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Nazing Apartments, in Roxbury, Massachusetts, is pictured here during the renovation of 144 units of affordable housing. This project received bank financing through the Part 24 Public Welfare Investment Authority. |
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Nearly a year has passed since the Office of the Comptroller of the Currency, working closely with the Federal Reserve Board and the Federal Deposit Insurance Corporation, revised the Community Reinvestment Act (CRA) regulation. One of the most significant changes was the creation of a new type of CRA evaluation for medium-sized banks. These banks, called “intermediate small banks” (ISBs), are defined as institutions with assets of $250 million to $1 billion. The new intermediate small bank examination was designed to reduce burden and improve flexibility for these banks by including a lending test and a community development test. ISBs are not required to collect and report certain CRA-related loan data. In addition, the ISB test does not prescribe a required threshold of community development (CD) loans, qualified investments, or CD services, but allows banks considerable discretion in how they structure their CD activities to respond to the community development needs of their assessment areas.
Although the changes to the regulation under September 1, 2005, some institutions may remain sufficiently unfamiliar with the ISB examination to warrant a thorough discussion of how it compares with the lending, investment, and service test (under the large bank test), which previously had been the only option for banks in the $250 million to $1 billion range. The CRA regulation continues to allow an institution the option of being examined as a large bank if it collects and reports the required CRA loan data. However, before they can make an informed decision, bankers need to understand the difference between the two exams.
Prior to the regulatory revision, there had been four types of tests for CRA examinations:
- Small bank test: a streamlined lending test with an option to consider qualified investments and community development services
- Large bank test: divided into three parts—lending, investments, and services—with lending receiving the most weight
- Limited purpose or wholesale bank test: relies on a community development test focusing on CD loans, qualified investments, and CD services
- Strategic plan examination: a custom-designed test based on a pre-approved CRA plan
To these options the banking regulators have added the ISB examination, consisting of the existing streamlined small bank lending test and a new CD test. The tests, which are evenly weighted to produce the overall rating, are designed to reduce the data burden on mid-sized banks and increase their options for addressing local CRA issues. Under this approach, banks provide less formal, but equally important, information about their retail lending performance, along with descriptions of their CD loans, qualified investments, and CD services for examiner review and analysis.
The chart below illustrates the components and weighting of the ISB examination and the large bank examination.
Comparison of Intermediate Small Bank and Large Bank by Weight of Test Components |
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Framework for CRA Evaluations
A critical component of any CRA evaluation is what examiners call “performance context,” which provides the framework for viewing the CRA activities and decisions that a bank makes. This framework is drawn from a combination of:
- A bank’s business strategy and major business products; its delivery methods, financial condition, and capacity to help meet local credit needs, including community development needs;
- The local economy, including needs and opportunities for lending and community development activities in the local area; and
- Any other relevant information that helps the examiner evaluate the bank’s CRA performance.
OCC examiners develop a performance context for each bank at the beginning of an examination by holding discussions with bankers and local community groups, as well as by considering any written information a bank might want to provide to identify local CD needs and opportunities. The examiner’s understanding of this performance context guides the judgment of the CRA ratings on the individual test components for every bank.
As in other types of examinations, banks under the ISB test should guide examiners to important information about their compliance efforts. For example, banks should provide examiners with information about local CD needs and opportunities. They should also explain how their CD-related activities and products were responsive to these identified needs in the communities they serve. Examiners can then review the materials and determine the extent to which the amount, combination, and quality of the CD loans, qualified investments, and CD services are responsive to the needs and opportunities in the banks’ assessment areas.
As part of their analysis, examiners ascertain whether banks’ activities reflect the credit, investment, and service needs of their communities. Do banks’ activities and decisions point to some special expertise or efforts to provide community benefits that otherwise would not exist? Do banks demonstrate critical understanding of community situations, such as when a smaller loan has more impact or benefit to a community than a larger loan? Examiners consider banks’ activities to be particularly responsive when they combine benefits to low- and moderate-income individuals with low- or moderate-income geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies. (See "Rebuilding Communities After a Disaster.")
Comparing the Large Bank and ISB Tests
Both large banks and ISBs undergo a lending test. Loans made by both categories of banks are examined for geographic distribution and activity in assessment areas, but some other criteria differ. The chart below illustrates some of the similarities and differences in the lending tests for large banks and ISBs:
Comparison of Lending Tests for ISBs and Large Banks
Intermediate Small Banks |
Performance Criteria |
Large Banks |
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Geographic Distribution |
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Borrower Distribution |
√ |
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Activity in Assessment Area(s) |
√ |
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Loan-to-Deposit Ratio |
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CD Lending |
√ |
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Innovative or Flexible Lending Practices |
√ |
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Responses to Complaints |
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In/Out Ratio |
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What Are the Relevant Loans?
