low- and moderate-income census tracts.

Comments Received

The agencies received many comments on the proposed “retail lending volume screen” from a variety of stakeholders.

Many commenters that addressed the proposed retail lending volume screen supported its inclusion in the proposed Retail Lending Test, with a number of these commenters recommending a more stringent Retail Lending Volume Threshold than proposed by the agencies, as discussed below. Many of these commenters asserted that a retail lending volume screen would help to reduce perceived ratings inflation in CRA evaluations.

However, many other commenters that addressed the proposed retail lending volume screen opposed it or raised concerns about the screen, with some suggesting modifications to the proposed screen and its incorporation into the CRA framework. For example, some commenters expressed concerns that the proposed retail lending volume screen would not account for all bank business strategies and that certain types of banks could have difficulty passing the screen. Points made by these commenters included, for example, that: a bank that operates without branches could have trouble meeting the screen in the facility-based assessment area delineated around its home office; the screen would disadvantage depository CDFIs that maintain branches in economically distressed areas where there is less demand for large loans; the screen would penalize and disadvantage banks with business models that do not focus on retail lending; and (banks that specialize in consumer lending might fail the screen because they did not engage in sufficient home mortgage lending, small business lending, and small farm lending.

A commenter suggested that the agencies apply a materiality standard such that the retail lending volume screen would not apply if a bank did not have a sufficient volume of both retail lending and deposits in a facility-based assessment area. Another commenter suggested that banks should be exempt from the retail lending volume screen if they demonstrate that their business structure is incompatible with originating a meaningful number of loans as a percentage of their deposits in facility-based assessment areas.

Various commenters expressed concerns that applying the retail lending volume screen might discourage banks from maintaining branches with low deposits even though those branches provide services to low-deposit customers. Commenters suggested that this could discourage banks from maintaining facilities in rural markets or markets that are incidental to the banks' business strategies or lead to consolidation or branch closures among banks, including depository CDFIs, serving rural or underserved areas. Concerns were also raised that the retail lending volume screen represented a pass/fail approach that would lead to banks prioritizing retail lending dollar volume at the expense of developing innovative products and services responsive to unbanked or underbanked consumers and microbusinesses.

A few commenters raised concerns that some lenders in certain markets could face challenges in meeting the threshold due to local lending conditions. For example, a commenter stated that in some rural and economically challenged assessment areas, loan demand is low, which could cause a bank to fail the proposed retail lending screen even if the bank is committed to providing a range of banking services to these communities. A commenter indicated that the screen would not account for a variety of scenarios that are common in suburban, exurban, and urban areas where large banks have high concentrations of deposits.

Some commenters also raised legal arguments with respect to the retail lending volume screen. A commenter suggested that the retail lending volume screen exceeds the agencies' statutory authority because it is not explicitly authorized by the CRA statute. Other commenters stated that the retail lending volume screen would conflict with congressional intent because section 109 of the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 (section 109) instructs the agencies to use a loan-to-deposit ratio to determine whether a bank engaged in interstate branching meets the credit needs of the communities it serves. In addition, a commenter suggested that if the retail lending volume screen prompts banks to close any branches to avoid adverse consequences under the Retail Lending Test the outcome would be contrary to the statutory purposes of the CRA.

Final Rule

As noted above, final § __.22(c) and section I of final appendix A adopt the proposed Retail Lending Volume Screen, with certain clarifying, technical, and substantive edits described in more detail below. Based on the agencies' consideration of the comments and further analysis and deliberation, the agencies continue to believe that the Retail Lending Volume Screen is an appropriate baseline measure of the amount of a bank's retail lending relative to its presence and lending capacity in a facility-based assessment area, as indicated by the volume of deposits received from the area surrounding the bank's deposit-taking facilities. The agencies also believe that a holistic evaluation of whether a bank is meeting the credit needs of its facility-based assessment areas necessarily includes consideration of not only a bank's loan distribution, but also the bank's lending volume relative to its presence and capacity.

The final rule reflects the agencies' view that the Retail Lending Volume Screen and the distribution metrics are both important to ensuring a complete and accurate evaluation of whether a bank has met the credit needs of its community. Specifically, the agencies generally do not believe that a bank with lending levels well below its community presence and capacity is meeting the credit needs of its entire community, regardless of the bank's distribution of loans to low- and moderate-income borrowers and low- and moderate-income census tracts. In this regard, the agencies considered that removing the screen from the Retail Lending Test approach for evaluating facility-based assessment areas would mean that a bank could achieve “Outstanding” performance by making only a very small number of loans relative to the bank's capacity, if a high percentage of those loans are to designated borrowers ( i.e., low-income borrowers, moderate-income borrowers, businesses with gross annual revenues of $250,000 or less, businesses with gross annual revenues of more than $250,000 but less than or equal to $1 million, farms with gross annual revenues of $250,000 or less, or farms with gross annual revenues of more than $250,000 but less than or equal to $1 million) and designated census tracts ( i.e., low-income census tracts or moderate-income census tracts).

The Retail Lending Volume Screen is based on standardized metrics and will apply across banks evaluated in facility-based assessment areas under the Retail Lending Test, to ensure clarity, consistency, and transparency in this important volume-based assessment of a bank's retail lending. The agencies considered that the final rule approach builds upon the current evaluation approach, under which the agencies consider a bank's volume of retail lending in an assessment area without quantitative benchmarks or thresholds indicating what level of lending is adequate.

