[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
UPHOLDING THE SPIRIT OF CRA: DO CRA RATINGS ACCURATELY REFLECT BANK
PRACTICES?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON DOMESTIC POLICY
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
OCTOBER 24, 2007
__________
Serial No. 110-159
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.oversight.house.gov
----------
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California
BRIAN HIGGINS, New York KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina
Columbia BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota BILL SALI, Idaho
JIM COOPER, Tennessee JIM JORDAN, Ohio
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
David Marin, Minority Staff Director
Subcommittee on Domestic Policy
DENNIS J. KUCINICH, Ohio, Chairman
TOM LANTOS, California DARRELL E. ISSA, California
ELIJAH E. CUMMINGS, Maryland DAN BURTON, Indiana
DIANE E. WATSON, California CHRISTOPHER SHAYS, Connecticut
CHRISTOPHER S. MURPHY, Connecticut JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
BRIAN HIGGINS, New York BRIAN P. BILBRAY, California
BRUCE L. BRALEY, Iowa
Jaron R. Bourke, Staff Director
C O N T E N T S
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Page
Hearing held on October 24, 2007................................. 1
Statement of:
Bradford, Calvin, Board member, National Training and
Information Center; James H. Carr, chief operating officer,
National Community Reinvestment Coalition; Dr. Richard
Marsico, professor of law, New York Law School, and
director, Justice Action Center; and Hubert Van Tol,
director, Economic Justice, Rural Opportunities, Inc....... 113
Bradford, Calvin......................................... 113
Carr, James H............................................ 161
Marsico, Richard......................................... 173
Van Tol, Hubert.......................................... 188
Thompson, Sandra L., Director, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corporation;
Sandra F. Braunstein, Director, Division of Consumer and
Community Affairs, Board of Governors of the Federal
Reserve System; Montrice Godard Yakimov, Managing Director
for Compliance and Consumer Protection, Office of Thrift
Supervision; and Ann F. Jaedicke, Deputy Comptroller for
Compliance Policy, Office of the Comptroller of the
Currency................................................... 16
Braunstein, Sandra F..................................... 35
Jaedicke, Ann F.......................................... 60
Thompson, Sandra L....................................... 16
Yakimov, Montrice Godard................................. 51
Letters, statements, etc., submitted for the record by:
Bradford, Calvin, Board member, National Training and
Information Center, prepared statement of.................. 116
Braunstein, Sandra F., Director, Division of Consumer and
Community Affairs, Board of Governors of the Federal
Reserve System, prepared statement of...................... 37
Carr, James H., chief operating officer, National Community
Reinvestment Coalition, prepared statement of.............. 163
Davis, Hon. Danny K., a Representative in Congress from the
State of Illinois, prepared statement of................... 86
Jaedicke, Ann F.,Deputy Comptroller for Compliance Policy,
Office of the Comptroller of the Currency, prepared
statement of............................................... 62
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio:
Prepared statement of.................................... 6
Prepared statement of Mr. Irvin Henderson................ 109
Marsico, Dr. Richard, professor of law, New York Law School,
and director, Justice Action Center, prepared statement of. 175
Thompson, Sandra L., Director, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corporation,
prepared statement of...................................... 18
Van Tol, Hubert, director, Economic Justice, Rural
Opportunities, Inc., prepared statement of................. 190
Yakimov, Montrice Godard,Managing Director for Compliance and
Consumer Protection, Office of Thrift Supervision, prepared
statement of............................................... 53
UPHOLDING THE SPIRIT OF CRA: DO CRA RATINGS ACCURATELY REFLECT BANK
PRACTICES?
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WEDNESDAY, OCTOBER 24, 2007
House of Representatives,
Subcommittee on Domestic Policy,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2154, Rayburn House Office Building, Hon. Dennis J.
Kucinich (chairman of the subcommittee) presiding.
Present: Representatives Kucinich, Cummings, and Davis.
Staff present: Jaron R. Bourke, staff director; Noura
Erakat, counsel; Jean Gosa, clerk; Natalie Laber, press
secretary, Office of Congressman Dennis J. Kucinich; Leneal
Scott, information systems manager; Kristina Husar, minority
counsel; and Larry Brady, minority senior investigator and
policy advisor.
Mr. Kucinich. The committee will come to order. The
Domestic Policy Subcommittee of the Oversight and Government
Reform Committee will now come to order.
