November 19, 2018, marked the end of the comment period for the advance notice of proposed rulemaking (Notice) issued by the Office of the Comptroller of the Currency (OCC) to solicit ideas for transforming and modernizing the Community Reinvestment Act (CRA) regulatory framework. The OCC’s Notice is just one of many recent attempts by both lawmakers and regulators to renew focus on, and jumpstart momentum for, CRA reform. The question nevertheless remains unanswered as to whether the Notice represents the first shot fired as part of CRA change and how differing views, and possibly priorities, among regulators will impact this much-needed reform.
The CRA was originally enacted in October 1977 to stop the practice of redlining and to encourage banks to meet the credit and deposit needs of communities that they serve, including low- and moderate-income communities. Since that time, the CRA has been amended at the margins numerous times through legislative action. Regulatory actions, including CRA regulations and interagency questions and answers regarding the CRA, have further modified and shaped the CRA framework. The OCC, through the Notice and otherwise, has recognized that the current CRA regulatory framework no longer reflects how many banks and consumers engage in the business of banking. The need for more fundamental, structural CRA reform is the result of changes in the financial services industry over the past decades, including the removal of interstate branching restrictions, the expanded and transformative role of technology, and shifting business needs and consumer behavior and preferences, not to mention increased competitive forces from nonbank competitors. The emphasis on financial inclusion in the financial technology space also points toward the need for a CRA regulatory framework that is more adapted to the digital transformation that is coming to the banking sector.
In principle, the need for CRA reform has also been acknowledged by representatives of the Board of Governors of the Federal Reserve System (the Federal Reserve) and the Federal Deposit Insurance Corporation (the FDIC), the two other federal bank regulatory agencies charged with CRA implementation. Federal Reserve Vice Chairman for Supervision Randal Quarles and Federal Reserve Governor Lael Brainard, as well as FDIC Chairman Jelena McWilliams and FDIC Director Martin Gruenberg, have acknowledged that the digital evolution of the banking industry will require changes to the CRA regulatory framework. Lawmakers and other stakeholders in the financial industry also recognize the need for reform and have put forward their own CRA reform recommendations or proposals.
Although there is broad consensus among the regulatory principals that CRA reform is needed, the question of how to reform the CRA regulatory framework remains open. This article first analyzes the approach to reforming the CRA contained in the OCC’s Notice. It then discusses current dynamics among the CRA regulators to the extent they are publicly known, pointing out consistencies (and inconsistencies) among the OCC’s approach in the Notice and the approaches that at least some at the Federal Reserve and FDIC seem to prefer. The article concludes with a brief outlook on what we expect to happen next with respect to CRA reform.
I. The OCC Notice’s Approach to CRA Reform
The OCC under Comptroller Joseph Otting has recognized that aspects of the current CRA regulatory framework may be sufficient for certain locally focused and less complex banks, but this framework no longer reflects how many banks and consumers engage in the business of banking. The Notice offers few, if any, concrete proposals and instead focuses on soliciting comments pertaining to reform in four key areas of the existing CRA regulatory framework:
- revising the current performance evaluation methods by establishing clear and objective measures to assess CRA performance;
- revisiting the definition of “assessment areas” that banks serve;
- expanding CRA-qualifying activities; and
- reducing the administrative burden associated with CRA compliance in various ways.
As Comptroller Otting pointed out in his testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the Senate Banking Committee) on October 2, 2018, improvements in these key areas will “strengthen the CRA by encouraging more lending, investment, and activity where it is needed most—fulfilling the ultimate purpose of the CRA.” Unsurprisingly, the Notice’s four key areas of reform are consistent with the approach that Comptroller Otting outlined in his June 2018 testimony before the Senate Banking Committee and the U.S. House of Representatives Committee on Financial Services (the House Financial Services Committee). Additionally, the Notice’s key reform areas have much in common with the key areas for CRA reform identified by the Department of the Treasury (the Treasury Department) in its memorandum regarding CRA modernization recommendations (the CRA Reform Memorandum), and the Notice also builds on the OCC’s prior efforts to modernize the CRA regulatory framework.
