I’m posting very anonymous but need help.

Our bank had been sold and the former senior officers bought another bank. Because of same personnel and staying in the same markets as the old bank, the bank is growing fast $150M in 6 months – the capital is OK, expect to be $250M by 1st anniversary.

Situation
Bank is in a single state, is OCC regulated and has good residential loan production. The bank wants to add an established wholesale mortgage lending department (under bank charter for preemption). The wholesale mortgage company immediately sells the loans but 90% of their lending is out of state. Although the bank residential lending is robust, based on realistic projections, 75% of the mortgages will be out of the delineated communities.

Question
Is there any way for this to work? From a CRA point most of the loans are out of state. Would having an equity position with the mortgage company rather than an operating department be an option, or a “boutique bank”?

I don’t think it’s possible, but have been offered a compliance position. The bank doesn’t want a “Doctor NO!” for compliance, but I don’t want to feel the wrath of the OCC.

Guidance??

Loans originated by the bank out of state will be "Outside" the assessment area. If production of these loans decreases "total" loans originated by the bank inside the assessment area, to less than 50%, you will have a problem.

If bank personnel are makeing credit decisions to originate or purchase they will be counted in the total inside/outside percentage.

Don's advice is correct. You mention the mortgage sub immediately sells loans after they are booked. Does your mortgage company make the credit decision or are they acting as agent for a third party? If the credit decision is made by third party, then the loans are not counted for reporting purposes, although you can get credit for service test.

There is one other issue. Yes your inside/outside ratio might be bad, but you have to factor that into your current situation. Do you completely rock in the CRA world, or are you pushing up daiseys in the "needs to improve" field. If you're doing very well, and I do mean VERY well, do not let that inside/outside figure scare the heck out of you. It's a business decision, or line of business, which can be justified...and if in all other ways you're doing great, it should not kill your CRA ratings.

"and if in all other ways you're doing great, it should not kill your CRA ratings."

I would call a friendly examiner and run that by them as I have seen an instance where a bank was originating mortgage loans outside the assessment area to the tune of 60% to 70% of its total loans. The FDIC cited them as a substantial portion of originations were not in the assessment area. After a 2 year battle the bank had to desolve its mortgage operation completely.

Ya but Don...we all know the FDIC does crazy stuff like that. This is the OCC silly They're rational!

I would certainly want to be in a position to defend the situation, but still feel that "If all else is great, this isn't a huge deal". THat part of the test is not supposed to be a make or break it deal. If it is used in that manner, it needs to be run up the federal flag pole.

But by "great" I mean that your inside loans lead you towards an outstanding rating, your investments rock, you've spent time on CD and your performance context is 100% completed, covering this line of business as well as the inside portion of the lending. Better yet, do a rock solid job of serving the outside portion and you might get a "bully for you" block of points as well. The "extra credit" of the exam world But if you're marginal at best, ya this is a huge challenge.

I would feel comfortable defending the market decision myself (of course if I knew what was going on with the balance of the exam). It would take work, and that should be factored into the decision (you may be small but given this change perhaps treating your exam like a large bank is a good idea from this point forward?) and I'd certainly want to have a full time CRA officer, verses the half a job or less typical to smaller banks given the issue. But if the bank will pony up, and the analysis can be done, I would fight to the death to support that it was ok, given all else is nifty keen (new CRA rating)