[Federal Register: November 24, 2004 (Volume 69, Number 226)]
[Proposed Rules]
[Page 68257-68265]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no04-13]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 68257]]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563e
[No. 2004-53]
RIN 1550-AB48
Community Reinvestment Act--Community Development, Assigned
Ratings
AGENCY: Office of Thrift Supervision, Treasury (OTS).
ACTION: Notice of proposed rulemaking.
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SUMMARY: In this notice of proposed rulemaking (proposal), OTS is
proposing changes to, and soliciting comment on, its Community
Reinvestment Act (CRA) regulations in two areas to reduce burden.
First, OTS is proposing to revise the definition of ``community
development'' to encourage all savings associations to increase their
community development lending, qualified investments, and community
development services in rural areas, with a particular focus on
increasing these activities in underserved nonmetropolitan areas. The
proposal also solicits comment on further encouraging savings
associations to perform community development activities in any areas
affected by natural or other disasters or other major community
disruptions.
Second, the proposal solicits comment on providing additional
flexibility in assigning CRA ratings to encourage large retail savings
associations to focus their community reinvestment efforts on the types
of activities the communities they serve need, consistent with safe and
sound operations. As an alternative, the proposal solicits comment on
eliminating the investment test.
Today's proposed changes are designed to reduce burden to the
extent consistent with safe and sound supervision of the industry. They
would further the CRA burden reduction OTS began in its final rule
published in the Federal Register on August 18, 2004, which revised the
definition of ``small savings association.'' They would also further
the burden reductions in the interim final rule published elsewhere in
today's Federal Register as part of OTS's review of regulations under
section 2222 of the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (EGRPRA).
DATES: Comments must be received by January 24, 2005.
ADDRESSES: You may submit comments, identified by No. 2004-53, by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail address: regs.comments@ots.treas.gov. Please
include No. 2004-53 in the subject line of the message and include your
name and telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: No. 2004-53.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: No. 2004-53.
Instructions: All submissions received must include the agency name
and docket number or Regulatory Information Number (RIN) for this
rulemaking. All comments received will be posted without change to the
OTS Internet site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1
, including any personal information
provided.
Docket: For access to the docket to read background documents or
comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1
.
In addition, you may inspect comments at the Public Reading Room,
1700 G Street, NW., by appointment. To make an appointment for access,
call (202) 906-5922, send an e-mail to public.info@ots.treas.gov, or
send a facsimile transmission to (202) 906-7755. (Prior notice
identifying the materials you will be requesting will assist us in
serving you.) We schedule appointments on business days between 10 a.m.
and 4 p.m. In most cases, appointments will be available the next
business day following the date we receive a request.
FOR FURTHER INFORMATION CONTACT: Theresa A. Stark, Program Manager,
Thrift Policy, (202) 906-7054; Richard Bennett, Counsel (Banking and
Finance), Regulations and Legislation Division, (202) 906-7409, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Introduction
After considering the comments on a joint advance notice of
proposed rulemaking (ANPR) published on July 19, 2001 (66 FR 37602),
and a joint notice of proposed rulemaking (NPR) published on February
6, 2004 (69 FR 5729), OTS is proposing changes to, and soliciting
comment on, its CRA regulations in two areas: (1) The definition of
``community development'' and (2) the assignment of ratings. These
proposed changes are designed to reduce burden to the extent consistent
with the safe and sound supervision of the industry. These changes
would provide institutions with more flexibility to make their own
determinations about how best to serve their communities. They would
further the CRA burden reduction OTS began in its final rule published
in the Federal Register on August 18, 2004, which revised the
definition of ``small savings association.'' 69 FR 51155. They would
also complement the burden reductions contained in OTS's interim final
rule published elsewhere in today's Federal Register as part of OTS's
review of regulations under section 2222 of the EGRPRA (Pub. L. 104-
208, Sept. 30, 1996). The related EGRPRA rule is reducing regulatory
burden on savings associations by updating and revising various
application and reporting requirements.
Community Development Proposal
OTS is proposing to revise the definition of ``community
development.'' The proposal is designed to encourage all savings
associations to increase their community development lending, qualified
investments, and community development services in rural areas, with a
particular focus on increasing these activities in underserved
nonmetropolitan areas. The proposal also solicits comment on
[[Page 68258]]
further encouraging savings associations to perform community
development activities in any areas affected by natural or other
disasters or other major community disruptions. OTS is considering
these revisions to encourage more community development activities in
rural areas, to cover the full range of activities that should receive
favorable consideration in all areas, and to reduce burden by affording
savings associations greater flexibility in serving their communities.
The Current Rule
Under the current definition in section 563e.12(f) of OTS's
regulation, ``community development'' means:
(1) Affordable housing (including multifamily rental housing) for
low-or moderate-income individuals;
(2) Community services targeted to low-or moderate-income
individuals;
(3) Activities that promote economic development by financing
businesses or farms that meet the size eligibility standards of the
Small Business Administration's Development Company or Small Business
Investment Company programs (13 CFR 121.301) or have gross annual
revenues of $1 million or less; or
(4) Activities that revitalize or stabilize low-or moderate-income
geographies. See 69 FR 41181, 41188 (July 8, 2004) (redesignating the
definition of ``community development'' as paragraph (f) of section
563e.12, among other changes).
