The Community Reinvestment Act mandates that a bank meets the credit needs of the communities which it serves as delineated by its CRA assessment areas. The regulation has a simple test to address that issue. It's called the "CRA Assessment Area Concentration Ratio" which calculates the percentage of a bank's CRA-related lending within its defined community. When a bank has multiple assessment areas the total for all its CRA-related lending within those assessment areas is compared to all its CRA lending everywhere. The regulation considers a ratio of 50% to be the minimum acceptable ratio. For small banks, examiners will also measure a bank's loan-to-deposit ratio compared to "peers". The failure to extend an adequate volume of CRA qualified loans is almost always a prescription for failure in a CRA exam. Both of these approaches have serious deficiencies that should be addressed in any reform of the CRA regulations.
The Assessment Area Concentration Ratio has an underlying assumption that lending is a zero-sum game in which loans extended outside a CRA assessment area reduces the lendable funds available to a bank's local community. This was true 50 years ago when almost all lending by community banks was based on deposits obtained locally. At that time the CRA was instituted to stop banks from taking money out of their local communities and lending that money elsewhere. But that implicit assumption is no longer true in 2026.
Ever since the beginning of the 2000's a growing number of community banks have adopted a marketing model that extends far beyond their traditional CRA assessment areas. Those banks don't rely on local deposits to fund those loans. In most cases, those banks are funding loans outside their immediate market by sales of those loans into the secondary markets. This means that loans outside a bank's local community need not be funded by local deposits. Therefore, the Assessment Area Concentration Ratio no longer is a reliable indicator of situations where a bank may be siphoning local money to fund borrowers who are far away from a bank's neighborhoods where it has deposit taking branches.
Regulators attempted to correct this deficiency in the 2023 CRA rule by replacing the Assessment Area Concentration Ratio with a new "Retail Lending Volume Screen" ("RLVS") which used a variation of the loan-to-deposit ratio as a reference point. In the RLTS a bank's loans within its assessment area would be compared to its deposits inside that assessment area. For very large banks the 2023 CRA rule required them to geocode their deposits to the county in which the depositor was located. But for community banks the deposits within an assessment area would have been based on their location by branches within the defined community. The resulting ratio would be compared to the ratio of other lenders with depository branches in the same market. In other words, loan volume adequacy would be evaluated based on the relative volume of local loans to local deposits. With the revocation of the 2023 CRA that alternative test is no longer officially available.
Back in 2020 we were contacted by a bank that had a highly successful national marketing program for residential mortgages and SBA-guaranteed small business loans. They were about to fail their CRA exam because their Assessment Area Concentration Ratio was only 9%. But when we examined their actual mortgage lending volume and compared it to banks active within their assessment areas, we found that they were relatively highly ranked. That led us to wonder how they would look if the evaluations were based on their assessment area lending volume compared to their assessment area deposits and then that ratio compared to all other HMDA and CRA reporters active in the defined community with depository facilities in the same area. It turns out that in their first assessment area they were ranked #3 of 53 institutions and in their second assessment area they were ranked #12 of 38 institutions. When they showed examiners the results the examiners agreed that the results demonstrated that the bank's lending outside its CRA assessment areas did not impair or reduce its lending within its defined communities. In fact, examiners agreed that the analysis indicated that the bank was outperforming other depository institutions with respect to its local lending compared to local deposits.
So, there's evidence that examiners may accept an alternative measure of loan volume adequacy by comparing local CRA-related loans to local deposits. But with a growing number of community banks adopting markets far from the traditional local branch-based markets and relying on sale of those loans into the secondary markets it's time that regulators recognize this significant development and its implications for measuring loan volume adequacy.
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