CONFERENCE OF STATE BANK SUPERVISORS
April 6, 2004
Communications Division
Public Information Room
Mailstop 1-5
Office of the Comptroller of the Currency
250 E Street, SW
Washington, DC 20219
Docket No. 04-06
Robert E. Feldman, Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 200551
Re: Docket No. R-1181
Regulation Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Attention: No. 2004-04
RE: Proposed Changes to the Community Reinvestment Act
Dear Ladies and Gentlemen:
The Conference
of State Bank Supervisors (CSBS)1 is pleased to have the opportunity
to comment on the interagency Notice of Proposed
Rulemaking (Proposal) to amend the regulations that implement the
Community Reinvestment Act. The Proposal makes several significant
changes that CSBS would like to address.
Amending
the Definition of “Small Institution”
The Proposal
suggests increasing the threshold definition of a small institution
from
$250 million to $500 million regardless of the institution’s
holding company status. It should be noted that by increasing the
asset threshold for the definition of a small institution, the Proposal
does not eliminate the obligations under the CRA regulations for
any of the institutions under $500 million. Rather, if this change
goes into effect, institutions with less than $500 million in assets
would no longer have to comply with a series of requirements that
large banks are subject to, such as data reporting and the investment
test. This proposed change, therefore, expands the number of institutions
that are eligible for evaluation under the streamlined small institution
test.
CSBS understands that most community banks, by necessity, are required
to be an active participant in and fully serve their community to
remain profitable. Additionally, we have heard from small banks as
to the increased difficulty and cost of meeting the requirements
of the large bank CRA tests. We also recognize, however, that this
change may have strong implications for rural and inner city areas.
Taking these separate views into account, CSBS would like to work
with the Federal regulatory agencies to more fully analyze the communities
that could be most affected by this change and weigh these costs
against our strong support for regulatory burden relief.
Proposed Definition for Predatory Lending
To better address
abusive lending practices in CRA, the Proposal would amend the
regulation
to specifically provide that Federal agencies
will take into account evidence that an institution, or any affiliate
included in the institution’s performance evaluation, has engaged
in illegal practices, including unfair and deceptive practices. Specifically,
the Proposal would make it clear that the Federal agencies will consider
a pattern or practice of secured lending based predominantly on the
liquidation or foreclosure value of the collateral in cases where
the borrower cannot be expected to be able to make the payments required
under the terms of the loan. Evidence of such abusive practices would
adversely affect the institution’s CRA performance evaluation.
CSBS feels strongly that the asset-based definition of abusive lending
in this Proposal is not sufficient. The CRA regulations should note
that there are numerous other factors that should be considered when
determining whether the institution has participated in a pattern
or practice of abusive lending and CRA regulations should make that
very clear. CSBS does not support this narrow definition and discourages
the Federal banking agencies from adopting this language as the de
facto universal standard in connection with predatory lending activity.
State governments have been on the forefront of defining and addressing
predatory lending activity. CSBS would be happy to provide additional
information on other types of abusive practices that have been identified
by the state banking departments.
The Federal agencies
note that other aspects of predatory lending, such as “loan flipping,” the refinancing of special subsidized
mortgage loans, and “fee packing” could also demonstrate
evidence of unfair and deceptive practices that violate section 5
of the FTC Act. In this matter, the Proposal seems ambiguous and
could be enforced on an uneven basis across the various Federal banking
regulatory agencies. Instead of a general statement about having
the authority to enforce section 5 of the FTC Act, the regulation
should expressly state the lending activities (if noted as a pattern
or practice) that will adversely affect an institution’s performance
evaluation. CSBS also encourages the Federal banking agencies to
clarify that they may also consider the following predatory activity
based on examiners’ evaluations: equity stripping, loan flipping,
large pre-payment penalties, negative amortization provisions, an
extraordinary yield spread between a consumer’s APR and the
Treasury yield when total points and fees exceed a certain percentage
of the total loan amount, as well as any other appropriate examples.
CSBS also encourages the agencies to consider requiring institutions
to demonstrate a net tangible benefit for the consumer in obtaining
the loan that would be apparent during the examination.
Furthermore as
noted previously in this letter, 12 states have specifically provided
a much more
explicit definition of predatory lending. Violations
of these state laws should be noted in and adversely affect an institution’s
performance evaluation.
Affiliate Lending
The Proposal
notes that financial institutions can still elect to include affiliates
on
CRA examinations at their option. In this regard,
CSBS would like to highlight a recent study by the Joint Center for
Housing Studies of Harvard University2, which chronicles the changing
mortgage lending landscape. According to the study, “25 years
ago banks and thrifts originated the vast majority of home purchase
loans… Today, less than 30 percent of home purchase loans are
subject to intensive review under CRA. In some metropolitan areas
this share is below 10 percent.” Much of this erosion of home
purchase originations within the purview of CRA is attributed to
a substantial portion of home purchase lending activity being conducted
by mortgage brokers, finance companies, and affiliates/operating
subsidiaries of depository banking institutions3. The past decade
has witnessed a dramatic restructuring of the mortgage industry,
including the explosion of mortgage banking operations taking place
outside the actual depository institution. “Banking operations
operating outside of their CRA assessment areas have expanded rapidly
and today constitute the fastest growing segment of the residential
mortgage market. As a result, between 1993 and 2000 the number of
home purchase loans made by CRA-regulated institutions in their assessment
areas as a share of all home purchase loans fell from 36.1 percent
to 29.5 percent.”4 The Harvard study also found that some institutions
would make good, prime loans within their assessment areas, while
focusing on subprime lending activity outside the depository institution’s
assessment area.
