Volume 11; No. 2; September 1999
Letters to Community Investments
Each week, Community Affairs staff receive technical questions related
to the application and interpretation of the CRA and Fair Lending regulations.
The following are recent questions whose answers we thought would be useful
Keep your questions and comments coming! You can fax them to us at (415)
Q. What percentage of my portfolio must be in qualified investments
to receive an outstanding rating?
CI: There are no established benchmarks that indicate what level of investments
is considered "outstanding." The performance context, the nature of the
investments, and the impact of these investments all contribute to the
assessment of investments. You may want to read the public evaluations
of your peer institutions to get an idea of what has been acceptable to
regulators in the past.
Q: How do examiners determine which loans to consider when performing
a small bank CRA examination?
CI: Examiners look at major product types by both the number and dollar
amount of loans extended. Usually this requires a review of small business
loans and consumer credit. Generally, examiners will not analyze products
that are not considered significant to the bank or are not indicated by
the bank to be major product lines.
Q: Do I have to develop a written performance context?
CI: The CRA regulation does not require a bank to develop a performance
context. Even so, a bank may be asked to respond to questions by examiners
about lending penetration in specific areas, distribution of loans among
various income levels, or conspicuous gaps in loan distribution. Verbal
responses are generally acceptable, but bank representatives may want
to consider written responses to ensure consistency throughout the bank.
Q: Our bank is considering offering HUD's 184 Loan Guarantee Program
to address housing needs on reservations. Will the bank receive the same
amount of CRA consideration for these loans as for loans that are not
CI: Yes. The lending test does not take into account whether or not loans
Q: Does our bank need to get approval from our regulator before we
make a community development investment?
CI: Not necessarily. According to Regulation H, you merely need to send
your regulator notice of community development and public welfare investments
made. However, the following exceptions apply: 1) if the aggregate investment
exceeds five percent of capital stock and surplus, 2) if your bank's CAMELS
and/or consumer compliance ratings are rated "three" or below, 3) if your
bank is not adequately capitalized, or 4) if your bank is subject to an
enforcement action. Under these conditions, you will need to seek approval
before making an investment.
Fair Lending Questions
Q: We are concerned about competitive loan pricing. How can our bank
mitigate the fair lending risks associated with this business practice?
CI: Examiners are aware that the market drives loan pricing, and banks
have the discretion to price loans based on a number of factors, including
market competition. However, pricing is considered a bank policy issue,
and departures from policy should be clearly documented in the files as
an "exception to policy." In addition, it is wise (though not required)
to track the number of and reasons for these exceptions to avoid fair
lending and safety and soundness problems.
Q: If discriminatory loans are identified, what corrective actions
can and should be taken?
CI: There are three steps a bank should take:
1) make the affected applicant "whole." That is, bring the applicant
to the level that would have applied if he/she had not been discriminated
against. This might include adjusting loan terms or re-evaluating a credit
decision, 2) identify and correct the policy, procedure or staff-training
issue that led to the problem, and 3) monitor periodically to ensure that
the correction is fully effective.
Q: Is it a problem to limit our bank's second review program to minority
applicants and/or those considered to be low-or moderate-income applicants?
CI: Banks should not limit second review programs to protected classes.
Regulation B prohibits institutions from discriminating against applicants
on a prohibited basis regarding any aspect of a credit transaction. Thus,
limiting a second review program on the basis of race or gender, for example,
could be construed as illegal discrimination. A policy of reviewing applications
from low-and moderate-income individuals would not be considered discriminatory
since income level is not a protected class under the FHA or ECOA.
Financial institutions not supervised by the Federal Reserve are encouraged
to verify this information with their regulatory agency.