[Federal Register Volume 70, Number 40 (Wednesday, March 2, 2005)]
[Rules and Regulations]
[Pages 10023-10030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-4016]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563e

[No. 2005-09]
RIN 1550-AB48


Community Reinvestment Act--Assigned Ratings

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

ACTION: Final rule.

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SUMMARY: In this final rule, OTS is making changes to its Community 
Reinvestment Act (CRA) regulations to reduce burden, provide greater 
flexibility to meet community needs, and restore the focus of CRA to 
lending. Specifically, OTS is providing additional flexibility to each 
savings association evaluated under the large retail institution test 
to determine the combination of lending, investment, and service it 
will use to meet the credit needs of the local communities in which it 
is chartered, consistent with safe and sound operations.

[[Page 10024]]


DATES: This rule is effective on April 1, 2005.

FOR FURTHER INFORMATION CONTACT: Celeste Anderson, Program Manager, 
Thrift Policy, (202) 906-7990; Richard Bennett, Counsel, Regulations 
and Legislation Division, (202) 906-7409, Office of Thrift Supervision, 
1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On November 24, 2004, OTS published a notice of proposed rulemaking 
(NPR) proposing changes to, and soliciting comment on, its CRA 
regulations in two areas: (1) the definition of ``community 
development'' and (2) the assignment of ratings. (69 FR 68257) OTS 
indicated that it was considering addressing these areas to reduce 
burden to the extent consistent with the safe and sound supervision of 
the industry and provide institutions with more flexibility to make 
their own determinations about how best to serve their communities.
    The proposal was designed to further the CRA burden reduction OTS 
began in its final rule published in the Federal Register on August 18, 
2004 (69 FR 51155), which revised the definition of ``small savings 
association'' (2004 Final Rule). It was also crafted to increase the 
burden reductions in the interim final rule published in the Federal 
Register on November 24, 2004 (69 FR 68239) as part of OTS's review of 
regulations under section 2222 of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996 (EGRPRA) (EGRPRA Interim Final Rule).
    In this final rule, OTS is adopting changes to the way it assigns 
CRA ratings. OTS is deferring action, however, on revising the 
definition of ``community development.'' OTS notes that the Federal 
Deposit Insurance Corporation (FDIC) has also issued a proposal to 
expand the definition of ``community development.'' 69 FR 51611 (August 
20, 2004). OTS is deferring action on this portion of its proposal to 
allow for further opportunities for consideration of, and coordination 
on, these and other proposals. Accordingly, the remainder of this 
Supplementary Information section is limited to addressing the 
assignment of ratings.

II. The Way CRA Works

A. The CRA Statute

    CRA is a statute addressed to the credit needs of communities. The 
statute clearly states that the purpose of CRA is ``to require each 
appropriate Federal financial supervisory agency to use its authority 
when examining financial institutions to encourage such institutions to 
help meet the credit needs of the local communities in which they are 
chartered consistent with the safe and sound operation of such 
institutions.'' 12 U.S.C. 2901(b) (emphasis added). Congress further 
provided that the written evaluations of CRA performance are to 
evaluate ``the institution's record of meeting the credit needs of its 
entire community, including low and moderate-income neighborhoods.'' 12 
U.S.C. 2906(a)(1) (emphasis added).
    The legislation's chief sponsor, Senator William Proxmire, 
indicated the lending focus to CRA when he explained the purpose of the 
provision authorizing the federal banking agencies to evaluate how well 
institutions meet the credit needs of the areas which they are 
primarily chartered to serve. He stated, ``The provision is intended to 
eliminate the practice of redlining by lending institutions.'' 123 
Cong. Rec. S8932 (daily ed. June 6, 1977) (emphasis added).

B. The Original CRA Rule

    The four federal banking agencies (the Agencies) implemented the 
CRA through joint final regulations published in 1978. 43 FR 47144 
(October 12, 1978) (1978 rule). These regulations specified twelve 
factors that the Agencies would consider in assessing an institution's 
record of performance in helping to meet the credit needs of its 
community.
    Several of the twelve factors focused on the institution's lending. 
However, some factors focused on the institution's services and 
investments. For example, one service-focused factor was ``the 
institution's record of opening and closing offices and providing 
services at offices.'' 43 FR 47154 (promulgating 12 CFR 563e.7(g)). One 
investment-focused factor was ``the institution's participation, 
including investments, in local community development and redevelopment 
projects or programs.'' 43 FR 47154 (promulgating 12 CFR 563e.7(h)).
    While the factors covered lending, investment, and service among 
other aspects of the institution's performance, the factors did not 
mandate any particular level of performance on any particular factor or 
factors. Indeed, as indicated in the preamble to the 1978 rule, the 
Agencies considered, but specifically rejected, giving specific weights 
or imposing a scoring system on the factors. The preamble explained, 
``[T]he Agencies believe that specific weights or scoring systems would 
not adequately address the diversity of institutions and communities 
[and] would prevent rather than encourage thoughtful response to 
community needs.'' 43 FR 47145.