Today's hearing will examine the Community Reinvestment
Act's rating system. Specifically, this hearing will
investigate how accurately CRA ratings reflect bank practices.
Now, without objection, the Chair and the ranking member
will have 5 minutes to make opening statements, followed by
opening statements not to exceed 3 minutes by any Member who
seeks recognition.
And, without objection, Members and witnesses will have 5
legislative days to submit a written statement or extraneous
materials for the record.
At the outset, I want to point out that Mr. Issa has been
called to California concerning the fires that are devastating
so much of the south part of the State. And so, our thoughts
and our prayers are with the people of California and with Mr.
Issa and his constituents as they endure this severe threat of
fire.
I want to thank Mr. Issa's staff for their cooperation.
And, certainly, any Member from the Republican side who shows
up will be invited to fully participate.
I thank you.
And, with the consent of Mr. Issa and his office, we are
going to start this hearing.
I want to welcome the witnesses. I am going to proceed with
an opening statement, and then we will invite you to join in
the discussion.
This is the third in a series of hearings on subprime
lending and the response of regulators. Our first hearing in
March examined the subprime mortgage industry and the problem
of foreclosure, the pay-day lending industry and the
enforcement of the Community Reinvestment Act.
In our second hearing, the subcommittee took a closer look
at the foreclosure crisis in Cleveland and its relationship to
the Federal Reserve Board.
And in this hearing, ``Upholding the Spirit of the
Community Reinvestment Act: Do CRA Ratings Accurately Reflect
Bank Practices?'', we are exploring the coincidence of
persistent discrimination in lending and a 98-percent passing
rate among banks on their CRA exams. We hope, by the end of
this hearing, we can identify a few solutions that will enhance
the CRA and its enforcement by the regulators so that it better
reflects discriminatory practices by regulated banks.
Congress enacted the Community Reinvestment Act in 1977 to
combat redlining practices by the banks. As Mayor of Cleveland
at the time, I was one of the first mayors to sign a Community
Reinvestment Act agreement to hold banks to account for their
history of discrimination. CRA made illegal the banking
practice of arbitrarily and systematically refusing service to
low- and moderate-income and minority communities.
The CRA applies to federally insured depository
institutions and is enforced by regulatory review. Enforcement
is delegated to four Federal agencies: the Federal Deposit
Insurance Corporation, the Federal Reserve System, the Office
of Thrift Supervision and the Comptroller of the Currency.
The regulatory banking agencies have a powerful enforcement
tool: the authority to deny or approve a banking institution's
application for a new charter, a new branch, a merger or an
acquisition. Banking regulators exercise this authority based
on an institution's CRA rating, which measures the bank's
performance to meet the credit needs of its communities.
Failure to meet the credit needs of its communities can
translate, via the CRA and its rating, into a missed
opportunity for the bank to acquire more wealth, making the CRA
rating a critical incentive for banks to serve its minority and
low- and moderate-income communities.
But, since 1990, the banking regulators gave failing grades
in just 225 of 60,194 CRA exams.
Take a look at the slide. The staff has put up a slide on
the board. I don't know how your vision is, but if you can see
that, you are better than I am.
But, today, 98.4 percent of all regulated banks passed the
CRA. Compare this to 1990, when only 90.4 percent of regulated
banks received a passing CRA rating. Does this significant rise
of the number of banks that passed the CRA suggest that, in
2007, banks are improving their lending practices? Does a
passing grade accurately reflect bank lending practices? Well,
not necessarily.
Let us look at slide two.
According to a recent study conducted by the National
Coalition for Community Reinvestment, 24 of the 25 largest U.S.
metropolitan municipalities and their surrounding areas have
fewer banking branches in densely populated urban centers than
the less populated suburbs. Today, nearly 14 million
households, or 21 percent of all U.S. households, are unbanked,
meaning they have no relationship to a bank or credit union.
Other households are underbanked, in that they have deposit
accounts but often seek services from pay-day lenders and check
cashers.
Not only do minority communities have less access to banks,
but, according to the 2004 HMDA data, when they do have access,
African American and Latino populations receive a
disproportionate share of higher-rate home loans.
Slide three.
Even after accounting for differences in risk, borrowers of
color were more than 30 percent more likely to receive a
higher-rate loan than white borrowers.
So our question is this: How can banks be passing the CRA
at such high rates while the HMDA data shows statistically
significant racial discriminatory lending practices and while
bank services for low- and moderate-income communities are
diminishing? We invited Federal banking regulators here today
to help us answer that question.
