Community Reinvestment Act-Assigned Ratings, 10023-10030 [05-4016]
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Federal Register / Vol. 70, No. 40 / Wednesday, March 2, 2005 / Rules and Regulations
PART 509—RULES OF PRACTICE AND
PROCEDURE IN ADJUDICATORY
PROCEEDINGS
1. The authority citation for part 509
continues to read as follows:
I
Authority: 5 U.S.C. 504, 554–557; 12
U.S.C. 1464, 1467, 1467a, 1468, 1817(j), 1818,
3349, 4717; 15 U.S.C. 78(l), 78o–5, 78u–2; 28
U.S.C. 2461 note; 31 U.S.C. 5321; 42 U.S.C.
4012a.
2. Revise § 509.100(a) of subpart B to
read as follows:
I
Subpart B—Local Rules
§ 509.100
Scope.
*
*
*
*
*
(a) Proceedings under section
10(a)(2)(D) of the HOLA (12 U.S.C.
1467a(a)(2)(D)) to determine whether
any person directly or indirectly
exercises a controlling influence over
the management or policies of a savings
association or any other company,
except to the extent the Director
exercises his or her discretion to
commence a proceeding of the kind
identified in subpart C of this part;
*
*
*
*
*
3. Amend part 509 by adding a new
Subpart C to read as follows:
I
Subpart C—Special Rules
Sec.
509.200 Scope.
509.201 Definitions.
509.202 Commencement of proceedings
and contents of notice.
509.203 Answer, consequences of failure to
answer, and consent.
509.204 Hearing Procedure.
§ 509.200
Scope.
The rules and procedures in subpart
C of this part and those rules and
procedures in subparts A and B of this
part that are identified in subpart C of
this part shall apply to any proceedings
under section 10(a)(2)(D) of the HOLA
(12 U.S.C. 1467a(a)(2)(D)) to determine
for purposes of section 10 of the HOLA,
other than subsections (c), (d), (f), (h)(2),
(m), (n), (q) and (s), whether any
company that owns at least one percent
but no more than 10 percent of the
outstanding shares of a savings
association or savings and loan holding
company directly or indirectly exercises
a controlling influence over the
management or policies of such savings
association or savings and loan holding
company.
§ 509.201
Definitions.
The definitions contained in § 509.3
of this part shall apply to this subpart.
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§ 509.202 Commencement of proceedings
and contents of notice.
(a) Commencement of proceedings.
The Director commences a proceeding
by issuing a notice and having it served
on the respondent in the manner
provided for service by the Director in
§ 509.11 of this part;
(b) Contents of notice. The notice
must set forth: (1) The legal authority for
the proceeding and for the Office’s
jurisdiction over the proceeding;
(2) A statement of the matters of fact
or law showing the Office is entitled to
issue an Order finding, for purposes of
section 10 of the HOLA, other than
subsections (c), (d), (f), (h)(2), (m), (n),
(q) and (s), the respondent to be directly
or indirectly exercising a controlling
influence over the management or
policies of a savings association or
savings and loan holding company;
(3) A proposed Order;
(4) A statement that the respondent
must file an answer and, if it so desires,
request a hearing within 20 days of
service of the notice; and
(5) The time and place of the hearing
if one is properly requested by the
respondent.
§ 509.203 Answer, consequences of failure
to answer, and consent.
(a) Content of answer. (1) An answer
must specifically respond to each
paragraph or allegation of fact contained
in the notice and must admit, deny, or
state that the party lacks sufficient
information to admit or deny each
allegation of fact. A statement of lack of
information has the effect of a denial.
Denials must fairly meet the substance
of each allegation of fact denied; general
denials are not permitted. When a
respondent denies part of an allegation,
that part must be denied and the
remainder specifically admitted. Any
allegation of fact in the notice which is
not denied in the answer must be
deemed admitted for purposes of the
proceeding. A respondent is not
required to respond to the portion of a
notice that constitutes a prayer for relief
or proposed Order.
(2) If a respondent does not contest
the allegations in a notice, the
respondent may file an answer that
contains only a statement that the
respondent consents to the entry of the
proposed Order. At any time thereafter,
the proposed Order may be issued as a
final Order.
(b) Default. Failure of a respondent to
file an answer within the time provided
constitutes a waiver of its right to
appear and contest the allegations in the
notice. If a timely answer is not filed, a
default Order may be entered. A
respondent that believes that there was
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good cause for it to not file an answer
within the time allowed may request
that the Office exercise its discretion to
vacate such a default Order. A default
Order based upon a respondent’s failure
to answer is deemed to be a final Order
issued upon consent.
§ 509.204
Hearing Procedure.
(a) (1) The Director shall preside at
the hearing and enter the final decision
of the agency, provided that no party
seeks discovery or proffers any oral
testimony;
(2) Respondents shall provide two
copies of any pleadings and other filings
to the Office of the Chief Counsel,
Business Transactions Division. The
Office of the Chief Counsel, Business
Transactions Division shall serve in the
manner provided in § 509.11 of this
part, each respondent separately
represented with a copy of any pleading
or other filing made by the Office.
(b) If any party seeks discovery or
proffers any oral testimony, the
procedures in subparts A and B of this
part shall apply from that time until the
conclusion of the proceeding.
Dated: February 24, 2005.
By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 05–4017 Filed 3–1–05; 8:45 am]
BILLING CODE 6720–01–P
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563e
[No. 2005–09]
RIN 1550–AB48
Community Reinvestment Act—
Assigned Ratings
Office of Thrift Supervision,
Treasury (OTS).
ACTION: Final rule.
AGENCY:
SUMMARY: In this final rule, OTS is
making changes to its Community
Reinvestment Act (CRA) regulations to
reduce burden, provide greater
flexibility to meet community needs,
and restore the focus of CRA to lending.
Specifically, OTS is providing
additional flexibility to each savings
association evaluated under the large
retail institution test to determine the
combination of lending, investment, and
service it will use to meet the credit
needs of the local communities in
which it is chartered, consistent with
safe and sound operations.
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This rule is effective on April 1,
2005.
FOR FURTHER INFORMATION CONTACT:
Celeste Anderson, Program Manager,
Thrift Policy, (202) 906–7990; Richard
Bennett, Counsel, Regulations and
Legislation Division, (202) 906–7409,
Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Introduction
On November 24, 2004, OTS
published a notice of proposed
rulemaking (NPR) proposing changes to,
and soliciting comment on, its CRA
regulations in two areas: (1) the
definition of ‘‘community development’’
and (2) the assignment of ratings. (69 FR
68257) OTS indicated that it was
considering addressing these areas to
reduce burden to the extent consistent
with the safe and sound supervision of
the industry and provide institutions
with more flexibility to make their own
determinations about how best to serve
their communities.
The proposal was designed to further
the CRA burden reduction OTS began in
its final rule published in the Federal
Register on August 18, 2004 (69 FR
51155), which revised the definition of
‘‘small savings association’’ (2004 Final
Rule). It was also crafted to increase the
burden reductions in the interim final
rule published in the Federal Register
on November 24, 2004 (69 FR 68239) as
part of OTS’s review of regulations
under section 2222 of the Economic
Growth and Regulatory Paperwork
Reduction Act of 1996 (EGRPRA)
(EGRPRA Interim Final Rule).
In this final rule, OTS is adopting
changes to the way it assigns CRA
ratings. OTS is deferring action,
however, on revising the definition of
‘‘community development.’’ OTS notes
that the Federal Deposit Insurance
Corporation (FDIC) has also issued a
proposal to expand the definition of
‘‘community development.’’ 69 FR
51611 (August 20, 2004). OTS is
deferring action on this portion of its
proposal to allow for further
opportunities for consideration of, and
coordination on, these and other
proposals. Accordingly, the remainder
of this Supplementary Information
section is limited to addressing the
assignment of ratings.
II. The Way CRA Works
A. The CRA Statute
CRA is a statute addressed to the
credit needs of communities. The
statute clearly states that the purpose of
CRA is ‘‘to require each appropriate
Federal financial supervisory agency to
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use its authority when examining
financial institutions to encourage such
institutions to help meet the credit
needs of the local communities in
which they are chartered consistent
with the safe and sound operation of
such institutions.’’ 12 U.S.C. 2901(b)
(emphasis added). Congress further
provided that the written evaluations of
CRA performance are to evaluate ‘‘the
institution’s record of meeting the credit
needs of its entire community,
including low and moderate-income
neighborhoods.’’ 12 U.S.C. 2906(a)(1)
(emphasis added).
The legislation’s chief sponsor,
Senator William Proxmire, indicated the
lending focus to CRA when he
explained the purpose of the provision
authorizing the federal banking agencies
to evaluate how well institutions meet
the credit needs of the areas which they
are primarily chartered to serve. He
stated, ‘‘The provision is intended to
eliminate the practice of redlining by
lending institutions.’’ 123 Cong. Rec.
S8932 (daily ed. June 6, 1977) (emphasis
added).
B. The Original CRA Rule
The four federal banking agencies (the
Agencies) implemented the CRA
through joint final regulations published
in 1978. 43 FR 47144 (October 12, 1978)
(1978 rule). These regulations specified
twelve factors that the Agencies would
consider in assessing an institution’s
record of performance in helping to
meet the credit needs of its community.
Several of the twelve factors focused
on the institution’s lending. However,
some factors focused on the institution’s
services and investments. For example,
one service-focused factor was ‘‘the
institution’s record of opening and
closing offices and providing services at
offices.’’ 43 FR 47154 (promulgating 12
CFR 563e.7(g)). One investment-focused
factor was ‘‘the institution’s
participation, including investments, in
local community development and
redevelopment projects or programs.’’
43 FR 47154 (promulgating 12 CFR
563e.7(h)).
While the factors covered lending,
investment, and service among other
aspects of the institution’s performance,
the factors did not mandate any
particular level of performance on any
particular factor or factors. Indeed, as
indicated in the preamble to the 1978
rule, the Agencies considered, but
specifically rejected, giving specific
weights or imposing a scoring system on
the factors. The preamble explained,
‘‘[T]he Agencies believe that specific
weights or scoring systems would not
adequately address the diversity of
institutions and communities [and]
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would prevent rather than encourage
thoughtful response to community
needs.’’ 43 FR 47145.
C. Experience With the 1978 Rule
The experience with the 1978 rule
was summarized in the preamble to the
Agencies’ 1995 CRA rule. 60 FR 22156
(May 4, 1995) (1995 rule). It stated:
The CRA has come to play an increasingly
important role in improving access to credit
in communities—both rural and urban—
across the country. Under the impetus of the
CRA, many banks and thrifts opened new
branches, provided expanded services, and
made substantial commitments to increase
lending to all segments of society.
