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CRA getting good grades.

Several banks and thrifts have shown you can bring needed funds into credit-starved markets without risking the bottom line. Here's the low-down on winning top Community Reinvestment Act ratings.

In the wake of renewed consumer group pressure and new regulatory data suggesting ongoing problems with discrimination in lending, the Community Reinvestment Act (CRA) has re-emerged as an effective tool in monitoring the flow of private capital into needier communities.

As Congress debates both new regulation of Fannie Mae and Freddie Mac and wide-ranging banking reform in 1992 - a process that is likely to continue into 1993 - the issue of CRA compliance continues to gain increased attention. Along those lines, Congress is considering additional requirements for lenders under CRA tied to giving banks interstate branching authority. Coupled with shrinking public resources for housing and economic development, active participation by financial institutions in community investment is now more important than ever.

As a result, lenders are searching for ways to meet CRA requirements, while maintaining safe and sound banking practices. This article traces CRA's development and its impact on the banking community, focusing on the difficulties depository institutions have experienced complying with it, and spotlighting programs institutions have developed under the law in response to their community's credit needs.

How CRA evolved

When former Senator William Proxmire (D-WI) introduced the bill that became CRA in 1977, he said the measure merely restated lending institutions' responsibilities to help meet the credit needs of the local communities where they were chartered.

The law was enacted against a back-drop of concern over redlining. Before the passage of CRA, observers in the industry recalled earlier times when some institutions would literally draw red lines on maps depicting neighborhoods within their delineated community and refuse to lend in those areas. CRA helped to end many of the most blatant types of discriminatory lending practices by financial institutions.

In 1977, Congress conducted extensive hearings to address the redlining issue. The hearings generated testimony detailing how many institutions used the deposits of poor inner-city residents to make loans to middle- and upper-income residents, while denying loans to the poor urban residents.

Largely as a result of such testimony, Congress passed CRA to encourage more private-sector involvement in government efforts to rebuild deteriorating inner-city neighborhoods.

The act directs the four federal agencies with supervisory authority over depository lenders (Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and the Office of Thrift Supervision) to consider a lender's record of serving local credit needs in their decisions to grant or deny the expansion plans of depository institutions. Inadequate CRA performance evaluation is sufficient grounds to deny an expansion request.

For years, many banks behaved as though their existing lending programs satisfied the requirements of the act, and the federal regulators seemed to agree. During the mid- to late-1980s, however, community groups began to voice their collective concerns that CRA was not being enforced properly. They charged that federal regulatory agencies were lax in their CRA examinations of financial institutions, citing as evidence that as of 1988, only eight of 50,000 applications seeking regulatory approval to merge, acquire or expand were rejected on CRA grounds. (This statistic was cited in an article written by John D. Marsh for Southern Banker titled "Turning Up the Heat on CRA," November 1989.) Largely as a result of this statistic and others like it cited in testimony prior to enacting legislation to resolve the thrift crisis, Congress revised CRA when it enacted the Federal Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) to require public disclosure. The theory is that public disclosure of CRA ratings will help enforce the act, by opening the process to public scrutiny.

This article was developed as a result of an examination of hundreds of bank CRA statements in preparation for a book written on the CRA. A Banker's Guide To The Community Reinvestment Act provides a practical blueprint for creating a successful CRA plan by featuring how 33 financial institutions from all geographic regions have met the challenge of CRA compliance, turned it to their economic advantage and dramatically improved their standing and reputation in their communities.

In researching the book, what I quickly realized was that lenders with the most effective records for meeting their CRA responsibilities emphasized similar community investment policies. Additionally, the community investment policies commonly held by these institutions dovetail neatly with the basic factors regulatory agencies evaluate during examinations. For example, there are three areas that both bankers and examiners identify as essential components of an effective CRA program. They include: managerial participation; the CRA plan; documentation and monitoring.

Managerial participation

Managerial commitment is essential to establishing the proper CRA climate at an institution. CRA compliance is a total institutional effort and, therefore, needs to be part of the ongoing agenda of the board and management in order to be effective. Institutions both large and small will not be successful without the support, commitment and involvement of their board and senior management. An institution's CRA performance will be a direct reflection of that attention.

What follows are examples of how depository institutions have maintained management participation as part of their community investment approach.

