Consumer Compliance Outlook: Third Quarter 2014

Community Reinvestment Act: Developing a Strategy for Success

By Cathy Gates, Senior Project Manager, Federal Reserve Board, and Maria Villanueva, Senior Examiner, Federal Reserve Bank of San Francisco

Congress passed the Community Reinvestment Act (CRA or the act) in 1977 to encourage depository institutions to help meet the credit needs of their local communities, including low- and moderate-income (LMI) neighborhoods, consistent with safe and sound operations. The Board of Governors of the Federal Reserve System (the Federal Reserve Board, Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC)(the agencies), have rulewriting and supervisory authority for the CRA.1 While the act and its implementing regulations have been updated over time, the core principles of the CRA remain unchanged. This article discusses some of the changes to the CRA since its enactment and offers suggestions for institutions in setting CRA strategy and goals and monitoring CRA performance.

The CRA’s Evolution

Since its enactment, the CRA and its implementing regulations have been updated. Some of the updates have focused on the role of the public in the CRA evaluation process. For example, in 1989, the act and, subsequently, the regulations were amended to require CRA ratings and performance evaluations to be made public.2 Most recently, the regulations were updated in 2010 to encourage institutions to support eligible development activities in areas designated under the U.S. Department of Housing and Urban Development’s (HUD) Neighborhood Stabilization Program.3 The most significant update to the CRA regulations was the comprehensive regulatory revision undertaken by the agencies to make the CRA regulations more performance oriented pursuant to an executive order issued in July 1993. The final regulations that were issued in 1995 laid out several evaluation methods tailored to an institution’s size and business model.4 Since 1995, CRA examinations have not evaluated an institution’s process for achieving performance, only the result of its lending, investment, and service activities. Nonetheless, institutions with a CRA strategy and monitoring plan are in a better position to meet the CRA performance expectations set out by their management and boards of directors.

Selecting a CRA Strategy

All institutions, regardless of size or business model, benefit from having a strategy for CRA performance. Whether formal or informal, a strategy focuses bank management on helping to meet the credit, service, and community development needs of an institution’s assessment area(s) and on the institution’s goals, not just for its more prosperous customers and areas but also for LMI customers and areas. An effective CRA strategy will consider both the institution’s particular business advantages and the needs and opportunities that exist in its assessment area(s). This is important because examiners are instructed to evaluate an institution’s CRA performance within the context of its business strategy, its capacity and constraints, the overall economic conditions and credit needs in its assessment area(s), the availability of community development activities appropriate to the institution, its past performance, and the performance of similarly situated lenders. These elements are commonly referred to as the performance context.

The first step in developing an effective CRA strategy is to take stock of the institution’s business model and operational strengths:

The answers to these questions will vary from institution to institution and will influence the activities that a particular institution chooses to include in its CRA strategy. In fact, the answers could even influence which CRA examination method an institution chooses. For example, if the institution offers only a narrow product line, such as credit cards, it may decide to request a limited purpose bank designation, and to be examined under the community development test for wholesale or limited purpose banks. Or if the bank has an unusual business model, it may choose to develop, and to be examined under, an approved strategic plan.

After considering an institution’s characteristics, the next step is to understand the needs of its assessment area(s) and the opportunities available to help meet those needs. Most bankers have access to a great deal of information about the demographics, economic conditions, and needs of their assessment area(s) through the normal course of business. Additional information may be available from government agencies, local businesses and community groups, nonprofit service providers, community development organizations, and universities. For example, HUD maintains a list of approved Consolidated Plans online.5 These plans are developed by state and local governments to assess affordable housing and community development needs. Moreover, they include community development priorities for the areas covered by the plan that are helpful for coordinating various sources of funding and expertise.

In addition to these readily available sources of community-level data, it is useful to ask the bank’s employees and board members for input. The relationships that bankers build through community outreach and involvement are critical to identifying and understanding community needs and opportunities. An institution’s branch managers; commercial, consumer, and small-business lending officers; and other retail banking management can provide their understanding of community credit, service, and community development needs based on information learned through both their interactions with customers and their personal experiences.

Building relationships with community groups, government officials, community leaders, and financial intermediaries (such as community development corporations, small-business investment corporations, and community development financial institutions) for their perspective on community needs is also extremely helpful. A community with a sophisticated network of community organizations, financial intermediaries, and government officials will provide a rich base from which to understand community needs. For an institution that operates in a small community with few community organizations, relationships with local business leaders and government officials, such as the local economic development authority or the farm service agency, will likely be helpful sources of information and partnership possibilities.