C. Experience With the 1978 Rule

    The experience with the 1978 rule was summarized in the preamble to 
the Agencies' 1995 CRA rule. 60 FR 22156 (May 4, 1995) (1995 rule). It 
stated:

    The CRA has come to play an increasingly important role in 
improving access to credit in communities--both rural and urban--
across the country. Under the impetus of the CRA, many banks and 
thrifts opened new branches, provided expanded services, and made 
substantial commitments to increase lending to all segments of 
society.
    Despite these successes, the CRA examination system has been 
criticized. Financial institutions have indicated that policy 
guidance from the agencies on the CRA is unclear and that 
examination standards are applied inconsistently. Financial 
institutions have also stated that the CRA examination process 
encourages them to generate excessive paperwork at the expense of 
providing loans, services, and investments to their communities.
    Community, consumer, and other groups have agreed with the 
industry that there are inconsistencies in CRA evaluations and that 
current examinations overemphasize process and underemphasize 
performance. Community and consumer groups also have criticized the 
agencies for failing aggressively to penalize banks and thrifts for 
poor performance.
    Noting that the CRA examination process could be improved, 
President Clinton requested in July 1993 that the Federal financial 
supervisory agencies reform the CRA regulatory system. The President 
asked the agencies to consult with the banking and thrift 
industries, Congressional leaders, and leaders of community-based 
organizations across the country to develop new CRA regulations and 
examination procedures that ``replace paperwork and uncertainty with 
greater performance, clarity, and objectivity.''
    Specifically, the President asked the agencies to refocus the 
CRA examination system on more objective, performance-based 
assessment standards that minimize compliance burden while 
stimulating improved performance. He also asked the agencies to 
develop a well-trained corps of examiners who would specialize in 
CRA examinations. The President requested that the agencies promote 
consistency and even-handedness, improve CRA performance 
evaluations, and institute more effective sanctions against 
institutions with consistently poor performance.

60 FR 22156-57.

D. The 1995 Rule and Subsequent Guidance

    The experience with the 1978 rule led the Agencies to replace it in 
1995 with a rule designed to emphasize performance rather than process, 
promote consistency in evaluations, and eliminate unnecessary burden. 
60 FR 22156. Among other things, it

[[Page 10025]]

established a large retail institution test comprised of three tests: 
one for lending, one for investment, and one for service.
    OTS has previously summarized how the performance of large retail 
institutions has been assessed under the lending, investment, and 
service tests under the 1995 rule. See, e.g., 69 FR 68258; 66 FR 37602 
(July 19, 2001) (2001 Joint ANPR); 69 FR 5729 (February 6, 2004) (2004 
Joint NPR). In sum, under OTS's CRA rule at 12 CFR 563e.28(b), OTS 
assigns ratings to savings associations assessed under the large retail 
institution test in accordance with the following three rating 
principles:
    (1) A savings association that receives an ``outstanding rating on 
the lending test receives an assigned rating of at least 
``satisfactory'';
    (2) A savings association that receives an ``outstanding'' rating 
on both the service test and the investment test and a rating of at 
least ``high satisfactory'' on the lending test receives an assigned 
rating of ``outstanding''; and
    (3) No savings association may receive an assigned rating of 
``satisfactory'' or higher unless it receives a rating of at least 
``low satisfactory'' on the lending test.
    Interagency Questions and Answers Regarding Community Reinvestment, 
66 FR 36620 (July 12, 2001), developed jointly by the Agencies, address 
how the Agencies weigh performance under the lending, investment, and 
service tests for large retail institutions to come up with one overall 
Composite Rating. Q&A 28(a)-3, 66 FR 36639, provides:

    A rating of ``outstanding,'' ``high satisfactory,'' ``low 
satisfactory,'' ``needs to improve,'' or ``substantial 
noncompliance,'' based on a judgment supported by facts and data, 
will be assigned under each performance test. Points will then be 
assigned to each rating as described in the first matrix set forth 
below. A large retail institution's overall rating under the 
lending, investment and service tests will then be calculated in 
accordance with the second matrix set forth below, which 
incorporates the rating principles in the regulation.

    The Q&A then sets forth the following Component Test Rating chart 
(66 FR 36639):

  Points Assigned for Performance Under Lending, Investment and Service
                                  Tests
------------------------------------------------------------------------
                                     Lending      Service     Investment
------------------------------------------------------------------------
Outstanding......................           12            6            6
High Satisfactory................            9            4            4
Low Satisfactory.................            6            3            3
Needs to Improve.................            3            1            1
Substantial Noncompliance........            0            0            0
------------------------------------------------------------------------

    This chart is followed by the following Composite Rating matrix (66 
FR 36639-40):

                   Composite Rating Point Requirements
                      [Add points from three tests]
------------------------------------------------------------------------
                 Rating                            Total points
------------------------------------------------------------------------
Outstanding.............................  20 or over.
Satisfactory............................  11 through 19.
Needs to Improve........................  5 through 10.
Substantial Noncompliance...............  0 through 4.
------------------------------------------------------------------------
Note: There is one exception to the Composite Rating matrix. An
  institution may not receive a rating of ``satisfactory'' unless it
  receives at least ``low satisfactory'' on the lending test. Therefore,
  the total points are capped at three times the lending test score.

