CRA: An Examiner's Perspective
Considerations for Branch Closings

This article is part of a series on Community Reinvestment Act (CRA) best practices from an examiner's perspective. Although this column focuses on CRA best practices for financial institutions, the content may provide insights for community development organizations working with financial institutions to meet credit and community development needs. As a disclaimer, this series is meant only to represent best practices; financial institutions should consider the information presented in context of the requirements or guidance from their primary regulators and their own business needs.

According to a 2018 Pew Research Center study, millennials became the largest generation in the U.S. labor force in 2016.¹ Correlating with the rise of millennials in the U.S. labor force is the increasingly ubiquitous presence of technology in today’s financial markets. Millennials are assumed to be more technologically savvy than prior generations and have become a key target demographic for companies, including banks. To meet their needs, many banks are transitioning from traditional banking models towards digital platforms.

In transitioning to a digital focus, a bank may reduce its number of branches to concentrate its resources and maximize profitability. However, before a bank can close a branch it must follow the requirements set forth in Section 42 of the Federal Deposit Insurance Act. Among the requirements, a bank must notify its regulatory agency of its intent to close a branch while providing reasons and data supporting the decision. In addition to notifying its regulatory agency, a bank must also notify customers affected by the branch closure.

Notice requirements are more restrictive on interstate banks (banks that operate in more than one state) seeking to close a branch in a low- or moderate-income (LMI) census tract. In this scenario, notices sent to customers must include the address of the bank’s regulatory agency with a statement that comments regarding the closing may be mailed along to the agency. While regulatory agencies do not have the authority to prevent an institution from closing a branch, they are required to schedule a meeting with relevant stakeholders if customer comments indicate that a branch closure would adversely affect the community.

When deciding whether to close a branch, bank management may focus its analyses on its profitability. While profitability for a bank is unquestionably essential, it should not be the only factor considered. Branch closures can have negative impacts on communities, as well as a bank’s Community Reinvestment Act (CRA) rating.

In terms of community development, branch closures (most notably those located in LMI areas) can have unintended negative consequences for community residents and organizations. For area residents, a branch closure may result in less access to personal banking products such as checking accounts, savings accounts, and consumer purpose loans. A branch closure may also result in less access to basic financial education and training for residents of the community. This combination could result in more reliance on nontraditional financial institutions, such as check cashing stores and payday lenders that tend to charge exorbitant fees relative to a community bank; especially in areas where bank branches are already limited. For organizations, fewer branches in LMI areas could limit interactions between a bank and the community organizations located in those areas. These limited interactions could result in missed community development opportunities for the bank and the community. Consequently, banks should consider these factors in their decision-making process, as community development performance contributes to a bank’s overall CRA rating. Community development is included in a bank’s CRA rating only if the bank is evaluated as an intermediate small bank or large bank based on annually updated asset thresholds.

For large banks, regulatory agencies also assess a bank’s systems for delivering retail banking services with particular emphasis on the distribution of branches and the amount that were opened and closed. The primary emphasis is specifically on full-service branches, since convenient access to these locations within a community is an important factor in determining the availability of credit and non-credit services. Generally, a full-service branch is one where deposits are accepted, loans are made, accounts are opened and closed, normal hours are maintained, and full-time staff are present (including on-site loan officers). While online banking has increased significantly over the last 20 years, many customers still utilize bank branches.⁴ Closing branches in LMI census tracts may negatively affect a bank’s service test rating to the extent that the branch closures have a negative impact on the accessibility of banking services in the community.

There is no denying that banks are adapting their traditional banking models to fit the technological landscape in the industry. This increased focus has led some banks to change their branching structure in an effort to concentrate resources and maximize profitability. While profitability is certainly an important factor to consider, banks should also seriously consider the possible negative effects a branch closure could have on the development of local communities and the ratings assigned during CRA examinations.

Bill Ward is a consumer affairs examiner at the Federal Reserve Bank of St. Louis.