Community Reinvestment Act, 6574-7222 [2023-25797]

Download as PDF 6574 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations FOR FURTHER INFORMATION CONTACT: DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 25 [Docket ID OCC–2022–0002] RIN 1557–AF15 FEDERAL RESERVE SYSTEM 12 CFR Part 228 [Regulation BB; Docket No. R–1769] RIN 7100–AG29 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 345 RIN 3064–AF81 Community Reinvestment Act Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; and Federal Deposit Insurance Corporation. ACTION: Final rule. AGENCY: The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) are adopting final amendments to their regulations implementing the Community Reinvestment Act of 1977 (CRA) to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. DATES: Effective date: This rule is effective on April 1, 2024, except for amendment nos. 29, 52, and 75, which are effective April 1, 2024, through January 1, 2031, and amendment nos. 7, 11, 18, 20, 25, 35, 39, 43, 45, 49, 58, 62, 66, 68, and 72, which are delayed indefinitely. The agencies will publish a document in the Federal Register announcing an effective date for the delayed amendments. Applicability date: Sections ll.12 through ll.15, ll.17 through ll.30, and ll.42(a); the data collection and maintenance requirements in § ll.42(c) through (f); and appendices A through F of the common rule text as adopted by the OCC, Board, and FDIC are applicable on January 1, 2026. Section ll.42(b) and (g) through (i) and the reporting requirements in § ll.42(c) through (f) of the common rule text as adopted by the OCC, Board, and FDIC are applicable on January 1, 2027. ddrumheller on DSK120RN23PROD with RULES2 SUMMARY: VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 OCC: Heidi M. Thomas, Senior Counsel, or Emily Boyes, Counsel, Chief Counsel’s Office, (202) 649–5490; or Vonda Eanes, Director for CRA and Fair Lending Policy, or Cassandra Remmenga, CRA Modernization Program Manager, Bank Supervision Policy, (202) 649–5470, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. If you are deaf, hard of hearing, or have a speech disability, please dial 7–1–1 to access telecommunications relay services. Board: Taz George, Senior Supervisory Policy Analyst; Dorian Hawkins, Counsel; S. Caroline (Carrie) Johnson, Manager; Matthew Lambert, Senior Supervisory Analyst; Eric Lum, Senior Supervisory Analyst; Cayla Matsumoto, Supervisory Policy Analyst; or Lisa Robinson, Lead Supervisory Policy Analyst; Lorna Neill, Senior Counsel; Amal Patel, Senior Counsel; or Jaydee DiGiovanni, Counsel; Division of Consumer and Community Affairs or David Alexander, Special Counsel; Cody Gaffney, Senior Attorney; or Gavin Smith, Senior Counsel; Legal Division, Board of Governors of the Federal Reserve System at (202) 452–2412 or. For users of TDD–TYY, (202) 263–4869 or dial 711 from any telephone anywhere in the United States. FDIC: Pamela A. Freeman, Senior Examination Specialist, Compliance and CRA Examinations Branch, Division of Depositor and Consumer Protection, (202) 898–3656; Patience R. Singleton, Senior Policy Analyst, Supervisory Policy Branch, Division of Depositor and Consumer Protection, (202) 898– 6859; Sherry Ann Betancourt, Counsel, Legal Division, (202) 898– 6560; Alys V. Brown, Senior Attorney, Legal Division, (202) 898–3565, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. SUPPLEMENTARY INFORMATION: Table of Contents I. Summary of the Final Rule II. Background III. General Comments Received IV. Section-by-Section Analysis Section ll.11 Authority, Purposes, and Scope Section ll.12 Definitions Section ll.13 Consideration of Community Development Loans, Community Development Investments, and Community Development Services Section ll.14 Community Development Illustrative List; Confirmation of Eligibility Section ll.15 Impact and Responsiveness Review of Community Development Loans, Community Development Investments, and Community Development Services PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 Section ll.16 Facility-Based Assessment Areas Section ll.17 Retail Lending Assessment Areas Section ll.18 Outside Retail Lending Areas Section ll.19 Areas for Eligible Community Development Loans, Community Development Investments, and Community Development Services Section ll.21 Evaluation of CRA Performance in General Section ll.22 Retail Lending Test Section ll.23 Retail Services and Products Test Section ll.24 Community Development Financing Test Section ll.25 Community Development Services Test Section ll.26 Limited Purpose Banks Section ll.27 Strategic Plan Section ll.28 Assigned Conclusions and Ratings Section ll.29 Small Bank Performance Evaluation Section ll.30 Intermediate Bank Performance Evaluation Section ll.31 Effect of CRA Performance on Applications Section ll.42 Data Collection, Reporting, and Disclosure Section ll.43 Content and Availability of Public File Section ll.44 Public Notice by Banks Section ll.45 Publication of Planned Examination Schedule Section ll.46 Public Engagement Section ll.51 Applicability Dates and Transition Provisions V. Regulatory Analysis I. Summary of the Final Rule The CRA 1 is a seminal piece of legislation that requires the OCC, the Board, and the FDIC (together referred to as the agencies, and each, individually, the agency) to assess a bank’s 2 record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the bank’s safe and sound operation. Upon completing this examination, the statute requires the agencies to ‘‘prepare a written evaluation of the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods.’’ 3 The statute further provides that each agency must consider a bank’s CRA performance ‘‘in its evaluation of an application for a deposit facility by such institution.’’ 4 The agencies implement 1 12 U.S.C. 2901 et seq. purposes of this SUPPLEMENTARY INFORMATION, the term ‘‘bank’’ includes insured national and State banks, Federal and State savings associations, Federal branches as defined in 12 CFR part 28, insured State branches as defined in 12 CFR 345.11(c), and State member banks as defined in 12 CFR part 208, except as provided in 12 CFR ll.11(c). 3 12 U.S.C. 2906(a). 4 12 U.S.C. 2903(a)(2). 2 For E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the CRA and establish the framework and criteria by which the agencies assess a bank’s performance through their individual CRA regulations, which are supplemented by supervisory guidance.5 Under the CRA regulations, the agencies apply different evaluation standards for banks of different asset sizes and types. The agencies issued a notice of proposed rulemaking published in the Federal Register on June 3, 2022 (NPR, proposal, or the proposed rule),6 seeking comment on updates to their respective CRA regulations to achieve the following objectives: • Strengthen the achievement of the core purpose of the statute; • Adapt to changes in the banking industry, including the expanded role of mobile and online banking; • Provide greater clarity and consistency in the application of the regulations; • Tailor performance standards to account for differences in bank size and business models and local conditions; • Tailor data collection and reporting requirements and use existing data whenever possible; • Promote transparency and public engagement; • Confirm that CRA and fair lending responsibilities are mutually reinforcing; and • Promote a consistent regulatory approach that applies to banks regulated by all three agencies.7 The agencies believe that each objective is met through the promulgation of this final rule. Additional discussion of, and commenter feedback received regarding, the agencies’ objectives can be found in section III.B of this SUPPLEMENTARY INFORMATION. This section provides a summary of the final rule and highlights certain key elements and changes as compared to the proposal. For a more detailed discussion, including the agencies’ considerations of the comments received, see sections III and IV of this SUPPLEMENTARY INFORMATION. 5 See 12 CFR parts 25 (OCC), 228 (Regulation BB) (Board), and 345 (FDIC). For clarity and to streamline references, citations to the agencies’ existing common CRA regulations are provided in the following format: current 12 CFR ll.xx. For example, references to 12 CFR 25.12 (OCC), 228.12 (Board), and 345.12 (FDIC) would be streamlined as follows: ‘‘current 12 CFR ll.12.’’ Likewise, references to the agencies’ proposed and final common CRA regulations are provided in the following formats, respectively: ‘‘proposed § ll.xx’’ and ‘‘final § ll.xx.’’ 6 87 FR 33884 (June 3, 2022). 7 The agencies have revised this objective for the final rule, to recognize that the agencies currently have common regulations. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Bank Asset Size Categories and Limited Purpose Banks The final rule implements a revised regulatory framework for the CRA that, like the current framework, is based on bank asset size and business model. This tailoring of the framework recognizes the capacity and resource differences among banks. Under the final rule, banks are classified as either a large bank, an intermediate bank, a small bank, or a limited purpose bank. Pursuant to the final rule: large banks are those with assets of at least $2 billion as of December 31 in both of the prior two calendar years; intermediate banks are those with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years; and small banks are those with assets of less than $600 million as of December 31 in either of the prior two calendar years. These asset-size thresholds will be adjusted annually for inflation. The final rule revises the definition of limited purpose bank to include both those banks currently considered ‘‘limited purpose banks’’ and those currently considered ‘‘wholesale banks,’’ as those terms are defined under the current regulation and were defined under the proposal. Specifically, the final rule defines a limited purpose bank as a bank that is not in the business of extending certain loans, except on an incidental and accommodation basis, and for which a designation as a limited purpose bank is in effect. The final rule therefore does not reference ‘‘wholesale banks’’ because a separate definition is no longer necessary. The agencies have also clarified that limited purpose banks are not evaluated as small, intermediate, or large banks. Evaluation Framework Overview. The final rule’s performance evaluation framework utilizes performance tests to evaluate a bank’s performance in meeting the credit needs of its entire community. In finalizing this evaluation framework, the agencies seek to meet the objectives described above, including: strengthening the achievement of the core purpose of the statute; tailoring to account for differences in bank size, business model, and local conditions; and adapting to changes in the banking industry, including the rise of mobile and online banking. Depending on a bank’s asset size or limited purpose bank designation, the agencies will evaluate banks under one or a combination of the following seven PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 6575 performance tests: the Retail Lending Test; the Retail Services and Products Test; the Community Development Financing Test; the Community Development Services Test; the Intermediate Bank Community Development Test; the Small Bank Lending Test; and the Community Development Financing Test for Limited Purpose Banks. The agencies have also retained the strategic plan option, with revisions, as an alternative method for evaluation under the CRA. The agencies will evaluate large banks under four performance tests: the Retail Lending Test, the Retail Services and Products Test, the Community Development Financing Test, and the Community Development Services Test. The agencies will evaluate intermediate banks under the Retail Lending Test and either the current community development test, referred to in the final rule as the Intermediate Bank Community Development Test, or, at the bank’s option, the Community Development Financing Test. The agencies will evaluate small banks under either the current small bank test, referred to in the final rule as the Small Bank Lending Test or, at the bank’s option, the Retail Lending Test. Finally, the agencies will evaluate limited purpose banks, under the Community Development Financing Test for Limited Purpose Banks. The final rule also provides that relevant activities of a bank’s operations subsidiaries or operating subsidiaries are included in a bank’s performance evaluation. Relevant activities of other affiliates would be considered at a bank’s option. For each applicable performance test, the agencies will assign conclusions reflecting the bank’s performance in its facility-based assessment areas, and in the case of the Retail Lending Test, certain other geographic areas. In most instances, including for small banks that opt to be evaluated under the Retail Lending Test, the agencies will assign one of five conclusions to the bank: ‘‘Outstanding’’; ‘‘High Satisfactory’’; ‘‘Low Satisfactory’’; ‘‘Needs to Improve’’; or ‘‘Substantial Noncompliance.’’ For small banks evaluated under the Small Bank Lending Test, the agencies will assign one of four conclusions: ‘‘Outstanding’’; ‘‘Satisfactory’’; ‘‘Needs to Improve’’; or ‘‘Substantial Noncompliance.’’ The conclusions assigned in connection with each of the applicable performance tests are combined to develop a bank’s CRA ratings. The agencies may assign a bank one of the four ratings, as indicated in the statute: ‘‘Outstanding’’; ‘‘Satisfactory’’; ‘‘Needs E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6576 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations to Improve’’; or ‘‘Substantial Noncompliance.’’ For banks that are evaluated under more than one performance test, specific weights are applied to each performance test conclusion, with weighting varying by bank asset size. For large banks: the Retail Lending Test is weighted at 40 percent; the Retail Services and Products Test is weighted at 10 percent; the Community Development Financing Test is weighted at 40 percent; and the Community Development Services Test is weighted at 10 percent. Relative to the proposal, this large bank weighting reflects a decrease in the percentages assigned to the Retail Lending Test and the Retail Services and Products Test and a resulting increase in the percentage assigned to the Community Development Financing Test. For intermediate banks, each applicable performance test is weighted at 50 percent. As noted above, banks of all sizes will maintain the option to elect to be evaluated under an approved strategic plan. Among other revisions, the final rule updates the standards for obtaining approval for such plans. The final rule clarifies the proposal to explain the circumstances in which banks must include the performance tests that would apply in the absence of a strategic plan, the modifications and additions that banks may make to those tests, and the justifications that banks must provide for their draft plans. Retail Lending Test. The Retail Lending Test evaluates a bank’s record of helping to meet the credit needs of its entire community through the bank’s origination and purchase of home mortgage loans, multifamily loans, small business loans, and small farm loans, as well as through automobile lending if the bank is a majority automobile lender. Specifically, the Retail Lending Test includes an evaluation of how banks are serving low- and moderateincome individuals, small businesses, small farms, and low- and moderateincome census tracts in the bank’s facility-based assessment areas and, as applicable, retail lending assessment areas and outside retail lending areas. As noted above, under the final rule, intermediate and large banks are required to be evaluated under the Retail Lending Test, and small banks may opt to be evaluated under this performance test. The Retail Lending Test includes two sets of metrics, as well as additional factors that are used to complement the use of metrics. First, the Retail Lending Volume Screen measures the volume of a bank’s retail lending relative to its deposit base in a facility-based VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 assessment area and compares that ratio to a Retail Lending Volume Threshold based on the aggregate ratio for all reporting banks with at least one branch in the same facility-based assessment area. Second, the agencies evaluate the geographic distribution and borrower distribution of a bank’s major product lines in its Retail Lending Test Areas (facility-based assessment areas, retail lending assessment areas, and outside retail lending area) using a series of metrics and benchmarks. For example, for a bank’s closed-end home mortgage lending in a Retail Lending Test Area, the geographic distribution analysis evaluates the bank’s percentage of lending (1) in low-income census tracts and (2) in moderate-income census tracts, while the borrower distribution analysis evaluates the bank’s percentage of lending (3) to low-income borrowers and (4) to moderate-income borrowers. Under the final rule, the agencies evaluate the distribution of a large bank’s major product lines in its facilitybased assessment areas, any retail lending assessment areas the bank is required to delineate, and its outside retail lending area. For intermediate banks, and small banks that opt to be evaluated under the Retail Lending Test, the agencies evaluate the distribution of the bank’s major product lines in its facility-based assessment areas and any outside retail lending area, if applicable. Regardless of the geographic area in which a bank is evaluated, for most major product lines, a bank’s performance relative to the retail lending distribution benchmarks is translated into a recommended conclusion using performance ranges that establish the level of performance needed to achieve a particular conclusion, such as ‘‘High Satisfactory.’’ In addition, in the final rule the agencies consider a list of additional factors that are intended to account for circumstances in which the retail lending distribution metrics and benchmarks may not accurately or fully reflect a bank’s retail lending performance, or in which the benchmarks may not appropriately represent the credit needs and opportunities in an area. In response to commenter feedback, the agencies sought ways to ensure that the final rule’s Retail Lending Test appropriately balances the agencies’ objectives. For example, the agencies adjusted some of the multipliers utilized as part of the Retail Lending Test to make ‘‘Outstanding’’ and ‘‘High Satisfactory’’ Retail Lending Test supporting conclusions more attainable relative to the proposal, while PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 maintaining an appropriate degree of rigor. Moreover, as compared to the proposal, the final rule reduces the number of product lines potentially evaluated under the Retail Lending Test from six to three (closed-end home mortgage loans, small business loans, and small farm loans) for most banks. In addition, the agencies will only evaluate a bank’s automobile loans if automobile loans represent a majority of the bank’s retail lending, or if the bank opts to have its automobile loans evaluated under the Retail Lending Test. Retail Services and Products Test. The Retail Services and Products Test utilizes a tailored approach to evaluate the availability of a bank’s retail banking services and retail banking products and the responsiveness of those services and products to the credit needs of the bank’s entire community, including low- and moderate-income individuals, low- and moderate-income census tracts, small businesses, and small farms. Under the final rule, this performance test maintains the overall approach set out in the NPR, with certain modifications, and incorporates benchmarks to evaluate the availability of a bank’s branch and remote service facilities. In addition, the agencies will evaluate the digital and other delivery systems of some banks. Evaluation of the retail banking services of a large bank with assets greater than $10 billion includes a review of the bank’s branch availability and services, remote service facilities (including automated teller machines (ATMs)), and digital delivery systems and other delivery systems. The agencies will also consider the digital delivery systems and other delivery systems of large banks with assets less than or equal to $10 billion if the bank does not operate any branches or, for banks that operate at least one branch, at the bank’s option. Evaluation of a bank’s retail banking products includes a review of the responsiveness of the bank’s credit products and programs, and availability and usage of responsive deposit products. Both deposit products and credit products and programs are evaluated at the institution level and, in a change from the proposal, are given only positive consideration and may not negatively impact a bank’s Retail Services and Products Test conclusion. This aspect of the performance test is designed to evaluate a bank’s efforts to provide products that are responsive to the needs of low- and moderate-income communities. The agencies will not evaluate the availability and usage of responsive deposit products in connection with large banks with assets E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations less than or equal to $10 billion, unless the bank opts in. Community Development Financing Test. The Community Development Financing Test evaluates how well large banks and intermediate banks that opt into the performance test meet the community development financing needs in each facility-based assessment area, each State or multistate metropolitan statistical area (MSA), as applicable, and for the institution. The test is not assessed in retail lending assessment areas. The Community Development Financing Test includes the following elements: (1) a community development financing metric used to evaluate the dollar volume of a bank’s community development loans and investments relative to the bank’s deposit base; (2) standardized benchmarks to aid in evaluating performance; and (3) an impact and responsiveness review to ensure consideration of community development loans and investments that are particularly impactful or responsive. The final rule also includes a metric for banks with assets greater than $10 billion to measure the bank’s community development investments relative to deposits. This metric is intended to ensure a focus on certain bank community development investments (including Federal LowIncome Housing Tax Credit (LIHTC) and New Market Tax Credit (NMTC) investments). This metric is applied at the institution level and may only contribute positively to a bank’s Community Development Financing Test conclusion. Community Development Services Test. The Community Development Services Test considers the importance of community development services in fostering partnerships among different stakeholders, building capacity, and creating conditions for effective community development, including in rural areas. The agencies will evaluate large banks under this performance test in facility-based assessment areas, in States, multistate MSAs, and nationwide. Under the final rule, the evaluation includes a qualitative review of relevant community development services data, and an impact and responsiveness review to assess services that are particularly responsive to community needs. After considering commenter feedback, the performance test does not require a metric of community development service hours per full-time employee for banks with assets greater than $10 billion. Moreover, the final rule maintains the existing requirement that volunteer services considered VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 under this performance test must be related to the provision of financial services or the expertise of bank staff and must have a community development purpose. The performance test will provide consideration for activities that promote financial literacy for low- or moderate-income individuals, households, and families, even if the activities benefit individuals, households, and families of other income levels as well. Geographic Areas in Which a Bank’s Activities Are Considered Facility-based assessment areas. As under the current CRA regulations, the final rule maintains facility-based assessment areas as the cornerstone of the CRA evaluation framework. The final rule adopts the delineation requirements for facility-based assessment areas mostly as set out in the proposal with clarifying changes. Specifically, banks will continue to delineate facility-based assessment areas in the MSAs or nonmetropolitan areas of States in which the following facilities are located: main offices, branches, and deposit-taking remote service facilities. As under the proposal, large banks are required to delineate facility-based assessment areas composed of whole counties, while intermediate and small banks will continue to be permitted to delineate facility-based assessment areas consisting of partial counties. The final rule continues to provide that facilitybased assessment areas may not reflect illegal discrimination and may not arbitrarily exclude low- or moderateincome census tracts. Retail lending assessment areas. The final rule requires a large bank to delineate a new type of assessment area, referred to as retail lending assessment areas, in an MSA or the nonmetropolitan area of a State in which the large bank has a concentration of closed-end home mortgage or small business lending outside of its facility-based assessment area(s). Large banks are evaluated under the Retail Lending Test, but not the other performance tests, in retail lending assessment areas. Relative to the proposal, the final rule tailors the retail lending assessment area requirement by exempting large banks that conduct more than 80 percent of their retail lending within facility-based assessment areas. Upon consideration of commenter feedback regarding the retail lending assessment area proposal, the final rule increases, relative to the proposal, the loan count thresholds that trigger the retail lending assessment area PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 6577 delineation requirement to at least 150 closed-end home mortgage loans or at least 400 small business loans in each year of the prior two calendar years. The final rule also simplifies the evaluation of a large bank’s retail lending performance by reducing the number of product lines potentially evaluated in a retail lending assessment area from six to two product lines, and only evaluating a product line if the bank exceeds the relevant loan count threshold. Outside retail lending areas. Under the final rule, the agencies will evaluate the retail lending performance of all large banks, certain intermediate banks, and certain small banks that opt to be evaluated under the Retail Lending Test in the outside retail lending area, which consists of the nationwide area outside of the bank’s facility-based assessment areas and applicable retail lending assessment areas, excluding certain nonmetropolitan counties. Evaluation in these areas is designed to facilitate a comprehensive evaluation of a bank’s retail lending to low- and moderateincome individuals and communities under the Retail Lending Test, and to adapt to changes in the banking industry, such as mobile and online banking. For an intermediate bank or a small bank that opts to be evaluated under the Retail Lending Test, the agencies evaluate the bank’s retail lending performance in the outside retail lending area on a mandatory basis if the bank conducts a majority of its retail lending outside of its facilitybased assessment areas. If the intermediate or small bank does not conduct a majority of its retail lending outside of its facility-based assessment areas, the bank may opt to have its retail lending in its outside retail lending area evaluated. Areas for eligible community development activities. Like the proposal, the final rule provides that all banks will receive consideration for any qualified community development loans, investments, or services, regardless of location. In assessing a large bank’s Community Development Financing Test performance, the final rule includes a focus on performance within facility-based assessment areas. Specifically, when developing conclusions for a State, multistate MSA, or for the institution overall, the final rule combines two components through a weighted average calculation: (1) performance within the bank’s facilitybased assessment areas in the State, multistate MSA, or for the institution overall; and (2) performance across the entire State, multistate MSA, and for the institution. The weights of the two E:\FR\FM\01FER2.SGM 01FER2 6578 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations components are based on the percentage of a bank’s retail lending and deposits inside its facility-based assessment areas. For example, for a bank with a relatively low percentage of retail lending and deposits inside its facilitybased assessment areas, the bank’s performance within its facility-based assessment areas receives less weight than its performance across the entire State, multistate MSA, or nationwide area. In this way, the Community Development Financing Test recognizes differences in bank business models. ddrumheller on DSK120RN23PROD with RULES2 Categories of Community Development Updated community development definition. Under the current CRA regulations, in evaluating a bank’s CRA performance, banks may receive community development consideration for community development loans, investments, and services under various tests. The final rule updates the definition of community development to provide banks with additional clarity regarding the loans, investments, and services that the agencies have determined support community development. The agencies believe these activities are responsive to the needs of low- and moderate-income individuals and communities, designated distressed or underserved nonmetropolitan areas, Native Land Areas,8 small businesses, and small farms. Specifically, the agencies have defined the following eleven community development categories in the final rule: • Affordable housing, which has five components: (1) rental housing in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy; (2) multifamily rental housing with affordable rents; (3) one-to-four family rental housing with affordable rents in a nonmetropolitan area; (4) affordable owner-occupied housing for low- or moderate-income individuals; and (5) mortgage-backed securities. • Economic development, which includes loans, investments, and services undertaken in conjunction or in syndication with government programs; loans, investments, and services provided to intermediaries; and other forms of assistance to small businesses and small farms. Unlike the proposal, this category includes direct loans to small businesses and small farms in conjunction or in syndication with government programs that meet a size and purpose test. 8 The final rule defines ‘‘Native Land Areas’’ in final § ll.12. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 • Community supportive services, which includes activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals, and replaces the current rule’s ‘‘community services targeted to low- or moderateincome individuals’’ category. • Six categories of place-based activities, which replace the revitalization and stabilization activities component of the current rule. Each of the final place-based categories adopts a focus on targeted geographic areas and includes common place-based eligibility criteria that must be met. The six placebased categories are: Æ Revitalization or stabilization activities; Æ Essential community facilities; Æ Essential community infrastructure; Æ Recovery activities that promote the recovery of a designated disaster area; Æ Disaster preparedness and weather resiliency activities; and Æ Qualifying activities in Native Land Areas. • Activities with minority depository institutions (MDIs), women’s depository institutions (WDIs), low-income credit unions (LICUs), and community development financial institutions (CDFIs). • Financial literacy, which retains the proposed approach of qualifying activities assisting individuals, families, and households of all income levels, including low- or moderate-income individuals, families, and households. Illustrative list and confirmation process. To promote clarity and consistency, the final rule also provides that the agencies will issue, maintain, and periodically update a publicly available illustrative list of nonexhaustive examples of loans, investments, and services that qualify for community development consideration. In addition, the final rule includes a process through which banks can confirm with the appropriate Federal financial supervisory agency whether a particular loan, investment, or service is eligible for community development consideration.9 9 The CRA defines ‘‘appropriate Federal financial supervisory agency’’ as (1) the Comptroller of the Currency with respect to national banks and Federal savings associations (the deposits of which are insured by the Federal Deposit Insurance Corporation); (2) the Board of Governors of the Federal Reserve System with respect to State chartered banks which are members of the Federal Reserve System, bank holding companies, and savings and loan holding companies; (3) the Federal Deposit Insurance Corporation with respect to State chartered banks and savings banks which are not members of the Federal Reserve System and the deposits of which are insured by the Corporation, and State savings associations (the deposits of which are insured by the Federal Deposit Insurance Corporation). 12 U.S.C. 2902(1). PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 Impact and responsiveness review. To promote clarity and consistency in the final rule, the agencies will evaluate the extent to which a bank’s community development loans, investments, and services are impactful and responsive in meeting community development needs, through the application of a nonexhaustive list of review factors. Such factors were referred to as impact review factors in the agencies’ proposal but are referred to as impact and responsiveness factors in the final rule. Data Collection, Maintenance, and Reporting Consistent with the proposal, the agencies are not imposing any new data collection and reporting requirements for small and intermediate banks. For large banks, the final rule leverages existing data where possible and introduces updated data collection, maintenance, and reporting requirements to fill gaps in the current regulation and facilitate implementation of the final rule. For example, the final rule requires certain large banks to collect, maintain, and report data that would enable the agencies both to implement the metrics and benchmarks included in the Retail Lending Test and Community Development Financing Test, and to evaluate activities under the Retail Services and Products Test. These data requirements are intended to support greater clarity and consistency in the application of the CRA regulations and are tailored by bank size, such as by introducing certain data requirements only for those large banks with assets over $10 billion dollars. The final rule requires the agencies to publish on their respective websites certain information related to the distribution by borrower income level, race, and ethnicity of a large bank’s home mortgage loan originations and applications in each of the bank’s assessment areas. This disclosure would leverage existing data available under the Home Mortgage Disclosure Act (HMDA).10 Transition Although the effective date of the final rule is April 1, 2024, the applicability date for the majority of the provisions is January 1, 2026. Specifically, the following provisions of the final rule will become applicable on January 1, 2026: final §§ ll.12 through ll.15; final §§ ll.17 through ll.30; final § ll.42(a); the data collection and maintenance requirements in final § ll.42(c) through (f); and appendices A through 10 12 E:\FR\FM\01FER2.SGM U.S.C. 2801 et seq. 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 F. Banks will have until January 1, 2027, to comply with the reporting requirements of § ll.42(b) through (f), with data reporting requirements every April 1 beginning in 2027. In final § ll.51, the agencies have also included transition provisions relating to: applicability of the current CRA regulations; HMDA data disclosures; CRA consideration of eligible loans, investments, services, or products; strategic plans; and a particular ratings standard relating to minimum performance requirements applicable to large banks. Until the applicability dates for these provisions, banks will follow the current CRA regulations, included as appendix G to the revised CRA regulations. Transition to Section 1071 Data As discussed in the section-by-section analysis of §§ ll.12, ll.22, and ll.42, the agencies have included amendments to transition to the use of Consumer Financial Protection Bureau’s (CFPB) final rule under section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 11 (Section 1071 Final Rule) 12 small business and small farm lending data (section 1071 data) once the data are available. The section 1071 data would replace CRA small business and small farm lending data required to be collected, maintained, and reported pursuant to final § ll.42(a)(1) and (b)(1). With respect to the agencies’ transition to using section 1071 data, as indicated in the section-by-section analysis of § ll.12, the agencies have removed proposed references to section 1071 data in the final rule’s regulatory text. Instead, each agency is adopting separate agency-specific amendatory text that provides for a transition to section 1071 data. These transition amendments implement the intent of the agencies articulated in the proposal to leverage section 1071 data while accounting for the current uncertainty surrounding the availability of that data. Specifically, when effective, these transition amendments will add appropriate references to the section 1071 rulemaking, remove references to Call Report-based small business and small farm data, and make other corresponding changes to the final rule regulatory text. The agencies are not including an effective date for these section 1071related transition amendments in the final rule. Instead, once the availability 11 Public Law 111–203, 124 Stat. 1376 (2010). FR 35150 (May 31, 2023); see also 12 CFR part 1002. 12 88 VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 of section 1071 data is clarified, the agencies will take steps to provide appropriate notice in the Federal Register of the effective date of the transition amendments. The agencies expect that the effective date will be on January 1 of the relevant year to align with the final rule’s data collection and reporting, benchmark calculations, and performance analysis, which all are based on whole calendar years. Implementation The agencies expect to issue supervisory guidance, including examination procedures, to promote clarity and transparency regarding implementation of the final rule. In addition, the agencies will conduct outreach and training to facilitate implementation of the final rule. For instance, the agencies expect to develop data reporting guides and technical assistance materials to assist banks in understanding supervisory expectations with respect to the final rule’s data reporting requirements. In addition, the agencies expect to develop templates, such as for the submission of digital and other delivery systems data as well as for responsive deposit products data, to increase consistency, and will continue to explore other tools to improve efficiency and reduce burden. The agencies are also planning to develop data tools for banks and the public that will increase familiarity with the operation of the performance tests and allow for monitoring of performance relative to benchmarks based on historical data. Each of the topics highlighted through this Summary of the Final Rule are discussed in greater detail in the section-by-section analysis in section IV of this SUPPLEMENTARY INFORMATION. The agencies are setting forth in this SUPPLEMENTARY INFORMATION the final rule using common regulation text for ease of review. The agencies have also included agency-specific amendatory text 13 where necessary to account for differing agency authority and terminology.14 13 The OCC notes that current 12 CFR part 25 includes subpart E, Prohibition Against Use of Interstate Branches Primarily for Deposit Production. This subpart implements section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, 12 U.S.C. 1835a, which only applies to certain national banks and Federal branches of a foreign bank. As proposed, this final rule redesignates this subpart as subpart F but does not amend it. 14 In addition to the changes described in this SUPPLEMENTARY INFORMATION, the agencies have made conforming and technical changes throughout the final rule. The agencies will evaluate at a later date other rules that cross-reference to the CRA regulations to identify conforming changes that may be appropriate. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 6579 II. Background A. General Statutory Background The CRA was passed by Congress as part of the Housing and Community Development Act of 1977 15 and is designed to encourage regulated banks to help meet the credit needs of the communities in which they are chartered. Specifically, Congress found that (1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business; (2) the convenience and needs of communities include the need for credit services as well as deposit services; and (3) regulated financial institutions have a continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.16 The CRA requires the agencies to ‘‘assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.’’17 Upon completing this assessment, the statute requires the agencies to ‘‘prepare a written evaluation of the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods.’’18 The statute further provides that each agency must consider a bank’s CRA performance ‘‘in its evaluation of an application for a deposit facility by such institution.’’19 Since its enactment, Congress has amended the CRA several times, including through: the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 20 (which required public disclosure of a bank’s CRA written evaluation and rating); the Federal Deposit Insurance Corporation Improvement Act of 1991 21 (which required the inclusion of a bank’s CRA examination data in the determination of its CRA rating); the Resolution Trust Corporation Refinancing, Restructuring, and Improvement Act of 1991 (which permits the agencies to provide favorable consideration where the bank has donated, sold on favorable terms, or 15 Public Law 95–128, 91 Stat. 1111 (Oct. 12, 1977). 16 12 U.S.C. 2901(a). 17 12 U.S.C. 2903(a)(1). 18 12 U.S.C. 2906(a). 19 12 U.S.C. 2903(a)(2). 20 Public Law 101–73, 103 Stat. 183 (Aug. 9, 1989). 21 Public Law 102–242, 105 Stat. 2236 (Dec. 19, 1991). E:\FR\FM\01FER2.SGM 01FER2 6580 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 made available rent-free any branch of the bank ‘‘located in any predominantly minority neighborhood to any minority depository institution or women’s depository institution’’); 22 the Housing and Community Development Act of 1992 23 (which included assessment of the record of nonminority-owned and nonwomen-owned banks in cooperating with minority-owned and womenowned banks and LICUs); the RiegleNeal Interstate-Banking and Branching Efficiency Act of 1994 24 (which (1) required an agency to consider an outof-State national bank’s or State bank’s CRA rating when determining whether to allow interstate branches, and (2) prescribed certain requirements for the contents of the written CRA evaluation for banks with interstate branches); and the Gramm-Leach-Bliley Act of 1999 25 (which, among other things, provided regulatory relief for smaller banks by reducing the frequency of their CRA examinations). Additionally, Congress directed the agencies to publish regulations to carry out the CRA’s purposes.26 In 1978, the agencies promulgated the first CRA regulations, which included evidence of prohibited discriminatory or other illegal credit practices as a performance factor as discussed further in the next section.27 Since then, the agencies have together significantly revised and sought to clarify their CRA regulations twice— in 1995 28 and 2005 29—with the most substantive interagency update occurring in 1995. In addition, the agencies have periodically jointly published the Interagency Questions and Answers Regarding Community Reinvestment (Interagency Questions 22 Public Law 102–233, 105 Stat. 1761 (Dec. 12, 1991). 23 Public Law 102–550, 106 Stat. 3874 (Oct. 28, 1992). 24 Public Law 103–328, 108 Stat. 2338 (Sept. 29, 1994). 25 Public Law 106–102, 113 Stat. 1338 (Nov. 12, 1999). 26 12 U.S.C. 2905. 27 43 FR 47144 (Oct. 12, 1978). Congress also charged, in addition to the agencies, the Office of Thrift Supervision (OTS) and its predecessor agency, the Federal Home Loan Bank Board, with implementing the CRA. The OTS had CRA rulemaking and supervisory authority for all savings associations. Pursuant to Title III of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376, 1522 (2010) (Dodd-Frank Act), the OTS’s CRA rulemaking authority for all savings associations transferred to the OCC and the OTS’s CRA supervisory authority for State savings associations transferred to the FDIC. As a result, the OCC’s CRA regulation applies to both State and Federal savings associations, in addition to national banks, and the FDIC enforces the OCC’s CRA regulations with respect to State savings associations. 28 60 FR 22190 (May 4, 1995). 29 70 FR 44268 (Aug. 2, 2005). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 and Answers) 30 to provide guidance on the CRA regulations. B. CRA, Illegal Discrimination, and Fair Lending The CRA was one of several laws enacted in the 1960s and 1970s to address fairness and financial inclusion in access to housing and credit.31 During this period Congress passed the Fair Housing Act 32 to prohibit discrimination in the sale or rental of housing,33 and the Equal Credit Opportunity Act (ECOA) in 1974 34 (amended in 1976), to prohibit creditors from discriminating against an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, and age, because all or part of the applicant’s income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.35 These fair lending, fair housing, and other similar laws provide the legal basis under Federal law for prohibiting discriminatory lending practices by creditors based on race, ethnicity, and other protected characteristics.36 The agencies have long recognized that CRA and fair lending are mutually reinforcing. For example, starting with the original CRA regulations issued in 1978, the agencies have taken evidence of discrimination or other illegal credit practices into account when evaluating a bank’s CRA performance.37 Other provisions in the original 1978 regulations similarly expressed the agencies’ view that the exclusion of certain segments of a bank’s community is ‘‘contrary to’’ and ‘‘in conflict with’’ the CRA’s purpose of requiring banks to 30 See 81 FR 48506 (July 25, 2016). ‘‘Interagency Questions and Answers’’ refers to the ‘‘Interagency Questions and Answers Regarding Community Reinvestment’’ guidance in its entirety. ‘‘Q&A’’ refers to an individual question and answer within the Interagency Questions and Answers. 31 See, e.g., Board, Gov. Lael Brainard, ‘‘Strengthening the Community Reinvestment Act by Staying True to Its Core Purpose’’ (Jan. 8, 2020), https://www.federalreserve.gov/newsevents/speech/ brainard20200108a.htm (‘‘The CRA was one of several landmark pieces of legislation enacted in the wake of the civil rights movement intended to address inequities in the credit markets.’’). See also 123 Cong. Rec. 17630 (1977) (statement of Sen. Proxmire) (discussing enactment of CRA and addressing banks taking deposits from a community without reinvesting them in that community). 32 42 U.S.C. 3601 et seq. 33 42 U.S.C. 3604 through 3606. 34 15 U.S.C. 1691 et seq. 35 15 U.S.C. 1691(a). 36 See Federal Financial Institutions Examination Council (FFIEC), ‘‘Interagency Fair Lending Examination Procedures’’ (Aug. 2009), https:// www.ffiec.gov/pdf/fairlend.pdf. 37 See 43 FR 47144, 47146 (Oct. 12, 1978); current appendix A, paragraph (a)(1). PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 meet the credit needs of their entire communities.38 Specifically, the agencies provided for ‘‘assessment of an institution’s lending patterns to see if the institution discriminates between geographic areas or excludes qualified borrowers from low- and moderateincome neighborhoods.’’ 39 Factors identified as warranting unfavorable treatment were ‘‘practices intended to discourage applications,’’ evidence of ‘‘violations of the Equal Credit Opportunity Act and the Fair Housing Act,’’ and ‘‘failure to provide usual services—such as not accepting mortgage applications—at certain branches.40 C. Overview of Current CRA Regulations and Guidance for Performance Evaluations CRA Performance Evaluations The current CRA regulations provide different methods to evaluate a bank’s CRA performance depending on the asset size and business strategy of the bank.41 Under the current framework: Æ Small banks—currently, those with assets of less than $376 million as of December 31 of either of the prior two calendar years—are evaluated under a lending test and may receive an ‘‘Outstanding’’ rating based only on their retail lending performance. Qualified investments, services, and delivery systems that enhance credit availability in a bank’s assessment areas may be considered for an ‘‘Outstanding’’ rating, but only if the bank meets or exceeds the lending test criteria in the small bank performance standards. Æ Intermediate small banks— currently, those with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years— are evaluated under the lending test for small banks and a community development test. The intermediate small bank community development test evaluates all community development activities together. Æ Large banks—currently, those with assets of at least $1.503 billion as of December 31 of both of the prior two calendar years—are evaluated under separate lending, investment, and 38 See 43 FR 47144, 47146 (Oct. 12, 1978). 39 Id. 40 Id. 41 See generally current 12 CFR ll.21 through ll.27. The agencies annually adjust the CRA asset-size thresholds based on the annual percentage change in a measure of the Consumer Price Index for Urban Wage Earners and Clerical Workers. The current bank asset-size thresholds set forth in this SUPPLEMENTARY INFORMATION are accurate through December 31, 2023. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations service tests. The lending and service tests consider both retail and community development activities, and the investment test focuses on qualified community development investments. To facilitate the agencies’ CRA analysis, large banks are required to report annually certain data on community development loans, small business loans, and small farm loans (small banks and intermediate small banks are not required to report these data unless they opt into being evaluated under the large bank lending test). Æ Designated wholesale banks (those engaged in only incidental retail lending) and limited purposes banks (those offering a narrow product line to a regional or broader market) are evaluated under a standalone community development test. Æ Banks of any size may elect to be evaluated under a strategic plan that sets out measurable, annual goals for lending, investment, and service activities in order to achieve a ‘‘Satisfactory’’ or an ‘‘Outstanding’’ rating. A strategic plan must be developed with community input and approved by the appropriate Federal financial supervisory agency. The agencies also consider applicable performance context information to develop their analysis and conclusions when conducting CRA examinations. Performance context comprises a broad range of economic, demographic, and bank- and community-specific information that examiners review to calibrate a bank’s CRA evaluation to its communities. ddrumheller on DSK120RN23PROD with RULES2 Assessment Areas The current CRA regulations require a bank to delineate one or more assessment areas in which the bank’s record of meeting its CRA obligations is evaluated.42 The regulations require a bank to delineate assessment areas generally consisting of one or more MSAs or metropolitan divisions, or one or more contiguous political subdivisions 43 in which the bank has its main office, branches, and deposittaking ATMs, as well as the surrounding geographies (i.e., census tracts) 44 in which the bank has originated or purchased a substantial portion of its loans (including home mortgage loans, small business and small farm loans, and any other loans the bank chooses, such as consumer loans on which the bank elects to have its performance assessed). The statute instructs the agencies to assess a bank’s record of meeting the credit needs of its ‘‘entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution, and . . . [to] take such record into account in its evaluation of an application for a deposit facility by such institution.’’ 45 The statute does not prescribe the delineation of assessment areas, but they are an important aspect of the regulation because the agencies use assessment areas to determine what constitutes a bank’s ‘‘community’’ for purposes of the evaluation of a bank’s CRA performance. Qualifying Activities The CRA regulations and the Interagency Questions and Answers provide detailed information, including applicable definitions and descriptions, respectively, regarding activities that are eligible for CRA consideration in the evaluation of a bank’s CRA performance. Banks that are evaluated under a performance test that includes a review of their retail activities are assessed in connection with retail lending activity (e.g., home mortgage loans, small business loans, small farm loans, and consumer loans) 46 and, where applicable, retail banking service activities (e.g., the current distribution of a bank’s branches in geographies of different income levels, and the availability and effectiveness of the bank’s alternative systems for delivering banking services to low- and moderateincome geographies and individuals).47 Banks evaluated under a performance test that includes a review of their community development activities are assessed with respect to community development lending, qualified investments, and community development services, which must have a primary purpose of community development.48 Guidance for Performance Evaluations In addition to information included in their CRA regulations, the agencies also provide information to the public regarding how CRA performance tests are applied, where CRA activities are considered, and what activities are eligible through publicly available CRA 45 12 current 12 CFR ll.41. 43 Political subdivisions include cities, counties, towns, townships, and Indian reservations. See Q&A § ll.41(c)(1)—1. 44 See current 12 CFR ll.12(k). 42 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 U.S.C. 2903(a). current 12 CFR ll.12(j), (l), (v), and (w). 47 See generally current 12 CFR ll.21 through ll.27; see also current 12 CFR ll.24(d). 48 See current 12 CFR ll.12(g) through (i) and (t); see also current 12 CFR ll.21 through ll.27. 46 See PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 6581 performance evaluations,49 the Interagency Questions and Answers, interagency CRA examination procedures,50 and interagency instructions for writing performance evaluations.51 D. Stakeholder Feedback and Recent Agency Rulemaking Efforts The financial services industry has undergone transformative changes since the CRA was enacted, including the removal of national bank interstate branching restrictions and the expanded role of mobile and online banking. Prior to publishing the NPR, and to better understand how these developments impact both consumer access to banking products and services and a bank’s CRA performance, the agencies sought, received, and reviewed feedback from the banking industry, community groups, academics, and other stakeholders on several occasions. Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) From 2013 to 2016, the agencies solicited feedback on the CRA as part of the EGRPRA review process.52 Stakeholders raised issues related to: assessment area definitions; incentives for banks to serve low- and moderateincome, unbanked, underbanked, and rural communities; regulatory burdens associated with recordkeeping and reporting requirements, and asset thresholds for the various CRA examination methods; the need for clarity regarding performance measures and better examiner training to ensure consistency and rigor in examinations; and refinement of CRA ratings methodology.53 OCC CRA Advance Notice of Proposed Rulemaking and OCC and Federal Reserve Outreach Sessions On September 5, 2018, the OCC published an advance notice of proposed rulemaking (ANPR) to solicit ideas for a new CRA regulatory framework.54 More than 1,500 comment letters were submitted in response. The 49 See, e.g., Board ‘‘Search: Evaluations & Ratings (Federal Reserve Supervised Banks),’’ https:// www.federalreserve.gov/apps/CRAPubWeb/CRA/ BankRating; FDIC, ‘‘Community Reinvestment Act (CRA) Performance Ratings,’’ https:// crapes.fdic.gov/; OCC, ‘‘CRA Performance Evaluations,’’ https://occ.gov/publications-andresources/tools/index-cra-search.html. 50 See, e.g., FFIEC, ‘‘Community Reinvestment Act: CRA Examinations,’’ https://www.ffiec.gov/cra/ examinations.htm. 51 Id. 52 See, e.g., 80 FR 7980 (Feb. 13, 2015). 53 See 82 FR 15900 (Mar. 30, 2017). 54 See 83 FR 45053 (Sept. 5, 2018). E:\FR\FM\01FER2.SGM 01FER2 6582 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations OCC held more than 40 meetings and outreach events after its ANPR. To augment that input, the Board and the Federal Reserve Banks held about 30 outreach meetings with representatives of banks, community organizations, and the FDIC and OCC.55 OCC–FDIC CRA Notice of Proposed Rulemaking and OCC CRA Final Rule On December 12, 2019, the FDIC and the OCC issued a joint notice of proposed rulemaking to revise and update their CRA regulations.56 In response, the FDIC and the OCC received over 7,500 comment letters. On May 2020, the OCC issued a CRA final rule (OCC 2020 CRA Final Rule), retaining the most fundamental elements of the joint proposal but also making adjustments to reflect stakeholder input.57 The OCC deferred establishing the metrics-framework for evaluating banks’ CRA performance until it was able to assess additional data,58 with the final rule having an October 1, 2020, effective date and January 1, 2023, and January 1, 2024, compliance dates for certain provisions.59 Board CRA Advance Notice of Proposed Rulemaking On September 21, 2020, the Board issued a CRA ANPR (Board CRA ANPR) requesting public comment on an approach to modernize the CRA regulations by strengthening, clarifying, and tailoring the regulations to reflect the current banking landscape and better meet the core purpose of the CRA.60 The Board CRA ANPR sought feedback on ways to evaluate how banks meet the needs of low- and moderateincome communities and address inequities in credit access. The Board received over 600 comment letters in response. ddrumheller on DSK120RN23PROD with RULES2 Interagency Statement and Other Developments On July 20, 2021, the agencies issued an interagency statement indicating their commitment to work collectively 55 For a summary of the Federal Reserve outreach session feedback, see ‘‘Perspectives from Main Street: Stakeholder Feedback on Modernizing the Community Reinvestment Act’’ (June 2019), https:// www.federalreserve.gov/publications/files/ stakeholder-feedback-on-modernizing-thecommunity-reinvestment-act-201906.pdf. 56 85 FR 1204 (Jan. 9, 2020). 57 85 FR 34734 (June 5, 2020). 58 See OCC, News Release 2020–63, ‘‘OCC Finalizes Rule to strengthen and Modernize Community Reinvestment Act Regulations’’ (May 20, 2020), https://www.occ.gov/news-issuances/ news-releases/2020/nr-occ-2020-63.html; see also 85 FR 34736. 59 85 FR 34784. 60 85 FR 66410 (Oct. 19, 2020). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 to, in a consistent manner, strengthen and modernize their CRA regulations.61 On December 15, 2021, the OCC issued a final rule, effective January 1, 2022, to rescind the OCC 2020 CRA Final Rule and replace it with CRA regulations based on those that the agencies jointly issued in 1995, as amended. The OCC’s final rule also integrated the OCC’s CRA regulation for savings associations into its national bank CRA regulation at 12 CFR part 25.62 E. The Agencies’ Proposal Community development definitions. The NPR included a proposal to revise the community development definitions to clarify eligibility criteria for a broad range of community development activities and incorporate certain guidance currently provided through the Interagency Questions and Answers. The agencies also proposed using a primary purpose standard for determining eligibility of community development activities, with pro rata consideration for certain affordable housing activities. Qualifying activities confirmation and illustrative list of community development activities. The agencies proposed to maintain a publicly available illustrative, non-exhaustive list of community development activities eligible for CRA consideration, which the agencies would periodically update. In addition, the agencies proposed a process, open to banks, for confirming eligibility of community development activities in advance. Impact review of community development activities. To promote clearer and more consistent evaluation procedures, the agencies proposed to include impact and responsiveness factors (referred to in the NPR as impact review factors) in the regulation. The impact review factors would inform the agencies’ evaluation of the impact and responsiveness of a bank’s activities under the proposed community development tests. Assessment areas and areas for eligible community development activity. The agencies offered a series of proposals on delineating facility-based assessment areas for main offices, branches, and deposit-taking remote service facilities (to include ATMs). The NPR sought to maintain facility-based assessment areas as the cornerstone of 61 See ‘‘Interagency Statement on Community Reinvestment Act, Joint Agency Action’’ (July 20, 2021), https://www.occ.gov/news-issuances/newsreleases/2021/nr-ia-2021-77.html (OCC); https:// www.federalreserve.gov/newsevents/pressreleases/ bcreg20210720a.htm (Board); https://www.fdic.gov/ news/press-releases/2021/pr21067.html (FDIC). 62 86 FR 71328 (Dec. 15, 2021). PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 the CRA evaluation framework. Under the proposal, large banks would delineate assessment areas comprised of full counties, metropolitan divisions, or MSAs. Intermediate and small banks could continue to delineate partial county facility-based assessment areas, consistent with current practice. The agencies also proposed that large banks would delineate retail lending assessment areas where the bank has concentrations of home mortgage and/or small business lending outside of its facility-based assessment areas. Under that aspect of the proposal, a large bank would delineate retail lending assessment areas where it had an annual lending volume of at least 100 home mortgage loan originations or at least 250 small business loan originations in an MSA or nonmetropolitan area of a State for two consecutive years. The agencies also proposed to allow banks to receive CRA credit for any qualified community development activity, regardless of location, although performance within facility-based assessment areas would be emphasized. Performance tests, standards, and ratings in general. The agencies proposed an evaluation framework that would include a Retail Lending Test, a Retail Services and Products Test, a Community Development Financing Test, and a Community Development Services Test. Under the proposal, large banks would be evaluated under all four tests. Intermediate banks would be evaluated under the Retail Lending Test and the status quo community development test, unless they opted into the Community Development Financing Test. Small banks would be evaluated under the status quo small bank lending test, unless they opted into the Retail Lending Test. Wholesale and limited purpose banks would be evaluated under a tailored version of the Community Development Financing Test. Under this proposed framework, large banks would be banks that had average quarterly assets, computed annually, of at least $2 billion in both of the prior two calendar years; intermediate banks would be banks that had average quarterly assets, computed annually, of at least $600 million in both of the prior two calendar years and less than $2 billion in either of the prior two calendar years; and small banks would be banks that had average quarterly assets, computed annually, of less than $600 million in either of the prior two calendar years.63 The agencies also 63 Of particular relevance to the agencies’ CRA regulations, the SBA revised the size standards applicable to small commercial banks and savings E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations proposed adding a new definition of ‘‘operations subsidiary’’ to the Board’s CRA regulation and ‘‘operating subsidiary’’ to the FDIC’s and OCC’s CRA regulations to identify those bank affiliates whose activities would be required to be attributed to a bank’s CRA performance (together, bank subsidiaries). The agencies proposed to maintain the current flexibilities that would allow a bank to choose to include or exclude the activities of other bank affiliates that are not considered bank subsidiaries. The NPR also discussed performance context, and the requirement for activity in accordance with safe and sound operations. Retail Lending Test product categories and major product lines. The agencies proposed categories and standards for determining when a bank’s retail lending product lines are evaluated under the proposed Retail Lending Test. The agencies proposed the following retail lending product line categories: closed-end home mortgage, open-end home mortgage, multifamily, small business, and small farm lending. The agencies also proposed including automobile lending as an eligible retail lending product line. In addition, the agencies proposed a 15 percent major product line standard to determine when a retail lending product line would be evaluated. Retail Services and Products Test. The agencies proposed to evaluate large banks under the Retail Services and Products Test, which would use a predominantly qualitative approach, incorporating quantitative measures as guidelines, as applicable. The agencies proposed that the evaluation of digital and other delivery systems would be required for large banks with assets of over $10 billion, and not required for large banks with assets of $10 billion or less. Furthermore, the credit products and deposit products part of the proposed Retail Services and Products Test aimed to evaluate a bank’s efforts to offer products that are responsive to the needs of low- and moderate-income communities. The agencies proposed that the evaluation of deposit products responsive to the needs of low- or moderate-income individuals would be required for large banks with assets of over $10 billion, and not required for large banks with assets of $10 billion or less. institutions, respectively, from $600 million to $750 million, based upon the average assets reported on such a financial institution’s four quarterly financial statements for the preceding year. The final rule had a May 2, 2022, effective date. See 87 FR 18627, 18830 (Mar. 31, 2022). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Community Development Financing Test. The agencies proposed to evaluate large banks as well as intermediate banks that opt into the test under the proposed Community Development Financing Test. As proposed, the Community Development Financing Test would consist of a Community Development Financing Metric, benchmarks, and an impact review. These components would be assessed at the facility-based assessment area, State, multistate MSA, and institution levels, and would inform conclusions at each of those levels. Community Development Services Test. The agencies proposed to assess a large bank’s community development services, underscoring the importance of these activities for fostering partnerships among different stakeholders, building capacity, and creating the conditions for effective community development. The agencies proposed that in nonmetropolitan areas, banks may receive community development services consideration for volunteer activities that meet an identified community development need, even if unrelated to the provision of financial services. The proposed test would consist of a primarily qualitative assessment of the bank’s community development service activities. For large banks with assets of over $10 billion, the agencies proposed also using a metric to measure the hours of community development services activity per full time employee of a bank. Wholesale and limited purpose banks. The agencies proposed a Community Development Financing Test for Wholesale and Limited Purpose Banks, which would include a qualitative review of a bank’s community development lending and investments in each facility-based assessment area and an institution level-metric measuring a bank’s volume of activities relative to its capacity. The agencies also proposed giving wholesale and limited purpose banks the option to have examiners consider community development service activities that would qualify under the Community Development Services Test. Strategic plans. The agencies proposed to maintain a strategic plan option as an alternative method for evaluation. Banks that elect to be evaluated under a strategic plan would continue to request approval for the plan from their appropriate Federal financial supervisory agency. The agencies proposed more specific criteria to ensure that all banks meet their CRA obligation to serve low- and moderateincome individuals and communities. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 6583 As proposed, banks approved to be evaluated under a strategic plan option would have the same assessment area requirements as other banks and would submit plans that include the same performance tests and standards that would otherwise apply unless the bank is substantially engaged in activities outside the scope of these performance tests. In seeking approval for a plan that does not adhere to requirements and standards that are applied to other banks, the plan would be required to include an explanation of why different standards would be more appropriate in meeting the credit needs of the bank’s communities. Assigned conclusions and ratings. The agencies proposed to provide greater transparency and consistency on assigning ratings for a bank’s overall performance. The proposed approach would produce performance scores for each applicable test, at the State, multistate MSA, and institution levels based on a weighted average of assessment area conclusions, as well as consideration of additional test-specific factors at the State, multistate MSA, or institution level. These performance scores would be mapped to conclusion categories to assign test-specific conclusions at each level. The agencies further proposed to combine these performance scores across tests to assign ratings at each level. The agencies proposed to determine a bank’s overall rating by taking a weighted average of the applicable performance test scores. For large banks, the agencies proposed the following weights: 45 percent for Retail Lending Test performance score; 15 percent for Retail Services and Products Test performance score; 30 percent for Community Development Financing Test performance score; and 10 percent for Community Development Services Test performance score. For intermediate banks, the agencies proposed to weight the Retail Lending test at 50 percent and the community development test, or if the bank opted into the Community Development Financing Test, at 50 percent. The agencies also proposed updating the criteria to determine how discriminatory and other illegal practices would adversely affect a rating, as well as what rating level (State, multistate MSA, and institution) would be affected. Performance standards for small and intermediate banks. The agencies proposed to continue evaluating small banks under the small bank performance standards in the current CRA framework. However, under the proposal, small banks could opt into the E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6584 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Retail Lending Test and could continue to request additional consideration for other qualifying CRA activities. The agencies would evaluate intermediate banks under the proposed Retail Lending Test, and would evaluate an intermediate bank’s community development activity pursuant to the criteria under the current intermediate small bank community development test. Intermediate banks could also opt to be evaluated under the proposed Community Development Financing Test. Effect of CRA performance on applications. The agencies proposed no substantive changes to the regulatory provisions concerning the effect of CRA performance on bank applications, such as those for mergers, acquisitions, or consolidation of assets, deposit insurance requests, and the establishment of domestic branches. Data collection, reporting, and disclosure. The agencies proposed to revise data collection and reporting requirements to increase the clarity, consistency, and transparency of the evaluation process through the use of standard metrics and benchmarks. The proposal recognized the importance of using existing data sources where possible, and tailoring data requirements, where appropriate. In addition to leveraging existing data, however, the proposal would have required large banks to collect, maintain, and report additional data. The data requirements under the proposal for intermediate banks and small banks would remain the same as the current requirements. All large banks under the proposal would have new requirements for certain categories of data, (including community development financing data, branch location data, and remote service facility location data); however, some new data requirements would only apply to large banks with assets of over $10 billion. The agencies also proposed updated standards for all large banks to report the delineation of their assessment areas. Content and availability of public file, public notice by banks, publication of planned examination schedule, and public engagement. The agencies proposed to provide more transparent information to the public on CRA examinations and encourage communication between members of the public and banks. The agencies proposed to make a bank’s CRA public file more accessible to the public by allowing any bank with a public website to include its CRA public file on its website. The agencies also proposed publishing a list of banks scheduled for VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 CRA examinations for the next two quarters at least 60 days in advance in order to provide additional notice to the public. Finally, the agencies proposed to establish a way for the public to provide feedback on community needs and opportunities in specific geographies. Transition. The agencies proposed a phased-in timeline that would facilitate the transition from the current regulatory and supervisory framework to the updated CRA regulatory and supervisory framework. III. General Comments Received The agencies received approximately 950 unique comment letters regarding the proposal from a wide range of commenters, including: financial institutions; non-financial institution and financial institution trade associations; CDFIs; financial and nonfinancial businesses; community development organizations; consumer advocacy groups; civil rights groups; other nonprofit organizations; Federal, State, local, and tribal government commenters; tribal organizations; academics; individuals; and other interested parties. The agencies have carefully considered all the commenter feedback in developing the final rule. Comments received by the agencies cover a wide-ranging set of topics across the entire proposal. General public comments on the NPR are summarized below. Comments relating to specific regulatory provisions of the agencies’ proposal and the final rule are discussed in detail in the section-by-section analyses of the specific provisions on which commenters shared their views. A. General Comments Regarding the NPR Modernizing the CRA performance evaluation framework. Many commenters expressed appreciation for the agencies’ unified efforts to modernize the CRA framework. Some commenters noted support for the objective of providing transparency and consistency for banks covered by CRA and the communities they serve. In addition, several commenters, expressed support for various aspects of the NPR, including the proposal’s metrics-driven approach and attention to climate resiliency. Some commenters stated that while the agencies’ proposal is a step in the right direction, more could be done to improve the CRA regulations, such as requiring the agencies to consult with a diverse set of community representatives when evaluating an institution’s CRA performance. A few commenters also suggested that the final rule should encourage both meaningful PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 action to help low- and moderateincome communities and collaboration between banks and financial technology (fintech) companies. Another commenter recommended that the agencies view the military community as a community deserving of CRA support. The commenter further stated that bank activities that serve the military community should generally receive CRA credit. Other commenters opposed or expressed concerns about the proposal for various reasons, asserting that aspects of the NPR could result in, for example: decreased bank competition; undue burden and costs; less credit availability; gentrification of urban Black neighborhoods; and fewer services in low- and moderate-income communities. Complexity of the proposed rule. Numerous commenters expressed concern that the agencies’ proposal was too complex and difficult to understand—primarily related to the proposed performance test measures and ratings methodology requiring significant resources and costs to implement—and recommended that the agencies develop a simpler final rule to avoid unintended negative consequences. Some commenters recommended the agencies develop tools, guidance, and training for examiners and allow banks to consult with the agencies as needed. Coordination of the CRA regulations with State and Federal agencies. A few commenters expressed concerns regarding the lack of coordination between the agencies, the CFPB, and the States and suggested the agencies work together with these other entities to improve consistency and further the mission of CRA. Other commenters noted that given shifts in the banking industry, the agencies should extend CRA regulations to nonbank lenders and, some commenters recommended, work with the CFPB to do so. Length of the comment period and other rulemakings. Several commenters objected to the length of the comment period stating that it was too short and did not provide sufficient time for analysis and comment, with some commenters recommending that the agencies withdraw the proposal, issue a revised set of proposed rules, or open a new comment period. A few commenters suggested that the agencies should delay issuance of a final rule given uncertainty in the industry and the status of other rulemakings such as the CFPB’s Section 1071 Final Rule and the agencies’ separate rulemaking on capital requirements for certain banks. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Application of the proposed regulations to different business models. Some commenters expressed concern that the agencies’ proposal did not address the needs of different business models and could create a one-size-fitsall approach that favors particular business models, which would not reflect the ever-changing banking landscape. These commenters indicated that the final rule should do more to recognize the inherently diffuse nature of digital banking and that more flexibility is necessary to account for different business models. Promoting activities in local communities, including rural and underserved areas. Some commenters asserted that the NPR would be more effective in boosting reinvestment activity in underserved areas if the evaluations and ratings were more rigorous. Other commenters expressed concerns regarding the proposed use of metrics and certain data, suggesting that they could lead to disinvestment in hard to serve areas and overinvestment in urban areas due to the use of census data. The agencies also received comments outlining different methods of promoting activities and investments at the local level, including specific recommendations: on how to promote investments in underserved rural and native communities; that the agencies should incentivize affordable small dollar loans and other products; and that the agencies should seek to end ‘‘rent-a-bank’’ partnerships. A few other commenters suggested that the final rule should address the issue of appraisal bias to ensure lenders are fulfilling the needs of the communities they serve, and recommended that bank lenders should complete additional due diligence on the appraisers they work with. The agencies also received several comments regarding the importance of performance context, suggesting that performance context and examiner discretion is necessary to understand the metrics embedded in the CRA exam. Legal issues. Some commenters provided general comments raising legal concerns with the proposal. For example, some commenters stated that if the proposal is finalized as proposed, the final rule could be challenged as arbitrary and capricious because it was not supported by a reasoned analysis. Several commenters expressed the view that the agencies lack the authority to adopt the proposal. Finally, a commenter questioned the FDIC Board’s authority to issue the NPR and to adopt a final rule based on certain aspects of the FDIC’s organic statute and the FDIC VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Board’s composition at the time the NPR was issued. Other comments. The agencies also received suggestions about how the agencies could evaluate the impact of the final rule, including five-year lookback reviews and an impact study. Commenter feedback also included noting that performance evaluations should be published as soon as reasonably possible. Some commenters urged the agencies to expand the coverage of CRA to credit unions to ensure low- and moderate-income communities are adequately served. 6585 and Servicemembers Civil Relief Act may constitute discriminatory or other illegal credit practices that may adversely affect a bank’s CRA performance. More generally, the agencies believe that many bank activities that serve the military community may receive community development consideration under the final rule. For further discussion of these provisions, see the section-bysection analyses of §§ ll.12, ll.16(d), ll.21(a)(5), and ll.28(d). The agencies appreciate comments encouraging the agencies to coordinate with States, the CFPB, and other Federal Final Rule regulators to improve consistency and The agencies have carefully efficiency of CRA examinations, and the considered the general commenter agencies note that they currently, and feedback regarding ways in which the will continue to, coordinate with other NPR could be improved and believe the regulators when appropriate on CRA final rule strikes the proper balance examinations. Further, the agencies are between the stated objectives, including not able to extend the CRA regulations to update the CRA regulations to to cover nonbank lenders and credit strengthen the achievement of the core unions. Such an expansion is outside purpose of the statute and adapt to the scope of this rulemaking and the changes in the banking industry. For agencies’ current authority. additional discussion regarding the In response to comments regarding agencies’ objectives, see section III.B of the length of the comment period, the this SUPPLEMENTARY INFORMATION. The agencies note that the NPR’s comment agencies also carefully considered period was 90 days, which is consistent commenters’ concerns regarding the with the requirements of the complexity of the proposed rule and Administrative Procedure Act and have made modifications to various provided sufficient time for public aspects of the final rule to reduce consideration and comment, as complexity as explained in more detail demonstrated by the number of detailed in section IV of this SUPPLEMENTARY and thoughtful comments the agencies INFORMATION. In addition, with respect to received on the proposal. the Retail Lending Test, the agencies One of the objectives of the CRA believe that the final rule ensures that proposal was to tailor performance CRA evaluations of retail lending are standards to account for differences in appropriately robust and bank size, business models, and local comprehensive, provides greater conditions. The agencies have carefully consistency and transparency, and considered commenter feedback, and reduces overall complexity relative to while the agencies believe the proposal the approach set out in the NPR. The provided flexibility to accommodate institutions with different business agencies note that any evaluation models, the agencies have made various approach leveraging metrics and changes in response to commenter benchmarks that captures the different feedback to provide additional ways that banks may serve the credit flexibility in the final rule as outlined in needs of an area will necessarily entail the section-by-section analyses in a degree of complexity. The agencies appreciate commenter section IV of this SUPPLEMENTARY feedback that the military community INFORMATION. The agencies also note the should be considered a community final rule retains the strategic plan deserving of CRA support. The agencies option for banks to adjust the believe that the final rule encourages performance tests or weighting based on banks to meet the credit needs of their business model. After carefully considering military communities. For example, the commenter suggestions on how to final rule codifies ‘‘military bank’’ as a encourage reinvestment activity through defined term in final § ll.12, and rigorous evaluations and standards, the clarifies the assessment area and evaluation approach to military banks in agencies are declining to adopt these specific commenter recommendations. final §§ ll.16(d) and ll.21(a)(5), respectively.64 In addition, the agencies The agencies believe the final rule’s evaluation framework is appropriately are specifying in final § ll.28(d) that rigorous and encourages reinvestment violations of the Military Lending Act activity, while maintaining flexibility 64 See also 12 U.S.C. 2902(4). and allowing room for consideration of PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6586 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations performance context. The agencies have considered the views from some commenters raising concerns on the potential negative impacts of the use of metrics and data in the proposal. As discussed further in section IV of this SUPPLEMENTARY INFORMATION, the agencies believe the use of metrics and data in the final rule is appropriately tailored to encourage, rather than deter, reinvestment in hard to serve areas. While the agencies appreciate commenters’ suggestions on additional methods to encourage activities and investments at the local level, the agencies are declining to adopt these recommendations and believe the final rule adequately evaluates activities and investments in underserved and native communities. The agencies appreciate the comments highlighting the importance of performance context in CRA examinations, and the agencies are retaining the use of performance context in the final rule, as explained in the section-by-section analysis of § ll.21(d). The agencies appreciate commenters’ suggestions to address appraisal bias, and the agencies note that if such bias were found to evidence discrimination by an institution evaluated under CRA, the agencies may consider this as the basis for a downgrade as discussed in the section-by-section analysis of § ll.28. The agencies believe that the NPR adequately explained the agencies’ rationale for the proposed changes. The NPR contains detailed analysis of the current CRA regulations, the need for modernization, and an in-depth review of the proposed rule and alternatives the agencies considered, which are all supported by extensive data. The agencies acknowledge that commenters provided general comments raising legal concerns with the proposal. The agencies note that the CRA authorizes the agencies to adopt regulations to carry out the purposes of the statute,65 and requires the agencies to assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the bank.66 The final rule furthers the purposes of the CRA and is consistent with the agencies’ rulemaking authority. The agencies also considered the points raised by the commenter questioning the FDIC Board’s authority but find no such impediment to adoption of the final rule. Legal issues concerning particular B. General Comments Regarding the Agencies’ CRA Modernization Objectives As noted in section I of this SUPPLEMENTARY INFORMATION, the agencies’ updates to their CRA regulations in this final rule are guided by eight objectives. These objectives were set out in the NPR, and some general comments received on the objectives are summarized below. Throughout this SUPPLEMENTARY INFORMATION, the agencies provide additional information and discussion regarding the ways in which this final rule accomplishes the objectives, including in the section-by-section analysis in section IV. The Agencies’ Proposal, Comments Received, and the Final Rule Strengthen the achievement of the core purpose of the statute. As provided for in the statute, the CRA states that ‘‘[i]t is the purpose of this chapter to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.’’ 67 The CRA requires the agencies to ‘‘assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.’’68 Commenter feedback on this objective included: support for updating the CRA regulations to achieve this purpose; that CRA modernization should result in a net increase in the quantity and quality of financial products and services available in low- and moderate-income areas; and, that the burden is on the agencies to demonstrate that modernization efforts would meet these baseline goals for reform. Additional commenter feedback included: that the sole criterion for extending CRA consideration to a business activity should be its direct, significant, and exclusive benefit to low- and moderateincome individuals; that by ignoring race during CRA exams, the agencies’ proposal falls far short of this objective; and that to achieve the goal of serving communities with the greatest needs, the agencies must maintain a balance between the qualitative and quantitative aspects of the tests and, specifically, to align the twin tracks of CRA compliance and CDFI certification. The agencies believe that the final rule updates the CRA regulations to strengthen the achievement of the core purpose of the statute. The agencies believe the final rule accomplishes this in various ways, for example, by: establishing a tailored and rigorous approach for the performance tests used to assess a bank’s record of meeting the credit needs of its entire community; evaluating the responsiveness of certain bank’s credit products and deposit products, including an impact and responsiveness review for community development activities; and including community development definitions that reflect an emphasis on activities that are responsive to community needs, especially the needs of low- and moderate-income individuals and communities. With respect to a commenter’s assertion that the agencies should not ignore race during CRA examinations, the agencies note that the final rule retains the conditions that facility-based assessment areas are prohibited from reflecting illegal discrimination and must not arbitrarily exclude low- or moderate-income census tracts. Additionally, banks’ performance under the CRA can be adversely affected by evidence of discriminatory or other illegal credit practices, including violations of ECOA and the Fair Housing Act. The agencies also believe the final rule appropriately balances the qualitative and quantitative aspects of the performance tests by 65 See 66 12 12 U.S.C. 2905. U.S.C. 2903(a)(1). aspects of the proposal are discussed in the section-by-section analysis in section IV of this SUPPLEMENTARY INFORMATION. In response to comments regarding lookback reviews, the agencies often do reviews of their examinations after implementation of revised or new rules. While the agencies will keep these recommendations in mind, the agencies are not committing to adopt such recommendations in a specific timeframe or through a specified method. Regarding the development of tools, including for small banks, as noted in section I of this SUPPLEMENTARY INFORMATION, the agencies expect to develop various materials for banks including data reporting guides, data reporting templates, and technical assistance to assist banks in understanding supervisory expectations with respect to the final rule’s performance evaluation standards and data reporting requirements. The agencies will continue to explore other tools to provide transparent information to the public, improve efficiency, and reduce burden. VerDate Sep<11>2014 18:11 Jan 31, 2024 67 12 Jkt 262001 PO 00000 U.S.C. 2901(b). Frm 00014 Fmt 4701 68 12 Sfmt 4700 E:\FR\FM\01FER2.SGM U.S.C. 2903(a)(1). 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations incorporating standardized metrics and benchmarks in several of the performance tests, and retaining the ability for the agencies to consider performance context. Adapt to changes in the banking industry, including the expanded role of mobile and online banking. Many commenters expressed general support for this objective with several of these commenters noting that now is the time to update the CRA regulations, given advances in banking technology. A few of these commenters also stated that the CRA has not kept up with the way consumers expect to use technology to access financial products and services and that the current CRA regulations and guidance do not recognize the wide diversity in business practices of banks or the changes in the financial services industry that have occurred since the CRA was enacted in 1977. While some commenters believed the agencies met this objective, particularly in response to the expanded role of mobile and online banking, other commenters did not believe the proposal sufficiently met the objective, noting: efforts to modernize the CRA regulations should account for current and future ranges of banking and financial service business models; the NPR emphasizes physical bank branches, which the commenter asserted will require the agencies to update the CRA rule once digital banking becomes more common; the proposal may adversely impact how banks are able to respond to innovations in the marketplace, explaining that banks should have the ability to comply with the letter and spirit of the CRA within their chosen business models; the agencies should request additional authority from Congress to maintain the integrity and vibrancy of the CRA; and, CRA modernization must recognize and address the critical importance of digital equity for creating opportunities and upward mobility for low- and moderateincome, minority, and rural communities. Also, a commenter stated that adapting to advances in banking technology should be the one and only objective of CRA reform, and that the other seven objectives can be accomplished within the current regulatory framework and through more effective examinations. The agencies believe that the final rule takes into account changes in the banking industry. For example, evaluating retail lending outside of facility-based assessment areas accounts for current and future ranges of banking business models. The agencies also believe that the final rule strikes the appropriate balance by maintaining the VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 importance of physical branches, while including consideration of digital and other delivery systems for large banks in recognition of the trend toward greater use of online and mobile banking. The section-by-section analysis provides additional discussion regarding the agencies’ decision to maintain the importance of physical branches in this final rule. See section IV of this SUPPLEMENTARY INFORMATION. Provide greater clarity and consistency in the application of the CRA regulations. Some commenters expressed general support for this objective, with a commenter stating, for example, that the CRA regulations and supervision have become overly complex and unpredictable. Another commenter asserted that the proposal promotes this objective by establishing a framework that would lead to many positive changes but asserted that certain revisions to the proposal are required to effectively meet the objective. The agencies believe that the final rule meets this objective in several ways, including, for example, by clarifying eligibility requirements for community development activities, providing that the agencies will maintain a publicly available illustrative list of non-exhaustive examples of qualifying activities, and updating certain performance tests to incorporate standardized metrics, benchmarks, and thresholds and performance ranges, as applicable. Better tailor performance standards to account for differences in bank size, business models, and local conditions, and better tailor data collection and reporting requirements and use existing data whenever possible. Commenter sentiments on this objective included support for tailoring the performance standards and data requirements of the final rule, as well as concerns that the agencies’ proposal failed to meet these objectives. The agencies believe the final rule tailors the performance standards based on bank size, business models, and local conditions in multiple ways. For example, small banks may continue to be evaluated under the Small Bank Lending Test, unless they opt into the Retail Lending Test; and intermediate and large banks, which have more resources than small banks, will be evaluated under the Retail Lending Test. The final rule also tailors data collection and reporting requirements because, as further explained in the section-by-section analysis of § ll.42, the new data collection and maintenance requirements in the final rule do not apply to small and intermediate banks, PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 6587 and certain new requirements apply only to large banks with more than $10 billion in assets. Promote transparency and public engagement. Commenter feedback on this objective included statements that the CRA regulations must enhance community participation so that CRA activity is tied to community needs, and concerns that the proposal may not expand community participation. The agencies believe the final rule advances this objective. For example, as explained in more detail in the sectionby-section analysis of § ll.46, the final rule specifically provides a process whereby the public can provide input on community credit needs and opportunities in connection with a bank’s next scheduled CRA examination. Further, the strategic plan provision provides an opportunity for the public to provide input on a bank’s strategic plan. See the section-by-section analysis of § ll.27. Confirm that the CRA and fair lending responsibilities of banks are mutually reinforcing. The agencies received an array of comments on this objective. Some commenters, for example, asserted that robustly enforcing current and future CRA requirements relating to race and ethnicity, in addition to other relevant Federal, State, and local laws and regulations, is essential to addressing racial and ethnic inequality. Many commenters asserted that greater coordination between CRA examinations and fair lending examinations is needed, including, for example, through development of a CRA examination racial discrimination assessment that would identify disparate trends, such as in marketing, originations, pricing and terms, default rates, and collections. In turn, these commenters indicated that any adverse findings from this assessment should trigger and support fair lending examinations. A few commenters indicated that such CRA discrimination assessments should include an affordability analysis and an analysis of the quality of lending for all major product lines that includes, for example, a review of delinquency and default rates. Other commenters asserted that, in CRA examinations, the agencies should assess whether banks employ discriminatory algorithm-driven models or other assessment criteria that disproportionately screen out low- and moderate-income and minority consumers. Additional commenters indicated that, likewise, when a fair lending examination is pending, appropriate CRA follow-up activity and corrective action must ensue once it has concluded. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6588 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Several commenters suggested incorporating additional information related to discrimination into banks’ CRA examinations. In this regard, a few commenters noted that public information about fair lending examinations included in CRA performance evaluations has typically been cursory. Several commenters specified that the agencies should use race-based HMDA data and, once available, race-based section 1071 data as a screen in CRA examinations for fair lending reviews. Some commenters suggested that the agencies should consider evidence of discrimination obtained by State and local agencies. On fair lending examinations specifically, commenter feedback included: that the agencies should bolster fair lending reviews accompanying CRA exams for banks that perform poorly in the HMDA data analysis of lending by race; that fair lending examinations should solicit and rely on feedback from all relevant Federal and State agencies, as well as community group stakeholders; that both section 1071 data and HMDA data by race should be utilized in bank fair lending examinations; that fair lending examinations should include a quantitative analysis of lending to minority individuals and communities and incorporate an analysis of access to services; and that disparate impact related to climate change should be incorporated into the existing fair lending supervisory framework. The agencies reiterate their view that CRA and fair lending requirements are mutually reinforcing. Both regimes recognize the importance of ensuring that the credit markets are inclusive. Accordingly, and as noted above and discussed further in the section-bysection analysis of § ll.16, the final rule retains the provisions that delineations of a bank’s facility-based assessment areas are prohibited from reflecting illegal discrimination and must not arbitrarily exclude low- and moderate-income census tracts. As discussed further in the section-bysection analysis of § ll.23, the agencies are specifying in the final rule that all special purpose credit programs under ECOA can be a type of responsive credit program. As discussed further in the section-by-section analysis of § ll.28, the agencies are also retaining the provision that allows downgrading a bank for discriminatory or other illegal credit practices. For more information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in the final rule, see section III.C of this VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 SUPPLEMENTARY INFORMATION. Moreover, although the agencies appreciate suggestions to enhance the rigor of fair lending examinations, such examinations are outside the scope of this rulemaking. The agencies are nevertheless committed to upholding their regulatory responsibilities for both fair lending and CRA examinations, and the agencies will seek to coordinate those examinations where practicable. Additionally, and in furtherance of the agencies’ objective to promote transparency, as discussed in the section-by-section analysis of § ll.42(j), the final rule requires the agencies to provide additional information to the public for large banks related to the distribution by borrower income, race, and ethnicity of the bank’s home mortgage loan originations and applications in each of the bank’s assessment areas. This disclosure would leverage existing data available under HMDA. As discussed in the section-bysection analysis of § ll.42(j), providing data about borrower and applicant race and ethnicity in this disclosure would have no independent impact on the conclusions or ratings of the bank and would not on its own reflect any fair lending finding or violation. Instead, this provision of the final rule is intended to enhance the transparency of information available to the public. Promote a consistent regulatory approach that applies to banks regulated by all three agencies. Commenter feedback on this objective included support for a coordinated interagency approach to CRA modernization and a unified CRA rule, with a commenter stating that the CRA’s purpose is more fully realized when the agencies work in concert. Some commenters expressed support for coordination between Federal and State CRA regulatory requirements and between Federal and State agencies for CRA exams. The agencies appreciate these comments, believe the final rule meets this objective, and will continue to coordinate their implementation of the final rule as appropriate. C. General Comments Regarding the Consideration of Race and Ethnicity in the CRA Regulatory Framework Comments Received The agencies received many comments regarding consideration of race and ethnicity in the CRA regulatory and supervisory framework from a wide range of commenters. General comments on this topic are summarized below, in this section of the SUPPLEMENTARY PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 INFORMATION. Furthermore, the agencies received comments regarding the consideration of race and ethnicity with respect to the agencies’ proposed approach to an array of specific topics, such as: bank size categories; 69 assessment areas; 70 the Retail Lending Test; 71 the Retail Services and Products Test, including the consideration of special purpose credit programs; 72 affordable housing; 73 economic development; 74 activities with MDIs and CDFIs; 75 disaster preparedness and climate resiliency; 76 impact factors; 77 data on race and ethnicity in the CRA regulatory framework; 78 discriminatory or other illegal practices; 79 bank applications; 80 public files; 81 and public engagement.82 The agencies have carefully considered this commenter feedback in developing the final rule. Comments relating to specific regulatory provisions of the agencies’ proposal and the final rule, referenced above, are discussed in detail in the section-by-section analyses of the specific provisions on which commenters shared their views. Those discussions cross-reference this section of the SUPPLEMENTARY INFORMATION where appropriate. General comments. Many commenters providing input on the consideration of race and ethnicity under the CRA asserted that the agencies’ proposal represented a missed opportunity to make racial equity a central focus of the CRA and to maximize what some commenters viewed as the statute’s potential impact on advancing minority 69 See the section-by-section analysis of final § ll.12 (asset size). 70 See, e.g., the section-by-section analysis of final § ll.16 (facility-based assessment areas). 71 See the section-by-section analysis of final § ll.22 (Retail Lending Test), including the section-by-section analyses of final § ll.22(d)(1)(ii)(A)(1), (d)(4), and (e). 72 See the section-by-section analysis of final § ll.23 (Retail Services and Products Test). 73 See the section-by-section analysis of final § ll.13(b) (affordable housing). 74 See the section-by-section analysis of final § ll.13(c) (economic development) 75 See the section-by-section analysis of final § ll.13(j) (activities with MDIs, WDIs, LICUs, or CDFIs). 76 See the section-by-section analysis of final § ll.13(i) (disaster preparedness/weather resiliency). 77 See the section-by-section analysis of final § ll.15 (impact and responsiveness review). 78 See the section-by-section analysis of final § ll.42(j) (HMDA disclosure). 79 See the section-by-section analysis of final § ll.28(d) (conclusions and ratings). 80 See the section-by-section analysis of final § ll.31 (effect of CRA performance on applications). 81 See the section-by-section analysis of final § ll.43 (public file). 82 See the section-by-section analysis of final § ll.46 (public engagement). E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations access to lending, investment, and services through the mainstream financial system. Most of these commenters stated that the CRA was enacted as a response to the history of redlining, other systemic discrimination, and structural racism, and that the agencies’ current and proposed CRA regulations do not adequately address the need to advance racial equality, reduce racial wealth and homeownership gaps, and address intergenerational poverty in minority communities. In this regard, commenter feedback included that there has been little progress in closing the racial wealth gap since the enactment of the CRA, and that the racial wealth gap has actually worsened since that time. Commenter feedback also included that approximately 98 percent of banks pass their CRA examinations and that expanded consideration of race and ethnicity would be appropriate to increase the rigor of CRA examinations. Additional views included that the agencies should use the CRA to broaden access to credit for racial and ethnic minorities in much the same way that the statute has broadened access to credit for low- and moderate-income individuals and communities. Some of these commenters also urged greater consideration of race in a modernized CRA evaluation framework due to racial inequality related to land use policies, and unjust and inequitable lending practices, all of which, these commenters indicated, have contributed to persistent disparities in home ownership rates, wealth accumulation, and educational and health outcomes for racial and ethnic minorities. In this regard, some commenters drew attention particularly to the lack of affordable housing opportunities for racial and ethnic minorities in metropolitan and rural communities alike. For instance, one commenter asserted that racial and ethnic minorities who are more likely to live in low-cost neighborhoods as part of the legacy of historical residential segregation and decades of discriminatory real estate practices are not adequately served due to unmet demand for low-cost housing, including but not limited to small-dollar home mortgage loans. In addition to the housing concerns, another commenter asserted that low-income minority communities disproportionately do not have access to the banking services and products that they need to build wealth, and further stated that not requiring banks to better address these needs leads to increased potential for predatory lending and reduced wealth VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 in these communities. Some commenters also asserted that robustly enforcing current and future CRA requirements relating to race and ethnicity, in addition to other relevant Federal, State, and local laws and regulations, is essential to addressing racial and ethnic inequality. A few commenters asserted that explicit consideration of race and ethnicity in the CRA evaluation framework would provide a buffer against displacement of minority consumers, which these commenters indicated leads to the loss of important local resources, such as healthcare and social services. In this regard, commenter feedback included: advocating for a greater focus on loans to minority consumers and not simply loans in minority communities, where the loans might be made largely to white consumers; an assertion that banks’ lending practices in connection with minority consumers and minority communities were impacted by the lack of diversity among bank employees, particularly at senior and executive levels; an assertion that all banks should be positioned to work with non-English speaking consumers; and a recommendation that banks be given consideration for offering linguistically and culturally appropriate services and resources to consumers with limited English proficiency so that such consumers may access safe and affordable credit. Some commenters suggested that the agencies adopt forms of quantitative analyses to consider race and ethnicity as part of CRA evaluations. For example, a commenter recommended that the agencies conduct periodic statistical analyses to identify areas where discrimination or ethnic and racial disparities in credit access exist. This commenter further recommended that in areas where significant disparities exist, the agencies should incorporate performance measures based on race and ethnicity into bank performance evaluations, with separate race- and ethnicity-based performance measures contributing to bank ratings on individual performance tests and overall. On the subject of terminology, a commenter urged the agencies not to use the term ‘‘minority’’ in the CRA regulations but rather to use the term BIPOC (Black, Indigenous, and People of Color), which the commenter asserted better acknowledges different types of prejudice and discrimination.83 83 The agencies acknowledge the commenter suggestion to use the term ‘‘BIPOC’’ throughout the final rule but are electing to use the term PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 6589 Comments on legal basis for express consideration of race and ethnicity in the CRA regulatory framework. Several commenters provided input supporting the permissibility of express consideration of race and ethnicity under the statute. Some of these commenters asserted that the CRA is a civil rights law and that, accordingly, the agencies have authority to expressly consider race and ethnicity in their CRA regulations to address redlining and other racial discrimination in banking. Moreover, several commenters stated that addressing racial inequities is a core ‘‘remedial’’ purpose of the CRA as part of a ‘‘suite’’ of laws enacted to address racial inequities in housing and credit. A few commenters pointed to the CRA’s focus on encouraging banks to serve their ‘‘entire community’’ 84 suggesting that the agencies should therefore focus specifically on the minority constituencies who are part of the entire community in evaluating each bank’s CRA performance. Another commenter provided legal analysis arguing that the agencies could incorporate express consideration of race and ethnicity in CRA regulations in various ways that the commenter stated were consistent with requirements applicable to race-based government action under the Equal Protection Clause of the U.S. Constitution. Relatedly, the commenter indicated that, to satisfy constitutional requirements and appropriately target the effects of discrimination, the agencies should conduct and periodically update a study to determine with specificity where, and regarding which financial products, discrimination continues to have an impact. Other commenters asserted that express references to race in the statute, such as the provision allowing investments with MDIs to count for CRA,85 indicate that an explicit focus on race is within the purview of the CRA. Conversely, a few commenters cautioned against expanding consideration of race and ethnicity in the CRA regulatory framework due to legal concerns. Some of these commenters expressed their perspective that the law is limited in its capacity to address racial equity, even though they view the CRA as a civil rights law and acknowledge that racial equity is central to equal opportunity, social cohesion, and prosperity. Another commenter ‘‘minority,’’ which is used expressly in the CRA statute, and to clarify, where practicable, when the agencies intend to refer specifically to racial and ethnic minorities. See 12 U.S.C. 2907(b)(3). 84 See 12 U.S.C. 2903 and 2906. 85 See, e.g., 12 U.S.C. 2903(b). E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6590 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations suggested that the CRA is a race-neutral law designed to combat race-based discriminatory policies and practices. Additionally, commenter feedback included that, although structural racism is a reality, incorporating racial equity into the CRA evaluation process could lead to both legal and practical issues and undermine the valuable contribution that CRA can make to lowand moderate-income consumers and communities. Low-and moderate-income status and race. Many commenters advocating for greater consideration of race and ethnicity under the CRA indicated that, in addition to focusing on low- and moderate-income consumers and communities, the agencies should explicitly focus on minority consumers and communities. For example, a commenter asserted that racial discrimination will persist if income categorizations continue to be used to rate bank performance without considering race. Some commenters also noted that low- and moderate-income communities and minority communities are not the same, so closing racial wealth gaps requires express consideration of race. To illustrate this point, a commenter stated that about two-thirds of low-income communities are predominantly minority, but only about one-third of moderate-income neighborhoods are predominantly minority. Another commenter similarly indicated that nearly two-thirds of lowand moderate-income households are White, while nearly 40 percent of Black households and more than half of Hispanic households are not low- or moderate-income. Consequently, many commenters urged that racial equity should be incorporated comprehensively into the agencies’ CRA regulations, including through both incentives and affirmative obligations for banks to serve racial and ethnic minority consumers, businesses, and communities. Many of these commenters asserted that doing so would have a direct, positive impact on such minorities’ economic inclusion, quality of life, and health outcomes. Closing the racial wealth gap, a commenter stated, would also make the U.S. economy substantially stronger. To facilitate the incorporation of racial equity into the CRA regulations, a commenter asserted that the agencies could employ the ‘‘other targeted population’’ framework already provided for in the Riegle Community Development and Regulatory Improvement Act’s definition of ‘‘targeted populations,’’ which the commenter explained can include either individuals who are low-income or VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 others who ‘‘lack adequate access to Financial Products or Financial Services in the entity’s Target Market,’’ to include certain minority groups. Final Rule The agencies have considered and appreciate the many comments asserting that the agencies should incorporate additional regulatory provisions regarding race and ethnicity into the CRA regulatory and supervisory framework. These comments raise important and significant considerations about financial inclusion, discrimination, and broader economic issues. The agencies have carefully considered these comments, including those summarized in this section and in the section-by-section analysis of the final rule (see section IV of this SUPPLEMENTARY INFORMATION), as well as the statutory purposes and text of the CRA. The agencies have also assessed other relevant legal and supervisory considerations, including, in particular, the constitutional considerations and implementation challenges associated with adopting regulatory provisions that expressly address race and ethnicity when implementing statutory text that does not expressly address race or ethnicity. Based upon these considerations, the agencies have determined not to include additional race- and ethnicity-related provisions other than what is adopted in this final rule and discussed in more detail throughout this Introduction and section IV of the SUPPLEMENTARY INFORMATION. The agencies believe that the final rule strengthens the CRA’s emphasis on encouraging banks to engage in activities that better achieve the core purpose of the CRA, and thereby meet the credit needs of their entire communities, including low- and moderate-income individuals and communities. Relatedly, the agencies continue to recognize that the CRA and fair lending requirements are mutually reinforcing, including by specifying in the final rule that special purpose credit programs under ECOA can be a type of responsive credit program, and by reaffirming that violations of the Fair Housing Act and ECOA can be the basis of a CRA rating downgrade. As noted, for example, in section III.B of this SUPPLEMENTARY INFORMATION, the final rule also retains the current rule’s prohibition against banks delineating facility-based assessment areas in a manner that reflects illegal discrimination or arbitrarily excludes low- and moderate-income census tracts, and provides that the CRA performance of banks that engage in PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 discriminatory or other illegal credit practices can be adversely affected by such practices. For more information and discussion regarding how the final rule strengthens the achievement of the core purpose of the statute, and confirms that CRA and fair lending responsibilities are mutually reinforcing (see sections III.B and IV of this SUPPLEMENTARY INFORMATION). IV. Section-by-Section Analysis Section ll.11 Authority, Purposes, and Scope Current Approach and the Agencies’ Proposal Current § ll.11 sets forth the authority, purposes, and scope of the CRA regulations. Paragraphs (a) and (c) of the section are agency-specific regulatory text, with paragraph (a) outlining the legal authority for each agency to implement the CRA and paragraph (c) providing the scope of each agency’s CRA regulations. Common rule text in § ll.11(b) provides that this part implements the CRA by establishing the framework and criteria by which the agencies assess a bank’s record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the bank; and providing that the agencies take that record into account in considering certain applications. Consistent with the current rule, proposed § ll.11 sets forth the authority, purposes, and scope of the CRA regulations, with the authority and scope paragraphs (proposed § ll.11(a) and (c)) including agency-specific regulatory text. Proposed § ll.11(b) included technical, non-substantive edits to the current regulatory text, such as adding CRA’s legal citation. The OCC proposed to amend its authority section, § 25.11(a) by referencing part 25 in its entirety instead of each subpart, and by removing paragraph (a)(2), Office of Management and Budget (OMB) control number, as such information is unnecessary for regulatory text. The OCC also proposed technical edits to its scope section, § 25.11(c), to reflect the organization of the proposed common rule text. The Board did not propose any amendments to its authority section, § 228.11(a), and proposed to amend its scope section, proposed § 228.11(c), to replace references to ‘‘special purpose banks’’ with ‘‘exempt banks’’ to avoid any potential confusion with the OCC’s special purpose bank charter. