[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]

                         BUT CHALLENGES REMAIN 



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                           FEBRUARY 13, 2008


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-90
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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma                  KEVIN McCARTHY, California
                                     DEAN HELLER, Nevada

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    February 13, 2008............................................     1
    February 13, 2008............................................    63

                      Wednesday, February 13, 2008

Barnes, Rahn V., Vice President/CRA Officer/Manager of the 
  Community Development Department, Provident Bank, on behalf of 
  the American Bankers Association...............................    47
Barr, Michael, Professor, University of Michigan Law School......    37
Blankenship, Cynthia, Vice Chairman and Chief Operating Officer, 
  Bank of the West, on behalf of the Independent Community 
  Bankers Association............................................    51
Braunstein, Sandra F., Director, Division of Consumer and 
  Community Affairs, Board of Governors of the Federal Reserve 
  System.........................................................     6
Fish, Lawrence K., Chairman, Citizens Financial Group............    45
Homer, Ron, Chief Executive Officer, Access Capital Strategies, 
  LLC............................................................    48
Jaedicke, Ann, Deputy Comptroller for Compliance Policy, Office 
  of the Comptroller of the Currency.............................     8
Kennedy, Judy, President and Chief Executive Officer, National 
  Association of Affordable Housing Lenders......................    52
Pitkin, Howard F., Commissioner, Connecticut Department of 
  Banking........................................................    12
Seidman, Ellen, Director, Financial Services and Education 
  Project, New America Foundation................................    29
Taylor, John, Chief Executive Officer, National Community 
  Reinvestment Coalition.........................................    31
Thompson, Sandra L., Director, Division of Supervision and 
  Consumer Protection, Federal Deposit Insurance Corporation.....     7
White, Lawrence, Professor of Economics, New York University-
  Stern School of Business.......................................    35
Williams, Marva, Senior Program Officer, Chicago Local 
  Initiatives Support Corporation................................    34
Yakimov, Montrice Godard, Managing Director, Compliance and 
  Consumer Protection, Office of Thrift Supervision..............    10


Prepared statements:
    Marchant, Hon. Kenny.........................................    64
    Barnes, Rahn V...............................................    66
    Barr, Michael................................................    77
    Blankenship, Cynthia.........................................    88
    Braunstein, Sandra F.........................................    98
    Fish, Lawrence K.............................................   118
    Homer, Ron...................................................   121
    Jaedicke, Ann................................................   127
    Kennedy, Judy................................................   152
    Pitkin, Howard F.............................................   158
    Seidman, Ellen...............................................   167
    Taylor, John.................................................   179
    Thompson, Sandra L...........................................   213
    White, Lawrence..............................................   238
    Williams, Marva..............................................   247
    Yakimov, Montrice Godard.....................................   252

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Letter from former Governor Larry Lindsey, Board of Governors 
      of the Federal Reserve System, dated April 12, 1995........   267
Thompson, Sandra L.:
    Written responses to questions from Hon. Barney Frank........   269
    Written responses to questions from Hon. Keith Ellison.......   272
    Written responses to questions from Hon. Maxine Waters.......   273

                         BUT CHALLENGES REMAIN


                      Wednesday, February 13, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Maloney, 
Velazquez, Watt, Capuano, Clay, Baca, Scott, Green, Cleaver, 
Sires, Ellison, Klein, Murphy; Bachus, Manzullo, Biggert, 
Capito, Brown-Waite, and Bachmann.
    The Chairman. The hearing will come to order. Would someone 
close that door, please? This hearing begins what will be one 
of the most important initiatives that this committee will be 
undertaking, and that I hope the whole Congress will undertake. 
In 1977, before any of us on this committee got here, Congress 
passed the Community Reinvestment Act under the leadership, at 
the time, of the Senate Banking Committee chairman, Senator 
Proxmire. It has worked very well.
    I made a point of asking Larry Lindsey, who was the Federal 
Reserve Governor with responsibility for consumer and 
regulatory affairs some years ago, but not all that long ago, 
how he evaluated the Community Reinvestment Act and other 
consumer protection acts. Particularly, I wanted to ask him if 
he thought they had interfered with the ability of the 
institutions covered, the banks, to perform their very 
important function, the function of intermediation in our 
financial system, of gathering up relatively small amounts of 
money from a large number of people and making it available for 
useful work. He wrote me back a very useful letter, and I 
forgot to bring it with me.
    I will insert it in the record, saying that--and this is 
Mr. Lindsey, a conservative who had served in Republican 
Administrations--and his conclusion was that there was no 
evidence of any harm, that there was no indication that this 
had in any way interfered with safety and soundness, and that 
in fact it has done a great deal of good.
    We are now looking at this Act 31 years later, and there 
are two areas where I believe we should be amending it to 
enhance its effectiveness. First, if you go back to 1977, the 
Community Reinvestment Act covered most of the institutions 
that did the kind of activity it was meant to cover.
    Thirty-one years later, there has been a great increase in 
the number and type of institutions that engage in these forms 
of activities who are not covered by CRA. And so the first 
question we will address is whether or not, and if so how, to 
expand the obligations of the Community Reinvestment Act to 
institutions that now do the kinds of things that banks were 
doing 31 years ago but either weren't doing them then or didn't 
exist then. That is a much smaller piece of the relevant action 
is now covered by CRA that should have been.
    Secondly, there are questions about the enforcement of CRA. 
There have been arguments from some that there has been 
excessive paperwork, and we are open to listening to that, 
particularly from some of the smaller institutions. But there 
is also a concern that many people have, myself included, that 
there is a limited chance to enforce CRA.
    CRA ratings come into play when there is a change in 
ownership of the bank, but that shouldn't be the only time in 
which that happens. There ought to be, I believe, some forms of 
enforcement, and not just enforcement in the negative sense, 
but reward for those institutions that have done well. There 
are also questions about whether or not the range of activities 
covered, and for which entities get credit, should be expanded.
    So that's the topic. It's a serious one to me. I think the 
Community Reinvestment Act is a very important operation of our 
overall system. The urban areas in particular are concerned 
about it, and this hearing begins what will be a fairly 
thorough study, and I am hoping that we will begin the 
legislative process. We may not be able to complete it this 
year. It is February of the second year of a term, and we had 
other things to accomplish. But this is the beginning of a 
serious legislative process.
    Finally, I just want to apologize. At 12:30, I will have to 
go to a meeting that the Speaker has asked me to attend, and at 
1:15, I leave for the White House to be at the signing of the 
stimulus bill, and I will therefore be leaving the hearing in 
about 2\1/2\ hours, and we have a long panel. But I do want to 
assure people that we are monitoring this very closely, and 
those who will be testifying later are not going to be speaking 
to a bunch of vacant chairs. We give this a great deal of 
serious consideration.
    It's a busy week. We're only in for a couple of days this 
week, and the attendance does not reflect the interest, I can 
assure you. And with that, I'm glad to call on the ranking 
member of the Subcommittee on Housing and Community 
Opportunity, the gentlewoman from West Virginia, Mrs. Capito.
    Mrs. Capito. Thank you, Mr. Chairman, and I want to thank 
all of the folks who have come in through this difficult 
weather to testify today on an important issue. The ranking 
member of the full committee extends his apologies for not 
being here and has asked me to come in his stead and offer the 
    No government mandate should continue in perpetuity without 
congressional oversight, and CRA is no exception. The banking 
industry and our credit markets have changed dramatically, we 
all know, since CRA was first enacted in 1977. American 
innovation, along with increased industry competition, has 
created credit opportunities today that were unimaginable years 
ago. These market forces have prompted some to question whether 
significant regulatory burdens imposed by CRA, particularly on 
small community banks, have come to outweigh any benefits the 
law was originally intended to confer upon underserved 
    The evidence suggests that deregulation and technological 
advances have spurred new lending to once underserved 
communities over the past 3 decades. For example, a 2000 study 
by an economist at the Dallas Federal Reserve Bank found that 
CRA covered lenders as a group devoted about the same 
proportion of their home purchase loans to low-income 
neighborhoods from year to year. Even though those institutions 
were subject to CRA, their lending in low-income communities 
grew no faster than other types of lending. In other words, CRA 
may not be necessary to ensure that all segments of our economy 
enjoy access to credit.
    There are some who argue that CRA should be extended to 
credit unions and other segments of the financial services 
industry that currently fall outside the law's coverage. 
Indeed, rather than expanding the regulatory dragnet, our focus 
must be on providing appropriate regulatory relief to our 
financial institutions so they're free to serve the needs of 
their communities unshackled by outdated regulatory mandates 
and bureaucratic red tape.
    It is for that reason that I look forward to working with 
my colleagues on both sides of the aisles to develop an 
appropriate regulatory relief package that Congress can act on 
this year. The bill we passed last year was a good first step, 
but much remains to be done if we are serious about maintaining 
a strong community banking sector in this country.
    Thank you again, Mr. Chairman, for holding this important 
hearing. Although we may have some philosophical differences--
imagine that--we agree on the need for this committee to 
fulfill its oversight responsibility to review the law's 
implementation and the effect it has had on depository 
institutions, underserved communities, and our economy.
    Let me again thank the witnesses for their testimony. I 
look forward to the hearing. Thank you.
    The Chairman. I thank the gentlewoman. And I would just 
comment, if you have no objection, that I appreciate seriously 
her reference to philosophical differences. There is an 
understandable unhappiness that some people have with 
disagreement that appears to be for its own sake. But the 
notion that legitimate philosophical differences among elected 
officials shouldn't be expressed has started to bug me. I will 
confess all this talk about being post-partisan seems to me to 
devalue democracy. I'm beginning to suffer from post-partisan 
depression here.
    The Chairman. Because I don't want to see legitimate issues 
that ought to be discussed somehow subordinated or that 
discussion devalued. And I am very proud of the fact that under 
my predecessor, Mike Oxley, and now, I think we have been a 
model of how you can have legitimate philosophical debate 
without in any way impinging on our ability to work together in 
some other areas. So I thank the gentlewoman for saying that. 
And we're going to continue to be a place where we will be 
partisan sometimes and bipartisan other times without either 
one eating into the legitimate area of the other.
    The gentleman from Texas.
    Mr. Green. I thank you, Mr. Chairman. I thank you and the 
ranking member. I concur with you that honorable people can 
have honorable disagreements. I am so proud to be here this 
morning with the CRA being a topic of discussion.
    I had the good fortune of being president of a branch of 
the NAACP, and I have a firsthand understanding of how the CRA 
can be of great benefit in terms of helping financial 
institutions to go into areas that they may not have had a real 
good look at. It has been a great benefit to organizations like 
the NAACP, community-based organizations, and I am hopeful that 
we will be able to make sure that it continues to help and aid 
in the communities that are underserved.
    I, unfortunately, will have to leave. I have a Homeland 
Security meeting. Secretary Chertoff is before the Homeland 
Security Committee that I sit on, and I also have a piece of 
legislation on the Floor of the House. But I assure you, I will 
be monitoring the hearing, and I am eager to do what I can to 
make sure that the CRA continues to be of benefit to 
underserved communities.
    Thank you, Mr. Chairman, and I yield back the balance of my 
    The Chairman. Next, we will hear from the gentlewoman from 
California, who as chairwoman of the Housing and Community 
Opportunity Subcommittee has, of course, a great interest and 
involvement in these areas. Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. I will be 
brief, because I know we have three large witness panels to 
hear from and may be interrupted by votes. So let me start by 
saying that I consider the Community Reinvestment Act to be one 
of the most significant pieces of legislation of the 3 decades 
that have elapsed since its enactment.
    I, too, well remember the days of redlining where 
minorities simply could not get access to the capital they 
needed to purchase homes and start businesses. Indeed, when I 
entered the California Assembly in 1976, just prior to 
congressional passage of CRA, these practices were in full 
    The impact of CRA on investments in underserved communities 
by covered financial institutions has become enormous. Its 
effect has been documented by studies like the one conducted by 
Harvard's Joint Center on Housing Studies, which showed that 
CRA encouraged financial institutions subject to its reach to 
originate a higher proportion of loans to lower-income people 
and communities than they would have if the law did not exist.
    Recently, Federal Reserve Chairman Bernanke himself 
acknowledged that CRA has helped institutions discover and 
enter new markets that were previously underserved or entirely 
    But I don't need academics or others to credentialize CRA. 
I have seen its impact with my own eyes in the communities I 
have represented in the California State legislature and here 
in Congress. To those who suggest that CRA has unnecessarily 
distorted the market and that increased access to credit by 
low-income and minority communities would have happened on the 
same timetable without it, I say that's not true. Without CRA, 
we still would be sitting here wringing our hands about what to 
do to get sound credit flowing into underserved communities.
    I'm thankful that today rather than having to fend off an 
attempt to gut CRA, the kind of battle which I'm afraid 
occurred with some frequency in congressional sessions from 
1994 until now, we can instead begin the process of carefully 
analyzing how to improve the program. And I think one of the 
first things we need to think about seriously is extending its 
    I earlier emphasized the importance of CRA in extending 
sound credit into underserved communities, because rigorous 
analysis of recent HMDA data reveals that CRA-covered 
institutions were less likely to originate the kind of high-
cost loans that fuel foreclosures and more likely to retain 
loans in their portfolio rather than risking the risk of 
default into the secondary market. The result has been lower 
foreclosure rates in places with high concentrations of bank 
    The problem is that today CRA covers less of the credit 
market than it ever has, thanks to the evolution of the 
financial services industry and technology. For example, less 
than a third of all home loans are subject to CRA review. This 
is in part due to the entry of nondepository and often 
underregulated institutions into the mortgage and other credit 
markets too often to disastrous effect. It is also due in part 
to CRA's outdated notion of an assessment area which harks back 
to 1977 when we all had to go into an actual bank branch to 
carry out a financial institution. There were no ATMs outside 
even, if you can imagine that.
    Today CRA-covered entities make many loans that escape CRA 
review because they are originated in communities in which the 
financial institutions maintain no physical presence. I look 
forward to hearing from witnesses about how we can update CRA 
so that it can provide some assurance of safe and sound lending 
practices for a larger share of the market.
    Similarly, I'm interested in expanding the CRA enforcement 
tool box beyond just acting to slow a merger, acquisition or 
application to open a new branch. These opportunities are 
becoming fewer and farther between as the financial services 
industry consolidates and the need for new branches wanes in 
the face of advancing technology, and enforcement is completely 
absent when an institution has no ambitions to expand. This is 
    Again, I thank you, Chairman Frank, for holding this 
hearing and look forward to hearing the witnesses' perspectives 
on improving this linchpin of our financial regulatory 
    The Chairman. I thank the gentlewoman. Are there any 
further requests? If not, we will go to our panel. We have 
three panels here: The first consists of representatives of the 
regulatory agencies; the second consists of various advocacy 
groups on one side or the other; and the third consists of 
people who are in the business of either lending or borrowing 
for these purposes.
    So we will begin with Sandra Braunstein, who is the 
Director of the Division of Consumer and Community Affairs of 
the Federal Reserve Board.
    Ms. Braunstein.

                     FEDERAL RESERVE SYSTEM

    Ms. Braunstein. Thank you. Chairman Frank, Congresswoman 
Capito, and members of the committee, thank you for the 
opportunity to discuss the Community Reinvestment Act or CRA.
    I have been active in community development in a variety of 
positions in the government, private, and nonprofit sectors for 
the past 30 years. From my experience, I know that CRA is an 
important law for households and communities big and small, 
rural and urban. Commensurate with the CRA's importance, the 
Board implements the law through a separate Division for 
Consumer and Community Affairs, which I direct, and through 
separate CRA examinations conducted by reserve bank examiners 
specially trained in CRA and consumer compliance.
    The Board has had a separate consumer compliance and CRA 
examination program since the late 1970's. Our implementation 
of CRA is guided by the long-standing statutory principle that 
insured depository institutions must serve the convenience and 
needs of the communities in which they are chartered. CRA 
requires the agencies to encourage institutions to help meet 
the credit needs of their local communities and to do so in a 
safe and sound manner.
    The law gives the agencies considerable discretion and 
flexibility to fashion rules, programs, and procedures. This 
flexibility has enabled the agencies to modify their CRA 
regulations over time to respond to changes in communities and 
markets. At the same time, the agencies have duly respected, as 
they must, the boundaries on their authority, both expressed 
and implied by the Act.
    CRA examinations are at the core of our efforts to 
encourage State member banks to help meet the credit needs of 
their communities. Examiners look especially closely at an 
institution's record of serving low- and moderate-income 
households and communities. This record is a big factor in an 
institution's rating. The examiners evaluate this record in the 
context of all relevant factors, such as a bank's capacity and 
constraints and local economic conditions. These factors are 
important, because under CRA statue and regulations, insured 
depository institutions must meet the credit needs of their 
communities only through activities that are safe and sound.
    Research conducted over the years has generally suggested 
that CRA has helped to ensure that consumers and communities 
have access to financial services and products from their local 
depositories. The law and regulations are a catalyst for 
depository institutions to become involved in lending and 
community development projects that may not have been completed 
without their involvement.
    As successful as it has been, CRA does face challenges. The 
30 years since the CRA's enactment have been marked by major 
structural changes in the banking and financial services 
markets. Banks have significantly expanded their role in the 
broader financial services industry. At the same time, nonbank 
financial institutions have increasingly offered traditional 
banking services, including a full range of credit products.
    With these trends, competition in the marketplace has 
increased, and the lines between banks and nonbanks have 
blurred. These changes have created challenges for the 
implementation of CRA. One challenge is that many financial 
transactions are now being offered by nonbank service providers 
and other types of nondepository financial entities which are 
not covered by CRA.
    Insured banks and thrifts remain the primary conduit for 
many financial services, including the full range of deposit 
accounts. However, Federal Reserve surveys of small business 
and consumers document the increasing tendency of small 
businesses and households to use nondepository financial 
institutions. Some have suggested that these institutions 
should be covered by CRA. Such an expansion of CRA would 
require a searching reevaluation of CRA's conceptual 
    CRA is based on a fundamental quid pro quo. The banks and 
thrifts covered by CRA receive special benefits, such as 
deposit insurance. In exchange for these benefits, banks are 
expected to help meet the credit needs of their local 
communities. By definition, this conceptual underpinning of the 
statute does not apply where nondepository financial 
institutions are concerned.
    Covering such institutions would seem to require that the 
Congress articulate a new conceptual foundation to guide it in 
deciding such difficult questions as the type of entities to 
cover, the scope of the responsibilities, how to evaluate them, 
and which Federal agency or agencies to vest with these duties.
    I appreciate this opportunity to appear before the 
committee and welcome any questions you may have.
    [The prepared statement of Ms. Braunstein can be found on 
page 98 of the appendix.]
    The Chairman. Thank you, Ms. Braunstein.
    Next we have Sandra Thompson, who is the Director of the 
Division of Supervision and Consumer Protection at the Federal 
Deposit Insurance Corporation.