Despite these successes, the CRA
examination system has been criticized.
Financial institutions have indicated that
policy guidance from the agencies on the
CRA is unclear and that examination
standards are applied inconsistently.
Financial institutions have also stated that
the CRA examination process encourages
them to generate excessive paperwork at the
expense of providing loans, services, and
investments to their communities.
Community, consumer, and other groups
have agreed with the industry that there are
inconsistencies in CRA evaluations and that
current examinations overemphasize process
and underemphasize performance.
Community and consumer groups also have
criticized the agencies for failing aggressively
to penalize banks and thrifts for poor
performance.
Noting that the CRA examination process
could be improved, President Clinton
requested in July 1993 that the Federal
financial supervisory agencies reform the
CRA regulatory system. The President asked
the agencies to consult with the banking and
thrift industries, Congressional leaders, and
leaders of community-based organizations
across the country to develop new CRA
regulations and examination procedures that
‘‘replace paperwork and uncertainty with
greater performance, clarity, and objectivity.’’
Specifically, the President asked the
agencies to refocus the CRA examination
system on more objective, performance-based
assessment standards that minimize
compliance burden while stimulating
improved performance. He also asked the
agencies to develop a well-trained corps of
examiners who would specialize in CRA
examinations. The President requested that
the agencies promote consistency and evenhandedness, improve CRA performance
evaluations, and institute more effective
sanctions against institutions with
consistently poor performance.
60 FR 22156–57.
D. The 1995 Rule and Subsequent
Guidance
The experience with the 1978 rule led
the Agencies to replace it in 1995 with
a rule designed to emphasize
performance rather than process,
promote consistency in evaluations, and
eliminate unnecessary burden. 60 FR
22156. Among other things, it
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established a large retail institution test
comprised of three tests: one for
lending, one for investment, and one for
service.
OTS has previously summarized how
the performance of large retail
institutions has been assessed under the
lending, investment, and service tests
under the 1995 rule. See, e.g., 69 FR
68258; 66 FR 37602 (July 19, 2001)
(2001 Joint ANPR); 69 FR 5729
(February 6, 2004) (2004 Joint NPR). In
sum, under OTS’s CRA rule at 12 CFR
563e.28(b), OTS assigns ratings to
savings associations assessed under the
large retail institution test in accordance
with the following three rating
principles:
(1) A savings association that receives
an ‘‘outstanding rating on the lending
test receives an assigned rating of at
least ‘‘satisfactory’’;
(2) A savings association that receives
an ‘‘outstanding’’ rating on both the
service test and the investment test and
a rating of at least ‘‘high satisfactory’’ on
the lending test receives an assigned
rating of ‘‘outstanding’’; and
(3) No savings association may receive
an assigned rating of ‘‘satisfactory’’ or
higher unless it receives a rating of at
least ‘‘low satisfactory’’ on the lending
test.
Interagency Questions and Answers
Regarding Community Reinvestment, 66
FR 36620 (July 12, 2001), developed
jointly by the Agencies, address how the
Agencies weigh performance under the
lending, investment, and service tests
for large retail institutions to come up
with one overall Composite Rating. Q&A
28(a)–3, 66 FR 36639, provides:
A rating of ‘‘outstanding,’’ ‘‘high
satisfactory,’’ ‘‘low satisfactory,’’ ‘‘needs to
improve,’’ or ‘‘substantial noncompliance,’’
based on a judgment supported by facts and
data, will be assigned under each
performance test. Points will then be
assigned to each rating as described in the
first matrix set forth below. A large retail
institution’s overall rating under the lending,
investment and service tests will then be
calculated in accordance with the second
matrix set forth below, which incorporates
the rating principles in the regulation.
The Q&A then sets forth the following
Component Test Rating chart (66 FR
36639):
POINTS ASSIGNED FOR PERFORMANCE UNDER LENDING, INVESTMENT AND SERVICE TESTS
Lending
Outstanding ..............................................................................................................................................
High Satisfactory ......................................................................................................................................
Low Satisfactory ......................................................................................................................................
Needs to Improve ....................................................................................................................................
Substantial Noncompliance .....................................................................................................................
This chart is followed by the
following Composite Rating matrix (66
FR 36639–40):
COMPOSITE RATING POINT
REQUIREMENTS
[Add points from three tests]
Rating
Total points
Outstanding ..........................
Satisfactory ...........................
Needs to Improve .................
Substantial Noncompliance ..
20 or over.
11 through 19.
5 through 10.
0 through 4.
Note: There is one exception to the Composite Rating matrix. An institution may not receive a rating of ‘‘satisfactory’’ unless it receives at least ‘‘low satisfactory’’ on the lending test. Therefore, the total points are capped
at three times the lending test score.
As reflected in the Component Test
Rating chart, lending receives
approximately 50 percent weight,
service receives approximately 25
percent weight, and investment receives
approximately 25 percent weight. OTS
applies the tests in a performance
context that considers several factors
specified in § 563e.21(b) of OTS’s CRA
rule.
As discussed in the preamble to the
2004 NPR, 69 FR 68260–61, the CRA
regulation has been implemented to give
some consideration to the unique
statutory and regulatory structure of
savings associations. This structure
includes the qualified thrift lender test.
12 U.S.C. 1467a(m). It also includes
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lending and investment limits, such as
on commercial loans and community
development investments. 12 U.S.C.
1464(c)(2)(A), (c)(3)(A), and 1831e; 12
CFR 560.30 and 560.36. Because of
these differences between savings
associations and other financial
institutions, the preamble to the 1995
CRA rule indicated that a savings
association could receive at least a ‘‘low
satisfactory’’ rating on the investment
test without making qualified
investments, depending upon its
lending performance. 60 FR 22156,
22163 (May 4, 1995). Similarly, the 2001
interagency CRA Qs&As indicate that a
savings association that has made few or
no qualified investments due to its
limited investment authority may still
receive a low satisfactory rating under
the investment test if it has a strong
lending record. Q&A 21(b)(4), 66 FR
36631. In 2002, OTS issued examiner
guidance further clarifying this policy.
III. OTS’s Proposal and Solicitation of
Comments
While the CRA rule, as interpreted,
provides some flexibility, OTS solicited
comment in the 2004 NPR on providing
additional flexibility in the way it
assigns CRA ratings. OTS explained that
the purpose would be to reduce burden
while encouraging large retail savings
associations to focus their community
reinvestment efforts on the types of
activities the communities they serve
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12
9
6
3
0
Service
Investment
6
4
3
1
0
6
4
3
1
0
need, consistent with safe and sound
operations. Rather than mandating
changes to the weights assigned to
lending, investment, and service under
the large retail institution test from the
fixed 50 percent lending, 25 percent
service, 25 percent investment formula
currently applied, OTS solicited
comment on providing flexibility in
those weights. 69 FR 68261–63.
OTS explained that this approach
would serve to clarify and build upon
existing guidance. But for greater
burden reduction, OTS also solicited
comment on providing each savings
association evaluated under the large
retail institution test a choice, at its
option, on the weight given to lending,
investment, and service in assessing its
performance. Consistent with the
traditional and appropriate emphasis on
lending, OTS would not allow less than
a 50 percent weight to lending. The
remaining 50 percent, however, would
weigh lending, investment, or service,
or some combination thereof, based on
the savings association’s election. As a
result, each savings association could
choose to have OTS weigh lending
anywhere from 50 to 100 percent for
that association’s overall performance
assessment, service anywhere from 0 to
50 percent, and investment anywhere
from 0 to 50 percent. 69 FR 68262.
OTS explained that under this
approach, as under the existing
Component Test Rating chart, OTS
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would continue to allocate a total of 24
possible points among the three tests.
OTS would allocate 12 of these possible
points to lending. OTS would allocate
the remaining 12 possible points to
lending, service, investment, or some
combination thereof based on the
savings association’s weight election.
For each test, the savings association
would receive a percentage of the
possible points it chose to have OTS
allocate to that test, with the percentage
varying depending on the rating it
would receive on that test. 69 FR
68262–63. For any component rating of
‘‘outstanding,’’ the association would
receive 100 percent of the possible
points allocated to that test, 75 percent
for a ‘‘high satisfactory,’’ 50 percent for
a ‘‘low satisfactory,’’ 25 percent for a
‘‘needs to improve,’’ and 0 percent (i.e.,
no points) for a ‘‘significant
noncompliance.’’ These percentages
correspond to the current point
allocation on the lending test of 12
points for ‘‘outstanding,’’ nine points for
‘‘high satisfactory,’’ six points for ‘‘low
satisfactory,’’ three points for ‘‘needs to
improve,’’ and no points for ‘‘substantial
noncompliance.’’
The preamble set out the method for
creating a Component Test Rating chart
for any possible weight combinations a
savings association might select. It also
set out an alternative Composite Rating
matrix that would apply to any
alternative weight combination selected.
As with the current Composite Rating
matrix, which would remain applicable
to standard weights, the alternative
Composite Rating matrix contained a
note indicating that an institution may
not receive a rating of ‘‘satisfactory’’
unless it receives at least ‘‘low
satisfactory’’ rating on the lending test
and, therefore, the total points are
capped at three times the lending test
score. 69 FR 68262–63.
OTS explained that continuing to
include this note to the Composite
Rating matrix, which is the same note as
is contained in the Composite Rating
matrix used since 1995, would have
certain implications. For example, a
savings association opting to allocate
equal weight to lending as to the
combination of services and
investments could not receive a rating of
‘‘satisfactory’’ overall if it received a
‘‘needs to improve’’ or ‘‘substantial
noncompliance’’ rating on its lending.
69 FR 68263.
The preamble also provided several
examples of possible weights for
illustrative purposes, including the
applicable Component Test Rating chart
for each of those examples.
The preamble indicated that if OTS
were to offer this type of flexibility, a
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savings association evaluated under the
large retail institution test could elect
weights, much in the same way as it
elects consideration of other
components of the CRA examination
that are left to the institution’s option.
These include whether OTS will
consider as part of its examination
lending by an affiliate or consortium, or
investments or services by an affiliate.
See 12 CFR 563e.22(c)–(d), 563e.23(c),
and 563e.24(c). The Preliminary
Examination Response Kit (PERK)
currently contains optional questions
permitting the savings association to
elect to have information on such
activities considered by providing
relevant data and information pertaining
to those activities. See PERK 008L (12/
2004), ‘‘Community Reinvestment Act
Information—Large Institutions.’’
Likewise, the PERK could be revised to
provide an opportunity for a savings
association to answer an optional
question in which the association could
specify alternative weights for lending,
service, and investment. Through this
process, a savings association could
make a new weight election at the start
of each CRA examination. A savings
association that did not make an
election through the PERK would be
evaluated under the existing matrix
contained in Q&A 28(a)–3. 69 FR
68263–64.
