Community Reinvestment Act Regulations; Proposed Rule

SUMMARY: The Office of the Comptroller of the Currency, the Board of

Governors of the Federal Reserve System, the Federal Deposit Insurance

Corporation, and the Office of Thrift Supervision, (collectively, the

Federal financial supervisory agencies or agencies) propose to revise

their regulations concerning the Community Reinvestment Act (CRA). The

agencies published a joint notice of proposed rulemaking on this issue

on December 21, 1993 (December proposal). The revised proposal

published today reflects comments received on the December proposal and

the agencies' further internal considerations.

The purpose of the CRA regulations is to implement the continuing

and affirmative obligation of regulated financial institutions to help

meet the credit needs of their communities, including low- and

moderate-income neighborhoods, consistent with safe and sound

operations and to provide guidance on how the agencies assess the

performance of institutions in meeting that obligation.

The revised proposal would provide guidance to financial

institutions on the nature and extent of their CRA obligation and the

methods by which the obligation will be assessed and enforced. The

proposed procedures seek to emphasize performance rather than process,

promote consistency in assessments, permit more effective enforcement

against institutions with poor performance, and reduce unnecessary

compliance burden while stimulating improved performance. As compared

to the December proposal, the revised proposal broadens the examination

of performance, more explicitly considers community development

activities, and makes other modifications and clarifications.

DATES: Comments must be received by November 21, 1994.

ADDRESSES:

OCC: Comments should be directed to: Communications Division, Office of

the Comptroller of the Currency, 250 E Street, SW., Washington, DC

20219, Attention: Docket No. 94-15. Comments will be available for

public inspection and photocopying at the same location.

BOARD: Comments should be directed to: William W. Wiles, Secretary,

Board of Governors of the Federal Reserve System, Docket No. R-0822,

20th Street and Constitution Avenue, NW., Washington, DC 20551.

Comments addressed to Mr. Wiles may also be delivered to Room B-2222 of

the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the

guard station in the Eccles Building courtyard on 20th Street, NW.

(between Constitution Avenue and C Street) at any time. Comments may be

inspected in Room MP-500 of the Martin Building between 9 a.m. and 5

p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's rules

regarding the availability of information.

FDIC: Comments should be directed to: Robert E. Feldman, Acting

Executive Secretary, FDIC, 550 17th Street, NW., Washington, DC 20429.

They may be hand delivered to Room 402, 1776 F Street, NW., Washington,

DC between 8:30 a.m. and 4:30 p.m. on business days. They may be sent

by facsimile transmission to (202) 898-3838. Comments will be available

for public inspection at the FDIC Reading Room #7118 at 550 17th

Street, NW., Washington, DC between 9 a.m. and 4:30 p.m. on business

days.

OTS: Comments should be directed to: Director, Information Services

Division, Public Affairs, Office of Thrift Supervision, 1700 G Street,

NW., Washington, DC 20552, Attention: Docket No. 94-213. These

submissions may be hand delivered to 1700 G Street, NW. from 9 a.m. to

5 p.m. on business days; they may be sent by facsimile transmission to

FAX number (202) 906-7755. Submissions must be received by 5 p.m. on

the day they are due in order to be considered by the OTS. Comments

will be available for public inspection at 1700 G Street, NW., from 1

p.m. until 4 p.m. on business days. Visitors will be escorted to and

from the Public Reading Room at established intervals.

FOR FURTHER INFORMATION CONTACT:

OCC: Stephen M. Cross, Deputy Comptroller for Compliance, (202) 874-

5216; and Matthew Roberts, Director, Community and Consumer Law

Division, (202) 874-5200.

BOARD: Glenn E. Loney, Associate Director, Division of Consumer and

Community Affairs, (202) 452-3585; Scott G. Alvarez, Associate General

Counsel, Legal Division, (202) 452-3583; Robert deV. Frierson,

Assistant General Counsel, Legal Division, (202) 452-3711; and Leonard

N. Chanin, Managing Counsel, Division of Consumer and Community

Affairs, (202) 452-3667.

FDIC: Ken A. Quincy, Acting Assistant Director, Division of Compliance

and Consumer Affairs, (202) 898-6753; Bobbie Jean Norris, Chief, Fair

Lending Section, Division of Compliance and Consumer Affairs, (202)

898-6760; Robert Mooney, Fair Lending Specialist, Division of

Compliance and Consumer Affairs, (202) 898-3540; Ann Hume Loikow,

Counsel, Regulation and Legislation Section, Legal Division, (202) 898-

3796; and Sandy Comenetz, Counsel, Regulation and Legislation Section,

Legal Division, (202) 898-3582.

OTS: Timothy R. Burniston, Deputy Assistant Director for Policy, (202)

906-5629; Theresa A. Stark, Program Analyst, Specialized Programs,

(202) 906-7054; and Lewis A. Segall, Senior Attorney, Regulations and

Legislation Division, Chief Counsel's Office, (202) 906-6648.

SUPPLEMENTARY INFORMATION:

Introduction

The Federal financial supervisory agencies are jointly proposing to

revise their regulations implementing the CRA (12 U.S.C. 2901 et seq.).

The proposed regulations would replace the existing regulations in

their entirety.

The CRA is designed to promote affirmative and ongoing efforts by

regulated financial institutions to help meet the credit needs of their

entire communities, including low- and moderate-income neighborhoods,

consistent with safe and sound operations. Despite the CRA's notable

successes, bank and thrift industry, community, consumer and other

groups maintain that its full potential has not been realized, in large

part, because compliance efforts have focused on process rather than

performance.

In accordance with a request by the President, the Federal

financial supervisory agencies have undertaken a comprehensive effort

to reform their evaluation standards and examination procedures. The

proposed regulations would implement one part of this reform effort by

substituting a new system that would rate institutions based on their

actual performance in helping to meet community credit needs.

In addition to this rulemaking, the agencies will work together to

improve examiner training and to increase interagency coordination

regarding application of standards, performance of examinations,

assignment of ratings, and use of enforcement procedures. These efforts

should produce a CRA assessment process that is less burdensome for

many institutions yet yields better results for the local communities

the law is intended to benefit.

Background

In 1977, the Congress enacted the CRA to encourage banks and

thrifts to help meet the credit needs of low- and moderate-income

communities, consistent with safe and sound lending practices. In the

CRA, the Congress found that regulated financial institutions are

required to demonstrate that their deposit facilities serve the

convenience and needs of the communities in which they are chartered to

do business, and that the convenience and needs of communities include

the need for credit as well as deposit services. The CRA has come to

play an increasingly important role in improving access to credit among

under-served communities--both rural and urban--across the country.

Under the impetus of the CRA, many banks and thrifts opened new

branches, provided expanded services, and made substantial commitments

to increase lending to all segments of society.

Despite these successes, the CRA examination and enforcement system

has been criticized. Financial institutions have complained that policy

guidance from the supervisory agencies on the CRA is unclear and that

examination standards are applied inconsistently. Financial

institutions have also complained that the CRA examination process

encourages them to generate excessive paperwork at the expense of

providing loans, services, and investments.

Community, consumer, and other groups have agreed with the industry

that there are inconsistencies in CRA evaluations and current

examinations overemphasize process and underemphasize performance.

Community and consumer groups also have criticized the regulatory

agencies for failing to aggressively penalize banks and thrifts for

poor performance.

Believing that the CRA examination and enforcement process can be

improved, the President requested in July 1993 that the Federal

financial supervisory agencies reform the CRA examination and

enforcement system. The President asked the agencies to consult with

the banking and thrift industries, Congressional leaders, and leaders

of community-based organizations across the country to develop new CRA

regulations and examination procedures that ``replace paperwork and

uncertainty with greater performance, clarity, and objectivity.''

Specifically, the President asked the agencies to refocus the CRA

examination system on more objective, performance-based assessment

standards that minimize compliance burden while stimulating improved

performance. He also asked the agencies to develop a well-trained corps

of examiners who would specialize in CRA examinations. In undertaking

this effort, the President requested that the agencies promote

consistency and even-handedness, improve CRA performance evaluations,

and institute more effective sanctions against institutions with

consistently poor performance.

To implement the President's initiative, the four agencies held a

series of seven public hearings across the country in 1993. At those

hearings, the agencies heard from over 250 witnesses. Nearly 50 others

submitted written statements. The preamble to the December proposal

reviewed the results of those hearings.

The December Proposal

The December proposal (58 FR 67466) would have eliminated the

twelve assessment factors in the present CRA regulation and substituted

a performance-based evaluation system. Under the December proposal, a

financial institution would not have been assessed on its efforts to

meet community credit needs, nor on its methods for determining the

credit needs of its community. Rather, the agencies would have

evaluated institutions based on their actual lending, service, and

investment performance.

Generally, independent institutions with at least $250 million in

assets and affiliates of holding companies with at least $250 million

in bank and thrift assets would have been evaluated based on some

combination of lending, service, and investment tests. Institutions

would have had to report to the agencies and make available to the

public data on the geographic distribution of their loan applications,

denials, originations and purchases. Small banks and thrifts could have

elected to be evaluated under a streamlined method that would not have

required them to report this data. Every institution would have had the

option to have its performance evaluated based on a pre-approved

strategic plan that had been subjected to review and comment by

community-based organizations and the rest of the public. However, the

strategic plan option would not have relieved an institution of its

data reporting obligations.

There would have been five ratings--``outstanding,'' ``high

satisfactory,'' ``low satisfactory,'' ``needs to improve,'' and

``substantial noncompliance''--under each of the lending, investment,

and service tests so as to measure with more refinement the variations

in performance among institutions. The agencies proposed to have only

four overall ratings, however, as required by statute--``outstanding,''

``satisfactory,'' ``needs to improve,'' and ``substantial

noncompliance.''

The December proposal was originally published with a 60-day

comment period. This period was extended for 30 additional days in view

of the magnitude of the proposed changes, the complexity of the issues,

the level of interest in the subject, and delays resulting from the

holiday season (59 FR 5138). After considering the thousands of

comments received, the agencies produced the revised regulations

proposed today, which respond to suggestions in the comments while

preserving the December proposal's goal of emphasizing performance over

process.

Overview of Comments on the December Proposal

Collectively, the agencies received over 6700 comment letters on

the December proposal. The agencies received comment letters from

representatives of banks and thrifts, consumer and community groups,

Congress, state and local governments, and others as shown in the

following table:

Table of Comments Received

----------------------------------------------------------------------------------------------------------------

Letters from

banks, thrifts Letters from Letters from Letters

Agency and their consumer and government from Total

trade community entities others

associations groups

----------------------------------------------------------------------------------------------------------------

OCC....................................... 1329 253 78 153 1813

Board..................................... 1236 209 54 181 1680

FDIC...................................... 2002 219 71 82 2374

OTS....................................... 486 240 62 55 843

----------------------------------------------------------------------------------------------------------------

The agencies reviewed and considered all of the above-described

comments concerning the December proposal. Comments are discussed in

greater detail in the section-by-section analysis of the revised

proposal. As a general matter, the vast majority of commenters

expressed support for the agencies' goal of developing more objective,

performance-based assessment standards that minimize burden while

stimulating improved performance. Many commenters believed that, under

the existing CRA regulations, the agencies focus too closely on

documentation of CRA performance and too little on actual performance.

These commenters felt the present documentation requirements are overly

burdensome. Many commenters also supported the agencies' goal of

ensuring consistency and evenhandedness among the agencies in CRA

evaluations. Commenters supported enhanced CRA examiner training to

increase consistency. While most commenters generally supported the

agencies' goals in amending their CRA regulations, many expressed

concern over some aspects of the December proposal.

The Revised Proposal

In General

The revised proposal retains, to a significant extent, the

principles and structure underlying the December proposal but makes

significant changes to the details in order to respond to many of the

concerns raised in the comments. Like the December proposal, the

revised proposal would eliminate the existing regulation's twelve

assessment factors and substitute a performance-based evaluation

system.

In order to take into account community characteristics and needs,

the revised proposal would make explicit the assessment context against

which the tests and standards set out in the proposed regulation would

be applied. This assessment context would include consideration of: (1)

Demographic data about the community; (2) information about community

characteristics and needs; (3) information about the institution's

capacity and constraints; (4) information about the institution's

product offerings and business strategy; (5) data on the prior

performance of the institution; and (6) data on the performance of

similarly-situated lenders. The agencies, rather than the institution,

would develop the assessment context for each institution. The agencies

will neither require nor request an institution to provide data for

this assessment context, although any data offered by an institution

would be considered.

As in the December proposal, the agencies would give particular

attention to the institution's record of helping to meet credit needs

in low- and moderate-income geographies. However, the revised proposal

would further emphasize the institution's performance with respect to

low- and moderate- income individuals, and other individuals and areas

where appropriate, given community characteristics and needs. The

agencies also have modified the definitions of low- and moderate-income

geographies in response to concerns that the definitions in the

December proposal were too low for high cost areas. Under the revised

proposal, the qualifying income levels would be adjusted to reflect

prevailing housing construction costs or significant anomalies in

family income levels. The agencies would make available annually a list

of qualifying income levels by geographic area.

The lending, service and investment tests would continue to

constitute the primary method by which the agencies would assess the

CRA performance of independent retail institutions with at least $250

million in assets and affiliates of holding companies with at least

$250 million in bank and thrift assets. However, the revised proposal

changes how an institution's ratings on the three tests would be

combined to produce the institution's overall composite rating. The

revised proposal would give primacy to lending performance by requiring

an institution to receive a ``satisfactory'' or better rating on the

lending test in order to receive a ``satisfactory'', or better, overall

rating. At the same time, the rating system would increase the

importance of the service and investment tests, because the effect of

those tests on the overall rating would no longer be limited to

situations in which an institution had extraordinarily strong or weak

performance on one of the tests.

The agencies also have made modifications to the details of the

lending, service and investment tests in order to broaden their scope.

Rather than rely presumptively on a few quantitative measures that

could then be adjusted or rebutted by other considerations, the tests

would be based from the outset on a broader range of quantitative and

qualitative criteria that would include both those criteria that formed

the basis for the presumptive ratings in the December proposal and

those additional considerations contained in the adjustment and

rebuttal sections of the December proposal. The revised proposal

therefore would not use rebuttable presumptions and adjustments.

