Federal Deposit
Insurance Corporation

RE: Community Reinvestment Act Regulations Dear Mr. Feldman:

Montecito Bank & Trust submits the following comments on the interagency Joint Notice of Proposed Rulemaking amending Community Reinvestment Act ("CRA") regulations, published February 6, 2004, at 69 Federal Register 5729 (the "Proposal"). Montecito Bank & Trust is a community bank with $580 million in assets, serving Santa Barbara County, California. We appreciate the opportunity to comment on the Proposal.

Our principal concern with the Proposal regards the expansion of §345.28(c), regarding assignment of a bank's CRA rating. Section 345.28(c) currently states:

Evidence of discriminatory or other illegal credit practices adversely affects the FDIC's evaluation of a bank's performance. In determining the effect on the bank's assigned rating, the FDIC considers the nature and extent of the evidence, the policies and procedures that the bank has in place to prevent discriminatory or other illegal credit practices, any corrective action that the bank has taken or has committed to take, particularly voluntary corrective action resulting from self-assessment, and other relevant information.

The Proposal expands this section to further provide that the FDIC's evaluation of a bank's CRA performance will be adversely affected by violations by the bank of additional various lending laws, specifically:

• Violations of the Home Ownership and Equity Protection Act (high rate home equity loans)
• Violations of Section 5 of the Federal Trade Commission Act (unfair and deceptive credit practices)
• Violations of Section 8 of the Real Estate Settlement Procedures Act (payment of unearned referral fees for mortgage transactions)
• Violations of the Truth in Lending Act provisions regarding a consumer's right of rescission

We oppose that portion of the Proposal that would expand §345.28(c) for the following reasons:

1) It eliminates examiner discretion in determining whether isolated violations of certain lending laws should adversely impact a bank's CRA performance;
2) It would result in duplicative supervisory enforcement for the same infractions; and
3) It exceeds the statutory authority of the Community Reinvestment Act and other statutes.

Removal of Examiner Discretion

Current regulations state that evidence of discriminatory or other illegal credit practices adversely affects the FDIC's evaluation of a bank's CRA performance. In determining the affect on a bank's assigned rating, the FDIC considers the nature and extent of the evidence, the policies and procedures that the bank has in place to prevent such practices, and any corrective action the bank has taken or committed to take, particularly voluntary corrective action resulting from self-assessment.

Under the present regulations, CRA examiners are allowed discretion in determining whether: 1) a bank's violation of lending laws and regulations constitutes a "practice", and 2) such practice has the effect of reducing the availability of credit within the bank's assessment area including low- and moderate-income areas. We believe the proposed language in §345.28(c)(1) removes such discretion and requires the examiner to regard even an isolated, inadvertent infraction of any of the listed laws as adversely affecting the bank's record of making loans throughout the community.

For example, we do not understand how an isolated, inadvertent violation of the Truth in Lending Act regarding right of rescission, such as a minor error in the expiration date of the rescission period, is a reflection of a bank's record of extending credit throughout its entire assessment area. We further believe that a seasoned examiner would not consider such a violation as having any impact on the bank's CRA performance. However, under the proposed language of §345.28(c)(1), the examiner would have no discretion and would be required to consider it adversely in evaluating the bank's CRA performance.

Duplicative Supervisory Enforcement

We believe that requiring violations of certain statutes to adversely affect the FDIC's evaluation of the bank's CRA performance constitutes duplicative supervisory enforcement and penalties for the same violation, a "double jeopardy" of sorts. Some of the statutes listed in §345.28(c)(1) and their accompanying regulations already provide for penalties and sanctions, some of which are quite severe. For example, violation of Section 8 of the Real Estate Settlement Procedures Act can result in a fine of $10,000 and imprisonment of up to one year (12 USC §2607(d)).

Even where the listed statutes and their accompanying regulations do not expressly prescribe penalties, banks already are subject to normal supervisory enforcement for violations of those statutes and regulations. Such enforcement actions can take the form of more frequent examinations, quarterly reporting, a Memorandum of Understanding, or, in egregious cases, a Cease and Desist Order. Community groups advocating duplicative supervisory enforcement through the CRA rating are not knowledgeable about how such supervisory enforcement creates significant business hardship on a bank for the duration of the increased supervision. Adverse impact on a bank's CRA rating is not a necessary incentive for banks to avoid violations of the listed statutes.

Exceeds the Statutory Authority

We believe §345.28(c)(1) of the Proposal exceeds the authority of the Community Reinvestment Act of 1977 (the "Act"). Section 804(a) of the Act requires a bank's supervisory agency to:

1) Assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of such institution; and
2) Take such record into account in its evaluation of an application for a deposit facility by such institution.

Other than in paragraph (2) of Section 804(a), the Act contains no enforcement provisions. Throughout the Act's history, banks and community groups have been at odds about how the Act should be "enforced," absent statutory enforcement provisions. When the CRA's implementing regulations underwent major revision in 1995, the evaluation criteria were significantly quantified to emphasize actual lending performance and geographic loan dispersion by a bank within its assessment area(s). Much of the subjectivity and evaluation inconsistencies that had long pervaded the CRA examination process were removed. However, at that time, it was generally agreed that violations of fair lending laws were sufficiently relevant to a bank's performance in extending credit throughout its community so as to appropriately adversely impact the examiners' (subjective) evaluation of a bank's CRA performance.

However, the Proposal's expansion of §345.28(c) goes much too far in creating enforcement criteria without sufficient statutory authority, either under the Community Reinvestment Act or under any other statutes listed in the Proposal. We do not find where the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership and Equity Protection Act, Federal Trade Commission Act, Real Estate Settlement Procedures Act, or Truth in Lending Act provide for adverse impact on a bank's CRA rating as an enforcement measure. We therefore believe the Proposal's broadening of §345.28(c) is an unauthorized expansion of existing statutory authority.

We oppose the Proposal's expansion of §345.28(c) for the reasons stated above. We appreciate the opportunity to provide comments and thank you for your consideration of our concerns. Please feel free to contact me at (805) 564-0200 or the bank's Compliance Officer, Carla St. Romain, at (805) 564-0282 with any questions.

Sincerely,

Rodney K. Brown
President and CEO

cc: California Bankers Association
American Bankers Association