WASHINGTON -- New community reinvestment rules could change the way banks define their market.

While banks still will determine their own service areas, it will be the banks' examiners -- not its management --- that decide what the credit needs of that market are.

The industry is worried these changes to Community Reinvestment Act rules will put too much power in the hands of the supervisors.

Regulators may not possess the proper training to understand a bank's community or its credit needs, said James D. McLaughlin, director of agency relations at the American Bankers Association.

Examiners also may overreact if a bank does not lend money equally throughout its service area, he said.

But Stephen M. Cross, deputy comptroller for compliance management, said the concern is unfounded. He vowed "we are not going to harass you on technical issues."

To determine a bank's market, or service area, institutions would map the locations of their branches and deposit-taking ATMs and then plot where they made home mortgage, farm, and small-business loans. Banks also could opt to include consumer loans.

Once plotted, bankers would draw circles -- encompassing full census tracts and block numbers -- around branches containing a "significant" number of those loans.

All the space within the circles would become the service area, explained Mr. Cross.

To ensure banks are serving their entire community, examiners would determine the credit needs of a bank's market. The so-called "assessment context" would require regulators to study each bank's community, looking at median incomes, housing costs, distribution of household income, nature of the housing stock and housing costs.

Examiners also would study the size and condition of the bank, estimating the institution's capacity to meet the community's needs.

And regulators would look at a bank's past performance and at the current performance of other banks in the area.

The agencies would process this data to determine how much of the community's needs the bank should be meeting. They then would compare its results to the bank's actual performance in three categories: lending, service, and investment.

Regulators would grade banks on a scale that runs from "substantial noncompliance" to "needs to improve" to "satisfactory" to "outstanding."

Regulators said they plan to base a bank's grade on how it did in the area it should be serving. If a bank is servicing the wrong area, then regulators will fault the institution for failing to meet the needs of the correct community.

To avoid this, said Joe Belew, president of the Consumer Bankers Association, regulators should approve a bank's service area and notify the bank of its assessment context two to three years before an exam.

"That way everyone is on the same wave length," he said.

Other trade group officials said bankers may have a hard time understanding the proposal.

"The last thing we need to do is confuse banks as what areas they are serving," said Diane Casey, executive director of the Independent Bankers Association of America. Regulators could fix this by dropping the service-area plan and retaining the current setup, she said.

Community groups have their own concerns.

Allen Fishbein, general counsel to the Center for Community Change, said the new rules would force banks to delineate their exact service boundaries, rather than allowing them to name an entire metropolitan area.

"We can predict that the areas they leave out will be low income areas," Mr. Fishbein said. "It won't be the affluent areas."

While banks would have discretion to draw as large or as small a circle they want, regulators would review the service areas to ensure banks do not arbitrarily exclude low- and moderate-income neighborhoods, Mr. Cross said.

Comments on all aspects of the CRA proposal are due Nov. 21.

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