CRA Modernization Rule, Part III: What Is the Retail Lending Test?
Written by: Bill Dolan, CMB, AMP
Once again, small banks (less than $600 million in assets) will be evaluated under the current Small Bank Lending Test, with the option of being evaluated under the new Retail Lending Test.
Intermediate (over $600 million but under $2 billion) and large banks (over $2 billion in assets) will be subject to the Retail Lending Test which offers a more quantitative way to measure compliance with CRA.
Under a metric known as the Retail Volume Screen which pertains to only banks’ facility-based assessment areas, both intermediate and large banks must meet or exceed 30% of the Market Volume Ratio (the “Retail Lending Volume Threshold”). The Market Volume Ratio is determined by dividing the annual average loan originations at large banks with the facilities in your assessment area by their average annual deposits.
The CRA modernization final rule concluded that banks “who do meet a Retail Lending Volume Threshold set at a 30% Market Volume Threshold are substantially underperforming their peers in terms of meeting the credit needs of their communities”.
The Retail Lending Test includes originations of mortgages, small business loans, multi-family loans, small farm loans, and auto loans – if auto loans represent a substantial portion of your institution’s portfolio.
Under the final rule, examiners will evaluate retail lending performance outside facility-based assessment areas – but not under the Retail Volume Screen. The outside retail lending area is nationwide, which gives banks considerable flexibility in satisfying CRA requirements.
The agencies and their examiners understand the evolution of digital financial products expands a bank’s assessment area. They work a more comprehensive approach that considers retail lending to LMI individuals and to communities outside traditional assessment areas.
Additional Tests for Intermediate Banks
Intermediate banks will undergo two tests that are equally weighted at 50% - the same as current CRA requirements. The Retail Lending Test will take the place of the present lending assessment. Intermediate banks can choose assessment under the existing Community Development Test or the newly established Community Financing Test.
Test for Large Banks
Under CRA modernization, large banks will undergo four tests instead of three, weighted by the examiners as follows:
Retail Lending Test (40%)
Community Development Financing Test (40%)
Retail Services and Products Test (10%)
Community Development and Services Test (10%)
The Retail Services and Products Test will assess a bank’s credit and deposit offerings in meeting the needs of LMI communities. This includes the bank’s availability of branches, remote service facilities, and digital access for customers.
The Community Development Services Test will be a detailed analysis of community development services in addition to the Impact and Responsiveness Review.
SCA realizes just how heavy CRA can feel but our consultants can lighten your load. Compliance with CRA comes down to the story you and your institution tell the examiners, and you must have a solution that determines LMI ratios based on your defined assessment area to be able to tell the story well.
At SCA, our team of experts (former regulators, compliance directors, and examiners) will review your CRA compliance data, crunch the numbers, analyze the geocoded maps, and provide you with the necessary tools and support you need in creating your CRA strategy plan or, if you are having concerns with your upcoming CRA exam, or possibly feel not as prepared as you should be, start the year off right by contacting Spillane Consulting Associates to help guide you on a path with a CRA strategy that will demonstrate to your examiners, the accountability that you and your financial institution have taken with CRA compliance.
Contact Bill Dolan, Director, at (617) 694-2617 or by email at: Wdolan@scapartnering.com to begin managing your CRA strategy TODAY!
