NATIONAL COMMUNITY CAPITAL ASSOCIATIONFrom: Cheryl Neas
[mailto:Cheryln@communitycapital.org]
sent: Thursday, April 01, 2004 2:09 PM
To: Comments
Subject: Attention: Comments
Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
March 30, 2004
The National Community Capital Association appreciates the
opportunity to comment on the Joint Notice of Proposed Rulemaking
regarding the Community Reinvestment Act (CRA) [69 FR 5729].
National Community Capital strongly supports an effective,
well-enforced Community Reinvestment Act that keeps pace with the
changing financial services industry. Our comments reflect a commitment
to a community development finance industry in which banks and community
development financial institutions (CDFIs) are important partners in
expanding access to capital and credit.
While we commend your efforts regarding the expansion of data
collection, the other two proposed changes—definition of “small banks”
and predatory lending standards—will undermine the intent of the law in
providing equitable lending in underserved communities. National
Community Capital cannot support these proposals in their current form
and we strongly urge you to withdraw the proposed definition of small
banks and expand the predatory lending standards, as well as include
additional provisions to bring CRA in line with changes in the financial
services industry.
Since its passage in 1977, and especially since the last significant
revisions in 1995, CRA has greatly increased the flow of capital to
low-income people and communities. Because of CRA, banks and other
financial institutions often partner with community development
financial institutions to successfully enter new markets that were
previously ignored or “redlined.” These communities have reaped
benefits, not only from the growth in CRA-motivated capital, but also
from the partnerships between banks and CDFIs. Both banks and CDFIs have
realized that working in partnership can enhance both institutions'
effectiveness in reaching underserved markets. The Community
Reinvestment Act has played a key role in this effective collaboration,
fostering millions of new homeowners, thriving businesses, and
accountholders.
National Community Capital is concerned that the provisions of the
Proposed Rule will undermine the success of the last twenty-five years
of community reinvestment and will curtail the flow of capital into
underserved communities. This letter comments on three main aspects of
the Proposed Rule: 1) the definition of "small banks;" 2) inclusion of a
predatory lending standard; and 3) additional data reporting and
disclosure. This letter also offers two ways that CRA could be further
enhanced.
Change in the Definition of "Small Banks"
The agencies propose to make approximately 1,100 banks subject to
less rigorous CRA exams by changing the "small bank" limit from $250
million to $500 million. National Community Capital respects the
agencies' effort to minimize regulatory burden and to adjust the
definition to keep up with inflation However, bank investments represent
an important way to increase access to capital in low-income
communities. The successful partnerships between CDFIs and banks,
including those which result in Bank Enterprise Award program awards[1],
illustrate that investment opportunities are available and can be part
of a bank’s strategy for community reinvestment, regardless of size. For
example, between 1999 and 2001, 11% of BEA awardees were institutions
with assets between $250 and $500 million. These partnerships indicate
that investment opportunities are available for banks of all sizes and
in markets across the country. The proposal would particularly impact
rural communities, where the number of institutions subject to complete
CRA exams would decline by an estimated 73%.
Further, the change that designates a bank "small" without regard to
whether it is part of a large holding company further reduces the
financial services assets subject to CRA provisions, bringing the Act
even further out of step with the "modernized" financial services
industry and would release more than $387 billion in assets from CRA
examination. Underserved communities will have far less access to
banking services and capital. National Community Capital strongly urges
you to withdraw this proposed change from consideration to ensure
continued inclusion of "investment" and "service" tests in the CRA exams
of a maximum number of banks.
Predatory Lending Standards
The provisions regarding predatory lending standards in the proposal
are insufficient to protect consumers from abusive lending and could
actually perpetuate the practice. The proposal rightly targets loans
made without regard for the borrower's ability to repay, but fails to
incorporate other instances of predatory practices, including fee
packing, prepayment penalties, and loan "flipping." Without a
comprehensive standard, the inclusion of anti-predatory provisions into
CRA becomes nearly meaningless and, in fact, could allow CRA ratings to
cover up for abusive practices.
A rigorous predatory lending standard would protect new homeowners
created by the Administration's initiatives, but this proposal falls
short of providing that protection. The Rule should contain a
comprehensive, enforceable provision to consider abusive practices and
assess CRA compliance accordingly, and it must apply to ALL loans made,
not just loans secured with real estate. In addition, any bank
partnering with a payday lender should have its CRA rating negatively
affected by this practice. National Community Capital recommends that
this proposal be strengthened significantly, and that the agencies
develop a more meaningful plan to stop predatory lending.
Enhanced Data Disclosure
The Proposed Rule includes two new provisions for expanded data
collection and disclosure. National Community Capital believes that
these proposals will improve access to affordable capital. The Home
Mortgage Disclosure Act (HMDA) has contributed significantly to reducing
discrimination in housing finance, and similar disclosure for small
business lending can help ensure fair and equal access to credit for
small businesses.