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 The FDIC proposed to amend its authority section, § 345.11(a), by removing paragraph (a)(2), OMB control number, as such information is unnecessary for regulatory text. The FDIC did not propose any amendments to its scope section in § 345.11(c). Comments Received and Final Rule The agencies did not receive comments specific to the language in proposed § ll.11(b) or the agencyspecific language in proposed § ll.11(a) and (c). Therefore, the agencies are adopting § ll.11(b) as proposed, and the Board is adopting its agency-only provisions, paragraphs (a) and (c), as proposed. The OCC adopts paragraph (a) as proposed, and paragraph (c) as proposed with technical edits. Specifically, the OCC has moved the definition of ‘‘appropriate Federal banking agency’’ in proposed § 25.11(c)(1)(iii) to final § 25.12 (Definitions), where it more appropriately belongs. As in the current rule and as proposed, ‘‘appropriate Federal banking agency’’ in the final rule means, with respect to subparts A (except in the definition of minority depository institution in § 25.12) through E and appendices A through G, the OCC with respect to a national bank or Federal savings association and the FDIC with respect to a State savings association.86 In addition, the OCC has added Federal branches of foreign banks to paragraph (c)(1)(i), which lists the types of entities for which the OCC has authority to prescribe CRA regulations, to more accurately describe this authority. The OCC has also made minor technical edits to the listing of part 25 subparts in final paragraph (c). The FDIC is adopting paragraph (a) as proposed and paragraph (c) with technical edits. In the proposed rule, the FDIC’s paragraph (c)(2) maintained references to current § 345.41. The FDIC is adopting paragraph (c)(2) to reflect the final rule’s new assessment area provisions. Thus, final paragraph (c)(2) provides that, for insured State branches of a foreign bank established and operating under the laws of any State, their facility-based assessment area and, as applicable, retail lending assessment areas and outside retail lending assessment area, are the community or communities located within the United States, served by the branch as described in § 345.16 and, applicable, §§ 345.17 and 345.18. 86 Final subpart F of part 25, Prohibition Against Use of Interstate Branches Primarily for Deposit Production, applies only to certain national banks and Federal branches of a foreign bank and includes ‘‘OCC’’ instead of ‘‘appropriate Federal banking agency.’’ VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Section ll.12 Definitions In proposed § ll.12 (Definitions), the agencies proposed many terms defined in the current CRA regulations, some with substantive or technical revisions. The agencies also proposed new definitions that the agencies considered necessary to clarify and implement proposed revisions to the CRA evaluation framework, some of which reflect understandings of terms long used in the CRA evaluation framework or that are consistent with the Interagency Questions and Answers. The agencies received numerous comments on some of these definitions. These comments and the definitions as included in the final rule are discussed below. Affiliate Under the current CRA regulations, the term ‘‘affiliate’’ means any company that controls, is controlled by, or is under common control with another company. The term ‘‘control’’ has the same meaning given to that term in section 2 of the Bank Holding Company Act, 12 U.S.C. 1841(a)(2), and a company is under common control with another company if both companies are directly or indirectly controlled by the same company.87 The agencies proposed to retain their current definitions of ‘‘affiliate,’’ with the Board including one technical change to the definition in its regulation to add a reference to its bank holding company regulations, Regulation Y, 12 CFR part 225. Specifically, the Board proposed to define affiliate as any company that controls, is controlled by, or is under common control with another company. The term ‘‘control’’ has the meaning given to that term in 12 U.S.C. 1841(a)(2), as implemented by the Board in 12 CFR part 225, and a company is under common control with another company if both companies are directly or indirectly controlled by the same company. The FDIC and the OCC did not propose any revisions to the definition of ‘‘affiliate’’ in the agencies’ respective CRA regulations.88 The agencies did not receive any comments on the proposed definitions of ‘‘affiliate’’ and adopt the definitions as proposed in the final rule. Accordingly, the Board is adopting the proposed definition of ‘‘affiliate’’ in the final rule, which will be contained solely in its CRA regulations. The FDIC and the OCC are retaining the current definition of ‘‘affiliate’’ in their respective CRA regulations, which current 12 CFR ll.12(a). current 12 CFR 25.12(a) (OCC) and 345.12(a) (FDIC). 87 See 88 See PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 6591 define affiliate as any company that controls, is controlled by, or is under common control with another company. The term ‘‘control’’ has the same meaning given to that term in 12 U.S.C. 1841(a)(2), and a company is under common control with another company if both companies are directly or indirectly controlled by the same company.89 Affordable Housing The agencies proposed to add a definition of ‘‘affordable housing’’ to mean activities described in proposed § ll.13(b). See the section-by-section analysis of § ll.13(b) for a detailed discussion of affordable housing. The agencies did not receive any comments on the proposed ‘‘affordable housing’’ definition and adopt it as proposed in the final rule. Area Median Income The agencies proposed to retain the current definition of ‘‘area median income,’’ 90 with one conforming change to replace the term ‘‘geography’’ with ‘‘census tract,’’ but keep the same meaning (see the discussion of ‘‘census tract’’ in § ll.12 of this section-bysection analysis).91 Under the proposal, ‘‘area median income’’ would mean: (1) the median family income for the metropolitan statistical area (MSA), if a person or census tract is located in an MSA, or for the metropolitan division, if a person or census tract is located in an MSA that has been subdivided into metropolitan divisions; or (2) the statewide nonmetropolitan median family income, if a person or census tract is located outside an MSA. The agencies did not receive any comments on the proposed ‘‘area median income’’ definition. However, the agencies are adopting the definition in the final rule as proposed with conforming and clarifying edits. First, in paragraph (1), the agencies have made a minor conforming change by replacing ‘‘metropolitan statistical area (MSA)’’ with ‘‘MSA.’’ Second, in paragraphs (1) and (2), the agencies have replaced the phrase ‘‘if a person’’ with ‘‘if an individual, family, household.’’ Third, in paragraph (1), the agencies have added the phrase ‘‘that has not been subdivided into metropolitan divisions’’ after ‘‘located in an MSA’’ to differentiate the first and second prongs of this paragraph. Fourth, in paragraph (2), as a conforming change, the 89 See id. current 12 CFR ll.12(b). 91 See current 12 CFR ll.12(k) (defining ‘‘geography’’ to mean ‘‘a census tract delineated by the United States Bureau of the Census in the most recent decennial census’’). 90 See E:\FR\FM\01FER2.SGM 01FER2 6592 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations agencies have replaced the phrase ‘‘outside an MSA’’ with ‘‘in a nonmetropolitan area.’’ Final § ll.12 defines ‘‘nonmetropolitan area’’ to mean any area that is not located in an MSA. Accordingly, the final rule defines ‘‘area median income’’ to mean: (1) the median family income for the MSA, if an individual, family, household, or census tract is located in an MSA that has not been subdivided into metropolitan divisions, or for the metropolitan division, if an individual, family, household, or census tract is located in an MSA that has been subdivided into metropolitan divisions; or (2) the statewide nonmetropolitan median family income, if an individual, family, household, or census tract is located in a nonmetropolitan area. Assets The final rule includes a new definition for ‘‘assets,’’ not included in the proposal. This term means total assets as reported in Schedule RC of the Consolidated Reports of Condition and Income as filed under 12 U.S.C. 161, 324, 1464, or 1817, as applicable (Call Report), or as reported in Schedule RAL of the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (Report of Assets and Liabilities), as filed under 12 U.S.C. 1817(a), 3102(b), or 3105(c)(2), as applicable. Although the agencies did not propose this definition, they have added it to the final rule to clarify the intended meaning of this term in the CRA regulations. ddrumheller on DSK120RN23PROD with RULES2 Assessment Area The current CRA regulations define ‘‘assessment area’’ to mean a geographic area delineated in accordance with 12 CFR ll.41.92 Current § ll.41 sets out the criteria for banks to delineate assessment areas. The agencies proposed to replace ‘‘assessment area’’ with three new terms in proposed § ll.12: ‘‘facility-based assessment area,’’ ‘‘retail lending assessment area,’’ and ‘‘outside retail lending area,’’ as these new terms are used in the proposal. These new definitions are discussed below. The agencies did not receive any comments concerning the removal of the ‘‘assessment area’’ definition and have removed this term in the final rule. Bank Under the current CRA regulations, the Board and FDIC have separate definitions for the term ‘‘bank.’’ Each agency defines ‘‘bank’’ to refer to the entities regulated by the agency for 92 See current 12 CFR ll.12(c). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 which the agency evaluates CRA performance. The FDIC and Board did not propose changes to the current definitions of ‘‘bank’’ in their respective CRA regulations and received no comments on their proposed definitions of ‘‘bank.’’ Accordingly, the final rule retains the current definitions of ‘‘bank’’ in the FDIC’s and the Board’s regulations.93 As such, for the FDIC, the term ‘‘bank’’ means a State nonmember bank, as that term is defined in section 3(e)(2) of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1813(e)(2)), with federally insured deposits, except as defined in final § 345.11(c). The term ‘‘bank’’ also includes an insured State branch as defined in final § 345.11(c). For the Board, the term ‘‘bank’’ means a State member bank as that term is defined in section 3(d)(2) of the FDIA (12 U.S.C. 1813(d)(2)), except as provided in final § 228.11(c)(3) and includes an uninsured State branch (other than a limited branch) of a foreign bank described in final § 228.11(c)(2). Accordingly, consistent with the Board’s current CRA regulations, the term ‘‘bank’’ in final § 228.12 includes an uninsured State branch (other than a limited branch) of a foreign bank that results from an acquisition described in section 5(a)(8) of the International Banking Act of 1978 (12 U.S.C. 3103(a)(8)). Also, generally consistent with the current CRA regulations, ‘‘bank’’ in final § 228.12 does not include banks that do not perform commercial or retail banking services by granting credit to the public in the ordinary course of business, other than as incident to their specialized operations and done on an accommodation basis.94 This exception for banks that do not perform commercial or retail banking services aligns with the current CRA regulations, including that performing commercial and retail banking services solely ‘‘on an accommodation basis’’ will not qualify an entity as a ‘‘bank.’’ The OCC’s current CRA regulation provides that ‘‘bank or savings association’’ means, except as provided in § 25.11(c), a national bank (including a Federal branch as defined in part 28) with federally insured deposits or a savings association. Further, the OCC 93 The agencies’ definitions of ‘‘bank’’ are included in the agency-specific amendatory text, outside of the common rule text. 94 See final § 228.12 (defining ‘‘bank’’ to exclude institutions described in final § 228.11(c)(3)). These institutions include bankers’ banks, as defined in 12 U.S.C. 24(Seventh), and banks that engage only in one or more of the following activities: providing cash management-controlled disbursement services or serving as correspondent banks, trust companies, or clearing agents. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 regulation provides that ‘‘bank and savings association’’ means, except as provided in § 25.11(c), a national bank (including a Federal branch as defined in part 28) with federally insured deposits and a savings association.95 For clarity and conciseness, the OCC proposed separate definitions of ‘‘bank’’ and ‘‘savings association,’’ without changing the substance of the current definitions. The OCC received no comments on this technical change and adopts the definitions as proposed in the final rule. As a result, in the final rule, ‘‘bank’’ means a national bank (including a Federal branch as defined in part 28) with federally insured deposits, except as provided in § 25.11(c); and ‘‘savings association’’ means a Federal savings association or a State savings association. Bank Asset-Size Definitions Current Approach Under the current CRA regulations, the agencies define ‘‘small bank’’ to mean ‘‘a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.503 billion.’’ 96 The agencies defined ‘‘intermediate small bank’’ to mean ‘‘a small bank with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years.’’ 97 The agencies adjust these terms annually for inflation based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI–W), not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million.98 The current CRA regulations do not define the term ‘‘large bank,’’ but any bank with assets exceeding those defining an ‘‘intermediate small bank’’ is understood to be a large bank (otherwise referred to as a ‘‘large institution’’). The Agencies’ Proposal The agencies proposed raising the asset-size threshold for the ‘‘small bank’’ definition to provide more clarity, consistency, and transparency in the 95 See current 12 CFR 25.12(e). Pursuant to title III of the Dodd-Frank Act, and as described in footnote 2 of this SUPPLEMENTARY INFORMATION, the OCC’s CRA regulation applies to both State and Federal savings associations, in addition to national banks. The FDIC enforces the OCC’s CRA regulations with respect to State savings associations. 96 The current asset-size threshold for a ‘‘small bank’’ reflects the annual dollar adjustment to the figures contained in current 12 CFR ll.12(u)(1). See current 12 CFR ll.12(u)(2). 97 See current 12 CFR ll.12(u)(1). 98 See current 12 CFR ll.12(u)(2). E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations evaluation process, and in recognition of the potential challenges associated with regulatory changes and data collection requirements for banks with more limited capacity. Under the proposal, a small bank would be a bank that had average assets of less than $600 million in either of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. The agencies also proposed to add a new definition for ‘‘intermediate bank’’ that would replace the current ‘‘intermediate small bank’’ definition. Under the proposal, intermediate bank would mean a bank that had average assets of at least $600 million in both of the prior two calendar years and less than $2 billion in either of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. The agencies intended the proposed ‘‘intermediate bank’’ definition to comprise a category of banks that have meaningful capacity to engage in CRArelated activities under the proposed Retail Lending Test and conduct community development activities, but that might have more limited capacity regarding data collection and reporting requirements than large banks. Finally, the agencies proposed to add a new ‘‘large bank’’ definition that would mean a bank that had average assets of at least $2 billion in both of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. This proposed definition reflects the agencies’ view that banks of this size generally have the capacity to conduct the range of activities that would be evaluated under each of the four performance tests proposed to apply to large banks. The agencies proposed to make annual adjustments to the asset-size thresholds for all three categories of banks based on the same CPI–W inflation measure used in the current CRA regulations for small and intermediate banks.99 As under the current CRA regulations, asset-size classification is relevant because it determines a bank’s CRA evaluation framework. Consistent with the proposal, under the final rule, large banks are evaluated under the Retail Lending Test in final § ll.22, the Retail Services and Products Test in final § ll.23, the Community Development Financing Test in final § ll.24, and the Community Development Services Test in final § ll.25. Intermediate banks are 99 See current 12 CFR ll.12(u)(2). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 evaluated under the Retail Lending Test in § ll.22, and either the current Intermediate Bank Community Development Test, in final § ll.30(a)(2),100 or, at the bank’s option, the Community Development Financing Test in final § ll.24.101 Small banks are evaluated under the small bank lending test, in final § ll.29(a)(2),102 or, at the bank’s option, the Retail Lending Test in final § ll.22. Comments Received The agencies received numerous comments on the proposed ‘‘small bank,’’ ‘‘intermediate bank,’’ and ‘‘large bank’’ definitions. Given that the current and proposed definitions are interconnected, the agencies believe it is appropriate to discuss the comments collectively. Many commenters expressed general support for the proposal to increase the asset-size thresholds for small, intermediate, and large banks. Many of these commenters indicated that the proposed thresholds are reasonable and would represent appropriate burden relief for banks that would qualify as small or intermediate banks under the proposed definitions. Several commenters stated that the proposed asset-size thresholds are appropriate to ensure that smaller banks with more limited staff and other resources are not subjected to the same performance expectations or data collection and reporting requirements as larger banks. Several other commenters supported the proposed asset-size thresholds based not only on other regulatory burden they anticipate under the proposal but also on the principle that community banks already experience significant regulatory burden unrelated to the CRA. Another commenter approved of the increased asset-size thresholds on the basis that they would permit smaller banks to expand to meet the needs of their communities without necessarily subjecting themselves to new CRA requirements that the commenter stated were likely to have onerous costs. Many commenters specifically expressed support for increasing the asset-size threshold for a small bank to $600 million. These commenters noted that the asset-size threshold would apply to approximately the same percentage of banks as were classified as 100 In the proposal, the Intermediate Bank Community Development Test, referred to as the ‘‘intermediate bank community development evaluation,’’ is in proposed § ll.29(b). 101 See final § ll.30(a)(1). 102 In the proposal, the Small Bank Lending Test, referred to as the ‘‘status quo small bank lending test,’’ is in proposed § ll.29(a). PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 6593 small banks when the agencies’ amended their CRA regulations in 2005. Several other commenters explained that the asset-size threshold increases would be a timely and welcome adjustment because of changes in the banking industry and the unprecedented growth of bank balance sheets and excess liquidity that has resulted from Federal Government stimulus in response to the COVID–19 pandemic. Another commenter indicated that raising the asset-size threshold as proposed was a timely action on the part of the agencies due to recent trends in inflation that are beyond banks’ control. One commenter stated that the current asset-size thresholds are too low and reflected prior conditions. Many other commenters expressed opposition to the proposed asset-size threshold increases and advocated for the agencies to maintain the current thresholds. Some of these commenters stated that the proposed changes were inappropriate because reclassified banks would be subject to less rigorous performance standards and diminished agency oversight, which would minimize transparency and accountability and reduce those banks’ CRA obligations and reinvestment. Other commenters noted that raising the asset-size thresholds would result in missed opportunities for reclassified banks to expand and improve their CRA activity under more rigorous performance standards. These commenters also asserted that the proposed changes to the asset-size thresholds are not justified because banks already perform successfully under the current, lower thresholds for small, intermediate small, and large banks. Many commenters focused on the number of banks that would be reclassified into a smaller asset-size category and the adverse effect this reclassification could have on community development financing, with a few commenters stating that increasing the small bank asset-size threshold would reduce the amount of community development activity, especially in smaller and more rural communities. Some commenters highlighted the agencies’ statement in the proposal that approximately 778 current intermediate small banks would be reclassified as small banks and 216 current large banks would be reclassified as intermediate banks.103 These commenters expressed their belief that the reclassified banks would no longer be held accountable (or would 103 See E:\FR\FM\01FER2.SGM 87 FR 33884, 33924 (June 3, 2022). 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6594 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations be held accountable to a lesser degree) for community development financing activity. Many of these commenters suggested that this loss of accountability would cause significant reductions in community development financing, with some commenters citing estimated annual losses of $1 billion to $1.2 billion. These commenters argued that, if these forecasted losses in community development financing are remotely accurate, the change in asset-size thresholds would amount to a significant failure on the part of the agencies. Many commenters indicated that although the impact of reduced community development financing would be experienced in low- and moderate-income communities nationwide, the losses are likely to be most acute in less populated communities, such as rural, micropolitan, and small-town areas, where a substantial number of the reclassified banks are located. A few commenters specified that any loss of community development financing could adversely affect the availability of affordable housing and bank responsiveness to other important community needs. Several commenters explained that reductions in community development financing as a result of asset-size threshold changes could adversely affect CDFIs by diminishing bank-CDFI relationships, and the flow of capital from banks to CDFIs—especially CDFIs located in smaller or rural communities. Noting that the agencies stated in the proposal that raising the asset-size thresholds would impact only two percent of bank assets in the banking system, some commenters indicated that a reclassified bank may be the only lender or one of a small number of banks with any presence in a geographic area. Some commenters stated that reclassifying some current large banks as intermediate banks could negatively impact the availability of banking services in low- and moderate-income and rural communities because the proposed Retail Services and Products Test and Community Development Services Test would only apply to large banks. Several other commenters stated that reclassifying a large bank as an intermediate bank would effectively eliminate agency evaluation of applicable service considerations such as the operation of bank branches in their communities. A few commenters expressed concerns about the impact of the agencies’ proposal to revise asset-size thresholds on racial or ethnic minority communities. A commenter stated that VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 a number of Black communities would be significantly adversely impacted by the reclassification of certain large banks as intermediate banks and certain intermediate small banks as small banks. The commenter asserted that these changes would reduce these banks’ incentives to engage with Black communities, given the specific performance tests that would be applicable to small banks and intermediate banks under the agencies’ proposal. Another commenter raised concerns that small banks and intermediate banks would not be subject to a retail services test. In the commenter’s view, an evaluation of retail services is critical to ensure that bank branches are located in both lowand moderate-income communities and minority communities. A few commenters stated that raising the large bank asset-size threshold could result in diminished bank investment in New Markets Tax Credits (NMTC) and other community tax credit investments given that, under the proposal, intermediate and small banks would not have corresponding community development requirements. These commenters also indicated that relieving banks of these requirements could negatively impact overall demand for community tax credit investments, for which the majority of investors are CRA-motivated banks. Many of the commenters opposing the proposed asset-size threshold increases asserted that regulatory relief for banks was not a sufficient justification for changes that would adversely impact local communities. Several commenters argued that the potential burden on banks from being classified as a larger institution would not outweigh the need for accountability and equity. Another commenter indicated that the agencies did not produce estimates or data indicating that the proposed regulatory approach would be so prohibitively burdensome that significant increases in asset-size thresholds were necessary. Several other commenters stated that the agencies’ proposal should, at a minimum, provide for the same range of community development financing activity for all current intermediate small banks and large banks as under the current CRA regulations. A commenter asserted that the proposal goes backwards with no justification for how the reduction in compliance burden for banks reclassified as smaller banks would offset the loss of reinvestment activity from a public benefits perspective. Some commenters added that the impacted banks are engaging in community development under the current asset-size thresholds PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 without any apparent deleterious impacts. Other commenters asserted that maintaining the current asset-size thresholds would be more consistent with the agencies’ goal of strengthening the CRA framework. A few commenters suggested that the current asset-size thresholds could remain in place and continue to be adjusted for inflation. A commenter indicated that, based on the application of inflation adjustments to the current asset-size thresholds, the proposed small bank asset-size threshold was too large in comparison. The commenter explained that if the agencies’ proposed asset-size thresholds for small, intermediate, and large banks were adjusted for inflation, the asset-size thresholds would be approximately $375 million for small banks and approximately $1.5 billion for large banks. A commenter opposed the proposed asset-size threshold changes on the grounds that the thresholds for intermediate and large banks are arbitrary and not based on any relevant data or analysis. The commenter also asserted that the proposed intermediate bank threshold is similarly unsupported and would subject reclassified intermediate banks to considerably increased compliance costs without commensurate benefit. Another commenter stated that the agencies did not provide documentation supporting the increase in the proposed asset-size thresholds. Alternate asset-size thresholds. Many commenters recommended that the agencies adopt asset-size thresholds for small, intermediate, and large banks that are higher than those proposed. These commenters suggested asset-size thresholds of $750 million to $5 billion for intermediate banks and from $2.5 billion to $20 billion for large banks. Commenters asserted that higher assetsize thresholds are necessary to provide regulatory relief and limit the significant compliance burdens that the agencies’ proposal would otherwise impose on smaller banks. A commenter stated that increasing the small bank asset-size threshold to $750 million would avoid placing unnecessary regulatory burden on smaller mission-driven institutions. Another commenter stated that regulatory burden considerations justified a variety of small bank assetsize thresholds of up to $3 billion. Another commenter stated that it lacked the financial and human resources to monitor performance under the proposed Retail Lending Test and requested a significantly higher assetsize threshold for large banks. Other commenters suggested asset-size E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations thresholds for large banks ranging from $3.3 billion to $20 billion, based on compliance burden as well as inflation adjustments. A few commenters specifically drew attention to smaller banks’ resource capacities in advocating for higher assetsize thresholds. A commenter suggested an asset-size threshold of $750 million for small banks and an asset-size threshold of $3 billion for large banks based on resource capacity. Another commenter expressed support for a large bank asset-size threshold of $3 billion. Several other commenters recommended an asset-size threshold of $1 billion for small banks and an assetsize threshold of $5 billion for large banks to better reflect resource capacity and the ability to comply with the proposed performance test requirements. A commenter suggested that a $1 billion asset-size threshold for small banks would prove beneficial to many community banks located in rural areas with few low- and moderateincome census tracts. A few commenters suggested that asset-size thresholds of $1 billion and $10 billion for small and large banks, respectively, would better reflect bank capacity and compliance resource availability. Another commenter stated that an assetsize threshold cap on intermediate banks of $3 billion would be a better representation of the median large bank in its State and region. One commenter argued that setting the asset-size thresholds for small banks and intermediate banks at $1 billion and $3 billion, respectively, would provide significant regulatory relief for smaller banks and free up resources for the agencies to focus on the largest banks and banks with poor CRA performance. Similarly, another commenter stated that any bank with assets between $1 billion and $15 billion should be classified as an intermediate bank to reduce regulatory burden. A commenter cited rapid growth in bank balance sheets due to bank consolidation and monetary and fiscal policy as reasons to further raise the small and intermediate bank asset-size thresholds, to a small bank threshold of $750 million and a large bank threshold of $2.5 billion. Another commenter cited similar reasons in support of a $1 billion asset-size threshold for small banks. Another commenter suggested a small bank asset-size threshold ranging anywhere between $2 billion and $5 billion and a large bank asset-size threshold of $10 billion due to the growth in bank balance sheets. Further, some commenters stated that the asset-size thresholds should better reflect the distribution of small, VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 intermediate, and large banks when these categories were originally established. Many commenters stated that, to maintain a similar percentage distribution of banks in the intermediate bank category to the distribution of intermediate small banks when that category was established in 2005, an intermediate bank should be any bank with assets between $600 million and $3.3 billion. Another commenter agreed that the agencies should attempt to maintain a similar percentage distribution of intermediate-sized institutions as in 2005. The commenter also indicated that a large bank threshold of $5 billion would likewise achieve this outcome. A different commenter suggested that any bank with assets between $1 billion and $5 billion should be categorized as an intermediate bank to adjust for inflation since the asset-size thresholds were originally set. Some commenters noted that setting the intermediate bank asset-size threshold at $10 billion would serve to eliminate the proposal’s distinction between two tiers of large banks.104 For example, a commenter stated that a $10 billion asset-size threshold for large banks would eliminate the confusion associated with the agencies’ proposal to designate two tiers of large banks in which only the largest large banks would have comprehensive data collection and reporting requirements. Another commenter suggested that the agencies create an additional ‘‘large community bank’’ evaluation tier for banks with $2 billion to $10 billion in assets; alternatively, the commenter suggested that the agencies expand the intermediate bank tier to banks with assets of $10 billion or less. Similarly, several commenters stated that the agencies should consider raising the asset-size threshold for large banks because the proposal is based on an incorrect perception that a bank with assets slightly over $2 billion is the peer of a significantly larger regional bank with $50 billion in assets—or an even larger institution with a nationwide presence. A few commenters also noted that financial regulators often consider a bank with less than $10 billion in assets a ‘‘community bank’’ for supervisory purposes. A few other commenters concurred that banks with assets between $2 billion and $10 billion are typically considered to be community banks. Another commenter, recommending a large bank asset-size 104 The proposed and final rule apply certain aspects of the final rule to large banks with assets greater than $10 billion. See the section-by-section analysis discussion of §§ ll.22 and ll.42. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 6595 threshold of $5 billion, asserted that raising the asset-size threshold for large banks would minimize unfair comparison of larger intermediate-size institutions with significantly larger banks. One other commenter suggested raising the intermediate bank asset-size threshold so that more banks would have the option of being evaluated under the status quo community development test, as the agencies proposed for intermediate banks (referred to in the proposal as the intermediate bank community development evaluation). A few commenters suggested that the agencies conform increased asset-size thresholds with other existing thresholds. A commenter stated that the agencies should set the asset-size threshold for small banks at $750 million to conform with the U.S. Small Business Administration’s (SBA) size standard for small banks.105 The commenter also stated that the asset-size threshold for intermediate banks should be increased to $2.5 billion, an amount that would more closely approximate the Board’s threshold of $3 billion to distinguish between small and large bank holding companies. Several commenters stated that the small bank asset-size threshold should be $1 billion, to be consistent with the proposed definition of ‘‘community bank’’ in the 2012 FDIC Community Banking Study.106 A few other commenters suggested that large banks should have assets of $10 billion or more to maintain consistency with regulatory definitions in the Dodd-Frank Act. Another commenter suggested that the agencies follow the National Credit Union Administration’s (NCUA) position that institutions that it supervises are ‘‘large’’ when they have greater than $15 billion in assets. Final Rule The agencies considered commenters’ concerns and recommendations related to the proposed asset-size thresholds. As a part of that process, the agencies observed that commenters did not coalesce around a particular asset-size framework that would address their respective concerns related to the proposed asset-size framework. In fact, the opposite was true, as commenters’ recommendations as to how to structure the asset-size framework were varied and frequently unique. The agencies conclude that the myriad comments and recommendations reflect an absence of 105 See infra note 113. FDIC, ‘‘Community Banking Study’’ (Dec. 2012), https://www.fdic.gov/resources/communitybanking/report/2012/2012-cbi-study-full.pdf. 106 See E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6596 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations consensus around an asset-size framework that would address all, or a majority of, the commenters’ concerns. The agencies continue to believe that the proposed framework strikes the appropriate balance between recognizing the capacity differences between banks of varying size and maintaining a strong CRA evaluation framework that benefits communities served by banks of all sizes and capacities. The agencies also considered commenter input that the proposed asset-size thresholds are arbitrary and not based on relevant data analysis. The agencies believe increasing the assetsize threshold for small banks to $600 million is appropriate based on an analysis of industry asset data, current CRA asset-size thresholds, supervisory experience with those thresholds, and bank asset-size standards employed by other agencies. First, as discussed in the proposal, the agencies analyzed Call Report and the FDIC’s Summary of Deposits data to estimate how the proposed asset-size thresholds would redistribute banks throughout the proposed categories. The agencies estimated that the proposed change to the small bank asset threshold would result in approximately 778 banks, representing two percent of all deposits, transitioning from the current intermediate-small bank category to the proposed small bank category. The agencies further estimated that the proposed increase in the large bank asset-size threshold would result in approximately 216 banks representing approximately two percent of all deposits transitioning from the current large bank category to the proposed intermediate bank category.107 The agencies communicated the findings of this analysis as a part of the proposal to ensure that the public was apprised of the potential redistribution of banks across the proposed framework.108 Second, the agencies, over the multidecade period since the CRA was enacted, have developed supervisory experience related to the asset-size thresholds and an understanding of the capacity of banks in each class of bank to engage in CRA activity, and incorporated that understanding into the consideration of the proposed assetsize thresholds. Based on this supervisory experience, the agencies calibrated the level of CRA requirements to bank size, consistent with the 107 The agencies based these estimates on average assets from 2020 and 2021 Call Report data and the FDIC’s 2021 Summary of Deposits data. These statistics included some banks with no CRA obligations, such as banker’s banks. 108 See 87 FR 33884, 33924 n. 162 (June 3, 2022). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 statutory purpose and the agencies’ objective of encouraging banks to meet the credit needs of their communities. Third, the agencies considered adopting the SBA’s ‘‘small bank’’ definition, but ultimately elected to adopt the $600 million asset-size threshold because it is better aligned with the CRA’s policy goals, and the agencies believe that banks with assets between $600 and $850 million have the capacity to engage in community development activity. The agencies believe that the assetsize framework in the final rule strengthens the agencies’ implementation of the CRA statute and furthers the CRA statute’s emphasis on assessing the records of banks of all asset sizes in meeting the credit needs of their entire communities, including low- and moderate-income neighborhoods. The final rule also implements the CRA statutory provisions that focus specifically on MDIs, WDIs, and LICUs.109 As discussed above, CRA and fair lending laws such as ECOA and the Fair Housing Act are mutually reinforcing. Specifically, under the CRA, the agencies assess banks’ records of helping meet the credit needs of the entire community,110 while fair lending laws serve to identify and address lending discrimination for protected classes, such as race and ethnicity. Under the final rule, intermediate banks and small banks may receive additional consideration at the institution level for activities with MDIs, WDIs, and LICUs, which, as noted, reflects CRA statutory provisions. For example, under the final rule a small or intermediate bank can receive consideration for a capital investment, loan participation or other venture with an MDI. An intermediate bank or small bank that opts into the Retail Services and Products Test may receive CRA consideration for bank credit products and programs that are conducted in cooperation with MDIs and Special Purpose Credit Programs as examples of credit products and programs that are responsive to the needs of the communities in which the bank operates, including the needs of lowand moderate-income individuals, families, and households; small businesses; and small farms. The final rule also retains the current prohibition against banks, including intermediate banks and small banks, delineating 109 See 12 U.S.C. 2903(b) and 2907(a). more information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. 110 For PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 facility-based assessment areas in a manner that reflects illegal discrimination or that arbitrarily excludes low- and moderate-income census tracts; and retains the current provision regarding discriminatory or other illegal credit practices that can adversely affect a bank’s CRA performance. Further, both intermediate banks and small banks continue to have retail lending requirements. Under the final rule, intermediate banks are evaluated under the Retail Lending Test in final § ll.22, and either the Intermediate Bank Community Development Test in final § ll.30(a)(2) or, at the bank’s option, the Community Development Financing Test in final § ll.24.111 Likewise, under the final rule, small banks are evaluated under the Small Bank Lending Test, in final § ll.29(a)(2) or, at the bank’s option, the Retail Lending Test in final § ll.22.112 Additional bank asset-size categories. A few commenters suggested that the agencies create a new category for banks with assets much higher than the proposed $2 billion large bank asset-size threshold and apply the most demanding performance tests or data reporting and collection requirements solely to those banks. According to commenters, including a category for the largest banks would help the agencies to better tailor CRA requirements for smaller large banks. A commenter explained that the agencies could impose the most demanding requirements on ‘‘super large’’ banks with greater than $50 billion in assets. Similarly, another commenter suggested the creation of a ‘‘mega bank’’ category for banks with assets greater than $100 billion on which the agencies could impose unique performance test structures and standards. Another commenter questioned why the agencies did not apply the large bank requirements exclusively to banks with greater than $100 billion in assets, a decision that according to the commenter, would capture 75 percent of total industry assets. One other commenter recommended that the agencies combine the proposed intermediate bank and large bank categories, so that there would only be categories for small and large banks in the final rule. The agencies considered the commenters’ concerns but are not adopting additional asset-size categories 111 See the section-by-section analysis of final § ll.30. 112 See the section-by-section analysis of final § ll.29. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 for banks with assets significantly greater than the proposed asset-size threshold for large banks—e.g., ‘‘super large’’ or ‘‘mega bank’’ categories for institutions with assets over $50 billion and $100 billion, respectively. Applying certain aspects of the large bank performance test only to very large banks in the manner suggested by commenters would reduce the number of banks subject to certain aspects of the performance tests and could thereby discourage CRA activity by some banks. Similarly, the agencies did not adopt commenters’ suggestion to eliminate the intermediate bank category in the final rule. The agencies believe that the three size categories of banks in the final rule effectively balance bank capacity with the obligation of a bank to meet the needs of its community. Removing an asset-size category would reduce tailoring of the CRA performance tests based on bank capacity. Depending on which asset-size category were removed, for example, more banks might be classified as small banks, potentially countering the agencies’ goal of encouraging banks with a meaningful capacity to engage in community development activities, or more performance tests would apply to banks that potentially lack the capacity to meet those tests’ parameters, increasing regulatory burden. SBA size standards for small banks. The agencies specifically requested feedback on whether they should adopt an asset-size threshold for small banks that differs from the SBA’s then small bank asset-size standard of $750 million.113 Several commenters supported the agencies conforming to the SBA’s small bank asset-size standard, with some specifically stating that consistency across Federal agencies should be maintained wherever possible. In contrast, some commenters found the SBA’s small bank asset-size standard of $750 million too high, for the same reasons provided by commenters who found the proposed size standards of $600 million too high, as discussed above. The agencies recognize that consistency across Federal agencies is 113 The SBA’s applicable asset-size standards are set forth in 13 CFR 121.201, Sector 52—Finance and Insurance, Subsector 522—Credit Intermediation and Related Activities (specifically, North American Industry Classification System (NAICS) codes 522110 and 522180). At the time of the proposed rule’s publication date, the SBA’s small bank asset-size threshold was $750 million. The SBA revised this asset-size standard, as of December 19, 2022, from $750 million to $850 million in assets, determined by averaging the assets reported on the depository institution’s four quarterly financial statements for the preceding year. See 87 FR 69118, 69128 (Nov. 17, 2022). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 generally desirable, but the agencies believe that deviating from the SBA’s small bank asset-size standard is appropriate to meet the CRA’s statutory purpose. In particular, applying the SBA’s $850 million small bank assetsize standard in the CRA framework would significantly increase the number of banks that would be classified as small banks. This might, in turn, result in less community development activity relative to the current CRA regulations or proposal because fewer banks would be evaluated under the status quo community development test.114 Such a development would be counter to the CRA statute’s purposes and the agencies’ CRA modernization objectives. Inflation adjustments to asset-size thresholds. Several commenters expressed support for the agencies’ proposal to adjust the asset-size thresholds for small, intermediate, and large banks annually for inflation. However, a few commenters expressed concerns. A commenter stated that, although the proposed inflation adjustments may seem reasonable, they could have the unintended consequence of decreasing investments in low- and moderate-income communities when banks are reclassified to a smaller assetsize category. A few other commenters stated that inflation adjustments tied to the CPI–W do not take into account major changes, including consolidation, that have occurred in the banking industry over the past decade. The agencies considered the commenters’ feedback and elected to maintain the proposed annual inflation adjustment methodology in the final rule. The agencies believe the proposed methodology, whereby asset-size thresholds would be adjusted annually for inflation based on the annual percentage change in the CPI–W, is preferable due to its alignment with the current CRA regulations’ annual inflation adjustments to the asset-size thresholds. With respect to commenters’ concerns about unintended consequences associated with banks moving into lower asset-size categories, 114 Based on an analysis of current bank size characteristics, the agencies estimate that the $600 million small bank asset-size threshold would result in approximately 609 banks that are required to comply with the CRA rule—representing approximately 13 percent of all banks— transitioning to the small bank category. However, if the agencies were to incorporate an $850 million asset-size standard in the CRA regulations, the agencies estimate that this would lead to approximately 957 current intermediate small banks that are required to comply with the CRA rule, representing approximately 21 percent of all banks, transitioning from the current intermediate small bank category to the small bank category. Estimates are based on year-end assets from 2021 and 2022 Call Report data. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 6597 the agencies recognize that this is a potential outcome associated with employing an annual inflation adjustment to the asset-size thresholds. However, the agencies believe the benefits of employing an annual inflation adjustment mechanism outweigh this concern, because it mitigates the risk of needing to employ large or unpredictable increases to realign the asset-size thresholds with conditions in the banking industry. Further, utilizing ad hoc adjustments to the asset-size thresholds, which would be less predictable and less stable, could mean more movement of banks from one size category to another from yearto-year, which inherently creates uncertainty for banks and stakeholders. Moreover, if the agencies declined to include an annual inflation adjustment mechanism, a scenario could develop where institutions would graduate into higher size categories due to inflation regardless of whether their financial condition or capabilities to engage in CRA activity have changed. Finally, the agencies note that the annual asset-size threshold adjustment methodology is not designed to account for industry changes such as consolidation. Rather, the methodology is designed to ensure that the asset-size thresholds evolve with economic conditions. Asset-size threshold alternatives. A few commenters cautioned against the agencies placing too much reliance on asset-size thresholds to determine which performance tests apply to a particular bank. These commenters stated that the agencies should consider various factors such as a bank’s business model, risk profile, areas of specialization, communities served, assessment area sizes, presence in an assessment area, staffing levels, and technology limitations. A few other commenters suggested that, under an ‘‘alternate prong’’ in the large bank definition, the agencies should designate a bank as a large bank if it makes a certain amount of loans in an evaluation period, even if its asset size would otherwise qualify it as a small or intermediate bank. These commenters asserted that this alternate prong would account for situations where a bank claims to be the ‘‘true lender’’ for loans that it makes with support from a third party. The agencies considered commenter feedback that the final rule should include alternative formulations to determine which performance tests apply to a bank. The agencies believe that alternative formulations for the baseline determination of which performance tests apply to a bank, including adding factors such as risk E:\FR\FM\01FER2.SGM 01FER2 6598 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 profile, areas of specialization, technology limitations, and others, would increase the complexity of the final rule and its administration without meaningfully furthering the agencies’ CRA objectives. Therefore, the agencies are maintaining asset size as the sole factor for purposes of categorizing most institutions in the final rule. However, as discussed throughout this SUPPLEMENTARY INFORMATION, the agencies have incorporated performance context information into performance test metrics and benchmarks, as well as express consideration of qualitative factors in evaluating a bank’s performance, which include, among others, business model.115 In addition, the agencies have retained a distinct evaluation approach for limited purpose banks,116 as well as the option for banks to be evaluated under a strategic plan.117 Asset-size threshold calculations. A commenter requested clarification regarding how the agencies propose to determine a bank’s asset size. The commenter noted that the proposal defines a small bank as a bank that had average assets of less than $600 million in either of the prior two calendar years, based on the assets reported on its four quarterly Call Reports for each of those calendar years. The commenter requested that the agencies clarify whether a bank must have average assets of less than $600 million at each quarter-end versus the current method that considers year-end values. After considering this comment, the agencies have decided to retain the asset-size calculation methodology in the current CRA regulations, which provides that asset size is calculated as of the end of a calendar year without reference to quarterly Call Report figures.118 This methodology is simpler than the proposed formula, it is widely understood,119 and retaining it will minimize complexity in the final rule. 115 See, e.g., final §§ ll.21(d) and ll.22(g) and the accompanying section-by-section analyses. 116 See final §§ ll.12 (definition of ‘‘limited purpose bank’’) and ll.26 and the accompanying section-by-section analyses. 117 See final § ll.27 and the accompanying section-by-section analysis. 118 As a result of retaining the current year-end asset-size calculation, the agencies estimate that the number of small banks will decrease from 3252 (NPR asset-size calculation methodology) to 3219 banks, the number of intermediate banks will increase from 883 (NPR asset-size calculation methodology) to 889, and the number of large banks will increase from 492 (NPR asset-size calculation methodology) to 519. Numbers are for banks that are required to comply with the CRA regulation; estimates are based on year-end assets from 2021 and 2022 Call Report data. 119 See current 12 CFR ll.12(u)(1). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 For the reasons discussed above, the agencies are adopting the proposed definitions of ‘‘small bank,’’ ‘‘intermediate bank,’’ and ‘‘large bank’’ in the final rule, with two substantive changes. First, the agencies are adding the clause, ‘‘excluding a bank designated as a limited purpose bank 120 pursuant to § ll.26,’’ to each of the three definitions to clarify that a bank designated as a limited purpose bank that also falls into one of the asset-size categories is evaluated as a limited purpose bank and not a small, intermediate, or large bank, with the attendant requirements of the performance tests that would otherwise be applicable to such a bank.121 Second, the agencies have changed the asset-size calculation methodology to reflect assets held at year-end, instead of at each quarter-end, as proposed. The agencies have also made minor technical wording changes. Accordingly, in the final rule, ‘‘small bank’’ means a bank, excluding a bank designated as a limited purpose bank pursuant to § ll.26, that had assets of less than $600 million as of December 31 in either of the prior two calendar years. ‘‘Intermediate bank’’ means a bank, excluding a bank designated as a limited purpose bank pursuant to § ll.26, that had assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years. ‘‘Large bank’’ means a bank, excluding a bank designated as a limited purpose bank pursuant to § ll.26, that had assets of at least $2 billion as of December 31 in both of the prior two calendar years. For all three definitions, the agencies adjust and publish the asset-size thresholds annually, based on the year-to-year change in the average of the CPI–W, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million. As indicated above, and in the proposal, the agencies believe that these asset-size thresholds appropriately balance the agencies’ objectives of meeting the CRA’s purpose of encouraging banks to meet the credit needs of their communities and recognizing differences in bank capacity based on asset size. In accordance with the Small Business Act 122 and its implementing 120 As discussed below, in the definition of ‘‘limited purpose bank,’’ the agencies have combined limited purpose banks and wholesale banks into one category, ‘‘limited purpose banks.’’ 121 For limited purpose bank evaluations, see final §§ ll.21(a)(4) and ll.26 and the accompanying section-by-section analyses. 122 15 U.S.C. 632(a)(2)(C). PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 regulations,123 the agencies sought and received approval from the SBA to deviate from the SBA’s asset-size standard applicable to small depository institutions—i.e., small banks. Branch Current Approach and the Agencies’ Proposal The agencies proposed to update the current definition of ‘‘branch’’ without materially changing the substantive meaning of this term. The current CRA regulations define ‘‘branch’’ to mean a staffed banking facility authorized as a branch, whether shared or unshared, including, for example, a mini-branch in a grocery store or a branch operated in conjunction with any other local business or nonprofit organization.124 Under the proposal, ‘‘branch’’ would mean a staffed banking facility, whether shared or unshared, that is approved or authorized as a branch by the appropriate Federal financial supervisory agency and that is open to, and accepts deposits from, the general public. As noted in the proposal, the agencies did not intend for the removal of the list of examples from the definition to change or narrow the meaning of the term ‘‘branch’’ and believed that these examples did not fully reflect the breadth of shared space locations that might exist, particularly as new bank business models emerge in the future. In addition, the agencies proposed to add the language ‘‘open to, and accepts deposits from, the general public’’ to the definition of ‘‘branch’’ to underscore that this definition would capture new bank business models, with different types of staffed physical locations, when those locations are open to the public and collect deposits from customers. Similarly, the agencies added that a branch must be approved or authorized as a branch by the agency to clarify that the agencies have varying processes for branch designation and that the name that a bank assigns to a facility is not determinative of whether an agency considers it a ‘‘branch’’ for CRA purposes. The agencies did not view these revisions as a change from the current standards. For the reasons stated below, the agencies are adopting the proposed definition of ‘‘branch’’ in the final rule. Comments Received The agencies received several comments concerning the proposed definition of ‘‘branch.’’ A commenter recommended that the agencies adopt a 123 13 CFR 121.903. current 12 CFR ll.12(f). 124 See E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 flexible definition of ‘‘branch’’ that can adjust with changes in the industry. Other commenters offered views on what the agencies should and should not consider a branch for purposes of delineating a facility-based assessment area. A commenter requested that the agencies clarify whether the proposed definition of ‘‘branch’’ (and ‘‘remote service facility,’’ discussed below) would include a financial institution taking deposits at a school or community organization facility. Another commenter recommended stating explicitly, either in the regulation or in guidance, that a staffed physical location in a shared space in which a financial institution has partnered with a nonprofit organization is a branch. This commenter also suggested that the agencies specify that any examples of shared physical locations in the regulation are illustrative and not exhaustive. Another commenter requested that a trust office be specifically excluded from the definition of ‘‘branch’’ if the office is not open to or does not accept deposits from the general public. Final Rule After reviewing the comments received on this definition, the agencies are adopting the definition of ‘‘branch’’ as proposed. Accordingly, ‘‘branch’’ means a staffed banking facility, whether shared or unshared, that the appropriate Federal financial supervisory agency approved or authorized as a branch and that is open to, and accepts deposits from, the general public. The agencies believe the proposed definition of ‘‘branch’’ provides adequate flexibility to adapt to the continuous evolution of the banking industry by relying on the agencies’ authority to approve and authorize branches. As the banking industry evolves, the agencies have the authority to adjust their rules, regulations, and guidance to accommodate industry developments. The agencies decline to opine on whether the scenarios presented by the commenters would qualify as a branch under the definition, because branching decisions are analyzed on a case-by-case basis and subject to the agencies’ respective statutory authority, regulations, and guidance, which may be modified in the future and render some or all of the examples contained in the list inaccurate. The agencies do not believe that trust offices that are not open to the public or do not accept deposits from the general public need to be explicitly excluded from the definition of ‘‘branch,’’ because a trust office VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 exhibiting those characteristics would likely not satisfy the elements of the definition of ‘‘branch’’ in the final rule. However, as discussed above, branching decisions are fact-specific inquiries, so the agencies are not opining on whether trust offices are generally excluded under the definition of ‘‘branch’’ in the final rule. Census Tract The current rule defines ‘‘geography’’ to mean a census tract delineated by the U.S. Bureau of the Census in the most recent decennial census.125 To simplify and clarify the CRA regulations, the agencies proposed to use the term ‘‘census tract’’ in place of the term ‘‘geography,’’ without changing the substantive meaning. As proposed, ‘‘census tract’’ would mean a census tract delineated by the U.S. Census Bureau in the most recent decennial census. In addition, the agencies proposed to substitute the word ‘‘census tract’’ for the word ‘‘geography’’ wherever ‘‘geography’’ appears in the regulatory text. The agencies did not receive any comments concerning the proposed ‘‘census tract’’ definition and are adopting the definition as proposed with one change. The agencies are removing the phrase ‘‘in the most recent decennial census’’ from the definition in the final rule to conform this definition to current agency practice. The U.S. Census Bureau periodically updates census tract boundaries and numbering during the years between decennial censuses, and the Federal Financial Institutions Examination Council (FFIEC) compiles these changes to provide one update between decennial censuses, after five years. Under current practice, the agencies have been using the census tract boundaries and numbering posted on the FFIEC website. This practice balances between the benefit of using updated census tract definitions between decennial censuses and the benefit of having a substantial period of stability (five years) between adjustments to census tract delineations and numbering. The agencies believe that the revised definition would allow for the current practice of using interdecennial changes to census tract delineations, which would not be possible under the proposed language because the definition would be confined to the census tract delineations included in the decennial census. 125 See current 12 CFR ll.12(k) (‘‘Geography means a census tract delineated by the United States Bureau of the Census in the most recent decennial census.’’). PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 6599 Accordingly, the final rule defines ‘‘census tract’’ to mean a census tract delineated by the U.S. Census Bureau. The U.S. Census Bureau publishes census tract data and information at census.gov.126 Closed-End Home Mortgage Loan For a discussion of the definition of ‘‘closed-end home mortgage loan,’’ see the discussion below for MortgageRelated Definitions. Combination of Loan Dollars and Loan Count To provide clarity and consistency, and to simplify the text of the CRA regulations, the agencies are adopting a new definition for ‘‘combination of loan dollars and loan count,’’ not included in the proposal, that means, when applied to a particular ratio, the average of: (1) the ratio calculated using loans measured in dollar volume; and (2) the ratio calculated using loans measured in number of loans. This term is employed in calculations for the Retail Lending Test in final § ll.22, as provided in final appendix A; the calculations for the Community Development Financing Test in final § ll.24, as provided in final sections II and IV of appendix B, and the Community Development Services Test in final § ll.25, as provided in final section IV of appendix B; and the Retail Services and Products Test in final § ll.23, as provided in final appendix C. These calculations are discussed in more detail in the sectionby-section analysis of §§ ll.22 through ll.25. For the Retail Lending Test in particular, the combined loan dollars and loan count approach for various calculations better tailors the Retail Lending Test to accommodate individual bank business models. The agencies determined that use of this combination helps to account for differences across product lines, bank strategies, and geographic areas, relative to an approach that uses only loan dollars or only loan count. Loan size can vary among different product lines (e.g., home mortgage loans versus automobile loans), and this approach seeks to balance the value of dollars invested in a community with the number of borrowers served. In particular, the agencies believe that both loan dollars and loan count reflect different aspects of how a bank has served the credit needs of a community. For example, in the agencies’ supervisory experience, employing a combination of loan dollars 126 See U.S. Census Bureau, ‘‘TIGER/Line Shapefiles,’’ https://www.census.gov/cgi-bin/geo/ shapefiles/index.php. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6600 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations and loan count recognizes the continued importance of home mortgage lending to low-income and moderate-income communities, which has been a focus of the CRA, while also accounting for the importance of typically smaller dollar small business, small farm, and automobile lending to low- and moderate-income communities. The loan dollars represent the total amount of credit provided, while the loan count represents the number of borrowers served. The agencies believe this is a balanced approach that ensures consideration of lending that would be significant to the bank by either dollar or number. Specifically, the agencies believe that use of this term will improve understanding and readability of the following calculations in the Retail Lending Test: (1) the retail lending assessment area 80 percent exemption threshold, as provided in final paragraph II.a.1 of appendix A; (2) the outside retail lending area 50 percent exemption threshold for intermediate banks, as provided in final paragraph II.a.2 of appendix A; (3) the 15 percent major product line threshold for facilitybased assessment areas and outside retail lending areas, as provided in final paragraph II.b.1 of appendix A; (4) the standard for determining whether a bank is a majority automobile lender, as provided in final paragraph II.b.3 of appendix A; (5) weighted performance conclusions for major product lines in facility-based assessment areas, retail lending assessment areas, and outside retail lending areas to develop corresponding area performance conclusions, as provided in final paragraph VII.b of appendix A; and (6) weighted average performance scores for different areas in which banks are evaluated to develop performance test conclusions for States, multistate MSAs, and the institution, as provided in final paragraph VIII.b.2 of appendix A. Similarly, the agencies believe that, for purposes of consistency throughout the final rule and to provide clarity, it is appropriate to incorporate the term into the calculations related to the Community Development Financing Test in final § ll.24 and the Community Development Services Test in final § ll.25, as provided in final appendix B, as well as the Retail Services and Products Test in final § ll.23, as provided in final appendix C. As with the Retail Lending Test in final § ll.22, this definition helps to improve understanding and readability in the calculations for the: (1) weighting of benchmarks in final paragraph II.o of appendix B; (2) combined score for facility-based assessment area VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 conclusions and the metrics and benchmarks analyses and the impact and responsiveness reviews in final paragraph II.p of appendix B; (3) the weighting of conclusions in final section IV of appendix B; and (4) the weighting of conclusions in final paragraph c of appendix C. Community Development The current CRA regulations include a detailed definition of ‘‘community development.’’127 The agencies proposed to move this definition, with substantive additions and clarifications, to a separate new section, proposed § ll.13, Community Development Definitions, and to define this term in § ll.12 by cross-referencing to proposed § ll.13. The agencies did not receive any comments on the proposed definition of ‘‘community development’’ and adopt it as proposed in the final rule. Final § ll.13, as discussed in the section-by-section analysis of § ll.13, describes activities that constitute community development, as proposed, but is retitled ‘‘Consideration of community development loans, community development investments, and community development services.’’ Community Development Financial Institution The agencies proposed to add the definition of ‘‘Community Development Financial Institution (CDFI)’’ to the CRA regulations. This term would have the same meaning given to that term in section 103(5)(A) of the Riegle Community Development and Regulatory Improvement Act of 1994 (RCDRIA) (12 U.S.C. 4701 et seq.).128 The agencies proposed this definition to promote clarity in the CRA regulations and consistency across Federal programs addressing CDFIs, particularly the CDFI Fund established by RCDRIA.129 The agencies did not receive any comments concerning the proposed definition of ‘‘Community Development current 12 CFR ll.12(g). 103(5)(A) of RCDRIA defines ‘‘CDFI’’ to mean a person (other than an individual) that: (1) has a primary mission of promoting community development; (2) serves an investment area or targeted population; (3) provides development services in conjunction with equity investments or loans, directly or through a subsidiary or affiliate; (4) maintains, through representation on its governing board or otherwise, accountability to residents of its investment area or targeted population; and (5) is not an agency or instrumentality of the United States, or of any State or political subdivision of a State. See 12 U.S.C. 4702(5)(A). 129 See U.S. Dept. of the Treasury, ‘‘Community Development Financial Institutions Fund,’’ https:// www.cdfifund.gov/about; see also 12 U.S.C. 4703. 127 See 128 Section PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 Financial Institution’’ and are adopting the definition as proposed in the final rule with several technical and clarifying edits. First, the agencies are replacing the phrase ‘‘has the same meaning given to that term’’ with ‘‘means an entity that satisfies the definition.’’ Second, the agencies are changing the cross-reference to the RCDRIA to the more specific ‘‘Community Development Banking and Financial Institutions Act of 1994,’’ which is title I, subtitle A of RCDRIA. Third, in conjunction with the revised cross-reference to the Community Development Banking and Financial Institutions Act of 1994, the agencies have revised the citation from ‘‘12 U.S.C. 4701 et seq.’’ to ‘‘12 U.S.C. 4702(5).’’ Finally, in order to clarify that references to CDFIs in the final rule pertain to those entities that are determined to be CDFIs by the U.S. Department of the Treasury’s CDFI Fund, the definition has been amended by adding the clause ‘‘and is certified by the U.S. Department of the Treasury’s Community Development Financial Institutions Fund as meeting the requirements set forth in 12 CFR 1805.201(b).’’ This definitional change affirms the agencies’ intent to ensure that, beyond MDIs, WDIs, and LICUs, the entities with which a bank may engage for automatic consideration of loans, investments, and services have undergone the U.S. Department of the Treasury’s CDFI certification process and meet requirements for maintaining that certification. The agencies consider this a critical guardrail to ensuring that community development on an inclusive community basis is the focus of bank loans, investments, and services in cooperation with these CDFIs. See discussion of CDFIs in the section-bysection analysis of § ll.13. Accordingly, the final rule defines ‘‘Community Development Financial Institution (CDFI)’’ to mean an entity that satisfies the definition in section 103(5)(A) of the Community Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 4702(5)) and is certified by the U.S. Department of the Treasury’s Community Development Financial Institutions Fund as meeting the requirements set forth in 12 CFR 1805.201(b). Community Development Investment The agencies proposed to replace the term ‘‘qualified investment’’ in the current CRA regulations 130 with the term ‘‘community development 130 See E:\FR\FM\01FER2.SGM current 12 CFR ll.12(t). 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations investment.’’ 131 The current CRA regulations define ‘‘qualified investment’’ to mean ‘‘a lawful investment, deposit, membership share, or grant that has as its primary purpose community development.’’ 132 The agencies believe the term ‘‘community development investment’’ is better aligned with the other types of community development activities discussed in the proposal—i.e., community development loans and community development services. (The definitions for these terms are discussed below). The agencies based the proposed ‘‘community development investment’’ definition on the current ‘‘qualified investment’’ definition and incorporated several additions. First, the proposed ‘‘community development investment’’ definition clarified that a lawful investment includes a legally binding commitment to invest that is reported on Schedule RC–L of the Call Report if its primary purpose is community development. Second, the proposed definition expressly included a ‘‘monetary or in-kind donation’’ if its primary purpose is community development in order to increase certainty and clarity as to what activities would qualify under the definition. Finally, the agencies added a crossreference to proposed § ll.13(a), Community Development Definitions. The agencies did not receive any comments concerning the proposed definition of ‘‘community development investment’’ and are adopting the definition as proposed, with technical edits to conform to the changes made to § ll.13 in the final rule and adjust punctuation. Specifically, the agencies are changing ‘‘has a primary purpose of community development’’ to ‘‘supports community development’’ and revising the cross-reference to ‘‘§ ll.13(a)’’ to ‘‘§ ll.13.’’ A payment to a third party that is not an affiliate to perform community development service hours qualifies as a ‘‘monetary or in-kind donation’’ under the definition of ‘‘community development investment’’ in § ll.12. ddrumheller on DSK120RN23PROD with RULES2 Community Development Loan The current CRA regulations define ‘‘community development loan’’ to mean a loan that: (1) has as its primary purpose community development; and 131 As discussed, the change in the final rule from ‘‘qualified investment’’ to ‘‘community development investment’’ is a change in nomenclature only; for purposes of simplifying the discussion, this SUPPLEMENTARY INFORMATION hereafter refers to ‘‘qualified investments’’ under the current rule as ‘‘community development investments.’’ 132 Id. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 (2) except in the case of a wholesale or limited purpose bank, has not been reported or collected by the bank or an affiliate for consideration in the bank’s assessment as a home mortgage, small business, small farm, or consumer loan, unless the loan is for a multifamily dwelling (as defined in § 1003.2(n) of this title); and benefits the bank’s assessment area(s) or a broader statewide or regional area(s) that includes the bank’s assessment area(s).133 The agencies proposed several revisions to this definition to add greater specificity and to reflect consideration of community development loans and retail loans under the proposed CRA evaluation framework. First, the proposed definition included the clause, ‘‘a legally binding commitment to extend credit, such as a standby letter of credit,’’ to clarify that these types of commitments could be considered ‘‘community development loans’’ if their primary purpose is community development pursuant to proposed § ll.13(a). Second, the agencies removed the reference to assessment areas because this part of the current definition caused uncertainty as to whether an otherwise eligible activity would qualify. Finally, the proposed definition reflected the proposed CRA framework’s consideration of certain loans solely under the proposed Retail Lending Test, with an option for certain intermediate banks to have a home mortgage loan, a small business loan, or a small farm loan considered as either a retail loan or a community development loan. Specifically, the agencies proposed to define ‘‘community development loan’’ to mean a loan, including a legally binding commitment to extend credit, such as a standby letter of credit, that: (1) has a primary purpose of community development, as described in § ll.13(a); and (2) has not been considered by the bank, an operations subsidiary or operating subsidiary of the bank or an affiliate of the bank under the Retail Lending Test as an automobile loan, closed-end home mortgage loan, open-end home mortgage loan, small business loan, or small farm loan unless (1) the loan is for a multifamily dwelling (as defined in 12 CFR 1003.2(n)); or (2) in the case of an intermediate bank that is not required to report a home mortgage loan, a small business loan, or a small farm loan, the bank may opt to have the loan considered under the Retail Lending Test in § ll.22, or under the 133 See PO 00000 current 12 CFR ll.12(h). Frm 00029 Fmt 4701 Sfmt 4700 6601 intermediate bank community development performance standards in § ll.29(b)(2), or, if the bank opts in, the Community Development Financing Test in § ll.24.134 The agencies did not receive any comments concerning the proposed ‘‘community development loan’’ definition and are adopting the definition in the final rule with changes to reflect revisions to the final rule regarding consideration of certain home mortgage loans, small business loans, and small farm loans as community development loans. First, the agencies are changing ‘‘has a primary purpose of community development’’ to ‘‘supports community development’’ and revising the cross-reference from ‘‘§ ll.13(a)’’ to ‘‘§ ll.13’’ to conform to the changes made to § ll.13 in the final rule. Next, the agencies removed proposed paragraph (2) and added text intended to clarify that a one-to-four family home mortgage loan for rental housing with affordable rents in nonmetropolitan areas under § ll.13(b)(3) (as discussed in the section-by-section analysis of final § ll.13(b)(3)) may be considered in a bank’s CRA evaluation under both the Retail Lending Test in § ll.22, if applicable, and under the applicable community development tests in the final rule. Under the final definition of ‘‘community development loan,’’ a small business loan or a small farm loan that has a community development purpose, as described in § ll.13, may also be considered in a bank’s CRA evaluation under both the Retail Lending Test in § ll.22, if applicable, and under the applicable community development test in the final rule. For example, as discussed in the section-bysection analysis of final § ll.13(c)(3), certain loans to small businesses and small farms may fall within the economic development category of community development. The changes regarding consideration of certain home mortgage loans, small business loans, and small farm loans as community developments loans are discussed in more detail in the sectionby-section analyses of § ll.13(b) and (c). Accordingly, the final rule defines ‘‘community development loan’’ as a loan, including a legally binding commitment to extend credit, such as a standby letter of credit, that supports community development, as described in § ll.13. A community development loan does not include any home mortgage loan considered under the Retail Lending Test in § ll.22, with the exception of one-to-four family 134 See E:\FR\FM\01FER2.SGM proposed § ll.12. 01FER2 6602 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations home mortgage loans for rental housing with affordable rents in nonmetropolitan areas under § ll.13(b)(3). Community Development Services ddrumheller on DSK120RN23PROD with RULES2 Current Approach and the Agencies’ Proposal The agencies proposed to replace the current term ‘‘community development service,’’ with the term, ‘‘community development services,’’ and revise the definition. The current CRA regulations define ‘‘community development service’’ to mean a service that: (1) has as its primary purpose community development; (2) is related to the provision of financial services; and (3) has not been considered in the evaluation of the bank’s retail banking services under § ll.24(d).135 Under current guidance, activities related to the provision of financial services include services of the type generally provided by the financial services industry, which often involves informing community members about obtaining or using credit.136 Further, community development service includes, but is not limited to, serving on the board of directors for a community development organization, serving on a loan committee, developing or teaching financial literacy curricula for low- and moderate-income individuals, providing technical assistance on financial matters to a small business, and providing services reflecting a bank employee’s professional expertise at the bank (e.g., human resources, information technology, legal).137 Personal charitable activities provided by an employee or director outside the ordinary course of their employment do not qualify for community development consideration.138 Instead, services must be performed in the capacity of a representative of the bank.139 The agencies proposed to replace the current term ‘‘community development service,’’ with the term, ‘‘community development services’’ and revise the definition. Specifically, the agencies proposed to define ‘‘community development services’’ to mean ‘‘activities described in § ll.25(d).’’ The agencies, generally, proposed in § ll.25(d) to incorporate the existing 135 Under current 12 CFR ll.24(d), the agencies evaluate ‘‘the availability and effectiveness of a bank’s systems for delivering retail banking services. . . .’’ See also Q&A § ll.24(d)—1 and —2; Q&A § ll.24(d)(3)—1 and —2; and Q&A § ll.24(d)(4)—1. 136 See Q&A § ll.12(i)—1. 137 See Q&A § ll.12(i)—3. 138 See Q&A § ll.12(i)—2. 139 Id. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 definition of community development services while codifying existing guidance on the meaning of ‘‘related to the provision of financial services.’’ Proposed § ll.25(d) defined community development services as: (1) activities that have a primary purpose of community development, as defined in proposed § ll.13(a)(1); (2) volunteer activities performed by bank board members or employees; and (3) activities related to the provision of financial services as described in proposed § ll.25(d)(3), unless otherwise indicated in proposed § ll.25(d)(4).140 Proposed § ll.25(d)(2) excluded volunteer services performed by bank board members or employees of the bank who are not acting in their capacity as representatives of the bank. Proposed § ll.25(d)(3) provided that activities related to the provision of financial services are generally activities that relate to credit, deposit, and other personal and business financial services, and included a non-exhaustive list of examples. Proposed § ll.25(d)(4) provided that banks may receive community development services consideration for volunteer activities undertaken in nonmetropolitan areas that otherwise meet the criteria for one or more of the community development definitions, as described in § ll.13, even if unrelated to financial services. The agencies reasoned that banks operating in nonmetropolitan areas may have fewer opportunities to provide community development services related to the provision of financial services. Proposed § ll.25(d)(4) provided that examples of qualifying activities not related to financial services include, but are not limited, to assisting an affordable housing organization to construct homes; volunteering at an organization that provides community support such as a soup kitchen, a homeless shelter, or a shelter for victims of domestic violence; and organizing or otherwise assisting with a clothing drive or a food drive for a community service organization. Comments Received The agencies received numerous comments concerning the proposed definition of ‘‘community development services’’ that are discussed below. Community development purpose for community development services. A few commenters stressed that the final rule should require community development services to have or be related to a community development purpose. 140 See PO 00000 proposed § ll.25(d). Frm 00030 Fmt 4701 Sfmt 4700 Related to the provision of financial services. As described above, proposed § ll.25(d)(3) provided that ‘‘[a]ctivities related to the provision of financial services’’ are those that relate to credit, deposit, and other personal and business financial services and included the following non-exhaustive list of examples: serving on the board of directors of an organization that has a primary purpose of community development; providing technical assistance on financial matters to nonprofit, government, or tribal organizations or agencies supporting community development activities; providing support for fundraising to organizations that have a primary purpose of community development; providing financial literacy education as described in proposed § ll.13(k); or providing services reflecting other areas of expertise at the bank, such as human resources, information technology, and legal services. A few commenters supported the inclusion of volunteer activities reflecting expertise of the employee, such as human resources, legal services, and information technology. A few other commenters specifically noted that activities related to the provision of financial services should include financial literacy or financial education. One of these commenters also suggested the provision of financial services should include volunteering at Volunteer Income Tax Assistance sites managed by nonprofit organizations. Performed on behalf of the bank. Regarding the proposed exclusion of volunteer activities by bank board members or employees of the bank who are not acting in their capacity as representatives of the bank, a commenter requested clarification that the proposed exclusion would not require the volunteer to act as an agent of the bank when serving on a community organization’s board of directors. This commenter believed that if the volunteer must act as an agent, it could create a conflict of interest. Another commenter stated that banks should only receive CRA credit for volunteer activities performed during bank business hours. Volunteer activities in nonmetropolitan areas. The agencies received many comments on the proposed expansion to allow CRA consideration for volunteer service hours in nonmetropolitan areas that are unrelated to the provision of financial services. Only a few commenters supported the provision as proposed. A majority of commenters on this topic opposed the inclusion of volunteer activities unrelated to the provision of E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations financial services in any location. A few commenters disputed the premise stated in the proposal that there are insufficient volunteer opportunities in nonmetropolitan areas, and one commenter urged the agencies to collect data to verify the premise before expanding to include services unrelated to the provision of financial services in nonmetropolitan areas. Several other commenters stated that although nonfinancial volunteer activities benefit communities, the inclusion of such services loses sight of the CRA’s intent to provide financial services to underserved communities. These commenters believed that the CRA should increase services related to the provision of financial services and should not include all types of volunteer activities. A few commenters supported the provision to include volunteer activities unrelated to the provision of financial services in all areas, not just nonmetropolitan areas. These commenters highlighted the benefit general volunteerism provides to lowand moderate-income communities and stressed that there is need in both metropolitan and nonmetropolitan areas. A few commenters said that limiting the provision of services unrelated to financial services to only nonmetropolitan areas would restrict community organizations from directing the service hours where needed. Another commenter believed the restriction would be inappropriate at this time because community organizations continue to experience challenges in recruiting volunteers as a result of the COVID–19 pandemic. Other commenters said the expansion to consider volunteer activities unrelated to the provision of financial services in all communities could help reduce the number of CRA ‘‘hot spots.’’ A commenter conveyed that some bank employees are not well positioned for or comfortable providing services related to the provision of financial services. Another commenter questioned the delineation of nonmetropolitan versus metropolitan areas because the delineation would exclude certain rural areas that are on the outskirts of metropolitan areas. A commenter stated bank employees volunteering services unrelated to financial services be given CRA consideration in all communities, at least in instances when it involves helping an affordable housing organization build homes for homeownership. In support of this position, the commenter highlighted the connection between the creation of affordable housing built for VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 homeownership and expanding credit and homeownership opportunities for low- and moderate-income communities. If the agencies allow CRA consideration for volunteer service hours in nonmetropolitan areas that are unrelated to the provision of financial services, a few commenters offered other requirements or limitations to the evaluation of these service hours, such as weighting the provision of financial services more heavily than those unrelated to financial services; granting pro rata consideration for services unrelated to the provision of financial services based on the percent of lowand moderate-income recipients; establishing a limit for receiving CRA consideration for services unrelated to financial services; establishing a separate metric; limiting the expansion to those community development services that satisfy basic needs like shelter, safety, and food; or requiring the bank to show it made a demonstrated effort to provide the provision of financial services before it may receive credit for services unrelated to financial services. Final Rule In response to commenter feedback and for the reasons described below, the agencies are adopting a definition of ‘‘community development services’’ in § ll.12 that includes substantive changes as well as technical and conforming edits. Specifically, the final rule defines ‘‘community development services’’ to mean the performance of volunteer services by a bank’s or affiliate’s board members or employees, performed on behalf of the bank, where those services: (1) support community development, as described in § ll.13; and (2) are related to the provision of financial services, which include credit, deposit, and other personal and business financial services, or services that reflect a board member’s or employee’s expertise at the bank or affiliate, such as human resources, information technology, and legal services. The agencies agree with commenters that a community development purpose is fundamental to eligibility as a community development service. Thus, with non-substantive conforming edits, the agencies are adopting the proposed requirement that a community development service must support community development as described in § ll.13. The agencies removed the examples of what qualifies as ‘‘related to the provision of financial services’’ from the final definition. Instead, the agencies believe the examples are more PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 6603 appropriate for future agency guidance. In addition, the agencies will consider these examples as they develop the illustrative list described in final § ll.14. The agencies note that the removal of examples of community development services from the ‘‘community development services’’ definition in the final rule should not be interpreted as a statement on what qualifies or does not qualify as relating to the provision of financial services. The examples provided in the proposal and restated in the preceding discussion would still be considered ‘‘related to the provision of financial services.’’ Further, the agencies determined that references to specific programs, like the suggestion to identify Volunteer Income Tax Assistance sites as related to the provision of financial services, in the text of the regulation could be overly limiting and possibly inconsistent with the durability of the rule over time. Free tax preparation is likely to qualify as ‘‘related to the provision of financial services’’ and may receive community development service consideration if it otherwise meets the definition of community development services. In response to commenter feedback that the proposed exclusion—excluding volunteer services performed by bank board members or employees of the bank who are not acting in their capacity as representatives of the bank— could be misinterpreted to require or establish an agency relationship, the agencies removed the exclusion. Instead, the agencies require that the services must be ‘‘performed on behalf of the bank.’’ The agencies do not intend to require that an employee or director must be acting as a bank’s agent in the legal sense of the term, nor do the agencies intend to suggest that volunteering on behalf of the bank necessarily creates an agency relationship. The agencies also considered the comment that banks should only receive CRA credit for volunteer activities performed during bank business hours. The agencies believe that the nature of community development services may vary depending on community needs and seek to give banks flexibility to address those needs regardless of the timing of projects and other community development-related activities. Thus, consistent with the proposal, the final rule provides that a service may still qualify as ‘‘volunteer’’ where the service is performed during an employee’s offduty hours if that service otherwise meets the ‘‘community development services’’ definition. Conversely, volunteer activities conducted by an employee or board member in their E:\FR\FM\01FER2.SGM 01FER2 6604 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations personal capacity are generally not considered performed on behalf of the bank if the activity is not sponsored or organized by the bank. A service can also be considered ‘‘volunteer’’ for purposes of the ‘‘community development services’’ definition even if an employee is paid in the normal course of employment. For example, volunteer hours could include those hours associated with a bank employee performing an economic development service activity, such as completing tax returns for small businesses, during the employee’s work hours. Even though the bank pays the employee in the regular course of employment, the bank essentially donates those hours because the bank employee is performing economic development for the small business, rather than performing that employee’s regular bank duties. The agencies have not adopted the proposal to include volunteer activities unrelated to the provision of financial services in nonmetropolitan areas. The agencies believe that volunteer service hours, even if unrelated to financial services, can provide a meaningful benefit in nonmetropolitan areas, but have determined that, by focusing on activities related to the provision of financial services, this provision is more consistent with the CRA’s statutory focus and also emphasizes activities that examiners have competency and expertise to evaluate. The removal of this proposed expansion in nonmetropolitan areas also is intended more generally to address commenter requests that the agencies reduce the final rule’s complexity. Finally, the agencies made conforming edits to clarify that service hours performed by the employees or board members of a bank’s affiliate may qualify as community development services, as provided for in final § ll.21(b). Consumer Loan ddrumheller on DSK120RN23PROD with RULES2 Current Approach The current CRA regulations define ‘‘consumer loan’’ to mean a loan to one or more individuals for household, family, or other personal expenditures, but does not include a home mortgage, small business, or small farm loan. Further, ‘‘consumer loan’’ includes the following categories of loans: (1) a motor vehicle loan, which is a consumer loan extended for the purchase of and secured by a motor vehicle; (2) a credit card loan, which is a line of credit for household, family, or other personal expenditures that is accessed by a borrower’s use of a credit card, as this VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 term is defined in 12 CFR 1026.2; (3) an other secured consumer loan, which is a secured consumer loan that is not included in one of the other categories of consumer loans; and (4) an other unsecured consumer loan, which is an unsecured consumer loan that is not included in one of the other categories of consumer loans.141 The Agencies’ Proposal The agencies proposed to modify the ‘‘consumer loan’’ definition to refine its scope, simplify and clarify it, and align it with revisions to related Call Report definitions as well as proposed revisions to the CRA regulations. Specifically, the proposed definition replaced the term ‘‘home mortgage’’ with ‘‘home mortgage loan’’ (both a closed-end home mortgage loan, and an open-end home mortgage loan) and a ‘‘multifamily loan’’ to use terms included in the proposal, discussed below. The proposal also modified the reference to ‘‘motor vehicle loan’’ to ‘‘automobile loan,’’ and specified that an automobile loan includes new or used passenger cars or other vehicles, providing examples, such as a minivan, a pickup truck, a sport-utility vehicle, a van, or a similar light truck for personal use, as defined in Schedule RC–C of the Call Report. The agencies proposed this change to conform with the proposal to add a definition for ‘‘automobile loan’’ to the CRA regulations, discussed above, and to align the term with the definition of ‘‘automobile loan’’ in Schedule RC– C of the Call Report. The proposed ‘‘consumer loan’’ definition also added ‘‘other revolving credit plan,’’ to mean a revolving credit plan that is not accessed by credit card. This change conforms to Call Report revisions, which now distinguishes between revolving and non-revolving credit rather than secured and unsecured credit. The proposal also combined the ‘‘other secured consumer loan’’ and ‘‘other unsecured consumer loan’’ categories into the ‘‘other consumer loan’’ category to simplify the definition. Comments Received The agencies received several comments related to the proposed ‘‘consumer loan’’ definition. A commenter supported the agencies’ inclusion of an automobile loan as a consumer loan. The commenter believed that including automobile loans as a type of consumer loan is important for areas where employment and economic opportunities are significant distances from where 141 See PO 00000 current 12 CFR ll.12(j). Frm 00032 Fmt 4701 Sfmt 4700 individuals reside, and public transportation may not be available or reliable. Another commenter supported the proposed definition of ‘‘automobile loan,’’ likewise in the definition of ‘‘consumer loan,’’ because it eliminates uncertainty around direct versus indirect loan inclusion. A commenter suggested that the agencies define ‘‘unsecured personal loans,’’ as they do with credit cards, separately from the general category of ‘‘other secured and unsecured loans,’’ because unsecured personal loans are a fairly uniform credit class. Final Rule The agencies are adopting the proposed definition of ‘‘consumer loan’’ in the final rule with several edits designed to simplify the definition and avoid the possibility of future misalignment of the definition with the Call Report. Specifically, ‘‘consumer loan’’ in the final rule means a loan to one or more individuals for household, family, or other personal expenditures and that is one of the following types of loans: (1) automobile loan as reported in Schedule RC–C of the Call Report; (2) credit card loan, as reported as ‘‘credit card’’ in Schedule RC–C of the Call Report; (3) other revolving credit plan, as reported in Schedule RC–C of the Call Report; and (4) other consumer loan, as reported in Schedule RC–C of the Call Report. For clarity, the agencies have elected to refer only to these loans as reported in Schedule RC–C of the Call Report for each category of loan covered in the definition. Referring only to loans reported in schedule RC–C of the Call Report better aligns the categories of loans with how banks report those classes of loans on the Call Report. As a result, ‘‘automobile loan,’’ ‘‘credit card loan,’’ ‘‘other revolving credit plan,’’ and ‘‘other consumer loan’’ are now described as those loans reported in Schedule RC–C of the Call Report and do not include specific examples.142 The agencies appreciate commenter concerns about any generality associated with the term ‘‘other secured and unsecured loans,’’ labeled ‘‘other consumer loans’’ in the proposal. The final definition of ‘‘consumer loan’’ is designed to address those concerns not only with the addition of the new category of ‘‘other revolving credit plan,’’ but also with references to the loans reported in Schedule RC–C. To provide additional clarity about the scope of the term ‘‘consumer loan,’’ the agencies also revised the definition to 142 The agencies note that the Call Report uses the term ‘‘credit card’’ and not ‘‘credit card loan.’’ E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 make the list of categories of loans considered consumer loans exhaustive. With this change, the agencies made a technical edit to no longer exclude home mortgage loans, multifamily loans, small business loans, and small farm loans because these loans would not otherwise fall within the final definition of ‘‘consumer loan.’’ County The agencies proposed adding a definition for ‘‘county’’ and defining it to mean any county or statistically equivalent entity as defined by the U.S. Census Bureau. The agencies proposed this definition to increase clarity and consistency in the CRA regulations by aligning the term with the scope of the applicable U.S. Census Bureau definition.143 The agencies did not receive any comments concerning this proposed definition and are adopting the definition with one conforming change and one technical change. The agencies are revising the definition to include the phrase, ‘‘county equivalent,’’ to provide additional clarity and further align the definition of ‘‘county’’ in the CRA regulations with the applicable terms used by the U.S. Census Bureau. The U.S. Census Bureau utilizes the term ‘‘county equivalents’’ to refer to those geographic areas comparable to counties—i.e., parishes in Louisiana, boroughs, independent cities in certain States, Census Areas, cities in Alaska; municipios in Puerto Rico, districts and islands in American Samoa, municipalities in the Commonwealth of the Northern Mariana Islands, islands in the U.S. Virgin Islands, the District of Columbia, and Election Districts in Guam.144 The agencies believe the addition of ‘‘county equivalent’’ clarifies that the definition of ‘‘county’’ captures those areas that are geographically comparable to counties, but are not identified as such, and that these areas will receive the same treatment under the CRA regulations. The agencies are also referring to these terms as used by the U.S. Census Bureau, instead of as defined, and including a cross-reference to the authority of the U.S. Census Bureau to more accurately provide a source for these terms. Accordingly, the definition of ‘‘county’’ in the final rule means any county, county equivalent, or 143 See U.S. Census Bureau, ‘‘Glossary,’’ https:// www.census.gov/glossary/?term=County%20 and%20equivalent%20entity (defining ‘‘county and equivalent entity’’). 144 See U.S. Census Bureau, ‘‘Geographic Levels,’’ https://www.census.gov/programs-surveys/ economic-census/guidance-geographies/levels.html. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 statistically equivalent entity as used by the U.S. Census Bureau pursuant to title 13 of the U.S. Code. The agencies have made conforming changes throughout the final rule to remove references to ‘‘county equivalent’’ that are now unnecessary. Deposit Location The agencies proposed to add a definition of ‘‘deposit location’’ to the CRA regulations as a clarifying corollary to the proposed definition of ‘‘deposits.’’ Specifically, the agencies proposed to define ‘‘deposit location’’ to mean: (1) for banks that collect and maintain deposits data as provided in proposed § ll.42, the census tract or county, as applicable, in which the consumer resides, or the census tract or county, as applicable, in which the business is located if it has a local account; (2) for banks that collect and maintain, but that do not report, deposits data as provided in proposed § ll.42, the census tract or county, as applicable, in which the consumer resides, or the census tract or county, as applicable, in which the business is located if it has a local account except that, for purposes of the Market Volume Benchmark and for all community development financing benchmarks, the county of the bank branch to which the deposits are assigned in the FDIC’s Summary of Deposits data; and (3) for banks that do not collect and maintain deposits data as provided in proposed § ll.42, the county of the bank branch to which the deposits are assigned in the Summary of Deposits. Some commenters stated that the definition of ‘‘deposit location’’ for banks that collect and maintain deposits data under the proposal is vague. A commenter noted that the proposed definition would leave significant questions unresolved, including what it means for a business to be ‘‘located’’ in a place and whether a business can be ‘‘located’’ in multiple places. The agencies are adopting the definition of ‘‘deposit location’’ with revisions consistent with the revisions to the definition of ‘‘deposits,’’ discussed below, as well as revisions to address commenter concerns. Specifically, the definition in the final rule removes the category of banks that collect and maintain, but do not report, deposits data. As explained in the discussion of the ‘‘deposits’’ definition, this category is no longer necessary. The agencies also agree with commenters’ suggestions that the proposed definition could be clarified, and does not clearly indicate where deposits are located. Therefore, the agencies are removing the references to census tracts and counties PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 6605 from the part of the definition that applies to banks that collect, maintain, and report deposits data as provided in § ll.42, and replacing them with ‘‘the address on file with the bank for purposes of the Customer Identification Program required by 31 CFR 1020.220 or another documented address at which the depositor resides or is located.’’ The agencies also made a clarifying change to replace the terms ‘‘consumer’’ and ‘‘business’’ used in the proposal with ‘‘depositor’’ and a technical change to replace ‘‘branch’’ with ‘‘facility’’ to refer to the term used in the FDIC’s Summary of Deposits. Accordingly, the final rule provides that ‘‘deposit location’’ means: (1) for banks that collect, maintain, and report deposits data as provided in § ll.42, the address on file with the bank for purposes of the Customer Identification Program required by 31 CFR 1020.220 or another documented address at which the depositor resides or is located; and (2) for banks that do not collect, maintain, and report deposits data as provided in § ll.42, the county of the bank facility to which the deposits are assigned in the FDIC’s Summary of Deposits data. Depository Institution The final rule includes a new definition for ‘‘depository institution,’’ not included in the proposal, to mean any institution subject to CRA, as described in 12 CFR 25.11, 228.11, and 345.11. The agencies are adopting this definition as a technical clarification to effectuate their intent that ‘‘bank’’ or ‘‘banks’’ in certain provisions of the proposal was meant to include institutions evaluated by any of the agencies under part 25, 228, or 345.145 For example, in the Community Development Financing Test, the 145 The agencies integrated the term ‘‘depository institution’’ or ‘‘large depository institution’’ into the final rule in final §§ ll.21(b)(1) (consideration of affiliate activities); ll.22(g)(1) (Retail Lending Test additional factors); ll.23(b)(2)(i)(B) (Retail Services and Products Test benchmark); ll.24(b)(2)(i) and (ii), (c)(2)(ii); (d)(2)(ii); and (e)(2)(ii) and (iv) (benchmarks related to the Community Development Financing Test); ll.26(f)(2)(ii) and (iv) (benchmarks related to the Community Development Financing Test for Limited Purpose Banks); ll.27(c)(4) (consideration of affiliate activities for strategic plans); ll.42(h) (aggregate disclosure statements); ll.44 (public notice by banks); the Market Volume Benchmark in appendix A, paragraph I.b; appendix B, paragraph I.a (numerator and denominator for final § ll.24 and final § ll.26 calculations); and the benchmarks in appendix B, as applicable. Throughout the remainder of this SUPPLEMENTARY INFORMATION the agencies use the terms ‘‘banks’’ and ‘‘large banks’’ to simplify the discussion. When discussing the above provisions, certain references to ‘‘banks’’ or ‘‘large banks’’ are references to all ‘‘depository institutions’’ or ‘‘large depository institutions,’’ as applicable. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6606 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations benchmarks would include the lending, investments, and deposits of all banks in the applicable geographic area regardless of regulator. The final rule replaces those references to the term ‘‘bank’’ with the term ‘‘depository institution’’ or ‘‘large depository institution,’’ discussed below. The agencies also made other conforming edits to integrate these terms into the final rule.146 meaning as in the FDIC’s Summary of Deposits Reporting Instructions. For banks that do not collect and maintain deposits data as provided in proposed § ll.42, the proposal provided that ‘‘deposits’’ would have the same meaning as in the FDIC’s Summary of Deposits Reporting Instructions. Deposits Several commenters stated that the agencies should exclude corporate deposits from the definition of ‘‘deposits’’ and recommended defining ‘‘deposits’’ as the sum of total deposits intended primarily for personal, household, or family use, as reported on Schedule RC–E of the Call Report, items 6.a, 6.b, 7.a(1), and 7.b(1). One of the commenters made the same comment with specific reference to large banks. Another commenter explained that including corporate deposits in the proposed definition of ‘‘deposits’’ could reduce incentives for banks to address the community development needs of underserved communities, particularly rural communities, where few corporate deposits are attributed. This commenter also expressed concern that including corporate deposits could lead to distorted or inconsistent results due to fluctuations in corporate deposits that could in turn lead to CRA focus and resource challenges for banks. Another commenter explained that using the suggested items in the Call Report would more accurately reflect a bank’s capacity to engage in qualifying activities for individuals, small businesses, and small farms, because the items collect information on deposits maintained primarily for personal, household, or family use. The commenter further explained that use of these suggested items would also eliminate the potential for large corporate deposits to skew the allocation of deposits across different geographies, thereby better capturing the amount of deposits collected from specific assessment areas. Another commenter supported this position, referencing the proposal’s potential to exacerbate CRA hot spots in urban centers where deposits are concentrated, fluctuations in the working capital needs of corporate depositors, and the potential challenges of assigning a location for corporate deposits in locations spanning multiple geographies. If not removed, the commenter warned that corporate deposits could distort the calculation of the retail lending volume screen, the calculation of the Community Development Financing Metric, and the The Agencies’ Proposal The agencies proposed to add a definition of ‘‘deposits’’ to the CRA regulations to support and clarify the proposal to use deposits data for several evaluation metrics, benchmarks, and weights under the proposed performance tests. This definition would be based on whether a bank had to collect, maintain, or report deposits data. As discussed further in the section-by-section analysis of § ll.42, the agencies proposed to require large banks with assets greater than $10 billion to collect, maintain, and report county-level deposits data based on the county in which the depositor’s address is located to allow for more precise measurement of a bank’s local deposits by county.147 For these banks, the agencies proposed a definition of ‘‘deposits’’ based on deposits in domestic offices of individuals, partnerships, and corporations, and of commercial banks and other depository institutions in the United States as defined in Schedule RC–E of the Call Report, which constitute the majority of deposit dollars captured overall in the Call Report categories of Deposits in Domestic Offices. The proposed definition excluded U.S. Government deposits, State and local government deposits, domestically held deposits of foreign governments or official institutions, or domestically held deposits of foreign banks or other foreign financial institutions. For banks that collect and maintain, but that do not report, deposits data as provided in proposed § ll.42, the proposal provided that ‘‘deposits’’ would have the same meaning as for banks that must report deposits data except that, for purposes of the Retail Lending Test’s Market Volume Benchmark and for all community development financing benchmarks, ‘‘deposits’’ would have the same 146 For example, the agencies replaced references to the common rule text sections with specific pin cites to all three agencies final regulations as appropriate. 147 See proposed § ll.42(a)(7) and (b)(5); see also final § ll.42(a)(7) and (b)(3) and the accompanying section-by-section analysis. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Comments Received PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 weighting of banks’ performance conclusions across assessment areas. Other commenters stated that the agencies should broaden the definition of ‘‘deposits’’ to include deposits from limited liability companies (LLCs) and trusts, and not just individuals, partnerships, and corporations. One of these commenters noted that LLC deposits are domestic deposits in substance and another commenter suggested that the definition be broadened to include deposits from all entities. The commenters stated that the agencies should specifically include these deposits in the final rule for clarification. One of these commenters also requested the agencies clarify that the ‘‘deposits’’ definition does not include deposits from foreign persons or entities that are made in U.S. branches. The commenter explained that these deposits do not come from a bank’s assessment area and are not related to the CRA’s purpose of returning money to the community. The commenter also expressed concern that including these types of deposits in the definition may incentivize some banks to keep the funds outside of the United States entirely. Another commenter indicated that the agencies should include State and local government deposits in the definition because banks can lend against these deposits and some State and local jurisdictions have developed public policies designed to promote reinvestment goals by tying their deposits to bank community performance. The organization stated that CRA rules should not undermine these local efforts by lowering the reinvestment bar for banks with which State and local governments do business. Final Rule The agencies are adopting the proposed definition of ‘‘deposits’’ in the final rule with substantive revisions and technical changes. Specifically, the agencies are collapsing the three categories of institutions under the proposed definition—(1) banks that collect, maintain, and report deposits data; (2) banks that collect and maintain, but do not report, deposits data; and (3) banks that do not collect and maintain deposits data—into two categories. Thus, under the final rule, the definition would address: (1) banks that collect, maintain, and report deposits data; and (2) banks that do not collect, maintain, and report that data. The agencies elected to simplify the definition of ‘‘deposits’’ in response to comments about both the overall E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations complexity of the proposal and the complexity of the provisions related to deposits data collection and reporting. Further, because the final rule provides that institutions that collect and maintain deposits data, whether required or opting to do so, must also report deposits data, the category for banks that collect and maintain but do not report is unnecessary. By removing this category, the agencies believe the final rule provides a less complex and more workable definition. The agencies are also making a technical change to refer to deposits as reported in the FDIC’s Summary of Deposits as required under 12 CFR 304.3(c), instead of referring to the instructions, to more accurately provide a source for this term. The agencies have also replaced ‘‘U.S.’’ with ‘‘United States.’’ The agencies have declined to remove corporate deposits from the ‘‘deposits’’ definition because the agencies believe that utilizing both personal and corporate deposits results in a more comprehensive representation of the community that an institution serves. The agencies understand concerns that including corporate deposits in the proposed ‘‘deposits’’ definition could reduce incentives for banks to address the community development needs of underserved communities, because, for example, reporting banks could have higher proportions of their deposits in other areas and, under the Community Development Financing Test, commensurately higher expectations for activity in those areas. However, the agencies believe that other aspects of the rule will encourage banks to focus more on these areas. Specifically, under § ll.15, the agencies consider whether an institution serves geographic areas with low levels of community development financing. Further, ‘‘targeted census tracts’’ are used in the final rule to consider whether certain place-based community development activities qualify, and the definition of this term, discussed below, includes underserved communities. Lastly, the agencies are addressing the concern related to CRA hot spots where deposits are concentrated by evaluating bank community development financing and retail lending outside of facility-based assessment areas.148 The agencies also declined to modify the ‘‘deposits’’ definition to include deposits from LLCs and trusts. The agencies note that because LLCs are a form of corporation, they are captured under corporate deposits on the Call 148 See final §§ ll.17 through ll.19 and the accompanying section-by section analyses. