JPMorganChase
April 6, 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
Re: Joint Notice of Proposed Rulemaking Regarding the Community
Reinvestment Act Regulation
Dear Sir or Madam:
JPMorgan Chase
Bank and its bank affiliates (collectively, "JPMorgan
Chase") appreciate the opportunity to comment upon the Joint
Notice of Proposed Rulemaking (the "Proposal") regarding
proposed changes to the regulations ("the Regulation”),
which implement the Community Reinvestment Act ("CRA").
The Proposal results from the bank regulatory agencies' (the "Agencies")
review of the current Regulation since changes were adopted in 1995.
JPMorgan Chase is troubled by the Proposal and recommends that
the Agencies not adopt it. The Proposal would place an inappropriate
risk and concomitant difficult burden on banks, particularly large
retail banks, in managing their CRA activities.
A. The Agencies Did Not Address the Problems with the Investment
Test
As an initial
matter, JPMorgan Chase must convey its deep disappointment that
the Agencies
did not adopt its (and others') recommendation
to reorganize the Lending, Investment and Service Tests into a Retail
Banking Test and a Community Development Test. By moving community
development lending and community development investments into a
new Community Development Test, JPMorgan Chase's suggestions would
have addressed the legitimate difficulties that banks have in meeting
the requirements of the Investment Test. The Investment Test does
not assess how well an institution is meeting the credit needs of
the entire community. It assesses how much the institution has invested,
whether the investments are CRA-eligible, whether any investments
are innovative or complex and how the portfolio compares quantitatively,
but not qualitatively, with the investment portfolios of peer institutions.
The performance evaluation does not consider whether making investments
is aligned with the bank’s business strategy or whether the
investments are prudent or even yield a return, because the Regulation
requires large retail banks to make CRA-eligible investments regardless
of these considerations. JPMorgan Chase's proposal would have helped
institutions to better align their CRA initiatives with their business
strategies, enhancing their ability to make meaningful investments
in their communities, and would have helped examiners to more easily
balance qualitative and quantitative measures.
B. JPMorgan Chase Opposes Expansion of the Regulation to Downgrade
a Bank's CRA Rating Because of Violations of Certain Consumer Protection
Laws
The current
12 C.F.R. §__.28(c) provides that evidence of
discriminatory or other illegal credit practices adversely affects
the CRA evaluation of a bank's performance. The Proposal would replace
the current 12 C.F.R. §__.28 with a more detailed provision
that provides that a bank's CRA performance is adversely affected
by evidence of the following in any geography by the bank or in any
assessment area by an affiliate whose loans have been considered
(emphasis added):
(i) Discriminatory or other illegal practices including, but not
limited to:
(A) Discrimination on a prohibited basis in violation of the Equal
Credit Opportunity Act ("ECOA") or the Fair Housing Act
("FHA");
(B) Violations of the Home Ownership and Equity Protection Act ("HOEPA");
(C) Violations of section 5 of the Federal Trade Commission Act ("FTC");
(D) Violations of section 8 of the Real Estate Settlement Procedures
Act ("RESPA");
(E) Violations of the Truth in Lending Act ("TILA") provisions
regarding a consumer's right of rescission; and
(ii) In connection with home mortgage and secured consumer loans,
a pattern or practice of lending based predominantly on the foreclosure
or liquidation value of the collateral by the bank, where the borrower
cannot be expected to be able to make the payments required under
the terms of the loan.
The new additions
that can trigger a CRA downgrade are (i) discriminatory or other
illegal
practices in violation of certain specified as well
as unspecified consumer protection acts; (ii) engaging in a pattern
or practice of asset-based lending where the borrower cannot be expected
to repay; and (iii) violations of either (i) or (ii) by a mortgage
affiliate whose loans are used for CRA credit. JPMorgan Chase is
dismayed that the Agencies would consider expanding CRA into an umbrella "super-compliance" regulation
when appropriate remedies already exist in these other regulations.
1. The Current Provision is Sufficient and Retains the Distinction
between CRA Compliance and Compliance with Other Consumer Protection
Laws
JPMorgan Chase
believes that the language of the current provision is more than
sufficient
to cover a bank's discriminatory or other
illegal practices that are specified in 12 C.F.R. §__.28(i)(A)-(E)
and therefore the new additions are unnecessary.
The overriding purpose of the CRA is to ensure that banks help
meet the credit needs of the communities they serve, including low-
and moderate-income communities. The current CRA regulations were
drafted to evaluate how well banks are meeting these needs. However
well-intentioned, it is totally inappropriate to overlay the entire
structure of consumer compliance on CRA. These are two distinctly
different spheres and should be treated as such. With respect to
the newly specified acts, each of them has its own compliance and
enforcement mechanisms. Each of these laws was passed by Congress
at different times to achieve different and distinct purposes. Compliance
with each of these laws is already strictly monitored by the Agencies
during consumer compliance examinations. Moreover, FIRREA was specifically
enacted to provide a comprehensive framework of regulatory action
and enforcement powers around compliance violations. It was not Congress'
intent to have the Agencies impose the entire consumer compliance
examination process into CRA.
The Proposal
also implies that violations of state consumer protection laws
could trigger
a CRA downgrade. JPMorgan Chase opposes overlaying
state consumer protection laws onto a federal CRA regulation. Some
states, such as New York State, already have adopted their own CRA
laws. If a state perceives that violations of state consumer protection
laws should impact the state's CRA rating, it can make that determination.
