Docket No. 04-06
Communications Division
Public Information Room, Mail Stop 1-5
Office of the Comptroller of the Currency
250 E St., SW
Washington, DC 20219
Docket No. R-1181
Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th St NW
Washington, DC 20429
Regulation Comments
Attention: No. 2004-04
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street NW
Washington, DC 20552
Re: Community Reinvestment Act
To Whom It May Concern:
Local Initiatives Support Corporation (LISC) appreciates the opportunity
to comment on proposed changes to the rules implementing the Community
Reinvestment Act. CRA has been indispensable to bringing capital
into low-income communities. We agree that the current CRA rule is
fundamentally sound, and we appreciate the constructive and responsible
way in which the regulators have sought to make CRA effective and
responsive to communities.
Investment Test
We are disappointed that the regulators decided
not to create a community development test that would combine
investments with
community
development lending and services. For many reasons we expressed
in our response to the ANPR, we believe that approach would rationalize
examination of a bank’s overall community development activities
and accommodate the needs of different low-income communities.
However, we do appreciate the regulators’ invitation
for comments for improving implementation of the investment test
within
the structure
of the current rule. Our 2001 response to the ANPR discusses the
issue at some length. More specifically, we recommend that:
• The regulators should affirm that qualitative factors should
carry substantial weight within the investment test, in addition
to the quantity of investments. The regulators should clarify that
investments that are especially responsive to a community’s
needs, that reach into especially distressed or economically isolated
communities, and that fill gaps in the availability of financing
should receive more credit than others. How an investment addresses
a community’s needs should be more important than its form.
Innovation and complexity will often be necessary means to address
a community’s most important needs, and in such cases they
should be recognized for that, but they should not be ends in themselves.
A complex investment that is unresponsive to community needs should
receive less recognition than an investment that is simple but truly
adds value. In some cases, an institution can best meet a community’s
needs by working through CDFIs or other intermediary organizations.
These intermediaries often take on activities that add real value
to communities and it is more effective for all partners that the
intermediary assumes responsibility for the innovative, complex,
and sometimes risky aspects of the activity. Such investments should
be considered based on their community impacts. The goal should
be to improve communities, not to make doing business harder or
easier
for institutions.
• The regulators should provide guidance that institutions
should receive full recognition for investments outside an assessment
area but within the broader region that includes the assessment area,
provided that the institution is adequately serving its assessment
area. This standard is somewhat similar to the one for wholesale
and limited purpose banks. It ensures that the assessment area’s
needs are addressed first, but then offers full recognition for investments
elsewhere within the region. The examiner’s current discretion
to grant less recognition for regional investments can discourage
them by creating substantial doubt among institutions at the time
they make investment decisions. This moment may be two to three
years before the investment is closed and the next CRA examination
occurs.
This uncertainty is a significant and unnecessary obstacle that
regulators could remove easily within the framework of the current
rule. Again,
the degree to which the investment adds value to a community, not
its location within the assessment area, should determine how much
credit the institution should receive.
Small/Large Institution Threshold
LISC is greatly concerned that raising the threshold between small
and large institutions from $250 million to $500 million could substantially
and adversely affect many rural communities. We are disappointed
that the regulators did not analyze the likely impact of this proposal
on communities in the two years between the close of the ANPR comment
period and the date of this proposal. We understand that such an
analysis is now under way and urge the regulators not to proceed
with this proposed change if it would adversely affect a significant
number of communities.
We especially urge the regulators to consider the
impact on rural communities. In many rural areas, it is our understanding
that
institutions with assets between $250 million and $500 million
comprise a substantial
share of the market, and that low-income households comprise a
substantial share of these communities. Because low-income households
are often
less geographically concentrated in rural areas than in urban areas,
it is important that the regulators recognize that rural areas
without large “pockets of poverty” may have many low-income
households who would benefit from lending, investment, and services.
Many rural
areas are broadly and chronically distressed. For example, the
upper plains states have suffered from out-migration, while the
Mid-South
Delta and Appalachia have high poverty rates. Under such conditions,
distress may be geographically pervasive rather than concentrated.
Compounding this problem is that rural areas appear
not to receive much attention within the CRA exam process for
very large institutions.
For institutions serving multiple regions or states, examiners
tend to focus on their large metropolitan assessment areas. While
understandable,
this approach tends to overlook rural areas. Seen from many rural
areas, the proposal to raise the small/large bank threshold means
that CRA will effectively hold accountable neither very large nor
relatively small institutions, significantly reducing CRA’s
overall relevance in those areas. For this reason, we believe the
regulators should consider how CRA could be better implemented
in rural areas.
Adverse Consideration of Abusive Lending
We appreciate the regulators’ recognition that abusive but
legal lending activities of an institution should adversely affect
its CRA rating. Otherwise, such abusive activities would perversely
improve the CRA rating. We also agree that abusive lending activities
should be considered even if they occur outside an institution’s
assessment area. We further agree that asset-based lending is inherently
abusive.
However, we are concerned that treating only asset-based
lending as abusive would be a mistake. There are various other
abusive
but legal practices at work in the market today – for example,
loans with short terms and high fees may strip a borrower’s
equity and require refinancing on disadvantageous terms, even if
the loans are not solely asset-based. Moreover, the marketplace
is rapidly evolving, and new abusive practices may develop quickly.
It has been nine years since the CRA rule was last revised, and
almost
three years since the current rulemaking process began. To establish
a rigid and narrow rule on abusive lending seems shortsighted and
easy to circumvent, especially since it may be many years before
the next CRA rule revisions.
In addition, there is a significant risk that sanctioning
only asset-based lending could create a de facto safe harbor;
other
abusive activities
would not adversely affect an institution’s CRA rating. This
interpretation would turn the worthy intent of the rule on its
head. Instead of curtailing abusive lending broadly, it would leave
open
the door to new abusive practices even while closing the door on
one kind of abusive lending. While curtailing asset-based lending
would be a step in the right direction, it should not be the only
step for many years to come.
We believe a better approach would be for the rule
to establish the principle that an institution’s abusive
lending will adversely affect its CRA rating, and that the regulators
will establish
less
formal guidance (such as through inter-agency Questions and Answers)
on what kinds of lending are abusive. The regulators should then
provide immediate such guidance that asset-based lending is abusive
and begin to consider other forms of abusive lending.
Affiliate Lending
We are pleased that the regulators propose to clarify
that discriminatory or other illegal or abusive lending activities
by an affiliate
of an institution would adversely affect its CRA rating. However,
we
do not believe that such activities should be considered only when
undertaken within the institution’s assessment area. We note
that legal but abusive asset-based lending by the institution itself
outside an assessment area would adversely affect its CRA rating.
Consistency suggests that the same standard should apply to affiliate
lending. We also note that affiliate lending is considered under
CRA only if the institution elects to include it. If an institution
decides to make such an election, then it is reasonable that the
complete lending record of the affiliate should be considered.
Regulators should not disregard discriminatory and other illegal
or abusive
lending for CRA purposes merely because it occurs outside an assessment
area.
Small Business and Small Farm Loan Data
We support the regulators’ proposal to release
small business and small farm lending data on a geographical
basis. We believe
that such data will be useful to communities and to other institutions
in assessing the adequacy with which institutions are serving their
communities. We believe the proposal appropriately balances the
benefits
to the public with any risk of unwarranted disclosure of otherwise
private information.
Conclusion
This concludes our comments. We would be happy to address any questions
you may have.
Sincerely,
Benson F. Roberts
Vice President for Policy