The following briefly summarizes the OCC’s considerations regarding CRA reform as shown through the four key areas for which the Notice solicited public comment.
A. CRA Performance Evaluations
The current CRA performance evaluation framework provides for six different types of banks that are evaluated on the basis of different tests. Although there are common elements across performance evaluation tests, there are certain elements that are unique to each test. The OCC points out that neither the CRA itself nor the current CRA regulations expressly define the term “community,” but instead implement the term through assessment areas, which are areas surrounding a bank’s main office, branch offices, and deposit-taking automated teller machines and the assessment areas’ delineation.
With this background regarding the current CRA framework in mind, the Notice then outlines a transformational approach to CRA reform that would involve the creation of a metric-based performance measurement system with thresholds corresponding to the four statutory CRA rating categories. This approach is consistent with the outline of CRA reform that Comptroller Otting gave in his June 2018 Congressional testimony, where he promoted “clearer, more transparent metrics for what banks need to do to achieve a certain CRA rating.” The Notice explains that the relevant metrics could be calculated as a ratio between the dollar value of CRA-qualifying activities on the one hand, and other objective criteria, such as a banking organization’s domestic assets, deposits, or capital on the balance sheet, on the other hand. The Notice solicits comments on appropriate benchmarks and how much weight should be given to certain categories of CRA-qualifying activities.
The Notice’s metric-based approach stands in contrast to the more moderate, revisionary approach to reforming the CRA’s performance evaluation framework that has been discussed by members of the Federal Reserve and FDIC. This more moderate, revisionary approach focuses not on developing a new metric-based approach, but instead on amending the existing performance tests and standards to include a more flexible evaluation of retail or community-development activities for all banks. The Notice recognizes this more moderate, revisionary approach by seeking comment on an alternative, tailored method for evaluating CRA performance that would take into account a bank’s “business model, asset size, delivery channels, and branch structure.”
B. Definition of Assessment Area
The Notice’s focus on redefining a bank’s “community” and the “assessment areas” in which a bank engages in activity is guided by the recognition of evolving banking practices in a changed technological environment. This reform proposal aligns with the Treasury Department’s recommendation in its CRA Reform Memorandum. The Notice’s proposal regarding the definition of assessment area would both accommodate business models of banks that operate without—or beyond the scope of—a physical location, and recognize the ways in which banking, including the cost of operating branches, has evolved due to technological advances and shifting consumer and business needs.
Under the current CRA regulatory framework, which was developed when banking was based largely on physical branch locations as the primary means of delivering products and services, a bank’s assessment area (and thus its community) is limited to the physical area surrounding a bank’s main office, branch offices, or deposit-taking ATMs. Comptroller Otting criticized this framework, expressing the belief that limiting “assessment areas to a bank’s branch-based footprint has become an impediment to investment and providing capital in areas of need that the bank may serve.” Instead, he called for broadened thinking so that a bank’s assessment area includes all areas where institutions provide their services.
The Notice also requests comment on whether a bank’s qualifying CRA activities outside of its traditional assessment areas should be considered and assessed in the aggregate. The Notice specifically invites thoughts on how “the current approach to delineating assessment areas” could be “updated to consider a bank’s business operations.” The OCC also considers weighing or grading investment areas to ensure that bank activities in low- and moderate-income geographies continue to receive appropriate focus from banks.
C. CRA-Qualifying Activities
Beyond asking whether CRA credit should be available for activity outside of the current limited definition of “assessment area,” the Notice seeks to ensure that CRA consideration is given for a broad range of activities that support community and economic development while retaining a focus on low- and moderate-income populations and areas. In his June 2018 Congressional testimony, Comptroller Otting explained that CRA consideration currently is too focused on single- and multi-family residential lending, even though residential lending is not the only activity that can have a meaningful impact in communities. Comptroller Otting instead indicated that CRA reform should be an opportunity to encourage banks to “help neighborhoods become communities where families can make a living and not just reside,” and supported the CRA recognition of “small business lending, student lending, economic development opportunities, and in some cases, additional opportunities for consumers to access credit.”