OTS also explained that conforming
changes could be made to OTS’s CRA
rule. In particular, additional text could
be added to § 563e.28 indicating that a
savings association could, at its option,
elect to have its rating assigned under
alternative weights of lending, service,
and investment (so long as at least 50
percent weight is given to lending). To
the extent of any inconsistency between
the three rating principles in
§ 563e.28(b) and the Composite Rating
generated from the savings association’s
election of alternative weights, the
standards set forth under the applicable
matrix would govern. Thus, for
example, the principle referring to
ratings on the service test and
investment test would not apply to a
savings association that chose not to
have OTS give weight to either or both
of those factors. 69 FR 68264.
OTS explained that providing
flexibility for a savings association to
elect alternative weights would
supplement the use of the performance
context factors and serve many of the
same functions. OTS already evaluates a
savings association’s performance in the
context of factors such as the savings
association’s product offerings and
business strategy, its institutional
capacity and constraints, information
about lending, investment, and service
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opportunities in the savings
association’s assessment area(s), and
demographic and other relevant data
pertaining to a savings association’s
assessment area. See 12 CFR 563e.21(b).
Likewise, providing weight alternatives
would enable the savings association to
have its performance evaluated in a
manner most appropriately tailored to
the lending, investment, and service
opportunities in its assessment area(s),
demographic and other relevant data
pertaining to its assessment area(s), its
product offerings and business strategy,
and its institutional capacity and
constraints. This approach would be
designed to encourage large retail
savings associations to focus their
community reinvestment efforts on the
types of activities the communities they
serve need, consistent with safe and
sound operations.
IV. The Comments
A. Overview
OTS received approximately 4,200
comments. The vast majority (about
4,000) came from consumer and
community organizations and
representatives (Consumer Comments).
These included community
development advocates, Community
Development Corporations, Community
Development Financial Institutions,
housing authorities, consumer
protection and civil rights organizations,
faith-based organizations, and
educators, as well as a large number of
individuals whose personal or
professional interest in CRA was not
indicated. Most of these comments were
form letters; some organizations
submitted multiple letters. These
comments opposed the proposal, though
a significant number did not address the
portion of the proposal on assigned
ratings. OTS also received several
comments from members of Congress as
well as state and local officials, also
opposed to the proposal, including the
portion on assigned ratings.
In contrast, OTS received a couple of
hundred comments from financial
institutions and industry trade
associations (Financial Institution
Comments). Almost all of these
supported the proposal, including the
portion on assigned ratings. Many of
these also were form letters; some
institutions submitted multiple letters.
Given that of the nearly 900 savings
associations OTS regulates, only about
100 are large and would be directly
affected by the proposed changes to the
assignment of ratings, OTS considers
the level of support significant.
A summary of comments received on
the portion of the proposal addressing
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the assignment of ratings follows.
Comments on the portion of the
proposal addressing the definition of
‘‘community development’’ are not
summarized in this SUPPLEMENTARY
INFORMATION section since, as explained
in Part I of this SUPPLEMENTARY
INFORMATION section, OTS is deferring
action on that aspect of the proposal.
B. Commenters Opposing Proposal
The Consumer Comments, in
opposing the proposal, stated that CRA
examinations have been very useful in
encouraging investment in housing and
services for low-income people.
Generally, they predicted that if the
proposal were finalized, it would result
in a decrease in services and
investments by large thrifts. Some of the
main arguments presented were:
• OTS should not allow large thrifts
to ‘‘design their own watered-down
CRA exams.’’ If OTS were to permit this,
it would fail in its responsibility to
enforce CRA.
• Thrifts would opt to receive a CRA
rating based 100 percent on lending
performance, leading to a decrease in
services and investments by savings
associations. For example, allowing
thrifts to eliminate the investment test
would mean that they would not have
to finance affordable rental housing
through Low Income Housing Tax
Credits or small businesses through
equity investments. Allowing thrifts to
eliminate the service test would mean
that they would not have to place or
maintain branches in low- and
moderate-income communities and
could ignore the need for remittances
and other low-cost banking services.
• CRA has been effective because the
Agencies have issued regulations in a
careful and uniform manner. OTS acted
alone in making the streamlined
examination for small institutions
available to institutions between $250
million and $1 billion in assets without
regard to holding company size. They
asserted that OTS was again acting
unilaterally and without the benefit of
interagency debate, this time to weaken
the examination requirements for
institutions over $1 billion in assets.
The Consumer Comments elaborated
in various ways on these arguments:
• Some emphasized the harmful
national impact they expect the
proposal would have if finalized. One
commenter estimated that the large
thrifts impacted by the proposal control
87 percent of thrift assets and that thrifts
with assets over $1 billion hold CRA
investments of $1.3 billion. It projected
that the assigned ratings proposal would
reduce the level of CRA investments by
more than 50 percent. It indicated that
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if other regulators followed suit, the
impact would be even more dramatic.
• Some argued that large institutions
have substantial room for improvement
on their CRA performance and criticized
OTS’s oversight of large institutions.
One reported performing a sampling of
thrifts from which it concluded that a
sizeable minority of thrifts does not
engage in community development
lending at all. It speculated that, but for
the investment test, these thrifts would
offer no community development
financing. Another provided data from
which it concluded that large
institutions proportionally offer fewer
full service offices in low-or moderateincome (LMI) communities than smaller
institutions in certain service areas.
Some expressed concern that because
the current rules give equal
consideration to purchased loans and
directly originated loans under the
lending test, an institution that would
elect to base its rating 100 percent on
lending could receive an ‘‘outstanding’’
or ‘‘satisfactory’’ rating without any
direct presence in LMI markets, further
noting that the same loans can be
bought several times by numerous
institutions to boost their perceived
CRA performance.
• Some asserted that the change was
unnecessary, since OTS has already
established a mechanism to account for
the home loan focus of thrifts through
their ability to concentrate on
community development lending. One
further concluded that the Home
Owners’ Loan Act’s investment limits
do not disadvantage thrifts under the
investment component because even
thrifts that receive ‘‘outstanding’’ ratings
on investments have investment levels
below the investment limits.
• Some recommended alternative
ways OTS could change CRA
performance evaluations. One suggested
that OTS could revise the current
structure of the investment test to award
more points for difficult investments
that require patient capital or earn
below market rates of interest. It also
argued that the service test should be
made more rigorous by requiring data
disclosures on the number and
percentage of checking and savings
accounts for LMI borrowers and
communities and use it as a
straightforward measure of
responsiveness to deposit needs.
Many Consumer Comments also
addressed an issue covered in the
EGRPRA interim final rule. They
asserted that it would reduce vital
opportunities for community groups
and thrifts to meet with OTS to discuss
CRA and anti-predatory lending matters
when thrifts are merging because it
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10027
would allow OTS the discretion to hold
only one meeting, instead of two. Since
this issue pertains to a separate
rulemaking, it is not further discussed
in this Supplementary Information
section.
Comments from elected officials
included one from 28 members of the
House of Representatives (including 13
members of the Committee on Financial
Services), who filed a joint letter urging
OTS to withdraw the proposal. They
called upon OTS to continue to fully
evaluate all large retail institutions on
their lending, service, and investment
performance. They expressed concern
that permitting institutions to choose
whether to provide services to, or make
investments in, the communities in
which they are located will encourage
them to concentrate on whatever is
‘‘easiest’’ to do, regardless of the
communities’ needs. They
recommended that OTS instead expand
the range of appropriate activities that
qualify for CRA credit, such as
remittances under the service test, and
complex housing investments under the
investment test. Several Representatives
and a Senator wrote separately to voice
their opposition to the proposal, raising
similar concerns.
Several state and local government
officials also wrote to oppose the
proposal, citing similar reasons. These
included a joint comment letter from 45
mayors and another from 50 members of
the New York State legislature.
A few financial institutions and one
industry trade association also opposed
the proposal (or various aspects of it),
explaining that the current rule strikes
the appropriate balance between
regulatory burden and compliance
under the CRA. They expressed
particular concern about the lack of
uniformity among regulators. One
industry trade group supported the
‘‘spirit’’ of the proposal and the goal of
increasing flexibility, but opposed the
proposal based on this lack of
uniformity. It asserted that the lack of
uniformity would increase regulatory
costs and burdens, particularly at
institutions that have multiple charters,
necessitate revisions to the interagency
CRA Qs&As, introduce artificial
distinctions between the activities
conducted by institutions with different
charters, and hinder the ability to
compare CRA performance among
institutions.
One large holding company with both
thrift and bank subsidiaries argued that
providing a choice of weights would
decrease an institution’s ability to
internally monitor its performance and
would make comparisons among
institutions more difficult through the
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lack of uniformity. A couple of other
financial institutions that are not
chartered by OTS and not subject to its
version of the CRA rule also opposed
the proposal.
C. Commenters Supporting Proposal
Most financial institutions and
industry trade groups commenting, on
the other hand, strongly supported the
proposal and praised OTS’s efforts to
innovate. They explained that the
proposal would inject flexibility into the
CRA process, allow thrifts to better
serve their communities by allowing
them to focus resources where they are
most needed, and eliminate unnecessary
regulatory burden.
Some explained how the assigned
ratings changes would be consistent
with CRA. They pointed out that the
primary focus of the CRA is on the
provision of credit, as reflected in the
wording of the statute itself, and
pointed out that the CRA statute itself
does not mandate the service and
investment tests. Some cited legislative
history to further support a lending
focus.
Some of the main arguments
presented were:
• The weights in the current CRA rule
are inappropriate. The 50 percent
weight for lending is too low for
traditional thrifts and forces depository
institutions into other activities where
they may not have sufficient expertise.
The 25 percent weight for investments
forces institutions to seek out risky or
complex investments and other
investments beyond their expertise.
• The way ratings are currently
assigned is not sufficiently flexible. The
current service test does not offer
sufficient flexibility to thrifts that do not
offer transaction-based accounts. CRA
does not adequately accommodate
institutions that exclusively employ
alternative, non-branch delivery systems
as their primary distribution channel.
The proposal would be consistent with
CRA by allowing OTS to give due
consideration to the unique factors
applicable to each depository
institution, taking into account regional
differences, and the varied business
models and product offerings.
Several Financial Institution
Comments addressed the specific
questions that OTS had also included in
the preamble to highlight particular
aspects of the proposal:
• Several trade associations projected
that allowing alternative weights would
increase the importance of lending and
increase the provision of credit to the
community, consistent with the CRA
statute.
