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#1481661 - 12/16/10 04:59 PM Still battling with the OCC....
ACBbank Offline
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So after a long and heated "discussion" about loans qualifying as community development loans, we won the battle. However, a new issue has come up.

Given that this is our first exam as an ISB, we didn't have any investments or services. That said our CRA consultant is taking the position that since the bank examined its assessment areas and surrounding communities and determined the best way to serve them was by its SBA Lending, we don't need any investments and services. The OCC disagrees.

I foresee another battle coming and I was wondering if we had a leg to stand on? I read the Q & A from March and it appears it will come down to how someone interprets the guidance.

Any thoughts/opinions or advice?
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#1481668 - 12/16/10 05:08 PM Re: Still battling with the OCC.... ACBbank
bOaty Offline
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None at all?

IMO, I'd be looking for a new consultant.

I talking with examiners from the FDIC, FRB & OCC at a recent roundtable, while they admited an ISB isn't required to have investments, they did not think it would be possible to get a 'Satisfactory' without any. Pair that up with not having any services, I would be quite concerned.

Again, just my opinion.
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#1481718 - 12/16/10 05:49 PM Re: Still battling with the OCC.... bOaty
ACBbank Offline
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Someone said the same thing about the consultant in my previous thread Shasta and in the long run, he was correct. I'm confident in his opinion.

I do share your concern though. If we lose this debate and a NTI was issued, could the OCC actually prevent us from opening additional branches? Would they go that far for a first offense?
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#1482393 - 12/17/10 05:33 PM Re: Still battling with the OCC.... ACBbank
bOaty Offline
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Well, I don't know about that. I think KayBee might have a pretty good idea. Let's wait to see what she has to say.
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#1482613 - 12/17/10 09:14 PM Re: Still battling with the OCC.... bOaty
Len S Offline
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The regulatory agencies have the authority and will use it to stop any branch openings if you don't earn at least a satisfactory rating on your PE. We were asked to help in a situation in which a bank had just become an ISB a few years ago. Their consultant had assured them they would pass their CRA exam. But they failed because of a insufficient CD activity. The FDIC told the bank to withdraw their branch applications immediately. With our assistance the bank was able to earn a satisfactory rating in its next CRA exam two years later. But the halt to branch openings for 2 years was a big shock to the bank.
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#1482617 - 12/17/10 09:21 PM Re: Still battling with the OCC.... Len S
Kathleen O. Blanchard Offline

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I have been through similar experiences to what Len just related with ISBs and needs to improve. It is as bad as an unsatisfactory.

For an ISB, you do not need ALL 3 types of community development but most have at least 2 categories.

Some CD loans
Some services

Most also have some investments, even if they are grants.

I always tell my banks to start getting ready to be an ISB before they are an ISB. Once you are approaching that category, start services and investments.

A lot will hang on what your peer banks in your community that are ISBs are doing. I always do a comparison and cite whether the bank I am working with is as good as or better than competition.
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#1482695 - 12/17/10 11:43 PM Re: Still battling with the OCC.... Kathleen O. Blanchard
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I guess I am naive and have spent too much time at mega banks, but with banks in general being the leaders in their communities in terms of community development and services and philanthropy, I can't imagine a bank not meeting all three tests of the CRA satisfactorily.
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#1482697 - 12/17/10 11:49 PM Re: Still battling with the OCC.... Pale Rider
Kathleen O. Blanchard Offline

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You would be surprised! But, sometimes it is just a matter of not adequately describing their activities.
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#1482733 - 12/18/10 04:57 PM Re: Still battling with the OCC.... Kathleen O. Blanchard
Kathleen O. Blanchard Offline

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Just wanted to add that you are not supposed to be required to have all three types of community activity as an ISB. I still recommend taking a look at what your peer ISB banks in your area are doing.

Then prepare an argument supporting your SBA loans as adequate. If you have quite a few, it may fly. I can see examiners viewing that as an easy way out, not out in the community looking to see what is needed and participating in supporting the community.

If you do sell the SBA loans as adequate CD activity, I would start working on some services and investments/grants for the next go-round.
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#1483565 - 12/21/10 07:00 PM Re: Still battling with the OCC.... Kathleen O. Blanchard
ACBbank Offline
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My FI is actually the number two SBA Lending FI in our MSA (second only to Citi) and number five in the NY area. Given our size (just over 432 million) I'm trying to use that to support my argument. We have actually made minor ground with the OCC since I last posted.

However, we have no investments or services (other than totally free checking). I have thrown that out there, but all of our branch locations are near middle/upper income areas. I donít know if the OCC will pick up on that though.