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Report.149 Further, institutions holding trust account deposits have a fiduciary obligation to invest those deposits in accordance with the trust’s instructions. As a result, those deposits are generally not available to be reinvested into the community and should not be included in ‘‘deposits.’’ The agencies also decided not to exclude deposits from foreign persons or entities that are made in U.S. branches. The exclusions in the deposit definition are limited to whole categories in the Call Report definition of deposit. Excluding foreign individuals or companies would exclude only a partial category in the Call Report. This partial exclusion would increase burden because these categories are known and understood by the industry and, the agencies believe, would not offer significant benefit. Second, as explained in the proposal, the agencies elected to exclude State and local government deposits, along with foreign government deposits, because these deposits are sometimes subject to restrictions and may be periodically rotated among different banks causing fluctuations in the level of deposits over time.150 These government entities make up one whole category under the Call Report definition. This determination is based on the agencies’ supervisory experience, which also considered that restricted funds may also misrepresent a bank’s ability to reinvest funds in the local community. The agencies have elected to maintain deposits data collection from banks with assets greater than $10 billion and decline to expand this collection requirement to other banks. The agencies believe the collection of deposits data is important, but that data collection should be limited to large banks with assets greater than $10 billion due to the burden associated with this requirement.151 Further, the agencies have declined to expand the use of the FDIC’s Summary of Deposits data to all banks because of the limitations of Summary of Deposits data. In particular, Summary of Deposits data is tied to a bank’s branches. As banks’ business models continue to evolve, there is the possibility that branches will be less representative of the communities that banks serve. As a result, Summary of Deposits data may also be less representative of the communities a bank serves. The 149 See Call Report, Schedule RC–E. 87 FR 33884, 33995 (June 3, 2022). 151 For additional discussion of this issue, see the discussion on deposits in the section-by-section analysis of § ll.42. 150 See PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 6607 agencies note, however, that banks that opt into deposits data collection and maintenance must report these data.152 Accordingly, the definition of ‘‘deposits’’ in the final rule provides that: (1) for banks that collect, maintain, and report deposits data as provided in § ll.42, ‘‘deposits’’ means deposits in domestic offices of individuals, partnerships, and corporations, and of commercial banks and other depository institutions in the United States as defined in Schedule RC–E of the Call Report; deposits does not include U.S. Government deposits, State and local government deposits, domestically held deposits of foreign governments or official institutions, or domestically held deposits of foreign banks or other foreign financial institutions; and (2) for banks that do not collect, maintain, and report deposits data as provided in § ll.42, ‘‘deposits’’ means a bank’s deposits as reported in the FDIC’s Summary of Deposits as required under 12 CFR 304.3(c). Digital Delivery System The final rule includes a new definition for ‘‘digital delivery systems,’’ not included in the proposal, to mean a channel through which banks offer retail banking services electronically, such as online banking or mobile banking. The agencies are adopting this definition to clarify the agencies’ intended meaning of this term, which is to reflect the common understanding of this term. This term is used in § ll.23, Retail Services and Products Test. For additional discussion of digital delivery systems, see the section-by-section analysis of § ll.23. Dispersion of Retail Lending The agencies proposed to add a definition of ‘‘dispersion of retail lending’’ to § ll.12 in support of the proposal to assess a bank’s retail lending performance in a facility-based assessment area based not only on a bank’s Retail Lending Volume Screen (see proposed § ll.22(c)) and geographic and borrower distribution metrics (see proposed § ll.22(d)), but also in consideration of several other factors, including the dispersion of retail lending in the facility-based assessment area to determine whether there are gaps in lending in the facilitybased assessment area that are not explained by performance context. Specifically, the agencies proposed to define ‘‘dispersion of retail lending’’ to mean how geographically diffuse or widely spread such lending is across 152 See final rule § ll.42(b)(3)(i) and the sectionby-section analysis of § ll.42. E:\FR\FM\01FER2.SGM 01FER2 6608 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 census tracts of different income levels within a facility-based assessment area, retail lending assessment area, or outside retail lending area. The agencies did not receive any comments on this definition. However, after further review, the agencies have elected not to adopt a definition of ‘‘dispersion of retail lending’’ in § ll.12 because this term is used only once, in § ll.22. Instead, the agencies have incorporated this concept into § ll.22(g) of the final rule. Distressed or Underserved Nonmetropolitan Middle-Income Census Tract In the current CRA regulations, the definition of ‘‘community development’’ includes activities that revitalize or stabilize ‘‘distressed or underserved nonmetropolitan middle-income geographies’’ as designated by the agencies based on: (1) rates of poverty, unemployment, and population loss; or (2) population size, density, and dispersion. Further, this provision states that activities revitalize and stabilize geographies designated based on population size, density, and dispersion if they help to meet essential community needs, including the needs of low- and moderate-income individuals.153 The agencies proposed to include a definition of ‘‘distressed or underserved nonmetropolitan middle-income census tract’’ in § ll.12, based on the language in the current definition of ‘‘community development,’’ with certain edits. Specifically, the agencies proposed to add clarity and consistency by incorporating additional detail from the Interagency Questions and Answers into the proposed definition.154 The agencies also proposed technical and conforming changes, such as replacing the term ‘‘geography’’ with the term ‘‘census tract,’’ reflecting the change to this term discussed above, and restructuring the definition. As proposed, ‘‘distressed or underserved nonmetropolitan middle-income census tract’’ would mean a census tract publicly designated as such by the agencies and compiled in a list published annually by the FFIEC. The agencies would designate a nonmetropolitan middle-income census tract as distressed if it is in a county that has: (1) an unemployment rate of at least 1.5 times the national average; (2) a poverty rate of 20 percent or more; or (3) a population loss of 10 percent or more between the previous and most recent decennial census or a net migration loss 153 See 154 See current 12 CFR ll.12(g)(4)(iii). Q&A § ll.12(g)(4)(iii)—1. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 of five percent or more over the fiveyear period preceding the most recent census. The agencies would designate a nonmetropolitan middle-income census tract as underserved if it meets the criteria for population size, density, and dispersion that indicate the area’s population is sufficiently small, thin, and distant from a population center that the census tract is likely to have difficulty financing the fixed costs of meeting essential community needs, based on the Urban Influence Codes established by the U.S. Department of Agriculture’s (USDA) Economic Research Service numbered ‘‘7,’’ ‘‘10,’’ ‘‘11,’’ or ‘‘12.’’ 155 The agencies did not receive any comments on the proposed definition of ‘‘distressed or underserved nonmetropolitan middle-income census tract,’’ and are adopting the definition as proposed with two technical changes, referencing the official name of the Board, and replacing the word ‘‘migration’’ with ‘‘population.’’ Distribution of Retail Lending The agencies proposed to add a definition of ‘‘distribution of retail lending’’ to § ll.12 to increase clarity and consistency regarding the evaluation of a bank’s retail lending under the proposed Retail Lending Test. As proposed, ‘‘distribution of retail lending’’ would refer to how retail lending is apportioned among borrowers of different income levels, businesses or farms of different sizes, or census tracts of different income levels. The agencies did not receive any comments on this definition. However, after further review, the agencies have elected not to adopt this definition in the final rule because the distribution analysis is explained extensively in the Retail Lending Test in the final rule.156 Evaluation Period The agencies proposed to add a definition of ‘‘evaluation period’’ to increase clarity and consistency in the CRA regulations. Specifically, proposed § ll.12 defined ‘‘evaluation period’’ to mean the period of time between CRA examinations, generally in calendar years, in accordance with the agency’s guidelines and procedures. The agencies received no comments concerning the proposed definition of ‘‘evaluation period.’’ Accordingly, the agencies are adopting this term in the final rule with several technical changes designed to enhance the clarity and accuracy of the 155 See U.S. Dept. of Agriculture, ‘‘Urban Influence Codes,’’https://www.ers.usda.gov/dataproducts/urban-influence-codes/. 156 See final § ll.22 and appendix A and accompanying section-by-section analysis. PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 definition. Specifically, the agencies revised the phrase ‘‘period of time’’ to ‘‘the period’’ and moved the clause ‘‘generally in calendar years’’ so that it now follows ‘‘the period,’’ and replaced the phrase ‘‘time between CRA examinations’’ with ‘‘during which a bank conducted the activities that the [Agency] evaluates in a CRA examination.’’ Accordingly, ‘‘evaluation period,’’ in the final rule means the period, generally in calendar years, during which a bank conducted the activities that the agency evaluates in a CRA examination, in accordance with the agency’s guidelines and procedures. Facility-Based Assessment Area As discussed above, the agencies proposed to replace the term ‘‘assessment area’’ in § ll.12 with the terms ‘‘facility-based assessment area,’’ ‘‘retail lending assessment area,’’ and ‘‘outside retail lending area.’’ The agencies proposed to define ‘‘facilitybased assessment area’’ to mean a geographic area delineated in accordance with § ll.16.157 Section ll.16 describes the bases for delineating this type of assessment area. For information regarding facility-based assessment area delineation requirements in the final rule, see the section-by-section analysis of § ll.16. A commenter suggested clarifying that an ATM not owned and operated exclusively by a bank would not trigger a new facility-based assessment area, consistent with the current regulation. The agencies agree that a nonproprietary remote service facility, such as a network ATM, does not constitute a bank facility because such ATMs are owned and operated by a third party and are not operated exclusively for the bank. Further, a bank participating in such an ATM network may have limited control over where an ATM is located. Therefore, such ATMs would not by themselves trigger a new facility-based assessment area. For the reasons stated above, the agencies are adopting the ‘‘facility-based assessment area’’ definition as proposed in the final rule with a minor wording change. Specifically, the agencies replaced the phrase ‘‘in accordance with’’ with ‘‘pursuant to’’ in the final rule. 157 Similarly, as discussed above, the current CRA regulations define ‘‘assessment area’’ to mean ‘‘a geographic area delineated in accordance with § ll.41’’—the section of the current CRA regulations that describes the bases for delineating an assessment area. See current 12 CFR ll.12(c). E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations High Opportunity Area ddrumheller on DSK120RN23PROD with RULES2 The Agencies’ Proposal The agencies proposed to add a definition of ‘‘High Opportunity Area’’ to mean: (1) an area designated by the U.S. Department of Housing and Urban Development (HUD) as a ‘‘Difficult Development Area’’ (DDA); or (2) an area designated by a State or local Qualified Allocation Plan as a High Opportunity Area, and where the poverty rate falls below 10 percent (for metropolitan areas) or 15 percent (for nonmetropolitan areas). As discussed further in the sectionby-section analysis of § ll.15, the agencies proposed to define ‘‘High Opportunity Area’’ in relation to the proposal to conduct an impact review of community development activities.158 One of the proposed factors that the agencies would consider in assessing the impact and responsiveness of a community development activity would be whether the activity ‘‘[d]irectly facilitate[s] the acquisition, construction, development, preservation, or improvement of affordable housing in High Opportunity Areas.’’ 159 The proposed definition would align with the Federal Housing Finance Agency’s (FHFA) definition of ‘‘High Opportunity Areas,’’ 160 and was intended to demarcate areas where efforts to increase affordable housing could be especially beneficial for lowand moderate-income individuals. The agencies solicited comment on whether the proposed approach to use the FHFA’s definition of ‘‘High Opportunity Areas’’ is appropriate, and whether there are other options for defining High Opportunity Areas. Comments Received Most commenters that provided input on this definition supported the proposal to align the ‘‘High Opportunity Areas’’ definition with the FHFA’s definition, for example, because the high cost of housing in otherwise low poverty areas can absorb significant resources from large portions of the population. A commenter observed that low poverty rates are an important component of identifying high opportunity areas. This commenter supported limiting the variability of definitions promulgated in State Qualified Allocation Plans but proposed § ll.15. proposed § ll.15(b)(6). 160 See FHFA, ‘‘Overview of the 2020 High Opportunity Areas File’’ (2020), https:// www.fhfa.gov/DataTools/Downloads/Documents/ Enterprise-PUDB/DTS_Residential-EconomicDiversity-Areas/DTS_High%20Opportunity_Areas_ 2020_README.pdf. 158 See 159 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 suggested there may also be other relevant opportunity or social vulnerability indices. Another commenter suggested the agencies clarify the definition to allow for variation in terminology used from State to State. Some commenters offered various suggestions for expanding the ‘‘High Opportunity Areas’’ definition, such as to include Qualified Census Tracts to allow communities concerned about displacement of low- and moderateincome residents the ability to access CRA-motivated financing. Another commenter recommended expanding the definition to include Empowerment Zone and Enterprise Communities, transit-oriented areas, and census tracts where 40 percent or more of the homes meet the definition of affordable housing, and a different commenter suggested the definition should be expanded to include certain climate resilience factors. Another commenter stated that, in addition to aligning with the FHFA definition, the agencies should permit flexibility in how financial institutions identify affordable housing needs, gaps, and opportunities, utilizing data analytics tools. A few commenters opposed the proposed ‘‘High Opportunity Areas’’ definition. Some of these commenters opposed using the FHFA’s definition because it would include DDAs, which these commenters asserted were created to permit higher levels of housing tax credit subsidies in areas with high construction, land, and utility costs and are not directly related to higher income areas with low rates of poverty. Another commenter expressed some concern about including DDAs and suggested that the agencies consider eliminating DDAs or adding criteria to ensure that in-scope DDAs include features supporting economic mobility, such as strong transit connectivity of the housing to schools and childcare facilities, health facilities, employment centers, and green space. Similarly, another commenter stated that the proposed FHFA definition is limited to quantifiable poverty measures and State Qualification Allocation Plan definitions but may not address a more holistic view of ‘‘opportunity,’’ and suggested that incorporating service-enriched housing could be a good counterbalance. A commenter also stated that the FHFA definition may be too restrictive for some communities and recommended that the agencies be open to other options where high cost of living relative to local wages and income demonstrates a need. PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 6609 Final Rule The agencies are adopting the definition of ‘‘High Opportunity Areas’’ in the final rule with substantive revisions. As discussed above, the agencies intended the proposed definition of ‘‘High Opportunity Area’’ to align with the FHFA’s definition of ‘‘High Opportunity Area.’’ However, the FHFA maintains a ‘‘High Opportunity Areas File’’ that designates the specific census tracts that qualify as high opportunity areas for purposes of residential economic diversity activities.161 In consideration of the fact that the FHFA maintains a ‘‘High Opportunity Areas File,’’ the agencies believe it is prudent to defer to the FHFA’s interpretation of its regulation and guidance in the identification of ‘‘High Opportunity Areas.’’ 162 Further, the agencies believe reliance on the FHFA’s identification of ‘‘High Opportunity Areas’’ will eliminate any potential ambiguity in the definition. For these reasons, the agencies have modified the proposed definition of ‘‘High Opportunity Area’’ to mean an area identified by the FHFA for purposes of the Duty to Serve Underserved Markets regulation in 12 CFR part 1282, subpart C. This definition generally includes geographic areas where the cost of residential development is high 163 and affordable housing opportunities can be limited. While the agencies considered commenters’ concerns about the definition and suggestions for alternatives, the agencies continue to believe the ‘‘High Opportunity Area’’ definition included in the final rule provides the best option for the purposes of the impact and responsiveness factor in § ll.15(b)(7) because, as defined by FHFA, these areas are intended to capture areas that provide strong opportunities for lowand moderate-income individuals, families, and households. The definition captures both DDAs and also areas designated as High Opportunity Areas where the poverty rate is low. The agencies agree that increasing affordable housing opportunities in these areas helps to provide low- or moderateincome individuals, families, and households with more choices to live in neighborhoods with economic 161 See FHFA, ‘‘Overview of the 2023 High Opportunity Areas File,’’ https://www.fhfa.gov/ DataTools/Downloads/Documents/EnterprisePUDB/DTS_Residential-Economic-Diversity-Areas/ DTS_High_Opportunity_Areas_2023.pdf. 162 See 12 CFR 1282.1, 1282.36(c)(3). 163 See, e.g., HUD, Office of Policy Development and Research, ‘‘Qualified Census Tracts and Difficult Development Areas’’ (2022), https:// www.huduser.gov/portal/datasets/qct.html. E:\FR\FM\01FER2.SGM 01FER2 6610 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations opportunities. The agencies considered various alternative options, including commenter suggestions to expand the definition to other types of geographic areas or exclude DDAs from the definition but continue to believe the definition provides a clear set of standards related to where additional affordable housing may be both needed and hard to develop and is in alignment with an already in-use Federal agency definition with readily available geographic classifications. ddrumheller on DSK120RN23PROD with RULES2 Home Mortgage Loan For a discussion of the definition of ‘‘home mortgage loan,’’ see the discussion for Mortgage-Related Definitions in this section-by-section analysis of § ll.12. Income Level To increase clarity, the agencies proposed non-substantive and minor structural revisions to the current definition of ‘‘income level’’ 164 and, as in other definitions, to replace the term ‘‘geography’’ with the more precise term ‘‘census tract.’’ Specifically, the agencies proposed that ‘‘income level’’ include the following definitions: • Low-income would mean: (1) for individuals within a census tract, an individual income that is less than 50 percent of the area median income; or (2) for a census tract, a median family income that is less than 50 percent of the area median income. • Moderate-income would mean: (1) for individuals within a census tract, an individual income that is at least 50 percent and less than 80 percent of the area median income; or (2) for a census tract, a median family income that is at least 50 percent and less than 80 percent of the area median income. • Middle-income would mean: (1) for individuals within a census tract, an individual income that is at least 80 percent and less than 120 percent of the area median income; or (2) for a census tract, a median family income that is at least 80 percent and less than 120 percent of the area median income. • Upper-income would mean: (1) for individuals within a census tract, an individual income that is 120 percent or more of the area median income; or (2) for a census tract, a median family income that is 120 percent or more of the area median income. Comments Received The agencies received several comments on the proposed definition of ‘‘income level.’’ A commenter requested that the agencies include persons with 164 See current 12 CFR ll.12(m). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 vision loss—and persons with disabilities in general—in the CRA regulation’s ‘‘low-income’’ population, explaining that persons with vision loss or other disabilities often experience high unemployment, average income that is lower than the general population, less access to technology and the internet, and are more likely to be persons of color. Another commenter suggested the agencies include persons with disabilities in the low- and moderate-income designation even if their incomes exceed that designation because of the financial vulnerabilities and high costs associated with living with a disability, such as the expenses of accessible van conversions, assistive technology, and home renovations. Another commenter suggested that the agencies revise the income levels in an upward direction so that ‘‘lowincome’’ is less than 60 percent of area median income, ‘‘moderate-income’’ is between 60 percent and 100 percent of area median income, ‘‘middle-income’’ is between 100 percent and 125 percent of area median income, and ‘‘upperincome’’ is more than 125 percent of area median income. The commenter stated that this upward revision of the income levels could provide additional support for middle-class home ownership and assist more middleincome households that have lost ground after the COVID–19 pandemic and due to high inflation and would be consistent with the change in the agencies’ special designation of distressed or underserved nonmetropolitan middle-income census tracts (a designation referencing between 80 percent and 120 percent of area median income) and in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which defines low-income as 80 percent of area median income and moderateincome as income ‘‘not in excess of area median income.’’ Another commenter stated that it welcomes the agencies providing more examples on how to identify low- and moderate-income individuals and families, and requested that the agencies consider a broader, more flexible framework that uses enrollment status in the USDA National School Lunch Program and Medicaid as part of the definition of low- and moderate-income. Final Rule The agencies are adopting the proposed definition of ‘‘income levels’’ in the final rule with several revisions to the first prong of each income level. Specifically, the agencies removed the reference to ‘‘census tracts’’ because inclusion of the term is unnecessary. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 The agencies also expanded the definition so that it applies to individuals, families, and households, instead of only individuals, as proposed. The agencies added families and households in recognition of the fact that the measurement of income would be incomplete if each income levels excluded families or households. Accordingly, the agencies are adopting the following definition of ‘‘income levels’’: • ‘‘Low-income,’’ which means: (1) for individuals, families, or households, income that is less than 50 percent of the area median income; or (2) for a census tract, a median family income that is less than 50 percent of the area median income. • ‘‘Moderate-income,’’ which means: (1) for individuals, families, or households, an income that is at least 50 percent and less than 80 percent of the area median income; or (2) for a census tract, a median family income that is at least 50 percent and less than 80 percent of the area median income. • ‘‘Middle-income,’’ which means: (1) for individuals, families, or households, an income that is at least 80 percent and less than 120 percent of the area median income; or (2) for a census tract, a median family income that is at least 80 percent and less than 120 percent of the area median income. • ‘‘Upper-income,’’ which means: (1) for individuals, families, or households, an income that is 120 percent or more of the area median income; or (2) for a census tract, a median family income that is 120 percent or more of the area median income. The agencies considered the commenters’ recommendations and suggestions to consider a broader and more flexible framework and to revise the income levels upwards but have elected to maintain the income levels as proposed in the final rule. The income levels in the proposed definition mirror the income levels in the current definition, so the income levels standards are well known and understood within the banking industry. Further, the agencies believe a framework that relies on quantitative income factors provides for the most workable definition and minimizes complexity. Intermediate Bank For a discussion of the definition of ‘‘intermediate bank,’’ see the discussion above for Bank Asset-Size Definitions. Large Bank For a discussion of the definition of ‘‘large bank,’’ see the discussion above for Bank Asset-Size Definitions. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Large Depository Institution The final rule includes a new definition for ‘‘large depository institution,’’ not included in the proposal, to mean any depository institution, excluding depository institutions designated as limited purpose banks or savings associations 165 pursuant to 12 CFR 25.26(a), or designated as limited purpose banks pursuant to 12 CFR 228.26(a) or 345.26(a), that meets the asset size threshold of a large bank. The agencies are adopting this definition as a technical clarification to effectuate their intent that ‘‘large bank’’ in certain proposed benchmarks in the Community Development Financing Test includes all large banks and savings associations evaluated under 12 CFR parts 25, 228, and 345. The agencies also made other conforming edits to integrate these terms into the final rule.166 Limited Purpose Bank ddrumheller on DSK120RN23PROD with RULES2 The current CRA regulations define ‘‘limited purpose bank’’ to mean a bank that offers only a narrow product line (such as credit card or motor vehicle loans) to a regional or broader market and for which a designation as a limited purpose bank is in effect, in accordance with § ll.25(b).167 The agencies proposed to revise the illustrative list of loan types from ‘‘credit card or motor vehicle loans’’ to ‘‘credit cards, other revolving consumer credit plans, other consumer loans, or other non-reported commercial and farm loans’’ and to change the cross-reference. The agencies proposed this change to more specifically identify the types of product lines that might be offered by a bank eligible for a ‘‘limited purpose bank’’ designation. Additionally, the agencies proposed to remove the reference to ‘‘motor vehicle loans’’ (replaced in the proposal by the proposed term ‘‘automobile loans,’’ as discussed above) as an illustrative type of a narrow retail product line, because the agencies proposed to evaluate automobile 165 As provided in the OCC’s agency-specific amendments, below, final 12 CFR part 25 generally replaces the term ‘‘bank’’ in the common rule text with the term ‘‘bank or savings association.’’ As such, in the definition of ‘‘large depository institution’’ the phrase ‘‘limited purpose’’ modifies both ‘‘banks’’ and ‘‘savings associations’’ and should be read as ‘‘limited purpose banks’’ and ‘‘limited purpose savings associations.’’ More generally, any modifiers that precede the terms ‘‘bank(s) or savings association(s)’’ or ‘‘bank(s) and savings association(s)’’ modify both ‘‘bank(s)’’ and ‘‘savings association(s).’’ 166 See supra note 145. 167 See current 12 CFR ll.12(n). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 lending under the proposed Retail Lending Test. In addition, the current CRA regulations define ‘‘wholesale bank’’ to mean a bank that is not in the business of extending home mortgage, small business, small farm, or consumer loans to retail customers, and for which a designation as a wholesale bank is in effect, in accordance with § ll.25(b).168 To determine whether a bank meets this definition, the agencies consider whether a bank holds itself out to the retail public as providing such loans; and may consider the bank’s revenues from extending such loans compared to its total revenue, including off-balance sheet activities.169 The proposal included the same definition as the current rule, with a technical change to the cross-reference. Comments Received The agencies received a number of comments concerning the proposed definitions of ‘‘limited purpose bank’’ and ‘‘wholesale bank.’’ A few commenters stated that these definitions should be reevaluated so that a bank without a material amount of its balance sheet loan originations or loan volume subject to the proposed major product line standard could qualify for the designation. A group of commenters supported maintaining existing guidance for wholesale and limited purpose banks from the Interagency Questions and Answers, with a commenter specifically identifying guidance addressing the amount of unrelated lending in which a bank may engage while retaining its designation. Other commenters expressed concern with designating banks that engage in extensive credit card lending as wholesale or limited purpose banks. These commenters asserted that the proposal to apply the Community Development Financing Test for Wholesale or Limited Purpose Banks to wholesale or limited purpose banks (discussed in greater detail in the section-by-section analysis of § ll.26) would eliminate the possibility of these banks’ credit card lending being evaluated; this raised concerns for these commenters, who noted that credit card lending is an important source of credit to individuals and small businesses. Instead, most of these commenters urged the agencies to exclude credit card banks from the option to seek a wholesale or limited purpose bank designation or otherwise ensure the distribution of credit card loans is current 12 CFR ll.12(x). 169 See Q&A § ll.12(x)—1. 168 See PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 6611 evaluated pursuant to the proposed Retail Lending Test. Final Rule The agencies are adopting a revised ‘‘limited purpose bank’’ definition and eliminating the ‘‘wholesale bank’’ definition in the final rule. Specifically, the agencies have revised the ‘‘limited purpose bank’’ definition to be similar in structure to the current ‘‘wholesale bank’’ definition. To that end, the agencies are changing the definition of ‘‘limited purpose bank’’ from indicating that these banks offer only a narrow product line to indicating that these banks do not extend to retail customers the loan types evaluated under the final Retail Lending Test. Further, the agencies no longer believe it is necessary to impose the limitation that limited purpose banks may only operate in a ‘‘regional or broader market.’’ The removal of this language equips the definition with the ability to accommodate new or future market participants, such as fintech banks. Finally, the agencies are also adding language to indicate that these banks may extend to retail customers—i.e., the retail public, including, but not limited to, individuals and businesses 170— those loan types evaluated under the final Retail Lending Test on an incidental and an accommodation basis without losing the limited purpose bank designation, as requested by some commenters. Therefore, the final rule defines a ‘‘limited purpose bank’’ as a bank that is not in the business of extending closed-end home mortgage loans, small business loans, small farm loans, or automobile loans evaluated under § ll.22 to retail customers, except on an incidental and accommodation basis, and for which a designation as a limited purpose bank is in effect, in accordance with § ll.26. Because this definition, generally, includes banks considered either ‘‘limited purpose banks’’ or ‘‘wholesale banks’’ under the current or proposed regulations, a separate definition of ‘‘wholesale bank’’ is not necessary. Overall, the changes to ‘‘limited purpose bank’’ in the final rule and the removal of the term ‘‘wholesale bank’’ in the CRA regulations, are intended to improve clarity, minimize complexity, and provide for new and future market participants. Because the current and proposed CRA regulations apply the same performance test to each bank type, the change in nomenclature does not 170 The meaning of retail customers is consistent with current guidance for wholesale banks. See Q&A § ll.12(x)—1. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6612 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations substantively affect the application of performance tests. In other words, a wholesale bank under the proposal would have been subject to proposed § ll.26; a limited purpose bank (which includes wholesale banks under the proposed definition) under the final rule remains subject to the performance test in § ll.26. The agencies believe that most banks that meet the current definition of a ‘‘wholesale bank’’ or ‘‘limited purpose bank’’ will continue to meet the ‘‘limited purpose bank’’ definition in the final rule. However, the agencies acknowledge that a bank that primarily offers automobile loans (and therefore meets the majorityautomobile-lender standard discussed below) may have qualified as a limited purpose bank under the current rule or the proposal but will not qualify as a limited purpose bank under the final rule because they are in the business of extending loans evaluated under § ll.22 to retail customers. The agencies declined to revise the definition of ‘‘limited purpose bank’’ to exclude consumer credit card banks or evaluate credit card banks under the Retail Lending Test, as requested by some commenters. First, based on the agencies’ supervisory experience, credit card banks often have unique business models and do not have extensive branch systems. Second, evaluating credit card banks under the Retail Lending Test would require significant additional data collection from these banks. Credit card underwriting may not rely on a customer’s income, and banks do not have an obligation to collect and routinely update credit card customers’ income data. As a result, credit card customer data collected from these banks would not be complete and could vary widely among banks, posing significant challenges to performing the borrower distributions that are central to the Retail Lending Test. The agencies recognize, however, the importance of credit card lending to low- and moderate-income individuals, small businesses, and small farms. For further discussion of the evaluation of credit card and other non-automobile consumer loans under the final rule, see the section-by-section analyses of §§ ll.22(d) (Retail Lending Test; major product lines) and ll.23 (Retail Services and Products Test). In this regard, for example, the agencies note that small business credit card lending is included in the small business loan product line evaluated under the final Retail Lending Test. In response to some commenters’ recommendations, the agencies note that guidance included in the Interagency Questions and Answers on VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 wholesale and limited purpose banks will no longer be relevant guidance for the final rule, unless the agencies specifically include this guidance in subsequent issuances. Loan Location Under the current CRA regulation, the definition of ‘‘loan location’’ provides that a consumer loan is located in the geography where the borrower resides; a home mortgage loan is located in the geography where the property to which the loan relates is located; and a small business or small farm loan is located in the geography where the main business facility or farm is located or where the loan proceeds otherwise will be applied, as indicated by the borrower.171 The agencies proposed technical revisions to this definition to add greater precision and clarity. As discussed above, the agencies proposed a conforming change across many definitions to replace the term ‘‘geography’’ with the more precise term ‘‘census tract.’’ Additionally, to clarify the point in time when a consumer loan’s location is assigned, the agencies proposed that the location of a consumer loan is based on where the borrower resides at the time the consumer submits the loan application. Further, the agencies proposed to clarify that a home mortgage loan’s location is based on where the property securing the loan is located, instead of where the property related to the loan is located. The agencies did not receive any comments concerning the proposed ‘‘loan location’’ definition and are adopting the definition as proposed with the following changes. First, the agencies have replaced the term ‘‘consumer’’ with the term ‘‘borrower’’ in the first prong, to conform with the reference to ‘‘borrower’’ earlier in the sentence. Second, the agencies have included multifamily loan in the second prong to clarify the location of multifamily loans, which the agencies recognize was not specified in the proposal. Third, the agencies made a non-substantive change to the sentence structure of the third prong to remove the passive tense in one clause. As adopted, the definition of ‘‘loan location’’ in the final rule provides that: (1) a consumer loan is located in the census tract where the borrower resides at the time that the borrower submits the loan application; (2) a home mortgage loan or a multifamily loan is located in the census tract where the property securing the loan is located; and (3) a small business loan or small farm loan is located in the census tract where the main business facility or farm is located or where the borrower will otherwise apply the loan proceeds, as indicated by the borrower. Loan Production Office The current CRA regulations define ‘‘loan production office’’ to mean a staffed facility, other than a branch, that is open to the public and that provides lending-related services, such as loan information and applications.172 The agencies proposed to remove this definition given the limited focus on, and consideration of, loan production offices in the agencies’ proposal. The agencies did not receive any comments concerning the removal of this definition, and the agencies are removing this definition in the final rule as proposed. Low Branch Access Census Tract; Very Low Branch Access Census Tract The agencies proposed to define ‘‘low branch access census tract’’ to mean a census tract with one bank, thrift, or credit union branch, and a ‘‘very low branch access census tract’’ to mean a census tract with no bank, thrift, or credit union branches, within: (1) 10 miles of the census tract center of population or within the census tract in nonmetropolitan areas; (2) five miles of the census tract center of population or within the census tract in a census tract located in an MSA but primarily outside of the principal city components of the MSA; or (3) two miles of the census tract center of population or within the census tract in a census tract located in an MSA and primarily within the principal city components of the MSA. The agencies proposed to evaluate a bank’s branch distribution in, among other geographic areas, ‘‘low branch access census tracts or very loan branch access census tracts.’’ 173 Upon further consideration of comments received on this topic, the agencies have elected to not consider the availability of branches in low branch access census tracts or very low branch access census tracts in the Retail Services and Products Test. For additional discussion, see the section-by-section analysis of § ll.23, Retail Services and Products Test. As a result, the CRA regulations no longer require definitions of ‘‘low branch access census tracts’’ or ‘‘very low branch access census tracts’’ and the agencies are adopting the final rule without them. Low-Cost Education Loan Current § ll.21(e), Low-cost education loans provided to low-income 172 See 171 See PO 00000 current 12 CFR ll.12(o). Frm 00040 Fmt 4701 Sfmt 4700 173 See E:\FR\FM\01FER2.SGM current 12 CFR ll.12(p). proposed § ll.23(b)(1)(i)(C)(1). 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 borrowers, provides that, for purposes of that paragraph, ‘‘low-cost education loans’’ means any education loan, as defined in section 140(a)(7) of the Truth in Lending Act (15 U.S.C. 1650(a)(7)) (including a loan under a State or local education loan program), originated by the bank for a student at an ‘‘institution of higher education,’’ as that term is generally defined in sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001 and 1002) and the implementing regulations published by the U.S. Department of Education, with interest rates and fees no greater than those of comparable education loans offered directly by the U.S. Department of Education. It further provides that such rates and fees are specified in section 455 of the Higher Education Act of 1965 (20 U.S.C. 1087e). The agencies proposed to add this definition of ‘‘low-cost education loan’’ to § ll.12, with changes to update a citation, applying the definition only to private loans, as provided in section 140(a)(7) of the Truth in Lending Act (15 U.S.C. 1650(a)(8)), and other minor wording changes. This definition was needed for the proposal to consider the responsiveness of credit products and programs to the needs of low- and moderate-income individuals, including through low-cost education loans, in the proposed Retail and Products Service Test.174 As with the current rule, this proposed definition leveraged the statutory definitions of related terms. Specifically, the agencies proposed to define ‘‘low-cost education loan’’ to mean any private education loan, as defined in section 140(a)(7) of the Truth in Lending Act (15 U.S.C. 1650(a)(8)) (including a loan under a State or local education loan program), originated by the bank for a student at an ‘‘institution of higher education,’’ as generally defined in sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001 and 1002) and the implementing regulations published by the U.S. Department of Education, with interest rates and fees no greater than those of comparable education loans offered directly by the U.S. Department of Education. Such rates and fees are specified in section 455 of the Higher Education Act of 1965 (20 U.S.C. 1087e). The agencies did not receive any comments concerning the proposed 174 See proposed § ll.23(c)(1). This aspect of the proposal was intended to incorporate into the CRA regulations the statutory requirement that the agencies consider low-cost education loans provided to low-income borrowers as a factor in evaluating a bank’s record of helping to meet the credit needs of its entire community. See 12 U.S.C. 2903(d). For further discussion, see the section-bysection analysis of § ll.23. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 definition of ‘‘low-cost education loan’’ and adopt it as proposed in the final rule with one technical change to replace the reference to U.S. Department of Education regulations with the regulatory citation, 34 CFR part 600. Low-Income Credit Union The agencies proposed to add a definition for ‘‘low-income credit union (LICU)’’ in support of various proposed provisions related to community development. As discussed further in the section-by-section analysis of § ll.13, Consideration of community development loans, investments, and services, the agencies proposed to create a category of ‘‘community development’’ that would comprise activities with MDIs, WDIs, LICUs, or CDFIs.175 In addition, the agencies proposed to consider, as a factor in evaluating the impact and responsiveness of any community development activity, whether the activity supports an MDI, WDI, LICU, or Treasury Department-certified CDFI.176 The agencies proposed to define LICU as having the same meaning given to that term in NCUA’s regulations, 12 CFR 701.34. The NCUA’s regulations provide, in part, that based on data obtained through examinations, the NCUA will notify a Federal credit union that it qualifies for designation as a LICU if a majority of its membership qualify as low-income members.177 The agencies did not receive any comments concerning the proposed definition of ‘‘LICU’’ and adopt it as proposed in the final rule. Low-Income Housing Tax Credit The final rule includes a new definition for ‘‘Low-Income Housing Tax Credit (LIHTC),’’ not included in the proposal, to clarify that ‘‘LowIncome Housing Tax Credit’’ in the CRA regulations is a reference to a Federal program. This term is utilized in §§ ll.13, ll.15, and ll.42. Accordingly, the agencies are adopting a definition of ‘‘Low-Income Housing Tax Credit (LIHTC)’’ in the final rule to mean a Federal tax credit for housing persons of low income pursuant to section 42 of the Internal Revenue Code of 1986 (26 U.S.C. 42). Major Product Line The final rule includes a new definition for ‘‘major product line,’’ not included in § ll.12 of the proposal. In the proposal, the agencies described the concept of major product line in proposed § ll.13(j). proposed § ll.15(b)(3). 177 See 12 CFR 701.34(a)(1). 175 See 176 See PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 6613 § ll.22. In the final rule, instead of including the concept solely in § ll.22, the agencies are also adding a definition for ‘‘major product line’’ in § ll.12 because the term is used outside of § ll.22 and the agencies recognized it was more appropriate as a defined term. However, in the final rule the agencies are modifying what constitutes a ‘‘major product line.’’ The new definition explains that ‘‘major product line’’ means a product line that the appropriate Federal financial supervisory agency evaluates in a particular Retail Lending Test Area, pursuant to § ll.22(d)(2) and paragraphs II.b.1 and II.b.2 to appendix A of the final rule. This definition is intended to identify the product lines with the greatest importance to the bank and its community and that, accordingly, are subject to evaluation under the Retail Lending Test. As described in the section-by-section analysis of § ll.22, Retail Lending Test, closed-end home mortgage loans, small business loans, and small farm loans are major product lines in a facility-based assessment area or outside retail lending area if the bank’s loans in the respective product line represent at least 15 percent of the bank’s reported loans and other loans considered across all product lines in the same geographic area during the evaluation period. This 15 percent standard is calculated based on a combination of loan dollars and loan count (see above for a discussion of the definition of ‘‘combination of loan dollars and loan count’’). The same 15 percent standard is used to determine whether automobile loans are a major product line in a facility-based assessment area or outside retail lending area, if the bank is a majority automobile lender for the institution as a whole or opts into having its automobile lending evaluated. In addition, closed-end home mortgage loans and small business loans are a major product line in a particular calendar year for a retail lending assessment area if the product line meets or exceeds the threshold requiring delineation of a retail lending assessment area pursuant to § ll.17 (i.e., 150 reported closed-end home mortgage loans, or 400 reported small business loans, in each of the prior two calendar years). As discussed in the section-by-section analysis of § ll.22, the agencies determined that it was not appropriate to include open-end home mortgage loans or multifamily loans in the major product line definition in the final rule, as the agencies proposed. E:\FR\FM\01FER2.SGM 01FER2 6614 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Majority Automobile Lender The final rule includes a new definition for ‘‘majority automobile lender,’’ not included in the proposal, defined to mean a bank for which more than 50 percent of its home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans were automobile loans, as determined pursuant to paragraph II.b.3 of appendix A. Paragraph II.b.3 of appendix A includes the provisions of the final rule that identify the banks for which evaluation of automobile lending is mandatory in each facility-based assessment area or in an outside retail lending area in which automobile lending represents a major product line. As described in the section-by-section analysis of § ll.22, a bank is considered a majority automobile lender if its automobile loans originated and purchased over the combined twocalendar-year period preceding the first year of the evaluation period exceeded 50 percent, based on a combination of loan dollars and loan count, of the bank’s lending across specified categories. Specifically, the final rule calculates the 50 percent standard based on the following loan categories: home mortgage loans; 178 multifamily loans; small business loans; small farm loans; and automobile loans originated and purchased overall. The agencies intend this new definition to be a clarifying change and have added it to make the regulatory text in § ll.22 and appendix A less complex and readable. Metropolitan Area ddrumheller on DSK120RN23PROD with RULES2 The agencies proposed to add a definition of ‘‘metropolitan area’’ because the term is used throughout the rule to describe areas where the agencies will evaluate a bank. Specifically, the agencies proposed to define ‘‘metropolitan area’’ to mean any MSA, combined MSA, or metropolitan division as that term is defined by the Director of the Office of Management and Budget (Director of the OMB).179 178 See the definition of ‘‘home mortgage loan’’ in final § ll.12. 179 The CRA statute defines the term ‘‘metropolitan area’’ to mean ‘‘any primary metropolitan statistical area, metropolitan statistical area, or consolidated metropolitan statistical area, as defined by the Director of the OMB, with a population of 250,000 or more, and any other area designated as such by the appropriate Federal financial supervisory agency.’’ 12 U.S.C. 2906(e)(2). The agencies did not propose to include ‘‘primary metropolitan statistical area’’ or ‘‘consolidated metropolitan area’’ because the Director of the OMB no longer uses these terms. The agencies exercised their discretion to define this term in the final rule to include all MSAs, without regard to whether it has a population of 250,000 or more. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 The agencies did not receive any comments related to the proposed ‘‘metropolitan area’’ definition. However, the agencies are adopting this definition with several revisions. First, the agencies are removing reference to ‘‘combined MSA’’ from the definition because ‘‘combined MSA’’ is not a term defined by the Director of the OMB. Second, the agencies are removing reference to ‘‘metropolitan division’’ from the definition. Metropolitan divisions are parts of certain populous MSAs, so the agencies determined that the term is not necessary and that it added complexity to separately list both terms in the ‘‘metropolitan area’’ definition. For example, any county in a metropolitan division would also be in an MSA. Finally, the agencies are removing the phrase ‘‘as defined by the Director of the Office of Management and Budget’’ from the definition. As discussed below, the term ‘‘MSA’’ is defined in the final rule to mean a metropolitan statistical area defined by the Director of the OMB. Accordingly, ‘‘metropolitan area’’ in the final rule means any MSA. Metropolitan Division The current CRA regulations define ‘‘metropolitan division’’ to mean a metropolitan division as defined by the Director of the OMB.180 The agencies proposed this same definition, with a minor technical change. Specifically, the agencies replaced the phrase ‘‘means a metropolitan division as defined’’ with the phrase ‘‘has the same meaning given to that term.’’ The agencies did not receive any comments related to the proposed definition of ‘‘metropolitan division,’’ and are adopting the definition as proposed in the final rule. Military Bank The agencies proposed to add a new definition of ‘‘military bank’’ in support of proposed § ll.16, which would provide an exception to certain facilitybased assessment area delineation requirements for military banks.181 Specifically, the agencies proposed to define ‘‘military bank’’ to mean a bank whose business predominately consists of serving the needs of military personnel who serve or have served in the Armed Forces (including the U.S. Air Force, U.S. Army, U.S. Coast Guard, U.S. Marine Corps, and U.S. Navy) or dependents of military personnel, basing this definition on language in the current 12 CFR ll.12(q). proposed § ll.16(d). See also the section-by-section analysis of § ll.16 for further discussion of this provision. 180 See 181 See PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 CRA statute.182 The agencies proposed this definition to increase clarity and consistency in the CRA regulations. A commenter provided input on the proposed definition of ‘‘military bank.’’ Although expressing support for inclusion of a definition of ‘‘military bank,’’ the commenter expressed concern that the agencies’ proposed definition is too narrow and recommended that the word ‘‘predominantly’’ be defined to include ‘‘a bank whose most important customer group is military personnel or their dependents,’’ as in the OCC 2020 CRA Final Rule. The commenter noted that this qualification should lead to the extension of the ‘‘military bank’’ definition to all financial institutions with a commitment, mission, or business model to serve the military community exclusive of all other communities. The commenter also suggested that the definition of ‘‘military bank’’ should include on-base branches of financial institutions that do not otherwise fit within the definition so that branches on military bases could benefit from the CRA’s geographic assessment area exception without extending this treatment to the larger, non-military financial institution of which they are part. Further, this commenter expressed support for the proposed definition’s inclusion of those who serve or have served in the Armed Forces or dependents of military personnel. Finally, the commenter noted that the definition of ‘‘military bank’’ should include the U.S. Space Force, established in 2019, in the definition’s listing of military service branches. The agencies have made substantive edits to the proposed definition of ‘‘military bank’’ in response to these comments. First, the agencies agree that ‘‘predominantly’’ should be defined to clarify that a ‘‘military bank’’ is a bank whose most important customer group is military personnel or their dependents. This added language is consistent with the interpretation of ‘‘predominantly’’ in the preamble to the 1979 CRA rulemaking 183 and codifies a decades-old interpretation that ‘‘predominantly’’ is not based on a numerical standard.184 Additionally, the 182 See 12 U.S.C. 2902(4) (‘‘A financial institution whose business predominately consists of serving the needs of military personnel who are not located in a defined geographic area may define its ‘entire community’ to include its entire deposit customer base without regard to geographic proximity.’’). The agencies note that the statute uses the term ‘‘predominately,’’ however, the more common spelling is ‘‘predominantly,’’ and accordingly, the agencies have used that term instead. 183 44 FR 18163, 18164 (Mar. 27, 1979). 184 Id. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations agencies believe this final rule regulatory text comports with the language in the CRA statute. Second, the agencies agree with the commenter that the new U.S. Space Force should be included in the definition as a branch of the U.S. Armed Forces. The agencies, however, declined to adopt the commenter’s suggestion that the definition should include on-base branches of financial institutions that do not otherwise fit within the definition. The agencies believe such revision would be inconsistent with the CRA statute’s provision regarding military banks, which refers to the business of the financial institution as predominantly consisting of serving the needs of military personnel, and not branches of a financial institution.185 For the reasons stated above, the agencies are adopting a definition of ‘‘military bank’’ to mean a bank whose business predominantly consists of serving the needs of military personnel who serve or have served in the U.S. Armed Forces (including the U.S. Air Force, U.S. Army, U.S. Coast Guard, U.S. Marine Corps, U.S. Navy, and U.S. Space Force) or their dependents. A bank whose business predominantly consists of serving the needs of military personnel or their dependents means a bank whose most important customer group is military personnel or their dependents. ddrumheller on DSK120RN23PROD with RULES2 Minority Depository Institution Current Approach and the Agencies’ Proposal The agencies proposed to add a definition of ‘‘minority depository institution (MDI)’’ to support the provisions in the proposal related to community development. As discussed above, and further in the section-bysection analysis of § ll.13(k), the agencies proposed to create a category of ‘‘community development’’ that would comprise activities with MDIs, WDIs, LICUs, or CDFIs.186 In addition, the agencies proposed to consider, as a factor in evaluating the impact and responsiveness of any community development activity, whether the activity supports an MDI, WDI, LICU, or Treasury Department-certified CDFI.187 The proposed definitions also account for a provision in the CRA statute providing that the amount of any bank contribution or loss in connection with donating, selling on favorable terms, or making available on a rent-free basis any 185 See 12 U.S.C. 2902(4). proposed § ll.13(j). 187 See proposed § ll.15(b)(3) and the accompanying section-by-section analysis of § ll.15. 186 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 branch of the bank located in a predominantly minority neighborhood to an MDI or WDI may be a factor in determining whether the bank is meeting the credit needs of its community, which includes specific definitions of MDI and WDI.188 The agencies structured the proposed ‘‘MDI’’ definition to provide two avenues through which an institution may qualify as an MDI. The agencies pursued this dual track structure to both ensure consistency with the CRA statute and incorporate the agencies’ current policies for determining what institutions qualify as ‘‘minority-owned financial institutions’’ under 12 U.S.C. 2903(b). First, the agencies determined that the proposed ‘‘MDI’’ definition should incorporate the statutory definition of ‘‘minority depository institution’’ to ensure consistency with the CRA statute, which applies to certain transactions involving branches. Specifically, under 12 U.S.C. 2907 (i.e., the statutory provision concerning donating, selling on favorable terms, or making certain branches available on a rent-free basis to a minority depository institution), ‘‘minority depository institution’’ is defined as a depository institution (as defined in 12 U.S.C. 1813(c)): (1) more than 50 percent of the ownership or control of which is held by 1 or more minority individuals; and (2) more than 50 percent of the net profit or loss of which accrues to 1 or more minority individuals. The agencies note that this definition is required for the narrow set of branching activities referenced in 12 U.S.C. 2907. More broadly, 12 U.S.C. 2903 states that, in assessing an institution’s record of helping to meet the credit needs of the entire community, the agencies may consider, ‘‘as a factor capital investment, loan participation, and other ventures undertaken by the institution in cooperation with minority- and women-owned financial institutions and LICUs provided that these activities help meet the credit needs of local communities in which such institutions and credit unions are chartered.’’ 189 Unlike 12 U.S.C. 2907, 12 U.S.C. 2903 does not define the terms ‘‘minority-owned financial institution’’ or ‘‘women-owned financial institution.’’ Given the absence of statutory definitions, the agencies, through their respective supervisory authority, have applied criteria for determining which institutions are considered minority- or women-owned financial institutions when interpreting 188 See 189 12 PO 00000 12 U.S.C. 2907. U.S.C. 2903(b) (emphasis added). Frm 00043 Fmt 4701 Sfmt 4700 6615 CRA.190 Therefore, the second aspect of the proposed ‘‘MDI’’ definition was designed to capture those institutions that the agencies recognize as ‘‘minority-owned financial institutions’’ pursuant to their current policies. Specifically, the agencies proposed to define an ‘‘MDI,’’ for purposes other than the specified branch-related transactions under 12 U.S.C. 2907, as a bank that: (1) meets the definition under 12 U.S.C. 2907(b)(1); 191 (2) is a minority depository institution as defined in section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C. 1463 note); 192 or (3) is considered to be a minority depository institution by the appropriate Federal banking agency. This proposed definition is derived in part from the definition of ‘‘minority depository institution’’ in the 190 Generally, the agencies have considered institutions that qualify under their MDI policies to qualify under section 2903. See OCC, News Release 2013–94, ‘‘Comptroller Curry Tells Minority Depository Institutions OCC Rules Make It Easier for Minority Institutions to Raise Capital,’’ ‘‘Policy Statement on Minority National Banks and Federal Savings Associations’’ (June 13, 2013), https:// www.occ.gov/news-issuances/news-releases/2013/ nr-occ-2013-94.html (permits a bank that no longer meet the minority ownership requirement to continue to be considered a minority depository institution if it primarily serves the credit and economic needs of the community in which it is chartered and serves a predominantly minority community); Board, SR 21–6/CA 21–4: ‘‘Highlighting the Federal Reserve System’s Partnership for Progress Program for Minority Depository Institutions and Women’s Depository Institutions’’ (Mar. 5, 2021), https:// www.federalreserve.gov/supervisionreg/srletters/ SR2106.htm (permits designation as a minority depository institution if the majority of a bank’s board of directors consists of minority individuals and the community that the bank serves is predominantly minority); and FDIC, Statement of Policy Regarding Minority Depository Institutions, 86 FR 32728, 32732 (June 23, 2021) (permits designation as a minority depository institution if a majority of the bank’s board of directors consists of minority individuals and the community that the bank serves is predominantly minority). 191 The agencies incorporated section 2907 into this second prong of the definition to ensure that banks are not limited to the engaging in the specified branch-related activities with institutions that meet the statutory definition but are not otherwise consistent with the agencies’ MDI designation policies. 192 The agencies’ MDI designation policies are based on section 308 of the FIRREA, and the agencies determined it was appropriate to expressly reference that statute in the definition for further consistency. Under section 308, ‘‘minority financial institution’’ means any depository institution that— (A) if a privately owned institution, 51 percent is owned by one or more socially and economically disadvantaged individuals; (B) if publicly owned, 51 percent of the stock is owned by one or more socially and economically disadvantaged individuals; and (C) in the case of a mutual institution where the majority of the Board of Directors, account holders, and the community which it services is predominantly minority. Further, under section 308, the term ‘‘minority’’ means any black American, Native American, Hispanic American, or Asian American. E:\FR\FM\01FER2.SGM 01FER2 6616 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Emergency Capital Investment Program 193 enacted as part of the Consolidated Appropriations Bill of 2021,194 revised to be appropriate for the CRA. The agencies stated that using this statutory-based definition for purposes of CRA promotes further consistency across government programs. ddrumheller on DSK120RN23PROD with RULES2 Comments Received A number of commenters addressed the proposed ‘‘MDI’’ definition. For example, a commenter supported a definition that would include both banks owned by minority individuals and minority-operated banks. According to the commenter, successful and growing banks need to raise outside capital, which could result in the bank no longer meeting the minority-owned definition and would therefore have the unintended consequence of keeping minority banks small. In response to the agencies’ question on whether to include minority insured credit unions recognized by the NCUA in the ‘‘MDI’’ definition, most commenters stated that such credit unions should be included. In addition, some commenters recommended that State-insured MDI credit unions and Puerto Rico’s cooperativas also be included in this category. Commenters generally noted that such credit unions and related entities share the same purpose as MDIs, are insured and supervised, and accordingly should be treated the same as MDI banks. A commenter stated that this addition could expand the number of MDIs available to partner with banks on CRA activities. Although no commenters expressed opposition to including MDI credit unions in the definition, a commenter did suggest that smaller credit union MDIs could be included, but those with more than 50,000 members or more should be subject to additional scrutiny to ensure that 51 percent of its owners are people of color. Final Rule The agencies are adopting the proposed ‘‘MDI’’ definition in the final rule with several technical edits. First, in paragraph (1), the agencies removed the parenthetical, ‘‘(i.e., donating, selling on favorable terms (as determined by the [Agency]), or making available on a rent-free basis any branch of the bank, which is located in a predominately minority neighborhood).’’ This language 193 See 12 U.S.C. 4703a. Public Law 116–260, 134 Stat. 1182 (Dec. 27, 2020). 194 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 paraphrased the cited statute, 12 U.S.C. 2907(b)(1), and is therefore not necessary. Second, the agencies made non-substantive wording changes to the definition to improve its structure and readability and to promote consistency with the statutes cited in the definition. Accordingly, the final rule defines ‘‘minority depository institution (MDI)’’ to mean: (1) for purposes of activities conducted pursuant to 12 U.S.C. 2907(a), ‘‘minority depository institution’’ as defined in 12 U.S.C. 2907(b)(1); and (2) for all other purposes: (i) a ‘‘minority depository institution’’ as defined in 12 U.S.C. 2907(b)(1); (ii) a ‘‘minority depository institution’’ as defined in section 308 of the FIRREA (12 U.S.C. 1463 note); or (iii) a depository institution considered to be a minority depository institution by the appropriate Federal banking agency. For purposes of this definition, ‘‘appropriate Federal banking agency’’ has the meaning given to it in 12 U.S.C. 1813(q). As also discussed in the section-bysection analysis of § ll.13(k), the agencies considered but are not including minority credit unions in the ‘‘MDI’’ definition. Unlike MDIs, which are independently reviewed by each agencies’ staff, credit unions self-certify MDI status and the NCUA does not verify or certify the accuracy of this status.195 The agencies also note that there is a large overlap between minority credit unions and LICUs.196 Thus, a large percentage of minority credit unions will be eligible under the rule for community development consideration based on their LICU status. In response to comments about including banks that are owned by minority individuals and minorityoperated banks in the ‘‘MDI’’ definition, the agencies recognize that banks have varied ownership structures and need to raise capital and have considered these issues when designating MDIs. The proposed and final rule both include as a component of the definition of ‘‘MDI’’ banks that are considered to be minority depository institutions by the appropriate Federal banking agency. This component of the definition provides flexibility and incorporates each agency’s applicable policies regarding the designation of MDIs. 195 See 80 FR 36356, 36357 (June 24, 2015). NCUA, ‘‘Minority Depository Institutions Annual Report to Congress,’’ 2 (2021), https:// ncua.gov/files/publications/2021-mdicongressional-report.pdf (approximately 81% of MDIs also held a designation as LICUs as Dec. 31, 2021 (i.e., 412 out of 509 MDIs)). 196 See PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 Mission-Driven Nonprofit Organization The agencies are adding a new definition for ‘‘mission driven nonprofit organization,’’ not included in the proposal, to support this term’s use in §§ ll.13 and ll.42 in the final rule. Specifically, the final rule defines ‘‘mission-driven nonprofit organization’’ to mean an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) and exempt from taxation under section 501(a) of such Code that benefits or serves primarily low- or moderateincome individuals or communities, small businesses, or small farms. The agencies are adopting this definition primarily to support revisions made in the final rule, based on consideration of comments, to expand the government plan eligibility criteria in the place-based community development categories to include plans, programs, or initiatives of mission-driven nonprofit organizations.197 The final rule also provides services that are conducted with a mission-driven nonprofit organization as one example of a qualifying community supportive service in § ll.13(d). These aspects of the final rule are discussed in greater detail in the section-by-section analysis of § ll.13. The final rule also uses the term mission-driven nonprofit organization for consistency as an example of detail that could be provided about a community development loan or community development investment in final § ll.42. The agencies included the first part of this definition to explicitly state that an organization must be a 501(c)(3) organization to qualify as a missiondriven nonprofit organization. Further, the definition specifies that these organizations benefit or serve primarily low- or moderate-income individuals, small businesses, or small farms. The agencies believe that, with these two core components, the definition of mission-driven nonprofit organization is appropriately tailored to capture entities that are dedicated to benefiting and serving low- and moderate-income individuals or communities, small businesses, or small farms while being sufficiently narrow not to permit a broad expansion of eligibility criteria under the place-based community development categories. The agencies also believe that this definition is consistent with the types of organizations that the agencies proposed would be partners with banks in conducting community development. 197 See E:\FR\FM\01FER2.SGM final § ll.13(e) through (j). 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations For example, the proposal included a discussion of nonprofit organizations in reference to the proposed affordable housing category of community development in proposed § ll.13(b), as well as in relation to community supportive services in proposed § ll.13(d).198 MSA Under the current CRA regulations, the agencies define ‘‘MSA’’ to mean a metropolitan statistical area as defined by the Director of the OMB.199 The agencies proposed maintaining this definition but changing the defined term from ‘‘MSA’’ to ‘‘metropolitan statistical area (MSA)’’ and with minor technical wording changes. The agencies did not receive any comments on this proposed definition. However, after further consideration, the agencies are reverting back to the current defined term ‘‘MSA’’ in the final rule because ‘‘MSA’’ is the term known and understood by the industry. The agencies are also reverting the wording of the definition back to its current form to be consistent with the wording of other definitions and making minor technical changes to reference OMB delineation and to add OMB authority citations. Accordingly, the agencies are defining ‘‘MSA’’ to mean a metropolitan statistical area delineated by the Director of the Office of Management and Budget, pursuant to 44 U.S.C. 3504(e)(3) and (10), 31 U.S.C. 1104(d), and Executive Order 10253 (June 11, 1951). ddrumheller on DSK120RN23PROD with RULES2 Mortgage-Related Definitions Under the current CRA regulations, the agencies define ‘‘home mortgage loan’’ to mean a closed-end mortgage loan or an open-end line of credit as defined under 12 CFR 1003.2 (Regulation C), the CFPB’s HMDA implementing regulations, that is not an excluded transaction under 12 CFR 1003.3(c)(1) through (10) and (13).200 198 See proposed § ll.13(b)(2)(ii) and (d)(1); see also 87 FR 33884, 33896 (June 3, 2022). 199 See current 12 CFR ll.12(r). 200 See current 12 CFR ll.12(l). Excluded transactions under 12 CFR 1003.3(c)(1) through (10) and (13) are as follows: (1) a closed-end mortgage loan or open-end line of credit originated or purchased by a financial institution acting in a fiduciary capacity; (2) a closed-end mortgage loan or open-end line of credit secured by a lien on unimproved land; (3) temporary financing; (4) the purchase of an interest in a pool of closed-end mortgage loans or open-end lines of credit; (5) the purchase solely of the right to service closed-end mortgage loans or open-end lines of credit; (6) the purchase of closed-end mortgage loans or open-end lines of credit as part of a merger or acquisition, or as part of the acquisition of all of the assets and liabilities of a branch office as defined in § 1003.2(c); (7) a closed-end mortgage loan or openend line of credit, or an application for a closedend mortgage loan or open-end line of credit, for VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 The agencies proposed to amend the current ‘‘home mortgage loan’’ definition to refer to an ‘‘open-end home mortgage loan’’ rather than an ‘‘openend line of credit,’’ with no intent to change the meaning. The agencies also proposed to remove the cross-reference to the CFPB’s Regulation C and add new definitions for ‘‘closed-end home mortgage loan’’ and ‘‘open-end home mortgage loan,’’ which would have the same meanings given to ‘‘closed-end mortgage loan’’ and ‘‘open-end line of credit’’ in 12 CFR 1003.2(d) and (o), respectively, excluding multifamily loans as defined in proposed § ll.12.201 ‘‘Closed-end home mortgage loan’’ is defined in 12 CFR 1003.2(d) to mean an extension of credit that is secured by a lien on a dwelling and that is not an open-end line of credit under the HMDA regulations. ‘‘Open-end line of credit’’ is defined in 12 CFR 1003.2(o) to mean an extension of credit that is secured by a lien on a dwelling and is an open-end credit plan as defined in CFPB’s Regulation Z, 12 CFR 1026.2(a)(20),202 but without regard to whether the credit is consumer credit, as defined in 12 CFR 1026.2(a)(12),203 is extended by a creditor, as defined in 12 which the total dollar amount is less than $500; (8) the purchase of a partial interest in a closed-end mortgage loan or open-end line of credit; (9) a closed-end mortgage loan or open-end line of credit used primarily for agricultural purposes; (10) a closed-end mortgage loan or open-end line of credit that is or will be made primarily for a business or commercial purpose, unless the closed-end mortgage loan or open-end line of credit is a home improvement loan under § 1003.2(i), a home purchase loan under § 1003.2(j), or a refinancing under § 1003.2(p); and (11) a transaction that provided or, in the case of an application, proposed to provide new funds to the applicant or borrower in advance of being consolidated in a New York State consolidation, extension, and modification agreement classified as a supplemental mortgage under New York Tax Law section 255; the transaction is excluded only if final action on the consolidation was taken in the same calendar year as final action on the new funds transaction. 201 As discussed further below, the agencies proposed to define ‘‘multifamily loan’’ as ‘‘a loan for a ‘multifamily dwelling’ as defined in 12 CFR 1003.2(n).’’ Multifamily dwelling is defined in 12 CFR 1003.2(n) as ‘‘a dwelling, regardless of construction method, that contains five or more individual dwelling units.’’ 202 ‘‘Open-end credit’’ means consumer credit extended by a creditor under a plan in which: (1) The creditor reasonably contemplates repeated transactions; (2) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and (3) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid. See 12 CFR 1003.2(o) and 100.1026.2(a)(20). 203 ‘‘Consumer credit’’ means credit offered or extended to a consumer primarily for personal, family, or household purposes. See 12 CFR 1026.2(a)(12). PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 6617 CFR 1026.2(a)(17),204 or is extended to a consumer, as defined in 12 CFR 1026.2(a)(11).205 The agencies proposed to add separate definitions for ‘‘closed-end home mortgage loan’’ and ‘‘open-end home mortgage loan,’’ because, as discussed further in the section-bysection analysis of § ll.22, given their distinct characteristics, these types of loans would be considered separately under the proposed Retail Lending Test. The agencies’ proposed definitions of these terms are consistent with the current ‘‘home mortgage loan’’ definition, which cross-references 12 CFR 1003.2 to define closed-end home mortgage loans and open-end lines of credit. The agencies excluded multifamily loans from the definitions of ‘‘closed-end home mortgage loan’’ and ‘‘open-end home mortgage loan’’ because the proposal included a separate definition for ‘‘multifamily loan’’ that covers different transactions (as discussed below in the section-bysection analysis). This exclusion was 204 ‘‘Creditor’’ means a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract. For purposes of §§ 1026.4(c)(8) (Discounts), 1026.9(d) (Finance charge imposed at time of transaction), and 1026.12(e) (Prompt notification of returns and crediting of refunds), a person that honors a credit card. For purposes of subpart B, any card issuer that extends either open-end creditor credit that is not subject to a finance charge and is not payable by written agreement in more than four installments. For purposes of subpart B (except for the credit and charge card disclosures contained in §§ 1026.60 and 1026.9(e) and (f), the finance charge disclosures contained in §§ 1026.6(a)(1) and (b)(3)(i) and 1026.7(a)(4) through (7) and (b)(4) through (6) and the right of rescission set forth in § 1026.15) and subpart C, any card issuer that extends closedend credit that is subject to a finance charge or is payable by written agreement in more than four installments. A person regularly extends consumer credit only if it extended credit (other than credit subject to the requirements of § 1026.32) more than 25 times (or more than 5 times for transactions secured by a dwelling) in the preceding calendar year. If a person did not meet these numerical standards in the preceding calendar year, the numerical standards shall be applied to the current calendar year. A person regularly extends consumer credit if, in any 12-month period, the person originates more than one credit extension that is subject to the requirements of § 1026.32 or one or more such credit extensions through a mortgage broker. See 12 CFR 1026.2(a)(17). 205 ‘‘Consumer’’ means a cardholder or natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§ 1026.15 and 1026.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest. For purposes of §§ 1026.20(c) through (e), 1026.36(c), 1026.39, and 1026.41, the term includes a confirmed successor in interest. See 12 CFR 1026.2(a)(11). E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6618 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations necessary because, under the proposal, the agencies could consider multifamily loans, unlike other closed-end home mortgage loans, under the Community Development Financing Test in § ll.24.206 The agencies also proposed this exclusion of multifamily loans because multifamily loans were a distinct category of retail loan which could qualify as a major product line under the Retail Lending Test in § ll.22. A commenter requested that the excluded transaction language in the definition of ‘‘home mortgage loan’’ referencing 12 CFR 1003.3(c)(1) through (10) and (13) be narrowed to 12 CFR 1003.3(c)(1),207 (5),208 (7) through (10),209 and (13).210 In particular, the commenter objected to the current definition’s exclusion of loans secured by unimproved land (12 CFR 1003.3(c)(2)), expressing the view that this would penalize financial institutions for lending to builders or individuals seeking to build in low- and moderate-income communities. Similarly, the commenter objected to the exclusion of temporary financing (12 CFR 1003.3(c)(3)), such as bridge financing or a loan for home construction, asserting that this could undermine a financial institution’s ability to finance the construction of homes in low- and moderate-income communities, even if the financing is only on a temporary basis. The commenter objected to excluding from the ‘‘home mortgage loan’’ definition purchased closed-end home mortgage loans and open-end lines of credit, whether as a pool of credits or through an acquisition or merger (12 CFR 1003.3(c)(4) and (6)), explaining that financial institutions are purchasing whole loans and servicing rights and not merely purchasing an investment vehicle, and that purchasing loan pools also permits financial institutions to meet the credit needs of their communities despite not having the resources to generate these loans one transaction at a time. The agencies decline to revise the excluded transactions language. As under the current CRA regulations, the agencies intend to leverage HMDA data in the final rule, i.e., data reported pursuant to 12 CFR part 1003, which allows for sufficient data for analysis while not increasing the data collection or reporting burden on these banks, as part of the CRA evaluation framework. proposed § ll.22(a)(5)(ii). 12 CFR 1003.3(c)(1). 208 See 12 CFR 1003.3(c)(5). 209 See 12 CFR 1003.3(c)(7) through (10). 210 See 12 CFR 1003.3(c)(13). 206 See 207 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 If the agencies narrowed the number of excluded transactions as requested by the commenter, HMDA reporters would be required to produce additional data that exceeds their current HMDA reporting obligations, which would both increase burden for banks and add complexity to CRA examinations. Further, the agencies note that the exclusion of purchased closed-end home mortgage loans and open-end lines of credit from the ‘‘home mortgage loan’’ definition does not mean that they are not considered under the CRA regulations. For a more detailed discussion of the CRA regulations’ consideration of purchased loans, see the section-by-section analysis of final § ll.22, Retail Lending Test. After consideration of commenters’ concerns and recommendations and further review of the proposed definitions in light of other aspects of the final rule, the agencies are adopting the definitions of ‘‘home mortgage loan,’’ ‘‘closed-end home mortgage loan,’’ and ‘‘open-end home mortgage loan’’ with technical changes. First, the agencies have moved the HMDA exclusions from the definition of ‘‘home mortgage loan’’ to the definitions of ‘‘closed-end home mortgage loan’’ and ‘‘open-end home mortgage loan,’’ where the exclusions are more appropriately located. Second, the agencies have removed the specific paragraph designations in the cross-references to the HMDA definitions so that they now read ‘‘12 CFR 1003.2’’ instead of 12 CFR 1003.2(d) and (o) so that these crossreferences remain accurate if the CFPB modifies this section in the future. Accordingly, under the final rule: • ‘‘home mortgage loan’’ means a closed-end home mortgage loan or an open-end home mortgage loan as these terms are defined in final § ll.12; • ‘‘closed-end home mortgage loan’’ has the same meaning given to the term ‘‘closed-end mortgage loan’’ in 12 CFR 1003.2, excluding loan transactions set forth in 12 CFR 1003.3(c)(1) through (10) and (13) and multifamily loans as defined in final § ll.12; and • ‘‘open-end home mortgage loan’’ has the same meaning as given to the term ‘‘open-end line of credit’’ in 12 CFR 1003.2, excluding loan transactions set forth in 12 CFR 1003.3(c)(1) through (10) and (13) and multifamily loans as defined in final § ll.12. Multifamily Loan The agencies proposed to add a new definition of ‘‘multifamily loan’’ and define it to mean a loan for a ‘‘multifamily dwelling’’ as defined in 12 CFR 1003.2(n) in the CFPB’s Regulation C, which implements HMDA. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 Multifamily dwelling is defined in 12 CFR 1003.2(n) to mean a dwelling, regardless of construction method, that contains five or more individual dwelling units. The agencies intended the proposed definition to correspond to the proposal to treat multifamily loans separately from closed-end and openend home mortgage loans, given their distinct characteristics. The proposal for considering ‘‘multifamily loans’’ is discussed in detail in the section-bysection analyses of §§ ll.22 (Retail Lending Test) and ll.13(b) (affordable housing category of community development). The agencies did not receive any comments on this definition and are adopting it as proposed, with two changes. First, the agencies are replacing ‘‘loan’’ with ‘‘an extension of credit that is secured by a lien’’ in the final rule to make this term consistent with HMDA. Second, the agencies have removed the specific paragraph designations in the cross-references to the CFPB’s definition so that it now reads ‘‘12 CFR 1003.2’’ instead of ‘‘12 CFR 1003.2(n).’’ Accordingly, ‘‘multifamily loan’’ is defined in the final rule to mean an extension of credit that is secured by a lien on a ‘‘multifamily dwelling’’ as defined in 12 CFR 1003.2. Multistate MSA The agencies proposed to add a new definition of ‘‘multistate metropolitan statistical area (multistate MSA)’’ and define it to have the same meaning given to that term by the Director of the OMB. As discussed in detail in the section-by-section analysis of § ll.28, under the proposal, the agencies would assign conclusions for a bank’s performance under each applicable performance test and ratings for a bank’s overall CRA performance across performance tests at the State, multistate MSA, and institution levels.211 The agencies did not receive any comments related to the proposed ‘‘multistate metropolitan statistical area’’ definition. The agencies are adopting a definition of this term in the final rule with technical changes. First the agencies revised the definition to remove the cross-reference to the OMB definition and instead are defining the term to mean an MSA that crosses a State boundary, which is the agencies’ intended meaning of this term. The agencies made this revision to reflect the fact that ‘‘multistate metropolitan statistical area’’ is not a term defined by the Director of the OMB. Instead, the 211 See, e.g., proposed § ll.28 and appendices C, D, and E. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Director of OMB defines the term ‘‘MSA,’’ and the final rule defines ‘‘MSA’’ by cross-referencing to this OMB definition. Second, consistent with the change discussed above under the definition of ‘‘MSA,’’ the agencies are replacing ‘‘metropolitan statistical area’’ with ‘‘MSA.’’ Thus, the resulting defined term will be ‘‘multistate MSA’’ instead of ‘‘multistate metropolitan statistical area.’’ Accordingly, ‘‘multistate MSA’’ is defined in the final rule to mean an MSA that crosses a State boundary. ddrumheller on DSK120RN23PROD with RULES2 Nationwide Area The agencies proposed to add a new definition for ‘‘nationwide area’’ to support the proposal to evaluate a bank’s community development financing activities in a ‘‘nationwide area,’’ as discussed below in the sectionby-section analyses of §§ ll.24 through ll.27; the proposal to evaluate large banks’ and certain intermediate banks’ retail lending performance in ‘‘outside retail lending areas,’’ as discussed in the section-bysection analysis of § ll.18, which would include the ‘‘nationwide area’’ outside of a bank’s assessment areas; the proposal’s impact and responsiveness review, as discussed in the section-bysection analysis of § ll.15; and the proposal’s data collection, maintenance, and reporting requirements, as discussed in the section-by-section analysis of § ll.42. Specifically, the agencies proposed that ‘‘nationwide area’’ would mean ‘‘the entire United States and its territories.’’ The agencies received one comment requesting clarity on what the agencies meant by the term ‘‘nationwide area,’’ recommending that the agencies define this term to include the broader regional areas beyond defined multistate MSAs. In this way, the commenter theorized that banks could receive credit for financing activities like affordable housing in a particular region of the United States that cover multiple States but where that region is not a defined multistate MSA. This commenter misunderstands the scope of the proposed ‘‘nationwide area’’ definition. ‘‘Nationwide area’’ includes the entirety of the United States and its territories, and is not limited to multistate areas. The allocation of community development financing activities, including how an activity that benefits more than one State but not the entire nation will be attributed, is discussed in the section-by-section analysis of § ll.24. Thus, the agencies are adopting the definition of ‘‘nationwide area’’ as proposed in the final rule. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Native Land Area The Agencies’ Proposal The agencies proposed to add a new definition of ‘‘Native Land Area’’ to provide clarity in support of the proposal’s encouragement of activities that address the significant and unique community development challenges in these areas. The proposal sought to encourage these activities through the proposed establishment of a category of community development for qualifying activities in Native Land Areas,212 discussed in the section-by-section analysis of § ll.13(j), and by considering the impact and responsiveness of a bank’s community development activities that benefit Native communities, such as community development activities in Native Land Areas under § ll.13(j),213 discussed in the section-by-section analysis of § ll.15(b)(8). Native American land ownership is complex, and lands can have a complicated and intermingled mix of land ownership status involving various statutes, regulations, titles, and restrictions.214 The agencies intended the proposed ‘‘Native Land Area’’ definition to be responsive to stakeholder feedback provided during outreach prior to the issuance of the proposal indicating support for a geographic definition broader than the definition of Indian country under 18 U.S.C. 1151, and to include lands such as Hawaiian Home Lands, as well as other lands typically considered Native and tribal lands with unique political status under established Federal Indian law. The proposed ‘‘Native Land Area’’ definition leveraged other Federal and State designations of Native and tribal lands, as well as the OCC 2020 CRA Final Rule, and included areas typically considered by the Bureau of Indian Affairs (BIA) and the U.S. Census Bureau as Native geographic areas. Accordingly, the proposed ‘‘Native Land Area’’ definition included all geographic areas delineated as U.S. Census Bureau American Indian/Alaska Native/Native Hawaiian (AIANNH) Areas and/or BIA Land Area Representations. For example, the proposed definition included State American Indian reservations established through a governor-appointed State liaison that provides the names and boundaries for proposed § ll.13(l). proposed § ll.15(b)(7). 214 See, e.g., Congressional Research Service, ‘‘Tribal Land and Ownership Statuses: Overview and Selected Issues for Congress’’ (July 2021), https://sgp.fas.org/crs/misc/R46647.pdf. 212 See 213 See PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 6619 State-recognized American Indian reservations to the Census Bureau. Specifically, under the proposal, ‘‘Native Land Area’’ would mean: (1) all land within the limits of any Indian reservation under the jurisdiction of the U.S. Government, as described in 18 U.S.C. 1151(a); (2) all dependent Indian communities within the borders of the United States whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a State, as described in 18 U.S.C. 1151(b); (3) all Indian allotments, the Indian titles to which have not been extinguished, including rights-of-way running through the same, as defined in 18 U.S.C. 1151(c); (4) any land held in trust by the United States for Native Americans, as described in 38 U.S.C. 3765(1)(A); (5) reservations established by a State government for a tribe or tribes recognized by the State; (6) any Alaska Native Village as defined in 43 U.S.C 1602(c); (7) lands that have the status of Hawaiian Home Lands as defined in section 204 of the Hawaiian Homes Commission Act, 1920 (42 Stat. 108), as amended; (8) areas defined by the U.S. Census Bureau as Alaska Native Village Statistical Areas, Oklahoma Tribal Statistical Areas, Tribal-Designated Statistical Areas, or American Indian Joint-Use Areas; and (9) land areas of State-recognized Indian tribes and heritage groups that are defined and recognized by individual States and included in the U.S. Census Bureau’s annual Boundary and Annexation Survey. Comments Received The agencies received many comments concerning the proposed ‘‘Native Land Area’’ definition, discussed below. Geographic areas included in the definition. Some commenters expressed support for the geographic areas included in the proposed definition. For example, a commenter supported such an inclusive list given the past and ongoing discrimination against Indigenous people and communities. Another commenter recognized the proposal’s relatively comprehensive list of defined Native American lands, further indicating that accurately and comprehensively identifying Native lands is difficult because of the fragmented ownership of Native lands arising from historical Federal land allotment policies. This commenter also recommended that the agencies provide a single source file made available once the definition is agreed on. Another commenter expressed support for ensuring that all Native people in E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6620 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Alaska and Hawaii would be covered under the definition. In contrast, some commenters recommended broadening the definition to include additional geographic areas. Several other commenters supported the ability for tribes to designate lands eligible for CRA qualification, with some supporting the inclusion of ‘‘unceded’’ lands, i.e., lands without a formal agreement with the government and controlled by non-tribal interests but that tribes consider historically Native lands, as part of the definition in light of prior Federal dispossession policies. Another commenter suggested that the definition should be connected to census geographies. Several other comments recommended that the ‘‘Native Land Area’’ definition should include Native American Pacific Islands including Guam, American Samoa, and the Commonwealth of the Mariana Islands. A few commenters expressed support for adding tribal fee lands citing the loss of tribal lands due to earlier Federal policies aimed at dispossessing tribes, with one commenter stating that this would be consistent with the current Federal policy of encouraging tribal selfdetermination and with principles of tribal sovereignty. This commenter also noted that the process of gaining Federal trust status for tribal fee lands (which would then meet the definition of ‘‘Native Land Area’’ pursuant to proposed § ll.12, addressing lands held in trust) is expensive and time consuming. Geographic areas outside of the proposed definition. Many commenters supported broadening the ‘‘Native Land Area’’ definition to include activities benefiting Native individuals and communities outside of proposed geographic areas. Several commenters asserted that activities benefiting Native Americans should qualify anywhere and cited that the majority of American Indian, Alaska Native, and Native Hawaiian people live outside the Native Land Areas covered by the proposed definition. A group of commenters further stated that the proposed definition would limit the ability of Native CDFIs, tribal governments, and other entities to secure CRA-qualified investments to support Native communities residing within their respective service areas but outside of the proposed ‘‘Native Land Area’’ definition. A commenter supported including service areas adjacent to reservations, where a large number of tribal members live or tribal programs are distributed, to help facilitate better community revitalization activities. However, alternatively, a commenter VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 asserted that qualification for activities should not extend past designated geographic areas. Alternative approaches for designating geographic areas. A commenter suggested that, rather than focusing on activities in Native Land Areas, the agencies consider a metricbased determination for where activities could qualify, in conjunction with Native-led organizations and CDFIs, that would consider capital access in Native American communities. This commenter suggested that the agencies additionally include a weighting factor for banks investing in rural and remote Native American communities that might not have any credit or capital access. In support of these ideas, the commenter indicated that some populations covered in the ‘‘Native Land Area’’ definition have access to credit and successful economic development opportunities, while some Native American communities not in Native Land Areas as defined under the proposal do not. Another commenter asserted that the definition of ‘‘Native Land Area’’ should use an alternative geographic criterion for qualifying activities, instead including qualification for activities in census tracts with a greater than 40 percent Native American population and earning less than 100 percent of the average median family income. Final Rule The agencies are adopting the ‘‘Native Land Area’’ definition as proposed with a few technical changes. First, the agencies have revised paragraph (4) of the definition to include any land held in trust by the United States for tribes or Native Americans or tribally-held restricted fee land. This change more clearly effectuates the agencies’ intent in the proposal to include in the definition both individually- and tribally-owned restricted fee lands as well as land held in trust by the United States for both tribes and individuals. This change also aligns the definition with available BIA data, which covers both individuallyheld and tribally-held restricted fee and trust lands.215 The agencies are also removing the cross-reference to ‘‘38 U.S.C. 3765(1)(A)’’ in paragraph (4) as redundant.216 Finally, the agencies are making a technical change to paragraph (6), which covers Alaska Native villages, to use the term defined in the cited statute; as a result, the final rule 215 See Bureau of Indian Affairs, Branch of Geospatial Support, ‘‘General Information for Geospatial Questions’’ (Sept. 5, 2023), https:// biamaps.geoplatform.gov/faq.html. 216 See 38 U.S.C. 3765(1)(A). PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 references ‘‘Any Native village, as defined in 43 U.S.C. 1602(c), in Alaska.’’ The ‘‘Native Land Area’’ definition in the final rule is intended to align with existing and established Federal Indian law regarding lands and communities with unique political status. The final rule is also intended to be responsive to stakeholder feedback received at all stages of this rulemaking, indicating support for a comprehensive geographic definition of ‘‘Native Land Areas.’’ The final definition focuses on lands and communities that, as noted by commenters, have generally experienced little or no benefits from bank access or investments. The agencies have carefully considered commenters’ suggestions for expanding the geographic areas included in the definition, and are sensitive to the many complexities underlying the development of a ‘‘Native Land Area’’ definition, including the impacts of varying historical policies regarding land ownership and political status.217 However, the agencies are concerned that substantively expanding the ‘‘Native Land Area’’ definition could inadvertently create new precedent by incorporating lands without a similar unique political status as those lands included under the definition, and further could be impracticable where data is not currently collected, reported, or readily available. The agencies believe it is important for stakeholders and examiners to have access to and utilize a consistent and comparable data set. The agencies also decline to expand the ‘‘Native Land Area’’ definition to incorporate areas outside of the proposed geographic areas where Native individuals may also reside, or to use alternative metrics for defining Native Land Areas. The agencies are concerned about precedential impact, as well as the practicality of implementation, such a change would have, particularly with a highly dispersed population. Further, complex land ownership structures associated with the lands falling within the final definition can make economic development in those lands particularly difficult, which the agencies believe support a more specific focus on those lands. The agencies note that activities benefiting Native individuals and 217 See, e.g., U.S. Dept. of Interior, ‘‘Land BuyBack Program for Tribal Nations,’’ https:// www.doi.gov/buybackprogram/fractionation (discussing fractionation resulting from Federal allotment policies); Congressional Research Service, ‘‘Tribal Land and Ownership Statuses: Overview and Selected Issues for Congress’’ (July 2021), https://sgp.fas.org/crs/misc/R46647.pdf (discussing historical land policies). E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 communities outside a designated Native Land Area may qualify for CRA consideration under another community development purpose as provided in § ll.13. (For a detailed discussion of these community development categories under the final rule, see the section-by-section analysis of § ll.13.) For example, a loan to support the development of a multifamily housing project to benefit low- and moderateincome tribal individuals outside of a Native Land Area would qualify for consideration under § ll.13(b) (affordable housing) if a portion of the project’s housing units are affordable.218 The agencies also note that the final rule incorporates various impact and responsiveness review factors under § ll.15 for examiners to consider in evaluating a bank’s community development activities. This includes an impact and responsiveness factor for areas with low levels of community development financing and activities serving low-income individuals and families that may apply to activities benefiting Native Americans living adjacent to or otherwise outside a Native Land Area.219 Finally, as noted in the proposal, robust, publicly available data files (‘‘shapefiles’’), defining the boundaries of the geographic areas adopted in the final rule are actively maintained by the U.S. Census Bureau and BIA, respectively.220 The agencies anticipate making this data readily available to stakeholders as part of the agencies’ regulatory implementation efforts, which, among other benefits, the agencies anticipate will facilitate stakeholders’ ability to engage with confidence in CRA-eligible activities and enhance the transparency of the agencies’ consideration of those activities. In adopting the ‘‘Native Land Area’’ definition, the agencies sought to maintain consistency with established categories of Native Land Areas. On balance, the agencies believe the final rule’s definition is as comprehensive as feasible to ensure alignment with current Federal Indian law and to support the rule with durable, publicly available data sources. This, in turn, will make identifying Native Land Areas practicable for stakeholders and 218 See final § ll.13(b)(1) and (2), discussed in the section-by-section analysis of these provisions below. 219 See final § ll.15(b)(2) and (7), discussed in the section-by-section analysis of these provisions below. 220 See U.S. Census Bureau, ‘‘AIANNH shapefile,’’ https://www2.census.gov/geo/tiger/TIGER2021/ AIANNH/; Bureau of Indian Affairs, ‘‘BIA Tract Viewer,’’ https://biamaps.geoplatform.gov/BIAopendata/. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 facilitate their ability to engage in and track CRA-eligible activities. New Markets Tax Credit As a clarification, the final rule includes a definition for ‘‘New Markets Tax Credit (NMTC),’’ not included in the proposed rule, to mean a Federal tax credit pursuant to section 45D of the Internal Revenue Code of 1986 (26 U.S.C. 45D). The final rule uses this term in § ll.15(b)(10) as one of the impact and responsiveness factors and in § ll.42(a)(5)(ii) as part of the data collection of community development loans and community development investments, including whether the community development loan or community development investment is an investment in a project financed by NMTCs. The proposal used this term in proposed § ll.42 but did not define it. Nonmetropolitan Area The agencies proposed no changes to the current ‘‘nonmetropolitan area’’ 221 definition, which would continue to mean any area that is not located in an MSA. The agencies did not receive any comments concerning the ‘‘nonmetropolitan area’’ definition and are adopting it as proposed in the final rule. Open-End Home Mortgage Loan For a discussion of the definition of ‘‘open-end mortgage loan,’’ see the discussion above for Mortgage-Related Definitions. Operations Subsidiary or Operating Subsidiary The Board proposed to add a definition of ‘‘operations subsidiary’’ to its CRA regulations, and the OCC and FDIC proposed to add a definition of ‘‘operating subsidiary’’ to their respective CRA regulations. The agencies each proposed their own definitions because of differences in their supervisory authority. The agencies proposed these changes to identify those bank affiliates whose activities would be required to be attributed to a bank’s CRA performance pursuant to proposed § ll.21, Performance Tests, standards, and ratings, and § ll.28, Assigned conclusions and ratings.222 Specifically, the Board proposed to define ‘‘operations subsidiary’’ to mean an organization designed to serve, in effect, as a separately incorporated department of the bank performing at locations at which the bank is authorized to engage in business, functions that the bank is empowered to perform directly.223 The FDIC proposed to define ‘‘operating subsidiary’’ to mean an operating subsidiary as described in 12 CFR 5.34.224 The OCC proposed to define ‘‘operating subsidiary’’ to mean an operating subsidiary as described in 12 CFR 5.34 in the case of an operating subsidiary of a national bank or an operating subsidiary as described in 12 CFR 5.38 in the case of a savings association.225 Regarding comments concerning the definitions of ‘‘operations subsidiary’’ and ‘‘operating subsidiary,’’ a commenter stated that the proposed definition of an ‘‘operations subsidiary’’ and ‘‘operating subsidiary’’ appear reasonable. The commenter stated that, generally, there should be uniformity in these and other definitions across all Federal agencies that receive financial institution data or reports. Another commenter recommended that the agencies avoid defining operations subsidiary and operating subsidiary too broadly. The commenter stated that it is not correct that financial institutions universally exercise ‘‘a high level of ownership, control, and management’’ of all affiliates, which in some circumstances may be considered as ‘‘subsidiaries.’’ As an example, the commenter stated that numerous CDFI banks have nonprofit affiliates that provide substantial mission support, but these nonprofit organizations often have their own boards of directors, have been capitalized in a variety of ways, and control is exercised in different manners as well. For the reasons stated below, the Board is adopting the proposed definition of ‘‘operations subsidiary,’’ and the FDIC and OCC are adopting the proposed definitions of ‘‘operating subsidiary.’’ The agencies believe that the proposed definitions of ‘‘operations subsidiary’’ and ‘‘operating subsidiary’’ are sufficiently consistent based on the agencies’ respective statutory authorities and mandates. In addition, the agencies do not believe these proposed definitions are too broad. If an entity meets the definition of affiliate, and not the definition of operation subsidiary or operating subsidiary, it will not be treated as an operations subsidiary or operating subsidiary under the CRA regulations. Further, the agencies elected not to change these definitions because the description of these terms in the agencies’ CRA regulation should 223 See current 12 CFR ll.12(s). 222 See proposed § ll.21(c). 221 See PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 6621 proposed 12 CFR 228.12. proposed 12 CFR 345.12. 225 See proposed 12 CFR 25.12. 224 See E:\FR\FM\01FER2.SGM 01FER2 6622 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations not differ from the description of these terms in other contexts. Other Delivery System The agencies are adopting a new definition of ‘‘other delivery system,’’ not included in the proposal, to mean a ‘‘channel, other than branches, remote services facilities, or digital delivery systems, through which banks offer retail banking services.’’ This may include telephone banking, bank-bymail, or bank-at-work. For a more detailed discussion of the meaning of other delivery system, see the section-by-section analysis of § ll.23(b)(4). ddrumheller on DSK120RN23PROD with RULES2 Outside Retail Lending Area As discussed above, the agencies proposed to replace the term ‘‘assessment area’’ in § ll.12 with the terms ‘‘facility-based assessment area,’’ ‘‘retail lending assessment areas,’’ and ‘‘outside retail lending areas.’’ The agencies proposed to define the new term ‘‘outside retail lending area’’ to mean the nationwide area outside of a bank’s facility-based assessment areas and, as applicable, retail lending assessment areas. The agencies proposed this new term as part of the proposed Retail Lending Test.226 In particular, under the proposed Retail Lending Test, the agencies would evaluate the retail lending performance of large banks and certain intermediate banks in areas outside of facility-based assessment areas and retail lending assessment areas, as applicable. The final rule now includes a new section that describes the bases for delineating outside retail lending areas. Therefore, the more detailed proposed definition of outside retail lending areas is not necessary, and instead the final rule defines ‘‘outside retail lending area’’ to mean the area delineated pursuant to § ll.18. Comments pertaining to the proposed outside retail lending area provisions, as well as detailed information regarding the final rule’s outside retail lending area delineation requirements, are described in the section-by-section analysis of § ll.18. Persistent Poverty County The agencies included in proposed § ll.15(b)(1) a definition of ‘‘persistent poverty county’’ to mean a county or county-equivalent that had poverty rates of 20 percent or more for the past 30 years, as measured by the most recent decennial censuses. This definition appeared in proposed § ll.15(b) in connection with a list of factors (termed 226 See proposed § ll.22. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 ‘‘impact review’’ factors in the proposal) relevant for evaluating the impact and responsiveness of community development activities. In the final rule, the agencies are moving the ‘‘persistent poverty county’’ definition to § ll.12 for ease of reference, as the term appears in both final § ll.15(b)(1) (finalized as an impact and responsiveness review factor) and the corresponding data collection provision in final § ll.42(a)(5) and (6). Further, consistent with the revision to the definition of ‘‘county,’’ discussed above, ‘‘county-equivalents’’ has been removed from the definition of ‘‘persistent poverty county’’ in the final rule. Lastly, the agencies are replacing the phrase ‘‘as measured by the most recent decennial censuses’’ with reference to a list of counties designated by the Board, FDIC, and OCC and published by the FFIEC. Among other things, this change will provide for statistical reliability while also allowing for regular data updates as conditions change. For a more detailed discussion of the definition of ‘‘persistent poverty county,’’ comments received on the definition, and the final impact and responsiveness review factor associated with this term, see the section-by-section analysis of § ll.15(b). Accordingly, the agencies are adopting a definition of ‘‘persistent poverty county’’ in the final rule that means as a county that has had poverty rates of 20 percent or more for 30 years, as publicly designated by the Board, FDIC, and OCC, compiled in a list, and published annually by the FFIEC. Product Line The agencies are adopting a new definition of ‘‘product line’’ in the final rule, not included in the proposal. The final rule defines ‘‘product line’’ to mean a bank’s loans in one of the following, separate categories in a particular Retail Lending Test Area: (1) closed-end home mortgage loans; (2) small business loans; (3) small farm loans; and (4) automobile loans, if a bank is a majority automobile lender or opts to have its automobile loans evaluated pursuant to § ll.22. As discussed in greater detail in the section-by-section analysis of § ll.22, the definition of ‘‘product line’’ is intended to increase clarity regarding identifying those bank product lines that may potentially be subject to evaluation under the Retail Lending Test, as applicable. Remote Service Facility The Board’s and OCC’s current CRA regulations define the term ‘‘automated PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 teller machine (ATM)’’ to mean an automated, unstaffed banking facility owned or operated by, or operated exclusively for, the bank at which deposits are received, cash dispersed, or money lent.227 The FDIC’s CRA regulation instead contains a definition for ‘‘remote service facility,’’ which has the same definition as the Board’s and OCC’s definition of ATM but also includes a list of examples, specifically, automated teller machine, cash dispensing machine, point-of-sale terminal, or other remote electronic facility. The proposal would replace the Board’s and OCC’s ‘‘ATM’’ definitions with a definition of ‘‘remote service facility’’ that would include ATMs and update the FDIC’s existing definition of ‘‘remote service facility.228 Specifically, the proposal defined ‘‘remote service facility’’ to mean an automated, virtually staffed, or unstaffed banking facility owned or operated by, or operated exclusively for, a bank, such as an ATM, interactive teller machine, cash dispensing machine, or other remote electronic facility at which deposits are received, cash dispersed, or money lent. The agencies believed the proposed definition better reflects changes in the way that banks deliver banking services. The agencies requested feedback as to whether the proposed ‘‘remote service facility’’ definition includes sufficient specificity for the types of facilities and circumstances under which banks would be required to delineate facilitybased assessment areas, or whether other changes to the CRA regulations are necessary to better clarify when the delineation of facility-based assessment areas would be required. A commenter suggested that the ‘‘remote service facility’’ definition should include ATMs that are not owned or operated by, or operated exclusively for financial institutions, noting the importance of low- and moderate-income individuals’ access to independent ATMs. Several commenters recommended that deposittaking remote service facilities should include any bank partnerships with third parties involving remote or virtual banking services, with another commenter suggesting ATM networks operated by a third party. The agencies have declined to explicitly incorporate remote services facilities that are not owned or operated by, or operated exclusively for, a bank into the ‘‘remote service facility’’ definition because of the tenuous connections of these ATMs to a bank. The agencies do not believe that a non-proprietary remote service 227 See 228 See E:\FR\FM\01FER2.SGM current 12 CFR 25.12(d) and 228.12(d). current 12 CFR 245.12(d). 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 facility, such as a network ATM, constitutes a bank facility because such ATMs are owned and operated by a third party. Further, a bank participating in such an ATM network may have limited control over where an ATM is located. The agencies note that the current definition of ‘‘ATM’’ requires that the ATM be owned or operated by, or operated exclusively for, the bank.229 Therefore, the agencies are adopting the proposed definition of ‘‘remote service facility’’ in the final rule with two clarifying changes. First, the definition now provides that a remote service facility must be open to the general public. The agencies believe this substantive change clarifies that this definition only captures those remote deposit facilities that benefit the credit needs of the bank’s local community by having a public facing presence. Second, the definition in the final rule now provides that deposits are ‘‘accepted’’ instead of ‘‘received.’’ This change was made to describe the facility’s interaction more accurately with the public. Accordingly, the final rule provides that ‘‘remote service facility’’ means an automated, virtually staffed, or unstaffed banking facility owned or operated by, or operated exclusively for, a bank, such as an automated teller machine (ATM), interactive teller machine, cash dispensing machine, or other remote electronic facility, that is open to the general public and at which deposits are accepted, cash dispersed, or money lent. Reported Loan To enhance clarity in the final rule, the agencies are adding a new definition of ‘‘reported loan,’’ not included in the proposal, defined to mean: (1) a home mortgage loan or a multifamily loan reported by a bank pursuant to HMDA, as implemented by 12 CFR part 1003; or (2) a small business loan or a small farm loan reported by a bank pursuant to § ll.42. This term is primarily used in the Retail Lending Test (final § ll.22 and appendix A) to specify where only reported loans are used in certain benchmarks. In addition, the term is used in defining when a retail lending assessment area must be delineated pursuant to final § ll.17. For a detailed discussion of the Retail Lending Test, see the section-by-section analysis of final § ll.22 (also addressing appendix A), and for a discussion of retail lending assessment areas, see the section-by-section analysis of § ll.17. 229 See current 12 CFR ll.12(d) (definition of ‘‘automated teller machine (ATM)’’). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 The agencies have included an amendment to transition the definition of ‘‘reported loan’’ to reference small business loans and small farm loans reported by a bank pursuant to the CFPB Section 1071 Final Rule after the section 1071 data is available.230 Retail Banking Products The final rule includes a new definition of ‘‘retail banking products,’’ not included in the proposed rule, to clarify the agencies’ intended meaning of the term in final § ll.23 (Retail Services and Products Test). Specifically, the final rule defines ‘‘retail banking products’’ to mean credit and deposit products or programs that facilitate a lending or depository relationship between the bank and consumers, small businesses, or small farms. For additional discussion of retail banking products, see the section-bysection analysis of § ll.23. Retail Banking Services The agencies proposed to add a new definition of ‘‘retail banking services’’ to increase clarity and consistency in the CRA regulations, particularly with respect to the proposed Retail Services and Products Test.231 The agencies proposed to define ‘‘retail banking services’’ to mean retail financial services provided by a bank to consumers, small businesses, and small farms, and to include a bank’s systems for delivering retail financial services. The agencies did not receive any comments concerning the proposed ‘‘retail banking service’’ definition and are adopting the definition as proposed in the final rule with a non-substantive wording change. Retail Lending Assessment Area As discussed above, the agencies proposed to replace the term ‘‘assessment area’’ in § ll.12 with the terms ‘‘facility-based assessment area,’’ ‘‘retail lending assessment areas,’’ and ‘‘outside retail lending areas.’’ The agencies proposed to define the term ‘‘retail lending assessment area’’ to mean a geographic area, separate and distinct from a facility-based assessment area, delineated in accordance with § ll.17. The agencies proposed this new term as part of the proposed Retail Lending Test.232 230 Specifically, the transition amendments included in this final rule will amend the definitions of ‘‘reported loan’’ to mean a small business loan or small farm loan reported by a bank pursuant to subpart B of 12 CFR part 1002. The agencies will provide notice of the effective date of these transition amendments in the Federal Register after section 1071 data is available. 231 See proposed § ll.23. 232 See proposed § ll.22. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 6623 The agencies did not receive any comments specific to the proposed definition of ‘‘retail lending assessment area.’’ However, the agencies received numerous comments regarding the retail lending assessment area approach, which are discussed in the section-bysection analysis of § ll.17. To be consistent with the ‘‘facility-based assessment area’’ and ‘‘outside retail lending area’’ definitions in the final rule, the agencies are revising the ‘‘retail lending assessment area’’ definition in the final rule. Specifically, the agencies are removing the phrase ‘‘separate and distinct from a facility-based assessment area’’ and replacing ‘‘in accordance with’’ with ‘‘pursuant to.’’ Accordingly, the final rule defines ‘‘retail lending assessment area’’ to mean ‘‘a geographic area delineated pursuant to § ll.17.’’ Detailed information regarding the final rule’s retail lending assessment area delineation requirements is included in the section-by-section analysis of § ll.17. Retail Lending Test Area In the final rule, the agencies are adding a new definition of ‘‘Retail Lending Test Area,’’ not included in the proposal, to mean a facility-based assessment area, a retail lending assessment area, or an outside retail lending area. The agencies believe this definition will increase the final rule’s consistency and improve its readability with respect to referencing retail lending assessment areas, facility-based assessment areas, and outside retail lending areas, both individually and collectively, for purposes of the Retail Lending Test. Retail Loan In relation to the proposed Retail Lending Test,233 the agencies proposed to add a new definition of ‘‘retail loan’’ to mean, for purposes of the Retail Lending Test in § ll.22, an automobile loan, closed-end home mortgage loan, open-end home mortgage loan, multifamily loan, small business loan, or small farm loan. For all other purposes, retail loan would mean a consumer loan, home mortgage loan, small business loan, or small farm loan. The agencies did not receive any comments concerning this proposed definition. However, after further review, the agencies have elected not to adopt a definition of ‘‘retail loan’’ in § ll.12 in the final rule. Instead, the agencies are adopting a definition of ‘‘product line’’ in the final rule, which 233 See E:\FR\FM\01FER2.SGM proposed § ll.22. 01FER2 6624 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations references loan categories relevant to the Retail Lending Test. Small Bank For a discussion of the definition of ‘‘small bank,’’ see the discussion above for Bank Asset-Size Definitions. Small Business and Small Farm Current Approach and the Agencies’ Proposal The agencies proposed to add definitions of ‘‘small business’’ and ‘‘small farm,’’ as they are not defined in the current CRA regulations. Instead, the current CRA regulations define ‘‘community development’’ to be activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the SBA’s Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less. The current regulations also consider the borrower distribution of small business loans and small farm loans to businesses and farms with gross annual revenues of $1 million or less. The proposal would define ‘‘small business’’ to mean ‘‘a business that had gross annual revenues for its preceding fiscal year of $5 million or less’’ and ‘‘small farm’’ to mean ‘‘a farm that had gross annual revenues for its preceding fiscal year of $5 million or less.’’ The agencies proposed these definitions to support the evaluation of retail lending under the proposed Retail Lending Test 234 and community development loans and investments supporting small businesses and small farms that would be evaluated under the proposed Community Development Financing Test.235 These proposed definitions were consistent with the definitions for ‘‘small business’’ proposed by the CFPB in its section 1071 rulemaking.236 Comments Received ddrumheller on DSK120RN23PROD with RULES2 The agencies received numerous comments related to the proposed ‘‘small business’’ and ‘‘small farm’’ definitions. Some commenters expressed support for the proposed definitions, while other commenters recommended the agencies adopt the definitions with various changes or implement new definitions that incorporate different criteria. proposed § ll.22. proposed §§ ll.13(c)(2) and (3); ll.24; and ll.26. 236 The CFPB section 1071 regulation does not separately define ‘‘small farm,’’ rather it includes them as types of small businesses identifiable by the of the NAICS codes 111–115. See 88 FR 35150, 35271, 35295 (May 31, 2023). 234 See 235 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Specifically, many commenters supported the proposal to adopt size standards for small businesses and small farms that would be consistent with the proposed small business size standard in the CFPB’s section 1071 rulemaking (i.e., gross annual revenues of $5 million or less for the preceding fiscal year). In general, these commenters asserted that consistent definitions across regulations and regulators would provide for reporting consistency and efficiency with less burden. Several other commenters stated that, although they believed that the gross annual revenues of $5 million or less proposed by the CFPB was too high, they supported aligning the definitions with the CFPB’s section 1071 rulemaking even if the CFPB later adopted the larger size threshold in its Section 1071 Final Rule. Some commenters suggested that the small business size standard should be as consistent as possible with both the CFPB’s section 1071 rulemaking and the SBA’s small business size standards. However, other commenters opposed the proposal to align the size standards for small businesses and small farms with the proposed small business size standard in the CFPB’s section 1071 rulemaking. Many of these commenters generally stated that the proposed small business and small farm size standards are unusually high because the vast majority of small businesses have gross annual revenues significantly below $5 million. Moreover, a few of these commenters stated that CRA’s focus should be on the credit needs of the smallest businesses, with some commenters expressing concern that the proposed $5 million threshold would result in capital being redirected to larger businesses. Several commenters also emphasized that aligning the ‘‘small business’’ and ‘‘small farm’’ definitions with the CFPB’s size standard would be inappropriate because section 1071 serves a different purpose than the CRA; namely, the threshold proposed by the CFPB establishes reporting requirements that would facilitate enforcement of fair lending laws. A few commenters also stated that it was not prudent for the agencies to propose a size standard based on a proposed rule. Many commenters that opposed aligning the small business and small farm size standards with the CFPB’s section 1071 proposed small business size standard recommended a range of alternative thresholds for consideration. A commenter recommended that the agencies adopt the SBA’s small business size standards. Another commenter recommended that a small business PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 definition should encompass manufacturing businesses with 500 or fewer employees and other businesses with gross annual revenues up to $8 million. One other commenter argued in favor of an $8 million gross annual revenues threshold, asserting that this figure is the most common size standard threshold for average annual business receipts and would capture a majority of small businesses. Another commenter recommended that the agencies define ‘‘small business’’ and ‘‘small farm’’ based on loan size rather than gross annual revenues but did not specify an amount. One other commenter supported a threshold of gross annual revenues of $1 million or less because many large banks only have system codes for gross annual revenues that indicate whether a business is above or below $1 million, but not the actual threshold. Other commenters requested clarifications of the definitions of ‘‘small business’’ and ‘‘small farm’’ or offered additional comments regarding these definitions. A commenter requested clarity on the treatment of revenues for affiliated businesses and guarantors, and how to calculate the revenues of small businesses or small farms when a line of credit is renewed (and updated revenue information is not collected). A few other commenters noted that defining small business and small farm by reference to gross annual revenues could create difficulty at the beginning of a calendar year, when borrowers may not have reliable revenue figures for the preceding year. Both commenters suggested that banks should be able to use prior-year revenue figures under these circumstances. Another commenter stated there should be clear guidance on how gross annual revenues should be determined to better provide reporting and examination consistency. A commenter suggested that the agencies adopt a consistent definition of ‘‘small business’’ and ‘‘small farm’’ across the regulation, including for the borrower distribution metrics under the Retail Lending Test.237 A few commenters pointed out that even if the agencies align the ‘‘small business’’ and ‘‘small farm’’ definitions with the CFPB’s size standard in its section 1071 rulemaking, there would still be opportunity to improve consistency across banking regulations because 237 Under proposed § ll.22(d)(2)(iii)(D), the agencies would review bank lending to, among other borrowers, small businesses, and small farms with gross annual revenues of $250,000 or less and small businesses and small farms with gross annual revenues of more than $250,000 but less than or equal to $1 million. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations these definitions would not be reflected in Call Report requirements. ddrumheller on DSK120RN23PROD with RULES2 Final Rule After considering the varied perspectives and recommendations on the proposed ‘‘small business’’ and ‘‘small farm’’ definitions, the agencies are adopting the definitions as proposed.238 The final rule defines ‘‘small business’’ to mean a business that had gross annual revenues for its preceding fiscal year of $5 million or less and ‘‘small farm’’ to mean a farm that had gross annual revenues for its preceding fiscal year of $5 million or less.239 The agencies declined to use the SBA’s small business size standards because they believe that these standards would not serve the CRA’s purposes well. The SBA small business size standards are based on gross annual revenues or the average number of employees for a wide range of business entities, resulting in over 1,000 North American Industry Classification System (NAICS) codes. In addition, the agencies also considered the fact that the SBA has recently increased many of its size standards and no longer employs a $1 million average annual receipts size standard for any industry.240 In particular, many of the SBA’s gross annual revenues standards are much larger than the gross annual revenues thresholds included in the proposed ‘‘small business’’ and ‘‘small farm’’ definitions. The SBA’s size standards 238 The agencies requested and received permission from the SBA to use size standards for small businesses and small farms that differ from the SBA’s size standards, as required by 15 U.S.C. 632(a)(2)(C) and 13 CFR 121.903. 239 The final rule’s transition amendments will amend the definitions of ‘‘small business’’ and ‘‘small farm’’ to instead cross-reference to the definition of ‘‘small business’’ in the CFPB section 1071 regulation. This will allow the CRA Regulatory definitions to adjust if the CFPB increases the threshold in the CFPB section 1071 regulatory definition of ‘‘small business.’’ This is consistent with the agencies’ intent articulated in the preamble to the proposal and elsewhere in this final rule to conform these definitions with the definition in the CFPB section 1071 regulation. The agencies will provide the effective date of these amendments in the Federal Register once section 1071 data is available. 240 Through a series of rules that became effective on May 2, 2022, the SBA implemented revised size standards for 229 industries (all using average annual receipts standards) to increase eligibility for its Federal contracting and loan programs. See 87 FR 18607 (Mar. 31, 2022); 87 FR 18627 (Mar. 31, 2022); 87 FR 18646 (Mar. 31, 2022); 87 FR 18665 (Mar. 31, 2022). The SBA did not reduce any size standards—it either maintained or increased the size standards for all 229 industries, in many cases with size standard increases of 50 percent or more. Effective July 14, 2022, the SBA also increased size standards for 22 wholesale trade industries and 35 retail trade industries. 87 FR 35869 (June 14, 2022). See SBA Small Business Size Standards by NAICS Industry, 13 CFR 121.201. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 for agricultural industries now range from $2.25 million to $34 million, and the size standards for non-agricultural industries now range from $8 million to $47 million.241 Therefore, applying the SBA size standards under the CRA regulations would undermine the focus on smaller small businesses and farms. Further, the agencies believe it is not appropriate to set a lower threshold, particularly when considering how the final rule will use the terms. A lower size standard may unduly restrict the type of lending and investment that the agencies have historically considered under economic development (i.e., the current rule considers as loans and investments that support businesses and farms that meet the size eligibility standards of the SBA’s Development Company or Small Business Investment Company programs (13 CFR 121.301)). In addition, the agencies believe that size standards that draw on a single data point—i.e., gross annual revenues of $5 million or less in the preceding year— are easy for institutions to understand and implement and minimize the data banks are required to collect and report. If the agencies adopted definitions that introduced additional criteria, as suggested by some commenters—e.g., average number of employees, average revenue, or industry codes—institutions would be required to collect and report additional data points, which would increase banks’ collection and reporting burden. The agencies also believe that $5 million is the appropriate threshold for small businesses and small farms. As discussed above, commenters advocated for both lowering the threshold to focus the regulations on the smallest small business and raising the threshold to capture larger small businesses, but the agencies believe that the proposed ‘‘small business’’ and ‘‘small farm’’ definitions strike a proper balance. As such, the definitions in the final rule capture entities all along the small business spectrum, from the smallest small businesses and farms through larger small businesses and farms. Further, a $5 million threshold is consistent with the definition of ‘‘small business’’ in the CFPB’s section 1071 rulemaking. As explained in more detail below in the discussion of the definitions of ‘‘small business loans’’ and ‘‘small farm loans,’’ leveraging the CFPB’s ‘‘small business’’ definition for purposes of the Retail Lending Test will reduce the data collection and reporting burden under the CRA regulations because banks will not have to report 241 See SBA Small Business Size Standards by NAICS Industry, 13 CFR 121.201. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 6625 small business loan data to two different agencies with two different thresholds once the agencies transition to using section 1071 data.242 In addition, as also explained below, aligning the CRA’s ‘‘small business’’ and ‘‘small farm’’ definitions with the CFPB’s ‘‘small business’’ definition will enable the agencies to expand and improve the analysis of CRA small business and small farm lending for all banks subject to the Retail Lending Test. The agencies understand that the CFPB’s section 1071 rulemaking, although finalized, is not yet applicable, and, therefore, the agencies will not yet be able to leverage the CFPB’s section 1071 rulemaking’s ‘‘small business’’ definition for purposes of the Retail Lending Test at this time. However, the final rule’s ‘‘small business’’ and ‘‘small farm’’ definitions are also necessary for determining which loans, investments, or services meet the community development criteria under final § ll.13 for purposes of the Community Development Financing Test in § ll.24, the Community Development Services Test in § ll.25, and the Community Development Financing Test for Limited Purpose Banks in § ll.25, and for evaluating a bank’s retail banking services and retail banking products under the Retail Services and Products Test in final § ll.23. As explained above, the current regulations do not explicitly define ‘‘small business’’ and ‘‘small farm,’’ and defining ‘‘small business’’ and ‘‘small farm’’ to mean those businesses and farms with $5 million or less in gross annual revenues is preferable to using the SBA’s small business size standards, which can be significantly larger, and would undermine the CRA’s focus on smaller small businesses and farms. Therefore, to be consistent throughout the CRA regulations, the agencies believe it is important to include this definition in the final rule. With regard to commenters’ concerns related to the treatment of revenues, the agencies anticipate updating the CRA data collection and reporting guidance to reflect the new collection and reporting obligations related to the reporting of gross annual revenues. In developing that guidance, the agencies will consider the commenters’ suggestions and recommendations. With respect to the commenter’s concern regarding the agencies proposing a size standard based on the 242 As discussed in the section-by-section analysis of § ll.42, the agencies will eliminate the current CRA small business and small farm data collection and reporting requirements once the agencies transition to using section 1071 data. E:\FR\FM\01FER2.SGM 01FER2 6626 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations CFPB proposed rule under section 1071 of the Dodd-Frank Act (Section 1071 Proposed Rule),243 the agencies note that the $5 million size standard for a small business or small farm was included in the proposal; the agencies did not cross-reference to the CFPB section 1071 rulemaking. Therefore, commenters were able to comment on the exact threshold proposed. The agencies appreciate commenters’ concern that inconsistencies with respect to size standards for small businesses and small farms would remain because the CRA definitions would not be reflected in the Call Report. However, revisions to Call Report requirements are outside the scope of this rulemaking. Small Business Loan and Small Farm Loan ddrumheller on DSK120RN23PROD with RULES2 Current Approach The current CRA regulations define ‘‘small business loan’’ to mean ‘‘a loan included in ‘loans to small businesses,’ as defined in the instructions for preparation of the Consolidated Report of Condition and Income.’’ 244 Likewise, ‘‘small farm loan’’ means ‘‘a loan included in ‘loans to small farms,’ as defined in the instructions for preparation of the Consolidated Report of Condition and Income.’’ 245 The current approach captures loans of $1 million or less to businesses, and loans of $500,000 or less to farms, as reported in the Call Report.246 The Agencies’ Proposal The agencies proposed to retain these definitions with two technical changes. First, the proposed ‘‘small business loan’’ and ‘‘small farm loan’’ definitions included a provision indicating that the proposed ‘‘small business loan’’ and ‘‘small farm loan’’ definitions should be read independently from the ‘‘small business’’ and ‘‘small farm’’ definitions. This distinction is relevant because, until the agencies transition to using small business lending data derived from the CFPB Section 1071 Final Rule, the CRA regulations need to continue to use the current rule’s ‘‘small business loan’’ and ‘‘small farm loan’’ definitions in evaluating bank performance under the proposed Retail Lending Test in § ll.22. The agencies indicated in the proposal that once section 1071 data on small business loans become available, the agencies will transition to ‘‘small business loan’’ and ‘‘small farm loan’’ definitions that are consistent with the 243 See 86 FR 56356 (Oct. 8, 2021). current 12 CFR ll.12(v). 245 See current 12 CFR ll.12(w). 246 See Call Report, Schedule RC–C, Part II. 244 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 definition of ‘‘small business’’ in the CFPB Section 1071 Final Rule. Second, the agencies proposed to substitute ‘‘Consolidated Report of Condition and Income’’ in each definition for the shorter term, ‘‘Call Report,’’ which would have the same meaning and be established as the term used throughout the regulation earlier in the regulatory text. (See the ‘‘assets’’ definition discussion above.) With these technical changes, the agencies proposed to define ‘‘small business loan’’ to mean, notwithstanding the definition of ‘‘small business’’ in § ll.12, a loan included in ‘‘loans to small businesses’’ as defined in the instructions for preparation of the Call Report, and ‘‘small farm loan’’ to mean notwithstanding the definition of ‘‘small farm’’ in § ll.12, a loan included in ‘‘loans to small farms’’ as defined in the instructions for preparation of the Call Report.’’ Comments Received The agencies received numerous comments related to the proposed ‘‘small business loan’’ and ‘‘small farm loan’’ definitions. Some commenters expressed support for the proposed definitions and intended transition to the CFPB section 1071 rulemaking definition of ‘‘small business,’’ while other commenters recommended the agencies adopt definitions with various changes or implement entirely new definitions that incorporate different criteria. Specifically, a few commenters stated that using the proposed small business size standard in the CFPB’s section 1071 rulemaking will provide a more accurate picture of lending to small entities than the current threshold, which measures lending based on loan size as opposed to business revenue size. However, other commenters opposed the proposed changes to the ‘‘small business loan’’ and ‘‘small farm loan’’ definitions and recommended continuing using the Call Report definitions, with a commenter stating that retaining these definitions is necessary to ensure that smaller dollar loans are targeted to businesses with capital gaps. Another commenter recommended continuing to use the current Call Report definitions of ‘‘loans to small businesses’’ and ‘‘loans to small farms,’’ and reevaluating after a full year of section 1071 data are available. Some commenters contended that the proposed threshold would impose considerable new data collection and reporting requirements for community banks that elect to be evaluated under the proposed Retail Lending Test. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 Another commenter proposed a hybrid approach that would define ‘‘small business loan’’ to include both: (1) a loan to a business with gross annual revenues of $1 million or less; and (2) a commercial loan in an amount of $1 million or less. Some commenters suggested using certain size standards adopted by the SBA and USDA to encourage lending to socially disadvantaged businesses and farms owned by persons of color. Another commenter questioned whether the ‘‘small business loan’’ and ‘‘small farm loan’’ definitions include loans made to individuals because of the use of the term ‘‘revenue’’ as opposed to ‘‘income.’’ This commenter claimed that the exclusion of small business and small farm loans to individuals would cause underreporting and could negatively affect a bank’s Retail Lending Test results, metrics, benchmarks, and possibly other areas. Further, the commenter suggested the ‘‘small business loan’’ and ‘‘small farm loan’’ definitions should include renewals and credit limit increases, as set forth in the Interagency Questions and Answers.247 Another commenter suggested that the agencies should not give CRA consideration for all loans to businesses that meet the SBA standards for small businesses. This commenter reasoned that the SBA standards for employee size represent too high a threshold to meaningfully segment the small business lending market. Final Rule The agencies appreciate the commenters’ varied perspectives and recommendations related to the proposed ‘‘small business loan’’ and ‘‘small farm loan’’ definitions. However, after consideration of these comments, the agencies are adopting the ‘‘small business loan’’ and ‘‘small farm loan’’ definitions as proposed in the final rule, with technical changes, and have included amendments to transition to ‘‘small business loan’’ and ‘‘small farm loan’’ definitions leveraged off of the CFPB section 1071 regulation’s ‘‘small business’’ definition once section 1071 data is available.248 Specifically, the final rule provides that ‘‘small business loan’’ and ‘‘small farm loan’’ mean those loans included in ‘‘loans to small businesses’’ or ‘‘loans to small farms’’ as Q&A § ll.42(a)–5. final rule’s transition amendments will amend the definitions of ‘‘small business loan’’ and ‘‘small farm loan’’ to mean a loan to a small business or small farm, respectively, as defined in § ll.12 of the CRA regulations. The agencies will provide notice of the effective date of this amendment in the Federal Register once section 1071 data is available. 247 See 248 The E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations reported in Schedule RC–C of the Call Report. The agencies are referring to these terms as reported in the Call Report, instead of as defined in the instructions, to more accurately provide a source for these terms. As indicated above, maintaining the current rule’s definitions of ‘‘small business loan’’ and ‘‘small farm loan’’ based on the Call Report is necessary until the agencies transition to using section 1071 data. Further, transitioning to section 1071 data will enable the agencies to use borrower and geographic distribution metrics and benchmarks that provide more insight into banks’ performance relative to the demand for small business loans in a given geographic area. It also will allow for an analysis that uses an expanded data set measuring loans to small businesses of different revenue sizes, including— importantly—to the businesses and farms with gross annual revenues of $250,000 or less, as discussed in the section-by-section analysis of § ll.22, the Retail Lending Test. In sum, these definitions will enable the agencies to expand and improve the analysis of CRA small business and small farm lending for all banks, as applicable, since section 1071 data will also enable expanded analysis for intermediate and small banks that are subject to reporting pursuant to the CFPB’s section 1071 rulemaking. Further, because a large business may obtain small dollar loans, and a small business may obtain large dollar loans, the agencies believe the size of a business obtaining the loan is a better factor than the size of the loan to a business for determining whether a loan is made to a small business that warrants CRA consideration. For the same reasons as noted in the ‘‘small business’’ and ‘‘small farm’’ definitions discussion, the agencies do not find it appropriate to adopt definitions of ‘‘small business loan’’ or ‘‘small farm loan’’ based on the SBA’s small business size standards. As noted above, the SBA currently employs varying small business standards which are based on various factors, including industry, average annual receipts, and average number of employees. As a result, capturing all loans to businesses that qualify as small businesses under the SBA’s standards would necessitate the collection and reporting of additional data, including NAICS codes to determine the industry in which a business operates, average employee headcount, and average receipts over a multi-year period. This would impose increased compliance and operational burden and costs in negotiating what, for many or most banks, would be a complicated overlay on their lending VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 activity (e.g., use of NAICS codes) that could reduce efficiencies in their small business and small farm lending programs. In response to comments about the inclusion of loans to individuals as small business loans or small farm loans based on income of the individual as opposed to business revenues and how renewals and other credit limit increases are considered, the agencies intend to continue historical practices with respect to these issues. Specifically, pursuant to Call Report instructions and certain limitations, loans to sole proprietorships for commercial or agricultural purposes are included in the ‘‘small business loan’’ and ‘‘small farm loan’’ definitions, respectively. Banks have historically reported the gross annual revenues relied on in making credit decisions. This reporting included affiliate revenues when relied on, but never combined individual income with business revenues even if the bank relied on the individual income of a sole proprietor in making the credit decision. The agencies continue to believe this is appropriate, because irrespective of whether the bank relied on individual income in making a credit decision, it keeps the focus on the size of the business for purposes of considering the loan under the performance tests. Therefore, under the final rule, banks will report only the gross annual revenues of the business benefiting from the loan proceeds.249 It is also notable that once the transition to section 1071 data is complete, the small business loan data used for the Retail Lending Test will capture business credit transactions that are secured by real estate. For example, section 1071 data will capture business loans secured by an applicant’s primary residence or residential investment property as collateral for inventory financing or working capital. Such loans would not be captured under HMDA because they do not involve a home purchase, home improvement, or refinancing and would not be captured in the Call Report definition of ‘‘loans to small businesses’’ because they are secured by residential real estate. For the reasons discussed above, the agencies are adopting in the final rule a definition of ‘‘small business loan’’ that 249 The agencies intend to make one change from the current guidance regarding the treatment of affiliate revenues, pursuant to the final rule and any guidance issued, gross annual revenue reporting will be limited to the business revenues of the benefiting business regardless of whether affiliate revenues are considered in a credit decision to more accurately identify the size of a business under the performance tests. PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 6627 means, notwithstanding the definition of ‘‘small business’’ in this section, a loan included in ‘‘loans to small businesses’’ as defined in the instructions for preparation of the Call Report. Similarly, the agencies are adopting in the final rule a definition of ‘‘small farm loan’’ that means, notwithstanding the definition of ‘‘small farm’’ in this section, a loan included in ‘‘loans to small farms’’ as defined in the instructions for preparation of the Call Report. Amendments included in the final rule will transition these definitions to reflect the final rule’s definitions of ‘‘small business’’ and ‘‘small farm,’’ which leverages the definition of ‘‘small business’’ in the CFPB’s section 1071 rulemaking, once small business data reported pursuant to that rulemaking becomes available and the agencies announce an effective date for this transition in the Federal Register. State To increase clarity and consistency in the CRA regulations, the agencies proposed to add a definition of ‘‘State’’ to mean a U.S. State or territory, and the District of Columbia. The agencies did not receive any comments on this definition and are adopting the definition as proposed in the final rule. Targeted Census Tract The agencies proposed to add a definition of ‘‘targeted census tract’’ for purposes of certain community development categories in proposed § ll.13. As proposed, this term would mean: (1) a low-income census tract or a moderate-income census tract; or (2) a distressed or underserved nonmetropolitan middle-income census tract. This definition was intended to reflect the current CRA regulations regarding community development activities now categorized as revitalization and stabilization activities,250 as well as accompanying guidance in the Interagency Questions and Answers regarding relevant geographic areas for these activities.251 The agencies did not receive any comments concerning the proposed definition of ‘‘targeted census tract’’ and adopt it as proposed in the final rule. Tribal Government The final rule includes a new definition for ‘‘tribal government,’’ not included in the proposal, to clarify the agencies’ intended meaning of ‘‘tribal government’’ where referenced in the current 12 CFR ll.12(g)(4). generally 81 FR 48506, 48526–48528 (July 25, 2016). 250 See 251 See E:\FR\FM\01FER2.SGM 01FER2 6628 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 final rule (see, e.g., community development categories in proposed and final § ll.13 and the accompanying section-by-section analysis). As discussed above, the proposed and final community development place-based categories, including activities in Native Land Areas, include as eligibility criterion that activities be ‘‘conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative.’’ 252 However, the proposal did not define ‘‘tribal government,’’ although the agencies sought feedback on various aspects of the government plan criterion. Some commenters addressed the types of entities that should be included in the government plan requirement, including tribal governments, associations, and other designees. A commenter expressed support for defining ‘‘tribal government’’ to mean the recognized governing body of any Indian, or Alaska Native tribe, band, nation, pueblo, village, community, component band, or component reservation, individually identified (including parenthetically) in the list most recently published pursuant to section 104 of the Federally Recognized Indian Tribe List Act of 1994.253 Based on comments and on further consideration, the agencies believe that a definition of ‘‘tribal government’’ will provide needed clarity and certainty for banks and other stakeholders seeking to determine whether activities meet the required eligibility criterion. Accordingly, the final rule defines ‘‘tribal government’’ to mean the recognized governing body of any Indian, or Alaska Native tribe, band, nation, pueblo, village, community, component band, or component reservation, individually identified (including parenthetically) in the list most recently published pursuant to section 104 of the Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C. 5131). As with the definition of ‘‘Native Land Areas,’’ this definition is derived from and intended to align with existing Federal Indian law. Wholesale Bank As detailed in the ‘‘limited purpose bank’’ definition discussion above, the agencies are adopting the single term, ‘‘limited purpose bank,’’ and eliminating the ‘‘wholesale bank’’ definition in the final rule. This change is intended to improve clarity, minimize complexity, and provide for new and future market participants. 252 See 253 See final § ll.13(j)(2)(i). Public Law 103–454, 108 Stat. 4791 (Nov. 2, 1994). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Women’s Depository Institution The agencies proposed to define ‘‘women’s depository institution (WDI)’’ as having the same meaning given to that term in 12 U.S.C. 2907(b)(2). The cross-referenced provision of the CRA statute defines ‘‘WDI’’ to mean a depository institution, as defined in the FDI Act, with: (1) more than 50 percent of the ownership or control of which is held by 1 or more women; (2) more than 50 percent of the net profit or loss of which accrues to 1 or more women; and (3) a significant percentage of senior management positions of which are held by women. The agencies did not include an alternate definition of WDI because their policies with respect to designating WDI’s vary. The FDIC does not specifically designate or define WDIs under its MDI policy statement, however, it does recognize WDIs for purposes of the CRA. The Board defines WDI consistent with the CRA statute and institutions that meet the definition are eligible to access resources under the Federal Reserve System’s Partnership for Progress program.254 The OCC, in contrast, considers WDIs to be MDIs under its MDI Policy Statement, and, therefore, womenowned institutions that do not meet the statutory definition of WDI in section 2907 would be considered MDIs if the institution otherwise meets the requirements of the OCC’s MDI Policy Statement. The agencies did not receive any comments on the proposed definition of WDI and are adopting the definition as proposed with non-substantive revisions for conformity with the structure of other definitions in final § ll.12. Accordingly, under the final rule, ‘‘Women’s depository institution (WDI)’’ means ‘‘women’s depository institution’’ as defined in 12 U.S.C. 2907(b)(2). Section ll.13 Consideration of Community Development Loans, Community Development Investments, and Community Development Services Current Approach and the Agencies’ Proposal The current CRA regulations define ‘‘community development’’ as comprising four broad categories: affordable housing, community services, economic development, and revitalization and stabilization.255 The 254 See Board, SR 21–6/CA 21–4: ‘‘Highlighting the Federal Reserve System’s Partnership for Progress Program for Minority Depository Institutions and Women’s Depository Institutions’’ (Mar. 25, 2021), https://www.federalreserve.gov/ supervisionreg/srletters/SR2106.htm. 255 See current 12 CFR ll.12(g). PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 agencies proposed to update the community development definition in current § ll.12 by creating a new § ll.13 that would define community development as including eleven different categories of activities and would establish standards for when community development activities would receive full and partial consideration. Proposed § ll.13 incorporated aspects of the current Interagency Questions and Answers into the regulation and established specific eligibility standards for a broad range of community development activities. Proposed § ll.13 was also designed to provide more clarity regarding the kinds of activities the agencies consider to be community development, as well as regarding eligibility for community development consideration. Comments Received Commenters provided general feedback on the agencies’ proposal to adopt a definition of community development with eleven categories of activities, as well as on the specific proposed categories (which are discussed in the section-by-section analysis of each individual category below). Many commenters were generally supportive of the proposal, with several noting that the proposed approach for defining community development would provide more clarity for all stakeholders on the types of activities that qualify and the eligibility requirements for different activity types. Several commenters were particularly supportive of adding new categories to the current community development definition, such as the proposed categories for disaster preparedness and climate resiliency activities, activities with MDIs, WDIs, LICUs, and CDFIs, and activities in Native Land Areas. Other commenters noted that proposed changes to the community development definition would increase the responsiveness of banks to community needs and expressed the view that the changes would help to more effectively target community development activities. In contrast, a few commenters opposed the proposed changes to the community development definition. Commenter feedback included: that the activities that could be considered under the new categories could be considered under the four existing categories of community development; concern that the new community development categories were too rigid and complex, including that it would be difficult to obtain the data needed to show activities meet the new requirements; and that the definition of E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations community development would lead to a narrowing of what could qualify, which might result in fewer or less impactful activities in low- and moderate-income communities. Additionally, several commenters provided suggestions for additional categories of activities that should be considered under community development, such as equitable media, activities focused on arts and culture, broadband and digital inclusion, activities benefiting military communities, and activities that are designed to support individuals with disabilities. ddrumheller on DSK120RN23PROD with RULES2 Final Rule The agencies are adopting proposed § ll.13, with revisions from the proposal and retitled as ‘‘Consideration of community development loans, community development investments, and community development services.’’ The final rule updates the current definition of community development to provide banks with additional clarity regarding the loans, investments, and services that the agencies have determined support community development that is responsive to the needs of low- and moderate-income individuals and communities, certain distressed or underserved nonmetropolitan areas, and small businesses and small farms. Consistent with the structure of the proposal, final § ll.13 adopts standards for when community development loans, community development investments, and community development services will receive full and partial consideration (final § ll.13(a)), and replaces the current definition of community development with the following eleven categories: Section ll.13(b) Affordable housing; Section ll.13(c) Economic development; Section ll.13(d) Community supportive services; Section ll.13(e) Revitalization or stabilization; Section ll.13(f) Essential community facilities; Section ll.13(g) Essential community infrastructure; Section ll.13(h) Recovery of designated disaster areas; Section ll.13(i) Disaster preparedness and weather resiliency; Section ll.13(j) Revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency in Native Land Areas; VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Section ll.13(k) Activities with MDIs, WDIs, LICUs, or CDFIs; and Section ll.13(l) Financial literacy. Final § ll.13(a) has been revised to clarify the standards within each category for determining full or partial consideration. Final § ll.13(b) through (l) have also been revised to address comments, improve clarity, and promote greater internal consistency. Revisions to these categories are discussed in greater detail in the corresponding section-by-section analyses below. The final rule incorporates aspects of the guidance that is currently provided in the Interagency Questions and Answers and provides more specificity, relative to the current rule, on the kinds of activities that the agencies consider to be community development. By building on the current rule and expanding the categories of community development, the agencies believe that final § ll.13 will emphasize activities that are responsive to community needs, and especially the needs of low- and moderate-income individuals, families, and households and small businesses and small farms. Further, the agencies believe that the final rule will provide increased transparency and consistency by providing stakeholders with a better upfront understanding how loans, investments, and services supporting community development can receive consideration. Overall, the agencies believe that the final rule will reduce uncertainty and facilitate banks’ ability to identify community development opportunities. In adopting final § ll.13, the agencies considered comments regarding each proposed category of community development, and on appropriate standards for providing full and partial consideration for community development activities. These comments and the final rule are discussed below in the section-bysection analyses of § ll.13(a) through (l). In addition, the agencies are adopting a variety of clarifying and conforming technical edits across final § ll.13. For example, across all community development categories, the agencies are revising the term ‘‘low- and moderate-income individuals’’ to ‘‘lowand moderate-income individuals, families, and households’’ for consistency across the various paragraphs in § ll.13, to provide more clarity and to comprehensively include the beneficiaries of different community development activities. Similarly, where appropriate, the final rule replaces ‘‘activities’’ with ‘‘loans, investments, and services,’’ consistent with revisions made elsewhere in the regulation to PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 6629 more accurately capture the distinction between community development activities, and a bank’s loans, investments, and services that support those activities (for which CRA consideration is granted). The agencies considered commenter feedback that revising community development to include eleven categories could be too rigid or complex, and comments that activities under proposed § ll.13(b) through (l) could be included under the four existing community development categories. The agencies believe, however, that additional community development categories, with specific eligibility requirements for each, will provide stakeholders with better clarity. Additionally, as previously noted and consistent with the proposal, the final rule incorporates existing guidance into the definition, which represents an evolution towards a more comprehensive and transparent regulation. The agencies note that, while banks subject to the rule are permitted to qualify loans, investments, and services under any applicable community development category, and that some activities may meet the criteria of multiple categories, activities may count only once for the purposes of calculating the Community Development Financing Metric. The agencies also appreciate comments suggesting additional categories for inclusion under community development and note that these are generally discussed in the section-by-section analyses of final § ll.13(b) through (l). The agencies have considered these comments but believe that the adopted categories most clearly and specifically align with the scope of community development under the CRA regulations. The agencies note that loans, investments, and services supporting additional activities suggested by commenters could still receive consideration if they otherwise meet the required criteria under any category included in final § ll.13. Finally, the agencies believe that the establishment in final § ll.14 of an illustrative list of qualifying community development activities and of a confirmation process, available if a bank wants to request review in advance, will help to provide additional clarity and transparency for banks regarding the consideration of community development loans, investments, and services. For more information, see the section-by-section analysis of § ll.14. E:\FR\FM\01FER2.SGM 01FER2 6630 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Section ll.13(a) Full and Partial Credit for Community Development Loans, Community Development Investments, and Community Development Services ddrumheller on DSK120RN23PROD with RULES2 Current Approach Under the current CRA rule, a bank may, depending on its size and business model, be evaluated for its community development lending, investments, and services under the lending, investment, or service tests, as applicable.256 To be eligible for CRA community development consideration, a loan, service, or investment must have community development as its primary purpose.257 The Interagency Questions and Answers explain that a loan, investment, or service is considered to have a primary purpose of community development ‘‘when it is designed for the express purpose of’’ the following: • ‘‘Revitalizing or stabilizing low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middleincome areas;’’ • ‘‘Providing affordable housing for, or community services targeted to, lowor moderate-income persons;’’ or • ‘‘Promoting economic development by financing small businesses or small farms that meet the requirements set forth in 12 CFR ll.12(g).’’ 258 The Interagency Questions and Answers explain that the agencies use one of two approaches to determine whether an activity is ‘‘designed for an express community development purpose.’’ An activity meets the primary purpose standard, and the entire activity may be eligible for CRA considerations if: • ‘‘[A] majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes;’’ 259 or • Less than a majority of the dollars or benefits is identifiable to one or more community development purposes, but: (1) ‘‘the express, bona fide intent of the activity . . . is primarily one or more of 256 See, e.g., current 12 CFR ll.22 through ll.26. 257 See current 12 CFR ll.12(h)(1) (for community development loans), (i)(1) (for community development services), and (t) (for community development or ‘‘qualified’’ investments). 258 See Q&A § ll.12(h)–8. The referenced requirements for small businesses and small farms are that they ‘‘meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs (12 CFR 121.301) or have gross annual revenues of $1 million or less.’’ 12 CFR ll.12(g)(3). 259 Q&A § ll.12(h)–8. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 the enumerated community development purposes’’; (2) ‘‘the activity is specifically structured . . . to achieve the expressed community development purpose’’; and (3) the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved.’’ 260 Even where those standards have not been met, loans, investments, or services involving the provision of mixed-income housing that incudes affordable housing may be deemed to have a primary purpose of community development as specified in the Interagency Questions and Answers.261 Specifically, at a bank’s option, these activities may be considered to have a primary purpose of community development and be eligible for CRA credit on a pro rata basis; a bank may receive pro rata consideration for the portion of the activity that helps to provide affordable housing to low- or moderate-income individuals.262 For example, a bank could receive CRA consideration for 20 percent of the dollar amount of a loan or investment for a mixed-income development, if 20 percent of the units are set aside for affordable housing for low- or moderateincome individuals.263 The Agencies’ Proposal The agencies proposed to define the standards for determining whether a community development activity has a ‘‘primary purpose’’ of community development to clarify eligibility criteria for different community development loans, investments, or services (proposed § ll.13(a)). To this end, proposed § ll.13(a)(1) established specific standards based on the interagency guidance described above 264 for eleven categories of community development. These categories were listed in proposed § ll.13(a)(2) and described in detail in proposed § ll.13(b) through (l). With the proposed categories, the agencies intended to reflect an emphasis on activities that are responsive to community needs, especially the needs of low- and moderate-income individuals and communities and small businesses and small farms. Specifically, proposed § ll.13(a) stated that ‘‘[a] bank may receive community development consideration for a loan, investment, or service that 260 Id. Q&A § ll.12(h)–8 specifies that the ‘‘express, bona fide intent’’ of the activity may be ‘‘as stated, for example, in a prospectus, loan proposal, or community action plan.’’ Id. 261 See id. 262 See id. 263 See id. 264 See id. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 has a primary purpose of community development.’’ The agencies proposed several ways in which an activity could be determined to have a primary purpose of community development.265 First, under proposed § ll.13(a)(1)(i), if a majority of the dollars, applicable beneficiaries, or housing units of the activity were identifiable to one or more of the community development purposes listed in proposed § ll.13(a)(2), then the activity would meet the requisite primary purpose standard and would receive full CRA credit. Second, and alternatively, under proposed § ll.13(a)(1)(i)(A), where an activity supported rental housing purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government (see proposed § ll.13(b)(1)), and fewer than 50 percent of the housing units supported by that activity were affordable, the activity would be considered to have a primary purpose of community development only in proportion to the percentage of total housing units in the development that were affordable. Third, under proposed § ll.13(a)(1)(i)(B), where an activity involved low-income housing tax credits to support affordable housing under proposed § ll.13(b), the activity would be considered to have a primary purpose of community development for the full value of the investment, even if fewer than 50 percent of the housing units supported by that activity were affordable. Finally, under proposed § ll.13(a)(1)(ii), a loan, investment, or service would be considered to have a primary purpose of community development if the express bona fide intent of the activity was one or more of the proposed community development purposes and the activity was specifically structured to achieve, or was reasonably certain to accomplish, the community development purpose. Pro rata consideration for other community development activities. Although the proposal did not specify any other application of partial credit, the agencies sought feedback on whether such consideration would be appropriate for other community development activities (for example, financing broadband infrastructure, health care facilities, or other essential infrastructure and community facilities). If so, the agencies also sought feedback on whether the activity should be eligible for partial consideration only if a minimum percentage of the 265 See E:\FR\FM\01FER2.SGM proposed § ll.13(a)(1). 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 community development purpose it supported served low- or moderateincome individuals or census tracts or small businesses and small farms, such as 25 percent. Further, if partial consideration were provided for certain types of community development activities, the agencies sought feedback on whether to require a minimum percentage standard greater than 51 percent to receive full consideration— such as a threshold between 60 and 90 percent. Comments Received The agencies received several comments generally supporting the proposed standard for determining whether an activity has a ‘‘primary purpose’’ of community development. For example, one commenter offered the general comment that it found the proposed clarifications to the primary purpose standard to be helpful and clear. As discussed in this section, many comments focused on the specific components of the proposed primary purpose standard and provided responses to the questions on which the agencies requested feedback. A majority of dollars, applicable beneficiaries or housing units are identifiable to one or more of the community development categories (proposed § ll.13(a)(1)(i)). Many commenters supported the agencies’ proposal to determine that an activity has a primary purpose of community development if a majority of dollars, applicable beneficiaries or housing units of the activity are identifiable to one or more community development purposes set out in proposed § ll.13(a)(2). A few commenters supported this aspect of the proposal without changes, while others asserted that CRA credit generally should not be granted unless the majority of beneficiaries are low- or moderate-income people and communities, or people and communities of color and indigenous people and communities. The express, bona fide intent of the activity is one or more of the community development categories and the activity is specifically structured to achieve, or is reasonably certain to accomplish, the community development purpose (proposed § ll.13(a)(1)(ii)). A few commenters expressed concern with the agencies’ proposal to determine that an activity has a primary purpose of community development if the express, bona fide intent of the activity is one or more of the community development categories or the activity is specifically structured to achieve, or is reasonably certain to accomplish, the community development purpose. One of these VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 commenters suggested that this could lead to abuses where only a small percentage of dollars are dedicated to community development. To mitigate this potential problem, the commenter suggested eliminating this basis for determining whether an activity has a primary purpose of community development or, alternatively, pairing this consideration with a minimum threshold for the percentage of the activity that corresponds with community development, such as 40 percent, below which no consideration would be available. Another commenter asserted that the agencies should revise this prong to retain only the proposed language regarding whether ‘‘[t]he express, bona fide intent of the activity is one or more of the community development purposes.’’ This commenter stated that that language regarding the activity being ‘‘specifically structured to achieve’’ the community development purpose was redundant in light of the ‘‘intent’’ requirement. The commenter further expressed the view that determining whether an activity is ‘‘reasonably certain to accomplish’’ a community development purpose would result in bank and examiner speculation regarding the results of an activity. According to this commenter, the resulting uncertainty of both the ‘‘specifically structured to achieve’’ and ‘‘reasonably certain to accomplish’’ components of this proposed standard could be confusing and discourage innovative community development activities. Affordable housing-related provisions (proposed § ll.13(a)(1)(i)(A) and (B)). Many commenters addressed the two proposed clarifications to the primary purpose standard for affordable rental housing. As described above, these included: (1) a provision allowing for pro rata consideration of activities in conjunction with a Federal, State, local, or tribal government plan, program, initiative, tax credit, or subsidy, when fewer than 50 percent of housing units supported by the activity are affordable (proposed § ll.13(a)(1)(i)(A)); and (2) a provision allowing for full consideration of any affordable housing activity involving low-income housing tax credits (proposed § ll.13(a)(1)(i)(B)). Subsidized affordable rental housing (proposed § ll.13(a)(1)(i)(A)). Many commenters supported providing pro rata consideration for affordable rental housing activities based on the percentage of housing units that are affordable. Several commenters supporting pro rata consideration for affordable housing cited the benefits of PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 6631 mixed-income housing for sustaining needed services and amenities in lowand moderate-income communities and for low- and moderate-income residents, as well as for promoting economic stability for low- and moderate-income individuals and communities. A commenter also noted that in rural areas, mixed-income housing is needed to accommodate projects of a sufficient scale to achieve development and operating efficiencies. Some commenters expressed the view that the pro rata consideration proposal was too narrow. In this regard, commenter suggestions included changes to the proposal to enhance incentives for investments and loans in affordable housing, e.g., that the agencies should afford full credit for subsidized affordable housing if 20 percent of the units were affordable, a level some commenters stated would align with the eligibility thresholds of certain other Federal affordable housing programs. A few commenters noted, however that, when less than 20 percent of the units are affordable, affordability may be incidental to the project and immaterial to financing. Commenter feedback also included the view that properties developed without government funding should receive pro rata consideration if the percentage of units affordable to low- or moderateincome households were 50 percent or lower, and full consideration if the percentage of units affordable to low- or moderate-income households were greater than 50 percent. A few commenters conveyed that the proposal for pro rata consideration was too broad. In this regard, for example, a commenter expressed concern that the proposal could lead to providing CRA consideration for projects that do not preserve long-term affordability for lowor moderate-income individuals. Instead, the commenter stated that pro rata consideration should be limited to affordable housing projects that are: (1) owned by mission-driven affordable housing nonprofit organizations or public entities; (2) restricted to remain affordable at the lesser of 80 percent of area median income or HUD’s Small Area Fair Market Rent;266 and (3) subject to compliance monitoring by a public entity. One commenter urged caution with pro rata consideration for affordable housing, stating that displacement pressure associated with new market rate housing in a low- and moderate-income community could 266 See, HUD, Office of Policy Development and Research, ‘‘Small Area Fair Market Rents,’’ https:// www.huduser.gov/portal/datasets/fmr/smallarea/ index.html. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6632 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations offset the benefit of providing the additional affordable units. Another commenter suggested that banks should not receive credit for affordable housing lending if the percentage of affordable units falls meets only the minimum required under a local inclusionary ordinance. LIHTCs (proposed § ll.13(a)(1)(i)(B)). Many of the commenters addressing the affordable housing component of the primary purpose standard strongly supported the proposal to provide full consideration for activities that involve LIHTCs to support affordable housing. A few commenters referenced the important role that LIHTC-financed projects have in addressing the need for affordable housing and noted that the LIHTC program drives most privately financed construction and rehabilitation of affordable housing. Other commenters asserted that the statutory and regulatory restrictions of the LIHTC program ensured that these activities were in the interest of public welfare. Several commenters, however, suggested changes to this component. Some commenters stated that banks should receive full consideration for investments in mixed-income LIHTC projects, noting that the tax credits for investments under the LIHTC program is already prorated based on the percentage of units that are affordable. However, these commenters urged that lending to these projects should be prorated, asserting that lending to mixed-income LIHTC projects could include significant financing for marketrate housing, and expressed the view that banks should not get community development credit for this portion. Several commenters suggested that full consideration for affordable housing projects should apply more broadly to include other types of affordable housing, in addition to LIHTC projects. A few commenters recommended that full consideration be given for investments through nonprofit organizations with a mission or primary purpose of providing affordable housing, regardless of the purpose of the underlying collateral. One of these commenters asserted that bank investments supporting affordable housing projects through communitybased development organizations (CBDOs) with a history of serving the needs of low- and moderate-income people and communities should also receive full consideration. This commenter maintained that full consideration for these projects would be warranted regardless of the income levels targeted by the project because CBDOs have the ‘‘mission and VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 experience’’ to consider community mixed-income housing needs. Another commenter questioned why full consideration would not also be extended to all affordable housing developed with Federal housing subsidies, such as HUD’s HOME Investment Partnerships Program (HOME) or project-based section 8 rental assistance. Pro rata consideration for other community development categories. As noted previously, the agencies sought commenter perspectives on whether a partial consideration framework should be extended to some, or all, community development categories, in addition to affordable rental housing. Some commenters supported limiting partial consideration to only affordable housing. These commenters noted several common reasons for this, including the documented benefits of mixed-income housing for low- and moderate-income individuals and communities; the additional financing challenges for affordable housing compared to other types of projects; and the concern that expanding partial consideration beyond housing could divert limited resources away from projects that target low- and moderateincome individuals or communities. One commenter stated that approximately one-third of the national population is low- and moderateincome, so many activities could receive approximately that amount of credit if pro rata consideration were based on the population of low- and moderateincome individuals, without specifically targeting this population. This commenter asserted that any percentage of low- and moderate-income beneficiaries set for pro rata consideration would have therefore have to be substantially higher than the share of the low- and moderate-income population to demonstrate that the activity had the actual intent of serving that population, at which point the level would approach the existing 50 percent threshold. Thus, the commenter believed that there is little to be gained and much to be lost in offering partial consideration outside of affordable housing activities, where income mixing is often part of an intentional strategy or necessary condition for creating new affordable homes. Other commenters supported allowing partial credit for certain types of larger-scale community development projects that might benefit low- or moderate-income individuals and communities. In general, these commenters noted that some projects might not be limited to a specific geographic area and would still benefit PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 low- and moderate-income people and communities within the area affected. One commenter suggested that providing pro rata credit for a wider range of community development activities would acknowledge the complexities of delivering services to a large geographic area and could incentivize more financing in economically struggling or rural areas. The community development activity most often cited by commenters urging more extensive partial consideration was expanding access to broadband, with commenters noting the critical need for these services that are lacking in many rural and low- and moderateincome communities. Examples of other community development activities referenced by commenters for partial credit included: (1) infrastructure and community facilities; (2) projects that increase access to transportation, health care or renewable energy; or (3) projects that help to revitalize vacant and abandoned land or buildings. One commenter expressed general opposition to partial consideration but conveyed support for exceptions for projects in rural areas, using access to broadband as an example. Several commenters suggested that, if partial consideration is provided, certain guardrails should be in place to ensure that low- or moderate-income individuals and communities benefit. One commenter stated that partial consideration should be allowed only for activities that specifically target lowand moderate-income areas, and that merely benefiting these areas was not sufficient. A few commenters similarly expressed concerns about granting partial credit for activities that support community development but do not intentionally target benefits to low- and moderate-income people and communities; specifically they recommended that, for activities supporting community facilities and essential infrastructure to qualify for partial credit, the primary beneficiaries of the project should be low- and moderate-income persons or residents of low- and moderate-income communities. Another commenter supported partial credit for infrastructure projects that benefit ‘‘rural and other socially disadvantaged communities,’’ citing as an example the educational benefits to low- and moderate-income populations afforded by access to broadband. However, this commenter stated that no credit should be given to projects that would happen even without the incentive of CRA credit and that do not have a demonstrable benefit for low- or moderate-income communities. This E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations commenter further recommended that partial CRA credit be given in proportion with the demonstrated impact on low- and moderate-income communities, suggesting that this might be based on the income levels of the census tracts a project spans. Finally, a commenter suggested that partial consideration could be warranted for community development activities other than support for affordable housing, as communities might have other community development needs but recommended, however, that the community development activities, among other criteria: (1) ‘‘significantly improve’’ factors impacting the health of residents in low- and moderate-income communities; (2) be undertaken with a U.S. Treasury-certified CDFI; (3) be widely supported by the community; and (4) ‘‘contribute directly’’ to a range of potential community benefits. Numerous other commenters favored expansion of partial consideration for all community development categories. Several commenters asserted that partial consideration would encourage banks to expand the geographic reach of their community development activities and encourage more community development activity that benefits lowand moderate-income individuals and communities. One commenter expressed the view that extending partial consideration to all community development categories would not dilute community development resources for low- or moderate-income communities and asserted that partial credit could incentivize more large-scale projects addressing infrastructure needs beyond affordable housing. Another commenter added that a partial credit framework would appropriately account for the complexities that can be associated with bringing services to geographically dispersed populations. Similarly, several commenters stated that partial consideration of community development activities would be particularly beneficial in rural areas, where the population is more widely dispersed and there are fewer low- or moderate-income tracts and individuals. One commenter expressed support for partial consideration for all community development activities but indicated that the ‘‘majority’’ standard for primary purpose should also be retained,267 since some banks might not have the capacity to document partial consideration levels with more specificity. Threshold for partial consideration. Many commenters who supported 267 See proposed § ll.13(a)(1)(i). See also Q&A § ll.12(h)–8. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 partial consideration for activities in some or all community development categories also thought that a minimum threshold for the percentage of the activity that serves low- or moderateincome individuals and geographic areas or small businesses and small farms should apply for a bank to be eligible to receive partial consideration for the activity. Numerous commenters suggested a minimum threshold ranging from 10 percent to over 50 percent for partial consideration eligibility, with a minimum of 25 percent being the threshold most frequently suggested. For example, a commenter suggested that a threshold of 10 percent would be appropriate, allowing for projects with complex development and construction markets, including higher-income markets. A number of commenters asserted that no minimum threshold should be required for partial consideration eligibility, as long as some benefit of the activity to low- or moderate-income individuals or communities or small businesses or small farms could be documented. For example, a commenter stated that excluding loans or investments that do not meet a 50 percent threshold presents an incomplete picture of a bank’s overall community development activities. This commenter further asserted that a pro rata framework for all community development activities would further the CRA goals of expanding lending and investment in low- and moderateincome communities because all of a bank’s community development efforts would count. Finally, regarding when full consideration of an activity should be given, some commenters expressed the view that, for an activity to receive full credit, the percentage of benefits to lowor moderate-income individuals or communities or small businesses and small farms should be higher than 51 percent (see discussion of comments on the ‘‘majority’’ standard above). The thresholds suggested by these commenters ranged from 60 percent to 80 percent for full consideration. For example, one commenter recommended a 75 percent threshold and cautioned against activities that do not in fact serve communities but sustain poverty over the long term, such as, among other examples, infrastructure projects that cause affordable housing losses. This commenter also urged the agencies to consider a standard based on whether the activity is supported or requested by the community itself. Another commenter suggested that a 60 percent threshold would strike an appropriate balance between incentivizing a focus PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 6633 on low- and moderate-income needs and allowing for a range of projects that could benefit a wider range of residents, such as in a mixed-income community. Final Rule The agencies are finalizing the proposal to clarify eligibility criteria for different community development activities, with several changes and restructuring. The agencies carefully considered comments received regarding standards for determining whether an activity has the primary purpose of a community development. Based on the agencies’ review of the comments and supervisory experience, the agencies concluded that ‘‘primary purpose’’ does not accurately describe when a bank will receive full or partial credit and resulted in some confusion in this regard. Thus, under the final rule, the agencies are modifying the proposal that focused on a primary purpose standard by adopting specific standards for full and partial consideration of community development activities, to clarify when activities will receive such consideration. To streamline the regulation, the agencies are eliminating the list of community development categories in proposed § ll.13(a)(2) and instead adding new language in final § ll.13(a) that a bank may receive community development consideration for a loan, investment, or service that supports one of eleven categories of community development described in final § ll.13(b) through (l), as outlined above. The agencies also reorganized proposed § ll.13(a) into two distinct sections: final § ll.13(a)(1), which details the circumstances in which a bank receives full credit; and final § ll.13(a)(2), which details the circumstances in which a bank receives partial credit for a community development loan, investment, or service. Also as noted above, the agencies are replacing ‘‘primary purpose’’ terminology and setting forth a framework consistent with the current and proposed primary purpose standard, but delineated for each category of community development to convey more clearly and transparently the parameters for community development loans, investments, and services to receive full or partial credit, as discussed in more detail below in the section-by-section analysis of final § ll.13(a)(1) and (2). Overall, the agencies believe that the final rule provides meaningful clarification of the standards for consideration of community development loans, investments, and services, in response to comments and E:\FR\FM\01FER2.SGM 01FER2 6634 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations on further deliberation by the agencies. The section-by-section analysis below provides additional detail. ddrumheller on DSK120RN23PROD with RULES2 Section ll.13(a)(1) Full credit The agencies are adopting final § ll.13(a)(1) to identify four circumstances under which a bank will receive credit for the entire community development loan, investment, or service. More specifically, banks will receive full credit for these types of activities if they: • Meet the majority standard in § ll.13(a)(1)(i); • Meet the bona fide intent standard in § ll.13(a)(1)(ii); • Involve an MDI, WDI, LICU, or CDFI as provided in § ll.13(a)(1)(iii); or • Involve LIHTCs as provided in § ll.13(a)(1)(iv). The agencies intend with this reorganization to address comments seeking clarification about standards for community development consideration. By categorizing and clarifying the types of community development activities that receive full credit, the agencies are emphasizing activities that are responsive to community needs. Section ll.13(a)(1)(i) Majority Standard Similar to proposed § ll.13(a)(1)(i), the agencies are finalizing a majority standard with additional criteria that more specifically address how the standard is applied with respect to each of the community development categories. Final § ll.13(a)(1)(i)(A), states that any loan, investment, or service must support community development under one or more of the categories outlined in final § ll.13(b) through (l). Further, final § ll.13(a)(1)(i)(B) provides that the loan, investment, or service must meet one or more of the other criteria established under the majority standard that correspond to each of the community development purposes. Specifically, under § ll.13(a)(1)(i)(B)(1), for a community development loan, investment or service that supports any of the categories of affordable housing under final § ll.13(b)(1) through (3) to meet the majority standard, the majority of the housing units supported by the bank’s loan, investment or service must be affordable to low- or moderate-income individuals. The agencies believe that, for these categories of community development, the housing unit standard for measuring whether the majority standard is met (or the appropriate proportion of partial credit) is objective and consistent with the impact that the VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 project will have on the community. Regarding other categories of community development, final § ll.13(a)(1)(i)(B)(2) through (6) provide that a loan, investment, or service meets the majority standard if the majority of beneficiaries are, or the majority of dollars benefit or serve, the following: • Low- and moderate-income individuals, with respect to affordable housing and community supportive services pursuant to final § ll.13(b)(4) and (5) and (d), respectively; 268 • Small businesses and small farms, with respect to economic development pursuant to final § ll.13(c); 269 • Residents of targeted census tracts, with respect to revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency pursuant to final § ll.13(e) through (g) and (i); 270 • Residents of designated disaster areas with respect to recovery of designated disaster areas pursuant to final § ll.13(h); 271 • Residents of Native Land Areas, with respect to revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency in Native Land Areas pursuant to final § ll.13(j).272 Lastly, final § ll.13(a)(1)(i)(B)(7) provides that loans, investments, and services supporting community development under final § ll.13(b)(l) meet the majority standard if they primarily support financial literacy. The agencies considered comments that suggested establishing a threshold greater than a majority (i.e., over 50 percent) (ranging from 60 to 80 percent) to receive full credit for a community development activity. However, the agencies believe that the majority standard, which has a longstanding history in the current rule, appropriately identifies those activities that primarily have a community development purpose, while acknowledging that many important community development initiatives and projects are not solely dedicated to the community development purposes in final § ll.13(b) through (l). While a few commenters suggested that the majority standard should be applied to beneficiaries that are racial final § ll.13(a)(1)(i)(B)(2). final § ll.13(a)(1)(i)(B)(3). 270 See final § ll.13(a)(1)(i)(B)(4). 271 See final § ll.13(a)(1)(i)(B)(5). 272 See final § ll.13(a)(1)(i)(B)(6). 268 See and ethnic minorities in addition to those elements that were identified in the proposal, the agencies did not add these beneficiaries to the majority standard, although the agencies expect that the clarified majority standard will better facilitate banks meeting the community development needs of their entire communities. For more information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. Section ll.13(a)(1)(ii) Bona Fide Intent Standard Consistent with proposed § ll.13(a)(l)(ii), the agencies are adopting final § ll.13(a)(l)(ii), with restructuring and a technical change from the proposal. The final rule confirms loans, investments, and services that meet the bona fide intent standard receive full community development credit. A loan, investment, or service meets the bona fide intent standard if: • The housing units, beneficiaries, or proportion of dollars necessary to meet the majority standard are not reasonably quantifiable; 273 • The loan, investment, or service has the express, bona fide intent of one or more of the community development purposes in final § ll.13(b) through (l); 274 and • The loan, investment, or service is specifically structured to achieve one or more of the community development purposes in final § ll.13(b) through (l).275 In addition to reorganizing final § ll.13(a)(l)(ii) from the proposal for clarity and to confirm that a bank may receive full credit for meeting the bona fide intent standard, the agencies are clarifying that the bona fide intent standard applies when the ‘‘housing units, beneficiaries, or proportion of dollars necessary to meet the majority standard are not reasonably quantifiable.’’ For example, this standard could be appropriate when considering a loan to an organization that has a bona fide intent of serving low- or moderate-income individuals but does not track data on the income of every individual served, such that demonstrating an activity meets the majority standard would be highly challenging. Additionally, the agencies removed the language in the proposal that the activity must also be 269 See PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 final § ll.13(a)(1)(ii)(A). final § ll.13(a)(1)(ii)(B). 275 See final § ll.13(a)(1)(ii)(C). 273 See 274 See E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 ‘‘reasonably certain to accomplish’’ a community development purpose. The agencies appreciated the commenter concern that the ‘‘reasonably certain to accomplish’’ criterion could produce uncertainty and inconsistency in application, based on conjectures regarding the outcomes of the activity. However, the agencies are retaining the criterion that an activity must be ‘‘specifically structured to achieve’’ a community development purpose, which the agencies believe helps to ensure that any activities that do not meet the majority standard appropriately receive consideration under the bona fide intent standard, as an activity focused on a community development purpose. The agencies also considered the commenter suggestion that the bona fide intent standard should be removed from the final rule, but based on supervisory experience, believe that this would eliminate from consideration numerous beneficial initiatives that have a community development purpose, but do not meet the majority standard in final § ll.13(a)(l)(i). Further, the agencies believe the three required criteria for the bona fide intent standard will help to eliminate any potential abuse in the application of this standard. With the revisions to the language regarding the bona fide intent standard, the agencies believe that the standard is a balanced approach to encouraging community development activities, while eliminating from consideration any activities that are not predominantly focused on a community development purpose. Section ll.13(a)(1)(iii) Community Development Related to MDIs, WDIs, LICUs, and CDFIs As the proposal did not specifically address how the primary purpose consideration would be applied with respect to a loan, investment, or service to an MDI, WDI, LICU, or CDFI that supports community development under proposed § ll.13(a)(2)(ix) and (j), the agencies added and are finalizing § ll.13(a)(l)(iii) to clarify that activities conducted in conjunction with these four types of entities are eligible for full credit. As discussed in more detail in the section-by-section analysis of final § ll.13(k), community development under final § ll.13(k) (renumbered from proposed § ll.13(j)) differs somewhat from the other types of community development under final § ll.13(b) through (j) and (l) in that the credit a bank receives is based exclusively on the entity to which the bank is providing the loan, investment, or service, rather than looking at a VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 measurable benefit using the corresponding dollars, beneficiaries, or housing units associated with the activity. The provision of full credit to these types of activities is also consistent with how the agencies currently consider loans, investments, and services that support MDIs, WDIs, and LICUs.276 Section ll.13(a)(1)(iv) Community Development Related to LIHTCFinanced Projects The agencies are adopting proposed § ll.13(a)(1)(i)(B), renumbered as final § ll.13(a)(1)(iv), with certain revisions for clarity. This provision clarifies the agencies’ intent, consistent with the current CRA framework, that a loan, investment or service involving a project financed by LIHTCs under final § ll.13(b)(1) will receive full community development credit. Under proposed § ll.13(a)(1)(i)(B), full consideration was limited to only investments in projects financed by LIHTCs. Many commenters supported providing full community development credit for all activities that involve LIHTCs to finance affordable housing. Therefore, in response to these commenters and considering past supervisory practice, the agencies adopted final § ll.13(a)(1)(iv), to state that a loan, investment or service involving LIHTCs to finance the development of affordable housing under final § ll.13(b)(1) will receive full community development credit. The agencies considered commenter concerns that lending to mixed income housing projects that include units financed by LIHTCs could also include financing for market-rate housing that does not benefit or serve low- and moderate-income individuals. However, the agencies determined that granting full credit for these loans under § ll.13(a)(1)(iv) is appropriate for ensuring certainty regarding existing approaches to financing LIHTC projects, as full credit for these loans is consistent with current guidance.277 The agencies also considered that projects developed with LIHTCs have the expressed intent of providing affordable housing, regardless of the percentage of affordable units that are supported, and believe that providing credit for LIHTC-related lending aligns with the statutory purpose of encouraging banks to meet the credit needs of their communities, including 276 See current § ll.21(f) and Q&A § ll.21(f)– 277 See Q&A § ll.12(t)–4. 1. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 6635 low- and moderate-income populations.278 The agencies also considered comments suggesting that full credit for loans, investments, or services should be extended to all affordable housing developed with Federal housing subsidies or to all affordable housing projects developed through CBDOs with a history of serving low- and moderateincome populations. The agencies recognize the importance of all Federal housing programs in financing affordable housing and the important role that CBDOs play in developing affordable housing. However, on further review of these suggestions, the agencies have determined that loans, investments, and services for projects financed by Federal housing subsidies or developed by CBDOs should not automatically receive full consideration because the scope and target of these subsidies and projects may vary greatly. While the agencies believe that most of the affordable housing projects developed in conjunction with Federal subsidies and CBDOs will likely warrant consideration as a community development activity, the agencies believe that they should be considered individually, and not universally provided full credit; rather, given the wide variety of subsidies and projects, the corresponding loans, investments, and services will be more appropriately considered under the full or partial credit criteria in final § ll.13(a)(1) and (2), as applicable to these types of projects. Section ll.13(a)(2) Partial Credit Partial consideration for affordable housing. A second category implemented as part of the restructuring reflected in final § ll.13(a) includes loans, investments, and services that will receive partial credit. The agencies are adopting proposed § ll.13(a)(l)(i)(A), renumbered as final § ll.13(a)(2), and reworded for clarity. Final § ll.13(a)(2) memorializes current interagency guidance related to the provision of mixed-income housing with an affordable housing set-aside required by a Federal, State, or local government.279 Under this construct, a bank will receive partial credit for any loan, investment, or service that supports affordable housing under final § ll.13(b)(1) and does not meet the majority standard under final § ll.13(a)(1)(i). This partial credit will 278 For further discussion of final rule provisions regarding LIHTCs, see the section-by-section analysis of § ll.15(b)(10) (impact and responsiveness review factor for investments in LIHTC). 279 See Q&A § ll.12(h)–8. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6636 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations be calculated in proportion to the percentage of total housing units in any development that are affordable to lowor moderate-income individuals. For example, if a bank makes a $10 million loan to finance a mixed-income housing development in which 10 percent of the units will be set aside as affordable housing for low- and moderate-income individuals according to a local government set-aside requirement, the bank may elect to treat $1 million of such loan as a community development loan. This provision will provide flexibility for banks to engage in affordable housing even if rental housing purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government affordable housing plan, program, initiative, tax credit, or subsidy does not include a majority of housing units that are affordable to low- or moderateincome individuals. The final rule is intended to be responsive to the numerous commenters that supported the proposal to provide pro rata consideration for affordable rental housing based on the percentage of housing units that are affordable. While commenter suggestions included that banks receive full credit for subsidized affordable housing that represented at least 20 percent of the bank’s financing, the agencies believe that such treatment could inappropriately dilute the consideration of community development loans and investments by providing significant amounts of credit for housing that is not affordable to low- and moderate-income people. The agencies have also decided not to provide partial credit to loans or investments in affordable housing projects that are developed without government support if less than 50 percent of the units are affordable. This type of affordable housing may not have protections to preserve the housing as affordable to low- and moderate-income individuals during the term of the loan or investment, which are typical of government-supported affordable housing. As mentioned previously, the agencies considered comments suggesting that partial credit for affordable housing was too broad and should be limited to provide partial credit only for those projects that maintain at least 20 percent of the units as affordable. However, the agencies do not believe that such a limitation is necessary. The final rule restricts partial consideration to only rental housing in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 pursuant to § ll.13(b)(1), which will help ensure that there is an intent of providing affordable housing and will limit the consideration of housing units that may be incidental. The agencies believe it is appropriate to defer to the Federal, State, local, or tribal government to set minimum standards for participating in affordable housing programs, plans, initiatives, tax credits, or subsidies that are responsive to their respective communities. The agencies also contemplated the suggestion that banks should not receive credit for lending for affordable housing if the housing is associated with a local inclusionary zoning ordinance and provides only the minimum amount of affordable housing required. While the agencies acknowledge the compulsory nature of these ordinances and concerns with providing community development credit for loans and investments that support this housing, the agencies believe that affordable housing associated with inclusionary zoning should be included. The agencies recognize that inclusionary zoning represents an important tool utilized by local jurisdictions to create and preserve affordable housing for lowand moderate-income individuals, especially in higher-income areas. In addition, under the final rule, if affordable housing provided through these programs does not meet the majority standard, the credit afforded to a bank is limited to only the percentage of units that are considered affordable. Partial consideration for other community development categories. As discussed above, the agencies received a wide range of comments in response to the request for feedback on whether partial credit should be extended to some, or all, community development categories, in addition to affordable housing. After consideration of these comments, the agencies are adopting final § ll.13(a)(2) without extending partial credit to other categories of community development. The agencies share commenter concerns that expanding partial consideration beyond mixed-income rental housing could divert limited community development resources away from the projects that target low- or moderate-income people and communities, as well as small businesses and small farms. To this end, the agencies are not adopting suggestions that the final rule provide partial credit for certain larger-scale community development projects that have the potential to impact low- or moderate-income individuals and communities but are not primarily targeted to these populations. Unless these projects are associated with PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 LIHTCs or are conducted with MDIs, WDIs, LICUs, or CDFIs, the agencies believe that these projects should receive credit only when they meet the majority or bona fide intent standards. The full and partial credit criteria in § ll.13(a) serve as sufficient guardrails to ensure that low- or moderate-income individuals and communities, as well as other underserved segments of the community identified in community development categories in § ll.13(b) through (l), benefit. The agencies also considered feedback from some commenters that supported some degree of expansion of the partial credit standard with certain qualifications, limitations, and additional criteria. However, the agencies determined that the consistent and transparent application of an expansion with these qualifications would be untenable, such as limiting partial credit to projects that would only happen without CRA recognition or that are widely supported by the community. The agencies also considered suggestions to allow partial consideration with a minimum threshold for the percentage (ranging from 10 to 50 percent and most often cited as 25 percent) of the activity that served low- or moderate-income individuals and geographic areas, small businesses, and small farms. The agencies carefully considered the many varying views on extending a partial credit framework to other community development categories, and the suggested thresholds for doing so. On balance, the agencies believe that applying the majority and bona fide intent standards to other categories of community development affords the consistency and clarity that can foster a predictable and transparent framework for bank partnerships and engagement in community development within the communities they serve. For the reasons discussed above, the agencies believe that government-related mixed-income affordable housing is distinguishable from other types of community development in ways that make a partial credit framework appropriate for facilitating bank involvement in these projects, consistent with government assessments of the affordable housing needs of their communities. Further, the agencies note that banks will receive full credit for any loan, investment, or service that is not entirely dedicated to a community development purpose, as long as it meets the majority or bona fide intent standard pursuant to § ll.13(a)(1). As mentioned previously, several commenters suggested the expansion of partial credit consideration for E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 broadband, noting that the need for this infrastructure is particularly critical in many rural and low- and moderateincome communities. The agencies have considered these comments but determined that outside of affordable housing, it is difficult to single out unique treatment for specific activities. Therefore, the agencies have decided to retain the final rule as proposed, and all activities beyond affordable housing will have to meet the majority or bona fide intent standard pursuant to pursuant to § ll.13(a)(1). The agencies recognize that a need for broadband exists in rural and low- or moderateincome communities and seek to address this need under § ll.13(g), the community development category for essential community infrastructure, which allows consideration for infrastructure activities, including those expanding broadband access, that benefit or serve targeted census tracts (which includes low-income, moderateincome, or distressed or underserved middle-income nonmetropolitan tracts) and meets other specified criteria. For further discussion, including additional comments on broadband access and other types of essential community infrastructure, see the section-by-section analysis of § ll.13(g). The agencies intend that consideration for activities under several community development categories, including revitalization or stabilization, essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency 280 that benefit or serve residents of targeted census tracts, including distressed and underserved nonmetropolitan middleincome census tracts, will help to address commenters’ concern that partial credit is necessary to ensure that the community development needs of rural areas, which are often more widely dispersed and have fewer low- or moderate-income tracts and individuals, are met. Section ll.13(b) Affordable Housing In proposed § ll.13(b), the agencies proposed a definition for affordable housing that included four components: (1) affordable rental housing developed in conjunction with Federal, State, local, and tribal government programs; (2) multifamily rental housing with affordable rents; (3) activities supporting affordable low- or moderate-income homeownership; and (4) purchases of mortgage-backed securities that finance affordable housing. The agencies intended the proposed definition to clarify the eligibility of affordable 280 See final § ll.13(e) through (i). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 housing as well as to recognize the importance of promoting affordable housing for low- or moderate-income individuals.281 Specifically, the agencies stated their belief that the proposal would, first, add greater clarity around the many types of subsidized activities that currently qualify for CRA consideration.282 Second, the agencies sought to provide clear and consistent criteria in order to qualify affordable low- or moderate-income multifamily rental housing that does not involve a government plan, program, initiative, tax credit, or subsidy (also referred to in the agencies’ proposal as ‘‘naturally occurring affordable housing’’ or ‘‘affordable multifamily rental housing’’).283 Third, the agencies stated their intention to ensure that activities that support affordable low- and moderate-income homeownership are sustainable and beneficial to low- or moderate-income individuals and communities.284 Finally, the agencies, through the proposal, sought to appropriately consider qualifying mortgage-backed security investments, so as to emphasize community development financing activities that are most responsive to low- or moderate-income community needs.285 Comments on the overall structure of the agencies’ affordable housing proposal varied, with some commenters commending the breadth of housing activities included in the proposal, while others viewed the proposal as too narrow or rigid, or questioned whether the proposal would add burden on banks that may constrain banks’ capacities to meet affordable housing needs. Commenters also provided feedback on specific aspects of the affordable housing community development category proposal, including feedback on which affordable housing activities should be required to meet an agencydetermined affordability standard, which affordability standard or standards the agencies should adopt, and what, if any, geographical considerations should be factored in when determining whether affordable housing activities should be eligible for community development consideration. For the reasons discussed in this section, the agencies have adopted an approach to defining the affordable housing category of community development that aligns closely with the agencies’ proposal, as well as key 281 87 FR 33884, 33892 (June 3, 2022). id. at 33894. 283 See id. at 33895. 284 See id. at 33897. 285 See id. 282 See PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 6637 aspects of current practice and interpretations under the CRA. Importantly, in response to commenter feedback, the agencies are adopting modifications to the affordable housing community development category to ensure that the criteria are sufficiently flexible to account for a variety of housing models that address community needs. The final rule adds a component for consideration of activities that finance one-to-four family rental housing with affordable rents in nonmetropolitan areas. In addition, the final rule incorporates revisions designed to clarify the eligibility of rental housing in conjunction with a government affordable housing program, initiative, tax credit or subsidy. The final rule also revises and clarifies the affordability standard for naturally occurring affordable housing, clarifies the requirements for affordable owneroccupied housing activity, and revises and clarifies the requirements for purchases of mortgage-backed securities. Current Approach The current CRA regulations define ‘‘community development’’ to include ‘‘affordable housing (including multifamily rental housing) for low- or moderate-income individuals.’’ 286 The agencies have stated in the Interagency Questions and Answers that, for housing to be considered community development, low- or moderate-income individuals must benefit or be likely to benefit from the housing.287 In this regard, the Interagency Questions and Answers provide that, for example, consideration for a ‘‘project that exclusively or predominately houses families that are not low- or moderateincome simply because the rents or housing prices are set according to a particular formula’’ would not be appropriate.288 Under the current regulation, singlefamily (i.e., one-to-four family) home mortgage loans are generally considered as part of the large bank and small bank lending tests, but may be considered as community development loans under the community development test for intermediate small banks that do not report such loans under HMDA (at the bank’s option and if for affordable housing).289 Multifamily affordable CFR ll.12(g)(1). Q&A § ll.12(g)(1)–1. 288 See id. 289 See current 12 CFR ll.22(b)(1) (lending test) and ll.26 (small bank performance standards). See also Q&A § ll.12(h)–2 (consideration of retail loans for small institutions) and Q&A § ll.12(h)– 286 12 287 See E:\FR\FM\01FER2.SGM Continued 01FER2 6638 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 housing loans may qualify for both retail lending and community development consideration if those loans also meet the definition of a ‘‘community development loan.’’ 290 Housing that is financed or supported by a government affordable housing program or a government subsidy is considered subsidized affordable housing and is generally viewed as qualifying under affordable housing if the government program or subsidy has a stated purpose of providing affordable housing to lowor moderate-income individuals. Multifamily housing with affordable rents that is not financed or supported by a government affordable housing program or a government subsidy, is generally considered unsubsidized affordable housing (and is also referred to in this SUPPLEMENTARY INFORMATION as naturally occurring affordable housing). Such housing can qualify as affordable housing under the current definition of ‘‘community development’’ if the rents are affordable to low- or moderateincome individuals, and if low- or moderate-income individuals benefit, or are likely to benefit, from this housing.291 Current interagency guidance mentions certain information that examiners may consider in making this determination.292 Regarding affordability, no specific standard exists under the current regulatory framework for determining when a property or unit is considered affordable to low- or moderate-income individuals, for either multifamily or single-family housing.293 One approach used by some examiners is to calculate an affordable rent based on what a moderate-income renter could pay if they allocated 30 percent of their income to rent. Alternatively, some examiners use HUD’s Fair Market Rents as a standard for measuring affordability.294 Purchases of mortgage-backed securities qualify as affordable housing activity if they demonstrate a primary purpose of community development.295 3 (home mortgage loan consideration for intermediate small banks). 290 See Q&A § ll.42(b)(2)–2; see also Q&A § ll.12(h)–2 and –3 (regarding multifamily loan consideration for intermediate small banks). 291 See Q&A § ll.12(g)(1)–1. 292 See id. (providing, for example, that for projects where the income of the occupants cannot be verified, ‘‘examiners will review factors such as demographic, economic, and market data to determine the likelihood that the housing will ‘primarily’ accommodate low- or moderate-income individuals’’). 293 See, e.g., Q&A § ll.12(g)(1)–1. 294 See HUD, Office of Policy Development and Research, ‘‘Fair Market Rents,’’ https:// www.hud.gov/program_offices/public_indian_ housing/programs/hcv/landlord/fmr. 295 See Q&A § ll.12(t)–2. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Specifically, the security must contain a majority of single-family mortgage loans to low- or moderate-income borrowers, or of loans financing multifamily affordable housing, to qualify as an investment with a primary purpose of affordable housing.296 Overall Affordable Housing Category Structure The Agencies’ Proposal The NPR stated in proposed § ll.13(a)(2)(i) that loans, investments, or services that ‘‘promote . . . [a]ffordable housing that benefits lowor moderate-income individuals’’ would have the requisite community development purpose for CRA consideration. This provision crossreferenced proposed § ll.13(b) for greater detail about which activities qualify as ‘‘affordable housing that benefits low- or moderate-income individuals.’’ To this end, the agencies proposed four types of activities that would qualify under the affordable housing category of community development: (1) affordable rental housing developed in conjunction with Federal, State, local, and tribal government programs; (2) multifamily rental housing with affordable rents; (3) activities supporting affordable low- or moderate-income homeownership; and (4) purchases of mortgage-backed securities that finance affordable housing. The agencies sought feedback on what changes, if any, should be made to ensure that the proposed affordable housing category is clearly defined and appropriately inclusive of activities that support affordable housing for low- or moderate-income individuals, including activities that involve complex or novel solutions such as community land trusts, shared equity models, and manufactured housing. Comments Received Structure of affordable housing category. Many commenters provided feedback on the overall structure of the proposed affordable housing category of community development. Several commenters suggested that the agencies should not distinguish between government-subsidized and naturally occurring affordable housing. These commenters supported combining the first and second components of the proposed affordable housing category into one, with a universally applied affordability standard. In this regard, some commenters suggested that creating separate affordable housing standards based on the presence or 296 See PO 00000 id. Frm 00066 Fmt 4701 Sfmt 4700 absence of government support would be mistaken and urged the agencies to establish a uniform standard that would apply to all affordable multifamily housing—other than housing financed with LIHTCs—regardless of whether it has government support. These commenters proposed focusing on rent affordability as a percent of area median income, or the HUD Fair Market Rents standard, and a combination of other criteria such as: location in low- or moderate-income census tracts or in census tracts where the median renter is low- or moderate-income; nonprofit or CDFI ownership or control; documented occupancy by low- or moderate-income individuals; or an owner commitment to maintain the affordability of housing units for low- or moderate-income individuals for at least five years. These commenters also asserted that the agencies should include a requirement to periodically confirm the continued affordability of housing activities that receive community development consideration. Scope of affordable housing category. Many commenters urged the agencies to provide additional support for difficultto-finance housing projects by narrowing the agencies’ proposal. For example, one commenter expressed the view that, by incorporating a wide variety of housing models, the proposed affordable housing category could reward banks that gravitate to easier-tofinance projects, versus projects for which banks may need further incentives to provide financing. Other commenters, for example, suggested that the agencies should prioritize consideration of activities that finance owner-occupied homes over investorowned housing, with one of these commenters conveying that the agencies should evaluate any investor-related lending to determine whether it helps to build wealth for minority consumers or, alternatively, displaces them. This commenter also asserted that the agencies needed to comprehensively analyze banks’ multifamily lending to provide consideration for beneficial activities and to impose sanctions for adverse behavior, such as financing landlords who are harassing and displacing tenants. Along those same lines, several commenters emphasized that the agencies should scrutinize banks’ multifamily lending programs, including those conducted in partnership with third-party non-bank institutions, for illegal practices. Another commenter asserted that insufficient regulation of low-income housing tax credit investments has contributed, nationally, to over- E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 concentration and racial and ethnic segregation of low-income housing tax credit projects in minority communities, and that the agencies should address this dynamic in the final rule. A variety of commenters addressed the agencies’ request for feedback on what changes, if any, the agencies should consider to ensure that the proposed affordable housing category of community development is clearly and appropriately inclusive of activities that support affordable housing for low- or moderate-income individuals. Many commenters requested that the agencies add provisions specific to community land trusts, shared equity models, land banks, accessory dwelling units (ADUs), and manufactured housing to the proposed affordable housing category. In support of this view, a commenter asserted that adding these housing initiatives would help strengthen communities and reduce social barriers such as unemployment, lack of education, and limited transportation. Another commenter recommended that the agencies specifically include supportive housing that provides both affordable housing and wrap-around services for people with complex medical needs. Commenters further requested that the agencies allow a guidance line of credit, which is a form of credit pre-approval from a lender, to be eligible for CRA consideration, as this financing method is used by nonprofit organizations in the affordable housing space. Other general comments on affordable housing category. Some comments touched on affordable housing in conjunction with other community development activities. Commenter feedback included requests that the agencies: promote co-development of disaster preparedness and climate resiliency activities with affordable housing and other activities to mitigate the risk of displacement; provide more support specifically for governmentsubsidized housing; and provide more quantitative and qualitative consideration of the value of lowincome housing tax credit and NMTC syndications and sponsorship activities. Final Rule The agencies are adopting final § ll.13(b), which establishes criteria for consideration of affordable housing activities, substantially as proposed but with targeted revisions discussed in the section-by-section analysis that follows. Overall, the agencies are adopting a final rule that maintains the multipronged approach to the affordable housing category. As part of this, the agencies have decided to retain in the VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 final rule separate prongs for government-related programs, including subsidized affordable housing, and naturally occurring affordable housing. Under this approach, the agencies can better tailor the standards for each affordable housing prong. Moreover, for information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. Section ll.13(b)(1) Rental Housing in Conjunction With a Government Affordable Housing Plan, Program, Initiative, Tax Credit, or Subsidy The Agencies’ Proposal In proposed § ll.13(b)(1), the agencies proposed that a rental housing unit be considered affordable housing if it is purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government affordable housing plan, program, initiative, tax credit, or subsidy with a stated purpose or the bona fide intent of providing affordable housing for low- or moderate-income individuals. The agencies intended this proposed provision to cover a broad range of government-related affordable multifamily and single-family rental housing activities for low- or moderateincome individuals, including lowincome housing tax credits. To qualify under this component of the affordable housing category, a government-related affordable housing plan, program, initiative, tax credit, or subsidy would have needed ‘‘a stated purpose or bona fide intent of supporting affordable rental housing for low- or moderate-income individuals.’’ 297 The agencies did not propose a separate affordability standard for this prong and would rely upon the affordability standards set in each respective government affordable housing plan or program. The agencies sought feedback on whether additional requirements should be included to ensure that activities qualifying under this category of community development support housing that is both affordable to and occupied by low- or moderate-income individuals. In this regard, the agencies sought feedback on whether to include in this component a specific rent affordability standard based on 30 percent of 80 percent of area median income, or a requirement that programs must verify that occupants of affordable units are low- or moderate-income 297 Proposed PO 00000 Frm 00067 § ll.13(b)(1). Fmt 4701 Sfmt 4700 6639 individuals or families. The agencies also sought feedback on whether activities involving governmentsponsored programs that have a stated purpose or bona fide intent to provide affordable housing that serves middleincome individuals, in addition to lowor moderate-income individuals, should qualify under this prong in certain circumstances. For example, the agencies sought feedback on government-sponsored programs that support housing affordable to middleincome individuals if the housing is located in nonmetropolitan counties or in high opportunity areas.298 Comments Received Many commenters offered general views on the proposed standards of the first component of the affordable housing category. Some commenters believed the proposed component was overly broad, expressing concerns: that government programs and tax credits do not always benefit low-income individuals and people of color and, therefore, the agencies should reconsider the presumption that any government plan benefits local communities; that the agencies should address the over-concentration and racial and ethnic segregation of lowincome housing tax credit projects in minority communities by imposing additional requirements for low-income housing tax credit investments to be eligible for community development consideration; that it is not clear how a plan can require and enforce affordable housing; and that the component should be removed entirely, asserting that it is overly restrictive and could hinder bank investments. Several commenters asked the agencies to broaden the proposed government-related rental housing standard by permitting activities that are ‘‘consistent with’’ or ‘‘in alignment with’’ government program guidelines, so that such guidelines could be considered but not required. Other commenter feedback included: support for an automatic presumption that activities with State or Federal lowincome housing tax credits or other affordable housing tax credits or incentives qualify for community development consideration; and requests that the agencies recognize activities undertaken in conjunction with additional program sponsors such as community-focused entities with a stated mission and record of providing affordable housing and Tribally Designated Housing Entities (TDHEs). 298 See E:\FR\FM\01FER2.SGM proposed § ll.12. 