FDIC proposes changes to CRA rules

by Clarissa French

SBJ Editor

cfrench@sbj.net

The Federal Deposit Insurance Corp. has issued a proposal to change the definition of "small bank" under the Community Reinvestment Act.

What that means to approximately 900 banks nationwide is a reduced regulatory burden, according to Karen Thomas, executive vice president, chief operating officer and regulatory relations group director for Independent Community Bankers of America.

"For small banks, it's a good thing," said Stuart Wetzel, compliance officer for Citizens National Bank of Springfield.

The FDIC proposal would change the definition of small banks, under the Community Reinvestment Act, from those with less than $250 million in assets to those with less than $1 billion in assets, regardless of holding company affiliation. It also has proposed a new community development criterion for small banks.

The proposal is the latest twist in the Community Reinvestment Act, or CRA, which was created in 1977 to ensure that depository institutions were meeting the convenience and needs of their communities, including credit needs.

The CRA was amended in 1995, to streamline the CRA exam process for all lenders, but particularly for banks defined as small.

From Citizens National Bank's perspective, avoiding the large-bank CRA exam a little longer is a positive.

"The billion dollar threshold probably sounds very reasonable to us," said Frank Hilton, chairman and CEO of Citizens National, which has assets of approximately $222 million. At $1 billion, "you're talking about a larger bank in a bigger metropolitan area that might very well have some CRA issues that need to be addressed.

"From just the regulatory, reporting side of things that would be good for us because we continue to be inundated by other regulatory requests for more and more documentation and more and more paperwork to prove what we're doing," Hilton said.

Why size matters

"In the old days, prior to 1995, the Community Reinvestment Act was the same for everybody. We had to basically prove that we were reinvesting in the community, and it was very burdensome," said Wetzel. "There was a 12-point assessment test that we all had to go through. It was very cumbersome, especially for small banks (because of limited staffing). It took a long time to complete that test for the examiners to prove to them that we were actually reinvesting."

For small banks, the streamlined process shifted much of that work to the regulators.

"The beauty of the streamlined exam is that it puts the burden on the examiner to do the analysis," Thomas said. "They will come in and pull loan files and satisfy themselves that the bank is lending to people of different income levels, is lending to census tracts of different income levels; the examiner will pull the files and do that analysis."

Ten years ago, banks had "to keep score and put a tedious tick mark by every good thing we thought we had done in the community, whether that was a loan on a low-income housing project or whatever the case might be," said Hilton. "It's been a nice relief to go ahead and do business and not have to do that."

For banks defined as large those having more than $250 million in assets the 1995 revision of CRA simplified the process in some ways, but made it more complex in others. While the 12-point assessment was abandoned, large banks went to a lending, service and investment test.

"They have to go in and establish plans: here's our plan for lending, here's our plan for investing and here's our plan for service," Wetzel said.

Also, the investment test "requires bank investments not loans that support community development. Unfortunately the competition for these qualifying investments is very stiff, and (community banks) frequently can't compete for them or there are not the opportunities for these investments in their own communities," Thomas said.

Large banks also have to collect data, which can require an investment in tracking software as well as staff time.

"They have to collect data on small business and small farm loans and report that data to the regulators. They don't have to do that if they're subject to the streamlined exam," Thomas said.

She added that a 2002 study by Independant Community Bankers of America and Grant Thornton showed the mean employee cost attributable to CRA compliance was 36.5 percent higher for large community banks ($115,270 a year) compared to small community banks ($84,443 a year).

Thomas said she expects the FDIC to take action on the proposal in the next month or two. The FDIC proposal can be viewed at www.fdic.gov. Public comment will be accepted until Sept. 14.