SUMMARY: The OCC, Board, FDIC, and OTS, (collectively, the Federal 
financial supervisory agencies or agencies) are amending their 
regulations concerning the Community Reinvestment Act (CRA). The 
agencies published a joint notice of proposed rulemaking on this issue 
on December 21, 1993 (1993 proposal) and again on October 7, 1994 (1994 
proposal). This final rule reflects comments received on both proposals 
and the agencies' further internal considerations.
    The purpose of the CRA regulations is to establish the framework 
and criteria by which the agencies assess an institution's record of 
helping to meet the credit needs of its community, including low- and 
moderate-income neighborhoods, consistent with safe and sound 
operations, and to provide that the agencies' assessment shall be taken 
into account in reviewing certain applications.
    The final rule seeks to emphasize performance rather than process, 
to promote consistency in evaluations, and to eliminate unnecessary 
burden. As compared to the 1993 and 1994 proposals, the final rule 
reduces recordkeeping and reporting requirements and makes other 
modifications and clarifications.

EFFECTIVE DATES: This joint rule is effective July 1, 1995, except 12 
CFR 25.3 through 25.7 and 25.51, 12 CFR 228.3 through 228.7 and 228.51, 
12 CFR 345.3 through 345.7 and 345.51, and 12 CFR 563e.3 through 563e.7 
and 563e.51 are removed effective July 1, 1997.

FOR FURTHER INFORMATION CONTACT:
    OCC: Stephen M. Cross, Deputy Comptroller for Compliance, (202) 
874-5216; or Matthew Roberts, Director, Community and Consumer Law 
Division, (202) 874-5750, Office of the Comptroller of the Currency, 
250 E Street, SW., Washington, DC 20219.
    Board: Glenn E. Loney, Associate Director, Division of Consumer and 
Community Affairs, (202) 452-3585; Robert deV. Frierson, Assistant 
General Counsel, Legal Division, (202) 452-3711; or Leonard N. Chanin, 
Managing Counsel, Division of Consumer and Community Affairs, (202) 
452-3667, Board of Governors of the Federal Reserve System, 20th Street 
and Constitution Avenue, NW., Washington, DC 20551.
    FDIC: Bobbie Jean Norris, Chief, Fair Lending Section, Division of 
Compliance and Consumer Affairs, (202) 942-3090; Robert W. Mooney, Fair 
Lending Specialist, Division of Compliance and Consumer Affairs, (202) 
942-3092; or Ann Hume Loikow, Counsel, Regulation and Legislation 
Section, Legal Division, (202) 898-3796, Federal Deposit Insurance 
Corporation, 550 17th Street, NW., Washington, DC 20429.
    OTS: Timothy R. Burniston, Assistant Director for Compliance 
Policy, (202) 906-5629; Theresa A. Stark, Program Analyst, Compliance 
Policy, (202) 906-7054; or Lewis A. Segall, Senior Attorney, 
Regulations and Legislation Division, Chief Counsel's Office, (202) 
906-6648, Office of Thrift Supervision, 1700 G Street, NW., Washington, 
DC 20552.

SUPPLEMENTARY INFORMATION:

Introduction

    The Federal financial supervisory agencies jointly are amending 
their regulations implementing the CRA (12 U.S.C. 2901 et seq.). The 
amended regulations will, when fully effective, replace the existing 
regulations in their entirety.
    The CRA is designed to encourage regulated financial institutions 
to help meet the credit needs of their entire communities, including 
low- and moderate-income neighborhoods, consistent with safe and sound 
operations. Despite the CRA's notable successes in improving access to 
credit, banks and savings and loan institutions, as well as community 
and consumer groups, maintain that its full potential has not been 
realized, in large part because regulatory compliance efforts have 
focused on process rather than performance.
    In accordance with a request from the President, the Federal 
financial supervisory agencies have undertaken a comprehensive effort 
to reform their standards for evaluating compliance with CRA 
requirements. The final rule implements this reform effort by 
substituting a new system that evaluates institutions based on their 
actual performance in helping to meet their communities' credit needs.

Background

    In 1977, the Congress enacted the CRA to encourage banks and 
thrifts to help meet the credit needs of their entire communities, 
including low- and moderate-income neighborhoods, consistent with safe 
and sound lending practices. In the CRA, the Congress found that:
    ``(1) regulated financial institutions are required by law to 
demonstrate that their deposit facilities serve the convenience and 
needs of the communities in which they are chartered to do business;
    (2) the convenience and needs of communities include the need for 
credit as well as deposit services; and
    (3) regulated financial institutions have continuing and 
affirmative obligation[s] to help meet the credit needs of the local 
communities in which they are chartered.''

(12 U.S.C. 2901(a))

    The CRA has come to play an increasingly important role in 
improving access to credit in communities--both rural and urban--across 
the country. Under the impetus of the CRA, many banks and thrifts 
opened new branches, provided expanded services, and made substantial 
commitments to increase lending to all segments of society.
    Despite these successes, the CRA examination system has been 
criticized. Financial institutions have indicated that policy guidance 
from the agencies on the CRA is unclear and that examination standards 
are applied inconsistently. Financial institutions have 
also stated that the CRA examination process encourages them to 
generate excessive paperwork at the expense of providing loans, 
services, and investments to their communities.
    Community, consumer, and other groups have agreed with the industry 
that there are inconsistencies in CRA evaluations and that current 
examinations overemphasize process and underemphasize performance. 
Community and consumer groups also have criticized the agencies for 
failing aggressively to penalize banks and thrifts for poor 
performance.
    Noting that the CRA examination process could be improved, 
President Clinton requested in July 1993 that the Federal financial 
supervisory agencies reform the CRA regulatory system. The President 
asked the agencies to consult with the banking and thrift industries, 
Congressional leaders, and leaders of community-based organizations 
across the country to develop new CRA regulations and examination 
procedures that ``replace paperwork and uncertainty with greater 
performance, clarity, and objectivity.''
    Specifically, the President asked the agencies to refocus the CRA 
examination system on more objective, performance-based assessment 
standards that minimize compliance burden while stimulating improved 
performance. He also asked the agencies to develop a well-trained corps 
of examiners who would specialize in CRA examinations. The President 
requested that the agencies promote consistency and even-handedness, 
improve CRA performance evaluations, and institute more effective 
sanctions against institutions with consistently poor performance.
    To implement the President's initiative, the four agencies held a 
series of seven public hearings across the country in 1993. At those 
hearings, the agencies heard from over 250 witnesses. Nearly 50 others 
submitted written statements. The preamble to the 1993 proposal 
reviewed the results of those hearings.