These revisions to the lending, investment and service tests would

increase, rather than reduce, the number of judgments that examiners

would be required to make in the examination process. The agencies

believe that a CRA evaluation system eliminating all examiner judgment

would not be desirable, even if it were achievable. Preservation of

examiner judgment to take into account the characteristics and needs of

an institution's community and the capacity and constraints of the

institution is critical.

At the same time, the agencies believe that consistency in

evaluations, reduction in compliance burden, and focus on performance

are fully consistent with the necessary degree of examiner judgment.

The agencies believe that the revised proposal, which entails a series

of examiner decisions in reliance on detailed data concerning an

institution's actual lending, service and investment performance, would

provide the proper balance between objective analysis and subjective

judgment. In order to minimize unnecessary subjectivity, the agencies

have attempted to provide more guidance in the revised proposal as to

the standards that examiners would apply to make the required

judgments.

In addition to identifying the data that would form the basis for

their performance analysis, the information that would provide the

background assessment context, and the criteria that would guide the

assessments, the agencies have proposed detailed performance rating

profiles for each rating level of the lending, service, and investment

tests. An institution's performance need not fit every performance

aspect of the typical profile in order to receive a certain rating.

Exceptionally strong performance on some aspects can compensate for

weak performance on others. However, the institution would receive a

rating which is generally consistent with the institution's overall

performance on the various aspects of the profile.

The December proposal based its presumptive ratings on comparative

terms, for example whether an institution's qualified investments were

significant as compared to its capital, or whether an insignificant

percentage of an institution's branches were located in or readily

accessible to low- and moderate-income geographies in the institution's

service area. While many comments stated that these terms should be

further defined, few commenters, despite a specific request in the

December proposal, actually suggested what these definitions should be.

The ratings profiles in the current proposal continue to use

comparative terms, such as excellent, significant, and poor, without

further specification. Many comments agreed that the mechanical

application of numerical ratios would not foster fair and appropriate

CRA assessments. The agencies continue to believe, given the wide

diversity of institutions and communities, that it is inadvisable to

provide such specific numerical ranges or ratios. The agencies expect

the current proposal to increase the consistency and clarity of the

examination process. By identifying a set of performance-based

assessment criteria, and expanding the objective performance data

available to examinations, institutions and the public will be better

able to evaluate the basis on which examiner judgments are made. In

addition, by providing more detailed profiles that involve several

criteria, assessment under the current proposal will not turn on the

evaluation of a single factor.

The revised proposal also modifies the lending and service tests

for retail institutions to emphasize the importance of community

development activities in the assessments of performance under those

tests. In addition, the revised proposal replaces the investment test

with a community development test for wholesale or limited purpose

institutions. The proposal incorporates into this community development

test both community development lending and community development

services in addition to qualified investments. Therefore, under the

revised proposal, wholesale or limited purpose institutions would be

subject only to the community development test.

The revised proposal would reduce data reporting burdens by

streamlining reporting requirements to coincide more closely with

existing requirements and eliminating unnecessary reporting. The one

significant new data reporting requirement would be that small business

and small farm loan data reported to the agencies would include

information on the race and gender of small business and farm borrowers

to respond to concerns that the December proposal did not give enough

weight to the fair lending aspect of an institution's CRA performance.

This concern is also reflected in the revision of the provisions

regarding consideration of illegal discrimination to conform them more

closely to existing regulatory language.

Smaller banks and thrifts would continue to be evaluated under a

streamlined assessment method that would not require reporting of

additional lending data. However, the streamlined method would be the

presumptive method for evaluating small institutions and would be

applied to every qualifying institution unless the institution

affirmatively requests an alternative assessment method. The agencies

have also altered the description of the streamlined assessment method

in order to make clear that this assessment is not intended to operate

as an exemption from the CRA rules.

The streamlined assessment method would continue to focus on the

institution's loan-to-deposit ratio, degree of local lending, record of

lending to borrowers and geographies of different income levels, and

record of responding to complaints. The institution's fair lending

record would still be taken into account in assigning a final rating.

In response to comments, the agencies have eliminated the provision in

the December proposal that made a loan-to-deposit ratio of 60% or more

presumptively satisfactory. The revised proposal would consider an

institution's size, financial condition, and credit needs of its

service area in evaluating whether its loan-to-deposit ratio is

reasonable. The evaluation would further consider, as appropriate,

other lending-related activities, such as originations for sale on the

secondary market and community development lending and investment.

Every institution would continue to have the option to be evaluated

pursuant to a pre-approved strategic plan. The strategic plan option

would not relieve an institution from any reporting obligations that it

otherwise would have. The revised proposal clarifies, however, that

small institutions would not subject themselves to any data reporting

responsibilities by electing the strategic plan option. The agencies

also have provided more detail as to how the proposed strategic plan

option would operate in practice.

The revised proposal has eliminated provisions that some comments

interpreted as ``safe harbors'' from examination or enforcement action.

The revised proposal would not make substantive modifications to the

December provisions governing what types of institutions are subject to

the proposed regulations, although the agencies have clarified that

bankers banks would not be covered. The revised proposal continues to

provide that uninsured branches of foreign banks would not be covered

by the proposed regulations. However, the agencies are aware that the

Interstate Banking Efficiency Act would address the CRA coverage of

certain uninsured branches of foreign banks. Should this Act be signed

into law, the agencies would modify the revised proposal to reflect the

new legal requirements.

The December proposal would have made an institution with an

assigned rating of ``substantial noncompliance'' subject to an

enforcement action under 12 U.S.C. 1818. A number of commenters

questioned the legal authority of the agencies under the CRA to use

assigned ratings as the basis for an enforcement action. Other

commenters endorsed taking enforcement action against institutions with

poor CRA ratings.

The revised proposal includes the enforcement provisions from the

December proposal while the agencies continue to analyze the issues

raised by the comments. The agencies invite further comment on these

issues before issuing a final rule.

The Lending Test

The lending test in the December proposal would have evaluated--on

the basis of its performance in relation to other lenders subject to

CRA and on an independent basis--the extent to which a retail

institution was making loans in the low- and moderate-income portions

of its service area. The test would have evaluated an institution's

lending performance relative to other lenders by comparing the

institution's market share of housing, small business, small farm, and

consumer loans in the low- and moderate-income geographies of its

service area with its share of such loans in the other parts of its

service area. The test would have evaluated performance on an

independent basis by examining the ratio of reported loans made (both

number and amount) by the institution in the low- and moderate-income

geographies of its service area to the reported loans made throughout

its entire service area and the geographic distribution of its reported

loans across the low- and moderate-income geographies of its service

area.

At the election of the institution, the agencies would have

considered indirect loans under the lending test. Indirect loans were

defined to include loans made by third parties, such as lending

consortia, subsidiaries of the institution, non-chartered affiliates

funded by the institution, and other lenders that lent to low- and

moderate-income individuals or geographies and in which the institution

had made lawful investments. The agencies would have attributed

indirect loans to an institution in proportion to the size of the

institution's investment in or funding of the third party lender or

participation in the third party's loans, provided the institution

reported the indirect loans.

The December proposal would have made a distinction between the

ability of an institution to claim credit under the lending test for

indirect loans by its subsidiaries and funded non-chartered affiliates

and its ability to claim credit for indirect loans made by other

lenders. An institution would have been able to claim credit for

lending by its subsidiaries or non-chartered affiliates if the

institution either invested in the entity or made a loan to it. For

third party lenders, however, the institution would have been required

to make an investment in the entity (as opposed to making a loan to the

entity) in order to claim credit under the lending test for the third

party loans. The purpose of this distinction was to recognize the

unique relationship between an institution and its subsidiaries and

affiliates, and to give institutions and their parent corporations

greater flexibility to structure their lending as they saw fit.

While the foregoing factors would have served as the basis for a

rating under the lending test, the December proposal would have allowed

the agencies to adjust an institution's assessment upward, and, in

exceptional cases, downward. Upward adjustment might have been

warranted if the institution made, for example, a substantial amount of

loans requiring innovative underwriting or loans for which there was

special need, such as loans for multifamily housing construction and

rehabilitation, loans for start-up or very small businesses, loans to

community development organizations or facilities, or loans to very

low-income individuals and geographies. An institution's assessment

also could have been increased if it operated a ``second look'' program

to reevaluate loan applications that, based on an initial review, the

institution had planned to deny. On the other hand, a downward

adjustment could have been warranted if, for example, the quantitative

measures inaccurately portrayed the institution's actual lending to

low- or moderate-income geographies or individuals.

Commenters from both the banking industry and the public believed

the lending test contained in the December proposal was too narrow in

its focus. In particular, some believed the test gave insufficient

emphasis to community development lending and innovative underwriting.

Other commenters noted that the proposed lending test placed undue

emphasis on the location of the borrower rather than on the borrower's

individual characteristics (e.g., income). Some commenters believed the

December proposal would have given institutions a greater incentive to

make loans to high-income borrowers located in low-income geographies

than to make loans to low-income borrowers located in high-income

geographies.

In response to commenters who believed the December proposal

underemphasized the importance of community development lending, the

revised proposal would treat such lending as a principal component of

an institution's lending performance, not merely an adjustment factor.

The revised proposal also defines community development loans. Such

loans are loans (including lines of credit, commitments and letters of

credit) that address affordable housing or other community economic

development needs not being met by the private market, provided such

loans (1) Principally benefit low- or moderate-income individuals,

businesses or small farms with annual revenues less than or equal to $1

million, or businesses or farms that qualify as small businesses under

a Small Business Administration program; (2) have not been reported or

collected by the bank or one of its affiliates as home mortgage loans,

small business loans, small farm loans, or consumer loans for CRA

purposes, unless the loans are for multifamily dwellings (as defined in

the Home Mortgage Disclosure Act (HMDA) (12 U.S.C. 2801 et seq.)

regulations); and (3) except in the case of a wholesale or limited

purpose bank, benefit the bank's service area(s) or a broader statewide

or regional area that includes the bank's service area(s). This

definition clarifies that community development loans deserving of

favorable consideration are those that fill a void left by the ordinary

operation of the private market. In addition, it is designed to prevent

double-counting of all loans except for multifamily housing loans,

which the agencies believe should be considered both in the

distribution analyses of an institution's home mortgage lending and for

evaluation of its community development lending in order to properly

evaluate the value of the loans for CRA purposes. Finally, the

definition also provides that an institution will get favorable

consideration for a community development loan if it is in the

institution's service area or is in a broader region that includes the

institution's service area. This broader geographic scope would

recognize the nature of some lending programs and consortia that

produce these loans. An institution would be evaluated based on the

number, amount, complexity, and innovativeness of its community

development loans.\1\

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\1\Examples of community development loans identified by the

agencies include, but are not limited to, loans to: borrowers in

support of affordable housing rehabilitation and contruction,

including construction and permanent financing of multifamily rental

property serving low- and moderate-income persons; not-for-profit

organizations serving primarily low- and moderate-income housing or

other community economic development needs; borrowers in support of

community facilities in low- and moderate-income areas or that

primarily benefit low- and moderate-income individuals; and

financial intermediaries including, but not limited to, Community

Development Financial Institutions (CDFIs), Community Development

Corporations (CDCs), minority- and women-owned financial

institutions, and low-income or community development credit unions

that primarily lend or facilitate lending in low- and moderate-

income areas or to low- and moderate-income individuals in order to

promote affordable housing and/or community economic development.

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The agencies also have revised the lending test in response to

comments that the December proposal placed undue emphasis on the

geography of the borrower rather than on the borrower's individual

characteristics. Under the revised proposal, while the agencies would

continue to place a heavy emphasis on the geographic distribution of an

institution's lending, they also would consider favorably loans made to

low- and moderate-income individuals regardless of where the borrowers

reside. The agencies would evaluate the number and amount of home

mortgage loans to low-, moderate-, middle-, and upper-income

individuals; the number and amount of loans to small business and small

farms with annual revenues less than or equal to $1 million; the number

and amount of loans to small businesses and small farms by size of

loan; and, at the institution's option, the number and amount of

consumer loans to low-, moderate-, middle-, and upper-income

individuals. The revised proposal provides that distribution of

borrower characteristics would be examined with particular reference to

the institution's service area, but need not be limited to the

institution's service area. Institutions would receive favorable

consideration for lending to low- and moderate-income individuals and

small businesses and farms outside of their service area, so long as

they have not neglected these borrowers inside their service area. The

agencies have also created an assessment criterion regarding an

institution's use of innovative and flexible lending practices to

recognize those programs and products that might have been cause for

upward adjustments in the December proposal.

The agencies received numerous comments on the market share

component of the lending test. Many banks and thrifts felt the market

share test was misleading in that, among other things, it overlooked

loans by institutions that do not have any reporting obligations under

HMDA or CRA. Further, institutions could have had service areas that

overlapped partially, but not completely, in ways that would distort

the measurement of their lending performance under the test. Many also

were concerned that if one bank increased its market share, another

necessarily would lose market share; hence, the commenters suggested

that the market share test could promote a price war among institutions

trying to make loans in low- and moderate-income areas, potentially

leading to unsafe and unsound banking practices. Banks and thrifts

frequently stated that the lending test in the December proposal was a

form of credit allocation. On the other hand, many community groups and

government officials liked the market share test because it provided an

objective and quantitative standard for measuring an institution's CRA

performance. At the same time, a number of community groups expressed

concern that the formula did not take into account qualitative

differences among loans.

In light of these comments, the lending test has been modified. The

lending test would continue to give significant weight to the

geographic distribution of an institution's lending; and, as part of

the assessment context, examiners would consider, among other

considerations described earlier in this preamble, the performance of

other similarly-situated lenders where appropriate. In this regard,

examiners would use market share and other analyses to assist in

evaluating the geographic distribution of an institution's lending

where such analyses would provide accurate insight. However, the

proposed regulation does not require examiners to use any single type

of analysis, and would not link a particular market share ratio, or any

ratio, with a particular lending test rating.

In considering the geographic distribution of an institution's

loans, the agencies, under the revised proposal, would evaluate the

number and amount of an institution's loans in the low-, moderate-,

middle-, and upper-income geographies of the institution's service

area. They also would assess the dispersion of the institution's

lending throughout its service area. In response to concerns expressed

by some commenters that an institution might limit the size of its

service area to obtain a better performance rating, the revised

proposal would penalize an institution if too little of its lending

were made inside its service area.

