Community Reinvestment Act Regulations
Federal RegisterMay 4, 1995
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[Federal Register Volume 60, Number 86 (Thursday, May 4, 1995)]
[Rules and Regulations]
[Pages 22156-22223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10503]
[[Page 22155]]
_______________________________________________________________________
Part III
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 25
Federal Reserve System
12 CFR Part 228
Federal Deposit Insurance Corporation
12 CFR Part 345
Department of the Treasury
Office of Thrift Supervision
12 CFR Part 563e
Federal Reserve System
12 CFR Part 203
_______________________________________________________________________
Community Reinvestment Act Regulations and Home Mortgage Disclosure;
Final Rules
Federal Register / Vol. 60, No. 86 / Thursday, May 4, 1995 / Rules
and Regulations
[[Page 22156]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 25
[Docket No. 95-07]
RIN 1557-AB32
FEDERAL RESERVE SYSTEM
12 CFR Part 228
[Regulation BB; Docket No. R-0822]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 345
RIN 3064-AB27
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563e
[Docket No. 95-72]
RIN 1550-AA69
FEDERAL RESERVE SYSTEM
12 CFR Part 203
Community Reinvestment Act Regulations
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Office of Thrift Supervision,
Treasury (OTS).
ACTION: Joint final rule.
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SUMMARY: The OCC, Board, FDIC, and OTS, (collectively, the Federal
financial supervisory agencies or agencies) are amending their
regulations concerning the Community Reinvestment Act (CRA). The
agencies published a joint notice of proposed rulemaking on this issue
on December 21, 1993 (1993 proposal) and again on October 7, 1994 (1994
proposal). This final rule reflects comments received on both proposals
and the agencies' further internal considerations.
The purpose of the CRA regulations is to establish the framework
and criteria by which the agencies assess an institution's record of
helping to meet the credit needs of its community, including low- and
moderate-income neighborhoods, consistent with safe and sound
operations, and to provide that the agencies' assessment shall be taken
into account in reviewing certain applications.
The final rule seeks to emphasize performance rather than process,
to promote consistency in evaluations, and to eliminate unnecessary
burden. As compared to the 1993 and 1994 proposals, the final rule
reduces recordkeeping and reporting requirements and makes other
modifications and clarifications.
EFFECTIVE DATES: This joint rule is effective July 1, 1995, except 12
CFR 25.3 through 25.7 and 25.51, 12 CFR 228.3 through 228.7 and 228.51,
12 CFR 345.3 through 345.7 and 345.51, and 12 CFR 563e.3 through 563e.7
and 563e.51 are removed effective July 1, 1997.
FOR FURTHER INFORMATION CONTACT:
OCC: Stephen M. Cross, Deputy Comptroller for Compliance, (202)
874-5216; or Matthew Roberts, Director, Community and Consumer Law
Division, (202) 874-5750, Office of the Comptroller of the Currency,
250 E Street, SW., Washington, DC 20219.
Board: Glenn E. Loney, Associate Director, Division of Consumer and
Community Affairs, (202) 452-3585; Robert deV. Frierson, Assistant
General Counsel, Legal Division, (202) 452-3711; or Leonard N. Chanin,
Managing Counsel, Division of Consumer and Community Affairs, (202)
452-3667, Board of Governors of the Federal Reserve System, 20th Street
and Constitution Avenue, NW., Washington, DC 20551.
FDIC: Bobbie Jean Norris, Chief, Fair Lending Section, Division of
Compliance and Consumer Affairs, (202) 942-3090; Robert W. Mooney, Fair
Lending Specialist, Division of Compliance and Consumer Affairs, (202)
942-3092; or Ann Hume Loikow, Counsel, Regulation and Legislation
Section, Legal Division, (202) 898-3796, Federal Deposit Insurance
Corporation, 550 17th Street, NW., Washington, DC 20429.
OTS: Timothy R. Burniston, Assistant Director for Compliance
Policy, (202) 906-5629; Theresa A. Stark, Program Analyst, Compliance
Policy, (202) 906-7054; or Lewis A. Segall, Senior Attorney,
Regulations and Legislation Division, Chief Counsel's Office, (202)
906-6648, Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552.
SUPPLEMENTARY INFORMATION:
Introduction
The Federal financial supervisory agencies jointly are amending
their regulations implementing the CRA (12 U.S.C. 2901 et seq.). The
amended regulations will, when fully effective, replace the existing
regulations in their entirety.
The CRA is designed to encourage 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 in improving access to
credit, banks and savings and loan institutions, as well as community
and consumer groups, maintain that its full potential has not been
realized, in large part because regulatory compliance efforts have
focused on process rather than performance.
In accordance with a request from the President, the Federal
financial supervisory agencies have undertaken a comprehensive effort
to reform their standards for evaluating compliance with CRA
requirements. The final rule implements this reform effort by
substituting a new system that evaluates institutions based on their
actual performance in helping to meet their communities' credit needs.
Background
In 1977, the Congress enacted the CRA to encourage banks and
thrifts to help meet the credit needs of their entire communities,
including low- and moderate-income neighborhoods, consistent with safe
and sound lending practices. In the CRA, the Congress found that:
``(1) regulated financial institutions are required by law to
demonstrate that their deposit facilities serve the convenience and
needs of the communities in which they are chartered to do business;
(2) the convenience and needs of communities include the need for
credit as well as deposit services; and
(3) regulated financial institutions have continuing and
affirmative obligation[s] to help meet the credit needs of the local
communities in which they are chartered.''
(12 U.S.C. 2901(a))
The CRA has come to play an increasingly important role in
improving access to credit in 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 system has been
criticized. Financial institutions have indicated that policy guidance
from the agencies on the CRA is unclear and that examination standards
are applied inconsistently. Financial institutions [[Page 22157]] have
also stated that the CRA examination process encourages them to
generate excessive paperwork at the expense of providing loans,
services, and investments to their communities.
Community, consumer, and other groups have agreed with the industry
that there are inconsistencies in CRA evaluations and that current
examinations overemphasize process and underemphasize performance.
Community and consumer groups also have criticized the agencies for
failing aggressively to penalize banks and thrifts for poor
performance.
Noting that the CRA examination process could be improved,
President Clinton requested in July 1993 that the Federal financial
supervisory agencies reform the CRA regulatory 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. 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 1993 proposal
reviewed the results of those hearings.
The 1993 Proposal
The agencies published proposed revisions to their CRA regulations
on December 21, 1993. The 1993 proposal (58 FR 67466) would have
eliminated the twelve assessment factors in the present CRA regulations
and substituted a more performance-based evaluation system. Under the
1993 proposal, the agencies would have evaluated institutions based on
their actual lending, service, and investment performance rather than
on how well they conducted their needs assessments, documented their
community outreach, and implemented other procedural requirements of
the existing regulations.
Generally, large retail institutions would have been evaluated
based on some combination of lending, service, and investment tests.
Institutions would have been required to report data on the basis of
the geographic distribution of applications, denials, originations, and
purchases of loans. 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 also could have elected to have
its performance evaluated on the basis of a pre-approved strategic
plan.
All banks and thrifts would have been assigned one of four
statutorily mandated CRA ratings (12 U.S.C. 2906(b)(2)). However, five
ratings would have been used for the lending, service, and investment
tests, with the satisfactory category split into low satisfactory and
high satisfactory.
Collectively, the agencies received over 6,700 comment letters on
the 1993 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. However, many expressed concern over
aspects of the 1993 proposal that they viewed as allocating credit to
particular kinds of borrowers. After considering the comments, the
agencies published a second proposal on October 7, 1994, which
responded to many of the suggestions in the comments on the 1993
proposal, including concerns about credit allocation, while preserving
the 1993 proposal's goal of emphasizing performance over process.
The 1994 Proposal
The 1994 proposal (59 FR 51232) retained the principles and
structure underlying the 1993 proposal but made significant changes to
the details in order to respond to many of the specific concerns raised
in the comment letters. As in the 1993 proposal, the 1994 proposal
would have replaced the existing regulations' twelve assessment factors
with a performance-based evaluation system. The 1994 proposal retained,
but modified, the lending, investment, and service tests for large
retail institutions; the streamlined evaluation for small institutions;
an alternative evaluation for limited purpose and wholesale
institutions; and the pre-approved strategic plan option available to
all institutions.
The 1993 proposal had been criticized because of certain objective
criteria in the proposal (including market share, a presumptively
reasonable loan to deposit ratio, loan mix, investment to capital
ratios, and the number of branches readily accessible to low- and
moderate-income geographies) which were intended to respond to concerns
about the need for more objective standards for evaluating compliance
with CRA requirements. Many commenters viewed these criteria as calling
for credit allocation, although the agencies did not intend this
result. The 1994 proposal removed these criteria from the regulatory
language and substituted a broader range of qualitative and
quantitative criteria. A system for evaluating compliance with CRA
should not eliminate examiner judgment, even if completely objective
criteria consistently applied were achievable. Preservation of examiner
judgment to take into account the unique characteristics and needs of
an institution's community and the institution's own capacity and
relevant constraints are essential for a workable rule.
At the same time, consistency in evaluations, reduction in the
burden of compliance, and emphasis on performance are fully consistent
with assuring a measure of examiner judgment. The 1994 proposal would
have provided a balance between objective analysis and subjective
judgment through a series of examiner decisions relying on detailed
data measuring an institution's actual lending, service and investment
performance. In order to minimize unnecessary subjectivity, the
agencies provided guidance as to the standards that examiners would
have applied in making the required judgments.
Compared to the 1993 proposal, the 1994 proposal would have reduced
data reporting burdens by streamlining reporting requirements. The one
significant new reporting requirement was the collection and reporting
of information on the race and gender of small business and farm
borrowers. The agencies proposed this provision to respond to concerns
that the 1993 proposal did not give enough weight to the fair lending
aspect of an institution's CRA performance.
In order to take into account community characteristics and needs,
the 1994 proposal would have made explicit the context in which the
tests and standards would have been applied to individual institutions.
In a specific effort to reduce burden, the preamble indicated that the
agencies, rather than institutions, would have collected and
[[Page 22158]] developed the information needed to provide this
``assessment context.''
The 1994 proposal also modified the rating process from the 1993
proposal. For large retail institutions, in calculating the assigned
rating, the revised proposal would have given primacy to lending
performance, but an institution's performance on the service and
investment tests also would have been reflected in the assigned rating.
The rating process for small institutions similarly would have given
primacy to lending performance, and would have provided guidance on how
the agencies would have considered service and investment performance.
For all institutions, evidence of discriminatory or other illegal
credit practices would have adversely affected the evaluation of an
institution's performance. In addition, an appendix to the 1994
proposal included rating profiles to guide the assessments.
The 1994 proposal revised and clarified other important features of
the 1993 proposal. It provided more detail as to how the proposed
strategic plan option would operate in practice. Wholesale and limited
purpose institutions were made subject to a community development test,
which would have incorporated both community development lending and
community development services in addition to qualified investments.
Also, the agencies revised the definition of service area to include
the local areas around an institution's deposit facilities in which it
has significant lending activity and all other areas equally distant
from such facilities.
Overview of Comments on the 1994 Proposal
Collectively, the agencies received over 7,200 comment letters on
the 1994 proposal. The agencies received comment letters from
individuals, representatives of bank and thrift institutions, consumer
and community groups, members of Congress, state, local, and tribal
governments, and others, as shown in the following table.
Table of Comments Received
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Letters from
banks, thrifts Letters from Letters from
Agency and their consumer and government Letters from Total
trade community entities others
associations groups
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OCC............................. 669 839 39 672 2,219
Board........................... 607 832 12 482 1,933
FDIC............................ 1,007 788 32 237 2,064
OTS............................. 261 623 24 173 1,081
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The agencies reviewed and considered all of these comments in
writing the final rule. The section-by-section analysis of the final
rule discusses these comments in greater detail. 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. Some 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, without including specific
criteria that might be viewed as allocating credit to specific
borrowers. Commenters supported enhanced CRA examiner training to
increase consistency. Although most commenters generally supported the
agencies' goals in amending their CRA regulations, many expressed
concern over certain aspects of the 1994 proposal.
The Final Rule
Review of Comments on the 1994 Proposal and Responses
The final rule retains, to a significant extent, the principles and
structure underlying the 1993 and 1994 proposals, but makes important
changes to some details in order to respond to concerns raised in the
comment letters and further agency consideration. The following
discussion describes by topic the ways in which the agencies addressed
commenters' concerns. The discussion also describes important technical
modifications included in the final rule.
Enforcement Authority
The agencies have removed two provisions found in both the 1993 and
1994 proposals that engendered considerable comment. These provisions
were the community reinvestment obligation, which stated that banks and
thrifts have a specific affirmative obligation to help meet the credit
needs of their communities, and the enforcement provision, which
provided for penalties against banks and thrifts with ``substantial
noncompliance'' ratings using the agencies' general enforcement powers
under 12 U.S.C. 1818. Substantial comment was received both in favor
of, and in opposition to, these provisions. Based on further analysis
of their statutory authority, the agencies have removed these
provisions.
Consistent with the statute, the final rule provides that an
institution's CRA rating reflects its record of helping to meet the
credit needs of its entire community. The agencies will take into
account an institution's record when evaluating various types of
applications, such as applications for branches, office relocations,
mergers, consolidations, and purchase and assumption transactions, and
may deny or condition an application on the basis of the institution's
record.
Scope
The scope of the final rule does not differ appreciably from the
scope of the current CRA regulations or the 1993 and 1994 proposals.
