CRA Overhaul Another Signal of Support for Small Business Lending
The CRA is set to undergo a significant transformation starting January 1, 2026.
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The FDIC, FRB, and OCC finalized a major overhaul of the Community Reinvestment Act on October 24, 2023. The interagency rule initially went into effect on April 1, 2024, but the agencies issued an interim rule extending the date to January 1, 2026. Data reporting requirements will go into effect in 2027.
The update was driven, in part, by financial institutions’ shift from a reliance on physical locations to more digital and mobile interactions.
In this post, we’ll review key changes to the CRA and its implications for small business lending.
Required performance tests by size.
The breadth and depth of scrutiny will still depend on the financial institution’s size. The rule breaks institutions into three size categories: small, intermediate, and large. It also gives small and intermediate banks the option to continue to use previous performance tests or opt-in to new performance measures.
New performance tests include:
Revised Retail Lending Test: Measures the lending volume compared to the bank’s depositor base within the bank’s facility-based assessment area and evaluates the geographic and borrower distribution of the bank’s major product lines across all its assessment areas.
Retail Services and Product Test: Measures the availability and responsiveness of the bank’s retail products.
Community Development Financing Test: Combines the community development loans and investments in community development financing metrics and adds an impact and responsiveness measurement.
Community Development Services Test: A qualitative assessment of a bank’s community development service activities, such as volunteer work or serving on a nonprofit board.
| Category | Asset Size | Tests |
| Small | Less than $600M | Small bank lending test or opt-in to the retail lending test |
| Intermediate | $600M-$2B | Retail lending test, Intermediate Bank Community Development Test (default) Or Community Development Financing Test (opt-in) |
| Large | $2B+ | Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, Community Development Services Test |
New geographic assessment areas.
The interagency rule created new geographic assessment areas to address financial institutions’ expanding area footprint.
Retail lending assessment areas
In addition to an institution’s facility-based assessment area, large banks will now also be assessed via a retail lending assessment area. The retail lending assessment area consists of a metropolitan statistical area or the nonmetropolitan area of a state in which the bank has a concentration of closed-end home mortgages (150) or small business lending (400). Large banks would be exempt from adding a retail lending area if there is more than 80% overlap between their facility-based and retail lending areas.
Outside retail lending area
Large banks and certain intermediate and small banks may also be assessed by an outside retail lending area if the bank conducts most of its retail lending outside its facility-based and retail-lending assessment area.
Direct loans are now considered a qualifying activity.
The new rule expands economic development activity under the Community Development Financing Test to include direct loans made to small businesses and farms that meet a size and purpose test.
To qualify, the loan must be issued to small businesses that meet the size standards for an SBDC or SBIC or have gross annual revenues of $5 million or less. The loan must also meet the purpose of promoting permanent job creation or retention within low-to-moderate-income communities.
While loans issued in conjunction with an SBDC or SBIC will be presumed to meet the purpose requirement, other types of loans, including SBA loans, will now also be considered if they meet the size and purpose criteria.
Additionally, small business loans can be counted under both the Retail Lending Test and Community Development Financing Test if they qualify under each category.
Concerns with the new rule.
While the rule passed, FDIC Board of Directors Vice Chair Travis Hill and Director Jonathan McKernan, and one Federal Reserve Board member, Michelle Bowman, voted against the Final Rule, citing concerns with the rule’s complexity and cost to implement.
In a statement, Michelle Bowman outlined several reasons for her dissent including the possibility of it being more difficult for a bank to get a passing grade under the new requirements.
“As described in the materials before the Board today, based on changes to the retail lending test alone, nearly 10 percent of banks would be rated “Needs to Improve” based on data from 2018 to 2020. Today, the number of banks with a “Needs to Improve” rating stands at roughly one percent.”
She also argued that the body doesn’t have the data to determine the impact of the new community development financing test on banks’ CRA ratings.
Additionally, a lawsuit has been filed in a U.S. district court in Texas alleging the agency has gone beyond its authority by including areas outside the bank’s geographic areas and including non-credit products in the evaluation procedure. On March 29, 2024, the court granted a preliminary injunction pausing enforcement of the new rules until the lawsuit is resolved. The current injunction only applies to the plaintiffs in the lawsuit.
Potential impact on banks.
The consequences of the rule, intended and unintended, are up for debate. Some argue that banks will have an incentive to stay small to avoid the more stringent requirements placed on intermediate-sized banks. There could also be an incentive to avoid offering services in expanded areas to avoid needing to create a new assessment area, reducing the number of small businesses being funded.
However, the rule also rewards small business lending by including additional direct loans as a qualifying activity under the Community Development Financing Test and by allowing those direct loans to be counted within every test it qualifies for.
As with any rule change, the new CRA rule brings new compliance risks for banks. Banks will need to get familiar with the lengthy rule and the evolving evaluation methodology all while managing a potentially wider assessment area.
The case for small business lending.
While the outcome of the impending lawsuit is still up in the air, it’s clear that there’s increasing recognition of the value of small business lending. Through SMB lending, banks can meet (in part) CRA requirements, grow wallet-share with depositors, and grow lending opportunities.
However, banks face several challenges in lending to small businesses. Small businesses seek smaller loan amounts, making it cost-prohibitive for the bank to underwrite the loan with manual processes and legacy origination software.
Now, imagine a bank that has developed a significant depositor base in an inner city or rural area where it doesn’t have physical branches or loan officers available. Current systems are dependent on in-person meetings and printed paperwork, making it difficult for the bank to meet compliance criteria in the expanded area.
This bank now has two problems to solve. 1) How to effectively target and reach eligible borrowers in the expanded area and 2) How to provide those services cost-effectively.
Banks using Lendio Intelligent Lending can overcome the second challenge with automated underwriting technology that can complete rapid, low-cost analysis of applicants based on their lending policy.
To address the first challenge, the bank can offer loan products on Lendio’s online marketplace, which enables access to a broader spectrum of borrowers than a bank can normally serve.
Now, the bank can cost-effectively originate loans to qualified small business owners actively looking for a loan within the service area boosting compliance and total loan volume.
84% of banks already see SMB lending as a significant opportunity for growth. Now, with updated technology banks can generate revenue and meet growing compliance requirements with a single solution.
Learn more about the opportunities in small business lending.
