I've finished reading this document monster of nearly 1,500 pages. It's unbelievably bad IMO (although great for consultants like me). I will be posting periodic comments here.

One of the worst parts of this reporting nightmare is the requirement to pass the Retail Lending Test in the "Outside Retail Lending Area".(ORLA). The ORLA is a nationwide area where a bank originated or purchased loans excluding the Facility-Based AAs and the Retail Lending Areas and areas where a bank did not originate or purchase any closed-end mortgages, small business loans, small farm loans, and auto loans

There are a great number of computations that must be done in the Facility-Based AAs and the Retail Lending Areas, but those pale in comparison to the potential number of calculations required for the "Distribution Tests" in the ORLA. I have a client that would be an Intermediate Bank under the new Rule. But they have several dozen LPOs around the country that will lead them to have to calculate the Distribution Tests in at least 50 "component" areas in the ORLA. For each distribution test for each major product line there are at least 8 computations (and more when you convert the results to scores and then convert to recommended conclusions). So for that bank, I estimate they will need to do 400-500 calculations for their ORLA performance alone!

Surprisingly, I saw no comments by bank associations of ORLA concept. Everyone seemed to be focus on the Retail Lending Assessment Areas, which also increase the computational work, but at least the RLAAs don't have to have computations done for countless "component geographic areas" that would be the potential case in a nationwide area. It makes little or no sense at all.

The ORLA concept IMO is one the least justifiable aspects of the new rule. It attempts to measure potentially every single loan extended by a bank anywhere, even thousands of miles from a bank's facilities. Every association representing banks should strongly oppose this aspect of the new CRA.

I don't disagree, especially from the standpoint of what the actual CRA statute says, and how only banks are subject to this. However, I also get that if a bank is only doing 50% of their lending in their market and working to serve the LMI communities in those areas, but just looking for profit with the other 50% of their loans, then LMI communities are not going to be served. Ignoring that fact is a huge whole in the current CRA. I think if you are going to hunt profits nationwide, it's not totally unreasonable for examiners to have you make at least a minimum CRA effort. Accounting for the fact that most banks just aren't lending in their markets, not even primarily for many, is a main point of the modernization, and in theory, I don't disagree with it.

Now from the standpoint of everyone else (CUs, mortgage companies, etc) not having to worry about this, I think it's grossly unfair. Only banks have to structure their lending to serve these communities nationwide, while less and less of the mortgage and small business lending is taking place through banks, and that portion is shrinking every year, which this rule is going to only accelerate. I think the uneven playing field that results from this is more the issue then the actual objective. Sadly, I think Congress is needed to actually modernize CRA effectively, and for some reason, I don't find that likely. Maybe the CFPB is onto something with state expansion, but for now, this rule is just going to push more lending into less regulated lenders, which is probably not going to help anything. Bank's should have to consider their outside lending's effect on LMI communities, but so should everyone else.

IR, great points.
One other issue is that although Fair Lending is looked at during the CRA exam, regulators substitute Majority Minorithy ("MM") for LMI tracts. ADDITIONALLY, they look outside the AA, especially if the lender has substantial lending outside. Redlining is becoming more absurd now since theytook the position that any lending outside the AA is subject to being reviewed as a "Reasonablky Expected Market Area" (REMA), and if you have loans (or applications) and not in the approximate same proportion in the MM tracts, they will be potentially citing the lender for redlining.

Here's another twist - our Bank has begun purchasing some small business loans from outside our area as an investment strategy - they are relatively high yield, but not to LMI borrowers. And they are not concentrated in any one region. They do NOT reduce our ability to serve the needs of our community; the income from these loans helps us maintain satisfactory margins so that we can FURTHER serve the needs of our community. However, in the current environment, local lending has been difficult, so our inside/outside ratio for small business loans isn't looking very good. If we have to discontinue this practice, our local community will actually suffer because we will be forced to look for higher yields.

Regarding the adequacy of the volume of bank lending within its defined communities, I've seen a number of situations with a very low ratio that would lead you to believe the bank is not lending enough within its assessment areas. But in most of those cases it was because the bank was funding its lending activity with secondary market sales.

One situation that we were called in to help had a 9% AA ratio. Think about that, 9%!!

But when we analyzed the situation we found that the bank had the third highest ratio (of 53 depository institutions with branches inside the assessment area) of loans inside the community relative to deposits inside the community. How can that be?

The answer is that the AA Ratio is based on the concept that all lending is funded by deposits from inside the assessment area. The more a bank lends outside the AA the fewer funds available to lend inside the community. In other words, the ratio is built on the assumption that lending is a zero sum game. But with the advent and development of the secondary markets that assumption is no longer true. The AA ratio does not consider the fact that all those loans outside the community were not funded by deposits inside the community. But it does count all the loans extended outside the community which can severely dilute the AA Ratio leading to a misleading conclusion. When the bank brought this analysis to the examiners they gave the bank a pass on the AA Ratio because the bank was able to demonstrate that they are one of the leading lenders in the LTD Ratio in the assessment area.

