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Appeals of Material Supervisory Determinations: Guidelines & Decisions

SARC-99-02 (February 4, 1999)

On January 28, 1999, the Supervision Appeals Review Committee ("Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) considered the appeal by [Bank] (“Bank”) of the Community Reinvestment Act (“CRA”) rating and the compliance examination findings resulting from the FDIC’s examination of the Bank dated April 13, 1998.

After carefully considering the issues raised in the Bank’s appeal letter dated November 30, 1998, the Committee concluded that the CRA rating and the examination findings should be affirmed.

As you know, the CRA regulations were revised in 1995 and became finally effective in 1997 following a two-year transition period. Prior to 1997, large retail institutions were evaluated using process-based criteria. Under the “new” CRA regulations, however, large retail institutions are evaluated based upon the institution’s actual performance under lending, investment, and service tests. In turn, each of the three performance tests prescribed certain criteria against which an institution’s performance is measured. The changes to the CRA regulations were made in order to promote consistency in evaluations and to eliminate unnecessary burdens associated with process-based evaluations. As a result of the changes, however, many of the community development activities and donations that the Bank previously received credit for are no longer considered during a CRA performance evaluation.

As a result of the examination, the Bank was assigned an overall CRA composite rating of “Satisfactory.” This composite rating was based upon the Bank’s combined performance under the three performance tests. The Bank was rated Highly Satisfactory under the lending test; Low Satisfactory under the investment test; and Outstanding under the service test. Aside from the CRA rating, the Bank received a consumer compliance rating of “2” in the examination. It is evident that certain aspects of the Bank’s performance under the applicable performance criteria were quite strong. However, the Bank’s overall performance was not sufficient to merit a CRA composite rating of Outstanding.

With regard to the lending test, there are many factors to be considered when rating an institution under this test, including lending activity, assessment area concentration, geographic distribution, and borrower characteristics. Although the Bank performed well with regard to certain components of the lending test, the Bank’s overall performance was not sufficient to warrant an Outstanding rating in the lending category. For example, the Bank’s lending in low- and moderate-income areas and to low- and moderate-income individuals within all of its assessment areas is generally at or below the aggregate percentages; the Bank’s performance in comparison to aggregate lending within each Metropolitan Statistical Area (“MSA”), not just in the Syracuse MSA, were contributing factors to the rating of Satisfactory. Please be advised that the violations cited in the examination report did not impact the Bank’s assigned CRA rating.

In reference to the Bank’s investment performance, although the Bank may be making more community development investments than their competitors, this not the standard used in assigning a rating under the investment test. To receive an Outstanding rating under the investment test, an institution must have an excellent level of qualified community development investments and grants (particularly those that are not routinely provided by private investors), often in a leadership position. The institution must exhibit excellent responsiveness to credit and community economic development needs and make extensive use of innovative and/or complex investments. The Bank's qualified investments did not meet these criteria.

The Committee also concluded that the composite “2” compliance rating is appropriate given the violations cited at the examination, which were determined to be valid, and the Bank’s deficiencies in its compliance program at the time of the examination.

Lastly, the Bank expressed concerns that the Satisfactory CRA rating will adversely affect the Bank. A Satisfactory CRA rating will not have an adverse impact on applications to enter a new market or on the Bank’s efforts to expand services in an existing one. In fact, those institutions which have a Satisfactory or better CRA rating and have compliance rating of “1” or “2”, which includes your institution, are eligible for expedited application processing. The Committee acknowledges the Bank’s statement that it is committed to community development and affordable housing and encourages the Bank in its efforts to meet community credit needs.

This determination of the Committee is considered a final supervisory determination by the FDIC.

By direction of the Supervision Appeals Review Committee of the Federal Deposit Insurance Corporation.