It is not easy to tell whether your bank complies with the Community Reinvestment Act.
The four federal regulators differ in how they evaluate the assets banks have put on their books to meet CRA requirements and how they decide the territory to consider in determining compliance.
A bank known for making loans to lower-income households or serving the community will be inundated with loan applications, while one with a reputation for being stingy will be ignored because of an expectation of being turned down. The result: The stingy one will reject fewer requests and therefore will look better than the one trying to do a good job.
Community banks are trying to raise the $250 million threshold for small-bank exemption from the more onerous CRA mandates.
Currently banks must meet each supervising agency's requirements on the basis of three major tests: lending, investment, and service.
The lending test is straightforward enough. It measures mortgage originations and purchases; farm, community development, and consumer loans according to geographic distribution; and innovative and flexible lending practices.
The service test evaluates branch locations, accessibility to low- and moderate-income areas, and availability of credit and services.
It is on the investment test that many banks have problems. They may be in areas that have limited opportunities for affordable housing, community development, and other investments that benefit low- and moderate-income residents. Regulators may then approve or require a broadened territory.
But how much of a bank's assets and capital should be devoted to such investments?
James C. Feeney, an associate at Milestone Advisors in Short Hills, N.J., has analyzed recent CRA exams for small and large banks to find out what separates those that receive "outstanding" ratings" from the ones with "low satisfactory" or "needs to improve."
Mr. Feeney, who spent more than eight years with the Federal Deposit Insurance Corp., found that "outstanding" banks typically commit 1.18% of assets and 13.44% of capital to qualified CRA investments. "Needs to improve" banks commit roughly one-tenth of 1% of assets. (See table.)
The study, now being made public by Milestone, gives a good indication of what a bank has to do to satisfy this subjective investment test.
For banks not meeting these guidelines, the firm recommends CRA mortgage-backed securities pools or mutual funds that invest in community development.
Mr. Feeney stresses that no single product can serve as a "magic bullet." Examiners like to see a variety of investment - in both debt and equity vehicles - as well as grants to qualifying organizations. He recommends funds as a way of meeting the test without devoting too much of management's time to finding and approving investments.
To me, though, the main value of the Milestone study is that it gives bankers guidelines on what level of investment they must make to win an "outstanding" rating. A bank can use the results when it argues its case about meeting its CRA obligations fairly and adequately.
Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management in Newark, N.J.
