CHEROKEE BANK
October 6, 2004
Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
RE: RIN number 3064-AC50- Proposed Revisions to the Community
Reinvestment Act (CRA)
Dear Mr. Feldman,
Cherokee State Bank (“Bank”), a $243 million bank (state, non-member)
with five branches located in St. Paul, Minnesota, welcomes this
opportunity to comment on the proposal to increase the “small
institution” test for banks under the CRA from $250 million to $1
billion, without regard to holding company affiliation. Four of our
branches are located in urban settings. Our flagship office and one
branch are located in moderate-income census tracts. Another branch
opened in 1994 in a Hispanic market, is located in a low-income census
tract.
We strongly support the FDIC’s proposal to raise the threshold for
the streamlined small bank CRA examination to $1 billion without regard
to the size of the bank’s holding company.
After both the OCC and the Federal Reserve Board withdrew proposed
revisions to CRA, the FDIC’s decision to move forward and propose new
changes could not have been easy. Yet the language in this proposal
clearly indicates the FDIC is trying to find the common ground between
the following forces:
• The concern that the proposal is somehow changing or diluting the
CRA
• The concerns of the community groups that community banks will stop
lending and investing in low/moderate income areas
• The complaints from community bankers regarding an ever-growing
regulatory burden that is helping to accelerate the merger trend
• The challenge of allocating agency resources to cover the more
frequent, time-consuming, and complex large bank CRA exams.
The following is an examination of these forces in relation to the
proposal:
Is the FDIC proposal somehow changing or diluting the CRA with this
proposal?
No. The original intention of CRA was to encourage financial
institutions to help meet the credit needs of their entire communities,
including low- and moderate- income neighborhoods consistent with safe
and sound lending practices. Actually, the proposal increases the
likelihood that a bank, both urban and rural, achieves the goals of CRA.
By re-defining what constitutes a large bank, the FDIC is really saying
it makes no sense to expect a $250 million bank to devote significant
time and efforts to seek loans, investments and services that may meet
the technical definition of community development, but may make no sense
to the community being served. The proposed community development
criterion encompasses both the spirit and intent of the CRA.
Will the proposal encourage community banks to abandon low/moderate
income areas within the communities they serve?
Absolutely not. The assumption by some community groups that
reinvestment in a low and moderate income areas occurs because of CRA
and that the proposed changes to the CRA will cause community banks to
stop lending and serving the credit needs of all members of the
community is incorrect. The CRA did not exist when Cherokee Bank began
lending locally in 1908, sixty-nine years before the CRA was enacted. It
was well understood by the Bank’s founders that the long-term viability
of the bank was directly related to the success of the local community.
The Bank’s philosophy of serving the local community did not change
because of the creation of the CRA in 1977. We are proud of our
ninety-six year tradition of helping all the communities we serve to
grow and prosper. We have always seen our success tied directly to the
success of the communities we serve.
Because a bank is examined using the streamlined CRA exam procedures
does not mean that it is exempt from CRA. Community banks would continue
to be examined to ensure they lend to all segments of their communities,
including low- and moderate-income individuals and neighborhoods. In
that regard nothing would change, but what will change for both the
banks and the examining agencies is the cost and efficiency of the CRA
exam.
By adding the community development criterion, the FDIC’s proposal is
responding to the community groups concerns. Banks would still be
required to help meet the credit needs of their entire communities and
the new community development criterion will be an opportunity for banks
to demonstrate their community development strengths. The flexibility
offered by the community development criterion would be welcomed by
bankers. However, it needs to be designed so that a balance is achieved
between the need of community groups to assess the banks’ community
development successes and the community banks’ need for regulatory
relief.
Will the proposal placate the community bankers that complain of the
regulatory burden?
We find it ironic that community groups seem oblivious to the costs
associated with items like the large bank CRA data collection and
reporting requirements, yet these same groups decry the bank mergers
that eliminate local banks from the community. They want the local
decision makers with a vested interest in the success of the community,
not someone making decisions five states away. Community groups cannot
have it both ways. They are missing the direct connection between the
ability of the community banks to comply with the ever-growing
regulatory burden and competing against the large institutions at the
same time. The large institutions can more effectively manage the
regulatory burden by developing processes and procedures and spreading
the development costs across many banks. Standard forms, centralized
processing and strong internal controls are developed that not only
create additional efficiencies, but result in a uniform, high standard
end product. Community banks, while being held by examiners to the same
high standards for the end product, do not share the luxury of spreading
the costs and creating those same large bank efficiencies. For us, the
implementing and ongoing costs for the regulatory burden come from just
one source, our bottom line. One of the major reasons for the bank
consolidation trend is the inability of community banks to absorb the
costs associated with the ever-growing and complex regulatory burden.
The large bank CRA data collection and reporting requirements are
examples of the ever growing, complex and costly regulatory burden for
“small” community banks.
The community development criterion must be developed and tested so
that it is significantly less burdensome than the large bank data
collection and reporting requirements, otherwise no regulatory relief
for small banks will be achieved under this proposal. Also, we oppose
making the community development criterion a separate test from a bank’s
overall CRA evaluation. Again, our concern is that the regulatory burden
will not be reduced by this proposal, just “replaced”.
Does the proposal make sense for the FDIC as a regulator?
Definitiely. We believe the FDIC, in particular, should have a strong
interest in seeing an increase for what asset size constitutes a large
bank. No other regulatory agency will have as many banks moving past the
existing $250MM threshold to large bank status in the near future. Also,
it must be a continual challenge to not only develop a staff with CRA
expertise, but also meet the maximum time deadlines between CRA exams.
The current timeframe between exams for small banks rated “Satisfactory”
is five years. Currently, the timeframe for large banks rated
“Satisfactory” is two years. Therefore, if the large bank threshold is
not increased, not only will there be more large banks to examine, but
the timeframe between exams for many community banks would decrease from
five years to two years placing additional stress on agency resources.
While current small bank streamlined examination process is much simpler
for examiners, it still accomplishes the goals of the CRA. By not
increasing the threshold more banks will be subject to the more complex
large bank exam. From the risk standpoint, one has to question if
spending numerous hours analyzing complex loan and community data,
preparing core tables and then writing a carefully worded report for a
$250MM community bank is the best use of agency resources. Again, for an
agency that has seen considerable restructuring recently in an effort to
make the best use of available resources, does it make any sense to
complete a large bank CRA exam on a $250MM community bank every two
years? If consensus is not built through the comment letter process, the
deciding factor in the debate to change the large bank threshold may be
the FDIC’s ability to manage the increased number of large bank CRA
exams.
The FDIC proposal to increase the large bank threshold to at least $1
billion without regard to the size of the bank’s holding company is an
example of regulators, financial institutions and community groups
working together to forge a more effective, yet fair, approach to the
goals of the CRA. For both banks and consumer groups, the reduced costs
of regulatory burden will not only assist with the continued viability
of community banks, but also add resources back to the community in the
form of new loans, products and services. For regulators, the proposal
allows them to allocate examination resources to better match risk,
schedules and examiner expertise. And most importantly, for all groups
engaged in the discussion, the proposal ensures that the spirit, intent
and measurable successes of the CRA remain intact.
Thank you for the opportunity to share our views on this important
proposal.
Sincerely,
Heidi R. Gesell
President and CEO
William J. Patient
CRA and Compliance Officer
