[Federal Register Volume 69, Number 159 (Wednesday, August 18, 2004)]
[Rules and Regulations]
[Pages 51155-51161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18863]



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  Federal Register / Vol. 69, No. 159 / Wednesday, August 18, 2004 / 
Rules and Regulations  

[[Page 51155]]



DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563e

[No. 2004-42]
RIN 1550-AB48


Community Reinvestment Act Regulations

AGENCY: Office of Thrift Supervision, Treasury (OTS).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In this final rule, OTS is revising the definition of ``small 
savings association'' under its Community Reinvestment Act (CRA) 
regulations. Under the revised definition, ``small savings 
association'' means a savings association with total assets of less 
than $1 billion. This definition will apply without regard to any 
holding company assets. This change will permit additional small 
savings associations to be subject to streamlined examinations as well 
as reduced data collection and reporting burdens under the CRA. This 
change is consistent with OTS's ongoing efforts to identify and reduce 
regulatory burden, particularly for smaller institutions. The final 
rule will not relieve small savings associations from other existing 
and ongoing compliance requirements or legal obligations under the CRA. 
At the same time, OTS is withdrawing other changes to the CRA 
regulations that had been proposed.

DATES: This final rule is effective October 1, 2004.

FOR FURTHER INFORMATION CONTACT: Theresa A. Stark, Program Manager, 
Thrift Policy, (202) 906-7054; Richard Bennett, Counsel (Banking and 
Finance), Regulations and Legislation Division, (202) 906-7409, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Introduction

    After considering the comments on a joint advance notice of 
proposed rulemaking (ANPR) published on July 19, 2001 (66 FR 37602), 
and a joint notice of proposed rulemaking (NPR) published on February 
6, 2004 (69 FR 5729), OTS is revising its regulation implementing the 
CRA (12 U.S.C. 2901 et seq.). This final rule revises the definition of 
``small savings association'' to mean a savings association with total 
assets of less than $1 billion (without regard to any holding company 
assets). At the same time, OTS is withdrawing other changes to the CRA 
regulations that had been proposed in the NPR.

Background

    In 1977, Congress enacted the CRA to encourage insured banks and 
thrifts to help meet the credit needs of their entire communities, 
including low- and moderate-income areas, consistent with safe and 
sound lending practices. In the CRA, Congress found that regulated 
financial institutions are required to demonstrate that their deposit 
facilities serve the convenience and needs of the communities in which 
they are chartered to do business, and that the convenience and needs 
of communities include the need for credit as well as deposit services. 
The CRA plays an important role in improving access to credit among 
under-served rural and urban communities.
    On May 4, 1995, OTS, along with the Office of Comptroller of the 
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and 
the Board of Governors of the Federal Reserve System (FRB) 
(collectively, the banking agencies) adopted major amendments to 
regulations implementing the CRA (60 FR 22156). In connection with that 
rulemaking, the banking agencies received a large number of comments 
from small institutions seeking regulatory relief. These commenters 
stated that they incurred significant regulatory burdens and costs from 
having to document CRA performance, and that these burdens and costs 
impeded their ability to improve their CRA performance. The 1995 
regulations reflected the banking agencies' objectives that the CRA 
regulations provide for performance-based assessment standards that 
minimize compliance burdens while stimulating improved performance.
    Under the 1995 rule, an institution is considered small if, at the 
end of either of the two previous years, it had less than $250 million 
in assets and was independent or affiliated with a holding company with 
total bank and thrift assets of less than $1 billion. Under the 
regulations, a small institution's CRA performance is evaluated under a 
streamlined test that focuses primarily on lending. The test considers 
the institution's loan-to-deposit ratio; the percentage of loans in its 
assessment areas; its record of lending to borrowers of different 
income levels and businesses and farms of different sizes; the 
geographic distribution of its loans; and its record of taking action, 
if warranted, in response to written complaints about its performance 
in helping to meet credit needs in its assessment areas.

The 2001 ANPR

    In the 1995 rulemaking, the banking agencies stated that they 
intended to review the CRA regulations in 2002. The banking agencies 
indicated that the regulations would be reviewed for their 
effectiveness in placing performance over process, promoting 
consistency in evaluations, and eliminating unnecessary burden. 60 FR 
22156, 22177 (1995). The banking agencies initiated this review in July 
2001 with the publication in the Federal Register of a joint ANPR (66 
FR 37602). The banking agencies solicited comment on the fundamental 
issue of whether any change to the regulations would be beneficial or 
warranted. They specifically requested comment on eight discrete 
aspects of the regulations. One of those aspects involved small 
institutions and the streamlined small institution evaluation.
    The ANPR explained that some had suggested that the asset 
thresholds for being considered a small institution are too low. Others 
had asserted that holding company assets are irrelevant--if an 
institution has less than $250 million in assets, it should be 
considered small even if it is affiliated with a large holding company. 
Still others had suggested that holding company assets are relevant 
only if the holding company provides support for CRA activities or 
otherwise directs the CRA activities of an institution.

