Finding a Bank with a Social Conscience
By Jill Terry
Yes, thanks to a federal regulation implemented by the Community Reinvestment Act (CRA). Moreover, a bank’s performance under this regulation is public information. If you’d prefer to bank with good corporate citizens, you have the means to comparison shop among banks to find one with a high CRA rating.
The Power and Purpose of CRA
In 1977, CRA was enacted to encourage banks to better serve the low- and moderate- income communities in their neighborhoods, primarily by extending credit. The trouble was that regulatory agencies determined that almost anything satisfied the then CRA’s rather spineless requirements. To make matters worse, a bank’s CRA rating was confidential, creating little impetus for a bank to improve its performance. In 1995, Congress added a backbone to CRA by articulating specific requirements, designing a quantifiable rating system, and making every bank’s rating available to the public. Today’s CRA is a much truer measurement of a bank’s social conscience than the earlier version it replaced.
If the public disclosure element isn’t enough to inspire a bank toward stellar performance, the possible threat to future mergers and acquisitions certainly is. Federal banking regulatory agencies have been known to deny a bank’s application for a new branch or purchase of another bank on the basis of a poor CRA rating. CRA, then, is one of the few consumer regulations that grabs hold of a bank’s attention.
The revised regulation recognizes that large and small banks can’t help the neighborhoods they serve in the same way. Small banks are limited by personnel and financial constraints. Large banks have greater responsibilities because they take in more deposits. Additionally, the geographical, financial, and demographic context in which a bank operates plays a significant role in how its performance is rated.
- Large Banks
Banks with assets over $250 million must pass 3 tests under CRA: lending, investment, and service. Lending is by far the most heavily weighted. Bank examiners assign points to a bank’s lending performance based on the number and geographic distribution of loans. The number and amount of home mortgage loans to low- and moderate-income borrowers, and the number and amount of small business/small farm loans are also important here. Community development loans score high, too. There are 5 ratings a large bank can earn: Outstanding, High Satisfactory, Low Satisfactory, Needs to Improve, and Substantial Noncompliance. You should look for a bank in one of the first 3 categories–the last two are strong indicators that a bank is either clueless or heartless about serving low- and moderate-income credit needs.
- Small Banks
Banks with assets under $250 million must still show healthy lending levels (within their financial capacity), but the rating system is slightly different. 4 categories are available: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. As with the large bank rating system, you’ll want to avoid banks with performance ratings of Needs to Improve or Substantial Noncompliance.
Where to Find the Information
Walk right into any bank and ask for its CRA Public Evaluation. Expect perplexed looks–most bank employees probably won’t know what you’re talking about. The manager is guaranteed to know, so ask to speak to him or her if necessary. If you don’t have time to pay them a visit, you can call, but be advised they may charge for photocopying and mailing you a copy of the document.
The CRA Public Evaluation is what’s prepared by the bank’s regulatory agency for consumers to read. That’s where you’ll find the bank’s rating and a rating explanation. If you’re at a bank’s main office or the designated branch of an interstate bank, you can also ask to see the CRA Public File. This file contains public comments, the CRA Public Evaluation, a list of bank services, a map of the bank’s branches, a list of opened and closed branches, and several other items that are helpful in determining a bank’s commitment to serving its community. Banks with less than satisfactory ratings must include their plans for improvement in this file.
A bank’s performance dictates how often the regulatory agency will conduct a CRA compliance examination. Consequently, it may be years between examinations for some banks. If you’d like to know when a bank is scheduled for its next examination, you can consult the Federal Financial Institutions Examination Council’s Web site, where exam schedules are published quarterly. The site also offers comprehensive information on CRA in general.