What % of loans in a county outside our AA would constitute a look at expanding our AA into that county? This question is based on us taking whole counties as part of our AA.

Who is your regulator? The FRB is currently frowning heavily upon partial counties and partial MSAs.

As is the FDIC.

Also consider:
Interagency CRA Q&A § __.22(b)(2) & (3) – 2: Must an institution lend to all portions of its assessment area?

A2. The term “assessment area” describes the geographic area within which the agencies assess how well an institution, regardless of examination type, has met the specific performance tests and standards in the rule. The Agencies do not expect that simply because a census tract is within an institution’s assessment area(s), the institution must lend to that census tract. Rather the Agencies will be concerned with conspicuous gaps in loan distribution that are not explained by the performance context. Similarly, if an institution delineated the entire county in which it is located as its assessment area, but could have delineated its assessment area as only a portion of the county, it will not be penalized for lending only in that portion of the county, so long as that portion does not reflect illegal discrimination or arbitrarily exclude low-or moderate-income geographies. The capacity and constraints of an institution, its business decisions about how it can best help to meet the needs of its assessment area(s), including those of low-and moderate-income neighborhoods, and other aspects of the performance context, are all relevant to explain why the institution is serving or not serving portions of its assessment area(s).

I don't know that anyone can give you a hard and fast percentage of loans outside of your AA that would support taking into your AA another county. You need to look at the type of loans being made, the make-up of the county, i.e. low-/mod-census tracts, and if you can support servicing that county.

First, you must have at least 50% of your loans inside your AA's. We recommend that a bank reconsider its AA delineation annually when it conducts is annual CRA self-assessment. Facts and circumstances change and an perfectly fine AA may become outdated by internal and external events. Of course if you should open a branch outside the current AA's you should immediately redefine your AA. We generally suggest that if more than 20% of your loans are outside your AA and in areas contiguous with the current AA you should consider adjusting your AA. But whether you should expand it should be based on (1) meeting technical requirements of CRA and (2) the implications for your CRA performance expectations.

Too many banks ignore this second point. Expanding your AA always should be based on a realistic definition of your market and an understanding of the impact on CRA performance standards.If expanding the AA would increase regulator expectations under the various CRA lending tests, you may want to think twice. On the other hand, expanding your AA may have favorable implications for examiner expectations such as a lower penetration rate with respect to lending in AA LMI tracts. This means you must not only know the geographic distribution of your loans you need to recognize and understand how the AA delineation will affect "Performance Context" which is what drives CRA performance standards.

As I've posted on other threads and RR Jen and mtngrrl noted above, the regulators are increasingly frowning on partial counties. It might be helpful to look at your deposit customer distribution as well as your loan distribution. You should also consider whether you can serve the potential additional county with investments and services as well as loans. Since many banks provide services via their branch network, it is sometimes hard to deliver services where you don't have branches.

My experience is that examiners in the field are inconsistent about including whole counties in an AA. I've seen situations in which they pressed a bank to include only counties in their entirety. On the other hand, in the last year we've worked with 2 banks that were advised to reduce their AA to a part of a county. One of the counties was LA county in which the bank had only 2 deposit taking facilities to serve the 2,346 tracts in the county - an impossible task that will lead to unrealistic performance expectations driven by the performance context of the entire county.

If you adopt an unrealistically expansive AA you almost certainly will inflate performance standards lending in LMI tracts, etc. Even if examiners say they understand that and will take it into consideration during your CRA PE it puts you immediately into a defensive position in which you must rely on examiners "understanding" that your AA is unrealistic to begin with. It also means any analysis is much more complicated and subjective because the market driven performance context standards aren't realistic so they will be almost meaningless.

The Q&A's clearly address this situation and clearly say that you can reduce your AA to something less than an entire county down to the level that you can realistically be expected to serve given your resources, etc. This is one of those situations where it may be advisable to take a stronger stand if you have the data to back up your points.

We were encouraged to decrease our AA, and only include the closest tracts to our physical presence. We took out tracts that were greater than 20 miles from our branches. Then we were further encouraged to look at it again, and potentially remove another tract due to the census tract gerrymandering. There's a hole in one of my tracts, drawn up by the census bureau. We can't serve the residents on the far side of the tract, but I can't have partial tracts -- it's not my fault the tract in the middle is a donut hole -- I don't serve the residence on the other side of the hole either -- so we showed them why and our competition in that market and they encouraged us to exclude the tract my predecessor wanted included to avoid the appearance of redlining. We're rural, so taking whole counties would be ludicrous for us. There's no way I could serve that geographic footprint.

Despite the Q&As and ludicrousness of it all, the FRB strongly recommended we not only take in an entire rural county (that's part of a MSA) and another urban county we no longer have a physical presence in to avoid any redlining concerns. It is unreasonable to expect someone from a LMI/majority minority tract in the city to drive 30+ miles past multiple competitors to bank with us in a teeny tiny rural town, but we either took it into the AA or it would have to go to Washington for review.

We were told last time, it was because we had little online transactional ability. We don't close loans remotely, we don't open accounts online.

I guess as referenced above, it depends on your region and regulators.

Reading between the lines , , ,

So, if you don't include a certain area that is remote to your branches you will be accused of redlining? But if you do include the remote area in your defined community you will be accused of redlining if you haven't extended any loans in the remote area. Which is the more defensible position:
1- you exclude a certain area because it is not practical to serve and get accused of redlining or
2 - you include the remote area in your defined community but get accused of redlining because you are not generating loans in that remote area?

Either situation is not good, but if you've declared a certain geographic area as part of your market and you don't extend loans in that area it seems to me you are in a less defensible position. If you've declared the area is part of your market why aren't you extending credit there? - that's a question you will be asked by examiners. You can be accused of redlining if you omit certain geographies but you also can be accused of redlining if you acknowledge a geography as part of your community but don't provide credit there.

So if you declare certain geographies are part of your Assessment Area you should make certain that you extend credit there. If it is truly difficult to generate credit activity there, maybe your best strategy is not to declare it as part of your market. I don't envy your choices. Either way you are stuck in a difficult situation. Defending against a redlining accusation is a no-win situation. If you must include an area impractical to serve you better find a way of generating credit activity there.

In recent examination and consent order activity, there is an increasing trend of using separate geographies for CRA and fair lending analyses. The idea seems to be that you can serve a larger area for credit than you can for CD services, grants, and investments.

"In recent examination and consent order activity, there is an increasing trend of using separate geographies for CRA and fair lending analyses. The idea seems to be that you can serve a larger area for credit than you can for CD services, grants, and investments."

Agree - mostly FDIC looking outside the AA using the term REMA - "reasonably expected market area". For the fair lending review, they look at the lending outside the AA and generally compare penetration between majority minority tracts and non MM tracts. The REMA has been around at least as far back as the 2009 Interagency Fair Lending Examination Manual, but only been enforced/reviewed for the past few years that I'm aware of.

The other regulators are doing this too, but calling their geographies by different names, including market area, service area, credit market, etc.