CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2005 No.3 July 28, 2005

Vol 2005 No. 3 July 28, 2005

New CRA exam for "intermediate small banks"

The OCC, Federal Reserve Board, and the FDIC have finalized a compromise Community Reinvestment Act (CRA) rule raising the asset size threshold (from $250 million to $1 billion) that determines a small bank for purposes of evaluation under the CRA. While on its face the rule appears to match the OTS's rule applicable to federal savings institutions, the new rule comes with strings attached.

First, the three agencies did not adopt the OTS's flexible rule applicable to large thrifts (over $1 billion in assets), under which an institution is permitted to count up to 100 percent of its lending activities toward its CRA rating, based on the characteristics of the institution and its business.

Second, the other agencies have created an "intermediate small bank" category for banks with $250 million to $1 billion in assets. 1Banks in this category would be subject to the lending test but not the separate investment and service subtests that large banks (over $1 billion in assets) are under. However, intermediate small banks would also be subject to a new community development test.

In determining a bank's asset size, holding company affiliation is no longer considered. Also, the agencies formalized the position that a bank's CRA rating must take into account any evidence of discrimination or other credit practices that violate other laws, such as the Equal Credit Opportunity Act and the Real Estate Settlement Procedures Act.

Reduced Reporting
One of the more significant improvements of the new rule is that intermediate small banks are not required, as large banks are, to report data on small business, small farm, and community development loans. The agencies found that the costs of the mandatory data collection and reporting by intermediate small banks outweigh the benefits of such reporting.

Also, intermediate small banks would not be required to collect and report information about the location of property securing home loans located outside MSAs and in metropolitan divisions where the bank's home or branch office is located. Note though that banks would still be evaluated for small business, farm, and community development lending under the new test if they constitute major product lines of the bank. 2

Community Development Test
The community development test is to be "applied flexibly to permit a bank to apply its resources strategically to the types of community development activities (loans, investments, and services) that are most responsive to helping to meet community needs, even when those activities are not necessarily innovative, complex, or new." Thus, innovativeness and complexity, which are applied to large banks, will not be applied to intermediate small banks in this new test.

No strict allocations are set as among community development loans, qualified investments, and community development services. Instead, banks are expected to assess and respond to the needs in their communities. Community needs are to be assessed using "information normally used to develop a business plan or identify potential markets and customers," and examiners will consider information from community, government, civic, and other sources. Retail banking services will be incorporated into the community development test rather than evaluated in a separate service test.

Community development definition
The new rule increases the number and kinds of rural tracts in which bank activities are eligible for community development credit, including by adding activities that revitalize or stabilize "distressed or underserved non-metropolitan middle-income geographies." Non-metropolitan refers to an area outside of an MSA. An area is "distressed" based on its rate of poverty, unemployment, and population loss. An area is underserved if it has difficulty meeting essential community needs considering population size, density, and dispersion.

To alleviate the need for banks to screen activities in rural areas for qualifying characteristics, the agencies will publish a list of eligible rural tracts on the Web site of the Federal Financial Institutions Examination Council. 3

Also, bank activities conducted to revitalize or stabilize designated disaster areas (but only during the period of such designation) are eligible for CRA consideration, and "significant weight" will be given to a bank's revitalization activities in such areas if they benefit low- or moderate-income individuals.

Ratings
The new community development test evaluates an intermediate small bank's community development loans, qualified investments, and community development services, and the extent that the bank responds to community development needs. Together, these factors constitute a single rating for community development performance.

Overall CRA ratings for intermediate small banks would be based on ratings for this community development test and the streamlined small bank lending test. The rule states that a bank will be assessed for such activities based on its performance context, namely the bank's capabilities, business strategy, needs of the community, and the number and types of opportunities for community development activities.

Community development test component
Satisfactory: "The bank demonstrates adequate responsiveness to the community development needs of its assessment area(s) or a broader statewide or regional area that includes the bank's assessment area(s) through community development loans, qualified investments, and community development services. The adequacy of the bank's response will depend on its capacity for such community development activities, its assessment area's need for such community development activities, and the availability of such opportunities for community development in the bank's assessment area(s)."

Outstanding: "The bank demonstrates excellent responsiveness to community development needs in its assessment area(s) through community development loans, qualified investments, and community development services, as appropriate, considering the bank's capacity and the need and availability of such opportunities for community development in the bank's assessment area(s)."

Needs to improve or substantial non-compliance: The bank's performance has failed to meet the standards for a "satisfactory" rating.

Overall rating
Satisfactory: An intermediate small bank may not receive an assigned overall rating of "satisfactory" unless it receives a rating of at least "satisfactory" on both the lending test and the community development test.

Outstanding: An intermediate small bank that receives an "outstanding" rating on one test and at least "satisfactory" on the other test may receive an assigned overall rating of "outstanding."

Needs to improve or substantial non-compliance: A small bank may receive a rating of "needs to improve" or "substantial non-compliance" depending on the degree to which its performance has failed to meet the standards for a "satisfactory" rating.

