Study Finds Documentation Biggest Factor in CRA Rating

A study for a nonprofit research group has concluded that documentation is more important than home loan commitments in determining banks' ratings under the Community Reinvestment Act.

The study for the San Francisco-based Community Reinvestment Institute reviewed the home lending records of the first 70 bank and thrifts in California and Massachusetts to make their CRA ratings public.

The institute expected lending practices in low-income neighborhoods to be the determining factor in ratings, said Charles H. Grice, executive director.

But the study found that an institution's lending record is "a big zero in terms of explaining performance.... The test now is a documentation test."

The group concluded that large banks do disproportionately well because they can devote more resources and personnel to record keeping, making community contacts, and related activities.

Success Secret

"The only question you could ask a CEO to predict a bank's grade is its asset size," Mr. Grice said.

The conclusions support criticisms of the CRA process made by several community groups over the past few months.

"All you need to do is go to the conventions and workshops regulators appear at and listen to them," said Michael D. Shea, executive director of Acorn Housing Corp., a national community organization based in Washington. "All they talk about is documentation."

Such charges will likely add to calls for reform of the regulatory evaluation process. But instead of strengthening the law, a proposal now pending in the House would exempt institutions with less than $100 million in assets from CRA evaluations.

The survey's researchers, two graduate students at the Kennedy School of Government at Harvard University, reached their conclusions after reviewing written evaluations of the examined institutions.

They looked for patterns in the various ratings. And they analyzed data on asset size and loans in an attempt to correlate certain characteristics of banks with the ratings received.

Big Banks and Good Ratings

The researchers reported that most of the evaluations included scant detail on the loans made by institutions and broad generalizations about CRA performances. The only factor linking banks with the highest ratings was their size.

Average assets of banks receiving the highest ratings were $17.6 billion, compared with $4 billion for institutions receiving the second-highest rating, $532 million for the third rating, and $55 million for the lowest of the four ratings.

On average, banks receiving the highest ratings extended 17% of their single-family home loans to lower-income families, compared with 16% among the group with the second-highest ratings and 15% in the next tier. But the banks with the lowest ratings made 40% of their home mortgages to low-income people.

The study also looked at the portion of assets banks devoted to government-backed mortgage loans and multifamily housing loans. As in the single-family category, the researchers found little correlation between the rating received and the number of such loans.

From these findings, and from interviews with regulators, bankers, and community representatives, the researchers concluded that because larger banks have the greatest capacity to document, they have received the highest ratings.

Study Criticized

But at least one bank dismissed the study as seriously flawed.

John Popovich, senior vice president and director of First Interstate Bank of California, said the study's conclusions were based on inadequate data and faulty reasoning.

Mr. Popovich gave some credence to the study's conclusion that of the factors considered, a banks' size seemed to have the greatest relationship to the rating it received. But he said the researchers had no data to support their conclusion that large banks were more likely to receive better ratings because they had greater capacity to elaborately document their CRA performance.

Mr. Popovich and a spokeswoman for the Office of the Comptroller of the Currency also said the conclusions are flawed because residential mortgage lending is only a portion of banks' CRA responsibilities.

Focus on Records Defended

The Comptroller's spokeswoman defended the regulator's emphasis on documentation.

"If they don't document what they're doing, it's hard for us to know what they're doing and rate them well," the spokeswoman said.

Although the researchers acknowledged shortcomings in their work, they maintained their conclusions were justified.

Mr. Grice's group plans to submit the findings to congressional committees this month.

"No one's addressing the purpose of this exercise," Mr. Grice said of the CRA process. "Is this the incentive structure we want?"

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.