The agencies considered comments that it could be challenging for a bank to meet the Retail Lending Volume Threshold in markets with low levels of retail lending demand. However, the agencies determined that the final rule approach accounts for this concern both through the Market Volume Benchmark and the acceptable basis factors for not meeting the threshold, finalized in final § __.22(c)(3)(i) and discussed in more detail further below. Specifically, the Market Volume Benchmark is based on retail loans and deposits from all banks with a branch in a geographic area, which will reflect the level of credit demand in that area. In addition, the acceptable basis factors include performance context information that could explain a bank's low level of lending in an area, such as the bank's business strategy and any other circumstances unique to a facility-based assessment area. These factors are designed to help address scenarios raised by commenters such as that of an internet bank not meeting the Retail Lending Volume Threshold in a headquarters facility-based assessment area and of a CDFI bank serving an area with lower loan demand.

The agencies understand that banks operate in variable conditions, and that they have different characteristics, business strategies, and customer bases. For this reason, the Retail Lending Volume Screen—both as proposed and as finalized—does not operate on a “pass/fail” basis. Rather, the Retail Lending Volume Screen is one aspect of the agencies' evaluation of a bank's retail lending performance; it functions as a key piece of the framework under which the agencies determine the appropriate approach for evaluating the retail lending performance of a particular bank in its facility-based assessment areas. For example, for a bank with a Bank Volume Metric above the Retail Lending Volume Threshold in a facility-based assessment area, the agencies believe it is appropriate to determine a recommended conclusion based on a distribution analysis of the bank's retail lending. In contrast, for a bank with a Bank Volume Metric below the Retail Lending Volume Threshold in a facility-based assessment area, the agencies believe it is important to first assess whether the bank had an acceptable basis for exhibiting a very low level of retail lending prior to applying the distribution analysis. The acceptable basis factors will address a variety of circumstances that could limit a bank's ability to lend in a facility-based assessment area. Accordingly, the agencies have not included any references in final § __.22(c) to a bank “failing” to meet the Retail Lending Volume Threshold, as the agencies acknowledge that a bank may have a relatively low Bank Volume Metric due to the bank's business model or other acceptable basis factors that are not indicative of “failing” performance.

The agencies also considered, but are not adopting, a commenter suggestion to apply a materiality standard such that the Retail Lending Volume Screen would not apply if a bank did not have a sufficient volume of both retail lending and deposits in a facility-based assessment area. The agencies determined that it is beneficial to have consistent standards that apply to all facility-based assessment areas such that, for each bank evaluated in its facility-based assessment areas under the Retail Lending Test, a volume-based assessment of a bank's lending is a component of evaluating whether a bank is meeting the retail lending needs of these communities. In addition, the agencies believe that applying a materiality standard could result in less robust evaluation standards in smaller markets, rural areas, and low-income areas where banks may tend to conduct less lending and source lower volumes of deposits.

The agencies also considered, but are not adopting, a commenter suggestion that banks should be exempt from the Retail Lending Volume Screen if they demonstrate that their business structure is incompatible with originating a meaningful number of loans as a percentage of their deposits in facility-based assessment areas. Based on further consideration of this suggestion, the agencies determined that the variety of bank business strategies and structures presents significant challenges to establishing an appropriate exemption. Thus, the agencies believe that it is preferable to apply the Retail Lending Volume Screen and, if warranted, determine whether a bank has an acceptable basis for not meeting the Retail Lending Volume Threshold. As discussed elsewhere in this section-by-section analysis, the acceptable basis factors in final § __.22(c)(3)(i) include consideration of a bank's business strategy and other aspects of the performance context of the area.

The agencies have also carefully reviewed and considered comments presenting legal considerations. The CRA statute's grant of rulemaking authority to the agencies empowers them to carry out the purpose of the statute. As discussed in section I of this SUPPLEMENTARY INFORMATION , in enacting the CRA, Congress was focused on the relationship between a bank's deposit-taking activity in an area and its lending activity, and on ensuring that banks meet not only the deposit needs but also the credit needs of their communities. Thus, the agencies view consideration of a bank's loan-to-deposit ratios as within the appropriate purview of the agencies' approach to CRA examinations. The agencies also note that this reflects a longstanding position of the agencies; for example, since 1995, the agencies have used loan-to-deposit ratios as a criterion to evaluate small bank performance. Further, based on supervisory experience, the agencies believe that the loan-to-deposit ratios of other banks in a facility-based assessment area are informative of credit needs in a community, and thus a useful point of comparison as part of a larger framework for determining whether a bank is meeting the credit needs of its community.

Regarding commenters' mention of provisions of section 109, the agencies have considered the distinct policy objectives, calculation methodologies, and applications of section 109 and of the CRA, and do not believe that section 109 precludes the agencies from implementing the Retail Lending Volume Screen in the final rule. First, section 109 was enacted 17 years after the CRA statute, but did not change or displace the agencies' CRA rulemaking authority. Second, although the section 109 loan-to-deposit ratios used by the agencies may have some conceptual similarities with the Retail Lending Volume Screen, their distinct policy objectives, calculation methodologies, and applications require separate metrics to achieve their respective purposes, as discussed in more detail further below. Congress enacted section 109 to ensure that a bank's interstate branches would not take deposits from a host state (or other host jurisdiction) without the bank reasonably helping to meet the credit needs of that host state. The application of section 109 requirements involves a loan-to-deposit ratio test that measures the lending and deposit activities of a bank's interstate branches and then compares the bank's statewide loan-to-deposit ratio with the relevant host state's loan-to-deposit ratio, which is based on host state banks' lending and deposits volumes. If the bank's statewide loan-to-deposit ratio is at least one-half of the relevant host state loan-to-deposit ratio, the bank passes the section 109 evaluation and no further review is required. If the bank fails the loan-to-deposit ratio test (or the loan-to-deposit ratio cannot be calculated because data are not sufficient or are not reasonably available), the agencies will determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank in the host state—this step requires examiners to review the activities of the bank, such as its performance under the CRA. The Retail Lending Volume Screen is therefore a complement to, and not a substitute for, the section 109 evaluation of whether a bank with interstate branches impermissibly uses those branches to primarily engage in deposit production rather than serving the credits needs of its communities. Accordingly, the agencies do not believe that the Retail Lending Volume Screen intrudes on or otherwise conflicts with prior congressional decisions on interstate banking prescribed in statute.

