Dealing With Small Intermediate Bank (SIB) CRA
We all know the background of CRA.
The 1977 Community Reinvestment Act (CRA) was enacted to encourage depository institutions to help meet the credit needs of their local communities, including low-and moderate-income neighborhoods (consistent with safe and sound banking operations).
The CRA requires that each insured depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. This evaluation typically occurs in conjunction with a financial institution’s Regulatory Compliance/CRA examination. Results are taken into account in considering an institution’s application for deposit facilities, INCLUDING MERGERS AND ACQUISITIONS.
A SIB for CRA purposes as of January 1, 2018 was approximately $313 million or more in assets as of the end of the past two calendar years and less than $1.252 billion as of the end of the calendar year of either of the two prior calendar years.
In today’s “merger mania” banking world, many surviving financial institutions are rapidly finding themselves SIB CRA applicable. An inaccurate assumption is “oh, well … we’ve always been fine on CRA.” The exam significantly differs in a SIB from a small bank CRA exam. The transition from a Small Bank CRA to a SIB is material and not something you can think about a week before the exam.
So to be ready for that SIB CRA exam, what are some recommendations … beyond the obvious of making sure your Main Office and Branch CRA file content is current and SIB compliant?
First off, make sure you have defined and know your assessment area of your branch and deposit taking ATM network. This entails compilation of demographic, economic, and income data for your assessment area/census tracts. If you have a LPO/LPOs not in your assessment area, you may elect NOT to include these non-deposit taking locations in your Assessment Area (optional). However, loans originating in the LPO must be monitored in terms of origination to ensure the impact is not skewing your CRA assessment area initiative.
As a result of a merger with branch locations outside your current Assessment Area, an addition to your Assessment Area will likely need to be evaluated and finalized by the Board in conjunction with the plotting of acquired branch locations. Evaluation of census tracts by income level and minority percentage in relation to acquired branch locations is essential to this task. HMDA software vendor products often have the capability to perform this task, as do private vendors.
Under SIB test, a financial institution is subject to both a lending test and a community development (CD) test. Criteria reviewed include: Net loan-to-deposit ratio; percentage of lending related activities located inside the institution’s assessment area(s); geographic distribution of loans; record of lending to borrowers of different income levels and to businesses and farms of different sizes; and action, if warranted, in response to written complaints about the institution’s performance in helping meet community credit needs.
The CD test measures the extent to which an institution engages in community development activities. In evaluating the responsiveness of a bank’s community development activities, the volume, mix, and qualitative aspects of community development loans, of qualified investments, and of community development services is reviewed. Specifically, the CD test measures:
- number and amount of community development loans
- number and amount of qualified investments
- extent of community development services provided, and
- RESPONSIVENESS of community development loans, qualified investments, and community development services to community development needs and opportunities.
An institution must UNDERSTAND and be RESPONSIVE to the community development needs of its assessment area(s). DIALOG with customers and community groups provides an understanding of potential community development initiatives. Regulators expect the SIB to engage in a mixture of community development loans, qualified investments, and community development services consistent with the institution’s capacity and business strategy as well as with the community development needs and opportunities in the area.
A loan, investment, or service has as its primary purpose community development when it is designed for the express purpose of revitalizing or stabilizing low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas, providing affordable housing for, or community services targeted to low- or moderate-income persons, or promoting economic development by financing small businesses and farms …
Consideration of qualitative aspects of community development recognizes that community development activities sometimes provide benefits that would otherwise not be made available. Therefore, a smaller dollar loan that is responsive to need may provide more qualitative benefit to a specific community than a larger dollar loan.
If the primary purpose is providing community services targeted to low- or moderate-income (LMI) individuals; economic development; or revitalizing or stabilizing LMI areas, designated disaster areas, distressed, or underserved nonmetropolitan middle-income areas, an institution can receive consideration for the full amount invested. However, if the primary purpose is for affordable housing for LMI individuals, the institution can receive consideration under CRA for only the portion of the activities that helps to provide affordable housing to LMI individuals thus, emphasizing the importance of documentation.
