March 8, 2004
Docket No. 04-06
Communications Division
Public Information Room, Mailstop 1-5
Office of the Comptroller of the Currency
250 E St. SW,
Washington 20219
Docket No. R-1181
Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington DC 20551
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th St NW
Washington DC 20429
Regulation Comments, Attention: No. 2004-04
Chief Counsel's Office
Office of Thrift Supervision
1700 G Street NW
Washington DC 20552
Dear Officials of Federal Bank and Thrift Agencies:
As a member of the National Community Reinvestment Coalition,
Fairness in Rural Lending urges you to withdraw the proposed changes
to the Community Reinvestment Act (CRA) regulations. CRA has been
instrumental in increasing access to homeownership, boosting economic
development, and expanding small businesses in the nation's rural,
minority, immigrant, and low- and moderate-income communities. Your
proposed changes are contrary to the CRA statute because in our
opinion they will slow, if not reverse, the progress made in
community reinvestment.
The proposed changes include three major elements: 1) provide
streamlined and much weaker CRA exams for banks with assets between
$250 million and $500 million; 2) establish a weak predatory lending
compliance standard under CRA; and 3) expand data collection and
reporting for small business and home lending. The beneficial
impacts of the third proposal are overwhelmed by the damage caused
by
the first two proposals.
In addition, the federal banking agencies did not update procedures
regarding affiliates and assessment areas in their proposal, and
thus
missed a vital opportunity to continue to expand CRA's effectiveness.
Increasingly large financial institutions are doing business far
from
their deposit-taking branches and home offices. Thus in a state with
a large number of rural communities like Wisconsin we find some of
the largest financial institutions in the country becoming an
increasing part of our overall financial services market, by pushing
high cost loans through affiliates, but having no CRA obligations
to
provide services and investments to communities that are by and large
the kind of low and moderate income communities that CRA was designed
to benefit.
For example Citigroup, with its CitiFinancial affiliate and HSBC
with
its Household and Beneficial affiliates both do a large amount of
high cost lending in Wisconsin, but have no CRA obligation to provide
us with beneficial prime-priced products or to make investments to
support the work of non profit organizations providing low cost
housing, or supporting small business development in low and moderate
income communities. Their size, dominance in the market, and
marketing capacity threatens to overwhelm some of the positive prime
rate lending done by our local lenders because they primarily offer
products that hook low and moderate income customers on an expensive
debt treadmill that is hard to get off.
Streamlined and Cursory Exams. Under the current CRA regulations,
banks with assets of at least $250 million are rated by performance
evaluations that scrutinize their 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.
This proposed change would have particular impact in Wisconsin and
the Midwest where so many of these medium sized community banks are
located. In Wisconsin this proposal would remove an additional 36
banks from the "large bank" CRA performance evaluation
and leave just
23 banks out of a total of 311 banks which will still be reviewed
for
their investment and service record.
This proposal adds insult to injury since the banking regulators
are
already very lax about bringing banks into the "large bank" test
as
their assets grow. Currently small banks are reviewed every five
years while large banks are reviewed every two years and it seems
to
be the regulators' habit to leave banks on the small bank review
schedule as their asset size grows past the threshold level.
Additionally the first CRA review after a bank grows past the current
$250 million in assets threshold is usually still performed under
the
small bank test. This practice by the examiners which is neither
sanctioned by law or regulation has the effect of already exempting
a
large number of banks that should be assessed using the "large
bank"
CRA evaluation.
In the group of banks in Wisconsin with assets between $250 million
and $500 million the average date of the last CRA exam publication
was 32 months ago. Only about 1/3 of the Wisconsin banks with assets
between $250 million and $500 million, as of Dec. 31, 2003, have
been
examined under the large bank test. Of the ones that were examined
under the large bank test all have either a "Needs to Improve" or
"
Low Satisfactory" rating on the Investment test. Our low and
moderate income communities need the investments that these banks
can
give; its time for the banking agencies to more rigorously enforce
the law, rather than to propose regulations that weaken the law and
reward their poor performance.
Predatory Lending Standard. The proposed CRA changes contain an
anti-predatory screen that will more than likely actually perpetuate
abusive lending. The proposed standard states that loans based on
the foreclosure value of the collateral, instead of the ability of
the borrower to repay, can result in downgrades in CRA ratings. The
asset-based standard falls short because it will not cover many
instances of predatory lending. For example, abusive lending would
not result in lower CRA ratings when it strips equity without leading
to delinquency or foreclosure. In other words, borrowers can have
the necessary income to afford monthly payments, but can still lose
wealth as a result of a lender's excessive fees or unnecessary
products.
CRA exams will allow abusive lending if this proposed simplistic
anti-predatory standard becomes part of the CRA regulation. The
standard proposed does not address the problems of the packing of
fees into mortgage loans and the subsequent financing of these fees,
high prepayment penalties, loan flipping, mandatory arbitration,
and
other abuses. Rigorous fair lending audits and severe penalties on
CRA exams for abusive lending are necessary in order to ensure that
unsophisticated and elderly homeowners are protected; the proposed
predatory lending standard will not provide the necessary
protections. 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 outside their assessment areas, the
proposed standard will frustrate the purpose of CRA.
Enhanced data disclosure. 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).
While we welcome the enhanced data disclosure, the positive aspects
of the proposed data enhancements do not begin to make up for the
significant harm caused by the first two 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 new data to provide less
weight on CRA exams to high cost loans than prime loans and assign
less weight for purchases than loan originations.
Missed Opportunity to Update Exam Procedures: The agencies also
failed to close gaping loopholes in the CRA regulation. Banks can
still elect to include affiliates on CRA exams at their option. They
can thus manipulate their CRA exams by excluding affiliates not
serving low- and moderate-income borrowers and excluding affiliates
engaged in predatory lending. The game playing with affiliates will
end only if the federal agencies require that all affiliates be
included on exams. Lastly, the proposed changes do not address the
need to update assessment areas to include geographical areas beyond
bank branches. Many banks make considerable portions of their loans
beyond their branches; this non-branch lending activity will not
be
scrutinized by CRA exams.
We urge the regulators to go back to the drawing board to come up
with a proposal that truly meets the needs of communities by updating
CRA to meet current market realities. As currently written we
believe that this proposal does more harm than good. Thank you for
your attention to this critical matter.
Sincerely,
Hubert Van Tol
Executive Director
Fairness in Rural Lending
5856 Fantail Ave.
Sparta, WI 54656