You're correct Kaybee this should have been addressed prior to the Examination. Nevertheless, I was made the CRA Officer two weeks (I'm a BSA/AML guy) prior to the OCC showing up, so it has been somewhat of a fire drill.
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#1483571 - 12/21/10 07:07 PM Re: Still battling with the OCC.... ACBbank
Kathleen O. Blanchard Offline

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What fun. I wondered why all of a sudden you were posting about CRA! So no board members or senior management or anyone at all on the boards of any non-profits?
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#1483596 - 12/21/10 07:26 PM Re: Still battling with the OCC.... Kathleen O. Blanchard
ACBbank Offline
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Yea, I usually stick to the BSA/AML forum. At least I know what I'm talking about when I post there.

None. I already asked Management to contact the board about this and I was told there was nothing I could use.
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#1483719 - 12/21/10 09:08 PM Re: Still battling with the OCC.... ACBbank
Karen Tucker Offline
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ß __.26(c) Ė 1: How will the community development test be applied flexibly for intermediate small institutions?

A1. Generally, intermediate small institutions engage in a combination of community development loans, qualified investments, and community development services. An institution may not simply ignore one or more of these categories of community development, nor do the regulations prescribe a required threshold for community development loans, qualified investments, and community development services. Instead, based on the institutionís assessment of community development needs in its assessment area(s), it may engage in different categories of community development activities that are responsive to those needs and consistent with the institutionís capacity.
An intermediate small institution has the flexibility to allocate its resources among community development loans, qualified investments, and community development services in amounts that it reasonably determines are most responsive to community development needs and opportunities. Appropriate levels of each of these activities would depend on the capacity and business strategy of the institution, community needs, and number and types of opportunities for community development.

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#1483763 - 12/21/10 09:59 PM Re: Still battling with the OCC.... Karen Tucker
ACBbank Offline
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Consultant brought that exact reference and the OCC disagreed with his reading of it. Big time. The battle will continue.
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"100 victories in 100 battles isnt the most skillful. Subduing the other's military w/o battle is the most skillful." Sun-Tzu

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#1483802 - 12/21/10 11:25 PM Re: Still battling with the OCC.... ACBbank
Len S Offline
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A number of years ago I was told by a high level regulatory agency person that banks under $1 billion generally fulfill their Community Development "investment" responsibility by contributions for qualified purposes. This is particularly true in very competitive areas like NYC area where mega-banks eat up most CD investment opportunities. You don't have any qualified donations at all?
Where are your branches located? Are any in LMI tracts? What percentage are in LMI tracts and what percent of the population in your AA is located within the AA LMI tracts. Under large bank standards the "service" test is heavily weighted toward comparing these two numbers (see OCC Large Bank examination manual). If your comparison looks good I would cite that as supporting your "service" activity (bank services provided through branches in LMI areas are an important community service directed to a targeted population). Include seminars for first time home buyers and for small business persons in your list of community services. Do you support credit counseling services? Do you have a program to help homeowners avoid foreclosure?

Check out any construction financing you provided for small businesses to expand or relocate (SBA 504 loans are great) and which may have provided for job creation or improvement in LMI areas or benefiting primarily LMI persons. I think banks do a lot more CD activity than they recognize and lose credit because they don't capture the information.
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#1487357 - 12/30/10 03:38 PM Re: Still battling with the OCC.... Len S
ACBbank Offline
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Once again, the OCC is backing off a bit. The consultant really pushed them on their interpretation of 26c and they have agreed to re-open the discussion.

Len, none of our branches are located in LMI tracts. We have seven and are in the process of opening number eight. Our AA includes Queens, Brooklyn and NYC even though we have no branches remotely close to them (Our next branch will be in Queens, but not in a LMI tract). Long Island (Nassau and Suffolk County) has a few LMI areas, but not many. Those we do have are not near any of our branch locations. As I referenced earlier, we are 100% reliant on our SBA Lending, which we are number two in our area (Second only to Citi I believe).

I'm actually working on developing some seminars for homeowners with the lending department, but that won't help me with this examination.
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"100 victories in 100 battles isnt the most skillful. Subduing the other's military w/o battle is the most skillful." Sun-Tzu

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#1487362 - 12/30/10 03:41 PM Re: Still battling with the OCC.... ACBbank
Kathleen O. Blanchard Offline

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Good luck! You sure are learning under fire.
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#1487390 - 12/30/10 04:14 PM Re: Still battling with the OCC.... Kathleen O. Blanchard
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Let me know if you need recommendations for nonprofit partners to work with, we do a little bit of work in your assessment areas.
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#1487435 - 12/30/10 05:23 PM Re: Still battling with the OCC.... Pale Rider
ACBbank Offline
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Pale I would appreciate any advice you have. Please PM me the info. at your convenience.
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"100 victories in 100 battles isnt the most skillful. Subduing the other's military w/o battle is the most skillful." Sun-Tzu