For a bank holding company, such as Firstar Corporation, Milwaukee, the incorporation of a CRA program as part of strategic planning is essential. With 39 subsidiary banks in five states, effective managerial oversight requires strategic planning. In 1989, Firstar recognized the evolving nature of CRA responsibilities for financial institutions and established a task force to review and, where appropriate, to improve the management of Firstar's compliance process.

According to Firstar's CRA statement, the task force rated the performance of Firstar's bank subsidiaries using 12 evaluation techniques similar to those published by the regulatory agencies. The task force employed methods to improve subsidiary banks' CRA compliance programs. The methods were refined by Firstar's CRA officer in conjunction with the Firstar CRA compliance team (the First Team). The First Team is made up of individuals from all areas of the corporation that are directly involved in CRA compliance. As part of their overall methodology, the First Team installed a CRA compliance officer in each subsidiary bank. The CRA compliance officer reports to a bank-level CRA committee that in turn reports to the First Team at the bank holding company level.

In conjunction with establishing company-wide CRA compliance programs, each subsidiary bank, as detailed in Firstar's CRA statement, has drafted a CRA strategic plan outlining how it would implement programs, products and services the bank had selected to meet its community's credit needs. The strategic plan for each subsidiary bank has its goals and objectives established by the First Team. The First Team's CRA strategic plan for each subsidiary bank delineates tasks to be performed, assigns the individual or department within a subsidiary bank to perform the task and establishes who will evaluate its effectiveness. Firstar's First Team also provides ongoing CRA training of bank personnel and finally, the plan describes how each subsidiary bank's progress in meeting its CRA responsibilities will be measured and documented.

As of July 1991, 12 of Firstar's banks had been examined for CRA compliance by financial institution regulators. Of those institutions, five received CRA ratings of outstanding and seven were rated satisfactory.

At Star Bank, N.A., of Cincinnati, the board of directors and executive management are involved in planning, implementing and monitoring the bank's CRA program. For example, Star Bank established a senior management Community Outreach Committee to demonstrate that a commitment to community reinvestment starts at the top. This committee was responsible for establishing a community outreach plan in 1989.

The primary function of the community outreach plan, as described in the bank's CRA statement, is to help make Star Bank the leading financial institution in its region in such diverse areas as affordable housing, small business development and education. Currently, Star Bank has a satisfactory CRA rating.

The Community Outreach Committee is responsible for setting the policies and guidelines necessary for implementing the community outreach plan. The committee reviews the bank's CRA performance on a periodic basis. Findings of the committee are reported to the board of directors.

The bank's CRA statement documents that in 1990, a Senior Management Community Outreach Committee was established. This committee oversees the activities of the entire bank with emphasis on community outreach and community reinvestment efforts. The Senior Management Committee has developed a system that examines the disposition of applications (on an individual basis) for real estate and retail applicants. Additionally, senior management provides CRA training for bank personnel.

Training is something all institutions dedicated to serving their community's credit needs agree is needed to make community reinvestment goals work. National Westminster Bank USA (NatWest), based in New York, has established a formal CRA training program with the goal of having every employee attend the program. NatWest received an outstanding CRA rating.

The CRA training program, described in the bank's CRA statement, includes the American Bankers Association videotape "CRA Today" and a 10- to 15-minute presentation by the community relations officer or the community development officer on the bank's CRA structure, policy and activities. Upon completion of the presentation, each employee must certify that he or she has seen the CRA videotape and received a copy of the bank's CRA statement. This videotape presentation is part of the bank's new employee orientation program. Thus far, more than half of the bank's more than 3,000 employees have received CRA training; all are expected to have received it by the end of 1991, according to the bank's CRA statement.

The community relations officer arranges CRA presentations for groups meeting within the bank. The community relations officer maintains all documentation related to the CRA training program.

NatWest's CRA statement reports that in July 1990, each bank employee was given a reprint of the Statement of the Federal Financial Supervisory Agencies regarding the Community Reinvestment Act. This brochure was accompanied by a memorandum from the president and CEO of the bank, pointing out the importance of CRA and the need for employees along with the bank's financial commitment, to make the bank's CRA program successful.

In September 1990, each employee received a copy of the bank's expanded CRA statement, a booklet entitled "The Bank in Community Action - A Report of Community Activities and Our CRA Statement," again accompanied by a letter from the president reaffirming the bank's commitment to community reinvestment and the bank's appreciation of employee efforts.

Finally, NatWest has included segments on CRA in two of its quarterly video updates - which function as a "video magazine" on activities throughout the bank. The videotapes are available upon request.