    Ms. Thompson. Chairman Frank, Congresswoman Capito, and 
members of the committee, thank you for the opportunity to 
testify today on behalf of the FDIC regarding the Community 
Reinvestment Act. CRA was landmark legislation, and its effect 
has been significant in enhancing credit opportunities 
    Before CRA was enacted in 1977, there were severe shortages 
of credit available to low- and moderate-income neighborhoods, 
as well as concerns about redlining and discrimination. CRA was 
intended to expand access to credit and reduce discriminatory 
credit practices. Consistent with safe and sound operations, 
CRA assigns federally insured financial institutions a 
continuing and affirmative obligation to help meet the credit 
needs of their entire communities, including low- and moderate-
income neighborhoods.
    CRA is a flexible tool for regulators, because it contains 
broad goals without detailed requirements about how to achieve 
them. With its focus on the needs of the community as opposed 
to specific products or services, it allows bankers to alter 
their offerings in response to changing credit demands.
    Studies have shown that banks can meet their lending 
obligations to their entire community, including low- and 
moderate-income borrowers, in a safe and sound manner that is 
also profitable. Yet there continue to be areas where CRA could 
have an important impact. Financial needs today in low- and 
moderate-income communities include basic banking services, 
savings programs, affordable small dollar loans, and 
foreclosure prevention programs. CRA's flexibility ensures that 
it will continue to enhance the ability of all consumers to 
access and benefit from our banking system.
    Today, the FDIC is promoting the use of CRA to encourage 
solutions to several key consumer financial concerns, 
specifically, encouraging alternatives for homeowners facing 
mortgage foreclosures, meeting the need for affordable, small 
dollar loans, and addressing the exceptionally high cost of 
credit and the need for basic banking services in many 
underserved communities.
    For example, in April of this year, the Federal financial 
regulatory agencies issued guidance encouraging financial 
institutions to consider prudent workout arrangements to keep 
borrowers in their homes, and made clear that there may be 
favorable CRA consideration for programs to transition low- and 
moderate-income borrowers from higher cost loans to lower cost 
loans, provided that the loans are made in a safe and sound 
manner. And the agencies have proposed revisions to several CRA 
Q&As to encourage institutions to work with homeowners who are 
facing foreclosures.
    Patterns evident in the new HMDA data on higher priced home 
mortgage loans underscore questions about the scope of CRA and 
the way we evaluate the credit services provided by banks. 
While credit has become more available, a smaller percentage is 
subject to CRA evaluation, as nonbanks increase their share of 
mortgage originations. In addition, the HMDA data has 
highlighted the importance of focusing attention on not just 
whether loans are being made, but also at what price and by 
whom, particularly with regard to minority borrowers.
    In conclusion, while CRA's current emphasis on lending has 
served important needs, the financial services industry and 
consumers have changed in recent years. CRA's flexibility will 
ensure that it addresses the changing credit demands of 
consumers and their access to banking services.
    Thank you for the opportunity to testify today, and I look 
forward to answering questions.
    [The prepared statement of Ms. Thompson can be found on 
page 213 of the appendix.]


    Ms. Jaedicke. Chairman Frank, Ranking Member Bachus, 
Congresswoman Capito, and members of the committee, I am Ann 
Jaedicke, Deputy Comptroller for Compliance Policy at the 
Office of the Comptroller to the Currency. I am pleased to 
appear before you today to discuss the Community Reinvestment 
Act and the effectiveness of this law over the last 3 decades.
    CRA emerged as a seemingly simple concept. Banks that take 
deposits from the local community where they are chartered have 
an obligation to help meet the credit needs of that community, 
and CRA had a simple but powerful goal: to stop redlining. The 
law has had its measure of criticism, to be sure, but in my 
view it is working. It has proven to be a powerful tool that 
has brought real change and improved conditions in underserved 
and economically depressed communities.
    This hearing offers an excellent opportunity to reflect on 
the CRA and to exchange ideas about the challenges we face 
going forward. To further this discussion we offer the 
following perspectives:
    First, the CRA has proven to be a remarkably effective and 
resilient piece of legislation, and has provided the Federal 
banking agencies with the flexibility we need to respond to 
changing circumstances.
    Second, the CRA has acted as an incentive for insured 
depository institutions to provide billions of dollars in 
loans, investments, and services in communities across the 
    And third, CRA lending and investments have proven to be 
safe, sound, and generally profitable.
    Yesterday, Comptroller Dugan gave a speech before the 
National Association of Affordable Housing Lenders. He 
described three recommendations related to CRA, and I'd like to 
recount them here today. First is the need for legislation to 
restore national bank public welfare investment authority. The 
Federal law that authorizes national banks to make public 
welfare investments was amended over a year ago. While the 
amendments increase the amount of investments permissible for 
national banks, they simultaneously decrease the types of 
investments that may be made. Comptroller Dugan has been very 
appreciative of your leadership, Chairman Frank, and of yours, 
Representative Bachus, in achieving bipartisan passage by the 
House of Representatives of H.R. 1066. H.R. 1066 would restore 
the broader preexisting public welfare investment standard. A 
comparable bill recently has been introduced in the Senate, and 
the OCC urges that the public welfare investment authority of 
national banks be restored by enacting legislation like H.R. 
    Second, yesterday the Comptroller proposed an important CRA 
regulatory initiative to assist communities that are being 
hard-hit by the rising tide of mortgage foreclosures. The 
Comptroller urged that the Federal banking agencies provide a 
CRA incentive for additional mortgage relief in middle-income 
communities significantly affected by the subprime mortgage 
turmoil. He called for the development of a targeted amendment 
to the inner agency CRA regulations. This amendment would 
provide a CRA incentive for community development investments 
that revitalized and stabilized middle-income urban and 
suburban communities that are distressed due to unprecedented 
foreclosures. With this change, the banking agencies could give 
CRA consideration for, and thereby encourage, loans, services, 
and investments in more communities suffering the consequences 
of foreclosures. We believe that we should be able to make this 
change by revising the definition of community development in 
the CRA rules.
    Finally, in the 30 years since CRA was enacted, the 
financial services industry has changed. While insured 
depository institutions previously may have provided most 
financial transactions of the type that are evaluated under 
CRA, now many non-bank companies provide such financial 
products and services. In light of these developments a 
legitimate question may be raised: What are the public policy 
reasons for continuing to restrict the application of CRA to 
insured depository institutions? As the Comptroller said 
yesterday, the time may be right to evaluate whether a 
legislative determination, made over 30 years ago about the 
scope and coverage of CRA continues to be appropriate given the 
significant changes in our financial market.
    Thank you, Mr. Chairman, for the opportunity to appear 
before you today. I would be pleased to answer any questions 
you might have.
    [The prepared statement of Ms. Jaedicke can be found on 
page 127 of the appendix.]
    The Chairman. We will take this next witness, then we will 
go to vote, and we will come back.
    Please, Ms. Yakimov.


    Ms. Yakimov. Thank you. Good morning, Chairman Frank, 
Ranking Member Bachus, Congresswoman Capito, and members of the 
committee. My name is Montrice Godard Yakimov, and I am the 
Managing Director for Compliance and Consumer Protection at the 
Office of Thrift Supervision. I thank you for the opportunity 
to testify on behalf of the OTS to commemorate the 30th 
anniversary of the Community Reinvestment Act, reflecting on 
its array of accomplishments and exploring how to move forward 
positively into the next 30 years. I'm pleased to help 
celebrate the role CRA has played to encourage regulated 
institutions to meet the credit needs of their communities. I 
have submitted a full statement for the record, so this 
morning, I will just highlight a few points.
    First, OTS strongly believes that CRA has played a 
significant and positive role and has helped the thrift 
industry meet the needs of low- and moderate-income households. 
One example is community development lending by savings 
associations, which increased from about $2 billion in 1996 to 
nearly $10.5 billion a decade later in 2006. CRA's focus on 
community development has been one important reason.
    OTS-regulated institutions also continue to make sizeable 
amounts of CRA eligible investments, approximately $899 million 
by our large institutions in 2006 and 2007 alone. Savings 
associations also play a leadership role in originating multi-
family loans, a key vehicle for affordable housing. In 
September 2007, OTS-regulated savings associations had about 4 
percent of their assets in multi-family loans, where commercial 
banks had about 1 percent of their assets in such loans. CRA 
has contributed significantly to the rise in small business 
lending, an important driver in the economic empowerment of 
low- and moderate-income neighborhoods. In 1996, OTS-supervised 
institutions originated about 36,000 small business loans 
totaling about $3.5 billion. A decade later, savings 
associations were originating about 5 million small business 
loans totaling about $29 billion.
    The second point I'd like to note is OTS's interest in 
legislation that will empower savings associations to further 
contribute to community and economic development. OTS Director 
Reich has made recommendations to expand the ability of OTS-
supervised institutions to engage in small business and 
commercial lending. This increase would not only strengthen 
OTS-regulated institutions by further diversifying their 
business signs, but would also increase the availability of 
credit in local communities. Small business and commercial 
lending are keys to economic growth and recovery, particularly 
in low- and moderate-income areas. Earlier versions of this 
proposal were part of legislation passed by the House in both 
the 108th and 109th Congresses, and we are hoping for favorable 
consideration by this body again.
    Third, I'd like to point out two important CRA developments 
in 2007 that deserve mention. The first came in March when OTS 
published a final CRA rule, bringing our regulations back into 
alignment with the regulations of the other Federal banking 
agencies. These changes support the core principal and policy 
objectives of CRA and facilitate more consistent and effective 
evaluations of the CRA performance of banks and thrifts 
operating within the same market areas. The second took place 
in July 2007, when the OTS and the other Federal banking 
agencies issued for comment proposed questions and answers to 
clarify the types of foreclosure prevention activities eligible 
for CRA favorable consideration. For example, credit counseling 
to assist low- and moderate-income borrowers in avoiding 
foreclosure would receive CRA favorable consideration, as would 
loan programs to help low- and moderate-income homeowners 
facing foreclosures.
    There is one issue I would like to mention that underscores 
the commitment OTS has to consumer protection, and that is an 
advance notice of proposed rulemaking relating to unfair or 
deceptive acts or practices. The ANPR sought public comment on 
a proposal that OTS might consider in determining whether and 
to what extent additional regulation is needed to ensure that 
customers of OTS-regulated entities are treated fairly. We 
intend to move forward with the proposed rulemaking to 
establish a clear set of rules and standards for thrift 
institutions in this area.
    In conclusion, OTS can measure attention to the important 
role the Community Reinvestment Act has played over time and 
ways positive gains can be expanded. We stand ready to work 
with you and to serve as a resource in this exploration. I'd 
like to thank you again for inviting me here today, and I look 
forward to responding to your questions.
    [The prepared statement of Ms. Yakimov can be found on page 
252 of the appendix.]
    The Chairman. Thank you. We are going to break, but let me 
just make an announcement. There is a fight going on that is 
going to spill over here; there is a dispute about the decision 
of whether or not to take up the Foreign Intelligence Security 
Act. There may be procedural votes all day, so we may not be 
able to finish this hearing. I wanted to say this: Those 
witnesses who came at some expense, I have instructed the staff 
to find ways that we can reimburse them. As it is, we may have 
to ask some of the witnesses to return. If we do, we will 
provide travel expenses. This is an important hearing. I regret 
the fact that it is going to get interrupted, but there may be 
a pattern of procedural votes that will keep us from doing 
much. Our Attention Deficit Disorder, which is inherent in our 
work, may be exacerbated by exogenous factors in this 
particular case. So we are going to break now, but we will be 
    I do just want to note that the public welfare bill that 
was referenced, the House has again passed it, and we are 
hoping that the Senate will. We do agree that this is very 
important. We were told by various advocacy groups. So the 
House has passed that bill, and we're hoping the Senate will do 
the same. We will return as soon as we can.
    The Chairman. Mr. Bachus made a very good suggestion. If 
this keeps up, he and I will stay through the next set of 
votes--it is only the one vote--and some other Members--we are 
going to try to keep this going. We apologize. So we will now 
finish the panel with our representative from the States, 
Howard Pitkin, who is the commissioner of the Connecticut 
Department of Banking.
    Commissioner, please go ahead.