[[Page 51156]]

    The ANPR asked several questions concerning the small institution 
performance standards, including:
     Do the provisions relating to asset size and holding 
company affiliation provide a reasonable and sufficient standard for 
defining ``small institutions'' that are eligible for the streamlined 
small institution evaluation test? If so, why? If not, how should the 
regulations be revised?
     Are the small institution performance standards effective 
in evaluating such institutions' CRA performance? If so, why? If not, 
how should the regulations be revised?

Comments on the 2001 ANPR

    The banking agencies received about 400 comment letters on the 
ANPR. As summarized in the 2004 NPR, most of these comments were 
submitted by banks, thrifts, and their trade associations (``financial 
institutions''), and by local and national nonprofit community advocacy 
and community development organizations (``community organizations'').
    Most small institutions commented that they were satisfied that 
qualifying under the ``small institution'' definition substantially 
reduced their CRA compliance burden. Many commenters, however, argued 
that the small institution performance standards should be available to 
a larger number of institutions. Generally, these commenters raised 
many of the same concerns raised in the 1995 rulemaking. Primarily, 
these commenters argued that the regulatory burden of the CRA rules 
impedes smaller banks from improving their CRA performance. Many 
financial institutions suggested that, to reduce undue burden, the 
agencies should raise significantly the small institution asset 
threshold and eliminate or significantly raise the holding company 
limitation. These commenters cited the burdens on retail institutions 
that are subject to the ``large institution'' CRA tests because they 
slightly exceed the asset threshold for small institutions. Commenters 
asserted that these institutions have difficulty achieving a ``low 
satisfactory'' or better rating on the investment test and, as a 
result, have difficulty achieving an ``outstanding'' rating overall. 
Commenters added that these institutions encounter serious challenges 
competing with larger institutions for suitable investments and, as a 
result, sometimes invest in activities inconsistent with their business 
strategy, their own best financial interests, or community needs. 
Commenters also asserted that data collection and reporting are 
proportionally more burdensome for institutions within a range 
moderately exceeding the threshold than for institutions far above the 
threshold.
    Some commenters asserted that upon exceeding the $250 million 
threshold, institutions face a threefold increase in compliance costs 
for CRA due to the need for new personnel, data collection and 
reporting costs, and the particular burdens imposed by the investment 
test applicable to large retail institutions. They asserted that 
raising the existing asset threshold for small institutions would be 
consistent with the banking agencies' intent in 1995 to avoid 
regulatory burdens counterproductive to the objectives of the CRA. They 
also questioned the benefit of reporting small business and small farm 
loan data, especially by institutions that serve limited geographic 
areas. Some commenters suggested that institutions be relieved of 
reporting such data and that examiners instead sample files or review 
only the data gathered and maintained by institutions pursuant to other 
laws or procedures (for example, the Call Report or Thrift Financial 
Report).
    Financial institutions also commented that changes in the industry 
had rendered the threshold out-of-date. They pointed to the 
consolidation in the banking and thrift industries through mergers and 
acquisitions, and the growing gap between ``mega-institutions'' and 
those under $1 billion in assets. They noted that the number of 
institutions considered small, and the percentage of overall bank and 
thrift assets held by those institutions, has decreased significantly 
since the 1995 revisions. The financial institutions suggested raising 
the small institution asset-size threshold from $250 million to amounts 
ranging from $500 million to $2 billion. They also generally suggested 
eliminating or raising the $1 billion holding company threshold. They 
contended that affiliation with a large holding company does not enable 
an otherwise small institution to perform any better under the large 
retail institution test than a small institution without such an 
affiliation.
    Community organizations opposed changing the definition of ``small 
institution.'' These commenters were primarily concerned that reducing 
the number of institutions subject to the large retail institution 
test--and, therefore, the investment test--would reduce the level of 
investment in low- and moderate-income urban and rural communities. 
Community organizations were also concerned that the reduction in 
publicly available small business and small farm loan data would follow 
a reduction in the number of large retail institutions.

The 2004 NPR

    In the 2004 NPR, the banking agencies considered the institution 
asset-size and holding company asset-size thresholds in light of these 
comments. The NPR explained that the regulations distinguish between 
small and large institutions for several important reasons. The NPR 
noted that institutions' capacities to undertake certain activities, 
and the burdens of those activities, vary by asset size, sometimes 
disproportionately. Examples of such activities include identifying, 
underwriting, and funding qualified equity investments, and collecting 
and reporting loan data. The case for imposing certain burdens is 
sometimes more compelling with larger institutions than with smaller 
ones. For instance, the number and volume of loans and services 
generally tend to increase with asset size, as do the number of people 
and areas served, although the amount and quality of an institution's 
service to its community certainly is not always directly related to 
its size. Furthermore, evaluation methods appropriately differ 
depending on institution size.
    The NPR further explained that the banking agencies originally 
included the holding company limitation to reflect the ability of a 
holding company of a certain size (over $1 billion) to support a bank 
or thrift subsidiary's compliance activities. The NPR noted, however, 
that anecdotal evidence suggested that a relatively small institution 
with a sizable holding company often finds addressing its CRA 
responsibilities no less burdensome than does a similarly-sized 
institution without a sizable holding company. Thus, the banking 
agencies proposed to eliminate the holding company limitation on small 
institution eligibility.
    The preamble to the NPR indicated that several factors led the 
banking agencies to propose raising the asset threshold. First, with 
the increase in consolidation at the large end of the asset size 
spectrum, the gap in assets between the smallest and largest 
institutions has grown substantially since the line was drawn at $250 
million in 1995. Because some compliance costs are fixed, the 
compliance burden on institutions in a range moderately exceeding any 
threshold, measured as the cost of compliance relative to asset size, 
generally will be proportionally higher than the burden on institutions 
far above the same threshold. Yet, the asset gap between the smallest 
institutions

