Federal Deposit
Insurance Corporation

October 15, 2004

Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429

Attention: Comments/Legal ESS

Re: Community Reinvestment; RIN Number 3064-AC50
68 FR 51611(August 20, 2004)

Dear Sir or Madam:

America’s Community Bankers (“ACB”)¹ welcomes the opportunity to comment on the proposal issued by the Federal Deposit Insurance Corporation (the “FDIC”) that would amend the regulation that implements the Community Reinvestment Act (“CRA”)². The proposal would amend the regulation in three respects. First, the definition of a small institution would be revised to include those institutions with up to $1 billion in assets regardless of holding company affiliation. Second, the proposal would add a community development activity criterion to the streamlined evaluation method for small banks with assets greater than $250 million up to $1 billion in assets. Finally, the proposal would expand the definition of community development to encompass a broader range of activities in rural areas.

ACB Position
ACB strongly supports this proposal. We have had a policy position for a number of years that called for raising the threshold for what is considered to be a small bank to those institutions with assets up to $1 billion. ACB strongly believes that using the same three prong lending, investment and service examination process to measure the compliance of a bank with $300 million in assets and a bank with $300 billion in assets does not make any sense. Small banks should be able to use the valuable and scarce human and financial resources in truly understanding and meeting the needs of their communities rather than trying to prove compliance with the broader examination requirements.

We also support the addition of the community development criterion to the small institution streamlined examination for those small institutions between $250 million in assets and $1 billion in assets. ACB believes that the FDIC’s proposal represents a good first step in identifying a more flexible approach to the streamlined examination for those community banks that chose to serve their communities by providing financing for infrastructure, economic development and other community development activities. We urge the FDIC and the other federal banking agencies to work with the banking industry and the community groups to develop guidance establishing reasonable criteria for this addition to the streamlined test.

ACB strongly urges the FDIC and the other federal banking agencies to continue the review of the implementing CRA regulation and the accompanying guidance in the form of questions and answers and the examiner guidance. We commend the agencies for the work they have done to date reviewing the current regulation, which is now almost ten years old. We continue to believe that given the rapid evolution of the industry that the agencies must constantly review the guidance and update it as necessary.

General
ACB members are committed to making credit available to the communities in which they operate. Community banks would not survive if they did not serve the financial services needs of their communities and their customers. These financial needs involve all aspects of family life. It is no longer possible to limit service to these customers to providing home mortgage and consumer credit and basic deposit products. Communities themselves are each different and what is successful in meeting the needs in one geography is not successful in another. If regulations cannot be community-specific, then examiners must be that much more flexible in looking at what the institution is doing and the impact that it has.

ACB believes that the performance context of a community bank’s compliance with its CRA obligations is an important starting place for the evaluation. The current regulations provide that an institution’s performance is evaluated when looking at the information about the institution, its community, its competitors, and its peers. Such an evaluation makes sense to the extent that it recognizes that communities and institutions are different. The difficulty is balancing the quantitative and the qualitative measures. Providing specific quantifiable goals can make it easier for the examiner to determine whether the institution has met its requirements, but it takes away the incentive to undertake innovative and complex projects. Another frequent concern is that peer information is hard to obtain because many community banks do not know have true peers in the communities they serve. In the context of the proposed changes, we believe that the use of performance context continues to play an important role. We urge the agencies continually to evaluate the information and how to measure what a community bank is doing vis a vis what is needed. What a community bank does in the context of all of the factors is an important measure of what is possible. A community bank may do more to further the goal of meeting the credit needs of the community by doing something other than financing home mortgage loans.

One area that ACB has monitored through an informal polling process for the past three years is the amount of time that ACB members devote to community service. In each of the last three years, ACB has done a spot poll of members soliciting information about the time commitment and the number of employees that each institution spends on community service. In the past year for example, 45 out of 130 community bank CEOs reported that they personally spent 11 to 20 hours per month on community service. Of the total, 43 CEOs reported that they spent six to 10 hours per month on community service. One of the most interesting results is that 99 of the 130 CEOs reported that their bank supports 11 or more nonprofit community organizations. This particular number has been consistently high over the past three years. This number is very enlightening and looked at in the context of one of the criticisms that opponents of the proposal are making it is even more interesting.

What is especially interesting is the size demographics of the 130 CEOs. Of the total, 76 are from institutions with under $250 million in assets and only 16 are from institutions with over $ 1 billion in assets. It appears from this informal survey that community banks with less than $250 million in assets are active supporters of a number of community nonprofit organizations and we believe that the proposal will not change that.

Community banks form partnerships with local nonprofit groups to work together to make the entire community a better place. It is in the best interests of every community bank to support local groups and to enter into partnerships with them. We strongly believe that the proposal will reinforce that process rather than diminish it.

