A Ray of Sunshine for CRA?

It's out. The new CRA in the Sunshine rule has been published by the banking agencies. And it took effect on April Fool's Day!

There are changes - including some significant ones - from the proposal. The changes were intended to clarify some of the grey areas and make compliance as effortless as possible. The primary refinements deal with the definition of covered agreements. There are also changes to the reporting procedures. The rule is presented as a regulation with examples. This has the effect of incorporating guidance similar to that of a commentary into the single document of the rule.

Acronyms abound. It is no longer enough to talk about CRA, LMI areas and G-L-B. Now there are IDIs (insured depository institutions) and NGEPs (non-governmental entity or persons.)

Covered Agreement
The definition of covered agreement in the final ties more closely to true CRA discussions and the bank's CRA program. The proposed rules's broad inclusion of anything touching on CRA is replaced in the final rule with a process that is managed by the bank's CRA program. Thus, conversations and loan agreementthat take place spontaneously in the commercial lending department - and happen to mention CRA in the process - would not be subject to the new sunshine rule.

A CRA agreement must involve at least two parties: an IDI and a NGEP. Without one of these entities involved, the test is not met. And the agreement must be in writing. To be covered by the regulation, the agreement must involve at least one IDI and one NGEP. The agreement may involve multiple parties as well.

The agreement must be for purposes of "fulfillment of the CRA." This means that it must involve lending, investments, or services that would be considered for purposes of evaluating performance under CRA. Alternatively, an agreement would be covered if it was conditioned upon providing or refraining from providing CRA-related comments or testimony to the IDI's regulator.

The agreement could involve payment of money or other consideration, or the making of one or more loans. Individual loans, based on market rates or near market rates, would not, by themselves, trigger the sunshine rule. This concept is designed to avoid coverage of lending that is not triggered by specific CRA requests or agreements but is instead part of the bank's ordinary business practice.

Agreements follow - or must be preceded by - a CRA communication. This communication becomes the trigger for the rest of the regulation. An agreement with all of these elements but without a CRA communication would not be covered by the new rule. This does not mean that there would be no CRA credit for the activity; simply that there would be no reporting.

CRA Communication
The final rule provides a finer and clearer line on what constitutes a CRA agreement. In spite of the clarification, there is still plenty of room for confusion.

A CRA communication involves one or more of five actions:

providing comments to the regulatory agency on the IDI's CRA performance,
submitting a written CRA comment to the IDI,
contacting the IDI about providing comments or testimony on CRA performance,
contacting the IDI about providing written CRA comments that would be included in the IDI's public file, or
contacting an IDI about the adequacy of the CRA performance of the IDI or any affiliate.

The first type of communication involves comments to the regulatory agency. The other four categories include verbal or written comments, and non-written communications that essentially announce the intent to comment. This latter approach could be used as a negotiating tool but would be sufficient to trigger the communication necessary to bring coverage on any subsequent agreement.

Statements made in a context unrelated to the bank or the regulatory agency about the bank, such as general statements about a bank's CRA record in a public setting, would not be a CRA communication. The new rule would limit the triggering communications to those which involve more specific actions.

CRA fulfillment
Agreements and communications are covered if they are related to the fulfillment of the CRA. This includes any activities that would be considered favorably or given weight in the bank's CRA examination. Loans, including community development loans and small farm and small business loans, investments, and services would all be potential topics for agreements.

Disclosures and Reporting
The final rule simplifies the disclosure and reporting. For example, placing an agreement in the CRA public file would be sufficient as disclosure to the public. However, both the IDI and the NGEP must make a copy available promptly to any individual or entity upon request. There may be a reasonable charge for copying.

The essential information to disclose includes the names and addresses of the parties to the agreement, the amount of monies to be paid, loaned, or granted or any other consideration, the planned use or uses of the funds, and the term of the agreement. The parties must also disclose any other information that may not be withheld.

Some information may be withheld. The test for this is fairly stringent: if it is information that could be withheld by the agency under the Freedom of Information Act, then the NGEP may request that it be withheld from public disclosure.

Both the IDI and the NGEP must provide information to the IDI's supervisory agency. The IDI must automatically provide the agency with a copy of the agreement within 60 days of the end of the quarter in which the agreement was reached. NGEPs would only be required to provide copies to the agency in response to the agency's request.

Both the IDI and the NGEP will have to file annual reports with the agency. The NGEP must file for any year in which it receives or uses funds or resources under the agreement. The report will include detailed information describing how the funds were spent. The IDI would report amounts paid and how those amounts were to be used according to the agreement.

Enforcement and Penalties
No regulation is complete without provision for enforcement and penalties and this regulation includes them. One interesting difference in this regulation is that penalties fall on non-bank organizations (NGEPs) that fail to comply.

Willful noncompliance by a NGEP will be noted by the agency and the NGEP will be given 90 days to comply. Willful noncompliance is most likely to involve a failure to report information as required. If the NGEP's noncompliance continues, the agreement will be unenforceable. However, if the noncompliance involves "diversion of funds" by the NGEP the consequences will be more severe. The NGEP will be barred from being a party to a sunshine agreement for as long as ten years.

Barring the NGEP from the agreement does not relieve the bank of compliance with the agreement. The agencies will assist the bank in finding new parties to step into the agreement.

ACTION STEPS

Compile information - comprehensive - on all contacts with individuals or groups that meet the regulation's definition of "non-governmental entity or person" and that involve CRA.. Review this and decide whether you need to establish a tracking system for contacts subject to CRA in the Sunshine.
Consider the content - as it relates to CRA's three tests - of contacts, communications, and agreements with third parties and determine which would be subject to the rule.
Review the information you have compiled and draw up a list of everyone in the bank who has had or may have a CRA communication or be involved in a CRA agreement. They all need to know about this new rule.
Schedule a briefing session for the board and all affected staff - those that may be involved in CRA communications and CRA agreements.
By April 1, 2001 you need to be ready to go live.