CONSUMER BANKERS ASSOCIATION
April 6, 2004
Communications Division
Office of the Comptroller of the Currency
250 E Street, SW
Washington, DC 20219
Regs.comments@occ.treas.gov
Ms. Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th St. and Constitution Avenue, NW
Washington, DC 20551
Regs.comments@federalreserve.gov
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
comments@fdic.gov
Regulation Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Regs.comments@ots.treas.gov
Re: Proposed Revisions to the Community Reinvestment Act Regulations
OCC: Docket No. 04-06
FRB: Docket No. R-1181
FDIC: 12 CFR 345
OTS: No. 2004-04
Dear Sir or Madam:
The Consumer
Bankers Association (CBA)1 appreciates the opportunity to comment
on the joint notice
of proposed rulemaking (“the
Proposal”) of the above-named agencies (“the Agencies”)
to amend the Community Reinvestment Act (CRA). CBA commented on the
Advance Notice of Proposed Rulemaking (ANPR) that the Agencies issued
on July 19, 2001.
In our comments
on the ANPR, we stated our view that a whole new CRA “reform” process
of the type undertaken a decade ago would be counterproductive,
as it would lead to a major disruption
in the operations of financial institutions and that any resulting
benefits would be at too great a cost. The Agencies have clearly
paid close attention and are limiting the proposed changes to a few
discrete areas.
In our comments on the ANPR we also suggested that much of what
was under consideration could be better addressed through the exam
process and the performance context and amending the exam guidelines,
rather than in a rulemaking. Again, we are gratified that the Agencies
have listened and will be seeking ways to improve the guidelines
and the examination process to fine-tune the regulation.
We will limit our comments to the following proposed changes:
(1) Credit Terms and Practices. Evidence that an institution, or
any affiliate whose loans are included for CRA consideration, has
engaged in specified discriminatory, illegal or abusive credit
practices in connection with certain loans, will adversely affect
that institution’s CRA evaluation;
(2) Public Performance Evaluations. Change the public disclosure
of data in the CRA public evaluations and disclosure statements related
to providing information on loan originations and purchases, HOEPA-covered
and HMDA “high cost” loans, and affiliate loans.
Our comments on these proposed changes follow:
Credit Terms and Practices
The CRA regulations
provide that discriminatory or other credit practices may affect
an institution’s CRA rating. The Agencies
are now proposing to amend the regulations to “enhance how
the CRA regulations address credit practices that may be discriminatory,
illegal, or otherwise predatory and abusive.”
The Proposal
would identify, in the regulations, examples of certain violations
of law that
will adversely affect an agency’s evaluation
of an institution’s CRA performance. The regulations
would provide a list, deemed to be illustrative and not exhaustive,
of
such practices. The list would be the following:
(i) Discrimination against applicants on a prohibited basis in violation,
for example, of the Equal Credit Opportunity Act or the Fair Housing
Act;
(ii) Violations of the Home Ownership and Equity Protection Act;
(iii) Violations of section 5 of the Federal Trade Commission Act;
(iv) Violations of section 8 of the Real Estate Settlement Procedures
Act; and
(v) Violations of the Truth in Lending Act provisions regarding
a consumer’s right of rescission.
These are described
as being the “types of illegal and discriminatory
credit practices” that will be considered. In addition, according
to the Supplementary Information, “[e]vidence of violations
of other applicable consumer protection laws affecting credit practices,
including state laws if applicable, may also adversely affect the
institution’s CRA evaluation.”
These practices
would adversely affect an institution’s evaluation
in connection with home mortgage lending, small business and small
farm lending, consumer lending (whether or not the institution elects
to have it considered in its evaluation) and community development
lending. The practices would be considered regardless of whether
they involve loans in the institution’s assessment area(s)
or in any other geographical location. They would also be considered
if engaged in by any affiliate (whether an operating subsidiary or
a subsidiary of the holding company) provided that any loans of that
affiliate have been considered for CRA evaluation. Such practices
by an affiliate, however, would only be considered within the institution’s
assessment area(s).
According to
the Supplementary Information, “[t]he agencies
will consider all credible evidence of discriminatory, other illegal,
or abusive credit practices that comes to their attention. Such information
could be obtained from supervisory examinations …, CRA comments
in connection with applications for deposit facilities, and public
sources.”
We are certainly mindful of the need to protect consumers from abusive
and predatory lending practices. We are very supportive, for example,
of the steps that the OCC has taken to adopt rules and guidance that
assists national banks and their operating subsidiaries in maintaining
lending products and practices that are in all ways responsible and
above reproach. We also believe that efforts to promote better financial
literacy can help shield the more vulnerable consumers from the worst
forms of financial abuse. CBA has surveyed our members for the past
several years, and the results demonstrate a strong commitment to
education in finance. It is appropriate that CRA consider these practices,
as well as the other positive steps being taken by financial institutions
to provide affordable loan products and other innovative ways of
bettering the communities they serve.
