^Vj president CLINTON'S COMMUNITY
REINVESTMEN T ACT PROPOSAL
Y 4. B 22/1; 103-114
President Clinton's Connunitg Reinv. ..
HEARING
BEFORE THE
SUBCOMMITTEE ON
CONSUMER CREDIT AND INSURANCE
OF THE
COMMITTEE ON BANKING, FINANCE AND
URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
FEBRUARY 8, 1994
Printed for the use of the Committee on Banking, Finance and Urban Affairs
Serial No. 103-114
^ 9
U.S. GOVERNMENT PRINTING OFFICE
76-345 CC WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington. DC 20402
ISBN 0-16-046184-7
J
PRESIDENT CLINTON'S COMMUNITY
REINVESTMEN T ACT PROPOSAL
Y 4. B 22/1; 103-114
\^
President Clinton's Connunity Reinu. ..
HEARING
BEFORE THE
SUBCOMMITTEE ON
CONSUMER CREDIT AND INSURANCE
OF THE
COMMITTEE ON BANKING, FINANCE AND
URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
SECOND SESSION
FEBRUARY 8, 1994
Printed for the use of the Committee on Banking, Finance and Urban Affairs
Serial No. 103-114
U.S. GOVERNMENT PRINTING OFFICE
76-345 CC WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046184-7
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
HENRY B. GONZALEZ, Texas, Chairman
STEPHEN L. NEAL, North Carolina
JOHN J. LaFALCE, New York
BRUCE F. VENTO, Minnesota
CHARLES E. SCHUMER, New York
BARNEY FRANK, Massachusetts
PAUL E. KANJORSKI, Pennsylvania
JOSEPH P. KENNEDY II, Massachusetts
FLOYD H. FLAKE, New York
KWEISI MFUME, Maryland
MAXINE WATERS, California
LARRY LaROCCO, Idaho
BILL ORTON, Utah
JIM BACCHUS, Florida
HERBERT C. KLEIN, New Jersey
CAROLYN B. MALONEY, New York
PETER DEUTSCH, Florida
LUIS V. GUTIERREZ, Illinois
BOBBY L. RUSH, Illinois
LUCILLE ROYBAL-ALLARD, California
THOMAS M. BARRETT, Wisconsin
ELIZABETH FURSE, Oregon
NYDIA M. VELAZQUEZ, New York
ALBERT R. WYNN, Maryland
CLEO FIELDS, Louisiana
MELVIN WATT, North Carolina
MAURICE HINCHEY, New York
CALVIN M. DOOLEY, California
RON KLINK, Pennsylvania
ERIC FINGERHUT, Ohio
JAMES A. LEACH, Iowa
BILL MCCOLLUM, Florida
MARGE ROUKEMA, New Jersey
DOUG BEREUTER, Nebraska
THOMAS J. RIDGE, Pennsylvania
TOBY ROTH, Wisconsin
ALFRED A. (AL) McCANDLESS, California
RICHARD H. BAKER, Louisiana
JIM NUSSLE, Iowa
CRAIG THOMAS, Wyoming
SAM JOHNSON, Texas
DEBORAH PRYCE, Ohio
JOHN LINDER, Georgia
JOE KNOLLENBERG, Michigan
RICK LAZIO, New York
ROD GRAMS, Minnesota
SPENCER BACHUS, Alabama
MIKE HUFFINGTON, California
MICHAEL CASTLE, Delaware
PETER KING, New York
BERNARD SANDERS, Vermont
Subcommittee on Consumer Credit and Insurance
JOSEPH P. KENNEDY II,
HENRY B. GONZALEZ, Texas
LARRY LaROCCO, Idaho
LUIS V. GUTIERREZ, Illinois
BOBBY L. RUSH, Illinois
LUCILLE ROYBAL-ALLARD, California
THOMAS M. BARRETT, Wisconsin
ELIZABETH FURSE, Oregon
NYDIA M. VELAZQUEZ, New York
ALBERT R. WYNN, Maryland
CLEO FIELDS, Louisiana
MELVIN WATT, North Carolina
MAURICE HINCHEY, New York
PAUL E. KANJORSKI, Pennsylvania
FLOYD H. FLAKE, New York
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
PETER DEUTSCH, Florida
Massachusetts, Chairman
ALFRED A. (AL) McCANDLESS, California
MICHAEL CASTLE, Delaware
PETER KING, New York
DEBORAH PRYCE, Ohio
JOHN LINDER, Georgia
JOE KNOLLENBERG, Michigan
DOUG BEREUTER, Nebraska
CRAIG THOMAS, Wyoming
RICK LAZIO, New York
ROD GRAMS, Minnesota
SPENCER BACHUS, Alabama
RICHARD H. BAKER, Louisiana
BERNARD SANDERS, Vermont
(II)
CONTENTS
Page
Hearing held on:
February 8, 1994 1
Appendix:
February 8, 1994 59
WITNESSES
Tuesday, February 8, 1994
Cincotta, Gale, Executive Director, National Training and Information
Center 49
Culberson, James M. Jr., Chairman and CEO, First National Bank and
Trust Co 45
Fiechter, Jonathan L., Acting Director, Office of Thrift Supervision 11
Fishbein, Allen, General Counsel, Center for Community Change 42
Hove, Andrew C, Jr., Acting Chairman, Federal Deposit Insurance Corpora-
tion 8
Jorde, Terry, President, Towner County State Bank, Cando, ND 40
Lewis, Bertha, Director, New York, Association of Community Organizations
for Reform Now 47
Lindsey, Lawrence B., Governor, Federal Reserve Board of Governors 5
Ludwig, Eugene A., Comptroller, Office of the Comptroller of the Currency 2
Plummer, Marshall, Vice President, the Navajo Nation 35
Stith, Rev. Charles R., National President, Organization for a New Equality .. 38
APPENDIX
Prepared statements:
Kennedy, Hon. Joseph P 60
Rush, Hon. Bobby L 63
Cincotta, Gale 223
Culberson, James M., Jr 172
Fiechter, Jonathan L 119
Fishbein, Allen 161
Hove, Andrew C, Jr 99
Jorde, Terry 152
Lewis, Bertha 183
Lindsey, Lawrence B 84
Ludwig, Eugene A 65
Plummer, Marshall 129
Stith, Rev. Charles R 141
Additional Material Submitted for the Record
Association of Community Organizations for Reform Now [ACORN], "Analysis
of the New Community Reinvestment Act [CRA] Regulations" Briefing
Paper, January 1994 193
Comptroller of the Currency, News Release, Remarks by Eugene A. Ludwig,
Comptroller of the Currency, before the National Community Reinvestment
Coalition, Washington, DC, February 7, 1994 77
Consumer Bankers Association and The Bankers Roundtable, prepared
statement 229
Kennedy, Hon. Joseph P., II:
Questions to Eugene A. Ludwig 237
Responses 238
(HI)
IV
Page
Kennedy, Hon. Joseph P., II — Continued
Questions to Andrew C. Hove, Jr 247
Responses 248
Questions to Lawrence B. Lindsey 252
Responses 253
Questions to Jonathan L. Fiechter 241
Responses 242
PRESIDENT CLINTON'S COMMUNITY
REINVESTMENT ACT PROPOSAL
TUESDAY, FEBRUARY 8, 1994
House of Representatives,
Subcommittee on Consumer Credit and Insurance,
Committee on Banking, Finance and Urban Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in room
2128, Raybum House Office Building, Hon. Joseph P. Kennedy H
[chairman of the subcommittee] presiding.
Present: Chairman Kennedy, Representatives LaRocco, Rush,
Roybal-AUard, Velazquez, Wynn, Watt, Hinchey, McCandless,
Knollenberg, Bereuter, Thomas, and Bachus.
Mr. LaRocco [presiding]. The purpose of the hearing is to inves-
tigate the administration's community reinvestment proposals.
Chairman Kennedy has been held up on a flight. He should be here
shortly from Boston, but we want to move ahead. As I understand
it, there are transportation problems throughout our region here.
I don't have an opening statement this morning. I will turn to
Mr. McCandless. And let me say, as a colleague of Mr. McCandless,
I want to note his recent announcement of plans to leave this dis-
tinguished body and to express my thanks for the work that we
have done together.
I turn to him for an opening statement.
Mr. McCandless. Thank you, Mr. Chairman. I don't want to
take any of your time because it is important that we hear from
these gentlemen. I am interested in hearing from these witnesses
their assessment of the President's initiative. I want to hear the
strengths and weaknesses of these proposed regulations.
Basically, I am interested in hearing whether banks and commu-
nities would be better off under this proposal or under the current
regulations. I encourage the witnesses to be candid and to talk
about the specific issues that they feel are most needed in this
discussion.
I want to remind our witnesses that their written testimony will
be included in the record. I want to welcome the witnesses and look
forward to their testimony.
Thank you, Mr. Chairman.
Mr. LaRocco. Thank you, Mr. McCandless.
Mr. Thomas.
Mr. Thomas. Thank you. I come from Wyoming where most of
the banks are small. I want to note that there is special recognition
of small banks. You would be surprised how much time we spend,
whether it is bank regulators or educators whatever, trying to
(1)
make things that are done here fit in Jackson, Wyoming, where the
banker has been asked to have a full-time person to do the paper-
work in a small bank for community reinvestment.
I am pleased that we are doing that.
I hope that you will comment on the 60 percent loan question
which raises questions in the minds of many of us, and perhaps ex-
amine for us a little bit the merit of having some kind of a flexible
one, where the average — or where you were compared to your peers
in terms of loan ratios.
Obviously, if too much paperwork is involved in this, if we could
find a way to reduce that, I hope we can do that.
I look forward to your testimony.
Mr. LaRocco. Mr. Knollenberg.
Mr. Knollenberg. Thank you, Mr. Chairman.
I recall some of you back as repeat witnesses. I look forward to
the testimony. And while I wholeheartedly support the idea of ex-
panding capital access in the traditionally underserved areas, I do
have some general questions or concerns about the CRA proposal
in question.
It seems to me that the proposal subtly changes the proposal and
the basis of a CRA rating for banks, and the results do concern me.
And while this may seem like a change that is prudent on the sur-
face, on the face, I am concerned that the act might act as an in-
centive for banks to engage in unsafe lending practices to simply
improve their rating.
Our first responsibility is to protect the taxpayer at large in any
kind of financial instability.
So with that in mind, I look forward to your testimony; and I ap-
preciate the opportunity to make the statement.
Thank you, Mr. Chairman.
Mr. LaRocco. Thank you.
We have a long morning ahead of us, and the first panel is seat-
ed before us. I remind all witnesses that the members of the sub-
committee received copies of your full statements. And if you could
summarize, that would be helpful to us, hopefully within 5
minutes.
We will start with the Honorable Eugene A. Ludwig, Comptroller
of the Currency. He has been an energetic and welcome new voice
in the administration. He has made a commitment to improve the
Community Reinvestment Act, which is long overdue.
We express our appreciation to you for joining us today and
please proceed with your testimony.
STATEMENT OF EUGENE A. LUDWIG, COMPTROLLER, OFFICE
OF THE COMPTROLLER OF THE CURRENCY
Mr. LUDWiG. I am honored to be here. I appreciate this oppor-
tunity to discuss the proposal published for public comment by the
four Federal banking agencies to reform the Community Reinvest-
ment Act regulation. I have a detailed written statement that de-
scribes the proposal. In the interest of time, I would also like the
statement submitted for the record. I would like to submit for the
record the text of an address on CRA that I delivered yesterday to
the National Community Reinvestment Coalition.
Mr. LaRocco. Without objection, they will be entered into the
record.
[The information referred to can be found in the appendix.]
Mr. LUDWIG. To me, Mr. Chairman, community reinvestment is
not some vague abstraction. I know, not from analysis but from
personal experience, how important credit can be in the life of a
community and in the lives of individuals.
My father was the son of an immigrant and a son of the Great
Depression. My father wanted to be a country doctor. Without bank
credit, achieving this dream would have been impossible. Bank
credit permitted him to fulfill his dream and go on to serve the
community of York, Pennsylvania, through a free medical clinic
and in many other ways over a period of 60 years.
My father's dream, the dream of a better life for his family and
of contributing to his community, is an American dream — one ful-
filled by the fathers and grandfathers of many people in this room.
Tens of millions of Americans today, affluent and poor, have a simi-
lar dream.
In our market economy, access to credit determines whether
many, perhaps most, people can fulfill their dreams of a better
life — whether they can go to school, whether they can start a busi-
ness. Credit alone may not be sufficient to turn millions of Amer-
ican dreams into reality, but it is necessary for that to happen. For
small business owners in particular, access to credit often means
the difference between having a great idea and a grand opening —
between having a going concern or a going-out-of-business sale.
I know you understand this, Mr. Chairman — you have been a
fighter for equal access to credit, and the availability of credit, so
that our people can fulfill their dreams and contribute to their com-
munities. I know you appreciate how important it is to reform CRA
so that it can fulfill its promise.
President Clinton understands the critical need for CRA reform.
During the 1992 Presidential campaign, he had heard strong com-
plaints from bankers and community leaders that CRA had fallen
short of its promise — that it was administered through a regulatory
framework that emphasized process over results. Rather than mak-
ing loans, the current system directed banks to produce mounds of
useless paperwork that documents meetings and board actions and
telephone calls.
Last July, the President instructed the banking regulators to re-
form the CRA process so that it would work as it was intended.
President Clinton told us he wanted results. He challenged us to
reform CRA so that we would have a system that would evaluate
banks on what they did, not what they said.
As you know, from the very beginning of the reform process, we
regulators have been dedicated to a painstaking process of con-
sultation and deliberation so the final product would be right. Be-
fore we made a single decision on reform, we turned to the public
for direction.
We held a series of hearings throughout the country — ^hearings
in Washington, Los Angeles, San Antonio, Albuquerque, Chicago,
New York City, and Henderson, North Carolina — the most exten-
sive series of hearings ever held on CRA. In these hearings, the
heads of the OCC, the Office of Thrift Supervision, and the Federal
Deposit Insurance Corporation and Federal Reserve Governor
Lindsey heard more than 250 witnesses. We recorded thousands of
pages of testimony. We walked through south central Los Angeles
and low-income neighborhoods in New York to see with our own
eyes and to listen with our own ears to what should be done. We
talked with representatives of the Navajo Nation, to bankers, large
and small, to poor people in rural America. What we have heard
and what we learned both corroborated what the President had
heard and shaped the reform package we proposed. Virtually every
witness strongly criticized the current system. They complained
that the current system was subjective and that it focused on effort
and not on results. Most witnesses wanted results. Community
groups, as well as individuals, wanted credit, services, and invest-
ments. Banks, especially small banks, wanted relief from useless
regulatory burden.
My point in describing our deliberative process, Mr. Chairman,
is simple. Far from avoiding comment on CRA reform, we have,
from the very beginning, sought it out. And, we are still seeking
it out. We welcome it. That was one reason that we extended the
comment period on our proposal. We want to encourage public par-
ticipation and meaningful analysis because both will benefit
reform.
The comment so far has been constructive, and we anticipate re-
ceiving more constructive comment. We want to do it right, and so
we are willing to take the time and to make the effort to do it
right. If our proposal were perfect, we would not have had to put
it out for public comment. Public comment is intended to be a
stress test that will reveal flaws and imperfections. Public com-
ment is just as essential to perfecting the proposal as our public
hearings were to developing it.
Mr. Chairman, we will be just as attentive to how we implement
the final rule, to writing detailed examination procedures, and to
training our examiners as we were to developing the proposal. We
are dedicated to making CRA reform work in practice as well as
in theory. Along the way we will have to address a host of manage-
rial problems: How to provide the most effective examination train-
ing; what specific procedures the examiners will use to evaluate
small banks; how to evaluate bank-generated CRA plans. In this
way, our CRA proposal is not unlike other regulatory initiatives —
setting broad outlines and goals first. We will then fill in the
details.
We will get the job done. And we will get it done expeditiously.
Just as our proposal is aggressive, the final product will be aggres-
sive. It will aggressively address the real problems of real people
who are now underserved, or unserved, in communities throughout
the country.
Thank you, Mr. Chairman. I look forward to answering your
questions.
Mr. LaRocco. Thank you, Mr. Ludwig.
[The prepared statement of Mr. Ludwig can be found in the
appendix.]
Mr. LaRocco. The next witness is the Honorable Lawrence D.
Lindsey. He is a member of the Board of Governors of the Federal
Reserve System. He served as Special Assistant to the President
for Policy Development from 1990 to 1991 at the White House as
Associate Director for the Economic Policy from 1989 to 1990.
Thank you for being here today, and I am looking forward to
your testimony.
STATEMENT OF LAWRENCE B. LINDSEY, GOVERNOR, FEDERAL
RESERVE BOARD OF GOVERNORS
Mr. LiNDSEY. Thank you. I appreciate the opportunity to appear
before this subcommittee to discuss CRA reform.
The Community Reinvestment Act is intended to ensure that
every community has access to adequate credit to help meet its
needs.
We at the Federal Reserve Board believe that the law has pro-
duced substantial benefits; however, the CRA has not, nor should
it have been expected to have, cured all the problems that plague
our cities.
I have joined with my colleagues in an effort to reform CRA by
amending our regulations. This effort is the result of the Presi-
dent's request to make CRA more objective, the ratings more uni-
form, and the paperwork less burdensome.
The effort is a challenging one. It involves a substantial commit-
ment by the agencies and encompasses many different issues. We
are very conscious of the fact that what we do could significantly
affect both financial institutions and the public, and that care must
be exercised when undertaking such an important project.
Now, as we are midway in the process and still receiving com-
ments from the public, today our comments will necessarily be
somewhat preliminary.
In the course of our review of CRA, we have heard from many
consumer and community groups about how valuable the law has
been in getting credit extended to low- and moderate-income areas.
Some groups put the success of CRA at $30 billion, which they esti-
mate to be the level of CRA commitments for new credit. This has
occurred with a comparatively light hand from Washington.
Indeed, one of the strengths of the present system is that it al-
lows great flexibility in fashioning programs to meet the differing
and changing credit needs of this country's divergent needs of
communities.
I have submitted a written statement. I would like to focus on
one important point. We developed the proposed changes to our
CRA regulations in conjunction with the other agencies. During the
comment period, I am paying particular attention to questions or
complaints about the details of implementation and of potential un-
intended consequences from how the proposal will work in practice.
I am committed to making sure that the regulation we finally
adopt will work. We will do no one any favors by promulgating a
rule that is operationally untenable. I would like to turn to some
specific issues that have been raised by my colleagues and by mem-
bers of this subcommittee in inviting us here.
First, the proposal is intended to provide greater certainty to in-
stitutions in the type of evaluation they might expect to receive,
primarily based on their performance relative to others.
Some have noted that measuring an institution's performance
against other lenders in the service area yearend means that the
standards necessarily will be fluid from year to year.
Moreover, some have noted that the terms used to describe dif-
ferent levels of performance, such as "roughly comparable," "signifi-
cant amount," and similar words are anything but precise.
These general standards were proposed, in part, to reflect the di-
versity of America, its inner cities, and its many credit markets.
Still, institutions may have to speculate about the activities of
their competitors. And examiners will be forced to interpret these
terms on a case-by-case basis when evaluating institutions.
To some extent, we will always be plagued by the dilemma of
how to provide better guidance and certainty in CRA without re-
ducing needed flexibility.
The second concern involves the new data collection require-
ments. It is important to the goal of making the CRA process more
quantifiable, yet data collection could be very costly. For covered
commercial banks, the annual cost of the small business portion of
the data collection alone could approach $21 million.
In all, about 4,400 institutions will be required to gather new
data. I think it is, therefore, a legitimate question whether it is de-
sirable to impose this burden since so much subjectivity necessarily
is also part of the new system.
The third question involves the appropriateness of the stream-
lined review procedure for small institutions under $250 million in
assets — we have gotten many comments on this — as well as the im-
pact of the presumption that such small institutions will have a
reasonable loan-to-deposit ratio if it is 60 percent.
We have heard from a number of small banks who have com-
mented on the proposal that this is unrealistically high and rigid,
and we have some concerns that some institutions that want to
benefit from the streamlined CRA review might be forced impru-
dently to change their lending standards in order to meet this
presumption.
The other controversial aspects of our proposal, such as whether
the alternative evaluation plan for banks is workable, whether the
role of the public in community groups in the development of the
plans is adequate, and whether we in fact should be treating insti-
tutions receiving low ratings as being in violation of the regulation,
I believe, will receive considerable attention from the public.
In the letter of invitation, a number of other questions were
raised. The first has to do with the appeals process. Financial insti-
tutions have always been able to request supervisory personnel at
Reserve banks to review the ratings issued by examiners, whether
involving CRA or other supervisory issues. But we do not consider
this a formal appeals process.
We anticipate that our informal system would complement the
opportunities for input in CRA evaluations. The proposal would
permit institutions to rebut presumptive ratings under the lending,
service, and investment tests. But the proposal also provides that
the agencies would announce upcoming examinations in order to
get public comment on an institution's performance. These com-
ments, and those in the institution's public file, would be taken
into great account in our assessment of their performance.
The second question raised in the letter of invitation involves the
frequency of examinations for institutions rated outstanding. The
proposal doesn't address examination frequency. Our current pol-
icy, however, does allow evaluations to be conducted less frequently
for institutions with outstanding ratings.
Presently, State member banks rated outstanding with at least
satisfactory ratings on consumer compliance in general are exam-
ined once every 18 to 24 months compared to a 6- to 12-month ex-
amination frequency for poor performers.
At this time, I would assume that we would maintain our current
policy even with the regulatory changes.
The third question involved the effect of investment credits and
indirect lending on ratings. Under the proposal, investment activity
by retail banks could help to increase their base rating in the lend-
ing test up two levels if the investment performance is outstanding.
Investments will be the sole criteria for measuring the perform-
ance of wholesale and limited purpose banks, however. Indirect
lending activity may be taken into account under either the lending
or investment tests.
These aspects of the proposal are controversial and of particular
concern to community groups. We will be evaluating their com-
ments very carefully as we consider what the appropriate treat-
ment of investment and indirect lending should be.
The next question raised in the letter involved the effect of rat-
ings and public involvement on applications. CRA ratings, as well
as public comments, on applications can and do influence signifi-
cantly the Board's consideration of an institution's application. This
has been made clear in earlier CRA policy statements.
The proposal is more explicit than our current regulation about
the effect of different ratings and what effect that will have on the
Board's consideration. For example, under the proposal, an out-
standing would be looked on very favorably; and a substantial non-
compliance rating generally would result in a denial of an applica-
tion. We are aware that tnere may be an implicit safe harbor in
the proposal. That was not intended; and to the extent that there
is any misunderstanding, it will be clarified in the final version.
In conclusion, Mr. Chairman, we have been afforded a unique op-
portimity to step back and take a fresh look at the enforcement of
one of the most important, yet controversial, laws affecting finan-
cial institutions.
In proposing the comprehensive regulatory reform of CRA, we
have been highly aggressive in our approach; and our efforts are
bound to generate a good deal of debate and concern. Although I
take some natural pride in authorship, given the time that I have
invested along with my colleagues, I am not inalterably wedded to
this proposal.
If the public comments pointed out serious fiaws, particularly in
the area of operations or implementation, or if better ideas emerge,
I am perfectly willing to recommend to my fellow regulators and
members of the Board of Governors that we return to the drawing
board. We should not hesitate to do so if that is the way to ensure
that we have done the best job possible. To give the public any-
thing less than the best is a goal that no one involved in this proc-
ess should condone.
8
Thank you, Mr. Chairman.
Mr. LaRocco. Thank you.
[The prepared statement of Mr. Lindsey can be found in the
appendix.]
Mr. LaRocco. I would like to note the arrival of a few of my col-
leagues: Mr. King, Mr. Kinder, and Mr. Bereuter and Congress-
woman Roybal-Allard and Congresswoman Velazquez and Mr.
Watt.
And if any of those members would like to enter an opening
statement into the record at this time, without objection, so
ordered.
And — OK Thank you very much.
Our next witness is the Honorable Andrew C. Hove, Jr. He is the
current Acting Chairman of the Federal Deposit Insurance Cor-
poration. He was the chairman and chief executive officer at
Mendon Exchange Bank & Trust Co., in Nebraska before joining
the FDIC.
We would like to express our appreciation to you, and please
proceed.
STATEMENT OF ANDREW C. HOVE, JR., ACTING DIRECTOR,
OFFICE OF THRIFT SUPERVISION
Mr. Hove. Thank you, Mr. Chairman and members of the
subcommittee.
On behalf of the Federal Deposit Insurance Corporation, I wel-
come this opportunity to testify on the proposal to reform the regu-
lations that implement the Community Reinvestment Act.
In July of last year. President Clinton requested that the agen-
cies undertake sweeping reform of CRA regulations. After consulta-
tion with depository institutions, community organizations, and
others throughout the country, the agencies under the leadership
of Comptroller Ludwig, drafted a proposal to reform regulations im-
plementing CRA. That proposal is now out for comment until
March 24.
I think there is general agreement that we can improve upon the
way we implement the CRA. In public hearings across the country,
there was a common message that not enough attention was being
placed on whether loans are being made and services are being pro-
vided. Banks and thrifts are not satisfied with the current regula-
tions and procedures because they focus too much on the process
and documentation. Individuals and community organizations also
feel that more emphasis needs to be placed on results but that we
need more data to confirm that institutions are producing those
results.
The proposed CRA regulation issued by the banking agencies is
intended to focus our efforts on results. Institutions will be evalu-
ated based on their performance in the areas of lending, invest-
ment, and the provision of services. Small institutions will have a
streamlined examination process; but, here too, the focus will be on
results.
I would like to turn to some of the issues that the subcommittee
requested we address in our testimony. A detailed discussion of all
the issues outlined in your letter of invitation is included in my
written testimony.
An issue of particular importance to the FDIC is the provision
allowing small institutions the option of a streamlined assessment
method. As the regulatory agency responsible for supervising ap-
proximately 65 percent of the institutions under $250 million in
total assets, the FDIC would like to make it clear that the proposed
streamlined assessment method will not constitute an exemption
for these small institutions.
As stated in the proposal, the agencies do not believe that an ex-
emption is permitted by the statute. Furthermore, we believe that
an exemption would be unwise because it may result in the neglect
of credit needs of some communities that are served by small
institutions.
Under the proposed streamlined method, examinations will not
become mere formalities or simple reviews in which examiners
quickly determine whether the institutions have met the items on
a checklist. Examiners will be required to determine if an institu-
tion has a reasonable loan-to-deposit ratio, makes the majority of
its loans locally, and makes a variety of loans across all income
levels.
In addition, if the institution is required to report loans under
the Home Mortgage Disclosure Act, the institution will be required
to have a reasonable geographic distribution of reported loans. Ex-
aminers also will consider whether or not an institution has en-
gaged in illegal lending discrimination.
We are very interested in comments on whether these standards
for small institutions are addressed in a way that will allow us to
take into account differences in the size and capabilities of institu-
tions while also taking into account the varying needs of their
communities.
With respect to larger institutions, in order to evaluate the re-
sults of their lending efforts, an examiner must know something
about the types of loans the lender originates, how many, in what
amount, and where. The proposal will require the collection of loan
data to measure these results. Large institutions with more than
$250 million in total assets will be required to report information
on the geographic distribution of certain consumer loans, small
business loans, and small farm loans. We will study comments on
the costs and feasibility of this approach.
Finally, the proposal allows an institution the option of submit-
ting for agency approval a strategic plan as an alternative to being
rated after the fact under the lending, service, and investment
tests or the small basic assessment method. The strategic plan will
detail how the institution proposes to meet its CRA obligation
using measurable goals.
Notice of the proposed plan will be widely published by the insti-
tution. This will allow community groups and others an oppor-
tunity to review the plan and provide the agency with comments
prior to approval. Again we will be interested in the comments on
this aspect of the proposal.
So how will the FDIC implement these changes? Since 1990, the
FDIC has undertaken a series of important initiatives to expand
our capability and improve fair lending compliance. Many of these
steps will be helpful in implementing the new CRA regulations.
10
These include the formation of a separate Compliance Examina-
tion Program within our Division of Supervision and Community
Affairs Program within our Office of Consumer Affairs.
An Assistant Regional Director in each of our eight regions in the
Division of Supervision is now dedicated solely to the management
of the compliance and fair lending function. Until now, Assistant
Regional Directors who managed this function had additional re-
sponsibilities. There are now approximately 300 compliance exam-
iner positions at the FDIC compared to 150 when the separate
Compliance Examination Program was first implemented in early
1991. More will be added as necessary.
Each region maintains a separate Compliance Examination Re-
view staff with specific responsibility for the compliance and fair
lending examination function.
We have improved examiner training and increased communica-
tion with depository institutions, community organizations, and
other agencies.
Further, we have improved our examinations tools. For example,
the HMDA Analysis Reports, customized for each institution and
specific geographic areas, are being provided for examiners and ta-
bles summarizing an institution's reported HMDA data were re-
cently installed on easily accessible computer networks in each
region.
Recently, we began a HMDA Disparities Investigation project to
review racial and ethnic disparities in denial and application rates
reflected by the 1992 HMDA data reported by FDIC-supervised in-
stitutions nationwide.
Extensive review procedures have been set out to ensure that all
institutions with high denial rates for minorities will undergo a re-
view to discover the reasons for the disparities and identify those
institutions exhibiting possible illegal discriminatory behavior.
In conclusion, the FDIC believes that strong, fair lending actions
by the banking industry, supervision by its regulators, and partner-
snip efforts with community groups and individuals are critically
important to making the Community Reinvestment Act work.
We are mindful of our responsibility to promote safe and sound
banking and of the recognition in the Community Reinvestment
Act that depository institutions have an obligation to help meet the
credit needs of their entire communities, including low- and
moderate-income communities.
We believe that both of these goals are attainable. While the pro-
posed CRA regulation is not perfect, we believe it represents a sig-
nificant step in reaching these goals. We will carefully evaluate all
of the comments received and expect to further refine the proposal.
Thank you very much, Mr. Chairman.
[The preparea statement of Mr. Hove can be found in the
appendix.]
Mr. LaRocco. I want to note the arrival of Mr. Rush and Mr.
Wynn and make the opportunity available to enter a written state-
ment into the record if you so desire at this time.
Mr. Rush. Thank you, Mr. Chairman.
Mr. LaRocco. Without objection, so ordered.
[The prepared statement of Mr. Rush can be found in the
appendix.]
11
Mr. LaRocco. And, Mr. Wynn.
Mr. Wynn. I will submit one.
Mr. LaRocco. Thank you.
Our next witness, and the final one of the panel, is the Honor-
able Jonathan Fiechter.
He has been the Acting Director of the Office of Thrift Super-
vision since 1992. He served as Director of the FDIC, the Thrift De-
pository Protection Oversight Board, and the Neighborhood Rein-
vestment Board. He served as Deputy Comptroller at the Office of
the Comptroller of the Currency for 10 years.
We look forward to your testimony.
STATEMENT OF JONATHAN L. FIECHTER, ACTING DIRECTOR,
OFFICE OF THRIFT SUPERVISION
Mr. Fiechter. Thank you, Mr. Chairman and members of the
subcommittee. I appreciate the invitation to appear today.
My written testimony outlines the President's CRA initiative,
discusses the agencies' proposed CRA regulation, and responds to
the questions posed in the letter of invitation.
I would like to use my time this morning to discuss three issues
that are relevant to our regulatory reform efforts and the overall
effectiveness of the CRA.
At the outset, I want to assure the subcommittee that OTS fully
supports the effort to revitalize our communities through rein-
vestment.
I believe that credit can be used as an engine for economic
growth and revitalization. To succeed in this effort, communities,
financial institutions, and government need to form partnerships
and work together to make credit and financial opportunities avail-
able to people in all walks of life and in all communities.
At the same time, the Federal Government needs to reduce any
unnecessary regulatory roadblocks or burdens on financial insti-
tutions.
The agencies' proposed CRA regulation focuses more on perform-
ance and less on process. It also attempts to provide clearer stand-
ards of what is expected. If we are successful, the result will be an
approach that will more effectively generate lending services and
investments in our communities.
Solving the problems of depressed and underserved areas of the
country requires the coordinated efforts of government, industry,
and private citizens, all acting in partnership with a common goal.
This partnership is the first issue I would like to discuss.
If we are to successfully increase the fiow of credit to areas of
need in our country, we must make certain that we are doing all
that we can at the Federal level to reduce any unnecessary barriers
to safe and sound lending.
We also need to ensure that the various Federal, State, and local
government programs are coordinated and accessible to all institu-
tions and the public.
There are a number of State and Federal programs available to
assist an institution that wants to develop a neighborhood or block
in its community.
12
But there is no one place that an institution can go to find out
how to access these programs and service*. Moreover, the programs
themselves may not be compatible.
OTS has begun to address part of this market inefficiency in our
affordable housing initiative announced last spring. We are com-
mitted to encouraging safe and sound lending for affordable hous-
ing by examining and removing any regulatory or programmatic
barriers to such lending and by providing education and support
services to institutions that are interested in doing more affordable
housing lending. We are also pleased to see the establishment of
the President's Fair Housing Council and look forward to partici-
pating on that group.
I believe that focusing on community reinvestment in a coopera-
tive manner and eliminating as many market inefficiencies as pos-
sible will stimulate more community lending in the long term.
The second issue I would like to discuss involves the coverage of
CRA in general and the role of thrift institutions in particular.
The thrift industry is making progress in contributing to commu-
nity reinvestment through the provision of credit and basic finan-
cial services.
A comparison of the 1992 HMDA data with the 1990 and 1991
data suggests that the thrift industry is increasing the proportion
of total loans going to low- and moderate-income applicants.
On the other hand, the thrift industry is also much smaller than
it was a few years ago. Thrifts' market share of 1- to 4-family mort-
gages has dropped from 38 percent to 18 percent in the last 5
years.
As a result, improvements in the performance of the thrift indus-
try will have a wiuch smaller effect on the overall objective of pro-
moting community development.
One of my personal goals during this reform process is to dispel
any concerns that savings associations may have that compliance
with the CRA jeopardizes safe and sound lending. That is simply
not true; and, in particular, the 60 percent loan-to-deposit standard
jeopardizes safe aiid sound lending, that is simply not true.
In fact, the proposed regulation recognizes that an institution's
CRA obligation must be met using prudent business practices. The
proposal doesn't encourage or expect a liberalization of underwrit-
ing standards to the detriment of safe and sound lending
principles.
On the other hand, it does encourage institutions to be innova-
tive in attempting to create products to meet the various needs of
a diverse customer base. Lending to low- and moderate-income
households and businesses can be good business for both the insti-
tution and the local community if done properly. It strengthens ties
between the institution and the community. Frequently, these
loans are made to the fabric of the community: The school teachers,
local municipal workers, and households dependent on retirement
income.
In conclusion, the interagency proposal is a significant departure
from the way in which the CRA has been administered in the past.
As a result, we expect substantial public comment.
We would be pleased to share what we learn from these com-
ments with the subcommittee as the regulatory process continues.
13
Again, I would like to thank you, Mr. Chairman, for your invita-
tion and your continuing interest in our reform efforts.
I will be pleased to respond to any questions that you may have.
[The prepared statement of Mr. Fiechter can be found in the
appendix.]
Mr. LaRocco. Thank you, very much. And I will begin the ques-
tioning to you Mr. Ludwig.
In 1992, 9,000 institutions were examined; 87 failed. That is 87,
not 87 percent. Eighty-nine percent got satisfactory or better.
My question is: How will these numbers change as your proposal
is implemented? And what are your projections? Do you have
some?
Mr. Ludwig. We don't know precisely how those numbers will
change. We do know that we will be looking at what the institu-
tions are actually doing. And we will be able to evaluate in a way
that is credible to the public and credible to the agencies.
One of the problems with the current system — and I have read
dozens and dozens of exam reports — is that if you evaluate on the
basis of how many meetings a bank has, how many telephone calls
they make, and whether they report to the Board or not, you can-
not come up with a credible report that community groups, bank-
ers, or regulators have confidence in as properly evaluating the
institution.
I remember a small institution in New Mexico that, by any
standards, is doing an outstanding job. They had begun inner-city
efforts in their small town a year before CRA, and they were in a
county that was well below the national median in terms of income.
Yet, that institution barely got a satisfactory rating, let alone an
outstanding, because it had not produced its pile of papers, irre-
spective of the amount of lending it was doing.
The new proposal would make judgments on the basis of what
banks are doing. In the end, I think most institutions in this coun-
try will work very hard to get satisfactory or outstanding ratings.
And, we will see a preponderance of institutions in the satisfactory
column. But in terms of absolute numbers, I can't give them to you.
Mr. LaRocco. Do any other members have a projection in mind
if the
Mr. LiNDSEY. I agree completely with the Comptroller, there is
no way to project at this time.
Mr. Hove. I would agree. I guess the goal is to get 100 percent
of institutions rated satisfactory or better. That is the goal — to
make sure that there is an effort by all banks to do the right kind
.of job.
Obviously, we are not going to get that. But it is a little hard at
this time to know what kind of numbers we are going to get.
Mr. Fiechter. This is a different standard than the one that we
are applying.
Mr. LaRocco. Last week the Financial Institutions Subcommit-
tee approved legislation on interstate branching, banking, and con-
solidation. Are there special CRA issues for interstate banks?
The interstate issue has been referred to this subcommittee.
What should we say about it from a CRA perspective?
Mr. Ludwig. The CRA reform proposal takes into account banks
that have broad geographic areas whether within a State or across
14
State lines. It would evaluate banks on the basis of their service
areas, where they do their lending, regardless of whether they are
across State lines or they are spread across a very large State. So
the proposal contemplates evaluation of an interstate institution.
Chairman KENNEDY. Excuse me.
First of all, let me just say thank you to Mr. LaRocco. I have
been circling this great city for the last IV2 hours. So it is good to
be finally on the ground.
I want to just say very brieflv that, although I haven't had a
chance to see the ranking member since he made his announce-
ment some time ago that he was not going to be seeking reelection,
I just wanted to say, Al, that despite the fact that I don't know if
I could come up with a single issue we ever agreed on, I neverthe-
less am going to miss you. I want to mention what a real pleasure
it has been to work with you over the course of the last 8 years,
that you have always spoken out very forthrightly about your be-
liefs about the policies that we have taken up in this subcommittee
and have been a bellwether that many people could get a handle
on our positions based on your positions.
So I do, in all honesty, want to say that I think you have contrib-
uted a tremendous amount to our country. Also, that despite the
fact that we don't agree, the honorable eflmrts that you have made
on behalf of people that you have believed in have really made a
difference for our country. I want to say what a pleasure it has
been to work with you.
I want to continue to work with you over the course of the next
year. I want to let you know that, above all else, I consider you a
friend and a colleague and someone that I will miss working with.
So thank you for your efforts, and best of luck in the future.
Mr. McCandless. Thank you, Joe. Flattery will get you
everywhere.
Chairman Kennedy. Mr. McCandless, you have as much time as
you may consume in the next 5 minutes.
Mr. McCandless. How high was that plane? Was air coming
through some of the windows?
Let me ask the panel a couple of basic questions.
We still have the OCC, the Federals, the FDIC, and the Securi-
ties and Exchange Commission doing some type of regulatory ex-
amining process in most of our institutions.
Now we are talking about changing this program; and, in a
sense, we are saying that we are going to broaden the examiners'
role. And if I understand correctly, that role will be extended to the
section of the Code which deals with all aspects of banking as it
relates to administration rather than the limited narrow area cur-
rently in which the examiner performs.
To the extent that an examiner, under this proposal, given its
passage, could close a bank because it didn't comply based upon the
section that would apply here, 12 U.S.C. 1818.
Now we have four examiners. They all have a certain authority
over a little bank. For example, one where they have 10 to 13 peo-
ple on the staff, and 1 spends full-time doing nothing but paper-
work to satisfy current regulations.
With respect to the examiners, are we going to have four sepa-
rate report cards from four separate institutions based upon four
15
separate observations as to whether this institution being exam-
ined is satisfactory, unsatisfactory, whatever?
Where can we standardize what is necessary in the way of prop-
er examiner oversight yet have consistency from which, then, the
management of that bank can grasp and move in terms of policy?
Mr. Lindsey.
Mr. Lindsey. I think your point is well taken, Mr. McCandless.
And I think that one of the tasks we have is to have greater con-
sistency in our examination process.
Right now, regarding CRA at any given institution, there is one
and only one examiner. So, for example, when we at the Fed con-
template a merger application, we have before us, often, an exam-
ine that the OCC has written. I think that greater standardization
of procedures among the agencies is also an important part of this.
And we will work toward that.
Mr. McCandless. Let me drop a little tidbit here for your bene-
fit. Back in the previous major legislation in 1990, there was to be
a section 6 in which we would have a bank examination system for
all agencies. The Feds were inalterably opposed to this. And as a
result, they prevailed.
Given the proposal that we have before us, wouldn't, in your
opinion, there need to be a review, a revisiting of the subject for
purposes of examining and standardization?
Mr. Lindsey. Well, I think that the FFIEC and all other efforts
on this issue are to standardize the product.
Again, there would be one examiner in any given institution.
There is under current practice. So, I must say, I have no doubt
that we can do a better job; but I am not sure the point of the
question.
Mr. McCandless. Mr. Ludwig.
Mr. Ludwig. Yes, sir. This is precisely why I favor consolidation
of the Federal banking regulatory apparatus. We will do our best
to coordinate our efforts, but inconsistencies are bound to arise
when you have four different agencies. Nonetheless, working to-
gether with these gentlemen around the country in developing this
proposal, I am confident that we can administer the current system
in a way that can be reasonable. But I agree with your comment.
We are much better off if we have a consistent, single voice in
these matters.
Mr. McCandless. Mr. Fiechter, GAO has concern about this pro-
posal in that it may create disincentives for institutions not already
located in low- and moderate-income areas to move into these
areas.
What comment would have you about that?
Mr. Fiechter. I think, as I understand the GAO report, it has
to do with the lending test. I think that we will be able, in our pro-
posal as we develop it, to make certain that an institution that
makes a few loans in one area and, as a consequence, in one re-
spect doesn't do well because it has such a small market share, will
not be penalized.
Clearly, the objective of the proposal is to encourage more insti-
tutions to come into these areas and lend. I am pretty confident
that we can address the problem that the GAO has brought up.
Chairman Kennedy. Mr. Rush.
16
Mr. Rush. Thank you, Mr. Chairman.
Mr. Ludwig, with regard to the market share test, if a lender is
doing only a small number of small business loans in wealthy
areas, is it in your opinion that there is a danger that even if there
is a strong need for business loans in low-income communities that
the lender is under no real obligations and possibly could be given
a satisfactory rating based on the loans in the wealthy community?
Mr. Ludwig. Congressman Rush, the market share test is really
more o^ a screen. It is a rebuttable presumption. That is, even if
a bank passed it, the agency might nnd that its performance was
unsatisfactory. And, indeed, the test itself is not just made on the
basis of market share but also on whether there is substantial
lending and whether a bank is lending in a preponderance of its
low- and moderate-income census tracts. So it is much more com-
plex than whether you have equivalent market share.
What we attempted to do was to fashion a screen that is not an
absolute test or a bright line but is intended to give guidance. But
the real test is more complex than that. It is what a bank is actu-
ally doing. For example, it includes a number of different aspects.
Are the projects innovative? Is a bank doing this in a preponder-
ance of its low- and moderate-income census tracts? Are the loans
it is making substantial in comparison to its size and other
institutions?
So we clearly have not explained this well. Moreover, there has
been a lot of comment, and we expect a lot of comment on it. But
it was not meant to be a bright line test.
Mr. Rush. I am concerned about some of the ambiguity in certain
portions of this particular act, ambiguity as it relates to examiners
who can interpret and apply such words as "significant," "roughly
comparable," "very significant percentages," "significantly less," "in-
significant percentages."
How do you intend to make sure that the examiners receive suffi-
cient training so that they can have more of an intimate under-
standing of what community development is all about and what the
goals and objectives of those of us who are concerned about commu-
nity development and those of you who have a distinct responsibil-
ity to make sure that CRA is implemented in the spirit that it was
written?
How do you intend to train and educate and upgrade the under-
standing of the examiners, especially in light of the fact that they
have these ambiguous terms that they can utilize?
Mr. Ludwig. Sir, you are going right to the heart of it. Examiner
training and enforcement have got to be the heart of any approach.
If we are going to avoid credit allocation — which we certainly don't
want to get near — there has to be a level of subjectivity and the
examiner has to play an important role.
In that regard, we have increased our examiner force. When I
started at the OCC, we had 150 compliance examiners. By the end
of this year, we are anticipating having 410. Moreover, the proposal
is structured so that data collection starts in July 1994, and it is
July 1995 when the system becomes mandatory. That gives us a
full year for training, which we believe we need. We will involve
community groups and bankers in the training. We have done this
a little in the past.
17
I agree with you that the training and the coordination and the
implementation are absolutely essential. I think it is important to
get our people out of the office and onto the streets. They need to
see the projects and walk the streets. But, we fully recognize that
is our responsibility. It would be our responsibility, frankly, wheth-
er or not we have a new system.
Mr. Rush. Mr. Chairman, I have a yellow slip, but I have one
question.
Chairman Kennedy. That is fine. Go ahead, Bobby.
Mr. Rush. Can you elaborate on why the sex, income, and racial
characteristics of applicants for small business and farm loans, as
well as the size of the small business loans, was not included in
the regulator's disclosure requirements?
Mr. LUDWIG. You are referring to race as well as the size of
the
Mr. Rush. Race, sex, and income.
Mr. LuDWiG. The small business data will be sliced and diced ac-
cording to the sales volume of the small businesses under the pro-
posal. In other words, we will know whether the loan is to the
smallest small business or the largest. In that sense, income data
will be part of this. Moreover, we currently collect outside of CRA
data on the basis of size of the loans, using that as a rough equiva-
lent as to whether they are being made to small or large
businesses.
In terms of collecting more detailed data or race data, I must say
that we talked about it. It is a very hard judgment. I, myself, have
a good deal of sympathy for the notion that we ought to collect
more data, including race data. But as a group, the agencies felt
that it was important to keep the data collection as simple as pos-
sible because this was about economic development. And the census
tract data gave us a very good gauge for whether a particular area
was low income, or very low income or moderate income. Unfortu-
nately, in much of the United States those census tracts are, in es-
sence, single race census tracts so we would have some gauge as
to whether or not the lending was discriminatory. But we also felt
that we do have strong fair lending rules that we are enforcing ag-
gressively and that CRA was economic in nature. If we had to sac-
rifice something in terms of tryiftg to get simplification, as a group
we decided that this is where we would come out.
Mr. Rush. Thank you, Mr. Chairman.
Chairman Kennedy. Thank you very much, Mr. Rush.
Mr. Knollenberg.
Mr. Knollenberg. Mr. Chairman, thank you very much. I am
glad your plane got down.
In my opening remark I made a comment about the concern that
I have about banks engaging in unsound lending practices to im-
prove their rating.
I noticed Mr. Fiechter — I will come to you — you, in your written
testimony, indicate that your personal goal was to insist or dispel
any concerns that compliance with the CRA proposals in any way
jeopardizes the safety and soundness of the whole process. And
then you go on to make some comments about how the proposal
does not encourage or expect a liberalization of underwriting stand-
ards to the detriment of safe and sound lending principles.
18
And it is the next statement that I wanted to direct your atten-
tion to. You say that: "It does, however, encourage institutions to
be innovative in attempting to create products to meet the various
needs of a diverse customer base."
And I guess it is in that area of the creativity, what products did
you have in mind, and what innovation did you have in mind?
Mr. FlECHTER. One example — and we at OTS and, I think, all of
the agencies, have instances of where banks have developed afford-
able housing programs, where they have created loan products that
are not traditional in the sense, for instance, of downpayments for
a traditional home loan where, without the downpayment, the pay-
ment can't be borrowed. We have, in some areas, found, for some
ethnic communities, borrowing money from relatives. And it is for
downpayments.
Getting the downpayment as low as 5 percent, in fact, has not
produced the kinds of default rates that you might have with more
traditional loans where the lower the downpayment, the higher the
default rate.
The institutions we have talked to have said that these programs
are expensive to put into place because you need to have lending
officers that are more familiar with nontraditional sources of in-
come, for instance.
Some types of payments beyond the traditional income sources,
if properly underwritten, these loans have default rates that are
equal to or, in fact, lower than the more traditional loans. That is
what I had in mind.
Mr. Knollenberg. So the idea could be to encourage the consoli-
dation of monies from relatives and that kind of thing.
Mr. FlECHTER. That might be one area. Looking at a potential
borrower who has changed jobs every 12 months, usually a red flag
goes up if you haven't been able to, quote, unquote, hold a job.
In some of the low- and moderate-income areas, that is a sign of
really progressing. If you take on lots of different jobs, that is the
way you progress through the income ladder. And you have to look
more carefully.
The point is that a loan made in Fairfax County by a lending of-
ficer using traditional standards may be fine in Fairfax County. If
you are going into southeast Washington and applying those same
standards, it may turn out that you turn down a lot of what, with
further study, are a lot of very good loans. They take more work,
though. That is what I had in mind.
Mr. Knollenberg. This is not a character loan, but in a sense
it is.
Mr. FlECHTER. In some senses, it is a character loan; but in no
way are these institutions suggesting that they are going to throw
money at the problem and change their underwriting standards in
a fashion that causes higher default rates. That helps nobody.
Mr. Knollenberg. Final question — and this could be for any-
body, but maybe it is a minor thing — but in the comments I have
heard, there is the distinction made between large banks and small
banks, the suggestion that there is a separate set of standards that
small banks have to pass muster on that is different than the large
banks?
Is it just in your commentary that it comes up as a distinction.
19
As a matter of fact, is there one grand plan of passing muster
that appHes to all banks? Small or large?
Mr, LUDWIG, We have proposed very different examination proce-
dures for small institutions versus large institutions. That doesn't
mean the small institutions have an exemption or that they can
redline. It does mean we recognize that data collection by small in-
stitutions may not only be difficult but in some ways meaningless.
A small institution may exist in one small geographic area. Having
that institution collect and give us data on the basis of geocodes
may be meaningless, and just more paperwork.
Mr. Knollenberg. They all have the same responsibilities to
their communities.
Mr. LuDWiG. That is right.
Chairman Kennedy. Thank you, Mr. Knollenberg. Ms. Roybal-
Allard.
Ms. Roybal-Allard. Thank you, Mr. Chairman. Mr. Ludwig,
during your testimony you said that one of your objectives was to
address the needs and real problems of real people. And I believe
that has been the sentiment that has been expressed by the entire
panel.
The district that I represent is one that has the lowest per capita
income of any congressional district in the country.
I also represent the downtown Los Angeles area which has one
of the highest homeless populations in the country. Yet, it is my
understanding that low-cost, multiple family rental housing loans
have been omitted from consideration under the lending test that
has been administered to banks?
And if this is so, I would like to know why?
And then, what incentive would be there for larger banks to
make these kinds of loans? Because many people whom I have just
described will never be able to qualify for a single-family home and
will depend on this kind of multifamily housing to be able to get
off the streets or to be able to move out of a situation where you
have two or three families living together.
Mr. Ludwig. I am glad you raised that question. The answer is,
happily, absolutely not — no loan is excluded. We tried to make this
as broad as possible. We just used the word "loan" in recognition
of what you are saying. Now maybe we can be more explicit. Obvi-
ously, this is an area in which we have created some unintended
confusion. But, multifamily housing loans are certainly included.
Ms. Roybal-Allard. So there will be an effort to clarify that?
Mr. Ludwig. Certainly.
Ms. Roybal-Allard. One of the complaints that I have heard is
that the process by which the agency, especially the Federal Re-
serve, handles the CRA challenges is closed and they say bank-
friendly.
Could you please respond to complaints that the agencies almost
never hold public hearings or extend public comment periods even
on protested applications that involve multiple States and that the
agencies almost never deny a merger applications?
And if that is true, how is that going to be addressed?
Mr. Ludwig. That is a good question. The new proposal involves
the community much more than the current system. It involves it
in a way that I am proud of, in a proactive way.
20
We envision the community getting involved earlier in the proc-
ess than currently is the case. This will happen in three different
ways. Number one, we will publish a list of those banks we intend
to examine before examining them. That way, the community
groups will know we are going in, and that now is the time to com-
ment. We will take those comments seriously. In the implementa-
tion of this proposal at the OCC, we are going to go out and solicit
information as we do our CRA analysis.
Number two, in the plan approach where, as an option, institu-
tions can decide to develop a business plan, that plan must be pub-
lished for 30 days to elicit community comment. We will seek out
community comment. We will not judge the plan until we give the
community an opportunity to comment.
Number three, in the small bank test, a bona fide community
complaint can knock a bank out of the simplified examination.
Here, too, we are trying to do this in a proactive way so that we
get the complaint or the comment before it is just simply negative,
to stop that application.
In terms of whether or not there have been denials of applica-
tions, I would say that although the system today has not worked
well and certainly not perfectly, in many of these cases, there
haven't been denials, but the approval of the application has been
conditioned upon changes in the way that the bank has dealt with
the community. There have been approvals conditioned on the
basis of the bank's fulfilling its CRA responsibility more
adequately.
Ms. Roybal-Allard. One final question with regards to how you
are going to be seeking pubic comment. Is it going to be just
through some of the traditional ways of putting an ad in the paper?
How will that public comment be solicited?
Mr. LuDWiG. That is a good question. It will be part of the imple-
mentation, not typically in the rule. Maybe we ought to give some
thought to including it in the rule, but we would want to do it in
a way that is most effective in terms of actually getting comment.
Your point is well taken.
Ms. Roybal-Allard. I would like to suggest that if it is put in
my community, in the L.A. Times, even on the front page or page
5 or 34, it is never going to be seen.
Yet, if you use, for example, announcements through churches or
through the local-elected officials, they will then be able to get that
information out, and we have been very successful in where there
has been no attendance at hearings. We had up to 1,000 people in
hearings where otherwise people have never attended.
I think that is important.
Chairman Kennedy. Thank you.
Congressman Bereuter.
Mr. Bereuter. Thank you, Mr. Chairman.
Thank you, gentlemen, for your testimony and a special warm
welcome to my fellow Nebraskan. I have a limited amount of time,
so I will focus on one area.
But before I do that, I want to commend you, Mr. Ludwig, and
all of you working in cooperation, to attempt to bring reform to the
method for assessing the adequacy of actions by financial institu-
tions, to meet the CRA requirements.
21
They go back to 1977, as you all know. They have, by and large,
been very unsuccessful, it seems to me, in many institutions. They
have created an incredible amount of meaningless paperwork, espe-
cially for small facilities. And they have been enshrined as some-
thing that has been untouchable. And we have seen that the
Congress has added immeasurably to the regulatory burden relief
of financial institutions to the detriment of savers and institutions
time and time again.
