[Federal Register Volume 69, Number 226 (Wednesday, November 24, 2004)]
[Proposed Rules]
[Pages 68257-68265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26011]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 69, No. 226 / Wednesday, November 24, 2004 / 
Proposed Rules

[[Page 68257]]



DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563e

[No. 2004-53]
RIN 1550-AB48


Community Reinvestment Act--Community Development, Assigned 
Ratings

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

ACTION: Notice of proposed rulemaking.

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

SUMMARY: In this notice of proposed rulemaking (proposal), OTS is 
proposing changes to, and soliciting comment on, its Community 
Reinvestment Act (CRA) regulations in two areas to reduce burden.
    First, OTS is proposing to revise the definition of ``community 
development'' to encourage all savings associations to increase their 
community development lending, qualified investments, and community 
development services in rural areas, with a particular focus on 
increasing these activities in underserved nonmetropolitan areas. The 
proposal also solicits 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.
    Second, the proposal solicits comment on providing 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. As an alternative, the proposal solicits comment on 
eliminating the investment test.
    Today's proposed changes are designed to reduce burden to the 
extent consistent with safe and sound supervision of the industry. They 
would further the CRA burden reduction OTS began in its final rule 
published in the Federal Register on August 18, 2004, which revised the 
definition of ``small savings association.'' They would also further 
the burden reductions in the interim final rule published elsewhere in 
today's Federal Register as part of OTS's review of regulations under 
section 2222 of the Economic Growth and Regulatory Paperwork Reduction 
Act of 1996 (EGRPRA).

DATES: Comments must be received by January 24, 2005.

ADDRESSES: You may submit comments, identified by No. 2004-53, by any 
of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail address: <a href="/cdn-cgi/l/email-protection#dfadbab8acf1bcb0b2b2bab1abac9fb0abacf1abadbabeacf1b8b0a9"><span class="__cf_email__" data-cfemail="cebcaba9bde0ada1a3a3aba0babd8ea1babde0babcabafbde0a9a1b8">[email protected]</span></a>. Please 
include No. 2004-53 in the subject line of the message and include your 
name and telephone number in the message.
    <bullet> Fax: (202) 906-6518.
    <bullet> Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: No. 2004-53.
    <bullet> Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: No. 2004-53.
    Instructions: All submissions received must include the agency name 
and docket number or Regulatory Information Number (RIN) for this 
rulemaking. All comments received will be posted without change to the 
OTS Internet site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1, including any personal information 
provided.
    Docket: For access to the docket to read background documents or 
comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1.
    In addition, you may inspect comments at the Public Reading Room, 
1700 G Street, NW., by appointment. To make an appointment for access, 
call (202) 906-5922, send an e-mail to <a href="/cdn-cgi/l/email-protection#79451859110b1c1f44" http: public.info">public.info</a>@ots.treas.gov">public.info@ots.treas.gov</a>, or 
send a facsimile transmission to (202) 906-7755. (Prior notice 
identifying the materials you will be requesting will assist us in 
serving you.) We schedule appointments on business days between 10 a.m. 
and 4 p.m. In most cases, appointments will be available the next 
business day following the date we receive a request.

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 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. These 
proposed changes are designed to reduce burden to the extent consistent 
with the safe and sound supervision of the industry. These changes 
would provide institutions with more flexibility to make their own 
determinations about how best to serve their communities. They would 
further the CRA burden reduction OTS began in its final rule published 
in the Federal Register on August 18, 2004, which revised the 
definition of ``small savings association.'' 69 FR 51155. They would 
also complement the burden reductions contained in OTS's interim final 
rule published elsewhere in today's Federal Register as part of OTS's 
review of regulations under section 2222 of the EGRPRA (Pub. L. 104-
208, Sept. 30, 1996). The related EGRPRA rule is reducing regulatory 
burden on savings associations by updating and revising various 
application and reporting requirements.

Community Development Proposal

    OTS is proposing to revise the definition of ``community 
development.'' The proposal is designed to encourage all savings 
associations to increase their community development lending, qualified 
investments, and community development services in rural areas, with a 
particular focus on increasing these activities in underserved 
nonmetropolitan areas. The proposal also solicits comment on

[[Page 68258]]

further encouraging savings associations to perform community 
development activities in any areas affected by natural or other 
disasters or other major community disruptions. OTS is considering 
these revisions to encourage more community development activities in 
rural areas, to cover the full range of activities that should receive 
favorable consideration in all areas, and to reduce burden by affording 
savings associations greater flexibility in serving their communities.

The Current Rule

    Under the current definition in section 563e.12(f) of OTS's 
regulation, ``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. See 69 FR 41181, 41188 (July 8, 2004) (redesignating the 
definition of ``community development'' as paragraph (f) of section 
563e.12, among other changes).

