There are many elements of the 2022 Community Reinvestment Act notice of proposed rule-making that could be described as “groundbreaking” but there is one element in the proposed Rule that could be better described as “earth-quaking”: the rules related to assessment areas. How these areas are delineated has implications of the highest magnitude for banks. The notice, or NPR, contains three different assessment areas for large banks each with profound CRA performance consequences.
The NPR continues the so-called “facility-based” (deposit-taking branches) assessment area concept but adds two completely new and radical types of assessment areas. Small banks and intermediate banks (with one exception) will not be subject to the new assessment areas.
Facility-based assessment areas will apply to “large banks” (those over $2 billion in assets) but with an important change – the inability to adjust assessment areas to markets a bank can “reasonably be expected to serve.” Instead, large banks would be compelled to incorporate entire counties within any facility-based assessment area.
The loss of geographic flexibility in branch-based assessment areas will have significant negative consequences for “large banks” because it will require many large banks to adopt unrealistically big assessment areas.
Look to LA for Example
A good example can be found in Los Angeles County, California. A review of the FDIC’s 2021 summary of deposits data shows there were 99 banks operating 1,634 branches in the county. Of those banks, 17 exceeded the proposed $2 billion large bank threshold but operated three or fewer branches to serve the 2,495 census tracts within the county. Not only is it impossible for those institutions to serve the entire county, they also are at a tremendous disadvantage competing with the largest banks that operate dozens of branches within LA. An unrealistic assessment area leads to unrealistic performance standards undermining the credibility of the CRA performance rating system.
Even more devastating is that “large banks” would be subject to CRA evaluation in two completely new markets, so-called “retail lending areas” and “outside retail lending areas.”
The first type of new assessment area for large banks is called “retail lending areas.” The second new type of market subject to CRA performance evaluations for large banks are “outside retail lending areas.”
Most comments from the banking community have focused on the retail lending areas. That focus is understandable because of the dramatic burden the implementation of retail lending areas would have for large banks. But the incredible complications introduced by the mandate to evaluate a bank’s lending outside the retail lending assessment areas anywhere in the country may be even more burdensome and unjustifiable. I will explain the problems inherent in the Retail Lending Areas concept and then touch upon the serious consequences of mandating examination of lending in “outside retail lending” areas.
Problematic Evaluation Areas
Retail lending areas are defined as areas, no smaller than a metropolitan statistical area, in which a bank originated at least 100 home mortgages or 250 small business loans in each of the two previous years.
Not only does this definition suffer from the serious defect of arbitrarily large assessment areas (based on MSAs) but it also mandates the evaluation a bank’s lending in communities where it has no deposit-taking branches – where performance standards will be based on competition that does have local facilities. Once again, unrealistic and unfair assessment areas lead to seriously misleading performance evaluations, undermining confidence in the accuracy and reliability of the evaluation framework.
Another serious defect in the concept of retail lending areas is the potential proliferation of assessment areas. The American Bankers Association, in testimony submitted to the House Financial Services Committee, identified at least one community bank that has three assessment areas but will be forced to be evaluated in 60 retail lending areas!
Much Effort for Little Lending
Finally, there is the concept of rating a bank’s performance in “outside retail lending areas.” This aspect of the NPR had far fewer objections from the industry than the concept of the retail lending areas. But the requirements as laid out in the NPR are incredibly complicated.
The proposed rule would require the evaluation of a large bank’s lending for any major product line anywhere in the country outside its facility-based and retail lending areas. This means a Miami-based bank that may have extended one residential mortgage in the Los Angeles MSA, 2,500 miles away, would have to include in its performance analysis that mortgage along with any other mortgages extended in any of the other 411 MSAs or 35 metro-divisions or 50 statewide non-MSA areas outside that bank’s facility-based or retail lending areas.
This means not only identifying those loans, but then comparing them to the local “tailored” calibrated benchmarks in each location (how accurate would any “conclusion” be based on a single loan in any MSA?). This could involve hundreds or thousands of comparisons and calculations to determine a performance rating at the institution level for a bank’s lending outside its retail lending areas. According to the NPR only about 10 percent of all large bank mortgages and 16 percent of small business loans are in these outside areas. No cost-benefit analysis can justify so much effort for so little lending.
The new assessment areas may precipitate many misleading ratings and undermine the credibility of CRA performance evaluations.
Len Suzio is president of CRA and HMDA compliance consultancy GeoDataVision LLC.