ICBA - Advocacy - Agencies' CRA Proposal

Agencies' CRA Proposal

JANUARY 20, 2004


Agencies' CRA Proposal Would Reduce Regulatory Burden;
Propose Small Bank CRA Exam Increase to $500 Million

In action welcomed by ICBA, federal bank regulators are proposing to increase the asset size limit for banks eligible for the small bank streamlined Community Reinvestment Act examination from $250 million to $500 million. They also propose to eliminate any holding company size limit (currently $1 billion) for the small bank exam. The FDIC Board met today to approve releasing the interagency proposal for comment. The other regulators will soon follow suit. The changes come after a thorough review of the CRA regulation and a public comment period soliciting suggestions for improvement that ended in Oct. 2001.

If the agencies' proposal is adopted as a final rule, regulatory paperwork and examination burden on 1,100 community banks between $250 million and $500 million of assets will be eased. 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%.

"We commend the regulators for making this change to CRA regulations that will do more than any other to emphasize performance over process and eliminate unnecessary regulatory burden," said ICBA president/CEO Kenneth A. Guenther. "In an age of trillion dollar banks, examining a $500 million bank using the 'large bank' CRA exam procedures is completely unwarranted."

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 compared CRA compliance examination costs between "small" and "large" community banks. The study showed that these costs can more than double when a bank exceeds $250 million in assets and is no longer eligible for the streamlined CRA exam. In support of the proposal, FDIC staff referred today to cost studies that quantify the increased CRA exam burden on large 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 set in 1995.

Other Changes. To "balance" this change, the agencies are also proposing that evidence of specific discriminatory, illegal, predatory or abusive lending practices will adversely affect a bank's CRA evaluation. Included are violations of certain laws or regulations such as ECOA, HOEPA, RESPA Section 8, and TILA (right of rescission); unfair or deceptive practices; and a pattern or practice of making loans based primarily on collateral or foreclosure value rather than ability to repay.

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 public performance evaluation 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 plan to address other issues, raised in public comments, through guidance and examiner training. For example, they plan to address concerns related to the investment test, including alleviating pressure to make equity investments merely to satisfy the investment test.

Your Comments Important. The small bank changes are controversial and will be vigorously opposed by consumer and community groups. To preserve them (or to advocate for a small bank cut off higher than $500 million) will require that the agencies hear from community bankers. The agencies will accept comments for 60 days once the proposal is published in the Federal Register. Watch ICBA's Washington Weekly Report and ICBA's website (www.icba.org) for more information, including sample comment letters, etc.