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Experiencing the New CRA: That Performance Context

When the new CRA regulation was published, the term "performance context" sounded like a fact - scientific and solid. In practice, it has not been clear. During the first year of new CRA examinations, we have learned more about what "performance context" means. It is becoming apparent that building a performance context can be as much art as science. It is also clear that the performance context is the keystone to the new CRA examination.

In spite of its importance, performance context remains a hazy concept. In fact, a bank's assessment area and its performance context seem to be the starting points for most of the disagreements between the examiners and the examined. Examiners may enter the bank with an understanding of the performance context that differs in significant ways from the bank's understanding of its market. Because the performance context is the basis for the entire examination, it is important that there be some common ground as the examination begins.

The new regulation transferred the regulatory requirement for documentation from the bank to the examiner. This transfer of burden was well-intended but has not been easy for examiners to carry out. The difficulty for examiners, given their resources, is how to approach and understand the bank's market economy and community dynamics.

The bank functions and survives as a business in its performance context. It is a daily reality. However, examiners encounter the performance context quite differently. For them, the performance context is based on research and analysis of data available to them. Examiners must work with generalized databases and a standardized research approach. No matter how thorough their research, any banker should know more about the bank's market than examiners can glean from their data resources. Even more important than compiling data is understanding the data's significance. Markets are much more than the relevant facts that can be compiled. Every market is comprised of a group of people who, as individuals and as groups, have distinct personalities. The market population's group personality is more than the demographic facts that describe it. These group personalities can be as significant to the performance context as the basic facts about the group. Understanding the market and its distinct personality is critical to a successful CRA program and to a good CRA examination rating.

In spite of the agencies' promise to reduce documentation burden by shouldering the responsibility for much of it themselves, a bank that waits for the regulator's analysis is taking a great risk. If the examiner's analysis is consistent with your knowledge of your market, the exam should go smoothly. However, if the examiner's analysis of the performance context differs from your understanding of your market, the CRA examination will not go smoothly.

The solution is to maintain your own performance context analysis. If you maintain information about your performance context and use it in your CRA program and self assessment, you will be in the best position to influence the way in which the examiner approaches your CRA exam. You will also have readily available the information needed to support your bank's business strategies.

Fundamentally, the data compiled to establish a bank's performance context is the very information the bank should be using for its own marketing purposes. Much like the "old" CRA requirement to conduct needs assessment and design products to meet those needs, the newer performance context is similar information used in a different way. Simply put, it is marketing information.

Performance context information includes basic census information about the population, income level, racial composition, and home ownership. It also includes information about changes in population and home ownership.

The bank should use this basic demographic information, together with market surveys (and market observations) to identify who in their community does or wants to borrow, and for what purpose they borrow. The information may also tell the bank what to expect in borrowing patterns.

For example, an aging population tends to save rather than borrow. If credit is needed, products such as reverse mortgages or home equity loans may be more popular than adjustable rate mortgages. In contrast, if the community has a large population that is just becoming qualified for home ownership, special mortgage lending programs should be a lending niche.

Demand for dwelling related loans will also depend on the type, cost, and extent of housing stock in the community. Low-income or moderate income census tracts comprised of rental housing would have a higher demand for installment loans and a low demand for dwelling-secured loans.

Cultural characteristics in the assessment area may also be vital to understand and take into account. The bank should be aware of issues such as cultural barriers to borrowing or to banking. If these are present, the bank will need to explain the absence of loan applications and demonstrate what it is doing to serve and perhaps educate its customers. These factors will not be readily apparent from census data. It may also be useful to compare your bank with other banks in your market. Identify similarly situated banks and compare their CRA performance and customer base with your own bank. A similarly situated bank is one that is of the same size, maintains a similar business strategy, and is located in the same or a very similar community. It may also be important to look at banks that are not similar, particularly if the bank is larger. Other banks may have a business specialty or business niche that explains your absence of customers for a similar product line. Use that information to explain how your bank chooses to offer credit products and compete.

Fundamentally, your bank should maintain enough performance context information to establish your case and demonstrate why your CRA program is in fact "Satisfactory" or "Outstanding."

The only way you can be sure that your performance context tells the right story is to tell the story yourself. No matter how hard an examiner works to compile and analyze data, that information will be factual and sterile. It will be information only and lack the understanding of your community and its special dynamics. That is why your performance context analysis will be essential to really tell your community's story- and your bank's.


  • Maintain a clipping file about banks in your general area. Look for articles that discuss bank's business strategy, business niche, and any market limitations or issues.
  • Keep sources of demographic data and market data handy. Use every free source available. This may include your local governments, the internet, colleges and universities (data compiling or analysis is a great job for a student) and your own marketing department.
  • Compile the CRA public examination reports for other banks in your area. In particular, compile reports from similarly situated banks and any banks that dominate your market. Study how the bank's performance context was developed and used in the evaluation.
  • Collect HMDA data for other banks in your market and compare loan performance and market penetration. Determine how your bank compares with others. Remember that HMDA data is now available on the Internet.
  • Use your bank's marketers. Work with your marketing department or outside marketer to be sure that CRA data sources and uses for data are identified in marketing research conducted for or by your bank.
  • Give attention especially to responses to types of advertisements and product offerings.
  • Contact a variety of sources. State and local government planning offices may be useful sources for information. Local universities or colleges may have information. State universities or any university that has a school of public administration and planning should have information. They may also have graduate students interested in doing free or almost free research.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 14, 9/96

First published on 09/01/1996

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