Federal Deposit
Insurance Corporation

Local Initiatives Support Corporation

October 20, 2004

Mr. Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th St. NW
Washington DC 20429

RE: RIN 3064-AC50

Dear Mr. Feldman:

Local Initiatives Support Corporation (LISC) opposes the proposed rule to limit Community Reinvestment Act (CRA) examinations for banks with assets between $250 million and $1 billion. These mid-sized banks play significant roles, and we are concerned that the proposed change would curtail the private capital that is critical to revitalize low-income communities. Moreover, we are concerned that by limiting full CRA exams to a small minority of banks – only 4% of FDIC supervised banks – the proposed rule will weaken CRA overall. Finally, we encourage the Federal Deposit Insurance Corporation (FDIC) to find consensus with the other federal banking regulators in CRA rulemaking, as it has done until this proposed rule.

LISC helps neighbors build communities. In almost 25 years, LISC has mobilized approximately $5 billion from private sources to revitalize low-income urban, rural, and suburban communities. We have used these funds to help nonprofit low-income community development corporations (CDCs) to build 150,000 homes and 22 million square feet of economic development facilities. In addition to the CDCs, we work with numerous banks, as well as other corporations, foundations, and government at all levels. LISC operates through 35 local offices nationwide.

We have seen first hand how CRA has played an essential and constructive role in community development. A basic principle of CRA is that all banks share an affirmative obligation to help meet the needs of the low-income parts of the communities where they do business. Each bank is more willing and able to do its part if it knows that other banks will be doing theirs. We are concerned that this principle will be compromised if the FDIC adopts its proposed rule, since only four percent of FDIC-regulated banks would still be subject to full CRA examination. These remaining banks could no longer be confident that other banks will join them in reinvesting.

Moreover, we are concerned that adoption of the proposal would cause larger banks to seek relief from CRA, on the basis that only a small minority of banks must bear the industry’s responsibilities for reinvestment.

We believe that the proposed limited CRA examination would provide significantly less motivation for banks with assets between $250 million and $1 billion to reinvest in low-income communities. Most fundamentally, these mid-sized banks would no longer assemble and analyze data, and FDIC staff would assume this entire responsibility. It is unrealistic to expect the examiners to handle this additional work for so many more banks and still conduct a thorough examination. The result will be a less meaningful CRA, and we are concerned that will in turn diminish reinvestment activity.

Mid-sized banks play important roles in communities. In many communities they are the only local banks; the larger banks are based elsewhere and may be less responsive to local needs. Since many larger banks have standardized product lines, communities often rely on mid-sized local banks to respond to local needs. For example, larger banks may not make smaller community development loans, participate in lending consortia, or provide construction financing on a modest-sized multifamily rental housing development. While this issue is especially acute for rural areas and small towns, especially since the CRA exam for larger banks often overlooks activities there, it also has relevance to urban and suburban areas.

We believe the proposed limited CRA examination is too narrow in scope for mid-sized banks.

• Their examination would no longer cover basic banking services, such as branch locations and deposit accounts, an important aspect of how banks serve low-income people and communities.

• Further, while we do appreciate the FDIC’s desire to retain consideration of community development, we do not believe that the FDIC’s specific proposal to add a community development factor to various lending elements would be effective, and in its current design it could inadvertently weaken CRA.

o First, community development activities are essentially different from more standardized and higher volume home mortgage and small business lending, so they should be considered separately. Community development activities may not generate as much volume as home mortgage and small business lending, and they often require more time to structure. But community development activities are often essential to address critical needs, and can add value disproportionate to their size. These considerations are likely to get lost if community development is just one of several, primarily quantitative lending factors. LISC has long advocated a separate community development test that combines special lending and investments.

o Second, a bank could satisfy the proposed community development factor without ever making a loan or investment, as long as it provides some service, such as providing advice to a nonprofit organization. Such services are useful complements to lending and investments, but they are no substitute for financing. We oppose the proposed approach.

o Third, we disagree with the FDIC’s proposed new definition of rural community development, because it would include activities without regard to whether they benefit low-income people or low-income areas. We recognize that current definitions may not fully reflect community distress, especially for some rural areas, but the focus should continue to be on low-income areas and people. To count for CRA purposes virtually any activity in any rural area would make the community development factor meaningless. Moreover, by recognizing activities that do not address low-income needs, this factor would only serve to dilute the consideration of other activities that do serve low-income people and areas.

In sum, such a narrow and poorly designed community development review would unintentionally weaken CRA.

This concludes our comments. We would be happy to provide further information upon request.

Sincerely,

Benson F. Roberts
Senior Vice President for
Policy and Program Development