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Compliance Corner: First Quarter 2004

The Community Reinvestment Act: Proposed Changes That Could Affect Your Bank

On February 6, 2004, the Board of Governors of the Federal Reserve System, together with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision, issued a joint interagency notice of proposed rulemaking regarding the Community Reinvestment Act (CRA).1 The limited changes to the CRA regulations proposed by the agencies are intended to reduce burden on smaller financial institutions and clarify the CRA consequences of illegal or abusive credit practices by financial institutions or their affiliates. Financial institutions and the public are invited to submit comments on the proposed changes by April 6, 2004. Thereafter, the agencies will consider the comments and determine whether to adopt the proposed changes in final form.

This article will explain, as succinctly as possible, the proposed changes and how they might impact your bank.

The Proposed Changes
This proposal was issued following the agencies' review of the CRA regulation, which included an analysis of about four hundred comments received on the July 19, 2001 Advanced Notice of Proposed Rulemaking (ANPR). After considering the comments submitted in response to the ANPR and the changes in the financial services industry, the agencies issued this Notice of Proposed Rulemaking. This proposal would change CRA in two major ways—it would increase the number of small banks and clarify and expand the existing description of credit practices that could impact an institution's CRA rating.

Increased Number of Small Banks. The increase in the number of small banks would result from two changes to the definition of "small institution":

  • Doubling the asset threshold to $500 million.
  • Eliminating the holding company limitation (currently an institution is not considered "small," regardless of its asset size, if its holding company is larger than $1 billion).

The proposal would increase by roughly 1,200 the number of "small" institutions for purposes of CRA. However, nearly 90 percent of the aggregate assets of the nation's banks and thrifts, comprising about 1,000 institutions, would remain subject to the large bank methodology and reporting requirements.

Clarification and Expansion of Credit Practices Impacting a CRA Rating. In an effort to clarify and expand the types of credit practices that could impact an institution's CRA rating, the proposal would add to the regulation an explicit list of violations of consumer protection laws, including, but not limited to, those listed in the 2001 FFIEC CRA Questions and Answers document.2 The Q&A list would be expanded to include the practice of abusive collateral-based lending (i.e., making secured mortgage or consumer loans without a reasonable expectation that the borrower has the ability to repay). The changes would make clear that an institution's CRA rating could be impacted by abusive lending, even if the abusive lending did not occur in its assessment area, and would also explicitly state that if an institution elects to have an affiliate's loans considered under CRA, any discrimination, other illegal credit practices, or abusive asset-based lending by the affiliate could impact the institution's CRA rating.

The proposal would also enhance the availability of public CRA data by aggregating data at the census tract level, instead of the current MSA level. This would allow the public to discern more detailed information about small business lending without increasing the reporting burden on institutions.

When and How Will This Affect Your Institution?
If your institution is a large bank now but has less than $500 million in assets, or if your bank has, just this past year, exceeded the $250 million threshold for two consecutive years, your bank will be examined under the large bank methodology and frequency until any changes are enacted. Any change in the frequency of examinations for institutions under these circumstances will be determined once a final decision is made on the proposal. Stay tuned for further developments!

But, in the interim, let your voice be heard! Please submit your comments on the proposed changes to the Community Reinvestment Act to the Board of Governors, if you are supervised by the Federal Reserve, or your federal regulator. Comments can be submitted through the Board's website External Link, by e-mail to regs.comments@federalreserve.gov, or by fax to the Office of the Secretary at (202) 452-3819 or (202) 452-3102. All public comments are available on the Board's website External Link as submitted.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

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