I would like to start a thread that addresses 3 elements of the revised CRA. The first issue is the "savings" bankers think they will achieve by the relief from annual reporting. What savings do you expect to achieve as an intermediate-size bank and what offsetting costs you will incur to maintain some type of on-going self-assessment process? Also, since the intermediate-size PE REQUIRES a "satisfactory" on COMMUNITY DEVELOPMENT activities, what additional expense do you expect to incur as a result of this mandate (additional time contacting community organizations, below normal rates of return on CD loans or investments or services, etc.)?
Second, how do you feel about your ability to achieve a satisfactory rating on community development activities?
Third, are you considering exercising your option to continue to be examined under the large bank standards in effect since 1995?

My company has reviewed available public data and found the following interesting observations:

1 - 775 of about 2100 reporting "large bank" lenders reported NO COMMUNITY DEVELOPMENT LOANS for the latest year data is available. More than 1,100 lenders (i.e., more than 50%) reported 0-2 CD loans

2- GeoDataVision reviewed 500 PE's on the FDIC website for banks $1 billion or less and examined as large banks and found that:
(a) 496 had an overall PE of "satisfactory". Of these lenders, 91 (18.2%) had either a "Needs to Improve" or "substantial non compliance" on the Investment Test.
(b) Of the 91 lenders rated below satisfactory on the Investment test, 5 were rated below satisfactory on the Service Test too
(c) Of the 496 lenders with an overall satisfactory PE, 255 (51.4%) were rated low satisfactory on the Investment Test. In other words, more than half the banks with an overall PE of satisfactory were at the low end of satisfactory on the Investment Test;
(d) Of the 496 lenders with an overall satisfactory PE, 5 (1%) had a "needs to improve" rating on the Service test and 174 (35%) were rated "low satisfactory" on the Service Test.

To summarize, more than one-third of reporting lenders haven’t reported any community development loans, almost 20% of a sample (500 FDIC reporting banks) of intermediate-size banks rated overall satisfactory are NI or SNC on the Investment Test and more than 50% are low satisfactory on the Investment Test and 35% are low satisfactory on the Service Test.

Since the Investment Test and Service Test emphasize community development activities, and since there are so many banks not reporting any community development loans, the foregoing data would suggest that many intermediate size banks could be borderline or below with respect to community development activities and might be better off continuing to report and be evaluated as large banks using the same standards with which they have achieved an overall PE of satisfactory rather than risking loss of the overall satisfactory rating under the mandatory community development activities test.

Good observations. Or do you think competition for CD loans will increase as more banks chase CD deals for credit?

If the CD test is mandatory like it is under the new intermediate bank PE standards, it seems to me that the competition will be more fierce than ever, since the intermediate banks MUST have community development activity to pass the CRA PE. Granted, it can be in the form of services, investments or loans, nevertheless the intermediates won't be able to shrug their shoulders and assume they'll get a satisfactory anyway. Of course that also means the "profit" of CD activity will shrink "ceteris paribus" (all things being equal).

In answer to your questions:

1. My management sees the savings in time and money as the lending asst documenting CRA worksheets, loan operations collecting the data and paper. I see that as a savings but the cost will be shifted to someone to identify, documenting, etc. CD opportunties. Result: Burden will be reduced for lenders, increased for others. No savings.

2. I don't feel good at all about our ability to do well on CD test. We have always been very good at meeting the credit needs of our AA, which inclues LMI areas. (That is after all, the purpose of CRA) We do a good job of mortgage lending and we make a LOT of small business/farm loans. Some are VERY small. We struggle, like the banks in your PE survey on CD.

3. I'm considering it but I don't think I can sell management on it. All they can see, from their prior experience as lenders, is less stuff for them to remember.

I really don't know which way to go here.
Sidebar: What does an outstanding CRA rating get you vs. the cost?

Thank you for your response.
You might want to ask Senior Management how they would feel if they receive an NI or SNC on the CD test which would mandate a NI or SNC on the overall PE, especially if there are no real savings. Do they want to bet their entire performance evaluation on community development? Why not suggest an intermediate course of action - continue collecting data for this year while you assess your CD performance opportunities, then make a decision?
By the way, how much do they value the savings as they perceive it - $5000/yr, $10,000 or what?

Savings is substantially over $10M per year. A couple of banks I've chatted with put it in the $40M plus range (one less staff member plus the savings on lender time and software).

And folks...on CD loans. Don't fall into that CRA world where we think we have to give away the bank 99% of my CD loans are NOT below market, in fact, I'm thinking back to the last exam with $111MM in CD loans...the only booked rates below market were tax exempt, which yield above market rates after the tax issue is considered so...really it's no loans at below market rates.

txbkr...I'd agree with Len that the worry should be if you fail CD criteria, it's not how you feel about satisfactory, it's how they feel about below satisfactory. What's the difference between outstanding and satisfactory though? It saves me time on many issues, including being able to approve our own investments, savings with FHLB, ease in opening, and because my peers are outstanding, market pressure. If you're not into rapid expansion, I'd look at your peer banks to answer that question. Is satisfactory where they are as well? How would your community react if you could market the outstanding? For us, that means that we have a leg up with MANY large groups, including muni's, cities, native groups etc.

No one has commented on whats on the last page of the ruling. Does this sound like they have said its OK to do away with data collection.

Comment Request:
Comments continue to be invited on:
(a)Whether the collection of information is necessary for the proper performance of the agencies’ functions, including whether the information has practical utility;

(b)The accuracy of the estimates of the burden of the information collection, including the validity of the methodology and assumptions used;(c) Ways to enhance the quality, utility, and clarity of the information to be collected;

(d)Ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and

(e)Estimates of capital or start up costs and costs of operation, maintenance, and purchase of services to provide information.

It should be further noted that the Estimated Paperwork burden give for the new changes is EXACTLY the same as that given in a January 22,2004 rule making. (OCC Doc No 04-06 RIN 1557-AB98, FRN Doc R-1181 Rg BB) Nothing has been calculated for the additional CD changes. In other words the FRB doesn't have a clue on how many hours it takes to do any of this and has been using the same numbers for several years.