The 2001 ANPR
As discussed in the 2001 ANPR, ``[S]ome [commenters] indicate that
many projects intended to revitalize or stabilize rural communities do
not qualify under the current regulatory definition of community
development because they are not located in low- or moderate-income
geographies as defined in the regulations. Others assert that the
definition does not adequately value activities benefiting communities
or projects involving persons with a mix of incomes.'' 66 FR at 37605.
As explained in the preamble to the 2004 NPR, commenters on the
2001 ANPR were split over the appropriateness of the current definition
of ``community development.'' Financial institutions asked the banking
agencies to remove from the definition of ``community development'' the
requirement that community development activities target primarily low-
or moderate-income individuals or areas, and expand the definition to
include community-building activities that incidentally benefit low- or
moderate-income individuals or areas. For instance, several financial
institutions contended that any activity that helps ``revitalize and
stabilize'' an area (e.g., after a natural disaster or a steady
economic decline) should be considered community development, even if
the activity is not located in, or targeted to, low- or moderate-income
communities. Other examples of activities for which they sought
consideration included municipal bonds and grants to cultural
organizations and other charities. In contrast, community organizations
that expressed a view favored retaining the current definition of
``community development'' or narrowing it. For example, many community
organizations sought to limit the ``economic development'' component of
the definition to financing minority-owned businesses or farms and
businesses or farms in low- or moderate-income areas. 69 FR at 5733.
The 2004 NPR
The 2004 NPR did not propose to revise the definition of
``community development.'' Thus, it did not specifically solicit
comment on this issue and commenters did not focus on it. But as noted
in the preamble to OTS's August 18th final rule, community
organizations opposed to changing the definition of ``small
institution'' were primarily concerned that reducing the number of
institutions subject to the large retail institution test--and
therefore, the investment test--would reduce the level of investment in
low- and moderate-income urban and rural communities. 69 FR at 51157.
Further, some in Congress submitted comments encouraging the banking
agencies to expand the definition of ``community development.'' A few
other commenters supported giving more weight to philanthropy in
underserved markets.
Today's Proposal
Today's proposal on the definition of ``community development''
would address rural areas as well as any areas affected by natural or
other disasters or other major community disruptions.
With respect to rural areas, the second and fourth paragraphs of
the community development definition would be expanded. Thus, under the
proposed expanded definition, community development would also include:
(1) Community services targeted to individuals in rural areas; and (2)
activities that revitalize or stabilize rural areas. Community
development activities in rural areas would be covered even if the
individuals or areas served are not low- or moderate-income. This would
contrast with the current definition of ``community development,''
which focuses on activities that benefit low- and moderate-income
individuals or geographies.
OTS is proposing this change to reduce burden and provide greater
flexibility. OTS is responding to concerns that competition for scarce
CRA loans and investments in certain metropolitan areas not only
disadvantages small institutions that cannot compete for quality CRA
loans and investments, but also results in a largely urban CRA focus.
OTS's examination experience indicates that rural areas tend to be
composed of mixed-income census tracts that may not qualify as low- or
moderate-income areas. Expanding the definition of ``community
development'' as proposed would further encourage savings associations
to engage in community development activities outside of their
traditional CRA market--while still applying existing standards for
consideration of activities inside or outside the assessment area(s)--
and thereby encourage the extension of CRA and community development to
currently underserved and overlooked rural communities.
As explained in OTS's August 18th final rule, even with respect to
small savings associations, OTS already considers performance in making
community development loans and qualified investments and providing
community development services, at the savings association's request,
for purposes of raising a rating. 69 FR at 51159. Thus, the proposed
change to the definition of ``community development'' is designed to
encourage all thrifts--large and small--to increase their community
development activities in rural areas, with a particular focus on
increasing these activities in underserved nonmetropolitan areas.
OTS is not proposing a specific definition of ``rural'' at this
time. However, it solicits comments on the appropriate definition
below.
The proposal also solicits comment below on further encouraging
savings associations to perform community development activities in any
areas affected by natural or other disasters or other major community
disruptions. This portion of the proposal would not be limited to rural
areas or activities targeted to low- or moderate-income individuals or
low- or moderate-income geographies. OTS has not, however, included
proposed rule text that would address this possible change.
[[Page 68259]]
Solicitation of Comment on Community Development Proposal
OTS solicits comments on all aspects of this proposal.
A. Solicitation of Comments on the Definition of ``Community
Development''
1. Should the definition of ``community development'' be expanded?
If so, how?
2. Does the proposed change to the community development definition
encompass the full range of community development activity that
benefits rural areas? Should the definition include a savings
association's demonstrated participation in other types of community
activities? Should the regulation provide for the Director of OTS to
determine that additional activities that benefit the public welfare
constitute ``community development?''
3. OTS has indicated in the wake of natural disasters and the
September 11th terrorist attacks, that it would take into account an
institution's response to its community when evaluating the
institution's stabilization activities under CRA. Would it be
appropriate for the definition of ``community development'' to
expressly provide that community development also includes, in any area
(rural or not, low- or moderate-income or not): (1) Community services
targeted to individuals in areas affected by natural or other disasters
or other major community disruptions; and (2) activities that
revitalize or stabilize areas affected by natural or other disasters or
other major community disruptions? What other types of major community
disruptions should be covered (e.g., civil unrest, arson)?
