Independent Community Bankers Comment On Reinvestment Act Regulatory Framework
To:
Re: Reforming the Community Reinvestment Act Regulatory Framework
Docket ID OCC-2018-0008; RIN 1557-AE34
Dear Comptroller Otting:
The
The CRA was enacted in 1977 to ensure that each insured depository institution serves the convenience and needs of its entire community, including low- and moderate-income ("LMI") neighborhoods, consistent with [its] safe and sound operation.3 This mission is the essence of what community banks do. As local businesses themselves, community banks only thrive when their customers and communities flourish. They answer to
Executive Summary
ICBA appreciates and commends the OCC's initiative to transform and modernize the outdated and overly burdensome CRA regulations and examination process. Highlights from our comments are noted below.
* Community banks' success hinges on the success of their communities; therefore, ICBA and community banks support fair, equitable, consistent and transparent implementation of the Community Reinvestment Act.
* ICBA urges the OCC to work with the
* The current regulations are outdated and at times serve as barriers to implementing the very mission they are intended to bring about.
* Community banks are seeing inconsistency in the examination process, which creates uncertainty and confusion.
* ICBA requests that regulators provide performance evaluations in a timely manner so that community banks can quickly adjust their operations to ensure compliance for the next examination.
* The asset thresholds defining "small," "intermediate small," and "large" banks do not adequately reflect the current banking environment and should be adjusted upwards accordingly.
* Assessment areas should be identified and delineated by community banks rather than the regulators as community banks must know and understand their communities to flourish.
* Any examination cycle that includes a newly delineated or revised assessment area should begin at the time the bank is informed of the new or revised assessment area and not applied retroactively.
* A bank should receive consideration for CRA-qualified activities beyond its delineated assessment area in targeted areas; however, the bank should determine whether these areas are included in its assessment area.
* ICBA appreciates that the OCC is exploring new tools and mechanisms, such as a metric- based system, to address deficiencies in the current framework. However, there is great potential for unanticipated ancillary effects in such a system. More importantly, community banks want clear expectations and consistency so that they can focus on serving the needs of their communities rather than speculating what activities will receive credit and what documentation demonstrates compliance.
* A metric-based framework would need to capture and consider all relevant activity and account for data points that might be difficult to quantify, such as "innovativeness," "responsiveness," and "complexity."
* If a metric-based approach is proposed in a future notice of proposed rulemaking, ICBA strongly urges that community banks have the option of continuing to use the current framework.
* ICBA contends that a more forward-looking approach to the examination process that utilizes an illustrative list of activities that provides a presumption of CRA credit would provide consistency and clarity for banks. Such a list, however, should not be considered exhaustive, and activities not on the list should still be eligible for credit.
* Refining many of the definitions in CRA regulations will facilitate more certainty and consistency. In particular, clarifying and simplifying the "small business," "community development," and "economic development" definitions would be most beneficial.
* The agencies should not favor national nonprofit organizations over local, lesser known nonprofits.
* ICBA encourages the agencies to award credit for any community service provided by a bank employee, regardless of whether the service is financial in nature or during banking hours.
* Banks should receive credit for loans and investments for improved infrastructure, transportation and other community services that are targeted to the entire community, including LMI populations.
* ICBA recommends that an exemption from documenting compliance with CRA regulations should be given to minority- and women-owned financial institutions, and a streamlined approach be taken for certified community development financial institutions.
* Banks should be provided clear guidance on what documentation and recordkeeping is required for all activities prior to their examination to address the significant inconsistencies and lack of transparency during the examination process.
Current Regulatory Approach
The current regulations are outdated and at times serve as barriers to implementing the very mission they are intended to bring about. Community banks are experiencing inconsistencies in the examination process, which creates uncertainty and confusion for community banks. The inconsistent manner in which loans and services receive CRA credit occurs between examinations within an agency, as well as between agencies. This makes it difficult for community banks to determine how well they are meeting their CRA requirements.