Moreover, many state laws, such as some of the state "high cost" anti-predatory
lending laws, are so complicated that it would be very easy for a
mortgage lender to inadvertently violate one of their provisions
without doing harm to any consumer. For these reasons, JPMorgan Chase
does not believe it appropriate that state laws should play any role
in determining a bank's CRA rating under the federal CRA Regulation.
It is unclear whether the rule envisions immediately stripping
a bank of a current CRA rating or waiting for the next examination
after a violation has been found in an affiliate's examination. The
Proposal leaves many unanswered questions. But the worst outcome
of the Proposal is that it would change the nature of CRA from its
special status as a proactive, business-driven regulation that increases
access to capital and banking services to a catch-all for all fair
lending regulations, including but not limited to ECOA, FHA, HOEPA,
RESPA, the FTC, and TILA as well as for asset-based lending where
the borrower lacks the ability to repay.
2. The Proposal Dramatically Increases the Risk of a Financial Holding
Company Losing Powers Granted by the Gramm Leach Bliley Act
Particularly
troubling is the increased risk to financial holding companies
of having
the new powers granted to them under the Gramm
Leach Bliley Act (the "GLB Act") taken away because of
a CRA downgrade. A bank that currently has a "Satisfactory" rating
could easily be downgraded to "Needs to Improve" for relatively
minor violations of one of the consumer protection laws, such as
the single failure to send a right of rescission notice. If Congress
had intended that a bank's compliance with consumer protection laws
could prevent a financial institution from engaging in securities
and insurance activities, Congress would have included such language
in the GLB Act. If adopted, the Proposal would greatly undermine
the purpose of the GLB Act--to allow financial holding companies
to engage in a broad array of financially related activities.
3. The Proposal Would Penalize Banks whose Mortgage Affiliates are
Examined and Create an Uneven Playing Field
Currently, all
depository banks and their consumer lending subsidiaries are regularly
and
rigorously examined for compliance with the consumer
protection and fair lending laws. The Proposal would address explicitly,
for the first time, the consequences of an affiliate’s illegal
or abusive credit practices to a bank’s CRA rating. The Proposal
expands the potential for a CRA downgrade to include, evidence of
discrimination or illegal credit practices not only by the bank but
also by any affiliate whose loans are included in the bank’s
CRA examination.
While the Proposal may, on its face, seem reasonable, in fact,
it increases the liability of a CRA downgrade to precisely those
banks that include only the loans of an affiliate that is regularly
and rigorously examined for compliance with the fair lending laws.
It ignores the fact that consumer lending subsidiaries of holding
companies are, with a rare exception, never examined for compliance
with the fair lending laws.
While the Federal Trade Commission is responsible for regulating
these holding company subsidiaries for consumer compliance purposes,
it uses litigation rather than examination as its enforcement tool.
Litigation, of course, occurs only after a potential violation of
law has occurred and nearly all litigation ends in settlement where
the lender does not admit to any wrongdoing. It is highly unlikely,
therefore, that banks that use loans from unexamined affiliates will
ever have their CRA rating downgraded. The Proposal takes aim at
those banks that already shoulder the highest level of regulatory
scrutiny. Their examined affiliates already will pay significant
consequences should a violation be found during an examination and
those consequences include a program of strict remediation, a cease
and desist order, civil money penalties and a referral to the Department
of Justice for further investigation.
In effect, the
Proposal creates double jeopardy for banks with examined affiliates
by layering
the results from affiliate examinations
on top of the bank’s examination and, potentially, the exam
results of one agency on top of the examination results of a different
agency. The unintended consequence of the Proposal is to encourage
financial institutions to move mortgage lending bank subsidiaries
to holding company subsidiaries to avoid double jeopardy and level
the playing field with peer banks that use loans from unexamined
affiliates in their CRA examinations.
C. JPMorgan Chase Opposes the Proposed Changes to the Public Performance
Evaluation
The Agencies
propose to disclose in a bank's CRA Public Performance Evaluation
the number
of purchased loans, HOEPA loans and loans that
exceed the rate spread threshold for reporting under the Home Mortgage
Disclosure Act ("HMDA"). JPMorgan Chase opposes this change
because it would stigmatize these loans and eventually lead to their
being "discounted" or "not counted" for CRA purposes.
With respect to purchased loans, the CRA regulation gives them equal
weight to originations. Purchased loans help provide liquidity to
the mortgage market. By distinguishing between purchased and originated
loans in the Public Evaluation, the Agencies imply that there is
a distinction important to the manner in which CRA should be evaluated.
With respect to HOEPA loans and HMDA loans over the new threshold,
the Agencies would be distinguishing these as subprime loans. It
would reinforce the views of many that subprime lending is abusive
or predatory on its face, contrary to the express views of the Agencies
that subprime lending, when done properly, helps borrowers obtain
loans who otherwise would not have been able to get them. Moreover,
with the HOEPA and HMDA threshold loans, this information is already
available in the publicly released HMDA data. To import this into
CRA suggests falsely that there is some significance to these loans
for CRA purposes.
In sum, CRA
has been appreciated by lenders for its unique ability to actually
make
things happen that have an impact on communities.
In the world of banking regulations, CRA stands alone as a rule that
has evolved over time and affirmatively encourages banks to make
a commitment to their communities. It should not be confused with
specific consumer regulations that have been adopted over the years
for purposes of consumer protection. It rewards banks for doing more
in their local communities, for being creative in structuring complex
transactions that can save local municipalities’ tax dollars
and for providing quality financial education in multiple languages.
None of these activities is specifically required and that is what
makes the CRA unique and meaningful.
Thank you for the opportunity to present these views. I would be
happy to discuss these issues with you.
Sincerely,
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