Effect of Certain Credit Practices
The rule formalizes the position that evidence of discrimination or commission of prohibited credit practices would adversely affect a bank's CRA performance. This applies to all banks. By formalizing this principle in the regulation itself, banks may find that they are in greater jeopardy now of receiving unsatisfactory CRA ratings based on non-CRA violations or alleged violations.

The list of violations include discrimination against applicants on a prohibited basis under the Equal Credit Opportunity Act (Regulation B) and Fair Housing Acts (found at 42 U.S.C. 3601 et seq.); violation of section 8 (illegal kickbacks) of the Real Estate Settlement Procedures Act; practices that are subject to a consumer's right of rescission under the Truth in Lending Act (Regulation Z, particularly Section 32 relating to high cost mortgages), and unfair or deceptive credit practices in violation of the Federal Trade Commission Act.

The list is not intended to be exhaustive. Evidence of credit practices in violation of other laws and regulations, including state laws, could also adversely affect a bank's rating. Also, a violation need not be connected to a loan in the bank's assessment area. On the other hand, a violation by a bank's affiliate could affect the bank's rating if the loan was considered in the bank's CRA evaluation, but only if the loan was in the bank's assessment area. The rationale is based on the rule that a bank may not elect to include as part of its CRA evaluation affiliate loans outside the bank's assessment area.

In determining whether such practices will affect a bank's rating, the agencies may consider the nature, extent, and strength of the evidence of the practices, the policies and procedures that the bank or affiliate has in place to prevent the practices, corrective actions (including voluntary corrective action resulting from a self-assessment), and any other relevant information.

Final Notes
The agencies intend to issue interagency CRA guidance and interagency examination procedures some time before September 1st, the effective date of the new rule. Those procedures will pertain only to the community development test applicable to intermediate small banks. Note that intermediate small banks (and small banks as well) retain the option to be examined under the existing large bank test.

If you have any questions, you may direct them to Leland Chan, CBA General Counsel at lchan@calbankers.com.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