In exploring this conundrum, this subcommittee identified
several regulatory and statutory issues that raised red flags.
These include the discretionary latitude exercised by banking
regulators, the lack of transparency of the CRA exam process
and incongruency of the 1999 Gramm-Leach-Bliley Act and the
CRA.
The regulations surrounding the review of banks are broad
and undefined. Although the regulations stipulate that evidence
of discrimination adversely impacts a bank's CRA rating, the
regulators do not stipulate a mandatory downgrade in the face
of such evidence. As we dug deeper into the matter, we found
cases where the Department of Justice prosecuted a bank for
Fair Housing and Equal Credit Opportunity Act violations while
simultaneously the Federal regulator issued a bank a passing
CRA rating.
Case in point: In 2006, the Department of Justice filed
suit against Old Kent Bank for violating the FHA and the ECOA.
In its complaint, the Department of Justice alleged that, in
spite of regulation, Old Kent Bank circumscribed its lending
area in the Detroit metropolitan statistical area to exclude--
to exclude--most of the majority-African American neighborhoods
by excluding the city of Detroit.
Between 1997 and 2001, the Federal Reserve Bank not only
gave Old Kent passing CRA ratings, but it also approved Old
Kent's significant branching activity. In January 1996, Old
Kent had 18 branches in the Detroit MSA. Not a single one was
in the city of Detroit. By March 2000, it had expanded to 53
branches located in every county of the Detroit MSA except for
the city of Detroit, which, at that point, was 81 percent
African American.
Now, how can the Fed see this map, refer the case to the
Department of Justice for prosecution and give Old Kent Bank a
passing CRA rating? We asked the Fed that question, and we were
told, in the Fed's discretion, the bank's practices were
reasonable and legal. If discretionary latitude is broad enough
to deem this donut hole reasonable, then perhaps it is too
broad.
But regulatory discretion does not explain everything.
Something in the regulations makes it possible for the CRA
rating to not reflect discriminatory practices.
Now, in 1999, the Sixth Circuit Court of Appeals upheld a
finding against Flagstar Bank for discrimination against
minority borrowers. In 2001, a Federal court in Indianapolis
found a written pricing policy developed by Flagstar so overtly
discriminatory that it ruled against Flagstar on summary
judgment. During the period of Flagstar's violations, the
Federal regulator, the Office of Thrift Supervision, conducted
five CRA examinations. It awarded Flagstar four satisfactory
ratings and one outstanding rating. Significantly, the
outstanding rating was awarded after the summary judgment
finding in 2003.
Now, how can Flagstar be awarded with passing CRA grades
while it is being prosecuted for its discriminatory practices?
We learned that one way a bank can mitigate a low CRA
rating is by agreeing to take corrective action to address its
discriminatory practices. Discriminatory practices are found
during a fair lending exam, the findings of which are not made
public, unlike the CRA exam. Not only is the fair lending exam
secret, but so, too, are the negotiations on corrective actions
between the regulatory agency and the bank. This, I think,
flies in the face of the CRA spirit, which was borne out of
public protest and sustained by public participation.
According to the Treasury Department, CRA-related home
lending in low- to moderate-income communities increased in
Metropolitan areas in which lending institutions and community
groups negotiated CRA agreements. An informed public and a
participating public is a hallmark of the CRA. By negotiating
corrective actions behind closed doors, banks and the
regulators create generic solutions that may not be appropriate
for all. In exchange for generic solutions and the exclusion of
public participation, banks like Flagstar maintain their good
reputations and are afforded the privileges associated with
passing CRA grades.
Then there is another problem that has nothing to do with
the regulations at all but instead is a problem with the law.
In March 2000, the Gramm-Leach-Bliley Act effectively allowed
financial institutions to merge with insurance companies,
security underwriting firms and mortgage lending companies for
the first time in history. But the CRA was not amended to
reflect this financial development.
As a result, while a loan offered by a bank or thrift is
subject to CRA review, that same loan evades CRA scrutiny if it
is offered by that bank or thrift's affiliated mortgage
company, finance company or nondepository affiliate. This
loophole enables banks to move their financial assets to
noncovered affiliates to reduce their CRA obligations.
Subprime borrowers are especially vulnerable to these
unregulated lenders. According to RealtyTrac, Inc., which
compiles statistics on home ownership, last month foreclosures
totaled 225,538, double the number a year ago. Would the
numbers be different if these companies were the subject of CRA
obligations? Has this legal loophole enabled a surging
foreclosure crisis? And if this is indeed the case, has
Congress allowed the CRA to become obsolete in certain
respects?
