Pandemic Branch Closings, Digital Channels Put Banks at a CRA Crossroads

Not too long ago, banks primarily served their communities through their expansive network of branches, with customers walking in and out of physical locations dotted across their institution’s footprint. In recent years, digital transformation efforts to meet customers online and through applications have pushed traffic away from those traditional brick-and-mortar branches. 

This shift, which had been in the works in various shapes and forms for nearly two decades, escalated at lightning speed starting in March 2020: The swift arrival of the coronavirus prompted banks to shut down branches almost overnight to protect both customers and employees. Financial services leaders scrambled for safe ways to operate in an unprecedented, large-scale public health crisis for which they had no playbook – and which has left many branches still in long-term limbo. 

At risk of being overlooked is how these evolutions will challenge organizations to comply with the Community Reinvestment Act (CRA), a federal regulation designed to ensure banks conveniently serve the credit needs of their communities, including low- to moderate-income (LMI) neighborhoods Just because branch networks – historically the backbone for assessing CRA activity – are disappearing doesn’t mean that banks’ responsibilities to community development are dissipating at the same rapid rate. Instead, as the banking industry launches new strategies and channels to meet customers where they are, it must also determine how to ensure modern practices conform to a more than 40-year-old regulation.  

With the impact of fast-paced disruptions to traditional channels and the lingering pandemic still being felt, banks must be prepared for greater scrutiny regarding their branch closing decisions. Frankly, whether the spirit of CRA has evolved along with the banking environment isn’t the point right now (though the pandemic and robust digitalization have prompted regulators to tee up reform), as the existing law remains the barometer for assessing fair credit practices – particularly when it comes to reviewing a bank’s policies regarding LMI communities. 

Americans’ Banking Habits Are Changing 

Even before the pandemic, people were changing how they managed their money and how they engaged with their bank. The modern interaction model certainly doesn’t mirror the banking experience of 1977, when CRA was enacted.  

Between 2008 and 2020, banks shuttered more than 13,000 locations, representing 14% of all branches across the country, and those closures disproportionately impacted customers living in low-income areas. The pandemic expedited branch closings, with a record shutdown of 3,324 bank or thrift branches in 2020. 

As your bank comes up for its next CRA evaluation – the frequency of which is typically determined by past performance – use this time to shore up answers to tougher questions about how you’re meeting your community’s needs. And remember that this will be complicated because regulators’ attention will be focused mainly on decisions you made years ago, with minimal grace given to crisis-state branch closures due to the pandemic. 

Banking leaders shouldn’t minimize your response because a poor CRA rating will hinder your bank’s strategy – including mergers and acquisitions – even stopping you in your tracks because of something you did at a single moment in time. On top of that, the CRA review, which can take up to a year for a large bank, includes subjective elements: While financial organizations follow a general checklist on what to report and include, the interpretation of different requirements varies among examiners. Poorly presenting your story at this pivotal juncture could put your bank back at square one, assembling documentation for another exam in less than a year. 

Why Branch Closings Are Hot Buttons 

One way banks should be able to defend their branch closings is by demonstrating how they remain open to serving LMI and other underserved communities through alternative avenues. They might continue to operate ATMs in neighborhoods that once featured a branch, or promote the availability of services that are accessible via telephone and digital channels. 

But not every service can be completed through a virtual or phone experience, no matter how sophisticated the financial organization is. Some transactions still must be handled in a branch, such as getting a cashier’s check, and if customers have to travel an hour to handle that occasional business, then your organization isn’t meeting the definition of convenience. 

Permanent branch shutdowns in LMI localities will negatively affect a bank’s service test during their CRA review. It makes no difference if the decision was justified due to COVID-19 safety precautions. As the Federal Reserve of St. Louis has detailed, closings in underserved areas can have drastic consequences: decreased access to personal baking products, financial education, and training; and diminished interaction between banks and community organizations. Branch closings can also drive increased reliance on non-traditional financial institutions such as check-cashing stores and payday lenders, whose services often come with higher price tags. 

Through their responses to ongoing CRA exams, banks routinely self-report their service footprint, made up of “assessment areas,” which means regulators have a track record of where branches have historically been located. Making changes to assessment areas, such as lopping off LMI neighborhoods where you no longer have branches, going into your next exam will only lead regulators (or watchdogs) to say that you’re redlining those communities – particularly if the data suggests you’re cutting off certain census tracts based on their socioeconomic makeup. If you’re not actively growing your footprint, then your assessment areas should be fairly consistent from exam to exam. 

