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Agencies extend applicability date of certain provisions of their Community Reinvestment Act final rule
On March 21, the FDIC, Fed, and OCC jointly issued an interim final rule to extend the applicability date of certain provisions of the Community Reinvestment Act (CRA) final rule and requested comments on the extension. As previously covered by InfoBytes, the final rule was intended to modernize how banks comply with the CRA, a law that encouraged banks to help meet the credit needs of low- and moderate-income communities.
Stated “[t]o promote clarity and consistency,” the agencies have postponed the applicability date of the facility-based assessment areas and public file provisions from April 1, 2024, to January 1, 2026. As a result, banks would not be required to modify their assessment areas or public files in response to the final rule until the new 2026 date. This extension would put these elements on the same timeline as other components of the 2023 CRA final rule that also would take effect on January 1, 2026, including the performance tests and geographic area provisions.
The agencies also made technical, non-substantive updates to the CRA final rule and related agency regulations that reference it. One of these technical adjustments specified that banks are not required to update their public CRA Notices until January 1, 2026. Public comments on the postponed implementation date must be received 45 days following the rule's publication in the Federal Register.
Bank regulators respond to bankers’ motion to enjoin CRA final rule
On March 8, the Fed, OCC, and FDIC (the federal banking agencies, or “FBAs”) submitted a brief opposing the plaintiffs’ motion for a preliminary injunction to stop the CRA final rule from going into effect. As previously covered by InfoBytes, a group of trade, banking, and business associations filed a class-action complaint for injunctive relief against the bank regulators’ enforcement of the final rule to implement the CRA before it goes into effect on April 1. The FBAs assert that, in opposing the final rule, the plaintiffs are asking the court to “graft” two exclusions from the CRA’s purpose that are not actually in the statute: first, to exclude geographic areas where a bank conducts retail lending from the scope of the bank’s “entire community”; and second, to exclude a bank’s deposit activities from the assessment on whether a bank is meeting its entire community’s “credit needs.” The banking regulators also argued that the plaintiffs’ motion for preliminary relief should fail because the plaintiffs cannot show irreparable harm, in that they have failed to demonstrate that costs to comply with the CRA final rule, which would not apply until 2026 and 2027, were significant when considered in the context of the bank’s overall finances. Finally, the FBAs argued that the public interest and balance of equities favor allowing the final rule to proceed, as, among other factors, “the rule provides significant regulatory relief and lower compliance costs for smaller institutions by increasing the asset size thresholds that determine which performance tests apply to an institution.”
FFIEC highlights the importance of property valuation practices
On February 12, the Federal Financial Institutions Examination Council (FFIEC) released a statement on examination principles related to ensuring fair and creditable residential property valuation practices among supervised institutions. The FFIEC underscored the necessity for institutions to comply with anti-discrimination laws and regulations, such as the ECOA and the Fair Housing Act, while also adhering to safety and soundness regulations outlined in statutes like the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. According to the statement, effective valuation review programs are essential for identifying and addressing deficiencies, ensuring compliance with appraisal regulations, and promoting fair lending practices. Through examination processes, both in consumer compliance and safety and soundness assessments, the FFIEC aimed to mitigate risks associated with valuation discrimination or bias.
Hsu notes a “trip wire approach” for FSOC review of payments, private equity systemic risk
On February 21, Acting Comptroller of the Currency Michael Hsu delivered remarks at Vanderbilt University, discussing banking and commerce, regulatory effectiveness, and financial stability. Hsu further discussed the “blurring of the line” between banking and private credit/equity, its relevance to different market crashes, and how it can create risk. Hsu mentioned the potential to fill a regulatory gap regarding payments.
Hsu highlighted that the FSOC’s recent analytic framework indicated vulnerable points that can commonly contribute to financial stability risks and discussed how FSOC may address the risks. The framework also established how the council determines whether a given nonbank should be under the Fed’s supervision and prudential standards (covered by InfoBytes here). In his speech, Hsu defines banking as “institutions that take deposits, make loans, and facilitate payments” and commerce as “everything else” including nonbank finance.
He added that the FSOC should use its macro-prudential tools to address risk and develop metrics and thresholds to identify when a payments or private equity firm may need an assessment of systemic risk. This “trip wire approach” would leverage the FSOC’s framework, moving a firm from the identification phase to the assessment phase of the FSOC’s analytic framework, and the assessment would inform if there was a need for FSOC response. Because of the rise in cash managed by nonbanks on behalf of consumers, Hsu said that could serve as a metric for the trip wire for payments-focused fintechs and other nonbank companies. “The standardization, scalars, and level at which an FSOC assessment would be triggered would be informed by public comment,” he added. Finally, Hsu highlighted how the trip wire approach offered a transparent and proactive method for identifying and addressing systemic risks before they escalate.
