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GEODATAVISION Robert E. Feldman, Executive Secretary
Attention: Comments, Federal Deposit Insurance Corporation
Re: NPR regarding the Community Reinvestment Act Regulations
February 28, 2004
Dear Sirs,
GeoDataVision is a consulting firm, that among various services,
provides consulting advice and analysis to community banks to help them
analyze and meet their performance responsibilities under the CRA. We
utilize advanced Geographic Information Systems technology to assist us
in this task. We also have assisted community and consumer advocacy
groups in the evaluation of market data reported under CRA and HMDA.
Accordingly, we have a perspective from experience serving "both sides
of the street" in the debate over CRA and its modification. We offer our
comments on the proposed changes as follows:
Revisions to the definition of "small institution" within the
Community Reinvestment Act
The proposed modification of asset size to increase to $500 million
is largely based on the intention to "reduce unwarranted burden". We
believe that the only relief provided by the proposed change would be
the alleviation of the investment and service test requirements as
applied to institutions that would fall into the $250 million to $500
million range. There would be no benefit or relief with respect to the
so-called "Lending Test" which is the primary test upon which all
institutions' CRA performance is evaluated by regulators.
Even "small institutions" are expected to understand and provide for
the need for credit services within their assessment areas and to prove
they are meeting that need. This means that any institution is expected
to maintain a database by which it can monitor its performance,
regardless of whether the institution is required to report such data.
The primary burden of reporting and non-reporting institutions is the
creation and maintenance of such databases, without which it is
impossible to assess performance. Small institutions are expected to
meet the Lending Test standards, although they are not required to
report their data to regulators. Ironically, the reporting of data is
only the last and least costly step in the monitoring process. Moreover,
relief from this annual responsibility may actually be more costly in
the long run because it encourages the small institutions to defer the
maintenance of the necessary databases until their next CRA exam. We
believe no institution's best interests are served by relief from
reporting information critical to its performance evaluation. The added
step of reporting information is only a fraction of the cost of
capturing and maintaining the information (most of this data is already
collected by readily available software designed to comply with
reporting requirements anyway).
We also point out that all states also have adopted their own
versions of the Community Reinvestment Act. Often these state CRA's
require the maintenance of information more expansive than the federal
CRA. For example, Connecticut requires the maintenance of loan
information pertaining to all loans made, not just mortgages reported
under HMDA and small business loans reported under CRA. Connecticut's
Department of Banking specifies a format in which that data must be
maintained for banks of all sizes. Thus, even small institutions are
required to maintain a database much larger in scope than required by
the federal CRA. If small banks, under state CRA's are going to have to
maintain even more data than that mandated by federal CRA regulations,
what reduced burden is obtained by relaxing merely reported information
under the federal CRA? We think the benefit is minimal at best. At
worst, the omission of the reporting requirement may hurt small
institutions who, due to lack of manpower, may be encouraged to postpone
the implementation of their self-assessment process.
We also believe that many small banks (meaning under $1 billion)
frequently are confused by what is reported and what is not reported
under federal CRA. Given that many of these banks are already required
to maintain databases on consumer and other business loans under their
state CRA, we advocate the reporting of all loans under federal CRA.
Consumer loans are an important financial service rendered by most banks
to their community. Why should these loans not be reported under federal
CRA? Moreover, there is considerable confusion regarding small business
loans as reported under the current CRA. In particular, many
institutions do not report loans to small businesses that involve
residential real estate as collateral. The present regulations appear to
require the reporting of such loans when the collateral secures a
guarantee or is taken as an "abundance of precaution", but not when it
secures the loan itself. Since residential real estate may frequently be
taken as collateral to secure a small business loan, many small business
loans may never be reported. Nevertheless, the loan proceeds are to
finance a small business. Why should billions of dollars of small
business loans and consumer loans be omitted from consideration about an
institution's meeting the credit needs of its community? Moreover, many
institutions maintain information about non-reported loans, not only
because of state requirements, but because federal regulations allow the
bank the option to include such loans in a federal CRA exam. In other
words, larger lenders who maintain the optional information have an
advantage over smaller lenders who do not. This is a double-standard
that favors larger and more sophisticated lenders. The playing field
should be level. We suggest that requiring all loans to be reported
prevents the under-reporting of significant credit services provided by
banks to the community, equalizes the performance standards of all banks
and will entail minimal extra burden on banks.
