By Hannah Bergman

American Banker
September 8, 2004

WASHINGTON – Though the fight over simplifying Community
Reinvestment Act exams has gotten more attention, regulators are quietly
weighing a change that would give banks more flexibility in defining the
geographical area where their performance under the 1977 law is judged.

Under a July 8 interim rule, the current
assessment-area units – metropolitan statistical areas – could be subdivided
into “metropolitan divisions.”

Critics claim this could let a bank define its CRA
assessment area more narrowly and shun low-income areas.

“We feel this proposal threatens to facilitate
redlining,” Geoff Smith, the projects director for the Woodstock Institute in
Chicago, wrote in a comment letter to regulators.

“Bank regulators will use metropolitan divisions to
calculate median family income levels for CRA analysis, and financial
institutions will be allowed to designate one or more metropolitan division, up
to an entire MSA, as their assessment area.”

But Robert G. Rowe 3d, the regulatory counsel of the
Independent Community Bankers of America, said that is unlikely to happen.

“Theoretically a bank could try it, but they would be
very ill advised to do so,” Mr. Rowe said.

Existing CRA requirements forbid a bank from drawing its
assessment area to deliberately exclude low- and moderate-income areas, and that
would not change under the new rule, Mr. Rowe said.

Every 10 years or so the Office of Management and Budget
issues standards for defining statistical areas, and the bank and thrift
agencies’ joint interim rule is designed to incorporate these. Comments closed
Tuesday, and the agencies received just a handful of

In the interim rule, the agencies used the Detroit metro
area as an example, suggesting a bank could exclude the entire downtown from its
assessment area and choose to serve only the more affluent

The National Community Reinvestment Coalition decried
the use of the median income of a metropolitan division rather than of an MSA
when calculating low, moderate, middle, and upper levels of

“This will have the effect of converting some suburban
middle-income tracts into moderate-income tracts and will have the effect of
turning some urban moderate-income tracts into middle-income tracts,” the
group’s president, John Taylor, wrote in its comment

The letter cites Franklin Bank in Southfield, Mich., as
an example. The bank has six branches in Detroit suburbs, none in low- to
moderate-income areas. Though its current CRA assessment area includes the city
of Detroit and therefore requires lending there, under the new rule the bank
could exclude Wayne County from its assessment area and reduce lending in the

But James Ballentine, the director of community
development for the American Bankers Association, said excluding areas with low
to moderate income is not practical.

“That is the traditional line that the community groups
use in this instance,” Mr. Ballentine said. “The attempt to leave out an area
which was deemed … an underserved area would not go over very well on a bank’s
CRA exam.”

Few of the comment letters focused on the

“It’s a pretty significant issue, and it hasn’t gotten a
lot of publicity,” Mr. Smith of Woodstock said in an

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