    As reflected in the Component Test Rating chart, lending receives 
approximately 50 percent weight, service receives approximately 25 
percent weight, and investment receives approximately 25 percent 
weight. OTS applies the tests in a performance context that considers 
several factors specified in Sec.  563e.21(b) of OTS's CRA rule.
    As discussed in the preamble to the 2004 NPR, 69 FR 68260-61, the 
CRA regulation has been implemented to give some consideration to the 
unique statutory and regulatory structure of savings associations. This 
structure includes the qualified thrift lender test. 12 U.S.C. 
1467a(m). It also includes lending and investment limits, such as on 
commercial loans and community development investments. 12 U.S.C. 
1464(c)(2)(A), (c)(3)(A), and 1831e; 12 CFR 560.30 and 560.36. Because 
of these differences between savings associations and other financial 
institutions, the preamble to the 1995 CRA rule indicated that a 
savings association could receive at least a ``low satisfactory'' 
rating on the investment test without making qualified investments, 
depending upon its lending performance. 60 FR 22156, 22163 (May 4, 
1995). Similarly, the 2001 interagency CRA Qs&As indicate that 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 36631. In 2002, OTS issued examiner 
guidance further clarifying this policy.

III. OTS's Proposal and Solicitation of Comments

    While the CRA rule, as interpreted, provides some flexibility, OTS 
solicited comment in the 2004 NPR on providing additional flexibility 
in the way it assigns CRA ratings. OTS explained that the purpose would 
be to reduce burden while encouraging large retail savings associations 
to focus their community reinvestment efforts on the types of 
activities the communities they serve need, consistent with safe and 
sound operations. Rather than mandating changes to the weights assigned 
to lending, investment, and service under the large retail institution 
test from the fixed 50 percent lending, 25 percent service, 25 percent 
investment formula currently applied, OTS solicited comment on 
providing flexibility in those weights. 69 FR 68261-63.
    OTS explained that this approach would serve to clarify and build 
upon existing guidance. But for greater burden reduction, OTS also 
solicited comment on providing each savings association evaluated under 
the large retail institution test a choice, at its option, on the 
weight given to lending, investment, and service in assessing its 
performance. Consistent with the traditional and appropriate emphasis 
on lending, OTS would not allow less than a 50 percent weight to 
lending. The remaining 50 percent, however, would weigh lending, 
investment, or service, or some combination thereof, based on the 
savings association's election. As a result, each savings association 
could choose to have OTS weigh lending anywhere from 50 to 100 percent 
for that association's overall performance assessment, service anywhere 
from 0 to 50 percent, and investment anywhere from 0 to 50 percent. 69 
FR 68262.
    OTS explained that under this approach, as under the existing 
Component Test Rating chart, OTS

[[Page 10026]]

