Don’t count the loans, make the loans count
How to collect loan data for a Community Reinvestment Act (CRA) examination
A Performance Evaluation (PE) is developed based on your bank’s performance context. The performance context will consider your bank’s ability and capacity to meet the credit needs of your community, such as asset size, financial condition, branching network, business strategies, economic conditions, loan demand, and competition.
The PE will also consider the loan portfolio mix and determine major product lines when performing the analysis to determine the bank’s performance context.
Look at your bank’s last PE report to determine what loan products examiners considered to be your major loan products and then review current loan information, such as that reported on the current Consolidated Report of Condition (Call Report), to see if there has been a shift in the bank’s major products.
Typically, examiners consider mortgage loans such as those reported under the Home Mortgage Disclosure Act (HMDA) and small business and small farm loans, but your bank’s business strategy might focus more on other consumer loans such as indirect automobile lending or credit cards. Examiners will focus on the loan types that make up a majority of your bank’s lending since these will be material to support the conclusions of the PE. Examiners also allow your bank to optionally collect data for one or more consumer loan types, if the bank wishes to have those loan types considered in the evaluation. Keeping tabs on your loan volume within certain categories will help to ensure the correct loan data is being collected and provided to examiners.
Large banks must collect and file reports with specific information about their small business and small farm loans, but collecting the information is “optional” for small and intermediate small banks.
If no such reports or information is available for examiners or if they cannot verify the accuracy of the reports or information provided, examiners will select a sample of loans and collect the needed data only for the sample to be used within their analysis. While this alleviates the need for a bank to collect the data, it will not receive credit for the loans not included in the sample, which may result in examiners not seeing the bank’s full CRA performance.
Small business loans are those with original loan amounts of $1 million or less and are reported on your bank’s Call Report as either loans secured by nonfarm nonresidential properties (Schedule RC-C Part I lines 1.e.1 and 1.e.2) or commercial and industrial loans (line 4). Small farm loans are those with original loan amounts of $500,000 or less and are reported as either “loans to finance agricultural production and other loans to farmers (line 3) or loans secured by farmland (line 1.b). The data to gather for small business and/or farm loans includes a unique identifying number for each loan, the loan amount or maximum credit limit at time of origination or purchase, loan type, necessary geographic information such as a complete address or geocodes, the date of origination or purchase and the last renewal date, information regarding the gross annual revenue of the business, and if applicable, an indicator that the loan was originated or purchased by an affiliate of your bank rather than your bank itself.
If your portfolio mix shows that your majority of lending involves home mortgages, the information to be collected would already be included within the Home Mortgage Disclosure Act Loan Application Register (HMDA LAR) if you’re a HMDA reporter. There may be situations where the majority of your loans are home mortgages, but you are not a HMDA reporter; for instance, if your bank is not located in a Metropolitan Statistical area. In this situation, you may consider collecting some of the HMDA LAR data fields in order to get credit for these loans. This would include the loan number, origination date, loan amount, necessary geographic information such as a complete address or geocodes and information on the borrower’s income.
If consumer lending constitutes a substantial majority of the loan portfolio, your bank may voluntarily collect information on such loans. Examiners will consider consumer lending in one or more of the following categories: motor vehicle, credit card, home equity, other secured, and other unsecured loans. However, if your bank collects information for any certain category, it must collect the data for all loans originated or purchased within that category and cannot pick and choose which ones to use. The data collected should include a unique identifying number for the loan, the loan amount at origination or purchase, geographical information on the loan location, and the gross annual income of the borrower that was considered when making the credit decision.
Examiners will typically use the loans originated or renewed since the last CRA examination, so several years of data may be requested and used. Reviewing the last PE report to determine the period of coverage will help determine the starting point for the next PE.
Knowing your lending portfolio, collecting the applicable data and having it readily available for your next CRA examination will ensure all applicable loans get counted and hopefully help your CRA examination go smoothly.
Using the information for your own self-assessment would not be a bad idea either. Performing your own analysis can detect shortcomings so that actions can be implemented to correct any negative trends prior to the next CRA examination or to provide the reasons for the changes in performance based on your performance context. Being prepared can assist in telling your story and providing meaningful explanations when corrective action cannot be made or where the analysis might have otherwise looked unreasonable. Know your data and avoid surprises.