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6640 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Stated purpose or bona fide intent of providing affordable housing for low- or moderate-income individuals. Some commenters supported the agencies’ proposal to require that government plans, programs, initiatives, tax credits, or subsidies must have a ‘‘stated purpose or bona fide intent’’ of providing affordable housing for low- or moderate-income individuals in order for associated bank activities to receive community development consideration. In this regard, a commenter noted that the proposal allows State and local governments to tailor their affordable housing programs to meet the specific needs of their constituents. Other commenters expressed a variety of concerns about the ‘‘stated purpose or bona fide intent’’ standard, including: that the standard would not adequately target activities that benefit low- or moderate-income households; and that government programs should not need to have a stated purpose or bona fide intent of providing affordable housing to low- or moderate-income individuals. Affordability standard. Some commenters supported the agencies’ proposal to not include an affordability standard in proposed § ll.13(b)(1) and recommended that the agencies refrain from establishing any affordability standards for this component. However, the majority of commenters that addressed this component of the proposal supported establishing an affordability standard that would be based on 30 percent of 80 percent of area median income for rents. This affordability standard would be separate from the affordability standard proposed for naturally occurring affordable housing (which is addressed in the section-by-section analysis of final § ll.13(b)(2)). Commenter feedback also included suggestions that the agencies: establish a lower affordability threshold in order to serve a lower income population; utilize hybrid approaches whereby the agencies adopt an area median income-based threshold for all units and require that a portion of the units serve lower income populations, such as very low-income individuals; and use the HUD Fair Market Rents standard to establish affordability standards. Verification of low- or moderateincome status. Commenters expressed differing views about the use of verification measures to ensure the lowand moderate-income status of renter occupants of housing units. Some commenters supported the inclusion of verification measures in the government-related rental housing component of the final rule to ensure that low- and moderate-income VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 individuals occupy a majority of the affordable units in government-related housing. For example, several commenters suggested that a majority standard was not enough, and that 100 percent of the units should be occupied by low- or moderate-income individuals in order to qualify under § ll.13(b)(1). A different commenter supported verifying the income of occupants in circumstances where funding did not occur under government housing programs with income guidelines. However, several other commenters stated that additional verification of occupant income would be unnecessary, given that it is reasonable to assume government programs would collect and verify this information. Expanding the proposal to cover certain affordable housing to middleincome individuals. Many commenters expressed views regarding whether the agencies should expand CRA consideration in the affordable housing category to include activities in conjunction with government-related rental housing in certain geographic areas that is affordable to middleincome individuals. Some commenters opposed such an expansion, indicating that CRA resources should be targeted to low- or moderate-income families, not middle-income families. For example, a few commenters opposed providing consideration for middle-income housing, noting that the low- or moderate-income housing needs in high opportunity areas are immense and raised a concern that giving consideration for middle-income housing in such areas would dilute the incentive to meet those needs.299 Some commenters expressed concern that consideration in the affordable housing category for lending that benefits middle- or high-income households would result in banks receiving CRA consideration for financing developments that could price low- and moderate-income families out of their current communities. Among the commenters that supported expanding CRA consideration to government-related rental housing activities that provide affordable housing to middle-income individuals, most qualified their recommendation by stating that such activities should be limited to high 299 The term ‘‘high opportunity area’’ has not been uniformly defined within the housing industry. The agencies proposed to define a ‘‘high opportunity area’’ as (1) An area designated by HUD as a ‘‘Difficult Development Area’’; or (2) An area designated by a State or local Qualified Allocation Plan as a High Opportunity Area, and where the poverty rate falls below 10 percent (for metropolitan areas) or 15 percent (for nonmetropolitan areas). PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 opportunity areas, rural and nonmetropolitan counties, high-cost markets, or a combination thereof. Citing the need for rental housing affordable to middle-income individuals in high opportunity areas and nonmetropolitan areas, one commenter urged the agencies to further explore and consider providing CRA consideration for affordable housing that serves individuals and families with a range of incomes. Another commenter suggested that government programs serving middle-income—as well as low- and moderate-income— individuals in rural and nonmetropolitan areas should be included. A different commenter suggested that CRA consideration may be appropriate in nonmetropolitan and rural areas where median income measurements can distort market characteristics in a way that is unique to rural areas, and that partial credit could be considered for housing benefiting middle-income people if the housing is developed or maintained by a CBDO with a history of serving the needs of low- and moderate-income people and places. Some commenters urged consideration for housing where the cost of rent is up to HUD’s Fair Market Rents standard in the relatively few, particularly unaffordable markets where Fair Market Rents exceeds the affordability standard of 30 percent of 80 percent of area median income. One commenter suggested that housing for middle-income individuals should be considered where there is a documented need by the local government or housing agencies due to the high cost of housing in the area compared to local wages. Another commenter suggested that activities in middle-income census tracts and low- to moderate-income adjacent tracts should be considered. Other commenters recommended that the agencies use a high-cost areas standard rather than a high opportunity areas criterion. Final Rule The agencies are adopting final § ll.13(b)(1) with some substantive and technical revisions. Under final § ll.13(b)(1), rental housing for lowor moderate-income individuals that is purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with a Federal, State, local, or tribal government affordable housing plan, program, initiative, tax credit, or subsidy will receive consideration under the affordable housing category. This component is intended to enable consideration of the full range of government-related affordable rental E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations housing activities for low- and moderate-income individuals, including programs, plans, initiatives, tax credits, and subsidies pertaining to both multifamily and single-family properties. The examples in the following discussion demonstrate how this affordable housing component is designed to add greater clarity concerning the many types of government-related rental housing activities that qualify for consideration. The final rule retains the requirement set out in the NPR that an activity be conducted ‘‘in conjunction with’’ a government plan, program, initiative, tax credit, or subsidy to ensure that there is a direct link between activities that are given consideration under this affordable housing prong and government-sponsored programs or initiatives. While the agencies have not adjusted the ‘‘in conjunction with’’ language in the final rule to expand the proposed standard as requested by some commenters, the agencies believe that the range of covered activities is broad. For example, consistent with the agencies’ proposal, qualification under this component of the final rule includes activities with rental properties receiving low-income housing tax credits or subsidized by government programs that provide affordable rental housing for low- or moderate-income individuals, such as project-based section 8 rental assistance and the HOME Investment Partnerships Program. In addition, this component includes Federal, State, local, and tribal government affordable housing plans, programs, initiatives, tax credits, or subsidies that support affordable housing for low- or moderate-income individuals. Examples include affordable multifamily housing programs offered by State housing finance agencies and affordable housing trust funds managed by a local government to support the development of affordable housing for low- or moderate-income individuals. Qualification under this component also includes affordable rental units for lowor moderate-income individuals created as a result of local government inclusionary zoning programs, which often provide requirements or incentives for developers to set aside a portion of housing units within a property for occupancy by low- or moderate-income individuals. Stated purpose or bona fide intent of providing affordable housing for low- or moderate-income individuals. As also discussed in the section-by-section analysis of final § ll.13(a), the final rule removes the specific requirement within proposed § ll.13(b)(1) that a VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 government plan, program, initiative, tax credit, or subsidy must have a ‘‘stated purpose or bona fide intent of providing affordable housing for low- or moderate-income individuals.’’ The agencies are making this change in part to avoid potential confusion regarding how the activities eligible for consideration under this component differ from activities that qualify for consideration under the bona fide intent standard in final § ll.13(a)(1)(ii). Additionally, the agencies have considered commenter feedback that there are government plans, programs, initiatives, tax credits, and subsidies that provide access to rental housing for low- and moderate-income individuals but that do not have a stated mission of providing affordable housing for lowand moderate-income individuals. Removal of this specific requirement is intended to affirm that activities conducted in conjunction with such government plans, programs, initiatives, tax credits, or subsidies nonetheless may be considered under this component of the affordable housing category. Regarding commenter suggestions that certain government programs, including a low-income housing tax credit program, may not benefit, or may negatively affect, lowincome or minority communities, the agencies believe that it is appropriate to recognize and defer to the expertise and priorities of Federal, State, and local government entities responsible for the design and implementation of affordable housing programs, plans, initiatives, tax credits, and subsidies. For more information and discussion regarding the agencies’ consideration of comments recommending adoption of race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. Affordability standard. While the NPR sought feedback on whether to include an affordability standard for activities under § ll.13(b)(1), the final rule implements the proposed approach without applying a uniform affordability standard. Instead, the final rule accommodates the various affordability standards across government affordable housing plans, programs, and initiatives. Consistent with concerns expressed by many commenters, the agencies are of the view that assessing affordability using the standards set in the applicable government program helps to ensure that the affordability determination reflects local needs and priorities that accommodate unique economic conditions, particularly in high-cost and rural areas. In addition, the agencies believe that adopting a PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 6641 uniform affordability standard in this context could create undue complexity by requiring additional evaluation to determine whether some loans, investments, or services supporting rental housing in connection with government programs could receive consideration under other components of the affordable housing category. Accordingly, under final § ll.13(b)(1), any loan, investment, or service supporting rental housing in conjunction with a government program will be eligible for consideration. The agencies note that in determining the amount of credit the bank will receive under final § ll.13(a), the agencies will defer to the government program’s affordability standard. To illustrate, if a government program defines affordability as rent that does not exceed 40 percent of a low- or moderate-income renter’s income, the agencies would consider the percentage of units with rents that do not exceed 40 percent of a low- or moderate-income renter’s income to determine under final § ll.13(a) whether the project meets the majority standard. For more information on the majority standard and partial credit under CRA, see the section-by-section analysis of § ll.13(a). Verification of low- or moderateincome status. As with the proposal, the final rule does not require, for activities under final § ll.13(b)(1), verification that a majority of occupants of affordable units are low- or moderateincome individuals. The agencies considered feedback on this issue and note that community development consideration will be based on the pro rata share of affordable units pursuant to final § ll.13(a) unless a majority of the units are affordable to low- or moderateincome individuals. See the section-bysection analysis of § ll.13(a). Ultimately, the agencies will be able to determine eligibility under final § ll.13(b)(1) by leveraging information demonstrating that the housing is in conjunction with a government plan, program, initiative, tax credit, or subsidy, and the rent amounts being charged to renters. Housing affordable to middle-income individuals. As previously stated, the agencies sought feedback on whether activities involving government programs that have a stated purpose or bona fide intent to provide affordable housing serving low-, moderate-, and middle-income individuals should qualify for affordable housing consideration in certain circumstances, such as when these activities are located in high opportunity areas or nonmetropolitan geographic areas. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6642 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations While the agencies recognize that there are government programs that target affordable housing for middle-income individuals, the agencies have decided not to adopt a provision that would extend § ll.13(b)(1) to include housing affordable solely to middleincome individuals in certain geographic areas. Consistent with the proposal, and as discussed further in the section-by-section analysis of final § ll.13(a)(2), bank support for projects and programs that include housing that is affordable to low-, moderate-, and middle-income individuals would be eligible for pro rata consideration based on the portion of the project affordable to low- and moderate-income individuals. The agencies acknowledge feedback from some commenters raising concerns about the limited supply of affordable housing in high opportunity areas and nonmetropolitan areas and expressing the view that consideration of support for housing affordable to middle-income individuals could provide additional flexibility for banks to identify opportunities to address community needs. However, the agencies are persuaded by commenter concerns that broadening this category could reduce the emphasis on activities that directly contribute to housing for low- and moderate-income individuals, for whom housing options in high opportunity areas and nonmetropolitan areas are equally important and may be more difficult to attain. Under current CRA interagency guidance, examiners have flexibility to consider a bank’s lending and investments in high-cost areas, including those activities that address the housing needs of middle-income individuals in addition to low- or moderate-income individuals.300 In developing the final rule, the agencies considered whether this flexibility should be incorporated into the evaluation of multifamily rental housing activities in conjunction with a government plan, but decided to retain the proposed rule’s focus on housing units that are affordable to low- and moderate-income individuals. The agencies considered that additional regulatory provisions would be needed to designate high-cost markets and to ensure that low- and moderate-income individuals are also likely to benefit from the housing (generally consistent with standards for affordable housing in high-cost market under current guidance) 301 and found these Q&A § ll.12(g)–3. id. (noting, for example, that with respect to loans or investments addressing a middle-income 300 See 301 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 requirements would add undue complexity to the final rule while also adding significant uncertainty in terms of how this would impact affordable housing opportunities for low- and moderate-income individuals. Relatedly, the agencies considered that the structure of the Community Development Financing Metric would not distinguish between housing affordable to low- and moderate-income individuals, as opposed to middleincome households in high-cost markets, and have considered concerns that including all of these activities in the metric could impact the degree to which activities focus on housing affordable to low- and moderate-income individuals who likely also face acute housing needs in such high-cost areas. The agencies further considered the role of the impact and responsiveness review and whether it could address such complexities; however, the agencies determined that such an approach would be uncertain and that the more appropriate approach, on balance, was to focus this component on housing affordable to low- and moderate-income households. The agencies note that government affordable housing programs may benefit low-, moderate-, and middle-income individuals, even in high-cost markets. Accordingly, for an activity to receive full consideration under the final rule, the majority of the housing units must be affordable to lowor moderate-income individuals. If the housing units that are affordable to lowand moderate-income individuals represent less than a majority of the housing units, then the activity will receive pro rata consideration under the final rule. For nonmetropolitan areas, the agencies considered—as expressed by some commenters—that these geographies may have limited opportunities for affordable housing. However, the agencies have determined that, as in other geographies, the best approach in nonmetropolitan areas is to focus on units affordable to low- or moderate-income individuals under this component of affordable housing. As credit shortage due to housing costs, the agencies consider ‘‘whether an institution’s loan to or investment in an organization that funds affordable housing for middle-income people or areas, as well as low- and moderate-income people or areas, has as its primary purpose community development’’). See also Q&A § ll.12(g)(1)–1 (‘‘The concept of ‘affordable housing’ for low- or moderate-income individuals does hinge on whether low- or moderate-income individuals benefit, or are likely to benefit, from the housing. It would be inappropriate to give consideration to a project that exclusively or predominately houses families that are not low- or moderate income simply because the rents or housing prices are set according to a particular formula.’’) PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 discussed above, under the alternative approach of allowing housing affordable to middle-income individuals in nonmetropolitan areas, bank activities for affordable housing could consist of activities solely or mostly focused on housing affordable to middle-income individuals, with an eliminated or reduced focus on housing affordable to low- or moderate-income individuals in these communities. Accordingly, under the final rule, activities in conjunction with government programs in nonmetropolitan areas that may include middle-income renters such as the USDA Section 515 Rural Rental Housing or Multifamily Guaranteed Rural Rental Housing programs could be eligible for consideration to the extent such activities create units affordable to lowand moderate-income individuals. In addition, the agencies note the addition of a component focused on affordable single-family rental housing in nonmetropolitan census areas, as discussed further in the section-bysection analysis of § ll.13(b)(3). While the agencies have declined to expand consideration of rental housing activities in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy that targets middle-income individuals, the agencies believe that including an impact and responsiveness factor that supports affordable housing in High Opportunity Areas in final § ll.15(b)(7) will support encouragement of affordable housing in geographic areas where the cost of residential development is high and affordable housing opportunities can be limited. Additional impact and responsiveness factors, such as the geographic impact and responsiveness factors discussed in the section-bysection analysis of § ll.15(b)(1) through (3), may also help encourage more affordable housing in nonmetropolitan areas. These and other impact and responsiveness factors are discussed further in the section-bysection analysis of final § ll.15. Section ll.13(b)(2) Multifamily Rental Housing With Affordable Rents The Agencies’ Proposal Proposed § ll.13(b)(2) provided criteria to define affordable low- or moderate-income multifamily rental housing that does not involve a government program, initiative, tax credit, or subsidy (also referred to as naturally occurring affordable housing in this SUPPLEMENTARY INFORMATION). With the proposed criteria in § ll.13(b)(2), the agencies sought to provide clear and consistent standards E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 to identify naturally occurring affordable housing that may receive affordable housing consideration under the CRA. First, under this component, the agencies proposed that the rent for the majority of the units in a multifamily property could not exceed 30 percent of 60 percent of the area median income for the metropolitan area or nonmetropolitan county. Second, the agencies proposed that naturally occurring affordable housing would also be required to satisfy one or more of the following additional eligibility criteria in order to increase the likelihood that units benefit low- or moderate-income individuals: (1) the housing is located in a low- or moderate-income census tract; (2) the housing is purchased, developed, financed, rehabilitated, improved, or preserved by a nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing; (3) there is an explicit written pledge by the property owner to maintain rents affordable to low- or moderate-income individuals for at least five years or the length of the financing, whichever is shorter; or (4) the bank provides documentation that a majority of the residents of the housing units are low- or moderate-income individuals or families. Comments Received Overall, commenters supported the inclusion of naturally occurring affordable housing in the affordable housing category. Many commenters generally expressed the view that naturally occurring affordable housing is an important part of the affordable housing ecosystem and serves many low- or moderate-income individuals. Several commenters supported the inclusion of naturally occurring affordable housing-related activity but expressed concerns that the proposal as written would be either too restrictive or too lenient to provide assurance that the activity would actually support affordable housing for low- or moderateincome individuals. One commenter that opposed the inclusion of naturally occurring affordable housing in the affordable housing category asserted that doing so would divert CRA-eligible capital from traditional incomerestricted, subsidized affordable housing that provides permanently affordable apartments to low- or moderate-income families, while another expressed concern that the proposal would not provide sufficient protection to residents in gentrifying areas and suggested additional affordability restrictions. Commenters who were concerned with the requirements being VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 too restrictive expressed, for example, that the proposed standards would not account for any of the naturally occurring affordable housing in their local markets. Final Rule The agencies are adopting in final § ll.13(b)(2) a component for naturally occurring affordable housing with some substantive revisions. Specifically, as described in detail in the section-by-section analyses that follow, the final rule recognizes that multifamily rental housing purchased, developed, financed, rehabilitated, improved, or preserved can be considered under final § ll.13(b)(2) if for the majority of units, the monthly rent as underwritten by the bank, reflecting post-construction or postrenovation changes, does not exceed 30 percent of 80 percent of the area median income and if the housing also meets one or more of the criteria in final § ll.13(b)(2)(ii). The agencies believe that naturally occurring affordable housing provides a meaningful contribution to the stock of available affordable housing and believe that the criteria discussed in more detail below will help to address commenter concerns that including consideration for such housing will divert resources from other types of affordable housing projects. As noted previously, some commenters urged the agencies to implement a single category for all affordable rental housing, including housing that is developed in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy and naturally occurring affordable housing. Upon consideration of commenter feedback, the agencies have determined to retain a separate component in the final rule for multifamily rental housing that has rents affordable to low- and moderate-income individuals. Naturally occurring affordable housing is not already subject to the requirements of a government plan, program, initiative, tax credit, or subsidy, and the agencies believe that by including adequate affordability criteria and the additional criteria in § ll.13(b)(2)(ii), the final rule will help to ensure that activities qualifying under this prong will meaningfully benefit low- and moderate-income individuals. PO 00000 Section ll.13(b)(2)(i) Affordability Standard for Multifamily Rental Housing With Affordable Rents The Agencies’ Proposal The agencies proposed an affordability standard to determine if multifamily rental housing had affordable rents and therefore would be considered naturally occurring affordable housing. The agencies proposed that rents would be considered affordable if the rent for the majority of the units in a multifamily property did not exceed 30 percent of 60 percent of the area median income for the metropolitan area or nonmetropolitan county.302 This proposed standard would have established narrower affordability criteria than what is often used today to determine whether rents are affordable for low- or moderate-income individuals, which is 30 percent of 80 percent of the area median income. Under the agencies’ proposal, the rent amount used to determine whether the affordability standard is met would be the monthly rental amounts as underwritten by the bank, reflecting any post-construction or post-renovation rents considered as part of the bank’s underwriting for financing.303 The agencies’ objective in including this provision was to target community development consideration to properties that are likely to remain affordable and to minimize the likelihood of providing consideration for activities that may result in displacement of low- or moderate-income individuals. The agencies intended to reinforce these objectives by requiring that a majority of the units meet the affordability standard. The agencies sought feedback on whether there were alternative ways to ensure that CRA consideration for support of naturally occurring affordable housing is targeted to properties where rents remain affordable for low- or moderate-income individuals. Comments Received Many commenters addressed the affordability threshold for naturally occurring affordable housing under proposed § ll.13(b)(2). The majority of commenters on the issue opposed the proposed affordability threshold of 30 percent of 60 percent of area median income and supported raising the affordability threshold to 30 percent of 80 percent of area median income. Commenters cited several reasons for adopting a higher affordability standard, 302 See 303 See Frm 00071 Fmt 4701 Sfmt 4700 6643 E:\FR\FM\01FER2.SGM proposed § ll.13(b)(2). id. 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6644 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations including that doing so would align with other affordable housing programs and would better account for affordable housing needed to address housing shortages and provide workforce housing. Some commenters expressed concern that a 30 percent of 60 percent of area median income affordability standard could have a negative impact on the availability of debt financing for affordable rental housing. Other commenters supported the proposed 30 percent of 60 percent of area median income affordability threshold, citing that it would preserve resources for lowor moderate-income renters who are most in need of housing support. Other commenters suggested that the affordability standard should be closer to 30 percent of 30 to 50 percent of area median income in high-cost areas. In contrast, some commenters asserted that the affordability threshold should be higher and more flexible in high-cost markets. Lastly, a few commenters recommended that the agencies adopt the HUD Fair Market Rents standard to determine rental affordability for naturally occurring affordable housing.304 Several commenters expressed support for the proposal that monthly rents, for the purposes of determining affordability, be determined as underwritten by the bank, reflecting post-construction or post-renovation changes, as applicable. However, these same commenters noted that, to ensure continuing affordability, consideration for prior-year financings should be conditioned on periodic documentation that the units remain affordable. For example, one commenter suggested that examiners should evaluate rent rolls annually to confirm ongoing affordability of properties financed in prior years and examination cycles. The agencies received comments supporting the requirement that a majority of units in a naturally occurring affordable housing property must meet the affordability standard. One commenter suggested that the agencies consider a higher standard for the percent of units that must meet the affordability criteria to ensure long term affordability of most units. Another commenter expressed concerns that the proposed requirement does not adequately incentivize mixed income and inclusionary housing. Rather, the commenter suggested the final rule should provide pro rata credit based on 304 See HUD, Office of Policy Research and Development, ‘‘Fair Market Rents,’’ https:// www.hud.gov/program_offices/public_indian_ housing/programs/hcv/landlord/fmr. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 the percentage of affordable units among market rate units in a property. Final Rule Final § ll.13(b)(2)(i) is revised from the proposal and adopts an affordability standard stating that naturally occurring affordable housing purchased, developed, financed, rehabilitated, improved, or preserved will be considered affordable housing under final § ll.13(b) if, for the majority of the units, the monthly rent as underwritten by the bank, reflecting post-construction or post-renovation changes as applicable does not exceed 30 percent of 80 percent of the area median income. The affordability standard adopted in the final rule does not include the proposed 30 percent of 60 percent of the area median income affordability standard, which the agencies proposed in recognition that, historically, a substantial percentage of occupied rental units with affordability between 61 and 80 percent of area median income were occupied by middle- or upper-income households.305 However, the agencies have determined that the proposed affordability standard would have restricted eligibility for properties with affordability levels at 80 percent of area median income even in cases where many of the units are occupied by low- or moderate-income households. Additionally, the agencies are sensitive to the concerns expressed by some commenters that the proposed affordability standard could have had a negative impact on the availability of debt financing for this type of affordable housing. The overwhelming majority of commenters favored the adoption of a more flexible affordability standard than the proposal, with most commenters supporting the use of the 30 percent of 80 percent of area median income affordability standard adopted in final § ll.13(b)(2)(i). The final rule retains the agencies’ proposal to use the monthly rental amounts as underwritten by the bank to determine whether the rental housing meets the affordability standard. The prong further specifies that rent amounts should reflect any postconstruction or post-renovation changes considered as part of the bank’s underwriting for providing financing. The agencies’ objective in including this provision is to target community development consideration to properties that are likely to remain affordable and to avoid providing consideration for activities that may result in displacement of low- or moderateincome individuals. 305 See PO 00000 87 FR 33884, 33895 (June 3, 2022). Frm 00072 Fmt 4701 Sfmt 4700 Though some commenters suggested that the agencies require documentation (such as rent rolls or an annual review of rents) to confirm ongoing affordability, the agencies are not adopting an annual verification process as part of the final rule. In this context, the agencies view evaluation of the loan underwriting, which contains a forwardlooking assessment of projected rent amounts and rental income, along with the requirement to meet one of the four additional criteria, described below, as sufficient to promote the agencies’ objective of ensuring that a bank intends to finance properties where rent remains affordable to low- or moderate-income individuals. Final § ll.13(b)(2)(i) requires the majority of units in naturally occurring affordable housing to meet the affordability standard. The prong does not award pro rata consideration for activities related to properties in which fewer than 50 percent of housing units are affordable. The agencies believe that this requirement will help to ensure activities that qualify under this prong support housing that is both affordable and likely to be occupied by low- and moderate-income individuals. As discussed further in the section-bysection analysis of final § ll.13(a) above, this majority standard in § ll.13(b)(2) is consistent with similar majority criteria for other categories of community development in § ll.13(a), which are intended to emphasize activities that are responsive to community needs, especially the needs of low- and moderate-income individuals and communities. Section ll.13(b)(2)(ii) Additional Eligibility Standards for Multifamily Rental Housing With Affordable Rents The Agencies’ Proposal The agencies proposed that one of four additional criteria would have to be met for multifamily housing to qualify as naturally occurring affordable housing under proposed § ll.13(b)(2).306 These criteria were intended to increase the likelihood that multifamily housing under this component of affordable housing would benefit low- or moderate-income individuals and that the rents would likely remain affordable for low- or moderate-income individuals. Specifically, in addition to the requirement that rents for a majority of the units meet the affordability standard, multifamily housing would have to meet at least one of the following criteria: 306 See E:\FR\FM\01FER2.SGM proposed § ll.13(b)(2)(i) through (iv). 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations (1) The housing is located in a lowor moderate-income census tract; (2) The housing is purchased, developed, financed, rehabilitated, improved, or preserved by any nonprofit organization with a stated mission of, or that otherwise directly supports, affordable housing; (3) The property owner has made an explicit written pledge to maintain affordable rents for low- or moderateincome individuals for at least five years or the length of the financing, whichever is shorter; or (4) The bank provides documentation that the majority of the housing units are occupied by low- or moderateincome individuals or families.307 ddrumheller on DSK120RN23PROD with RULES2 Comments Received The agencies received a number of comments on this aspect of the proposal, with some commenters objecting generally to the proposed additional criteria, suggesting that naturally occurring affordable housing should be simplified into a single requirement that the housing meet an affordability standard. Comments specific to each of the additional eligibility criteria are discussed in the respective section-by-section analyses for those sections. Final Rule The agencies are adopting proposed § ll.13(b)(2)(i) through (iv) in a revised and reorganized final § ll.13(b)(2)(ii), which requires naturally occurring affordable housing to meet one or more eligibility criteria in addition to the affordability standard in § ll.13(b)(2)(i). Specifically, the final rule requires that a project meet at least one of the following eligibility criteria: (1) the housing is located in a low- or moderate-income census tract; (2) the housing is located in a census tract in which the median income of renters is low- or moderate-income and the median rent does not exceed 30 percent of 80 percent of the area median income; (3) the housing is purchased, developed, financed, rehabilitated, improved, or preserved by any nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing; or (4) the bank provides documentation that a majority of the housing units are occupied by low- or moderate-income individuals or families. The agencies have adopted several changes to the proposed eligibility criteria based on commenter feedback, as described below. The agencies believe that the eligibility criteria adopted in the final rule will ensure that naturally occurring affordable housing is likely to benefit low- or moderateincome individuals and increase the likelihood that rents will remain affordable for low- or moderate-income individuals. By offering multiple criteria to demonstrate that rental housing with affordable rents is likely to benefit lowand moderate-income individuals, the agencies sought to provide flexibility and balance the objectives of encouraging banks to support naturally occurring affordable housing with ensuring that this housing is likely to benefit low- and moderate-income individuals. Section ll.13(b)(2)(ii)(A) and (B) Lowor Moderate-Income Census Tracts and Low- and Moderate-Renter Median Income Census Tracts The Agencies’ Proposal The first proposed additional criterion was that the location of the multifamily housing be in a low- or moderateincome census tract.308 This criterion was based in part on the agencies’ recognition that verifying tenant income might be infeasible for many property owners or developers, whereas median census tract income is readily available. This criterion is also consistent with current guidance providing that examiners may consider economic and related factors associated with a particular geographic area to determine whether the housing is likely to benefit low- or moderate-income individuals.309 The agencies also sought feedback on whether to include a geographic criterion to encompass middle- and upper-income census tracts in which at least 50 percent of renters are low- or moderate-income. The agencies considered that affordable rental housing in a neighborhood in which the majority of renters are low- or moderateincome would also be likely to benefit low- or moderate-income individuals. Incorporating this standard into the CRA regulation could result in multifamily housing in certain middleand upper-income census tracts qualifying as naturally occurring affordable housing under proposed § ll.13(b)(2). Further, the agencies sought feedback on not including a geographic criterion. Under this option, to qualify under this component of affordable housing, the multifamily housing would have had to meet one of the other criteria in addition to the proposed affordability standard of rents not exceeding 30 percent of 60 percent of the area median income. 308 See 307 Proposed VerDate Sep<11>2014 § ll.13(b)(2)(i) through (iv). 18:11 Jan 31, 2024 Jkt 262001 309 See PO 00000 proposed § ll.13(b)(2)(i). Q&A § ll.12(g)(1)–1. Frm 00073 Fmt 4701 Sfmt 4700 6645 Comments Received The agencies received some comments that supported requiring all naturally occurring affordable housing to be located in a low- or moderateincome census tract. Alternatively, some commenters urged the agencies to eliminate this criterion, with viewpoints including: that multifamily loans should be evaluated on the affordability of the housing and not simply the location of the housing; that this criterion could present a risk of providing consideration for units that are not serving low- or moderate-income residents soon after the financing occurs; and that this criterion could incentivize concentrating affordable housing in lowor moderate-income areas. Some commenters addressed the agencies’ request for comment on whether to expand this proposed geographic criterion. Of these, several commenters indicated a preference to prioritize other criteria (e.g., affordability and low- or moderateincome occupancy) over the location of a property. However, other commenters supported qualifying naturally occurring affordable housing specifically in census tracts in which the majority of renters were low- or moderate-income. One commenter supported expansion of the geographic criteria into census tracts in which the majority of renters were low- or moderate-income if the agencies also increased the required percentage of units in naturally occurring affordable housing properties from the proposed 50 percent to 60 or 67 percent. Some commenters supported qualifying naturally occurring affordable housing in other geographic areas, including distressed and underserved census tracts, and others supported expansion of the geographic criteria to nonmetropolitan and rural census tracts. Final Rule In final § ll.13(b)(2)(ii)(A), the agencies are adopting the proposed geographic criterion (see proposed § ll.13(b)(2)(i)), that the housing be located in a low- or moderate-income census tract, as one of the ways of demonstrating that naturally occurring affordable housing is likely to benefit low- and moderate-income individuals. This approach is consistent with existing guidance, under which examiners may review factors such as demographic, economic, and market data in surrounding geographies to determine the likelihood that housing will ‘‘primarily’’ accommodate low- or moderate-income individuals. For example, examiners look at median E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6646 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations rents of the assessment area and the project; the median home value of either the assessment area, and the project; the median home value of either the assessment area, low- or moderateincome geographies, or the project; the low- or moderate-income population in the area of the project; or the past performance record of the organization(s) undertaking the project.310 In addition, retaining the geographic criterion provides a streamlined option for determining whether housing qualifies as naturally occurring affordable housing that is likely to benefit low- and moderateincome individuals or families, as census tract income data is readily available and verifiable information. The final rule also adopts a new geographic criterion in final § ll.13(b)(2)(ii)(B), indicating that naturally occurring affordable housing may qualify for consideration if it is located in a census tract in which the median income of renters is low or moderate, and the median rent does not exceed 30 percent of 80 percent of the area median income. In doing so, the agencies intend to help address the concern commenters noted, that restricting naturally occurring affordable housing to low- and moderate-income census tracts could promote geographic concentrations of poverty, and the agencies recognize the importance of locating affordable housing in communities of all income levels. The agencies acknowledge concern expressed by some commenters that naturally occurring affordable housing in middle- and upper-income tracts could be more likely to attract higherincome renters and could contribute to the involuntary displacement of lowerincome renters. The agencies evaluated several alternatives to this geographic criterion to better ensure that low- and moderate-income renters were likely to benefit from this housing and determined that adding the requirement that the median rent in the census tracts must not exceed 30 percent of 80 percent of the area median income would increase the likelihood that lowand moderate-income individuals would benefit from the housing. Moreover, adding these census tracts increases the number of qualifying census tracts (compared to only lowand moderate-income tracts) by over 100 percent—adding about 23,000 middle- and upper-income census tracts—in addition to the approximately 22,500 low- and moderate-income census tracts that would be eligible 310 See Q&A § ll.12(g)(1)–1. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 currently.311 This criterion also aligns with current guidance in the Interagency Questions and Answers on the information that may be considered when determining the likelihood that the housing will primarily accommodate low- or moderate-income individuals or families.312 Section ll.13(b)(2)(ii)(C) Nonprofit Organizations With a Stated Mission of, or That Otherwise Directly Support, Providing Affordable Housing The Agencies’ Proposal The agencies proposed a second criterion for determining whether multifamily housing qualifies as naturally occurring affordable housing under proposed § ll.13(b)(2). Specifically, the agencies proposed that if housing is purchased, developed, financed, rehabilitated, improved, or preserved by any ‘‘nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing,’’ then the activity could be considered naturally occurring affordable housing.313 The agencies intended this provision to encompass organizations that have a mission to serve individuals and communities especially vulnerable to housing instability or that otherwise target services to low- or moderateincome individuals and communities. Multifamily housing that met this criterion in addition to the affordability standard in proposed § ll.13(b)(2)(i) would qualify as naturally occurring affordable housing under proposed § ll.13(b)(2) in any census tract, including middle- and upper-income census tracts. Comments Received Most of the commenters who commented on the second proposed criterion for naturally occurring affordable housing supported its inclusion and stated that it was well tailored to providing CRA consideration for units that meet the purposes of the CRA. A few commenters suggested that this criterion should be a requirement for CRA consideration for naturally occurring affordable housing. In addition, some commenters 311 Based on including census tracts where the median rent is below 30 percent of 80 percent of the area median income and where the median renter’s income is below 80 percent of the area median income in the 2015–2019 American Community Survey. 312 See, e.g., Q&A § ll.12(g)(1)–1. Under existing guidance, examiners may look at median rents of an assessment area and other factors to determine the likelihood that housing will primarily accommodate low- and moderate-income individuals. 313 Proposed § ll.13(b)(2)(ii). PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 recommended additional requirements—for example, that the nonprofits should be led by people of color, a majority of residents should be low- or moderate-income, or the property must be compliant with antidisplacement principles. Several other commenters opposed the proposed criterion. For example, a commenter opposing this criterion stated that it would impede banks from garnering community development financing consideration because affordable housing often comes from partnerships with small developers, as well as nonprofit organizations. Final Rule Under final § ll.13(b)(2)(ii)(C), the agencies are adopting the proposed additional eligibility criterion for affordable multifamily housing activity in conjunction with a nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing substantially as proposed (see proposed § ll.13(b)(2)(ii)). The agencies observe that many of these nonprofit organizations serve individuals and communities that are especially vulnerable to housing instability or otherwise target services to low- or moderate-income individuals and communities. The agencies do not anticipate that this criterion will impede community development financing consideration for banks working with small property developers that are not nonprofit organizations, as this criterion is only one of four criteria for qualifying naturally occurring affordable housing activities. The agencies also considered commenter recommendations for additional requirements, and the agencies do not believe such additional requirements are necessary given the agencies’ view that the proposed criterion is adequate to provide consideration for loans, investments, and services supporting housing units that are likely to be occupied by low- or moderate-income individuals. Proposed § ll.13(b)(2)(iii) Written Affordability Pledge The Agencies’ Proposal The agencies proposed a third criterion for determining whether multifamily housing would qualify as naturally occurring affordable housing under proposed § ll.13(b)(2). This criterion would have required the property owner’s explicit written pledge to maintain rents that are affordable for at least five years or for the length of the E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations financing, whichever is shorter,314 and was intended to address concerns about the likelihood of rents in an eligible property increasing in the future and potentially displacing low- or moderateincome households. Multifamily housing that met this criterion in addition to the baseline affordable rent standard discussed above would qualify as naturally occurring affordable housing under proposed § ll.13(b)(2) in any census tract, including middleand upper-income census tracts. Comments Received Several commenters supported this proposed criterion. Of those commenters, a few supported the proposed five-year time period for the affordability pledge. Most commenters addressing this aspect of the proposal suggested extending the duration of the pledge—to 10, 15, or 20 years—or ensuring that the pledge is binding. Other commenter sentiment included: that the effectiveness of the criterion would depend on the legal enforceability of such a written pledge and the ability of an entity to monitor compliance; that this criterion should be required of all naturally occurring affordable housing lending and should not be optional; and that the pledge should be to keep the rents affordable for low- and moderate-income renters for the life of the investment or loan. Another commenter suggested that the agencies should publish best-practice examples of documents that outline the affordability restrictions, time period for those restrictions, and applicable tenant protections. Some commenters, however, opposed the additional criterion for an owner’s explicit written pledge altogether on the grounds that it would be unappealing to property owners and unrealistic in many markets. ddrumheller on DSK120RN23PROD with RULES2 Final Rule In the final rule, the agencies have determined to not adopt the proposed additional eligibility criterion that would allow consideration based on an explicit written pledge by the property owner to maintain affordable rents for low- or moderate-income individuals for at least five years or the length of the financing, whichever is shorter. In proposing this additional eligibility criterion, the agencies sought to increase proposed § ll.13(b)(2)(iii). The agencies noted in the NPR their expectation that the length of financing would often go beyond the five-year written affordability pledge. The agencies further stated that they would scrutinize short-term financing (less than five years) to ensure such financing is not a way to avoid the affordability commitment. See 87 FR 33884, 33896 n. 72 (June 3, 2022). 314 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 the number of options for demonstrating the likelihood that housing will benefit low- and moderate-income persons, while recognizing that requiring such a pledge would necessitate additional documentation. In determining not to adopt this part of the proposal, the agencies considered the views of many commenters who supported the written affordability pledge proposal, a longer affordability period, or a mandatory pledge on the belief that such requirements would help to ensure that housing remains affordable and would limit the risk of renter displacement due to increasing rents. The agencies also considered feedback that the effectiveness of such a pledge would depend on its legal enforceability and that enforcing the pledge could be impracticable and potentially require an entity to monitor compliance. The agencies evaluated the proposed additional criterion in light of feedback from commenters and determined that, because neither the agencies nor the banks would be in a position to effectively oversee the enforceability of these pledges, which may not be recorded in the public record, the impact of these pledges could be limited. In addition, the proposed criterion would have required the pledge to be in effect for either five years or the length of the financing, which could have had the unintended result of providing consideration for, and possibly unintentionally encouraging, one-year loans that would not contribute to ongoing affordability. Finally, by retaining the criterion that naturally occurring affordable housing be purchased, developed, financed, rehabilitated, improved, or preserved by any nonprofit organization with a stated mission of, or that otherwise directly supports, providing affordable housing, the agencies believe that including a pledge criterion would likely be superfluous for nonprofit owners, and not a clear means to capture activity that is outside other criteria that would apply to naturally occurring affordable housing. Section ll.13(b)(2)(ii)(D) Tenant Income Documentation The Agencies’ Proposal A fourth additional criterion proposed by the agencies for determining whether multifamily housing would qualify as naturally occurring affordable housing under proposed § ll.13(b)(2) was that the bank provided documentation that the majority of the housing units were occupied by low- or moderate-income PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 6647 individuals or households.315 Multifamily housing that met this criterion in addition to the affordability standard in § ll.13(b)(2)(i) would qualify as naturally occurring affordable housing under proposed § ll.13(b)(2) in any census tract, including middleand upper-income census tracts. Comments Received Of those commenters who weighed in on the criterion that the bank provide documentation that the majority of the housing units were occupied by low- or moderate-income individuals or households, most supported retaining it as a criterion in the final rule and suggested ways that the criterion could be successfully implemented. However, one commenter asserted that banks do not have the authority to collect tenant income information, while another indicated that the documentation could be impossible to obtain if units remain vacant after the project is completed. Another commenter suggested that the acceptance of Housing Choice Vouchers should be included as a way of demonstrating that rents will be affordable for low- and moderateincome individuals. A few commenters raised objections, stating that the proposed criterion is unnecessary, overreaching, and impractical as proposed and could lead banks that seek CRA consideration to impose new burdensome administrative requirements on multifamily borrowers. Final Rule The final rule adopts § ll.13(b)(2)(iv) as proposed, renumbered as final § ll.13(b)(2)(ii)(D), which allows a bank to demonstrate the eligibility of multifamily housing by, in addition to meeting the affordability standard, providing documentation that a majority of the housing units in an unsubsidized multifamily affordable housing project are occupied by low- or moderateincome individuals or families. For example, in the case of a multifamily rental property with a majority of rents set at 30 percent of 80 percent of area median income, the activity could receive consideration under this additional criterion where the bank can document that the majority of occupants receive Housing Choice Vouchers.316 proposed § ll.13(b)(2)(iv). housing choice voucher program is the Federal Government’s major program for assisting very low-income families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the private market. See 24 CFR part 982 (program requirements for the tenant-based housing assistance program under section 8 of the United 315 See 316 The E:\FR\FM\01FER2.SGM Continued 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6648 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations The agencies observe that such documentation would demonstrate that the activity was benefiting low- or moderate-income individuals. The agencies acknowledge commenters’ assertion that tenant income documentation might be unobtainable, unnecessary, or impractical. However, the agencies ultimately believe this criterion provides a useful alternative for banks that are able to obtain such documentation through the process of originating or renewing a loan. Banks retain the flexibility to demonstrate eligibility using the other criteria in final § ll.13(b)(2)(ii) their CRA activities, and downgrade banks for incidents of harm and displacement of low- or moderateincome and racial and ethnic minority tenants; that incentivizing mixed-income housing developments with a focus on racial and income integration would help address displacement concerns; and that loans to finance rental housing should only receive consideration if they are structured to tangibly improve the lives of tenants and do not permit landlords to pull money away from operations to pay for greater debt service. Other Comments on Naturally Occurring Affordable Housing Commenters offered a variety of suggestions for alternative ways to ensure that CRA consideration for naturally occurring affordable housing would be targeted to properties where rents remain affordable for low- or moderate-income individuals. Some commenters indicated that the rule should emphasize one or more of the proposed criteria in different combinations, while other commenters offered suggestions for criteria that were not expressly contemplated in the proposal. A few commenters asserted that the agencies should take steps to limit consideration for financing that may not provide long-term affordable housing, citing, for example, concern regarding the long-term intentions of certain institutional investors and private developers. Several commenters requested that the agencies require contracts or land use agreements that ensure a specific level and length of affordability, especially, at least one commenter noted, for properties where a renovation is occurring. Some commenters suggested that the agencies create anti-displacement requirements, quality of housing requirements, or both, in order for activities supporting naturally occurring affordable housing properties to qualify for CRA consideration. Commenter feedback along these lines included: that the agencies should require banks to demonstrate that landlord borrowers are complying with tenant protection, habitability, local health code, civil rights, credit reporting act, unfair, deceptive, or abusive acts and practices, and other laws; that the agencies should give credit to banks for adopting and adhering to anti-displacement and responsible lending best practices in Final Rule States Housing Act of 1937 (42 U.S.C. 1437f); the tenant-based program is the housing choice voucher program). See also HUD, ‘‘Choice Vouchers Fact Sheet,’’ https://www.hud.gov/topics/housing_ choice_voucher_program_section_8. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 For the reasons stated in the preceding discussion of the affordability standard and additional eligibility requirements, the agencies are adopting the component for naturally occurring affordable housing under final § ll.13(b)(2) with revisions. The agencies are not adopting commenter suggestions to restrict CRA consideration for financing provided to institutional investors and private developers, because the basis for doing so is not clear, especially if the affordability requirements of this section are met, and because such parties play an important role in adding to the overall supply of needed affordable housing. Instead, the agencies are relying on the criteria adopted to ensure that the multifamily housing with affordable rents is likely to benefit low- or moderate-income individuals. Similarly, the agencies considered, but are not requiring contracts or land use agreements that ensure a specific level and period of affordability, as these would be challenging for a bank to enforce efficiently. Additionally, the agencies are not including an additional criterion in this component regarding resident displacement and responsible lending best practices. The agencies believe that such a criterion is less needed in the naturally occurring affordable housing context given that such activities will create units or facilitate maintenance of existing units of affordable housing, and examiners will retain the discretion to consider whether an activity reduces the number of housing units affordable to low- or moderate-income individuals. The agencies believe the adopted criteria will appropriately encourage activities beneficial to low- and moderate-income individuals and families. PO 00000 Section ll.13(b)(3) One-to-Four Family Rental Housing With Affordable Rents in Nonmetropolitan Census Tracts The Agencies’ Proposal In the NPR, the agencies sought feedback on whether single-family rental housing should be considered under the naturally occurring affordable housing category, provided that it meets the same combination of criteria proposed for multifamily rental housing.317 This alternative would have expanded the affordable housing category to include single-family rental housing that meets the affordability threshold and the additional eligibility criteria under proposed § ll.13(b)(2)(i) and (ii), respectively. The agencies also sought feedback on whether such an alternative should be limited to rural geographies, or eligible in all geographies.318 In seeking feedback on the potential expansion to include unsubsidized single-family affordable rental housing, the agencies acknowledged that single-family rental housing can be an important source of affordable housing, especially in geographies, such as rural communities, where multifamily housing is less common. Comments Received Many commenters offered views on whether single-family rental housing should be considered under the naturally occurring affordable housing category, provided such housing meets the requirements of proposed § ll.13(b)(2). Some commenters generally opposed expanding the naturally occurring affordable housing proposal to include single-family homes, noting: that this expansion could incentivize investors buying single-family homes to serve as investment properties rather than encouraging homeownership amongst low- or moderate-income individuals and families; that such an expansion could inadvertently reinforce racial segregation and concentrated poverty; and that permanent home mortgage loans for single-family rental housing were already covered as part of the proposed Retail Lending Test. Most of the commenters that remarked on this alternative supported broadening the eligibility of naturally occurring affordable housing to include single-family rental housing in some or all geographies. For example, one commenter noted that affordable singlefamily rentals are a critical part of the multipronged approach to address 317 See 87 FR 33895. 318 Id. Frm 00076 Fmt 4701 Sfmt 4700 E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations affordable housing in this country and should be included in the affordable housing category. Imposing higher standards for singlefamily rental housing. Although several commenters suggested applying the exact same naturally occurring affordable housing criteria to both multifamily and single-family housing, some commenters suggested that activities relating to single-family rentals be held to a higher standard or subject to additional restrictions as compared to activities relating to multifamily naturally occurring affordable housing. Commenters supporting higher standards raised a number of considerations including: that single-family rental housing should be limited to homes that either are eligible for purchase (e.g., lease-to-own), are prioritized for low- or moderateincome families enrolled in first-time homeowner programs through HUD, or are part of a State program that will remain permanently affordable through a community land trust or other vehicle to sustain affordability; that singlefamily rental housing should be limited to housing owned or developed by a nonprofit organization; and that, if forprofit ownership and development is allowed, there should be mechanisms to ensure that the property is in decent physical condition and that bank financing is not supporting abusive property owners, landlords, management companies, or investors. Other commenters expressed concerns about investor activity. For example, a commenter suggested that the agencies restrict CRA consideration to properties whose owners own fewer than 50 single-family rental units unless the owner is a nonprofit with a bona fide mission of providing affordable housing. Another commenter recommended that, to prevent speculative activity or corporate ownership, the agencies could exclude from consideration single-family rental housing in any low- or moderate-income or predominantly minority census tract in which more than one-third of the single-family housing stock became rental housing in last five years. Geographic considerations in recognizing affordable single-family rental activity. A few commenters addressed the agencies’ request for comment on whether to limit any inclusion of single-family rental properties in the proposed naturally occurring affordable housing component to properties located in rural areas. The majority of these commenters opposed limiting single-family rentals to rural areas. In this regard, a commenter stated that affordable housing is needed VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 everywhere and, therefore, the category should not be limited to rural communities. A few commenters supported limiting single-family rentals to rural areas, noting the large percentage of occupied rental units in rural areas that are single-family homes. Another commenter suggested eliminating all geographic criteria and allowing single-family rentals to receive CRA consideration anywhere. Final Rule The final rule adopts as final § ll.13(b)(3) a component in the affordable housing category for singlefamily rental housing in nonmetropolitan areas. The component applies in instances where such housing is purchased, developed, financed, rehabilitated, improved, or preserved, and the housing meets the affordability criterion in final § ll.13(b)(2)(i) and at least one of the additional eligibility criteria in final § ll.13(b)(2)(ii). This component is intended to address single-family rental housing with affordable rents in nonmetropolitan areas. As previously noted, the agencies inquired whether the proposed approach to considering naturally occurring affordable housing should be broadened to include single-family rental housing that meets the requirements in proposed § ll.13(b)(2), and if so, whether consideration of single-family rental housing should be limited to rural geographies, or eligible in all geographies. In making this determination, the agencies have considered the views from commenters on this request for feedback. Standards for single-family rental housing. Currently, the lack of a consistent standard for affordability, combined with unclear methods for determining whether low- or moderateincome individuals are likely to benefit, leads to inconsistent consideration of unsubsidized affordable housing, including single-family rental housing. The agencies sought feedback on the potential application of the criteria in proposed § ll.13(b)(2)(i) and (ii) to single-family rental housing because those criteria aim to provide a consistent methodology for determining benefit for low- or moderate-income individuals. After considering commenter feedback, the agencies believe that the revised criteria for naturally occurring affordable housing for multifamily rental housing under § ll.13(b)(2), which include a defined affordability standard and a requirement that rents be determined based on the amounts used by the bank for purposes of underwriting, are suitable for PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 6649 adoption in the single-family nonmetropolitan area rental housing context. The agencies carefully considered commenter suggestions for a more stringent or more lenient affordability standard, and determined that adopting the criteria in final § ll.13(b)(2) for both multifamily rental housing and single-family rental housing in nonmetropolitan areas will provide a clear and consistent option that is likely to benefit low- and moderate-income individuals and families. Geographic considerations in recognizing affordable single-family rental activity. Although the agencies considered the assertion by some commenters that affordable rental housing is needed in all geographic areas, as noted previously, this component supports consideration only for single-family rental housing in nonmetropolitan areas. The agencies also considered that the composition of the housing stock varies across geographies, and that in some areas, such as in certain nonmetropolitan areas, it may be difficult to develop affordable multifamily rental housing at scale, either in conjunction with a government program or as naturally occurring affordable housing. An agency analysis of data from the 2016–2020 American Community Survey showed that 22 percent of occupied rental units in nonmetropolitan areas are structures with more than 4 units, compared to 47 percent of occupied rental units in metropolitan areas.319 In reaching their determination, the agencies believe that the final rule approach appropriately balances adding a component specific to affordable single-family rental housing and tailoring it to the unique affordable housing needs in nonmetropolitan areas. The agencies also considered that not including this component could otherwise limit opportunities for affordable housing in nonmetropolitan areas. This component is designed to address the single-family affordable housing needs in nonmetropolitan areas, including the particular needs in rural areas. Accordingly, although the agencies recognize that single-family affordable housing is important to 319 Multifamily housing is also less common in rural areas where a smaller 12 percent of occupied rental units are in structures with more than 4 units according to the same data source. Rural areas are conceptually distinct from nonmetropolitan areas, however, and this final rule relies upon the nonmetropolitan area designation. The Census Bureau uses a distinct methodology of designating urban and rural census blocks relative to the Office of Management and Budget’s methodology for determining if a county is within a metropolitan statistical area. E:\FR\FM\01FER2.SGM 01FER2 6650 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations addressing the affordable housing needs for low- and moderate-income individuals in metropolitan areas, the agencies have determined not to expand this component to apply to single-family rental housing in metropolitan areas. Such units may still be eligible for consideration under final § ll.13(b)(1) to the extent that the unit(s) and associated loan, investment, or service meet the requirements under that component. Section ll.13(b)(4) Affordable OwnerOccupied Housing for Low- or Moderate-Income Individuals ddrumheller on DSK120RN23PROD with RULES2 The Agencies’ Proposal Proposed § ll.13(b)(3) provided a component for the affordable housing category of community development for ‘‘activities that support affordable owner-occupied housing for low- or moderate-income individuals.’’ This component included activities that: (1) ‘‘directly assist low- or moderateincome individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing’’; or (2) ‘‘support programs, projects, or initiatives that assist low- or moderateincome individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing.’’ 320 Owneroccupied housing referenced in the agencies’ proposal included both singlefamily and multifamily owner-occupied housing. Activities under proposed § ll.13(b)(3) would have expressly excluded single-family home mortgage loans considered under the Retail Lending Test in proposed § ll.22.321 Instead, as discussed in the agencies’ proposal, activities eligible for consideration under proposed § ll.13(b)(3) included, for example, construction loan financing for a nonprofit housing developer building single-family owner-occupied homes affordable to low- or moderate-income individuals; financing or a grant provided to a nonprofit community land trust focused on providing affordable housing to low- or moderate-income individuals; a loan to a resident-owned manufactured housing community with homes that are affordable to low- or moderate-income individuals; a sharedequity program operated by a nonprofit organization to provide long-term affordable homeownership; and financing or grants for organizations that provide down payment assistance to low- or moderate-income homebuyers. Other activities eligible for 320 Proposed 321 See § ll.13(b)(3). id. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 consideration under this proposed component include: activities with a governmental or nonprofit organization with a stated purpose of, or that otherwise directly supports, providing affordable housing; and activities conducted by the bank itself, or with other for-profit partners, provided that the activity directly supports affordable homeownership for low- or moderateincome individuals. The agencies sought feedback on what conditions or terms, if any, should be added to this component to ensure that qualifying activities are affordable, sustainable, and beneficial for low- or moderate-income individuals and communities. Comments Received Nearly all commenters that commented on the affordable homeownership component of the NPR expressed support for CRA consideration for such activities. Some of the commenters suggested a different definition for this component under which the financing, construction, or rehabilitation of owner-occupied homes would qualify if: (1) the homes are located in a low- or moderate-income census tract or a distressed or underserved middle-income nonmetropolitan census tract; and (2) the sales price does not exceed four times the area median income. One commenter noted that this definition should explicitly include government programs with a ‘‘stated purpose or bona fide intent’’ of providing affordable housing or housing assistance for low, moderate-, or middle-income individuals. Many commenters offered specific suggestions regarding the activities that should be eligible for consideration under this component. Commenter suggestions included: that the agencies should explicitly include financing for the rehabilitation or reconstruction of an already owner-occupied home if the owner is a low- or moderate-income individual; that investments and interests in early buyout loans should receive CRA consideration because they enable servicers to work with and buy delinquent loans with government insurance or guarantees without foreclosing on the properties, thereby allowing residents to remain in their homes; and that the agencies should provide CRA consideration for the costs of transporting housing materials to remote areas. A few commenters encouraged the agencies to use this component to encourage affordable homeownership for specific populations. For example, a commenter suggested that the agencies PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 increase and preserve affordable homeownership for low- or moderateincome individuals from racial and ethnic groups that were subjected to redlining and other discriminatory practices. Similarly, a commenter recommended that the agencies emphasize activities that expand homeownership for first-time buyers who are individuals with disabilities or represent other underserved populations. Some commenters encouraged the agencies to include specific products or programs in this component of affordable housing. These suggestions include first-look homebuyer programs,322 home repair programs that help homeowners bring homes into building code compliance, participation in specific pilot programs offered by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Government-sponsored enterprises or the GSEs),323 real estateowned note sales, education on and resolution of heirs’ property titles, low balance loans for homeowners, use of alternative credit models, limited equity housing cooperatives, and property tax abatements to assist low- or moderateincome owners whose taxes have risen rapidly. Other commenters suggested that the agencies provide CRA consideration for activities related to lender fee-for-service payments, investment, grants, and developing fees for service programming by HUDcertified housing counseling agencies. Lastly, some commenters recommended that the agencies encourage banks to partner with nonprofit affordable housing groups to provide or support affordable homeownership options. These commenters explained that nonprofit affordable housing groups— including developers, owners, counselors, and others—provide products and services that are appropriately tailored to low- and 322 For example, Freddie Mac’s First Look Initiative offers homebuyers and select nonprofit organizations an exclusive opportunity to purchase certain homes prior to competition from investors. See Freddie Mac, ‘‘Freddie Mac First Look Initiative,’’ https://www.homesteps.com/homesteps/ offer/firstlook.html. 323 GSE pilot programs are designed to target a wide range of housing access issues. GSE pilot programs may help renters establish and improve their credit scores, defray or decrease the cost of security deposits for renters, or take other actions to help renters and homeowners. For example, Fannie Mae’s Multifamily Positive Rent Payment Reporting pilot program is aimed at helping renters build their credit history and improve their credit score. See Fannie Mae, ‘‘Fannie Mae Launches Rent Payment Reporting Program to Help Renters Build Credit’’ (Sept. 27, 2022), https:// www.fanniemae.com/newsroom/fannie-mae-news/ rent-payment-reporting-program-launch. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 moderate-income borrowers and help guard against predatory or unsustainable homeownership activities. Final Rule The agencies are adopting proposed § ll.13(b)(3), renumbered as final § ll.13(b)(4), with clarifying revisions to provide community development consideration for activities that support affordable owner-occupied housing for low- and moderate-income individuals. Specifically, in final § ll.13(b)(4), affordable housing includes ‘‘assistance for low- or moderate-income individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing, excluding loans by a bank directly to one or more owner-occupants of such housing.’’ The agencies believe that adopting this component facilitates consideration of a variety of the affordable housing models suggested by commenters. The agencies also note that some of the activities suggested by commenters, such as use of alternative credit scores, special purpose credit programs, and use of other credit products that assist low- or moderateincome individuals with purchasing a home could be considered responsive credit products under the Retail Services and Products Test, described in the section-by-section analysis of § ll.23. Owner-occupied one-to-fourfamily home mortgage loans, including but not limited to owner-occupied oneto-four-family home mortgage loans considered under the Retail Lending Test in § ll.22, are excluded from consideration under this component. Relative to the agencies’ proposal, the final rule combines the two prongs (‘‘direct’’ support and support for ‘‘plans, programs, and initiatives’’) into a single component that covers all forms of assistance for affordable homeownership. By creating a single component, the agencies seek to streamline the requirement and clarify that a bank may receive community development consideration for activities that support any qualifying assistance under the component regardless of whether the support is provided directly to a low- or moderate-income individual or indirectly, through a third-party organization. As a result, under the final rule, a down payment grant provided by a bank to a low- or moderate-income individual is evaluated using the same standards as those standards that apply to a down payment grant to a nonprofit organization that provides affordable housing assistance to low- or moderateincome individuals. This parallel treatment is consistent with the agencies’ objectives, including the VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 objective seeking to provide greater clarity and consistency in the application of the regulations, and the criteria in the proposal. Assistance for low- or moderateincome individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing. Under final § ll.13(b)(4), activities that assist lowor moderate-income individuals to obtain, maintain, rehabilitate, or improve affordable owner-occupied housing are considered. The proposal would have recognized activity that ‘‘directly’’ assists with these functions. The agencies removed ‘‘directly’’ to better align this component with the majority standard outlined in final § ll.13(a)(1)(i)(B)(1). As noted in the proposal, activities under this component could be conducted in conjunction with a variety of financing types. For example, this component would include activities such as construction loan financing for a nonprofit housing developer constructing single-family owneroccupied homes affordable to low- or moderate-income individuals; a grant to a nonprofit organization that provides home rehabilitation and weatherization improvements for low- and moderateincome homeowners; financing or a grant to a nonprofit community land trust focused on providing affordable housing to low- or moderate-income individuals; a loan to a resident-owned manufactured housing community with homes that are affordable to low- or moderate-income individuals; a sharedequity program operated by a nonprofit organization to provide long-term affordable homeownership; and financing or grants for organizations that provide down payment assistance to low- or moderate-income homebuyers.324 Furthermore, under this component, eligible activities may include those involving assistance to a government agency or nonprofit organization that provides access to affordable homeownership, and assistance provided by the bank itself, or by other for-profit entities. Accordingly, each of the following may qualify for consideration under final § ll.13(b): participation in first-look homebuyer programs or home repair programs that help homeowners bring homes into building code compliance; a down payment grant offered directly by a bank to help low- or moderate-income individuals purchase a home; an investment in a government bond that finances home mortgage loans for low324 See PO 00000 proposed § ll.13(b)(3). Frm 00079 Fmt 4701 Sfmt 4700 6651 or moderate-income borrowers; 325 and activities supporting a program that conducts free home repairs or maintenance for low- or moderateincome homeowners. Exclusion of loans by a bank directly to owner-occupants. The proposal specifically excluded any home mortgage loans considered under the Retail Lending Test in § ll.22. The agencies were concerned that, as written, the requirement could suggest that a bank might receive consideration for such loans under either performance test, but not both. To minimize confusion and to clarify the agencies’ intent, final § ll.13(b)(4) replaces the reference to the Retail Lending Test with language that excludes any loan directly to an owner-occupant, regardless of whether the loan is considered under the Retail Lending Test. Consistent with the proposal, this clarification ensures that banks will not receive CRA consideration under both final § ll.13(b)(4) and final § ll.22 for a single loan. Section ll.13(b)(5) Mortgage-Backed Securities The Agencies’ Proposal Under proposed § ll.13(b)(4), the agencies proposed to define standards for investments in mortgage-backed securities related to affordable housing that qualify for community development consideration. Specifically, the agencies proposed that mortgage-backed securities would qualify as affordable housing when the security contained ‘‘a majority of either loans financing housing for low- or moderate-income individuals or loans financing housing that otherwise qualifies as affordable housing under [proposed § ll.13(b)].’’ 326 This proposed component of affordable housing was intended to be generally consistent with current practice and to recognize that purchases of qualifying mortgagebacked securities that contain home mortgage loans to low- or moderateincome borrowers or that otherwise contain loans that qualify as affordable housing are investments in affordable housing. The agencies sought feedback on alternative approaches that would create a more targeted definition of qualifying mortgage-backed securities. One alternative approach would be to consider investments in mortgageQ&A § ll.12(t)–2. Q&A § ll.12(t)–2. See also, e.g., Q&A § ll.23(b)–2 (indicating that CRA credit for MBS investments is conferred only if the MBS is ‘‘not backed primarily or exclusively by loans that the same institution originated or purchased.’’). 325 See 326 See E:\FR\FM\01FER2.SGM 01FER2 6652 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 backed securities only in proportion to the percentage of loans in the security secured by affordable properties. For example, if 60 percent of a qualifying mortgage-backed security consists of single-family home mortgage loans to low- or moderate-income borrowers, and 40 percent of the security consists of loans to middle- or upper-income borrowers, the mortgage-backed security would receive consideration only for the dollar value of the loans to low– or moderate-income borrowers. Additionally, the agencies sought feedback on whether to limit consideration of mortgage-backed securities to the initial purchase of a mortgage-backed security from the issuer, and not to consider subsequent purchases of the security. This change would have been intended to reduce the possibility of multiple banks receiving CRA consideration for purchasing the same security. Comments Received The majority of commenters recognized the important role mortgagebacked security purchases play in creating liquidity for the mortgage market and enabling banks to originate more loans and favored retaining this component of affordable housing. However, many of these commenters supported restrictions on the types of eligible securities as well as the amount of CRA consideration received relative to other activities. Other commenters suggested eliminating consideration for purchases of mortgage-backed securities altogether because of the view that such investments are low impact or add little value to communities. Scope. Some commenters requested that the agencies clarify or modify the scope of this component. For example, a commenter sought clarification regarding the treatment of purchases of securities collateralized by mortgage loans in low- and moderate-income census tracts. Separately, several commenters recommended that the proposed mortgage-backed securities component include purchases of other affordable housing investment vehicles issued by State housing finance authorities or municipalities, such as mortgage revenue bonds. In contrast, other commenters supported restricting consideration to certain types of purchases of mortgage-backed securities, such as loans or mortgagebacked securities purchased from a certified CDFI, or loans or mortgagebacked securities that meet certain requirements but that are not guaranteed by the Federal Government. Other commenters proposed limitations that would provide CRA consideration only VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 for the first or second purchase of a mortgage-backed security. Amount of consideration for mortgage-backed securities. The majority of commenters addressing the agencies’ request for comment on whether to consider investment in mortgage-backed securities only in proportion to the percentage of loans in the security secured by affordable properties favored the proportional consideration alternative. In contrast, a couple of commenters addressing this alternative opposed using proportional consideration, asserting that it would increase complexity without material benefit to the volume and scope of affordable housing activities in low- or moderate-income communities. Other commenters suggested a hybrid approach whereby full CRA consideration would be granted for investments in mortgage-backed securities comprised of 50 percent or more affordable housing loans and pro rata credit would be granted for investments in mortgage-backed securities comprised of less than 50 percent affordable housing loans. Another commenter suggested that the full value of a mortgage-backed security only be considered when at least 50 percent of the underlying loans were used to finance supportive affordable housing developments. Other commenters recommended that CRA consideration for purchases of mortgage-backed securities be discounted relative to other community development investments. These commenters suggested that mortgagebacked securities investments be discounted by 50 percent in comparison to more traditional lending or investment in qualified CRA activities because these securities remain liquid and provide comparably less public benefit than other qualifying CRA activities. Similarly, some commenters suggested that the agencies limit consideration for mortgage-backed securities investments to a percentage of a bank’s nationwide community development activity, with some of these commenters suggesting either a 20 or 25 percent cap. Other commenters requested that consideration be limited to the percentage of loans to low- or moderate-income individuals. Other restrictions or limitations. Finally, several commenters suggested that the agencies consider or set a minimum threshold for the time period that a bank must hold the mortgagebacked securities on its books, such as two or more years. Some commenters also opposed limiting mortgage-backed securities consideration to only the initial purchase from the issuer, citing PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 that this limitation would add complexity and could negatively impact the market for mortgage-backed securities. Final Rule In the final rule, the agencies are adopting the proposal related to mortgage-backed securities, renumbered as final § ll.13(b)(5) and reorganized to include final § ll.13(b)(5)(i) and (ii), with both substantive and clarifying edits. Specifically, the final rule includes as a component of affordable housing purchases of mortgage-backed securities that are collateralized by loans, a majority of which are not loans that the bank originated or purchased, and which are either home mortgage loans made to low- or moderate-income individuals or loans financing multifamily affordable housing that meets the requirements of final § ll.13(b)(1). For clarity, the two subcategories (home mortgage loans to low- or moderate-income individuals and loans secured by multifamily affordable housing) form two separate prongs under the overall mortgagebacked security component. The agencies are also revising final § ll.13(b)(5) to confirm that the component only applies to mortgagebacked securities where a majority of the underlying loans are not loans that the bank originated or purchased. This limitation is consistent with current interagency guidance and ensures that banks are not likely to receive consideration under both final § ll.13(b)(5) and the Retail Lending Test in final § ll.22 for the same loan(s).327 Section ll.13(b)(5)(i) Section ll.13(b)(5)(i). Final § ll.13(b)(5)(i) specifies that affordable housing includes purchases of mortgage-backed securities where a majority of the underlying loans are not loans that the bank originated or purchased and ‘‘[a]re home mortgage loans made to low- or moderate-income individuals.’’ This provision adopts the proposal to consider purchases of mortgage-backed securities that contain a majority of ‘‘loans financing housing for low- or -moderate income individuals’’ (proposed § ll.13(b)(4)). On further review, the agencies determined that ‘‘loans financing housing for low- or -moderate income individuals’’ could be read broadly to include single-family loans and multifamily loans. The agencies intended, however, to refer with this language solely to loans secured by 327 Q&A E:\FR\FM\01FER2.SGM § ll.23(b)–2. 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 single-family homes. Thus, final § ll.13(b)(5)(i) refers more specifically to ‘‘home mortgage loans made to lowor moderate-income individuals.’’ As discussed further in the section-bysection analysis of § ll.12, ‘‘home mortgage loan’’ is defined to mean a ‘‘closed-end home mortgage loan’’ or an ‘‘open-end home mortgage loan,’’ which are in turn defined to exclude multifamily loans.328 The agencies also note that final § ll.13(b)(5)(i) only allows consideration based on the income of the individuals to whom the loans are made and does not allow consideration for mortgage-backed securities solely because the underlying loans are secured by property in low- and moderate-income census tracts. This approach, which is consistent with the agencies’ proposal, is intended to maintain the component’s focus on lowor moderate-income individuals. The agencies do not believe that providing consideration for mortgage-backed securities where the underlying loans are made to middle- or upper-income individuals residing in low- or moderate-income census tracts is likely to further the agencies’ goal of encouraging affordable housing lending to low- and moderate-income individuals. Section ll.13(b)(5)(ii) Under final § ll.13(b)(5)(ii), the agencies replaced phrasing that referred to loans that finance housing that ‘‘otherwise qualifies’’ as affordable housing with a direct reference to final § ll.13(b)(1). This revision clarifies that, as it relates to multifamily housing, the agencies intend to provide community development consideration only for those mortgage-backed securities where a majority of the underlying loans are secured by multifamily rental housing purchased, developed, financed, rehabilitated, improved, or preserved in conjunction with government affordable housing plans, programs, initiatives, tax credits, and subsidies. The agencies believe that this clarification will facilitate consistency in evaluating mortgagebacked securities. The agencies note that purchases of tax-exempt bonds issued by Freddie Mac and Fannie Mae, which finance affordable housing projects, and tax-exempt bond issuances that finance affordable housing projects sponsored by State housing authorities or municipalities, may be eligible for community development consideration 328 See final § ll.12 (defining ‘‘home mortgage loan,’’ ‘‘closed-end home mortgage loan,’’ and ‘‘open-end home mortgage loan’’). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 under the final rule, provided that the bond is a mortgage-backed security that meets the requirements in final § ll.13(b)(5)(ii). Amount of consideration for mortgage-backed securities. Under final § ll.13(a) mortgage-backed securities that meet the requirements in final § ll.13(b)(5) (i.e., a majority of the underlying loans are not loans that the bank originated or purchased, and are either home mortgage loans made to low- or moderate-income individuals or loans financing multifamily affordable housing that meets the requirements of final § ll.13(b)(1)) will be eligible to receive consideration for the full value of the security.329 The agencies carefully considered commenter feedback regarding the amount of consideration that mortgage-backed securities should be eligible to receive under CRA, including ideas for partial consideration of bank investments in mortgage-backed securities. On further deliberation, the agencies are not adopting a partial consideration framework for bank investments in mortgage-backed securities. The agencies believe that the final rule’s majority approach for mortgage-backed securities will facilitate compliance and supervision, as it is less complex than other alternatives suggested and considered, and consistent with the majority standard employed in most other categories of community development.330 While generally aligned with current guidance on bank investments in mortgage-backed securities noted earlier, the final rule will provide greater clarity, transparency, and uniformity in how bank investments in mortgage-backed securities are considered under CRA. The agencies believe that the requirements in final § ll.13(b)(5), including the majority requirement, the home mortgage loan limitation, and the express tie to final § ll.13(b)(1) for multifamily affordable housing, appropriately balance considerations of current guidance; the benefits of greater consistency and clarity in the treatment of investments in mortgage-backed securities under CRA; and the recognition that purchases of mortgagebacked securities containing home mortgage loans to low- or moderateincome borrowers or loans that finance multifamily affordable housing can improve liquidity, in turn supporting more loans to low- and moderatefinal § ll.13(a)(1)(i)(A)(2). discussion of the final rule on full and partial credit for community development loans, investments, and services, see the section-bysection analysis of final § ll.13(a). 329 See 330 For PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 6653 income borrowers and more affordable housing development. The agencies remain sensitive to commenter views that mortgage-backed securities are lower in impact and responsiveness to community credit needs than other qualifying affordable housing activities more directly supporting housing for low- or moderate-income individuals. Accordingly, the agencies will continue to monitor the impact of including mortgage-backed securities in the affordable housing category. Other restrictions or limitations. After carefully considering commenter feedback, the agencies have decided not to limit consideration of mortgagebacked securities to the initial purchase of a mortgage-backed security from the issuer under this component. The agencies sought feedback on limiting consideration to the initial purchase in order to emphasize activities that may more directly serve low- or moderateincome individuals and communities and to reduce the possibility of multiple banks receiving CRA consideration for purchasing the same security. However, the agencies believe that this potential limitation is mitigated as examiners will be able to use information regarding the amount of time a mortgage-backed security was owned by the bank to determine the appropriate amount of consideration. For more information regarding the agencies’ use of performance context, see the section-bysection analysis of § ll.21(d). Complex, Specialized, and Novel Topics in Affordable Housing As previously noted, the agencies sought feedback on how to ensure that the proposed affordable housing category is clearly defined and appropriately inclusive of activities that support affordable housing for low- or moderate-income individuals, including activities that involve complex, specialized, or novel solutions, such as community land trusts, shared equity models, and manufactured housing. The agencies considered the wide array of commenter responses that identified particular activities that help to further access to affordable housing for lowand moderate-income individuals. However, the agencies have declined to revise the affordable housing category to explicitly list such activities, because the agencies believe that many of the activities identified in comments would be eligible for community development consideration under the various components of the affordable housing category. This outcome is consistent with the agencies’ objective for the affordable housing category, which is to create standards and identify E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6654 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations characteristics that may be used to evaluate a broad range of affordable housing activities and programs, both current and future, and identify those that meet the standards for consideration. The following is a discussion of the ways in which several activities cited by commenters are captured within the various affordable housing components or may otherwise receive consideration under the final rule. Manufactured housing. In the NPR, the agencies stated that a loan to a resident-owned manufactured housing community with homes that are affordable to low- or moderate-income individuals could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderateincome individuals. As noted previously, the agencies also requested feedback about the inclusion of manufactured housing in the proposed affordable housing category. The agencies received several comments related to manufactured housing, and commenters provided feedback on a variety of approaches for affordable manufactured housing eligibility. For example, some commenters supported special consideration of financing for affordable manufactured housing that is on tribal land, while other commenters supported a broader approach to include all loans that finance affordable manufactured housing. Some commenters urged the agencies to provide consideration only for residentowned manufactured housing communities or to nonprofit organizations that provide land for manufactured housing. In contrast, other commenters urged the agencies to include consideration for for-profit manufactured home communities, with one commenter suggesting that loans to manufactured housing communities with homes that are affordable to lowor moderate-income individuals should not be restricted to only resident-owned communities, because for-profit entities play an essential role in purchasing older communities and making significant infrastructure repairs, such as roads, sewer, and water. Another commenter suggested that community development consideration should be extended for loans to manufactured home dealers that commit to providing more favorable financing terms to lowor moderate-income buyers. The agencies have considered these comments and recognize that manufactured housing can provide important affordable housing options for low- and moderate-income individuals VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 and families. Nonetheless, the agencies intend and expect that some manufactured housing activity will meet the requirements under a component of affordable housing adopted in the final rule. For example, an acquisition loan made to a manufactured housing community with homes that are affordable to low- or moderate-income individuals could help fill a housing gap and may qualify under final § ll.13(b)(4) as assistance supportive of affordable owner-occupied housing for low- or moderate-income individuals.331 Alternatively, financing provided to a nonprofit, in conjunction with a government program, to develop manufactured housing and buy land for use as affordable rental housing for lowand moderate-income individuals and families could qualify under final § ll.13(b)(1) (rental housing in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy).332 As discussed further in the section-bysection analysis of final § ll.22(d)(1), below, single-family home mortgage loans meeting the HUD code for manufactured housing are generally reportable under HMDA, and will therefore receive consideration under the Retail Lending Test in final § ll.22.333 Shared equity housing programs and community land trusts. In the NPR, the agencies stated that a shared-equity program operated by a nonprofit organization to provide long-term affordable homeownership could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderate-income individuals.334 In addition, the agencies stated that an activity that provides financing for the acquisition of land for a shared equity housing project that brings permanent affordable housing to a community could meet the impact review factor for activities that result in a new community development financing product or service under the Community Development Financing Test or the Community Development Financing Test for Limited Purpose Banks, to the extent that it involves a new strategy to meet a community development need.335 331 Final § ll.13(b)(4) is discussed in greater detail in the section-by-section analysis of § ll.13(b)(4), below. 332 Final § ll.13(b)(1) is discussed in greater detail in the section-by-section analysis of § ll.13(b)(1), below. 333 See HUD Manufactured Home Construction and Safety Standards, 24 CFR part 3280. 334 87 FR 33884, 33897 (June 3, 2022). 335 See 87 FR 33915. PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 The NPR also specifically addressed community land trusts, which typically operate a specific type of shared-equity program. The agencies stated that providing financing to, or a grant for a nonprofit community land trust focused on providing affordable owner-occupied housing to low- or moderate-income individuals could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderateincome individuals.336 Several commenters noted that activities, such as those conducted in coordination with community land trusts, can prevent displacement of vulnerable residents. It is the agencies’ view that shared equity housing programs, including but not limited to community land trust activities, provide opportunities to support long-term affordable housing. Commenters generally supported qualification of these activities under the affordable housing category, with some commenters noting that such activities can make homeownership affordable for low- or moderate-income individuals who might be otherwise unable to afford to purchase a home. The agencies agree that shared equity housing and community land trusts are important tools to promote homeownership. Although the final rule does not create a separate component or prong for qualification of shared equity housing as affordable housing, the agencies highlight that loans, investments, and services involving shared equity programs and community land trusts may be eligible for consideration under final § ll.13(b)(4), when they involve assistance for low- or moderate-income individuals to obtain affordable owneroccupied housing. As another example, to the extent that a community land trust operates rental housing meeting the requirements under final § ll.13(b)(1) or (2), loans, investments, and services to support such housing would qualify for consideration under the applicable component. Moreover, mortgage loans that allow homeowners to purchase a home through these programs may be considered under the Retail Lending Test in final § ll.22, or under the responsive credit product evaluation in the Retail Services and Products Test in final § ll.23.337 Accessory dwelling units (ADUs). Several commenters requested consideration for banks supporting development of ADUs under the affordable housing category. For example, commenters requested 336 See 337 See E:\FR\FM\01FER2.SGM 87 FR 33897. final § ll.22. 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations consideration for loans extended to finance ADUs that are intended to help low- and moderate-income homeowners develop an income-producing property that could offset the cost of a mortgage or rising property taxes, or to encourage affordability by creating additional housing supply.338 One commenter suggested that the agencies provide community development consideration to ADUs and small multifamily buildings and asked the agencies to clarify that banks can receive consideration for loans to support improvements and repairs to existing dwellings, including for small dollar loans and to install accessibility features. As adopted under final § ll.13(b), certain activities related to ADUs could be considered affordable housing, such as those that contribute to the provision of housing affordable to low- and moderate-income individuals and families. For example, a loan to a nonprofit organization that supports the creation of an ADU on the property of a low- or moderate-income homeowner could qualify under final § ll.13(b)(4). Alternatively, a loan or investment in a fund operated in conjunction with a government program to support the construction of ADUs could qualify under final § ll.13(b)(1), if the resulting ADUs were rental housing for low- or moderate-income individuals (and not considered under the Retail Lending Test). Land banks. The NPR did not specifically address the consideration of land banks under the various prongs of the affordable housing category, and a number of commenters requested that the agencies explicitly address land banks and land bank-related activities in the final rule. Commenters stated that land bank-related activities often help to address the need for affordable housing for low- and moderate-income individuals and in low- and moderateincome communities. The agencies recognize that land banks, which are typically established by a government entity or a nonprofit organization, can help to facilitate the development of affordable housing by acquiring and holding land until some future time when it can be developed as affordable housing. The agencies acknowledge that many of these activities could be considered under the affordable housing category if they have the bona fide 338 Accessory dwelling units or ADUs are additional living quarters on single-family lots that are independent of the primary dwelling unit. See HUD, Office of Policy Development and Research, ‘‘Accessory Dwelling Units: Case Study’’ (June 2008), https://www.huduser.gov/portal/ publications/adu.pdf. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 intent and are specifically structured to provide affordable housing for low- and moderate-income individuals, and the agencies believe that these activities could qualify under several components of the affordable housing category under the final rule. For example, a loan to a land bank created by a government entity to hold land for the development of affordable rental housing could qualify under final § ll.13(b)(1). Alternatively, a loan to a land bank operated by a nonprofit organization for the purpose of acquiring land on which to develop and sell single-family housing to low- and moderate-income individuals could qualify under final § ll.13(b)(4). Special purpose credit programs. In the proposal, the agencies sought feedback on whether special purpose credit programs 339 should be listed as an example of a responsive credit product or program that facilitates mortgage and consumer lending targeted to low- or moderate-income borrowers under the Retail Services and Products Test.340 Several commenters instead recommended qualification for these activities under the affordable housing category of community development. In response to these comments, the agencies note that under the final rule, special purpose credit programs can be considered in the evaluation of responsive credit products and services pursuant to final § ll.23(c)(2)(v). In addition, although specific special purpose credit programs are not expressly listed as qualifying programs under the affordable housing category in final § ll.13(b), the agencies recognize that it would be possible for the objectives of specific special purpose credit programs to align with one or more affordable housing category components, and in such cases, these activities may be eligible for consideration within the affordable housing category of community development. For example, a grant to a nonprofit who is implementing a special purpose credit program that provides down payment assistance to low- or moderate-income individuals may qualify for consideration under final § ll.13(b)(4). Down payment assistance. In the NPR, the agencies stated that financing or grants for organizations that provide 339 See HUD, ‘‘Office of General Counsel Guidance on the Fair Housing Act’s Treatment of Certain Special Purpose Credit Programs That Are Designed and Implemented in Compliance with the Equal Credit Opportunity Act and Regulation B’’ (Dec. 6, 2021), https://www.hud.gov/sites/dfiles/GC/ documents/Special_Purpose_Credit_Program_OGC_ guidance_12-6-2021.pdf. 340 87 FR 33966. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 6655 down payment assistance to low- or moderate-income homebuyers could be eligible for community development consideration as an activity that supports affordable homeownership for low- and moderate-income individuals under proposed § ll.13(b)(3).341 Several commenters suggested that the agencies provide consideration for activities that provide down payment assistance to low- and moderate-income individuals. Nonetheless, the agencies note that direct grants and other programs offered by banks that help low- and moderate-income homebuyers make a down payment are eligible for consideration as an activity that supports affordable homeownership for low- and moderate-income individuals under final § ll.13(b)(4), as long as the down payment assistance is not provided as a loan by the bank directly to the owner-occupant of the home. Other suggested housing programs. Commenters requested that the agencies explicitly address many additional activities, including but not limited to home repair for low- and moderateincome individuals and families, supportive housing models, and firstlook homebuyer programs. The agencies have considered these recommendations and acknowledge that there are many types of investments, loans, and services provided by banks in connection with such activities that may qualify under the affordable housing category of community development. As previously noted, many activities recommended by commenters would qualify under one or more of the five affordable housing components adopted in final § ll.13(b), when the activity meets the qualifying criteria and thereby supports affordable housing for low- and moderate-income individuals and families. In addition, to provide increased certainty on what community development activities will qualify for CRA consideration, pursuant to final § ll.14, the agencies will maintain a publicly available, non-exhaustive illustrative list of examples of community development activities that qualify for CRA consideration, including examples of qualifying affordable housing activities. The list will be periodically updated. Final § ll.14 also provides a formal confirmation process through which any bank could request a determination as to whether a proposed community development activity would be eligible for CRA consideration. 341 See E:\FR\FM\01FER2.SGM 87 FR 33897. 01FER2 6656 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Section ll.13(c) Economic Development ddrumheller on DSK120RN23PROD with RULES2 Current Approach Under the current regulation, community development is defined to include ‘‘[a]ctivities that promote economic development by financing businesses or farms that meet the size eligibility standards of the U.S. Small Business Administration Development Company (SBDC) or Small Business Investment Company (SBIC) programs or have gross annual revenues of $1 million or less.’’ 342 Under the current Interagency Questions and Answers, activities qualify as economic development if they meet both a ‘‘size’’ test and a ‘‘purpose’’ test.343 Size test. An institution’s loan, investment, or service meets the ‘‘size’’ test if it finances, directly or through an intermediary, businesses or farms that either meet, as noted, the size eligibility standards of the SBDC or SBIC programs, or have gross annual revenues of $1 million or less.344 The term ‘‘financing’’ is considered broadly and includes technical assistance that readies a business that meets the size eligibility standards to obtain financing.345 Currently, small business loans and small farm loans that meet the definition of ‘‘loans to small businesses’’ or ‘‘loans to small farms,’’ based on the Call Report definitions—loans with original amounts of $1 million or less to businesses and loans with original amounts of $500,000 or less to farms 346—are generally evaluated as retail loans and not as community development loans. Loans that exceed these amounts, as applicable, can be considered as community development loans if the business or farm borrower either meets the size eligibility standards of the SBDC or SBIC programs or has gross annual revenues of $1 million or less. Purpose test. A bank’s loans, investments, or services can meet the ‘‘purpose’’ test if they ‘‘promote economic development’’ by supporting either: (1) Permanent job creation, retention, and/or improvement: 342 See current 12 CFRll.12(g)(3). See also 13 CFR 120.10 (SBDC program) and 13 CFR part 107 (SBIC program). 343 See Q&A § ll.12(g)(3)–1. 344 See id. 345 See id. 346 See current 12 CFR ll.12(v) (defining a small business loan as a loan included in ‘‘loans to small businesses’’ as defined in the instructions for preparation of the Call Report). See also 12 CFR ll.12(w) (defining a small farm loan as a loan included in ‘‘loans to small farms’’ as defined in the instructions for preparation of the Call Report). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 • For low- or moderate-income persons, in low- or moderate-income census tracts, in areas targeted for redevelopment by Federal, State, local, or tribal governments; • By financing intermediaries that lend to, invest in, or provide technical assistance to start-ups or recently formed small businesses or small farms; or • Through technical assistance or supportive services for small businesses or farms, such as shared space, technology, or administrative assistance; 347 or (2) Federal, State, local, or tribal economic development initiatives that include provisions for creating jobs or improving access by low- or moderateincome persons to jobs or to job training or workforce development programs.348 The agencies will presume that loans, investments, or services in connection with the following specific government programs promote economic development, thereby satisfying the purpose test: SBDCs, SBICs, USDA Rural Business Investment Companies 349 (RBICs), New Markets Venture Capital Companies,350 NMTCeligible Community Development Entities 351 (CDEs), or CDFIs that finance small businesses or small farms.352 Currently, an intermediate small bank that is not required to report small business or small farm loans may opt to have its small business and small farm loans considered as community development loans, as long as they meet the definition of community development. An intermediate small bank that opts to have such small business and small farm loans considered as community development loans cannot also choose to have these loans evaluated under the current lending test.353 The Agencies’ Proposal The agencies proposed several revisions to the economic development category of community development that were intended to provide clarity to stakeholders about the activities that qualify under this category and to encourage activities supportive of small businesses and small farms. Specifically, the agencies proposed that the economic development category of community development would comprise three types of activities: Q&A § ll.12(g)(3)–1. id. 349 See 7 CFR 4290.50. 350 See 13 CFR part 108. 351 See 26 U.S.C. 45D(c). 352 See Q&A § ll.12(g)(3)–1. 353 See Q&A § ll.12(h)–3. 347 See 348 See PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 • Activities undertaken consistent with Federal, State, local, or tribal government plans, programs, or initiatives that support small businesses, as defined in the plans, programs, or initiatives. This prong expressly included lending to, investing in, or providing services to an SBDC, SBIC, New Markets Venture Capital Company, qualified CDE, or RBIC (proposed § ll.13(c)(1)). • Support for financial intermediaries that lend to, invest in, or provide technical assistance to businesses or farms with gross annual revenues of $5 million or less (proposed § ll.13(c)(2)); or • Providing technical assistance to support businesses or farms with gross annual revenues of $5 million or less, or providing services such as shared space, technology, or administrative assistance to such businesses or farms or to organizations that have a primary purpose of supporting such businesses or farms (proposed § ll.13(c)(3)). Gross annual revenue threshold for small businesses and small farms under economic development. The agencies proposed alternative size standards for defining small businesses and small farms, as discussed in the section-bysection analysis of § ll.12.354 Specifically, the agencies proposed a gross annual revenue threshold for the businesses and farms supported under proposed § ll.13(c)(2) and (3) of $5 million or less. For government-related support of small businesses and small farms, the size standards of the relevant government plan, program, or initiative would apply, with the proposed $5 million gross annual revenue threshold applying in the absence of a definition in the plan, program, or initiative. As discussed in the proposal, the $5 million size standard was intended in part to align the meaning of small business and small farm across the CRA regulation, including under the proposed Retail Lending Test, with the definition of small business under the CFPB’s Section 1071 Proposed Rule, subsequently adopted in the Section 1071 Final Rule. Purpose of job creation, retention, and improvement for low- and moderateincome individuals under economic development. Under the proposal, the current purpose test described above would not be required for loans, investments, and services to qualify as supporting economic development, as long as the proposed criteria in 354 See final § ll.12 (‘‘small business’’ and ‘‘small farm’’ definitions); see also, e.g., final § ll.22(d) and the accompanying section-bysection analysis. