Meetinghouse Bank, based in Boston’s Dorchester neighborhood, was rated as “Needs to Improve” in the area of compliance with the Community Reinvestment Act by the Federal Deposit Insurance Corp.

For a financial institution that prides itself on community involvement, a poor Community Reinvestment Act rating from federal regulators has been a wake-up call.

In the six months since the Federal Deposit Insurance Corp. examination that led to a “Needs to Improve” rating for Community Reinvestment Act compliance, Meetinghouse Bank has implemented a series of operational changes designed to adapt to its changing marketplace and attract the business of younger families and expand its footprint in the Dorchester area. The result of the FDIC exam was made public last month.

Bank President Anthony Paciulli doesn’t screen his phone calls. Along with a growing list of mortgage specialists and an online application system, the bank’s new Web site features photos of employees giving checks to community groups. Meetinghouse also recently added its first ATM and Saturday hours and is building a $350,000 operations center behind its single Dorchester branch to accommodate its growth.

Paciulli, who has been Meetinghouse’s president and chief executive officer since March 2006, said the exam by the FDIC was fair. And he understands its implications.

“If we don’t get our CRA rating back on track, our ability to borrow from the Federal Home Loan Bank could be suspended. On any given day, that [funding source] helps us maintain our cash flow. It’s very serious,” Paciulli said.

A CRA rating also affects whether a bank gets regulatory permission to merge or add branches.

The Massachusetts Division of Banks gave 93-year-old Meetinghouse Bank a “Satisfactory” Community Reinvestment Act rating in 2005.

State regulators and the FDIC apply similar criteria in assessing compliance with the CRA, evaluating banks’ loan-to-deposit ratios; percentage of loans originating in the bank’s self-defined assessment area; record of lending to borrowers of different income levels and businesses of different sizes; geographic distribution of loans; and record of taking action, if warranted, in response to written complaints about meeting credit needs in the community.

Institutions also are graded on the number and amount of their community development loans, services and investments.

Small banks, like Meetinghouse, a mutual thrift with $50 million in assets, must in theory make at least 50 percent of their loans in their assessment area to receive a Satisfactory rating.

However, the state Division of Banks gave Meetinghouse a Satisfactory rating in 2005 while the bank was issuing 40.4 percent of its loans within its assessment footprint.

The agency said the lower percentage was “mitigated to a large extent by the bank’s small size, limited staff, and competitive environment in which it operates.”

Meetinghouse, which does four-fifths of its business in one- to four-family residential loans, made 32 percent of its loans within its assessment area during its most recent FDIC assessment period from 2004 to 2006.

It also had a “poor” record of lending to low- and moderate-income borrowers, and in low- and moderate-income census tracts within its lending area, the FDIC found. Just 9.4 percent of its loans, three of 32 in total, were made to low, and moderate-income borrowers in an assessment area – mainly Dorchester, Milton and North Quincy – in which half the households fit that description.

No loans were made in low-income census tracts and just seven in moderate-income neighborhoods.

Rare Designation
Meetinghouse board member Richard Shea said that because the bank issues a small number of loans, reaching the 50 percent threshold to low- and moderate-income borrowers sought by regulators is a very achievable mark going forward.

Shea admitted to being “a bit frustrated” by the FDIC’s CRA rating, but pointed out that none of Meetinghouse Bank’s loans have resulted in foreclosure.

No CRA-related complaints were mentioned in the FDIC report, and the agency found no evidence of discriminatory or other illegal credit practices.

Needs to Improve is a rare CRA designation, given only when state or federal regulators determine that a financial institution’s track record of lending to those of all income levels in its community well off target.

Just four Massachusetts banks have earned such a rating from state or federal regulators in the past decade; two of those later merged with larger banks. Meetinghouse also was given a Needs to Improve CRA rating by the FDIC in 1995. Since then, until the most recent rating, the bank has received Satisfactory ratings in both state and federal examinations.