While agreeing with the concept of including affiliate and third-

party lending at the institution's option, many industry commenters

criticized the December proposal--which would not have considered

lending by chartered or non-funded affiliates--as unduly restrictive

and inconsistent with the corporate funding practices of certain

institutions. Also, some community and consumer groups expressed

concern that institutions could use third-party lending to avoid their

direct lending obligations and, in effect, ``buy out'' of their CRA

obligations.

Like the December proposal, the revised proposal would allow

institutions, at their option, to include affiliate and third-party

lending in their lending record but would make certain changes to the

December proposal in this regard. First, the revised proposal would

consider indirect lending by any of an institution's affiliates--

regardless of whether the affiliate is chartered or how it is funded.

The revised proposal would not impose restrictions on the corporate

structures of institutions and their affiliates.

Second, the rules regarding the allocation of loans among

affiliates have been simplified. The revised proposal would also

include several new provisions designed to prevent an institution from

selectively including (or excluding) its affiliate lending. Under the

revised proposal, the agencies would evaluate an institution's

affiliate lending when assessing the institution's overall lending

performance, provided the institution (or its affiliate) chooses to

collect and report the data pertaining to such lending. If an

institution chooses to report some of its affiliate loans in a service

area for a particular lending category, such as home mortgages, or

small business loans, it would be required to report all of its

affiliate loans of that category for that specific service area. An

agency would be able to consider the lending of an institution's

affiliate, notwithstanding whether the institution wants the agency to

consider its affiliate lending, if the agency were to determine that

such lending is integral to the institution's business. An affiliate's

lending would be integral to an institution's business if the

institution's operations closely involve or support the marketing,

management, or other operation of the affiliate's lending. Lending

would not be considered integral to an institution's business merely

because the institution had a financial interest in the affiliate.

Third, the revised proposal would no longer allow an institution to

include third party loans with its direct and affiliate loans for

purposes of assessing the geographic distribution of the institution's

lending or the distribution of its lending across borrower

characteristics. Under the revised proposal, third party loans could be

attributed to an institution only if they meet the definition of

community development loans. This change responds to comments from

community and consumer groups who expressed concern that institutions

could use third-party lending to avoid their direct lending obligations

and, in effect, ``buy out'' of their CRA obligations. The revised

proposal also would operate to relieve third party lenders of the

burden of reporting the geographic location of their loans that could

have been placed on them by the December proposal.

The Investment Test

In the December proposal, retail institutions as well as wholesale

or limited purpose institutions would have been evaluated under the

investment test based on the amount of assets they had devoted to

``qualified investments'' in comparison to their risk-based capital.

The focus of the investment test would have been on the ultimate impact

of an institution's investment rather than the investment per se.

Therefore, qualified investments would not have been credited under the

test unless they had a demonstrable impact, e.g., in providing loans or

community development projects that benefit low- and moderate-income

individuals and geographies.

Qualified investments would have included lawful investments that

benefit low- and moderate-income geographies or individuals in an

institution's service area. Examples of such investments would have

included those: (1) in support of local affordable housing and

community, economic, or small business development; (2) in community

development financial institutions, community development corporations,

community development projects, small business investment companies

(including specialized small business investment companies), and

minority- and women-owned financial institutions and other community

development financial intermediaries; (3) in consortia or other

entities serving low- and moderate-income individuals and areas; and

(4) in state and local government agency housing bonds or state and

local government revenue bonds specifically aimed at helping low- and

moderate-income areas and individuals. Eligible grants and the donation

or sale on favorable terms of branches to minority- or women-owned

financial institutions also would have counted as qualifying

investments.

The agencies could have adjusted an institution's rating upward

under the investment test to take into account whether the

institution's investments were particularly innovative or met a special

need or whether the institution's activities in connection with the

investments were particularly complex or intensive. The agencies also

would have been able to adjust an institution's rating upward if the

institution had made a large amount of investments that would have been

qualified investments except that they failed to benefit the

institution's service area. Downward adjustments would have been

justified only in exceptional cases.

Commenters criticized several aspects of the proposal. Most

notably, many banking industry commenters expressed dissatisfaction

with the test's focus on the amount of qualified investments relative

to an institution's risk-based capital. They felt reliance on any such

investment-to-capital ratio would unfairly penalize well-capitalized

institutions. Community groups commented on various aspects of how the

term ``qualified investments'' was defined and the banking industry

criticized the restriction that qualified investments must benefit the

institution's service area.

The investment test in the revised proposal has been modified to

address the principal concerns raised in the comments. The reliance on

the ratio of qualified investments to risk-based capital has been

eliminated. Rather, under the revised proposal, the agencies would

focus on the dollar amount of the institution's qualified investments

(independent of the institution's capital), the innovativeness and

complexity of the qualified investments and their connection to credit

needs, and the institution's responsiveness to credit and community

economic development needs.

Further, the revised proposal clarifies the definition of

``qualified investments.''\2\ Qualified investments are lawful

investments, deposits, membership shares in a credit union, and grants

that primarily benefit low- or moderate-income individuals or

businesses or farms with under $1 million in annual revenues or that

qualify as small businesses under SBA regulations; and that address

affordable housing (including multifamily rental housing) or other

community economic development needs that are not being met in the

normal course of business by the private market. The agencies intend

the limitation regarding needs not being met by the private market to

exclude untargeted municipal bonds and standard mortgage-backed

securities. The revised proposal also would clarify that grants,

membership shares in a credit union, and other non-loan financial

support can qualify as qualified investments. Under the definition, a

qualified investment would not otherwise be disqualified because an

institution receives favorable treatment (for example as a tax

deduction or credit) for them under the Internal Revenue Code. In

addition, under the revised proposal, qualified investments no longer

would need to benefit an institution's service area, provided the

investments benefit a broader statewide or regional geographic area

that includes the institution's service area. This change would conform

with the broader geographic scope permitted for community development

loans discussed previously.

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\2\Examples of qualified investments identified by the agencies

include, but are not limited to, investments and grants: in or to

financial intermediaries (including, but not limited to CDFIs, CDCs,

minority- and women-owned financial institutions, and low-income or

community development credit unions) that primarily lend or

facilitate lending in low- and moderate-income areas or to low- and

moderate-income individuals in order to promote affordable housing

and/or community economic development; in support of organizations

engaged in affordable housing rehabilitation and construction,

including multifamily rental housing; in support of organizations

promoting small businesses, including Small Business Investment

Companies (SBICs), and specialized SBICs; in and to not-for-profit

organizations serving low- and moderate-income housing needs and/or

other community economic development needs; to support or develop

facilities that promote community economic development in low- and

moderate-income areas or for low- and moderate-income individuals,

such as day care facilities, in projects eligible for low-income

housing tax credits; in state and municipal obligations that

specifically support affordable housing or other community economic

development to benefit low- and moderate-income individuals or

areas; to not-for-profit organizations serving low- and moderate-

income housing and/or other community economic development needs,

such as home-ownership counseling, home maintenance counseling,

credit counseling, and other financial services education; and in or

to organizations supporting activities essential to the capacity of

low- and moderate-income individuals or geographies to utilize

credit or to sustain economic development.

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The revised proposal deletes the definition of small business from

the December proposal that some commenters criticized as too

complicated. Instead, the qualified investment and community

development loan definitions refer to investments and loans that

benefit businesses with annual revenues under $1 million or that would

qualify as small businesses under a Small Business Administration

program. The $1 million figure was chosen because it is used in

Regulation B to differentiate among borrowers for requirements

concerning adverse action notices and application retention. The new

proposed definitions also maintain a treatment of small business that

conforms to the SBA definitions, as required by law for federal

agencies.

As described more fully later in this preamble, under the revised

proposal, wholesale or limited purpose banks would be subject to

evaluation under the new community development test rather than under

the investment test.

The Service Test

The December proposal would have evaluated an institution's CRA

service performance primarily on the basis of the percentage of its

branches located in or readily accessible to low- and moderate-income

geographies. The percentage of branches that an institution would have

been expected to have in or readily accessible to low-and moderate-

income geographies in each service area would have depended, in part,

on the number of such geographies in the service area. Under the

December proposal, institutions would not have been required to expand

the size of their branching network or to operate branches at a loss.

The agencies would have been able to adjust an institution's

service record upward or downward to reflect more accurately its branch

service to lowor moderate-income geographies or individuals, but

downward adjustments would have been made only in exceptional cases. In

determining the appropriateness and degree of any adjustment, the

agencies would have considered: (1) the institution's record of opening

and closing branches; (2) whether branches--wherever located--were

actually serving low- and moderate-income individuals; (3) any

significant differences in the quality, quantity or types of services

offered to low- or moderate-income individuals or geographies; and (4)

similar factors. The agencies also could have adjusted an institution's

rating upward to reflect a strong record of providing or supporting

other services that promote credit availability for low- and moderate-

income individuals or geographies. Particular weight would have been

given to credit and home-ownership counseling, small and minority-owned

business counseling, low-cost check-cashing, and low-cost deposit

services.

The service test contained in the revised proposal would change the

service test contained in the December proposal in response to comments

received by the agencies. In crafting the December proposal, the

agencies were guided by a belief that ready access to branches is a

critical factor in the availability of credit and deposit services in a

community. However, many banking industry representatives commented

that the service test placed too much emphasis on ``brick and mortar''

branches (i.e., permanent staffed banking facilities). The commenters

noted that although branches are still valuable, present technology has

made the need for branches less imperative to the provision of banking

services. On the other hand, many consumer groups stressed that,

despite changes in technology, brick and mortar branches continue to

have symbolic and practical relevance to credit availability. A number

of commenters emphasized, however, that evaluations based on the mere

presence of brick and mortar facilities is not sufficient. Rather, the

agencies must consider the actual services that are provided.

In light of these comments, the agencies have decided to modify the

service test so that ``brick and mortar'' branches no longer would

serve as the overwhelming factor in assessing an institution's service

performance, although they still would receive prominent consideration.

Under the revised proposal, equal weight would be given to the actual

services provided to low- and moderate-income geographies.

Under the revised proposal, the agencies would evaluate an

institution's systems for delivering retail banking services (where the

term ``systems'' includes, among other things, branches, automated

teller machines (ATMs), loan production offices, banking by telephone

or computer, mobile branches, and bank-at-work or by-mail programs) by:

(1) assessing the distribution of the institution's branches and ATMs

among low-, moderate-, middle-, and upper-income geographies; (2)

reviewing the institution's record of opening and closing branches and

ATMs; (3) assessing the range of services provided in low-, moderate-,

middle-, and upper-income geographies; and (4) evaluating the

availability of alternative systems for delivering retail banking

services.

In addition, the agencies would evaluate the extent to which an

institution provides community development services and the

innovativeness and responsiveness of such services, given the needs of

the institution's community and the capacity and constraints of the

institution. The revised proposal defines community development

services as services that primarily benefit low- and moderate-income

individuals, businesses or farms with annual revenues less than or

equal to $1 million, or businesses or farms that qualify as small

businesses under a Small Business Administration program and that

address affordable housing (including multifamily rental housing) or

other community economic development needs that are not being met by

the private market.\3\

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\3\Examples of community development services would include,

among other things: providing technical expertise for not-for-profit

organizations serving low- and moderate-income housing needs and/or

economic growth and development, lending executives to organizations

facilitating affordable housing construction and rehabilitation and/

or development of affordable housing; providing credit counseling,

home buyers counseling, home maintenance counseling, and/or

financial planning to promote community economic development and

affordable housing, school savings programs, and other financial

services education; and offering lifeline deposit services, low-cost

or free government check cashing, or participating in an electronic

benefit transfer network.

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The Community Development Test for Wholesale or Limited Purpose

Institutions

Under the December proposal, wholesale or limited purpose

institutions were defined as insured depository institutions that are

in the business of extending credit to the public but do not make a

significant amount of reportable loans (i.e., home mortgage, consumer,

small farm and small business loans). These would have included

institutions that make primarily large commercial loans, as well as

credit card banks, and similar institutions. The December proposal

would have required an evaluation of the CRA performance of these

institutions primarily under the proposed investment test.

Performance under that test would have been measured based on the

amount of an institution's assets devoted to qualified investments as

compared to its risk-based capital. Qualified investments would have

consisted of lawful investments that benefited low- and moderate-income

geographies or individuals in an institution's service area, including

investments that supported local affordable housing and community,

economic, or small business development. Eligible grants and loans that

would have constituted a qualified investment also would have been

included within the investment test. In assigning the overall rating

for wholesale or limited purpose institutions, the institution's

investment test rating could have been increased one level for

outstanding performance and decreased one level for a ``substantial

noncompliance'' rating on the service test.

In light of the comments received, the revised proposal would

replace the investment test with the community development test as the

primary test for wholesale or limited purpose institutions. A number of

commenters considered the investment test too narrowly focused to use

as a tool for assessing the CRA performance of wholesale or limited

purpose institutions and suggested replacing the test with a test that

focused on community development activities more generally.

The community development test in the revised proposal would focus

on a wholesale or limited purpose institution's record in helping to

meet the credit needs of its service area through qualified

investments, community development lending, and community development

services. In general, these community development-related activities

would be similar to the community development aspects of the lending

and service tests, and would adopt the definition of qualified

investments used in the investment test in the revised proposal. The

community development test also would consider small business and small

farm loans as well as loans to low- and moderate-income individuals and

geographies as community development loans, whether or not reported or

collected under the data collection requirements of the revised

proposal.

Several commenters believed the December proposal's definitions of

wholesale or limited purpose institutions did not clearly distinguish

between these types of institutions and retail institutions. Some

commenters also suggested that these institutions be permitted to

conduct a certain amount of incidental retail lending without losing

their wholesale or limited purpose institution status. Several comments

suggested that an institution should have the opportunity to confirm

its status as a wholesale or limited purpose institution with the

agencies in advance of being examined.

In response to these comments, the revised proposal would clarify

which institutions would be considered wholesale or limited purpose

institutions for purposes of CRA. The definition for institutions

eligible for wholesale or limited purpose designation would be as

follows: (1) wholesale institutions are institutions that are not in

the business of extending home mortgage, small business, small farm, or

consumer loans to retail customers; and (2) limited purpose

institutions are institutions that offer only a narrow product line

(such as credit cards or automobile loans) to a national or regional

market. An institution would not be considered in the business of

extending loans to retail customers if it does not hold itself out to

the retail public as providing such loans and the institution's

revenues from extending such loans are insignificant when compared to

its overall lending operations. An institution could conduct some

incidental retail lending if the retail activity would not cause the

institution to exceed these limitations. However, a so-called ``niche

institution'' (an institution that is in the business of lending to the

public but which specializes in certain types of retail loans or

extending credit to a class of borrowers with, for example, certain

financial or professional characteristics) would not generally qualify

as a wholesale or limited purpose institution.

