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Appeal of Needs to Improve CRA Rating - Limited-Purpose Institution (Fourth Quarter 1997)

Background

A formal appeal was received concerning a bank's Community Reinvestment Act (CRA) rating of "Needs to Improve Record of Meeting Community Credit Needs" ("Needs to Improve"). The bank is chartered under the Competitive Equality Banking Act (CEBA) and engages solely in consumer credit card operations. For CRA purposes the bank is considered a limited-purpose bank and is evaluated under the Community Development Test.

The bank originally filed an appeal with the District Deputy Comptroller, who confirmed the "Needs to Improve" rating assigned by the supervisory office. Bank management then appealed to the ombudsman.

The bank stated that since it was operating under both "old and new" CRA regulations during this evaluation period that OCC examiners had not fully considered some of its CRA initiatives. Specifically, the bank felt its program to provide credit cards to individuals living in low-and moderate-income (LMI) census tracts was not fully considered, although that activity does not meet the standards under the Community Development Test. In the appeal letter, management stated that when the new CRA regulation was published the bank considered which evaluation methods would be the most suitable to their business. The bank added that of the three possible options, the large bank and strategic plan methods have clear minimum transition periods of 12 to 18 months to allow an institution time to develop and implement programs to achieve "satisfactory" performance under the revised standards. The appeal letter stated the transition period under the limited purpose method is unclear.

The bank relates they had no reason to think that their lending activities designed for CRA objectives since the last examination would not be fully considered since the bank was operating under the old provisions of CRA for a significant portion of the performance period. In addition, management did not agree that all of the bank's community development investments and services within its assessment area had been fully considered.

Discussion

The two issues resulting from the appeal are:

  1. If a bank's designation to a limited-purpose bank falls within the middle of an evaluation period, under what criteria is the evaluation based? and
  2. Did the examiners consider all of the bank's community development investments and services within its assessment area?

The regulation, 12 CFR 25, states the following:

For purposes of this part, the following definitions apply: 

(o) Limited-purpose bank means a bank that offers only a narrow product line (such as credit card or motor vehicle loans) to a regional or broader market and for which a designation as a limited-purpose bank is in effect, in accordance with 25.25 (b).

12 CFR 25.25-Community development test for wholesale of limited-purpose banks  

(b) Designation as a wholesale or limited-purpose bank. In order to receive a designation as a wholesale or limited-purpose bank, a bank shall file a request, in writing, with the OCC, at least three months prior to the proposed effective date of the designation. If the OCC approves the designation, it remains in effect until the bank requests revocation of the designation or until one year after the OCC notifies the bank that the OCC has revoked the designation on its own initiative.

The regulation provides for a bank to make an alternative election under a strategic plan; however, it stipulates that the bank will have to be operating under an approved plan for at least one year before being assessed under the pan. The large bank method allowed for institutions to elect to operate under the old standards for 18 months, the time between the January, 1996 effective date on which to begin collecting data and the July, 1997 date on which the new examination procedures would go into effect and data on performance was available.

The bank did seek a limited-purpose designation and it became effective half way through the evaluation period. Subchapter 25 states the performance criteria for the community development test as follows:

(c) Performance criteria. The OCC evaluates the community development performance for a wholesale or limited-purpose bank pursuant to the following criteria: 

  1. The number and amount of community development loans (including originations and purchases of loans and other community development loan data provided by the bank, such as data on loans outstanding, commitments, and letters of credit), qualified investments or community development services; 
  2. The use of innovative or complex qualified investments, community development loans, or community development services and the extent to which the investments are not routinely provided by private investors; and 
  3. The bank's responsiveness to credit and community development needs.

Based on the above information, the regulation does not address under what criteria a bank approved as limited-purpose bank during the middle of an evaluation period, will be assessed.

Conclusion

The regulation does not directly address how a bank will be evaluated when it changes designation from large to a limited-purpose bank during an evaluation period. Although the choice to seek a limited-purpose designation does not unilaterally erase all CRA initiatives performed to that date. Therefore, future letters from the OCC granting approval for a limited purpose designation will contain language addressing how the bank will be evaluated during their next CRA examination.

In the case of this institution, the length of time from the designation as a limited purpose bank until receipt of the appeal was considered adequate to assess the bank under the community development test. While the bank's belief that providing credit cards to individuals living in LMI census tracts is within the spirit of CRA is understandable, providing credit cards does not fall within the community development definition contained within the CRA regulation. The supervisory office was appropriate in its exclusion of these activities.

During the review of the bank's community development investments it was found that not all qualified investments had been fully identified or presented by the bank to the examiners for consideration, including investments in state-wide and regional organizations that includes the bank's assessment area.  In addition, some CRA initiatives that were in the early stages of development during the examination had progressed to the point where some consideration could be given,  after reassessing and factoring in these additional investments and initiatives, the Ombudsman concluded that the bank's CRA performance level met the standards for "Satisfactory Record of meeting Community Credit Needs."  The district prepared a revised CRA Public Disclosure.