The agencies historically have excluded from CRA coverage certain
special purpose institutions, such as banker's banks, that are not
organized to grant credit to the public in the ordinary course of
business. These institutions continue to be treated as special purpose
banks in the final rule and are excluded from coverage. Several
commenters were concerned that the definition of banker's bank in the
1994 proposal may not have conformed with that found in 12 U.S.C. 24
(Seventh), as modified by the Interstate Banking Efficiency Act of 1994
(IBEA). Therefore, the final rule references the definition of
``banker's [[Page 22159]] bank'' found in 12 U.S.C. 24 (Seventh). The
rule also specifies that institutions that provide only cash management
controlled disbursement services are excluded from CRA coverage. In
addition, the final rule provides for the CRA's applicability to
foreign institutions consistent with the IBEA and prior agency
interpretations.
Definitions
Many of the definitions in the 1994 proposal remain the same in the
final rule or have been adjusted only for purposes of clarity, with no
change in substance. The agencies did, however, change some definitions
substantively.
Assessment area. The agencies replaced the term ``service area'' in
the 1994 proposal with ``assessment area'' in the final rule for the
reasons explained in the discussion of assessment area.
ATM and branch. The agencies changed the definitions of ATM and
branch to eliminate the requirement that an ATM or a branch be at a
fixed site. This change means that staffed mobile offices that are
licensed as branches will be considered ``branches'' under the final
rule and that mobile ATMs will be considered ``ATMs.'' This change may
affect the delineation of an institution's assessment area(s) because
the assessment area(s) must include the geographies in which the
institution has its main office, branches and deposit-taking ATMs.
Including mobile branches and ATMs in defining an assessment area
ensures that an institution that uses these means in an area not
otherwise served by the institution will be evaluated on its success in
helping to meet the credit needs of the area. Including mobile branches
in the definition of ``branch'' will also affect evaluation of an
institution's service to its community because the ``service test''
evaluates the distribution of an institution's branches and the
institution's history of opening and closing branches. In the revised
Part 345, the FDIC uses the term ``remote service facility'' instead of
``ATM'' to conform with the terminology used in its regulations.
Community development. The 1994 proposal did not provide a separate
definition of ``community development,'' although the term was used in
defining community development loans and services and qualified
investments. Several commenters requested further guidance on the scope
of activities that would qualify. Some commenters were concerned that,
without further specification, the regulation might permit an overly
broad range of activities to be considered favorably as supporting
community development. Others were concerned that the definition might
be too narrow.
The final rule separately defines community development to mean:
(1) Affordable housing (including multifamily rental housing) for low-
or moderate-income individuals; (2) community services targeted to low-
or moderate-income individuals; (3) activities that promote economic
development by financing businesses or farms that meet the size
eligibility standards of 13 CFR 121.802(a)(2) or have gross annual
revenues of $1 million or less; or (4) activities that revitalize or
stabilize low- or moderate-income geographies.
The definition of community development restricts qualifying
activities to those that promote community welfare, while recognizing
that community welfare can be promoted in diverse ways. For example, a
number of commenters, representing both the industry and community and
consumer groups, stated that the requirement in the 1994 proposal that
community development loans and services and qualified investments meet
``community economic development needs'' inappropriately limited
community development to efforts that meet ``economic'' needs. The
final rule does not contain this limitation, and community development
includes community- or tribal-based child care, educational, health, or
social services targeted to low- or moderate-income persons or services
that revitalize or stabilize low- or moderate-income geographies.
In response to comments, the definition clarifies the small
businesses and farms that the agencies intend to cover. The section of
the definition that discusses activities that promote economic
development by financing small businesses and farms refers to 13 CFR
121.802(a)(2), the size limitations for the Small Business
Administration's Small Business Investment Company and Development
Company programs, as well as the $1 million gross annual revenues
threshold used for lending test analysis.
Several commenters stated that community development should require
benefit to low- and moderate-income areas. However, narrowing the focus
to only these areas would ignore some of the beneficial purposes of
community development lending for low- and moderate-income individuals.
Under the rule, community development includes activities outside of
low- and moderate-income areas if the activities provide affordable
housing for, or community services targeted to, low- or moderate-income
individuals or if they promote economic development by financing small
businesses and farms. Activities that create, retain, or improve jobs
for low- or moderate-income persons to stabilize or revitalize low- or
moderate-income areas also qualify as community development, even if
the activities are not located in low- or moderate-income areas.
The final rule also requires that, in order to be community
development loans or services or qualified investments, activities must
have community development as their primary purpose. Activities not
designed for the express purpose of revitalizing or stabilizing low- or
moderate-income areas, providing affordable housing for, or community
services targeted to, low- or moderate-income persons, or promoting
economic development by financing small businesses and farms are not
eligible. The fact that an activity provides indirect or short-term
benefits to low- or moderate-income persons does not make the activity
community development. Thus, a loan for upper-income housing in a
distressed area would not qualify simply on the basis of the indirect
benefit to low- or moderate-income persons from construction jobs or
the increase in the local tax base that supports enhanced services to
low- and moderate-income area residents.
The final rule removes the requirement in the 1994 proposal that
community development loans and services and qualified investments
primarily benefit low- or moderate-income persons or small businesses
or farms. This requirement is unnecessary because the definitions of
community development loan and service and qualified investment in the
final rule require that community development be the primary purpose of
the activities.
Community development loan. The agencies have amended the
definition of ``community development loan'' as described in the
discussion of ``community development'' and in several other ways to
respond to commenters' concerns.
First, many commenters objected to the requirement in the 1994
proposal that community development loans meet needs ``not being met by
the private market.'' Some commenters pointed out that financial
institutions are part of the private market so, if financial
institutions make the loans, the needs addressed by the loans will, as
a matter of course, be met by the private market. To respond to these
comments, the agencies removed this [[Page 22160]] qualifier from the
definition of a community development loan.
Second, some commenters expressed confusion about the extent to
which the definition of ``community development loan'' in the 1994
proposal would have differed for wholesale and limited purpose
institutions. The agencies amended the definition of ``community
development loan'' in the final rule to clarify the two ways in which a
``community development loan'' differs for wholesale and limited
purpose institutions. First, wholesale and limited purpose institutions
may consider loans as community development loans wherever they are
located, if the institutions have otherwise adequately addressed the
credit needs in their assessment area(s). This different treatment
accounts for the fact that wholesale and limited purpose institutions
typically draw their resources from, and serve areas well beyond, their
immediate communities. Second, a wholesale or limited purpose
institution may consider loans reported as home mortgage, small
business, small farm or consumer loans to be community development
loans. Institutions subject to the lending test may not consider loans
reported in those categories to be community development loans, unless
the loans are multifamily dwelling loans. This different treatment
recognizes that the rule does not separately assess wholesale and
limited purpose institutions on these reported loans.
Some commenters also urged that the agencies permit wholesale and
limited purpose institutions to include as a community development loan
any loan that primarily benefits low- or moderate-income individuals
regardless of the loan's effect on community development. The lending
test evaluates an institution's performance in making home mortgage,
small business, small farm, and consumer loans based on the geographic
distribution of loans to borrowers of different incomes, not on the
basis of the total number and dollar amount of loans to low- and
moderate-income borrowers. Because the community development test does
not consider borrower distribution, but only loan amount and volume,
crediting any loan that benefits low- and moderate-income individuals
could significantly inflate performance under this test. Therefore, the
final rule does not incorporate the suggested change.
Other commenters urged that institutions that are not wholesale or
limited purpose institutions have the option of treating a home
mortgage, small business, or small farm loan as a community development
loan if it would otherwise qualify. The agencies have not done so. For
retail institutions, the community development loan category permits
consideration of loans that do not meet the definitions of home
mortgage, small business or small farm loans but deserve favorable
consideration in a CRA assessment. Loans that do meet the definitions
of home mortgage, small business and small farm loans are more
appropriately evaluated based on the criteria provided for these loans
in the lending test.
Some commenters requested that retail institutions receive
favorable consideration for community development loans outside their
assessment areas. Under the final rule, an institution that is not a
wholesale or limited purpose institution may receive favorable
consideration for a community development loan that benefits a broader
statewide or regional area that includes the institution's assessment
area(s). This approach maintains a balance between the broader purposes
of community development lending and the focus of CRA on meeting the
credit needs of an institution's local community. As previously noted,
because of their different operational focus, wholesale and limited
purpose institutions receive consideration for community development
loans made outside this broader area if they have adequately addressed
credit needs within the area.1
\1\Examples of community development loans include, but are not
limited to, loans to: borrowers for affordable housing
rehabilitation and construction, 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
development needs; borrowers in support of community facilities in
low- and moderate-income areas or that are targeted to 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 community development. Other
examples include loans to: local, state, and tribal governments for
community development activities; and loans to finance environmental
clean-up or redevelopment of an industrial site as part of an effort
to revitalize the low- or moderate-income community in which the
property is located.
Community development service. The definition of ``community
development service'' has been moved to the definition section of the
rule for clarity. The definition has been conformed to the definitions
of ``community development loan'' and ``qualified investment'' by
removing the reference to ``needs not being met by the private market''
for the reasons described in the discussion of ``community development
loan.'' In addition, community development services are required to be
related to the provision of financial services. For example, service on
the board of directors of an organization that promotes credit
availability or affordable housing meets this requirement. Providing
technical assistance in the financial services field to community-based
groups, local, or tribal government agencies, or intermediaries that
help to meet the credit needs of low- and moderate-income individuals
or small businesses and farms is also related to the provision of
financial services. By contrast, general participation by bank or
thrift employees in community activities that do not take advantage of
the employee's technical or financial expertise would not qualify.
Although an admirable civic contribution, such employee participation
is not sufficiently related to the provision of financial services to
meet the purposes of CRA. As mentioned in the preamble to the 1994
proposal, electronic benefits transfer and point-of-sale terminal
systems that are designed to improve access, such as by decreasing
costs, for low- or moderate-income individuals would receive favorable
consideration.2
\2\Examples of community development services include, among
other things: providing technical expertise for not-for-profit,
tribal or government organizations serving low- and moderate-income
housing needs or economic revitalization and development; lending
executives to organizations facilitating affordable housing
construction and rehabilitation or development of affordable
housing; providing credit counseling, home buyers counseling, home
maintenance counseling, and/or financial planning to promote
community development and affordable housing; school savings
programs; and other financial services the primary purpose of which
is community development, such as low-cost or free government check
cashing.
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Consumer loan. The definition of ``consumer loan'' remains
substantially the same as in the 1994 proposal. As in the 1994
proposal, a consumer loan must be extended to one or more individuals
for household, family, or other personal expenditures. However, as
proposed in 1994, the definition would have mirrored the definition of
consumer loan in the Consolidated Report of Condition and Income (Call
Report) or Thrift Financial Report (TFR) in an effort to reduce
potential regulatory burden. The Call Report and TFR definitions
exclude loans secured by real estate and loans used to purchase or
carry securities. Many industry commenters objected to these
exclusions. Commenters were particularly concerned that home equity
loans that do not fall within the [[Page 22161]] definition of home
improvement loans reportable under HMDA would not have been considered
consumer loans under the proposed rule. The definition of consumer loan
in the final rule no longer uses the definition in the Call Report or
TFR. As a result, home equity loans that are not reportable under HMDA
are consumer loans if they otherwise meet the definition. However, the
agencies have clarified in the final rule that consumer loans do not
include home mortgage, small business, or small farm loans. These loans
are considered separately under the lending test so treating them also
as consumer loans would result in double-counting.
The final rule contains definitions for five categories of consumer
loans: motor vehicle loans, credit card loans, home equity loans, other
secured consumer loans, and other unsecured consumer loans. These
definitions reflect the fact that the final rule permits an institution
to elect evaluation of its consumer lending on a product-by-product
basis.
Home mortgage loan. In the 1994 proposal's definition of ``home
mortgage loan,'' the agencies referred to the HMDA and its implementing
regulations. Some commenters pointed out that the Board has refined the
definition of home mortgage loan in its HMDA regulations (12 CFR Part
203). These commenters indicated it would be preferable and, perhaps,
less confusing if the agencies referred only to the Board's HMDA
regulations, rather than to both the HMDA and the regulations. The
agencies have amended the definition of ``home mortgage loan'' in the
final rule accordingly. Under the final rule, a home mortgage loan
means a ``home improvement loan'' or a ``home purchase loan'' as these
terms are defined in 12 CFR Part 203. This definition includes
multifamily dwelling loans and refinancings of home improvement and
home purchase loans.
Income level. The income level definitions under the 1994 proposal
would have included adjustments to reflect high-cost areas and family
size. A number of commenters suggested that, although these adjustments
would make the income definitions more accurate, the value of the
increased accuracy would be outweighed by the complication and burden
associated with the use of adjusted figures. Other commenters pointed
out that HMDA disclosure statements, which are used, in part, to
evaluate CRA performance, do not employ the adjustments. Some
commenters strongly supported the use of adjusted area median income,
especially in high-cost communities. However, the flexibility of the
performance standards allows examiners to account in their evaluations
under the tests for conditions in high-cost communities, such as a
shortage of credit for moderate-income persons or areas. In addition,
the flexibility in the requirement that community development loans,
community development services, and qualified investments have as their
``primary'' purpose community development allows examiners to account
for conditions in high-cost areas. Therefore, the definitions of income
level in the final rule are based upon area median income without
adjustments. In addition, the definition of ``area median income'' for
rural areas has been simplified and uses only the statewide non-
metropolitan median rather than the higher of county median or the
statewide figure.
Limited purpose institution and wholesale institution. A number of
industry commenters suggested that ``nonbank banks'' permitted under
the Competitive Equality Banking Act (12 U.S.C. 1843(f)) (CEBA banks)
should automatically be considered limited purpose institutions. These
institutions operate under a variety of different business plans and
legal constraints and include retail and wholesale banks, credit card
banks, and industrial loan companies. CEBA banks may legally engage in
different activities, depending on which activities a particular bank
engaged in as of March 1, 1987. A uniform treatment of these
institutions is therefore not practicable. The final rule provides the
necessary flexibility to assess the CRA performance of these
institutions and does not require any institution to engage in
proscribed activities. Some of these institutions could be designated
as wholesale or limited purpose institutions on a case-by-case basis.
