For CRA Evaluations, It's Performance That Counts

Performance, not process, is the new watchword for judging compliance with the Community Reinvestment Act.

New rules for implementing CRA, issued recently by the Federal Reserve Board and other banking agencies, give much more weight to financial institutions' effectiveness in getting products and services to low- and moderate-income communities, and less to paperwork.

The rules, which are the result of nearly two years of planning, are the first major revisions to CRA since the late 1970s, when the law was enacted. They are designed, according to a press release issued by the Federal Reserve Board, "to emphasize performance rather than process, promote consistency in assessments, and reduce unnecessary compliance burdens while encouraging improved performance."

The rules allow a more judgment-based approach to assessing CRA performance, by eliminating reliance on rigid market-share tests for large banks, and the 60 percent loan-to-deposit ratio for small banks. They also require examiners to use more data in conducting examinations, while taking into account differences among banks and the communities they serve.

Information to be considered in bank examinations would include local demographics, community credit needs, and the bank's products, business strategy, capacity, constraints, and past performance. Examination would also include comparisons with the performance of similar institutions, comments in the bank's public file, and other relevant information. Examinations and requirements would differ depending on the institution's size.

Under the new rules, large banks (those with assets of $250 million or more or that are subsidiaries of a holding company with assets of $250 million or more) are required to collect and report data on business loans of $1 million or less, and farm loans of $500,000 or less. Data collection would include:

· The amount of the loan origination

· The location of the business or farm

· Whether the borrower has annual revenues of $1 million or less

The proposal calls for large banks to be evaluated on the basis of three tests -- a lending test, an investment test, and a service test. Of these, the most important is the lending test, since it would account for 50 percent of the bank's assigned composite rating. A large bank could not achieve an overall rating of satisfactory or better without getting at least a low satisfactory rating on the lending test.

Small Bank Performance Standards

The CRA reform proposal offers a streamlined assessment process for financial institutions with assets of less than $250 million. Its rating would be based on an assessment of:

· The small bank's loan-to-deposit ratio, adjusted for seasonal variation

· The percentage of loans and other lending-related activities in the bank's assessment area

· The geographic distribution of loans

· Responsiveness to CRA complaints

· The bank's record of lending to and engaging in other lending-related activities for borrowers of different income levels and businesses and farms of different sizes.

Wholesale and Limited Purpose Banks

In order for an institution to receive a designation as a wholesale or limited purpose bank, the institution must submit a request in writing to the appropriate regulatory agency at least three months prior to the proposed effective date of the designation. If the regulatory agency approves the designation, it remains in effect until the bank requests revocation of the designation or until one year after the regulatory agency notifies the bank that the regulatory agency has revoked the designation on its own initiative. Financial institutions that are designated as wholesale or limited purpose banks' performance will be assess based on the following criteria:

· The number and amount of community development loans, qualified investments, and community development services

· The use of innovative or complex qualified investments, community development loans, or community development services and the extent to which the investments are not routinely provided by private investors

· The bank's responsiveness to credit and community development needs.

Strategic Plan Options

The regulations offer a financial institution the option of developing a strategic plan for meeting its CRA obligations. The institution must submit the strategic plan to the appropriate agency for approval at least three months prior to the proposed effective date of the plan. The institution can only be assessed under the plan if it has operated under it for at least one year. Once it is finalized, the institution must solicit written public comment for at least 30 days. The plan must specify measurable goals for helping meet the credit needs of each assessment area, particularly the needs of low- and moderate-income geographies and individuals. Large institutions using the strategic plan option must still meet their data reporting requirements. The strategic plan will be assessed based on the following criteria:

· The extent of lending or lending-related activities, including the distribution of loans among different geographies, businesses and farms of different sizes, and individuals of different income levels, the extent of community development lending, and the use of innovative or flexible lending practices to address credit needs

· The amount and innovativeness, complexity, and responsiveness of the bank's qualified investments

· The availability of effectiveness of the bank's system for delivering retail banking services and the extent of innovativeness of the bank's community development services.

The new rules become effective January 1, 1996, for small institutions and those who want to be evaluated under a strategic plan. Large retail financial institutions will be subject to the rules after July 1, 1997, unless they have elected to be evaluated under the new provisions, and have collected the data before then. Date collection requirements are effective January 1, 1996, and data reporting requirements become effective January 1, 1997.

Performance Standards

Lending Test

The lending test evaluates a large retail bank's performance in helping meet the credit needs of its service area by measuring:

· Home mortgage originations and purchases

· Small business and small farm loans outstanding

· Community development loans outstanding

The test would also be based on the geographic distribution of loans, the distribution of loans based on borrower characteristics, the record of community development lending, and the use of innovative or flexible lending practices. Institutions may receive favorable consideration for community development loans that benefit a broader area which includes its assessment area(s).

Investment Test

The investment test evaluates a large bank's record in helping meet the credit needs of its assessment area(s).

The criteria of the test include:

· The dollar amount of qualified investments

· The innovativeness or complexity of qualified investments

· The institution's responsiveness to individual credit and community economic development needs

· The degree to which the qualified investments are not routinely provided by private investors

Service Test

The service test has two components. The first is an assessment of the large bank's retail banking services, and is based on:

· The distribution of the bank's branches among low- , moderate-, middle-, and upper-income neighborhoods and communities

· The bank's record, in the context of the current distribution of its branches, of opening and closing branches, particularly branches in low- and moderate-income areas

· The availability and effectiveness of alternative systems for delivering retail banking services, such as ATMs, loan production offices, or bank-by-mail services, in low- and moderate-income areas and to low- and moderate-income individuals

· The range of services provided in low- , moderate-, middle-, and upper-income areas and the degree to which the services are tailored to meet the needs of those areas.

Other articles in this issue:

Legislation Opens Opportunities for CDFIs

Factors: An Alternative Source of Credit for Distressed Communities

McGowan Named 4D Community Affairs Officer

Cleveland Residential Mortgage Project Moves Ahead

Realtists Perform Vital Role in Housing Market

Fannie Mae Surveys Show Homebuying Dream Remains Strong

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