Regulatory Compliance Newsletter #5
These newsletters are intended to help you with regulatory compliance.
GeoDataVision issues these advisories periodically.Recent CRA changes Dear CRA Professional,
There was much jubilation in many community banks last week when the regulatory agencies announced the adoption of the proposed changes in the Community Reinvestment Act. However, the joy in Mudville may be premature. While the changes bring with them the benefit of relief from reporting for so-called "intermediate size" banks, they also bring new responsibilities and new emphasis. Moreover, the revisions do not release banks from performance under CRA. This means you shouldn't throw your data collection systems overboard just yet! Let's take a very brief look at the major changes and their implications for your bank if you fall into the intermediate size category ($250 million to $1 billion asset size)..
The primary benefit of the regulatory change for intermediate size banks is relief from the annual filing of data under CRA. Intermediate-size lenders nevertheless will be expected to continue to perform according to the lending tests under CRA. This has two important ramifications. First, when a bank is examined under CRA, examiners will conduct a sampling of loan data which will be used as the basis for performance evaluation. How reliable the sample is as a measure of your bank's performance remains to be seen. Sampling techniques used by examiners for small bank analysis have been subject to criticism, so there is no guarantee that it will accurately represent your performance. Second, since you will be expected to continue to perform under CRA it would behoove every CRA officer to maintain some type of self-assessment program – unless you want to suffer terminal anxiety between exams while you wait and wonder how well you're performing and what the examiners will say. The fact is, you should continue to collect loan data as if you had to report because you need to know what your performance is on an on-going basis and you need to know any performance shortcomings before examiners show up. Furthermore, you need to be prepared in case your CRA examiners is excessively critical (does that ever happen?). If you don't collect the data and don't monitor it you will be at the mercy of your examiner. So, if you're buying into the revised CRA, caveat emptor (Buyer beware)! Our advice is to continue to collect the data and monitor your performance. At the very least it will show examiners you are serious about your responsibilities.
What the regulators giveth, the regulators taketh away! Now that the regulators have freed you from one responsibility, they now have the excuse to lay another one on you – the requirement to attain a satisfactory rating on "community development activities" in order to attain an overall satisfactory rating. This by far is the most threatening element of the revised regulation. Before, you may have done little community development lending or investing and you could still get an overall satisfactory rating. This no longer is the case. Many community banks have found the community development aspect of CRA to be the most difficult. Few community development opportunities, intense competition from the mega-lenders, and disqualification from CD status because a loan is considered to be small business as a priority for reporting have undermined the community development performance of community banks. The latest CRA data shows that one-third of reporting lenders did not originate even one community development loan and more than half originated 2 or fewer loans. How will you be able to document the non-existence of community development opportunities or the presence of an overwhelming competitive situation? Since you and your peers will no longer be reporters, you won't even have the reported data to back up your claim of no opportunities because the only reporting lenders will be the ones who dominated the CD market to begin with! Does anyone see a problem here? In order to comply with the revised regulation, we advise you to develop a documented community development outreach program full of contacts with community development sources (affordable housing developers, economic development programs, etc.).
The revised regulation does allow intermediate size banks to be examined under the current "large" bank standards, but they would be required to continue to report as if they were a large bank? Why would an intermediate size bank elect to be rated under the large bank performance criteria rather than the new intermediate bank standards? If your community development activities (cd loans, investments and services) are not strong, or if you are not certain about the strength of your community development activities you may want to consider exercising your elective and continuing to report under the current system. Remember, a less than satisfactory rating under the new intermediate bank community development activities performance standards is fatal – no matter how strong your performance is under the lending test. If you don't rate a satisfactory on the community development test, you will get a "needs to improve" or a "substantial non-compliance" rating on your entire CRA rating. The changes also require any unfair or deceptive practices to be factored into the CRA performance rating. Since you should have been collecting reportable loan data for the first half of 2005, it may be prudent to continue collecting the data for the remainder of the year as a means of preserving your elective. At the same time, you should undertake an evaluation of your community development activities to determine how strong your performance is. If you think your performance comes up short (and the national community development loan data shows that more than half the current reporting banks originated 2 or fewer community development loans for the last year (2003) for which data is currently available), you will be able to report your 2005 loan data on March 1, 2006 and preserve your right to be examined under the current standards (the devil you know may be better than the devil you don't know!). Then take another look in 2006.
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