A midwest community bank client who is about to undergo a CRA PE told me yesterday that she had been asked by examiners whether she wanted to be evaluated under the Large Bank tests or the new ISB standards. She told me in response to the examiner's question that she asked the examiner if they had examined any banks under the new ISB standards since they became effective last month. She was told that one bank had been examined under the new ISB standards. She asked what the overall PE was and she was told the bank received a "needs to improve" rating. She asked why and the examiner told her because the bank did not get a satisfactory on the CD test. She then asked how the bank would have been rated under the old Large Bank standards and was told the bank would have received an overall PE of satisfactory because its loan performance was high satisfactory. The PE is too new and so has not yet been published on the FFIEC website. My client then elected to be evaluated under the Large Bank standards. I have encouraged her to write her experience here on threads and I hope she will soon. But I thought this anecdote would be interesting to BOL readers. Have any other BOL readers been evaluated under the new ISB standards and what have been the results?

I wonder what agency they were examined by? It's very unusual for an examiner to do an exam under new procedures when the bulk of the exam (probably ALL of the exam) fell under old procedures. Were I the other bank, I'd be chatting with the ombudsman for the examining agency. It's not fair to expect them to meet standards that weren't even published as of the date of the exam request (consider if they have a rating now, they had to have been examined at least a month or two ago, with the request letter going out 60 days before that, far before September 1).

It's highly suspect that this is just a wierd rumor, because if the exam isn't public, it's against the rules to discuss the outcome of the exam. I'd guess that the exam will be reviewed in DC and changed due to the above issues, which means, that the bank will get a Sat and none of this will matter. But heck, who knows in the world of examiners

Dawnie, the agency was the Fed and all the agencies appear to be giving banks the choice. I have at least 3 clients undergoing CRA PE's right now and all have been given the option of which standard they would like to be examined under. I agree it seems wierd to be examined under standards that didn't exist during most of the time period under exam, but apparently the agencies think this is acceptable if the bank elects the option. The agencies won't force a bank to be rated under the new ISB standards. As far as the case I outlined, my client told me only a few minutes after she had discussed it with the examiner in charge. The conversation convinced her to opt for the Large Bank standards.

Wow Len, that's absolutely bizzare. More bizzare though that a bank would have prepared for a large bank exam and then chose ISB what the heck were they thinking? (Ok likely they weren't thinking right?) Sounds like a CRA officer who needs to find another occupation

I think they were thinking that the "new flexible" community development test would be to their advantage. But obviously it wasn't. It may be new and flexible but you can't pass without it!

It's only flexible if you prepare for it properly. It sounds like they would have skated by with a low investment and service score, but passed lending just high enough to get to Sat. Lack of documentation kills a lot of bank's ratings, but with the new test, it really will kill those who don't make the effort to cover their behinds It really does come down to a CRA officer not doing their job though, which is unfortunate for the bank involved.

If I were that bank I'd still hope for help from the ombudsman. I'd claim "stupid" on the CRA officer, let them go, and ask for a review under the old test, hoping for that Satisfactory. The choice to go with the ISB test, when the regulation wasn't even clearly defined, was really beyond idiotic.

Bartman - that's very interesting because I've got a client who is regulated by the FDIC and whose CRA PE began this week and the EIC gave her a clear choice, Large Bank or ISB. My client whose assets are about $750 million chose large bank because of concerns about CD activities. I'll try to get more feedback from the CRA officer as well as from other clients who are scheduled for examination. But so far, our FDIC and FRB regulated clients who are undergoing exams right now have all have been given the option of large bank or ISB by their EIC's. Go figure!!

Once again I have to say...I'm so glad I'm not regulated by the FDIC!!! Bartman, call their ombudsman and have a chat. I'd do it sooner rather than later!

As a ISB bank I am curious as to how flexible the CD test will be. We are located primarily in small communities and 1 branch in a large MSA. Not a lot of opportunities in these communities and too small to compete in the MSA. I wonder how long we will have the choice of exams? We are going to be half and half by the time our exam comes around next year.

What do they mean by "flexible"? It's the same Q&A that is years old.

