Background
A formal appeal was received
concerning a bank's Community Reinvestment Act (CRA) rating of
"Needs to Improve Record of Meeting Community Credit Needs" ("Needs
to Improve"). The bank is chartered under the Competitive Equality
Banking Act (CEBA) and engages solely in consumer credit card
operations. For CRA purposes the bank is considered a
limited-purpose bank and is evaluated under the Community
Development Test.
The bank originally filed an
appeal with the District Deputy Comptroller, who confirmed the
"Needs to Improve" rating assigned by the supervisory office. Bank
management then appealed to the ombudsman.
The bank stated that since
it was operating under both "old and new" CRA regulations during
this evaluation period that OCC examiners had not fully considered
some of its CRA initiatives. Specifically, the bank felt its program
to provide credit cards to individuals living in low-and
moderate-income (LMI) census tracts was not fully considered,
although that activity does not meet the standards under the
Community Development Test. In the appeal letter, management stated
that when the new CRA regulation was published the bank considered
which evaluation methods would be the most suitable to their
business. The bank added that of the three possible options, the
large bank and strategic plan methods have clear minimum transition
periods of 12 to 18 months to allow an institution time to develop
and implement programs to achieve "satisfactory" performance under
the revised standards. The appeal letter stated the transition
period under the limited purpose method is unclear.
The bank relates they had no
reason to think that their lending activities designed for CRA
objectives since the last examination would not be fully considered
since the bank was operating under the old provisions of CRA for a
significant portion of the performance period. In addition,
management did not agree that all of the bank's community
development investments and services within its assessment area had
been fully considered.
Discussion
The two issues resulting
from the appeal are:
- If a bank's designation to a
limited-purpose bank falls within the middle of an evaluation
period, under what criteria is the evaluation based? and
- Did the examiners consider all of the bank's community
development investments and services within its assessment area?
The regulation, 12 CFR 25, states the following:
For purposes of this part,
the following definitions apply:
(o) Limited-purpose
bank means a bank that offers only a narrow product line (such as
credit card or motor vehicle loans) to a regional or broader market
and for which a designation as a limited-purpose bank is in effect,
in accordance with 25.25 (b).
12 CFR
25.25-Community development test for wholesale of limited-purpose
banks
(b) Designation as a
wholesale or limited-purpose bank. In order to receive a designation
as a wholesale or limited-purpose bank, a bank shall file a request,
in writing, with the OCC, at least three months prior to the
proposed effective date of the designation. If the OCC approves the
designation, it remains in effect until the bank requests revocation
of the designation or until one year after the OCC notifies the bank
that the OCC has revoked the designation on its own initiative.
The regulation provides for
a bank to make an alternative election under a strategic plan;
however, it stipulates that the bank will have to be operating under
an approved plan for at least one year before being assessed under
the pan. The large bank method allowed for institutions to elect to
operate under the old standards for 18 months, the time between the
January, 1996 effective date on which to begin collecting data and
the July, 1997 date on which the new examination procedures would go
into effect and data on performance was available.
The bank did seek a
limited-purpose designation and it became effective half way through
the evaluation period. Subchapter 25 states the performance criteria
for the community development test as follows:
(c) Performance criteria. The OCC evaluates the
community development performance for a wholesale or limited-purpose
bank pursuant to the following criteria:
- The number and
amount of community development loans (including originations and
purchases of loans and other community development loan data
provided by the bank, such as data on loans outstanding,
commitments, and letters of credit), qualified investments or
community development services;
- The use of
innovative or complex qualified investments, community development
loans, or community development services and the extent to which the
investments are not routinely provided by private investors;
and
- The
bank's responsiveness to credit and community development needs.
Based on the above
information, the regulation does not address under what criteria a
bank approved as limited-purpose bank during the middle of an
evaluation period, will be assessed.
Conclusion
The regulation does not
directly address how a bank will be evaluated when it changes
designation from large to a limited-purpose bank during an
evaluation period. Although the choice to seek a limited-purpose
designation does not unilaterally erase all CRA initiatives
performed to that date. Therefore, future letters from the OCC
granting approval for a limited purpose designation will contain
language addressing how the bank will be evaluated during their next
CRA examination.
In the case of this
institution, the length of time from the designation as a limited
purpose bank until receipt of the appeal was considered adequate to
assess the bank under the community development test. While the
bank's belief that providing credit cards to individuals living in
LMI census tracts is within the spirit of CRA is understandable,
providing credit cards does not fall within the community
development definition contained within the CRA regulation. The
supervisory office was appropriate in its exclusion of these
activities.
During the review of the bank's community
development investments it was found that not all qualified
investments had been fully identified or presented by the bank to
the examiners for consideration, including investments in state-wide
and regional organizations that includes the bank's assessment
area. In addition, some
CRA initiatives that were in the early stages of development during
the examination had progressed to the point where some consideration
could be given, after
reassessing and factoring in these additional investments and
initiatives, the Ombudsman concluded that the bank's CRA performance
level met the standards for "Satisfactory Record of meeting
Community Credit Needs."
The district prepared a revised
CRA Public Disclosure.