CRA-Focused Lending - STRATMOR Group...CRA-Focused Lending Do you believe origination of CRA/LMI mortgages is a profitable activity? 10 • 61 percent of the respondents believe that

© Copyright 2018, STRATMOR Group

CRA-Focused LendingAugust 2018

STRATMOR SURVEYS

CRA-Focused Lending

Contents

• Background

• Summary of Key Findings

• Governance

• Sales Structure and Compensation

• Products and Marketing

• Respondent Profile

2 © Copyright 2018, STRATMOR Group

Background

• The STRATMOR Group does topic-specific surveys that gives senior

mortgage executives a unique way to obtain specific qualitative mortgage

industry information about:

• What senior executives at other companies think about issues and

significant new industry developments; and,

• What actions they are considering, planning or have taken.

• The CRA-Focused Lending survey was launched on June 1, 2018 and

remained open until July 15, 2018.

• Responses were received from 19 unique lenders and represented financial

institutions that originated less than $500M per year to those that originated more

than $10B.

• Average Asset Size: $50.8 billion

• Average Bank Households: $2.1 million

• Average HFI Portfolio: $5.8 billion

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STRATMOR SURVEYS

CRA-Focused Lending


KEY FINDINGS

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Summary of Key Findings

• The responding banks indicated a strong focus on meeting CRA requirements and generating loans in LMI communities and to LMI borrowers. Governance structures are in place at all responding institutions.

• 90 percent of banks believe that it will be harder to meet these goals over the next 24 months than it is currently.

• More than half of banks believe that originating CRA/LMI loans is a profitable activity either in its own right or when combined with the net interest income benefits of owning portfolio loans.

• Two-thirds of respondents favor some change to the CRA lending test requirements.

▪ A significant issue is the impact of originations outside of the bank’s delineated communities on the lending volume requirements inside the delineated communities — the “50%” test. (Banks feel constrained by the regulators requiring that 50 percent of their mortgage originations must be in the bank’s trade area.)

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STRATMOR SURVEYS

CRA-Focused Lending


Summary of Findings, cont’d.

• Communication of goals via “Community Commitment Plans” is in

use at two-thirds of the responding banks.

• More than half of the respondents supplement their own originations

with purchases of targeted loans in the capital markets, but at

relatively low levels as a percentage of overall LMI originations.

• More than half of respondents have a separate group of CRA/LMI

sales people.

▪ This sales force reports to mortgage sales management in most

institutions.

• The sales force has a broad CRA/LMI business development mission

beyond merely taking loan applications.

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STRATMOR SURVEYS

CRA-Focused Lending


Summary of Findings, cont’d.

• The predominant compensation structure for CRA/LMI LOs is a

base salary augmented with commission based on closed loan

volume.

• Actual closed loan volume for these LOs is 3.4 loans per month,

versus an expectation of 4.1 loans per month.

• 80 percent of CRA/LMI originations are sold in the secondary

markets, with servicing retained 70 percent of the time.

▪ 61 percent of the responding banks also have proprietary CRA

products available.

• Use of down payment assistance programs is important to 90

percent of respondents, although only 38 percent of respondents

have their own bank-funded down payment assistance or grant

programs.

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STRATMOR SURVEYS

CRA-Focused Lending


STRATMOR SURVEYS

CRA-Focused Lending

Is CRA/LMI loan origination a significant topic or focus

at your bank?

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• All but one respondent

viewed CRA/LMI loan

origination as a

significant topic at their

bank.

STRATMOR consistently hears that CRA/LMI lending is an issue that receives significant attention from management at bank-affiliated mortgage companies.


STRATMOR SURVEYS

CRA-Focused Lending

Do you believe that meeting CRA/LMI lending goals will

be easier or harder in the next 24 months?

9

• Only 10 percent of respondents believed

that meeting CRA/LMI lending

requirements will be easier over the next

24 months. This is somewhat surprising

given the review of CRA being

undertaken in Washington and the

general perception that credit

requirements are easing somewhat. The

lower level of overall mortgage

originations appears to be a factor

leading banks to this response.

