INDEPENDENT COMMUNITY BANKERS OF AMERICA
Communications Division
Public Information Room
Mailstop 1-5
Office of the Comptroller of the Currency
250 E Street, SW
Washington, DC 20219
Docket No. 04-06
Robert E. Feldman, Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 200551
Re: Docket No. R-1181
Regulation Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Attention: No. 2004-04
Re: Community
Reinvestment Act Regulations
Dear Sir or Madam:
The Independent
Community Bankers of America (ICBA)1 strongly supports the proposed
increase in the asset size limit for banks eligible
for the small bank streamlined Community Reinvestment Act (CRA) examination
process. We applaud the proposal to increase the limit to $500 million
in assets and eliminate the separate holding company qualification,
although we believe that a preferable threshold would be $2 billion
in assets. While community banks will still be subject to CRA, the
proposal will free many community banks from the more onerous compliance
burdens associated with the large bank CRA examination and free them
to concentrate efforts and resources on serving their communities.
The bulk of CRA examination resources should be focused on truly
large banks whose hundreds or thousands of local branches never see
a CRA examiner, not on community banks that cannot thrive unless
they serve their communities.
Overview. At a time when banking monoliths stretch from coast-to-coast,
evaluating the CRA performance of large complex banking organizations
and small locally owned and operated community banks on the same
examination standards simply does not make sense. Increasing the
small bank size limit will not undermine the purposes of CRA. Instead
it will free larger community banks from unnecessary costs, improving
their productivity and enhancing their ability to meet the credit
needs of their communities. If the agencies’ proposal is adopted,
the regulatory paperwork and examination burden will be eased for
1,350 community banks between $250 million and $500 million of assets.
These banks will no longer be subject to the investment and service
tests, nor to CRA loan data collection and reporting requirements.
Even so, the percentage of industry assets examined under the large
bank tests will decrease only slightly from a little more than 90%
to a little less than 90%.
The small bank
examination process, the most successful innovation of the 1995
CRA revisions,
has worked well. The ICBA applauds the
agencies for recognizing that it is time to expand this critical
burden reduction benefit to larger community banks. This will allow
more community banks to focus on what they do best—fueling
America's local economies. Adjusting the asset size limit also more
accurately reflects significant changes and consolidation within
the banking industry in recent years. To be equitable, banks should
be evaluated against their peers, not in the same context as banks
hundreds of times their size that stretch from coast to coast. Extending
the streamlined exam to more community banks would do more than any
other change to foster the goals of the 1995 CRA reform—to
insure the regulations emphasize performance over process and eliminate
unnecessary regulatory burden.
The Threshold
Should be Higher Than $500 Million. While the proposed
increase is a good
first step, the size of banks eligible for the
small-bank streamlined CRA examination should be increased to $2
billion, or at a minimum, $1 billion. As FDIC Vice Chairman John Reich
commented when the FDIC Board discussed the proposal, “many in the
industry will say it doesn’t go far enough, and I’m inclined to agree
with them.” He expressed concerns that the regulatory burden is
drowning small community-based banks, and that the agencies are
regulating community banks out of existence. This is a point that
cannot be underscored strongly enough, as has been stressed at EGRPRA2
outreach meetings held by the agencies.
In today’s market, $500 million in assets is not representative
of a large bank. When the small bank streamlined examination was
first considered, 17 percent of the banking industry’s total
assets were subject to the small bank exam using a $250 million asset
limit. Due to changes in industry demographics since the small bank
streamlined examination was adopted in 1995, if the asset limit were
increased to $1 billion today, only slightly more than 15 percent
of industry assets would be subject to the small bank exam—still
less than the percentage of assets covered when the streamlined examination
was first adopted nearly ten years ago.
Community
Banks are Integral Parts of their Communities With or Without
CRA. Community activists seem oblivious to the costs and
burdens imposed by CRA examinations and the effect these costs have
on the local bank. Yet, community activists object to bank mergers
that remove the local bank from the community. To keep the local
banks in the community where customers have better access to decision-makers,
community activists must recognize the regulatory burdens that are
strangling smaller institutions and forcing them to consider selling
to larger institutions that can better manage these burdens.
