ABA Bank Compliance - November/December 2007 - (Page 3) anti-predatory lending, CRA and BSA/AML should remain high on their radar screens. overall effectiveness of the financial institution’s BSA/AML compliance program. Transaction testing to verify adherence to organizational policies and procedures should also be conducted. The audit should include an evaluation of the bank’s efforts to resolve previously identified procedural gaps and deficiencies. CRA: Continual Self-Assessment Is Key Even though the primary focus for bankers in 2008 will continue to be fair lending and anti-predatory lending, CRA and BSA/AML should remain high on their radar screens. Legislative bodies, regulators, and the community will look to banks to continue their impressive role in revitalizing communities and serving the banking and borrowing needs of their customers, including low- and moderate-income (LMI) people. Banks need to understand that the time to focus on CRA compliance isn’t every two to five years when the examiner shows up at the door. Rather, the time to focus on CRA compliance is right after the most recent CRA exam. In addition to completing an annual CRA self-assessment that provides an overall understanding of the bank’s CRA efforts, a bank should monitor its CRA lending performance in each of its designated assessment areas on an ongoing basis. The bank should understand the market demographics and its peers, and define goals—potentially even a stretch goal—and actual year-to-date performance. The frequency of the review will vary depending on the size of the bank, the number of assessment areas, the bank’s rating expectation, and the area being reviewed. For example, the year-to-date actual loan volume may be monitored twice a year for a community bank and monthly for large banks, but the aggregate market data and goal benchmarks will be adjusted annually when the data is available. CRA compliance requires ongoing monitoring through proven systems and processes. Putting a measurement system in place will isolate, identify, and manage CRA compliance weaknesses. Recognition of potential weaknesses is an important element of CRA compliance management. If your analysis reveals weak performance, you should develop a plan of action, which may include either an explanation for the weak performance (for example, high percentage of households below the poverty line) or implementation of defined actions (such as an innovative lending program) to correct the weakness. This will show examiners that you are monitoring your performance; you understand your products, lending patterns, and market, including any potential roadblocks; and you are actively managing your commitment to the community. Performing a CRA self-assessment will allow the bank to write its own story in a manner that explains to the examiners the community, the bank’s performance, any action plans, and progress. The first step should be to review the delineated assessment areas to ensure that each area meets regulatory requirements including representing branch locations, deposit-taking ATM locations, and distribution of home mortgage and small-business lending. Plotting these items on a map provides an excellent visual confirmation that the assessment area lines are properly drawn. A map will further ensure that the technical requirements for an assessment area are being met, including that the area consists of one or more whole metropolitan statistical areas (MSAs), contiguous areas, or whole census tracts, and that the area does not reflect illegal discrimination or arbitrarily exclude any low- or moderate-income area, taking into account the bank’s size and financial condition. As part of a CRA self-assessment, the bank’s lending performance should be measured against demographic benchmarks such as LMI census tract distribution, number of housing units, total number of families and households, total population, and number of small businesses in the area. Again, plotting these items on a map provides a visual summary for each area. Mapping performance also creates opportunity for special explanations such as how a particular branch provides LMI access even though it is not located within an LMI tract. If the bank has one assessment area but lends nationwide, the bank should be aware of the number of loans that are originated in the assessment area versus outside the assessment area. If a large portion of the loans originated outside the assessment area, the bank should include an explanation as to how it is meeting the community needs within the assessment area. A bank’s CRA self-assessment should assign internal expected ratings to subcategories and its overall performance. The bank should review and appreciate the resources and commitments that are required to increase its rating or size classification. Community institutions, many of which stratify the different size classifications for the CRA exams, should start planning long before they move from one size category to another (i.e., “small,”“intermediate,”“large”). Structurally, there are significant changes in each size category to meet obligations under the various CRA tests. Too often, a highly rated small institution will lose its rating when it moves up the line. It is very important for banks to understand what the issues are when they transition from small to intermediate to large. Having a CRA self-assessment template and monitoring process in place allows the bank to manipulate the data requirements in a way that will show the result of the new enhanced goal or size category requirements. Anti-Predatory Lending: Educating Consumers and Implementing Internal Controls Support is building in Washington for a national predatory lending law. Such a law would undoubtedly bring ABA Bank Compliance NOVEMBER | DECEMBER 2007 3
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