Further, the final rule permits the agencies to take into account any
legal constraints placed on an institution in assessing performance. As
in the case of thrifts, adjustments can be made in the ratings profiles
to reflect the legal constraints imposed on the activities of CEBA
banks.
Other commenters requested more guidance on incidental lending
activities that wholesale and limited purpose institutions could engage
in without losing their special designation. Wholesale institutions may
engage in some retail lending without losing their designation if this
activity is incidental and done on an accommodation basis. Similarly, a
limited purpose institution continues to meet the narrow product line
requirement if it provides other types of loans on an infrequent basis.
Qualified investment. The definition of ``qualified investment''
has been moved to the definition section for clarity and changed to
reflect the new definition of ``community development'' and to respond
to comments. The agencies have removed the requirement that a qualified
investment must address community development needs ``not being met by
the private market.'' Instead, in evaluating performance, the agencies
will give greater weight to qualified investments that are not
routinely provided by private investors.
The 1994 proposal clearly permitted consideration of investments in
organizations that make qualified investments, and the final rule is
unmodified in this respect. Some commenters asked that qualified
investments be required to benefit low- or moderate-income areas or
required to benefit either low- or moderate-income people or areas. The
agencies rejected these suggestions for the reasons noted in the
discussion of ``community development.''
The final rule clarifies specific aspects of qualified investments
proposed in the 1994 proposal that raised issues in the comments. For
example, the explicit reference to investments in credit unions has
been removed to clarify that no special treatment for these
institutions was intended under the investment test. Deposits and
membership shares in any financial institution that otherwise meet the
criteria discussed earlier for treatment as a qualified investment
qualify under the investment test. In addition, although some comments
suggested otherwise, Federal Home Loan Bank stock does not have a
sufficient connection to community development to be considered a
qualified investment.
The use of the term ``standard'' mortgage backed securities in the
preamble to the 1994 proposal was ambiguous and should be clarified to
mean ``untargeted'' mortgage backed securities. Untargeted mortgage
backed securities and untargeted municipal bonds are not qualified
investments because their primary purpose is not community development.
Investments in municipal bonds designed primarily to finance community
development generally are qualified investments and need not be
housing-related. Housing-related municipal bonds must primarily address
affordable housing (including multifamily rental housing) needs in
order to qualify.
The term ``grants'' in the final rule includes in-kind
contributions of property to community development organizations.
Grants do not automatically have less weight than
[[Page 22162]] investments, but the weight accorded a grant is
determined under the performance criteria in the investment test.\3\
\3\Examples of qualified investments include, but are not
limited to, investments, grants, deposits or shares: 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 community
development, such as a CDFI that promotes economic development on an
Indian reservation; in support of organizations engaged in
affordable housing rehabilitation and construction, including
multifamily rental housing; in support of organizations promoting
economic development by financing small businesses, including Small
Business Investment Companies (SBICs) and specialized SBICs; to
support or develop facilities that promote community development in
low- and moderate-income areas 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
development; to not-for-profit organizations serving low- and
moderate-income housing or other community 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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Small institution. Under the 1994 proposal, institutions would have
been considered small institutions if they had total assets of less
than $250 million and were either independent institutions or
affiliates of holding companies with less than $250 million in total
assets. This definition of ``small institution'' received numerous
comments. Industry commenters generally believed that the asset level
for holding companies should be raised or eliminated entirely, although
some indicated that the $250 million asset level for small institutions
would be satisfactory. Some commenters representing institutions with
assets below $250 million affiliated with a larger holding company
indicated that their institutions typically operated independently from
the holding company in complying with CRA obligations. They stated that
it would be unfair for them to be evaluated under the assessment tests
for a larger institution merely because of their ownership structure.
On the other hand, community and consumer groups often commented that
small institutions should not be treated differently, or that only
institutions with fewer than $50 million in assets should be considered
small institutions for purposes of the CRA rule.
The final rule modifies the definition of ``small institution'' in
light of these comments. In the final rule, for any independent
institution to be considered a small institution, it must have total
assets of less than $250 million. Moreover, an institution with total
assets of less than $250 million that is owned by a holding company
would be considered a small institution if the total bank and thrift
assets of its holding company are less than $1 billion. The agencies
were persuaded that some smaller holding companies may be unable to
provide support to their subsidiary banks and thrifts for CRA
compliance. Larger holding companies have the ability to provide
support to their subsidiary banks and thrifts, so small institutions
owned by these holding companies will not be unfairly burdened by
evaluation under the lending, investment, and service tests used in the
assessments of larger institutions. The choice of the $1 billion level
reflects the weight of the comments that suggested raising the asset
level and the agencies' judgment regarding the size at which a holding
company should be expected to support the compliance activities of its
bank and thrift subsidiaries. The agencies estimate that this change
will add only a limited number of institutions, with average assets of
about $100 million, to those eligible under the small bank performance
standards.
Many commenters also asked the agencies to clarify the date on
which the determination will be made whether an institution is a small
institution. The agencies have amended the definition of ``small
institution'' to clarify that an institution will be considered a small
institution throughout any calendar year if, as of December 31 of
either of the prior two calendar years, the total assets of the
institution (and, if applicable, its holding company) fell below the
asset limits set out earlier for a small institution. This definition
ensures some stability in whether an institution is classified as a
small institution and minimizes the chance that an institution's status
will change repeatedly from year to year. The definition also ensures
that institutions that exceed the asset limits have adequate time to
prepare to meet the requirements applicable to larger institutions.
Small business loan and small farm loan. The agencies made no
substantive changes to the definitions of ``small business loan'' and
``small farm loan.'' The final rule cross-references the Call Reports
and TFR definitions rather than restating the substance of the
definitions as the 1994 proposal would have done. The definitions are
based on the size of the loans. Some commenters urged that the
definitions be based on the asset size of the business or the farm, as
was originally proposed in 1993. The agencies have concluded that,
although defining small business and small farm loans by the size of
the loan may not be as precise as definitions based on business or farm
asset size, following the approach used in the Call Report and TFR will
appreciably reduce the burden of compliance for institutions and their
borrowers. Also, the Call Report and TFR definitions minimize the need
for institutions to collect additional information. The danger of
inaccuracy is limited, because loan size roughly correlates with the
size of a business or farm borrower. Furthermore, the agencies have
retained the proposed requirement that institutions indicate whether a
small business or small farm loan is to a business or farm with gross
annual revenues of $1 million or less. This requirement will provide
additional information to identify loans to small entities.
Several commenters requested that the agencies clarify whether the
definitions of small business and small farm loans include loans made
to nonprofit organizations as described in the Internal Revenue Code at
26 U.S.C. 501(c)(3). Loans made to nonprofit organizations are included
to the same extent they are included under the Call Report and TFR
definitions of small business and small farm loans. Loans to nonprofits
that are reported as small business or small farm loans cannot also be
reported as community development loans, except by wholesale and
limited purpose institutions.
Performance Tests, Standards and Ratings in General
Several changes have been made to the section of the 1994 proposal
on assessment tests, standards, and ratings. As an initial matter, the
terms ``performance tests,'' ``performance standards,'' and
``performance criteria'' have been substituted for the terms
``assessment tests,'' ``assessment standards,'' and ``assessment
criteria'' to reflect more accurately the final rule's focus on
performance rather than process. The agencies have also changed the
term ``assessment context'' to ``performance context'' because the
latter term better describes the role of this information in the CRA
evaluation process.
Performance context. An institution's performance under the tests
and standards in the rule is judged in the context of information about
the institution, its community, its competitors, and its peers.
Examiners will consider the following information, as appropriate, in
order to assist in [[Page 22163]] understanding the context in which
the institution's performance should be evaluated: (1) The economic and
demographic characteristics of the assessment area(s); (2) lending,
investment, and service opportunities in the assessment area(s); (3)
the institution's product offerings and business strategy; (4) the
institution's capacity and constraints; (5) the prior performance of
the institution and, in appropriate circumstances, the performance of
similarly situated institutions; and (6) other relevant information.
The final rule clarifies that a proposed strategic plan will also be
evaluated in the same context. However, all of the factors described in
the performance context would not necessarily apply to each strategic
plan. In this regard, the performance of similarly situated lenders
would not generally be appropriate for evaluating future goals under a
strategic plan.
Under the 1994 proposal, the assessment context would have included
examiner-developed information on the credit needs of an institution's
service area. Many commenters interpreted the proposal to mean that the
agencies would prepare a detailed needs assessment for each
institution's service area(s). Several bank and thrift commenters
criticized such a role for the agencies, reasoning that institutions
know their communities far better than a regulatory agency, and that
agency-prepared assessments would lead to credit allocation. Some
community organization commenters, while more supportive of the concept
of agency prepared needs assessments, were concerned that the proposal
might imply that institutions did not need to make an effort to know
their communities' credit needs, but could instead look to the agencies
for that determination.
The agencies did not intend to suggest that an agency-developed
needs assessment would prescribe the credit needs an institution must
address. Instead, the examiner-developed information on credit needs
was intended to help inform the examiner's judgment about the
institution's record of performance. Institutions are in the better
position to know their communities, and it is neither appropriate nor
feasible for the agencies to prepare a detailed assessment of the
credit needs of an institution's community. Thus, under the final rule
the agencies will analyze the information an institution maintains on
the credit needs of its community along with relevant information
available from other sources. At the same time, the final rule does not
establish a requirement that each institution prepare a ``needs
assessment'' to be evaluated by the examiner as urged in some comments
provided by financial institutions and community organizations.
Under the final rule, the agencies will neither prepare a formal
assessment of community credit needs nor evaluate an institution on its
efforts to ascertain community credit needs. Instead, the agencies will
request any information that the institution has developed on lending,
investment, and service opportunities in its assessment area(s). The
agencies will not expect more information than what the institution
normally would develop to prepare a business plan or to identify
potential markets and customers, including low- and moderate-income
persons and geographies in its assessment area(s). This information
from the institution will be considered along with information from
community, government, civic and other sources to enable the examiner
to gain a working knowledge of the institution's community. In response
to comments, the final rule also clarifies that information about
lending, investment, and service opportunities in an institution's
assessment area will, where appropriate, be obtained from tribal
governments, as well as from other sources.
Statutory limits on investment authority. Several thrift commenters
had concerns about the application of the investment test to thrift
institutions because of their limited investment authority. Rather than
providing a blanket exemption from the investment test, the final rule
modifies the ``capacity and constraints'' section of the performance
context to clarify that examiners should consider an institution's
investment authority in evaluating performance under the investment
test. A thrift that has few or no qualified investments may still be
considered to be performing adequately under the investment test if,
for example, the institution is particularly effective in responding to
the community's credit needs through community development lending
activities.
Safety and soundness. The CRA requires the agencies to assess an
institution's record of helping to meet the credit needs of its entire
community, consistent with the safe and sound operation of the
institution. A number of industry commenters were concerned that the
1994 proposal would not have stressed the importance of the safety and
soundness of an institution's operation to the same extent as the CRA
statute or the current regulations. These commenters responded
primarily to the omission of a statement in the 1993 proposal that the
CRA does not require any institution to make loans or investments that
are expected to result in losses or are otherwise inconsistent with
safe and sound operations. The agencies did not intend by this omission
to encourage unprofitable or otherwise unsafe and unsound practices.
The agencies firmly believe that institutions can and should expect
lending and investments encouraged by the CRA to be profitable. The
final rule explicitly reflects this belief and addresses the importance
of safety and soundness considerations in several sections and in the
ratings appendix. The agencies assess an institution's record of
helping to meet community credit needs with careful attention to the
constraints imposed by safety and soundness. As in other areas of bank
and thrift operations, unsafe and unsound practices are viewed
unfavorably. The ratings appendix specifically states: ``The bank's
overall performance, however, must be consistent with safe and sound
banking practices. * * *''
Flexible underwriting approaches. The final rule states that the
agencies permit and encourage an institution's use of flexible
underwriting approaches to facilitate lending to low- and moderate-
income individuals and areas, but only if consistent with safe and
sound operations. This is consistent with, and clarifies, language in
the 1994 proposal. Some commenters urged that the rule expressly
identify particular types of areas or borrowers covered by this
provision. Mentioning particular types of borrowers or areas in the
regulatory text is unnecessary and inconsistent with the principle of
evaluating each institution and its community based on their
characteristics, capacity, and needs. However, certain borrowers or
areas, such as Native Americans residing in Indian country, may face
difficulties obtaining credit that could warrant special consideration.
The efforts of lenders that utilize innovative or flexible methods, in
a safe and sound manner, to address these or other unusual underwriting
issues are recognized under the lending test.
The Lending Test
The lending test in the final rule is substantially similar to the
1994 proposal. However, there are some significant changes in response
to the comments.
Consideration of originations and purchases. The 1994 proposal
would [[Page 22164]] have evaluated home mortgage lending based on HMDA
data, which is based on loan originations and purchases. However, the
proposal would have required institutions to collect, report, and be
evaluated on loans outstanding for other types of loans. The agencies
took this approach in an effort to reduce burden on the industry,
because institutions must already report loans outstanding on Call
Reports and TFRs.
