Leadership Council for Metropolitan Open Communities
Brian C. White
Director for Community Relations
Leadership Council for Metropolitan Open Communities
111 W. Jackson Blvd, 12th Floor
Chicago, IL 60604
April 6, 2004
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th St NW
Washington DC 20429
Re: Opposition to Proposed Changes in CRA
Dear Mr. Feldman,
I am writing from the Leadership Council for Metropolitan Open Communities
in Chicago to comment on the proposed changes to the regulation of
the Community Reinvestment Act. The Leadership Council is a private,
non-profit fair housing organization that works to eliminate patterns
of segregation and discrimination in the metropolitan Chicago area.
We were founded in 1966 as a direct product of the Chicago Freedom
Movement campaign for open housing led by Dr. Martin Luther King,
Jr. and other civil rights leaders.
Since our founding, we have fought against redlining, discrimination
and predatory lending. We have also invested a tremendous amount
of energy working with banks to promote investment in minority and
low- and moderate-income communities, develop innovative products
and services, and stand with us against abusive practices. The Community
Reinvestment Act is an important tool for low- and moderate-income
communities. We feel that if but for a strong CRA, the level of investment
in our communities would be far less than what we see today. The
proposed changes to the CRA regulation significantly threaten continued
or new community reinvestment by small and midsize banks. Further,
the proposed changes fail to close loopholes and modernize the CRA
regulation. We thus would call on the Office of Thrift Supervision
to not adopt the proposed changes and to implement instead specific
improvements outlined below.
Small Bank Limits
The proposed CRA regulation would change the definition of “small
bank” from any institution with less that $250 million in assets
and not part of a holding company with over $1 billion in assets
to include all institutions with less than $500 million in assets
regardless of holding company size. This change will dramatically
increase the number of banks considered “small” that,
for CRA purposes, are examined under the streamlined small bank CRA
examination. This exam, as you know, does not evaluate banks for
their levels of community investment and services.
This change will disproportionately effect rural communities and
small cities where smaller institutions have significant market share.
In Illinois, it will reduce the number of institutions covered by
the comprehensive CRA exam by 63 percent, from 198 banks to 74. However
in rural areas or small cities, the number of institutions covered
by comprehensive CRA will decline by nearly 73 percent. In these
communities, many of which are already struggling from recent and
historic disinvestments decisions, banks will have less incentive
to provide innovative investment opportunities and services to community
residents.
By removing the holding company threshold from the definition of
small bank, regulators will create a loophole for large holding companies
seeking to legally evade compliance with the spirit of CRA. Under
the proposed changes, large holding companies will likely re-constitute
their banking subsidiaries as a series of local “small banks” to
avoid comprehensive CRA examinations. A bank like Harris Trust and
Savings, which currently has 26 separately chartered institutions
in the Chicago area totaling over $30 billion in assets, would find
that 19 of its institutions would be considered “small” under
the new CRA regulation despite being part of Bancmont Financial Corp,
a holding company with over $39 billion in assets in the United States.
Of those Harris institutions not covered, at least three serve communities
with significant low-income or minority populations.
Affiliate Lending and Assessment Areas
Regulators also are forgoing a significant opportunity to modernize
CRA by not requiring affiliate lending to be considered in CRA exams.
As bank holding companies increasingly use non-bank lenders to originate
mortgages, it is critical that all lending affiliates be required
to report lending in an institution’s CRA exam. As currently
structured, the CRA regulation allows banks to choose which affiliate
loans in a given assessment area they want to apply toward the lending
test. This allows institutions to cherry pick the best lending affiliates
for each assessment area and exclude affiliates in assessment areas
where those affiliates might not be adequately serving the community.
As holding companies increasingly acquire non-bank lenders, including
subprime lenders, it is critical that regulators close this loophole
and that all lending affiliates be considered in CRA exams.
Additionally, we were disappointed to see that there was no change
to how assessment areas are considered. As technology and regulatory
policy has advanced to allow financial institutions to conduct business
through channels other than traditional branches, CRA has not advanced
with it. For example, a recent publication of the Woodstock Institute,
a leading CRA watchdog, shows that insurance banks conduct over 75
percent of their lending outside of their CRA assessment areas. None
of this lending is considered in these institutions’ CRA exams
and there is no accountability to ensure that these banks are making
loans in low- and moderate-income communities or to minorities that
might otherwise benefit from this lending activity..
Predatory Lending Standard
Regulators also missed a significant opportunity to make a strong
statement about predatory lending. The proposed standard allows that
loans originated based on foreclosure value of collateral rather
than borrower ability to repay can negatively affect a bank’s
CRA exam. This standard misses numerous predatory practices such
as packing exorbitant fees onto mortgage loans, loan flipping, charging
high prepayment penalties, and mandatory arbitration that can strip
equity from homeowners and trap borrowers in abusive loans. Regulators
should apply a strong predatory lending standard to bank loans and
to loans made by affiliates.
Data Disclosure
We welcome additional data disclosures on CRA exams, but feel the
data need to be more fully considered in evaluations to be truly
effective. Specifically, we support adding data to CRA exams to differentiate
between the share of bank and affiliate loans that are originated
and purchased and those which are high interest rate and HOEPA loans,
but these loans should not be weighted equally. Originated, lower
interest rate, and non-HOEPA loans should be given more weight. The
purpose of CRA is to stimulate conventional lending in underserved
areas; allowing banks to boost CRA performance by purchasing loans,
particularly loans that may not be in the best interest of the borrower,
runs counter to the intent of CRA.
The Leadership Council appreciates the opportunity to comment on
these proposed changes and looks forward to continuing our work ensuring
that banks have the incentives and the encouragement to invest in
underserved low- and moderate-income communities.
Sincerely,
Brian C. White
Director for Community Relations and
Chair, Chicago CRA Coalition Housing Task Force
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