I think you have made a good start.
Mr. LUDWIG. Thank you.
Mr. Bereuter. I will focus on the special alternative assessment
methods for small institutions. And I commend you for that dif-
ferential approach. Those institutions do constitute 77 percent of
the total banks and thrifts in this country.
The one area of controversy I have noted immediately from some
of my colleagues is their reaction to the 60 percent loan-to-deposit
ratio. There is a "Dear Colleague" letter that floated around dated
February 3. I was solicited as an original signer. The three original
people are, not surprisingly, all members of the Agriculture Com-
mittee. I didn't sign on because I think that they are wrong in sug-
gesting that no fixed ratio is appropriate.
And I noted, Mr. Ludwig, in particular, your testimony on page
9, you are saying that the loan-deposit ratio of 60 percent or more
would be presumed to satisfy the test for reasonable loan-to-deposit
ratio. The 60 percent ratio would not be a requirement or a bright
line test that an institution would either pass or fail, rather it is
intended as a helpful presumption that would provide a simplified
method for demonstrating compliance for roughly half the commu-
nity banks whose ratio exceed 60 percent.
Despite that, the concern exists that examiners will come to
think of it in a different fashion and that any kind of arbitrary pre-
sumptive level at 60 percent or any other percent that is fairly high
may fail to take into account other relevant factors. And I quote,
such as competition in the markets, local and regional economies,
loan demands, community characteristics, and ebb and flows of the
marketplace. So what additionally can you do to assure me and my
colleagues and the financial institutions that are writing me in
great numbers now, from my State and surrounding States, that
the 60-percent presumption will, in fact, be working in their favor
and not against them?
Mr. Ludwig. This is an area which we clearly did not explain
well in the rule, and we are going to have to do a better job of it.
That is to say, the test is a reasonableness test. We avoided bright
lines because we didn't want to have credit allocation and because
of the funny anomalies you get when you have a bright line. In a
recession, 60 percent may be so high that you are giving banks an
incentive to do things they shouldn't do. In very heavy lending
times, it may not reflect what most banks are doing either. We
tried to put the 60-percent figure in as a simplification so that
banks could, if they were above 60 percent, avoid having to worry
about that. But, clearly, we didn't explain it well. And we must, in
the final rule, have it sufficiently clear that this is not a bright line
test.
22
Mr. Bereuter. Mr. Chairman, may I ask if others would like to
respond to this, my only question?
Chairman Kennedy. Sure.
Mr. Hove. Congressman Bereuter, I know that you are very fa-
miliar with agricultural areas and familiar with the other areas of
the country that are involved in agriculture. The loan-to-deposit
ratio is an average. As you know, borrowings in an agricultural
area are high in the spring planting season and low after crops are
harvested.
It is an attempt to use a reasonable test as to what is the loan-
to-deposit ratio that should be used in that area: What are loans
that are available? How well is the bank responding to that. Are
they, in fact, making the loans that are necessary to provide credit
to agriculture, business, and consumers?
Mr. Bereuter. Well, I think these comments might be helpful to
have in the record and somewhat reassuring, I hope.
Thank you, Mr. Chairman.
Chairman Kennedy. Thank you very much, Mr. Bereuter,.
Nydia Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
I want to commend the panel. I believe that the proposal moves
us in the right direction by establishing a performance-driven sys-
tem. This will better serve both the industry and our communities.
However, there are some areas of concern which are important to
address. After all, if we are going to invest time and energy in
changing CRA, let us do it once and let us do it right.
I have a few questions, and those questions could be answered
by any of the members of the panel. I understand the banks that
operate in many cities will receive a single, overall rating based on
sampling of the service area.
How will the sample be selected? And how can you detect wheth-
er a bank is doing well in one area but not doing well in another
when you just sample?
Mr. LuDWiG. The sampling is intended to be a statistically ran-
dom sample so that if you went to an institution year after year,
you would not be choosing the same areas. You would actually be
sampling so there would be some certainty that the bank was com-
plying with its CRA requirements everywhere throughout its
system.
Now, we are not going to be blind to some institutions that are
highly concentrated in and around low- and moderate-income
areas. These are areas to which we will pay special attention. But
the notion of sampling is not that you simply look at one part of
a system. Rather, it is meant to efficiently use the examiner force
so that we get a genuinely useful view as to the whole system.
The performance evaluation would list the grade in each area
sampled. In other words, we would know, and it would be available
to the public, what the grade was in each service area. We would
homogenize it for the final overall result for the institution. But ev-
eryone would know whether they got an A in one area or a Z in
another area. Obviously, it would be helpful to the institution, the
community groups, and to us to be able to say what is going on in
any one area.
23
Ms. Velazquez. The proposed rule gives banks the opportunity
to respond to an examiner's findings and appeal for a higher rat-
ing. This appeals process seems like a fair exercise; however, if
banks have the opportunity to appeal a low rating, why is the pub-
lic not offered the opportunity to respond to the bank's appeal? And
why is the community not offered the opportunity to appeal a rat-
ing that is considered too high? Isn't that a double standard?
Mr. LUDWIG. We do not, in the rule, have an appeals process.
The banks can appeal according to the normal appeals process for
all regulatory matters. We have tried to include the public in a va-
riety of ways early in the process; that is, before the banks even
get a rating, we are going to be soliciting comment. The public, in
the end, has more than an appeal; it has a stopper. When a bank
files for an application, public comment is solicited again at a very
serious point in the evolution of the institution. But I hear your
concern. In terms of getting balance, that is something we are
going to have to think about very hard.
Ms. Velazquez. The fact is that under CRA, current CRA, very
few mergers are denied. That is a fact. How do your new regula-
tions address the complaint that mergers' applications are a fore-
gone conclusion?
Mr. LuDWiG. The proposed system really does address it in that
we will know for the first time what a bank is doing. You can't,
with a straight face, say a bank is good or give it a passing grade
or let it go through a merger if it, demonstrably, on paper, with
numbers, has a rotten record — not just whether they have gone out
and had outreach but whether they are making loans and invest-
ments. That also is helpful to the institution beforehand because if
they demonstrably have a rotten record, they know that they are
going to get in serious trouble with the regulator at the time of the
application process and most likely with their community.
Ms. Velazquez. Just one final comment. I am sure that you will
agree with me that small businesses owned by minorities experi-
ence discrimination on the basis of their race, ethnicity, and gender
of the business owners. I just would like to raise and to echo Mr.
Rush's concerns about omission of this type of data. And I would
like to ask for careful consideration of this matter.
Mr. LuDWiG. Thank you very much. We will give that careful
consideration.
Chairman KEN^fEDY. Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman.
Would this reform initiative have to be modified in any way if
we pass an interstate banking law?
Mr. LuDWiG. No, sir, it would not. We are looking at the institu-
tion throughout its service areas. If you take my home State of
Pennsylvania as an example, you have got Philadelphia on one side
and Pittsburgh on the other, quite a distance apart and with siz-
able populations. There is not much difference in terms of Philadel-
phia and Trenton, New Jersey, in terms of making an honest eval-
uation. So we have taken that into consideration in this proposal,
and we would not have to make modifications if the interstate bill
is passed.
Mr. Bachus. And the branches?
Mr. LuDWiG. Yes, sir.
24
Mr. Bachus. Governor Lindsey, let me ask a question that I
think not only concerned this subcommittee but the entire Banking
Committee. We iust had a quarter percent increase in the discount
rate. Yesterday s budget figures, do you think they need to be
changed in any way to accommodate higher interest rates?
Mr. Lindsey. As I understand the assumptions in the budget —
and I have to say, I have not, in the last 24 hours, had a chance
to go through the document — but there was an assumption that in-
terest rates would rise during the year. I believe that was
incorporated.
So as of this time, I would not say that the budget numbers have
to be reevaluated, and I can't predict what will happen throughout
the year with regard to interest rates.
Mr. Bachus. But you think there was some incorporation into
the budget that there would be some higher interest rates?
Mr. Lindsey. It is my understanding from some public state-
ments of Secretary Bentsen that a quarter point increase was an-
ticipated and was incorporated in the budget.
Mr. Bachus. Do you expect that we will see slower than antici-
pated growth this year?
Mr. Lindsey. I think we are probably on a course of sustained,
moderate growth. And I would have no reason to question the as-
sumption in the budget about economic growth.
Mr. Bachus. Thank you. I have one final question for Mr.
Fiechter.
You mentioned compliance concerns that thrifts have with com-
pliance under CRA. I am sure you are aware that several of us on
the Banking Committee are glad we have our semiannual oversight
committee hearings.
Is Secretary Bentsen — he is aware of our request that these two
oversight hearings be held, is he not?
Mr. Fiechter. Yes, I believe he is.
Mr. Bachus. Is he willing to conduct these hearings?
Mr. Fiechter. I believe they are scheduled by the chairman of
the House and Senate Banking Committees. It is up to the commit-
tee chairmen to schedule the hearings.
Mr. Bachus. Does the Secretary have any position? Is he willing
to go forward with these hearings?
Mr. Fiechter. I would assume so.
Mr. Bachus. Do you have any reason why we have not had these
required hearings?
Chairman Kennedy. Mr. Bachus, I don't think it is appropriate,
in terms of the line of questioning, to ask Mr. Fiechter those
questions.
In fact, the chairman of this Committee has addressed those
questions. Those are going to be dealt with by the full committee
that you serve on.
I don't think it is appropriate to be asking Mr. Fiechter those
questions.
Mr. Bachus. I was asking for his personal knowledge, if he
knows, why we hadn't had the hearings.
Chairman Kennedy. I understand the purpose of your question,
Mr. Bachus. There is no misunderstanding on my part.
Mr. Bachus. I was searching for information.
25
Chairman Kennedy. I would just ask you to withhold the ques-
tion until the full committee, Mr. Bachus.
Mr. Bachus. OK. Thank you.
Chairman Kennedy. Mr. Wynn.
Mr. Wynn. Thank you, Mr. Chairman.
I would like to thank the regulators for the work that you have
done in this area. You have made progress, and that is important.
I introduced H.R. 918, the Small Business Loan Disclosure Act
which included many of the provisions that you are now rec-
ommending to us in terms of itemizing the actual loans that are
being made; but it appears that you have omitted the most impor-
tant factor, which is race.
We have all kind of worked in a courteous way to talk about
community reinvestment, but we have to be candid and recognize
that underlying this discussion is the realities of the HMDA data
and also the Boston Fed study which basically said there is racial
discrimination in lending.
Therefore, to go back to my colleague. Congressman Rush's ques-
tion: Why have you not recommended that this data, which docu-
ments amounts of loans made in specific geographic areas, not re-
flect the racial or ethnic characteristics of the loan applicant?
Mr. LUDWIG. As I mentioned, Congressman Wynn, I am person-
ally sympathetic to your concerns. As a group, the banking agen-
cies felt that we are dealing aggressively with racial discrimina-
tion, have the tools to deal with that issue, were very concerned
about adding another data collection requirement when what we
want to do is give banks an incentive to make loans in low- and
moderate-income areas. I am very sympathetic to your concerns,
and we are certainly going to take this issue up again as a group.
Mr. Wynn. When you consider that many of the neighborhoods
that you say need service are characterized by race or ethnic com-
munities, that data ought to be there as well.
Let me ask you: Is there any criteria relating to personnel diver-
sity? In every discussion that I have been a party to on the subject
of lending discrimination, the question continues to come up: It is
the lack of minority loan officers and the lack of minority board
members and the lack of minorities on loan committees that have
a lot to do with whether loans are being made. And I don't see that
particular issue being addressed.
Shouldn't personnel diversity be one of the criteria by which
these institutions are evaluated?
Mr. LupwiG. Let me tell you how we try to deal with that, and
maybe this will allay some of your concerns about the importance
of data collection by race.
Our view has been that you simply can't make loans in low- and
moderate-income communities that are largely of one ethnic variety
or another without recognizing that you have to have loan officers
that reflect the people you are serving. You can't do it. And, inter-
estingly enough, in a recent American Bankers Association news-
letter, they gave advice to bank CEOs for 1994 to hire African-
Americans and other minorities as officers and board members to
deal with the issues of the latter part of the 20th century. How can
you have a significant number of loans in a census tract that is
low- and moderate-income and a largely minority community if you
26
don't have sensitivity to connecting with the people you are serv-
ing? We felt that would, in fact, take care of a lot of this problem.
Mr. Wynn. If we accept your comments — and I do — then
shouldn't we say that if a bank doesn't reflect that kind of person-
nel diversity that you just described as essential to making loans
in an underserved community, that that is evidence of a lack of
good faith and ought to be considered when you are talking about
their CRA evaluation?
It seems to me to go hand and hand, and I would strongly ask
that you would consider that as one of the criteria that ought to
be looked at.
The other question I have relates to the sanction, and it has also
been raised before. I think we should be candid. There has been a
poor record in terms of sanctions.
We are now entering an era of interstate banks, and it seems
like that situation is likely to become worse.
What can be done to strengthen the sanctions for failure to meet
CRA requirements, because I think that is the essence of what we
are doing. Your work has been fine. I, obviously, want you to go
further, but what can be done when there is not compliance beyond
what we are seeing?
Mr. LuDWiG. One thing we are doing or proposing to do is that
if a bank has the lowest rating, it will be subject to the normal
agency enforcement procedures for the first time. In other words,
if a bank thumbs its nose at the law, it is subject to civil money
penalties and cease and desist orders under this proposal for the
very first time. That is controversial. There are a lot of people who
don't like it. We feel it is appropriate. We believe that will be a
powerful incentive for banks not to be in substantial non-
compliance.
Mr. Wynn. What is the standard for substantial noncompliance?
Mr. LuDWiG. Under the new rule, it is very complex. A bank has
to be making a small number of loans in its area.
Mr. Wynn. You are allowing extra credit for the so-called innova-
tive lending. Could this extra credit be used to offset a failure to
actually provide service which is a key criteria or investment. They
say we have this new innovative loan product, but you are not tak-
ing any investment in the community.
How does that extra credit process work? And could it, in fact,
offset significant deficiencies in one of the other areas?
Mr. LuDWiG. I think it would be much harder to game under this
system than past systems.
Mr. Wynn. I think that is true. But acknowledging that, could
they do it under the new system that you are proposing?
Mr. LUDWiG. We would have to be blind, because I know that you
would haul us up here in a second. If an institution was not mak-
ing the loans needed by its community while other institutions
were doing so, and they suggested that because they had one inno-
vative program they ought to be given a passing grade — ^you would
know it, and we would know it. We would have significant pressure
on us for that kind of anomaly not to happen. It would be so much
more obvious than it is under the current system.
The one thing I would say, sir, is that you really do want to give
people an incentive to engage in a lot of these innovative programs.
27
I am convinced that people have viewed as unsafe a lot of loans
that are perfectly safe and that is not the issue here. As banks
reach out to serve the population that has been disadvantaged
more and more, it will take innovative new ways of thinking; and
they ought to be given an incentive to do that.
Mr. WY>fN. I agree. But it argues for my colleague, Ms.
Velazquez' point that there ought to be an opportunity for the com-
munity to challenge or appeal these ratings where this may have
occurred.
Mr. LUDWIG. Good point. Yes, sir.
Chairman Kennedy. Good questions.
I now recognize Mr. Watt for 5 minutes.
Good questions, Mr. Wynn.
Mr. Watt. Thank you, Mr. Chairman.
It seems to me that the freshmen members of this subcommittee
have formed a chorus that I will add my voice to at the bass end
of the level. We have got some sopranos and altos and tenors, and
I need to express my concern about the gathering of information on
race and income also. And go back maybe to a comment that you
made, Mr. Ludwig, earlier.
I take it that your response to our concerns, at least in part, is
that information is being collected based on census tracts and that
that would somehow correlate into race and income data, and that
that is, in effect, an economic — you used this term, "an economic
evaluation," not a race evaluation or — I think that was the para-
phrasing of what you said.
What about the case where vou have people moving into census
tracts, which happens quite often in this day and time, and there
is a process of what we call "gentrification" going on and essen-
tially you have suburban residents moving back into those census
tracts that you are talking about?
Wouldn't that be a case where you simply need to have race cri-
teria to evaluate what the bank was doing in terms of actually sup-
porting the existing neighborhood as opposed to what mignt be-
come the neighborhood over time?
And how would you respond to that?
Mr. Ludwig. Your comments on this point, as well as those of
your colleagues, are thoughtful comments. We are strongly of the
view that this should not be a formulaic and quota driven system.
So there is subjectivity involved in terms of an examiner looking
at an institution and what the institution is actually doing and an
opportunity for public comment. I would think it surprising if there
was not a new and cry over an institution that was basically mak-
ing its loans in a limited way, vis-a-vis gentrification. Also, we
would have information on housing loans from the HMDA data so
that we could do some analysis to identify where home loans are
being made for gentrification. That is, the housing data would be
more detailed.
Mr. Watt. Clarify for me the component which that data would
be used in the CRA evaluation process. And is it formally taken
into account? Or is that a separate body of data that you might in-
formally take into account, but there is no formal process for it?
Mr. Ludwig. In order to simplify institutions' data collection, we
would be using what is already out there as opposed to trying to
28
invent a new mousetrap. We would be using existing HMDA data,
and collecting, for the first time, new consumer and commercial
loan data. We would be homogenizing some of the data to make
some of these calculations. But, we have tried to create a system
that cannot easily be gamed and doesn't create unintended
anomalies.
Mr. Watt. Let me turn my attention to another concern, and
that is this small bank exemption — or if not exemption, at least dif-
ferent standard.
Am I correct that — I had the figure 74 percent. But Mr. Bereuter
said it was actually 77 percent of banks or small institutions that
would fall into this category?
Mr. LuDWiG. Yes, the lion's share of institutions in this country,
77 to 80 percent, are below $250 million in assets.
Mr. Watt. I understand that. Isn't it also true that that 77, 80
percent of banks typically has a disproportion of the higher per-
centage of the low CRA ratings?
Mr. LuDWiG. I don't know whether that is the case, to be honest
with you. My staff is telling me it is true.
Mr. Watt. If that is then the case, how was that $250 million
level set? And why would you relax standards for institutions
which presumably have a higher or more of a problem?
Mr. LuDWiG. Let me explain. That is under the current rating
system. Under the current rating system, banks are disadvantaged
to a degree if they are small, because they cannot afford to hire,
either internally or externally, CRA consultants. One small bank,
for example, came to us with a good record, but they had to go out
and pay $55,000 to hire a CRA consultant to create the kind of pa-
perwork they needed to get a passing grade.
So it isn't necessarily the case that the smaller institutions aren't
doing the job. We just don't know that. We have been evaluating
on criteria that don't make any difference, so that although the rat-
ings mav be lower, it doesn't necessarily mean that they are doing
a bad job.
And $250 million was a rough guesstimate. There is no magic in
$250 million. We looked at the size of the institutions and the kind
of staff they tended to have, given the various sizes. In other
words, how many people do they have on their payroll, and how
able are they, given their profitability and size, to perform the
geocoded exercise that we have for the larger institutions? It is a
little bit of feel and touch that below this line it would be much
more difficult and less meaningful. But, when you have a bright
line, there are going to be anomalies in terms of institutions that
fall on one side or the other.
Chairman Kennedy. Thank you very much, Mr. Watt.
I, first of all, want to thank all of you for coming this morning.
I apologize for being late. I want to commend all of you for the re-
newed emphasis that each of you has placed within your agencies
on CRA compliance and with fair lending in general.
While I believe the changes that have been proposed are submit-
ted with the goal in mind of actually increasing lending and de-
creasing opportunities for discrimination in this country, I do think
that there are several issues that need to be raised and need to be
dealt with.
29
I want to thank the other members of the subcommittee for
bringing up some of the conceiTis, certainly that I have, with re-
gard to these institutions' abilities to make loans and their willing-
ness to make loans as well.
And I particularly want to thank Grene Ludwig for the efforts
that you have made to include more data regarding small business
lending. A few years ago, I attempted to include data about small
business loans as part of HMD A. It was defeated by this sub-
committee, and the full committee. We did succeed in amending
HMDA to include data on race, income, and gender, but not small
business loans.
But in any event, the fact is that, as I have mentioned, there are
some areas that I am concerned with. As you know, I have re-
quested the GAO to do a study of the actual implementation of the
existing CRA, and — Larry, you are nodding your head — they came
back and said there were significant problems with CRA compli-
ance as it pertains to the actual examiners that are going in and
making the determination. The fact was that there is a distinct
problem with the training programs that have been set up.
So I would like to hear a little bit about that.
Second, correctly — and Larry, this is basically another area that
I think you know probably more about than everyone — the HMDA
data that you are actually receiving from institutions is, in many
cases, 30 to 40 percent inaccurate. That is information according to
the GAO study.
We also understand that if we just look at the years when Presi-
dent Bush was leading our country, the number of satisfactory or
outstanding CRA ratings was about 89 percent. Today it is about
93 percent.
So you guys have actually been more generous in terms of your
satisfactory and outstanding ratings. And yet, at the same time, if
we look at the HMDA data, it has not demonstrated significant im-
provement. I am not questioning the fact that you have some out-
standing and innovative programs out there. But that leads me to
an even greater problem that you might have created inadvert-
ently. If I run an institution that is not active in terms of minority
funding and have a substantial noncompliance rating, and I know
that I want to make an acquisition of another institution, I could
have a problem. Under your proposal, I can basically buy my way
out at the last minute and move up two grading levels.
While I know you make these changes with the best of inten-
tions, in fact, if we look at the overall situation, it might have unin-
tended consequences. All you have to do is drive into parts of Mel's
district, or parts of my district, and you will still see a hell of a
lot more banks in Brighton, Massachusetts, than you do in
Roxbury. You see a heck of a lot higher degree of home ownership
in white, blue-collar Boston than you see in blue-collar, black Bos-
ton. I think that is probably true. I know it is true in every city
that I have driven in around this country.
I am not certain that we are really getting to it. I am concerned
that what we have done is answer the political problem in America,
which is, hey, small banks are popular, even in Democratic dis-
tricts; let's give them an exemption. What we are not doing is find-
ing a way to make these banks provide the loans that they should
30
be providing. So I am very concerned that we have set ourselves
up for a political win that is, in fact, a hidden defeat for the very
people that we are here looking out for.
So, Mr. Ludwig, maybe the four of you can get back to me on
those concerns.
Mr. Ludwig. Let me respond to your concern here. First of all,
if a bank is in substantial noncompliance, Mr. Chairman, for the
first time it will be subject to all the enforcement tools we currently
have available. It couldn't sit there year after year and have a sub-
stantial noncompliance rating. We would have the power to issue
a cease and desist order or civil money penalties.
Chairman Kennedy. How many banks currently have a substan-
tial noncompliance status?
Mr. Ludwig. It is in the neighborhood of dozens, not hundreds.
Chairman Kennedy. Does that meet your instinctive sense of the
number of noncomplying banks? How many banks are in this
country?
Mr. Ludwig. Currently, there are some 13,000 depository
institutions.
Chairman KENNEDY. Do you think it is appropriate that only a
couple of dozen have a substantial noncompliance record?
Mr. Ludwig. I would say this. Your comment about the 93 per-
cent and the 87 percent is a similar comment. The current system
can be gamed. There is no way on Earth you can tell actual per-
formance because ratings are based on 12 assessment factors,
which are largely subjective. Bankers have told me that they meet
with their Kiwanis Club, and they put another memo in a huge pile
and that is what they are judged on — subjective activities that
don't mean loans in the community.
Chairman KENNEDY. Mr. Ludwig, I ask these questions knowing
that in your heart you are trying to get the right thing done here.
You say that the system that you are putting in place cannot be
gamed as easily.
However, I am concerned that, without having the four of you
take some stand on what you really believe is the situation in the
real world today, that all these systems will not work. Essentially,
it is similar to one of those grading charts when you were in high
school.
They are going to say, listen, no matter how well anybody does
on the test, so many people are going to pass, so many people are
going to be in the middle, and so many people are going to fail. So
it doesn't matter how you do the test in terms of what you write.
What does matter is how many are going toward good, now many
are going toward bad, and how many are going toward the middle.
No matter how you arrange the deck chairs, if that is what you
have ended up with, then it might look good, and it might smell
good, but, boy, I don't think it is going to change much out there.
Mr. Ludwig. If you look at Boston, there are white census tracts
and black census tracts, and we are going to be looking at all cen-
sus tracts and whether there are loans made in each. Your com-
ment about people learning to game any system is well taken, and
a bell curve will most likely develop. But we will have shifted the
bell curve.
31
Chairman Kennedy. Do you think that, under this system, there
will be more banks that fall into the substantial noncompliance cat-
egory. Will there be far less institutions gaining satisfactory and
outstanding grades?
Mr. LUDWIG. I think that all banks and — hopefully, all banks will
try to get satisfactory.
Chairman Kennedy. I want them to try.
Mr, LuDWiG. And, we will be measuring them on a meaningful
scale. I think we will have to come back and revisit this periodi-
cally. We have committed among ourselves to hold hearings again
in 2 years after this is put in place to see whether or not it is work-
ing correctly. I think that is very, very important.
Chairman Kennedy. I appreciate your answers, Mr. Ludwig. I
have taken perhaps more time than I should have. I would like to
give a brief chance for the other three witnesses to respond.
Mr. LiNDSEY. I would like to address your question about the
HMDA data quality. It is an issue on which I agree with you com-
pletely. I think we definitely have to work much harder in that
area.
Let me explain first why you called on me and why I am the one
to answer this question. Each of our agencies collects the data. And
we at the Fed collect the data from about 600 of the 9,000 deposi-
tories. But the FFIEC, which we all sit on, contracts with the Fed
to do the computer spread. So we divided the labor in that regard.
With regard to the inaccuracy levels, the first thing I would point
out is that we are taking this matter very seriously. In two cases
that I know, Mr. Chairman, you are very familiar with. Fleet and
Shawmut, an explicit reason given for the Federal Reserve Board's
action against those institutions was highly inaccurate HMDA
data. And you know the consequences that they faced, and thev got
a lot of attention. So we think that this is important. I think we
rang a gong for all bankers in America that they have got to take
this seriously, getting it right.
At the same time, let me point out what we are able to do and
what we are not able to do with regard to resolving the data situa-
tion. We get raw data in. We have a number of computer screens
that can detect obvious errors. For example, if it comes in that a
number is zero for income, or zero for mortgage application, well,
the computer is smart enough to know that that is a mistake, and
we send it back and we ask the bank to correct it.
But there are things that the computers can't check, and it re-
quires our compliance examiners to go into the bank. For example,
if someone says that they are black, they are white, or vice versa,
there is no way for the computer to know that. There is no way
for anyone aside from the person who collected that data to know
it. So part of the correction process is going to be our compliance
people going around and making sure that people check the right
box.
Where that is a real problem, and where I think a lot of the data
errors are coming from, is on the income question. What we are
dealing with is initial applications by individuals. And folks tend
to round their income. They also may tend to round it up on their
initial application. Where the numbers are verified, oftentimes, a
lower income level is produced.
32
And so, the application file is going to be scored as having an in-
creased level of income. The bank will interpret one level — ^you un-
derstand what I am talking about.
Those are the kinds of problems that are going to be very dif-
ficult to get at. I don't believe that the error rate is 30 or 40 per-
cent. I think it is high. And I think it is too high.
Chairman Kennedy. Is there anything, Mr. Lindsey, that could
be done in terms of those new regulations to help you improve this?
Mr. Lindsey. One thing we are looking at; I have ordered our
staff to look at how we can deal with things like the income prob-
lem. Do we really care, for example, what the applicant's initial
claim of income was? Or do we care what the actual verified in-
come was? I tend to think it is the latter.
That is the kind of thing, I think, is going to get at a lot of the
problems.
Chairman Kennedy. Do you have something else?
Mr. Lindsey. One other thing. One thing that I believe we are
all doing is that we are now beginning a process of fines for banks
who file late and who file with significant data errors. And that
may well help the matter, too.
Chairman Kennedy. Terrific. I think that what you might do is
write me a very brief letter. You don't have to send me a formal
letter, but a brief letter indicating where you see the substantial
problems and what kinds of changes that you think would be help-
ful to extract a better accuracy rate from the institutions them-
selves. We can then talk about how we may be able to implement
that.
Mr. Lindsey. I would like that. And I would particularly like it
if you give me a little time. Because one thing we are doing, we
have to go back and see what the problem actually is.
And I will be happy to give you what my initial impressions are,
but
Chairman Kennedy. Have you looked at the GAO study?
Mr. Lindsey. Yes. I have read it very quickly. I thought they had
a lot of very good observations and certainly ones that we are going
to take into account.
Chairman Kennedy. Thank you very much.
Mr. Hove. Mr. Chairman, I think that the FDIC certainly is very
interested in finding those places where there are errors and cor-
recting those errors. And, in fact, as Governor Lindsey mentioned,
we are preparing cases to fine late filers and find the data that is
in error.
We also have started a project at FDIC where we are making in-
vestigations of HMDA disparities. And where we see disparities in
the HMDA data where there are large rejections, larger than what
would be normal, we have designated 100 examiners throughout
the country to specifically look at these institutions and find why
these disparities exist and try to correct them and ferret out any
problems that there may be and identify those that really are dis-
criminating. And we are serious about this.
Chairman Kennedy. I heard you made that announcement the
other day, Mr. Hove. I want to congratulate you. I think that is an
important step forward. Still, more needs to be done.
Mr. Fiechter.
33
Mr. Feechter. I think we are all working on getting more timely
accurate HMDA data.
On your question of will more institutions fail under the new
proposal, I would be reluctant to prejudge the outcome in a couple
of years. I don't have any doubt, however, that it is a more mean-
inrful standard that we have proposed than what we had before.
Chairman Kennedy. I want to deal with that directly. There is
a sense, I think, by the country in general that we are out of touch.
Now, I am trying to let you know that you must do something
about this. People don't need to look at the phone books of HMDA
data and all the reports and all the silly questions that bank exam-
iners ask chairmen of boards of banks about board meetings and
all that hogwash. It doesn't make any difference to some poor per-
son that has enough money to pay $700, $800, $900 a month in
rent, and yet can't buy a house. Those people need to know that
they can go to a bank and buy a house. That is what is not getting
across.
All the efforts that you make with regard to this issue, the rea-
son why you are doing it, other than your personal instincts, are
because it is, in fact, being recognized as a legitimate issue out
there in the country. People understand that if we can have eco-
nomic development in other countries, we can have economic devel-
opment in the United States in very poor communities.
When there are banks that are doing good things, we ought to
congratulate them. We ought to put them up on a pedestal and
have other people try to emulate them.
But, fellows, there just is not enough lending going on in this
country to poor people and to people of color. And banks are not
getting out there and doing it. Meanwhile, you are giving them
higher ratings. You ought to be willing, I think, to come forward
and say, yes, in fact, unless banks change, if the existing lending
rates continue and nothing changes out there, more banks are
f^oing to fail. Less banks are going to get a satisfactory rating, and
ess banks are going to get an outstanding rating because the sys-
tem you have in place right now is broken; it doesn't work. Ninety-
three percent of the banks ought not to be getting good or out-
standing ratings while the kind of lending discrimination that the
raw data, even if it is that inaccurate. Governor, demonstrates, in
fact, exists.
Anyone who drives around urban America doesn't need this data.
All you have to do is look. There are hardly any banks in the black
communities. There are very few in the Hispanic communities.
There are very substantial differences in home mortgage rates ver-
sus rental rates as well as the lack of ability of people to own their
own small businesses in those communities.
I will say it until I am blue in the face; but the fact is that we
need you to help. I think you are making an effort. However, I
think you have to be clear that these are going to be tough regula-
tions to finally get the job done.
Mr. Hinchey.
Mr. Hinchey. I am just agreeing with you, Mr. Chairman.
Chairman Kennedy. OK. Thank you.
Do you have any questions?
Mr. Hinchey. No.
34
Mr, McCandless. Mr. Chairman, if I may take a little liberty
here with respect to the subject involved and the gentlemen at the
table are the shakers and movers of our industrial complex, finan-
cial complex, you collectively — not you as individuals, but you col-
lectively — have created an environment of such a negative nature
that people are forced to come to what it is we are talking about
here in the way of regulatory power. Let me explain it.
We no longer have loan officers in these banks. The loan officer
comes in and he is the regulator, and he criticizes this particular
portfolio, and he criticizes that particular portfolio as being sub-
standard, packs up his suitcase in 1 day or 2 days and leaves. You
have got those banks so afraid to loan money, irrespective of what
the ethnic background or the individual's standing is in the com-
munity, that they don't want to step out.
For whatever value it is, I was in the automobile and truck busi-
ness for 22 years as a dealer. All of the things that I sold had re-
course condition of sale contracts. So I have a certain respect for
the credit statement and what it represents in the way of an
individual.
Your loan officers can no longer take that credit statement as a
profile of that individual and make a judgment call based upon
whether that person has the willingness and ability to pay. They
have to meet some kind of a Federal or other type of regulatory
confirmation in terms of a ledger sheet with a certain amount of
this or that.
And it is going to, time after time after time — and I can give you
all kinds of examples if you would like to have them from my dis-
trict because, over a period of time, I got pretty well acquainted
with the financial industry; and they are frustrated because they
can't lend this person money that they have lent to for years to
conduct the affairs of a small business.
Unless you overcome that, it isn't going to make a dam bit of dif-
ference whether it is ethnic or nonethnic. The ethnic part is going
to be a part of who is left out. This attitude has cost this Nation
and is due to what took place in the 1980's. What took place in the
1980's was not attributable to a loan officer sitting across the
counter or the desk from a person who wanted to borrow money.
That person paid it back. It was the guy upstairs that borrowed
the big figures and went out and invested it in some type of a ven-
ture that cost this Nation and that bank its charter and the money
involved.
Now, we have been talking here — and I sound like a lecture, and
I probably am. But I am frustrated by this because of what you can
create in the way of a social structure to satisfy what it is we are
sitting here about, if you have the latitude as a loan officer and
your bank has the policies necessary to follow up.
But the policies are not going to be forthcoming; and, therefore,
the loan officer is not going to be forthcoming. So everybody sits
with their hands tied and are afraid to do anything because they
will be criticized by the regulators for stepping out and making
loans the way they used to.
Thank you, Mr. Chairman.
35
Chairman Kennedy. Thank you, Al. I agree with a substantial
portion of what you are talking about which, I hope, is a good omen
for the next year.
I want to thank all of you very much for coming forward and for
providing us with excellent testimony this morning. We look for-
ward to working with you over the course of the next couple of
months to refine some of these ideas that have been put forth.
Thank you for your effort.
Our next panel is really a different panel. It is a panel that cen-
ters around Marshall Plummer, the vice president of the Navajo
Nation. He also serves on the Select Committee of Tribal-County
Relations, the New Mexico Association of Counties, and the McKin-
ley County Commission. We want to thank you very much for being
here. Have a seat and begin your testimony when you are ready.
STATEMENT OF MARSHALL PLUMMER, VICE PRESffiENT, THE
NAVAJO NATION
Mr. Plummer. Thank you. Congressman. We submitted a written
statement. What I will be doing is touching on certain points.
Yes, we are different in many ways, and we are unique, and we
are asking that some consideration be given to how Indian nations
may be treated under this particular act.
I testified on October 1, 1993, before this group in regards to the
CRA, and we have some remaining concerns that I would like to
propose at this time.
But before I do that, let me just apprise you of a situation that
has recently been dealt with by Janet Reno and, of course, Eugene
Ludwig.
This particular matter happened in South Dakota at the Black
Pipe State Bank. There was a settlement wherein the bank was re-
fusing to make secured loans to individuals when the collateral was
located on the Indian Reservation, also placed credit requirements
on American Indians that it did not require of non-Indians. And
the Indians, of course, were charged greater interest rates and fi-
nance charges.
This particular case, I think, is just an example of the situation
with Indian tribes across this great Nation of ours.
The Navajo Nation, being the largest in land and population
size — the size of West Virginia, as I stated in my previous testi-
mony — has only three banks on its lands. We have 3,000 miles of
paved roads compared to West Virginia's 18,000. The lack of finan-
cial institutions has been a tremendous hardship on the people that
I represent.
As an example, it is not common for employees, either of the Fed-
eral Government or the tribe or other agencies that are present on
Indian Reservations, to drive to deposit their checks or cash their
checks a 4-hour round trip. And I am not talking about a traffic
jam or anything. This is just straight driving at 55 miles per hour.
And the distances are so long, makes it very difficult.
Because of the fact that Indian Reservations are held in trust by
the Federal Government, it makes it very difficult for bankers to
provide loans to members of our tribe — of our many tribes across
this land.
36
In addition to that, there are ambiguities in how banks interpret
some of the language that is presently in place. We need to clarify
some of the language that is currently in place.
Also, to address the fact that the landholdings that we have held
in trust, and trying to find ways as to how Indian tribes may be
treated. We are not like an urban area or a suburban area
Chairman Kepwedy. Mr. Plummer, I know that we have talked
with you about the fact that we are under somewhat of a tight
timeframe, because there are other witnesses that want to come
forward and testify who have tight schedules as well.
I am very, very interested in hearing your specific concerns as
to how this subcommittee can assist the Indian tribes. We have
heard your testimony in the past about some of the great difficul-
ties in distances that exist on the reservation itself. I wonder if you
might be able to focus your oral testimony this morning on what
you would like us to focus in on in terms of the specific problems
you are having with CRA and what kind of action you would like
us to try to take to assist you.
Mr. Plummer. Thank you, Congressman. I will, then, im-
mediately go to the things that we would like to provide as
suggestions.
Chairman Kennedy. Thank you.
Mr. Plummer. The fact that there are not many banks and the
fact that there has been little activity on Indian Reservations, we
are asking that a study, a thorough study be done by the four insti-
tutions that have oversight so that we can then get a feel for how
severe the problem is.
That is number one.
Number two, that small banks and thrifts not be exempt from
providing data on geographical distribution on loan applications,
denials, and purchases to the public.
Third, that small banks not be exempted from data collection
requirements.
Chairman Kennedy. Would that only be on reservations?
Mr. Plummer. Yes, sir. This would be banks that would be adja-
cent to reservations because the three banks that we have pres-
ently are considered — is considered a large bank, but small banks
that are contiguous to the reservation.
Fourth, that we have a clarifying statement on trust land sales
and travel repossession laws, of which we can help in structuring.
Fifth, that there be incentives that would help boost CRA rat-
ings. There is really a need for some incentives for banks to become
interested. We have a terrible time understanding why foreign
countries are given preferences when Indian nations are not.
Also, that other incentives that would help in coordinating with
established Cxovernment Loan Guarantee Programs such as Farm-
ers Home or Veterans benefits, HUD Programs.
Seventh, that supervisory agencies have proper training and un-
derstanding in Indian Reservations and their unique status.
And also that, number eight, that we be given an opportunity to
comment as to the bank's activities.
So those are our suggestions that I would like to provide to this
group.
37
Last, let me just say that we need to continue working with the
Department of Justice and other agencies to make sure discrimina-
tion does not continue.
Thank you very much.
[The prepared statement of Mr. Plummer can be found in the
appendix.]
Chairman Kennedy. Mr. Vice President, I want to thank you
very, very much for your willingness to come and testify this
morning.
You know this is an issue that I am very, very interested in
working with you to develop some solutions to.
Since I was a very young fellow, I have come and visited the
Navajo Nation on a number of different occasions and look forward
to continuing to work on issues that you are concerned with.
Obviously, economic development is key. I would hope that we
could follow up in terms of you working with my office on trying
to coordinate, both at a congressional level and, as I point out, with
the regulators, so that they understand the importance of this issue
and develop strategies to deal with the particular needs of the Nav-
ajo Nation and other Indian tribes around our country.
We would look very much forward to working with you.
If there are other comments that people want to make right now.
If not, I would ask the other witnesses to come forward.
Mr. McCandless.
Mr. McCandless. Mr. Plummer, one of the things that I con-
tinue to come in contact with — and I have 11 tribes in my district —
is the sovereignty problem. That is very difficult to overcome when
you are talking about the normal social structures of a given soci-
ety, whether it be land use or whether it be the offering of services,
the repossession of property, and we can go on.
I am not advocating that you give up your sovereignty. I am say-
ing that it is very difficult for businesses to do business in, essen-
tially, another country.
I think that is one of the key elements that relates to what you
are talking about in the case you gave where you have to travel
4 hours round trip.
Obviously, it would require an investment on the part of a finan-
cial institution to provide the financial services that I think you are
looking for on a sovereign nation's territory with a very restrictive
window of legal availability.
So therein lies one of the key elements that would need to be
overcome in the area that we are talking about.
Mr. Plummer. That is exactly why we feel that there should be
an area within the proposed changes that would deal specifically
with Indian tribes.
We find ourselves in an awkward position, as I stated earlier,
when foreign governments are able to get agreements in place or
even get Federal assistance to boost their economies when our In-
dian nations, we just don't have that ability at the present time.
And the area of sovereignty should be included in these discus-
sions and in the changes that will be proposed in this particular
law.
Chairman Kennedy. Thank you very much.
38
If the other members of the subcommittee don't have any ques-
tions, I could excuse you, Mr. Vice President. If you would like to
stay on at the witness table while we invite the other witnesses
from the third panel up, that is your choice. OK?
Mr. Plummer, Well, we would like to invite you to come and visit
our nation.
Chairman Kennedy. I would love to. Please. Maybe you could
drop me a note at the end of hearing.
Thank you, Mr. Vice President.
I will now ask the third panel to please come forward. The third
panel is a distinguished panel and the first and foremost is a very
good friend of mine, the Reverend Charles R. Stith, the national
president of the Organization for a New Equality. He founded the
organization in 1985. Reverend Stith has received numerous
awards including from the National Urban Bankers and the Bank
Educators Alliance of Massachusetts.
It is a pleasure to have you with us this morning. And we will
be looking forward to your testimony.
If everyone else is settled, I might just ask Reverend Stith to
grab the microphone and start his testimony. Because of the late
hour and because people have planes to catch, I would ask if every-
body could try to keep their remarks to 5 minutes, we could get to
questions as soon as possible.
STATEMENT OF REV. CHARLES R. STITH, NATIONAL
PRESIDENT, ORGANIZATION FOR A NEW EQUALITY
Reverend Stith. First of all, Mr. Chairman, I would like to com-
mend you for the stalwart work that you have done historically to
try to make CRA compliance in this country a reality.
And I would like to commend the entire committee for convening
this hearing on the proposed regs.
I appreciate the opportunity to testify before the subcommittee
on the proposed regulatory changes in CRA. As you have articu-
lated so well during your queries of the regulators, reform is abso-
lutely necessary and it is necessary because of the record of dis-
crimination by banks toward low-income communities in general,
but minority communities in particular. And this is a point of real
concern for us.
When you look at the rate of business ownership along racial
lines, whites own 30 times the number of businesses which blacks
do. When you look at the history of home ownership, whites own
homes 12 times — the number is 12 times greater than blacks.
When you look at the net worth of the average white family
against the average black family, the average white family America
is worth about $43,000; the average black family is worth about
$4,300. And the irony of that disparity is that over the last 30
years, the membership of black families in the middle-class has
grown over 300 percent.
The reason for the disparity in terms of equity and ownership
has to be directly related to this issue of the lack of access to credit
and capital.
There are three critical flaws that ONE and our National Com-
munity Reinvestment Network has observed relative to the present
proposal.
39
First of all, there is a failure to significantly deal with race as
a factor in determining or evaluating CRA compliance. Again, as
you noted in your queries of the regulators, that while there is ref-
erence made to HMDA in the evaluation process, it is ambiguous
as to how that data will be interpreted; and it is ambiguous rel-
ative to the weight that HMDA data will be given in determining
a bank's compliance with CRA. And the failure to deal with race
as a factor is further underscored by not requiring the collection of
race-specific data as it relates to small businesses.
This, obviously, portends a problem relative to mitigating or
monitoring the discrimination that takes place against minority
business owners and minority entrepreneurs.
A second concern is that the ratings system is flawed. At the core
of the issue of compliance is the credibility of the composite ratings
system. Under the proposed regs, a retail bank, again as you noted,
could do very well in terms of a grade without having a record of
any achievement in terms of lending, and that is where the rubber
hits the road.
Our third critical issue with the proposed regs is that community
groups are marginalized in terms of their input around CRA com-
pliance. You know, one way in which that is reflected is just in the
lack of resources and capacity of many small grassroots organiza-
tions to evaluate what banks are doing, the appropriateness of
strategic plans.
The component to which they are marginalized are also reflected
in the fact that, while as Comptroller Ludwig mentioned, commu-
nity groups would have an opportunity to respond to strategic
plans, it is after the fact. And they ought to be a part of that proc-
ess from the very beginning.
We have got 10 recommendations.
First the HMDA data must be used as a factor to determine mar-
ket share parity under the lending tests.
Two, it is absolutely critical that there be a collection and a re-
porting of HMDA-like data for small business loans. And it must
be mandatory for all banks.
Three, small business lending to racial minorities must be used
to determine market share parity under the lending test.
Four, community groups must be given the right to appeal in-
flated ratings.
Five, community input should be sought by regulators, as Mr.
Ludwig said, as part of the examination process but also at the
onset of a development of a bank's CRA strategic plan.
Sixth, quantifiable measures should be assigned to the qualifiers
to fairly measure a bank's performance. Earlier, Congressman
Rush talked about the ambiguity of phrases like "very significant."
It just doesn't zero in.
Seven, no retail bank which performs poorly on the lending test
should be given a passing final grade.
Eight, minority hiring and the appointment of minorities to a
bank's board of directors should be used as factors in a service test.
Nine, minority procurement should be used as a factor in the in-
vestment test.
And then, banks should be given credit under the investment
test for the support of CRA advocacy groups.
40
Thank you, Mr. Chairman.
[The prepared statement of Reverend Stith can be found in the
appendix.]
Chairman Kennedy. Thank you very much, Reverend Stith, for
cutting to the quick.
Reverend Stith. And you know that is hard for a preacher.
Chairman ICennedy. Well, you did a good iob, Charles.
I want to thank you for coming down ana encourage you to con-
tinue the excellent work that you and your organization have ac-
complished in terms of actually substantially increasing, certainly
in our hometown, the bank participation in lending programs and
really being a national leader on this issue.
Thank you for coming and sharing your thoughts with us this
morning.
Our next witness is Terry Jorde, who is the president of the
Towner County State Bank m Cando, North Dakota. She is active
in several local community and State affairs and on the board at
the North Dakota Department of Banking and Financial
Institutions.
I am looking forward to hearing your testimony.
STATEMENT OF TERRY JORDE, PRESmENT, TOWNER COUNTY
STATE BANK, CANDO, ND
Ms. Jorde. Thank you, Mr. Chairman.
I am Terry Jorde. I am president and CEO of the Towner County
State Bank in Cando, North Dakota.
My bank has $24 million in assets and 12 employees serving a
town of 1,500. This is very typical of the IBAA member banks that
I am representing today. We appreciate the opportunity to testify.
In the near future, the IBAA, will be submitting formal com-
ments to the agencies, and I ask that you accept these comments
into the record of this hearing.
Chairman Kennedy. Hearing no objection, it is so ordered.
Ms. Jorde. Thank you.
We appreciate the opportunity to testify.
The proposed CRA regulations respond to the President's direc-
tive to improve the CRA process in ways that "minimize the com-
pliance burden on financial institutions while stimulating improved
CRA performance." This initiative was based on the fact that CRA
is one of the most burdensome and least effective regulations.
We strongly support the proposed streamlined examination proc-
ess for banks under $250 million. The current CRA enforcement
scheme treats large, multinational, and regional banks the same as
community banks. This is unjustified. Both the banks and the mar-
kets they serve are completely different. About the only thing my
bank has in common with Bankers Trust or J. P. Morgan is the fact
that we both accept deposits and have commercial bank charters.
In 1991, the Financial Institutions Subcommittee recognized this
fact and adopted an amendment offered by Representative Kan-
jorski exempting from CRA all institutions under $150 million in
assets and all rural institutions under $250 million. The full com-
mittee dropped the proposal in a deal over an unrelated provision.
The current proposal builds on the principle behind the Kanjorski
amendment, that community banks are, by definition, committed to
41
serving their markets while maintaining the requirement that all
institutions comply with CRA.
Community bankers strongly support the goal of CRA. Many
community banks serve low- to moderate-income residents since
they make up the great majority of our market. This is where we
work and live. CRA, as it is presently administered, detracts from
banks serving these communities by emphasizing a paper trail
rather than ongoing lending performance.
The proposed streamlined examination process for banks under
$250 million in assets is consistent with the legislative history of
CRA. The committee reports and floor debate do not indicate any
intent to require that all banks undergo an identical enforcement
scheme. And the legislative history makes clear that the act was
not intended to require banks to do any additional paperwork. The
agencies' proposal is completely consistent with this by signifi-
cantly cutting back the paperwork requirements for smaller banks.
We believe a tiered system is consistent with President Clinton's
request for CRA improvements. On July 15, he said a CRA "system
which is too inflexible to recognize the real differences among the
circumstances in which our banks and thrifts operate, would poorly
serve both our financial system and our communities." Currently,
banks with staffs of 10 are being asked, and are expected to do the
same as those with staffs of thousands. The proposed CRA revi-
sions differentiate between multinational and regional institutions
serving large, metropolitan areas and the community banks serving
small towns and rural areas.
The $250 million streamlined examination process is not an ex-
emption. CRA examiners will look at a community bank's actual
lending record to determine if it is serving its community.
The streamlined examination system has a serious flaw, how-
ever. To gain a satisfactory rating, a community bank must have
a 60 percent loan-to-deposit ratio. A fixed ratio fails to account for
differences among local markets and for the ebbs and flows of ac-
tivity within markets.
Many areas lack sufficient loan demand, making it impossible to
meet an arbitrary 60 percent test. In addition, many markets, par-
ticularly rural areas, experience significant seasonal variations. My
bank's loan-to-deposit ratio ranged from 44 percent in January
1993 to a high of 65 percent in September. It is now just under 50
percent.
And I might add, it is 28 below zero too. Nothing grows at that
time of year.
Because of these factors, half the banks do not meet the 60 per-
cent test. It is makes no sense for examiners to impose and then
require thousands of banks to demonstrate that a lower ratio is
reasonable.
A loan-to-deposit benchmark also ignores much of the bank's
community reinvestment activity. Loans that banks originate and
sell into the secondary market help our communities, but do not
show up in the ratio.
Similarly, community banks effectively lend to local municipali-
ties for infrastructure development by purchasing municipal bonds.
These are not counted as loans. The banks also make considerable
investments in collateralized mortgage instruments and mortgage-
42
backed securities. These investments allow banks to support long-
term home lending without paying long-term interest rate risks.
If the proposed 60 percent loan-to-deposit test were adjusted to
take these factors into account, these bank's loan-to-deposit ratios
would rise significantly.
We are also concerned that the proposed CRA regulation could
become an artificial incentive for banks to reach to make loans that
they should not make. This is unwise and unnecessary. Many
bankers have told me that they wish that there were more opportu-
nities to make more sound loans in their markets.
Because of these factors, we recommend that the regulatory
agencies drop any reference to a specific loan-to-deposit ratio.
Though some nave argued that the $250 million asset level en-
compasses too many institutions, it only applies to around 16 per-
cent of the banking industry's total assets. Many community banks
above that level operate with small staffs and have an intense local
focus.
Therefore, we recommend community banks up to $500 million
in assets have the option of being examined under the tiered sys-
tem. This would only increase the level of assets covered to ap-
proximately 19 percent.
We appreciate the opportunity to assist you in your review of the
proposed CRA regulations. We strongly urge you to support the
tiered examination system.
Unless community banks can get a break from the current heavy
burden, they will find it increasingly difficult to continue serving
their communities. And that would truly undermine the goals of
the Community Reinvestment Act.
Thank you for the opportunity to comment.
[The prepared statement of Ms. Terry Jorde can be found in the
appendix.]
Chairman Kennedy. Thank you very much.
Our next witness is Allen Fishbein. He is general counsel for the
Center for Community Change, and director of the Center's Neigh-
borhood Revitalization project, which aids low-income and minority
community -based organizations.
Mr. Fishbein has been involved in this effort for over 14 years
and has provided legal representation for the first successful chal-
lenge to a bank expansion application under the CRA.
We want to thank you for all the hard work you have done on
behalf of lower income people and people of color in our country,
and thank you for coming and testifying today.
STATEMENT OF ALLEN FISHBEIN, GENERAL COUNSEL,
CENTER FOR COMMUNITY CHANGE
Mr. Fishbein. Thank you, Mr. Chairman. And it is a pleasure to
be here and on this distinguished panel. And I want to commend
you for your continuing leadership in this area and the involve-
ment of the subcommittee because we need you.
Last July, President Clinton directed the agencies to make good
on his promise to turn CRA into a more performance-oriented regu-
latory system. And the proposal that was unveiled last December,
we think, represents an important downpayment on making good
43
on that promise. It provides a framework for a more intelligent
performance-oriented rating system.
We believe that it also contains some important flaws, some of
which, if not corrected, would actually represent a step back from
existing regulatory practice.
Also embedded in the proposal are a number of issues that are
raised which need to be addressed in the final regulation for the
purposes of greater clarity and to guard against unintentional con-
sequences. We believe that these are all fully correctable through
the rulemaking process and hope that they will be addressed. But,
at the same time, we encourage the subcommittee to play a close
role in monitoring and oversight of the rule.
You pointed out, Mr. Chairman, in questions to the previous
panel, about the need for reform being ongoing. And I think you
said that quite well and quite directly. And certainly our research
seems to indicate that, in the past year, rating inflation seems to
be creeping back into the regulatory process and emphasizes the
need to develop a new more rationalized scheme. We think the pro-
posal represents an important step forward in several years.
First, as I said before, it provides a framework for performance-
oriented ratings system, particularly through the lending test. And
the heart of that is the comparative market share analysis.
And I must say, I was a little disappointed in the comments from
the regulators to hear what I think is backpedaling on the impor-
tance of that market share analysis because it is the one really ob-
jective measure in this proposal which is intended to be perform-
ance oriented.
Because, number one, it compares a lender against itself. It looks
to see whether a lender is equally active in all parts of the market.
It compares a lender against how it is performing in the context
of other lenders, because it looks at their market share throughout
the communities that they are serving. And while we don't know
it is perfect, we think it is a good starting point. The deletion or
the minimization of that test would really leave very little left of
this new performance-oriented system.
Second, the disclosure of loan data is an important step forward.
The progress on the HMDA, which you were responsible for ex-
panding significantly, shows that the disclosure of loan informa-
tion, in and of itself, is a powerful tool for driving changes in bank-
ing practices. And we certainly hope that the final rule will include
race, gender, and ethnic data for small businesses as well.
