CRA: More Than A Numbers Game

The phrase “regulatory relief” can be a misnomer. In fact, it’s only a relief after everyone learns to operate by the new rules. For example, when revised Community Reinvestment Act rules became effective last September, even banks that purportedly received the most relief were circumspect. The changes in CRAu00e2u20ac”including freedom from copious CRA data collection, release from tests designed for larger banks that didn’t work in community banks, and help with redefining CRA in rural areasu00e2u20ac”were steps in the right direction. However, they also meant banks had to examine their CRA plans from a brand-new perspective, which brought its own challenges.

A look back

To bring some perspective on what has occurred, let’s take a brief look back. CRA was designed to prevent redlining and ensure banks provided credit access to all segments of their communities, including low- and moderate-income areas. Previously, banks under $250 million, considered “small banks” under the act, were mostly tested on whether they were making loans to the entire community. Banks with more than $250 million, considered “large banks,” were tested for lending practices but were also required to earn 25% of their grade in service and 25% in community investments. For years, the so-called large banks complained it was unfair to be held to the same standard as banks with assets in the trillions. Trying to keep up with the data collection requirements on small farms, small businesses, and community loans took enormous time and came with great cost. And the investment testu00e2u20ac”designed to provide more flexibilityu00e2u20ac”ended up making banks scramble for investments merely for compliance sake, even if the investments had little impact on their communities. In time, regulators recognized the validity of the larger banks’ argument and sought to level the playing field.

Fastforward to today. The new CRA rules released nearly 1,800 intermediate-sized banksu00e2u20ac”those with assets from $250 million to $1 billionu00e2u20ac”from CRA’s data-collection requirement as well as investment and service tests. Instead, the new rules added something called the “community development test.” Today, to gain a rating of “satisfactory,” a bank must get a “satisfactory” on both lending and community development tests.

The community development test was designed to tier the system enough that large banks wouldn’t feel overburdened and community groups wouldn’t feel left behind. Unfortunately, that didn’t happen. Banks over $1 billion felt the new CRA rules should have given them a break, too. On the other side, community advocates were appalled that some 90% of banks would have a streamlined test. What’s more, the introduction of the community development test marked a further separation between the OCC, the Fed, the FDIC, and the Office of Thrift Supervision as they attempted to compromise and agree on the same examination standards.

Empowering banks

In making these compromises, regulators wanted to strike an appropriate balance between the need to provide meaningful regulatory relief to small banks and the need to preserve and encourage meaningful community development activities by those banks.

“What we are trying to do with the intermediate small bank test is give them a lot more flexibility in how they allocate resources,” says Sandra Braunstein, director of the division of consumer and community affairs with the Federal Reserve. “Before, they felt like they had to fill up each bucket according to the numbers. If a bank feels it needs to spend more money in the investment bucket and less in the service bucket, it should be able to decide that.”

The new community development test covers four areas of activity: affordable housing, community services, economic development, and revitalization or stabilization activities. The first two tests apply to activities targeted to low- or moderate-income individuals. The third test, economic development, applies to small businesses or farms. And the fourth test, revitalization or stabilization, targets specific areas such as low- or moderate-income census tracts or underserved rural areas. The community development test includes new opportunities to gain credit for helping distressed or underserved rural areas and takes into account assistance to disaster areasu00e2u20ac”a fact which should make coastal areas very happy these days.

Tough choices

Regulators have posted examination procedures and questions and answers about the new regulation. But the reality is, each bank has to figure out how to apply these new guidelines to their own communities. “Banks know their communities best,” says Braunstein. “They make these choices by talking to their local organizations about what they’re doing for the community. CRA shouldn’t be something they’re doing just to make the numbers.”

Yet, in reality, making the numbers is precisely what a lot of banks have trained themselves to do over the years. “CRA is a most difficult and challenging regulation,” says Capital City Bank of Topeka CEO Bob Kobbeman. “Under the old rules, you could almost give the whole bank away and not do well. In order to do it properly and effectively, it’s something we have to handle on a weekly basis.”

Moreover, CRA’s results should be tangible. Says Charlotte Bahin, senior vice president for regulatory affairs for America’s Community Bankers: “There are a lot of bankers who perceived CRA as proving to people that they’re involved in the communityu00e2u20ac”not as the actual work they do in the community.”

This was especially true when it came to the investment test. Smaller banks contended they had to compete with large banks for CRA-qualified investments, and they often found themselves more focused on the test than on the needs of the community.

“For many institutions, they made investments to make investments,” Bahin says. “Often, it was outside their assessment areas. Many banks bought mortgage-backed securities as an investment for CRA purposes, but in some cases, the institution may not have had the people who had the expertise necessary to buy one of those.”

Banks with all or part of their assessment areas in rural communities often fared the worst. The definitions and parameters created for CRA in the past did not take into account the vast differences between metropolitan areas and rural areas, much to the detriment of the latter. And because median income in a given area may be low, the old definitions failed to credit banks with CRA activity when they lent to someone who was poor but whose income showed up as average for the area.

Along with releasing banks from making extraneous investments, the new CRA rules also take a very different approach to rural areas. They use two sets of criteria to determine if an area is distressed or underserved. Criteria indicating that an area is in distress would include poverty, unemployment, and population loss. Criteria indicating an area may have trouble meeting basic community needs includes population size, density, and dispersion. To help avoid confusion, the Federal Financial Institutions Examination Council website publishes a national list of eligible distressed and underserved areas.

“A big problem in rural areas is that they are thinly populated or there is a population exodus and there is no tax base for hospitals, schools, and roads,” says Michael Bylsma, director of the community and consumer law divisions of the OCC. “The new CRA rules will give credit to an institution that lends money or invests in these areas.”

CRA critics

While responding to the outcry from banking groups that reform was necessary to improve CRA’s effectiveness, the actions of lawmakers and regulators have simultaneously incurred the ire of community advocates. Raising the large-bank threshold to $1 billion in assets removed a ready source of information on many banks that community watchdogs such as the National Community Reinvestment Coalition and Association of Community Organizations for Reform Now (ACORN) used to monitor CRA activity on most banks. “I can’t say

I was surprised by the final regulations, but we were certainly disappointed,” says David Berenbaum, executive vice president of the National Community Reinvestment Coalition. “From our perspective, the regulators’… decision was more in the interest of the institutions they regulate than the public trust.” The proof of CRA’s past success, Berenbaum says, is in the more than $4 trillion in CRA loans made since the law’s inception. “Without access to annual data, communities are stripped of their ability to see how these banks are serving their communities. They can’t track growth or other investments.”

Some bank advocates, however, contend that it is the loss of investment money that these agencies most lament. Without the investment test, many banks may avoid what has been a difficult form of CRA compliance.

Community groups weren’t the only ones with complaints. The Consumer Bankers Association felt the size-based bank strata should be abolished. “We actually didn’t think there should be a distinction based on the size of the bank,” says Fritz Elmendorf, vice president of communications for the Consumer Bankers Association, which represents the nation’s largest banks. “When it comes to meeting tests, they should be applied uniformly.”

Moving forward

Despite all the dissention, what everyone seems able to agree on now is that community banks should concentrate on what they have always done best: work on relationships between the bank and the community.

Braunstein of the Fed maintains mid-sized banks who were already doing a good job under the old CRA rules should find the new rules a relief. They can use the CRA documents they’ve already collected if they wish, but they don’t have to collect any more. Finally, it appears community banks have regulators’ blessing to focus on building relationships rather than building a defense case. And for community bankers, that’s at least one way to spell regulatory relief.