[[Page 51157]]

above the threshold and the largest institutions continues to grow. As 
a result, the compliance burden on the smallest institutions above the 
threshold has grown disproportionately. Second, the number of 
institutions defined as ``small'' has declined by over 2,000 since the 
threshold was set in 1995, and their percentage of industry assets has 
declined substantially. Third, some asset growth since 1995 has been 
due to inflation, not real growth. Fourth, the banking agencies are 
committed to reducing burden where feasible and appropriate.
    The NPR proposed to raise the small institution asset threshold to 
$500 million, without reference to holding company assets. The banking 
agencies calculated that raising the asset threshold to $500 million 
and eliminating the holding company limitation would reduce the number 
of institutions subject to the large retail institution test but 
decrease the percentage of industry assets subject to the large retail 
institution test only slightly.
    The banking agencies explained that the proposed changes would not 
diminish in any way the obligation of all insured depository 
institutions subject to CRA to help meet the credit needs of their 
communities. Instead, the proposed changes were meant only to address 
the regulatory burdens associated with evaluating institutions under 
CRA. The NPR sought comment on whether the proposal would improve the 
effectiveness of CRA evaluations, while reducing unwarranted burden.
    The NPR also proposed several additional changes to the CRA 
regulations involving institutions or affiliates that engage in 
discriminatory, illegal, or abusive credit practices and amending the 
specifications for the CRA Disclosure Statements that each agency 
banking prepares annually for each institution that reports data. The 
preamble to the NPR further indicated that the banking agencies would 
begin using publicly available HMDA and CRA data to disclose additional 
information in the public CRA performance evaluations. This final rule 
withdraws these other proposed changes to the CRA regulations.

Comments on the 2004 NPR

    OTS received approximately 800 comments on the 2004 NPR. Most were 
from financial institutions and their trade associations (``Financial 
Institution Comments'') or from consumer and community members and 
organizations (e.g., civil rights organizations, Community Development 
Corporations, Community Development Financial Institutions, community 
developers, housing authorities, and individuals) (``Consumer 
Comments''). Other commenters included members of Congress, other 
Federal government agencies, and state and local governments, agencies, 
and organizations.
    The Financial Institution Comments strongly supported raising the 
asset threshold and eliminating the holding company test. Most of these 
commenters expressly supported raising the asset threshold beyond the 
level in the proposed rule. Most suggested thresholds ranging from $1 
billion to $2 billion. Many commenters argued that raising the asset 
threshold would reduce regulatory burden and allow community banks to 
focus their resources on economic development and meeting credit 
demands of the community, rather than compliance burdens. They also 
asserted that raising the asset threshold was necessary to reflect 
consolidation in the bank and thrift industries. Other commenters noted 
that raising the asset threshold to $1 billion would have only a small 
effect on the amount of total industry assets under the large 
institution test but would provide substantial additional relief by 
reducing the compliance burden on more than 500 additional 
institutions.
    The Consumer Comments strongly opposed raising the asset threshold 
and urged the banking agencies to withdraw the proposed rule. Most of 
the comments focused on the proposed raising of the asset threshold to 
$500 million but did not specifically mention the proposed elimination 
of the holding company test. Many Consumer Comments argued that raising 
the asset threshold would eliminate the investment and service parts of 
the CRA examination for many institutions, would reduce the rigor of 
CRA examinations, and would lead to less access to banking services and 
capital for underserved communities. In particular, these commenters 
argued that Low Income Housing Tax Credits and Individual Development 
Accounts would suffer, diminishing the effectiveness of the 
Administration's housing and community development programs. The 
commenters observed that this would be contrary to the statutory 
obligation on financial institutions to affirmatively serve credit and 
deposit needs on a continuing basis. Commenters also noted that the 
change would disproportionately affect rural communities and small 
cities where smaller institutions have a significant market share. 
Other commenters emphasized the need for rural banks and other 
depository institutions to serve the investment and deposit needs of 
all the communities in which they are chartered and from which they 
take deposits.
    Comments from members of Congress were mixed. One letter (including 
House Capital Markets Subcommittee Chairman Richard Baker and six other 
Republican members of the House Financial Services Committee) supported 
raising the asset threshold to $1 billion. It stated that such a move 
would not have a significant impact on the total amount of assets nor 
the total number of institutions covered by the large institution 
examination, but would provide relief to many additional institutions. 
Congressional Democrats, on the other hand, opposed raising the asset 
threshold. OTS received one letter from 31 Senators (including Senate 
Banking Committee Ranking Member Paul Sarbanes), one letter from 
Senators Herb Kohl and Russell D. Feingold, one letter from seven House 
Representatives (including House Financial Services Committee Ranking 
Member Barney Frank), one letter from House Financial Services 
Committee Member Nydia Velazquez, and one letter from House 
Representative Louise Slaughter. These letters echoed the Consumer 
Comments discussed above.

