2024 has been a big year for banking compliance, with some Community Reinvestment Act (CRA) updates having gone into effect April 1st, 2024 and Section 1071 regulations going back and forth due to legal challenges and ongoing litigation. Compliance dates, as of June 2024, are now scheduled to go into effect beginning July 18th, 2025.
Community bankers and advocates have voiced several concerns regarding both of these rules, mainly around potential negative implications and regulatory burdens for community financial institutions.
Although trade associations, such as Independent Community Bankers of America (ICBA) and American Bankers Association (ABA), have filed lawsuits against the Federal Reserve, FDIC and OCC for exceeding statutory authority, as it currently stands these rules will likely be the reality for community bankers in the coming years. While we can still maintain hope that the regulatory burden might be alleviated, it is best practice to proactively devise a strategy for how community banks will manage the additional load, even if your bank’s threshold to qualify comes in one of the later tiers.
What are the main concerns and challenges people are seeing, and how can we combat them, even if the bank has limited resources to spare?
Clarity of Compliance
Many bankers have expressed concern that the new CRA rule is overly complex and does not offer community banks a clear path to meet its expectations, as expressed in a Federal Reserve Community Depository Institutions Advisory Council meeting.
There are several strategies and resources available to help community banks gain clarity around the new CRA and Section 1071 rules and ensure compliance, all with varying amounts of financial and human resources needed.
Leverage Provided Resources
The Federal Reserve, FDIC, and OCC often provide guidance documents, FAQs, and other resources to help banks understand new regulations. The Federal Reserve’s website lists various resources related to CRA, including a webinar recording, fact sheet, board memos, and Federal Register notices that discuss the final rule and its implications.
Banks can always consult with legal counsel or compliance consultants, but if you are looking for more cost-effective options, you could also participate in forums, workshops, seminars, or webinars offered by industry associations, vendors, or consultants.
Although they require some time commitment, these resources can serve as a foundational knowledge base for banks to develop their internal training program and compliance strategies.
Look into Technology Offerings
Consider adopting or upgrading software solutions that can help manage the increased data collection, analysis, and reporting requirements. Technology can also assist in optimizing lending practices to meet the new CRA evaluation criteria and some of the 1071 data points.
A simple and scalable solution could be implementing automated workflows to auto-determine if additional data needs to be collected to satisfy CRA or 1071 requirements, and automatically route and collect that data in a streamlined system. Technology can also help relationship bankers that may not have a formal commercial loan application process establish a system that simultaneously satisfies that particular 1071 requirement and collects needed data. There are many fintech and technology vendors with solutions for these needs.
Disproportionate Regulatory Burdens on Community Banks
Another concern is that the CRA final rule applies the same regulatory expectations for small banks as it does for the largest institutions, which is not usually the case, mentioned Federal Reserve Governor Michelle W. Bowman.
Similarly, many have also stated concerns that 1071 compliance poses a bigger burden for community banks, as they have less resources to devote to the additional workload. Combating the extra workload posed by these new rules may require a more strategic approach from community banks, possibly pursuing external expertise or technology solutions. Some ideas to help alleviate the burden:
Leverage Technology and Fintech Partnerships
Review and optimize internal processes and operations to determine potential areas for efficiency gains. Often times, leveraging technology partnerships is a cost-effective way to free up resources to manage additional regulatory requirements.
Look into fintech companies that provide technology solutions to streamline data collection, reporting, and compliance processes for 1071. The right technology can help reduce the cost and complexity of complying with new regulations.
Additionally, assess your data management strategy to ensure it can efficiently handle the increased data collection and reporting requirements, and consider investing in data analytics tools or seeing if your technology partners offer these tools.
Advocate Through Associations
You can engage with trade associations like ICBA or ABA to collectively advocate for regulatory adjustments that will help simplify these regulations for community banks. These organizations can lobby for scalable regulatory requirements or exemptions that reduce burdens on smaller institutions. You can also engage directly with regulatory agencies to discuss the specific challenges your bank faces.
Long-term Impact on Communities
Industry advocates and leaders also fear that the rules' complexity and the broadened evaluation scope could inadvertently contradict the goal of enhancing banking services and credit access in underserved areas. Federal Reserve Governor Bowman also expressed concern that “blurring” regulatory standards “will constrain the resources that community banks can devote to supporting their communities.” The lawsuit also highlights concerns that the new rules may discourage lending in low- or moderate-income communities rather than fostering it.
Creating a strategic plan that both aligns with your bank's business model and complies with the new CRA and Section 1071 rules may include reassessing your bank's community involvement, lending services and product offerings, or implementing new systems and processes.
Focus on Community Impact
Community banks can take proactive measures to reinforce their commitment to serving and supporting their community and combat these potentially negative side effects. Understanding community needs can help tailor services and lending practices to support economic growth and development effectively.
Consider expanding engagement with the communities you serve to understand their needs better. This can involve more frequent community meetings, surveys, partnerships with local organizations, or sponsoring/offering financial education programs (financial literacy, credit-building strategies, homeownership, etc.) targeted at underserved and low- to moderate-income populations could also open up new business opportunities and empower your community.
Your community involvement strategy will undoubtedly be dependent on available resources, which will ebb and flow as times change. Regularly reviewing and adapting your bank's strategies to respond to changing community needs will help ensure that your bank remains a relevant and supportive force in the community over the long term.
Evaluate Product and Service Offerings
Promoting access to credit for underserved groups in the community, especially small businesses and entrepreneurs, can strengthen a community bank’s role as vital contributors to the economic well-being and growth of the communities they serve.
It might be worth evaluating product and service offerings to see if there are easy or simple ways your bank can help fill the gaps in access to credit for underserved groups in your community.
Utilize Data to Guide Strategy
While the data collection requirements of 1071 and CRA will bring new challenges to your bank, you can also leverage the collected data internally to gain insights into lending patterns and gaps in community needs.
This data can be utilized to help guide strategic decisions about where to focus lending efforts or community development endeavors. Robust reporting technology can help with this and will free up resources so your team can continue to focus on more high-value initiatives within the institution.
Although there are considerable challenges and concerns for community banks as these new regulations go into effect, we know that community banks are resilient. With proactive planning and the right systems in place, community banks can adhere to these new guidelines while still maintaining their competitive edge and relationship-style banking.
If you’d like to learn more about Teslar’s solutions for 1071 data collection and reporting capabilities, schedule a demo here: https://teslarsoftware.com/demo/
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