Anyone clarify what the following section of the new FDIC/OCC CRA proposal (which makes the large bank threshold at $1 billion) actually means:

An intermediate small bank would not receive an overall CRA rating of "satisfactory" unless it received a "satisfactory" rating on both the small bank lending test and the community development test

Well, if they ever make up their minds & issue a rule instead of another proposal, this would mean that banks between $250 million & $1 billion would have to pass a newly proposed 'community development test' with at least a satisfactory in order to achieve an overall satisfactory rating. Thus far, I've only skimmed the proposal - got a pesky little HMDA submission to complete...

It sure looks a lot like the OTS regs, which makes them look pretty smart and ahead of the curve. It doesn't give any help to banks greater than $1 billion (especially investment test relief), and that just stinks !

I'm working on submission too Dave, so I'm not deep in the proposal yet, but my guess from an outside position at this point would be that they are proposing to structure it somewhat like the large bank test. You can't score enough points for an outstanding rating if your lending is low-satisfactory. This leans on the value of the lending test being the highest or most important part of the CRA.

But I haven't read it, so that could be pure crap

Depending on their clasification it could be a good thing. I'm completely against each agency having a different defination, which confuses the hell out of everyone. I also would like to see subsidiaries being held to the current standards, without a blanket rule on size.

I don't think the investment test is too hard so I can't chime in there. It's just a mattter of putting together your performance context. If you don't focus on that and don't have the numbers, yup, you're screwed

So Dave, what it means is that if you're an "Intermediate Small Bank" (between $250MM and $1B) you no longer have a service and investment test. You instead have a "Community Development" test that encompases the service and investment tests of the past (in an easier fashion). You have to get a Sat on both lending and CD to get an overall Sat.

I read the proposal this morning and I have to say....YIPPIE!!!! finally a regulatory proposal that isn't written by idi...ummm nevermind I'm glad the OCC finally got involved, and showed that they are once again the toughest, but fairest! agency out there. This proposal isn't an embaresment to the banking community, stays within the spirt of CRA and does not give any regulated bank an unfair advantage over a bank regulated by another agency. Kudo's I can finally write a nice comment

Here's the OCC's draft: Link

Ok, now my questions is this. I was examined a year ago, so probably next in 2006. As I write this, we sit at ~ $920 million. If we go over $1 billion right before next exam, what happens???

Well, CD, in that case, you are going to experience first hand what "it stinks" is.

Dawnie - I am in a Fed member bank. As far as I know,the Fed was not part of this proposal. So much for a level playing field.

They'll come on board Anon. Give them time. The Feds are a pretty good agency as well. They tend to be pretty fair, and considerate of their banks. Where the OCC and the FDIC tread in unison, the Feds will follow. I'd bet money on it.

Dave I haven't scanned that deep, and don't know if it was addressed from my reading, but my guess again (I do that a lot) is that it will follow the same pattern as the old reg, in that you'll need to hit the $1 billion two years running. We'll see, but that makes sense (e gads did I just guess that a regulatory body would make sense?...I've lost all credibility)

And I do see relief in the reg in this proposal. The added and defined "rural" issue will be a benefit to me. I still have no problem with the investment test, as I've stated before, but this will expand the ability to take credit for those on the fence deals that should qualify as CD Lending but don't currently. Add that to your performance context..."We can't find the investments so we put a high focus on CD lending" and you'll ace the tests.

The main thing for us is that we will not have to report our CRA loans if we under $1 billion...is that right? We are just barely over the $250 mm threshold. We have a CRA exam in 2 weeks - think they will be a little more lenient on us since we are going to be going back to a small bank?

Shanon

There is a common misconception that the annual reporting requirement and a CRA exam are one in the same. They are not, they are two seperate functions. Not reporting data once a year does not chage the function of a CRA Examination.

While you may not have to file an annual report, you will still be required to gather and provide examiners with a host of information about your CRA activities for the examination.

If you are an 800 mil bank and not tracking loan activity by tract income classification or what percentage of lending is inside and outside an assessment area, and just waiting for examiners to come in a suprise you with the results of their findings, IMO is not a good thing to do.

Annual reporting is just a small portion of the total CRA process.

