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Last quarter’s issue of Compliance Corner contained an article summarizing recent amendments to the Community Reinvestment Act (CRA), including changes that expand the definition of community development and clarify illegal credit practices. This issue focuses on the new CRA classification for banks with assets between $250 million and $1 billion regardless of holding company affiliation: the intermediate small bank (ISB).
Banks within this asset threshold now have the option of being evaluated as either an ISB or a large bank. Because this change will impact many banks in the Third District, this article will review factors that banks should consider in determining whether to elect ISB or large bank procedures for their next CRA evaluation.
Who Is Eligible for the ISB Evaluation?
Banks with total assets of at least $250 million as of December 31, 2005, for both of the two prior calendar years and with less than $1 billion as of December 31, 2005, for either of the two prior calendar years are eligible to be evaluated as ISBs. These thresholds will be updated yearly based on the Consumer Price Index, and the new limits will be published in the Federal Register.
How Is the ISB Evaluation Conducted?
An ISB evaluation consists of a streamlined lending test and a community development test. The lending test evaluates all the elements of a small bank CRA evaluation, namely, a bank’s loan-to-deposit ratio, the percentage of its loans located in the assessment area, the bank’s record of lending to borrowers of different incomes and businesses of different sizes, the geographic distribution of the bank’s loans, and the bank’s record of response to written CRA-related complaints.
The community development test evaluates the following:
Basic Differences Between ISB and Large Bank Data Collection Procedures. Under the ISB evaluation, banks with assets between $250 million and $1 billion are no longer required to submit CRA small business and small farm data. However, if a bank chooses to be evaluated under the large bank procedures, it must have submitted at least one year of small business/small farm data. Conversely, if a bank has been evaluated as a large bank in the past but now chooses the new ISB procedures, it is no longer required to submit data.
Evaluation of Community Development Lending. Under the ISB procedures, community development lending is no longer evaluated under the lending test, but rather as part of the community development test, which includes all of the bank’s community development activities. Retail banking services are no longer evaluated under the service test. Instead, examiners evaluate the extent to which banks provide community development services to low- and moderate-income people, including through branches and other facilities located in low- and moderate-income areas.
However, under the large bank procedures, community development activities are evaluated separately; community development loans are evaluated as part of the lending test, qualified investments as part of the investment test, and community development services as part of the service test.
It is important to understand how a bank’s community development lending performance affects its overall CRA rating under the large bank and ISB procedures. With the large bank procedures, as long as a bank’s lending test rating is satisfactory, it can still receive an overall satisfactory CRA rating—even if its performance under the investment or service test is rated “needs to improve.”
Under the ISB procedures, by contrast, a bank cannot receive a satisfactory rating overall unless its performance under both the lending and community development tests is satisfactory. In deciding which procedures to select for its next CRA evaluation, a bank must consider, therefore, its community development lending performance, either along with the rest of its lending as part of the lending test under the large bank procedures or along with the rest of its community development activities under the new ISB procedures.
Responsiveness Versus Innovation and Flexibility. Another important distinction between the ISB and large bank CRA procedures is that the large bank procedures evaluate banks on the innovation and flexibility of their products in meeting community development needs in their assessment areas. The ISB procedures, however, do not evaluate innovation and flexibility, but they place much greater emphasis on a bank’s responsiveness to the specific community development needs in its assessment area. This determination will be based on the capacity and business strategy of the bank, actual community needs, and the number and type of opportunities for community development. While these criteria are ostensibly easier to meet, they require more research, thought, and planning on the part of both bankers charged with meeting these criteria and examiners evaluating their performance. Examiners will consider the bank’s assessment of community needs, along with information from community, government, civic, and other sources to gain a working knowledge of community needs.
Banks eligible to be evaluated under the new ISB procedures should review their last performance evaluation (and information on CRA performance since the last evaluation) to determine their strengths and weaknesses and should examine their performance through the filter of the new ISB procedures. This process will enable banks to determine whether they would benefit from electing the new ISB procedures or whether it would be more advantageous to be evaluated under the large bank procedures.
The examination procedures for ISBs are available on the FFIEC website at www.ffiec.gov/cra. If you have further questions, however, please contact Senior Examiner Elizabeth Rozsa or Supervising Examiner John D. Fields through the Regulations Assistance Line at (215) 574-6568.
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.