Today's Final Rule

    Having carefully reviewed all the comments submitted, OTS is 
amending the definition of ``small savings association'' to mean a 
savings association with total assets of less than $1 billion (without 
regard to any holding company assets). This change will be effective 
October 1, 2004. It will apply to OTS's CRA examinations beginning in 
the fourth quarter of 2004. Of course, any small savings association 
that prefers to be assessed under the lending, investment, and service 
tests may so elect in accordance with 12 CFR 563e.21(a)(3), if it 
collects and reports the data required for other savings associations 
under 12 CFR 563e.42.
    This change should reduce the existing CRA examination and 
reporting burden on the affected savings associations in order for 
these institutions to be able to dedicate scarce resources to better 
meet the credit needs of their local communities and in areas requiring 
continuing vigilance, for example, offsetting the appreciable burden 
arising from implementation of anti-money laundering (AML) programs, 
Bank Secrecy Act (BSA) requirements, and other compliance initiatives. 
This change will permit the additional ``small savings associations'' 
to be subject to streamlined CRA examinations that focus on lending as

[[Page 51158]]

well as benefiting from reduced data collection and reporting burdens 
under the CRA. The final rule will not in any manner relieve small 
savings associations of all other existing and ongoing compliance 
requirements and legal obligations under the CRA.
    OTS is able to use its expertise to make a predictive assessment 
that this change will reduce unwarranted burden without negatively 
impacting upon the purpose of CRA to require each Federal banking 
agency to encourage institutions to help meet the credit needs of local 
communities in which they are chartered consistent with safe and sound 
operation. 12 U.S.C. 2901(b). This revision is consistent with the 
agency's ongoing efforts to identify and reduce regulatory burden, 
particularly for smaller institutions, where appropriate and feasible.
    OTS is also making this change to take into account substantial 
institution asset growth and consolidation in the bank and thrift 
industries since the definition was originally adopted. Although the 
final rule will increase the number of thrift institutions eligible for 
evaluation under the small institution performance standards, it will 
not have a significant impact on the portion of combined thrift and 
bank assets subject to evaluation under the large retail institution 
performance standards. Around the time the CRA rule was developed and 
promulgated in 1994-1995, total thrift and bank assets covered by the 
lending, investment, and service tests for large institutions 
represented 86.2% of total thrift and bank industry assets, including 
87.9% of thrift industry assets. Based on March 31, 2004 Thrift 
Financial Report data, raising the asset threshold to $1 billion (and 
eliminating consideration of holding company assets) will result in 
86.4% of thrift industry assets being covered by the large institution 
test. Thus, the overwhelming majority of thrift assets will remain 
covered by the large institution test, there will be only a slight drop 
in the percentage of thrift industry assets covered by the large 
institution test as compared to the percentage when the 1995 rule was 
developed and promulgated, and the change will bring the percentage of 
thrift assets covered by the large institution test in line with the 
1994 combined thrift and bank industry average. The dollar value of 
thrift assets covered by the large institution test will increase 
substantially compared to when the rule was promulgated, from 
approximately $678.3 billion in 1995 to $1 trillion.
    Further, the total number of thrifts and the total dollar value of 
thrift assets, as a percentage of the combined bank and thrift 
industries, has dropped since 1995. Whereas in December 1995, OTS-
regulated thrifts accounted for 12% of the number of thrifts and banks 
and 14.4% of total thrift and bank industry assets, by March 2004 OTS-
regulated thrifts accounted for 10.1% of the number of thrifts and 
banks and 12.4% of total thrift and bank industry assets. Thus, the 
impact of the change on the combined bank and thrift industries will be 
minimal. Of course, the impact on the bank and thrift industries as a 
whole would increase to the extent the other banking agencies follow 
suit.