The vast majority of commenters who addressed this issue (almost
exclusively industry commenters) stated that use of originations would
provide a substantially more accurate picture of actual lending
activity, because current activity would not be obscured by past
activity and the data would reflect seasonal variations and sale of
loans in the secondary market. Moreover, using originations rewards,
rather than penalizes, institutions for selling loans on the secondary
market, which frees up capital for additional lending and increases
credit availability. The commenters did not support the premise that
use of originations would be more burdensome than using loans
outstanding. Because institutions would have to collect and report
additional information on each loan for CRA purposes, using loans
outstanding would not significantly decrease burden. The bulk, if not
all, of the burden reduction would be achieved by using the Call Report
and TFR definitions. The final rule therefore uses originations and
purchases, instead of loans outstanding, for all types of loans.
Lines of credit are considered originated at the time the line is
approved or increased; and an increase is considered a new origination.
Generally, the full amount of the credit line (or in the case of an
increase in an existing line, the amount of the increase) is the amount
that is considered originated. Although some lines of credit may be for
both home improvement and other purposes, only the amount that is
considered to be for home improvement purposes is reported as a home
improvement loan under HMDA. Lines of credit should be considered in
assessing an institution's lending activity in all applicable loan
types. Therefore, where a portion of a line of credit is reported under
HMDA and another portion meets the definition either of a ``small
business loan'' or a ``consumer loan,'' the full amount of the line of
credit should be reported as a small business loan or collected as a
consumer loan, as appropriate, and the agencies will also consider as a
home mortgage loan the portion of the credit line that is reported
under HMDA.
The final rule contains an option for lenders also to provide data
on loans outstanding, which may, in certain circumstances, enhance an
examiner's understanding of an institution's performance. Institutions
may also provide for examiner consideration information on letters of
credit and commitments, as well as any other loan information. The
language of the lending test (and the definition of ``community
development loan'') has been adjusted as appropriate to reflect these
changes.
Consumer loan evaluation. Under the 1994 proposal, consumer lending
would have been evaluated under the lending test only if an institution
elected to have it evaluated and provided the necessary loan data.
Thus, the 1994 proposal would have permitted an institution that is
primarily a consumer lender not to be evaluated on a substantial
portion of its business if it so chose. Under these circumstances,
meaningful evaluation of certain institutions might have been very
difficult. The final rule, therefore, changes the treatment of consumer
lending. Under the rule, if a substantial majority of an institution's
business is consumer lending, this lending is evaluated in the lending
test. The rule does not impose any reporting requirements for consumer
lending, however. If an examiner determines that a substantial portion
of an institution's business is consumer lending, and the institution
has not elected to provide consumer loan data, the examiner will
evaluate consumer lending by analyzing an appropriate sample of the
institution's consumer loan portfolio. In addition, this aspect of the
final rule does not affect the evaluation of a limited purpose bank,
because the bank will be evaluated under the community development
test, not the lending test.
The 1994 proposal would have required that institutions provide
information on all consumer loans if they choose to provide information
on any consumer loans. The agencies included this requirement because
they were concerned that, otherwise, an institution might provide
information only on those consumer products that would reflect well on
the institution's CRA performance and would choose not to provide
information on those products that would reflect poorly.
Many industry commenters stated that the prospect of reporting all
their consumer loan information was so burdensome that they would not
report any information. On the other hand, consumer and community
groups commented that, if consumer lending is to be considered in CRA
at all, consumer loan reporting should be mandatory. After considering
these comments, the agencies have decided to permit institutions to
provide information on one or more categories (motor vehicle, credit
card, home equity, other secured, and other unsecured) of consumer
loans.
Although an institution may have some opportunity to mask poor
performance or otherwise inappropriately influence its CRA evaluation
through selective provision of data, this opportunity will be limited
by the provision in the final rule requiring an institution to maintain
data on all loans in the category or categories in which it seeks to be
evaluated. For example, if an institution provides information on its
credit card lending, it would have to provide information on all its
credit card lending, although it need not provide information on its
motor vehicle lending. Furthermore, under the final rule, if an
institution is a substantial consumer lender, the agencies will
evaluate its consumer lending in appropriate categories regardless of
whether the institution reports data for those categories.
Relative weight of different lending categories. The 1994 proposal
explicitly stated that home mortgage, small business, and small farm
lending (and consumer lending if it was considered) would have been
weighted to reflect the relative importance of the categories to the
institution's overall business. The proposal also stated that community
development lending would have been weighted to reflect the
characteristics and needs of an institution's assessment area(s), the
capacity and constraints of the institution, and the opportunities
available for this lending. Several commenters expressed concern about
the lack of certainty in these provisions; some also believed that
community development lending would have received excessive weight.
However, a fixed formula for the relative weight of different
categories would require a determination that some categories of
lending are uniformly more important than others, when the appropriate
weight depends on the specific institution and its community. The
agencies have removed the discussion of the relative weight assigned to
different lending categories because examiners will determine the
appropriate weight based on the performance context.
Lending activity criterion. The lending test in the 1994 proposal,
unlike the current CRA regulations, did not specifically consider the
volume of lending activity--the number and amount of home mortgage,
small business, small farm, and consumer loans located in the
institution's [[Page 22165]] assessment area(s). Experience under the
current regulations has demonstrated that this criterion can be useful
in assessing performance. Therefore, based on further internal agency
considerations, the final rule contains a lending activity performance
criterion. This criterion encourages an institution that does not
itself engage in the categories of lending evaluated under the lending
test to seek designation as a wholesale or limited purpose institution
so that the institution's CRA performance can be evaluated under
criteria appropriate to the institution. The criterion also creates a
disincentive for institutions to try to influence inappropriately the
evaluation of their CRA performance by conducting activities viewed
favorably under CRA in the institution and other activities in an
affiliate. An institution's performance on the lending activity
criterion will be assessed taking into account the information
described in the section of the preamble discussing the performance
context, including the institution's business strategy regarding the
lending conducted by the institution itself and the lending conducted
by affiliates.
Market share analysis. Many commenters, particularly community and
consumer groups, suggested that the market share evaluation of the 1993
proposal be reinstated or that the agencies substitute an alternative
objective ratio to serve as the linchpin for an institution's lending
test rating. Other commenters, particularly those representing the
industry, opposed using any market share analysis. In the agencies'
opinion, the 1994 proposal struck the appropriate balance between
objective performance measures and subjective judgments. A single,
standardized set of performance evaluation tools is not appropriate
because of the variety of institutions and the differences among the
communities that they serve. The public evaluation prepared by the
agencies will explain the data and analytic tools used to evaluate the
institution.
The geographic distribution of an institution's loans remains a
component of the lending test. One element of the geographic
distribution analysis, both in the 1994 proposal and in the final rule,
is the amount of lending to low-, moderate-, middle- and upper-income
geographies. As part of the performance context, examiners would
consider, among other considerations described earlier in this
preamble, the performance of other similarly-situated lenders. 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 final
rule 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.
Proportion of lending within assessment areas. Under the final
rule, as under the 1994 proposal, another component of the geographic
distribution criterion is the proportion of total loans made in an
institution's assessment area(s). Some commenters believed that this
criterion is inappropriate; they noted that safety and soundness
considerations require an institution to lend to a geographically
dispersed area. This criterion is a consideration under the existing
CRA rules and has proved over the years to be one useful indicator of
the degree to which an institution is focused on serving its local
community. Moreover, the agencies believe the criterion encourages an
institution to draw its assessment area broadly enough to allow the
dispersion of its lending and distribution of its loans among
geographies of different income levels. Therefore, the agencies
retained the provision unchanged in the final rule.
Dispersion. The third component of the geographic distribution
criterion of the lending test is the dispersion of the institution's
lending activity. The 1994 proposal would have assessed the degree of
dispersion ``throughout'' an institution's assessment area(s). For
clarification, the word ``throughout'' has been changed to ``in'' in
the final rule. The agencies will still examine the entire assessment
area; however, an institution is not expected to lend evenly throughout
or to every geography in its assessment area. Rather, an institution's
lending pattern should not exhibit conspicuous gaps that are not
adequately explained by the performance context.
Borrower distribution. The lending test also considers the
distribution of an institution's loans among borrowers of different
income levels and businesses of different sizes. Favorable
consideration is given for loans to low- and moderate-income persons
and small businesses and farm loans outside of the institution's
assessment area, provided that the institution has adequately served
borrowers within its assessment area. The importance of this criterion,
particularly in relation to the geographic distribution criterion, will
depend on the performance context. For example, borrower distribution
may be more important in rural areas or in assessment areas without
identifiable geographies of different income categories; geographic
distribution may be more important in urban areas and assessment areas
with the full range of geographies of different income categories.
Some commenters recommended that the lending test evaluate an
institution's record of lending to different racial and ethnic groups
and to women. The final rule does not incorporate this suggestion. The
appropriate inquiry regarding service to particular racial or ethnic
groups and men and women is whether the institution is operating in a
non-discriminatory manner. Therefore, in arriving at an institution's
assigned rating, the agencies consider whether there is evidence of
discrimination in violation of the Fair Housing Act or Equal Credit
Opportunity Act, or evidence of other illegal credit practices.
Innovative or flexible lending practices. The final rule, like the
1994 proposal, assesses an institution's use of innovative or flexible
lending practices in a safe and sound manner to address the credit
needs of low- and moderate-income individuals or geographies. An
innovative practice is one that serves low- and moderate-income
creditworthy borrowers in new ways or serves groups of creditworthy
borrowers not previously served by the institution. Both innovative
practices and flexible practices are favorably considered. Although a
practice ceases to be innovative if its use is widespread, it may
nonetheless receive consideration if it is a flexible practice. An
institution need not provide lending data connected with a practice in
order to receive consideration. For example, an examiner could consider
an institution's secured credit card program as a flexible lending
practice even though the institution has not provided its credit card
loan data for evaluation under the other criteria of the lending test.
Compliance with private commitments. Some commenters suggested
that, in the lending test, the agencies should consider the extent to
which an institution has fulfilled lending agreements that the
institution has made with third parties. The final rule does not
incorporate this suggestion. The CRA requires the agencies to assess an
institution's record of helping to meet the credit needs of its
community, not to enforce privately negotiated agreements. Therefore,
an institution's record of fulfilling these types of agreements is not
an appropriate CRA performance criterion.
Affiliate lending. The 1994 proposal would have permitted
consideration of affiliate lending at an institution's option or if the
agency determined that [[Page 22166]] the affiliate's activity is
integral to the institution's business. Many industry commenters
opposed consideration of affiliate lending except at the institution's
option on the ground that consideration without the institution's
consent may be equivalent to extending CRA coverage to affiliates that
may not be subject to the statute. Some community and consumer groups
supported consideration of affiliate activity and urged that the
regulatory language be strengthened to require the agencies to take
affiliate lending into account under certain circumstances. In the
final rule, affiliate lending is considered only at the election of the
institution, except with regard to the lending activity criterion,
where, as described earlier, it will provide context for the assessment
in order to discourage an institution from inappropriately influencing
an evaluation of its CRA performance by conducting activities that
would be viewed unfavorably in an affiliate. The agencies also received
comments that the phrase ``integral to the institution's business'' in
the proposal was unclear. The final rule does not use this phrase.
The other limitations on consideration of affiliate lending
contained in the 1994 proposal have been retained in the final rule.
However, the limitation against double-counting of loans has been
modified to clarify that an institution can count as a purchase a loan
originated by an affiliate, or count as an origination a loan sold to
an affiliate, provided the same loans are not sold several times to
inflate their value for CRA purposes.
The agencies have added language to the final rule to clarify that
affiliate lending is not considered in evaluating the proportion of
total lending made within an institution's assessment area(s). The
agencies also wish to clarify that if an institution elects to have the
lending activities of its affiliates considered in the evaluation of
the institution's lending, the geographies served by the affiliate's
lending activities do not affect the institution's delineation of
assessment area(s).
Furthermore, the final rule would not change the existing
supervisory authority of the agencies over institutions and their
affiliates. Therefore, although lending by affiliates may be treated as
lending by an institution, this treatment for CRA purposes will not
permit a regulatory agency to examine any institution or its affiliate
if it does not otherwise have such authority.
Direct and indirect lending. Many consumer and community groups
expressed concern that the 1994 proposal did not adequately emphasize
direct lending by the institution as compared to indirect lending
carried out through consortia and third parties. Other commenters,
particularly from the industry, urged a return to the provisions of the
1993 proposal that would have treated direct and indirect lending as
interchangeable. The final rule clarifies that loans originated or
purchased by third parties and consortia in which an institution
participates or invests may only be considered if they qualify as
community development loans and may only be considered under the
community development lending criterion. Indirect loans will not affect
an institution's performance under the other four lending test
criteria. Under the final rule, direct lending performance is an
essential element of an institution's CRA performance.
Some commenters requested clarification whether an institution is
required to participate directly in making or funding each loan that is
made through a consortium or third party in order for the loan to be
considered under the community development lending criterion of the
lending test. An institution need not directly participate in the
making or funding of consortia- and third party-loans for the loans to
be considered (subject to the constraints set out in the rule) under
the community development lending criterion, provided the loans meet
the definition of community development loan. Loans originated directly
on the books of the institution or purchased by the institution are
considered to have been made directly by the institution, even if the
institution originated or purchased the loans as a result of its
participation in a loan consortium.
Investment Test
The 1994 proposal would have focused on the dollar amount of an
institution's qualified investments, the innovativeness and complexity
of the qualified investments and their responsiveness to the credit and
economic development needs of the community. The 1994 proposal also
would have clarified that the investment test considers all qualified
investments benefitting a broader statewide or regional area that
included an institution's assessment area. Most of the comments on the
investment test concerned the definition of qualified investment and
have been discussed earlier in the preamble.
Limited investment authority. One group of commenters representing
institutions with statutory constraints on their authority to make this
type of investment maintained that reliance on an investment test in
assigning a CRA rating could unfairly stigmatize their CRA performance.
