Background
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:
- The bank's
principle line of business had not changed substantially since the
previous CRA evaluation that resulted in a ''satisfactory''
rating.
- The bank was
following the same business strategy, yet the examiners did not
properly consider the performance context issues as was done in
the prior examination.
- The bank's
business plan and strategy centered on origination of
''non-conforming'' residential mortgage loans to customers
throughout the country.
A large number of these loans were made to low- and
moderate-income individuals.
The appropriateness of the management component rating
downgrade from 1 to 2 was also appealed.
Discussion
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:
- Loan to
deposit ratio;
- Percentage
of loans and as appropriate, other lending related activities
located in the bank's assessment area (lending in the assessment
area);
- Record of
lending to borrowers of different income levels and businesses and
farms of different sizes;
- Geographic
distribution of the bank's loans; and,
- Record of
taking action in response to complaints about its performance in
helping to meet credit needs in its assessment
area.
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:
- The economic
condition and demographics of the assessment
area;
- Information
about lending, investment, and service opportunities;
- The bank's
product offering and business strategy;
- Any limiting
factors or constraints;
- Past
performance;
- The bank's
public file, and
- Any other
information deemed relevant by the OCC.
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:
- Affordable
housing (including multi-family rental housing) for low- or
moderate-income individuals;
- Community
services targeted to low- or moderate income
individuals;
- Activities
that promote economic development; or,
- Activities
that revitalize or stabilize low- or moderate income
geographies.
Conclusion
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.
Appeal of the Criterion
used to Examine a Community Development Focused Bank -
(Third Quarter
2000)
Background
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:
- Creating
mortgages that are smaller, more labor intensive, and take longer
to close than traditional mortgages.
- Financing
businesses with smaller loan amounts, and principals lacking the
financial sophistication and expertise of traditional
borrowers.
- Serving
consumers who, on the deposit side, are characterized by having
low balances and requiring a great deal more time and attention
due to cultural, linguistic, and experiential difficulties, and
who, on the loan side, are disadvantaged by nonexistent,
inadequate, or unsatisfactory credit histories; in addition, these
consumers have earning streams that are inconsistent, small,
and/or from non-traditional sources.
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.
Discussion
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:
- The business
of the association will be designed to primarily promote the
public welfare consistent with the requirements for national bank
investment in the community development projects pursuant to
national banking laws and regulations, including 12 CFR 24
(Eleven) and 12 CFR 24.
- The bank
must obtain prior written approval of the OCC before amending its
articles of association to alter its business operations from
those of a community development focus.
There are no
other special provisions or requirements designed for banks with a
CD focus.
Conclusion
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.
Appeal of a
''Satisfactory'' CRA rating - (Third Quarter
2000)
Background
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 PE
states that the primary reasons for the bank being rated
''satisfactory record of meeting community credit need''
are:
- The bank's
lending levels reflect a good responsiveness to the credit needs
of its assessment area.
- A
substantial majority of the bank's loans are in the assessment
area.
- The bank's
distribution of small loans to businesses is good. The bank's geographic
distribution of small loans to businesses is also
good.
- The bank
has a good distribution of loans to borrowers of different
income levels. The
bank's geographic distribution of loans to borrowers of
different income levels is satisfactory.
- The level
of community development investments and grants is
adequate. However,
the bank makes extensive use of flexible lending programs to
help meet the needs of its assessment area
(AA).
- The bank's
delivery systems are accessible to geographies and individuals
of different income levels. To the extent changes
have been made, the bank has improved the accessibility of its
delivery systems.
- The
institution provides a satisfactory level of community
development services.
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.
Discussion and
Conclusions
Lending
Test
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 bank had
demonstrated a good responsiveness to the credit needs in its
assessment areas, taking into account the number and amount of
home mortgage, small business, small farm, and consumer loans in
its assessment areas.
- A
substantial majority of loans were made in the bank's assessment
area.
- The bank's
record of lending to businesses of different sizes was good. The bank also demonstrated
a good geographic distribution of small loans to
businesses.
- The bank has
a good distribution of loans to individuals of different income
levels. The bank's
geographic distribution of loans to borrowers of different income
levels is satisfactory.
- The level of
community development lending is reasonable based on the available
opportunities.
