Directors’ College Video Series – The Community Reinvestment Act

Directors’ College Video Series – The Community Reinvestment Act


– Thank you for joining us for the Federal Deposit Insurance Corporation’s Information Session
for Bank Directors on the Community
Reinvestment Act, one of several sessions
being developed as part of the FDIC’s
community banking initiative. I’m Julie Banfield,
Deputy Regional Director with the FDIC’s Division of Depositor
and Consumer Protection. This presentation
is an overview of the Community
Reinvestment Act and FDIC’s implementing regulation, Part 345. It’s designed to provide
bank directors with foundational knowledge
regarding the Act and the implementing
regulation, which are commonly
referred to as “CRA.” During the session, we’ll
discuss the purpose of the Act, different CRA evaluation types,
how to comply with CRA, and practical ideas
to assist your institution in helping to meet the credit
needs of its assessment areas. The FDIC’s goal
for the session is to outline a bank’s
CRA responsibilities, and to emphasize that
your role as a bank director is vital to the process. The slides used
in our presentation can be found on
www.fdic.gov. We hope you find the information
beneficial for you and your institution. Here with me now to share
information with you are: Assistant Regional Director
Chris Finnegan and Field Supervisor
Rafael Valle. Chris will now discuss some
background information on CRA. – Let’s start out by covering
the purpose of CRA. The Community Reinvestment Act was signed into law
as Title VIII of the Housing and Community Development Act of 1977. CRA was enacted in an effort
to encourage lenders to make more loans
in their communities to help stabilize and revitalize
deteriorating neighborhoods throughout the country. The statute details
three findings by Congress and the purpose of CRA. The findings were: 1) regulated financial institutions are required by law to demonstrate
that their deposit facilities serve the convenience
and needs of the communities in which they are
chartered to do business; 2) the convenience and needs
of communities include the need for credit services
as well as deposit services; and 3) regulated institutions have a continuing
and affirmative obligation to help meet the credit needs
of the local communities in which they are chartered. The law’s purpose
is to require each appropriate federal
financial supervisory agency to use its authority when examining
financial institutions, to encourage such institutions to help meet the credit needs
of the local communities in which they are chartered, including low-
and moderate-income borrowers and geographies; small businesses;
and small farms. Since 1977,
the CRA has been modified by the enactment
of several other laws; however,
none of the modifications have changed the purpose
of the Act. As previously stated,
the statute encourages lenders to help meet the credit needs
of their local communities and requires federal regulators to assess the financial institution’s
record of doing so. Through a provision
in the CRA, Congress delegated
to the federal regulators the task
of creating regulations to carry out the purposes
of the CRA. In 1978, the federal bank
regulatory agencies issued joint regulations
implementing the CRA. The FDIC’s
implementing regulation is Part 345-Community Reinvestment. The implementing CRA regulations have been revised over time, and our presentation
will focus on the requirements applicable in 2013. – It’s important to reiterate
that CRA requires the FDIC to evaluate
your bank’s record of helping to meet the credit
needs of its local communities, including low- and moderate-income neighborhoods. The Act also requires
that these efforts always be performed
within the standards of safe and sound
banking operations. Before we discuss
how FDIC evaluates your bank’s CRA performance, Rafael will cover
the record keeping, disclosure, and notice requirements
of the CRA regulation. – There are three requirements
associated with records, reporting, and disclosures: The first of these requirements is that your bank must place in the public lobby
of your main office, and each of your branches,
a public notice. This notice must state
that the public is entitled to certain information
about your bank’s operations and your performance
under the CRA. The second requirement is that
your bank must maintain a file that is available for
public viewing that includes certain information specified
in the regulation. The third item requires Large
Banks to collect and report certain data pertaining to
the bank’s small business, small farm, and community
development lending activities. If your bank is transitioning
from a small to a large bank, it is critical to develop
a strong framework for data collection
and effective staff training. The definition
of what constitutes a small or large bank
for CRA purposes will be provided later
in this presentation. Another requirement
is to delineate one or more assessment areas within which the FDIC
evaluates the bank’s record of helping to meet the credit
needs of its community. Chris will explain
the requirements for delineating
CRA assessment areas, which is a function
that a bank director will definitely
be involved in. – As Rafael noted, the CRA regulation
requires a bank to delineate one or more assessment areas
within which the FDIC will evaluate your bank’s record
of helping to meet the credit needs
of your community. It is the Board’s responsibility to ensure
that the assessment area is properly designated