And the third item is the use of supervisor powers, under certain
circumstances, which has been a change and glaring omission in
the regulatory scheme up until now, and we commend the adminis-
tration for proposing that.
Four, having listed some of those positive steps forward, let me
spell out some of the critical concerns we have with the proposal.
Number one, we continue to have too much emphasis on activi-
ties other than direct lending. As you pointed out, a lender can re-
ceive an overall satisfactory rating even if it has failed the lending
department, if it scores well on the investment and service test. We
think this was wrong. CRA was established primarily for credit ac-
cess, and we think this imbalance ought to be corrected in the final
rule.
44
Second, the small bank exemption, we think, needs to be ad-
dressed in the final rule. Under the guise of what is being de-
scribed as streamlining, the proposal would exempt the overwhelm-
ing majority of banks in this country from any meaningful
coverage.
And let me suggest that under the rules or the screens that they
are proposing, it is entirely possible for small banks to do virtually
no lending in barrios, or to significant African-American segments,
perhaps of a local or rural community and yet get a satisfactory or
perhaps outstanding rating on their overall CRA evaluation.
We think this is inadequate, and there is no justification for it
under the statute. And it needs to be deleted in the final rule.
Also I would say that the rule seeks to narrow discrimination in
the evaluation process. Race, in many respects, is decoupled from
the CRA evaluation process except in very limited situations. We
think that is wrong and it needs to be addressed.
The backdoor safe harbor is a fourth item I would mention. I
think it is unnecessary in the proposal. It would mean that the
public would have an ability to comment on corporate expansions
in only a handful of situations in America, when we know that the
richness of that comment during the expansion application process
has arguably been the most important wheels and mechanism of
the CRA enforcement process.
Let me conclude, by saying that we think that the proposal offers
great potential; but many issues need to be addressed before we
can say with any assurance that the rating system would result in
a system that would command respect from all parties, number
one; or two, would likely result in increased lending to underserved
communities.
And one final note, Mr. Chairman. The regulation places a heavy
emphasis on community groups to be active monitors, to comment,
to follow activity.
But one of the questions that didn't get addressed in this pro-
posal or, for that matter, in the President's budget — or virtually
any aspect of funding — is to provide expanded resources for com-
munity groups to do this work. Most of them are operating on a
wing and a prayer with very limited resources; and if they are ex-
pected to play a very substantial, ongoing, and meaningful role in
the evaluation process, we think expanded resources have to go
arm in arm with helping that occur.
Thank you very much.
[The prepared statement of Mr. Fishbein can be found in the
appendix.]
Chairman Kennedy. Excellent point, Allen. And I appreciate
your testimony.
The next witness is James Culberson, who is presently the chair-
man of the First National Bank and Trust Co., of Asheboro, North
Carolina.
He first joined the bank in 1974 as president — not a bad way to
start — and chairman and chief executive officer.
Mr. Culberson has been active in several banks' organizations
and is currently on the boards of directors of the American Bankers
Association.
45
Thank you very much for joining us today. We are looking for-
ward to your testimony.
STATEMENT OF JAMES M. CULBERSON, JR., CHAIRMAN AND
CEO, FIRST NATIONAL BANK & TRUST CO.
Mr. Culberson. I am dehghted to be here with you today and
to discuss with you the CRA proposal. The proposal we are here
to discuss this morning would make sweeping changes in CRA reg-
ulation. Some of those proposed changes are good, others are not
so good.
First the good news. The proposal takes a very positive step by
recognizing that one size does not fit all.
Today's approach is particularly hard on community banks which
have significantly less capacity to cope with the massive docu-
mentation required.
A streamlined examination process for smaller banks will fi*ee up
scarce resources for more productive uses in the community, and
it will be welcome news to both bankers and bank customers.
I know that some consumer advocates characterize the stream-
lined examination as an exclusion for small banks. That is simply
not true. "Streamlined" is not a code word for excused. Small banks
would have the same obligations they have today to meet local
credit needs, but they would not be required to document their
every move.
Another positive element is the menu approach; one that offers
different options for demonstrating CRA compliance. Also positive
is the specialized institutions, like credit card and wholesale banks,
would be able to meet their CRA obligation in additional ways com-
patible with their type of business.
However, I must tell you, Mr. Chairman, that we have great con-
cern about many elements of the proposal, not only about how they
may be implemented in 1994 but also what they may become in fu-
ture years. We have seen well intentioned laws and regulations
turn into nightmares before.
CRA is so open ended that our industry must be concerned about
ever increasing costs and it has potential for slowly but surely sub-
stituting government and political^ control over the credit decision
process.
We have serious concerns about the proposal's new reporting re-
quirement for all banks over $250 million in assets.
Mr. Chairman, my bank has approximately $250 million in as-
sets, and I can tell you how the additional reporting requirements
will affect me and my customers.
It will raise the cost of each and every small business, small
farm, and reportable consumer loan I make and do absolutely noth-
ing to improve credit availability.
The data will not tell you much about the credit conditions for
small businesses, farms, or consumer borrowers. Banks are not the
only source of these loans. Finance companies, credit unions, and
other lenders do not report their lending activities. The omission of
these players would simply give an incomplete picture of what is
happening in these markets. The added reporting should be
eliminated.
46
A related concern is that the cutoff for the streamlined exam is
too low. Today, a market for a $250 million bank is not very big.
Banks like mine are doing a good job meeting the credit needs of
their communities and should have no difficulty demonstrating
that fact under a streamlined examination process. The $250 mil-
lion threshold should be raised.
We are also concerned that the proposed 60 percent loan-to-de-
posit ratio test is unrealistic. Many smaller community banks will
find the SO percent ratio inconsistent with sound business
practices.
Moreover, many market areas do not have sufficient loan de-
mand to generate a 60 percent loan-to-deposit ratio. The 60 percent
test is simply not a good indication of how well a community bank
is meeting local needs.
Another important issue is credit allocation. We are concerned
that the phrase, quote, performance over paperwork, end quote, is
being interpreted to mean that specific bank loan targets should be
set for low- and moderate-income borrowers or for certain geo-
graphic areas. This is credit allocation pure and simple.
Moreover, the proposed market share test may inadvertently re-
sult in credit allocation by requiring that a bank's market share in
low- to moderate-income areas be equal to or greater than the
bank's market share in the remainder of its market.
There may be tremendous pressures on banks to lower their un-
derwriting standards in order to achieve — to meet this test.
I would like to add one final point, and that is the continued ex-
clusion of credit unions and other financial service providers from
CRA.
Two of my biggest competitors are credit unions. Both are larger
than my bank and federally insured, and yet they have no CRA re-
sponsibilities. Community bankers find incredibly frustrating that
credit unions, security firms, mutual funds, insurance companies,
and the farm credit system do not play by the same rules. How can
this be justified?
Mr. Chairman, a great many questions remain about how to
make CRA work better. Some parts of the regulators' proposal
seem to move in the right direction. Others are entirely at odds
with efficient and effective CRA reform. ABA's Government Rela-
tions Council will meet later this week to discuss the proposal in
more depth, and we will file a detailed comment letter with the
regulators.
There are many examples of bankers, community groups, and
local governments working together to solve local problems and to
build a better future. We all need to work together to have a fair
and reasonable structure for the administration of CRA.
Thank you very much.
IThe prepared statement of Mr. Culberson can be found in the
appendix.]
Chairman Kennedy. Thank you, Mr. Culberson. I will be happy
to work with you to extend CRA to all those other institutions as
well.
I would now like to introduce Bertha Lewis, who is the director
of ACORN in New York
Ms. Lewis. You can promote me. That is fine.
47
Chairman Kennedy. That is fine with me. She directs ACORN's
loan counseling activities and has extensive underwriting experi-
ence. We thank you for joining us and we are looking forward to
your testimony.
STATEMENT OF BERTHA LEWIS, DIRECTOR, NEW YORK, ASSO-
CIATION OF COMMUNITY ORGANIZATIONS FOR REFORM
NOW
Ms. Lewis. Good morning to you, and I am glad you have landed.
I would like to say good morning also to the remaining members
of the subcommittee. And I appreciate this opportunity to testify
before you today on behalf of ACORN.
ACORN has supported the President's stated goal of strengthen-
ing enforcement of CRA and focusing CRA evaluations on perform-
ance rather than process. But we are sorry this morning to report
to you, therefore, that unless these proposed CRA regulations are
substantially strengthened, they will result in less, not more, com-
munity reinvestment in neighborhoods like the one that I live and
work in, in Brooklyn, New York.
In their current form, the regulations do not represent a net gain
over the status quo. And for some communities they represent a
loss.
While we have great respect for Comptroller Ludwig's efforts, we
have to say that we are deeply disappointed in the lack of political
will that the administration has displayed to date. Even more
banks are getting passing CRA grades under the new administra-
tion than under the Bush administration, and does anyone really
believe that 93 percent of the banks in our country are doing a sat-
isfactory or outstanding job of community reinvestment?
I know I don't believe it, and I don't think that most of the sub-
committee does either.
The administration's major bank initiatives, such as interstate
branching and regulatory consolidation, contain nothing for con-
sumers or communities, and the regulators are backpedaling from
the CRA plan in response to industry criticism. They are back-
pedaling so fast you would think you are watching a video in
rewind.
We have heard a lot about how the Fed is undermining CRA re-
form, and that is the truth. But there is no reason why the other
three agencies can't put out a strong regulation on their own. We
would rather have a strong regulation from three agencies than a
weaker CRA from all four.
Now, I have attached to my testimony today a briefing paper on
the new CRA regulations which lays out 16 specific changes that
are desperately needed. The regulations do have some positive
features, including the market-share methodology, public disclosure
of small business and underlending, and greater clarity about the
enforcement powers of the regulatory agencies. But these improve-
ments are overshadowed by the glaring fiaws of the proposals
which include, first, the ability of banks to buy out of CRA, through
investments in community development banks or other invest-
ments.
We cannot allow banks that redline to get satisfactory CRA rat-
ings by creating an investment loophole. We don't want a separate
48
and unequal banking system; one that is for the poor and minori-
ties and another one for everybody else.
The bottom line is, no bank that fails the lending test should get
a satisfactory rating, period.
Second, the implicit safe harbor provision. The new system still
relies on the subjective judgments of examiners. And examiners are
often wrong and ill-trained. My community should not pay the
price for regulatory failures. And I should add that while the ad-
ministration may deny that there is a safe harbor in the proposal,
the Fed thinks that the regulation does create a modified safe har-
bor. And the Fed decides most bank applications.
While the regulation does create a safe harbor for bankers, they
don't deal with the main problems that community groups have
identified with CRA over the years, mainly that the agencies, espe-
cially the Fed, deal with challenges in a hostile, closed, and secre-
tive manner. Merger applications almost never trigger public hear-
ings, comment periods, or denials, even when they involve many
States and the^ are protested by many community groups. Either
this portion of the rule should deal with the — ^how the agencies
deal with merger applications or it should be totally deleted.
Third, the exemption of small banks from CRA. These are the
very banks that have done the worst job at CRA over the years.
Fourth, the rule rewards gen trifi cation, which is a major problem
in cities like New York. Banks will actually get CRA credit for
loans to high-income people that come in and displace low- and
moderate-income families.
Fifth, despite appearances, the rule actually lowers the rate
given to racial discrimination in CRA exams. Wnile the regulators
will give a bank that is in violation of lending law an unsatisfac-
tory rating, the regulators never find such violations. And what
banker would be stupid enough not to correct such a problem be-
fore a CRA exam?
The rule should be changed to let examiners take into account
any evidence of discrimination such as disparities in rejection rates
for loans, low levels of applications from minorities or biased un-
derwriting guidelines.
Sixth, the proposal creates a secret appeals process for bankers
that is not available to the public.
Seventh, no guidance about strategic plans would be evaluated
by the regulators or how they would respond to community chal-
lenges to such a plan. The strategic plan could become a massive
loophole for savvy bankers, and we know they are pretty savvy.
ACORN would prefer that CRA be strengthened through the reg-
ulatory process; however, if the key problems raised by the pro-
posed rules aren't fixed in the final rule, we will not circle — we will
land and approach Congress with legislative proposals to undo any
significant damage that may have occurred.
Historically, Congress has done a much better job with CRA than
have the regulators, in part because Congress is a little bit more
in touch with our communities, and a little less cozy with the in-
dustry. Until the regulatory process runs its course, however, legis-
lation in this area would be counterproductive.
Again, Mr. Chairman and members of the subcommittee, I can-
not emphasize enough how important CRA is to our communities.
49
In New York alone, I have witnessed a revolution in the practices
of the industry with regard to home mortgage lending, resulting in
unprecedented opportunities for credit access and economic oppor-
tunity for thousands of low- and moderate-income families and they
have not lowered their lending standards one iota.
We hope that these oversight hearings will contribute to a
stronger and more effective CRA. We may need to call on your
leadership again, Mr. Chairman, if we find the regulations to still
be inadequate.
Thank you and that concludes my statement.
[The prepared statement of Ms. Bertha Lewis can be found in the
appendix.]
Chairman Kennedy. Thank you, Bertha. We appreciate your
comments this morning and look forward to working with you over
the course of the next few months as these regulations are, I hope,
refined.
Our final witness this morning is Gale Cincotta. She is the
cofounder and serves as executive director of the National Training
and Information Center. She has been a leader in the neighborhood
movement for many years. She was appointed by President Carter
to the National Commission on Neighborhoods where she chaired
the Reinvestment Task Force.
We have worked a little bit — not as much as maybe I had
hoped — in the past together, and I am looking forward to your tes-
timony and to working with you in the future.
Gale.
STATEMENT OF GALE CINCOTTA, EXECUTIVE DIRECTOR,
NATIONAL TRAINING AND INFORMATION CENTER
Ms. Cincotta. Thank you. I am very glad that you were able to
hold the hearings, and where I am going, all the flights are can-
celed, so we can stay here all that you want. Nobody wants to eat
lunch.
It is good that someone in the Congress is holding hearings on
what the regulators are trying to do. I commend Mr. Ludwig for
trying to do something, but in trving to pull together all the four
regulators, you worry that you will end up with tne lowest common
denominator rather than the highest standards of what should be
done to improve the CRA process.
When I look back on the history of community reinvestment, in
Chicago in 1972, we got a city ordinance that had business loan
and housing loan disclosure based on banks wanting to be a deposi-
tory of city funds. Somehow these banks have figured out a way
since 1972 to disclose housing and business loan data by census
tract.
Former Mayor Daley announced at our first conference, where
we pulled community groups together across the country, over
2,000 groups came together and formed National People's Action.
The main thrust that came out of that conference is that we should
go to Congress and get legislation so that all the financial institu-
tions across the country report to all the folks across the country
on where they are making their loans.
We wrote the bill on the church floor and on scratch pads. It was
called the Financial Institutions Reporting Act. Taking it to Con-
50
gress, we lost business loan disclosure by about one vote under
Senator Proxmire at that time. What we did win, was disclosure
of mortgage loans and that became the Home Mortgage Disclosure
Act.
We have spent all our time since then trying to get business loan
disclosure included. We have heard every argument on the books
of why you can't deal with it, why it can't be brought in at least
as Ludwig's proposal is talking about business loan disclosure.
Twenty-some years later, we will hang around to make sure we
get some form or it.
I thought — our thought is that, one, there should be no safe har-
bor for any of the financial institutions. In no way can they opt out
under any circumstances on what they do.
Going back a little bit, we don't think that — let me say it this
way. We feel all banks that disclose under home mortgage disclo-
sure should disclose business loan data. Requiring only banks that
have $250 million in assets is ludicrous. If all these banks have
been able to figure out how to disclose housing loans, they should
be able to disclose business loans.
In hearing Mr, Ludwig talk about his father and wanting a loan
so he could go to school to become a doctor, I thought about my
parents who nad a small restaurant, and the only loans that they
could get were from suppliers. So that if you are the person who
brought in the meat or the canned goods this was where you got
your loans.
When Congressman Kanjorski held hearings on the possibility of
a secondary market for business loans, what people there were tes-
tifying is that now it is not a loan that you get from a supplier.
The small business people have to have a credit card or put a sec-
ond mortgage on their home to get a loan. And when I talk about
small businesses, we are talking about small businesses — the gro-
cery stores, drug stores, cleaning establishments, and so forth.
So I think small business, by one definition, is very different
from what we think it is going to take to rebuild our neighborhoods
across the country.
One of the comments I heard here was that race data was not
going to be available, and what I would like to recommend, just
like now the home mortgage disclosure didn't give you race data,
but when you brought in the FIRREA data, we got the race data
on the housing loans through that. Probably, what happened is
that the Fed and the regulators used that to pull the public's access
to the data away for a year.
Where we usually got the HMDA data March 31, they said we
are going to mesh something that didn't mesh. The danger in doing
this together would be that the Feds, again who have tried to sabo-
tage everything year after year after year, would do it again; so I
would suggest that if we get the business loan disclosure like we
get the home mortgage disclosure — and under like FIRREA you
would get the race data and under orders that the Feds would let
the data on business loan and housing data come out on time — and
then separate that when they get this other data under your direc-
tion, so we don't get into the same problem we have. We still don't
get access to the data by March 31.
I know it is turning red over there.
51
Safe harbors, I think, should be absolutely out. Again, I think,
there should be bump-ups for investments. It is like again you are
trying — I think selling this to try to get everybody to agree to the
proposal. And you hear here, the banks aren't going to agree, even
with what Ludwig and the other regulators have agreed, you hear
the bank executives saying, we don't like it anyway. These are the
same folks that, when we tried to get business loan disclosure in
the State of Illinois, and had meetings with them over and over
again in our office — we went down to the hearings trying to come
up with some agreement — ^fought it, fought it and killed it.
So I think that, again, bump-ups for investments is very, very
scary because we need regular business loans coming into our
neignborhood. We don't need a buyout where somebody can dump
a couple of bucks in a CDFI and get rid of their obligation to pro-
vide direct loans in the neighborhood.
We need the banks to operate in our communities. We need the
trade associations maybe to stay out of the discussion. And maybe
you could get some bankers here who would tell you that with us,
and we can agree with some of the bankers, the regulators have
screwed up this process so bad. We don't want a room of paper; the
bankers don't want a room of paper. We want loans; hopefully, they
want loans. And I think Ludwig is trying to get it where you don't
have to have a bank have a room of paper. A room of paper does
us no good.
You have to have cross-training, all the regulators together, all
the safety and soundness, as well as the regulators that are looking
for discrimination on the data.
Chairman Kennedy. Well, I
Ms. CiNCOTTA. I will stop it there, but I know the time is — I
would like to talk longer. As you sit and listen to all the other
folks, you start writing yourself more notes.
[The prepared statement of Ms. Cincotta can be found in the
appendix.]
Chairman Kennedy. Gale, I do appreciate your testimony and
your directness.
I would like to deal with what I consider to be the heart of the
political problem that we are facing here as well and I think that
Ms. Jorde really makes what appears to sound like a very reason-
able case. It is especially relevant if you don't represent a district
like mine which is 40 percent black, brown, and yellow and very,
very poor, as Charles can tell you.
If you are a Member of Congress and you listen to Terry's testi-
mony, she says she comes from Cando, what a great name for a
town, Cando, North Dakota, and there are probably not a lot of
blacks, browns, and yellows in Cando, North Dakota. Maybe there
are a few Indians, but I don't know. She would say that they are
out there doing the best they can. They want to make loans. They
want to take care of everybody in the community. Terry, what is
your bank rated?
Ms. Jorde. As far as account rating?
Chairman Kennedy. No, your CRA rating.
Ms. Jorde. We just had a CRA exam in December and received
for the first time an outstanding rating.
52
Chairman Kennedy. So she has an outstanding rating and she
comes up here to Capitol Hill and says, hey, why should we have
to go through this? What is all this about? Isn't there some reduc-
tion in this paperwork? Can't we somehow deal with the fact that
in our particular part of the country this is just not an issue? Why
don't we let Gale and Charles speak to these questions.
Ms. CiNCOTTA. One of the things we talk about in the testimony
is that all the regulators should, and their enforcement officers,
should have the demographics, when you go into some area you
have the demographics of race and ethnicity, if they are farmers,
if they are built up cities and where other banks are located; what
is the story there and that all the regulators should have cross
training on that.
So if you go somewhere maybe in Minnesota or North Dakota
you are looking for farm loans, you are looking for other things
that you might not have in the city. I think that folks can be
trained to do that. We used to, all of our groups, years back, do this
kind of training. It was all stopped after the first couple of years.
But some sense of what are you walking into? What are the other
institutions? What are the credit needs of the area? Who is there?
So it might be that there are farmers in the Indian Nation as well
as some smaller urban areas. In Chicago, New York, it is another
story. But that has not
Chairman Kennedy. That is certainly not-
Ms. CiNCOTTA. You could do it, I could do it. The regulators.
Chairman Kennedy. I am agreeing with you. I think that is so
much more sophisticated than the way the regulatory structure
exists.
Ms. CiNCOTTA. They get paid a lot of money. There are hundreds
of them now. There is going to be more. How about we give them
some lessons in smarts? You travel around the country. We do. You
would know. I would know. Why can't they know if they really
wanted to know?
Chairman Kennedy. It is a good point. Charles.
Reverend Stith. Last year, Congressman, in April we held an
economic summit here in Washington, DC, and one of the partici-
pants on the panel that was a part of the deliberations was Bill
Brandon, the president of the ABA, and he raised the paperwork
issue over against the issue around reporting of race-based data for
small businesses. And we said to him at that time we would be
willing to sit down with bankers anywhere in this country to try
to come up with something that was mutually agreeable around
the issue of paperwork reduction. As Gale said earlier, we don't
want a room full of paper. They claim they don't want a room full
of paper. But I am going to tell you, I am beginning to believe the
argument is a straw man. We have not been able to get together
with folks to talk about this issue in a substantive way, and the
more I hear the concern, the more I am inclined to interpret it as
not a concern about a reduction in paperwork but rather a reduc-
tion in the responsibility to be held accountable on this issue.
Chairman Kennedy. Well, I certainly understand your frustra-
tion. Reverend Stith. I don't know if Mr. Culberson, might be will-
ing to address that. Were you just sort of parachuted in here by
53
the ABA? Any particular quality of yours that enabled you to get
this distinguished opportunity?
Mr. Culberson. Ajid the parachute landed. I am cochairman of
the Government Relations Council for the ABA.
Chairman Kennedy. I don't know if you might be willing to sit
with Reverend Stith and see if there might be some way to come
to grips with some of the concerns that both of you have raised. I
know he runs a very important organization that has been very in-
volved in these efforts. Maybe you could see whether or not there
might be some areas that you could agree upon.
Mr. Culberson. I would be more than happy to. I would like to
make a comment, if I may, on that subject.
Chairman Kennedy. Sure.
Mr. Culberson. Under FIRREA, the Fed was required to get re-
ports on small business and small farm lending and their first re-
port was just issued in December of this year. And in that report,
it states that there were 6,400 banks that made business loans, vir-
tually all the business loans, of under $100,000. That was $73 bil-
lion outstanding on September 30 of last year. But significantly, it
showed that there was a 6 percent increase in those loans in 1
year. So there were a lot of loans made in a year when the general
reports were that business loans were down.
They surmised in this report the reason for loans being down
was restructuring of large loans and that sort of thing, but, gen-
erally speaking, there were lots of small business loans.
Second, I would agree with Ms. Cincotta that I don't know what
the definition of a small business is either. I think the barber shop
and the beauty shop and the grocery store are small business loans
but those numbers seem to go up and down. There is no real fine
definition on it.
Finally, I would say that despite what others may think, bankers
are very serious about their communities. We make our living
there. That is what it is all about. Granted, we are not perfect, and
I think there have been some positive things that have come out.
We have learned some things that we need to do a better job, but
overall we are very concerned about our communities, about hous-
ing, about loans, and there are laws on the books about fair credit
and discrimination and those are serious laws and we take them
very seriously because there are some strong penalties for them.
Chairman Kennedy. Nobody questions the general commitment.
I think what Bertha was trying to say to you, Mr. Culberson, is
that the fact is that there is, we have noticed, not only in the busi-
ness community but certainly in the government, a lack of under-
Standing by, in many cases, a lot of wealthy white men to the
needs of poor minority men and women. Those issues sometimes
take an awakening to understand the kind of concerns that actu-
ally exist in a country that is as diverse as the United States. That
is where I think there is going to always be kind of a rub. I think
that what we are trying to do is say that it isn't going far enough.
When we look at the actual underlying data, there really is a sta-
tistical demonstration of prejudice that exists in these kinds of
loans. For instance, on the home mortgage loans, if you look at na-
tionwide data, if you look at city by city, if you look at census track
by census track, if you look at individuals of different racial or eth-
54
nic backgrounds coming out of the same neighborhoods with the
same income levels, there is a problem. What we are talking about
is how do we solve this.
I want to ask one last question. I have always been somewhat
confused about how to apply CRA to, say, the Beverly Hills Savings
Bank, if it even exists, or to, say, one very large bank in Boston
that operates as a trust company, and has very little opportunity
to make home mortgage loans or small business loans. It has al-
ways seemed to me to be reasonable to think that what we could
do is ask these institutions to adopt other communities, to partici-
pate in funds, loan funds and the like. It bangs up against the no-
tion that we want these banks to be in the business of making the
loans themselves and therefore we don't want to give them the op-
portunity of a buyout.
I am not so instinctively upset about a buyout. I am more wor-
ried about whether we get the loans into the community. I want
to throw it out and maybe, Allen, you can tell me what your con-
cerns are about doing buyouts in general? Also, what is your sense
about where you might draw the line?
Mr. FiSHBEiN. Well, let me answer that question this way, Chair-
man Kennedy. I think the proposal very intelligently attempts for
the first time to separate out how a wnolesale or special purpose
bank meets its CRA obligations compared to retail institutions and
I think that make a lot of sense and I think most communities
would agree that looking to banks that do not have retail presence,
do not collect consumer deposits or make consumer loans, to look
to their investment activity and community development financial
institutions and loan funds, to look at the way they help provide
services or buy loans as a secondary market for retail banks makes
a lot of sense.
Because we think that in the retail bank area, the emphasis real-
ly needs to continue to be on lending because what is at stake here
is putting an encouragement factor into retail banks, learning how
to lend in areas they are not serving very well. In some ways the
easiest thing for them to do is to write a check, to look at some
number at the end of the year and say, I have to pass my CRA
exam, how much is it going to cost me.
Chairman Kennedy. Is that so bad? Gale, maybe you could just
address that?
Ms. CiNCOTTA. I think you are talking about, we are talking
about banks according to their size. That all banks could buy out
with a little bit of money to a CDFI, who incidentally may or may
not work, or some other different thing, maybe a bank being in a
bank consortium where $50 million is needed, but it came together
with a lot of banks putting the money together so the banks are
going to get the money out.
But I am — we are really worried about buyout of where you want
the bank to be in the business of lending money. They are in that
business except where we live and who we represent. Somehow
they have figured out how to do this other stuff. So that trying to
get the bank and all their services to come in to deal with all the
folks who are pushing them to do that, sometimes as I said, special
loan pools. But what this reflects is they could just dump some
money and buy out of the process of dealing with the community
55
as part of regular business. Dealing with the community as a whole
not only on lending but services, and access in the neighborhood is
needed so you don't have a split community.
Chairman KENNEDY. I am interested
Ms. CiNCOTTA. There are those who don't know what a bank is.
Chairman Kennedy. I agree with you, Gale. When all is said and
done, if we have got 13,000 banks in this country with substantial
compliance. You have got a phenomenal number of them that are
getting these satisfactory and outstanding ratings, right?
Mr. FiSHBElN. Right.
Chairman Kennedy. You know they are not making the loans in
those neighborhoods. They are just not doing it.
Ms. CiNCOTTA. The regulators have never made them. Instead of
figuring out how to make them, they come here with another
buyout.
Chairman KENNEDY. I know. Do we really care whether or not
Mrs. McGullicuddy gets her loan from the Shawmut Bank versus
some other bank. I don't really care.
Ms. CiNCOTTA. Mr. Chairman, let me ask
Chairman Kennedy. The bank makes the loan, you know, puts
the money up and Ms. McGullicuddy ends up getting her loan if
she qualifies, right?
Ms. CiNCOTTA. No, you are talking about dual financing for peo-
ple, and it is the same argument we have been hearing on the pro-
posal on the CDFIs. We are talking in the city of Chicago where
the whole west side, for miles, and the whole south side don't have
financial institutions so somebody is going to anoint somebody or
put a CDFI there. We are now trying to get all the banks there,
downtown banks, and everybody dealing with those communities.
If you put — anoint a CDFI or a group or a credit union that may
be only $1 million, dump some money, wash your hands. That is
not how business should be done in the financial — work should be
done in our communities. It is getting very scary because what I
see with the city and these, by CDFI, and these buyouts, we are
talking about the war on poverty with a nickel and where we move
to getting the badges, their brains, their part of the planning in our
community, they are going to dump it on one of us nonprofits to
do and that is not the same thing. It is just really wrong.
I know you sound frustrated on this point but it is the same kind
of stuff, let them do their business which equates to we really
don't
Chairman Kennedy. If what you are saying worked. Gale, I
would be less inclined to sort of get my back up on it. I just don't
see that these banks are doing it.
Reverend Stith. Mr. Chairman?
Chairman KennI']DY. Yes.
Reverend Stith. I would — sometimes I believe it is possible to
work so hard that you don't even realize to the full extent of the
benefits of your labor, you know, as a result of the very aggressive
work that you have been doing in the city of Boston, the Bank of
Boston, for example, from 1991 to 1992 did three times the amount
of mortgage lending to African-Americans in 1992 than they did in
1991, and they wound up with a declination rate that was actually
a few percentage points higher for whites than it was for blacks.
56
Now, if you had asked the Bank of Boston before 1989 if that
were possible, they probably would have argued: One, that the
business wasn't there; two, get me some quick way to buy out of
this and let us go on doing with what we have been doing. And I
think that we cannot underestimate the very cutting edge work of
folks like yourself and other folks on this subcommittee and the
kind of initiatives that you put in to policy that really do begin to
make a difference. I mean, that is the backdrop against which we
are working. It is not as hopeless as it seemed 4 years ago because
we have seen that the — Governor Lindsey talked about the light
hand of government and I think he misspoke himself, yes, it has
been the light hand of the regulators but it has been the swift kick
of folks like yourself who helped to make a difference.
Ms. Lewis. Mr. Chairman, if I may make one brief comment. The
spirit of CRA was to integrate lending in every day operations of
all lending institutions. We cannot countenance in any way, shape,
or form a separate but unequal banking system. We are going to
create ghetto banks. The work that Reverend Stith has referred to
in the long term will benefit not only Mrs. McGullicuddy, but her
son and her son's son and her son's son's son for generations. We
have changed banking forever.
When you say that a retail bank who gets the same deposits
from these working class people does not have to directly lend back
to them, I think it is ludicrous and we destroy CRA entirely. Maybe
there is room for compromise. We need to talk about possibly
wholesale banks being able to do some investment but it must not
be allowed for retail banks. The long-term value of what we have
done and the committee and my organization and organizations
like Reverend Stith's in underwriting have made those results,
have made those results and have not — this is good business and
unless we support banks and say, you know what, it is not going
to happen in 1 year. It is not going to happen in 2 years but you
are going to see that low- and moderate-income people are the larg-
est market in this country. How can we therefore say, OK, folks,
let's put you over in one little category, unless the large and the
small banks that do retail business in our neighborhood change
their underwriting, unless the secondary market changes its under-
writing as well as the insurance industry. Then we are giving them
a safe way out. Then we are saying CRA doesn't matter.
Let me tell you something, I talk to bankers every day and you
know what? They think this is a done deal. Champagne is being
ordered. Cocktail parties are being planned. Bankers feel as though
now they are out of the cold ana community groups are feeling a
chill not only in the temperature outside but in underwriting. This
is happening. It is happening now. Because they are gearing up to
set up their ghetto banks. This is why we have got to fight it and
we have got to fight it vigorously.
Chairman Kennedy. Well, I want to say that I appreciate all of
the witnesses' testimony. If you have additional comments that you
might choose to make, please feel free to submit the additional
comments in writing. The record will be kept open for a period of
4 weeks from today so that those views might be heard.
I do think that this was a very helpful and active panel, and I
thank you all for coming forward. Thank you for agreeing to work
57
with us so we can fashion some good comments for the regulatory
changes that have been proposed, and good legislation if need be.
Have a great day.
Ms. CiNCOTTA. Could I make one last comment?
Chairman Kennedy. I am sure you will.
Ms. CiNCOTTA. We have — we have all fought through the Reagan
and Bush years to keep this and make it better. Our group, our or-
ganization has gotten over $12 billion in CRA agreements, that if
under the new administration we don't gain but we also lose and
it gets worse and our communities are tagged a certain way, this
would be unbelievable.
Chairman Kennedy. I hear you, kid.
Ms. JORDE. Mr. Chairman, may I just add 1 more minute. All I
got to tell you is what my bank rating is. I think it is really impor-
tant as we look at all of these issues and we consider the problems
with CRA, and apparently there have been some benefits, too, from
some of the testimony that we have heard, but that we be very con-
scious of how CRA will affect the communities, how banks will look
at going into low- and moderate-income areas.
In North Dakota, as you pointed out, in my community, we have
no choice; CRA is banking. It is pure and simple. We have three
out of five of our directors that serve on our Economic Development
Board. Our staff of 12 puts in hundreds of hours. Without that,
without our community being strong, we wouldn't be there either,
and if we encourage regulation or amendments that scare banks
away from being in those areas, for example in North Dakota in
the 1980's, a large Minneapolis-based holding company sold 27
banks located within agricultural areas because ag was not good at
that time. That didn't help the communities. It doesn't help the
farmers or the consumers in those areas. We have to make sure
that we remember that side of the story.
Chairman Kennedy. Thank you very much. I want to again
thank all of the witnesses for your testimony. You have a great day
now. The subcommittee is in recess.
[Whereupon, at 1:38 p.m., the hearing was adjourned.]
59
APPENDIX
February 8, 1994
60
JOtETM P KENNEDY IL MASMCMUSETTS. CHAJRUAM
HEMirr B. GONZALEZ. TEXAS
uuurr laROCCO. ioaho
LUIS V- GunERREZ. ILLINOIS
•OBrr L RUSH nUNOIS
LUCILLE nOVBALAUJUtO. CAUFORNIA
THOMAS M. BARRETT. WISCONSIN
aOABrTH FURSE. OREGON
NYDtA M VELAZQUEZ NEW YORK
ALBERT H VrrHH MARYLAND
CLEO FIELDS LOU'SLANA
MELVIN WATT HORTM CAROLINA
MAUhlCE HINCMEV. NEW YORK
PAUL E KANJOnSKI. PENNSYLVANIA
ELOYD M FLAKE. NfW YORK
MAXINE WATEHS CAUK)RNIA
CAROLYN B MALONEY. NEW YORK
KTEN OEUTSCK HORtOA
U.S. HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE
COMMITTEE ON BANKING. FINANCE AND URBAN AFFAIRS
ONE HUNDRED THIRD CONGRESS
ROOM 604 O'NEILL HOUSE OFFICE BUILDING
WASHINGTON, DC 206 IS
U/nED A. MCCANOUSS. CAUFOflNU
MICHAEL CASTU. DELAWARE
PETEfl KINO. NEW TORK
DEBORAH PRVCE. OHIO
JOHN UNDER. GEORGIA
JOE KNOLLENBERG MICHIGAN
DOUG BEREUTER NEBRASKA
CRAIG THOMAS. WTOMINO
RICK LA2I0. NEW YORK
NOD GRAMS. MINNESOTA
SPENCER BACHUS III. ALABAMA
RICHARD H BAKER. LOUISIANA
eeWAflO SANDERS. VERMONT
1203) ZaS-4BT2
Statement
by
Representative Joseph P. Kennedy II{D--MA)
February 8, 1994
BEFORE I BEGIN A FORMAL OPENING STATEMENT, I'D LIKE TO
ACKNOWLEDGE FOR THE RECORD THAT THE RANKING MEMBER OF THIS
SUBCOMMITTEE, MR. MCCANDLESS, HAS ANNOUNCED HIS RETIREMENT AT THE
END OF THE YEAR. I KNOW I SPEAK FOR MEMBERS ON BOTH SIDES OF THE
AISLE IN SAYING THAT IT'S BEEN A PLEASURE WORKING WITH YOU, AL.
THOUGH WE MAY NOT HAVE AGREED ON MANY ISSUES -- IN FACT, WE MAY NOT
HAVE AGREED ON ANY ISSUES! -- I HAVE REALLY ENJOYED OUR
ASSOCIATION, AND APPRECIATE YOUR FAIRNESS AND WILLINGNESS TO MOVE
THE COMMITTEE PROCESS FORWARD. I HOPE THAT WE'LL BE ABLE TO
CONTINUE DOING THAT THIS YEAR, AND I WISH YOU A LONG AND HAPPY
RETIREMENT.
THIS MORNING, THE SUBCOMMITTEE CONSIDERS THE ADMINISTRATION'S
PROPOSAL TO REFORM THE COMMUNITY REINVESTMENT ACT. THIS PROPOSAL
WAS PUBLICLY UNVEILED IN DECEMBER, FOLLOWING PRESIDENT CLINTON'S
DIRECTIVE LAST YEAR TO OVERHAUL THE REGULATIONS GOVERNING CRA. THE
PRESIDENT'S MANDATE WAS SIMPLE, STRAIGHTFORWARD, AND ONE THAT ALL
SIDES OF THE ISSUE AGREE WITH: DECREASE PAPERWORK, AND INCREASE
PERFORMAIICE .
HOWEVER, THIS PROPOSAL ILLUSTRATES ONE OF THE CENTRAL TRUTHS
OF WASHINGTON: IT'S EASY TO POINT TO THE END ZONE, IT'S ANOTHER
THING TO PUT THE BALL THERE. THE ADMINSTRATION' S CRA PROPOSAL HAS
GENERATED INTENSE INTEREST AND SCRUTINY FROM ALL CORNERS, INCLUDING
LENDERS, COMMUNITY-BASED ORGANIZATIONS, THE CONGRESS, AND EVEN THE
GENERAL ACCOUNTING OFFICE. THAT'S UNDERSTANDABLE, BECAUSE -- EVEN
THOUGH CRA HAS GENERATED OVER $3 BILLION IN LOANS TO LOW- AND
MODERATE -INCOME COMMUNITIES OVER THE YEARS -- IT'S A LAW THAT HAS
BEEN POORLY ENFORCED.
COMPTROLLER LUDWIG AND HIS COLLEAGUES DESERVE CREDIT FOR THE
EFFORT THEY HAVE MADE TO SATISFY THE PRESIDENT'S TWIN GOALS OF
IMPROVED PERFORMANCE AND REDUCED PAPERWORK. THEY ARE THE
REGULATORY EQUIVALENT OF THE "FLYING WALLENDAS", THE LEGENDARY HIGH
WIRE PERFORMERS. HERE, THEY ARE CERTAINLY WALKING A TIGHTROPE IN
TRYING TO MEET THE PRESIDENT'S GOALS, BECAUSE THE CONSEQUENCES OF
FAILURE ARE SEVERE. IF THEY SLIP TO THE SIDE OF REDUCING
PAPERWORK, THEY HARM THE GOAL OF INCREASING PERFORMANCE, AND VICE
VERSA.
61
The proposal they have submitted for public comment gets them
part of the way across the wire, but not clear to the other side.
while it contains several commendable features, it also raises
serious questions that make it uncertain whether this proposal will
fulfil its objective. let's take a few examples:
first, the new "investment test" is a step forward insofar as
it rewards lenders -- especially wholesale and special purpose
lenders -- who invest in cdc's and other activities that benefit
low- and moderate- income communities. • however, this test also
allows a bank's overall cra rating to be increased by two levels if
it makes a lot of investments. that means that, if a bank does a
poor job of lending to local communities, it can still get an
outstanding cra rating just by writing a check. this provision may
create an incentive in lenders to comply with cra not by making new
loans, but by "buying" a good rating. although i think it's a good
thing to encourage investments, we shouldn't be doing that at the
risk of discouraging lending.
second, the proposal to collect data from larger lenders on
their business lending is another step in the right direction. as
we have seen with hmda, lending data sheds important light on
whether and how a lender is meeting community credit needs,
however, this proposal does not collect data on the race and
ethnicity of borrowers. that information is essential to ensure
that business loans are being made to community members. as the
proposal is currently written, it could benefit residents of
affluent communities rather than those of low- and moderate- income
areas -- which is what cra requires.
third, the value of this new data could be undermined by
errors. a recent g.a.o. survey indicates that as much as 30 to 40
percent of data reported under hmda is inaccurate. despite this
huge error rate, though, the agencies have indicated tq the g.a.o.
that they do not plan to verify the accuracy of the new business
lending data that will be required under the proposal. that
creates a huge incentive on the part of lenders to be careless, and
in the long run could make this data practically useless.
fourth, the administration proposes less stringent
requirements for lenders with less than $250 million in assets,
these institutions -- which make up about 75% of the country's
lenders -- would be exempt from the 3 performance -based
requirements and the new data reporting requirements. instead,
they would be presumed to have a satisfactory rating if they met 6
standards that most well-run lenders should meet anyway. i believe
that too many examiners have unfairly asked smaller lenders to
produce paperwork comparable to larger lenders. that practice
should stop. however, i question the wisdom of effectively
removing a large number of lenders from close supervision by the
agencies. all the evidence shows that smaller institutions are
just as likely --if not more likely --to have unsatisfactory cra
ratings as larger institutions. these institutions need more
appropriate supervision, not less supervision.
62
FIFTH, AND FINALLY, THESE REGULATIONS BEYOND A DOUBT MOVE CRA
ENFORCEMENT MORE IN THE DIRECTION OF PERFORMANCE. THAT IS A
POSITIVE CHANGE. HOWEVER, THE G.A.O. HAS STATED THAT THE PROPOSED
REGULATIONS WILL REQUIRE MORE AND BETTER TRAINED EXAMINERS TO
ENFORCE THEM APPROPRIATELY. I AM CONCERNED THAT THE AGENCIES WILL
NOT HAVE A CAPABLE FORCE OF EXAMINERS IN PLACE WHEN THESE
REGULATIONS HIT THE STREET.
THESE ARE JUST SEVERAL OF THE AREAS THAT I BELIEVE NEED
FURTHER CONSIDERATION IF THESE REGULATIONS ARE GOING TO ENSURE THAT
CRA IS FINALLY GIVEN THE PRIORITY IT DESERVES. I LOOK FORWARD TO
WORKING WITH THE REGULATORS, AND OTHER WITNESSES, WHO ARE WITH US
TODAY TO GET THE JOB DONE, AND PUT THE BALL INTO THE END ZONE.
63
BOBBY L RUSH CONGRESS OF THE UNITED STATES __^
.ST DISTRICT HOUSE OF REPRESENTATIVES banking, finance and urban «fa,rs
W^SHtNGTON, D.C. 20515 government operations
OPENING STATEMENT FOR CONGRESSMAN BOBBY L. RUSH
FOR HOUSE BANKING SUBCOMMITTEE ON CONSUMER CREDIT AND
INSURANCE HEARING ON THE COMMUNITY REINVESTMENT ACT
(February 8, 1994)
Thank you. I am pleased that Chairman Kennedy has convened
this hearing this morning on the recently-announced Clinton
Administration regulatory revisions to the Community
Reinvestment Act. As I don't need to tell those in this room,
making certain that these revisions are done well is extremely
critical: although there were some of us that have worked hard
on the Community Development Financial Institutions bill and
look forward to the President's signing it into law this Spring, the
potential for funding genuine community development that the
CRA effort contains almost boggles the mind in comparison to
that of CDFI. But first, tiiere are some mine fields to negotiate:
as is frequently the case with such complicated policy matters,
virtually no one is happy with the regulations as proposed. For
example, some community and consumer organizations are
concerned that the level of scrutiny that will be afforded to
institutions with assets of less thanr $250 million is not sufficient,
WASHINGTON OFFICE: CITY OFFICE: SUBURBAN OFFICE:
1726 LONGWOHTM H.O.B, 666 E. 79TH STREET 9730 S. WESTERN AVENUE .
WASHINGTON, DC 20516 CHICAGO. IL 60619 SUITE 237
12021 226-W72 (3121 224-6600 EVERGREEN PARK, IL 60842
— rTOei 422-4066
64
and many banks feel that the disclosure provisions of the
regulations will be overly burdensome. Time will tell. I look
forward to working with Chairmen Kennedy and Gonzalez, my
House Banking Committee colleagues, the banking industry, and
community and consumer representatives to give CRA reform the
careful consideration and attention that it is due. Thank you.
65
For Release Upon Delivery
10:00 A.M., February 8, 1994
TESTIMONY OF
EUGENE A. LUDWIG
COMPTROLLER OF THE CURRENCY
Before the
SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE
of the
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
of the
U. S. HOUSE OF REPRESENTATIVES
February 8, 1994
66
Mr. Chairman, and members of the Subcommittee, I welcome this opportunity to
discuss the efforts of the Office of the Comptroller of the Currency—in cooperation with the
Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Board of
Governors of the Federal Reserve System~to change fundamentally how we evaluate the
performance of banks and thrifts under the Community Reinvestment Act (CRA).
The CRA reform effort is an important part of the Administration's efforts to promote
increased credit availability and economic growth. In the past year, the bank and thrift
supervisory agencies have worked diligently to create a regulatory environment in which banks
and thrifts can apply their skills and judgment to the task of extending credit to creditworthy
borrowers, wherever they may be located. Initiatives taken by the banking agencies-such as
the creation of a new low-documentation program for small business loans, the proposal to
reconsider appraisal requirements for real estate loans, and the instimtion of a formal process
for appealing examination decisions-have already begun to affect the flow of credit to
households and businesses. But we need to take additional steps to ensure that the benefits of
greater credit availability are shared by all segments of society. By reforming how we assess
bank performance under the CRA, I believe that we can charmel billions of dollars of new
credit into America's distressed conmiunities.
I want to emphasize that the Administration does not regard the CRA program as a
hand-out for distressed communities, and we are not asking banks and thrifts to make bad
loans. I have learned in the course of our efforts to reform the CRA that there are numerous
opportunities to make good, profitable loans in all parts of the community, including low- and
moderate-income areas. One of the most encouraging developments to emerge from the CRA
is the involvement of local community organizations in identifying creditworthy borrowers in
low- and moderate-income neighborhoods and linking them with sources of credit. Such
organizations also play a key role in promoting conmiunity development.
Background
The Community Reinvestment Act was enacted in 1977 to prevent redlining and to
promote affirmative efforts by banks and thrifts to help meet the credit needs of all segments
of their communities, including low- and moderate-income neighborhoods. In many respects,
the CRA is an extension and clarification of the long-standing expectation that banks will serve
the credit needs of their conmiunities. The CRA-and the regulations issued under the CRA-
require federal regulators to assess the record of each bank and thrift in helping to meet the
credit needs of all portions of its community, including low- and moderate-income
neighborhoods, and to take that record into account when considering corporate applications
for charters or for approval of mergers, acquisitions, branch openings, or office relocations.
The CRA provides a framework in which depository institutions and community groups
can work together to promote the availability of credit and other banking services to
underserved communities. Under the impetus of the CRA, many banks and thrifts have
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2
opened new branches, provided expanded services, adopted more flexible loan underwriting
standards, and made substantial commitments to state and local governments or community
groups to increase lending to all segments of society.
Despite these positive results, the current CRA process lacks credibility with the
banking industry and with representatives of the communities that the Act is intended to
benefit. Community and other groups complain that many communities are not adequately
served because the CRA evaluation process does not focus enough on actual lending,
investments, and services provided. At the same time, bankers complain that the current
implementation of the CRA results in excessive burden relative to the benefits that the system
produces.
It was against this backdrop of broad dissatisfaction with the current approach to CRA
that President Clinton, in July of last year, challenged the federal regulators of banks and
thrifts to make fundamental changes in the way we administer the CRA. The President
established several broad principles to guide the agencies' reform efforts. He called for CRA
assessment standards that are based more on measurable performance, less burdensome CRA
examinations that are more consistent and even-handed, the elimination of unnecessary
documentation requirements, better public access to information on CRA evaluations, and
tougher actions against institutions with persistently poor CRA performance.
To ensure that CRA reform addressed the needs of the banking industry, community
groups, and other key sectors of the conmiunity, the federal banking agencies held a series of
seven public hearings last year at locations around the country. These hearings represent the
most extensive effort on the part of the agencies to solicit public views on community
reinvestment since the CRA was enacted in 1977. The hearings were attended by the heads
of the OCC, OTS, and FDIC, and by Federal Reserve Governor Lindsey. This unusually
high-level representation at the hearings reflects the great importance that the agencies have
accorded this effort. I think I can speak for all four of us when I say that we learned a great
deal about the problems facing low- and moderate-income areas, and came away with a unique
appreciation for the issues involved in CRA reform.
Following the public hearings, the agency heads and Governor Lindsey worked closely
together to come up with the proposal that was announced jointly by the federal banking
agencies. The proposal is designed to meet the objectives established by the President. It
emphasizes results rather than process, and is intended to ensure that all segments of our
society have access to credit and other financial ^services provided by banks and thrifts.
The agencies published the proposed rule in the Federal Register on December 21st.
We still have work to do, however, before we can put a final rule in place. The comment
period was originally scheduled to close on February 24th, but because of the considerable
public interest in the rule, the significance of the changes we are proposing, and the fact that
the proposal was published shortly before the Christmas and New Year holidays, the agencies
agreed to extend the deadline for comments by 30 days, to March 24th.
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I cannot predict at this point exactly what the provisions of the final rule will be. That
will be determined by the rulemaking process, after the agencies have had the opportunity to
review all of the public conmients we receive. I am committed to accomplishing that as
expeditiously as possible, and it is my expectation that we will publish a final rule in the late
spring.
The agencies propose that the data collection required by the proposed rule would go
into effect on July 1, 1994, with larger instimtions having to report data for the last six months
of 1994 by January 31, 1995. Evaluations under the new standards would become mandatory
after July 1, 1995. Until then, banks would be able choose whether they will be evaluated
under the new rule or under the old CRA standards. This proposed schedule assumes, of
course, that a final rule is published in the spring. We will modify this schedule if the
rulemaking process takes longer to complete.
I must underscore that our efforts will not produce a panacea. Reform of CRA
regulations and examination procedures cannot solve all the problems of distressed rural and
urban communities, nor answer all the complaints of bankers about regulatory burden. But
I am confident that at the end of the process we can have a CRA evaluation system that is far
superior to the one we currently use.
Balancing Competing Interests
The proposed rule published on December 21st is the result of five months of
consultation and deliberation. The four federal banking agencies held seven public hearings,
at which we heard from more than 250 witnesses representing community groups, small
businesses, financial institutions, local governments, and other individuals and organizations.
Another 50 persons submitted written statements for the record. We also walked through
South Central Los Angeles and a predominantly minority neighborhood in New York City to
see for ourselves how banks were serving their communities, and to talk with residents. V/e
spoke with representatives of the Navajo nation, with officials from large and small banks, and
with poor people in rural North Carolina.
Although those we heard from held diverse viewpoints, there were many areas of
agreement. Our efforts focused on building upon those areas of agreement. For example,
most of those who commented-bankers, government officials, and leaders of community -based
organizations— called for a system that evaluated performance without resorting to a formula-
driven approach. They emphasized that CRA evaluations should focus primarily on lending,
particularly to low- and moderate income individuals, small farms and businesses, and
affordable housing and economic development organizations, but they stressed that an
institution's lending record should be viewed in the context of its business strategy, its
financial condition, and the credit needs of the conmiunity in which it operates. Expressing
a closely related point of view, many small institutions noted that the documentation
requirements of the current CRA regulation consume resources that could be better used
providing credit and services to their conununities.
G9
Many coramenters expressed interest in enabling financial institutions to work with
community representatives to develop strategic plans, with measurable goals, for meeting their
CRA obligations. Some wanted the CRA process to center upon enforceable agreements
between community groups and financial institutions, while others suggested that the CRA
process should center on enforceable agreements between institutions and their regulators.
A number of commenters noted that implementation of a meaningful performance-based
evaluation process would require the collection of data on the geographic distribution of small
business and consumer loans. Other witnesses, particularly those who represented smaller
institutions, noted the regulatory burden that institutions currently bear, and urged that the
regulation mandate no additional reporting of loans.
Many financial institutions and some community groups expressed the view that the
current system focuses too much on punishing institutions that fail to help meet the needs of
their communities. They suggested that the revised regulation should focus more on providing
incentives for institutions that meet the credit and service needs of their communities. Outside
the banking and thrift industries, however, there was strong opposition to establishing a "safe
harbor" from protests based on the regulator's evaluation of an institution's CRA performance.
The agencies tried to address many of these concerns in developing the proposed rule.
The proposal would not allocate credit, or require any institution, in any community, to
provide any set level of lending, service, or investments to any constituency. Rather, it would
base CRA evaluations more on objective measures of a bank's lending, service, and investment
activities, while continuing to evaluate each institution's record in light of its business strategy
and conditions in its community. It contains no "safe harbor," but provides incentives for
strong CRA performance by specifying how the agencies will consider CRA performance when
deciding an application, and by establishing that institutions whose performance is in
substantial noncompliance with the requirements of the law may be subject to enforcement
action.
We believe the proposed rule would make significant reductions in regulatory burden
for most institutions. The proposal is longer, in terms of pages of text, than the current CRA
regulation, but its overall effect is to simplify the CRA process. The proposal would reduce
the nimiber of CRA evaluation factors from 12 to three. Moreover, by replacing subjective
factors with measurable, objective standards, the proposal would reduce regulatory uncertainty .
Finally, the proposal would tailor CRA requirements to the circimistances of different types
of institutions. While this adds to the overall length of the regulation, it means that any given
institution would have to deal only with those sections of the regulation that would apply to
it.
The proposal would require data reporting on loans to small businesses and consumers,
but sr>iller institutions could choose to be evaluated under streamlined procedures that would
not r- ^aire them to make these reports. Furthermore, the proposal would eliminate the need
for banks and thrifts to prepare detailed CRA statements, to review those statements annually
70
and note those reviews in the minutes of board meetings, to justify the basis for their
community delineations, to explain the methods they used to ascertain community credit needs,
or to maintain voluminous files documenting their marketing efforts in low- and moderate-
income areas. The resources formerly devoted to such procedural requirements would be
available for strengthening capital and making new loans.
I do not mean to suggest that the proposal would impose no regulatory burden. The
agencies need some information on banks' and thrifts' lending, community investments, and
other services provided to low- and moderate-income areas in order to refocus CRA
evaluations on objective measures of performance . As a result, some institutions would not
see as great a reduction in regulatory burden as others. The regulatory burdens they did bear,
however, would be more directly linked to the provision of banking services to their
communities. The unproductive burden associated with the current process- which bases CRA
evaluations largely on documentation— would be eliminated.
