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FDIC Federal Register Citations

NATIONAL COMMUNITY CAPITAL

From: Cheryl Neas [mailto:Cheryln@communitycapital.org]
Sent: Thursday, September 16, 2004 2:46 PM
To: Comments
Subject: RIN 3064-AC50

Mr. Robert E. Feldman
Executive Secretary
ATTN: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
RE: RIN 3064-AC50

September 20, 2004

Dear Mr. Feldman:
National Community Capital appreciates the opportunity to comment on the Federal Deposit Insurance Corporation's (FDIC) proposed rule regarding the Community Reinvestment Act (CRA). Our comments reflect a commitment to a community development finance industry in which banks and community development financial institutions (CDFIs) are partners in expanding access to capital and credit.

On behalf of National Community Capital's 158 Member CDFIs, the thousands of businesses they finance, the tens of thousands of low- and moderate-income homeowners and renters they benefit, and the thousands of entrepreneurs they have financed, NCCA strongly opposes the changes set out in the proposed regulations. In particular, we oppose the changes to the definition of a "small bank," the expansion of the definition of community development in rural areas, and the elimination of reporting requirements on small business lending data for mid-sized banks. We urge you to withdraw this proposal, which would undermine nearly three decades of success of the CRA. It is likely to mean the loss of hundreds of millions of dollars in loans, investments, and services for local communities, and would disproportionately impact rural areas and small cities where these mid-sized banks often have significant market presence.

In February 2004, the four federal banking regulators, including the FDIC, issued a proposed rule [69 FR 5729] regarding the Community Reinvestment Act. That rule proposed raising the asset threshold from $250 million to $500 million for “small banks.” National Community Capital expressed serious concerns about that proposal's impact on the availability of capital and credit in underserved communities. Rather than addressing the shortcomings of that proposal, the FDIC proposal moves in the opposite direction and would further curtail services and investment to low- and moderate-income communities.

Thirty members of the United States Senate shared National Community Capital's concern that changing the definition of "small bank" would significantly harm community reinvestment and violate the Congressional intent of CRA. In a letter to the agencies, these Senators noted, "This proposal dramatically weakens the effectiveness of CRA…We are concerned that the proposed regulation would eliminate the responsibility of many banks to invest in the communities they serve through program such as the Low Income Housing Tax Credit or provide critically needed services such as low-cost bank accounts for low- and moderate-income consumers." Clearly, exempting a large number of banks from full CRA exams does not serve needy communities as Congress intended in enacting the CRA.

Definition of "Small Bank"

Under current regulations, banks with assets of at least $250 million have performance evaluations that review lending, investing, and services to low- and moderate-income communities. The FDIC’s proposal that state-chartered banks with assets between $250 million and $1 billion follow a community development criterion that allows banks to offer community development loans, investments OR services will result in significantly fewer loans and investments in low-income communities―the very communities that the CRA was enacted to serve. Currently, mid-size banks must show activity in all three assessment areas. Under the proposed regulations, the banks will now be able to pick the services convenient for them, regardless of community needs.

As we indicated in our comment letter of March 30, 2004, changing the definition of "small bank" and conducting full CRA exams on significantly fewer banks would likely result in a substantial decrease in investment in underserved communities. At that time, the FDIC and other regulatory agencies proposed lifting the threshold to only $500 million. Exempting even more banks from full CRA examination by raising the asset size to $1 billion would further exacerbate the effects that concern us. Changing the definition of "small bank" from $250 million to $1 billion would remove 879 state-chartered banks with more than $392 billion in assets from the scrutiny of full CRA exams. This change would mean that 96% of the banks regulated by the FDIC would be able to "choose" their own community reinvestment obligation, rather than responding to the range of credit needs of low- and moderate-income people in their markets.

Lending, services, and investment have all contributed to the nearly three decades of the CRA's success. Banks have increasingly recognized that CRA-motivated lending is profitable to them as well as beneficial to low-income communities. Investments channel capital and products through organizations with expertise in serving emerging low- and moderate-income markets. The current “service test” encourages banks to become more active in the essential retail banking services needs of low- and moderate-income consumers. Low-cost bank accounts and individual development accounts, for example, have been important tools to help low-income people build assets; banks would have far less incentive to provide these tools under the FDIC's proposal.

One way banks are able to meet the investment test is through investments in CDFIs. Bank investments in CDFIs represent an important way to increase capital flow to low-income communities. The successful partnerships between CDFIs and banks, including those that result in Bank Enterprise Award (BEA) program awards[1], illustrate that investment opportunities are available and can be part of a bank’s strategy for community reinvestment, regardless of the institution's size. In the most recent round of Bank Enterprise Awards, announced last month, fully 70% of the awardees had assets of less than $1 billion. Since 1999, 19% of all BEA awardees have been institutions with assets between $500 million and $1 billion. The partnerships exemplified in these awards indicate that investment opportunities are available for banks of all sizes and in markets across the country.

