North Carolina has a long history of redlining that goes back over 80 years. Redlining is often referred to in connection with politics, but it spans more than this, including banking. There are various federal and state laws enacted to reduce redlining.
In terms of banking, one of the major pieces of legislation was the Community Reinvestment Act of 1977, which was enacted to set standards for offering financial services in low- to moderate-income communities and, while not outwardly stated, reduce or eliminate redlining.
The CRA imposed the general goal of "rebuilding and revitalizing [inner-city and other struggling[1]] communities through sound lending and good business judgment [which] should benefit both communities and financial institutions," per the Federal Reserve's consumer compliance manual.[2]
The subtext was also intended to reduce redlining and ultimately address the failure of banks and credit unions to provide access to lending and other financial services to borrowers in low- and moderate-income communities.
The CRA requires federal banking agencies — the Federal Reserve Board, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — to assess each financial institution's record of meeting the credit needs of its entire community, including low- to moderate-income neighborhoods, and to take such record into account in an application for a deposit facility by such institution.
In October 2023, the Fed, FDIC and OCC released a final rule updating certain regulations pertaining to the CRA.
On April 1, 2024, the federal banking agencies released a supplemental final rule clarifying the dates upon which the above changes would take effect. The supplemental final rule extends the applicability date of the facility-based assessment areas and public file provisions from April 1, 2024, to Jan. 1, 2026.
A number of small- to intermediate-sized North Carolina banks have started not only publishing policy statements that focus on the obligations required under the new rule, but also going further to include its spirit as well.[3]
In fact, just before April, North State Bank published a policy[4] that provides that:
The Bank recognizes that this requires it to take a proactive approach to determining and meeting community needs, including those of small businesses and small farms, and the needs of creditworthy low- and moderate-income areas and individuals, particularly in regard to residential real estate credit. It is the policy of the Bank to respond to all creditworthy segments of its market. The Bank believes that doing so is basic to good business practice and to the Bank's long-term viability.
This commitment is intended to fulfill both the legal obligations under the CRA as well as its spirit.
Changes Under the New Rule
The new rule has increased the asset size thresholds for each bank category while also changing the specific performance test each bank category is subject to.
Small banks, i.e. those with assets less than $600 million, may continue under the existing lending test currently used or can choose to opt in to the new retail lending test, and community development is not required.
Intermediate banks, i.e. those with assets between $600 million and $2 billion, are subject to the new retail lending test and may continue under the existing community development test, or can choose to opt in to the new community development financing test. One or the other is required, however.
Large banks, i.e., those with assets greater than $2 billion, are subject to the new retail lending test and the new retail services and products test. They are subject to the new community development financing test and the new community development services test.
New Tests Under the New Rule
- The new retail lending test evaluates the sufficiency of a bank's home mortgage, small farm and small business loans in each of its facility-based geographic assessment areas.
- The new retail services and products test evaluates the availability of a bank's retail banking services, retail banking products, and the responsiveness of those services and products to the credit needs of the bank's community.
- The new community development test evaluates the amount of a bank's qualifying community development loans and investments, i.e., community support services, essential community infrastructure, recovery of designated disaster areas, affordable housing, economic development, etc.
- The new community development services test evaluates a bank's record of meeting the community development service needs of its community.
- Finally, the rule requires banks to maintain a public file that includes specific information related to the bank's branches' services, and performance in helping to meet community credit needs. This change is meant to modernize the CRA and allow individuals greater access to such information through a bank's website or brick-and-mortar location. CRA evaluations are available at the OCC's website.[5]
Takeaways for Banking Entities with Locations in North Carolina
Compliance
Banks and financial institutions in North Carolina should start preparing for the updated CRA rule, gearing up to be in full compliance by Jan. 1, 2026.
Lending Practices
Institutions should review their lending practices, especially in lender's mortgage insurance and underserved areas, to ensure they will meet the updated performance standards for their particular category.
Data Management and Publication
Implement or upgrade systems for data collection and management to meet the revised reporting requirements, keeping in mind that certain data must be made publicly available under the new rule.
Community Engagement
Plans Develop community engagement initiatives and related policies in line with the obligations and spirit of the new rule to enhance credit services to targeted populations and ensure compliance with community development tests. Such initiatives should take into account the specific needs of your geographic area.
Anticipating Enforcement
Be aware that regulators will continue to enforce fair lending responsibilities and that these are reinforced alongside the CRA updates.
Performance Monitoring
Monitor performance under the new CRA rule to ensure adherence, identify areas for improvement and avoid potential downgrades in CRA ratings.
Impact Assessment
Assess the impact of the CRA final rule changes on current programs and investments, particularly those involving affordable housing and economic development activities. Monitor impacts and performance over time to ensure compliance with the new rule and avoid potential downgrades in CRA ratings.
North Carolina banks and lenders involved in housing and community development should also consider how implementation of the new rule might open up new opportunities for investment and services that can benefit underserved areas, while keeping in mind that tangible improvements in equitable access to credit will require ongoing efforts and attention beyond regulatory compliance.
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