CRA

A Quick-and-Dirty Guide to CRA Compliance Exams

January 18, 2017 | Posted by Mark Piccolo
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10 Minute Read

The Community Reinvestment Act (CRA) has been around since the 70s, so most compliance professionals are pretty familiar with it. In this post, you'll get a quick-and-dirty overview of CRA exams, and a handful of prep best practice tips. Let's jump in.

CRA compliance is familiar for most lending institutions, but in this post, we'll cover a few things you may not know, and provide some tips for how to prep for a CRA exam. CRA, Redlining, and Fair Lending compliance are all closely entwined; best practice institutions will review their CRA compliance performance with an eye and an ear toward managing Fair Lending and Redlining compliance risk, too.


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Let's start with a basic overview of what CRA is all about:

The Two Things CRA was Designed to Do

The Community Reinvestment Act (CRA) is a law intended to encourage depository institutions to help meet the credit needs of the communities in which they operate. CRA was designed to do two things:

  1. Eliminate the illegal practice of Redlining.
    • Redlining is defined in the FFIEC’s Fair Lending Exam Procedures as “a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.”
    • Redlining has been a major regulatory hot topic since 2015. We have written a lot of blogs about redlining compliance; click here to view all of the blogs that relate to Redlining. Consider analyzing your data for Redlining risk, if you aren't already.
  2. Encourage depository financial institutions to meet the credit needs of every community they serve. Both the income level of the individuals and the census tracts geographies, including Low-to-Moderate Income (LMI) and Majority-Minority (MM) census tracts, are considered. 

CRA compliance is closely monitored by regulators and examiners. However, neither credit unions nor nonbank entities supervised by the Consumer Financial Protection Bureau have to comply with CRA. 

Finally, CRA does not encourage the extension of unsafe or unsound credit. A financial institution's loan and deposit activity is expected to be safe, sound, and non-discriminatory.

CRA Exam Performance is Public

In 1989, a CRA rating system was introduced, and the reasoning behind the rating system was explained. At this time, written evaluations became required: one for the institution, and one for the public. In 1995, the CRA regulations were revised again to put greater emphasis on the performance outcomes; different evaluation types were developed for different types of institutions. Public CRA ratings also became available online.

bank-home-mortgage-lending.jpeg

Today, the public CRA exam results are evaluated by community action groups, journalists, individual consumers, and of course, regulators. It will likely also be considered in any application for M&A activity. 

Best Practice Tip: If you have a merger or acquisition planned for the future, take some time to evaluate all institutions' Fair Lending and CRA performance. As we've seen, issues with Fair Lending, CRA or Redlining can stall M&A activity.

Crucially, Fair Lending performance can and will impact your CRA performance rating. Evidence of potential discrimination according to Fair Lending regulations can lead to CRA rating downgrades. 

The 4 CRA Ratings

There are four types of ratings that your institution will be assigned by your regulator (FDIC, FRB, or OCC):

  • Outstanding
  • Satisfactory
  • Needs to Improve
  • Substantial Noncompliance

These ratings will be made public. While Satisfactory and Outstanding ratings are the most common, lower ratings are not unheard of. We also anticipate that the heightened Redlining scrutiny in recent years may lead to increased CRA scrutiny now and in the future.

[Read Also: 9 Tips to Prep for a CRA Compliance Exam]

CRA Evaluation Types & Their Performance Criteria

There are 5 CRA evaluation types, which are designed to accommodate basic differences in institutions' structures and operations.

bank.jpegThese unique evaluation methods are intended to establish performance-based CRA exams that are complete, accurate, and minimally burdensome to financial institutions. Here are the 5 evaluation types:

  1. Small Bank: Assets less than $304M as of Dec. 31 in either of the two previous calendar years.
  2. Intermediate Small Bank: Assets of at least $304M as of Dec. 31 in both of the prior calendar years, and less than $1.216B as of Dec. 31 in either of the prior two calendar years.
  3. Large Bank: Assets of at least $1.216B as of Dec. 31 in both of the previous two calendar years.
  4. Community Development Test: Evaluates Community Development activities for for limited-purpose and wholesale banks.
  5. Strategic Plan: Reviews an institution's strategic CRA plan.

We will focus on the performance criteria of the first three types of CRA exams.

Best Practice Tip: It's worth noting that each of these three types of exam includes some form of data analysis. If data analysis isn't already part of your CRA compliance risk management program, it should be!

Here is an outline of the performance criteria evaluated in each of the exam types:

  • Small Bank Exam
    • Lending Test
      • Average Net Loan-to-Deposit Ratio
      • Assessment Area Concentration (In-Out Assessment Area Ratio)
      • Geographic Distribution (Proportion of lending in Census Tracts)
      • Borrow Distribution (Lending to individual borrowers inside Assessment Area)
    • Complaints and Responses
    • Public File
    • Evidence of Discriminatory Practices (Fair Lending)
    • Assessment Areas
    • Optional: Investments & Services. This may be considered at the bank's request to enhance a Satisfactory rating.
  • Intermediate Small Bank Exam
    • Lending Test
      • Average Net Loan-to-Deposit Ratio
      • Assessment Area Concentration (In-Out Assessment Area Ratio)
      • Geographic Distribution (Proportion of lending in Census Tracts)
      • Borrow Distribution (Lending to individual borrowers inside Assessment Area)
    • Community Development Test
      • Loans
      • Investments
      • Services
      • Responsiveness of CD activities
    • Complaints and Responses
    • Public File
    • Evidence of Discriminatory Practices (Fair Lending)
    • Assessment Areas
  • Large Bank Exam
    • Lending Test
      • Assessment Area Concentration (In-Out Assessment Area Ratio)
      • Geographic Distribution (Proportion of lending in Census Tracts)
      • Borrow Distribution (Lending to individual borrowers inside Assessment Area)
      • Community Development Loans 
      • Innovative or Flexible Lending Practices to Address Needs of LMI Individuals or Geographies
    • Investment Test
      • $ Amount of Qualified Investments
      • Innovativeness and Complexity of Qualified Investments
      • Responsiveness of Qualified Investments to Credit and Community Development Needs
    • Service Test
      • Retail Services
      • CD Services
      • Innovativeness and Responsiveness
    • Complaints and Responses
    • Public File
    • Evidence of Discriminatory Practices (Fair Lending)
    • Assessment Areas 

cra-exam-prep-kitTRUPOINT Viewpoint

Want more information about how to prepare for a CRA exam? You're in luck. We've developed a sharable guide to CRA Exams that can help you prepare for the exam. Share it with the compliance team and your management in order to make sure everyone knows what to expect from a CRA exam. Just fill out the form below to get it!

 

Learn More About TRUPOINT's CRA Analytics

As you can see, every CRA exam includes an analysis of your data in the lending test (at least). If you aren't analyzing your data regularly for CRA compliance, it's impossible to truly understand your risk. TRUPOINT is experienced in CRA data analysis, mapping and geocoding; we help hundreds of institutions analyze their data and prepare for exams every year. To learn more about how we can help you improve your CRA compliance, fill out the form below:

 

Additional Reading:

  


 

Mark Piccolo

Mark Piccolo

I've been a member of the TRUPOINT team since the company was founded, and throughout the years, my favorite part of my work is helping my clients be successful. I was born and raised in Monongahela, PA, and moved to Charlotte in 1987. One year later, I married my wife of 30 years, Lou Ann. We have one son, John, and a granddaughter, Savannah. In my free time, I enjoy spending time with my family, gardening, playing Texas Hold'Em poker, and competitive League Bowling. I'm a certified bowling instructor, too, so I can coach both youth and adult players.