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Community Banker
|February2006
Most bankers think of CRA as mandat-ing lending to economically depressed areasor low-income people or minorities. CRAdoes emphasize that banks should be meet-ing the need for credit services to all seg-ments of the community, in particular low-and moderate-income borrowers and areas.But other aspects of CRA mandate what isreally in the best interest of banks: success-ful marketing of loan services.Under CRA, there are no quantitativeperformance standards specified. Rather,the regulation stipulates that performancewill be evaluated in light of the “perform-ance context.” This is a term that refers tothe facts and circumstances of the lenderand the market the lender serves. Indeed,one of the collateral benefits of CRA, andthe Home Mortgage Disclosure Act, is thetremendousamount of loan market dataavailable because of the reporting require-ments of both acts.The reported loan data constitute themost important performance context data. With the reported CRA and HMDA data,market rank and market share for any re-porting lender can be determined in anymarket anywhere in the country. Moreover,this market data can be “mined” forsubmarkets too. Many bankers fail to takeadvantage of this significant benefit ofCRA.If you are going to pay the price ofregulatory compliance, why not reap someofthe rewards?Isthereabank president anywhere whodoes not want to know how his or her bank ranks in the bank’s mortgage market or smallbusiness loan market? Not onlyis this in-formation critical to CRA performanceevaluations, it is very important to the suc-cess of any lender. Every banker shouldhave the reported loan market data at theirfingertips so they can measure the fulfill-ment of their CRA responsibilities and si-multaneously maximize their market per-formance.
Mining the Data
Let’s take a look at the major performanceparameters defined in the CRA “lendingtest” and correlate the compliance issuewith information critical to successful mar-keting strategy.The first element is the “assessment areaconcentration ratio.” This ratio measuresthe relative amount of a bank’s lending ex-tended within its market (assessment area).The very nature of CRA is the expectationthat banks are going to reinvest in theircommunities. This is based on the premisethat the economic life of local communities isdependent on financial intermediaries invig-orating localeconomieswith credit re-sources. Therefore, the very first priority is todetermine how much of its lending resourcesabank is lending back to the market.The regulations state that a bank mustoriginate a “substantial majority” of itsloans within itsassessment area. Generally,this is interpreted to mean 60 percent to 65percent. Some bankers may say, “but thereare not enough lending opportunities with-in our area.” The response under CRA is,“Prove it. Show us you know your market orexpand your market based on your marketresearch.” Another way banks can measure theirperformance under this parameter is to ex-amine the mortgage market data and thesmall business loan market data to deter-mine howgoodajob the institution is doingrelative to the competition and the needs ofthe market. Within a bank’s assessment area,how important is it as a source of mortgageor small business loans? What is the bank’smarket rank and market share? What is thecompetitive structure of the small businessloan market? All this information is neces-sary, not only to judge a bank’s complianceperformance, but also to understand thethreats and opportunities that exist in itsunique market.The second element of the CRA lendingtest is the evaluation of the geographic dis-tribution of a bank’s loans inside its assess-ment area. The regulation does not require abank to lend in every census tract within theassessment area, but it does proscribe “un-explained gaps in contiguous tracts.”If there were big geographic lending gapsinside your market, wouldn’t you want toknow it and understand if those gaps repre-sent poor marketing strategy? Again, marketdata is indispensable for a complete analysisof performance under this parameter. If thereare10towns within your assessment area,what percentage of your loans was originatedin each town? Who are the dominant lenders?How do you compare to other peer lenders?How big is the loan market in the areas whereyou are not generating much loan volume? Anybank president should be interestedin this information for marketing reasons,let alone for CRA compliance responsibili-ties. And with this information, a bank candetermine if it is underperforming relativeto the market and missing market opportu-nities. This is another example of how suc-cessful compliance and successful market-ing go hand-in-hand.Under CRA,the geographic distributionof lending in the low- and moderate-income(LMI) geographies is particularly impor-tant.Too often, bankers write off economi-cally depressed areas. But frequently, thereis a surprising amount of very profitablelending activity in these tracts.Because CRA credits the originator andthe purchaser of loans, banks with LMI
If you aregoing to pay the price of regulatory compliance, why not reap someof the rewards?
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