When you understate your community development loans you are compromising your bank’s lending performance under the CRA which is the most heavily weighted aspect of the CRA. As you know, if you don’t meet the credit needs of your communities, this can lead to public relations risks that could even result in an internal “needs to improve” rating or hamper your ability to adjust your bank’s strategy priorities.
Let’s take a step back for a minute. You know that your bank is in the business of originating commercial purpose loans. But do you know which of these bank’s loans qualify as community development loans? I’m guessing the number is higher than you think. Most banks under report this special category of loans. This is why we must seek CRA training for ourselves and also deploy CRA training internally within our financial institutions.
Community development loans are loans that have as their primary purpose community development which means the loans support affordable housing, community services, economic development, and/or revitalization or stabilization.
Identifying your bank’s existing community development loans might make the difference between a Satisfactory CRA rating and an Outstanding CRA rating. These loans aren’t just important for your bank’s rating, they are important tools to sustain and revitalize the communities you serve and this is especially important as we all work to stabilize our local communities in a post-pandemic world.
One best practice you can establish at your bank is to begin to identify community development loans through your bank’s existing loan origination workflow. Liaison with your commercial lenders to teach them how to spot potential community development loans and how to shore up their credit memorandums to support the community development purpose. Your loan officers and loan documentation team members should be the first line of identification for CD loans.
To learn more about community development loans, consider joining the CRA Hub!