                     DEPARTMENT OF BANKING

    Mr. Pitkin. Good morning, Chairman Frank, Ranking Member 
Bachus, and distinguished members of the committee. My name is 
Howard Pitkin, and I am pleased to be here today on behalf of 
the Connecticut Department of Banking to discuss the Community 
Reinvestment Act at work in Connecticut and other States. I 
also appear today as a member of the Conference of State Bank 
Supervisors and the National Association of State Credit Union 
Supervisors. As you know, these are the professional 
associations of State officials that regulate the banking and 
credit union industries.
    The Community Reinvestment Act has provided access to 
lending and investing programs by highlighting a need for 
community investment and development initiatives. The very 
nature of CRA is the expectation that banks and credit unions 
will seek out loans and investments that promote community 
development. The people of Connecticut have realized the 
benefit of this law through banks and credit unions' 
participation in construction loans for affordable housing, 
low- and moderate-income mortgages, loans to small business and 
consumer and automobile lending. In pursuit of their CRA goals, 
these institutions have provided funds for the education of our 
children and made vital contributions to community-based 
organizations. Most importantly, the officers and employees of 
the banks and the credit unions are leaders within their 
    Our banks and credit unions have found CRA to be 
profitable, and the statistical analysis necessary to define a 
community's credit needs are an important part of the strategic 
plan--the lending, business development, and developing deposit 
account relationships. Connecticut's Community Reinvestment Act 
was enacted on July 1, 1990. The State statute uses Federal law 
as a model, but also requires each Connecticut bank to publish 
a State Community Reinvestment Act notice announcing the public 
access to the bank's performance evaluation and clearly stating 
how to send written comments to the banking commissioner. Since 
July 1, 2001, Connecticut has enforced similar requirements for 
State-chartered community credit unions. These are credit 
unions that have assets of $10 million or more and draw their 
members from a well-defined community, neighborhood, or rural 
    Connecticut State-chartered banks have had a long-standing 
record of compliance with both State and Federal CRAs. Since 
1999, no State-chartered Connecticut bank has a CRA rating 
below satisfactory. Since February 2005, Connecticut has 
administered an offsite program for monitoring banks' CRA 
compliance. We develop a profile for each bank and require an 
update on an annual basis. We incorporate information from each 
bank's Federal CRA examination into this profile, along with 
additional statistical analysis using the Home Mortgage 
Disclosure Act data and a software tool that analyzes lending 
statistics. Examiners also use peer information to compare bank 
performance with other competitors in the market place.
    We found this process to be very effective in monitoring 
CRA performance and making sure it remains a priority for our 
institutions. I have the power to deny or set conditions on 
many types of applications based on CRA performance. We found 
that this off-site CRA monitoring system not only reduces 
regulatory burden on our institutions, but also gives accurate 
and up-to-date information about lending performance and 
trends. In addition, the offsite program does not restrict the 
department's authority to conduct an onsite examination if we 
deem it necessary.
    Connecticut and Massachusetts have implemented CRA 
requirements for credit unions. We use the same rating scale we 
use for banks. We look at several factors similar to the 
factors we use to asses the community reinvestment practices of 
our State-chartered banks, but taking into account credit 
unions unique structure and mission. Connecticut posts CRA 
rating for the banks and credit unions on our Web site and 
reports institutions that have a CRA rating of ``needs to 
improve'' or ``substantial noncompliance'' to the State 
treasurer. No bank or credit union included on that list can 
receive public deposits.
    The Community Reinvestment Act has been, in my opinion, a 
unique law requiring banks--and in our State, credit unions--to 
identify and serve the credit needs of their communities. They 
need to do that to be profitable. Six States plus the District 
of Columbia have enacted their own CRA laws. Some States have 
gone beyond the provisions of Federal law by expanding the 
application of their CRA statutes, what qualifies for CRA 
credit, or how CRA is enforced. Other States have simply 
mirrored the Federal statute, giving them the opportunity to 
enforce the Federal statute through their own laws.
    If Congress or the Federal regulators are considering 
changes to CRA, I suggest these changes may include 
consideration of fewer restrictions on the type of or dollar 
thresholds for investments. We should continue to encourage and 
foster community focused lending and investing, a building 
block in the foundation of community banking and credit union 
    Thank you for your time this morning and for inviting me to 
be here with you today to celebrate 30 years of accomplishments 
with the Community Reinvestment Act.
    [The prepared statement of Mr. Pitkin can be found on page 
158 of the appendix.]
    The Chairman. Thank you. Let me begin with Ms. Jaedicke. I 
know that Comptroller Dugan has proposed an expansion to give 
CRA credit to communities that have been victimized by the 
foreclosure issue when they would be above the general income 
level. The question I have is, would it be possible to do that 
for a time-limited period? That is, we understand the 
disruption for now, but how would you frame that so that 10 
years from now, we will not still be giving CRA credit for 
investing in the type of communities that were not ordinarily 
thought of as CRA targets?
    Ms. Jaedicke. Our proposal is to make a change to the 
definition of community development within the regulation. And 
we can put a sunset provision on it or a time limit on it, if--
    The Chairman. I know that you would do that. Again, we do 
understand that there are communities that are being hit by 
this, but I think I would ask you to ask the Comptroller to 
consider that--some kind of sunset, because otherwise we hope 
that we will be able to resolve some of these issues. It's a 
useful initiative, but I think it shouldn't be a forever one. 
So that would be very helpful.
    Let me ask Mr. Pitkin. You mentioned that Connecticut and 
Massachusetts have covered credit unions. Now we have this 
issue--and in fact I will put in the record now, without 
objection, a letter from the National Association of Federal 
Credit Unions, and also a study by the law firm of Traiger and 
Hinckley on the Community Reinvestment Act. They title their 
study, ``A Welcome Anomaly in the Foreclosure Crisis: 
Indications that the CRA deterred irresponsible lending in the 
15 most populous U.S. metropolitan areas.'' And we will make 
that part of the record.
    But let me ask, what has been the experience--are the 
credit unions in Connecticut unhappy? How long has it been in 
place and have they found it to be burdensome? I mean, their 
argument is, ``Well, we do this sort of thing anyway.'' And 
many of them do. We do have the issue of some of the larger, 
less geographically based, but when did it go into effect and 
what has been the experience, and is there any effort by the 
credit unions now in Connecticut to repeal that coverage?
    Mr. Pitkin. Mr. Chairman, there is--our law passed in 2001 
for community-type credit unions, and there has been no adverse 
reaction from the industry. We all felt that credit unions have 
a story to tell, and don't often have a chance to tell it. 
While they lend to a delineated community field of membership, 
they also take part in community development activities and 
investment within their communities, and it's significant. And 
we have had good experience with our industry; they have 
cooperated, and in the spirit of the law they have served the 
credit needs of their communities.
    The Chairman. You said, ``community credit unions,'' 
meaning those that are geographically based as opposed to 
    Mr. Pitkin. Yes, Mr. Chairman. They generally have, in 
Connecticut, a county or two. The larger ones can serve up to 
three counties. We have not yet given a charter for a 
    The Chairman. Oh. All right. So you have that?
    Mr. Pitkin. Right. Right.
    The Chairman. And I mention that because--and I understand 
people don't like to feel that if they haven't done anything 
wrong, they should be treated as if they might. And I would 
hope people--and say we don't regard this as punitive when we 
talk about expanding CRA. We think it is a useful tool, and as 
you said in some cases, I would say to people, ``If you're 
doing the right thing anyway, you'll get better recognition for 
it. So we appreciate that.''
    Let me ask you, if any of the panel members now--and I 
understand it's a congressional decision to us. I appreciate 
the spirited testimony in every case--let's be clear: there is 
a consensus, I think, that CRA has worked well, and that in the 
last 31 years there have been changes in the industry. I think 
it's fair to say this: If CRA were passed for the first time 
today it would have a wider footprint than the one it had in 
1977. That is a decision we have to make.
    Let me ask all of you now and in the future--and you raised 
this question--how do we deal with--there are a couple of 
issues. One is a conceptual. You know the quid pro quo. Well, I 
think we can deal with that one. There is no financial 
institution operating in America today that doesn't get some 
benefits from the relationship with the government.
    But beyond the issue is where the institution in question 
does not have a geographic footprint. What would a CRA set of 
requirements look like? Does anyone want to respond to that 
now? But that is something I would ask all of you, in writing, 
to advise us. And I understand--we're not asking you to endorse 
the broadening, but if we were to broaden this to cover lending 
institutions that don't have a geographic footprint, how would 
you formulate the requirements? Do any of the witnesses want to 
try that now?
    Yes, Ms. Thompson?
    Ms. Thompson. Well, I would certainly include the public 
evaluation concept, because I think that is critical to make 
sure that the public is very aware and informed of an entity's 
performance with regard to CRA. And I'd also try to figure out 
a mechanism for enforcement. That is a key issue.
    The Chairman. But also the question is, what would we be 
enforcing? And what is their obligation, if it is not a 
geographic one?
    Ms. Thompson. If it's not a geographic obligation, you 
would have to define the customer base. Who are you lending to? 
And make sure that whatever parameters you put in place are 
enforcing responsible lending. Because what we found, again, is 
that CRA answered one question, and that was access to credit. 
There are other questions, such as cost of credit. And you're 
finding that so many people have been told, ``no,'' that when 
they get the ``yes'' answer, they don't ask the detailed 
    The Chairman. I appreciate that. The gentleman from 
    Mr. Bachus. Thank you. A lot of my complaints from our 
small community banks are about the compliance cost of CRA. Can 
you give me an idea about what is the compliance cost? Have 
there been any studies or any figures on what the compliance 
cost is? And of all regulations, is it the most expensive?
    Ms. Yakimov. Congressman Bachus, what we have heard from 
institutions is as it had experience with the Community 
Reinvestment Act some 31 years, the complaints we have heard 
about costs there have subsided over time. Frankly, 
institutions have pointed to compliance costs associated with 
the Bank Secrecy Act, in fact, anti-money laundering as one of 
their key areas. That is on top of their wish list in terms of 
some regulatory rule.
    Mr. Bachus. Well, actually, you're right. It used to be 
CRA, but I think it is Bank Secrecy Act now. So that is good.
    Ms. Braunstein. Congressman? I just wanted to say that, 
certainly, as the agencies, all of us have always been aware of 
the fact that there have been issues around compliance costs 
and we tried to address those in developing categories of 
compliance for CRA. You know, we have a small bank category, 
and we most recently developed an intermediate small bank 
category, and then a large bank category.
    And that was to help address some of those issues, as well 
as the Congress put in place a few years back a dictated 
schedule for examinations to help relieve some of the 
compliance burdens. So I think that these matters have been, 
you know, somewhat addressed over time.
    Mr. Bachus. You know, I would agree. I think categorizing 
the banks has helped in exempting some of the smaller banks. In 
light of market changes over the last 30 years, what 
particularly, maybe the growth, you know. At one time, banks 
couldn't expand across State lines. Now we have money center 
banks, some banks that have 8 and 10 percent of the total 
market in the country.
    Would you revise CRA in light of market changes? And, if 
you did, what would those revisions be? I notice the 
Comptroller of the Currency recently said that maybe in light 
of market changes, the CRA ought to be retooled. What would 
some of those changes be? I'll just start.
    Mr. Pitkin. If I could, again. Congressman, I think the 
view that non-bank lenders should be included in CRA. At the 
State level we license thousands of those companies. And the 
Commonwealth of Massachusetts has recently passed a law which 
includes them under CRA and is staffing right now to include 
non-bank lenders in their examination program.
    All of the States are adopting examination guidelines to do 
the same thing. In addition, the National Mortgage Licensing 
System is being formed by CSBS, NACA, and Armor. And I think 
that will be a major step forward in consumer protection. So my 
feeling on non-bank lenders is, let's let Massachusetts be the 
laboratory and watch how they make out doing it, and I think 
then take another step forward.
    Mr. Bachus. I know that probably would be problematic for 
some of us, but I appreciate that suggestion.
    Anyone else? Seems like you've thrown a chill over the rest 
of the panel.
    Mr. Pitkin. Well, I certainly don't mean to. The chairman 
encouraged differences of opinion, so.
    Mr. Bachus. Anyone else?
    Ms. Jaedicke. The Comptroller made the proposal yesterday 
as part of a speech that he made, and I would say that we 
haven't worked out the details or the specifics about how 
expanding CRA might work. But we would be happy to work with 
other thought leaders in this area to see what might be done.
    Mr. Bachus. Was he talking about expanding it or revising 
    Ms. Jaedicke. Well, he was really speaking to the changes 
in the financial services industry today--the fact that 
financial products are being offered by a lot of non-depository 
institutions, particularly mortgages. I think we're all 
witnessing that.
    Mr. Bachus. So the same thing the Commissioner was talking 
about, Commissioner Pitkin?
    Ms. Jaedicke. Right.
    Mr. Bachus. Okay.
    Ms. Jaedicke. So we simply raised the question of, should 
there be a broader coverage of CRA?
    Mr. Bachus. I see. How about for those institutions that 
are now covered. Any changes there, or no?
    Ms. Thompson. Well, one of the things that we have been 
looking at is how to bring underserved people into the banking 
sector and alleviate some of the high costs of products, like 
payday loans. We are advocating small dollar loans in the 
banking system. So, you want to bring people in and you want to 
make sure that the banking services that they get are going to 
receive some sort of credit. And we want to make sure that CRA 
is expansive enough, and we believe it is, to include basic 
banking services and products, as well as positive 
consideration for institutions that are currently offering 
those services and products.
    Mr. Bachus. Thank you.
    Ms. Braunstein. I would just say that one of the things 
that has made CRA so successful is the flexibility that was 
built into the statute from the beginning, which has allowed us 
to address credit needs and changes in markets as they have 
    So I think that there are a number of things that we could 
discuss and those discussions are worth having. But something 
to keep in mind is the flexibility that is currently in the 
statute, and retaining that.
    The Chairman. Thank you. Ms. Yakimov.
    Ms. Yakimov. Chairman Frank, I would offer that OTS has had 
some experience with non-traditional thrifts--thrifts that 
operate outside of a traditional branch network that raise a 
significant amount of deposits through the Internet and other 
means--and there may be some lessons learned through our 
experience with examining those institutions with CRA that 
might be helpful.
    Looking first at how they satisfy their obligations within 
the assessment area, that meets the threshold looking outside, 
particularly with community development lending. So we would 
offer ourselves as a resource in that area.
    The Chairman. That would be very helpful if you would give 
us that result. I would just say with regard to, I think it was 
Ms. Thompson's point, yes, we feel very strongly, and I know a 
lot of members in this committee feel that getting into the 
banking system is very important.
    Ms. Waters has had the lifeline banking issue. Others, Mr. 
Hinojosa and Ms. Biggert, have been worried about financial 
literacy, where the banks have been helpful with regard to 
check cashing, payday lending, remittances.
    I know people pay a much higher set of transaction costs 
than we do, and we want to keep mentioning that banks and 
credit unions are great assets for people here. In particular, 
we did take an initiative that the regulators responded to 
favorably; and, I think, the remittance services are now you 
get CRA credit for remittance services, and that has been very 
helpful in bringing down that cost. So we do intend to move on 
    The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    I perhaps want to be a little bit more direct with the 
panel than Mr. Bachus was on this issue of coverage of non-
insured institutions under the CRA. When we did Gramm-Leach-
Bliley, there was a proposal put forward at that time, an 
amendment offered at least to the bill, that would have 
expanded CRA to other parts of the financial institutions that 
would have given more flexibility for banks and lenders to be 
    Obviously, the rationale or the argument against it was 
that insured depository institutions received an implied 
subsidy, and historically have had an implied obligation 
therefore to their communities in exchange for that. A lot of 
non-insured institutions were basically doing a lot of banking 
activities--the same activities as insured depository 
institutions at that time--and Gramm-Leach-Bliley allowed that 
to happen even more, and expansion of activities substantially 
across line securities into banks, banks into securities, 
    So the question I would ask is, number one, what are the 
institutions that we ought to be looking at? I guess I have 
heard each of you implicitly endorse the notion that CRA ought 
to be expanded. And I understand regulators don't have the 
authority to do that. We have to do it as Congress. We could 
use the same language if we expanded the coverage.
    So I'm going to assume that each one of the regulators 
thinks that is at least something we ought to be exploring and 
looking at. And if you were going to do that, to what financial 
entities would you be talking about doing or at least 
considering doing? Ms. Thompson, if you want to go first, that 
would be great.
    Ms. Thompson. Yes. One category I would consider would be 
the mortgage lenders, in terms of non-depository institutions.
    Mr. Watt. Okay, so we have mortgage lenders on the table. 
Tell me who else. And I'm going to cut you off. I know we can 
talk about the rationale for each. I just want to get the 
laundry list on the table here, and, if we have time, we can 
talk about the rationale for including or excluding them.
    But what is the laundry list? Mortgage lenders; who has 
another one? Do you have another one, Ms. Thompson? I didn't 
mean to cut you off if you had another one. I just didn't want 
you to spend all my time telling me what the rationale for 
mortgage lenders was.
    Ms. Thompson. Congressman, I respect fully when asked to 
look at a category of high-cost service providers and mortgage 
lenders, because of the current crisis, leads that charge. And, 
if you recall, we were here in October and we specifically 
talked about HMDA data and the pricing differentials between 
non-bank lenders and bank lenders.
    So that was the reason I would discuss that. But I really 
categorize high-cost service providers.
    Mr. Watt. And who does that include? Mortgage lenders, who 
    Ms. Thompson. Let's see: check cashers; payday lenders.
    Mr. Watt. You're saying we should include check cashers and 
payday lenders under CRA? That before I would get to insurance 
companies or securities dealers, I would be looking at check-
cashers first?
    Ms. Thompson. Well, under CRA, we are looking at low- and 
moderate-income, generally speaking. And for securities, I know 
there are suitability requirements that apply to the purchase 
of most investments and most securities. So I'm thinking about 
the least educated, most vulnerable group of people who are 
paying more for products and services than other categories.
    Mr. Watt. Okay. Payday lenders, check cashers, mortgage 
lenders. Who else? You all are falling silent on me out there.
    Mr. Pitkin. Well, Congressman, being from Connecticut, I--
    Mr. Watt. Who do you all include?
    Mr. Pitkin. We include banks and credit unions.
    Mr. Watt. Credit unions?
    Mr. Pitkin. Under CRA.
    Mr. Watt. Okay.
    Mr. Pitkin. I think that we have two different industries 
here with mortgage lenders and brokers and originators. It is a 
Commission-driven industry and banks are concerned. When they 
write a mortgage with safety and soundness, it is a completely 
different approach to a mortgage.
    But mortgage brokers, lenders and originators report under 
HMDA and we can tell exactly where they're lending, who has 
made the most loans in Connecticut, where they have lent, and 
how many are high cost.
    Mr. Watt. Well, I presume, we could make anybody who has a 
CRA requirement report on what they were doing in the community 
in one way or another. I still don't have any takers on 
    That's all right--I have a reluctant. I'll yield back.
    The Chairman. I would say that of the things Mr. Pitkin 
suggested to me, one of the sort of conceptually obvious things 
would be to have CRA and HMDA tracked together. Because you 
were referring to entities that were covered by HMDA, but not 
CRA, and that would be one area where we're doing it.
    The other I wasn't sure, Mr. Pitkin, when you started to 
say as someone from Connecticut whether you were going to 
volunteer hedge funds to be under CRA, but we'll pass on that 
one. But I do think at this point the HMDA tracking does seem 
to be. We will be talking about some of the others as well.
    The gentlewoman from Florida, Ms. Brown-Waite, I'm told is 
    Ms. Brown-Waite. I thank the gentleman.
    And like many other members of the committee, I serve on 
another committee, which is why I wasn't here for the opening 
statements and for the testimony of the panel. It is certainly 
not for lack of interest, and I thank you all for being here.
    If the CRA was enacted about 30 years ago in response to 
perceived redlining, are any of you aware of any institution 
that purposefully avoids doing business in particular 
neighborhoods or with particular customers, solely because of 
race? And, if so, wouldn't it better to absolutely insist on 
the enforcement of anti-discrimination laws rather than force 
banks to make loans?
    And, you know, there is another form of redlining that is 
going on right now in my home State, Mr. Chairman. I don't know 
if you are aware of it. And that is when you live in certain 
areas, and there are sinkholes, you are not going to get 
insurance, even though your house does not have a sinkhole. You 
probably aren't going to get a mortgage for it.
    So there absolutely is existing redlining for purposes 
other than originally that the CRA was created for. And I would 
just like to have a response as to whether or not today when we 
have both Federal and State anti-discrimination laws, if CRA 
should be continued.
    Ms. Yakimov. I would offer, we have a host of tools to deal 
with any discrimination with respect to violations of the Equal 
Credit Opportunity Act, and the Fair Housing Act. And if we 
identified an institution that has fair lending violations, 
violations of such laws, it has an adverse impact on the CRA 
    So, in that sense, fair lending and CRA work together. But 
we would certainly not tolerate an institution that we 
identified purposely avoiding making loans on a prohibited 
basis, such as race as you described.
    Mr. Pitkin. Congresswoman, I think that what we have 
noticed in analyzing our subprime lending and high-cost lending 
in Connecticut is that the reverse really has happened where 
the high cost loans were contained, mainly in our inner cities. 
And it is a real problem when you target people who use English 
as a second language, or who might not be as financially savvy 
as most.
    They want their share of the American dream just like all 
of us. And I think in a lot of cases, because of piling loans 
into those areas of our State, for instance, the City of 
Bridgeport has 5,000 subprime loans contained in it; the City 
of New Haven has 4,000. And I think it is going to be a long 
time working this problem out.
    Ms. Brown-Waite. Thank you, Mr. Chairman. If no one else is 
going to respond, I will yield back.
    The Chairman. The gentlewoman from New York.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Braunstein, last month during a roundtable I held in my 
congressional district in Brooklyn, New York, on solutions to 
the mortgage crisis, participants suggested expanding the 
coverage of CRA to non-banks and other financial entities as a 
solution to curb predatory lending. You suggest that changes in 
the financial sector warrant this expansion, but caution also 
about some of the issues that may arise as a consequence. Can 
you expand on those issues and tell us how the Federal Reserve 
plans to address them?
    Ms. Braunstein. Yes, thank you. Actually, the expansion of 
CRA to entities other than depository institutions would really 
be a matter for Congress to decide. It is not something the 
Federal Reserve or any of the other agencies could undertake 
themselves. And what I was pointing out was that in that 
decision we certainly are quite happy and willing to work with 
you and discuss these issues with you. But there was a strong 
kind of underpinning for the original CRA that was a quid pro 
quo in terms of deposit insurance.
    And it seems that certainly changes in the financial 
services markets have warranted relooking at this. But there 
needs to be some kind of strong underpinning for any kind of 
CRA requirements that are put on other organizations, and that 
would definitely be worth a conversation.
    Ms. Velazquez. Okay. Thank you. I would like to address 
this question to any of the witnesses.
    In his testimony on behalf of the American Bankers 
Association, Mr. Barnes mentions that 98 percent of all banks 
and savings associations receive a CRA rating of satisfactory 
or both as a positive step. Some of us may see it differently, 
particularly where something like this may be called grade 
    Can you explain why this is the case, particularly, when we 
have seen the effects of the subprime lending crisis in 
minority neighborhoods across the country and especially within 
my district?
    Ms. Braunstein. Well one of the things I think we've all 
seen is that a large majority of the loans that were made of 
the subprime variety, especially the ones that are causing the 
problems, were not made by depository institutions which were 
covered by CRA. And that has been one of the issues and one of 
the reasons for the discussion of the expansion. And CRA has a 
very strong component of safety and soundness.
    And so banks would have discouraged our banks from 
competing in this communities, in those products, because those 
were not often safe and sound products, and there was a lot of 
loose underwriting.
    Ms. Velazquez. Wouldn't that be a good argument to expand 
CRA to non-banking institutions?
    Ms. Braunstein. Possibly, yes. Yes. And in terms of the 
grades, I would just say that CRA has been around for over 30 
years and that most banks are quite familiar with the Act and 
what is required of the regulations. And so, in some ways, it 
is not surprising that banks have learned how to, you know, get 
good CRA grades and are doing the right things. And we have 
seen that CRA has been very successful on a number of fronts.
    Ms. Velazquez. Thank you. And, yes?
    Ms. Yakimov. I would add to that, that I think you have to 
look at not just the ratings breakdown but also the data, the 
numbers. The volume of small business loans, the volume of 
community development loans, and that completes the picture. At 
least it fills out the picture, so to the extent that 
institutions have had 30 years of experience, we saw when we 
came out with the new BSA exam manual, initially new procedures 
violations were at a level over time we've seen some of those 
ratchet down. So I think you have to look at not just the 
ratings, but also the picture behind it. What are institutions 
doing to support all their communities?
    Ms. Velazquez. Thank you.
    The Chairman. The gentlewoman from Illinois, Mrs. Biggert, 
the ranking member of the Subcommittee on Financial 
Institutions and Consumer Credit.
    Mrs. Biggert. Thank you, Mr. Chairman. In 1992, Grant 
Thornton reported that CRA compliance was the single most 
expensive regulatory burden placed on community banks, and over 
the past 15 years, the Federal banking agencies have 
successfully reduced the unnecessary and unproductive paperwork 
burden imposed on community banks. I think that the agencies 
are to be commended for their efforts in this area, but is 
there more that can be done to relieve the administrative 
burden of compliance?
    Ms. Braunstein. Well, one thing, Congresswoman, that the 
agencies did recommend in the report to Congress on regulatory 
burden is repeal of the CRA Sunshine Act; I have to say that I 
think we are all in agreement that hasn't really produced much 
in the way of benefits, and it is a paperwork burden to 
financial institutions. So that is something that Congress 
could consider.
    Mrs. Biggert. Anybody else have any comment on that?
    [No response]
    Mrs. Biggert. Well, then maybe--and I'm sorry. I don't know 
if these have been asked or not, but how much time do 
regulators spend in a bank doing the CRA examination?
    Mr. Pitkin. Well, Congresswoman, we in Connecticut do ours 
offsite, and we take into consideration the Federal examination 
that is done, but we have a profile of each of our banks. It is 
very detailed. There is a cottage industry of tools you can use 
with software to use on the HMDA data to create whatever market 
area the bank is operating in, and it has worked out very well 
for us. We update it yearly, and I think that is probably more 
often than most banks get their CRA exam onsite. We think it is 
very accurate and very effective in keeping track of banks' 
compliance with CRA.
    Mrs. Biggert. So you think there are less burdens now 
    Mr. Pitkin. Yes I do. I do think there are a lot less 
burdens, and that is the feedback from our institutions.
    Mrs. Biggert. Would anybody else like to comment?
    Ms. Thompson. At the FDIC, we supervise about 5,200 banks, 
and most of them are small community banks, and we typically 
spend about a week or so on our CRA and compliance exams.
    Mrs. Biggert. Okay. Thank you. Yes?
    Ms. Jaedicke. For the OCC, I would say it varies 
dramatically based on the size of the financial institution, 
and we regulate some financial institutions that are 
extraordinarily large. But also we regulate a large number of 
small community banks.
    For our community banks, it takes about a week to do a CRA 
exam, and after Gramm-Leach-Bliley, when the examination 
schedule was extended, smaller community banks that have an 
outstanding rating will only receive an exam every 5 years.
    So I think the burden has been greatly reduced in terms of 
the amount of time we spend and the number of exams a bank gets 
over a certain period of time. For a large bank, it takes a 
significant amount of time to do a CRA exam, because they may 
have multiple assessment areas across the United States.
    Ms. Yakimov. Those institutions that we go into more 
frequently are those that received a less-than-satisfactory 
rating, where more active supervision is warranted. So I think 
we have done a lot to try to reduce, the Congress has done a 
lot to establish those benchmarks as well.
    Mrs. Biggert. When a bank receives a less-than-favorable 
rating, what steps do they take, or how do you work with them 
to improve that?
    Ms. Yakimov. We go onsite more frequently. We follow up on 
issues that were raised during the previous exam and make sure 
that they are following that, and if necessary, an enforcement 
action is an outcome.
    Mrs. Biggert. Thank you. Thank you, Mr. Chairman. I yield 
    Mr. Cleaver. [presiding] I have just one question, then we 
will move on to Mr. Sires. In the Community Reinvestment Act, 
the language, ``local community'' is all through the 
legislation. And it has occurred to me that the banking world 
has changed so dramatically that we don't have much of a local 
community with regard to banks. I mean, much of their business 
is now done even through the Internet. The huge banking 
conglomerates have taken over, so there is no local community. 
And I'm curious about whether any of you would agree that 
perhaps we ought to revisit the language, ``local community,'' 
redefine ``local community'' in the language, or define it 
    Mr. Pitkin. Well, Congressman, I think we have talked about 
doing that in our home State, and I do think that the word 
``local'' can restrict the delineation of a community bank's 
identity in its community, and that the footprint--in the 
Northeast, I think we have the phenomenon of a barbell 
industry. We have small banks, and we have large banks, but we 
don't have a lot in the middle. And there are consequences to 
that as far as lending authorities go and also identification 
in the community.
    But I do think that the word ``local'' should be removed 
from the law.
    Ms. Braunstein. We discussed that. The agencies discussed 
those issues pretty thoroughly when we went through the last 
revision of CRA, and one of the things that we found is that 
for most banks, the current definition of assessment area 
worked pretty well, that even those banks that have a presence 
on the Internet, generally have some kind of brick-and-mortar 
presence, and that being able to define a local assessment area 
seemed to work except in a few cases.
    And we made some kinds of alterations to the regulation to 
allow people--and to the questions and answers--to allow 
institutions to make investments and lending and have 
activities outside of those assessment areas as long as they 
were taking care of their local assessment area.
    And it seems to be working, from what we are hearing, it 
seems to have worked fairly well, but I think it is always 
worth a conversation, because if we can improve it further, we 
are certainly willing to do that.
    Mr. Cleaver. Well, some of the large banks may have in a 
community, in a neighborhood, just a drive-through operation. 
Is it the bank of that local community?
    Ms. Braunstein. Yes. If they're taking deposits and 
offering services, yes.
    Mr. Cleaver. Well, normally those operations, they offer a 
service, but it's deposit and withdrawal. That's it. I mean, 
there are no loan applications taken there. In fact, it's 
almost--I mean, it's smaller than, you know, a Burger King.
    Anyone else?
    Ms. Jaedicke. I'd offer that I think what makes this 
question difficult is that there are banks that still have a 
local community, and we still have a significant number of 
community banks in the United States that operate within a 
defined, fairly local neighborhood or community.
    But we also have many large banks in the United States 
whose assessment areas span across perhaps several States, or a 
significant part of the country, which I think is what makes 
the question difficult.
    Mr. Cleaver. All right. Thank you. Mr. Sires.
    Mr. Sires. Thank you, Mr. Chairman. I just want to get back 
to the ratings a little bit, because as I read here, it says 
here that according to the Federal Reserve, 99 percent of the 
banks and thrifts receive an outstanding or satisfactory 
rating. That leaves 1 percent. What do you have to do to get an 
unsatisfactory rating?
    Ms. Thompson. You have to not lend in your local defined 
assessment area, and we have had institutions that have been 
rated nonsatisfactory and needs to improve. But I will tell you 
that the public input into the process is critical. The 
financial institutions covet the outstanding and satisfactory 
ratings and will do what is necessary to achieve those ratings.
    For example, you cannot expand your branches if you have 
less than a satisfactory designation.
    Mr. Sires. But, Ms. Thompson, I'm just talking about 1 
percent. That seems--with all the problems that have been going 
on with lending and everything else, I would think that percent 
would be a little higher. How do you rate? You know, I don't 
understand just 1 percent.
    Ms. Thompson. Well, in our examination process, we look at 
the lending that is done in the assessment area, and we also, 
as part of our compliance examinations and CRA examinations, 
look at fair lending issues, and we look at the cost of credit. 
And we look for patterns and practice of discrimination.
    But, again, I would note that much of the lending in 
financial institutions, especially those in low- to moderate-
income areas, is done in a safe and sound manner.
    Mr. Sires. And it also says here that the Federal Reserve 
received, since 1988, 13,500 applications for formation of 
banks. Then it goes on to say that only eight were denied. I 
don't know. I mean, that seems kind of low to me.
    Ms. Braunstein. Well, yes, it does sound very low. But one 
of the things to consider is that most financial institutions, 
when they enter into an applications process, they know that 
they have to have good records in order to complete that 
process, so they don't come forward unless they are doing the 
right things.
    And there also are cases for which I admit we don't have 
numbers, we don't track this, but there are cases where 
financial institutions may come forward who don't have the best 
records and don't have good records in various affairs, and it 
may be CRA, and they're discouraged from entering an 
application. And that would not be captured in those numbers.
    But we don't deny, at the Federal Reserve, we're not 
denying applications for any reason. It's not just CRA. There 
are a whole host of things that they're rated on, but most 
banks know that they have to have all their ducks in a row 
before they come forward with an application.
    Mr. Sires. I'm just wondering if anybody thinks that the 
rating process is a little lax.
    Mr. Pitkin. Congressman, if I could comment, I do think CRA 
has reached the point of maturity with the banking industry, 
and I think that the HMDA database is so extensive now that 
they know where their market is, and to be profitable, they 
have to serve that market. I can say that we have worked with 
our Federal counterparts at the Federal Reserve and the FDIC in 
holding up transactions for banks that didn't have a 
satisfactory compliance rating or a CRA rating. And it's not in 
the public interest to allow that rating to stand. It's in the 
public interest I think to get that bank back between the lines 
and serving its community. And I think probably that's where 
we're coming from.
    Mr. Sires. Mr. Chairman, may I have one more question? I 
see that my district, every time I wake up, I think there is a 
new bank on the main street. But worse, I see these, all these 
machines to extract money. They are everywhere; bodegas, 
pharmacies, I mean, you name it. When you do your review, is 
that part of it? You know, how does that work? Who reviews that 
when a bank puts a machine in a bodega or something and they 
charge you $2 or $3 to take out $20? You know, how does that 
work? I'm a little naive.
    Ms. Yakimov. Well, ATMs aren't considered branches for 
purposes of the Community Reinvestment Act, although we look at 
the way our institutions provide services in a broad sense. I 
guess I would offer that Community Reinvestment Act ratings are 
public, unlike the other ratings that we provide for fair 
lending and in other areas.
    So you may have an institution that--where we have seen 
issues and concerns that are not public. If there are fair 
lending violations and concerns, it has an adverse impact on 
the CRA rating, but wouldn't necessarily take an institution 
from outstanding to, you know, substantial noncompliance, or 
from satisfactory all the way down to substantial 
    So all these things are factored in in terms of our 
evaluation, but most of these ratings aren't public. And 
because CRA ratings are public, I think there is even a greater 
incentive for institutions, they want to get it right. They 
don't want to be embarrassed. Outside of the implications for 
approvals for mergers and branches, they don't want an 
unsatisfactory rating that is public.
    Mr. Sires. How many people do you know, that when they open 
a bank account, they look at the CRA rating?
    Ms. Yakimov. Probably none.
    Mr. Sires. Okay. Thank you very much, Mr. Chairman.
    The Chairman. The gentlewoman from California, Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. Let me thank 
our panelists for being here today. From the time that I first 
became involved with CRA, we have been interested in trying to 
make sure that the ratings make good sense when they get 
excellent or satisfactory ratings, it's because they have 
basically complied with the spirit of CRA.
    We have been concerned about mergers and bank branches and 
all of that, and I think enough has been said or perhaps will 
be said today about the fact that banking services are provided 
in so many different ways now that increasingly, we're not 
talking about the same certainly structures that we talked 
about before.
    I am interested in trying to delve into how we could 
possibly use CRA to deal with our subprime crisis. I have not 
thought it through, but I certainly would like to do something 
to encourage those banks, such as Countrywide, who were 
involved in a lot of the subprime lending, to do workouts and 
to do modifications and to help people stay in their homes.
    I also realize that a lot of this paper is not held by the 
traditional bank as we have known it. But let me just ask, has 
anybody given any thought to that?
    Ms. Braunstein. Well, we did. The agencies issued guidance 
to the industry encouraging participation in workouts and 
saying that they would get CRA recognition for doing that. So 
we have--
    Ms. Waters. Oh, you did?
    Ms. Braunstein. Yes.
    Ms. Waters. What kind of response did you get?
    Ms. Braunstein. Well, I don't--I mean, I think that there 
are a number of institutions that are trying to work towards 
disclosure--towards, I'm sorry, foreclosure mitigation. I don't 
know--I mean, we haven't measured a response specifically to 
our guidance. Our guidance, you know, also came out when other 
things were happening, before other things happened. After our 
guidance was out, the HOPE NOW coalition was formed, some other 
kinds of initiatives have gone on.
    Ms. Waters. Yes. We are still hoping.
    Ms. Braunstein. So, I don't know if that was--
    Ms. Waters. We are still hoping for the HOPE NOW coalition.
    Ms. Braunstein. I'm sorry?
    Ms. Waters. We are still hoping that the HOPE NOW coalition 
will do what it said it would or could do.
    Ms. Thompson. We are looking for ways to give CRA credit to 
institutions that are willing to transition borrowers from 
high-cost loans from some of the subprime exploding ARMs to 
low-cost loans. And we have also been working with institutions 
to give them credit for foreclosure prevention mechanisms, to 
keep the borrowers in their homes.
    So we think that CRA can be used in a proactive way. And in 
July, the agencies issued a number of Q&As that address the 
subprime issue and foreclosure and loan mitigation 
    Ms. Waters. I don't know if that information has been made 
available to the committee, or I don't think most of the 
Members of Congress know that or understand that you have 
issued guidelines and that you have found a way to give CRA 
credit for workouts and modifications and loan mitigation. So I 
certainly would like to have that information, and I would 
also, Mr. Chairman, would like to, since it only would take 
into consideration the institutions that are covered by CRA, 
aside from this kind of look at that, what we could do with the 
securitization firms and organizations that are involved with, 
you know, managing the paper with all of this.
    So, thank you. And we will follow up to get additional 
information about what you have issued and how the CRA credits 
you are creating work. Thank you very much.
    The Chairman. Those are clearly areas that tie in, because 
the role of the securitizers has become very significant, the 
potential legal issue there. That is one of the things we are 
most focused on.
    The gentleman from Minnesota.
    Mr. Ellison. Thank you, Mr. Chairman. Also let me thank all 
the panelists; it has been a fascinating dialogue this morning. 
I want to talk to you about the 10 million people who are 
unbanked in our country, or that is the estimates that I have 
heard. How is the CRA addressing this unbanked population? Do 
you get credit for addressing all these people who are 
basically cash consumers, paying high fees for everything? How 
do you address the unbanked population?
    Ms. Thompson. Well, I can--the FDIC has established, 
through Chairman Bair's leadership, a committee for economic 
inclusion, and we also have alliances for economic inclusion in 
nine areas of the country where we formed broad-based 
coalitions with financial institutions, regulators, and 
community groups to try to identify unbanked and underbanked 
people, people who--
    Mr. Ellison. Underbanked.
    Ms. Thompson. --are not using banking services to the 
extent that they should, to bring them into the banking system. 
Chairman Bair has also established a small dollar loan pilot 
program to try to encourage financial institutions to provide 
small dollar loans at a reasonable price. We have about 30 
banks participating in our pilot program so that we can try to 
figure out what some of the best practices are so we can fill 
the gaps in for some of the high-cost credit products.
    Mr. Ellison. How is it going? Have you been able to 
document whether you have made any progress?
    Ms. Thompson. We just started our pilot program this year, 
and we're expecting information coming in from our institutions 
in the near term.
    Mr. Ellison. Would you be able to send us that?
    Ms. Thompson. Absolutely.
    Mr. Ellison. Thank you. What about this--I'm curious to 
know how it is that there could be so many unbanked people, 
given the existence of CRA. I mean, CRA is all about economic 
inclusion and bringing people in. Is CRA inadequate to address 
the needs of the unbanked? Do we need to change the law in some 
way to create better motivation for banks to reach down into 
this vast pool of people who are unbanked or underbanked? What 
do you think about that, Ms. Yakimov?
    Ms. Yakimov. Well, I think one step the agencies have taken 
to deal with this issue and bring more people into the 
financial services mainstream is giving credit for remittances, 
so institutions that provide that service a good opportunity to 
reach out to underbanked and unbanked people.
    Also the Treasury Department has the Financial Literacy 
Education Commission. They have had a series of meetings in 
various communities, African-American, and Latino communities, 
to try to understand why there is some reluctance for 
institutions to take advantage of financial services, how can 
the system be more attractive. I think those discussions and 
these meetings--
    Mr. Ellison. Well, you know--
    Ms. Yakimov. --are really important.
    Mr. Ellison. Excuse me, you know, Ms. Yakimov, it's 
interesting, because it is kind of a--there are two ways to 
look at it. You can say well, the banks aren't reaching out to 
these communities, or you can say these communities don't want 
to go to banks. You can look at it both ways.
    I tend to think that paying $10 to cash a check for $100 is 
something most people wouldn't want to do. And if they had a 
bank, they wouldn't do it. So, if you assume consumers are 
rational actors in the market, then if you are unbanked, then 
there is some barrier to being banked. Don't you agree with 
    Ms. Yakimov. Well, it's a good point you raise. And the 
service test is one way that we observe and we measure how our 
institutions are reaching and providing services in their 
communities. So, for example, we look at the branch network. We 
look at where they're located. We look at whether they're 
located in low- and moderate-income communities. So that's an 
important tool in the arsenal with respect to CRA.
    Mr. Ellison. Do you think the service test is adequate to 
really test what we're trying to measure? Because, again, you 
know, we have a lot of people who are unbanked, so something's 
not happening right.
    Ms. Yakimov. This is something I think the agencies need to 
look at. Director Reich has publicly said how important he 
believes it is for institutions to serve. Branches provide an 
    Mr. Ellison. Right.
    Ms. Yakimov. Particularly branches in low- and moderate-
income communities, they provide a more cost-effective means to 
obtain financial services with respect to--vis-a-vis payday 
lenders and check cashers. So--
    Mr. Ellison. Title loans.
    Ms. Yakimov. All of that.
    Mr. Ellison. The whole nine--pawn shops.
    Ms. Yakimov. All of that.
    Mr. Ellison. Yes, these kind of institutions, you know, in 
many ways, they work to, you know, reinforce poverty. Part of 
being poor is that you don't get enough, and the other part is 
that you pay too much. And so access to a bank that can give 
you an affordable financial product is a very important anti-
poverty measure.
    Ms. Braunstein, could you talk about how hard it is for 
people who are unbanked to make it? I mean, what are some of 
the barriers that they are facing?
    Ms. Braunstein. I think it is very difficult for people who 
are unbanked in many ways. Sometimes it--well, it creates 
problems in terms of the costs that they pay for financial 
services, number one. It's also more difficult for them to 
build up any kind of credit record, which is used not just for 
provision of financial services nowadays, but can be used in 
other means, getting insurance, other kinds of--in 
transactions, even sometimes getting employment.
    Also, sometimes employers are doing direct deposit now, and 
so if you don't have a bank account, that can be a barrier for 
that. Although many employers are going to payroll cards, 
which, you know, present their own kinds of issues. It is 
certainly better if people have services, access to or serviced 
by a financial institution.
    Mr. Ellison. My time is up.
    The Chairman. Thank you. I thank the panel. We will hope to 
hear from you more as we deal with this. This is, as I said, 
something we take seriously, and let's get the next panel here. 
It does look to me now like we are going to be able to finish 
today. I will be gone, but I will have someone else sit here. 
So let's move quickly, people.
    Do not impede the leaving of the table. Let's sit down. You 
can shake hands and talk later. A minute may not sound like 
much to you now, but we are in a real hurry. Just sit down.
    I will begin with Ellen Seidman, who is the director of the 
financial services and education project at the New America 
Foundation. Ms. Seidman, please go ahead.
    Everybody's full statements and material will be submitted 
for the record, so there will be no further need to request 
    Go ahead.


