understanding the cra and how it may benefit your · pdf filecra and how it may benefit your...

UNDERSTANDING THE

CRA AND HOW IT MAY

BENEFIT YOUR

ORGANIZATION

Janet Hamer, FRB Atlanta

Community & Economic Development

Community Investing: Understanding CRA

and Community Development

Florida Housing Coalition Annual Conference

September 10, 2013

WHAT IS CRA?

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CRA Statute --12 USC

Enacted to prevent redlining and to encourage financial

institutions to help meet the credit needs of all

segments of their communities, including low- and

moderate-income (LMI) neighborhoods

– Including low- and moderate-income individuals and

tracts.

– Including businesses/farms of different sizes and

borrowers of different income levels.

– Consistent with safe and sound operations.

FRB Atlanta Community and Economic

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 implementing regulations issued by the

Federal supervisory agencies.

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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) – Federal Deposit Insurance Corporation (FDIC) – Office of the Comptroller of the Currency (OCC)

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http://www.federalreserve.gov/

http://www.fdic.gov/

http://www.occ.treas.gov/

WHAT IS CRA?

• Banks are evaluated based on asset size using specific criteria for either:

– Small Banks (under $296 million)*

– Intermediate Small Banks (ISB)

($296 million to $1.186 billion)*

– Large Banks (assets over $1.186 billion)

– Wholesale & limited purpose banks

– Banks with approved CRA strategic plans

*These thresholds are updated annually.

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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


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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

Designated disaster areas , as designated by FEMA

– Large bank threshold raised to $1 billion New category of bank established - intermediate small bank

– Relationship of fair lending violations to CRA rating clarified

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http://www.ffiec.gov/cra/pdf/2010distressedorunderservedtracts.pdf

http://www.fema.gov/news/disasters.fema

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’s affordable home mortgage

loans and small business and small farm loans may be

considered as CD loans

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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”

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KEY DEFINITIONS

PERFORMANCE CONTEXT

• A bank’s performance is judged in the context of information

about the bank and its Assessment Area, including

– 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

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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 MFI

– Moderate-income: 50% - < 80% of MFI

– Middle-income: 80% - < 120% of MFI

– Upper-income: 120% or more of MFI

• 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

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KEY DEFINITIONS

SMALL BUSINESS/FARM

• Small business and small farm – Businesses or farms with gross annual revenues of $1 million or less,

or that meet the size requirements of the SBA Small Business Development Companies (SBDC) or Small Business Investment Companies (SBIC)

• Small business loan

– Generally, a loan with an original amount of $1 million or less

– Recorded on the bank’s financial records as a “commercial and

industrial loan “ or “loan secured by nonfarm nonresidential property”

• Small farm loan – Generally, a loan of $500,000 or less

– Recorded on the bank’s financial records as “loans secured by farmland” or “loans to finance agricultural production and other loans to farmers”

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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

• Activities that support “eligible uses” in targeted areas under the Neighborhood Stabilization Program (NSP)

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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.

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TYPES OF CRA EXAMINATIONS

• Exam Types

– Small Bank

– Intermediate Small Bank (ISB)

– Large Bank

– Wholesale/Limited Purpose

– Strategic Plan

http://www.ffiec.gov/cra/examinations.htm

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http://www.ffiec.gov/cra/examinations.htm

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EXAMINATION PROCESS

6 mo 5 mo 3 mo 1 mo CRA Exam After Examiners Leave

CRA

Strategy

Exam

Planning

Data

Analysis

PE Sent to

Bank and

Published

Data

Verification

Agency Publish

Next Quarter

CRA Exam

Request

Letter

To Bank

Write CRA

PE/Bank

Reviews Draft


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SMALL BANK TEST

• Banks with assets under $296 million

• Subject only to a lending test

• Exam 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

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ISB PERFORMANCE CONSIDERATIONS

• Banks with assets between $296 million and

$1.186 billion are “intermediate small banks” or

referred to as “ISBs.”

– Examination combines small bank test and Community

Development.

– Community development (CD) test

• Community development activities must have

community development as their primary purpose.

• CD loans must benefit a banks’s assessment area or a

larger area that includes the bank’s assessment area

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ISB PERFORMANCE CONSIDERATIONS

– Community development (CD) test (continued)

• A CD loan may not have been reported by the bank or an affiliate

for consideration in the bank’s assessment area as a home

mortgage, small business, small farm, or consumer loan, unless it

is a multifamily dwellng.

• Examiner will assess the following:

– Number and amount of CD loans,

– Extent of community development services and/or investment

– Responsiveness to CD lending, investment and service needs.

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LARGE BANK PERFORMANCE STANDARDS

LENDING TEST

• Large Bank exam criteria:

– Lending Test

– Investment Test

– Service Test

• Lending Test

– Lending Activity

• Geographic distribution

• Borrower characteristics

• Community development lending

• Innovative/flexible lending practices

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INVESTMENT TEST

• Investment test – Qualified Investments are lawful investments, deposits,

membership shares, or grants that have community development as their primary purpose

– Must meet one of five 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.

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SERVICE TEST

• Service Test – Retail services and branch distribution

– Evaluation of services

• 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 finance of affordable

housing construction and rehabilitation or development of

affordable housing.

– Developing and teaching financial education curricula for LMI

individuals.

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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

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COMMON CRA CHALLENGES FOR BANKS

• Documentation of eligibility and impact.

• Capturing income data related to activities.

• Ensuring activities fulfill intended outcome.

• Training and technical expertise in development programs.

• Adequate documentation for underwriting.

• Outreach to underserved and unbanked markets and

populations.

• Identification of banking and development

needs.

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WHAT BANKS LOOK FOR IN PARTNERS

• Capacity

• Proven Performance

• Sustainability

• Assessment and Responsiveness

• Innovation

• Target Market Penetration

• Recordkeeping and Accountability

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BANK DECISION FACTORS

• Assessment Area

• Risk

• Cost

• Response to assessed need

• Business/skill alignment

• Leverage

• Value to overall CRA strategy/portfolio

• Business development potential

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PUBLIC FILE FOR ALL INSTITUTIONS

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• Full file at the main office and at one office in each state

• Limited file at branch locations

• All written comments for the current year and two previous

years

• Most recent public evaluation

• List of all branches - address and geographies

• List of services

• Map of Assessment Areas

• Last two years HMDA Disclosure Statement


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RESOURCES

• FFIEC Community Reinvestment Act Page

http://www.ffiec.gov/cra/

• FFIEC Guide to CRA Data Collection and Reporting

http://www.ffiec.gov/cra/guide.htm

• FFIEC Guide to HMDA Reporting

http://www.ffiec.gov/hmda/guide.htm

• Federal Reserve Bank CRA Guide

http://www.dallasfed.org/ca/epersp/2007/4_2.cfm

• FFIEC CRA Q & As 2010

http://www.ffiec.gov/cra/pdf/2010-4903.pdf

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http://www.ffiec.gov/cra/

http://www.ffiec.gov/cra/guide.htm

http://www.ffiec.gov/hmda/guide.htm

http://www.dallasfed.org/ca/epersp/2007/4_2.cfm






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Questions?

CONTACT INFORMATION


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Janet Hamer

FRB Atlanta,

Community & Economic Development

[email protected] (southern FL)

[email protected] (northern FL)

mailto:[email protected]

mailto:[email protected]

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