Volume 10; No. 2; Spring 1998
CRA Data Collection - Answers to Perplexing Questions
By Carol A. Cordova, Vice President and Compliance Manager, Bankers'
Compliance Group, Inc.
1997 was the first year that both large and small institutions were
examined under the new CRA. In March of this year, large institutions
finished their second reporting cycle of CRA data, a process that underscored
the need for additional information related to CRA data collection. Beyond
data collection, however, there continue to be a number of questions related
to the examination process under the new CRA. To address some of these
perplexing issues, Community Investments teamed up with Bankers' Compliance
Group, Inc. (BCGI). Together, we developed a Q & A format which we
hope will address a variety of issues in an efficient and effective manner.
Our thanks to Carol Cordova at BCGI for volunteering her time and expertise
to provide the following information.
Q: Can a loan renewal be counted as a loan origination?
A: Under the new data collection rules, unfortunately no. This position
is different from the regulatory agencies' original interpretation that
a loan renewal could be counted as a loan origination if a new credit
decision was made (substance over form). According to the newly revised
Federal Financial Institutions Examination Council's (FFIEC) Interagency
Questions and Answers (issued October 6, 1997), a loan refinancing
typically involves the satisfaction of an existing obligation that is
replaced by a new obligation undertaken by the same borrower (i.e., taking
a new note). For example, suppose a one-year business line of credit is
maturing and the borrower wishes to renew the line of credit. After considering
whatever information it deems necessary, the bank agrees to renew the
loan for an additional one-year period, and has the borrower sign a new
note. In this instance, the loan refinancing is considered a new obligation
and would be counted as a loan origination.
On the other hand, when a change-in-terms agreement or other modification
agreement is used to extend the maturity date or make other material changes,
the loan is considered renewed (extended) or modified. A loan renewal
or modification of this nature would not be counted as a loan origination
for CRA data collection and reporting purposes. In short, whether a loan
renewal can be counted as a loan origination is now based on form rather
than substance. Additionally, this was dealt with by the Federal Reserve
Bank of San Francisco in a letter to all state member banks dated March
16, 1998, in which the Reserve Bank emphasized the distinction between
refinancings and renewals.
Keep in mind that information collected and reported from the CRA data
collection software is just a starting point for an institution's CRA
exam. It is not the be-all or end-all of an institution's CRA exam. At
the time of examination, an institution is permitted (and even encouraged)
to provide additional information (i.e., information on its loan renewals)
on its lending performance, especially if the institution believes that
its lending performance cannot be meaningfully measured without this additional
Moreover, the federal banking agencies and bankers alike agree that the
current CRA data collection process is not a perfect system. In fact,
earlier this year the FDIC requested comments on how to improve the data
collection process and make it less burdensome on financial institutions
(Federal Register January 22, 1998).
Q: If a loan meets the definition of a home mortgage, small business
or small farm loan and qualifies as a community development loan, how
should it be reported?
A: Unfortunately, except for multifamily affordable housing loans, which
may be reported by retail institutions under HMDA as home mortgage loans
and under CRA as community development loans, retail institutions must
report loans that meet the definition of a home mortgage, small business
or small farm loan as such - even if they also meet the definition of
community development loans. For example, suppose a bank makes a loan
to revitalize a low-income area located within an enterprise zone. Coincidentally,
this loan also meets the definition of a small business loan. The institution
would be required to report the loan as a small business loan.
Again, information collected and reported from the CRA data-collection
software is just the starting point of an institution's CRA exam. At the
time of examination, institutions should seriously consider supplementing
their reportable loan information regarding the dual-purpose nature of
the institutions' lending. This is especially important if a portion of
an institution's home mortgage, small business or small farm lending was
through a third-party or consortium lender (i.e., loan pool commitments).
Q: What street address should be used for evaluating an institution's
loans under the CRA performance standards?
A: The answer depends upon the type of loan: for consumer loans, an institution
should look to the address where the borrower resides; for small business
or farm loans, use the address where the main business facility or farm
is located; and for home mortgage loans, where the property is located.
For small business loans, the institution can also use the location where
a majority of the proceeds will be used (this is helpful, for instance,
in connection with construction loans). Remember: when downloading the
data from the mainframe for purposes of analysis, be sure to retrieve
the correct address - that is, the facility or proceeds address - not
necessarily the billing address. Furthermore, if downloading or inputting
information into the data collection software at a later date, remember
to keep the integrity of the original address intact. If the borrower
moves or changes its address after the loan is originated, the address
at the time the loan was originated must be maintained.
It is extremely important that the data be accurate. In the area of HMDA
reporting, the regulatory agencies are assessing civil money penalties,
as a routine matter, for late HMDA LARs and inaccurate data. It shouldn't
surprise anyone if the regulatory agencies start imposing the same penalties
for late or faulty CRA-record submissions in the not-too-distant future.
Q: Should an institution analyze all loan originations or just
its reportable loans: specifically, mortgage loans, small business loans
and small farm loans?
