Community Reinvestment Act “CRA” An Overview John Meeks FDIC Community Affairs

1936 Home Owners Loan Corp map of Philadelphia

Summary of CRA Legislation passed in 1977 Requires supervisory agencies to: Encourage financial institutions to help meet credit needs of local communities Assess the institutions’ records of meeting those needs Consider CRA records when evaluating applications for acquisitions, mergers, branches, relocations, and deposit insurance Regulatory agencies are attempting to achieve consistency in the examination procedures and ratings We are currently conducting a interagency exchange project designed to reduce the inconsistencies in CRA support and ratings among the FRB, FDIC, OCC, and OTS

CRA Ratings Public Disclosure Satisfactory Needs to Improve Outstanding Satisfactory Needs to Improve Substantial Noncompliance Public Disclosure By far, most banks are rated Satisfactory. Approximately 10 percent of banks are outstanding. Few Needs to Improve. Small bank procedures ensure satisfactory rating because there is no documentation requirements. Bank may request examiners to review services and investments for outstanding rating - Most small banks do not have sufficient activity to warrant an upgrade

CRA Examination Procedures Small Bank Test Total assets less than $250 million Large Bank Test Total assets $250 million or more Holding company $1 billion or more Community Development Test Wholesale or Limited Purpose Only Strategic Plan All institutions Most banks will be evaluated under the small bank or large bank CRA procedures. Small bank - Total assets under $250 million. Large bank - Total assets exceeding $250 million for the previous 2 years or belong to a holding company with total assets of $1 billion or more Small bank - Has option to be evaluated under large bank procedures, but must collect and report small business and small farm loan data Limited Purpose Institution - Reserved for banks offering narrow product line (such as credit cards or automobile loans) to regional or broader market. “Niche” banks generally DO NOT qualify as limited purpose Wholesale institution - Not in the business of extending home mortgages, small business, small farm, or consumer loans to retail customers. May engage in incidental retail lending, but cannot hold itself out to the public as providing such loans. Revenues from extending such loans must be insignificant to the total operations. Strategic plan - Bank has opportunity to tailor CRA objectives to the needs of its community and to its own capacities, business strategies, and expertise. A strategic plan must receive approval by the FDIC at least 3 months before its implementation. Strategic plans are used infrequently. Thus far, only 5 have been submitted and approved - None in North Carolina

As of September 1, 2005 – Intermediate Small Bank (ISB) Total assets originally $250 million to less than $1 billion For 2009: $277 million to $1.109 billion Holding company size not a factor

Small Bank Performance Criteria Loan to Deposit Ratio Loans Inside Assessment Area Geographic Distribution Income Distribution Response to Complaints There is no established benchmark for performance for loan-to-deposit ratio or percentage of lending inside the assessment area Geographic distribution refers to the dispersion of loans inside the assessment area by census tract or block numbering area, i.e., low, moderate, middle, or upper income areas. For consumer loans, geography is defined as the residence of the borrower. For home mortgages, geography is the address of the property. For commercial loans, geography is the main office of the business. For consumer and home mortgage loans, income distribution based on income recorded in bank’s loan files that is relied upon to make the credit decision. For commercial loans, income is the gross annual revenues of the business entity. Complaints must be related to a bank’s CRA performance - does not include complaints about other matters

Intermediate Small Bank Performance Criteria Small bank factors plus A single rating factor that includes the level of qualified Community Development loans, investments and services.

Large Bank Performance Criteria Lending Test Investment Test Service Test Lending Test receives the most weight in the over CRA rating. A bank cannot get a satisfactory CRA rating unless the lending test is at least low satisfactory Large banks often have difficulty in achieving strong ratings for Investments and services, particularly investments. The regulation only permits CRA consideration for activities that target low- and moderate-income families and areas. Affordable housing for low and moderate income individuals Activities that promote economic development by financing small businesses and small farms with gross annual revenues of $1 million or less Community services targeted to low and moderate income individuals Activities that revitalize or stabilize low and moderate income geographies

Revised CRA Regulation When? Effective September 1, 2005 Why? To reduce regulatory burden

Major Changes of Regulation Adds new element to definition of Community Development Original elements: Affordable Housing Community Service Small business/farm financing Activities that revitalize or stabilize low- or moderate- income geographies.

Major Changes of Regulation New elements added to “Activities that revitalize or stabilize” Designated Disaster Areas Distressed or underserved non-metropolitan middle-income geographies.

Major Changes to Regulation Disaster Areas – Designation as Disaster Area by appropriate Federal or State agency, such as FEMA. The disaster designation for CRA ends when area no longer a disaster area. Significant weight given to revitalizing activities that benefit low- and moderate income individuals

Major Changes to Regulation Distressed Unemployment >1.5X national average or Poverty rate of 20% or more Population loss of 10% or more between last two censuses or Population loss of 5% or more over 5 year period preceding most recent census

Major Changes to Regulation Underserved Low population size, density and dispersion indicate: Areas population is sufficiently small, thin and distant from population center that the tract is likely having difficulty financing fixed costs of meeting community needs.

Major Changes to Regulation Eligible underserved tracts will be designated by the Agencies based on “urban influence codes” maintained by the Economic Research Service Eligible underserved tracts will be published on FFIEC website

Major Changes to Regulation ISB’s need not : collect and report CRA loans Collect and report information on location of mortgage loans outside an MSA in which bank has home or branch office or any other MSA (as it is now for small banks under HMDA)

Major Changes to Regulation Agencies will continue to evaluate CRA and non-metropolitan mortgage loans if it constitutes a major product line of the bank

Major Changes to Regulation Effects of Change on ISB’s ISB’s will be able to apply resources strategically to the types of Community Development activities (loans, investments, services) that are most responsive to the community need

Major Changes to Regulation The “innovation” and “complexity” of Community Development activities are not a weighting factor as with large banks

Major Changes to Regulation The regulation does not imply that a bank may ignore one or more category or arbitrarily decrease previous activity level, but there is no required threshold for allocation between the CD activities. A bank may focus on meeting the CD needs without undue regulatory consequences from the form of response.

Major Changes to Regulation Discrimination or illegal credit practices: The old regulation stated that evidence of discriminatory or other illegal credit practices effects a CRA performance rating. The new regulation provides more detail.

Major Changes to Regulation Discrimination or illegal credit practices: The discriminatory or illegal credit practice need not be in the Assessment Area to be an adverse factor in CRA rating. For affiliate loans considered in the bank’s lending performance, loans in the Assessment Area can adversely affect the rating.

Major Changes to Regulation Examples provided of practices that can be considered in CRA rating Discrimination against applicants on a prohibited basis in violation of ECOA or FHA Illegal referral practices in violation of Section 8 of RESPA Violations of Truth in Lending relating to the customers right of rescission. Violations of Home Ownership and Protection Act Evidence of unfair and deceptive credit practices under Section 5 of the Federal Trade Commission Act

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