The Notice continues this line of arguments and invites comment on the types and categories of activities that should receive CRA consideration. Specifically, it solicits thoughts on ways to provide more clarity and certainty regarding community development, small-business lending, and retail service activities for which a bank may receive CRA consideration. The Notice raises the question of whether financial education or literacy programs, including digital literacy, should be considered for CRA credit and whether bank activities to expand the use of small and disadvantaged service providers should receive CRA consideration. The Notice solicits comments generally on the expansion of CRA-qualifying activities, the role of small-business credit, and the circumstances under which small-business loans should receive CRA consideration. Other questions focus on the possibility of different weightings for loan purchases versus loan originations, and for loans originated for sale versus loans to be held in portfolio.
D. Reducing Administrative Burden Associated with CRA Compliance
Last, but certainly not least, the Notice raises the concern that the current CRA regulatory approach does not facilitate regulatory tracking, monitoring, and comparisons of levels of CRA performance by banks and other stakeholders. It argues that the OCC’s transformational, metric-based approach for CRA performance evaluation would allow stakeholders to better understand CRA performance and compare a bank’s CRA performance to that of its peers or the entire industry, and also would allow for differentiation of CRA activity by location, type, and other factors.
II. The Current Dynamics: Federal Reserve and FDIC Views on CRA Reform
As indicated above, we believe there is agreement in principle among the federal bank regulatory agencies charged with CRA implementation that CRA regulatory reform is much needed. In addition to the Notice’s endorsement of CRA reform, both Federal Reserve Vice Chairman Quarles and Governor Brainard have repeatedly expressed their support for CRA reform. FDIC Chairman McWilliams and Director Gruenberg have also indicated that CRA reform is something that they hope to achieve. Based on public statements, however, there is not yet consensus on how to accomplish that reform. Given the CRA’s history in the sins of redlining, and current social and political debates, this lack of consensus is not surprising.
At the Federal Reserve, Vice Chairman Quarles emphasized the importance of branches in rural communities, which indicates a preference for a moderate approach to CRA regulatory reform, although he has not publicly provided more detail on his vision. Governor Brainard has been the most outspoken governor on this topic and repeatedly articulated the following five principles that she expects would guide the Federal Reserve’s commitment to regulatory CRA revisions:
- broadening the evaluation of banks’ CRA performances to appropriately reflect technological advances;
- appropriately tailoring the CRA regulations, including assessment areas, to banks based on their sizes and business models;
- redesigning CRA regulations with the goal of encouraging banks to seek opportunities in underserved areas;
- promoting consistency and predictability in CRA evaluations and ratings; and
- developing CRA reform in the context of mutually enforcing laws.
Although Governor Brainard’s principles of reflecting technological advances and promoting consistency and predictability in CRA performance are largely consistent with the Notice, some of her other principles are in tension with the OCC’s approach to CRA reform, specifically the goal of tailoring CRA regulations to banks based on sizes and business models. This principle indicates a desire to moderately adjust the current regulatory framework as opposed to following the transformational, metric-based approach outlined by the OCC in the Notice.
Likewise, FDIC Chairman McWilliams has defended the importance of branches in low- and moderate-income communities to the extent that consumers rely on branches in these areas more than they rely on digital services; however, she has not yet publicly detailed her views on how to reform the CRA regulatory framework. Director Gruenberg also expressed a concern that “a single ratio of CRA performance” as proposed by the metric-based approach and the OCC’s Notice could be difficult to reconcile with CRA statutory requirements and the foundational community-based focus of the CRA.
III. Outlook: What’s Next with Respect to CRA Reform?
Although there is clearly momentum for CRA reform, the above analysis of current dynamics among the federal bank regulatory agencies clearly shows that the agencies are not yet fully aligned on how to approach and implement such reform and underscores the difficult road ahead. Further discussion and compromise on the right path forward are needed. Our assumption is that in light of the need for CRA reform, serious but not yet public discussions are ongoing among the principals and their deputies on how to balance these difficult policy issues.