Principal Features of the Proposed System
Performance-based evaluations . The regulatory agencies propose to replace the twelve
assessment factors currently used to evaluate compliance with the CRA with a performance-
based evaluation system. The current assessment factors are almost entirely subjective, and
unduly burdensome. Under the proposed system, depository institutions would be assessed on
results, measured in objective terms: the loans they provide, the investments they make, and
the services they offer in their communities.
Flexibility . The agencies have not proposed to require any set level of lending to any
particular community or constituency. The agencies wish to avoid a formulaic approach to
CRA reform, which could have the effect of forcing institutions into a common mold. Where
the proposal does use specific tests or benchmarks, they take the form of rebuttable
presumptions that would permit each institution to be evaluated on the basis of it own
situation.
The proposal is designed to recognize the diversity that characterizes the banking and
thrift sectors. In general, institutions would be evaluated on the basis of the product lines they
offer to their customers in the normal course of business, so in no way would the proposed
regulation require banks and thrifts to offer specific products or to make loans or investments
that are inconsistent with safety and soundness.
Lending Test . The agencies propose to evaluate retail institutions primarily on the basis
of the loans they make. The evaluation would be based on objective measures of the
institution's activities: the nimiber, dollar volume, and geographic distribution of its loans.
The agencies would use this information to apply a lending test, which institutions could rebut
where circumstances warranted. Lenders would receive extra credit for making complex or
innovative loans or loans that serve particularly pressing community needs.
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The lending test would include two main components. The first component would, in
effect, evaluate an institution's lending record in low- and moderate-income areas against the
lending records of its competitors. It would do so by comparing the institution's market share
of reportable loans in low- and moderate-income areas within its service area with its share
of such loans in the rest of its service area. (Reportable loans would include home mortgage,
consumer, small business, and small farm loans.)
The second component of the lending test would evaluate the institution's record in
isolation, by comparing the volume and number of reportable loans that a bank or thrift made
in low- and moderate-income areas in its service area with the volume and number of such
loans that it made throughout its service area, or, alternatively, by examining the geographic
distribution of such loans across the low- and moderate-income areas in the instimtion's service
area.
By looking at both components, the agencies hope to ensure that favorable ratings under
the lending test would reflect a reasonable distribution of loans among low-, moderate-, and
high-income neighborhoods in the bank's service area, while at the same time avoiding the
possibility of unfairly penalizing a bank that-despite strong efforts in low- and moderate-
income neighborhoods—had a relatively small market share simply because it had more
competitors there than elsewhere in its service area. And I would like to emphasize again that
the results of the lending test-like the other tests contained in the proposal-could be rebutted
where circumstances warranted. For example, a bank that did not make as many loans in low-
and moderate-income areas as its competitors did might still pass the lending test if its lending
record compared favorably with other institutions on a regional or national basis.
The agencies propose to credit to a bank or thrift institution— at its option— its share of
the loans made by non-bank entities in which the bank or thrift has invested or participated.
Such entities could include consortia of banks or thrifts, community development enterprises
of various kinds, or other organizations that make loans in the bank's or thrift's service area.
The ft-action of the entity's loans for which a given bank or thrift received credit would usually
be equal to the bank's or thrift's share of the entity's overall funding.
Investment Test . The agencies propose to evaluate wholesale and limited-purpose
institutions-defined as institutions without a significant volume of home mortgage loans,
consumer loans, or loans to small businesses and small farms-primarily on the basis of
investments they make that benefit low- and n^oderate-income neighborhoods or individuals
within the institution's service area. The agencies would base their evaluation of an
institution's investment performance on the amount of assets— relative to the institution's risk-
based capital-that it devoted to qualifying investments. Qualifying investments would include
investments in organizations, consortia, and initiatives that foster community lending,
community development, or affordable housing; and investments in state and local government
agency housing or revenue bonds that are specifically aimed at helping low- and moderate-
income communities and individuals.
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The focus of the investment test would be the effect of the investments on the
community rather than the investment per se. Investments would not be credited under the
test unless they had a demonstrable impact on the provision of credit, community development
projects, or services benefiting low- and moderate-income individuals or areas. Regulators
could adjust an institution's rating under the investment test to take into account investments
that are particularly innovative or that meet special needs. If an institution made an investment
that indirectly generated lending, the institution could receive credit for the indirect lending
under the lending test, and credit for the rest of the investment under the investment test.
Retail institutions would also be evaluated on the basis of their investment performance.
Those whose investment performance was found to be outstanding would have their "base"
CRA rating, reflecting their performance under the lending test, raised by two levels on the
five-level scale. Those whose investment performance was the higher of the two satisfactory
ratings would have their base CRA rating raised by one level. The absence of investments,
however, would not penalize an institution. Although we believe that suitable investments can
complement an institution's lending record, the CRA does not obligate banks and thrifts to
make community development investments.
Service Test . The agencies propose to evaluate all institutions on the basis of the
services they provide in low- and moderate-income neighborhoods. Evaluations of retail
institutions would focus on the accessibility of branches, while the evaluation of wholesale and
limited-purpose institutions would focus on their support for services that promote credit
availability in low- and moderate-income areas, such as credit counseling, low-cost or
"lifeline" checking accounts, financial planning, home ownership counseling, and loan
packaging that assists small and minority businesses. An institution's performance under the
service test could boost its overall CRA rating in the case of outstanding service, and reduce
its rating in the case of substantial noncompliance in service.
The proposed evaluation system has been designed so that an institution's CRA rating
would reflect its performance in all the conmiunities in which it operates. For banks and
thrifts that do business in more than one community, the agencies propose to evaluate all of
the institution's loan data, and to conduct full lending and service tests in a sample of its
service areas. The agencies would then assign separate composite CRA ratings for each area,
with the bank's or thrift's overall rating reflecting its performance in all areas studied.
In the view of the agencies, a financial institution is not serving its entire community
if it is discriminating illegally. The proposal would therefore establish a rebuttable
presumption that an instimtion would receive a composite rating of less than satisfactory if the
institution had committed an isolated act of illegal discrimination of which it had knowledge,
and that it had not corrected or was not in the process of correcting; or if it had engaged in
a pattern or practice of illegal discrimination that it had not corrected. That presumption
could be rebutted in the case of technical or de minimis violations.
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Data on lending patterns . The agencies propose to require all banks and thrifts (except
those that use the streamlined assessment method described below) to collect and report to
their supervisor data on the geographic distribution of their home mortgage, consumer, small
business, and small farm loans. This would be in addition to data already collected unaer the
Home Mortgage Disclosure Act (HMD A) and the agencies' fair housing data collection
requirements. The reports would include data on written applications received by the
instimtion, denials of applications, loan originations, and loan purchases. These data would
form the basis of the agencies' evaluations under the lending test, and would be made available
to the public by the individual lenders and the agencies. The Federal Reserve Board would
continue to make available to the public the information that institutions collect under HMDA.
Alternative assessment method for smaller ban ks and thrifts. In the course of the public
hearings that preceded the development of the proposal, representatives of many small
instimtions urged the regulators to exempt small banks and thrifts from CRA assessments. The
agencies have not proposed to do so because such an exemption could result in the neglect of
the credit needs of communities served by smaller banks and thrifts, and because we do not
believe that such an exemption is permitted by the statute. The agencies are proposir:,
however, to use their discretion under the CRA to offer small banks and thr; ^--defined ^s
independent banks and thrifts with total assets of under $250 million, or members of a holding
company with total banking and thrift assets of less than $250 million--the option of a
streamlined assessment method. Smaller institutions that chose to be assessed under the
streamlined method would not have to comply with the proposed data collection requirements
necessary to apply the general assessment method.
The proposed streamlined process is designed to measure how well smaller banks and
thrifts are serving the needs of their entire local communities. The primary basis for a small
institution's rating would be an evaluation of its lending record. As a general rule, an
institution would receive a satisfactory or better CRA rating if it had a reasonable loan-to-
deposit ratio; made most of its loans locally; made a variety of loans across income levels; and
did not have any bona-fide conmiunity complaints or fair lending violations.
In addition, at the option of the institution, the regulator would evaluate the institution's
record of making investments that result in the provision of credit and financial services to
low- and moderate income areas within their communities, and its record of providing
branches, remote service facilities, automated teller machines, and other services that enhance
credit availability or otherwise meet the need? of low- and moderate-income persons in its
service area. Strong performance in these areas could raise an instimtion' s rating from
satisfactory to outstanding.
The regulator would also seek the views of community members, particularly when
there are complaints about the institution; and review the findings of the instimtion's most
recent fair lending examination. In the event that a small institution failed to meet or exceed
the standards for a satisfactory rating, its regulator would conduct a more extensive examin-
ation of its loan-to-deposit ratio, its record of lending to its local conmiunity, and its loan mix.
74
In order to make it easier for small institutions to use these streamlined procedures, the
agencies propose that a loan-to-deposit ratio of 60 percent or more would be presumed to
satisfy the test for a reasonable loan-to-deposit ratio. The 60 percent ratio would not be a
requirement or a bright-line test that an institution would either pass or fail. Rather, it is
intended as a helpful presumption that would provide a simplified method for demonstrating
compliance for the roughly half of community banks whose ratio exceeds 60 percent. The
underlying requirement would be the same for all institutions using the streamlined procedures:
those above and below the 60 percent figure. They would have to have a reasonable loan-to-
deposit ratio given their size, their financial condition, and the credit needs of their
communities. An institution in a community where there is insufficient loan demand to reach
a 60 percent ratio would need only to have a ratio that is reasonable given the level of
demand.
Strategic plan alternative . Under the proposed rule, any institution, rather than being
assessed under the lending, investment, and services tests, could submit for agency approval
a plan with measurable goals against which the agency would assess the instimtion's
subsequent CRA performance. The proposal would not specifically require institutions to
involve community groups and other members of the public in the formulation of their
strategic plans, but we would certainly encourage them to do so. An institution would be
required to disclose its plan publicly before it is evaluated by its regulator, and the regulator
would consider public comments in its assessment of a submitted plan.
If the agency approved the plan, it would base its subsequent CRA reviews of that
institution on whether it met or exceeded the goals specified in the plan. If the institution
failed to meet the preponderance of the measurable goals set forth in the plan, its performance
would be evaluated under the lending, service, and investment tests (or, for eligible
institutions, the small bank assessment method). Assessment under an approved plan would
not relieve an institution from its obligation to report data on the geographic distribution of
loans.
Examination and enforcement . The federal regulators of banks and thrifts would
continue to consider CRA performance in evaluating applications to charter a bank or thrift,
to obtain deposit insurance, to establish or relocate a branch office or ATM, or to acquire
another insured depository institution or its assets. Under the proposal, as today, the CRA
examination rating would often be the most important factor in assessing CRA performance,
but it would not be the exclusive consideration, and could be overridden by other factors, such
as information collected through public comment, legitimate complaints, and fair lending
violations.
Under the proposal, a rating of "outstanding" would generally be consistent with
approval of the application, and would receive extra weight in reviewing the application. A
rating of "satisfactory" would also be consistent with approval, but it would not receive extra
weight. A rating of "needs to improve" would generally be an adverse factor in the CRA
review of the application, and in the absence of demonstrated improvement in the bank's CRA
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performance or other countervailing factors would generally result in conditional approval or
denial of the application. A rating of "substantial noncompliance" would generally result in
denial of the application.
The agencies recognize, however, that the corporate application process alone is not
sufficient to ensure effective enforcement action against institutions that fail to satisfy their
CRA responsibilities. It is only effective for institutions that face branch opening or relocation
decisions or that are active in mergers and acquisitions. The agencies therefore propose that
an institution that received a composite rating of "substantial noncompliance" would be subject
to formal and informal enforcement measures authorized by 12. U.S.C. 1818.
In addition to considering CRA performance in the application process and exercising
their general enforcement powers, the agencies plan to use the frequency of CRA examinations
to provide incentives for strong performance. Institutions with ratings of "outstanding" will
generally be examined less frequently than the average institution, while institutions with less
than satisfactory ratings will generally be examined more frequently. Of course, other factors,
such as an instimtion's financial condition, will also affect the frequency of examinations, and
in no case do we plan to examine banks less frequently than once every two years. The
agencies believe that linking examination frequency to performance makes sense not only
because it provides an incentive for strong performance, but also because it reflects a sensible
allocation of the agencies' limited examination resources.
A ppeals . The subcommittee's letter of invitation inquired about the process that
depository institutions will be able to use to appeal their CRA ratings. Disagreements between
bankers and bank examiners are a normal part of the supervisory process. In most cases, such
disagreements can be resolved through informal discussions. When they cannot, however,
banks have a right to a fair prompt review of the disagreement.
On March 10th of last year, the federal banking agencies announced that they would
be overhauling their appeals processes to ensure that appeals are handled fairly and
expeditiously, and do not result in retribution against either the bank or the examiner. The
OCC's new review process for banker appeals, which the agency announced on June 10,
encourages bankers to seek a review of any disputed examination decision, establishes specific
time limits for action on appeals, and creates a new Ombudsman position to oversee those
reviews.
Under the new process, national banks may appeal any examination findings to the
Ombudsman, including CRA ratings and other results of CRA examinations. (The only
exception to this rule is for a limited set of matters where the appeal could adversely affect
safety and soundness, such as the appointment of receivers and conservators; preliminary
examination conclusions conmiunicated to the national bank prior to the issuance of written
communication from the OCC, such as a final Report of Examination; and enforcement-related
matters.) Since these new appeal procedures apply to CRA appeals, the banking agencies did
not see any need to include separate appeal procedures in the proposed CRA rule.
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Conclusions
The Administration's CRA proposal attempts to strike a reasonable balance between
improving the availability of banking services in underserved urban and rural communities,
and minimizing regulatory burdens on the banking industry. Consequently, both community
groups and bankers may not be completely satisfied with some provisions of the proposed rule.
Bankers need to recognize that it is worth making an effort to bring currently underserved
areas into the mainstream of financial markets. Community groups need to recognize that
even well-intentioned requirements, if they are too burdensome, can weaken the banking
industry and reduce its capacity to serve the banking public-including low- and moderate-
income neighborhoods. I would ask both groups to compare the agencies' proposal with the
status quo, and ask, first, whether it represents an overall improvement over the status quo,
and second, what changes are needed to make the proposal more effective. I look forward to
hearing their comments.
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O
NEWS RELEASE
Comptroller of tt>a Currency
Adrr<lni8trator of National Banka NR 94-14
Washington, DC 20219
For: IMMEDIATE RELEASE Contact: (202) 874-4700
Date: FEBRUARY 7. 1994
Remirks by
EUGENE A. LUDWIG
ComptroUer of the Currency
Before the
Natiooal Community Reinvestment Coalition
Washington, D.C
February 7, 1994
DVTRODUCTIQN
Thank you and good afternoon.
I see a lot of familiar faces here, and for a very good reason: your singular
involvement in Community Reinvestment Act reform. Iivin Henderson was at the White
House when President Qinton announced the goals of the reform process. You had
representatives at each of the hearings that have ihaped reform so for. In fact, at one of
those hearings Irvin Henderson originated the idea of 'capture ratios,' which would later
appear as the market share screen in the Administration's CRA proposal. You were there
every stq> of the way. As we go forward I am certain that your thoughts and your words
will be as important in shaping the outcome of CRA reform as they were in contributing to
the form and substance of the Administration's proposal.
To me, community reinvestment is not some vague abstraction. I know, not by
analysis but by personal example, how important credit can be in the life of the individual
and the community.
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My father was the son of an immigrant and a son of the Great Depression. He
wanted something better for his family than the hard times he had known growing up. He
wanted to go to medical school and to practice medicine as a country doctor. A bank made
his dream possible by providing him with the credit he needed to get his start in life. Not
only did he and his family benefit from this credit, so too did the community of York,
Pennsylvania, where he practiced. He devoted 60 years of service to that community,
through the free medical clinic he ran once a week and in many other ways.
My father had a dream ~ an American dream of taking charge of his life, and
through hard work and individual reqxnisibility, making both a success of himself and a
contribution to a better society.
Millions of Americans today have the same dream - Americans from both sides of
the tracks. For many ~ perhaps most - people in our capitalist society, access to credit is
the key to achieving this dream. A person's ability to go to school, to buy a house, to start a
business, is often determined by whether credit is available. Further, by enabling borrowers
to become producers, credit can be the means through which people in a capitalist system
escape poverty. Put simply: Credit is often the hammer that allows people to forge their
future.
Credit is critical to the workings of the capitalist economy. And credit allows people
outside the mainstream of that economy to enter it. For all of these reasons, feir and equal
access to credit is in the public interest.
THE APMffffSTRATION'S PRQORAM
President Clinton understands how important credit is to the well-being and the
advancement of all Americans. And he understands how necessary credit is td revitalizing
our cities and poor rural areas. He recognizes that we have to encourage genuine economic
development if we are to solve the problems of unemployment, poverty and crime. Within
days of his coming to office, we b^an working together on a Presidential credit availability
effort that would remove regulatory obstacles to bank lending. And within days of my
arrival at the OCC, we launched an aggressive effort on fair lending, an effort to make equal
credit opportunity a feature of American banking as unexceptional as the checkbook or the
vault.
Further, over the last year, the President has launched an ambitious array of policy
initiatives through which Wadiington will work in tandem with state and local governments,
banks and other businesses, community otganizations, and other institutions to address our
problems. In these initiatives, the federal government acts as a catalyst that brings about
desired change. And these initiatives often seek to empower communities to solve their
problems themselves. Much work remains to be done here, but we are on our way.
Three of these initiatives directly promote economic growth and development in
neighborhoods, communities, and other localides where financial stimulus is needed.
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One, as you know the budget bill enacted last August offers tax incentives to
businesses that locate within the nine "empowerment zones* and 95 'enterprise communities"
the bill authorized. Localities can apply for designation as an empowerment zone or an
enterprise community. Two, legislation to fund Community Development Financial
Institutions has passed both die full House and the Senate Banking Committee. And, three,
Federal bank regulators have proposed a major reform of the Community Reinvestment Act
regulation, under which banks must address community credit needs.
These three initiatives are interrelated -• and mutually supportive. They are all three
ways of getting the private sector involved in addressing economic needs.
Banlcs, for example, could meet part of their obligations under the CRA by investing
in CDFIs. And CDFIs could interact with banks by exploring new markets that banks could
help serve.
THE COMMUNITY
The effort to reform the CRA has been a daily concern of mine for more than six
months. The proposed rule is intended to fulfill a directive from President Clinton to breathe
new life and new purpose into the CRA. Fifteen years ago, Congress passed the CRA to
ensure that banks and thrifts served the financial needs of their entire communities, and, in
particular, to help economically empower persons of low and moderate income. For a
number of reasons, however, the CRA never achieved dte full promise Congress had
intended.
During the 1992 Presidential campaign, Governor Clinton, responding to the strong
complaints of bankers and community leaders, vowed to reform CRA regulations to make the
law work. Following up on his campaign pledge, President Clinton last July told us to
rethink the entire system of regulation through which we put the CRA into ef^t. In
December, we proposed our reform package.
We crafted the reform package to achieve the goals the President established for us.
Speaking on behalf of my regulatory colleagues ~ as well as for myself - we are
eager for the public to comment on the padoge. We are roughly half of the way through the
90-day comment period, so there is plenty of time left to do so. We want to hear if we have
gotten things wrong, if we could do a better job. But we also want to hear if we have gotten
things right. We will need positive reinforcement, as well as constructive criticism, when we
craft the final package of reforms.
As you know, ftom the very beginning, we have been dedicated to a painstaking
process of consultation and deliberation so the final product would be right. The President
gave us a difficult mission. We knew from the itait that we could not perform it in a
vacuum. Before we made a single decision on proposing reform, we turned to the public for
direction. We held a series of hearings throughout the country - hearings in Washington,
Los Angeles, Albuquerque, San Antonio, Chicago, New York City, and Henderson, North
Carolina - the most extensive series of hearings ever held on CRA. We heard more than
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250 witnesses and recorded thousands of pages of testimony. We walked througii South
Central Los Angeles and a minority neighborhood in New York to see with our own eyes
and to listen with our own ears to what should be done. We talked with representatives of
the Nav^o Nation - to bankers large and small - to poor people in rural America. What
we saw and what we heard shaped the reform package we proposed.
Here in Washington, we heard the Reverend Charles Cummings, Junior, tell us:
'Low-income and minority communities here in D.C. are ravaged by a shortage of jobs and
of affordable housing. Bank redlining has contributed to the spiral of decline in our
communities. Abandoned houses, check-cashing outlets, vacant lots and boarded-up store
feints are the symptoms of a credit famine in our neighborhoods. Community reinvestment
is not the only solution to our urban problems, but without bank participation, any plan to
turn things around is doomed to fail."
At the same hearing, we heard a banker describe how the current system undercut
lenders that were dedicated to achieving meaningful community reinvestment.
'I would like to show you a photo," she said, 'and believe it or not it's real, it's not
a staged picture. The printouts here make up a pile about 20 feet high and represent the
quarterly r^rts documenting just one aspect of our CRA efforts. Think of the people and
the resources that it takes to produce those reports. Would any of you sitting here today
wade through that stack of paper in order to make a decision? I don't think so. And our
managers, who must balance the need to make community develcipment loans with all of
their other responsibilities, feel exactly the same way."
In Arizona, Richard Mike, a small businessman who is a member of the Navajo
Nation, testified to his fhistration in obtaining bank credit to expand his operations on the
reservation. He was told that a government agency guarantee would be required for such a
loan. Mr. Mike stated: "If the Naviyo Nation and iu people are to become financially
indq)endent, it is essential that they have access to credit and banking services. I believe the
U.S. insured banks in Arizona have a long way to go to meet the requirements of the
Community Reinvestment Act when an establltited busineuman from the Navajo Nation is
willing to offer a high equity loan, full personal guarantees, waiver of sovereign Immunity by
the Navajo Nation, liens on all other aasett and properties, and still be unable with a good
business record, a good location, and a good financial position, to secure any loan without a
government guarantee." v
I would also like to briefly mention what Angela Roberts told us. Ms. Roberts works
with the BEC New Community Shepherds Program, an organization in Brooklyn, New York,
that provides counseling to credit applicanu.
Ms. Roberts said: 'There is no great mystery about the reasons our cides and rural
areas are in trouble. Reinvestment is the key. Recycle our capital in part back into our
communities so that we can build housing and small businesses and we will see the end of
guns and drugs and an enormous decline to crime. Do that and we will see a new American
renaissance."
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If that sounds moving coming from me, imagine liow moving it was listening to her.
We regulators had a big job to do.
In setting the goals of refbnn last July, the President could not have been clearer.
The implementation of CRA, he said, 'has focused too much on documentation and process,
and not enough on actual performance. Banks complain about excessive paperwork and
inconsistent implementation of the law. Community gioups complain that their communities
remain unserved, and the CRA evaluations often fail to reflect actual community
reinvestment activities.''
We were challenged to revise our regulatory approach to reduce unnecessary
compliance burdens and to reward improved perfbimance by lenders.
We were challenged to recognize the diversity of lenders - in size, in the product
lines lenders offer - and the diversity of the markets that lenders serve. Our regulations
were to be made flexible to address that diversity.
We were challenged to strengthen enforcement of CRA, particularly in regard to
lenders with consistently poor performance.
In our reform package, we have tried to meet all of those joals.
To provide clearer guidance to lenders, the reform package would eliminates the 12
qualitative assessment factors that appear in current reguladon. It would eliminate subjective
evaluations of minutes, meetings, marketing efforts, and so forth. The proposed rule would
make significant reductions in regulatory burden.
No longer would lenders have to prqnre CRA statements, review these statements
annually and note these reviews in the minutes of the board of directors meetings, or justify
the basis for their community delineations, or ascertain community credit needs and explain
their methods of doing so.
Instead of public relations or documentation, the proposal would stress quantitative
measures of performance: lending, service and investment performance - the kind of
performance you can bank on. No longer would a lender get an "A* just for effort. Under
the proposed rule, not every institution would be subject to assessment in each measure of
performance. Rather, the regulator would consider the products and services an institution
offers in its normal course of business. Retail banks - those that focus on individual
consumers - would be evaluated primarily on tiieir lending performance. Wholesale banks -
- those tiiat focus on serving business ~ and limited purpose banks that do not engage in
significant retail lending would be evaluated primarily on their investmenu. In this way, the
proposal would respond to the diversity of markets that banks serve. The proposal would
also respond to the range in bank size. It would provide for streamlined - but rigorous -
examinations of small institutions, while stressing that these institutions would still be
responsible for helping to meet the credit needs of their entire communities.
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Under the proposal, the regulators would publish a list of the institutions that are
scheduled to undergo examinations and the public would be invited to submit comments on
the CRA performance of any institution on the list.
The proposed regulation would make clear that a lender found in substantial
noncompliance with the law would be subject to formal enforcement actions.
, And we would work together to improve public access to daU required by the Home
Mortgage Disclosure Act and tite proposed CRA regulations.
cmcumm
In the spedfle ways I have discussed the proposal would meet the goals the President
set - and would address the concerns and needs that we heard expressed in our public
hearings.
Let there be no mistake, this is an aggressive proposal. It responds to long and loud
criticism of CRA: Bankers, community activists, academic experts, memben of Congress
and others identifying flaws in our current CRA approach and advocating change.
The proposal would testnicture the system of evaluation under CRA -- because
virtually everyone agrees that a restructuring is needed, The proposal would judge lenders
by what tiiey do, not by what they say ~ because virtually everyone agrees tlut this shift in
emphasis is needed. Our proposal would allow diffiering lenders to meet their CRA
obligations in diffiering ways -- because virtually everyone agrees that this flexibility is
needed. This proposal is aggressive - an aggressive effort to cure tiie problems in the
current system.
Is the proposal perftet? If it were, we would not have had to put it out for comment.
Public comment is — and is intended to be - a stress test that will reveal flaws and
imperfections.
One problem has already come to light: We were not sufficientiy clear in
communicating several elements of the proposal and as a result there has been some
confusion. I would like to address those elements briefly to clear up that confusion.
First of all, there is a misconception that small banks are exempted from CRA. That
is certainly not the case. Under the proposal, small banks would be subject to a different
kind of examination from large banks ~ one that takes into account the differences in the
way small banks operate and the size of their portfolios. But we would continue to examine
small banks and hold them accountable for meeting all their CRA obligations.
Second, some people have expressed concerns about the 60 percent loan-to-deposit
ratio that would be an>lieid to small banks. They have assumed tiiat, if a small bank did not
have 60 percent loans-to-deposits, it would automatically receive a less than satisfiactory CRA
rating. That is not true.
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The 60 percent ratio is a screen - not a test - one of fiye screens for small banks in
the proposal. If a bank is picked up by this screen, it simply means that examiners will take
a closer look at the bank's loans in its local community. There may be good reasons for the
lower ratio. For example, it is certainly understandable that a local recession might translate
into all banks in a community dropping below a 60 percent loan-to-d^wsit ratio. If that Is
the case, the banks' lending may well be satisfactory.
Incidentally, some people have asked the source of that 60 percent ratio. It is nothing
more than the median loan-to^eposit ratio for all banks with less than $250 million in assets.
That means that at least half of all small banki will pass this screen ~ though passing this
screen will not alone ensure a satisfactory rating. I hope we will get comments on whether
that is the correct ratio or whether we should adopt a more appropriate standard.
Third, there has been some confiision about the market share provisions -- the
outgrowth of Mr. Henderson's capture ratios - in the proposed rule. Again, let me
emphasize that this is a screen ~ not a test. If a bank does not make it through the screen,
that does not mean it will automatically receive a poor CRA rating. This screen tells our
examiners the institution needs a closer kwk <- that where there may be a problem.
A final point of confusion is the notion that the proposal would create a self-
contained, stand-alone compliance system ~ that once the final rule is in place, nothing more
will need to be done. Not true. After the rule is in place we will need to write detailed
examination procedures and develop examiner training to ensure consistent application of
CRA requirements. We will need to address managerial and day-to-day problems. We will
need to establish procedures to govern a range of activities from ^jproving CRA plans to
collecting and analyzing data. And we will.
Public comments are an essential part of rulemaking. Already, comments on our
propose CRA rule have highlighted points that need clarification or a second look. As we go
fbrward, the regulators will continue to listen to the voice of the public, and respond to it.
In doing so, we will assure that CRA reform will address the flaws of the current system,
that CRA reform will establish a reasonable and productive process that will endure for many
years to come, and that CRA reform contributes significantly to the efforts of the Clinton
Administration to increase economic opportunity for everyone in our nation.
Thank you.
84
For release on delivery
10:00 a.m. , EST
February 8, 1994
Statement by
Lawrence B. Lindsey
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Credit and Insureince
of the
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives
February 8, 1994
85
Mr. Chairman, I appreciate the opportunity to appear
before this siibcoinmittee to discuss Community Reinvestment Act
(CRA) reform. The Community Reinvestment Act is intended to
ensure that every community has access to adequate credit to help
meet its needs. We at the Federal Reserve Board believe that the
law has produced substantial benefits. However, the CRA has not
- - nor should it be expected to have - - cured all the problems
that plague our cities.
As you Icnow, the federal financial institution
regulatory agencies are actively engaged in an effort to reform
CRA by amending our regulations. This effort is the result of
the President's request to meUce CRA more objective, the ratings
more uniform and the paperwork less burdensome. This effort is a
challenging one; it involves a substantial commitment by the
agencies and encompasses many difficult issues. We are very
conscious of the fact that what we do could significantly affect
financial institutions emd the public alike and that care must be
exercised when undertaking such em importemt project. As we are
midway in the process emd still receiving comments from the
public, our report to you necessarily will be somewhat
preliminary.
History of CRA and the Current Refor m Effort
Before discussing the proposal to reform CRA, I'd like
to briefly review the law and a little of its history, since that
history is very relevant to the reform project. The Community
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Reinvestment Act calls for the financial regulatory agencies to
use their examination authority to encourage institutions to help
meet the credit needs of their communities, including low- axid
moderate -income areas, consistent with safe and sound business
practices. The agencies are required to assess the community
lending records of the institutions they supervise as part of
their examinations and to take into account those records in
considering applications. The law, however, gives no other
indication how the agencies are to accon^lish these tasks, and
does not define key concepts, such as how an institution's
community is defined or what constitutes satisfactory
performance. A considercLble responsibility, therefore, was
placed by Congress on the agencies.
The regulations adopted in 1978 by the finemcial
regulatory agencies focused, at least in part, on factors related
to the process used by institutions to determine the credit needs
of their community and how they responded to those needs. To
avoid credit allocation, and to allow for the maximum amount of
creativity by institutions in meeting the varying credit needs of
their localities, these regulations did not atteii^t to prescribe
any particular level of lending. Instead, the evaluation of a
financial institution's performance has been based on the
application of twelve assessment factors, including how community
credit needs are ascertained, the geographic distribution of
loans, the record of opening and closing branches and providing
services, participation in local community development projects.
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3
and the financial and legal capcQ>illty o£ the institution. In
determining how well an institution ascertains the credit needs
of its community, examiners have tcdcen into account such matters
as the institution's community outreach and credit marketing.
In the course of our review of CRA, we have heard from
many consumer and community groups a±>out how valucdsle the law has
been in getting credit extended in low- and moderate -income
areas. Some groups put the success of CRA at $30 billion, which
they estimate to be the level of CRA commitments for new credit.
I suspect the total impact of CRA considerably exceeds the $30
billion estimate. And, to date, this has occurred with a
coit^aratively light hand from Washington. Indeed, one of the
strengths of the present system is that it allows great
flexibility in fashioning programs to meet the different and
changing credit needs of this country's diverse communities.
Despite the significant benefits that communities have
seen from CRA, the approach taken in the regulations, and the
agencies' in^lementatlon of that approach, has generated a good
deal of criticism. Financial Institutions have frequently
complained that they are burdened from in^jrecise rules and
inconsistent evaluations on the one hand, and overly prescriptive
documentation requirements on the other hemd. Small
institutions, in particular, complain eUsout the costs of
compliance emd contend the law is unnecessary because they must
serve their entire community to succeed. Further, it appears to
some that there is little incentive for institutions to try to
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achieve cm outstanding rating, especially when applications filed
by institutions with outstanding CRA ratings may still be
protested by the pxiblic.
CoEninuni4:y representatives have conplained that the
regulators emphasize documentation of CRA activities in their
examinations of financial institutions, instead of actually
measuring the degree to which they are meeting community credit
needs. They point to the fact that almost 90 percent of
institutions receive "passing" ratings, and the fact that the
agencies rarely deny applications for CRA reasons alone, as
evidence that regulatory enforcement of the law has been weak.
They also wish to have a more formal role in the evaluation
process .
While we have tried to respond to these various
concerns through modifying our process and providing official
guidance, it has become clear that CRA enforcement needs a broad-
based review to see whether improvements are in order and if so,
what they should be. Consequently, the President requested the
Board, the Office of the Coir^jtroller of the Currency, the Federal
Deposit Insurance Corporation and the Office of Thrift
Supervision to reexamine the regulations. The President asked
the agencies to inprove them by addressing several areas of
concern. The objectives outlined by the President, which we also
believe are in^ortant to the ultimate reform of CRA, include:
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5
• replacing paperwork and process -related requirements
with clear objective criteria that measure actual
performance; and
• working together to imprave uniformity in
evaluations and instituting more effective sanctions
for consistently poor CRA performance.
The ultimate goal, according to the President's request, is to
"replace paperwork and \incertainty with greater performance,
clarity and objectivity." We are in full accord with this
objective.
The agencies held a series of seven public hearings
throughout the coiintry to gather information on the best way to
eunend our CRA regulations ouad enhance our enforcement. Over 250
witnesses testified, many raising common concerns. We were
strongly encouraged to revise our regulations so that CRA
performance would be evaluated in as objective a manner as
possible and to give better guideuice on how different types and
levels of performance will be rated.
While witnesses stressed that CRA should continue to
focus on lending, many also recommended that greater weight be
given to investments (such as in community development projects)
and the provision of beuiking services (such as through locating
bramches and providing low- cost accounts or noncustomer check
cashing) . Meuiy witnesses requested that institutions be required
to collect more data on the geographic distribution of loeins in
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order that they may be better edsle to evaluate an institution's
CRA performance.
Representatives of smaller institutions, on the other
hsmd, generally criticized the burden and expense they bear from
existing documentation recfuirements . Other witnesses recommended
that institutions be allowed to develop their own CRA plajis
against which their performance would be rated, with these plans
reviewed by the agencies. Finally, most witnesses, other than
those from financial institutions, opposed providing a safe
harbor from CRA protests to institutions rated satisfactory or
outstanding.
Following these meetings, we developed the proposed
changes to our CRA regulations in conjunction with the other
agencies and published them on December 21, 1993. Comment on the
proposal has been requested by March 24. We have extended our
comment period to that date to accommodate the numerous requests
for time to do a complete analysis of what is a very con^lex
proposal . We do not know how many comments will ultimately be
received and whether fundamental changes in our proposed approach
will be called for. Although I cannot state when a final rule
will be adopted, we do intend to move the process along as
quickly as is appropriate. And, I want to emphasize that I would
not expect amy final rule to become mandatory iintil after an
adequate lead time -- particularly if the proposed data
collection requirements, or something similar, are retained.
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Most importemt, I am committed to maJcing sure that our
final rule will work . We will do no one amy favors by
promulgating a rule that is operationally xintenable. During this
comment period, I eun paying particular attention to questions or
conplaints about the details of in5)lementation and of unintended
consequences from how the proposal will work in practice.
Balancing Competing Objectives
With this proposal, we have attempted to achieve the
difficult and importemt goal of balancing the con^jeting concerns
of providing greater specificity on what is e3q>ected on the one
hand without dictating credit decisions on the other. The
proposal atten?)ts to clarify our expectations for CRA performamce
by (1) creating a new, more nxunerically driven system for
assessing CRA performance in three critical elements: first and
foremost, lending, and secondarily, services and investments;
(2) requiring the collection of data on the number, amoxmt, and
geographic location of small business, small farm, amd some
consumer loans to use in the assessments; (3) providing for
streaunlined review of small institutions; (4) permitting
institutions to submit their CRA plam in advance to their
regulator for approval and public comment as an alternative to
being evaluated under the general assessment scheme; amd
(5) specifying the regulatory sanctions that are possible from
noncompliance with the regulations.
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In part, the balance we seek to achieve In the proposal
is Intended to respond to those most concerned by CRA - - banks
emd representatives of conununltles . Despite their different
perspectives on CRA reform, I think that In mamy respects the
Interests of banks and community representatives are consistent
rather than at odds. Both wemt local lending institutions to be
strong and viable so that they will have the capacity to
effectively serve their communities over the long term. Both
want to assure that the projects that are funded make economic
sense for lender and borrower alike. Both also have a common
Interest in a CRA evaluation system that is fair and consistent,
eind that avoids \innecessary paperwork. To be sure, community
groups may favor more data collection, greater public
participation and more stringent accountability than lenders, but
on balance, I believe there is greater commonality of Interest
among the groups in the goals of reform than is often assxuned.
Having said that, however, I eun sure there are some
specific points in the proposal where views may differ -- for
example, on the appropriate cut-off level for the more
streamlined review procedures for "small banks.* Points of
difference like this seem unavoidedsle in a proposal as
conprehenslve emd complicated as ours cmd the public comment
should help us resolve some of the disagreements cd^out the right
approach. I cein assure you that we have struggled throughout
this process to achieve an appropriate balamce to the competing
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9
interests where it does exist; how well we have done this will be
judged in the public comment process.
Issues Raised by the Proposal
Given Con^troller Ludwig's description of the proposal
for the subcoiranittee, I will not also review the details. As is
well known, however, although the Board joined with the other
agencies in seeking public comment on the proposal, Board members
have a variety of concerns eibout the proposal. For exan^le:
• The proposal is intended to provide greater
certainty to institutions in the type of evaluation they might
expect to receive, primarily based on their performance relative
to others. Yet, measuring an institution's performance against
other lenders in the service area at year- end means that the
standard will necessarily be fluid from year to year.
Moreover, the terms used to describe different levels
of performcuice include "roughly con^>arable, " "significzmt
amovint," and similar words that are anything but precise. These
general standards have been proposed, in part, to avoid giving
specific numbers which would risk resulting in the specific
allocation of the eunount, type, or terms of credit institutions
must provide.
Institutions will have to speculate about the
activities of their coirpetitors, and examiners will be forced to
interpret these terms on a case-by- case basis, when evaluating
individual institutions. Thus, em institution may have some of
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10
the same uncertainty about how Its perfomifmce will be evaluated
that it has now. To some extent we will always be plagued by the
dilemma of how to provide better guidance amd certainty in the
CRA area without reducing needed flexibility. But we expect
these issues to be resolved over time although ultimately the
experience may prove frustrating to both financial institutions
and community groups.
• There may be problems associated with the "market
share" test. One such problem may result from the fact that the
market share for other than mortgage loems will be confuted only
in con^arison to other depository institutions who must report
data. Leaving out small depositories (generally iinder $250
million in assets) and nondepositories, the percentage of those
who are subject to CRA and included in the market share
comparison will be low. In some localities, a very few or even a
single institution may be included in the "market." This could
cause practical problems and anomalous results.
• The new requirement for summary reporting of the
number, amount euid geographic distribution of small business,
mortgage and some consumer loans is a significemt one. It is
in^ortant to the goal of making the CRA process more
quantif icible; yet it could be costly. For covered commercial
banks, the ainnual cost for the small business portion of the data
collection alone has been estimated by our staff to approach $21
million. In all, sibout 3,400 institutions will be required to
gather new data.
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Because of these concerns, we have also asked for a
discussion of burdens and benefits of this requirement in the
public comments.
• The appropriateness of the streamlined review
procedure for small institutions under $250 million in assets
will surely be questioned in the comments - - as well as the
impact of the presumption that such small institutions have a
"reasonable" loan-to-deposit ratio if it is 60 percent. We have
heard from the small banks who have commented on the proposal
thus far that this is an unrealistically high loem-to-deposit
ratio for them, especially for good quality loans, and we have
some concerns that small institutions who want to benefit from
the streamlined CRA review might be forced to irr^jrudently chcmge
their lending steindards in order to meet this presim^tion.
• There are other potentially controversial aspects to
our proposal, such as whether the alternative evaluation for
banks with preapproved plans is workable, whether the role of the
public and community groups in development of the plans is
adec[uate, euid whether we, in fact, should be treating
institutions receiving low ratings as being in violation of the
regulation and subject to our enforcement authority. These
important issues will also receive considereible attention by us
and, I hope, by the public.
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rUHKuasion of Sneeific Issu ph Raised in Letter of Invitation
In addition to nany of the issues I have already
addressed in my statement, I would like to respond to some of the
questions raised in your letter of invitation:
• The Appeals process ; Financial institutions have
always been able to request supervisory personnel at Reserve
Banks to review the ratings issued by examiners- -whether
involving CRA or other supervisory issues- -but we do not consider
this a formal appeals process. We anticipate that our informal
system for appeals would coii5>lement the opportunities for input
in CRA evaluations. The proposal would permit institutions to
rebut pres\in?)tive ratings under the lending, service and
investment tests. But the proposal also provides that the
agencies would smnounce upcoming examinations in order to get
public comment on an institution's performcuice. These comments,
and those in the institution's public file, would be taken into
account in our assessment of their performance.
• Frequency of examinations for institutions rated
■outstanding" ; The proposal does not address examination
frequency. Our current policy, however, does allow evaluations
to be conducted less frequently for outsteuading- rated
institutions. Presently, state member bamks rated outstanding,
with at least satisfactory ratings in consumer con?)liance in
general, are examined once every eighteen to twenty- four months,
con?)ared to the six- to twelve-month examination frequency for
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poor performers. At this point, I would assiune that we would
maintain our current policy even with regulatory changes.
• Effect of investment cred its and in direct lending on
ratings ; Under the proposal, investment activity by retail banks
could help to increase their base rating in the lending test, up
to two levels if the investment performance is outstanding.
Investments will be the sole criteria for measuring the
performance of wholesale and limited-purpose bsmks, however.
Indirect lending activity may be teUcen into accoxint iinder either
the lending or investment tests. These aspects of the proposal
are controversial, and of particular concern to community groups.
We will be evaluating their comments very carefully as we
consider what the appropriate treatment of investments and
indirect lending should be.
• Effect of ratings and piiblic involvement on
a pplications : CRA ratings, as well as public comments on
applications, can and do influence significeintly the Board's
consideration of an institution's application. This has been
made clear in earlier CRA policy statements. The proposal is
more explicit than our current regulation cQjout the effect
different ratings will have on the Board's consideration of an
application. For exeuiple, under the proposal, em "outstouading"
would be looked on very favored)ly emd a "substamtial
nonconpliance" rating generally would result in the denial of the
application. We are aware of the concern of community groups
that there may be eui is^>licit "safe harbor" in the proposal. A
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"safe harbor" %ras not intended, amd to the extent that there Is
any mlsunderstamdlng, it will be clarified in the final version.
Conclusion
Through our internal review of CRA and the public
hearings on CRA reform, we have been afforded a unique
opportunity to step back and take a fresh look at the enforcement
of one of the most inqportant, yet controversial, laws affecting
financial institutions. In proposing our conprehensive
regulatory reform of CRA, we have been highly aggressive in
approach. Our efforts are bound to generate a good deal of
debate and concern -- for example, that we are demeuiding too much
or not enough, that we have been too specific or too vague, amd
that we have been too sensitive to small banks' concerns about
paperwork burden or not sensitive enough.
As I said during the Board's public deliberations on
the proposed amendments to our CRA regulation, although I take a
natural pride of authorship given the time I have invested with
my colleagues, I am not unaltersUDly wedded to this specific
proposal. If the public comment points out serious flaws,
particularly in the areas of operations or in^lementation, or if
better ideas emerge, I am perfectly willing to recommend to my
fellow regulators and members of the Board of Governors that we
return to the drawing board. We should not hesitate to do so if
that is the %my to ensure that we have done the best job
possible. To give the public anything less than the best is a
goal that no one involved in this process would condone.
99
TESTIMONY OF
ANDREW C. HOVE, JR.
ACTING CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
ON
PROPOSAL TO REFORM THE COMMUNITY REINVESTMENT ACT REGULATIONS
BEFORE THE
SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
10:00 A.M.
TUESDAY, FEBRUARY 8, 1994
ROOM 2128, RAYBURN HOUSE OFFICE BUILDING
100
t-
y^'.:, Good morning, Mr. Chairman and Members of the Subcommittee.
On behalf of the Federal Deposit Insurance Corporation ("FDIC") ,
I welcome this opportunity to testify on the proposal to reform
regulations that implement the Community Reinvestment Act
("CRA") . I also will update the Subcommittee on several fair
lending initiatives undertaken by the FDIC.
I. Observations on the CRA Reform Effort
I would first like to make some general observations about
the CRA regulatory reform effort.
In July 1993, President Clinton requested that the Federal
Deposit Insurance Corporation, the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the
Currency and the Office of Thrift Supervision ("agencies")
undertake sweeping reform of the CRA regulations, after
consultation with depository institutions, community
organizations and others throughout the country.
The CRA regulatory reform effort has involved a more
comprehensive process than undertaken for the development of most
depository institution regulations. First, the agencies held
public hearings at seven locations across the country during
August and September of last year. We heard testimony from over
250 witnesses, with nearly 50 others submitting written
testimony. Next, these comments were synthesized and many are
101
reflected in the proposed rule which was published in the Federal
Register on December 21, 1993. The comment period on the
proposed rule has been extended to Meurch 24, 1994.
In order to ensure maximum comment on the proposal, the FDIC
has mailed the proposal to all FDIC-supervised institutions,
approximately 7,300, and to over 2,000 community organizations
and coalition groups nationwide, asking for their comments. FDIC
staff have encouraged banks and community groups to provide
comment at recent community development and fair lending
conferences in Massachusetts, Illinois, Missouri, California,
Puerto Rico and the District of Colvimbia and are doing so
elsewhere. We are urging interested parties to comment on what
they like in the proposal, as well as what they do not like. We
are asking for alternative recommendations and advising that
interested parties may comment on the entire proposal or only on
what is of concern to them. We believe it is important to take
the time needed to carefully evaluate the comments and refine the
proposal appropriately.
Most of the witnesses at the public hearings, including the
regulators, agreed that in the past we have focused too much on
process. The banking agencies over the past couple of years have
attempted to address this complaint by issuing guidelines to
examiners and institutions which clarify requirements, downplay
paperwork requirements, and focus attention on meeting the intent
102
of CRA — nedcing credit available within all communities.
Nevertheless, in our meetings across the country there was a
common message that not enough attention was being placed on
whether loans were being made and services were being provided.
I think there is general agreement that, we can improve upon
the way we implement the CRA. Banks and thrifts are not
satisfied with the current regulations because they focus too
much on process and documentation. Many bankers complain that
CRA regulations, together with other regulatory requirements,
leave them little time to do the very thing the CRA is meant to
encourage them to do — make loans. Individuals and community
organizations feel that more emphasis needs to be placed on
results and that we need more data to confirm that institutions
are producing those results.
The proposed CRA regulation issued by the banking agencies
would focus our efforts on results. Institutions would be
evaluated based on their performance in the areas of lending,
investment and the provision of services. Small institutions
would have a streamlined examination process but, here too, the
focus would be on results. Clearly, the direction we are going
is to place greater weight on the loans, investments and services
banks and thrifts have actually provided to their communities,
especially low- and moderate-income areas, and less weight on
showing us the efforts they have made.
103
I think this direction is good. However, I would like to
add a cautionary note. In changing our focus to results, greater
emphasis will be placed on formulas, ratios and other standards
to compare the performance of insured institutions. These may
provide fair comparisons for many institutions. However, I doubt
that we could write a formula to evaluate CRA performance that
would be fair to all institutions or the communities they serve
one hundred percent of the time. We believe the proposed
regulation will allow examiners to make justifiable exceptions
where the performance measures do not make adequate allowance for
individual circumstances. We will be most interested in comments
that address whether the proposal strikes the appropriate balance
in this area.
II. Issues Raised by the Proposal
I would now like to turn to the issues which the Subcommittee
requested that we address in our testimony — issues that are
particularly important in implementing community lending
standards .
1) The process established in the regulations for a financial
institution to appeal a CRA rating.
The proposed regulation would not establish a new process
for a depository institution to appeal a CRA rating. It does
104
reiterate formally an institution's right to provide additional
information or comment before a CRA rating becomes final. The
proposal provides that the preliminary ratings of an institution
under the three tests that measure lending, investment and
service performance are "subject to rebuttal." Under the present
system, at the conclusion of the onsite portion of the FDIC's CRA
examination, preliminary findings are communicated by the
examiner to the institution at a meeting with its senior
management or, if problems are noted, with its board of
directors. Then, the examiner's findings and recommendations are
carefully scrutinized by senior review examination staff at the
FDIC regional office before a final CRA rating is determined.
During this review period, there is sufficient time and
opportunity for an institution to react to the preliminary
findings and to provide additional information. The proposed
regulation explicitly restates an institution's right to the
review process.
2) The lessening in frequency of CRA ezzuninations for
institutions which achieve an "Outstanding" CRA rating.
There is no provision in the proposed CRA regulations which
addresses the frequency of CRA examinations. However, in the
preamble to the proposal, the agencies discuss the possibility of
less frequent examinations for institutions that show strong
performance in order to create an incentive to improve
105
performance. We seek public comment on this suggestion.
The FDIC's current guidelines provide for CRA examinations
of institutions rated "Satisfactory" or "Outstanding" at least
every two years. Institutions that are rated "Needs to Improve"
or "Substantial Non-compliance", however, will vindergo an
examination at least once each year with additional visitations
conducted as necessary. We do this primarily to ensure that
timely corrective actions are undertaken by problem institutions.
3) The modification in CRA requirements for
institutions under $250 million in assets which meet
specific criteria.
An issue of particular importance to the FDIC is the
provision allowing small institutions the option of a streamlined
assessment method. Small institutions are defined in the
proposal as having total assets of less than $250 million. As
the regulatory agency responsible for supervising approximately
65 percent of the institutions with under $250 million in total
assets, the FDIC would like to make clear that the proposed
streamlined assessment method would not constitute an exemption
for small institutions. Many small institutions and their
representatives have urged that the agencies exempt small
institutions from CRA assessments. As stated in the proposal,
the agencies do not believe that an exemption is permitted by the
106
statute. Furthermore, we believe that an exemption would be
unwise because it may result in the neglect of credit needs of
some communities that are served by small institutions.
Under the proposed streamlined method for small
institutions, examinations would not become mere formalities or
simple reviews in which examiners quickly determine whether the
institutions have met the items on a checklist. Although small
institutions would not be required to either geo-code loans or
report consumer, small business or small farm loan data,
exeuniners would be required to determine if an institution has a
reasonable loan-to-deposit ratio, makes the majority of its loans
locally, and makes a variety of loans across all income levels.
In addition, if the institution is required to report loans under
the Home Mortgage Disclosure Act ("HMDA") , the institution would
be required to have a reasonable geographic distribution of
reported loans. Examiners also would consider whether or not an
institution has engaged in illegal lending discrimination that it
has not corrected or is in the process of correcting fully.
In an attempt to further streamline the process, small
institutions would be able to decide whether a regulatory agency
considers, in addition to its lending record, the institution's
record of making qualified investments and its provision of
branches and other services to low- and moderate-income persons
in its service area. This would not, however, exempt small
107
institutions from making a reasonable variety of loans across all
income levels or the agencies from our responsibility to attempt
to measure this lending performance.
We are very interested in comments concerning these results-
oriented standards for small banks, such as "reasonable" loan-to-
deposit ratios and "reasonable" geographic and income
distributions of lending, and whether they are addressed in a way
that would allow us the flexibility to take into account
differences among the size and capabilities of institutions and
also the varying needs of their communities.
4) The role that credit for investment in certain activities
will have on composite CRA ratings.
Generally, institutions over $250 million in asset size
would be evaluated by three tests that measure their lending,
investment and service performance, each of which could affect
the composite CRA rating for an institution. The investment test
would consider an institution's investments in community and
economic development activities and would also take into account
investment partnerships with community development organizations.
Activities like these allow institutions to lend in low- and
moderate- income neighborhoods by injecting the capital often
missing in such neighborhoods. These investments also better
enable lenders to qualify for the federal, state and private
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108
funding or insurance programs that provide capital. Increased
capital will provide the borrower equity necessary to encourage
increased lending levels in low-income, or moderate- income
neighborhoods, in a safe and sound manner.
A retail institution's rating under the lending test, which
evaluates whether an institution lends throughout its community,
forms the basis for its composite rating. To provide an
incentive for a retail lender's participation in community
development activities, however, the institution's base rating
would be increased by two levels if the institution has an
"Outstanding" investment test rating, or by one level if it has
a"High Satisfactory" investment test rating. A wholesale or
limited purpose institution, which does not make residential,
consumer, small business or small farm loans, would not be
evaluated under the lending test. Instead, the investment test
would form the basis for its composite CRA rating. Finally, a
small institution, electing to be evaluated under the streamlined
assessment method, would be able to decide whether an agency
considers the institution's record of investment in addition to
its lending record.
The composite CRA rating of an institution also can be
affected by its rating under the service test. As an additional
incentive for improved performance, the base rating would
increase by one level if the institution has an "Outstanding"
109
service test rating and decrease by one level if the institution
has a "Substantial Noncompliance" service test rating. The
service test evaluates the accessibility of branches and the
extent to which the institution provides other services that
enhance credit availability.
5) Th« reporting of small business lending data by larger
institutions .
The objective of the agencies is to devise clearer
regulations that focus more on results than process. In order to
evaluate the results of an institution's lending effort rather
than the process used, an examiner must know something about the
types of loans the lender originates, how many, in what amount,
and where. The proposal would require the collection of loan data
to measure these results. Large institutions with more than $250
million in total assets would be required to report information
on the geographic distribution of certain consumer loans, small
business loans and small farm loans. Data on applications and
their disposition would be reported by census tract allowing
examiners to measure loans in low-and moderate-income or other
areas.
One aspect of the proposal is "the requirement that
institutions identify loans to small businesses with 1) average
annual gross receipts of less than $250,000; 2) average annual
10
no
gross receipts of $250,000 or more but less than $1 million; 3)
average annual gross receipts of $1 million or more but less than
$10 million; and 4) manufacturing businesses with average annual
gross receipts of $10 million or more but less than 500
employees. Including small business credit as a key component of
"reportable" loans reflects its pivotal role in the economic
development process in low- and moderate- income areas. Under the
proposal, banks and thrifts would be required to explicitly
identify small business lending both within and outside of low
and moderate- income areas. The costs and benefits of requiring
banks and thrifts to collect or report data on small business
lending has been the subject of discussion for some time now. We
look forward to comments on the costs and feasibility of this
approach .