4. As proposed, OTS would not expand the first paragraph of the
definition of ``community development'' to include affordable housing
(including multifamily rental housing) for individuals in rural areas
who are not low- or moderate-income. Would it be appropriate to cover
such activities? Do such activities contribute to community
development? If so, how? Are there difficulties with housing
affordability and availability in rural areas (e.g., marketability on
the secondary mortgage market) that could appropriately be addressed by
revising the definition of ``community development?''
5. As proposed, OTS would not expand the third paragraph of the
definition of ``community development'' to include activities that
promote economic development by financing businesses or farms in rural
areas without regard to their size or gross annual revenues. Would it
be appropriate to cover such activities? Do such activities contribute
to community development? If so, how? Are there difficulties with
financing business or farms of various sizes or gross annual revenues
in rural areas that could appropriately be addressed by revising the
definition of ``community development?''
6. What would be the impact of the proposed definitional change for
purposes of the community development test for wholesale or limited
purpose savings associations, the large retail institution test, the
small savings association test, and any other provisions of the CRA
regulation affected?
B. Solicitation of Comment on the Definition of ``Rural''
1. Would a definition of ``rural'' be helpful? If so, how should
``rural'' be defined?
2. Would the definition of ``nonmetropolitan area,'' which is to be
incorporated in section 563e.12(r) of OTS's CRA regulation, be
appropriate (i.e., any area that is not located in a metropolitan
statistical area)? See 69 FR at 41188. This definition is derived from
the Office of Management and Budget's Standards for Defining
Metropolitan and Micropolitan Statistical Areas. 65 FR 82228 (December
27, 2000). However, OMB has indicated, ``The Metropolitan and
Micropolitan Statistical Area Standards do not equate to an urban-rural
classification; many counties included in Metropolitan and Micropolitan
Statistical Areas, and many other counties, contain both urban and
rural territory and populations.'' OMB Bulletin No. 04-03 (February 18,
2004), available at, http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html
.
3. Are there other definitions that would be appropriate? For
example:
a. The U.S. Census Bureau classifies as ``urban'' all territory,
population, and housing units located within an urbanized area (UA) or
an urban cluster (UC). It delineates UA and UC boundaries to encompass
densely settled territory, which consists of:
(1) Core census block groups or blocks that have a population
density of at least 1,000 people per square mile and (2) surrounding
census blocks that have an overall density of at least 500 people per
square mile. In addition, under certain conditions, less densely
settled territory may be part of each UA or UC. The Census Bureau's
classification of ``rural'' consists of all territory, population, and
housing units located outside of UAs and UCs. The rural component
contains both place and nonplace territory. Geographic entities, such
as census tracts, counties, metropolitan areas, and the territory
outside metropolitan areas, often are ``split'' between urban and rural
territory, and the population and housing units they contain often are
partly classified as urban and partly classified as rural. See ``Census
2000 Urban and Rural Classification,'' available at http://www.census.gov/geo/www/ua/ua_2k.html
.
b. The U.S. Department of Agriculture (USDA) uses various
definitions.
i. One definition groups counties according to their official
status as metropolitan or nonmetropolitan under OMB standards. It then
applies 9 rural-urban continuum codes to further distinguish among
metropolitan counties by size and nonmetropolitan counties by their
degree of urbanization or proximity to metropolitan areas. Codes 1
through 3 are various types of metropolitan counties while codes 4
through 9 are various types of nonmetropolitan. Within nonmetropolitan
areas, Code 8 is a county that is completely rural or has less than
2,500 in urban population and is adjacent to a metropolitan area, while
Code 9 is a county that is completely rural or has less than 2,500 in
urban population and is not adjacent to a metropolitan area. See ``What
is Rural?'' available at http://www.nal.usda.gov/ric/faqs/ruralfaq.htm
and ``Measuring Rurality: Rural-Urban Continuum Codes,'' available at
http://www.ers.usda.gov/briefing/rurality/RuralUrbCon.
ii. Another definition, contained in the Farm Security and Rural
Investment Act of 2002, applies generally to the USDA's Rural Community
Advancement programs. It defines ``rural'' and ``rural area'' generally
to mean ``any area other than a city or town that has a population of
greater than 50,000 inhabitants; and the urbanized area contiguous and
adjacent to such a city or town.'' 7 U.S.C. 1991(a)(13).
iii. Another definition, applicable to the Rural Empowerment Zones
and Enterprise Communities initiative, generally defines a ``rural
area'' as consisting of any area that lies outside the boundaries of a
Metropolitan Area, as designated by OMB, or an area that has a
population density less than or equal to 1,000 persons per square mile,
the land use of which is primarily agricultural. 7 CFR 25.503(a).
Assigned Ratings Proposal
OTS is soliciting comment on providing additional flexibility in
the way that CRA ratings are assigned. This
[[Page 68260]]
change would reduce burden and encourage large retail savings
associations to focus their community reinvestment efforts on the types
of activities the communities they serve need, consistent with safe and
sound operations. As an alternative way to reduce burden, the proposal
solicits comment on eliminating the investment test.
The Current Rule
Under the CRA regulation at 12 CFR 563e.28(b), OTS assigns ratings
to savings associations assessed under the lending, investment, and
service tests in accordance with the following three rating principles:
(1) A savings association that receives an ``outstanding'' rating
on the lending test receives an assigned rating of at least
``satisfactory'';
(2) A savings association that receives an ``outstanding'' rating
on both the service test and the investment test and a rating of at
least ``high satisfactory'' on the lending test receives an assigned
rating of ``outstanding''; and
(3) No savings association may receive an assigned rating of
``satisfactory'' or higher unless it receives a rating of at least
``low satisfactory'' on the lending test.