    The regulatory burden reduction for small savings associations, 
however, will be significant. Thrifts remain home mortgage lenders, in 
part, because unlike banks, they must have at least 65% of their assets 
in the form of what are generally mortgages or mortgage-related loans 
in order to avoid the adverse consequences of failing to meet the 
qualified thrift lender test under the Home Owners' Loan Act (HOLA). 12 
U.S.C. 1467a(m). Thrifts are also subject to HOLA lending and 
investment limits, including limits on commercial loans and community 
development investments. 12 U.S.C. 1464(c)(2)(A) and (c)(3)(A); 12 CFR 
560.30. Small institutions often do not engage in significant amounts 
of small business or small farm lending.
    According to the FRB's analysis of 2003 CRA data for the Federal 
Financial Institutions Examination Council (FFIEC), thrifts accounted 
for approximately 21.9% (by number of loans) and 7.9% (by amount of 
loans) of the small business loans originated or purchased reported by 
all banks and thrifts combined. A closer look reveals that thrifts 
under $1 billion in assets contributed only about 0.5% of the total (by 
number of loans) and 2.2% of the total (by amount of loans), while 
thrifts over $1 billion in assets contributed about 21.4% of the total 
(by number of loans) and 5.7% of the total (by amount of loans). 
Similarly, thrifts only accounted for approximately 11.3% (by number of 
loans) and 3.6% (by amount of loans) of the small farm loans originated 
or purchased reported by all banks and thrifts combined in 2003. 
Thrifts under $1 billion in assets contributed about 1.2% of the total 
(by number of loans) and 1.5% of the total (by amount of loans) while 
thrifts over $1 billion in assets contributed about 10.1% of the total 
(by number of loans) and 2.1% of the total (by amount of loans). See 
Table 4-2, ``Savings Association Lending by Asset Size,'' CRA National 
Aggregate Reports, available at http://www.ffiec.gov/webcraad/cranaag.htm.
    This pattern of lending by savings associations under $1 billion in 
assets has remained fairly constant over the years. It demonstrates 
that thrifts, in the main, make mortgage-related loans that are 
reported under HMDA. By raising the asset threshold, the burden 
associated with reporting requirements for loans that constitute a 
minor part of the overall business of small thrifts will be relieved 
without significant impact to the CRA data collection as a whole and 
the benefits derived from such data.
    Moreover, OTS's examination experience since implementing the 
current CRA regulations indicates that there is not a significant 
change in the way that smaller institutions meet their CRA obligations 
once they cross the $250 million threshold. Institutions between $250 
million and $1 billion tend to continue to meet the credit needs of 
their communities by making loans in their assessment areas. We have no 
belief that institutions impacted by this regulatory change will alter 
their lending habits. Institutions under $1 billion in assets generally 
do not have the financial capacity to hire specialized staff, engage in 
significant investments, or open new branches. Indeed, an interagency 
Q&A on CRA has previously recognized that factors outside of an 
institution's control may prevent it from engaging in certain 
activities. It provides, ``Examiners will take into account statutory 
and supervisory limitations on an institution's ability to engage in 
any lending, investment, and service activities. For example, a savings 
association that has made few or no qualified investments due to its 
limited investment authority may still receive a low satisfactory 
rating under the investment test if it has a strong lending record.'' 
Q&A 21(b)(4), 66 FR 36620, 36631 (July 12, 2001). Accordingly, the 
lending focus under the small savings association performance standards 
is particularly well tailored to evaluating the performance of thrifts 
with under $1 billion in assets.
    Far from being an exemption from CRA requirements, the small 
savings association performance standards provide for OTS to evaluate 
the record of a small savings association in meeting the credit needs 
of its assessment area under particular lending-focused criteria. Those 
criteria, enumerated in OTS's regulation at 12 CFR 563e.26 are:
    (1) The savings association's loan-to-deposit ratio, adjusted for 
seasonal variations and, as appropriate, other lending-related 
activities, such as loan originations for sale to the secondary

[[Page 51159]]

