Passed by Congress in 1977, the Community Reinvestment Act (CRA) states that “regulated financial institutions have continuing and affirmative obligations to help meet the credit needs of the local communities in which they are chartered.” The act then establishes a regulatory regime for monitoring the level of lending, investments, and services in low- and moderate-income neighborhoods traditionally underserved by lending institutions. Examiners from four federal agencies assess and “grade” a lending institution’s activities in low- and moderate-income neighborhoods.
If a regulatory agency finds that a lending institution is not serving these neighborhoods, it can delay or deny that institution’s request to merge with another lender or to open a branch or expand any of its other services. The financial institution regulatory agency can also approve the merger application subject to specific improvements in a bank’s lending or investment record in low- and moderate-income neighborhoods.
In the spring of 1995, the federal agencies released new CRA regulations. The regulations outline how federal agencies are to assess the activities of lending institutions in traditionally underserved neighborhoods. The federal agencies conducting CRA examinations are: the Office of the Comptroller of the Currency (http://www.occ.gov) that examines nationally chartered banks, the Office of Thrift Supervision (http://www.ots.treas.gov) that examines savings and loan institutions, and the Federal Deposit Insurance Corporation (http://www.fdic.gov) and the Federal Reserve Board (http://www.federalreserve.gov) – both of whom examine state chartered banks.
The CRA regulations had been revised as part of the Clinton administration’s initiative to create performance-based and objective standards. The new regulations attempt to satisfy community activists by focusing more attention on the lending, investment, and service records of banks. The regulations also attempt to reduce the amount of paperwork required of lending institutions. Gone are previous paper trail generating requirements such as documenting participation by a bank’s board of directors in reviewing CRA compliance. In their place, are examinations that are suppose to flexibly assess lending activities in low- and moderate- income neighborhoods of institutions of various financial capacities.
The CRA regulation establishes various tests for lending institutions of different sizes and a strategic plan option. Under each test, examiners rate banks according to their lending records and responsiveness to community needs. Banks receive a score based on their evaluations of “outstanding”, “satisfactory”, “needs to improve”, or “substantial non-compliance.” The last two scores can result in delays or denials of mergers, acquisitions, or expansions of services.
Lending institutions with assets greater than $1 billion are subjected to the most rigorous exams. They are evaluated under a lending test that considers the number and percentages of loans made to low- and moderate-income individuals and communities. Likewise, they are evaluated under an investment test and a service test that consider, respectively, the number and types of investments and services (branches and bank accounts) in low- and moderate-income communities. When conducting the evaluations, examiners are to consider the “performance context” of the lending institutions. In other words, examiners are advised to consider factors such as the business opportunities available to a lending institution and the size and financial condition of the lending institution.
In 2005, the federal agencies established a streamlined exam for “intermediate small banks” defined as institutions with assets of $250 million to $1 billion (the asset range is adjusted annually to take inflation into account). These intermediate small banks or mid-size banks undergo a lending test and a community development test. The community development test incorporates elements of the large bank’s investment and service test. The community development test scrutinizes the amount and responsiveness of a mid-size bank’s community development lending, investing, and services. Unfortunately, the mid-size banks are no longer required to report small business or community development lending data.
Small banks, as defined as institutions with less than $250 million in assets, are evaluated under a test less encompassing than the evaluation for their larger counterparts. Small banks are not subjected to an investment and service test. Their lending test consists of the following five criteria: a “reasonable” loan-to-deposit ratio, the percentage of loans in the bank’s assessment area, the bank’s distribution of loans to individuals of different income levels and businesses and farms of different sizes, the geographic distribution of loans, and the bank’s record of responding to written complaints about its lending performance in its assessment area.
The Gramm-Leach-Bliley Act of 1999 established a less frequent exam cycle for small banks of under $250 million in assets with passing CRA ratings. Small banks with outstanding ratings will be examined once every five years and those with satisfactory ratings will be examined once every four years. Banks with passing ratings can be examined more frequently if regulatory agencies believe a compelling reason, such as deteriorating CRA performance, makes it necessary to do so. Community groups should contact the regulatory agencies if they believe that a particular small bank should be examined before its lengthened time cycle.
Wholesale and limited purpose banks are also assessed under a test tailored to their capabilities. These banks provide services such as offering credit cards or specialize in large commercial deposits. Lending tests cannot adequately assess wholesale and limited purpose banks because many of them do not accept consumer deposits or make home loans. Instead examiners are to focus their evaluation of these banks on the number of community development loans and investments (such as affordable housing rehabilitation loans, low-income housing tax credits, or investments in organizations that finance small businesses). The tests for mid-size and large banks also consider community development loans and investments.
Any lending institution can opt for developing a strategic plan in lieu of a regulator evaluation. Developed in conjunction with neighborhood organizations, a strategic plan seeks to satisfy the credit needs of a bank’s assessment area and must address the lending, investment, and service criteria that would have been part of the usual evaluation. Federal regulators must approve the strategic plan and rate it at least “satisfactory.” If a bank receives a lower rating on its plan, it has the option of submitting to the applicable tests for large, small, or limited purpose banks.
A CRA rating can be downgraded if a federal agency uncovers evidence of illegal, abusive or discriminatory lending on fair lending exams that occur at about the same time as CRA exams. Community groups should bring fair lending concerns to attention of CRA examiners.
In addition to the strategic plan option, community groups can be involved in the CRA evaluation process. Federal agencies publish in advance a list of banks that will be evaluated each quarter. Once every three months, NCRC notifies its members about the banks scheduled for upcoming CRA exams. NCRC encourages its members and other neighborhood organizations to offer their comments on the CRA performance of banks in advance of their examinations. Timely comments can influence a bank’s CRA rating by directing examiners to particular areas of strength or weakness in a bank’s lending, investments, or services in low- and moderate-income neighborhoods. A community group’s comment can have an influence on the overall CRA rating for an institution or the CRA rating for a state or one of the tests on the CRA exam. Even changing a rating from Outstanding to Satisfactory in one state or one part of the exam can motivate a bank to increase the number of loans, investments, and services to low- and moderate-income communities.
Also, community organizations can offer written comments on a bank’s CRA and fair lending performance when a bank has submitted an application to merge or acquire another bank or thrift. NCRC can assist community organizations in preparing comments on merger applications. The vast majority of merger applications are approved, but comments can still direct regulatory agencies’ attention to areas of weakness. The federal agency can approve the merger application, but still indicate in the approval order that the bank should improve upon its area of weakness. In addition, the bank can pledge in writing to address its shortfall by implementing a fair lending reform and/or increasing its lending, investing, and services to traditionally underserved communities.