Don, are you saying that we should continue to collect information on our CRA small business and small farm loans (just as we do now but for reporting purposes), scrub it, and keep it maintained on our reporting software? I understand that we will still have our CRA activities looked at and I am comfortable with that portion of the exam. We are fairly new to the reporting and geocoding requirements (CRA and HMDA hit only one year apart for us) so that is what my struggle has been. Not having the burden of reporting that information(even if only temporarily) will be a relief to us.

I like the proposal. I think it is reasonable and fair and well thought out.

I just don’t understand why the agencies aren’t working together on this. Fed is not part of this proposal and the OTS has already issued their own new rule.

It doesn’t affect my Bank anyway because we are already well over $2 billion, but I still think the rules—whatever they are—should be the same for everyone.

Here's the 2/25 FRB release:
http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050225/default.htm

I can only speculate on what you should do about data collection under the proposed change. I don't see where it changes a lot, as even a small bank under current regulations is asked to provide a lot of loan information prior to an exam.

Presented with a letter requesting the forwarding of loan information for several years since a last exam, and have to recreate it a couple months befor an exam is a worse nightmare than having to do an annual submission.

I wouldn't go dumping data collection processes until I had a real good understanding it was OK to do so.

Shannon, make no changes until a regulation is final! To do so, as Don mentions, is a huge mistake. You have absolutely no idea when and how this will end up. Today, we keep operating business as usual.

Absolutely ~ I was just thinking about after it's final. I'll visit with FDIC when they here in a couple of weeks for their opinion about what to do once it is final.

I believe the proposed changes are misguided and ineffective. First, the primary criteria that are used to measure bank performance under CRA come from the loan market data reported by reporting lenders. Now if all the lenders under $1 billion don't have to report (at least half the reporting lenders), the only data left would be the data reported by large lenders. This means it would be all but impossible for smaller banks to compare their CRA lending to their peers, unless you're going to take the time to read through many performance evaluations (I know Dawnie does this, but heck, what else are you going to do when half the year is dark 24/7- only kidding Dawnie). This makes your CRA self-assessment more difficult and uncertain. Remember also that the proposed changes don't exempt banks from CRA responsibilities. They just eliminate the reporting requirement and make a token change to the community development requirement. There are software programs available for under $1,000/year that prepare CRA data for submission, so the cost saving can't be that significant, unless you don't intend to monitor your CRA lending anyways.
Good banks recognize that the market data available under CRA and HMDA (you can be as small as $35 million under HMDA and have to report) can help them not only assess their regulatory performance, but also analyze their lending markets in more detail. In 2004, one of our client banks took the time to really study the CRA loan market data report we compiled for them and realized the data showed a significant market opportunity in the form of small loans to small businesses that was being dominated by the mega-lenders. Subsequently they developed and marketed a special program aimed at that market niche. The program has been a great success. Without the complete market data available under CRA they wouldn't have even recognized the opportunity. This is a good example of how CRA can actually help astute bankers. That is not to say that there isn't room for plenty of improvement under CRA. I believe it is a big mistake to eliminate small business loans that have residential real estate as part of their collateral. And there are too many gray areas and inconsistencies. In particular, I believe the community development investment and lending tests need to be reconsidered all together. Back here in Connecticut in 2003 one lender extended 95% of all the community development loans reported by Connecticut based lenders. Half of the Connecticut lenders did not report even one community development loan. Nationally, more than 33% of the 2,103 reporting lenders did not originate even one community development loan in 2003. And, nationally, more than half the lenders reported 2 or fewer community develpment loan that year. There is another danger in relieving so many lenders from reporting. The old adage, "Out of site, out of mind" applies. I've seen too many non-reporting lenders ignore CRA until an exam is scheduled -and then the fire-drill starts. Why have a regulation that expects you to perform, but doesn't require you to report? This approach will only encourage an undisciplined attitude. Eliminate the ambiguities and clarify the definitions would be the easiest and most productive changes the FFIEC should consider.

One other thing I neglected to mention in my previous comments. The proposed changes incorporate entirely new issues into the CRA performance rating. See "Effect of Certain Credit Practices on CRA Evaluations" section of the proposal. This is the "camel's nose under the tent". Note that it is hidden in the very last section before the requests for comments section. It seems to me that bankers in their rush to be exempted from reporting under CRA may overlook this other potential briar patch tucked in the back end of the proposal.

