Consumer Compliance Outlook: Fourth Quarter 2014

Transitioning from an Intermediate Small Bank to a Large Bank Under the Community Reinvestment Act

By Rebecca Zirkle White, Senior Examiner, Federal Reserve Bank of Richmond

A bank’s transition under the Community Reinvestment Act (CRA) from an intermediate small bank (ISB) to a large bank may seem challenging at the onset because of differences between the large and ISB evaluation standards. For example, a large bank must begin collecting and reporting data for small business, small farm, and community development loans1 in the year in which it meets the CRA definition of large bank. The following year, it will be subject to the large bank CRA examination procedures, which include separate tests for lending, investments, and services. To help facilitate the transition, this article discusses ways for an ISB to anticipate the changes, develop an appropriate strategy, and enlist the aid of personnel across the institution to ensure a successful transition to the large bank examination procedures.

Transitioning to a Large Bank Under CRA

An institution is no longer considered an ISB when its assets equal or exceed the upper asset size threshold for small banks (which includes ISBs), as of December 31 for both of the prior two years.2 The small bank threshold equals $1.202 billion for 2014 and is adjusted annually.3

When an institution transitions from an ISB, it must immediately begin collecting loan data that will be reported in the following calendar year, consistent with standards provided for in Section 42 of Regulation BB and detailed later in this article. The institution will not be subject to the large bank examination procedures until one full calendar year after it ceased being an ISB (that is, until it has collected a full year of loan data subject to large bank CRA collection). Anticipating and understanding the requirements of a large bank before becoming one are critical to a successful transition.

Overview of the ISB Evaluation Process

Before discussing the standards for evaluating a large bank under CRA, it is helpful to review the ISB standards to highlight the differences. For an ISB, CRA performance is evaluated under the small bank lending and community development tests. The lending test evaluates the bank’s loan-to-deposit ratio, the percentage of lending in the bank’s assessment areas, the distribution of lending to borrowers with different incomes and revenues, and the distribution of loans in geographies of different income levels. See 12 C.F.R. §228.22(b). The streamlined lending test for small banks also considers an institution’s record of taking action in response to written complaints about its performance in helping to meet the credit needs in its assessment area(s). The community development test considers activities that meet the definition of community development as it is discussed in the next section of this article. In particular, the test considers the number and amount of community development loans and qualified investments,4 the extent of community development services, and the responsiveness through these activities to community development needs. Because both tests are weighted equally, a bank must receive at least a satisfactory rating for both the lending and community development tests to receive an overall satisfactory rating; a less than satisfactory rating for either test will result in an overall less than satisfactory CRA rating.

Community Development

Community Development is one aspect of the CRA examination that does not change when a bank becomes a large bank. Community development is defined in Regulation BB. See 12 C.F.R. §228.12(g). External Link Additional guidance is included in the Interagency Questions and Answers Regarding Community Reinvestment (Interagency Q&As).5 The term community development includes:

With limited exceptions, community development loans, qualified investments, and community development services that are considered as community development activities under an ISB CRA evaluation will continue to qualify under a large bank CRA evaluation with two key differences. First, large banks will not have the flexibility to have certain home mortgage, small business, or small farm loans that meet the regulatory definition of community development as community development loans.7 For large banks, these loans will be reported and will be considered under the retail portion of the lending test. Second, community development activities will be evaluated under different performance tests (the lending, investment, and service tests) instead of being evaluated together under one community development test.