As previously discussed, the final rule has modified the performance
context for CRA evaluations to account for financial institutions with
limited investment authority. These modifications would permit an
institution with limited authority to make investments to receive a low
satisfactory rating under the investment test, although it has made few
or no qualified investments, if the institution has a strong lending
record, thereby preventing potential anomalies in the CRA performance
ratings.
Disposition of branch premises. To implement the statutory
requirement in 12 U.S.C. 2907(a), the final rule specifies that a
donation, sale on favorable terms or rent-free occupancy of a branch
(in whole or in part) in a predominantly minority neighborhood to any
minority- or women-owned depository institution is a qualifying
investment. Similar disposition of branch premises to a financial
institution with a primary mission of promoting community development
is also a qualified investment.
Service Test
Compared to the 1993 proposal, the service test in the 1994
proposal would have reduced the significance in the CRA performance
evaluation of an institution's full service, ``brick and mortar''
branch structure by elevating the consideration given to alternative
systems for delivering retail banking services (e.g., ATMs, mobile
branches, loan production offices, or banking-by-telephone or banking-
by-computer). In this regard, the provision of retail banking services
would have been evaluated on the basis of an institution's: (1)
Distribution of branches and ATMs among low-, moderate-, middle-, and
upper-income areas; (2) record of opening and closing branches and
ATMs; (3) range of services to low-, moderate-, middle-, and upper-
income areas; and (4) efforts to make alternative delivery systems
responsive to the needs of low- and moderate-income areas and
individuals. In addition, the extent to which an institution provided
innovative and responsive community development services would also
have been considered under the service test. The final rule retains the
essential structure and elements of the test as proposed but makes some
modifications.
Relative weight of branches and alternative delivery systems. The
overwhelming majority of community and consumer group commenters stated
[[Page 22167]] that the 1994 proposal placed too little emphasis on the
location of an institution's full service branches in evaluating
performance under the service test. Many of those commenters also were
concerned that the proposed service test would have erroneously equated
ATMs with full service branches. On the other hand, several industry
commenters commended the proposal's recognition that full service
branches should not be the determining factor under the service test as
consistent with the trend in the industry toward the use of alternative
service delivery systems.
The final rule responds to these issues by adjusting the balance of
the service performance evaluation in favor of full-service branches
while still considering alternative systems. In this regard, references
to ATMs in the criteria for evaluating the distribution of an
institution's branches have been removed, and conforming changes have
been made in the ratings appendix. These changes signify a recognition
that convenient access to full-service branches within a community is
an important factor in determining the availability of credit and non-
credit services. The focus of the service test, however, remains on an
institution's current distribution of branches, and the test does not
require an institution to expand its branch network or operate
unprofitable branches.
The final rule emphasizes that alternative systems for delivering
retail banking services, such as ATMs, are to be considered only to the
extent that they are effective alternatives in providing needed
services to low- and moderate-income areas and individuals.
Furthermore, network ATMs owned by other institutions do not receive
the same consideration in an institution's evaluation as ATMs owned by
or operated exclusively for that institution.
An institution's branches and other service delivery systems need
not be accessible to every part of an institution's assessment area.
However, the service delivery systems should not exhibit conspicuous
gaps in accessibility, particularly to low- or moderate-income areas or
individuals, unless the gaps are adequately explained by the
performance context.
Other issues. The final rule conforms the community development
services component of the service test to that of the investment test
by giving consideration to community development services that benefit
a broader statewide or regional area encompassing an institution's
assessment area.
Some of the specific suggestions in the comments were not
implemented in the final rule. For example, the rule does not require
institutions to provide basic banking services or low-cost checking
accounts, because the CRA permits institutions substantial leeway to
determine the specific policies and programs that help meet credit
needs in their communities. In addition, the final rule does not
evaluate the effectiveness of service performance on the basis of
deposit growth. This measurement is not clearly related to helping to
meet the credit needs of the community and could necessitate burdensome
coding of deposit accounts on a geographic basis. Finally, debit cards
are not a retail credit delivery system, and therefore the agencies
have not included debit cards in the list of examples of alternative
delivery systems for retail services.
Community Development Test
The performance of wholesale and limited purpose institutions would
have been evaluated in the 1994 proposal separately under the community
development test. This test would have focused on the record of these
institutions in helping to meet credit needs through community
development lending, qualified investments, and community development
services. The 1994 proposal also would have required wholesale or
limited purpose institutions to serve a designated local area and would
have placed limits on consideration of activities outside this
designated area. The final rule maintains the community development
test with some changes.
Request for designation as a wholesale or limited purpose
institution. In response to comments on the 1994 proposal, the final
rule provides more detail on the process by which an institution is
designated wholesale or limited purpose. An institution that seeks
designation as wholesale or limited purpose must file a request in
writing at least three months prior to the proposed effective date of
the designation. If the designation is approved, it remains in effect
until the institution requests revocation of the designation or until
one year after the agency notifies the institution that the agency has
revoked the designation on its own initiative. Thus, once an
institution has received a designation, the institution need not
reapply before each CRA examination.
Benefit to assessment area. Many commenters, including both
industry and some community group commenters, maintained that the
limitations placed on considering out-of-assessment area activities
were too restrictive and did not account for the broader business
strategies and operations of wholesale and limited purpose
institutions, which often serve communities on a nationwide basis.
The final rule removes the specific limitation that community
development activities outside an institution's assessment area be
considered only up to the amount of activities within the institution's
assessment area. Under the final rule, the agencies consider all
activities that benefit the institution's assessment area(s) or a
broader statewide or regional area that includes the assessment
area(s). In addition, other activities receive full consideration as
long as the institution has adequately addressed the needs of its
assessment area.
Technical changes and clarifications. The final rule clarifies that
investments in third party community development organizations may be
treated either as qualified investments or as community development
loans (with the institution receiving credit for a pro rata share of
the loans made by the third party, at the institution's option). In
addition, the agencies note that a wholesale or limited purpose
institution need not engage in all three categories of activities
considered under the community development test but can perform well
under the test by engaging in one or more of these categories.
Technical changes have also been made to conform with the
modifications, previously discussed, to the definition of community
development loans, the definitions of wholesale and limited purpose
institutions, and the focus of lending performance assessments on
originations and purchases rather than loans outstanding.
Small Institution Performance Standards
The small institution performance standards have been retained in
the final rule essentially as proposed in 1994, except for the change
in the eligibility threshold described earlier. As a technical matter,
the final rule has been changed to clarify that an institution that was
a small institution as of the end of the prior calendar year is
examined as a small institution.
Many commenters, predominantly representing community organizations
but also including some larger institutions, stated that the
streamlined approach would amount to a de facto exemption from CRA for
small institutions. Other commenters, predominantly representing the
industry, supported the proposal for streamlined examinations and an
exemption from new data collection and [[Page 22168]] reporting. Many
commenters representing the industry stated that data collection may
place a greater relative burden on smaller institutions than larger
institutions due to limitations in staff and financial resources. After
considering the comments, the agencies have decided not to change
materially the smaller institution performance standards. Examinations
of small banks and thrifts will be streamlined and will not require the
periodic reporting of new data. Examinations will be meaningful and
will not be implemented as de facto exemptions.
Performance criteria. The 1994 proposal provided that to determine
whether a small institution's CRA record is satisfactory, the agencies
would consider the institution's loan-to-deposit ratio, adjusted for
seasonal variation and, as appropriate, other lending-related
activities, such as loan originations for sale to the secondary
markets, community development loans or qualified investments. This
provision of the 1994 proposal responded to concerns following the 1993
proposal that institutions that package and sell their loans would be
disadvantaged when compared to portfolio lenders by a strict loan-to-
deposit ratio test. This provision of the 1994 proposal has been
retained in the final rule. Evaluations will also take into account the
institution's size, financial condition, and the credit needs of its
assessment area.
The final rule also requires consideration of the proportion of the
institution's total lending made to borrowers in its assessment area.
The agencies will take into account local lending and investment
opportunities in assessing this criterion.
In addition, the agencies will evaluate the distribution of loans
and lending-related activities among individuals of different income
levels and businesses and farms of different sizes. Where appropriate,
the agencies will also evaluate the geographic distribution of loans in
the institution's assessment area, including low- and moderate-income
geographies. Contrary to the concerns expressed by some commenters,
however, a small institution is not expected to lend evenly throughout
its service area; rather, loan distribution will be evaluated within
the context of an institution's capacity to lend, local economic
conditions, and lending opportunities in the assessment area.
The agencies also will evaluate whether an institution has taken
appropriate action, as warranted, in response to written complaints
about the institution's performance in helping to meet the credit needs
of its assessment area(s). Some commenters suggested that complaints
resolved satisfactorily for the complainant not be considered in the
evaluation. The agencies will consider those complaints, but their
satisfactory resolution will be a favorable element in an evaluation.
Other commenters expressed concern that the agencies might not
adequately consider bona fide complaints from community members.
However, the agencies intend to consider all CRA complaints in the
course of an examination. Therefore, this criterion is retained in the
final rule as proposed.
Elements of outstanding performance. Some commenters requested a
clarification of the circumstances under which a small institution
could earn an ``outstanding'' rating. Others urged that some
flexibility be provided to consider a range of activities that enhance
credit availability and promote community development. Under the final
rule, in addition to determining whether an institution has exceeded
some or all of the standards for a satisfactory rating, the agencies
will consider a small institution's investment and service performance
based on the broad range of investment and service activities discussed
in the rule for other institutions.
Strategic Plan
The provisions of the strategic plan in the 1994 proposal have been
adopted largely as proposed, with some changes.
The 1994 proposal provided that, as an alternative to being rated
under the lending, service, and investment tests, or the small
institution performance standards, a bank or thrift could submit to its
supervisory agency for approval a strategic plan developed with
community input detailing how the institution proposed to meet its CRA
obligation. The 1994 proposal made clear that an institution would not
be assessed under a plan unless the plan had been approved by its
supervisory agency. To facilitate examinations of institutions with
approved plans, the final rule clarifies that an institution is only
evaluated under a plan if the plan is in effect and if the institution
has operated under an approved plan (although not necessarily the
particular plan currently in effect) for at least one year. Affiliates
may prepare joint plans. The final rule permits activities to be
allocated among affiliated institutions at the institutions' option,
provided that the same activities are not considered for more than one
institution. This change was made in response to comments requesting
greater flexibility and increased opportunities for affiliated
institutions sharing the same assessment area(s) to work together to
help meet the credit needs of their communities and, in particular, in
low- and moderate-income areas.
Public participation. The final rule retains the public
participation provisions in the 1994 proposal. The final rule requires
an institution informally to seek suggestions from the public while
developing a plan. Once the institution has developed a plan, it must
publish notice of the plan and solicit written public comment for at
least 30 days. In order to avoid unduly lengthening the plan approval
process, the final rule does not extend the minimum comment period.
After the comment period, the institution shall submit the plan to its
regulator, along with any written comments received. If the plan was
revised in light of the comments received, the institution shall also
submit the plan in the form released for public comment. The agencies
have added in the final rule a requirement that an institution submit
with its plan a description of its informal efforts to seek suggestions
from members of the public. As under the 1994 proposal, the final rule
states that a plan will be approved if the agency fails to act on it
within 60 days after submission, unless the agency extends the review
period for good cause.
Because of the importance of constructive community involvement in
the plan process, the agencies have not changed in the final rule the
amount of public participation required. Requiring an institution to
seek informal suggestions in formulating a plan, and then to solicit
formal comment before submitting a plan to the agency, encourages
consultation between an institution and its community, including local
government, community leaders, the public and tribal governments. There
is no need for 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.
Several comments appeared to misunderstand why the strategic plan
provides for comment from the public. The strategic plan option
provides institutions an opportunity to tailor their CRA objectives to
the needs of their community and their capacity and expertise. Several
industry comments were concerned that under the strategic plan option,
community organizations would play an inappropriate role in an
[[Page 22169]] institution's operations. However, the purpose of the
consultation is for the institution to develop the fullest possible
information about the needs of its community and how these needs might
be met. The institution nevertheless makes all decisions regarding how
it plans to help meet those needs. In reviewing the public
participation, the agencies will not consider whether community
organizations unanimously support the plan, but whether the institution
made an appropriate investigation to determine the needs of its
community, and whether the goals of the plan serve those needs.
As a technical clarification, the final rule provides that an
institution may impose a reasonable charge for copying or mailing a
plan but may not charge for reviewing the plan.
Assessment of performance under the plan. Under the final rule, as
under the 1994 proposal, the agencies will generally rate an
institution's performance under an approved plan solely in relation to
goals set out in the plan. An institution has the option, however, to
elect in its plan to be subject to the standard tests should it fail to
meet substantially its ``satisfactory'' goals under the plan. The final
rule makes this election clear. An institution operating under an
approved plan would, during the period of the plan, not be subject to
assessment under the standard tests, unless the institution so chose.
In considering whether an institution has substantially met plan goals,
an agency will give consideration to circumstances beyond the
institution's control, such as economic conditions, that have affected
its ability to perform.
Confidential information. 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. In response to similar comments on the 1993 proposal, the
1994 proposal would have permitted institutions to submit additional
information to the relevant agency on a confidential basis. The final
rule includes this provision, which adequately addresses
confidentiality concerns.
Data collection and reporting responsibilities. Despite industry
comments to the contrary, the final rule provides that approval of a
plan does not affect an institution's data collection responsibilities.
These 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 will be in its public file, the public will have the
appropriate context in which to evaluate the lending data.
Assigned Ratings
In the final rule, as under the 1994 proposal, an institution will
be assigned one of the four assigned ratings required by the statute:
``outstanding,'' ``satisfactory,'' ``needs to improve,'' or
``substantial noncompliance.'' (12 U.S.C. 2906(b)(2)) For institutions
that are evaluated under the community development test for wholesale
or limited purpose institutions, the small institution performance
standards, or an approved strategic plan, the rating on these tests
will be the institution's assigned rating with adjustment for any
evidence of discrimination. Retail institutions that are evaluated
under the lending, investment and service tests will be assigned a
rating based upon the assigned rating principles and the matrix that
implements these principles, also with adjustment for any evidence of
discrimination.
