[Federal Register Volume 71, Number 70 (Wednesday, April 12, 2006)]
[Rules and Regulations]
[Pages 18614-18618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3472]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563e

[No. 2006-16]
RIN 1550-AB48


Community Reinvestment Act--Community Development

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

ACTION: Final rule.

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

SUMMARY: In this final rule, OTS is revising the definition of 
``community development'' in its Community Reinvestment Act (CRA) 
regulations to reduce burden and provide greater flexibility to meet 
community needs. The change is designed to encourage savings 
associations to increase their community development lending, qualified 
investments, and community development services in distressed or 
underserved rural areas and designated disaster areas. This change will 
make OTS's definition of ``community development'' and the definition 
of the other federal banking agencies uniform. OTS is also making a 
technical change to conform the lettering of its definitions

[[Page 18615]]

to that of the other federal banking agencies.
    Accompanying this final rule and published in the Notices portion 
of today's Federal Register, is a Notice and Request for Comment to 
revise OTS's CRA guidance. That notice contains proposed questions and 
answers related to the revised definition of ``community development'' 
and other topics as well as revisions to existing questions and 
answers.

DATES: This rule is effective on April 12, 2006.

FOR FURTHER INFORMATION CONTACT: Celeste Anderson, Senior Program 
Manager, Operation Risk, (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.
    OTS designed the proposal to further the CRA burden reduction it 
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 also furthered 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).
    On March 2, 2005, OTS adopted changes to the way it assigns CRA 
ratings. 70 FR 10023. Specifically, OTS provided 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. OTS deferred action, however, on revising the definition of 
``community development.'' OTS noted that the Federal Deposit Insurance 
Corporation (FDIC) had also issued a proposal to expand the definition 
of ``community development.'' 69 FR 51611 (August 20, 2004). OTS 
indicated that it was deferring action on this portion of its proposal 
to allow for further consideration of, and coordination on, these and 
other proposals.
    On March 11, 2005, the Office of the Comptroller of the Currency 
(OCC), the Board of Governors of the Federal Reserve System (Board), 
and the FDIC issued a joint notice of proposed rulemaking which, among 
other things, proposed to expand the definition of ``community 
development'' to include certain community development activities in 
underserved rural areas and designated disaster areas. 70 FR 12148 
(Three-Agency Proposal). Like OTS's proposal, the Three-Agency Proposal 
responded to suggestions from both institutions and community 
organizations that the current definition of ``community development'' 
was too narrow.

II. OTS's November 2004 Proposal

    Under OTS's current CRA regulation at 12 CFR 563e.12(f), 
``community development'' means:
    (1) Affordable housing (including multifamily rental housing) for 
low-or moderate-income individuals;
    (2) Community services targeted to low-or moderate-income 
individuals;
    (3) Activities that promote economic development by financing 
businesses or farms that meet the size eligibility standards of the 
Small Business Administration's Development Company or Small Business 
Investment Company programs (13 CFR 121.301) or have gross annual 
revenues of $1 million or less; or
    (4) Activities that revitalize or stabilize low-or moderate-income 
geographies. 12 CFR 563e.12(f).
    The definition of ``community development'' significantly affects 
the requirements on large retail savings associations. OTS evaluates 
them under a three-part test that can include consideration of their 
``community development'' loans and services, as well as their 
qualified investments. To earn CRA credit for these activities, the 
primary purpose must be ``community development.'' 12 CFR 563e.12 and 
563e.21-563e.24.
    The definition also affects the requirements for wholesale or 
limited purpose savings associations, since they are evaluated under a 
test specifically focused on their community development lending, 
qualified investments, and community development services. 12 CFR 
563e.25. The definition could even affect small savings associations. 
For a small savings association, OTS considers its performance in 
making community development loans and qualified investments and 
providing community development services for purposes of raising a 
rating, where the savings association so requests. 69 FR at 51159.
    The appropriate definition of ``community development'' was an 
issue discussed in the July 2001 joint advance notice of proposed 
rulemaking and the February 2004 joint notice of proposed rulemaking. 
OTS's November 2004 proposal would have revised the definition of 
``community development'' with respect to rural areas and solicited 
comment on also encompassing any areas affected by natural or other 
disasters or other major community disruptions.
    With respect to rural areas, OTS proposed to expand the second and 
fourth paragraphs of the community development definition. Under the 
expanded definition, community development would also include community 
services targeted to individuals in rural areas and activities that 
revitalize or stabilize rural areas.
    OTS did not propose a specific definition of ``rural'' in the NPR. 
However, it solicited comments on the appropriate definition. 69 FR at 
68258-68259.
    The proposal also solicited comment on further encouraging savings 
associations to perform community development activities in any areas 
affected by natural or other disasters or other major community 
disruptions. OTS designed this portion of the proposal to build on the 
long-standing OTS policy of extending CRA credit for relief efforts in 
the wake of natural and other disasters. This policy was formalized in 
OTS Thrift Bulletin 71 (August 8, 1997), which states, ``OTS will 
consider the institution's response to a disaster as an important 
element of ``performance context'' under [OTS's] Community Reinvestment 
Act regulations (12 CFR Sec.  563e.21(b)) when evaluating the 
institution's reconstruction, stabilization and redevelopment 
activities in its community.'' OTS has reiterated this policy in a long 
line of agency guidance pertaining to natural disasters, including 
Hurricanes Katrina, Rita, and Wilma, as well as other disasters such as 
the September 11, 2001 terrorist attacks.

