Piecing Together Your Community Development Story | Wolters Kluwer
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  • Piecing Together Your Community Development Story

    Britt Faircloth

    Published June 13, 2017

    In 1977, the Community Reinvestment Act was enacted with the dual purpose of preventing redlining while also encouraging banks and savings associations to meet the credit needs of all segments of their communities, including low-to-moderate income (LMI) neighborhoods and individuals. The implementing regulations later defined the manner in which institutions would be examined for compliance.

    For most institutions, the CRA exam process includes consideration of community development activities, including:

    • Large banks – Community development lending, investments, and services are considered, with lending receiving the most weight
    • Intermediate small banks – Community development lending, investments, and services are reviewed
    • Small banks – Consideration of community development is optional
    • Wholesale or limited purpose institutions – Assessed solely on community development activities

    Community Development Defined

    To qualify as community development, an activity (whether lending, investment, or service) must meet one of the following criteria:

    • Supports affordable housing for LMI individuals
    • Targets community services to LMI individuals
    • Promotes economic development
    • Revitalizes or stabilizes LMI geographies, designated disaster areas, or distressed or underserved areas
    • Supports, enables, or facilitates projects or activities meeting the eligible uses criteria of the Neighborhood Stabilization Program as described by HUD

    Beyond the Old Staples

    Those responsible for CRA within an institution should have a reasonable understanding of the community development criteria and ensure that the institution and its employees engage in activities that will result in exam credit. However, it seems that regulatory expectations are continually evolving. Generally, banks appear to be held to the highest standards. This can particularly be true for institutions with a high rate of growth via acquisitions.

    As banks deal with shifting regulatory expectations, many are shifting their internal goals as well. In the past, it was relatively common to see banks benchmark to levels that would grant them a rating of “satisfactory.” As rating downgrades due to non-CRA related compliance issues have become more prevalent, we now see a larger number of institutions benchmarking to achieve a rating of “outstanding.”

    Institutions may also be losing some opportunities that have garnered favorable consideration in the past. Changes in funding levels and policies are making some community development opportunities essentially obsolete. This creates a need for more creative options.

    Furthermore, many banks are under intense pressure from community groups and leaders to be more involved within the communities that they serve. At times, these interactions from community groups impact both CRA and fair lending as we continue to see a convergence of the risks associated with both. As banks strategize for ways to meet these rising expectations, some are seeking creative, high-impact activities that may grant additional credit in upcoming exams.

    High-Impact Activities

    In general, activities considered high-impact reflect some or all of the following characteristics:

    • Responsive – Is the activity in response to a recognized need in the community?
    • Innovative – Is the activity serving the market in new ways?
    • Flexible – Does the activity expand access to groups that have been traditionally underserved?

    Responsive and innovative or flexible activities may be viewed favorably during an institution’s exam, and regulators have commented on the potential of harnessing responsible innovation to promote fair access and financial inclusion.

    As a practical matter, creating a successful community development program that’s inclusive of high-impact activities depends on one vital factor: creating partnerships. Strong partnerships can help an institution assess community needs, discover opportunities, set goals, and execute them.

    Who are the Right Partners?

    In order to both achieve efficiency and derive the most value, an institution must engage in valuable partnerships. Valuable partners will vary depending upon the institution and the activity. There are, however, some types of partners that can be productive for many institutions:

    • Internal Partners – Partnerships within an institution, particularly with front-line staff, are critical. Market staff have tremendous insight into their markets. When appropriately engaged, staff can often leverage those insights for the benefit of a community development program. Consider engaging internal partners to assist in the needs assessment process. This provides insight into the needs of each individual assessment area that can be utilized in determining focused activities that will be responsive to those needs.
    • Civic Partnerships – Partnerships with local government agencies can provide both information and opportunities. City leadership can generally provide information about neighborhoods suffering from blight, local down payment assistance availability, and much more. They also may be willing to partner with an institution to provide affordable housing or community services.
    • Non-profit Partnerships – Partnerships with nonprofit entities are critical to a strong community development program. Many banks have partnerships with an array of non-profit entities, and depending on the population and resources available within a bank’s service area, there can exist opportunities with a range of partners potentially positioned to help contribute to your community development program. A bank may consider an organization whose goal is to provide financial literacy education. Another possibility is to partner with organizations that provide education courses to homebuyers or home owners wishing to maintain their properties. Such groups help to promote sustainable home ownership, which is a need in many communities throughout the country.

    In many situations, leveraging partnerships in all three categories can create incredible results and value for all parties. At Wolters Kluwer’s 2016 CRA and Fair Lending Colloquium, for example, the winner of the Community Impact Award was a regional bank that successfully utilized partnerships in all of the above categories to create a powerful neighborhood revitalization project.

    This bank used internal partners to recognize a pressing local community need for neighborhood revitalization and, accordingly, address that need.

    The bank partnered with a local, municipal government to assist in revitalizing blighted areas and thereby increase the stock of affordable housing. The municipal government was willing to provide blighted and vacant properties to the institution at no cost. This, of course, was under the condition that the institution would renovate or build new homes at a certain price and sell them at little to no profit.

    Additionally, a partnership was created with a local non-profit providing homebuyer and homeownership education. The non-profit was able to provide education to potential homeowners as a requisite for part of the municipal government’s down payment assistance program.

    The low cost of selected houses, combined with the city’s down payment assistance program, along with an additional bank contribution to closing costs, provided opportunities for low-income borrowers to become homeowners. Consequently, the influx of newer housing and homeowners helped to stabilize a declining neighborhood. Finally, the homebuyer and homeowner education helped in promoting truly sustainable home ownership as well in this program that really proved to be a “win” for everyone involved.

    Tell Your Story

    While the success of community development activities depends on strong partnerships, success in the exam process is dependent upon an institution’s ability to articulate both its community development efforts and the results. In other words…success largely hinges on being able to tell a story.

    As with just about everything in compliance, documentation of one’s efforts is critical. The type of documentation needed will depend on the type and purpose of the activity. Lending to an entity that is building an apartment complex with affordable rents, for example, will require documentation of, at minimum, the loan amount, location of the property, number of units, and the rental amounts per unit.

    More complex CD programs, such as the one detailed above, require a deeper narrative, something that is well suited to being discussed in a performance context. What are some best practices for documentation?

    • Think like an examiner. Ask what information you would want to see if you were an examiner attempting to assess whether an activity qualifies as community development. The task seems daunting, but you will likely find that common sense usually prevails.
    • A little reading never hurts. Read recent CD performance evaluations – as many as possible from similarly situated institutions. They can yield a wealth of information.
    • Timing is everything. Do not wait to document activities at exam time. Memories fade and, in the rush to prepare everything, something will inevitably fall through the cracks. The best time to document activities is as they occur. Take the time to consider what documentation is necessary and gather it early on in the process. It will save a lot of time in the long run.

    A strong, successful community development program, inclusive of high-impact activities, is possible, especially with the right partners and a collective willingness to consider innovative and fresh ideas. With the right group of people at the table, almost anything can be accomplished.


    Britt Faircloth, CRCM, is a Senior Regulatory Consultant on the Advisory Services team at Wolters Kluwer. In this role, she brings over 18 years of relevant banking and regulatory compliance experience to assist institutions of all sizes in performing fair lending data analytics, CRA self-assessments, redlining and REMA analysis, and other HMDA related analytics. Britt can be reached at britt.faircloth@wolterskluwer.com.

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