Readers of this article may think I am referring to Orcas, sometimes known as “killer whales.” But what I am referring to is the new form of Assessment Area in the 2023 CRA Rule. However, the analogy/metaphor may be appropriate because the concept of an ORLA, or “Outside Retail Lending Area”, is an absolute killer of any reasonable or fair measurement of a bank’s performance meeting the need for credit services in its local communities.

First, what is an ORLA? Many people inside and outside the banking industry appear not to understand what an ORLA is. As I was interviewed by a reporter about the new CRA the other day, I was asked why lawsuits contesting the new CRA Rule don’t mention anything about the ORLA concept or several other controversial aspects of the new Rule. My response was, “No one seems to understand it.”

An Outside Retail Lending Area includes anywhere in the entire USA outside a “large” ($2 billion or larger) bank’s traditional branch-based assessment area and its “Retail Lending Assessment Areas.” It includes areas where the bank has extended a single loan qualified as a “major product line” loan. This means that a New York City bank could close a single closed-end mortgage 2,500 miles away in Los Angeles and that single loan will be rated based on how it meets the credit needs of the entire Los Angeles-Long Beach-Anaheim MSA consisting of 3,104 census tracts (Los Angeles and Orange Counties). This sounds preposterous, but it really is in the new Rule.

There is no minimum number of loans in each component geographic area before the complex series of multiple tests, calibrated benchmarks, converted scores, weighted scores,  “supporting conclusions”, “recommended conclusions”, and “assigned conclusions” must be applied in an ORLA. We have determined that in some markets, more than 100 calculations and data conversions will need to be done to arrive at a “recommended conclusion”. There is no way that any meaningful CRA analysis can be developed for remote markets in which a bank extends only a handful of loans, but the new CRA demands it be done. 

The foregoing is only a part of the computational burden imposed for lending in the ORLA. Under the new Rule an ORLA will consist of potentially dozens of “component geographic areas” each of which is nothing smaller than an entire MSA or statewide non-MSA adjusted for any FBAA or RLAA or counties in which a bank did not originate a major product line loan within those areas. So, a single loan or two in any ORLA may be compared to a large market containing thousands of census tracts and millions of people in any component geographic area. Moreover, the ORLA can include dozens, even hundreds, of “component geographic areas” which are treated like submarkets in the ORLA and in which all the data conversions and computations must be done. This can lead to thousands of calculations against “tailored” benchmarks that are meaningless.

Now, some readers may be concerned that dropping the application of the ORLA concept will result in the omission of a major part of residential mortgage and small business lending from regulatory scrutiny. But Table 36 in the preamble to the 2023 CRA Rule indicates that as a “Percent of all bank lending”, the Outside Retail Lending Areas account for only 18%. 

Table 36 reveals another troubling aspect of the ORLA concept. The data in the table show that almost 29% of the recommended Retail Lending Test Area conclusions were “Needs to Improve” or “Substantial Noncompliance” for ORLAs. That’s 3 times higher than the less than satisfactory performance ratings in the traditional Facility Based Assessment Areas as indicated in the same table. 

Far from demonstrating that banks are not meeting the need for credit services in their ORLA, the grossly distorted failure rate shows how meaningless and misleading analyzing CRA performance in an ORLA can be.

Not only is analysis of a bank’s lending in remote markets questionable because of a lack of statistically significant loan volume by a distant lender in potentially many “component geographic areas” it also does not reflect the significant disadvantages in situations where a bank extends a handful of loans in a market remote to any of the bank’s facilities. 

In those situations, local lenders enjoy significant competitive advantages that can distort comparisons for which the “tailored” calibrated benchmarks aren’t adjusted. For local lenders that market is known as a Facility Based Assessment Area and Table 36 shows that in 60.5% of the FBAAs, lenders were given “high satisfactory” or “outstanding” recommended conclusions, more than double the rate for ORLAs. The Lending Test failure rate in the ORLAs was more than 3 times the rate in the FBAAs (28.8% vs 9.6%).

The application of the ORLA concept in the new CRA Rule does not seem reasonable and appears to fail any cost-benefit considerations. The so-called “tailored” benchmarks are not tailored to adjust to the competitive realities in the ORLAs. Moreover, the absence of a minimum lending volume threshold to qualify as an ORLA or “component geographic area” is likely to result in invalid “recommended conclusions” that are a disservice to the banking industry and will create a public and political misconception of how banks are fulfilling their CRA responsibilities.

Examiners may adjust the ORLA recommended performance conclusions in light of “performance context factors”, but the publication of the scoring may confuse the public because the public will see a score that may not coincide with an “assigned conclusion”. 

When banks recognize the impact of the ORLA on their CRA performance it may well cause many lenders to severely reduce their lending outside their FBAAs and their RLAAs. Perhaps this was the intent of the regulators; to force many lenders to concentrate on lending in their FBAAs. But it is likely to make fewer mortgages and small business and small farm loans available in the smaller markets (many rural communities) where there are fewer bank branches to meet the needs of those communities. In other words, the application of the ORLA concept may considerably harm the communities it is intended to help.

It is suggested that regulators reconsider the implementation of the ORLA concept given its failure to recognize in the calibrated benchmarks the disadvantages for competing in markets where a bank has no branches nor significant loan volume and the consequent extremely high failure rates in the ORLA market as reflected in Table 36. If regulators fail to act Congress should take a close look at the new Rule and consider amending the law itself. The original CRA never intended to include every residential closed-end mortgage and every small business loan everywhere in the entire country without regard to a bank’s branch system. The regulators know that, and they enforced the regulation that way since 1977 - until now.