# Community Reinvestment Act Regulations > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A95-10503 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 4, 1995 - **Citation:** 60 FR 22156 ## Text [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. ----------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- Letters from banks, thrifts Letters from Letters from Agency and their consumer and government Letters from Total trade community entities others associations groups ---------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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 wou [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-10503. Public record. Not legal advice.