(Almost) Everything You Need to Know about CRA Performance Context

When it comes to CRA compliance, your so-called "performance context" could be a source of uncertainty. What is it exactly? What does it mean for my bank? How should I create it? In this post, we will demystify this key compliance concept, and share links to 10 helpful resources to help you understand it better.

When you go through a Community Reinvestment Act (CRA) exam, your examiners will consider your bank's performance context. But just what is that, exactly?

In this post, we will define "performance context," share links to valuable CRA resources from the regulators and other industry leaders, explain why your performance context really matters, and provide best practices tips to help you develop a strong performance context narrative.

Let's jump in...

How the Regulators Define Performance Context

The performance context can be defined as the unique economic and demographic conditions, as well as the community- and institution-specific circumstances, in which your financial institution operates. 

Even though our definition may seem pretty straightforward, the reality is that many bankers and examiners struggle with a clear way to understand and contextualize a bank's performance. The good side is that regulators understand that every financial institution is different, and they will consider the demographic, economic, and business factors that impact your business.

“Performance context is a broad range of economic, demographic, and institution- and community-specific information that an examiner reviews to understand the context in which an institution’s record of performance will be evaluated.”

- CRA Regulation - Part 345.21(b) CRA Q&A __.21(b)–1

Your examiners may develop a performance context for you, or they may ask you to develop one for your institution. We have heard of both situations anecdotally.

In general, your CRA performance context will likely cover the following:

• Your institution's profile. This may include:
  • Asset size and financial information. 
  • Year established.
  • Structure.
  • Business strategy.
  • Product offerings.
  • Historical data, including past CRA ratings.
• Community profile. This may include:
  • Community needs.
  • Local market conditions.
  • Employment statistics and small business conditions.
• Assessment Area(s). This may include:
  • Geographic data.
  • Demographic data.
  • Economic conditions.
• Community Development lending, investment, and service opportunities. 
• Any CRA-related complaints received either by the institution or the regulators.

That said, every regulatory agency that conducts CRA exams (the OCC, FDIC, and Federal Reserve Board) has a slightly different approach to understanding your performance context.

In addition, each CRA examination type - Small Bank, Intermediate-Small Bank, and Large Bank - has a different definition for performance context. 

That said, there are some similarities across exam type, so your Performance Context will always consider:

• Standardized worksheets and other agency information sources about demographic, economic, and loan data available.
• Review of Call Reports, Universal Bank Performance Reports, Annual Reports, Supervisory Reports, and prior CRA evaluations.
• Institution-provided data about the local community, business strategy, and lending capacity.
• Communication with local community groups about the institution's performance.
• Review of the public file.
• Documentation of the Performance Context information gathered by the examiners.

Here are links to the Examination Guidelines for each exam type. Just search for "Performance Context" to jump to that section:

• Small Bank
• Intermediate Small Bank
• Large Bank

How the OCC Defines Performance Context...

The OCC, for example, says that the "OCC evaluates a financial institution's activities under CRA based on information about:

• The institution: Its capacity, constraints, business strategies, competitors, and peers; and
• The community: Its demographic and economic data, and lending, investment, and service opportunities."

How the FDIC Defines Performance Context...

Last year, Tina Brinson, a Review Examiner for the FDIC, led a presentation that discussed how to define your CRA assessment area and understand your CRA performance context.

In it, she noted that the performance context should include:

• Bank Profile and Characteristics
  • Demographic and economic data.
  • The bank's product offerings and business strategy.
  • Institutional capacity and constraints.
  • The bank's past performance and the performance of similarly situated lenders.
  • The bank's public file and any written comments about the bank's CRA performance submitted to the bank or the FDIC.
• Assessment Area Profile and Characteristics
  • Information about lending, investment, and service opportunities in the bank's assessment area(s).
• Any information deemed relevant by the FDIC.

How the Federal Reserve Bank Defines Performance Context...

Each Federal Reserve Bank region has a slightly different definition of Performance Context, but there are some similarities. 

The Federal Reserve Bank of New York says that the Performance Context should include:

• Description of Institution
  • Background
  • General Business Strategy
  • Ability and Capacity
    • Financial Data
    • Lending Focus
  • Holding Company/Affiliates/Subsidiaries
• Description of Assessment Area(s)
  • Specific Description & Demographic Data
  • Economic Data
  • Community Contacts
    
    • Insight Into Area’s Economic Condition
    • Insight Into Changes in Area’s Description
    • Insight Into Area’s Credit Needs
    • Insight Into Institutions’ Response
• CRA-Related Complaints
• Discriminatory or Illegal Credit Practices

"A truly responsive and innovative CRA program should begin with the “performance context,” or knowledge about the bank’s local markets, including the needs of the community as well as the opportunities that exist within the local network of resources and organizations.