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• Some projected that allowing
alternative weights would not change
the level of lending, investment, and
service in the community. Some
reasoned that community banks of all
sizes are committed to meeting the
needs of their communities through
community service—not because it is
necessary to satisfy CRA compliance
requirements—but because it is good
business. Several argued that,
notwithstanding the fears expressed by
consumer commenters, it is extremely
unlikely that any large institution would
adopt a matrix based solely on lending.
One form letter submitted by many
financial institutions asserted that
community banks would not change the
way they do business or reduce the
volume of loans, but what they could
do, particularly those in rural areas,
would be to stop investing in statewide
or regional projects that actually take
resources away from the institution’s
local community.
• Several supported continuing to
require at least a 50 percent weight for
lending, as being consistent with the
purposes of the CRA, though one
opposed this requirement in the interest
of greater flexibility. A few trade
associations commented that they did
not think it would be necessary for OTS
to otherwise impose restrictions on the
weight choices, since doing so would
reduce the rule’s flexibility. A few
Financial Institutions Comments
specifically encouraged OTS to provide
examples as guidance, as in the
proposal.
• A couple supported continuing to
require that an institution must receive
at least a ‘‘low satisfactory’’ rating in
lending to receive an overall
‘‘satisfactory’’ rating. They indicated
that this requirement is consistent with
the emphasis on returning to the core
requirements of the CRA, i.e., the
institution’s record of helping to meet
the credit needs of the entire
community.
• None preferred eliminating the
investment test to the alternative weight
proposal. Several specifically opposed
the elimination of the investment test as
an alternative, noting that the
alternative weights proposal would
provide flexibility to all large retail
savings associations, including those
that may wish to make investments and
have their performance evaluated under
the investment test. One argued that
eliminating the investment test would
reduce the variety of mechanisms
available to institutions to meet their
CRA responsibilities. As a result, this
change would actually decrease the
flexibility that institutions have to serve
their communities.
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• Some trade associations suggested
that concerns about uniformity were
overstated, noting that the Agencies are
not required to have uniform rules on
CRA. One benefit of departing from
uniformity might prove to be that
differences produce successful and
innovative solutions to community
reinvestment issues. Others favored
obtaining greater uniformity by having
the other regulators adopt OTS’s
approach.
V. Today’s Final Rule
Having carefully considered the
comments, OTS has decided to provide
additional flexibility in assigning CRA
ratings to encourage large retail savings
associations to focus their community
reinvestment efforts on the types of
activities the communities they serve
need, consistent with safe and sound
operations. The final rule revises the
manner in which ratings are assigned to
reduce burden and restore the focus of
CRA to lending.
As discussed in Part II.A. of this
SUPPLEMENTARY INFORMATION section, the
statutory language and legislative
history of CRA confirm its appropriate
lending focus. Given OTS’s
responsibility to evaluate an
institution’s performance in meeting
credit needs, we believe it is appropriate
to allow institutions to be evaluated
with greater emphasis on lending than
at present. At the same time, in
recognition of the value to communities
of investments and services, OTS is not
mandating any decrease in the emphasis
given to investments or services in an
evaluation. In fact, today’s final rule
provides flexibility for savings
associations evaluated under the large
retail institution test to opt to be
evaluated with the same or greater
emphasis given to either investments or
services than at present. Savings
associations that do not want alternative
weights do not have to do anything
differently, as today’s final rule contains
no mandatory changes in the way
savings associations are evaluated.
A. Regulatory Changes
The final rule adds a new paragraph
to OTS’s CRA rule (12 CFR 563e.28(d))
to reflect that savings associations
subject to the large retail institution test
may elect alternative weights for the
lending, investment, and service
components. In keeping with the
proposal, a savings association may
elect alternative weights for lending,
service, and investment, so long as
lending receives no less than 50 percent
weight and, of course, the weights total
100 percent.
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The requirement that lending receive
50 percent weight is not codified in the
current CRA rule, only in implementing
materials. Accordingly, OTS is
continuing that approach with respect
to the requirement that any alternative
weights selected accord a minimum of
50 percent weight to lending. OTS will
incorporate that specification and other
technical details for implementing
alternative weights into guidance that it
will issue separately.
OTS believes that a minimum of 50
percent weight to lending is appropriate
for purposes of the large retail
institution test, consistent with the
traditional and appropriate emphasis on
lending. OTS notes, however, that
savings associations that may wish to
place a different emphasis on their CRA
efforts might consider submitting a
strategic plan under § 563e.27 of OTS’s
CRA rule. While that regulation
provides that a savings association,
other than a wholesale or limited
purpose institution, generally is to
address all three performance categories
(lending, investments, and services) and
emphasize lending and lending-related
activities, it also indicates that a
different emphasis is possible. The
regulation states, ‘‘[A] different
emphasis, including a focus on one or
more performance categories, may be
appropriate if responsive to the
characteristics and credit needs of its
assessment areas(s), considering public
comment and the savings association’s
capacity and constraints, products
offerings, and business strategy.’’ 12
CFR 563e.27(f)(1)(ii).
New § 563e.28(d) further provides
that the principles in § 563e.28(b) will
not apply to the extent of any
inconsistency with alternative weights
selected. Thus, for example, the
principle in § 563e.28(b)(2) stating that
a savings association that receives an
‘‘outstanding’’ rating on both the service
test and the investment test and a rating
of at least ‘‘high satisfactory’’ on the
lending test will receive an assigned
rating of ‘‘outstanding’’ will not apply to
a savings association that chooses not to
have OTS give weight to services and
investments. (Likewise, the CRA Qs&As
will not apply to savings associations
regulated by OTS to the extent of any
inconsistency with today’s final rule or
any implementing guidance.)
OTS is also making a conforming
change to § 563e.21(a)(1) of its CRA rule
to avoid any misimpression that OTS
will continue to always apply all three
components of the large retail
institution test to savings associations
assessed under that test. Under today’s
final rule, OTS will continue to apply
the lending test to all savings
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associations evaluated under the large
retail institution test. But whether OTS
will apply the investment and service
tests will depend upon whether the
savings association elects optional
weights and whether those weights
entail consideration of these tests.
Accordingly, OTS is revising
§ 563e.21(a)(1) to indicate that OTS
applies the lending, investment, and
service tests to the extent consistent
with § 563e.28(d), the provision
allowing savings associations to elect
alternative weights. If no weight is
selected for service and/or investment,
OTS will not rate that component or
components.
OTS is not making any change to the
performance context regulation.
However, OTS examiners will take the
weights selected into consideration as
part of each savings association’s
performance context. All else being
equal, a savings association that opts for
OTS to give greater weight to any
particular component than would apply
under standard weights will be expected
to exhibit stronger performance on that
component than it would under
standard weights in order to receive the
same rating. At the same time, a savings
association that opts for OTS to give
lesser weight to any particular
component than would apply under
standard weights will not be expected to
exhibit performance as strong on that
component as it would under standard
weights in order to receive the same
rating. The performance context is
sufficiently flexible, without regulatory
change, for OTS examiners to take into
consideration differences in weight
allocations that different savings
associations may elect as part of existing
performance context factors such as
institutional capacity. See 12 CFR
563e.21(b).
For savings associations that do not
elect alternative weights for lending,
service, and investment, OTS will
continue to apply the Component Test
Rating chart in Part II.D. of this
SUPPLEMENTARY INFORMATION section to
assign component ratings that reflect the
institution’s lending, investment, and
service performance and calculate the
composite rating using the Composite
Rating matrix in Part II.D. of this
SUPPLEMENTARY INFORMATION section.
These are the same Component Test
Rating chart and Composite Rating
matrix as have been in place since 1995.
For savings associations that elect
alternative weights, OTS will issue
separate guidance detailing the
methodology for assigning ratings.
OTS has considered that providing
flexibility to savings associations to
choose alternative weights will decrease
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10029
uniformity if the other Federal banking
agencies do not provide the same type
of flexibility for the institutions they
regulate. However, OTS does not
anticipate that this decrease in
uniformity will cause significant
complications. For example, if a thrift
and a bank are under the same holding
company and both institutions want to
continue to have the same weight
allocations used in their examinations
by their respective regulators, the thrift
can simply refrain from opting for an
alternative weight allocation.
B. Using Existing Procedures
A savings association evaluated under
the large retail institution test will be
able to elect weights, much in the same
way as it may currently elect
consideration of other activities under
CRA, such as lending by an affiliate or
consortium, or investments or services
by an affiliate, as discussed in Part III of
this SUPPLEMENTARY INFORMATION
section. This has proven to be a simple
and efficient procedure. OTS intends to
revise the PERK package shortly to
provide a specific optional question
soliciting the institution’s alternative
weight designation, if any, just as there
are currently optional questions for
lending by an affiliate or consortium, or
investments or services by an affiliate.
Any necessary updates to examination
procedures will also be made.
Savings associations that wish to opt
for an alternative weight for lending,
service, and investment, will be able to
do so effective with examinations
beginning the second quarter of 2005.
Until the PERK is revised, savings
associations with examinations noticed
for the second quarter of 2005 or
thereafter may still elect alternative
weights through their responses to the
existing PERK information requests.
PERK 008L (12/2004), ‘‘Community
Reinvestment Act Information—Large
Institutions,’’ already provides that an
institution is welcome to provide
information not listed in the PERK
relevant to demonstrating the
institution’s performance.
By enabling savings associations to
elect optional weights through the
PERK, CRA examinations will become
more efficient. Savings associations that
opt for no weight to the investment test
and/or service test will not have to
provide information pertaining to that
component or components as part of the
CRA examination and OTS examiners
will not have to evaluate such
information, except as the information
may relate to the performance context.
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C. Anticipated Effect on Community
Development
Commenters have furnished little
evidence on the proposal’s effect on
community development. The
proposal’s opponents predict that
allowing alternative weights will result
in a decrease in services and
investments by large thrifts, and that
this decrease will have an adverse
impact on community development.
These predictions are speculative.
Supporters make contrary predictions
that large savings associations will
continue to provide community
development services and investments
and are extremely unlikely to adopt a
matrix based solely on lending.
Rather than rely on such predictions
by opponents or supporters of the
proposal, we have focused on the
common-sense economic principle that
allowing a savings association greater
freedom to specialize in those things at
which it is relatively more efficient
should result in more, not less, real
community development being
delivered. Part of the idea behind
allowing alternative weights is to not
force a savings association to provide a
service or make an investment that it
cannot do efficiently—or that may not
even be a central part of its business
plan—and to encourage it to engage in
activities at which it is relatively more
efficient (i.e., where the savings
association has a comparative
advantage). By encouraging each savings
association to meet its community
development obligations through
activities at which it excels, OTS
anticipates gains in economic efficiency
deriving from specialization. And these
gains, in turn, will result in more
effective, not less effective, community
development.
