Community Reinvestment Act: Challenges Remain to Successfully Implement CRA

The agencies overhauled their CRA examination procedures, including the public CRA evaluation report. The new procedures were released to the public in November 1995. The agencies trained over 1,100 staff members on the revised CRA regulation and examination procedures. This training was conducted by CRA compliance specialists from the agencies, including the individuals who drafted the examination procedures, between September and December 1995. Instruction was provided in all aspects of the CRA regulations, emphasizing consistency in the examination approach between agencies. In addition to examiner training, the agencies sponsored two training sessions for staff attorneys who will deal with CRA issues. To ensure that both new and experienced examiners have continued training, ongoing CRA training on the revised regulation is being incorporated into the compliance training curricula for agency examiners.

The agencies finalized interagency examination procedures on November 13, 1995. Those revised procedures implement the regulation that was agreed to in March 1995. Training of all CRA examiners began in September 1995, and concluded in December 1995. That training provided to CRA examiners comprehensive instruction in the regulation and the examination procedures, as well as case studies.

Interagency examiner training was conducted in late 1995. Presentations were given by CRA compliance specialists. More than 1,200 examiners and other compliance staff participated in the training. The agencies developed worksheets to guide examiners in compiling the economic and demographic information necessary to profile institutions' performance in the appropriate context. Each agency will provide this information to its examiners based on an agreed-upon database. FDIC will facilitate worksheet development by providing data integration software that maps application and loan distribution through customized displays of the geographic and economic variables applicable to each institution's market areas. Specialized CRA training is being developed on an interagency basis at the regional level, as needed. To provide uniform interpretation of CRA regulations and promote more consistent exams, agency staff are drafting a commentary to be published in the Federal Register.

An interagency "Question and Answer" document provides guidance on how to interpret the various provisions and how assessments will be made by the agencies under the different standards and tests set forth in the regulation. The Interagency Questions and Answers document was last updated in May 1999. The Federal Reserve conducts a series of schools for examiners. FRB's CRA Examination Techniques courses covers detailed examination issues for small banks and large banks and wholesale/limited purpose examination procedures. A session on the Lending Test teaches participants how to identify, gather, and verify loan data. Other sessions include the CRA Investment Test, Services, Assessment Area, Community characteristics in the Performance Context, and a Public Evaluation Exercise.

OTS issued revised examination procedures in September 1997, that require its examiners to verify that the financial institution is accurately compiling HMDA data by testing a sample of loans and applications. The examiners are required to sample already-submitted data, and current year data are also to be reviewed. On September 8, 1995, OTS issued a policy statement that outlined specific guidelines for assessing civil money penalties against HMDA reporters that submit late or inaccurate reports.

OCC had complied with the first part of the recommendation. OCC's "Community Reinvestment Act Examination Procedures: Comptroller's Handbook" states that the examiners should test a sample of loan files to verify the accuracy of the data collected or reported by the bank. OCC provided a copy of its policy for ensuring accuracy of HMDA data and its ability to assess civil money penalties. It is the policy of OCC to consider assessing a CMP against a national bank whenever a bank submits a delinquent or inaccurate HMDA Loan Application Register. The policy also stated that to ensure the accuracy and timely reporting of HMDA data, the bank's board and senior management need to ensure the effectiveness of internal controls used to collect and report the data.

The FDIC compliance examination manual incorporates the interagency examination procedures on HMDA data collection and reporting, which requires examiners to assess the accuracy of the HMDA data. FDIC provided a copy of its examination manual for verification. The agency's policy for ensuring that HMDA data is submitted on a timely and accurate manner is 12 C.F.R. Part 338. Section 338.8 states, "Bank and other lenders required to file a Home Mortgage Disclosure Act loan application register (LAR) where the FDIC shall maintain, update, and report such LAR in accordance with Regulation C of the Board of Governors of FRS." Since 1996, the FDIC has information on institutions that were cited for inaccurate HMDA data during 919 compliance examinations and 915 CRA examinations. The agency provided the data for verification.