6) The function of comm\inity groups and other members of the
public in developing strategic plans.
The proposal allows an institution the option to submit for
agency approval a strategic plan as an alternative to being rated
after the fact under the lending, service and investment tests or
the small bank assessment method. The plan would detail how the
institution proposes to meet its CRA obligation using measurable
goals. This alternative method is intended to provide an
institution with some degree of certainty about the acceptability
of its CRA approach. Notice of the proposed plan would be widely
11
Ill
published by the institution in each of its communities, copies
of the plan would be available for review at the institution's
offices, and public comments may be submitted to the
institution's regulatory agency. This will allow community
groups and others an opportunity to review the plan and provide
the agency with comments prior to agency approval. This will
also provide institutions an opportunity to seek valuable input
from community organizations during the development of a
strategic plan.
7) The role that indirect lending will play in CRA
assessments.
An institution could elect to have the agencies consider
indirect loans under the lending test. Indirect loans include
permissible loans or investments made to third parties that lend
to low- and moderate-income individuals or areas, such as
affiliates of the institution, lending consortia, minority -owned
institutions, low-income credit unions and community development
lenders. The proposal makes a distinction between the
recognition of indirect loans by its affiliates and indirect
loans by the other lenders. The institution could claim credit
for the lending of affiliates under rules of the lending test
regarding proportionate shares, whether it invests in the entity
or loans to it. For other third party lenders, however, the
institution would be required to have made a permissible equity
12
112
investment in the entity in order to claim any credit under the
lending test for its loans. Any loans or investments that an
institution reports as indirect lending under the lending test
could not be counted again as qualified investments under the
investment test.
The purpose of this provision is to recognize the unique
quality of indirect lending activity, the need that exists for it
in low- and moderate-income areas, and to enhance an
institution's flexibility to meet this important need. We believe
that it is these types of locally-based partnerships and
cooperative efforts that are most productive in revitalizing
depressed communities.
8) The effect of ratings on bank applications, and ptiblic
involvement in the application process.
When considering an application, the CRA rating assigned to
an institution is an important and often controlling factor
because it indicates how well an institution has fulfilled its
requirement to meet the convenience and needs of the community.
Under the proposal, a "Needs to Improve" CRA rating, absent any
demonstrated improvement over time in performance or other
factors, generally would result in the denial or a conditional
approval of an application. A "Substantial Noncompliance" rating
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113
generally would be so adverse a finding as to result in denial of
an application.
Public involvement in the application process will continue
to be of paramount importance. As under the present system, a
public comment period will allow for comments, endorsements or
protests. There are no "safe harbor" provisions in the proposal
that would exempt an institution from this public application
process due to its CRA rating.
III. The FDIC's Fair Lending Initiatives
Since 1990, the FDIC has undertaken a series of important
initiatives to improve fair lending supervision. These include
the formation of a separate Compliance Examination Program within
our Division of Supervision and a Community Affairs Program
within our Office of Consumer Affairs. In recent months, we have
evaluated organizational structure, policies and procedures
impacting fair lending supervision; taken a new look at
examination procedures and other tools to detect and prevent
illegal discrimination; and improved administration of the
consumer complaint process. We have developed recommendations to
improve fair lending and community reinvestment performance
through both examiner training and increased communication with
depository institutions, community organizations and other
agencies.
14
114
Let me briefly touch on some of the most recent initiatives:
• An Assistant Regional Director in each of our eight regions of
the Division of Supervision is being dedicated solely to the
management of the compliance and fair lending function. Until
now. Assistant Regional Directors who managed this function had
additional responsibilities. There are now approximately 300
compliance examiner positions at the FDIC compared with 150 when
the separate Compliance Examination Program was implemented in
early 1991. More will be added as necessary. Each region also
maintains a separate Compliance Examination Review staff with
specific responsibility for the compliance and fair lending
examination function.
• The FDIC's Fair Housing Examination Procedures were
significantly revised last year. Directions for the extensive
use of HMDA data and a comprehensive review of loan files and
loan policies are incorporated in the procedures to help detect
evidence of illegal discrimination or disparate treatment.
• The FDIC is undertcUcing increased use of targeted fair lending
excuninations. Last month we began a HMDA Disparities
Investigation Project to review racial and ethnic disparities in
denial and application rates reported by FDIC-supervised
institutions nationwide for the 1992 calendar year. This special
targeted effort involves experienced senior level staff from the
15
115
Division of Supervision and the Office of Consumer Affairs.
Extensive review procedures have been set out to ensure that all
institutions with high disparity rates for minorities will
undergo a review to discover the reasons for the disparities and
identify those institutions exhibiting possible illegal
discriminatory behavior.
• Improved examination tools are now available to examiners.
For example, HMDA Analysis Reports customized for each
institution and specific geographic areas are being provided for
regional and field office use. HMDA Examination Tables,
summarizing an institution's reported data and designed to assist
exzuniners in studying the data, were recently installed on easily
accessible computer networks in each region. Complete 1992 HMDA
Disclosure Reports for all reporting institutions will soon be
available on CD ROM to examiners. Census Tract Maps and CD ROMs
with census tract level demographic data have been purchased from
the Bureau of the Census to assist exeuniners in forming judgments
on an institution's lending patterns across racial, ethnic and
economic areas in each locality. Other related products that
have been developed for examiner use include a series of Wide
Area Census Tract Profiles which provide an analysis of the
racial and ethnic populations, income levels and housing
characteristics by census tracts.
16
116
• The Office of Consumer Affairs has expanded the Community
Affairs staff in each region to include a Fair Lending
Specialist. Fair Lending Specialists assist the Community
Affairs Officers in each region in acting as a liaison between
community groups, lenders and the FDIC on the fair lending
process. The Fair Lending Specialists are also a resource for
compliance examiners on matters concerning HHDA data analysis,
lending discrimination and community development. We have also
added a Fair Lending Specialist to the Washington staff of the
Office of Consumer Affairs.
• Fair lending testing guidelines have been developed and are
under review for release next month. The guidelines are intended
to be a self-help guide for depository institutions on how to
improve fair lending performance and self-test for illegal
discrimination and disparate treatment in the loan application
process .
• The Consumer Complaint and Inquiry System, an automated system
for tracking the number and nature of complaints and inquiries,
has been revised to provide more complete timely information on
the nature of consumer complaints and inquiries so that we are
better able to monitor them for timely response and potential
problems.
17
117
• FDIC Fair Lending Roundtables will be convened by the Office of
Consumer Affairs and the Division of Supervision in communities
throughout each of our eight regions on a periodic basis.
Roundtable meetings will bring together a variety of
representatives from depository institutions and community
organizations with specific knowledge of fair lending and
community development issues to establish a dialogue with our
examination staff, identify barriers to fair lending and discuss
ways to overcome them.
• We are actively coordinating with HUD, DOJ and the other
financial institution regulators on enforcement of fair lending
laws, such as the Fair Housing and the Equal Credit Opportunity
Act. We intend to be an active participant in the President's
new Fair Housing Council and continue to work with other federal
agencies to affirmatively further fair housing.
• Finally, in order to better implement the FDIC's Equal
Employment Opportunity Policy and to improve diversity in our
workforce, affirmative action accountability has become a
specific element in the performance evaluations of the FDIC's
managers and supervisors. We have also conducted Multicultural
Awareness and Sensitivity training over the past 12 months for
staff of several of its Offices and- Divisions including senior
management levels and examination staff. This training increases
sensitivity to stereotyping and resultant discrimination of all
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118
types. We have recommended to lenders that they conduct similar
training to help identify possible illegal discriminatory
practices.
TV. Conclusion
In conclusion, the FDIC believes that strong fair lending
actions by the banking industry, supervision by its regulators
and partnership efforts with community groups and individuals are
critically important to making the Community Reinvestment Act
work. We look forward during the public comment period to
receiving comments that will assist in developing regulations
that in the President's words, "increase investment in
communities that need it, while simultaneously streamlining and
clarifying the regulatory process." We are mindful of our
responsibility to promote safe and sound banking, and of the
recognition in the Community Reinvestment Act that banks have an
obligation to help meet the credit needs of their entire
communities, including low- and moderate- income communities. We
believe that both of these goals are attainable.
19
119
EMBARGOED
jntil Feb 8, 10 am
Testimony
of
Jonathan L. Fiechter, Acting Director
Office of TTuift Supervision
concerning the
Community Reinvestment Act
before the
Subcommittee on Consumer Credit and Insurance
of the
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
Febniary 8, 1994
Office of Thrift Supervision
Department of the Treasury
1700 G Street N.W.
Washington D.C. 20552
202.906.6288
120
INTRODUCTION
Mr. Chairman and members of the Subcommittee, I am
pleased to provide the Office of Thrift Supervision's ( OTS )
views on President Clinton's Community Reinvestment Act (CRA)
Reform Initiative.
My testimony will describe our efforts, in conjunction
with those of the other Federal financial supervisory
agencies, to establish and implement the President's CRA
initiatives. My testimony will also summarize significant
elements of the proposed CRA regulations, discuss issues that
are relevant to our reform efforts and the effectiveness of
CRA generally, and address the questions posed in your
invitation letter.
I believe that credit can be used as an engine for
economic growth and revitalization. Communities, financial
institutions, and government can form a partnership and work
together to energize this needed growth and revitalization by
making credit and financial opportunities available to all
people in all communities throughout this nation. At the same
time, I believe we can also reduce unnecessary regulatory
burdens on financial institutions.
As you know. President Clinton initiated the CRA reform
effort last summer when he asked the Federal agencies
responsible for the administration and enforcement of the CRA
to seek ways to improve their evaluation standards and
examination procedures. The President specifically asked us
to: (1) work with bank and thrift institutions, the public
and Congress to develop a new approach to CRA that emphasizes
performance rather than documentation; (2) develop a well-
trained corps of examiners specialized in CRA; (3) promote
consistency and fairness, improve performance evaluations and
institute more effective sanctions against poor performers;
and (4) focus new evaluation standards on three types of
community reinvestment activities - lending, investments and
services.
The agencies' reform efforts are guided by three primary
goals: (1) to improve CRA performance by focusing the
regulations on making credit and financial services available
to all communities, particularly underserved areas throughout
urban and rural America; (2) to reduce regulatory burden by
having clearer and more objective evaluation standards that
emphasize performance over documentation; and (3) to promote
consistency in examinations and enforcement.
Following seven public hearings on the CRA, the agencies
developed a proposed regulation using the broad outline given
by the President and the comments we received from the public
hearings. The proposal, which was published for comment on
121
December 21, 1993, attempts to achieve the agencies' CRA
reform goals. We are looking forward to the comments of
industry representatives, community groups and other
interested parties on whether the proposal accomplishes its
stated objectives and where it can be improved.
As of the end of January, OTS had received only
twenty-four comments on the proposal from a variety of
interested parties, including thrifts, state-chartered banks,
national banks, industry consultants, and a member of
Congress. Most of these letters are from small institutions
and focus on one or two issues. These small institutions
generally welcome the proposal's streamlined examination
process, but raise concerns about the eligibility criteria for
such examinations. We expect more comment letters to be
submitted toward the end of the comment period.
The comment period, originally scheduled to end on
February 22, 1994, was recently extended to March 24, 1994.
We anticipate that the final regulation will be issued by late
spring.
SELECTED ELEMENTS OF THE PROPOSED REGULATION
Evaluation Tests
The most significant difference between the current CRA
regulations and the proposal is the replacement of twelve
assessment factors to determine CRA compliance with three
performance-based tests: lending, investment and service.
Institutions would generally be evaluated on the basis of the
product lines offered to their customers in the normal course
of business. For most institutions, the lending test would be
the primary basis for measuring performance. The investment
and service tests would serve to augment performance under the
lending test.
The lending test evaluates an institution's direct
lending in low- to moderate-income and other areas. The test
compares the institution's market share of loans in low- and
moderate-income geographies to its market share in the
remainder of its service area. It gives "extra credit" to
institutions for making complex or innovative loans that serve
pressing community development needs without undermining
safety and soundness.
An institution may also elect to have its indirect
lending evaluated under the lending test. Indirect loans are
those made by third parties such as:
o lending consortia,
o subsidiaries of the institution,
o nonchartered affiliates of the institution that it
assists in funding, and
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122
o women- or minority-owned institutions, low-income credit
unions, and other lenders in which the institution has
made lawful investments.
If an institution elects this option, its indirect loans
would be evaluated in proportion to its investment, taking
into account both the total lending by the third party and the
lending done by the third party in the institution's service
area.
The proposal distinguishes between the ability of an
institution to claim credit under the lending test for
indirect loans by its subsidiaries and affiliates, and its
ability to claim credit for indirect loans made by other
lenders. An institution could claim credit for the lending of
subsidiaries or affiliates whether it invests in the entity or
makes a loan to it. For other third-party lenders, an
institution would be required to have made an investment in
the entity to claim credit under the lending test for its
loans. This distinction therefore recognizes the unique
relationship between an institution and its subsidiaries and
affiliates, and enhances the flexibility of institutions and
their parent corporations to structure their community
development lending programs. The agencies specifically ask
for comment on whether indirect loans should be included in
the lending test, and whether their proposed treatment is
meaningful, workable and effective.
The investment test evaluates an institution's record of
qualified investment in organizations and initiatives that
foster community development, small- and minority-owned
business development, or affordable housing lending, including
state and local government agency housing or revenue bonds.
The service test evaluates whether branches are
accessible to low- and moderate-income areas and whether
services promote the availability of credit. It gives special
consideration to accomplishments or programs that provide
greater access to credit, capital or services. Providing
services such as low-cost check cashing, "lifeline" accounts
and credit counseling can also work to improve an
institution's CRA rating.
We asked for comment on this three-test approach.
Specifically, we are interested in:
o whether those who work with CRA believe that the lending,
investment and service tests are meaningful and workable as
a way of measuring actual performance;
o whether the proposal has struck the appropriate balance
between the need for certainty in the system and the need
for flexibility to reflect an institution's service
capabilities and credit needs of the community; and
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o how performance under these three tests should be measured.
For example, we are open to suggestions on whether the
quantitative measures used in the tests should be expanded
to include a broader array of performance measures.
In addition, we are interested in knowing what, if any,
analytical or computational problems result from the
requirement to calculate relevant ratios under the lending
test using only loans made by institutions that would be
required to report their lending, rather than loans made by
all lenders in the relevant markets. One possible problem may
be that in some instances the "market share" test may not be
an accurate reflection of the true market. For example, the
percentage of lenders subject to CRA and included in a market
share comparison for a given area may be low because both
small institutions and lenders other than depository
institutions would not be reporting data.
Alternative Assessment Methods
Another significant feature of the proposal is the
availability of two alternative assessment methods. The first
is a streamlined examination for small institutions (defined
as independent institutions with total assets under $250
million or institutions with total assets under $250 million
that are subsidiaries of a holding company with total banking
and thrift assets under $250 million). The streamlined
examination would consider an institution's loan-to-deposit
ratio, whether most of its loans are made locally, its loan
mix (including the distribution of loans across income
levels), its record of community complaints and substantive
compliance with the fair lending laws.
The streamlined examination does not constitute an
exemption from the CRA's requirements for small institutions,
and we do not envision a streamlined examination as a mere
formality. We expect our examiners to carefully review an
institution's performance within the framework of a
streamlined examination. The streamlined examination process
should benefit small thrifts and the communities they serve to
the extent that it will allow those thrifts to redirect scarce
resources from additional data collection to community
lending.
The second alternative assessment method, a strategic
plan, is available to all institutions. Strategic plans would
have measurable goals and would be submitted to an
institution's regulator for approval. Notice of a proposed
plan would have to be published in. a newspaper of general
circulation in the affected communities. Regulators would
consult with community groups to decide whether a particular
plan is responsive to community credit needs, and any comments
received from community groups would be taken into account in
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124
the agency's assessment of the plan. If an institution fails
to meet the preponderance of goals set forth in the plan, its
performance would be evaluated under the lending, investment
and service tests.
Regulatory Burden
The focus of the proposal on performance has allowed us
to propose eliminating some procedural requirements.
Institutions would no longer have to prepare CRA statements,
review them annually, or document them in minutes of the board
of directors meetings. Regulators would no longer require
institutions to justify the basis for community delineations
or to document efforts in marketing or the ascertainment of
community credit needs. However, institutions that do not
elect or are not eligible for the small institution
streamlined assessment method would be required to report data
on the geographic distribution of their small business and
some consumer loans.
Data on small business loans would be reported based on
the sales volume of the business. Data on race and gender of
borrowers would not be collected and reported, except to the
extent such data are required by current law. Data would be
reported in summary form and submitted to the agencies by
January 31 of the calendar year following the calendar year
for which the data were collected.
The additional data collected on small business and
consumer loans will be made available to the public along with
Home Mortgage Disclosure Act (HMDA) data. The proposal also
continues the practice of making CRA evaluations public.
Enforcement
The CRA requires the OTS to take into account the CRA
performance record of institutions in considering applications
for deposit facilities. The proposal is more specific than
the current regulations in exactly how the CRA rating will be
considered. In addition to evaluating CRA performance in the
applications process, the proposal specifically imposes upon
depository institutions the continuing and affirmative
obligation to help meet the needs of their entire communities,
including low- and moderate-income areas, consistent with safe
and sound operations. It also provides that institutions
assigned a composite rating of Substantial Noncompliance are
subject to enforcement actions pursuant to 12 U.S.C. 1818,
including the issuance of cease and desist orders and the
imposition of civil money penalties.
Transition Period
Evaluation under the revised CRA standards would not be
mandatory until July 1995. Institutions may elect to be
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125
assessed under the new methods prior to that time. Data
collection under the regulation would begin shortly after it
is finalized.
We will be working throughout the transition period to
revise our CRA examination procedures, train our compliance
examiners, and provide consistent guidance on the new
regulation to the industry.
EXAMIHATIONS AND RATINGS
The Subcommittee's invitation letter asks us to address
the role that credit for investment in certain activities will
have on composite CRA ratings, the process established in the
regulations for institutions to appeal their CRA ratings, the
frequency of CRA examinations for institutions that achieve an
outstanding CRA rating, and the effect of ratings on
applications .
CRA Composite Ratings
Generally, an institution is assigned one of five ratings
for its performance under each of the three evaluation tests:
Outstanding, High Satisfactory, Low Satisfactory, Needs to
Improve, and Substantial Noncompliance. A retail
institution's rating under the lending test forms the basis
for its CRA composite rating. This base rating may be
increased by two levels if the institution has an Outstanding
rating in the investment test or by one level if it has a High
Satisfactory rating. The base rating may also be increased by
one level for an Outstanding rating in the service test, or
decreased by one level for a rating of Substantial
Noncompliance .
The rating would then be converted to the four-level
rating system required by the CRA. High Satisfactory and Low
Satisfactory ratings are both scored as Satisfactory in
reaching the final composite rating. An institution's Needs
to Improve rating would be changed to Substantial
Noncompliance if it received no better than a Needs to Improve
rating on both of its last two examinations. Finally, the
composite rating would be adjusted to take into account
illegal lending discrimination by the institution.
where an institution operates in more than one service
area, the agencies will conduct evaluations in a sample of all
the service areas in which the institution operates. Separate
composite ratings will be assigned on each of the evaluated
service areas. The overall rating for the institution will
reflect the performance of the institution in the evaluated
service areas.
126
Appeals Process
The agencies recognize that the proposed regulations
represent a dramatic change in existing practices and
encourage open and frank dialogue of all aspects of an
institution's CRA performance. The proposal specifically
encourages institutions to consult with the agencies on
compliance with the new standards. In addition, the proposal
permits an institution to rebut its preliminary rating
assigned under the three evaluation tests. The proposal also
encourages liberal use of the agencies' existing appeal
processes.
The OTS currently has a supervisory review process in
place that we expect to use to resolve issues that may arise
under the new regulation. This process establishes a three-
step review for resolving substantive matters that are
inconsistent with existing OTS policies and procedures or have
not been resolved to the institution's satisfaction.
o First, institutions are encouraged to express any
disagreement arising during an on-site examination directly
with the examiner-in-charge while at the institution.
Comments supporting the institution's position may be
included in the final report of examination.
o Second, if a disagreement cannot be resolved during the
examination, institutions are encouraged to directly
contact the appropriate OTS regional office.
o Finally, if a disagreement still has not been
satisfactorily resolved, an institution may file an appeal
with our Washington office. We will request any additional
information within 15 days and make a decision within 30
days of the original request or receipt of additional
information.
Examination Frequency and Ratings
The agencies believe that a link between examination
frequency and an institution's CRA rating provides us with a
sensible way to allocate limited examination resources. We
believe that our attention needs to be focused on institutions
with lower ratings. The agencies also believe that a shorter
examination frequency for institutions with low CRA ratings
may serve as a performance incentive.
Under our present compliance examination procedures,
savings associations rated Outstanding or Satisfactory for CRA
are examined on a two-year cycle, associations rated Needs to
Improve are examined on a one-year cycle, and associations
rated Substantial Noncompliance are examined every six months.
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127
Our policies also permit more frequent examinations where
warranted.
Effect of Ratings on Applications
The CRA requires the agencies to consider the CRA
performance record of an institution in considering
applications by the institution for a deposit facility. The
proposal does not change this long-standing requirement, but
does explain how the CRA ratings will be considered in certain
types of applications.
Along with assessing safety and soundness concerns, the
CRA rating would continue to be an important - and often
controlling - factor in assessing an application. The
proposal recognizes, however, that other information related
to CRA performance is also relevant and should be considered.
For example, information collected through public comment and
through periodic and special reports might be especially
helpful in evaluating an application.
As proposed, ratings of Outstanding and Satisfactory
would generally mean that the CRA aspect of an application is
consistent with an application's approval. A rating of Needs
to Improve would generally be an adverse factor in the CRA
review of an application. This rating would generally result
in conditional approval or denial of an application, absent
demonstrated improvement in the institution's CRA performance
or other countervailing factors. A rating of Substantial
Noncompliance would generally result in denial of the
application.
DISCUSSION
I would like to discuss two issues that are relevant to
our regulatory reform efforts and the effectiveness of the CRA
generally.
First, OTS fully supports the effort to revitalize our
communities through reinvestment. The thrift industry can and
is making a significant contribution to community reinvestment
by providing credit and basic financial services.
Nonetheless, the thrift industry is only one small segment of
the financial system that needs to be mobilized to solve the
nation's community development needs.
In the last five years, the thrift industry's market
share in 1-4 family mortgage originations has dropped from 38
to 18 percent as private mortgage companies and other lenders
increase their market shares. These trends raise the question
of whether nondepository institutions should share in the
responsibility for community development in some way.
128
Second, if we are to successfully increase the flow of
credit to areas of need in our country, we must make certain
that we are doing all that we can at the Federal level to
reduce any barriers to such lending. Solving the problems of
depressed and underserved areas of the country requires the
coordinated efforts of government, industry and private
citizens, all acting in partnership with a common goal.
We need to ensure that the various Federal, state and
local government programs are coordinated and accessible to
all institutions and the public. Currently, were a thrift to
take on the challenge of developing a neighborhood or block in
its community, there would be a number of state and Federal
programs that are available to assist with this lending. But
there is no one place that the thrift could go to find out
about these programs and services. OTS has begun to address
part of this market inefficiency in our affordable housing
initiative announced last spring. We are committed to
encouraging safe and sound lending for affordable housing by
examining and removing any regulatory or programmatic barriers
to such lending and to work with institutions who are
interested in doing more affordable housing lending.
CONCLUSION
The goal of our CRA reform effort is to encourage lending
in low- and moderate-income areas by reducing the paperwork
burden on thrifts and measuring performance rather than
process. We firmly believe that this goal is attainable
within the bounds of safe and sound banking practices.
One of my personal goals during this reform process is to
dispel any concerns that savings associations have had under
the current regulations, or may continue to have, that
compliance with the CRA jeopardizes safety and soundness.
That is simply not true. In fact, one of the underpinnings of
the proposed regulation is the recognition that an
institution's CRA obligation must be met using prudent
business practices. The proposal does not encourage or expect
a liberalization of underwriting standards to the detriment of
safe and sound lending principles. It does, however,
encourage institutions to be innovative in attempting to
create products to meet the various needs of a diverse
customer base.
The interagency proposal is a significant departure from
the way in which the CRA has been administered in the past.
As a result, we expect substantial public comment on the
proposal. We would be pleased to share what we learn from
those comments with the Subcommittee as the regulatory process
continues .
- 9 -
PETERSON ZAH
PRESWSffT
MARSHALL PLUMHER
VICS-PRESIDKNT
129
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NAVAJO NATION WASHINGTON OFFICE
FAITH R. ROESSEU ESQ.
KXtCVnVt DIKICTOR
IIOI 17TB STREET, N.W., SUITE 250
WASHWCTON. D.C 20036
TELEPHONE OOZ) 77^0393
FACSIMILE am 77M075
Testimony of the Navajo Nation
Before the
House Subcommittee on Consumer Credit
and Insurance
of the
Committee on Banking, Finance and Urban Affairs
on Proposed Regulations to Reform the
Community Reinvestment Act of 1977 (CRA)
February 8, 1994
130
PETERSON ZAH
PRKSIDSNT
HAKSHALL PLUMXER
WCS P«f S/DSJVT
FACSIMILE 0aZ) TTMOTS
'if
NAVAJO NATION WASHINGTON OFFICE
PAITM R. ROESSEU ESQ.
SXKCUTIVS DIRECTOK
1101 ITTH STREET, N.W.. SUTTE UO
WASHiNcroN. aa tooss
Testimony of the Navajo Nation remnoHE rnirnam
Before the
House Subcommittee on Consumer Credit and Insurance
of the
Committee on Banking, Finance and Urban Affairs
on Proposed Regulations to Reform the
Community Reinvestment Act of 1977 (CRA)
February 8, 1994
Introduction
Good morning, my name is Marshall Plummer and I am Vice-President of the
Navajo Nation, the largest American Indian tribe in the United States. On behalf of
the Navajo Nation and President Peterson Zah, I would like to thank Chairman
Kennedy and the members of the Subcommittee for conducting this hearing on the
proposed federal regulations to reform the Community Reinvestment Act of 1977
(CRA). The Navajo Nation would also like to commend the Clinton Administration
and the federal financial supervisory agencies for undertaking this much-needed
effort of reforming the CRA.
On October 21, 1993, I testified before this Subcommittee and outlined the
tremendous need for CRA reform that would address the unique lending issues on
the Navajo Nation and in Indian country. The Navajo Nation remains concerned,
however, that the proposed regulations are likely to remain ineffective when
addressing some of the distinct banking issues prevalent on the Navajo Nation and
Indian country. In my statement today, I would like to share some of the Navajo
Nation's concerns with the proposed CRA regulations, and offer some
recommendations to ensure that solutions to banking and credit needs of American
Indians are included in reforming the CRA.
131
Background
Profile of the Navajo Nation
The Navajo Nation is the largest American Indian tribe in the United States,
with a total population of 219,198 enrolled members (13 percent of all Indians
nationwide). The Navajo reservation is also the largest in size (36 percent of all
Indian lands in the lower-48 states), spanning more than 17 million acres across
three states: Arizona, New Mexico and Utah. Our land base is comparable in size
to the state of West Virginia.
Socio-economic conditions on the Navajo Nation are comparable to those
found in underdeveloped third world countries because of the lack of a strong
private sector economy, due in large part by the lack of a solid financial
infrastructure. According to the 1990 Census, the percentage of Navajos living
below the poverty level was approximately 56 percent as compared to
approximately 13 percent for the entire United States. Overall, the average Indian
reservation unemployment rate -on reservations located in 32 states across the
country— is 56 percent .
Housing statistics on the Navajo Nation are equally alarming. In 1993, the
number of Navajo families needing new housing was approximately 20,996\ Of
this total, it is estimated that the total number of families waiting for new houses
was 13,539. Many of these Navajo families are currently living with extended
families in overcrowded conditions thereby creating undue hardship on the
homeowners. The remaining 7,457 families are currently living in houses that are
in such poor condition that they warrant complete replacement. In addition, it is
estimated that 18,427 housing units are in sub-standard condition because they
lack either running water, indoor plumbing, electricity and/or central heating.
Economic and Community Disinvestment
Currently the Navajo economy is experiencing a massive amount of
economic leakage that is directly attributable to community disinvestment. More
than $700 million dollars per year escapes to neighboring border towns which
serve as Navajo regional shopping centers. Many Navajos are forced to travel long
distances to border towns and metropolitan communities such as Albuquerque,
New Mexico or Phoenix, Arizona to purchase almost all of their basic goods,
including food, clothing, vehicles, farm equipment, and the like. Important services
such as automobile repair, laundry and recreational opportunities are also
'According to Navajo Housing Services, Navajo Division of Community
Development, 1993.
132
predominately found in outlying communities. This translates into a loss of jobs for
Navajo communities and an increase in the economy for the off-reservation border
towns and metropolitan areas. Income spent outside the reservation in
municipalities such as Gallup and Farmington, New Mexico are taxed at the point of
sale with all sales taxes utilized for the benefit of that municipality and not
necessarily for Navajo citizens.
Furthermore, many middle income Navajos residing on the reservation,
oftentimes can only secure financing on mobile homes or must move to off-
reservation border towns and metropolitan areas to purchase homes because banks
are reluctant to provide financing for new home construction on the Navajo
reservation. As a result, these Navajos, who otherwise qualify for new home loans
or comparable loans off the reservation, also purchase goods and services in the
border towns in which they reside. Some of these goods and services may be
available on the reservation which further contributes to economic decline.
Banking and Financial Services on the Navajo Nation
I
A financial infrastructure is virtually nonexistent in the Navajo Nation except
for three banks in Shiprock, New Mexico and Window Rock and Tuba City,
Arizona. The disparity of banking services available to Navajo residents is evident
when one drives through a border town such as Gallup and observes in existence,
at least eight banks for a community which has a population of not more than
approximately 20,000. On the other hand, the Navajo Nation, with a population of
more than 200,000 has only three existing banking facilities on the reservation at
this time. As a result, the vast majority of Navajos on the reservation lack access
to capital and financing for personal, small business and industrial development
purposes.
The lack of financial institutions has created a tremendous hardship on
tens of thousands of Navajo people, many of whom must travel up to four hours
round-trip to the nearest facility for basic banking services. Because of the long
distances, it is not uncommon for many Navajo employees to take leave from work
to deposit or cash their paycheck. Despite this tremendous inconvenience, our
communities continue to grow, further increasing the need for financial institutions.
Navajo savings and checking deposits are on the rise in those banks that are
located on the reservation as well as those found in neighboring border towns.
Yet, credit opportunities for Navajo banking customers and business owners are
still severely limited or non-existent.
Credit Terms on the Navajo Nation
Due to the lack of access to credit, many Navajos are forced to seek
financing from many non-financial institutions. For example, in order to purchase
133
an automobile, many Navajos must seek credit through automobile dealers in
outlying border towns instead of financing through more traditional financial
institutions such as banks or credit unions. Although no statistics are available, the
Navajo Nation firmly believes that this type of financing often results in worse
credit terms for Navajo consumers with shorter term loans, higher monthly
payments and higher interest rates. As a result, the Navajo Nation believes that
repossession rates of such business entities are artificially higher because credit
through banks or credit unions is not available.
Overreliance on Federal and Tribal Programs
As mentioned before, the lack of a strong private sector economy forces
many Navajos to rely heavily on federal and tribal assistance programs to provide
basic living needs. For example, adequate housing is extremely scarce on the
Navajo Nation, and one of the major barriers to increased housing development is a
lack of financial resources. In addition to not providing commercial or business
loans, many banks are also unwilling to engage in mortgage lending for new home
construction on the reservation. This places a tremendous burden on many federal
agencies, such as the Department of Housing and Urban Development (HUD) and
tribal governments in attempting to provide adequate housing for Navajo families.
Due to the shrinking federal budget and increased need for housing
throughout the United States, these federal and tribal housing programs cannot
fulfill the tremendous need on the Navajo Nation. Therefore, in order to foster
community development by increasing the amount of new home construction and
repair on the Navajo Nation, federal policies, such as the CRA, need to be
revamped to seek innovative methods of financing for Indian country.
Developing a Self-Sufficient Economy
As previously stated, financial resources for community and economic
development are extremely limited on the Navajo Nation and have therefore
severely dampened tribal initiatives to foster community and economic
development. Therefore, it is vital to the future of our people that banks and/or
community development financial institutions be incorporated into the Navajo
Nation's economy.
The Navajo Nation is currently working to accelerate the development of an
on-reservation private sector by encouraging the creation and expansion of small
businesses, expanding tourism and attracting industrial development to the
reservation. These efforts will require significant capital and financing to pay for
wages, raw materials and other costs, making financial institutions on the Navajo
Nation a virtual necessity. However, if successful, these initiatives will assist in
decreasing the amount of disinvestment and economic losses and increase
134
employment.
Need for CRA Refor m on the Navajo Nation and Indian Country
Historical Perspective of the CRA
Since its enactment, the CRA of 1977 has never been a productive
mechanism in fostering economic and community development in underserved
areas throughout the United States. It has remained even more ineffective with
respect to the Navajo Nation and Indian country since it has never addressed the
specific credit and service needs of Indian country. As a result, CRA assessments
have permitted banks to refrain from providing adequate banking and financial
services to the Navajo Nation and Indian country because it has never been
necessary in order to receive an adequate rating. Consequently, the Navajo Nation
and Indian countrv in general, continue to be among the most disinvested areas in
the United States.
Barriers to Accessing Credit on Indian Reservations
A major barrier to achieving an appropriate amount of credit and financial
services on reservation lands is that most of the land is held in trust for tribes by
the federal government. Consequently, this has subjected banks to the difficulties
of perfecting loans to which the federal government holds ultimate title. Banks,
realizing they cannot foreclose on the federal government generally have chosen
not to extend lending opportunities to reservation areas. While the trust land issue
has presented some difficulties in reservation lending, specifically home mortgages,
banks have expanded their non-lending policies to include most forms of consumer,
commercial and business loans. This includes loans that do not require substantial
collateral.
In addition, most of the banks in and around the Navajo Nation have stated
that repossession is a big problem for their businesses in terms of collecting their
collateral or property. Yet the Navajo Nation has a repossession law which is
available as a remedy to Navajos and non-Navajos. Further, the Navajo Nation has
an approved Commercial Code that governs general business transactions
generally. The Navajo Commercial Code was designed, in part, to address bank
concerns and encourage them to become more active in lending on the Navajo
Nation (Navajo laws and tribal court decisions are published and available).
Attorneys at the Navajo Nation Department of Justice can assist banks and others
that have questions or require further information. In short, the Navajo Nation is
willing to be flexible and creative in its efforts to facilitate an environment
conducive to increasing banking activities.
However, banks have not acted alone in the prolonged practice of non-
135
lending to reservations. The federal financial supervisory agencies have allowed
banks' policies of non-lending on the Navajo Nation and Indian country to exist and
even expand by providing them with acceptable CRA ratings. This is based on
banl<s' contentions that by originating loans on reservations they would be
subjected to an unreasonable amount of high risk, increased cost and unacceptable
time delays. Without any statistical evidence to support such a claim, federal
financial agencies have generally not held banks accountable for failure to provide
adequate lending or banking services, by not rating banks poorly on their CRA
assessment evaluations. Therefore, the original Congressional intent for the CRA
to address credit needs for home mortgages and commercial purposes throughout
America has completely bypassed the Navajo Nation and Indian country.
The Navajo Nation's Involvement with the CRA
Despite our misgivings concerning the CRA, the Navajo Nation has used the
CRA recently with great success in our successful negotiations with Norwest
Arizona in purchasing Arizona's Citibank. In addition, Eugene Ludwig, and the
Office of the Comptroller of the Currency, have played a pivotal role along with an
outgoing bank president who was reasonable and willing to listen to our concerns.
The result was a letter of commitment from Norwest to the Navajo Nation which
aims to significantly improve banking services throughout the Navajo Nation by
originating S60 million in loans over the next ten years, and building a new bank in
Tuba City, Arizona to replace the existing trailer. Norwest has also agreed to
establish new branches in Kayenta and Chinle, Arizona, and improve the branch in
Window Rock, Arizona. Finally, Norwest plans to install ATM machines at all of
these locations.
We are optimistic and hopeful that Norwest will fulfill the goals set forth in
its commitment letter to the Navajo Nation, and we stand poised to assist Norwest
in achieving these banking improvements and lending standards. In spite of this,
the Navajo Nation remains apprehensive because of previous negotiations with
banks.
While the Navajo Nation has only begun utilizing the CRA for only a short
time since its enactment, the Nation now recognizes it as a potentially effective
mechanism to assist in our community and economic development efforts. For
these reasons and many more, we have entered in the arena of public debate on
the CRA.
Proposed Regulations
The Navajo Nation believes that the proposed CRA regulations will generally
encourage a higher degree of actual lending, service and investment throughout
many underserved areas in the United States. It is not clear, however, if these
136
regulatory improvements will result in greater economic opportunities for American
Indian people. The Navajo Nation firmly believes that the present CRA regulations
provide very little incentive for a bank to increase its lending, service and
investment activity on Indian reservations. This may also be true to a lesser degree
for other rural and urban areas which can argue, rationally and intelligently, they
too have not received the benefit of the spirit and intent of the CRA.
Under the proposed regulations, much emphasis has been placed on small
banks, presumably for the purpose of relieving them from being overburdened by
the CRA process. In doing so, small banks will become the major beneficiaries
from this reform by being excluded from data collection and by a "streamlined"
CRA evaluation.
Since small banks make up the majority of those located in and around the
Navajo Nation and Indian country, the Navajo Nation is concerned with this focus
on alleviating small banks from many of the same CRA standards required for larger
banks. The Navajo Nation feels that most small banks will continue to approach
the federal financial supervisory agencies with the same premise that non-lending
to Indian reservation areas is borne out of a business necessity.
Furthermore, federal financial supervisory agencies may continue to accept
this line of reasoning, negating any potential benefits the Navajo Nation and Indian
country may receive from this reform process. Therefore, the language included in
the proposed regulations, which provides that the CRA does not require any bank
to make loans or investments that are expected to result in losses or are otherwise
inconsistent with safe and sound banking operations, needs clarification. The
Navajo Nation is concerned that the language is too broad and ambiguous, and in
order to be more effective, language must be included to specifically address Indian
issues as is done in other regulatory matters. This will assist in ensuring that
American Indian communities, and American Indian people, are given every
consideration by the banking industry and the federal agencies when providing
banking and financial services.
Recommendations
The Navajo Nation has done an analysis of the proposed CRA regulations and
will continue to be involved in the reform process by maintaining a consistent
dialogue with the federal financial supervisory agencies, Congressional members,
and community groups. In addition, the Navajo Nation will be submitting its
comments to the federal financial supervisory agencies on the proposed CRA
regulations on the appropriate deadline date. As a result of our analysis, the
Navajo Nation proposes the following recommendations on how the CRA
regulations should be revamped to address the specific lending and banking service
needs of American Indian people.
137
1 ) Reservation Banking Study
Due to the lack of comprehensive statistics and information on the unique
financial circumstances and needs in Indian country, the Navajo Nation
recommends that the four federal financial supervisory agencies conduct a
thorough study on reservation banking and lending. Financial institutions and
federal agencies do not possess a comprehensive understanding of the lack of
banking services and its impact on American Indians. Results from such a study
would provide much-needed insight on the specific financial circumstances found in
Indian country and should then be disseminated to federal agencies who administer
or oversee programs on or near Indian reservations including HUD and the
Department of Justice.
2) Eliminate Streamlined Method and Disclosure Exemptions for Small Banks
Since small banks are basically the major holders of potential credit on the
Navajo Nation and Indian country, and because of their reluctance to focus on
Indian reservation financial needs, the Navajo Nation recommends that small banks
and thrifts in and around Indian reservations not be exempt from providing data on
the geographical distribution of their loan applications, denials, origins and
purchases to the public. The potential for the public to monitor their community's
bank activities will strongly encourage an increase in lending, service and
investment performance to take place from that bank. Additionally, this will
provide tribal leaders with the opportunity to determine if tribal members are
actually the recipients of the lending activity or, if in checkerboard areas, non-
Indians living within a reservation are the recipients of lending activities. Without
this important data on Indian reservations, where wholesale discrimination is most
likely to occur, the public as well as the federal financial supervisory regulators will
be less likely to become aware of any isolated or class acts of illegal discrimination.
3) Require Data Collection for Small Banks Located on or Near Indian
Reservations
The Navajo Nation recommends that small banks located on or near Indian
reservations not be exempted from the data collection requirements. Since we are
only beginning to explore the role of banking in reservation communities, the need
for quantifiable measurements are needed to assess banks' progress, identify
lending patterns as well as service trends and to plan for the future. If necessary,
because of the tremendous need and because of the federal trust responsibility
over Indian tribes, the data collection efforts may need to be subsidized by the
federal government concerning reservation areas if the concern is to avoid a
disproportionate share of the cost burden of small banks compared to large banks.
Geographic data collection is therefore critical to the success of addressing credit
issues of Indian reservations.
8
138
4) Clarify Safe And Sound Definition to Include Circumstances in Indian Country
The Navajo Nation urges the federal financial supervisory agencies to provide
a clarifying statement In the proposed CRA reform language contained in 25.6 (c)
to ensure that the unique circumstances on Indian reservations and Indian country
cannot solely be construed by banks to be inconsistent with safe and sound
operations. Banks located on or near the Navajo Nation have benefitted from the
ambiguity of this statement by using it to justify non-lending practices on the
Navajo Nation.
5) Provide Incentives for Institutions that Relocate or Expand Services on or
near Indian Reservations
Improve lending, service, and investment tests by providing incentives that
would help boost CRA ratings for financial institutions that relocate or expand their
services on or near Indian reservations. Given the decades of absence in
addressing banking issues on reservation areas by not only the banking industry but
also by the federal financial supervisory agencies, this would allow banks to
increase their CRA assessment for the expansion of facilities and ATM's on
reservation lands. In addition, these incentives would permit banks to improve
their CRA assessments for participating directly with tribal governments in
identifying credit barriers and implementing actions to alleviate those problems.
Incentives for increasing the amount of lending on Indian reservations would greatly
enhance tribal efforts at economic and community development and strengthen the
private sector economy of the Navajo Nation and Indian country. With improved
lending and banking services on the reservation, thousands of Navajos who
presently have to travel up to four hours, round trip, to the nearest bank would
benefit substantially.
6) Provide Incentives for Banks that Utilize Federal Programs Addressing
American Indian Needs
Other incentives that would help boost CRA ratings should be implemented
for banks that utilize and coordinate their lending efforts with established
government loan guarantee programs of particular interest to American Indian tribes
and American Indian people. For instance, banks should be awarded for activities
such as becoming an approved lender of guaranteed loans from the Bureau of
Indian Affairs and the Farmers Home Administration, Housing and Urban
Development Programs, and other government programs which are of special
interest to American Indians. This would provide the motivation and incentive
needed for banks to address Indian concerns. Presently, these programs exist but
not all banks on or near reservation areas are participants.
139
7) Improve Training for CRA Examiners
Federal supervisory agencies must provide bank examiners with proper
training on the unique characteristics of lending issues on or near Indian reservation
areas. This would allow examiners to independently assess and evaluate CRA
ratings for banks on or near reservations without unfair influence from the banking
industry. This will also provide bank examiners with better insight into the
desperate need for banking lending services on or near Indian reservations.
8) Redefine Multiple Service Territories to Include Indian Country
Provide necessary language that will ensure that bank examiners pay
particular attention to the delineated service territories of a bank located on or near
a reservation when conducting a bank's CRA evaluation. This would ensure that
the reservation is not being illegally omitted from a bank's service area. Cases
known to us indicate that banks which are subjected to scrutiny by the federal
financial supervisory agencies regarding lending and services on reservation
property have included activities by those banks to attempt to redraw their
delineated service area or to exclude reservation areas from those already drawn so
as to avoid any accountability for reservation areas in regards to the CRA.
9) Provide Consultation Mechanisms for Communities and Tribal Governments
that would affect a Bank's CRA rating
As currently drafted, it is vague how much consideration would be given to
comments of community members or tribal governments if they did not approve of
a bank's positive CRA rating. The Navajo Nation recommends that more weight be
placed on the comments of American Indian communities and tribal governments
that would affect CRA ratings for banks located on or near reservations. In
addition, the new regulations should require that tribal governments and community
members have a specific opportunity to offer input and review the proposed plan of
action regarding a potential effort to increase banking activities in an area on or
near an Indian reservation.
10) Coordinate Efforts with the United States Department of Justice
The Navajo Nation recommends that the federal financial supervisory
agencies coordinate efforts with the Department of Justice to eliminate illegal
lending discrimination. Recently, the United States Department of Justice settled a
lawsuit that was brought about involving the Blackpipe State Bank in South
Dakota. In a press release dated January 20, 1994, the Justice Department
indicated that in November of 1993, Blackpipe State Bank was sued by the Justice
Department for allegedly refusing to make secured loans where the collateral was
located on an Indian reservation, for placing^credit requirements on American
10
140
Indians that it did not require of non-Indians, and because Indians were charged
greater interest rates and finance charges than non-Indians were. Attorney General
Janet Reno indicated that this was the first lawsuit of its type to be brought on
behalf of American Indians, and said the investigation focused on the unique
problems people on the reservation have in obtaining credit.
11) Establish a Task Force to Coordinate Lending Efforts with the Federal
Financial Supervisory Agencies
Specific language should indicate that a task force or commission, made up
of the various department heads having special government guaranteed programs,
will be established to coordinate with the federal financial supervisory agencies
those activities which will result in a greater coordination of efforts in regards to
addressing the special unique characteristics of lending, service and investment
issues relative to Indian reservation lands.
Conclusion
In order to assist the Navajo Nation and other American Indian tribes improve
the current standard of living throughout Indian country by developing self-
sustaining private sector economies, and decreasing the overreliance on federal
programs, it is vital that current efforts at reforming the CRA include specific
strategies that address the unique lending characteristics on the Navajo Nation and
Indian country.
If however, specific improvements-directed to improving the specific lending
and banking issues prevalent on the Navajo Nation and Indian country-are not
included in the proposed CRA regulations, socio-economic standards on the Navajo
Nation and Indian country in general, will continue to remain among the lowest in
the United States. The accumulative result, an increase in unemployment and
poverty on Indian reservations, will continue without the aid of a well developed
private sector. By necessity, the Navajo Nation is looking to this nation's financial
institutions, the federal financial supervisory agencies and Congressional members
to conduct this reform in a coordinated and cooperative effort to ensure that the
unique economic and community needs of American Indian people are addressed.
Thank you for the opportunity to testify today. The Navajo Nation looks forward
to working with you in the near future.
11
141
CRA REGULATORY REFORM:
OF INCLUSION
Testimony for the
U.S. House of Representatives
Subcommittee on Consumer Credit
and Insurance
of the Committee on Banking
Finance and Urban Affairs
By Rev. Charles R. Stith. National President
Organization for a New Equality
February 8, 1W4
142
CRA REGULATORY REFORM: THE ILLUSION OF INCLUSION*
Last year President Clinton charged the nations' bank regulators with the task
of revising the Community Reinvestment Act so that the regulations would focus
on performance rather than process. The fundamental principle the President felt
should guide this effort was that the CRA should result in equal access to credit,
capital, and services for the minority community and other capital-starved com-
munities. The effect of this reform was to be the inclusion into the economic main-
stream of those who historically have been mired in the economic swampland.
Reform of the CRA was necessitated by discriminatory practices by banks.
This has been documented by such varied sources as:
• The Atlanta Constitution newspaper 1988 study showing that a white high
school drop-out had a 60% better chance of getting a mortgage than a black person
with a graduate degree;
• The First District Federal Reserve Bank study of Mortgage Lending in Boston
based on 1990 HMDA data documented a 3:1 disparity in the declination of home
mortgages for minorities.
The effects of these practices are more startling than the details of the dis-
crimination itself.
* Testimony presented by Rev. Dr. Charles R. Siiih, National President, Organization for a
New Equality and on behalf of the Naiional Communiiy Reinvestment Network, with affili-
ates from communities of color in over 80 ciiics and towns across America.
143
The Illusion of Inclusion/page 2
In 1987 (the most recent date for which complete figures exist), whites owned
30 times as many businesses as African Americans.
COMPARISON OF BUSINESS OWNERSHIP BY RACE
91%
13.5 MIL. WHITE-OWNED BUSINESSES
OPEN FOR
BUSINESS
ERENCE
424,000
BLACK-OWNED
BUSINESSES
Whites own 30 times the number
of businesses as Blacks
1 987 U S OEPT OF SMALL BUSINESS ADMNISTOATXJN
144
The Illusion of Inclusion/page 3
Whites own 12 times the number of homes as African Americans. (It is worth
noting that the rate of homeownership for African Americans in 1990 is 42%;
which does not equal the rate of homeownership for whites in 1890, which was
51%!)
COMPARISON OF HOME OWNERSHIP RATES BY RACE
55 MIL. WHITE-OWNED HOMES
90%
a
THE
IRENCE
ANtt
WHli
IK
4.6 MIL.
BLACK-OWNED
HOMES
7.5%
Whites own 12 times the number
of homes as blacks
1992 U S.CENSUS BUREAU
FACT: Black mortgage applications are
rejected at more than 2 times the rate of White.
145
The Illusion of Inclusion/page 4
These disparities translated into terms of net worth result in the average
white family in America being worth $43,000 while the average Black family is
only worth $4,300.
MEDIAN NET WORTH BY RACE
$
50,000
45,000
25.000
15,000
5,000
WHITE
BLACK
1984
WHITE
$43,000
4,300
BLACK
1988
WHITE
BLACK
1991
The Difference in Black & White
us CENSUS BUREAU - 1991
1991 CONSTANT DOLLARS
146
The Illusion of Inclusion/page 5
The irony of this disparity in net worth is underscored by the growth of the
Black middle class. In the past thirty years Black membership in the middle class
has increased 300%.
BLACKS IN THE MIDDLE CLASS
$
42%
18%
1960
1990
Black membership In the middle class has grown
300% In the past 30 years
147
The Illusion of Inclusion/page 6
While the CRA Reform Proposal as packaged promises that minorities will be
included as full panicipants in the financial marketplace and that banks will pur-
sue fairer practices; in fact, what it really offers is the "illusion of inclusion."
There are three critical flaws in the proposed package which preclude it from
resulting in the degree of fairness in lending and services that would enable the
minority community to begin to close the equity gap which exists between it and
the white community.
1.) There Is a Failure to Significa ntly Deal with Race as a Factor in De-
termining or Evaluating CRA Compliance
While the proposed CRA reform package makes reference to HMDA in the
evaluation process; it is ambiguous as to how to interpret what HMDA means rela-
tive to the evaluation, or what weight is to be given to the data in determining a
bank's compliance with CRA.
The failure to deal with race as a factor is further underscored by not requir-
ing the collection of race specific data for small business loans.
The failure to collect small business data to reveal the race of the borrower
makes it impossible to mitigate or monitor discrimination against minority busi-
ness owners and entrepreneurs. To simply measure a bank's market share of busi-
ness loans by zip code or other geographic measure would do nothing to remedy
the problem of racial discrimination against minority entrepreneurs and business
owners who want to operate in communities of color.
2.) The Rating System is Flawed
At the core of CRA compliance is the credibility of the composite rating sys-
tem. The proposed system could obscure the lack of a lending relationship by a rc;
tail bank with communities of color and other low and moderate income communi-
148
The Illusion of Inclusion/page 7
ties. Because a bank's composite rating could be raised by two levels for an out-
standing rating on the investment test, and by one level for an outstanding on the
service test; a bank could get a "Needs to Improve" on the lending test and still re-
ceive an overall outstanding rating.
Another shortcoming of the proposed plan is that it allows a bank to appeal its
CRA rating, but it does not afford the same opportunity to community based or-
ganizations.
A third problem with the rating system is the vagueness of the qualifiers used
to determine the ratings themselves, for example terms like "very significant,"
"very little," "insignificant," do little to objectively clarify what an institution must
do to be in compliance.
3.) Community Groups are Marginalized in Terms of CRA Compliance
The option of banks developing strategic plans in consultation with the
"community" as a way of fulfilling their CRA commitments sounds promising, but it
is also problematic. The principle problems being the lack of resources and capaci-
ty of many grassroots community organizations to evaluate the appropriateness of
a CRA plan and to monitor such a plan after it is agreed to. The resource issue be-
came very clear for us when we requested HMDA data from BancOne and their re-
sponse was that we would have to pay over $400 to get it! While 0»N«E as a na-
tional organization could afford this cost, many of our member organizations could
not. What's more, even if they could get the data, the ability to analyze it properly
poses a substantial barrier for many groups.
The point is this: relative to the banks, community groups lack resources.
Communities lacking effective CRA advocates can have the bank define its CRA
plan without effective community input. Banks, in soliciting input on strategic
149
The Illusion of Inclusion/page 8
plans can afford to play one group off against another. Once the CRA plan has been
approved, even the most sophisticated community groups have difficulty monitor-
ing compliance.
Finally, community groups are marginalized because there is no formal mech-
anism for soliciting input during either the examination process or the develop-
ment of a bank's strategic plan.
0»N»E's 10 Recommendations for Reforming the CRA Regulations
1.) HMD A data must be used as a factor to determine market share parity un-
der the lending test.
2.) Collection and reporting of HMDA-like data for small business loans must
be mandatory for all banks.
3.) Small business lending to racial minorities must be used to determine mar-
ket share parity under the lending test.
4.) Community groups must be given the right to appeal inflated ratings.
5.) Community input should be sought by regulators as part of the examina-
tion process and by banks at the outset of the development of their CRA Strategic
Plans.
6.) Quantifiable measures should be assigned to qualifiers to fairly measure a
banks' performance.
7.) No retail bank which performs poorly on the lending test should be given a
passing final grade.
8.) Minority hiring and the appointment oT minorities to a bank's Boards of Di-
rectors should be used as factors in the service test.
9.) Minority procurement should be used as a factor in the investment test.
150
The Illusion of Inclusion/page 9
10.) Banks should be given credit under the investment test for support of
CRA advocacy groups.