"In the same way, bank examiners must also understand the local context in which financial institutions are operating in order to appropriately assess a bank’s CRA activities."

- Federal Reserve Bank of San Francisco, "Understanding Community Development Needs through CRA Performance Context" - December 2014

The takeaway? What you should include in your CRA performance context will depend on your regulator, so do a little bit of research on what they're expecting and go from there.

Read also: Why Do I Need a HMDA and CRA Transmittal Tool?

Performance Context and the Top 4 Reasons Your CRA Exam Ratings Matter

This performance criteria is an important factor the examiners will consider as they evaluate your CRA performance.

After a CRA exam, you'll recieve one of four possible CRA Performance Ratings: Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance.

Here are the top four reasons that your CRA exam ratings matter:

1. Your CRA Performance Evaluations, aka CRA exams, are public, and so is your corresponding CRA rating. This can impact your financial institutions reputation with consumers, journalists, community groups, and more. Poor CRA ratings are a competitive disadvantage.
2. Your CRA ratings will be considered in any applications for deposit facilities, as well as any merger or acquisitions. If your CRA performance isn't strong, it can limit your ability to grow your branch network, or engage in M&A activity.
3. Every CRA exam includes a Fair Lending evaluation. Findings in a CRA exam can spark a targeted Fair Lending exam. 
4. Good CRA ratings will result in less frequent CRA examinations. According to the FDIC, "maintaining a Satisfactory or better CRA exam rating will result in less frequent CRA examinations at your institution." Win-win!

Your Performance Context Narrative

In an exam, the performance context will always be documented. It's far better to be in a position to present your examiners with information about your institution than rely on them to draw their own conclusions without your input.

That's part of why we recommend taking a proactive approach to building your performance context, so that if and when the examiners show up, you have good, high-quality information to share with them.

As the compliance conscience at your institution, it's a good idea to understand the story you want to tell about your institution, and have the data to back that story up. This is true for all compliance examinations, not just CRA.

CRA Performance Context Template

Many compliance professionals are looking for a template they can use to build their CRA performance context narrative.

While we don't have a single performance context template - after all, every institution is unique - here is an outline you can use:

• Executive Summary
• Description of Institution
  • Institution's History
  • Business Profile and Core Offerings
  • Competitor/Peer Analysis
• Assessment Area Overview
  • Demographics
  • Economics
• Results of Analysis
  • Note: For large banks, analysis of CRA data and performance compared to peers is required. For smaller institutions, CRA analysis can provide clarity and insights that will help the regulators understand your institution.
• Conclusions about the Performance Context
  • Constraints and Opportunities
  • Goals
• History of CRA Performance
  • CRA Exam Ratings
  • Complaints
  • Fair Lending and/or Redlining Risk Overview

When writing your narrative, make sure to review the public CRA Performance Evaluations of other financial institutions in your area. Every CRA Performance Evaluation includes some performance context narrative. Reviewing these reports will help you gain clarity on what examiners in your area are expecting.

Anecdotally, we've heard that some examiners appreciate it if you go ahead and put your performance context narrative into the format they are likely to use on their final public Performance Evaluation report.

Resources to Help You Research Your Performance Context

You may also be looking for guidance about resources you can use to research your performance context. Here are a couple of resources that might be helpful as you're building your performance context:

• Federal Statistics: Federal statistics can be a really helpful source of information for your performance context. Some great resources include:
  • Census Data
  • Public CRA Performance Evaluations

  Related: How to Build a Strong Fair Lending & Redlining Compliance Management System

• Local Statistics
  • Look for any Economic Reports to Your Governor, Mayoral Progress Reports, City Council Reports or other local government reports.
  • News articles from local publications can be a valuable source of community-related information.

Here is a list of other often-overlooked compliance resources that you may find valuable.

Ncontracts Viewpoint: Your performance context is an important part of CRA compliance exams. Building a strong performance context is all about understanding your institution. One essential component of understanding your institution's performance is understanding the story your data tells.

In addition to identifying risk exposure, CRA compliance analysis can really help you gain clarity and insight about your market, potential opportunities, and lending performance.

Discover new tips about building your own lending compliance management system.