LenS:

Amen and well said !

Well I'll heartedly disagree with Len on this one. I believe that as usual the OCC actually took a look at the market and made a reasonable decision instead of shooting from the hip as other agencies have done in past attempts to revise CRA. The issue with rural lending and areas of disaster is highly thought out, verses the general statements that shot fear in the hearts of both community groups and banks alike that was produced by the FDIC. The additional tests for midsized banks also is well thought out. They aren’t going to stop reporting, they’ll just have a different focus, and frankly, for those of us who are large banks, they won’t muss up the works when it comes to CD investments in tight communities. So often these banks have one officer, who handles CRA and 300 other regulations and is expected to produce the same level of CRA data as BofA. It’s a leveling of the playing field, with bank size taken into the consideration. It doesn’t take away the focus, it just changes it somewhat depending on the banks size.

There is data out there, and it's valuable. CRA examinations are one source, and despite a misconception that I'm the only bank reading them, there are others. Any smart CRA officer will be reviewing the exams of the other banks in their market. Developing a performance context without a scan of these is a waste of time. Why do I look at so many? Because I need to in order to develop my performance context in regards to CD Lending and Investments. I have a unique challenge and I rise to the occasion to meet it by reviewing the data available to me. Other banks can do the same quite easily and should. If a bank is uncertain, it's not due to a lack of information. It'd due to a lack of homework.

I don't need a study to tell me that in my market I need to provide certain products. What I need to do is actually spend time in my market and listen to the community needs. Sure pulling some hard data is helpful, but a compilation of small bank's data isn't going to be the answer. It does not take a rocket scientist to know that American Express is working a full court press in your small business community, or to see that the local CU has hired some of the top guns in commercial banking in town. What does this mean? That someone's discovered an opportunity, and is planning an attack. To combat that, I keep my ear to the ground and plan the counter attack. I also talk with my business community about their needs. A market study produced out of Cleveland isn't going to tell me what we need to be doing in Bethel. While it might be helpful if I don't have the time to commit to that market, if I'm actually taking the time, my footwork is always going to be a bigger value to the bank than outside studies. And before you consultants all freak out, I see value in your services. I see lots of value, but nothing can beat me on the streets of my community. If I don't want to take the time to do that work, than your services can be helpful, but I'd never say they could be more valuable than someone who lives and breaths in their own market can be.

I develop products and services on a regular basis, and tweak those I offer based on this approach. Again, I don't need small bank data to tell me that I need to do this. As a leader in the market, what is a tiny bank in a local community going to do to surprise me that I won't hear of on the street? Probably not much.

Quote:

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Back here in Connecticut in 2003 one lender extended 95% of all the community development loans reported by Connecticut based lenders. Half of the Connecticut lenders did not report even one community development loan. Nationally, more than 33% of the 2,103 reporting lenders did not originate even one community development loan in 2003.

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Well they didn't report it on the LR anyhoo. Does this mean they're not doing CD lending? Or does it mean that many are small and are happy with a satisfactory examination so they don't take the time to dig through their portfolio and report the deals? Are banks out there really that stingy with their CD money? Or are they meeting the needs of their communities and just not spending the time to mine their portfolios for CD value by February 28th? I do read a lot of exams, and while I don't compare their content to the LR's I don't see many large banks that aren't reporting some CD lending at exam time. A couple local banks here don't report squat for CD lending on their LR's, but they're building right next to my bank in the communities in need, and at exam time, they do point this out. I reported 52 loans at $110 Million on this particular LR. I mined the portfolio and found the gold, but the figure I reported won't be the actual figure I submit at exam time, and the way exams are structured, there really isn't any way to compare LR submitted data with exam submitted data. I'll have more deals when I have time to wander through the type 9's, and some of the deals reported on the LR will not make it to exam because they were used in a previous exam that covered part of the last year's data. With this in mind, I take a VERY cursory look at the figures submitted, but base nothing on them, because I know how fluid they really are.

