SARGENT SHRIVER NATIONAL CENTER ON POVERTY LAW
April 8, 2004
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th St NW
Washington DC 20429
Dear Mr. Feldman:
The 18,000 member
cities of the National League of Cities (NLC) appreciate the opportunity
to comment on proposed regulations entitled
Community Reinvestment Act Regulations, 69 Fed. Reg. 5729 (Feb. 6,
2004). The notice of proposed rulemaking was issued jointly by the
Office of the Comptroller of Currency (OCC), the Board of Governors
of the Federal Reserve (Board), the Federal Deposit Insurance Corporation
(FDIC), and the Office of Thrift Supervision, Treasury (OTS), hereafter
referred to collectively as "the agencies."
I. NLC's 2004 National Municipal Policy Calls for Strong Agency
Enforcement of the Community Reinvestment Act (CRA) and Other Predatory
Lending Laws.
NLC believes that financial institutions strongly influence current
and future capital investments and economic development throughout
local economic regions. They play a critical role in the development
and long-term economic health of our communities. Without reasonably
equal and fair access to capital, many low- and moderate-income groups
and communities would continue to under perform economically. For
this reason, the federal government must remain an active player
in influencing the direction of the financial industry's lending
practices. The federal government can only play this role through
appropriate regulation and oversight. This oversight must include
all financial institutions including commercial banks, mortgage lenders,
savings and loan institutions, mutual savings banks, credit unions,
and industrial banks.
II. The Purpose of the CRA is to Ensure Financial Institutions Meet
the Deposit and Credit Needs and Convenience of Low- and Moderate-Income
Communities.
The Community
Reinvestment Act (CRA)1 and its implementing regulations have been
particularly
useful tools in maintaining this oversight.
CRA has been instrumental in increasing access to homeownership,
boosting economic development, and expanding small businesses in
the nation’s minority, immigrant, and low- and moderate-income
communities. It has had the effect of creating productive investment
in cities and reducing urban blight. The federal government must
remain committed to the intent and application of this important
law. For this reason, NLC supports vigorous enforcement of the CRA.
Moreover, NLC will oppose any federal efforts to weaken or eliminate
the CRA, or efforts to create safe harbors for financial institutions.
In enacting
the CRA, Congress found that "regulated financial
institutions are required by law to demonstrate that their deposit
facilities serve the convenience and needs of the community in which
they are chartered to do business."2 (Emphasis added). The convenience
and needs of communities includes "the need for credit services
as well as deposit services."3 Therefore, Congress concluded
the purpose of the CRA was to require the agencies to use their regulatory
authority when examining financial institutions, "to encourage
such institutions to help meet the credit needs of the local communities
in which they are chartered consistent with the safe and sound operation
of such institutions." 4
As will be discussed
later in this comment, many of the proposed regulatory changes
appear to be inconsistent with the purposes of
the Act. Instead of enhancing the agencies' ability to oversee and
ensure that regulated institutions demonstrate that they serve the "convenience
and needs" of the communities in which they are chartered, the
proposed regulations weaken that ability by lessening CRA reporting
requirements for over 1,100 financial institutions. Additionally,
the proposed regulations weaken screens against predatory lending
by failing to take into account all instances of predatory lending.
III. NLC Opposes The Proposed Rule Change Because It Undermines
the Intent of the Community Reinvestment Act and Fails to Update
Exam Procedures.
NLC opposes the proposed rule change for three reasons. First, the rule increasing
the asset threshold definition for a small institution would allow too many
financial institutions to escape the most stringent and appropriate CRA review.
Second, the proposed changes in the predatory lending standard would have the
counter-productive effect of perpetuating abusive lending practices. Third,
the proposed changes represent a missed opportunity for the agencies to update
CRA exam procedures.
A. Increasing the Asset Threshold for the Definition Would Allow
Too Many Financial Institutions to Escape Appropriate CRA Review.
The proposed rule would change the definition of "small institution" to
mean financial institutions with less than $500 million in total assets, without
regard to the assets of any holding company. The previous definition for a "small
institution" was any financial institution with less than $250 million
in assets.5 The former definition also took into account the assets of a financial
institution's holding company (i.e., the institution would be subject to CRA
examination if its holding company had more than $1 billion in assets).
Under the current CRA regulations, the agencies rate large banks
by performance evaluations that scrutinize these banks' 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. There are currently 1,111 banks and financial institutions,
accounting for more than $387 billion in assets, that fall into this
category.
This change
of definition would translate into considerably less access to
banking services and capital for underserved communities.