SoccerMom - I believe the option to elect Large Bank PE will remain because it is consistent with the option that has existed since 1995 for small banks to elect to be evaluated as large banks (and some actually do!) and it was written explicitly into the revision. The critical condition however, is the the requirement to file annual CRA data. The relief from filing of course was the big benefit trumpeted for the revision. As Don Narup and I have repeatedly stated, the benefit is neglible because any ISB should continue to maintain a self-assessment process and that requires the collection and maintenance of loan data for evaluation. Even sampling is not a great money or time saver because many ISB's originate so few loans.
One of the big problems with the "pass or else" CD test is the ability to prove what CD opportunities actually exist in an Assessment Area. A CRA officer can never be certain that he/she has really identified the CD market (don't forget too that you're supposed to have the elements of a business plan in your CD program). And don't forget, those new "underserved" tracts are supposed to increase the CD opportunities for rural banks so the expectation of examiners will be higher now that there are more CD qualified tracts for you to conduct CD activities in!!! If you have done very little CD activity how can you really be comfortable that your examiner won't identify opportunities you overlooked and consequently will rate your performance as less than satisfactory? If you have little CD activity you have to prove a negative - i.e., that the market doesn't exist, but you can never really be sure you've covered all your bases. Unless you have really strong CD activity I don't know how you can be certain that your CD activity is going to satisfy your examiner.
Bonnie, your comment is well-taken. In my consulting work with community banks I have seen the CRA officer perform so many other functions that they hardly have time for CRA. Most community bank CRA officers are overwhelmed with multiple responsibilities that leave them inadequate time for CRA. That's why companies like mine and Don's are successful - we give the beleaguered community bank CRA officers some relief and save them lots of time for their other responsibilities.

Soccer, I'd guess that (from conversations with examiners I know) that the choice will continue, but that means data collection must continue for you, which, as you probably know, means expense for the bank. I had a great conversation with an examiner about this very subject (data collection). His thoughts were that if you're dumb enough to waste the time and money...what the heck, it's easier on them than a sampling But they're not going to go fluffy on the CD test for a large bank if that option is selected, which they have done to some extent for "small" large banks in the past. I always joke about having to meet the same standard as BofA, and basically I do, but a bank at $300 million didn't get held to that level even if they were large, but now, they probably should expect it.

So ask yourself, if you're collecting CD data, (which you would do for either ISB or Large Bank Exams) do you want to focus on two pieces of it (Investment and Lending) or do you want three (add in Services)? And then add in reporting

Bonnie I do understand that many banks who were previously large and now are ISB have compliance staff handling many regulations. But if one takes on the responsability, they should understand the reg. To choose to be evaluated under a reg you don't understand, and didn't prepare for is a silly choice and there aren't any excuses that make that anyone's fault other than the person who chose it. It's a lot like the airport controller who says "I didn't have time to watch all the planes so those two crashed". If you're that overworked, that you can't make informed decisions, at some point it becomes a personal issue on your integrity if you choose to ignore some of the "Stuff" on your plate, ie CRA because your plate is full. If you don't speak up and say you can't handle it, who's to blame? As you know, you can always work elsewhere.

There are many great CRA officers and compliance officers who handle all regs (including CRA) at community banks. The one thing they have in common is that they don't dismiss any of their regs as unimportant.

Did anyone sit in on the FDIC Dallas Region Conference call 10-20, topic CRA? It was stated a ISB could choose to be examined as a large bank as long as they did data collection and reporting. It was also stated banks could go back and forth. Don't know who would want to. We may stay a large bank. We somewhat know what to expect as was stated in the conference call.

Data Collection is one of the simplest processes a bank has to do. Its also the least expensive and 98% of it can be done with no duplication of effort.

Compliance officers spend many hours a day and probably worry half the night about "Getting it Right" So psychologically it seems like a huge burden.

I say the burden is not data collection, its the Data Scrubbing that causes the problems. It's data scrubbing that becomes expensive in labor costs due to having untrained people collect the data, management that does not support the CRA requirements, a lack of understanding of the requirements, and other than the CRA officer, not holding other clerical and officer staff responsible for the collection of incorrect data.

Both Data Collection and Data Scrubbing become costly, when the management of an institution decides they will not invest in any automation or tools to make these processes much more effective and efficient. Instead, what an institution winds up with is a hodge podge of homemade spread sheets and jury rigged databases that don't talk to each other, which only increases labor costs and the time to complete the tasks required. Dumping the CRA reporting requirement on an individual, and not provide the support or budget is what costs banks a lot of money unnecessarily.

Granted there is a cost to comply, but the cost, and the time can be greatly reduced. A couple thousand dollars is a small investment to make to save the thousands I have seen wasted in inefficient processes.

So what is the cost of Community Development? Think its less than data collection?

You may be able to count on one hand the number of banks that do not need to include in their Community Assessment Needs Report, low cost housing, economic development, and jobs programs.

