Federal Deposit
Insurance Corporation

September 20, 2004

Mr. Robert E. Feldman Executive Secretary
Attn.: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW Washington, D.C. 20429

RE: RIN 3064-AC50 -- Comments to Proposed Revisions to Community Redevelopment Act Examination Regulations.

Dear Mr. Feldman:

On behalf of the Attorney General for the State of California, I am writing to urge the Federal Deposit Insurance Corporation (the "FDIC") not to adopt its proposed revisions to its Community Reinvestment Act (the "CRA") regulations. The CRA is the primary law that requires FDIC-insured banks to serve the needs of low-, and moderate-income communities. It has therefore been crucial to improving the lives of those who inhabit the poorest California communities by increasing the stock of low-income rental housing, increasing home and small business ownership, and encouraging economic development. I am concerned about the FDIC's proposed revisions primarily because they will reduce the banks' obligations to serve such needs and adversely impact minority, immigrant, rural, and other communities most in need of affordable credit and community development services.

The FDIC's proposal will severely dilute the CRA's effectiveness by vastly reducing the number of banks in California that must demonstrate meaningful investment in communities of need. By enlarging the definition of "small" bank to include banks with assets between $250 million and $1 billion, without regard to holding company affiliation, FDIC-insured banks will only be subject to a limited CRA examination -- and no longer be accountable in any significant manner for complying with the CRA, especially in the areas of investment and service. These banks will also no longer be required to collect most data in the investment and service areas, nor will they be required to annually report small business and farm loan data, community development loan data, and home mortgage loan data.

In lieu of a CRA examination of investment and service activities, the FDIC proposes to examine these banks on community development lending, investment or services. This proposal is inadequate because banks will only be examined in one additional, small subset of investment and service activities. In addition, this proposal will allow banks in rural communities to demonstrate compliance by providing community development loans, investments, or services to any individual, regardless of his or her income or need -- thus repealing a long time requirement that, in order to rate well on their CRA performances, banks must address the community development needs of the poorest and neediest rural communities.

According to the FDIC Statistics on Depository Institutions Database (3/31/2004), this new "small bank" definition will most severely impact California's rural populations. The number of state-chartered, FDIC insured banks in rural California that will be exempt from the more meaningful CRA examination requirements will increase by 33%, for a total of 89% of such banks. Furthermore, in urban California, the number of such banks entitled to the exemption will increase 25%, up to a total of 84% of state-chartered, FDIC insured banks.

By cutting the majority of investment and service information upon which such banks are examined, the following information will no longer be taken into account by the FDIC in rating the community reinvestment performance of these institutions:

• Amount and number of small business or farm loans by census tract or revenue size of the small business borrowers;
• Loans and investments in homeownership, affordable rental housing, health clinics, community services targeted to low- and moderate-income individuals, and economic development projects, especially in rural areas;
• The institution's branch distribution among communities of different income levels; and
• The institution's record of opening and closing branches, particularly in low- and moderate-income communities.

Moreover, removing the $1 billion holding company threshold from the definition of small bank will create a potential loophole for large holding companies to exploit when trying to evade CRA compliance. This change raises the possibility that large holding companies will reform their banking subsidiaries as a series of local "small banks" to avoid the investment and service tests.

Overall, the FDIC's proposal will hinder, rather than further, the CRA's statutory purpose of obligating banks to meet the community development and credit needs of the communities in which they are chartered. This proposal will most likely cause state-chartered, FDIC-insured banks in California to dramatically reduce services desperately needed by many rural, immigrant, minority, and low- and moderate-income communities, including loans and investments in homeownership, small businesses, small farms, affordable rental housing, health clinics, community centers, and economic development projects. I therefore urge the FDIC not to adopt the proposed revisions to its CRA examination regulations.

Sincerely,

NINI REDWAY
Special Assistant Attorney General