would continue to allocate a total of 24 possible points among the 
three tests. OTS would allocate 12 of these possible points to lending. 
OTS would allocate the remaining 12 possible points to lending, 
service, investment, or some combination thereof based on the savings 
association's weight election. For each test, the savings association 
would receive a percentage of the possible points it chose to have OTS 
allocate to that test, with the percentage varying depending on the 
rating it would receive on that test. 69 FR 68262-63. For any component 
rating of ``outstanding,'' the association would receive 100 percent of 
the possible points allocated to that test, 75 percent for a ``high 
satisfactory,'' 50 percent for a ``low satisfactory,'' 25 percent for a 
``needs to improve,'' and 0 percent (i.e., no points) for a 
``significant noncompliance.'' These percentages correspond to the 
current point allocation on the lending test of 12 points for 
``outstanding,'' nine points for ``high satisfactory,'' six points for 
``low satisfactory,'' three points for ``needs to improve,'' and no 
points for ``substantial noncompliance.''
    The preamble set out the method for creating a Component Test 
Rating chart for any possible weight combinations a savings association 
might select. It also set out an alternative Composite Rating matrix 
that would apply to any alternative weight combination selected. As 
with the current Composite Rating matrix, which would remain applicable 
to standard weights, the alternative Composite Rating matrix contained 
a note indicating that an institution may not receive a rating of 
``satisfactory'' unless it receives at least ``low satisfactory'' 
rating on the lending test and, therefore, the total points are capped 
at three times the lending test score. 69 FR 68262-63.
    OTS explained that continuing to include this note to the Composite 
Rating matrix, which is the same note as is contained in the Composite 
Rating matrix used since 1995, would have certain implications. For 
example, a savings association opting to allocate equal weight to 
lending as to the combination of services and investments could not 
receive a rating of ``satisfactory'' overall if it received a ``needs 
to improve'' or ``substantial noncompliance'' rating on its lending. 69 
FR 68263.
    The preamble also provided several examples of possible weights for 
illustrative purposes, including the applicable Component Test Rating 
chart for each of those examples.
    The preamble indicated that if OTS were to offer this type of 
flexibility, a savings association evaluated under the large retail 
institution test could elect weights, much in the same way as it elects 
consideration of other components of the CRA examination that are left 
to the institution's option. These include whether OTS will consider as 
part of its examination lending by an affiliate or consortium, or 
investments or services by an affiliate. See 12 CFR 563e.22(c)-(d), 
563e.23(c), and 563e.24(c). The Preliminary Examination Response Kit 
(PERK) currently contains optional questions permitting the savings 
association to elect to have information on such activities considered 
by providing relevant data and information pertaining to those 
activities. See PERK 008L (12/2004), ``Community Reinvestment Act 
Information--Large Institutions.'' Likewise, the PERK could be revised 
to provide an opportunity for a savings association to answer an 
optional question in which the association could specify alternative 
weights for lending, service, and investment. Through this process, a 
savings association could make a new weight election at the start of 
each CRA examination. A savings association that did not make an 
election through the PERK would be evaluated under the existing matrix 
contained in Q&A 28(a)-3. 69 FR 68263-64.
    OTS also explained that conforming changes could be made to OTS's 
CRA rule. In particular, additional text could be added to Sec.  
563e.28 indicating that a savings association could, at its option, 
elect to have its rating assigned under alternative weights of lending, 
service, and investment (so long as at least 50 percent weight is given 
to lending). To the extent of any inconsistency between the three 
rating principles in Sec.  563e.28(b) and the Composite Rating 
generated from the savings association's election of alternative 
weights, the standards set forth under the applicable matrix would 
govern. Thus, for example, the principle referring to ratings on the 
service test and investment test would not apply to a savings 
association that chose not to have OTS give weight to either or both of 
those factors. 69 FR 68264.
    OTS explained that providing flexibility for a savings association 
to elect alternative weights would supplement the use of the 
performance context factors and serve many of the same functions. OTS 
already evaluates a savings association's performance in the context of 
factors such as the savings association's product offerings and 
business strategy, its institutional capacity and constraints, 
information about lending, investment, and service opportunities in the 
savings association's assessment area(s), and demographic and other 
relevant data pertaining to a savings association's assessment area. 
See 12 CFR 563e.21(b). Likewise, providing weight alternatives would 
enable the savings association to have its performance evaluated in a 
manner most appropriately tailored to the lending, investment, and 
service opportunities in its assessment area(s), demographic and other 
relevant data pertaining to its assessment area(s), its product 
offerings and business strategy, and its institutional capacity and 
constraints. This approach would be designed to encourage large retail 
savings associations to focus their community reinvestment efforts on 
the types of activities the communities they serve need, consistent 
with safe and sound operations.

IV. The Comments

A. Overview

    OTS received approximately 4,200 comments. The vast majority (about 
4,000) came from consumer and community organizations and 
representatives (Consumer Comments). These included community 
development advocates, Community Development Corporations, Community 
Development Financial Institutions, housing authorities, consumer 
protection and civil rights organizations, faith-based organizations, 
and educators, as well as a large number of individuals whose personal 
or professional interest in CRA was not indicated. Most of these 
comments were form letters; some organizations submitted multiple 
letters. These comments opposed the proposal, though a significant 
number did not address the portion of the proposal on assigned ratings. 
OTS also received several comments from members of Congress as well as 
state and local officials, also opposed to the proposal, including the 
portion on assigned ratings.
    In contrast, OTS received a couple of hundred comments from 
financial institutions and industry trade associations (Financial 
Institution Comments). Almost all of these supported the proposal, 
including the portion on assigned ratings. Many of these also were form 
letters; some institutions submitted multiple letters. Given that of 
the nearly 900 savings associations OTS regulates, only about 100 are 
large and would be directly affected by the proposed changes to the 
assignment of ratings, OTS considers the level of support significant.
    A summary of comments received on the portion of the proposal 
addressing

[[Page 10027]]

the assignment of ratings follows. Comments on the portion of the 
proposal addressing the definition of ``community development'' are not 
summarized in this SUPPLEMENTARY INFORMATION section since, as 
explained in Part I of this SUPPLEMENTARY INFORMATION section, OTS is 
deferring action on that aspect of the proposal.