Can you honestly say that your bank has a loan product that encourages developers to build low cost housing. If you don't do you have management willing to do so? Do you have a program that reduces rates and requirements, so LMI individuals can afford to buy a low cost home, if they can find one. How many thousands of dollars will an institution loose by providing lower rates, fees and other requirements to provide affordable housing in their community.

"His thoughts were that if you're dumb enough to waste the time and money...

Amazing that someone would even buy into this bit of drivel reportedly supplied by a field examiner. We all know how smart they are. Lets see banks complying with federal regulations are Dumb because the choose to comply.

Dawnie would you confirm that as a direct quote please and provide the name of the examiner that you are reporting as speaking on behalf of the agency they represent. Or is this your interpretation of a comment.

IMO I don't believe ANYONE has even begun to look at the cost associated with Community Development work. So I think its incredible to imply that the cost associated with Community development is less than data collection and reporting.

The cost associated with data collection and reporting is an EXPENSE and tax deductible. The costs of most Community Development loan programs will be a direct Loss to INCOME.

Quote:

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"His thoughts were that if you're dumb enough to waste the time and money...

Amazing that someone would even buy into this bit of drivel reportedly supplied by a field examiner. We all know how smart they are. Lets see banks complying with federal regulations are Dumb because the choose to do so.

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Don I think you misunderstood my comment. The comment was in regards to banks that choose to collect data when they don't have to (due to the regulatory change), not remotely in regards to complying with a stated regulation.

I know we have a difference of opinion here, but there is room for that within the regulation on many issues. I try not to provide "drivel" in my comments. I'm sure you do the same. If we could agree to disagree, verses call each other's comments drivel...I'd really appreciate it!

As to the costs of CD "work"...there are collection costs associated with that as well (data collection and reporting). If you're an ISB you have to take that burden on given the change in the reg. It's not an option to avoid those costs with either the large bank exam or the ISB, but those costs should be limited to the costs of data collection. (IE mining your portfolio for CD deals, handling those write ups, documenting the CD value, documenting opportunity, etc.)

The balance of CD activity though I don't see as a cost. The reg does not require that you give away the bank to meet the goals of CRA. While I might discount a loan product (and that's a might), I'm never doing it for CRA purposes, but instead to attract a client. If it costs me $100 bucks in loan fees to pick up a mortgage I wouldn't have gotten without that discount, it's a cheap $100. That's no different than providing the higher end client with an increased something % on a savings account. We do it to attract and retain that client. That's more about competition than it is giving the bank away to meet any regulation.

Dawnie my drivel comment was to the person that said it. Not your repeat of it.

If an ISB choose to be examined as a large bank, which means they have to comply with regulations, classifying that as dumb is unconscionable.

Picking up a deal here and ther by waiving a few fees is one thing. It's quite another to develop a mtg product that will stimulate growth of affordable housing. Current rates and terms with waiving a few fees is not going to do that.

Most banks have nothing in place that's going to do that. It going to take some creative ability to come up with a program that will. I'm sure that would have to include some rate as well as fee consessions. That going to add up to a lot of dollars.

The CD exam includes how well a bank does in meeting the Community needs. So the product has to work and achieve results in order to pass.

Ok then to be clear...we were not discussing ISB's who choose to be examined as a large bank, but instead ISB's who will be rated under the ISB test.

Shew, glad we cleared that up! heh heh

Summary: Big Bank Test GOOD; ISB Bank Test BAD (Fire BAD too; RIP Phil Hartman)

Ron, I don't know if it's as simple as that. If you're an ISB and you struggle with meeting the numbers for small business and mortgage loans, but you have a good Community Development program, then the ISB test is just the ticket.

The warnings that Len and Don are saying are to those misguided CEO's and CFO's (because they are usually the ones that make the decisions on these issues in smaller banks and NOT the Compliance Officer) that don't have a CLUE about Community Development (they've blown off the many memos from the Compliance Officer and never have time to meet with him or her) and think, somehow, that the ISB exam will be a cakewalk to an easy Satisfactory.

I understand. I was just being flip because I thought this thread was beaten to death.

Ron
I'm sure you are a good guy but please go back to the Cooler and be flip. This is not a Flip forum.

Your intelligent contributions are appreciated.

Just to close the loop -

I spoke yesterday with the examiner who will actually be doing the CRA portion of our exam. One throw-away comment - "let me know if you'd like to be examined as a large bank" caught my attention.

I don't want to say the EIC didn't know what she was talking about during our initial conversation, but I certainly got a different impression after speaking with the person who'll actually do the work.

Bartman - so you are being given the choice of Large Bank or IS Bank like my community bank clients have?