    Ms. Seidman. Chairman Frank, and members of the committee, 
thank you very much for this opportunity to testify today about 
the effectiveness and the future of the Community Reinvestment 
Act. You mentioned that I am currently directing the Financial 
Services and Education Project at the New America Foundation, 
but from October of 1997 to December of 2001, I was the 
Director of OTS. And as OTS Director, one of my priorities was 
to make certain that the institutions we regulated understood 
the importance of meeting both the letter and the spirit of 
    My experience with CRA at OTS, with this New America 
Project, and also with my job at ShoreBank has taught me 
several lessons. First, what is measured, like residential 
loans, is what gets done. Measurement is incredibly important. 
CRA has focused heavily on residential loans and the kinds of 
investments that are easily measured.
    Second, the regulatory system can be significantly 
leveraged by information made directly available to the public. 
Third, CRA has generated a fair amount of innovation. I think 
this is really important with respect to some of the questions 
that were being asked earlier. CRA changed the hurdle rate for 
new products, services, and markets, encouraging banks and 
thrifts to look for investments and products for which a part 
of the return was in CRA credit rather than in dollars. Some of 
those products continue on purely financial terms. In other 
cases, the institutions understand the value of both CRA and 
the publicity that comes with it.
    Fourth, the implicit requirement that banks enter new 
markets for which gaining trust, getting business, and making a 
profit were not familiar has required partnership and 
collaboration with a wide variety of more community-oriented 
    So those are the positive lessons, but there is plenty of 
room for improvement. Most obviously, as you have discussed, 
the CRA applies only to banks and thrifts. The myriad of other 
types of organizations that provide some or all of the same 
types of financial services to some or all of the people that 
CRA was designed to assist remain uncovered.
    Second, it has become a complex regulatory regime, 
especially with respect to service and investment. Third, the 
lack of an explicit enforcement mechanism beyond the merger 
situation works well in terms of major merger activity, but not 
as well otherwise. Some States and localities have been 
effective in adding other incentives such as linked deposits. 
We need to think of other ways to incent CRA performance.
    Fourth, the spatial origin of CRA has had several negative 
effects. They are described in my testimony, but let me just 
raise one: notwithstanding that redlining had its origin in 
racial discrimination, the statute is color-blind, which has 
limited its impact in many of the communities and populations 
it was meant to serve.
    The language of CRA is focused on communities, and the 
impetus for its enactment was redlining of entire 
neighborhoods. Nevertheless, the manner in which financial 
institutions dealt with people in low- and moderate-income 
communities, limiting their access to credit, closing branches, 
and moving out was also part of CRA's origins.
    Our current debt crisis makes this a propitious time to 
consider how the ``people'' aspect of CRA can be improved. I go 
into this in much greater detail in my written testimony, but 
let me just say I think it's time, at least to consider, a 
totally new paradigm for consumer financial services and one 
that is just as bold as CRA was 30 years ago; namely, any 
financial institution that provides an essential consumer 
product must make that product available in a fair and 
transparent manner to low- and moderate-income consumers, in 
all communities, in all broad geographies in which the entity 
does more than an incidental amount of business in the product. 
This paradigm would concentrate the attention of business, the 
public and government on what is important to consumers and 
would use the market forces generated by consumers with the 
knowledge and resources to demand high quality financial 
services to extend the reach of those products and services to 
the rest of the market.
    To bring CRA as applied to banks and thrifts more fully in 
line with both the modern financial services system and the 
principles proposed, some changes would be desirable. CRA 
should cover service to low- and moderate-income consumers 
everywhere a bank or thrift does a significant amount of 
business and a covered product. Effective public disclosure 
regimes should be added to cover essential products beyond 
residential loans. Any for-profit subsidiary of a holding 
company that provides any of the essential products should be 
evaluated in the same manner and at the same time as the 
largest bank or thrift in the holding company group.
    With respect to consumer protection and fair lending 
responsibilities, the agencies have moved in that direction but 
they need to become much more firmly embedded in all CRA 
evaluations, including in particular the investment test. And 
incentives should be established that are external to CRA.
    But as we all know, changing the rules for banks and 
thrifts is not enough, and in fact would make the unlevel 
playing field even more unlevel. It's essential to extend the 
responsibility to serve all consumers fairly and equitably to 
all providers of essential consumer financial services.
    One could extend CRA's language and regulatory system to 
other types of financial institutions, placing examination and 
enforcement responsibility on their regulators to the extent 
they have them or on surrogates such as HUD. However, for 
financial services entities operating under different types of 
or no regulatory regime, alternative solutions that take 
maximum advantage of regulatory systems and responsibilities 
already in place, such as the suitability standard in the 
securities industry, may be a better solution.
    In conclusion, by enacting CRA 30 years ago, the Federal 
Government challenged the banking industry to help lower income 
communities and their residents to achieve a better life. 
Consumers today are expected to take much greater 
responsibility for their financial health and stability, and 
many Americans are having a difficult time with this task. The 
new responsibility paradigm presented here challenges the 
entire financial services industry, as CRA did banks 30 years 
ago, to help American consumers to do better.
    Thank you.
    [The prepared statement of Ms. Seidman can be found on page 
167 of the appendix.]
    The Chairman. Thank you.
    Next, John Taylor, who is the chief executive officer of 
the National Community Reinvestment Coalition.