The 1993 Proposal

    The agencies published proposed revisions to their CRA regulations 
on December 21, 1993. The 1993 proposal (58 FR 67466) would have 
eliminated the twelve assessment factors in the present CRA regulations 
and substituted a more performance-based evaluation system. Under the 
1993 proposal, the agencies would have evaluated institutions based on 
their actual lending, service, and investment performance rather than 
on how well they conducted their needs assessments, documented their 
community outreach, and implemented other procedural requirements of 
the existing regulations.
    Generally, large retail institutions would have been evaluated 
based on some combination of lending, service, and investment tests. 
Institutions would have been required to report data on the basis of 
the geographic distribution of applications, denials, originations, and 
purchases of loans. Small banks and thrifts could have elected to be 
evaluated under a streamlined method that would not have required them 
to report this data. Every institution also could have elected to have 
its performance evaluated on the basis of a pre-approved strategic 
plan.
    All banks and thrifts would have been assigned one of four 
statutorily mandated CRA ratings (12 U.S.C. 2906(b)(2)). However, five 
ratings would have been used for the lending, service, and investment 
tests, with the satisfactory category split into low satisfactory and 
high satisfactory.
    Collectively, the agencies received over 6,700 comment letters on 
the 1993 proposal. As a general matter, the vast majority of commenters 
expressed support for the agencies' goal of developing more objective, 
performance-based assessment standards that minimize burden while 
stimulating improved performance. However, many expressed concern over 
aspects of the 1993 proposal that they viewed as allocating credit to 
particular kinds of borrowers. After considering the comments, the 
agencies published a second proposal on October 7, 1994, which 
responded to many of the suggestions in the comments on the 1993 
proposal, including concerns about credit allocation, while preserving 
the 1993 proposal's goal of emphasizing performance over process.

The 1994 Proposal

    The 1994 proposal (59 FR 51232) retained the principles and 
structure underlying the 1993 proposal but made significant changes to 
the details in order to respond to many of the specific concerns raised 
in the comment letters. As in the 1993 proposal, the 1994 proposal 
would have replaced the existing regulations' twelve assessment factors 
with a performance-based evaluation system. The 1994 proposal retained, 
but modified, the lending, investment, and service tests for large 
retail institutions; the streamlined evaluation for small institutions; 
an alternative evaluation for limited purpose and wholesale 
institutions; and the pre-approved strategic plan option available to 
all institutions.
    The 1993 proposal had been criticized because of certain objective 
criteria in the proposal (including market share, a presumptively 
reasonable loan to deposit ratio, loan mix, investment to capital 
ratios, and the number of branches readily accessible to low- and 
moderate-income geographies) which were intended to respond to concerns 
about the need for more objective standards for evaluating compliance 
with CRA requirements. Many commenters viewed these criteria as calling 
for credit allocation, although the agencies did not intend this 
result. The 1994 proposal removed these criteria from the regulatory 
language and substituted a broader range of qualitative and 
quantitative criteria. A system for evaluating compliance with CRA 
should not eliminate examiner judgment, even if completely objective 
criteria consistently applied were achievable. Preservation of examiner 
judgment to take into account the unique characteristics and needs of 
an institution's community and the institution's own capacity and 
relevant constraints are essential for a workable rule.
    At the same time, consistency in evaluations, reduction in the 
burden of compliance, and emphasis on performance are fully consistent 
with assuring a measure of examiner judgment. The 1994 proposal would 
have provided a balance between objective analysis and subjective 
judgment through a series of examiner decisions relying on detailed 
data measuring an institution's actual lending, service and investment 
performance. In order to minimize unnecessary subjectivity, the 
agencies provided guidance as to the standards that examiners would 
have applied in making the required judgments.
    Compared to the 1993 proposal, the 1994 proposal would have reduced 
data reporting burdens by streamlining reporting requirements. The one 
significant new reporting requirement was the collection and reporting 
of information on the race and gender of small business and farm 
borrowers. The agencies proposed this provision to respond to concerns 
that the 1993 proposal did not give enough weight to the fair lending 
aspect of an institution's CRA performance.
    In order to take into account community characteristics and needs, 
the 1994 proposal would have made explicit the context in which the 
tests and standards would have been applied to individual institutions. 
In a specific effort to reduce burden, the preamble indicated that the 
agencies, rather than institutions, would have collected and developed the information needed to provide this 
``assessment context.''
    The 1994 proposal also modified the rating process from the 1993 
proposal. For large retail institutions, in calculating the assigned 
rating, the revised proposal would have given primacy to lending 
performance, but an institution's performance on the service and 
investment tests also would have been reflected in the assigned rating. 
The rating process for small institutions similarly would have given 
primacy to lending performance, and would have provided guidance on how 
the agencies would have considered service and investment performance. 
For all institutions, evidence of discriminatory or other illegal 
credit practices would have adversely affected the evaluation of an 
institution's performance. In addition, an appendix to the 1994 
proposal included rating profiles to guide the assessments.
    The 1994 proposal revised and clarified other important features of 
the 1993 proposal. It provided more detail as to how the proposed 
strategic plan option would operate in practice. Wholesale and limited 
purpose institutions were made subject to a community development test, 
which would have incorporated both community development lending and 
community development services in addition to qualified investments. 
Also, the agencies revised the definition of service area to include 
the local areas around an institution's deposit facilities in which it 
has significant lending activity and all other areas equally distant 
from such facilities.

