CRA Developments

The mountain may be moving just a little bit. The three bank regulatory agencies (yes, even the Federal Reserve Board) have published proposed revisions to the CRA regulations. The comment period is set for 60 days from the date of publication in the Federal Register. The FDIC and OCC published a joint document. The FRB's proposal followed a few days later under separate cover.

There are several items in the proposal aimed at providing some relief for smaller banks that are too large to fit within the small bank definition. The smaller large banks have raised serious concerns about their ability to meet the community investment test. The agencies have proposed several techniques for easing this pain, including creating a new category of intermediate small banks and making adjustments to the investment test.

"Intermediate Small Banks"
Perhaps the most significant feature of the latest proposal is the idea of creating a new category of banks for purposes of CRA evaluations. This is a proposal only and nothing is yet guaranteed. However, the agencies would consider creating the category of intermediate small bank to include banks having between $250 million and $1 billion in assets.

The creation of such a category will be accompanied by significant controversy. On the one hand, most financial institutions in that size category - and larger - have encountered serious difficulties in meeting the investment test. There may be limited investment opportunities for many institutions in that size category because of their assessment area needs. In addition, when investment opportunities occur, these institutions often find themselves losing the bid to larger institutions that can afford to undercut them.

On the other hand, there are a significant number of banks in this size category. Consumer advocacy groups will not easily accept what they consider to be the loss of so many institutions. To prevent what they perceive as a loss, they are raising arguments that the community investment test has resulted in important investments without which communities would suffer. What they have not done is make the connection between needed investments and banks in this size category.

A Two-Part Test
Creating the intermediate bank category would be accompanied by a test based largely on lending but with the additional consideration of services and investment as a combined category. Institutions in this category would have the ability to choose how their resources are directed, but would also have to support the decision.

Intermediate banks would be subject to the lending test as are small banks. However, they would also face a community development test. The community development test is a flexible merger of service, community development lending and investments. The institution would have a choice in how it places emphasis.

An interesting aspect of the proposed new approach is that, to a limited extent, it brings process back into the formula. Community development would get new attention and possibly a new definition. The term "development" is used instead of service or investment. While intended to encompass both, it also brings a possible new meaning.

The focus of CRA has been locked onto the income of the recipients or beneficiaries of a loan, service, or investment. Examiners have refused to consider an investment unless the institution can demonstrate that the loan, investment or service continues to benefit low- or moderate-income population for the term of the loan, investment or service.

With the term development, the door may be opened slightly to improvements in income or economic circumstances. The concept of development is change or growth. Community development implies that the starting point would be low- or moderate-income but that the end result could be bringing that population into a higher income category. This could not only bring consideration to investments that have previously been rejected by examiners, but could bring improvements through change to communities by providing more diversity in financial institution activities.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 3, 3/05