That final issue, the "other" factors that can influence our exam outcome...how is that a bad thing? We should not be able to fail a fair lending exam and receive an Outstanding. We should not be given an outstanding while at the same time being a predatory lender. These are contrary to the very core of CRA and being rewarded on one side while we rape and pillage on the other is not right. A good lender won't have a problem with that camel sniffing under the tent. We'll open up the flaps and let them come right in and see what we've got going. A lender with something to hide...well yes, I can see it might cause a problem, but kudos for the regulators suggesting this should come to light!

Well, my take on this is still almost exactly what it was when I submitted comments to the FDIC: (as follows)

My letter is not going to be the form letter that is flooding your postal box and e-mail inbox. While I support the proposed changes to CRA, I feel that using asset size of a bank once again misses the mark in fulfilling the intent of the Community Reinvestment Act.

I have never been CRA Officer as a "small bank", so I am not sure what relief I would experience under a small bank test, but as a $900 million + community bank, I would think by our next exam, we will be $1 Billion and I will see no change at all if the change is made.

I recently attended the EGRPRA meeting in Chicago and spoke my mind there, stating that I believe that the distinction should be made by the nature of the bank (and perhaps the size of branch network), not by asset size. Whether it be broken down by urban, rural, agricultural, etc., there must be a better way.

Assuming we go over $1 Billion in assets, frankly, we are still a small community bank, serving a very small geographical area, with 7 locations, which just happen to be in a fairly affluent region. We don't have low-moderate income tracts in our AA - we have very few middle income tracts. We have a family-owned bank who are as philanthropic as they come, pouring hundreds of thousands of dollars annually into our community, many of those dollars benefiting the small percentage of low-moderate income families living within our boundaries. We also pour money into our schools, our religious and civic organizations, senior centers, athletic programs, etc.

I can proudly state that my employer is the largest business contributor to our community by far, and has consequently earned a place in the heart of the residents and businesses who live in this community.

At no fault of our own, there is just not a whole lot of opportunity for community development lending or investing in our AA (as defined by the CRA regulations), and what opportunity there is is far and few between and can usually be snapped up by the larger banks. We have employees and managers and Exec VPs and our Chairman volunteering throughout our community; we do an awful lot here and we are proud of that fact.

What bothers me the most is that to try and satisfy the regulations and to come out of an exam with a good rating, I am almost forced to spend my time looking for investment opportunities that may help in our exam, but frankly don't do a thing for our community. I can purchase a CD from Shore Bank in Chicago and get Investment Test credit. I understand the reasoning, but frankly, that doesn't take any innovative thinking and does not directly help my community. I can purchase mortgage-backed securities from ABN AMRO and get investment test credit. Again, not innovative and not directly helping my community.

The name of the regulation is COMMUNITY Reinvestment Act. Every bank operates in a distinctive community. Some banks obviously operate in a wide variety of communities all over the country. That is a difficult one to judge, I give you that. But for true community banks (like the one I am proud to work for), I would desperately like to see some congratulatory handshakes from my examiners (and if you must get quantitative, some good scores) for a consistent job well done within our community

Mega dittos to Dave as well. My bank is also the lead provider of community support in most of the 12 MSAs we have full service operations, as well as 30 other rural communities in Texas. We are less than $4 billion in assets so that averages to less than $500 million per large community served, but the examiners see total asset size and judge as against regional, super-regional and money center banks. And probably just like your bank, we would support our communities in a like manner, whether the CRA existed or not. The CRA has resulted in good, but at what cost to the taxpayer. Like all government mandated programs, businesses don't pay these costs, the public does.
There, I feel better now, so I will get down off my soapbox and hope my next employer doesn't read this.

