The Community Reinvestment Act (CRA) celebrated its 40th anniversary in 2017. The Act was established to ensure banks were meeting the credit needs of the community they designated as their assessment or market area, which often was a circle around their branches. Passing a CRA exam was less troublesome since bankers only had to be able to substantiate that they had a plan to lend where their deposits base was located and met the credit needs of their communities through loan programs. Then came the rewrite in 1989 that added the rating system, along with the development of the performance evaluation reports; all this made passing a CRA exam even more difficult. Since the rewrite, not much has changed with the Act. The big changes that occurred were embedded in the FAQs, which primarily focused on the qualification and quantification of community development activities.
One thing to remember is that CRA is about meeting the credit needs of low‐ to moderate‐income locations and individuals, whereas Fair Lending is all about inequality of credit based on personal borrower characteristics. Therefore, CRA is focused on the low‐ to moderate‐income individuals and geographies within a bank’s assessment area.
Assessment areas are critical and crafting one is the soul of the CRA exams today. Performance evaluations are based on the level of lending in the bank’s assessment area compared to its peers. This would include the lending within the assessment area, the level of lending to low to moderate locations (tracts) within a community to small businesses and small farms, and lending to the low‐ to moderate‐income individuals in the assessment areas. For larger banks, it includes the level of community development activities such as the making of community development loans, investments and services. Smaller banks can present at, their option, community development activity information to their examiners to receive CRA credits, but most don’t because of the challenge.
Community Development Activities Emphasized
With more emphasis being placed on community development activities for large and intermediate‐small banks, this article will highlight a few areas of community development topics that should be considered since a bank’s CRA performance success will be its participation in the community advocacy programs. What will the community leaders have to say about the bank when asked by the bank examiners? Will the examiner hear a pause, or will the community leaders be able to sing the bank’s praises about its activity in the community to meet the area’s credit needs?
Many factors can make a community unstable such as loss of jobs, natural disasters and economic downturns. Community development is ever evolving, especially when revitalization can happen in one area while another area of the community may be experiencing the start of deterioration requiring revitalization going forward. Bankers need to monitor the pulse of their communities to identify areas of need.
Community development puts pressure on banks to be more involved in their communities. This expectation can be accomplished by a bank’s involvement with non‐profit organizations that help communities that focus on job training, financial health, affordable housing financing, and homeless shelters.
We see often where one individual impacts the community in a positive way, which spreads to other communities. For instance, the block leaders’ role under the auspices of the Neighborhood Housing organization.
The same type of reaction occurs when a bank has an innovative idea to meet a community’s need and becomes a partner with a non‐profit organization that shares the same mission and vision.
As a bank enters into community development partnerships, it needs to remember the results will not come quickly but bear fruit over a period time. That’s why it is imperative for bankers to document their efforts, so they can tell their story to other community leaders and especially to the bank examiners.
Community Development Loan Eligibility Often Confusing
Deciphering what is an eligible community development loan can be baffling at times. Generally, loans need to show the proceeds will serve low‐ to moderate‐income individuals or geographies. The loan proceeds need to be clear that activity affords opportunities to stabilize employment or assist with the revitalization of low‐ to moderate‐income census tracts. Loans to help assist with more affordable housing – either by rent or actual homeownership in low‐ to moderate‐income census tracts or to low‐ to moderate‐income individuals within the bank’s assessment area – receive CRA recognition.
Examples of community development loans include construction of affordable housing or rehabilitation of a facility located in low‐ to moderate‐income areas or serving primarily low‐ and moderate‐income individuals. Rehabilitation of affordable housing or community facility to remove or correct environmental hazards such as lead paint, mold, asbestos or radon. Improvement of affordable housing or community facility with renewable energy, energy‐efficient or water conservation equipment. Other considerations would be the repurposing of abandoned buildings for new employment opportunities or assist in the development of green space for inner‐city farming in low‐ and moderate‐income locations. Donating bank branches counts too, but this is not as easy as turning over a deed to a group.
Community Development Investment Have Benefits Too
A few things to remember with Community Development investments is to ensure the funds will have a direct impact on low‐ to moderate‐income areas or to low‐ to moderate‐income individuals. Consider funds going toward affordable rental units, funds for lunch programs at schools with a population of more than 50% of the children being from low‐ to moderate‐income families, funds for down payment assistance programs for low‐ to moderate‐income individuals to purchase a home, or rehabilitation facilities that are heavily focused on helping low‐ to moderate‐income individuals.
Community Development Services a Building Stone
Services that can be considered Community Development services build lasting relationships that yield lending opportunities. Consider being involved in internships or mentoring programs for low‐ to moderate‐income individuals to assist them for future employment in the community. Provide financial education classes to the local social service office, schools and to first‐time home buyers. The bank can provide technical assistance to a start‐up small business in the community.
Another creative idea that can be of assistance to the underbanked and underserved is mobile banking. Just about everyone has a cellphone, so providing classes or seminars on utilizing mobile devices for their banking needs has proven successful. In addition, banks can provide classes on how to establish credit or offer products that can benefit the underbanked and underserved in their communities.
Many banks ask: How do we start to locate outreach opportunities? First, start with your regulatory agency which typically has a resource webpage for CRA or they have a community liaison. Several will offer topics on community developments and training material to assist with financial educational classes, such as the FDIC with their Money Smart program.
In addition, get out of the office and meet with organizations in the community. Attend community events geared toward affordable housing, financial health, and programs assisting low‐ to moderate‐income individuals. Be sure to document these efforts and the result of the bank’s involvement with such organizations.
Technology and innovative programs prove to be a wealth of resources on CRA to assist banks in their journey to seek opportunities in the community development realm. The internet provides at a quick glance those resources that are available.
On May 22, 2018, TCA will conduct a webinar regarding CRA to provide valuable insight considerations and community development resources.
If your bank needs to have your CRA evaluated or needs assistance with obtaining resources to strengthen your programs, contact TCA and let us help you meet the needs of your community.