markets, community development loans, or qualified investments;
    (2) The percentage of loans and, as appropriate, other lending-
related activities located in the savings association's assessment 
area(s);
    (3) The savings association's record of lending to and, as 
appropriate, engaging in other lending-related activities for borrowers 
of different income levels and businesses and farms of different sizes;
    (4) The geographic distribution of the savings association's loans; 
and
    (5) The savings association's record of taking action, if 
warranted, in response to written complaints about its performance in 
helping to meet credit needs in its assessment area(s).
    As discussed in Appendix A to OTS's CRA rule (12 CFR Part 563e, 
App. A), savings associations evaluated under the small savings 
association performance standards will only receive a ``satisfactory'' 
performance evaluation if, in general, the savings association 
demonstrates:
    (1) A reasonable loan-to-deposit ratio (considering seasonal 
variations) given the savings association's size, financial condition, 
the credit needs of its assessment area(s), and taking into account, as 
appropriate, lending-related activities such as loan originations for 
sale to the secondary markets and community development loans and 
qualified investments;
    (2) A majority of its loans and, as appropriate, other lending-
related activities are in its assessment area(s);
    (3) A distribution of loans to and, as appropriate, other lending 
related-activities for individuals of different income levels 
(including low- and moderate-income individuals) and businesses and 
farms of different sizes that is reasonable given the demographics of 
the savings association's assessment area(s);
    (4) A record of taking appropriate action, as warranted, in 
response to written complaints, if any, about the savings association's 
performance in helping to meet the credit needs of its assessment 
area(s); and
    (5) A reasonable geographic distribution of loans given the savings 
association's assessment area(s).
    As further discussed in Appendix A, a savings association that 
meets each of the standards for a ``satisfactory'' rating and exceeds 
some or all of those standards may be considered for an overall rating 
of ``outstanding.'' In assessing whether a savings association's 
performance is ``outstanding,'' OTS considers the extent to which the 
savings association exceeds each of the performance standards for a 
``satisfactory'' rating and its performance in making qualified 
investments and providing branches and other services and delivery 
systems that enhance credit availability in its assessment area(s).
    In contrast, a savings association may receive a rating of ``needs 
to improve'' or ``substantial noncompliance'' depending on the degree 
to which its performance has failed to meet the standards for a 
``satisfactory'' rating.
    The interagency CRA Qs&As elaborate further. One Q&A states, 
``Examiners can consider `lending-related activities,' including 
community development loans and lending-related qualified investments, 
when evaluating the first four performance criteria of the small 
institution test.'' Q&A 26(a)-1, 66 FR at 36637. Another Q&A states 
that examiners will consider these types of lending-related activities 
``when it is necessary to determine whether an institution meets or 
exceeds the standards for a satisfactory rating'' or ``at an 
institution's request.'' Q&A 26(a)-2, 66 FR at 36637. Still another 
asks, ``Under the small institution performance standards, how will 
qualified investments be considered for purposes of determining whether 
a small institution receives a satisfactory CRA rating?'' The answer 
provided is that the ``small institution performance standards focus on 
lending and other lending-related activities. Therefore, examiners will 
consider only lending-related qualified investment for the purposes of 
determining whether the small institution receives a satisfactory CRA 
rating.'' Q&A 26(a)-5, 66 FR at 36637.
    Thus, under OTS CRA regulations, as further interpreted in the 
interagency Qs&As, OTS already considers, and will continue to 
consider, a small savings association's performance in making community 
development loans and qualified investments and providing community 
development services, at the savings association's request, for 
purposes of raising a rating. While community development activities 
are not required for small savings associations, information a savings 
association provides about its community development activities may 
impact a rating. For example, a savings association that might 
otherwise be rated ``satisfactory'' may be rated ``outstanding,'' or a 
savings association that might otherwise be rated less than 
``satisfactory'' may be rated ``satisfactory'' depending on its 
performance in a variety of community development activities.
    Therefore, even though the asset threshold is being raised, all 
small savings associations would continue to have an incentive to 
perform community development activities to improve their CRA rating. 
In particular, savings associations with between $250 million and $1 
billion in assets that may already have significant commitments to make 
qualified investments and perform community development services, 
though now recategorized as ``small,'' will continue to have incentives 
to perform a range of community development activities. Those 
activities can be fully considered during their examination.

Application to Savings Associations Only

    This final rule only applies to OTS-regulated savings associations. 
The change to the small institution asset threshold would not affect 
entities regulated by the OCC, FDIC, or the FRB. OTS is aware that 
section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (12 U.S.C. 4803) directs the banking agencies 
to work jointly to make uniform all regulations and guidelines 
implementing common statutory or supervisory policies. While uniformity 
is the ultimate goal of section 303, the statute recognizes that the 
results of these efforts must be ``consistent with the principles of 
safety and soundness, statutory law and policy and the public 
interest.'' The uniformity required by section 303, for example, is not 
intended to result in unreasonable or unwarranted requirements that add 
to burden. S. Rep. 103-169, at 48 (1993), reprinted in 1994 
U.S.C.C.A.N. 1881.
    Consequently, the four Federal banking agencies have occasionally 
imposed or retained non-uniform regulatory requirements based on 
different conclusions regarding safety and soundness, and other policy 
and public interest considerations. See, e.g., Joint Report: 
Differences in Accounting and Capital Standards Among the Federal 
Banking Agencies; Report to Congress, 69 FR 8523 (February 24, 2004). 
Where there are different interpretations of common statutes, the 
banking agencies are encouraged to highlight and explain the 
differences, so that users will have clear notice of any areas of 
difference among regulations or guidelines relating to a common 
statutory scheme or supervisory concern. S. Rep. 103-169, at 48 (1993), 
reprinted in 1994 U.S.C.C.A.N. 1881.

Other Issues

    OTS is withdrawing the remaining portions of its proposed rule.