Conclusion
While there are going to be honest differences of opinion in the debate about
reforming CRA, we should remember that our deliberations are not taking place in
a vacuum. We should not be timid about taking bold action to correct age old ine-
quities because there is evidence that CRA can work. It can be profitable for banks
and beneficial for individuals in communities that cling to the hope of realizing the
American Dream. The Bank of Boston has demonstrated that dramatic change is
possible. In just one year the bank did three times as much mortgage business in
the African American community as it did the year before; with no disparity in the
CASE STUDY OF PROGRESS: The Bank of Boston
Home Mortgage Loans to
Blacks
in Greater Boston
14%
Mortgage Application
Denials, 1992
1 2.4%
10.9%
1991
1992
WHITE
BLACK
■ Lending to Blacks up 300%
Rejections for Whites > Blacks
151
The Illusion of Inclusion/page 10
declination rate.
Finally, let me underscore that what is at issue here is something more than
can be reflected in charts and graphs. It is something more fundamental than that
which is expressed in cold, staid, statistical terms. What is at stake is the ability of
people of color in this country to fashion a financial future for our families, to re-
vive our communities, and save our children.
The name of the economic game in America is not just income, but equity; it's
not just what you have, but what you own. Unless we have access to the capital,
credit and services of banks and S&L's, the American Dream will be beyond our
grasp. The flaws in the present proposal must be corrected lest we're left with the
"illusion of inclusion" rather than a real option of opportunity.
152
TESTIMONY
of
TERRY J. JORDE
PRESIDENT/CHIEF EXECUTIVE OFFICER
TOWNER COUNTY STATE BANK
CANDO, NORTH DAKOTA
on behalf of the
INDEPENDENT BANKERS ASSOCIATION OF AMERICA
before the
SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE
of the
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
FEBRUARY 8, 1994
153
Mr. Chairman, I am Terry Jorde and I am President and CEO of the Towner County
State Bank in Cando, North Dakota. I am also Vice-Chairman of the Bank Operations
Committee of the Independent Bankers Association of America and I have been nominated to
serve as the IBAA's Treasurer. The IB A A is the only national trade association that
exclusively represents the interests of community banks.
The Towner County State Bank is a small bank serving Main Street America and
American agriculture. We have $24 milhon in assets and 12 employees, serving a town of
1500 people. There are thousands of banks throughout the Midwest and the nation carrying
forward this important role. I am personally involved in community support activities,
serving on the board of our county hospital and the board of an economic development
corporation. My activities are typical of an involved community banker. I am aware of
similar activities throughout my state because the governor has appointed me to the Board of
the North Dakota Department of Banking and Financial Institutions.
We appreciate the opportunity to testify about the Administration's proposed
Community Reinvestment Act regulations. They respond to the President's directive to
improve the CRA process in ways that "minimize the compliance burden on financial
institutions while stimulating improved CRA performance. "
The CRA reform initiative was based on the recognition that CRA is one of the most
burdensome and least effective regulations. We commend the regulators for recognizing that
local community banks shouldn't be under the same paperwork requirements as multinational
and multistate institutions. We strongly support the proposed streamlined examination
process for banks under $250 million.
My testimony today will discuss this feature of the regulations, as well as other key
aspects. In the near future the IBAA will be submitting formal comments to the agencies and
I ask that you accept these comments into the record of this hearing.
A TIERED REGULATORY SYSTEM
The current CRA enforcement scheme treats large, multinational and regional banks
the same as community banks. This is unjustified. Both the banks and the markets they
serve are completely different. About the only thing my bank has in common with Bankers
Trust or J. P. Morgan is the fact that we both accept deposits and have commercial bank
charters.
In 1991 the Financial Institutions Subcommittee recognized this fact and adopted an
amendment offered by Representative Kanjorski exempting from CRA all institutions under
$150 million in assets and all rural institutions under $250 million. The full committee
dropped the proposal in a deal with the Bush Administration over an unrelated provision.
The current proposal builds on the principle behind the Kanjorski amendment — that
community banks are, by definition, committed to serving their markets -- while maintaining
the requirement that all institutions comply with CRA.
154
While the Community Reinvestment Act covers all sizes of institutions, it is flexible.
The statute provides regulators with ample authority to ease the compliance burden imposed
on community banks.
Some have claimed that the proposed streamlined examination system for banks under
$250 million in assets is inconsistent with the legislative history of CRA. However, there
was no discussion or reference in any of the committee reports or floor debate which
indicates that all banks had to undergo an identical enforcement scheme. And, the legislative
history makes clear that the Act was not intended to require banks to do any additional
paperwork. The proposed streamlined examination process is completely consistent with this
original intent by significantly cutting back the paperwork requirements for smaller banks.
This is justified by the fact that different sized banks have differing abilities to comply with
regulations.
Community bankers strongly support the goal of CRA-investment in our
communities. Many community banks serve low-to-moderate income residents since they
make up the great majority of our market. This is where we work and live. CRA as it is
presently administered detracts from banks serving these communities by emphasizing a
paper trail rather than ongoing lending performance.
Our bank recently completed a CRA examination by the FDIC and received an
"outstanding" rating. It is hard to argue with success, but I want to point out that it was
very costly and time consuming for our bank to obtain this rating. Examiners did give us
credit for helping beginning farmers to obtain loans from the Bank of North Dakota and for
the many other community development programs that we promote. But, they also looked at
our CRA file which included a lot of paperwork intended to show that we are trying to
determine our community's needs and offering products to meet those needs. This is very
burdensome for my bank which has only 12 employees. Although we are proud of our
"Outstanding" rating, I can honestly tell you that all of the extra paperwork and
documentation did not result in even one more loan being made in our community. All it
does is take up the critical time that our staff could better spend outside of the bank working
directly with members of our community. Thai sort of paperwork is unnecessary; if we
don't know and meet our community's needs our community won't survive, and neither will
we. It's that simple.
It is our hope-and our prayer— that CRA reform significantly reduces the paperwork
burden while enhancing the lending and investments of the relatively few community banks
that need improvement.
We believe a tiered system is consistent with President Clinton's request for an
improved CRA process. On July 15, the President said a CRA "system too inflexible to
recognize the r^ differences among the circumstances in which our banks and thrifts operate
would poorly serve both our financial system and our communities." The proposed CRA
revisions differentiate between multinational and regional institutions serving large,
155
3
metropolitan areas, and the community banks serving small towns and rural areas.
Small town America has the "other side of the tracks" in their towns. Other small
towns are comprised almost solely of low- and moderate-income families. What is often
overlooked is Uiat the small town community bank must serve both sides of the track if it is
to survive, and more importantly, if its community is to survive. This is because in many
small town communities, a large number of residents have low- to-moderate incomes.
Existing regulatory policies make modest acknowledgements about the need to
differentiate between small banks and large banks. Yet, most often, no meaningful burden-
reducing distinctions are made. Community bankers repeatedly testified during the
regulators' CRA hearings that they are being held to the same standard~in terms of
documentation and paperwork as their larger competitors. Banks with staffs of 10 are being
asked—and are expected—to do the same as those with staffs of thousands. Banks in towns of
1,000 are being held to standards that parallel those for multinational financial corporations
operating nationally and serving the world.
What public purpose is served by a regulatory system which discriminates against
community banks by inflicting them with the same regulatory burden as multi-billion
institutions? What public purpose is served by a regulatory structure that threatens the very
existence of small community banks, and yes, even the communities they serve?
STREAMLINED EXAlVnNATION PROCESS
Not an "Exemption"
The $250 million streamlined examination process is not an "exemption." In
proposing this plan the regulators recognized that while community banks must continue to
comply with CRA, they cannot bear the same paperwork burden as larger banks. Under the
new system CRA examiners will look at a community bank's actxial lending record .
Examiners will no longer require a bank to prove that it is trying to serve its community.
Instead, examiners will determine whether the bank is actually serving its community by
reviewing the bank's loan files.
Problems With the 60% Benchmark
The streamlined examination system has a serious flaw, however. To gain a
satisfactory rating a community bank must have a 60% loan-to-deposit ratio, which is
presumed to be reasonable.
There are a number of serious problems with any fixed ratio in a regulation intended
156
to apply nationwide to banks serving many different markets. A fixed ratio fails to account
for differences among local markets and for the ebbs and flows of activity within markets.
Many areas lack sufficient loan demand, making it impossible to meet an arbitrary
60% test. For example, one rural bank cited a number of reasons why its loan-to-deposit
ratio is below 60%:
- farmers who survived the agriculture crisis of the 1980s are reluctant to
borrow;
- housing costs are much lower than in urban areas so loans are smaUer and
run for shorter terms;
- real estate often changes hands by land sale contract between buyer and seller
which cuts capital gains taxes and, incidentally, generates no loan demand; and,
- many rural customers are older people who have substantial savings and do
little borrowing.
These factors would likely affect thousands of banks in rural and small-town America.
It makes no sense for examiners to impose the 60% benchmark and then require these
thousands of banks to demonstrate that a lower ratio is reasonable.
In addition, many markets, particularly rural areas, experience significant seasonal
variations as farmers take out loans to plant crops or businesses buy inventory and then repay
the loans later in the year. A fixed loan-to-deposit ratio would not adequately reflect these
seasonal variations.
My bank provides an excellent example of this. We make every good loan we can,
mostly for agricultural purposes. The following table shows how our ratio fluctuates on an
annual basis due to the seasonal patterns of agriculture:
1993 January
44.76
February
44.49
March
45.76
April
48.74
May
50.67
June
57.52
July
62.05
August
64.38
September
64.60
October
64.48
November
61.64
December
55.92
157
1994 January 50.68
My bank's loan-to-deposit ratio has ranged from 44.5% to a high of 64.5%. If my
bank was examined in August under the proposed regulation we would be rated
"Satisfactory," but if examined in January, we would come under intense scrutiny. I would
have to keep all the required documentation in order to plead my case if we were examined
in the winter. Keep in mind that we were examined this winter and still received an
Outstanding rating. Clearly, our loan-to-deposit ratio was considered, but other factors were
more relevant.
I do not believe that averaging our loan-to-deposit figures, as some have suggested,
would accurately reflect the credit demands in Cando and the needs we have met. We
clearly have a predictable annual cycle in my market; but other markets may have very
different cycles, depending on the lines of business that are important in those areas. A
simple averaging rule could not be sensitive to those differences.
The loan-to-deposit benchmark also ignores much of a bank's community
reinvestment activity. Banks are increasingly originating loans and selling them into the
secondary market. This activity helps banks' communities but does not show up in the ratio.
As I indicated, we received CRA credit for helping three farmers get Beginning Farmer
Loans from the Bank of North Dakota. No portion of these loans is carried on our books.
We also participate in a program which helps our lower-income customers get long-term,
fixed-rate real estate mortgages with very low down payments. The loans are sold on the
secondary market and our bank receives just $100.00 per loan for our services. Since we
pay a $1000 per year fee to HUD to participate in the program this is clearly a service, not a
profit center. These are the types of activities CRA encourages, yet none of them are
reflected in the bank's loan to deposit ratio.
Similarly, community banks effectively lend to local municipalities for infrastructure
development by purchasing municipal bonds. These are not counted as loans. Banks also
make considerable investments in collateralized mortgage instruments and mortgage-backed
securities (CMO & MBS). These investments allow banks to support long-term home
lending without taking long-term interest rate risk.
Our bank also originated and participated out to other banks $2,690,000 in loans. We
did this to stay under our lending limit or to provide our customer with a lower interest rate.
If these loans were added to our own, it would increase our loan-to-deposit ratio by more
than 12 percent.
If the proposed 60% loan-to-deposit test were adjusted to take these factors into
account it would make a vast difference to many other banks. For example, IBAA's
President, Jim Lauffer, testified before another subcommittee last week that his suburban
bank's loan-to-deposit ratio would increase from 49% to 67%.
158
That would actually understate many banks' support for community lending if they
originate and sell a substantial amount of home loans each year . Most of the funds they lend
originate in any given year will remain outstanding while they continue to originate and sell
new loans the next. By using the secondary market this way we can leverage our deposits
and provide an ever-increasing amount of long-term financing to homeowners throughout our
community.
The term "deposit" also presents difficulties, particularly for community banks which
depend much more heavily than large banks on deposits to fund their assets. In addition,
public deposits can be a significant portion of a bank's deposit base, yet they are often short
term. They are often placed in the bank for short periods. In short, they are not "core"
deposits available for community lending. Including public deposits in the loan-to-deposit
ratio would further misrepresent banks' lending activity.
Because of these factors, half of the banks under $250 million in assets do not meet
the 60% requirement. Indeed, the regulators have said they chose that figure because it is
the median. Because it is a national median, it does not take regional and local economic
differences into account or the differences between rural and urban banks.
Hundreds of banks that are relatively close to the 60% ratio may try to book enough
loans to reach a ratio which is inconsistent with safety and soundness. Thus, the proposed
CRA regulation could become an artificial incentive to "reach" to make loans that a bank
should not make. This could undermine the efforts of safety-and-soundness examiners who
have for decades cautioned community banks against maintaining a too-high loan-to-deposit
ratio.
This sort of artificial incentive is not only unwise, it is unnecessary. Many bankers
have told me that they wish that there were more opportunities to make sound loans in their
markets.
Because of these factors, we will recommend to the regulatory agencies that they drop
any reference to a specific loan-to-deposit ratio.
Level of Banks Eligible for Streamlined Examinations
Though some have argued that the $250 million asset level encompasses too many
institutions, it only applies to approximately 16% of the banking industry's total assets.
There are many community banks above that level that operate with small staffs and with an
intense local focus. They too should be examined under the streamlined examination system.
Therefor, we are recommending that the regulators give community banks up to $500 million
in assets the option of being examined under the tiered system. Even this level of coverage
would increase the level of assets covered to approximately 19%.
159
We also recommend that banks under $250 million in assets within somewhat larger
holding companies be eligible for streamlined examinations. Many of these smaller banks
are operated as completely independent entities in widely separate markets and do not have
any greater resources than banks outside of holding companies.
We strongly urge the regulators to provide for regular adjustments to whatever asset
cutoff they adopt for the tiered system. This is needed to account for the fact that banks
grow as a result of inflation, economic activity, and interest credited while maintaining the
same level of staffing. A static asset level for streamlined examinations could discourage
community banks from growing and helping their communities create jobs.
Enforcement Provisions
Under the proposal, regulators could impose the full range of enforcement provisions
to enforce CRA. Congress did not provide for this when it originally passed CRA. It only
provided that an institution's CRA performance would be a factor when an agency considered
an application for approval of a new branch, a merger, or the like. We will urge the
regulators to continue their current practice of enforcing CRA through the applications
process.
LARGER BANK EXAMINATION SYSTEM
Service Areas
Our members - which are fully examined for CRA compliance - must often compete
against branches of larger banks that are almost never visited by a CRA examiner. These
branches are free to accept deposits and do little else to serve their community. The large
bank may use some of the deposits to make splashy, but relatively small, CRA commitments
in far-away communities. Otherwise, these branches get a free ride.
The proposed regulations begin to address this loophole. They would define a bank's
service areas as those areas where it makes most of its direct loans. Even so, you should
understand that the agencies lack the resources to examine all branches of large banks. They
will have to rely on sampling. The competitive inequity will remain, though it might be
somewhat decreased.
Other Financial Service Providers
At the time Congress passed the Community Reinvestment Act, banks and savings
and loans played much larger roles in the financial marketplace than they do today. The cost
of federal deposit insurance was comparatively low. Only commercial banks had direct
access to the Federal Reserve's discount window. This has all changed.
160
Banks and thrifts have lost significant market share to competitors. The cost of
federal deposit insurance has nearly tripled since 1989. In 1991 Congress gave securities
firms direct access to the discount window. But, CRA still applies only to banks and savings
and loans.
Non-bank institutions such as mutual funds, insurance companies, and credit unions
benefit significantly from the Federal Government's commitment to maintain the stability of
the financial system. However, the government imposes no community investment
requirements on them. Given the shifts in market share from banks and savings and loans to
these other financial players, a smaller and smaller share of the financial marketplace is
under any CRA obligations. Banks and thrifts cannot singlehandedly cure the problems CRA
was designed to address. We recommend that Congress expand CRA to encompass those
firms that are gaining a greater share of the financial marketplace.
CONCLUSION
We appreciate this opportunity to assist you in your review of the proposed CRA
regulations. We strongly urge you to support the tieroi examination system that the
regulators have develop^ for community banks. Unless community banks can get a break
from the current heavy burden they will find it increasingly difficult to continue serving their
communities. That would truly undermine the goals of the Community Reinvestment Act.
#
161
Center for Community Change
Testimony By
Allen J. Fishbein
General Counsel
Center for Community Change
Washington, D.C.
on
The Administration's Community Reinvestment Act
Reform Proposal
before
the Subcommittee on Consumer Credit and Insurance
of the
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives
February 8, 1994
1000 Wisconsin Avenue, NW, Washington, D.C. 20007 202-342-0519 FAX: 202-342-1132
162
Good morning, Mr. Chairman and members of the Subcomminee. My name is
Allen J. Fishbein and I am the General Counsel of the Center for Community Change
(CCC) and Director of the Center's Neighborhood Revitalization Project. My
involvement in the community reinvestment field spans over sixteen years, during
which time I have authored and co-authored numerous publications on the
community reinvestment. In addition, I have served on the Federal Reserve Board's
Consumer Advisory Council, the Federal National Mortgage Association's Affordable
Housing Impact Advisory Council, and the American Bar Association's Consumer
Financial Services Committee.
CCC is a national, non-for-profit organization, based here in Washington, D.C.,
that provides research and assistance to community groups working in low income
and minority communities across the country. Over the course of more than twenty
years, CCC has trained hundreds of grassroots organizations on the techniques for
assessing community credit needs, evaluating lender performance, and building
effective community reinvestment partnerships. In addition, we monitor the
performance of the bank supervisory agencies in carrying out their mandates under
the Community Reinvestment Act (CRA), Home Mortgage Disclosure Act (HMDA), and
the fair lending laws. CCC is also a founding member and serves on the Board of the
National Community Reinvestment Coalition, whose members are engaged in efforts
nationwide to expand access to credit for low income and minority communities.
Chairman Kennedy, I very much appreciate the opportunity to testify here
today before this Subcommittee on the important and timely subject of the
Administration's CRA reform proposal. Your outstanding leadership and tireless
support for expanding credit access in underserved communities has been invaluable
in promoting much of the progress that has occurred in this area in recent years.
Last July, President Clinton directed the four federal regulatory agencies to
undertake an effort to strengthen CRA enforcement by placing greater emphasis on
the lending performance of financial institutions. The President's initiative was
generally applauded by community groups and lenders alike as a means for improving
administration of the act, which as we should all know by know has been plagued
from the outset by weak and inconsistent enforcement. The Administration's proposal
was finally unveiled at the end of last year.
We are certainly appreciative of the efforts by Comptroller Ludwig, who has
served as the President's quarterback for this reform initiative. The energy and
refreshing openness Mr. Ludwig brought to this endeavor has gone a long way toward
restoring some measure of community group confidence in the commitment of the
regulatory agencies to enforce CRA.
163
Despite the history of lackluster enforcement, CRA cannot be described as a
failure. The law has been responsible for generating billions of dollars in new loans
and investments to underserved communities. Further, the mere existence of CRA has
spurred many banks and thrift institutions to discover new markets and develop new
products to better ser,-e the loan needs of modest income families and neighborhoods.
In short, lenders and communities have found ways to form reinvestment partnerships
to address unmet credit needs notwithstanding the many shortcomings which have
existed in enforcement.
In testimony last fall before Congress on the then yet to be released reform
proposal, Comptroller Ludwig stated, "One of the principal goals of the President's
reform initiative is to achieve a CRA rating system that commands respect from all
parties." We could not agree more with this statement. Inflated and inconsistent CRA
ratings have been cited in a number of congressional inquiries as undermining the
effectiveness of the statute.
As we know, Mr. Chairman, prior to the public disclosure of CRA ratings, which
you championed, hardly any institutions examined received less than satisfactory CRA
grades from the regulators. In contrast, in the first two and one-half years following
the institution of the public disclosure requirement the distribution of CRA ratings
changed considerably, with approximately eleven percent (11%) of industry receiving
less than favorable ratings. There is evidence, however, that over the course of the
past year ratings inflation in creeping back into the system. A study my organization is
about to release found that the percentage of institutions receiving less than
satisfactory ratings is down significantly. In first nine months of 1993 fewer than
seven percent (7%) of lenders received less than satisfactory CRA ratings from their
regulators.
Now clearly, this can be a case of whether the glass is considered to be half-
empty or half-full. I guess an argument can be made that the decrease in poor ratings
reflects improvements in the community reinvestment performance of lenders.
Alternatively, it may simply mean that lenders are becoming more adept at working
the system by providing examiners with what they think the examiners would like to
hear. Based on my review of hundreds of performance evaluations I have read I think
it is most likely to be the latter rather than the former.
In any event, I cite this information because it illustrates the ongoing need for
clearer, more measurable performance standards, which we all know do not exist
under the current regulatory scheme. In fact, we believe that the two most important
measures for assessing the quality of the CRA reform proposal are: 1) Is it likely to
lead to a ratings system "that commands respect from all parties"? 2) Is it likely to
result in increased community reinvestment in underserved communities? Unless both
questions can be answered in the affirmative, the exercise is little more than
rearranging the furniture in the regulatory living room.
164
The Proposed System
The system the regulators are proposing is a far reaching one. It would
completely scrap the old CRA regulations, with the twelve assessment factors that
agency examiners have used for over fifteen years to assess individual lender
performance. Instead, the type of examination that banks and thrifts would undergo
would likely depend on their size.
Thus, under the proposed system financial institutions with assets under J250
million would be presumed to have a satisfactory performance under CRA if they
passed on a number of screening criteria. Primary among these is the bank's loan to
deposit ratio, with a 60% loan to deposit ratio presumed to be reasonable. Larger
banks and thrifts would be subject to three tests, which would focus on their lending
performance, their investments and their provision of banking services. Retail
institutions would be judged primarily on the results of their lending test, while
wholesale and special purpose banks' ratings would be determined by how they fared
under the investment test.
"Pros and Cons" of the Proposed New CRA Regs
To begin with, we believe the regulators collectively deserve credit for
proposing a thoughtful alternative to the current ineffective ratings system. For one
thing, the proposal has required four to six weeks of study before anyone has been
able to begin hurling grenades at it.
The proposed regulations seek to place greater weight on a lending
institution's actual record of performance (i.e., loans made in low and moderate
income areas) and much less emphasis on the process the lender goes through to
achieve its record. We believe the proposal esublishes a framework for shifting the
emphasis of CRA enforcement to a more performance driven system, although
considerable discretion remains with the examiners to interpret standards. While we
like to the movement to a performance driven system, unfortunately, the proposed
rules do not effectively address a number of important concerns. Moreover, in several
key respects, we fear these regs could result in weaker, not stronger CRA enforcement.
Having said that, let me emphasize that we believe that the flaws in the
proposal are certainly correctable through the administrative rulemaking process.
Therefore, Mr. Chairman, we would encourage Congress to wait until the rulemaking
has run its full course before making a judgment about whether legislative action is
needed.
165
Important Steps Forward
As we talk to community groups around the country, consensus seems to be
emerging around several elements of the proposal that groups feel represent
significant advances over the status quo. These include:
1. Expanded disclosure of loan data.
The public disclosure of loan information has proven time and again to be a
powerful tool for changing banking industry practices with respect to low and
moderate households and communities. Under the proposal, new geo-coded
information about small business, small farm, and certain types of consumer lending
activities of larger banks (assets over $250 million) for the first time will provide the
public with important information about where lending occurs. This information,
along with housing-related disclosures, will be extended to rural areas for which there
currendy is no Home Mortgage Disclosure Act (HMDA) data. Moreover, the collection
and disclosure of this data is integral to the implementation of a more performance
oriented ratings system.
2. Use of supervisory po^rers.
The new rules spell out the circumstances in which the agencies can use their
full range of supervisory powers (e.g., civil money penalties, cease and desist orders,
etc.) against lenders that thumb their noses at CRA compliance. Under the proposal,
those institutions receiving "Substantial non-compliance" ratings may be subject to
enforcement actions. Additionally, if a lender receives a "Needs to improve" rating for
three consecutive evaluations it will be automatically downgraded to "Substantial non-
compliance." This provision is consistent with the statute, which gave the agencies
broad discretionary authority to "implement the purposes" of the act.
3. Comparative market share analysis.
Under the reform proposal, the level of lending would primarily determine a
larger retail bank's CRA rating. Lenders would be rated on the extent to which its
share of various types of loans - housing, small business, consumer, and small farm -
made in low and moderate income areas of its community compares, favorably or
unfavorably, to its share of loans in the other areas of its community. In addition to
this comparative test, the even distribution of a lender's loans throughout the low and
moderate income areas of its community and the total amount also would be
considered.
The market share analysis is central to creating a performance oriented rating
institution. Under this method banks will be rated on whether they are as aggressive
166
in their efforts to do business in low and moderate income areas within their lending
territories as they are in more affluent areas.
Although supportive of the market share approach, we recognize that certain
aspects of this methodology need refinement. These concerns will be discussed later
on in my testimony.
4. "Low income" and "moderate income" defined.
The regulations define low and moderate income for the purposes of CRA
compliance. For the first time lenders, examiners, community groups and localities
can all be sure that they mean the same things by these terms. We also like the
proposed regs focus on serving low and moderate income needs as a cornerstone of
the evaluation process.
Under the proposal, low income areas are defined as areas where the median
family income is less than 50% of the median family income for the Metropolitan
Statistical Area. In non-metro areas, its would be less than 50% of the non-
metropolitan state-wide median family income for the state. Moderate income areas
are those where the median family income is between 50% and 80% of the median
family income for the MSA, or between 50% and 80% of the non-metro state-wide
median family income for areas outside MSAs.
5. Advance notice of CRA exams.
The proposal gives the public advanced notice of the institutions that will be
examined by the agencies and invites their comments. This would represent a
considerable improvement over current procedures in which the public is largely kept
in the dark about which lenders are scheduled to be examined for CRA purposes.
Critical Concerns
Opinion among community groups also seems to be converging on a number
of aspects of the proposal that give rise to serious concern. These include:
1. The composite ratings place too much emphasis on activities other than
direct lending.
Although the lending institution is intended to form the base line rating for
larger retail banks, the proposal permits examiners to shift the rating, mostly upward,
based on other investments made in, and services provided to, low and moderate
income areas. Thus, investments would include donations or other forms of financial
support to things like loan consortia, minority and women-owned businesses,
167
community development financial institutions, purchase of mortgage revenue bonds.
The weight these investment would be given would be based upon percentage it
represented of the institution's risk-based capital. Credit also would be given for
deposit services that are useful in low income communities, services and products that
promote credit availability, and in part, based on how many of the institution's
branches are located in or accessible to low and moderate income areas.
Unfortunately, the rule permits a lender with a less than satisfactory grade on
its lending test to receive a "Satisfactory" or even "Outstanding" rating if its scores well
on the investment and/or service tests. This proposal raises concerns for several
reasons: 1) Allowing lenders to purchase a satisfactory rating via the investment test
may discourage institutions from undertaking these activities on their own, which
means that they will not develop the expertise or the products necessary for effect
effective community lending which lies at the heart of CRA; 2) lenders m.ay be able to
devote fewer dollars to achieve a higher rating through the investment test than they
would be required to do to achieve a comparable rating through the lending test; 3)
institutions will be given credit for investments even though much of their benefit may
be to entities located outside of their market areas, thus breaking down the traditional
link between CRA and requiring lenders to serve local markets.
In order to correct this bounce, we recommend that the final rules require
lenders to achieve at least a minimum "Satisfactory" grade in the base lending test in
order to be eligible to receive "extra credits" via the investment and services tests.
2. Small bank exemption.
Although the agencies may call it "streamlined" procedures, the proposal
effectively exempts small lenders (assets under $250 million) from the performance-,
oriented requirements that will apply to large lenders (i.e., regulators will not apply
the numeric tests and the requirements to disclose additional lending data). As a
result, 74% of banks and savings institutions will be exempt from the new record
keeping requirements, although evidence shows some small lenders have some of the
worse CRA lending records.
The proposed regs are constructed in a way that presumes small banks will
receive a "Satisfactory" rating providing they meet six minimal threshold requirements,
including an adequate loan to deposit ratio (60% is the general measure), a majority
of their loans in its service area, an adequate loan mix by income category, no record
of discrimination, no bona fide community complaints, and for HMDA reporters, an
adequate distribution of housing related loans.
While perhaps a case can be made for the need for the regulators to tailor
specialized examination procedures for smaller institutions, this proposal goes well
beyond that. It seeks to fashion different ratings standards, which the CRA statute
168
clearly does not authorize. In fact, in 1991 Congress rejected efforts to exempt small
banks from CRA coverage.
What we are the most concerned with is that this small bank exemption
effectively places the burden on the underserved residents of non-metropolitan
communities to rebut the presumption that small banks are satisfactorily serving their
local communities. Unfortunately, this constituency is often least able to raise the
type of bona fide complaints that will be required by the regulators. What is more, in
many rural communities organized community groups do not even exist.
The small bank exemption should be eliminated and these institutions should
be required to meet the same types of performance oriented tests that larger banks
would be required to meet.
3. Backdoor safe harbor.
An implicit "safe harbor" is provided in the rules for lenders achieving an
"Outsunding" or "Satisfactory" CRA rating. The proposal discourages public comment
on corporate expansion requests for lenders with high CRA ratings, even though the
ratings still rely to a large extent on the subjective judgment of examiners.
We believe that references to how CRA ratings will be treated as part of agency
review of expansion requests should be deleted from the proposal. The
Administration should develop a separate policy document addressing a whole range
of matters concerning how community group challenges will be taken into account
into the corporate expansion review process.
4. Role of discrimination in CRA evaluation is sharply curtailed.
If the proposal is adopted, examiner leeway is reduced for citing lenders for
engaging in racial redlining or policies and practices that may have an adverse impact
on minority applicants.
Under the existing regulations, examiners can cite "evidence of discriminatory
credit practices or other illegal credit practices," and consider whether the lender was
discouraging applications, or engaged in pre-screening. For example, examiners can
now consider as part of the CRA examination whether the volume of applications
from minority areas is significantly low, or whether there are differences in lending
between low and moderate white and low and moderate income non-white areas.
Under the proposed system, it is unlikely that they will be able to consider these
matters unless they involve an actual case of lending discrimination that is underway.
We like the fact that the proposed rule would result in a less than satisfactory
rating being assigned to a lender engaged in discrimination. At the same time, we
169
recommend that the proposal be modified to mainuin the existing standard for
considering "evidence of discrimination" in the CRA evaluation process.
5. No racial/ethnic data for small business loans.
Evidence suggests that lending discrimination against minority firms may be a
severe problem. Yet, as a result of opposition from the Federal Reserve Board, the
proposal does not require lenders to collect information on the race and ethnicity of
small business borrowers that would be invaluable for detecting discrimination, much
the same way that HMDA data has been useful in helping to identify mortgage
discrimination.
Apparently, the inclxision of race/ethnic data on loan applications would
require a modification to Reg B (Equal Credit Opportunity Act). Since the Federal
Reserve Board has rulewriting authority under ECOA, a statutory change may be
necessary before this important data is required to be reported.
6. Insufficient guidance is provided to examiners on the importance of different
types of lending to individual market areas.
The proposed rule is incomplete in instructing examiners on how to weigh
lending activities that meet the most pressing or difficult needs of low income
communities and households. The "degree of difficulty" in providing certain types of
important community development or community support loans should be better
factored into the evaluation process. So should lending in low income household
(income under 50% of area median income) as compared to moderate income
households (income under 80% of area median income). Further, lending activities
that promote "gentrification" and the displacement of low and moderate income
residents should lead to downgrading in CRA evaluations, as required under the
existing agency examination procedures.
We recommend that more deuiled rules be set out in the final rule to provide
sufficient and consistent guidance to examiners on how to weigh that are especially
important to low and moderate income areas and households.
7. "Indirect lending"
The regs allow a lenders to bump-up what otherwise would be their base rating
on the lending test by getting credit for loans made to third parties in which the
institution has invested, including entities that are not part of the same corporate
structure (e.g., community development financial institutions, loan pools, consortia,
etc.). Like the investment test, this undermines the thrust of CRA to encourage
lenders to develop the necessary expertise and products to do business themselves in
low and moderate income communities.
8
170
We recommend that indirect lending should not be counted under the lending
test, but should be factored into the investment test.
8. Creation of a private appeals process for banks.
The regs provide the opportunity for banks to rebut examiner findings and
argue for higher grades that the performance tests would suggest. This appeals
process would occur entirely behind closed doors, with no opportunity for the public
to provide input or to make a case when they believe a lending's rating is too high.
We recommend that if a rating is challenged by a lender it ought to be
published as a "proposed" rating and the community also be afforded an opportunity
to weigh in with their comments about the appropriateness of the rating.
9. No needs assessment.
The existing system is criticized by some for directing examiners to place too
much emphasis on steps taken by a lender to assess local credit needs. The new
proposal would eliminate a needs assessment altogether. Yet, this is an important
process for banks to undergo in order to understand how they can serve their local
communities most pressing needs. It is also critical for examiners to have information
on local credit needs, or they will have no context in which to evaluate lenders'
performance.
We recommend that the regs require lenders to demonstrate that have taken
steps to ascertain local community credit needs and to publish the information they
have generated as a result of this analysis in their public file.
10. Strategic plans.
The proposal allows any lender to employ the option of creating a strategic
plan that would include measurable goals for how the institution will meet local
needs. Although there is mention that public comment on the adequacy of the plan
in addressing local needs would need to be solicited, the rules set out surprisingly
little detail about how this procedures would work. Further, it is very unclear as to
the criteria the agencies would use for evaluating the proposed plan's effectiveness.
We recommend that the final rules provide at least 90 days for the community
to review and comment on a lender's strategic plan. The agencies must also set out
the criteria that will be used for determining the plans adequacy, as well as make a
determination that the plan will not result in less activity than would otherwise be
required under the three performance tests.
171
In conclusion, we believe the proposed CRA regulations offer great potential to
establish a performance based evaluation system, but many issues must be resolved
before we can say with any assurance that it will result in a ratings system that is likely
"command respect from all parties," or one that is likely to result in increased lender
activity in underserved communities.
This ends my formal testimony. I will be glad to answer any questions that
members of this Subcommittee may have.
10
172
STATEMENT OF
JAMES M. CULBERSON, JR-
On Behalf of
THE AMERICAN BANKERS ASSOCIATION
Before the
SUBCOIVIMITTEE ON CONSUMER CREDIT AND INSURANCE
of the
COMMITTEE ON BANKING, HNANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
February 8, 1994
173
Statement of James M. Culberson, Jr.
on Behalf of the American Bankers Association
Before the
Subcommittee on Consumer Credit and Insurance
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
February 8, 1994
Mr. Chairman, I am James M. Culberson, Jr., Chairman of the First National Bank
and Trust Company in Asheboro, North Carolina. I serve on the Board of Directors of the
American Bankers Association, and I Co-Chair the ABA's Government Relations Council.
The American Bankers Association is the national trade and professional association for
America's commercial banks, from the smallest to the largest. ABA members hold about 90
percent of the industry's total assets. Approximately 94 percent of ABA members are
community banks with less than S500 million in assets.
I am pleased to be here this morning to speak to the Subcomminee on the
interagency proposal to overhaul the regualtory structure of the Community Reinvestment
Act (CRA). I am very hopefiil that this process of reexamining the current structure will
result in a more workable and efficient system.
Few regulatory issues raise as much emotion as CRA. CRA began as a simple
statement of community responsibility -- that each bank should meet the credit needs of its
entire community, including low and moderate income neighborhoods. I am in complete
agreement with this goal, as are virtually all bankers. The relationship between banks and
their communities is, after all, a two-way street - the profitabilit>' and strength of my bank
rests squarely upon the economic health and vitality of my community, the individuals and
local businesses that are my depositors and borrowers. I can assure you that anyone who
does not understand this relationship won't last long in the business of banking.
The problem bankers have with CRA is not its philosophy, but its implementation.
Over the years, as regulators struggled to find meaningful ways to judge compliance with
CRA, it has simply grown into a monumental compliance nightmare.
174
The fact is that no one is satisfied with the current administration of CRA -- not
bankers, not community groups, not regulators, and not Congress. In response to the
growing level of dissatisfaction, the Administration direaed the federal banking agencies to
rethink the implementation of CRA. The agencies, in turn, have proposed sweeping changes
in CRA's regulatory structure.
ABA's Government Relations Council will be meeting tomorrow and Thursday
(February 9 and 10), and will devote considerable time to discussing the details of the
proposal. Since the Council has not yet considered the proposal in depth, my statement
today will deal with our initial reactions to the approach the regulators have taken rather than
with many of the specifics of the proposal.
Mr. Chairman, we recognize that the regulators charged with redrafting CRA do not
have an easy job. While the intent of CRA is clear and straightforward, designing an
appropriate regulatory structure is anything ^«f clear and straightforward, and it is admittedly
difficult to satisfy all constituencies. How do you determine just how good a job a bank is
doing in meeting the aedit needs of its community without imposing huge reporting
burdens and without substituting subjective regulatory decisions for private business
decisions? How do you design a system that works for both very large and small banks?
How do you design a system that works in urban, suburban and rural markets? How do you
design a system that is efficient and does not allocate credit?
Another question of critical importance is at what point does the cost of compliance
begin to constrain the ability of banks to meet community credit needs? Only a few short
months ago, the Administration and many in Congress recognized that the excessive
regulatory burden on the banking industry was one of the faaors inhibiting the flow of
credit to small businesses. Since documenting performance under the current CRA s^'stem
is among the most costly and time-consuming regulatory burdens, it is vital that reform
efforts look carefully at this issue, and that its importance not be underestimated.
Answering these and other fundamental questions on how CRA regulation should be
redrafted is a challenging task. In order to help analyze the complex and lengthy proposal
the regulators have put forth, ABA developed six principles. I would like to share these
principles with the Subcommittee this morning.
175
The CRA system should:
► recognize differences in institutions and communities in the CRA process;
*■ improve the efficiency- of the regulatory process by reducing the amount of required
documentation and paperwork;
*■ provide realistic performance standards without credit allocation and without lowering
credit underwriting standards;
*■ emphasize positive and achievable incentives to assist banks in making the extra efforts
community development lending often requires;
► foster cooperation rather than confrontation between community groups and banks;
and
*■ recognize the increasing role that financial service institutions not currentiy subjert
to CRA play in meeting the community credit needs.
How docs the current proposal stack up against these principles? As you would
expect, there is good news and bad news.
First the good news. The proposal takes a very positive step by recognizing that one
size does not fit all. One of the biggest problems with the current s>'Stem is that the same
rules apply to large and small banks, to urban and rural banks, and to retail and wholesale
banks.
Today's one-size-fits-all approach has been particularly hard on community banks
because they have significantiy less capacity to cope with the massive documentation
requirements of the current system. Furthermore, the documentation requirements, often
designed for urban areas, make no sense in small communities. So the concept of having a
streamlined examination process for smaller banks is certainly going to be welcome news to
communit)' bankers. And because it fi-ees up scarce resources for more productive uses in
the community, it will be welcome news to bank customers as well.
176
Many bankers like the concept of a menu approach -- one that offers different options
for demonstrating that they are meeting their community's credit needs. For example, the
strategic plan option may be attractive to some larger banks. There are many large banks
that already use a similar approach for their own internal goal setting and evaluation
purposes. Other banks may prefer to use another option to show that they are meeting their
CRA obligation.
The proposal also recognizes that certain specialized types of institutions -- like credit
card banks and wholesale banks - need to be able to meet their CRA obligations in a way
that is compatible with their type of business, and, in the case of credit card banks, with the
limitations on their charter. Rather than trying to make these institutions fit into the same
regulatory mold as their full service retail-oriented brethren, the regulators' proposal offers
specialized institutions alternative ways of satisfying CRA.
In summary, by recognizing the differences in banks and banking markets, this more
flexible approach to CRA regulation conforms with the spirit of our first two principles.
However, as is usually the case with complicated issues, the devil is in the details. We have
great concern about many elements of the proposal -- not only about how they may be
implemented in 1994, but also as to what they may evolve into in future years. We have
seen well-intentioned laws and regulations turn into nightmares before. CRA is potentially
so open-ended that our industry must be concerned about ever-increasing costs and its
potential for slowly but surely substituting government and political control over the credit
decision process.
For example, we have serious concerns about the proposal's new reporting
requirement for all banks over $250 million in assets and all banks under a holding company
structure that has aggregate bank and tlirift assets of more than S250 million. This means
that my bank, located in a rural/urban area with about S250 million in assets, would be
subjea to the same reporting requirements as huge banks with hundreds of billions of dollars
in assets. Reporting institutions would be required to collect and report the geographic
distribution of all small business, small farm, and certain consumer loans, including all written
applications (approvals and denials); loans purchased; and indirect loans. In addition, some
banks that are now not HMDA reporters would find themselves having to report home
mortgage loans in this format as well.
177
The claim that reporting this data for small business/small farm loans would work just
like HMDA reporting for home mortgage loans is simply not true -- small business/small
farm loans are far more complex than mortgage loans. Home mortgages are relatively
straightfor^'ard, homogeneous produas -- small business and small farm loans are not. A
loan on one house looks pretty much like a loan on any other house. But because no two
small businesses/small farms are alike, these loans are individually tailored to suit each
borrower's situation.
The standardization of mortgage lending, created largely by secondary market
requirements, makes it relatively simple to design a standard application form requesting the
pertinent information. The flexibility required by small business/small farm lending makes
a standardized application form \'irtually useless for lenders. And this is why so many banks
do not even use an application form for these loans - at least not an application form that
is in any way analogous to a residential mortgage loan application.
There is no doubt that the massive amount of new reporting required by the
regulators' proposal would impose significant costs on both banks and their borrowers. The
impaa of this costly new burden should not be underestimated. The additional reporting
will increase costs by slowing down the lending process and by requiring the collection of
additional information fi-om small business/small farm applicants, not to mention the
additional compliance burden. And, because reporting is likely to lead to a standardized
lending format, it may also reduce the flexibility that is such an important element of small
business/small farm lending. In short, adding yet another expense to banks' lending
actiNHties will surely have a negative impact on both the cost and availability of bank credit.
Moreover, the data collected is not necessary to assess whether a bank is meeting its
CBa\ obligations. Nor will the information colleaed tell you much about the credit
conditions for small business, small farms or consumer borrowers. Banks are not the only
source of these loans -- finance companies, credit unions, asset-based lenders and others do
not report their lending activities. These are major players, and their omission will certainly
give an incomplete picture of what is happening in these markets.
In summary-, Mr. Chairman, I think it is pretty clear that the heavy new reporting
requirements in the regulators' proposal fall far short of meeting the principle of improving
178
the cfficienq' of the regulatory process by reducing the amount of required documentation
and paperwork.
The massive reporting requirements proposed for banks that do not qualify for the
streamlined examination process highlights another issue of critical importance to community
bankers -- the upper limit for the streamlined examination is simply too low and should be
increased.
Mr. Chairman, as mentioned earlier, my bank has approximately $250 million in
assets, so I feel I can speak to the ability of banks of this size to comply with the additional
reporting that will be required for all banks that do not qualify for the streamlined exam.
It will raise the cost of each and every small business, small farm and reportable consumer
loan I make -- and it will hurt the very borrowers it is intended to help. All across the
country, banks like mine are doing a good job in meeting the credit needs of their
communities, and should have no trouble demonstrating that fact under a streamlined
examination process. In terms of bank sizes today, $250 million in assets is small. To add
this burden to a bank my size will do absolutely nothing to improve credit availability nor
will it provide any meaningfial information. To the contrary, it will add another costly and
unnecessary regulatory burden with no or nominal benefit. The cut-off at $250 million
should be raised.
The way the proposal is structured now, even the very smallest banks would not be
eligible for the streamlined CRA examination process if they are part of a bank holding
company with assets in excess of $250 million. CRA is a local issue -- and CRA compliance
is done at the local bank level. It is not at all clear that a small bank in a large holding
company has any more capacity to deal with the huge amount of paperwork and
documentation than a small independent bank. If the goal of CRA reform is to improve
credit availability to small businesses, smrll farms and consumers, I beheve wc must rethink
the eligibility cut-ofF and put it on a bank basis, not a holding company basis.
We are also very concerned that the proposed 60 percent loan to deposit ratio test is
unrcalisdc for many banks. For example, smaller community banks generally have a greater
need for liquidity than do large banks, and may find a 60 percent ratio inconsistent with
sound business practices. In fact, as bank size declines, so does the average loan to deposit
179
ratio. This makes the proposed 60 percent test regressive because the smallest bani.s are the
least likely to have such a high loan to deposit ratio.
In addition, many market areas served by community banks simply do not have
sufficient loan demand to generate a 60 percent loan to deposit ratio. This may be true, for
example, in areas experiencing economic slowdowns, in areas with a high percentage of
retired people, and in some rural areas where there is very little or no growth. The upshot
is that for many community banks the 60 test is not a very good indication of how well they
are meeting community credit needs.
In response to our concerns on this issue, the regulators have assured us that the 60
percent ratio is not intended to be a cut-off for passing or failing the streamlined
examination. They indicated that the loan to deposit ratio need only be reasonable given the
size, financial condition and market area conditions of the institution. While this clarification
gives us some level of comfort, it does not put all our concerns to rest. The faa is that the
proposed regulation sets the test at 60 percent, making it incumbent on each bank to prove
why this is not a reasonable level for its particular circumstances.
Let me now turn to another issue of very great importance to bankcn, and that is
performance standards and credit allocation. Let me assure you that bankers are working
hard to meet the credit needs of their communities. As I said at the outset of my statement
this morning, they are doing so because the success of each bank is closely tied to the success
of the community it serves. But we are growing increasingly concerned that the phrase
"performance over paperwork" is being interpreted by some to mean that specific bank loan
targets should be set for low- and moderate-income borrowers or for certain geographic
areas. This is credit allocation pure and simple.
We are concerned that the " market share " test proposed by the regulators may have
the unintended consequence of allocating credit. The market share test would compare a
bank's lending share in low/moderate income areas with their lending share in other areas.
If a bank wants to earn an outstanding rating, its market share in low/moderate income
markets must exceed their share in other markets. In effect, then, the market share test will
lead to credit allocation. And to the extent that banks are competing with each other to
increase their market share in low/moderate income areas, there will be pressure to reduce
their underwriting standards.
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There is another dimension of this problem that may also have unintended
consequences. Suppose, for example, that a minority bank has a 30 percent market share in
a given low/moderate income census traa, with the remaining share divided among 4 other
banks with a broader service area. If each of these 4 banks has a 25 percent market share
in the surrounding area, to achieve a satisfactory CRA rating they would have to boost their
market share in the low/moderate area from 15 percent to 25 percent. It puts extreme
underwriting pressure and interest rate pressure on the minority bank in the heart of its own
market. Where docs this leave the minority bank?
Mr. Chairman, the term "credit allocation" has a negadve connotation -- and wth
good reason. In this instance, it is particularly disturbing because it may well be inconsistent
with safe and sound lending. This should concern not only bankers, but regulators, the
Congress and the public as well. We ask that the credit allocation aspea of the regulators
proposal be given very carefiil thought before potentially negative incentives are put in place.
Let me now turn to the principles of creating positive incentives and promoting
cooperation rather than confrontation. Finding ways to satisfy these principles v.iil provide
a far more desirable way of encouraging banks to devote the extra time and money that is
necessary to build a successful community development lending program. What
encouragement is there in the regulators plan to put in extra time and money?
For that matter, what assurances arc there that a strong and consistent record of CRA
compliance will stop unsubstantiated challenges to applications for mergers? There is no
regulatory benefit under the CRA process for meeting the credit needs of a bank's
community. In fact, many bankers believe that earning an "outstanding" only sen'es to make
the bank a magnet for criticism and demands for additional effort by the bank.
If positive encouragement cannot be provided for outstanding CRA performance,
doesn't this perpetuate confrontation and eleventh hour challenges by community groups?
Even for banks rated "satisfaaory" or "outstanding", applications for an acquisition or a
merger are often protested by advocacy groups seeking grants or loan commitments. A bank
that is not deficient in meeting its community's credit needs deserves to be freed from costly
delays arising from unsubstantiated challenges during CRA review.
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The number of successful joint projects between banks, local governments, nonprofit
organizations and community groups demonstrates that cooperation, rather than
confrontation, yields far better results for all involved. There are many, many examples of
bankers, community groups and local governments working together to solve local problems
and to build a better future.
ABA's Center for Community Development was established in 1992 as an expression
of the industry's commitment to help bankers improve and enlarge their community
development lending programs. It also provides a vehicle through which banks can share
their knowledge and expertise in the field nor only with other lenders, but with community
groups, secondary market agencies, mortgage insurers and other interested paities as well.
Through the Center, we hope to be better able to build on the successful programs that are
already on-going in large and small communities across the country.
Our last principle addresses the issue of reaching beyond the banking industry for
investment capital. There are other financial intermediaries such as brokerage firms, mutual
funds, money market funds, insurance companies, members of the Farm Credit System, and
even credit unions, which offer bank-like products that draw savings and investment funds
by the tens of billions of dollars out of communities across the country. But these
institutions are not held to the same high standards of community responsibility that banks
are. They have the ability to oflfer combinations of financial products and services that banks
cannot offer which gives them a competitive edge; and yet, they are not required by laws or
regulations to make any reinvestment in the communities from which they draw money.
This situation makes it even more difficult for banks to carry \irtually the whole load in
meeting community credit needs. We realize that this issue is not under the purview of the
banking regulators. Nonetheless, it is an issue that will become more and more important
as financial markets continue to evolve.
I would like to add one final point on the issue of CRA that is of great concern to
bankers, and that is the continued exclusion of credit unions fi'om CRA. Even community
development credit unions are not covered by CRA. The credit union industry often argues
that it is so small in comparison with the banking industry that the diff-rences in regulatory
costs are unimponant. That is not true. Two of my biggest competitors are credit unions -
- both larger than my bank and federally insured -- and yet they have no CRA
responsibilities. Community banks that are working hard to meet their customers needs
182
while laboring under a heavy regulatory burden — including CRA -- find it incredibly
fi^strating that their credit union competitors do not play by the same rules, nor do they face
the same compliance costs. How can this be justified?
Conclusion
Mr. Chairman, a great many questions remain about how to construct the appropriate
regulatory' fi-amework for CRA. My statement this morning looks at only a few of the
important issues raised by the regulators' proposal.
There arc, however, many questions about how the strategic plan option will work
and whether it will prove to be an efficient, effective way to demonstrate CRA compliance
or whether it will become encumbered by bureaucratic red tape and confrontation with
community groups. There are also questions about how the market share component will
work and whether it makes sense for any business to have market shares equivalent across all
regions of a service area. There are questions about how and in what form the service and
investment component will count for CRA compliance. There are questions about what the
use of a fixed loan-to-deposit ratio in determining CRA performance in light of differences
in bank size, liquidity needs, market area, and competition from depository and non-
depository institutions.
Certainly, the proposal put forth by the bank regulators moves afErmatively to satisf>'
at least some of the important principles for CRA reform. However, many elements -
particularly the truckload of new reporting requirements for larger institutions - are entirely
at odds with efficient and effective CRA reform and, if approved, will continue to constrain
available credit, particularly to those borrowers on the very edge of safe and sound
underv^Titing standards. Such an important initiative requires very careful analysis to fully
understand the ramifications. No matter how good the concept, inevitably the difference
between improved efficiency and failure lies in the details -- which, as we all know, is where
the Devil often lurks.
10
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Testimony Submitted By
Bertha Lewis
New York ACORN
On Behalf Of
The Association of Community Organizations for Reform Now
(ACORN)
On
the New Community Reinvestment Act (CRA) Regulations
To
The Subcommittee on Consumer Credit and Insurance of the
Committee on Banking, Finance, and Urban Affairs
U.S. House of Representatives
The Honorable Joseph P. Kennedy, H, Chairman
February 8, 1994
184
Good Morning, Mr. Chairman and members of the Subcommittee. My
name is Bertha Lewis, Director of New York ACORN. I appreciate
this opportunity to testify before you today on behalf of ACORN.
ACORN
ACORN, the Association of Community Organizations for Reform Now,
is the country's largest grassroots organization of low- and
moderate-income families. ACORN consists of 400 neighborhood
groups organized in 26 states that work on a broad range of
issues, including neighborhood safety, affordable housing, and
education reform.
ACORN was the first community group ever to file a Community
Reinvestment Act challenge in 1978, and has worked closely with
many lenders around the country to improve access to mortgage
credit for low- and moderate-income and minority families.
ACORN'S sister organization, the ACORN Housing Corporation,
develops affordable single- and multi-family housing for low- and
moderate- income fa.'nilies.
INTRODUCTION
The proposed CRA regulations issued in December by the four
federal banking agencies represent a radical departure from
present policy and practice. ACORN supported the President's
stated goal of strengthening enforcement of CRA and focusing CRA
evaluations on performance rather than process.
Unless the regulations are substantially strengthened, however, we
believe that the proposed regulations will not meet the
President's objectives, and mav in fact result in less --not more--
credit availability in our communities.
Conversely, if the regulations are significantly strengthened,
they can potentially result in new housing and employment
opportunities for millions of low- and moderate-income families.
SUMMARY OF TESTIMONY
I have appended to our testimony ACORN 's briefing paper on the
regulations. Analysis of the New Community Reinvestment Act
Regulations, which contains 16 specific recommendations for
strengthening the regulations. The testimony below first
summarizes the points made in that document, offers some
observations on the politics of CRA reform, and discusses two new
controversies --over the market share methodology and the "safe
harbor" provision-- that have arisen since that time. Finally, I
will briefly touch on what the appropriate role for the Congress
might be.
185
My testimony today has three principal points:
1. Taken as a whole, the regulations proposed by the agencies
--in their current form-- would not lead to increased community
reinvestment in our neighborhoods. Unless they are significantly
strengthened, they could result in decreased credit availability
for underserved populations and sectors in many communities in the
nation.
2. The regulations have many positive features, including:
a. the creation of a framework that, with modification,
can provide the basis for a performance-oriented evaluation
system;
b. a focus on the provision of credit in lov;- and
moderate-income neighborhoods, including for the first time a
definition of "low-income" and "moderate-income";
c. requirements for public disclosure by depository
institutions with more than $250 million in assets of small
business, small farm, and other lending on a census tract basis;
d. the use of a comparative market share methodology,
which provides a sound basis for evaluating CRA performance;
e. the clarification of the agencies existing
enforcement authority for institutions in non-compliance with the
law, which includes the use of cease-and-desist orders, civil
money penalties, and other actions.
