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CRA: How Not to Change a Regulation

The proposal, following on the advance notice of proposed rulemaking, is now out. It may look innocuous - at first glance. But look again, carefully. There are traps in here that could result in much more burden. The result is up to you. Your comments are your vote. Get it in.

What stays the same
Much of the existing CRA regulation would not be changed by the proposal. Regulatory issues such as definition of the assessment area are unchanged and the agencies have stated that comments from community groups to the contrary have been unpersuasive. There is also no proposed change to performance context.

The three-test approach for large banks remains untouched and the balance between the three tests is not changed. What could change is some consideration of investments or services but this will most likely be dealt with in the guidance and examiner training.

Similarly, the balance between quantitative and qualitative measures is unchanged. Here, again, the agencies expect to provide additional guidance and training without changing the rule itself.

There is no change to the treatment of loan purchases relative to loan originations, but the agencies are seeking comment on whether to report purchases and originations as separate categories.

Perhaps most significant, the investment test is not going away. The investment test was the brain child of multi-national institutions who wanted credit for investments they made at the request of community groups or in lieu of lending. They wanted more recognition for investments than was given by the old Category L also known as "good guy stuff." The naive request resulted in an investment test for all "large" institutions.

Community groups love the investment test and have argued for its retention. In fact, community groups have argued that investment is an important way of meeting credit needs - not something that was ever thought about by the legislators who dreamed up CRA. So in it stays, in spite of the fact that only two industry commenters supported it this time around.

The service test is also unlikely to undergo official change, but we can expect to see plenty of guidance on it. The service test is still founded on bricks and mortar but now includes many service activities in addition to physical presence.

There is no change to wholesale and limited purpose institutions or to the strategic plan option.

Bigger Small Banks
Under the proposal, a small bank would be any institution having $500 million in assets or less. This effectively doubles the asset size of what is currently a small bank.

And there is an added bonus. The holding company test would be thrown out the window. This means that an otherwise small bank that is part of a holding company of more than $1 billion in assets would still be a small bank. The agencies have been persuaded that the existence of a holding company is not a significant resource for CRA for its small banks.

Warning: this is not a done deal. Your comments on this proposal are critical to making it a reality. And you are also free to ask for a larger size cut-off, such as $1 billion in assets. If you do make such a suggestion, support it with reasons and facts.

Data "Enhancement"
When regulators play something down as a mere enhancement, watch out! What is being presented as a "by the way" enhancement of data collection has enormous ramifications.

The proposal would have the agencies generating the CRA statements by geography for each reporting institution. The reports would show the level of business and small farm lending by census tract - a detail that is of great interest to community groups.

The plans to prepare more detailed data reports will place renewed emphasis on accurate reports. In short, the methods you use to collect and compile the information for CRA data reporting will come under more scrutiny than in the past. And the accuracy of the information will have the potential to help or harm your CRA rating and any relations with community organizations as the "where" of business lending comes under the magnifying glass.

Abusive Lending Practices
No regulatory proposal would be complete these days without some attempt to control or limit abusive lending practices. Every regulatory change is an opportunity for the agencies to make a political statement as well as an opportunity to have an impact on lending practices. CRA is no exception.

Just like a coupon off the purchase price of an item, a discriminatory or abusive lending practice will be a reduction in your CRA rating - right off the top. This shouldn't be a terrific surprise in the current environment of concerns about predatory lending. The significant factor in this proposal is that the CRA regulation is being used to draw together a litany of protections against predatory lending from other existing regulations. In short, CRA becomes the repository for much more than helping to meet credit needs. The proposal specifically lists the discrimination prohibitions of ECOA and the Fair Housing Act, but also leaves open discrimination that violates any other law. There is a specific reference to violations of HOEPA so that failures to capture and disclose high cost mortgages would lower the CRA rating.

HOEPA isn't the only target here. The proposed rule also specifically refers to violations of Truth in Lending rescission rules, the entire Real Estate Settlement Procedures Act, and the FTC Act prohibiting unfair and deceptive trade practices. In effect, almost all lending-related consumer protection laws are being brought into the CRA rating mix.

In addition to technical violations of HOEPA and other regulations, the proposal contains a provision strikingly similar to the OCC's new anti-predatory lending rule. This part of the proposal prohibits lending "based predominantly on the foreclosure or liquidation value of the collateral by the bank, where the borrower cannot be expected to be able to make the payments required under the terms of the loan." As with the OCC rule, this requires lending based on an evaluation of the borrower's ability to repay. The purpose of the rule is to protect the borrower's ownership stake in the property. The presumption is that any lending based solely on the property value may be harmful to the borrower and predatory.

With the CRA proposal and the OCC final rule on predatory lending, financial institutions must give close attention to whether and how they evaluate a consumer's ability to repay - and prove that they did so.

The Federal Register document provides some suggestions. In addition to a clear, documented evaluation of the borrower's income and debt ratios, the discussion would allow consideration of the borrower's credit history. Creditors could also use preexisting customer relationships and other information considered by the institution or an affiliate. What the document does not make clear is whether the lender must consider all of these factors, or whether one or a combination of several would be sufficient.

This raises the question of whether the practice of making loan decisions based on credit score alone will be an acceptable practice or whether the lender must consider other factors to place the score into an ability-to-pay context.

Interesting Trends
For the first time, a CRA proposal consistently refers to rural credit needs as well as urban. This amounts to official recognition that CRA belongs in rural areas and that non-urban banks have an obligation to meet non-urban credit needs.

There is also implicit admission that there is much more room for examiner guidance and training. Even if the regulation is not changed in a way that affects your institution, you may have an influence on how examiners are trained. Your comment letter could even produce examples for use in training.

Comments are your vote and comments are your primary opportunity to influence the outcome. Remember that even what you like in the proposal can change, so you should support it.

Community group commenters have put forward a number of issues. They would like to see examiners evaluate the appropriateness of the credit terms and practices rather than only an assessment of the amount. These groups have also urged that institutions be evaluated everywhere they do business, and not merely in deposit-taking facilities. They would like all components of the holding company - including non-bank affiliates - to be part of the CRA evaluation. They would like more data - much more. And community groups strongly support the investment test. In short, while you may find the proposal acceptable, there are groups out there that will argue the changes should be much more expansive.

The agencies received approximately 400 comments to the ANPR. Keep up with that number. Get your comments in!


  • Be counted. Prepare to write your comment letter.
  • Review the location of your business and small farm loans by income level of the census tract. This information should help you to comment and to prepare for publication of your lending patterns.
  • Once again, look hard at your lending policies and procedures and at your loan products to find any hint of predatory lending.
  • If you are part of a holding company, find out what kinds of lending your affiliates are doing. You don't want to be surprised by their practices.
  • Look carefully at referral practices between affiliates. Make sure that practices include referring qualified customers up to better loan products.

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 1, 2/04

First published on 02/01/2004

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