We hope that, with the insight of Federal banking
regulators as well as community groups and advocates, we can
answer some of these questions and find a way to restore the
Community Reinvestment Act and uphold its spirit.
With that, my opening statement is concluded.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. And any Member who shows up will be given an
opportunity to participate in the questions.
The subcommittee is now going to receive testimony from the
witnesses before us. I want to start by introducing our first
panel.
Ms. Sandra Thompson is director of the Federal Deposit
Insurance Corporation's Division of Supervision and Consumer
Protection, where she directs risk management and consumer
protection examination activities relating to approximately
5,200 FDIC-supervised institutions. Ms. Thompson previously
served as the FDIC's deputy to the vice chairman and led the
Corporation's Bank Secrecy Act and anti-money laundering
supervisory activities. Prior to joining the FDIC in 1970, Ms.
Thompson was an associate at Goldman Sachs and Co. in New York
City. She holds a degree in finance from Howard University.
Welcome. I appreciate your presence here.
Next, I would like to introduce Ms. Sandra Braunstein, who
I had the privilege of having come to Cleveland to participate.
And I appreciated your presence there, as well as here.
Ms. Braunstein is director of the Division of Consumer and
Community Affairs for the Board of Governors for the Federal
Reserve System. She currently oversees the implementation of
the Federal Reservice System polices and programs regarding
community and economic development. Ms. Braunstein also serves
as the board's liaison to the Consumer Advisory Council and
provides leadership to various consumer education and research
activities. Before joining the Federal Reserve Board in 1987,
Ms. Braunstein held positions in economic and community
development for nonprofit, Government and private-sector
organizations. She is a graduate of American University.
Thank you, again, for being here.
Ms. Montrice Yakimov--is that correct?
Ms. Yakimov. Yakimov.
Mr. Kucinich. Yakimov--is the managing director for
compliance and consumer protection at the Office of Thrift
Supervision. Ms. Yakimov coordinates the agency-wide compliance
and consumer protection programs at the Office of Thrift
Supervision, including overseeing the agency's Community
Reinvestment Act program. Prior to becoming the FRB in 2005,
Ms. Yakimov served as senior vice president and director of
regulatory affairs at the Conference of State Bank Supervisors.
She has advised the Federal Financial Institutions Examination
Council Supervision Task Force on a broad range of State
banking issues and has extensive knowledge of Federal and State
consumer protection statutes and regulations.
I appreciate you being here.
Finally, Ms. Ann Jaedicke is the Deputy Comptroller for
Compliance Policy for the Office of the Comptroller of the
Currency. Ms. Jaedicke is responsible for policy and
examination procedures relating to consumer issues and anti-
money laundering. She chairs the FFIEC's Consumer Compliance
Task Force and sits on its Bank Secrecy Act Task Force. Earlier
in her career, Ms. Jaedicke served as the director for the
OCC's Large Bank Division and also managed its Problem Bank
Division. 2001 to 2002, she led projects to restructure OCC's
six districts in OCC's Washington, DC, headquarters.
Thank you for appearing.
I want to, again, thank all the witnesses.
Before we begin, it is the policy of the Committee on
Oversight and Government Reform to swear in our witnesses
before they testify. I would ask that you would rise and raise
your right hands.
[Witnesses sworn.]
Mr. Kucinich. Let the record reflect that the witnesses
have answered in the affirmative.
And you may be seated.
I ask that each of the witnesses now give a brief summary
of their testimony and keep the summary under 5 minutes in
duration. I would like you to bear in mind that your written
statement will be included in the hearing record.
So, Ms. Thompson, let us begin with you.
STATEMENTS OF SANDRA L. THOMPSON, DIRECTOR, DIVISION OF
SUPERVISION AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE
CORPORATION; SANDRA F. BRAUNSTEIN, DIRECTOR, DIVISION OF
CONSUMER AND COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM; MONTRICE GODARD YAKIMOV, MANAGING
DIRECTOR FOR COMPLIANCE AND CONSUMER PROTECTION, OFFICE OF
THRIFT SUPERVISION; AND ANN F. JAEDICKE, DEPUTY COMPTROLLER FOR
COMPLIANCE POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY
STATEMENT OF SANDRA L. THOMPSON
Ms. Thompson. Thank you.
