How do examiners measure CRA performance?
Len Suzio, GeoDataVision
The first thing to understand about CRA is that it boils down to a very simple question: “How does my bank meet our community's need for credit services?” Whenever you measure your bank's CRA performance you should always keep this in mind. This question has 3 built-in assumptions: (1) you know what your community's credit needs are, (2) you have loan products to meet those needs and (3) you have ways to measure how you are meeting those needs. Let's briefly review the first of these topics.
Know your community's need for credit services! - Get the specific information
Knowing and understanding your community's need for credit products is the very beginning of having a strong CRA program, but many community bankers overlook it. How do you measure your community's need for credit services? There are 2 critical components that must be used to develop your community's credit picture: (1) local demographic information and (2) local loan market data. Examiners themselves use both types of information as they develop your CRA performance evaluation.
Community Demographics
The most important demographic data used by examiners includes income and housing demographics. Since CRA emphasizes a bank's responsibility to lend to all people in the community including low and moderate-income persons in particular, one of the first demographic factors used by regulators is the distribution of the low and moderate-income population. You should know the size and the geographic distribution of the low and moderate-income population in your assessment area. Examiners will compare the relative size of the LMI population (its percentage compared to the entire population in the community) to the relative percentage of low and moderate-income borrowers within your mortgage portfolio. If 25% of your community's population is low and moderate-income persons, how does that compare with the percentage of your mortgages to LMI borrowers? Another demographic factor used by examiners is the distribution of owner-occupied housing among low and moderate-income tracts in the community. Again, if 30% of owner-occupied housing is in you community's LMI tracts, what percentage of your mortgage portfolio was originated in those tracts? These are exactly the comparisons that will be made by examiners when the evaluate your CRA performance.
Loan Market Data - the best indicator of community credit needs
Another very important measure of your community's need for credit services is the loan market data reported by lenders under CRA and HMDA. There is no better measure of your community's need for credit services than the actual loan market data that reflects that need . How is mortgage lending in your market distributed among low and moderate-income borrowers? What is the volume of mortgage lending in are low and moderate-income census tracts? How does the distribution of your mortgage portfolio compare to the market? If 30% of all reported mortgages in your community were originated in the community LMI tracts and only 20% of your mortgages were extended in those neighborhoods your examiner will want to know why. Are you prepared to answer those questions? In order to rate your performance meeting the need for credit services you must have the loan market data that shows you: (1) the volume of mortgage lending and small business lending in your community, (2) the geographic distribution of loan markets in your community, (3) the competitive structure of the loan markets in your community including market rank and market share and (4) key characteristics (low and moderate-income borrowers and very small business owners) of the borrower market.
In summary, the foundation of a strong CRA program consists of demographic and loan market data that paint a picture of your community's credit needs. Knowing and understanding that data is critical because it contains the benchmarks that will be used by examiners to measure your performance.