Banks: Have you assessed CRA performance risk during the pandemic?

The COVID-19 pandemic has heightened the need for digital banking technology and platforms. However, it may have also increased the likelihood of physical branch closures by banks in an effort to adapt to the virtual service environment and grapple with the economic pressures of the COVID-19 crisis. If you’re a community bank thinking of closing a branch, take note — doing so can pose a significant risk to your Community Reinvestment Act (CRA) performance.

As outlined by a recent Federal Reserve Bank of St. Louis article, a branch closure — particularly one in a low- or moderate-income area — may cause unintended consequences from a community development standpoint, including:

• Decreased access to personal banking products.
• Decreased access to basic financial education and training.
• Increased reliance on nontraditional financial institutions, such as check cashing stores and payday lenders.
• Decreased interaction between bank and community organizations.

Not only are these problematic issues for the community, they can also damage your reputation and leave you with significant fines. While closing a community bank after COVID-19 might seem logical, the unintended repercussions could be viewed negatively by a bank examiner.

Beyond avoiding physical branch closures, banks should ensure that product offerings and customer service are consistent from branch to branch across their assessment areas and census tracts. Limiting lobby access, branch hours, and bank services in low- or moderate-income tracts can run in direct conflict with the intent of the CRA, particularly in challenging economic times such as these.

Moreover, the pandemic has had a noticeable impact on the ability to contribute to key charitable organizations within communities in light of limited fundraising opportunities. This can limit a bank’s ability to invest in its assessment area, which is a key component of CRA performance, and thus another risk.

Have you taken a step back to self-assess CRA performance during the pandemic?

We recommend taking an objective approach to assessing your bank’s CRA performance over the past year. While CRA reportable loan volume may have increased due to PPP loans and other factors, banks should consider the impact digital banking and other remote service options may have had on its assessment areas, particularly in a low- or moderate-income tracts. Further, banks should consider the following action items:

• Review branch hours, availability, and service offerings to ensure consistency across census tracts and assessment areas.
• Determine whether CRA risk was adequately assessed as part of any recent branch closures.
• Consider whether qualified investment and charitable contributions are still being made in a manner consistent with pre-COVID-19 times.

If you look back and realize you already made a mistake, like closing a branch in an underserved area without proper justification, your best move is self-identification. Before your next exam, take meaningful steps to rectify the situation — document the issue, show how you’re resolving it, document the new process you’ll use to avoid it in the future, and maybe even make a contribution to the community.

If you need help preparing for an upcoming CRA exam or resolving an issue, let’s get in touch. Using a unique and tailored approach, our team can efficiently help you assess your bank’s CRA risk and any material changes that have developed as part of the pandemic. We can also conduct an independent review to gain an understanding of your bank’s CRA performance and ensure a complete and objective performance assessment to help you get ahead of CRA challenges and regulatory scrutiny.