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Correspondence Date: June 11, 1996

Dear [ ]:

Thank you for your December 7, 1995, letter to Stephen Cross, Glenn Loney, and me addressing several issues concerning the comparison of "similarly-situated lenders" and the concept of performance context in the CRA regulations. Specifically, your membership is concerned that banks are not in a position to respond to examination findings and will have difficulty producing their own analysis to provide to examiners given the lack of business lending data currently available to the examined institution regarding peer performance. Furthermore, given the lack of available peer data, banks are unclear how to place "their lending performance in the context in which they will be examined." The issues you raised were carefully considered by the FDIC, Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), and Office of Thrift Supervision (OTS) during the drafting of both the new regulations and examination procedures and were addressed during interagency examiner training sessions. My counterparts at the other agencies have also reviewed this reply to your letter and agree with my conclusions.

"Performance context" describes information about an institution and its community that an examiner must review in order to assess adequately the institution's performance. This basic demographic and other information about an institution and its community provide the context for evaluating data on an institution's lending, service, and investment performance. Typically, this information includes demographic and economic data about the institution's assessment area(s) and information about local economic conditions, the institution's major business products and strategies, and its financial condition, capacity, and ability to lend or invest in its community. See 60 Fed. Reg. at 22,180, 22,191, 22,203, and 22,214 (to be codified at 12 C.F.R. §§25.21(b), 228.21(b), 345.21(b), and 563e.21(b)). Consideration of these factors during a CRA examination reflects a fundamental underpinning of the new CRA regulations -- that the differences in institutions and the communities in which they do business preclude rigid and inflexible rules. Information about other lenders can be a useful part of the performance context in certain circumstances.

As part of the geographic distribution analysis, one of the five lending test performance criteria under the new rule, an examiner may include, among other analyses, an analysis of the lending performance of other similarly-situated lenders. Such an analysis could provide accurate insight, for example, into lending opportunities available in the examined bank's assessment area. This analysis may also be useful in evaluating why an institution has an abnormally low loan penetration in certain areas. See 60 Fed. Reg. at 22,165; see also Interagency CRA Examination Procedures for Large Retail Institutions at Step 6 under the lending test (attached). Nonetheless, this analysis is simply one tool among many that an examiner may use in evaluating one lending test criterion. The new regulations do not require examiners to use any single type of analysis and would not link any particular ratio with a particular test rating or overall CRA rating.

Identifying similarly-situated lenders for comparison may be difficult in some cases and, perhaps, not possible in others. Therefore, the Interagency CRA Examination Procedures (Steps 6 and 7 under the Lending Test, 1995 Large Institution Examination Procedures) make clear that the comparative analysis may be used in situations where an institution's lending patterns show abnormally low loan penetration in certain parts of its assessment area if the analysis will provide useful information. To determine whether analysis of the performance of similarly-situated lenders would provide insight into an institutions low loan penetration in certain geographic areas, examiners will first consider whether:

  • The reported loan category is substantially related to the institution's business strategy
  • The area under analysis substantially overlaps the institution's assessment area
  • The analysis includes a sufficient number and volume of transactions and an adequate number of lenders with overlapping assessment areas to conduct a meaningful analysis
  • The assessment area data are free from anomalies that can cause distortions such as, for example, lenders that dominate parts of the area

If it appears that peer group analysis would be helpful, an examiner may seek information from the institutions's management and community contacts on the reasons for the loan penetration of the other lenders and the lack of penetration by the institution examined. In evaluating the examined institution's ability to serve its assessment area, examiners will take into account the area's demographic characteristics, economic conditions, lending opportunities and demand, and the institution's business strategy, capacity and constraints.

  The examination procedures make clear that examiners should engage in discussions with an institution' s management when comparing the performance of similarly-situated lenders (See Step 7c under the Lending Test, 1995 Large Institution Examination Procedures). This will involve a discussion of the data analyzed, including any information the institution may choose to provide. In addition, under each section of the examination procedures, examiners are instructed to discuss preliminary findings for that section with an institution's management before summarizing conclusions, a further guarantee that an institution will have input into the analysis (See Step 12 of the lending test, 1995 Large Institution Examination Procedures).

I trust that this letter addresses your concerns. A copy of the examination procedures is enclosed for your information. Should you have any questions, please let me know.

Bobbie Jean Norris, Chief
Fair Lending Section