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The Case for a Community Reinvestment Act Plan (or why every bank should have one)

The Case for a Community Reinvestment Act Plan (or why every bank should have one)

Oct 30, 2017

When we work with financial institutions on Community Reinvestment Act (CRA) matters, we ask whether they have created a CRA plan. The answers we get range from “Yes” to “Not yet, but it’s on our list of things to do” to “No, and it’s not going to happen!”   

While some banks feel they are doing just fine without the extra work, others may insist that unless required by their primary regulator for a special reason, no explicit directive exists to create and maintain a CRA Plan. Another argument circles the examination standard defense line, “If we don’t plan, the examiners cannot judge our performance against the plan and write us up if we fall short.” And, frankly, planning takes time. So why should the senior management team prepare a CRA Plan with these types of stumbling blocks in the way? 

Consider Just the Basics

Starting with the basics is an important first step. For all sizes of financial institutions, initial planning efforts should focus on:

  • The bank’s loan-to-deposit ratio being reasonable and adjusted for possible seasonal variations and other appropriate lending activities such as loan originations for sale to the secondary markets, community development loans, or qualified investments.
  • The majority percentage of the bank’s loans and, as relevant, other lending-related activities being in its assessment area (AA).
  • The bank’s record of lending to and engaging in other appropriate lending-related activities for borrowers of different income levels, business types, and farm sizes being reflective of reasonable penetration per the designated AA.
  • Geographic distribution of the bank’s lending activities being reasonable in dispersion.
  • The bank’s record of taking action, if warranted, in response to written complaints about its performance.

Examination Focus Areas

A CRA examination for a small bank focuses on the following factors: 

Characteristics Indicators of Satisfactory Performance
Loan-to-Deposit Ratio (considering seasonal variations and taking into account lending-related activities) Reasonable given the bank’s size, financial condition, and AA credit needs
Assessment Area(s) (AA) Concentration A majority of loan and other lending-related activities being in the AA
Borrower’s Profile Reasonable penetration among individuals of different income (including low- to moderate-income (LMI)) levels and businesses and farms of different sizes
Geographic Distribution of Loans The geographic distribution of loans being reflective of reasonable dispersion throughout the AA
Response to Substantiated Complaints Appropriate action being taken by the bank in response to substantiated CRA complaints

If the board of directors’ desired result is a satisfactory performance rating, the approach seems pretty straight forward. Plus, without any push for extra credit for more performance or extra efforts, it even sounds easy! 

But What About . . .?

The “what about” questions can come at any time, from an examiner, a director, or a member of senior management. And of course, the public can always send a written request to discuss the bank’s CRA performance. Generally this type of scenario starts with one question, followed by a string of follow-up drill-down inquiries:

  • Is the loan-to-deposit ratio reasonable given the bank’s size and financial condition, and the credit needs of the designated AA?
    • Historically, what has the ratio reflected? 
    • Have any seasonal changes or yearly shifts occurred?  
    • How does the bank compare to other institutions in the area?
    • Has the ratio changed since the last examination?
  • Regarding the AA concentration, are a majority of loans and other lending-related activities in the AA?
    • Based on historical analysis, what is the current trend? For example, if the AA ratio is slowly falling to 55% inside versus 45% outside the AA, and the previous average was 60% inside, the bank needs to explore the reasons for this. Seldom is there a singular event or issue behind this type of trend.
    • Is a quarterly analysis performed to assess lending trends by loan product in the designated AA? What are the historical trends of the bank versus its peers?
    • If the number and/or dollar amount of loans within the AA falls below 50% in the AA, have responsive options been identified?
  • Does the geographic distribution of loans reflect reasonable dispersion throughout the AA?
    • What is deemed reasonable distribution for each institution?
    • Who is tracking this and performing the analysis, preferably on a quarterly basis but no less than semiannually?
    • Have there been changes in the AA demographics that might suggest different types of credit requests?
  • Have lending activities since the last examination reflected reasonable penetration among individuals of different income (including LMI) levels and businesses and farms of different sizes in the AA?
    • When reviewing the percentage of loans to low-income or moderate-income individuals, does the percentage of each activity reflect the demographics of the AA? 
    • If data is based on location of loans, are loans made to LMI individuals or middle- and upper-income borrowers? 
    • Does small business lending (and if applicable, farm lending) reflect the makeup of the AA?
  • Has the bank received any credit-related complaints regarding its performance?
    • If such a complaint has been received, has management taken specific steps to review and respond to the complaining party(ies)?
    • Have response times been reasonable?
    • Have mutually agreeable solutions been identified, discussed, and implemented?

Pulling the Plan Together

Now it’s time to pull all the pieces together in a viable plan. An annual plan may be the first step since it’s often the easiest one to project and it has the greatest relevance to the most recent year’s (or years’) performance. Consider the following table as the first step in documenting desired performance.  

Examination Focus Area Goal Baseline Measure
Loan-to-Deposit Ratio (considering seasonal variations and taking into account lending-related activities) REASONABLE given the bank’s size, financial condition, and AA credit needs

 

62%

Assessment Area(s) (AA) Concentration

A MAJORITY of loans and other lending-related activities being IN the AA

 

65%
Borrower’s Profile EXCELLENT penetration among individuals of different income (including LMI) levels and businesses and farms of different sizes

Example: AA statistics are 6% low-income and 8% moderate income.

14% to 16% range
Geographic Distribution of Loans

The geographic distribution of loans being reflective of reasonable dispersion throughout the AA

10% low-income and 15% moderate-income census tracts

Lending in 90% of these tracts
Response to Substantiated
Complaints
NOTEWORTHY, CREATIVE action taken in response to substantiated CRA complaints Response done within 30 days and attempt made for mutual solution

The next steps in planning may include:

  • Comparing last year’s performance to peers’ performance per last examination report.
  • For each category, graphing the performance over multiple years.
  • For each category, graphing performance for peers versus the bank over the last two exams.

These ideas and others can provide information to help the bank gauge its next steps. Look for future insights to be shared exploring CRA planning for all sizes of institutions, with tips and resource links.

Moving Forward

While the annual plan is a first step in CRA management, many banks have expanded their vision to a multi-year plan. This can be particularly beneficial when also planning community development activities for lending, investments, and service.

A major value of the CRA plan is reviewing past performance, analyzing and comparing it to current trends, and projecting potential performance. It’s also important to periodically (e.g., quarterly) report performance to the board of directors. In addition, be sure to retain documentation of the analysis and reporting to share with examiners. Good planning will help produce good results.

Author(s)

Jerry Miller
Jerry Miller, CRM, CRP, CRCM, AMLS
Partner
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