In recent years we have seen an increasing number of "community" banks adopt regional and national loan markets. These banks have embarked on a business plan that funds loan growth primarily through sales of loans into the secondary markets. The strategy appears to be working except that it has created very serious problems relating to the Community Reinvestment Act and its requirement that banks extend the majority of their loans within their Assessment Areas.

In fact, examiner manuals make it clear that a bank must have at least 50% of their loans within their defined communities or they must get a less than satisfactory performance rating on the Assessment Area ratio test. This is based on the assumption that loans outside the Assessment Area reduce a bank's ability to lend inside their Assessment Areas. It's based on the antiquated notion that bank lending is limited by the volume of bank deposits. Every dollar loaned outside the community is one dollar less available to extend inside the community. In other words, it's a "Zero-Sum" game.

This was true in 1977 when the CRA was passed. I can remember as a young loan officer in 1979 that I was told by the bank president to stop lending! Our bank (and almost every bank at the time) was losing deposits to the money market funds that could pay 14% interest on deposits while banks were limited by Reg Q to something less than 5%. That experience prompted me to become one of the pioneers in the development of the secondary market for SBA guaranteed loans.

But the advent of the Internet, Remote-deposit and other modern banking technologies, and the development of the secondary market for loans has freed bank lending from its historical ties to bank deposits.

Regrettably, the Regulation and the regulators haven't caught up with the times. Even the OCC's 2020 CRA Rule and the Fed's ANPR regarding CRA don't address the growing problem of community banks breaking the traditional business model that restricted banks to their hometown communities.

We are currently advising a bank that has an Assessment Area ratio far below the 50% minimum and they will consequently get a less than satisfactory rating on that part of the exam. The question is will it result in a composite performance rating of less than satisfactory.

The only way to escape that terrible consequence is to be able to demonstrate that your bank is doing a volume of lending within its Assessment Areas that is at least normal and reasonable for a bank your size and with your resources. If your bank has adopted a regional or national lending model you should anticipate the problems it will create and be prepared to make certain you pass your CRA exam, your Assessment Area ratio notwithstanding.

Fintech and other nonbank partnerships exacerbate this issue. Such partnerships can help reach consumers and small businesses that have historically been underserved, but the bank may pay a price in the assessment area ratio.