If CRA exams are going to be graded by how a bank serves the needs of communities in their assessment area, then regulators should hold those institutions accountable for doing a poor job. I think that doing that can only occur if the exam is re-thought. Currently, the performance evaluations are overly focused on quantitative measurement. There is a great need for the examiners to have the ability to put more reasoning to how they gauge a bank's work.
This issue is relevant to the announced acquisition of Square 1 Bank by PacWest. In any application, regulators review how well a bank has met its CRA obligations. Naturally, they only do that in the communities that have been designated as assessment areas. Square 1's assessment area is made up of Durham and Wake Counties.
Square 1 holds more than 24 percent of deposits in the Triangle. People might imagine that one of our most well-known banks like Wells Fargo, BB&T, Bank of America or SunTrust might be the largest, but that is not true. Square 1 is the answer. If deposits define CRA obligations, then Square 1 should be very active. But it turns out that this is not the case. Indeed, it is hard to find anyone in Durham that knows of Square 1. The same holds true in terms of what CRA work is actually being performed. Plenty of banks are making CRA loans and investments in Durham, but not one can be attributed to Square 1.
The FDIC gave Square 1 an "outstanding" on its most recent CRA exam.
About the assessment area
The Community Reinvestment Act says that banks have to re-invest in their community. They have to meet the needs for investment, lending, and service in the places that are defined as being within a bank's community. In its application, the size of a community is either a county or a Metropolitan Statistical Area ("MSA"). In the case of a bank that has deposits in many MSAs, an examiner commonly allows the bank to focus their work on a subset of those locations.
The assessment area has remained a standard construct within the CRA regulatory regime. Indeed, it is fair to say that regulators have been unbending about the relationship between deposit location and assessment area, even as monoline prepaid issuers like Green Dot or non-branch banks such as USAA have developed new models that can serve consumers in locations that are entirely separate from the areas where their deposits are stored. These banks cannot get credit for doing work outside of their areas where their deposits are held. Green Dot is judged by what they do in Provo, Utah. USAA Bank's assessment area is Las Vegas, Nevada.
In that construct, banks have generally responded to expectations. The assessment area chosen by the relevant regulator is the place where the banks apply their CRA work, even if they draw a substantial share of their customers from another location. No place makes this point better than Sioux Falls, South Dakota. With its bank-friendly banking laws, South Dakota has become the location of a number of banks that issue credit cards. Among those is Citibank (South Dakota) National Association. That specific name might be familiar to you. It is the issuer of Citibank's credit cards. While its status as an issuing bank means that it holds receivables rather than deposits, those accounts still become the determining factor in the location of their CRA obligation.
In its 2009 CRA exam, Citibank (SD) reported that it made over $2 billion in qualified investments, grants, and community development loans. The bank provided capital for the construction of low-and-moderate income neighborhoods in the environs of Sioux Falls. Some specific examples:
- An investment of $16 million in CitiHousing to fund the rehabilitation of 370 housing units for LMI households, the elderly, and people with special needs in Sioux Falls.
- An investment of $7 million to build a new 74-unit affordable housing complex in Sioux Falls.
- $9.7 million in grants to fund more than 300 different community development programs, including programs aimed at transitional housing for the homeless, IDA accounts, small business development, affordable housing, financial education, child care development, et al.
- A $5 million line of credit to the City of Sioux Falls for a neighborhood revitalization program.
- $2.2 million in financing to build affordable housing on a nearby Native American reservation.
- Over $1 million in construction financing to build 24 housing units for homeless families in Rapid City.
- Service in building a statewide IDA program.
- Provided financial education to 375 students in the Sioux Falls School District.
- Created a micro-entrepreneurship program.
- Purchased $180 million in South Dakota state housing authority revenue bonds which were specifically created to fund the creation of affordable housing.
- Participated in a community-wide task force that aimed to identify needs in the community.
Citibank's commitment went to the top of its corporate leadership. As if he didn't have enough to do in 2009, Citibank CEO Vikram Pandit flew to Sioux Falls to meet with the Pettigrew Heights Neighborhood Association Housing Resource Center. Later he met with the Mayor and some of the staff of the City of Sioux Falls.
In its most recent exam, the OCC gave Citibank (South Dakota) an "outstanding" rating.
Square 1 in Durham and Wake
Square 1 focuses on businesses in a few tech sectors. It has offices in about five states in locations across the country, but it holds all of its deposits in one branch. Square 1 has been growing rapidly. As of last June it had almost $2.5 billion in deposits. It holds almost one in four of every dollar deposited in our community. Naturally, Square 1 only has one assessment area: Raleigh-Durham, North Carolina.
So what did they do in Durham and Wake? Their most recent CRA exam reports that the bank held a portfolio of mortgage-backed securities with exposure to LMI borrowers. Presumably, some of those LMI borrowers live in the Raleigh-Durham area. In 2010, Square 1 purchased $9 million in MBS. They upped their stake to $16 million the following year and trimmed it back to $14.6 million in 2014. A CRA exam adds those numbers at face value, regardless of any qualitative judgment about their mission-effectiveness. Square 1 also held some CDs at an assortment of local CDFIs, invested in an SBIC, purchased a municipal security, and wrote a CRA loan.
The FDIC gave Square 1 an "outstanding" rating on its 2013 CRA exam.
Tonight, a homeless family is sleeping in a warm bed because of Citibank. But you can't say the same thing about the results of Square 1's work.
Theoretically, Raleigh-Durham mortgage applicants may be downstream beneficiaries of the additional liquidity enjoyed by local mortgage bankers due to GSEs. Do you think they feel that benefit? Do you think they feel it as much as if Square 1 had investment $16 million in new homeless shelters?
The CRA should provoke the kind of activity that might not occur otherwise. It should be more creative. It should involve some flexibility in underwriting. It should mean that banks work through a bit more in the way of "stickiness" - where it has to spend a little extra time arranging financing, reviewing additional documents, working with some unusual partners, and maybe even doing things in a "one-off" way.
Our non-profit has finished a number of projects with local banks that surely qualified for CRA credit. In each case, the banks (SunTrust, BB&T, Bank of America, Wells Fargo....and more) had to work directly on the project. The benefits are real. Our immediate neighborhood has been revitalized. This is why the CRA matters. I think this is a reason to put conditions on any approval of PacWest's purchase of Square 1. PacWest should make a commitment to do more.