This inconsistency makes it incredibly difficult for community banks to plan and implement their CRA requirements responsibly. ICBA urges the OCC to work with the
Additionally, examiners will not share their method for determining CRA credit. There is virtually no feedback during or following an examination until the actual performance evaluation is shared with the bank. This policy or practice is problematic as performance evaluations are typically not shared for several months. Additionally, community banks are often compared to institutions that are not peers. For example, a community bank with an assessment area limited to a geographical area surrounding its branch was measured against a national online mortgage company serving customers nationwide.
Asset Thresholds Should Be Adjusted
ICBA believes that the current thresholds defining "small," "intermediate small," and "large" banks do not adequately reflect the extensive consolidation and growth that has occurred in the industry since 1977 when CRA was adopted and should be increased. The CRA regulations currently use a tiered approach to evaluating banks. Different evaluation methods are used based on the bank's size and how it operates.
* Small banks--currently those with assets of less than
* Intermediate small banks--a subset of "small banks" with assets between
* Large retail banks with
ICBA's recommendations for increasing the asset thresholds are:
* Small banks - increase the asset threshold to include all banks with assets less than
* Intermediate small banks - increase the asset threshold to include banks with assets between
* Large retail banks - increase the asset threshold to include all banks with assets of
Once changed, all these asset thresholds should be subject to annual adjustments based on the percentage increase in total assets of all insured depository institutions.
By expanding the number of banks that fall under the definition of "small bank" and "intermediate small bank," regulators would significantly ease the CRA regulatory burden for most community banks while not impacting the ability to adequately assess community banks for their CRA performance.
Redefining Communities and Assessment Areas
Shifting Delineation of Assessment Areas Has Created Uncertain Compliance Expectations
The CRA regulations state that, "a bank shall delineate one or more assessment areas within which the [agency] evaluates the bank's record of helping to meet the credit needs of its community. The [agency] does not evaluate the bank's delineation of its assessment area(s) as a separate performance criterion, but the [agency] reviews the delineation for compliance" with CRA regulations.5
Specifically, the CRA states that when examining a financial institution, a federal agency must assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.6 Additionally, the implementing regulations do not expressly define "community," but rather implement this provision by requiring a bank to delineate one or more assessment area(s) within certain parameters. Currently, the assessment area(s) determined by a bank must consist of one or more metropolitan statistical areas or metropolitan divisions and one or more contiguous political subdivisions, such as counties, cities, or towns. A bank's assessment area(s) must include the geographies in which the bank has its main office, its branches, and its deposit-taking ATMs, as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans (including home mortgage loans, small business and small farm loans, and any other loans the bank chooses, such as those consumer loans on which the bank elects to have its performance assessed).7
There has been a growing trend recently of examiners reinterpreting geographies and redefining a bank's assessment area for the bank during an examination, rather than - as the regulations state - deferring to the bank to delineate its own assessment area. Additionally, in some instances, regulators adjust assessment areas every time they visit a bank for an examination.
These fluctuations include, but are not limited to, examiners shifting assessment areas:
* from low- and moderate-income areas to majority minority areas;
* from census tracts to whole counties; and
* from census tracts surrounding a bank's branches to census tracts distant from a bank's market area.
Such shifts at times do not correspond to a bank's community and create significant uncertainty for community banks. At a minimum, these unilateral changes from the regulators complicate CRA planning and compliance for community banks. The bank is operating according to the assessment area it has delineated, but then may be judged during an exam according to an assessment area redefined by examiners. Assessment areas should be identified and delineated by community banks rather than the agencies so that community banks can plan accordingly.
Not only does the unilateral change and fluctuation of assessment areas at each examination make it difficult for community banks to plan accordingly, it at times overlooks common sense. There are instances where examiners insist on using whole counties as geographic delineations, rather than the existing use of census tracts or natural partitions to delineate assessment areas. In these instances, the counties are very large or include geographic features, such as large lakes, rivers or mountains, that partition the area making it difficult, if not impossible, to attract customers from the new assessment area. These directives from examiners force community banks to expand their footprint into areas larger than they intended, which is contrary to a community bank's business model. Unlike larger banks, community banks channel their loans to the neighborhoods where their depositors live and work, which helps local businesses and communities thrive.