The agencies have also considered commenter sentiment that the Retail Lending Volume Screen is onerous and would therefore result in banks closing branches in markets where their Bank Volume Metric may not meet the Retail Lending Volume Threshold. However, in considering these comments and additional agency analysis, the agencies believe that the Retail Lending Volume Screen is appropriately calibrated and that the Retail Lending Volume Threshold is generally attainable. In reaching this determination, the agencies considered a number of factors. First, the agencies considered that the current evaluation framework includes assessing a bank's volume of retail lending, and for small banks includes a loan-to-deposit ratio. The agencies believe that the Retail Lending Volume Screen is therefore grounded in the current approach and will not introduce significant new burden or complexity for banks. Second, the agencies considered that based on estimates using available data from 2018–2020, and as discussed more fully below, the Bank Volume Metric exceeds the Retail Lending Volume Threshold in approximately 96 percent of banks' facility-based assessment areas. The agencies also considered that this analysis was applied to years when the screen was not in effect. In future years when the screen is in effect, banks will have access to information such as recent estimates of relevant metrics and benchmarks in different geographic areas, which could be used to help monitor performance. Third, the agencies considered that the acceptable basis factors in final § __.22(c)(3)(i) cover circumstances in which a bank's Bank Volume Metric does not meet the Retail Lending Volume Threshold due to performance context factors or other legitimate business reasons, such as a bank's business model. Taking into account these considerations, the agencies anticipate that the screen will appropriately evaluate whether a bank has conducted retail lending that is commensurate with peer lending in facility-based assessment areas, and is not unduly complex or burdensome.

Specific components of the Retail Lending Volume Screen are discussed below in the section-by-section analysis of final § __.22(c)(1). The section-by-section analyses of final § __.22(c)(2) and (3) address the ways in which a bank's performance on the Retail Lending Volume Screen informs the blend of quantitative and qualitative factors considered by the agencies in determining a bank's Retail Lending Test conclusion in a facility-based assessment area.

Section __.22(c)(1) Retail Lending Volume Threshold

Consistent with the proposal, final § __.22(c)(1) and section I of final appendix A provide that, for a bank evaluated under to the Retail Lending Test, the Retail Lending Volume Screen will compare its Bank Volume Metric against a Market Volume Benchmark in a facility-based assessment area. The bank will meet or surpass the Retail Lending Volume Threshold in that facility-based assessment area with a Bank Volume Metric of 30 percent or greater of the Market Volume Benchmark. The Bank Volume Metric, the Market Volume Benchmark, and the 30 percent threshold are discussed in turn below.

Bank Volume Metric

The Agencies' Proposal

To provide a consistent measure of how much of a bank's local capacity has been oriented toward retail lending, the agencies proposed that the retail lending volume screen would consist, in part, of a “bank volume metric.” The proposed bank volume metric would be calculated as a ratio comparing bank lending against bank deposits. The numerator would have included the annual average of the year-end dollar amount of a bank's originated and purchased automobile loans, closed-end home mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, and small farm loans in a facility-based assessment area.

The denominator would include the annual average amount of the bank's deposits in that facility-based assessment area over the evaluation period, if the bank collected and maintained this data. Specifically, the agencies proposed that collecting and maintaining deposits data would be required for large banks with assets of over $10 billion and would be optional for large banks with assets of $10 billion or less, intermediate banks, and small banks that opted to be evaluated under to the Retail Lending Test. For any bank evaluated under to the Retail Lending Test that did not collect and maintain deposits data, the agencies proposed to use the deposits assigned to the banks' branches in each assessment area as reported in the FDIC's Summary of Deposits data to calculate the local deposit base, in the denominator. The agencies requested feedback on using alternative sets of deposits data than proposed, based on bank asset size, to construct the bank volume metric.

Comments Received

Numerator. Some commenters offered suggestions and requested clarification regarding the numerator of the proposed bank volume metric. A commenter indicated that the numerator should include personal loans, credit card loans, and other non-automobile consumer loans, while another commenter similarly expressed the view that the bank volume metric numerator should include personal loans, because some small business owners, particularly self-employed individuals, often use personal loans for commercial purposes.

Another commenter indicated that the agencies needed to clarify whether loan renewals would be considered in the bank volume metric numerator, asserting that the exclusion of loan renewals could adversely affect banks' performance under the Retail Lending Test (as well as under the Community Development Financing Test). Other commenters asserted that the proposal was unclear as to whether loans originated and sold before year-end would be included in the numerator, with a commenter specifically emphasizing a lack of clarity in the proposed numerator's description (“the annual average of the year-end total dollar amount of the bank's originated and purchased . . . loans”).

A commenter expressed concern that banks whose core retail lending businesses are excluded from the numerator of the bank volume metric may not meet the Retail Lending Volume Threshold as proposed. Another commenter asserted that calculating the bank volume metric using dollar amounts would negatively affect small business lending, which the commenter stated represents only a small portion of overall retail lending, on a dollar amount basis, for some banks.

Denominator. Regarding the denominator for the proposed bank volume metric, a few commenters indicated that a bank's deposit base was not an appropriate measure of a bank's capacity and obligation to conduct retail lending.

Some other commenters supported requiring large banks of all sizes to collect and maintain deposits data, including for calculating the bank volume metric, with one commenter expressly supporting this requirement for intermediate banks as well. Another commenter asserted that applying the deposits data collection and reporting requirements to all large banks would improve the accuracy of the bank volume metric because, as proposed, the metric mixed bank-collected data with the FDIC's Summary of Deposits data that is less accurate in capturing depositor location.

