My institution has branch offices in an MSA which is included in our assessment area. We also have an home mortgage affiliate that has an LPO office in a different MSA which is not included in our assessment area since we do not have a branch there. This affiliate also utilizes brokers to originate loans which are signed on our notes. I just discovered that 70% of our lending is being made in the MSA that the LPO and brokers are located in. Since a substantial portion of our lending is being derived within this MSA, should I expand my assessment area delineation to include it?

Delineation of an assessment area goes beyond branches.

From the Reg:

Regulation BB

Sec. 228.41 Assessment area delineation.

(a) In general. A bank shall delineate one or more assessment areas within which the Board evaluates the bank's record of helping to meet the credit needs of its community. The Board does not evaluate the bank's delineation of its assessment area(s) as a separate performance criterion, but the Board reviews the delineation for compliance with the requirements of this section.

(b) Geographic area(s) for wholesale or limited purpose banks. The assessment area(s) for a wholesale or limited purpose bank must consist generally of one or more MSAs or metropolitan divisions (using the MSA or metropolitan division boundaries that were in effect as of January 1 of the calendar year in which the delineation is made) or one or more contiguous political subdivisions, such as counties, cities, or towns, in which the bank has its main office, branches, and deposittaking ATMs.

(c) Geographic area(s) for other banks. The assessment area(s) for a bank other than a wholesale or limited purpose bank must:
(1) Consist generally of one or more MSAs or metropolitan divisions (using the MSA or metropolitan division boundaries that were in effect as of January 1 of the calendar year in which the delineation is made) or one or more contiguous political subdivisions, such as counties, cities, or towns; and

(2) Include the geographies in which the bank has its main office, its branches, and its deposit-taking ATMs, as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans (including home mortgage loans, small business and small farm loans, and any other loans the bank chooses, such as those consumer loans on which the bank elects to have its performance assessed).

I think KB is saying yes Sano.

You may have a problem that a growing number of banks have been experiencing. The problem is compounded by the fact that the agencies (with the exception of the soon to be defunct OTS) insist that you must have at least one deposit-taking branch in each AA. Moreover, no AA boundary can substantially cross an MSA boundary. This means you cannot simply create another separate AA in another MSA if you don't have a branch in the MSA nor can you significantly encroach in the second MSA as part of your current AA. There is nothing in the law, regulation or the Q&A's that says you must have a deposit-taking facility in each AA, but the agencies have taken that approach with the exception of the OTS. I have asked them to cite the authority for their insistence on the need for a deposit taking facility and they have failed to respond to my requests for the last 3-4 years.

The agencies know there is a growing problem caused by LPO's, Internet banking, and an expanding number of banks that are adopting non-traditional lending strategies (national/regional lending funded by secondary market sales). Sooner or later they will have to make a change. In the meantime, you can only appeal to the inherent "flexibility" within CRA that supposedly considers your lending strategy as an important performance context factor that mitigates performance under the Assessment Area Ratio test or you will have to adopt a CRA Strategic Plan approach.

This may be regional, as I have many clients around the country who lend in nearby MSAs and the regulator has not insisted there must be a branch to include the region in the AA - in fact I have seen many cases where the regulator has suggested adding the area to the AA to correct the performance ratios.

If the area where the bank is lending without branches is not in the general regional area (in heavily populated states, you can go from MSA to MSA just driving down the road), the bank will have a more difficult time defending its practices. If the bank is in California or New Jersey and all of a sudden is making loans in Texas - the question will be why? What is going on?

Banks need to also remember that adding areas to their consolidated assessment area means that the bank has now taken on responsibility for community development loans, services and/or investments in that area (depending upon bank size).

Bank's need to think long and hard about where they are lending. I don't recommend lending heavily in areas not serviced by branches - it goes against one of the basic premises of CRA which is to provide loans and services where the bank is gathering deposits - giving back to those communities. To lend elsewhere can be construed as taking deposits from one area and lending elsewhere (of course not all lending is supported by branch deposits, it may be FHLB loans, brokered deposits, etc.)

CRA needs to be considered when new lending offices are opened and performance ratios must be monitored. Banks also need to adequately explain their locations, lending rationale, and performance. Do not leave it up to the regulators to tell you - you tell them. Your chances of success improve greatly.

Also, if the bank is going to be lending so heavily in a region - essentially bringing in new customers - why not consider a branch in that area to service these customers?

I thought that the deposit taking requirement is from this in the Q&A:

§ll.41(e)(4)—2: May an institution delineate one assessment area that consists of an MSA and two large counties that abut the MSA but are not adjacent to each other?

A2. As a general rule, an institution’s assessment area should not extend substantially beyond the boundary of an MSA. Therefore, the MSA would be a separate assessment area, and because the two abutting counties are not adjacent to each other and, in this example, extend substantially beyond the boundary of the MSA, the institution would delineate each county as a separate assessment area, assuming branches or deposit-taking ATMs are located in each county and the MSA.

So, in this example, there would be three assessment areas. However, if the MSA and the two counties were in the same CSA, then the institution could delineate only one assessment area including them all. But, the institution’s CRA performance in the MSAs and the non-MSA counties in that assessment area would be evaluated using separate median family incomes and other relevant information at the MSA and state, non-MSA level, rather than at the CSA level.


