Financial Institution Challenges CRA Ruling? And Wins

Financial Institution Challenges CRA Ruling?And Wins

When Chief Executive Officer Carl Schmitt's University National Bank and Trust Company was given a "needs to improve" CRA rating by the OCC, he refused to accept it.

By challenging the regulator, and winning, he has possibly helped other community banks who are in the same position.

University National B & T is located in Palo Alto, California. It is 14 years old and has $406 million in assets, 2 branches, and 143 employees.

Following a procedure now available to financial institutions regulated by OCC, when his institution was given a "needs to improve" CRA rating, he appealed the score to the OCC regional office.

He prepared carefully for his appeal.

The OCC examiners said that 20% of the institution's delineated community had only 6% of its loans. Mr. Schmitt hired Secura Group to help prove the methodology OCC was using was wrong. They argued that just because a loan is not in a "designated" area doesn't mean it's not a CRA credit. By using other loans that qualified and including small-business loans in the total, Secura found more than 31% of University National's credits to be CRA related.

The regional office denied the appeal, standing behind the original findings.

CEO Carl Schmitt then went to OCC's ombudsman-a position that came into being under Comptroller Eugene Ludwig. The ombudsman found in favor of the bank, and raised the rating to "satisfactory."

The CEO and the Board of Directors of University National B & T is now in the process of converting from a national bank to a state charter, in order to avoid future clashes with OCC.

Many conflicts between regulators and small, community financial institutions have developed because of the way regulators interpret loan portfolios. One of University National's board members, who approves of the principle of CRA, was quoted as saying, "I don't think the law was designed to deal with a bank like ours, but a large chain bank. When CRA is applied to us, it doesn't make any sense."

By taking the stand that he did, and winning, Carl Schmitt may have shown the way for others with the same problem.

Copyright © 1994 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 4, No. 11, 6/94