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CRA: Mid-year Check-up

We are now more than halfway through 1996. That means that you should have compiled the first six months of lending data under the new CRA regulation. This data will become the basis for your future CRA evaluations. It will also become an important tool for community groups in analyzing the performance of banks. Obviously, there are heavy consequences hanging on the data. The smart compliance manager will have a process in place to review these reports before they become available to the public.

Mortgage Lending
Mortgage lending of all types will be analyzed. The process and results of this analysis are now familiar to us and there is no reason to expect any significant change. However, public scrutiny will probably occur more frequently under the new quarterly reporting system. You will want to watch for the impact of trends on the loan transactions you report. For example, loan demand could be affected by seasonal market fluctuations, a drop or rise in housing construction, or the entry or departure of a major area employer in your market. If a trend has an unfavorable impact on your bank's CRA data reports, you need to be prepared with the explanation.

New Lending Reports
Under the new CRA rules, loans to small businesses will receive close attention from regulatory agencies and from any group using the reported data looking for any patterns that may appear discriminatory. Community activist groups have expressed a high interest level in loans to small businesses. In fact, this could become the focus of future CRA protests. This interest, together with the newness of the reporting process, makes it critically important that you have an early understanding of what your bank's small business lending pattern shows.

To some extent, you will be looking at the small business lending reports without a context. This will be the first time data on loans to small businesses is compiled and reported. You will therefore have nothing to compare your reports to. Neither your bank nor your competition is likely to have a handy standard to use as a guide in determining whether your bank has done enough small business lending. There is also no existing measurement or standard for the level of need or demand for small business loans. This will develop in the coming years.

Agriculture loans will present similar problems. Unless you are lucky enough to have an examiner truly experienced in agricultural lending, you will need to keep close watch on your agricultural loans and be prepared to explain each loan, and how and why it does or does not relate to the CRA evaluation. In addition you can expect problems in data entry, such as loans secured by family farms being >
Optional Reports
For the first time, some banks will be reporting information on consumer installment loans. Many banks, particularly small community banks, find that their strongest lending activity to low- and moderate-income borrowers is in automobile loans and other consumer loans. This is particularly likely to be true if the cost of housing in your community is high relative to income. Even though it is optional to report consumer loans, the added burden of compiling this information may prove valuable to your CRA rating.

Data errors
Experience with HMDA tells us to expect a high error level in compiling this information. These new reports contain all of the opportunities for mistakes that exist on the HMDA LAR - and then some. For example, determining the correct amount of income to enter for mortgages is a chronic problem. The issues of applicant income or gross revenues of a business, will arise in each loan reporting category. However, for each major category of loans, your bank will need separate instructions on how to select the correct income amount to report.

Another error hazard will be categorizing and reporting loans correctly. The regulation requires banks to report all loans of a particular type and not simply a subset of loans. For example, if the bank reports automobile loans, it must report both new and used car loans. Internally, you will need clear procedures and instructions that help bank staff correctly categorize and report consumer loans. Finding the correct census tract for each loan is becoming more of a science than an art, but mistakes are still common. This will be complicated by the necessity of choosing an address for loans to businesses that have more than one location.

Finally, accuracy will be a constant problem. Each loan to be recorded and reported presents several opportunities for mistakes. The regulatory error tolerance that is emerging for HMDA seems to be 5% to 10% as long as the pattern of mistakes is not a "material" piece of data. Keeping error rates that low is a daunting prospect that will put the best compliance procedures to the test.

ACTION STEPS

  • Check the status of your data collection systems for all categories of CRA loans. Make sure you are on track. If not, work out the procedural problems or program bugs.
  • Take a hard look at where your bank stands. Remember that the peak lending period is almost over.
  • There's not much time to change the picture.
  • Compare the lending reports with the bank's CRA goals and strategic business plan.
  • Compare the reports to any information you have on outreach and credit needs assessments.
  • Prepare demographic profiles of businesses by size and population by income to use in evaluating the bank's lending accomplishments.
  • Maintain a clipping file on your market area as a record of any unusual market trends, such as slow housing sales or rapid growth in new businesses.
  • If your loans don't measure up, start looking hard for investment opportunities that will boost your rating.
  • Review the types of errors that you find. Prepare training and simple, clear instructions for those who compile the data.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 11, 7/96

First published on 07/01/1996

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