We do believe that raising the asset size threshold by which an
institution is subject to the "Investment" and "Service" test would have
a salutary impact on small institutions' burden as intended by the
proposed revisions. The limited resources of small institutions makes it
very difficult to commit the investment in bricks and mortar implied by
the Service test. Moreover, many small institutions cannot compete with
mega-institutions with respect to qualified investments. We have
observed time and again, many situations in which banks under $1 billion
were outbid for qualified investments by big lenders who used their
"muscle" to get first opportunity to qualified investments or simply
outbid their smaller counterparts in an aggressive strategy to meet
their CRA investment standards. Currently there is no reporting
requirement under these tests, so it is impossible to refer to public
information regarding this issue. However, it has been our experience
serving many community banks that the Investment test is particularly
burdensome. At the very least, we encourage relief from the Investment
test. We suggest that the CRA be modified to impose the Investment and
Service tests only on institutions whose asset size exceeds $1 billion
because the primary service provided by small institutions is credit,
i.e., loan service.
Proposed Change in Data Collection and Reporting
The proposed revisions indicate, "The agencies intend to revise the
regulations, however, to enhance the data disclosed to the public. . .
As we intend to revise the regulations, they will provide that the
Disclosure Statement would contain the number and amount of the
institutions's small business and small farm loans by census tract." We
strongly support this change. First, the current lack of geography
disclosure makes it very difficult, if not impossible, to judge an
institution's performance under this crucial "performance context"
parameter. Second, the disclosure by geography detail is available for
mortgages under HMDA, but not for small business loans under CRA. Thus,
there is an inconsistency in the regulations. Third, the purported
reason for not disclosing CRA reported loans by geography, the "risk of
unwarranted disclosure of otherwise private information" (i.e., the
protection of the lenders themselves) is contrary to the best interest
of the community (and small businesses) which is the promotion of
competition among lenders. Fourth, many of our small bank clients have
asked for this information to help them assess the market for this vital
credit service. In other words, the "private" parties whose interest the
current policy "protects" from disclosure, have themselves asked for the
disclosure of this information.
We note however, that the proposed language to effect the disclosed
information does not appear to disclose "the number and amount of the
institution's small business and small farm loans by census tract" as
explicitly explained in the "Proposed Rules" published in the Federal
Register, Volume 69, No. 25. We note the language in section 25.42 of 12
CFR Chapter 1, Part 25 (Office of the Comptroller of the Currency, as
well as the related Community Reinvestment Act regulations for the
Federal Reserve, the FDIC and the Office of Thrift Supervision) "Data
collection, reporting and disclosure," requires the OCC (and other
agencies as per above) to prepare for each reporting bank annually, "(i)
The number and amount of small business and small farm loans reported as
originated or purchased by geography, grouped (emphasis added) according
to whether the geography is low-, moderate-, middle- or upper- income"
and (ii) a list showing each geography in which the bank reported a
small business or small farm loan . . ." This language seems to repeat
the current disclosure practice of grouping loans by tract income
category for each lender. Provision (ii) seems to suggest a mere listing
of "each geography in which the bank reported a small business or small
farm loan" without disclosing the number and volume of the bank's loan
activity by geography. We suggest the language clarify the intention of
disclosing information including the number and value of loans
originated for each and every census tract by each reporting lender.
We also support the disclosure of the relative amount of lending
inside and outside the reporting lender's assessment area, since this is
a very important component of the Lending Test. However, we also
encourage the requirement of including the description of the assessment
area in the Annual CRA Disclosure Statement released by the FFIEC. This
information is available by inspection of the public file of each
reporting lender, but is not included with the release of the annual
data making it impractical to analyze how many institutions have
included a MCD or tract within their defined market. This would be an
important piece of information in the determination of what communities
are "underserved" by lenders who have omitted those communities as part
of their market. If this information were available electronically as
part of the overall CRA database, it would be possible to analyze the
extent to which communities and neighborhoods are targeted by banks as
part of their market.
We submit these thoughts with the hope they will contribute to an
improvement in the regulations and the ability of banks to identify and
serve the need for financial services in their communities.
Respectfully,
GeoDataVision
Leonard Suzio, President
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