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Posted by Trey Sullivan
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31 Minute Read

Experts put the likelihood of Community Reinvestment Act modernization somewhere between "possible" and "likely." That means it's time to make sure you understand the changes on the table, and what they might mean for you. In this post, we will outline the four CRA recommendations made by the Treasury Department, and how they could impact your CRA compliance program.

The Community Reinvestment Act was passed in 1977 to help encourage financial institutions to meet the credit needs of all of the communities they serve, even low-to-moderate income communities. In the intervening 41 years, the CRA has been modified only slightly. That may be about to change.


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In early April, the U.S. Department of the Treasury released recommendations for how to modernize CRA. These recommendations, issued to the primary CRA-regulating agencies (the OCC, FDIC, and FRB), can be grouped into four categories:

  1. Assessment Areas
  2. Examination Clarity and Flexibility
  3. Examination Process
  4. Performance

These broad recommendations are designed to reduce the complexity and burden of CRA compliance on the industry, and  “better align CRA activity with the needs of the communities that banks serve, while being conducted in a manner consistent with a bank’s safety and soundness.”

So what does “aligning CRA activity with the needs of the community” really mean, especially in the context of changing consumer behavior, the rise of digital-only banks and neobanks globally, and the potential increase in mergers and acquisitions in the US? How can examiners evaluate CRA performance when interstate banking, mortgage securitization, and online banking are mainstream? The CRA recommendations provided by the Treasury are intended to help answer those questions.

In this post, you’ll learn the 4 CRA recommendations, and practical insights about what CRA modernization would mean for you.

We’ll also cover some tips for how your CRA compliance analysis and risk management may need to change. First, you’ll learn more details about the recommendations, and then see how it might impact you.

1. How Updating Assessment Areas Might Impact Your Bank

In their 35-page memo, the first recommendation that the Treasury Department offers is the idea of updating the definitions of geographic assessment areas. These updates should, they say, reflect the impact of changes in technology, customer behavior, and communities.

As they rightly note, the idea of assessment areas originated in 1977, and a lot has changed since then. Today’s consumers often bank across state lines, and with mobile and online banking, deposits can come from almost anywhere.

In its current iteration, the CRA defines assessment areas primary as the geographies around the main office, branches, and deposit-taking ATMs, in addition to the geographies in which the bank has originated or purchased a substantial portion of its loans.

Their recommendation is to expand beyond a geographically focused assessment area determination to include LMI communities outside of the bank’s physical footprint, and in other areas where the bank accepts deposits and does substantial business.

What It Means for You...

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For many CRA compliance officers, adjusting assessment areas = headaches. It can be complicated to redefine an assessment area, especially when considering all of the new factors at play. In addition, changing an assessment area means changing all of the CRA analysis and procedures.

Some CRA analysis softwares, like TRUPOINT Analytics, can help with this process. For example, we work with our CRA Analytics customers to define the assessment area. In some cases, we may help customers create multiple potential assessment areas, so that we can look at how those definitions impact their performance. Finally, once you’ve determined your new assessment area, updating the system takes only 5 minutes.

P.S. If you’re a CRA Analytics customer who would like to review and potentially adjust your assessment area, reach out to customersuccess@trupointpartners.com to connect with your Customer Success Manager and schedule a meeting time.

That said, the Treasury Department has indicated that their goal is to ensure that banks are getting credit for the work they’re doing in LMI communities that may not fall precisely in their geographic footprint. This may mean that CRA ratings are more positive, or at least that examiners may see your LMI-focused efforts more favorably.

However, it’s important to keep in mind that CRA was also designed to prevent illegal Redlining. Irregular assessment area shapes (think: croissants and donuts) may create Redlining and Reverse-Redlining risk exposure.

2. How Improving the Clarity and Flexibility of CRA Exams Might Impact Your Bank

regulatory-compliance-examTreasury also recommends improving the clarity of CRA exam guidance and flexibility of CRA exams, which they say would benefit not only banks, but also the communities they serve. This two-pronged recommendation would accommodate the desire for both clearer standards and more bank-centric evaluations. 

In addition, they recommend improvements to the CRA performance evaluation criteria, which they say would help increase the transparency and efficacy of CRA rating determination.

Clarity in compliance is almost always welcomed, and in CRA there is a lot of potential good to be done. Examination procedures are developed by the Interagency groups, but each regulatory agency gives additional guidance to examiners. In addition, each individual examiner applies those regulations slightly differently. Finally, each bank has a unique performance context that guides the exam itself. This unique performance context is the reason for the flexibility advocated by Treasury.