The Federal Reserve provided a copy of examination procedures that require examiners to assess the accuracy of the HMDA data. The Federal Reserve examination procedures require the examiner to verify that the financial institution accurately compiled home mortgage disclosure information in the prescribed categories by testing a sample of loans and applications.

The agencies revised the form and content of the CRA public evaluation as part of the larger effort to revise examination procedures. OTS officials believe that these revisions will result in a clear presentation of each institution's performance and the rationale used to assess its performance against the revised examination standards. In addition, the examiner's conclusions will be supported by relevant facts and data.

In its "Community Reinvestment Act Examination Procedures: Comptroller Handbook," OCC described how the examiners should present the performance information and the rationale used to assess institutions' performance in the public evaluation reports. The manual states: "The facts, data, and analyses that were used to form a conclusion about the rating should be reflected in the narrative, including the parts about institution strengths and areas for improvement. The narrative should clearly demonstrate how the results of each of the performance test analyses and relevant information from the performance context contributed to the institution's overall rating. Charts and tables should be used whenever possible to summarize and effectively present the most critical or informative data used by the examiner in analyzing the institution's performance and reaching conclusions."

The agencies have cooperated in revising the public evaluations to reflect significant changes in the CRA regulations. The public evaluations are tailored for each type of lending institution defined by the new rules (large, small, wholesale and limited-purpose institutions, and institutions opting to be evaluated on the basis of a strategic plan). The public evaluation for each type focuses on the examiner's evaluation of the institution's performance. The interagency training emphasized the need for examiners to document clearly in the public evaluation the facts and data that support the examiner's conclusion.

Interagency instructions for writing a public evaluation specifically require examiners to present conclusions for each of the factors considered in arriving at a rating. In addition, the facts and data to support these conclusions are to be included. The instructions further indicate that charts, tables, and appendices should be used throughout the public evaluation to facilitate presentation and discussion of an institution's performance. Federal Reserve officials are confident that presenting narrative conclusions, along with facts and data in the form of charts or tables, will make the evaluations more useful and provide more insight into the rationale behind each rating.

OTS officials indicated that they plan to continue monitoring resources and techniques needed to meet the requirements of the revised CRA regulations. According to OTS, its regional offices reviewed their staffing levels in light of the then-proposed regulation. OTS subsequently restructured its examination approach when the revised CRA regulations were issued. OTS' experiences under the revised CRA regulations indicated that the time needed to conduct comprehensive reviews of institutions' CRA performance has increased. OTS anticipates that this additional time will subside as institutions and examiners become more familiar with the revised regulation. OTS plans to continue to monitor the examination process to ensure that sufficient time is devoted to assessing institutions' CRA performance.

OCC completed resource assessments for small banks in 1997 and 1998. OCC provided information on the resource assessments for small bank CRA examinations. The agency provided GAO data on the number of examinations completed for 1997, and the days on-site, days off-site, and total days to complete the examinations. OCC did not provide any information on the size of the examiner workforce needed to conduct CRA examinations.

FDIC plans to maintain its authorized compliance examination staffing level and hire to offset attrition. FDIC predicts that the introduction of the interagency CRA examination procedures for large banks will result in an estimated 25-percent increase in average examination hours through 2000. FDIC's workforce still includes a large number of examiners who are completing their training requirements, and DCA will be unable to both address all of its required examination workload and clear up its backlog of delinquent examination in 1999 and 2000. According to FDIC, staffing will be sufficient to eliminate delinquencies and handle its full required examination workload by the end of 2001, based on projected productivity improvements and the decline in the number of institutions subject to examination. The number of examinations conducted annually will increase as FDIC's compliance examiner workforce becomes fully trained and more experienced with new procedures.

The Federal Reserve has approximately 200 consumer affairs examiners who are responsible for conducting consumer compliance examinations (including CRA) at state member banks. On an annual basis, Board staff conduct an evaluation of the performance of each Reserve Bank, one aspect of which is an analysis of the adequacy of staffing levels. The Federal Reserve participates in interagency efforts to develop examination techniques, procedures, and guidance used by all of the federal banking regulatory agencies when examining for compliance with the revised CRA regulations.