for your bank. So, what must your bank remember when delineating
an acceptable assessment area? The regulation places some
requirements and restrictions on how assessment areas
should be delineated. First, the assessment area
should consist of whole political subdivisions, such as Metropolitan
Statistical Area(s), counties, cities, or towns, and must contain
whole census tracts. When designating
your assessment area, you cannot split
a census tract in half. Your bank should either include
the entire census tract or exclude it. Next, the assessment area may not reflect
illegal discrimination or arbitrarily exclude low- or
moderate-income census tracts. Finally, your bank’s delineated
assessment areas must include
all of the geographies in which your bank’s
main office, branches, and deposit-taking ATMs
are located, as well as surrounding areas in which your bank has originated or purchased a substantial portion
of its loans. The term
“substantial portion” is not defined
by the regulation, but generally means
more than 50 percent of your home mortgage,
small business, and small farm loans. It is important to remember that the bank’s
delineated assessment area should be evaluated
on a periodic basis to ensure it is changing as
the bank expands or contracts. Now Rafael will discuss
performance context. – One of the most important
components of the CRA evaluation is considering the bank’s
performance context. The CRA regulation recognizes that banks do not operate
in a vacuum and that every institution deals
with unique circumstances– one size definitely
does not fit all. Examiners will not dictate what
products your bank has to offer, as each bank is responsible for developing its own
business strategy. Therefore,
your bank’s performance is evaluated within the context
of the environment in which it operates. The idea of performance context
includes a broad range of economic, demographic,
institution-specific, and community-specific
information that examiners review to understand
the local environment in which your bank
is operating. One of the key purposes
of the performance context is to determine what
opportunities for lending, investing,
and providing services exist
in an assessment area. To obtain this information, examiners will contact area
business and community leaders for their opinion on what is
needed in the community. These “Community Contacts”
are important in helping to establish your bank’s
performance context. Now I’ll turn it back over
to Julie to discuss
CRA examination types. – In 1995, and again in 2005,
changes to the CRA regulation were made to prescribe
different examination procedures for the different
types of institutions. The Small Bank CRA examination
is a streamlined review of your bank’s
lending performance. For Intermediate Small Banks,
commonly referred to as “ISBs,” the examination combines
the small bank lending test with a community
development test. We’ll talk more specifically about these first two types
of bank examinations a little later
in the presentation. For Large Banks, the examination includes
an expanded performance review. The examination involves
a comprehensive review of your bank’s lending,
qualified investments, and services. If your bank is a Large Bank, you must also collect
and report certain loan data. The vast majority of banks
are evaluated using one of these first three
types of examinations, but there are two other examination types used by a relatively small number of banks. Limited-purpose
and wholesale banks are subject to an examination
that focuses only on the bank’s community
development activities. These banks
are evaluated solely under the Community
Development Test. Finally, all banks are permitted
to establish their own Strategic Plan for CRA
evaluation purposes, subject to regulatory
approval. When establishing
a CRA Strategic Plan, you must include specific, measurable, and quantifiable
annual goals. Public participation
is required, including formally soliciting public comment on the proposed Plan. Your examiners will then
measure your performance against your stated goals when evaluating
your CRA performance. You may want to consider
this option if your bank has
a unique niche. Next, Chris will discuss
the asset thresholds for small, intermediate small,
and large banks. – Under the CRA rules, a Small Bank is defined
as a bank with assets less than 296 million dollars
as of December 31 in either of the two prior
calendar years. An Intermediate Small Bank
is a bank with assets of at least
296 million dollars for both of the previous
two calendar years, and less than
1.186 billion dollars in either of the prior
two calendar years. Since assets tend to fluctuate and could be over the 296 million dollar
threshold in one year and decrease below the threshold the following year, it is important
to keep in mind that you have to exceed
the threshold both of the two prior years
in order to be an ISB. A Large Bank for CRA purposes has total assets of at least
1.186 billion dollars as of December 31 in both of
the prior two calendar years. As mentioned previously,
Large Banks are subject to CRA loan data
reporting requirements. The regulation allows
a full calendar year to comply with these data
reporting requirements. A bank should provide
the necessary resources to ensure accurate reporting. Please note that the CRA
asset size thresholds are indexed
and change each year. The thresholds
used in this presentation were effective
as of January 1st, 2013. Now Rafael will explain