Hope for uniformity and compromise remains, however, in that since the release of the Notice, the OCC on the one hand and the Federal Reserve and the FDIC on the other have offered a conciliatory tone. Comptroller Otting has, for instance, noted an intent to cooperate and potentially compromise on CRA reform, emphasizing that he is looking forward to working with his “regulatory colleagues and other stakeholders,” by which we believe he means direct outreach to community groups. Vice Chairman Quarles and Governor Brainard have publicly announced that the Federal Reserve will be reading the comment letters on the Notice, with both also signaling that the Federal Reserve anticipates working with the OCC and FDIC on a future joint proposal on CRA reform based on those comments. FDIC Chairman McWilliams echoed this sentiment, stating that the FDIC and Federal Reserve will join in on a proposed rulemaking, downplaying the significance of the OCC acting alone.
Key principals at the federal banking agencies have clearly signaled that they are aware of their differences in this area and have signaled their interest in a mutual solution that both furthers the goals of the CRA and reflects the realities of the modern banking system. It is hoped that they will be able to solve any differences and develop a unified approach to reforming and modernizing the CRA regulatory framework—an outcome that should be beneficial to both banks and the communities they serve. The key unknowns are timing and regulatory priorities.
The authors are members of the financial institutions practice of Davis Polk & Wardwell LLP. They thank Olivia C. Harrison and Eric B. Lewin for their contributions to this article. The authors note that this article was submitted for publication on November 5, 2018, and does not account for any subsequent developments.
 Office of the Comptroller of the Currency, Reforming the Community Reinvestment Act Regulatory Framework, 83 Fed. Reg. 45,053 (Sept. 5, 2018).
 Pub. L. No. 95-128, 91 Stat. 1147 (Oct. 12, 1977), codified at 12 U.S.C. § 2901 et seq.
 83 Fed. Reg. at 45,054.
 Acts that amended the statute include: (1) the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (Aug. 9, 1989); (2) the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 Stat. 2236 (Dec. 19, 1991); (3) the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Pub. L. No. 103-328, 108 Stat. 2338 (Sept. 29, 1994); and (4) the Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338 (Nov. 12, 1999). For a brief summary of the changes imposed by these acts, see the Background and Introduction Section of the Notice, 83 Fed. Reg. at 45,054. For additional information on the origins and revolution of the CRA, see also Martin J. Gruenberg, Member, Board of Directors, FDIC, The Community Reinvestment Act: Its Origins, Evolution, and Future, Speech at Fordham University, Lincoln Center Campus, New York, New York (Oct. 29, 2018).
 The Notice points out that the first CRA regulations were released in 1978, with amendments in 1995 and 2005. See 83 Fed. Reg. at 45,054; see also 43 Fed. Reg. 47,144 (Oct. 12, 1978); 60 Fed. Reg. 22,156 (May 4, 1995); 70 Fed. Reg. 44,256 (Aug. 2, 2005).
 83 Fed. Reg. at 45,055.
 Governor Brainard discussed the need for suggestions on “how we can broaden our evaluation of banks’ CRA performances to take into account the technological advances that have made it possible for banks to serve customers remotely.” See Lael Brainard, Governor, Federal Reserve, Community Investment in Denver, Speech at the Federal Reserve Bank of Kansas City, Denver, Colorado (Oct. 15, 2018). Vice Chairman Quarles stated that “the financial system is evolving and branches have a different role than they have had in the past,” and FDIC Chairman McWilliams testified that “we need to take a look at the way branches are playing the role in today’s community.” See Testimony of Randal K. Quarles, Vice Chairman for Banking Supervision, Federal Reserve, and Jelena McWilliams, FDIC Chairman, before the Senate Banking Committee (Oct. 2, 2018). FDIC Director Gruenberg confirmed that the central issue of CRA reform “will be to preserve the foundations of CRA—the community-based focus, the reliance on community input, and the consideration of discriminatory and other illegal credit practices in the CRA evaluations—while adapting CRA to a changing banking environment.” See Gruenberg, supra note 4.
 In April 2018, the Department of the Treasury released a memorandum regarding CRA modernization recommendations. See Treasury Department, Memorandum for the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (Apr. 3, 2018). Senator Elizabeth Warren released the American Housing and Economic Mobility Act in September 2018, which is intended to extend the CRA to “cover more financial institutions, promote investment in activities that help poor and middle-class communities, and strengthen sanctions against institutions that fail to follow the rules.” See Senator Elizabeth Warren, American Housing and Economic Mobility Act, Bill Summary (Sept. 26, 2018).
