As compliance specialists, we’ve seen a lot of hot topics come and go over the years. From the Truth in Savings Act, privacy, Good Faith Estimates, flood requirements, overdraft protection products, redlining, the Bank Secrecy Act, and integrated mortgage disclosures to the Home Mortgage Disclosure Act, each year seems to bring on a new theme. Usually, we can pinpoint a new or amended regulation or a national event that stimulates the interest and hype about the new hot topic that year, but this year we’ve seen an uptick in interest related to assessing a bank’s performance under the Community Reinvestment Act (CRA). At no time during the past twenty-five years have we seen such an interest in this topic, and we really can’t pinpoint any particular reason for the increase in the number of requests for this service, but it seems to be one of higher interest during the last few months.
Examiners assess a bank’s performance under CRA every three to five years. Small bank examinations include only the lending test, while intermediate small banks include the same lending test required of small banks and a community development test, and large banks are assessed on the lending, investment, and service tests. The components of the CRA Performance Evaluation are listed below by bank size.
While it’s tempting to forget about the Community Reinvestment Act until notification of an upcoming examination, more banks seem to be proactively assessing their performance on at least an annual basis.
What Does This Entail?
First a bank needs to develop its performance context. The context considers things unique to the bank and its location, which may set expectations for the bank’s CRA performance. Areas to be considered within the performance context include:
- Demographic data on median income levels, distribution of household income, nature of housing stock, housing costs, and other relevant data pertaining to a bank's assessment area(s).
- Any information about lending, investment, and service opportunities in the bank's assessment area(s) maintained by the bank or obtained from community organizations; state, local, and tribal governments; economic development agencies; or other sources.
- The bank's product offerings and business strategy.
- Institutional capacity and constraints, including the size and financial condition of the bank, the economic climate (national, regional, and local), safety and soundness limitations, and any other factors that significantly affect the bank's ability to provide lending, investments, or services in its assessment area(s).
- The bank's past performance and the performance of similarly situated lenders.
- The bank's public file and any written comments about the bank's CRA performance submitted to the bank or the regulator.
- Any other information deemed relevant.
Small and intermediate small banks need to calculate their average loan-to-deposit ratios for each quarter since the last examination and compare them to peer banks. Peer banks are banks of a similar asset size serving the same assessment area with a similar product mix. Peer data can be found in the peer bank’s CRA Performance Evaluations located on the Federal Financial Institutions Examination Council’s website. If loan-to-deposit ratios are lower than peers, an examination of factors within the performance context should be conducted to determine whether the average loan-to-deposit ratio appears in line.
Banks of all sizes should plot their mortgage, small business, and small farm loans originated and purchased during the time period under review to determine whether the majority of the loans are made within their assessment area(s). If a bank wants a consumer loan type to be considered, those loans should be plotted also. If the majority are made outside of the assessment area or the ratio is getting close to 50%, the bank should consider where it is making a substantial portion of its loans outside of the assessment area and determine whether the assessment area needs to be expanded.
Also, the location of those loans originated or purchased should be considered to determine the quantity and dollar amount by the income level of the tract, with special consideration given to loans in low- or moderate-income tracts. Banks of all sizes should also determine the level of lending to low- or moderate-income borrowers and small businesses and small farms with revenue under $1 million by quantity and dollar amount. A bank’s performance in this area should be compared to peers. If it appears the bank’s dispersion of loans is low as compared to peers and is not in context with the bank’s ability to lend in low- or moderate-income tracts or to low- or moderate-income borrowers, steps should be taken to expand lending in those areas.
Banks should consider any complaints they’ve received from the public about meeting the credit needs in the communities served. Were these complaints responded to appropriately and were any changes needed to address these complaints implemented? Do these complaints require additional action?
Intermediate small and large banks should compile a list by quantity and dollar amount of community development loans and investments as well as a list of community development services provided during the period being reviewed. Large banks also need to consider their innovativeness and flexibility in meeting community development needs. The level of performance in this area should also be compared to peer banks. If it appears the level of community development performance is not in line with peers, consider the bank’s capacity to engage in these activities. If it appears more is needed in the areas of community development, there is still time to improve your performance by adding community development loans, investments, and services before your next examination.
Large banks also need to consider their ability to meet the needs of the community through retail banking services. Do branch and automated teller machine locations meet the needs of low- or moderate-income areas? What types of products and services are available to meet the credit needs of the community, particularly low- or moderate-income areas? Are alternative systems available that may also assist low- or moderate-income individuals in accessing bank services? Are the hours of operation at the branches or products and services available inconveniencing low- or moderate-income individuals in the assessment area(s)? Where were branches opened and closed since the last CRA examination? Were any in low- or moderate-income areas?
While it may be time-consuming to assess your performance, not doing so on a regular basis could result in a less than satisfactory rating on your next CRA Performance Evaluation. Adding this annual assessment exercise to your regular risk mitigating strategies may allow you the time needed to improve your performance before the next exam and will allow you to discuss your own assessment of your performance with your examiners while they’re on site. Having the answers already formulated before the examiners ask will demonstrate your commitment to CRA and will better your chances of at least a satisfactory rating. We can help you. Send an email to the author of this article or contact your relationship executive for assistance with your CRA Assessment.