Overview of Comments on the 1994 Proposal

    Collectively, the agencies received over 7,200 comment letters on 
the 1994 proposal. The agencies received comment letters from 
individuals, representatives of bank and thrift institutions, consumer 
and community groups, members of Congress, state, local, and tribal 
governments, and others, as shown in the following table.

                                           Table of Comments Received                                           
----------------------------------------------------------------------------------------------------------------
                                   Letters from                                                                 
                                  banks, thrifts   Letters from    Letters from                                 
             Agency                  and their     consumer and     government     Letters from        Total    
                                       trade         community       entities         others                    
                                   associations       groups                                                    
----------------------------------------------------------------------------------------------------------------
OCC.............................             669             839              39             672           2,219
Board...........................             607             832              12             482           1,933
FDIC............................           1,007             788              32             237           2,064
OTS.............................             261             623              24             173           1,081
----------------------------------------------------------------------------------------------------------------

    The agencies reviewed and considered all of these comments in 
writing the final rule. The section-by-section analysis of the final 
rule discusses these comments in greater detail. As a general matter, 
the vast majority of commenters expressed support for the agencies' 
goal of developing more objective, performance-based assessment 
standards that minimize burden while stimulating improved performance. 
Many commenters believed that, under the existing CRA regulations, the 
agencies focus too closely on documentation of CRA performance and too 
little on actual performance. Some commenters felt the present 
documentation requirements are overly burdensome. Many commenters also 
supported the agencies' goal of ensuring consistency and evenhandedness 
among the agencies in CRA evaluations, without including specific 
criteria that might be viewed as allocating credit to specific 
borrowers. Commenters supported enhanced CRA examiner training to 
increase consistency. Although most commenters generally supported the 
agencies' goals in amending their CRA regulations, many expressed 
concern over certain aspects of the 1994 proposal.

The Final Rule

Review of Comments on the 1994 Proposal and Responses

    The final rule retains, to a significant extent, the principles and 
structure underlying the 1993 and 1994 proposals, but makes important 
changes to some details in order to respond to concerns raised in the 
comment letters and further agency consideration. The following 
discussion describes by topic the ways in which the agencies addressed 
commenters' concerns. The discussion also describes important technical 
modifications included in the final rule.

Enforcement Authority

    The agencies have removed two provisions found in both the 1993 and 
1994 proposals that engendered considerable comment. These provisions 
were the community reinvestment obligation, which stated that banks and 
thrifts have a specific affirmative obligation to help meet the credit 
needs of their communities, and the enforcement provision, which 
provided for penalties against banks and thrifts with ``substantial 
noncompliance'' ratings using the agencies' general enforcement powers 
under 12 U.S.C. 1818. Substantial comment was received both in favor 
of, and in opposition to, these provisions. Based on further analysis 
of their statutory authority, the agencies have removed these 
provisions.
    Consistent with the statute, the final rule provides that an 
institution's CRA rating reflects its record of helping to meet the 
credit needs of its entire community. The agencies will take into 
account an institution's record when evaluating various types of 
applications, such as applications for branches, office relocations, 
mergers, consolidations, and purchase and assumption transactions, and 
may deny or condition an application on the basis of the institution's 
record.

Scope

    The scope of the final rule does not differ appreciably from the 
scope of the current CRA regulations or the 1993 and 1994 proposals. 
The agencies historically have excluded from CRA coverage certain 
special purpose institutions, such as banker's banks, that are not 
organized to grant credit to the public in the ordinary course of 
business. These institutions continue to be treated as special purpose 
banks in the final rule and are excluded from coverage. Several 
commenters were concerned that the definition of banker's bank in the 
1994 proposal may not have conformed with that found in 12 U.S.C. 24 
(Seventh), as modified by the Interstate Banking Efficiency Act of 1994 
(IBEA). Therefore, the final rule references the definition of 
``banker's bank'' found in 12 U.S.C. 24 (Seventh). The 
rule also specifies that institutions that provide only cash management 
controlled disbursement services are excluded from CRA coverage. In 
addition, the final rule provides for the CRA's applicability to 
foreign institutions consistent with the IBEA and prior agency 
interpretations.