The revised proposal also would require an institution that elects

to be evaluated as a wholesale or limited purpose institution to file a

written request with the appropriate agency and receive confirmation of

its status before the commencement of the examination. The agencies

will issue guidelines regarding how long in advance of a scheduled

examination an institution must file its request, and under what

circumstances an institution will have to reapply to retain wholesale

or limited purpose status. An institution whose request for wholesale

or limited purpose status has been denied by the appropriate agency

would be evaluated under the tests applicable to retail institutions,

small institutions, or an institution with approved strategic plans, as

appropriate.

The OTS did not include provisions for wholesale or limited purpose

thrifts in its version of the December proposal. In response to

comments, the OTS's revised proposal includes provisions that would

allow thrifts the opportunity to request designation as a wholesale or

limited purpose institution.

Small Institution Assessment Option

The December proposal would have offered small banks and thrifts

the option of choosing to be evaluated under a streamlined assessment

method. The regulations would not have imposed upon small institutions

the data collection requirements imposed on other institutions. The

agencies stressed in the preamble to the December proposal that,

notwithstanding the different assessment methods, examinations of small

banks and thrifts would have been meaningful examinations and would not

have been implemented as de facto exemptions.

Small banks and thrifts were defined in the December proposal as

independent institutions with assets of less than $250 million or

members of holding companies the total banking and thrift assets of

which are less than $250 million. A small institution's CRA rating

under the December proposal would have been based primarily on its

lending record. An institution would have been presumed to receive a

``satisfactory'' rating if it had a reasonable loan-to-deposit ratio,

made the majority of its loans locally, had a good loan mix (i.e., made

a variety of loans to the extent permitted by law and regulation and

lent across economic levels), had no legitimate, bona-fide complaints

from community members, had not committed an isolated act of illegal

discrimination of which it had knowledge that it had not corrected

fully or was not in the process of correcting fully, and had not

engaged in a pattern or practice of illegal discrimination that it had

not corrected fully. If an institution was required to report loans

under the HMDA, the institution also would have been required to have a

reasonable geographic distribution of reported loans.

A small institution that met each of the standards for a

``satisfactory'' rating and exceeded some or all of those standards

could have received an overall rating of ``outstanding'' depending on

the degree to which it exceeded the criteria for a ``satisfactory''

rating and, at its option, its record of making qualified investments

and its record of providing services. If a small institution failed to

meet or exceed all of the standards for a ``satisfactory'' rating, the

relevant agency would have conducted a more extensive examination of

the institution, including, at the option of the institution, an

examination of its investment and service performance. Also, if a small

institution operated in more than one service area, the relevant agency

would have evaluated the institution's performance in all of those

service areas.

Many community and consumer group commenters asked the agencies to

eliminate the small institution assessment method because they believed

that it would operate as an exemption for qualifying institutions.

However, many banks and thrifts, as well as the weight of Congressional

comments, supported the streamlined approach. The agencies have

retained the streamlined assessment method as modified in the revised

proposal. The agencies also have retained the December proposal's

exemption of small institutions from the new data collection and

reporting requirements for small business, small farm and community

development loans, although the agencies have clarified that small

institutions would not be subjected to those requirements because they

request to be evaluated under the strategic plan assessment option.

The agencies reiterate, however, that they do not intend by the

proposal to exempt small institutions from the CRA or subject them to a

less demanding standard of performance. The revised proposal has been

redrafted so that the format of the small institution approach is more

straightforward. The revised proposal first states the criteria that

the agencies would use to assess the performance of a small

institution, and then describes the performance levels that correspond

to satisfactory performance. As under the tests for large retail

institutions, the agencies have eliminated the structure of rebuttable

presumptions and have proposed a rating profile. A small institution's

performance need not fit every aspect of the rating profile describing

``satisfactory'' performance for it to receive that rating.

Exceptionally strong performance on some aspects can compensate for

weak performance on others provided the institution's overall

performance is consistent with the rating profile. Small institutions

that do not meet the standards for a ``satisfactory'' record would be

given the appropriate rating without the necessity of a ``closer

review.''

Some commenters expressed concern that under the December proposal

an institution would be required to affirmatively elect to be examined

under the streamlined assessment method and suggested that the

streamlined method be the default examination procedure unless a

qualifying institution elects another assessment method. The agencies

agree and have drafted the revised proposal accordingly.

Commenters representing holding companies and small institutions

that are affiliates of holding companies with total banking and thrift

assets over $250 million urged that the $250 million asset limit take

into consideration only the assets of the subject bank or thrift and

not the aggregate amount of bank and thrift assets held by the holding

company or, alternatively, that the asset limit be raised. Many

community and governmental groups, on the other hand, believed that the

asset limit should be lowered. After considering all of the comments,

the agencies have decided to retain the definition of small institution

set forth in the December proposal. No compelling evidence was

presented to support a change of the asset limit. Further, the revised

proposal reflects the notion that the CRA performance of a small

independent institution or small affiliate institution of a small

holding company should be measured against different standards than a

small institution affiliate of a larger holding company. The

consideration of assessment context added in the revised proposal will

permit the agencies to make this differentiation. The larger holding

company could be expected to provide support and assistance to a degree

not available to a small independent institution or to an affiliate

institution of a small holding company.

Many commenters from small institutions criticized the presumption

in the December proposal that a 60% loan-to-deposit ratio was

reasonable. These commenters pointed out that economic conditions,

institutional capacity and other constraints may result in loan-to-

deposit ratios significantly below this figure. Although the agencies

did not intend the December proposal to suggest that a loan-to-deposit

ratio below 60% would have been presumed less than reasonable, the

agencies have eliminated the use of any fixed percentage. Instead, the

revised proposal would require that an institution's loan to deposit

ratio, adjusted for seasonal variation and, as appropriate, other

lending related activities, must be reasonable given the institution's

size, financial condition, and the credit needs of its service area.

The adjustment for lending related activities, such as secondary market

sales and community development lending and investment, is new in the

revised proposal. This provision responds to concerns that institutions

that package and sell their loans would be disadvantaged, compared to

portfolio lenders, by a strict loan-to-deposit ratio test. The proposed

adjustment also addresses concerns raised by commenters that the small

institution assessment method in the December proposal would have

ignored the community development lending performance of small

institutions.

Many industry commenters also criticized the requirement in the

December proposal that, to be presumed to be performing satisfactorily,

an institution would have needed a good loan mix, which would have

included offering, to the extent permitted by law, a variety of loans

to customers across economic levels. These commenters were concerned

that an institution would have been required to offer all permissible

loan products to all customers. The agencies agree that the focus on

the types of products offered was inconsistent with the tenor of the

proposed regulation as a whole and have altered the criterion in the

revised proposal to eliminate any requirement concerning the types of

products that an institution offers. The revised proposal would retain

the aspect of the criterion focussing on lending to customers across

economic levels.

In a related change, the revised proposal would broaden the

criterion in the December proposal concerning the distribution of loans

by institutions required to report loan data under HMDA. The revised

proposal would explicitly provide that the agencies would consider the

geographic distribution of loans of all small institutions, not just

these subject to HMDA. The agencies believe this consideration was

implicit in the December proposal, which required lending across

economic levels. In any event, the agencies do not intend this change

to result in any increased documentation burden on small institutions.

The geographic analysis would be performed by the agencies' examiners

and would not be required of the institutions.

The agencies also received comments questioning the meaning of the

criterion in the December proposal focussing on the complaint record of

small institutions. Because of concerns by commenters that a

``legitimate, bona- fide complaint'' was not adequately defined, the

agencies have now proposed a criterion that would focus on the

institution's record of taking appropriate action, as warranted, in

response to written complaints about its CRA performance.

Many commenters expressed concern that the December proposal was

unclear regarding the circumstances under which a small institution

could have earned an ``outstanding'' or less than ``satisfactory''

rating. The changes in the revised proposal clarify and conform the

treatment of small banks to the requirement proposed for large retail

institutions--that lending performance must be ``satisfactory'' for an

institution to receive an overall satisfactory rating. Under the

revised proposal, the agencies would consider a small institution's

investment and service performance in order to determine whether it is

eligible for an ``outstanding'' rating. Strong investment or service

performance could help boost a small institution's rating to the

``outstanding'' level. Poor investment or service performance would not

lower a small institution's rating below ``satisfactory'' but could

prevent the institution from receiving an ``outstanding'' rating. The

agencies would not consider investment and service performance to

offset less than ``satisfactory'' performance by a small institution on

the basic assessment criteria.

The revised proposal also reflects minor changes to clarify the

treatment of small institutions. The agencies have eliminated the

criterion in the December proposal relating to discrimination because

the issue is addressed in the section on the assignment of overall

ratings. In addition, consistent with the changes in the proposal for

large institutions, the discussion of the examination procedures for

small institutions with multiple service areas has been eliminated.

Strategic Plan Assessment

The December proposal would have provided that, as an alternative

to being rated under the lending, service, and investment tests, or the

small institution assessment standards, an institution could submit to

its supervisory agency for approval a strategic plan detailing how the

institution proposed to meet its CRA obligation. The December proposal

would have required that the plan be submitted three months in advance

of its effective date, and that the institution solicit public comment

on the plan at the time the plan is submitted to the agency. No plan

would have been approved unless it provided measurable goals for

proposed performance and those goals constituted at least satisfactory

performance under the standards of the regulation. No plan could have

had a term beyond two years, and the institution could have petitioned

the agency to amend the plan on the grounds that a material change of

circumstances made the plan no longer appropriate. The agency would

have assessed the CRA performance of the institution under the plan. If

the institution failed to meet or exceed the preponderance of its

goals, its performance would have been evaluated against the lending,

service and investment tests or the small institution assessment

method, as applicable. The preamble to the December proposal stated

that an institution operating under an approved strategic plan would

not be relieved of its obligation to report data under the regulation.

The concerns regarding the strategic plan option most consistently

raised by the comments were the December proposal's lack of details

concerning important aspects of how the plan option would operate and

the nature of public input into the process. The revised proposal would

provide substantially more detail about the operation of the plan

option than the December proposal, and would modify the December

proposal in other respects as well. In the revised proposal, the

agencies have attempted to provide a real alternative to the standard

lending, investment, and service tests through the strategic plan

option, while assuring that those operating under a plan are subject to

a CRA assessment that is no less stringent and performance-based than

the proposed standard tests.

The revised proposal would substantially revise the provisions in

the December proposal regarding public participation in the plan

process. An institution would be required to informally seek

suggestions from the public while developing the plan. Once the

institution had developed the plan, the institution would be required

to formally solicit public comment on the plan for at least 30 days.

The agencies have decided not to extend the minimum comment period to

avoid unduly lengthening the plan process. After the comment period,

the institution would submit the plan to its regulator, along with any

comments received, and, if the plan was revised in light of the

comments received, the plan in the form released for public comment.

Under the revised proposal, a submitted plan would be approved if the

agency fails to act on the plan within 60 days after submission, unless

the agency extended the review period for good cause. Until a plan was

approved, an institution would be subject to the standard performance

tests.

These changes would increase the opportunity for productive

community input in the plan process. By requiring an institution to

seek informal suggestions in formulating a plan, and then to solicit

formal comment before submitting a plan to the agency, this process

will encourage consultation between an institution and its community,

including local government, community leaders, and the public. There

would not be a further comment period after the institution submits its

proposed plan to the agency because such a comment period could

undermine the direct communication and consultation between an

institution and its community that is most beneficial to the process.

The revised proposal would provide that, in evaluating a plan, the

agency would consider the public's involvement in formulating the plan

and any response by the institution to public comment on the plan.

Several comments appeared to misunderstand why the strategic plan

would provide for input from the public. The plan option would provide

institutions an opportunity to tailor their CRA objectives to the needs

of their community and their capacity and expertise. Few comments

suggested that an institution would be able to determine the needs of

its community without consulting in some fashion with those in the

community. Several industry comments were concerned that under the

strategic plan option, community organizations would play an

inappropriate role in an institution's operations. However, the purpose

of the consultation would be for the institution to develop information

about the needs of its community and how they might be met so that it

can make better judgments when formulating its plan objectives. The

decision regarding how the institution is to meet those needs would

remain with the institution. In reviewing the public participation, the

agencies would not consider whether community organizations unanimously

supported the plan, but whether the institution made an appropriate

investigation to determine the needs of its community, and whether,

considering the information about community credit needs that the

institution received in the comments, the plan goals are appropriate.

The agencies would evaluate strategic plans and their proposed

measurable goals in the assessment context against which the tests and

standards of the proposed regulation would be applied.

The revised proposal also would provide significantly more guidance

regarding the standards for approval of a plan. Commenters on the

December proposal were divided over the standards for approval. Some

commenters thought the regulation should state that the standards for

approval of a plan are the same as the standards on the lending,

service, and investment tests, or that the plan should require no less

lending than the lending test. In contrast, some industry commenters

thought that the plan would not provide a real alternative unless it

permitted an institution to depart from the standard tests in

responding to local needs. Under the revised proposal, a plan would

have to specify measurable goals for helping to meet the credit needs

of the institution's service area, particularly the needs of low- and

moderate-income geographies and low- and moderate-income individuals.

These goals would have to reflect the institution's capacity and

constraints, product offerings, and business strategy.

The revised proposal would require that the plan specify measurable

goals in lending, investment, and the provision of services, as

appropriate to the circumstances. The proposal would specify the broad

criteria in lending, investment, and services that should be the

framework for the plan goals. At the same time, however, the proposal

would make clear that an institution has great flexibility to fashion

its program within those parameters. An institution would not be

required to set levels of performance in all three categories. In order

to maintain the focus on lending for retail institutions operating

under a plan, a retail institution's goals would have to emphasize

lending and lending-related activities, unless a different emphasis

were appropriate given the credit needs of the service area, public

comment, and the institution's capacity and constraints.

The agencies intend through these provisions to provide guidance to

the industry and the community regarding the standards for plan

approval, while preserving substantial flexibility for institutions to

tailor their CRA programs. The purpose of the plan is not to provide

institutions operating under a plan with a different or lesser

obligation to help meet the needs of their community; it is to provide

more certainty and flexibility for those institutions that wish to meet

their obligation in a fashion that they believe may not be

appropriately assessed by the standard performance tests.