A commenter expressed concern that the proposal to give large banks with assets of $10 billion or less the option of separately collecting and maintaining deposits data would result in banks in predominantly rural communities feeling compelled to collect and maintain deposits data despite relatively limited resources. This commenter believed that collecting and maintaining deposits data might represent the only way that these banks might be able to pass the retail lending volume screen, as otherwise they might be adversely impacted by their relatively low retail lending volume when compared to their deposit volume in a facility-based assessment area based on the FDIC's Summary of Deposits data.

Some commenters suggested alternative ways to compute bank deposits (for large banks reporting deposits, as opposed to banks for which the FDIC's Summary of Deposits data would be used). A number of these commenters argued for removing corporate deposits from the bank volume metric based on their view that including corporate deposits could unfavorably skew a bank's performance on the retail lending volume screen, making it more difficult for a bank to pass the screen in the corresponding facility-based assessment area. These commenters pointed to various reasons to exclude corporate deposits, including that they can be large and fluctuate unpredictably and are typically centralized in a single branch location, as well as that commercial lending to larger entities would not be included in the numerator. Other commenters also suggested that including corporate deposits could lead to additional CRA hot spots in, or banks otherwise diverting lending to, urban areas at the expense of rural and suburban areas, because banks would endeavor to increase retail lending in these urban areas (where they have more deposits) to avoid failing the screen.

Some commenters made similar arguments for excluding government deposits from the proposed bank volume metric denominator. A commenter recommended that the agencies include bank deposits from domestic limited liability companies and trusts in a bank's bank volume metrics, noting that these are domestic deposits in substance and thus appropriately considered as part of a CRA metrics framework. A commenter noted that health savings account deposits that lack depositor location should be excluded from the bank volume metric and other relevant metrics.

Final Rule

Final § __.22(c)(1) and paragraph I.a of final appendix A adopt the proposal to employ a Bank Volume Metric as the measure of how much of a bank's local capacity has been oriented toward retail lending. In light of comments received and based on further deliberations, the agencies are making substantive, technical, conforming, and clarifying edits in the final rule to increase clarity and consistency when calculating the Bank Volume Metric.

Numerator. As provided in paragraph I.a.1 of final appendix A, the numerator of the Bank Volume Metric will be the sum of the annual dollar volume of a bank's originations and purchases of all volume metric loans for the facility-based assessment area over the years in the evaluation period. The bank's annual dollar volume of volume metric loans is the total dollar volume of all home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans (for banks for which automobile lending is a product line) originated or purchased by the bank in the facility-based assessment area in that year. The agencies are finalizing a calculation based on the sum of the annual dollar volume of lending over the years in the evaluation period, rather than an annual average of the year-end dollar total amount as proposed, to reduce complexity in the calculation of the Bank Volume Metric by reducing the number of steps required without affecting the result of the calculations. The use of the term volume metric loans is intended to increase clarity.

The numerator of the Bank Volume Metric is based on the dollar volume of a bank's lending instead of the number of loans (as is the numerator of the Market Volume Benchmark). The agencies understand commenter concerns about the potential for a bank that makes a high volume of small-dollar loans and few or no larger dollar loans to have a relatively low Bank Volume Metric. For this reason, as discussed in further detail below, the agencies selected a Retail Lending Volume Threshold level that is significantly below the Market Volume Benchmark (specifically, 30 percent of the Market Volume Benchmark). In addition, the agencies note that the acceptable basis factors would include consideration of a bank's business model, such as a bank's specialization in small-dollar lending. In light of these considerations, the agencies believe that lending volume metrics comparing both loans and deposits in terms of dollars is an effective and appropriate measure of how fully a bank has utilized its lending capacity, and is also consistent with the CRA's emphasis on banks reinvesting their deposits back into their communities.

With respect to commenter sentiment indicating that the proposal was unclear as to whether loans originated and sold before year-end would be included in the numerator, the agencies are clarifying that the dollar volume of a bank's originations and purchases of all volume metric loans for the facility-based assessment area in any year of the evaluation period may be included in the Bank Volume Metric, even those loans that are subsequently sold. The agencies believe that this approach will appropriately give positive consideration to loan originations made through a variety of bank business models, including banks that sell originated loans on the secondary market to increase liquidity, which can increase a bank's capacity to lend and further meet the credit needs of the community.

Once the agencies have transitioned to using section 1071 data, as discussed in the section-by-section analyses of final §§ __.12 and __.51, the numerator will include purchased small business loans and small farm loans only at the bank's option (because section 1071 data does not include loan purchases). Specifically, a bank may opt to have the agencies include in its Bank Volume Metric numerator purchases of loans that meet the definition of a “covered credit transaction” under the CFPB Section 1071 Final Rule. The agencies believe that the inclusion of purchased small business loans and small farm loans reflects the different ways in which banks may meet the credit needs of communities. Once the agencies transition to using section 1071 data, the agencies have determined that the inclusion of these loan purchases should be optional to reduce data collection and maintenance requirements.

The agencies are also clarifying that, consistent with the treatment of reportable business loans pursuant to the CFPB Section 1071 Final Rule, once that data is used by the agencies, small business loan renewals and small farm loan renewals will be counted in the Bank Volume Metric only if the renewal increases the credit amount or credit line amount. Generally, home mortgage loan renewals are not reportable pursuant to HMDA; consistent with this standard, the agencies will not include home mortgage loan renewals in the Bank Volume Metric.

