Large Institutions | Lending Test

1. Identify the institution’s loans to be evaluated by reviewing:

a. The most recent HMDA and CRA Disclosure Statements, the interim HMDA Loan Application Register (LAR), and any interim CRA loan data collected by the institution;

b. A sample of consumer loans if consumer lending represents a substantial majority of the institution’s business so that an accurate conclusion concerning the institution’s lending record could not be reached without a review of consumer loans;

c. Any other information the institution chooses to provide, such as small business loans secured by non-farm residential real estate, home equity loans not reported for HMDA, unfunded commitments, any information on loans outstanding, and loan distribution analyses conducted by or for the institution, including any explanations for identified concerns or actions taken to address them.

2. Test a sample of loan files to verify the accuracy of data collected and/or reported by the institution. In addition, ensure that:

a. Affiliate loans reported by the institution are not also attributed to the lending record of another affiliate subject to CRA. This can be accomplished by requesting the institution to identify how loans are attributed and how it ensures that all the loans within a given lending category (e.g., small business loans, home purchase loans, motor vehicle, credit card, home equity, other secured, and other unsecured loans) in a particular assessment area are reported for all of the institution’s affiliates if the institution elects to count any affiliate loans;

b. Loans reported as community development loans (including those originated or purchased by consortia or third parties) meet the definition of community development loans. Determine whether community development loans benefit the institution’s assessment area(s) or a broader statewide or regional area that includes the institution’s assessment area(s). Except for multifamily loans, ensure that community development loans have not also been reported by the institution or an affiliate as HMDA, small business or farm, or consumer loans. Review records provided to the institution by consortia or third parties or affiliates to ensure that the amount of the institution’s third party or consortia or affiliate lending does not account for more than the institution’s percentage share (based on the level of its participation or investment) of the total loans originated by the consortia, third parties, or affiliates;

c. All consumer loans in a particular loan category have been included when the institution collects and maintains the data for one or more loan categories and has elected to have the information evaluated.

3. Identify the volume, both in number and dollar amount, of each type of loan being evaluated that the institution has made or purchased within its assessment area. Evaluate the institution’s lending volume considering the institution’s resources and business strategy and other information from the performance context, such as population, income, housing, and business data. Note whether the institution conducts certain lending activities in the institution and other activities in an affiliate in a way that could inappropriately influence an evaluation of borrower or geographic distribution.

4. Review any analyses prepared by or for and offered by the institution for insight into the reasonableness of the institution’s geographic distribution of lending. Test the accuracy of the data and determine if the analyses are reasonable. If areas of low or no penetration were identified, review explanations and determine whether action was taken to address disparities, if appropriate.

5. Supplement with an independent analysis of geographic distribution as necessary. As applicable, determine the extent to which the institution is serving geographies in each income category and whether there are conspicuous gaps unexplained by the performance context. Conclusions should recognize that institutions are not required to lend in every geography. The analysis should consider:

a. (Excluding affiliate lending) the number, dollar amount, and percentage of the institution’s loans located within any of its assessment areas, as well as the number, dollar amount, and percentage of the institution’s loans located outside any of its assessment areas;

b. The number, dollar amount, and percentage of each type of loan in the institution’s portfolio in each geography, and in each category of geography (low-, moderate-, middle-, and upper-income);

c. The number of geographies penetrated in each income category, as determined in step (b), and the total number of geographies in each income category within the assessment area(s);

d. The number and dollar amount of its home purchase, home refinancing, and home improvement loans, respectively in each geography compared to the number of one-to-four family owner-occupied units in each geography;

e. The number and dollar amount of multifamily loans in each geography compared to the number of multifamily structures in each geography;

f. The number and dollar amount of small business and farm loans in each geography compared to the number of small businesses/farms in each geography;

g. Whether any gaps exist in lending activity for each income category, by identifying groups of contiguous geographies that have no loans or those with low penetration relative to the other geographies.

6. If there are groups of contiguous geographies within the institution’s assessment area with abnormally low penetration, the examiner may determine if an analysis of the institution’s performance compared to other lenders for home mortgage loans (using reported HMDA data) and for small businesses and small farm loans (using data provided by lenders subject to CRA) would provide an insight into the institution’s lack of performance in those areas. This analysis is not required, but may provide insight if:

a. The reported loan category is substantially related to the institution’s business strategies;

b. The area under analysis substantially overlaps the institution’s assessment area(s);

c. The analysis includes a sufficient number and volume of transactions, and an adequate number of lenders with assessment area(s) substantially overlapping the institution’s assessment area(s);

d. The assessment area data is free from anomalies that can cause distortions such as dominant lenders that are not subject to the CRA, a lender that dominates a part of an area used in calculating the overall lending, or there is an extraordinarily high level of performance, in the aggregate, by lenders in the institution’s assessment area(s).