The revised proposal would require that each plan specify

measurable goals, the satisfaction of which, the institution believes,

would warrant a ``satisfactory'' rating. An institution also would have

the option of identifying a separate set of goals that, if met, would

warrant an ``outstanding'' rating. An institution would not be

considered for a rating of outstanding unless its plan contained

outstanding goals that had been approved by the relevant agency.

The revised proposal also would clarify how performance would be

assessed under the plan. The agencies believe that the standard of

performance in the December proposal should be strengthened, and the

revised proposal would require an institution to substantially achieve

its plan goals to receive that rating. This would apply to the

satisfactory rating and, if the plan contained such approved goals, to

the outstanding rating.

Some commenters believed that the possibility of being considered

under the standard tests, as contemplated by the December proposal,

made the plan a less attractive alternative to the standard tests. The

revised proposal would, unless the institution chose otherwise, rate an

institution's performance under an approved plan solely in relation to

its plan goals. An institution would have the option, however, to elect

in its plan to be subject to the standard tests should its performance

under the plan goals be less than satisfactory. The agencies intend

that an institution operating under an approved plan would, during the

period of the plan, never be subject to assessment under the standard

tests, unless the institution so chose.

In response to industry comments that said the two year plan term

in the December proposal was too short to warrant the expense of

preparing a plan and to permit institutions to initiate activities with

a longer view, the agencies have lengthened the possible plan term to 5

years, but would require the plan to have annual interim measurable

goals. The agencies agree that it is beneficial to provide institutions

the opportunity for long-range planning, and the interim goals should

enable effective examinations during the plan period. The proposal also

would permit an institution to develop a single plan for one or more or

all of its service areas and allow affiliated institutions to prepare

joint plans.

A number of industry commenters indicated that the possibility of

public disclosure of confidential information presented a major

disincentive to their use of the strategic plan alternative. The

revised proposal would allow institutions to submit additional

information to the relevant agency on a confidential basis. However,

the publicly available information would have to be sufficiently

specific to enable the public and the agency to judge fairly the merits

of the plan's goals.

The revised proposal also would provide more detail regarding plan

amendment. An institution would be able to petition for an amendment on

the grounds that a material change in circumstances had made the plan

no longer appropriate. In order to preserve the integrity of the public

participation in the plan process, any proposed amendment would have to

go through the public consultation and comment process described

earlier in this preamble.

Despite industry comments to the contrary, the revised proposal

continues to provide that approval of a plan would not affect an

institution's data collection responsibilities. The data are useful to

the agencies in assessing overall lending in communities, and would

also be of value to the public. Since the institution's plan would be

in its public file, the public would have the appropriate context in

which to evaluate the lending data.

The revised proposal also clarifies that evidence of discrimination

would affect an institution's rating based on plan performance in the

same manner as such evidence would affect an institution's rating

calculated pursuant to the standard tests.

Assigned Ratings

Under the December proposal, institutions would have been assigned

one of four overall, or composite, ratings, as required by the statute:

``outstanding'', ``satisfactory'', ``needs to improve'', and

``substantial noncompliance''. In the December proposal, ratings on the

lending, investment, and service test were combined into a composite

rating. For a retail institution, the institution's rating under the

lending test would have served as the base rating. This base rating

would then have been increased by two levels in the case of outstanding

investment performance or by one level in the case of high satisfactory

investment performance. For a wholesale or limited-purpose institution,

the institution's rating under the investment test would have served as

the basis for the overall rating. For any institution, the rating would

have been increased by one level in the case of an ``outstanding''

rating for service and decreased by one level in the case of a

``substantial non-compliance'' rating for service.

Because the lending, service and investment tests had five rating

levels rather than four, the rating would then have been converted to

the statutorily-required four level rating system, with ``high

satisfactory'' and ``low satisfactory'' both scored as

``satisfactory''. An institution that would otherwise have received a

``needs to improve'' rating would have been rated in ``substantial

noncompliance'' if the institution received no better than a ``needs to

improve'' rating on each of its two previous examinations. Finally, the

rating would have been adjusted to take into account any illegal

lending discrimination by the institution to arrive at a final

composite rating.

Many commenters, particularly community and consumer groups, were

concerned that the rating system proposed in December permitted a

retail institution with poor lending performance to achieve a

satisfactory or outstanding overall rating through outstanding

performance on the investment and service tests. These commenters asked

that no retail institution be permitted to achieve a satisfactory

overall rating unless it received a satisfactory rating on the lending

test. The revised proposal would ensure that lending performance

receives sufficient weight by weighing a retail institution's rating on

the lending test so as to count for at least 50 percent of its overall

rating. Furthermore, a retail institution would be required to achieve

a rating of satisfactory on the lending test in order to receive an

overall rating of satisfactory.

Some commenters were concerned that investment and service

performance only affected an institution's overall rating at the

margins--if investment or service performance was extraordinarily

strong or weak. The revised proposal would allow investment and service

performance to boost an institution's rating provided the institution

had achieved a rating of satisfactory on the lending test. Poor

performance on either the investment or service test could negatively

affect an institution's overall performance.

These principles would be implemented through the process described

in paragraph (b) of Appendix A for assigning a rating for retail

institutions assessed under the lending, service and investment tests.

Points would be assigned to an institution's performance on each of the

underlying tests. The total number of points would determine the

composite rating, unless the total exceeds twice the number of points

attributable to the institution's performance under the lending test.

In that case, the composite rating would be determined using twice the

number of points attributable to the institution's lending performance

to ensure that lending performance accounts for at least 50 percent of

the overall rating.

Small institutions, wholesale or limited purpose institutions, or

institutions with an approved strategic plan would be rated as

described in paragraphs (c) through (e) of Appendix A.

As in the December proposal, the revised proposal would require the

agencies to adjust ratings for all institutions, regardless of the

method of CRA evaluation, to take evidence of discrimination or other

illegal credit practices into consideration. In addition, the revised

proposal, as in December's proposal, provides that an institution that

otherwise would receive a needs to improve rating would be rated in

substantial noncompliance if it received no better than a needs to

improve rating on each of its two previous examinations.

Lending Discrimination

Under the December proposal, an institution would presumptively

have received a final CRA rating of less than satisfactory if the

institution (1) committed an isolated act of illegal discrimination of

which it had knowledge that it had not corrected fully or was not in

the process of correcting fully or (2) engaged in a pattern or practice

of illegal discrimination that it had not corrected fully. The

presumption could have been rebutted in the case of technical or de

minimis violations, for example, if an institution violated the Equal

Credit Opportunity Act by offering a preferential credit program for

individuals over age 55 (rather than limiting the program to

individuals over age 62 as the law requires).

Many community and consumer groups criticized this proposal as a

retreat from current practice. They pointed out that the existing

regulation provides that the agencies will consider any evidence of

discriminatory or other illegal credit practices. Although the agencies

did not intend in the December proposal to reduce the weight given

evidence of illegal discrimination in the CRA evaluation process, they

believe that the commenters' concerns should be addressed. The revised

proposal conforms with the language of the existing regulation. Also,

the discrimination provisions in the revised proposal would avoid the

use of a rebuttable presumption consistent with the elimination of

presumptions throughout the proposal.

Under the revised proposal, any evidence of discriminatory or other

illegal credit practices would adversely affect the agencies'

evaluation of an institution's CRA rating. In determining the effect on

an institution's rating, the agencies would consider the nature and

extent of the evidence, the policies and procedures that the

institution has in place to prevent discriminatory or other illegal

credit practices, any corrective action that the institution has taken

or has committed to take, particularly voluntary corrective action

resulting from self-assessment, and other relevant information, such as

the institution's past fair lending performance.

There was also some confusion regarding whether the December

proposal intended that illegal discrimination would have the same

effect for all institutions regardless of the assessment method that

they chose. The revised proposal makes clear that evidence of

discrimination would be considered in assigning a rating to all banks

and thrifts, regardless of whether they were evaluated under the

lending, service, and investment tests, the community development test

for wholesale or limited purpose banks, the small institution

assessment method, or the strategic plan option.

Multiple Service Areas

The preamble to the December proposal stated that an institution's

CRA rating should reflect its performance in all the local communities

in which it does business. However, the proposed regulatory language

provided that the agencies would conduct full lending, service, and

investment tests (or the other appropriate assessments) in a sample of

the service areas in which the institution operated. The agencies would

then assign separate composite ratings for each area. The institution's

overall rating would reflect the performance of the institution in all

service areas studied.

Some commenters urged the agencies to conduct assessments in every

one of an institution's service areas, because every institution has an

obligation to help meet the credit needs of all of its service areas.

These commenters and others also expressed concern that the regulation

did not provide clear rules as to how performance in each of the

service areas assessed would be combined to arrive at an overall rating

for the institution.

An institution is obligated to help meet the credit needs of its

entire community, including all of the institution's service areas.

However, ensuring that institutions fulfill this responsibility does

not necessarily require that an institution's performance in each of

its service areas must be examined. Questions of how many service areas

should be examined during an examination and how performance in

different service areas should be weighed are more appropriately

handled through examination procedures than through regulatory

language. The agencies have therefore omitted from the revised proposal

all discussion of examination treatment of multiple service areas.

The agencies note that the Interstate Banking Efficiency Act would

establish requirements for the examination of multi-state and other

institutions. This proposal and examination procedures will be modified

as necessary to comply with that Act if it becomes law.

Effect of Ratings on Applications

The CRA requires the agencies to consider an institution's CRA

performance record when considering an application by the institution

to establish a deposit facility (e.g., branch). The December proposal

specified how CRA ratings would be considered in applications. For

example, an application from an institution with a ``substantial

noncompliance'' CRA rating would have generally been denied, whereas an

application from an institution with an ``outstanding'' rating would

have been given extra weight. A ``satisfactory'' rating generally would

have been consistent with approval of an application and a ``needs to

improve'' rating, absent other evidence, generally would have resulted

in a denial or conditional approval of an application. The agencies

emphasized, however, that the CRA examination rating is not conclusive

and recognized that other information related to CRA performance and

the convenience and needs of communities, including information

collected through public comment and reports, is also relevant and

would be considered.

Although not intended as such, a number of the commenters believed

these provisions would have provided institutions with a ``safe

harbor'' from challenges to their performance record in the

applications process if they achieved an ``outstanding'' CRA

examination rating. Those commenters were concerned that they could be

prevented from effectively commenting on the CRA performance aspects

relevant to applications and urged that those provisions be dropped.

The discussion of the effect of particular ratings on applications

in the December proposal was not intended to alter the agencies' policy

of considering examination ratings and public comment during the

applications process and has been deleted. As stated in the December

proposal, the agencies have consistently recognized that materials

relating to CRA performance received during the applications process

from public comments and other sources, can and do provide relevant and

valuable information. The revised proposal explicitly states that

interested parties would have the opportunity to comment on

applications and that the agencies would take their views into account

in considering the CRA performance of an institution in the

applications process. The agencies continue to believe, as provided in

the Interagency Policy Statement Regarding the Community Reinvestment

Act, that information from an examination is a particularly important

consideration in the applications process because it represents the on-

site evaluation of an institution's CRA performance by its primary

federal regulator. The revised proposal also would specify that an

institution's record of CRA performance would be considered in an

institution's expansion proposals (as defined in the CRA) and may be

the basis for approving, denying, or conditioning approval of an

application.

Definition of Service Area

The December proposal would have replaced the concept of

``delineated community'' in the existing regulation with the concept of

service area. The December proposal would have defined service area as

the area around each institution's office or group of offices where the

preponderance of direct reportable loans made through those offices are

located. A service area would have been presumed acceptable if it was

broad enough to include low- and moderate-income geographies and did

not arbitrarily exclude such geographies. An institution had the

opportunity to show there were no low- and moderate-income geographies

within a reasonable distance given its size and financial condition,

and the supervisory agency could reject an otherwise acceptable service

area if the service area did not account for the true effective lending

territory of the institution or if it reflected past redlining or

illegal discrimination. The proposal would have required an institution

to delineate multiple service areas if the geographies it served

extended substantially across state boundaries or the boundaries of a

Metropolitan Statistical Area (MSA). An institution serving military

customers would have been permitted to delineate a ``military

community'' consisting of those customers. Each institution would also

have been required to compile and maintain a list of all the

geographies within its service area or areas and a map of each service

area. The December proposal would not have required wholesale or

limited purpose institutions to delineate a service area, but would

have treated all low- and moderate-income geographies in the country as

the service area for wholesale or limited purpose institutions.

As a result of numerous comments received on this issue, the

revised proposal makes several changes to the definition. Several

commenters suggested that the proposed regulation adopt concepts from

the existing regulation, including the equidistance provision that

requires an institution to include those areas around its offices where

it makes a substantial portion of its loans and all other areas

equidistant from its offices as those areas. The revised proposal would

adopt the equidistance principle from the current regulation in

slightly modified form. The equidistance requirement is an effective

tool to assure that the delineation of a service area is consistent

with the purposes of the statute and that institutions do not draw

their service areas too narrowly. This modification clarifies the

service area requirement and builds on concepts with which the industry

and community already have experience. This change does not

significantly modify the substance of the December proposal, since the

December proposal preamble stated that a service area conforming to the

equidistance concept would generally have been acceptable.

The revised proposal also incorporates the concept of ``local

area'' from the current regulation. This responds to comments

expressing concern that loans made a substantial distance from a branch

might inappropriately expand the scope of a service area.

The revised proposal would delete the requirement that a service

area be broad enough to include low- and moderate-income areas. The

necessity for this requirement was unclear, given the provision

preventing institutions from arbitrarily excluding low- and moderate-

income geographies. The proposal would clarify that the requirement

that low- or moderate-income geographies not be arbitrarily excluded

would take into account the institution's size, financial condition,

and the extent of its branching network. An institution's performance

evaluation would include an account of how many low- and moderate-

income geographies are included in the institution's service area(s).

The revised proposal would clarify that an institution's service

area is derived from its direct lending in relation to its branches and

proprietary deposit-taking ATMs, rather than its other non-deposit-

taking offices. This appropriately links an institution's CRA

obligations to where it takes deposits, while enabling the agencies to

review whether the institution is serving the needs of its entire

community in the manner in which it extends credit.

