When you are lookintg to expand or create and AA. Do you do it from the tract level, or from what level do you start with?

I look at the banks lending penetration by tract and choose tracts that meet the definition in CRA and those tracts that have a high concentration of loans and tracts where the bank may exapand it reach in.

How do you look at and AA?

We are more rural so it made more sense for us to take entire counties.
But I would say that concentrating on the areas that you have the most lending would make sense. You should be giving back to where you "take" from.

We're in both rural and urban areas. Previously we would assign our assessment area by the tract level. We chose tracts that were near our branches and had a high concentration of loans. Prior to starting a CRA Exam a couple years ago, the examiners told us that we should include the entire counties, even though we had done it like this for years. We've always been able to explain why we didn't include certain tracts, but they said that it was better to include them and then explain why there were few loans in that area. They told me that including the entire counties would only help the bank because our in/out ratio would be better. Then, a year later, they came in and criticized us for not making more loans in the LMI tracts that were in our assessment area. They looked at the percentage of tracts in the assessment area that were LMI, and then the percentage of loans that were made in LMI tracts. There was, of course, a big discrepancy in the percentages because our branches are located far away from the LMI tracts. The same data a year prior would have been fine. I wanted to scream!

This sounds similar to our exam 4 years ago. Our EIC worked with us and helped us, but the map that they created looked like a donut, leaving us excluding portions of an LMI area - which a different EIC would not have liked. We opted to modify their suggestions. And were careful to document ever discussion that took place. In the end our assessment area (we only have 6 branches in a 4 county area) looks more like a donut.

Our examiners encouraged us not to include entire counties.
At our last exam two years ago (still OCC by the way) they then came in and we were told that we had 2 seperate assessment areas. One of an entire county and a seperate one of other tracts. But they were fine with this, for no matter how we looked at the numbers, our in vs out ratios were still better than our peers.

Are you using any sort of a software to help you in this?

We use CRA Wiz.

That's what we use too. And it really helped us to select areas and run the numbers. The other thing was that our board did not take the examiner's recommendations as the Bible. They were recommendations, and we knew that one examiner would differ in opinion to another.

In our rural area we selected the entire county but in the urban we did it by tract. Our last exam was in 2007, and like I said, they informed us that as such we have 2 seperate AAs but in the end, all Loan to Deposit ratios as well as loan penetration tests reflected that we were mindful of our areas needs.

As I have said many times, the most important CRA decision you make is how you define your Assessment Area. However, it is important not only because it will affect the calculation of your numbers under various lending tests such as the Assessment Area ratio. It is extremely important because it also affects the performance context data that is used to compute your performance standards for CRA. When examiners review your performance they look not only at your data, they look at the demographics of the community and the local credit market data - and they use the demographic and credit market data to develop the performance standards that actually determine your performance rating.

So, 80% of your loans are inside your AA. That is only the first test. You still have to explain any "lending gaps" inside your AA. You have to determine if your "penetration rates" in the low- and moderate-income tracts are good or bad with respect to the community demographics and credit needs and the activity of other local lenders. Too many banks don't consider the implications of Assessment Area configuration for the market-driven performance standards. They are content to either have an AA that is technically compliant or one that shows a good AA ratio. But that is only the beginning of performance evaluation.

This does not have to be a major project every year, although the AA configuration ought to be reviewed and confirmed or tweaked annually. But every 5 years or so, it is worth it to go into a major review of your AA construction and determine if you should significantly change it in light of your bank's changing circumstances.

Has your Assessment Area been critizied for not taking in whole political subdivisons?

The Regulation in subsection .41 allows an AA to be less than a complete political subdivision as explained in the Q&A's. In fact, I would estimate that 80% of our clients have drawn AA's that consist of parts of counties or even minor civil divisions (towns).

But have your clients started from the tract level and not taken in whole towns? I have a bank that is being questioned why it did not take all the tracts in a town.

Bubs
Absolutely true. The Regulation allows banks to eliminate parts of political subdivisions they cannot reasonably be expected to serve. A bank in Los Angeles County with 3 offices cannot reasonably be expected to serve the entire county let alone the entire city of Los Angeles. Sometimes it is reasonable to draw AA boundaries that are very close to your branch offices, like in Manhattan NY. Other times, the boundaries can be miles from the nearest branch because of the population distribution and the competitive structure of the market. Road networks, geographic barriers (e.g., rivers), etc. are all considerations. Again, a very high percentage of the hundreds of banks that we have advised have incorporated only parts of political subdivisions (counties, cities and towns). It they do it right they should have no problem. An examiner normally will accept a reasonable explanation as long as there is no apparent "red lining".

By the way, if you read the examiners manual, you will see instructions that tell them to ignore incorrectly drawn AA's and not to criticize banks as long as they don't violate the Regulation by overt red lining. So if your friend is being questioned it may be because of a situation that may look like red lining.

Actually, if you read the CRA examination procedures you will see the following:

"If an institution’s assessment area(s) does not coincide with the boundaries of an MSA/MD or political subdivision(s), assess whether the adjustments to the boundaries were made because the assessment area would otherwise be too large for the institution to reasonably serve, have an unusual configuration, or include significant geographic barriers.

If the assessment area(s) fails to comply with the applicable criteria described above, develop, based on discussions with management, a revised assessment area(s) that complies with the criteria. Use this assessment area(s) to evaluate the institution’s performance, but do not otherwise consider the revision in determining the institution’s rating."

Basically, this means that you should start with a complete political subdivision that includes all of the main office/branches/deposit-taking ATM locations, and you may adjust it smaller - as discussed.

Examiners should not ignore incorrectly drawn AAs if they are inconsistent with the regulation and procedures. In fact, they may have to redraw them and then use the redrawn AA to do the analysis.

CRAReg

We have done Assessment Area maps for hundreds of banks. I can tell you that I have seen a relatively high percentage (15%-20%) of Assessment Area descriptions that clearly do not comply with the regulation. Some of the most common infractions involve substantial overlap of an Assessment Area from one MSA to another or from a non-MSA area into an MSA (by "substantial" I mean entire counties for example). One very high level Agency person acknowledged that her Agency does not criticize or object to these problems unless there is overt redlining. I also have seen Assessment Areas consisting of non-contiguous geographies. In every case, when we have pointed out these violations we have been greeted by an incredulous banker who will inevitably state that examiners have never called the violation to their attention. The examiners manual states that an examiner is supposed to include comment about an improperly drawn Assessment Area in the Report of examination, but not in the public evaluation. Do you think that is the practice in the field, or do you think this is overlooked by examiners?