why small banks are treated differently. – Small banks generally
have more limited staffing and expertise available
for the CRA function. Small banks also typically do not have an employee dedicated to CRA. The CRA program
is often run by a committee, with a member
of senior management serving as the CRA Officer. This person likely wears
many hats on a daily basis. Additionally,
due to their size, small banks typically
have limitations on the breadth and volume
of products they can offer. With these issues in mind, the regulation created a more
streamlined examination approach for small and intermediate
small banks. Now I will describe the streamlined examination approach for small banks. The majority of
FDIC-supervised banks are evaluated using the Small
Bank performance criteria. These criteria focus solely
on the bank’s lending activity, with emphasis on how well
a bank is serving the credit needs of low-
and moderate-income borrowers and census tracts,
small businesses, and small farms. Performance is evaluated
using five criteria: First, the average net
loan-to-deposit ratio is calculated using
each quarterly loan to deposit ratio
since the prior CRA evaluation. This measures the extent
to which the bank is lending in relation to
its deposit base. Next, the assessment area
concentration is evaluated by determining
the percentage of loans originated
inside the assessment area, versus outside. To satisfy this criterion,
your bank needs to have more than half of its lending
inside the assessment areas. Another criterion
is borrower distribution, which measures the proportion
of your bank’s lending to the various income groups
of individual borrowers inside your designated assessment areas. For example,
low-income borrowers, moderate-income borrowers,
and so on, as well as the proportion
of your bank’s lending to small businesses
and small farms based on gross annual
revenues. The fourth criterion is geographic
distribution of loans. This measures the proportion
of your bank’s lending in the various income categories
of census tracts located inside
your assessment areas. Last, the FDIC will assess
your bank’s response to any written CRA complaints
received by the bank since the last
CRA evaluation. Any CRA complaints
and your bank’s response should also be included
in your CRA Public File. Banks have the option
to receive consideration to enhance
a Satisfactory rating by including
the evaluation of qualified community development
investments and retail services. If you would like to
consider this option, please be sure
to inform the examiners at the beginning
of the review. – What tests apply to
an Intermediate Small Bank? The FDIC will evaluate
your bank’s performance using a Lending Test and
a Community Development Test. The Lending Test measures the
same five performance criteria as Rafael just covered
for Small Banks. The Community Development Test measures your bank’s responsiveness to “community development” needs
through the combination of loans, investments,
and services. For any of these activities
to qualify, it must have community development
as its primary purpose. An Intermediate Small Bank
can only receive a Satisfactory or better
CRA rating if it receives at least
a Satisfactory rating on each of these two tests. In other words,
your bank must demonstrate at least satisfactory
performance on both tests to be considered Satisfactory
or better for CRA purposes. As a bank transitions
from being a Small Bank to becoming
an Intermediate Small Bank, a common question is: What constitutes
community development? The CRA regulation
defines community development with five main components: The first is providing
affordable housing for low- or moderate-income
individuals. This includes
multi-family housing. The second component
is community services targeted to low- or
moderate-income individuals. This would include community
or tribal-based/child care, educational, health,
or social services that are targeted to
serving the needs of low or moderate income
individuals or families. The next component is promoting
economic development by financing small businesses
or small farms. To qualify under this prong
of the definition, the activity must meet
a “size” and “purpose” test. The fourth component
of community development is activities
that Revitalize or Stabilize low- or moderate-income
census tracts, designated disaster areas, or distressed or underserved
non-metropolitan middle-income
census tracts. The fifth and final prong
of community development was added in January, 2011. To qualify under the abandoned
or foreclosed homes prong, the loan, investment,
or service must support eligible development activities
in areas designated under the Neighborhood
Stabilization Program administered by
the Department of Housing and Urban Development. Please note, to qualify
as community development, the activity must meet
one prong, not all prongs. A few examples of community
development activities include placing
a certificate of deposit with a Minority
Depository Institution, instructing a Money Smart session at a local school with primarily low-
to moderate-income students, or providing the financing
of a multi-family dwelling that houses primarily low-
and moderate-income individuals. – Now we’ll move into
a brief discussion regarding large bank
performance criteria. Three tests are required for the evaluation of
large bank performance. The first test
is the Lending Test, which is similar to
the Lending Test for Small and Intermediate
