Letters to Regulators

Support for Small Bank CRA Proposal

June 7, 2004

The Honorable Donald E. Powell
Federal Deposit Insurance Corporation
500 17th Street, NW
Washington, DC 20429

The Honorable Alan Greenspan
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

The Honorable John D. Hawke
Comptroller of the Currency
250 E Street, SW
Washington, DC 20219

The Honorable James E. Gilleran
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552


I am writing to reiterate the strong support of the Independent Community Bankers of America for your Agencies' pending proposal to expand eligibility for the small bank streamlined Community Reinvestment Act examination, and to express our strong disagreement with the May 17, 2004 letter sent to you by 31 Senators urging withdrawal of the proposal.

ICBA takes strong issue with the Senators' contention that extending the streamlined CRA exam to community banks with up to $500 million in assets will dramatically weaken the effectiveness of CRA. In fact, the proposal will increase the ability of community banks to serve their communities by relieving them of the more onerous regulatory burden associated with the large bank exam.

Small Banks Remain Subject to CRA

Under the proposal, small banks remain fully subject to CRA. They are not relieved in any way of their CRA obligation to help meet the credit needs of their communities. Instead, recognizing the disproportionate impact that regulatory burden has on small banks, the proposal will merely subject more community banks to streamlined examination criteria to help alleviate that burden.

Under the streamlined exam, a small bank is subjected to a through review, albeit more simple than the large bank review, and is evaluated on its record of providing credit in its community considering: its loan to deposit ratio; the percentage of its loans made in the local community (assessment area); the distribution of loans to borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of loans; and its record of taking action in response to written complaints about its performance in helping to meet credit needs in its assessment area.

The streamlined exam was the most successful innovation of the 1995 CRA revisions. It achieved the goals of the revisions by emphasizing performance over paperwork, while maintaining an effective review of a bank's CRA record. Now is the time to extend the burden-reducing benefits of the streamlined exam to more community banks.

Community Banks Serve Their Communities With or Without CRA

The success and survival of most community banks is closely intertwined with the success and viability of their communities, particularly in small towns and rural areas. The notion that an increase in the small bank size limit from $250 million to $500 million would undermine economic development efforts in the communities served by community banks, as suggested by the Senators, is unfounded. Economic development is the lifeblood for community banks and rural communities. The vast majority of community banks reach out into their communities, make low- and moderate-income loans, offer special deposit services for low and moderate-income residents, and otherwise spend time and financial resources to promote economic development and meet the credit needs of their communities because it is good business. Ignoring the needs of the community is not a viable business model for a community bank.

The Proposal Recognizes Changing Industry Demographics

The Senators' letter recognizes and notes that the burden reducing benefits of the streamlined exam for the nation's smallest banks in the 1995 CRA regulation revisions was proper. However, the Senators fail to acknowledge the changing industry demographics that warrant a substantial increase in the size limit for eligibility for the streamlined exam.

Since the adoption of the streamlined exam in 1995, the industry has seen dramatic concentration and the creation of numerous megabanks with assets in the hundreds of billions. In today's market, $500 million is not representative of a large bank. ICBA has urged the Agencies to increase the size limit for the streamlined exam to $2 billion, or at a minimum, $1 billion.

The Senators' letter correctly notes that the proposal will affect 1100 banks between $250 million and $500 million in assets and that 12 percent of banks will be subject to the large bank test. However, the letter overlooks the fact that these 1100 banks hold a very small percentage of industry assets. If the proposal is adopted, nearly 90 percent of industry assets will remain subject to the large bank test, decreasing only slightly from a little more than 90 percent of industry assets that are examined under the large bank test with the current $250 million size limit for small banks. Only roughly ten percent of industry assets will be examined under the small bank test. These facts belie the Senators' claim that the proposal will undo the increased investment in distressed and low- and moderate- income neighborhoods since 1995.

Due to changing industry demographics, a $500 million size limit does not even allow small banks to catch up to where they were in 1995. Since 1995 the number of small institutions has declined by 2,000. When the small bank streamlined examination was first considered, the $250 million asset limit resulted in 17 percent of industry assets being subject to the small bank exam. Even if the asset limit were increased to $1 billion today (twice the size proposed by the Agencies), only slightly more than 15 percent of industry assets would be subject to the small bank exam — still less than the percentage of assets covered when the streamlined examination was first adopted nearly ten years ago.

Large Bank Test Imposes Unnecessary Costs on Community Banks

The Senators' letter criticizes the agencies for not closely examining the regulatory burdens and costs of the large bank exam. However, in our view, the proposal correctly recognizes that CRA compliance burdens place an unfair burden on "large" community banks.

A 2002 ICBA/Grant Thornton study entitled The High Cost of Community Bank CRA Compliance: Comparison of 'Large' and 'Small' Community Banks showed that CRA compliance costs can more than double when community banks exceed $250 million in assets and are no longer subject to streamlined examinations. A survey conducted as part of the study showed that the mean employee cost attributable to CRA examination is 36.5 percent higher at large community banks than at small community banks. Further, in each of two specific cases analyzed in the study — one contrasting costs for a bank that grew from "small" to "large" bank status, and one contrasting costs for a "small" and "large" bank owned by the same holding company — CRA examination and paperwork costs were four or more times greater for large community banks than for small ones.

Regulatory Burden Reduction is Key to Community Bank Survival

The Agencies' proposal must be viewed in light of the overall regulatory burden that disproportionately impacts community banks and threatens their continued viability. Regulation burden is one of the top three or four concerns of community bankers today. The burden has been increased dramatically in recent years as Congress and the regulators constantly impose new reporting and compliance requirements such as the privacy title of the Gramm-Leach-Bliley Act, anti-money laundering/anti-terrorist financing provisions of the USA-PATRIOT Act, accounting, auditing and corporate governance reforms of the Sarbanes-Oxley Act, consumer disclosures and other obligations under the FACT Act, and expanded data collection and reporting under the Home Mortgage Disclosure Act.

FDIC Vice Chairman John Reich stressed the importance of regulatory burden reduction to community banks and the communities they serve in recent Congressional testimony: "I believe that in looking to the future, regulatory burden will play an increasingly significant role in shaping the industry and the number and viability of community banks….if we do not do something to stem the tide of ever increasing regulation, America's community banks will disappear from many of the communities that need them most."

The Agencies' pending proposal to relieve regulatory burden by extending the benefits of the streamlined CRA exam to more community banks is an important part of this effort that will enhance — not diminish — community banks' service to their communities.

For these reasons, ICBA urges the Agencies to reject the Senators' recommendation, and to increase the asset size limit for the streamlined CRA exam to at least $1 billion. A copy of ICBA's April 6, 2004 comment letter on the proposal is attached.


Karen M. Thomas
Executive Vice President
Director, Regulatory Relations Group


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