Data Collection and Reporting for Large Banks

One significant new obligation for a bank transitioning from an ISB to a large bank is the requirement under 12 C.F.R. §228.42 to collect information about the small business, small farm, and community development loans it originates or purchases and to report this data annually to its CRA federal regulator. Anticipating the need to collect these loan data will help ensure a smooth transition, including establishing appropriate processes and systems to comply with this requirement. A recommended practice is to begin planning for data collection before the bank exceeds the small bank threshold on December 31 of the two consecutive years because the data collection requirement is effective when a bank crosses the large bank threshold. The Federal Finance Institutions Examination Council provides many resources, including instructional guides and free data entry software, to assist banks with data collection. These resources can be found at External Link

As detailed in the CRA regulation and guidance included in the Interagency Q&As, the collection of data for small business loans is limited to loans whose original amounts were $1 million or less and were reported as either “loans secured by nonfarm or nonresidential real estate” or “commercial and industrial loans” in Part I of the Report of Condition and Income (Call Report).8 A small farm loan must be reported if the original amount was for $500,000 or less, and if it was reported under either “loans to finance agricultural production and other loans to farmers” or “loans secured by farmland” in Part I of the Call Report.9 The annual revenue of a business or farm does not affect the small business or small farm classification.

As detailed in the table below, four key pieces of information must be collected for each individual small business or small farm loan.

Data to be collected for each small business and small farm loan include:
  • A unique number or alphanumeric symbol to identify the relevant loan file
  • The loan amount at origination
  • The loan location (MSA or MD,10 state, county, and census tract)
  • An indicator whether the loan was to a business or farm with gross annual
  • revenues of $1 million or less11

Data must be reported in the aggregate. Specifically, for each geography in which the reporter originated or purchased a small business or small farm loan, the aggregate number and amount of loans in the following categories must be reported:

Data collection is one of the key actions a bank must take during the one-year lag period before it is subject to the large bank examination procedures. When the CRA data are collected for any year, the aggregated CRA data must be reported in the required format by March 1 of the following year.12 Examination staff will use small business and small farm loan data when evaluating a bank’s performance under the lending test.

In addition to reporting small business and farm loans, large banks must report community development loans. However, this data reporting is more limited because only the aggregate number and aggregate amount of community development loans originated or purchased during the prior year are reported.13 A bank that elects to have its CRA examiners consider community development loans by a consortium or third party must report the data the bank would have reported had the loans been originated or purchased by the bank.

If a large bank is subject to the Home Mortgage Disclosure Act (HMDA) reporting rules, it must report additional mortgage data for CRA purposes. Specifically, the location of each home mortgage loan application, origination, or purchase outside the MSAs in which the bank has a home or branch office (or outside any MSA) must also be reported in accordance with the regulatory requirements. This information must be included in the loan application register. See C.F.R. §1003.4(e).

Furthermore, a large bank has the option to collect and maintain (but not report) consumer loan data for consumer loans originated or purchased during a calendar year. Categories of consumer loans for which a bank may collect data include motor vehicle, credit card, home equity (if not reported under the HMDA), other secured, and unsecured.14 Banks may collect information for one or more of the categories, but if a bank chooses to collect data for loans in a certain category, it must collect data for all loans originated or purchased in that category. The consumer loan data to be collected, if a bank chooses to do so, mirrors the data requirements for small business and small farm loan collection: a unique identifier for each loan, loan amount at origination or purchase, loan location, and gross annual income of the consumer that the bank considered in making its credit decision. These data should be provided to examination staff for consideration in the bank’s CRA evaluation.

Section 228.22(c) additionally provides that, at a bank’s option, loans by an affiliate of the bank will be considered if the bank provides data on the affiliate’s loans pursuant to §228.42. A bank that elects to have loans by an affiliate considered shall collect, maintain, and report for those loans the data that the bank would have collected, maintained, and reported had the loans been originated or purchased by the bank. For home mortgage loans, the bank shall also be prepared to identify the home mortgage loans reported under Regulation C by the affiliate.

In particular, CRA Q&A ___.22(c)(2)(i)—1 PDF External Link provides that an institution may elect to have loans by its affiliate(s) considered. The bank may elect to have all or only certain categories of the following types of loans considered: home mortgage loans, small business loans, small farm loans, community development loans, and the five categories of consumer loans mentioned previously.