Small Banks that we’ve previously discussed. However, your bank’s use of innovative or flexible lending practices to address the credit needs
of low- or moderate-income individuals or census tracts
is also given consideration in the Large Bank evaluation, as is the bank’s community
development lending. The second test is
the investment test, which evaluates
the dollar amount, innovativeness, complexity, and responsiveness
of your bank’s qualified community development
investments. The final test
is the service test, which evaluates
the availability and effectiveness
of your bank’s system for delivering
retail banking services, and the extent
and innovativeness of the community development services provided by your bank. Of course,
all of these activities must be performed
in a safe and sound manner. Rafael, can you please
describe what ratings an institution can be assigned
based on its CRA performance? – Sure. The examiner carefully
reviews the available data for the various
performance tests, considers the institution’s performance context, and determines the appropriate overall CRA rating. There are four possible ratings
a bank can receive: The best rating
is “Outstanding”, which is assigned
to an institution with an outstanding record
of helping to meet the credit needs
of its assessment areas, including low- and
moderate-income neighborhoods, in a manner consistent with
its resources and capabilities. The other ratings
are Satisfactory; Needs to Improve;
and Substantial Noncompliance. – Your institution’s
overall CRA rating can be affected by substantive findings of discrimination or other illegal
credit practices. When these types of violations,
inconsistent with helping to meet community credit needs
are identified, the CRA evaluation will state that substantive violations
were found. Examples include:
Discriminatory violations of the Equal Credit Opportunity
or Fair Housing Acts, as well as violations
of Section 5 of the Federal Trade
Commission Act involving Unfair or Deceptive
Acts or Practices. The evaluation will indicate
whether the violations caused the CRA rating
to be adjusted downward, and briefly explain
why the rating was or was not adjusted. The evaluation will identify
the law and regulation violated, the extent of the violations [for example widespread or
limited to a particular office], and characterize management’s
responsiveness in correcting the violation. So you can see
it is important to have all areas of your lending program in order. – Thank you, Chris. Now Rafael,
can you please address how CRA performance
could impact an institution? – Yes. There are a number
of different ways. First, your bank’s CRA Rating
and performance evaluation are public information. Therefore, your competitors,
local community groups, and your customers have access
to your bank’s CRA rating and performance evaluation. They may use this information
to determine whether to continue
doing business with you, or to challenge,
through a CRA protest, the opening of a new branch
or a proposed merger. The FDIC also considers
CRA performance when evaluating
bank applications. Less than satisfactory
CRA performance may result in denial, or conditional approval
of an application to open new offices or acquire
another financial institution, thus impacting your bank’s
ability to expand. – Thank you, Rafael. Can you now explain the
frequency of CRA examinations? – The CRA examination frequency
was altered as a result of the
Gramm-Leach-Bliley Act in 1999. The act extended the CRA
examination frequency for banks with total assets
of 250 million dollars or less to at least four years if an institution has
a “Satisfactory” CRA rating, and at least five years
if the institution receives an “Outstanding” CRA rating. However, the regulators
may conduct a CRA evaluation at any time for cause. If you have questions
about the timing of your next CRA examination, you can contact FDIC Regional
or Field Office management. – While most banks do a good job
meeting CRA requirements, there can be challenges
to your institution. Chris, can you please describe
some of those challenges? – Sure. One of the challenges
is for banks transitioning from a Small Bank
to an Intermediate Small Bank. The primary difference
between the CRA examination for a Small Bank
and for an ISB is the addition of
the Community Development Test. When your bank is approaching
the asset threshold to be considered an ISB,
you need to begin preparing for the Community Development
Test. Remember, there is a built-in
transition period since you will not be evaluated as an Intermediate Small Bank until your year-end assets
exceed the established threshold for two consecutive
year-ends. Likewise, banks transitioning
from an ISB to a Large Bank may have challenges with
the three Large Bank tests. Such banks should consider the innovativeness
of lending products, and available opportunities
in the assessment area for investments and services
that may assist low- and moderate-income
borrowers and geographies. You should also consider
contacting the Community Affairs staff
in your FDIC Regional Office to discuss additional community
development opportunities as your bank prepares to
transition to a new CRA test. Another fairly common
challenge is when a bank purchases
a large volume of loans from outside
its assessment area. In addition to safety
and soundness considerations, management and the Board should consider the potential CRA implications before making
these purchase decisions. Remember, one of
the performance criteria in the Lending Test
for any size bank is the proportion