B. Commenters Opposing Proposal

    The Consumer Comments, in opposing the proposal, stated that CRA 
examinations have been very useful in encouraging investment in housing 
and services for low-income people. Generally, they predicted that if 
the proposal were finalized, it would result in a decrease in services 
and investments by large thrifts. Some of the main arguments presented 
were:
     OTS should not allow large thrifts to ``design their own 
watered-down CRA exams.'' If OTS were to permit this, it would fail in 
its responsibility to enforce CRA.
     Thrifts would opt to receive a CRA rating based 100 
percent on lending performance, leading to a decrease in services and 
investments by savings associations. For example, allowing thrifts to 
eliminate the investment test would mean that they would not have to 
finance affordable rental housing through Low Income Housing Tax 
Credits or small businesses through equity investments. Allowing 
thrifts to eliminate the service test would mean that they would not 
have to place or maintain branches in low- and moderate-income 
communities and could ignore the need for remittances and other low-
cost banking services.
     CRA has been effective because the Agencies have issued 
regulations in a careful and uniform manner. OTS acted alone in making 
the streamlined examination for small institutions available to 
institutions between $250 million and $1 billion in assets without 
regard to holding company size. They asserted that OTS was again acting 
unilaterally and without the benefit of interagency debate, this time 
to weaken the examination requirements for institutions over $1 billion 
in assets.
    The Consumer Comments elaborated in various ways on these 
arguments:
     Some emphasized the harmful national impact they expect 
the proposal would have if finalized. One commenter estimated that the 
large thrifts impacted by the proposal control 87 percent of thrift 
assets and that thrifts with assets over $1 billion hold CRA 
investments of $1.3 billion. It projected that the assigned ratings 
proposal would reduce the level of CRA investments by more than 50 
percent. It indicated that if other regulators followed suit, the 
impact would be even more dramatic.
     Some argued that large institutions have substantial room 
for improvement on their CRA performance and criticized OTS's oversight 
of large institutions. One reported performing a sampling of thrifts 
from which it concluded that a sizeable minority of thrifts does not 
engage in community development lending at all. It speculated that, but 
for the investment test, these thrifts would offer no community 
development financing. Another provided data from which it concluded 
that large institutions proportionally offer fewer full service offices 
in low-or moderate-income (LMI) communities than smaller institutions 
in certain service areas. Some expressed concern that because the 
current rules give equal consideration to purchased loans and directly 
originated loans under the lending test, an institution that would 
elect to base its rating 100 percent on lending could receive an 
``outstanding'' or ``satisfactory'' rating without any direct presence 
in LMI markets, further noting that the same loans can be bought 
several times by numerous institutions to boost their perceived CRA 
performance.
     Some asserted that the change was unnecessary, since OTS 
has already established a mechanism to account for the home loan focus 
of thrifts through their ability to concentrate on community 
development lending. One further concluded that the Home Owners' Loan 
Act's investment limits do not disadvantage thrifts under the 
investment component because even thrifts that receive ``outstanding'' 
ratings on investments have investment levels below the investment 
limits.
     Some recommended alternative ways OTS could change CRA 
performance evaluations. One suggested that OTS could revise the 
current structure of the investment test to award more points for 
difficult investments that require patient capital or earn below market 
rates of interest. It also argued that the service test should be made 
more rigorous by requiring data disclosures on the number and 
percentage of checking and savings accounts for LMI borrowers and 
communities and use it as a straightforward measure of responsiveness 
to deposit needs.
    Many Consumer Comments also addressed an issue covered in the 
EGRPRA interim final rule. They asserted that it would reduce vital 
opportunities for community groups and thrifts to meet with OTS to 
discuss CRA and anti-predatory lending matters when thrifts are merging 
because it would allow OTS the discretion to hold only one meeting, 
instead of two. Since this issue pertains to a separate rulemaking, it 
is not further discussed in this Supplementary Information section.
    Comments from elected officials included one from 28 members of the 
House of Representatives (including 13 members of the Committee on 
Financial Services), who filed a joint letter urging OTS to withdraw 
the proposal. They called upon OTS to continue to fully evaluate all 
large retail institutions on their lending, service, and investment 
performance. They expressed concern that permitting institutions to 
choose whether to provide services to, or make investments in, the 
communities in which they are located will encourage them to 
concentrate on whatever is ``easiest'' to do, regardless of the 
communities' needs. They recommended that OTS instead expand the range 
of appropriate activities that qualify for CRA credit, such as 
remittances under the service test, and complex housing investments 
under the investment test. Several Representatives and a Senator wrote 
separately to voice their opposition to the proposal, raising similar 
concerns.
    Several state and local government officials also wrote to oppose 
the proposal, citing similar reasons. These included a joint comment 
letter from 45 mayors and another from 50 members of the New York State 
legislature.
    A few financial institutions and one industry trade association 
also opposed the proposal (or various aspects of it), explaining that 
the current rule strikes the appropriate balance between regulatory 
burden and compliance under the CRA. They expressed particular concern 
about the lack of uniformity among regulators. One industry trade group 
supported the ``spirit'' of the proposal and the goal of increasing 
flexibility, but opposed the proposal based on this lack of uniformity. 
It asserted that the lack of uniformity would increase regulatory costs 
and burdens, particularly at institutions that have multiple charters, 
necessitate revisions to the interagency CRA Qs&As, introduce 
artificial distinctions between the activities conducted by 
institutions with different charters, and hinder the ability to compare 
CRA performance among institutions.
    One large holding company with both thrift and bank subsidiaries 
argued that providing a choice of weights would decrease an 
institution's ability to internally monitor its performance and would 
make comparisons among institutions more difficult through the

[[Page 10028]]

lack of uniformity. A couple of other financial institutions that are 
not chartered by OTS and not subject to its version of the CRA rule 
also opposed the proposal.

