Consumer Compliance Outlook
Understanding the Community Reinvestment Act’s Assessment Area Requirements
Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage depository institutions to help meet the credit needs of the local communities in which they are located and to help combat redlining.1 To accomplish these goals, the CRA requires the federal agencies with responsibility for assessing depository institutions’ CRA performance — the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (Board), and the Office of the Comptroller of the Currency (OCC) — to periodically conduct CRA examinations of the institutions they supervise. During the examination, examiners assess an insured depository institution’s record of helping to meet the credit needs of the communities it serves, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution.2 Based on an institution’s performance, examiners assign a CRA rating and issue a public performance evaluation.
Regulation BB, 12 C.F.R. part 228, is the Board’s implementing regulation for the CRA that applies to the institutions it supervises.3 To facilitate CRA examinations, the regulation requires that depository institutions delineate a geographic assessment area(s).4 The technical definition of an assessment area is discussed in detail in the next section, but it generally refers to the geographies in which the bank has its main office, its branches, and its deposit-taking automated teller machines (ATMs), as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans.
Assessment areas are a central concept of the CRA regulation. Although an institution’s asset size and operations determine which CRA tests are considered, all of the tests measure an institution’s performance in its assessment area(s).5 It is therefore critically important that institutions subject to the CRA understand the requirements for delineating assessment areas. This article reviews those requirements, discusses the importance of monitoring changes in assessment areas, notes the benefits of using mapping software, and explains the effect of assessment areas that do not meet the technical requirements of the regulation.
Regulatory Requirements for Delineating an Assessment Area
Regulation BB sets forth several technical criteria for delineating assessment areas.6 First, the geographic location of assessment areas must consist generally of one or more metropolitan statistical areas (MSAs); metropolitan divisions; or one or more contiguous political subdivisions, such as counties, cities, or towns.7 A political subdivision includes townships and Indian reservations, but it does not include wards, school districts, voting districts, and water districts.8 Assessment areas must include the institution’s main office, its branches, and its deposit-taking ATMs, as well as surrounding geographies in which the institution has originated or purchased a substantial portion of its loans.9 However, if an institution asks its regulator to consider affiliate lending in the CRA examination, the geographies within which the affiliate’s loans have been made do not affect the institution’s delineation of its assessment area(s).10
If an institution predominately serves an area smaller than a political subdivision, it may adjust the boundaries of its assessment area to include only the portion of a political subdivision that it can reasonably be expected to serve.11 Adjusting the boundaries of an assessment area may also be appropriate if the assessment area would otherwise be extremely large, of unusual configuration, or divided by significant geographic barriers such as a body of water or a mountain.12
Second, assessment areas must not reflect illegal discrimination.13 For purposes of defining CRA assessment areas, this refers to the practice of excluding geographies from assessment areas on a prohibited basis under the federal fair lending laws.
Third, assessment areas cannot arbitrarily exclude low- or moderate-income geographies. Examiners may consider the following factors to determine if this has occurred:
- income levels in the institution’s assessment area(s) and surrounding geographies
- locations of branches and deposit-taking ATMs
- loan distribution in the institution’s assessment area(s) and surrounding geographies
- the institution’s size
- the institution’s financial condition, and
- the business strategy, corporate structure, and product offerings of the institution.14
Finally, assessment areas must consist of whole geographies and may not extend substantially beyond an MSA boundary or beyond a state boundary unless they are located in a multistate MSA.15 When more than one MSA is combined with another in a combined statistical area (CSA), performance is measured using data at the MSA level — not the CSA level.16 If an institution serves areas in a state that are separate and not contiguous, each area should be delineated as a separate assessment area.17 Similarly, if an institution serves an MSA with counties that abut the MSA but are not adjacent to one other (i.e., they extend substantially beyond the MSA), each county would be a separate assessment area.18 However, if the MSA and counties are in the same CSA, they could all be included in the same assessment area, except the data used in measuring CRA performance would not be based on the CSA-level data but on the MSA-level data for the MSA, and at the state, non-MSA levels for the counties.19
Benefits of Mapping Software
To help verify compliance with these requirements, the Federal Reserve System and other federal regulators use maps that include relevant demographic information, which can be useful in several ways to both regulators and financial institutions. First, these maps can provide a visual representation of the income levels and racial compositions of census tracts in an assessment area. This visual representation can help determine if an assessment area arbitrarily excludes low- and moderate-income tracts or reflects illegal discrimination.
