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.
In reference to the CRA
rating of "Needs to Improve," the appeal letter states the board of
directors cannot comprehend the position of the OCC, as the bank
operated under severe financial constraints during the two-year CRA
review period.
According to the letter the bank has been working diligently
to improve the condition of the bank by returning it to
profitability, ensuring capital adequacy, complying with two
regulatory enforcement actions, and improving risk management
systems. Despite these
obstacles, members of the bank were able to participate in community
development organizations in the assessment area during the review
period. Management
concludes by stating the board believes that the CRA activities of
the bank more adequately support a "Satisfactory" rating.
The ROE states the bank has
a minimal level of qualifying community development services, and
has made no CRA loans. The ROE continues by stating
that little has been done since the bank was designated a limited
purpose institution.
The ROE does acknowledge that management and the board's time
and effort during the past year has been focused on implementing and
strengthening controls over credit card assets; nonetheless, the
bank's demonstrated performance under CRA falls substantially short
of the criteria for a "Satisfactory" rating. Board and management were
encouraged to develop a plan to strengthen the bank's performance
under CRA, consistent with the spirit and intent of the act.
Discussion
For purposes of this discussion, apply
the following definitions from 12 CFR 25:
(a) 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).
["Definitions," 12 CFR 25.12(o).]
(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.
(c) Performance
criteria. The OCC
evaluates the community development performance of a wholesale or
limited purpose bank pursuant to the following criteria:
(1) 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;
(2) 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
(3) The bank's
responsiveness to credit and community development needs. ["Community development test
for wholesale or limited purpose banks," 12 CFR 25.25(b)-(c).]
The preamble to the 1995 revision to the
CRA regulations lists what information the examiners will consider,
as appropriate by stating the following:
- Performance
context. An
institution's performance under the tests and standards in the rule
is judged in the context of information about the institution, its
community, its competitors, and its peers. Examiners will consider the
following information, as appropriate, in order to assist in
understanding the context in which the institution performance
should be evaluated:
(1) The economic and
demographic characteristics of the assessment area(s);
(2) Lending,
investment, and service opportunities in the assessment area(s);
(3) The institution's
product offerings and business strategy;
(4) The institution's
capacity and constraints;
(5) The prior
performance of the institution and, in appropriate circumstances,
the performance of similarly situated institutions; and,
(6) Other relevant
information. [Federal
Register, vol. 60, no. 86,
May 4, 1995, p.22162-22163.]
Conclusion
During the time since the bank's last CRA
examination, the management team and the bank's board of directors
focused their primary attention on the financial condition of the
bank. The bank's
condition did not allow the bank's management and board to expend
significant resources on the bank's compliance with CRA. The bank's election to be
designated as a limited purpose institution limited the bank's CRA
performance to an evaluation under the Community Development
Test. After reassessing
the bank's performance under the Community Development Test, the
ombudsman concluded that the institution's capacity and constraints
were considered, and the bank's CRA performance was appropriately
assigned a "Needs to Improve" CRA rating.