For example, CRA exams for the newly defined small financial institutions
would no longer consider investment in Low Income Housing Tax Credits
(LIHTC)6 as a factor in approving applications for certification.
Congress created the LIHTC program with the Tax Reform Act of 1986
as an alternate method of funding housing for low- and moderate-income
households. Developers and investors must use the tax credits for
new construction, rehabilitation, or acquisition and rehabilitation
of rental housing.7 Consequently, the LIHTC has been a major source
of capital and leverage for loans for affordable housing projects.
Under the proposed
rule, many of these newly defined small banks would have diminished
incentive
to make loans, especially those leveraged
with LIHTC monies, for affordable housing developments located in
low- and moderate-income communities. This is because the proposed
rule eliminates the investment test element of CRA evaluation for
a significant number of financial institutions. Without such scrutiny,
these institutions are less likely to make investments in projects
leveraged by LIHTC. Again, the Act mandates "each appropriate
Federal financial supervisory agency . . . use its authority when
examining financial institutions, to encourage such institutions
to help meet the credit needs of the local communities in which they
are chartered consistent with the safe and sound operation of such
institutions."8 The agencies have made no argument that applying
the investment test to institutions with less than $500 million in
assets would jeopardize the safety and soundness of their operations.
Moreover, they have made no compelling argument that would lead one
to believe these institutions would continue to make investments
meeting the credit needs of low- and moderate-income communities.
Therefore, the proposed rule change is inconsistent with the intent
of the Act.
Additionally,
under the proposed rule, the agencies would no longer scrutinize
whether
the newly defined small financial institutions
provide bank branches, checking accounts, Individual Development
Accounts (IDA), or debit card services to low- and moderate-income
individuals or communities. This is because the service test element
of the CRA evaluation is eliminated for these institutions. As the
agencies point out, "the service test takes into account the
degree to which services are tailored to meet the needs of low- and
moderate income geographies, whether as "mainstream" retail
banking services or community development services."9 Without
the application of the service test to these newly defined smaller
institutions, the agencies have failed to explain how they will hold
these institutions accountable, in the manner intended by Congress,
for their obligation to "demonstrate that their deposit facilities
serve the convenience and needs of the communities in which they
are chartered to do business."10 For this reason also, the proposed
rule is inconsistent with the intent of the Act.
B. The Proposed Change in the Predatory Lending Standard Would Perpetuate
Abusive Lending Practices By Failing to Curb Several Other Forms
of Abusive Lending.
The proposed
rule will also change CRA evaluations of predatory lending practices.
Specifically,
under the new rule, if certain specific
evidence is found showing a financial institution or any of its affiliates,
in approving or denying loan applications, "engaged in discriminatory,
illegal, or abusive credit practices in connection with certain loans,"11
such evidence can adversely affect the evaluation of that institution's
CRA evaluation. The agencies contend that this change in the regulation
would "better address abusive lending practices."12
NLC believes
the agencies have provided little basis for this contention. NLC
is concerned
that the proposed anti-predatory lending screen
will actually perpetuate abusive lending practices by shielding banks
from the consequences of abusive lending. The agencies have proposed
a standard that evaluates lending based on foreclosure value alone.13
In other words, a bank's performance evaluation will only be down-graded
if evidence is found connecting the bank's home mortgage and secured
consumer loans to "a pattern or practice of lending based predominately
on the foreclosure or liquidation value of the collateral by the
bank (or affiliate, as applicable). . . ."14 This is assuming
the agencies also determine the borrowers in question cannot be expected
to make the payments under the terms of the loan.15 NLC believes
this asset-based standard falls short of curbing abusive lending
practices
because it fails to cover many other instances of predatory lending.
For example, under the proposed rule, abusive lending practices would
not result in lower CRA ratings in situations where the practice
strips equity without leading to delinquency or foreclosure. This
generally happens when a borrower has sufficient income to pay on
the terms of the note, but where the terms also contain excessive
fees or unnecessary products (such as disability insurance) that
make it difficult for the borrower to build equity and wealth in
the collateral.
CRA exams will
continue to allow abusive lending practices if the proposed predatory
lending
standard does not expressly address problems
associated with fee packing, high prepayment penalties, loan flipping,
mandatory arbitration, and other abuses. 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 the convenience and needs of low- and moderate-income
communities. Therefore, the rule is not consistent with the purposes
of the Act.