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations proposed § ll.13(c)(1), (2), or (3) were met. The agencies requested feedback on whether the proposed economic development category should retain a separate component of economic development to consider activities that support job creation, retention, and improvement for low- and moderateincome individuals. Moreover, the agencies sought feedback on whether activities conducted with businesses or farms of any size and that create or retain jobs for low- or moderate-income individuals should be considered. Additionally, the agencies requested feedback on criteria that could be included to demonstrate that the activities satisfied this component and that ensure activities are not qualified solely because they offer low wage jobs. Evaluation of direct loans to small businesses and small farms. As discussed in greater detail in the section-by-section analysis of § ll.22, the agencies proposed that a bank’s reported loans to small businesses and small farms, regardless of the loan amount, generally would be evaluated under the proposed Retail Lending Test.355 Relatedly, under proposed § ll.13(c), the agencies proposed that reported loans directly to small businesses and small farms would not be included in the economic development category of community development and, therefore, would not be considered in the proposed Community Development Financing Test. Consistent with current guidance, the agencies proposed that intermediate banks would retain flexibility to have certain retail loans—small business, small farm, and home mortgage loans— be considered as community development loans. This option was proposed to be available to an intermediate bank if those loans have a primary purpose of community development and are not required to be reported by the bank (under HMDA or CRA).356 The agencies proposed this approach to reflect the agencies’ belief that loans to small businesses and small farms are primarily retail lending products for banks, and therefore would be more appropriately considered under the proposed Retail Lending Test. Under the proposed Retail Lending Test, described in detail in the section-by-section analysis of § ll.22 below, small business loans and small farm loans 355 See proposed § ll.22(a); see also, e.g., final § ll.22(d) and the accompanying section-bysection analysis. 356 See proposed § ll.22(a)(5)(iii); compare with Q&A § ll.12(h)—3 (small business, small farm, home mortgage, and consumer loan consideration for intermediate small banks). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 would be evaluated based on the distribution metrics and would not be subject to additional requirements such as the current community development criterion for economic development.357 Accordingly, the proposed revisions to the economic development category of community development were designed to emphasize other activities that would promote access to financing for small businesses and small farms, as discussed in greater detail below. However, as also discussed further below, the agencies also sought feedback on whether the proposed approach to evaluating direct small business and small farm lending solely under the Retail Lending Test would sufficiently recognize activities that support job creation, retention, and improvement for low- or moderateincome individuals and communities. Under the proposal, for retail loans evaluated under the proposed Retail Lending Test, the agencies proposed to transition from the current CRA definitions of small business loans and small farm loans to the definitions of loans to small businesses and small farms with gross annual revenues of $5 million or less—with the focus on the size of the small business or small farm, not the size of the loan. Hence, whereas currently, as noted, small business and small farm loans are generally evaluated under the lending test if they are loans with origination amounts of $1 million or less to a business (of any size) and loans with origination amounts of $500,000 or less to a farm (of any size),358 small business and small farm 357 As further discussed in the section-by-section analysis of final § ll.42, under the current rule, for each census tract in which a bank (other than a small bank) originated or purchased a small business or small farm loan, the bank must report the aggregate number and amount of the loans with an amount at origination of: (1) $100,000 or less; (2) more than $100,000 but less than $250,000; and (3) more than $250,000. See current 12 CFR ll.42(b)(1)(i) through (iii). These banks must also report small business and small farm loans to businesses and farms with gross annual revenues of $1 million or less (based on the revenue size used by the bank in making the credit decision). See current 12 CFR ll.42(b)(1)(iv). Subject to changes discussed in the proposal pertaining to the transition to using section 1071 data, the proposed Retail Lending Test distribution metrics would evaluate a bank’s small business loans and small farm loans to businesses and farms with gross annual revenues of less than $1 million. The proposal also would evaluate loans to small businesses and small farms of more than $250,000 but less than or equal to $1 million, and of $250,000 or less. See proposed § ll.22(d); see also final § ll.22(e) and the accompanying section-bysection analysis. See also, e.g., current 12 CFR ll.12(g)(3) and Q&A § ll.12(g)(3)–1. 358 See 12 CFR ll.12(v) (defining a small business loan as a loan included in ‘‘loans to small businesses’’ as defined in the instructions for preparation of the Call Report). See also 12 CFRll.12(w) (defining a small farm loan as a loan PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 6657 lending evaluated under the proposed Retail Lending Test would consider loans of any size, as long as they were to businesses or farms with gross annual revenues of $5 million or less. As proposed, the transition to this evaluation approach for small business and small farm lending would be based on the availability of data under the CFPB Section 1071 Final Rule on small business loan data collection. In the interim, to evaluate small business and small farm loans under the Retail Lending Test, the agencies proposed to use the current definitions of small business loan and small farm loan.359 The agencies sought feedback on this aspect of the proposal and on whether to continue considering bank loans to small businesses and small farms that currently qualify under the economic development criteria as community development loans during the period between when the final rule becomes applicable and when the agencies begin to use section 1071 data for bank CRA evaluations. Comments Received Many commenters provided a variety of views on the proposal overall and offered feedback on the issues on which the agencies specifically requested comment, as discussed in further detail below. Several commenters expressed general support for the proposed changes to the economic development category and the proposed components. Many commenters expressed concerns, however, that the proposed changes to the economic development category would limit the activities that would have qualified under the current rule for this category and/or limit the range of small businesses that could be supported. Generally regarding a ‘‘size’’ and ‘‘purpose’’ test for the economic development category of community development, multiple commenters supported retaining the current size and purpose tests because, in these commenters’ view, these tests highlight women- and minority-owned businesses. A commenter suggested that the ‘‘size’’ test and ‘‘purpose’’ test be retained but that a qualifying activity under the economic development category should be required to satisfy only one of these tests, not both. Comments discussed below address the following topics regarding the proposed economic development category of community development: (1) proposed size standards for small included in ‘‘loans to small farms’’ as defined in the instructions for preparation of the Call Report). 359 See 12 CFR ll.12(v) (defining small business loan) and (w) (defining small farm loan). E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6658 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations businesses and small farms; (2) the proposal to eliminate the existing ‘‘purpose’’ test for qualifying economic development activities; (3) criteria to demonstrate job creation, retention, and improvement; and (4) the proposed evaluation of direct loans to small businesses and small farms. As relevant, comments on these topics are also included in the section-by-section analysis of the individual components of the final rule (final § ll.13(c)(1) through (3)). Gross annual revenue threshold for small businesses and small farms under economic development. Numerous commenters addressed the proposal to include a gross annual revenue threshold for businesses and farms that could be considered under the economic development category. Some commenters generally supported the proposed size threshold of gross annual revenues of $5 million or less for businesses and farms, with some asserting the proposed size threshold would allow a greater number of small businesses to be supported under this category. A few commenters supported the $5 million gross annual revenue threshold but suggested that support for intermediaries that target the smallest businesses (with gross annual revenues of $1 million or less) should receive enhanced credit, while another commenter expressly supported using the $5 million gross annual revenue threshold for the intermediary prong (proposed § ll.13(c)(2)). On the other hand, many commenters opposed or expressed concerns about the proposed size thresholds for small businesses and small farms. Commenters generally expressed concerns that the proposed approach would eliminate credit or stifle growth for many businesses, including minority-owned businesses and midsized companies, and would limit or omit many projects that impact low- and moderate-income areas or individuals. A commenter asserted that the proposed $5 million gross annual revenue threshold failed to account for the significant positive impact larger businesses have on job creation, retention, and improvement. Some commenters suggested maintaining the current ‘‘size’’ standards to qualify activities that support small businesses and small farms under the economic development category, with some expressing concerns that activities directly supporting small businesses that meet the size eligibility standards established by the SBA and affiliated programs (but that have gross annual revenues of greater than $5 million), as well as support for the financial VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 intermediaries assisting these businesses, would no longer qualify under this proposed economic development category. A commenter asserted that setting a specific revenue threshold for small businesses fails to recognize differences among businesses across different industries and suggested that the agencies adopt a business size index and standard like the one used by the SBA.360 A few commenters asserted that the proposed threshold of $5 million in gross annual revenues would be too low. A few other commenters expressed concern that the proposal did not provide a clear rationale for the proposal to use a $5 million gross annual revenues threshold for small businesses and farms supported under the proposed economic development category. One commenter recommended that banks of any size should be allowed to receive consideration for loans to any small business or small farm loan, regardless of gross annual revenue, under any category of community development.361 Some commenters asserted that the proposed threshold of $5 million in gross annual revenues for small businesses and small farms would be too high. A commenter suggested that the size standard should be $1 million gross annual revenues or less, consistent with current CRA small business loan reporting, without consideration for the size standards established by the SBA and affiliated programs and noted that most small, minority-owned, and women-owned businesses have gross annual revenues of $1 million or lower. Several commenters indicated that a $5 million gross annual revenue threshold would create a disincentive for banks to support very small businesses and minority-owned businesses. Another commenter suggested that a size standard of $750,000 in gross annual revenues would target an appropriate business size, particularly in rural areas, but also supported retaining the flexibility to use the size standards established by the SBA for economic development loans. A few commenters suggested that, if the agencies adopt the small business and small farm gross annual revenue threshold as proposed, exceptions should also be adopted. A commenter suggested that activities that support minority-owned businesses, including those with more than $5 million in gross 360 See, e.g., SBA, ‘‘Table of Size Standards’’ (effective March 17, 2023), https://www.sba.gov/ document/support-table-size-standards. 361 This commenter specifically suggested merging the proposed economic development category with the proposed revitalization category. See proposed § ll.13(e). PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 annual revenues, should also qualify without having to document job creation, retention, or improvement. Another commenter similarly suggested that any loan or investment in a certified minority business enterprise should qualify. Purpose of job creation, retention, and improvement for low- and moderateincome individuals under economic development. The agencies received many comments related to the proposal to eliminate the ‘‘purpose’’ test from the economic development category of community development. Some commenters supported the expansion of possible eligible loan purposes; for example, a commenter favorable noted that the removal of the jobs-focused ‘‘purpose’’ test would enable banks to receive CRA consideration for making loans to small businesses or farms for new equipment or facilities that could support their growth. Another commenter asserted that the proposal would allow a greater number of small businesses to be supported, expressing the view that the ‘‘purpose’’ test required by current CRA regulations under the economic development definition limited support for some small businesses, particularly sole proprietors that generally do not create jobs for low- and moderate-income individuals, and therefore do not meet the current ‘‘purpose’’ test standard. A commenter stressed that an important reason to retain the existing ‘‘purpose’’ test is that it provides consideration for jobs to low- and moderate-income individuals and communities as well as areas targeted for revitalization. Many commenters supported retaining job creation, retention, and improvement as a component of the economic development category. Some commenters raised concerns that the proposed approach to evaluate loans to small businesses and farms under the Retail Lending Test would not sufficiently recognize job creation, retention, and improvement benefits for low- and moderate-income individuals. Commenters expressed concern that eliminating the current purpose test focused on job creation, retention or improvement for low- and moderateincome individuals and would disincentivize banks from investing in certain funds, programs, and other activities that focus on these objectives. A commenter noted that retaining the purpose requirement would improve transparency and noted that they did not believe demonstrating that a loan’s purpose is to create, retain, or improve jobs is difficult. Several commenters highlighted that the requirements for qualifying a Public Welfare Investment E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations (PWI) include demonstrating that the investment is designed ‘‘primarily’’ to promote the public welfare, including the welfare of low- or moderate-income communities or families (such as by providing housing, services, or jobs) 362 and that the emphasis on job creation should be similarly retained in the economic development category of community development under CRA. A few commenters expressed concerns about the possibility of materially different standards for community development investments versus permissible PWIs. Many commenters also suggested that the economic development category include consideration for loans and investments to small businesses and small farms that demonstrate job creation, retention, and improvement not only for low- and moderate-income individuals, but also in low- and moderate-income areas and areas targeted for redevelopment by Federal, State, local, or tribal governments, consistent with current guidance.363 Several commenters suggested that loans to or investments in any size small business or small farm that could demonstrate job creation, retention, or improvement for low- and moderateincome individuals should be considered. One of these commenters also suggested that additional consideration should be given to activities that support businesses owned by persons of color, women or veterans, and small family-owned farms. Finally, a commenter suggested that if the jobsfocused requirement were not included in the economic development category, then it should be considered as part of the impact review for the Community Development Financing Test.364 In contrast, some commenters viewed a separate component for activities supporting job creation, retention, or improvement as unnecessary. For example, a commenter thought that the proposed approach for considering direct loans to small businesses and small farms under the Retail Lending Test was simpler and that other proposed components for the economic development category would support job creation and retention. Criteria to demonstrate job creation, retention, and/or improvement for lowor moderate-income individuals. Commenters also provided input on criteria that could be included to 362 See 12 U.S.C. 24(Eleventh) (OCC), 12 U.S.C. 338a (Board), 12 CFR 345.12(g)(1) through (4), (h)(1), (i)(1), and (t)(1) (FDIC). 363 See Q&A § ll.12(g)(3)–1. 364 See proposed §§ ll.15 and ll.24, discussed in the section-by-section analyses of final §§ ll.15 and ll.24. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 demonstrate that the purpose of an activity is job creation, retention, or improvement for low- or moderateincome individuals. Many commenters highlighted the CRA Interagency Questions and Answers and noted that banks have successfully followed this guidance to provide examiners with information that demonstrates the purpose of the activity to be job creation, improvement, or retention and that this approach should be sufficient. A commenter suggested any documentation about the type of job, training offered or outreach to low- and moderate-income individuals or areas should be considered. Commenters provided suggestions on resources that a bank can use to demonstrate that the purpose of an activity is for job creation, retention, or improvement for low- or moderateincome individuals. For example, suggestions included relying on the recipient’s credit profile, public websites, such as glassdoor.com, and criteria established by the HUD Community Development Block Grant Program.365 A commenter suggested that if the anticipated or documented wages exceed 80 percent of area median income, the location of the job should be considered, particularly if the company has committed to hire from a low- or moderate-income or underserved area. This commenter did not support the development of a prescriptive standard or requirement for documentation, however, and suggested that a bank should be allowed to demonstrate, with or without documentation from the business, that the activity is likely to create or retain jobs. Many commenters on this topic offered specific views on criteria that could be considered to evaluate the quality of the job. Commenters offered suggestions examiners should consider, such as the type of job, compensation, access to job training and other support for career advancement as well as quality specific factors, such as whether the job provides at least three employee benefits including health insurance, dental insurance, 401(k) or other retirement plan, sick leave, vacation leave, and disability, as well as consideration of whether the job offers at least a living wage and cited the ‘‘living wage calculator’’ developed by the Massachusetts Institute of 365 See 24 CFR 570.208(a)(4). The comment cited HUD Office of Block Grant Assistance, ‘‘Basically CDBG,’’ https://files.hudexchange.info/resources/ documents/Basically-CDBG-Chapter-3-Nat-Obj.pdf. PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 6659 Technology.366 A commenter suggested using the same standards for assessing job quality as the Community Economic Development Program within the Office of Community Services at the U.S. Department of Health and Human Services 367 to ensure that activities are not given credit if they offer only low wage jobs. Several commenters did not support considering wages provided by the job as a measure of job quality. These commenters asserted that all jobs are valuable and should be considered regardless of the wages offered and indicated that jobs that offer lower wages may still be important entry level jobs. Additionally, a commenter noted that jobs created by small businesses provide important opportunities in historically marginalized communities and stated that the importance of creating jobs of all salary levels should be recognized. Evaluation of direct loans to small businesses and small farms. Commenters had differing views on whether loans made by banks directly to small businesses and small farms should be considered under the economic development category of community development or should only be considered under the Retail Lending Test, as proposed. Some commenters raised concerns that the proposed approach to evaluate loans to small businesses and farms under the Retail Lending Test would not sufficiently recognize job creation, retention, and improvement benefits for low- to moderate-income individuals. For example, a commenter supported continuing to include loans to small businesses and small farms that satisfy the size and purpose tests as community development loans, asserting that considering them under the Retail Lending Test would fail to incentivize small business lending. Another commenter expressed concerns that this approach would limit community development activities not associated with government programs, such as activities undertaken through nonprofit affiliates of CDFIs, that CDFIs can leverage to meet economic development goals without some of the challenges of participating in a government program. On the other hand, some commenters suggested that a bank should have the option of choosing whether to have a loan to a small business or small farm 366 See Massachusetts Institute of Technology, ‘‘Living Wage Calculator,’’ https:// livingwage.mit.edu/. 367 See U.S. Dept. of Health & Human Svcs., Office of Community Svcs., ‘‘Community Economic Development (CED),’’ https://www.acf.hhs.gov/ocs/ programs/ced. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6660 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations considered either under the proposed Community Development Financing Test or the proposed Retail Lending Test. A commenter recommended that the proposed flexibility for intermediate banks to have certain retail loans considered community development loans should be extended to large banks with under $10 billion in assets. A few commenters suggested that, in general, loans to small businesses or small farms should be considered under the proposed Community Development Financing Test if they have a purpose of community development. Some commenters asserted that the proposed approach would sufficiently recognize loans to small businesses and small farms and that may also support job creation, retention, and improvement for low- or moderateincome individuals or communities. A commenter asserted that the proposed approach would be more inclusive of all small business lending compared to the current approach, noting that only loans to small businesses that are greater than $1 million and that also satisfy the size and purpose test qualify as community development loans. Another commenter expressed the view that removing the requirement that activities demonstrate job creation, retention, and improvement for low- and moderateincome individuals would incentivize banks to provide more support to microbusinesses. Commenters provided several other suggestions for how direct lending to small businesses and small farms that demonstrates job creation, retention or improvement for low- and moderateincome individual could be considered if not included in the economic development category. A few commenters suggested that the agencies include a qualitative review of loans considered under the Retail Lending Test to determine whether they demonstrate job creation, retention, or improvement for low- and moderateincome individuals and communities. Another commenter suggested that only loans to small businesses and small farms that demonstrate job creation, retention, or improvement for low- and moderate-income individuals or areas should be considered under the proposed Retail Lending Test. This commenter further recommended that, of those loans, only loans that can demonstrate the creation of ‘‘good jobs,’’ supporting economic mobility, such as those that provide apprenticeships or shared equity, should qualify. A few commenters suggested that the agencies eliminate the exclusion set forth in proposed § ll.24(a)(2)(i) for considering retail loans with a VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 community development purpose under the Community Development Financing Test with commenters suggesting that this could produce unintended results once the agencies replace the CRA definition of ‘‘small business loan’’ with a definition based on the CFPB’s Section 1071 Final Rule. One of the commenters explained that many community development loans are made to special purpose, startup, or nonprofit entities that do not have gross annual revenues of more than $5 million. The commenter suggested that the proposed Retail Lending Test would incentivize banks to distribute their small business loans in a particular way but would not provide incentives for banks to make small business loans that satisfy the community development definition, which can be especially impactful loans. The commenter further explained that there would be no ‘‘double counting’’ of small business loans if the Community Development Financing Test allowed for certain small business loans to qualify as community development loans, since the Retail Lending Test and the Community Development Financing Test would evaluate different aspects of the same qualifying small business loan. A commenter suggested that, for direct loans to small businesses and small farms, job creation, retention, or improvement should be considered as part of a qualitative review under the proposed Retail Services and Products Test for large and intermediate banks 368 and suggested that for small banks, this criterion could be considered as part of the qualitative review under the Retail Lending Test. Another commenter also suggested that for large banks, job creation, retention, and improvement could be considered as part of a qualitative review under the proposed Retail Services and Products Test, but for intermediate and small banks it could be considered as part of a qualitative review under the Retail Lending Test. finalized, the provisions for this category are intended to provide greater clarity, to promote activities that support small businesses and small farms, and to recognize the role of intermediaries that provide assistance to small businesses and small farms. Final § ll.13(c) establishes three components for the economic development category. For clarity and overall organization of this section, the final rule includes section headers for each of these three components. Under the final rule, the three components are: • Government-related support for small businesses and small farms (final § ll.13(c)(1)), which includes activities undertaken in conjunction or in syndication with Federal, State, local, or tribal governments and comprises two subcomponents: Æ Loans, investments, and services other than direct loans to small businesses and small farms (final § ll.13(c)(1)(i)); and Æ Direct loans to small businesses and small farm (final § ll.13(c)(1)(ii)). • Intermediary support for small businesses and small farms (final § ll.13(c)(2)), which provides for support to small businesses or small farms through intermediaries. • Other support for small businesses and small farms (final § ll.13(c)(3)), which addresses for other assistance to small businesses or small farms, such as financial counseling, shared space, technology, or administrative assistance, to small businesses or small farms. Relative to the proposal, the final rule broadens the scope of eligible activities under the economic development category and expands the range of small businesses and small farms that could be supported, while providing greater clarity to stakeholders regarding the economic development category. Each component of the final rule is discussed in turn in the section-by-section analysis below. Final Rule Section ll.13(c)(1) GovernmentRelated Support for Small Businesses and Small Farms Overview The Agencies’ Proposal The agencies are adopting, with revisions, the proposed economic development category in § ll.13(c). As Under proposed § ll.13(c)(1), activities ‘‘undertaken consistent with Federal, [S]tate, local, or tribal government plans, programs, or initiatives that support small businesses or small farms as those entities are defined in the plans, programs, or initiatives’’ would be considered community development loans as discussed in greater detail below.369 Consistent with current interagency 368 Under the proposal, small banks and intermediate banks would not be subject to the proposed Retail Services and Products Test. See proposed § ll.21(b)(2) and (3). As discussed in the section-by-section analysis of § ll.21, the agencies proposed that small banks would be evaluated under the performance standards for small banks under proposed § ll.29(a), but could opt to be evaluated under the Retail Lending Test. See proposed § ll.21(b)(3); see also final § ll.21(a)(3). PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 369 Proposed E:\FR\FM\01FER2.SGM § ll.13(c)(1). 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations guidance,370 this proposed provision was intended to encourage support for highly responsive activities that are relevant to small businesses and small farms, as well as coordination among banks, government agencies, and other program participants. The proposed gross annual revenue threshold of $5 million or less for qualifying businesses or farms would not be required for activities that support business or farms through these government plans, programs, or initiatives, or through the specified entities. Instead, the size standards used by the respective government plans, programs, or initiatives to qualify business or farms as small would apply.371 The agencies also proposed to specify that lending to, investing in, or providing services to an SBDC, SBIC, New Markets Venture Capital Company, qualified CDE, or RBIC would qualify as economic development. With certain technical differences, this aspect of the proposal generally would memorialize existing guidance which presumes that activities with these entities promote economic development.372 By including this list in the proposed regulation, the agencies intended to provide greater clarity and encourage the continued participation in, and support of, programs offered through these key providers of small business and small farm financing. New Markets Venture Capital Companies, as well as Federal, State, local, or tribal government plans or programs.373 Commenters also suggested that loans and investments should be considered if they finance, either directly or through an intermediary, businesses or farms that either meet the size eligibility standards of the SBDC or SBIC programs or have $5 million in gross annual revenues or less. On the other hand, a commenter objected to the proposal to rely on the small business and small farm size standards of the applicable government plan, program, or initiative, asserting that government programs often do a poor job of targeting businesses owned by low- and moderate-income individuals. This commenter urged the agencies to adopt a $5 million maximum gross annual revenue threshold for small businesses and farms under this component, asserting that this would be important for consistency in small business and small farm size standards across the regulation. A few commenters expressed concerns about the presumption of qualifications for SBICs. For example, one of these commenters raised doubts as to how well SBICs serve targeted groups and suggested that SBICs should not automatically garner CRA credit. Comments Received Final Rule The agencies are finalizing proposed § ll.13(c)(1) with revisions to the proposed activities undertaken with government plans, programs or initiatives for specificity and clarity. Final § ll.13(c)(1) adopts ‘‘Government-related support for small businesses and small farms’’ as the paragraph header for this component; this provision encompasses loans, investments, or services that are undertaken in conjunction or in syndication with Federal, State, local, or tribal government plans, programs, or initiatives. Such loans, investments, or services can be made or provided directly or indirectly to or in small businesses or small farms, as described below. ddrumheller on DSK120RN23PROD with RULES2 Several commenters supported § ll.13(c)(1) as proposed, with multiple commenters specifically supporting the agencies’ inclusion of SBDCs in this component of the economic development category. A few commenters supported relying on the size standards used by the respective government programs to qualify activities, with a commenter noting that the proposal to allow consideration for activities that meet the size standards of the applicable government program would allow support for some larger businesses and would accommodate some level of intentional job creation. Commenter feedback also included a suggestion that the agencies include an express ‘‘presumption’’ of qualification for CRA credit for activities in connection with SBDCs, SBICs, RBICs, 370 See, e.g., Q&A § ll.12(g)(3)–1 and Q&A § ll.12(g)(4)(i)–1. 371 See id. 372 See Q&A § ll.12(g)(3)–1 (stating that ‘‘the agencies will presume that any loan or service to or investment in a SBDC, SBIC, [RBIC], New Markets Venture Capital Company, New Markets Tax Credit-eligible [CDE], or [CDFI] that finances small businesses or small farms, promotes economic development’’). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 373 As noted earlier in this section-by-section analysis, the proposal specifies that ‘‘[e]conomic development activities are: (1) Activities undertaken consistent with Federal, State, local, or tribal government plans, programs, or initiatives that support small businesses or small farms as those entities are defined in the plans, programs, or initiatives, . . . including lending to, investing in, or providing services to an [SBCD] (13 CFR 120.10), [SBIC] (13 CFR 107), New Markets Venture Capital Company (13 CFR 108), qualified [CDE] (26 U.S.C. 45D(c)), or [RBIC] (7 CFR 4290.50).’’ See also Q&A § ll.12(g)(3)–1. PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 6661 The final rule under § ll.13(c)(1) replaces the proposed rule text referencing activities undertaken ‘‘consistent with’’ Federal, State, local, or tribal government, plans, programs, or initiatives with the phrase ‘‘in conjunction or in syndication with’’ these plans, programs, or initiatives. In this way, the final rule emphasizes the intended link between loans, investments, or services that will qualify as economic development under this prong with Federal, State, local, or tribal government, plans, programs, or initiatives. The final rule adds ‘‘in syndication with’’ for clarity, to refer to those loans extended to a single borrower by a group of entities. The agencies believe that qualifying activities in conjunction with or in syndication with government plans, programs, or initiatives helps ensure that activities are responsive to the credit needs of small businesses and small farms, in alignment with the goals of CRA. In this regard, the agencies believe that government plans, programs, or initiatives are general indicators of community needs, and thus provide a mechanism for ensuring that activities are intentional and support the needs of small businesses and small farms. In addition, the nexus to government plans, programs, and initiatives provides transparency regarding program requirements and certainty for qualification, which the agencies believe is important for all stakeholders. As noted above and as described below, final § ll.13(c)(1) is organized into two subcomponents: loans, investments, and services other than direct loans to small businesses and small farms (final § ll.13(c)(1)(i)); and direct loans to small businesses and small farms (final § ll.13(c)(1)(ii)). Section ll.13(c)(1)(i) Loans, Investments, and Services Other Than Direct Loans to Small Businesses and Small Farms The final rule in § ll.13(c)(1)(i) provides that loans, investments, and services, excluding direct loans to small businesses and small farms, that are undertaken in conjunction or in syndication with Federal, State, local, or tribal governments are eligible for consideration as economic development. Consistent with the proposal, under final § ll.13(c)(1)(i), loans, investments, and services may support small businesses or small farms in accordance with how small businesses and small farms are defined in the applicable plan, program, or initiative. If the government plan, program, or initiative does not identify E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6662 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations a standard for the size of the small businesses or small farms supported by the plan, program, or initiative, the small businesses or small farms supported must meet the definition of small business or small farm in final § ll.12. Also consistent with the proposal, loans to, investments in, or services provided to the following are presumed to meet the criteria of final § ll.13(c)(1)(i): SBICs; New Markets Venture Capital Companies; qualified CDEs; and RBICs. Under final § ll.13(c)(1)(i), for example, an investment in a microloan program operated by a local government could be considered provided that this activity met the required criteria. The agencies are finalizing the provision regarding certain Federal programs to memorialize current interagency guidance and, as noted in the proposal, provide greater clarity and encourage the continued participation in, and support of, plans, programs or initiatives offered through these key providers of small business and small farm financing.374 The agencies understand that some commenters oppose the express presumption of qualification for activities in connection with SBICs because of concerns regarding how well SBICs serve certain groups of business owners, but the agencies believe that it is important to recognize them in the final rule because they offer an opportunity for banks to provide an important source of capital to grow small businesses.375 The agencies note that specifying SBICs and other entities in the final rule provides greater clarity and certainty about the types of loans, investments and services that may receive consideration under this subcomponent. The final rule also provides consistency for stakeholders with the current framework. As noted, this subcomponent of the economic development final rule generally memorializes current interagency guidance, which provides that any loan or service to or investment in an SBDC, SBIC, RBIC, New Markets Venture Capital Company, NMTC-eligible CDE, or CDFI that finances small businesses or small farms, is presumed to promote economic development. 376 As the proposal, final § ll.13(c)(1)(i) does not mention CDFIs, as activities with CDFIs are considered under a separate category Q&A § ll.12(g)(3)–1. generally, SBA, ‘‘The Small Business Investment Company (SBIC) Program Overview’’ (Oct. 1, 2018), https://www.sba.gov/sites/sbagov/ files/2019-02/2018%20SBIC%20Executive%20 Summary.pdf. 376 See Q&A § ll.12(g)(3)–1. 374 See 375 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 the government program or as provided in the definition for small business and small farms in § ll.12 will capture activities that support a broad range of small businesses and small farms, while providing clarity. The agencies also note that support for small businesses and small farms under final § ll.13(c)(2) and (3) is more targeted, to small businesses and small farms with gross annual revenues of $5 million or less, which the agencies believe will appropriately focus those activities on smaller businesses. In addition, the impact and responsiveness review under final § ll.15 includes as a review factor support for small businesses or small farms with gross annual revenues of $250,000 or less.378 of community development in the final rule.377 Size eligibility standard under final § ll.13(c)(1)(i). As noted, for this subcomponent of economic development, the agencies are adopting a size standard for businesses or farms that are supported by government plans, programs, or initiatives that aligns with relevant size standards for small businesses and small farms intended to be the beneficiaries of the applicable government plan, program, or initiative. The size standard could be lower or higher than the $5 million gross annual revenue threshold that would otherwise apply under the category, or it could be expressed in terms of employee size or some other measure. However, if the government plan, program, or initiative does not define a size standard for small businesses or small farms that it supports then the gross annual revenue consistent with the small business and small farm definitions in § ll.12 (gross annual revenue of $5 million or less), would apply. The agencies are not adopting a maximum gross annual revenue threshold of $5 million for all small businesses and small farms under § ll.13(c)(1)(i) because the agencies believe that standards vary across different government plans, programs, and initiatives to address various community development and small business or farm needs; the standards in the final rule are designed to accommodate the ways in which these plans, programs, and initiatives may be tailored to respond to community needs. The agencies understand that government plans, programs, and initiatives will likely identify the standard for the size of business or farm supported and believe it is appropriate to maintain flexibility. However, for clarity, the final rule provides that, in the absence of a size standard established by the government program, plan, or initiative, the business or farm supported by the government program, plan, or initiative must meet the definition of ‘‘small business’’ or ‘‘small farm’’ as defined in § ll.12. The agencies considered the feedback provided by commenters advocating for a higher or lower threshold for various reasons, including views that the proposed approach would eliminate credit or stifle growth for many businesses or would create a disincentive for banks to support very small businesses and minority-owned businesses. The agencies, however, believe the size standards established by Section ll.13(c)(1)(ii) Direct Loans to Small Businesses and Small Farms The agencies are adopting a second subcomponent in final § _.13(c)(1)(ii) to provide consideration of certain direct loans to small businesses and small farms. Specifically, under final § ll.13(c)(1)(ii), the economic development category of community development would include loans by a bank directly to businesses or farms, including, but not limited to, loans in conjunction or syndicated with an SBDC or SBIC, that meet the following size and purpose criteria: • Size eligibility standard. The loans must be to businesses and farms that meet the size eligibility standards of the SBDC or SBIC programs or that meet the definition of small business or small farm in § ll.12 (final § ll.13(c)(1)(ii)(A)). • Purpose test. The loans must have the purpose of promoting permanent job creation or retention for low- or moderate-income individuals or in lowor moderate-income census tracts (final § ll.13(c)(1)(ii)(B)). The agencies considered broad commenter feedback that loans made to small businesses and small farms should be considered under economic development and that a ‘‘size’’ and ‘‘purpose’’ test should be retained for various reasons. The agencies understand commenter concerns that certain loans to small businesses do have a community development purpose and should be considered as community development loans. The agencies are also sensitive to expressed concerns about the potential reduction in qualifying loans if direct lending to small businesses is not included in the economic development category of the final rule. As stated in the proposal, the 377 See final § ll.13(k) and the accompanying section-by-section analysis. 378 See final § ll.15(b)(6) and the accompanying section-by-section analysis. PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations agencies believe that loans to small business and small farm are generally more suitable for consideration under the Retail Lending Test. However, the agencies have carefully considered the many comments on this issue, and believe there are certain loans to small businesses and small farms that would align with the goals of community development. The first eligibility criterion—that the loans are made in conjunction or in syndication with a government plan, program, or initiative—is the same standard that applies to activities under final § ll.13(c)(1)(i) that are not direct loans to small businesses and small farms. As stated previously, the agencies believe that this criterion helps to demonstrate that the loans are responsive to identified community needs and support articulated community development goals. In addition, this criterion will increase certainty and transparency by setting a clear standard for determining that an activity qualifies as community development. This provision further specifies that loans in conjunction or syndication with SBDCs and SBICs, and that meet the size and purpose criteria, are considered to qualify as economic development under final § ll.13(c)(1)(ii). As similarly discussed in the section-by-section analysis of final § ll.13(c)(1)(i), the agencies believe that noting these programs in the rule text provides helpful clarity and transparency, as well as assurance that loans in conjunction or syndication with these programs, which serve an important role within the ecosystem of small business and small farm lending, will continue to qualify as economic development under the final rule. Size eligibility standard. On consideration of the comments on a size eligibility standard for economic development and further deliberation, the agencies are adopting a size eligibility standard for direct loans to small businesses or small farms that aligns with the current CRA framework’s size standard, discussed above—namely, the size standards of the SBDC or SBIC programs—in addition to including loans supporting businesses of gross annual revenues of $5 million or less. The agencies believe that adopting these size standards for direct lending to small businesses under the economic development category of community development will provide consistency with the current CRA framework, which will foster certainty and predictability for banks engaging in this lending. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Purpose test. The agencies are also adopting a purpose test to qualify certain direct loans to small businesses and small farms under final § ll.13(c)(1)(ii)(B). As previously noted, loans that may be considered to be economic development under final § ll.13(c)(1)(ii) must have the purpose of promoting permanent job creation or retention for low- or moderate-income individuals or in low- or moderateincome census tracts. The agencies carefully considered commenter feedback on a purpose test for qualifying economic development activities. As discussed above, many commenters supported retaining job creation, retention, and improvement as a component of the economic development category. The agencies acknowledge feedback indicating that the current purpose test is helpful for encouraging jobs-focused activities, and have deliberated further on commenter concerns that the proposed approach to evaluate loans to small businesses and farms under the Retail Lending Test might not sufficiently recognize jobrelated activities benefiting low- and moderate-income individuals and communities. At the same time, the agencies have considered feedback that elimination of the purpose test provides greater flexibility and opens up the possibility of more activities meeting a wider range of small business and small farm credit needs to qualify as economic development. On balance, the agencies determined it appropriate to retain consideration of direct loans to small businesses and small farms, in conjunction or syndication with a government plan, program, or initiative, and to apply a purpose test to this subcomponent of economic development, which is intended generally to align with the current purpose test and to be responsive to suggestions and concerns raised by commenters. Recognizing the benefits that commenters have noted of removing the purpose test from the economic development category of community development, however, the agencies are not applying the purpose test to final § ll.13(c)(1)(i) or (c)(2) or (3). In adopting the purpose test for permanent job creation and retention for final § ll.13(c)(1)(ii)(B), the agencies sought to recognize the contributions of small businesses and small farms in communities, particularly with respect to long-term job opportunities for lowor moderate-income individuals. In addition to considering prior stakeholder feedback and comments on the proposal, the agencies considered their own supervisory experience PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 6663 regarding the complexities involved under the current purpose test in determining whether small business and small farm loans support permanent job creation, retention, or improvement for low- or moderate-income individuals and low- or moderate-income census tracts. In addition, the agencies considered feedback that eliminating the purpose test from the final rule on economic development entirely could result in different standards for community development investments versus PWIs.379 The purpose test adopted in final § ll.13(c)(1)(ii)(A) requires that the loan proceeds are applied for the purpose of promoting permanent job creation or retention for low- or moderate-income individuals or in lowor moderate-income census tracts. As noted, loans that are made by a bank directly to small businesses or small farms in conjunction or in syndication with an SBDC or SBIC presumptively qualify under this prong but are not the exclusive loans that qualify; other loans that are made in conjunction or in syndication with other government programs, plans, or initiatives and that meet the size and purpose criteria could also qualify. For example, an SBA 7(a) loan380 extended for the purpose of purchasing new long-term machinery and that would allow a small business to hire additional employees could qualify, provided it also met other required criteria. A loan to support a facility improvement in conjunction with a State loan guarantee program associated with the State Small Business Credit Initiative could qualify provide it met all necessary criteria.381 A working capital loan in conjunction with a State program that is for the purpose of retaining employees could qualify provided other required criteria are met. However, loans that fund general business operations would be less likely to qualify without additional information on whether the loan proceeds would be applied for the purpose of job creation or retention. The agencies believe that the purpose test under the final rule aligns appropriately with the current purpose test, with clarifying modifications discussed below, to provide continued encouragement of banks in extending 379 The agencies have noted comments on the proposal related to PWIs, and will continue to be aware of intersections between the CRA and PWI frameworks in supervising banks. 380 See SBA, ‘‘7(a) Loans,’’ https://www.sba.gov/ funding-programs/loans/7a-loans. 381 See U.S. Dept. of Treasury, ‘‘State Small Business Credit Initiative,’’ https:// home.treasury.gov/policy-issues/small-businessprograms/state-small-business-credit-initiativessbci. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6664 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations loans to small businesses and small farms as a community development activity. In keeping with current guidance, the purpose test in the final rule focuses on job-related benefits for low- or moderate-income individuals and lowor moderate-income census tracts.382 Other items mentioned in the guidance—areas targeted for redevelopment by Federal, State, local, or tribal governments; intermediaries supporting small businesses and small farms; and technical assistance to small business and small farms—are incorporated elsewhere in the final rule provisions regarding community development.383 As explained above, under the current purpose test, a loan for the purpose of job improvement could qualify under economic development as long the loan met other criteria. The agencies are not adopting ‘‘job improvement’’ as a factor under the purpose test in this final rule. Although the agencies did not receive comments specific only to ‘‘job improvement’’ in feedback concerning the purpose test or economic development in general, based on supervisory experience, the agencies believe that difficulties arise in demonstrating and determining whether a loan promotes job improvement, presenting challenges to establishing predictable and workable standards for both compliance and supervision. In addition, the amount of time, resources, and expertise needed to fairly evaluate the quality of jobs could be overly burdensome for both the bank and examiners. However, job improvement is closely tied to workforce development and training programs and the agencies believe in the importance of the contributions these programs make into communities. Therefore, the final rule provides that workforce development or training programs can be considered community development as a community supportive service pursuant to § ll.13(d), discussed in more detail in the section-by-section analysis of § ll.13(d). Relatedly, the final rule does not incorporate particular standards regarding the quality of jobs for lowand moderate-income individuals, including wage levels and other wagerelated considerations. The agencies considered views and suggestions offered by commenters on this topic, Q&A § ll.12(g)(3)–1. id. See also, e.g., final § ll.13(e) and (j)(2) (revitalization or stabilization activities in targeted census tracts and in Native Land Areas, respectively), (c)(2) (intermediary support for small businesses and small farms), and (c)(3) (other assistance for small businesses and small farms). 382 See 383 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 and have determined that it would be difficult to address job quality in the rule in a manner that would effectively and consistently account for the many diverse types of small businesses and small farms in different industry sectors. The agencies believe that the final rule’s purpose test, focused on job creation and retention, will provide greater clarity relative to the current purpose test, thereby facilitating bank lending under this subcomponent of the final rule on economic development, and improved consistency and transparency in the agencies’ evaluations of this lending. Lending Test’s distribution analysis, the share of loans (based on loan count) to small businesses and small farms at different revenue levels is considered,385 while under the Community Development Financing Test, the dollar volume of loans is considered, as well as their impact and responsiveness.386 With respect to direct loans to small businesses and small farms that qualify as economic development under final § ll.13(c)(1)(ii), the agencies believe that this approach allows for a holistic evaluation of bank engagement in this lending. Consideration of Loans to Small Businesses and Small Farms Under the Retail Lending Test and Community Development Financing Test Final § ll.13(c)(1)(ii) recognizes certain direct loans to small businesses and small farms that benefit local communities and have specific community development goals, but that are not evaluated under the Retail Lending Test.384 In addition, the final rule provides that certain direct loans by banks to small businesses or small farms may be considered under both the Community Development Financing Test and the Retail Lending Test, if they qualify for consideration under both tests. This approach is a change from the current rule where, as discussed above, loans to businesses with an origination amount of $1 million or less and loans to farms with an origination amount of $500,000 or less generally are evaluated only under the lending test, while loans that exceed the applicable loan amount can be considered as a community development loan if they meet the current size and purpose test. However, unlike under the current rule, which provides that the same loan cannot be counted as both a retail loan and a community development loan, the final rule allows small business and small farm loans to qualify under both the Retail Lending Test and Community Development Financing Test. This is also different from the agencies’ proposal, which would have considered reported loans made directly to small businesses and small farms under the Retail Lending Test. The agencies believe that this approach is appropriate because the Retail Lending Test and Community Development Financing Test generally focus on a different aspect of a bank’s direct lending to small businesses and small farms: in general, under the Retail Section ll.13(c)(2) Intermediary Support for Small Businesses and Small Farms 384 For discussion of the standards for evaluating loans under the Retail Lending Test, see the sectionby-section analysis of § ll.22. PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 The Agencies’ Proposal Under proposed § ll.13(c)(2), the second component of the proposed economic development category would comprise ‘‘[s]upport for financial intermediaries that lend to, invest in, or provide technical assistance to businesses or farms with gross annual revenues of $5 million or less.’’ This provision was intended to promote and facilitate access to capital for smaller businesses and farms. The agencies proposed to use the same gross annual revenue standard for small businesses and farms in this provision as in other parts of the proposal for simplicity and consistency. The current regulation and interagency guidance on community development activities does not specifically address financial intermediaries that increase access to capital for small businesses and small farms; proposed § ll.13(c)(2) was intended to respond to stakeholder feedback emphasizing, and the agencies’ recognition of, the importance of these intermediaries. Examples of financial intermediaries that the agencies intended this provision to cover included a Community Development Corporation that provides technical assistance to recently formed small businesses, or a CDFI that provides lending to support sustainability of small farms. Comments Received Many commenters provided a range of views on proposed § ll.13(c)(2), 385 See final § ll.22(e) and the accompanying section-by-section analysis. The agencies note that, consistent with the proposal, the dollar volume of small business and small farm lending would be considered in the Retail Lending Volume Screen of the final rule. See final § ll.22(c) and the accompanying section-by-section analysis. 386 See final § ll.24 and the accompanying section-by-section analysis. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations including a variety of suggestions for revisions. Some commenters expressly supported proposed § ll.13(c)(2) without any further suggestions for additions or clarifications. Several commenters suggested that CDFIs be considered an eligible financial intermediary under this component. Several other commenters raised concerns that the removal of the current ‘‘size’’ test and ‘‘purpose’’ test would result in certain financial intermediaries being excluded from the economic development category and that this would limit access to capital for small businesses. Some of these commenters suggested including support for financial intermediaries or loan funds that are not licensed or certified by the SBA but that lend to or invest in small businesses that meet the size eligibility standards of the SBA’s SBIC or SBDC programs (which might exceed $5 million in gross annual revenues). Another commenter similarly and more specifically requested that the agencies include in the definition of economic development financial intermediaries that lend to, invest in, or provide technical assistance to businesses that: (1) have more than $5 million in gross annual revenues but still meet the size eligibility standards of the SBDC or SBIC Programs; and (2) support permanent job creation, retention, and/ or improvement for low- and moderateincome individuals, in low- and moderate-income areas, or in areas targeted for redevelopment. Some commenters who supported retaining job creation, retention, or improvement suggested that the final rule should clearly include consideration of investments and loans to financial intermediaries that support small business and small farms for the demonstrable purposes of job creation, retention, or improvement for low- and moderate-income individuals. Another commenter suggested that this component should also consider loans and investments made to CDFIs to support small businesses with less than $5 million gross annual revenues, as these also help to create jobs. A commenter suggested that consideration for loans and investments to Community Action Agencies 387 be presumed to advance economic development through workforce development, indicating that workforce development has been central to the creation and function of these entities.388 Another commenter 387 See Economic Opportunity Act of 1964, tit. II, Public Law 88–452, 78 Stat. 516–24 (1964). 388 See Q&A § ll.12(g)(3)–1 (providing that activities are considered to promote economic VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 suggested that the proposal for financial intermediary support should also recognize loans and investments made to support projects using NMTCs,389 as well as activities that support economic development initiatives of universities and local chambers of commerce. Some commenters emphasized that many financial intermediaries that are not certified SBICs, are minority-led and women-led and that such entities play an important role in providing access to capital for minority- and women-owned businesses. One of these commenters noted that many of these companies that fund small businesses in underserved communities face challenges becoming SBICs and suggested that the agencies provide consideration for non-SBICs that are owned by minorities and women as long as these companies adhere to SBIC net worth and after-tax income size limits. Another commenter suggested that loans to minority-owned small businesses should be presumed to promote economic development and receive CRA credit. An additional commenter similarly suggested that the agencies should clarify that banks can receive credit for economic development activities that include investments and loans in a minority-owned small business or minority-owned financial intermediaries and that, at a minimum, these activities should count for credit if they achieve impact outcomes like job creation, retention, or improvement for low- to moderate-income persons or areas. Other feedback included concerns that, without more clarifications about the intended coverage of proposed § ll.13(c)(2), banks would tend to favor activities with SBICs under proposed § ll.13(c)(1), and that this would disadvantage minority-owned enterprises and first-time fund managers. At least one commenter supported coverage of activities with financial intermediaries that are not SBICs in the economic development category if these activities create, retain or improve jobs. A commenter suggested that this prong also include investments in Qualified Opportunity Funds that include low- and moderate-income census tracts in designated Opportunity Zones.390 development if they support ‘‘Federal, state, local, or tribal economic development initiatives that include provisions for creating or improving access by low- or moderate-income person to jobs or to job training or workforce development programs’’). 389 See, e.g., Internal Revenue Service (IRS), LMSB–04–0510–016, ‘‘New Markets Tax Credits’’ (May 2010), https://www.irs.gov/pub/irs-utl/ atgnmtc.pdf. 390 See, e.g., IRS, ‘‘Opportunity Zones,’’ FS–2020– 13 (updated Apr. 2022), https://www.irs.gov/ newsroom/opportunity-zones (discussing both PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 6665 On a technical note, a commenter requested that the term ‘‘support’’ in the proposed regulatory text be further clarified to mean loans, investments, and services to financial intermediaries. Another commenter stated that the proposal did not specifically address financial intermediaries that increase access to capital for small businesses, asserting that determining business size later in the process would be inappropriate. Both industry and community group stakeholders have stressed the importance of financial intermediaries, such as loan funds, in providing access to financing for small businesses that are not ready for traditional bank financing. In addition, some commenters recommended clarifying that the size of the small business or small farm be determined at the time of the investment by the financial intermediary, noting that because the purpose of these investments is to support the growth of the business. Final Rule For the reasons discussed below, the agencies are finalizing proposed § ll.13(c)(2) to include in the economic development category intermediaries that support small businesses and small farms; however, the final rule expands the type of intermediaries considered under this component and adopts several revisions for clarity and consistency with other prongs in the economic development category. Additionally, the final rule provides examples of the types of support an intermediary can provide to a small business or small farm. Specifically, final § ll.13(c)(2) provides that loans, investments, or services provided to intermediaries that lend to, invest in, or provide assistance, such as financial counseling, shared space, technology, or administrative assistance, to small businesses or small farms can be considered under economic development. The final rule broadens the types of intermediaries that may be considered under this category beyond financial intermediaries, by removing the word ‘‘financial’’ from the description of this category. Instead, under the final rule, non-financial intermediaries such as business incubators and small business assistance providers can be considered along with financial intermediaries such as nonprofit revolving loan funds. The agencies intend that the expansion of the types of intermediaries that can be included under this component will Opportunity Zones and Qualified Opportunity Funds). E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6666 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations help address commenter concerns about some intermediaries that could be covered under the current rule potentially being excluded under the proposal, such as those that support primarily support businesses with gross annual revenue above $5 million, and better ensure recognition of the range of intermediaries providing support for small businesses and small farms. The agencies intend that many of the intermediaries that could be considered under the current rule would continue to qualify under this component if they support small businesses and farms through loans, services, and investments. The agencies recognize that there are many types of intermediaries, including those that support minority-owned small businesses, as mentioned by commenters, and that financial intermediaries play a critical role in providing access to capital for small businesses and small farms when traditional bank financing might not be possible. For more information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. To address commenter requests for clarification regarding the coverage of the proposed financial intermediary prong, the agencies note that, consistent with the proposal, the intermediaries under final § ll.13(c)(2) are distinct from intermediaries that provide government-related support to small businesses and small farms under final § ll.13(c)(1)(i); this allows for nonSBIC and other non-government-related intermediaries to be included in the economic development category. The agencies also recognize that intermediaries can provide support to businesses or farms of all sizes; however, consistent with the proposal, support for intermediaries under final § ll.13(c)(2) is focused on intermediary lending to, investments in, and services to businesses and farms with gross annual revenues of $5 million or less.391 The agencies believe that, for non-government-related aspects of economic development, a gross annual revenue threshold of $5 million for supported businesses and farms will foster clarity regarding the availability and consistency in application. The agencies also believe that this size 391 The standards for banks to receive full credit for these loans, investments, and services are discussed further in the section-by-section analysis of final § ll.13(a). See, e.g., final § ll.13(a)(1)(i)(B)(3). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 standard will allow support for a wide range of financing, including the smallest businesses. For further discussion of the definition of the definition of small business and small farm in the final rule, see final § ll.12 (‘‘small business’’ and ‘‘small farm’’) and accompanying section-by-section analysis. The final rule also clarifies that ‘‘support’’ for intermediaries means loans, investments, or services provided to intermediaries that lend to, invest in, or provide assistance to small businesses or small farms. As noted, in response to commenter concern that the term ‘‘support’’ in the proposal was not clear. Examples of activities that could be considered under this category are provided in the final rule and include financial counseling, shared space, technology, or administrative assistance. The agencies did not adopt in the final rule a specific criterion for the point in time when the size of the small business or small farm should be determined, as suggested by some commenters. However, the agencies generally believe that this determination should be based on the size of the small business or small farm at the time of the activity undertaken by the intermediary. The agencies also decline to specify that CDFIs are considered an eligible financial intermediary under this prong. The agencies recognize that CDFIs are important financial intermediaries, but rather than list them as qualified intermediaries for multiple community development categories, the agencies have adopted in the final rule that a bank will receive community development consideration if a loan, investment, or service involves a CDFI as specified under final § ll.13(k). In addition, the final rule establishes, as an impact and responsiveness review factor, consideration of whether a loan, investment, or services supports a CDFI.392 The agencies decline to include in this prong investments in Qualified Opportunity Funds that support projects in designated Opportunity Zones.393 The agencies do not believe that such activities are specifically designed or structured to support small businesses and small farms and therefore, loans or investments in Qualified Opportunity Funds would not likely meet criteria for 392 For further discussion of the final rule provisions on CDFIs, see the section-by-section analysis of final § ll.13(k) and final § ll.15(b)(4). 393 See IRS, ‘‘Opportunity Zones,’’ FS–2020–13 (Aug. 2020; updated Apr. 2022) (discussing both Opportunity Zones and Qualified Opportunity Funds), https://www.irs.gov/newsroom/opportunityzones. PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 economic development. However, the activity may qualify for community development credit under other categories of community development, such as revitalization and stabilization under § ll.13(e), so long as the activity meets the criteria for the relevant community development category. Section ll.13(c)(3) Other Support for Small Businesses and Small Farms The Agencies’ Proposal Proposed § ll.13(c)(3) would have established a third prong of the economic development category: ‘‘[p]roviding technical assistance to support businesses or farms with gross annual revenues of $5 million or less, or providing services such as shared space, technology, or administrative assistance to such businesses or farms or to organizations that have a primary purpose of supporting such businesses or farms.’’ This provision would have included services such as ‘‘shared space, technology, or administrative assistance’’ and codified current guidance highlighting these services.394 The agencies proposed this provision in recognition that some small businesses and small farms might not be prepared to obtain traditional bank financing and might need technical assistance and other services, including technical assistance and services provided directly by a bank, to obtain credit in the future. Comments Received Commenters on proposed § ll.13(c)(3) broadly supported it. A commenter asserted that this component would fill a gap in needed services for small businesses and small farms and play a critical role in helping a small business and small farm grow and thrive. Another commenter suggested including consideration in this economic development category for financial literacy training, communityowned real estate financing, and financial products and programs for immigrant and immigrant-owned businesses. Final Rule For the reasons discussed below, the final rule adopts, with clarifying edits, proposed § ll.13(c)(3) to provide clarity regarding support for small 394 See Q&A § ll.12(g)(3)–1 (providing that loans, investments, or services are considered to ‘‘promote economic development’’ if they ‘‘support permanent job creation, retention, and/or improvement . . . through technical assistance or supportive services for small businesses or farms, such as shared space, technology, or administrative assistance’’). E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 businesses and small farms that is not provided through intermediaries. Specifically, final § ll.13(c)(3) states that assistance, such as financial counseling, shared space, technology, or administrative assistance, provided to small businesses and small farms can be considered economic development. To distinguish these activities from government-related support and intermediary support, these activities are referred to as ‘‘other support for small businesses and small farms’’ under the final rule, and are intended to include such services that are provided directly by a bank. The agencies made several clarifying edits to the proposal for this component in the final rule. First, the agencies removed ‘‘technical’’ from the rule text out of recognition that providing access to space or technology goes beyond technical assistance and that this term might be applied and understood inconsistently. Second, the agencies removed the $5 million gross annual revenues when referring to small businesses and small farms because these terms are defined in final § ll.12 (discussed further in the section-bysection analysis of final § ll.12). Finally, the agencies removed ‘‘primary purpose’’ to reference the level of support to businesses or farms to be consistent with the majority standard as described in final § ll.13(a), discussed further in the section-by-section analysis of final § ll.13(a). The agencies acknowledge commenter feedback that some small businesses and small farms may not be in a position to obtain traditional bank financing and, as such, may need assistance to obtain credit in the future. The agencies believe that providing CRA consideration for assistance that supports small businesses and small farms will afford banks with recognition for the positive role they play in facilitating small business and small farm credit access. The agencies have noted through past experience that banks can play an important role in supporting, and directly providing the types of assistance that help small businesses and small farms obtain financing, which in turn strengthens small businesses and small farms,395 fostering their growth and durability. 395 See, e.g., OCC, ‘‘Community Development Loan Funds: Partnership Opportunities for Banks,’’ Community Development Insights (Oct. 2014), https://www.occ.gov/publications-and-resources/ publications/community-affairs/communitydevelopments-insights/pub-insights-oct-2014.pdf; Financial Services Forum, ‘‘Supporting Historically Underserved Communities,’’ https://fsforum.com/ our-impact/supporting-underserved-communities. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 In response a commenter’s suggestion that banks should receive consideration for providing financial literacy training, community-owned real estate financing, and financial products and programs for immigrant and immigrant-owned businesses, the agencies note that financial counseling is specified as an example of the type of assistance that could be considered under final § ll.13(c)(3). Additionally, the final rule provides that banks may receive community development consideration for other types of financial literacy programs under final § ll.13(l), discussed further in the section-bysection analysis of § ll.13(l). The other items suggested by the commenter could also be considered under the economic development category, or other community development categories, assuming that the activities meet the appropriate criteria. Evaluation Approach Prior to Section 1071 Data Availability The Agencies’ Proposal and Comments Received The agencies sought feedback on whether loans made directly by banks to small businesses and small farms that are currently evaluated as community development loans should continue to be considered community development loans until these loans are assessed as reported loans under the Retail Lending Test. Most commenters who opined on this question asserted that loans to small businesses and small farms should be considered community development loans during this transition period. For example, a commenter suggested that current guidance should be used to qualify loans to small businesses and small farms under the Community Development Finance Test until loans are evaluated as reported loans under the proposed Retail Lending Test.396 Similarly, a few commenters suggested that loans larger than $1 million to small businesses and small farms should be considered community development loans, as they are currently, until section 1071 data are available, and these loans are evaluated as reported loans under the proposed Retail Lending Test.397 A few commenters suggested that during the transition period, banks should have the option of having loans evaluated under the proposed Community Development Financing Test or under the proposed Retail Lending Test. Another commenter suggested that banks should always have the option to report small 396 Q&A § ll.12(g)(3)–1. 397 Id. PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 6667 business loans as community development loans if the economic development criteria are met. Other commenters expressed concern with allowing banks to receive community development credit for loans that will be considered under the Retail Lending Test once section 1071 data are available and used in CRA evaluations. A commenter suggested that a bank should not be allowed to have these loans considered as community development loans only if the majority of the bank’s examination cycle took place before the final rule was implemented. Along the same lines, a commenter expressed concern that evaluating loans to small businesses and small farms as community development activities until they are assessed as reported loans under the Retail Lending Test could allow banks to receive credit for the same activity multiple times, and suggested that the loans should count only once, unless there is some change or expansion of the activity, such as an increased loan amount or new loan payment deferment option. Final Rule The agencies appreciate feedback from commenters regarding whether to continue to evaluate loans to small businesses and small farms as community development loans, if such loans meet the current specified criteria, prior to the availability of section 1071 data. The agencies considered the comments, including those that suggested providing banks the option to select consideration for these loans under either the proposed Community Development Financing Test or proposed Retail Lending Test during this interim period, or continuing to evaluate the loans under current interagency guidance until the CFPB section 1071 data are available and the reported loans can be evaluated under the proposed Retail Lending Test. On further consideration of this issue, the agencies have determined that continuing with the current evaluation approach or developing an interim approach for evaluating loans to small businesses and small farms loans during the interim period between the applicability date for final § ll.13(c) and availability and use in CRA evaluations of section 1071 data is not necessary. As discussed above regarding final § ll.13(c)(1)(ii), the final rule provides consideration of certain direct loans to small businesses and small farms as community development loans. This approach would enable certain government-related direct loans to businesses and farms that meet the criteria in final § ll.13(c)(1)(ii) E:\FR\FM\01FER2.SGM 01FER2 6668 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations considered under economic development as soon as this provision of the final rule becomes effective. The agencies believe that this approach will provide greater clarity and reduce potential confusion and complexity during the interim period rather than continuing to apply current standards for considering loans to small businesses and small farms to be community development loans.398 The agencies note that, except for certain loans to small businesses and small farms as explained above, most lending to small businesses and small farms will be evaluated under the Retail Lending Test, and that the definitions for small business and small farm loans are subject to the final rule’s transition amendments.399 Regarding the concern expressed by a commenter that evaluating loans to small businesses and small farms as community development until such loans are assessed under the Retail Lending Test would allow banks to get credit for the same activity multiple times, the agencies acknowledge, as discussed above, that some loans to small businesses and small farms that meet the criteria under final § ll.13(c)(1)(ii) will be considered under both the Retail Lending Test and Community Development Financing Test. However, the agencies do not believe that this would result in double counting because the final rule provides that different aspects of such loans would be considered under the applicable test. ddrumheller on DSK120RN23PROD with RULES2 Workforce Development and Job Training The current regulations do not mention workforce development and training programs in the definition of community development 400 (including the economic development category of 398 For a discussion of the final rule’s incorporation of loans to small businesses and small farms into the economic development category of community development, see the section-by-section analysis of final § ll.13(c)(1)(ii). For a discussion of the final rule’s consideration of small business and small farm lending under the Retail Lending Test, see the section-by-section analysis of final § ll.22(d). 399 The final rule’s transition amendments will amend the definitions of ‘‘small business’’ and ‘‘small farm’’ to instead cross-reference to the definition of ‘‘small business’’ in the CFPB section 1071 regulation. This will allow the CRA regulatory definitions to adjust if the CFPB increases the threshold in the CFPB section 1071 regulatory definition of ‘‘small business.’’ This is consistent with the agencies’ intent articulated in the preamble to the proposal and elsewhere in this final rule to conform these definitions with the definition in the CFPB section 1071 regulation. The agencies will provide the effective date of these amendments in the Federal Register once section 1071 data are available. 400 See 12 CFR ll.12(g). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 that definition 401), but the Interagency Questions and Answers provide that loans, investments, and services supporting these activities for businesses and farms that meet the ‘‘size’’ test discussed above are considered to ‘‘promote economic development.’’ 402 The agencies proposed to consider workforce development and job training program activities under the community supportive services category of community development and this was generally supported by commenters who opined on this issue. Therefore, the agencies are adopting workforce development and job training as proposed as a community supportive services category under final § ll.13(d). See the section-by-section analysis of community supportive services in final § ll.13(d) below for additional discussion of the comments received and final rule. Additional Issues The agencies received other comments related to the economic development category. A few commenters suggested adding certain types of activities to those that could be considered for CRA credit under the economic development category. For example, a commenter suggested that loan referrals made by banks to CDFIs for small business loans should qualify and also suggested that loan referrals made by banks to non-bank lenders or fintech companies that have a mission of economic development that is consistent with the goals of the CRA should also qualify as economic development; this commenter asserted that partnerships between traditional and non-traditional lenders could increase access to capital for lowincome geographic areas. A few commenters suggested that if loans to small business and small farms are considered under the proposed Retail Lending Test, loans to minorityowned small businesses should nonetheless be considered separately as a qualifying activity under the economic development category of community development. Lastly, a commenter stated that the agencies’ proposal was innovative but suggested that training for nonprofit organizations could be needed, as activities that are currently considered as community development might be considered under different performance tests. The agencies decline to add a prong to the economic development category under final § ll.13(c) to provide 401 See 402 See PO 00000 12 CFR ll.12(g)(3). Q&A § ll.12(g)(3)–1. Frm 00096 Fmt 4701 Sfmt 4700 specific consideration for additional types of activities, such as loan referrals made by banks to CDFIs or those made by banks to nonbank lenders, as suggested by commenters. The agencies understand from commenters that partnerships between traditional and nontraditional lenders are important because of the potential to increase capital to small businesses and small farms. As discussed further in the section-by-section analysis of final § ll.23(c), such activities may qualify for consideration under the Retail Services and Products Test as such activities may help facilitate responsive credit products and programs.403 Regarding commenter suggestions that loans to minority-owned small businesses should be considered separately as a qualifying activity under the economic development category of community development, the agencies note that the final rule adopts a provision that certain direct loans to small businesses and small farms, which includes direct loans made to minority-owned small businesses, will be considered under the economic development category. See the sectionby-section analysis of final § ll.13(c)(1)(ii) above. Additionally, the agencies have adopted an impact factor described in final § ll.15 for activities that benefit small businesses with gross annual revenue under $250,000, which will serve to highlight activities with smaller businesses, which would include minority-owned businesses with gross annual revenue under $250,000. For more information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. The agencies appreciate commenter feedback regarding the potential need for examiner training as the proposed approach to the evaluation of certain activities that would currently be considered only under community development may be considered under a different test or multiple tests. The agencies will take this feedback under advisement as the agencies develop implementation plans. Section ll.13(d) Community Supportive Services Current Approach The CRA regulations currently define community development to include ‘‘community services targeted to low- or 403 See final § ll.23 and the accompanying section-by-section analysis. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations moderate-income individuals,’’ 404 but the regulations do not further define community services. The Interagency Questions and Answers provide several examples of community services and characteristics of those services to assist institutions in determining whether the service is ‘‘targeted to low- or moderateincome individuals.’’ 405 Interagency guidance also clarifies that ‘‘investments, grants, deposits, or shares in or to . . . [f]acilities that . . . provid[e] community services for lowand moderate-income individuals, such as youth programs, homeless centers, soup kitchens, health care facilities, battered women’s shelters, and alcohol and drug recovery centers’’ are considered community development investments eligible for CRA credit.406 The Agencies’ Proposal In proposed § ll.13(d), the agencies replaced the current community development category of ‘‘community services targeted to low- or moderateincome individuals’’ with ‘‘community supportive services.’’ 407 Specifically, incorporating and building on aspects of current guidance noted above, proposed § ll.13(d) defined community supportive services as ‘‘general welfare services that serve or assist low- or moderate-income individuals, including, but not limited to, childcare, education, workforce development and job training programs, and health services and housing services programs.’’ The agencies proposed to consider workforce development and job training program activities under the community supportive services category of community development, rather than under economic development (where workforce development and job training programs are generally considered today). Existing guidance regarding economic development generally limits what can be considered an economic development activity (including workforce development and job training) to support for small businesses meeting certain size standards.408 Under the proposal to consider these activities under the reconfigured ‘‘community 12 CFR ll.12(g)(2). Q&A § ll.12(g)(2)–1. 406 Q&A § ll.12(t)–4. 407 The proposed term ‘‘community supportive services’’ encompassed different activities than those proposed under the concept of ‘‘community development services,’’ which is described further in the section-by-section analysis of § ll.25(d) (proposed Community Development Services Test), below, and generally refers to volunteer service hours that meet any one of the community development purposes in final § ll.13. 408 See proposed § ll.13(d); compare with 12 CFR ll.12(g)(3) and Q&A § ll.12(g)(3)–1. 404 See ddrumheller on DSK120RN23PROD with RULES2 405 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 supportive services’’ category, activities that support workforce development and job training programs would receive consideration if the program’s participants are low- or moderateincome individuals, without regard to the size of any business associated with the activity.409 The agencies also proposed to build on current guidance by both clarifying and expanding upon a non-exclusive list of examples of community services and characteristics of those services that banks can use to demonstrate that a program or organization primarily serves low- or-moderate income individuals. Seven of the eight examples in proposed § ll.13(d) reflected current guidance with certain technical edits, as follows: • Activities conducted with a nonprofit organization that has a defined mission or purpose of serving low- or moderate-income individuals or is limited to offering community supportive services exclusively to lowor moderate-income individuals (proposed § ll.13(d)(1)); • Activities conducted with a nonprofit organization located in and serving low- or moderate-income census tracts (proposed § ll.13(d)(2)); • Activities conducted in low- or moderate-income census tracts and targeted to the residents of the census tract (proposed § ll.13(d)(3)); • Activities offered to individuals at a workplace where the majority of employees are low- or moderate-income, based on readily available U.S. Bureau of Labor Statistics data for the average wage for workers in that particular occupation or industry (proposed § ll.13(d)(4)); • Services provided to students or their families through a school at which the majority of students qualify for free or reduced-price meals under the USDA’s National School Lunch Program (proposed § ll.13(d)(5)); • Services that have a primary purpose of benefiting or serving individuals who receive or are eligible to receive Medicaid (proposed § ll.13(d)(6)); and • Activities that benefit or serve recipients of government assistance plans, programs, or initiatives that have income qualifications equivalent to, or stricter than, the definitions of low- and moderate-income (as defined in the proposed rule). Examples include, but are not limited to, HUD’s section 8, 202, 515, and 811 programs or the USDA’s section 514, 516, and Supplemental 409 See PO 00000 id. Frm 00097 Fmt 4701 Sfmt 4700 6669 Nutrition Assistance programs (proposed § ll.13(d)(8)).410 The agencies also proposed an additional example not reflected in current guidance: activities that benefit or serve individuals who receive or are eligible to receive Federal Supplemental Security Income, Social Security Disability Insurance, or support through other Federal disability assistance programs.411 This proposed example reflected a suggested additional example raised in the Board CRA ANPR that received wide stakeholder support.412 Comments Received The agencies received comments on the community supportive services proposal from many different commenter types, raising a wide range of issues. Most of these commenters generally supported the agencies’ proposal. A few commenters, for example, expressed that the community development services proposal would elevate the importance of community services and provide more clarity about what types of activities are included. In contrast, a commenter that disagreed with the proposal stated that the proposal would create unnecessary confusion and complexity and limit flexibility. This commenter expressed the view that the current community services definition should be retained, asserting that it better allows banks to tailor the provision of services to the specific needs of each community. Regarding the general definition of community supportive services in proposed § ll.13(d), many commenters expressed their support for including ‘‘health’’ or ‘‘healthcare services.’’ Several commenters also expressed support for the proposal to include workforce development and job training as community supportive services. A few of these commenters noted that doing so could allow banks to receive credit for supporting activities in connection with a wider range of businesses than under the current CRA framework. Commenters also shared views on the list of examples in proposed § ll.13(d)(1) through (8). For example, a commenter that expressed support for the proposal to include ‘‘[a]ctivities conducted with a nonprofit organization located in and serving low- or moderateincome census tracts,’’ 413 noted that these types of organizations often serve the community in which they are § ll.12(g)(2)–1. § ll.13(d)(7). 412 See 85 FR 66410, 66446 (Oct. 19, 2020). The example was also adopted in the illustrative list published with the OCC 2020 CRA Final Rule. 413 Proposed § ll.13(d)(2). 410 Q&A 411 Proposed E:\FR\FM\01FER2.SGM 01FER2 6670 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 located. With respect to proposed § ll.13(d)(7), regarding activities that benefit or serve individuals who receive or are eligible to receive Federal disability assistance, many civil rights and consumer advocacy groups for individuals with disabilities requested that the agencies also explicitly include vocational rehabilitation services and Medicaid-waiver funded home and community-based services. One commenter stated that, as not all individuals with disabilities receive Federal benefits, the agencies should consider including other activities that support individuals with disabilities, such as a loan to upgrade equipment in a public library to accommodate lowand moderate-income disabled individual patrons. Commenters also encouraged the agencies to add a variety of examples to the list in § ll.13(d)(1) through (8). For instance, a few commenters suggested adding activities that promote digital inclusion or digital literacy, indicating that those activities can improve access to important community services. Additional examples suggested included, among others: food access and sustainability projects; activities that house the homeless; higher education career courses or programming; activities that support service members, veterans, and their families; and activities that support consumers with limited English proficiency. Final Rule As discussed in more detail below, the final rule revises the general definition of ‘‘community supportive services’’ in proposed § ll.13(d) to provide greater clarity about the meaning of this community development category. The final rule also adopts the non-exhaustive list of examples in § ll.13(d)(1) through (8) generally as proposed, with certain technical revisions. Specifically, the final rule defines ‘‘community supportive services’’ as activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals, such as childcare, education, workforce development and job training programs, health services programs, and housing services programs. The definition in proposed § ll.13(d) is thus revised by replacing the phrase ‘‘general welfare activities that serve or assist low- or moderateincome individuals’’ with ‘‘activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals.’’ As noted in the proposal, the agencies believe that adopting a community VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 supportive services category that revises the existing ‘‘community services’’ category and associated guidance will provide clearer standards in the regulation for identifying the kind of activities that qualify as community development. Upon further consideration and in light of comments received, the agencies are concerned about potential confusion as to what constitutes ‘‘general welfare activities’’ in the proposed provision. The final rule’s revised language focusing on the ‘‘health, stability, or well-being’’ of lowor moderate-income individuals is intended to better achieve the agencies’ goal of providing clarity in outlining the kinds of activities that are eligible for consideration under this category, accounting for the types of benefits and services that many commenters highlighted. The agencies are adopting as proposed the community supportive services listed in the proposed general definition—childcare, education, workforce development and job training programs, health services programs, and housing services programs; these are intended to be illustrative of the kinds of services that can meet the criterion of assisting, benefiting, or contributing to the health, stability, or well-being of low- or moderate-income individuals and, as noted above, were generally supported by commenters. As also discussed above, considering workforce development and job training activities under the community supportive services category of community development clarifies that bank support for workforce development and job training, whose participants are low- or moderate-income individuals, is eligible for CRA consideration, regardless of the size of the businesses that may be associated with those activities. The final rule also adopts the nonexclusive list of examples of community supportive services in § ll.13(d)(1) through (8), generally as proposed, with certain revisions as follows: • Proposed § ll.13(d)(1) is revised to refer to activities that are ‘‘conducted with a mission-driven nonprofit organization.’’ This change in final § ll.13(d)(1) reflects that the final rule adopts a new definition of ‘‘missiondriven nonprofit organization’’ in § ll.12, in order to support the term’s use across multiple provisions in § ll.13. As noted in the section-bysection analysis of § ll.12 above, the final definition is intended to be consistent with the types of organizations that the agencies proposed would be partners with banks in conducting community development. PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 • Proposed § ll.13(d)(2) through (5) are adopted generally as proposed, with non-substantive technical edits to align the regulatory text structure. • Proposed § ll.13(d)(6), referencing activities that ‘‘have a primary purpose of benefiting or serving individuals who receive or are eligible to receive Medicaid’’ (emphasis added) is revised to reference activities that ‘‘Primarily benefit or serve individuals who receive or are eligible to receive Medicaid’’ (emphasis added), with no substantive change intended. This revision is a conforming change consistent with proposed § ll.13(a) that eliminates proposed references to the phrase ‘‘primary purpose of community development,’’ as discussed in the section-by-section analysis of § ll.13(a). • Proposed § ll.13(d)(7) and (8) are revised to add the term ‘‘primarily,’’ so that, as adopted, they refer to activities that ‘‘Primarily benefit or serve individuals who receive or are eligible to receive’’ Federal disability assistance (final § ll.13(d)(7)) and ‘‘Primarily benefit or serve recipients of government assistance plans, programs, or initiatives . . . .’’ (final § ll.13(d)(8)). This addition is intended to provide consistency with the language in final § ll.13(d)(6) described above, and to align with the agencies’ intent to provide examples of activities that are specifically focused on benefiting or serving the individuals described in these examples. As discussed above, the examples in § ll.13(d)(1) through (6) and (8) are adapted from existing guidance to promote clarity and consistency regarding the types of services that could be considered to be targeted to low- or moderate-income individuals. The agencies believe that the adopted examples will facilitate banks’ ability to document and demonstrate that a program or organization assists, benefits, or contributes to the health, stability, or well-being of low- or moderate-income individuals as set forth in § ll.13(d). For example, with respect to § ll.13(d)(2), the agencies believe that qualified activities performed in conjunction with ‘‘a nonprofit organization located in and serving low- or moderate-income census tracts’’ are likely to assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals due to the geographic location and service-orientation of the nonprofit organization on low- or moderate-income census tracts. Accordingly, the agencies believe that this example will facilitate banks’ identification of qualified community E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 supportive services and opportunities to serve needs in their communities.414 In adopting the example in proposed § ll.13(d)(7), related to activities for individuals receiving or eligible to receive Federal disability assistance, the agencies understand that many disability programs are means-tested, and that and research has found that households that include any workingage people with disabilities are more likely to have substantially lower incomes than those without any disabilities.415 Accordingly, the agencies believe that the example in § ll.13(d)(7) will serve as another key proxy for activities that assist, benefit, or contribute to the health, stability, or well-being of low- or moderate-income individuals, and will facilitate banks’ ability to identify clear and consistent examples of community supportive services. The agencies also considered and appreciate additional examples of community supportive services offered by commenters, including additional suggestions noted above to supplement § ll.13(d)(7) regarding other activities that benefit or serve individuals with disabilities. As discussed above, the list of examples in § ll.13(d)(1) through (8) is non-exclusive. The agencies believe that the list of examples adopted in the final rule address a wide range of qualified community supportive services and do not believe that it would be possible or practicable to capture every kind of community supportive service in the regulation. The agencies note that, to the extent that any other activity meets the general definition set forth in § ll.13(d), it would be considered a community supportive service. While the agencies are not adding mention of specific additional community supportive services activities to the final rule, the agencies will take commenters’ recommended examples under advisement as the agencies develop the illustrative list anticipated by § ll.14(a). 414 Final § ll.13(d)(2) is distinguishable from final § ll.13(d)(1). Section ll.13(d)(1) references the narrower defined term of missiondriven nonprofit organizations, but is not geographically focused; while § ll.13(d)(2) references nonprofit organizations more broadly, but is focused on particular census tracts. Both examples are intended to facilitate banks’ ability to identify and document that an activity is a qualified community supportive service. 415 See, e.g., William Erickson, Camille Lee, and Sarah von Schrader, ‘‘2021 Disability Status Report: United States,’’ Cornell University Yang-Tan Institute on Employment and Disability, 40 (2023), https://www.disabilitystatistics.org/report/pdf/ 2021/2000000. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Section ll.13(e) Through (j) PlaceBased Community Development Current Approach The current regulation defines ‘‘community development’’ to include ‘‘activities that revitalize or stabilize’’ the following four types of geographic areas: • Low- or moderate-income census tracts; • Designated disaster areas; • Distressed nonmetropolitan middleincome census tracts; and • Underserved nonmetropolitan middle-income census tracts.416 The Interagency Questions and Answers further elaborate on revitalization and stabilization activities in these geographic areas.417 With respect to low- and moderate-income census tracts, designated disaster areas, and distressed nonmetropolitan middleincome census tracts, current guidance states that revitalization and stabilization activities are those that help to ‘‘attract new, or retain existing, businesses or residents’’ in that geographic area.418 Current guidance for the same three targeted geographic areas also states that an activity will be presumed to revitalize or stabilize a geographic area if the activity is consistent with a government plan for the revitalization or stabilization of the area.419 416 12 CFR ll.12(g)(4). The current regulation provides that distressed or underserved nonmetropolitan middle-income census tracts are ‘‘designated by [the Board, FDIC, and OCC] based on—(A) Rates of poverty, unemployment, and population loss; or (B) Population size, density, and dispersion.’’ 12 CFR ll.12(g)(4)(iii). The regulation further provides that ‘‘[a]ctivities revitalize and stabilize [census tracts] designated based on population size, density, and dispersion if they help to meet essential community needs, including needs of low- and moderate-income individuals.’’ Id. 417 See Q&A § ll.12(g)(4)(i)–1 (regarding low- or moderate-income census tracts), Q&A § ll.12(g)(4)(ii)–2 (regarding designated disaster areas), Q&A § ll.12(g)(4)(iii)–3 (regarding distressed nonmetropolitan middle-income census tracts), and Q&A § ll.12(g)(4)(iii)–4 (regarding underserved nonmetropolitan middle-income census tracts). Activities considered to revitalize and stabilize a designated disaster area must also be ‘‘related to disaster recovery.’’ See Q&A § ll.12(g)(4)(ii)–2. 418 See Q&A § ll.12(g)(4)(i)–1 (regarding low- or moderate-income geographies), Q&A § ll.12(g)(4)(ii)–2 (regarding designated disaster areas), and Q&A § ll.12(g)(4)(iii)–3 (regarding distressed nonmetropolitan middle-income census tracts). The ‘‘attract new or retain existing businesses or residents’’ language is not in the guidance on revitalization and stabilization activities for underserved nonmetropolitan middleincome census tracts. See Q&A § ll.12(g)(4)(iii)– 4. 419 See Q&A § ll.12(g)(4)(i)–1 (regarding low- or moderate-income census tracts), Q&A § ll.12(g)(4)(ii)–2 (regarding designated disaster areas), and Q&A § ll.12(g)(4)(iii)–3 (regarding PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 6671 Further, in designated disaster areas and distressed nonmetropolitan middleincome census tracts, current guidance specifies that examiners will consider all activities that revitalize or stabilize a census tract but give greater weight to those activities that are most responsive to community needs, including the needs of low- or moderate-income individuals or neighborhoods.420 In determining whether an activity revitalizes or stabilizes a low- or moderate-income census tract, in the absence of a Federal, State, local, or tribal government plan, guidance instructs examiners to evaluate activities based on the actual impact on the census tract, if that information is available.421 If not, examiners will determine whether the activity is consistent with the community’s formal or informal plans for the revitalization and stabilization of the low- or moderate-income census tract.422 Regarding underserved nonmetropolitan middle-income census tracts, current guidance focuses on clarifying the regulatory provision stating that activities in census tracts designated by the agencies as underserved based on ‘‘population size, density, and dispersion’’ are considered to be revitalization and stabilization activities ‘‘if they help to meet essential community needs, including needs of low- and moderate-income individuals.’’ 423 To this end, the Interagency Questions and Answers state that activities such as ‘‘financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks, affordable housing, or communication services’’ in underserved nonmetropolitan middleincome census tracts will be evaluated to determine whether they meet essential community needs.424 The guidance also provides several examples of projects that may be considered to meet essential community needs, such as hospitals, industrial parks, rehabilitated sewer lines, mixed-income housing, and renovated schools—as long as the population served includes distressed nonmetropolitan middle-income census tracts). 420 See Q&A § ll.12(g)(4)(ii)–2 (regarding designated disaster areas) and Q&A § ll.12(g)(4)(iii)–3 (regarding distressed nonmetropolitan middle-income census tracts). 421 See Q&A § ll.12(g)(4)(i)–1. 422 See id. 423 12 CFR ll.12(g)(4)(iii)(B). 424 Q&A § ll.12(g)(4)(iii)–4. E:\FR\FM\01FER2.SGM 01FER2 6672 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 low- and moderate-income individuals.425 Overview of the Proposal The agencies’ proposal replaced the current revitalization and stabilization activities component of the community development definition with six separate categories of activities: • Revitalization activities undertaken in conjunction with a government plan, program, or initiative; 426 • Essential community facilities activities; 427 • Essential community infrastructure activities; 428 • Recovery activities in designated disaster areas; 429 • Disaster preparedness and climate resiliency activities; 430 and • Qualifying activities in Native Land Areas.431 Each of the proposed categories included requirements to benefit residents of targeted geographic areas, as discussed in more detail below, and thus are referred to as ‘‘place-based categories’’ (and the activities defined within the categories as ‘‘place-based activities’’) throughout this SUPPLEMENTARY INFORMATION. Each of the proposed place-based categories also generally shared three other common required eligibility criteria (with adjustments specific to certain categories). Specifically, relevant activities must: • Benefit or serve residents of the targeted geographic area, including lowor moderate-income individuals; • Not displace or exclude low- or moderate-income individuals; and • Be conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative that includes an explicit focus on benefiting or serving the targeted geographic area. These criteria are generally referred to as ‘‘place-based criteria’’ throughout this SUPPLEMENTARY INFORMATION. By refining and further clarifying the current regulation and guidance regarding the revitalization and stabilization category of community development, the agencies intended to provide greater certainty about what activities are considered to revitalize and stabilize communities, and thus be considered community development. This section-by-section analysis first discusses the three place-based criteria 425 See id. proposed § ll.13(e). 427 See proposed § ll.13(f). 428 See proposed § ll.13(g). 429 See proposed § ll.13(h). 430 See proposed § ll.13(i). 431 See proposed § ll.13(k). 426 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 noted above, including general comments received and general revisions made in the final rule. An analysis of each of the six place-based community development categories follows, under which specific final place-based criteria provisions and revisions are discussed. As will be discussed below, the final rule generally retains the three common place-based criteria proposed for each of the six place-based categories, with some modifications. The analysis of the placebased criteria below generally follows the order of the proposal; as discussed under the analysis of each of the specific place-based categories, the final rule reorganizes the common placebased criteria to establish a consistent parallel structure across the categories. Benefits or Serves Residents, Including Low- or Moderate-Income Individuals, of Targeted Geographic Areas The Agencies’ Proposal Across all place-based categories, the agencies proposed that activities supported by a bank’s loans, investments, or services would be considered community development only in relation to particular geographic areas. Specifically, revitalization activities in conjunction with a government plan, program or initiative, essential infrastructure activities, essential community facilities activities, and disaster preparedness and climate resiliency activities would be community development under the proposal if they benefited or served residents, including low- or moderateincome residents, of one or more ‘‘targeted census tracts,’’ defined in proposed § ll.12 to mean low- or moderate-income census tracts and distressed or underserved nonmetropolitan middle-income census tracts.432 Similarly, essential community facilities, essential infrastructure, and disaster preparedness and climate resiliency activities would also be required to be ‘‘conducted in’’ targeted census tracts.433 Under the proposal, recovery activities in designated disaster areas qualified in census tracts of all income 432 See proposed § ll.13(e) (revitalization activities), (f) (essential community facilities activities), (g) (essential community infrastructure activities), and (i) (disaster preparedness and climate resiliency activities). For further discussion of the definition of ‘‘targeted census tract,’’ see the section-by-section analysis of § ll.12 (‘‘targeted census tract’’). 433 See proposed § ll.13(f) (essential community facilities activities), (g) (essential community infrastructure activities), and (i) (disaster preparedness and climate resiliency activities). PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 levels, provided that the activities benefited or served residents, including low- or moderate-income residents, in an area subject to a Federal Major Disaster Declaration (excluding Major Disaster Categories A and B).434 Activities in Native Land Areas would qualify as community development if they were ‘‘specifically targeted to and conducted in Native Land Areas’’ and ‘‘benefited residents of Native Land Areas, including low- or moderateincome residents.’’ 435 The agencies also proposed requirements regarding the beneficiaries of place-based activities—specifically, that they benefit or serve residents of the relevant targeted geographic area, including low- or moderate-income residents. The express inclusion of ‘‘low- or moderate-income residents’’ incorporated an emphasis on benefits for low- and moderate-income individuals reflected in the current regulation and guidance on revitalization and stabilization activities, as well as the CRA statute.436 The agencies sought feedback on how place-based activities can focus on benefiting residents in targeted census tracts and ensure that the activities benefit low- or moderate-income residents. Comments Received Commenters offered various views on how to focus place-based activities on benefiting residents in targeted geographic areas, and how to ensure that the activities benefit low- or moderate-income residents. Comments specific to whether activities should be directly conducted in targeted geographic areas are generally discussed under the section-by-section analyses for the respective place-based categories, where applicable. Several commenters suggested that the agencies adopt quantitative measures for evaluating benefits, such as requiring a majority of the beneficiaries to be lowor moderate-income in the targeted geographic area, or requiring a majority of beneficiaries to be low- or moderateincome minorities. Some commenters recommended that data on benefits to low- and moderate-income residents proposed § ll.13(h)(1). proposed § ll.13(l). The definition of ‘‘Native Land Area’’ is discussed further in the section-by-section analysis of § ll.12. 436 See, e.g., 12 CFR ll.12(g)(4); Q&A § ll.12(g)(4)(i)–1 (regarding low- or moderateincome geographies), Q&A § ll.12(g)(4)(ii)–2 (regarding designated disaster areas), Q&A § ll.12(g)(4)(iii)–3 (regarding distressed nonmetropolitan middle-income census tracts), and Q&A § ll.12(g)(4)(iii)–4 (regarding underserved nonmetropolitan middle-income census tracts); 12 U.S.C. 2903(a) and 2906(a)(1). 434 See 435 See E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations should be part of community development data submissions, such as documentation regarding the number and percent of low- and moderateincome persons in the census tract(s) of the target area and a narrative explaining how the activity would benefit them, or other evidence of community benefit such as job creation, living wages, fair lease payments, or sound land-use planning practices. In contrast, a commenter suggested that the agencies also allow for consideration of activities where benefits to low- or moderate-income individuals are not readily quantifiable, but otherwise demonstrable. This commenter cautioned that ‘‘means testing’’ would complicate community development financing and might not be possible, potentially discouraging bank investment, but suggested that projects located in low- and moderate-income or distressed census tracts were likely to serve residents of those tracts and others in the area. Some commenters suggested requiring community input to demonstrate that activities benefit residents, including low- or moderate-income residents, of targeted census tracts. For instance, commenters recommended that banks document (and the agencies consider) public feedback provided by community groups; public attestations; or community benefit agreements (CBAs). Several commenters recommended that examiners use their judgment to determine whether qualifying activities benefit low- and moderate-income residents, indicating, for example, that different types of activities will warrant different types of evidence to demonstrate benefit to low- and moderate-income residents. Other commenters suggested that a statement from a bank’s public or nonprofit organization partners could provide evidence of a place-based activity’s impact on low- and moderate-income communities. ddrumheller on DSK120RN23PROD with RULES2 Final Rule The final rule generally retains the three common place-based criteria proposed for each of the six place-based categories, with some modifications. Generally applicable language and revisions are addressed here, with category-specific language described under each category below in this section-by-section analysis. Consistent with the proposal, each of the final place-based categories adopts a specific focus on targeted geographic areas, discussed in each of the sectionby-section analyses of the place-based categories below. Under the final rule, VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 6673 the geographic area focus for each category is as follows: • For revitalization or stabilization (§ ll.13(e)), essential community facilities (§ ll.13(f)), essential community infrastructure (§ ll.13(g)), and disaster preparedness and weather resiliency (§ ll.13(i)): ‘‘targeted census tracts.’’ Consistent with the proposal, targeted census tracts are defined in final § ll.12 as low- and moderate-income census tracts, as well as distressed or underserved nonmetropolitan middle-income census tracts; • For recovery of designated disaster areas (§ ll.13(h)): ‘‘areas subject to a Federal Major Disaster Declaration, excluding Major Disaster Categories A and B’’; and • For qualified activities in Native Land Areas (§ ll.13(j)): ‘‘residents of Native Land Areas.’’ 437 For each place-based category, the final rule also adopts substantially as proposed the place-based criterion that activities benefit or serve residents, including low- or moderate-income individuals, in the targeted geographic areas, including the proposed criterion that revitalization activities in Native Land Areas must have ‘‘substantial benefits for low- and moderate-income residents.’’ 438 The final rule revises the proposed language of this criterion, with no substantive change intended, to reference ‘‘low- or moderate-income individuals’’ rather than ‘‘low- or moderate-income residents,’’ which aligns with usage of the word ‘‘individuals’’ in the definitions of lowincome and moderate-income in final § ll.12 and is generally consistent with usage of the term ‘‘low- or moderate-income individuals’’ throughout the rule. As discussed in the proposal, this criterion establishes a consistent expectation that residents in the relevant targeted geographic areas will benefit from the qualifying activity and that the residents benefiting from the activity will include low- and moderate-income individuals. To further the purposes of CRA, the agencies believe it important that loans, investments, and services considered in a bank’s community development performance evaluation support placebased activities that provide direct benefit to the people living in targeted geographic areas rather than solely supporting redevelopment these geographic areas more generally. Together with the other common placebased criteria discussed in more detail below, the agencies believe that this criterion will ensure a strong connection between activities and community needs. The agencies have considered, but are not adopting, additional quantitative standards or criteria in final § ll.13(e) through (j), including a requirement that a majority of the beneficiaries of a qualifying activity in the proposed (and final) targeted geographic areas be lowor moderate-income individuals, minorities, or other underserved individuals. The agencies understand and appreciate the concerns giving rise to commenter suggestions for more precisely defining qualifying community development activities to focus on these individuals and communities. For this reason, as noted in the proposal, the agencies also considered a criterion that place-based activities benefit or serve solely low- or moderate-income individuals. On further consideration, however, the agencies believe that the final criterion (‘‘benefits or serves residents, including low- or moderate-income residents’’ 439) is appropriately adaptable, providing needed flexibility to address the wide range of community development needs that may exist in the areas targeted in the proposed and final rule’s place-based community development categories. Rather than adding quantitative limitations or other parameters to this proposed criterion, the agencies intend, in adopting this criterion generally as proposed, to maintain flexibility for activities to meet multiple types of community needs in the areas targeted by place-based activities—while also requiring the inclusion of low- or moderate-income individuals as beneficiaries. This flexibility remains particularly important in distressed and underserved nonmetropolitan middle-income census tracts, which can have fewer low- or moderate-income residents. The agencies further believe that this criterion, as adopted, is consistent with the CRA statute, which is focused on meeting the credit needs of an entire community, including low- and moderate-income needs.440 In addition, 437 The term ‘‘Native Land Area’’ is separately defined in section § ll.12 and discussed in detail in the accompanying section-by-section analysis. 438 See proposed § ll.13(l)(1)(i)(A) (‘‘revitalization activities in Native Land Areas’’) and final § ll.13(j)(2)(ii) (revised to refer to ‘‘revitalization or stabilization activities in Native Land Areas’’). 439 The final rule adopts different language for revitalization or stabilization activities in Native Land Areas, which must benefit or serve residents of Native Land Areas, ‘‘with substantial benefits for low- or moderate-income individuals’’ (emphasis added). See final § ll.13(j)(2)(ii), discussed in the section-by-section analysis of § ll.13(j). 440 See 12 U.S.C. 2903(a) and 2906(a)(1). PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 E:\FR\FM\01FER2.SGM 01FER2 6674 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations the agencies note that, under the majority standard discussed in the section-by-section analysis of § ll.13(a), loans, investments, or services supporting placed-based community development may receive community development consideration only if the majority of the beneficiaries are, or the majority of the dollars benefit or serve, residents of the targeted geographic areas.441 The agencies are also not adopting additional criteria, recommended by some commenters, for demonstrating and evaluating the benefits of placebased activities, such as through suggested data points or requiring community input. On further deliberation, the agencies are concerned that requiring specific ways of demonstrating benefits to residents could add complexity and burden, potentially dissuading banks from supporting place-based activities. The agencies further believe that maintaining some flexibility in the regulation is necessary to accommodate varying community needs and relationships that banks have with communities. At the same time, the agencies recognize that data and community input could be helpful in demonstrating and evaluating benefits of activities to residents of targeted geographic areas, including low- and moderate-income individuals; the final rule does not preclude banks and examiners from using an array of useful information in this regard. As was noted by commenters, examiner judgment will continue to have a role in agency determinations regarding whether activities benefit residents of targeted geographic areas, including low- or moderate-income individuals. However, by adopting the criterion requiring activities to benefit or serve residents, including low- or moderate-income individuals, in combination with other place-based criteria, the agencies intend to clarify expectations and to promote consistency in application across placebased categories of community development. Comments Received The Agencies’ Proposal The agencies proposed that eligible place-based activities could not lead to the displacement or exclusion of low- or moderate-income residents in relevant geographic areas.442 For example, the Most commenters supported requiring that qualifying place-based activities not displace or exclude low- and moderateincome residents. Many of these commenters asserted that the antidisplacement and anti-exclusion criterion should be extended to other categories of community development, with a number of commenters advocating for an extension of the criterion to the proposed category for affordable housing under proposed § ll.13(b), including the naturally occurring affordable housing prong in proposed § ll.13(b)(2).443 A variety of commenters asserted that the criterion should be strengthened, and offered suggestions for demonstrating or measuring nondisplacement and non-exclusion for activities supported by a bank’s loans, investments, or services. Suggestions included, for example, that a bank: • Demonstrate compliance with tenant protections, local health and habitability codes, civil rights and other relevant laws; • Conduct due diligence to determine whether a project involves any concerns relating to eviction, harassment, complaints, rent increases, or habitability violations; • Demonstrate that projects did not reduce affordable housing units or displace small businesses or farms; • Evidence support for resident retention through lending in low- and moderate-income communities or minority communities to ensure nondisplacement of those communities; or • Provide attestations from public sector or nonprofit partners that displacement did not occur, or require final § ll.13(a)(1)(i)(B)(4) through (6). proposed § ll.13(e)(2) (revitalization), (f)(2) (essential community facilities), (g)(2) (essential community infrastructure), (h)(2) (recovery in designated disaster areas), proposed (i)(2) (disaster preparedness and climate resiliency), and (l)(1)(i)(B) and (l)(2)(i) (Native Land Areas). 443 See proposed § ll.13(b), discussed above. Prohibits Displacement or Exclusion of Low- or Moderate-Income Individuals ddrumheller on DSK120RN23PROD with RULES2 proposal noted that, if a project to build commercial development to revitalize an area involved demolishing housing occupied by low- or moderate-income individuals, then the project would not meet this criterion and loans, investments, or services supporting it would be ineligible for CRA credit. In proposing this criterion, the agencies sought to ensure that qualifying activities do not have a detrimental effect on low- or moderate-income individuals or communities or on other underserved communities. The agencies sought feedback on how considerations about whether an activity would displace or exclude low- or moderateincome residents should be reflected in the rule. 441 See 442 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 other documentation of the community engagement process. Other commenters focused on gentrification concerns more expressly. For example, commenters recommended that the agencies: (1) consider whether an activity would promote gentrification and displacement of existing low- and moderate-income residents through increased rents.; (2) recognize both physical displacement, such as in the proposal’s example of affordable housing being demolished to create housing serving higher-income households, and more general displacement from inflationary pressures caused by rapid growth or gentrification; and (3) closely evaluate the demographics of financial institutions’ financing practices in relation to gentrification. Other commenters indicated that impact on minorities within identified census tracts should be accounted for, or that the agencies should expand CRA discrimination downgrade criteria to include incidents of displacement of, or harm to, low- and moderate-income communities and/or minorities. Some commenters supported the goal of preventing displacement but suggested that the proposed criterion was too broad and thus might inadvertently disqualify activities that would otherwise align with community development goals. Accordingly, some commenters recommended that the criterion be revised to, for instance: (1) allow for activities that result in displacement, if mitigation of displacement is incorporated into the project, such as voluntary agreements that provide for compensation, alternative housing in or near the relevant community, or other similar benefits to displaced residents; (2) provide other carve-outs from the criterion, such as for temporary relocations or limited displacement; or (3) include only involuntary or forced displacement, to permit, for example, voluntary relocation from climateimpacted areas. Other commenters opposed the proposal to include an antidisplacement or anti-exclusion criterion as part of place-based community development activities, with some explicitly opposed to a criterion disallowing exclusion of low- and moderate-income individuals. Some of these commenters expressed concern about an undefined, overbroad, or subjective standard, with some suggesting that the proposed criterion would be difficult to demonstrate and for examiners to evaluate. A commenter suggested that meeting this criterion E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 would be especially difficult in advance of, or shortly after the completion of, the activity, and indicated that banks might not be able to predict or control the long-term effects of projects. This commenter asserted that the proposal would add inconsistency and uncertainty to CRA evaluations and potentially chill beneficial community development projects in low- or moderate-income communities. Several commenters suggested that the agencies omit the displacement and exclusion prohibition and instead weigh the overall impact of activities on targeted census tracts (and other relevant geographic areas, as applicable). For example, commenters suggested that activities could have larger community benefits even if some displacement results, such as a commercial mixed-use project that results in some displacement of lowand moderate-income residents but includes housing for low- and moderateincome residents. A commenter also suggested that the proposed antidisplacement criterion was inconsistent with the criterion that a project be ‘‘in conjunction with’’ a government plan, indicating that government revitalization plans sometimes involve the removal of apartment buildings that have sub-standard units. Final Rule In the final rule, the agencies are adopting a revised version of the proposal to include a place-based criterion that activities may not ‘‘directly result in the forced or involuntary relocation of low- or moderate-income individuals’’ in the targeted geographic areas. This criterion is designed to ensure that qualifying activities do not have a direct detrimental effect on low- or moderateincome individuals or communities in the relevant targeted geographic areas. The agencies believe that qualifying place-based community development activities that deny such populations the benefits of those activities through forced or involuntary relocation out of the targeted geographic area would be inconsistent with the purpose of the CRA to encourage banks to help serve the credit needs of their communities, including low- or moderate-income populations. The agencies have considered and are persuaded by comments that refinements to the proposed criterion are appropriate so as not to disqualify responsive community development activities that align with the purpose of the CRA. In particular, the agencies have considered concerns raised by some commenters based on their view VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 of the breadth of the proposed standard. The agencies recognize, for example, that otherwise qualifying disaster recovery or disaster preparedness activities with widespread benefits for a community could involve voluntary relocation residents due to environmental conditions such as an increased risk of significant flooding. Therefore, the agencies have revised the proposal to focus the final rule’s criterion on prohibiting activities that would result in the forced or involuntary physical displacement of low- or moderate-income individuals as a direct result of the activity. The final rule’s criterion on displacement does not include the proposal’s specific prohibition on ‘‘exclud[ing]’’ low- and moderateincome residents. As noted above, the final rule includes a criterion that placebased activities must benefit or serve residents of a targeted geographic area, including low- or moderate-income individuals (with revitalization or stabilization activities in Native Land Areas requiring ‘‘substantial benefits for low- or moderate-income individuals’’ 444). Given that the requirement to benefit or serve a targeted geographic area must include low- or moderate-income individuals (and therefore cannot exclude those individuals), on further consideration, the agencies believe that the exclusion language is redundant. However, the agencies do not intend a substantive change relative to the proposal. Thus, if low- or moderate-income individuals were not able to access or benefit from an activity, then the activity would not include low- or moderate-income individuals and therefore would not qualify as community development under the final rule. Under the final rule, ‘‘forced or involuntary relocation’’ could encompass both overt activities such as demolishing a building, as well as actions directly resulting in conditions for remaining in place being infeasible or undesirable, such as uninhabitable conditions. Accordingly, under the final rule, a project that involves demolishing a multifamily building in which low- or moderate-income individuals reside, thereby forcibly removing residents, would not qualify as community development under the place-based categories. In contrast, projects involving relocation of individuals could conceivably qualify as community development where residents agree to voluntary relocation. Regarding the concern that the proposed antidisplacement standard could conflict 444 See PO 00000 final § ll.13(j)(2)(ii). Frm 00103 Fmt 4701 Sfmt 4700 6675 with government plans, the agencies believe that the revisions to the proposal—to focus on ‘‘forced or involuntary relocation’’—will help mitigate this concern by adding greater specificity to the provision. For example, if a government plan involves demolishing a building that has suffered substantial hurricane damage, and all tenants are willing to relocate, the relocation of those tenants would not be disqualifying under this place-based criterion. Additionally, the final rule states that activities may not ‘‘directly’’ result in forced or involuntary relocation. Accordingly, to be disqualified, an activity must directly relate to the involuntary relocation. For example, if a commercial development project to revitalize an area involved demolishing housing occupied by low- or moderateincome individuals, this project would directly result in the relocation of those occupants. Depending on the facts and circumstances, if the relocation were forced or involuntary, then the loans, investments, or services supporting the project would be ineligible for CRA consideration. In contrast, while the agencies note commenter feedback regarding future market pressures on rents and other costs resulting from neighborhood redevelopment and share these concerns, the agencies do not believe such pressures generally would directly result in forced or involuntary relocation, and thus generally would not be disqualifying under the final criterion. Further, the agencies believe that evaluating the impact of a particular project on the broader market in the future, such as the possibility of general rent increases across the market, could be challenging or speculative, resulting in inconsistencies in application and decreased certainty as to which projects may qualify as community development. For similar reasons, the agencies are not incorporating specific displacement and relocation mitigation options as part of this criterion in the final rule. The agencies are concerned that doing so could create a need for a complex set of parameters regarding appropriate mitigation for otherwise qualifying activities. Further, determining when mitigation efforts are sufficient in all cases could be difficult or impracticable, as facts and circumstances can vary widely. Likewise, on further consideration, the agencies are not adopting additional commenter-recommended standards or criteria to measure or otherwise demonstrate or determine whether an activity displaces residents. As with the above place-based criterion to benefit or E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6676 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations serve residents of a targeted geographic area, including low- and moderateincome individuals, the agencies are concerned that specific evidentiary requirements or required methods to demonstrate or determine whether an activity displaces residents could add complexity and burden, potentially dissuading banks from engaging in place-based activities. The agencies further recognize that the range of circumstances and contexts of potentially qualifying projects could have implications for whether specific measures pertaining to displacement determinations are appropriate, and might not be foreseeable. The agencies have also considered commenter suggestions to incorporate this particular criterion into other community development categories, but believe that this criterion is most appropriate for place-based activities. The agencies believe that the criterion is appropriate specifically for place-based activities to ensure that activities designed to benefit a targeted geographic area do not have direct detrimental impacts on the residents the activities are intended to serve. Further, the relocation impacts of a particular activity can be more easily identified relative to a particular targeted geographic area, which are well-defined in, and the focus of, place-based community development activities in the final rule. Regarding comments encouraging expansion of the criterion to the affordable housing category, particularly naturally occurring affordable housing in § ll.13(b)(2), the agencies note that, under the final rule, this type of affordable housing is designed to create units or facilitate maintenance of existing units of affordable housing, and examiners will retain discretion to consider whether an activity reduces the number of housing units affordable to low- or moderateincome individuals. This design thus indirectly includes anti-displacement guardrails.445 The criterion is also less appropriate for other community development categories, such as community supportive services and financial literacy, that are unlikely to result in the direct relocation of residents.446 Regarding comments that the rule should permit downgrades for activities that result in displacement, the agencies note that under the final rule, as currently, evidence of illegal credit practices is the basis of a rating 445 For further discussion, see final § ll.13(b)(2) and the accompanying section-by-section analysis. 446 See final § ll.13(d) and (k), respectively, and the accompanying section-by-section analyses. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 downgrade.447 The agencies have given serious consideration to the types of practices that should result in a ratings downgrade, in light of significant comments on this topic. For further discussion of the types of practices that can lead to a ratings downgrade under the final rule, see the section-by-section analysis of final § ll.28(d). The agencies also emphasize that, under the final rule, no place-based activity directly resulting in forced or involuntary relocation of low- or moderate-income individuals will qualify as community development, so no bank may receive community development consideration for loans, investments, or services supporting those activities. Finally, the agencies are not removing this criterion from the final rule or revising the rule to weigh overall impacts to a market, such as net benefits of an activity to a particular market, accounting for displacement. The agencies have considered comments suggesting removal or revision in this regard, but believe that granting consideration for loans, investments, or services that support projects directly resulting in forced or involuntary relocation of low- or moderate-income residents of targeted geographic areas, even in conjunction with a government plan, would be inconsistent with the express focus of the CRA on the needs of low- or moderate-income populations. Overall, the agencies believe that the final criterion as adopted offers a more precise standard relative to the proposal that appropriately balances encouraging activities that provide community benefits to residents of a targeted geographic area, including low- and moderate-income residents of targeted geographic areas, while discouraging activities that have detrimental effects on the residents of those targeted geographic areas, including low- or moderate-income individuals. The agencies recognize commenter concerns that the proposed rule was overbroad or could be difficult to evaluate, and believe that the final rule regulatory text on this criterion more accurately expresses the intent of the proposal and will be more practicable to establish than the proposed language. Conducted in Conjunction With a Government Plan, Program, or Initiative The Agencies’ Proposal The agencies proposed that activities eligible under the place-based community development categories 447 See current 12 CFR ll.28(c), proposed § ll.28(d), and final § ll.28(d). PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 would need to be undertaken ‘‘in conjunction with a [F]ederal, [S]tate, local, or tribal government plan, program, or initiative’’ that, for most proposed placed-based activities, would have to include ‘‘an explicit focus’’ on benefiting the relevant targeted geographic area.448 The agencies sought feedback on whether any or all placebased definition activities should be required to be conducted in conjunction with a government plan, program, or initiative and include an explicit focus of benefiting the targeted geographic area. In addition, the agencies sought feedback on appropriate standards for government plans, programs, or initiatives and asked about alternative options for determining whether placebased activities meet identified community needs. Comments Received Some commenters supported the proposed common criterion to require that place-based community development be conducted in conjunction with a government plan, program, or initiative. These comments included, for example, a commenter asserting that banks’ lending should be aligned with government efforts to ensure investments reach underserved communities and have the highest impact, and expressing the view that the proposed language ‘‘in conjunction with’’ would ensure that alignment. Several commenters supportive of the proposed criterion suggested adding other criteria as well, such as showing that a plan, program, or initiative has broad community support, to ensure that the government plan, program or initiative is responsive to community needs, or involves consultation and partnership with community- and faithbased organizations in targeted communities to determine how best to tailor activities. Commenter recommendations also included that banks should have to demonstrate that the underlying government plan or program includes goals and standards appropriately aligned with a community development category under CRA; and that qualifying plans should be included in an official government document that is readily available to the public and has 448 See proposed § ll.13(e) (revitalization), (f)(3) (essential community facilities), (g)(3) (essential community infrastructure), (h)(3) (recovery in designated disaster areas), (i)(3) (disaster preparedness and climate resiliency), and (l)(1)(i) (revitalization in Native Land Areas). Proposed § ll.13(l)(2)(ii) (essential community facilities and essential community infrastructure in Native Land Areas) and (l)(3)(ii) (disaster preparedness and climate resiliency in Native Land Areas) did not include the ‘‘explicit focus’’ language. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations been subject to a formal community review process. However, a majority of commenters opposed or expressed concerns about requiring place-based activities to be conducted in conjunction with a government plan, program, or initiative as proposed, with some commenters suggesting eliminating the requirement altogether, or expanding the government plan, program, or initiative criteria to include other options for defining eligible activities. Some commenters viewed the criterion as too limiting, given that communities do not always have government plans, programs, or initiatives in place for community development. Commenters stated, for example, that: local governments in areas most in need of stabilization and revitalization, including small towns and rural areas, might not always have a plan, program, or initiative for the targeted census tract; consolidated plans developed at the State level often do not target rural areas at the census tract level; the requirement could prevent activities where banks are unable to find a government partner or to know in advance if one will be available for a prospective project; and, more generally, the requirement could lead to a contraction rather than an expansion of community development activities. A few commenters expressed concern that the proposed criterion would exclude impactful activities with nonprofit organizations or in the private sector that are not associated with a formal government plan but could effectuate the same community development purposes. A commenter expressed concern that banks could be penalized for supporting activities in areas without a plan and suggested that, at a minimum, the agencies should instead require only that an activity be conducted ‘‘consistent with’’ such a government plan, program, or initiative. Particularly regarding the proposed disaster preparedness and climate resiliency category of community development,449 a commenter suggested that if the government plan requirement were retained, the final rule should clarify that plans developed by local utilities are included. Other commenters asserted that government plans that do exist do not always match community goals or, similar to comments mentioned above, may unevenly address community needs. For instance, a commenter suggested that a local agency plan or initiative might not be responsive to needs of modest-income residents or 449 See final § ll.13(i), discussed in detail in the accompanying section-by-section analysis. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 minorities, or might be harmful to their interests. With respect to climate activities, a number of commenters argued that government plans may be inadequate or slow to respond to community needs. A few commenters noted that government programs regarding climate change often lack a racial justice focus. Some commenters supported broadening this criterion to include place-based activities in partnership with not only governments, but also local community organizations with plans, programs, or initiatives, particularly organizations that have knowledge of, and a successful record of working within, the relevant community; or, similarly, communityled plans and plans conducted in conjunction with community development organizations and nonprofit organizations that benefit lowand moderate-income individuals and communities. For example, a commenter recommended that bank lending and investment in low- and moderate-income communities working with mission-driven lenders should receive community development consideration. Another commenter emphasized the importance of including in any criterion the activities of Black developers or community organizers that engage in place-based activities outside of government plans—as long as such activities still meet the explicit focus of benefiting the targeted census tract, including low- and moderateincome residents. Other commenters suggested that place-based activities should instead simply qualify as community development if clearly supported by documentation that the activity meets a need in the community. For example, a commenter expressing concern regarding the level of required government engagement advocated for giving banks more flexibility to engage with non-government partners in projects that also met community needs, without the need to have a government plan in place. Several commenters suggested that the key qualification standard for place-based activities should be whether intended beneficiaries are low- and moderateincome census tract residents or other low- and moderate-income individuals. Some commenters supported the agencies’ goals to create clear standards for qualification of place-based activities, but recommended alternatives to a requirement that place-based activities be conducted in conjunction with a government plan, program, or initiative. For example, several commenters suggested that, rather than PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 6677 requiring a nexus to a government, plan, program, or initiative, the final rule should incorporate impact scoring to boost consideration of activities undertaken in conjunction with a government plan, or that government plans should serve as evidence that an activity is responsive to local needs. A few commenters recommended a qualitative approach to assessing the value of place-based activities to the community, such as through examiner analysis of performance context or a CBA to determine community needs and whether activities respond to them. Additionally, a few commenters suggested that the agencies consider activities with a race-conscious objective or develop a ranking of activities that emphasize working in conjunction with government plans, programs, and initiatives that have a race conscious objective. Final Rule The final rule adopts the proposed criterion that activities be conducted in conjunction with a government plan, program, or initiative, with revisions to: (1) broaden the criterion to include activities undertaken in conjunction with a mission-driven nonprofit organization; and (2) to generally delete the word ‘‘explicit’’ where applicable when referencing the focus of the government plan on the relevant community development activity in a particular geographic area.450 Accordingly, the final rule generally adopts as a criterion that activities be undertaken in conjunction with a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on, for example, ‘‘revitalizing or stabilizing targeted census tracts.’’ 451 In general. As discussed in the proposal, the agencies intend this criterion to achieve several objectives. First, the criterion will help ensure that place-based activities are responsive to identified community needs. Government plans, programs, or initiatives provide a mechanism for ensuring that activities are intentional 450 As noted, the ‘‘explicit focus’’ language for the government plan, program, or initiative appeared the provisions for all proposed placed-based categories of community development, other than essential community facilities, essential community infrastructure, and disaster preparedness and climate resiliency activities in Native Land Areas. 451 See final § ll.13(e)(1)(i) (revitalization and stabilization), (f)(1) (essential community facilities), (g)(1) (essential community infrastructure), (h)(1)(i) (disaster recovery), and (i)(1) (disaster preparedness and weather resiliency). The ‘‘explicit focus’’ language is adopted regarding qualifying activities in Native Land Areas. See final § ll.13(j)(2)(i) and (j)(3)(i). E:\FR\FM\01FER2.SGM 01FER2 6678 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 and support articulated community development goals, with a specific tie to the relevant geographic areas. The agencies believe that these plans, programs, and initiatives are general indicators of community needs. As discussed in more detail below, expanding the criterion to plans, programs, and initiatives of missiondriven nonprofit organizations will provide another mechanism to ensure a nexus between an activity and community needs in a particular geographic area, given these organizations’ knowledge and record of working within, and with residents of, targeted geographic areas. Including mission-driven nonprofit organizations in the criterion also will help address commenter feedback that government plans, programs, and initiatives are not always available or are not always responsive to or inclusive of all of the needs in a particular geographic area. Second, the final rule is intended to improve consistency, certainty, and transparency, which will give banks and other stakeholders more upfront clarity on how activities may qualify, prior to banks engaging in those activities. The criterion will increase consistency relative to current practice, where standards are complex and vary across geographic areas, including related to how banks can rely on a government plan to demonstrate qualification.452 The rule will also increase certainty and transparency in that this criterion sets forth a clear standard for determining whether a place-based activity qualifies as community development and a bank’s community development loans, investments, or services supporting it could receive community development consideration. Finally, the agencies believe that the final rule will provide additional clarity relative to current guidance by permitting consideration for activities in conjunction with a program or initiative, even if not part of a plan. The agencies believe that the adopted criterion will allow for consideration of 452 For example, under current guidance an activity in a distressed nonmetropolitan middleincome geography is presumed to revitalize or stabilize the area if the activity is consistent with a bona fide government revitalization or stabilization plan (see Q&A § ll.12(g)(4)(iii)–3), while an activity in a low- or moderate-income census tract is presumed to revitalize or stabilize the area if the activity has been approved by the governing board of an Enterprise Community or Empowerment Zone (designated pursuant to 26 U.S.C. 1391) and is consistent with the board’s strategic plan, or if the activity has received similar official designation as consistent with a Federal, State, local, or tribal government plan for the revitalization or stabilization of the low- or moderate-income census tract. See Q&A § ll.12(g)(4)(i)–1. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 activities related to a wide range of government plans, programs, and initiatives, including those found in all types of communities within the targeted geographic areas of the placebased community development categories. For example, a grant to support a park in a low-income census tract could qualify if undertaken in conjunction with a citywide government program or initiative to expand green space in low- or moderate-income areas, even if support for that park is not outlined in a particular plan. The final rule does not further specify the kinds of plans, programs, or initiatives that meet the criterion, nor the types of government entities, as these can vary by community and Federal, State, or local law. Mission-driven nonprofit organization plan, program, or initiative. The final rule broadens the proposed criterion to include activities undertaken in conjunction with plans, programs, or initiatives of not only governments, but also mission-driven nonprofit organizations. (For a more detailed discussion of the definition of missiondriven nonprofit organization, see the section-by-section analysis of § ll.12 (‘‘mission-driven nonprofit organization’’)). In reaching a determination on this final rule provision, the agencies considered commenter views that the proposed government plan, program, or initiative criterion is too narrow or limited. The agencies are persuaded by points raised by some commenters that not all communities have government plans, programs, or initiatives in place or that plans may vary in their level of application to different geographic areas. The agencies also considered comments that government plans do not always match the goals of all members of the community. Further, the agencies considered commenter views that the proposed requirement for activities to be conducted in conjunction with a government plan, program, or initiative could exclude impactful activities that are not associated with a formal government plan but that could also bring benefits to residents of a targeted geographic area. As defined in the final rule, missiondriven nonprofit organizations have knowledge of geographic areas that are the focus of place-based activities under the final rule, and a successful record of working within and with residents of these areas to meet community needs. Further, these organizations can be identified and evaluated through demonstrable and consistent standards (as discussed in more detail in the section-by-section analysis of § ll.12). PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 The agencies believe that expanding this criterion to include mission-driven nonprofit organizations will facilitate community partnerships between banks and these organizations. Moreover, the agencies believe that this expansion is consistent with ensuring that activities remain place-based and benefit or serve residents of targeted census tracts, designated disaster areas, and Native Land Areas, as applicable. In addition, the agencies believe that many commenters’ specific suggestions will be addressed through this revision, such as suggestions to broaden the rule to allow for qualifying activities in connection with community organizations or community plans, programs, or initiatives. The agencies also recognize commenter suggestions to include activities with a range of organizations and entities, such as Black developers, community organizers, or other specific groups other than government entities, for determining qualification under the place-based categories. While not specifically included in the final rule, the agencies believe that the revised adopted criterion will both allow for and encourage partnerships with many such organizations. The final rule does not expand this criterion to include all private sector partners, as the agencies believe that these entities can have varying goals and missions that do not always align with the goals of CRA. Instead, by adding mission-driven nonprofit organizations as defined in the final rule, the agencies believe that the final rule will appropriately broaden the kinds of plans, programs, and initiatives that can count for place-based activities, while continuing to ensure a focus on activities that are aligned with the goals of CRA. Additional considerations. The agencies have carefully considered but are not adopting further revisions related to commenter feedback regarding whether to require this criterion; the appropriate standards for this criterion; and alternative options. This includes comments suggesting additional requirements for this criterion such as demonstrations related to formal community review; advocating for a more qualitative approach emphasizing examiner judgment for assessing the value of place-based activities to the community in lieu of this criterion; or suggesting that proposed government plans, programs, or initiatives be a method for demonstrating that an activity meets community needs rather than a requirement. Regarding comments that any plan be included in a publicly available E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations document and/or be subject to formal community review process, or requiring community inputs as an additional criterion, the agencies are concerned that specific requirements of these types could be overly burdensome and limiting, and dissuade banks from engaging in place-based activities. However, the agencies expect that many government plans, programs, and initiatives will involve a public input process. Regarding comments advocating for a more qualitative approach or that a government plan, program, or initiative be considered on an evidentiary rather than a mandatory basis, the agencies believe that including the adopted criterion—expanded to allow for activities in conjunction with missiondriven nonprofit organization plans, programs, and initiatives—is important to ensuring that activities qualifying under place-based community development categories are strongly linked to relevant local community needs in the targeted geographic areas. In addition, as noted regarding other place-based criteria discussed above, the agencies recognize commenter feedback to consider activities with a raceconscious objective or to develop a ranking that favors encouraging work in conjunction with government plans, programs, and initiatives that are ‘‘racially-conscious.’’ While these provisions are not included in the final rule, the agencies intend that the revised adopted criterion provides standards for ensuring that a broad range of residents in targeted geographic areas benefit and are served by place-based activities. For more information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. On balance, the agencies believe the adopted criterion achieves an appropriate balance between a flexible standard that will ensure that place-based activities are designed to benefit or serve residents of targeted geographic areas, while also promoting clarity and consistency about eligible place-based activities. ‘‘Explicit focus’’ and ‘‘in conjunction with’’—in relation to a plan, program, or initiative. Other than for plans, programs, or initiatives related to activities in Native Land Areas,453 the final rule removes the term ‘‘explicit’’ from the proposed regulatory text, which would have required that the ‘‘explicit focus’’ of the government plan, program, or initiative be on, for 453 See final § ll.13(j)(2)(i) and (j)(3)(i). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 example, revitalizing targeted census tracts.454 The agencies recognize that plans, programs, or initiatives may cover broader range of community development needs than those related to a specific category of place-based activities. In addition, the agencies are concerned that too narrow a focus on the specific wording in the type of plan, program, or initiative could potentially and inadvertently disqualify otherwise eligible activities that align with the community development goals of CRA. The agencies do not intend that removal of the word ‘‘explicit’’ has any substantive implications for the requirement that a plan, program, or initiative under this criterion include a focus on, for example, revitalizing or stabilizing a targeted census tract, or on disaster preparedness or weather resiliency activities in a targeted census tract. For further discussion of the inclusion of ‘‘explicit focus’’ in the final rule provisions on activities in Native Land Areas, see the section-by-section analysis of § ll.13(j). Finally, the agencies considered feedback to change the proposed requirement that an activity be ‘‘in conjunction with’’ a government plan, program, or initiative, to ‘‘consistent with’’ a plan, program, or initiative, but determined that ‘‘consistent with’’ would not provide sufficient clarity in determining when an activity meets the required standard. The agencies believe that finalizing a requirement for activities to be ‘‘in conjunction with’’ a government or mission-driven nonprofit organization plan, program, or initiative will provide greater clarity relative to current guidance by expressly connecting the eligible activity to the applicable plan, program, or initiative. Currently, as noted, standards are complex and vary across the targeted geographic areas, including guidance related to how banks can rely on a government plan to demonstrate that an activity helps to attract or retain residents. Under the final rule, a uniform standard will apply to all activities, with flexibility to cover a range of government and nonprofit entities, as well as varying types of plans, programs, and initiatives. Regarding comments that any plan be included in a publicly available document and/or be subject to formal community review process, or requiring community inputs as an additional criterion, the agencies are concerned that a specific requirement in the regulation could be overly burdensome and limiting, and dissuade banks from engaging in place-based activities. 454 See PO 00000 proposed § ll.13(e). Frm 00107 Fmt 4701 Sfmt 4700 6679 However, the agencies expect that many government plans, programs, and initiatives will involve a public input process. Section ll.13(e) Revitalization or Stabilization Activities The Agencies’ Proposal In proposed § ll.13(e), the agencies proposed a category of community development for revitalization activities undertaken in conjunction with a Federal, State, local, or tribal government plan, program, or initiative that includes an explicit focus on revitalizing or stabilizing targeted census tracts.455 The plan, program, or initiative would also specifically need to include the targeted census tracts, although the goals of a plan, program or initiative could include stabilization or revitalization of other geographic areas. In addition to the targeted geographic focus and government plan, program, or initiative common criterion, the agencies proposed that activities under this category would need to meet the two other common place-based elements: proposed § ll.13(e)(1) required activities to benefit or serve residents, including low- or moderateincome residents, in one or more of the targeted census tracts, while proposed § ll.13(e)(2) required that activities not displace or exclude low- or moderate-income residents in the targeted census tracts. Proposed § ll.13(e) also provided several representative examples to clarify the type of activities that could be considered under this category, including adaptive reuse of vacant or blighted buildings, brownfield redevelopment, or activities consistent with a plan for a business improvement district or main street program. The agencies proposed to exclude housing-related activities from the category of revitalization activities in proposed § ll.13(e). Currently, pursuant to interagency guidance, activities that support housing for middle- and upper-income residents can receive community development credit if they revitalize or stabilize a distressed nonmetropolitan middle-income census tract or a designated disaster area, with greater weight given to activities that are most responsive to community needs, including needs of low- or moderateincome individuals or 455 See proposed § ll.12 (defining ‘‘targeted census tract’’ to mean: ‘‘(1) A low-income census tract or a moderate-income census tract; or (2) A distressed or underserved nonmetropolitan middleincome census tract’’). E:\FR\FM\01FER2.SGM 01FER2 6680 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations neighborhoods.456 Based in part on prior stakeholder feedback that housing that benefits middle- or upper-income individuals, particularly in a low- or moderate-income census tract, can lead to displacement of existing residents,457 the agencies proposed that, under the ‘‘affordable housing’’ category of community development in § ll.13(b), as discussed above, activities that promote housing exclusively for middle- or upper-income residents would not be eligible for CRA credit as affordable housing, regardless of the type of geographic area benefited.458 The agencies considered that additional clarity could come from qualifying most housing-related community development activities under the affordable housing category. The agencies also recognized that affordable housing activities are often components of government plans, programs, and initiatives to revitalize communities, and therefore sought feedback on whether housing-related revitalization activities should be considered under the affordable housing category or the revitalization activities category, and under what circumstances. ddrumheller on DSK120RN23PROD with RULES2 Comments Received Comments regarding the three common place-based criteria are discussed above. Remaining comments on proposed § ll.13(e) primarily focused on the agencies’ request for feedback on whether certain housing activities should be considered eligible under the revitalization category of community development. Many commenters supported including consideration for housing activities under § ll.13(e), consistent with current guidance.459 Some commenters asserted that these activities are central to overall community revitalization efforts, without specifying which housing activities should be included. A commenter suggested that limiting housing activities to the affordable housing category would create uncertainty for banks considering mixed-use revitalization projects that include both affordable housing and commercial revitalization. A few commenters suggested that affordable housing should be allowed to count under categories such as revitalization Q&A § ll.12(g)(4)–2. 457 See 87 FR 33884, 33904 (June 3, 2022). Stakeholder feedback considered for the proposal also included that revitalization or stabilization activities do not always provide direct benefits to low- or moderate-income individuals. See id. at 33902. 458 See proposed § ll.13(b). 459 See 12 CFR ll.12(g)(4) and Q&A § ll.12(g)(4)–2. 456 See VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 and climate resiliency, but should not be double-counted, as counting twice could lead to decreases in investment. A commenter suggested that housing should be included as an eligible revitalization activity and should be counted in all geographic areas, while another commenter stated that limiting consideration of housing activities under the revitalization category to activities serving high poverty or high vacancy geographic areas may not be necessary, as pockets of distress exist in otherwise prosperous communities. Some commenters seeking to include housing under § ll.13(e) expressed support for including a variety of types of housing activities under the revitalization category as a crucial component of comprehensive, equitable neighborhood revitalization. Suggestions included, for example, eligibility for activities that support: (1) the construction or rehabilitation of owner-occupied homes (including condominiums and cooperatives), if the homes are in certain census tracts and the sales price is capped; (2) rehabilitation or reconstruction of owner-occupied homes if the owner is low-, moderate-, or middle-income; (3) the disposition, rehabilitation, or replacement of vacant and foreclosed homes, to create new opportunities for affordable homeownership for low- and moderate-income households; (4) supportive housing development, operation, and services in any geographic area, because the need for supportive housing outweighs supply (citing the impact of supportive housing due to lack of stable affordable housing with wrap-around services); and (5) home repair and mitigation activities for low- and moderate-income homeowners. Other commenters supported including mixed-income or mixed-used housing under the revitalization category. For example, a commenter suggested that mixed-income and mixed-use housing developments should qualify: (1) if in low- and moderate-income census tracts, and (2) if in higher-cost areas, and rent is limited to 60 percent of the area median income. This commenter suggested that high-cost neighborhoods are often the least accessible to low- and moderateincome individuals, but because these neighborhoods often offer the greatest access to jobs, higher performing schools, transportation, and other necessities, increasing access to these neighborhoods should be considered a revitalization activity. A few commenters recommended including housing developments that have onsite or co-located childcare and early PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 education programs as eligible revitalization activities. Alternatively, several commenters stated that place-based revitalization activities and housing activities should be separately considered under the rule, or with limited exceptions. For example, a commenter suggested that considering housing activities solely as part of the affordable housing category would help clarify whether disparities in non-housing resources and investments are being adequately addressed, which this commenter asserted is particularly important because affordable and subsidized housing is often concentrated in lowresourced areas. A few commenters similarly indicated that areas targeted for revitalization activities are often areas where low-income housing is already concentrated, and housing activities undertaken as part of revitalization efforts can risk perpetuating economic and racial segregation. A commenter generally supportive of qualifying housing activities outside of the revitalization category also supported an exception for housing being removed or demolished as part of a broader community revitalization effort. Commenters also addressed proposed § ll.13(e) beyond the question of whether to include housing. For example, a commenter expressed the view that the proposed rule’s definitions of revitalization and stabilization activities would help direct more of the benefits of CRA-focused investment to low- and moderate-income communities and individuals. Another commenter suggested that any community revitalization plan or activity should include assurances that low- and moderate-income households will be able to remain in the neighborhood and enjoy the benefits of revitalization (through CBAs, support of community land trusts, or inclusionary zoning). A few commenters suggested certain activities that should be considered revitalization activities, such as broadband; sustainability projects including those related to food access, food and water source protection; renewable energy investments; and private investment in land banking activities. Final Rule The agencies are adopting proposed § ll.13(e), reorganized for clarity and consistency with the structures of other place-based categories, and further modified as described below. The final rule makes a technical revision to the name of the proposed community development category from E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 ‘‘revitalization’’ to ‘‘revitalization or stabilization’’ for consistency with the current regulation and to reflect the agencies’ intent to retain the concept of ‘‘stabilization’’ in this community development category. Final § ll.13(e)(1) provides the general definition of the types of activities included in this category of community development. These activities must also meet specific place-based eligibility criteria in § ll.13(e)(i) through (iii). Final § ll.13(e)(2) adds a new provision for mixed-use revitalization or stabilization projects. Section ll.13(e)(1) In General Similar to the proposal, under final § ll.13(e)(1), revitalization or stabilization comprises activities that support revitalization or stabilization of targeted census tracts, including adaptive reuse of vacant or blighted buildings, brownfield redevelopment, support of a plan for a business improvement district or main street program, or any other activity that supports revitalization or stabilization. Final § ll.13(e)(1) incorporates the technical revision from ‘‘revitalization’’ to ‘‘revitalization or stabilization’’ and other non-substantive edits. Consistent with the proposal, the final rule incorporates some aspects of existing guidance for revitalization and stabilization, but no longer focuses eligibility of activities on the extent to which an activity helps to attract or retain residents or businesses in targeted geographic areas. Consistent with prior stakeholder feedback and as noted in the proposal, the agencies have determined that the standard in current interagency guidance that an activity ‘‘attract new, or retain existing, businesses or residents’’ has proven difficult for banks, community groups, and the agencies to apply, resulting in inconsistent outcomes. Under the ‘‘attract or retain’’ standard, banks and other stakeholders lacked upfront clarity about which loans, services, or investments would be eligible for consideration, and the standard also sometimes allowed for development that did not align with the purpose of the CRA, such as housing for higherincome individuals, without benefits to low- or moderate-income individuals. Thus, the final rule focuses instead on revitalization and stabilization activities benefiting or serving targeted census tracts, and includes the other placebased criterion discussed in detail above. As further discussed below, the agencies believe that final § ll.13(e) will provide stakeholders with a better upfront understanding of the types of activities that will qualify as VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 revitalization and stabilization, and result in more consistency in community development consideration for loans, investments, and services supporting these activities. The final rule adopts the proposed focus on activities in targeted census tracts, in alignment with current guidance. The agencies considered commenter suggestions to qualify revitalization or stabilization activities in all geographic areas, but believe that the geographic nexus to targeted census tracts—defined in final § ll.12 to include low-income census tracts, moderate-income census tracts, or distressed or underserved nonmetropolitan middle-income census tracts—is an important standard to align the final rule with a longstanding geographic focus of CRA implementation, consistent with the CRA’s emphasis on communities of need. The agencies believe that final § ll.13(e) will allow activities to qualify across a range of community types with varying needs, including distressed and underserved nonmetropolitan middle-income census tracts without significant low- or moderate-income populations, as well as more densely populated metropolitan census tracts with a greater concentration of low- or moderateincome individuals. The examples of revitalization or stabilization in the final rule (as described above, adaptive reuse of vacant or blighted buildings, brownfield redevelopment, and support of a plan for a business improvement district or main street program) are drawn from current guidance and intended to clarify the types of activities that might be considered eligible under this category. However, these illustrative examples are intended to be non-exhaustive; the final rule clarifies that eligible activities include ‘‘any other activity that supports revitalization or stabilization.’’ The agencies recognize commenter suggestions to include specific activities under the revitalization or stabilization category, such as food access, renewable energy projects, or other sustainability projects, and believe that many of these types of projects could be included for consideration within this category upon meeting the required criteria. For example, a project to build a new supermarket within a low- or moderateincome census tract of a small town would qualify as a revitalization or stabilization activity if the activity met the required criteria. Similarly, the agencies recognize commenter support for including land banking and disposition of vacant or foreclosed land under revitalization, and believe that PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 6681 these activities would qualify provided they met other criteria in § ll.13(e), as these are often central elements of neighborhood redevelopment efforts. The agencies note that some activities raised by commenters might qualify in other categories; for example, broadband is provided as an example under final § ll.13(g) regarding essential community infrastructure. Other activities suggested by commenters might qualify under final § ll.13(b) regarding affordable housing, such as financing that assists low- or moderateincome individuals to rehabilitate or reconstruct their owner-occupied homes (excluding loans by a bank directly to one or more owner-occupants of such housing),460 or alternatively, the financing of a supportive housing development and operation that meets applicable requirements in § ll.13(b).461 In response to comments suggesting co-located childcare and early education should qualify, the agencies believe this activity may, depending on the circumstances, qualify as a community supportive service (final § ll.13(d)) or an essential community facility (final § ll.13(f)), provided the activity meets all relevant criteria. Section ll.13(e)(1)(i) Through (iii) Place-Based Criteria The final rule adopts the three proposed common place-based eligibility criteria for revitalization or stabilization activities, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Accordingly, under the final rule, revitalization or stabilization activities are those that: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on revitalizing or stabilizing targeted census tracts (final § ll.13(e)(1)(i)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § ll.13(e)(1)(ii)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in targeted census tracts (final § ll.13(e)(1)(iii)). As noted, the reasons for adopting these final criteria, and for revisions to 460 See final § ll.13(b)(4) and the accompanying section-by-section analysis. 461 See final § ll.13(b)(1) and (2) and the accompanying section-by-section analyses. E:\FR\FM\01FER2.SGM 01FER2 6682 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the proposed criteria, are collectively discussed above in this section-bysection analysis. With respect to the revitalization or stabilization category in particular, the agencies note that final § ll.13(e)(1)(iii) is revised from the proposal to prohibit activities that directly result in forced or involuntary relocation of low- and moderate-income individuals in targeted census tracts. Accordingly, the agencies are not incorporating into the final rule a commenter suggestion that community revitalization plans include assurances that low- and moderate-income households will not be displaced. The agencies believe that adopting the common place-based criteria, combined with the majority standard set forth in § ll.13(a),462 will adequately ensure that qualifying revitalization or stabilization activities benefit and serve the residents of targeted tracts, including low- and moderate-income individuals. Section ll.13(e)(2) Mixed Use Revitalization or Stabilization Project On consideration of feedback regarding whether housing-related revitalization activities should be considered under the revitalization category, the agencies are adopting a provision that brings certain mixed-used revitalization or stabilization projects under the revitalization and stabilization category of community development. Specifically, § ll.13(e)(2) incorporates into this community development category projects to revitalize or stabilize targeted census tracts that include both commercial and residential components, if: (1) the project meets all other criteria in § ll.13(e)(1), including all place-based criteria (final § ll.13(e)(2)(i)); and (2) more than 50 percent of the project is non-residential, as measured by the percentage of total square footage or dollar amount of the project (final § ll.13(e)(2)(i)). The final rule is designed to take into account some commenters’ views that mixed-use housing can be central to revitalization projects. However, the agencies do not intend to include in this category projects that are primarily comprised of housing, particularly mixed-use developments with housing that is targeted to middle- or upperincome individuals, including such projects in low- or moderate-income census tracts. The agencies have considered that this type of 462 For a detailed discussion of the majority standard in relation to when community development loans, investments, and services are eligible for full or partial credit, see the section-bysection analysis of final § ll.13(a). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 development might not clearly benefit existing residents of the targeted census tracts, particularly low- or moderateincome residents, and can sometimes lead to displacement of existing residents. On further consideration of comments, the agencies are adopting this revision to better allow for needed comprehensive redevelopment efforts in targeted census tracts that involve mixed-use properties comprised of some, but not primarily, housing. The agencies considered several alternative thresholds for the percentage of a mixed-use comprehensive redevelopment project that can be residential for the project to qualify as under § ll.13(e), and are adopting a threshold requiring that more than 50 percent of the project must be nonresidential as measured by the percentage of total square footage or dollar amount of the project (corresponding to a threshold of 50 percent or lower for the residential component of the project). The agencies believe that the adopted percentage threshold provides appropriate additional flexibility for mixed-use development under the final rule’s revitalization and stabilization category. In this regard, the agencies considered that a lower residential percentage threshold would exclude several types of mixed-use projects central to overall community revitalization efforts. On the other hand, the agencies believe that activities inclusive of a higher percentage threshold of housing within a project (i.e., above 50 percent) are more appropriately considered under the affordable housing category in section § ll.13(b), as those projects are primarily housing. An example of housing activity that could qualify under final § ll.13(e)(2), as long as all criteria are met, would be a main street mixed-use project to revitalize a series of vacant buildings to include 60 percent commercial space and 40 percent apartments serving middle-income residents. An example that would not qualify under § ll.13(e)(2) would include a condominium project that is 100 percent apartments that are affordable exclusively to higher-income residents in a targeted census tract. Likewise, the agencies recognize comments regarding supportive housing in any geographic area, and reconstruction or rehabilitation of owner-occupied homes in low- or moderate-income census tracts or distressed or underserved middle-income census tracts. These activities may qualify as affordable housing (final § ll.13(b)) and would qualify under § ll.13(e) if they meet criteria as part of a comprehensive PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 mixed-use revitalization project. Banks subject to the rule are permitted to qualify activities under any applicable category, but those activities may count only once for the purposes of calculating the Community Development Financing Metric. Section ll.13(f) Essential Community Facilities Current Approach and the Agencies’ Proposal Currently, in low- or moderateincome census tracts, distressed nonmetropolitan middle-income census tracts, and designated disaster areas, bank support for community facilities and infrastructure generally can receive community development consideration to the extent that these activities help to attract or retain residents or businesses.463 However, among these three geographic areas, these activities are only explicitly mentioned in current guidance for distressed nonmetropolitan middle-income areas 464 (with guidance on designated disaster areas mentioning ‘‘essential community-wide infrastructure’’ but not facilities 465). Regarding underserved nonmetropolitan middle-income census tracts, as noted earlier, the current CRA regulation provides that activities qualify for community development consideration in these areas ‘‘if they help to meet essential community needs, including needs of low- and moderate-income individuals.’’466 To clarify this provision, the Interagency Questions and Answers states that activities such as ‘‘financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks, affordable housing, or communication services’’ in underserved nonmetropolitan middleincome census tracts will be evaluated to determine whether they meet essential community needs.467 463 See Q&A § ll.12(g)(4)(i)—1 (regarding lowor moderate-income census tracts), Q&A § ll.12(g)(4)(ii)—2 (regarding designated disaster areas), and Q&A § ll.12(g)(4)(iii)—3 (for distressed nonmetropolitan middle-income census tracts). 464 See Q&A § ll.12(g)(4)(iii)—3 (‘‘Qualifying activities may include, for example, . . . activities that provide financing or other assistance for essential infrastructure or facilities necessary to attract or retain businesses or residents.’’). 465 See Q&A § ll.12(g)(4)(ii)—2. 466 12 CFR ll.12(g)(4)(iii)(B). 467 Q&A § ll.12(g)(4)(iii)—4. As also noted, the guidance provides several examples of projects that may be considered to meet essential community needs in underserved nonmetropolitan middleincome census tracts, such as hospitals, industrial parks, rehabilitated sewer lines, mixed-income housing, and renovated schools—as long as the E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 The agencies’ proposal aimed to provide more clarity, certainty, and consistency regarding CRA consideration for activities that support essential community facilities and infrastructure. To this end, proposed § ll.13(f) (essential community facilities) and proposed § ll.13(g) (essential community infrastructure, discussed further below in this sectionby-section analysis) built on the current Interagency Questions and Answers to clarify that essential community facilities and essential community infrastructure would be considered community development if they were conducted in and benefit or serve residents of targeted census tracts, defined in proposed § ll.12 to mean low- or moderate-income census tracts, as well as distressed or underserved nonmetropolitan middle-income census tracts. Specifically, the agencies proposed a category of community development for essential community facilities, defined as activities that provide financing or other support for public facilities that provide essential services generally accessible by a local community. Proposed § ll.13(f) included the following non-exhaustive examples of the types of facilities that would fall into this category: schools, libraries, childcare facilities, parks, hospitals, healthcare facilities, and community centers. The proposal further defined essential community facilities as activities conducted in targeted census tracts (as defined in proposed § ll.12) that also meet the other place-based criteria discussed above: that activities benefit or serve residents, including low- or moderate-income residents (proposed § ll.13(f)(1)); that activities do not displace or exclude low- or moderate-income residents in the targeted census tracts (proposed § ll.13(f)(2)); and that an activity that finances or supports essential community facilities must be conducted in conjunction with a Federal, State, local, or tribal government plan that includes an explicit focus on benefiting or serving the targeted census tracts (proposed § ll.13(f)(3)). Comments Received Most commenters offering feedback on the agencies’ proposal regarding essential community facilities were generally supportive. A few commenters supported the agencies’ decision not to propose the current requirement that community facilities must also attract or retain businesses and residents. population served includes low- and moderateincome individuals. See id. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Commenters offered different views on the examples in the proposed essential community facilities category. Some commenters expressly supported the proposed examples of essential community facilities. Others sought clarity on the types of activities that would qualify under this community development category, or advocated for including additional types of activities in the regulation. For example, a number of commenters highlighted the proposed examples of hospitals and other healthcare-related facilities, noting this may encourage new investment in healthcare access, while others noted the inclusion of childcare facilities, citing a wide variety of community benefits. Others sought clarity on the types of activities that would qualify under this community development category, or advocated for including additional types of activities in the regulation. Several commenters suggested that the agencies add supermarkets and other food-related facilities to the proposed list of examples, including because low- and moderate-income communities are disproportionately more likely to be food deserts.468 Other comments included: a suggestion to clarify that the financing of retail service businesses, including grocery stores, pharmacies, and other neighborhood-scale services, are eligible facilities, regardless of the size of the occupant business, as these facilities bring convenience, jobs, physical revitalization, and lower prices for consumers; and suggested eligibility for financing grocery stores larger than the size standards in the proposed Retail Lending Test or proposed economic development category of community development. Another commenter cautioned the agencies against defining all examples of essential community facilities and essential community infrastructure in the regulation, stating that doing so could cause banks to limit activities based on the list and limit creativity in responding to local needs. A number of commenters also responded to the agencies’ request for feedback regarding whether the proposed category should incorporate additional requirements to help ensure that essential community facilities activities include a benefit to low- or moderate-income residents in the communities served by these projects. Several commenters asserted that CRA 468 Suggestions also included adding support for grocery stores to the illustrative list of eligible activities in proposed § ll.14(a). For discussion of the proposed and final rules regarding the illustrative list of eligible community development loans, investments, and services, see the section-bysection analysis of final § ll.14(a). PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 6683 credit should be given only to essential community facilities activities that serve critical community needs directly in low- and moderate-income areas that are otherwise unable to attract funding. One of these commenters stated that CRA credit should be limited if the market is already fully able to serve such needs. Another commenter recognized the challenges of determining the specific population of people who benefit from a public investment, but argued for identifying a set of characteristics or parameters to distinguish certain projects beneficial to low- and moderate-income residents from those where financing would be readily available at reasonable terms notwithstanding CRA eligibility. Other commenters emphasized that the goal for qualifying activities under this category should be to provide benefits to low- and moderate-income residents. Commenter recommendations in support of this goal included, among others, that the final rule should: require banks to explain how low- and moderate-income residents benefit from an activity; include a primary purpose standard for qualifying bank support for essential community facilities under which a majority of the dollars invested by the bank would have to be directed toward supporting low- and moderateincome residents; and establish guardrails to ensure financing goes directly to low- and moderate-income communities, including metrics to measure benefits of these projects, such as jobs created for low- and moderateincome individuals and contracts with local companies, and growth in median income for census tract residents. A commenter recommended that any facility be presumed to serve low- and moderate-income residents if it is open to all residents of a targeted census tract, with fees (if any) that are affordable to low- and moderate-income persons. A few commenters opposed adding other criteria to the essential community facilities category to ensure that lowand moderate-income communities and residents benefit. These commenters asserted that activities should qualify if they benefit the entire community, including but without a specific focus on low- and moderate-income residents. A commenter recommended that essential community facilities should qualify, at least for partial credit, if located outside of targeted census tracts, if and to the extent they benefit lowand moderate residents of the targeted geographic areas. Final Rule The agencies are adopting proposed § ll.13(f), reorganized for clarity and E:\FR\FM\01FER2.SGM 01FER2 6684 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 consistency with the structures of other place-based categories and modified as described below. Consistent with the proposal, final § ll.13(f) provides the general definition of the types of activities included in this category of community development, and requires that these activities must also meet specific place-based eligibility criteria in final § ll.13(f)(1) through (3). Section ll.13(f) In General Under final § ll.13(f), essential community facilities are public facilities that provide essential services generally accessible by a local community, including, but not limited to, schools, libraries, childcare facilities, parks, hospitals, healthcare facilities, and community centers that benefit or serve targeted census tracts. The final rule reflects technical edits for readability, but is substantively consistent with the proposal. As noted in the discussion of the revitalization or stabilization category in § ll.13(e) above, the agencies believe that the final rule, with the common place-based criteria discussed throughout the section-bysection analysis of § ll.13(e) through (j), will provide stakeholders with a better upfront understanding of the types of essential community facilities that will qualify as community development relative to an ‘‘attract or retain’’ standard, resulting in more consistency in application. Further, the agencies believe that, relative to current practice, the final rule will better ensure that loans, investments, and services support activities aligned with the purposes of CRA to meet the credit needs of entire communities, including low- or moderate-income individuals. The proposed rule defined essential community facilities as those that are ‘‘conducted in’’ targeted census tracts; the final rule revises the proposal to define essential community facilities as those that ‘‘benefit or serve’’ residents of targeted census tracts, including lowand moderate-income individuals. The agencies proposed the ‘‘conducted in’’ standard to facilitate a bank’s demonstration that activities are benefiting and serving the residents of a targeted census tract. Based on comments and on further consideration, however, the agencies believe that the ‘‘conducted in’’ standard could exclude facilities located in close proximity to a targeted census tract that nonetheless benefit and serve residents of that census tract, including low- and moderate-income individuals. For example, under the proposal, a construction loan to build a fire station located just outside but primarily serving residents of a targeted census VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 tract would have not qualified for consideration. Under the final rule, that construction loan could be considered, provided the rule’s other criteria are met. The agencies believe that the requirement as revised—to require that essential community facilities benefit or serve targeted census tracts—will ensure a strong connection between essential community facilities and community needs in targeted census tracts, and that this connection will be further bolstered by the other two place-based criteria (e.g., undertaken with a plan, program, or initiative that includes a focus on benefiting or serving the targeted census tract and not directly resulting in the forced or involuntary displacement of low- or moderate-income individuals in the targeted census tract). The agencies note that banks will be expected to be able to demonstrate that a project benefits the targeted census tracts in accordance with the rule. The agencies considered but are not adopting the suggestion for a presumption that any facility open to all residents of targeted census tracts with affordable fees serves low- and moderate residents, given the variety of potential facts and circumstances. The agencies believe, however, that a facility will qualify for consideration if a bank demonstrates that the facility is public and provides essential services, serves low- or moderate-income residents in the targeted census tract, and meets the rule’s other required criteria. Similarly, the agencies are not adopting the commenter suggestion that activities qualify if they benefit the entire community without specific inclusion of low- and moderate-income individuals. The agencies believe that qualifying essential community facility activities should be demonstrably inclusive of low- and moderate-income individuals, in alignment with the CRA’s express focus on encouraging banks to meet low- and moderateincome community needs in the communities they serve. Final § ll.13(f) adopts the proposed list of examples of essential community facilities: schools, libraries, childcare facilities, parks, hospitals, healthcare facilities, and community centers, which are generally consistent with examples found in current guidance. The agencies believe that these examples provide adequate clarity to illustrate the types of activities that may qualify under this category. The list is intended to help clarify, for instance, that a loan to help build a public school or a community center that serves residents of a targeted census tract would qualify for community development consideration, provided PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 all other criteria of § ll.13(f) are met. While the final rule does not adopt other examples raised by commenters, the agencies note that the list of examples is illustrative and nonexhaustive. The final rule does not preclude agency consideration of investments, loans, or services supporting other types of essential community facilities meeting the criteria set forth in § ll.13(f). The agencies do not believe that identifying every kind of essential community facility in the regulation is practicable or possible. However, the agencies will take commenters’ suggestions under advisement as the agencies develop the illustrative list contemplated by § ll.14(a). Additionally, activities mentioned by commenters that might not qualify as essential community facilities under the final rule might qualify under other categories of community development. For example, a loan to finance a public road or sewer could qualify for consideration as supportive of essential community infrastructure under § ll.13(g), if all of the rule’s criteria were met, while a grant to support a food bank that opens a food pantry could qualify under § ll.13(d) as supportive of a community supportive service. Financing of retail service businesses such as grocery stores, retail pharmacies, and other neighborhoodscale services are generally private sector facilities, and thus are not considered essential community facilities, which are defined as public facilities. However, these retail services may qualify as revitalization or stabilization activities under § ll.13(e), should they meet the criteria of that provision. On consideration of the comments and further deliberation, the agencies are not adopting additional or alternative requirements to help ensure that essential community facilities include a benefit to low- or moderateincome residents in the communities served by these projects. For example, regarding comments that the rule should qualify only activities supporting critical community needs, the agencies believe that this approach could be overly limiting in light of communities’ varying needs and different views about which needs are critical. The agencies intend the final rule to maintain sufficient flexibility for banks and communities to address a wide range of needs that communities consider important. Regarding comments that the rule should require activities to have a primary purpose of serving low- and moderate-income residents in targeted E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 census tracts, the final rule seeks to maintain flexibility for activities to meet a range of community needs, while also requiring the inclusion of low- or moderate-income individuals as beneficiaries. As noted, this flexibility remains particularly important in distressed and underserved nonmetropolitan middle-income census tracts, which can have fewer low- or moderate-income residents. On the other hand, the agencies are also not adopting the suggestion to qualify facilities open to the entire community without specific inclusion of low- and moderate-income individuals. The agencies believe that the final criterion, as adopted, is tailored and consistent with the CRA statute, which focuses on benefits to communities, including to low- or moderate-income populations. The agencies believe that the rule as finalized, combined with the majority standard set forth in § ll.13(a),469 appropriately ensures inclusion of lowor moderate-income residents. For similar reasons, the agencies are also not incorporating into final § ll.13(f) metrics for measuring the benefits of essential community facility activities to low- and moderate-income individuals. The agencies are concerned that specific metrics-related requirements or methodologies for demonstrating low- or moderate-income benefits of essential community facilities could be overly burdensome and complex to apply, potentially dissuading banks from supporting essential community facilities and limiting the adaptability of the rule to accommodate a variety of activities over time. However, banks will be expected to demonstrate that essential community facilities benefit or serve residents of targeted census tracts, including low- and moderate-income individuals. Finally, as discussed further in the section-by-section analysis of § ll.13(a), the agencies are not adopting a partial consideration option in § ll.13(f). The agencies believe the primary focus of activities should be to benefit or serve residents of targeted tracts and an alternative option providing partial consideration would allow for qualification of 469 For further discussion of the standards for receiving full credit for a loan, investment, or service supportive of essential community facilities or essential community infrastructure, and related public comments, see the section-by-section analysis of § ll.13(a). Loans, investments, or services supporting community development under final § ll.13(f) meet the ‘‘majority standard’’ for receiving full credit it the majority of the beneficiaries are, or the majority of dollars benefit or serve, residents of targeted census tracts. See final § ll.13(a)(1)(i)(B)(4). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 activities that do not share this focus as an intentional goal. Section ll.13(f)(1) Through (3) Place-Based Criteria The final rule adopts the three common place-based eligibility criteria for essential community facilities, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Accordingly, under the final rule, essential community facilities are public facilities that: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving targeted census tracts (final § ll.13(f)(1)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § ll.13(f)(2)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in targeted census tracts (final § ll.13(f)(3)). As noted, the reasons for adopting these final criteria, and for revisions to the proposed criteria, are collectively discussed above in this section-by-section analysis. Section ll.13(g) Essential Community Infrastructure The Agencies’ Proposal In proposed § ll.13(g), the agencies proposed a category of community development for essential community infrastructure activities, defined as activities that provide financing and other support for infrastructure, including, but not limited to broadband, telecommunications, mass transit, water supply and distribution, and sewage treatment and collection systems. The proposal further defined essential community infrastructure as activities conducted in targeted census tracts (as defined in proposed § ll.12 and discussed above) that also meet the other place-based criteria discussed above: that activities benefit or serve residents, including low- or moderateincome residents (proposed § ll.13(g)(1)); that activities do not displace or exclude low- or moderateincome residents in the targeted census tracts (proposed § ll.13(g)(2)); and that an activity that finances or supports essential community infrastructure must be conducted in conjunction with a Federal, State, local, or tribal government plan that includes an explicit focus on benefiting or serving PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 6685 the targeted census tracts (proposed § ll.13(g)(3)). Thus, under the proposal, support for larger infrastructure projects could be eligible for community development consideration if the project is conducted in relevant targeted census tracts, demonstrably benefits the residents of the targeted census tracts, and it is evident that, in particular, low- or moderate-income residents, of the targeted census tracts would benefit and not be excluded from the larger-scale improvements. Comments Received Many comments on proposed § ll.13(g) provided feedback on the types of infrastructure that should be considered essential community infrastructure, with a number requesting clarification about specific types of infrastructure projects. Many commenters expressly supported the proposed consideration for broadband activities, emphasizing, among other things, the importance of broadband access in community resilience, closing the digital divide, and creating access to financial services, jobs, healthcare, and education, and noting the role of CRA in overcoming broadband investment costs. Additional commenter feedback included support for qualification of broadband infrastructure only if reliable, affordable, and locally controlled; and support for qualifying only the infrastructure examples included as part of the proposal. Other commenters generally highlighted the importance of investments made in functioning roadways, internet, health, and safety, with additional suggestions that the regulation specify a range of activities that qualify as essential community infrastructure, including renewable energy projects; transitoriented infrastructure, including road and technology infrastructure; hospital construction; jail renovations; and refuse services. The agencies also received a number of comments in response to the agencies’ request for feedback regarding whether the proposed category should incorporate additional criteria to help ensure that essential community infrastructure activities include a benefit to low- or moderate-income residents in the communities served by these projects. Some commenters opposed additional criteria for community development consideration of infrastructure projects (or community facilities), indicating that activities benefiting all residents, including persons of any income level, should qualify. As discussed in more detail below, other commenters on this aspect E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6686 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations of the proposal supported an emphasis on benefits to low- and moderateincome residents, with some suggesting additional criteria for ensuring that community infrastructure projects qualifying as community development under the CRA benefit low- and moderate-income residents. Some commenters asserted that essential community infrastructure activities should be focused on benefiting low- and moderate-income residents of targeted census tracts (or other relevant geographic areas). For example, a commenter expressed concerns about certain proposed infrastructure examples such as broadband, water, and sewage, as greatly expanding the number and types of eligible activities without a clear benefit to low- and moderate-income people and places. A few commenters recommended that essential community infrastructure be limited to activities with a clear and demonstrable benefit to, or primary purpose of serving, lowand moderate-income people and geographic areas. Several commenters suggested that CRA credit for infrastructure should be limited based on a strong correlation with benefits to low- and moderate-income individuals and families because reasonable financing is already available for most essential infrastructure projects. Commenters also asserted that CRA credit should be given only to essential community infrastructure activities that serve critical community needs directly in low- and moderate-income areas and are otherwise unable to attract funding. A few commenters recommended that essential community infrastructure be limited to activities with a clear and demonstrable benefit to, or primary purpose of serving, low- and moderateincome people and geographies. Another commenter emphasized that qualifying activities in this category should have a clear objective of meeting needs in targeted communities. Other comments on ensuring benefits for ensuring benefit for low- and moderate-income individuals and communities included support for limiting CRA consideration to those activities with a strong correlation to benefits for low- and moderate-income individuals and families, such as a project in a majority low- and moderateincome population census tract. Suggestions for measuring the benefits of infrastructure projects to low- and moderate-income communities included considering jobs created for low- and moderate-income individuals; contracts with local companies; economic growthrelated metrics such as growth in median income for census tract VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 residents; and environmental improvements, such as greenhouse gas emissions and/or pollution reductions, increases in the amount of greenspace, community health benefits, and climate adaptation strategies. Citing the impact of historical disinvestment in basic infrastructure on many low- and moderate-income communities, particularly minority communities, a commenter suggested that the CRA framework should prioritize ensuring that all communities have a minimum standard of infrastructure, including protective infrastructure, over enhancing infrastructure in areas that already have a standard level of investment. Another commenter suggestion was that the agencies consider a bank’s activities supporting essential community infrastructure in light of the overall balance of activities that comprise a bank’s portfolio, to ensure that a significant portion of the bank’s community development activities are targeting places and populations of high need with products that are not otherwise likely to be offered by the bank. This commenter further suggested that that agencies cap the volume of essential community infrastructure that could be included in the proposed Community Development Financing Metric,470 asserting that essential community infrastructure projects are often relatively safe investments to make but might not necessarily be directly targeted to low- and moderateincome persons or communities. As also discussed above in the section-by-section analysis of § ll.13(a), a few commenters expressed support for giving partial credit for essential community infrastructure activities. Citing the largescale nature of many infrastructure projects and concerns about the potential difficulty of applying the proposed primary purpose standard,471 commenters recommended various approaches to a partial credit framework for essential community infrastructure. These included partial credit based on the percentage of low- and moderateincome census tracts served by the activity, or based on whether the infrastructure project meets or exceeds a minimum threshold of serving low- and moderate-income census tracts, residents, or small businesses or farms. A commenter separately suggested granting at least partial credit for 470 See proposed § ll.24. See also final § ll.24 and the accompanying section-by-section analysis. 471 See proposed § ll.13(a). See also final § ll.13(a) and the accompanying section-bysection analysis. PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 infrastructure (and facilities) located outside of targeted census tracts, as long as the infrastructure benefits residents of those census tracts. In contrast, at least one commenter expressly opposed providing partial credit for bank support of essential community infrastructure, noting concerns that these activities tend to be large dollar transactions that are not necessarily targeted at low- and moderate-income residents with intentionality, and thus partial credit could allow for more projects to qualify and potentially comprise a significant portion of a bank’s community development finance metric numerator at the expense of smaller, more impactful investments. However, this commenter recommended an exception for partial credit for activities in rural communities and cities with low bond ratings and thus that might not otherwise receive financing support. Final Rule The agencies are adopting proposed § ll.13(g), reorganized for clarity and consistency with the structures of other place-based categories and modified as described below. Consistent with the proposal, final § ll.13(g) provides the general definition of the types of activities included in this category of community development, and requires that they meet specific place-based eligibility criteria in final § ll.13(g)(1) through (3). Section ll.13(g) In General Under final § ll.13(g), essential community infrastructure comprises activities benefiting or serving targeted census tracts, including but not limited to broadband, telecommunications, mass transit, water supply and distribution, and sewage treatment and collection systems. Thus, final § ll.13(g) makes no substantive changes to the proposal other than technical edits for readability. As with other place-based categories, the agencies believe that final § ll.13(g), with the common place-based criteria discussed in more detail elsewhere in the section-by-section analysis of § ll.13, will provide stakeholders with a better upfront understanding of the types of essential community infrastructure that will qualify as community development relative to the current approach based on an ‘‘attract or retain’’ standard. Additionally, consistent with the proposal, the final rule clarifies that essential community infrastructure is a community development category that applies across all targeted census tracts (i.e., low-income, moderate-income, distressed or underserved middle- E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations income census tracts), whereas, as noted, current guidance explicitly references infrastructure only in the context of distressed or underserved nonmetropolitan middle-income census tracts. Further, the agencies believe that, relative to current practice, the final rule will better ensure that loans, investments, and services support activities that align with the purposes of CRA to meet the credit needs of entire communities, including low- or moderate-income individuals. As noted, proposed § ll.13(g) defined essential community infrastructure as those that are ‘‘conducted in’’ targeted census tracts; the final rule revises the proposal to define essential community infrastructure activities as those that ‘‘benefit or serve’’ residents of targeted census tracts, including low- or moderate-income individuals, similar to revisions made with respect to the essential community facilities category under § ll.13(f). As with proposed § ll.13(f), the agencies proposed the ‘‘conducted in’’ standard to facilitate a bank’s demonstration that essential community infrastructure activities are benefiting and serving the residents of a targeted census tract. Based on comments and on further consideration, the agencies believe that the ‘‘conducted in’’ standard could exclude infrastructure projects located in close proximity to a targeted census tract that nonetheless benefit and serve residents of that tract, including low- and moderate-income individuals. The agencies also intend this revision to strengthen the emphasis on benefits to residents of targeted census tracts, including low- or moderate-income individuals, in the event that infrastructure projects ‘‘conducted in’’ a targeted census tract might have only ancillary if any benefits for the targeted census tract. For example, a project to build a sewer line that connects services to a middle- or upper-income housing development but passes through a lowor moderate-income census tract without connecting needed sewer services to that community generally would not qualify as essential community infrastructure under the final rule.472 In contrast, a project to improve water supply to residents of targeted census tracts could qualify as community development even if the water supply improvements were made outside of those census tracts, provided that the bank could demonstrate the project benefits the targeted census tracts in accordance with the rule. The agencies believe that the requirement as 472 See also Q&A § ll.12(g)(4)(iii)—4. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 revised—to require that essential community infrastructure benefit or serve targeted census tracts—will ensure a strong connection between essential community infrastructure and community needs in targeted census tracts, and that this connection will be further bolstered by the other two common place-based criteria. The agencies further note that banks will be expected to be able to demonstrate that a project benefits the targeted census tracts in accordance with the rule. As noted above, the final rule adopts the proposed non-exhaustive list of examples of essential community infrastructure: broadband, telecommunications, mass transit, water supply and distribution, and sewage treatment and collection systems. On consideration of the comments and further review, the agencies continue to believe that the proposed examples provide adequate clarity for the types of activities that could be considered essential community infrastructure under final § ll.13(g), and also note that they generally align with current guidance, discussed above. Accordingly, examples of the types of loans, investments, and services that support essential community infrastructure under § ll.13(g) could include a municipal bond to help fund a transit improvement within targeted census tracts, or financing of a project to provide residents of targeted census tracts access to broadband, subject to the other criteria being met. Regarding other examples raised by commenters, the agencies note that the list of examples is illustrative and nonexhaustive. Thus, the final rule does not preclude agency consideration of investments, loans, or services supporting other types of essential community infrastructure that meet the criteria set forth in § ll.13(g). The agencies do not believe that identifying every kind of essential community infrastructure in the regulation is practicable or possible. However, the agencies will take commenters’ suggestions under advisement as the agencies develop the illustrative list contemplated by § ll.14(a). The agencies also considered the suggestion to limit the provision to only those activities listed in § ll.13(g), but believe that this approach would be too restrictive; communities may have differing infrastructure needs, and limitations could deter new or innovative essential community infrastructure projects. Additionally, activities that are not essential community infrastructure may qualify under other categories of community development. For example, a project to PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 6687 redevelop vacant brownfield lots into buildable land would not qualify as essential community infrastructure in section § ll.13(g), but might qualify as a revitalization or stabilization activity pursuant to section § ll.13(e). On consideration of the comments and further deliberation, the agencies believe that final § ll.13(g), combined with the majority standard set forth in § ll.13(a),473 appropriately ensures a focus on low- or moderate-income residents of targeted census tracts. Accordingly, the agencies have determined not to adopt additional or alternative requirements to help ensure that essential community infrastructure activities include a benefit to low- or moderate-income residents in the communities served by these projects. Having carefully reviewed commenter suggestions, the agencies are concerned that additional criteria might be overly limiting, such as qualifying only activities supporting critical community needs, or particular activities only under specified conditions, such as limited costs or local control. The agencies recognize that community needs can vary widely across communities, and therefore intend the final rule to be sufficiently adaptable for banks and communities to address those needs. While the agencies note that infrastructure projects in higher income areas tend to be sufficiently resourced, the agencies believe that the final rule will provide recognition of bank support for a variety of needed activities in targeted census tracts, including those projects that would be less likely to be funded otherwise. In addition, the agencies are not adopting comments suggesting that the rule should require activities to primarily serve low- and moderateincome residents in targeted census tracts; to strongly correlate to the benefit to low- and moderate-income individuals; or to limit eligible activities to census tracts with majority low- or moderate-income populations. The final rule seeks to maintain flexibility for activities to meet a range of community needs, while also requiring the inclusion of low- or moderate-income individuals as beneficiaries. As noted in the discussion of essential community facilities (final § ll.13(f)), the agencies believe that this flexibility remains particularly important in distressed or 473 See final § ll.13(a)(1)(i)(B)(4) (providing that loans, investments, or services supporting community development under final § ll.13(f) and (g) meet the ‘‘majority standard’’ for receiving full credit it the majority of the beneficiaries are, or the majority of dollars benefit or serve, residents of targeted census tracts), discussed in the section-bysection analysis of final § ll.13(a)(1). E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6688 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations underserved nonmetropolitan middleincome census tracts, which can have fewer low- or moderate-income residents. Thus, the final rule is intended to balance a number of considerations by specifically requiring that essential community infrastructure under § ll.13(g) benefit or serve residents of these census tracts, or lowor moderate-income census tracts, but also requiring that low- or moderateincome individuals within those census tracts benefit from the project. At the same time, the agencies are declining to expand the rule to qualify activities benefiting all residents without regard to income level, as the agencies believe it is important that there be some demonstrated benefit to low- and moderate-income individuals. For similar reasons, the agencies are also not adopting in the regulation recommended methods for measuring the benefits of these projects to low- and moderate-income individuals. The agencies are concerned that specific requirements in this regard could be overly burdensome and add a level of complexity to the rule that could run counter to facilitating partnerships between banks and communities to meet essential community infrastructure needs. The agencies further believe that there is a need to maintain flexibility in the rule, as noted above, for qualifying a range of infrastructure projects that meet varying community needs. However, banks will be expected to demonstrate that all of the criteria in § ll.13(g) have been met, notably the criterion in § ll.13(g)(2) that essential community infrastructure benefits or serves residents of targeted census tracts, including low- and moderateincome individuals. The agencies have also considered comments suggesting an option to provide partial credit for activities under § ll.13(g), but continue to believe that not including a partial credit option for essential community infrastructure will better facilitate clarity and consistency in the consideration of essential community infrastructure. In addition, the agencies are concerned that providing partial credit could allow for qualification of projects without a specific focus on benefiting and serving residents of targeted census tracts, and might allow for activities with only tangential benefits to the targeted census tracts. The agencies recognize commenter concerns that the criteria for essential community infrastructure could result in support for larger infrastructure projects not qualifying for CRA credit, but believe that these larger projects are likely to have financing options even if VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 they have only ancillary benefits to residents of targeted census tracts. The place-based criteria adopted under the final rule thus are designed to help ensure that community development under the CRA includes larger infrastructure projects that provide clear and meaningful benefits to residents of targeted census tracts, and that smaller projects benefiting residents of targeted census tracts have needed financial support. Larger scale infrastructure projects will qualify if they meet all required criteria, including that there is a demonstrated majority benefit for residents of targeted census tracts.474 Thus, a bank could purchase a bond to fund improvements for a citywide water treatment project that is consistent with a city’s capital improvement plan; this bond purchase would qualify if the majority of the project benefits or serves residents in the eligible census tracts, includes low- or moderate-income residents, and meets the other criteria of § ll.13(g). Section ll.13(g)(1) Through (3) PlaceBased Criteria The final rule adopts the three common place-based eligibility criteria for essential community infrastructure, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Accordingly, under the final rule, essential community infrastructure are activities that: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving targeted census tracts (final § ll.13(g)(1)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § ll.13(g)(2)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in targeted census tracts (final § ll.13(g)(3)). As noted, the reasons for adopting these final criteria, and for revisions to the proposed criteria, are collectively discussed above in this section-by-section analysis. Section ll.13(h) Recovery Activities in Designated Disaster Areas Current Approach and the Agencies’ Proposal Similar to the current CRA regulations and guidance regarding support for 474 See final § ll.13(a)(1)(i)(B)(4) and the accompanying section-by-section analysis. PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 designated disaster areas,475 proposed § ll.13(h) would establish recovery activities in designated disaster areas as a category of community development. Specifically, proposed § ll.13(h)(1) stated that these recovery activities comprised activities that revitalize or stabilize geographic areas subject to a Major Disaster Declaration administered by the Federal Emergency Management Agency (FEMA). Consistent with current guidance, the proposed provision expressly excluded activities that revitalize or stabilize counties designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures), but modified the exclusion by providing that the agencies may determine to grant a temporary exception for these areas.476 Also aligned with current guidance, the proposal provided that activities promoting the revitalization or stabilization of designated disaster areas would be eligible for CRA consideration for 36 months after a Major Disaster Declaration unless that period is extended by the agencies.477 The proposal further defined recovery activities in designated disaster areas as activities that also meet the other placebased criteria discussed above: that activities benefit or serve residents, including low- or moderate-income residents (proposed § ll.13(h)(2)); not displace or exclude low- or moderateincome residents, of these geographic areas (proposed § ll.13(h)(2)); be conducted in conjunction with a Federal, State, local, or tribal government disaster plan that includes an explicit focus on benefiting the designated disaster area (proposed § ll.13(h)(3)). Under the proposal, activities in designated disaster areas that meet these eligibility standards could be considered regardless of the income level of the designated census tracts. Comments Received Comments on the proposal regarding recovery activities in designated disaster areas generally focused on the agencies’ specific request for feedback on whether they should consider any additional criteria to ensure that activities in this category benefit low- or moderateincome individuals and communities. Some commenters, for example, indicated support for additional criteria for this category to focus the benefits of 475 See 12 CFR ll.12(g)(4)(ii). See also Q&A § ll.12(g)(4)(ii)–1 and –2. 476 See proposed § ll.13(h)(1); compare with Q&A § ll.12(g)(4)(ii)–1. 477 See id. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations recovery activities in disaster areas on low- and moderate-income individuals and communities and to avoid recovery efforts being concentrated in higherincome areas. Commenters noted that disasters disproportionately impact lowincome communities, and pointed to the inequitable distribution of recovery resources following a disaster. Several of these commenters recommended metrics to help ensure low- and moderate-income community benefit of disaster recovery activities, such as: (1) requiring that a specific percentage of benefits inure to low- and moderateincome residents; (2) use of a Social Vulnerability Index to help determine and assess low- and moderate-income benefit; or (3) consideration of criteria used in the Census Bureau’s Community Resilience Estimates, which focus on various factors that could impact a community’s ability to survive and rebound from declared disasters.478 A few commenters further suggested that the agencies give credit for activities that serve displaced residents who were forced to migrate, as well as the census tracts that receive those displaced residents; or require that recovery activities in designated disaster areas benefit low- and moderate-income communities, minority communities, or both, in order to be eligible for CRA consideration. Another commenter similarly suggested that the focus of disaster recovery should be expanded to include minority communities, to ensure the agencies are fulfilling their obligation under the Fair Housing Act’s affirmatively furthering fair housing provision.479 This commenter suggested that minority individuals and communities are especially vulnerable to disasters and are also the least likely to have access to the resources needed to recover from disasters. Commenter feedback also included a recommendation to qualify activities that primarily benefit low- and moderate-income communities affected by a natural disaster without requiring a FEMA declaration or disaster plan for that community. In lieu of additional criteria, a few commenters advocated for using the proposed impact review to give positive treatment for bank financing activities for disaster recovery based on the extent to which low- and moderate-income 478 See, e.g., U.S. Census Bureau, ‘‘Community Resilience Estimates’’ (May 30, 2023), https:// www.census.gov/programs-surveys/communityresilience-estimates.html. 479 See 42 U.S.C. 3608. See also, e.g., 24 CFR 5.150 through 5.180, as proposed to be amended in 88 FR 8516 (Feb. 9, 2023). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 individuals or neighborhoods benefit.480 For instance, a commenter suggested that CRA performance evaluations should specifically factor in the degree to which these activities benefit lowand moderate-income populations, with higher scores assigned to projects benefiting low- and moderate-income residents than other projects. Some commenters supported qualifying recovery activities in designated disaster areas, regardless of income level, or otherwise opposed additional criteria to ensure benefits for low- and moderate-income individuals and communities in designated disaster areas. For example, a commenter supported considering disaster recovery activities as responsive to community needs and suggested that such activities in middle- and upper-income areas can benefit low- and moderate-income persons. A few commenters suggested that the agencies rely on the expertise of the bank’s CRA professional to create a case for the activity and demonstrate that the activity is in direct response to a natural disaster. Another commenter referenced current guidance on disaster recovery activities under the CRA that are not income-limited,481 and asserted that, to ensure that disaster recovery efforts are effective, all members of any community who have experienced economic dislocation due to a disaster must continue to be able to benefit from the community development activities undertaken by the financial institution, regardless of income. Final Rule Final § ll.13(h) adopts proposed § ll.13(h), reorganized for clarity and consistency with the structures of other place-based categories, and modified as described below. Consistent with the proposal, final § ll.13(h)(1) provides the general definition of the types of activities included in this category of community development and specifies that they must also meet the common place-based eligibility criteria (final § ll.13(h)(1)(i) through (iii)). Final § ll.13(h)(2) contains the proposed exclusion from consideration for loans, investments, and services supporting disaster recovery in counties designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures), and the timeframe for eligibility for consideration. 480 See proposed § ll.15(b). See also final § ll.15(b) and the accompanying section-bysection analysis. 