It cannot be stressed strongly enough that increasing the size of
banks eligible for the small-bank streamlined CRA examination does
not relieve banks of CRA responsibilities. Since the success and
survival of many community banks is closely intertwined with the
success and viability of their communities, the proposal will merely
eliminate some of the most burdensome exam requirements, such as
the data-collection requirements, imposed on larger banks and thrifts.
In a survey of
ICBA leadership bankers, virtually all reported offering special
deposit services
for low- and moderate-income residents of
their communities because it is good business. These are services
they report they would offer regardless of CRA requirements. Additionally,
these bankers almost all reported that they provide community services
that do not currently receive CRA credit, such as monetary contributions
to civic organizations, service on local community committees, special
loans to non-profit organizations and churches and support for local
charities. As one banker commented, “success depends on not
only opening a branch but involvement in the community.” Community
banks truly prosper or decline with the economies of their communities.
By nature, a bank with less than $1 billion in assets will concentrate
its lending within the local community and will more likely reach
into the community because bank management is involved in community
development activities. The loan data collection and reporting as
well as the investment test are more suited to larger financial institutions.
The cost of compliance in both these areas can be a hardship on smaller
community banks, since many compliance costs are fixed and weigh
disproportionately on smaller banks. As a result, any benefit to
the consumer is far outweighed by the financial impact on the bank,
which uses up resources that could be better allocated to serving
the community.
ICBA/Grant
Thornton CRA Cost Study. ICBA has long urged federal regulators to increase
the CRA small bank size limit, preferably
to $2 billion in assets. CRA compliance examination costs place an
unfair burden on “large” community banks. A 2002 ICBA/Grant
Thornton study entitled The High Cost of Community Bank CRA Compliance:
Comparison of ‘Large’ and ‘Small’ Community
Banks reveals that CRA compliance costs can more than double when
community banks exceed $250 million in assets and are no longer subject
to streamlined examinations. A survey of community banks showed the
mean employee cost attributable to CRA is 36.5 percent higher at
large community banks than at small community banks. In each of two
case studies—one contrasting costs for a bank that grew from “small” to “large” bank
status, and one contrasting costs for a “small” and “large” bank
owned by the same holding company—CRA compliance costs were
four or more times greater for large community banks than for small
ones.
The study showed
that the investment test of the large bank exam is also a cost
burden
for large community banks. Ninety-two percent
find the market for CRA investment opportunities “competitive” or “highly
competitive” and 69 percent say such investments are “not
readily available.” Half report giving yield concessions to
make CRA-qualified investments.
In supporting
the current regulatory proposal, the agencies referred to cost
studies that
quantify the increased CRA exam burden for larger
community banks. The agencies also cited changing industry demographics
as the gap between “mega-banks” and those under $1 billion
grows. Because of industry consolidation and bank asset growth, the
number of banks defined as “small” has declined by 2000
since the $250 million small bank threshold was originally established
in 1995.
Investment
Test.
Opponents of the proposal contend that community investments will
disappear
if smaller institutions are no longer
subject to the investment test of the large bank CRA examination.
As noted above, community bankers report that they would be involved
in the local community and make investments in community development
because their success and survival depends on the success and the
survival of the community and because they are integral parts of
those communities. Nonetheless, to address this concern the agencies
should consider giving all banks, even those not subject to the three-part
large bank CRA exam, credit for community development activities,
such as such as hospital funding, school funding or road funding
and other activities that generally benefit the community. While
many of these projects would continue without CRA credit, the incentive
would acknowledge banks’ contributions to the community.
The agencies have declared their intention to provide additional
guidance, through revised examination procedures, on community development
investments and the application of the performance context. The ICBA
considers this an area of sufficient importance that any revisions
should be issued for public comment to give interested parties an
opportunity to participate in the discussion. If certain investments
are to be evaluated for their benefit to the community under examination
procedures, then the public should have the opportunity to comment
on how those evaluations will be made. This is especially important
since much of the criticism of the current evaluation, e.g., about
whether investments are innovative or creative, is the result of
misapplication of the existing standards by examiners.