Definitions
    Many of the definitions in the 1994 proposal remain the same in the 
final rule or have been adjusted only for purposes of clarity, with no 
change in substance. The agencies did, however, change some definitions 
substantively.
    Assessment area. The agencies replaced the term ``service area'' in 
the 1994 proposal with ``assessment area'' in the final rule for the 
reasons explained in the discussion of assessment area.
    ATM and branch. The agencies changed the definitions of ATM and 
branch to eliminate the requirement that an ATM or a branch be at a 
fixed site. This change means that staffed mobile offices that are 
licensed as branches will be considered ``branches'' under the final 
rule and that mobile ATMs will be considered ``ATMs.'' This change may 
affect the delineation of an institution's assessment area(s) because 
the assessment area(s) must include the geographies in which the 
institution has its main office, branches and deposit-taking ATMs. 
Including mobile branches and ATMs in defining an assessment area 
ensures that an institution that uses these means in an area not 
otherwise served by the institution will be evaluated on its success in 
helping to meet the credit needs of the area. Including mobile branches 
in the definition of ``branch'' will also affect evaluation of an 
institution's service to its community because the ``service test'' 
evaluates the distribution of an institution's branches and the 
institution's history of opening and closing branches. In the revised 
Part 345, the FDIC uses the term ``remote service facility'' instead of 
``ATM'' to conform with the terminology used in its regulations.
    Community development. The 1994 proposal did not provide a separate 
definition of ``community development,'' although the term was used in 
defining community development loans and services and qualified 
investments. Several commenters requested further guidance on the scope 
of activities that would qualify. Some commenters were concerned that, 
without further specification, the regulation might permit an overly 
broad range of activities to be considered favorably as supporting 
community development. Others were concerned that the definition might 
be too narrow.
    The final rule separately defines community development to mean: 
(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 13 CFR 121.802(a)(2) or have gross annual 
revenues of $1 million or less; or (4) activities that revitalize or 
stabilize low- or moderate-income geographies.
    The definition of community development restricts qualifying 
activities to those that promote community welfare, while recognizing 
that community welfare can be promoted in diverse ways. For example, a 
number of commenters, representing both the industry and community and 
consumer groups, stated that the requirement in the 1994 proposal that 
community development loans and services and qualified investments meet 
``community economic development needs'' inappropriately limited 
community development to efforts that meet ``economic'' needs. The 
final rule does not contain this limitation, and community development 
includes community- or tribal-based child care, educational, health, or 
social services targeted to low- or moderate-income persons or services 
that revitalize or stabilize low- or moderate-income geographies.
    In response to comments, the definition clarifies the small 
businesses and farms that the agencies intend to cover. The section of 
the definition that discusses activities that promote economic 
development by financing small businesses and farms refers to 13 CFR 
121.802(a)(2), the size limitations for the Small Business 
Administration's Small Business Investment Company and Development 
Company programs, as well as the $1 million gross annual revenues 
threshold used for lending test analysis.
    Several commenters stated that community development should require 
benefit to low- and moderate-income areas. However, narrowing the focus 
to only these areas would ignore some of the beneficial purposes of 
community development lending for low- and moderate-income individuals. 
Under the rule, community development includes activities outside of 
low- and moderate-income areas if the activities provide affordable 
housing for, or community services targeted to, low- or moderate-income 
individuals or if they promote economic development by financing small 
businesses and farms. Activities that create, retain, or improve jobs 
for low- or moderate-income persons to stabilize or revitalize low- or 
moderate-income areas also qualify as community development, even if 
the activities are not located in low- or moderate-income areas.
    The final rule also requires that, in order to be community 
development loans or services or qualified investments, activities must 
have community development as their primary purpose. Activities not 
designed for the express purpose of revitalizing or stabilizing low- or 
moderate-income areas, providing affordable housing for, or community 
services targeted to, low- or moderate-income persons, or promoting 
economic development by financing small businesses and farms are not 
eligible. The fact that an activity provides indirect or short-term 
benefits to low- or moderate-income persons does not make the activity 
community development. Thus, a loan for upper-income housing in a 
distressed area would not qualify simply on the basis of the indirect 
benefit to low- or moderate-income persons from construction jobs or 
the increase in the local tax base that supports enhanced services to 
low- and moderate-income area residents.
    The final rule removes the requirement in the 1994 proposal that 
community development loans and services and qualified investments 
primarily benefit low- or moderate-income persons or small businesses 
or farms. This requirement is unnecessary because the definitions of 
community development loan and service and qualified investment in the 
final rule require that community development be the primary purpose of 
the activities.
    Community development loan. The agencies have amended the 
definition of ``community development loan'' as described in the 
discussion of ``community development'' and in several other ways to 
respond to commenters' concerns.
    First, many commenters objected to the requirement in the 1994 
proposal that community development loans meet needs ``not being met by 
the private market.'' Some commenters pointed out that financial 
institutions are part of the private market so, if financial 
institutions make the loans, the needs addressed by the loans will, as 
a matter of course, be met by the private market. To respond to these 
comments, the agencies removed this qualifier from the 
definition of a community development loan.
    Second, some commenters expressed confusion about the extent to 
which the definition of ``community development loan'' in the 1994 
proposal would have differed for wholesale and limited purpose 
institutions. The agencies amended the definition of ``community 
development loan'' in the final rule to clarify the two ways in which a 
``community development loan'' differs for wholesale and limited 
purpose institutions. First, wholesale and limited purpose institutions 
may consider loans as community development loans wherever they are 
located, if the institutions have otherwise adequately addressed the 
credit needs in their assessment area(s). This different treatment 
accounts for the fact that wholesale and limited purpose institutions 
typically draw their resources from, and serve areas well beyond, their 
immediate communities. Second, a wholesale or limited purpose 
institution may consider loans reported as home mortgage, small 
business, small farm or consumer loans to be community development 
loans. Institutions subject to the lending test may not consider loans 
reported in those categories to be community development loans, unless 
the loans are multifamily dwelling loans. This different treatment 
recognizes that the rule does not separately assess wholesale and 
limited purpose institutions on these reported loans.
    Some commenters also urged that the agencies permit wholesale and 
limited purpose institutions to include as a community development loan 
any loan that primarily benefits low- or moderate-income individuals 
regardless of the loan's effect on community development. The lending 
test evaluates an institution's performance in making home mortgage, 
small business, small farm, and consumer loans based on the geographic 
distribution of loans to borrowers of different incomes, not on the 
basis of the total number and dollar amount of loans to low- and 
moderate-income borrowers. Because the community development test does 
not consider borrower distribution, but only loan amount and volume, 
crediting any loan that benefits low- and moderate-income individuals 
could significantly inflate performance under this test. Therefore, the 
final rule does not incorporate the suggested change.
    Other commenters urged that institutions that are not wholesale or 
limited purpose institutions have the option of treating a home 
mortgage, small business, or small farm loan as a community development 
loan if it would otherwise qualify. The agencies have not done so. For 
retail institutions, the community development loan category permits 
consideration of loans that do not meet the definitions of home 
mortgage, small business or small farm loans but deserve favorable 
consideration in a CRA assessment. Loans that do meet the definitions 
of home mortgage, small business and small farm loans are more 
appropriately evaluated based on the criteria provided for these loans 
in the lending test.
    Some commenters requested that retail institutions receive 
favorable consideration for community development loans outside their 
assessment areas. Under the final rule, an institution that is not a 
wholesale or limited purpose institution may receive favorable 
consideration for a community development loan that benefits a broader 
statewide or regional area that includes the institution's assessment 
area(s). This approach maintains a balance between the broader purposes 
of community development lending and the focus of CRA on meeting the 
credit needs of an institution's local community. As previously noted, 
because of their different operational focus, wholesale and limited 
purpose institutions receive consideration for community development 
loans made outside this broader area if they have adequately addressed 
credit needs within the area.1

