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September 1993 UPERVISORY I Supervisory News and Views for the Eighth District ss uEs Community Banks Demonstrate Resilience In late July, the St. Louis Fed conducted an informal telephone survey of community banks to determine the effects of the Midwest flood. Fed employees reached 205 banks in 38 counties that border the flooded Missouri, Mississippi and Illinois Rivers. Flood Prompts Regulatory Response https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis s part of an interagency effort, the Fed is working to assist banks and their customers affected by flooding in the Midwest. Among other measures, the Fed has waived federal appraisal requirements for extensions of credit related to flood recovery, permitted the use of preprinted forms to waive the right of recision, and allowed more flexibility in A Despite the many obstacles to overcome, including sandbags and spectators, respondents confirmed that all banks located in flooded counties continued to operate. Institutions that were forced to evacuate found alternate locations from which to conduct daily business. Many banks moved their operations from their head office to a branch or facility, whereas others relocated to contingency sites. Of the 19 banks that had to evacuate, one served customers from a gymnasium, another from a firehouse, and still another from a local college library. In one area, a competing bank cooperated by permitting a displaced bank to continue operations in its building. In another area, the bank was the only business remaining on its main street and was surrounded by a tall sandbag wall. To get employees and customers to the bank, the managers brought them in with a boat-and-pulleysystem. In addition, for those who were certain consumer compliance matters. Specific information about these initiatives follows. directly affected by the Midwest flood from real estate appraisal requirements. For the next three years, state member banks and bank holding companies are exempt from the provisions of Regulation H relating to real Waiver of Appraisal Regulation As permitted by provisions of the Depository Institutions Disaster Relief Act of 1992, each banking agency has exempted transactions involving real estate located in areas (continued on next page) (continued on next page) Flood Survey (continuedfrom front page) not comfortable banking by boat, an offke was opened in city hall. Thirty-one additional banks responded that their operations were significantly affected by flooded roads and bridges, which hindered employee and courier traffic. To circumvent potential problems, one bank planned to fly key employees to work had conditions warranted. Also, the Fed made arrangements with several banks to deliver cash letters to alternate sites. Despite the efforts of these bankers, however, the flood did deliver some costly blows to institutions. Ten banks reported that either the main office or a branch had sustained physical damage from lengthy flooding. In at least one instance, the facility is estimated to be a total lo . As part of the survey, the Fed requested information about the flood's effect on loan portfolios. Although respondents believe that it is premature to provide estimates concerning credit quality, two-thirds reported that they expect an adverse effect. As of mid-August, however, most lenders estimated that less than ten percent of their portfolios would be affected. The Fed will continue to monitor the effect of the flood on Eighth District institutions. Regulation Zfor consumers who need to obtain credit quickly to begin repairs in flood damaged areas. Bankers may use a preprinted form to secure a consumer's waiver of the right to rescind certain home-secured loans when the loan proceeds are necessary to meet a consumer's bona fide examinations to minimize disruptions to banking operations that are directly affected by the flood or serve communities affected by the flood. While Fed examiners will take into account any extenuating circumstances on a case-by-case basis before citing violations, the Fed is not legally able to relieve state member banks from re ponsibility for compliance with these laws and the civil liability provided in many of the consumer protection statute . encourage institutions to work constructively with borrowers who experience difficulties from conditions beyond their control, the Fed encourages institutions to work with borrowers in a manner that is consistent with sound business practice . oting that one of the principal objectives of the examination and supervision process is to achieve an accurate assessment of a financial institution's loan portfolio and financial condition, the Fed recognizes that efforts to work with borrowers in communities under stress, if conducted in a reasonable manner, are consistent with safe and sound practices and in the public interest. Regulatory Response (continuedfrom front page) estate appraisals providing that the following conditions are met: • The property is in a major Midwest flood disaster area, as declared by President Clinton, and designated as eligible for federal assi tance by the Federal Emergency Management Agency (FEMA); • The property is either directly affected by the flood or, if it is not directly affected, the institution's records explain how a transaction involving the property would enable disaster recovery; • Abinding commitment exists to fund transactions no later than July 9, 1996; and • The lender retains documentation supporting the property's valuation for examiner review. Consumer Compliance Relief Regulation Z The Board is providing a temporaryexemption to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Fed is working to assist banks and their customers affected by the flooding. personal financial emergency. While using the form is permissible, the consumer must sign and date the waiver. This exemption is available