In the final rule, automobile loans are included in the bank's annual dollar amount of volume metric loans only if automobile loans are a product line for the bank ( i.e., if the bank is a majority automobile lender or opts to have its automobile loans evaluated). For those banks that collect and maintain automobile lending data pursuant to final § __.42(a)(2), the numerator will include the annual dollar amount of the bank's originated and purchased automobile loans. The agencies determined that automobile loans should only be included in a bank's Bank Volume Metric for banks that have their automobile lending evaluated as a product line, in order to ensure a comprehensive evaluation. As a result, a bank that has automobile lending considered as part of the Bank Volume Metric would also have its automobile lending evaluated under the distribution analysis pursuant to final § __.22(e) and (f) if its automobile lending is a major product line in one or more facility-based assessment areas or its outside retail lending area. The agencies determined that an alternative approach of considering automobile loans as part of the Bank Volume Metric for a bank that does not have automobile lending as a product line would result in a less comprehensive evaluation because the bank would receive favorable consideration for these loans in the Bank Volume Metric without any evaluation of the distribution of those loans to low- and moderate-income borrowers or in low- and moderate-income census tracts.

As in the proposal, the numerator of the Bank Volume Metric does not include non-automobile consumer loans. This decision reflects the lack of non-automobile consumer lending data and is also intended to align the Bank Volume Metric's numerator with the final rule's treatment of non-automobile consumer loans—namely, that they will not be evaluated as a product line under the Retail Lending Test, but will be considered pursuant to the Retail Services and Products Test. This aspect of the final rule is discussed in more detail in the section-by-section analyses of final §§ __.22(d) and __.23. To the extent that commenters expressed concerns that not including non-automobile consumer lending in the numerator of the Bank Volume Metric would disadvantage banks, the agencies note that they will apply the acceptable basis factors in final § __.22(c)(3)(i), as discussed below, as part of the operation of the Retail Lending Volume Screen for banks that do not meet the Retail Lending Volume Threshold. Specifically, pursuant to final § __.22(c)(3)(i)(A), the agencies will take into account a bank's dollar volume of non-automobile consumer loans.

Denominator. The agencies are also making substantive, technical, and clarifying edits in the final rule regarding calculating the denominator of the Bank Volume Metric. As provided in paragraph I.a.2 of final appendix A, the denominator of the Bank Volume Metric will be the sum of a bank's annual dollar volume of deposits from that facility-based assessment area over the years in the evaluation period. The agencies are making revisions that clarify that a bank's annual dollar volume of deposits is: for a bank that reports deposits data pursuant to final § __.42(b)(3), the total of annual average daily balances of deposits reported by the bank in counties in the facility-based assessment area in that year; and, for all other banks, the total of deposits assigned to branches reported by the bank in the FDIC's Summary of Deposits data in counties in the facility-based assessment area in that year. The agencies are finalizing a calculation based on the sum of the annual dollar volume of deposits over the years in the evaluation period, rather than an annual average as proposed, to reduce complexity in the calculation of the Bank Volume Metric by reducing the number of steps required without affecting the result of the calculations.

Pursuant to final § __.42(a)(7) and (b)(3), collecting, maintaining, and reporting deposits data will be required for large banks with assets greater than $10 billion. Deposits data collection and maintenance will be optional for large banks with assets less than or equal to $10 billion, intermediate banks, and small banks that opt into the Retail Lending Test. Should a bank with assets less than or equal to $10 billion elect to collect and maintain deposits data pursuant to final § __.42(a)(7), the bank will be required to report deposits data pursuant to final § __.42(b)(3). The agencies have considered comments recommending that they modify their proposal to require large banks with assets greater than $10 billion to collect, maintain, and report deposits data and to allow large banks with assets less than or equal to $10 billion the option to collect and maintain this data. The agencies are finalizing this element of the Retail Lending Volume Screen as proposed, to appropriately balance the trade-off between maximizing the accuracy of the screen and corresponding data burden.

Deposits data that are collected and reported pursuant to final § __.42(b)(3) will facilitate metrics that accurately reflect a bank's deposits inside and outside of its facility-based assessment areas. By contrast, the FDIC's Summary of Deposits data necessarily assigns all deposits to bank branch locations and does not identify the amount or percentage of deposits sourced from outside of a bank's facility-based assessment areas. As a result, a bank with assets less than or equal to $10 billion that sources deposits from outside of its facility-based assessment areas that elects to collect, maintain, and report deposits data could meaningfully increase its Bank Volume Metric in a facility-based assessment area by decreasing the dollar amount of deposits included in the denominator of the metric. Conversely, electing not to collect and maintain deposits for such a bank may result in a lower Bank Volume Metric, because deposits sourced from outside of the facility-based assessment area would then be included in the denominator of the metric.

Regarding comments that requiring all intermediate banks, and large banks with assets less than or equal to $10 billion, to report deposits data would improve the accuracy and consistency of the Bank Volume Metric, to balance data collection burden the agencies decline to require these banks to all collect, maintain, and report deposits data. The agencies again note, however, that if a large bank with assets less than or equal to $10 billion, intermediate bank, or small bank that opts into the Retail Lending Test wishes to use more specific deposits data in the Retail Lending Test, then the bank must collect, maintain, and report this data.

With respect to comments recommending using the FDIC's Summary of Deposits data across all large banks to inform the Bank Volume Metric, the agencies decline to adopt this approach. The agencies considered that although this alternative approach would reduce data burden, the FDIC's Summary of Deposits data alone would be less accurate in capturing the location of depositors than the final rule's combination of bank-collected deposits and the FDIC's Summary of Deposits data. As discussed below, using the FDIC's Summary of Deposits data for all large banks would also result in the inclusion of U.S. Government deposits, state and local government deposits, domestically held deposits of foreign governments or official institutions, or domestically held deposits of foreign banks or other foreign financial institutions in deposit calculations for these banks. The combination of these two factors, in conjunction with the fact that large banks with assets greater than $10 billion hold over 80 percent of all deposits, would have a disruptive impact on the functioning of the Retail Lending Volume Screen, both with regard to their own metrics and the impact of their deposits on construction of Market Volume Benchmarks.