3. The regulations also contain many negative features, which
include:
a. the creation of a "two-tiered" system for the
evaluation of small and large lenders that may effectively exempt
small banks from CRA;
b. allowing lenders to count "indirect lending" by third
parties, such as community development financial institutions, in
which they have invested for purposes of the lending test;
c. allowing lenders that redline to achieve an overall
rating of "satisfactory" or even "outstanding" by virtue of non-
lending activities, such as investments;
d. the creation of a de facto safe harbor provision that
would greatly undermine the weight given to public comment in the
applications process;
e. a significantly lesser role for racial discrimination
in the CRA evaluation process;
f. allowing lenders to receive CRA credit for loans that
186
result in gentrif ication or the displacement of low- and moderate-
income households;
g. insufficient attention to the "degree of difficulty"
of lending: loans in moderate-income and low-income areas would
receive the same weight; complex loans for rehabilitation of multi-
family housing would receive the same weight as consumer loans;
and home improvement and refinancing loans would receive the same
weight as single- and multi-family originations.
h. the creation of a behind-closed-doors appeals process
for lenders dissatisfied with their CRA ratings ("rebuttable
presumption" ) ;
i. insufficient clarity about how composite ratings
would be arrived at in the case of lenders with multiple service
areas ;
j . failure to require the disclosure of the race and
ethnicity of small business borrowers;
k. too much ambiguity in the service test, with respect
to both the evaluation of branch locations and the definition of
basic banking and government check cashing services;
1. credit given for activities that are of marginal
benefit to communities, or which represent a minimal "stretch" for
lenders, such as investments in mortgage revenue bonds;
m. the absence of a system for examiners to evaluate the
the nature and extent of community credit needs, a necessary
foundation for assessing bank performance under the CRA;
n. a lack of clarity about how strategic plans filed by
lenders would be evaluated by the regulatory agencies, including
the process by which community challenges to strategic plans would
be handled; and
o. the absence of plans to train examiners in community
lending, or to develop internal infrastructure at the agencies to
deal with the new system.
OBSERVATIONS ON THE POLITICS OF CRA REFORM: A FAILURE OF
LEADERSHIP?
ACORN was at first excited when the President included
strengthening CRA in his campaign platform, and again when it
appeared that his appointees were putting fair lending and
community reinvestment on the front burner.
Unfortunately, while the Administration has taken a strong verbal
stand for fair lending and community reinvestment, its actions
have yet to adequately match these words. Indeed, to date, we
have seen time and time again a lack of political will to take on
187
the banking industry when necessary to achieve stated policy
goals. A few examples include:
♦Despite the tough talk of the Administration on CRA reform,
the distribution of CRA ratings under Clinton appointees has
gotten worse. More than 93% of CRA ratings are now "satisfactory"
or better, compared to 89% under Bush appointees. I cannot
believe that a single person in this room believes that 93% of the
country's banks deserve passing CRA grades. To paraphrase Senator
William Proxmire, how can so many of our banks be passing while so
many of our neighborhoods are failing?
*Despite a pledge from the Comptroller of the Currency to
launch a testing program for loan bias, this pilot project has
been delayed, postponed, and put back on the shelf. And the other
agencies have yet to take any action at all.
♦while there have been a few more referrals to the Justice
Department for violations of the fair lending laws, the change has
been marginal at best --though there is now widespread
acknowledgement that discrimination in. the banking industry is
pervasive .
*The agencies continue to take a narrow view of loan
discrimination, focusing on disparate treatment of loan
applicants, to the exclusion of issues of pre-screening and
disparate effects.
♦Despite the obvious implications for fair lending, community
reinvestment and consumer compliance, the Administration's major
banking initiatives --ranging from interstate branching to
regulatory consolidation-- have contained virtually nothing for
consumers or communities.
The approach of this Administration in this areai has been to throw
community, consumer, and civil rights groups the occassional bone,
and to serve the banking industry filet minon. One is tempted to
wonder whether the occasional tough rhetoric about discrimination
in lending coming from the Administration is designed to forestall
opposition to serious initiatives to further the industry's
deregulation agenda --regulatory relief, interstate branching,
bank sale of mutual funds and insurance, and the rest.
From the outset, the process by which the Administration has
sought to reform the Community Reinvestment Act has been driven as
much by politics as by substance. The Administration has sought
to play a coy game of hide and seek wi-th all interest groups --and
has resisted tough choices.
A classic case of this problem is the treatment of small banks in
the proposed regulations. We have yet to hear a substantive
defense of this provision from anyone in the Administration. It
is clear that the political calculus of constituency politics
--the political power of small banks, and the lack of community
188
organization in many poor and minority communities in rural areas
--rather than the actual record of small banks at meeting
community credit needs that has shaped the contours of this
proposal .
CRA reform is not rocket science. Ultimately, the consequences of
this reform initiative for low- and moderate-income communities
will depend on the political will of the Administration. Press
reports of meetings between representatives of the banking
industry and the regulatory agencies suggest that the agenies are
in full retreat from many aspects of the proposal, including the
loan-to-deposit ratio test for small banks. The record to date of
political backbone at the agencies does not augur well for a
genuinely progressive CRA.
Add to this lack of will by the Administration the bedrock
opposition of the Federal Reserve and some parts of the banking
industry, and we may have a recipe for backsliding and evasion --
in short, for a weaker, not a stronger CRA.
COMPARATIVE MARKET SHARE ANALYSIS
Most of the positive and negative features of the proposal a-^e
discussed at length in the attached analysis. I want to take some
time to discuss one feature of the proposal that has come under
heavy attack from the banking industry in recent weeks, namely the
market share methodology that forms the basis of the lending test
set forth in the proposed regulations.
The market share analysis forms the core of a performance-based
system for evaluating CRA performance. Under this method, a bank's
share of the market in home mortgage, small business, and consumer
lending in low- and moderate-income areas will be compared to its
penetration of the market in the rest of its service area.
While many details of the methodology require revisions, as
discussed in the attached Briefing Paper, it is far preferable to
a formula driven approach of the kind developed by the New York
State Banking Department for at least three reasons:
1. It compares banks to themselves.
The market share analysis has the virtue of focusing and
examiner's attention on whether an institution is as aggressive m
seeking out business opportunities in the low- and moderate-income
areas of its service area as it is in high income areas. A bank
that has a much higher level of penetration in high-income areas
than low- and moderate- income areas should --except in aberrant
cases-- get a less than satisfactory rating. Needless to say,
this methodology depends on the availability of geo-coded lending
data for lenders' primary product lines (housing, small business,
etc. ) .
Take as an example mortgage lending in Los Angeles in
189
1990. One thrift, Great Western Bank made 24% of all the mortgage
loans in low- and moderate- income areas, and 9% in high- income
areas. Bank of America, on the other hand, made only 3% of all
the mortgages in low- and moderate- income areas, compared to 9% of
all mortgages in high-income areas. Under the current system,
both lenders got "outstanding" CRA ratings. Under the new system
(assuming similar performance in small business and consumer
lending) , Great Western would probably get an "outstanding" CRA
rating under the lending test, and Bank of America would get a
less than satisfactory rating under the lending test.
(Ironically, the proposed regulations would still allow Bank of
America to get an overall rating of "satisfactory" or
"outstanding, " despite its record of redlining, by virtue of its
record of investments and services.)
2. It compares banks to each other.
Implicitly, the market share analysis compares the
performance of lenders to other lenders in the same market. Thus,
a lender is not being evaluated in a vacuum, but in relation to
the performance of other lenders.
It should be noted that the market share method will
fail as an indicator of performance in areas where there is little
or no lending in low- and moderate- income areas by all lenders.
In such cases, a high market share in low- and moderate- income
areas would mask the overall low level of lending. The proposal
addresses this issue by requiring examiners to determine whether
the overall level of lending in low- and moderate- income areas is
"substantial," "significant," etc. Arguably, more guidance for
examiners may be required in defining these terms.
3. If provides flexible, rather than arbitrary standards for
evaluating performance.
Rather than setting an arbitrary numerical test for
performance, the proposal ac)cnowledges that community credit needs
will change over time. For example, if the need for mortgages in
low- and moderate-income neighborhoods increases over time,
lenders in those areas will not be stuck at an arbitrary level of
lending, but rather would be encouraged to respond aggressively to
changes in market conditions.
The banking industry has raised three principal objections to the
market share methodology, all of which appear to rest on the
realization that many of the largest banks in the country with
high CRA ratings might not fare so well under the new system.
First, they argue that the market share test will result in
nximerous "anomalies, " for example in areas where only there is
only one large bank covered by the reporting requirements. Such a
lender would, by definition, have a 100% market share throughout
the service area. While there will certainly be anomalous cases,
we believe the credibility of the rule should rest on the typical
scenario, with many institutions reporting information to the
190
agencies. The rule provides ample flexibility to deal with the
exceptional cases.
Second, bankers --and especially the Federal Reserve-- have argued
that the rule might result in "gaming" of the system, i.e.
underpricing of loan products to capture market share in low- and
moderate- income areas. Frankly, we think that bringing the market
and the forces of competition to bear in low-income areas is
exactly what's needed. When lenders compete aggressively for
business in high-income areas, this is usually called capitalism
--the workings of a market economy. Such competition in low-
income areas should be viewed in the same way --as providing
benefits to banks and communities alike.
Third, trade groups have argued that the market share analysis
might lead lenders to make unsafe or unsound loans. This argument
has been brought to bear against CRA for many years, and has never
been substantiated. A recent study by the Woodstock Institute
suggests that single-family mortgages in low- and moderate- income
areas have lower default rates than mortgages in middle- and high-
income areas. Data collected by the Private Mortgage Insurance
(PMI) industry confirms this finding. While lenders may have to
revise underwriting standards to do more business in low- and
moderate- income neighborhoods, such revisions have not in the past
led to a decrease in credit quality, and there is no good reason
to expect that changes in response to the nature of the market
being served will do so in the future.
CLARIFICATION OF "SAFE HARBOR" PROVISION
One of the major flaws in the proposal is the portion of the
regulation that appear to create an effective safe harbor for
banks with satisfactory or outstanding CRA ratings. I would like
to shed some light on this controversial portion of the
regulation.
The OCC and Administration officials consistently deny that the
regulations contain any safe harbor. They claim that the portion
of the regulation dealing with applications is merely a
codification of existing agency policy.
However, it is important to recognize that it is really the
Federal Reserve which decides most major merger applications,
because of its authority under the Bank Holding Company Act.
Thus, the views of the other agencies on this aspect of the rule
are virtually irrelevant. In the Federal Reserve Board's public
discussion. Governor Larry Lindsey clearly stated that he believed
that the provision would provide an "incentive" to banks for
strong CRA compliance. He has subsequently added that he believed
that it represented a mid-way point to a full safe harbor for
banks with satisfactory or better ratings. Thus, the Fed believes
that this provision constitutes a modified "safe harbor" --cuid it
is the Fed's view that really counts in this area.
191
Even a modified "safe harbor" is a terrible idea, for many
reasons. First, the new system will still rely to a large extent
on subjective judgements by examiners --and examiners have often
proved fallible in the past. Second, the new evaluation scheme
would require examiners to sample service areas for lenders
operating in many cities and rural areas. A bank could get a
satisfactory CRA rating by virtue of its performance in thesampled
areas, but still be doing an inadequate job in non-sampled areas.
Only the public comment process would bring such evidence to
light. Lastly, the credibility of CRA ratings will be open to
question for many years to come, and won't be known for certain
until there are several years of experience with the new system.
We should note that the regulations do absolutely nothing to
address one of the main problems with CRA identified by community
groups over the years, namely the way in which the Fed's closed
and secretive procedures effectively insulate banks from community
group challenges. Under current practice, the Fed almost never
holds public hearings or grants extensions of the public comment
period, even when major interstate applications are protested by
many community groups. At the same time, protests almost never
result in the denial of merger applications, which sends a signal
to the banking industry about the seriousness with which the Fed
regards CRA.
In our view, either the agencies should address all the issues
surrounding how applications are handled --including the lack of
openness and credibility in administrative procedures-- or they
should delete this section of the regulation altogether.
WHAT SHOULD THE CONGRESS DO?
ACORN would prefer that CRA be strengthened through the regulatory
process. However, if the key problems raised by the proposed
rule, 'and described at length in the attached briefing paper, are
not resolved in the final rule, we will approach Congress with
legislative proposals to undo any significant damage that may be
incurred. Until the regulatory process runs its course, however,
legislation in this area would be counterproductive.
In addition, the Administration is not completely beholden to the
Federal Reserve. Time and time again, the Fed has provided a
convenient excuse for the weaknesses of the proposal. Yet, there
is nothing to prevent the other three agencies from approving
strong final regulations, even with the Fed's opposition. While it
would be preferable for all the agencies to approve a strong CRA
regulation, if that proves impossible. Congress should insist that
the other three agencies proceed with a progressive new regulation
rather than further weaken the proposal to accomodate the Federal
Reserve.
CONCLUSION
Again, Mr. Chairman and members of the Subcommittee, I cannot
8
192
emphasize enough how important CRA is to our communities. It has
already resulted in billions of dollars in loans for housing,
jobs, and community development that have would otherwise have not
been made .
In New York alone, I have witnessed a revolution in the practices
of the industry with regard to home mortgage lending, resulting in
unprecedented opportunities for credit access and economic
opportunity for thousands of low- and moderate- income and minority
families.
It is crucial, therefore, that the new regulations build on the
strengths of the existing system. We hope that many of you will
urge the agencies to significantly strengthen the regulation, as
discussed in the attached briefing paper.
We believe that these oversight hearings will contribute to a
stronger and more effective CRA.
Thank you, Mr. Chairman, that concludes my statement.
193
ANALYSIS OF THE
NEW COMMUNITY
REINUESTMENT ACT (CRA)
REGULATIONS
BRIEFING PAPER
January 1994
ACORN
Association ot
Community Organizations
for Reform Now
739 8th Street S.E., Washington. DC 20003. (202)547-2500
194
ANALYSIS OF THE NEW COMMUNITY REINVESTMENT ACT
(CRA) REGULATIONS
Briefing Paper
Background & Overview
Summary of the Proposal
1. Treatment of Small Banks and Thrifts..
1
2
. 7
2. Lending Test for Banks and Thrifts With Less Than $250 Million In Assets 9
a. "Indirect Lending"
b. Weighting of Home Mortgage, Small Business, and Consumer Lending
c Methodology for Analysis of Home Mortgage and Small Business Lending
d. Gentrification and Displacement of Low- and Moderate- Income Households
e. Targeting
f. Quality of Credit Extended
g. Adjustments
3. Service Test 14
4. Investment Test 16
5. Rebuttable Presumption 17
o* C'Omposite KaungSa**>****»**»********.**«**..*.*.«..«.*......«..*«.*..«»..».«..«.*.*.M**»**«*«**M*«**»«.......«»»*M***«lo
7. Disclosure of Lending Data. ^ ....................... 21
8. Enforcement ..^..............23
9. "Safe Harbor" Provision 24
10. Role of Discrimination in CRA Evaluations ...............,~.- .....«......25
ACORN
I
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ANALYSIS OF THE NEW COMMUNITY REINVESTMENT ACT
(CRA) REGULATIONS
Briefing Paper
Background & Overview
The four federal banking agencies proposed new regulations to implement the
Community Reinvestment Act (CRA) on December 22nd. Public comments on
the proposed rule, which would replace the existing regulations in their entirety,
are due by February 22nd.
The agencies issued the new rules in response to a request by the President that
they revise the regulations to emphasize lending performance over process and
documentation, and strengthen enforcement of the law.
The sweeping and dramatic changes proposed by the new regulation raise many
serious concems. Whether or not the new rules will meet the President's
objective of increasing credit availability in low- and moderate-income
neighborhoods will largely depend on the resolution of many key issues discussed
in this paper.
Unless the proposal is considerably strengthened, the impact of the proposal on
many low- and moderate-income communities may be neutral or even
detrimental.
The new rules raise a wide variety of technical and practical issues regarding
implementation. For the most part, this paper focuses on structural and
conceptual issues raised by the rule. Technical issues will be discussed in
ACORN's formal comment on the regulation.
The briefing paper first provides a summary of the key features of the proposed
regulations, and proceeds to an analysis of major issue areas. The order of
subjects discussed in the paper generally follows the logic of the proposed
regulations. An overall assessment of the regulations is provided in ttie
conclusion.
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Summary of the Proposal
Two-tiered system
The current CRA regulations consist of 12 assessment factors. The new rules
would replace the existing factors in their entirety, and establish a "two-tiered"
system of evaluation for lenders with less than $250 million and more than $250
million in assets.
Treatment of small banks and thrifts
Small banks and thifts —defined as independent banks or thrifts with less than
$250 million in assets or banks and thrifts owned by holding companies whose
total banking assets are less than $250 million-- would be subject to minimal,
"streamlined" requirements. A lender would get a "satisfactory" rating if it
passed the following six tests:
1. a "reasonable" loan-to-deposit ratio (60% is presumed to be reasonable);
2. makes the majority of its loans within its service area;
3. has a "good loan mix" -a variety of loans made available across income levels;
4. has no "bona fide" complaints from community members;
5. has not engaged in discrimination; and
6. for a bank reporting under HMDA (banks in urban areas with more than $10
million in assets), a reasonable geographic distribution of loans.
Small banks passing all six tests would receive a "satisfactory" rating, while
lenders not passing any one of the tests would undergo a more thorough
examination. Under the $250 million threshold, 74% of all banks and thrifts
would undergo the "streamlined exam."
Two Options for Large Lenders: Strategic Plan and Lending, Service, and
Investment Tests
Lenders with more than $250 million in assets could choose to be evaluated under
one of two assessment schemes. They could choose to develop a "strategic plan"
with measurable goals, have the plan approved by their regulator, and be
evaluated on the basis of their performance with respect to the goals outlined in
their plan. Lenders not choosing the strategic plan option would be rated imder
lending, service, and investment tests on a five-point scale. These three ratings
would then be used to arrive at a composite rating which would be on the four
point scale mandated by statute. (Wholesale and special purpose lenders would
not be evaluated under the lending test. Instead, their performance under the
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investment and service test would determine their rating.)
Lending Test
The heart of the lending test is a comparison of the market share of institutions in
low- and moderate-income neighborhoods to their market share in the rest of
their service area, separately analyzed for home mortgage, small business, and
some consumer loans. The market share analysis effectively compares an
institution to itself —whether it is equally aggressive in seeldng out lending
opportunities throughout its service area— and, implicitly, compares institutions
to others lenders in the service area.
In general, lenders whose share of the market in low- and moderate-income
neighborhoods is "roughly comparable" to their market share in the rest of their
service area would get a "satisfactory" rating, while lenders whose market share
in low- and moderate-income areas exceeded their share in affluent areas would
get an "outstanding" rating. Conversely, lenders with a market share that was
"less than, and not roughly comparable to" their market share in high-income
areas would get less than satisfactory ratings.
Lenders could choose to count "indirect lending" for purposes of the market
share analysis —i.e. lending done by affiliates of the bank or community
development banks in which the lender had made an equity investment.
After computing the market share figures, examiners will check the actual
number of loans originated in low- and moderate-income areas. This provision is
designed to deal with cases where an institution may have a high market share in
low- and moderate-income areas, but because the level of lending by all lenders is
very low, the market share may not indicate a good performance.
Service and Investment Tests
The service test focuses on the percentage of branches accessible to low- and
moderate-income neighborhoods, with consideration given to the provision of
basic banking, government check cashing, and other services. For retail lenders,
the examiners will analyze the percentage of branches that are in or accessible to
low- and moderate-income neighborhoods mid make a judgement as to whether
this percentge is "substantial," "significant," etc.
The investment test measures investments by institutions in specified activities that
benefit low- and moderate- income neighborhoods relative to their risk-based
capital. Examples of qualifying investments include investments in loan
consortia, minority- and women-owned banks, community development financial
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insdtudoDS, or mortgage revenue bonds, provided that they benefit low- and
moderate-income areas (a retail bank would get credit for all of its qualifying
investments, provided that a portion benefited its service area).
Adjustments and Rebuttable Presumption
Under each of the three tests, a lender's rating could be adjusted upwards to
reflect qualitative aspects of their performance, such as the degree of difficulty or
innovation of the lending and investments undertaken by institutions. Only in
exceptional cases would an institution's rating be downgraded —if the lender
believed that the quantitative analysis did not accurately reflect the lender's actual
performance in low- and moderate-income neighborhoods.
After an examiner arrived at preliminary ratings under each of the three tests, a
bank would have the opportunity to "rebut" the rating, either because the analysis
failed to take into account certain aspects of its performance, or because of
peculiarities in its service area.
Composite Ratings
For retail institutions, the rating under the lending test would form the "base"
rating. An outstanding rating under the service test could increase a lender's
grade one level, while a rating of substantial non-compliance could decrease the
rating one level. An outstanding or "high satisfactory" rating under the
investment test could increase a lender's rating two or one levels, respectively. A
lender's rating could not be reduced by virtue of its performance under the
investment test.
Lenders with multiple service areas within a state would be rated separately for
each service area and a single composite rating for the whole state would then be
determined. The rule does not specify how disparate performance by a lender in
different service areas would be reconciled.
Disclosure of Loan Information: Small Business and Consumer Lending
Lenders with more than $250 million in assets would be required to report and
publicly disclose their small business and consumer lending on a geographic basis.
Data would be reported on originations, applications, denials, and purchases of
loans. There would be five categories for small business loans, based on the
annual sales of the small business, and the number of employees. Lenders would
report data only on closed-end consumer loans, and would not have to report data
on credit card or automobile loans. Data would not be collected on the race,
gender, or income of borrowers or applicants. All the loan data would be
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collected in both urban and rural areas, by census tracts or block numbering
areas.
Enforcement
The rule would for the first time clarify that institutions in substantial non
-complizince would be subject to the full range of enforcement powers available
to the agencies —including civil money penalties and cease-and-desist orders.
Institutions receiving a "needs-to-improve" rating on three sequential exams
would automatically get a rating of "substantial non-compliance" after the third
exam. Previously, a low CRA rating was a factor only for lenders that had
corporate applications —to merge or open new branches, for example— pending
before a regulatory agency.
De Facto "Safe Harbor" Provision
The rule appears to create a de facto safe harbor for lenders with "satisfactory"
or "outstanding" CRA ratings. In order to provide an "incentive" to institutions,
the regulations "clarify" how the agenices will deal with appUcations to merge or
expand based on CRA ratings (the previous regulations were silent on
applications procedures).
Discrimination
Institutions that have engaged in discrimination could not get a satisfactory rating,
although the evidentiary standard for discrimination is significantly higher than it
was under the previous regulations.
Public Comment Prior to CRA Exams
The public would for the first time have the ability to comment on lender
performance prior to CRA exams (a listing of banks to be examined would be
published 30 days in advance of the calendar quarter).
Delineation of Service Areas
The new rules require lenders to delineate their service areas by defining their
"effective lending territory" except that the service area could not arbitrarily
exclude low- and moderate-income areas. Lenders operating throughout a state
would have to define separate service areas for each MSA and rural area in which
they originated loans.
Definition of Low- and Moderate-Income Neighborhoods
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"Low- and moderate-income neighborhoods" would for the first time be defined
as neighborhoods where the income is less than 50% or 80%, respectively, of
area median income (AMI).
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1. Treatment of Small Banks and Thrifts
The proposed rule would establish a lower set of conpliance standards for
lenders with less than $250 million in assets —approximately 72% of the banks
and thrifts in the country. Lenders with less than $250 million in assets would
simply have to meet six tests in order to get a satisfactory CRA rating, including
an adequate loan-to-deposit ratio (of not less than 60%), a majority of loans in its
service area, its record of discrimination and of community complaints, an
adequate "loan mix," and, for HMDA reporters, a reasonable geographic
distribution of mortgage loans.
Beyond the technical difficulties it presents, the small bank provision in the
proposed rule represents a major retreat from current policy and practice, and
may in effect amount to an exemption for small institutions. This retreat is
justified neither by legislative history, nor by the performance of small banks.
Nowhere in the statute is there any indication that Congress intended small banks
to be held to a lower standard than larger banks. Indeed, proposals to exempt
small banks and thrifts from CRA have been soundly defeated in the Congress, as
have efforts to raise the threshold for institutions required to report under
HMDA from $10 million to $50 million.
Moreover, there is no evidence that small banks are better performers under
CRA than their larger counterparts. Small banks have accounted for a
disproportionate share of the lowest CRA ratings awarded since 1990, and
anecdotal evidence strongly suggests that these institutions are actually less
responsive to the needs of low- and moderate-income people than their larger
counterparts.
Proponents of relaxed treatment for small banks argue that different standards
are justified by the disproportionate burdens that CRA places on small banks. In
fact, CRA imposes only 3 minimal technical requirements on lenders: posting a
notice in the lobby of a branch, maintaining a public comment file, and preparing
a CRA statement containing a map of the lender's service area and a list of
products offered. Agency policy is that institutions need not maintain any
additional documentation beyond that kept in the ordinary course of doing
business. In addition, the existing regulations and policy guidelines direct
examiners to take the size and capacity of institutions into account in assessing
compliance. While individual examiners may have departed from this policy, this
argues for better training —not lowered standards.
Residents of rural areas will be especially hard hit by the rule, since they are
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disproportionately served by small banks, and often have few banking options.
Many of the rural communities in which many small banks op>erate are ethnically
and racially diverse, and contain large low- and moderate-income populations.
Rural areas are, compared to major urban centers, without conununity or
"watchdog" organizations and are therefore particularly dependent on effective
supervision. Indeed, the argument that small banks "by their nature" serve their
communities misses the mark —rural communities are often not homogenous, and
a small bank is as likely to avoid certain areas or populations as large institutions.
With the exception of the loan-to-deposit test, the specific threshold standards
established for smaller institutions are either too low or too vague to be
meaningful.
For example, it is altogether unclear how lenders, examiners, or the public can
know whether an institution makes the majority of its loans within its service
area, or whether it has a "good loan mix" including a distribution across income
levels, without any collection of data. Beyond the practical question of
implemetation, the rule leaves unclear what constitutes a "good loan mix" and
does not indicate whether or how examiners would be required to justify their
conclusions in the public CRA evaluations.
The "discrimination" and "community complaint" tests may prove to be
meaningless in practice. While the agencies have begun to reform their fair
lending procedures, the number of discrimination cases remains low. The lack of
community organizations in rural areas -together with the reluctance of residents
of many small towns to take on their elite— may significantly reduce the value of
the "complaint" provision. Additionally, the rule does not specify what will
constitute a "bona fide" complaint (particularly in light of the absence of
statistical data).
Needed Changes: The small bank exemption provision is not justified on
policy grounds, and is inconsistent with the legislative history of CRA. The small
bank exemption should be eliminated, and small banks should be subject to the
szune standards and requirements as large banks, including public disclosure of
lending data.
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2. Lending Test for Banks and Thrifts With More Than $250 Million
in Assets
The CRA reform initiative would focus an examiner's evaluations of lending
performance on a comparison of an institution's market share of small business,
home mortgage, and consumer lending in low- and moderate-income
neighborhoods to its market share in the service area as a whole. This "relative"
test is complemented by an analysis of whether the institution has made a
"significant" number of loans throughout low- and moderate-income areas, or
whether its total lending in low- and moderate-income areas is "substantial."
The market share methodology that is the basis of the lending test is a significant
improvement over current practice, in that it focuses the attention of examiners
on whether an institution is as aggressive in seeking out lending opportunities in
low- and moderate-income neghborhoods as it is in the rest of its service area.
This approach is far preferable to formula-based schemes, such as that proposed
by the New York State Banking Department in its proposed changes to CRA.
Many of the specifics of the lending test, however, are troubling, and would
undermine the value of the market share methodology. This section will discuss
the rule's treatment of: indirect lending; the weighting of mortgage, small
business, and consumer lending; the disaggregation of different kinds of
mortgage lending; gentrification; targeting; and "adjustments" of the base
lending score.
a. "Indirect Lending"
The proposal would allow lenders to count for CRA credit a proportionate share
of loans made by third parties —such as community development banks— in
whom they had made equity investments. This would allow banks and thrifts to
"buy out" of CRA, in effect to redline in their main business operations, but
achieve compliance through non-lending activities.
This is clearly contrary to the spirit of CRA, which was intended to integrate
community lending into the everyday operations of lending institutions, rather
than to institutionalize a "separate and unequal" banking system for low- and
moderate-income areas. In addition, the proposal appears to contradict the public
statements of Administration officials that banks would not be able to achieve
compliance with CRA simply thorough investments in CDFI's. Finally, the
proposal threatens to undo years of progress in developing underwriting and
marketing expertise in the mainstream banking industry with regard to
community reinvestment. Loans made by mainstream lenders that have
developed this expertise are of much greater long-term value to communities than
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lending conducted through separate intamediaries.
Investments in afiiliates of depository institutions —such as a mortgage bank
affiliate or a bank CDC— do not raise the same concerns. How a bank structures
community reinvestment into its corporate organization is its own business. It is
unacceptable, however, to move community reinvestment outside the banking
organization altogether.
Needed Change: Indirect lending should nol count for purposes of the lending
test. Investments in community development entities that generate significant
amounts of credit in low- and moderate-income areas should be evaluated under
the investment test, if at all. In no case should a lender that itself fails the lending
test get a "satisfactory" rating by virtue of "indirect lending."
h. Weighting of Home Mortgage, Small Business, and Consumer
Lending
The proposal would have examiners conduct separate market share comparisons
for small business, home mortgage, and consumer leading, and "an overall
market share performance rating" would be arrived at "after weighing each
lending category based on such factors as the needs of the community being
served, the bank's capabilities and business plans, and the degree to which the
bank's performance with respect to one of the loan categories, in fact, balances or
compensates for its performance under another category."
It is not clear how examiners in practice will arrive at overall market share
ratings in specific cases —how they will determine "community needs" or make
judgements about disparate performance in different product Unes.
The legislative history of CRA has consistently emphasized small business and
home mortgage lending. For example, the conference report for FIRREA in
1989 stated that written CRA evaluations should "place special emphasis on the
insured depository's record of serving the housing credit needs of low- and
moderate-income persons, small business credit needs, small farm credit needs
and rural economic development." The regulation itself does not expUcitly give
these product lines any greater weight than consumer lending —which has
historically been of less importance in community development efforts and
strategies.
Needed Change: Specify in the regulation that consumer lending will receive
significantly less weight than home mortgage and small business lending, and that
a poor record in home mortgage or small business lending will generally result in
a less than satisfactory rating under the lending test
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c. Methodology for Analysis of Home Mortgage and Small Business
Lending
The market share analysis would aggregate all types of mortgage lending for
purposes of analysis, including home purchase, home improvement, multi-family,
and refinancing orginations and purchases. This may greatly distort results and
understates the particular need in low- and moderate-income communities for
home purchase and multi-family credit. Refinancings and home improvement
loans, while they may be of value to low- and moderate-income people, are not as
important for community development purposes as home purchase and multi-
family loans.
In particular, many lenders may do large volumes of home improvement loans in
low- and moderate-income areas precisely because they do not offer home equity
loans in those areas to the same extent as in high-income neighborhoods (home-
equity loans are not reported under HMDA). Originations should get greater
weight than purchases because they require underwriting and marketing efforts
on the part of the lender.
Similarly, the analysis would aggregate all small business lending for purposes of
the market share computation. Anecdotal evidece strongly suggests that the
greatest problems of credit availability face very small businesses with sales of
less than $100,000 annually. "Lumping" all small businesses together might mask
problems faced by specific segments of the market. A new reporting category
should be created to reflect this fact, and the market share analysis should be
conducted for each of the five categories of small business.
Needed Change: Require examiners to conduct the market share test separately
for home purchase, multi-family, refinancing, and home improvement loans, and
state explicitly that greater weight will be given to home purchase and multi-
family originations. In addition, a new category of small businesses —those with
annual sales of less than $100,000 per year-- should be created for reporting
purposes, and the market share analysis should be conducted for each of the five
categories.
d. Gentrification and Displacement of Low- and Moderate-Income
Households
Since the market share analysis focuses exclusively on lending to low- and
moderate-income neighborhoods as opposed to individuals, lenders will get
credit for loans to high-income individuals moving into or displacing low-income
families. Gentrification —because it involves the rapid ttimover of housing stock
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~ is often accompanied by huge volumes of lending in census tracts that would be
defmed as low- and moderate-income based on the last census.
Needed Change: Lenders should not get credit —and in fact should be
downgraded— for lending that results in the displacement of low- and moderate-
income families. Conversely, lending to low- and moderate-income individuals
outside of low- and moderate-income areas should receive CRA "credit." Since
HMDA data provides information on the income of borrowers, examiners can
determine whether gentrification may be occuring without in^sing any new
reporting burden on lenders.
e. Targeting
The proposal would treat lending in very low-, low-, and moderate-income areas
equally for purposes of the market share analysis. By "lumping" each of these
segments of the market together, the proposal may encourage lenders to seek out
neighborhoods or borrowers solely at the high-end of the spectrum, and to
neglect low- and very low-income areas and people.
Needed Change: The rule should require examiners to conduct the market
share tests separately for low-income and for moderate-income neighbrohoods.
Institutions focusing on moderate-income areas to the exclusion of low-income
areas should be downgraded.
f. "Quality" of Credit Extended
In some cases, lenders may be extending significant amounts of credit in low- and
moderate-income areas, but under unfavorable or even abusive terms.
Needed Change: Examiners should ensure that credit extended in low- and
moderate-income neighborhoods is not priced differently or accompanied by
higher fees than credit extended in other areas.
g. Adjustments.
Under the proposal, examiners may increase a bank's lending rating if the lenders
engages in especially difficult types of lending, or targets very low-income
neighborhoods. Only in "exceptional cases", however, would a bank's lending
rating be downgraded.
This approach is extremely troubling. There are as many reasons why the
statistical analysis would overstate performance as it might understate
performance. For example, a lender with a high market share in low- and
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moderate-income neighborhoods might be lending exclusively to high income
individuals, thereby facilitating gentrification and the displacement of low-income
households. Or a lender might be lending in low- and moderate-income white
neighborhoods to the exclusion of low- and moderate-income minority areas. Or
it may avoid lending in low-income areas, and focus solely on moderate-income
neighborhoods.
Needed Changes: The regulation should not contain language suggesting that
upward adjustments are any more likely than downward adjustments. In
addition, specific reasons for adjusting a rating downwards (like those listed
above) should be listed in the regulation, just as the specific reasons for
increasing a rating are itemized.
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3. Service Test
The service test would involve an analysis of the distribution of a lender's
branches in a given service area, and a determination of whether the percentage
in or readily accessible to low- and moderate-income areas was "substantial,"
"significant," or "insignificant." A lender's rating under the service test would
also depend on the extent to which it offered services that promoted credit
availability, including loan and homeownership counseling, loan packaging for
small businesses, and basic banking and government check cashing. An
"outstanding" rating under the service test would increase a lender's rating one
level, and a rating of "substantial non-compliance" would reduce the rating one
level. Other ratings under the service test would have no impact on the
composite rating.
The service test raises two principal concerns. First, the use of terms such as
"significant" and "substantial" leaves too much room for examiner discretion. In
particular, the connotations of the terms "substantial" and "insignificant" suggest
that many lenders might get "outstanding" ratings, and very few would get
ratings of "substantial non-compliance."
Second, the terms of basic banking and government check cashing services are
not adequately defined. Many lenders offer some typ)e of lifeline account or
check cashing service, but few offer services that are genuinely affordable or
accessible to low- and moderate-income people.
Needed Change: The service test should involve much higher standards. In
order to get an "outstanding" rating under the service test, the percentage of an
institution's branches located in or readily accessible to low- and moderate-
income tracts should be equal to or greater than the percentage of tracts in the
service are that are at or below 80% of area median income (weighted for
population). An institution whose percentage of branches in low- and moderate-
income tracts is less than 50% of the percentage of all tracts in the service area
that are low- and moderate-income (weighted for population) should be given a
rating of "substantial non-compliance." Branches located in low-density
downtown areas -which are often low-income by census criteria, but serve a
middle-income or high-income clientele— should not be counted for purposes of
the analysis.
In order to receive favorable consideration, a basic banking account should at a
minimum: require only a nominal opening balance and no minimum balance;
allow full access to tellers; provide for fees that no more than cover costs of
operating the account (including bounced check fees); and allow for at least 12
free checks per month. In order to receive favorable consideration, a
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government check cashing service should either be free or include only a nominal
fee designed to recoup costs, and should not require excessive identification to be
presented. Banks should demonstrate that the services are effectively marketed
and extensively used before receiving any credit.
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4. Investment Test
The investment test measures investments by institutions in specified activities that
benefit low- and moderate-income neighborhoods relative to their risk-based
capital. Examples of qualifying investments include investments in loan
consortia, minority- and women-owned banks, community development financial
institutions, or mortgage revenue bonds, provided that they benefit low- and
moderate-income areas (a retail bank would get credit for all of its qualifying
investments, provided that a portion benefited its service area).
It is probably appropriate to employ an investment test for wholesale and other
special purpose banks (such as credit card banks) for whom retail lending is a
relatively minor part of their ordinary business.
The role of the investment test with respect to retail banks, however, is among
the most troubling features of the proposed CRA regulation.
Except for investments in minority- and women-owned banks that benefit low-
and moderate-income neighborhoods, the statute focuses exclusively on lending
activities. While diere may be many sources for worthy investments in low- and
moderate-income areas, only banks are able to provide long-term community
development financing. For this reason alone, it is crucial to maintain the focus
of CRA on lending.
Moreover, the standards for investment —a substantial amount relative to an
institution's risk-based capital— would appear to represent a retreat from current
standards for lending. In terms of dollar volume, we would expect that lenders
would devote far more resources if they were judged solely with respect to their
lending activities than if they could achieve compliance through investments.
The provision of the investment test that allows banks to get credit for
investments outside their service area(s) appears to sever the connection between
lenders and local communities that is at the heart of CRA —and will become
increasingly important as the banking system evolves.
Finally, the list of qualifying investments in the proposed rule appears to make
almost no credible distinction among investments. For example, investments in
mortgage revenue bonds are not a stretch for any lender —indeed, they confer
concrete tax advantages for purchasers.
Needed Changes: Analysis of investments may be appropriate for special
purpose institutions, but the exceptional case should not drive the rule. A retail
institution with a less than satisfactory record of direct lending should not be able
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to get a satisfactory or better rating by virtue of its investment activities.
Otherwise, as the Federal Reserve analysis of the proposal puts it, "institutions
that are less than satisfactory in lending may be able to 'purchase' a satisfactory
rating through investments." This could potentially result in less lending in low-
and moderate-income neighborhoods, and some lenders might get ratings of
substantial non-compliance' under the lending test but get an overall rating of
"satisfactory" by virtue of an "outstanding" performance under the investment
test.
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5. Rebuttable Presumption
The proposed rule would allow lenders to contest the initial ratings they receive
from examiners through an appeals process. In fact the rule encourages "liberal
use of agency appeals processes" in the early years of the rule's implementation.
The appeals process threatens the credibility of the new system, because it affords
a behind-closed-doors opportunity for lenders to negotiate with the agencies
regarding the ratings they will receive. Large and sophisticated lenders will
undoubtedly use this provision to intimidate examiners. No comparable process
is offered to citizens who believe that a CRA rating overstates a lender's
performance.
Needed Change: Either the ^peals process should be made equally available to
the public, or it should be eliminated altogether.
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6. Composite Ratings
The process by which the agencies will arrive at composite ratings is problematic
for two reasons. First, the process by which the lending, service, and investment
tests are balanced is likely to undermine the focus on lending. Second, the
question of how composite ratings are to be arrived at in the case of lenders
operating in multiple service areas within a state is left unclear.
a. Balance of Lending. Investment, and Services Tests
The legislative history of the Act, regulatory policy, and die community group
postvu"e have always pointed to the need to maintain the focus of CRA on lending.
The proposed rule raises the troubling prospect that lenders with less than
satisfactory records in lending will get satisfactory or better ratings by virtue of
non-lending activities.
b. Composite Rating for Lenders With Multiple Service Areas Within A State
The proposed rule states that the lending, service, and investment tests will only
be conducted in "sample" service areas for lenders with multiple service areas in
a state. It is unclear whether or not the statistical portion of the lending will be
conducted in non-sampled service areas.
The rule does not propose any guidelines for how sample areas will be selected,
and more importantly how different ratings in different areas will be reconciled
or weighted. It is irrelevant to residents of a given community that a large
institution with branches throughout the state is performing at a certain level
overall. Their focus will rightly be on the lender's performance in their own
community.
Needed Changes: The rule must be altered to clearly state that any lender with
a less than satisfactory performance under the lending test shall get a composite
of less than satisfactory rating, regardless of its performance under the service
and investment tests. With respect to lenders with multiple service areas, the
expectation must be that a lender is to get a satisfactory rating in all its service
areas.
Specifically, a lender with multiple service areas should not be able to get an
"outstanding" rating unless it has an outstanding performance in more than 80%
of its service areas, and it has a satisfactory rating in the balance of its service
areas (which should not include any of its largest service areas, either in terms of
population or its deposit base). A lender should not be able to obtain a
"satisfactory" rating unless it has at least a satisfactory rating in 90% of its
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service areas (including its largest service areas), and in no case has a rating of
"substantial non-compliance." Any lender that gets a less than satisfactory rating
in the same service area in two sequential evaluations should get a less than
satisfactory composite rating, notwithstanding its performance in other service
areas.
In addition, the rule should explicitly require examiners to disclose in the public
portion of the CRA evaluation which service areas were sampled (and any
rationale for the selection), as well as lenders' performance rating in each
sampled service area.
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7. Disclosure of Lending Data
The proposal would require the collection of data on housing, small business and
closed-end consumer loans (except auto loans) for all lenders with more than
$250 million in assets.
The provisions requiring additional public disclosure of lending data are the
greatest strengdis of the proposed regulations. The experience with HMDA data
has been that public disclosure is by itself the most powerful force for change in
the banking industry. Public disclosure of HMDA data has assisted lenders' own
efforts to comply with CRA, facilitated fair lending supervision, empowered
residents of low- and moderate-income neighborhoods, and has resulted in a
revolution along every step of the mortgage lending chain, from underwriting to
marketing.
The disclosure of lending data —especially for lending to small businesses and
small farms- is absolutely essential to implement the proposed performance-
based methodology.
While the disclosure provisions are a significant step forward, they can and
should be improved.
First, the proposal does not require collection of data on lending to minority-
owned small businesses. There is considerable anecdotal evidence of credit
availability problems for such firms. A provision of FDICIA provides broad
authority to the agencies to collect and disclose data on the race and ethnicity of
small business applicants and borrowers. (Requiring banks to collect data on the
race and ethnicity of small business borrowers would require an amendment to
the implementing regulations for the Equal Credit Opportunity Act [ECOA], but
there is no statutory impediment to the collection of such data).
Second, the proposal does not require collection of data on loans to firms with
less than $100,000 in annual sales. Such firms constitute a majority of small
businesses in the country, and anecdotal evidence strongly suggests that these
firms face the greatest difficulties in accessing credit from depository institutions.
Third, collecting data only from institutions with more than $250 million in
assets may provide a very incomplete record of actual lending activities in
particular communities.
Lastly, the rule does not clarify the means through which tliis data will be made
available to the public. The Federal Reserve's obstructionist policy with regard
to the release of HMDA data suggests that the rule must deal with issues of
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dissemination and accessibility in an explicit fashion.
Needed Changes: The rule should require reporting on appUcations received,
denials, and originations by the race and ethnicity of small business owners. The
rule should also provide for a fifth "threshold" for small businesses —firms with
less than $100,000 in annual sales. The regulations should provide for collection
of data from all banks and thrifts with more than $10 million in assets —the
threshold contained in HMDA. Clear policies regarding the dissemination of the
newly collected data must be established in the rule, and should be governed by
the principle that data should be made available in a wide variety of formats to
facilitate use by a wide range of users -from academics to low-tech conununity
groups.
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8. Enforcement
The new rules clarify for the first time that the agencies may use the full range of
enforcement powers available to them --including cease-and-desist orders and
civil money penalties— for institutions in "substantial non-compliance" with the
CRA. This provision is fully consistent with the statute, which gives the agencies
broadly defined powers to promulgate regulations to "implement ihe purposes"
of the Act. The Federal Reserve, which has objected to the enforcement
language, has actually used a cease-and-desist order in at least one case for
persistent non-compliance with CRA.
Needed Change: The rule should not preclude the agencies from using the full
range of their enforcement powers for lenders with "needs-to-improve" ratings.
In addition, a lender should receive a rating of substantial non-compliance if it
has received two —rather than three— sequential ratings of needs-to-improve.
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9. "Safe Harbor" Provision
The proposal contains an implicit safe harbor for banks achieving an
"outstanding" or "satisfactory" CRA rating. While the proposal does not prevent
the agencies from considering comments by the public in weighing the application
of an institution with a satisfactory or better rating, it suggests that the new
appUcations policy —for the first time explicitly laid in the rule-- would provide
an "incentive" for banks to achieve a high CRA rating.
At the same time, the rule fails to address one of the principal complaints of
community groups with regard to the enforcement of CRA —the unwillingness of
the Federal Reserve to consider applications in an open and critical manner. Not
only has the Fed refused to deny many applications, it has refused to hold public
hearings or extend public comment periods in the case of major mergers
involving dozens of communities and many requests for such procedures.
Since most applications are decided by the Federal Reserve Board, this new "safe
harbor" policy will in all likelihood be implemented in a draconian fashion, and
dramatically undermine the role of the public in fostering community
reinvestment.
The proposed "safe harbor" is misguided on several counts. First, the new
regulations are -by their authors own admission— a radical departure from
current practice, and may result in a wide variety of anomalies that cannot be
anticipated. The agencies should not lower the weight accorded to public
comment given that the new system has not been tested. Second, the agencies
have apparently not decided how to arrive at a composite rating for banks with
branches in many metropohtan areas. And they have stated that they only intend
to "sample" representative market areas to arrive at the overall rating for such
institutions. It is therefore plausible that an institution with a stellar record in
sampled areas may in fact be doing a disasterous job in others —a subject that
would only be raised by the public conmient process. Third, the recurrent use of
subjective terms such as "roughly comparable," "significant," and "substantial" in
the rule suggests that examiner judgement will continue to play a central role in
deciding CRA ratings. Such judgements are not infallible, and should be open to
criticism.
CRA has worked because of public participation -and in spite of regulatory
hostility and malfeasance. The new rule should build on —not discourage— this
record of citizen involvement.
Needed Changes: The portion of the rule dealing with apphcations must be
deleted.
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10. Role of Discrimination in CRA Evaluations
The proposed rule would greatly erode the role of fair lending in CRA
evaluations. Specifically, under the "old" CRA, one assessment factor required
examiners to look for "evidence of prohibited discriminatory credit practices or
other illegal credit practices," while another required analysis to determine
whether the lender was discouraging applications on a phohibited basis, or
"prescreening."
Under the "old" CRA, extremely low levels of ^plications from minorities, or
underwriting criteria with a discriminatory effect on minority neighborhoods
might constitute sufficient evidence to warrant a lowered CRA rating.
Alternatively, a lender that originated a large volume of loans to low- and
moderate-income whites, but few to low- and moderate-income minorities would
be subject to scrutiny under these assessment factors.
The proposed rule, by contrast, provides for a much narrower definition of
discrimination, namely any individual case of discrimination that had not been
fully corrected by the institution or which it is not in the process of correcting,
or any pattern or practice of discrimination which it had not fully corrected at
the time of the exam. Given the sorry record of the banking agencies in finding
instances of discrimination —and the narrowness of the definition— this is Hkely
to prove a meaningless test.
It is important to note that the new focus on fair lending has yet to produce a
significant uptick in cases or referrals to the Justice Department. In addition, the
focus of the agencies has been almost excluisively on issues of disparate
treatment. Other issues such as pre-screening and disparate impact have not been
dealt with in the fair lending context. They should continue to be analyzed as
part of CRA evaluations.
Needed Changes: The rule is correct in providing that discrimination should
result in a less than satisfactory CRA rating. The proposed rule must be altered,
however, to preserve the existing evidentiary standard with respect to
discrimination. Specifically, evidence of discrimination should continue to include
low levels of applications from minorities, disparities in the rejection or approval
rates for white and minority borrowers, and loan underwriting standards or
policies that have a discriminatory effect on predominantly neighborhoods. In
addition, the lending analysis should also include market share breakdowns of
home mortgage, consumer, and small business lending by the racial composition
of neighborhoods.
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11. Strategic Plan
The proposed rule allows all lenders to choose the option of creating a strategic
plan with measurable goals to meet their CRA obligations, in consultation with
community groups. However, the proposal does not include the mechanisms that
would ensure that conununity groups are able to participate in the process, nor
does it address how the agencies would respond to unfavorable public comment
about the substance of a strategic plan. It is also extremely unclear how a
strategic plan would be evaluated by the agencies. The rule provides for no
specific conmient period and only requires one-time newspaper notification by
lenders of their intent to develop a strategic plan.
An additional concern is that many lenders may file strategic plans for a given
area at the same time —thereby placing a tremendous burden on conmiunity
organizations to comment.
Needed Changes: This provision of the rule must ensure that community
groups are able to participate in the process as envisioned. Specifically, the
agencies must regularly disseminate lists of lenders that are formulating strategic
plans (the existing rule provides for only publication of notice by the lender in
newspapers), and allow for no less than 90 days for public comment on a plan
once it is filed. The agencies must also clearly state that the standards for
institutions pursuing this option would be no less than for lenders that would be
evaluated under the lending, services, and investment tests. Finally, in approving
or disapproving a plan that has been commented upon unfavorably by the public,
the agencies should as a matter of course explain their reasoning and respond in
detail to specific issues raised by commenters.
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12. Public Comment and Assessments of Community Need
A principal complaint by community groups about the implementation of CRA
over the years has been that examiners often neglect to contact members of a
lender's community —especially low- and moderate-income people— prior to
conducting a CRA exam. Such contacts are essential not only to verify claims
made by lenders, but to get a "feel" for the nature of credit needs in a
community, and the kinds of products that would meet those needs.
Indeed, the proposed rule -for all its emphasis on "objectivity"- recognizes
implicitly that meeting locally determined credit needs is at the heart of CRA.
For example, in assigning a rating under the lending test to a bank with a stellar
record in consumer lending, but an abomiable record in small business and home
mortgage lending, examiners would weigh the different performances based in
part on "the needs of the community being served."
However, the rule does virtually nothing to ensure that examiners get a sense
from residents of local conrmiunities about what their credit needs are. Important
decisions about CRA ratings will, therefore, be made in the absence of crucial
information -information that can only be collected by examiner contacts with
residents of local conmiunities.
The proposed rule does provide that the agencies will pubhsh 30 days in advance
a list of institutions scheduled to undergo CRA examinations in the next calendar
quarter, and allow for public comment. This provision -which would impose a
substantial burden on conmiunity groups- should not be a substitute for
aggressive outreach by examiners. There is simply no substitute for proactive
outreach by examiners to determine community perceptions and credit needs.
It is unlikely that community groups will be able to provide meaningful
comments on the performance of potentially dozens of lenders in the short period
provided for in the rule. Moreover, most community organizations simply do
not have the resources or time to devote to responding to notices in the Federal
Register -especially when they are unsure as to whether their comments will be
taken seriously.
Needed Change: The list of institutions to be examined should be pubUshed no
less than 90 days in advance of the next calendar quarter. In addition, as part and
parcel of every CRA evaluation, exmainers should be required to contact
community groups regarding their perceptions of credit needs and lender
performance, and to make use of the information in arriving at ratings.
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CONCLUSION
The proposed CRA regulations represent dramatic change. Whether the
regulations will fulfill President Clinton's promise to strengthen CRA will depend
largely on how key questions are resolved in the final rule.
The rule contains several positive features, including a stronger focus on lending
in low- and moderate-income areas, public disclosure of lending data, and the
introduction of the concept of market share analysis.
Key areas where the rule must be changed include: the role of investments and
indirect lending in the evaluation process; the proposed "safe harbor" provisions;
the treatment of small banks; the evidentiary standard for discrimination; the
implementation of the strategic plan concept and the role of the public and
community groups in the CRA process; the rebuttable presumption and
adjustments provisions; several aspects of the market share methodology; and the
way in which composite ratings for institutions with multiple markets would be
determined.
Ultimately the regulation -unless significantly strengthened-- could result in less
community reinvestment in low- and moderate-income neighborhoods around the
country. Conversely —if significantly strengthened— the rule could potentially
enhance credit availability in low- and moderate-income areas, and fulfill the
President's commitment to strengthen CRA.
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<^'
UXI^ National Training and Information Canter
PI I I W tlO N. MHwwihM Av*. D CMei«o. IHIneis «>B2a-4103 0(312) 24S403S
TESTIMONY BEFORE THE HOUSE SUBCOMMITTEE
(W CONSUMER CREDIT AND INSURANCE
SUBMriTED BY GALE CINCOTTA
EXECUnVE HRBCIXW OF THE NATIONAL TRAINING AND INFMtMATHW CENTER
AND CHAIRFERSON OF NATKWAL PBCXLE'S ACTION
FEBRUARY 8, 1994
224
Thank you, Mr. Chairman and other members of the Committee for this opportunity to testify,
and for your interest in community reinvestment. I speak not only as Executive Director of the
National Training and Information Center, but as Chairperson of National People's Action.
NPA is a nationwide coalition of over 300 grassroots organizations working on a variety of
neighborhood issues since 1971.
Community reinvestment is one of the most important means to address the lack of credit in our
nation's low and moderate income neighborhoods. Since the Community Reinvestment Act's
inception, the National Training and Information Center has negotiated over $12 billion dollars
in lending commitments for low and moderate income communities. The Act itself has never
been difficult to understand. However finding a means to enforce the Act has been problematic.
I would like to applaud the President and Mr. Eugene Ludwig, head of the Office of the
Comptroller of the Currency for their efforts to reform the community reinvestment act. For
too long, community groups have been telling the regulators that much was needed to improve
and to strengthen the Community Reinvestment Act and the way in which lenders are evaluated
and graded under this system. For the past several years, the regulators have not concentrated
on the intent of the CRA, rather they have focused too much on the process.
I believe that the proposed regulations, led by the OCC, are a step forward for the Community
Reinvestment Act and for all those who have the ability to benefit from increased access to
credit. The new regulations go a long way in returning the focus of the Community
Reinvestment Act back to the original intent of the law: Are loans being made in low and
moderate income communities?
First, let me say that I am extremely happy to see that the new regulations are performance
based rather than process based as in the past. Because the Assessment Factors were
subjective, lenders tended to overcompensate for uncertainties about their exams and the way
in which the examiners may interpret their performance. This ultimately led to excessive
documentation by the lenders and a backlash against the Community Reinvestment Act. Such
detailed reporting was never the aim of the CRA statute, nor was it suggested or desired by
community residents active in community reinvestment. Performance-based standards allow
the entire CRA process to focus on len<ting performance which was the original intent of the
law.