immediately in counties declared disaster areas by President Clinton and will expire on July 9, 1994. Consumer Compliance Community Reinvestment Act In assessing CRA performance in communities affected by the flood, the Fed will give positive consideration to financial institutions' participation in programs where most or all of the financing provided may ultimately benefit low- and moderate-income borrowers, even if such neighborhoods are located outside an institution's delineated community. Examinations The St. Louis Fed has po tponed several Eighth District consumer compliance Consistent with its longstanding practice to promote supervisory actions that Small Loans Evaluated on Performance https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis he four federal banking age~cies are encouraging bankers to foster , the growth of lending to creditworthy borrowers, particularly smalland medium-sized businesses and farmers. In March 1993 an interagency statement on credit availability outlined a program that encouraged adequately capitalized institutions to identify a portion of their loan portfolios for examiners to evaluate solely on performance. Recognizing that as of mid-August few banks in the Eighth District have taken advantage of this program, the following reiterates the specifics of the program. T • Exempt loans: Bankers must document in writing assignments of loans to this exempt portion of their portfolios and they must maintain aggregate lists or accounting segregations of the assigned loan including the performance status of each loan. • Limit on value of individual loans: Aloan, or group of loans, to one borrower, assigned to the exempt loans category may not exceed $900,000 or 3 percent of the institution's total capital (as defined in the capital adequacy standards), whichever is smaller. • Ineligible loans: Loans to any executive officer, director, or principal shareholder of the institution, or any related interest of that person, may not be included with the exempt loans. • Aggregate limit on loans: The aggregate value of all exempt loans may not exceed 20 percent of the institution's total capital (as defined in the capital adequacy standards) . • Restrictions on loans in the exempted portion of the portfolio: The institution must fully evaluate the collectibility of exempt loans when determining the adequacy of its allowance for loan and lease losses (ALLL) or general valuation allowance (GVA) attributable to such loans and must include this evaluation in internal records of assessment of the adequacy of its ALLL or GVA. Once a loan in the exempt portion of the portfolio becomes more than 60 days past due, the loan may be reviewed and classified by an examiner; however, any decision to classify would be based on credit quality and not on the level of documentation. Institutions that choose to designate a portion of their portfolio for these exempt loans may benefit by stimulating lending growth in their communities. Official Reassignments Effective August 1, 1993, the Banking Supervision and Regulation Division realigned many responsibilities. Please call the following Division officers and field directors with questions concerning regulatory and supervisory matters. Bank and Bank Holding Company Applications John W. Block, Jr. Assistant Vice President (314) 444-8486 Dennis W. Blase Supervisory Officer (314) 444-8435 Safety & Soundness, Western Region (AR, MS & MO) Timothy A. Bosch Assistant Vice President (314) 444-8440 Carl K. Anderson Field Director (314) 444-8481 Safety & Soundness, Eastern Region (IL, IN, KY & TN) Kim D.. ·et on Assistant Vice President (314) 444-8735 Barkley K Bailey Field Director (314) 444-8768 CRA & Consumer Compliance, Trust & EDP Supervision Harold H. Rieker Assistant Vice President (314) 444-8445 Monitoring & Enforcement John W. Block,Jr. Assistant Vice President (314) 444-8486 Michael W. Declue Supervisory Officer (314) 444-8759 Fed Strengthens Fair Lending Examination Activities ome Mortgage Disclosure Act (HMDA) data released August 5will soon be subject to more extensive analysis by federal regulators. The Fed, along with the OCC, FDIC and OTS, issued a statement on credit availability expressing concern that some small business owners and minority consumers may be experiencing discriminatory treatment and urged banking institutions to increase fair lending activities. In addition, the Fed is developing and testing a new compliance examination tool that will supplement its analysis of HMDA data and permit examiners to conduct more detailed reviews and comparisons of loan application files to detect po ible discrimination. The new examination tool relies on a statistical model loaded on a personal computer to make detailed analyses of Loan Application Register (LAR) in specific mortgage applications in specific institutions. data supplemented by addiWhile this new tool flags tional facts from application disparities for further analysis, files. Using a technique based the examination technique on regression analysis, the model will identify discrepanultimately relies on the cies in credit decisions on , examiners' judgment when loan applications that contain determining whether possible lending discrimination exists. similar financial data, but are submitted by applicants of different races. Once identified, ' r:'f~-==--=-~---=- -::....:~. • examiners will review II )1' • i11 the questionable loan I111 I• 1 applications more care- ) ,\ fully by gathering and II , 11 analyzing applicant \1 1 information, such as Ii -~ I credit history and debt, •:'. . 