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8 Steps to a Successful Community Reinvestment Act Compliance Strategy

6 min read
Dec 26, 2017

Do you have a strategy for Community Reinvestment Act compliance? You should. It's an important indicator to examiners that you are serious about CRA compliance. Learn more about the 8 elements of a strong CRA strategy here!

As part of your CRA examination, the regulators will review your lending, investments, and service activities. They'll also look at how you achieve your CRA goals. Building a strong CRA strategy that can get you there will not only help you look good to the regulators, it can also help your bank comply and grow.

How? Lenders with a CRA strategy and monitoring plan are in a better position to meet the CRA performance expectations set out by their management and boards of directors. Just because the examiners aren't looking directly at your strategy doesn't mean it's not critically important to compliance success.

A CRA strategy demonstrates to examiners that you take responsibility for CRA compliance. Here are 8 elements of a strong CRA compliance strategy that you should consider.

Please note that a CRA strategy, as we're discussing here, is different than a formal CRA Strategic Plan. The CRA regulation contains an option to create a public CRA Strategic Plan. This formal option allows you to create a plan that is tailored to the needs of the community by seeking public comment during development and publication. Here's how: The institution informally seeks suggestions from the public while developing the plan. Once developed, it must publish notice of the plan and solicit public comment for 30 days. After the comment period, the institution submits the plan to its regulator for review and approval.

Let's get started:

1. Understand the Purpose Behind the Community Reinvestment Act

The primary purpose of the Community Reinvestment Act is to demonstrate that the bank is effectively working to meet the credit needs of its entire community, including low- and moderate-income neighborhoods in a safe and sound manner. CRA does, however, reinforce the long-standing expectation that financial institutions will serve the needs of their respective communities fairly and without bias. It's important that you comply with both the letter and the spirit of CRA regulation.

In general, we can understand the CRA to:

  1. Be a US law that encourages regulated insured depository institutions to meet the credit needs of low- and moderate-income (LMI) individuals and communities.
  2. Address discrimination in the access to loans and credit, aka prohibiting the illegal act of Redlining.
  3. Require examiners to evaluate the performance of banks in complying with CRA. This allows them to fulfill their obligations to the community and to consider the bank's record in the evaluation of application for charters or for the approval of bank mergers, acquisitions, and branch openings.
  4. Have incentives for banks to comply.

In addition, CRA is enforced primarily thru the application process. In fact, CRA contains no civil or criminal liability provisions. However, that doesn't mean there aren't repercussions for poor performance.

2. Understand Performance Evaluation Criteria for Your Institution

Some possible performance evaluation criteria may include Lending Tests, Geographic Distribution of Loans, Investment Tests, Service Tests, Community Development Tests, Public File Review, and more. You should know how your institution will be evaluated in order to prepare for an exam. 

The FFIEC publishes some great CRA resources about how your institution will be examined. You can also get access to the different examination procedures for each asset size here.

3. Review Overall Bank Strategy and Assessment Area Characteristics

The regulators judge a bank’s performance in the context of information about the financial institution and its assessment areas. In order to set a CRA strategy, you should understand your overall strategy and the underlying market. This sets the stage for a more constructive, credible, and efficient strategy:

  1. Review Bank Model Characteristics and Overall Strategy
    • Type of Institution (consumer, business, full service)
    • Target Market of Customer Base
    • Products and Services Offered
    • Business Trends (growing, stable, shrinking)
    • Branch and Service Center Locations
  2. Review Assessment Area Characteristics and Needs
    • Demographics
    • Economic Conditions
    • Market Trends
    • Peer Analysis (e.g., Call Reports, CRA Public Evaluations, Annual Reports/10-Ks, etc.)
    • Community Needs
    • Institution’s Public File (Comments Received)
  3. Review Prior CRA Performance Evaluation
    • How did the bank perform with the last exam?
    • How have things changed within the bank and the community?
  4. Review Existing Assessment Area 
    • It is critically important that institutions regularly review the existing assessment area(s) and how they have been delineated. Reg BB (click here) sets forth several technical criteria for delineating assessment areas.