This added flexibility—permitting a
savings association to focus its
community reinvestment efforts on
activities that it does well—also serves
the important goal of helping to assure
that the savings association meets its
community reinvestment obligations in
a manner consistent with safe and
sound operations. Common-sense
dictates that experience and expertise
contribute to safe and sound operations.
VI. Regulatory Analysis
A. Paperwork Reduction Act
In accordance with the requirements
of the Paperwork Reduction Act of 1995,
OTS may not conduct or sponsor, and
a respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (OMB) control
number. This collection of information
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14:59 Mar 01, 2005
Jkt 205001
is currently approved under OMB
Control Number 1550–0012. This final
rule does not change the collection of
information.
I
B. Regulatory Flexibility Act
(a) * * *
(1) Lending, investment, and service
tests. The OTS applies the lending,
investment, and service tests, as
provided in §§ 563e.22 through 563e.24,
in evaluating the performance of a
savings association, except as provided
in paragraphs (a)(2), (a)(3), and (a)(4) of
this section, and to the extent consistent
with § 563e.28(d).
*
*
*
*
*
I 3. Amend § 563e.28 by:
I a. Removing ‘‘paragraphs (b) and (c) of
this section’’ in paragraph (a) and by
adding in lieu thereof ‘‘paragraphs (b),
(c), and (d) of this section’’; and
I b. Adding a new paragraph (d) to read
as follows:
Pursuant to section 605(b) of the
Regulatory Flexibility Act, OTS certifies
that the final rule will not have a
significant economic impact on a
substantial number of small entities and
will not impose any additional
paperwork or regulatory reporting
requirements. This final rule relates
only to the treatment of savings
associations under the retail test
mandated only for large institutions.
C. Executive Order 12866 Determination
OTS has determined that this final
rule is not a significant regulatory action
under Executive Order 12866.
D. Unfunded Mandates Reform Act of
1995 Determination
Section 202 of the Unfunded
Mandates Reform Act of 1995, Pub. L.
104–4 (Unfunded Mandates Act)
requires that an agency prepare a
budgetary impact statement before
promulgating a rule that includes a
Federal mandate that may result in
expenditure by State, local, and tribal
governments, in the aggregate, or by the
private sector, of $100 million or more
in any one year. If a budgetary impact
statement is required, section 205 of the
Unfunded Mandates Act also requires
an agency to identify and consider a
reasonable number of regulatory
alternatives before promulgating a rule.
OTS has determined that this rule will
not result in expenditures by State,
local, and tribal governments, or by the
private sector, of $100 million or more.
Accordingly, OTS has not prepared a
budgetary impact statement nor
specifically addressed the regulatory
alternatives considered.
List of Subjects in 12 CFR Part 563e
Community development, Credit,
Investments, Reporting and
recordkeeping requirements, Savings
associations.
12 CFR Chapter V
For the reasons outlined in the
preamble, the Office of Thrift
Supervision amends part 563e of chapter
V of title 12 of the Code of Federal
Regulations as set forth below:
I 1. The authority citation for part 563e
continues to read as follows:
I
Authority: 12 U.S.C. 1462a, 1463, 1464,
1467a, 1814, 1816, 1828(c), and 2901 through
2907.
Frm 00010
Fmt 4700
Sfmt 4700
§ 563e.21 Performance tests, standards,
and ratings, in general.
§ 563e.28
Assigned Ratings.
*
*
*
*
*
(d) Savings associations electing
alternative weights of lending,
investment, and service. A savings
association subject to the lending,
investment, and service tests may elect
alternative weights for lending, service,
and investment. The principles in
paragraph (b) of this section do not
apply to the extent of any inconsistency
with the alternative weights selected.
Dated: February 24, 2005.
By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 05–4016 Filed 3–1–05; 8:45 am]
BILLING CODE 6720–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2004–19202; Directorate
Identifier 2004–NM–95–AD; Amendment 39–
13989; AD 2005–05–01]
RIN 2120–AA64
Airworthiness Directives; Boeing
Model 757 Series Airplanes
Office of Thrift Supervision
PO 00000
2. Revise § 563e.21(a)(1) to read as
follows:
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Final rule.
AGENCY:
SUMMARY: The FAA is adopting a new
airworthiness directive (AD) for certain
Boeing Model 757 series airplanes. This
AD requires identification of the part
number for the cable assembly for the
lower anti-collision light, and related
E:\FR\FM\02MRR1.SGM
02MRR1
Agencies
[Federal Register Volume 70, Number 40 (Wednesday, March 2, 2005)]
[Rules and Regulations]
[Pages 10023-10030]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-4016]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563e
[No. 2005-09]
RIN 1550-AB48
Community Reinvestment Act--Assigned Ratings
AGENCY: Office of Thrift Supervision, Treasury (OTS).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: In this final rule, OTS is making changes to its Community
Reinvestment Act (CRA) regulations to reduce burden, provide greater
flexibility to meet community needs, and restore the focus of CRA to
lending. Specifically, OTS is providing additional flexibility to each
savings association evaluated under the large retail institution test
to determine the combination of lending, investment, and service it
will use to meet the credit needs of the local communities in which it
is chartered, consistent with safe and sound operations.
[[Page 10024]]
DATES: This rule is effective on April 1, 2005.
FOR FURTHER INFORMATION CONTACT: Celeste Anderson, Program Manager,
Thrift Policy, (202) 906-7990; Richard Bennett, Counsel, Regulations
and Legislation Division, (202) 906-7409, Office of Thrift Supervision,
1700 G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Introduction
On November 24, 2004, OTS published a notice of proposed rulemaking
(NPR) proposing changes to, and soliciting comment on, its CRA
regulations in two areas: (1) the definition of ``community
development'' and (2) the assignment of ratings. (69 FR 68257) OTS
indicated that it was considering addressing these areas to reduce
burden to the extent consistent with the safe and sound supervision of
the industry and provide institutions with more flexibility to make
their own determinations about how best to serve their communities.
The proposal was designed to further the CRA burden reduction OTS
began in its final rule published in the Federal Register on August 18,
2004 (69 FR 51155), which revised the definition of ``small savings
association'' (2004 Final Rule). It was also crafted to increase the
burden reductions in the interim final rule published in the Federal
Register on November 24, 2004 (69 FR 68239) as part of OTS's review of
regulations under section 2222 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (EGRPRA) (EGRPRA Interim Final Rule).
In this final rule, OTS is adopting changes to the way it assigns
CRA ratings. OTS is deferring action, however, on revising the
definition of ``community development.'' OTS notes that the Federal
Deposit Insurance Corporation (FDIC) has also issued a proposal to
expand the definition of ``community development.'' 69 FR 51611 (August
20, 2004). OTS is deferring action on this portion of its proposal to
allow for further opportunities for consideration of, and coordination
on, these and other proposals. Accordingly, the remainder of this
Supplementary Information section is limited to addressing the
assignment of ratings.
II. The Way CRA Works
A. The CRA Statute
CRA is a statute addressed to the credit needs of communities. The
statute clearly states that the purpose of CRA is ``to require each
appropriate Federal financial supervisory agency to use its authority
when examining financial institutions to encourage such institutions to
help meet the credit needs of the local communities in which they are
chartered consistent with the safe and sound operation of such
institutions.'' 12 U.S.C. 2901(b) (emphasis added). Congress further
provided that the written evaluations of CRA performance are to
evaluate ``the institution's record of meeting the credit needs of its
entire community, including low and moderate-income neighborhoods.'' 12
U.S.C. 2906(a)(1) (emphasis added).
The legislation's chief sponsor, Senator William Proxmire,
indicated the lending focus to CRA when he explained the purpose of the
provision authorizing the federal banking agencies to evaluate how well
institutions meet the credit needs of the areas which they are
primarily chartered to serve. He stated, ``The provision is intended to
eliminate the practice of redlining by lending institutions.'' 123
Cong. Rec. S8932 (daily ed. June 6, 1977) (emphasis added).
B. The Original CRA Rule
The four federal banking agencies (the Agencies) implemented the
CRA through joint final regulations published in 1978. 43 FR 47144
(October 12, 1978) (1978 rule). These regulations specified twelve
factors that the Agencies would consider in assessing an institution's
record of performance in helping to meet the credit needs of its
community.
Several of the twelve factors focused on the institution's lending.
However, some factors focused on the institution's services and
investments. For example, one service-focused factor was ``the
institution's record of opening and closing offices and providing
services at offices.'' 43 FR 47154 (promulgating 12 CFR 563e.7(g)). One
investment-focused factor was ``the institution's participation,
including investments, in local community development and redevelopment
projects or programs.'' 43 FR 47154 (promulgating 12 CFR 563e.7(h)).
While the factors covered lending, investment, and service among
other aspects of the institution's performance, the factors did not
mandate any particular level of performance on any particular factor or
factors. Indeed, as indicated in the preamble to the 1978 rule, the
Agencies considered, but specifically rejected, giving specific weights
or imposing a scoring system on the factors. The preamble explained,
``[T]he Agencies believe that specific weights or scoring systems would
not adequately address the diversity of institutions and communities
[and] would prevent rather than encourage thoughtful response to
community needs.'' 43 FR 47145.
C. Experience With the 1978 Rule
The experience with the 1978 rule was summarized in the preamble to
the Agencies' 1995 CRA rule. 60 FR 22156 (May 4, 1995) (1995 rule). It
stated:
The CRA has come to play an increasingly important role in
improving access to credit in communities--both rural and urban--
across the country. Under the impetus of the CRA, many banks and
thrifts opened new branches, provided expanded services, and made
substantial commitments to increase lending to all segments of
society.
Despite these successes, the CRA examination system has been
criticized. Financial institutions have indicated that policy
guidance from the agencies on the CRA is unclear and that
examination standards are applied inconsistently. Financial
institutions have also stated that the CRA examination process
encourages them to generate excessive paperwork at the expense of
providing loans, services, and investments to their communities.
Community, consumer, and other groups have agreed with the
industry that there are inconsistencies in CRA evaluations and that
current examinations overemphasize process and underemphasize
performance. Community and consumer groups also have criticized the
agencies for failing aggressively to penalize banks and thrifts for
poor performance.
Noting that the CRA examination process could be improved,
President Clinton requested in July 1993 that the Federal financial
supervisory agencies reform the CRA regulatory system. The President
asked the agencies to consult with the banking and thrift
industries, Congressional leaders, and leaders of community-based
organizations across the country to develop new CRA regulations and
examination procedures that ``replace paperwork and uncertainty with
greater performance, clarity, and objectivity.''
