CRA Success Starts with a Plan

The results of Community Reinvestment Act examinations are now subject to public disclosure, and many bankers therefore approach compliance with trepidation and uncertainty.

The trade press and general media are full of stories about community activists protesting alleged bank noncompliance with the CRA. These protesters often demand mandatory set-asides for loans to the community.

What many bankers may not realize is that bank regulatory agencies place an emphasis on an institution's CRA operating system and the documentation of a bank's community investment activities.

What that adds up to is: The traditional, simple CRA statement has become obsolete.

The 12 Factors

An expanded CRA statement can be an operational mission statement used to address each of the 12 assessment factors in CRA regulations.

For the first 12 years of the act's existence (1977 to 1989) - which incidentally was a time when reportedly only eight out of 50,000 applications were turned down for noncompliance - most community financial institutions used a CRA reporting form that addressed the bare minimum requirements.

At a minimum, a CRA statement must contain the delineation of the local community, a list of specific types of credit that the financial institution is prepared to extend in its local community, and a copy of the specified CRA notice.

What Regulators Want

Since their promulgation in 1978, CRA regulations have provided that a CRA statement may also set forth optional information:

* A description of how the institution's current programs, including special credit-related programs, help to meet the needs of the local community.

* A current report of the institution's record of helping to meet the community credit needs.

* A description of the institution's efforts to determine the credit needs of its community, including communication with members of the community regarding credit services.

Measuring Performance

The 12 CRA assessment factors used to define performance are:

* The extent the institution uses marketing to make members of the community aware of the credit services offered by the institution.

* Activities conducted by the institution to ascertain the credit needs of its community, including communication with members of its community regarding the credit services provided by the institution.

* The extent of participation by the institution's directors in formulating its CRA policies and reviewing its performance.

* Any practices intended to discourage applications for types of credit set forth in the institution's CRA statement.

* The geographic distribution of the institution's credit extensions, applications, and denials.

* Evidence of prohibited discriminatory or other illegal credit practices.

* The record of opening and closing offices and providing services at offices.

* Participation in local community development and redevelopment projects.

* Origination or purchase of residential mortgage loans, housing rehabilitation loans, home improvement loans, and small business or small farm loans within the community.

* Participation in governmentally insured, guaranteed, or subsidized loan programs for housing, small businesses, or small farms.

* The institution's ability - based on its financial condition, size, legal impediments, and local economic conditions - to meet various community credit needs.

* Other factors that, in the agency's judgment, reasonably bear upon the extent to which an institution is helping to meet the credit needs of its entire community.

How to Succeed

In order to achieve a satisfactory or excellent CRA performance evaluation, an institution's CRA statement should be expanded into a "marketing prospectus" to identify each measure undertaken to meet a particular CRA assessment factor.

In order to address the problem of a board of directors that's detached from community reinvestment issues - a common situation - it is advisable to establish a CRA board committee that will meet at least quarterly.

Such a committee will demonstrate active board involvement and oversight of the institution's CRA process and program.

Additionally, officers of the institution should prepare and deliver reports to the CRA committee addressing each of the 12 CRA assessment factors. These reports will be included in committee minutes, and the activities of the CRA committee will be reported to the full board and will serve to document board involvement and oversight of CRA issues.

A community financial institution should interact with local governments and businesses, trade associations, and community members and organizations through an officer call program.

The institution's expanded CRA statement should describe the officer call program and should identify those directors and officers who serve on or assist CRA-related organizations.

Holding town hall meetings can serve as a more informal means of ascertaining community credit needs. Customer satisfaction surveys can be utilized to determine the effectiveness of the institution's services and business hours, and special market studies could also be conducted to identify the credit needs of business and individuals in community development organizations.

How Loans Are Distributed

The institution should also consider using procedures to identify the geographic distribution of its loan products (geo-coding).

For institutions with a home or branch office in a metropolitan statistical area, the institution should annually study its Home Mortgage Disclosure Act record of loan originations to determine penetration of the delineated CRA community.

To the extent that these measures are implemented, the institution's CRA statement should identify such special activities designed to ascertain community credit needs.

With respect to the types of credit offered and extended by the institution, a substantial majority of the loan originations should be within the institution's delineated CRA community.

The institution's CRA statement should identify the marketing and advertising programs used to make members of the community aware of the credit services offered.

Additionally, the CRA statement should identify the institution's participation in governmentally insured, guaranteed, or subsidized loan programs for housing, small businesses, or small farms.

The CRA statement should correctly list all of the institution's credit products available throughout its entire CRA community. Although targeting of marketing at certain community segments is permissible, many community financial institutions mistakenly only offer a product in certain segments of their community and not all portions of the delineated CRA community.

Delineating the Community

A CRA-regulated financial institution has three choices to delineate its CRA community. It can use:

* Existing boundaries, such as those of standard metropolitan statistical areas or counties.

* The areas around an institution's office where the institution makes a substantial portion of its loans.

* Any other reasonably delineated local area that meets the purposes of the CRA and does not exclude low- and moderate-income neighborhoods.

For the typical community institution, a CRA delineation based on a standard metropolitan statistical area represents too broad a delineation.

Except in unusual circumstances, a community financial institution should seek to define its CRA community narrowly. The institution can lend outside its CRA community as long as the credit needs of the community are served.

Thus, if 80% of the institution's loans were originated within its delineated community, the origination of loans outside the community should not expose the institution to legitimate criticism from either community activists or bank examiners.


An expanded CRA statement can address the assessment factors concerning discrimination and illegal credit practices by pointing to what the institution's board has developed in the way of written policies, procedures, employee training programs, and internal review mechanisms to assure that the institution does not illegally discourage or screen out applicants.

The institution's CRA statement should identify examples of loans that finance community development, the institution's philanthropy that benefits its community - particularly the needs of low- and moderate-income groups - and technical assistance provided to community development organizations.

An expanded CRA statement and an effective CRA program are only as good as the documentation backing them up. Consistent with the bank examiner adage that "if it is not documented, it does not exist," an institution should develop a formal, well-documented CRA program.

And unlike community activists who are more interested in the volume of credit channeled to low- and moderate-income communities, regulators focus on the existence of a formal, well-documented CRA program. That is a far more attainable and preferable goal for bankers than the mandatory credit set-asides urged by activists.

Mr. Grady is an attorney leading the financial institutions' practice of Seeley, Savidge & Aussem, a Cleveland law firm. He previously worked for the Federal Deposit Insurance Corp.

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