Chairman Kucinich and members of the subcommittee, I am the
director of supervision and consumer protection for the Federal
Deposit Insurance Corporation. In this role, I oversee the
agency's bank supervision activities, including both safety and
soundness and compliance with consumer protection and fair
lending laws.
I appreciate the opportunity to testify today on behalf of
the FDIC regarding the enforcement of the Equal Credit
Opportunity Act and the Fair Housing Act and how the FDIC
considers compliance with the fair lending laws in assigning
CRA ratings to financial institutions.
As you stated, the purpose of CRA is to encourage banks to
serve the credit needs of their entire communities. At the time
CRA was enacted, there was a severe shortage of credit
available to low- and moderate-income neighborhoods and concern
about racial redlining and discrimination. While CRA and the
Federal fair lending laws have had significant positive impact,
there still remains much work to be done.
This afternoon, I would like to focus my statement on a few
key points.
First, the FDIC is committed to protecting consumers and
ensuring that the institutions under our supervision adhere to
the letter and spirit of the fair lending laws. When the FDIC
finds practices that violate these laws, we take action to
ensure that the practices cease and that harm to consumers is
remedied, using a range of supervisory and enforcement tools.
Where the violation appears to involve a pattern or practice of
discrimination, the FDIC refers the case to the Department of
Justice.
Second, from January 1, 2002, through September 30th of
this year, the FDIC cited banks for substantive fair lending
violations in 237 examinations. Although most fair lending
violations cited had already been corrected by the bank or were
promptly corrected at the direction of examiners, more serious
violations were addressed through informal and formal
enforcement actions. In all cases, banks were required by the
FDIC to remedy the harm experienced by affected consumers and
to advise the consumers of their right to pursue legal action.
And they were ordered to stop engaging in discrimination.
During the same 5-year period, the FDIC has referred 181
findings of illegal discrimination to the Department of
Justice.
Third, in addition to performing fair lending reviews, as
part of every compliance exam FDIC examiners separately
evaluate the CRA performance of the approximately 5,200
institutions we supervise. Fair lending violations are one of
the factors considered in determining CRA ratings. Since 2002,
fair lending violations have resulted in several CRA rating
downgrades.
In conclusion, CRA was adopted to address redlining and,
over its 30-year history, has made a significant contribution
to the revitalization of many low- and moderate-income
communities in both urban and rural areas. Fair lending
examinations are critical to achieving complete and accurate
CRA reviews. The FDIC is committed to using CRA and fair
lending laws in the continuing effort to address the credit
needs of low- and moderate-income areas and individuals.
That concludes my statement, and I would be happy to
respond to any questions the subcommittee might have.
[The prepared statement of Ms. Thompson follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you very much.
Ms. Braunstein.
STATEMENT OF SANDRA F. BRAUNSTEIN
Ms. Braunstein. Thank you, Chairman Kucinich and members of
the subcommittee. I appreciate this opportunity to discuss the
implementation of the Community Reinvestment Act and the
enforcement of fair lending laws by the Federal Reserve System.
The Federal Reserve has a longstanding commitment to
ensuring that every bank it supervises complies fully with
Federal financial consumer protection laws, including fair
lending laws, and that every bank meets its obligations under
the CRA.
Consumer compliance supervision, which includes the
administration of CRA and fair lending laws, has been a
separate function at the Board and the Federal Reserve Banks
for more than 30 years. The Federal Reserve Banks are
instrumental in carrying out the Board's mission of consumer
protection through their supervision of the approximately 900
State member banks for which the system has regulatory
responsibility.
Federal Reserve consumer compliance examiners focus
exclusively on consumer compliance supervision and are required
to complete a comprehensive training program that includes
specialized intensive coursework on CRA and fair lending. A
specialized fair lending enforcement section at the Board works
closely with Reserve Bank staff to provide guidance on fair
lending matters and to ensure that the fair lending laws are
enforced consistently and rigorously throughout the system.
When conducting fair lending examinations, consumer
compliance examiners perform two distinct functions. First,
examiners make sure that management is committed to fair
lending and has the appropriate system, policies and staff in
place to prevent violations.
Second, examiners determine if the bank has, in fact,
violated the fair lending laws. Because the Federal Reserve
requires the banks we supervise to devote significant resources
to fair lending and because we examine them routinely for fair
lending compliance, we expect fair lending violations to be
rare among the banks we supervise. Such violations are, indeed,
rare. But when they do occur, we do not hesitate to take strong
action, including referrals to the Department of Justice.