A: A large retail institution (greater than $250 million in assets) is
required to collect and report to their regulatory agency each calendar
year-end (beginning with December 31, 1996), information on small business,
small farm and home mortgage loan originations and purchases. The starting
point for the examiners is a review of the institution's loan originations
and purchases of reportable loans since the institution's last exam. If
the institution can furnish its own analysis of reportable loan originations
and purchases, then it has the necessary information to respond to any
questions from or conclusions drawn by the examiners, should they decide
to review only a sampling of the institution's reportable loan originations
The institution also has the option to provide additional data concerning
its lending activity, such as information on its entire loan portfolio,
and should do so to the extent that the information would enhance the
institution's performance. However, the institution must assemble and
present such additional information to examiners.
The purpose of analyzing loan data prior to a CRA exam is to prepare
in a proactive manner for the exam. By analyzing the data ahead of time,
the institution can: 1) gauge its performance, 2) review and correct any
potential deficiencies that could produce a less-than-satisfactory rating,
and 3) educate the board of directors and management about its current
efforts and results in meeting the credit needs of its communities. Because
the examiners are required to evaluate the institution's reportable loan
originations and purchases, we recommend that the institution analyze
at least this same information. If the institution has the resources to
analyze its entire loan origination portfolio or loans outstanding, we
recommend that the institution conduct such an analysis as a secondary
Conversely, examiners will evaluate a small institution's performance
based on all of its loan originations and purchases. Like large institutions,
however, a small institution has the option of assembling and presenting
additional loan information, such as information on loans outstanding,
if it will enhance the institution's performance.
Q: How must an institution evaluate its small business and small farm
A: There are actually two steps in evaluating a retail institution's
small business and small farm loan activity. The first step is to determine
whether the financial institution is making small business and farm loans
(as defined in the Call Report instructions). For small business loans,
an institution must report the number and dollar volume of all small business
loans $100,000 or 1 less, more than $100,000 but less than or equal to
$250,000, and more than $250,000 but not more than $1 million. For small
farm loans, an institution must report the number and dollar volume of
all business and farm loans of $100,000 or less, more than $100,000 but
less than or equal to $250,000, and more than $250,000 but not more than
In the second step, the institution must determine out of all of its
defined small business and farm loans, how many are to businesses or farms
with gross annual revenues of $1 million or less, using the gross annual
revenues the institution considered in making its credit decision. It
is the amount of the loan that first gets reported and then a determination
is made as to the revenue size of the business or farm; not the reverse.
Q: If it is determined that consumer loans are a "substantial
majority" of a retail institution's business, can the institution pick
and choose which categories it wants to have evaluated?
No. The institution is, of course, free to collect data on one or more
categories of consumer lending and provide it to the examiners as supplemental
information. If the institution chooses not to collect such information,
though, examiners will still evaluate one or more of the appropriate categories
if the institution's consumer loans constitute a "substantial majority"
of its loan portfolio by number or dollar volume. These categories are:
- Motor vehicle loans;
- Credit cards;
- Home equity loans;
- Other secured consumer loans; and,
- Other unsecured consumer loans.
If consumer loan data is not provided by the institution, examiners will
analyze a meaningful sample of the appropriate categories of an institution's
consumer loan portfolio. This may be to an institution's benefit or detriment,
depending on its performance and whether the sample accurately reflects
the institution's overall consumer loan portfolio.
Q: For consumer loans, what constitutes a "substantial majority "
of an institution's business?
A: Unfortunately, there is no magical number or percentage (i.e., greater
than 50%) that defines a "substantial majority." The agencies interpret
"substantial majority" to the extent that the Lending Test evaluation
would not meaningfully reflect the institution's lending performance if
consumer loans were excluded.
Q: If an institution decides to collect data on its consumer loans,
how should the institution +ort consumer construction loans, and wI3icb
location should be used for the loan: the borrower's address or the construction
property `s address?
According to an informal discussion with staff of the Federal Reserve
Board, a financial institution's portfolio of consumer construction loans
would be categorized under "other secured consumer loans." (This assumes
that the loans are not reportable under HMDA because they are temporary
financing with no commitment for permanent financing from the financial
institution.) With regard to loan location, staff believes that since
the regulation is unclear as to which address to use, the institution
could use either the borrower's address at the time of loan origination
or the construction property's address, as long as the financial institution
is consistent in its approach. However, staff recommended using the construction
property's address, which seems to make the most sense.
Q: Since the assessment area is not one of the performance criteria
of the CRA exam, and an institution cannot be criticized for its delineation,
how could the assessment area delineation impact an institution's performance?
A: Don't be lulled into a false sense of security here. While an institution's
assessment area delineation is not a separate performance standard, if,
during an examination, it appears that an institution has not complied
with the four requirements for delineating its assessment area, an examiner
could recommend the institution redraw its area. Consequently, the institution's
CRA evaluation would be based on an entirely different assessment area
- not the one it originally delineated and upon which it reported its
loans and based its impact on the institution's CRA performance rating.