 It is noteworthy that the OCC was the first and only agency to issue the Notice and seek public comment. Although the federal banking agencies usually act jointly to the extent that more than one agency has rulemaking authority, the Federal Reserve and FDIC did not join the release, which is typically a strong indicator for lack of agreement among the agencies.
 Joseph M. Otting, Comptroller of the Currency, Testimony before the Senate Banking Committee (Oct. 2, 2018).
 Joseph M. Otting, Comptroller of the Currency, Testimony before the Senate Banking Committee (June 14, 2018).
 Joseph M. Otting, Comptroller of the Currency, Testimony before the House Financial Services Committee (June 13, 2018).
 The Treasury Department’s CRA Reform Memorandum (see supra note 8) includes recommendations that focus on four key areas: (1) assessment areas, (2) examination clarity and flexibility, (3) examination process, and (4) performance, which largely overlap with the Notice’s key focus areas of revising the current performance evaluation methods, revisiting the definition of “assessment areas,” and reducing the administrative burden associated with CRA compliance.
 These prior efforts include, for example, the OCC’s revisions to its existing CRA examination and ratings policies to require a “logical nexus” between a discriminatory or illegal credit practice and a bank’s CRA lending before the bank’s CRA rating may be downgraded. See OCC Bulletin 2018-23: Revisions to Impact of Evidence of Discriminatory or Other Illegal Credit Practices on Community Reinvestment Act Ratings (Aug. 15, 2018).
 Large banks (more than $1.252 billion in assets) are subject to lending, investment, and service tests; intermediate small banks (between $313 million and $1.252 billion in assets) are subject to retail lending and community development tests; small banks (less than $313 million in assets) are subject to a retail lending test that may also consider community development loans; wholesale, limited purpose, and military banks are subject to their own differing tests and standards, and any bank can elect to be evaluated under a strategic plan that sets out measurable, annual goals for lending, investment, and service. See 83 Fed. Reg. at 45,055.
 Id. at 45,056. See also 12 C.F.R. § 25.12(c) (definition of “assessment area”), 12 C.F.R. § 25.41 (assessment area delineation provision).
 83 Fed. Reg. at 45,056. The four statutory rating categories are outstanding, satisfactory, needs to improve, and substantial noncompliance. See 12 U.S.C. § 2906(b)(2).
 See supra notes11 and 12.
 83 Fed. Reg. at 45,057.
 Id. at 45,056.
 Id. at 45,057.
 See supra note 8 (stating assessment areas should be updated to reflect the changing nature of banking arising from changing technology, consumer behavior, and other factors).
 83 Fed. Reg. at 45,056.
 See supra notes 11 and 12.
 See supra notes 11 and 12.
 83 Fed. Reg. at 45,057.
 Id. at 45,058.
 See supra notes 11 and 12.
 See supra notes 11 and 12.
 83 Fed. Reg. at 45,057–58.
 Id. at 45,058.
 John Heltman, CRA Needs to Come Off “Autopilot,” Fed’s Quarles Says, Am. Banker, Apr. 17, 2018 (describing Vice Chairman Quarles’s testimony before the House Financial Services Committee stating that the CRA must “move off of autopilot” and emphasizing the need to take a fresh look at modernizing the CRA to achieve its core purpose).
 See supra note 7; see also Lael Brainard, Governor, Federal Reserve, Keeping Community at the Heart of the Community Reinvestment Act, Speech at the Association of Neighborhood and Housing Development, Eighth Annual Community Development Conference Build.Community.Power, New York, NY (May 18, 2018).
 See supra notes 7, 4; see also Jon Hill, FDIC Chief Wants to Put the ‘Bank’ Back in Banking, Law360, Oct. 23, 2018.
 See supra note 7.
 See supra notes 7, 42.
 See supra note 7.
 See supra note 4.
 See supra note 10.
 See supra note 7.
 See supra note 43.