The 2001 ANPR

    As discussed in the 2001 ANPR, ``[S]ome [commenters] indicate that 
many projects intended to revitalize or stabilize rural communities do 
not qualify under the current regulatory definition of community 
development because they are not located in low- or moderate-income 
geographies as defined in the regulations. Others assert that the 
definition does not adequately value activities benefiting communities 
or projects involving persons with a mix of incomes.'' 66 FR at 37605.
    As explained in the preamble to the 2004 NPR, commenters on the 
2001 ANPR were split over the appropriateness of the current definition 
of ``community development.'' Financial institutions asked the banking 
agencies to remove from the definition of ``community development'' the 
requirement that community development activities target primarily low- 
or moderate-income individuals or areas, and expand the definition to 
include community-building activities that incidentally benefit low- or 
moderate-income individuals or areas. For instance, several financial 
institutions contended that any activity that helps ``revitalize and 
stabilize'' an area (e.g., after a natural disaster or a steady 
economic decline) should be considered community development, even if 
the activity is not located in, or targeted to, low- or moderate-income 
communities. Other examples of activities for which they sought 
consideration included municipal bonds and grants to cultural 
organizations and other charities. In contrast, community organizations 
that expressed a view favored retaining the current definition of 
``community development'' or narrowing it. For example, many community 
organizations sought to limit the ``economic development'' component of 
the definition to financing minority-owned businesses or farms and 
businesses or farms in low- or moderate-income areas. 69 FR at 5733.

The 2004 NPR

    The 2004 NPR did not propose to revise the definition of 
``community development.'' Thus, it did not specifically solicit 
comment on this issue and commenters did not focus on it. But as noted 
in the preamble to OTS's August 18th final rule, community 
organizations opposed to changing the definition of ``small 
institution'' 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. 69 FR at 51157. 
Further, some in Congress submitted comments encouraging the banking 
agencies to expand the definition of ``community development.'' A few 
other commenters supported giving more weight to philanthropy in 
underserved markets.

Today's Proposal

    Today's proposal on the definition of ``community development'' 
would address rural areas as well as any areas affected by natural or 
other disasters or other major community disruptions.
    With respect to rural areas, the second and fourth paragraphs of 
the community development definition would be expanded. Thus, under the 
proposed expanded definition, community development would also include: 
(1) Community services targeted to individuals in rural areas; and (2) 
activities that revitalize or stabilize rural areas. Community 
development activities in rural areas would be covered even if the 
individuals or areas served are not low- or moderate-income. This would 
contrast with the current definition of ``community development,'' 
which focuses on activities that benefit low- and moderate-income 
individuals or geographies.
    OTS is proposing this change to reduce burden and provide greater 
flexibility. OTS is responding to concerns that competition for scarce 
CRA loans and investments in certain metropolitan areas not only 
disadvantages small institutions that cannot compete for quality CRA 
loans and investments, but also results in a largely urban CRA focus. 
OTS's examination experience indicates that rural areas tend to be 
composed of mixed-income census tracts that may not qualify as low- or 
moderate-income areas. Expanding the definition of ``community 
development'' as proposed would further encourage savings associations 
to engage in community development activities outside of their 
traditional CRA market--while still applying existing standards for 
consideration of activities inside or outside the assessment area(s)--
and thereby encourage the extension of CRA and community development to 
currently underserved and overlooked rural communities.
    As explained in OTS's August 18th final rule, even with respect to 
small savings associations, OTS already considers 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. 69 FR at 51159. Thus, the proposed 
change to the definition of ``community development'' is designed to 
encourage all thrifts--large and small--to increase their community 
development activities in rural areas, with a particular focus on 
increasing these activities in underserved nonmetropolitan areas.
    OTS is not proposing a specific definition of ``rural'' at this 
time. However, it solicits comments on the appropriate definition 
below.
    The proposal also solicits comment below on further encouraging 
savings associations to perform community development activities in any 
areas affected by natural or other disasters or other major community 
disruptions. This portion of the proposal would not be limited to rural 
areas or activities targeted to low- or moderate-income individuals or 
low- or moderate-income geographies. OTS has not, however, included 
proposed rule text that would address this possible change.

[[Page 68259]]

Solicitation of Comment on Community Development Proposal

    OTS solicits comments on all aspects of this proposal.