90% of banks believe that it will be harder to meet these goals over the next 24 months than it is currently.


STRATMOR SURVEYS

CRA-Focused Lending

Do you believe origination of CRA/LMI mortgages is a

profitable activity?

10

• 61 percent of the respondents believe that their CRA/LMI lending is a profitable activity, most without inclusion of any net interest income from owning portfolio products.

• This is a more positive response than might have been expected given the need for price concessions on these products, which is often expressed by lenders in informal discussions.


STRATMOR SURVEYS

CRA-Focused Lending

Do you favor any changes to the CRA lending test

requirements?

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RESPONDENT COMMENTS

Purchased Loans• Change the rules for crediting non-originated CRA

loans (purchased).

• The spirit of the regulation is to originate not acquire through purchase. The activity which should be used to test should be based on true origination volume in census tracks which apply to the institution.

Requirements• Consideration for market competition in CRA areas

that address reasonable/achievable goals

• CD Lending should not negatively impacting the overall lending test

• The 50% of lending within the designated footprint is not reflective of the current need for expansion beyond the bank's market.

• HMDA data - Aggregated performance metrics for Purchases and Refinances, not separate; Aggregated performance for Mod/Low tract and Mod/Low borrower (income); Not sure how HMDA data for secured home improvements helps LMI geographies.

Two thirds of respondents favor some change to the CRA lending test requirements.


GOVERNANCE

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STRATMOR SURVEYS

CRA-Focused Lending

Governance➢ Is there a CRA governance or similar

committee in operation at the Bank?➢ 100% of the respondents answered “Yes”

➢ Are the Bank's Low and Moderate Income lending and CRA goals for mortgage established in conjunction with overall Bank CRA and LMI lending goals?➢ 100% of the respondents answered “Yes”

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Are specific LMI and CRA lending goals established at a Census Tract level?

Are CRA/LMI lending goals updated periodically for current trends in overall

mortgage closed loan volume levels being experienced in the market?

All banks in the survey have formal governance structures in place to deal with CRA requirements.


STRATMOR SURVEYS

CRA-Focused Lending

Does the Bank have formal Community Commitment Plans

in place for its key markets relative to LMI lending?

• Two thirds of banks have

Community Commitment

Plans in place for their key

markets.


STRATMOR SURVEYS

CRA-Focused Lending

How are the CRA/LMI goals expressed?

15

Goals for minority borrowers or majority-minority census tracts are part of plans for more than two-thirds of institutions.


STRATMOR SURVEYS

CRA-Focused Lending

Does your bank source CRA/LMI mortgages through

loan brokers and what percent of loans are sourced

through brokers?

• Only 21 percent of respondents source CRA/LMI loans through brokers as

an additional way to generate volume and penetrate these markets.


STRATMOR SURVEYS

CRA-Focused Lending

Does your bank purchase closed loans in the capital

markets in order to supplement CRA/LMI origination

goals and what percent of loans are purchased?

• More than half of respondents do engage in closed loan purchases as a way to augment CRA loan volume. However, most banks source less than 10 percent of their overall volume using this approach.


SALES STRUCTURE & COMPENSATION

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STRATMOR SURVEYS

CRA-Focused Lending

Is the overall Loan Originator sales force tasked with any CRA/LMI origination goals?

Is there a separate group of Loan Originators who are specifically charged with originating loans in CRA target areas or to targeted LMI income individuals?

• 63 percent of respondents ask their overall LO sales force to participate in CRA/LMI origination via establishment of goals for these loans. At the same time, more than half have a separate group of sales people who focus specifically on CRA/LMI originations.


STRATMOR SURVEYS

CRA-Focused Lending

Where do the CRA/LMI LOs report?

How many LOs are employed in the CRA/LMI group?

• For all but one institution, the CRA/LMI LOs report to mortgage sales management. The targeted CRA LOs represent an average of 8.6 percent of the overall LO sales force for the respondents which have a separate group.

