Assessing the Credit Needs of Your Community
One of the basic tenants of compliance with the Community Reinvestment
Act (“CRA”) is that a financial institution should strive to “meet the credit
needs of its community”. Despite this
requirement, there has never been clear definition
or guidance on how Banks should systematically determine what those needs
are. We believe that the lack of a clear
definition in this area presents both a problem and a an opportunity. Ultimately, we believe that the Bank that can
demonstrate that it has a clear understanding of credit needs vis- a-vis the
products that it offers will present a strong case for compliance not only with
CRA but also Fair Lending and UDAAP. We
suggest the following approach.
Step One: Develop Basic Economic Data.
There is a great deal of public economic data that is available
for each and every census tract in the United States. We suggest that at a minimum, that your
economic research should include the following information:
·
The median Income for the assessment area
·
The median housing prices for the assessment
area
·
The largest employers in the county that
comprises the bulk of your assessment area
·
Information on the business and business owners
in the county (in particular, women and minority ownership)
·
Information on whether or not there are economically
distressed areas within your assessment area.
[1]
The idea here is to be able to tell a story about the economic
conditions that exist in your assessment area. Using
this information, you can make a generalization about what the typical potential
borrower at your bank will look like in economic terms. Local and county chambers of commerce
generally will prepare economic predictions that can be used to analyze trends in the area. Finally, community groups in your area often
have economic information that can be very useful for development of an
economic picture. With all of this information,
you can start to tell a story about the potential borrowing needs in the community. For
example, the information can show that business is growing in certain sectors
in the area, which will imply a need for SBA or asset-based lending. It is important to be expansive in your
description of the credit needs in the assessment area. Remember, just because a certain type of
lending is a need in the community, it does not create a requirement that your
bank should offer these types of loans.
The point of this exercise is to show that your bank is aware
of the credit needs of the community .
Telling the Bank’s
Story
The second step is to develop the economic story of the bank.
It is critically important to reflect on the raison d’etre for the bank.
Why is your bank in existence and who is the basic customer base? Although
the answer to this question may seem obvious to those who have been a part of
your bank for some time, it is at all obvious to the outsiders who will be
reviewing the CRA performance of your bank!
Moreover, this is a good
starting point for the comparison that is necessary to do a strong assessment
of the credit needs of the community.
How do the goals of the bank match up with the credit needs of the community? In many cases, communities have changed
significantly since banks opened. Events
that range from economic calamities and technological innovations have cause
many communities to shift in overall makeup.
What was once a small agricultural community can quickly become a mecca
for software development. While the
goals of the bank can remain steadfast, the way that those goals are met can
change.
Take a look at the list of products that are offered at the
bank and start to see how they match up with the economic profile that you
developed in phase one. As part of this process,
it is a best practice to compare the economic profiles used by the bank as
minimum guidelines with the profiles of the assessment area. For example, suppose your bank has set a minimum
level of disposable income acceptable to make a loan. Does that minimum reflect current economic conditions
in your community. We recently consulted
with a bank that had set a minimum of $2,300 a month in disposable income for
its consumer loans. The standard was
applied equally across all consumer applications. However, because this minimum level was set at a time when the economy
in the assessment area was strong, it did not reflect the current conditions of
a great deal of the population that immediately surrounded the bank. As a result, the bank was not lending to the
majority of its customers.
In the above example, the fact that the banks standards
resulted in few loans in the area surrounding its main office was not the
actual problem, remember, neither CRA or
Fair Lending laws require banks to make bad loans or even loans that they don’t
feel are desirable. The problem was that
the Bank could not present economic justification for the $2,300 disposable
income limit. It was more of a custom than
an economic consideration. If there had
been some sort of research that showed that this was the considered business
decision of the Board based upon the study of the community, there would have
little to no concern on the part of the regulators. In this case unfortunately, without the
evidence they needed the bank was faced with potential enforcement action.
The goal in telling the bank’s economic story is to compare
economic conditions in the assessment area with the goals and the economic realities at the bank. A community may have a strong need for
mortgages, but if your bank doesn’t have mortgage lending staff, or if the Board
has determined that its risk appetite does not include mortgages, then there is
a good business decision why this product is not offered. The fact that mortgage loans have been
identified and legitimately eliminated as a product is a very strong case for
compliance with the CRA!.
Dynamic Assessment is
a Key
The area of greatest risk that we come across is the failure
of banks to make their risk assessments a dynamic process. We recommend for our clients that they make the
risk assessment of the credit needs of the community an annual process. By doing so, the current trends become part
of the assessment can be updated with an eye towards making changes as is necessary. We also strongly recommend that our banks
include community groups and local trade organizations a part of the
process. This can easily be
accomplished by the use of surveys and interviews. The idea is to use the most current
information available to establish a clear and accurate view of the community.
Product develop should take place with an eye towards trends
in the community. While the bank does
not have to meet all of the needs of its community, there should be an effort to
determine how new and developing products fit in with the current and
developing needs in a community.
The CRA does not require a bank to meet ALL of the credit
needs of it community, but the prudent bank is aware of those needs so that in the
future as products changes, these needs are considered.
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