The community development departments in each of the Federal Reserve Banks also serve as valuable sources of information regarding community needs and potential partners. The Interagency CRA community contact procedures include useful information, too. These procedures can be a resource for considering the types of organizations that may be helpful to the bank because they describe the various types of organizations that are active in communities and the information each type may be able to provide. Reviewing the procedures offers insight into the factors examiners consider as they work to understand a bank’s performance context.6

Setting Goals

Once an institution is armed with the knowledge of its business strategy, its capacity and constraints, and the needs and opportunities in the community, it is much easier to set appropriate CRA goals. Setting such goals is not required by the act or CRA regulations unless an institution has chosen to be evaluated under the strategic plan option. Examiners do not measure performance against internal goals. They evaluate performance in context, including the performance of other similarly situated institutions. Nonetheless, financial institutions find that setting goals is an effective way of focusing on desired outcomes. The goals may cover all retail and community development activities or focus on those most important to the institution’s effort to meet the credit needs of LMI areas and individuals. They can be stated in terms of numbers or percentages of loans, investments, or services provided or in terms of the numbers of people that benefited from the activity. The key to developing effective CRA goals is to make them measurable, relevant, and appropriate to your institution. Aligning the CRA goals with the bank’s lines of business and relative market strengths and community credit needs enables an institution’s board of directors and management to facilitate and encourage efforts to achieve them.

Before setting any goal, an institution should discuss the rating it wants to achieve with senior management and the board of directors or with the board’s CRA committee. Assuming an institution would like to achieve at least a satisfactory rating, it can develop goals by reviewing past performance (as recorded in previous performance evaluations), performance since the last examination, and information in the public file, including complaints about CRA performance. Because examiners evaluate performance relative to other similarly situated institutions, it is also helpful to know what other institutions have done by reviewing their public CRA performance evaluations in the institution’s assessment area(s). These evaluations provide insight into the credit, service, and community development needs and opportunities captured in those reports and will give the institution a sense of how examiners viewed its performance. This additional information is helpful to understanding the institution’s comparative advantages and may even point to missed opportunities.

While considering past performance can provide valuable information, it is important to remember that goals are set for actions that will be undertaken in the future. Once you understand what your institution and its competitors have done to address the needs of LMI areas and individuals in the past, be sure to review changes in your community’s demographics, economic conditions, needs, and opportunities. Of course, any changes to the institution’s capacity and constraints should be evaluated, too.

All of this information should be analyzed to determine the role that the institution can play in helping to meet its community’s needs, and your goals should reflect this analysis. Discussions with community organizations and local government agencies can provide a good check on whether the goals are aligned with the needs of the community. Identifying gaps through analysis and outreach may lead you to set goals for activities that are new to the institution or may signal that the institution’s involvement in ongoing activities should increase. In some instances, an institution may have to adjust the manner in which community needs are addressed based on changes in economic conditions or constraints that the institution is facing. Refining goals to address current business conditions should be part of the process.

The Benefits of CRA Monitoring

Monitoring CRA activity can help identify weaknesses, allow the institution time to make adjustments where needed, help provide accurate reporting to the institution’s management and board of directors, and make it possible to respond to questions from examiners and community organizations. Examination periods can be as short as one year and as long as five years; therefore, without monitoring, it can be difficult to know if your institution is staying on course. Only by monitoring performance can you see when your performance is lagging, take the time necessary to figure out the cause, and address the issue before your next examination.

Perhaps the best way to appreciate the benefits of monitoring performance between examinations is to consider the consequences of not monitoring. Institutions that do not monitor performance may miss opportunities and risk a negative CRA rating. The public nature of CRA ratings can expose the institution to significant reputation risk and endanger plans to acquire or merge with other financial institutions since CRA ratings are considered in the application process.7

Best Practices for CRA Monitoring

Good CRA monitoring is a continuous process and requires the participation of the entire bank, including the board of directors, senior management, and staff. A solid understanding of the CRA helps everyone at the institution identify CRA opportunities and remember to report activities that should be considered during a CRA examination. This means that CRA training is essential for many bank employees, particularly investment officers; commercial, consumer, and small-business lending officers; and retail banking management and staff. Having a broad training program for bank employees reduces the risk of not having qualified lending, investment, and service activities identified, reported, and considered during a CRA examination.

Once directors, management, and staff are engaged, it is important to have an accessible and easy-to-use system for reporting CRA activity. Larger financial institutions often facilitate the collection of data online using proprietary intranet systems so that data can be collected about events or activities as they occur. Real-time or periodic data collection is more effective, and likely more accurate, than last-minute preparation. Gathering data at the time of loan approval is an efficient method used by many financial institutions to collect information related to CRA performance. By collecting data electronically on an ongoing basis, bankers can review performance periodically and even share it with examiners.