A CRA plan

Each financial institution is different in terms of its history, locality, resources and personnel. A bank's CRA plan must be customized. An effective CRA plan includes marketing and advertising programs that communicate to an institution's delineated community the types of lending products and services the institution has designed to help meet community credit needs, including low- and moderate-income borrower's needs. A CRA plan should also include a mechanism for regularly examining the disposition of loan applications to ensure that discriminatory lending patterns do not occur.

The following are examples of how depository institutions have designed CRA plans to fit the needs of their community in a manner consistent with the bank's resources and capabilities.

Although CRA is most often criticized for being vague, its ambiguity is the very thing that allows financial institutions to make their reinvestment capabilities correspond with the act's goals. It is CRA's imprecise language that allows Franklin National Bank of Minneapolis, with assets of $21 million, to do whatever is necessary to determine its community's credit needs. The bank has instituted a program whereby bank personnel call on local businesses, nonprofit organizations, churches and local government agencies. The calling program is an effective method to determine the community's credit needs. The major benefit of the program is that it allows the bank to keep in touch with the community's needs while minimizing marketing expenditures. Franklin National Bank of Minneapolis personnel made 841 of these calls in 1989 and 1,000 such calls in 1990, according to its CRA statement.

Talman Home Federal Savings and Loan Association, based in Chicago, uses television to market its credit and financial services to its community. In 1987, Talman agreed to sponsor and produce a one-hour television program highlighting the different ethnic neighborhoods of Chicago, as part of a new ethnic cable television channel. The one-hour show usually comprises about 3 1/2 minutes of commercials, plus several minutes of other air time that Talman Vice President Thomas Gobby, the show's producer and host, uses to promote specific Talman products and services. Commercial time has been used to market Talman-initiated low- and moderate-income lending programs, its rehabilitation lending program and its Good Neighbor CD, which provides direct contributions to nonprofit organizations, according to Gobby.

In addition to providing the bank with good public relations, the show has provided a forum for community groups to discuss their community rehabilitation and conservation activities and to appeal for financial aid and volunteer-group support.

As of May 28, 1991, Gobby reported that a total of 151 programs have been produced, 31 of which dealt with CRA-related issues.

In trying to serve the credit needs of low- and moderate-income communities, lenders often find themselves having to develop special lending and financial service programs. For example, the Pennsylvania-based National Bank of Boyertown, in conjunction with the Neighborhood Housing Services (NHS) of Reading, Pennsylvania, has developed a Share Deposit and Mortgage Program to assist low- and moderate-income families buying homes.

Under the program, according to the National Bank of Boyertown's CRA statement, deposit funds are solicited from concerned individuals and organizations in the bank's community. These deposits are placed in a shared money-market fund that generates funds, that are then invested in residential mortgages for families with income of less than $30,000. The National Bank of Boyertown forfeits up to 2 percent of its interest income on all share deposits and passes it on to a non-profit, independent committee to use in helping individuals become homeowners. NHS provides additional funding, and these combined proceeds can account for up to 100 percent of the necessary financing.

A shared committee, made up of bank personnel and NHS staff members, independently evaluates mortgage applicants to determine if they are eligible for the program. The National Bank of Boyertown has won an outstanding CRA rating.

Finally, when regulators analyze an institution's CRA plan, they assess the institution's actual record in serving its community's credit needs. Boston Bank of Commerce (BBOC), Boston's only minority-owned financial institution, has an outstanding record of meeting the credit and financial service needs in its community. For example, in 1991, according to BBOC President Ronald A. Homer, the bank received 215 loan applications, and 120 were approved. Homer reports that among the 120 borrowers who received the loans, 60 percent were African-American, 20 percent were white, 15 percent were Hispanic, and 5 percent were unknown. Additionally, out of the 73 mortgage loans granted by BBOC in 1991, 15 to 20 of them were made after another institution rejected the loan, according to Homer.

Bankers like to refer to the bottom line, and based on BBOC's actual community reinvestment record, their bottom line represents the performance of a true equal opportunity lender. BBOC's loan rejection rate is relatively consistent across various racial and ethnic groups. BBOC's CRA statement reports a 36 percent rejection rate for white applicants, 42 percent for Hispanics, 44 percent for African Americans and 40 percent for Asians. The regulators seemed to concur that the bank's lending performance has been commendably evenhanded. In 1992, BBOC received an outstanding CRA rating on both its state and federal CRA examination. BBOC has been the only financial institution to date in the city of Boston to receive an outstanding CRA rating.

