Volume 9; No. 3; Summer 1997
CRA Examination Procedures: Answers to Common Questions
Compiled By Jack Richards, Community Affairs Manager, Federal Reserve
Bank of San Francisco
The Federal Reserve Bank of San Francisco recently completed a series
of ten Community Reinvestment Act regulation examination procedures roundtables
throughout the Twelfth District in cooperation with the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, and the Office
of the Comptroller of the Currency. Over 250 financial institution representatives
This article details the most commonly asked questions and answers from
the series. The questions and answers have been separated into general
CRA regulation categories.
Q. How are multi-state banks operating under one charter examined?
A. Multi-state financial institutions receive institution-wide
CRA evaluations with analyses of CRA performance for each metropolitan
area (MSA, CMSA, PMSA) where there are branches. For non-metropolitan
areas, separate analyses supported by relevant data are presented for
each area. These analyses are not as specific as ratings, but tend to
follow similar standards.
Q. If lending is through an affiliate, is it viewed separately during
A. Yes & No. Affiliate lending can be considered
part of overall lending performance only if an institution elects to have
it included. Institutions must collect, maintain, and report data for
any particular category of affiliate lending to be considered and this
lending can be measured only once. Also, all loans in a selected category
must be examined for each affiliate.
Note that although affiliate loans may be included, they are not considered
in evaluating the proportion of total lending within an institution's
Q. What lending performance is considered "jobs creating" under the
A. Although there is not a specific definition of jobs
creation in the CRA regulation, the regulation does state that in order
to receive community development lending consideration, loans must support
activities that revitalize or stabilize low- or moderate-income geographies.
As such, loans that result in increased employment opportunities must
create jobs that will be permanent additions to a work force. Loans that
support job retention or provide better jobs for low- or moderate-income
people would also receive CRA consideration.
Q. What is meant by borrower's profile?
A. The term, "borrower's profile" is one of seven categories
assessed under the large bank lending test. In each of the categories
assessed, a large financial institution receives either an outstanding,
high satisfactory, low satisfactory, needs to improve, or substantial
noncompliance rating. To receive an outstanding rating in the borrower's
profile category, a financial institution's portfolio of borrowers must
reflect "excellent" penetration, given product lines offered among customers
of different income levels and businesses of different sizes.
Q. How is community development lending measured?
A. Community development lending is one of five criteria
evaluated under the lending test. A financial institution's community
development lending activity is measured by the number and dollar amount
of community development loans, and the extent, complexity, and innovativeness
of those loans.
Examiners will determine the extent to which community development lending
opportunities have been available to an institution, the responsiveness
of an institution's community development lending, and the extent of leadership
an institution has demonstrated in its community development lending.
Q. Against what criteria is lending distribution measured?
A. Criteria used to measure lending distribution include
the institution's performance context and established assessment area,
the geographic distribution of loans across census tracts and block numbering
areas of different income levels, the distribution of loans among borrowers
with different income levels, data from peer institutions, and legitimate
business reasons for an allocation of lending activity.
Q. How should I measure service, including volunteer efforts?
A. Volunteer efforts receiving service test consideration
must relate to the provision of financial services and be provided as
part of an employee's ordinary course of business as a representative
of his/her financial institution.
Examiners look for records of activities that explain types of activities,
their applicability under the CRA, and personnel involved and the extent
of their involvement. There is no preferred method of reporting and so
institutions are encouraged to develop informative internal reporting
Q. Are supermarket locations considered by examiners to be the same as
A. Yes. Full-service supermarket branches within a bank's
assessment area(s) would be evaluated as traditional brick and mortar
facilities. Examiners review the distribution of offices, including supermarket
branches, among low-, moderate-, middle- and upper-income geographies
in each assessment area and evaluate banking services offered, hours of
operation, and available loan and deposit products.
Although primary emphasis is placed on full-service branches, alternative
delivery systems such as automated teller machines are also evaluated.
Supermarket locations that do not include access to complete bank services
would be evaluated for convenience and effectiveness as alternative delivery
Q. How do examiners review qualified investments for eligibility under
the CRA and what information do they want to see?
A. Examiners must identify a financial institution's
qualified investments that benefit its assessment area(s). This is accomplished
by reviewing the investment portfolio, and at the institution's option,
its affiliate's investment portfolio.
This review includes qualified investments made since the previous examination
(including those that have been sold or have matured) and qualified investments
made prior to the previous examination that are still outstanding. Examiners
also consider qualifying grants, donations, or in-kind contributions of
property since the previous examination that are for community development
A prospectus or other information describing an investment, grant, donation,
or in-kind contribution will help examiners to determine its eligibility.
Q. Would school bonds in rural areas that are not low- or moderate-income
be eligible investments? In what cases would school bonds or sewer bonds
A. Usually, general issue municipal bonds are not eligible
for investment credit because fund distribution cannot be controlled to
target low- or moderate-income areas or individuals. However, there may
be an argument for eligibility if the bonds were specifically designed
for programs targeted to low- or moderate individuals, even though the
funds may not be exclusively channelled to low- or moderate-income areas.
