Small Bank Community Reinvestment Act

The Community Reinvestment Act was enacted by Congress to require the banking agencies to assess if the financial institutions were meeting the credit needs of the local communities in which the financial institutions were located.  The regulators review the lending practices of the financial institutions to make sure they are meeting the credit needs of their community but doing so in a safe and sound manner.  It is important to make sure that the institution is meeting all segments of the markets credit needs but specifically the low and moderate income neighborhoods.

A financial institution is given either an outstanding, satisfactory, needs to improve or substantial noncompliance rating during their exam.  The rating reflects the banks record of helping to meet the credit needs of its ENTIRE community.  When looking at the institutions ability to meet the needs of its entire community, they must do so only with safe and sound credit packages.  The Community Reinvestment Act does not require an institution to make a loan or investment or to provide services that are not safe and sound.  

When a small bank is evaluated, the regulators look at the institutions loan to deposit ratio to see how high it is.  They look at the percentage of loans that are made in the banks assessment area or areas to make sure that most of them are being made within the assessment area(s).  They also make sure that the banks are lending to and if able to, engaging in other lending related types of activities for borrowers of different income levels.  The banks need to make sure that they are lending in all areas of their assessment area and not leaving out certain geographic areas.  The examiners also want to see how a bank responds to a consumer complaint about its performance in meeting the credit needs in its assessment area.

When an examination is being performed, the rating of the institution can be lowered if the regulator has proven discrimination has occurred or if other illegal credit practices have been evidenced.  It does not matter if this illegal activity or discrimination had taken place within or outside the banks assessment area.  

It is important to financial institutions to receive an outstanding or satisfactory rating during their examination because of several reasons.  If these ratings are not obtained, it looks unfavorable upon the institution when they would like to establish a new branch that will take deposits, the relocation of a branch office or the main office, or if the financial institution is in the process of merging with another institution.  

When a bank engages in determining its assessment area, they must delineate one or more assessment areas which the regulators will evaluate their lending activity.  An assessment area must consist of one or more Metropolitan Statistical Area’s (MSA’s) or one or more contiguous political subdivision, such as counties/parishes, cities or towns.  This area must include the area where its main office is located, its branches, and where the bank has made a substantial portion of its loans.  When setting up the assessment area, institutions must be aware to only include whole geographies, not reflect illegal discrimination, may not exclude low or moderate income geographies and may not extend beyond the MSA boundary or beyond the state boundary unless the MSA is a multistate MSA.  

Data collection is a part of the Community Reinvestment Act which is time consuming and can take extra personnel to accomplish.  A small bank is excluded from these requirements unless they elect to be evaluated under the lending, investment and service tests.

Each financial institution is required to maintain a Public File which includes the following information.  

  • Any written comments received from the public specifically relating to the bank’s performance in helping meet the credit needs for the current year and the prior two calendar years along with the institutions response to the comment as long as nowhere in either document does it adversely reflect on the name or reputation of an individual.
  • A copy of the public section of the most recent CRA Performance Evaluation for the institution.  (This must be added to the file within 30 business days after its receipt)
  •  A list of the institution’s branches, their street address and geographies.
  •  A list of branches that have been opened or closed by the institution during the current year and each of the prior two years with their street address and geographies.
  •  A list of services generally offered by the branches and if different from one branch to another, that should be spelled out. This list should include the hours of operation, available loan and deposit products and transaction fees.  
  • A map of each assessment area showing the boundaries and identifying the geographies contained within the area either on the map or in a separate list.
  • The bank’s loan to deposit ratio for each quarter of the prior calendar year and, 
  •  Any other information that the institution chooses to disclose.
An institution shall make this information available to the public upon request and at no charge at its main office and if an interstate bank, at one branch in each state.  At each individual branch, the institution shall make the file available with a copy of the public section of the most recent CRA Public Evaluation and a list of services provided by that specific branch.  These Public Files are required to be updated with all current information as of April 1 of each year.

To make sure that the general public knows of their rights under the Community Reinvestment Act, an institution shall provide a notice in its lobby which is shown in appendix B of the CRA.  Depending on how an institution is organized, it will need different information in the notice.