The Community Reinvestment Act, which became law in 1977, applies to all FDIC-insured banks. In Massachusetts, it also applies to state-chartered credit unions. Ratings are on a scale of “Outstanding” and “Highly Satisfactory” to “Substantial Non-Compliance.” While a Needs to Improve rating is rare, many banks earn top marks. In 2006, for example, 35 percent of Massachusetts banks earned Outstanding ratings from state and federal regulators. Ratings have been public since 1990, due to the efforts of former U.S. Rep. Joseph P. Kennedy.

State and federal regulators frequently share rating-related information with each other and often conduct exams side by side, according to Massachusetts Division of Banks Chief Operating Officer David Cotney.

Neither he nor FDIC spokesman Frank Gresok would comment on specific ratings or exam procedures.

“There is no set formula [for achieving a certain rating],” explained Gresok. “If we tried to talk generically, we’d end up talking about the specific bank, and we can’t discuss open and operating institutions.”

Thomas Callahan, executive director of the Massachusetts Affordable Housing Alliance, a Dorchester-based advocacy group that publishes lenders’ CRA ratings on its Web site, said ratings provide useful information for anyone considering doing business with a bank.

“I don’t think there’s a good excuse for any bank to be failing on CRA,” he said.

Stan Ragalevsky, a Boston banking attorney with Kirkpatrick & Lockhart Preston Gates Ellis, suggested that competition from non-bank lenders with more liberal underwriting standards could account for a bank’s difficulty in obtaining loan business or referrals from Realtors. In Meetinghouse’s assessment area, 298 different lenders originated residential mortgage loans in 2004. But Callahan said regulators understand and account for marketplace competition.

Cotney said the DOB “includes the number of financial institutions in the lending area” when conducting its review of CRA compliance.

But Callahan said Paciulli is taking steps to get Meetinghouse more involved in its community. He noted that the bank reached out to MAHA last month and will soon add the Massachusetts Housing Partnership’s SoftSecond loan product to its portfolio.

MAHA considers the low-down-payment, state-subsidized SoftSecond loan “the most affordable loan product in the state.”

Paciulli said he believes his bank’s low rating from the FDIC was a result of its reliance on a loyal, existing customer base, even as many of them were retiring to homes on Cape Cod and being replaced by residents with different needs.

A loan to a Meetinghouse customer – even those to low- or moderate-income borrowers – doesn’t count toward fulfillment of CRA mandates if the property for which the loan is issued isn’t within the bank’s assessment footprint, he said.

Meetinghouse recently decided to expand its assessment area from Dorchester, Milton and North Quincy to include all of Boston.

Shea said customers who seek loans on properties outside of the bank’s assessment area may compromise the CRA rating, “but we’re not going to turn away their business.”

What’s key, he said, is that the bank is now responding to changed demographics in its footprint and reaching out to new customers.

Paciulli said the board members who hired him knew he worked in Dorchester for years. Throughout the 1990s, he was in a senior lending position at Massachusetts Co-Operative Bank in Fields Corner. That bank has since merged with Sovereign Bank.

Under his watch, Meetinghouse has taken a hard look at its lending-area demographics, which include a many new immigrants and young families, and added a number of retail banking conveniences in a bid for new depositors who could turn into loan customers.

Both deposit and loan rates have increased by double digits in the past year, Paciulli noted.

Dorchester housing advocates and business owners think of Meetinghouse Bank as friendly, if not assertive.

“Mt. Washington Bank [which has one branch in Dorchester and is building another] is much more aggressive, but they’re bigger,” said Hiep Chu, executive director of Dorchester’s Viet Aid Community Development Corp.

Sam Schneiderman, principal broker for Greater Boston Home Team, a real estate firm that is active in Dorchester, said he thinks of Meetinghouse as a “customer-friendly bank.”

While only one of his homebuyer clients has secured a loan from the bank, he said, “I would recommend it as a bank that [a buyer] should explore.”

Longtime Meetinghouse board member Bill Fitzgerald said the bank’s community roots coupled with Paciulli’s energy are already helping it grow in ways that will improve its CRA rating the next time around.

“Tony knows this area better than anybody I’ve met,” he said. “He knows what the people are looking for. We as a board were thrilled to get him.”

The board views its recent CRA exam as “a learning experience,” Fitzgerald noted, saying the goal to improve its rating is guiding strategy decisions for Meetinghouse as it expands and adapts to new customers.