Bonds specifically targeted to low- or moderate-income areas generally
would be eligible for investment credit.
Q. What are examples of "innovative" investments?
A. An example of an innovative qualified investment
could be one in which a nonprofit organization provides loans for low-income
housing development through the sale of tax-exempt bonds secured by low-income
real estate properties to financial institutions.
Another example could be a proposal by a nonprofit housing organization
to create a construction loan pool. This pool which would provide construction
financing for low-income borrowers with take-out financing provided by
a state agency, and could be created through the solicitation of low interest
rate investments from financial institutions and other affordable housing
Q: What constitutes a "majority" of loans in an assessment
A. Typically, a majority of loans in an assessment area
would be 51% or greater, although this percentage will vary depending
on financial institution products and services, assessment area(s), and
Q. Will financial institutions be required to enlarge their assessment
areas to include geographies where there are no branches but there is
a fair amount of lending? Should areas with loan production offices be
A. Financial institution assessment areas (other than
wholesale or limited-purpose) must consist of whole geographies, generally
should include entire political subdivisions, should include geographies
in which an institution has its main office, branches, and deposit-taking
ATMs, and should include surrounding geographies in which an institution
has originated or purchased a substantial portion of its loans.
Also, each assessment area may not reflect illegal discrimination and
may not arbitrarily exclude low or moderate-income geographies, given
the institution's size and financial condition. A financial institution
may include an area tangential to a geography that does not extend substantially
beyond a CMSA boundary. If a geography does extend substantially beyond
a CMSA, a separate assessment area may be needed.
If including an entire political subdivision would create an area that
is too large for an institution to reasonably serve, the institution may
adjust the boundaries of its assessment area to include only portions
of a political subdivision. An adjustment is particularly appropriate
in the case of an assessment area that otherwise would be extremely large,
of unusual configuration, or divided by significant geographic barriers.
For purposes of the CRA, loan production offices (LPOs) are not considered
to be "branches." A bank cannot delineate a separate assessment area outside
a CMSA based solely upon the location of an LPO. However, an institution
may elect to delineate a larger geography to ensure that its assessment
area appropriately reflects its lending activity.
Examiners will use the assessment area(s) delineated by the institution
in its evaluation of the bank's CRA performance unless the assessment
area does not comply with the requirements of the regulation.
Q. If tribal lands are contiguous to my assessment area, must I include
A. No. If including an entire political subdivision
like an Indian reservation would create an area that is larger than the
area the institution can reasonably be expected to serve, an institution
may, but is not required to, adjust the boundaries of its assessment area
to include only portions of a political subdivision.
While Indian reservations are political subdivisions for CRA purposes,
financial institutions should be aware that the boundaries of these reservations
may not be consistent with boundaries of census tracts or block number
areas. In these cases, institutions must ensure that their assessment
area(s) consists only of whole geographies by adding portions of the geographies
that lie inside or outside a political subdivision to the delineated assessment
Note that when adjusting the boundaries of their assessment areas, institutions
must not arbitrarily exclude low- or moderate-income geographies or set
boundaries that reflect illegal discrimination.
Q. How are community contacts chosen? How is the information they provide
used as part of an examination? Is this information available to the public?
A. Examiners solicit community contacts in portions
of given assessment areas that appear to have relatively lower consumer,
mortgage or commercial lending activity. Examiners then use their own
knowledge of an area to make contacts or solicit the advice of local government
representatives, regulatory community affairs representatives, other examining
agency representatives, or local publications listing appropriate contacts.
As part of the examination process, examiners consider information obtained
from interviews with local community, civic, and government leaders. These
interviews provide examiners with knowledge regarding the local community,
its economic base, and any community development initiatives. To foster
a wider array of contacts, the agencies share community contact information.
The information, however, is not publicly available.
Q. My bank is transitioning from small to large. If my "large bank""
examination occurs before data are to be submitted, what do I do? When
is my bank officially considered a "large institution?"
A. In this case, if the CRA examination occurs before
data are to be submitted, this institution would be examined as a small
Data on community development loans, small business and small farm loans
must be reported by large financial institutions by March 1 for the previous
calendar year. Small banks do not have to submit these data.
A financial institution is considered "large" when total assets
exceed $250 million or, if applicable, when holding company assets exceed
$1 billion as of the end of either of the two prior calendar years. Therefore,
if a financial institution transitions to a large bank during a calendar
year by exceeding asset limits, it would not be examined as a large bank
until after December 31 of the second calendar year in which its assets
exceeded $250 million.
Additionally, the revised regulation states that an institution that
was a small institution during the prior calendar year but is no longer
a small institution would be subject to data collection and maintenance
requirements but not data reporting requirements. The data reporting requirements
do not apply because the institution would not have collected data to
Q. Do limited purpose banks need to maintain public files?
A. Yes. All institutions are required to maintain public
files. An institution should maintain one copy of its public file at its
main office and, if an interstate institution, at one branch office in
We would like to thank Federal Reserve Bank of San Francisco CRA examination
staff Jill Terry, Laura Boughner, and Beverly McCoy for their assistance
in preparing this article.