A. Solicitation of Comments on the Definition of ``Community 
Development''

    1. Should the definition of ``community development'' be expanded? 
If so, how?
    2. Does the proposed change to the community development definition 
encompass the full range of community development activity that 
benefits rural areas? Should the definition include a savings 
association's demonstrated participation in other types of community 
activities? Should the regulation provide for the Director of OTS to 
determine that additional activities that benefit the public welfare 
constitute ``community development?''
    3. OTS has indicated in the wake of natural disasters and the 
September 11th terrorist attacks, that it would take into account an 
institution's response to its community when evaluating the 
institution's stabilization activities under CRA. Would it be 
appropriate for the definition of ``community development'' to 
expressly provide that community development also includes, in any area 
(rural or not, low- or moderate-income or not): (1) Community services 
targeted to individuals in areas affected by natural or other disasters 
or other major community disruptions; and (2) activities that 
revitalize or stabilize areas affected by natural or other disasters or 
other major community disruptions? What other types of major community 
disruptions should be covered (e.g., civil unrest, arson)?
    4. As proposed, OTS would not expand the first paragraph of the 
definition of ``community development'' to include affordable housing 
(including multifamily rental housing) for individuals in rural areas 
who are not low- or moderate-income. Would it be appropriate to cover 
such activities? Do such activities contribute to community 
development? If so, how? Are there difficulties with housing 
affordability and availability in rural areas (e.g., marketability on 
the secondary mortgage market) that could appropriately be addressed by 
revising the definition of ``community development?''
    5. As proposed, OTS would not expand the third paragraph of the 
definition of ``community development'' to include activities that 
promote economic development by financing businesses or farms in rural 
areas without regard to their size or gross annual revenues. Would it 
be appropriate to cover such activities? Do such activities contribute 
to community development? If so, how? Are there difficulties with 
financing business or farms of various sizes or gross annual revenues 
in rural areas that could appropriately be addressed by revising the 
definition of ``community development?''
    6. What would be the impact of the proposed definitional change for 
purposes of the community development test for wholesale or limited 
purpose savings associations, the large retail institution test, the 
small savings association test, and any other provisions of the CRA 
regulation affected?

B. Solicitation of Comment on the Definition of ``Rural''

    1. Would a definition of ``rural'' be helpful? If so, how should 
``rural'' be defined?
    2. Would the definition of ``nonmetropolitan area,'' which is to be 
incorporated in section 563e.12(r) of OTS's CRA regulation, be 
appropriate (i.e., any area that is not located in a metropolitan 
statistical area)? See 69 FR at 41188. This definition is derived from 
the Office of Management and Budget's Standards for Defining 
Metropolitan and Micropolitan Statistical Areas. 65 FR 82228 (December 
27, 2000). However, OMB has indicated, ``The Metropolitan and 
Micropolitan Statistical Area Standards do not equate to an urban-rural 
classification; many counties included in Metropolitan and Micropolitan 
Statistical Areas, and many other counties, contain both urban and 
rural territory and populations.'' OMB Bulletin No. 04-03 (February 18, 
2004), available at, http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.
    3. Are there other definitions that would be appropriate? For 
example:
    a. The U.S. Census Bureau classifies as ``urban'' all territory, 
population, and housing units located within an urbanized area (UA) or 
an urban cluster (UC). It delineates UA and UC boundaries to encompass 
densely settled territory, which consists of:
    (1) Core census block groups or blocks that have a population 
density of at least 1,000 people per square mile and (2) surrounding 
census blocks that have an overall density of at least 500 people per 
square mile. In addition, under certain conditions, less densely 
settled territory may be part of each UA or UC. The Census Bureau's 
classification of ``rural'' consists of all territory, population, and 
housing units located outside of UAs and UCs. The rural component 
contains both place and nonplace territory. Geographic entities, such 
as census tracts, counties, metropolitan areas, and the territory 
outside metropolitan areas, often are ``split'' between urban and rural 
territory, and the population and housing units they contain often are 
partly classified as urban and partly classified as rural. See ``Census 
2000 Urban and Rural Classification,'' available at http://www.census.gov/geo/www/ua/ua_2k.html.
    b. The U.S. Department of Agriculture (USDA) uses various 
definitions.
    i. One definition groups counties according to their official 
status as metropolitan or nonmetropolitan under OMB standards. It then 
applies 9 rural-urban continuum codes to further distinguish among 
metropolitan counties by size and nonmetropolitan counties by their 
degree of urbanization or proximity to metropolitan areas. Codes 1 
through 3 are various types of metropolitan counties while codes 4 
through 9 are various types of nonmetropolitan. Within nonmetropolitan 
areas, Code 8 is a county that is completely rural or has less than 
2,500 in urban population and is adjacent to a metropolitan area, while 
Code 9 is a county that is completely rural or has less than 2,500 in 
urban population and is not adjacent to a metropolitan area. See ``What 
is Rural?'' available at http://www.nal.usda.gov/ric/faqs/ruralfaq.htm 
and ``Measuring Rurality: Rural-Urban Continuum Codes,'' available at 
http://www.ers.usda.gov/briefing/rurality/RuralUrbCon.
    ii. Another definition, contained in the Farm Security and Rural 
Investment Act of 2002, applies generally to the USDA's Rural Community 
Advancement programs. It defines ``rural'' and ``rural area'' generally 
to mean ``any area other than a city or town that has a population of 
greater than 50,000 inhabitants; and the urbanized area contiguous and 
adjacent to such a city or town.'' 7 U.S.C. 1991(a)(13).
    iii. Another definition, applicable to the Rural Empowerment Zones 
and Enterprise Communities initiative, generally defines a ``rural 
area'' as consisting of any area that lies outside the boundaries of a 
Metropolitan Area, as designated by OMB, or an area that has a 
population density less than or equal to 1,000 persons per square mile, 
the land use of which is primarily agricultural. 7 CFR 25.503(a).

