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A community bank appealed its Community Reinvestment Act (CRA) rating of ''needs to improve'' assigned by the supervisory office. The performance evaluation (PE) stated that lending within the bank's assessment area was lower than the standard for ''satisfactory'' performance. The bank believed the conclusion was inappropriate based on the following:
As reported in the PE, the bank had a low level of lending within its assessment area. For the two-year evaluation period, the bank originated 79 loans equating to 7 percent of all bank HMDA reportable (one- to four-family purchase, home improvement, and home refinance) loans. The facts were not in dispute. The key issue was whether the bank's low level of lending within its assessment area could result in a satisfactory record of meeting the bank's community credit needs when considering all relevant factors, including the bank's performance context. Banks with assets of less than $250 million are defined as small institutions under the CRA regulation. Small institutions are evaluated under five assessment criteria:
The PE concluded the bank's performance in all the above criteria was found to be reasonable with the exception of lending in the assessment area. In all CRA evaluations, performance context is an integral component of the analysis. The performance context considers:
Performance context is especially important to this bank due to their business strategy and non-traditional product delivery systems. The bank's primary lending activity focuses on non-conforming/subprime mortgage secured loans. Management stated that because there was strong competition from several larger institutions in their market area for traditional lending products, that they had identified subprime lending as a viable niche. According to bank management, this strategy and type of lending has affected the bank's ability to generate a significant volume of loans within their assessment area.
The May 3, 1999 FFIEC Community Reinvestment Act; Questions and Answers Regarding Community Reinvestment (Qs & As) states that if the percentage of loans and other lending-related activities in an institution's assessment area is less than a majority, then the institution does not meet the standards for satisfactory performance only under this criterion. However, its effect on the overall performance rating of the institution is considered in light of the performance context. In addition, the Qs & As also state that examiners can consider ''lending-related activities,'' including community development loans when evaluating the first four performance criteria of the small institutions performance tests.
Community development lending provides support on a performance context basis to the degree that a loan benefits a low- or moderate-income individual or is made in a low- or moderate-income geography. Community development is defined as:
The performance context under which this bank operates is unique. It is a small bank (under CRA criterion) that has a narrow product offering which has affected its ability to provide a significant level of traditional lending within its assessment area. While the bank is compensated for assuming additional risk, the benefits to the customers include availability of credit, debt consolidation, and opportunity to improve their credit rating. Although performance context allows for consideration of items such as business strategy and past performance when evaluating CRA, in this situation it did not provide the degree of mitigation needed to bridge the unusually low level of lending within the bank's assessment area to reach an overall ''satisfactory'' rating. Therefore, considering the above factors the ombudsman concluded that the bank's performance under the CRA was reflective of a ''needs to improve'' rating. While the bank's community development lending had a positive impact on the assessment area performance, its current level did not bring the bank's performance to an overall ''satisfactory'' level.
A bank with a community development (CD) focus formally appealed the criterion used to examine the bank. The appeal pointed out that, by pursuing the CD focus, which was the bank's mission, the bank was in direct conflict with some of the examination criterion employed by the Office of the Comptroller of the Currency (OCC). In its appeal the bank expressed concern that the OCC's evaluation of some component ratings is not sensitive to the obstacles facing banks with a CD focus. To illustrate this point, the appeal stated that the bank's CD focus works contrary to profit maximization (earnings) by:
The appeal further stated a CD-focused bank's approach to offsetting these inherent disadvantages is to seek available financial assistance from public and private sources supportive of its mission. A significant source of offset comes from within the U.S. Treasury Department in the form of a Bank Enterprise Act (BEA) award. A bank with a
CD focus is entitled to these awards based on accomplishing preset goals consistent with its mission. Despite documentation showing the bank's eligibility for these funds, in this instance the examiners discounted them because of their non-traditional status.
The appellate submission noted that, unlike investors in most banks that are motivated to acquire new capital and accumulate additional capital based solely on maximizing profit; a bank with a CD focus looks for a balance between profits and service to the low- and moderate-income community. As emphasized above in the discussion of earnings, banks with a CD focus have non-traditional means of raising additional capital such as awards or grants from community groups or other banks. Additionally, the appeal stated that management's ability to budget and project financial outcomes for a bank with a CD focus are severely constrained by the unavailability of comparable data. It further notes that by definition, the customers of a bank with a CD focus have not been well served by traditional banks and available data is very limited.
