Am I thinking right here?

We became a large bank under existing rules on January 1. In anticipation, I trained my staff to recognize community development loans as loans with a community development purpose that aren't counted as small business / small farm on the LAR (i.e. over $1 million), with some exceptions.

If we revert to an intermediate bank under the proposed new FDIC rule, 1) we'll be evaluated as a small bank; 2) we'll no longer have to report small business / small farm deals on a LAR; 3) we'll be subject to a community development test; and 4) community development loans will still have some CD benefit but can be of any amount.

Therefore - I'll need to retrain my recently trained lenders to ignore the $1 million threshold and think solely about whether the community development bar has been cleared.

Have I got my head sufficiently around the dollar threshold issue here?

Also (and I realize this hasn't been addressed in the proposal), any idea what they'll require for large bank data collected year-to-date? Obviously, this will be a part of my comment letter...

I appreciate your thoughts -

My advice...DON'T CHANGE ANYTHING! This is just a proposal, one of several we've seen. If you train your lenders to think it's real, then it isn't, you're going to look like an idiot in their eyes. Waste of their time and yours.

Act like you are what you are today. That means a large bank from what I read.

I'm confused on "what" you're looking to for CD loans. A CD loan can be ANY size, as long as it's not a type 1 or 2 loan on your CRA LR. I submit deals as small as $1M (that's one thousand) and as large as $32MM (million). The deals don't qualify as type 1 or 2, so I can then look to them for CD purpose. They could include a corporate credit card issued to a food bank, or the construction of a new airport. So, in working backwards on your numbered list, I think item 4 needs some work.

Item 3, (I'm feeling very backwards today) maybe don't change your life until you know what that CD test is. It could be that you can meet it with CD lending instead of investments, it could be that you have to invest a certain percentage of net tier one and you're screwed, it could be that opening a branch in Kmart will meet the CD test...you don't know, so don't focus on it until it's reality.

2, see item 3. Plan on reporting as you are required to do now. I'm reading something between item 2 and 4 as well though. You're thinking you can report any deal that has CD value, despite it's CRA LR designated reportability IF you don't have to submit a LR right? The terminology is "reportable" not "reported". Just because you're not submitting a LR does not mean you can take CD credit for deals that I can't. Again, wait for the reg, but I'd be highly suprised if this was the case. It wouldn't allow a level playing field. I'd be up in arms about this if you were allowed to do this.

and rule 1) wishful thinking at this point. Keep up the work you're doing now.

If the reg changes, you have no idea how they'll implement. I would expect that they will make an effort to allow inclusion of CD efforts a bank has made, despite their reporting requirements if they did so under the current operating rules. The transition will probably allow inclusion of these deals so your time is not wasted. How peeved would I be if I found out the $100MM in CD lending I searched for last month was all a waste of time? VERY!!! I'd also be upset because my CD lending is a focus because of my lack of investment opportunities. They wouldn't slap me on the hand for no CD investments when I've done this level of CD lending, even with a regulatory change. They'd expect me to change during the period of the next exam, but you can bet they'll work in some provisions for what you're dealing with now in the upcoming exams of banks this change impacts.

Thanks, Dawnie - good food for thought, as always.

First of all, no one is changing anything here or doing any retraining (yet). We became a large bank 1-1-05 & will stay that way until this gets sorted out. However, management & directors continue to ask for updates & potential effects, and I want to make sure I'm providing sound guidance.

Secondly (and I could've been more clear here), I'm looking at the specific impact this will have on my particular situation with the intention of developing a comment letter that's targeted and not generic boilerplate. Two critical issues for us are implementation date and potential retraining of staff / realignment of procedures.

So let's look at a specific example - as a large bank, I'd list a $900,000 loan meeting the appropriate call report definitions as a type 1 small business loan. If that loan had community development characteristics, I couldn't double-count it on both the small business LAR and also the community development section of the annual report (as I understand the rules).

If the proposal is adopted, I would no longer complete a CRA LAR; and this $900,000 loan with CD overtones would be considered a community development loan. Your comment "The deals don't qualify as type 1 or 2, so I can then look to them for CD purpose" no longer has relevance - as I need to look at ALL loans (regardless of amount) in order to determine community development applicability.

If that's true, then the implication is that AT SOME POINT, I'll need to retrain staff at some cost to the bank. And my comment letter will ask for some guidance & offer some suggestions about that topic.

I think the heart of the question is this, especially as it relates to the level playing field argument: Does an intermediate bank identify & take credit for community development loans within the large bank structure (i.e. excluding those loans that would otherwise be counted as type 1 or 2 on the LAR); or does an intermediate bank apply the community development test to all loans regardless of large bank rules & amounts?

What do you think?

I've been reading my heart out and find holes in the reg that need to be answered. How unlike the feds to put out a reg that has questionable areas huh?

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Secondly (and I could've been more clear here), I'm looking at the specific impact this will have on my particular situation with the intention of developing a comment letter that's targeted and not generic boilerplate. Two critical issues for us are implementation date and potential retraining of staff / realignment of procedures.

