Pub. 11 2020 Issue 1

Spring 2020 13 West Virginia Banker their retail lending and deposit gathering, going beyond phys- ical locations. With the “50%-5%” rule, banks that receive 50% or more of their deposits from outside their current assessment areas would be required to make any area that contributes at least 5% of deposits a new assessment area. Banks potentially would receive credit for qualifying activities outside of their as- sessment areas, allowing banks to claim credit for investing in areas which have limited access to physical banking locations (i.e., tribal lands and underdeveloped rural areas). OCC officials have noted, however that few banks would see their assess- ment areas significantly altered. Updates for CRA-eligible activities All banks suffer from a lack of clarity surrounding how different loans qualify for CRA. This change would clarify the type of activities that qualify for credit, with most of them echoing what has been historically encouraged by CRA. Regulators would have to regularly publish an illustrative list of approved CRA activities, both from lending and investments. Addition- ally, regulators would have to create a process whereby banks could have projects approved for credit before underwriting. Some noteworthy examples in the NPR about approved CRA activities include: • Investment in mortgage-backed securities (MBS) that are primarily secured by loans to LMI borrowers; • Investment in an SBA Guaranteed Loan Pool Certificate; • Purchase of a local municipal bond, where the proceeds will be used to construct a new school for students from all income levels, including students from LMI families; and • A bank certificate of deposit in a minority depository institution. The proposal would also address how CRA investment is scored over time. The current framework provides too much credit to some activities regardless of how long they have been on the bank’s balance sheet, or even when they do not result in a new qualifying activity. The changes would ensure that the bank’s balance sheet is reflective of its ongoing commitment to CRA, and not just for the next exam. In doing this, the ex- am-to-exam format would be eliminated, and banks would take on an average month-end approach: investments purchased before the most recent exam would only receive credit based on their monthly average balance during the exam period. Elizabeth K. Madlem Associate General Counsel Elizabeth has come back to Compliance Alliance as Associate General Counsel & Compliance Officer. Elizabeth will be handling C/A document reviews, participating in the Education department, and contributing as a featured author. She is looking forward to assisting members with their compliance and regulatory questions. Contact the Membership Development Team at 888-353-3933 or info@compliancealliance.com Performance Measurements This is a major area of change: banks’ performance evalua- tions currently are based on their size (small, intermediate and large banks). The new proposal would set general performance standards for evaluating all banks with assets of more than $500 million. The required quantitative targets would be more transparent for achieving “outstanding” or “satisfactory” ratings. There would be two fundamental tests: a distribution test and an impact test, both evaluated to the specific targets established before the beginning of a bank’s evaluation period. Distribution would measure the number of qualifying loans to LMI individuals, small farms, small businesses and LMI geographies. Impact would meas- ure the value of the bank’s qualifying activities related to its retail domestic deposits. One significant change that could affect tax incentives is that the bank would be evaluated on both the number of CRA-eligible loans and investments and the total amount of loans and investments to communities. It is important for banks to participate in the 60-day com- ment period before any potential finalization of reform takes place. Reactions remain mixed, with the potential of using the aggregate balance sheet ratio causing most concerns. It is likely implementation would be phased over several years to allow for institutions to prepare. Additionally, as the Federal Reserve did not endorse the proposed draft, it is important for banks to keep in mind that any proposals do require unanimous consent among all three regulators. But a clay model is on the table; we’re just waiting to see if the finished model hits the assembly line.  1 Clozel, Lalita. “Bank Regulator Pitches Low-Income Lending Rule Changes on U.S. Road Trip.” The Wall Street Journal Aug. 19, 2019. https://www.wsj . com/articles/bank-regulator-pitches-low-income-lending-rule-changes-on- u-s-road-trip-11566229418 2 FFIEC Interagency CRA Rating Search: https://www.ffiec.gov/%5C/ craratings/default.aspx All banks suffer from a lack of clarity surrounding how different loans qualify for CRA. This change would clarify the type of activities that qualify for credit, with most of them echoing what has been historically encouraged by CRA. Regulators would have to regularly publish an illustrative list of approved CRA activities, both from lending and investments.