Further, Q&A ___.22(c)(2)(i)—1 PDF External Link explains rules that prohibit an affiliate from claiming a loan origination or loan purchase when another institution claims the same loan origination or purchase. Additionally, Q&A ___.22(c)(2)(ii)—1 prohibits “cherrypicking” within any particular category of loans by providing that when an institution elects to have considered loans within a particular lending category made by one or more of the institution’s affiliates in a particular assessment area, all loans made by all of the institution’s affiliates within that lending category in that particular assessment area must be considered.

Large Bank Evaluations

The large bank CRA performance standards include three tests, lending, investment, and service, which are discussed in greater detail below. Unlike the ISB evaluation method, in which the lending and community development tests are weighted equally in determining the institution’s overall CRA rating, the large bank lending test receives greater weight than either the investment or service tests in determining the overall rating. The investment and service tests are weighted equally. The table below shows the weight assigned for each rating under each test.

Component Test Ratings
Points for Lending
Points for Investment
Points for Service
High Satisfactory
Low Satisfactory
Needs to Improve
Substantial Noncompliance

An institution rated outstanding for the lending test will receive an overall rating of at least satisfactory.15 Alternatively, an institution that receives a rating of less than satisfactory for the lending test will receive an overall rating of less than satisfactory16 regardless of the ratings of the investment and service tests.

The following table illustrates how the sum of the component test rating scores translates to the assignment of the overall CRA rating.

Composite Rating
Points Needed
20 or more
11 through 19
Needs to Improve
5 through 10
Substantial Noncompliance
0 through 4

Lending Test

The lending test components for a large bank CRA evaluation differ from those for an ISB evaluation. For a large bank, two ISB lending test factors are eliminated: the loan-to-deposit ratio and the institution’s responsiveness to written complaints about its performance in meeting the credit needs in its assessment area(s). Conversely, two new elements are introduced for the large bank lending test:

However, the most significant difference between the ISB lending test and the large bank lending test involves community development lending. The first change involves qualitative considerations when evaluating community development loans. While the regulatory definition of community development is unchanged, community development loans are no longer grouped with investments and services under a broad community development test but are considered as a component under the large bank lending test. Community development loans are evaluated based upon the number and dollar amount of such loans as well as their complexity and innovativeness. These last two criteria add additional qualitative dimensions to the evaluation of a large bank’s performance and may augment performance under the quantitative criteria of the lending test.18

Another significant difference involving community development loans is the removal of the ISB option to treat certain small business, small farm, or mortgage loans as community development loans. As previously discussed, when an ISB does not report mortgage, small business, or small farm loan data, it can choose, on an individual loan basis, to have any of these types of loans that meet the definition of community development treated as community development loans. Upon this election, these loans are considered under the community development test and cannot also be considered under the ISB lending test.

This option is not available to large banks, even when the large bank does not report mortgage loan data. With one exception, loans that would need to be reported under Regulation C, if the large bank were required to collect and report such loans, cannot be treated as community development loans. The only exception is for multifamily housing loans that have a community development purpose. Whether reported or not, such a loan can be considered both a community development loan and a mortgage loan under the large bank lending test. Since large banks must report community development loans, it is critical that such loans be identified both to meet this technical reporting requirement and to ensure such loans are properly evaluated as part of the lending test.

Successfully identifying community development loans will typically require the involvement of loan officers or loan administration personnel because these staff members are often in the best position to identify when a loan meets the definition of community development. Staff training, checklists to establish when loans have a community development purpose, and strong collaboration between lending staff and bank staff responsible for reporting community development loans can help to ensure such loans are properly identified and reported.

The remaining elements of the lending test for a large bank evaluation are unchanged from the ISB evaluation process and focus on an analysis of the bank’s major loan products. Loans reviewed will include small business, small farm, and loans reported under the HMDA although, based upon a bank’s distinctive lending profile, other types of loans may be reviewed. Assessment area concentration measures the proportion of loans originated inside the bank’s delineated assessment area(s). Additionally, within the bank’s assessment area(s), the geographic distribution of lending in geographies of different income levels and the distribution of lending to borrowers with different incomes or revenues continue to be considered under a large bank CRA evaluation. The table below summarizes the lending test similarities and differences for large banks and ISBs.

