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CALIFORNIA BANKERS ASSOCIATION
March 11, 2004
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
Docket No. R-1181
Communications Division
Office of the Comptroller of the Currency
Docket No. 04-06
Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
Chief Counsel's Office
Office of Thrift Supervision
No. 2004-04
Re: CRA Interagency Proposal
Dear Sir/Madam:
The California Bankers Association (CBA), a trade association
established in 1891, representing banks and savings institutions in
California (hereafter, simply "banks"), appreciates this opportunity to
comment on the interagency proposal to amend the regulations promulgated
under the Community Reinvestment Act. CBA's members comprise of almost
90 percent of the banks and savings and loan associations in California
(hereafter, "banks"), ranging in size from several million dollars in
assets to hundreds of billions.
We commend the agencies' ongoing efforts to update and improve the
regulations issued under the CRA. As discussed more fully below, CBA
strongly supports increasing the asset size limit below which banks are
eligible for less complex CRA examinations. We understand that, at this
time, the agencies are submitting three specific proposals for comment:
adjusting the definition of "small institution;" considering violations
of other laws when assigning a CRA rating; and modifying the contents of
public evaluation files. We also provide additional comments on other,
non-specific, changes that the agencies suggest they may make in the
form of interpretations, guidelines, and examiner training. We provide
comments on the following issues: balancing quantitative and qualitative
factors; investment test; service test; and the treatment of purchases
and originations of home mortgages.
"Small institution." It remains a viable presumption today that a
small bank meets the credit needs of its community if it makes a certain
amount of loans relative to deposits taken. A small bank is typically
non-complex; it takes deposits and makes loans. Its business activities
are usually focused on small, defined geographic areas where the bank is
known in the community. We agree with the agencies' observations that
raising the threshold is justified given substantial asset growth and
consolidation in the industry. This reasoning is doubly appropriate in a
more populous state such as California, where a single branch can exceed
the current $250 million threshold. It is also appropriate to disregard
the existence of bank holding companies when setting the limit, as this
factor has little or no bearing on whether or how a bank meets the
credit needs of its community.
Under the existing rules, a bank with more than $250 million in
assets faces a panoply of additional requirements that substantially
increase regulatory burdens without necessarily producing additional
benefits as contemplated by the Community Reinvestment Act. CBA
continues to believe that some of these requirements, such as the
investment and service tests, and the recordkeeping and reporting
requirements are not specifically authorized by the statute. At any
rate, under the current rules, banks as small as $25 1 million in assets
are, in concept, subject to the same requirements as banks a thousand
times larger.
Regardless of where the limit is set, we recognize it is unavoidable
currently that banks above and below the limit are treated radically
differently. This cliff effect is moderated to a degree by applying the
concept of performance context but, at present, it is inescapable that
the amount of time that a "large" institution close to the limit spends
to comply with the regulation is disproportionate to the beneficial
activities actually taken within the communities served. We believe a
more rational, long term solution is to phase in specific regulatory
requirements more gradually based on different asset-size ranges.
Until such time, CBA strongly supports adjusting the threshold, but
$500 million is too modest a mark. In California even a $500 million
bank often has only a handful of branches. Raising the limit to $1
billion rather than $500 million is appropriate in two important
aspects. First, keeping a focus on lending would be entirely consistent
with the purpose of the Community Reinvestment Act, which is to ensure
that banks meet the credit needs of the communities they serve.
Second, raising the limit to $1 billion will have only a small effect
on the amount of total industry assets covered under the more
comprehensive large bank test. According to the agencies' own findings,
raising the limit from $250 to $500 million would reduce total industry
assets covered by the large bank test by less than one percent (from
slightly more than 90% of total industry assets to a little less than
90%). The change will, however, have the salutary effect of reducing the
number of banks subject to the large bank test by one half.
According to FDIC data available as of December 31, 2003, raising the
limit to $1 billion will reduce the amount of assets subject to the more
onerous test by only 4% (to about 85%). Yet, the additional relief
provided would, again, be substantial, removing more than 500 additional
banks (compared to a $500 million limit) from the large bank category.
Accordingly, we strongly encourage the agencies to raise the limit to at
least $1 billion.
Consideration of credit terms and practices. CBA and its members
strictly support maintaining the highest standards when providing credit
to customers, and ensuring compliance with all lending laws.
