FEDERAL RESERVE BANK OF SAN FRANCISCO COMMUNITY DEVELOPMENT JUNE 8, 2015 WEBINAR HOSTED BY PACIFIC COAST AFFORDABLE HOUSING NETWORK Understanding the CRA and How it May Benefit Your Organization Craig Nolte, Regional Manager, Community Development Federal Reserve Bank of San Francisco

Today’s Agenda FRB San Francisco Community Development 2  Purpose & Goals for Webinar  Introduction to CRA  Working with Financial Institutions – CRA Officers  CRA Resources Overview  Questions

This Webinar FRB San Francisco Community Development 3  Focus will be on CRA for housing organizations  Let’s make this conversational – ask questions  Feel free to contact me later

What Is CRA? 4 CRA Statute --12 USC 2901 (Reg. 12 CFR 25) Enacted to prevent redlining – geographic law Encourages financial institutions to help meet the credit needs of all segments of their communities, including low- and moderate-income (LMI) neighborhoods, consistent with safe and sound operations of the institution. FRB San Francisco Community Development

What is CRA? The CRA requires regulators of federal financial institutions to assess the record of each bank and thrift in helping to fulfill their obligations to the community and to consider that record in evaluating applications for charters or for the approval of bank mergers, acquisitions, and branch openings Enforced under Regulation BBRegulation BB 5 FRB San Francisco Community Development

What is CRA? CRA applies to federally insured depository institutions, national banks, thrifts, and state-chartered commercial and savings banks The federal financial institution regulators are:  Board of Governors of the Federal Reserve System (FRB) Board of Governors of the Federal Reserve System  Federal Deposit Insurance Corporation (FDIC) Federal Deposit Insurance Corporation  Office of the Comptroller of the Currency (OCC) ; and Office of the Comptroller of the Currency 6 FRB San Francisco Community Development

What is CRA? Banks are evaluated based on asset size:  Small Banks (under $300 million)*  Intermediate Small Banks (ISB) ($300 million to $1.202 billion)*  Large Banks (assets over $1.202 billion)  Wholesale & limited purpose banks  Banks with approved CRA strategic plans * These thresholds are updated annually. 7 FRB San Francisco Community Development

8 Why are CRA Ratings Important? Regulators must take into account the bank’s record of helping to meet the community credit needs when considering any corporate or licensing action.  Examples include:  Branching, mergers, acquisitions, consolidations FRB San Francisco Community Development

CRA History CRA was amended in 2005 to focus on impact and:  Community development definition expanded – activities that revitalize or stabilize - applies to ALL BANKS  Distressed or Underserved non metropolitan middle-income geographies Distressed  Designated disaster areas, as designated by FEMAdisaster areas  Large bank threshold raised to $1 billion  New category of bank established - intermediate small bank  Relationship of fair lending violations to CRA rating clarified 9 FRB San Francisco Community Development

CRA History Effective January 6, 2009:  Participation in foreclosure prevention programs  Investments in nationwide community development funds  Investments in minority- or women-owned financial institutions and low-income credit unions  Intermediate Small Bank’ affordable home mortgage loans and small business and small farm loans may be considered as CD loans 10 FRB San Francisco Community Development

Key Definitions Assessment Area Each bank is evaluated on how well it serves its “assessment area” Assessment area:  Geographies in which bank has its main office, branches, and deposit taking ATMs  Surrounding areas where bank has originated or purchased a substantial portion of its loans  Must consist of “whole geographies” 11 FRB San Francisco Community Development

Key Definitions Performance Context A bank’s performance is judged in the context of information about the bank and its Assessment Area, including o Demographic data on median income levels, distribution of household income, nature of housing stock, housing costs and other relevant data  Lending, investment and service opportunities  The bank’s product offerings and business strategy, capacity and constraints, past performance and the performance of similarly situated lenders  The bank’s public file and any written comments about the bank’s CRA performance  Any other relevant information 12 FRB San Francisco Community Development

Key Definitions LMI Low- and Moderate-Income (LMI) is based on area median income (AMI) of a geography, based on census data  Low-income: < 50% of median income  Moderate-income: 50% - < 80% of median income  Middle-income: 80% - < 120% of the median income  Upper-income: 120% or more of the median income AMI - annual income figure for which there are as many families with incomes below that level as there are above that level  For metro areas use the MSA’s Median Family Income  For rural areas use the Statewide Non-metropolitan Median Family Income 13 FRB San Francisco Community Development

Key Definitions Small Business/Farm Small business loan – to enterprise with gross annual revenues of $1 million or less Small business loan - loan with an original amount of $1 million or less Small farm loan – to farm with gross annual revenues of $1 million or less Small farm loan - loan included in “loans to small farms” as defined in the instructions for preparation of the Call Report with an original amount of $500 thousand or less 14 FRB San Francisco Community Development

Key Definitions Community Development Affordable Housing for LMI individuals; Community services targeted to LMI individuals; Activities that promote economic development by financing small business/farms. Area Revitalization and Stabilization  Low- or moderate-income geographies;  Designated disaster areas; or  Distressed non-metropolitan middle-income geographies  Underserved non-metropolitan middle-income geographies 15 FRB San Francisco Community Development

Key Definitions Qualified Investment Lawful investment, deposit, membership share, or grant that has community development as its primary purpose Examples:  Financial intermediaries that lend in LMI areas or to LMI individuals in order to promote community development  Organizations that promote economic development by financing small business  Facilities that promote community development in LMI areas for LMI individuals  Projects eligible for low-income housing tax credits. 16 FRB San Francisco Community Development

Types of CRA Examinations Exam Types  Large Bank  Intermediate Small Bank (ISB)  Small Bank 17 FRB San Francisco Community Development