III. The Comments

    As summarized in the March 2005 final rule, OTS received over 4,000

[[Page 18616]]

comments on its November 2004 proposal. The vast majority of comments 
came from consumer and community organizations and representatives 
(Consumer Comments). These comments opposed the proposal, though a 
significant number did not address the portion of the proposal on the 
community development definition. Many expressed concern that the 
proposal would allow thrifts to serve affluent neighborhoods in rural 
areas and areas affected by natural disasters, while neglecting low- 
and moderate-income neighborhoods. They argued that expanding the 
definition of ``community development'' would burden low- and moderate-
income individuals who would have no other option but to turn to 
predatory and subprime lenders to finance their homes and small 
businesses. One joint comment letter from 28 members of the House of 
Representatives (including 13 members of the Committee on Financial 
Services) argued that neither the CRA nor its legislative history 
supports treating all rural activities as qualifying for CRA credit. 
The Representatives emphasized that the proper focus of the CRA should 
be on the needs of low- and moderate-income areas without a distinction 
between urban and rural areas.
    In contrast, OTS received about two hundred comments from financial 
institutions and industry trade associations (Financial Institution 
Comments). Almost all of these supported the proposal, including the 
portion on the definition of community development. A common argument 
was that thrifts with assessment areas that include rural areas often 
have few opportunities to provide qualified CRA loans, investments, and 
services. As a result, these thrifts often invest in housing bonds in 
statewide areas that do not benefit the institution's community. 
Further, the current rule encourages thrifts to undertake activities 
primarily in urban areas, leaving many rural areas underserved, 
notwithstanding the fact that low- and moderate-income families are 
often dispersed throughout rural areas.
    There was no consensus among those who commented on how best to 
delineate the rural areas that would count for community development. 
Yet, there was strong sentiment that the public needed a definition for 
clarity.