of your lending inside your assessment areas. In order to have “satisfactory”
performance on this criterion, your bank must originate
or purchase more than half of its loans from
inside your assessment area. If your bank purchases
a large volume of loans from outside your area, you will need to consider
how this fits into your overall CRA
strategy and performance. – Now let’s discuss
some practical ideas that may assist your bank in helping to meet
its CRA responsibilities. These ideas include:
Developing a CRA strategy, performing self-assessments,
and utilizing FDIC resources. Rafael and Chris will spend
the next few minutes providing more information
on each of these areas. – Our first suggestion
is to develop a CRA strategy for your bank that considers
your current size and business model,
as well as any future plans. An effective CRA strategy
can help your management team and staff understand
the connection between the well-being
of the bank and the well-being
of your community. One cannot prosper
without the other. It is important to ensure
that your employee responsible for CRA compliance
is involved in this process. He or she should have
a good understanding of your local community
and can provide valuable assistance
to the Board in this process. When developing
a CRA strategy, it is important
to foster relationships with State
and local officials, community groups, and others
involved in your community. These relationships
can help your bank identify unmet needs
in the community. When considering new products
to meet the community’s needs, we encourage banks
to review the FDIC’s model small dollar loan program
for safe and affordable loans as well as the Safe deposit
accounts model. The small dollar loan program
promotes affordable small dollar loans
that have a risk-based, streamlined
underwriting process. The Safe account is a low-cost
transaction and savings account designed to target
under-served and low- and moderate-income
consumers. Most bankers participating in the small dollar loan
program pilot indicated that
these small dollar loans were used to develop
or retain long-term relationships
with customers. Likewise, participants in
the Safe deposit account pilot suggested that Safe accounts
may have greater longevity and lower costs
than other deposit accounts and performed similar to,
or better than other transaction
and savings accounts. – Another idea
for your bank to consider is performing
regular self-assessments of your CRA performance and assessing the adequacy of
your delineated assessment area. In conducting an assessment, your bank would monitor performance in home mortgage, small business, and small farm
lending, as applicable. You would then
compare your results to Home Mortgage Disclosure
Act aggregate data or demographic data available
from the U.S. Census Bureau. Your bank would look for areas
of weak performance and implement measures
to improve that performance. The developed monitoring systems
should identify any gaps in your performance
and track progress toward meeting
your established CRA goals. Since CRA performance
evaluations are public documents, you can also compare
your performance to that of your local
competitors. Reviewing your competitors’
public performance evaluations may also give you insight into community development opportunities that your bank
would want to consider. As a member
of the Board of Directors, you should be aware
of your bank’s CRA performance; therefore, Board reporting
is an essential part to any successful
CRA strategy. – What information is available
to help banks comply with CRA? – The Interagency
Questions and Answers Regarding Community Reinvestment
CRA Q&As are a great resource for
guidance on CRA requirements, as well as community
development information. Another resource is the “Guide to CRA Data Collection and Reporting”. While the Guide is only
applicable to Large Banks and their data collection
and reporting requirements, smaller institutions may also
find some of the information contained in the guide
useful to their CRA operations. There are a number of resources
available through FDIC for banks to use to enhance
their CRA performance. Bankers should consider
contacting the FDIC’s Community Affairs staff. They are located
in each region and can be a helpful resource
to your bank. They can provide information on the community development opportunities in your area as well as public information about other banks competing
in your local community. You can also receive technical
assistance regarding CRA by contacting your FDIC regional
or field office management. In addition, the FDIC’s
National Survey of Unbanked and Underbanked Households,
released in September of 2012, provides detailed information
about potential opportunities for financial institutions. And as I mentioned previously, the FDIC has models
for small dollar loan programs and Safe deposit accounts. – We encourage you
to view these resources and use them to strengthen
your CRA performance. Effective Community Reinvestment
is a win-win proposition for all banks and for
the communities they serve. This concludes
our presentation on the Community Reinvestment
Act for Bank Directors. We hope that you found
the presentation helpful. If you have additional
questions regarding CRA, please send them
to the mailbox: [email protected] On behalf of Chris,
Rafael, and myself, we appreciate
your participation, and thank you
for your commitment to your local community.

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