The agencies have considered comments recommending that, when possible, government and foreign deposits should be excluded from the Bank Volume Metric. The agencies note that the definition of “deposits” in proposed § __.12 specifically excluded: U.S. Government deposits; state and local government deposits; domestically held deposits of foreign governments or official institutions; or domestically held deposits of foreign banks or other foreign financial institutions. Accordingly, under the proposal, the denominator of the bank volume metric did not include government or foreign deposits for banks with assets of greater than $10 billion. As described further in the section-by-section analysis of final § __.12, the final rule's definition of “deposits” continues to exclude these types of deposits. However, the agencies are not excluding government and foreign deposits from the Bank Volume Metric for banks that do not collect and report deposits data ( i.e., banks that use deposits reported under the FDIC's Summary of Deposits data). This is because these government and foreign deposits are included in the FDIC's Summary of Deposits data at the aggregate (institution) level, without any information regarding how government and foreign deposits are distributed across a bank's individual branches or across the counties where these branches are located. This information about how these deposits are distributed would be necessary to accurately remove the deposits from the facility-based assessment areas for which Bank Volume Metrics are calculated. The agencies note that any bank that takes the position that it might be materially disadvantaged by the inclusion of these government and foreign deposits may choose to collect and report the more limited set of deposits data for use in the Retail Lending Volume Screen and elsewhere in the CRA regulations.

The agencies are not excluding corporate deposits, health savings account deposits, and trust deposits from the Bank Volume Metric. The agencies find that in cases where large corporate or health savings account deposits or government or foreign deposits unfavorably skew a bank's performance on the Retail Lending Volume Screen, examiners could consider this factor as an acceptable basis pursuant to final § __.22(c)(3)(i)(E) and (F) for a bank not meeting the Retail Lending Volume Threshold in a facility-based assessment area.

Market Volume Benchmark

The Agencies' Proposal

To assess the level of a bank's retail lending volume relative to local opportunities in a facility-based assessment area, the agencies proposed to compare the bank volume metric to a “market volume benchmark.” As provided in paragraph I.2 of proposed appendix A, the market volume benchmark would have been comprised of the annual average of the year-end total dollar amount of automobile loan, closed-end home mortgage loan, open-end home mortgage loan, multifamily loan, small business loan, and small farm loan originations in the facility-based assessment area by all large banks that operated a branch in counties wholly or partially within the facility-based assessment area, in the numerator, divided by the annual average amount of deposits collected by those same banks from that facility-based assessment area, in the denominator. The dollars of deposits in the denominator would have been based on: the annual average of deposits in counties in the facility-based assessment area reported by all large banks with assets greater than $10 billion that operate a branch in the assessment area in the years of the evaluation period during which they operated a branch at the end of the year; and the annual average of deposits assigned to branches in the facility-based assessment area by all large banks with assets less than or equal to $10 billion, according to the FDIC's Summary of Deposits data, over the evaluation period.

The agencies requested feedback on using alternative sets of deposits data than proposed, based on bank asset size, to construct the market volume benchmark.

Comments Received

Some commenters expressed concerns that the market volume benchmark would be based on the lending and deposits of a limited subset of banks—large banks with branches in the relevant facility-based assessment area—rather than the total number of banks active in a facility-based assessment area. In this regard, one commenter asserted that setting the market volume benchmark based on a subset of market participants would make the market volume benchmark susceptible to collusion, and indicated that the agencies would need to guard against such market manipulation.

Other commenters contended that the market volume benchmark, as proposed, would fail to provide banks or other stakeholders with appropriate notice regarding performance expectations. Some of these commenters expressed concerns that banks would not have the ability to adjust performance during an evaluation period, because the benchmark would be unknown until their evaluation periods have ended and their CRA examinations have started.

Commenters also raised concerns that the market volume benchmark would not sufficiently capture unique characteristics of a given market. For example, some commenters asserted that, in areas with one or a few dominant lenders, other lenders would be disadvantaged in meeting the proposed Retail Lending Volume Threshold, while another commenter suggested that the market volume benchmark should account for market loan demand.

Final Rule

In final § __.22(c)(1) and section I.b of final appendix A, the agencies are making clarifying, technical, and substantive edits to the proposal to use a Market Volume Benchmark, to increase clarity, consistency, and readability.

Numerator. As provided in paragraph I.b.1 of final appendix A, the numerator of the Market Volume Benchmark will be the annual dollar volume of volume benchmark loans originated in the facility-based assessment area and reported by benchmark banks, over the years in the evaluation period. Volume benchmark loans are the total dollar volume of all closed-end home mortgage loans, open-end home mortgage loans, multifamily loans, small business loans, and small farm loans originated in the facility-based assessment area in that calendar year that are reported loans originated by benchmark banks. A benchmark bank for a particular year is a bank that, in that year, was subject to reporting pursuant to final § __.42(b)(1), 12 CFR part 1003, or both, and operated a facility included in the FDIC's Summary of Deposits data in the facility-based assessment area. In contrast to the proposed approach, benchmark banks under the final rule will include small banks, intermediate banks, and large banks that report loan data.

The agencies believe that this approach will increase the amount of data included in the Market Volume Benchmark and will result in a more robust and representative benchmark, without any increase in data burden or complexity, since there are no additional data requirements associated with this change. The use of the sum of the dollar volume rather than annual average of the year-end total dollar amount, as provided in the proposal, and the focus on banks that operated a facility included in the FDIC's Summary of Deposits data during a calendar year, rather than banks that operated a branch at year-end of a calendar year, represent changes from the proposal intended to increase clarity and reduce complexity in the calculation of the Market Volume Benchmark. The use of the terms benchmark bank and volume benchmark loans is intended to increase clarity.