Nevertheless, we are wary of the regulatory creep that is evident in the
proposal to overlay compliance with other banking laws onto the CRA
regulatory framework. The overriding purpose of the Community
Reinvestment Act is to ensure that banks meet the credit needs of the
communities they serve. The regulations promulgated under the Community
Reinvestment Act should be strictly and narrowly crafted to advance the
purposes of this underlying law and this law only. As already noted, we
believe the regulations already overstep their legal tether by imposing
onerous recordkeeping and reporting requirements, and by mandating
investment and service activities that are, at best, only marginally
related to the provision of credit.
Neither CBA nor its members doubt the importance of complying with
the Equal Credit Opportunity Act, Fair Housing Act, Federal Trade
Commission Act, HOEPA, RESPA, and TILA. But each of these laws was
passed by Congress at different times to achieve different and distinct
purposes. Each includes its own compliance mechanisms and specifies the
consequences of violations. Compliance with each of those laws is
already strictly monitored by the agencies and others, in accordance
with the intent of Congress when passed.
We are not aware of any authority in the Community Reinvestment Act
or in these other statutes (and the agencies have not proffered any
available authority) that permits the agencies by regulation to consider
compliance with separately-passed acts when assessing a bank's
compliance with the Community Reinvestment Act. To do so is to arrogate
to administrative agencies the power to enhance (i.e., alter) the
enforcement scheme of underlying laws, an activity that is clearly
legislative in nature and outside of the legal purview of administrative
agencies.
We are particularly troubled by any attempt to tie CRA assessments
with the still-amorphous concept of predatory lending. The agencies note
in the proposal that they will “consider all credible evidence of
discriminatory, other illegal, or abusive credit practices that comes to
their attention.” We hope that the agencies would not look to compliance
with local predatory lending laws that have proliferated in recent
years, including in this state, which are so poorly and broadly drafted,
that in several cases (including Oakland, California), ratings
organizations refuse to rate any loans originated in jurisdictions in
which they are passed.
One such ordinance proposed (but not yet passed) in another major
California city defines a home loan as a covered predatory loan,
regardless of fees or rates, if the creditor had violated any provision
of TILA or RESPA. It is difficult enough that banks have to navigate
their way through nonsensical and misdirected predatory lending laws and
ordinances. To cross-enforce such laws with CRA assessments only
compounds the unfairness.
More specifically, the agencies propose to develop specific rules
addressing "equity stripping," one of the "central characteristics" of
predatory lending. This is the practice of making home-secured loans
without regard to borrowers' ability to repay. Of course, CBA member
banks condemn these unscrupulous practices perpetrated largely by
loosely-regulated non-depository creditors in the marketplace. But the
agencies' new emphasis suggests the need also to establish a bright line
between a loan that is considered predatory and one that is innovative,
particularly when, in the course of meeting its CRA obligations, a bank
makes loans on terms that normally would not be acceptable under
conventional underwriting standards.
Lastly, while the agencies suggest that the proposed change will not
entail specific evaluations of individual complaints or loans, banks can
hardly take comfort in the direction in which this proposal leads. The
proposal is fraught with the promise of further reporting and other
complexities. The proposal to consider the activities of banks'
affiliates would add yet another layer of complexity and another basis
for extra paperwork. We fear that these proposals are exercises in
administrative experimentation that serve only to bring about the
continued transformation of the CRA regulations and in view of the clear
statutory purpose of the Community Reinvestment Act, to make them
unrecognizable. For the foregoing reasons, CBA opposes the proposed
enhancements to section __.28(c) of the regulations.
Public file (originations v. purchases). The agencies propose to
distinguish between mortgage purchases and originations in banks' public
evaluations. While this change would not result in additional burdens on
banks, CBA nevertheless does not support the change. Underlying
this proposal is the implication that purchases are not as desirable as
originations under CRA. Not only is there no statutory basis for making
this distinction, but we maintain that the public benefits of purchasing
loans may be under-appreciated. There is little doubt that the
availability of capital for secondary market purchases of mortgages has
vastly enhanced their availability and affordability. Also, treating
originations and purchases differently under the lending test
establishes another degree of complexity for which little benefit is
achieved.
Other comments. These are comments to future guidance not
specifically proposed at this time.