Assigned Ratings Proposal

    OTS is soliciting comment on providing additional flexibility in 
the way that CRA ratings are assigned. This

[[Page 68260]]

change would reduce burden and 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. As an alternative way to reduce burden, the proposal 
solicits comment on eliminating the investment test.

The Current Rule

    Under the CRA regulation at 12 CFR 563e.28(b), OTS assigns ratings 
to savings associations assessed under the lending, investment, and 
service tests 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.
    The Interagency Questions and Answers Regarding Community 
Reinvestment, 66 FR 36620 (July 12, 2001), address how the banking 
agencies weight performance under the lending, investment, and service 
tests for large retail institutions. Q&A 28(a)-3, 66 FR at 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 matrices (66 FR at 36639-
36640):

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


                   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 first matrix, currently approximately 50 
percent weight is given to lending, and approximately 25 percent weight 
is given to services and investments each.
    Under section 563e.21(b) of OTS's CRA regulation, OTS applies the 
tests in a performance context that considers the following:
    (1) Demographic data on median income levels, distribution of 
household income, nature of housing stock, housing costs, and other 
relevant data pertaining to a savings association's assessment area(s);
    (2) Any information about lending, investment, and service 
opportunities in the savings association's assessment area(s) 
maintained by the savings association or obtained from community 
organizations, state, local, and tribal governments, economic 
development agencies, or other sources;
    (3) The savings association's product offerings and business 
strategy as determined from data provided by the savings association;
    (4) Institutional capacity and constraints, including the size and 
financial condition of the savings association, the economic climate 
(national, regional, and local), safety and soundness limitations, and 
any other factors that significantly affect the savings association's 
ability to provide lending, investments, or services in its assessment 
area(s);
    (5) The savings association's past performance and the performance 
of similarly situated lenders;
    (6) The savings association's public file, as described in section 
563e.43, and any written comments about the savings association's CRA 
performance submitted to the savings association or the OTS; and
    (7) Any other information deemed relevant by the OTS.
    The CRA regulation has been implemented to consider factors outside 
of a savings association's control that prevent it from engaging in 
certain activities. When the banking agencies promulgated the 1995 CRA 
rule, they specifically noted in the preamble:

    Statutory limits on investment authority. Several thrift commenters 
had concerns about the application of the investment test to thrift 
institutions because of their limited investment authority. Rather than 
providing a blanket exemption from the investment test, the final rule 
modifies the ``capacity and constraints'' section of the performance 
context to clarify that examiners should consider an institution's 
investment authority in evaluating performance under the investment 
test. A thrift that has few or no qualified investments may still be 
considered to be performing adequately under the investment test if, 
for example, the institution is particularly effective in responding to 
the community's credit needs through community development lending 
activities.

60 FR 22156, 22163 (May 4, 1995) (emphasis added).
    This flexible approach for evaluating the performance of savings 
associations was restated in the interagency CRA Qs&As. These Qs&As 
specifically acknowledge that limitations on institutional capacity and 
constraints will be considered in evaluating performance under the 
investment test. Q&A 21(b)(4)-1 asks, ``Will examiners consider factors 
outside of an institution's control that prevent it from engaging in 
certain activities?'' 66 FR at 36631. The answer provided states:
    Yes. 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

[[Page 68261]]

investment authority may still receive a low satisfactory rating under 
the investment test if it has a strong lending record.

66 FR at 36631 (emphasis added).
    The CRA regulation also emphasizes that the rating assigned 
reflects the savings association's record of helping to meet the credit 
needs of its entire community, including low- and moderate-income 
neighborhoods, ``consistent with the safe and sound operation of the 
savings association.'' 12 CFR 563e.21(c). The CRA regulation goes on to 
elaborate in 12 CFR 563e.21(d):
    Safe and sound operations. This part and the CRA do not require a 
savings association to make loans or investments or to provide services 
that are inconsistent with safe and sound operations. To the contrary, 
the OTS anticipates savings associations can meet the standards of this 
part with safe and sound loans, investments, and services on which the 
savings associations expect to make a profit. Savings associations are 
permitted and encouraged to develop and apply flexible underwriting 
standards for loans that benefit low- or moderate-income geographies or 
individuals, only if consistent with safe and sound operations.

