WASHINGTON - Banking regulators have proposed a deal that seeks to balance small banks' cries for simpler reinvestment exams with activists' demands for rules that do a better job of promoting community development.
The Federal Deposit Insurance Corp. board voted unanimously at a meeting Tuesday to issue the proposal, and officials of the Office of the Comptroller of the Currency followed suit. Federal Reserve Board officials are closely monitoring the proposal and are expected to endorse it shortly.
Regulators have been scrambling since the Office of Thrift Supervision raised the asset size of thrifts that get simpler Community Reinvestment Act exams to $1 billion.
The interagency proposal, which would be open for comment for two months after publication in the Federal Register, would create a separate exam structure for small, midsize, and large banks.
Those with assets of less than $250 million would continue to be tested on lending alone. Those with $1 billion or more would continue to be tested on lending, investment, and service. The ones in the middle would be tested on lending and community development.
Such an approach would eliminate the investment test for the midsize banks, which have complained is pointless and too hard to satisfy in many towns and rural areas, but promote the economic development initiatives that consumer advocates endorse.
Banks with $250 million to $1 billion of assets would have to receive a "satisfactory" on the lending and community development tests to receive an overall "satisfactory" CRA grade.
The community development test would include an assessment of services and the number and amount of such loans and qualified investments. It would also evaluate how responsive the bank activities have been to the needs of a community.
The proposal includes another regulatory relief element: midsize banks would not have to collect and report data on small-business, small-farm, and community development lending. The agencies asked for comment on how these data have been used in the past and if other data sources could be used.
Further, the proposal says evidence of discrimination or abusive credit practices by a bank or any of its affiliates in any geographic area would count against its CRA exam score.
FDIC Vice Chairman John Reich said that regulators tried to strike a balance.
"Is the proposal perfect? No," he said. "Will the community groups oppose it? I hope not, but I'm afraid they will. Will community bankers like it? I hope they will, but I'm afraid they won't. I think it's a good compromise."
Acting Comptroller Julie Williams, who is also an FDIC board member, said "it's been a very good collaborative process. This proposal strikes a fair balance."
She stressed that the proposal balances the need for regulatory burden reduction with the need to ensure banks meet their community development needs.
The OTS is expected to stick with the changes it finalized last year; it has also proposed streamlining exams for large thrifts.
Though many following the matter had hoped for a final rule Tuesday, the agencies were forced to reissue a joint proposal because they had not officially proposed many of the changes.
Documents presented at the FDIC meeting said "the OCC and the FDIC would expect that a bank will appropriately assess the needs in its community, engage in different types of community development activities based on those needs and the bank's capacities, and that it will take reasonable steps to apply its community development resources strategically to meet those needs."
The definition of "community development" would be changed from one largely based on low- and moderate-income people and areas to one that includes affordable housing development in underserved rural and disaster areas. The proposal asks for comment on how to identify them.
The change, according to FDIC board documents, is necessary because "about 60% of nonmetropolitan counties lack such low- and moderate-income tracts. As a result, many rural areas in need of community development activities are not in low- or moderate-income tracts."
The proposal also calls for periodically adjusting the definitions of small, midsize, and large banks. The definitions would be tied to the consumer price index and be adjusted yearly.