Documentation and monitoring

The most common criticism regulators voice on CRA grounds is a technical one. Institutions fail to document their community reinvestment activity. When institutions are examined they must be able to prove everything they claim to be doing in the community; that is, making the types of loans they say they are, and serving the community in other ways that they claim.

As important as it is for an institution to establish a system where appropriate CRA documentation can be retained, it is equally important for the system to analyze the information gathered and respond to it.

The following examples describe effective documentation and monitoring systems used to manage institutions' CRA programs.

First National Bank of Chicago is among the large money-centered institutions with an effective documentation system. First National's CRA statement contains a list of contacts that bank officers have made throughout the year. The list reflects First National's CRA policies and performance.

First National Bank of Chicago's list of contacts validates its activities when substantive CRA issues are raised during an examination or in an application process that have not been addressed in the bank's examination report. If First National's record showed disparities in lending that are not related to safety and soundness interests, the examining agency would investigate its efforts to determine its community's credit needs. At this point, additional documentation, such as the bank's list of contacts, serve to verify the bank's efforts to determine its community's credit needs.

Phoenix-based Valley National Bank of Arizona (VNB) has developed what it calls an Employee Community Involvement Profile to better determine its community's credit needs by annually documenting the outreach efforts of its 7,000 employees throughout Arizona, according to the bank's CRA statement.

The purpose of VNB's employee community involvement profile is twofold: (1) to match non-profit organizational needs with VNB employee skills for the betterment of the community; and (2) to take advantage of employees' experiences as volunteers to maintain dialogue with all customers regarding their social, economic and credit needs.

Deposit Guaranty National Bank of Jackson, Mississippi, has established a statewide strategy to effectively monitor the geographic distribution of its credit extension efforts. Deposit Guaranty's CRA statement defines its credit customers as customers of the bank's installment, commercial or mortgage loan products. The bank tracks the location of these loans by ZIP code or, where available, by use of census tracts around Deposit Guaranty's banking markets. The bank defines its effective lending territory as the ZIP codes or census tracts around each community where approximately 75 percent of its credit customers are based.

The bank maintains a system to monitor the geographic distribution of its credit extensions on a quarterly basis. Consequently, Deposit Guaranty is well equipped to track its credit allocations and analyze lending patterns. Credit monitorization is an excellent tool for all CRA assessment factors. The ability to pinpoint where the bank's loans are made, and where denials occur, allows Deposit Guaranty to document that its credit products and services are available and penetrate all sections within its geographical distribution area.

For example, the bank's CRA statement details the following types of loans that the bank periodically reviews to ensure the proper coding needed to track its loan disbursement: (1) loans to low-income persons; (2) small business loans; (3) small farm loans; (4) low- and moderate-income special mortgage loans; and (5) home improvement loans.

Finally, banks recognize the importance of self-assessment in the CRA process. First Bank System (FBS), based in Minneapolis, instructs its 31 subsidiary banks in seven states to engage in periodic self-assessment of its CRA performance, using the same criteria and assessment factors as the federal examiners. The self-evaluation ends one cycle and starts another in the ongoing compliance process.

FBS's community reinvestment planning process, an internal planning document, includes a section on communicating the results of FBS's community investment efforts. This section provides a profile of member bank credit and financial programs for review and inclusion in FBS's Community Reinvestment Act Report and Home Mortgage Disclosure Act (HMDA) reporting requirements.

The focus on community banking is not new - CRA has been around since 1977. So much can be learned from the institutions that have successfully experimented and "learned by doing" in the area of CRA compliance. Certainly, there are banks and thrifts, such as the ones described in this article, who have provided leadership by example in their everyday business. Their efforts have succeeded because they make sense and are underwritten to be profitable for the institution.

The 1990s will require financial institutions to address a growing range of housing and community economic development challenges. Those institutions that become agents of positive change will effectively serve the cities, towns and rural areas across this country and will thereby benefit themselves as well as the communities they serve.

Kevin T. Kane is a banking attorney and principal author of "A Banker's Guide to the Community Reinvestment Act: Case Studies of 33 Institutions," published by The Bureau of National Affairs, Inc., 1991.
COPYRIGHT 1992 Mortgage Bankers Association of America
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Title Annotation:Community Reinvestment Act
Author:Kane, Kevin T.
Publication:Mortgage Banking
Date:Jun 1, 1992
Words:3482
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