The corporate process and requirements for chartering a bank with a CD focus is subject to the same standard requirements as any other bank. However, there is a special condition that banks with a CD focus must include the nature of its activities in the articles of association. Specifically, the articles must state:
There are no other special provisions or requirements designed for banks with a CD focus.
As the ombudsman considered whether the examination criterion of the OCC represents a conflict for banks with a CD focus, he recognized the ''intrinsically more challenging undertaking" that these institutions face. However, the financial health of any banking organization is critical to fulfilling its obligation to the stockholders and the community it serves. As CD banks pursue a balance between serving low- and moderate-income communities and profitability, the financial health of these institutions becomes increasingly important. Financially stable community development institutions will have longevity, which will allow them to maximize the positive impact on their communities. The ombudsman concluded that the existing safety and soundness criterion contributes to achieving this longevity. In the OCC's evaluation of a bank's performance under the Community Reinvestment Act, a bank with a CD focus receives recognition for their efforts to provide financial services to low- and moderate-income communities.
The OCC is committed to ensuring that its supervisory conclusions consider the uniqueness of each institution in assigning ratings that reflect the safety and soundness of its operation. The ombudsman offered assurance that the agency will continue to evaluate the issues confronting institutions with a community development focus to ensure there is a reasonable chance for their success.
A large retail bank filed an appeal concerning its Community Reinvestment Act (CRA) rating of "satisfactory." The bank also appealed the lending test rating of "high satisfactory," the investment test rating of "low satisfactory," and the service test rating of "high satisfactory." The bank's last performance evaluation (PE) rated the bank as having an "outstanding record of helping to meet the community credit needs." The submission noted that even prior to the enactment of CRA; the bank took great pride in delivering its products and services to all individuals and businesses in its trade area. It continued that since the inception of CRA and the rating system, the bank had made every effort to attain and sustain an "outstanding" CRA rating. CRA has become a part of the bank's yearly business plans and a major goal of the bank's management.
The submission detailed the reasons for disagreement on each of the tests and the overall rating, as follows:
The bank is an intrastate bank and is the lead bank in a multi-bank holding company. The bank's assets exceed $2 billion with multiple offices located in four counties. Ninety-five percent of the offices are full-service locations. The bank owns and operates a number of automated teller machines (ATMs) in its assessment area (AA). The bank's AA consists of two separate but contiguous areas. One of the bank's AAs is a metropolitan statistical area (MSA), while the other is a non-MSA. The bank's AAs are comprised of 2 percent low-income geographies, 22 percent moderate-income geographies, 61 percent middle income geographies, and 9 percent upper-income geographies. By family income level, 18 percent of the families in the AAs are considered low-income families, 19 percent are moderate-income, 27 percent are middle income, and 36 percent are upper-income. The bank's business strategy is to operate with a community-bank orientation while offering a large-bank range of products. Commercial lending has long been a primary focus of the bank with small business lending considered one of the bank's market niches.
The lending test evaluates a bank's performance in terms of the volume of lending, the geographic distribution of loans originated and purchased, the borrower dispersion of loans originated and purchased, the responsiveness to community needs, the level of innovation and flexible products offered, and community development lending activities. The PE concluded:
The appellate submission stated that the lending test rating should be ''outstanding'' based on the information contained in the PE because the bank was consistently ranked as the leading provider of CRA-related loans to low- and moderate-income individuals, businesses, and farms in the bank's assessment area.
A review of the bank's lending tables disclosed that the bank extended a high volume of loans for the evaluation period. While the bank had the largest deposit share in its market, its lending activities also reflected dominance. The market share for small business lending, the bank's acknowledged niche, was commensurate with the bank's deposit share in the MSA and exceeded its deposit share in the non-MSA. The bank ranked first in market share for loans to small businesses, home purchase loans, home improvement loans, and multifamily real estate loans - which identified as the most significant credit needs in the community. The bank's market share percentage was significant in these product categories.
Additionally, the substantial majority of the bank's loans were within the designated assessment areas. Therefore, the ombudsman concluded that the bank's level of lending reflected an excellent responsiveness to the area's credit needs.
Small business lending represents a significant portion of the bank's business lending. The bank's strategy emphasized business lending, which has long been considered its strength. Additionally, loans for start-up companies was one of the most frequently cited credit needs in the bank's AA. Therefore, when considering all factors, the ombudsman concluded that at the time of the examination, the primary emphasis should be placed on small business lending. The PE also stated that affordable, first-time homebuyer loans and multifamily real estate loans were identified credit needs. As such, performance in home purchase and multifamily lending was weighted heavier than other housing-related products.