The Interagency Questions and Answers Regarding Community
Reinvestment, 66 FR 36620 (July 12, 2001), address how the banking
agencies weight performance under the lending, investment, and service
tests for large retail institutions. Q&A 28(a)-3, 66 FR at 36639,
provides:
A rating of ``outstanding,'' ``high satisfactory,'' ``low
satisfactory,'' ``needs to improve,'' or ``substantial noncompliance,''
based on a judgment supported by facts and data, will be assigned under
each performance test. Points will then be assigned to each rating as
described in the first matrix set forth below. A large retail
institution's overall rating under the lending, investment and service
tests will then be calculated in accordance with the second matrix set
forth below, which incorporates the rating principles in the
regulation.
The Q&A then sets forth the following matrices (66 FR at 36639-
36640):
Points Assigned for Performance Under Lending, Investment and Service Tests
----------------------------------------------------------------------------------------------------------------
Lending Service Investment
----------------------------------------------------------------------------------------------------------------
Outstanding..................................................... 12 6 6
High Satisfactory............................................... 9 4 4
Low Satisfactory................................................ 6 3 3
Needs to Improve................................................ 3 1 1
Substantial Noncompliance....................................... 0 0 0
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Composite Rating Point Requirements
[Add points from three tests]
------------------------------------------------------------------------
Rating Total points
------------------------------------------------------------------------
Outstanding............................. 20 or over.
Satisfactory............................ 11 through 19.
Needs to Improve........................ 5 through 10.
Substantial Noncompliance............... 0 through 4.
------------------------------------------------------------------------
Note: There is one exception to the Composite Rating matrix. An
institution may not receive a rating of ``satisfactory'' unless it
receives at least ``low satisfactory'' on the lending test. Therefore,
the total points are capped at three times the lending test score.
As reflected in the first matrix, currently approximately 50
percent weight is given to lending, and approximately 25 percent weight
is given to services and investments each.
Under section 563e.21(b) of OTS's CRA regulation, OTS applies the
tests in a performance context that considers the following:
(1) Demographic data on median income levels, distribution of
household income, nature of housing stock, housing costs, and other
relevant data pertaining to a savings association's assessment area(s);
(2) Any information about lending, investment, and service
opportunities in the savings association's assessment area(s)
maintained by the savings association or obtained from community
organizations, state, local, and tribal governments, economic
development agencies, or other sources;
(3) The savings association's product offerings and business
strategy as determined from data provided by the savings association;
(4) Institutional capacity and constraints, including the size and
financial condition of the savings association, the economic climate
(national, regional, and local), safety and soundness limitations, and
any other factors that significantly affect the savings association's
ability to provide lending, investments, or services in its assessment
area(s);
(5) The savings association's past performance and the performance
of similarly situated lenders;
(6) The savings association's public file, as described in section
563e.43, and any written comments about the savings association's CRA
performance submitted to the savings association or the OTS; and
(7) Any other information deemed relevant by the OTS.
The CRA regulation has been implemented to consider factors outside
of a savings association's control that prevent it from engaging in
certain activities. When the banking agencies promulgated the 1995 CRA
rule, they specifically noted in the preamble:
Statutory limits on investment authority. Several thrift commenters
had concerns about the application of the investment test to thrift
institutions because of their limited investment authority. Rather than
providing a blanket exemption from the investment test, the final rule
modifies the ``capacity and constraints'' section of the performance
context to clarify that examiners should consider an institution's
investment authority in evaluating performance under the investment
test. A thrift that has few or no qualified investments may still be
considered to be performing adequately under the investment test if,
for example, the institution is particularly effective in responding to
the community's credit needs through community development lending
activities.
60 FR 22156, 22163 (May 4, 1995) (emphasis added).
This flexible approach for evaluating the performance of savings
associations was restated in the interagency CRA Qs&As. These Qs&As
specifically acknowledge that limitations on institutional capacity and
constraints will be considered in evaluating performance under the
investment test. Q&A 21(b)(4)-1 asks, ``Will examiners consider factors
outside of an institution's control that prevent it from engaging in
certain activities?'' 66 FR at 36631. The answer provided states:
Yes. Examiners will take into account statutory and supervisory
limitations on an institution's ability to engage in any lending,
investment, and service activities. For example, a savings association
that has made few or no qualified investments due to its limited
[[Page 68261]]
investment authority may still receive a low satisfactory rating under
the investment test if it has a strong lending record.
66 FR at 36631 (emphasis added).
The CRA regulation also emphasizes that the rating assigned
reflects the savings association's record of helping to meet the credit
needs of its entire community, including low- and moderate-income
neighborhoods, ``consistent with the safe and sound operation of the
savings association.'' 12 CFR 563e.21(c). The CRA regulation goes on to
elaborate in 12 CFR 563e.21(d):
Safe and sound operations. This part and the CRA do not require a
savings association to make loans or investments or to provide services
that are inconsistent with safe and sound operations. To the contrary,
the OTS anticipates savings associations can meet the standards of this
part with safe and sound loans, investments, and services on which the
savings associations expect to make a profit. Savings associations are
permitted and encouraged to develop and apply flexible underwriting
standards for loans that benefit low- or moderate-income geographies or
individuals, only if consistent with safe and sound operations.