For a satisfactory rating on the CD test, an SIB’s performance must demonstrate adequate responsiveness.
For an SIB to receive an overall satisfactory rating for its CRA performance, it must receive at least a satisfactory rating on both the lending test and the CD test. However, if an SIB receives a needs to improve rating on either test, its overall rating will be needs to improve.
LENDING STAFF should be able to UNDERSTAND AND IDENTIFY community development lending opportunities in the assessment area(s). Likewise, investment staff should be able to identify and evaluate potential qualified investments. Marketing staff with an understanding of community development services can better tailor outreach.
Now, if your bank is an SIB for CRA purposes, what are the key areas to consider and document?
COMMUNITY DEVELOPMENT OUTREACH RESULTS
The results of OUTREACH can be used to engage in the community development activities (loans, investments, and services) that are the most RESPONSIVE to community development NEEDS and OPPORTUNITIES within the financial institution assessment area(s). Consider providing outreach paths, such as questionnaires, etc. on your website and in meetings with Community Groups, Community Leaders, Community Organizations.
SERVICE ACTIVITY OF STAFF & DIRECTORS
Document specific investment and service activity of your Staff and Directors. PROVIDE BACKUP DOCUMENTATION TO DOCUMENT COMMUNITY DEVELOPMENT QUALIFYING APPLICABILITY!!! This includes organization and income information relative to the organization and participants.
LOAN TO DEPOSIT RATIO
Document the quarterly loan to deposit ratio for the CRA file, as applicable (a ratio indicative of the bank maximizing its deposit production for lending benefit in its assessment area).
PROGRAMS THROUGH SECONDARY
Document programs through Secondary Market Area where your financial institution brokers consumer residential HMDA loans solely for secondary market investors even though reflected on the investor LAR (since the investor makes the credit decision and originates the loan).
Document loans closed in programs such as FHA, USDA and First Time Homebuyer.
Document Deposit programs such as where the bank promotes a Youth Savings Account with a more favorable fee structure than other similar product accounts.
COMMUNITY DEVELOPMENT QUALIFYING LOANS
Document whether where your community financial institution originates small dollar consumer loans for consumers. Most important, specifically document Community Development qualifying loans (by definition). PROVIDE BACKUP DOCUMENTATION TO DOCUMENT COMMUNITY DEVELOPMENT QUALIFYING APPLICABILITY!!! An example of such documentation includes income restricted units in a multifamily residential facility.
Document updates for CRA qualifying investments. This may include financial institution deposit accounts in minority owned financial institutions or financial institutions providing programs to benefit disaster areas.
CRA QUALIFYING DONATIONS
Document potential CRA qualifying donations. An understanding of what constitutes CRA qualifying donations is essential or both program documentation and to ensure donations provide the most “bang for the buck” for your financial institution. PROVIDE BACKUP DOCUMENTATION TO DOCUMENT COMMUNITY DEVELOPMENT QUALIFYING APPLICABILITY!!! An example includes detailed information on the Community Development qualifying purpose of an organization.
CRA RELATED DOCUMENTATION
Ensure lending personnel have a form to document CRA related loans in their portfolios (and related backup as Community Development qualifying) as qualifying loans are made. Otherwise, qualifying loans may not be determined to document. Remember that certain SFR loans are HMDA applicable but do not count as CRA qualifying. Completed forms can be forwarded to the CRA Officer for inclusion in the nonpublic section of the CRA file.
Consider contacting your specific FHLB office regarding educational and program offerings that may be utilized to benefit your CRA program.
Discussions with your primary regulator’s CRA staff are also beneficial and informative.
Bottom line, get that process going and get it documented. As a discussion with any regulator will reveal, you must document “Community Development Qualifying” and make your SIB CRA case for your regulatory exam.
March 15, 2019