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NORTH MIDDLESEX SAVINGS BANK
April 1, 2004
The Honorable Donald E. Powell
Chairman
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington,
DC 20429
Dear Sir:
We are writing to submit our joint comments regarding the agencies'
proposed rule published in the February 6, 2004, Federal Register to
update implementation of the Community Reinvestment Act (CRA). We
appreciate the opportunity to comment on the agencies' proposal and
respectfully request your consideration of our comments as the rule is
finalized.
Small Institutions Streamlined Exam
The agencies propose to expand the number of banks and thrifts that
qualify for examination under the streamlined CRA process. We commend
the agencies for proposing this expansion as it is well known that small
institutions incur a disproportionately high regulatory cost when
subjected to the large retail institution exam. However, we believe the
agencies must consider additional relief in this area than has been
proposed.
Under current rules, only those institutions with less than $250
million in assets being independent or affiliated with a holding company
with less than $1 billion in assets qualify for the streamlined
examination process. The agencies propose to increase the asset size
limitation to $500 million and eliminate the holding company
restriction.
The agencies note that raising the asset limit to $500 million will
have little material impact on the amount of total assets currently
covered by the large retail institution exam, but will reduce by
approximately half the number of institutions subject to such review.
Specifically the agencies write:
"Raising the asset threshold to $500 million ... would approximately
halve the number of institutions subject to the large retail institution
test (to roughly 11% of all insured depository institutions), but the
percentage of industry assets subject to the large retail institution
test would decline only slightly, from a little more than 90% to a
little less than 90%" Federal Register, Vol. 69, No. 25 (p. 5738)
We concur with the agencies' determination to ensure the vast
majority of industry assets remain subject to the large retail exam.
However, we note that increasing the exemption amount from $500 million
in assets to $1 billion in assets accomplishes this same purpose.
Our analysis of available information shows that as of December 31,
2003, the Federal Deposit Insurance Corporation insured 9,182 banks and
thrifts representing $9 trillion in industry assets (FDIC Quarterly
Banking Profile, Fourth Quarter 2003). Of these institutions, 8,088 had
total assets $500 million or less while 8,612 had total assets of $1
billion or less. Further, institutions with $500 million or less in
assets account for $1.03 trillion in assets, or 1.1 percent of total
industry assets. The data also showed that institutions with $1 billion
or less in assets account for $1.38 trillion in assets or 15 percent of
total industry assets.
Under the agencies' proposal, approximately $8.05 trillion in
industry assets will remain under the large retail exam. If the $1
billion threshold is adopted, approximately $7.68 trillion will remain
under the large retail exam. This is a difference of only 524
institutions and $362 billion of industry assets.
Increasing the asset threshold for the large retail institution exam
to $1 billion would not have a significant impact on the total amount of
assets nor the total number of institutions covered by the exam. Such an
amendment will provide relief to an additional 524 institutions while
ensuring that 85 percent of total industry assets are covered under the
large retail exam. Accordingly, we strongly encourage the agencies to
raise the threshold to $1 billion.
Investment Test
The agencies propose to address concerns with regard to the
investment test in two principal ways. First, by increasing the number
of institutions that qualify for the streamlined CRA exam, the number of
institutions subjected to the investment test will be reduced. Secondly,
the agencies propose to clarify the application of the investment test
through additional guidance.
The agencies noted that several commenters raised issues with regard
to the investment test. Many expressed frustration that certain
activities fostering community development were excluded from
consideration of institutions' CRA-related investment activities while
others discussed the subjective manner in which institutions'
investments have been judged as "innovative or complex."
Decreasing the number of institutions subjected to the investment
test may decrease the number of these complaints but does little to
correct identified problems. Likewise, providing additional guidance to
institutions that remain captive to the subjective judgment of examiners
offers only modest certainty to the examination process. Clarifying CRA
regulations on these important issues will give certainty to
institutions, community organizations and units of local government with
an interest in CRA qualifying activities.