C. Commenters Supporting Proposal

    Most financial institutions and industry trade groups commenting, 
on the other hand, strongly supported the proposal and praised OTS's 
efforts to innovate. They explained that the proposal would inject 
flexibility into the CRA process, allow thrifts to better serve their 
communities by allowing them to focus resources where they are most 
needed, and eliminate unnecessary regulatory burden.
    Some explained how the assigned ratings changes would be consistent 
with CRA. They pointed out that the primary focus of the CRA is on the 
provision of credit, as reflected in the wording of the statute itself, 
and pointed out that the CRA statute itself does not mandate the 
service and investment tests. Some cited legislative history to further 
support a lending focus.
    Some of the main arguments presented were:
     The weights in the current CRA rule are inappropriate. The 
50 percent weight for lending is too low for traditional thrifts and 
forces depository institutions into other activities where they may not 
have sufficient expertise. The 25 percent weight for investments forces 
institutions to seek out risky or complex investments and other 
investments beyond their expertise.
     The way ratings are currently assigned is not sufficiently 
flexible. The current service test does not offer sufficient 
flexibility to thrifts that do not offer transaction-based accounts. 
CRA does not adequately accommodate institutions that exclusively 
employ alternative, non-branch delivery systems as their primary 
distribution channel. The proposal would be consistent with CRA by 
allowing OTS to give due consideration to the unique factors applicable 
to each depository institution, taking into account regional 
differences, and the varied business models and product offerings.
    Several Financial Institution Comments addressed the specific 
questions that OTS had also included in the preamble to highlight 
particular aspects of the proposal:
     Several trade associations projected that allowing 
alternative weights would increase the importance of lending and 
increase the provision of credit to the community, consistent with the 
CRA statute.
     Some projected that allowing alternative weights would not 
change the level of lending, investment, and service in the community. 
Some reasoned that community banks of all sizes are committed to 
meeting the needs of their communities through community service--not 
because it is necessary to satisfy CRA compliance requirements--but 
because it is good business. Several argued that, notwithstanding the 
fears expressed by consumer commenters, it is extremely unlikely that 
any large institution would adopt a matrix based solely on lending. One 
form letter submitted by many financial institutions asserted that 
community banks would not change the way they do business or reduce the 
volume of loans, but what they could do, particularly those in rural 
areas, would be to stop investing in statewide or regional projects 
that actually take resources away from the institution's local 
community.
     Several supported continuing to require at least a 50 
percent weight for lending, as being consistent with the purposes of 
the CRA, though one opposed this requirement in the interest of greater 
flexibility. A few trade associations commented that they did not think 
it would be necessary for OTS to otherwise impose restrictions on the 
weight choices, since doing so would reduce the rule's flexibility. A 
few Financial Institutions Comments specifically encouraged OTS to 
provide examples as guidance, as in the proposal.
     A couple supported continuing to require that an 
institution must receive at least a ``low satisfactory'' rating in 
lending to receive an overall ``satisfactory'' rating. They indicated 
that this requirement is consistent with the emphasis on returning to 
the core requirements of the CRA, i.e., the institution's record of 
helping to meet the credit needs of the entire community.
     None preferred eliminating the investment test to the 
alternative weight proposal. Several specifically opposed the 
elimination of the investment test as an alternative, noting that the 
alternative weights proposal would provide flexibility to all large 
retail savings associations, including those that may wish to make 
investments and have their performance evaluated under the investment 
test. One argued that eliminating the investment test would reduce the 
variety of mechanisms available to institutions to meet their CRA 
responsibilities. As a result, this change would actually decrease the 
flexibility that institutions have to serve their communities.
     Some trade associations suggested that concerns about 
uniformity were overstated, noting that the Agencies are not required 
to have uniform rules on CRA. One benefit of departing from uniformity 
might prove to be that differences produce successful and innovative 
solutions to community reinvestment issues. Others favored obtaining 
greater uniformity by having the other regulators adopt OTS's approach.

V. Today's Final Rule

    Having carefully considered the comments, OTS has decided to 
provide additional flexibility in assigning CRA ratings to encourage 
large retail savings associations to focus their community reinvestment 
efforts on the types of activities the communities they serve need, 
consistent with safe and sound operations. The final rule revises the 
manner in which ratings are assigned to reduce burden and restore the 
focus of CRA to lending.
    As discussed in Part II.A. of this SUPPLEMENTARY INFORMATION 
section, the statutory language and legislative history of CRA confirm 
its appropriate lending focus. Given OTS's responsibility to evaluate 
an institution's performance in meeting credit needs, we believe it is 
appropriate to allow institutions to be evaluated with greater emphasis 
on lending than at present. At the same time, in recognition of the 
value to communities of investments and services, OTS is not mandating 
any decrease in the emphasis given to investments or services in an 
evaluation. In fact, today's final rule provides flexibility for 
savings associations evaluated under the large retail institution test 
to opt to be evaluated with the same or greater emphasis given to 
either investments or services than at present. Savings associations 
that do not want alternative weights do not have to do anything 
differently, as today's final rule contains no mandatory changes in the 
way savings associations are evaluated.