When examiners go into a large bank, they know which loan products they will examine because the CRA regulation tells them they must review and consider home mortgage, small business, small farm, and community development loans. (Examiners will also consider consumer data at the bank’s request or if consumer loans constitute a substantial majority of its lending activity.) To accommodate this analysis, examiners have access to the large bank’s CRA lending data in electronic form.
Mid-sized banks using the ISB approach provide information in a different form. In this case, examiners don’t have mandated loan types to review and often don’t have access to electronic loan data. So what do they do? The examiners first identify the primary loan products originated and purchased by the bank during the evaluation period. Primary loan products are loans that the bank originated or purchased most during the evaluation period, ranked by number of loans and dollar amount. These, along with any other loan data that management brings to the examiners’ attention, form the basis for the lending analysis. Examiners review internal bank loan records and talk with bank managers to identify these loan products.
Because examiners typically do not have access to electronic data on an ISB's primary loan products, the examiners generally obtain lending data from either the loan credit files or internal bank records. For example, if business lending is one of the primary loan products for an ISB, examiners will select a random sample of business loan files to review and pull the pertinent data directly from the files. Examiners can get data from the files on loan origination amount and date, the locality in which the loan was used, and whether the business borrower had gross annual revenues of $1 million or less. These are the same data that large banks report electronically on small loans to businesses.
Where Are the Loans?
Both the large bank and ISB lending tests include a geographic distribution analysis. In the large bank test, examiners consider the geographic distribution of the bank’s home mortgage, small business, small farm, and consumer loans (if applicable) among low-, moderate-, middle-, and upper-income geographies in the bank’s assessment area along with the dispersion of these loans within the assessment area.
Under the ISB test, examiners consider the same geographic distribution for the primary (and other loan data) products. But whereas the large bank test includes a review of the proportion of the bank’s lending in its assessment area under a geographic distribution criterion, the ISB test includes the in/out ratio—a comparison of loans made inside the assessment area to loans made outside that area—as a separate performance criterion. As a result, the in/out ratio weighs more heavily in an ISB exam.
Who Received These Loans?
Both tests look at borrower distribution—but again, this part of the analysis may include different loan types. In the large bank test, examiners consider the borrower distribution of the bank’s home mortgage, small business, small farm, and consumer loans (if applicable). In the ISB lending test, examiners consider the borrower distribution of the primary and other loan data which are the loan products identified during the examination process. Both tests focus on the number and dollar amount of loans to low-, moderate-, middle-, and upper-income individuals, and to businesses and farms having gross annual revenues of $1 million or less.
Comparing Community Development Performance Criteria
It’s important to remember that although a single regulatory definition of community development applies to banks of all sizes, ISB and large bank examinations consider community development activities in different tests. Large banks allocate their CD activities into three different tests—lending, investments, and service. ISB examinations consider CD lending, qualified investments, and CD services under one CD test.
The chart below illustrates some of the differences between how the ISB and large bank tests evaluate community development performance.
Evaluating Community Development Performance
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Criteria |
Evaluation |
| ISBs |
The CD test includes
- Number and dollar amount of CD loans
- Number and dollar amount of qualified investments
- The extent to which the bank provides CD services
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Responsiveness of CD loans, qualified investments, and CD services, evaluated together, to local needs. Examiner determination is based on performance context and bank activities and products. |
| Large Banks |
- CD loans considered in lending test
- Dollar amount of qualified investments—in the investment test
- Retail and CD services considered in the service test
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Innovativeness or complexity of CD loans and qualified investments;
the degree to which the qualified investments are not routinely provided by private investors;
responsiveness of CD loans and qualified investments to credit and community development needs; innovativeness and responsiveness of CD services |
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Community Development Lending
Community development loans are part of the lending criteria for a large bank. Examiners consider the number and dollar amount of CD loans, as well as their complexity, innovativeness, and responsiveness. Community development lending always has a neutral or positive impact on a large bank’s lending test rating and can help a bank improve that rating from “satisfactory” to “outstanding.” In fact, exceptionally strong CD lending can also help mitigate other weaknesses within the large bank lending performance criteria, such as a poor geographic distribution. This potential impact adds some flexibility to the large bank lending test. Examiners also consider, as a separate lending criterion, a large bank’s use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low- or moderate-income individuals or geographies. In contrast, CD lending in an ISB test is considered only within the CD test, as part of a range of activities that are evaluated together to determine bank responsiveness to identified CD needs and opportunities in its assessment area.
