There was a lot of talk a few years ago about the regulatory agencies updating their rules implementing the Community Reinvestment Act (CRA). The Office of the Comptroller of the Currency (OCC) even revised its CRA rule. But the other agencies did not follow suit, and the OCC rescinded its amendments, reverting to the previous regulation.

The last time the agencies overhauled their CRA rules was during the Clinton administration in the 1990s. So, it’s probably due — banking and the communities it serves have changed significantly in the past 20 or so years — but that effort will take some time. For now, we have to make sure we are serving our communities to the best of our abilities and complying with the current CRA rules.

The 1990s-era CRA rules are more performance-focused than the previous rules, but they are not objective. The rules and examination procedures do spell out what examiners will review. However, because many subjective terms and flexible standards are used, how examiners will review CRA performance is not specified. Examiner judgment is the guiding principle here. This leaves banks not knowing whether their performance is satisfactory until after an examination is completed.

Banks cannot eliminate this risk of examiner criticism entirely, but steps can be taken to significantly reduce it, including good strategic planning.

Why Manage CRA?

Many banks feel they are doing a pretty good job of meeting the credit (and other banking) needs of their local communities. So, why should they invest significant time and effort in managing their CRA climate and performance?

The answer is that good CRA performance is just good business. As with any other business function, smooth operation depends on good management. Directing the CRA function also allows banks to navigate the CRA examination process more easily and can prevent unexpected and unnecessary delays in future mergers, branching and other corporate applications.

Setting the Stage

A bank can, to some extent, set the framework within which its performance will be judged. A formal way to do this is to choose the formal CRA strategic plan option, where the bank writes its own lending, investment and service goals with input from its community. The bank’s supervisory agency reviews and approves the plan, then assesses the bank’s performance against the plan’s goals.

There is a less formal way to accomplish the same ends. A bank can formulate an internal CRA strategic plan that sets out objective standards against which its performance can be gauged. An important element of such a plan is to establish realistic goals based on local community factors (economic conditions, credit needs and demand, etc.) and the bank’s situation (size, financial condition, stability, etc.). One crucial component of such a scheme is the ongoing internal monitoring and reporting of results.

An informal plan should be shared with examiners, assuming the goals are being met, to provide them with the objective standards the bank wants to use to measure its CRA performance. This allows the bank to control its destiny to a greater extent by building the gauge for rating its performance, one that accounts for its own and its community’s unique situation.

Other advantages of an informal plan over a formal one are that it does not have to be negotiated with members of the public, formally approved by regulators or made public.

Drafting a Plan

A CRA plan should be developed to align with the bank’s existing planning structure and culture. It should build on the bank’s identified strengths in its performance and aim to shore up any weak areas.

The team assembled to draft the plan should be diverse and represent all areas of the bank that affect and touch on CRA performance. This brings the strengths and viewpoints of a variety of bank players into the process and helps get wide “buy-in” to the plan, an important element for its success.

The plan also must be tailored to fit the CRA environment within which the bank operates — the size and CRA type of the bank (small, intermediate small, large retail, limited purpose or wholesale), past CRA performance of the bank, characteristics of the bank (culture, business lines, etc.) and local community conditions (employment and income levels, economic needs, etc.). This process will guide the bank in deciding how to address its CRA responsibilities.

Elements of the CRA planning and management process include:

• Setting clear, attainable goals for a “satisfactory” CRA rating, and more ambitious, stretch goals for an “outstanding” rating
• Managing the information about the bank’s CRA performance (data revolving around the three key tests in the CRA examination scheme for large retail banks and thrifts: lending, investments and services), including analysis of that data to get a picture of the bank’s ongoing performance
• Establishing and nurturing relationships with active community partners, with a positive approach to working together for the betterment of the local community

Conclusion

Banks can control their CRA destiny. However, to do so, the entire process must be managed proactively — plans drawn up, goals set, information managed and community partnerships nurtured. Dynamic, ongoing management of the entire CRA process, with appropriate accountability standards for all players, can yield positive results not only for banks but also for their communities.