Other Changes
Abusive
Lending.
In addition to the proposal to increase the size of banks eligible
for the
small bank streamlined CRA exam, the agencies
propose to clarify that predatory or abusive loan practices can affect
a bank’s CRA rating. The proposal would explicitly provide
that a pattern or practice of loans based primarily on collateral
or foreclosure value instead of the borrower’s ability to repay
would be indicative of predatory lending.
The ICBA does not view consideration of abusive lending practices
in a CRA evaluation as a substantial change from existing examination
procedures. Since the regulators stress that assessment of predatory
practices will not be incorporated as a new element in CRA exam procedures,
the ICBA does not object to this change, although it is more appropriate
to use compliance examinations and fair lending reviews, which are
better designed for this purpose, to identify and stop abusive lending
practices.
While the ICBA
does not view the proposal as a major departure from existing procedure,
we urge the agencies to offer better guidance
than merely listing certain regulations and suggesting that a violation
of one of these regulations could lead to a downgrade in the bank’s
CRA rating. A bank could inadvertently have a technical violation
of one of these regulations without engaging in any abusive or deceptive
practice. More specifics about the kind of violations that could
affect the rating should be provided, such as through an interagency
Q&A. Insufficient guidance leaves too much room for uneven interpretation
and enforcement by examiners.
While it might
be appropriate for the CRA examination team to consider violations
brought to
their attention by another examiner within
the same agency, referrals from other outside sources should be treated
differently to ensure reliability. Moreover, any referrals that might
be used to downgrade a bank’s CRA rating should only be considered
if the issue is final and not subject to pending discussions or investigation,
and the bank should have had an opportunity to defend its actions.
Whenever a CRA examiner considers these issues, the matter should
be fully discussed with bank management at the start of the CRA review
to put the bank on notice and allow it to ameliorate problems or
raise any related points that should be considered.
Loans
Made Primarily on Collateral Value. The regulators have identified
equity stripping as the predatory practice that is most easily addressed
by regulation. Accordingly, the proposal would provide that loans
made primarily on the basis of the value of collateral would be considered
predatory. The ICBA believes that further guidance is needed and
that the final rule should be more specific in excluding certain
loan programs, such as reverse mortgages, to ensure there is no room
for misinterpretation or confusion.
While banks should
make loans based primarily on credit history and the borrower’s ability to repay, barring banks from making
loans on the basis of collateral value will greatly restrict credit
availability. At times, individuals who have experienced credit problems
need collateral equity to help reestablish creditworthiness. Banks
should be able to lend based on the collateral to allow them to take
into account the loan applicant’s ability to generate income
in the future. Other loans based on collateral value that should
not be considered equity stripping include reverse mortgage programs
or loans to self-employed individuals. The text of the final rule
should make clear that any restrictions on collateral-based lending
does not restrict legitimate practices, such as reverse mortgages,
loans to self-employed borrowers or other loan applicants where reliance
on the collateral may be appropriate for safe and sound lending but
is neither abusive nor predatory.
Unfair
and Deceptive Acts or Practices. The proposal would also rely on the Federal
Trade Commission Act’s definition of unfair
and deceptive practices to determine whether certain loans might
be considered predatory. Generally, the ICBA does not object to this
approach, although more guidance may be needed in the future to ensure
that bankers and examiners understand what facets of loan products
might run afoul of this standard. If abusive lending practices could
detract from the bank’s CRA rating, it is important there be
a clear understanding between examiners and financial institutions
as to what is considered “abusive.” This guidance can
be provided in the form of best practices, Q&As or examination
procedures that are established after an opportunity for public review
and comment.
Other
Issues.
Under the proposal, examiners would consider discriminatory or
illegal practices
in the bank’s CRA evaluation no matter
where they occur, even if outside the bank’s assessment area.
The ICBA does not object to this element of the proposal, since the
assessment area should not define proper lending practices. Second,
if a bank elects to have a specific loan portfolio of an affiliate
included in its CRA evaluation, the proposal would clarify that the
examiner may consider the entire lending record of the affiliate
in that particular portfolio. The ICBA also agrees with this clarification.