In addition, 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 more out of step with the modernized financial services industry and would release more than $387 billion in assets from CRA examination.

Because the three-part examinations have resulted in new partnerships and opportunities, as well as hundreds of millions of dollars in new private capital in low- and moderate-income communities, we believe that a maximum number of banks should comply with the full examination. National Community Capital urges the FDIC to withdraw its proposal changing the definition to "small bank" to exempt 80% of the banks it regulates from these obligations.

Investment in Rural Communities

The FDIC is right to be concerned about the impact of its proposal on rural communities. Under this proposal, Alaska, Arizona, Idaho, Minnesota, Montana, New Mexico, and West Virginia would have no FDIC-regulated banks with CRA impetus for investment and services, meaning no bank in these states would be obligated to lend to, invest in, and provide services to their residents. In 19 states, the number of institutions subject to full CRA exams would drop by more than 80%; more than half of those states are predominantly rural. Eleven states, all but one predominantly rural, would see the assets subject to three-part examinations drop by more than 40%.

The solution the FDIC proposes—to include in CRA examinations community development activity in rural communities, regardless of borrower income—is wholly inadequate, even detrimental, and will not provide sufficient protection to the affected rural areas. Allowing banks to receive credit without regard for income contradicts the Act's intent to enhance service to low- and moderate-income communities. This proposal is also likely to divert services away from low- and moderate-income individuals in rural areas, populations that are among those having the greatest need for access to affordable credit and banking services.

The best way for the FDIC to ensure that mid-size banks respond to the needs of rural markets is to subject them to full CRA examinations that require a range of services to and investments in these communities.

Reporting Requirements

We are disappointed that the FDIC's proposal reverses the requirements for increased data disclosure proposed by the agencies in February. The proposals for increasing information on both small business lending data and high-cost loans would have provided banks and communities with important knowledge about financial institutions track record in serving community credit needs.

The Home Mortgage Disclosure Act (HMDA) has contributed significantly to reducing discrimination in housing finance. Similar disclosure for small business lending could help ensure fair and equal access to credit by the low-income and minority entrepreneurs that drive job creation in emerging markets.

The February proposal also contained provisions for separate reporting of high-cost loans and loan purchases. Better data on banks' activity in the high-cost market will provide clearer information on their provision of affordable credit. We urge the FDIC to restore the provisions to the February proposal on small business data collection and on high-cost loan data disclosure.

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, three 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 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.

However, CRA covers only banks, and therefore only a fraction of a financial institution’s lending. To keep CRA in step with financial reform, all financial services companies that receive direct or indirect taxpayer support or subsidy should comply with the three-part examination.

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.

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, including all banks that are part of large holding companies. 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 are 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.

3. CRA should provide meaningful predatory lending protection.

The explosion of the largely unregulated subprime market has contributed to an increase in abusive lending practices that threaten to undo many of the community reinvestment gains of the last decade, and changed the face of the financial services industry. The February proposal included a predatory lending standard that National Community Capital noted was a step in the right direction but criticized as inadequate; the current FDIC proposal completely ignores this critical issue. Predatory lending strips billions of dollars from consumers and communities in the United States. Borrowers lose an estimated $9.1 billion annually due to predatory mortgages; $3.4 billion from payday loans; and $3.5 billion in other lending abuses, such as overdraft loans, excessive credit card debt, and tax refund loans. In order to meet fully the intent of CRA, regulators must see that banks not only invest in communities but also take meaningful steps to preserve the wealth created by those investments.

A rigorous predatory lending standard would protect new homeowners created by the Administration's initiatives to increase minority and low-income homeowners, as these populations are among those most vulnerable to predatory lending. The FDIC's rule should contain a comprehensive, enforceable provision to consider abusive practices and assess CRA compliance accordingly. Without such a provision, many of the gains of CRA could be lost. National Community Capital urges the FDIC to develop a meaningful plan to stop predatory lending.

Conclusion

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 CDFIs to enter new markets that were previously ignored or "redlined." These communities have reaped significant 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 each institution’s 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 account holders.

The FDIC's proposal threatens to roll back these gains in providing access to capital and undermines Congressional intent for the CRA. It is critical that the FDIC not enact this proposal. To keep CRA strong and meaningful, the FDIC should:

Withdraw its proposal changing the definition of "small bank" to those with up to $1 billion in assets;

Maintain a full, three-part CRA exam for mid-sized banks, rather than allowing banks to choose only one of three activities;

Withdraw its proposal that institutions receive CRA credit for activities in rural areas, regardless of borrower income;

Restore provisions for data collection and disclosure that would enhance information about banks' small business lending and about their high-cost loans and loan purchases;

Take steps to expand CRA so that it better reflects changes in the financial services industry brought about by market shifts, technology advances, lending abuses, 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

Last Updated 09/28/2004 regs@fdic.gov

Last Updated: August 4, 2024