Qualitative/quantitative standards. The agencies may seek to clarify
through interagency guidance how qualitative considerations should be
applied when assessing a bank's lending, investments, and services. We
recognize the difficulty of crafting clear regulations and applying them
in a manner that achieves the potentially conflicting goals of
flexibility and consistency. This issue is particular pertinent to the
investment test. The agencies have received comments from banks about
the challenge of finding suitable investment opportunities, where
competition for the best opportunities can be fierce. Over the years,
CBA has expressed concerns that the investment test places too much
weight on quantitative factors.
At the same time. CBA members continue to voice frustrations over
differential treatment by examiners from one year to the next, by
examiners of different banks supervised by the same agency, and by
examiners among different agencies. Moreover. the two qualitative
factors specifically addressed in the regulations-innovation and
complexity-in some ways have become enshrined as ends in themselves,
such that their absence can be the basis for preclusion from a higher
rating. A bank should properly receive recognition for finding
innovative ways to engage in CRA activities where conventional
opportunities are lacking or where a transaction could not be made
through conventional means. But if a bank can best respond to the needs
of its community by providing conventional forms of loans, investments,
and services, then the absence of innovation is irrelevant.
The tension between being consistent and flexible can be ameliorated
through examiner training within each agency and better coordination
among different agencies. Some uncertainty can also be eliminated if a
bank's CRA performance is judged against its own strategic focus. If the
performance context is prepared by the bank, then it should be entitled
to deference. Any examiner-generated performance context information
that will be used should be communicated to the bank as early as
possible prior to an examination.
Investment test. The agencies may develop additional interagency
guidance on the investment test. CBA emphasizes again that, because
there is no statutory basis for the investment test, this test should
not be a mandatory element of the CRA examination. Nevertheless, as its
elimination appears unlikely, in the alternative, we generally support
the agencies' proposed clarifications.
We support any guidance to clarify that the investment test is not to
be a source of pressure on banks to make imprudent equity investments.
This clarification contemplates the possibility that, in some areas,
suitable investment opportunities are lacking, or that opportunities can
be found only with an unreasonable amount of time and effort. Therefore,
any guidelines should acknowledge this possibility, and further clarify
that banks confronted with such limitations would not be penalized. For
the same reason, we also support guidance on counting community
development activities outside of assessment areas, as long as any
effort taken to search beyond a bank's assessment areas is at the bank's
option. Any blanket requirement to look for opportunities beyond a
bank's assessment areas would only ensure increasing finding and due
diligence costs.
As noted above, we agree that the presence of "innovation" and
"complexity" is applicable only in recognition of a bank's efforts to
engage in CRA activities where a transaction could not be made through
conventional means. We also agree that guidance would be useful
regarding the treatment of prior investments and commitments for future
investments. Appropriate weight should be given to investments already
on the books. We believe that the duration of an investment depends on
factors that should be unrelated to a bank's CRA examination cycle, and
that banks should not be expected to churn investments to satisfy CRA
requirements.
Finally, as to demonstrating the "primary purpose" of an investment
of serving low- and moderate-income people, our members have suggested
that establishing proof is often painstaking, and good investments are
passed over even though the benefits to communities at large, or to
particular segments of a community, are evident, albeit difficult to
substantiate. Few organizations engage in activities and serve segments
of the community in ways that are entirely consistent with, and
recognized by, the CRA regulations. Also, it is not always feasible,
with respect to a broader investment vehicle, for a bank to direct funds
only to narrow, acceptable activities within the investment. Therefore,
CBA welcomes any guidelines to relieve the pressure on banks to track
investments in order to document the provision of services to targeted
individuals and communities.
Service lest. The agencies did not indicate an intent to issue
further guidance on the provision of banking services for low- and
moderate-income persons, but we must respond to a comment made by "many"
community organizations in this regard. We hope that the agencies will
give no credence whatsoever to the suggestion that banks should report
data on the distribution of deposits by income. It would be difficult to
imagine a more efficient means of overwhelming banks with paperwork
while simultaneously conducting a wholesale invasion of privacy on the
populous, all for purported benefits that are, at best, dubious.
CBA appreciates the opportunity to provide this comment letter. We
reiterate that we support any efforts to reduce unnecessary burdens
associated with CRA compliance. Raising the "large institution" limit is
a significant step forward in this regard. Please do not hesitate to
call the undersigned if you have any questions.
Sincerely,
Leland Chan
General Counsel
California Bankers Association
201 Mission Street, Suite 2400
San Francisco, CA 94105
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