Ratings principles and matrix. A number of comments discussed the
principles and methodology by which an assigned rating would be given
to retail institutions evaluated under the lending, investment and
service tests. The 1994 proposal set forth five principles that
governed the assignment of this rating. The methodology for calculating
the assigned rating was described in Appendix A. The proposal would
have required that an institution's rating on the lending test count
for at least 50 percent of its assigned rating. Furthermore, an
institution would have been required to achieve a ``satisfactory''
rating on the lending test in order to receive an assigned rating of
``satisfactory.'' In addition, the 1994 proposal would have allowed
investment and service performance to raise a institution's assigned
rating if it had earned at least a ``satisfactory'' rating on the
lending test. Poor performance on either the investment or service test
also could have negatively affected an institution's assigned rating.
The proposal would have required the agencies to adjust ratings for all
institutions, regardless of which test the agencies used to evaluate
their performance, to take into consideration evidence of
discriminatory or other illegal credit practices. Finally, an
institution that otherwise would have received a ``needs to improve''
rating would have been rated as ``substantial noncompliance'' if it
received no better than a ``needs to improve'' rating on each of its
two previous examinations.
Commenters generally supported the 1994 proposal's emphasis on
lending performance, but a number were concerned about several
apparently anomalous ratings that would have resulted from applying the
rating principles and the matrix in the appendix. Several commenters,
particularly community groups, were concerned that an institution could
receive an assigned rating of ``satisfactory'' even if it received a
rating of ``substantial noncompliance'' on both the investment and
service tests, if its rating on the lending test was at least a ``high
satisfactory.'' In addition, an institution with a rating of
``substantial noncompliance'' on either the service or investment test
could get an ``outstanding'' composite rating if its rating on the
lending and the third test was ``outstanding.'' These commenters
suggested revising the rating principles and matrix to avoid these
anomalous results.
After considering the comments, the agencies have revised the final
rule to eliminate these anomalies. The agencies eliminated the
principle that an ``outstanding'' rating on the lending test and either
the service or investment test would mean an ``outstanding'' assigned
rating even if the rating on the third test was ``substantial
noncompliance.'' The agencies also eliminated the principle that an
institution's rating on the lending test would count for at least 50
percent of its assigned rating. This change does not alter the
agencies' emphasis on the primacy of lending when evaluating CRA
performance, because no institution may receive an assigned rating of
``satisfactory'' unless it receives a rating of at least ``low
satisfactory'' on the lending test.
In light of the comments, the matrix that sets forth the
methodology for aggregating an institution's scores on the lending,
service and investment tests to arrive at an assigned rating has also
been revised. The number of points to be given for each rating on the
lending, service and investment tests remains unchanged as shown in the
following table.
[[Page 22170]]
------------------------------------------------------------------------
Component test ratings Lending Service Investment
------------------------------------------------------------------------
Outstanding............................. 12 6 6
High Satisfactory....................... 9 4 4
Low Satisfactory........................ 6 3 3
Needs to Improve........................ 3 1 1
Substantial Noncompliance............... 0 0 0
------------------------------------------------------------------------
The number of points needed to achieve each of the four composite
assigned ratings has been modified slightly, as shown in the following
table, to remove the anomalies discussed earlier.
------------------------------------------------------------------------
Points Composite assigned rating
------------------------------------------------------------------------
20 or over........................... Outstanding.
11 through 19........................ Satisfactory.
5 through 10......................... Needs to Improve.
0 through 4.......................... Substantial Noncompliance.
------------------------------------------------------------------------
To ensure that an institution does not receive an assigned rating
of ``satisfactory'' unless it receives a rating of at least ``low
satisfactory'' on the lending test, an institution's assigned rating
will be calculated using three times the lending test score if the
institution's point total exceeds three times the lending test score.
The agencies have removed the matrix from Appendix A. This change
will allow the agencies some flexibility in adjusting the matrix to
prevent any other unintended anomalies that may be found during the
examination process. If the agencies change the matrix in the future,
the new matrix will be published for information, but not necessarily
for comment, in the Federal Register.
Automatic downgrade of third ``needs to improve'' rating. The
agencies have also removed the requirement that an institution's CRA
rating be downgraded automatically from ``needs to improve'' to
``substantial noncompliance'' if it received no better than a ``needs
to improve'' rating on each of its two previous examinations. Even
though the automatic downgrading has been eliminated in the final rule,
the agencies will consider an institution's past performance in its
overall evaluation. If the poor performance continues, an institution
could be rated ``substantial noncompliance'' if prior ratings were
``needs to improve'' and the institution has not made efforts to
improve its performance.
Weight of service test. Some consumer groups urged that an
institution be required to get at least a ``low satisfactory'' on the
service test in order to get an assigned rating of ``satisfactory'' or
better. The agencies considered this suggestion, but decided that
because the CRA's focus is on helping to meet a community's credit
needs, it would be inappropriate to impose this requirement. However,
the changes to the ratings principles and matrix increase the weight of
both the service and investment tests.
High satisfactory and low satisfactory ratings. Some commenters
found confusing the use of a ``high'' and ``low'' satisfactory rating
on the lending, service and investment tests and only a
``satisfactory'' on the assigned rating. Because a wide range of
performance may be rated as satisfactory, the agencies decided to keep
the five ratings on the underlying tests, even though the assigned
ratings are limited to the four statutory ratings. This will permit the
agencies, banks and thrifts, and their customers to recognize the
stronger performances on the lending, investment, and service tests of
those institutions that are doing a very good, but not quite
outstanding, job of helping to meet the credit needs of their
communities.
Effect of CRA Performance 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. The statute defines applications for a
deposit facility as including applications for a Federal financial
institution charter or FDIC deposit insurance, applications to
establish or relocate a branch or home office, and applications for
mergers, consolidations, or the purchase of assets or assumption of
liabilities of a regulated financial institution. The 1994 proposal
provided that in considering an institution's application for a deposit
facility, the agencies would consider the institution's CRA performance
and take into account any views expressed by interested parties
submitted in accordance with the applicable agency's rules and
procedures. The proposal also stated that an institution's record of
CRA performance could provide a basis for approving, denying, or
conditioning approval of an application.
A number of comments from financial institutions asked the agencies
to create a ``safe harbor'' from CRA protests for banks with good CRA
ratings that apply to establish a deposit facility. Some commenters
suggested that a ``safe harbor'' would provide an incentive to achieve
an outstanding rating. Community and consumer groups, on the other
hand, opposed any sort of safe harbor from CRA protests.
The agencies have consistently recognized that materials relating
to CRA performance received during the applications process can and do
provide relevant and valuable information. The agencies also 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 final rule implements
without change the balance given in the 1994 proposal between CRA
performance ratings and material information presented through public
comment in the applications process.
The agencies noted in the preamble to the 1993 proposal that the
frequency with which the agencies will examine an institution will
depend in part on its record of performance. A similar discussion was
inadvertently omitted from the 1994 proposal. Examination frequency
will be based, in part, on an institution's record of performance. This
policy combines an efficient use of agency resources with an incentive
for good performance.
Assessment Area Delineation
As a result of numerous comments received on this issue, the final
rule makes several changes to the definition of service area in the
1994 proposal.
Assessment area. The CRA requires the agencies to assess an
institution's record of helping to meet the credit needs of its local
community. The assessment area as defined in the final rule represents
the community within which the agencies assess an institution's record
of CRA performance.
As noted earlier in the preamble, in the final rule, the term
``assessment area'' replaces the term ``service area,'' which was used
in the 1993 and 1994 proposals. The agencies believe the term
``assessment area'' more accurately [[Page 22171]] describes the
geographic area within which the specific performance criteria in the
rule will be assessed. Based on the continuing criticisms of the
``delineated community'' in the current regulation and the ``service
area'' in both the 1993 and 1994 proposals, the agencies have decided
to place a different emphasis on the institution's specific delineation
and the methods used by the institution to establish that delineation.
The agencies do not expect that, simply because a census tract or block
numbering area is within an institution's assessment area, the
institution must lend to that census tract or block numbering area. The
capacity and constraints of the institution, its business decisions
about how it can best help to meet the needs of its assessment area,
including those of low- and moderate-income neighborhoods, and other
aspects of the performance context, would be relevant to explain why
the institution is not serving portions of the assessment area(s).
The rule also clarifies that an institution's delineation of its
assessment area(s) is not separately evaluated as an aspect of CRA
performance, although the delineation will be reviewed for compliance
with the assessment area requirements of the rule. If, for example, an
institution delineated the entire county in which it is located as its
assessment area but could have delineated its assessment area as only a
portion of the county, it will not be penalized for lending only in
that portion of the county, so long as that portion does not reflect
illegal discrimination or arbitrarily exclude low- or moderate-income
geographies.
Assessment area boundaries. The 1994 proposal would have prohibited
a financial institution, other than a wholesale or limited purpose
institution, from delineating a service area that extends substantially
across boundaries of a metropolitan statistical area (MSA) or state
boundaries, unless the service area was located in a multistate MSA.
Further, the proposal would have prohibited an institution's service
area from reflecting illegal discrimination or arbitrarily excluding
low- and moderate-income geographies (taking into account the
institution's size and financial condition).
The final rule states that an institution shall not delineate an
assessment area extending substantially across the boundaries of a
consolidated metropolitan statistical area (CMSA). An institution shall
delineate separate assessment areas for the areas inside and outside
the CMSA and for different CMSAs. The 1994 proposal expressed these
limitations in terms of MSAs rather than CMSAs. The change in the final
rule has been made to address a technical shortcoming in the 1994
proposal, but does not change its substance. The final rule retains the
provision from both the 1993 and 1994 proposals that an assessment area
not extend substantially across state boundaries unless the assessment
area is located in a multistate MSA. The final rule applies these
limitations to wholesale and limited purpose institutions as well as
other institutions because of changes made to the community development
test.
To simplify the process of delineating an assessment area, the
final rule encourages institutions to establish assessment area
boundaries that coincide with the boundaries of one or more MSAs or one
or more contiguous political subdivisions, such as counties, cities, or
towns. An institution is permitted, but is not required, to adjust the
boundaries of its assessment area(s) so as to include only the portion
of a political subdivision it reasonably can be expected to serve. This
provision gives institutions some flexibility in their delineations,
particularly in the case of an area that would otherwise be extremely
large, of unusual configuration, or divided by significant geographic
barriers. As with the 1994 proposal, however, such adjustments may not
arbitrarily exclude low- and moderate-income geographies from the
institution's assessment area(s). For purposes of assessment area
delineation, an institution should use the MSA and CMSA boundaries in
effect on January 1 of the calendar year in which the institution is
making the delineation.
Equidistance principle. The 1994 proposal would have adopted the
effective lending territory principle from the current regulations in
slightly modified form. The 1994 proposal would have explicitly linked
an institution's CRA obligations to the areas around its branches and
deposit-taking ATMs, rather than its other non-deposit taking offices.
The service area delineated by the institution would have had to
include all geographies around its branches in which the institution
originated or had outstanding during the previous year a significant
number and amount of home mortgage, small business and small farm, and
consumer loans and any other geographies equidistant from its branches
and deposit-taking ATMs.
The final rule eliminates the equidistance principle as a required
part of the delineation of an assessment area. This change provides
institutions greater flexibility in their delineations. Several
commenters suggested that, in certain circumstances, the equidistance
requirement could be inappropriate, because institutions do not
routinely serve areas that are uniformly equidistant from their
deposit-taking offices. The final rule retains the requirement that an
assessment area not arbitrarily exclude low- or moderate-income
geographies.
Wholesale and limited purpose institutions. The final rule requires
that the assessment area(s) for a wholesale or limited purpose
institution must generally consist of one or more MSAs or one or more
contiguous political subdivisions in which the institution has its main
office, branches, and deposit-taking ATMs. This requirement is
substantively consistent with the 1994 proposed delineation of service
area for wholesale and limited purpose institutions, but the final rule
differs from the 1994 proposal in two ways. First, the final rule
specifies that the assessment area must generally consist of one or
more MSAs or contiguous political subdivisions; the 1994 proposal would
have required the institution to delineate ``an area or areas around
its offices.'' Second, the assessment area has been modified to conform
to changes made to the scope of the community development test. The
community development test permits consideration of community
development activities that are outside of an institution's assessment
area, but that are in a broader statewide or regional area that
includes the institution's assessment area. As a result, an institution
need not delineate a statewide or regional, rather than local,
assessment area in order to receive consideration for these activities.
Use of assessment area. In response to comments indicating concern
that examiners might modify the area delineated by the institution, the
final rule explicitly provides that the agencies will use the
assessment area delineated by the institution, unless they determine
that the assessment area does not comply with the requirements for
assessment areas set forth in the final rule. If the assessment area
fails to comply with the rule's requirements, the examiner will
designate an area that does comply and will use that area in evaluating
the institution's performance.
Technical changes and clarifications. The final rule includes other
technical changes to provide clarification. For example, some
commenters interpreted the use of the phrase ``significant number and
amount of loans'' in the 1994 proposal to have a different meaning than
the phrase ``substantial portion of its loans'' in the current
[[Page 22172]] regulations. The agencies did not intend a different
meaning and have used the wording from the current regulations in the
final rule. In addition, changes in the final rule reflect the rule's
shift in focus from loans outstanding to originations and the different
circumstances under which the lending test considers consumer loans.
