From: Marina Rota [mailto:mrota1@jhu.edu]
Sent: Tuesday, April 06, 2004 7:19 PM
To: Comments
Subject: Oppose Proposed Changes to the CRA Regulations
Marina Rota
2000 F Street, NW, No. 415
Washington, DC 20006
April 6, 2004
Executive Secretary Robert Feldman
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Dear Executive Secretary Feldman:
Dear Officials of Federal Bank and Thrift Agencies:
As a member of the National Congress for Community Economic Development,
my organization urges you to withdraw the proposed changes to the
Community Reinvestment Act (CRA) regulations. CRA is instrumental
in
increasing access to homeownership, boosting economic development,
and
expanding small businesses in the nation’s minority, immigrant,
and low-
and moderate-income communities. The changes proposed are contrary
to the
CRA statute because they will halt the progress made in community
reinvestment.
The proposed CRA changes will thwart the Administration’s
goals of
improving the economic status of immigrants and creating 5.5 million
new
minority homeowners by the end of the decade. We are concerned
that the
proposed CRA changes would facilitate predatory lending and reduce
the
ability of the general public to hold financial institutions accountable
for compliance with consumer protection laws.
The proposed changes include three major elements: 1) provide streamlined
and cursory exams for banks with assets between $250 million and
$500
million; 2) establish a weak predatory lending compliance standard
under
CRA; and 3) expand data collection and reporting for small business
and
home lending. While we support the third proposal, the first two
proposals are quite damaging. In addition, the federal banking
agencies
did not update procedures regarding affiliates and assessment areas
in
their proposal, and thus missed a vital opportunity to continue
the
effectiveness of the CRA.
Streamlined and Cursory Exams. Under the current CRA regulations,
large
banks with assets of at least $250 million are rated by performance
evaluations that scrutinize their level of lending, investing,
and
services to low- and moderate-income communities. The proposed
changes
will eliminate the investment and service parts of the CRA exam
for banks
and thrifts with assets between $250 and $500 million. The proposed
changes would reduce the rigor of CRA exams for 1,111 banks that
account
for more than $387 billion in assets.
We expect that the elimination of the investment and service tests
for
more than 1,100 banks will result in considerably less access to
banking
services and capital for underserved communities. For example,
these
banks would no longer be held accountable under CRA exams for investing
in
Low Income Housing Tax Credits, which have been a major source
of
affordable rental housing needed by large numbers of immigrants
and lower
income segments of the minority population. Likewise, the banks
would no
longer be held accountable for the provision of bank branches,
checking
accounts, Individual Development Accounts (IDAs), or debit card
services.
This may result in decreasing the effectiveness of the Administration’s
housing and community development programs. Finally, the federal
bank
agencies will no longer enforce CRA’s statutory requirement
that banks
have a continuing and affirmative obligation to serve credit and
deposit
needs if they eliminate the investment and service test for a large
subset
of depository institutions.
Predatory Lending Standard. The proposed CRA changes contain an
anti-predatory screen that will actually perpetuate abusive lending.
The
proposed standard states that loans based on the foreclosure value
of the
collateral, instead of the ability of the borrower to repay, can
result in
downgrades in CRA ratings. The asset-based standard is inapropriate
because it will not cover many instances of predatory lending.
For
example, abusive lending would not result in lower CRA ratings
when it
strips equity without leading to delinquency or foreclosure. In
other
words, borrowers can have the necessary income to afford monthly
payments,
but they are still losing wealth as a result of a lender’s
excessive fees
or unnecessary products.
CRA exams permit abusive lending because it does not address the
problems
of the packing of fees into mortgage loans, high prepayment penalties,
loan flipping, mandatory arbitration, and other abuses. Rigorous
fair
lending audits and severe penalties on CRA exams for abusive lending
are
necessary in order to ensure that the new minority homeowners are
protected, but the proposed predatory lending standard will not
provide
the necessary protections. In addition, an anti-predatory standard
must
apply to all loans made by the bank and all of its affiliates,
not just
real-estate secured loans issued by the bank in its “assessment
area” as
proposed by the agencies. By shielding banks from the consequences
of
abusive lending, the proposed standard will frustrate CRA’s
statutory
requirement that banks serve low- and moderate-income communities
consistent with safety and soundness.
Enhanced data disclosure. The federal agencies propose that they
will
publicly report the specific census tract location of small businesses
receiving loans in addition to the current items in the CRA small
business
data for each depository institution. This will improve the ability
of
the general public to determine if banks are serving traditionally
neglected neighborhoods with small business loans. Also the regulators
propose separately reporting purchases from loan originations on
CRA exams
and separately reporting high cost lending (per the new HMDA data
requirement starting with the 2004 data).
The positive aspects of the proposed data enhancements do not begin
to
make up for the significant harm caused by the first two proposals.
Furthermore, the federal agencies are not utilizing the data enhancements
in order to make CRA exams more rigorous. The agencies must not
merely
report the new data on CRA exams, but must use the new data to
provide
less weight on CRA exams to high cost loans than prime loans and
assign
less weight for purchases than loan originations.
Missed Opportunity to Update Exam Procedures: The agencies also
failed to
close loopholes in the CRA regulation. Banks can still elect to
include
affiliates on CRA exams at their option. They can manipulate their
CRA
exams by excluding affiliates not serving low- and moderate-income
borrowers and excluding affiliates engaged in predatory lending.
All
affiliates should be included on exams. Lastly, the proposed changes
do
not address the need to update assessment areas to include geographical
areas beyond bank branches. Many banks make considerable portions
of their
loans beyond their branches; this non-branch lending activity will
not be
scrutinized by CRA exams.
We expect that the proposed changes to CRA will directly undercut
the
Administration’s emphasis on minority homeownership and immigrant
access
to jobs and banking services. The proposals regarding streamlined
exams
and the anti-predatory lending standard threaten CRA’s statutory
purpose
of the safe and sound provision of credit and deposit services.
The
proposed data enhancements would become much more meaningful if
the
agencies update procedures regarding assessment areas, affiliates,
and the
treatment of high cost loans and purchases on CRA exams. CRA is
simply a
law that makes capitalism work for all Americans. In this year,
the 40th
anniversary of the Civil Rights Act and the Economic Opportunity
Act, we
think it is especially important to recommit ourselves to proven
strategies like CRA that provide economic opportunities for all.
Sincerely,
Marina Rota
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