A commonly cited example regarding branches on or near state borders is the exclusion of areas close to the branches, yet the inclusion of areas that are distant from a branch. In one situation, examiners accepted the assessment area of a bank with branches in two bordering states during one examination. However, during the next examination, the examiners removed one census tract from the bank's stated assessment area, resulting in two separate assessment areas - one for each state - and examined the bank using the new assessment areas. As a result, the bank was examined using an area that was previously not in its assessment area.
Another common situation is one in which branches closely border a state line. Due to geographical features or infrastructures, many residents of the bordering state conduct their banking in the branches just over the border in the other state. Examiners insist that the bordering state (or large county) be included in the bank's assessment area and perform two separate performance evaluations. If a bank is not carving out LMI neighborhoods from its assessment area, a bank should be able to include the census tract of the bordering state in its assessment area, without expanding the assessment area further into that state.
These examples underscore the importance of ensuring that banks determine their own assessment areas rather than regulators. Each community bank is founded to serve its community - whether that community is urban or rural, densely or sparsely populated, or naturally delineated by rivers or mountains - and each bank must know and understand its community to serve it. Furthermore, the diversity of community banks' workforces understand and support the financial services needs of diverse consumers and small business owners in rural and suburban communities, small towns and big cities throughout America and should be trusted to know the boundaries of their communities.
If an examiner determines that a bank is not appropriately delineating its community, the regulator and community banker should jointly determine any appropriate changes that should be made to the bank's assessment area. Any examination cycle that includes a new assessment area should begin at the time the bank is informed of the new assessment area and not applied retroactively.
Updating Assessment Areas for Evolving Banking Practices
To recognize evolving banking practices, the OCC is seeking comments on ways to update how a bank's community is interpreted for purposes of implementing the CRA. While the OCC states that banks would continue to receive consideration for CRA-qualifying activities within their branch and deposit-taking ATM footprint, it is considering an updated approach that would enable banks to receive consideration for providing certain activities in LMI areas outside of their branch and deposit-taking ATM footprint by including these areas in their assessment areas.
Community banks are entrenched in their communities and are in the best position to define their assessment areas. A bank should receive consideration for CRA-qualified activities beyond its delineated assessment area in targeted areas or areas that have historically been largely excluded from consideration, such as LMI and underserved areas. However, these areas should not necessarily be included in a bank's assessment area unless the bank determines that they should. Giving consideration to CRA-qualifying activities conducted in these areas without requiring banks to expand their assessment areas would address concerns of the current system, which at times restricts bank lending or investment in areas of need, while also helping community banks with footprints or assessment areas with few or no LMI areas. Additionally, and importantly, it will help banks execute the true mission of CRA by making sure loans and investments go to where they are needed most.
The current CRA regulations specify what must be and what cannot be included in the assessment area delineation. The assessment area delineation for a bank currently requires that the bank include the geographies in which the bank has its main office, its branches, and its deposit-taking ATMs, as well as the surrounding geographies in which the bank has originated or purchased a substantial portion of its loans.8
While the ATM has been a useful tool for banks by dispensing cash and providing a reliable method for customers to deposit funds, the advancement of technology has shifted the reliance on ATMs to other tools such as smartphones and computers. Additionally, community banks are increasingly relying on networked ATMs owned by others to meet their customers' cash access needs. While not commonplace today, many expect ATMs to accept deposits from the customers of any bank participating in the network. Requiring geographies surrounding deposit-taking ATMs, rather than relying on banks to determine if such areas are appropriate, is outdated and does not serve the purpose of CRA.
To recognize evolving banking practices, the OCC is also inviting comments on an updated approach to define assessment areas by allowing a bank to include additional areas tied to its business operations. Permitting a bank to determine whether its assessment area includes areas in which the bank has a concentration of deposits, loans, or other offices would enable a bank to determine its own community based on its unique business operations. However, requiring an assessment area to include areas in which a bank has a concentration of deposits, loans, or other operations rather than deferring to the bank to make that determination would severely limit certain community banks' ability to meet the needs of their communities.