The agencies are also specifying that the numerator of the Market Volume Benchmark is comprised of reported loan originations, and not all originations as proposed. The agencies are making this change to ensure the operability of the metrics-based approach, because data on loan originations that are not reported would not be available to include in the calculation of the benchmark. Accordingly, automobile loan originations would not be included. The agencies have determined that this approach appropriately balances the trade-off between, on the one hand, including automobile loans in this benchmark to support a more comprehensive analysis that accounts for different bank business models and strategies and, on the other hand, limiting the data collection, maintenance, and reporting requirements for automobile lending data.

The agencies have determined that including the activity of reporting small banks and intermediate banks, and not just large banks as proposed, in the Market Volume Benchmark numerator will make the Market Volume Benchmark more reflective of the aggregate lending activity of the facility-based assessment area. As noted earlier, this only applies to small banks and intermediate banks that already reported data pursuant to CRA small business loan or small farm loan reporting requirements (or section 1071 data once the transition provisions discussed in the section-by-section analysis of § __.51 take effect) or HMDA reporting requirements, and as a result this approach does not add any new data reporting requirements to these institutions.

Denominator. As described in paragraph I.b.2 of final appendix A, the denominator of the Market Volume Benchmark will be the sum over the years in the evaluation period of the annual dollar volume of deposits for benchmark banks. The annual dollar volume of deposits for benchmark banks is the sum across benchmark banks of: (1) the total of annual average daily balances of deposits reported by banks that report deposits data pursuant to final § __.42(b)(3) in counties in the facility-based assessment area in that year; and (2) the total of deposits assigned to branches reported by banks in the FDIC's Summary of Deposits data in counties in the facility-based assessment area in that year for benchmark banks that do not report deposits data pursuant to final § __.42(b)(3). As above, the agencies are finalizing a calculation based on the sum of the annual dollar volume of deposits over the years in the evaluation period, rather than an annual average as proposed, and with a focus on banks that operated a facility included in the FDIC's Summary of Deposits data during a calendar year, rather than banks that operated a branch at year-end of a calendar year as proposed, to increase clarity and to reduce complexity in the calculation of the Market Volume Benchmark, including because it would be difficult to determine based upon available data whether a branch was in operation at year-end. Furthermore, as noted above, the agencies have considered the comments that the proposed benchmark was limited by only including large bank data and that they should consider the lending and deposits data of a larger universe of banks.

The agencies acknowledge trade-offs in this adopted approach for establishing the denominator of the Market Volume Benchmark using both reported deposits data and the FDIC's Summary of Deposits data instead of requiring deposits data to be reported by all banks. The agencies believe, however, that the approach incorporated in the final rule strikes an appropriate balance between the additional precision provided by deposits data reporting relative to the FDIC's Summary of Deposits data and data reporting burden. The combination of reported deposits data and the FDIC's Summary of Deposits data will provide for the construction of more comprehensive and beneficial aggregate deposits data against which to measure bank performance.

The agencies have also considered comments that the Market Volume Benchmark, as proposed, would not provide banks with adequate notice regarding performance expectations, and that banks would not know the precise Market Volume Benchmark in advance of an evaluation period. The agencies believe that it is important that the Market Volume Benchmark reflect the level of retail credit needs and opportunities in the facility-based assessment area during the bank's evaluation period. Employing benchmarks that reflect the performance context of a facility-based assessment area further decreases the need to rely on examiner discretion to interpret bank retail lending performance. The agencies determined that the final rule approach will therefore result in greater consistency and standardization compared to an alternative approach in which the Market Volume Benchmark is calculated using years of data prior to the bank's evaluation period. Conversely, the agencies considered that under such an alternative, the benchmarks may not reflect the needs and opportunities of the facility-based assessment area and would not align with the years of data used to calculate the bank's Bank Volume Metric. The agencies note that Market Volume Benchmarks for facility-based assessment areas will be published in performance evaluations or through other means, such as data tools, to provide a historical guideline for retail lending activity.

In addition, the agencies note that under the final rule approach, the agencies would not automatically assign a “Needs to Improve” or “Substantial Noncompliance” conclusion for a bank with a Bank Volume Metric below the Retail Lending Volume Threshold; instead, the final rule provides for an evaluation of whether a bank has an acceptable basis for not meeting the threshold. The agencies note that the acceptable basis factors, discussed below, may address certain circumstances that result in relatively sudden changes in the Market Volume Benchmark, which the agencies believe may help to address the advance notice concerns described by commenters. For example, if a large competitor lender enters into, or exits from, a bank's facility-based assessment area, resulting in a significant change in the bank's lending opportunities or in the Market Volume Benchmark, the agencies may consider this circumstance as an acceptable basis for not meeting the Retail Lending Volume Screen pursuant to final § __.22(c)(3)(i)(C).

Retail Lending Volume Threshold

The Agencies' Proposal

The agencies proposed that banks would meet or surpass the retail lending volume screen in a facility-based assessment area with a bank volume metric of 30 percent or more of the market volume benchmark. The agencies provided that, in the absence of an acceptable basis for failing to meet the Retail Lending Volume Threshold pursuant to proposed § __.22(c)(2)(iii), banks that do not meet at least 30 percent of the market volume benchmark are substantially underperforming their peers in terms of meeting the credit needs of their communities. The agencies proposed to set the threshold at a level that is well below local averages so that banks with various business strategies could meet the threshold, including banks that generally hold loans on their balance sheet rather than selling loans on the secondary market. This threshold was also informed by agency analysis of historical lending data. The agencies also requested feedback on whether it would be appropriate for banks with retail lending volume performance that falls below a threshold lower than the proposed 30 percent threshold—such as a 15 percent threshold—to receive a Retail Lending Test recommended conclusion of “Substantial Noncompliance” in that facility-based assessment area.