The 2001 ANPR

    The 2001 ANPR contained extensive discussion of the way performance 
of large retail institutions is assessed under the lending, investment, 
and service tests. It explained that the regulations attempt to temper 
their reliance on quantitative factors by requiring examiners to 
evaluate qualitative factors, because not all activities of the same 
numerical magnitude have equal impact or entail the same relative 
importance when undertaken by different institutions in different 
communities. It also indicated that institutions' CRA ratings reflect 
the principle that lending is the primary vehicle for meeting a 
community's credit needs. It noted that in the preamble to the 1995 CRA 
rule, the banking agencies published a ratings matrix for examiners to 
use when evaluating large retail institutions under the lending, 
investment, and service tests. Under this matrix, it is impossible for 
an institution to achieve a ``satisfactory'' rating overall unless it 
receives at least a ``low satisfactory'' rating on the lending test. 66 
FR at 37604.
    In publishing the matrix in 1995, the banking agencies noted that 
they were not incorporating it into the CRA rule itself, to allow some 
flexibility to adjust the matrix to prevent unintended anomalies that 
may be found during the examination process. The preamble noted that if 
the banking agencies were to change the matrix in the future, the new 
matrix would be published for information, but not necessarily for 
comment, in the Federal Register. 60 FR at 22170. As discussed above, 
the matrix is currently published in Q&A 28(a)-3.
    With respect to the emphasis placed on each category of an 
institution's activities under the large retail institution test, the 
2001 ANPR indicated that some contended that lending should always be 
stressed, because they believe that deposits derived from communities 
should be reinvested in those communities through loans. Still others 
asserted that lending should be the only basis upon which institutions 
are evaluated. 66 FR at 37604.
    In contrast, some questioned whether lending should be emphasized 
more than investments and services. Some asserted that a CRA evaluation 
should allow for adjustment of this emphasis in a manner that more 
nearly corresponds with the activities of the institution and the 
particular needs of its community. For example, some asserted, that if 
an institution does not significantly engage in retail lending and, 
therefore, makes few loans, the lending test should not receive more 
emphasis than the investment and service tests for that institution's 
CRA evaluation. 66 FR at 37604.
    Further, some argued that an institution's record of providing 
services should be given more emphasis than it currently is given. 
Others asserted that providing services is not relevant to assessing 
whether an institution is meeting the credit needs of its community. 66 
FR at 37604.
    The 2001 ANPR asked: ``Do the regulations strike the appropriate 
balance between quantitative and qualitative measures, and among 
lending, investments, and services? If so, why? If not, how should the 
regulations be revised?'' 66 FR at 37604.
    The 2001 ANPR also discussed, in detail, and solicited comment on, 
each of the component parts of the large retail institution test. With 
respect to the investment test, it explained that the banking agencies 
included the investment test in their CRA regulations in recognition 
that investments, as well as loans, can help meet credit needs. Some 
asserted, however, that the banking agencies should only consider 
investment activities to augment institutions' CRA ratings. In their 
view, although investments may help an institution to meet the credit 
needs of its community, particularly in low- and moderate-income areas, 
CRA ratings should be based primarily on lending activity. Still others 
stated, however, that it is inappropriate for the banking agencies to 
evaluate investments under the CRA as a means of meeting credit needs. 
Yet others argued that investments by financial institutions are 
invaluable in helping to meet the credit needs of the institutions' 
communities, particularly in low- and moderate-income areas. 66 FR at 
37604-37605.
    The 2001 ANPR also noted that the availability of qualified 
investments has been an issue of concern to some. Although some 
observed that, since the 1995 regulations went into effect, the market 
of available CRA-related investments has grown and continues to grow, 
others asserted that appropriate investment opportunities may not be 
available in their communities. Further, some of the retail 
institutions subject to the investment test indicated that, in some 
cases, it was difficult to compete for investment opportunities, 
particularly against much larger institutions. 66 FR at 37605.
    The 2001 ANPR asked: ``Does the investment test effectively assess 
an institution's record of helping to meet the credit needs of its 
entire community? If so, why? If not, how should the regulations be 
revised?'' 66 FR at 37605.
    With respect to the service test, the 2001 ANPR discussed issues of 
concern on both evaluating retail services and community development 
services. It asked: ``Does the service test effectively assess an 
institution's record of helping to meet the credit needs of its entire 
community? If so, why? If not, how should the regulations be revised?'' 
66 FR at 37605.
    In summarizing the comments on the 2001 ANPR, the preamble to the 
2004 NPR indicated a majority of community organization commenters that 
addressed the weight given to the components of the three-part test 
believed that lending should continue to receive more weight than 
investments or services. Of financial institutions that addressed the 
issue, more than half agreed. The remainder of industry commenters 
generally believed either that the components should be weighted 
equally or that their weights should vary with performance context. 
Many financial institutions felt the investment test was weighted too 
heavily, while community organizations disagreed. 69 FR at 5732.
    The preamble also explained that although a small number of 
commenters objected to any consideration of investments under CRA, the 
comments revealed a general view that community