How banks consistently and fairly serve credit needs across communities is already a hot button in the eyes of regulators due to issues with other pandemic-instigated provisions – from emergency business loans to mortgage forbearance. Many banks limited access to Paycheck Protection Program applications to their existing customers, and borrowers in LMI neighborhoods often lack the engagement with bankers that was critical to getting their applications in the door before the funds ran out. Homeowners in those same communities are disproportionately represented among those exiting federal forbearance programs. With longstanding pressure on them for solid CRA performance now intensified, banks can’t afford the risk of a misstep right now. 

What Banks Must Do for Today’s CRA Exams 

Preparing for a CRA exam is never an easy task for any organization, but in today’s hyper-regulatory environment, you need to take a more strategic approach to how you present your CRA performance. Generally, that starts with a backward look at any actions – particularly those short-term decisions prompted by COVID – that could negatively impact your CRA rating. How can you relay those stories in the best light to your oversight agencies? Here are a few steps to get started: 

1. Develop cross-bank collaboration. Every bank experiences a natural tug-of-war between departments charged with protecting the bottom line and those protecting CRA ratings, and you need to short up the balance between the two. Knowing pandemic branch closings will lead to greater scrutiny, work across departments to understand what you’ve been doing differently – including the process you use to determine whether a branch will remain permanently closed – and analyze how that might have an impact on your CRA rating. Banks are not the same as they were before COVID, but expect regulators to follow old practices and not account for decisions made because of the pandemic.  
   
2. Align your story with today’s new banking environment. This starts with understanding neighborhoods and the needs of their residents. Perhaps a branch in question is located in a neighborhood where residents leave to work elsewhere, limiting their ability to drop in during operating hours. If five hours pass and no one walks in, is that branch truly serving the community? Online banking tutorials in the evening at the local library or a weekend pop-up branch might meet those customers where they want to be – and that’s the kind of story you want to illustrate with specific proof points. 
   
3. Develop community relationships. Make this a two-way street, complete with community leader partnerships that provide insight on residents’ needs. Again, the CRA exam goes beyond personal banking services to investments in initiatives that serve the greater community, such as funding low-income housing projects.  
   
4. Own your story. Banks will close branches in LMI areas, and the pandemic may have led to some of those closings, but that’s only part of the story. You must also speak to the other things you’re doing to serve those communities. A closed branch might have served a finite number of residents (and you need to be up front that closing that location did save you money), but perhaps you increased your investment through community loans for small businesses, or your leaders served on community boards during that review period. You need investment targets in every CRA bucket. If you’re not meeting those targets – and if you’re still closing branches – you’re going to face tough times with regulators. Finally, always be aware that your regulators will discount a portion of what you define as community development initiatives, so you’ll need to over-deliver on your targets. 

Stay the Course with Reform on the Horizon 

Frankly, based on our previous on-the-ground experience helping banks meet CRA standards, we recognize many aspects of the regulation are much less relevant today. While the OCC took an early, proactive call to strengthen the CRA and its mission to address credit inequities, reform now is on the radar of the multiple federal agencies charged with its oversight. 

Fortunately, the OCC has pulled back on changes from 2020, with the Federal Reserve and FDIC now on board for a joint CRA overhaul that will “best achieve a consistent, modernized framework across all banks to help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods.” However, until those changes are identified and implemented, banks must adhere to the CRA as it is written. That makes how you represent your community activities to support the act’s broad objectives – while the historical marker of fully staffed branches is diminishing – all the more critical. 

Don’t Go Into the Exam Process Alone 

As former banking professionals responsible for preparing for CRA exams, our Spinnaker consultants have the hands-on experience and deep knowledge needed to assist clients in effectively developing their stories and identifying the supporting documents and related decision-making regulators expect to see. Rather than put your bank at risk of receiving a poor rating that could halt your growth strategies on the spot, find out how our experts can advise you in presenting your bank’s commitment to CRA and how you serve all of your communities, including LMI areas. 

Spinnaker Consultants Veronica Baker-Adams, Holly Higginbotham and Chris Lucas contributed to this post.