Community banks serve as the only physical banking presence in nearly one in five
While technological advances are changing financial environments, community banks continue to be deeply involved in their local communities. Unlike larger banks that may take deposits in one state and lend in others, community banks channel their loans to the neighborhoods where their depositors live and work, which helps local businesses and communities thrive.
Assessment Area Reforms Should Allow for Service and Activities That Are Not Prevalent in a Bank's Current Area
CRA regulations require a bank to delineate one or more geographic assessment areas within which a bank's regulator will evaluate a bank's record of meeting the credit needs of its community. The assessment areas must include geographies in which a bank has its main office, its branches, its deposit-taking ATMs, and the surrounding geographies in which it has purchased a substantial portion of its loans. The OCC is seeking comment on qualifying activities outside of these areas in addition to activities in a bank's traditional assessment areas or local geographies.
In the compliance examination manual, examiners must compare credit extended inside versus outside of a bank's assessment area. It states, "[i]f the percentage of loans or other lending related activities in the assessment area is less than a majority, then the institution does not meet the standards for "Satisfactory" under this performance criterion."9 This is typically referred to as the in/out ratio.
Assessing the credit that is extended to the local communities in which banks are chartered is consistent with the purpose and intent of CRA. However, strictly adhering to a 50 percent benchmark produces unintended consequences and can stifle banks' lending or investments in areas of need, particularly for community banks in rural areas and those with few or no LMI areas.
However, such permissibility should be entirely at the option of the bank. Regulators should not require banks to serve LMI areas outside their typical assessment area. Many community banks will still be dependent on branch-centric customers - those that choose to serve their existing assessment areas should not be required to expand beyond those areas.
Expanding CRA-Qualifying Activities
Refining Definitions Will Facilitate More Certainty and Consistency
The OCC is seeking feedback on the type and categories of activities that should receive CRA consideration and whether certain terms could be better defined to address community needs and incentivize banks to lend, invest and provide services that further the purposes of the CRA. Indeed, the
ICBA has received dozens of examples from banks of all charter types that have not received credit for activities while other banks in similar markets or under a different regulator have received credit for the same activity. There are also several instances where a bank received credit for an activity during one examination, only not to receive credit for the same activity during subsequent examinations. ICBA believes that consistency could be improved by better defining terminology and clearly establishing which activities will be given credit.
While many of the definitions in CRA regulations could benefit from revisions, clarifying and simplifying "small business," "community development," and "economic development" would be most impactful.
Under the current regulations, the "small business loan" definition mirrors the Call Report definition, as loans "with original amounts of
The OCC is contemplating changing the definition of "small business" to be simpler and without as many stipulations. As the OCC and other regulators consider these changes, ICBA recommends against adopting the definition set forth by the
Regarding "community development," ICBA contends that the definition of what can and cannot be classified as a community development loan or activity is confusing and overly prescriptive. In part, the Interagency Questions and Answers Regarding Community Reinvestment ("Q&As") define a community development loan as a "loan [that] has a primary purpose of community development... designed for the express purpose of community development."13 This circular definition is not helpful and actually serves as a hindrance to banks that are required to seek and pursue community development activities. Similarly, the Q&As explain that activities that "promote economic development" count as community development.14 However, "promot[ing] economic development" is, itself, a term that establishes a multi-prong test that does not provide much clarity.
Finally, ICBA does not believe that the lack of community development activity should count negatively in a bank's CRA score. Community development loans are not always available in an assessment area and are extremely competitive as many banks are competing for the same limited loans. This creates bidding wars, and community banks typically cannot compete with the mega banks which creates an uneven playing field.
Need for More Equitable Treatment of Nonprofit Activity
Currently, Q&A *__.12(g)(2)-1 provides guidance and includes examples of ways that an institution can demonstrate that community services are offered to LMI individuals. Examples include: a community service offered by a nonprofit organization that is located in and serves a low- or moderate-income geography; or, a community service targeted to the clients of a nonprofit organization that has a defined mission of serving low- and moderate-income persons.