[[Page 68262]]

development-oriented investments (``qualified investments,'' under the 
regulations) should be considered to the extent they help meet 
community credit needs. Commenters, nonetheless, disagreed 
significantly about whether the current investment test effectively and 
appropriately assesses investments and about the extent to which 
assessment of investments should be mandatory or optional.
    As the preamble explained, financial institutions commented that 
the investment test is not sufficiently tailored to market reality, 
community needs, or institutions' capacities. Several financial 
institutions said there are insufficient equity investment 
opportunities, especially for smaller institutions and those serving 
rural areas. Some noted that intense competition for a limited supply 
of community development equity investments has depressed yields, 
effectively turning many of the investments into grants; some claimed 
that institutions had spent resources transforming would-be loans into 
equity investments merely to satisfy the investment test; and some 
expressed concern that institutions were forced to worry more about 
making a sufficient number and amount of investments than about the 
effectiveness of their investments for their communities. 69 FR at 
5732-5733.
    To address these concerns, many financial institutions favored 
abolishing the stand-alone investment test and making investments 
optional to one degree or another. Only two financial institutions 
expressly supported retaining the separate investment test. Several 
financial institutions and most financial institution trade 
associations endorsed one or more of the following three alternatives: 
(1) Treat investments solely as ``extra credit;'' (2) make investments 
count towards the lending or service test; or (3) treat investments 
interchangeably with community development services and loans under a 
new community development test. 69 FR at 5733.
    In contrast, the majority of community organization commenters 
urged the banking agencies to retain the investment test. Many of them 
claimed that the problem is more often a shortage of willing investors 
than an insufficient number of investment opportunities. Community 
organizations also contended that grants and equity investments are 
crucial to meeting the affordable housing and economic development 
needs of low- and moderate-income areas and individuals. They stated, 
for example, that investments support and expand the capacity of 
nonprofit community development organizations to meet credit needs. A 
few community organizations acknowledged a basis for some of the 
financial institutions' complaints concerning the investment test, but 
most of those community organizations argued that refining, rather than 
restructuring, the large retail institution test would address such 
complaints. 69 FR at 5733.
    The preamble to the 2004 NPR also discussed comments received on 
issues of concern under the service test. 69 FR at 5734-5735.

The 2004 NPR

    The preamble to the 2004 NPR explained that the three-part large 
retail institution test places primary emphasis on lending performance, 
and secondary emphasis on investment and service performance. It 
explained in detail the reasons that the banking agencies, at that 
time, did not propose to eliminate the investment test, modify the 
service test, or change the weights given to the three tests under the 
large retail institution test. 69 FR at 5733-5735. Thus, it did not 
specifically solicit comments on these issues. Nor did the 2004 NPR 
propose or specifically solicit comments on the possibility of 
retaining all three tests as part of the large retail institution test 
but providing additional flexibility in the way that CRA ratings are 
assigned. Thus, the comments received did not focus on these 
possibilities either.
    A few commenters on the 2004 NPR, however, indicated their 
continued support for creating a community development test that would 
incorporate all community development lending, community development 
investments, and community development services into a single test. A 
few commenters also urged the banking agencies to give more weight to 
certain types of services in the CRA rating.

Today's Proposal

    OTS is soliciting comment on providing additional flexibility in 
assigning CRA ratings. 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, investments, and 
services under the large retail institution test, OTS is soliciting 
comment on providing flexibility in those weights.
    This approach would serve to clarify and build upon the existing 
guidance currently contained in Q&A 21(b)(4)-1 discussed above 
addressing the application of the investment test to savings 
associations. Notwithstanding the Q&A and the statement in the 1995 
preamble also discussed above, OTS has heard anecdotal evidence 
suggesting that further elaboration would be useful.
    The existing guidance reflects the unique statutory and regulatory 
structure applicable to savings associations. Savings associations 
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). Savings 
associations 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. See 
69 FR at 51158.
    To bring further clarity to the issue, OTS is considering providing 
each savings association evaluated under the large retail institution 
test a choice, at its option, on the weight given to lending, 
investments, and services 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 would weigh lending, investments, or services, 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% for that association's overall performance 
assessment, services anywhere from 0% to 50%, and investments anywhere 
from 0% to 50%.
    As under the existing ratings matrix, OTS 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, services, investments, 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 allocated to that test, with the percentage 
varying depending on the rating it received on that test as follows:

