What it means
The idea behind the rule is simple: a bank that gathers deposits from a community should also lend and invest in that community. Regulators judge whether a bank has met that expectation fairly, with particular attention to low-income and moderate-income areas.
The assessment is separate from, and in addition to, the safety and soundness of the bank. Regulation BB specifically applies to state-chartered banks that are members of the Federal Reserve System.
Other bank types are covered by parallel rules written by the other federal bank regulators, and the standards are intended to align. That is why people often use the Community Reinvestment Act, or CRA, as shorthand for all of them.
Examiners look at a bank's record in its defined assessment area, which is the geographic area where it has its main office, branches and deposit-taking activity. They weigh the volume and spread of its loans, its community development lending and investments, and the availability of its branches and services.
The details of the tests differ by bank size, and the rules have been revised over time. The outcome is a public performance rating, historically one of four categories ranging from outstanding to substantial noncompliance.
The rating matters in practice because regulators consider it when a bank applies to open a branch, merge or make an acquisition. A weak rating can delay or block those plans.
For a non-finance professional the practical effect shows up in the market around you. Community development loans, affordable housing financing and small business lending programmes often exist partly because banks want strong CRA results.
Businesses and local organisations can sometimes use that interest to attract financing or partnership for projects that serve lower-income communities. A useful way to read the rule is as a bridge between safety and public purpose.
Regulators expect banks to earn profits and keep depositors safe, but they also expect the bank to show up for the people and small firms in its own backyard. Boards therefore tend to review community lending results alongside their financial results.
In practice
Real-world examples.
Example
A mid-sized bank plans to buy a smaller competitor and files an application with its regulators. Because its recent rating was satisfactory, the application proceeds without CRA objections. A rival bank with a weaker record in the same situation faces a longer review.
Example
A housing nonprofit seeks financing to build affordable apartments in a lower-income district. A local bank supplies a below-market construction loan and counts it as community development lending when examiners review its record.
Example
A retailer opening a new store in an underserved area finds that nearby banks are eager to offer small business loans and low-cost checking accounts. Their interest is driven in part by the wish to show regulators that they serve the whole of their local market.
Case study
Seen in the real world.
Riverbend Savings is an illustrative, fictional state member bank with branches in a mid-sized city. During a routine review, examiners noted that most of its mortgage and small business lending went to a few affluent neighbourhoods, while several lower-income areas it also served received very little credit.
Riverbend's management reacted by setting targets for lending across all parts of its assessment area, hiring two community lending officers and partnering with a local housing group on first-time buyer loans. At the next examination its rating improved, which cleared the way for the branch expansion it had been planning. The illustrative lesson is that community lending is both a legal obligation and a factor in the bank's growth plans.
Over the following two years Riverbend tracked its lending by neighbourhood each quarter and reported the figures to its board. The data made it easy to spot gaps early and to show examiners a clear story of improvement.
Watch out
Common mistakes.
- Believing that the rule forces banks to make unsound loans, when it expects lending that is consistent with safe and sound operation.
- Treating the rating as a private matter, when the performance evaluation is published and visible to customers, competitors and community groups.
- Assuming every bank is judged under Regulation BB, when other federal regulators apply parallel rules to the banks they supervise.
Questions
People also ask.
Does the Community Reinvestment Act apply to credit unions?
No, credit unions are not covered because they have their own membership-based structure and are outside the scope of the law.
What is an assessment area?
It is the geographic area, usually around a bank's main office and branches, in which examiners judge how well the bank is meeting local credit needs.
Can a poor rating stop a merger?
It can, because regulators must consider a bank's record when it applies to merge, acquire or open a branch.
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