IV. Today's Final Rule Revising the Community Development Definition

    Having carefully considered the comments, OTS is revising the 
definition of ``community development'' to be the same as the 
definition that the Board, OCC, and FDIC adopted in their August 2005 
final rule. The revision is designed to encourage all savings 
associations to increase their community development lending, qualified 
investments, and community development services in certain 
nonmetropolitan middle-income areas as well as areas affected by 
designated disasters. The reason OTS is making this revision is to 
encourage more community development activities in more areas, to cover 
the full range of activities that should receive favorable 
consideration, and to reduce burden by affording savings associations 
greater flexibility in serving their communities. This revision will 
make OTS's definition of ``community development'' and the definition 
of the other federal banking agencies uniform.
    OTS does not believe that the exclusive focus of CRA must be on 
low- and moderate-income individuals and geographies. The CRA statute 
indicates: ``It is the purpose of this title 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 also 
provided in the CRA statute that the written evaluations are to assess 
``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).
    Given the statutory text, it is appropriate that we evaluate an 
institution's record of meeting the credit needs of its entire 
community, particularly, but not limited to, low- and moderate-income 
neighborhoods and individuals. Accordingly, OTS believes the CRA rule 
must allow for due consideration of an institution's service to areas 
and individuals in its community with credit needs, even if those 
individuals or areas are not low-or moderate-income.
    Today's revisions will help ensure that OTS can appropriately 
consider how well an institution serves the credit needs of certain 
nonmetropolitan middle-income areas and areas affected by disasters, 
since these areas can also be part of an institution's community. The 
revisions do this, in part, by increasing the number and kinds of 
tracts, particularly rural tracts, in which a savings association's 
community development activities would receive full CRA credit.
    Specifically, OTS is expanding the fourth paragraph of the 
community development definition. This is the ``revitalize or 
stabilize'' category of the definition of ``community development.'' 
Under the expanded definition, community development will include 
activities that revitalize or stabilize:
     Low-or moderate-income geographies;
     Designated disaster areas; or
     Distressed or underserved, nonmetropolitan middle-income 
geographies designated by OTS based on rates of poverty, unemployment, 
and population loss or based on population size, density, and 
dispersion.
    Under the revised definition of ``community development,'' eligible 
rural tracts will also include nonmetropolitan middle-income tracts 
designated by OTS as distressed or underserved based on either of two 
sets of criteria: (1) Criteria indicating a community is in distress 
(rates of poverty, unemployment, and population loss) or (2) criteria 
indicating a community may have difficulty meeting essential community 
needs (population size, density, and dispersion). ``Nonmetropolitan'' 
means an area outside of an MSA. Eligible rural tracts will continue to 
include tracts currently defined as low-income or as moderate-income. 
OTS will base the ``distressed or underserved'' designations on 
objective criteria. OTS will designate a nonmetropolitan middle-income 
tract if it is in a county that meets one or more of the following 
triggers that the Community Development Financial Institution (CDFI) 
Fund employs as ``distress criteria': (1) An unemployment rate of at 
least 1.5 times the national average; (2) a poverty rate of 20 percent 
or more; or (3) a population loss of ten percent or more between the 
previous and most recent decennial census or a net migration loss of 
five percent or more over the five-year period preceding the most 
recent census. 12 CFR 1805.201(b)(3). While the CDFI Fund uses other 
criteria as well, including an income trigger different from the 
definition of ``low-or moderate-income'' under the CRA regulations, OTS 
is not incorporating these other criteria. Activities will qualify as 
revitalizing or stabilizing in these tracts, like in low-or moderate-
income tracts, based on the regulation and applicable guidance.
    A nonmetropolitan middle-income tract will also be designated if it 
meets criteria for population size, density, and dispersion that 
indicate the area's population is sufficiently small, thin, and distant 
from a population center

[[Page 18617]]

that the tract is likely to have difficulty financing the fixed costs 
of meeting essential community needs. OTS will use, as the basis for 
the designations, the ``urban influence codes'' maintained by the 
Economic Research Service of the United States Department of 
Agriculture. These codes can be found at www.ers.usda.gov/Briefing/Rurality/urbaninf. In designated areas, savings association financing 
for construction, expansion, improvement, maintenance, or operation of 
essential infrastructure or facilities for health services, education, 
public safety, public services, industrial parks, or affordable 
housing, generally, will be considered to meet essential community 
needs, so long as the infrastructure or facility serves low- and 
moderate-income individuals. Other savings association activities in 
such areas, generally, will not qualify for revitalization or 
stabilization consideration unless the area meets the distress 
criteria. In these cases, the decision about whether a particular 
activity qualifies for such consideration, based on the regulation and 
applicable guidance, will continue to be made on a case-by-case basis.
    The distressed or underserved, nonmetropolitan middle-income 
geographies OTS designates will be listed on the web site of the 
Federal Financial Institutions Examination Council (www.ffiec.gov). 
That web site contains the list of eligible rural tracts that are 
distressed or underserved. OTS will use the same list as the other 
three federal banking agencies. Year-to-year changes in the tracts 
designated based on the distress criteria are expected to be minimal; 
to account for such changes there will be a uniform lag period of 
twelve months for removal from the list of any tract designated based 
on those criteria. The lag will help promote investments that take an 
extended period to arrange. A qualifying loan, investment, or service 
in the area will count as long as the savings association made or 
entered into a binding commitment to make the loan or investment while 
the area remains on the FFIEC list. It will also count if the savings 
association provided or entered into a binding commitment to provide 
the service during the same period.
    OTS is also revising the definition of ``community development'' to 
include savings association activities to revitalize or stabilize 
designated disaster areas as eligible for CRA consideration. Under the 
revised community development definition, a ``designated disaster 
area'' is an area that has received an official designation as a 
disaster area.
    This change will serve to codify, through regulation, OTS's long-
standing policy of encouraging savings associations to take an active 
role in assisting in disaster recovery efforts. Particularly in light 
of several recent severe hurricanes, it is appropriate that OTS 
recognize the critical role that savings associations should play in 
helping revitalize affected communities and assisting borrowers 
affected to recover their financial strength. Examiners will give 
significant weight to a savings association's revitalization activities 
in a disaster area that benefit low- or moderate-income individuals.
    Accompanying this final rule and published in the ``Notice'' 
portion of today's Federal Register, is a Notice and Request for 
Comment to revise OTS's CRA guidance as contained in the Interagency 
Questions and Answers Regarding Community Reinvestment. 65 FR 36620 
(July 12, 2001). That notice contains proposed questions and answers 
related to the revised definition of ``community development'' and 
other topics as well as revisions to existing questions and answers. 
The proposed guidance in that notice is consistent with final guidance 
the other federal banking agencies recently issued. See 71 FR 12424 
(March 10, 2006).