The 2001 ANPR
The 2001 ANPR contained extensive discussion of the way performance
of large retail institutions is assessed under the lending, investment,
and service tests. It explained that the regulations attempt to temper
their reliance on quantitative factors by requiring examiners to
evaluate qualitative factors, because not all activities of the same
numerical magnitude have equal impact or entail the same relative
importance when undertaken by different institutions in different
communities. It also indicated that institutions' CRA ratings reflect
the principle that lending is the primary vehicle for meeting a
community's credit needs. It noted that in the preamble to the 1995 CRA
rule, the banking agencies published a ratings matrix for examiners to
use when evaluating large retail institutions under the lending,
investment, and service tests. Under this matrix, it is impossible for
an institution to achieve a ``satisfactory'' rating overall unless it
receives at least a ``low satisfactory'' rating on the lending test. 66
FR at 37604.
In publishing the matrix in 1995, the banking agencies noted that
they were not incorporating it into the CRA rule itself, to allow some
flexibility to adjust the matrix to prevent unintended anomalies that
may be found during the examination process. The preamble noted that if
the banking agencies were to change the matrix in the future, the new
matrix would be published for information, but not necessarily for
comment, in the Federal Register. 60 FR at 22170. As discussed above,
the matrix is currently published in Q&A 28(a)-3.
With respect to the emphasis placed on each category of an
institution's activities under the large retail institution test, the
2001 ANPR indicated that some contended that lending should always be
stressed, because they believe that deposits derived from communities
should be reinvested in those communities through loans. Still others
asserted that lending should be the only basis upon which institutions
are evaluated. 66 FR at 37604.
In contrast, some questioned whether lending should be emphasized
more than investments and services. Some asserted that a CRA evaluation
should allow for adjustment of this emphasis in a manner that more
nearly corresponds with the activities of the institution and the
particular needs of its community. For example, some asserted, that if
an institution does not significantly engage in retail lending and,
therefore, makes few loans, the lending test should not receive more
emphasis than the investment and service tests for that institution's
CRA evaluation. 66 FR at 37604.
Further, some argued that an institution's record of providing
services should be given more emphasis than it currently is given.
Others asserted that providing services is not relevant to assessing
whether an institution is meeting the credit needs of its community. 66
FR at 37604.
The 2001 ANPR asked: ``Do the regulations strike the appropriate
balance between quantitative and qualitative measures, and among
lending, investments, and services? If so, why? If not, how should the
regulations be revised?'' 66 FR at 37604.
The 2001 ANPR also discussed, in detail, and solicited comment on,
each of the component parts of the large retail institution test. With
respect to the investment test, it explained that the banking agencies
included the investment test in their CRA regulations in recognition
that investments, as well as loans, can help meet credit needs. Some
asserted, however, that the banking agencies should only consider
investment activities to augment institutions' CRA ratings. In their
view, although investments may help an institution to meet the credit
needs of its community, particularly in low- and moderate-income areas,
CRA ratings should be based primarily on lending activity. Still others
stated, however, that it is inappropriate for the banking agencies to
evaluate investments under the CRA as a means of meeting credit needs.
Yet others argued that investments by financial institutions are
invaluable in helping to meet the credit needs of the institutions'
communities, particularly in low- and moderate-income areas. 66 FR at
37604-37605.
The 2001 ANPR also noted that the availability of qualified
investments has been an issue of concern to some. Although some
observed that, since the 1995 regulations went into effect, the market
of available CRA-related investments has grown and continues to grow,
others asserted that appropriate investment opportunities may not be
available in their communities. Further, some of the retail
institutions subject to the investment test indicated that, in some
cases, it was difficult to compete for investment opportunities,
particularly against much larger institutions. 66 FR at 37605.
The 2001 ANPR asked: ``Does the investment test effectively assess
an institution's record of helping to meet the credit needs of its
entire community? If so, why? If not, how should the regulations be
revised?'' 66 FR at 37605.
With respect to the service test, the 2001 ANPR discussed issues of
concern on both evaluating retail services and community development
services. It asked: ``Does the service test effectively assess an
institution's record of helping to meet the credit needs of its entire
community? If so, why? If not, how should the regulations be revised?''
66 FR at 37605.
In summarizing the comments on the 2001 ANPR, the preamble to the
2004 NPR indicated a majority of community organization commenters that
addressed the weight given to the components of the three-part test
believed that lending should continue to receive more weight than
investments or services. Of financial institutions that addressed the
issue, more than half agreed. The remainder of industry commenters
generally believed either that the components should be weighted
equally or that their weights should vary with performance context.
Many financial institutions felt the investment test was weighted too
heavily, while community organizations disagreed. 69 FR at 5732.
The preamble also explained that although a small number of
commenters objected to any consideration of investments under CRA, the
comments revealed a general view that community
[[Page 68262]]
development-oriented investments (``qualified investments,'' under the
regulations) should be considered to the extent they help meet
community credit needs. Commenters, nonetheless, disagreed
significantly about whether the current investment test effectively and
appropriately assesses investments and about the extent to which
assessment of investments should be mandatory or optional.
