From: Dan Immergluck [mailto:immergld@gvsu.edu]
Sent: Tuesday, March 30, 2004 4:44 PM
To: Comments; regs.comments@federalreserve.gov; regs.comments@occ.treas.gov;
regs.comments@ots.treas.gov
Cc: jsilver@ncrc.org
Subject: Proposed Changes to CRA Regulations
From: Dan Immergluck
549 Gladstone Dr. SE
Grand Rapids, MI 49506
March 30, 2004
Docket No. 04-06
Communications Division
Public Information Room, Mailstop 1-5
Office of the Comptroller of the Currency
250 E St. SW,
Washington 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
Dear Federal Bank Regulatory Officials:
I am writing to urge you to withdraw the proposed changes to the
Community Reinvestment Act (CRA) regulations. CRA has been instrumental
in increasing access to credit and homeownership and expanding small
businesses in the nation's minority and low- and moderate-income
communities. Your proposed changes will undermine the progress made
in
community reinvestment over the last 27 years. CRA is an area of
policy
that I have worked on for the last decade. I have conducted numerous
studies on access to credit and have seen the impacts of this important
law. Unfortunately, I have also witnessed in recent years the
increasingly successful efforts to weaken CRA and fair lending laws.
I
attribute this primarily to a lack of political will on the part
of
regulatory officials to enforce the law and on the persistent efforts
of
well-funded lobbyists to weaken it. My forthcoming book, Credit to
the
Community: Community Reinvestment and Fair Lending Policy in the
U.S.,
details the failure of your agencies to implement and enforce the
law
with vigor. I hope it will discourage you from making further moves
in
the deregulatory direction. The book is due out in May, and I would
be
happy to send you a copy at that time.
The proposed CRA changes will thwart the Administration's purported
goals of improving the economic status of immigrants and creating
5.5
million new minority homeowners by the end of the decade. Instead,
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. The beneficial impacts of the third
proposal are overwhelmed by the damage imposed by the first two
proposals. 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 CRA's effectiveness.
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.
The elimination of the investment and service tests for more than
1,100
banks translates into 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. Thus,
the effectiveness of the Administration's housing and community
development programs would be diminished. Moreover, the federal bank
agencies will fail to 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 falls
short 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 will allow abusive lending if they contain the proposed
anti-predatory standard that does not address the problems of the
packing of fees into mortgage loans, high prepayment penalties, loan
flipping, mandatory arbitration, and other numerous 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 served by the Administration 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 gaping loopholes in the CRA regulation. Banks can still
elect
to include affiliates on CRA exams at their option. They can thus
manipulate their CRA exams by excluding affiliates not serving low-
and
moderate-income borrowers and excluding affiliates engaged in predatory
lending. The game playing with affiliates will end only if the federal
agencies require that all affiliates 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.
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. CRA is
too
vital to be gutted by harmful regulatory changes and neglect. Thank
you
for your attention to this critical matter.
Sincerely,
Dan Immergluck
Assistant Professor
Grand Valley State University
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