FDIC Federal Register Citations

From: MARINA ROTA 
Sent: Tuesday, October 19, 2004 12:17 PM
To: Comments
Subject: Community Reinvestment -- RIN 3064-AC50

Mr. Feldman:

I am a concerned citizen who opposes the Federal Deposit Insurance Corporation (FDIC) rule proposal that would ease Community Reinvestment Act (CRA) requirements for community development activities for banks in the $250M to $1 billion range. It is my belief that your proposal may violate our National Urban and New Community Development Policy, codified in Title 42, Chapter 59 of the U.S. Code.

I am particularly opposed to the proposed relaxation of the definition of community development activities and the proposed new community development criterion. The new criterion, as drafted by current FDIC management, undermines the potential of the CRA service test to provide the “unbanked” with innovative options to alternative financial services providers--payday lenders, check cashiers, for example--which have mushroomed in lower income communities since financial services modernization was enacted in 1999. Moreover, the proposal, as currently drafted, does not provide incentives for banks to engage in community development services that foster the growth of mediating institutions, such as CDFIs, in mid-sized communities.

When former FDIC chair Donna Tanoue proposed the CD test in her speech on community bank strategies at the Bank Administration Institute Conference on June 19, 2000, she stated that “a bank could focus on one activity more than another [emphasis added] to obtain a higher rating.” She did not propose a requirement for a single community development activity. After all the thoughtful suggestions that both the banking industry and community groups have presented as part of the 2001-2004 CRA review that provided the potential to ensure the sustainability of community development finance, why would you would propose a community development criterion that is particularly damaging to communities, particularly rural areas, around the country? This is unthinkable and inexcusable. It is also unfortunate, because in my view, with an effective CD test, the increase of the small institution asset threshold to $500 million may even be viable.

As the history of community reinvestment tells us, the genesis of our nation's current market inefficiencies began with the programs and policies of two government agencies, the Home Owners’ Loan Corporation (HOLC) and the Federal Housing Administration (FHA). It is common knowledge that to develop underwriting criteria for federally insured mortgage loans, the FHA hired University of Chicago economist Homer Hoyt, who in 1933 published a theory that correlated race with declining property values (for explicit language, see FHA’s 1938 underwriting manual par. 937. It is also common knowledge that these discriminatory criteria were incorporated into private-sector real estate appraisal policy until the 1948 Shelley v. Kraemer Supreme Court ruling and that policies laid the foundation for the dual-housing finance system, which prompted community groups to supplicate Congress for the drafting of community reinvestment legislation.

And with regard to the evolution of the Community Reinvestment Act, the record, most of which can be found in government documents, tell us that --

* The CRA was enacted not primarily to discourage redlining — but more specifically, to encourage the federal financial supervisory regulators to do their job properly with regard to encouraging insured depository institutions to help meet the credit needs of all communities, including LMI communities. Am I convinced that the regulators doing all they can to encourage banks to proactively engage in constructive community development activities in LMI communities? Your latest proposal does not provide such evidence.

* Small banks have been lobbying to eschew their responsibilities as public instrumentalities before Senator Proxmire's ink dried upon signing the legislation. Perhaps it would be appropriate for the regulators to remind small banks that they enjoy various direct and indirect subsidies by virtue of their bank charter?

* The enactment of the CRA was not enough to prod the regulators to undertake their responsibilities seriously. Community groups had to storm the Hill after the S&L bailout — which cost taxpayers $175-billion, or 3% of GDP back in 1989 — to ensure the efficacy of the CRA. And it was only through the ensuing Congressional oversight and prodding that the regulators began implementing the CRA. Might it be time for the regulators to remind small banks that community groups are also overwhelmed with exhausting reporting requirements and that, unlike banks, the government does not bail them out when they cannot meet their challenges?

And most importantly, the history of the Community Reinvestment Act also tells us that it was the leadership of former President Clinton who developed a brilliant CRA regulatory framework to unleash market forces for sustainable community development. Why would the Bush administration work to undermine such a policy that would provide the foundation for his pronouncements of goals of improving the economic status of immigrants and creating 5.5 new minority homeowners by the end of the decade? How would we realistically see the realization of the President Bush's vision of an Ownership Society without an effective CRA and efficient markets?

Considering that your proposal is framed as addressing changes in the financial services industry since the 1995 CRA -- why would you not address the impact of these changes on LMI communities? As a concerned citizen, I encourage you to make it unnecessary for community group to, once again, supplicate the Congress to ensure that the CRA is implemented to its full potential for the benefit of not only communities but also banks. The first step is to ensure that the CRA remains effective by providing banks with incentives to proactively provide communities with prime credit, when warranted, and with innovative, affordable retail banking products. And the lockstep is to ensure that the CRA remains effective by providing banks with the incentive to engage in the community development activities that will foster the institutional capacity of mediating community institutions, CDFIs, in particular.

In fact, an OCC survey of national banks, Effective Strategies for Community Development Finance, found that upon evaluating partnership potential in target markets, community development services provide banks with CRA credit as they assist CDFIs in organizational development prior to engaging in lending or investing and work toward bringing the institution to sustainability. These activities may take the form of providing grants, loaning executives to serve on boards of directors or on credit and underwriting committees, or providing CDFI-employee training on small business underwriting and loan servicing. This type of community development activity should be of paramount weight because, over the long term, it would foster profitable investment opportunities--just as the CRA has gradually developed the market for profitable lending opportunities in the past. Why is it that such complex, innovative work of bank leaders is relatively unrecognized by its weight in the CRA service test? Would it not be in the long-term interest of mid-sized banks to engage in such activities?

Although we have not yet fully reversed the effects of government's damaging HOLC-FHA policies of the past, the Clinton administration has developed the framework to do so. This framework needs some fine tuning, and both banks and community groups have provided you with excellent suggestions as to how to make the lending test more relevant by broadening its community development focus beyond housing, by ensuring the sustainability of the investment test be allowing it to be more flexible and viable, and the potential of the service test by making it more rigorous and effective.

I urge you to give taxpayers some bang for their buck by rereading these suggestions and also the suggestions presented by the Harvard-Joint Center for Housing Studies to revitalize the CRA and make it more relevant by ensuring a new focus on financial services. These suggestions were presented in a briefing to the bank regulators on March 20, 2002, and are detailed in the Ford Foundation-funded report, "The 25th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System," which is available online. The title of the press release issued by Harvard-JCHS on that day forewarns the regulators that the CRA has failed to keep pace with changing financial industry. So why is it that your proposed regulations ignore stated fact?

For your information, the impacts on communities are recounted in the publication Credit, Capital and Communities: The Implications of the Changing Mortgage Banking Industry for Community Based Organizations, which is posted on the Web site of the Harvard University-Joint Center for Housing Studies. Better yet, the impacts on mediating institutions, such as CDFIs and other community-based organizations are vividly detailed in the Harvard's Kennedy School of Government case study (no 1659.0), Seeking Sustainability: Neighborhood Housing Services of Chicago Faces Financial Challenge.

It is only when we have realized the full potential of the CRA--particularly through the unrealized power of the CRA service test--that market-forces will one day supplant the need for bureaucratic command-and-control regulations. Your proposal is hindering this process. I urge you to do all that you can to provide innovative, thoughtful solutions that would transform this vision into reality.

Thank you for your attention.

M. Loren Rota