Our record of referrals to Justice demonstrates our firm
commitment to enforcing the fair lending laws. In 2007, thus
far we have referred six institutions. These referrals included
matters of ethnic and racial discrimination in mortgage
pricing, racial discrimination in the pricing of automobile
loans, restrictions on lending on Native American lands, and
restrictions on row-house lending that discriminated on the
basis of race.
Discrimination and other illegal credit practices will
adversely affect a bank's CRA evaluation. In our evaluation of
a bank's CRA performance, we take into account evidence that a
bank engaged in illegal lending discrimination or other illegal
credit practices. At the conclusion of CRA examinations, the
examiners prepare a separate CRA public performance evaluation
that describes a bank's record of helping to meet the lending
service and investment needs of their communities.
Examiners assign a CRA rating that reflects the
institution's overall CRA performance. If examiners find fair
lending violations or find other illegal credit practices,
examiners seriously consider such findings when they determine
the appropriate CRA rating. Examiners consider the nature and
extent of discriminatory practices, the policies and procedures
in place to prevent such practices, and corrective action taken
by the bank.
Examiners may downgrade the rating otherwise earned to
``needs to improve'' or ``substantial noncompliance.'' However,
examiners assess the totality of the bank's record in the
community in making this determination. Whether or not the
examiner lowers the rating, they report their findings of
discrimination in the public performance evaluation.
The Federal Reserve is committed to safeguarding consumer
rights in financial services. The key to this commitment is
ensuring that every bank that the Federal Reserve supervises
meets the credit needs of its community and complies fully with
fair lending laws. Our supervisory process evaluates each
bank's compliance with the fair lending laws and takes that
record into account when evaluating its CRA performance.
Thank you very much.
[The prepared statement of Ms. Braunstein follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you, Ms. Braunstein.
Ms. Yakimov.
STATEMENT OF MONTRICE GODARD YAKIMOV
Ms. Yakimov. Good afternoon, Chairman Kucinich and members
of the subcommittee. Thank you for the opportunity to present
information regarding the activities of the Office of Thrift
Supervision on issues related to the Community Reinvestment Act
and fair lending enforcement.
In my testimony today, I will describe how OTS examines for
CRA compliance, compliance with fair lending laws, and how
violations of fair lending laws and other illegal credit
practices affect the CRA ratings we assign to savings
associations.
The Community Reinvestment Act calls for insured depository
institutions covered by the act to help meet the credit needs
of the communities in which they operate. The Office of Thrift
Supervision's implementing regulation requires the agency to
assess a savings association's record of helping to meet the
credit needs of its entire community, including low- and
moderate-income neighborhoods, consistent with safe and sound
operation.
Additionally, the CRA requires OTS to consider each
institution's record when evaluating an application for new
branches or relocation of an existing branch, mergers,
consolidations and other corporate activity. The regulations
and examination procedures require examiners to consider such
factors as the volume of mortgage and small-business lending
within the savings association's designated assessment area,
the volume in dollar of lending to low- and moderate-income
people, small-business lending, small-farm lending and mortgage
lending in low- and moderate-income geographies. Additionally,
in some instances, performance is based on a savings
association's community development lending and investments,
along with the ability to provide retail services to low- and
moderate-income individuals.
OTS assigns savings associations one of four ratings to
meet the credit needs of the communities they serve:
outstanding, satisfactory, needs to improve, or substantial
noncompliance.
So, through the CRA examination function, OTS reviews
thrift institutions' record of meeting the financial needs of
the communities they serve, including their record of lending
to low- and moderate-income individuals.
Separately, fair lending reviews are an integral part of
the OTS supervision to determine compliance with consumer
protection laws and regulations. OTS examiners conduct a fair
lending assessment during each comprehensive exam, every 12 to
18 months. In addition to HMDA, data examiners also use other
information in their investigations, including consumer
complaints, risks associated with the savings association's
business channels, and the adequacy of the institution's
compliance risk management system.
Through fair lending exams, OTS examiners seek to detect
all forms of discrimination, such as redlining, as well as
discrimination relating to pricing, marketing and underwriting.
If unlawful discrimination is found, OTS will make a referral
to the Department of Justice or the Department of Housing and
Urban Development in accordance with Federal fair lending laws.