Specifically, the President asked the agencies to refocus the
CRA examination system on more objective, performance-based
assessment standards that minimize compliance burden while
stimulating improved performance. He also asked the agencies to
develop a well-trained corps of examiners who would specialize in
CRA examinations. The President requested that the agencies promote
consistency and even-handedness, improve CRA performance
evaluations, and institute more effective sanctions against
institutions with consistently poor performance.
60 FR 22156-57.
D. The 1995 Rule and Subsequent Guidance
The experience with the 1978 rule led the Agencies to replace it in
1995 with a rule designed to emphasize performance rather than process,
promote consistency in evaluations, and eliminate unnecessary burden.
60 FR 22156. Among other things, it
[[Page 10025]]
established a large retail institution test comprised of three tests:
one for lending, one for investment, and one for service.
OTS has previously summarized how the performance of large retail
institutions has been assessed under the lending, investment, and
service tests under the 1995 rule. See, e.g., 69 FR 68258; 66 FR 37602
(July 19, 2001) (2001 Joint ANPR); 69 FR 5729 (February 6, 2004) (2004
Joint NPR). In sum, under OTS's CRA rule at 12 CFR 563e.28(b), OTS
assigns ratings to savings associations assessed under the large retail
institution test in accordance with the following three rating
principles:
(1) A savings association that receives an ``outstanding rating on
the lending test receives an assigned rating of at least
``satisfactory'';
(2) A savings association that receives an ``outstanding'' rating
on both the service test and the investment test and a rating of at
least ``high satisfactory'' on the lending test receives an assigned
rating of ``outstanding''; and
(3) No savings association may receive an assigned rating of
``satisfactory'' or higher unless it receives a rating of at least
``low satisfactory'' on the lending test.
Interagency Questions and Answers Regarding Community Reinvestment,
66 FR 36620 (July 12, 2001), developed jointly by the Agencies, address
how the Agencies weigh performance under the lending, investment, and
service tests for large retail institutions to come up with one overall
Composite Rating. Q&A 28(a)-3, 66 FR 36639, provides:
A rating of ``outstanding,'' ``high satisfactory,'' ``low
satisfactory,'' ``needs to improve,'' or ``substantial
noncompliance,'' based on a judgment supported by facts and data,
will be assigned under each performance test. Points will then be
assigned to each rating as described in the first matrix set forth
below. A large retail institution's overall rating under the
lending, investment and service tests will then be calculated in
accordance with the second matrix set forth below, which
incorporates the rating principles in the regulation.
The Q&A then sets forth the following Component Test Rating chart
(66 FR 36639):
Points Assigned for Performance Under Lending, Investment and Service
Tests
------------------------------------------------------------------------
Lending Service Investment
------------------------------------------------------------------------
Outstanding...................... 12 6 6
High Satisfactory................ 9 4 4
Low Satisfactory................. 6 3 3
Needs to Improve................. 3 1 1
Substantial Noncompliance........ 0 0 0
------------------------------------------------------------------------
This chart is followed by the following Composite Rating matrix (66
FR 36639-40):
Composite Rating Point Requirements
[Add points from three tests]
------------------------------------------------------------------------
Rating Total points
------------------------------------------------------------------------
Outstanding............................. 20 or over.
Satisfactory............................ 11 through 19.
Needs to Improve........................ 5 through 10.
Substantial Noncompliance............... 0 through 4.
------------------------------------------------------------------------
Note: There is one exception to the Composite Rating matrix. An
institution may not receive a rating of ``satisfactory'' unless it
receives at least ``low satisfactory'' on the lending test. Therefore,
the total points are capped at three times the lending test score.
As reflected in the Component Test Rating chart, lending receives
approximately 50 percent weight, service receives approximately 25
percent weight, and investment receives approximately 25 percent
weight. OTS applies the tests in a performance context that considers
several factors specified in Sec. 563e.21(b) of OTS's CRA rule.
As discussed in the preamble to the 2004 NPR, 69 FR 68260-61, the
CRA regulation has been implemented to give some consideration to the
unique statutory and regulatory structure of savings associations. This
structure includes the qualified thrift lender test. 12 U.S.C.
1467a(m). It also includes lending and investment limits, such as on
commercial loans and community development investments. 12 U.S.C.
1464(c)(2)(A), (c)(3)(A), and 1831e; 12 CFR 560.30 and 560.36. Because
of these differences between savings associations and other financial
institutions, the preamble to the 1995 CRA rule indicated that a
savings association could receive at least a ``low satisfactory''
rating on the investment test without making qualified investments,
depending upon its lending performance. 60 FR 22156, 22163 (May 4,
1995). Similarly, the 2001 interagency CRA Qs&As indicate that a
savings association that has made few or no qualified investments due
to its limited investment authority may still receive a low
satisfactory rating under the investment test if it has a strong
lending record. Q&A 21(b)(4), 66 FR 36631. In 2002, OTS issued examiner
guidance further clarifying this policy.
III. OTS's Proposal and Solicitation of Comments
While the CRA rule, as interpreted, provides some flexibility, OTS
solicited comment in the 2004 NPR on providing additional flexibility
in the way it assigns CRA ratings. OTS explained that the purpose would
be to reduce burden while encouraging large retail savings associations
to focus their community reinvestment efforts on the types of
activities the communities they serve need, consistent with safe and
sound operations. Rather than mandating changes to the weights assigned
to lending, investment, and service under the large retail institution
test from the fixed 50 percent lending, 25 percent service, 25 percent
investment formula currently applied, OTS solicited comment on
providing flexibility in those weights. 69 FR 68261-63.
OTS explained that this approach would serve to clarify and build
upon existing guidance. But for greater burden reduction, OTS also
solicited comment on providing each savings association evaluated under
the large retail institution test a choice, at its option, on the
weight given to lending, investment, and service in assessing its
performance. Consistent with the traditional and appropriate emphasis
on lending, OTS would not allow less than a 50 percent weight to
lending. The remaining 50 percent, however, would weigh lending,
investment, or service, or some combination thereof, based on the
savings association's election. As a result, each savings association
could choose to have OTS weigh lending anywhere from 50 to 100 percent
for that association's overall performance assessment, service anywhere
from 0 to 50 percent, and investment anywhere from 0 to 50 percent. 69
FR 68262.
OTS explained that under this approach, as under the existing
Component Test Rating chart, OTS
[[Page 10026]]
would continue to allocate a total of 24 possible points among the
three tests. OTS would allocate 12 of these possible points to lending.
OTS would allocate the remaining 12 possible points to lending,
service, investment, or some combination thereof based on the savings
association's weight election. For each test, the savings association
would receive a percentage of the possible points it chose to have OTS
allocate to that test, with the percentage varying depending on the
rating it would receive on that test. 69 FR 68262-63. For any component
rating of ``outstanding,'' the association would receive 100 percent of
the possible points allocated to that test, 75 percent for a ``high
satisfactory,'' 50 percent for a ``low satisfactory,'' 25 percent for a
``needs to improve,'' and 0 percent (i.e., no points) for a
``significant noncompliance.'' These percentages correspond to the
current point allocation on the lending test of 12 points for
``outstanding,'' nine points for ``high satisfactory,'' six points for
``low satisfactory,'' three points for ``needs to improve,'' and no
points for ``substantial noncompliance.''
The preamble set out the method for creating a Component Test
Rating chart for any possible weight combinations a savings association
might select. It also set out an alternative Composite Rating matrix
that would apply to any alternative weight combination selected. As
with the current Composite Rating matrix, which would remain applicable
to standard weights, the alternative Composite Rating matrix contained
a note indicating that an institution may not receive a rating of
``satisfactory'' unless it receives at least ``low satisfactory''
rating on the lending test and, therefore, the total points are capped
at three times the lending test score. 69 FR 68262-63.
OTS explained that continuing to include this note to the Composite
Rating matrix, which is the same note as is contained in the Composite
Rating matrix used since 1995, would have certain implications. For
example, a savings association opting to allocate equal weight to
lending as to the combination of services and investments could not
receive a rating of ``satisfactory'' overall if it received a ``needs
to improve'' or ``substantial noncompliance'' rating on its lending. 69
FR 68263.
The preamble also provided several examples of possible weights for
illustrative purposes, including the applicable Component Test Rating
chart for each of those examples.
The preamble indicated that if OTS were to offer this type of
flexibility, a savings association evaluated under the large retail
institution test could elect weights, much in the same way as it elects
consideration of other components of the CRA examination that are left
to the institution's option. These include whether OTS will consider as
part of its examination lending by an affiliate or consortium, or
investments or services by an affiliate. See 12 CFR 563e.22(c)-(d),
563e.23(c), and 563e.24(c). The Preliminary Examination Response Kit
(PERK) currently contains optional questions permitting the savings
association to elect to have information on such activities considered
by providing relevant data and information pertaining to those
activities. See PERK 008L (12/2004), ``Community Reinvestment Act
Information--Large Institutions.'' Likewise, the PERK could be revised
to provide an opportunity for a savings association to answer an
optional question in which the association could specify alternative
weights for lending, service, and investment. Through this process, a
savings association could make a new weight election at the start of
each CRA examination. A savings association that did not make an
election through the PERK would be evaluated under the existing matrix
contained in Q&A 28(a)-3. 69 FR 68263-64.
OTS also explained that conforming changes could be made to OTS's
CRA rule. In particular, additional text could be added to Sec.
563e.28 indicating that a savings association could, at its option,
elect to have its rating assigned under alternative weights of lending,
service, and investment (so long as at least 50 percent weight is given
to lending). To the extent of any inconsistency between the three
rating principles in Sec. 563e.28(b) and the Composite Rating
generated from the savings association's election of alternative
weights, the standards set forth under the applicable matrix would
govern. Thus, for example, the principle referring to ratings on the
service test and investment test would not apply to a savings
association that chose not to have OTS give weight to either or both of
those factors. 69 FR 68264.
OTS explained that providing flexibility for a savings association
to elect alternative weights would supplement the use of the
performance context factors and serve many of the same functions. OTS
already evaluates a savings association's performance in the context of
factors such as the savings association's product offerings and
business strategy, its institutional capacity and constraints,
information about lending, investment, and service opportunities in the
savings association's assessment area(s), and demographic and other
relevant data pertaining to a savings association's assessment area.
See 12 CFR 563e.21(b). Likewise, providing weight alternatives would
enable the savings association to have its performance evaluated in a
manner most appropriately tailored to the lending, investment, and
service opportunities in its assessment area(s), demographic and other
relevant data pertaining to its assessment area(s), its product
offerings and business strategy, and its institutional capacity and
constraints. This approach would be designed to encourage large retail
savings associations to focus their community reinvestment efforts on
the types of activities the communities they serve need, consistent
with safe and sound operations.
