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CRA: Continuous Evolution

If there is any area where we would like change to stop or at least slow down, it is CRA. Unfortunately, we might as well flap our hands and fly to the moon as expect a slow-down in the rate of change surrounding CRA. There is no reason to expect the next decade to be any different.

For starters, the agencies have promised a review of the current CRA regulation in 2002. That is now in sight. What will be a driving force in that review is anyone's guess. It could be concerns related to performance v. process, it could be the presidential election, or it could simply be how long the large bank exam takes. Whatever the considerations behind the next review, we know that as far as CRA is concerned, change doesn't necessarily mean for the better. It just means change.

In the immediate future, we are facing the new CRA examination cycle based on the bank's ratings. There are several interesting aspects to this. First, because the bank's rating will determine the cycle for the next examination, the rating may be influenced by how long the examiner is willing to stay away. If this happens, some of the present "Outstanding" ratings will become "Satisfactory," so that the next examination will be four years rather than five years away.

Second, the infrequency of examinations may affect how examiners conduct the CRA examination. With an examination for most banks occurring only every four years, the examiner must look very carefully at not only the current patterns, but also at trends. This may draw attention to the management process. It will certainly draw attention to the bank's level of continuous commitment to CRA. In short, you won't be able to beef up activity as you approach another examination.

This trend may increase the importance of economic development over simply making mortgages. Economic development takes time. The most difficult problem that banks face in getting recognition for economic development efforts is that the timing of projects often doesn't coincide with the data gathering cycle for examinations. Longer examination cycles will greatly increase the opportunity for a bank to put forward a completed economic development project, making this type of activity more attractive to banks.

Finally, we are still waiting for interpretations of the existing regulation. In particular, the definitions of renewals or refinancings will have a direct impact on what loans are counted. There is also need for clarity about small business activity - how it is defined, and what counts or doesn't count as small business. When these issues are clarified, they will have an impact on how a bank targets its commercial lending to fit into its CRA strategy.

The Investment Test
For something that began its regulatory life as almost an afterthought, the investment test has become one of the towering monsters for "large" banks. It is a nightmare for the not-very-big large banks.

The investment test has made significant changes to the concepts of what CRA should be and accomplish. There is virtually no similarity between the investment test and the days of making charitable donations and undertaking other "good guy" activities.

Investments are all about money and making a difference. In that respect, the investment test has changed CRA management from targeting loans and collecting information about individual bank staff's activities to something much more sophisticated. Finding and making investments that count for CRA purposes requires active, high-level attention.

The investment test has also brought new players into the CRA scope. Neighborhood organizations and operations such as Habitat remain important. But for the investment test, banks must find and work with groups and organizations that are dedicated to economic development.

Housing is only part of the problem in low-income areas. Infrastructure, education, and jobs are essential to breaking the poverty cycle. The investment test is pointed in that direction.

In the future, banks will need to use investment strategies to do the things that will really make a difference in their communities. Economic development will depend on the success of these investments.

ACTION STEPS

  • If you currently have an "Outstanding" rating, prepare to settle for a "Satisfactory." It is likely that "Outstandings" will be hard to get.
  • Spend some time with commercial lenders, especially those working with small businesses. Understand how loans are made, renewed, and/or refinanced and be ready for the final interpretation when it hits the streets.
  • Schedule CRA self-assessments at least annually. If you have any concerns at all, look at the bank's CRA performance more frequently. Once the exam cycle changes, the motivation to perform will need to come from you.
  • Look for economic development issues in your market. Consider how your bank can take on some longer-term projects.

Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 17 & 18, 1/00

First published on 01/01/2000

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