We recently switched charters and are being reviewed for the first time by a new regulatory agency. This agency is stating that we should be taking full counties (basically the entire MSA, which is composed of four counties) instead of the census tracts we currently take for our assessment area. Our current AA includes the county our three branches are in and the census tracts at the edges of neighboring counties.

Is this the new norm? This is the first time I've been told to take those larger geographies. When we plot our loans, we're doing some lending in those counties, but not equally throughout the counties. I'm concerned we will get criticized for not making loans in portions of the county that contain low- or moderate-income census tracts, but the examiner assured me that would not be the case if it can be explained by the distance from our branches.

We are regulated by the FDIC and they have reached out to us to take full counties and not just tracts. There was apparently a bank in Oklahoma that was hit for red lining and they did not take full counties so we were told that we should take whole counties because they did not wish for this to happen to any of their banks. Not sure how that would stop red lining?? This was the theme 4 years ago also. We were also told we are examined on the whole county anyway. The plan is to change our assessment area and just do what they want.

Personally I don't believe this is the spirit of CRA. They should change it to read take whole counties and not what a bank reasonability can expect to serve. I don't agree but it is what it is. I worry that they will come back in a few years and hit us for only having a few loans in those tracts that we have included and 'expect to serve.'

We consult for a small bank in large city, and in an examiner conference, the regulator said the bank should designate the area where they get deposits and make investments and loans - the area they reasonably expect to serve.
Imagine a denovo in Los Angeles taking on 2000 tracts from a storefront.

@JobSecurity - totally my concern too. I've been through CRA with all three agencies now, and the FDIC is the first agency that I've heard this from. It feels wrong, but they assured me it would be to our benefit.

If I recall from my glance at the OCC's proposed new CRA rule (before they rescinded it), this was part of the changes they were going to make as well. It will be interesting to see what the new interagency guidance ends up with.

We are FDIC and were told it's better to take whole counties and explain why you don't serve a particular area of the county well rather than just take a few tracts.

The FFIEC CRA Q&A lists reasons why a FI could take just census tracts:

For example, this adjustment is appropriate if the assessment area would otherwise be extremely large, of unusual configuration, or divided by significant geographic barriers (such as a river, mountain, or major highway system).

There is an explicit statement in the Q&As regarding AA delineation that allows an AA to be configured on less than a full county. I would venture to say that perhaps 75% of our bank clients delineate less than a complete county for their AA's. The important thing is to be sure to document your reasons for defining your AA as you finally end up doing.

Years ago I was speaking at the CA BA compliance conference about this topic and a banker approached me saying she had been told by examiners they wanted her one branch bank to annex all of Los Angeles County. Before I could answer her the fellow behind her told us he had been a FDIC examiner and he knew why the examiners were pushing for full counties even when they were unrealistic for banks. He said and I quote, "They are lazy. All their standard tables are based on complete counties so when a bank constructs an AA that is less than a full county it requires the examiners to redo every standard table."

The most popular service my company offers is live mapping for AA delineation purposes that allows for manipulating different potential CRA AA configurations taking into consideration the practical service area of the branch system, de facto loan distribution, competitive structure of the market, etc. Far more than half our clients do not include entire counties within their AA's.

Concerning Len's post, and additionally to mine -

IMHO, CRA measures where the loans are made in the designated AA. Fair Lending, which is usually examined at the same time
measures where the loans are NOT made in majority-minority tracts in the AA, or REMA (reasonably expected market area). You can take the whole county, but cannot reasonably serve all of it, and if you're missing loans from too many MM tracts, the bank can be criticized.

I have also heard this from the FRB in the past.