Community Reinvestment Act examination procedures do not provide a clear method for evaluating banks with few or no branches.
Banks that deliver their products primarily over the Internet, by telephone, or through the mail are often referred to as "banks without walls." The location of their main office or branches, if they exist, is irrelevant to their business of deposit-taking and lending, which is often conducted nationwide.
Yet today regulators examine these banks according to their assessment areas, often defined as the immediate area around the main office. This approach is appropriate only for those operating close to that office.
Both the lenders and their regulators know that an assessment area may represent only a small fraction of the area served. For such banks, the percentage of loans made inside the assessment area (a measure used to gauge commitment to lending in the community) is very small, sometimes 1% of the total or less.
One option regulators may consider in their CRA review is to treat more of these lenders like limited-purpose or wholesale banks - giving them credit for providing community development loans, investments, and services without focusing on a specific assessment area. A wholesale bank must first "adequately address the needs of its assessment area" but will then get credit for activities outside that area.
To better understand how "banks without walls" manage their CRA compliance, we reviewed performance evaluations from 1999 through 2001 for 10 banks whose assets ranged from $971 million to $33 billion.
The evaluations showed that the banks met the CRA challenge almost as if they were wholesale banks, often going beyond the law's strict requirements. Three received the highest rating, "outstanding," and seven received a "satisfactory."
The banks we looked at are regulated by the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corp. Each of the agencies gave one "outstanding" rating.
Each of the banks took a different approach to compliance, but there were similarities. At least seven had a CRA officer active in the assessment area. Like most wholesale banks, all 10 made community development investments and provided services, and most made community development loans.
Three participated in the Strategic Plan option, which requires them to submit a three- to five-year outline of how they intend to comply with the CRA. Three others are already classified as wholesale or limited-purpose banks. The remaining four, classified as large banks, chose to be evaluated relative to their peer group and regulator expectations.
To improve the results in their assessment areas, several banks bought home mortgage loans. These purchases often consisted almost entirely of mortgages to low- and moderate-income borrowers.
Some banks tried to achieve a benchmark based on the demographics of their assessment area, which meant buying loans to have their results approximate the percentage of owner-occupied homes in low- and moderate-income tracts. Others compared their results with aggregate lending levels of all banks in the assessment area.
Four of the 10 banks received CRA credit for loans made outside their assessment area. In each case, the bank, not the regulator, determined what additional areas would be included. One chose most of its major markets. Another chose areas that had characteristics similar to its primary market.
Examiners appreciated the unusual circumstances these banks faced in complying with the CRA and generally allowed them some flexibility.
What are the lessons to be learned from the performance of these 10 lenders? (Remember, each achieved at least a "satisfactory" rating, even though their business strategies were not closely aligned with traditional CRA evaluation methods.)
- Employ a CRA officer who is active in your assessment area.
- Determine what your ideal rating is, and be prepared to have as good a performance in your assessment area as similarly sized banks with that rating.
- Establish a strategy for community development investments.
- Develop good relationships with other large retail banks to facilitate partnerships that will help your CRA performance.
- Ensure open and frequent communication with your regulator.
Applying these lessons may help lenders meet their short-term CRA goals, but a disconnect remains between "banks without walls" and the measures that examiners may apply to them.Though the story of these 10 banks indicates a strong commitment that was recognized by their regulators, lack of further CRA guidance could lead to problems. Examiners' different interpretations may result in banks' under- or overshooting targets and focusing redundant benefits on certain areas while ignoring others.
These lenders should encourage regulators to revise CRA regulations, or at least issue interpretations that result in more consistent examinations. Removing uncertainty will allow banks to reach the most underserved communities.
It is clear that the 10 banks we reviewed met their CRA objectives through strategies similar to those used by wholesale banks. It remains to be seen whether agencies will change the rules to reflect the reality of a growing number of banks.
