Garnet Capital Advisors Blog

The implications and ramifications of the Community Reinvestment Act (CRA) were vividly illustrated by the Federal Reserve's Bank (FRB) recent downgrade for the CRA rating of Cincinnati-based Fifth Third Bankcorp, the nation's twelfth-largest bank. The FRB's CRA report in mid-July gave Fifth Third a "needs to improve" rating, one level below "satisfactory." As a result, its expansion via acquisition or branch additions is likely prohibited until it receives a higher rating.

The CRA was enacted in 1977 to ensure that lending institutions were meeting the credit needs of low- or moderate income consumers in their local communities. It was intended to guard against discriminatory policies based on income, race, or other categories. CRA compliance is monitored by several regulatory institutions, including the FRB.


The CRA is designed to provide financing to underserved constituents.

Expansion Plan Likely on Hold
Fifth Third's management had indicated in April that it was looking to get back into bank acquisitions, with a focus in the Chicago area, the Carolinas, and Tennessee. In 2008, Fifth Third purchased Charlotte-based First Charter Bank, which had $4.8 billion in assets. Fifth Third operates in 11 states currently, with 1,241 full-service banking centers. It has $142 billion in assets.

However, that plan is unlikely to develop further given the recent rating. American Banker noted that Regions Financial was given the same rating this spring and was "restricted from buying banks" as a result.

Fifth Third's chief executive officer Greg Carmichael noted recently that they will be looking at financial technology and non-bank assets as an expansion strategy.

Looking Forward
In response to the downgrade, Fifth Third indicated that it was looking forward to the next review to improve its rating, covering the 2014-2015 period and the first half of this year. The recent review focused on the 2011 to 2013 period.

From Fifth Third company spokesperson, Larry Magnesen: "It's disappointing to have received a rating that does not represent our commitment to our customers." He also observed that the scores in meeting community credit and financial needs were high, and that First Third plans to invest more than $27 billion over the next five years in the communities it serves.


New modifications to the CRA were finalized in mid-July.

Fifth Third's case illustrates how CRA regulation can affect a bank's strategies and expansion plans. Banks need to be aware that these regulations were updated in mid-July to clarify issues about community development plans, small-dollar loan activities, and other issues. These regulations are planned to be in effect soon.

Loan Sale Advisors: Help for Financial Institutions
The CRA practices of many banks are coming under significant regulatory scrutiny. At the same time, some originators have excess CRA origination capacity. Seasoned loan sale advisors such as Garnet Capital can provide banks with CRA loans by putting them in touch with the ideal partner.

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