- There is a
good use of flexible lending practices and
programs.
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.
Lending
Activity
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.
Geographic
Distribution
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:
- In the MSA,
the bank's 34 percent small business market share in low-income
geographies exceeded the overall market share. In addition, the bank's 26
percent small business market share in moderate-income geographies
equaled the overall market share. The percentage of the
bank's loans to businesses with revenues of $1 million or less did
not exceed the percentage of businesses in those areas. Small business lending
performance in the MSA's LMI areas was considered
good.
- The small
business market share in the non-MSA's moderate-income areas
exceeded the bank's overall small business market share and the
percentage of loans to small businesses in the moderate
geographies exceeded the percentage of businesses in those
areas. This was
considered an excellent level of performance.
- Home
purchase lending in the MSA's low-income geographies equaled the
percentage of housing units in that area and the market share in
the geographies exceeded the bank's overall market share. The performance in the
MSA's moderate-income areas was not as strong; however, the MSA's
home purchase lending overall was considered
good.
- In the
non-MSA, the bank's market share in moderate income areas was
comparable to its overall market share. The percentage of loans
made during this evaluation period was not as comparable to the
housing units located in that geography, but overall performance
in the non-MSA was also considered good.
- The
percentage of multifamily real estate loans in the MSA's
moderate-income geographies exceeded the percentage of housing
units in that geography and the bank's market share in that
geography exceeded its overall market share. Additionally, this lending
occurred in an area identified by the city as being in need of
revitalization in terms of housing and economic development. Performance in this
product relative to geographic distribution was
excellent.
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
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 bank's
overall market share of small loans to businesses was 27 percent
and ranked first. The
bank's market share of loans to businesses with revenues of $1
million or less exceeded its overall market share. The bank made 78 percent
of its business loans to businesses with revenue of $1 million or
less. This compared
very favorably to the overall market's percentage of loans to
those businesses. It
was also comparable to the percentage of businesses that had
revenues of $1 million or less. This was an excellent
level of performance in the MSA.
- The
performance with small businesses in the non- MSA was quite
comparable with the bank's excellent performance in the MSA
indicated above.
- In the MSA,
home purchase lending to low-income borrowers was significantly
lower than the demographic, however, approximately 40 percent of
these families have incomes below the poverty level. These families may have
difficulty qualifying for housing-related products. Home purchase lending to
moderate- income borrowers met the demographic, while the bank
ranked first in overall market share. The bank's market share of
moderate-income borrowers was comparable to its overall market
share. Considering
all factors, overall lending performance to LMI borrowers was good
in the MSA and non-MSA.
- Consumer
loans to LMI households exceeded the demographics, 113 percent and
175 percent, respectively.
This represented an excellent level of performance. As with geographic
distribution, these loan products addressed the identified credit
needs of the community and were appropriately weighted in
determining the overall performance for borrower
distribution. These
facts indicate the bank's response to the needs of small
businesses was excellent and performance in home purchase lending
was good. Therefore,
it was appropriate at the time of the examination to place the
most emphasis on these products.
The ombudsman
concluded the bank's overall performance in providing credit to
borrowers of different income levels was
excellent.
Community
Development Lending and Innovative or Flexible Lending
Programs
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.
Lending Test
Overall Conclusion
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.
Investment
Test
The bank's
performance under the investment test was evaluated in terms
of:
- The volume
of qualified investment and grants;
- The level of
innovation and complexity associated with the
investments;
- The degree
to which the investments and grants responded to the credit and
community development needs of the AA; and,
- The degree
to which these investments and activities are not routinely
provided by private investors.
The PE
concluded:
- The bank's
level of community development investments and grants is
reasonable, based on the investment opportunities available in the
community.
- The bank has
taken a leadership role in one significant investment
initiative.
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.
Service
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 PE
concluded:
- The bank's
delivery systems are accessible to all portions of its
AA;
- To the
extent changes have been made, the bank has improved the
accessibility of its delivery systems. Since the last CRA
evaluation, the bank acquired a full-service branch in a
moderate-income census tract;
- Banking
services and hours of operation are tailored to meet customer
needs;
- The bank is
a leader in providing community development
services.
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.
CRA Rating
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.