4. Understand Your Performance Context

Performance context is another important concept in CRA compliance. The performance context can be defined as the unique economic and demographic conditions, as well as the community- and institution-specific circumstances, in which your financial institution operates. 

“An effective CRA strategy will consider both the institution’s particular business advantages and the needs and opportunities that exist in its assessment area(s)," according to the regulators. With an awareness of this “performance context,” you can create an appropriate strategy. In general, your performance context should include the following:

  • Your institution's profile, including but not limited to:
    • Asset size and financial information. 
    • Year established.
    • Structure.
    • Business strategy.
    • Product offerings.
    • Historical data, including past CRA ratings.
  • Community profile. This may include:
    • Community needs.
    • Local market conditions.
    • Employment statistics and small business conditions.
  • Assessment Area(s). This may include:
    • Geographic data.
    • Demographic data.
    • Economic conditions.
  • Community Development lending, investment, and service opportunities. 
  • Any CRA-related complaints received either by the institution or the regulators.

That said, every regulatory agency that conducts CRA exams (the OCC, FDIC, and Federal Reserve Board) has a slightly different approach to understanding your performance context.

5. Set Strategic CRA Goals

cra-fair-lending-risk-managementWith knowledge of the bank’s business strategy, assessment area, community needs and CRA strategy, it is much easier to set appropriate goals.

As you define those goals, and build your strategy to achieve them, compare and contrast products and services provided by your institution against the area(s) served. Identify gaps in your lending and service by borrower income, geography or product. Catalog opportunities to lend, invest and/or provide services. Also, make sure to integrate the CRA strategy into the bank’s overall fair lending compliance strategy and business plan.

As you finalize your CRA goals, make sure to get approval from the Board and Senior Management so that everyone is on the same page. Once you've gotten that approval, think about including those CRA goals into compliance training, to help ensure a top-down and bottom-up approach to CRA compliance.

Keep in mind that it's not required for compliance to set goals, and examiners do not measure performance against goals. However, it will help you execute your CRA strategy.

6. Monitor CRA Performance

It can be up to five years between CRA Exams. How do you know if you are on track? One way is to compare your goals against the results and identify reasons for variances.

Monitoring CRA performance can help identify weaknesses, allow the institution time to make adjustments where needed, help provide accurate reporting to the institution’s management and Board, and make it possible to respond to examiners' questions. Only by monitoring performance can you see when your performance needs improvement, take the time necessary to figure out the cause, and address the issue before your next examination. Report, discuss and debate the results with the Board and Senior Management.

7. Consider Appointing a CRA Officer

The most important step in strategy execution may be the assignment of roles and responsibilities. Failure to define ownership can create tension, miscommunication and inefficiency within the organization. While CRA compliance is the responsibility of the entire financial institution, consistent execution is dependent on clarity of ownership.

In most organizations, the Community Reinvestment Act Officer is responsible for coordinating, developing, implementing and administering the CRA compliance program. This position is responsible for developing and implementing programs to ensure the Bank meets the needs of the community and attains CRA compliance goals.

8. CRA Exam Preparation

Be prepared to tell your story. There is no one better positioned to craft your story and explain your performance to examiners and the community-at-large. 

  • Gather Performance Context Data
  • Review Your Strategy and Goals
  • Document Processes
  • Review, Update and Organize Your Public File
  • Test the Integrity of the Data (Pull Samples and Compare to Source Data)
  • Analyze Your Data

There is no silver bullet when it comes to CRA compliance. However, a CRA strategy that aligns products and services to the community's needs will help ensure success. Your CRA strategy should help you better serve your community, improve compliance exam ratings, build internal support for CRA compliance, and ultimately help your financial institution grow.

As the Federal Reserve Board states, “developing a CRA strategy, setting goals, and monitoring results can make CRA performance more predictable and more meaningful.”

Ncontracts can help you think through your approach and help you to invest your time in the right resources. Assessment area reviews, analysis of market lending data, review of lending performance to benchmarks, branch location analysis, examining lending test ratios (e.g., in/out ratios), and reviewing mapped data to help you see your market performance are a few ways we can help you succeed with CRA.


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

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