It happens to me with a reasonable amount of frequency: someone calls in varying states of panic because – suddenly – their next CRA exam is imminent. Truthfully, it shouldn’t seem so sudden since you know approximately when the next exam will be as soon as the previous one concludes. That date seemed so far off then, but here it is, looming particularly large. And now, failure seems completely possible, thus the panic. I am here to tell you, failure is very unlikely.
Unless your institution is classified as Small and you haven’t been making loans inside your assessment area, or generally making loans at all, you are almost certainly going to pass. Being regulated by FDIC slightly raises your chances of failure, but not by much. I reviewed the ratings published for 2015 and 2016 for all three prudential regulators and this is what I found:
- The Federal Reserve did not have a single institution rated as Needs to Improve or Substantial Non-Compliance in either year.
- The OCC has 3 Needs to Improve ratings and 2 Substantial Non-Compliance ratings, all of them in 2015 (1.92% of their 260 published ratings).
- The FDIC issued 14 Needs to Improve in 2015 and 11 in 2016 along with 5 Substantial Non-Compliance in 2015 and 1 in 2016. However, the FDIC published 903 ratings in 2015 and 507 so far in 2016 making the failure rate 2.1% in 2015 and 2.37% so far in 2016. (So FDIC is on a slight upswing, which warrants about 0.2% more worry for these institutions.)
I looked at the details of every Needs to Improve and Substantial Non-Compliance given during this time and found several common denominators. As previously noted, most were Small banks. Many failed due to poor lending inside the assessment area (one was lending less than 1% inside) or very low loan-to-deposit ratios (less than 20% in most cases). Intermediate institutions failed one of the two tests (Lending and Community Development) in almost equal proportions. Those that failed the Lending Test had most of the same problems the Small institutions had. Those that failed Community Development were doing odd things like not keeping branches open for “usual” hours or they had little to no Community Development loans or investments.
It shocks me how many of you worry about your ability to pass the CRA Exam, but have given no consideration to how you look from a fair lending perspective. Many of the fair lending actions in recent years have not come during the CRA Exam, so they are not reflected in that rating. BancorpSouth Bank, whose fair lending problems just became very public, has received a Satisfactory CRA rating in every published exam the FDIC has administered on them since 1991, (the last was published in 2014).
I have seen institutions go to great lengths to justify their CRA position with tons of reports, charts, maps, and paper that make the case given the “context” of their community. This is awesome! Yet often, these same institutions could not tell me anything about their redlining risk – by far the hottest topic in lending compliance right now. They don’t know if they have disparity in underwriting or pricing within their own institution, or compared to peers, or whether that disparity is significant or what even constitutes “significant.”
I am not advocating that you not prepare for your CRA exam. I am simply suggesting that you put your concerns where they belong. Of course a negative CRA rating can have unpleasant consequences for your institution, but unless you are in the industry, you probably don’t even know banks have CRA ratings. Joe Consumer certainly has no idea. I worked in a bank in auto lending and even I had no idea what CRA was. But if you have a fair lending problem, then soon enough everyone who reads the news, your customers and all of your employees will know about it, and the negative consequences will likely be worse than those of CRA alone. There is huge reputational risk here, sports fans. And of course, if these issues are uncovered during the CRA exam, you will fail that anyway. Fair Lending violations are an immediate rating downgrade.
Spend a little time on CRA. You are not likely doomed to failure. Spend a little more time on Fair Lending. This is where your risk really is…according to what the regulators are doing and saying. And, if one more person tells me that “fair lending doesn’t apply to me,” I am going to freak out. I promise, fair lending applies to you. Don’t wait until you find out the hard way.