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#1487519 - 12/30/10 06:41 PM Re: Still battling with the OCC.... ACBbank
Len S Offline
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Going back to one of your original comments about your consultant's advice. It seems to me your issue is community development activity (or lack thereof). If your consultant assured you that SBA lending suffices in lieu of your community development responsibilities he was grossly incorrect. SBA lending would help you demonstrate that you have programs that are responsive to community needs, but it is no substitute for your community development responsibilities. Some SBA loans may qualify as CD loans because they may possess the requisite characteristics for "economic development" or "revitalization/stabilization", but SBA loans don't automatically qualify as CD loans. And they certainly don't qualify to offset your CD service and investment responsibilities. If you are big on SBA lending I would start sponsoring seminars featuring SBA personnel explaining to small business owners the benefits of the SBA programs and helping them to qualify for various SBA programs. That would qualify as CD service and it would help you attract more business to the bank too.
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#1490340 - 01/05/11 11:42 PM Re: Still battling with the OCC.... Len S
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Len - where you say "Some SBA loans may qualify as CD loans because they may possess the requisite characteristics for "economic development" or "revitalization/stabilization", but SBA loans don't automatically qualify as CD loans." - I struggle with understanding what I can use and what I cannot. In the CRA Q&A's .12(h)-1: "What are examples of community development loans?" it has a bullet-point "Businesses, in an amount greater than $1 million, when made as part" of the SBA's 504 CDC program. We have several of these loans. Some were for construction, some for expansion, and I have one loan that is the permanent financing of 50% of the construction loan. I had included all of these in my CDL. Are you saying that I need to provide further documentation on these (other than what the SBA CDC provided me?)
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#1490831 - 01/06/11 05:53 PM Re: Still battling with the OCC.... ImGoinNuts
Len S Offline
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Examiners will presume that SBA 504 loans over $1 million meet the definition of economic development because by their nature 504 loans are financing business expansion (if your an ISB you also can get credit for loans under $1 million). However, the 7A loans are frequently for working capital and other reasons that would not qualify. So you will need documentation for any 7A loans that may qualify. BTW, you can get credit for the construction loan for a project that qualifies (economic development or revitalization/stabilization). The 504 program opens some nifty opportunities because usually your bank will be financing not only its share of the permanent financing, but you also may be temporarily financing the CDC part of the deal until the construction phase is completed. That would be a qualified community development loan too.
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#1490977 - 01/06/11 07:41 PM Re: Still battling with the OCC.... Len S
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Fabulous - that is the direction I was going but started second-guessing myself. Thank you!
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#1491321 - 01/07/11 03:04 PM Re: Still battling with the OCC.... ImGoinNuts
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Len, I should have been more specific. This is my first time running CRA for an ISB, but the majority of our loans are SBA 504. The 7A loans were in fact documented and we presented write ups on how they created permanent jobs in the LMI area.

Again, I'm very confident in our consultant. We have actually made some progress with the OCC. Time will tell on the rating though.
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#1494160 - 01/12/11 07:30 PM Re: Still battling with the OCC.... Pale Rider
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While the community development test of the ISB CRA exam includes a bank's performance in community development lending, services and investments, those three categories are not individual tests themselves. The bank's performance over all three areas is considered when arriving at a CD rating. There isn't a separate rating for CD lending, CD services and CD investments. There's just a CD rating.

As pointed out by Pale Rider, section 26(c) discusses how flexibly the CD test will be applied. While it says banks may not simply ignore one or more of these categories of community development, it also says, based on the institutionís assessment of community development needs in its assessment area(s), it may engage in different categories of community development activities that are responsive to those needs and consistent with the institutionís capacity, etc.

As an examiner, I generally agree that having nothing in two of the three categories may be a problem, at least on the surface. What would lead me to conclude otherwise is a needs assessment by the bank. If a bank was vested in just one of the CD areas to the exclusion of the other two, a case could be made that it didn't ignore the other two as they were considered in the needs assessment. It could be that the bank just made a business decision on how it could best serve the AA based on the needs assessment that shows that the other two areas aren't as critical a need as the one area in which the bank is invested. MIS and analysis would be important here to generate reports that show the level of activity in the one CD category chosen, and the impact that CD activity has had on the AA.

What this boils down to is the age-old concept of performance context. Performance context is just as important today in CRA as it was when it was introduced back in 1995. So, if a bank can demonstrate from a needs assessment why it has nothing in two of the CD categories, I would be more open to that than in the case of a bank that did no needs assessment and just finds itself invested in one of the three CD categories.

So, my message is, develop your performance context to explain your performance to your examiner. If you don't, they'll do it themselves, but who knows your story better than you? Give it a try, if you haven't already.

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