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NATIONAL COMMUNITY CAPITAL
From: Cheryl Neas [mailto:Cheryln@communitycapital.org]
Sent: Thursday, September 16, 2004 2:46 PM
To: Comments
Subject: RIN 3064-AC50
Mr. Robert E. Feldman
Executive Secretary
ATTN: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
RE: RIN 3064-AC50
September 20, 2004
Dear Mr. Feldman:
National Community Capital appreciates the opportunity to comment on the
Federal Deposit Insurance Corporation's (FDIC) proposed rule regarding
the Community Reinvestment Act (CRA). Our comments reflect a commitment
to a community development finance industry in which banks and community
development financial institutions (CDFIs) are partners in expanding
access to capital and credit.
On behalf of National Community Capital's 158 Member CDFIs, the
thousands of businesses they finance, the tens of thousands of low- and
moderate-income homeowners and renters they benefit, and the thousands
of entrepreneurs they have financed, NCCA strongly opposes the changes
set out in the proposed regulations. In particular, we oppose the
changes to the definition of a "small bank," the expansion of the
definition of community development in rural areas, and the elimination
of reporting requirements on small business lending data for mid-sized
banks. We urge you to withdraw this proposal, which would undermine
nearly three decades of success of the CRA. It is likely to mean the
loss of hundreds of millions of dollars in loans, investments, and
services for local communities, and would disproportionately impact
rural areas and small cities where these mid-sized banks often have
significant market presence.
In February 2004, the four federal banking regulators, including the
FDIC, issued a proposed rule [69 FR 5729] regarding the Community
Reinvestment Act. That rule proposed raising the asset threshold from
$250 million to $500 million for “small banks.” National Community
Capital expressed serious concerns about that proposal's impact on the
availability of capital and credit in underserved communities. Rather
than addressing the shortcomings of that proposal, the FDIC proposal
moves in the opposite direction and would further curtail services and
investment to low- and moderate-income communities.
Thirty members of the United States Senate shared National Community
Capital's concern that changing the definition of "small bank" would
significantly harm community reinvestment and violate the Congressional
intent of CRA. In a letter to the agencies, these Senators noted, "This
proposal dramatically weakens the effectiveness of CRA…We are concerned
that the proposed regulation would eliminate the responsibility of many
banks to invest in the communities they serve through program such as
the Low Income Housing Tax Credit or provide critically needed services
such as low-cost bank accounts for low- and moderate-income consumers."
Clearly, exempting a large number of banks from full CRA exams does not
serve needy communities as Congress intended in enacting the CRA.
Definition of "Small Bank"
Under current regulations, banks with assets of at least $250 million
have performance evaluations that review lending, investing, and
services to low- and moderate-income communities. The FDIC’s proposal
that state-chartered banks with assets between $250 million and $1
billion follow a community development criterion that allows banks to
offer community development loans, investments OR services will result
in significantly fewer loans and investments in low-income
communities―the very communities that the CRA was enacted to serve.
Currently, mid-size banks must show activity in all three assessment
areas. Under the proposed regulations, the banks will now be able to
pick the services convenient for them, regardless of community needs.
As we indicated in our comment letter of March 30, 2004, changing the
definition of "small bank" and conducting full CRA exams on
significantly fewer banks would likely result in a substantial decrease
in investment in underserved communities. At that time, the FDIC and
other regulatory agencies proposed lifting the threshold to only $500
million. Exempting even more banks from full CRA examination by raising
the asset size to $1 billion would further exacerbate the effects that
concern us. Changing the definition of "small bank" from $250 million to
$1 billion would remove 879 state-chartered banks with more than $392
billion in assets from the scrutiny of full CRA exams. This change would
mean that 96% of the banks regulated by the FDIC would be able to
"choose" their own community reinvestment obligation, rather than
responding to the range of credit needs of low- and moderate-income
people in their markets.
Lending, services, and investment have all contributed to the nearly
three decades of the CRA's success. Banks have increasingly recognized
that CRA-motivated lending is profitable to them as well as beneficial
to low-income communities. Investments channel capital and products
through organizations with expertise in serving emerging low- and
moderate-income markets. The current “service test” encourages banks to
become more active in the essential retail banking services needs of
low- and moderate-income consumers. Low-cost bank accounts and
individual development accounts, for example, have been important tools
to help low-income people build assets; banks would have far less
incentive to provide these tools under the FDIC's proposal.
