ABA Bank Compliance - March/April 2013

CHALLENGE #4: Lending Test—Limited or Poor
Small Business Lending Performance

Much like HMDA lending, small business lending is analyzed based on borrower revenue characteristics and geographic distribution, with an emphasis placed on loans made in LMI geographies. In addition, distribution based on the size of the loan is considered. While small business loans are reported up to $1 million in size, small farm loans up to $500,000 are also analyzed using the same borrower/geographic distribution criteria.

The following provides possible solutions for resolving shortcomings in small business or small farm lending:

■ ■ If lending volumes are on the decline, verify that you are capturing everything. Is anything missing?

■ ■ Evaluate conspicuous “gaps” to confirm that you are lending throughout your assessment areas. Pay particular attention to LMI geographies and be prepared to explain gaps in coverage.

■ ■ Once you’ve verified that you are capturing all reportable activities, consult with front-line lenders to see, if together, you can identify overlooked opportunities and/or to brainstorm the development of new lending opportunities. (Note: you may choose to rely on the representatives of your CRA committee to assist with this process.)

■ ■ Analyze performance against demographics and other lenders. Review peer public evaluations to identify potential opportunities or to document performance context challenges.

■ ■ Organize an advisory board of small businesses to help identify needs and challenges.

■ ■ Consider participating in special lending programs targeted to small business, such as U.S. Small Business Administration lending pools, consortia, or other programs.

■ ■ Introduce a new product or program, or tailor an existing program, with flexible terms targeted to small businesses with up to and including $1 million in revenues.

■ ■ Raise awareness with lenders and senior management about the impact small business lending has on overall CRA rating.

■ ■ Share information (that provides performance context for assessing your performance) about your lending activities and the market in which you compete with your examiners.

CHALLENGE #5: Investment Test Many examiners analyze the dollar amount of CRA investments by assessment area as a percentage of allocated Tier 1 capital for each assessment area. The allocation of your deposits is a good proxy for allocating Tier 1 capital for your institution. However, you might also look at the allocation of loans and branches to see if that makes sense for your company. Be prepared to explain the reasons for using something other than deposits if you believe another allocation method makes the most sense. “How much is enough?” is a common question asked among CRA compliance officers. There is no simple answer. The level of investments required to obtain a “Satisfactory” or “Outstanding” CRA rating within the investment test will vary from institution to institution, based on the nature of the company, including its size and complexity. In addition, examiners will consider the availability

Considerations for Conducting a “Mock” CRA Examination Lending Test: 50 percent of overall exam rating

■ ■ Percentage of small loans to businesses (more than $100,000 but less than $250,000) are compared to all reportable loans.

■ ■ Overall, what direction has your performance taken? Are there mitigants to performance that should be considered?

3. Look at your lending volumes in each assessment area, particularly in areas where you take a significant number of deposits. Validate that you have a sufficient number of loans originated in each area? There is no “official rule” here, but something in the range of a minimum of 20 to 50 loans per year/per assessment area for all reportable loans should be sufficient depending upon the size of your institution. Be prepared to explain if you have taken deposits and don’t have lending volumes to counter them.