Two major flaws in the Community Reinvestment Act (CRA) NPR that will be detrimental to banks
We continue to be amazed by the number of comments that criticize the Community Reinvestment Act (CRA) Notice of Proposed Rule-making
(NPR) because it allegedly proposes a "single metric". Even FDIC Board member Gruenberg, interprets the proposal as containing a "single metric".What Gruenberg and most of the other commenters are referring to is formally labeled as the "CRA Evaluation Measure" in the NPR. But the CRA Evaluation Measure is by no means the only test that must be passed if the NPR becomes the final rule. In fact, the NPR requires a bank to pass two other tests.
Aside from the CRA Evaluation Measure, banks must pass the "Community Development Minimum" test and a group of tests labeled as "distribution" tests in order to attain at least a "satisfactory" performance rating. A failure to pass either the Community Development Minimum test or any single one of the "distribution" tests will result in a "needs-to-improve" or worse presumptive performance rating.
If the prospect of failing any single CRA performance test isn't daunting enough, the NPR will require a bank to report its "presumptive" performance ratings annually to its supervisory agency! Think about this, if you fail just 1 of the multiple CRA performance tests you will have to report a presumptive performance rating of "needs to improve" or "substantial non-compliance".
Think also about the implications of reporting a less than satisfactory presumptive performance rating! The NPR does not allow a bank to temper its presumptive performance rating by reference to "performance context" factors that may explain the results. The NPR does stipulate that examiners may temper a performance rating by taking into consideration performance context factors, but your exam may not happen for 2-3 years after you report your presumptive performance rating.
What will happen if you have plans to open a new branch or acquire another bank, but you've reported a less than satisfactory presumptive performance rating? Will the OCC or FDIC mandate an on-site evaluation of CRA performance before approving a new branch or bank acquisition? No one knows because this is not clear in the NPR.
Another major flaw in the NPR is the new rigid restriction on how an Assessment Area is delineated. The NPR will mandate unrealistic Assessment Area boundaries that will make it difficult if not impossible for many banks to meet performance expectations driven by unrealistic performance context factors which, in turn, are driven by unrealistic Assessment Area delineation. How you delineate your Assessment Area is the single most important factor driving performance standards. Until now, banks could adjust their Assessment Area(s) to reflect only the area they "could realistically be expected to serve". But that flexibility will be removed if the NPR becomes the final rule. This will be a disaster for many banks.
The foregoing are only 2 major flaws in the NPR. You can be sure the community advocates are not objecting to the NPR for those reasons!
We encourage bankers to send in comments so the agencies will get a balanced perspective from both sides of the controversy.
Speak now, or, "forever hold your piece".