Some institutions conduct self-assessments to help them gauge CRA performance. Effective self-assessments generally include a review of lending levels within census tracts of various income levels and a review of the dispersion of loans throughout the institution’s assessment area(s), to identify any areas with unusually low penetration. Most institutions use mapping software for this analysis. The CRA does not require, nor do examiners expect to see, lending in every geography or census tract. However, by monitoring your performance, you may identify conspicuous gaps in lending or areas with abnormally low lending penetration that may not be readily apparent. Most institutions would want to have an opportunity to address the shortcomings in their CRA performance or, at a minimum, to be able to explain the reasons behind the gaps in performance rather than have them raised for the first time in the context of an examination.

Similarly, reviewing the distribution of loans by borrower income and business revenue is a good way to determine whether the institution is lending to borrowers of all income levels, including LMI borrowers, and to small businesses and farms. Whenever a lending analysis reveals performance that does not meet the goals the institution set for itself, it is important to refer to the performance context factors and consider whether there were significant changes in the institution’s capacity and constraints or the needs and opportunities within its assessment area(s). This analysis should also consider the performance of other local institutions to determine whether opportunities were missed or whether the goals set for the institution are unreasonable under the circumstances. Other good sources for putting performance into context are CRA-related complaints and public comments about the institution’s CRA performance.

It is often helpful to refer to the Interagency CRA Examination Procedures8 when monitoring progress toward CRA goals. The procedures can guide an institution to the appropriate proxies to use for various analyses. For example, when assessing the geographic distribution of small-business loans, an appropriate proxy to compare lending levels would be the percentage of small businesses within a given geography. For home-purchase, home-refinance, and home-improvement loans, the percentage of one- to four-family owner-occupied units within a given geography can be used, together with appropriate performance context information, to help assess performance. If an institution has multiple assessment areas or has assessment areas in multiple states, it will also want to use the examination procedures as a guide to evaluating its performance at the assessment area, state, and institution level to identify potential gaps.

Finally, another important part of CRA performance is ensuring that the bank complies with consumer protection laws and regulations. Fair lending violations and certain other illegal credit practices will have a negative effect on the institution’s performance and could result in a rating downgrade. In addition to violations of the fair lending laws (both the Equal Credit Opportunity Act and the Fair Housing Act), other illegal credit practices can negatively impact a rating including (but not limited to) violations of the Home Ownership and Equity Protection Act, Section 5 of the Federal Trade Commission Act, Section 8 of the Real Estate Settlement Procedures Act, and the Truth in Lending Act provisions regarding a consumer’s right of rescission.9

Testing Your Analysis

Once you have conducted an analysis and compared the results with the goals the institution sets for itself, you should identify any significant variances. When the institution fails to meet a goal, you will first want to check for data accuracy. If it appears that your data are accurately reported, you should identify the issues, or change in performance context, that caused you to miss the goal. If a change in performance context is temporary, the bank’s goals may still be reasonable. If the change is expected to have a longer-term impact on loan demand, the bank may want to adjust its goals to fit the economic realities of the assessment area or the institution’s ability to meet assessment area needs.

Another possible cause for weak lending performance could be changes in the competitive environment. An analysis to identify new entrants to the lending market in your assessment area may be helpful. It is also possible that a bank’s product offerings are not responsive to the needs of the borrowers in the assessment area. Depending on the needs of the community, it may be a matter of adjusting current product offerings, developing new products, or partnering with community development organizations, including community development financial institutions, to help reach the customer base the bank wants to serve.

If a bank’s goals exceeded expectations, it may be because the bank grew and the CRA goals were not adjusted to reflect that growth. It could also be that the local economy is growing. Again, it is important to identify the reason for the variances, determine if the reason for the variances will have a temporary or longer-term impact, and adjust the bank’s internal goals accordingly.


Developing a CRA strategy, setting goals, and monitoring results can make CRA performance more predictable and more meaningful. An effective CRA monitoring program can help ensure the CRA is not just the responsibility of the bank’s CRA officer but of every employee at the institution. Regular reporting to the bank’s management and board of directors engages them in the process and reinforces the bank’s commitment to the credit and community development needs of its community. Moreover, regular monitoring helps remove the stress that surrounds CRA examinations by making it easier to answer questions regarding the bank’s performance and the factors that affected its performance during the examination period.

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