Data Collection and Reporting
In the final rule, the agencies continued their efforts to
streamline data collection and reporting requirements in response to
comments concerning potential burden. The final rule simplifies data
requirements and eliminates Appendix C.
Application of data collection provisions to small institutions and
wholesale and limited purpose institutions. The 1994 proposal would not
have applied small business and farm loan and community development
loan data requirements to small institutions. Some commenters
criticized the exemption from data collection and reporting
requirements for small institutions because only a subset of data would
actually be collected, restricting the regulators' ability accurately
to assess the overall performance of institutions in helping to meet
credit needs. These commenters stated that the benefits of collecting
the data across the industry outweighed the associated burden. However,
the burden on small institutions would be significant and the benefit
less than the commenters assert. Therefore, the final rule does not
subject a small institution to additional data collection and reporting
requirements. The volume of originations of loans other than home
mortgage loans in a small institution will generally be small enough
that an examiner can view a substantial sampling of loans without
advance collection and reporting of information by the institution. In
addition, although small institutions are large in number, they have a
relatively small percentage of the total assets of the industry.
An institution that was a small institution during the prior
calendar year but is no longer a small institution would be subject to
data collection and maintenance requirements but not data reporting
requirements. The data reporting requirements do not apply because the
institution would not have collected the data to report. The
institution would be subject to data reporting requirements in the year
following the first year for which it was required to collect data,
provided the institution does not qualify as a small institution at the
time the data must be reported.
The 1994 proposal would have required large wholesale and limited
purpose institutions to collect and report data. Some commenters urged
that wholesale and limited purpose institutions be exempt from data
collection and reporting. The final rule does not include an exemption.
The data are necessary for the agencies to determine whether the
institutions initially qualify and continue to remain qualified for
treatment as wholesale or limited purpose institutions. The data also
will be helpful in understanding the context in which the performance
of other institutions should be evaluated.
Collection and reporting of originations and purchases rather than
loans outstanding. For the reasons stated in the discussion of the
lending test earlier in the preamble, the final rule requires reporting
of and evaluation based on originations and purchases for all
categories of loans. Institutions still have the option to provide data
on loans outstanding, which examiners would consider to round out the
picture of lending performance.
Community development loan reporting. The community development
loan reporting provisions in the final rule have been modified to
reflect the decision to rely on originations and purchases.
Institutions, except small institutions and institutions that were
small institutions during the prior calendar year, are required to
report to their primary regulator annually on March 1 the aggregate
number and aggregate amount of community development loans originated
and purchased during the prior calendar year. The agencies will include
this information in the CRA Disclosure Statements that they prepare for
each institution, and which an institution shall place in its public
file within three days of receipt.
Some commenters requested reporting and disclosure of more detailed
information on community development loans, including a breakdown by
location and purpose of the loan. The agencies did not adopt these
suggestions because the additional burden would outweigh the potential
usefulness of more specific data. In assessing an institution's
performance under the lending or community development test, examiners
will review actual community development loan files to determine the
complexity and innovativeness of the loans and their responsiveness to
credit and community development needs. Examiners will discuss the
community development loans reviewed in the public portion of the
institution's CRA performance evaluation. The discussion will include
the nature and location (if relevant) of the activities supported by
the loans reviewed.
Consumer loan collection and maintenance. In the final rule, as in
the 1994 proposal, data collection and maintenance are optional for
consumer loans, and there are no reporting requirements. As described
in the discussion of the lending test earlier in the preamble, an
institution may provide data on one or more categories of consumer
loans, such as motor vehicle loans, and not on others. However, if an
institution provides data for any loan in a category, it is required to
provide data for all loans in the category. For each loan category for
which an institution elects to provide data, the data must include for
each loan in the category originated or purchased since the last CRA
examination: (1) the amount at origination or purchase, (2) the loan
location, and (3) the gross annual income of the borrower that the
institution considered in making the credit decision. If the
institution does not consider income in making an underwriting
decision, it need not collect income information. Further, if the
institution routinely collects, but does not verify, a borrower's
income when making a credit decision, it need not verify the income for
purposes of data maintenance. The location of the loan must be
maintained by census tract or block numbering area.
Reporting of loan information outside assessment areas and outside
MSAs. Some commenters asked that institutions not be required to report
small business and small farm loans located outside their assessment
areas or outside MSAs. The agencies have not made this change in the
final rule. The data on lending in rural areas provide important
information on how well institutions are serving rural communities
where they have branches. The data are also necessary for the lending
test assessment criterion that evaluates the degree to which an
institution's lending is inside its assessment area. Finally, the
lending data provide information that assists examiners in
understanding the context in which the performance of other
institutions should be evaluated. The commenters that opposed reporting
of small business and small farm loans outside their assessment areas
or outside MSAs also generally opposed the proposed change to require
institutions that are not small institutions and are subject to HMDA to
report the location of applications and originations of home mortgage
loans outside the MSAs in which the [[Page 22173]] institutions have
offices. The agencies have adopted the proposed change despite these
objections for the same reasons that the agencies did not change the
final rule for collecting of small business and small farm loans
outside MSAs or assessment areas. Conforming amendments to Regulation C
(HMDA) have been adopted by the Board.
Race and gender information on small business borrower not
required. The 1994 proposal would have required each institution, other
than a small institution, to collect and report data on the race and
gender of small business and small farm borrowers. This provision,
which was the most frequently addressed issue in the comments, was
proposed in order to support the fair lending component of the CRA
assessment. The agencies have removed this proposed requirement from
the final rule.
Many commenters, including virtually every community or consumer
group that addressed the issue, supported the provision. These
commenters believed that the information was critical to determine
whether discrimination was occurring in small business and small farm
lending. The commenters noted the value of HMDA data on race and gender
in monitoring home mortgage lending. Nearly every industry comment
opposed the collection as proposed. These commenters stated that the
requirement was burdensome and the data, as proposed to be collected
and reported, would be of limited utility. They asserted that reporting
institutions would be at a competitive disadvantage because small
institutions and non-financial institution lenders not only would not
be required to collect and report the information but actually would be
prohibited from doing so (because of the Board's Regulation B,
implementing the Equal Credit Opportunity Act). Some commenters also
questioned the relevance of the race and gender data to CRA. A few
industry commenters endorsed collection of race and gender data,
provided it was done through Regulation B. A larger number opposed
collection, but believed that, if the agencies concluded the data were
necessary, collection should be required under Regulation B.
The agencies have removed the proposed requirement from the final
rule. Although the agencies believe that fair lending performance is
directly relevant to CRA performance, they recognize the anomaly of
requiring some institutions to collect and report information that
other lenders are prohibited from collecting. Therefore, they believe
that it is more appropriate to address the issue of race and gender
data in fair lending regulations that apply equally to all lenders.
Small business data collection, maintenance, and reporting
generally. In response to industry comments regarding the burden
associated with the small business and small farm loan data
requirements, the final rule streamlines the data collection,
maintenance and reporting. The agencies have replaced loan-by-loan
reporting using loan registers with aggregate reporting by census
tract.
The 1994 proposal would have required lenders to indicate whether
small business borrowers had gross annual revenues $1 million or less.
Some commenters suggested that the requirement be eliminated because
they believed it was burdensome and unnecessary. The final rule retains
the requirement. The burden of collecting this information is minimal,
because $1 million is already used in the Board's Regulation B as a
threshold for certain requirements related to adverse action
notifications and record retention. Therefore, many institutions
already have a reason to track business and farm loans based on this
revenue figure.
The information on the revenue size of business and farm borrowers
is useful because, in combination with loan amount information, it will
enable the agencies to make accurate judgments about the size of
businesses and farms receiving reported loans. Some commenters
questioned whether an institution should report the revenue of the
entity to which the loan is actually extended or of its parent
corporation if the entity is a subsidiary. An institution should report
the revenues that the institution considered in making its credit
decision.
Some commenters asked that the agencies require collection and
reporting of data on applications and denials. The agencies did not
adopt this suggestion. The small business lending process is generally
far less formal than the consumer or home mortgage lending process.
Sometimes institutions do not require written applications for small
business loans; when they do, applications often come after potential
problems have been addressed in informal discussions. Because the
agencies do not believe information on applications and denials would
be particularly helpful, the final rule does not require collection or
reporting of information on small business and small farm applications
and denials. Instead, institutions are required to report all small
business and small farm loans that they originate or purchase.
Under the final rule, each covered institution is required to
collect and maintain in a standardized, machine readable format the
following information on each small business loan originated or
purchased since the prior CRA examination: (1) amount at origination;
(2) location; and (3) an indicator whether the loan was to a business
with $1 million or less in gross annual revenues. The location of the
loan must be maintained by census tract or block numbering area.
Each covered institution is required to report in machine-readable
form annually on March 1 the following information, aggregated for each
census tract/block numbering area in which the institution made at
least one small business or small farm loan during the prior calendar
year: (1) number and amount of loans with original amounts of $100,000
or less; (2) number and amount of loans with original amounts of more
than $100,000 but less than or equal to $250,000; (3) number and amount
of loans with original amounts of more than $250,000; and (4) number
and amount of loans to businesses and farms with gross annual revenues
of $1 million or less (using the revenues the institution considered in
making its credit decision).
Need for data collection and reporting. Some commenters continued
to question the validity and propriety of any data collection and
reporting for larger institutions. As discussed earlier, the agencies
have significantly reduced the data collection and reporting from that
originally proposed, and where feasible the rule relies on existing
data collections. However, the rule continues to provide for some
additional data collection and reporting by larger institutions. In a
performance-based CRA process, these requirements are necessary to
permit the agencies to carry out their statutory obligation to examine
and assess institutions' CRA records and to prepare the public sections
of CRA performance evaluations. The emphasis on actual performance
responds to the nearly universal criticism that current CRA
examinations rely too heavily on documentation of an institution's
policies, procedures and community contacts rather than lending. While
the agencies recognize that the collection of data regarding lending
activity will impose burden on many institutions, the final rule has
been tailored to rely primarily on data readily available to or already
collected by institutions in order to minimize the collection burden.
In addition, the burden of collecting actual loan performance data will
be offset somewhat by the elimination of requirements under the current
CRA [[Page 22174]] evaluation scheme that institutions document
policies, procedures, and CRA contacts. Finally, the agencies will
prescribe a standardized format for data maintenance and reporting and
make available software to facilitate data maintenance and reporting.
Disclosure of small business and small farm loan data. Under the
1994 proposal, every large institution would have been required to
include in its public file the following information on small business
loans: (1) the number and amount of loans in low-, moderate-, middle-
and upper-income census tracts; (2) a list of each census tract with at
least one loan; (3) the number and amount of loans inside the
institution's service areas and outside the institution's service
areas; (4) the number and amount of loans to businesses with gross
annual revenues of $1 million or less; (5) the number and amount of
loans to minority-owned businesses; and (6) the number and amount of
loans to women-owned businesses. The proposal did not provide that the
agencies would make any aggregate data available to the public.
The vast majority of consumer and community group commenters
maintained that the public disclosure provisions of the 1994 proposal
were not sufficient. They asked that small business loan data be made
available to the public in a HMDA-like format for individual
institutions and in aggregated form. They asked that, at a minimum,
data be available to the public on an aggregate and institution-by-
institution basis by individual census tract, including for each census
tract the number and volume of loans. Otherwise, the public would not
be able to judge how an institution is performing in one low-income
neighborhood as compared to another and, without incurring unreasonable
cost, would not be able to compare the performance of one institution
with the performance of another. The commenters also expressed concern
about the agencies' using certain data to evaluate institutions but not
making the data available to the public. Industry commenters generally
opposed detailed data collection and reporting requirements as
burdensome.
Census tract-by-census tract information provides the most detailed
information to the public. However, some commenters were concerned that
disclosure at this level for each institution might invade the privacy
of small business and small farm borrowers, could reveal protected
business information, might erroneously signal an expectation that an
institution lend in each census tract in its assessment area(s), and
might lead to misinterpretation of the data.
Based on these considerations, under the final rule, the agencies,
rather than the institutions, will prepare disclosure statements in
order to reduce burden on the industry. The agencies will prepare
annually individual CRA Disclosure Statements for each reporting
institution and aggregate disclosure statements for each MSA and the
non-MSA portion of each state. The agencies will make both the
individual and the aggregate disclosure statements available to the
public at central depositories.
The aggregate disclosure statements will indicate, for each
geography, the number and amount of small business and small farm loans
originated or purchased by all reporting institutions, except that the
agencies may adjust the form of the disclosure if necessary, because of
special circumstances, to protect the privacy of a borrower or the
competitive position of an institution.
The disclosure statements for the individual institutions will be
prepared on a state-by-state basis and will contain for each county
(and each assessment area smaller than a county) with a population of
500,000 or fewer in which the institution reported a small business or
small farm loan: (1) The number and amount of small business and small
farm loans located in low-, moderate-, middle-, and upper-income census
tracts or block numbering areas; (2) a list of each census tract or
block numbering area in the county or assessment area grouped according
to whether the geography is low-, moderate-, middle-, or upper income;
(3) a list of each census tract or block numbering area in which the
institution reported a small business or small farm loan; and (4) the
number and amount of small business and small farm loans to businesses
and farms with gross annual revenues of $1 million or less. For each
county (and each assessment area smaller than a county) with a
population greater than 500,000, the number and amount of small
business and small farm loans will be provided for geographies grouped
according to whether the median income of the geography relative to the
area median income is less than 10 percent, 10 or more but less than 20
percent, 20 or more but less than 30 percent, 30 or more but less than
40 percent, 40 or more but less than 50 percent, 50 or more but less
than 60 percent, 60 or more but less than 70 percent, 70 or more but
less than 80 percent, 80 or more but less than 90 percent, 90 or more
but less than 100 percent, 100 or more but less than 110 percent, 110
or more but less than 120 percent, or 120 percent or more.