Small Bank Test Banks with assets under $300 million (small banks) Examination Criteria: 1. Loan to deposit ratio 2. Lending inside and outside of the assessment area 3. Distribution of loans by geography 4. Distribution of loans by borrower income and revenue size 5. Responses to CRA related complaints 18 FRB San Francisco Community Development

ISB and Large Bank Test Banks with assets between $300 million and $1.202 billion are “intermediate small banks” or referred to as “ISBs.”  Examination combines small bank test and Community Development. Large Bank exam criteria:  Lending Test  Investment Test  Service Test 19 FRB San Francisco Community Development

Large Bank Performance Standards Lending Test  Lending Activity  Number and dollar amount of loans  Geographic distribution  Borrower characteristics  Community development lending  Innovative/flexible lending practices  Community development (CD) test  Community development loans must have community development as their primary purpose and benefit a banks’s assessment area or a larger area that includes the bank’s assessment area. 20 FRB San Francisco Community Development

Large Bank Performance Standards Service test  Has as its primary purpose community development.  Is related to the provision of financial services to LMI people, including through branches and other facilities in LMI areas. Examples:  Providing technical assistance on financial matters to nonprofit, tribal or government organizations serving LMI housing or economic revitalization and development needs.  Serving on a board of organizations facilitating affordable housing construction and rehabilitation or development of affordable housing.  Developing and teaching financial education curricula for LMI individuals. 21 FRB San Francisco Community Development

Large Bank Performance Standards Investment test  Qualified Investments are lawful investments, deposits, membership shares, or grants that have community development as their primary purpose  Must meet one of four components of community development definition  Investments must benefit the financial institution’s assessment area or a broader statewide or regional area that includes the assessment area  Examiners will assess the following:  Dollar amount,  Innovativeness or complexity,  Responsiveness,  Whether they routinely provided by private investors. 22 FRB San Francisco Community Development

CRA Ratings A bank’s record of meeting community needs is considered during an application review for a merger, acquisition, or branching  Outstanding  Satisfactory  Needs to Improve  Substantial Noncompliance 23 FRB San Francisco Community Development

24 CRA Officer’s Responsibilities Review Exam Request Letter Know their bank's AA(s) Check CRA public files to make sure information is up to date Perform a self assessment (not required) Document any important performance context issues – ensuring that the bank understands its market FRB San Francisco Community Development

25 More CRA Officer Steps Document all items to be considered for community development credit Know the bank’s primary products Prepare a communication plan–  either one bank liaison, or  a list of bank contacts FRB San Francisco Community Development

Working with CRA Officers What banks are looking for in partners: Capacity Proven Performance Sustainability Assessment and Responsiveness Innovation Target Market Penetration Recordkeeping and Accountability 26 FRB San Francisco Community Development

Working with CRA Officers FRB San Francisco Community Development 27 Keeping the CRA Officer as a Good Partner 1. Provide reports on the impact of the bank’s assistance (#individuals served through housing development and other services, positive impact on community, 2. Communicate other CRA opportunities – with/outside your organization – local redevelopment plans 3. Organize media opportunities where the bank and your housing organization can share its story 4. Be available to talk to bank examiners about your partnership with the bank 5. Make available demographic and other info about your community

Bank Decision Factors Assessment Area Risk Cost Response to assessed need Business/skill alignment Leverage Value to overall CRA strategy/portfolio Business development potential 28 FRB San Francisco Community Development

29 Steps in Developing a CRA Strategy Step 1. Understand CRA Performance Evaluation Criteria ( i.e. Small Bank vs. ISB vs. Large Bank) Step 2. Assess bank performance context Step 3. Assess community credit needs Step 4. Match bank products, services with community credit needs FRB San Francisco Community Development

30 Assessing Bank Performance Context Identify and build on bank capacity, strengths and business model Track economic and demographic trends in your community its housing stock, costs and income levels Read local revitalization plans, such as HUD consolidated plans and those reports prepared by the Federal Home Loan Banks and others to help determine community credit needs Develop a peer analysis of similarly situated institutions Catalogue CD opportunities to lend, invest or provide services Competitive Analysis  What are other banks doing? FRB San Francisco Community Development

31 Assessing Community Credit Needs Review written reports and publications on credit needs and programs to serve LMI families. Become knowledgeable of reports by entities that specifically research and analyze policies affecting LMI populations and underserved areas. Explore needs of the least-served areas, where opportunities may be greatest and the competition is least. Compare and contrast products and services provided by the bank against the areas served. FRB San Francisco Community Development

32 Matching Bank Products and Services with Community Credit Needs Compare the bank’s lending focus, its economic and performance context, and its products and services to community credit needs. Use government loan programs as resources to enhance lending opportunities and to manage and mitigate lending risk. FRB San Francisco Community Development

33 Developing CRA Goals and Objectives Performance Benchmarks based on the bank’s business model:  Lending  Mortgage Lending  Small Business/Small Farm Lending  Consumer Lending  Community Development Lending  Investments  Qualified Community Development Investments  Services  Qualified Community Development Services FRB San Francisco Community Development

34 CRA Goals and Objectives Understand and communicate the role and function of CD activities  CD products generate revenue.  CD initiatives can expand a bank’s market.  CD initiatives may complement existing product lines.  CD risks can be mitigated and managed Consider costs! FRB San Francisco Community Development

35 CRA Strategy Development Conclusion, a strong CRA Strategy:  Is by plan and not by chance  Is founded on facts and research  May be integrated into a bank’s business plan FRB San Francisco Community Development

Resources FFIEC Community Reinvestment Act Page Federal Reserve Bank CRA Guide FFIEC CRA Q & As 36 FRB San Francisco Community Development

QUESTIONS FRB San Francisco Community Development 37