[[Page 51160]]

Credit Terms and Practices

    The NPR proposed adding regulatory text providing that evidence 
that an institution or affiliate engages in discriminatory, illegal, or 
abusive credit practices would adversely affect the evaluation of the 
institution's CRA performance. Under the proposal, evidence pertaining 
to the institution's loans would be considered, regardless of their 
location, while evidence pertaining to an affiliate's loans would only 
be considered if the lending was by an affiliate with loans considered 
under the lending test and occurred in the institution's assessment 
area. Examples of discriminatory or illegal practices the proposal 
identified were: (1) Discriminating, such as Equal Credit Opportunity 
Act (ECOA) or Fair Housing Act violations; (2) violating the Home 
Ownership and Equity Protection Act (HOEPA); (3) violating section 5 of 
the Federal Trade Commission Act (FTC Act); (4) violating section 8 of 
the Real Estate Settlement Procedures Act (RESPA); and (5) violating 
the right of rescission under the Truth in Lending Act (TILA). Equity 
stripping was the only other practice listed, which the proposal 
defined as engaging in a pattern or practice of lending based 
predominantly on the foreclosure or liquidation value of the collateral 
in connection with home mortgage and secured consumer loans. The 
justification for the proposed change was to better address abusive 
lending practices in CRA evaluations.
    Commenters were united in their opposition to this portion of the 
proposal. The main argument against it expressed by Financial 
Institution Commenters was that CRA should not consider compliance with 
other statutes that are already covered in compliance examinations, 
such as the ECOA, the Fair Housing Act, the FTC Act, HOEPA, RESPA, and 
TILA, since that approach would be repetitive and create unnecessary 
complexity. Others suggested that a predatory lending component should 
be focused on patterns of prohibited, predatory or abusive conduct. A 
further comment was to urge the banking agencies not to penalize 
institutions for practices just because the banking agencies may regard 
them as abusive or predatory if those practices are not illegal.
    Consumer Commenters opposed the proposed predatory lending 
standard, expressing concern that it could protect predatory lenders by 
its omissions. Several commenters went out of their way to state very 
specifically and clearly that they would prefer no change to the rule 
with regard to predatory lending to finalizing the proposed standard. 
Many comments harshly criticized the proposed standard for not covering 
enough types of predatory conduct. Many commenters specifically listed 
fee packing, high prepayment penalties, flipping, and mandatory 
arbitration, as among the additional abuses that the standard should 
also address. Other commenters listed some additional practices such as 
targeting minorities, low-income people, and the elderly for subprime 
lending; originating sub-prime loans for borrowers who could qualify 
for prime loans; encouraging refinancing of unsecured debt to increase 
the loan size, points, fees, and commissions; selling single-premium 
credit insurance products; charging yield spread premiums and other 
compensation that rewards brokers for steering borrowers to higher cost 
products and large loans; and purchasing and investing in predatory 
loans as part of mortgage backed securities.
    Even with regard to equity stripping, which the proposal was 
designed to address, the commenters emphasized that the proposal should 
not focus solely on lending based on the foreclosure value of the 
collateral. They pointed out that equity stripping also occurs from 
excessive fees and unnecessary products and that this type of equity 
stripping is also abusive, even if it does not lead to delinquency or 
foreclosure. One large consumer organization added that without 
conducting file reviews of individual loans, even the one predatory 
practice identified in the proposed rule would not be discovered. Many 
Consumer Commenters urged that the anti-predatory lending standard must 
apply to the financial institution and all of its affiliates, whether 
inside or outside the assessment area, not just real estate secured 
loans by the financial institution in its assessment area.
    In light of the comments received, OTS is withdrawing this portion 
of its proposal. OTS's CRA rule will continue to indicate that evidence 
of discriminatory or other illegal credit practices adversely affects 
the performance evaluation. 12 CFR 563.28(c). An interagency Q&A on CRA 
will continue to address what is meant by ``discriminatory or other 
illegal credit practices.'' Q&A 28(c)-1, 66 FR at 36640. No further 
action is required at this time.

Enhancement of Disclosure Statements and Public Performance Evaluations

    The ANPR also solicited comment on CRA data collection 
requirements. Specifically, it asked whether the data collection and 
reporting and public file requirements are effective and efficient 
approaches for assessing an institution's CRA performance while 
minimizing burden. The NPR proposed to amend the specifications for the 
CRA Disclosure Statements that each banking agency prepares annually 
for each institution that is reporting data. The revised statements 
would include as additional data items the number and amount of small 
business and small farm loans by census tract. The justification was to 
enhance the data disclosed to the public. The preamble to the NPR 
further indicated that the banking agencies would begin using publicly 
available HMDA and CRA data to disclose additional information in the 
public CRA performance evaluations. The following additional data would 
be disclosed by assessment area: (1) The number, type, and amount of 
purchased loans; (2) the number, type, and amount of HOEPA loans and 
loans for which the rate spread information is reported under HMDA; and 
(3) the number, type, and amount of loans that were originated or 
purchased by an affiliate and included in the institution's evaluation, 
as well as the identity of the affiliate. The justification was to make 
it easier for the public to evaluate lending by individual 
institutions.
    Relatively few Financial Institution Commenters addressed these 
data issues and those that did reflected no strong consensus. Several 
commented on distinguishing loan purchases from originations in the 
public evaluation. More opposed than favored such an approach. The main 
argument against drawing the distinction was that such a move could 
suggest that purchases are not as beneficial as originations--a 
suggestion disputed by these commenters--and that the distinction would 
be purely technical. Similarly, several commented on distinguishing 
HOEPA loans from other loans in the public evaluation. More opposed 
than favored that approach as well. The main argument against was that 
HOEPA loans are not necessarily predatory but that such an implication 
could be drawn from making this distinction in the public evaluation. 
One large trade organization opposed revising the CRA Disclosure 
Statements to include the number and amount of small business and small 
farm loans by census tract. It argued that the privacy of the financial 
information of borrowers at many small, mostly rural institutions would 
be breached because many of these institutions have only one or two 
business borrowers in some census tracts.
    The Consumer Commenters, however, supported the enhanced data 
disclosure

