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While some midsized banks are cheering new federal regulations relieving them of burdensome reporting requirements under the Community Reinvestment Act (CRA), experts suggest bankers carefully consider an option to follow the old rules before altering how they document their lending activities.

Since the enactment of CRA in 1977, federal regulators have assessed banks’ community lending and investing practices — particularly efforts targeted at low- and moderate-income communities. The CRA regulations fell hardest on midsized banks, because smaller institutions don’t need to meet stringent data collection and regulatory tests, and larger banks have more resources to meet the requirements. To provide relief, bank regulators recently created a class of "intermediate small banks," which gives midsized lenders with assets of $250 million to $1 billion (previously considered large banks) the option not to file detailed annual reports under CRA.

The changes, which took effect Sept. 1, provide reporting relief for midsized banks. However, they also may bring new responsibilities, according to a white paper at BankersOnline.com, a widely recognized Internet portal serving the financial services industry. The report emphasizes that, while midsized banks are now freed from regular reporting, they still are held to CRA performance standards. That’s important to keep in mind, since bank regulators — namely, the Federal Deposit Insurance Corporation, Federal Reserve Bank and Office of the Comptroller of the Currency — use CRA ratings to evaluate applications for charters, branch openings, mergers and acquisitions.

What’s new for midsized banks
While midsized banks may stop filing detailed annual reports of their lending activities, experts say examiners still plan to conduct a "lending test" by reviewing bank reports or, if need be, sampling loan data to assess the banks under CRA. So record keeping, if not official CRA reporting, remains important.

Federal regulators also created a new "community development test" — a new, higher standard for midsized banks. Community development is more important than ever for midsized banks, as they now must earn at least a "satisfactory" rating for their community development activities to receive an overall satisfactory CRA rating. Under the old rules, midsized banks may have done little in the way of community development yet still received a satisfactory CRA rating based on other business activities.

Traditionally, regulators defined community development as the number and amount of loans, investments and services a bank makes in low- and moderate-income areas. The new definition of community development is broader and more flexible:

• Opportunities considered. Under the new community development test, examiners will evaluate banks in the context of an institution’s capacities, business strategies, and the number and types of opportunities for community development activities.
• More activities included. Under the old rules, community development focused on a bank’s activities in its primary trade area. However, the new definition of community development for midsized banks has expanded to include activities that stabilize or revitalize distressed or underserved rural areas, or designated disaster areas. The new definition gives banks more flexibility to find community development opportunities beyond their own backyards and to compete with larger banks that may have more-robust outreach programs.

Opting for the status quo
Some midsized banks may relish the less burdensome CRA reporting requirements, but others may find the alternative community development test even more challenging. The revised regulations hold a solution for both perspectives: Midsized banks can choose whether to be examined under the new rules or under the standards for large banks.

A midsized bank might choose to continue detailed CRA reporting as a large bank for the following reasons:

• Its community development loans, investments and services are weak. Many midsized banks lack solid track records in community development, though not for lack of trying. For example, some banks find limited community development opportunities, while others face intense development competition from larger banks. More than half of banks reporting on CRA activities in 2003 said they originated two or fewer community development loans, according to BankersOnline.com. One-third of reporting lenders did not originate any community development loans.
• It’s uncertain about the strength of its community development activities. Some midsized banks may not know how well they’re doing in terms of community development, because they may not have a formal program or keep adequate records. Since examiners have considerable leeway in evaluating a bank’s community development performance, and objective criteria for benchmarking is scarce, banks may not want to bet their overall CRA rating on community development performance.
• It’s near the $1 billion threshold. With less than $1 billion, an institution is not required to report lending and investment activities under CRA. But if your institution expects to grow past $1 billion in assets within a few years, you may want to continue the data collection and reporting systems you used when your bank was considered large under the old rules.

Tips for proceeding
Do you plan to follow the new CRA rules for midsized banks, or will you opt to report lending and investment activity like a large bank? Wherever you are in responding to the new CRA rules, experts recommend the following steps to comply.

• Learn the rules. Assess whether your bank qualifies for intermediate small-bank status, and know your options for reporting lending activities under the CRA. Become familiar with the new definition of community development and determine whether your bank could achieve a satisfactory rating under the new community development test.
• Determine your burden. Analyze how difficult and costly it is to report your bank’s lending activities, and whether it would be more advantageous to continue your current practices or move to the new requirements.
• Continue collecting data. Even if you do not report data under the standard for large banks, you still will be required to perform according to the lending tests under CRA (in other words, provide community development loans in your primary trade area). Absent a common measurement approach, there’s no guarantee bank examiners will accurately assess your performance. Therefore, continue to collect loan data as if you had to report it.
• Self-assess. Even before the examiners arrive, develop a system for evaluating your bank’s ongoing CRA performance. Monitoring your own activity will help head off anxiety and uncertainty between bank exams — and provide useful information for the examiners.
• Create a community development program. Even if you plan to report data under the standard for large banks (and therefore don’t need a satisfactory community development rating to maintain a solid CRA rating), still commit to do well on community development. Determine the opportunities for increasing your community development activity. Maintain contacts with affordable-housing developers, economic development programs and similar organizations.

By taking the steps outlined above, you can demonstrate that your bank is committed to overall CRA compliance. Consider contacting your regulatory agency and an expert advisor for help in analyzing the best CRA approach for your organization before your next bank exam.