Len, is it true that under the new rules, there will no longer be any flexibility for the examiners to recognize unique situations such as the one you described above?

Correct me if I'm wrong Len because I have not read the whole thing yet, but 1) I don't think that situation is particularly unique, and 2) I'm pretty sure the in/out AA test will no longer be a thing under the new rule. It's being essentially replaced by the retail lending volume screen (or something like that), which compares lending in your facility based AAs to deposits, so it would account for this situation by using deposits as the denominator. However, that bank is going to have to account for the 91% of loans it is making outside of it's facility based assessment areas (assuming it's not a small bank) even though it isn't making those loans with core deposits.

This whole rule reminds me of my former mentor in the field of research and behavioral analysis.

We were creating a survey / data collection tool, he stopped me and stated:
"Look at every data point you are collecting and ask yourself 1) what am I going to use the information for? 2) how will the collection of this information benefit my research? 3) once I have collected this information, am I prepared to respond to it in an actionable manner?"

His point was- do not expend time and resources collecting data unless you see a useful and actionable output / response that will address and impact the core purpose for the research.

In this rule, I see a lot of actions that do not have a clear and actionable result / response system that will address the purpose of the CRA. I just see a "grade" that will be handed out. If the agencies what all this info, are they prepared to utilize it in a way that goes beyond handing out a satisfactory response?

Apologies for the rant, just my opinion

Mntngrll - there is a provision that allows examiners to take into account 7 performance context factors (see §_.21(d). But the problem is that if you are immediately on the defensive you are in a bad spot and you are going to need to rely on the reasonableness of the EIC to agree that the performance context factors may exonerate your low performance scores and conclusions under the new Rule.

Inherent_Risk - several problems. First, the Intermediate banks have a specific provision in the new Rule that imposes a 50% threshold on them. If they lend more than 50% of their major product line loans outside their AA they will be required to have their lending in the ORLA examined.

The ORLA thing is another matter altogether. It covers the entire country and anywhere a bank may originate a major product line loan. For Retail Lending Test purposes the ORLA is broken down into "component geographic areas" which potentially include any of the hundreds of MSAs or MDs and any of the 56 statewide non-MSAs. If you make a single MPL loan in any 1 of those areas it becomes a component area (if it isn't already included in your FBAA or your RLAA). Since whenever you must evaluate your lending in any ORLA component area you will need to calculate Market and Community Benchmarks even for only a single MPL loan originated in the component area. plus develop the "bank metrics" for that area, compare the metrics to the benchmarks from which you will determine "supporting conclusions" which you would convert to "scores" and then proceed to develop weighted results followed by converting those "supporting" conclusions to scores and then weigh all those scores for each MPL across all the potential component geographic areas in order to determine RL Test conclusions.

Oh, an by the way, after you perform all those computations you will then need to roll up your conclusions to the state and multistate level and then the institution level!

This is the regulators' version of a Rube Goldberg contraption. This is why I am perplexed by the silence about this in the banking community. The ORLA implications seem to have been overlooked by everyone.

As a consultant I have no complaints. But as someone who recognizes the importance of preventing our banking system from degenerating into 10 major banks I am very concerned. The compliance burden has been magnified dramatically with the new CRA rule. I spoke to someone at a high level in one of the prudential regulators offices who told me he thinks the examiners will have a difficult time understanding this convoluted new Rule.

I readily admit - I have not researched the new rule or "dug" into it. If our bank has a line of business that is large commercial loans outside of our assessment areas, they would not be small business loans under the current CRA rule, could this substantially affect our CRA performance evaluation under the new rule? Or because they are not defined as small business loans, would not be considered in any way? Thank you!!

I will not be able to address your question fully since I just don't know all the details. However, I think you really need to take into consideration the impact of the new 1071 rule with the small business lending. With 1071 and the New CRA rule being in limbo, it can be hard to know exactly how far you want to go with the 'what if' scenarios.

Just know that if the small business reporting moves to the 1071 requirements, those "large" commercial loans might be considered small business loans for CRA since the 1071 rule has no loan amount limit (it is based on the business' previous year gross revenues- at or below 5 million is small business regardless of loan size).

I'm sure Len can answer this in a much more organized and thorough manner

Currently, the size of the business is not determinative of a commercial loan's CRA status. It's simply the loan cannot exceed $1 million. But in the new CRA the size of the business measured in terms of GAR is determinative and the initial limit will be $5 million GAR. The size of the loan could be far larger than $5 million.

Based on 30 years experience, I believe the new definition of what qualifies as a small business will precipitate a very substantial increase in the number of small business loans and likely will include many of your "large commercial loans". Don't forget those loans outside your traditional facility based AA will now be counted in the Retail Lending Assessment Areas (if you meet the volume thresholds) or the ORLA (where a single major product line loan in any composite area must be evaluated). One of the big problems is there will be no adjustment to the the calibrated benchmarks for the RLAA's and the ORLA even though you will be at an enormous competitive disadvantage in many situations where you may be engaged in a relatively small volume of lending, particularly in the composite areas that make up the ORLA.