While this clarification is helpful, ICBA members relay instances where examiners do not count the services of all nonprofit organizations or require more documentation than is otherwise required for other, more nationally-recognized nonprofits. Certain favored and nationally recognized nonprofits often serve as turnkey solutions for banks seeking CRA credits quickly and easily. By contrast, certain local nonprofits seeking to strengthen the specific community in which they and the bank are located, are unfairly burdened with additional compliance hurdles and documentation for CRA credit. This creates a barrier that weakens the partnerships that community banks strive to foster within their own communities and is counter to implementing the very mission of the statute.
CRA Regulations Should Recognize Entire Communities
In its ANPR, the OCC distinguishes between loans that receive credit regardless of LMI populations, and loans that only receive credit if directed toward LMI areas. The OCC seeks comment on whether these activities and products should only receive credit if they are directed toward LMI areas or populations, or whether CRA credit should be given for all loans and activities, so long as they serve the entire community. Additionally, the OCC asks under what circumstances consumer lending be considered as CRA-qualifying activity.
The purpose of CRA is to require banks to serve the needs of the communities in which they do business, including LMI neighborhoods. This has evolved to focus a majority of the review on LMI areas, sometimes to the detriment or exclusion of non-LMI areas within a community. Too many times, banks do not receive credit for loans and investments for improved infrastructure, transportation and other community services that are targeted to the entire community, including LMI populations. This is especially harmful to small cities and towns that need access to improved infrastructure and benefit every income stratum in these areas, including LMI populations.
One example of limiting credit to activities in LMI areas is the regulatory treatment of activity with nonprofits. Q&A *__12(g) lays out the requirements for banks that wish to receive credit for activities directed toward nonprofits. However, credits are limited to nonprofits that serve LMI populations. Instead, the determination should be whether the nonprofit serve the needs of the entire community, as well as to those activities that serve LMI populations.
Another example is the treatment of investments in public bonds. When a community bank invests in public bonds where the proceeds are distributed to various upper, middle, moderate, and low-income census tracts, it does not receive community development credit for those investments because only 40 percent of the bond proceeds positively affected LMI census tracts. Such an investment positively affects the entire community and the bank should receive presumptive credit for it. At a minimum, the bank should receive credit for 40 percent of its investment for the portion directly benefitting the LMI census tracts.
Provide a CRA Credit Safe Harbor for Certain Activities
The OCC seeks comment on whether certain categories of loans and investments should be presumed to receive consideration, such as those that support projects, programs, or organizations with a mission, purpose, or intent of community or economic development.
As the OCC and other banking agencies consider amendments and revisions to CRA regulations, ICBA reiterates that community banks desire a framework that is predictable and consistent. This requires the agencies to clarify existing terminology, but more importantly, consistently apply that terminology to each bank examination.
CRA exams are backward looking, with examiners awarding or withholding credit based on past performance. This 'moment-in-time' assessment does not facilitate predictability. A community bank could offer a service or loan product for years, expecting to receive credit, only to discover upon an examination that the activity is not eligible. In order to educate themselves and make informed guesses as to what activity receives credit, community banks must spend time analyzing past performance evaluations, as well as the performance evaluations of other similar banks in the area.
ICBA contends banks should be able to use a more forward-looking approach that utilizes a list of activities that provide a presumption of CRA credit. While the list would not capture the entire universe of activities that would receive credit, it would provide banks with greater clarity on certain qualifying activities. Additionally, while a list of certain qualifying activities would ensure CRA consideration for certain activities, it should allow for flexibility to capture innovative or unique situations. To address our evolving and expanding industry, a presumptive list could be reviewed and subjected to stakeholder feedback on a recurring basis.
In addition to streamlining the examination process, the safe harbor activities would also reduce the administrative burden for banks that otherwise need to produce various and inconsistent documentation for various activities to obtain CRA credit. It should be clear that such a list is not exhaustive and that activities not on the list will still be eligible for credit; they simply will not automatically receive the presumption. ICBA has compiled a list of activities that our members believe should receive a presumption of credit (see appendix A).
Click here to view the complete letter: https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-regulators/2018-Letters/18-11-19_cracl.pdf?sfvrsn=0
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