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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2017

Brokers Can Provide Value by Understanding Regulations

The Community Reinvestment Act helps to encourage lending that benefits underserved areas

Brokers Can Provide Value by Understanding Regulations

Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage banks to meet the needs of the communities in which they operate. Specifically, the CRA targets low- and moderate-income neighborhoods.

All depository institutions insured by the Federal Deposit Insurance Corp. (FDIC), such as national banks, savings associations, and state-chartered commercial and savings banks, are subject to the CRA. The legislation contains many compliance obligations for lenders, as well as many opportunities for commercial mortgage brokers working with these lenders to invest or provide services in local communities.

Mortgage brokers are in a unique position with respect to the CRA. Although they have no obligation to comply with the CRA, they have opportunities to serve the needs of their bank clients by understanding its parameters.

As banks seek opportunities to make loans and real estate investments, and undertake ventures that potentially provide both credit and financial profit, brokers that understand the requirements of the CRA are able to introduce more attractive and innovative investment possibilities to their clients.

Mortgage brokers also can help locate opportunities for banks to lend in community-development projects, qualified investments that are purchased with pretax income, or other loans in low- and moderate-income areas where a bank may be less equipped to find such opportunities.

How to capitalize

One challenge in making loans within low- and moderate-income areas is that many of them lack access to certain infrastructure. The CRA presents an opportunity for mortgage brokers with connections to leverage investments in infrastructure.

In July 2016, for example, the Federal Financial Institutions Examination Council (FFIEC) said, “Financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure may qualify for revitalization or stabilization consideration.”

Another example of community development is investment in renewable-energy projects. Here, regulators have indicated that “renewable energy facilities could benefit low- or moderate-income individuals by reducing the cost of providing utilities to common areas in an affordable housing development.”

Assessing compliance

A bank’s assessment area, or the geographic area it serves, is critical to its regulation. Assessment areas generally consist of one or more metropolitan areas. These areas cannot reflect illegal discrimination or arbitrarily exclude low- or moderate-income populations. 

Once assessment areas are established, regulators further divide lending institutions according to performance standards dictated by their asset sizes. There are three performance-standard groups:

  • Small banks, which generally have less than $1.226 billion in assets; 
  • Large banks, which generally have assets exceeding the small-bank threshold; and
  • Wholesale or limited-purpose banks.

Limited-purpose banks offer narrow product lines, such as credit cards or auto loans, to a regional market. Wholesale banks do not offer home mortgages, small-business loans or consumer loans to retail customers.

Wholesale and limited-purpose banks undergo a community-development test in which regulators review their lending products, services and qualified investments. For small and large banks, compliance assessments are more detailed.

A bank’s assessment area, or the geographic area it serves,
is critical to its regulation. 

In order to assist lenders with CRA compliance, the FFIEC periodically publishes interagency questions and answers. The FFIEC is comprised of five regulatory bodies — the Federal Deposit Insurance Corp. (FDIC); the Office of the Comptroller of the Currency (OCC); the Federal Reserve System board of governors; the National Credit Union Administration; and the Consumer Financial Protection Bureau.

Small banks

Lenders that consistently have less than $1.226 billion in assets are considered small banks. An appropriate agency, such as the OCC or FDIC, will evaluate the bank’s record in helping to meet the credit needs of its assessment area, pursuant to the small-bank lending test.

Under the small-bank lending test, the primary focus is on the institution’s loan-to-deposit ratio. Other activities, however, such as loan originations, community-development loans or qualified investments, will be incorporated into the performance criteria when appropriate. 

Lenders that consistently have between $307 million and $1.226 billion in assets are considered intermediate small banks. They are evaluated with criteria set forth in both the small-bank lending test and the aforementioned community-development test, which is broken into four prongs:

  • Community-development loans, both in number and dollar amount;
  • Qualified investments, both in number and dollar amount;
  • The extent to which the institution provides community-development services; and
  • The institution’s responsiveness through such activities to community-development lending, investing and service needs.

Large banks

The transition from intermediate small bank to large bank is substantial. It involves lending, investment and service tests. The scope of each of the individual tests is more detailed and rigorous, and each test impacts the institution’s overall compliance rating. The rating received for the lending test, for example, is weighed more heavily when determining the overall CRA-compliance rating.

Lenders are permitted to utilize flexible underwriting standards to originate loans that benefit low- and moderate- income areas.

The lending test evaluates an institution’s ending activities by considering home mortgage, small-business, small-farm and community-development products. A bank has the option to have regulators consider third-party, or affiliate loans. In 2016, regulators clarified that lenders are permitted to utilize flexible underwriting standards to originate loans that benefit low- and moderate- income areas, but only if the standards are consistent with the institution’s safe and sound operational practices.

The investment test considers an institution’s qualified investments that benefit its assessment area, or a broader statewide or regional area that includes the institution’s assessment area. Regulators review the dollar amount of qualified investments, their level of complexity, their responsiveness to credit and community-development needs, and how routinely they are provided by private investors.

The service test is used to evaluate a bank’s systems for delivering retail services, as well as the extent and innovativeness of the bank’s community-development services.

•  •  •

As lenders look for opportunities to serve the communities in which they operate, commercial mortgage brokers can play a valuable role in finding creative avenues to make loans or investments that also satisfy CRA obligations. As regulators continue to provide valuable guidance on CRA compliance, more opportunities will emerge for brokers to serve their bank clients in increasingly innovative ways.


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