Agencies issue final rule to modernize Community Reinvestment Act regulations
On October 24, the Fed, FDIC, and OCC issued an interagency announcement regarding the modernization of their rules under the Community Reinvestment Act (CRA), a law enacted in 1977 to encourage banks to help meet the credit needs of their communities, especially low- and moderate-income (LMI) neighborhoods, in a safe and sound manner. The new rule overhauls the existing regulatory scheme that was first implemented in the mid-1990s.
For banks with assets of at least $2 billion (Large Banks), the final rule adds a new category of assessment area to the existing facility based assessment area (FBAA). Large Banks that do more than 20 percent of their CRA-related lending outside their FBAAs will have that lending evaluated in retail lending assessment areas, i.e., MSAs or states where it originated at least 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years. All Large Banks will be subject to two new lending and two new community development tests, with lending and community development activities each counting for half a bank’s overall CRA rating. Banks with assets between $600 million and $2 billion will be subject to a new lending test. Large Banks with assets greater than $10 billion will also have special reporting requirements.
Additionally, the rule (i) implements a standardized scoring system for performance ratings; (ii) revises community development definitions and creates a list of community development activities eligible for CRA consideration, regardless of location; (iii) permits regulators to evaluate “impact and responsiveness factors” of community development activities; (iii) continues to make strategic plans available as an alternative option for evaluation; (iv) revises the definition of limited purpose bank so that it includes both existing limited purpose and wholesale banks and subjects those banks to a new community development financing test; and (v) considers online banking in the bank’s evaluations.
Most of the rule’s requirements will be effective January 1, 2026. The remaining requirements, including the data reporting requirements, will apply on January 1, 2027.
OCC updates cybersecurity exam procedures
On June 26, the OCC issued Bulletin 2023-22 announcing recent updates to the agency’s approach to cybersecurity assessment procedures. The Cybersecurity Supervision Work Program (CSW) provides high-level examination objectives and procedures aligned with the National Institute of Standards and Technology Cybersecurity Framework (NIST-CFS) and is part of the agency’s risk-based bank information technology supervision process. The CSW is intended to provide examiners an effective approach for identifying cybersecurity risks in supervised banks.
According to an overview provided by the OCC, the CSW “provides examiners with a common framework and terminology in discussions with bank management” and is structured according to the following NIST-CSF functions: identify, protect, detect, respond, and recover (as well as related categories and subcategories). The OCC also developed an additional function, Specialty Areas, to address areas of risk that may be part of OCC cybersecurity assessments, where applicable. Examiners will use these procedures to supplement those outlined in the “Community Bank Supervision,” “Large Bank Supervision,” and “Federal Branches and Agencies Supervision” booklets of the Comptroller’s Handbook, the FFIEC’s Information Technology Examination Handbook booklets, and other related supervisory guidance.
The OCC encourages supervised banks to use standardized approaches to assess and improve cybersecurity preparedness. Banks may choose from a variety of standardized tools and available frameworks, and should use the agency’s CSW cross-references table for further guidance. No new regulatory expectations are established with the issuance of the CSW.
OCC’s new enforcement policy targets banks with “persistent weaknesses”
On May 25, the OCC announced revisions to its Policies and Procedures Manual (PPM) for bank enforcement actions. According to OCC Bulletin 2023-16, the recently revised version of PPM 5310-3 replaces and rescinds a version issued in November 2018 (covered by InfoBytes here), and now includes “Appendix C: Actions Against Banks With Persistent Weaknesses” to provide increased transparency and clarity on how the OCC determines whether a bank has persistent weaknesses and how the agency considers what actions may be needed to address these issues. The OCC explained that “persistent weaknesses” may include “composite or management component ratings that are 3 or worse, or three or more weak or insufficient quality of risk management assessments, for more than three years; failure by the bank to adopt, implement, and adhere to all the corrective actions required by a formal enforcement action in a timely manner; or multiple enforcement actions against the bank executed or outstanding during a three-year period.”
Possible actions taken against a bank that exhibits persistent weaknesses may include additional requirements and restrictions, such as requirements that a bank improve “composite or component ratings or quality of risk management assessments,” as well as restrictions on the bank’s growth, business activities, or payments of dividends. A bank may also be required “to take affirmative actions, including making or increasing investments targeted to aspects of its operations or acquiring or holding additional capital or liquidity.”