481 See Q&A § ll.12(g)(4)(ii)–1 and –2. PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 6689 Section ll.13(h)(1) Recovery of Designated Disaster Areas Under final § ll.13(h)(1), activities that promote recovery of a designated disaster area are those that revitalize or stabilize geographic areas subject to a Major Disaster Declaration administered by FEMA. The final rule relocates the proposed additional parameters for qualification from proposed § ll.13(h)(1) to final § ll.13(h)(2), described below. The final rule is intended to describe eligible disaster recovery activities more clearly, as a stand-alone community development category of community development in the regulation, rather than including disaster recovery activities as a subcategory of revitalization and stabilization. Examples of bank activities for CRA credit as supportive of disaster recovery activities under final § ll.13(h) include, but are not limited to, assistance with rebuilding infrastructure; financing to retain businesses that employ local residents; and recovery-related housing or financial assistance to individuals in the designated disaster areas. As with the other place-based categories, the agencies believe that the final rule on disaster recovery activities, with the common place-based criteria discussed in more detail above, will provide stakeholders with a better upfront understanding of the types of disaster recovery activities that will qualify as community development relative to the current ‘‘attract or retain’’ standard. The agencies have considered commenter suggestions for additional or alternative criteria to help ensure that designated disaster recovery activities include a benefit to low- or moderateincome residents in the communities served by these projects. In particular, the agencies are sensitive to commenter concerns that disasters can often more severely impact low- and moderateincome individuals. At the same time, given the disparate and widespread impacts that major disasters can involve, the agencies are concerned about unduly limiting qualification of activities under this category and possibly qualifying fewer disaster recovery activities than under the current rule. Thus, the agencies are not adopting commenter suggestions that the rule should require that a majority of, or all, of disaster recovery activity benefits go to low- or moderate-income residents and communities, or other similar limitations noted in the summary of comments above. The agencies continue to believe that activities that promote the recovery of designated disaster areas should benefit E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6690 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations the entire community, including, but not limited to, low- or moderate-income individuals and communities, consistent with the purposes of CRA. Further, the agencies believe that the common place-based criteria adopted under the final rule will ensure a strong connection to community needs in designated disaster areas. Specifically, while activities in all census tract income levels may be considered, these activities must benefit or serve residents of the census tracts included in the designated disaster area, including lowor moderate-income individuals, and must not directly result in forced or involuntary relocation of individuals in designated disaster areas. The agencies are also not adopting the suggestion to include under disaster recovery those activities that are not tied to specific FEMA Major Disaster Declarations or disaster recovery plans. The agencies believe that revising the current (and proposed) rule to take a more expansive approach to designating eligibility under the disaster recovery category would be overbroad and could require supplemental eligibility criteria that would add complexity to the final rule, potentially detracting from the increased clarity and transparency for stakeholders and examiners that the final rule is designed to achieve. Incorporating State disaster declarations, for example, would pose compliance and implementation challenges due to varying standards and the large volume of such declarations. The agencies believe that generally retaining current and proposed parameters related to disaster recovery activities, including the focus on federally designated disaster areas and a nexus to a plan, program, or initiative,482 benefits stakeholders by providing consistency and predictability. The agencies also believe that the final rule’s tie to geographic areas subject to a FEMA Major Disaster Area Declaration will provide recognition for a wide range of projects benefiting communities in crisis across the United States within appropriately far-reaching, yet clearly defined, geographic areas. The agencies also note that there have been a significant number of FEMA Major Disaster Declarations in recent years, further indicating that the final rule approach has an appropriate scope for considering a wide range of activities assisting many specifically impacted communities. Finally, the agencies are declining to adopt specific methods to measure benefits as suggested by some 482 See proposed § ll.13(h); see also Q&A § ll.12(g)(4)(ii)–1 and –2. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 commenters. As with similar suggestions for other place-based categories, the agencies are concerned that specific requirements could be difficult to implement and dissuade banks from engaging in these activities. The agencies further aim to support adaptability of the rule and recognize that different facts and circumstances could give rise to a wide range of appropriate ways to demonstrate that an activity meets the disaster recovery standards in final § ll.13(h). As noted elsewhere, however, banks will be expected to demonstrate that they have met all of the criteria in § ll.13(h) for activities in designated disaster areas, notably that the activities benefit residents, including low- or moderateincome individuals, of designated disaster areas. Section ll.13(h)(1)(i) Through (iii) Place-Based Criteria The final rule adopts the three common place-based eligibility criteria for disaster recovery activities, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Under the final rule, activities that promote recovery from a designated disaster are activities that: are undertaken in conjunction with a disaster plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving the designated disaster area (final § ll.13(h)(1)(i)); benefit or serve residents, including low- or moderate-income individuals, of the designated disaster area (final § ll.13(h)(1)(ii)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals in the designated disaster area (final § ll.13(h)(1)(iii)). As noted, the reasons for adopting these final criteria, and for revisions to the proposed criteria, are collectively discussed above in this section-bysection analysis. Section ll.13(h)(2) Eligibility Limitations for Loans, Investments, or Services Supporting Recovery of a Designated Disaster Area Final § ll.13(h)(2) relocates and adopts, with non-substantive clarifications, the additional eligibility parameters in proposed § ll.13(h)(1). Specifically, under § ll.13(h)(2)(i), loans, investments, or services that support activities promoting recovery from a designated disaster in counties PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures) are not eligible for consideration under § ll.13(h), unless the agencies announce a temporary exception. Section ll.13(h)(2)(ii) states that loans, investments, and services that support activities under § ll.13(h) are eligible for consideration up to 36 months after a Major Disaster Declaration, unless that time period is extended by the agencies. The agencies continue to believe that activities covered under Categories A and B are generally short-term recovery activities that would significantly expand the number of designated disaster areas,483 and that longer-term activities are more likely to provide sustained benefits to impacted communities and thus are a more appropriate focus under the CRA. The agencies are therefore generally adopting the definition of designated disaster areas included in the Interagency Questions and Answers,484 and permitting the agencies to consider exceptions on a case-by-case basis, such as disaster declarations for the COVID– 19 pandemic. Similarly, consistent with the proposal and current guidance, the agencies are adopting a time frame in § ll.13(h)(2)(ii) making loans, investments, and services that support activities under § ll.13(h) eligible for consideration up to 36 months after a Major Disaster Declaration. Thus, for example, providing a loan for rebuilding a commercial property 24 months after a declaration could qualify, even if the project continues to be financed past 36 months. Overall, the agencies believe that adopting these criteria will recognize comments that supported a continuance of current practice for this category and provide clarity for banks on the qualification of activities. Section ll.13(i) Disaster Preparedness and Weather Resiliency Activities Current Approach The agencies’ CRA regulations have allowed CRA consideration for certain activities that help communities recover from natural disasters, including activities that help to revitalize and stabilize designated disaster areas, as discussed above. On a limited basis, activities that help designated disaster areas mitigate the impact of future disasters may be considered under CRA 483 See, e.g., FEMA, ‘‘Public Assistance Fact Sheet’’ (Oct. 2019), https://www.fema.gov/sites/ default/files/2020-07/fema_public-assistance-factsheet_10-2019.pdf. 484 See Q&A § ll.12(g)(4)(ii)–1. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations if Hazard Mitigation Assistance is included in the FEMA disaster declaration.485 Outside of activities related to disaster recovery, the Interagency Questions and Answers provide examples of ‘‘community development loans’’ that include loans financing ‘‘renewable energy, energyefficient, or water conservation equipment or projects that support the development, rehabilitation, improvement, or maintenance of affordable housing or community facilities.’’ 486 However, the current regulations and guidance do not expressly identify as eligible for CRA credit activities related to helping lowor moderate-income individuals, low- or moderate-income communities, small businesses, or small farms prepare for disasters or build resilience to future weather-related events. The Agencies’ Proposal In proposed § ll.13(i), the agencies proposed to establish a separate category of community development for activities that assist individuals and communities to prepare for, adapt to, and withstand natural disasters, weather-related disasters, or climaterelated risks. As with other proposed place-based categories of community development, eligibility under this category would be conditioned on meeting the proposed common placebased criteria. Specifically, the proposal stated that disaster preparedness and climate resiliency activities are those conducted in targeted census tracts and that: benefit or serve residents, including low- or moderate-income residents, in one or more of the targeted census tracts (proposed § ll.13(i)(1)); do not displace or exclude low- or moderate-income residents in the targeted census tracts (proposed § ll.13(i)(2)); and are conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative focused on disaster preparedness or climate resiliency that includes an explicit focus on benefiting a geographic area that includes the targeted census tracts (proposed § ll.13(i)(3)). ddrumheller on DSK120RN23PROD with RULES2 Comments Received General comments. Most commenters addressing proposed § ll.13(i) generally supported adding this category of activities under the community development definition, as an appropriate step to encourage 485 See Q&A § ll.12(g)(4)(ii)–1 and FEMA, ‘‘How a Disaster Gets Declared’’ (Apr. 25, 2023), https://www.fema.gov/disaster/how-declared. 486 Q&A § ll.13(h)–1. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 financial institutions to support disaster preparedness and climate resilience activities. A number of commenters asserted that these activities can mitigate risks that disproportionately impact low- and moderate-income communities, as well as indigenous communities and communities of color. For example, a commenter stated that low- and moderate-income communities are particularly vulnerable to extreme weather and other natural disasters because they are more likely to be sited in locations that have not benefited from investment in hazard mitigation. A few commenters highlighted the importance of proactive investment in communities as consistent with mission of the CRA, in addition to post-disaster funding. A few commenters asserted that climate resilience is a critical foundation for community health and economic stability and growth, while another noted that the proposed category could help communities understand what kinds of climate-related investments they can seek financing for, and help financial institutions understand which activities can receive CRA credit. In contrast, a commenter opposed the proposal to include this category of activities in the community development definition, arguing that such activities are inconsistent with the CRA. As discussed in more detail below, while most commenters expressed general support for proposed § ll.13(i), many of these commenters urged the agencies to clarify or broaden the scope and types of activities that would qualify under the proposed category as a way to strengthen the rule. Commenters also offered suggestions for revising the proposed category’s required elements for place-based activities under proposed § ll.13(i)(1) through (3), described in more detail below. Commenters also addressed miscellaneous topics outside the scope of the proposed provisions, discussed at the end of this section-by-section analysis. Qualifying activities: scope and examples. The agencies requested comment on whether the proposed disaster preparedness and climate resiliency category appropriately defined qualifying activities in proposed § ll.13(i) as those that assist individuals and communities to prepare for, adapt to, and withstand natural disasters, weather-related disasters, or climate-related risks. The proposal also provided various examples of eligible activities contemplated by this proposed provision. While commenters generally supported proposed § ll.13(i), many of those commenters requested the PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 6691 agencies provide additional clarity; provide additional, non-exhaustive examples of eligible qualifying activities; and/or broaden the types of eligible activities. For example, some commenters supported the term ‘‘climate-related risks,’’ but asserted that the agencies should interpret the term to include not only natural hazards or weather-related risks, but also environmental health and other risks exacerbated by climate change, such as those related to air quality, pest increases, and warming waters. A few commenters suggested State law climate mitigation frameworks as reference points. Other commenters suggested that the final rule specify, or provide as examples, a variety of activities they recommended should qualify, such as development of community solar and microgrids, battery storage, residential electrification, energy and water efficiency measures, green technology, broad environmental initiatives such as the creation and expansion of green jobs, greenhouse emission mitigation and decarbonization, and toxic waste and industrial site clean-up, among others. One commenter cautioned the agencies against being overly prescriptive, recommending that the final rule maintain definitions broadly associated with essential infrastructure, rather than list specific activities that could become obsolete. Categorizing activities that promote energy efficiency. The agencies sought comment on whether activities that promote energy efficiency should be included as a component of the disaster preparedness and climate resiliency category, or whether those activities should be considered under other categories, such as affordable housing (§ ll.13(b)) and essential community facilities (§ ll.13(f)). The agencies also sought feedback on whether certain activities that support energy efficiency should be included as an explicit component of the definition. Most commenters addressing the question supported the agencies’ inclusion of energy efficiency-promoting activities as a component of the disaster preparedness and climate resiliency category. For example, a commenter stated that energy efficiency activities can insulate low-income individuals from price inflation and fluctuations resulting from disasters and climate change impacts. Another commenter noted that in addition to decreased utility costs, many energy-efficient techniques support climate resiliency because they help maintain habitable conditions when power is disrupted. A commenter recommended that energy E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6692 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations efficiency promoting activities be included as a component of the rule, but consideration for the activities should be conditioned on whether the activities benefited low- or moderate-income individuals or communities. In contrast, one commenter expressed that the agencies should not include activities that promote energy efficiency as a component of disaster preparedness and climate resiliency, asserting that these activities are outside the scope of the CRA and are more appropriate for environmental, social, and corporate governance guidance. Several commenters also suggested that the agencies should take a broad view of what constitutes an eligible energy efficiency-promoting activity, with some suggesting mitigation efforts be considered. Examples include, among others: energy-efficient upgrades (or new installation) for residential and commercial buildings, such as appliance and fixture replacements, weatherization, improved insulation, window replacements, heat pump and HVAC system purchase and installation; and electrification or decarbonization measures that would help stabilize home energy costs; and water efficiency measures. A number of commenters suggested that energy efficiency-promoting activities should be considered a component of other proposed community development categories, such as affordable housing, community facilities, and/or community infrastructure. For example, several commenters observed that there will be circumstances where energy efficiency improvements can benefit affordable housing and community facilities and this approach would ensure such activities are targeted to the most underserved populations. In contrast, a few commenters supported including energy efficiencypromoting activities only under the proposed disaster preparedness and resiliency category, to facilitate initiatives that co-optimize the use of energy efficiency and weatherization with other related activities, to reduce confusion, or to prevent doublecounting. Other energy-related activities. The agencies sought comment on whether, distinct from energy efficiency improvements, other energy-related activities should be included in the disaster preparedness and climate resiliency category. Of those that responded, many commenters supported including other energyrelated activities as activities that assist individuals and communities in preparing for, adapting to, and VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 withstanding weather, natural disasters, and climate-related risks. Commenters offered various examples of such activities including, among others: renewable energy (including financing of solar panels in low- and moderateincome census tracts or on homes for low- and moderate-income homeowners, community solar installation, or a neighborhood-wide microgrid or district energy system); flood control and water run-off measures; decarbonization activities; energy storage systems; distribution grid modernization; and electric vehicle charging infrastructure. A commenter suggested that the CRA should prioritize clean energy related lending and investment and do so in a manner akin to how LIHTCs are prioritized under the current rule. Utility-scale projects. While the agencies noted in the proposal that proposed § ll.13(i) was not intended to include utility-scale projects, the agencies also sought comment on whether to include utility-scale projects, such as certain solar projects, that would benefit residents in targeted census tracts. Some commenters asserted that utility-scale projects could benefit lowand moderate-income areas through expanded capital investment and likely displacement of fossil fuel burning plants, which are more likely to be located in such areas; or to give clean energy options to residents who cannot install renewable energy on their homes (e.g., due to cost or because they are renters). A few commenters asserted that utility-scale projects such, as renewable energy plants developed outside of a targeted geography, should still be eligible for credit, if benefits accrue to residents of targeted census tracts. A commenter suggested that by definition, utility-scale clean energy should be considered to benefit residents in targeted census tracts, noting that clean energy, regardless of location, benefits the climate everywhere and that even utility-scale clean energy projects located physically outside the geographical borders of a low- and moderate-income community still benefits the environment, health, and welfare of low- and moderateincome persons and communities. Other commenters supported including utility-scale projects, conditioned on criteria such as a certain percentage of benefits accruing to lowand moderate-income census tracts; physical location in low- and moderateincome communities; or if documentation showed specific benefits to targeted geographies or to low- or moderate-income individuals. A few PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 commenters raised offering partial credit for dollars going to low- or moderate-income neighborhoods or benefiting low- or moderate-income individuals, or for projects providing demonstrable financial benefits to those communities. In contrast, some commenters responded that utility-scale projects should not be included as eligible activities. These commenters offered various reasons for this view, including that the benefits of utility-scale projects are not sufficiently directed to low- and moderate-income communities and conventional financing is more likely to be available for these projects (i.e., these projects would occur without a CRA incentive). Another commenter expressed the view that including utility-scale projects would dilute the intended core focus of the CRA, due to the broad application of such projects, and the large dollar amounts involved. Final Rule Section ll.13(i) In General The final rule adopts proposed § ll.13(i), renamed and reorganized from the proposal for clarity, including for consistency with the structure of other place-based categories, and with other modifications discussed below. Final § ll.13(i) uses the term ‘‘weather resiliency’’ instead of ‘‘climate resiliency’’ to clarify the types of activities that qualify under this category of community development. Under final § ll.13(i), disaster preparedness and weather resiliency activities are defined as those that assist individuals and communities to prepare for, adapt to, and withstand natural disasters or weather-related risks or disasters. As discussed below, final § ll.13(i) is revised to state that disaster preparedness and weather resiliency activities benefit or serve targeted census tracts and meet the common place-based criteria in § ll.13(i)(1) through (3). As noted by commenters and highlighted in a growing body of 487 See, e.g., Federal Reserve Bank of New York, ‘‘Reducing Climate Risk for Low-Income Communities’’ (Nov. 19, 2020), https:// www.newyorkfed.org/newsevents/events/regional_ outreach/2020/1119-2020 (referencing, for example, low-income communities’ vulnerability to weatherrelated events such as wildfires and hurricanes); Jesse M. Keenan and Elizabeth Mattiuzzi, ‘‘Climate Adaptation Investment and the Community Reinvestment Act,’’ Community Development Research Briefs (June 16, 2019), https:// www.frbsf.org/community-development/wpcontent/uploads/sites/3/climate-adaptationinvestment-and-the-community-reinvestmentact.pdf (stating that ‘‘shocks from extreme weather . . . exacerbate existing vulnerabilities associated with,’’ for example, affordable housing, household wealth and savings, and economic mobility). E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 literature, lower-income households and communities are especially vulnerable to the impact of natural disasters and weather-related risks and disasters.487 Low- and moderate-income communities are more likely to be located in areas or buildings that are particularly vulnerable to disasters or weather-related risks, such as storm shocks or drought.488 Because residents of affordable housing are more likely to be low-income, and affordable housing tends to be older and of poorer quality, low- and moderate-income households are more likely to have housing that is susceptible to disaster-related damage.489 Additionally, lower-income households tend to have fewer financial resources, making them less resilient to the temporary loss of income, property damage, displacement costs, and health challenges they face from disasters.490 Finally, low- and moderate-income communities are often disproportionately affected by the health impacts associated with natural disasters and weather-related events.491 488 See, e.g., Eleanor Kruse and Richard V. Reeves, ‘‘Hurricanes hit the poor the hardest,’’ Brookings Institute (Sept. 18, 2017), https:// www.brookings.edu/blog/social-mobility-memos/ 2017/09/18/hurricanes-hit-the-poor-the-hardest/; Bev Wilson, ‘‘Urban Heat Management and the Legacy of Redlining,’’ 86 J. Am. Planning Ass’n 443–57(2020), https://www.tandfonline.com/doi/ full/10.1080/01944363.2020.1759127. 489 See, e.g., Maya K. Buchanan et al., ‘‘Sea level rise and coastal flooding threaten affordable housing,’’ Environ. Res. Lett. 15 124020 (2020), https://iopscience.iop.org/article/10.1088/17489326/abb266/pdf (providing estimates of the expected number of affordable housing units that may be at risk of flooding due to exposure to extreme coastal water levels); Patrick Sisson, ‘‘In Many Cities, Climate Change Will Flood Affordable Housing’’ Bloomberg (Dec. 1, 2020), https:// www.bloomberg.com/news/articles/2020-12-01/ how-climate-change-is-targeting-affordable-housing (referencing significant projected losses of affordable housing in the United States due to repeated flooding and noting, for example, that ‘‘[o]lder homes tend to be poorer quality, suffer from deferred maintenance, and are more physically vulnerable to flooding damage (not to mention rising heat), all while housing a disproportionate amount of disabled, elderly and otherwise at-risk residents’’). 490 See, e.g., U.S. Global Change Research Program, ‘‘Fourth National Climate Assessment, Volume II: Impacts, Risks, and Adaptation in the United States’’ (2018), https://nca2018. globalchange.gov/(‘‘People who are already vulnerable, including lower-income and other marginalized communities, have lower capacity to prepare for and cope with extreme weather and climate-related events and are expected to experience greater impacts.’’); and Eleanor Kruse and Richard V. Reeves, ‘‘Hurricanes hit the poor the hardest,’’ Brookings Institution (Sept. 18, 2017), https://www.brookings.edu/blog/social-mobilitymemos/2017/09/18/hurricanes-hit-the-poor-thehardest. 491 Eleanor Kruse and Richard V. Reeves, ‘‘Hurricanes hit the poor the hardest,’’ Brookings Institution (Sept. 18, 2017), https:// www.brookings.edu/blog/social-mobility-memos/ 2017/09/18/hurricanes-hit-the-poor-the-hardest; VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 For these reasons, the agencies believe adding a disaster preparedness and weather resiliency category furthers the purpose of the CRA. While the proposed rule defined disaster preparedness and climate resiliency activities as those that are ‘‘conducted in’’ targeted census tracts, final § ll.13(i) is revised to define ‘‘disaster preparedness and weather resiliency’’ activities as those that ‘‘benefit or serve’’ targeted census tracts. The agencies recognize that while a ‘‘conducted in’’ standard could facilitate a bank’s demonstration that activities are benefiting and serving the residents of targeted census tracts, it could exclude disaster preparedness and weather resiliency activities located in close proximity to a targeted census tract that nonetheless are demonstrably designed to benefit and serve residents of that census tract, including low- or moderate-income individuals. Thus, under the final rule, a project to finance a levee specifically intended to prevent flooding in a targeted census tract could qualify for consideration, even if the levee were not located directly within the census tract, presuming all criteria of the rule were met. Qualifying activities under the final rule; examples; additional criteria. The agencies have considered commenter feedback on the scope and types of activities that might qualify under this category, and commenter responses to whether activities that promote energyefficiency and other energy-related activities should be explicitly included in the definition. For the reasons discussed below, the agencies are finalizing the proposal’s high-level, comprehensive approach regarding the scope and types of activities that qualify under this category, such as activities that assist individuals and communities to prepare for, adapt to, and withstand natural disasters or weather-related risks or disasters. The agencies believe the final rule will encompass a wide variety of activities that help low- or moderateincome individuals and communities proactively prepare for, adapt to, or withstand the effect of natural disasters or weather-related risks or disasters, such as earthquakes, severe storms, droughts, flooding, and forest fires. For example, potentially eligible activities under the final rule, include, but are not limited to, the construction of flood U.S. Global Change Research Program, ‘‘Fourth National Climate Assessment, Volume II: Impacts, Risks, and Adaptation in the United States’’ (2018), https://nca2018.globalchange.gov/(referencing increasing impacts from extreme weather on ‘‘the health and well-being of the American people, particularly populations that are already vulnerable’’). PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 6693 control systems in a flood prone low- or moderate-income or underserved or distressed nonmetropolitan middleincome census tract; and retrofitting multifamily affordable housing to withstand future disasters or weatherrelated events. Additional examples of potentially eligible qualifying activities include, but are not limited to: promoting green space in targeted census tracts in order to mitigate the effects of extreme heat, particularly in urban areas; weatherization upgrades to affordable housing such as more efficient heating and air-cooling systems or more energy-efficient appliances; community solar projects, microgrid and battery projects that could help ensure access to power to an affordable housing project in the event of severe storms; financing community centers that serve as cooling or warming centers in low- or moderate-income census tracts that are more vulnerable to extreme temperatures; and assistance to small farms to adapt to drought challenges. The agencies believe that the final definition provides banks the flexibility needed to encourage investments in a range of activities that promote disaster preparedness and weather resiliency, particularly given that communities face different types of risks across the country. To the extent that activities meet the definition and the common place-based criteria in final § ll.13(i), as well as meet the majority standard in final § ll.13(a), such activities would qualify for community development consideration. For this reason, while the agencies intend that the final rule will encompass some energy-efficiency and other energy-related activities (e.g., those mentioned above), the agencies believe it is unnecessary to more specifically reference those activities in the final rule. With respect to these and other activities raised by commenters, the agencies are concerned that a more prescriptive rule that either designates or provides examples of precise qualifying activities could be overly limiting for this category, become obsolete, or discourage innovative activities in an evolving area of community development. However, the agencies will take commenters’ suggestions under advisement as the agencies develop the illustrative list contemplated by § ll.14. While the agencies believe the final rule provides broad flexibility, the agencies are also declining to further expand community development under this category, for example, to incorporate all environmental health threats and other risks that could be exacerbated by climate conditions, all E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6694 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations activities to mitigate climate risks, such as those that promote decarbonization, or activities that facilitate the transition to clean energy generally. The agencies believe it is important that the final rule clearly link qualifying disaster preparedness and weather resiliency activities to those activities that benefit or serve residents of a targeted census tract, to ensure that these activities provide the community benefit in alignment with the CRA. The agencies are concerned that broadening the rule as suggested by some commenters would make it difficult for banks to demonstrate that nexus, as well as to meet the majority standard in § ll.13(a). Energy efficiency activities and other community development categories. The agencies have also considered comments on whether to include activities that promote energy efficiency in the disaster preparedness and weather resiliency category, or under other community development categories, such as affordable housing or essential community facilities. On further consideration, the agencies believe that energy efficiency-promoting activities are generally consistent with the final definition of disaster preparedness and weather resiliency, and therefore should be included within this category. However, the agencies do recognize that some energy efficiencypromoting activities could potentially be considered under other community development categories. For example, and as discussed in more detail in the proposal, certain weatherization improvements might also benefit affordable housing or essential community facilities. Banks subject to the rule are permitted to qualify activities under any applicable community development category, but those activities may count only once for the purposes of calculating the Community Development Financing Metric. Utility-scale projects. Relatedly, the agencies appreciate the varying views on whether to include utility-scale projects that benefit residents of targeted census tracts within the scope of the rule. After considering the comments, the agencies reaffirm that final § ll.13(i) is not intended to include utility-scale projects. Utility-scale projects tend to be large, even regional projects. In addition, given their nature and function, the agencies believe it would be difficult for utility-scale projects to meet the definition and place-based criteria described below; in particular, the agencies believe it would be difficult for banks to clearly demonstrate such projects benefit or VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 serve specific groups of residents in targeted census tracts. The agencies further believe it would be difficult for utility-scale projects to meet the majority standard described in § ll.13(a). The agencies also considered comments suggesting partial consideration be available for those utility-scale activities benefiting low- or moderate-income individuals or communities, but are not revising the rule in that regard. The agencies believe that partial consideration could allow for qualification of activities that are not primarily focused on benefiting or serving residents of targeted census tracts, and could allow for activities with only accessory benefits to targeted census tracts. Section ll.13(i)(1) Through (3) Placed-Based Criteria The Agencies’ Proposal The proposal defined disaster preparedness and climate resiliency activities as those conducted in targeted census tracts and that: benefit or serve residents, including low- or moderateincome residents, in one or more of the targeted census tracts (proposed § ll.13(i)(1)); do not displace or exclude low- or moderate-income residents in the targeted census tracts (proposed § ll.13(i)(2)); and are conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative focused on disaster preparedness or climate resiliency that includes an explicit focus on benefiting a geographic area that includes the targeted census tracts (proposed § ll.13(i)(3)). Comments Received Comments regarding the common place-based criteria are generally discussed in the introduction to this section-by-section analysis. The agencies additionally sought comment on questions specific to this category, as noted below. Criteria to ensure targeted benefits. The agencies sought feedback on other options for determining whether disaster preparedness and climate resiliency activities are appropriately targeted; how qualifying activities should be tailored to directly benefit low- or moderate-income communities and distressed or underserved nonmetropolitan middle-income areas; and whether other criteria are needed to ensure those activities benefit low- or moderate-income individuals and communities. Additionally, the agencies sought feedback on whether energy efficiency standards should be used to PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 determine if an activity provides sufficient benefit to targeted census tracts, including low- and moderateincome residents. Several commenters concurred that the proposal would appropriately require activities to be targeted to ensure benefits to low- and moderate-income individuals and communities. Some commenters further recommended that qualifying activities be evaluated to ensure that they provide clear, direct, targeted, meaningful, and/ or proven benefit to low- and moderateincome and historically disinvested individuals or communities. Other commenters expressed concern that the proposal was not sufficiently targeted, and urged the rule be revised to state that activities must directly benefit lowand moderate-income communities, Native communities, and minority communities to be eligible for CRA consideration, to prevent funding from going to higher-income areas. Some commenters offered specific views on whether additional tailoring is needed for eligible activities that benefit or serve low- and moderate-income individuals. A commenter encouraged the agencies to consider socially and environmentally beneficial activities even if the transaction does not directly involve a low- and moderate-income party, such as investments in broad environmental initiatives, green technology, and State programs to combat climate change. The commenter asserted that this would allow for financial institutions to more holistically serve low- and moderateincome communities. Another commenter noted that, as disasters do not target low- and moderate-income communities and impact all income levels, further tailoring is unnecessary. In contrast, a commenter stated that activities that are generically responsive to climate change such as wind farms or carbon capture efforts should not be eligible for CRA consideration as they lack the targeted benefit. Commenters also suggested various criteria for the agencies to consider including in the final rule to ensure disaster preparedness and climate resiliency activities benefit low- or moderate-income individuals and communities. Examples of criteria suggested included, among others, considering the mission or focus of the organization owning or controlling the project and whether they have a focus on serving residents of low- and moderate-income communities; whether a project leads to expected energy reduction for low- and moderate-income individuals and communities; or whether a project expands low- and moderate-income household access to E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations renewable energy. Other commenters suggested eligibility criteria, such as requiring renewable energy projects to have a certain percentage of low- and moderate-income subscribers, or prorating CRA credit for activities based on the portion of funds dedicated to low- and moderate-income individuals and communities. Additional prong for activities benefiting low- and moderate-income individuals regardless of geographic location. The agencies also sought comment on whether to include a separate prong of the disaster preparedness and climate resiliency category for activities that benefit lowand moderate-income individuals, regardless of whether they reside in one of the targeted census tracts; and if so, what types of activities should be included in this component. In response, commenters generally supported including a prong to qualify activities that benefit low- and moderate-income individuals, regardless of where they live, if there is a clear benefit to low- and moderateincome individuals or communities or minority communities. Various commenters noted that not all low- and moderate-income individuals live in low- and moderate-income areas and so may be subject to increased displacement risk or physical and financial impacts. Another commenter observed that poverty is not concentrated in rural regions in the same way as in metropolitan areas. In contrast, a commenter suggested that fewer and more inclusive prongs would avoid confusion. Examples of activities that might fit under such a prong submitted by commenters included, among others: activities that promote energy efficiency activities for low- or moderate-income individuals, regardless of where they live, and activities that facilitate improvements and recovery assistance for homes owned or rented by low- and moderate-income households. Consideration of activities in designated disaster areas. The agencies also requested feedback on whether to qualify activities related to disaster preparedness and climate resiliency in designated disaster areas, and if so, whether additional criteria are needed to ensure benefits accrue to communities with fewest resources to address the impacts of future disasters and climate-related risks. Most commenters addressing this question opposed including designated disaster areas as targeted geographic areas for these activities. These commenters noted that Federal disaster areas often include higher-income census tracts that VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 have access to greater resources to finance activities that promote disaster preparedness and climate resiliency, and that CRA should encourage resources to go to communities with limited resources and greater needs. A few commenters offered support, but only if low- and moderate-income individuals or targeted census tracts would be the beneficiaries, with defined constraints, such as demonstrable requirements to have low- and moderate-income census tracts comprise a high percentage of the total geography for the project financed. A few commenters offered support for specified activities in designated disaster areas (such as emergency protective measures), and one commenter suggested that credit could be pro-rated based on the portion of low- and moderate-income census tracts that benefit. Final Rule The final rule adopts the common place-based eligibility criteria, reorganized to be in a consistent parallel order across all place-based categories, and with the revisions described in the discussion of the place-based criteria above in this section-by-section analysis. Under the final rule, disaster preparedness and weather resiliency activities benefit or serve targeted census tracts and: are undertaken in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization, where the plan, program, or initiative includes a focus on benefiting or serving targeted census tracts (final § ll.13(i)(1)); benefit or serve residents, including low- or moderate-income individuals, of targeted census tracts (final § ll.13(i)(2)); and do not directly result in the forced or involuntary relocation of low- or moderate-income individuals residing in targeted census tracts (final § ll.13(i)(3)). As discussed in more detail above, the final rule expands the government plan criterion adopted in § ll.13(i)(1) to include mission-driven nonprofit organizations and deletes ‘‘explicit’’ from the requirement for the plan, program, or initiative to have a focus on benefiting or serving targeted census tracts. In particular, the agencies recognize that, consistent with feedback from some commenters, the Federal, State or local governments may not have disaster preparedness or weather resiliency plans or programs currently in place for some targeted census tracts. Additionally, some government plans may not be specifically focused on, or described as, disaster preparation or PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 6695 weather resiliency. The agencies also note that the Federal Government as well as more State and local governments are developing disaster preparedness or weather resiliencyrelated plans, and the agencies anticipate these plans will become more widespread over time. The criterion adopted in § ll.13(i)(2) is substantially similar to the proposed criterion, with a revision from ‘‘low- or moderate-income residents’’ to ‘‘low- or moderate-income individuals.’’ The criterion adopted in § ll.13(i)(3) is revised to prohibit activities that directly result in forced or involuntary relocation of low- and moderate-income individuals residing in the targeted census tracts. The agencies believe that the common placebased criteria, combined with the majority standard set forth in § ll.13(a), will adequately ensure that disaster preparedness and weather resiliency activities benefit and serve the residents of targeted census tracts, including low- and moderate-income individuals. Reasons for adopting these final criteria, and for the revisions made, are generally discussed above in this section-by-section analysis. Responses to comments on specific questions asked regarding this community development category follow below. Criteria to ensure targeted benefits. The agencies appreciate commenters’ thoughtful responses on potential additional eligibility criteria to ensure targeted benefits to low- or moderateincome individuals and communities of activities under this category of community development. The agencies have considered the suggestions and believe the adopted standard is adequately calibrated to provide needed flexibility for qualifying activities to support varying community development needs across different types of communities. In addition, the agencies are concerned that it may be burdensome to have to demonstrate that a project meets suggested criteria and could deter investments under this category. Therefore, the agencies are not adopting additional eligibility criteria. The agencies believe that the final rule is appropriately tailored to ensure a focus on low- and moderate-income residents in targeted census tracts and will facilitate banks’ ability to find opportunities to serve targeted communities. The agencies are also not adopting the suggestion to condition consideration of energy efficiency activities under the rule on specific benefits to low- or moderate-income individuals or communities, or specific energy E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6696 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations efficiency standards. The agencies have considered that such standards are continuously evolving and believe it would be impracticable to incorporate and enforce such standards in the final rule over time. In addition, the agencies have considered that, given the many different types of activities that could qualify, setting energy efficiency standards could result in standards that are not calibrated to the full breadth of qualifying activities. However, banks may find information showing that activities meet energy efficiency standards to be helpful in demonstrating that a particular activity meets the relevant criteria in § ll.13(i). Additional prong for targeted activities, regardless of geographic location. Similarly, the agencies are declining to expand the proposed rule to adopt an additional prong for activities directed to low- or moderateincome individuals, regardless of geographic location. Although the agencies recognize that not all low- and moderate-income individuals live in targeted census tracts, as discussed above, the agencies believe that this category should remain place-based and thus focused on activities that benefit or serve targeted census tracts. Adopting an additional basis for qualifying activities in this category would also reduce consistency across the placebased categories and in that regard could increase the final rule’s complexity. Consideration of activities in designated disaster areas. The agencies are also declining to expand the criterion in final § ll.13(i)(2) to include activities in designated disaster areas. In response to commenter concerns and upon further consideration, the agencies believe that the rule as finalized, combined with the majority standard in § ll.13(a), will appropriately help ensure a focus on low- or moderate-income residents and targeted census tracts. The agencies also note that, to the extent a designated disaster area already encompasses one or more targeted census tracts, that area would already be eligible under final § ll.13(i)(2). The agencies are concerned that expanding this category beyond targeted census tracts to include designated disaster areas would detract from ensuring that these activities continue to have a benefit for all residents, including low- and moderateincome residents, since designated disaster areas often include higherincome census tracts. The agencies also believe that many activities with longterm benefits for designated disaster areas could qualify under the separate category of community development VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 focused on recovery for designated disaster areas.492 The agencies believe the rule as finalized, combined with the majority standard set forth in § ll.13(a), sufficiently and appropriately ensures a focus on low- or moderate-income residents. Additional comments. Beyond the specific elements of proposed § ll.13(i), commenters also offered a variety of other suggestions related to the proposed disaster preparedness and climate resiliency category of community development. For example, a few commenters suggested the final rule should indicate the kinds of public data and tools available for banks to identify and/or quantify climate vulnerable communities and risks, to assess whether proposed investments align with known demographic and environmental conditions, and to prioritize investments to maximize benefits to targeted communities. For example, some commenters suggested leveraging the U.S. EPA’s Environmental Justice Screening and Mapping Tool (EJScreen) and White House Council on Environmental Quality’s Climate and Economic Justice Screening Tool (CEJST). While the agencies appreciate these suggestions, the agencies are aware that public data and tools are continuously evolving, and therefore are declining to adopt or reference specific tools in the final rule. As the agencies note in the section-bysection analysis of § ll.21, the agencies intend to make tools and information available to banks and the public on performance context related information and will take these comments into consideration as the agencies implement the final rule. Commenters also addressed topics such as how the climate impacts of a bank’s activities should be factored into a bank’s CRA performance evaluation. For example, some commenters stated that banks should be scrutinized and/or downgraded for financing activities that increase greenhouse gas emissions, asserting that such activities disproportionately impact low- and moderate-income communities or minority communities, while at least one commenter expressed concern about such an approach. A few commenters suggested that the agencies should avoid awarding CRA credit to programs or products that may take advantage of or otherwise be unaffordable to low- and moderateincome or other underserved homeowners or consumers. In this regard, the agencies note that under the final rule, as currently, evidence of illegal credit practices can be the basis of a rating downgrade.493 For more information on the final rule’s approach to rating downgrades, see the sectionby-section analysis of § ll.28. Several commenters suggested that the final rule encourage banks to provide financial services for climate resiliency activities in low-income, indigenous, and minority communities. Specifically, one commenter suggested that the agencies develop a race and ethnicity disclosure framework for community development activities, similar to the proposed disclosure of race and ethnicity data for mortgage lending under the Retail Lending Test. Another commenter asserted that race should be explicitly used as a metric to ensure that climate vulnerable communities receive improved access to credit and services. For more information and discussion regarding the agencies’ consideration of comments recommending adoption of additional race- and ethnicity-related provisions in this final rule, see section III.C of this SUPPLEMENTARY INFORMATION. A few commenters suggested that an impact factor for climate resiliencyrelated activities could be developed, to recognize, among others, activities such as energy efficiency improvements that also benefit affordable housing and essential community facilities (if not explicitly eligible under those categories); decarbonization features of otherwise qualified activities; or activities undertaken in line with community-based plans or in collaboration with public agencies. For example, a commenter suggested that the final rule offer additional CRA credit specifically for making investments in CDFIs or other institutions that directly invest in rural-based resilience and adaptation programs or projects. The commenter observed that rural communities, particularly rural coastal regions, face a greater threat from climate change than more-urbanized areas because they often lack the resources, infrastructure and adaptive capacity of city centers. While the final rule does not adopt a specific impact factor for these types of activities, as suggested above, the agencies note that certain activities associated with commenterrecommended impact factors could potentially already be counted under one of the twelve impact and responsiveness factors adopted in final § ll.15(b). These could include, for example, factors for community 492 See final § ll.13(h), discussed further in the accompanying section-by-section analysis. 493 See current § ll.28(c), proposed § ll.28(d), and final § ll.28(d). PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations development loans, investments, and services in specific geographic areas with significant community development needs (§ ll.15(b)(1) through (3)), that support an MDI, WDI, LICU, or CDFI (§ ll.15(b)(4)), or that serve low-income individuals or families (§ ll.15(b)(5)). Impact and responsiveness factors are discussed in more detail in the section-by-section analysis of § ll.15. Section ll.13(j) Revitalization or Stabilization, Essential Community Facilities, Essential Community Infrastructure, and Disaster Preparedness and Weather Resiliency in Native Land Areas Current Approach ddrumheller on DSK120RN23PROD with RULES2 The current CRA regulations do not include a specific category of community development for activities in Native or tribal lands, although current guidance encompasses ‘‘revitalization and stabilization’’ activities consistent with a tribal government plan if the activities are located in low- or moderate-income census tracts.494 The OCC 2020 CRA Final Rule adopted definitions of both ‘‘Indian country’’ and ‘‘other tribal and Native lands,’’ and designated certain activities as qualifying for consideration in these geographic areas.495 Discussed in greater detail below, to help address challenges specific to Native lands, the agencies proposed in § ll.13(l), a new category of qualifying community development activities related to revitalization, essential community facilities, essential community infrastructure, and disaster preparedness and climate resiliency that are specifically targeted to and conducted in Native Land Areas (as defined in § ll.12, discussed in the corresponding section-by-section analysis above). The final rule renumbers proposed § ll.13(l) as § ll.13(j), revises and reorganizes the section for clarity, and makes other modifications described below. 494 See 12 CFR ll.12(g)(4) and Q&A § ll.12(g)(4)(i)–1 (regarding activities in low- or moderate-income census tracts designated ‘‘as consistent with a Federal, state, local, or tribal government plan for the revitalization or stabilization of the low- or moderate-income [census tract]’’). See also Q&A § ll.12(g)(4)(ii)–2 (regarding activities in designated disaster areas ‘‘consistent with a bona fide government revitalization or stabilization plan’’) and Q&A § ll.12(g)(4)(iii)–3 (regarding activities in distressed nonmetropolitan middle-income census tracts ‘‘consistent with a bona fide government revitalization or stabilization plan’’). 495 See, e.g., 85 FR 34734, 34771, 34794–34796 (June 5, 2020). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 The Agencies’ Proposal Under proposed § ll.13(l), activities in Native Land Areas related to the following would comprise a distinct category of community development: revitalization, essential community facilities; 496 essential community infrastructure; and disaster preparedness and climate resiliency.497 Consistent with other proposed placebased categories of community development, the agencies proposed that essential community facilities, essential community infrastructure, and disaster preparedness and climate resiliency activities in Native Land Areas must: benefit or serve residents of Native Land Areas, including low- or moderate-income residents of Native Land Areas; 498 not displace or exclude low- or moderate-income residents of Native Land Areas; 499 and be conducted in conjunction with a Federal, State, local, or tribal government plan, program, or initiative that benefits or serves residents of Native Land Areas.500 Separately, the agencies proposed that revitalization activities in Native Land Areas have a more specific focus on low- and moderate-income individuals. Specifically, the agencies proposed that revitalization activities must benefit or serve residents of Native Land Areas, with substantial benefits for low- or moderate-income residents; 501 and must not displace or exclude low- or moderate-income residents.502 Revitalization activities in Native Land Areas also would need to be undertaken in conjunction with a Federal, State, local, or tribal government plan, program, or initiative with ‘‘an explicit focus on revitalizing or stabilizing Native Land Areas and a particular focus on low- or moderate-income households.’’ 503 Comments Received Commenters offered views on establishing a category of community development for activities in Native Land Areas, as well as feedback on the 496 The proposal’s regulatory text used the term ‘‘eligible’’ community infrastructure, which was a typographical error. The final rule corrects the language to ‘‘essential community infrastructure.’’ 497 Under the proposal, other community development activities (i.e., affordable housing or economic development) could still qualify for consideration if those activities took place in Native Land Areas, provided that they otherwise meet the eligibility standards for that particular activity under another paragraph of § ll.13. 498 See proposed § ll.13(l)(2)(i) and (l)(3)(i). 499 See proposed § ll.13(l)(2)(i) and (l)(3)(i). 500 See proposed § ll.13(l)(2)(ii) and (l)(3)(ii). 501 See proposed § ll.13(l)(1)(i)(A). 502 See proposed § ll.13(l)(1)(i)(B). 503 Proposed § ll.13(1)(1)(i). PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 6697 types of activities that would qualify for CRA consideration under the Native Land Areas category of community development and additional ways to facilitate activities in Native Land Areas. Comments on the proposed definition of Native Land Areas are discussed in the section-by-section analysis of that definition in § ll.12. General comments. Overall, commenters generally expressed wide support for including a new community development category for activities in Native Land Areas, with some indicating that the proposal would facilitate addressing unmet credit needs in geographical areas that have traditionally lacked access to CRA loans and investments, as well as bank branches in those areas. Comments included that the CRA should ensure capital is deployed to Native Land Areas, given persistent lending gaps in these areas; that the proposal could be an important step toward addressing housing needs and persistent poverty in these communities; and that a strengthened and targeted provision would incentivize banks to do more to promote prosperity in rural and Native communities throughout the country. Additional eligibility requirements. Commenters expressed a range of views in response to the agencies’ request for feedback on whether the agencies should consider additional eligibility requirements for activities in Native Land Areas to ensure that community development activities benefit or serves low- or moderate-income residents of Native Land Areas. A few commenters expressed general support for additional criteria to ensure that community development benefits accrue to low- and moderate-income residents of Native Land Areas. One such commenter, however, also wanted to ensure that CRA requirements do not place more burden on Native persons than others. Another commenter expressed support for focusing activities on low- and moderate-income residents, but asserted that low- and moderate-income resident benefit should not be a requirement for qualification. A number of commenters more specifically objected to including income limits on beneficiaries for activities to receive CRA consideration in Native Land Areas. Reasons offered included, among others, that: (1) AMI in these areas is often very low and credit challenges are not limited to those with below 80 percent AMI; (2) middleincome Native communities often experience gaps in services and funding opportunities; (3) income limits could deter investments; and (4) revitalization across the income spectrum can have E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6698 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations far-reaching positive community impacts across Native communities. Additional commenter feedback included: urging the agencies to make eligibility requirements as inclusive as possible, with various commenters noting the Federal Government’s trust and treaty obligations or the historic underinvestment in tribal communities; stating that consideration of activities should focus on how an investment benefits the tribal community, and expressing concern that additional requirements would add to the complexity of determining whether a project would qualify prior to a CRA examination; and emphasizing that investments in businesses owned by higher-income Native individuals with a broader impact on tribal community and economic development can help avoid an unintended consequence of maintaining islands of poverty without amenities. Finally, on the topic of requirements for qualifying activities on Native Land Areas more generally, a commenter asserted that tribal organizations are best positioned to determine community development needs of their communities and advocated that the agencies incorporate into the CRA framework the ability for tribal nations to determine what constitutes a qualifying community development activity in tribal communities. This commenter also recommended that the rule focus on loans to individuals as well as investments in tribal nations, as individual tribal citizens residing on tribal lands have difficulty obtaining lines of credit, loans, and other financial services. Tribal association or tribal designee plans, programs, or initiatives. As discussed in the proposal, tribal government designees such as tribal housing authorities, tribal associations and intertribal consortiums are central to economic development and community planning efforts in many Native Land Areas. Accordingly, the agencies sought feedback on whether to expand the government plan eligibility criteria to activities in Native Land Areas undertaken in conjunction with tribal association or tribal designee plans, programs, or initiatives. Most commenters on this topic expressed support for broadening qualification to include an option for activities in conjunction with tribal associations or designees. For example, a commenter stated that tribal associations and tribal designees offer and manage many services and programs on tribal lands and for tribal members. Another commenter noted the lack of capacity of tribal governments and indicated that VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 full consent to these proposed activities may therefore be unreasonable; this commenter suggested that broader investment opportunities would be possible if they did not have to be undertaken in conjunction with an explicitly established tribal government initiative. Commenters also offered views on how the rule could define what tribal associations or designees would be included in an expanded government plan eligibility criterion. Some suggested requiring that a tribal designee be led by or work closely with tribal members, or requiring that tribal association and designee plans be majority Native-led and endorsed by the tribal government or at least not actively opposed by a tribal government. A few commenters asserted that consortia should be included, while other commenters suggested that tribal charters, other Native-led organizations, Native CDFIs and TDHEs could fall within this category, with a commenter noting that tribes rely on federally funded TDHEs to drive housing development. One commenter suggested that regulators should be prepared to allow banks to invest in the activities of Native organizations even though the organizations may have an unfamiliar legal structure. Other recommendations for Native Land Area activities. Commenters also requested various clarifications or additions to the proposed rule. Suggestions included ensuring consideration for (1) activities that impactfully improve access to Native business loans, mortgage loans, and disaster loans; (2) investments in Native CDFIs to help make more micro loans and provide financing for larger, more complex development projects; and (3) high impact activities in Native Land Areas, such as bond and debt issuances for tribal government entities. Other recommendations included emphasizing climate resiliency or renewable energy with regard to activities in Native communities, as well as broadband and digital equity access for Native Americans. A few commenters suggested that the agencies provide express presumptions of eligibility for activities such as those carried out by or in conjunction with a tribal government or its agencies, tribal associations or designee plans, or where the primary beneficiaries are members of a federally or State-recognized Indian tribe. Several commenters, including tribal commenters, further asserted that the agencies should consult with tribes to exchange information, build relationships, and receive guidance and recommendations on reforming and PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 implementing the CRA framework. Other commenters addressed tribal consultations with respect to activities that potentially would qualify under proposed § ll.13(l). Comments included, for example, a suggestion that the agencies explicitly state that meaningful consultation should always be undertaken with the goal of obtaining tribal informed consent when a project would have an impact on tribal lands or resources, either on or off the reservation. Final Rule General Rule (§ ll.13(j)(1)) The agencies are adopting proposed § ll.13(l), renumbered as § ll.13(j), with revisions as follows. The final rule is reorganized for clarity and consistency with the structures of other place-based categories. Final § ll.13(j)(1) sets forth the types of activities included in this category of community development: generally consistent with the proposal, this provision states that revitalization or stabilization (termed ‘‘revitalization’’ in the proposal), essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency activities in Native Land areas are activities specifically targeted to and conducted in Native Land Areas. The final rule also adopts a conforming change from ‘‘climate resiliency’’ to ‘‘weather resiliency’’ for consistency with final § ll.13(i).These activities must also meet specific place-based eligibility criteria in § ll.13(j)(2) or (3), as applicable: final § ll.13(j)(2) describes place-based eligibility criteria for revitalization or stabilization activities in Native Land Areas, while final § ll.13(j)(3) collectively describes place-based eligibility criteria for essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency in Native Land Areas. These place-based eligibility criteria are discussed in more detail below. The final rule also makes other technical edits. Section ll.13(j)(1) and (2) now reference ‘‘revitalization or stabilization,’’ instead of ‘‘revitalization’’ as proposed, for consistency with revisions to § ll.13(e). Further, for clarity and to simplify the regulatory text, § ll.13(j)(3) now cross-references the definitions of essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency found in final § ll.13(f), (g), and (i), respectively. E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 The agencies believe that adopting a community development category for specified activities in Native Land Areas will further the purpose of the CRA to encourage banks to meet the credit needs of their entire communities, including those of low- and moderateincome communities. Available data indicate that Native and tribal communities face significant and unique community development challenges. For example, the poverty rate among Native individuals on reservations is 35 percent, and exceeds 50 percent in some communities.504 Banking and credit access remains a chronic barrier for tribal economic inclusion. Seven percent of American Indian or Alaska Native households were unbanked in 2021, much higher than the 2.1 percent among White, nonHispanic households.505 MajorityNative American counties have an average of two bank branches compared to the nine-branch average in nonmetropolitan counties and well below the 27-branch overall average for all counties.506 In addition, basic infrastructure in tribal areas significantly lags behind that of the rest of the country, with over one-third of Native households in tribal areas affected by major physical problems with their housing, including deficiencies with plumbing, heating, or electric—a share nearly five times greater than for the United States population as a whole.507 In addition, rates of broadband and cellular access are low in many tribal lands, with 21 percent of all tribal lands and 35 percent of rural tribal lands lacking broadband and cellular access.508 Given these 504 The Federal Reserve Bank of Minneapolis’ Center for Indian Country Development (CICD) calculated poverty rates for the American Indian and Alaska Native population living on federally recognized reservations and off-reservation trust lands using the U.S. Census Bureau’s American Community Survey 5-Year 2017–2021 data. Twenty-five of these land units had American Indian and Alaska Native poverty rates above 50 percent. Under the more expansive U.S. Census Bureau definition of Native lands, this number grows to 56 land units. 505 FDIC, ‘‘National Survey of Unbanked and Underbanked Households,’’ Table 3.1 (2021), https://www.fdic.gov/analysis/household-survey/ 2021report.pdf. 506 Information calculated using FDIC’s Summary of Deposits (2020). 507 HUD, ‘‘Housing Needs of American Indians and Alaska Natives in Tribal Areas: A Report from the Assessment of American Indian, Alaska Native, and Native Hawaiian Housing Needs’’ (2017), https://www.huduser.gov/portal/publications/ HNAIHousingNeeds.html. This study is based on a survey of 38 ‘‘tribal areas’’ that are considered Native Land Areas under the final rule. 508 Federal Communications Commission, ‘‘Fourteenth Broadband Deployment Report’’ 28 (2021), https://docs.fcc.gov/public/attachments/ FCC-21-18A1.pdf. As calculated by the Federal VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 challenges, and as noted in more detail in the place-based criteria discussion, the agencies believe it is particularly important that community development consideration under this category be directly linked to Native Land Areas. For this reason, the agencies are finalizing in § ll.13(j)(1) the proposed requirement that all qualifying activities under § ll.13(j) be ‘‘targeted to and conducted in’’ Native Land Areas, even where the cross-referenced community development category (e.g., essential community facilities in § ll.13(f)) does not itself have a ‘‘targeted to and conducted in’’ requirement. Based on comments received and upon further consideration, the agencies are not adopting additional eligibility requirements for activities in Native Land Areas to ensure that community development activities benefit or serve low- or moderate-income individuals residing in those areas, beyond those proposed and finalized. As discussed above, tribal communities in Native Land Areas face particular challenges related to access to credit. The agencies are concerned that additional income limitations or requirements could deter investments under this category. The agencies further believe that the rule as finalized is sufficiently tailored to ensure a focus on low- and moderateincome residents in Native Land Areas, and will accordingly encourage banks to find opportunities to serve low- and moderate-income communities in areas that can be more difficult to serve. The agencies are also not expanding the regulation to address commenter suggestions that tribal organizations determine what constitutes qualifying community development activities in Native Land Areas. The final rule is intended in part to ensure that stakeholders have a clear upfront understanding of what constitutes a qualifying activity, in order to encourage investment and greater certainty for banks and those they serve in undertaking community development. However, the final rule incorporates as an eligibility criterion that activities must be undertaken in conjunction with plans, programs, or initiatives of governments (including tribal governments) or mission-driven Reserve Bank of Minneapolis’ CICD using U.S. Census Bureau American Community Survey 5Year 2017–2021 data, nearly 1 in 5 households (17%) in Native geographic areas do not have access to the internet, compared to 1 in 10 households (10%) nationally. See also, e.g., Matthew T. Gregg, Anahid Bauer, and Donn. L. Feir, ‘‘The Tribal Digital Divide: Extent and Explanations’’ (revised June 2022), https://www.minneapolisfed.org/-/ media/assets/papers/cicdwp/2021/cicd-wp-202103.pdf (providing more detail on internet access challenges in Native geographic areas). PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 6699 nonprofit organizations, as discussed further below, and in the section-bysection analysis of the common criteria for placed-based activities, above. In this way, the final rule better incorporates recognition of the importance of tribal government and tribal nonprofit organizations in identifying, understanding, and addressing the needs of their communities, relative to the proposal. The agencies have also considered comments recommending additions or clarifications to the rule, such as to provide additional emphasis on various specific impactful activities or to provide presumptions of eligibility as described above. The agencies have decided not to adopt these recommendations specifically, but note that activities meeting the eligibility criteria in the full range of community development categories adopted in final § ll.13, and that meet the majority standard in § ll.13(a), would qualify for community development consideration. For the reasons explained in this section-by-section analysis, the agencies believe that the common placebased criteria are all important to ensuring that the place-based categories provide the intended community benefit, and thus are not adopting presumptions of eligibility in final § ll.13(j) for select activities on Native Land Areas that might not satisfy those criteria. The agencies also emphasize that the final rule adopts twelve impact and responsiveness factors under § ll.15 that highlight key areas of concern raised by stakeholders, including an impact and responsiveness factor expressly focused on activities that benefit or serve residents of Native Land Areas (final § ll.15(b)(8), discussed in the accompanying sectionby-section analysis below). Regarding comments seeking consultation with tribal stakeholders, the agencies engaged in significant outreach prior to issuing the NPR and received feedback from many stakeholders that informed the proposal and final rule, including from those that would be affected by the inclusion of activities in Native Land Areas. Moreover, ongoing engagement with the wide range of stakeholders, including tribes, related to community reinvestment and community development is a central element of agency practice and will continue to be over the course of CRA implementation. Further, the agencies continue to believe that limiting qualification under § ll.13(j) to only those activities where tribal governments had been consulted could be overly restrictive and impractical to implement, and E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 6700 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations could diminish the scope of the activities that would qualify as community development, due to the time and resource constraints of tribal governments. However, as discussed in more detail below, the final rule recognizes the importance of tribal governments and other tribal organizations; in particular, and as discussed below, the agencies are adopting the proposal to require that activities in Native Land Areas must be conducted in conjunction with a government plans, programs, and initiatives, including a tribal government plan, program, or initiative, as well as by expanding the ways that this requirement can be met by allowing for activities undertaken in conjunction with a mission-based nonprofit organization.509 Definitions and place-based criteria (§ ll.13(j)(2) (revitalization or stabilization activities) and (3) (essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency)). The final rule adopts place-based eligibility criteria for the community development category focused on activities in Native Land Areas in § ll.13(j)(2) (revitalization or stabilization activities) and (3) (essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency). These sections are reorganized from the proposal to be in a consistent parallel order with other place-based categories, with certain features specific to the Native Land Areas category that are substantially similar to those in the proposal. Government plan, program, or initiative (§ ll.13(j)(2)(i) and (j)(3)(i)). Consistent with other place-based community development categories, the final rule adopts a criterion in each of § ll.13(j)(2)(i) and (j)(3)(i) requiring an activity to be undertaken ‘‘in conjunction with a plan, program, or initiative of a Federal, State, local, or tribal government or a mission-driven nonprofit organization.’’ For clarity, and as described in the section-by-section analysis for § ll.12, the final rule adopts a definition of ‘‘tribal government.’’ The agencies believe that including a government plan criterion in each of § ll.13(j)(2)(i) and (j)(3)(i) will help ensure that community development activities under § ll.13(j) remain responsive to identified community needs, and that the addition of allowing activities with mission-driven nonprofit organizations will appropriately allow for and 509 See final § ll.13(j)(2)(i) and (j)(3)(i). VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 recognize the value and importance of targeted non-government-related activities that can serve communities in Native Land Areas. Final § ll.13(j)(2)(i) adopts the proposed requirement that the relevant plan, program, or initiative include an ‘‘explicit focus’’ on revitalizing or stabilizing Native Land Areas, while final § ll.13(j)(3)(i) is revised to include the requirement that the relevant plan, program, or initiative include an ‘‘explicit focus’’ on benefiting or serving Native Land Areas. While other final place-based categories are adopted without an ‘‘explicit focus’’ requirement (as described elsewhere in the section-by-section analysis of § ll.13), the agencies believe this standard is important for this category of community development, to establish that plans, programs, or initiatives have an intentional link to Native Land Areas, which as discussed above are particularly underserved geographic areas. Thus, for example, this category would qualify a flood mitigation project that is specifically designed to benefit residents of a Native Land Area (presuming all other criteria are met). Regarding revitalization or stabilization activities, final § ll.13(j)(2)(i) further requires that the plan, program, or initiative include ‘‘a particular focus on low- or moderateincome households.’’ As discussed in the proposal, the agencies are adopting a more targeted criterion for revitalization or stabilization activities, because Native Land Areas include some middle- and upper-income census tracts that are not designated as distressed or underserved nonmetropolitan middle-income census tracts. This criterion allows consideration for activities conducted in geographic areas that include middleand upper-income census tracts, but retains the focus on low- and moderateincome households. Based on supervisory experience, the agencies believe that the types of projects that could qualify as revitalization and stabilization activities are more feasibly and likely to be developed to target specific income levels than other categories of place-based activities covered in final § ll.13(j) (i.e., community facilities, infrastructure, and disaster preparedness and weather resiliency activities), which are more likely to be utilized by the community as a whole. Therefore, the agencies believe that it is appropriate to establish an express nexus between these activities and benefits to low- and moderate-income households in Native Land Areas, to better ensure direct PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 benefits to low- and moderate-income components of the community. As discussed above, the final rule expands the government plan criterion in each of § ll.13(j)(2)(i) and (j)(3)(i) from the proposal to include plans, programs, or initiatives of missiondriven nonprofit organizations. Regarding the Native Land Area category of community development in particular, the agencies believe that this expanded government plan criterion will generally capture plans, programs, and initiatives of qualifying Native CFDIs, Native Hawaiian organizations, TDHEs, Indian Health Centers, consortia, and other key Native designees focused on low- and moderate-income individuals and communities. For this reason, the agencies do not believe that expanding this criterion to include tribal associations or designees specifically is necessary. Further, based on the agencies’ research and commenter views on the proposal, the agencies are concerned that defining qualifying tribal associations or designees appropriately for the rule would be difficult. Rather, the agencies believe that defining and adding to this criterion mission-driven nonprofit organizations will remove potential ambiguity regarding which organizations would be eligible tribal associations or designees under this criterion, increasing clarity and transparency for stakeholders. Benefit or serve residents, including low- or moderate-income individuals (§ ll.13(j)(2)(ii) and (j)(3)(ii)). Final § ll.13(j)(2)(ii) and (j)(3)(ii) each contain the place-based criterion generally requiring benefits to residents in Native Land Areas. For the same reasons discussed above with respect to the government plan criterion, the agencies are adopting a more targeted criterion for revitalization or stabilization activities. Specifically, under § ll.13(j)(2)(ii), revitalization or stabilization activities ‘‘must benefit or serve residents of Native Land Areas and must include substantial benefits for low- or moderate-income residents.’’ For example, a bank’s purchase of a bond to fund a distribution center in a Native Land Area, where a substantial number of employment opportunities are expected to be filled by low- or moderate-income residents of the Native Land Area, may qualify for consideration if the activity met other required criteria. Under final § ll.13(j)(3)(ii), essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency activities in Native Land Areas must benefit or serve residents, including E:\FR\FM\01FER2.SGM 01FER2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations low- or moderate-income individuals, in Native Land Areas. The reasons for adopting this criterion and general revisions from the proposal are discussed above in this section-bysection analysis regarding the common place-based criteria. Forced or involuntary relocation (§ ll.13(j)(2)(iii) and (j)(3)(iii)). Final § ll.13(j)(2)(iii) and (j)(3)(iii) require that revitalization or stabilization activities and essential community facilities, essential community infrastructure, and disaster preparedness and weather resiliency activities in Native Land Areas, respectively, do not directly result in the forced or involuntary relocation of low- or moderate-income individuals residing in Native Land Areas. The reasons for adopting this criterion and general revisions from the proposal are discussed above in this section-bysection analysis regarding the common place-based criteria. Section ll.13(k) Activities With MDIs, WDIs, LICUs, or CDFIs Current Approach Under the CRA statute and current regulations, nonminority- and nonwomen-owned banks can receive CRA credit for ‘‘capital investment, loan participation, and other ventures’’ undertaken in cooperation with MDIs, WDIs, and LICUs, provided that these activities help meet the credit needs of local communities in which the MDIs, WDIs, and LICUs are chartered.510 These activities need not also benefit the bank’s assessment areas or the broader statewide or regional area that includes the bank’s assessment areas.511 While CDFIs are not separately highlighted in the statute or regulations, activities with CDFIs can qualify as community development under various provisions of the current regulations pursuant to current guidance.512 ddrumheller on DSK120RN23PROD with RULES2 The Agencies’ Proposal The agencies proposed to establish a category of community development for activities with MDIs, WDIs, LICUs, and U.S. Treasury Department-certified CDFIs. Specifically, a community development category in proposed § ll.13(j) included: • Investments, loan participations, and other ventures undertaken by any bank, including by MDIs and WDIs, in 510 See 12 U.S.C. 2903(b), implemented at 12 CFR ll.21(f). 511 See 12 CFR ll.21(f); see also Q&A § ll.21(f)–1. 512 See, e.g., Q&A § ll.12(t)(4) and § ll.21(h)– 1. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 cooperation with other MDIs, other WDIs, or LICUs;513 and • Lending, investment, and service activities undertaken in connection with a U.S. Treasury Department-certified CDFI,514 which the proposed rule expressly indicated would be presumed to qualify for favorable community development consideration.515 As discussed above in the section-bysection analysis of § ll.12, the proposal defined the term MDI to ensure consistency with the CRA statute and incorporate existing flexibility for each agency to define MDI as it determines appropriate. In this way, the agencies intended the proposal to ensure that activities conducted in cooperation with banks owned by minority individuals would receive consideration, and also provided consideration for activities conducted in cooperation with banks that the agencies have long considered to be MDIs.516 The agencies sought comment on whether the MDI definition should include insured credit unions considered to be MDIs by the NCUA. As also discussed in the section-by-section analysis of § ll.12, the proposal defined WDI by cross-reference to the definition of the term in the CRA.517 In the proposal, the agencies noted stakeholder feedback indicating support for a stronger emphasis on community development financing and services that support these institutions, including equity investments, long-term debt financing, technical assistance, and contributions to nonprofit affiliates. Some stakeholders previously suggested the need to increase certainty surrounding the treatment of activities in partnership with MDIs, WDIs, LICUs, and CDFIs. For example, stakeholders noted that examiners might require extensive documentation that a CDFI 513 Proposed 514 Proposed § ll.13(j)(1). § ll.13(j)(2). 515 Id. 516 See OCC, ‘‘Policy Statement on Minority Depository Institutions’’ (July 26, 2022), https:// www.occ.gov/news-issuances/news-releases/2022/ nr-occ-2022-92a.pdf; Board, SR 21–6/CA 21–4, ‘‘Highlighting the Federal Reserve System’s Partnership for Progress Program for Minority Depository Institutions and Women’s Depository Institutions’’ (Mar. 5, 2021), https://www.federal reserve.gov/supervisionreg/srletters/SR2106.htm; FDIC, ‘‘Statement of Policy Regarding Minority Depository Institutions,’’ 86 FR 32728 (June 23, 2021). 517 12 U.S.C. 2907(b)(2), defining the term ‘‘women’s depository institution’’ to mean a depository institution (as defined in 12 U.S.C. 1813(c)) in which: (i) more than 50 percent of the ownership or control is held by one or more women; (ii) more than 50 percent of the net profit or loss of which accrues to one or more women; and (iii) a significant percentage of senior management positions are held by women. See also the sectionby-section analysis of final § ll.12 (‘‘women’s depository institution’’). PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 6701 assists low-income populations, even though CDFI certification by the U.S. Treasury Department’s Community Development Financial Institutions Fund is an indication of having a mission of community development.518 In the proposal, the agencies also noted stakeholder support for conferring automatic CRA community development consideration for community development activities with U.S. Treasury Department-certified CDFIs, to provide a stronger incentive and reduce burden. The proposal clarified that investments, loan participations, and other ventures undertaken not only by nonminority institutions, but also by MDIs and WDIs, in cooperation with other MDIs, WDIs, and LICUs, would qualify for consideration under this category. This would expand on the current rule, which focuses on providing consideration for these activities when conducted by nonminority institutions.519 The agencies also sought feedback on whether activities undertaken by an MDI or WDI to promote its own sustainability and profitability should qualify for consideration. The agencies considered that allowing these activities to qualify could encourage new investments to bolster the financial positions of these banks, allowing them to deploy additional resources to help meet the credit needs of their communities. The agencies further sought comment on whether additional eligibility criteria should be considered to ensure investments by MDIs or WDIs in themselves would ultimately benefit low- and moderate-income and other underserved communities. The proposal to provide a presumption of favorable CRA consideration for lending, investment, and service activities with U.S. Treasury Department-certified CDFIs was based on the agencies’ recognition that these CDFIs already undergo specific certification processes and evaluations of CDFIs’ ongoing outputs and outcome goals in award-making processes to demonstrate that they have a mission of promoting community development and providing financial products and services to low- or moderate-income individuals and communities.520 518 See U.S. Dept. of Treasury, Community Development Financial Institutions Fund, ‘‘CDFI Certification,’’ https://www.cdfifund.gov/programstraining/certification/cdfi. 519 See 12 CFR ll.21(f) (implementing 12 U.S.C. 2903(b)). 520 See U.S. Dept. of Treasury, Community Development Financial Institutions Fund, ‘‘CDFI Certification,’’ https://www.cdfifund.gov/programstraining/certification/cdfi. E:\FR\FM\01FER2.SGM 01FER2 6702 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Comments Received General. The agencies received comments on proposed § ll.13(j) from a wide range of commenters. Overall, most commenters addressing proposed § ll.13(j) supported including this category of community development under proposed § ll.13, and most commenters supported both prongs of the proposal. Commenters noted, for example, that these organizations’ missions to serve (and record of serving) underserved or historically disadvantaged communities, is consistent with the goals of CRA; that the proposed category would provide clarity regarding the treatment of bank activities with MDIs, WDIs, LICUs, and CDFIs under the CRA; and that the proposal would encourage activities that would reinforce and build the capacity of these entities. As discussed in more detail below, some commenters recommended that the agencies apply additional eligibility criteria to proposed § ll.13(j), while others suggested that additional entities be included within the scope of proposed § ll.13(j). As discussed in more detail below, some commenters sought additional clarity on the types of activities included in the rule. Comments regarding MDIs, WDIs, and LICUs (proposed § ll.13(j)(1)). Most commenters addressing proposed § ll.13(j)(1) supported recognizing ‘‘investments, loan participations, and other ventures’’ undertaken by any bank, including by MDIs and WDIs, in cooperation with other MDIs, other WDIs, or LICUs, as community development. Similarly, several commenters noted that these entities are mission-driven and share a focus consistent with the purpose of CRA. For example, a commenter stated that MDIs have proven to advance economic mobility in Black communities, citing an FDIC study that included findings that an estimated 6 out of 10 people living in the service area of Blackowned banks are Black, and that MDIs originate a greater share of mortgage loans than non-MDIs to borrowers in low- and moderate-income census tracts and in census tracts with larger shares of minority populations.521 Another commenter stated that in many minority communities, MDIs offer safe and affordable banking services where other institutions may not, and that most MDIs provide vital deposit and credit 521 FDIC, ‘‘Minority Depository Institution: Structure, Performance, and Social Impact’’ (May 2019), https://www.fdic.gov/regulations/resources/ minority/2019-mdi-study/full.pdf. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 access services in communities that large financial institutions avoid. Commenters asserted that MDIs need increased capital investments to serve their communities and that the agencies should incentivize bank activities with MDIs that have a proven record of lending to minority consumers and in low- and moderate-income and minority communities. In this regard, a few commenters asserted that the agencies should specifically encourage activities with MDIs and minority-led or minority-owned CDFIs and credit unions in order to increase racial equity in historically underserved communities. Several commenters suggested additional eligibility criteria for activities with MDIs and WDIs, based on concerns that MDIs and WDIs might not always serve low- or moderate-income individuals or communities. A few commenters suggested that CRA credit for activities with MDIs be connected to the MDI’s record of serving borrowers in minority communities. For example, to ensure that minority communities are served, a commenter suggested that activities with MDIs or WDIs with assets over $1 billion be subject to additional data requirements for transparency, as well as other guardrails. Another commenter suggested incorporating into the CRA regulations a Federal statutory definition of ‘‘minority lending institution,’’ requiring that a majority of both the number and dollar volume of arm’s-length, on-balance sheet financial products be directed at minorities or majority minority census tracts or equivalents.522 Another commenter asserted that activities with CDFIs are more responsive and impactful than deposits or investments into MDIs and WDIs, and that automatic consideration should not be conferred for activities with MDIs or WDIs; instead, examiners should consider what the MDI or WDI does with a deposit or investment prior to granting CRA credit. Commenters separately addressed the proposed definition of MDI, including in response to the agencies’ question on whether to include in the definition minority insured credit unions recognized by the NCUA. These comments and the agencies’ response are addressed in the section-by-section analysis for the MDI definition in § ll.12. Comments regarding CDFIs (proposed § ll.13(j)(2)). Most commenters addressing proposed § ll.13(j)(2) supported qualifying ‘‘lending, 522 Consolidated Appropriations Act, 2021, tit. V, subtitle B, section 523(c)(4)(A), Public Law 116– 260, 134 Stat. 2088–89 (Dec. 27, 2020). PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 investment, and service activities’’ undertaken in connection with a U.S. Treasury Department-certified CDFI as community development under the rule, including the proposed presumption that such activities qualify for favorable community development consideration. Commenters supporting the provision noted that CDFIs are responsible, mission-based lenders and investors. For example, a commenter stated that CDFIs are very active in the NMTC program and work closely with banks to produce the thoughtful and impactful revitalization efforts. Some commenters emphasized that CDFIs can help support small businesses, especially minorityand women-owned small businesses, and continue to partner with banks to make credit accessible in low- and moderate-income communities across the country. Some commenters sought clarifications in the final rule related to CDFIs. Several commenters recommended that the final rule clarify that a bank’s activities with CDFIs would receive equal consideration to activities with MDIs, WDIs and LICUs, with some noting that this should apply regardless of a CDFI’s location relative to a bank’s assessment area. As noted above, one commenter suggested CDFIs are more impactful than MDIs, WDIs, or LICUs, and, accordingly, that only activities with CDFIs should receive automatic consideration. Some commenters also suggested that the final rule ensure uniform treatment of all kinds of CDFIs (e.g., loan funds, banks, and credit unions). A number of commenters suggested that the final rule explicitly include ‘‘CDFI banks,’’ based on concerns that the proposal was not clear that CDFI banks were ‘‘banks’’ and that activities between CDFI banks and MDIs, WDIs, and LICUs would be covered for CRA consideration under this category. Other commenters raised concerns about the potential impact of giving similar community development consideration to all CDFIs. For example, a few commenters expressed concern that allowing CRA consideration for bank activities in conjunction with a CDFI regardless of where the CDFI exists could have the effect of encouraging bank activities with only the largest CDFIs, thus redirecting capital resources away from smaller CDFIs with a primary mission of serving local communities. Thus, a commenter recommended that regulators should incentivize substantial participation with local CDFIs, as a condition precedent to an ‘‘Outstanding’’ rating. Activities undertaken by an MDI or WDI to promote its own sustainability and profitability; eligibility criteria. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations Most commenters responding to the question of whether the agencies should consider activities undertaken by an MDI or WDI to promote its own sustainability and profitability stated that these activities should be considered. Commenters cited the importance of keeping these institutions in business so that they may better serve their communities. Commenters further suggested clear language expressly allowing CDFI banks to receive CRA consideration for activities that promote their own sustainability and profitability. A few commenters responded to a related question posed by the agencies on whether additional eligibility criteria should be considered to ensure that investments by an MDI or WDI in itself provide benefit to low- and moderateincome and other underserved communities. A commenter stated that the investments should show an ancillary benefit to low- and moderateincome populations or low- and moderate-income areas served by the institution. Some commenters stated that no additional eligibility criteria should apply to WDI and MDI investments in themselves, but suggested that enhanced consideration should be given to investments that directly benefit low- and moderateincome and underserved communities. A few commenters opposed giving CRA consideration to activities undertaken by an MDI or WDI to promote its own sustainability and profitability, or suggested limits on consideration of these types of investments. For example, a commenter stated that MDIs or WDIs that are small or intermediate banks should receive CRA consideration for well-defined investments in building their capacity, but that this should not extend to large banks that are MDIs or WDIs. Other requests for clarification. Commenters also sought clarification on various other aspects of the rule. A commenter suggested that the proposal generally did not clearly articulate what activities would be eligible for consideration under proposed § ll.13(j), and thus would not provide sufficient incentive for banks to engage in these partnerships. Some commenters sought clarity on whether specific types of activities would qualify, such as, among others, CDFI products designed to address racial inequity, or loan participations that banks sold to or purchased from MDIs and CDFIs. Some commenters suggested that all bank investments or loans, including equity investments in or to certified CDFIs be eligible to receive CRA credit, and that the final rule provide full CRA credit for VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 loans originated to unbanked and underbanked borrowers that are originated by nonbank CDFIs (even if sold immediately to third-party investors). Commenters also recommended clarifying that investments, loans, or grants, and other support to subsidiaries or entities controlled or wholly-owned by U.S. Treasury Department-certified CDFIs be given the same CRA consideration as those supporting the CDFI. Additional entities. Some commenters recommended that community development consideration under proposed § ll.13(j) be extended to activities with other entities, such as those undertaken with chartered NeighborWorks organizations, HUDdesignated Community Housing Development Organizations, HUDapproved Housing Counseling Organizations, and Certified Development Companies (CDCs). In particular, commenters highlighted the rigor required for entities to maintain these certifications. Commenters also suggested adding a wide range of other entities that offer important community supports, such as Community Action Agencies (CAAs), Housing Partnership Network partners, Mutual Self-Help Housing grantees under the USDA Rural Development section 523 program, and other community-based organizations. Some commenters expressed concern that the proposal to grant automatic consideration to CDFIs could discourage similar support to CDCs and other nonCDFI-certified community-based organizations. A commenter suggested that providing CRA consideration for activities with community development venture capital funds and formative funds or entities seeking certified CDFI status would encourage bank support of valuable CDEs prior to certification, while another expressed support for the agencies’ clarification in the proposal that non-CDFI certified activities could be considered under another community development category (assuming criteria are met). Final Rule The final rule renumbers proposed § ll.13(j) as § ll.13(k) and revises it as discussed below. Under the final rule, activities with MDIs, WDIs, LICUs, or CDFIs are ‘‘loans, investments, or services undertaken by any bank, including by an MDI, WDI, or CDFI bank evaluated under [the agencies’ CRA regulations], in cooperation with an MDI, WDI, LICU, or CDFI.’’ Final § ll.13(k) covers activities with the same types of entities as those proposed, but the language referencing eligible types of activities with those entities is PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 6703 revised and simplified, with no substantive change intended, to refer to ‘‘loans, investments, and services.’’ This change is a clarification for consistency with the activities considered under the Community Development Financing Test in final § ll.24, the Community Development Services Test in final § ll.25, and the Community Development Financing Test for Limited Purpose Banks in final § ll.26. Additionally, the final rule states that these activities do not include investments by an MDI, WDI, or CDFI bank in itself. The final rule is intended to build on and clarify important community development financing and services through MDIs, WDIs, LICUs, and CDFIs that qualify under the current CRA framework. The agencies believe that, by establishing a clear and straightforward standard that allows a bank’s loans, investments, and services with MDIs, WDIs, LICUs, and CDFIs to receive community development consideration, the final rule will increase certainty and transparency concerning treatment of activities in partnership with these entities relative to current practice. The final rule is also expected to reduce documentation burden associated with demonstrating, for example, that CDFIs serve low- and moderate-income populations or otherwise have a community development mission, as commenters noted this can create challenges in engaging in these activities. Instead, the final rule is intended to streamline banks’ engagement with MDIs, WDIs, LICUs, and CDFIs by providing automatic community development consideration for loans, investment, and services with these entities.523 The agencies believe that the mission of MDIs, WDIs, LICUs, and CDFIs in meeting the credit needs of low- and moderate-income and other underserved individuals, communities, and small businesses is highly aligned with CRA’s core purpose of encouraging banks to meet the credit needs of their entire community, including low- and moderate-income populations. Emphasizing partnerships with MDIs, WDI, and LICUs in the final rule is consistent with the CRA’s express provision highlighting ‘‘capital investment, loan participation, and other ventures’’ by banks in cooperation with MDIs, WDIs and LICUs.524 As reflected in the current CRA framework, 523 See also final § ll.13(a)(1)(iii) regarding credit for community development activities under final § ll.13(k) and the accompanying section-bysection analysis. 524 12 U.S.C. 2903(b). E:\FR\FM\01FER2.SGM 01FER2 6704 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 CDFIs have long been recognized by the agencies as financial institutions that, like MDIs, WDIs, and LICUs, are critical to the lending and capital access ecosystem of low- or moderate-income communities.525 Based on the agencies’ supervisory experience, stakeholder feedback over the years of rulemaking leading to this final rule, and other relevant sources, the agencies believe that MDIs, WDIs, LICUs, and CDFIs often have intimate knowledge of local community development needs and opportunities, allowing them to conduct highly responsive activities.526 These entities also generally undergo rigorous and verifiable certification processes.527 Loans, investments, or services include, for instance, equity investments in and loan participations with MDIs, WDIs, and LICUs, and CDFIs. Consistent with current guidance, this would include, for example, loan participations that a bank purchased from a CDFI, loaning an officer or providing other technical expertise to assist an MDI in improving its lending policies and practices, or providing financial support for a WDI to partner with a local educational institution to provide financial literacy programming.528 The rule takes this broad approach in order to provide flexibility for banks to engage in a range of activities that will meet differing local needs across communities. 525 See, e.g., Q&A § ll.12(t)(4) and § ll.21(h)– 1. See also, e.g., 81 FR 48506, 48508–48510 (July 25, 2016). 526 See also, e.g., U.S. Government Accountability Office (GAO), ‘‘Paycheck Protection Program: Program Changes Increased Lending to Small Businesses and Underserved Businesses,’’ 13 (Mar. 16, 2022), https://www.gao.gov/assets/gao-22105788.pdf (estimating, for example, that 69 percent of Paycheck Protection Loans by MDIs and CDFIs went to businesses in high-minority counties). 527 See, e.g., OCC, ‘‘Policy Statement on Minority Depository Institutions’’ (July 26, 2022), https:// www.occ.gov/news-issuances/news-releases/2022/ nr-occ-2022-92a.pdf; Board, SR 21–6/CA 21–4, ‘‘Highlighting the Federal Reserve System’s Partnership for Progress Program for Minority Depository Institutions and Women’s Depository Institutions’’ (Mar. 5, 2021), https:// www.federalreserve.gov/supervisionreg/srletters/ SR2106.htm; FDIC, ‘‘Statement of Policy Regarding Minority Depository Institutions,’’ 86 FR 32728 (June 23, 2021); U.S. Dept. of Treasury, Community Development Financial Institutions Fund, ‘‘CDFI Certification,’’ https://www.cdfifund.gov/programstraining/certification/cdfi. See also 12 CFR 701.34 (NCUA standards for designating a Federal credit union as a ‘‘low-income credit union’’). 528 See Q&A § ll.21(f)–1. The final rule expands on current guidance to include CDFIs. Donating a branch, selling a branch on favorable terms, or making branches available on a rent-free basis to MDIs, WDIs, and LICUs pursuant to section 801 of the CRA would also qualify for consideration under this prong, based on the final rule’s definition of ‘‘community development investment,’’ discussed further in the section-by-section analysis of that definition in final § ll.12. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 Inclusion of CDFIs. The agencies have also considered comments regarding how CDFIs should be considered relative to MDIs, WDIs, and LICUs. The agencies believe that creating a single standard for CDFIs, MDIs, WDIs, and LICUs is not only simpler, but also serves to acknowledge the importance of CDFIs as critical providers of capital to low- or moderate-income communities. The agencies also believe that the construction of the final rule as it relates to activities with CDFIs is preferable since it more directly states that these activities are eligible under final § ll.13(k), as compared to the proposed rule’s approach of providing a presumption of credit for CDFIs in proposed § ll.13(j)(2). The agencies determined that the presumption language raised unintended uncertainty about whether activities with CDFIs would actually count for community development consideration. The final rule also references CDFIs instead of U.S. Treasury Departmentcertified CDFIs, as the definition of CDFI in the final rule is clarified to mean U.S. Treasury Departmentcertified CDFIs. See the section-by section analysis of § ll.12 for discussion of the definition of ‘‘Community Development Financial Institution (CDFI)’’. This definitional change affirms the agencies’ intent to ensure that, beyond MDIs, WDIs, and LICUs, the entities with which a bank may engage for automatic consideration of loans, investments, and services have undergone the U.S. Treasury Department’s CDFI certification process and meet requirements for maintaining that certification. The agencies consider this a critical guardrail to ensuring that community development on an inclusive community basis is the focus of bank loans, investments, and services in cooperation with these CDFIs. Activities conducted by MDIs, WDIs, and CDFI banks with other MDIs, WDIs, LICUs, and CDFIs. Under final § ll.13(k), any loans, investments, or services undertaken by any bank, including by an MDI, WDI, or CDFI bank, in cooperation with an MDI, WDI, LICU, or CDFI will qualify as community development. As noted in the proposal, in this regard the final rule expands on the current rule, which focuses on crediting these activities when conducted by nonminority institutions.529 As MDI, WDI, and CDFI banks are themselves subject to CRA evaluations, the agencies believe that this expansion is appropriate to ensure that the loans, investments, and services current 12 CFR ll.21(f) (implementing 12 U.S.C. 2903(b)). 529 See PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 of these institutions receive the same treatment as nonminority institutions. CDFI banks. The final rule also clarifies that loans, investments, and services by ‘‘any bank’’ include not only majority institutions, but also those by an MDI, WDI, or ‘‘CDFI bank’’ that is evaluated under the CRA. The definition of ‘‘CDFI’’ in final (and proposed) § ll.12 is general and thus includes both depository and non-depository CDFIs; however, the agencies intend with the reference to a ‘‘CDFI bank’’ in final § ll.13(k) to address commenter concerns that the proposal was not clear that CDFI bank loans, investments, and services in cooperation with MDIs, WDIs, LICUs, and other CDFIs could qualify for consideration under this provision. Additional eligibility criteria. The agencies have considered commenter suggestions to add additional eligibility criteria for MDIs and WDIs under the final rule, such as criteria concerning how investments in MDIs and WDIs are used, or an MDI’s record of service to minority communities. On further deliberation, the agencies believe that an additional layer of criteria would be overly complex to define and apply, potentially dampening the range and quantity of activities beneficial to communities that could otherwise qualify under this provision. For similar reasons, the agencies also are using their statutory authority not to include in final § ll.13(k) the reference in the statute and current regulation to activities that help meet the credit needs of ‘‘local communities in which [MDIs, WDIs, and LICUs] are chartered.’’ 530 As discussed above, based on the agencies’ supervisory experience, stakeholder feedback over the years of rulemaking leading to this final rule, and other relevant sources, MDIs, WDIs, LICUs, and CDFIs have robust knowledge about the needs of their local communities and records of serving these needs. The agencies believe that the structure and orientation of these entities provide needed guardrails to ensure that activities in cooperation with them will be consistent with the CRA’s community focus in the final regulation. Relatedly, under the final rule, activities with CDFIs are treated similarly to those with MDIs, WDIs, and LICUs, regardless of a CDFI’s location or size. The agencies are mindful of concerns expressed by some commenters that this approach could direct bank investment away from smaller, local CDFIs in favor of larger 530 See 12 U.S.C. 2903(b), implemented by current 12 CFR ll.21(f). See also 12 U.S.C. 2901(b), 2903(a) and (b), and 2905. E:\FR\FM\01FER2.SGM 01FER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 89, No. 22 / Thursday, February 1, 2024 / Rules and Regulations CDFIs. On further consideration, the agencies believe that adding size or location criteria regarding CDFIs with which banks may engage for CRA credit under this provision would diminish the flexibility needed for a range of activities meeting differing local needs across communities. The agencies also note the final rule’s adoption of an impact and responsiveness review under § ll.15, including an impact and responsiveness factor under § ll.15(b)(4) for loans, investments, and services that support an MDI, WDI, LICU, or CDFI (excluding certificates of deposit with a term of less than one year) will allow the agencies to consider the extent to which such activities are highly impactful or responsive to the needs of underserved areas and populations.531 Activities undertaken by an MDI or WDI to promote its own sustainability and profitability. The agencies have considered comments responding to the question on whether an MDI or WDI should receive consideration for activities that promote an MDI’s or WDI’s own sustainability and profitability, and are adopting a final rule that excludes investments by MDIs, WDIs, or CDFI banks in themselves.532 The agencies appreciate commenter views on the importance of investment support for these entities to bolster their financial position so that they can better serve their communities, as well as the need to consider ways to ensure that these investments benefit low- and moderate-income and underserved communities. On further consideration, the agencies are concerned that the linkage between such investments and benefits to low- or moderate-income communities may be attenuated and thus difficult to determine, in turn making establishment and application of clear and consistent guardrails to ensure benefits to low- and moderateincome communities unduly challenging. At the same time, the agencies believe that the final rule provides robust avenues of support for the sustainability and profitability of MDIs and WDIs through other CRAevaluated banks, including other MDIs and WDIs. Definition of MDIs; minority credit unions. The agencies considered comments in response to the agencies’ request for feedback regarding whether minority credit unions should be included in the definition of MDI for the 531 See final § ll.15 and the accompanying section-by-section analysis. 532 While the agencies requested comment only on investments by MDIs and WDIs, the final rule also excludes similar investments by CDFIs for parity. VerDate Sep<11>2014 18:11 Jan 31, 2024 Jkt 262001 final rule and conducted further research on this matter. The agencies note that there is a large overlap between minority credit unions and LICUs.533 Thus, a bank’s loans, investments, and services with a large percentage of minority credit unions will be eligible for community development consideration under final § ll.13(k), based on the minority credit union’s LICU status. For this and other reasons, the agencies have decided not to add minority credit unions to the proposed definition of MDI. The question of whether to include minority credit unions in the final rule’s definition of MDI, as well as other aspects of the final rule’s definition of MDI, is discussed in more detail in the section-by-section analysis of § ll.12 (‘‘minority-depository institution (MDI)’’). Additional entities. The agencies have also considered comments recommending that the final rule include additional types of entities with which banks could collaborate in order to receive community development consideration, and have decided not to include additional entities in § ll.13(k). The agencies have considered that entities such as NeighborWorks America’s network organizations, HUD’s Community Housing Development Organizations, and other community-based organizations perform important functions in communities, as do community development venture funds and formative funds, or other entities seeking certified CDFI status. However, because qualifying activities under § ll.13(k) are eligible for community development consideration without additional eligibility criteria, the agencies believe that narrowly tailoring the entities considered under the final rule is especially important and, accordingly, that focusing final § ll.13(k) on MDIs, WDIs, LICUs, and CDFIs is appropriate. As outlined above, MDIs, WDIs, LICUs, and CDFIs generally have missions and track records that directly align with the CRA’s mandate of providing credit to entire communities, including to low- or moderate-income communities; undergo rigorous and verifiable certification processes; and are financial institutions that provide critical capital access and credit to underserved communities. The agencies further believe that emphasizing partnerships with the 533 NCUA, ‘‘Minority Depository Institutions Annual Report to Congress,’’ 2 (2021), https:// ncua.gov/files/publications/2021-mdicongressional-report.pdf (indicating that 81 percent of minority credit unions are designated as LICUs). PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 6705 entities covered by final § ll.13(k) is consistent with the CRA’s express emphasis on cooperation with MDIs, WDIs and LICUs, as well as with the key role CDFIs play in the capital and financial ecosystem in low- or moderate-income communities. The agencies also note and expect that loans, investments, and services supporting activities performed by other entities suggested by commenters may be eligible for community development consideration under other provisions in § ll.13. The agencies have also considered comments that activities with subsidiaries or entities controlled or wholly-owned by CDFIs be eligible for community development consideration under § ll.13(k). The agencies note that subsidiaries or entities controlled or wholly-owned by MDIs, WDIs, or LICUs are not referenced in current § ll.21(f) or proposed § ll.13(j) 534 Similarly, final § ll.13(k) does not include activities with these subsidiaries or affiliates, as the agencies believe an automatic grant of community development consideration should remain narrowly tailored. However, activities with subsidiaries or affiliates could be considered under other categories of community development, to the extent they would meet the criteria of those categories. Section ll.13(l) Financial Literacy Current Approach Currently, activities related to financial literacy may qualify for CRA credit as ‘‘community development services.’’ 535 These activities must be targeted to low- or moderate-income individuals.536 Examples of community development services provided in current guidance include, among others: (1) ‘‘[p]roviding credit counseling, home-buyer and home maintenance counseling, financial planning or other financial services education to promote community development and affordable housing, including credit counseling to assist low- or moderate-income borrowers in avoiding foreclosure on their homes,’’ as well as (2) ‘‘[e]stablishing school savings programs or developing or teaching financial education or literacy curricula for lowor moderate-income individuals.’’ 537 534 The relevant CRA statutory provision also does not reference subsidiaries or controlled entities of MDIs, WDIs, or LICUs. See 12 U.S.C. 2