[[Page 68263]]



------------------------------------------------------------------------
                                                       Percent of points
                                                       allocated to test
                    Rating on test                     association would
                                                            receive
------------------------------------------------------------------------
Outstanding..........................................                100
High Satisfactory....................................                 75
Low Satisfactory.....................................                 50
Needs to Improve.....................................                 25
Substantial Noncompliance............................                  0
------------------------------------------------------------------------

    For illustrative purposes, here are some examples:
    1. Lending 80% Weight, Service 10% Weight, Investment 10%. If a 
savings association chose to be evaluated by OTS giving 80% weight to 
lending, 10% weight to services, and 10% weight to investment, OTS 
would apply the following matrix:

                   Points Assigned for Performance Under Lending, Investment and Service Tests
----------------------------------------------------------------------------------------------------------------
                                                                                                    Investment
                                                                Lending  (80%)   Service  (10%)       (10%)
----------------------------------------------------------------------------------------------------------------
Outstanding..................................................             19.2              2.4              2.4
High Satisfactory............................................             14.4              1.8              1.8
Low Satisfactory.............................................              9.6              1.2              1.2
Needs to Improve.............................................              4.8               .6               .6
Substantial Noncompliance....................................              0                0                0
----------------------------------------------------------------------------------------------------------------

    2. Lending 50% Weight, Service 10% Weight, Investment 40%. If a 
savings association chose to be evaluated by OTS giving 50% weight to 
lending, 10% weight to services, and 40% weight to investment, OTS 
would apply the following matrix:

                   Points Assigned for Performance Under Lending, Investment and Service Tests
----------------------------------------------------------------------------------------------------------------
                                                                                                    Investment
                                                                Lending  (50%)   Service  (10%)       (40%)
----------------------------------------------------------------------------------------------------------------
Outstanding...................................................              12              2.4              9.6
High Satisfactory.............................................               9              1.8              7.2
Low Satisfactory..............................................               6              1.2              4.8
Needs to Improve..............................................               3               .6              2.4
Substantial Noncompliance.....................................               0              0                0
----------------------------------------------------------------------------------------------------------------

    3. Lending 50% Weight, Service 30% Weight, Investment 20%. If a 
savings association chose to be evaluated by OTS giving 50% weight to 
lending, 30% weight to services, and 20% weight to investment, OTS 
would apply the following matrix:

                   Points Assigned for Performance Under Lending, Investment and Service Tests
----------------------------------------------------------------------------------------------------------------
                                                                                                    Investment
                                                                Lending  (50%)   Service  (30%)       (20%)
----------------------------------------------------------------------------------------------------------------
Outstanding...................................................              12              7.2              4.8
High Satisfactory.............................................               9              5.4              3.6
Low Satisfactory..............................................               6              3.6              2.4
Needs to Improve..............................................               3              1.8              1.2
Substantial Noncompliance.....................................               0              0                0
----------------------------------------------------------------------------------------------------------------

    Under all of these alternatives, the composite rating matrix would 
remain essentially the same as currently provided except for taking 
into account the possibility of fractions of points. It would read as 
follows:

                   Composite Rating Point Requirements
                  [Add points from tests as applicable]
------------------------------------------------------------------------
              Rating                            Total points
------------------------------------------------------------------------
Outstanding.......................  20 or over.
Satisfactory......................  11 or more but less than 20.
Needs to Improve..................  5 or more but less than 11.
Substantial Noncompliance.........  0 or more but less than 5.
------------------------------------------------------------------------


    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.

    Continuing to include the same note to the composite rating matrix 
as contained under the current matrix 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'' on its lending.
    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 may currently elect 
consideration of lending

[[Page 68264]]

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) package could be revised to 
provide an opportunity for a savings association to opt for an 
alternative weight 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 would be evaluated under the existing matrix contained in 
Q&A 28(a)-3.
    Conforming changes could be made section 563e.28 of the CRA rule. 
Additional text could be added to that section 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 section 563e.28(b) discussed above and the rating matrix 
generated from the savings association's election, the standards set 
forth under the matrix selected 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.
    Providing flexibility for a savings association to elect 
alternative weights would supplement the use of the performance context 
factors discussed above and serve many of the same functions. As 
discussed above, 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 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.

Solicitation of Comment on Assigned Ratings Proposal

    OTS solicits comments on all aspects of this proposal.