Qualified Investments
Qualified investments (QI) made by an ISB are considered in the CD test, while large banks have a separate investment test. In the ISB test, qualified investments are evaluated for number and dollar amount, as well as responsiveness to local needs. The large bank investment test, however, evaluates the dollar amount of qualified investments, innovativeness, or complexity of qualified investments, the responsiveness of QI to credit and community development needs, and the degree to which the qualified investments are not routinely provided by private investors.
Community Development Services
The ISB and large bank tests take different approaches to the evaluation of community development services. When examiners consider services under the large bank test, they look at retail services and CD services separately. The retail services review includes:
- The bank’s record of opening and closing branches;
- The current distribution of branches among low-, moderate-, middle-, and upper-income geographies;
- The availability and effectiveness of alternative delivery systems for retail services in low- and moderate-income geographies and to low- and moderate-income individuals; and
- The range of services provided and the degree to which these services are tailored to meet the needs of these different income-level geographies.
In the ISB test, however, examiners consider the extent to which the bank provides community development services and how responsive these CD services are when evaluated together with the bank’s qualified investments and CD loans. Thus, examiners will consider the types of CD services provided that benefit low- and moderate-income individuals, such as low-cost bank checking accounts and low-cost remittance services. They will also consider the provision and availability of CD services to low- and moderate-income individuals, including those delivered through branches and other facilities located in low- and moderate-income areas. Generally, the presence of branches in low- and moderate-income geographies will help to demonstrate the availability of banking services to low- and moderate-income individuals.
Bankers who need help identifying opportunities for CD loans, qualified investments, and CD services should contact their local examiners or their District Community Affairs Officers (see “CRA Consultations Available”), who can work with them to help identify opportunities and needs in their institutions’ assessment areas. (See “Community Affairs Indexes: Articles and Opportunities on Community Development Topics of Interest.”)
Evaluating Community Development Criteria
A bank that knows its community is one step ahead. Examiners request information about ISB and large banks’ CD loans, qualified investments, and CD services through their examination request letters, which are sent in advance of every examination. They also will accept any other information bank managers provide, including any CRA lending analyses, self-assessments, or information about the assessment area, such as local economic conditions and credit needs. CD performance is considered in light of a bank’s capacity, business strategy, the needs of the community, and the number and types of opportunities for each type of community development activity (its performance context). Examiners also will consider the results of any assessment by the institution of community development needs and how the bank’s activities respond to those needs.
In both large bank and ISB tests, considering the qualitative aspects of performance recognizes that community development activities sometimes require special expertise or effort on the part of the institution to provide a benefit to the community that would not otherwise be made available. In fact, in some cases, a smaller loan may have more qualitative benefit to a community than a larger loan. Activities are considered particularly responsive to community development needs if they benefit low- and moderate-income individuals in low- or moderate-income geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies.
An ISB has the flexibility to allocate its resources in amounts that it reasonably determines are most responsive to community development needs and opportunities within one CD test. While the CRA regulation does not prescribe a required threshold for CD loans, qualified investments, and CD services, an ISB may not simply ignore one or more of these categories of community development. Instead, based on the bank’s assessment of community development needs in its assessment area, it may engage in different degrees of community development activities that are responsive to those needs and consistent with the bank’s capacity.
For an ISB test, examiners evaluate whether the amount and combination of CD loans, qualified investments, and CD services, along with their qualitative aspects, are responsive to the CD needs and opportunities in the bank’s assessment area. This means that the bank should be familiar with the CD needs of its assessment area and then structure its CD activities in a way that will be responsive to these identified needs.
A large bank test, in contrast, includes CD lending in the lending test, qualified investments in the investment test, and CD services in the service test. Appropriate levels of each of these activities depend on the capacity and business strategy of the bank, community needs, and number and types of opportunities for community development.
Calculating a Rating
The determination of overall CRA ratings also differs for ISBs and large banks. An intermediate small bank must get a “satisfactory” on both the lending and the CD tests to get an overall “satisfactory” rating in CRA. It is possible for an ISB to get a “satisfactory” on one test and an “outstanding” on the other and receive an overall “outstanding” rating. But an ISB that gets a “needs to improve” on one of the tests will not receive an overall “satisfactory” rating.
Large banks, on the other hand, are rated on lending, investments, and services separately and they must achieve at least a “low-satisfactory” rating on the lending test to be rated “satisfactory” overall—regardless of their ratings on the investments and service tests. At the same time, a large bank that is rated “needs to improve” in either investments or services could still achieve an overall satisfactory rating with strong performances in the other two categories.
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