Cathy Lemieux Ph.D. a Senior Advisor with Treliant, has over 30 years of experience in financial services regulation, corporate governance/enterprise risk management, international banking regulation, and the Community Reinvestment Act. Cathy has helped banks of all sizes aligning their internal controls with their regulatory obligations, assessing their compliance and enterprise…
As a banker, you understand the important role banks play in their communities. You understand that one of the “costs” of having the government provide deposit insurance is sharing the benefits of those insured deposits with the areas where you operate. But what if you are not a typical bank that has branches and offers loans to finance the homes and small businesses surrounding those branches?
The Community Reinvestment Act (CRA) focuses on assessment areas defined by branch locations and on the provision of residential mortgages, small business lending, community development lending and services. But that focus no longer fits banks that use digital platforms to provide banking services nor banks engaged in other types of lending.
The deficiencies of the current approach have been recognized by regulators. In May, the Office of the Comptroller of the Currency (OCC) released a rule to strengthen and modernize the agency’s regulations under the CRA. Although this was not a joint rulemaking with the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve, FDIC Chair Jelena McWilliams said at the time that the FDIC strongly supports efforts to make CRA rules clearer, more transparent, and less subjective. The Federal Reserve also sees strengthening CRA as a priority, Governor Lael Brainard said in a speech in January.
While the OCC now has different rules on CRA than its peer agencies, one option available to any insured depository institution—whether regulated by the OCC, FDIC, or Federal Reserve—is to develop a CRA strategic plan. To date, 48 banks are operating under approved CRA strategic plans.
These banks are a diverse group ranging from small industrial loan companies to Top 10 banks. The Federal Reserve has approved six plans, the OCC has approved nine, and the FDIC has approved 33. Fifteen of the banks are headquartered in Utah. What they all have in common is a strategic focus that differs from a traditional bank’s business of making mortgages and small business loans in communities where they have branches.
What Is a CRA Strategic Plan?
The strategic plan option enables a bank to tailor its CRA goals and objectives to address the needs of its community consistent with its business strategy, operational focus, and financial capacity and constraints.
The plan must have measurable goals and defined performance levels to qualify for a satisfactory rating. A bank may also define what level of performance should be considered outstanding.
Banks must demonstrate an understanding of the credit needs of their assessment areas. They need to solicit formal input by making their proposed plans available to the public for comment for at least 30 days, submitting comments received to their regulator when requesting plan approval. Regulators also recommend that banks solicit informal input by meeting with local community groups and other interested parties.
The plan’s term can be up to five years. If material changes occur in the economy or business operations that were unforeseen when the plan was drafted, a bank may apply for an amendment.
Regulators use the following criteria to evaluate a CRA strategic plan:
- Extent and breadth of lending or lending-related activities, including geographic and borrower distribution of loans;
- Extent of community development lending;
- Use of innovative or flexible lending practices;
- Amount, innovation, complexity, and responsiveness of qualified investments;
- Availability and effectiveness of retail services; and
- Amount and innovation in community development services.
Each of the banking regulators has additional guidance on CRA strategic plans.1
What Are the Advantages and Disadvantages?
A key advantage to CRA strategic plans is certainty. A bank with an approved CRA strategic plan knows exactly what it must do to be rated satisfactory, because regulatory performance reviews will rely on the bank’s self-defined goals and measurements.
A second advantage is helping fund activities that address important needs in banks’ assessment areas. Because development of these plans requires formal and informal public input, banks can identify credit needs specific to their assessment areas rather than defaulting to housing and small business lending.
A third advantage is conducting activities that fit with banks’ business strategies. The strategic plan option allows a bank to identify ways to meet the credit, investment, and service needs of their communities that better align with their business. Increasingly, banks are developing business strategies that look very different from the traditional focus of community banking on making retail and business loans to customers located near their branches. With more and more banks adopting digital platforms where they provide financial products nationwide, the concept of a local community is challenged. For example, an internet bank that focuses on credit card lending might find that supporting a nationwide financial education program would be a CRA activity that would be aligned with its business strategy of providing consumer credit nationwide.
The main disadvantage of CRA strategic plans is that banks must publicly commit in advance to how they will address the credit needs of their assessment areas. Regulators’ evaluations of banks’ performance are public, so failure to meet goals identified in a strategic plan could impact a bank’s reputation.
In today’s world, banks’ business models are extremely varied. Banks that have opted for business models that do not emphasize financing residential housing and/or small business still have an obligation and a requirement to meet the credit needs of the areas around their head office and branches Regulators have developed an approach that allows banks to tailor their community development activities to their business models and the needs of local communities. This approach provides certainty for banks as they plan to meet their obligations under the CRA. The CRA strategic plan option is available to all insured depository institutions regardless of their primary federal regulator, but may be especially attractive to banks with nontraditional business models or a limited set of credit products.
1 Guide to Developing a Strategic Plan, https://www.fdic.gov/news/financial-institution-letters/1998/fil9826b.pdf; Guidelines for Requesting Approval for a Strategic Plan under the Community Reinvestment Act, https://www.federalreserve.gov/consumerscommunities/files/strategic-plan-guidance.pdf; Community Reinvestment Act: Guidelines for Requesting Approval of a CRA Strategic Plan, https://www.occ.gov/news-issuances/bulletins/2019/bulletin-2019-39.html.