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5 Common Reasons for Bad CRA Compliance Exam Ratings

5 min read
Feb 21, 2018

The Community Reinvestment Act (CRA) is a big part of consumer compliance today - and has been since the late 70s. As you work towards compliance success, it's important to keep an eye on your CRA performance and redlining risk. After all, your CRA exam ratings are public!

The Community Reinvestment Act isn't a new compliance requirement for financial institutions - it was enacted in 1978 - but it's as important today as it ever was. Regulators continue to conduct CRA exams, while journalists and consumer protection groups are paying attention to CRA and redlining.

For example, the Center for Investigative Journalism released a study earlier this month about the impact that the Community Reinvestment Act (CRA) can have on majority-minority communities in the US. Their reporting alleged (or at least posited) that banks are still illegally redlining, even though the CRA was designed to prevent that form of discrimination.

We will be talking more about this fascinating study in the weeks to come, but for now, we wanted to take an opportunity to update this blog, which was originally written a few years ago, with new information and insights.

regulatory-compliance-examCRA exams matter for a few reasons. First, the results of your CRA exam are public, so any interested journalist, consumer, or community group can see if and how well you served your markets. In addition, your record of CRA compliance will be reviewed by the regulators if you want to open or close any branches, or if you're involved in a merger or acquisition. Last but not least, CRA exams can spark fair lending exams, and vice versa.

For these and many other reasons, it's clear that good compliance is good business.

After your exam, you'll receive one of four ratings: Outstanding, Satisfactory, Needs to Improve or Substantial Noncompliance. 

Remember, your CRA performance evaluation ratings are public, and soon, detailed HMDA data will also be public. We can probably expect that increased transparency will be accompanied by increased scrutiny. 

In that spirit, here are 5 common factors that may cause your CRA Rating to be downgraded:

  1. Poor lending distribution, particularly in Low- to Moderate-Income (LMI) and high-minority areas.
  2. Low borrower distribution, particularly to LMI individuals.
  3. Low average net Loan-to-Deposit (LTD) ratio.
  4. Fair lending or redlining compliance issues.
  5. Inadequate Community Development activities.

Below, we'll take a deep dive into these 5 common CRA compliance tripwires.

1. Poor Geographic Distribution, Particularly to LMI and MM Tracts.

CRA is intended to ensure that financial institutions meet the credit needs of all areas of the community they serve. One way examiners will evaluate service is by analyzing your geographic distribution to low- to moderate-income (LMI) and majority-minority (MM) census tracts within your assessment area(s).


Financial institutions should geocode loans within the assessment area(s) and compare the mapping to the income levels for each census tract.  It is important to examine the entire assessment area to ensure that your geographic distribution of loans are not excluding LMI or MM census tracts. 

While reviewing your maps, keep an eye out for any shapes and patterns that may indicate that redlining is occurring. This can be an early warning that you have redlining risk exposure.

2. Low Borrower Distribution, Particularly to LMI or Minority Individuals.

Examiners will not only evaluate your lending to geographic areas, they will also evaluate your lending to individuals in your community. To evaluate your performance, analyze your borrower distribution, or lending to individual borrowers inside your assessment area(s).

If you have more that one assessment area, review this in aggregate and by individual assessment area. You'll also want to explore how you compare to peers and benchmarks.

Again, we recommend leaning on maps to help you visualize this performance. You may want to also include your branch locations in these maps, so that you get a really clear sense for the correlation between branches and lending. 

3. Low Average Net Loan-to-Deposit and/or In-Out Ratio.

The regulators will measure your efforts to meet the credit needs by looking at the number of loans versus deposits, or loan-to-deposit (LTD) ratio.

Examiners will likely only look at your Loan-to-Deposit ratio in aggregate. Still, it's important to be able to clearly explain the numbers they see. 

They will also evaluate the level of lending within your assessment area(s) compared to lending outside of your assessment area(s), which is sometimes called the in-out ratio.

You will want at least 50 percent of your loans to be within the assessment area. Generally speaking, we recommend around 70 percent or more, as some regulators don't view 50 percent as enough. In other words, the majority of loans by number and dollar amount should be inside the assessment area(s). 

In addition, consider analyzing your portfolio loans by both loan type and account type to provide even more clarity.

4. Fair Lending or Redlining Compliance Issues.

Every CRA examination will include an evaluation of fair lending compliance. In recent years, we've seen that fair lending issues are one of the top reasons for a CRA rating downgrade. Any evidence of illegal discrimination will impact your CRA performance rating - the question is just how much.

If you have a CRA exam coming up, that means you also have a fair Llnding exam. Findings in one area may lead to increased scrutiny in another.

In addition, the CRA was designed to prevent redlining, and your risk exposure will definitely be considered during your CRA exam.

5. Poor Community Development Lending or Community Investment.

For many banks, Community Development is a key part of their CRA exam. The Community Development test will evaluate your bank's responsiveness to the community development needs of your community through a combination of loans, investments and services. 

Community Development can be a little confusing, so we've developed a few resources to help explain it more. Here is a blog that explains five ways to get Community Development credit

There are other factors that play a large role in your CRA performance, including prior year performance and complaints, but the five listed above among the most common tripwires.

Exams start with numbers, but don't end there. Being prepared to tell your bank's story is critical. Ncommunity can help the bank to identify areas where they can improve, and proactively move towards better numbers. You'll also be focused on telling the story of the great things you are doing, which starts with knowing where you need to improve.


How to Build a Strong Fair Lending & Redlining Compliance Management System

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