CRA: Making the Leap from ISB to Large Bank

In the last Supervision News Flash, we began a series on the changing landscape for banks headquartered in the Federal Reserve Bank of Richmond’s district as relates to your bank’s growth and the impact that can have on your Community Reinvestment Act (CRA) program.

Differences in Large Bank Procedures

If your bank is approaching or has recently crossed the threshold to be evaluated under large bank procedures, you’ll be introduced to some new concepts. The first difference is that large bank component test ratings are tied to a point system: the lending test accounts for 50% of the rating, and the investment and service tests each account for 25%. A preliminary composite rating is assigned by adding the component test ratings for the lending, investment and service tests. The ratings and corresponding points can be found on page 12 of A Banker’s Quick Reference Guide to CRA (published by the Dallas Fed).

The next difference you’ll notice pertains to the components that make up the lending test. Under the large bank procedures, the lending test has seven components: 

• Lending activity 
• Assessment area(s) concentration 
• Borrower’s profile 
• Geographic distribution of loans 
• Responsiveness to credit needs of low-income individuals and geographies and very small businesses 
• Community development lending activities 
• Product innovation

The assessment area(s) concentration, borrower’s profile and geographic distribution of loans components are evaluated the same for banks of all sizes. While community development lending activities were evaluated under ISB procedures, for large banks this component is now evaluated under the lending test. This leaves us with three components that are unique to large bank procedures.

Lending Activity

Lending activity considers a bank’s responsiveness to credit needs within its assessment area(s) — considering the number and dollar amount of home mortgage, small business, small farm and consumer loans (if applicable) within its assessment area(s).  

To evaluate your bank’s lending activity, first determine the percentage of total lending in each assessment area as relates to the total lending in all assessment areas. For example, assume your bank has three assessment areas (A, B and C) and the lending within assessment area A is 500 loans totaling $10 million, assessment area B is 200 loans totaling $4 million and assessment area C is 400 loans totaling $6 million. Assessment area A represents 45.5% by number and 50% by dollar, assessment area B represents 18.2% by number and 20% by dollar and assessment area C represents 36.4% by number and 30% by dollar.

After understanding your bank’s lending in each assessment area, factors that can be used for comparative purposes include the proportion of your bank’s total number of branch offices contained within each assessment area and the proportion of the bank’s total deposits located within each assessment area.

While there’s no specific formula or metric used for the lending activity component, when analyzing your bank’s performance, it’s helpful to identify large differences between the proportion of lending in an assessment area and the proportion of branches and deposits.  For example, if an assessment area contains 40% of the bank’s branches and 40% of its deposits, but only 10% of its loans, it’s important to understand why such a large difference exists within the market. This could indicate the need to refocus lending efforts or priorities in that market, or the need to better understand any other contextual factors driving the difference. Conversely, if there are markets with significantly larger proportions of your bank’s lending than branches and/or deposits, such a difference could highlight successful lending practices that could add value in other assessment areas. In either instance, the key detail is to understand the driver of the significant differences.

In addition — to the extent that it’s available — your bank’s Home Mortgage Disclosure Act (HMDA) and CRA market share rankings and proportion of overall lending within an assessment area relative to other reporters is a factor to be considered when assessing lending activity. In general, a higher ranking and/or market share proportion of reported HMDA and/or CRA lending would likely have a more favorable impact on your bank’s lending activity performance.

Responsiveness to Credit Needs of Low-Income Individuals and Geographies and Very Small Businesses

There are three important factors to consider when evaluating responsiveness:

• Quantity: Evaluate the volume and type of your bank’s activities (i.e., retail and community development loans and services and qualified investments) as a first step in evaluating responsiveness to credit and community development needs.
• Quality: An assessment of responsiveness when evaluated qualitatively will account for some activities being more responsive than others. For example, some community development activities require specialized expertise or effort on the part of your bank or provide a benefit to the community that would not otherwise be made available. In some cases, a smaller loan may have more benefit to a community than a larger loan. Activities are more responsive if they are successful in meeting identified credit and community development needs. For large bank CD lending, there should be specific attention to the credit needs of low- and moderate-income individuals or geographies and very small businesses within your bank’s assessment areas.
• Performance Context: Consideration should be given to your bank’s capacity, business strategy, needs of the community and opportunities for community development activities when assessing responsiveness.

To determine your bank’s responsiveness to credit needs, it may be helpful to contact several lenders and/or branch managers in each assessment area to identify unique needs that are specific to that assessment area. Follow up by asking if your bank has made any loans that address those specific needs. If not, you may have uncovered an opportunity to pursue. Ensure that you document these unique needs and how your bank is addressing them to provide to your CRA examiners at your upcoming performance evaluation.

Product Innovation

There is no hard-and-fast way to evaluate your bank’s performance under the product innovation component of the lending test. As a starting point, determine if your bank offers any products that specifically benefit low- and moderate-income borrowers, small businesses and small farms. These can include loan products developed by your bank, or loan products that are offered by the bank through a participation agreement with other organizations. While it isn’t an exhaustive list, examples can include affordable housing loan programs, downpayment assistance programs and/or small business loan programs.

If such products exist, determine the number and dollar amount of each product by assessment area since the previous evaluation. These figures, as well as a description of each product and how it benefits low- and moderate-income borrowers, small businesses and small farms, should be provided to your CRA examiners for consideration at your next CRA performance evaluation.

Once you have that understanding of these components, it may be helpful to monitor and review your bank’s performance for the underlying factors on a routine basis — especially ahead of your next CRA performance evaluation.

At the Richmond Fed, our compliance contacts are available to answer your questions. If you do not know who your compliance contact is, reach out to us at supervisionoutreach@rich.frb.org.