Nevertheless,
we believe that the approach being proposed here is not appropriate
for CRA
and is fraught with problems. The use of
CRA for this purpose, though obviously well-intentioned, is a continuation
of the tendency we have witnessed over the years since its enactment
to employ CRA as a compliance vehicle rather than an opportunity
to promote community development. CRA is intended to determine whether
financial institutions are helping to meet the credit needs of the
communities they serve, including low- and moderate-income communities,
consistent with safe and sound banking. The original idea was to
ensure that low- and moderate-income communities, in particular,
not be used as a source of deposits for financial institutions that
would fail to provide their credit needs. It was not Congress’s
intention to have the regulatory agencies download the entire consumer
compliance examination process into CRA, making CRA, in effect, a
super-compliance oversight review process. Under the Proposal, every
product and practice of the institution that has already been subject
to a thorough audit for compliance (as well as safety and soundness)
would become part of the CRA process. It would move from a bird’s
eye view of each institution’s quantity and distribution of
lending and investments to a microscopic analysis of each individual
loan product. It is but a short step from this Proposal to a determination
of whether each and every loan meets the needs of the individual
customer—i.e. whether it is suitable for the customer.
In principle,
we have no objection to the Agencies finding fault with institutions
that
engage in a pattern or practice of mortgage
or consumer lending based predominantly on the foreclosure or liquidation
value of the collateral, where the borrower cannot be expected to
be able to make the payments required under the terms of the loan.
As you have noted, both HOEPA and the recent OCC regulations have,
in one form or another, prohibited this practice, and we assume that
the other bank regulatory agencies would similarly frown on this
form of “equity stripping.” Our concern is rather with
the inclusion of this as an element of CRA. This practice is already
subject to scrutiny and enforcement as either a safety and soundness
violation or a compliance violation. There is no additional benefit
to including it in CRA as well.
We have the same
basic objection to the inclusion of numerous compliance violations
under
the CRA umbrella. We do not endorse or support a
single one of the compliance violations listed in the Proposal; however,
each is already identified with a regulation or statute that already
assesses penalties, whether civil or criminal, and is subject to
administrative enforcement. When HOEPA, RESPA, TILA, and the rest
were enacted, Congress established the penalties for violations that
it viewed as appropriate for each. If they are also CRA consequences
because of the impact on the ratings—which may even include
loss of powers under the Gramm-Leach-Bliley Act—the penalties
substantially increase. If a creditor fails to provide the correct
notice regarding the 3-day right of rescission under TILA, for example,
the consumer already has the right to rescind, pay nothing and be
made whole for up to 3 years! Why is it necessary also to include
it as part of CRA?2 Civil liability and the possibility of criminal
liability for willful and knowing violations; regular examination
for compliance and the prospect of administrative enforcement with
cease and desist orders, restitution and monetary penalties; are
all lying in wait for those who engage in violations of most of the
compliance laws that would now become part of the CRA review as well.
This is well beyond anything Congress could have envisioned when
it enacted CRA or the consumer compliance laws.
In fact, the
language of the Proposal suggests that a single violation of one
of these
compliance laws “will affect” the performance
evaluation under CRA (since the asset-based lending provision mandates
a pattern or practice, but the other enumerated violations do not).
A typical large financial institution with tens or hundreds of thousands
of mortgage or consumer loans will generally have many such inadvertent
violations, notwithstanding procedures in place to prevent them.
The Proposal does not offer any flexibility to find such violations
de minimus or technical in nature, nor to allow for an acceptable
rate of error. In short, if this is adopted, CRA could well evolve
into the strictest and least forgiving compliance regulation, and
CRA examiners become super-compliance auditors.
The Proposal
also raises serious questions about the expansion of CRA outside
of the financial
institution’s assessment area.
The Proposal does not seek to extend the coverage of affiliate activities
outside of the assessment area, even where the affiliate’s
loans are being considered. This is appropriate. Yet it is prepared
to consider compliance violations by the financial institution wherever
they might occur, even if it is only loans within the assessment
area that are being considered. In their own discussion of assessment
areas in the Supplementary Information accompanying the Proposal,
the Agencies rightly point to the important historical relationship
of CRA to assessment areas. The proposal is one more step toward
the undoing of that relationship.
Although the
Supplementary Information states that this is not intended to be
a substantive
change in CRA, we cannot agree. The impact of
the Proposal would be considerable. If violations of these enumerated
laws, at least, will adversely affect CRA performance, numerous troubling
questions will arise that the Agencies will need to address. For
example, what constitutes “evidence of a violation” such
that it will impact CRA performance evaluations? What is the relationship
of a violation of any particular compliance law to the CRA rating?
Do different violations have a different impact on the evaluation?
What other illegal credit practices are of the same “type” as
those in the illustration? Can an institution find, retroactively,
that some other consumer compliance violation will affect its CRA
performance? What state laws will also affect CRA and how is an institution
supposed to know (the Proposal says state laws will affect CRA “if
applicable”)?
These are but a few of the serious questions that are raised by
the Proposal. We doubt that it is the direction the Agencies wish
to go and we respectfully request that this portion of the Proposal
be reconsidered.
