Toestablish abalancedcompliance pro- gram, compliance departments must be able to analyze current loan per- formance data and align goals of the
company with the goals of regulations. Analysis
results are only as good as the data being analyzed,
however, so the first and most critical step is to
validate the accuracy of the data being utilized.
Some data sets, such as those being reported
under the Home Mortgage Disclosure Act (HMDA)
and the Community Reinvestment Act (CRA), are
already subject to a validation or “scrubbing” process in most financial institutions. Other data, such
as auto or credit card lending, may not have been
subjected to the same level of scrutiny.
At a minimum, compliance departments should
take a sample of the data and use source documents to validate key fields. Much of this data is
being collected by originators, so it is important
for them to understand the data issues that compliance will be checking for.
A solid analysis should start with an evaluation of
a lender’s defined assessment area, which is a vital
component for CRA compliance. Lenders should
make sure to look critically at those areas just
outside of the defined assessment area. Are there
low- and moderate-income or majority minority
areas nearby that you have excluded? Is there a
solid business justification for their exclusion? This
consideration can be particularly important for
lenders that cover partial counties, which tends to
garner additional scrutiny from examiners.
In the case of fair lending, lenders often are
examined based on areas that extend beyond
their designated assessment area. Determining
a reasonably expected market area, or REMA, is
highly subjective, but is generally the geographic
area that the lender can reasonably serve based
on its distribution of applications and loans, as
well as its marketing and outreach efforts. Lenders
should analyze applications, lending and market-
ing efforts to determine what their appropriate
REMA could be.
Mapping is a powerful tool in determining a
lender’s REMA. Consider preparing maps that
show application and origination distribution by both tract income and tract minority-concentration levels. Pay particular attention to
lending volume outside the boundaries of the
defined assessment area. Is that volume significant?
While the term “significant” is relative, the absence
of firm, well-defined guidance from examiners
indicates there is no one-size-fits-all benchmark.
CRA and REMA goals
The challenge for compliance departments is the
need to analyze data and set goals for two different geographic areas: a defined assessment
area for compliance with CRA, and a REMA that is
utilized in fair-lending analysis. Therefore, lending
distribution should be analyzed and compared
with a view toward both the assessment area
Where possible, it may be beneficial to create
maps that show both the assessment area and the
expanded REMA. This type of consolidated view
can be valuable in understanding performance
from both a CRA and fair-lending perspective, as
well as for setting goals that complement each
Although some lenders are less reliant on physical locations today, brick-and-mortar branches
remain an integral part of CRA and fair-lending
redlining analysis as well. Despite a lack of specific
guidance on appropriate benchmarks in regard
to branch locations, a good starting point is to
understand the county demographics.
What percentage of the tracts within a county
are low-income, moderate-income, or majority
minority? What percentage of branch locations
are in low-income, moderate-income, or majority
minority tracts? This information is useful in future
branching decisions. If an institution is planning
to open a branch in a low-income area for CRA
purposes, is there a low-income tract that also
is majority minority that could assist with fair-
lending performance as well?
Mapping can be a powerful tool here again, providing a visual of the branch distribution. Maps
with application or origination volume can give
insight into how well the branch network is being
leveraged. As with assessment-area analysis, any
impediments or limitations to branching should
be thoroughly understood and well-documented.
Goals can then be set for opening or closing
branches with consideration for both CRA and
Analysis of assessment areas and branch distribution provides a solid understanding of a lender’s
geographic area. The next step, however, is to truly
understand how well the area is being served.
HMDA and CRA data is generally the starting point
for most institutions. Additionally, some lenders
choose to analyze other additional consumer
product types and services as well.
When setting goals for lending distributions,
there are several key points to consider. First,
what comparative factors should be evaluated?
Consider aggregate-lending data that is inclusive of all HMDA data for the geographic area,
aggregate-lending data that excludes nonbank
contributors, individual peers or peer groups, and
Second, determine how much lending is
enough. The reality is there is no consistent rule for
setting an appropriate goal or benchmark. Generally, there should be a marked level of concern
at or below 85 percent of the comparative factor.
If applications or originations fall below 50 percent of the comparative factor, those areas should
unquestionably become a companywide priority.
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