One way banks are able to meet the investment test is through
investments in CDFIs. Bank investments in CDFIs represent an important
way to increase capital flow to low-income communities. The successful
partnerships between CDFIs and banks, including those that result in
Bank Enterprise Award (BEA) program awards[1], illustrate that
investment opportunities are available and can be part of a bank’s
strategy for community reinvestment, regardless of the institution's
size. In the most recent round of Bank Enterprise Awards, announced last
month, fully 70% of the awardees had assets of less than $1 billion.
Since 1999, 19% of all BEA awardees have been institutions with assets
between $500 million and $1 billion. The partnerships exemplified in
these awards indicate that investment opportunities are available for
banks of all sizes and in markets across the country.
In addition, the change that designates a bank "small" without regard
to whether it is part of a large holding company further reduces the
financial services assets subject to CRA provisions, bringing the Act
even more out of step with the modernized financial services industry
and would release more than $387 billion in assets from CRA examination.
Because the three-part examinations have resulted in new partnerships
and opportunities, as well as hundreds of millions of dollars in new
private capital in low- and moderate-income communities, we believe that
a maximum number of banks should comply with the full examination.
National Community Capital urges the FDIC to withdraw its proposal
changing the definition to "small bank" to exempt 80% of the banks it
regulates from these obligations.
Investment in Rural Communities
The FDIC is right to be concerned about the impact of its proposal on
rural communities. Under this proposal, Alaska, Arizona, Idaho,
Minnesota, Montana, New Mexico, and West Virginia would have no
FDIC-regulated banks with CRA impetus for investment and services,
meaning no bank in these states would be obligated to lend to, invest
in, and provide services to their residents. In 19 states, the number of
institutions subject to full CRA exams would drop by more than 80%; more
than half of those states are predominantly rural. Eleven states, all
but one predominantly rural, would see the assets subject to three-part
examinations drop by more than 40%.
The solution the FDIC proposes—to include in CRA examinations
community development activity in rural communities, regardless of
borrower income—is wholly inadequate, even detrimental, and will not
provide sufficient protection to the affected rural areas. Allowing
banks to receive credit without regard for income contradicts the Act's
intent to enhance service to low- and moderate-income communities. This
proposal is also likely to divert services away from low- and
moderate-income individuals in rural areas, populations that are among
those having the greatest need for access to affordable credit and
banking services.
The best way for the FDIC to ensure that mid-size banks respond to
the needs of rural markets is to subject them to full CRA examinations
that require a range of services to and investments in these
communities.
Reporting Requirements
We are disappointed that the FDIC's proposal reverses the
requirements for increased data disclosure proposed by the agencies in
February. The proposals for increasing information on both small
business lending data and high-cost loans would have provided banks and
communities with important knowledge about financial institutions track
record in serving community credit needs.
The Home Mortgage Disclosure Act (HMDA) has contributed significantly
to reducing discrimination in housing finance. Similar disclosure for
small business lending could help ensure fair and equal access to credit
by the low-income and minority entrepreneurs that drive job creation in
emerging markets.
The February proposal also contained provisions for separate
reporting of high-cost loans and loan purchases. Better data on banks'
activity in the high-cost market will provide clearer information on
their provision of affordable credit. We urge the FDIC to restore the
provisions to the February proposal on small business data collection
and on high-cost loan data disclosure.
Missed Opportunities to Enhance CRA and Community Reinvestment
The 1999 Gramm-Leach-Bliley Act "modernized" the financial services
industry without commensurate reform to community reinvestment
requirements. In order for CRA to keep pace with the financial services
industry, three important reforms are necessary:
1. Expand CRA coverage to all financial service institutions that
receive direct or indirect taxpayer support or subsidy.
After passage of the Gramm-Leach-Bliley Act, banks became nearly
indistinguishable from finance companies, insurance and securities
firms, and other “parallel banks.” For example, banks and thrifts with
insurance company affiliates have trained insurance brokers to make
loans. Securities affiliates of banks offer mutual funds with checking
accounts. Mortgage finance company affiliates of banks often issue more
than half of a bank’s loans—especially in the subprime markets.
However, CRA covers only banks, and therefore only a fraction of a
financial institution’s lending. To keep CRA in step with financial
reform, all financial services companies that receive direct or indirect
taxpayer support or subsidy should comply with the three-part
examination.
In the paper, “The Parallel Banking System and Community
Reinvestment,” National Community Capital uncovered a web of
taxpayer-backed subsidies essential to the entire financial services
industry. For example, federal guarantees and Treasury lines of credit
have acted as a safety net against some nonbank insolvencies.
