WASHINGTON - The revised Community Reinvestment Act rules that regulators recently approved represent a fundamental shift in the way the law is enforced.

The focus on paperwork and process is gone. Instead, examiners will be looking at performance - how well institutions do in meeting the credit needs of low- and moderate-income communities.

No longer will banks have to grapple with 12 specific "assessment factors" that require extensive community meetings and board discussion. Rather, examiners will apply a three-pronged test that measures a bank's compliance on lending, service, and investment.

Bankers "ought to feel good about it," Comptroller Eugene Ludwig said in a recent interview. "It will reduce burden substantially. They got what they asked for."

But what exactly did they get? During the coming weeks, the American Banker will try to answer that question as it reviews the new CRA rules, which regulators have overhauled for the first time since Congress passed the law in 1977.

This first report focuses on the guts of the regulation - the three- pronged test. Articles on page 2 and 7 look at the rating system and new data collection requirements. Future stories will examine legislative reaction, specialized tests, examiner training, and other provisions of the 44-page rule.

The key to the three-pronged approach is lending, regulators and industry experts agree.

Examiners will look at the number and amount of loan originations, where the bank made the loans, and the income levels of recipients. Banks are not required to make loans in every census tract. But regulators will investigate "conspicuous" gaps.

Bankers also can decide to include several other types of lending at their discretion, including affiliate lending and community development projects, ranging from loans for affordable housing renovations to those for nonprofit groups serving low-income areas. Bankers also can include lines of credit and consumer lending, such as automobile loans.

Regulators will give particular weight to the geographic distribution of loans. They will look at the number and amount of loans to low, moderate, middle, and upper-income areas. Examiners then will compare the performance of competing banks, though this comparison will not be definitive.

Examiners also will look for the number and size of loans made within the bank's defined community. And they will give "favorable consideration" to banks that make mortgage and small business loans to low-income borrowers outside their defined areas, provided they adequately serve similar tracts within their home turf.

The second prong - service - requires examiners to evaluate how a bank delivers its products. The rules do not require banks to open new branches or run unprofitable ones. But they do warn that regulators will review unexplainable gaps in a bank's branching network.

Finally, regulators will look at a bank's investment in its community. This includes the purchase of mortgage-backed securities and municipal bonds. Investments that meet a community need that the private sector is neglecting will receive extra weight.

Examiners will judge banks using the "performance context," which urges regulators to meet with civic, community, and bank officials to learn about the neighborhood's credit needs. This replaces the assessment context, which some feared would require bankers to meet specific credit needs that regulators would outline in formal reports.

More important, regulators have killed the market share test, a controversial aspect of the 1993 CRA proposal that would require banks to secure specific shares of the low-income market. Bankers called this "credit allocation," but some community groups had pushed to reinstate it.

Bankers won't know exactly how to comply with the performance context and the three tests until regulators release guidelines for examiners in the coming months.

The guidance gives examiners detailed instructions on how to conduct their reviews, explaining what to look for and how to interpret the rules.

"We need to see the examiner guidelines," said C. Dawn Causey, director of governmental relations at America's Community Bankers. "It is very difficult to tell from the rule how these things are going to work in practice."

Still, many CRA experts agree that the changes will force banks to make more loans in low-income communities.

"Banks currently are able to meet their CRA requirements by participating with community groups, by thinking happy thoughts about lending in communities," said Karen Shaw, president of the industry consulting firm ISD/Shaw Inc. "But the new rules focus more on performance, and that means loans."

Bankers must develop business plans targeting low- and moderate-income areas, she said.

But some CRA experts said the changes that regulators outline do not differ from the reality at many banks today. In fact, they said, examiners unofficially have subjected banks to these revised rules for the past year.

"I'm not sure if banks are going to have to do something much different," said Paul Alan Smith, senior federal administrative counsel at the American Bankers Association.

Bankers should pass the test as long as they monitor the income level of their borrowers to make sure they are serving low-income communities, he said.

Not everyone is as confident. Charles Grice, the executive director of the Community Reinvestment Institute, said the dozens of bankers he briefed recently in Chicago were terrified of the changes.

Bankers fear that just making loans won't be enough, he said.

"We have created a discretion monster in the new exam," he said. "It is going to be very difficult for the average banker to get ready for it."

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