    \1\Examples of community development loans include, but are not 
limited to, loans to: borrowers for affordable housing 
rehabilitation and construction, including construction and 
permanent financing of multifamily rental property serving low- and 
moderate-income persons; not-for-profit organizations serving 
primarily low- and moderate-income housing or other community 
development needs; borrowers in support of community facilities in 
low- and moderate-income areas or that are targeted to low- and 
moderate-income individuals; and financial intermediaries including, 
but not limited to, Community Development Financial Institutions 
(CDFIs), Community Development Corporations (CDCs), minority- and 
women-owned financial institutions, and low-income or community 
development credit unions that primarily lend or facilitate lending 
in low- and moderate-income areas or to low- and moderate-income 
individuals in order to promote community development. Other 
examples include loans to: local, state, and tribal governments for 
community development activities; and loans to finance environmental 
clean-up or redevelopment of an industrial site as part of an effort 
to revitalize the low- or moderate-income community in which the 
property is located.
    Community development service. The definition of ``community 
development service'' has been moved to the definition section of the 
rule for clarity. The definition has been conformed to the definitions 
of ``community development loan'' and ``qualified investment'' by 
removing the reference to ``needs not being met by the private market'' 
for the reasons described in the discussion of ``community development 
loan.'' In addition, community development services are required to be 
related to the provision of financial services. For example, service on 
the board of directors of an organization that promotes credit 
availability or affordable housing meets this requirement. Providing 
technical assistance in the financial services field to community-based 
groups, local, or tribal government agencies, or intermediaries that 
help to meet the credit needs of low- and moderate-income individuals 
or small businesses and farms is also related to the provision of 
financial services. By contrast, general participation by bank or 
thrift employees in community activities that do not take advantage of 
the employee's technical or financial expertise would not qualify. 
Although an admirable civic contribution, such employee participation 
is not sufficiently related to the provision of financial services to 
meet the purposes of CRA. As mentioned in the preamble to the 1994 
proposal, electronic benefits transfer and point-of-sale terminal 
systems that are designed to improve access, such as by decreasing 
costs, for low- or moderate-income individuals would receive favorable 
consideration.2

    \2\Examples of community development services include, among 
other things: providing technical expertise for not-for-profit, 
tribal or government organizations serving low- and moderate-income 
housing needs or economic revitalization and development; lending 
executives to organizations facilitating affordable housing 
construction and rehabilitation or development of affordable 
housing; providing credit counseling, home buyers counseling, home 
maintenance counseling, and/or financial planning to promote 
community development and affordable housing; school savings 
programs; and other financial services the primary purpose of which 
is community development, such as low-cost or free government check 
cashing.
---------------------------------------------------------------------------

