Federal Deposit
Insurance Corporation

FEDERAL REGULATORY & HOUSING POLICY AREA
DAVID A. CROWE
Senior Staff Vice President
1201 15th Street, NW • Washington, DC 20005-2800

October 19, 2004

Mr. Robert E. Feldman Executive Secretary
Attention: Comments/OES
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429

RE: RIN 3064-AC50 Community Reinvestment Notice of Proposed Rulemaking 69 FR 161 (August 20, 2004)

Dear Mr. Feldman:

On behalf of the 215,000 member firms of the National Association of Home Builders (NAHB), I appreciate the opportunity to respond to the Federal Deposit Insurance Corporation’s (FDIC) request for comment on proposed revisions (Proposal) to Community Reinvestment Act (CRA) regulations for financial institutions whose primary federal regulator is the FDIC. The Proposal is based in part on an interagency review by the FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision (the Agencies) on whether the CRA regulations remain contemporary with the evolution of the financial services marketplace.

The specific changes to the CRA regulations the FDIC has proposed would: (a) change the definition of “small bank” to raise the asset size limit from $250 million to $1 billion, regardless of holding company affiliation; (b) add a community development activity criterion to the streamlined evaluation method for small banks with assets greater than $250 million and up to $1 billion; and, (c) expand the definition of “community development” to encompass a broader range of activities in rural areas.

NAHB Policy on CRA
NAHB strongly supports the goal of the CRA, which is to encourage federally insured banks and thrifts to help meet the credit needs of their entire communities. Throughout the Agencies’ three-year review of the CRA implementing regulations, NAHB has voiced concern that gaps in the present CRA regulatory framework perpetuate the chronic problem where some socio-economic sectors of the country have less than satisfactory access to the financial services system.

NAHB also has consistently opposed banking agency efforts to impose less rigorous compliance procedures on financial institutions if those procedures result in a de facto diminution in an institution’s obligation to provide basic financial services to those in need.

Small Bank Definition
NAHB opposes the FDIC’s proposal to change the definition of “small bank” by raising the asset size ceiling to $1 billion. Banks that qualify for the small bank CRA examination face a much less rigorous evaluation than banks that are subject to the large bank examination. Large banks are evaluated on a three-part test of how they lend, invest and provide services in their communities.

The lending component of the large bank test rates the bank’s CRA compliance for each type of loan product offered. Factors considered include the distribution of lending activity in the institution’s portfolio across various socio-economic segments and the actual vs. potential loan penetration rate for each loan category. The lending component of the “small” bank CRA test is much less comprehensive because it merely evaluates the bank’s total loan-to-deposit ratio, and the proportion of loans made within, or outside of the bank’s assessment area. Small banks also are spared the community service and investment tests bigger banks must pass.

NAHB believes that by quadrupling the asset-size criteria to qualify for the small-bank CRA exam, the FDIC’s Proposal would result in an excessive reduction in the level of scrutiny for CRA compliance for an expanded range of financial institutions. This, in turn, reduces the level of accountability and incentive for those institutions to meet or exceed their CRA obligations.

NAHB does not refute that financial institutions are subject to a wide array of regulatory reporting and recordkeeping requirements. NAHB is also aware that some financial institutions assert challenges in extending credit at reasonable terms in areas where it is difficult to justify a fixed-cost investment. Nevertheless, we believe myriad alternatives exist to relieve financial institutions of their administrative burdens without retarding the flow of financial services to areas that would otherwise be neglected were it not for the regulatory requirements of the CRA.

Therefore, NAHB suggests that the FDIC review the onus of an institution’s CRA obligations within the greater context of the Agencies’ regulatory review pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). We believe the interagency EGRPRA review is a more appropriate forum, not only because it facilitates a comprehensive cost/benefit analysis of all compliance requirements, but also because it minimizes the opportunity for financial institutions to engage in regulatory arbitrage. NAHB strongly discourages the FDIC, or any federal regulatory agency, from taking action that would result in an institution’s community reinvestment obligations being determined by its charter type.

Community Development Lending, Investment and Service Activities
NAHB appreciates the FDIC’s attempt to expand the reach of CRA’s benefits by permitting activities in rural areas to qualify for CRA credit. The FDIC’s proposed modification to the community development definition is a welcome adjustment that simultaneously assists financial institutions in meeting their CRA obligations and adds a new class of beneficiaries. NAHB members can attest first-hand that many rural communities continue to be overlooked and do not receive adequate levels of financial services.

Current regulations permit financial institutions to receive CRA credit only for activities in low- or moderate-income geographies. NAHB has long held that this income-specific measure for whether a particular community merits targeting for CRA purposes precludes the use of other equally valid benchmarks for defining underserved areas. Under the FDIC’s proposal, many projects intended to revitalize or stabilize rural communities would receive the CRA credit they deserve. However, NAHB cautions that the proposed definition of rural activities is too broad and would benefit from further refinement. As currently proposed, any community development activities in rural areas – regardless of scope or populations served – would count towards an institution’s CRA obligation.

NAHB requests that the Proposal be refined to better focus this provision so that financial institutions will gear their activities towards underserved segments of rural areas. A possible revision would be to give higher credit for activities directed towards low- and moderate-income families, and lower credit for other activities. NAHB believes this change comports more closely to the statutory intent of CRA to require banks to engage in activities that benefit low- and moderate-income families.

Assessment Areas
NAHB also believes that the Proposal does not address the systemic flaw that presently exists in defining an institution’s assessment area for CRA purposes. Currently, an individual institution is permitted to define its own assessment areas and, even though institutions are not permitted to arbitrarily exclude low- or moderate-income communities from their assessment areas, the very real possibility exists that some underserved areas are not included in any financial institution’s assessment areas.

NAHB members cite recent instances where several banks in proximity to an underserved community declined to finance proposed housing projects because that community was not considered to be in their CRA assessment areas. This anecdotal evidence suggests that many segments of this country have not benefited from advances in the operational, competitive, and legal structure of the financial services sector. NAHB requests that the FDIC, in concert with the other federal banking agencies, address this situation by overlaying the assessment areas of all financial institutions in order to ensure that no geographic segments are excluded from the consolidated CRA assessment area of the entire financial services system. NAHB further suggests that the FDIC amend the Proposal so that there are incentives for financial institutions to define their assessment areas in a manner representative of the locations of business and household customers in nearby geographic areas consisting of rural and other underserved areas.

In the interagency Notice of Proposed Rulemaking published in the Federal Register on February 6, 2004, the Agencies expressed a commitment to issue clarifying guidance on when community development activities outside of assessment areas will be weighted as heavily as activities inside of assessment areas. NAHB appreciates the efforts of the Agencies to encourage financial institutions to look beyond their CRA assessment areas for lending and investment opportunities. NAHB requests that the Agencies clarify this issue in a way that provides meaningful incentives for financial institutions to serve rural and other underserved areas.

Conclusion
NAHB endorses efforts to ensure that the CRA implementing regulations continue to channel the resources of financial institutions to underserved areas. NAHB hopes that you will adopt our recommendations to enhance the Proposal. Thank you again for the opportunity to comment. NAHB is available to answer any questions you may have concerning this statement or to provide any additional information that may be needed.

Sincerely,
David A. Crowe
Senior Staff Vice President
Federal Regulatory and Housing Policy