Agencies Propose CRA Relief for Small Banks
The ICBA strongly welcomed a proposal by federal bank regulators to increase the asset size of banks eligible for the small bank streamlined Community Reinvestment Act (CRA) examination from $250 million to $500 million and also eliminate the holding company size limit (currently $1 billion). The proposal comes after a thorough review of the CRA regulation and over 400 comments from the public that started in the summer of 2001. ICBA commends the regulators for making this change.
If the agencies' proposal is adopted, the regulatory paperwork and examination burden will be eased for 1,100 community banks between $250 million and $500 million of assets. These banks will no longer be subject to the investment and service tests, nor to CRA loan data collection and reporting requirements. Even so, the percentage of industry assets examined under the large bank tests will decrease only slightly from a little more than 90% to a little less than 90%.
During the FDIC's discussion of the proposal, Vice Chairman John Reich said that "many in the industry will say it doesn't go far enough, and I'm inclined to agree with them." OTS Director James Gilleran, while agreeing with Reich, suggested that a compromise was needed to keep the process moving. However, they both stressed the need to reduce regulatory burden. As Reich pointed out, "I'm concerned we're regulating community banks out of existence." Feedback received by the agencies as part of their efforts to reduce regulatory burden during the ongoing EGRPRA (Economic Growth and Regulatory Paperwork Reduction Act of 1996) review helped to spur this CRA proposal.
ICBA CRA Study. ICBA has long urged federal regulators to increase the CRA small bank size limit, most recently advocating an increase to $2 billion. A 2002 Grant Thornton/ICBA study showed that compliance costs can more than double when a bank is no longer eligible for the streamlined CRA exam. In supporting the proposal, FDIC staff referred to cost studies that quantify the increased CRA exam burden for larger community banks. The agencies also cited changing industry demographics as the gap between "mega-banks" and those under $1 billion grows. Because of industry consolidation and bank asset growth, the number of banks defined as "small" has declined by 2000 since the $250 million small bank threshold was originally established in 1995.
Other Changes. To "balance" this change, the agencies also propose to "clarify" that predatory or abusive loan practices can affect a bank's CRA rating. The proposal would explicitly provide that a pattern or practice of loans based primarily on collateral or foreclosure value instead of the borrower's ability to repay would be indicative of predatory lending. The proposal would also clarify that if a bank asks examiners to consider the lending record of an affiliate, the examiners may consider all aspects of the affiliate's lending practices-good and bad-and all loans made by the affiliate.
Finally, the CRA disclosures prepared by the agencies for "large banks" will include a breakdown of the number and amount of small business and small farm loans by census tract. This data is now disclosed only in the aggregate across tracts within income categories. The agencies stressed that this will not require banks to make any changes to their current reporting and will only change how the agencies disclose the data.
Banker Comments Critical. The small bank changes are controversial and will be vigorously opposed by consumer and community groups. Community activists quickly slammed the proposal, claiming it would allow more banks to 'shirk their duties' even though the proposal will not change small banks' obligations to meet their communities' credit needs. Charging that the proposal "goes in precisely the wrong direction," House Financial Services Committee ranking member Barney Frank (D-MA) and committee member Bernie Saunders (I-VT) immediately requested that Chairman Mike Oxley (R-OH) hold hearings on the proposal to explore whether it is "consistent with CRA."
Therefore, the agencies must hear from community bankers expressing support for the proposed changes or advocating an increase to the streamlined exam threshold higher than $500 million in assets. The agencies will accept comments for 60 days after the proposal is published in the Federal Register. Watch ICBA's Washington Weekly Report and Web site (www.icba.org) for more information in in the coming weeks.