    Mr. Taylor. Good afternoon, Chairman Frank, and thank you 
Representative Waters, Representative Watts, Representative 
Cleaver, and other members of the Financial Services Committee 
for the opportunity to offer the remarks of the National 
Community Reinvestment Coalition.
    Mr. Chairman, America, as you know, is in the grips of a 
foreclosure crisis. It is destroying family wealth, undermining 
communities, and destabilizing the economy. And the sad and 
unfortunate reality is that this problem was largely 
unnecessary and avoidable. The failure to protect consumers in 
the home loan market from rampant unfair and deceptive mortgage 
lending practices is the core of the problem that we face 
    Improved coverage and enforcement of the Community 
Reinvestment Act could have provided much of the needed 
protection. The overwhelming share of subprime mortgages 
heading into foreclosures were made or funded by lending 
institutions that are not subject to CRA. CRA does not apply, 
for example, to independent mortgage companies, investment 
banks that securitize these loans, and many mortgage company 
affiliates of banks.
    These non-CRA-covered institutions issue hundreds of 
thousands of loans annually, without adequate oversight. Their 
misbehavior has now impacted all Americans regardless of 
whether they have a subprime loan. In fact, inadequate 
regulation of the subprime market is negatively impacting all 
Americans, regardless of whether they even own a home.
    Sadly, all signs suggest the worst of both the foreclosure 
crisis and the slumping economy remains ahead of us. In 
addition to the need to expand CRA's coverage to other 
institutions, we must also improve the system of regulatory 
enforcement of this law. Regulators count less and less of the 
bank's geographic areas in doing their CRA assessment of banks. 
They have less frequent examinations under this law, and the 
grading system for assessing a bank's CRA performance has 
increasingly become inflated.
    Consider and compare just two 3-year periods of bank 
regulatory grading, 1990 to 1992, and 2004 to 2006. In the 
first period, 1990 to 1992, when lenders primarily issued prime 
loans where we saw none of the predatory aspects that we have 
seen recently, the average failure rate was 10 percent bank 
failure of the CRA exam.
    Now, fast-forward to the recent 3-year period, 2004-2006. 
This, of course, was the height of much of the unfair lending 
practices that created the problems we have today. In a period 
of time when we had the most outlandish, most predatory, 
usurious, unfair, and discriminatory kind of lending, we saw a 
900 percent drop in the percentage of failure CRA ratings that 
banks got on their CRA exam. So CRA-grade inflation was 
improper moding was promoted by allowing banks to pick and 
choose what activities and affiliated institutions to include 
in their CRA exams. Imagine that? The bank gets to say, well, 
yes we want this affiliate that does this kind of lending 
counted at our exam, or they don't.
    And so they use it to manipulate the score, and the 
regulators go along with that. Moreover, we have not had a 
public hearing on a bank merger since 2004, despite several 
major mergers involving branch closures and other serious 
ramifications for working class and minority neighborhoods. 
Numerous studies have found that CRA encourages responsible 
lending to low- and moderate-income communities in a way that 
is consistent with safety and soundness concerns. A study by 
the Joint Center for Housing studies at Harvard University 
estimates that without CRA, over 336,000 fewer home purchases 
would have been made to low- and moderate-income neighborhoods 
between 1993 and 2000.
    The Federal Reserve Bank, in their review of the Home 
Mortgage Disclosure Act data, has found that home loans issued 
by banks are significantly less likely to be high-cost and 
exhibit risky features than those issued by the independent 
mortgage companies and other non-CRA-covered institutions. 
These studies offer an important endorsement for the value in 
the potential of CRA.
    Greater CRA coverage for banks and other financial services 
firms would improve on these impressive statistics and enhance 
financial services access for working families in their 
communities across the Nation. Curiously, Federal regulators 
often say that their principal focus is to ensure the safety 
and soundness of the financial system, yet, the foreclosure 
crises demonstrates that the key way to ensure safety and 
soundness of this financial services system is to ensure proper 
financial services protections for consumers is in the credit 
    As long as short-term bank profitability is the sole or 
principal measure of safety and soundness, crises like the one 
we face today could occur again. The changes to the law I have 
suggested today in my opening remarks and detailed in my 
testimony are largely included in H.R. 1289, the CRA 
Modernization Act of 2007, proposed by Representative Eddie 
Bernice Johnson from Texas and 14 other co-sponsors. Passing 
that law is essential.
    Yet strengthening CRA will have little effect without 
enforcement. Congress also must ensure that the laws it enacts 
are thoroughly and fully enforced. In addition to the 
foreclosure crisis, we face today broader and systemic 
challenges of financial access. Payday lending, abusive credit 
card issuers, and related alternative high-cost financial 
services have grown exponentially over the past decade. Their 
growth has been accompanied by the closing and departure of 
bank branches from the same communities. With a CRA examination 
passing rate of 99 percent, it is clear that the Federal 
regulatory agencies are not seriously considering the Service 
Test of the CRA exam, or the overall history of opening and 
closing bank branches in minority or underserved communities.
    In conclusion, if this foreclosure crisis has taught us 
anything, it is that America must be effective in supporting 
efforts to sustain a Financially Inclusive Society. Consumer 
protection laws, CRA and the fair lending laws must be obeyed 
and they must be accompanied by adequate and effective 
regulatory enforcement mechanisms. The financial services needs 
of working class Americans must be respected and promoted if we 
are to have the kind of economic mobility that creates more 
    And I'm wrapping up, Mr. Chairman. Thank you.
    Americans willing to work hard, pay their taxes, practice 
their faith, and who are seeking to build a more promising 
economic future for their families, should no longer be 
subjected to the kind of lending malfeasance that we have 
experienced in the past several years. The need for a strong 
and expanded CRA with meaningful enforcement has never been 
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Taylor can be found on page 
179 of the appendix.]
    The Chairman. Next, we are going to have votes. We are back 
to real votes now. These are not procedural ones, so we will 
probably have a break for about a half hour, then I'm going to 
have to leave. But there will be other people testifying.
    Before I leave, I did want to ask Mr. Taylor one question. 
The legislation you mention by Congresswoman Johnson expands 
CRA coverage but does not expand it to credit unions, so I just 
wondered what your position would be on that.
    Mr. Taylor. Yes well, we were hoping that Representative 
McGovern has. It also, Mr. Chairman, does not call for--
    The Chairman. Well, let's just talk about the issue I 
    Mr. Taylor. Yes, I totally agree. And in Massachusetts, our 
experience has been that they perform as well or as better than 
banks. And those that aren't covered in Massachusetts because 
they are federally-chartered credit unions do not do as well.
    The Chairman. Well, because I was told that they weren't 
there, and with regards to the bill, I just want to make sure 
that is where we were. Next, we'll hear from Marva Williams, 
who is the senior program officer at the Chicago Local 
Initiatives Support Corporation. Ms. Williams?


    Ms. Williams. Thank you. I appreciate this opportunity to 
testify today.
    My name is Marva Williams, and I am a senior program 
officer of the Chicago office of the Local Initiative Support 
Corporation, or LISC.
    As many people have testified today, CRA is critical to 
bringing capital and financial services to lower income 
communities, and it has encouraged banks and thrifts to 
increase sound and profitable lending, to devolve flexible and 
financial products, to make community and development loans and 
investments available, and to encourage partnerships between 
financial institutions and community-based organizations.
    Since 1980, LISC has worked in numerous partnerships 
involving banks and thrifts, nonprofit housing development 
organizations, and government agencies. LISC currently invests 
over $1 billion each year in these partnerships, leveraging $25 
billion since 1980. Our work covers a range of activities that 
contribute to sustainable communities, and in fact the Chicago 
office was one of the first LISC offices to devolve a 
    The Chairman. Ms. Williams, we are time-limited. We did 
want this to be about CRA and not LISC.
    Ms. Williams. Okay, thank you.
    As others have testified today, CRA has worked remarkably 
well. However, it has not kept pace with the financial 
industries' trends over the last 30 years. Banks no longer 
originate a majority of home mortgage loans. They currently 
originate less than half of home mortgages. As Representative 
Cleaver noted, banks are no longer oriented to a local area, 
and so the assessment area is no longer appropriate or very 
    In 1977, the overriding concern was denial of credit in 
entire lower income neighborhoods. However, as John Taylor and 
others have mentioned, subprime lenders are now aggressively 
pursuing those communities. And I believe that the subprime 
mortgage crisis has shown us that prudent government regulation 
is important, not only for consumers and communities, but also 
for the safety and soundness of our financial system. And then 
last, banks and thrifts were peripheral to government housing 
and community development programs, and that is no longer true.
    I offer the following observations and suggestions for CRA. 
CRA coverage should be expanded beyond banks and thrifts. The 
CRA coverage to assessment areas around branches is no longer 
appropriate. Although CRA examinations occur regularly, CRA is 
most influential when a bank or thrift applies to merge with or 
acquire another institution. CRA should be enforced on a 
regular basis during examinations. The regulators should also 
actively and regularly invite public comment and public 
    The community development activities of large banks and 
thrifts should be considered together. Community development 
activities are qualitively different from other kinds of 
activities such as home mortgages and small business loans. 
Community development activities are generally smaller in 
volume, and sometimes more complex, but they add value and 
should contribute to a concerted strategy.
    Many rural communities have few if any banks with 
sufficient capacity to address complex community development 
needs. Banks and thrifts that serve local community needs 
should receive full recognition for that. Data requirements and 
performance criteria have not changed significantly over the 
last 30 years. Some thought should be given to updating an 
institution's qualitative and quantitative data reflecting 
recent learning in the asset development field.
    And, last, I am concerned about geographic redlining based 
on the predominant race of the community. Fair lending laws 
applied to individual borrowers and CRA applies to lower income 
communities, but neither law explicitly addresses disparate 
service to minority communities.
    In closing, I urge the Financial Services Committee to make 
CRA an effective tool for ending geographic discrimination and 
to increase the potential for asset development of lower income 
and minority communities and consumers.
    Thank you.
    [The prepared statement of Ms. Williams can be found on 
page 247 of the appendix.]
    The Chairman. Thank you. We are going to break now for a 
vote. I apologize. We have probably a half hour or so that we 
will be gone. But the votes are 15 minutes, and we only have 
about 3 minutes left, and it is a substantive vote, and not a 
procedural one. We will resume. That is just the nature of the 
business that we are in.
    The Chairman. As I was saying--actually, I am changing what 
I was saying. This really is a very important issue. I 
apologize for the disruptive day. I guarantee there were a lot 
of interested members; we had about 15 members at one point or 
another. That is indicative of real interest. We have talked 
among each other and there is real concern here.
    And this is more important to me than the photo op, so I 
will not be going to the White House. He can sign the bill 
without me. Although, when he acts without me, he does not do 
as well as when he acts with me. So we are just down to a 
signing now, so there is no problem. And I want to get this 
    I appreciate--this has been very useful to us. And I just 
want to again assure you that your time has not been wasted. We 
are paying serious attention here.
    Professor White, why don't you go ahead.


    Mr. White. Thank you, Mr. Chairman. My name is Lawrence 
White, and I am a professor of economics at the NYU Stern 
School of Business. I am here solely representing myself. I 
appreciate this opportunity to be here and thank you for the 
    My views on the CRA differ from those of my fellow 
panelists. Despite the good intentions and worthwhile goals of 
CRA's advocates, the CRA is simply the wrong instrument for 
achieving those goals. The CRA is fundamentally an effort to 
``lean'' on banks and savings institutions in a vague and 
subjective process to make loans that its advocates believe 
would otherwise not be made.
    The CRA processes have gotten better over the years. But 
still, fundamentally, they are a vague and subjective process--
because, ``meet the credit needs'' is inherently a vague 
    There is a fundamental contradiction at the heart of CRA. 
If these loans are profitable, then banks and thrifts should 
already be making them, unless the banks are lazy or dumb or 
ill-intentioned. And maybe that is a decent characterization of 
what the banking world was like in the pre-1970's era. But I 
think it is hard to describe the competitive banking world of 
2008 in those terms. Banks may not be the perfect profit 
maximizers of economics textbooks, but to think that they 
systematically overlook profitable opportunities, I think, is 
just not correct.
    Or maybe there are spillover effects such that individual 
loans aren't profitable, but collectively loans would be 
profitable. In that case, we ought to be seeing banks forming 
consortia and joint ventures among themselves. After all, this 
is a small numbers situation, and they do form consortia and 
joint ventures all the time.
    Or the loans are unprofitable. In which case, either those 
loans are going to have to be cross-subsidized by super-
profitable areas--but with increased competition there is going 
to be less and less super-profitable opportunities. Or the 
loans will cause losses. Or the obligations will be shirked in 
some manner. And none of these are good bases for policy.
    In sum, the localism orientation of the CRA is an 
anachronism. It is based on an inherent contradiction that runs 
counter to the broad sweep of public policy that has encouraged 
deregulation and greater reliance on competition. Ironically, 
at a time when residents of low- and moderate-income 
communities are having to rely on high-cost check cashing and 
payday lending services, which a number of the people 
testifying this morning have talked about, because of the 
absence of bank locations to which they can turn, the CRA 
obligations may well be discouraging banks from establishing 
locations in these communities and offering better priced 
services. This is especially if those locations are going to 
carry the burden not only of providing those services but also 
of forced lending to those communities. If bank branches are 
going to be characterized as institutions that drain deposits 
out of these communities, if banks are going to be told that 
just drive-through locations are not sufficient, if they are 
going to be given a hard time when they try to exit an area, 
then banks are not going to want to set up establishments in 
the first place. Barriers to exit are barriers to entry.
    There is a better way. First, vigorous enforcement of the 
Equal Credit Opportunity Act and other relevant statutes to 
prevent discrimination on the basis of racial or ethnic 
characteristics or other categories of personal discrimination 
is essential. It is terrifically important.
    Second, vigorous enforcement of the antitrust laws, to make 
sure that financial markets remain competitive is important. 
But competition should not be allowed to veer off into 
predatory behavior.
    Third, if there are socially worthwhile loans and 
investments that somehow are not being made by existing 
lenders, then those loans should be made through the public 
fisc in an on-budget and transparent process. The Community 
Development Financial Institutions Fund, which is financed 
through the public fisc, which is administered by the Treasury, 
is a good example of this kind of funding process. And, as 
appropriate, its funding should be increased so as to support 
these kinds of socially worthwhile investments and loans.
    Finally, if public policy persists with something that 
resembles the CRA, then the bank and thrift CRA obligations 
should be made explicit and tradable among banks. This would 
make an opaque process more transparent and would introduce the 
types of efficiencies and specialization that has made the cap-
and-trade system for dealing with sulfur dioxide emissions 
among electric utilities such a successful program.
    Thank you again for the opportunity to testify this 
morning. I will be happy to answer questions from the 
    [The prepared statement of Professor White can be found on 
page 238 of the appendix.]
    The Chairman. And our final witness on this panel is 
Professor Michael Barr of the University of Michigan Law 

