We are a small, community bank with an assessment area of about 10 towns around us. Due to slow loan growth, the Bank has hired remote mortgage originators throughout the state who will be originating loans well outside of our assessment area. We do not have branches in these locations so the liklehood of these folks doing their deposit banking with us is slim. What type of CRA implications are there for originating a lot of loans not within our assess. area? Any advise would be very helpful, thanks.

I apologize if the question seems like something basic, my boss was recently made CRA Officer and he's relying on me for a lot of this stuff and I haven't got a clue, never really had to worry about CRA before so I'm going to appreciate this forum a lot.

We have a similar situation due to several Loan Production Offices that are located outside our regular assessment area. After submitting our CRA data, the Fed calls me to verify data and always asks "why do you have so many loans in areas x, y, and z when your closest branch office is ___ miles away?" I answer them, "because we have LPOs located in x, y, and z, and they are producing ___ volume." This usually satisfies the situation. It will skew your outside/inside ratio a bit, but as long as you justify it with a decent explanantion it shouldn't be a problem.

It will become a problem if the percent of loans inside the banks assessment area drops below 50%. Regulations require the assessment area to contain the "majority" of the banks loans.

It will become a problem when its said there is no loan growth in the existing assessment area and examiners determine your peers are not having the same problem.

It will become a problem when the "needs" of the Community are not being meet but the bank is lending outside its assessment area.

You need to know the banks lending activity, by geography number and percent as well as the demographics of the assessment area. You need to be able to justify that the there really are no lending opportunities, rather than just not wanting to loan in certain census tracts within the assessment area.

The "Assessment Area Concentration Ratio" or the so-called "In-Out Ratio" is one of the first measures of bank performance under CRA. The ratio calculates the percentage of lender loans inside the Assessment Area. If it falls below 50% you have a potentially serious problem. The basic premise of CRA is that banks should be "meeting the need for credit services in their communities" i.e., banks should be "reinvesting" in the community. This does not prohibit all lending outside the community, but it does require that most of a bank's loans should be made where it gets its deposits.

So if you are going to lend a serious amount of your funds outside the community you had better be prepared to demonstrate that the market's needs are already being met. The problem is that if the community's needs are being met by banks from outside the community, the natural question is, "why isn't the local bank doing the job?" This means you had better have the market data to substantiate your claim. Let's assume you have the data and it shows millions of dollars of mortgage lending provided by "outsiders". Aside from the CRA implications, don't you think the results may be telling you that you are missing a market opportunity and maybe your bank could improve its market rank, market share and profitability?
The mortgage and small business market data is readily available for very little cost. So check that out first. Your management might find some surprising information about your market within the existing community. Or, you may find that there is a very viable market next to your current assessment area that you should expand your assessment area into.

All excellent comments, thanks for your insight.

Question - When you are calculating your in/out ratio, do you use all your AAs together? I have not found a way to do it just for one AA. If I do it for just the KC AA, it shows all the loans that are in other AAs as outside the AA. This is distorting. I did run a report that shows loans just outside a particular AA and those ratios don't look bad. I just don't know how to do the other.

KC- the way the regulatory agencies do this is to take all your data state by state. If you have multiple Assessment Areas in a given state you combine all the loans inside those AA's and compare it to all your loans in that state (i.e., all the loans inside and outside your assessment areas in that state). If you have an AA that straddles two or more states you take the loans inside that AA state by state and include them with any other loans inside AA's in each state and compare to all the loans originated by your bank inside and outside the AA's in each state. This is the way the data is compiled in the CRA A&D Database. If you look at the actual Assessment Area ratio tables for every state in the country as posted on our website www.geodatavision.com (see Assessment Area Report) you will see the results for the latest reported data (2004) for every reporting bank in every state in the country (there are two versions on our website - one is for the homestate of each bank and the other is for every state with every reporting lender).
I hope the foregoing isn't too confusing , but it is the way the ratios are calculted.

Is there a process to add to your assessment area or can you just increase the size of your assessment area to make the adjustment for more loans being outside your area?

never mind - I just read another post "doing 1st audit" that gave some information I can go to and check out.
Thank you

thanks Len. I will need to study this for a while and see if I understand it. If not, I will get back with you.

Also, make sure you prepare your own "performance context" to explain what you are doing and why. There is a thread on preparing a performance context at:

http://www.bankersonline.com/ubbthreads/showflat.php/Cat/0/Number/548738/an/0/page/1#Post548738

Pizza Queen, are these mortgages orginated for your own portfolio or are they being sold in the secondary market? Originations and sales generate revenues, but do not impede your ability to lend in your Assessment Area. If that is the case, make sure your put that in your performance context.


Al

Al, these are loans for portfolio. We currently don't sell anything except to the state association and those are far and few between.