In particular, the Treasury recommendations focus on:

  • Lack of Process to Determine Eligibility Prior to Making an Investment: Currently, banks have a difficult time determining which loans and investments might qualify for CRA and/or Community Development credit. This is made worse by the fact that Performance Evaluations are only available after a relatively long lag-time, so Bank’s aren’t sure about how their CRA activities were evaluated.
    • Recommendations:
      • Expansion of the types of loans, investments, and services eligible for CRA credit.
      • Establishment of clearer standards for eligibility for CRA credit, with greater consistency and predictability across each of the regulators.
      • 8 simplified record-keeping procedures, designed to make eligibility updates more regular and timely.
  • Lack of Clarity and Inconsistent Application of Bank Performance Context: As currently defined, the Performance Context is a highly subjective framework through which to view a bank’s CRA performance. Some say too much emphasis is placed on the economic factors rather than the community needs, and others noted challenges with defining peer groups. Almost everyone agrees that defining a performance context is challenging, time-consuming, and subjective, and doesn’t necessarily result in positive changes for the community.
    • Recommendation:
      • CRA regulatory agencies’ research and policy staff should be involved in developing the performance context before CRA examinations.
  • Lack of Clear Guidelines for Examination Criteria: All bank compliance officers know that the CRA exam guidelines are vague and subjective. There are no firm numerical guidelines, and most of the statistical guidelines (like In/Out Ratio recommendations) are practical, rather than standardized. This ambiguity also makes it difficult to compare banks to peer institutions, and it also makes it difficult for banks to set CRA goals.
    • Recommendations:
      • Establishing clear criteria for grading CRA loans, investments, and services.
      • The actual “measurement” of CRA activity should be clearly and predictably reportable.
  • Inconsistent Examination Staffing, Practices, and Procedures: Treasury officials noted that not all CRA examiners approach an exam, or its rating, in the same way. However, they didn’t note any recommendations for improving this reality.
  • Challenges with Developing and Amending Strategic Plans: Strategic plans were designed to help banks that are unique or operate in highly competitive markets create their own plans for complying with CRA. However, the Treasury Department noted that the Strategic Plan option has low adoption rates and doesn’t necessarily control well for CRA risk. They didn’t offer recommendations for improvements.
  • Overemphasis on Branch Network in the Service Test: New technologies mean that branches aren’t as big a part of customers’ day-to-day financial lives.
    • Recommendations:
      • Establishing a modernized, forward-looking approach to the Service Test that reframes the importance of branches.
      • Expanding the framework of CRA-eligible services provided or distributed by the bank, in response to technological changes and to promote innovation.

This section in the memo is the largest, and as you can see, the recommendations are wide-ranging.

What It Means for You…

The CRA modernization recommendations are primarily focused on making it easier for you, as a banker, to feel confident that you know how to and are empowered to comply with CRA. They also are focused on the community, which is the core of CRA compliance. From these perspectives, we think many of the recommendations are helpful and well-considered.

In particular, the Treasury Department focuses on making CRA and Community Development credit easier to understand.

In particular, they say “as part of the inherent need for modernization of CRA administration, Treasury supports any reform effort that embraces innovative approaches to CRA eligibility definition, including technology-enabled approaches.“

3. How Making the CRA Exams More Timely and Focused on CRA Planning Might Impact Your Bank

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Next, the Treasury Department encouraged regulators to make the CRA exams more timely, and increase accountability for CRA planning, goal-setting, and activities. This set of recommendations is directed primarily at regulators and examiners, as they noted that excessive delays in providing a Performance Evaluation has direct negative impacts on bankers and the communities they serve.

Below are the topics and recommendations that arefocused on the timeliness of performance evaluations and CRA ratings, and the scope of examinations:

  • Timeliness of Performance Evaluations and CRA Ratings: The Treasury Department focused on improving the timeliness of performance evaluations and allowing banks to be more accountable in planning their CRA activity. Some bankers have said that “the amount of time that it takes to conduct CRA examinations and to disclose CRA performance evaluations publicly has become excessively long.” Treasury officials noted that “delays in the completion of examinations are longer than the indicated examination cycles of all three of the CRA regulators, and across banks of all sizes.” This makes it difficult for banks to effectively comply and meet the needs of their communities.
    • Recommendations:
      • Reduce the amount of time between CRA examination and Performance Evaluation release.
      • Standardize the CRA examination cycles.
  • Scope of Examinations: Different assessment areas have differently scoped examinations. In general, non-metro assessment areas are considered limited-scope. As a result, more rural areas may not receive as much attention or access to banking as more urban areas. Treasury offered no recommendations for improving this.

