The Bank Evaluation Process
Large Bank Exam
Banks with assets greater than $1 billion are subjected to the most rigorous exams. They are evaluated under a lending test that considers the number and percentages of loans made to low- and moderate-income individuals and communities. They are also evaluated under an investment test that considers the number and types of specific investments in low- and moderate-income communities, as well as a service test that evaluates the types of services (branches and bank accounts) they provide to them. When conducting the evaluations, examiners are to consider the “performance context” of the lending institutions. In other words, they consider factors such as the business opportunities available to a bank, its size, and its financial condition.
Mid-Sized Bank Exam
In 2005, the federal agencies established a streamlined exam for “intermediate small banks,” defined as institutions with assets of $250 million to $1 billion (the asset range is adjusted annually for inflation). These mid-sized banks undergo a lending test and a community development test. The community development test incorporates elements of the large bank’s investment and service tests. It scrutinizes the amount and responsiveness of a mid-sized bank’s community development lending, investing, and services. Unfortunately, the mid-sized banks are no longer required to report small business or community development lending data.
Small Bank Exam
Small banks, as defined as institutions with less than $250 million in assets, are evaluated under a simpler exam than their larger counterparts. Small banks are not subjected to an investment or service test. Their lending test consists of the following five criteria: a “reasonable” loan-to-deposit ratio, the percentage of loans in the bank’s assessment area, the bank’s distribution of loans to individuals of different income levels and businesses and farms of different sizes, the geographic distribution of loans, and the bank’s record of responding to written complaints about its lending performance.
The Gramm-Leach-Bliley Act of 1999 established a less-frequent exam cycle for small banks that have passing CRA ratings. Small banks with outstanding ratings will be examined once every five years and those with satisfactory ratings will be examined once every four years. Banks with passing ratings can be examined more frequently if regulatory agencies believe a compelling reason, such as deteriorating CRA performance, makes it necessary to do so. Community groups should contact the regulatory agencies if they believe that a particular small bank should be examined before its lengthened time cycle.
Wholesale and Limited Purpose Bank Exam
Wholesale and limited purpose banks are also assessed under a test tailored to their capabilities. These banks provide services (such as offering credit cards) or specialize in large commercial deposits. Lending tests cannot adequately assess wholesale and limited purpose banks because many of them do not accept consumer deposits or make home loans. Instead examiners focus their evaluations of these banks on the number of community development loans and investments (such as affordable housing rehabilitation loans, low-income housing tax credits, or investments in organizations that finance small businesses).
Strategic Plan Option
Any lending institution can opt for developing a strategic plan in lieu of a regulator evaluation. Developed in conjunction with neighborhood organizations, a strategic plan seeks to satisfy the credit needs of a bank’s assessment area and must address the lending, investment, and service criteria that would have been part of the usual evaluation. Federal regulators must approve the strategic plan and rate it at least “satisfactory.” If a bank receives a lower rating on its plan, it has the option of submitting to the applicable tests for large, small, or limited purpose banks.
Evidence of Illegal and Discriminatory Lending
A CRA rating can be downgraded if a federal agency uncovers evidence of illegal, abusive or discriminatory lending on fair lending exams that occur around the same time as CRA exams. It is critical that community groups contact CRA examiners if they know of abuses or unfair lending practices.
Community Group Involvement
Community groups have several different ways to get involved in the CRA evaluation process. Federal agencies publish in advance a list of banks that will be evaluated each quarter. Once every three months, NCRC notifies its members about the banks scheduled for upcoming CRA exams. NCRC encourages its members and other neighborhood organizations to offer their comments on the CRA performance of banks in advance of their examinations. Timely comments can influence a bank’s CRA rating by directing examiners to particular areas of strength or weakness in a bank’s lending, investments, or services in low- and moderate-income neighborhoods. A community group’s comment can have an influence on the overall CRA rating for an institution or the CRA rating for a state or one of the tests on the CRA exam. Even changing a rating from Outstanding to Satisfactory in one state or one part of the exam can motivate a bank to increase the number of loans, investments, and services to low- and moderate-income communities.
Also, community organizations can offer written comments on a bank’s CRA and fair-lending performance when a bank has submitted an application to merge or acquire another bank or thrift. NCRC can assist community organizations in preparing comments on merger applications. The vast majority of merger applications are approved, but comments can still direct regulatory agencies’ attention to areas of weakness. The federal agency can approve the merger application, but still indicate in the approval order that the bank should improve upon its area of weakness. In addition, the bank can pledge in writing to address its shortfall by implementing a fair-lending reform and/or increasing its service to traditionally underserved communities.
