Regulatory Compliance Newsletter #7
These newsletters are intended to help you with regulatory compliance.
GeoDataVision issues these advisories periodically.CRA Compliance – Avoiding the Performance Context “Straight Jacket” CRA Compliance – Avoiding the Performance Context “Straight Jacket”
As every CRA professional knows, the goal of the Community Reinvestment Act is to
evaluate bank performance in terms of “meeting the need for credit services in the community”.
The Community Reinvestment Act does not define specific quantitative performance standards,
but rather enumerates a series of “tests” and CRA performance ratings that are based on
comparison to the “Performance Context” - a combination of demographic, economic, and
market variables as well as institutional history and resources. These performance context
parameters can be very general, but too many CRA officers let themselves get trapped into the
narrowly defined “Lending Tests” delineated in the Regulation and lose sight of the real goal of
CRA – assuring that a bank is providing adequate loan services to its community. This is a big
mistake that can result in a bank not receiving the performance rating it deserves.
Let’s take a look at one example of the “CRA test trap”. Most bankers will complain that
one of the biggest problems mandated by CRA is lending in so-called “LMI geographies” –
lending in census tracts classified as low- or moderate-income. Often community bankers will
complain that there is no significant loan market in those neighborhoods, or that the competition
is dominated by mega-lenders willing to lend at a loss to generate their CRA “quota” of LMI
loans (often, but not always true). What is community banker to do? Answer, don’t let your
lending to the low- and moderate-income community be defined only in terms of lending in LMI
geographies. There are many other ways to identify needy geographic markets. One very good
alternative is the “Underserved Areas” and defined by the Department of Housing and Urban
Development (HUD). As a federal agency charged with the responsibility for the nation’s
housing, HUD has identified areas that are not adequately served in terms of housing needs.
Often, the “Underserved” tracts are different and more numerous than the LMI tracts. Moreover,
since the underserved tracts are based on a combination of housing, income and race
demographics they often represent more realistic mortgage lending opportunities. In some cases,
HUD defined underserved areas are even upper-income tracts!
Underserved areas are only one example of your ability to define your community’s
needs and measure how you meet them. Empowerment Zones, HUB Zones, “Difficult to
Develop” Qualified Census Tracts and Enterprise Areas are other examples. You don’t have to
limit your performance measurement only to LMI tracts. Finally, your examiner will be very
impressed that you’ve taken the time to really evaluate your community’s needs. This kind of
effort can go a long way to convincing an examiner that you are serious about knowing and
understanding the need for credit services in your community – and that’s half the battle in a
CRA performance evaluation.
GeoDataVision
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