National Community Capital strongly urges regulatory agencies to
mandate that all lending and banking activities of non-depository
affiliates must be included on CRA exams, including all banks that are
part of large holding companies. This change would accurately assess the
CRA performance of banks that are expanding their lending activity to
all parts of their company, including mortgage brokers, insurance
agents, and other non-traditional loan officers.
2. A bank’s assessment area should be determined by how a bank
defines its market.
Under CRA, banks are required to provide non-discriminatory access to
financial services in their market and assessed according to where they
take deposits. In 1977, taking deposits was a bank’s primary function.
In 2004, banks no longer just accept deposits, they market investments,
sell insurance, issue securities, and are rapidly expanding the more
profitable lines of business. In addition, the advent and explosion of
Internet and electronic banking has blurred the geographic lines by
which assessment areas are typically defined.
Presently, CRA exams scrutinize a bank’s performance in geographical
areas where a bank has branches and deposit-taking ATMs. Defining CRA
assessment areas based on deposits is at odds with the way financial
institutions now operate. Moreover, it disregards the spirit of the CRA
statute, which sought to expand access to credit by ensuring that banks
lent to their entire markets.
National Community Capital recommends simplifying the definition of
CRA assessment area according to a financial institution’s customer
base. For instance, if a Philadelphia bank has credit card customers in
Oregon, it also has CRA obligations there. The obligations ought to be
commensurate with the level of business in any market.
3. CRA should provide meaningful predatory lending protection.
The explosion of the largely unregulated subprime market has
contributed to an increase in abusive lending practices that threaten to
undo many of the community reinvestment gains of the last decade, and
changed the face of the financial services industry. The February
proposal included a predatory lending standard that National Community
Capital noted was a step in the right direction but criticized as
inadequate; the current FDIC proposal completely ignores this critical
issue. Predatory lending strips billions of dollars from consumers and
communities in the United States. Borrowers lose an estimated $9.1
billion annually due to predatory mortgages; $3.4 billion from payday
loans; and $3.5 billion in other lending abuses, such as overdraft
loans, excessive credit card debt, and tax refund loans. In order to
meet fully the intent of CRA, regulators must see that banks not only
invest in communities but also take meaningful steps to preserve the
wealth created by those investments.
A rigorous predatory lending standard would protect new homeowners
created by the Administration's initiatives to increase minority and
low-income homeowners, as these populations are among those most
vulnerable to predatory lending. The FDIC's rule should contain a
comprehensive, enforceable provision to consider abusive practices and
assess CRA compliance accordingly. Without such a provision, many of the
gains of CRA could be lost. National Community Capital urges the FDIC to
develop a meaningful plan to stop predatory lending.
Conclusion
Since its passage in 1977, and especially since the last significant
revisions in 1995, CRA has greatly increased the flow of capital to
low-income people and communities. Because of CRA, banks and other
financial institutions often partner with CDFIs to enter new markets
that were previously ignored or "redlined." These communities have
reaped significant benefits, not only from the growth in CRA-motivated
capital, but also from the partnerships between banks and CDFIs. Both
banks and CDFIs have realized that working in partnership can enhance
each institution’s effectiveness in reaching underserved markets. The
Community Reinvestment Act has played a key role in this effective
collaboration, fostering millions of new homeowners, thriving
businesses, and account holders.
The FDIC's proposal threatens to roll back these gains in providing
access to capital and undermines Congressional intent for the CRA. It is
critical that the FDIC not enact this proposal. To keep CRA strong and
meaningful, the FDIC should:
Withdraw its proposal changing the definition of "small bank" to
those with up to $1 billion in assets;
Maintain a full, three-part CRA exam for mid-sized banks, rather than
allowing banks to choose only one of three activities;
Withdraw its proposal that institutions receive CRA credit for
activities in rural areas, regardless of borrower income;
Restore provisions for data collection and disclosure that would
enhance information about banks' small business lending and about their
high-cost loans and loan purchases;
Take steps to expand CRA so that it better reflects changes in the
financial services industry brought about by market shifts, technology
advances, lending abuses, and financial modernization legislation.
Thank you for the opportunity to comment. If you would like
additional information or have questions about this letter, please do
not hesitate to contact me at 215.320.4304 or markp@communitycapital.org.
Sincerely,
Mark Pinsky
President and CEO
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