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National NeighborWorks® Association
March 31, 2004
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Dear Officials of Federal Bank and Thrift Agencies:
I am writing on behalf of the National NeighborWorks® Association (NNA),
a national association of over 160 NeighborWorks® community development
organizations, to voice our opposition over several elements of the
proposed changes to the regulations governing the Community Reinvestment
Act (CRA). NNA commented in October 2001 in response to the Advance
Notice of Proposed Rulemaking (ANPR) and appreciates the opportunity to
provide additional feedback regarding CRA.
While we agree with the agencies’ stated goal of updating CRA
regulations to keep pace with changes in the financial services
industry, we believe that such an update should be aimed at
strengthening and broadening the reach of CRA as opposed to retracting
it as is suggested by the proposed rule. We appreciate this opportunity
to comment on the proposed rule and to share with you how NNA members
have effectively used CRA to cultivate relationships with financial
institutions and ensure that a full range of financial services and
products are available to residents of the low and moderate income
communities we work in.
NNA is a non-profit organization that advocates for better
neighborhoods and housing for low- and moderate-income Americans. NNA is
made up of more than 160 NeighborWorks® organizations (NWOs) that use
Neighborhood Reinvestment Corporation’s funds to leverage private
dollars to create new homeowners, revitalize distressed communities, and
build single family and multi-family housing for low- to moderate-income
families. All NWOs are committed to assisting low- and moderate-income
individuals and families recognize the dream of becoming homeowners and
living in safe and stable neighborhoods.
CRA has been a vital to the work of NWOs in our network. CRA not only
provides an incentive for financial institutions to develop relationship
with NWOs and other community based organizations, but it is also a
critical force in maintaining these relationships and in keeping banks
committed to providing services and products to residents in low and
moderate income communities.
THE IMPORTANCE OF CRA TO NNA MEMBERS
CRA opens the door for productive and responsive relationships
between community-based organizations, like NWOs, and the banking
industry. These relationships have helped to yield outstanding results
in communities served by NWOs. Since 1996 the NeighborWorks® Campaign
for Home Ownership has assisted 70,000 households to become homeowners,
89 percent of whom were low- or moderate-income and provided
homeownership counseling to over 420,000 individuals. These impacts
could not have been achieved without the participation of bank partners.
Spurred by CRA requirements, lenders frequently work with NWOs to
capitalize existing loan pools or create new products designed
specifically to target an underserved market niche. For example, in
Reading, Pennsylvania, a lender looking to improve its CRA rating
approached the Neighborhood Housing Services (NHS) of Reading to develop
a new product designed to assist low-income families purchase and
rehabilitate their homes. This product met a clear community need and
implied a greater risk for the bank and if not for CRA it is unlikely
that the bank would not have collaborated to create such a product.
Countless NWOs in NNA have had similar experiences using CRA as a
leverage to expand the availability of bank products and services in the
communities we serve. We can point to the Syracuse NHS, Boise NHS, NHS
of Silicon Valley, Chattanooga Neighborhood Enterprises and NHS of Los
Angeles.
Not only has CRA spurred lenders to provide more appropriate
products, it has also encouraged lenders to become more involved in
community education efforts. In Chicago, lenders provide support to the
NHS of Chicago’s homebuyer education courses; in St. Louis, lenders
provided financial support for a financial literacy courses.
PREDATORY LENDING
While we applaud the agencies’ desire to develop CRA standards
designed to curtail abusive lending practices, we are concerned that the
proposed rule as drafted will not have the effect of actually preventing
the practices we see perpetuated by predatory lenders in our
neighborhoods.
If abusive lending practices are allowed to continue, community-based
organizations, like NWOs, will continue to act as the safety-net for
victims of predatory lending and, with increasing frequency, many NWOs
will find themselves detracted from their core mission in order to
address the emergencies created by abusive lenders.
NNA members see first hand the destruction that predatory lenders can
have on a neighborhood. Local NWOs are often contacted by an individual
or family after they have been victimized by a predatory lender, have
lost their home or are on the verge of losing their home. The abusive
and misleading lending practices of predatory lenders have worked to
reverse the progress made by NWO across the country. As our
organizations are working to encourage homeownership, and help low
income people build assets – predatory lenders are working to strip
these homeowners of their equity and promoting financial products that
erode individual’s assets.
Differentiating predatory lending from responsible subprime lending
must be done carefully. NNA is made up of organizations that are
committed to working with low- and moderate-income individuals who for a
variety of reasons, including poor or non-existing credit histories or
unstable employment background, are unable to secure conventional
mortgage financing. As responsible lenders NWOs work to provide these
consumers with a range of financial services and products to enable them
to become homeowners or rehabilitate their homes. These homeowners would
otherwise be forced to a subprime product. We do this both as direct
lenders as well as by working with conventional lenders.
