Overview of the New CRA Regulations Fresno, CA August 11, 2005 John Olson Federal Reserve Bank of San Francisco

1. Overview of the New CRA RegulationsFresno, CAAugust 11, 2005John OlsonFederal Reserve Bank of San Francisco

2. Agenda Background on how we got where we are Provisions of the new rule Intermediate small banks Change to definition of community development Impact of illegal lending practices

3. Background Review of CRA regs started in 2001, as promised in the 1995 rule Interagency proposal Feb. 2004 OTS went its own way Three-way interagency agreement proposed in March 2005 and finalized August 2005

4. Fundamental issue Regulatory relief for small banks vs. Importance of small bank CD efforts, especially in rural areas

5. OTS Rules for Thrifts Large thrift threshold raised to $1 billion Changes to large thrift exam: Lending Test can be anywhere from 50-100% of exam, at institution�s discretion Other part of exam can be any combination of Service Test and Investment Test, again at the institution�s discretion Essentially allows large thrifts to opt out of Service and Investment Tests

6. New Regulations Published in Federal Register August 2 Rule will be effective September 1 New exam procedures have been published for the intermediate small bank exam format New Questions and Answers will further clarify parts of rule

7. Changes to Size Distinctions The new rule creates three classes of banks, defined by the asset size of the institution: Large banks � $1 billion or more Intermediate small banks � $250 million or more, less than $1 billion Small banks � less than $250 million

8. Changes to Size Distinctions �Small bank means a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1 billion. Intermediate small bank means a small bank with assets of at least $250 million as of December 31 of both of the prior two calendar years and less than $1 billion as of December 31 of either of the prior two calendar years.�

9. Changes to Size Distinctions Classifications will be made regardless of size of holding company Size thresholds will be updated annually based on changes to the Consumer Price Index Intermediate small banks no longer have to report data on community development, small business, or small farm lending

10. Intermediate Small Bank Exam New exam format, made up of two equally weighted tests: the Lending Test and the Community Development Test A bank would have to earn at least a satisfactory on both tests in order to be eligible for an overall satisfactory Lending Test will be similar to the small bank CRA exam

11. Review of Small Bank Exam Loan-to-deposit ratio Percentage of loans inside assessment area Distribution of lending by borrower income and size of businesses and farms Geographic distribution of lending by income level of census tract Response to complaints

12. Community Development Test CD Test performance will be evaluated on four criteria: Number and amount of CD loans Extent to which bank provides CD services (note that this includes branches and product offerings) Number and amount of CD investments; and Responsiveness of such activities to community needs

13. Exam Procedures An institution should: Appropriately assess the needs in its community Engage in different types of CD activity based on those needs and the institution�s capacities Take reasonable steps to apply its community development resources strategically to meet those needs

14. Exam Procedures Examiners will: Evaluate number and amount of CD loans and investments Evaluate the extent to which the bank provides CD services, including provision and availability of services to LMI people Consider the results of any assessment performed by the bank of needs and opportunities Review performance context information Determine whether �amount and combination� of CD activities, including qualitative aspects, are responsive to community needs and opportunities

15. Definition of community development The fourth element of community development, regarding revitalizing and stabilizing LMI geographies, has been expanded to include more geographies Revitalizing disaster areas now qualifies as community development �Distressed or underserved� middle-income rural areas, not just LMI rural areas, are now eligible for community development activity

16. Definition of community development Now includes disaster areas designated federal, state, or local governments (for example, Major Disaster Declarations by FEMA) These areas will be eligible as long as the disaster declarations are in force Expect further guidance (and restrictions) in Q&A

17. Definition of community development Now includes distressed or underserved middle-income tracts in nonmetropolitan areas The agencies will publish a list of covered tracts �Nonmetropolitan� means not in an MSA, which will exclude much of the Central Valley

18. Definition of community development �Community development means: � Activities that revitalize or stabilize: � Distressed or underserved nonmetropolitan middle-income geographies designated by [the regulators] based on��

19. Definition of community development ��based on: Rates of poverty, unemployment, and population loss; or 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 [LMI] individuals.�

20. Definition of community development Effect of rule change: Currently, only 15% of nonmetropolitan tracts are low- or moderate-income, compared to about one third of metropolitan tracts Under the new rule, approximately 40% of nonmetropolitan tracts will be eligible

21. Definition of community development Distressed Unemployment rate of at least 1.5 times the national average Poverty rate of 20% or more Population loss of 10% or more between the previous and most recent decennial census or a net migration loss of 5% or more over the five-year period preceding the most recent census.

22. Definition of community development Underserved Small population Distant from a population center Identified by Urban Influence Codes from the USDA In California, Mariposa, Plumas, and Siskiyou Counties are �underserved� In these areas, activities must benefit some LMI individuals

23. Illegal lending practices �evaluation of a bank�s CRA performance is adversely affected by evidence of discriminatory or other illegal lending practices� Applies to the bank and its affiliates Regulators will consider extent of evidence, bank policies and procedures, and any corrective action taken

24. Illegal lending practices Equal Credit Opportunity Act Fair Housing Act Federal Trade Commission Act Real Estate Settlement Procedures Act Truth in Lending Act (re: right of rescission)

25. Questions? John Olson Federal Reserve Bank of San Francisco (415) 974-2989 John.Olson@sf.frb.org