Modernizing The Community Reinvestment Act

November 29, 2018
Ensuring banks receive full credit for their LMI community work means allowing for context, freedom, and customization in contemporary CRA approach.

For the past year, Asurity Technologies has worked hand-in-hand with fair lending and CRA experts to best understand how to accurately record and report CRA activities in our RiskExec software. Context, freedom, and customization, it turns out, are key to building a new approach to CRA evaluations.

1. Expanding CRA Qualifying Activities

The ANPR points to the OCC’s consideration of a more metrics-based approach that would include balance sheet items like assets, deposits, capital, and other factors in CRA evaluations. However, measuring the impact of a bank’s contribution to a community with a dollar value may not do justice to the complex, long-term impact financial institutions can have on local communities through other service activities.

“A metrics-based approach may need to consider the relative costs of similar activities in different markets.” - Lynn Woosley, CRCM, Engagement Director, Treliant, LLC

“A metrics-based approach may need to consider the relative costs of similar activities in different markets,” says Lynn Woosley, CRCM, Engagement Director of Treliant, LLC. “If not, activities in rural and lower-cost markets will receive less CRA consideration than the same activities in higher cost markets. In many cases, such rural markets are in greatest need of community development.”

Because banks are already required to report the dollar values of community lending activities, they are incentivized to perform heavily-weighted activities that might distract from equally impactful but lesser-weighted activities. For smaller banks, a lack of capacity puts them at a significant disadvantage. Any proposed metrics-based approach should be broadly tested using data from institutions of differing sizes and geographic footprints prior to implementation. Appropriate testing will give real-world examples with information regarding how proposed changes will affect banks.

To increase the scope of evaluations, and level the playing field between large and small banks, the OCC should consider how a bank’s activities impact a community over time. In a recent Sratmor study of bank lenders, 100% of all respondents said that activities including attending community events, outreach programs, and cultivating relationships with realtors in LMI communities were typical of a CRA/LMI LO job description. In addition to crediting direct contributions to organizations or banking skills-based volunteerism, banks should be encouraged to fully engage within communities. While qualified loans, grants, and donations to organizations like Habitat for Humanity and United Way are important, they also need boots on the ground to help build homes, distribute items, and provide real-time support and service.

By fully crediting activities such as these banks are encouraged to fulfill the spirit of CRA and have a lasting effect on the community.

2. Redefining Assessment Areas

Current CRA assessment areas are mapped primarily based on the physical locations of banks. Yet, according to research published by the New York Fed, from 2009 to 2014, nearly 5,000 banks closed across the U.S. Between June 2016 and June 2017, 1,700 branches closed according to the Wall Street Journal - the fastest decline in history. With more than 62% of Americans primarily interfacing with banks online or on mobile, what is the best approach to defining a bank’s reasonably expected assessment area?

When regions are hit by natural disasters, regulators consider bank relief efforts as CRA activity, even if the region in need is not located within the bank’s assessment area. Communities recovering from underdevelopment, lacking economic opportunity, or located in more rural areas can benefit from a similar approach.

Providing online services to remote individuals and communities located in “CRA deserts” allows banks to positively impact rural populations regardless of their proximity to a physical branch. A Federal Reserve study found that 33% of rural residents used online banking services in 2015 and usage has since continued to increase.

A Federal Reserve study found that 33% of rural residents use online banking services.

By offering affordable products to rural, underserved, or recovering areas to incentivize CRA investment, regardless of geographic relevance to the lender, banks can support recovery and growth. CRA/LMI lending provides opportunities for borrowers and is a profitable product for the financial institution, according to 61% of respondents from the same Stratmor study. A new basis for defining assessment areas is necessary to encourage this type of activity.

3. Clarity, Simplicity, and Flexibility

The needs of an individual community may be hard to meet with a standard set of federal guidelines. When it comes to fulfilling the specific needs of a community, understanding the context of that need and a bank’s response to it, should be a factor in future CRA evaluations.

A memorandum released by the U.S. Department of the Treasury notes that “measurements or metrics utilized by the various examination tests should allow for flexibility based on the performance context of a bank.” Considering a financial institution’s ability to predict and account for the needs of its communities, “allows banks to highlight local factors and challenges.” Similarly, by retaining a strategic plan, limited purpose bank and wholesale bank CRA evaluation procedures are consistent with the Treasury’s statement on flexibility and performance context.

The Mortgage Bankers Association released a letter supporting a more flexible approach. “These components --compliance certainty and flexibility in the delivery of services--should be developed in a manner that encourages, and in fact facilitates, innovation by banks," the MBA said. The American Bankers Association also encouraged flexibility, especially when it comes to the diverse needs of America’s communities, adding “that CRA needs and opportunities in small towns and rural areas can be vastly different from those in urban centers.”

Providing greater clarity and consistency, and reducing subjectivity, according to the Consumer Bankers Association, might help motivate financial institutions to make greater investments into CRA. “If getting an Outstanding rating is too far out-of-reach,” the statement further reads, “banks might actually reduce their investment in CRA. Increased clarity in the rules and guidance, coupled with expectations that are more measurable, provide an environment where more banks will seek to reach for Outstanding ratings.”

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Updating CRA for Today’s Banks and Communities

Modernizing CRA is about expanding qualifying activities and assessment area definitions to make sure banks receive full credit for the work they do in LMI communities. Measures that take into account time and the specific needs of a community can help tell the rest of the story. The ultimate measure of effectiveness should be whether the activities respond to and fill the community’s needs.

What Can You Do Next?

  1. Review key themes from the aggregated responses to the OCC’s ANPR via National Mortgage News at this URL:
  2. Think holistically about your business, including the needs of the communities you serve, across your customers, financial services, and online access.
  3. Document and have confidence in your plan.

Learn more about how to submit for CRA and HMDA at

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