I am surprised by some of your response Dawnie. The main reason why CRA was changed in 1995 was to remove the "touchy, feely" aspects that made CRA ratings so subjective. Everyone welcomed the more quantitative emphasis which focused on performance context data. A primary element of performance context back here in the East is the loan data reported under CRA and HMDA. And believe me I can tell you stories of bankers who thought they were familiar with their market but were completely surprised by the loan data in certain neighborhoods in their community they thought they knew. It seems to me that many community bankers don't study their markets enough, but operate exclusively on a "feel" for the market. The reported data is very valuable for compliance and market analysis. Moreover, if reported small business lending is the main activity on which your performance is judged, why wouldn't the reported small business loan activity of other lenders in your market be a primary reference point to form an opinion about the market and how well you are servicing it? Certainly there are other local factors that can be introduced into a performance assessment, but the reported loan data has been a primary consideration in the exams I have seen. And, if there are local economic or demographic factors you had better have them documented. Frankly, most bankers with banks under $1 billion don't have enough time to commit to CRA self-assessments that would require the research and depth that you probably practice.
Also, you seem to dismiss the reported CRA community development lending as unreliable, almost irrelevant. Again, based on my observations of many community banks in the East, it is very difficult to generate a qualified community development loan that hasn't already been reported as a small business loan or taken by a mega-lender willing to subsidize the loan rate to the point community lenders can't afford. The low volume of reported community development lending by many smaller lenders is all too believable back here. If anything, I've seen too many instances where a community bank thought it had a community development loan that was disqualified by an examiner. So the community development lending may be overstated if anything. Maybe Alaska is very different or maybe the Northeast is very different.
Dawnie, you have my respect for your knowledge and your willingness to share it with others. The sheer volume and depth of most of your responses is amazing and is a service to many BOL readers. I guess we just have to have a "hearty" disagreement on this. But that's what makes the world go round and makes reading threads all the more interesting.

I have submitted hundreds of CRA submissions of banks located all over the US, and very few have any CD loans to report. I think its a symptom of not enough confidence in the compliance area to define what one is, and no time to research. Its a get it filed and out of my hair thing. It also is we never reported one before, and had no problems so no need to start now.

A few banks, which Dawnie seems to be one, go to great lengths to glean out everything they can find.

The submission is once a year and unfortunately there is a misconception that the submission is what CRA is all about. Because an exam is every several years the tendency is to forget that CRA is a constant gathering and analysis of data all the time. The problem will be that because a submission is no longer required people will think their CRA task are over.

I have been hammering CRA as the best marketing tool banks don't know they have, for years. I agree with Len in that officers feel they know an area and have never looked at the demographics, lending patterns or credit needs. Those that use the data available can absolutely increase market penetration and increase the bottom line. One reason is the folks at the other banks are not looking at the data either. So the one that does has the marketing edge.

IMO this revision just replaces one set of preceived problems for ones that will forth coming.

I would agree with Don's assessment that it's not that banks don't have CD lending, it's that they don't bother searching for the deals. I have unfortunately found, that it's the rare CRA officer who's come out of a lending background. Instead we have marketing people, with no comfort in the files trying to figure out what a lender is saying or where to find the information necessary to complete a write up. Again, as Don mentions, they feel "it hasn't been an issue in the past, so why bother".

I go to great lengths because I need to. A great deal of the development of my performance context centers around the lack of investment opportunities in my market, and our attempts to meet these needs through CD Lending. This is kind of what a CRA officer is for isn't it?

People who think CRA is centered around submission don't get it, and never will, and that might show up in their future exams. Maybe some rating shakeups will be a benefit to the market?

Len, quantitive is great, if you have the numbers to back up your program, but if the performance context as a whole were removed from CRA, many, including my bank, would look particularly bad if numbers were all we went on, despite the fact that we really are pretty outstanding I'm still in favor of some warm and fuzzy wiggle room to reflect a real value that banks bring to the market. If we ever change that, I'd be screaming heebe geebies

We can disagree, because that's the fun of CRA, all that grey matter

Here's the proposed rule's url.

http://www.occ.treas.gov/ftp/release/2005-19a.pdf

Happy reading!! Its only 44 pages which for a change to the CRA is amazingly short.

Where did the links go to the article(s) on the OCC/FDIC rule? It's not in Top Stories, pending proposals... It would be nice to reference.

These hit the FedReg today and it is now for the OCC, FDIC and FRB. Perhaps I fell asleep for a moment but I didn't remember the Fed wanting in on this originally.

Fed Reg 03-11-05

Dumb question; does the proposal apply to or impact banks over $1 Billion?

I haven't finished it yet to know that it does at all. We'll have a webinar on this by Lucy Griffin for those wanting a keener understanding and wanting to comment on it.

Yes it does. The defination of Community Development is being expanded to include rural issues. It could have significant impact for you. (I'm $2billion, and it is significant to my market).

It also changes how the little guys work, which will impact your CD investment opportunities. So one way or another, it will be felt on your doorsteps as well.