Comments Received

Many commenters supported a Retail Lending Volume Threshold of at least 30 percent, with several advocating for certain adjustments. Some recommended that the agencies should adjust the threshold upward from 30 percent for underserved communities identified through statistical or other methods, with several commenters recommending that the proposed 30 percent threshold should be raised to at least 50 percent to more effectively ensure that banks are deploying their deposits. One of these commenters indicated that a threshold of 60 percent or 70 percent would be feasible and would help to prevent deposit harvesting and redlining. A number of commenters jointly stated their view that the 30 percent threshold would be too low based on their comparison of this threshold to the much higher threshold for lending activity provided in section 109, which requires interstate banks to meet certain statewide (or other jurisdiction) loan-to-deposit ratios with respect to their operations outside of their home states. Some commenters stated that if the agencies establish a retail lending volume screen, they should incorporate the section 109 standards into CRA.

Other commenters generally opposed the 30 percent threshold, indicating that it was set too high. A few commenters indicated that a 30 percent threshold was unreasonable, particularly for banks with substantial personal loan originations. Another commenter noted that it would be difficult for banks to meet the 30 percent threshold in facility-based assessment areas with high market penetration and dominant lenders. Relatedly, a commenter recommended that the 30 percent threshold be lowered in rural or economically distressed assessment areas with low loan demand.

Several commenters suggested alternative threshold levels. For example, a commenter suggested that the agencies set two thresholds—30 percent and 15 percent—and provide that no bank that surpassed the 15 percent threshold would receive a “Substantial Noncompliance” conclusion, with another commenter suggesting somewhat more stringent corresponding thresholds of 34 percent and 17 percent of the market volume benchmark. Another commenter proposed that the agencies set ranges for performance conclusions—for example, 30 percent would reflect “Low Satisfactory” performance and 35 percent would reflect “Satisfactory” performance—with examiners having the ability to adjust these results based upon performance context. A commenter also argued for separate Retail Lending Volume Thresholds based on bank size, with different thresholds for large banks with $10 billion or less in assets and large banks with over $10 billion in assets; this commenter indicated that the largest banks could unfavorably impact the results of the retail lending volume screen for other banks in urban areas where they have high concentrations of retail lending. Another commenter expressed the view that a bank that passes the screen in a facility-based assessment area should receive a presumption of at least “Satisfactory” Retail Lending Test performance in that assessment area. A commenter indicated that the proposed retail lending volume screen was insufficient because it was based on a bank's loan-to-deposit ratio benchmarked against other banks in the same geographic area. The commenter indicated that, consequently, banks would all pass the screen if they collectively reduced their lending volume. Instead, this commenter indicated, the agencies should base a screen on the “loan price” of deposits—for example, that a bank's annual loan origination value in a geography should exceed 10 percent of its annual average deposits.

Other commenters questioned whether the proposed 30 percent threshold was based on quantitative analysis, and expressed concern that neither banks nor other stakeholders currently have access to market volume benchmarks in order to self-assess how they would perform pursuant to the retail lending volume screen.

Final Rule

As provided in final § __.22(c)(1) and section I.c of final appendix A, the agencies are finalizing their proposal that banks will meet or surpass the Retail Lending Volume Threshold in a facility-based assessment area with a Bank Volume Metric of 30 percent or greater of the Market Volume Benchmark. Pursuant to final § __.22(c)(2), if a bank meets or surpasses the applicable threshold the agencies will develop a Retail Lending Test recommended conclusion pursuant to the distribution analysis in final § __.22(d) through (f).

The agencies have considered commenter suggestions for both a higher or lower Retail Lending Volume Threshold, as well as alternative approaches for setting a threshold such as basing it on the loan price of deposits, and the reasons offered for these suggestions. On balance, the agencies believe that the final rule's threshold, set at 30 percent of the Market Volume Benchmark, provides a meaningful baseline measure of whether a bank is meeting the credit needs of its community, while necessarily accounting for the wide variety of bank business strategies that exist today and that will evolve in the future. The agencies note that the 30 percent threshold is set well below the Market Volume Benchmark, which is the local marketwide average loan-to-deposit ratio. The agencies determined that by setting a 30 percent threshold rather than a threshold closer to the Market Volume Benchmark, such as 50 percent or 70 percent, banks with various business strategies could reasonably be expected to meet or surpass the threshold.

In further considering an appropriate threshold, the agencies conducted a quantitative analysis of historical lending data on approximately 6,600 intermediate bank and large bank facility-based assessment areas from 2018–2020, summarized in Table 6. The analysis showed that bank performance in 96.4 percent of these facility-based assessment areas would have met or surpassed a 30 percent Retail Lending Volume Threshold during this period. Moreover, the same analysis showed that the share of these banks' facility-based assessment areas that would meet or surpass the threshold declines materially as the threshold is increased from 30 percent. For example, applying a 50 percent threshold to this same data results in 89.2 percent of these banks' facility-based assessment areas meeting or surpassing the threshold, and applying a threshold of 70 percent of the Market Volume Benchmark results in 79.8 percent of these banks' facility-based assessment areas meeting or surpassing the threshold. The agencies intend the Retail Lending Volume Screen to identify only those situations in which banks are far below average in terms of their lending relative to deposits in a facility-based assessment area. The agencies believe that applying a relatively narrow standard for identifying such banks is more consistent with current practice under the lending test, which primarily bases conclusions on the retail lending distribution analysis. As discussed earlier, the agencies believe that the screen helps to supplement the distribution analysis, and should not itself be the primary basis for assigning conclusions for the Retail Lending Test for a substantial segment of banks evaluated under this performance test. Accordingly, the agencies believe that the higher threshold alternatives recommended by some commenters would potentially overemphasize the screen relative to the distribution analysis.