Small Bank Definition
While thousands of community banks continue to be smaller than the $250 million threshold, there are many that are between $250 million and $1 billion in assets. It is incomprehensible that those institutions have to be judged on the same basis as the multibillion dollar banks. This arbitrary threshold makes no sense. The resources available to these institutions are vastly different, the philosophy of the institution and management, the operating strategy, and business plan are all different. Additionally, smaller “large” institutions are not able to engage in certain activities or offer products on the same terms and conditions as the large institutions without risking criticism from safety and soundness examiners. The stage must be set for a realistic standard that will promote and encourage community lending.
Community banks cannot exist without serving the credit needs of their communities. Lending to families and small businesses is the purpose of these institutions. One of the stated goals of the revisions of the regulation in the mid 1990’s was to reduce the paperwork associated with measuring CRA compliance while rewarding performance. For small institutions, the streamlined examination procedures represent a reduction in paperwork and therefore an addition to the resources that can be spent working with customers and developing products that really do meet the needs of the community.

We believe that the proposal would provide important regulatory relief to many community banks. Unnecessary regulatory burden drains resources that community banks would otherwise devote to serving their customers and their communities.

Significantly, the proposed revision would not exempt any institutions from complying with the CRA. Rather, the proposal would expand the number of institutions that would be evaluated for CRA compliance under a streamlined examination process. Streamlining an exam in no way diminishes an institution’s commitment to its communities. We are pleased that the proposal acknowledges that community banks should not be required to expend a disproportionate percentage of their resources to demonstrate that they serve their local communities. The principle underlying CRA is what community banking is all about – investing resources to benefit and serve the entire community. Community banks do not need a complicated examination process to show they are in compliance with the law.

Community banks across the country are successful because the business models focus on meeting the financial needs of communities. However, growing layers of red tape are consuming important resources that community banks could otherwise direct toward serving their customers and communities. The burden of new regulatory requirements mandated by the USA Patriot Act, the Gramm-Leach-Bliley Act, the Sarbanes-Oxley Act, and the Home Mortgage Disclosure Act, to name a few, weighs heavily on all financial institutions. Community banks have been particularly impacted by these regulations. We believe that defining a “small bank” as an institution with less than $1 billion in assets would be an important step in alleviating unnecessary regulatory burden.

Community Development Criteria
ACB generally supports the addition of the community development criteria to the small institution examination for those small banks between $250 and $1 billion in assets. We have long supported a more flexible interpretation of meeting the needs of the community. We strongly believe that community banks meet the needs of their communities everyday by engaging in activities that are far beyond the financing of mortgages or the provision of consumer or deposit products. The criteria developed by the FDIC include direct and indirect activities. We are particularly supportive of the inclusion of community development lending by affiliates, consortia and third parties.

It is through consortia and other partnerships that community banks are able to leverage their limited resources to provide meaningful services to their communities. We do not believe that the addition of the community development criteria will diminish any way the investment and partnership community banks have with local nonprofit groups.

While we support the addition of the community development criteria, we urge the agencies to develop specific guidance that will provide community banks with information on just what the FDIC will consider when examining for the criteria. ACB urges flexibility because of the differences in communities but at the same time, we recognize that community banks need to know what the measure will be so that they can make adjustments if necessary.

For example, we urge the agencies to develop a nonexclusive list that banks can look at and know that particular community development investments will satisfy the criteria. Several examples of activities or investments that we believe should be included in such a list are projects that are done through Habitat for Humanity and the Affordable Housing Program of the Federal Home Loan Bank System. These are just two examples, and we recognize that because of the local nature of much of the work that is being done, it is impossible to include all programs, but we believe that it is important to include some clarification.

We believe that such guidance can be in the form of additional questions and answers that can be changed over time in response to the evolving needs of communities. ACB also urges the FDIC to develop examiner guidance that addresses these criteria.

ACB also supports the amendment to the definition of community development that provides that community development includes the provision of services and affordable housing for individuals in rural areas. Again, while we support this important change, we are concerned about the interpretation. We believe that community banks in rural communities will not change the way that they serve their communities. Those banks would not exist if they did not serve all elements of the community.

Conclusion
We appreciate the FDIC’s leadership in issuing a proposal that acknowledges that community banks do not invest in their communities simply to comply with federal law. Rather, the proposal recognizes that community banks invest in their communities because it is good business. We urge the FDIC to continue working with the other federal banking agencies on all aspects of this rule and the implementing guidance.

We stand ready to work with the FDIC and the other federal banking agencies to develop workable guidance that meets the important goals of CRA but is not so burdensome that community banks are unable to comply.

Please do not hesitate to contact the undersigned should you have any questions about this letter.

Sincerely,

Charlotte M. Bahin
Senior Vice President
Regulatory Affairs
 

¹ America's Community Bankers is the member-driven national trade association representing community banks that pursue progressive, entrepreneurial and service-oriented strategies to benefit their customers and communities. To learn more about ACB, visit www.AmericasCommunityBankers.com.
² 69 Fed. Reg. 51611 (August 20, 2004)