11 'v.,'1 to test whether the additional factors can }., explain the institu- . ~ 1 ! tion's decision to deny ' r,/;, 1 - _ credit. This informa- ~~~ tion will serve as a basis to discuss with bank management any disparities in lending. This approach concentrates on identifying discrimination n response to numerous questions received at this Reserve Bank, the following clarifies exceptions to the aggregate lending limit as established by Regulation 0. Specifically, the aggregate lending limit for each institution does not apply to extensions of credit to insiders (including executive officers) which are secured by: • Treasury bills, federally guaranteed bonds, or other obligations fully guaranteed by the United States; or • unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission, U.S. establishment, or any wholly owned U.S. corporation. H Regulation 0 lending limit Clarified https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • a segregated deposit account in the lending bank; il I J' In addition, the Bank has been asked whether loans secured by such means are included in the $100,000 limit that applies to executive officers. The regulation does not provide for collateral exceptions to this limit. Therefore all loans made to an executive officer must be included in the individual limit for that officer (i.e., $100,000 or 2.5 percent, whichever is less) . Please direct additional questions regarding Regulation 0 to Timothy A. Bosch at (314) 444-8440 or Kim D. elson at (314) 444-8735. BANK PERFORMANCE Deposit Base Changes in U.S. and District Banks he relatively slow growth (1.8 percent) of total deposits in U.S. banks between March 1991 and March 1993 has been accompanied by a significant shift among deposit accounts. Comparing changes in the deposit base of District banks, which increased by 5.5 percent, with that of their national counterparts highlights a difference in the behavior of several deposit accounts. As the chart below illustrates, total time and savings deposits in U.S. banks showed a slight increase over this two-year period. Moreover, time and savings deposits in U.S. banks of comparable size (less than T Savings & Time Deposits U.S. Banks, U.S. Peer, Eighth District Billions of dollars 2000--..----------------- 110 - - + - - - - - - - - - - - - - - - - - - - 1 10s , - - - - - - - - =~_...._iiiiiiiiiiiiiiiiiiiiii,,,--~ · 100 t i_____ ---i ! : : : , . _ _ . . . : _ __ _ _ _ _ _ _ 9S---..---.--.....-___,..---------.--.....------' 12/90 3/91 6/91 9/91 12/91 3/92 6/ 92 9/92 12/ 92 3/93 . U.S. - U.S. Peer https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - District \ Large Time Deposits U.S. Banks, U.S. Peer, Eighth District Billions of dollars 400 --r------------------ 200 12/90 3/91 6/91 9/91 12/91 3/92 6/92 9/92 12/92 3/93 - U.S. - U.S. Peer $15 billion in assets) actually declined 3.9 percent over the period. In the District, however, time and savings deposits grew 5.6 percent. The primary reason for the national decline was a drop in large time deposits (over $100,000). Of total deposits, District large time deposits followed the national trend in the first four quarters as illustrated above. Beginning in March 1992, however, U.S. •and U.S. peer deposits fell from 10.4 percent to 8.2 percent as of the end of first quarter 1993 - a decline of almost 25 percent. This decline was somewhat offset by an increase in money market deposits accounts (MMDAs). In contrast the District's $731 million (6.6 percent) decline in large - District time deposits was offset by increases in more interest rate-sensitive MMDAs. Large time deposits now constitute a smaller portion of total deposits both in the District and across the country. on-District banks, however, continue to rely more heavily on such deposits than do District banks. Overall, District banks are experiencing less volatility in their deposit base than are their national counterparts. CRA Hearings Held Throughout the Country he federal financial supervisory agencies have been holding a series of hearings on the Community Reinvestment Act (CRA) nationwide since mid-August. The hearings are intended to help the agencies develop new regulations and standards for assessing a financial institution's performance under the CRA. Specifically, the agencies are meeting with the public, community groups and banking and thrift industries to make CRA implementation more effective. The goal is to reform CRA regulations and supervision in order to improve performance, clarify the regulations, and make CRA performance assessments more objective. his Reserve Bank has received inquiries about whether accounts that are charged third party ATM fees can be advertised as "free." The Board of Governors has clarified that fees imposed by third parties for the use of their ATMs worldwide cannot reasonably be expected to be known or disclosed by an institution advertising a free account. Afee imposed by a third party for use of its ATM is not considered either a maintenance or activity fee under Regulation DD when it is merely passed on by the consumer's institution. Therefore in accordance with the regulation, accounts that might be assessed third party ATM fees may be advertised as "free." T . Fot information on dates and locations of future meetings, please contact Harold H. Rieker at (314) 444-8445. 11 Survey Results ' Third Party ATM Fees Do Not Affect Advertising T ' Post Office Box 442 St. Louis, Missouri 63166 t HIL ARY DEBElM ORT tJ:c op i es Supervisory Issues is published bimonthly by the Banking Supervision and Regulation Division of the Federal Reserve Bank of St. Louis. Views expressed are not necessarily official opinions of the Federal Reserve System or the Federal Reserve Bank of St. Louis. Questions regarding this publication should be directed to Amy A. Helean, editor, 314-444-4634. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . Thank you for your participation in the recent Supervisory Issues survey. Your responses suggest that we generally meet your need for supervisozy information. To continue that trend, we plan to incorporate your suggestions for more specific guidance, information and details. Your continued involvement is appreciated. Please· direct your comments and suggestions to Amy A. Helean, editor, at (314) 444-4634. 'j