The disclosure statements will also contain information on the
number and amount of loans inside each and outside any assessment area
of the institution and the institution's community development loan
information. The disclosure statements will include affiliate lending
if the institution reported the affiliate lending for consideration in
its assessment.
An institution itself no longer has to prepare information on small
business and small farm lending or community development lending to
place in its public file. Instead, each institution is required to put
its CRA Disclosure Statement in its public file within three days of
receipt of the statement from its regulator.
List of geographies in assessment area and map of each assessment
area. The 1994 proposal also would have required each institution to
report (and include in its public file) a list of the geographies the
institution considers to be within its assessment area and a map of
each assessment area showing its geographies. Several industry comments
suggested that this requirement was overly burdensome and that either a
map or a list of the geographies in the assessment area(s) be reported
but not both. Under the final rule, institutions would only report the
list of geographies in each assessment area, and small institutions or
institutions that were small during the prior calendar year would not
have to report at all. In addition, the agencies have changed the
reporting date to March 1 to provide a uniform date for reporting of
information required under the final rule.
All institutions would still have to include a map of each
assessment area in the public file because the agencies believe a list
of census tract numbers is likely not to be useful to many members of
the public. To reduce burden, the final rule clarifies that the map
itself need not show the geographies. The geographies may be identified
on the map; alternatively, if the institution provides a separate list
of the geographies contained in the area, the map may need to show only
the boundaries of the area.
Public File
Other aspects of the public file requirements have also been
amended to provide more clarity and to respond to the criticism that
the requirements in the 1994 proposal were burdensome.
List of branches, ATMs, and services. The 1994 proposal would have
required the public file to include a list of the
[[Page 22175]] institution's branches and ATMs, their street addresses,
and geographies; a list of branches and ATMs opened or closed by the
institution during the current and each of the prior two calendar
years, their street addresses, and geographies; and a list of services
offered at the institution's branches and ATMs. Many industry
commenters stated that these requirements were extremely burdensome,
particularly the list of services offered at the branches. Much of this
information is central to the institution's performance under the
service test, and the public should have access to it. The final rule
therefore retains the requirement that the public file include a list
of services offered at the branches as well as the requirement that the
file include a list of the branches, their street addresses, and
geographies and a list of branches opened and closed during the current
and prior two calendar years.
However, the final rule does not require institutions to list ATMs
by street address or geography. Nor does the final rule require that
institutions provide a list of ATMs that have been opened or closed in
the current or prior two years. This change reduces burden on an
institution in trying to keep the public file current because ATMs may
be opened and closed more frequently than branches. This change is also
consistent with other changes that clarify that the agencies do not
consider ATMs as equivalent to branches in providing services to the
community.
Small business, small farm, consumer, and community development
loan data. The 1994 proposal would have required institutions that were
not small institutions (and small institutions that elected to be
evaluated under the lending, investment, and service tests) to include
data collected or reported to the agencies for each of the prior two
calendar years in their public file. The 1994 proposal would not have
required public disclosure of data if it might reasonably be expected
to disclose the identity of the borrower because of the small number of
loans made in particular geographies or to particular groups of
borrowers.
Institutions will no longer have to compile information on small
business, small farm, and community development loans for inclusion in
their public files. As described earlier, the information regarding
these loans that continues to be relevant under the final rule will be
contained in the institution's CRA Disclosure Statement prepared by the
agencies.
Institutions that elect to have any portion of their consumer
lending portfolios considered under the lending test will be required
to provide in the public file information on the number and amount of
consumer loans to
low-, moderate-, middle- and upper-income borrowers and census tracts,
as well as information on the number and amount of consumer loans
located both inside and outside of the institution's assessment area.
The final rule also removes the exception to providing data in the
public file that might reasonably be expected to disclose the identity
of the borrower. Because of changes to data disclosure in the final
rule, the agencies believe that a privacy exception is not necessary
for the individual CRA Disclosure Statements. As described earlier, the
agencies will take privacy concerns into account in preparing aggregate
disclosure statements.
Inclusion of comments received. The 1994 proposal would have
required an institution to include in the public file all signed,
written comments that it received from the public for the past two
years. A few industry commenters did not perceive a need to keep
correspondence related to complaints that have been satisfactorily
resolved. The agencies have not made a change in response to these
comments because, as discussed earlier, satisfactorily resolved
comments are relevant to assessment of the institution's performance.
The final rule removes the requirement that written comments be signed
in order to be included in the public file, because all written
comments should be considered even if the commenter wishes to remain
anonymous. Of course, the response appropriate to a comment may well
vary depending on whether the commenter has provided his or her name.
Loan-to-deposit ratio for small institutions. The 1994 proposal
would have required small institutions to include in the public file
their loan-to-deposit ratios computed at the end of the most recent
calendar year. Many small institutions requested that the public file
requirement for loan-to-deposit ratio information be expanded to
include loan-to-deposit ratios for each quarter, or alternatively, that
an annual average loan-to-deposit ratio be placed in the file in order
to better convey seasonal fluctuations in lending to the public. In
accordance with the comments, the final rule requires a small
institution to place annually in the public file the loan-to-deposit
ratio at the end of each quarter of the prior calendar year.
Public file location and number of copies. The 1994 proposal would
have required that institutions maintain a complete copy of the public
file at the home office. At least one branch office in each assessment
area would have been required to have the HMDA Disclosure Statement and
any materials from the public file relating to that assessment area
available to the public. In addition, if a request for the public file
was made at a branch office that did not maintain the file, the
institution would have been required to make a complete copy of the
file for that assessment area available for review at the branch within
five days at no cost. An institution could have imposed reasonable
copying and mailing charges if a member of the public requested copies
of information in the file.
Industry commenters maintained that the requirement to keep
multiple copies of the public file was extremely burdensome,
particularly given the large amount of information in the file. These
commenters suggested that only one public file should be required.
Under the final rule, an institution need maintain only one copy of
its public file in each state in which it has its main office or a
branch. The final rule provides that each institution shall make
available to the public for inspection upon request and at no cost the
information in the file at the main office and, if the institution is
an interstate institution, at one branch office in each state. At each
branch, an institution shall provide its public evaluation and a list
of services provided at the branch. The institution shall also make all
information in the public file relating to the assessment area in which
the branch is located available for review at the branch within five
calendar days of a request to review the file. These changes reduce the
burden associated with the maintenance of public files at a branch in
each assessment area while making it easier for the public to access
the file at any branch. They also reflect the statutory provisions of
the IBEA requiring separate written evaluations for each state in which
an interstate institution operates.
Additional clarifications. Some commenters requested the agencies
to specify a date on which the public file information should be
updated. The final rule provides that the public file be updated as of
April 1 of each year unless the rule specifies another time for a
particular element, such as the CRA Disclosure Statement. The final
rule also clarifies that contents of the public file can be
supplemented with any other information the institution deems
appropriate. The final rule further clarifies that lending data
contained in the public file relate to lending not only by the
institution, but [[Page 22176]] also its affiliates, if the lending by
affiliates is considered in the assessment of the institution.
Transition
The 1994 proposal would have established a transition period from
July 1, 1995, to July 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, 1995.
Assessments under the proposed standards would have begun July 1, 1996.
However, small institutions would have had the opportunity to be
examined, at their option, under the small institution assessment
method anytime after July 1, 1995. Anytime on or after July 1, 1995, an
institution could have elected to submit for approval a strategic plan,
and examinations under approved strategic plans would have begun July
1, 1996.
Many industry commenters requested that the transition period be
lengthened to provide institutions with more time to develop procedures
for satisfying the data collection requirements. Also, some of these
commenters recommended against implementing the data collection
requirements on July 1, because they believed that data collected for a
half year would not be useful. Moreover, some industry commenters asked
that data collection begin on January 1, to fall in line with other
materials that are maintained on a calendar-year basis.
In light of these comments and the fact that the implementation
dates set forth in the 1994 proposal reflected anticipated publication
of the final rule in January 1995, the data collection requirements set
forth in the final rule will become effective January 1, 1996. The
reporting requirements will become effective January 1, 1997.
Evaluations under the lending, investment, service, and community
development tests will begin July 1, 1997, in order to allow the
agencies to use the newly reported data. However, evaluations under the
small bank performance standards, which do not utilize new data, will
begin January 1, 1996. In addition, beginning January 1, 1996, any
institution may submit a strategic plan for approval or elect to be
examined under the revised performance tests, if the institution
provides the necessary data.
An institution that elects evaluation under the lending,
investment, and service tests before July 1, 1997, must provide, in
machine readable form, data on small business and small farm loans and
community development loans for the twelve month period preceding the
examination. The institution must also provide, in machine readable
form, the location of home mortgage loans located outside MSAs in which
the institution has an office (or outside any MSA) for that period. If
the institution elects evaluation of any category of consumer loans,
the institution must also provide consumer loan data, in machine
readable form, for that category for that period. An institution that
seeks evaluation under the community development test must apply for
designation as a wholesale or limited purpose bank three months prior
to its examination and must provide data on community development loans
for the twelve months prior to the examination. All institutions
evaluated under the revised tests and standards or under an approved
strategic plan before July 1, 1997, must delineate their assessment
areas in accordance with the provisions of the final rule.
CRA Notice
The 1994 proposal would have made minor changes to the notice
requirements set forth in the 1993 proposal. The term ``head office''
was changed to ``main office'' for clarity. Within the notice, the
statement of what is included in the CRA performance file would have
been expanded to describe more accurately the contents of the file. The
final rule makes additional changes to reflect changes in the public
file provisions.
Multiple Assessment Areas
The 1994 proposal did not address how institutions with multiple
assessment areas would be examined or how performance in different
assessment areas would affect the overall rating. The agencies received
comments expressing a broad range of opinions regarding the examination
treatment and assessment of institutions with multiple assessment
areas. Several community group commenters stated that ``sampling''
among assessment areas was unacceptable, while an industry organization
suggested an elaborate sampling procedure. Other commenters proposed
that certain assessment area characteristics, such as the percentage of
the institution's deposits or assets in the assessment area, should
determine the weight that performance in that assessment area should
have on the overall rating of the institution. Other commenters were
concerned that such proposals could mean that rural assessment areas
would not be given appropriate consideration in the examination
process.
The agencies continue to believe that the examination treatment of
multiple assessment areas is best left for examination procedures,
rather than stated in regulatory text. Whether an institution has one
assessment area or several, the examiner must have an adequate factual
basis on which to assess an institution's record of performance, and
the overall rating must be fair and appropriate. These objectives do
not necessarily require that an agency examine an institution's
performance in every assessment area in the same way or that the rule
state how performance in different assessment areas is aggregated. Just
as a single mathematical calculation cannot determine performance in an
assessment area, so the appropriate treatment of multiple assessment
areas cannot be reduced to a formula.
The agencies note that the IBEA amended the provisions of the CRA
regarding written evaluations, and the examination procedures will be
consistent with those requirements.
Written Evaluations
Although the 1994 proposal did not directly address the content of
the written performance evaluations required by the CRA statute, some
commenters did. These commenters focused on whether the agencies would
disclose an institution's ratings on the lending, investment, and
service tests to the institution and to the public.
The agencies jointly will issue guidelines for the contents and
disclosure of written evaluations prepared under the final rule, and
these guidelines will implement the IBEA amendments regarding written
evaluations. To address the issue raised in the comments, the agencies
envision that these guidelines will provide that an institution's
ratings on the different tests in the rule be disclosed both to the
institution and, as part of the public section of the written
evaluation, to the public. A guiding principle of the CRA reform effort
has been to clarify for all concerned the basis for an institution's
rating, and the disclosure of ratings will provide essential
information regarding the assessment of an institution's performance.
Contrary to the claim raised in some comments, neither the use of five
ratings, nor the disclosure of those ratings to the public, conflicts
with the statutory mandate that the agencies use four ratings in
assessing the overall performance of an institution.
Appeals
Many commenters requested that the agencies establish an
interagency appeals process. The final rule does not adopt this
suggestion. Each agency has a process under which an institution
[[Page 22177]] can appeal its CRA rating. The agencies have recently
reviewed and modified, as necessary, their appeals processes pursuant
to the Community Development and Regulatory Improvement Act of 1994. In
light of the recent review, the agencies do not believe that it is
necessary to adopt an interagency appeals process in the final rule.
Additional Interagency Initiatives
In addition to this rulemaking, the agencies will work together to
improve training for examiners, to increase interagency efforts to
apply standards consistently and reliably, and to minimize unnecessary
compliance burden. These efforts will focus on producing a CRA
assessment process that imposes fewer burdens on institutions yet
yields better results for the local communities in which they are
chartered to do business.
The agencies have also agreed to conduct a full review of the final
rule in the year 2002, five years after the rule is fully implemented.
This review will be conducted to determine whether the rule has been
effective in achieving the goals of the final rule, including
emphasizing performance rather than process, promoting consistency in
evaluations, and eliminating unnecessary burden. Any regulatory changes
that are determined to be necessary to improve the rule's effectiveness
will be made at that time.
Paperwork Reduction Act
OCC: The collections of information contained in this final rule
have been reviewed and approved by the Office of Management and Budget
in accordance with the requirements of the Paperwork Reduction Act of
1980 (44 U.S.C. 3504(h)) under control number 1557-0160.
The estimated annual burden per respondent varies, depending on
individual circumstances, from 2 hours for a small bank required to
perform only recordkeeping, to 280 hours for a large bank required to
perform all elements in part 25, with an estimated average burden of
18.5 hours.
The collections of information in this final rule are in 12 CFR
25.25, 25.27, 25.29, 25.41, 25.42, and 25.43.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to Legislative
and Regulatory Activities Division, Attention: 1557-0160, Office of the
Comptroller of the Currency
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