What Makes CRA So Difficult?

At its core, CRA is a simple concept. It simply says that financial institutions should make loans and investments and provide services in their service area. Since this is what these institutions are in fact chartered to do, this shouldn't seem too difficult. It is the business of banking.

The Community Reinvestment Act itself says very little that isn't already in the charter of most financial institutions. The charter usually contains some language about serving the convenience and needs of the community. In the context of banking, convenience and needs means credit, deposit, and related services. That pretty much makes up the lending, service and investment tests.

The only element that CRA adds, that is not specifically stated in the charter requirement, is that the provision of services includes meeting the credit needs of low- and moderate-income areas. On its face, this difference doesn't appear too huge. It is in the practice that things get difficult.

The real problem for institutions is that CRA is a moving target. No bank can be totally confident of what the examiners will conclude at the end of a CRA evaluation. We see two factors that contribute to this. One is the institutions themselves. The other is examiners. Financial institutions might like CRA to go away, or at least to stay contained in a small box. Wouldn't it be nice if CRA never changed and what was done last time to earn a Satisfactory was just right this time.

Unfortunately, the very concept underlying CRA is change: change in the economy, change in the market, change in the institution, and change for the better. When change is involved, things can't stay the same. For example, new people living and working in the market area means there may be a need for new products and services. Some of these are likely to be for low- and moderate-income areas. Bankers need to understand and accept that. When they do, CRA won't seem quite so difficult.

Accepting change is the challenge of the banker. Causing change in regulations is often the result of the examination process. Nothing changes regulations quite as consistently as the examiner grapevine.

The process of examination lends itself to constant evolution in interpretation of regulations. Each time examiners look at an institution, they see something they haven't noticed before. Noticing something raises questions, such as how the regulation deals with the situation. Closely related to the newly noticed phenomenon is regulatory creep.

The CRA examination is no exception. Each time examiners conduct a CRA examination, they ask whether the institution is working at the satisfactory level or better - or worse. There is this tricky element in CRA that measures effort. Effort, by definition, means more each time or there isn't any effort. So each time the examiners come in, they are looking for more: more lending, more services, and more investments.

The concept behind CRA is economic growth. CRA is designed to bring in the disenfranchised of the credit world. Bringing about this kind of change requires constant effort.

What all this means is that no-one in the institution should be asleep at the compliance wheel. Someone should understand all changes in the institution and be ready to answer questions when examiners ask them. This means knowing why as well as what. It means knowing how things have changed and how much is more. It also means knowing what other institutions are up to. CRA examinations are not performed in a vacuum. Instead, they are performed in the context of what others are doing. So stay awake and stay informed.

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 15, 12/04