How to Be Prepared for Increased Regulatory Focus on CRA Compliance
Regulators are signaling a future increase in CRA compliance scrutiny. Is your institution ready for deeper exams and heightened analysis? Learn how you can be prepared for CRA compliance evaluations in this blog post.
Just last week, the leader of the Office of the Comptroller of the Currency, Thomas J. Curry, gave a speech about the OCC's plans to refocus on Community Reinvestment Act (CRA) compliance in the future.
Last year, the OCC established a new department, Compliance and Community Affairs (CCA), dedicated entirely to managing policy, supervision, and community outreach for consumer, Fair Lending, BSA/AML, and CRA compliance. The CCA is led by Grovetta Gardineer.
"Already, this new business unit is making the CRA examination process more efficient and timely. A review of examination procedures is under way to identify policy and process improvements, and we are developing new examination tools to support more rigorous and transparent evaluations of CRA compliance."
- Thomas Curry, OCC
The establishment of the CCA department sends a clear signal: the regulators are (still) prioritizing CRA and Fair Lending compliance.
What does this mean for you and your institution? Here are a few things to know:
- The OCC is following the lead of other regulators and adopting a risk-based approach.
- CRA exams will likely get more rigorous and robust.
If CRA exams (from the OCC, at least) will be adopting a risk-based approach, and their CRA exams will likely be more robust and comprehensive, what does that mean for you?
A risk-based approach means that higher risk institutions may be prioritized for exams, and may be more likely to have more intensive exams when they do occur.
This means that knowing your CRA compliance risk is even more important.
You should have an understanding of your current CRA risk, which most institutions gain by geocoding and mapping their loan and deposit data and analyzing for performance.
We will go into that in more detail later, but for now, it's worth reviewing a few of the general factors that can increase your risk. The following factors will influence your risk profile:
- Diversity in your market area. Every financial institution has some diversity, because every institution has women in their market area. However, institutions that have high socioeconomic or demographic diversity tend to have more inherent risk. If you have Low- to Moderate-Income (LMI) census tracts in your market area, you have risk.
- High loan and depost volumes. Just like with Fair Lending, higher loan volumes can lead to greater risk exposure.
- History of CRA compliance issues. If a CRA issue has been identified in the past, the regulators may pay more attention to your institution in the future.
- Fair Lending issues. As we know, every CRA exam includes at least a cursory Fair Lending review. The results of this review will end up in the public Performance Evaluation, and poor Fair Lending performance can lead to a CRA downgrade.
The best way to know your risk is to analyze your data for CRA compliance.
The CRA is designed to ensure that financial institutions are meeting the credit needs of their community, and analyzing your data is the simplest way to help determine whether you are succeeding at that goal. That's why it's a key tool in the regulators' kit.
When analyzing your data, you should assess (at a minimum) your facility locations, in-out ratio, loan-to-deposit ratio, and service to LMI tracts in your Assessment Area(s). It's also a good idea to review the geocoded maps of your loans and deposits in order to clearly identify any potential Redlining risk.
(FYI this is exactly what we help with. If you'd like to get a free sample reports from the CRA Analytics tool, please click here!)
It's hard to say for certain what tools the OCC is developing to improve their CRA exam process, or how they plan on making those exams more rigorous. Based on past experiences, it's relatively safe to assume that it will involve deeper and more sophisticated analysis of your performance.
Please note: If you have a merger or acquisition in your future, the importance of CRA compliance cannot be overestimated. CRA and Fair Lending compliance issues can slow or halt M&A-related growth plans; evaluating CRA and Fair Lending performance is one key aspect of due diligence. TRUPOINT offers CRA Impact Analysis, which will evaluate the CRA impact of mergers, acquisitions, and other proposed changes to your business and branch/ATM network(s). Click here to learn more!
Tests are a big part of CRA performance evaluations, and most of those tests are based on some form of data analysis. If you don't know what the regulators will see when they analyze your data, and you don't know whether you have any statistically signficant disparities, you and your financial institution may be at a disadvantage.
Without that knowledge, it's hard to anticipate and prepare for their questions, take proactive steps to reduce your risk or even justify the disparity itself.
TRUPOINT Viewpoint: While data analysis isn't the only element of a strong CRA compliance program, it is an important one.
If data analysis seems a little overwhelming, we understand. The process of geocoding and mapping and reporting and analyzing can be a headache, while determining what all that data is actually telling you is another matter entirely.
This is where TRUPOINT can help. CRA Analytics builds interactive maps, charts, and tables using your data that will highlight disparities that signify risk and may attract the regulators' attention.
Simply upload your data and within minutes, you can conduct CRA analysis and generate all the reports you will need to get a handle on CRA. You'll then have the chance to review this data with a TRUPOINT compliance analyst who specializes in CRA compliance.
Just click the button below to get samples and learn more about the free guided report review in this free CRA Report Preview Kit!