V. Technical Amendment

    OTS is also making a technical change to conform the lettering of 
the definitions in its CRA rule to that of the other federal banking 
agencies. Because OTS's rule applies to savings associations rather 
than banks, OTS's rule does not define the term ``bank'' whereas the 
CRA rules of the other federal banking agencies do. Compare 12 CFR 
563e.12 with 12 CFR 25.12(e), 228.12(e), and 345.12(e). As a result, 
OTS designated many of the definitions in its rule with the letter that 
precedes the letter the other federal banking agencies use in their 
rules. These designations have caused technical complications, 
including complications in referencing the appropriate paragraph of the 
rule for purposes of interagency guidance.
    Today's final rule reserves one lettered paragraph in Sec.  563e.12 
to provide for greater consistency among the federal banking agencies 
regulations.

Regulatory Analysis

Administrative Procedure Act; Riegle Community Development and 
Regulatory Improvement Act of 1994

    OTS finds that there is good cause to dispense with the 30-day 
delay of effective date mandated by the Administrative Procedure Act. 5 
U.S.C. 553. OTS believes that this procedure is unnecessary and 
contrary to the public interest because this final rule imposes no 
additional requirements. It reduces burden by expanding the types of 
community development activities for which savings associations may 
receive CRA consideration. It is particularly appropriate that the 
provisions regarding CRA credit for revitalizing and stabilizing 
designated disaster areas are put into effect immediately in light of 
the unprecedented and tragic devastation caused by several recent Gulf 
coast hurricanes. In this way, OTS will further encourage savings 
associations to take an active role in assisting in disaster recovery 
efforts.
    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 provides that regulations that impose 
additional reporting, disclosure, or other new requirements may not 
take effect before the first day of the quarter following publication. 
12 U.S.C. 4802. This section does not apply because this final rule 
imposes no additional requirements. It reduces burden by expanding the 
types of community development activities for which savings 
associations may receive CRA consideration.

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.

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. It will not impose 
any additional paperwork or regulatory reporting requirements. It will 
simply encourage savings associations to increase their community 
development lending, qualified investments, and community development 
services in certain nonmetropolitan middle-income areas and areas 
affected by disasters. The technical amendment to the paragraph 
lettering in Sec.  563e.12 has no impact whatsoever.

[[Page 18618]]

Executive Order 12866 Determination

    OTS has determined that this final rule 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 (adjusted annually for inflation). 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, 
exceeding the expenditure threshold. Accordingly, OTS has not prepared 
a budgetary impact statement nor specifically addressed the regulatory 
alternatives considered.

Executive Order 13132

    OTS has determined that this final rule does not have any 
Federalism implications, as required by Executive Order 13132.

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. In Sec.  563e.12:
0
a. Redesignate paragraphs (e) through (w) as (f) through (x);
0
b. Add and reserve a new paragraph (e); and
0
c. Revise newly redesignated paragraph (g)(4) to read as follows:


Sec.  563e.12  Definitions.

* * * * *
    (e) [Reserved]
* * * * *
    (g) Community development means:
* * * * *
    (4) Activities that revitalize or stabilize--
    (i) Low- or moderate-income geographies;
    (ii) Designated disaster areas; or
    (iii) Distressed or underserved, nonmetropolitan middle-income 
geographies designated by OTS based on--
    (A) Rates of poverty, unemployment, and population loss; or
    (B) Population size, density, and dispersion. Activities revitalize 
and stabilize geographies designated based on population size, density, 
and dispersion if they help to meet essential community needs, 
including needs of low- and moderate-income individuals.
* * * * *

    Dated: March 31, 2006.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. 06-3472 Filed 4-11-06; 8:45 am]
BILLING CODE 6720-01-P