WASHINGTON -- Small banks scored a big victory in the battle over Community Reinvestment Act reform by carving out a special, streamlined exam for themselves.

But just how sweet success is will not be known until the first exams are completed in the third quarter of 1995.

That's because no one knows how examiners will use the ample discretion they have in the streamlined CRA exam.

"The subjectivity of the regulations may eliminate any benefit of a streamlined exam," said Harold Stones, executive vice president of the Kansas Bankers Association. "This allows the examiner complete and total freedom. That's just asking for trouble."

Mike Edwards, president of Prairie Security Bank, a $38 million-asset bank in Yelm, Wash., said the simplified exam could save small banks money. But he noted: "It all depends how it gets implemented in the field.

"I don't know what some academician from the Comptroller's office is going to

call 'reasonable,'" he said.

During exams, regulators will decide whether a small bank has a reasonable loan-to-deposit ratio and whether its loans are reasonably distributed.

The streamlined exam will apply to banks with less than $250 million in assets or that belong to a holding company with assets below that threshold.

About 8, 125 banks will qualify for the new CRA exam, or 75% of the industry. However, those banks hold $483 billion in assets, just 12% of the industry's total.

In comment letters due Nov. 21, small banks are expected to argue that they should be eligible for streamlined exams even if they belong to holding companies with more than $250 million in assets. But regulatory sources said last week that the threshold is not likely to be raised in final rules that are due out by yearend.

Jo Ann S. Barefoot, president of the consulting company Barefoot, Marrinan & Associates Inc. in Columbus, Ohio, said the new exams probably will be simpler and easier during the first few years.

But she warned that disagreements between institutions and examiners will force bankers to build paper files to defend themselves -- exactly what CRA reform was designed to fix.

"The agencies have very good intentions, but I also think the bank knows its market better than the examiners do," Ms. Barefoot said. "If they run into differences of opinion, the small bank is going to have to make its case. It is burden creep."

Here's how the streamlined exam would work.

A small bank would gain a satisfactory CRA rating if it has a "reasonable" loan-to-deposit ratio.

The original CRA proposal of December 1993 defined reasonable as 60% loaned out. But bowing to bankers' complaints, the revised plan leaves the definition of reasonable to the examiner who will consider several factors: seasonal variations, the bank's size and financial condition, and the credit needs of the bank's service area.

Also taken into account will be whether the bank sells loans into the secondary market and whether it does any community development lending or investing.

A small bank also will have to have a majority of loans and other lending-related activities in its service area to win a "satisfactory" rating. The bank's loans must be reasonably distributed among individuals of different income levels and across its service area.

Beyond lending, small banks must have a good record of responding to written complaints about its lending.

To get an "outstanding" CRA rating, a small bank must exceed these standards. It also could make investments in community development projects or provide branches, ATMs, or other services and delivery systems that bolster credit availability.

There is plenty of room for examiners and bankers to disagree. For example, what is a reasonable distribution of loans?

Stephen M. Cross, deputy comptroller for compliance management, said bankers should not be alarmed.

"The unreasonableness has to be pretty clear cut," he said. "I can understand they're being worried about it until they get some experience with it."

"What we're really trying to do is come up with a proposal that gets rid of some of the silly documentation and overemphasis on process."

While bankers concede the new exam could be easier, they are not expecting it to be a breeze.

"It's going to be a little bit easier, but not a lot easier," said John Lyon, president of Jupiter-Tequesta National Bank, a $68 million-asset bank in Florida.

"Despite the fact that they are making it look a lot easier, the regulators have very high expectations on CRA."

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