Separate reporting of high cost loans and of loan purchases will
better measure banks' service to low-income consumers. The agencies
should use this new data in assigning CRA ratings. Banks should receive
more credit for loan originations than for purchases, and for prime (or
the equivalent for business loans, when that data is available) loans
versus high-cost loans. Using the data in this way will ensure that
banks are directly providing affordable credit in their markets.
National Community Capital applauds the efforts of the agencies to
expand its data collection, and urges inclusion of this provision in the
Final Rule, but is concerned that the damage done by declining bank
investment and a weak predatory lending standard will overshadow the
benefits of this change.
Missed Opportunities to Enhance CRA and Community Reinvestment
The 1999 Gramm-Leach-Bliley Act "modernized" the financial services
industry without commensurate reform to community reinvestment
requirements. In order for CRA to keep pace with the financial services
industry, two important reforms are necessary.
1. Expand CRA coverage to all financial service institutions that
receive direct or indirect taxpayer support or subsidy.
After passage of the 1999 Gramm-Leach-Bliley Act, banks became nearly
indistinguishable from finance companies, insurance and securities
firms, and other “parallel banks.” For example, banks and thrifts with
insurance company affiliates have trained insurance brokers to make
loans. Securities affiliates of banks offer mutual funds with checking
accounts. Mortgage finance company affiliates of banks often issue more
than half of a bank’s loans—especially in the subprime markets. The
change in "small banks" in the proposed rule, which does not
differentiate between stand-alone banks and banks that are part of large
holding companies, exacerbates this trend.
However, CRA covers only banks, and therefore only a fraction of a
financial institution’s lending. To keep CRA in step with financial
reform, it should be extended to all financial services companies that
receive direct or indirect taxpayer support or subsidy.
In the paper, “The Parallel Banking System and Community
Reinvestment,” National Community Capital uncovered a web of
taxpayer-backed subsidies essential to the entire financial services
industry. For example, federal guarantees and Treasury lines of credit
have acted as a safety-net against some nonbank insolvencies. In October
1998, the Federal Reserve Board drove this point home convincingly when
it intervened to structure a massive bailout of Long Term Capital
Management by several taxpayer-subsidized banks.
National Community Capital strongly urges regulatory agencies to
mandate that all lending and banking activities of non-depository
affiliates must be included on CRA exams, and that small banks that are
part of large holding companies not be treated as small banks. This
change would accurately assess the CRA performance of banks that are
expanding their lending activity to all parts of their company,
including mortgage brokers, insurance agents, and other non-traditional
loan officers.
2. A bank’s assessment area should be determined by how a bank
defines its market.
Under CRA, banks are required to provide non-discriminatory access to
financial services in their market and assessed according to where they
take deposits. In 1977, taking deposits was a bank’s primary function.
In 2004, banks no longer just accept deposits, they market investments,
sell insurance, issue securities and are rapidly expanding the more
profitable lines of business. In addition, the advent and explosion of
Internet and electronic banking has blurred the geographic lines by
which assessment areas have been typically defined.
Presently, CRA exams scrutinize a bank’s performance in geographical
areas where a bank has branches and deposit-taking ATMs. Defining CRA
assessment areas based on deposits is at odds with the way financial
institutions now operate. Moreover, it disregards the spirit of the CRA
statute, which sought to expand access to credit by ensuring that banks
lent to their entire markets.
National Community Capital recommends simplifying the definition of
CRA assessment area according to a financial institution’s customer
base. For instance, if a Philadelphia bank has credit card customers in
Oregon, it also has CRA obligations there. The obligations ought to be
commensurate with the level of business in any market.
Conclusion
The Community Reinvestment Act has channeled billions of dollars into
underserved markets and fostered new, productive partnerships between
banks and community organizations. The regulators must not roll back
these gains in providing access to capital. Improved and enhanced data
disclosure is an important step, but other aspects of the proposal
threaten the expansion of capital and credit in underserved communities.
National Community Capital urges you to:
Maintain an investment test as part of banks' CRA performance by
maintaining the current "small bank" definition.
Continue to hold banks that are part of large holding companies to
the "large institution" standards.
Institute a strong, comprehensive predatory lending standard and
ensure that abusive lending counts against an institution's CRA rating.
Expand CRA so that it better reflects changes in the financial
services industry brought about by market shifts, technology advances,
and financial modernization legislation.
Thank you for the opportunity to comment. If you would like
additional information or have questions about this letter, please do
not hesitate to contact me at 215.320.4304 or markp@communitycapital.org.
Sincerely,
Mark Pinsky
President and CEO
National Community Capital Association
Public Ledger Building, Suite 572
620 Chestnut Street, Philadelphia, PA 19106
215.320.4304
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[1] The Treasury Department's Community Development
Financial Institutions Fund (CDFI Fund) administers the Bank Enterprise
Award Program (BEA), which provides incentives to insured depositories
to increase their investment in underserved communities; a primary way
that award recipients accomplish these goals is through investments in
CDFIs.
