Tanya Duncan – Credit needs being met

Fulfilling a promise to assess whether current Community Reinvestment Act regulations have kept up with the changing world of financial services, the federal government has asked the industry and public for their opinions.

The solicitation of public input is part of a general review to be conducted by the U.S. Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision, which issued a joint advance notice of proposed rule-making in July calling for comment. The comment period closed Oct. 17.

If any action is taken to change the rules, it is expected to occur by mid-year 2002, according to industry watchers.

Among the comments received were those of the Massachusetts Bankers Association. According to Tanya Duncan, director of federal regulatory and legislative policy for the MBA, Bay State bankers would like to see CRA changed as a reflection of the evolving industry, but not if its effects are detrimental to them.

I think that’s one of the most important things is to say we see some areas where CRA could be changed and improved. However, if the banks are used to CRA as it is, if the cost of retooling their equipment or changing their systems or training people is going to outweigh any benefit, they would rather just leave it the way it is, she said.

However, retooling CRA requirements would level out the playing field a little more. The MBA has long been tilting at the issue of equality among financial services players, and CRA is no exception.

CRA was originally enacted with the intent to meet the credit needs of communities where redlining had occurred, said Duncan. So the emphasis was meeting the credit needs of the community. Now, with the changing industry, with the increased number of lenders, some non-CRA lenders – mortgage companies, insurance companies and other financial services companies entering into the market – there’s a greater likelihood that they [credit needs] are being met, she said.

In fact, they’re [banks] really struggling to compete with other entities that are offering loans, she said.

The MBA proposes that examiners take a more encompassing stance when reviewing whether bank activity in the communities should qualify for CRA credit. Many banks give money to hospitals, which is really important. They have an important function in the community. Sometimes regulators tend to take the view that if it doesn’t directly impact low- to moderate-income individuals within the community, as opposed to the community as a whole, then it’s not eligible for CRA credit, she said.

That’s where MBA wants to see a relaxation of the stricter interpretation of CRA compliance. It argues that banks, by meeting community needs as a whole, are fulfilling the intent of CRA.

Maude Hurd, president of the Association of Community Organizations for Reform Now, also sees the opportunity for changes in CRA. Although much progress has been made since CRA initially was passed in 1977 and revised in 1995, there’s still room for improvement, she said. Examiners should look not only at the number of loans a bank produces in a neighborhood, but the quality.

They need to ensure that lenders are not engaged in a pattern of making or financing higher-cost subprime loans to borrowers who could qualify for prime loans; they need to recognize the difference between prime and subprime loans, and not reward lenders for making or financing subprime loans where they are not also marketing prime loans to qualified borrowers; and they should penalize lenders for making or financing abusive or predatory loans, said Hurd in her letter to the Fed.

The MBA has also suggested easing the three-pronged test regulators use to examine banks. Banks must lend to the community they serve, invest in their community and serve their community.

A lot of the banks feel that this [the investment test] creates an additional burden because they are able to meet the lending component of the test but … there may not be opportunities to invest [in one of the other areas] and they get penalized when meeting the needs in lending, said Duncan.

‘Predatory Features’
Of course, ACORN doesn’t see it that way. The investment test, the organization feels, should remain and examiners should be more vigilant in not only seeing to it that banks invest, but also in scrutinizing the areas in which they invest. The main problem is that the current test does not make any distinction among different types of investment, wrote Hurd. There are substantial differences in the community impact and level of commitment required, for instance, between grants, deposits in eligible institutions and investments in development projects.

Additionally, ACORN suggests investments in mortgage-backed securities should be monitored for predatory features.

Banks shouldn’t receive the same amount of credit for purchasing a loan as they do for originating a loan, either, according to ACORN.

While the purchase of a loan provides some additional liquidity, it does not require nearly the same amount [of] investment of resources as originating a loan … Sadly, many banks and thrifts that are careful to avoid the origination of predatory loans do not exhibit the same degree of caution in monitoring their purchases of loans, stated Hurd.

Although ACORN took pains to point out in its letter that disparities continue to occur, Duncan said that the explosion of financial service providers in the commonwealth has alleviated much of the problem. We believe the problems that existed when CRA was enacted do not exist. So here you have a regulation on the books where banks are trying to be contortionistic about trying to meet those [goals]. I think the key is to have some regulatory flexibility in meeting the CRA requirements, particularly giving attention to bank’s business plans and what their strategy is, she said.

Although there’s been talk at the state level of expanding CRA to non-bank lenders, the Massachusetts Mortgage Bankers Association has not filed comments on the national CRA front, said Dean Caso, president of Homevest Mortgage Corp. and chairman of the MMBA. Locally, no answer has been found. The problem with extending CRA requirements to non-bank lenders is that they are fettered by the standards set by the eventual buyers of the loans on the secondary market. Many mortgage brokers and lenders sell the majority of their loans to Fannie Mae and Freddie Mac and, therefore, can make only loans that comply with their standards, said Caso.

Additionally, if mortgage brokers or lenders want to make loans to underserved communities, they must find funding themselves but are caught in a Catch-22 situation, said Caso, because they aren’t eligible for many of the same government or nonprofit money pools that are made available to banks.

I understand where the banks are coming from. It’s a difficult issue for the banks to do those loans … they don’t make the same amount of money as they do on conventional loans, said Caso. But to subject mortgage lenders to the same standards raises the question of funding. It’s great to pass a law, he said, but if there’s no funding behind it, it places mortgage lenders in a tough financial spot.

Regulators are reviewing comments and said they will take into account the emphasis placed on evaluating how a bank performs instead of its process for compliance with CRA, ensuring consistent examinations and eliminating burdens. Changes also would take into account other issues that have come to light since recent financial modernization legislation became effective.