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Appeal of "Satisfactory" CRA Rating - (Second Quarter 1998)


A formal appeal was filed concerning a bank's Community Reinvestment Act (CRA) rating of "Satisfactory Record of Meeting Community Credit Needs."  The bank's final rating was determined based on the examiner's assignment of the following individual ratings for each of the three test areas:

Lending Test: High Satisfactory

Investment Test: Low Satisfactory

Service Test: Outstanding

Management appealed the rating of "High Satisfactory" on the lending test.  They stated in the appeal that their performance under this test should have been rated "Outstanding," which would have then resulted in an overall "Outstanding" CRA performance rating.  The bank's previous CRA rating had been "Outstanding" and management felt that they continued to warrant the higher rating.

While management understood the methodology used for analyzing performance under the lending test, they believe that an adjusted median family income (MFI) figure should be used that is more representative of the bank's individual assessment area.  In particular, they did not understand why state-wide nonmetropolitan MFI level was used to test their performance, instead of their county specific MFI level.

Management feels that county-wide MFI information is a more appropriate measure to evaluate their performance under the lending test for the following reasons:

  • The bank's assessment area is much different from other parts of the state because of the city's low unemployment rates and higher housing costs; and
  • The county-wide MFI number specifically includes their city (the capital of the state), where local income levels are positively affected by state government.  Management said that if the county-wide MFI figure was used, their mortgage loan penetration level to low- and moderate-income (LMI) borrowers would have equaled the level of LMI families in the bank's assessment area.  Based on this fact, management argued that the bank's performance under the lending test should have been rated "Outstanding."

Notwithstanding the bank's confusion on the MFI evaluation criteria, management was also concerned about the fairness and consistency among other bank regulators of using state-wide or county-wide MFI numbers when evaluating performance under the service test.  In particular, they provided examples of other competing financial institutions who were given overall "Outstanding" CRA ratings because another federal bank regulator used an "adjusted" MFI (instead of state-wide numbers) to support the bank's penetration figures.


The basis for using MFI to measure lending to LMI individuals is contained within 12 CFR 25.12 (b) of the CRA regulation:

(b) Area median income means:

(1) The median family income [MFI] for the MSA [metropolitan statistical area], if a person or geography is located in an MSA; or

(2) The statewide nonmetropolitan median family income, if a person or geography is located outside an MSA.

To reduce burdens on the industry, the agencies chose to use the MSA MFI level in metropolitan areas or the state-wide nonmetropolitan MFI level in rural areas, to measure lending to individuals of various income levels.  Since the bank's assessment area is not part of an MSA, the standard used to measure the bank's lending activity to LMI individuals is the state-wide nonmetropolitan MFI, as required by the regulation.


While it is clearly understandable why bank management believed that use of the state-wide MFI level is not appropriate for the bank's assessment area, there is not a sufficient basis for making this type of adjustment within the CRA regulation.  However, the regulation does give examiners guidance to include specific information about a bank or its assessment area into the Performance Context section of the CRA Public Disclosure, and to use this information to more accurately and fairly evaluate a bank's overall performance. 

During our examination, examiners used the regulation's guidance to analyze the bank's lending performance giving consideration to the differences between countywide and state-wide MFI levels.  Using the state-wide nonmetropolitan MFI level, the bank's performance was not representative of the community's demographics.  To mitigate this finding, the examiners analyzed the bank's performance using county-wide MFI data.  When considering county-wide MFI, the bank's lending practices to LMI individuals improved to a level more comparable to community demographics.  While improved penetration resulted from the use of county-wide MFI information, the level of the bank's lending to LMI individuals never exceeded the community's demographics.  The examiners incorporated this analysis into the Performance Context and used the results of the county-wide MFI levels to support a "High Satisfactory" rating. 

While bank management was correct that another federal banking agency did in fact, use an adjusted county-wide MFI, that particular examination was performed very early in the regulatory transition from the old to the new CRA regulation.  Unfortunately during that transitional period, some inconsistencies in the application of the regulation occurred between federal agencies.  Since that examination, all of the federal banking agencies have attended joint CRA training and have worked diligently to ensure consistent application of the regulation. 

After careful review of the information submitted in the appeal, the ombudsman decided that a "Satisfactory" rating accurately reflected the bank's CRA performance during the time period covered in the Public Disclosure.  Although the examiners appropriately incorporated the differences in lending performance based on county and state-wide MFI levels into the Performance Context, and used the analysis to support the "High Satisfactory" rating, additional detail was included in the Performance Context in the CRA Public Disclosure to support their analysis.  At the request of the ombudsman, representatives of the OCC contacted bank management in order to discuss with them what opportunities are available to enhance the bank's overall performance.