IV. The Comments
A. Overview
OTS received approximately 4,200 comments. The vast majority (about
4,000) came from consumer and community organizations and
representatives (Consumer Comments). These included community
development advocates, Community Development Corporations, Community
Development Financial Institutions, housing authorities, consumer
protection and civil rights organizations, faith-based organizations,
and educators, as well as a large number of individuals whose personal
or professional interest in CRA was not indicated. Most of these
comments were form letters; some organizations submitted multiple
letters. These comments opposed the proposal, though a significant
number did not address the portion of the proposal on assigned ratings.
OTS also received several comments from members of Congress as well as
state and local officials, also opposed to the proposal, including the
portion on assigned ratings.
In contrast, OTS received a couple of hundred comments from
financial institutions and industry trade associations (Financial
Institution Comments). Almost all of these supported the proposal,
including the portion on assigned ratings. Many of these also were form
letters; some institutions submitted multiple letters. Given that of
the nearly 900 savings associations OTS regulates, only about 100 are
large and would be directly affected by the proposed changes to the
assignment of ratings, OTS considers the level of support significant.
A summary of comments received on the portion of the proposal
addressing
[[Page 10027]]
the assignment of ratings follows. Comments on the portion of the
proposal addressing the definition of ``community development'' are not
summarized in this SUPPLEMENTARY INFORMATION section since, as
explained in Part I of this SUPPLEMENTARY INFORMATION section, OTS is
deferring action on that aspect of the proposal.
B. Commenters Opposing Proposal
The Consumer Comments, in opposing the proposal, stated that CRA
examinations have been very useful in encouraging investment in housing
and services for low-income people. Generally, they predicted that if
the proposal were finalized, it would result in a decrease in services
and investments by large thrifts. Some of the main arguments presented
were:
OTS should not allow large thrifts to ``design their own
watered-down CRA exams.'' If OTS were to permit this, it would fail in
its responsibility to enforce CRA.
Thrifts would opt to receive a CRA rating based 100
percent on lending performance, leading to a decrease in services and
investments by savings associations. For example, allowing thrifts to
eliminate the investment test would mean that they would not have to
finance affordable rental housing through Low Income Housing Tax
Credits or small businesses through equity investments. Allowing
thrifts to eliminate the service test would mean that they would not
have to place or maintain branches in low- and moderate-income
communities and could ignore the need for remittances and other low-
cost banking services.
CRA has been effective because the Agencies have issued
regulations in a careful and uniform manner. OTS acted alone in making
the streamlined examination for small institutions available to
institutions between $250 million and $1 billion in assets without
regard to holding company size. They asserted that OTS was again acting
unilaterally and without the benefit of interagency debate, this time
to weaken the examination requirements for institutions over $1 billion
in assets.
The Consumer Comments elaborated in various ways on these
arguments:
Some emphasized the harmful national impact they expect
the proposal would have if finalized. One commenter estimated that the
large thrifts impacted by the proposal control 87 percent of thrift
assets and that thrifts with assets over $1 billion hold CRA
investments of $1.3 billion. It projected that the assigned ratings
proposal would reduce the level of CRA investments by more than 50
percent. It indicated that if other regulators followed suit, the
impact would be even more dramatic.
Some argued that large institutions have substantial room
for improvement on their CRA performance and criticized OTS's oversight
of large institutions. One reported performing a sampling of thrifts
from which it concluded that a sizeable minority of thrifts does not
engage in community development lending at all. It speculated that, but
for the investment test, these thrifts would offer no community
development financing. Another provided data from which it concluded
that large institutions proportionally offer fewer full service offices
in low-or moderate-income (LMI) communities than smaller institutions
in certain service areas. Some expressed concern that because the
current rules give equal consideration to purchased loans and directly
originated loans under the lending test, an institution that would
elect to base its rating 100 percent on lending could receive an
``outstanding'' or ``satisfactory'' rating without any direct presence
in LMI markets, further noting that the same loans can be bought
several times by numerous institutions to boost their perceived CRA
performance.
Some asserted that the change was unnecessary, since OTS
has already established a mechanism to account for the home loan focus
of thrifts through their ability to concentrate on community
development lending. One further concluded that the Home Owners' Loan
Act's investment limits do not disadvantage thrifts under the
investment component because even thrifts that receive ``outstanding''
ratings on investments have investment levels below the investment
limits.
Some recommended alternative ways OTS could change CRA
performance evaluations. One suggested that OTS could revise the
current structure of the investment test to award more points for
difficult investments that require patient capital or earn below market
rates of interest. It also argued that the service test should be made
more rigorous by requiring data disclosures on the number and
percentage of checking and savings accounts for LMI borrowers and
communities and use it as a straightforward measure of responsiveness
to deposit needs.
Many Consumer Comments also addressed an issue covered in the
EGRPRA interim final rule. They asserted that it would reduce vital
opportunities for community groups and thrifts to meet with OTS to
discuss CRA and anti-predatory lending matters when thrifts are merging
because it would allow OTS the discretion to hold only one meeting,
instead of two. Since this issue pertains to a separate rulemaking, it
is not further discussed in this Supplementary Information section.
Comments from elected officials included one from 28 members of the
House of Representatives (including 13 members of the Committee on
Financial Services), who filed a joint letter urging OTS to withdraw
the proposal. They called upon OTS to continue to fully evaluate all
large retail institutions on their lending, service, and investment
performance. They expressed concern that permitting institutions to
choose whether to provide services to, or make investments in, the
communities in which they are located will encourage them to
concentrate on whatever is ``easiest'' to do, regardless of the
communities' needs. They recommended that OTS instead expand the range
of appropriate activities that qualify for CRA credit, such as
remittances under the service test, and complex housing investments
under the investment test. Several Representatives and a Senator wrote
separately to voice their opposition to the proposal, raising similar
concerns.
Several state and local government officials also wrote to oppose
the proposal, citing similar reasons. These included a joint comment
letter from 45 mayors and another from 50 members of the New York State
legislature.
A few financial institutions and one industry trade association
also opposed the proposal (or various aspects of it), explaining that
the current rule strikes the appropriate balance between regulatory
burden and compliance under the CRA. They expressed particular concern
about the lack of uniformity among regulators. One industry trade group
supported the ``spirit'' of the proposal and the goal of increasing
flexibility, but opposed the proposal based on this lack of uniformity.
It asserted that the lack of uniformity would increase regulatory costs
and burdens, particularly at institutions that have multiple charters,
necessitate revisions to the interagency CRA Qs&As, introduce
artificial distinctions between the activities conducted by
institutions with different charters, and hinder the ability to compare
CRA performance among institutions.
One large holding company with both thrift and bank subsidiaries
argued that providing a choice of weights would decrease an
institution's ability to internally monitor its performance and would
make comparisons among institutions more difficult through the
[[Page 10028]]
lack of uniformity. A couple of other financial institutions that are
not chartered by OTS and not subject to its version of the CRA rule
also opposed the proposal.
C. Commenters Supporting Proposal
Most financial institutions and industry trade groups commenting,
on the other hand, strongly supported the proposal and praised OTS's
efforts to innovate. They explained that the proposal would inject
flexibility into the CRA process, allow thrifts to better serve their
communities by allowing them to focus resources where they are most
needed, and eliminate unnecessary regulatory burden.
Some explained how the assigned ratings changes would be consistent
with CRA. They pointed out that the primary focus of the CRA is on the
provision of credit, as reflected in the wording of the statute itself,
and pointed out that the CRA statute itself does not mandate the
service and investment tests. Some cited legislative history to further
support a lending focus.
Some of the main arguments presented were:
The weights in the current CRA rule are inappropriate. The
50 percent weight for lending is too low for traditional thrifts and
forces depository institutions into other activities where they may not
have sufficient expertise. The 25 percent weight for investments forces
institutions to seek out risky or complex investments and other
investments beyond their expertise.
The way ratings are currently assigned is not sufficiently
flexible. The current service test does not offer sufficient
flexibility to thrifts that do not offer transaction-based accounts.
CRA does not adequately accommodate institutions that exclusively
employ alternative, non-branch delivery systems as their primary
distribution channel. The proposal would be consistent with CRA by
allowing OTS to give due consideration to the unique factors applicable
to each depository institution, taking into account regional
differences, and the varied business models and product offerings.
Several Financial Institution Comments addressed the specific
questions that OTS had also included in the preamble to highlight
particular aspects of the proposal:
Several trade associations projected that allowing
alternative weights would increase the importance of lending and
increase the provision of credit to the community, consistent with the
CRA statute.
Some projected that allowing alternative weights would not
change the level of lending, investment, and service in the community.
Some reasoned that community banks of all sizes are committed to
meeting the needs of their communities through community service--not
because it is necessary to satisfy CRA compliance requirements--but
because it is good business. Several argued that, notwithstanding the
fears expressed by consumer commenters, it is extremely unlikely that
any large institution would adopt a matrix based solely on lending. One
form letter submitted by many financial institutions asserted that
community banks would not change the way they do business or reduce the
volume of loans, but what they could do, particularly those in rural
areas, would be to stop investing in statewide or regional projects
that actually take resources away from the institution's local
community.
Several supported continuing to require at least a 50
percent weight for lending, as being consistent with the purposes of
the CRA, though one opposed this requirement in the interest of greater
flexibility. A few trade associations commented that they did not think
it would be necessary for OTS to otherwise impose restrictions on the
weight choices, since doing so would reduce the rule's flexibility. A
few Financial Institutions Comments specifically encouraged OTS to
provide examples as guidance, as in the proposal.
A couple supported continuing to require that an
institution must receive at least a ``low satisfactory'' rating in
lending to receive an overall ``satisfactory'' rating. They indicated
that this requirement is consistent with the emphasis on returning to
the core requirements of the CRA, i.e., the institution's record of
helping to meet the credit needs of the entire community.
None preferred eliminating the investment test to the
alternative weight proposal. Several specifically opposed the
elimination of the investment test as an alternative, noting that the
alternative weights proposal would provide flexibility to all large
retail savings associations, including those that may wish to make
investments and have their performance evaluated under the investment
test. One argued that eliminating the investment test would reduce the
variety of mechanisms available to institutions to meet their CRA
responsibilities. As a result, this change would actually decrease the
flexibility that institutions have to serve their communities.
Some trade associations suggested that concerns about
uniformity were overstated, noting that the Agencies are not required
to have uniform rules on CRA. One benefit of departing from uniformity
might prove to be that differences produce successful and innovative
solutions to community reinvestment issues. Others favored obtaining
greater uniformity by having the other regulators adopt OTS's approach.
V. Today's Final Rule
Having carefully considered the comments, OTS has decided to
provide additional flexibility in assigning CRA ratings to encourage
large retail savings associations to focus their community reinvestment
efforts on the types of activities the communities they serve need,
consistent with safe and sound operations. The final rule revises the
manner in which ratings are assigned to reduce burden and restore the
focus of CRA to lending.
