Banks will likely have to be more thoughtful as they plan expansions outside of their branch network, as government regulation catches up with changes in bank technology. iStock illustration

After the release of the new Community Reinvestment Act rules last month, community groups say banks must be careful in expanding too fast, and instead should focus on improving lending and investments in low- to moderate-income communities in areas they already serve.

Banks through the years have contributed to communities, compliant with the CRA rules. Much of that has come in the form of lending for the construction of affordable rental housing, as well as for small businesses in poorer or in minority neighborhoods. In other cases, banks have purchased tax-exempt bonds for affordable housing development or grants and aid to local housing and community development nonprofits.

The new CRA rules were designed to reflect modern banking practices that didn’t exist when the rules implementing the anti-redlining law were last updated at the end of the 20th century. But the most striking addition to the rules is the establishment of “Retail Lending Assessment Areas” which is the first expansion of CRA beyond branch-based assessment areas since the law was passed in 1977.

Starting Jan. 1, 2026, the “Retail Lending Assessment Area” will apply when more than 20 percent of a bank’s retail lending is done outside of the areas served by its branch network.

When a bank hits certain thresholds – 150 home mortgage loans or 400 small business loans – in an area outside its branch network, a bank may be required to undergo CRA evaluation for that area. This will assess whether the bank also spends enough capital on lending and investments in the low- to moderate-income communities there, despite not having a physical branch nearby.

“If we hit certain thresholds in Rhode Island, for example, we would then have to perform all these other activities in Rhode Island to be in compliance with the rule, even though our commercial [lending] office in the state does not take deposits,” said Thomas Golden, vice president and CRA officer at Hanover-based Rockland Trust Co.

Golden said the bank will be “a little bit more cognizant” of its activities outside its current branch footprint.

“There are thresholds that we will pay more attention to in order to make sure that if we are going to go over them, that we have an appropriate plan to hit all of the other things that come with that and vice versa. There is a lot of conversation about community impact versus regulatory [requirements], and balancing that as a community bank,” he said.

Advocates Predict Benefits

But the new CRA assessment areas that will now match up to banks’ expansion of non-branch lending in the last two decades are a good thing for Massachusetts residents, said Clark Ziegler, the executive director of the quasi-public Massachusetts Housing Partnership housing finance nonprofit.

He argued the rule will encourage banks to focus more on improving the community investments they make in their core territories, and be mindful of expanding to other areas that need it.

“I think one of the challenges has always been where banks are doing good things outside of their primary assessment areas. Are they taking care of their core business areas first? I think that is one of the things that the regulators have tried to address. Any kind of community investment is good, but the obligation of banks really starts with where their customer base is,” Ziegler said.

The new rule could also promote competition, he said, as different banks from different places can still lend in healthy amounts to areas outside of their branch territories without triggering a CRA assessment area, which will give borrowers more options for lenders.

“What you do not want to do is have everybody competing for the same business in big metropolitan areas. Like in Massachusetts, for example, you don’t want everybody chasing just the deals in Boston [but] not Springfield, Holyoke or Worcester. You are trying to encourage investment everywhere,” the MHP executive director said.

Thomas Callahan, the executive director of Boston advocacy group the Partnership for Financial Equity, said in an email he believes that the new rule will lead to “more lending in LMI areas, not less,” using an acronym for low- to moderate-income.

The top construction lenders for affordable housing in Massachusetts include Eastern Bank, Rockland Trust and SVB Commercial, now a division of North Carolina-based First Citizens Bank, according to MHP.

Quantitative, Predictable, Transparent

The new rules are more quantitative than the current CRA rules, with clear benchmarks and publicly available data. Ziegler said this should create more predictability and transparency around CRA assessments, which is positive for banks.

“One thing that is very positive in these rules is the idea of benchmarking and having more publicly available data on what different banks are doing in different markets. This can be a way for banks to see how each other are doing and compare their results with other banks,” Ziegler said.

Nika Cataldo

Golden, of Rockland Trust, said that having clear benchmarks to meet in the new rule in order to obtain specific CRA ratings will be an improvement.

“The current rule is very subjective, which, in my opinion, has led to a lot of grade inflation and detracted from the impact of what CRA [is for]. With these hard numerically based benchmarks, it will be very clear when an institution is doing its job versus when it’s not,” he said.

Scoring “outstanding” or “satisfactory” in CRA examinations is important for banks as it helps make regulatory approvals smoother for mergers, acquisitions and branch establishments, as well as burnish their reputations.

The new rule may be seen as stricter than the previous evaluation, but Ziegler said he believes that Massachusetts banks can step up to the challenge and bring better service in and outside of its local markets.

“We have a very strong tradition in Massachusetts of banks stepping up and playing a leadership role on community development. I think compared to most other states, our banks have really been leaders in this space, and I think the new rules will create the potential to enhance that bank leadership,” Ziegler said.