What It Means for You…

This puts the burden of timeliness in CRA performance evaluations onto the regulators. If you’ve struggled with a timely turnaround, and an inability to respond to previous findings before your next CRA exam, this one is for you.

Ultimately, it seems like the Treasury Department is moving towards advocating more frequent and analytical CRA examinations with more clear and standardized guidelines. This will give more credit to banks that are operating proactively, but it may provide less room to hide for banks that aren’t prioritizing CRA compliance.

CRA compliance should be a priority for all institutions, because healthy communities encourage healthy bank growth, and healthy bank growth encourages healthy communities. As we’ve said before, good compliance is good business.

4. How Providing CRA Performance Incentives Might Impact Your Bank

rawpixel-com-620227-unsplashFinally, Treasury recommended the idea of providing incentives for banks that meet the credit and deposit needs of their communities. These incentives, they believe, will encourage financial institutions to do more for LMI communities, especially if the bank has underperformed in the past. There are no current penalties for financial institutions who fail to meet CRA requirements.

If you’re thinking “there already are incentives,” then you’re right. The CRA rating is considered in different aspects of banking and growth, such as mergers and acquisitions, and growth plans. However, Treasury has recommendations for how downgrades could be improved to incentivize CRA performance.

In particular, they are focusing on:

  • Downgrades for Violations of Consumer Protection Laws: Some banks have seen their CRA ratings downgraded as a result of Fair Lending or other consumer compliance issues. According to Treasury, this is not always clearly or evenly applied.
    • Recommendations:
      • Adopt uniform guidance across regulators that considers whether there is a logical nexus between the CRA rating and evidence of discriminatory or illegal credit practices in the bank’s CRA lending activities.
      • Consider efforts the bank takes to improve and other remediation efforts when applying CRA downgrades.
  • Performance Evaluation Delays Due to Consumer Protection Law Investigations: In some instances, ongoing consumer protection regulations may result in CRA exams or Performance Evaluations being delayed. Treasury sees this as having the potential for negatively impacting the bank's ability to respond to CRA issues in a timely manner.
    • Recommendations:
      • Do not delay CRA performance evaluations as a result of pending consumer protection law investigations or enforcement actions. Instead, they recommend that the evidence be reviewed in the next Performance Evaluation.
  • Impact of Less Than Satisfactory Ratings and Remediation: A poor CRA rating has negative impacts on a bank's ability to expand and add new branches. Treasury believes that this has the potential to limit the bank's ability to serve new customers through branch growth. 
    • Recommendations:
      • All regulators should adopt guidelines for reviewing branch and M&A applications that are more in-line with the OCC's recently released CRA updates.
        • "A bank with a less than Satisfactory CRA rating should continue to receive enhanced scrutiny, but more consideration should be given to the bank’s remediation efforts to date and whether approving the application would benefit the communities served by the bank."
  • Use of Community Benefits Plans: During M&A activities, the banks involved are required to request public comment on the merger or acquisition. Negative comments during this time often center on CRA, and can result in significant delays. One way to resolve these issues is through Community Benefits plans. These are just one channel, and are not required.
    • Recommendations:
      •   Clarify that Community Benefits plans are not required; they are one of many valid channels of resolving concerns about a future merger or acquisition's impact on the community.
  • Burden of Maintaining a Public File in the Branch: All CRA-covered financial institutions are required to maintain a physical CRA public file. Treasury views this as outdated, given the fact that most information about banks can be viewed on their website.
    • Recommendations:
      •  Allow banks to store the CRA public file electronically on the bank’s website, while still providing physical access to anyone who is interested in reviewing it.

What It Means for You...

There are certain areas where CRA compliance and other consumer protection regulations overlap, but they are distinct. Depending on your regulator, that may feel more or less the case. Once again, the Treasury Department seems to be pushing for increased standardization, and a bit more clarity when it comes to how different types of regulations impacting consumers relate to one another.

The key overlap area referenced in the memo is Redlining. As we've seen time and time again, this is an area of compliance that impacts both CRA and Fair Lending. TRUPOINT provides Redlining Analytics to help financial institutions analyze and understand their redlining risk. As the potential for CRA changes evolve, don't overlook this unique risk area.

TRUPOINT Viewpoint: As you look to improve your CRA compliance, remember that some partners make it easy. TRUPOINT is one of your options.

Our CRA Analytics software is designed to make CRA compliance analysis a breeze. From updating your assessment area to providing clear reporting, we can help you. In addition to identifying risk exposure, CRA compliance analysis can really help you gain clarity and insight about your market, potential opportunities, and lending performance as you prepare for exams and work to meet your goals.

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Trey Sullivan

Trey Sullivan