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If you want to include an MSA where you do not have a branch or deposit taking facility, then see if you can get something in writing from your regulatory agency that agrees. Otherwise you may be in for a nasty surprise at exam time. I've seen that happen!

An added problem is the current emphasis on not taking partial counties. So, if the bank has a branch in one county that is an MSA, and lends significantly in a part of the next county, which is a separate MSA - a common situation in certain parts of the country - they are "encouraged" to take all of the other county. This is then contradicted by other examiners saying they can't add that other county if it has no branch or deposit taking ATM.

Banks are also encouraged not to skip a county that may very well be a separate MSA if they have branches in 2 counties/MSAs and not in a third that may be in between. Regulators do not like the "old" way of just selecting tracts surrounding a branch.

A bank could have a branch at one end of a county/MSA that extends off 100 miles in the other direction, yet another MSA sits right near the branch. They shouldn't lend there?

There are no walls at the edges of counties to keep people out. Many people who live in the one county may bank in the other if they work there or travel through there.

It comes down to banks paying a great deal more attention to their assessment areas and lending patterns than they have in the past and proactively discussing it with regulators.

It might be worth doing a study of where your depositors live/work to explain the impact of electronic banking. I rarely visit a branch of banks I use and I am not alone.

I see a lot of inconsistency in application from one part of the country to another, and from one exam team to another.

I have an assessment area that is part of an MSA. (MSA is made up of seven counties; however, we have branches in three of the counties, so the assessment area is the three counties).

One of the branches is two miles from an adjoining county (which is one of seven of the counties in the MSA). Based on analysis completed, we have begun to originate a large number of loans to businesses whose main offices are located in the adjoining county. Based on the analysis that we have done concerning the number and dollars originated in the adjoining county, is that justification to add this county to this assessment area, even if we do not have a branch there?

Let me begin by going back to one of the original issues - in my experience (hundreds of bank clients since 1994) I have seen situations where the regulators would not allow a bank to expand an AA boundary substantially across an MSA boundary. I also have seen situations in which regulators did not allow a bank to designate separate AA's in different MSA's in which they did not maintain at least one deposit-taking facility. I have seen these real life examples on the west coast and east coast. I have had discussions with very high people in two of the Agencies and they insist that you must have at least one deposit-taking branch in each AA. There is nothing in the law, Regulation or the Q&A's that explicitly states this requirement, nevertheless I have seen regulators insist on it and I have seen quite an altercation about this issues break out in at least one situation. So unless the Agencies change their position (I think they should) I would not risk my CRA performance on creating new AA's where I don't have at least one deposit-accepting facility.

Tennismom - since the counties are all in the same MSA you have the luxury of annexing the other counties where you are generating a significant increase in lending, even if you don't have any branches there.

Unfortunately many banks wait until right before an exam to do any sort of evaluation of their performance no matter how many times they are told that is foolish. Then at the very last minute they learn that their lending is skewed and 60% of their loans are outside their AA (including in a different adjacent MSA with no branches) - with luck it is a CSA. All that can be done at that point is help them to present the data in the best way possible to aim for a satisfactory rating.

I explain their problems to them, the challenges they face, and then do my utmost to bring every factor into play to get them the best rating possible in that situation, advising them that it just might not go well so that there are no surprises.

They cannot undo the loans at that point. It is what it is.

Then we talk about how to do this properly going forward - with planning.

[If there is time, and money, before an exam the bank can make some strategic loan purchases. That is one option to bring things into a better position.]

Thanks for the guidance.

Any assistance would be appreciated with the following:

Bank has branches in the State of Rhode Island and Suffolk County, MA. These two areas are within a CSA; however, the two MSAs for these areas are not contiguous - do they have to be? In other words, could we delineate one assessment area, i.e. the State of Rhode Island and Suffolk County or would we have to have two AAs, because the MSAs for each of these areas are not contiguous?

Thanks!

Generally for non contiguous areas you will have 2 AAs especially since you have crossed state lines. It really doesn't affect your activities, merely recordkeeping. You want to make sure you service both areas. If the bank is lending in areas in between you could consider including those areas for a combined AA. You will of course analyze your performance by county, by MSA and by the overall assessment area.

Thank you for confirming my initial thoughts. For the areas in between the two MSAs, there is not a substantial volume of lending. A strategic plan is being developed due to the fact that the in/out ratio is very low and due to the business model. Your statement on performance confirms my thoughts with respect to the measurable goals and thus performance.

Thank you again!!

I'm not sure if this makes a difference or not, I have a similar situation in that we are adding a branch to a non-MSA county that is not contiguous to our current AA or MSA. Is it required that I must make this contiguous to my current MSA or can it be it's own assessment area?

I am confused as to whether or not it must be in an MSA to make it's own AA.

A nonMSA area will generally be in its own AA; some regulators treat the non-MSA areas as one AA even when non-contiguous and those banks treated this way tend to then consider their AA in that fashion for analysis purposes to align with the exam. It can lead to some unusual results.

But in any event, the non-MSA will not be in an AA with an MSA.