7. Using the analysis from step number 6, form a conclusion as to whether the institution’s abnormally low penetration in certain areas should constitute a negative consideration under the geographic distribution performance criteria of the lending test by considering:

a. The institution’s share of reported loans made in low- and moderate-income geographies versus its share of reported loans made in middle- and upper-income geographies within the assessment area(s);

b. The number of lenders with assessment area(s) substantially overlapping the institution’s assessment area(s);

c. The reasons for penetration of these areas by other lenders, if any, and the lack of penetration by the institution being examined that are developed through discussions with management and the community contact process;

d. The institution’s ability to serve the subject area in light of (i) the demographic characteristics, economic condition, credit opportunities and demand; and (ii) the institution’s business strategy and its capacity and constraints;

e. The degree to which penetration by the institution in the subject area in a different reported loan category compensates for the relative lack of penetration in the subject area; and

f. The degree to which penetration by the institution in other low- and moderate-income geographies within the assessment area(s) in reported loan categories compensates for the relative lack of penetration in the subject area.

8. Review any analyses prepared by or for and offered by the institution for insight into the reasonableness of the institution’s distribution of lending by borrower characteristics. Test the accuracy of the data and determine if the analyses are reasonable. If areas of low or no penetration were identified, review explanations and determine whether action was taken to address disparities, if appropriate.

9. Supplement with an independent analysis of the distribution of the institution’s lending within the assessment area by borrower characteristics as necessary and applicable. Consider factors such as:

a. The number, dollar amount, and percentage of the institution’s total home mortgage loans and consumer loans, if included in the evaluation, to low-, moderate-, middle-, and upperincome borrowers;

b. The percentage of the institution’s total home mortgage loans and consumer loans, if included in the evaluation, to low-, moderate-, middle-, and upper-income borrowers compared to the percentage of the population within the assessment area who are low-, moderate-, middle-, and upper-income;

c. The number and dollar amount of small loans originated to businesses or farms by loan size of less than $100,000; at least $100,000 but less than $250,000; and at least $250,000 but less than or equal to $1,000,000;

d. The number and amount of the small loans to businesses or farms that had annual revenues of less than $1 million compared to the total reported number and amount of small loans to businesses or farms; and

e. If the institution adequately serves borrowers within the assessment area(s), whether the distribution of the institution’s lending outside of the assessment area based on borrower characteristics would enhance the assessment of the institution’s overall performance.

10. Review data on the institution’s community development loans using information obtained in the performance context procedures, especially with regard to community credit needs and institutional capacity, to determine:

a. The number and amount of community development loans in:

i. The institution’s assessment area(s); or

ii. The broader statewide or regional area that includes the assessment area(s) that support organizations or activities with a purpose, mandate, or function that includes serving the geographies or individuals located within the institution’s assessment area(s).

b. The extent to which community development lending opportunities have been available to the institution;

c. The institution’s responsiveness to the opportunities for community development lending;

d. The extent of leadership the institution has demonstrated in community development lending; and

e. The innovativeness or complexity involved.

11. If the institution has been responsive to community development needs and opportunities in its assessment area(s) based on the analysis in step number 10, consider:

a. The number and dollar amount of community development loans in the broader statewide or regional area that includes the assessment area(s), but:

i. Will not benefit the assessment area(s); and

ii. Do not support organizations or activities with a purpose, mandate, or function that includes serving geographies or individuals located within the institution’s assessment area(s).

b. The extent to which these loans enhance the institution’s performance. Note: Refer to the appendix for additional guidance on addressing activities at the state or multistate MSA, or institution level.

12. Evaluate whether the institution’s performance under the lending test is enhanced by offering innovative loan products or products with more flexible terms to meet the credit needs of lowand moderate-income individuals or geographies. Consider:

a. The degree to which the loans serve low- and moderate-income creditworthy borrowers in new ways or loans serve groups of creditworthy borrowers not previously served by the institution; and

b. The success of each product, including number and dollar amount of loans originated during the review period.

13. Discuss with management the preliminary findings in this section.

14. Summarize your conclusions regarding the institution’s lending performance under the following criteria:

a. Lending activity.

b. Geographic distribution.

c. Borrower characteristics.

d. Community development lending.

e. Use of innovative or flexible lending practices.

15. Prepare comments for the performance evaluation and the Compliance examination report. Refer to the appendix for guidance on addressing community development activities in the performance evaluation.

 

SOURCE:  Large Institution CRA Examination Procedures | OCC, FRB, FDIC, and OTS

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