[[Page 51161]]

the banking agencies proposed for the public portion of the CRA report. 
They specifically voiced support for disclosure of the specific census 
tract location of small business loans, distinguishing purchases from 
loan originations, and disclosing high cost loans. However, they were 
unequivocal that the potential beneficial effects of this aspect of the 
proposal were outweighed by the harm from other aspects of the 
proposal. Many of these commenters further argued that the banking 
agencies should not merely report the new data on CRA examinations, but 
should use the new data to provide less favorable weight on CRA 
examinations to high cost loans and loan purchases than to prime loans 
and loan originations.
    In light of the comments received, OTS is also withdrawing this 
portion of its proposal. OTS believes that the data disclosure changes 
would add to burden without providing corresponding benefits.

Regulatory Analysis

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995, the OTS may not conduct or sponsor, and a respondent is not 
required to respond to, an information collection unless it displays a 
currently valid Office of Management and Budget (OMB) control number. 
This collection of information is currently approved under OMB Control 
Number 1550-0012. OTS is giving notice that, with this final rule, the 
changed collection of information has been submitted to OMB for review 
and approval.
    Title of Proposal: Community Reinvestment--12 CFR Part 563e.
    Frequency of Response: Annual.
    Affected Public: Savings associations.
    Abstract: This final rule revises the definition of ``small savings 
association'' under OTS's CRA regulations. Under the final rule, 
``small savings association'' is defined as a savings association with 
total assets of less than $1 billion, without regard to any holding 
company assets. This change permits additional small savings 
associations to be subject to streamlined examinations as well as 
reduced data collection and reporting burdens under the CRA.
    Estimated Number of Respondents: 923.
    Estimated Burden Hours per Response: Small business and small farm 
loan register, 219 hours; Other loan data, 25 hours; Assessment area 
delineation, 2 hours; Small business and small farm loan data, 8 hours; 
Community development loan data, 13 hours; HMDA out-of-MSA loan data, 
253 hours; Data on lending by a consortium or third party, 17 hours; 
Affiliated lending data, 38 hours; Request for designation as a 
wholesale or limited purpose bank, 4 hours; and Public file, 10 hours.
    Estimated Total Burden: 80,998 hours.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that since this final rule will reduce burden and will not 
raise costs for small institutions, it will not have a significant 
economic impact on a substantial number of small entities. It does not 
impose any additional paperwork or regulatory reporting requirements. 
It will increase only slightly the overall number of small savings 
associations, as defined for Regulatory Flexibility Act purposes ($150 
million in assets or less), that will qualify for the reduced data 
collection requirements in 12 CFR Part 563e applicable to small savings 
associations.
    The Small Business Administration submitted comments on the NPR 
requesting further information to support the conclusion of no 
significant impact. In response, OTS has calculated that, based on 
March 31, 2004 data, there were 477 savings associations with $150 
million in assets or less, representing 51.8% of all thrifts, $33.7 
billion in assets, and 2.9% of thrift industry assets. Only 30 of these 
institutions--representing 3.3% of all thrifts, $1.5 billion in assets, 
and 0.1% of thrift industry assets--failed to qualify for the small 
savings association test because they were part of a holding company 
with over $1 billion in assets and will now qualify as ``small'' under 
the revised definition. Accordingly, a regulatory flexibility analysis 
is not required.

Executive Order 12866 Determination

    OTS has determined that this rulemaking is not a significant 
regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. OTS has determined that this 
rule will not result in expenditures by State, local, and tribal 
governments, or by the private sector, of $100 million or more. 
Accordingly, OTS has not prepared a budgetary impact statement nor 
specifically addressed the regulatory alternatives considered.

List of Subjects in 12 CFR Part 563e

    Community development, Credit, Investments, Reporting and 
recordkeeping requirements, Savings associations.

Office of Thrift Supervision

12 CFR Chapter V

0
For the reasons outlined in the preamble, the Office of Thrift 
Supervision amends part 563e of chapter V of title 12 of the Code of 
Federal Regulations as set forth below:

PART 563e--COMMUNITY REINVESTMENT

0
1. The authority citation for part 563e continues to read as follows:

    Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1814, 1816, 
1828(c), and 2901 through 2907.


0
2. Revise Sec.  563e.12(t) to read as follows:


Sec.  563e.12  Definitions.

* * * * *
    (t) Small savings association means a savings association that, as 
of December 31 of either of the prior two calendar years, had total 
assets of less than $1 billion.
* * * * *

    Dated: August 12, 2004.

    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 04-18863 Filed 8-17-04; 8:45 am]
BILLING CODE 6720-01-P