By tapping into
national and international capital markets and utilizing computer
technology,
larger banking organizations and their mortgage
company affiliates have come to dominate the mortgage market. “By
2000, 25 lending organizations accounted for 52 percent of all home
purchase loans that year.”5 With several mega-bank merger applications
currently being reviewed and others expected to be announced, the
trend toward consolidation of the nation’s largest mortgage
lending organizations is expected to continue.
Much of depository
institutions’ subprime
lending is now being conducted through non-depository operating
subsidiaries of these
financial institutions and outside the reach of CRA. Furthermore,
many of these operating subsidiaries, especially those owned by the
largest banking institutions, are doing much of their subprime lending
outside their deposit-taking assessment areas.
Although banking
affiliates are addressed in the CRA regulations, there does not
appear to
be any reference to operating subsidiaries
that are under the control of depository institutions. Neither interagency
guidance to examiners nor the CRA Questions & Answers address
how CRA examinations should scrutinize operating subsidiaries. The
only guidance in regard to operating subsidiaries and CRA that CSBS
could locate was from the OCC. OCC Bulletin 97-26 states, “In
conducting the lending test, examiners consider affiliate loans – including
loans made by operating subsidiaries – only if requested by
the bank.” In a letter to John Taylor, President and CEO of
the National Community Reinvestment Coalition, dated October 20,
1997, the OCC states, “The CRA regulations do not require a
bank to use its subsidiaries (or affiliates) to increase the lending
and investments that are considered in the bank’s CRA evaluation.
Consideration of an affiliate’s loans or qualified investments
is distinct from the performance context… and is only done
at the option of the bank.” (emphasis in original letter)
The OCC’s
guidance, however, seems in direct contradiction to its recent
assertion that national bank operating subsidiaries
are considered a “department” of the bank. Furthermore,
the OCC has stated that courts have consistently treated operating
subsidiaries and their parent bank as equivalents, unless Federal
law requires otherwise, in considering whether a particular activity
is permissible. Although CSBS strongly disagrees with the OCC’s
preemption rule released the beginning of January 2004, those regulations
include amendments to part 7 of the OCC regulations6 codifying the
OCC’s belief that the bank and its operating subsidiaries are
inexplicably linked so far as its regulations are applied. It would
follow, then, that based on the OCC’s recent interpretations,
the agency would agree that operating subsidiary finance and lending
activity, at the very least, should be considered during a CRA performance
evaluation.
If CRA is to
continue benefiting lower income people and communities, it must
be modified
to reflect industry changes and emerging financial
services needs. Accordingly, CSBS urges the Federal regulatory agencies
to expand not only the definition of depository institution to include
operating subsidiaries directly under the institution’s control,
but also capture finance and lending activity outside the banking
organization’s assessment area. This would, therefore, extend
the reach of CRA to all activities of the depository institution
as well as of those entities under the control of the depository
institution. As indicated previously in our comments, CSBS is very
willing to work with the agencies, the industry, and consumer groups
in evaluating the impact of this recommendation in the interest of
balancing consumer protection goals against imposing additional regulatory
burden.
Additional Disclosure in CRA Public Evaluations
The Proposal
would also modify the institution’s public CRA
evaluation. A public performance evaluation is a written description
of an institution’s record of helping to meet community credit
needs, and includes a rating of that record. An evaluation is prepared
at the conclusion of every CRA examination and made available to
the public. The agencies intend to make publicly available HMDA
and CRA data to disclose the following information in CRA performance
evaluations by assessment area:
- The number, type and amount of purchased loans;
- The number, type and amount of HOEPA loans and loans for which
rate spread information is reported under HMDA (data that will be
available in mid-2005);
- The number, type and amount of loans that were originated or purchased
by an affiliate and included in the institution’s evaluation,
and the identity of such affiliates.
CSBS supports providing additional data in CRA public evaluations.
Additional data disclosure should provide more transparency and assist
the public in determining if an institution is fulfilling its requirements
under the CRA rules, without imposing additional burden onto an already
highly regulated banking industry.
Conclusion
CSBS believes that cooperative efforts between state and Federal
authorities to ensure that financial institutions fully understand
compliance requirements, especially in regard to low-income people
and communities, will have a greater impact than individual efforts
at either the state or Federal level. We would welcome opportunities
to work with the Federal regulatory agencies to develop joint initiatives
and guidance in this area. Thank you for your consideration and we
invite you to call on us if we can provide additional information
on any of the state initiatives noted in our letter.
Best Personal Regards,
Neil Milner
President and CEO
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