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Why Community Reinvestment Act Data Is More Important Than Ever

Nov 28, 2018 by Loretta Kirkwood

While everyone’s attention has been focused on implementing 2018 HMDA data requirements — and then adjusting to S.2155 partial exemptions — regulators have been talking about what changes are required for the Community Reinvestment Act (CRA). The discussions started with “reducing burden” but have recently shifted to the need to more clearly define the purpose of CRA while adjusting to the new financial services landscape. Recommended changes would include redefining the concept of an assessment area, providing clarity and guidance to the examination process, the potential expansion of data collection and reporting, and potential incentives for certain LMI activities.CRA Analysis and Mapping

So, where are we today? During 2018 there has been considerable discussion and focus on the need to revisit CRA. However, it’s important to note that the U.S. Department of Treasury issued a report in June 2017 noting the need to “modernize” CRA. 

The resulting study conducted by the U.S. Government Accountability Office (GAO) confirmed the need to change CRA. The report recommended giving more consideration to basic banking services under the service test, adding small dollar non-mortgage consumer loans to the evaluation process, expanding the idea of an assessment area vs. a community, and increasing coverage to include all affiliates of financial institutions and additional entities such as credit unions, and non-banks. 

The recommendation to expand CRA to cover credit unions and non-banks was made based on the “utilization of financial services”. The GAO study found that lower-income consumers are more likely to use alternative financial services providers such as check cashing outlets, payday loan stores, automobile title lenders, and pawnshop lenders.

This begged the question: Why aren’t banks serving these consumers? The study additionally addressed the provision of basic financial services such as bank accounts, finding that 7% of U.S. households are unbanked — meaning no one in the household had a checking or savings account. 

In response to the GAO study, the U.S. Department of Treasury issued their CRA Modernization Recommendations which included the need to address four areas for improvement – 1) the definition of an assessment area; 2) CRA rating determinations; 3) timeliness of evaluations and increasing a bank’s accountability; and 4) incentives for activities in low- and moderate-income communities.

The next big announcement was made independently by the Office of the Comptroller of the Currency (OCC). In September, the OCC issued an Advanced Notice of Proposed Rulemaking (ANPR). The ANPR generally follows the GAO study and Department of Treasury recommendations and contains 31 questions related to three key areas – 1) revising the current regulatory approach including performance evaluation methodologies by adding a metric based framework to performance tests and redefining communities and assessment areas; 2) expanding CRA qualifying activities; and 3) increasing recordkeeping and reporting requirements. The comment period for this ANPR ended on November 19th.

Again, what does all this mean? 

Examination Process

First, let’s review the potential changes to the examination approach. I believe everyone would agree that there is limited clarity in the current examination process. There are different evaluation methods based on the size of the institution and/or whether the institution selects to be evaluated under the wholesale/limited purpose or strategic plan options.

This makes it difficult to compare performance ratings across all banks subject to CRA. Examination cycles vary based on the bank’s most recent CRA rating, asset size, and other factors. Add to that the limitation on which banks are required to collect and report CRA data and there are no true market comparisons to be made. 

And, there are still no performance benchmarks for banks to use in reviewing their own performance. CRA activities such as services and investments are not consistently evaluated – even from exam to exam – and, metropolitan areas are weighted more heavily during an examination than rural areas. 

So, what might change?

The OCC’s ANPR recommends that the evaluation method should take into consideration an institution’s size and business model, as well as the demographic characteristics and economic and financial condition of the communities reviewed.

It is further recommended that retail and community development activities should be evaluated separately for all banks, indicating a single approach. This suggests that while there could be a ranking component to performance measurements, there would not necessarily be different examination processes. 

The recommended “metrics-based framework” implies there might be an answer to the question of “how much is enough?”. The establishment of metrics for ratings would likely be, based on quantitative or numeric benchmarks, implying there will be targets for performance — and banks will actually know how well they are doing and what their CRA rating will likely be based on performance. The OCC additionally recommends creating standards for quantifying CRA activities, suggesting that some activities may be given more weight, such as innovative and flexible programs. One of the more complex recommendations is related to redefining “community” more broadly to include the “business of banking” – which means there could be new performance ratings based on other banking services. And, lastly, the OCC ANPR recommends expanding the types of LMI activities that are given consideration in evaluating performance under CRA.