A. Regulatory Changes

    The final rule adds a new paragraph to OTS's CRA rule (12 CFR 
563e.28(d)) to reflect that savings associations subject to the large 
retail institution test may elect alternative weights for the lending, 
investment, and service components. In keeping with the proposal, a 
savings association may elect alternative weights for lending, service, 
and investment, so long as lending receives no less than 50 percent 
weight and, of course, the weights total 100 percent.

[[Page 10029]]

    The requirement that lending receive 50 percent weight is not 
codified in the current CRA rule, only in implementing materials. 
Accordingly, OTS is continuing that approach with respect to the 
requirement that any alternative weights selected accord a minimum of 
50 percent weight to lending. OTS will incorporate that specification 
and other technical details for implementing alternative weights into 
guidance that it will issue separately.
    OTS believes that a minimum of 50 percent weight to lending is 
appropriate for purposes of the large retail institution test, 
consistent with the traditional and appropriate emphasis on lending. 
OTS notes, however, that savings associations that may wish to place a 
different emphasis on their CRA efforts might consider submitting a 
strategic plan under Sec.  563e.27 of OTS's CRA rule. While that 
regulation provides that a savings association, other than a wholesale 
or limited purpose institution, generally is to address all three 
performance categories (lending, investments, and services) and 
emphasize lending and lending-related activities, it also indicates 
that a different emphasis is possible. The regulation states, ``[A] 
different emphasis, including a focus on one or more performance 
categories, may be appropriate if responsive to the characteristics and 
credit needs of its assessment areas(s), considering public comment and 
the savings association's capacity and constraints, products offerings, 
and business strategy.'' 12 CFR 563e.27(f)(1)(ii).
    New Sec.  563e.28(d) further provides that the principles in Sec.  
563e.28(b) will not apply to the extent of any inconsistency with 
alternative weights selected. Thus, for example, the principle in Sec.  
563e.28(b)(2) stating that a savings association that receives an 
``outstanding'' rating on both the service test and the investment test 
and a rating of at least ``high satisfactory'' on the lending test will 
receive an assigned rating of ``outstanding'' will not apply to a 
savings association that chooses not to have OTS give weight to 
services and investments. (Likewise, the CRA Qs&As will not apply to 
savings associations regulated by OTS to the extent of any 
inconsistency with today's final rule or any implementing guidance.)
    OTS is also making a conforming change to Sec.  563e.21(a)(1) of 
its CRA rule to avoid any misimpression that OTS will continue to 
always apply all three components of the large retail institution test 
to savings associations assessed under that test. Under today's final 
rule, OTS will continue to apply the lending test to all savings 
associations evaluated under the large retail institution test. But 
whether OTS will apply the investment and service tests will depend 
upon whether the savings association elects optional weights and 
whether those weights entail consideration of these tests. Accordingly, 
OTS is revising Sec.  563e.21(a)(1) to indicate that OTS applies the 
lending, investment, and service tests to the extent consistent with 
Sec.  563e.28(d), the provision allowing savings associations to elect 
alternative weights. If no weight is selected for service and/or 
investment, OTS will not rate that component or components.
    OTS is not making any change to the performance context regulation. 
However, OTS examiners will take the weights selected into 
consideration as part of each savings association's performance 
context. All else being equal, a savings association that opts for OTS 
to give greater weight to any particular component than would apply 
under standard weights will be expected to exhibit stronger performance 
on that component than it would under standard weights in order to 
receive the same rating. At the same time, a savings association that 
opts for OTS to give lesser weight to any particular component than 
would apply under standard weights will not be expected to exhibit 
performance as strong on that component as it would under standard 
weights in order to receive the same rating. The performance context is 
sufficiently flexible, without regulatory change, for OTS examiners to 
take into consideration differences in weight allocations that 
different savings associations may elect as part of existing 
performance context factors such as institutional capacity. See 12 CFR 
563e.21(b).
    For savings associations that do not elect alternative weights for 
lending, service, and investment, OTS will continue to apply the 
Component Test Rating chart in Part II.D. of this SUPPLEMENTARY 
INFORMATION section to assign component ratings that reflect the 
institution's lending, investment, and service performance and 
calculate the composite rating using the Composite Rating matrix in 
Part II.D. of this SUPPLEMENTARY INFORMATION section. These are the 
same Component Test Rating chart and Composite Rating matrix as have 
been in place since 1995. For savings associations that elect 
alternative weights, OTS will issue separate guidance detailing the 
methodology for assigning ratings.
    OTS has considered that providing flexibility to savings 
associations to choose alternative weights will decrease uniformity if 
the other Federal banking agencies do not provide the same type of 
flexibility for the institutions they regulate. However, OTS does not 
anticipate that this decrease in uniformity will cause significant 
complications. For example, if a thrift and a bank are under the same 
holding company and both institutions want to continue to have the same 
weight allocations used in their examinations by their respective 
regulators, the thrift can simply refrain from opting for an 
alternative weight allocation.

