[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE COMMUNITY REINVESTMENT ACT:
THIRTY YEARS OF ACCOMPLISHMENTS,
BUT CHALLENGES REMAIN
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
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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HOUSE COMMITTEE ON FINANCIAL SERVICES
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
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
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
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Page
Hearing held on:
February 13, 2008............................................ 1
Appendix:
February 13, 2008............................................ 63
WITNESSES
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
APPENDIX
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
THE COMMUNITY REINVESTMENT ACT:
THIRTY YEARS OF ACCOMPLISHMENTS,
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
statement.
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
communities.
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.
[Laughter]
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
time.
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
force.
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
ignored.
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
reach.
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
branches.
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
unwise.
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
structure.
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.
STATEMENT OF SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF
CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE
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
underpinnings.
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.
STATEMENT OF SANDRA L. THOMPSON, DIRECTOR, DIVISION OF
SUPERVISION AND CONSUMER PROTECTION, 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
nationwide.
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.]
STATEMENT OF ANN JAEDICKE, DEPUTY COMPTROLLER FOR COMPLIANCE
POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY
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
country.
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.
1066.
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.
STATEMENT OF MONTRICE GODARD YAKIMOV, MANAGING DIRECTOR,
COMPLIANCE AND CONSUMER PROTECTION, OFFICE OF THRIFT
SUPERVISION
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
back.
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.
[Recess]
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.
STATEMENT OF HOWARD F. PITKIN, COMMISSIONER, CONNECTICUT
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
communities.
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
area.
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
activity.
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
others?
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
statewide--
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
questions.
The Chairman. I appreciate that. The gentleman from
Alabama.
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
it?
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
occurred.
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
that.
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
involved.
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,
insurance.
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
else?
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
securities.
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
next.
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
rating.
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
inflation.
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
than--
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
back.
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
anew.
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
noncompliance.
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
specifically.
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
that?
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
anchor.
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
that.
Go ahead.
STATEMENT OF ELLEN SEIDMAN, DIRECTOR, FINANCIAL SERVICES AND
EDUCATION PROJECT, NEW AMERICA FOUNDATION
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
CRA.
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
institutions.
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.
STATEMENT OF JOHN TAYLOR, CHIEF EXECUTIVE OFFICER, 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
today.
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
markets.
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
stakeholders.
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
greater.
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
raised.
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?
STATEMENT OF MARVA WILLIAMS, SENIOR PROGRAM OFFICER, CHICAGO
LOCAL INITIATIVES SUPPORT CORPORATION
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
sustainable.
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
useful.
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
hearings.
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.
[Recess]
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
complete.
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.
STATEMENT OF LAWRENCE WHITE, PROFESSOR OF ECONOMICS, NEW YORK
UNIVERSITY-STERN SCHOOL OF BUSINESS
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
opportunity.
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
concept.
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
committee.
[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
School.
STATEMENT OF MICHAEL BARR, PROFESSOR, UNIVERSITY OF MICHIGAN
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
problems.
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
unacceptable.
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
identify--
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
suburbs.
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
communities.
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.
taxpayer.
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
obligation.
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
functionality.
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
passed.
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
way--
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
general.
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
respond.
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.
STATEMENT OF LAWRENCE K. FISH, CHAIRMAN, CITIZENS FINANCIAL
GROUP
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
markets.
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
them.
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.
STATEMENT OF RAHN V. BARNES, VICE PRESIDENT/CRA OFFICER/MANAGER
OF THE COMMUNITY DEVELOPMENT DEPARTMENT, PROVIDENT BANK, ON
BEHALF OF THE AMERICAN BANKERS ASSOCIATION
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
residents.
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.
STATEMENT OF RON HOMER, CHIEF EXECUTIVE OFFICER, ACCESS CAPITAL
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
institutions.
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
you.
[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.
STATEMENT OF CYNTHIA BLANKENSHIP, VICE CHAIRMAN AND CHIEF
OPERATING OFFICER, BANK OF THE WEST, ON BEHALF OF THE
INDEPENDENT COMMUNITY BANKERS ASSOCIATION
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
reporting.''
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.
STATEMENT OF JUDY KENNEDY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS
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
in.
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.
Blankenship?
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
told--
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
occurred.
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
more--
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
credit.
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
awards.
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
percentage.
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
lenders.
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
serve.
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
it.
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
represent.
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
that.
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
it.
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
literate?
Mr. Fish. Regulate payday lenders.
Mr. Cleaver. And impose CRA requirements? On them?
Mr. Fish. I suspect you will diminish service to the
community.
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
Citigroup.
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
entities.
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
question.
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
adjourned.
[Whereupon, at 3:03 p.m., the hearing was adjourned.]
A P P E N D I X
February 13, 2008
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