C. The Agencies Have Missed an Opportunity to Update Exam Procedures.
NLC is concerned that the agencies missed an opportunity to close
certain loopholes in the current CRA regulations. For example, under
the proposed rule, banks will still be able to include or exclude
affiliates at their option. Consequently, regulated financial institutions
will be able to exclude from CRA review those affiliates that do
not serve low- and moderate-income borrowers. Worse, these institutions
may continue to exclude from review those affiliates that engage
in predatory lending practices. The result is that many underserved
communities and individuals will not benefit from the intended protections
of the Act. This situation can only be remedied if the federal agencies
require banks to subject all their affiliates to CRA review.
Finally, NLC is concerned that the proposed rule does not address
the current need to update assessment areas so that geographic areas
beyond bank branches are included. Today, it is not uncommon for
many banks to have a considerable number of loans within their portfolios
with borrowers outside the geographic territory of their branches.
Under current rules, the agencies do not scrutinize through CRA exams
non-branch lending activities. This situation fosters an environment
that allows many financial institutions to continue predatory lending
practices without the specter of regulatory penalty consequences.
IV. Provisions to Enhance Data Disclosure are Important Steps Toward
Improving Consumer Ability to Evaluate Bank Service to Low- and Moderate-Income
Communities.
The agencies propose to change the regulatory structure of CRA
related to data disclosure in an effort to enhance "data disclosed
in CRA public evaluations and CRA disclosure statements."16
Specifically, the agencies 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.17 The agencies also propose to report separately on CRA exams
purchases from loan originations.18 Moreover, they will begin reporting
separately high
cost lending (per the new Home Mortgage Data Act (HMDA) data requirements
starting with the 2004 data).19 NLC believes these changes will
improve the ability of
consumers to determine if banks are serving traditionally neglected neighborhoods
with small business loans.
Still, NLC believes these changes do not go far enough because
the federal agencies do not propose to utilize the data enhancements
in order to make CRA exams more rigorous. To make these changes truly
useful, the agencies must not merely report the new data on CRA exams,
but must also use the new data to give less weight on CRA exams to
high cost loans verses prime loans and assign less weight for purchases
verses loan originations.
V. Conclusion.
NLC opposes
exceptions or loopholes that allow financial institutions to "opt-out" of complying with the comprehensive three-part
evaluation of CRA. The provisions contained in the proposed rule
streamlining exams for certain institutions and modifying anti-predatory
lending standards are contrary NLC policy. NLC believes the proposals
significantly threaten the CRA’s statutory purpose of encouraging
financial institutions to serve the needs and convenience of underserved
individuals and communities.
NLC urges the agencies to include local branches and subsidiaries
in CRA examinations and ratings; conduct CRA reviews on a community
basis; and apply and standardize uniform CRA evaluation ratings and
procedures to all lending and other financial institutions.
Conceptually, NLC views the proposed data enhancements as one step
in the right direction. However, those enhancements do not begin
to make up for the significant harm caused by the other proposals
contained in the rule. Moreover, such data enhancements would be
much more meaningful if the agencies updated procedures regarding
assessment areas, affiliates, and the treatment of high cost loans
and purchases on CRA exams.
Because the proposed rule weakens CRA regulatory oversight of many
financial institutions, NLC opposes the joint rule and asks the agencies
to consider withdrawing it. NLC, however, looks forward to working
with the agencies in the future to develop new CRA regulatory structures
that better and more efficiently address the needs of the financial
services industry and the communities they serve.
Again, thank you for this opportunity to comment. Please feel free
to contact Jon P. Heroux, Senior Legislative Counsel, at (202) 626-3025
or heroux@nlc.org for further input or questions.
Sincerely,
Don Borut
Executive Director
_____________________
1 Community Reinvestment Act of 1977, 12 U.S.C. 2901 et. seq.
2 12 U.S.C.S. § 2901(a)(1)
3 12 U.S.C.S. § 2901(a)(2)
4 12 U.S.C.S. § 2901(b)
5 Community Reinvestment Act Regulations, Joint Notice of Proposed Rulemaking,
69 Fed. Reg. 5729, 5731 (Feb. 6, 2004).
6 42 U.S.C.S. § 256, et. seq.
7 About the Low Income Housing Tax Credit, Danter Company, http://www.danter.com/taxcredit/about.htm
8 42 U.S.C.S. §2901(b)
9 69 Fed. Reg. at 5734. See also, 12 C.F.R. §25.24 (d)(1)-(4)
10 12 U.S.C.S. § 2901(a)(1)
11 Community Reinvestment Act Regulations, 69 Fed. Reg. 5729 at 5729
12 Ibid.
13 See 69 Fed. Reg. at 5744, 5745, 5746. (e.g., §25.28(c)(1)(ii)).
14 Ibid.
15 Ibid.
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