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Implementation date will be whenever the darned thing finally passes. It could take a few years. How this affects you is based a bit on your last exam. When is the next one scheduled (approximately) and how much of that period will be under the old rules? If the majority of it is old rule, you'll find your exam will probably lean on that period for a result. If the majority is new rule, same deal, based on the new rule (whatever that is) but, you can bet your cahoonies that they'll allow for some consideration of both rules in the exam. How easy is that to prepare for? It sucks I just finished my exam. 50% of the exam was 1990 census and 50% was 2000 census, but then you throw in the new HMDA data...well it threw the entire exam off. I had to provide two preformance context's (one for each period) and we basically threw out HMDA for 2004. It could be possible you end up in the same boat

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So let's look at a specific example - as a large bank, I'd list a $900,000 loan meeting the appropriate call report definitions as a type 1 small business loan. If that loan had community development characteristics, I couldn't double-count it on both the small business LAR and also the community development section of the annual report (as I understand the rules).

If the proposal is adopted, I would no longer complete a CRA LAR; and this $900,000 loan with CD overtones would be considered a community development loan. Your comment "The deals don't qualify as type 1 or 2, so I can then look to them for CD purpose" no longer has relevance - as I need to look at ALL loans (regardless of amount) in order to determine community development applicability.

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This is the grey area of the reg. It just isn't clear in any of this documentation (how and what you'll be able to take). If you're writing a letter, ask for this to be considered (clarification) because right now, it's not covered. What I think is that it would be wrong to allow the intermediates to take CD credit for deals that are otherwise reportable, but again, it's not covered in this reg suggestion, so we're just going to have to wait. Maybe I have to get off the stick and write a comment letter as well

One thing you have to worry about (if this is adopted) is the CD test. Many smaller banks take this test with little seriousness. I'm sure if you're read my goober posts in the past you'll know I spend a great deal of time on mining the CD activities we provide at my bank. This is a pretty time consuming process. If this change goes through, CD will not be something to sneeze at. If you fail that test, you can fail your exam. I predict you'll see many banks struggle with this, and it might show in the ratings in a few years.

I don't think that retraining your folks on finding CD lending is a huge area to hipe on though. While the list of what loans qualify might change (ie those type 1 and 2 deals) you still would be looking to the same basic group of deals. It's going to be a "size matters" review, with focus on the big deals (that just makes sense, more bang for the buck and all) then a review of the smaller deals if time allows. The loan to Harry to open a garage is still most likely not going to count. You can easily filter your loans to non-profits out and look for CD credit now, and the multi-family deals are always worth reviewing. I don't even see a change in my write ups for that rural inclusion. I take credit now if the deals are affordable, even in middle income tracts. They'll just make it a tad bit easier to reason it out, but right now, you could be making a case that they're CD without this regulatory change.

I agree - allowing an intermediate bank credit for a CD deal that would otherwise be reported as a small business loan is not fair.

As to exam timing, our regional supervisor told me last week that he's expecting to send a team here in the July / August timeframe. This will be a small bank examination.

Thanks for taking the time to hash this out!

We just finished our first large bank exam and we are caught in the proposed intermediate bank wading pool. We had some CD Loans that I thought we would get credit for because they were at a time that we did not "report" but they were "reportable" had we been a reporter and so could not count them. (We did receive credit for them under innovative/flexible lending test though so all was not lost ).
Now that our exam is over I also want to take to concentrate on a comment letter. One of the examiners said when he was here that the definition of "rural" was open for comment...any suggestions as to the best way to define that or a cited guidance somewhere to go by? The examiner also mentioned that the examination schedule was not a part of the new proposal but encouraged to write in suggestions if we would like to see it included.

I'm not at odds with the current exam schedule so I wouldn't have anything to say about that. As to the rural, it's hard to define because it has many issues involved. I'd say "anything in a 9999 MSA" because for me, that means anywhere we have hub cities that are middle income, but serve as hubs for low income communities. But that wouldn't hold true for all.

I like the thought of using the Treasury BEA or CDFI defination. Their calculation is based on income, community need and unemployment rates.

That anonymous was me...I would like to think that rural also was based on distance to major cities etc. I also read in the proposal that they are open to considering an increase in the current MFI percentages. We have hardly any low communities and the moderate ones are few. We do have quite a few that are just above that 80%.

Another thing I read in the proposal is adjusting the bank's asset size annually with the Consumer Price Index such as what is done with HMDA. If a bank is consistently teetering at either the lower or upper end of the new proposed thresholds then how is it possibly going to be relief of regulatory burden if it is "now you are, now you're not"? I understand that the bank's own assets could cause it to fluctuate on its own but throwing in the annual adjustment on top of that would make it even worse IMO.

I like your thinking on rural Shannon, except that would then mean that my 99% of my state would probably be classified as "rural". The other issue is that we shouldn't be qualifying high income communities under this defination (ie a ski resort in colorado?).

Most rural communities have hubs that are middle-income. In my state this is even more common because most of the state is not on the road system. Airports, hospitals, police, etc are all in these rural hubs, but the surrounding area is all low income. Not terribly uncommon, just a bit more unique because of the road issue.