                           LAW SCHOOL

    Mr. Barr. Thank you, Chairman Frank, and distinguished 
members of the committee. It is an honor to be here today to 
discuss CRA.
    CRA has helped to revitalize low- and moderate-income 
communities and has provided expanded opportunities for low- 
and moderate-income households. Going forward, CRA could be 
strengthened to ensure its continued role in encouraging sound 
lending, investment, and services. At the same time, CRA cannot 
be expected to resolve the range of financial problems facing 
low- and moderate-income communities today.
    This committee has already taken strong leadership to clean 
up the mortgage business and I am confident that the committee 
will continue to lead in resolving our housing crisis.
    At its core, CRA helps to overcome market failures in low-
income communities. By fostering competition among banks and 
thrifts serving low-income areas, CRA generates larger volumes 
of lending from diverse sources, adds liquidity to the market, 
and decreases the risk of each bank's loan. Encouraged by the 
law, banks and thrifts have developed expertise and 
specialization in serving low-income communities. And they have 
created innovative products that meet the credit needs of 
working families in low-income areas with manageable risks.
    Increased lending by responsible originators to low-income 
communities has occurred under CRA and such responsible lending 
has not led to the kind or extent of excessively risky activity 
undertaken outside of CRA's purview. Despite the fact that CRA 
has increased bank and thrift lending in low- and moderate-
income communities, such institutions are not the only ones 
operating in these areas.
    In fact, subprime lending exploded in the late 1990's, 
reaching over $600 billion and 20 percent of all originations 
by 2005. More than half of subprime loans were made by 
independent mortgage companies, another 30 percent by 
affiliates of banks or thrifts, and the remaining 20 percent 
were made by banks and thrifts themselves.
    Although reasonable people can disagree about how to 
interpret the available evidence, my own judgment is that the 
worst and most widespread abuses have occurred in the 
institutions with the least Federal oversight. The housing 
crisis we face today, driven by serious problems in subprime 
lending and spreading rapidly, suggests that our system of home 
mortgage regulation is seriously deficient. We need to fill 
what my friend the late Federal Reserve Board Governor Ned 
Gramlich aptly termed, ``the giant hole in the supervisory 
safety net.''
    Banks and thrifts are subject to comprehensive Federal 
regulation and supervision, their affiliates far less so, and 
independent mortgage companies not at all. Market-based systems 
designed to ensure sound practices in this sector--broker 
reputational risk, lender oversight, investor oversight, rating 
agency oversight, and so on--simply have not worked. Conflicts 
of interest, lax regulation, and boom times covered up the 
abuses, at least for a while, at least for those not directly 
affected by the abusive practices. But no more. As has become 
all to evident, the subprime market has been plagued by serious 
    In some ways, CRA can help. Competition from banks and 
thrifts can help to drive out abusive practices. However, in 
recent years, there was intense competition among mortgage 
market participants to provide products that investors wanted, 
not those that households needed. Further Federal regulation is 
thus necessary to combat abusive practices, prevent a race to 
the bottom in bad lending behavior, and restore integrity to 
our housing markets. We need to ensure that all participants in 
the mortgage process have the right incentives to engage in 
sound lending practices.
    One step would be to include affiliates in the banks' 
performance context for CRA. For example, CRA regulations 
provide that evidence of illegal credit practices will affect 
an institution's CRA rating. Illegal credit practices of an 
affiliate should also be relevant to its affiliate bank's 
rating, and the bank agency should engage in risk-based 
examination of affiliates.
    Along with maintaining and strengthening CRA, Congress 
ought to enact a range of complementary policies. We need to 
give new authorities to FHA, Fannie Mae, and Freddie Mac to 
arrange through responsible originators for the refinancing of 
loans at terms that reduce the likelihood of default, 
foreclosure, and liquidation. We should take this opportunity 
to implement commonsense reforms to the mortgage market to 
reduce the likelihood of crises in the future, as this 
committee has in its mortgage reform bill. And we eagerly await 
that legislation being enacted by the other chamber and being 
signed into law.
    In moving forward, we should remind ourselves of Ned 
Gramlich's question: ``Why are the most risky loan products 
sold to the least sophisticated borrowers?'' Well, lenders hid 
the ball. Many borrowers took out loans that they did not 
understand and could not afford, with predictable results. That 
is why we need a new opt-out home mortgage plan, a plan under 
which borrowers would be offered a standard set of mortgages 
with sound underwriting and straightforward terms. Borrowers 
could opt out of the plan, but lenders would face incentives 
not to push borrowers into loans that they could not understand 
or afford.
    CRA in the past has helped to expand access to responsible 
credit to low- and moderate-income households. And in my view, 
it can continue to do so in the future. Innovation has been a 
hallmark of our financial system and with the appropriate mix 
of private sector initiative, government policy, and regulatory 
supervision, we can expect our financial system once more to be 
vibrant, strong, and inclusive.
    [The prepared statement of Professor Barr can be found on 
page 77 of the appendix.]
    The Chairman. Thank you.
    Mr. White, let me ask, as I understand the argument is that 
the notion that you have to push banks to make these loans is 
based on, as you said, the notion that they are either lazy or 
ill-intentioned or inefficient. And essentially, we can count 
on them to make loans that make sense.
    Mr. White. That would be--
    The Chairman. Then why do we need the racial 
discrimination--I find this glaring contradiction. You talk 
strongly about the need for racial enforcement. I must tell you 
the people whom I have heard previously make the argument, 
namely that you don't have to tell profit-making institutions 
to make a profit, they know enough to do that, generally don't 
want us telling them--I mean, is there something--they are not 
ill-intentioned, except that they are racist? Why, if the banks 
can do this on their own, is it so important that we deal with 
the race question?
    Mr. White. Basically, because racial, ethnic, and other 
types of discrimination are simply unacceptable.
    The Chairman. But how does it--no. No, it is not--you don't 
reach unacceptability. If we are dealing with rational, well-
intentioned, efficient, non-lazy institutions that know how to 
get money to be made, why do we have to make an exception with 
regard to race? I mean, do we have a set of perfectly sensible, 
well-functioning, profit-maximizing institutions, but they are 
blind about race? That just doesn't compute.
    In other words, you are making an exception for race, it 
seems to me, because nobody likes to say that we shouldn't 
fight racism. But I don't think it fits with your argument.
    Mr. White. Well, you know, unfortunately, we have a history 
of discrimination of various kinds. And that is just 
    The Chairman. I understand that. But we also have a 
history--you said, well, this might have made sense in the 
1970's. I mean, has history cleaned up its act in some areas, 
but not others? You say, you know, there was a period with 
banks--just again, if the banks are the thoughtful, well-
intentioned, profit--rational, efficient profit maximizers you 
make, then it wouldn't seem to me that we would need this.
    The other question I would have is this. Again, if these 
are banks--and not just banks, but other financial 
institutions, who made all those subprime loans? I mean, where 
did they come from? Were they made by efficient, well-
intentioned profit maximizers?
    Mr. White. In a world of securitization, there is clearly a 
problem of moral hazard, of a short-term perspective, 
reputation doesn't come into the picture. People make the loan, 
pass it on to somebody else, and say, ah--
    The Chairman. That doesn't sound like efficient profit 
maximizers who are well-intentioned to me. I am saying, you 
accept the fact that we have had these failures elsewhere. I 
don't understand why you assume we don't need to do anything in 
the other area.
    Mr. White. I see competitive processes. I see the kinds of 
extra things that I mentioned in my statement, as providing an 
alternative to this really vague--
    The Chairman. But banks don't compete for Black people? Why 
don't competitive processes help the Black and Hispanic people? 
I mean, why don't the competitive processes work there?
    Mr. White. I think that you have informational problems, 
for sure. But the way to deal with those is not leaning on 
banks and thrifts--
    The Chairman. I think the problem is too much information. 
They know that they are black. Maybe if they didn't, it 
wouldn't be so bad.
    All right, let me tell the others where I have some 
agreement. When we are talking about imposing these 
requirements, as I believe we should, let me deal with the 
argument about the quid pro quo which we heard earlier, in the 
earlier panel. I don't think there is an institution on whom we 
are considering imposing some requirements that cannot be shown 
to get some benefit from the Federal Government. So I don't 
think this notion that we are picking people who are honestly 
just walking down the street, entirely minding their own 
business, and giving them this burden.
    But if we do decide that there should be requirements on 
people who don't have a geographical footprint, how do we 
define the obligation? I understand there is enforcement and 
other issues. But it does seem to me if we get to it, that is 
going to be the critical, conceptual question. How do we define 
the obligation for people who don't have a geographic 
footprint? Does anyone want to start?
    Ms. Seidman.
    Ms. Seidman. I think that it is worth distinguishing on the 
geography issue between the community development issues and 
the consumer servicing issues.
    The Chairman. Agreed.
    Ms. Seidman. If we just talk about the consumer service 
issues, Montrice, this morning, mentioned that OTS has been 
facing up to this issue for--
    The Chairman. For those of us who don't spend quite as much 
time in these circles as you, Montrice was who, now? Please 
    Ms. Seidman. Montrice Yakimov from OTS, earlier today.
    The Chairman. Thank you.
    Ms. Seidman. OTS has been working those issues for about 10 
years now. Some of my co-panelists may not like fully the way 
that we did it then and I believe they still do it now, but if 
you start with a question, does an entity do any business in a 
broad, geographic area, then ask do they do an equivalent 
amount or an appropriate amount for low- and moderate-income 
consumers, you get somewhere.
    You also get somewhere if you just ask the national 
question. You just ask the question of, if I am doing home 
mortgage lending, how much am I doing in what income strata? 
How much--if we bring race into this, how much am I doing in 
what race strata? And then that is when it becomes critically, 
critically, critically important to make certain that the 
consumer protection and fair lending concepts are embedded in 
the analysis.
    The Chairman. I appreciate it. Because, you know, when I 
asked the others, one perfectly rational approach is to say, 
okay, it will be functional as opposed to geographical. Where 
there is no geographic footprint, then the obligations are 
functional and that is perfectly reasonable. But that is what--
and you are right, Ms. Yakimov did mention the work that had 
been done going back to when you were there and offered to 
share that with us and we will look for that.
    Professor Barr.
    Mr. Barr. I agree with the chairman that a functional 
approach makes a lot of sense. And in particular, looking at 
the kinds of products and services that are being offered.
    We were talking in the earlier panel about the problems of 
the unbanked. One of the problems of the unbanked is that the 
products and services that banks and thrifts tend to offer, 
such as a traditional checking account, don't make any sense 
for them. And so you would want to look at whether the bank is 
offering a low-cost, low-risk bank account that would be useful 
to low-income people. In the credit area, is the bank offering 
a credit product that makes sense for low-income people? And 
you can make that assessment in a qualitative way based on the 
kinds of products and services being offered.
    The Chairman. But what if we are talking about--Mr. Taylor.
    Mr. Taylor. Yes, I just wanted to get back to the original 
question of measuring nondepository institutions and--
    The Chairman. Right, that is a very important one.
    Mr. Taylor. There is data out there that can show you the 
pattern and practice of where their lending is occurring. And 
you are able to draw some conclusions about whether they are 
just sort of marketing and being very successful in making 
loans or disproportionately denying loans in what we would call 
protected areas, low- and moderate-income and minority 
neighborhoods, or whether they are just marketing all their 
loans and being very successful in middle and upper income 
    You know, I think what you do is you look at the data and 
then, you know, the regulator would say, well, gee, you know, 
you have an affirmative obligation, assuming CRA was extended, 
to make sure that creditworthy borrowers in other low-income 
communities which are not showing up in your data set and your 
market seems to be--you are heavily marketing in the northeast 
or nationally or whatever. You seem to be not being successful, 
I think you can do that through the available data.
    The Chairman. Anyone else? Yes, Ms. Williams.
    Ms. Williams. There have been some thoughts about how to 
improve the service tests that I think could apply to this 
area. And that is that it is possible to ``geocode,'' to 
determine the geographical location of people who have checking 
and savings accounts at an institution and to look at the 
market share ratio of those consumers compared to higher income 
consumers. And that would be one way of determining whether 
they are making an equal effort to low- and moderate-income 
communities and consumers and upper income consumers and 
    The Chairman. And I am going to turn to Mr. Baca now, 
because he is also here. I may return to this afterwards.
    The gentleman from California.
    Mr. Baca. Thank you very much, Mr. Chairman. And thank you 
for hosting this important meeting and asking so many important 
questions that you have just asked.
    Mr. Taylor, a question that I have: You mentioned that you 
think some sort of CRA-like program should be imposed on credit 
unions. Yet wasn't CRA imposed on banks because there was clear 
demonstration and evidence of bank redlining on low-income 
minority communities that they didn't find profitable?
    Mr. Taylor. Yes. And in fact, that is exactly what you will 
find with most credit unions, that when we have done studies 
and others have done studies on this, while they have improved 
in recent years, in most States, credit unions, particularly 
those that are geography based, lag banks. They are behind 
banks and thrifts in making loans to low-income and to minority 
borrowers. And in many States, to women borrowers.
    When we tell people this, they are always kind of shocked. 
Really, credit unions? Weren't they created for the purpose of 
being an alternative to the banking system because it wasn't 
serving people of small means? Wasn't that the language in 
their act?
    It was. But unfortunately, the industry has evolved to the 
point where we really do need--and especially because not only 
do they have deposit insurance, but they actually have tax 
exemption. They should never lag, let alone even be competitive 
with banks, they should be far and ahead of banks and thrifts 
in serving traditionally underserved populations because of the 
extra benefit, the added benefits that they get from the U.S. 
    Mr. Baca. And they are doing that in a lot of the areas.
    Just to follow up on that, why do you do so when Home 
Mortgage Disclosure Act data shows that the following to be 
true. A low- to moderate-income LMI application is more likely 
to get his or her loan approved at a credit union than at a CRA 
lender? And an LMI borrower is much less likely to be charged 
with higher rates, fees, at credit unions than at CHR lenders. 
And credit unions make a larger portion of their mortgage loans 
to LM borrowers than do CRA lenders, especially now, as we look 
at the foreclosures and the impact it has had on a lot of 
minorities, especially on Hispanics and African Americans?
    Mr. Taylor. Yes. Well, if you don't make the loans, you are 
not foreclosing on anybody. And I would dispute the data that 
you just put forward, that is number one.
    Number two, most of the borrowing that comes to the 
populations that you expressed a concern about, minorities and 
low- and moderate-income people, are not coming from either the 
credit unions or from the banks. Unfortunately, the problem 
loans that we are talking about are coming from non-CRA 
regulated institutions.
    You would think that the credit unions would have been far 
and away, in serving that population, perhaps reducing the 
amount of exposure that traditionally underserved people have 
to these predatory aspects of the market that are not covered 
by CRA, but they are not.
    Mr. Baca. Okay. Mr. Taylor, could you please state for the 
record how much money NCLR gets from banking interests in the 
way of conference attendance and other sponsorship or services?
    Mr. Taylor. NCLR, the National Council of La Raza, I 
couldn't tell you. But I assume you really mean to ask us how 
much NCRC gets.
    Mr. Baca. Right.
    Mr. Taylor. Right. We get about--well, we certainly get 
sponsored by financial institutions of all sorts for our annual 
conference, but we are primarily supported by grants and dues. 
We own a property, which generates income. So we have a very 
eclectic funding source. But we would be happy to have credit 
unions support us, if they were so moved.
    Mr. Baca. Thank you.
    Mr. Taylor. I do want to say that the disparities in white 
and black approval rates are higher at credit unions than they 
are at banks, the disparities in white/black approval rates are 
higher, according to the HMDA data, than they are--at credit 
unions than they are at banks. And we would be glad to give you 
that information.
    The Chairman. All right, let me--I just want to get back, 
because the other area, my colleague from North Carolina got 
into it. People who mend, it is one thing. The other question 
is, it gets into a harder area conceptually. Some of you heard 
Mr. Watt asking, well, what other institutions?
    There are firms not traditionally in the banking business 
who were major funders of the securitization of subprime loans. 
Are these entities that we should consider and what would the 
criteria be? You know, some of the financing of the subprime 
market obviously got far beyond the traditional. I agree with 
Mr. Taylor that, in fact, the regulated institutions did a much 
better job here than the others.
    Are we talking about securities firms or some aspects of 
securities firms? Are there entities that securitize mortgage 
loans? What would be the criteria, Ms. Seidman?
    Ms. Seidman. There are a couple of things. First of all, to 
some extent, it was the securities side of the banks that were 
participating. In that respect, the investment test can be 
brought to bear.
    The Chairman. That is easy. What about the securities 
people who weren't in parts of banks?
    Ms. Seidman. On the consumer side, suitability seems to 
work reasonably well in the securities industry. The question 
is, can we make it work on the investment banking side?
    The current way that we think about regulation of the 
securities industry is disclosure and protection of the 
investor. First of all, we now know that there wasn't 
disclosure and there wasn't--
    The Chairman. If I wanted answers to the easy questions, I 
would ask somebody else. I mean, I understand all that. But the 
question is, let's get to the hard question. Do we want to go 
beyond the current method? Do we want to impose some CRA-like 
requirements on those securities firms not parts of banks that 
have, in fact, the ones who entered into this through their 
role in the mortgage business?
    Ms. Seidman. And I would respond in two ways. The first is 
that, as to their activities with respect to consumers, I think 
that there is the possibility of a positive, affirmative 
    The Chairman. Okay, because remember, and here is the deal, 
look, this is the conversation. The issue here is that they are 
clearly involved with consumers, but not at the retail level.
    Ms. Seidman. I understand.
    The Chairman. The question is, do you take an involvement 
with consumers at the wholesale level and translate that into 
one of these obligations? That is the kind of question we have 
to deal with.
    Ms. Seidman. And I think the answer is that, if we can get 
to the goal of responsible products and services, we may be 
able to do it in the securities industry in a way that is not 
classically CRA--
    The Chairman. I see, by better regulation of the products?
    Ms. Seidman. We ought to think about it in terms of 
    The Chairman. Anyone else on that subject?
    Mr. Barr. I agree that there may be a narrower way of 
thinking about the question if we focus, for example, on a 
requirement of due diligence on the part of securitizers to 
assure that the products and services that they are packaging 
at least comply with underlying law. There is usually a 
recitation of that--
    The Chairman. A version of that is in the bill that we 
    Mr. Barr. Correct.
    Mr. Taylor. It just needs to be a little stronger than it 
is, in that there be an easier--that they are accountable in a 
    The Chairman. Well with enforcement, there are two separate 
questions--the requirements and then the enforcement itself.
    Mr. Taylor. Yes.
    The Chairman. The enforcement, I realize, I think we need 
further work. But the principle, and I feel frankly rather 
proud that we breached that wall by being the first ones to 
impose this kind of requirement and now we will have 
conversations about how better to enforce it. Although I must 
say, in this case, I think for the near term, people are 
sufficiently scared. Giving them the requirement is going to 
have an impact. I think there is going to be a reluctance to 
get caught.
    We do need to build up enforcement. But again, we are all 
agreeing then that the obligation, in effect, is not a classic 
CRA obligation in that you have to provide this response to 
that consumer, but it is part of the regulatory process in 
    Any further comments? Yes, Ms. Seidman?
    Ms. Seidman. I would like to say something in response to 
Professor White's point that you and he were talking about.
    The Chairman. Go ahead. And Professor, you will be able to 
    Ms. Seidman. I think what we need to recognize is that in 
all businesses, choices are made about which opportunities to 
pursue and which opportunities to spend capital on and which 
opportunities to spend capital on in order to research to 
decide whether to pursue.
    What CRA does is say, look at our communities, look at the 
opportunities in our communities, just as you would look at the 
opportunities in China. I think it is an incredibly important 
rebalancing that doesn't require one to assume that banks are 
stupid in order to say that it is valuable.
    The Chairman. Professor White, do you want to respond?
    Mr. White. This sounds like 1975 to me; it doesn't sound 
like 2008.
    The Chairman. Well, I wish it was 1975. We wouldn't have a 
subprime crisis.
    Any further discussion? If not, I thank the witnesses.
    Again, I just want to tell people that the Congressional 
Black Caucus had a previously scheduled, very serious, long 
meeting. That is why a number of my colleagues who were here 
earlier are not here now. But I again want to assure you, it is 
not a sign of lack of interest. The material is going to be 
read. Staff members have been monitoring the conversations and 
we will be dealing very seriously with this issue.
    We will call the next panel now.
    Again with my neighbor and banker--Mr. Larry Fish--who is 
the chairman of the Citizens Financial Group. Mr. Fish.


    Mr. Fish. Thank you, Mr. Chairman, and members of the 
committee. I am Lawrence K. Fish, a banker and chairman of 
Citizens Financial Group, Citizens Bank. I appreciate the 
opportunity to testify here today to discuss my personal views, 
based on over 35 years actually doing banking business, and my 
experience with the Community Reinvestment Act.
    In my opinion, this Act has brought tremendous benefits to 
our entire Nation. Specifically, I believe the Community 
Reinvestment Act: one, corrected a previous wrong; two, has 
been good for our communities; three, and maybe most 
importantly, has been good business; and, four, has been used 
as a guiding principle as policymakers consider how to ensure 
that the rapidly changing financial services industry 
appropriately contributes to the economic development of all 
our communities and our Nation in the future.
    First, the CRA helped right a previous wrong by addressing 
a practice common in the banking industry in the 1960's and 
1970's known as redlining. CRA ended that practice.
    Second, CRA has been good for our communities. In the span 
of just one generation, the law has dramatically improved 
America's previously underserved cities and neighborhoods. 
Since 1977, more than $1.5 trillion has been lent to 
communities for development. And as regulated bank mortgage 
lenders ventured into underserved neighborhoods, small business 
lenders followed.
    In 2005, nearly $11.6 billion worth of small loans were 
made to small business owners in low-income areas, up from $8 
billion in 1996. Together, home and business ownership build 
immense social capital. They begin a cycle of wealth creation, 
neighborhood stability, and even educational achievement. Seen 
in this way, CRA-generated ownership has helped provide an 
economic corollary, in fact, to the Civil Rights Act.
    Third, and this may be a bit surprising coming to you from 
a banker like me, but I believe CRA is good business. Citizens 
Financial Group has built a highly successful business around 
these emerging markets. In the past 15 years, we have grown 
from the 6th largest bank in the Nation's smallest geographical 
State, to the 8th largest bank in the United States, with over 
$160 billion in assets. Based in Providence, Rhode Island, we 
now have branches in 13 States.
    This growth took place not in spite of our commitment to 
CRA, but in part because of it. We now speak more than 70 
languages in our branches. Many of these branches are in 
markets that we might not have entered without CRA.
    Apparently other financial institutions have had similar 
results. According to the Federal Reserve, and I am surprised 
this wasn't brought up this morning, 98 percent of large 
residential lenders reported that their CRA loans are 
profitable. Within that group, 24 percent found them as 
profitable as or more profitable than conventional loans. 
Unexpectedly, banks came to see CRA communities as emerging 
    Finally, the question you are interested in, Mr. Chairman, 
where do we go from here? The Department of the Treasury 
recently renewed a far-reaching effort seeking public input to 
improve the overall financial regulatory structure to deal with 
fast changes in the industry. We understand that you, with your 
public comments, that this is also a priority of yours, one 
with which I wholeheartedly agree.
    This is likewise an opportunity for policymakers to 
consider modernizing community reinvestment requirements using 
CRA as a guiding principle. The financial services industry has 
changed significantly over the past 30 years and it is an 
appropriate moment to consider how the opportunities and 
benefits created by CRA might be extended.
    Let me give just two quick examples. Let's consider giving 
more dynamic CRA credit for successful programs in financial 
literacy. Financial literacy is not just about having knowledge 
of financial products and services. It's about how to access 
    Second, we should consider expanding CRA participants to 
include credit unions. Credit unions operate in their 
communities and are regulated in exactly the same manner as 
similar banks. Given their number and their total assets, it's 
logical that CRA benefits and opportunities be extended to them 
as well.
    I make these recommendations because I believe CRA has 
convinced me that when businesses invest in underserved 
communities, they are much more likely to return to health.
    Thank you for the opportunity of inviting me to be here 
today and I look forward to your questions.
    [The prepared statement of Mr. Fish can be found on page 
118 of the appendix.]
    The Chairman. Thank you, Mr. Fish.
    Next is Rahn Barnes, who is the vice president and CRA 
office manager of the community development department at 
Provident Bank, and he is testifying on behalf of the American 
Bankers Association.
    Mr. Barnes.