“Should a bank fail to correct its persistent weaknesses in response to prior enforcement actions or other measures . . . the OCC will consider further action to require the bank to remediate the weaknesses,” the agency said. “Such action could require the bank to simplify or reduce its operations, including that the bank reduce its asset size, divest subsidiaries or business lines, or exit from one or more markets of operation.” PPM 5310-3 also incorporates additional clarifications and updates legal and regulatory citations.
The same day, the OCC issued updates to its “Liquidity” booklet of the Comptroller’s Handbook used by examiners when assessing the quantity of a bank’s liquidity risk and the quality of its liquidity risk management. The booklet replaces an August 2021 version and reflects changes in regulations, makes clarifying edits, and addresses OCC issuances published since the last update.
Agencies release hypothetical scenarios for 2023 bank stress tests
On February 9, the Federal Reserve Board and the OCC released hypothetical economic scenarios for use in the upcoming stress tests for covered institutions. The Fed released supervisory scenarios, which include baseline and severely adverse scenarios. According to the Fed, the stress test evaluates large banks’ resiliency by estimating losses, net revenue, and capital levels under hypothetical recession scenarios that extend two years into the future. The Fed’s stress test also features for the first time “an additional exploratory market shock to the trading books of the largest and most complex banks” to help the agency better assess the potential of multiple scenarios in order to capture a wider array of risks in future stress test exercises. The OCC also released the agency’s scenarios for covered banks and savings associations, which will be used during supervision and will assist in the assessment of a covered institution’s risk profile and capital adequacy.
OCC announces 2023 assessment schedule
On December 1, the OCC released its 2023 assessment schedule. Among other things, the OCC noted that it would reduce the rates in the general assessment fee schedule and maintain assessment rates from 2022 for the independent trust and independent credit card fee schedules. The changes include reductions by 40 percent for all banks on their first $200 million in total balance sheet assets, and a 20 percent reduction for balance-sheet assets above $200 million and up to $20 billion. The OCC also noted that it is not adjusting the assessment rates for inflation. Additionally, the OCC said that it will increase the hourly fee for special examinations from $155 to $161. The OCC also highlighted that assessments are due March 31 and September 30, based on Call Report information as of December 31 and June 30. The OCC further explained that the schedule continues to include a surcharge for national banks, federal savings associations, and federal branches and agencies of foreign banks that require increased supervisory resources.
OCC senior deputy comptroller discusses fair lending
On November 14, Senior Deputy Comptroller for Bank Supervision Policy Grovetta Gardineer delivered remarks on behalf of acting Comptroller Michael J. Hsu before the CRA & Fair Lending Colloquium to discuss the agency’s ongoing efforts to ensure its regulated institutions provide fair and equitable credit services. Among other topics, Gardineer mentioned the agency’s initiatives to identify and address discriminatory lending practices, including addressing fair lending in advanced analytics and reducing barriers to financial inclusion. Noting that the banking industry has evolved “rapidly,” Gardineer stated that the OCC has “remained focused on the solid foundation of our mission,” and identified “three strategic goals: (1) agility and learning; (2) credibility and trust; and (3) leadership in supervision.”
She also said that the OCC is enhancing its risk-based supervisory approach by, among other things, “[r]ecognizing our strategic goal for ‘agility and learning,’” and by “conducting fair lending risk assessments during every supervisory cycle for each bank that engages in retail lending.” Regarding the agency’s efforts to reduce inequality in banking, Gardineer stated that the OCC has taken an active role on the Interagency Task Force on Property Appraisal and Valuation Equity, or PAVE, which is an initiative to evaluate the causes, extent, and consequences of appraisal bias. As previously covered by InfoBytes in March, the thirteen member agencies and offices of the PAVE Task Force came together in an extraordinary interagency effort to issue the Action Plan to Advance Property Appraisal and Valuation Equity, which represents “the most wide-ranging set of reforms ever put forward to advance equity in the home appraisal process.”
Gardineer also disclosed that the OCC is developing other internal measures to enhance credibility and trust, including measures to “improv[e] supervisory methods for identifying potential discrimination in property valuations.” In regard to addressing fair lending in advanced analytics, Gardineer warned that “the growing use of advanced analytics such as artificial intelligence or machine learning offers both the opportunity to help reduce inequality and to address safety, soundness, and fairness risks,” and emphasized that the agency “supports fair, ethical, responsible, and transparent adoption of advanced analytics, including artificial intelligence and machine learning, in the financial sector.”
In terms of the future, she highlighted that “the OCC is focused on strengthening our supervision processes and resources devoted to compliance with fair lending laws, while enhancing our ability to remain agile and successfully execute our mission to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations..”