Community Dividend

CRA exam basics and Ninth District breakdown

A description of the Community Reinvestment Act (CRA) examination process and assessment of how the Minneapolis Fed's member banks fare in terms of their CRA compliance.

Paula Woessner - Community Development Publications Editor

Published March 1, 2007  |  March 2007 issue

As our main feature indicates, the regulations implementing the Community Reinvestment Act (CRA) underwent significant revisions in 2005 that expanded the definition and geographic scope of CRA-qualified community development activities. In light of the changes, it's useful to revisit some fundamentals of the regulations, such as the basic workings of CRA examinations. Here, we offer a brief review of the examination process. We also provide an assessment of how the Minneapolis Fed's member banks fare in terms of their CRA compliance. As the assessment reveals, member banks in the Ninth District are generally in good standing under the CRA.

Ratings and tests

The Federal Reserve System (FRS) is one of numerous federal and state agencies that monitor and evaluate financial institutions' compliance with banking regulations, in order to ensure the banking system is safe and sound and consumers are protected. As part of this process, regulators perform periodic, specialized examinations to evaluate how well banks comply with laws and regulations such as the CRA.

A bank's overall CRA performance is rated Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance. To determine these ratings, regulators follow examination procedures based on the regulations that implement the CRA. These regulations set different performance criteria according to a bank's asset size.

A large bank, defined as an institution with assets of more than $1.033 billion,1/ is evaluated under three tests: lending, investment and service. The lending test involves a review of the bank's loan portfolio to determine, among other things, whether the institution is lending to small businesses and small farms; providing loans to borrowers at all income levels, with a focus on low- and moderate-income (LMI) borrowers; and making loans in census tracts of different income levels, with a focus on LMI tracts. As a component of the lending test, large banks are required to regularly collect and report data on their small farm and small business loans.

An additional component of the lending test requires large banks to make community development loans and to collect and report data on those loans. One of the other tests, the service test, also has a community development component. The remaining test, the investment test, differs from the other two tests in that it is based entirely on community development activity. In other words, the CRA requires large banks to participate in three categories of activity—lending, investments, and services—and further requires that all or some of the activities in each of the three categories meet the CRA’s definition of community development.

So what is that definition? Prior to September 1, 2005, the CRA regulations defined community development as:

  • Affordable housing for LMI individuals,
  • Community services targeted to LMI individuals,
  • Activities that promote economic development by financing small businesses or small farms [defined as businesses or farms having gross revenues of $1 million or less], or
  • Activities that revitalize or stabilize LMI geographies.

Under the revisions that took effect in 2005, the first three components of this definition were left unchanged and the fourth component was expanded. It now reads:

  • Activities that revitalize or stabilize LMI geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies.

Intermediate small banks (ISBs), defined as having assets from $258 million up to $1.033 billion, have a different set of CRA obligations than large banks. ISBs must meet the general components of the lending test, as described above for large banks, but are not required to collect and report CRA loan data. They also must meet a separate community development test that can include loan, investment and service activity, depending on the bank's strategy and resources. Examiners assess and rate an ISB's performance according to how responsive the bank's activities are to community development needs. For example, an ISB whose community development activities include many loans, some services and only a few investments could still earn a Satisfactory rating or better, so long as its activities reflect an appropriate level of responsiveness to the community development needs of the area.

Small banks, defined as having assets of less than $258 million, have yet a different set of obligations under the CRA. Small banks are required to fulfill community credit needs through lending solely. They are not required to report CRA loan data or engage in community development activities. Most small banks receive no higher than a Satisfactory CRA rating under this streamlined test. However, an Outstanding rating for a small bank is possible. A small bank with an exceptionally strong lending record can earn an Outstanding rating based solely on that record. Alternatively, a small bank that has a Satisfactory lending record and chooses to engage in community development activities can ask its regulator to evaluate those activities and consider the bank for an Outstanding rating.