It is important that an institution review its assessment area carefully
and document its rationale for the delineation (i.e., objective business
reasons) prior to the exam.
Q: How often should a financial institution review its assessment
A: It is recommended that both large and small financial institutions
review their assessment area(s) at least annually. This analysis should
include a review of: 1) the geographic distribution of lending activity
to help determine if the borrowing base has expanded beyond the current
delineation to the point where the majority of the institution's loans
(in both number and dollar volume) is not confined to the current boundaries;
2) the institution's current capacity and constraints; and 3) the institution's
marketing strategy and business plan for the upcoming year.
Q: How much is enough?
A: This seems to be the most perplexing question under the new CRA regulation.
Bankers and examiners alike are still in a quandary as to how much an
institution should maintain each year in community development investments.
The regulation itself does not provide guidance on how much a financial
institution should have in qualified investments to obtain a "satisfactory"
So, how much is enough? While the regulation itself provides little guidance,
there have been numerous strategic plans approved by the regulatory agencies.
These strategic plans include measurable goals for, among other things,
community development investments that the institution has committed to
obtain to achieve a satisfactory or outstanding rating. Also, the strategic
plans describe the types of investments in which each institution has
committed to invest.
It would be beneficial to review these approved plans to see how other
institutions approach the issue, and what the regulatory agencies view
as "enough" at least with respect to that particular institution. One
might review the ratio of total qualified investments to the institution's
net income or total assets.
A list of the approved strategic plans can be obtained through each regulatory
agency's website. Hard copies of the plans can be requested from the specific
regulatory agency or financial institution.
Q: How should a financial institution document its record of community
A: It is important to document the types of community development
services in which an institution is involved. And it is equally important
to document the number of hours that the institution's employees
devote to those activities. In order to get credit as a community development
service, the service must be performed by the employee in his or her official
Q: Will examiners consider a performance context provided by an institution?
A: Yes! An institution may provide examiners with )any information it
deems relevant, including information on the lending, investment and service
opportunities in its assessment area(s). Although the regulation does
not specifically require an institution to prepare its own performance
context, it is often helpful to do so. In order to explain properly its
performance under the new CRA regulations, the institution must have a
thorough understanding of its assessment area prior to the examination.
Note, however, that the agencies will not evaluate an institution's efforts
to ascertain community credit needs or rate an institution on the quality
of any information it provides.
Q: Were can peer group information be found?
A: For home mortgage data, the HMDA disclosure statements can be obtained
from the peer institution or from the FFIEC through its HMDA assistance
line at (202) 452-2016. For small business and small farm data, the CRA
Disclosure Statements can be obtained from the CRA assistance line at
(202) 872-7584. Also, the CD-ROM program entitled "1996 CRA Aggregate
and Disclosure Software" (version 1.0a) can be obtained from the FFIEC's
website. For other types of loan data (consumer loan or business loan
data for loans over $1 million), this information can be obtained from
the peer institution's public section of its CRA Performance Evaluation.
These can be requested from the peer institution or its regulatory agency.
In fact, the OCC has started to post its public evaluations, for both
large and small institutions, in a down-loadable format on its website
Q: What information must be maintained in the CRA public file if an
institution elects to have one or more categories of its consumer loans
considered under the Lending Test?
A. When a financial institution opts to have one or more of its consumer
loan categories (i.e., motor vehicle, credit card, home equity loan, other
secured or other unsecured loans) considered under the Lending Test evaluation,
the following data for that category of consumer loans must be included
in the public file:
- The number and amount of loans to low-, moderate-, middle- and upper-income
- The number and amount of loans located in low-, moderate-, middle,
and upper-income census tracts; and,
- The number and amount of loans located inside the institution's assessment
area and outside the assessment area.
Many of the issues addressed in this article will be covered in detail
at a special CRA Training Seminar that will be held in five California
locutions in June 1998. For more information, contact: Carol A. Cordova,
Bankers' Compliance Group, Inc., 18200 Von Karman Avenue, Suite 730, Irvine,
California 926l2, (714) 553-0909 or, (888) 599-1193.
What is Bankers' Compliance Group, Inc.?
Bankers' Compliance Group, Inc. (BCGI) is a subsidiary of law firm of
Aldrich & Bonnefin, P.L.C. It provides banking-related consulting
services in the areas of: CRA compliance (including year-end reporting),
auditing, public file review, drafting and reviewing internal CRA programs
and procedures, and training on CRA software. BCGI also provides unique
analytical products including maps, reports and geocoding of lending and
deposit activity in the areas of CRA, HMDA, fair lending and risk assessment.
BCGI also offers compliance consulting in establishing compliance management
programs and loan documentation system-setup and training. For more information
about the company's services, please call (888) 599-1193.
ABOUT THE AUTHOR
Carol A. Cordova specializes in establishing training and auditing programs,
maintaining current and active compliance programs and creating various
reporting tools to manage compliance with the ever-changing regulatory
landscape. Ms. Cordova has over 15 years of compliance experience, especially
in CRA. She is Vice President and Compliance Manager of Bankers' Compliance