Background
A formal
appeal was filed concerning a bank's Community Reinvestment Act
(CRA) rating of "Satisfactory Record of Meeting Community Credit
Needs." The bank's
final rating was determined based on the examiner's assignment of
the following individual ratings for each of the three test
areas:
Lending Test: High
Satisfactory
Investment Test:
Low Satisfactory
Service Test:
Outstanding
Management
appealed the rating of "High Satisfactory" on the lending test. They stated in the appeal
that their performance under this test should have been rated
"Outstanding," which would have then resulted in an overall
"Outstanding" CRA performance rating. The bank's previous CRA
rating had been "Outstanding" and management felt that they
continued to warrant the higher rating.
While
management understood the methodology used for analyzing performance
under the lending test, they believe that an adjusted median family
income (MFI) figure should be used that is more representative of
the bank's individual assessment area. In particular, they did not
understand why state-wide nonmetropolitan
MFI level was used to test their performance, instead of their
county specific MFI level.
Management
feels that county-wide MFI information is a more appropriate measure
to evaluate their performance under the lending test for the
following reasons:
- The bank's
assessment area is much different from other parts of the state
because of the city's low unemployment rates and higher housing
costs; and
- The
county-wide MFI number specifically includes their city (the capital
of the state), where local income levels are positively affected by
state government.
Management said that if the county-wide MFI figure was used,
their mortgage loan penetration level to low- and moderate-income
(LMI) borrowers would have equaled the level of LMI families in the
bank's assessment area.
Based on this fact, management argued that the bank's
performance under the lending test should have been rated
"Outstanding."
Notwithstanding the bank's confusion on
the MFI evaluation criteria, management was also concerned about the
fairness and consistency among other bank regulators of using
state-wide or county-wide MFI numbers when evaluating performance
under the service test.
In particular, they provided examples of other competing
financial institutions who were given overall "Outstanding" CRA
ratings because another federal bank regulator used an "adjusted"
MFI (instead of state-wide numbers) to support the bank's
penetration figures.
Discussion
The basis for
using MFI to measure lending to LMI individuals is contained within
12 CFR 25.12 (b) of the CRA regulation:
(b) Area
median income means:
(1) The median family income [MFI] for
the MSA [metropolitan statistical area], if a person or geography is
located in an MSA; or
(2) The statewide nonmetropolitan median family income, if a
person or geography is located outside an MSA.
To reduce
burdens on the industry, the agencies chose to use the MSA MFI level
in metropolitan areas or the state-wide nonmetropolitan MFI level in rural areas, to
measure lending to individuals of various income levels. Since the bank's assessment
area is not part of an MSA, the standard used to measure the bank's
lending activity to LMI individuals is the state-wide nonmetropolitan MFI, as required by the
regulation.
Conclusion
While it is
clearly understandable why bank management believed that use of the
state-wide MFI level is not appropriate for the bank's assessment
area, there is not a sufficient basis for making this type of
adjustment within the CRA regulation. However, the regulation does
give examiners guidance to include specific information about a bank
or its assessment area into the Performance Context section of the
CRA Public Disclosure, and to use this information to more
accurately and fairly evaluate a bank's overall performance.
During our
examination, examiners used the regulation's guidance to analyze the
bank's lending performance giving consideration to the differences
between countywide and state-wide MFI levels. Using the state-wide nonmetropolitan MFI level, the bank's
performance was not representative of the community's
demographics. To
mitigate this finding, the examiners analyzed the bank's performance
using county-wide MFI data.
When considering county-wide MFI, the bank's lending
practices to LMI individuals improved to a level more comparable to
community demographics.
While improved penetration resulted from the use of
county-wide MFI information, the level of the bank's lending to LMI
individuals never exceeded the community's demographics. The examiners incorporated
this analysis into the Performance Context and used the results of
the county-wide MFI levels to support a "High Satisfactory"
rating.
While bank
management was correct that another federal banking agency did in
fact, use an adjusted county-wide MFI, that particular examination
was performed very early in the regulatory transition from the old
to the new CRA regulation.
Unfortunately during that transitional period, some
inconsistencies in the application of the regulation occurred
between federal agencies.
Since that examination, all of the federal banking agencies
have attended joint CRA training and have worked diligently to
ensure consistent application of the regulation.
After careful
review of the information submitted in the appeal, the ombudsman
decided that a "Satisfactory" rating accurately reflected the bank's
CRA performance during the time period covered in the Public
Disclosure. Although
the examiners appropriately incorporated the differences in lending
performance based on county and state-wide MFI levels into the
Performance Context, and used the analysis to support the "High
Satisfactory" rating, additional detail was included in the
Performance Context in the CRA Public Disclosure to support their
analysis. At the
request of the ombudsman, representatives of the OCC contacted bank
management in order to discuss with them what opportunities are
available to enhance the bank's overall
performance.
