CRA Campaign

Myths about CRA Changes

Field Stories

Our Post Ad

Coalition

Impact on States

Banks should not be allowed to jettison community reinvestment responsibilities ... in the quest for profit. If these new regulations are allowed to stand ... Communities could eventually find themselves back in the dark ages of redlining and financial isolation.

New York Times
August 21, 2004

September 9, 2004

The Honorable Edward M. Gramlich
Federal Reserve Board
20th Street and Constitution Avenue, NW
Washington DC 20551

Dear Governor Gramlich:

The undersigned organizations wish to commend the Board of Governors for its decision earlier this summer to withdraw the pending rule changes to the Community Reinvestment Act (CRA) that would have set new minimum threshold requirements for applying the full CRA exam to state-chartered member banks. The Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) have proceeded in an unprecedented and unilateral manner to propose, and in the case of the OTS to adopt, fundamental and highly damaging changes to the CRA rules. We urge the Board to maintain its position on this important matter. Federal Reserve Board leadership is critical. We call upon the Board, therefore, to refrain from responding to the haphazard process embarked upon by others by proposing similar controversial changes of its own.

We agree with the Board’s July 16 statement, which concluded that, “On balance, the Board does not believe that the cost savings of the proposal clearly justify the potential adverse effects on certain rural communities.” As you know, the OTS recently adopted a rule that quadruples (to $1 billion) the minimum threshold and the FDIC is considering a controversial proposal that would apply a similar, more cursory CRA review to nearly 900 of the mid-size banks its supervises. Adoption of such a standard by these two agencies exempts an estimated 1700 additional banks and thrifts from the three-pronged CRA exam. It also 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 the market presence of these midsize institutions is especially great. We have written to the FDIC to urge that this proposal be withdrawn.

FDIC rulemaking on this matter is flawed in terms of both procedure and substance. The proposal was adopted on a divided vote at a board meeting that was called on unusually short notice, and that provided board members with only limited opportunity for prior review. The board provided a minimal 30-day public comment period. This comment period is unusually and unnecessarily brief for consideration of such a controversial rule and began during a traditional summer vacation month. We believe pressure to hastily enact proposed changes as soon as one month after the close of the comment period will be seen by many consumers as evidence of disregard for public input. The OTS, of course, did not even seek public comment when adopting its own regulation on this subject.

The FDIC rule, as proposed, would apply a weaker, streamlined exam, to midsize banks and thus eliminate extremely important standards necessary to ensure that CRA is effective. The proposed change would greatly weaken the lending test and also eliminates the investment and service parts of the CRA exam for FDIC supervised banks that have assets between $250 million and $1 billion.

The FDIC’s plan to add weak or trivial community development criterion in lieu of the investment and service tests applicable today (that collectively count for 50 percent of a bank’s CRA grade) is a wholly inadequate substitute for the present exam standards. The new factor permits these banks to satisfy the community development criterion by choosing whether to provide community development loans, investments or services instead of assessing their performances for all three categories, as is currently required. This change is likely to result in a significant drop-off of lending, investments and services for affordable housing development, Low Income Housing Tax Credits, community service facilities, such as clinics, and economic development projects.

Another harmful element in the FDIC’s proposal is the dramatic weakening of the lending test for midsized banks which could decrease access to credit for many Americans. Under that proposal banks with assets between $250 million and $1 billion assets will no longer be subject to the rigorous examination of their mortgage, small business, small farm, and consumer lending. Further, these banks will no longer be required to collect and report essential lending information, such as small business lending by census tracts or revenue size of the small business borrowers. Without data on lending to small businesses and small farms, it is impossible for the public to know how well these mid-size banks help meet the credit needs of their local communities.

We also fear that the elimination of the service test will have harmful consequences for low- and moderate-income consumers. It takes away the regulatory incentive for midsize banks to maintain and open new branches and ATM machines serving low-and moderate-income geographies. It is also likely to undercut the extent to which these banks provide affordable banking services and checking and savings accounts necessary for bringing unbanked households into the financial mainstream or money transfer and remittance services, which are particularly important to new immigrants and ethnically diverse communities.

According to FDIC data, the proposal would reduce the number of FDIC-supervised banks subject to the three-part CRA test by 80 percent and the bank assets examined under this more comprehensive examination by 27 percent. Should all four banking agencies adopt the $1 billion threshold standard, the drop in the number of banks subject to full CRA review would range from 65 percent to 80 percent (73 percent of Federal Reserve Board supervised banks). The increased threshold would hit some parts of the U.S. more drastically than others. We calculate that twelve states would experience a drop in assets subject to the three-part test by more than 80 percent, while twenty-three states would experience a drop by more than 60 percent, and thirty-nine states would experience a drop by more than 20 percent as a result of the FDIC proposal.

We urge, therefore, that the Board continue to adhere to its original course of action and reject the hasty FDIC efforts to finalize the one-sided and inadequate rule it has proposed.

Sincerely,

AARP
ACORN
AFL-CIO
American Corn Growers Association
Center for Community Change
Center for Rural Strategies
Coalition for Responsible Lending
Coalition of Community Development Financial Institutions
Consumer Action
Consumer Federation of America
Consumers Union
Enterprise Foundation
Federation of Southern Cooperatives
Housing Assistance Council
Leadership Conference on Civil Rights
League of Rural Voters
Local Initiatives Support Corporation
NAACP
NAAHL
National Association of Consumer Advocates
National Association of Counties
National Association of Housing and Redevelopment Officials
National Catholic Rural Life Conference
National Community Action Foundation
National Community Capital Association
National Community Development Association
National Community Reinvestment Coalition
National Congress for Community Economic Development
National Congress of American Indians
National Consumer Law Center
National Council of La Raza
National Fair Housing Alliance
National Family Farm Coalition
National League of Cities
National Low Income Housing Coalition
National People’s Action (NPA)
National Training and Information Center (NTIC)
National Tribal Development Association
National Urban League
Rural Coalition/Coalición Rural
Stand Up for Rural America
United Auto Workers
U.S. Conference of Mayors
U.S. Public Interest Research Group