As the preamble explained, financial institutions commented that
the investment test is not sufficiently tailored to market reality,
community needs, or institutions' capacities. Several financial
institutions said there are insufficient equity investment
opportunities, especially for smaller institutions and those serving
rural areas. Some noted that intense competition for a limited supply
of community development equity investments has depressed yields,
effectively turning many of the investments into grants; some claimed
that institutions had spent resources transforming would-be loans into
equity investments merely to satisfy the investment test; and some
expressed concern that institutions were forced to worry more about
making a sufficient number and amount of investments than about the
effectiveness of their investments for their communities. 69 FR at
5732-5733.
To address these concerns, many financial institutions favored
abolishing the stand-alone investment test and making investments
optional to one degree or another. Only two financial institutions
expressly supported retaining the separate investment test. Several
financial institutions and most financial institution trade
associations endorsed one or more of the following three alternatives:
(1) Treat investments solely as ``extra credit;'' (2) make investments
count towards the lending or service test; or (3) treat investments
interchangeably with community development services and loans under a
new community development test. 69 FR at 5733.
In contrast, the majority of community organization commenters
urged the banking agencies to retain the investment test. Many of them
claimed that the problem is more often a shortage of willing investors
than an insufficient number of investment opportunities. Community
organizations also contended that grants and equity investments are
crucial to meeting the affordable housing and economic development
needs of low- and moderate-income areas and individuals. They stated,
for example, that investments support and expand the capacity of
nonprofit community development organizations to meet credit needs. A
few community organizations acknowledged a basis for some of the
financial institutions' complaints concerning the investment test, but
most of those community organizations argued that refining, rather than
restructuring, the large retail institution test would address such
complaints. 69 FR at 5733.
The preamble to the 2004 NPR also discussed comments received on
issues of concern under the service test. 69 FR at 5734-5735.
The 2004 NPR
The preamble to the 2004 NPR explained that the three-part large
retail institution test places primary emphasis on lending performance,
and secondary emphasis on investment and service performance. It
explained in detail the reasons that the banking agencies, at that
time, did not propose to eliminate the investment test, modify the
service test, or change the weights given to the three tests under the
large retail institution test. 69 FR at 5733-5735. Thus, it did not
specifically solicit comments on these issues. Nor did the 2004 NPR
propose or specifically solicit comments on the possibility of
retaining all three tests as part of the large retail institution test
but providing additional flexibility in the way that CRA ratings are
assigned. Thus, the comments received did not focus on these
possibilities either.
A few commenters on the 2004 NPR, however, indicated their
continued support for creating a community development test that would
incorporate all community development lending, community development
investments, and community development services into a single test. A
few commenters also urged the banking agencies to give more weight to
certain types of services in the CRA rating.
Today's Proposal
OTS is soliciting comment on providing additional flexibility in
assigning CRA ratings. The purpose would be to reduce burden while
encouraging large retail savings associations to focus their community
reinvestment efforts on the types of activities the communities they
serve need, consistent with safe and sound operations. Rather than
mandating changes to the weights assigned to lending, investments, and
services under the large retail institution test, OTS is soliciting
comment on providing flexibility in those weights.
This approach would serve to clarify and build upon the existing
guidance currently contained in Q&A 21(b)(4)-1 discussed above
addressing the application of the investment test to savings
associations. Notwithstanding the Q&A and the statement in the 1995
preamble also discussed above, OTS has heard anecdotal evidence
suggesting that further elaboration would be useful.
The existing guidance reflects the unique statutory and regulatory
structure applicable to savings associations. Savings associations
remain home mortgage lenders, in part, because unlike banks, they must
have at least 65% of their assets in the form of what are generally
mortgages or mortgage-related loans in order to avoid the adverse
consequences of failing to meet the qualified thrift lender test under
the Home Owners' Loan Act (HOLA). 12 U.S.C. 1467a(m). Savings
associations are also subject to HOLA lending and investment limits,
including limits on commercial loans and community development
investments. 12 U.S.C. 1464(c)(2)(A) and (c)(3)(A); 12 CFR 560.30. See
69 FR at 51158.
To bring further clarity to the issue, OTS is considering providing
each savings association evaluated under the large retail institution
test a choice, at its option, on the weight given to lending,
investments, and services in assessing its performance. Consistent with
the traditional and appropriate emphasis on lending, OTS would not
allow less than a 50 percent weight to lending. The remaining 50
percent would weigh lending, investments, or services, or some
combination thereof, based on the savings association's election. As a
result, each savings association could choose to have OTS weigh lending
anywhere from 50% to 100% for that association's overall performance
assessment, services anywhere from 0% to 50%, and investments anywhere
from 0% to 50%.
As under the existing ratings matrix, OTS would continue to
allocate a total of 24 possible points among the three tests. OTS would
allocate 12 of these possible points to lending. OTS would allocate the
remaining 12 possible points to lending, services, investments, or some
combination thereof based on the savings association's weight election.
