Federal Deposit
Insurance Corporation

WASHINGTON LEGAL FOUNDATION
2009 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
(202) 588-0302

October 20, 2004

Mr. Robert E. Feldman,
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429

Re: RIN Number 3064-AC50; FDIC Proposed Increase in the Threshold for the Small Bank CRA Streamlined Examination, 12 CFR Part 345

Dear Mr. Feldman:

The Washington Legal Foundation (WLF) and WLF's Economic Freedom Law Clinic at George Mason University School of Law (Clinic) hereby submit these comments in general support of the Federal Deposit Insurance Corporation's (FDIC) proposed changes to 12 CFR Part 345 that would increase the asset size limit of banks eligible for the streamlined small-bank Community Reinvestment Act (CRA) examination.

FDIC’s proposed changes to Part 345 would do three things: 1) change the definition of “small bank” to raise the asset size threshold to $1 billion regardless of holding company affiliation; 2) 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 3) expand the definition of “community development” to encompass a broader range of activities in rural areas.

I. Interests of WLF and Clinic

WLF is a national non-profit public interest law and policy center based in Washington, D.C., with supporters nationwide. WLF devotes substantial resources to promoting the free-enterprise system and reducing unnecessary regulatory and costly paperwork burdens on the business community. WLF's Economic Freedom Law Clinic at George Mason University School of Law researches and participates in public interest and regulatory issues, and on occasion submits comments in relevant rulemaking proceedings.

II. Comments of WLF and the Clinic

A. Change in the Definition of “Small Bank”

Under the current CRA regulations, an institution is deemed “large” in a given year if, at the end of both of the previous two years, it had assets of $250 million or more, or if it is affiliated with a holding company with total bank or thrift assets of $1 billion or more. Large institutions are subject to a variety of tests under the CRA, while small institutions are evaluated under a streamlined test that is focused primarily on their lending activities. The test for small institutions takes into account that institutions’ capacities to undertake certain activities, and the burdens of those activities vary by asset size, sometimes disproportionately. The FDIC has wisely proposed to raise the "small bank" threshold for streamlined compliance from $250 million to $1 billion in assets.

WLF strongly supports FDIC’s proposal to lessen the burden on smaller institutions, particularly where small institutions are already overwhelmed with government regulations. In that regard, WLF supports the comments filed by Heritage Bank and others in this proceeding. Because of the nature of their business, small community banks are continually forced to seek out credit opportunities in their communities. The CRA’s current reporting requirements are extremely burdensome for even banks in the $250 million to $1 billion range to comply with, thereby causing these banks to incur large increases in overhead cost. This, in turn, leads to increases in the cost of providing credit to the communities that they serve.

Because more bank resources are spent reporting, less resources are available for developing, educating, and investing in their respective communities, all practices which further CRA’s goals. This is clearly counterproductive, and while the proposed FDIC rule will improve this situation greatly, a lifting of additional regulatory burdens and requirements on small institutions will go even further in accomplishing the CRA’s objectives. The CRA was designed to address the lending practices of the larger institutions which cater to high net worth clients in primarily urban areas. WLF suggests that the FDIC should not further burden the very institutions that actively provide solutions to the development problems in smaller and rural areas.

B. Community Development Criterion

The FDIC is concerned that smaller institutions, presently covered by the large bank test, have difficulty making qualified investments under the CRA, including the problem of trying to compete with larger banks for investment opportunities and maintaining staff and resources to do so. In response, FDIC proposes to add a mandatory community development criterion for those small banks with assets over $250 million and up to $1 billion, as an additional component of the streamlined small bank standards. The proposed criterion is meant to allow smaller institutions to balance their community development lending, investing, and service activities based on the opportunities in the market and the banks’ own strategic strengths.

In that regard, WLF supports the comments filed by Citizens Savings Bank, MC Bank and Trust Company, and other institutions which oppose making the Community Development (CD) criterion a separate test from the bank’s overall CRA evaluation. Such differentiation creates the impression that CD lending is different from the provision of credit to the entire community. The current small bank test considers the institution’s overall lending in its community. A separate test would create an additional CD obligation and regulatory burden and would undercut the rationale of the streamlined exam.

C. Community Development in Rural Communities

The FDIC has proposed that the “community development activity” component of the CRA could benefit either low- and moderate- income individuals, or individuals who reside in rural areas. WLF and the Clinic support this proposed change in the definition. As FDIC examiners know, it has proven extremely difficult for small institutions, especially those in rural areas, to find appropriate CRA qualified investments in their communities. Many small institutions have had to make regional or statewide investments that are extremely unlikely to ever benefit the banks’ own communities. This result was certainly not intent of Congress when it enacted CRA.

III. Conclusion

In conclusion, the regulatory burden on small institutions has grown significantly in the past ten years, while the nature of small institutions has not changed. When a small institution is forced to comply with even more regulations, the result is a loss of both money and personnel that could have been used to meet the credit needs of that institution’s community. While WLF and the Clinic generally support the proposed changes, we believe that it would be in the public interest for the FDIC to consider removing all unnecessary regulations on smaller institutions.

Respectfully submitted,

Daniel J. Popeo
Chairman and General Counsel

Paul D. Kamenar
Senior Executive Counsel

Matthew Cohen
Clinic Student
George Mason University School of Law