Officials at Sovereign Bank New England say larger institutions with greater resources such as theirs may be able to help smaller banks with Community Reinvestment Act compliance by creating innovative lending and investment models.

Complying with the Community Reinvestment Act can be financially burdensome for some community banks, creating a competitive and aggressive market for community outreach programs in the banking industry.

A study commissioned by the Independent Community Bankers of America shows that the regulations and guidelines associated with CRA compliance tests create a financial strain on smaller banks.

In the same study, ICBA found that larger institutions are spending almost double what small banks spend on compliance issues because they are no longer subject to the same streamlined CRA examinations.

“We happen to approach community reinvestment as good business for the bank and the community,” said Thomas Kennedy, vice president of Sovereign Bank New England. “I think it’s fair to say that larger banks are going to have staffs to do [compliance issues] full-time and therein lies a difference – you can justify this as an expense.”

The Community Reinvestment Act, enacted by Congress in 1977, is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods.

The CRA requires each institution to keep records of their lending, service and investment contributions in compliance with the CRA, and those records are evaluated periodically on a federal and state level. A poor rating could result in regulatory probations, including refusal to allow new branches or halting mergers with another bank.

Industry analysts say the act itself is pretty simple in its requirement and conditions – banks have an affirmative obligation to lend in their assessment areas with special focus on low- and moderate-income communities within the guidelines.

With the Gramm-Leach-Bliley Act now in place, the time between examinations for small institutions with a good CRA rating is a minimum of five years, while larger banks are subject to examinations every two to three years. Since the Gramm-Leach-Bliley Act, the banking industry has changed significantly with respect to CRA compliance.

As indicated by an FDIC spokesman, smaller banks are tested on their loan to deposit ratio, where the bank is lending, distribution of bank lending according to census tracts, distribution of loans among borrowers of different incomes and the bank’s response to community complaints.

Large banks – those with assets over $250 million – are rated on lending exposure, customer services and the qualitative and quantitative aspect of investments, including donations and grants to community organizations.

“When banks merge or open new branches, CRA compliance comes into place because [banks] are opening additional depository institutions,” said Kevin Handly, a bank attorney and director of Boston-based Goulston & Storrs. “Larger banks incur more compliance issues than smaller banks because they open more additional depository institutions.”

Setting the Bar

Officials at the Massachusetts Bankers Association agree that the burden on financial institutions is the methodology behind the CRA regulations and the manner in which banks keep track of their CRA compliance records.

“Regulators have established examination mechanisms, and those have been enforced by the state,” said Handly. “The agency has to examine institutions for CRA compliance and any examination is burdensome. Regulators come in and want to see everything, right then and right now. Then, banks are assessed for the examination.”

The financial burden for smaller banks can also be the cost of technology required to do tracking and record keeping for CRA examiners, according to Kevin F. Kiley, executive vice president and chief operating officer of the MBA.

“Smaller banks don’t necessarily have the resources to spend that kind of money,” said Kiley.

According to Handly, in order to be prepared for CRA examinations, bankers need to keep records of loans, investment activity and services that have a community service aspect and keep those documents in a place readily available for regulators.

Without the resources of in-house lawyers and compliance specialists, some smaller banks have to take people off their jobs and assign them to compliance and record keeping.

But industry officials in Massachusetts believe there is happy medium to be met if all banks work together in their community.

“Larger institutions can help set the bar for smaller institutions to achieve CRA compliance because they have greater resources to give to the community,” said Kiley. “In some ways, we’ve benefited as an association and industry by being able to work with larger banks to develop community reinvestment initiatives to help smaller community banks by way of the fair lending initiative. For example, foreign language brochures that large banks helped contribute and develop, and smaller banks are able to use.”

Kennedy believes the larger banks can pave the way for smaller banks by way of public relations initiatives achieved through greater manpower.

“As a small community bank, they wouldn’t be in business if they weren’t doing [community reinvestment] already because they are much closer to their communities,” said Kennedy. “Where the bar gets set is in the innovative and creative issues for lending and investments [initiated by larger banks] because smaller banks just don’t have the manpower.”

Fair-lending laws look at protecting classes and sexes within a community, and according to Kennedy, the tremendous amount of focus the Home Mortgage Disclosure Act created around the country helped to set the curve for the CRA.

“It wasn’t until 1990 that HMDA was amended and we now have to report sex and race,” said Kennedy. “Before then, CRA ratings were confidential and was promise more than performance [among banks].”

But a good economy may be indicative of good performance.

According to the ICBA survey, 92 percent of respondents said that the market for CRA investment opportunities was competitive.

Industry officials pinpointed the CRA investment test, which requires banks to invest in low- and moderate-income neighborhoods, as a major culprit of burdensome CRA compliance exams for larger banks, because banks with less than $250 million of assets are exempt from the investment test.

“The market for CRA investment opportunities is very competitive, and one area in which people look at most often [for investment purposes] are low-income housing tax credits,” said Kennedy. “Banks compete for the investment tests of CRA compliance … for some of the smaller banks, those are complicated projects that with a smaller staff might not be manageable.”

ICBA officials commented to regulators of the act, who last updated the CRA in 1995, that it is unfair to subject relatively small community banks to the same tests used for mega-banks.

“It’s not an objection to the fundamental principals of the act, but more about how to do what we do without disruption.” said Kiley. “Between state and federal regulations, smaller banks incur frequent visits that disrupt business practices – we need to expand the time frames.”

If the regulation were simplified for smaller banks it would beneficial to the industry and the community, according to Kiley.

“The big bank vs. small bank issue is constantly being played out,” said Kennedy. “It ranges from the smaller bank saying it’s too costly and the bigger bank can afford it all, to the small banks saying this is their bread and butter. Somewhere in the middle is the rationale.”

Study: Community Banks Struggle With CRA

by Banker & Tradesman time to read: 5 min