    Consumer loan. The definition of ``consumer loan'' remains 
substantially the same as in the 1994 proposal. As in the 1994 
proposal, a consumer loan must be extended to one or more individuals 
for household, family, or other personal expenditures. However, as 
proposed in 1994, the definition would have mirrored the definition of 
consumer loan in the Consolidated Report of Condition and Income (Call 
Report) or Thrift Financial Report (TFR) in an effort to reduce 
potential regulatory burden. The Call Report and TFR definitions 
exclude loans secured by real estate and loans used to purchase or 
carry securities. Many industry commenters objected to these 
exclusions. Commenters were particularly concerned that home equity 
loans that do not fall within the definition of home 
improvement loans reportable under HMDA would not have been considered 
consumer loans under the proposed rule. The definition of consumer loan 
in the final rule no longer uses the definition in the Call Report or 
TFR. As a result, home equity loans that are not reportable under HMDA 
are consumer loans if they otherwise meet the definition. However, the 
agencies have clarified in the final rule that consumer loans do not 
include home mortgage, small business, or small farm loans. These loans 
are considered separately under the lending test so treating them also 
as consumer loans would result in double-counting.
    The final rule contains definitions for five categories of consumer 
loans: motor vehicle loans, credit card loans, home equity loans, other 
secured consumer loans, and other unsecured consumer loans. These 
definitions reflect the fact that the final rule permits an institution 
to elect evaluation of its consumer lending on a product-by-product 
basis.
    Home mortgage loan. In the 1994 proposal's definition of ``home 
mortgage loan,'' the agencies referred to the HMDA and its implementing 
regulations. Some commenters pointed out that the Board has refined the 
definition of home mortgage loan in its HMDA regulations (12 CFR Part 
203). These commenters indicated it would be preferable and, perhaps, 
less confusing if the agencies referred only to the Board's HMDA 
regulations, rather than to both the HMDA and the regulations. The 
agencies have amended the definition of ``home mortgage loan'' in the 
final rule accordingly. Under the final rule, a home mortgage loan 
means a ``home improvement loan'' or a ``home purchase loan'' as these 
terms are defined in 12 CFR Part 203. This definition includes 
multifamily dwelling loans and refinancings of home improvement and 
home purchase loans.
    Income level. The income level definitions under the 1994 proposal 
would have included adjustments to reflect high-cost areas and family 
size. A number of commenters suggested that, although these adjustments 
would make the income definitions more accurate, the value of the 
increased accuracy would be outweighed by the complication and burden 
associated with the use of adjusted figures. Other commenters pointed 
out that HMDA disclosure statements, which are used, in part, to 
evaluate CRA performance, do not employ the adjustments. Some 
commenters strongly supported the use of adjusted area median income, 
especially in high-cost communities. However, the flexibility of the 
performance standards allows examiners to account in their evaluations 
under the tests for conditions in high-cost communities, such as a 
shortage of credit for moderate-income persons or areas. In addition, 
the flexibility in the requirement that community development loans, 
community development services, and qualified investments have as their 
``primary'' purpose community development allows examiners to account 
for conditions in high-cost areas. Therefore, the definitions of income 
level in the final rule are based upon area median income without 
adjustments. In addition, the definition of ``area median income'' for 
rural areas has been simplified and uses only the statewide non-
metropolitan median rather than the higher of county median or the 
statewide figure.
    Limited purpose institution and wholesale institution. A number of 
industry commenters suggested that ``nonbank banks'' permitted under 
the Competitive Equality Banking Act (12 U.S.C. 1843(f)) (CEBA banks) 
should automatically be considered limited purpose institutions. These 
institutions operate under a variety of different business plans and 
legal constraints and include retail and wholesale banks, credit card 
banks, and industrial loan companies. CEBA banks may legally engage in 
different activities, depending on which activities a particular bank 
engaged in as of March 1, 1987. A uniform treatment of these 
institutions is therefore not practicable. The final rule provides the 
necessary flexibility to assess the CRA performance of these 
institutions and does not require any institution to engage in 
proscribed activities. Some of these institutions could be designated 
as wholesale or limited purpose institutions on a case-by-case basis. 
Further, the final rule permits the agencies to take into account any 
legal constraints placed on an institution in assessing performance. As 
in the case of thrifts, adjustments can be made in the ratings profiles 
to reflect the legal constraints imposed on the activities of CEBA 
banks.
    Other commenters requested more guidance on incidental lending 
activities that wholesale and limited purpose institutions could engage 
in without losing their special designation. Wholesale institutions may 
engage in some retail lending without losing their designation if this 
activity is incidental and done on an accommodation basis. Similarly, a 
limited purpose institution continues to meet the narrow product line 
requirement if it provides other types of loans on an infrequent basis.
    Qualified investment. The definition of ``qualified investment'' 
has been moved to the definition section for clarity and changed to 
reflect the new definition of ``community development'' and to respond 
to comments. The agencies have removed the requirement that a qualified 
investment must address community development needs ``not being met by 
the private market.'' Instead, in evaluating performance, the agencies 
will give greater weight to qualified investments that are not 
routinely provided by private investors.
    The 1994 proposal clearly permitted consideration of investments in 
organizations that make qualified investments, and the final rule is 
unmodified in this respect. Some commenters asked that qualified 
investments be required to benefit low- or moderate-income areas or 
required to benefit either low- or moderate-income people or areas. The 
agencies rejected these suggestions for the reasons noted in the 
discussion of ``community development.''
    The final rule clarifies specific aspects of qualified investments 
proposed in the 1994 proposal that raised issues in the comments. For 
example, the explicit reference to investments in credit unions has 
been removed to clarify that no special treatment for these 
institutions was intended under the investment test. Deposits and 
membership shares in any financial institution that otherwise meet the 
criteria discussed earlier for treatment as a qualified investment 
qualify under the investment test. In addition, although some comments 
suggested otherwise, Federal Home Loan Bank stock does not have a 
sufficient connection to community development to be considered a 
qualified investment.
    The use of the term ``standard'' mortgage backed securities in the 
preamble to the 1994 proposal was ambiguous and should be clarified to 
mean ``untargeted'' mortgage backed securities. Untargeted mortgage 
backed securities and untargeted municipal bonds are not qualified 
investments because their primary purpose is not community development. 
Investments in municipal bonds designed primarily to finance community 
development generally are qualified investments and need not be 
housing-related. Housing-related municipal bonds must primarily address 
affordable housing (including multifamily rental housing) needs in 
order to qualify.
    The term ``grants'' in the final rule includes in-kind 
contributions of property to community development organizations. 
Grants do not automatically have less weight than investments, but the weight accorded a grant is 
determined under the performance criteria in the investment test.\3\