For each test, the savings association would receive a percentage of
the possible points it allocated to that test, with the percentage
varying depending on the rating it received on that test as follows:
[[Page 68263]]
------------------------------------------------------------------------
Percent of points
allocated to test
Rating on test association would
receive
------------------------------------------------------------------------
Outstanding.......................................... 100
High Satisfactory.................................... 75
Low Satisfactory..................................... 50
Needs to Improve..................................... 25
Substantial Noncompliance............................ 0
------------------------------------------------------------------------
For illustrative purposes, here are some examples:
1. Lending 80% Weight, Service 10% Weight, Investment 10%. If a
savings association chose to be evaluated by OTS giving 80% weight to
lending, 10% weight to services, and 10% weight to investment, OTS
would apply the following matrix:
Points Assigned for Performance Under Lending, Investment and Service Tests
----------------------------------------------------------------------------------------------------------------
Investment
Lending (80%) Service (10%) (10%)
----------------------------------------------------------------------------------------------------------------
Outstanding.................................................. 19.2 2.4 2.4
High Satisfactory............................................ 14.4 1.8 1.8
Low Satisfactory............................................. 9.6 1.2 1.2
Needs to Improve............................................. 4.8 .6 .6
Substantial Noncompliance.................................... 0 0 0
----------------------------------------------------------------------------------------------------------------
2. Lending 50% Weight, Service 10% Weight, Investment 40%. If a
savings association chose to be evaluated by OTS giving 50% weight to
lending, 10% weight to services, and 40% weight to investment, OTS
would apply the following matrix:
Points Assigned for Performance Under Lending, Investment and Service Tests
----------------------------------------------------------------------------------------------------------------
Investment
Lending (50%) Service (10%) (40%)
----------------------------------------------------------------------------------------------------------------
Outstanding................................................... 12 2.4 9.6
High Satisfactory............................................. 9 1.8 7.2
Low Satisfactory.............................................. 6 1.2 4.8
Needs to Improve.............................................. 3 .6 2.4
Substantial Noncompliance..................................... 0 0 0
----------------------------------------------------------------------------------------------------------------
3. Lending 50% Weight, Service 30% Weight, Investment 20%. If a
savings association chose to be evaluated by OTS giving 50% weight to
lending, 30% weight to services, and 20% weight to investment, OTS
would apply the following matrix:
Points Assigned for Performance Under Lending, Investment and Service Tests
----------------------------------------------------------------------------------------------------------------
Investment
Lending (50%) Service (30%) (20%)
----------------------------------------------------------------------------------------------------------------
Outstanding................................................... 12 7.2 4.8
High Satisfactory............................................. 9 5.4 3.6
Low Satisfactory.............................................. 6 3.6 2.4
Needs to Improve.............................................. 3 1.8 1.2
Substantial Noncompliance..................................... 0 0 0
----------------------------------------------------------------------------------------------------------------
Under all of these alternatives, the composite rating matrix would
remain essentially the same as currently provided except for taking
into account the possibility of fractions of points. It would read as
follows:
Composite Rating Point Requirements
[Add points from tests as applicable]
------------------------------------------------------------------------
Rating Total points
------------------------------------------------------------------------
Outstanding....................... 20 or over.
Satisfactory...................... 11 or more but less than 20.
Needs to Improve.................. 5 or more but less than 11.
Substantial Noncompliance......... 0 or more but less than 5.
------------------------------------------------------------------------
Note: There is one exception to the Composite Rating matrix. An
institution may not receive a rating of ``satisfactory'' unless it
receives at least ``low satisfactory'' on the lending test.
Therefore, the total points are capped at three times the lending
test score.
Continuing to include the same note to the composite rating matrix
as contained under the current matrix would have certain implications.
For example, a savings association opting to allocate equal weight to
lending as to the combination of services and investments could not
receive a rating of ``satisfactory'' overall if it received a ``needs
to improve'' or ``substantial noncompliance'' on its lending.
If OTS were to offer this type of flexibility, a savings
association evaluated under the large retail institution test could
elect weights, much in the same way as it may currently elect
consideration of lending
[[Page 68264]]
by an affiliate or consortium, or investments or services by an
affiliate. See 12 CFR 563e.22(c)-(d), 563e.23(c), and 563e.24(c). The
Preliminary Examination Response Kit (PERK) package could be revised to
provide an opportunity for a savings association to opt for an
alternative weight for lending, service, and investment. Through this
process, a savings association could make a new weight election at the
start of each CRA examination. A savings association that did not make
an election would be evaluated under the existing matrix contained in
Q&A 28(a)-3.
Conforming changes could be made section 563e.28 of the CRA rule.
Additional text could be added to that section indicating that a
savings association could, at its option, elect to have its rating
assigned under alternative weights of lending, service, and investment
so long as at least 50 percent weight is given to lending.
To the extent of any inconsistency between the three rating
principles in section 563e.28(b) discussed above and the rating matrix
generated from the savings association's election, the standards set
forth under the matrix selected would govern. Thus, for example, the
principle referring to ratings on the service test and investment test
would not apply to a savings association that chose not to have OTS
give weight to either or both of those factors.
Providing flexibility for a savings association to elect
alternative weights would supplement the use of the performance context
factors discussed above and serve many of the same functions. As
discussed above, OTS already evaluates a savings association's
performance in the context of factors such as the savings association's
product offerings and business strategy, its institutional capacity and
constraints, information about lending, investment, and service
opportunities in the savings association's assessment area(s), and
demographic and other relevant data pertaining to a savings
association's assessment area. See 12 CFR 563e.21(b). Likewise,
providing weight alternatives would enable the savings association to
have its performance evaluated in a manner most appropriately tailored
to the lending, investment, and service opportunities its assessment
area(s), demographic and other relevant data pertaining to its
assessment area(s), its product offerings and business strategy, and
its institutional capacity and constraints. This approach would be
designed to encourage large retail savings associations to focus their
community reinvestment efforts on the types of activities the
communities they serve need, consistent with safe and sound operations.