Regulators perform CRA examinations at intervals based on banks' ratings and asset sizes. Large banks and ISBs rated Satisfactory or better are examined every 24 months. Small banks rated Satisfactory are examined every 48 months, while those rated Outstanding are examined every 60 months. The exam interval shortens to 12 months for any bank rated less than Satisfactory, regardless of its asset size.

Procedures and context

In preparation for a CRA examination, examiners from the FRS' Consumer Affairs function consult the U.S. Census Bureau and other sources to gather information on the demographics and economic conditions of the institution's geographically delineated service area, or assessment area. During the examination, a team of examiners spends a week or more on the bank's premises, reviewing loan files and other records that have been generated since the previous examination. The examiners meet with bank officers and employees to discuss the institution's general performance, strategic plan, and many other matters. In addition, they interview people from the community, many of whom represent local nonprofit organizations or government agencies, to discuss how well the bank meets community credit needs.

Following procedures based on the CRA regulations and set by the Federal Financial Institutions Examination Council (FFIEC),2/ examiners analyze the information they've gathered, reach conclusions about the bank's performance under each criterion and assign a rating to each test. Ultimately, examiners rate the bank's overall performance under the CRA. Their analyses are grounded in the bank's performance context, which underlies each conclusion the examiners reach under the performance criteria.

The performance context consists of two general components: bank characteristics, such as products, resources and staff expertise; and assessment area characteristics, such as household income levels, housing costs, the availability of community development opportunities, and any other relevant factors tied to credit needs. By understanding the performance context, examiners can evaluate banks on a case-by-case basis and determine if each bank meets its community's credit needs in a reasonable way.

For large banks and ISBs, the CRA examination procedures instruct examiners on how to weigh and combine the ratings of individual tests to arrive at an overall rating. For example, the procedures state that an ISB will earn an overall Outstanding rating if examiners rate it Outstanding on both the lending and community development tests, or rate it Outstanding on one of those two tests and at least Satisfactory on the other. Once the examiners' analyses are complete and an overall rating assigned, the findings are compiled in a public disclosure known as a CRA Performance Evaluation (PE). Each newly completed PE is delivered to the president of the examined bank and made available to the public via the FFIEC's Web site.

The Ninth District breakdown

The Minneapolis Fed's Consumer Affairs examiners are responsible for evaluating the CRA performance of the 81 commercial state banks in the Ninth District that have elected to be members of the FRS. Although these 81 institutions, referred to as state member banks (SMBs), make up only one-tenth of the District's approximately 800 commercial banks, their geographic distribution and asset sizes suggest a fair representation of the banks in our region.

Of the Ninth District's 81 SMBs, 2 are classified as large banks under the CRA, 18 fall in the ISB category and the remaining 61 are classified as small banks. In a state-by-state breakdown, Montana leads with 30 of the Ninth District's SMBs, followed closely by Minnesota with 26. South Dakota has 11, northwestern Wisconsin and the Upper Peninsula of Michigan have 5 apiece, and North Dakota has 3. The remaining SMB is located in the outlier state of Wyoming, but falls under the Minneapolis Fed's jurisdiction because its bank holding company is located in Montana.

Overall, Ninth District SMBs appear to be doing a fine job of CRA compliance.

"All of our member banks are currently rated Satisfactory or better and we haven't had a Needs to Improve in a long time," notes Mike Wold, a Consumer Affairs managing examiner for the Minneapolis Fed.

CRA PEs identify some of the various activities that meet the CRA regulations' definition of a community development loan, qualified investment or community development service. Examples from the Ninth District, pulled from PEs of Outstanding-rated large banks and ISBs, include a certificate of deposit in a credit union owned by an American Indian tribe, an investment in a health and social service facility that serves LMI community members, a loan to construct a housing complex for LMI senior citizens, and the volunteer services of a bank officer who provides free tax preparation assistance to low-income people.