    \3\Examples of qualified investments include, but are not 
limited to, investments, grants, deposits or shares: in or to 
financial intermediaries (including, but not limited to CDFIs, CDCs, 
minority- and women-owned financial institutions, and low-income or 
community development credit unions) that primarily lend or 
facilitate lending in low- and moderate-income areas or to low- and 
moderate-income individuals in order to promote community 
development, such as a CDFI that promotes economic development on an 
Indian reservation; in support of organizations engaged in 
affordable housing rehabilitation and construction, including 
multifamily rental housing; in support of organizations promoting 
economic development by financing small businesses, including Small 
Business Investment Companies (SBICs) and specialized SBICs; to 
support or develop facilities that promote community development in 
low- and moderate-income areas for low- and moderate-income 
individuals, such as day care facilities; in projects eligible for 
low-income housing tax credits; in state and municipal obligations 
that specifically support affordable housing or other community 
development; to not-for-profit organizations serving low- and 
moderate-income housing or other community development needs, such 
as home-ownership counseling, home maintenance counseling, credit 
counseling, and other financial services education; and in or to 
organizations supporting activities essential to the capacity of 
low- and moderate-income individuals or geographies to utilize 
credit or to sustain economic development.
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    Small institution. Under the 1994 proposal, institutions would have 
been considered small institutions if they had total assets of less 
than $250 million and were either independent institutions or 
affiliates of holding companies with less than $250 million in total 
assets. This definition of ``small institution'' received numerous 
comments. Industry commenters generally believed that the asset level 
for holding companies should be raised or eliminated entirely, although 
some indicated that the $250 million asset level for small institutions 
would be satisfactory. Some commenters representing institutions with 
assets below $250 million affiliated with a larger holding company 
indicated that their institutions typically operated independently from 
the holding company in complying with CRA obligations. They stated that 
it would be unfair for them to be evaluated under the assessment tests 
for a larger institution merely because of their ownership structure. 
On the other hand, community and consumer groups often commented that 
small institutions should not be treated differently, or that only 
institutions with fewer than $50 million in assets should be considered 
small institutions for purposes of the CRA rule.
    The final rule modifies the definition of ``small institution'' in 
light of these comments. In the final rule, for any independent 
institution to be considered a small institution, it must have total 
assets of less than $250 million. Moreover, an institution with total 
assets of less than $250 million that is owned by a holding company 
would be considered a small institution if the total bank and thrift 
assets of its holding company are less than $1 billion. The agencies 
were persuaded that some smaller holding companies may be unable to 
provide support to their subsidiary banks and thrifts for CRA 
compliance. Larger holding companies have the ability to provide 
support to their subsidiary banks and thrifts, so small institutions 
owned by these holding companies will not be unfairly burdened by 
evaluation under the lending, investment, and service tests used in the 
assessments of larger institutions. The choice of the $1 billion level 
reflects the weight of the comments that suggested raising the asset 
level and the agencies' judgment regarding the size at which a holding 
company should be expected to support the compliance activities of its 
bank and thrift subsidiaries. The agencies estimate that this change 
will add only a limited number of institutions, with average assets of 
about $100 million, to those eligible under the small bank performance 
standards.
    Many commenters also asked the agencies to clarify the date on 
which the determination will be made whether an institution is a small 
institution. The agencies have amended the definition of ``small 
institution'' to clarify that an institution will be considered a small 
institution throughout any calendar year if, as of December 31 of 
either of the prior two calendar years, the total assets of the 
institution (and, if applicable, its holding company) fell below the 
asset limits set out earlier for a small institution. This definition 
ensures some stability in whether an institution is classified as a 
small institution and minimizes the chance that an institution's status 
will change repeatedly from year to year. The definition also ensures 
that institutions that exceed the asset limits have adequate time to 
prepare to meet the requirements applicable to larger institutions.
    Small business loan and small farm loan. The agencies made no 
substantive changes to the definitions of ``small business loan'' and 
``small farm loan.'' The final rule cross-references the Call Reports 
and TFR definitions rather than restating the substance of the 
definitions as the 1994 proposal would have done. The definitions are 
based on the size of the loans. Some commenters urged that the 
definitions be based on the asset size of the business or the farm, as 
was originally proposed in 1993. The agencies have concluded that, 
although defining small business and small farm loans by the size of 
the loan may not be as precise as definitions based on business or farm 
asset size, following the approach used in the Call Report and TFR will 
appreciably reduce the burden of compliance for institutions and their 
borrowers. Also, the Call Report and TFR definitions minimize the need 
for institutions to collect additional information. The danger of 
inaccuracy is limited, because loan size roughly correlates with the 
size of a business or farm borrower. Furthermore, the agencies have 
retained the proposed requirement that institutions indicate whether a 
small business or small farm loan is to a business or farm with gross 
annual revenues of $1 million or less. This requirement will provide 
additional information to identify loans to small entities.
    Several commenters requested that the agencies clarify whether the 
definitions of small business and small farm loans include loans made 
to nonprofit organizations as described in the Internal Revenue Code at 
26 U.S.C. 501(c)(3). Loans made to nonprofit organizations are included 
to the same extent they are included under the Call Report and TFR 
definitions of small business and small farm loans. Loans to nonprofits 
that are reported as small business or small farm loans cannot also be 
reported as community development loans, except by wholesale and 
limited purpose institutions.

Performance Tests, Standards and Ratings in General

    Several changes have been made to the section of the 1994 proposal 
on assessment tests, standards, and ratings. As an initial matter, the 
terms ``performance tests,'' ``performance standards,'' and 
``performance criteria'' have been substituted for the terms 
``assessment tests,'' ``assessment standards,'' and ``assessment 
criteria'' to reflect more accurately the final rule's focus on 
performance rather than process. The agencies have also changed the 
term ``assessment context'' to ``performance context'' because the 
latter term better describes the role of this information in the CRA 
evaluation process.
    Performance context. An institution's performance under the tests 
and standards in the rule is judged in the context of information about 
the institution, its community, its competitors, and its peers. 
Examiners will consider the following information, as appropriate, in 
order to assist in understanding the context in which 
the institution's performance should be evaluated: (1) The economic and 
demographic characteristics of the assessment area(s); (2) lending, 
investment, and service opportunities in the assessment area(s); (3) 
the institution's product offerings and business strategy; (4) the 
institution's capacity and constraints; (5) the prior performance of 
the institution and, in appropriate circumstances, the performance of 
similarly situated institutions; and (6) other relevant information. 
The final rule clarifies that a proposed strategic plan will also be 
evaluated in the same context. However, all of the factors described in 
the performance context would not necessarily apply to each strategic 
plan. In this regard, the performance of similarly situated lenders 
would not generally be appropriate for evaluating future goals under a 
strategic plan.
    Under the 1994 proposal, the assessment context would have included 
examiner-developed information on the credit needs of an institution's 
service area. Many commenters interpreted the proposal to mean that the 
agencies would prepare a detailed needs assessment for each 
institution's service area(s). Several bank and thrift commenters 
criticized such a role for the agencies, reasoning that institutions 
know their communities far better than a regulatory agency, and that 
agency-prepared assessments would lead to credit allocation. Some 
community organization commenters, while more supportive of the concept 
of agency prepared needs assessments, were concerned that the proposal 
might imply that institutions did not need to make an effort to know 
their communities' credit needs, but could instead look to the agencies 
for that determination.
    The agencies did not intend to suggest that an agency-developed 
needs assessment would prescribe the credit needs an institution must 
address. Instead, the examiner-developed information on credit needs 
was intended to help inform the examiner's judgment about the 
institution's record of performance. Institutions are in the better 
position to know their communities, and it is neither appropriate nor 
feasible for the agencies to prepare a detailed assessment of the 
credit needs of an institution's community. Thus, under the final rule 
the agencies will analyze the information an institution maintains on 
the credit needs of its community along with relevant information 
available from other sources. At the same time, the final rule does not 
establish a requirement that each institution prepare a ``needs 
assessment'' to be evaluated by the examiner as urged in some comments 
provided by financial institutions and community organizations.
    Under the final rule, the agencies will neither prepare a formal 
assessment of community credit needs nor evaluate an institution on its 
efforts to ascertain community credit needs. Instead, the agencies will 
request any information that the institution has developed on lending, 
investment, and service opportunities in its assessment area(s). The 
agencies will not expect more information than what the institution 
normally would develop to prepare a business plan or to identify 
potential markets and customers, including low- and moderate-income 
persons and geographies in its assessment area(s). This information 
from the institution will be considered along with information from 
community, government, civic and other sources to enable the examiner 
to gain a working knowledge of the institution's community. In response 
to comments, the final rule also clarifies that information about 
lending, investment, and service opportunities in an institution's 
assessment area will, where appropriate, be obtained from tribal 
governments, as well as from other sources.
    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.
    Safety and soundness. The CRA requires the agencies to assess an 
institution's record of helping to meet the credit needs of its entire 
community, consistent with the safe and sound operation of the 
institution. A number of industry commenters were concerned that the 
1994 proposal would not have stressed the importance of the safety and 
soundness of an institution's operation to the same extent as the CRA 
statute or the current regulations. These commenters responded 
primarily to the omission of a statement in the 1993 proposal that the 
CRA does not require any institution to make loans or investments that 
are expected to result in losses or are otherwise inconsistent with 
safe and sound operations. The agencies did not intend by this omission 
to encourage unprofitable or otherwise unsafe and unsound practices. 
The agencies firmly believe that institutions can and should expect 
lending and investments encouraged by the CRA to be profitable. The 
final rule explicitly reflects this belief and addresses the importance 
of safety and soundness considerations in several sections and in the 
ratings appendix. The agencies assess an institution's record of 
helping to meet community credit needs with careful attention to the 
constraints imposed by safety and soundness. As in other areas of bank 
and thrift operations, unsafe and unsound practices are viewed 
unfavorably. The ratings appendix specifically states: ``The bank's 
overall performance, however, must be consistent with safe and sound 
banking practices. * * *''
    Flexible underwriting approaches. The final rule states that the 
agencies permit and encourage an institution's use of flexible 
underwriting approaches to facilitate lending to low- and moderate-
income individuals and areas, but only if consistent with safe and 
sound operations. This is consistent with, and clarifies, language in 
the 1994 proposal. Some commenters urged that the rule expressly 
identify particular types of areas or borrowers covered by this 
provision. Mentioning particular types of borrowers or areas in the 
regulatory text is unnecessary and inconsistent with the principle of 
evaluating each institution and its community based on their 
characteristics, capacity, and needs. However, certain borrowers or 
areas, such as Native Americans residing in Indian country, may face 
difficulties obtaining credit that could warrant special consideration. 
The efforts of lenders that utilize innovative or flexible methods, in 
a safe and sound manner, to address these or other unusual underwriting 
issues are recognized under the lending test.