As discussed in Part II.A. of this SUPPLEMENTARY INFORMATION
section, the statutory language and legislative history of CRA confirm
its appropriate lending focus. Given OTS's responsibility to evaluate
an institution's performance in meeting credit needs, we believe it is
appropriate to allow institutions to be evaluated with greater emphasis
on lending than at present. At the same time, in recognition of the
value to communities of investments and services, OTS is not mandating
any decrease in the emphasis given to investments or services in an
evaluation. In fact, today's final rule provides flexibility for
savings associations evaluated under the large retail institution test
to opt to be evaluated with the same or greater emphasis given to
either investments or services than at present. Savings associations
that do not want alternative weights do not have to do anything
differently, as today's final rule contains no mandatory changes in the
way savings associations are evaluated.
A. Regulatory Changes
The final rule adds a new paragraph to OTS's CRA rule (12 CFR
563e.28(d)) to reflect that savings associations subject to the large
retail institution test may elect alternative weights for the lending,
investment, and service components. In keeping with the proposal, a
savings association may elect alternative weights for lending, service,
and investment, so long as lending receives no less than 50 percent
weight and, of course, the weights total 100 percent.
[[Page 10029]]
The requirement that lending receive 50 percent weight is not
codified in the current CRA rule, only in implementing materials.
Accordingly, OTS is continuing that approach with respect to the
requirement that any alternative weights selected accord a minimum of
50 percent weight to lending. OTS will incorporate that specification
and other technical details for implementing alternative weights into
guidance that it will issue separately.
OTS believes that a minimum of 50 percent weight to lending is
appropriate for purposes of the large retail institution test,
consistent with the traditional and appropriate emphasis on lending.
OTS notes, however, that savings associations that may wish to place a
different emphasis on their CRA efforts might consider submitting a
strategic plan under Sec. 563e.27 of OTS's CRA rule. While that
regulation provides that a savings association, other than a wholesale
or limited purpose institution, generally is to address all three
performance categories (lending, investments, and services) and
emphasize lending and lending-related activities, it also indicates
that a different emphasis is possible. The regulation states, ``[A]
different emphasis, including a focus on one or more performance
categories, may be appropriate if responsive to the characteristics and
credit needs of its assessment areas(s), considering public comment and
the savings association's capacity and constraints, products offerings,
and business strategy.'' 12 CFR 563e.27(f)(1)(ii).
New Sec. 563e.28(d) further provides that the principles in Sec.
563e.28(b) will not apply to the extent of any inconsistency with
alternative weights selected. Thus, for example, the principle in Sec.
563e.28(b)(2) stating that a savings association that receives an
``outstanding'' rating on both the service test and the investment test
and a rating of at least ``high satisfactory'' on the lending test will
receive an assigned rating of ``outstanding'' will not apply to a
savings association that chooses not to have OTS give weight to
services and investments. (Likewise, the CRA Qs&As will not apply to
savings associations regulated by OTS to the extent of any
inconsistency with today's final rule or any implementing guidance.)
OTS is also making a conforming change to Sec. 563e.21(a)(1) of
its CRA rule to avoid any misimpression that OTS will continue to
always apply all three components of the large retail institution test
to savings associations assessed under that test. Under today's final
rule, OTS will continue to apply the lending test to all savings
associations evaluated under the large retail institution test. But
whether OTS will apply the investment and service tests will depend
upon whether the savings association elects optional weights and
whether those weights entail consideration of these tests. Accordingly,
OTS is revising Sec. 563e.21(a)(1) to indicate that OTS applies the
lending, investment, and service tests to the extent consistent with
Sec. 563e.28(d), the provision allowing savings associations to elect
alternative weights. If no weight is selected for service and/or
investment, OTS will not rate that component or components.
OTS is not making any change to the performance context regulation.
However, OTS examiners will take the weights selected into
consideration as part of each savings association's performance
context. All else being equal, a savings association that opts for OTS
to give greater weight to any particular component than would apply
under standard weights will be expected to exhibit stronger performance
on that component than it would under standard weights in order to
receive the same rating. At the same time, a savings association that
opts for OTS to give lesser weight to any particular component than
would apply under standard weights will not be expected to exhibit
performance as strong on that component as it would under standard
weights in order to receive the same rating. The performance context is
sufficiently flexible, without regulatory change, for OTS examiners to
take into consideration differences in weight allocations that
different savings associations may elect as part of existing
performance context factors such as institutional capacity. See 12 CFR
563e.21(b).
For savings associations that do not elect alternative weights for
lending, service, and investment, OTS will continue to apply the
Component Test Rating chart in Part II.D. of this SUPPLEMENTARY
INFORMATION section to assign component ratings that reflect the
institution's lending, investment, and service performance and
calculate the composite rating using the Composite Rating matrix in
Part II.D. of this SUPPLEMENTARY INFORMATION section. These are the
same Component Test Rating chart and Composite Rating matrix as have
been in place since 1995. For savings associations that elect
alternative weights, OTS will issue separate guidance detailing the
methodology for assigning ratings.
OTS has considered that providing flexibility to savings
associations to choose alternative weights will decrease uniformity if
the other Federal banking agencies do not provide the same type of
flexibility for the institutions they regulate. However, OTS does not
anticipate that this decrease in uniformity will cause significant
complications. For example, if a thrift and a bank are under the same
holding company and both institutions want to continue to have the same
weight allocations used in their examinations by their respective
regulators, the thrift can simply refrain from opting for an
alternative weight allocation.
B. Using Existing Procedures
A savings association evaluated under the large retail institution
test will be able to elect weights, much in the same way as it may
currently elect consideration of other activities under CRA, such as
lending by an affiliate or consortium, or investments or services by an
affiliate, as discussed in Part III of this SUPPLEMENTARY INFORMATION
section. This has proven to be a simple and efficient procedure. OTS
intends to revise the PERK package shortly to provide a specific
optional question soliciting the institution's alternative weight
designation, if any, just as there are currently optional questions for
lending by an affiliate or consortium, or investments or services by an
affiliate. Any necessary updates to examination procedures will also be
made.
Savings associations that wish to opt for an alternative weight for
lending, service, and investment, will be able to do so effective with
examinations beginning the second quarter of 2005. Until the PERK is
revised, savings associations with examinations noticed for the second
quarter of 2005 or thereafter may still elect alternative weights
through their responses to the existing PERK information requests. PERK
008L (12/2004), ``Community Reinvestment Act Information--Large
Institutions,'' already provides that an institution is welcome to
provide information not listed in the PERK relevant to demonstrating
the institution's performance.
By enabling savings associations to elect optional weights through
the PERK, CRA examinations will become more efficient. Savings
associations that opt for no weight to the investment test and/or
service test will not have to provide information pertaining to that
component or components as part of the CRA examination and OTS
examiners will not have to evaluate such information, except as the
information may relate to the performance context.
[[Page 10030]]
C. Anticipated Effect on Community Development
Commenters have furnished little evidence on the proposal's effect
on community development. The proposal's opponents predict that
allowing alternative weights will result in a decrease in services and
investments by large thrifts, and that this decrease will have an
adverse impact on community development. These predictions are
speculative. Supporters make contrary predictions that large savings
associations will continue to provide community development services
and investments and are extremely unlikely to adopt a matrix based
solely on lending.
Rather than rely on such predictions by opponents or supporters of
the proposal, we have focused on the common-sense economic principle
that allowing a savings association greater freedom to specialize in
those things at which it is relatively more efficient should result in
more, not less, real community development being delivered. Part of the
idea behind allowing alternative weights is to not force a savings
association to provide a service or make an investment that it cannot
do efficiently--or that may not even be a central part of its business
plan--and to encourage it to engage in activities at which it is
relatively more efficient (i.e., where the savings association has a
comparative advantage). By encouraging each savings association to meet
its community development obligations through activities at which it
excels, OTS anticipates gains in economic efficiency deriving from
specialization. And these gains, in turn, will result in more
effective, not less effective, community development.
This added flexibility--permitting a savings association to focus
its community reinvestment efforts on activities that it does well--
also serves the important goal of helping to assure that the savings
association meets its community reinvestment obligations in a manner
consistent with safe and sound operations. Common-sense dictates that
experience and expertise contribute to safe and sound operations.
VI. Regulatory Analysis
A. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995, OTS may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid Office of Management and Budget (OMB) control number.
This collection of information is currently approved under OMB Control
Number 1550-0012. This final rule does not change the collection of
information.
B. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities and will not impose
any additional paperwork or regulatory reporting requirements. This
final rule relates only to the treatment of savings associations under
the retail test mandated only for large institutions.
C. Executive Order 12866 Determination
OTS has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
D. Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. OTS has determined that this
rule will not result in expenditures by State, local, and tribal
governments, or by the private sector, of $100 million or more.
Accordingly, OTS has not prepared a budgetary impact statement nor
specifically addressed the regulatory alternatives considered.
List of Subjects in 12 CFR Part 563e
Community development, Credit, Investments, Reporting and
recordkeeping requirements, Savings associations.
Office of Thrift Supervision
12 CFR Chapter V
0
For the reasons outlined in the preamble, the Office of Thrift
Supervision amends part 563e of chapter V of title 12 of the Code of
Federal Regulations as set forth below:
0
1. The authority citation for part 563e continues to read as follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1814, 1816,
1828(c), and 2901 through 2907.
0
2. Revise Sec. 563e.21(a)(1) to read as follows:
Sec. 563e.21 Performance tests, standards, and ratings, in general.
(a) * * *
(1) Lending, investment, and service tests. The OTS applies the
lending, investment, and service tests, as provided in Sec. Sec.
563e.22 through 563e.24, in evaluating the performance of a savings
association, except as provided in paragraphs (a)(2), (a)(3), and
(a)(4) of this section, and to the extent consistent with Sec.
563e.28(d).
* * * * *
0
3. Amend Sec. 563e.28 by:
0
a. Removing ``paragraphs (b) and (c) of this section'' in paragraph (a)
and by adding in lieu thereof ``paragraphs (b), (c), and (d) of this
section''; and
0
b. Adding a new paragraph (d) to read as follows:
Sec. 563e.28 Assigned Ratings.
* * * * *
(d) Savings associations electing alternative weights of lending,
investment, and service. A savings association subject to the lending,
investment, and service tests may elect alternative weights for
lending, service, and investment. The principles in paragraph (b) of
this section do not apply to the extent of any inconsistency with the
alternative weights selected.
Dated: February 24, 2005.
By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 05-4016 Filed 3-1-05; 8:45 am]
BILLING CODE 6720-01-P