    Mr. Barnes. Thank you, Mr. Chairman. Mr. Chairman and 
members of the committee, my name is Rahn Barnes, and I am CRA 
officer and manager of community development for Provident 
Bank, a $6.5 billion bank headquartered in Baltimore, Maryland. 
I am pleased to be here today and present the views of the 
American Bankers Association.
    The ABA believes that bank compliance with the spirit and 
letter of the Community Reinvestment Act is healthy. Forging 
partnerships and developing a deeper understanding of the 
perspectives of all parties has led to an open and effective 
system that now more accurately reflects banks' involvement in 
serving our communities.
    This evolution has not been without its difficulties, but 
it has led to improvements. This afternoon, I would like to 
talk briefly about the maturation of CRA compliance and suggest 
ways it can become more effective.
    CRA implementation has matured and clearly demonstrates 
that banks serve their communities well. The bank regulators' 
initial attempt to meet the mandate of the Act put the emphasis 
on process rather than performance. CRA examinations became 
paper trails for talking the talk rather than recognition that 
banks were walking the walk.
    The dissatisfaction on the part of bankers, community 
activists, and regulators led to important changes in the 
regulatory requirements and examination process. These include 
balancing the burden between smaller and larger institutions, 
enlarging the range of lending that received CRA credit in 
rural communities, and requiring consideration of any evidence 
of discriminatory lending or violations of consumer credit 
protection laws.
    Moreover, the CRA examination process is now an open one, 
incorporating public opinion as well as the regulators' review 
of banks' compliance. It would be an exaggeration to say that 
banks are content with the burdens that remain, but the new CRA 
regulations are certainly a marked improvement over the old 
regulations and now better reflect banks' contributions to 
their communities.
    The bottom line is that banks that do not serve the credit 
needs of their entire community do not prosper. Drill down in a 
CRA public evaluation and you will read about how we compete 
for market share across all income levels and all 
neighborhoods. It is therefore not surprising that the banking 
industry excels at satisfying community credit needs.
    Looking forward, bankers believe that the CRA process must 
continue to evolve to meet changing markets and participants. 
There are several areas where improvements can be made. First, 
the CRA regulations and examination are still too complex and 
should be simplified. For example, the banking agencies added 
an entirely new CRA examination, the intermediate small bank 
CRA examination. To add a third category which has a wholly new 
approach to assessing community development activities was an 
unnecessary complication of an already complicated regulation.
    Second, regulators also need to adjust the process to 
encourage responsiveness to changing markets. For example, the 
definitions for determining community development activities 
that qualify for CRA credit are still too complex and narrow in 
scope. Moreover, CRA regulations should recognize the financial 
literacy training provided by banks that benefits the entire 
community. Currently, CRA restricts consideration unless the 
majority of the participants are low- and moderate-income 
    Third, to fulfill the spirit of CRA, banks need broader 
authority to make public welfare investments. Without broader 
authority, banks are prevented from participating in some 
important community development projects. We appreciate your 
leadership, Mr. Chairman, and that of Ranking Member Bachus, to 
change this through your bill, H.R. 1066.
    In conclusion, the ABA believes that there has been 
significant evolution of the implementation of the Community 
Reinvestment Act. We believe the changes to simplify the 
process add flexibility and broaden the authority to make 
public welfare investments that will continue to improve CRA 
for the future.
    Mr. Chairman, I would be happy to answer any questions you 
or the committee may have.
    [The prepared statement of Mr. Barnes can be found on page 
66 of the appendix.]
    The Chairman. Thank you.
    Speaking of neighbors, Ron Homer, who is the chief 
executive officer of the Access Capital Strategies.

                        STRATEGIES, LLC

    Mr. Homer. Good afternoon. Chairman Frank and members of 
the committee, I am particularly honored and pleased to have 
the opportunity to testify here before you today. By way of 
background, I have had 37 years of experience in banking and 
the financial services industry. I founded Access Capital 
Strategies in 1997. We operate a community investment fund that 
is a qualified CRA investment. We serve about 120 banks 
throughout the country. However, in addition, we have attracted 
investments from about 20 nonbank institutions that comprise 
about 25 percent of the fund.
    Prior to that, I was a CEO of a community bank and had the 
opportunity in 1995 to testify before this body on behalf of 
the ABA on the revisions for the current CRA regulations that 
were--that the previous testifier mentioned changed from 
talking-the-talk to walking-the-walk regulations.
    So I am here to say that my experiences both as a banker, a 
businessman, an activist--I also serve as the vice chair of the 
Initiative of a Competitive Inner City, which was founded with 
Professor Michael Porter in 1994 to do research on market-based 
opportunities in inner city neighborhoods.
    So many of my experiences that I will relate to you and 
opinions, while they're anecdotal, they are also backed by the 
study of the Joint Center for Housing Studies at Harvard, which 
was prepared as a result of the 25th anniversary of CRA, so I 
would refer you back to that for some of the data.
    Clearly, CRA has encouraged banks to better serve low- and 
moderate-income communities. In fact, the data shows that as a 
result of these regulations, CRA-regulated banks make a much 
higher percentage of conventional prime mortgage loans in the 
areas where their branches are located than all the other 
competition, despite the fact that they had a diminishing 
amount of the overall mortgage market in that area. So they are 
highly motivated to seek the most efficient products. In fact, 
their advantage in conventional prime loans among African 
Americans are a full 20 percent higher; among Latinos 16 
percent higher. So in the areas which they have designated as 
their assessment area, they do a better job of providing low-
cost mortgage loans and possibly, had the Act been expanded 
like the Joint Studies Housing Study recommended in terms of 
functionality across lines, some of the subprime lending 
activity might have been mitigated, through the borrowers 
themselves, who would have had a wider range of choices 
available to them.
    So that brings me to my first point. I would recommend that 
while the Act has been successful in motivating banks to find, 
as Larry Fish mentioned, new profit opportunities, there are 
ways in which the Act could function better and provide a 
national service. First, I encourage the consideration of 
expanding the traditional mortgage lending focus around 
assessment areas to the broad footprint of banks wherever they 
do business. And as I think you mentioned, to use functionality 
as the test as opposed to geography.
    In particular, I think the banks should be evaluated not 
just on the deposit taking parts of their institutions, but 
also on affiliated mortgage companies and other entities that 
might be engaged either in the securitization or the selling or 
the purchase of mortgage-related securities. And I think that 
would be a fact-based, easy way to monitor what they are doing.
    One of the criteria I suggest using, because it has been 
shown that between 35 to 50 percent of the mortgage lending 
that has taken place, particularly in some minority and 
Hispanic neighborhoods could have qualified for prime mortgages 
under the criteria. So one of the ways of measuring their 
relative performance is just a report card showing what 
percentage of the loans they make in these areas are 
conventional loans versus what percentage are subprime.
    In terms of the enforcement mechanism, I think that 
certainly this committee's legislative oversight of the 
regulatory bodies would definitely be helpful. I think over the 
last 5 to 6 years, there has been not maybe enough attention 
about looking into how the regulations have been enforced.
    Secondly, because of the overall deregulation of the 
industry, looking at the remedies for noncompliance might look 
at branch expansion or expansion in business lines or other 
hurdles other than the actual acquisition and merger of 
    The role of public comment. I think that public comment has 
been effective, particularly in getting commitments from major 
banks, fairly broad-scale major banks. But I think that over 
time, probably some mechanism that would get all the banks to 
have consistent effort and particularly around what some people 
think is the grade inflation. So I think maybe creating some 
type of safe harbor mechanisms where thresholds are met on 
performance would be helpful. It would take some of the tension 
around the actual acquisition merger scenario and spread it out 
so there is a more evenness of commitment over time.
    The changes in the structure of the Financial Services 
Committee definitely warrant looking at other nonbank entities 
or nondepository entities. I definitely think that those 
entities affiliated with banks should be included in CRA 
because, indirectly, they get the subsidy and the quid pro quo 
of the deposit insurance one way or the other, even if it's in 
the bank holding company. How you do it and how you expand it 
to those who do not have deposit-taking entities, I'm not sure. 
But my experience, because we do a lot of business in Utah, is 
that just about ever investment bank that you have looked at in 
the subprime issue as a major player has an industrial loan 
corporation in Utah, so they probably could be pulled in, in 
any event.
    But last but not least, I think the law has principally 
been effective when activists, regulatory bodies, legislature, 
and the banking institutions that are regulated themselves, all 
are fairly clear as to what the goals and the objectives are of 
the Act. So I would encourage the work of your committee to 
help bring those parties together so that we have a clear and 
consistent message.
    As the name of our firm indicates, we have a goal of 
efficient access to capital for communities throughout the 
country. We understand that to build a healthy community, 
access to capital is critical. So we therefore stand ready to 
work with you and we commend you for taking on this issue and 
we stand prepared to work with you in the implementation of the 
current Act as well as any changes that might take place. Thank 
    [The prepared statement of Mr. Homer can be found on page 
121 of the appendix.]
    The Chairman. Next, Cynthia Blankenship, who is the vice 
chairman and CEO of the Bank of the West, and she is here on 
behalf of the Independent Community Bankers.
    Ms. Blankenship.


    Ms. Blankenship. Thank you. Mr. Chairman and members of the 
committee, thank you for the introduction. I, in fact, do 
represent the Independent Community Bankers of America. I am 
pleased to have the opportunity to present the views of the 
ICBA on the implementation of CRA.
    ICBA represents 5,000 community banks. Bank of the West has 
assets of $250 million, serving small businesses in the Dallas/
Fort Worth Metroplex and the agricultural community of Vernon, 
Texas. We have eight locations, three of which are located in 
low- to moderate-income areas.
    Community bankers are strongly committed to the goals of 
the Community Reinvestment Act. We appreciate the valuable 
improvements that the Federal financial regulatory agencies 
have made in the CRA examination procedures. ICBA strongly 
believes that the nation's credit unions should also comply 
with CRA under these improved procedures.
    Community banks are locally owned and operated 
institutions. Community reinvestment and community development 
are what we are all about. We do it on a daily basis. We play a 
key role in local civic activities. We are focused only on 
serving our communities with loans and other services that 
promote development.
    The simple fact is the health of the community bank and the 
economic vitality of the community depend on one another. If 
our communities don't survive and thrive, neither do we.
    Public policy can build on this by providing incentives and 
by removing unnecessary regulatory costs. For example, we urge 
the Senate to pass H.R. 1352, a bill to reduce SBA fees and 
permit a low documentation loan program for seasoned lenders. 
This will make the program more effective in our communities.
    Congress could also enhance our ability to serve our 
customers by enacting regulatory relief provisions included in 
Representative Velazquez's Communities First Act.
    The Federal Home Loan Banks, Fannie Mae, and Freddie Mac 
already help community banks provide commonsense mortgages to 
their customers that enable them to both become and remain 
homeowners. CRA regulations and examinations are working well 
for community banks.
    Ten years ago, the Federal banking agencies adopted a 
tiered examination system for CRA and successfully reduced the 
unnecessary and unproductive paperwork burden imposed by CRA 
rules. Before the Clinton Administration initiated these 
changes, a Grant Thornton study found that community banks 
spent $1 billion each year on CRA paperwork, much of which 
focused on documenting the bank's study of community needs. 
This contradicted the prediction by the primary author of the 
1977 act, Chairman William Proxmire, that, ``the regulations 
would be very minimal and would not require additional 
    The streamlined examination procedures for smaller banks 
that the regulators adopted in 1995 and improved beginning in 
2004, helped CRA compliance costs toward Chairman Proxmire's 
original intent. Community banks are still required to invest 
in their communities, which they would do regardless of the 
Act. However, performance, not production of paper is the 
examiner's focus. The key factors are the bank's loan to 
deposit ratio, the percentage of local lending, the 
distribution of loans to different income levels and business 
sizes, and geographic distribution of loans.
    In 2007, the regulators increased the small bank level from 
$250 million to $1 billion, but added an investment test for 
intermediate small banks between $250 million and $1 billion. 
Unfortunately, an important competitor for community banks, the 
tax exempt credit union industry, remains completely exempt 
from CRA.
    When CRA was enacted, credit unions mostly served members 
of a single group or a limited product line. That world has 
changed. Credit unions now offer business loans and serve so 
many different groups and communities that virtually anyone 
with a pulse can become a credit union member.
    Over 120 credit unions have more than $1 billion in assets. 
Studies show the rationale for the tax and CRA exemptions, that 
they serve limited memberships and people of modest means, no 
longer applies. In 2000, the National Credit Union 
Administration acted on these facts and adopted a rule 
requiring community credit unions to have a community action 
plan. Unfortunately, when NCUA's board changed, it repealed the 
CAP rule, taking a giant step backward.
    We strongly recommend Congress build on the agency's work 
in 2000 and require credit unions to comply with CRA 
requirements in the same manner with the same asset size 
distinctions as banks and thrifts.
    Thank you very much for the opportunity to testify.
    [The prepared statement of Ms. Blankenship can be found on 
page 88 of the appendix.]
    The Chairman. Thank you. And our last witness, and we 
appreciate her patience as well as her good work, Judy Kennedy, 
who is the president and CEO of the National Association of 
Affordable Housing Lenders, and therefore represents one of the 
important constituency groups that is one of the vehicles 
through which CRA operates.
    Ms. Kennedy.