The Lending Test

    The lending test in the final rule is substantially similar to the 
1994 proposal. However, there are some significant changes in response 
to the comments.
    Consideration of originations and purchases. The 1994 proposal 
would have evaluated home mortgage lending based on HMDA 
data, which is based on loan originations and purchases. However, the 
proposal would have required institutions to collect, report, and be 
evaluated on loans outstanding for other types of loans. The agencies 
took this approach in an effort to reduce burden on the industry, 
because institutions must already report loans outstanding on Call 
Reports and TFRs.
    The vast majority of commenters who addressed this issue (almost 
exclusively industry commenters) stated that use of originations would 
provide a substantially more accurate picture of actual lending 
activity, because current activity would not be obscured by past 
activity and the data would reflect seasonal variations and sale of 
loans in the secondary market. Moreover, using originations rewards, 
rather than penalizes, institutions for selling loans on the secondary 
market, which frees up capital for additional lending and increases 
credit availability. The commenters did not support the premise that 
use of originations would be more burdensome than using loans 
outstanding. Because institutions would have to collect and report 
additional information on each loan for CRA purposes, using loans 
outstanding would not significantly decrease burden. The bulk, if not 
all, of the burden reduction would be achieved by using the Call Report 
and TFR definitions. The final rule therefore uses originations and 
purchases, instead of loans outstanding, for all types of loans.
    Lines of credit are considered originated at the time the line is 
approved or increased; and an increase is considered a new origination. 
Generally, the full amount of the credit line (or in the case of an 
increase in an existing line, the amount of the increase) is the amount 
that is considered originated. Although some lines of credit may be for 
both home improvement and other purposes, only the amount that is 
considered to be for home improvement purposes is reported as a home 
improvement loan under HMDA. Lines of credit should be considered in 
assessing an institution's lending activity in all applicable loan 
types. Therefore, where a portion of a line of credit is reported under 
HMDA and another portion meets the definition either of a ``small 
business loan'' or a ``consumer loan,'' the full amount of the line of 
credit should be reported as a small business loan or collected as a 
consumer loan, as appropriate, and the agencies will also consider as a 
home mortgage loan the portion of the credit line that is reported 
under HMDA.
    The final rule contains an option for lenders also to provide data 
on loans outstanding, which may, in certain circumstances, enhance an 
examiner's understanding of an institution's performance. Institutions 
may also provide for examiner consideration information on letters of 
credit and commitments, as well as any other loan information. The 
language of the lending test (and the definition of ``community 
development loan'') has been adjusted as appropriate to reflect these 
changes.
    Consumer loan evaluation. Under the 1994 proposal, consumer lending 
would have been evaluated under the lending test only if an institution 
elected to have it evaluated and provided the necessary loan data. 
Thus, the 1994 proposal would have permitted an institution that is 
primarily a consumer lender not to be evaluated on a substantial 
portion of its business if it so chose. Under these circumstances, 
meaningful evaluation of certain institutions might have been very 
difficult. The final rule, therefore, changes the treatment of consumer 
lending. Under the rule, if a substantial majority of an institution's 
business is consumer lending, this lending is evaluated in the lending 
test. The rule does not impose any reporting requirements for consumer 
lending, however. If an examiner determines that a substantial portion 
of an institution's business is consumer lending, and the institution 
has not elected to provide consumer loan data, the examiner will 
evaluate consumer lending by analyzing an appropriate sample of the 
institution's consumer loan portfolio. In addition, this aspect of the 
final rule does not affect the evaluation of a limited purpose bank, 
because the bank will be e