Assessment Area vs. Community

The question of how a “community” should be defined and interpreted under CRA requires consideration of the changing financial landscape.

The current requirements for delineating assessment areas are well defined, but often create challenges. The assessment area:

  • Must include the Bank’s main office, branches, and deposit-taking ATMs, as well as a “substantial portion” of originated or purchased loans. The question here is what represents a substantial portion? Is it 51% or 80%?
  • Must not reflect illegal discrimination or result in redlining of minority neighborhoods.
  • May not arbitrarily exclude low- or moderate-income geographies.
  • Must consist of whole contiguous geographies.
  • Cannot combine MSA and non-MSA areas.

So, what could potentially change:

  • Expanded to include LPOs and non-bank affiliate offices.
  • Based on concentration of deposits, lending, employees, depositors, or borrowers.
  • Include digital lending channel footprint.

The OCC’s ANPR indicates that under an updated approach, banks would still be evaluated based on the branch and deposit-taking ATM footprint, but could also receive consideration for providing services outside of that footprint. The flip side of this would be if that consideration resulted in a negative exam finding, would performance be considered inadequate?

The expansion of activities to include basic banking services could redefine “community” to include the concentration of deposits which may be associated with where a customer works or lives, where you lend, what products you lend to certain areas, where your employees are located, and where your depositors and borrowers live. And performance won’t necessarily be just about mortgage, small business, and small farm lending -- performance could additionally be measured based on small dollar non-mortgage lending activities or consumer loans.

The question of how a digital footprint will affect the definition of an assessment area may create additional challenges.

CRA Qualified Activities

The current process for determining what is or is not a CRA-qualified activity is not well defined – specifically, what qualifies for a community development service, investment, or loan.

Community development activities must benefit LMI geographies or LMI individuals. While that seems simple, the determination of what qualifies isn’t always easy to make or defend.

The recommended changes indicate this process would be vastly improved - including the addition of clear standards for what will qualify and expanding current options. More weight may be given to certain activities – which if banks knew up front, it might be easier to define what community development activities would best fit with their business model and financial capacity.

Record Keeping and Reporting

The potential changes to data collection and reporting may offer the most significant impact from an operational perspective.

The current requirements for CRA data collection and reporting are based on an asset threshold of $1.252 billion for 2018. This obviously limits the number of lenders that are required to report any data and the availability of data for comparative analysis. And the data required to be reported is limited to small business, small farm, and community development lending. 

The potential changes to CRA data collection and reporting relate to the potential changes in the regulatory examination approach, including which financial institutions are required to report data, what data is required to be reported, and the frequency of reporting.

Prepare for the Future

Obviously, this blog post is based upon what “might happen” as opposed to any defined changes to the regulation. But, as all compliance professionals know, it is always better to be prepared for change than it is to respond to change. I am not saying there is any need to panic, but it is important to consider what these potential changes might mean to future CRA risk management initiatives. 

So, what can you do now?

First, review your assessment area delineation – but expand your analysis to include more banking services. Where are your concentrations of deposits? What non-branch offices do you have and where are they located? How does the distribution of banking services look when you consider LMI and majority-minority geographies?

Many compliance professionals have already started thinking about the potential impact of open-end lines of credit and reverse mortgages on the distribution of mortgage lending for CRA. But have you considered the potential impact of open-end lines of credit if your bank hasn’t met the 500-loan threshold for reporting?

There is also the potential that the definition of small business and small farm loans may be revised. Would a change that required you to report all small business and small farm loans regardless of loan size improve or worsen performance? 

And, finally, do you currently review consumer lending activity? Under today’s CRA, you may provide consumer data for consideration during an examination, but not many banks choose to do that. Given that the GAO study specifically indicates that lower-income consumers most frequently use alternative financial services, how does your distribution of consumer loans in LMI geographies look? 

I hope this discussion has been helpful in identifying potential changes to CRA. At QuestSoft, we provide the tools needed to optimize your assessment area, and evaluate your lending performance based on demographics and peers. See how Compliance RELIEF can help you analyze your performance and be exam ready by contacting us today!