Furthermore, the ombudsman's analysis found the bank's percentage of loans in LMI areas ranged from an adequate to excellent level of performance when evaluated against the percentage of housing units or businesses in those geographies. In addition, the following was considered:
As mentioned above, these loan products addressed the identified credit needs of the community, further demonstrating the bank's commitment to help meet community credit needs. Therefore, the ombudsman concluded that the bank's overall geographic distribution of loans was good.
Borrower distribution reflected a strong level of performance measuring borrowers with various income levels and market share measures. The bank's distribution of loans to LMI borrowers ranged from adequate to excellent. Of particular note during this evaluation period was:
The ombudsman concluded the bank's overall performance in providing credit to borrowers of different income levels was excellent.
There was no disagreement with the assessment that ''the bank's level of community development lending was reasonable based on available opportunities.'' The PE also described several lending programs that were flexible, responsive, and have had a positive impact on the development of the community. These programs utilize standards that make credit available to borrowers that typically have difficulty accessing credit. While some of the programs have been available for several years, the programs continue to generate loans. Therefore, the ombudsman concluded that the bank utilized flexible lending programs, which had a positive impact on the bank's overall rating for the lending test.
The bank's volume of lending was significant and substantial within its assessment areas. Therefore, the bank's performance in the geographic and borrower distribution of credit was key to the bank's overall rating for the lending test. The bank's performance in the geographic and borrower distribution of credit noted above reflected a commitment to helping meet the credit needs of the community. This was particularly true considering the identified credit needs, the bank's product niche or emphasis, the operating environment and the extensive use of flexible lending programs. The bank's overall volume of lending was consistent with the CRA guidelines for an ''outstanding'' rating for the lending test.
The bank's performance under the investment test was evaluated in terms of:
The PE concluded:
The appellate submission stated that the investment test rating of ''low satisfactory'' was not justifiable, given the information in the PE. In addition, the submission stated that management believes their willingness to invest in any economically viable project in their community, coupled with taking the lead in the only limited liability corporation of its kind, in a community where there are limited community development opportunities as noted by the community contacts, should afford the bank a ''high satisfactory'' rating.
No additional information was offered during the processing of the appeal that would increase the level of community development investments noted at the time of the examination. The level of qualified investments noted during the CRA review represented less than 1 percent of the bank's tier one capital and the PE noted only one occasion where the bank assumed a leadership position. The ombudsman agreed that the level of investment identified during the examination was accurately categorized as reasonable, given the bank's size and resources. Therefore, he concluded that the assigned ''low satisfactory'' rating was appropriate for the bank's performance on the investment test.
The bank's performance under the service test was evaluated in terms of retail banking services (the accessibility of delivery systems, changes in branch locations, and the reasonableness of business hours and services to help meet the AA's needs) and the level of community development services provided in the AAs.
The appellate submission stated that the PE supporting information supported an ''outstanding'' rating for the service test, so an upgrade from a ''high satisfactory'' to an ''outstanding'' was requested. The primary focus of the service test is the distribution of full service branches, while still considering alternative delivery systems. The bank's branch distribution in the MSA's LMI areas exceeded the demographic in the low income area, but not in the moderate-income areas. Information provided during the processing of the appeal revealed that the volume of ATM transactions in the MSA for ATMs located in or near LMI areas was significant. However, there are no branches or ATMs distributed in moderate-income areas of the non-MSA. Therefore, the overall branch distribution was good.
The PE noted that the bank opened a full service branch in a moderate-income geography, which did improve the accessibility of banking services in that geography. The bank's performance in opening and closing branches was excellent. Services listed in the PE were considered to determine the reasonableness of the bank's business hours and services. The services listed did not inconvenience any segment of the community. However, the services are not tailored specifically for LMI individuals or geographies and do not represent a significant difference from services offered by other banks.
Considering this, the bank's services were adequate. There was no dispute about the bank's community development services, which was described as excellent. When blending the conclusions of the other tests to determine the overall rating for the service test, the most weight was given to the bank's branch distribution and the community development services. Therefore, the ombudsman concluded an ''outstanding'' rating was appropriate for the bank's performance in the service test.
The ratings in each of the tests contribute to the overall CRA rating. In this case the changing of the rating on the lending test from ''high satisfactory'' to ''outstanding'' positively affected the overall rating on the bank's CRA performance. Therefore, the bank's overall CRA rating was changed to ''outstanding'' and a new PE was prepared to reflect the change.