C. Solicitation of Comment on Alternative Weights Election

    1. Would it be appropriate to provide the savings association 
flexibility in the way that CRA ratings are assigned by offering a 
choice of weights for the lending, service, and investment tests within 
the large retail institution test? If so, why? If not, why not?
    2. Are there ways OTS could make the process even more flexible 
than outlined in this proposal?
    3. What would be the impact on lending, investments, and services 
of offering alternative weights?
    4. Should OTS place limits on the savings association's ability to 
opt for particular weights? How could OTS help ensure that a savings 
association would select weights that focus on the types of activities 
the communities it serves need? How could OTS take a savings 
association's selection of a weight alternative into consideration as 
part of the performance context? Is there an appropriate role for 
public participation beyond existing opportunities for provision of 
information regarding the performance context and submission of 
comments about the savings association's CRA performance? See 12 CFR 
563e.21(b)(2), 563e.21(b)(6), 563e.29(c) and 563e.43(a)(1) and Q&A 
21(b)(2)-2, 66 FR at 36631.
    5. What logistical and practical issues would have to be addressed 
in providing a choice of weights and how should these issues be 
addressed (e.g., timing and method of alternative selected)?
    6. Would it be useful for OTS to publish examples of weight 
alternatives in the preamble to the final rule or elsewhere?
    7. For ease of administrative implementation, would it be 
appropriate for OTS to limit the choice of weights to a list containing 
several options? If so, what options should be offered? Which options 
would a savings association be likely to choose?
    8. Would it cause confusion for savings associations, community 
organizations, or the public to allow customized weight combinations 
that might be selected by only one or a few institutions (e.g., lending 
57%, service 28%, and investment 15%)?
    9. Would it be appropriate for the alternative weights to require 
at least a 50 percent weight to lending, as proposed? Why or why not? 
If a rating matrix that gives less than 50 percent weight to lending 
were to be offered, would that be consistent with the purposes of CRA?
    10. Would it be appropriate to continue to ensure that a savings 
association may not receive a rating of ``satisfactory'' unless it 
receives at least ``low satisfactory'' on the lending test by capping 
total points at three times the lending test score as under the current 
composite rating matrix, as proposed? Why or why not? If a rating 
matrix that allowed a savings association to receive a rating of 
``satisfactory'' without receiving at least ``low satisfactory'' on the 
lending test were offered, would that be consistent with the purposes 
of CRA?
    11. Is it appropriate to offer alternatives allowing less than a 25 
percent weight to services and less than 25 percent weight to 
investments, as proposed? Why or why not?

D. Solicitation of Comment on Eliminating the Investment Test

    1. Would a preferable alternative be to eliminate the investment 
test? If so, why? If not, why not?
    2. What would be the impact on investments of eliminating the 
investment test?
    3. If the investment test were eliminated as a mandatory separate 
component of the large retail institution test, should investments 
still be considered * * *
    a. At a savings association's option or to raise a rating?
    b. Within one of the other tests (e.g., under the lending test 
treated similarly to community development loans)?
    c. In some other fashion (e.g., treating investments 
interchangeably with community development services and loans under a 
new community development test)?
    4. If the investment test were eliminated as a mandatory separate 
component of the large retail institution test, what weight should be 
given to the remaining components of the test (e.g., weight lending 75% 
and service 25%, weight lending and service 50% each)?

Regulatory Analysis

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

[[Page 68265]]

number. This collection of information is currently approved under OMB 
Control Number 1550-0012. This proposal would not change the collection 
of information.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that since the proposal would not have a significant economic 
impact on a substantial number of small entities. It would not impose 
any additional paperwork or regulatory reporting requirements. It would 
simply encourage savings associations to increase their community 
development lending, qualified investments, and community development 
services in rural areas, with a particular focus on increasing these 
activities in underserved nonmetropolitan areas, by expanding the 
definition of ``community development.'' The proposal also solicits 
comment on further encouraging savings associations to perform 
community development activities in areas affected by natural or other 
disasters or other major community disruptions. The other portions of 
the proposal relate only to the treatment of savings associations under 
the retail test mandated only for large institutions.

Executive Order 12866 Determination

    OTS has determined that this proposal 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 would 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

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

PART 563e--COMMUNITY REINVESTMENT

    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.

    2. Revise Sec.  563e.12(f)(2) and (4) to read as follows:
* * * * *
    (f) Community development means:
* * * * *
    (2) Community services targeted to low- or moderate-income 
individuals or to individuals in rural areas;
* * * * *
    (4) Activities that revitalize or stabilize low- or moderate-income 
geographies or rural areas.
* * * * *

    Dated: November 18, 2004.

    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 04-26011 Filed 11-23-04; 8:45 am]
BILLING CODE 6720-01-P


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