If the Agencies choose
to go forward notwithstanding these objections, it is critical
that the consideration of illegal activities be more
limited and defined. Compliance management and CRA management (merged
as they will inevitably become) will be impossible without limits
such as the following:
• The
violations that are considered must be restricted to the activities
of the financial institution
itself or an affiliate
whose loans are
being considered;
• They must have occurred during the period of time under consideration;
• They must have occurred within the assessment area(s) of the financial
institution.
• Mere evidence of violations should not be sufficient, but rather
a determination made pursuant to an examination; and
•
There should be a finding that a pattern or practice of such violations
has occurred sufficient to affect the institution’s overall
impact on the community it serves.
Public Performance Evaluations
In order to make
it “easier for the public to evaluate the
lending by individual institutions,” the Agencies propose to
draw new distinctions in the public performance evaluations. These
include identifying those loans that are subject to HOEPA, those
that are over the reporting threshold for rate spread information
under HMDA, as revised, and those that are purchased versus those
that are originated by the institution. The Agencies seek comment
on the extent to which these enhancements of the public information
will make the evaluations more effective in communicating to the
public an institution’s contribution to meeting community credit
needs.
We oppose this change because we believe that the distinctions being
drawn create the impression that the Agencies view purchased loans,
HOEPA loans, and loans over the HMDA threshold for data spread reporting
to be in some way less favorable than others.
Although the Proposal would not give less weight to these types of
loans, we believe such a change would inevitably follow, as the public
display of the distinction would lead to a difference in perception
and ultimately a difference in treatment.
Purchased loans
are as valuable in their own way as originated loans. As we stated
in
our comments on the ANPR, where the Agencies first
suggested that purchased loans might be given less weight: “Not
only is there no statutory basis for making this distinction, but
we maintain that the public benefits of purchasing loans may be under-appreciated.
There is little doubt that the availability of capital for secondary
market purchases of mortgages has vastly enhanced their availability
and affordability.” By distinguishing in the public performance
evaluation between originations and purchases, the Agencies would
be implying—without actually stating—that the distinction
is significant to the manner in which CRA is or ought to be evaluated.
We can see no other reason to make a point of separating the categories
in the public evaluation.
HOEPA loans and loans over the new HMDA threshold are becoming de
facto measures of subprime lending, in the absence of other clear
delineations. Subprime lending, in turn, is often mistakenly treated
as a surrogate for predatory or abusive lending. They are both merely
categories of loans that meet a threshold test based on pricing,
which is tied to risk. By drawing distinctions in the public evaluation,
we believe the Agencies would only be encouraging this mistaken characterization
and therefore a lesser CRA weighting, either objective or subjective,
of this category of loans. The data are already available as part
of HMDA reporting, and to break them out here as well is to suggest
falsely that there is some significance to the information for CRA
purposes.
Review of Interagency Guidance
Specific places in the regulations where the Agencies indicate they
may undertake additional review of the interagency guidance include:
--How qualitative considerations should be employed and balanced
against quantitative measures.
--Clarifying that the Investment Test is not intended to be a source
of pressure on institutions to make imprudent equity investments.
Such guidance may also discuss (1) when community development activities
outside of assessment areas can be weighted as heavily as activities
inside of assessment areas; (2) that the criteria of “innovative” and “complex” are
not ends in themselves, but means to the end of encouraging an institution
to respond to community credit needs; (3) the weight to be given
to investments from past examination periods, to commitments for
future investments, and to grants; and (4) how an institution may
demonstrate that an activity’s “primary purpose” is
to serve low- and moderate-income people.
--The appropriate weight to be given to brick and mortar versus alternative
delivery systems in the Service Test.
--The appropriate treatment of assessment areas, particularly for
nontraditional institutions.
Many of these
are areas we have encouraged the Agencies to address further in
the context of the examination guidance. CBA and the CBA
Community Reinvestment Committee would be very pleased to work with
the Agencies as they consider these issues. As we have stated before,
we believe that industry should be more involved in providing technical
advice and support as the Agencies develop the guidelines that will
become part of the examination process.
Thank you once again for the opportunity to present our views. If
you have any questions or would like additional comment on any of
these issues, please do not hesitate to contact us.
Very truly yours,
Steven I. Zeisel
Senior Counsel
Consumer Bankers Association
______________________________________
1 The Consumer Bankers Association is the recognized
voice on retail banking issues in the nation's capital. Member institutions
are the leaders in consumer financial services, including auto finance,
home equity lending, card products, education loans, small business
services, community development, investments, deposits and delivery.
CBA was founded in 1919 and provides leadership, education, research
and federal representation on retail banking issues such as privacy,
fair lending, and consumer protection legislation/regulation. CBA
members include most of the nation's largest bank holding companies
as well as regional and super community banks that collectively hold
two-thirds
of the industry's total assets.
2 It is particularly hard for us to understand why violations
of RESPA’s section 8 and the TILA right of rescission were sufficiently
relevant to CRA
or “predatory lending” to be chosen for inclusion in the short list
that will affect CRA. Since these are intended to be representative examples
of violations that would be of concern, it would be helpful to understand what
they have in common and what bearing they have on lender’s efforts to
meet community credit needs.
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