Second, maps can be used to depict an institution’s lending activity, thus ensuring that the institution’s delineated assessment area(s) includes the geographies in which the bank has originated or purchased a substantial portion of its loans. Maps, along with tables that segment the bank’s aggregate lending inside and outside the bank’s assessment area(s), will reflect whether a significant number of loans are extended outside the assessment area(s). If this is the case, the institution should consider adjusting its assessment area(s) to include the areas where significant lending is occurring, consistent with the regulatory requirements. For example, after reviewing a map of an institution’s lending activity inside and outside of its assessment area, an institution may realize that it would be more appropriate to take an MSA as its assessment area rather than counties, or a county rather than individual towns.
Third, maps can help determine whether an assessment area is extremely large, has an unusual configuration, or has geographic barriers. The regulation allows institutions to adjust their assessment areas in any of these three circumstances.20
Finally, a map that includes demographic data could help illustrate certain aspects of the institution’s performance context. When conducting a CRA examination and assigning a CRA rating, examiners consider performance context — economic, demographic, institution- and community-specific information applicable during the evaluation period.21 For example, a map could identify geographic areas where no consumer, small business, or small farm lending could reasonably be expected to occur, such as a park or cemetery.
Monitoring Assessment Areas
The factors that influence the designation of an assessment area can change over time. It is therefore important that institutions monitor their assessment areas so they can make necessary adjustments to ensure ongoing compliance with the regulation. For example, an institution’s lending patterns can change, especially if the institution is growing. An institution may currently designate its assessment area(s) as A, B, and C counties, where it extends a substantial portion of its loans. But if the institution begins lending in neighboring D and E counties, it should determine whether its assessment area(s) should be expanded to include these counties, or the MSA containing these counties, to ensure that its assessment area(s) includes geographies where it has originated or purchased a substantial portion of its loans. The extent of lending in D and E counties would inform this decision.
The income and demographic composition of census tracts can also change over time, as reflected in updated census data. For example, the 2010 census data revealed that 17 percent of the census tracts designated as moderate-income tracts in 2000 changed to middle-income tracts in the 2010 census. Similarly, 25 percent of the census tracts designated as middle-minority tracts in the 2000 census (meaning 50–79 percent of the tract has a minority population) changed to high-minority tracts in the 2010 census (meaning 80 percent or more of the tract has a minority population).22
If an institution finds that the demographics of its assessment area(s) have changed in a material way, it should examine its assessment area(s) and lending patterns to determine whether its assessment area(s) should be adjusted. As the Board has noted in its supervisory guidance, “CRA assessment area designations will be reviewed during the course of an examination to ensure that the bank adequately adjusted its assessment area(s) to account for differences in census tract delineations based on the new 2010 census data.”23 But it is important to note that “the eligibility of a loan, investment, or service as a community development activity is based on demographic information available to the bank at the time the activity is undertaken.”24 For additional information, Outlook published an article in 2012 discussing the effect of changing census data on compliance with the CRA, the Home Mortgage Disclosure Act (HMDA), and fair lending laws.25
The U.S. Census Bureau previously collected and reported census data every 10 years. But beginning in 2005, the Bureau began issuing new census data reports every five years. Thus, depository institutions should monitor the five-year census reports for any changes in their lending areas. The Federal Financial Institutions Examination Council website provides tools to access updated census data.26
Supervisory Implications of Assessment Areas
Examination data reveal that the majority of depository institutions supervised by the Board have delineated assessment areas that comply with the regulation. Occasionally, however, examiners identify assessment areas that do not meet the regulation’s technical criteria.
Because a performance evaluation focuses on an institution’s lending, investments, and/or services, examiners will generally not downgrade an institution’s CRA rating for violating the technical requirements for designating assessment areas. Instead, examiners would designate corrected assessment area(s) to evaluate CRA performance. Additionally, examiners generally would document that the assessment area was redrawn to comply with Regulation BB and would cite any violations of the assessment area technical requirements of Regulation BB in the consumer compliance report of examination; however, examiners would not communicate the technical violation in the institution’s CRA performance evaluation.
Crucially, one circumstance in which a violation could affect an institution’s CRA rating and be noted in the CRA performance evaluation is an assessment area that reflects illegal discrimination.27 This finding could result in a CRA rating downgrade depending on the particular circumstances of the violation, including the strength of the evidence of the practices, the policies and procedures the bank has in place to prevent such practices, corrective action the bank has taken or committed to take, and any other relevant information.28 A full discussion of this fair lending issue is beyond the scope of this article, but institutions should be aware of this risk.
Examiners evaluate CRA performance with reference to the institution’s assessment area(s). It is, therefore, essential that institutions engage in due diligence when creating assessment areas, periodically monitor potential changes to assessment areas, and make appropriate adjustments when necessary. Specific issues and questions should be raised with your primary regulator.