Solicitation of Comment on Assigned Ratings Proposal
OTS solicits comments on all aspects of this proposal.
C. Solicitation of Comment on Alternative Weights Election
1. Would it be appropriate to provide the savings association
flexibility in the way that CRA ratings are assigned by offering a
choice of weights for the lending, service, and investment tests within
the large retail institution test? If so, why? If not, why not?
2. Are there ways OTS could make the process even more flexible
than outlined in this proposal?
3. What would be the impact on lending, investments, and services
of offering alternative weights?
4. Should OTS place limits on the savings association's ability to
opt for particular weights? How could OTS help ensure that a savings
association would select weights that focus on the types of activities
the communities it serves need? How could OTS take a savings
association's selection of a weight alternative into consideration as
part of the performance context? Is there an appropriate role for
public participation beyond existing opportunities for provision of
information regarding the performance context and submission of
comments about the savings association's CRA performance? See 12 CFR
563e.21(b)(2), 563e.21(b)(6), 563e.29(c) and 563e.43(a)(1) and Q&A
21(b)(2)-2, 66 FR at 36631.
5. What logistical and practical issues would have to be addressed
in providing a choice of weights and how should these issues be
addressed (e.g., timing and method of alternative selected)?
6. Would it be useful for OTS to publish examples of weight
alternatives in the preamble to the final rule or elsewhere?
7. For ease of administrative implementation, would it be
appropriate for OTS to limit the choice of weights to a list containing
several options? If so, what options should be offered? Which options
would a savings association be likely to choose?
8. Would it cause confusion for savings associations, community
organizations, or the public to allow customized weight combinations
that might be selected by only one or a few institutions (e.g., lending
57%, service 28%, and investment 15%)?
9. Would it be appropriate for the alternative weights to require
at least a 50 percent weight to lending, as proposed? Why or why not?
If a rating matrix that gives less than 50 percent weight to lending
were to be offered, would that be consistent with the purposes of CRA?
10. Would it be appropriate to continue to ensure that a savings
association may not receive a rating of ``satisfactory'' unless it
receives at least ``low satisfactory'' on the lending test by capping
total points at three times the lending test score as under the current
composite rating matrix, as proposed? Why or why not? If a rating
matrix that allowed a savings association to receive a rating of
``satisfactory'' without receiving at least ``low satisfactory'' on the
lending test were offered, would that be consistent with the purposes
of CRA?
11. Is it appropriate to offer alternatives allowing less than a 25
percent weight to services and less than 25 percent weight to
investments, as proposed? Why or why not?
D. Solicitation of Comment on Eliminating the Investment Test
1. Would a preferable alternative be to eliminate the investment
test? If so, why? If not, why not?
2. What would be the impact on investments of eliminating the
investment test?
3. If the investment test were eliminated as a mandatory separate
component of the large retail institution test, should investments
still be considered * * *
a. At a savings association's option or to raise a rating?
b. Within one of the other tests (e.g., under the lending test
treated similarly to community development loans)?
c. In some other fashion (e.g., treating investments
interchangeably with community development services and loans under a
new community development test)?
4. If the investment test were eliminated as a mandatory separate
component of the large retail institution test, what weight should be
given to the remaining components of the test (e.g., weight lending 75%
and service 25%, weight lending and service 50% each)?
Regulatory Analysis
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995, OTS may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid Office of Management and Budget (OMB) control
[[Page 68265]]
number. This collection of information is currently approved under OMB
Control Number 1550-0012. This proposal would not change the collection
of information.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS
certifies that since the proposal would not have a significant economic
impact on a substantial number of small entities. It would not impose
any additional paperwork or regulatory reporting requirements. It would
simply encourage savings associations to increase their community
development lending, qualified investments, and community development
services in rural areas, with a particular focus on increasing these
activities in underserved nonmetropolitan areas, by expanding the
definition of ``community development.'' The proposal also solicits
comment on further encouraging savings associations to perform
community development activities in areas affected by natural or other
disasters or other major community disruptions. The other portions of
the proposal relate only to the treatment of savings associations under
the retail test mandated only for large institutions.
Executive Order 12866 Determination
OTS has determined that this proposal is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. OTS has determined that this
rule would not result in expenditures by State, local, and tribal
governments, or by the private sector, of $100 million or more.
Accordingly, OTS has not prepared a budgetary impact statement nor
specifically addressed the regulatory alternatives considered.
List of Subjects in 12 CFR Part 563e
Community development, Credit, Investments, Reporting and
recordkeeping requirements, Savings associations.
Office of Thrift Supervision
12 CFR Chapter V
For the reasons outlined in the preamble, the Office of Thrift
Supervision proposes to amend part 563e of chapter V of title 12 of the
Code of Federal Regulations as set forth below:
PART 563e--COMMUNITY REINVESTMENT
1. The authority citation for part 563e continues to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1814, 1816,
1828(c), and 2901 through 2907.
2. Revise Sec. 563e.12(f)(2) and (4) to read as follows:
* * * * *
(f) Community development means:
* * * * *
(2) Community services targeted to low- or moderate-income
individuals or to individuals in rural areas;
* * * * *
(4) Activities that revitalize or stabilize low- or moderate-income
geographies or rural areas.
* * * * *
Dated: November 18, 2004.
By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 04-26011 Filed 11-23-04; 8:45 am]
BILLING CODE 6720-01-P