Communities have suffered for too long as we watched lenders center their efforts on marketing
and advertising plans, paper trails, and phone logs. We have watched as banks received
Satisfactory, even Outstanding ratings without making any loans in low and moderate income
neighborhoods. Currently, over 90% of all lending institutions receive Satisfactory or better
CRA ratings. Requiring lenders to meet measurable performance standards assures the
community that they are, indeed, making loans.
225
Although the proposed regulations do move the CRA process from subjective to performance
based standards, other areas of the regulations raise many concerns for community organizations.
The frequency of CRA examinations for banks receiving "Outstanding" ratings should not be
reduced. Until the community can be certain that an Outstanding rating means that an institution
has met the credit needs of its entire service area, banks cannot be rewarded for such a
perrormance. beiore relieving Uie oanks irom ttieir cka obugauons, let's allow time tor the
new regulations and their effects to take place. Consistent rating for three years are needed
before reducing a bank's frequency of examinations can be considered.
Although a streamlined examination for small banks may be warranted, tiie proposed asset size
determination is much too large. Currentiy; nearly 80% of all lending institutions would fall
under the $250 million asset size category and would be exempt from more rigorous lending
standards. Small banks should be defined as those with assets of less than $100 million. In
addition, for small banks, the loan-to-deposit ratio should be increased from 60% to 75%.
Small banks should also be subject to the same service test as large institutions. It cannot be
assumed that small banks automatically meet the credit needs of the community in which it is
located, particularly if the definition of small banks remains at $250 million. Small banks, like
larger institutions need to be encouraged and evaluated on the availability of banking services
as well as credit. Providing banking services is an integral part of an institution's obligation to
meeting the credit needs of its community. The size of an institution does not guarantee tiuit it
will provide appropriate banking services for all those within its service area. Therefore, all
banks must be subject to a service test.
Under NO CIRCUMSTANCES should a bank's composite CRA rating be adjusted up to two
levels, or even one level, for an Outstanding rating in Uie investment test. Allowing a bank to
increase its composite rating by two entire levels, removes the incentive for the bank to lend
directiy in low and moderate income communities. With such a system in place, a lender with
a Substantial Non-Compliance rating for the lending test could end up with a composite rating
of Satisfactory if they received an Outstanding rating for the investinent test.
This removes the lender's responsibilities to lend directiy in low and moderate income
commututies. Once again, unscrupulous lenders will be able to obtain high CRA ratings without
directiy providing loans to low and moderate income communities. While this approach may
be appropriate for wholesale and special purpose banks, its does not make any sense for retail
banks whose primary purpose is to provide direct lending services. The idea behind reforming
the CRA process was to emphasize a lender's lending performance, not mitigate this activity
with increased credit for investment performance.
I am afraid that allowing a lender to receive such increases for its investment performance will
consequentiy result in the elimination of a functional conventional market in those areas. The
Community Reinvestment Act is not just about reinvesting in neighborhoods, but about
RESTORING THE CONVENTIONAL MARKET in underserved areas. Community groups
226
want and need lenders to make investments. However, they also need to" be able to walk into
a lending institution located in their neighborhood and apply for mortgage credit.
For the same reasons, a lender should NOT be allowed to receive an increase in its composite
CRA rating for an outstanding service performance. Again, this would result in a shift in
emohasis from direct lendinp to mere)v nrovidine banking services While bankinp services are
an essenuai part ot a bank s oougauon to meeung uie credit needs of a community, an
outstanding rating on the service test should not result in an increase in the composite rating.
Care should also be given to insure that non-traditional branches, such as mini-branches in the
grocery stores, do not serve as substitutes for actual bank branches that provide full banking
services. An institudon's non-traditional branches should enhance its service rating but not
replace its obligation to provide traditional branch services.
One of the most exciting aspects of the new regulations is the possibility of getting business loan
data. In 1975, when the Home Mortgage Disclosure Act was intially introduced, it was called
the Financial Institutions Reporting Act. It included not only public disclosure of residential
mortgage loans by c^isus tract, but disclosure of commercial loans as well.
For over twenty years. National People's Action has been telling the regulators, the bankers, and
legislators that small business and small farm lending data is absolutely crucial to community
revitalization. In the same way in which the Home Mortgage Disclosure Act (HMDA)
dramatically increased the amount of housing loans, disclosure of small business data will
provide the community, as well as the lenders, with the information needed to develop
innovative lending programs for small business and small farms. Small business development
is one of the most promising routes for economic development and job opportunities in
disinvested neighborhoods. Providing this data will be the quickest way to truly revitalize low
and mod^ate income communities.
However, in order for communities to truly achieve this goal, the categories for small business
must be greatly reduced. When neighborhood groups speak of small business and small farms,
we speak about truly small business. Those whose annual sales are much less than $250,000.
In order to get an accurate picture of what is happening in inner-city and rural low income
communities, the categories must be broken down as follows: business with sales of less than
$50,000; those with average annual sales of $50,000-$ 100,000, those with average sales of
$100,000-$250,000; and those with average sales of $250,00-$500,000.
Small business and small farm loan data should be required by all institutions except those
already exempt from HMDA data.
Like small business data, small farm loan data must also be reported according to annual gross
farm income. The categories must be broken down as follows: farms with annual gross farm
income below $100,000, annual gross farm income of $100-$ 150,000; those with annual farm
income of $150,000-$200,000, $200,000-250,000; and those above $250,000 in annual farm
income. Only with these categories in place, will the community, lenders, and regulators be
227
able to determine whether or not the bank is meeting the credit needs of small and mid-sized
family farmers.
A lender's CRA plan cannot substitute for actual loans in underserved areas. The communities
do not care if a lender has a strategic CRA Plan if there are no loans made in low and moderate
income neighborhoods. Loans must be made in these areas, regardless of whether a lender has
Using market share to determine whether or not a lender is meeting the credit needs of low and
moderate income neighborhoods works only if a lender is making a large amount of loans in
higher income, non-risk areas. Regardless of a lender's lending activity in higher income areas,
lenders must have a reasonable amount of loans in low and moderate income neighborhoods.
Low and moderate income neighborhoods must have a variety of appropriate loan products
available to them. Just because a lender does not offer certain lending products, does not justify
inaction in those areas. Lenders must figure out a way to offer the appropriate products.
Banks must also continue to provide the public and the regulators with a CRA statement.
However, this statement need not be any longer than a one to two page statement describing the
bank's service area (including a map), hours of operation, branch locations and hours, ATM
locations, loan products, and banking services available. The public has a legitimate right and
interest in knowing what loan products and services are available to them. A CRA statement
allows the community to hold a lender accountable and to determine whether its needs are bdng
met. In addition, this statement should inform the public about the purpose and availability of
a lender's public CRA comment file.
Of great concern to community groups is the opportunity for banks to achieve a Safe Harbor.
Currently, the way the transition rules are written, there may be an opportunity for lenders to
achieve a safe haiiwr from the new CRA regulations. By July 1995, sufficient time has been
given for banks to comply under the new regulations. After this date, they should not be
allowed to be evaluated under the old standards.
In addition, if banks are examined less frequently due to Outstanding performance, this is a Safe
Harbor. Until there is some real meaning attached to ratings, the idea of exempting institutions
from review is distressing. Banks should not be rewarded for meeting the requirements of what
is law.
Further possibilities for a Safe Hari>or lie in the transition rules. A bank's application would
not be upheld nor would they be subject to enforcement actions if their first rating under the new
system was more than one rating below the institution's last rating under the old standards. This
is absolutely unacceptable.
The greatest power of a community group lies in its ability to challenge a bank's application if
its lending perfonnance is unsatisfactory. However, it appears that the new regulations attempt
to reduce this power if a bank has an Outstanding rating. CRA ratings will be an "important.
228
and often controlling, factor" on bank applications. An "Outstanding" ratifig will receive "extra
weight" in the application process and will result in a finding that the CRA aspect of the
application is consistent with approval. Again, before we provide carrots to the banks, let's give
the regulations time to take e^ect. Ratings must not take the place of the public's comments
regarding a lender's performance.
rur wnoiesdie oanKs, inoireci lenuing must piay a roie u) now tney are evaluated. Currently,
wholesale banks are evaluated primarily on their investments. However, investments do not go
far enough. A good way to insure that wholesale banks are making substantial investments in
low and moderate income communities is to require them to participate in indirect lending.
Indirect lending would insure that these banks are producing something new and would rq)resent
direct investments to low and moderate income neighborhoods. In addition, investments should
be measured against a bank's assets, not its capital.
The value of improving examiner training and the need for consistency between the four
regulatory agencies should not be underestimated. If the proposed regulations are to improve
the current system and are to have a positive effect on the way the Community Reinvestment Act
is interpreted, then we must have qualified and knowledgeable examiners who understand the
intent of the Community Reinvestment Act.
Thank you for the opportunity to testify.
229
STATEMENT
OF THE
CONSUMER BANKERS ASSOCIATION
AND
THE BANKERS ROUNDTABLE
BEFORE
THE SUBCOMMITTEE ON
CONSUMER CREDIT AND INSURANCE
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
UNITED STATES HOUSE OF REPRESENTATIVES
CONCERNING
COMMUNITY REINVESTMENT ACT REFORM
Februarys, 1994
230
The Consumer Bankers Association (CBA)'' and The Bankers Rouncltable2
(collectively, the Associations) appreciate the opportunity to provide this statement in
conjunction with the Subcommittee hearing on Community Reinvestment Act reform.
The Associations firmly believe that CRA has been successful in promoting
community development and that banks can continue to play a key role in achieving our
community development goals. We appreciate the extensive efforts undertaken by the
financial institution regulatory agencies to improve regulations under the Community
Reinvestment Act, and we believe that regulatory reform - and not legislative reform -
is the best vehicle for addressing the concerns of financial institutions, community
groups and the public about CRA.
For a variety of reasons, CRA regulation has not fulfilled everyone's
expectations. Some lenders have found that the implementing regulations are too
process-oriented, and many community advocates have not seen as much in the way of
results as they have wanted. Many believe that the current CRA regulations put too
much emphasis on documentation and not enough emphasis on providing credit to
improve our communities. These concerns have been the driving force behind the
reform process.
But despite all these problems, CRA as currently enacted has not been a failure.
It has been responsible for successfully putting billions of dollars into low- and
moderate-income communities. And it has encouraged many financial institutions to
recognize that there is a market in the revitalization of their communities and to find
creative ways to address the needs of low- and moderate-income neighborhoods. The
evidence demonstrates that much progress has been made.
For example, in October 1 992, the Consumer Bankers Association released the
results of its survey of affordable mortgage programs by financial institutions. The
survey reviewed programs at 140 large and medium-size banks, thrifts and holding
companies. While covering only part of the industry, the survey demonstrates that
banks have been making a major commitment to affordable mortgage programs and
related efforts to increase mortgage lending to minorities and low- and moderate-
income consumers.
^ The Consumer Bankers Association was founded in 1 91 9 to provide a progressive voice for the
retail banking industry. CBA represents approximately 750 federally insured bank and thrift Institutions that
hold more than 80 percent of all consumer deposits, arxi more tfian 70 percent of all consumer credit held
by federally insured depository Institutions.
2 The Bankers Roundtat)le Is an organization of atxiut 1 15 of the nation's largest tianking
organizations. The Bankers RoundtaWe was founded in mid-1993 through the merger of the Association of
Reserve City Bankers and the Associatk^n of Bank Holding Companies.
2
231
In 1992, more than 90 percent of the banks surveyed had programs to increase
mortgage lending to the target groups - - the most common of which involves more
flexible underwriting criteria. In addition, a large majority of the banks are providing
automatic reviews of mortgage loan rejections, stepped-up marketing to minorities,
credit counseling and employee sensitivity training. The programs are quite new: on
average, they are only two and one half years old. Therefore, the benefits are only
beginning to be visible but the early signs suggest that efforts under the present system
will be increasingly evident as these programs are refined and enhanced based on
actual experience.
CBA repeated its survey in 1993, and the survey shows significantly increased
efforts to provide affordable mortgage products. The overwhelming majority of banks
surveyed for 1993 offer products which involve lower down-payments, make use of
alternative credit history standards, or feature flexible debt-to-income, loan-to-value, or
credit history standards. Eighty-eight percent of the 103 respondents have a policy that
automatically requires a review of rejected loan applications. The number of loans
originated under affordable mortgage programs by the surveyed banks and the total
dollar volume of those loans also substantially increased from 1992 to 1993.
In addition, the CBA recently compiled a compendium of existing community
development activities and vehicles used by financial institutions. This compendium,
entitled, "Taking Responsibility. Financing America's Community Development in
1993," shows both the large number of programs and the great variety of mechanisms
employed for CRA-related lending - whether affordable mortgage, small business or
consumer lending. In each case, banks choose the methods of achieving their goals
that are best suited to their product offerings and the needs of their local communities.
The compendium displays the gamut of programs in existence, from bank
community development corporations to small business investment corporations to
community development loan funds. It demonstrates the tremendous commitment to
CRA lending by financial institutions, and belies the argument that banks are not
actively engaged in this effort. The compendium is currently being updated and we will
make it available to the Subcommittee when it is ready.
The surveys and the compendium offer evidence of the increasing success of
CRA. Nevertheless, CRA regulation can be improved. Changes can be made that
would (1 ) reward performance over process, (2) provide sufficient flexibility to enable
institutions to adjust to local needs using their own unique strengths and product
offerings, (3) improve the consistency of the examination and enforcement process,
and (4) create greater incentives to encourage outstanding achievement. Regulatory
changes must, however, be aimed at preserving and encouraging the areas of success
under current CRA regulations. No one wants chances that will divert resources from
or othen/vise seriously undermine the successful CRA programs and activities currently
in place .
232
We believe that any necessary changes in CRA are best effected by the
financial institution regulatory agencies and that legislative reform is not necessary.
We find the agencies' CRA reform proposal a good indication of precisely how difficult
it is (even within the relatively flexible realm of bank regulation) to improve the existing
system. In endeavoring to respond to the concerns of the community, including its
bankers, the particular proposal issued by the agencies raises many important issues
that must be resolved favorably before we can be certain that it will represent an
improvement over the present form of CRA regulation.
CRA reform should result in greater clarity and certainty with respect to what
activities "count" as CRA activities, but reform should not create a rigid structure that
inhibits creativity and flexibility. CBA's compendium of community development
activities and vehicles shows that there is a great variety of CRA programs currently in
existence. We do not want to see changes that would in any way stifle the ability of
institutions to fashion unique programs tailored to their communities' needs and the
bank's own strengths.
We have asked for and received additional time from the regulators for public
comment on the proposal. We believe that the additional time will be necessary to
address all the issues raised by the agency proposal. For purposes of this hearing, we
would like to offer our testimony regarding some of the most serious issues, the first
being those raised by the Lending Test.
LENDING TEST
First and foremost, we are concerned about whether the market share formula is
the appropriate way to measure the performance of financial institutions in meeting
community needs. The market share formula (which is the primary component of the
Lending Test) compares an institution's market share of loans in low- and moderate-
income areas to its market share elsewhere in its lending area.
We believe the market share formula may be an imperfect and risky way to test
CRA compliance because it would encourage financial institutions to engage in unsafe
and unsound practices. Competing institutions will be tempted to "buy" market share
through aggressively low lending standards, thereby potentially undermining safety and
soundness and jeopardizing the very neighborhoods and people we seek to serve.
A lender will not be judged on whether it is actually helping to meet local credit
needs, but instead on its market share of CRA loans compared to other institutions
located in its market area. Thus, it does not necessarily yield more loans in the
community. A lender will only excel at the expense of one or more competitors
regardless of absolute performance. Whether a lender obtains adequate market share
in low- to moderate-income loans is likely to have more to do with the competition
among lenders in their market area than with true CRA performance. Lenders will be
233
tempted to sacrifice their lending standards to protect or increase their market share.
The result could, therefore, be the same volume of loans having lower credit quality.
Additionally, because the test is an annual one based on past performance, in
competing for market share banks will be essentially working in the dark. Since the
reporting is only annual, banks will not be able to monitor their own performance
relative to the performance of their competitors during the year. They may think they
are doing well, but they will not know for sure until they see the competition's figures
(by which time it will be too late).
The examiners will rely on reported data to determine market share
performance, but by the time of the exam, the reported data is likely to be stale. The
lender will not be graded on its current performance but on its historical performance.
Evidence that an institution's current performance is better than its past performance
will require extensive documentation of the type CRA reform was supposed to
eliminate, and with no indication of the weight it will receive during an exam.
The Lending Test also fails to provide sufficient weight to provide incentives for
many activities that are necessary to promote community development. It allows for
certain adjustments if an institution makes a substantial amount of loans requiring
innovative underwriting or loans for which there is special need, such as loans for multi-
family housing constmction and rehabilitation, loans to start-up or very small
businesses, loans to community development organizations or facilities, loans to
community development lending institutions, and loans to very low-income individuals
and areas. The proposal states that the agencies will give these loans particular
consideration. An adjustment to the score could also be made if the institution employs
a "second look" program for denied applicants.
We are concerned that the proposal gives inadequate weight to some of the
most valuable activities that institutions engage in for community development. These
are some of the vital programs that have burgeoned under CRA, and any successful
revision to CRA should give them the consideration they deserve and encourage their
continued development.
INVESTMENT TEST
The Investment Test would measure "qualified investments" in organizations or
initiatives that foster community development, small and minority-owned business
development, or affordable housing lending, including state and local government
agency housing or revenue. An outstanding rating would be given for investments that
are substantial when compared with the institution's risk-based capital.
We are concerned that comparing qualified investments to risk-based capital
essentially penalizes well-capitalized banks. The current regulatory stmcture
encourages a large capital base, but the CRA proposal would set a higher investment
5
234
standard for these banks. For this reason, we prefer to see qualified investments
measured against some more appropriate benchmark. We are currently working on
alternative methods of assessing investment performance.
Regarding the coverage of the Investment Test, we Are troubled by the
possibility of failing to get credit or failing to get sufficient credit for significant
investments. The coverage of the test is at best vague; For example, it is not clear
whether it would include low-income housing tax credits as qualified investments. In
addition, it gives only secondary consideration to partnerships with community
organizations.
STRATEGIC PLAN
Although we generally support the agencies' efforts to provide an alternative
means of achieving CRA compliance, we are concerned that permitting adoption of a
strategic plan is not a real alternative unless the institution's strategic plan is permitted
to address local needs by departing from the standards set forth in the CRA
regulations. It is unclear how many institutions, if any, would choose to submit a
strategic plan for approval (which would be the basis of its CRA assessment) if the
institution is actually still subject to the lending, investment and service tests. The only
result of submitting a plan would be a double CRA review, first under the plan and then
under the regulations.
Beyond this, the fact that the plan must be published for comment makes what is
ostensibly a business plan into a public document. In the competitive environment that
would be created by the need to achieve market share, this would make the plan option
undesirable.
APPLICATIONS
Under the agencies' proposal, the CRA rating would continue to be an important
and often controlling factor in assessing the CRA aspect of a regulatory application.
We support this, but encourage the agencies to provide even greater certainty to
institutions of the impact of an outstanding CRA rating. Having a regulatory application
held up for CRA reasons, either as a result of community protests or at the initiative of
the regulators, is extremely costly. To eliminate or substantially reduce that risk for
institutions rated outstanding would be a great incentive for institutions to achieve that
rating. The regulations should offer more assurance that CRA factors would not defeat
an application of an institution with an outstanding rating. We agree with the concept
that institutions with outstanding CRA ratings should be examined for CRA less
frequently, and would encourage the use of any further incentives to achieving
outstanding ratings.
235
SMALL BUSINESS DOCUMENTATION AND DATA COLLECTION
We are quite concerned that the additional data collection requirements could
inadvertently result in a substantially increased burden to depository institutions. This
may be true for three reasons. First, it will be extremely difficult for financial institutions
to gather and report the required information on small business loans. Many financial
institutions do not require a small business to complete a loan application, and those
that do often do not request an application until the loan is about to close. Requiring
financial institutions to change this practice will be costly, and may deter small
businesses from approaching banks for loans. — - •
Second, collecting information on the average annual gross receipts for service
businesses and the number of employees for manufacturing businesses will be
extremely costly. At present, institutions collect small business data for Call Reports by
loan size. Substantially more cost would be involved if they would also have to
determine and monitor the sales volume and employee size of every loan customer.
Finally, the time period allowed for collecting, checking for accuracy of, and
reporting the data appears impossibly short. We recommend that the January 31
deadline for reporting summary CRA data for the previous calendar year be extended
to a more realistic deadline, such as March 31. At present, institutions have until
March 1 to report the Home Mortgage Disclosure Act data and are barely able to
accomplish it in many cases. The difficulties would be enhanced (not diminished)
under the proposal.
TRANSITION PERIOD
Finally, the transition period is far too short to allow banks the needed time to
adjust to the new regimen. CRA is being reinvented. Under the proposed scheme,
financial institutions will have to completely change their business practices.
Examiners will need extensive training and field experience. Massive amounts of new
data will be collected and reported, with all the attendant problems of software creation
and modification and error prevention. Yet the regulation will allow very little time (only
a few months at best from issuance of a final regulation) before data will have to be
collected (July 1, 1994), and only a short interval during which the new approach will be
optional (April 1, 1995-July 1, 1995). Many banks will not even be examined during that
period. Those that are examined will be measured against market share data
concerning a very brief period, with the result that the test may be even less
meaningful. In light of the dramatic nature of the changes in CRA requirements made
by this proposal, we think that imposing the data collection and reporting requirements
effective July 1 , 1 994 does not give institutions sufficient time in advance of that date to
revise their policies and procedures.
We are also troubled by the difficulty institutions will have planning for the future
during the first years of the new exam procedures. Data on previous years will be
236
unavailable and institutions will not be able to make meaningful decisions about the
future. Some attempts have been made in the proposal to minimize the harm to
institutions during this transition period; however, we would welcome even greater
efforts to treat this period as a "trial run."
CONCLUSION '
In summary, we are troubled with a number of the provisions of the reform
proposal and are working on developing our response to the agencies Nevertheless,
we do believe that, given the flexibility of the CRA statute, regulatory changes provide a
more workable mechanism for implementing ongoing improvements in CRA than new
legislation. We are grateful to have been given the opportunity to offer our views on
CRA reform.
237
O
Comptroller of the Currency
Administrator of National Banks
Wasfiington, D.C. 20219
April 6, 1994
The Honorable Joseph P. Kennedy II
Chairman
Subcommittee on Consumer Credit and Insurance
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives
Washington, D. C. 20515
Dear Mr. Chairman:
I appreciate having had the opportunity to testify before your subcommittee recently. The
responses to your follow-up questions are attached hereto.
I continue to be gratified by the keen interest and concern you exhibit on the CRA Reform
Initiative. I look forward to an on-going working relationship with you and your subcommittee
as we move toward final CRA regulations.
Sincerely,
lugene A. Ludwig /
Comptroller of the Currency
Enclosure
238
RESPONSES TO QUESTIONS FOR THE RECORD
FROM EUGENE LUDWIG
COMPTROLLER OF THE CURRENCY
MARCH 21, 1994
Q.l Would you please describe the rationale for allowing a lender who has received a
very poor grade in the lending test to "bump up" its composite CRA rating by as
many as two grades?
Couldn't lenders who do almost no lending in low- and moderate-income areas end
up receiving a "satisfactory" or "outstanding" CRA rating if they choose to make an
investment considered to merit an "outstanding" rating?
A.l The investment test evaluates banks on the amount of their qualifying investments
(relative to the institution's risk-based capital). This includes those investments that
demonstrably benefit low- and moderate-income geographies or persons in the bank's
service area. Such qualified investments could include support of affordable housing,
small business, consumer, and other economic development initiatives; investments in
community development banks, community development corporations, community
development projects, small business investment corporations, minority small business
investment corporations and minority- and women-owned financial institutions and other
community development financial intermediaries; and investments in state and local
government agency housing bonds aimed at helping low- and moderate-income
communities and individuals. Such investments are given credit under our proposal
because they enhance the flow of fiinds to entities with substantial experience and
expertise in channeling credit and other resources to traditionally underserved segments
of the community.
For a retail bank, its rating under the lending test forms the basis for its composite
rating. This rating would be increased by two levels in the case of outstanding
investment performance or by one level in the case of high satisfactory investment
performance. Therefore, it is conceivable that a bank with a lending test rating of
substantial noncompliance could receive an overall rating of satisfactory with outstanding
investment performance.
Q.2 The General Accounting Office has questioned the capacity of examiners to take on
the workload anticipated as a result of the proposed regulations. They point out
that while new data will be provided by larger banks, many examiners do not now
use the Home Mortgage Disclosure Act (HMDA) data supplied by lenders because
they do not have the time.
239
What steps have been taken by your agency to anticipate the increased workload for
examiners?
A. 2 Because we have a proposed, not final, rule we have not yet put into place all the
changes or programs that would be required to implement the rules if they were to be
adopted as currently proposed. However, there are a number of changes that are not
dependent on the precise form of the final rule that we can share with you.
We have already started to implement a restructuring of our compliance program, which
includes the use of specialist consumer compliance examiners, improved examiner
compliance training, and revisions to examination procedures.
A new training program has commenced for our cadre of specialist consumer compliance
examiners, which includes those who conduct CRA and fair lending exams. We have
already conducted training at the Washington, D.C. headquarters and starting this month
will send a training team to each of our six districts. We also have plans to implement
new intermediate training courses and seminars. In the area of fair lending, we are using
new, more elaborate procedures adopted subsequent to my appointment as Comptroller.
We believe the changes in procedures and training will result in an examination
workforce with special expertise in consumer compliance, particularly CRA, as well as
common training and basic experience in all aspects of bank examination. Under the
new compliance program, compliance examinations are to be completed at least every
other year in all banks. Examinations or follow-ups may be conducted more frequently
based on the assessed need in individual institutions.
Q.3 For larger institutions (those with over $250 million in assets), new data on small
business, small farm, and consumer loan applications will be required. Currently,
the error rate for HMDA data reported by institutions is estimated to be as high as
30-40 percent.
What procedures will the agencies put in place to check the accuracy of the new data
collected from larger lenders? Would you agree that unverified data is of little
practical use?
In a related matter, how useful will this data be if it is not broken down by gender
and by race, as is now required for HMDA data?
A. 3 Unverified data would be of little practical use. Therefore we will develop examination
procedures to allow examiners to verify data on-site. The new system will be more than
adequate to handle the increase in data collection, should the final rulemaking adopt such
a requirement.
240
The data proposed to be collected would provide information on the geographic
distribution of small business and consumer loans. These data are not currently
available. This data would provide valuable information about the extent to which an
institution serves its community. Inclusion of data broken down by race and gender
would provide additional information, and was considered in developing the proposal.
In developing a final rule we will, of course, reevaluate the proposed data collection in
light of public comments.
Q,4 Smaller banks have complained that the 60 percent loan-to-deposit ratio included in
the "small bank test" is unfair, since some institutions just don't make a lot of loans.
Could you describe how you arrived at the 60 percent figure? What other options
did you consider as a test? Please be specific.
A. 4 The 60 percent figure was settled on in the proposed rulemaking because it would reduce
uncertainty regarding ratings for roughly half of all community banks-those that have
loan-to-deposit ratios that meet or exceed the threshold. There has been, however, some
misunderstanding, or misinterpretation of this proposal among reviewers/commentors.
The 60 percent loan-to-deposit ratio is not a requirement. Those institutions qualifying
for the small bank examination and possessing a loan-to-deposit ratio of at least 60
percent would be presumed to have a reasonable loan-to-deposit ratio. An institution
with a loan-to-deposit ratio below 60 percent would have the reasonableness of its lending
ratio evaluated taking into account its size, its financial conditions, and the credit needs
of its community. A bank in a community where there is insufficient loan demand to
reach a 60 percent ratio would only need to have a ratio that is reasonable given its
capacity and the level of demand.
In developing the small bank examination, we explored a number of options that were
ultimately included along with the loan-to-deposit assessment in the proposed regulation.
Specifically, in addition to the loan-to-deposit ratio, we proposed that a small bank be
evaluated on whether it (1) makes the majority of its loans in its service area; (2) makes
its loans across economic levels; (3) has no legitimate, bona fide complaints from
community members; and (4) has not engaged in a pattern or practice or individual
instance of illegal discrimination that it has not corrected fully. Additionally, in the case
of a bank subject to reporting home mortgage lending data under HMDA, we would
examine the geographic distribution of such loans.
241
OTf*
V4^
J982,
^!i^ Office of Thrift Supervision
Department of the Treasury
Director
1700G Sireet. N.W , Washineton. DC. 20552 • (202) 906-6590
March 29, 1994
The Honorable Joseph P. Kennedy II
Chairman
Subcommittee on Consumer Credit and Insurance
Committee on Banking, Finance
and Urban Affairs
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
Please find enclosed for the record responses to the
follow up questions submitted in conjunction with your
February 8, 1994 Community Reinvestment Act reform proposal
hearing.
If I may provide further information, please do not
hesitate to contact me.
'Uxu h /^U/LLa^
Nathan L. Fiechter
Ccting Director
Enclosure
242
OFFICE OF THRIFT SUPERVISION
ANSWERS TO QUESTIONS POSED BY CHAIRMAN KENNEDY
ON CRA REFORM
1. Describe the rationale for allowing a lender who has
received a very poor grade in the lending test to "bump up"
its composite CRA rating by as many as two grades.
Couldn't lenders who do almost no lending in low- and
moderate- income areas end up receiving a "satisfactory" or
"outstanding" CRA rating if they choose to make an
investment considered to merit an "outstanding" rating?
The proposed CRA regulation attempts to recognize the value
of three very different but important performance categories in
assessing an institution's record under the CRA: lending,
investment and service. In order to reach a fair assessment of
an institution's CRA activities, the agencies proposed a rating
system for retail institutions that is based on lending
performance, but also considers an institution's investment
performance and provision of services to its community. The
agencies based the composite rating on lending because we
believe that lending performance is the most important of the
three factors.
There are four composite ratings required by the CRA
statute: Outstanding, Satisfactory, Needs to Improve and
Substantial Noncompliance. However, in determining an
institution's performance under the lending, investment and
service tests, the agencies agreed that a five-level rating
structure for each performance area might measure performance
more accurately. Thus, each institution is assigned a base
rating of Outstanding, High Satisfactory, Low Satisfactory,
Needs to Improve, or Substantial Noncompliance under the lending
test. That base rating can be increased by two levels if an
institution's investments are rated Outstanding or by one level
if they are rated High Satisfactory. In addition, an
institution's base rating can be increased one level for
outstanding performance under the service test or decreased one
level for a rating of Substantial Noncompliance under the
service test. In order to translate the five-level rating to a
composite rating, both High Satisfactory and Low Satisfactory
are rated as Satisfactory.
You ask whether a lender who does almost no lending in low-
and moderate-income areas could receive a Satisfactory or
Outstanding rating if it makes an investment considered to merit
an Outstanding rating. It is possible for an institution with a
low level of lending in low- and moderate- income areas to raise
its composite rating to Satisfactory because of an outstanding
investment test performance. However, in order to merit an
243
Outstanding rating under the investment test, an institution
would have to demonstrate performance beyond one investment as
your example implies. The investment test requires that an
institution must make investments that are substantial as
compared to its capital in order to achieve an Outstanding
rating.
We believe that the proposed rating structure allows each
institution to approach its CRA obligations in a manner tailored
to its particular circumstances. An institution that may not
have many lending opportunities but does invest substantially to
benefit the low- and moderate-income areas of its community
might merit a Satisfactory composite rating.
The proposal recognizes that strict application of a rating
formula may result in a situation where an institution's
performance ratings do not reflect their actual performance.
The proposal, therefore, incorporates some flexibility before
assigning a final rating by indicating that the ratings are
presumptive; that is, they may be adjusted by the regulator if
performance under the lending, investment, or service tests does
not reflect an institution's actual performance.
2. The General Accounting Office has questioned the capacity
of examiners to take on the workload anticipated as a
result of the proposed regulations. They point out that
while new data will be provided by larger banks, some
examiners do not now use the Home Mortgage Disclosure Act
(HMDA) data supplied by lenders because they do not have
the time. What steps have been taken by your agency to
anticipate the increased workload for examiners?
The efficient allocation of examination resources is a
constant challenge. To meet our statutory obligations, we take
a "top-down/risk-focused" approach to our compliance
examinations. This approach emphasizes a thrift's ability to
manage its compliance responsibilities. For instance, our fair
lending examination procedures (which are also relevant in the
CRA assessment process) include a comprehensive review of loan
policies, underwriting standards and processing procedures,
lending patterns, self-assessment efforts, staff training and
discussions with management and lending personnel. Our
examiners use HMDA data to identify significant disparities
associated with applicant or neighborhood characteristics such
as race or racial composition as part of their review of lending
patterns.
We have been particularly concerned with providing useful
analysis of HMDA data to our examiners. Through the Federal
Financial Institutions Examination Council (FFIEC), we
participate with the other agencies in ongoing efforts to
improve the analytical reports produced using HMDA data. For
example, by the end of this year, our examiners will have
on-line access to analytical tables developed in cooperation
244
with the other agencies. We are equally concerned with making
the data collected under the CRA reform package useful to
examiners in assessing an institution's CRA performance. We
have automated data systems experts and policy analysts
participating in an interagency working group to address these
issues, as discussed further in our response to question 3,
below.
In addition, several other interagency initiatives are
underway to prepare for the work that lies ahead. We are
currently developing examination procedures based on the
proposal, recognizing that there may be changes prior to the
promulgation of a final regulation. We also intend to provide
intensive training for our examiners on the CRA reform package,
the new examination procedures, and the analytical tools
available to them for more efficient workload management.
We will discuss the issue of examiner workload with the GAO
and determine if they identified any problems specific to OTS.
If so, we will make any necessary adjustments to our examination
program.
When our review of the comment letters is complete and we
develop a clearer picture of the final reform package, we will
be in a better position to determine if additional resources
will be necessary to carry out our regulatory responsibilities,
and we will respond accordingly.
3. For larger institutions (over $250 million in assets), new
data on small business, small farm, and consumer loan
applications will be required. Currently the error rate
for HMDA data reported by institutions is estimated to be
as high as 30-40%. What procedures will the agencies put
in place to check the accuracy of the new data collected
from larger lenders? Would you agree that unverified data
is of little practical use?
In a related matter, how useful will this data be if it is
not broken down by gender and by race, as is now required
for HMDA data?
Errors can occur at many stages in the HMDA data collection
process. For example, there may be data entry errors on loan
application forms, errors or omissions in transferring
information from all loan applications to the Loan Application
Register ("LAR"), and errors in transmitting the LAR data to the
regulatory agency. We have several procedures in place to
detect and correct these errors. For example, we apply
electronic edits developed by the FFIEC to detect and correct
incomplete or inconsistent entries, and we do not transmit the
HMDA data to the FFIEC until all errors are resolved. FFIEC
edits are enhanced each year to increase their effectiveness in
identifying incorrect data. In addition, our examiners compare
245
application files with LAR entries representing those files. If
they find significant errors, the institution is instructed to
correct and resubmit its LAR.
We continue to review our procedures to further improve
HMDA accuracy. We have established an interagency working group
consisting of automated data systems experts and policy analysts
to address these concerns. Many of its members have intimate
knowledge of HMDA and its shortcomings. We hope to apply the
lessons that we have learned from HMDA to create a CRA data
collection process that will be efficient, reliable, and useful.
The working group will recommend ways to structure the system
and to verify the accuracy of information collected.
The information that the agencies propose to collect
regarding loans to small businesses, small farms and consumer
loans will be useful in determining whether such loans are being
made in low- and moderate- income areas of the community. This
information is not currently collected, but is directly relevant
to CRA performance. We would not, however, be able to draw any
inferences about race or sex discrimination from the data that
we propose to collect. We appreciate that members of the
Subcommittee and other members of Congress who have written us
would like to see the agencies expand the data collection to
include race and gender. We will review this matter with the
other agencies prior to finalizing the CRA regulation.
4. Smaller banks have complained that the 60% loan-to-deposit
ratio included in the "small bank test" is unfair, since
some institutions just don't make a lot of loans. Could
you describe how you arrived at the 60% figure? What other
options did you consider as a test? Please be specific.
The proposal sets forth criteria under which small
institutions can avail themselves of streamlined examination
procedures. One criteria is a "reasonable" loan-to-deposit
ratio. The agencies indicate that a 60 percent loan-to-deposit
ratio is presumed to be reasonable. The agencies' intent was to
provide guidance on what we would presumptively consider fair
and reasonable to account for the varying portfolios of the
institutions regulated by each agency. Our intent was not to
preclude an institution from rebutting the presumption, or to
establish an inflexible maxim.
The agencies believe that the 60 percent figure would
reduce uncertainty for roughly half of the smaller institutions
that have loan-to-deposit ratios that meet or exceed the
threshold. For the thrift industry in particular, our data
suggests that smaller thrifts tend to meet the reasonableness
standard. At the same time, we do not believe that the 60
percent ratio would disadvantage an institution with a ratio
below that level. An institution with a lower ratio would need
to have a reasonable loan-to-deposit ratio given its size, its
246
financial condition, and the credit needs of its community. An
institution in a community where there is insufficient loan
demand to reach a 60 percent ratio would only need to have a
ratio that is reasonable given the level of demand.
Nonetheless, a number of the comment letters we have
received raised the 60 percent figure as an issue. Even thrifts
who meet that figure have raised concerns about the composition
of the lending that will qualify toward meeting the
loan-to-deposit ratio. This indicates to us that many aspects
of this part of the proposal will need to be clarified or
adjusted in the final regulation.
247
FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, dc 20429
OFFICE OF THE CHAIRMAN
March 24, 1994
Honorable Joseph P. Kennedy II
Chairman
Subcommittee on Consumer Credit
and Insurance
Committee on Banking,
Finance and Urban Affairs
House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
We are pleased to enclose responses to your
questions following-up on our testimony of February 8,
1994.
Please let us know if you have any further
questions .
Sincerely,
'l.^
/ - L
Andrew C . Hove , Jr .
Acting Chairman
Enclosure
248
Responses to Questions Posed by Chairman Kennedy
Q.l. Would you please describe the rationale for allowing
a lender who has received a very poor grade in the
lending test to "bump up" its composite CRA rating
by as many as two grades?
Couldn' t lenders who do almost no lending in low- and
moderate -income areas end up receiving a "satisfactory"
or "outstanding" CRA rating if they choose to make an
investment considered to merit an "outstanding" rating?
A.l. The rationale for allowing an institution to obtain a
higher composite CRA rating by using its investments was to
encourage institutions to engage in community development
activities that benefit low- and moderate -income communities.
An institution whose performance under the "Investment Test"
is rated as "Outstanding" would have its "base rating, " as
determined under the "Lending Test," raised by two levels
on the five-level scale. Therefore, it would not be possi-
ble for an institution with a base rating of "substantial
non-compliance" to get an "outstanding" composite rating,
although it would be possible for an institution with a base
rating of "substantial non-compliance" to get a "satisfac-
tory" composite rating and for an institution with a base
rating of "needs to improve" to get an "outstanding" compos-
ite rating.
It is significant that the focus of the "Investment Test"
would be the effect the investment has on the community as
well as the amount of the investment. The regulatory agen-
cies may adjust an institution's rating under the "Investment
Test" -- either an increase or a decrease -- after taking
into account whether its investments are particularly inno-
vative, meet a special need, or involve partnerships with
community development organizations.
In some distressed communities, there is insufficient loan
demand, but there also are unmet credit needs. To fulfill a
particular credit need, often it is necessary for an institu-
tion to invest in or to nurture projects that may not result
in loans being made for several years. For example, a finan-
cial institution might invest "seed money" in a community
development corporation that wants to provide affordable
single-family housing to low- and moderate- income persons.
The actual mortgage loans to individuals to purchase homes
may be three or four years away. Community support must
be generated, community leaders identified, public-private
partnerships created for financing, land acquired, contrac-
tors found, potential purchasers identified and counseled --
an extraordinary amount of effort expended over a long period
of time, without generating loans during this time. We
believe that institutions should receive appropriate consid-
eration for such long-term commitment.
249
We appreciate your concern that institutions which are not
otherwise helping to meet the needs of their communities
might be able to have investments compensate for inadequate
performance. However, this is not what is intended. We
believe the proposal provides us with the needed flexibility
to recognize not only the dollar amount of investments in the
community but also the institution's commitment to the commu-
nity. An institution would have to demonstrate performance
and commitment. It is unlikely that "an investment," as
indicated in your example, would warrant an "outstanding"
rating under the "Investment Test."
Q.2. The General Accounting Office has questioned the capa-
city of examiners to take on the workload anticipated
as a result of the proposed regulations. They point
out that while new data will be provided by larger
banks, many examiners do not now use the Home Mortgage
Disclosure Act (HMDA) data supplied by lenders because
they do not have the time.
What steps have been taken by your agency to anticipate
the increased workload for examiners?
A. 2. There are now approximately 300 compliance examiner
positions at the FDIC compared with 150 when the Compliance
Examination Program was implemented in 1990. Each Region
also maintains a separate Compliance Examination Review staff
with specific responsibility for the compliance and fair
lending examination function. We are committed to adding
additional examiner and review staff positions as needed.
The FDIC also has improved its management capacity for com-
pliance supervision. An Assistant Regional Director in each
of the eight regions of the Division of Supervision has been
dedicated solely to the management of the compliance and fair
lending function. Until now. Assistant Regional Directors
managing this function also had other responsibilities.
In addition, improved examination tools are being made avail-
able to examiners so they can conduct more thorough and
efficient examinations. For example, newly developed HMDA
Analysis Reports customized for each institution and specific
geographic area are being provided for regional and field
office use. HMDA Examination Tables summarizing an institu-
tion's reported data and designed to assist examiners in
studying the data were recently installed on easily access-
ible computer networks in each Region. Complete 1992 HMDA
Disclosure reports for all reporting institutions are avail-
able on CD ROM to examiners . Census Tract Maps and CD ROMs
with census tract level demographic data have been purchased
from the Bureau of the Census and are now in use to assist
examiners in forming judgments on an institution's lending
patterns across racial, ethnic and economic areas in each
locality. Other related products have been developed includ-
ing a series of Wide Area Census Tract Profiles.
250
Finally, the Office of Consumer Affairs has expanded the
Community Affairs staff in each Region to include a Fair
Lending Specialist. The Community Affairs staff serve as
liaison between community groups, lenders and the FDIC on
the fair lending process. They are also a resource for
compliance examiners on matters concerning HMDA data analy-
sis, lending discrimination and community development.
Q.3. For larger institutions (those with over $250 million
in assets) , new data on small business, small farm,
and consumer loan applications will be required.
Currently, the error rate for HMDA data reported by
institutions is estimated to be as high as 30-40%.
What procedures will the new agencies put in place
to check the accuracy of the new data collected from
larger lenders? Would you agree that unverified data
is of little practical use?
In a related matter, how useful will this data be if
it is not broken down by gender and by race, as is now
required for HMDA data?
A. 3. We recognize the importance of accurate data collection
and have established an interagency working group to address
this issue. The working group will seek to assure that the
system we establish for collecting loan data will enable
examiners to verify the accuracy of the data during an exami-
nation and that there are built-in mechanisms for automatic
detection of some of the more common errors at the point of
data collection and data entry. Many of the staff assigned
to this group have been extensively involved with the HMDA
data collection process. We believe that we can use the
lessons we have learned in collecting HMDA data to create
a reliable and useful CRA data collection process.
With respect to the usefulness of the data if it does not
contain gender and race, the Community Reinvestment Act and
the proposed CRA regulations focus on lending geographically,
including to low- and moderate -income areas. Under the
proposal, the agencies would evaluate the record of large
institutions by analyzing their market share of all report-
able loans and of reportable loans in low- and moderate-
income areas. Reporting of loan data by census tract without
reporting gender and race should be sufficient to evaluate
these types of market share. We understand that there also
is concern that we be able to use the data to identify possi-
ble lending discrimination. While we can formulate some
assumptions by pairing the reported data with certain demo-
graphic information available from other sources, we would
not be able to use the data to identify specific applications
or even trends where there may be possible lending discrimi-
nation. We have received numerous comments urging us to
expand the data collection requirements, and we certainly
will review the matter with the other agencies before final-
izing the CRA regulation.
251
Q.4. Smaller banks have complained that the 60% loan-to-
deposit ratio included in the "small bank test" is
unfair, since some institutions just don't make a
lot of loans .
Could you describe how you arrived at the 6 0% figure?
What other options did you consider as a test? Please
be specific.
A. 4. There appears to be considerable misunderstanding
regarding the 60 percent loan-to-deposit ratio cited in the
proposal. The proposed regulation sets forth criteria under
which small institutions can avail themselves of streamlined
examination procedures. One criteria is a "reasonable" loan-
to-deposit ratio. The proposed regulation indicates that a
60 percent loan-to-deposit ratio is presumed to be reason-
able. It is not, however, a hard and fast rule. A 60 per-
cent ratio may not be appropriate in all cases. Our intent
was to provide guidance as to what we would presumptively
consider fair and reasonable to account for varying port-
folios of the institutions regulated by each agency. The
60 percent figure would reduce the uncertainty for approx-
imately half of the institutions that would be eligible for
the small bank assessment method. Formulas or ratios applied
across the board without respect to the differences of commu-
nities or markets may result in standards that are unfair
to many institutions. The proposed regulation would allow
examiners to make justifiable exceptions where the loan-to-
deposit ratio does not make adequate allowance for individual
circumstances. We have, however, received a substantial
number of comments concerning this part of the proposal
indicating that additional clarification or. adjustments may
be needed in the final regulation.
###
252
.f«:^r«?^:
BOARD OF DOVERNORB
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.SD55I
March 22, 1994
LAWHENCE S. LIN05EY
MEMBER OF THE BOARD
The Honorable Joseph P. Kennedy, II
Chairman
Subcommittee on Consumer Credit
and Insurance
Committee on Banking, Finance
and Urban Affairs
House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
I appreciated the opportunity to testify before your
subcommittee last month regarding the interagency regulatory
proposal to reform CRA. Obviously, this is a matter of great
interest to all of us and one which requires that we get it
right. Your February 28 letter poses some follow-up questions
that I will answer as best I can, taking into account the fact
that we are still receiving, and will be analyzing, the public
comments on the proposal in order to decide whether, and how, to
revise the proposal.
Your first question raises the issue of whether the
proposal strikes the right balance in the rating system between
the lending an institution does (or does not do) , and the
investments in intermediaries that serve low- and moderate-income
areas that it chooses to make. In particular, you ask whether an
institution that does little or no lending in the low- and
moderate-income portions of its service areas should be able to
achieve a two-step "bump up" of its lending rating, perhaps even
to an overall "outstanding" level, even if its lending record is
considered less than satisfactory.
Since the proposal was issued in December, I've heard
your question postulated more directly, particularly by community
advocacy groups, in the vein of, "Why should a bank with a poor
lending record be permitted to 'buy' an overall good rating by
issuing a check and making an investment in a third party service
provider?" Since I was personally very deeply involved in
preparing this proposal, I can assure you that it was not the
purpose of the drafters to do such a thing. In fact, there was a
good deal of debate about the relative weight that would be
appropriate to give lending and investments. In the end,
however, it was decided that the potential for a significant
253
The Honorable Joseph P. Kennedy, II
Page 2
increase to the lending rating was warranted by a significant
quantity or quality of investments in third parties that make
loans, and provide other needed credit related services, in low-.
and moderate-income areas.
I cannot speak definitively as to why others in the
agencies reached that conclusion. For myself, I reached that
conclusion based on my belief that, since CRA's inception, such
investments, and the intermediaries they benefitted, have served
the purposes of getting loans and other community economic
development activity into low- and moderate-income areas in very
significant ways. The recipients of these investments have
frequently been the experts on the needs of the community being
served and the methods for serving them. In that respect, they
have been important partners to the lending community as it
sought ways to meet its responsibilities under the law.
It may be that we have missed the mark in assigning
relative weights to the two rating elements. I expect that this
issue will be an important one in the public comments on the
proposal. I am very willing, even eager, to learn from those
comments and, if necessary, adjust the relative weights assigned
to the rating elements. I strongly suspect that my colleagues in
this effort are willing to do so as well.
Your second question refers to a comment on the
proposal prepared by the General Accounting Office which
questioned whether the agencies have the examination ability to
deal with the increased workload in their examination programs
that the GAO believes this proposal will entail. In particular,
you indicate that the GAO believed that, while the proposal would
supply more data for the examiners regarding an institution's
lending, many examiners do not now use the Home Mortgage
Disclosure Act data presently available due to a lack of time.
You ask what steps have been taken to anticipate the increased
workload.
Since the examination workload increase will result
from a combination of the requirements of the final regulation
and any resulting examination procedures, it would be premature
for us to try to anticipate, with any reliable degree of
precision, how to adjust our resources to deal with it. The
agencies have, however, begun a process of planning for a
computerized system to collect, analyze, and disseminate any data
required by the final regulation to be collected. In doing this,
we are able to learn from the HMDA data analysis system we have
developed over the past few years and to which our examiners have
on-line access.
BOSTON PUBLIC LIBRARY
254
3 9999 05981 895 3
The Honorable Joseph P. Kennedy, II
Page 3
That system produces a set of standard analytical
reports and also enables our examiners to get answers to
questions they have tailored to the examination they are
conducting. This system has proven to be very useful to our
examiners (it is available to all of the agencies' examiners) and
is used routinely by them. We hope that by producing a similar
system using any data collected for the purposes of the new CRA
regulation we will minimize the examination burden while
maximizing its effectiveness. Nonetheless, should the final
regulation and examination procedures, for whatever reason,
unduly tax our ability to maintain an effective examination
program with present resource levels, we will do what is
necessary, quickly, to rectify the situation.
Your third question raises several issues relating to
the data to be collected under the proposal by larger institu-
tions regarding their lending to small businesses and consumers.
First, you ask what procedures the agencies will put in place to
verify the accuracy of the data. Second, you ask how useful the
data will be if it is not broken down by gender and race as is
presently the case under HMDA.
Regarding the first matter, I would anticipate that the
data collection system discussed in my preceding answer will
include significant edit procedures to assure that the data being
put into the system is accurately entered on any collection forms
or software. In fact, it may be that the agencies will be able
to issue to lenders collection software that contains the
necessary edits, thereby enabling them to check the data at the
source. These edit procedures in the computerized collection
system would, of course, only assure that the data are consistent
with the data entry regimen, e.g., that any census tract entered
is validly denominated, and the like. They cannot ensure that
any particular data element is, in fact, accurate. That can only
be done by examiners checking the records on site during the
examination.
As is the case with the HMDA data, I would anticipate
that any examination procedures that are prepared to guide the
examination process will include procedures to verify the data's
accuracy. Given the size of the data base, it is obvious that
such verification would have to be done by use of a sampling
technique. It seems to me that, given the importance of the data
to everyone involved — the institutions, the examiners, and the
communities — under the market share test of the proposal, the
accuracy of the data is a top priority.
255
The Honorable Joseph P. Kennedy, II
Page 4
The second major issue you raise in your third question
is an important one. It involves serious considerations about
the purposes for which the data are collected and the costs of
that collection. As I understand CRA, its purpose is to assure
that insured depository institutions help meet the credit needs
of their entire communities, including the low- and moderate-
income areas of those communities. It seems clear to me from my
understanding of the law that the operative component of that
formulation is geographic. If I am correct in that, it seems to
me that the type of geographically based data called for by the
proposal is appropriate to the task. Collecting data on the race
and gender of applicants does not seem necessary for such a
purpose and requiring institutions to do so in a regulation
promulgated under the auspices of CRA may be a bit of a stretch.
I am sensitive to the arguments regarding the need for
data concerning possible lending discrimination that this issue
involves. I am also aware of the fact that when the President
asked the agencies to reform CRA last July, he indicated that our
efforts should balance a number of factors, including the need to
reduce regulatory burden and documentation requirements. Requir-
ing institutions to report aggregate data that demonstrates the
geographic character of their lending, rather than more
applicant-specific data, seems to be responsive to that element
of the President's concerns. Being mindful of this need for
sometimes delicate balancing of interests, the agencies drafted
the proposal in the way we have discussed. But I have no doubt
that this will be a major issue in the public comments and I look
forward to being informed by them. This issue, like the others
you raise, is certainly still open given that we are still in the
comment-seeking phase of the reform effort.
Your final question deals with the matter of the 60
percent loan to deposit ratio included in the "small bank test."
You indicate that some small banks have opined that the 60
percent test is unfair because some institutions do not make many
loans. You asked how the 60 percent figure was derived, and
asked what other options were considered. First, I would
emphasize that a 60 percent loan to deposit ratio is not a
requirement to receive the fully streamlined small bank
examination treatment provided by the proposal. What is required
under the proposal for such treatment is a reasonable loan to
deposit ratio . The 60 percent figure, though misunderstood by
many, and, perhaps, poorly explained by the agencies, was placed
in the proposal as a presumptively reasonable loan to deposit
ratio merely in order to supply certainty to institutions that
meet that level of lending. It was not designed to be a floor or
a ceiling, or even a requirement.
256
The Honorable Joseph P. Kennedy, II
Page 5
Small institutions who do not meet the 60 percent level
can still be deemed to have a reasonable loan to deposit ratio.
The reasonableness of any particular institution's ratio will
have to be determined on a case-by-case basis, taking into
account local economic conditions, loan demand in the area, the
loan to deposit ratios of other depository institutions in the
area and the like.
The arguments put forward to justify the streamlined
examination treatment of small institutions included the notion
that small banks, especially those located in small towns, by
their very nature must be making loans in their communities,
thereby meeting CRA's main objective. If they weren't, it has
been argued, they would not be in business. By requiring that
the institution have a reasonable loan to deposit ratio, a good
loan mix, the majority of its loans in its community, and, if it
is a HMDA reporter, a good distribution of those loans (three of
the other tests for fully streamlined examination treatment
contained in the proposal) the proposal puts that justification
to the test.
The 60 percent presumptive standard was reached, in my
view, more by an exercise of judgment than science. We wanted a
standard that had some rigor, but one that also afforded a
significant number of small institutions the certainty intended.
At the 60 percent level, using current data we estimate that
approximately 50 percent of the banks that fall into the small
institution asset size category will be able to take advantage of
the presumption. That seemed about right, but, again, I hope to
be guided on the correctness of that judgment by the public
comments. I would add that, even if an institution does not meet
one of the criteria for fully streamlined examination treatment,
the only consequence is that it would be examined more closely.
The proposal would not force it into the more general approach
afforded larger institutions involving data collection and a
review of its lending, investments, and services.
I trust that this has been responsive to your interests
and concerns. Please contact me if I can be of further
assistance.
Sincerely,
O
76-345 (260)
ISBN 0-16-046184-7
Q 7Rn
fin"4RiP49
90000