Lending Test Component
Large Bank Lending Test19
ISB Lending Test20
Loan-to-Deposit Ratio
Lending Activity
Assessment Area Concentration
Geographic Distribution of Loans
Lending Distribution Based upon Borrower Characteristics (Income or Revenue)
Community Development Lending
No — but included in Community Development Test
Innovative or Flexible Lending Practices
Response to Written Complaints About Performance in Meeting the Credit Needs of Assessment Area(s)

Investment Test

The investment test can present challenges for an ISB transitioning to large bank status. Interagency Q&A ___.26(c)—1 PDF External Link explains that an ISB has the flexibility to allocate its resources among community development loans, qualified investments, and community development services in amounts that it reasonably determines are most responsive to community development needs and opportunities.

Large banks are evaluated under separate lending, investment, and service tests, which include expectations for community activities under each test. It is important for a large institution, or an institution that is approaching large bank status, to recognize the increased regulatory expectations and to plan accordingly. A bank that has not planned properly may discover too late that its level of participation in qualified community development investments is insufficient to achieve a satisfactory rating under the investment test.

Qualified investments must benefit one or more of a bank’s assessment areas or a broader statewide or regional area that includes the bank’s assessment area(s).21 Factors considered under the large bank investment test include:

All of these elements are considered when reviewing performance. Complexity, innovativeness, and the degree to which qualified investments are not routinely provided by private investors are all factors under the large bank investment test that are not included in the ISB community development test. These specific criteria permit an examiner to qualitatively weight certain investments differently or to make other appropriate distinctions when evaluating an institution’s record of making qualified investments. Banks should consider both quantitative and qualitative factors, in the context of safety and soundness, when weighing their investment choices. Ultimately, the investment test rating measures an institution’s responsiveness to community needs relative to available opportunities.22

Many institutions find that assistance from the chief financial officer or investment officer is critical to identify qualified investments or investment opportunities. Beyond the purchase of a qualified investment, documentation of the community development benefits of the investment is important. Documenting the purpose of the investment, through the prospectus or other relevant documents, the geographic area benefiting from the investment, and any qualitative elements will help both bank staff monitoring CRA performance and examination staff conducting the CRA evaluation.

Service Test

The service test for large banks generally does not present transition issues. It has two components: retail services and community development services. While an ISB evaluation considers community development services, the retail services component is specific to the large bank CRA examination process and focuses on the location of branch offices and their operations. The distribution and accessibility of branch offices to LMI areas and persons are considered along with the opening or closing of any branch locations, particularly in LMI geographies. Alternative delivery methods, including ATMs and mobile banking, are also considered. Finally, the range of services provided in geographies with different income levels and the degree to which the services are tailored to meet local needs are part of the performance evaluation.23

Under the community development services component of the large bank service test, CRA consideration is given to services with a community development purpose that are related to the “provision of financial services.”24 Both requirements must be satisfied. In general, activities that use employees’ financial expertise as related to banking meet the definition of a community development service.25 Activities may result from serving on the board of directors of a community development organization or by providing financial expertise through volunteer activities. Qualified community development services are reviewed for the extent to which community development services are provided and the innovativeness and responsiveness of the services to area needs.26

Identifying and documenting qualified services may be best accomplished through a bankwide effort that engages staff across the organization. Some institutions have had success capturing community development services through the use of an internal form to document qualified activities. The form may be structured as a survey completed by staff members. The forms are periodically submitted to or aggregated by the CRA officer or other responsible staff to verify that the activities submitted qualify. An effective process will identify the nature of the service provided, any partner organizations involved, targeted beneficiaries of the service, and dates.


With a clear strategy and proper preparation, banks transitioning from ISB performance standards to large bank performance standards can successfully navigate the differences between the two CRA evaluation methods. Enlisting the aid of bank personnel across different departments, including lending, finance, and retail administration, can facilitate the transition process, and engaging such staff on an ongoing basis can help sustain success.

Specific issues and questions should be raised with your primary regulator.