Partners (Number 2, 2006)
Partners (Number 2, 2006)
Vol. 16, No. 2, 2006
CRA Revisions: Flexibility and New Choices
|CRA Revisions: Flexibility and New Choices
Changes in the Community Reinvestment Act (CRA) will allow banks more flexibility to satisfy requirements through a broader definition of community development activities.
In addition, a new category of small banks will have more latitude in choosing assessment criteria. The revised act also addresses the impact of discrimination and other illegal credit practices on an institutions CRA rating.
Revision of the CRA was published as a joint final rule of the Board of Governors, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation in August 2005 and became effective in September 2005.
While the regulatory facelift, which acknowledges banks activities in under-served, distressed and disaster-affected areas, is good news for financial institutions, it will doubtless create challenges as banks and regulators adjust to the revised criteria.
New community development criteria for all banks
Areas that qualify as distressed and under-served, nonmetropolitan, middle-income census tracts will be determined by federal regulatory agencies and listed annually on the Federal Financial Institutions Examination Councils website, www.ffiec.gov. Designated disaster areas are identified by the Federal Emergency Management Agency (FEMA).
The range of activities considered revitalizing or stabilizing for communities will vary depending on the geography. In distressed, nonmetropolitan, middle-income geographies, activities will be required to serve the primary purpose of community development by helping to attract and retain residents and businesses (including through job creation). They can also qualify if they are part of a bona fide plan to revitalize or stabilize the geography. Banks must demonstrate that their endeavors provide long-term direct benefit to the entire community, including low- and moderate-income individuals and neighborhoods.
For areas designated as under-served, nonmetropolitan, middle-income geographies, examiners will determine if banks activities help meet essential community needs, including those of low- or moderate-income individuals. Financing for the construction, expansion, improvement, maintenance or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks or affordable housing will be considered under these criteria to determine if they qualify.
The regulations distinguish between activities that qualify for consideration in under-served geographies and those that qualify in distressed geographies. Financial institutions should contact their federal regulators to obtain clear guidance about which activities will satisfy the criteria.
Disaster recovery activities will be evaluated according to the same guidelines that would be applied to a low- or moderate-income geography or a distressed, nonmetropolitan, middle-income geography.
Since the goals of many community development activities are only achieved over time, regulating agencies instituted a lag period of 12 months for both distressed and under-served, nonmetropolitan, middle-income tracts. Revitalization and stabilization activities undertaken by banks during the 12 months following the lifting of an areas under-served or distressed status will be assessed as if the area were still designated as distressed or under-served.
Banks serving federally designated disaster areas will receive credit for disaster recovery-related activities for 36 months following the date of designation by the federal government.
The FFIEC website will indicate annually which designated distressed or underserved census tracts are in their lag period.
New choices for intermediate small banks
The joint final rule exempted banks in this category from CRA loan data collection and reporting obligations. It also made these institutions eligible for evaluation under the small bank lending test combined with a new community development test in lieu of subjecting them to the lending, investment and service tests used to evaluate larger banks.
The recent changes remove holding company affiliation as a factor in determining which CRA evaluation standards apply to a bank. The asset size of the holding company no longer has a bearing on which test applies to a bank.
Regulators will now use a two-part test to assess intermediate small banks: the performance criteria used to evaluate small banksthose with assets under $250 millionand a new community development test.
The new community development test examines how well a financial institution supports local development by meeting lending, investment and service needs. Performance is assessed according to the nature of the communitys needs and the capacity of the bank. This test is designed to be applied flexibly by regulators so banks can use their resources strategically to foster the types of activities that best meet the communitys needs.
To obtain an overall satisfactory rating, the financial institution must earn a satisfactory rating for both tests.
Small intermediate banks can still choose to be examined as a large bank under the lending, investment and service tests. A bank in this category should perform a self-analysis under both tests to determine which approach to examination will be most favorable and then choose which examination process to undergo.
Although intermediate small banks will no longer have to report CRA loan data annually to federal regulators, they will still be required to report HMDA data if they are subject to the reporting requirements of Regulation C Ð Home Mortgage Disclosure Act. A financial institution that opts to be examined under the large bank criteria must continue to collect and report CRA loan data.
Discrimination and the use of illegal credit practices
The final rule issued by the agencies states that evidence of discrimination or evidence of credit practice violations will have an adverse impact on a banks CRA performance. In addition, a banks CRA evaluation will also be adversely affected by evidence of discrimination or other illegal credit practices by an affiliate in connection with loans inside the banks assessment area(s), if any loans of that affiliate have been considered in the banks CRA evaluation.
Regulators will consider the following: evidence of discrimination against applicants on a prohibited basis under the Equal Credit Opportunity Act or Fair Housing Act; evidence of illegal referral practices in violation of section 8 of the Real Estate Settlement Procedures Act (RESPA); evidence of violations of the Truth in Lending Act concerning a consumers right to rescind a credit transaction secured by a principal residence; evidence of violations of the Home Ownership and Equity Protection Act; and evidence of unfair and deceptive credit practices in violation of section 5 of the Federal Trade Commission Act. Senior management and compliance officials at financial institutions will need to know the status of an affiliates record with regard to these laws and regulations before deciding to include its CRA loan data as a part of the performance evaluation.
Considerations in the wake of Hurricanes Katrina and Rita
Activities assisting the disaster areas or individuals affected by Katrina and Rita will be considered regardless of the median income of the census tract or the personal income of the individual. However, more weight will be given to activities that assist the entire community, including low- and moderate-income areas and individuals.
This article was written by Gary Clayton, senior consumer affairs examiner in the Atlanta Feds Supervision and Regulation Division.