MARK WELCH – Using caution
Community banks received relatively good news in late July after federal bank regulators issued final Community Reinvestment Act rules. The new rules, which includes a community development test, lessen the burden on banks to collect and report loan data.
Local bankers say the ruling is good news and will cut back on unnecessary time and money expenditures. However, they also say the changes aren’t exactly what banks asked for.
On July 19, the Federal Reserve System, Federal Deposit Insurance Corp. and Office of the Comptroller of Currency jointly approved final CRA rules that are “intended to reduce regulatory burden on community banks while making CRA evaluations more effective in encouraging banks to meet community development needs.”
The rules increase the small-bank asset size threshold to assets of less than $1 billion without regard to holding company affiliation. As a result, the rules reduce data collection and reporting burden for “intermediate small banks.” Those banks are defined as institutions with assets between $250 million and $1 billion. According to the FDIC, the new rules are intended to encourage community development lending, investment and services by the intermediate small banks.
Under the new rules, intermediate small banks won’t be collecting and reporting CRA loan data; however, examiners will still evaluate bank lending activity in the public CRA performance evaluations.
“The burden will shift to the examiners,” said David Barr, FDIC spokesman.
The same banks will be evaluated under two different tests: the small-bank lending test and a new, “flexible” community development test that includes an evaluation of community development loans, investments and services in response to community needs and the capacity of the bank.
Banks must score satisfactory ratings on both tests in order to receive an overall satisfactory CRA rating.
Barr said banks with $250 million or more previously had to have activity in each of the three areas of the lending test: loans, services and investments. Because investments were required, many intermediate small banks were making investments outside of their service area in order to comply. With the new rules, Barr said, the investments are not mandatory but expected. If a bank is not making investments, it must provide documentation proving why. However, if there are investments to be made within a community, Barr said a bank is expected to make them.
‘A Mixed Bag’
According to the OCC Web site, the Community Reinvestment Act was enacted in 1977 to prevent redlining and to encourage banks and thrifts to help meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods. It extends and clarifies the longstanding expectation that banks will serve the convenience and credit needs of their local communities. CRA also requires federal financial institution regulators to assess the record of each bank and thrift in fulfilling their obligations to the community and to consider that record in evaluating applications for charters or for approval of bank mergers, acquisitions and branch openings.
Daniel J. Forte, president of the Massachusetts Bankers Association, said the changes to CRA are a “mixed bag.”
“Given the magnitude of regulatory burden and associated cost that goes with it today, we’re appreciative of any step forward,” Forte said.
However, Forte said after 10 years of retrospection on CRA, he feels the regulators’ decision is a bit “underwhelming.”
“The home run would have been to keep banks under $1 billion under the small-bank test,” Forte said.
MBA had suggested the small-bank test for evaluation of banks with up to $500 million and a medium-bank test for institutions from $500 million to $1 billion, and that larger banks with more than $1 billion be evaluated under the large-bank test.
Mark Welch, president of the Institution for Savings in Newburyport and its Vicinity, described the new rules as good news for IFS, which falls under the intermediate small bank category with more than $400 million in assets.
“It’s never made sense to me that banks of our size should be subjected to the same exam as some of the major [banks],” said Welch.
Welch said the new changes to CRA acknowledge there are a variety of banks that can’t be judged on the same level.
“It recognizes there are different levels of banks,” he noted.
The large-bank exam, which IFS was also evaluated by, included the investment test.
“The investment test was what we always struggled with,” said Welch.
The bank, which doesn’t offer commercial lending as a service, would put money into CRA mutual funds in order to fulfill the investment requirement.
Noting that the banks with assets between $250 million and $1 billion were always hit hardest by CRA regulations, Welch said he hopes the changes will help his bank – which uses existing staff to comply with CRA – feel less of a burden in the future.
“I think it will be less work for us,” said Welch.
But he said he’s approaching the changes cautiously.
“It remains to be seen on how much will be saved,” Welch noted.
Forte said banks will feel the effects of the changes differently.
“It will depend on the bank,” Forte said. “It’s a slight improvement.”
While the intermediate small banks grow accustomed to the new rules, banks of all sizes will see changes, as well.
The FDIC has indicated that the new rules expand the definition of community development to include activities that revitalize or stabilize disaster areas and distressed or underserved rural areas.
“By including designated distressed or underserved rural areas, the agencies intend to recognize and encourage community development in more rural areas,” according to an FDIC statement.
The regulations also clarify when discrimination or other illegal credit practices by a bank will adversely affect an evaluation of a bank’s CRA performance.
The regulations become effective Sept. 1. The bank agencies are expected to have interim CRA exam procedures for intermediate small banks in place by Aug. 1.