Industry commenters were particularly concerned that the December

proposal meant that lending conducted by non-branch offices, such as

loan production offices, would expand an institution's service area.

The revised proposal would not require an institution to include

geographies where an institution has made loans through a loan

production office, unless those geographies are in the local area

around a deposit-taking branch or ATM. However, an institution would be

free to include such geographies if it wishes, and the regulation would

provide some incentive to do so. Under the revised proposal, if an

agency determined that lending by an institution's affiliate(s) was

integral to the business of the institution, then it would include the

lending by that affiliate in its assessment of the institution's

lending performance, even if the institution had not requested the

agency to do so. In addition, by limiting the size of its service area,

an institution would increase the likelihood that it would perform

poorly on the criterion of the lending test that considers the

proportion of the institution's total lending in its service area(s).

Rather than requiring the service area to include those geographies

accounting for a ``preponderance'' of the institution's loans, as in

the December proposal, or the areas accounting for a ``substantial

portion'' of the institution's loans, as in the existing regulation,

the revised proposal would require the service area to include those

geographies in which the institution has made ``a significant number

and amount of loans.'' The agencies intend the meaning of

``significant'' to be broad, and to include all geographies around its

branches and proprietary deposit-taking ATMs where an institution has

made more than a handful of loans. Because of this change in the

proposal, the criterion in the small institution assessment method that

requires a majority of an institution's loans to be in its service

area(s) for a satisfactory rating would not be redundant as it might

have been in the December proposal.

Under the revised proposal, as in the December proposal, the

agencies would consider whether the delineation reflects illegal

discrimination, and thus would, as some commenters suggested, consider

the racial composition of geographies in reviewing an institution's

delineation. The agencies have eliminated the term ``redlining''

because the agencies believe that term is included in the term

``illegal discrimination.'' In this regard, illegal discrimination

includes the practice of refusing to lend to an area or neighborhood on

the basis of race or other prohibited bases.

Some commenters thought that the agencies should require

institutions to justify the methodology for delineations, and that the

regulation expressly provide for community input into the delineation.

Under the revised proposal, examiners would review whether the service

area meets the requirements of the regulation, but the agencies would

not prescribe or review the method by which an institution defines its

service area. Rather than having the agencies determine whether a

delineation is ``reasonable,'' it is simpler and more effective in

meeting the purposes of the statute to focus on the lending patterns of

the institution, whether low- and moderate income areas are excluded,

and whether the service area reflects illegal discrimination.

Furthermore, the revised proposal would not expressly provide for

community input into the delineation. As part of the assessment

context, agency staff would review comments from the community with

regard to the performance of an institution, including its delineation

of its service area(s).

The revised proposal would retain the requirement from the December

proposal that institutions delineate multiple service areas, with

clarifying modifications. The revised proposal would not require

institutions to delineate an MSA or other political boundary. The

requirements that would govern under the revised proposal should

prevent institutions from inappropriately limiting their service

area(s) in order to exclude certain geographies.

Some commenters suggested requiring the service area to include

full census tracts and block numbering areas to facilitate data

collection and reporting. The agencies agree, and the revised proposal

would contain such a requirement.

While comments generally supported the separate treatment of

wholesale or limited purpose institutions, many commenters questioned

whether wholesale or limited purpose institutions should have

nationwide service areas and suggested that more consideration should

be given to qualified investments in the institution's local area. Some

commenters claimed that permitting wholesale banks to define a

``national community'' violated the ``local community'' orientation of

the statute. The revised proposal would eliminate a mandatory

nationwide service area for wholesale or limited purpose institutions.

Such institutions have chosen to locate in particular communities, and

it is appropriate that their CRA performance reflect their location.

The revised proposal would therefore require that a wholesale or

limited purpose institution designate as its service area the area or

areas around its offices, or a broader statewide or regional area that

includes such areas. The institution would have a broad scope in

preparing this designation, so long as the area meets the purposes of

the CRA and does not arbitrarily exclude low and moderate income

geographies. Performance under the community development test would

focus on qualified investments, community development loans outstanding

and community development services that benefit the areas within the

institution's service area. Qualifying activities that benefit areas

outside the institution's service area would be considered up to an

amount equal to the amount of qualifying activities within the

institution's service area. However, if the institution could

demonstrate only a limited need or opportunity to provide qualifying

activities within its service area, the appropriate agency could modify

or eliminate this limitation.

Data Collection and Reporting

The December proposal would have required institutions that were

not eligible for the small institution streamlined assessment method to

collect and report to the agencies data showing the geographic

distribution of written applications, application denials, originations

and purchases for home mortgage, small business and small farm, and

consumer loans. Home mortgage loans would have included all mortgage

loans reportable under HMDA and its implementing regulations. The

proposal would have required institutions to report separately

information covering loans for home purchase, home improvement,

multifamily dwellings, and refinancings. Small business loans would

have included all loans to private, for-profit organizations that in

the fiscal year preceding the making of the loan had gross receipts of

less than $10 million (for a firm providing services), or up to 500

employees (for a manufacturing firm). As proposed, institutions would

have had to separate such loans into in four categories based on the

sales volume of the business. Small farm loans would have been defined

to include all loans to private organizations engaged in farming

operations with gross receipts of less than $500,000 in the fiscal year

preceding the making of the loan. Consumer loans would have been

defined to include all closed-end loans, secured and unsecured,

extended to a natural person primarily for personal, family, or

household purposes, except for credit card loans and motorized vehicle

loans and those loans included in the definition of home mortgage

loans.

The December proposal would also have required institutions to

report data in summary form by geography for each of the three major

loan categories--mortgages, small businesses and small farms, and

consumer--by January 31 of each calendar year. The data would have

covered the related lending activity that took place in the preceding

calendar year.

Some commenters raised general concerns regarding the data

collection requirements in the December proposal. As discussed later in

this preamble, the agencies have streamlined requirements to reduce

burden. In addition, the agencies plan to make software available to

institutions to facilitate compliance with the proposed requirements.

The agencies have proposed the data collection and reporting

requirements in this revised proposal as a means for permitting the

agencies to fulfill their responsibilities under the CRA of assessing

each institution's record of helping to meet the credit needs of the

community. This proposal has also been made to permit the agencies to

discuss the facts supporting the agencies' conclusions regarding the

institution's record of lending.

The comments on the proposed data collection raised five principal

concerns, all of which have been addressed in the revised proposal.

First, many commenters indicated that the proposed rules would be

overly burdensome and, in the case of home mortgage loans, would have

required duplicative tracking of data. Under the revised proposal, the

agencies would base their analysis of mortgage lending on the data

already reported pursuant to HMDA. To acquire more geographic detail on

home mortgage lending, the agencies propose to amend the HMDA

regulation to require that institutions other than small banks and

thrifts report the geography of applications, approvals, and denials

for loans secured by properties outside the institution's MSA, data

that is already reported on a voluntary basis.

Second, some commenters questioned whether the need for consumer

loan data justified the burden of mandatory reporting. However, many of

the same commenters suggested that if consumer loan data were to be

required, the data should include all consumer loans, including credit

card loans and motor vehicle loans, which were not included in the

collection and reporting requirements of the December proposal. Some

institutions indicated that consumer lending was an important aspect of

their CRA performance that should be considered by the agencies. The

revised proposal would offer institutions the option of collecting data

on the amount outstanding, the location of the borrower, and the income

of the borrower for each open-end and closed-end consumer loan

outstanding as of the end of the calendar year. Such data is typically

required by all institutions as an integral part of their loan

underwriting procedures. If an institution selected this option, the

foregoing data would be reviewed during the institution's CRA

examination but would not be reported to the agencies.

Third, many lenders criticized the December proposal's inclusion of

information on small business applications and application denials.

Those commenters indicated that reporting should be limited to loan

outstandings or loan originations. The revised proposal would simplify

the definition of small business and small farm loans, by adopting the

definition of those terms now used by institutions for purposes of

completing, in the case of banks, their Reports of Condition and Income

(Call Reports), and in the case of thrifts, the Thrift Financial Report

(TFR). Under the revised proposal, institutions would collect and

report data on a loan-by-loan basis for all loans included in the

aggregate small business and small farm loan figures on the

institution's Call Report or TFR, which includes business loans with

original amounts under $1 million and farm loans with original amounts

under $500,000. These data would include the outstanding balance as of

December 31 of each year, the location of the business or farm or the

location where the loan proceeds would be applied (as indicated by the

borrower), an indication of whether the borrower has annual revenues of

less than or equal to $1 million, and an indication of whether the

borrower (if not publicly traded) is more than 50 percent owned by one

or more minority individuals or by one or more women. The loan register

information would be required to be submitted at the same time and in

accordance with the provisions for submitting HMDA data as provided in

12 CFR Part 203 (Regulation C). In addition, the revised proposal would

change the date on which Call Report or TFR data on small business and

small farms loans would be required to be submitted from June 30 to

December 31 of each year to coincide with the calendar year reporting

requirements of HMDA.

Fourth, many commenters criticized the failure of the December

proposal to require the collection of data on the race and gender of

borrowers except to the extent such data was required by current law.

These commenters were particularly interested in the reporting of race

and gender data for small business loans in order to support the fair

lending component of the CRA assessment. In response to these comments,

the revised proposal would require institutions to collect certain race

and gender data in connection with their small business and small farm

lending. Each institution would be required to request, either in

connection with a written application or, if the institution did not

use written applications, at an appropriate point in the lending

process, that an applicant or borrower indicate the percentage of the

business or farm owned by men and by women as well as the percentages

owned by members of different racial and ethnic categories. If the

institution neither takes a written application nor originates the

loan, the institution would not be required to request the information.

To protect the privacy of individual borrowers, this detailed

information would not be included on loan registers, which, as noted

earlier in this preamble, would only indicate whether an individual

loan was to a business or farm that was more than 50 percent women-

owned or more than 50 percent minority-owned. The institution would

also retain but not report or disclose the information on applicants

who did not receive a loan. To further safeguard privacy, the loan

registers would not be disclosed to the public but the institutions

would include aggregate information about the loans in their public CRA

files.

Finally, some commenters were concerned that because community

development loans were not required to be reported, examiners would not

give them sufficient weight in evaluating an institution's lending

performance. The revised proposal would require institutions to report

on their Call Reports and TFRs the aggregate number and dollar amount

of community development loans outstanding as of December 31 of each

year.

Public File and Disclosure

The December proposal would have required institutions to make

available for public inspection: (1) a file containing all the signed,

written comments that it had received from the public for the past two

years; (2) its performance data for that period; (3) maps of its

service areas (with lists of the census tracts or block numbering areas

that make up each service area); and (4) a copy of the public section

of its most recent CRA Performance Evaluation. If an institution

elected to be assessed under the strategic plan option, it would have

been required to include a copy of its plan in the public file. The

December proposal would have required the institution to maintain the

public file at its main office and to make available copies of the file

at cost to members of the public. Materials relating to a given service

area would have been maintained at each branch in that service area,

and every institution would have been required to post in the public

lobby of each branch a notice of its CRA obligation and the public's

opportunity to comment on and review data concerning that performance.

Commenters generally favored the public disclosure of an

institution's CRA-related activities, and the revised proposal retains

all the relevant public disclosure provisions of the December proposal.

The revised proposal modifies the required contents of the public file

to reflect proposed changes in the various assessment tests and the

proposed data collection requirements for small business and small farm

loans. For example, consistent with the proposed service test, the

revised proposal would require an institution to maintain a list of its

branches and ATMs along with their locations and the services generally

available at such facilities.

To protect the privacy of borrowers and the competitive information

of institutions, the revised proposal would not require an institution

to include the small business or small farm loan registers containing

information on individual applicants in its public file. Instead, the

revised proposal would require the public disclosure of aggregated

information on small business and small farm loans for the past two

calendar years by every institution (other than a small institution).

Loan registers would be available to agency examiners to confirm the

accuracy of the aggregated data but the agencies do not intend to make

unaggregated information publicly available.

Under the revised proposal, the following aggregated loan data for

small business and small farm loans would be placed in the public file:

(1) the number and amount of loans in low-,

moderate-, middle-, and upper-income geographies; (2) a list of the

geographies in which an institution made at least one loan; (3) the

number and amount of loans inside and outside the institution's service

area; (4) the number and amount of loans to minority- and women-owned

businesses; and (5) the number and amount of loans to businesses and

farms with annual revenues equal to or less than $1 million.

Institutions would also be required to disclose the number and amount

of community development loans outstanding. Institutions may elect to

disclose publicly the number and amount of consumer loans to

individuals and geographies by various income levels, and the number

and amount of these loans made within and outside its service area(s).

However, to protect the privacy interests of borrowers, an institution

may not place in its public file any loan information described above

for a particular year if special circumstances, such as a small number

of loans or a limited number of geographies in the designated

categories, could reasonably be expected to disclose the borrower's

identity.

A small institution would be required to include its loan-to-

deposit ratio computed at the end of the most recent calendar year. The

institution could include other data on its loan-to-deposit ratio if it

believed the data would give a more accurate picture of its lending and

lending-related activities. If a small institution elects to be rated

under the lending, investment, and service tests applicable to larger

institutions, it would be required to include in its public file all of

the lending information described earlier in this preamble. An

institution electing to be assessed under an approved plan would

continue to provide a copy of its plan in the public file but would not

have to disclose information submitted to the agencies on a

confidential basis.

In response to comments, the agencies have modified the provisions

regarding the location of the public file. The complete public file

would be required to be maintained at the institution's main office. In

addition, at least one branch in each service area would be required to

have copies of the bank's HMDA Disclosure Statements and all materials

in the public file relating to the service area in which the branch is

located. If a member of the public requested to review a bank's public

file at a branch that did not have a copy, the bank would have to make

a complete copy of the file for that service area available for review

at the branch within 5 business days at no cost.

Public Notice

The December proposal would have required that institutions provide

the Community Reinvestment Act Notice ``in the public lobby of its head

office and each branch,'' and it would have set forth the Notice. The

revised proposal makes minor changes to the Notice requirements. The

term ``head office'' is changed to ``main office'' for clarity. Within

the Notice, the statement of what is included in the CRA performance

file would be expanded to describe more accurately the contents of the

file. In addition, the revised proposal would require that the file

include a map identifying the institution's service area, a list of its

branches and ATMs in its service area, and a list of services the

institution provides at each of the foregoing locations.