More than a dozen of the District's Outstanding ratings belong to small banks that asked the examiners to evaluate their community development activities in addition to their lending activity. Sample community development activities that helped these small institutions earn Outstanding ratings include the purchase of bonds from a state housing finance agency that provides loans to LMI homebuyers; service on the board of a local nonprofit organization that helps abused, neglected or abandoned children; and grants to LMI families who were displaced by wildfires.

The Ninth District's CRA PEs reveal clusters of community development services and economic development financing—in other words, activities that fit the middle two prongs of the four-pronged community development definition listed above. According to Consumer Affairs Managing Examiner Lisa DeClark, that's pretty typical.

"Most of our District is made up of sparsely populated rural areas, where there's little developed infrastructure to support affordable housing or the kind of 'revitalization or stabilization' activities defined under the old CRA. Usually, the greatest number of activities in the District have fallen under community services and economic development. Of the four types of community development, it's the second and third where we've found most of our activities, not the first and fourth."

That could change under the revised CRA. As noted above and in our main feature, the revisions that took effect in late 2005 broadened the meaning of "revitalize and stabilize" to include not only LMI areas, but also designated disaster areas and distressed or underserved nonmetropolitan middle-income areas. With more counties in the Ninth District now eligible for consideration under the CRA, the potential for a bank's loans, investments and services to qualify as community development has expanded.

Repeating the process

The effects of the new community development definition remain to be seen, since it will take time for all of the Ninth District's SMBs to cycle through the examination schedule and receive an evaluation under the revised regulations.

As each bank's turn comes up, Consumer Affairs examiners will repeat the process of researching, traveling, analyzing and reporting. They'll grow accustomed to applying the new CRA revisions, just as they've incorporated past CRA revisions into their daily work. And at the end of each examination, they'll arrive at a rating that reflects their best judgment of how well the bank meets its community's needs.

For more information on the CRA, visit www.ffiec.gov/cra/default.htm. CRA PEs for Ninth District SMBs and other regulated commercial banks in the U.S. are available at www.ffiec.gov/craratings/default.aspx.


1/ Asset-size thresholds increase annually based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers. Thresholds listed here are in effect through December 31, 2007.

2/ The FFIEC is made up of the Board of Governors of the FRS, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Fed examiners share CRA compliance tips

The regulations that implement the Community Reinvestment Act (CRA) lay out clear-cut examination procedures for federal regulators to follow, but there are no corresponding procedures that tell banks how to monitor or improve their CRA performance. Some regulatory agencies offer banks guidance to help fill the gap. For example, the Minneapolis Fed conducts CRA outreach in the form of advisory visits, conference calls and one-on-one technical assistance. Here, we share some general CRA-related advice from the Minneapolis Fed's Consumer Affairs area.

First and foremost, and particularly for large banks and intermediate small banks, examiners recommend taking steps to ensure employees at all levels have a thorough understanding of the CRA's definition of community development, so they can identify qualified activities as they happen. Also, banks should consider developing an internal tracking system so they'll be aware of community development activities on an ongoing basis—an especially important recommendation for any bank that moves into a higher asset class and, consequently, faces a different evaluation process at its next CRA examination.

Karin Bearss, a Consumer Affairs senior examiner who conducts CRA advisory visits at the Minneapolis Fed's member banks, stresses another important piece of advice.

"Banks should be aware of the development needs and opportunities in their communities. If a bank says its assessment area doesn't have community development needs, our response will be, 'How do you know that?'"

Banks can stay abreast of community development needs by monitoring local news and events; reaching out to schools, human service organizations and housing agencies; and communicating regularly with customers, among other means.

Examiners also advise banks to make CRA compliance part of their overall strategic plan. For banks that are subject to community development tests under the CRA, that means weaving an emphasis on community development into their business practices and everyday operations.

For further guidance on the CRA, contact the Minneapolis Fed's Consumer Affairs office at 612-204-6500.

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