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Origination Volume

Average Count

of LOs

% of CRA LO to

Total LO

Under $500 Million 1.50 8.2%

Between $500 Million and $1 Billion 2.00 4.0%

Between $1 Billion and $2 Billion 8.25 8.8%



Over $10 Billion 28.00 20.0%

Overall Average 10.09 9.6%


STRATMOR SURVEYS

CRA-Focused Lending

Which of the following are included in the CRA/LMI LO job descriptions?

• The CRA/LMI LOs are tasked with a wide variety of business development activities for nearly all responding institutions.

• Home equity loans are not included in this role for all but a small minority of respondents.


STRATMOR SURVEYS

CRA-Focused Lending

Which of following best describes compensation structure for the CRA/LMI LOs?

• Only nine percent of

respondents use a

“commissions against

draw” structure for the

specialized group of LOs

• 82 percent of the

CRA/LMI Loan Officers

are classified as Non-

Exempt which means

that they are eligible for

overtime

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The predominant structure is to provide a base salary augmented by commission on closed loans.


STRATMOR SURVEYS

CRA-Focused Lending

Which of the following are factors in commission calculations?

• The lack of use of non-volume factors in commission structure is a somewhat surprising finding, given the broad business development tasks assigned to these specialist LOs. Most plans appear to use volume only in calculating commissions. Presumably the salary portion of compensation is used to cover the other responsibilities of the position.

• 58 percent of respondents have a minimum commission for lower balance loans.

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Volume is the primary driver of CRA/LMI Originators incentives.


STRATMOR SURVEYS

CRA-Focused Lending

What is the closed loan productivity level expected from CRA/LMI

LOs?

What was the actual closed loan productivity level in 2017 from

CRA/LMI LOs?

• Expected production

ranged from three to

five loans per month

• Actual production

ranged from two to

seven loans per month

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The CRA/LMI Originators are falling short of the monthly volume expectations.


PRODUCTS & MARKETING

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STRATMOR SURVEYS

CRA-Focused Lending

Do you have proprietary portfolio products targeted

toward serving LMI borrowers and communities? What

products?

• Most of the responding banks offer an array of products to assist in meeting CRA/LMI goals. ▪ FHA and VA products are the most popular products along with Low Down Payment

Conventional programs.

▪ However, only 61 percent offer proprietary portfolio products as part of their product mix.


STRATMOR SURVEYS

CRA-Focused Lending

Do you participate in down payment assistance programs offered in your market areas?

Do you offer any bank funded down payment assistance or grant programs?

• While all but two respondents participate in down payment assistance programs as part of their product offerings, only 39 percent have their own bank-funded down payment assistance programs.


STRATMOR SURVEYS

CRA-Focused Lending

What percentage of CRA/LMI originations are sold in the secondary market?

What percentage of loans were sold Servicing Retained vs. Released?

• Most banks sell a very large percentage of their CRA/LMI originations in the

secondary markets, meaning that standard products are predominantly

used to meet these obligations.

• 70 percent of loans are sold servicing retained providing an ongoing

relationship with the LMI customer.


STRATMOR SURVEYS

CRA-Focused Lending

Is there a specific marketing budget for first mortgage

CRA/LMI originations?

What area controls this budget?

• More than half the respondents indicated that there is no specific CRA/LMI marketing budget — somewhat surprising given the level of focus on this area indicated in earlier responses.


RESPONDENT PROFILE

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STRATMOR SURVEYS

CRA-Focused Lending

What was your total mortgage origination volume for

first half of 2018?

• The respondents represented a cross section of origination volume and bank

size.


STRATMOR SURVEYS

CRA-Focused Lending

What are your top 3 states where CRA delineated areas

are located?

32

• Respondents

were

concentrated

in the eastern

and central

states.


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Contact Us

STRATMOR SURVEYS

CRA-Focused Lending

Tom FinneganPrincipal

STRATMOR Group

Phone: 614-638-3795

[email protected]

Nicole YungSr. Partner

STRATMOR Group

Phone: 770-876-2028

[email protected]

For more information on STRATMOR Surveys

Contact:

[email protected]


mailto:[email protected]



CRA-Focused Lending - STRATMOR Group...CRA-Focused Lending Do you believe origination of CRA/LMI mortgages is a profitable activity? 10 • 61 percent of the respondents believe that

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