Publication of Examination Schedule

The December proposal would have required that each agency publish

a list of the banks scheduled for CRA exams in each calendar quarter at

least 30 days before the beginning of the quarter, and permitted

members of the public to submit comments about a bank's CRA

performance. The revised proposal would leave intact the provision

concerning timing of publication, but delete as redundant the provision

concerning public comment.

Transition

The December proposal would have established a transition period

from July 1, 1994, to April 1, 1996. Institutions subject to data

collection and reporting requirements would have been required to begin

collecting home mortgage, small business, and consumer loan data on

July 1, 1994. The data would have been reported to the agencies no

later than January 31, 1995, and annually thereafter. Evaluations under

the proposed standards would have begun April 1, 1995. However, any

institution could have elected to be evaluated under the existing

twelve assessment factors rather than the proposed standards until July

1, 1995, and any institution showing cause could have requested

evaluation under the existing standards up to April 1, 1996. The

agencies would have accepted strategic plans for approval at any time

after the publication of the final rule.

The December proposal, in addition, would have insulated some

institutions from supervisory sanctions until they had been subject to

at least two examinations under the proposed standards. Specifically,

the agencies would not have disapproved corporate applications or taken

any enforcement action against an institution whose initial CRA rating

under the proposed standards dropped by more than one level, if the

agencies determined that the drop in ratings occurred despite a good

faith effort to achieve at least a satisfactory level of performance.

Many of the commenters criticized the transition period in the

December proposal for being too short. Those commenters were

particularly critical of the proposal to begin collection of data on

July 1, 1994. Several commenters suggested that the proposed data

collection be delayed as much as 12 months after the publication of a

final rule. Some also criticized the proposal to begin conducting

examinations in 1995 using a partial year's data from the second half

of 1994.

Other commenters criticized the proposal to insulate certain

institutions from supervisory actions until they had gained more

experience with the proposed standards. Those commenters were generally

concerned that the proposal would have protected institutions whose

performance ratings would have suffered as a result of more objective,

performance-based assessments.

In developing the revised proposal, the agencies sought to address

these concerns in two principal ways. First, despite substantial

simplification in data collection compared to the December proposal,

the revised proposal would provide institutions additional time before

the data collection would begin. Under the revised proposal, collection

of new data elements would not be required until July 1, 1995.

Second, compared to the December proposal, the revised proposal

eliminates the grace period and instead would provide institutions with

additional time before assessments under the proposed standards would

become mandatory.

The revised proposal would also provide institutions with

assessment options prior to full implementation of the rule. Even

though assessments under the proposed standards would not be mandatory

until July 1, 1996, small institutions would have the opportunity to be

examined, at their option, under the small bank assessment method

anytime after July 1, 1995. Anytime on or after July 1, 1995, an

institution could also elect to submit for approval a strategic plan to

achieve satisfactory or better CRA performance. Examinations under

approved strategic plans could begin July 1, 1996.

Under the proposed transition schedule, the current regulation

would be repealed in its entirety on July 1, 1996.

Review

The agencies recognize that the revised proposal, like the December

proposal, represents a significant change in existing practices and

that cautious administration is therefore required. Consultation by

financial institutions with the agencies on compliance with the new

standards and procedures will be encouraged, as will liberal use of

agency appeals processes. The supervisory agencies will engage in an

internal review of the effectiveness of the new regulations. The

agencies contemplate reconsideration of the regulations to improve

their effectiveness within the next several years. The agencies intend

for the proposed regulations to require demonstrated performance but to

impose as little unnecessary compliance burden as possible, and the

agencies will review the regulations to determine whether they are

advancing these goals.

Other Efforts

In addition to this rulemaking, the agencies will work together to

improve examiner training and to increase interagency coordination

regarding application of standards, performance of examinations,

assignment of ratings, and use of enforcement tools. The agencies will

work together to make examinations as short in duration as possible, to

minimize unnecessary compliance burden, and to ensure consistency and

reliability in the rating process.

Benefit and Burden of Administrative Compliance Requirements

With respect to the reporting, disclosure, and other administrative

compliance requirements in the proposal, the agencies invite comment on

(1) any administrative burdens that these requirements in the revised

proposal would place on depository institutions, including small

depository institutions and customers of depository institutions; and

(2) the benefits of these requirements in the revised proposal for

depository institutions, their customers, and their communities.

Paperwork Reduction Act

OCC: The collections of information contained in this notice of

proposed rulemaking have been submitted to the Office of Management and

Budget for review in accordance with the Paperwork Reduction Act of

1980 (44 U.S.C. 3502(h)). Comments on the collections of information

should be sent to the Comptroller of the Currency, Legislative,

Regulatory, and International Activities, Attention: 1557-0160, 250 E.

Street, SW., Washington, DC 20219, with a copy to the Office of

Management and Budget, Paperwork Reduction Project (1557-0160),

Washington, DC 20503.

The collections of information in this proposed regulation are in

12 CFR 25.25, 25.27, 25.29, 25.42 and 25.43. This information is

required to evidence national bank efforts in satisfying their

continuing and affirmative obligation to help meet the credit needs of

their communities, including low- and moderate-income areas.

This information will be used to assess national bank performance

in satisfying the credit needs of their communities and in evaluating

certain corporate applications. The likely respondents/recordkeepers

are for profit institutions, including small businesses.

The estimated annual burden per respondent/recordkeeper varies from

three to 200 hours, depending on individual circumstances, with an

estimated average of 37 hours. There will be an estimated 857

respondents averaging 132 hours and 2,460 recordkeepers averaging 3.4

hours.

Board: In accordance with section 3507 of the Paperwork Reduction

Act of 1980 (44 U.S.C 3504(h)), the proposed information collection

will be reviewed by the Board under the authority delegated to the

Board by the Office of Management and Budget after consideration of the

comments received during the public comment period. Comments on the

collections of information should be sent to William W. Wiles,

Secretary of the Board, Board of Governors of the Federal Reserve

System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.

The collections of information in this proposed regulation are in

12 CFR 228.25, 228.27, 228.42, 228.43 and 228.44. This information is

required to evidence the efforts of banks in satisfying their

continuing and affirmative obligation to help meet the credit needs of

their communities, including low- and moderate-income areas. This

information will be used to assess bank performance in satisfying the

credit needs of their communities and in evaluating certain

applications.

The estimated annual burden per respondent/recordkeeper varies from

eight to 280 hours, depending on individual circumstances, with an

estimated average of 36 hours. There will be an estimated 297

respondents, averaging 133 hours, and 972 recordkeepers, averaging five

hours.

FDIC: The collections of information contained in this notice of

proposed rulemaking have been submitted to the Office of Management and

Budget for review in accordance with the Paperwork Reduction Act of

1980 (44 U.S.C. 3502(h)). Comments on the collections of information

should be sent to the Office of Management and Budget, Paperwork

Reduction Project (3604-0092), Washington, DC 20503, with copies of

such comments to be sent to Steven F. Hanft, Office of the Executive

Secretary, room F-453, Federal Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429.

The collection of information requirements in this proposed

regulation are found in 12 CFR 345.25, 345.27, 345.29, 345.42 and

345.43. This information is required to evidence efforts of financial

institutions in satisfying their continuing and affirmative obligation

to help meet the credit needs of their communities, including low- and

moderate-income areas. It will be used to assess an institution's

performance in satisfying the credit needs of its communities and in

evaluating certain corporate applications.

The likely respondents/recordkeepers are for-profit financial

institutions, including small businesses.

The estimated annual burden per respondent/recordkeeper varies from

two to 250 hours, depending on individual circumstances, with an

estimated average of 17 hours. There will be an estimated 730

respondents averaging 136 hours and 7,128 recordkeepers averaging three

hours.

OTS: The collections of information contained in this notice of

proposed rulemaking have been submitted to the Office of Management and

Budget for review in accordance with the Paperwork Reduction Act of

1980 (44 U.S.C. 3502(h)). Comments on the collections of information

should be sent to the Office of Management and Budget, Paperwork

Reduction Project (1550-0012), Washington, DC 20503, with copies to the

Office of Thrift Supervision, 1700 G. Street, NW., Washington, DC

20552.

The collections of information in this proposed regulation are in

12 CFR 563e.25, 563e.27, 563e.29, 563e.42 and 563e.43. This information

is required to evidence savings association efforts in satisfying their

continuing and affirmative obligation to help meet the credit needs of

their communities, including low- and moderate-income areas.

This information will be used to assess savings association

performance in satisfying the credit needs of their communities and in

evaluating certain corporate applications.

The likely respondents/recordkeepers are for-profit savings

associations, including small businesses.

The estimated annual burden per respondent/recordkeeper varies from

two to 300 hours, depending on individual circumstances, with an

estimated average of 38 hours. There will be an estimated 450

respondents averaging 136.3 hours and 1,600 recordkeepers averaging

four hours.

Regulatory Flexibility Act

OCC: It is hereby certified that this proposed rule, if adopted as

a final rule, will not have a significant economic impact on a

substantial number of small banks. Accordingly, a regulatory

flexibility analysis is not required. This proposal would enable most

small banks to avoid the data collection requirements in 12 CFR Part 25

and will encourage greater small business lending by banks of all

sizes.

Board: For all the reasons discussed in the joint preamble, it is

hereby certified that this proposed rule, if adopted as a final rule,

will not have a significant economic impact on a substantial number of

small banks. This proposal would enable most small banks to avoid the

data collection requirements in 12 CFR Part 228 and will encourage

greater small business lending by financial institutions of all sizes.

Accordingly, a regulatory flexibility analysis is not required. The

Board invites comment on this matter.

FDIC: It is hereby certified that this proposed rule, if adopted as

a final rule, will not have a significant economic impact on a

substantial number of small banks. This proposal would enable most

small banks to avoid the data collection requirements in 12 CFR Part

345 and will encourage greater small business lending by financial

institutions of all sizes. Accordingly, a regulatory flexibility

analysis is not required.

OTS: It is hereby certified that this proposed rule, if adopted as

a final rule, will not have a significant economic impact on a

substantial number of small savings associations. This proposal

provides an alternative means of evaluating a small savings

association's CRA requirements that would enable most such savings

associations to avoid the data collection requirements in 12 CFR Part

563e and will encourage greater small business lending by savings

associations of all sizes.

Executive Order 12866

OCC: It has been determined that this document is a significant

regulatory action. The proposal would clarify existing requirements and

would exempt small banks from many of the requirements in 12 CFR Part

25. Further, the proposal will encourage greater small business lending

by banks of all sizes.

OTS: It has been determined that this document is a significant

regulatory action. The proposal sets forth a more focused and

streamlined method of evaluating savings associations' compliance with

existing statutory requirements; moreover it would exempt small savings

associations from many of the requirements in 12 CFR Part 563e.

Further, the proposal will encourage greater small business lending by

savings associations of all sizes.

List of Subjects

12 CFR Part 25

Community development, Credit, Investments, National banks,

Reporting and recordkeeping requirements.

12 CFR Part 228

Banks, Banking, Community development, Credit, Federal Reserve

System, Investments, Reporting and recordkeeping requirements.

12 CFR Part 345

Banks, Banking, Community development, Credit, Investments,

Reporting and recordkeeping requirements.

12 CFR Part 563e

Community development, Credit, Investments, Reporting and

recordkeeping requirements, Savings associations.

Authority and Issuance

OFFICE OF THE COMPTROLLER OF THE CURRENCY

12 CFR CHAPTER I

For the reasons outlined in the joint preamble, the Office of the

Comptroller of the Currency proposes to amend 12 CFR chapter I as set

forth below:

PART 25--COMMUNITY REINVESTMENT ACT REGULATIONS

1. The authority citation for part 25 is revised to read as

follows:

Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215,

215a, 481, 1814, 1816, 1818, 1828(c), and 2901 through 2907.

Sec. 25.101 [Redesignated as Sec. 25.9]

2. Existing Sec. 25.101 is redesignated as Sec. 25.9 and

transferred with its undesignated center heading immediately following

Sec. 25.8.

3. Part 25 is amended by adding Subparts A through E and Appendices

A through C following Sec. 25.9 to read as follows:

Subpart A--General

Sec.

25.11 Authority, community reinvestment obligation, purposes and

scope.

25.12 Definitions.

Subpart B--Standards for Assessing Performance

25.21 Assessment tests and ratings, in general.

25.22 Lending test.

25.23 Investment test.

25.24 Service test.

25.25 Community development test for wholesale or limited purpose

banks.

25.26 Small bank assessment standards.

25.27 Strategic plan assessment.

25.28 Assigned ratings.

25.29 Effect of ratings on applications.

Subpart C--Records, Reporting and Disclosure Requirements

25.41 Service area delineation.

25.42 Data collection and reporting.

25.43 Public file and disclosure by banks.

25.44 Public notice by banks.

25.45 Publication of planned examination schedule.

Subpart D--Transition Rules

25.51 Transition rules.

Subpart E--Interpretations

25.101 Applicability of the Community Reinvestment Act to certain

special purpose banks.

Appendix A to Part 25--Ratings

Appendix B to Part 25--CRA Notice

Appendix C to Part 25--CRA Loan Data Format

Subpart A--General

Sec. 25.11 Authority, community reinvestment obligation, purposes and

scope.

(a) Authority and OMB control number--(1) Authority. The authority

for this part is 12 U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215, 215a,

481, 1814, 1816, 1818, 1828(c), and 2901 through 2907.

(2) OMB control number. The information collection requirements

contained in this part have been assigned OMB control number 1557-0160.

(b) Community reinvestment obligation. National banks have a

continuing and affirmative obligation to help meet the credit needs of

their communities, including low- and moderate-income areas, consistent

with safe and sound operations.

(c) Purposes. The purposes of this part are to implement the

community reinvestment obligation of national banks; to explain how the

Office of the Comptroller of the Currency (OCC) assesses the

performance of national banks in satisfying the community reinvestment

obligation; and to describe how that performance is taken into account

in certain applications.

(d) Scope--(1) General. This part applies to all national banks

that are in the business of extending credit to the public, including

wholesale or limited purpose banks, as defined in Sec. 25.12 of this

part.

(2) Certain special purpose banks. This part does not apply to a

bankers bank that engages exclusively in providing services for other

depository institutions and for their officers, directors and

employees, or to other special purpose banks described in Sec. 25.101

of this part.

