FDIC Federal Register Citations

RE: Proposed Revisions to the Community Reinvestment Act Regulations

Dear Mr. Feldman:

I am writing to support the federal bank regulatory agencies' (Agencies) proposal to enlarge the number of banks and saving associations that will be examined under the small institution Community Reinvestment Act (CRA) compliance examination. The Agencies proposal is to increase the asset threshold to $500 million (from $250 million) and to eliminate consideration of whether the institution is owned by a holding company. This proposal is clearly a major step toward appropriate implementation of the Community Reinvestment Act and should greatly reduce regulatory burden on those newly eligible institutions. I strongly support both aspects of this proposal.

When CRA regulations were rewritten in 1995, the banking industry recommended community banks of less than $500 million should be eligible for a less burdensome examination. This change actually achieved what the original Act intended: it asked examiners to focus on the bank’s loans and assess whether it was meeting the credit needs of its entire community. It imposed no investment requirement and added no data reporting requirements, fulfilling the promise of the Act’s sponsor, Senator William Proxmire, that there would be no additional paperwork or record keeping required. It also created a simple assessment test of the bank’s record of providing credit in its community. This test considers the institution’s loan-to-deposit ratio; the percentage of loans in its assessment areas; its record of lending to borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of its loans; and its record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment areas. Our bank’s CRA ratings have been Outstanding and we welcome the opportunity, through examinations, to document the commitment we make to our community. With total assets approaching $245 million, we are on the verge of losing our small bank status and need to anticipate the large bank CRA exam. In reading the requirements set forth in 12 CFR § 345.42 we will need to make a significant investment in technology upgrades, additional paperwork, and even manpower and this added expense will do nothing to enhance our already strong commitment to meeting the credit needs of our bank’s entire community.

Since 1995, regulatory burden on small banks has only grown larger, including massive new reporting requirements under HMDA, the USA Patriot Act and the privacy provisions of the Gramm-Leach-Bliley Act. However, the nature of community banks has not changed. When a community bank must comply with the requirements of the large institution CRA examination, its costs and burdens increase dramatically. In looking at my bank, converting to the large institution examination will require, among other things, that we devote additional staff time to documenting services and investments and begin to geocode all of our loans that might have CRA value. This imposes a dramatically higher regulatory burden that will drain both money and personnel away from helping meet the credit needs of the communities in which we do business.

It is as true today as it was in 1995, (and in 1977 when Congress enacted CRA), that a community bank meets the credit needs of its community if it makes a certain amount of loans relative to deposits taken. Its business activities are usually focused on small, well-defined geographic areas where the bank is known. The small institution CRA examination accurately captures the information necessary for examiners to assess whether a bank is meeting the credit needs of its community - nothing more should be required to satisfy the Act.

Even though raising the small institution CRA examination threshold to $500 makes more community banks eligible, there would only be a negligible change to the percentage of industry assets subject to the large retail institution test. It would only decline from a little more than 90% to a little less than 90%. That slight decline would more closely align the current distribution of assets between small and large banks with the distribution anticipated when the Agencies adopted the original definition of “small institution.” Thus, the Agencies’ proposal to revise the CRA regulation is really just preserving the status quo of the regulation, which has been altered by a drastic decline in the number of banks, inflation and an enormous increase in the size of large banks.

I really believe that the Agencies need to provide even greater relief to community banks than just preserving the status quo. Even though the small institution test was the most significant improvement of the 1995 CRA revision, it was wrong to limit its application to banks below $250 million in assets, thereby depriving many community banks of any regulatory relief. A bank with more than $250 million in assets faces significantly increased regulatory burdens without producing additional benefits, as contemplated by CRA. In today’s market, even a $500 million bank often has only a handful of branches. I recommend raising the asset threshold for the small institution exam to at least $1 billion.

Raising the limit to $1 billion is appropriate for two reasons. First, keeping the focus of small institutions on lending would be entirely consistent with the purposes of the Community Reinvestment Act, which is to ensure the Agencies evaluate how banks help to meet the credit needs of the communities they serve. Second, raising the limit to $1 billion will have only a small effect on the amount of industry assets covered under the more comprehensive large bank test. According to the Agencies’ own findings, raising the limit from $250 to $500 million would reduce total industry assets covered by the large bank test by less than one percent. According to December 31, 2003 Call Report data, increasing the limit to $1 billion will reduce the amount of assets subject to the much more burdensome large institution test by only 4% (to about 85%). Yet, the additional relief provided would be substantial and reduce the compliance burden on more than 500 additional banks and savings associations (compared to a $500 million limit). Accordingly, I urge the Agencies to raise the limit to at least $1 billion, providing significant regulatory relief while, to quote the Agencies in the proposal, not diminishing “in any way the obligation of all insured depository institutions subject to CRA to help meet the credit needs of their communities. Instead, the changes are meant only to address the regulatory burden associated with evaluating institutions under CRA.”

In conclusion, I strongly support increasing the asset-size of banks eligible for the small bank streamlined CRA examination process as a vitally important step in revising and improving the CRA regulations and in reducing regulatory burden. I also support eliminating the separate holding company qualification for the small institution examination, since it places small community banks that are part of a larger holding company at a disadvantage to their peers and has no legal basis in the Act. While community banks, of course, still will be examined under CRA for their record of helping to meet the credit needs of their communities, 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.

Sincerely,

Lori Hullermann
Manager, Patch Grove Branch Office
Peoples State Bank
Prairie du Chien, WI