Responsible subprime lending entails working with a consumer to come
up with a loan product at a price and with terms that appropriately
compensate the lender for risk, inclusion of reasonable return for the
lender, and understandable by and appropriate for the borrower.
For example, the NHS of Chicago created the first-of-its-kind, $2.2
million dollar loan fund to refinance predatory loans and replace them
with a fixed rate, responsible loan product that is affordable and
ultimately returns to the homeowner the equity they had worked for years
to build. The NORMAL Program (Neighborhood Ownership Recovery Mortgage
Assistance Loan) has refinanced 32 loans and has saved homeowners nearly
$1 million in reduced principal, waived fees, and penalties.
We believe that the proposed rules must go further to ensure that
this type of responsible lending is encouraged while at the same time
putting an end to the practices that are clearly abusive and not
developed with the well being of the consumer in mind – such as charging
of exceessive fees, loan flipping, pre-payment penalties and other
abusive lending practices.
We encourage the agencies to change the proposed predatory lending
standard. The proposed rule specifies that predatory lending will be
indicated by way of foreclosed value of the collateral, instead of the
ability of the borrower to repay. While this does address the most
destructive form of predatory lending – those ending in foreclosure – it
does not adequately cover all cases of predatory lending.
We believe that all lender affiliates should be subject to CRA
evaluation. Affiliates can erode investments made by its parent company.
While the parent company meets its CRA obligation, an affiliate can
erase those gains with abusive lending practices, resulting in a
zero-sum game. This alternative financing system cancels out CRA’s goal
– that of meeting lower income communities’ credit needs. We encourage
that the agencies to include all affiliates loans when evaluated the CRA
performance.
SMALL INSTITUTIONS
We oppose changing CRA regulations to allow banks with between $250
and $500 million to opt out of the investments and services test that is
currently required of all banks with $250 million or more in assets.
We believe that changing the definition of small institutions will
decrease bank investments and services currently available in low- and
moderate-income communities and will have a particularly negative impact
on rural communities that are particularly reliant on the activity of
smaller financial institutions. As reported in Harvard’s Joint Center
for Housing Studies report The 25th Anniversary of the Community
Reinvestment Act: Access to Capital in an Evolving Financial Services
System, “rural communities are served by smaller banks that are not
subject to the same degree to CRA scrutiny as larger banks and from the
absence of well-developed networks of community-based advocacy
organizations in many rural areas.”
Rural Opportunities, Inc. has experience that confirms this
observation. Forty-six lenders in New York (21 percent of all the
lenders in the state), have assets between $250 and $500 million. They
hold approximately $15.9 billion in assets and they have 244 branches
statewide. These banks also hold about $11.4 billion in deposits. In the
rural areas of New York, nine lenders, or more than 20 percent of the
lenders in these areas, would be affected by the changes. They hold over
$3.16 billion in assets, have 184 branches, and hold almost $9.4 billion
in deposits.
Allowing these lenders to opt out of the investment and services
tests will have a negative impact on investment in low income rural
communities. Access to mortgage products and other retail banking
services will be undermined in the rural areas of the Rural
Opportunities service area.
With the elimination of the investments test, fewer lenders would be
have the CRA incentive to invest in Low Income Housing Tax Credits which
has been a critical source of affordable rental housing and an important
tool used by NWOs in our network. In addition, elimination of the
services test would likely result in decreased bank activity in housing
counseling or Individual Development Account (IDA) programs.
ENHANCED DATA DISCLOSURE
The NNA applauds the move toward enhanced data disclosure on small
business lending, but urges that the proposed rule needs to go further
to ensure this data is actually put to good use in the CRA examination
process.
The federal agencies propose that they 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. This will improve the ability of the general
public to determine if banks are serving traditionally neglected
neighborhoods with small business loans. Also the regulators propose
separately reporting purchases from loan originations on CRA exams and
separately reporting high cost lending (per the new HMDA data
requirement starting with the 2004 data).
The positive aspects of the proposed data enhancements do not begin
to make up for the significant harm caused by the other proposals.
Furthermore, the federal agencies are not utilizing the data
enhancements in order to make CRA exams more rigorous. The agencies must
not merely report the new data on CRA exams, but must use the data to
provide less weight on CRA exams to high cost loans than prime loans and
assign less weight for purchases than loan originations.
Rural Opportunities, Inc. is the only SBA micro loan intermediary
serving rural portions of upstate New York. Access to capital for small
business start up and expansion is a serious issue in both rural and
urban areas and, if fully implemented, the enhanced data disclosure
provisions of the proposed rule can be a powerful tool to increase
access to capital in underserved markets.
Low income communities need access to a full range of financial
services and products, and small institutions play a key role in
providing these services to rural communities. We encourage the agencies
to retain the original definition of small institution.
We appreciate your attention to our concerns.
Sincerely,
Martina Guilfoil
President, National NeighborWorks® Association
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