(3) Federal branches and agencies. This part applies to insured

Federal branches. References in this part to ``main office'' mean, in

the case of insured Federal branches of foreign banks, the principal

branch within the United States. The ``service area'' of an insured

Federal branch refers to the community or communities located within

the United States served by the branch as described in Sec. 25.41 of

this part. The term ``branches'' refers to insured branches located

within the United States. As provided in Sec. 28.102 of this chapter,

this part does not apply to Federal agencies, limited Federal branches,

and uninsured Federal branches.

Sec. 25.12 Definitions.

For purposes of this part, the following definitions apply:

(a) Affiliate means any company that controls, is controlled by, or

is under common control with another company. For purposes of this

part, the term ``control'' has the meaning given to that term in 12

U.S.C. 1841(a)(2), and a company is under common control with another

company if both companies are directly or indirectly controlled by the

same company.

(b) Area median income means the median family income for the MSA

in which a person or geography is located or, in the case of a person

or geography located outside an MSA, the higher of the county median

family income or the statewide nonmetropolitan median family income.

(c) Automated teller machine (ATM) means an automated, unstaffed

banking facility with a fixed site owned or operated by or operated

exclusively for the bank at which deposits are received, cash

dispersed, or money lent.

(d) Bank means a national bank.

(e) Branch means a staffed banking facility (shared or unshared)

licensed as a branch with a fixed site at which deposits are received,

checks paid, or money lent, including a mini-branch in a grocery store

or a branch operated in conjunction with any other local business or

nonprofit organization.

(f) Community development loan means a loan (including a line of

credit, commitment, or letter of credit) that addresses affordable

housing (including multifamily rental housing) or other community

economic development needs not being met by the private market;

provided the loan:

(1) Primarily benefits low- or moderate-income individuals,

businesses or farms with gross annual revenues less than or equal to $1

million, or businesses or farms that qualify as small businesses under

a Small Business Administration program;

(2) Has not been reported or collected by the bank or one of its

affiliates as a home mortgage loan, small business loan, small farm

loan, or a consumer loan pursuant to Sec. 25.42 of this part, unless it

is a multifamily dwelling loan (as described in Appendix A to 12 CFR

Part 203); and

(3) Except in the case of a wholesale or limited purpose bank,

benefits the bank's service area(s) or a broader statewide or regional

area that includes the bank's service area(s).

(g) Consumer loan means a loan extended to one or more individuals

for household, family, or other personal expenditures; provided the

loan is not secured by real estate and is not used for the purpose of

purchasing or carrying securities.

(h) Geography means a census tract delineated by the United States

Bureau of the Census in the most recent decennial census, or a block

numbering area delineating a small statistical subdivision where a

census tract has not been established.

(i) HMDA means the Home Mortgage Disclosure Act (12 U.S.C. 2801 et

seq.).

(j) Home mortgage loan means a mortgage loan as defined in section

303(1) of HMDA (12 U.S.C. 2802(1)) and implementing regulations.

(k) Income level--(1) Low-income means, in the case of a person, an

individual income, or in the case of a geography, a median family

income, that is less than 50 percent of the adjusted area median

income, with adjustments to take into account family size and the

prevailing levels of residential housing construction costs or

unusually high or low family incomes.

(2) Moderate-income means, in the case of a person, an individual

income, or in the case of a geography, a median family income, that is

at least 50 percent and less than 80 percent of the adjusted area

median income, with adjustments to take into account family size and

the prevailing levels of residential housing construction costs or

unusually high or low family incomes.

(3) Middle-income means, in the case of a person, an individual

income, or in the case of a geography, a median family income, that is

at least 80 percent and less than 120 percent of the adjusted area

median income, with adjustments to take into account family size and

the prevailing levels of residential housing construction costs or

unusually high or low family incomes.

(4) Upper-income means, in the case of a person, an individual

income or, in the case of a geography, a median family income, that is

120 percent or more of the adjusted area median income, with

adjustments to take into account family size and the prevailing levels

of residential housing construction costs or unusually high or low

family incomes.

(l) Limited purpose bank means a bank that offers only a narrow

product line (such as credit cards or automobile loans) to a national

or regional market and has, pursuant to a written request, been

designated by the OCC as a limited purpose bank, as provided in

Sec. 25.25 of this part.

(m) Loan location. A loan is located in a geography as follows:

(1) A consumer loan is located where the borrower resides;

(2) A home mortgage loan is located where the property to which the

loan relates is located;

(3) A small business or small farm loan is located where the main

business facility or farm is located or where the loan proceeds

otherwise will be applied, as indicated by the borrower.

(n) Loan production office means a staffed banking facility that is

accessible to the public, and provides lending-related services such as

loan information and applications, but is not a branch.

(o) MSA means metropolitan statistical area or primary metropolitan

statistical area as defined by the Director of the Office of Management

and Budget.

(p) Minority means an individual who is an American Indian or

Alaskan Native, an Asian or Pacific Islander, a Black, or of Hispanic

origin as provided in the Office of Management and Budget's Statistical

Policy Directive No. 15, Race and Ethnic Standards for Federal

Statistics and Administrative Reporting.

(q) Minority-owned business means a business, including a farm,

that is more than 50 percent owned by one or more minority individuals,

and that has not issued any securities registered under Section 12(g)

of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) and has

100 or fewer shareholders.

(r) Service area means a geographical area delineated in accordance

with Sec. 25.41 of this part.

(s) Small bank means a bank with total assets of less than $250

million that is:

(1) Independent; or

(2) An affiliate of a holding company with total banking and thrift

assets of less than $250 million.

(t) Small business loan means a loan with an original amount of $1

million or less that is either a commercial or industrial loan or a

loan secured by nonfarm, nonresidential property.

(u) Small farm loan means a loan with an original amount of

$500,000 or less that is a loan secured by farmland (including a loan

to finance a farm residence or other improvements), a loan to finance

agricultural production, or any other loan to a farmer.

(v) Women-owned business means a business, including a farm, that

is more than 50 percent owned by one or more women, and that has not

issued any securities registered under Section 12(g) of the Securities

Exchange Act of 1934 (15 U.S.C. 78a et seq.) and has 100 or fewer

shareholders.

(w) Wholesale bank means a bank that is not in the business of

extending home mortgage, small business, small farm, or consumer loans

to retail customers, and has, pursuant to a written request, been

designated by the OCC as a wholesale bank, as provided in Sec. 25.25 of

this part.

Subpart B--Standards for Assessing Performance

Sec. 25.21 Assessment tests and ratings, in general.

(a) Assessment tests and standards. In connection with an

examination of a bank, the OCC shall assess the Community Reinvestment

Act (CRA) performance of the bank as follows:

(1) Lending, investment, and service tests. The OCC shall apply

these three tests, as described in Secs. 25.22 through 25.24 of this

part, in evaluating the performance of banks, except as provided in

paragraphs (a)(2), (3) and (4) of this section.

(2) Community development test for wholesale or limited purpose

banks. In evaluating the performance of wholesale or limited purpose

banks (as defined in Sec. 25.12 of this part), the OCC shall apply the

community development test, as provided in Sec. 25.25 of this part,

except as provided in paragraph (a)(4) of this section.

(3) Assessment standards for small banks. In evaluating the

performance of small banks (as defined in Sec. 25.12 of this part), the

OCC shall apply the assessment standards for small banks as provided in

Sec. 25.26 of this part. However, a small bank may elect instead to be

assessed as provided in paragraphs (a)(2) and (4) of this section, or

it may elect to be evaluated under paragraph (a)(1) of this section if

it has collected and reported the data required for other banks under

Sec. 25.42(a)(1) of this part.

(4) Strategic plan. Any bank may elect not to be assessed by any

tests described in paragraphs (a)(1), (2) and (3) of this section by

submitting to the OCC and receiving approval of a strategic plan as

described in Sec. 25.27 of this part.

(b) Assessment context. The OCC shall apply the tests and standards

in paragraph (a) of this section in the context of the following

information:

(1) Demographic data on median income levels, distribution of

household income, nature of housing stock, housing costs, and other

relevant data pertaining to a bank's service area(s);

(2) Examiner-developed information regarding the credit needs of

the bank's service area(s) obtained from community-based organizations,

state and local governments, economic development agencies, and from

any information the bank may choose to provide;

(3) The bank's product offerings and business strategy as

determined from data provided by the bank;

(4) Institutional capacity and constraints, including the size and

financial condition of the institution, the economic climate (national,

regional and local), safety and soundness limitations, and any other

factors that significantly affect the bank's ability to lend to the

different parts of its service area(s);

(5) The bank's past performance and the performance of similarly-

situated lenders;

(6) The bank's public file, as described in Sec. 25.43 of this

part, and any signed, written comments about the bank's CRA performance

submitted to the bank or the OCC; and

(7) Any other information deemed relevant by the OCC.

(c) Assigned ratings. The OCC shall assign to each bank one of the

following four ratings as set out in Sec. 25.28 of this part and

Appendix A of this part: ``outstanding''; ``satisfactory''; ``needs to

improve''; or ``substantial noncompliance'' based on:

(1) The results of the applicable assessment test(s) or standards

or performance under an approved strategic plan; and

(2) Any evidence of discriminatory or other illegal credit

practices.

(d) Safe and sound operations. This part and the CRA do not require

any bank to make loans or investments, or to provide services that are

inconsistent with safe and sound operations. Banks are permitted and

encouraged to develop and apply flexible underwriting standards,

consistent with safe and sound operations, for loans that benefit low-

or moderate-income geographies or individuals.

(e) Compliance with community reinvestment obligation. The assigned

ratings reflect the extent of compliance or noncompliance with the

community reinvestment obligation described in Sec. 25.11(b) of this

part. A bank that receives an assigned rating of ``substantial

noncompliance'' shall be subject to enforcement actions pursuant to 12

U.S.C. 1818.

Sec. 25.22 Lending test.

(a) Scope of test. (1) The lending test evaluates a bank's

performance in helping to meet the credit needs of its service area(s)

through its lending activities, as measured by home mortgage

originations and purchases, small business and small farm loans

outstanding, and community development loans outstanding. At the bank's

option, the lending test will also evaluate the bank's consumer loans

outstanding and any other loan distribution data the bank may choose to

provide, such as data on extensions of lines of credit, commitments,

and letters of credit.

(2) When evaluating a bank's overall lending performance, the OCC

shall weigh its assessments of the bank's home mortgage lending, small

business and small farm lending, and (at the bank's option) consumer

lending to reflect the relative importance of each category of lending

to the bank's overall business.

(3) The OCC shall weigh the bank's community development lending

according to the characteristics and needs of the bank's service

area(s), the capacity and constraints of the bank, and the

opportunities available to the bank for this lending.

(b) Assessment criteria. The OCC shall evaluate a bank's lending

performance pursuant to the following criteria:

(1) Geographic distribution. The geographic distribution of the

bank's lending (based on the location of the loan as provided in

Sec. 25.12 of this part), including:

(i) The proportion of total lending in the bank's service area(s);

(ii) The dispersion of lending throughout the bank's service

area(s); and

(iii) The number and amount of loans in low-, moderate-, middle-,

and upper-income geographies in the bank's service area(s);

(2) Borrower characteristics. The distribution, particularly in the

bank's service area, of the bank's lending (based on borrower

characteristics), including:

(i) The number and amount of home mortgage loans to low-, moderate-

, middle-, and upper-income individuals;

(ii) The number and amount of small business and small farm loans

to businesses and farms with gross annual revenues less than or equal

to $1 million;

(iii) The number and amount of small business and small farm loans

by size of loan; and

(iv) At the bank's option, the number and amount of consumer loans

to

low-, moderate-, middle-, and upper-income individuals;

(3) Community development lending. The bank's community development

lending, including the number and amount of community development loans

outstanding, their complexity and innovativeness, and the number and

amount of lines of credit, commitments, and letters of credit for

community development purposes; and

(4) Innovative or flexible lending practices. The bank's use of

innovative or flexible lending practices to address the credit needs of

low- or moderate- income individuals or geographies.

(c) Affiliate lending. (1) The OCC shall, if the bank elects,

consider in its assessment of a bank's lending performance under this

section lending by an affiliate of the bank, if the bank, or its

affiliate, reports or collects the lending data pursuant to Sec. 25.42

of this part.

(2) The OCC may consider in its assessment lending by a bank's

affiliate even if the bank has chosen not to have the affiliate's

lending considered if the OCC determines that this lending is integral

to the business of the bank.

(3) Consideration of affiliate lending shall be subject to the

following constraints:

(i) No affiliate may claim the same loan as another institution;

and

(ii) If the OCC considers loans within a particular lending

category (e.g., home mortgage, small business, small farm, consumer or

community development lending) made by one or more of the bank's

affiliates in a particular service area, the OCC shall consider all the

loans within that lending category made by all of the bank's affiliates

in that particular service area.

(d) Consortia and third-party lending. Community development loans

made through consortia in which the bank participates or through third

parties in which the bank has invested:

(1) Shall be considered under the lending test, if the bank elects,

provided the data pertaining to these loans are reported by the bank

under the applicable provisions of Sec. 25.42 of this part; and

(2) May be allocated among participants or investors as they choose

for purposes of the lending test, provided that no participant or

investor claims the same loan or part of a loan as another participant

or investor, or claims in the aggregate greater than its percentage

share (based on the level of its participation or investment) of the

total loans made by the consortium or third party.

(e) Lending performance rating. The OCC shall rate a bank's lending

performance as provided in Appendix A of this part.

Sec. 25.23 Investment test.

(a) Scope of test. The investment test evaluates the degree to

which a bank is helping to meet the credit needs of its service area(s)

through qualified investments. To be considered under this test, the

qualified investments of a bank must benefit its service area(s) or a

broader statewide or regional geographic area that includes the bank's

service area(s).

(b) Qualified investments. (1) Qualified investments are lawful

investments, deposits, membership shares in a credit union, or grants

that:

(i) Primarily benefit low- or moderate-income individuals,

businesses or farms with gross annual revenues less than or equal to $1

million, or businesses or farms that qualify as small businesses under

a Small Business Administration program; and

(ii) Address affordable housing (including multifamily rental

housing) or other community economic development needs that are not

being met by the private market.

(2) Donating, selling on favorable terms, or making available on a

rent-free basis any branch of the bank that is located in any

predominantly minority neighborhood to any minority depository

institution or women's depository institution (as defined in 12 U.S.C.

2907(b)) sha

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