    Ms. Kennedy. Thank you, Chairman Frank, in recognizing that 
the members who are here are the choir to whom I am preaching.
    The Chairman. I would say, Ms. Kennedy, you do not have to 
apologize for preaching to the choir to the Reverend Cleaver, 
who has on occasion done that himself.
    Ms. Kennedy. So, having heard a lot of great testimony, let 
me today just say who we are, suggest what's working right, 
quickly what's not working, and make a couple of suggestions 
about how to improve it.
    NAAHL's members are major banks that won an outstanding 
rating and will do what it takes to get it, and their blue-chip 
nonprofit lender partners, like LISC, like Access, who help 
banks in achieving the numbers that get outstanding ratings. We 
are committed to bringing more private capital to low- and 
moderate-income communities. We are proud of the fact that we 
have learned how to lend and invest properly.
    But I thought Ellen Seidman hit the nail on the head when 
she said that CRA has helped banks to look at the hurdle rate 
differently. ``Profitably'' doesn't mean double digit profits, 
but it does mean that you incorporate the social and the public 
good will achievements into the hurdle rate, and you do get a 
positive return.
    We have already learned how to help borrowers with little 
or no cash to bring to the closing table to become homeowners 
and to stay homeowners.
    Just a couple of statistics that are amazing. On the 
affordable rental housing side, private capital is leveraging 
the low income housing tax credit, depending on the locality, 
10 to 25 times, which obviously allows us to produce a lot more 
units. In just each of the last 3 years alone, institutions 
reported over $50 billion each year of community development 
loans, largely for affordable rental housing, accessible to 
people under 80 and 50 percent of area median income, and for 
other community and economic development.
    During the same period, lenders reported making--and this 
is also staggering--$800 billion in each of those 3 years of 
mortgages, single-family mortgages and small business loans, to 
low- and moderate-income borrowers or in low- and moderate-
income census tracts.
    So the numbers are pretty compelling. But I worked for 
Senator Proxmire and Representative McKinney, and I have to 
think that they are not smiling on Larry White this afternoon.
    The Chairman. I don't think that is appropriate. Talk about 
substance. There is no reason to get into that.
    Ms. Kennedy. He is a friend. He is a friend.
    We have a regulated system with tremendous supervision and 
examination that crosses every ``T'' and dots every ``I'' that 
has produced these numbers. It is all good news.
    But think of community and economic development as a three-
legged stool and CRA is one strong leg of that stool. But we 
have two other legs, one missing and one weak.
    The weak part is the regulation and examination part. 
Believe it or not, we have a community development regulation 
that discourages banks from doing multifamily affordable 
housing. It treats small business lending and single-family 
mortgage lending as layers of a cake, but only if you get at 
least a satisfactory on those layers do you get any credit for 
doing the really hard stuff, the multi-layered, multi-
subsidized, multifamily housing.
    And so we have highly recommended for the last 10 years 
that we treat community development lending for what it is, one 
of the most important types of what a bank can lend and invest 
    Unfortunately, some examiners' focus on assessment areas 
has discouraged what has been a tremendous success story of 
CRA: the pooling of banks' money in loan and equity funds like 
Massachusetts Housing Investment Corporation and Massachusetts 
Housing Partnership. These funds have allowed banks to 
diversify their risk, hire the right skillset, and make a 
difference throughout their States. Asking a bank in North 
Carolina to invest in a loan fund that may produce housing in 
Durham, when they are not located within 100 miles of Durham, 
always seemed to be the norm but, all of a sudden, it is being 
discounted or even disallowed.
    So the regulation and examination, at least of institutions 
over $1 billion, still needs a lot of improvement.
    And then finally, given the numbers I just shared with you, 
given $50 billion a year in community development loans almost 
all under $3 million, and $800 billion in single-family, CRA-
eligible mortgage loans, it would be great if Fannie Mae and 
Freddie Mac would bring the benefits of liquidity, particularly 
at this critical time, to the CRA market.
    [The prepared statement of Ms. Kennedy can be found on page 
152 of the appendix.]
    The Chairman. Thank you all.
    Let me ask in general some of the questions we have had 
before. Many of you represent the banking industry. The 
question of expanding this to entities not now covered, are 
there examples of lines of business, entities not now covered 
by CRA where it would be logical to extend it? Yes, Ms. 
    Ms. Blankenship. Well, Chairman Frank, from a small 
community bank that was privately held and started in 1986, one 
of our biggest challenges to remain part of very many 
communities that we serve, many of those low- to moderate-
income, is the competition. And--
    The Chairman. Well, you have mentioned credit unions. I am 
wondering, are there any additional entities? You have been 
very clear about wanting to cover--
    Ms. Blankenship. I think the mortgage industry has also 
been a competitor of ours. We do make some direct mortgages, 
but we saw a lot of that competition with the pricing and the 
aggressive nature of that.
    The Chairman. Well, I appreciate that. As you know, this 
committee's bill that passed the House extends many of the 
actual regulations. In fact, what we tried to do was to 
conceptualize to a great extent the regulations that the banks 
regulators impose on depository institutions and apply them to 
all mortgage originators and we think that has worked well.
    We talked about, for instance, the securitizers who have 
played a very important role--is there a way to deal with them? 
Should we be dealing with them?
    Ms. Kennedy. Well, we are in this mess because two 
unregulated, unexamined companies nurtured an alternative 
network of mortgage lenders that were not examined, regulated, 
or supervised. So, for example, had the CRA applied to Fannie 
Mae and Freddie Mac and if it had been enforced, we probably 
wouldn't be in this pickle.
    The Chairman. Fannie and Freddie? How--
    Ms. Kennedy. They would have had the same kind of 
examination, regulation on both the fair lending and the HMDA 
side as well as the Community Reinvestment side, that--
    The Chairman. Except they were buying--well, on the HMDA 
side? What's the--
    Ms. Kennedy. Well, for example, not only did they buy the 
loans, Chairman Frank, but in 2004, I am told--
    The Chairman. You are told? I need you to be sure. I'm 
    Ms. Kennedy. Okay. It's in a HUD report. It's in a HUD 
report from July. But I think your staff have heard this too 
from Bill Apgar and John Weicher. Fannie and Freddie persuaded 
HUD to let them use AAA-rated securities backed by subprime 
loans with many of the characteristics we are now dealing with, 
as counting towards ``affordable housing'' goals. That is how 
they achieved their goals for 2004, and it is probably how they 
will achieve them for 2005 and 2006. That is when the runup 
    Had there been a CRA examination, by something like a bank 
regulator, of Fannie and Freddie, the GSEs could never have 
used AAA-rated securities as their home mortgage lending in 
low-income census tracts or to low-income borrowers. So, in 
other words, instead of the GSEs engaging in the low end of the 
market, they nurtured the high-cost end of the market.
    The Chairman. But it was the low end of the market.
    Ms. Kennedy. No, it wasn't the low-cost, low-balance end. I 
mean, basically, on a day when prime mortgage rates were at 6 
percent, GSEs were financing subprime MBS with mortgages 
probably yielding between 8 and 10 percent.
    The Chairman. Any other entities that people think ought to 
be covered?
    Mr. Homer. Well, as I mentioned, I think the mortgage 
industry, because that is where we are focusing on, and the 
spillover to subprime and the fact that it looks like there is 
inefficiency in delivering products to certain communities 
where they are not getting the best deal, looking at bank 
holding companies and all of their various affiliate 
organizations and their engagement in the mortgage market to 
understand what percentages in CDOs and subprime, what 
percentages conventional, etc., would be a first step at least 
to know who is doing what and then to rank them and then maybe 
give them bonus points for being more efficient and putting 
    The Chairman. I don't see your point.
    Mr. Homer. --effort in that area. And it could be through 
safe harbor on expansion--
    The Chairman. I appreciate that. It just occurred to me 
that what we have done in the subprime area is to extend some 
regulation of the prohibitory sort, but you might want to then 
take a step further and then give some incentives to do some 
things. And that might be helpful because we're being told, oh, 
if you put these limits on subprime lending, then not just bad 
loans but good loans will disappear; people will be afraid of 
the whole area. And one way to potentially dilute that would be 
to give, along with the prohibitions, some incentives so that 
people--you change the risk calculation there. So it is not 
simply, oh, if you make those loans, you might get hurt. The 
answer is, yes, if you make them inappropriately, you might be 
hurt, but if you make them appropriately, you will get some 
    And so CRA credit in that area would be a logical 
concomitant of what we have done. I appreciate that.
    Mr. Homer. Right.
    Ms. Kennedy. Chairman Bair, obviously, is moving in that 
direction. But my members tell me that in Louisiana and New 
York recently, banks that move into areas that lack insured 
institutions with branching in underserved areas are now 
getting government deposits as an incentive.
    The Chairman. As an incentive, yes.
    No, I think that is very important that you don't just 
prohibit. Because people can overreact to the prohibition, and 
one way you deal with that is to give some incentives and some 
    Anything else?
    If not, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    I missed the opportunity to question the last panel and 
missed most of the testimony of this panel and I am sorry for 
that. But I understand who would supervise and administer a CRA 
requirement for credit unions. That would be easy, because we 
have a regulator. Who would supervise and administrator a CRA 
regimen for mortgage lenders, for example, or would it be 
necessary to--I mean, I can understand we can set up some 
criteria. But unless there is some enforceability to it either 
by a regulator or by a private right of action, for example, I 
don't know how it would be administered. Does anybody have any 
ideas about that?
    Mr. Homer. There are a good portion of mortgage 
originators, and after the subprime, more and more will be part 
of bank holding companies. So bringing in unaffiliated mortgage 
companies owned by bank holding companies would bring in a good 
    The remaining mortgage lenders are generally licensed by 
States or more and more States are bringing them in under 
licensure so that would probably be the vehicle. Or if you want 
to be extreme, you could require Federal licensing of mortgage 
    Mr. Watt. I think our bill actually at least sets some 
standard. I don't know about licensing itself. But the bill, 
the anti-predatory lending bill--
    Mr. Homer. Much like the securities industry, where there 
is a minimum threshold of amounts of capital, etc., and bring 
them under.
    Mr. Watt. I have heard a couple people suggest--and I am 
not sure if it was on this panel because I didn't hear the 
testimony on this panel--but somebody suggested that the 
suitability standards for non-CRA participants is somehow a 
substitute. I understand--I am a strong supporter of 
suitability standards and I think that is important. And it--it 
helps to clarify the standards for those that you do serve. But 
I am not sure how it imposes any obligation such as CRA to 
    So can somebody explain how that would--well, at least that 
is what I thought somebody on the prior panel suggested, that 
in some measure suitability standards served the same purpose 
as CRA.
    You all obviously didn't say that, so you can't explain it. 
All right. All right, in that case, I won't ask you to explain 
it if you didn't say it. I missed my opportunity to ask the 
last panel that question, and it is gone forever, except my 
staff heard it and they will propound it in writing maybe to 
the last panel.
    I appreciate you all being here. I am sorry I don't have 
more questions because I wasn't here to hear most of the 
testimony, and I have already been with Ms. Kennedy earlier 
today, and spoke to their group, so we already had an exchange 
about some of these issues.
    So I will yield back the balance of my time and recognize 
the gentleman, Representative Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I want to revisit this whole issue that I raised earlier. 
If you read the language--I am sorry. As you know, in the 
language of CRA is the term, local community. And as I 
mentioned earlier, things have changed dramatically since 1977 
when this legislation was enacted. And so we don't have banks 
that serve communities as much as we do now. I guess, Ms. 
Blankenship, you might have more in your organization.
    And so I raised the question earlier about redefinition of 
``local community.'' But I want to add to that a couple of 
other issues.
    First of all, I used to do an NPR radio talk show, and I 
went after the payday lenders. And I had a show with a live 
audience. I ended up in the audience with a whole row of poor 
people who came to support the payday lenders. And they came to 
support the payday lenders because they said without the payday 
lenders, they had no place to cash their checks. They go to 
work, they come home. The only place, payday lenders.
    So, you know, there is an absence in the poorest 
neighborhoods, I think, you might agree, of banks that are 
participating in CRA.
    And then, Ms. Blankenship, you were mentioning credit 
unions, that perhaps we ought to extend CRA to credit unions. 
Well, can you legitimately and fairly include credit unions 
without including payday lenders, check cashers, and remittance 
agents? I mean, where do we stop? Because in my world, the 
payday lenders are far more dangerous in terms of putting 
something back in the community than credit unions. It is a 
conundrum. Fix it. Please.
    Ms. Blankenship. Well, to answer your question, 
Congressman, I think that there should be more regulation on 
those entities that don't fall under CRA, as we do, a local 
bank that really provides services in low- to moderate-income 
areas. I think a good place to start is the credit unions. But 
we are certainly not opposed to you extending that regulation 
to the other entities, which you addressed.
    Mr. Cleaver. You realize, that would probably close them 
down. I mean, if you required CRA for Joe Willy's Friday Check 
Cashing Company, I mean, he is out of business. And that is 
okay if you are in banking. But if you are in politics and Joe 
Willy's can't cash Ms. Thompson's check, and that is the only 
place to cash it, then we have a problem.
    Ms. Blankenship. But I would argue respectfully that the 
community banks fill more of a role in that than maybe some of 
the large national bank chains, as far as accommodating the 
check cashing and some of the needs of those low- to moderate-
income areas. Because I know that we do in several of our 
markets. And we have the flexibility to do that.
    Mr. Cleaver. Mr. Homer?
    Mr. Homer. Your question, well, one, going back to the 
local community issue, I think if you changed ``local 
community'' to ``underserved communities'' and then gave 
institutions the flexibility to choose the underserved 
community that they desired, that would be one way to get at 
it, to give them a menu. Because you are absolutely right. When 
I ran a bank, I was not going to not accept a deposit because 
it didn't come from my community. I accepted them--I was a 
community bank in Boston but I had customers in California and 
all over. So changing that one word from local community to 
underserved communities, I think, would have a tremendous 
impact in attracting capital and services into areas that need 
    Mr. Fish. I would like to comment on that, Representative.
    Mr. Cleaver. Yes, Mr. Fish?
    Mr. Fish. I think--I don't know what community you 
    Mr. Cleaver. I represent Kansas City, Missouri, and the 
surrounding area.
    Mr. Fish. So I have great sympathy for the comments that 
you made. But I think it is dangerous to apply the presumption 
that local communities are underserved by all banks based on 
the experience in Kansas City.
    Let me explain what we do. And I can--I don't know if you 
were here for my comments, but we look at these markets as 
emerging markets and we believe that there is good business to 
be done in these markets. So some of these things, we try and 
look like a local bank, in a branch that is in an underserved 
community. And what do we do?
    Well, we give every branch in those communities somewhere 
between $2,500 and $3,500 a year so they can participate in a 
community sense, so that if somebody walks in and needs $25 for 
the Boy Scouts, or $50 for the Lions Club, our branch manager 
doesn't need to say, I'll take it up with the head office.
    We try and look like the neighborhood inside those 
branches. So we speak their language. We try and make the 
office friendly as opposed to intimidating.
    Despite all of that, in our neighborhoods, our biggest 
competitors are not the other banks; our biggest competitors 
are the check cashers, Western Union and the payday lenders. 
And I think the long-term answer to that, it is so expensive 
for these neighborhoods to do their financial services 
business. If they came into a bank and opened a checking 
account with overdraft protection and a savings account, their 
life would be so much simpler.
    We can't cash checks; it's difficult to cash checks for 
people who don't have accounts with the bank. I could go into 
    Mr. Cleaver. No, I understand all that.
    Mr. Fish. Okay, so you understand all that.
    So my point is, the answer to this is financial literacy. 
The answer to this is not only education for the consumer in 
these underserved neighborhoods about their personal finances, 
but financial literacy in terms of education about the fact 
that they can go into a bank.
    Mr. Cleaver. I want to interrupt you, and then I am 
finished, Mr. Chairman.
    Mr. Fish. I was being long-winded, but I feel very 
passionate about it.
    Mr. Cleaver. No, and I can tell you are passionate about 
    The frustration of being on this committee--I mean, this is 
a committee I wanted to be on. I was blessed to be on the exact 
committee I wanted to be on. However, whenever we start talking 
about regulations, what inevitably is injected into the 
conversation is financial literacy. I mean, I don't care what 
the subject is. You know, as a substitute for whatever we might 
be proposing, the panelists, at least one, somebody says, well, 
the solution is financial literacy.
    I don't disagree. We may be talking about 10 or 15 years to 
raise the level of financial literacy to a point where people 
are not going to Sam's Friday payday check cashing place.
    The problems we have are today. I mean, they are right--
they are on us today, tonight. I mean, people are going to the 
payday places today. And so it is an issue for me. I mean, it 
goes back--do you regulate everybody? Or do you just tell 
everybody their problem is financial literacy? Just become 
    Mr. Fish. Regulate payday lenders.
    Mr. Cleaver. And impose CRA requirements? On them?
    Mr. Fish. I suspect you will diminish service to the 
    Ms. Kennedy. After Representative Watt left us this 
morning, we had a 2\1/2\ hour agonizing debate with the best 
advocates, the best bankers, some government officials, and Ms. 
Seidman who has been on both sides. And, you know, we ended 
with financial literacy, still very important.
    Because how it feels to the bankers and the nonprofits that 
are responsible lenders is that they proved that CRA lending 
was good business. Not the highest profitability, but it was 
good business and it could be done responsibly, with consumer-
friendly terms. And the bad guys moved in without any scruples, 
without any oversight, any regulation, or any examination.
    So I think we are reaching a point where banks would say 
regulate the payday lenders. But we would also say, you know, 
this multifaceted problem, what Representative Watt called an 
onion, involving many, many layers, one piece of which is a 
credit scoring system that may not reflect our multinational 
demographics anymore. Members are working on an alternative 
credit scoring system through NeighborWorks America and 
    We have so many facets of this problem. But surely having a 
highly tightly regulated banking regime that is very ``bean-
counting,'' while having totally unregulated, unexamined 
entities that have no oversight, is a huge part of the problem.
    Mr. Cleaver. Thank you, Mr. Chairman.
    The Chairman. Mr. Murphy.
    Mr. Murphy. Thank you, Mr. Chairman. I don't have any 
original questions of my own. I think Mr. Cleaver's line of 
questioning is an important one and an interesting one and we 
sort of are bracketed by two different ways of approaching that 
and so I want to fill in the middle here and ask that question 
to the panel.
    Because I think whether we are talking about CRA or other 
obligations, I think it is an important one that major urban 
communities like Kansas City face, but smaller urban 
communities like Waterbury, Connecticut, and Danbury, 
Connecticut, that I represent face. So I might just pose that 
question to the rest of the panel, maybe focusing on CRA as it 
relates to nonbank entities such as payday lenders, as a way of 
talking about whether we should be looking at a new Federal 
regulatory structure for the--for payday lenders and like 
    Mr. Homer. I will go back to the old saying, you have to go 
where the money is. And so I think a change in the definition 
of how entities that are regulated now and maybe broadening it 
to their whole slew of ammunition, bullets, so these banks are 
all affiliated with other financial services entities, changing 
the definition to serving underserved communities as opposed to 
local, and thereby engaging all of the tremendous talent and 
innovation that is in these markets, they created CDO quads and 
sold them to people so they can do just about anything, would 
be a part of the beginnings of today's solution.
    Because I think--I will give you an example. One of the 
values of CRA, we create mortgage-backed securities that are 
guaranteed by Fannie and Freddie that only comprise loans to 
people below 80 percent of median. Now, intuitively, people say 
well that is either kind of risky or it is not going to--the 
fact is that those mortgages consistently outperform the 
mortgage backed index in the Lehman A, for the simple reason 
that people don't--they just don't prepay as fast and as much 
as other clients.
    So over time, we have shown to public pension funds and 
other investors, that actually taking the time to invest in 
those areas will actually give you a better return over time. 
So some parts of the regulation can help introduce profit-
making organizations so people who are looking for good 
investments, to opportunities they otherwise would have ignored 
just for the lack of information or experience.
    And so incenting people who have capital and the capacity 
and the talent to come up with these products in an efficient 
way through regulation and introducing them to them may be one 
way of getting them engaging and building incentives to--we 
provide a lot of incentives for renewable energy, for all kinds 
of things that we think have a long-term social good.
    So also figuring out how you can build in regulatory 
incentives or even particular subsidies or tax credits around 
how well they do this may be another way to--to reinforce it. 
Because we have to address the problems of these communities if 
we are going to be strong as a nation.
    Mr. Barnes. I would like an opportunity to address the 
question as you raised it, Congressman Murphy, and also 
Congressman Cleaver.
    I think the ``local community'' is still relevant. There is 
always the opportunity for change. But as a small, large bank 
under the CRA regulations, we still aggressively look at our 
local community. We can feel what our colleague down the table 
has suggested, the pressure from our friends in the credit 
union leagues, credit unions. But basically we do try to 
address what is happening in our local marketplace.
    I am in Baltimore. The FDIC has identified our City as one 
of their alliance for economic inclusion target cities, pilot 
markets. And in essence, we are trying to identify a small 
dollar loan that would be an alternative to payday lenders.
    This is a tight credit market to be considering that type 
of product. But clearly, through some collaborative efforts of 
other ABA members and banks in our market, we are looking to 
try to provide a product that might be an alternative to the 
payday loans.
    Ms. Blankenship. Well, just to follow up on your question, 
I think you really have to look at the spirit of who is 
currently regulated and why they are complying with CRA. For 
instance, we don't comply with it only because we have to; we 
comply with it just as a matter of staying in business. We 
chose those markets, and whether there were a CRA or not, we 
would comply with it and fulfill the spirit of the law.
    I think where your focus needs to be are on the non--the 
currently nonregulated entities, the nonregulated mortgage 
companies, the nonregulated payday lenders.
    The Chairman. Thank you all. Let me just add one last 
    I forgot to do it before, so I would ask you to think about 
this and get back to us. One obvious area that we just didn't 
get to enough is the various forms of insurance companies, 
major financial entities that evolved in many ways over the 
years. Does it make sense to put some sort of community 
reinvestment type obligation on the insurance companies of 
various sorts and, if so, how would we do it? Yes, Ms. Kennedy?
    Ms. Kennedy. Our group believes strongly that the nexus to 
the Federal benefits is an important one for CRA as we know it. 
But we also believe strongly that insurance companies that have 
any kind of benefits should have to insure properties that our 
members make loans on.
    The Chairman. So you would cover them under CRA?
    Ms. Kennedy. We would require them to have--well, we would 
propose that they have an affirmative obligation to insure in 
underserved areas.
    The Chairman. Which is a type of CRA obviously relevant to 
them. You don't give insurance companies an obligation to do 
things other than insurance.
    Ms. Kennedy. Right.
    The Chairman. Any others? Ms. Blankenship?
    Ms. Blankenship. Again, just, you know, the playing field 
should be level with respect to CRA. Banks have learned to 
comply with it.
    The Chairman. I will throw this out right here. You 
mentioned the duck didn't come down, as it would have for the 
older people, on Groucho Marx, on You Bet Your Life, if you 
said the magic word--level playing field.
    I have been looking. I frequently am told about the 
problems of the playing field not being level and it is often 
invoked by people who point out that they are at the bottom of 
an unlevel playing field.
    I am still looking for the entity in America that is at the 
top of the unlevel playing field. I have not found one. It 
appears to be an extraordinary geometrical or geographical 
foundation. It is always--people are always at the bottom and 
no one is at the top. So if you ever find anybody who has 
benefitted from the unlevel playing field in his or her mind, 
let me know.
    Mr. Homer.
    Mr. Homer. I would say to the extent that the insurance 
companies are competing for investments and then deploy those 
investments through communities that--looking at the insurance 
industry and imposing some type of requirement. Again, as you 
can tell from my testimony, my bent is always with a carrot 
rather than a stick, so providing some built-in incentives for 
the insurance industry to be engaged in these communities 
through regulation or subsidy would be the preference.
    The Chairman. Thank you. Mr. Barnes.
    Mr. Barnes. As a CRA officer, the water is just fine, come 
on in. Love to have investment bankers and insurance industry. 
As was alluded to earlier by Ms. Kennedy, one of the challenges 
is when you are trying to lend in certain markets, you can't 
get insurance. So effectively you almost have an issue that you 
can't do mortgages. So I think that is an obvious example--
    The Chairman. That is a very important point.
    Mr. Barnes. --of where they need to be involved 
affirmatively. And I appreciate the comment from Mr. Homer 
about the carrot as opposed to the punitive version, if it 
could be fashioned in a manner that would be an incentive to be 
involved, it would be a positive.
    The Chairman. I have to say this with regard to insurance, 
as you mentioned, Mr. Kanjorski is really focusing our efforts 
on insurance. There was a lot of discussion about whether or 
not there should be an optional Federal charter. And without 
indicating one way or the other, I will tell you this, if there 
is one, it is going to come with significant social 
responsibilities. I think that is one of the things that people 
should contemplate. And again, that would go along with what 
Ms. Kennedy said, because that would be--there would be a nexus 
there, in terms of a Federal benefit.
    Mr. Fish, we appreciate it. Do you want to finish up?
    Mr. Fish. No, I have nothing to add.
    The Chairman. All right, I thank the panel. And please feel 
free to elaborate on any of this.
    We will be in touch with all of you because this is an 
ongoing, important issue for this panel. The hearing is now 
    [Whereupon, at 3:03 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           February 13, 2008