Expanded definition of "community development"
The current definition of community development ignores the myriad
development projects that promote and stabilize communities. Such
activities include, but are not limited to the revitalization or
stabilization of communities, financing of environmental remediation
efforts, financing of wastewater facilities, financing of
infrastructure, financing of education facilities and financing of other
similar projects vital to communities. In many instances, such projects
languish due to a lack of sufficient local, state and federal resources.
Expanding the definition of community development may provide the
resources to make such projects economically feasible, thereby improving
the community for all residents.
The agencies noted the concerns of several commenters expressing
significant difficulty in making qualified investments due to a lack of
viable opportunities, while others discussed a need to simply make the
investments regardless of the impact of the investment on the community.
The agencies write:
"Some noted that intense competition for a limited supply of
community development equity investments has depressed yields,
effectively turning many of the investments into grants; some claimed
that institutions had spent resources transforming would-be loans into
equity investments merely to satisfy the investment test; and some
expressed concern that institutions were forced to worry more about
making a sufficient number and amount of investments than about the
effectiveness of their investments for their communities." Federal
Register, Vol. 69, No. 25 (p. 5733)
Institutions should never be forced by regulation to operate in an
unsafe or unsound manner; yet, it would seem the current definition of
community development lends itself to this very result. Furthermore, the
efficient deployment of capital is essential if CRA is to achieve the
public policy goals for which it was enacted. Regulation must not
prevent nor provide a disincentive for institutions to participate in
opportunities that will have the greatest impact on their communities.
Therefore, we strongly urge the agencies to adopt an expanded definition
of the term "community development" that maximizes the investment test's
impact on communities nationwide.
It is important to note that we believe institutions must be given
additional options in the implementation of the investment test.
However, this flexibility should not be implemented in a manner that
adds to the existing CRA burden. No institution should be forced to
involve itself in all aspects of an expanded list of approved community
development activities. Rather, institutions should be granted the
option of participating in a broader array of community development
activities.
Incentives for exempted institutions to continue investment
activities
As more institutions are exempted from the large retail exam, fewer
institutions will be examined for significant CRA investment activities.
We strongly believe the existing incentive program should not only be
retained, but also enhanced to ensure that demands for capital are met
in communities served by exempted institutions. While lending must
remain the central criteria by which exempted institutions are rated
under CRA, we urge the agencies to provide additional incentives for
such institutions to continue CRA investment activities.
Clarify the terms "innovative and complex"
As the agencies note, several commenters criticized the ambiguous
nature of the terms innovative and complex as related to CRA investment
activities. Although the agencies considered alternatives to the terms,
no changes have been proposed. Rather, the agencies have opted to
develop additional guidance for examiners and institutions.
We encourage the agencies to consider the impact of an investment an
institution makes rather than the complexity or uniqueness of the
transaction. The purpose of CRA, as the agencies note, was not to force
institutions to make loans or investments that will jeopardize safety
and soundness. Institutions that fulfill the requirements and spirit of
CRA through economically sound investments must receive full credit
irrespective of the "innovative or complex" characteristics of those
transactions.
If the agencies opt to retain the terms innovative and complex, we
strongly urge the terms be clearly defined through agency guidance.
Institutions need regulatory certainty in order to comply with CRA. It
is evident from the joint notice of proposed rulemaking that a
significant number of institutions submitted comments regarding the
ambiguous and subjective meaning of these terms. While the agencies
rightly note that exempting a greater number of institutions from the
investment test will bring relief, this offers no relief for large
retail institutions. We urge the agencies to address these concerns to
the greatest extent possible and provide large retail institutions with
the necessary regulatory certainty to fulfill their obligations under
the investment test.
We appreciate the effort the agencies have made to update and improve
regulations implementing CRA. We urge you to consider our comments and
look forward to working with you to finalize a rules change that is fair
to financial institutions and that maximizes the impact of CRA
activities in communities across the nation.
Sincerely, Frank J. Gracia
Senior Vice President
Mortgage Loan Officer
North Middlesex Savings Bank
7 Main Street
Ayer, MA 01432
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