B. Using Existing Procedures

    A savings association evaluated under the large retail institution 
test will be able to elect weights, much in the same way as it may 
currently elect consideration of other activities under CRA, such as 
lending by an affiliate or consortium, or investments or services by an 
affiliate, as discussed in Part III of this SUPPLEMENTARY INFORMATION 
section. This has proven to be a simple and efficient procedure. OTS 
intends to revise the PERK package shortly to provide a specific 
optional question soliciting the institution's alternative weight 
designation, if any, just as there are currently optional questions for 
lending by an affiliate or consortium, or investments or services by an 
affiliate. Any necessary updates to examination procedures will also be 
made.
    Savings associations that wish to opt for an alternative weight for 
lending, service, and investment, will be able to do so effective with 
examinations beginning the second quarter of 2005. Until the PERK is 
revised, savings associations with examinations noticed for the second 
quarter of 2005 or thereafter may still elect alternative weights 
through their responses to the existing PERK information requests. PERK 
008L (12/2004), ``Community Reinvestment Act Information--Large 
Institutions,'' already provides that an institution is welcome to 
provide information not listed in the PERK relevant to demonstrating 
the institution's performance.
    By enabling savings associations to elect optional weights through 
the PERK, CRA examinations will become more efficient. Savings 
associations that opt for no weight to the investment test and/or 
service test will not have to provide information pertaining to that 
component or components as part of the CRA examination and OTS 
examiners will not have to evaluate such information, except as the 
information may relate to the performance context.

[[Page 10030]]

C. Anticipated Effect on Community Development

    Commenters have furnished little evidence on the proposal's effect 
on community development. The proposal's opponents predict that 
allowing alternative weights will result in a decrease in services and 
investments by large thrifts, and that this decrease will have an 
adverse impact on community development. These predictions are 
speculative. Supporters make contrary predictions that large savings 
associations will continue to provide community development services 
and investments and are extremely unlikely to adopt a matrix based 
solely on lending.
    Rather than rely on such predictions by opponents or supporters of 
the proposal, we have focused on the common-sense economic principle 
that allowing a savings association greater freedom to specialize in 
those things at which it is relatively more efficient should result in 
more, not less, real community development being delivered. Part of the 
idea behind allowing alternative weights is to not force a savings 
association to provide a service or make an investment that it cannot 
do efficiently--or that may not even be a central part of its business 
plan--and to encourage it to engage in activities at which it is 
relatively more efficient (i.e., where the savings association has a 
comparative advantage). By encouraging each savings association to meet 
its community development obligations through activities at which it 
excels, OTS anticipates gains in economic efficiency deriving from 
specialization. And these gains, in turn, will result in more 
effective, not less effective, community development.
    This added flexibility--permitting a savings association to focus 
its community reinvestment efforts on activities that it does well--
also serves the important goal of helping to assure that the savings 
association meets its community reinvestment obligations in a manner 
consistent with safe and sound operations. Common-sense dictates that 
experience and expertise contribute to safe and sound operations.

VI. Regulatory Analysis

A. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995, 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. This final rule does not change the collection of 
information.

B. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities and will not impose 
any additional paperwork or regulatory reporting requirements. This 
final rule relates only to the treatment of savings associations under 
the retail test mandated only for large institutions.

C. Executive Order 12866 Determination

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

D. Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
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:
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.21(a)(1) to read as follows:


Sec.  563e.21  Performance tests, standards, and ratings, in general.

    (a) * * *
    (1) Lending, investment, and service tests. The OTS applies the 
lending, investment, and service tests, as provided in Sec. Sec.  
563e.22 through 563e.24, in evaluating the performance of a savings 
association, except as provided in paragraphs (a)(2), (a)(3), and 
(a)(4) of this section, and to the extent consistent with Sec.  
563e.28(d).
* * * * *

0
3. Amend Sec.  563e.28 by:
0
a. Removing ``paragraphs (b) and (c) of this section'' in paragraph (a) 
and by adding in lieu thereof ``paragraphs (b), (c), and (d) of this 
section''; and
0
b. Adding a new paragraph (d) to read as follows:


Sec.  563e.28  Assigned Ratings.

* * * * *
    (d) Savings associations electing alternative weights of lending, 
investment, and service. A savings association subject to the lending, 
investment, and service tests may elect alternative weights for 
lending, service, and investment. The principles in paragraph (b) of 
this section do not apply to the extent of any inconsistency with the 
alternative weights selected.

    Dated: February 24, 2005.

    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 05-4016 Filed 3-1-05; 8:45 am]
BILLING CODE 6720-01-P