WASHINGTON - Federal Deposit Insurance Corp. Chairman Donna Tanoue suggested Monday that federal regulators consider replacing the unpopular investment component of the three-part Community Reinvestment Act exam with a test that evaluates banks' community development activities as a whole.

"In this way, a bank could compensate in one community development activity for lack of opportunity in another," Ms. Tanoue said in a speech to community development officers and activists. "Or a bank could focus on one activity more than another to obtain a high rating. And banks would no longer have to worry about whether they have 'too many loans, not enough investments.' "

Under the current rules, banks with more than $250 million of assets must pass a three-part test. Lending activities account for half of the overall score, while the service a bank provides and the investments it makes each account for approximately one-quarter. Smaller banks receive a simpler exam that uses one test to evaluate compliance.

Ms. Tanoue is the first federal regulator to speak publicly about replacing the investment component of the large bank test with a new "community development" component. Rather than evaluating only investment in a bank's service area, the revised component would bring all of its community development activities - including lending, investment, and service - under the umbrella of a single test.

The current lending and service tests would still be administered. The investment component of the large bank exams has been criticized since it was adopted when the CRA rules were revamped in 1995.

"The investment test has taken on a life of its own, and moved away from the whole community development focus of CRA," said Mark A. Willis, Chase Manhattan Bank's executive vice president of community development. "Part of the problem is that investment was being viewed as independent from whether there actually was a community development need for investment."

He said Ms. Tanoue's proposal "could make a lot of sense."

"Some communities have fewer lending opportunities, others have more investments, while others have some combination of both," he said. "The exams should reflect the local context."

Ms. Tanoue said she plans to work with her colleagues at the other banking agencies to "address the problems currently associated with the investment test."

She set no deadline for changes, but noted the rules are scheduled for another overhaul in 2002.

"She views 2002 as a delivery date, not a start date, for the revised CRA regulations," said Stephen M. Cross, FDIC's director of compliance and consumer affairs. In addition to the investment test, Ms. Tanoue said she wants the review to address small bank performance, predatory lending, and Internet banks.

"Representatives from many … small banks … have told me time and time again that they think that it is too difficult for them to get a rating of 'outstanding,' " Ms. Tanoue said.

About 80% of the 3,544 institutions examined in 1999 received "satisfactory" ratings, while 18% were "outstanding."

"Many of them said that they have lowered their sights as a result - settling for a rating of 'satisfactory' without even trying for a rating of 'outstanding,' " Ms. Tanoue said. "This is extremely unfortunate. A regulatory review may help us maintain our focus on the critical aspects of small bank performance while also reducing regulatory burden."

Ms. Tanoue said the current exam's focus on the number and amount of loans may be diverting attention from predatory lending. "Should we evaluate loans for predatory features? If so, how should we conduct that review, and how should our findings affect our conclusions?"

Regulators have been toying with ways to properly evaluate the community development efforts of Internet banks. They have been particularly concerned with how to define their service areas for examination purposes.

The other banking agencies declined to comment on Ms. Tanoue's proposals.

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