However, the regulators should also consider that to the extent evaluations
depart from the original purpose and goal of the CRA statute, i.e.,
ensuring that a bank meets the credit needs of the community where the
bank takes deposits,3
the less likely evaluations will meet the primary goal of the statute.
Public
File.
A final proposed change would provide that CRA disclosures prepared
by the agencies
for “large banks” will include
a breakdown of the number and amount of small business and small
farm loans by census tract. This data is now disclosed only in the
aggregate across tracts within income categories.
Generally, census tracts are large enough to ensure that the privacy
of individual borrowers is properly protected. However, for smaller
census tracts, especially those in rural areas, it is critical that
the agencies establish procedures to consolidate the data to ensure
the privacy of individual borrowers is properly protected. In isolated
census tracts with limited loan activity, disclosing the information
where the borrower can easily be identified undermines and destroys
confidentiality. Congress and federal banking regulators require
banks to protect the security and confidentiality of customer information.
Therefore, if the agencies propose to release information as proposed,
they should take the proper steps to offer the same level of security
for the customers of the banks they supervise. Absent such assurances,
or if data cannot be sufficiently aggregated to protect the identity
of individual borrowers, the disclosures should not be made.
The agencies
also propose to distinguish between purchased loans and originated
loans in
the data released by the agencies for a bank’s
public file. Although the agencies will not distinguish purchased
loans from originated loans for CRA evaluation purposes, the ICBA
is concerned that the proposed change is the first step toward making
such a distinction. While some argue that purchased loans do not
merit the same level of credit under CRA as originated loans, purchased
loans should be given equal importance since they help support bank
lending activities.
While the agencies
stress that these changes to the data released for the bank’s
public file will not require banks to make any revisions to their
current
reporting and will only change how the
agencies disclose the data, the ICBA questions how long this will
hold true. Inevitably, changes to the way data is disclosed eventually
results in reformatted reporting systems by banks to facilitate the
processing of the data by the agencies.
Conclusion. The
ICBA welcomes the proposal. Increasing the asset-size of banks
eligible for the
small bank streamlined CRA examination
process is an important step to reducing regulatory burden. We also
support eliminating the separate holding company qualification for
the streamlined examination, since it places small community banks
that are part of a larger holding company at a disadvantage to their
peers. While community banks will still be subject to and comply
with the general requirements of CRA, this change will eliminate
some of the most problematic and burdensome elements of the current
CRA regulation from community banks that are drowning in regulatory
red-tape. In an age of trillion dollar banks, examining a $500 million
bank using the ‘large bank’ CRA exam procedures is completely
unwarranted. The ICBA urges the agencies to consider going further
to increase the asset size limit for the streamlined examination
to $2 billion or, at least, $1 billion in assets to better reflect
the current demographics of the banking industry.
Thank you for
the opportunity to comment. If you have any questions or need any
additional information, please contact ICBA regulatory
counsel Robert Rowe, or the undersigned, at 202-659-8111.
Sincerely,
Karen M. Thomas
Executive Vice President
Director, Regulatory Relations Group
___________________________
ICBA represents
the largest constituency of community banks in the nation and is
dedicated exclusively to protecting the interests of the community
banking industry. We aggregate the power of our members to provide a
voice for community banking interests in Washington, resources to
enhance community bank education and marketability, and profitability
options to help community banks compete in an ever-changing
marketplace.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996.
The statute requires the federal banking agencies to review their
regulations and identify provisions that are outdated, unnecessary, or
unduly burdensome. That review is currently underway.
Section 802(b) of the Community Reinvestment Act states: “It is the
purpose of this title to require each appropriate Federal financial
supervisory agency to use its authority when examining financial
institutions, to encourage such institutions to help meet the credit
needs of the local communities in which they are chartered consistent
with the safe and sound operation of such institutions.” 12 USC 2901;
Title VII of Pub. L. 95-128, 91 Stat. 1147 (October 12, 1977).
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