[FDIC version of uniform rules]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the joint preamble, the Board of Directors of the Federal Deposit Insurance Corporation amends part 345 of chapter III of title 12 of the Code of Federal Regulations to read as follows:
PART 345-COMMUNITY REINVESTMENT
1. The authority citation for part 345 continues to read as follows:
Authority: 12 U.S.C. 1814-1817, 1819-1820, 1828, 1831u and 2901-2907, 3103-3104, and 3108(a).
2. In § 345.12, revise paragraphs (g)(4) and (u) to read as follows:
§ 345.12 Definitions.
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(g) Community development means:
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(4) Activities that revitalize or stabilize-
(i) Low- or moderate-income geographies;
(ii) Designated disaster areas; or
(iii)Distressed or underserved nonmetropolitan middle-income geographies designated by the Board of Governors of the Federal Reserve System, FDIC, and Office of the Comptroller of the Currency, based on-
(A)Rates of poverty, unemployment, and population loss; or
(B) Population size, density, and dispersion. Activities revitalize and stabilize geographies designated based on population size, density, and dispersion if they help to meet essential community needs, including needs of low- and moderate-income individuals.
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(u) Small bank-(1) Definition. Small bank means a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1 billion. Intermediate small bank means a small bank with assets of at least $250 million as of December 31 of both of the prior two calendar years and less than $1 billion as of December 31 of either of the prior two calendar years.
(2) Adjustment. The dollar figures in paragraph (u)(1) of this section shall be adjusted annually and published by the FDIC, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each twelve-month period ending in November, with rounding to the nearest million.
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3. Revise § 345.26 to read as follows:
§ 345.26 Small bank performance standards.
(a) Performance criteria-(1) Small banks with assets of less than $250 million. The FDIC evaluates the record of a small bank that is not, or that was not during the prior calendar year, an intermediate small bank, of helping to meet the credit needs of its assessment area(s) pursuant to the criteria set forth in paragraph (b) of this section.
(2) Intermediate small banks. The FDIC evaluates the record of a small bank that is, or that was during the prior calendar year, an intermediate small bank, of helping to meet the credit needs of its assessment area(s) pursuant to the criteria set forth in paragraphs (b) and (c) of this section.
(b) Lending test. A small bank's lending performance is evaluated pursuant to the following criteria:
(1) The bank's loan-to-deposit ratio, adjusted for seasonal variation, and, as appropriate, other lending-related activities, such as loan originations for sale to the secondary markets, community development loans, or qualified investments;
(2) The percentage of loans and, as appropriate, other lending-related activities located in the bank's assessment area(s);
(3) The bank's record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and businesses and farms of different sizes;
(4) The geographic distribution of the bank's loans; and
(5) The bank's record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment area(s).
(c) Community development test. An intermediate small bank's community development performance also is evaluated pursuant to the following criteria:
(1) The number and amount of community development loans;
(2) The number and amount of qualified investments;
(3) The extent to which the bank provides community development services; and
(4) The bank's responsiveness through such activities to community development lending, investment, and services needs.
3. Revise § 345.28(c) to read as follows:
§ 345.28 Assigned ratings.
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(c) Effect of evidence of discriminatory or other illegal credit practices. (1) The FDIC's evaluation of a bank's CRA performance is adversely affected by evidence of discriminatory or other illegal credit practices in any geography by the bank or in any assessment area by any affiliate whose loans have been considered as part of the bank's lending performance. In connection with any type of lending activity described in §345.22(a), evidence of discriminatory or other credit practices that violate an applicable law, rule, or regulation includes, but is not limited to:
(i) Discrimination against applicants on a prohibited basis in violation, for example, of the Equal Credit Opportunity Act or the Fair Housing Act;
(ii) Violations of the Home Ownership and Equity Protection Act;
(iii) Violations of section 5 of the Federal Trade Commission Act;
(iv) Violations of section 8 of the Real Estate Settlement Procedures Act; and
(v) Violations of the Truth in Lending Act provisions regarding a consumer's right of rescission.
(2) In determining the effect of evidence of practices described in paragraph (c)(1) of this section on the bank's assigned rating, the FDIC considers the nature, extent, and strength of the evidence of the practices; the policies and procedures that the bank (or affiliate, as applicable) has in place to prevent the practices; any corrective action that the bank (or affiliate, as applicable) has taken or has committed to take, including voluntary corrective action resulting from self-assessment; and any other relevant information.
4. In Appendix A to part 345, revise paragraph (d) to read as follows:
Appendix A to Part 345-Ratings
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(d) Banks evaluated under the small bank performance standards-(1) Lending test ratings.
(i) Eligibility for a satisfactory lending test rating. The FDIC rates a small bank's lending performance "satisfactory" if, in general, the bank demonstrates:
(A) A reasonable loan-to-deposit ratio (considering seasonal variations) given the bank's size, financial condition, the credit needs of its assessment area(s), and taking into account, as appropriate, other lending-related activities such as loan originations for sale to the secondary markets and community development loans and qualified investments;
(B) A majority of its loans and, as appropriate, other lending-related activities, are in its assessment area;
(C) A distribution of loans to and, as appropriate, other lending-related activities for individuals of different income levels (including low- and moderate-income individuals) and businesses and farms of different sizes that is reasonable given the demographics of the bank's assessment area(s);
(D) A record of taking appropriate action, when warranted, in response to written complaints, if any, about the bank's performance in helping to meet the credit needs of its assessment area(s); and
(E) A reasonable geographic distribution of loans given the bank's assessment area(s).
(ii) Eligibility for an "outstanding" lending test rating. A small bank that meets each of the standards for a "satisfactory" rating under this paragraph and exceeds some or all of those standards may warrant consideration for a lending test rating of "outstanding."
(iii) Needs to improve or substantial noncompliance ratings. A small bank may also receive a lending test rating of "needs to improve" or "substantial noncompliance" depending on the degree to which its performance has failed to meet the standard for a "satisfactory" rating.
(2) Community development test ratings for intermediate small banks-(i) Eligibility for a satisfactory community development test rating. The FDIC rates an intermediate small bank's community development performance "satisfactory" if the bank demonstrates adequate responsiveness to the community development needs of its assessment area(s) or a broader statewide or regional area that includes the bank's assessment area(s) through community development loans, qualified investments, and community development services. The adequacy of the bank's response will depend on its capacity for such community development activities, its assessment area's need for such community development activities, and the availability of such opportunities for community development in the bank's assessment area(s).
(ii) Eligibility for an outstanding community development test rating. The FDIC rates an intermediate small bank's community development performance "outstanding" if the bank demonstrates excellent responsiveness to community development needs in its assessment area(s) through community development loans, qualified investments, and community development services, as appropriate, considering the bank's capacity and the need and availability of such opportunities for community development in the bank's assessment area(s).
(iii) Needs to improve or substantial noncompliance ratings. An intermediate small bank may also receive a community development test rating of "needs to improve" or "substantial
noncompliance" depending on the degree to which its performance has failed to meet the standards for a "satisfactory" rating.
(3) Overall rating-(i) Eligibility for a satisfactory overall rating. No intermediate small bank may receive an assigned overall rating of "satisfactory" unless it receives a rating of at least "satisfactory" on both the lending test and the community development test.
(ii) Eligibility for an outstanding overall rating. (A) An intermediate small bank that receives an "outstanding" rating on one test and at least "satisfactory" on the other test may receive an assigned overall rating of "outstanding."
(B) A small bank that is not an intermediate small bank that meets each of the standards for a "satisfactory" rating under the lending test and exceeds some or all of those standards may warrant consideration for an overall rating of "outstanding." In assessing whether a bank's performance is "outstanding," the FDIC considers the extent to which the bank exceeds each of the performance standards for a "satisfactory" rating and its performance in making qualified investments and its performance in providing branches and other services and delivery systems that enhance credit availability in its assessment area(s).
(iii) Needs to improve or substantial noncompliance overall ratings. A small bank may also receive a rating of "needs to improve" or "substantial noncompliance" depending on the degree to which its performance has failed to meet the standards for a "satisfactory" rating.
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