Depending on the outcome of the referral and the nature of
the violation, OTS may also take other actions to fully resolve
the matter. For example, when applicable, the OTS directs the
institution to cease violative activity, provide remedies to
harmed parties, and improve its fair lending compliance
controls and policies.
Additionally, and notably for today's hearing, the Office
of Thrift Supervision's CRA regulations indicate that a finding
of discrimination or other illegal credit practice will
adversely affect the savings association's CRA performance.
Such evidence includes, for example, certain violations of
Equal Credit Opportunity Act, Fair Housing Act, Real Estate
Government Procedures Act, Section 5 of the FTC Act and the
Homeowners Equity Protection Act. The extent to which the
finding of discrimination or other illegal practice affects the
CRA rating is determined by factors such as the nature and
extent of the evidence, the policies and procedures that the
savings association has in place to prevent discrimination or
other illegal credit practices, and corrective action that the
savings association has undertaken or has committed to take,
including volunteers.
Since 1990, in 37 instances OTS has reduced the CRA rating
of an institution in response to evidence of discriminatory or
other illegal credit practices. In five cases, the downgrade
was from ``outstanding'' to ``satisfactory.'' In 29 cases, the
rating declined from ``satisfactory'' to ``needs to improve.''
And in three cases, the rating declined from ``needs to
improve'' to ``substantial noncompliance.''
Both CRA and fair lending are critical parts of our
compliance examination function at OTS. While we believe the
regulation examination procedures equip us to monitor both of
these critical areas, we note that refinements to our processes
are certainly something that we consider on an ongoing basis.
We have taken such steps as building new econometric models,
adding additional training and additional resources here in
Washington to support our subject-matter experts in the field.
Ensuring that CRA ratings accurately reflect not only how
effectively thrifts serve the communities they serve but that
they are doing so in compliance with fair lending laws and in
the spirit of the Community Reinvestment Act are key priorities
at OTS. Thank you for raising this important issue, and I look
forward to answering your questions.
[The prepared statement of Ms. Yakimov follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Ms. Yakimov, thank you for your testimony.
I have been informed that there is a vote on, and so what
we are going to do is this. I am going to recess the committee
for 20 minutes, and that would bring us to about 5 minutes
before the hour. We will begin with Ms. Jaedicke's testimony,
and then we will go to questions of the witnesses.
So I would ask that you return in 20 minutes, and we will
start again. Thank you so much. And thank you for your
testimony. Thank you.
The committee is in recess.
[Recess.]
Mr. Kucinich. The committee will now come to order.
I want to thank the witnesses for their patience. The House
has just completed its business for the day, so I don't think
we will have any other interruptions.
We will hear from Ms. Jaedicke, and then we will go to
questions of the witnesses. And, again, I thank you for your
indulgence.
The Chair recognizes Ms. Jaedicke.
STATEMENT OF ANN F. JAEDICKE
Ms. Jaedicke. Chairman Kucinich, I am Ann Jaedicke, deputy
comptroller for compliance policy at the Office of the
Comptroller of the Currency. I am pleased to appear before you
today to discuss the OCC's fair lending and Community
Reinvestment Act examination processes. I will also discuss how
a national bank's CRA evaluation and rating can be adversely
affected by evidence of unlawful discrimination.
Let me begin by saying there is no room for unlawful
lending discrimination in the national banking system, and the
OCC fully expects banks to serve the credit needs of their
communities, including needs in low- and moderate-income areas.
The OCC has a comprehensive and rigorous fair lending oversight
program, which is the foundation for ensuring that national
banks comply with fair lending laws.
We also conduct examinations of national banks to evaluate
whether they are meeting the credit needs of their communities
as required by the Community Reinvestment Act. At each CRA
examination of a national bank, the examiner not only evaluates
the manner in which the bank is meeting the credit needs of the
community, but the examiner also considers the nature and
extent of any unlawful discrimination or other illegal credit
practices in which the bank may have engaged.
The joint CRA regulations of the Federal banking agencies
provide that evidence of unlawful discrimination or other
illegal credit practices has an adverse effect on a bank's CRA
evaluation. Therefore, if there is evidence of unlawful
discrimination, that information is taken into account in the
bank's CRA evaluation, and the examiner's findings are
discussed in the public performance evaluation [PE].
The interagency CRA rules further provide guidance on the
factors that will be considered in determining whether a bank's
CRA rating should be adjusted as a result of such evidence.
These factors include, among other things, the nature of the
violation, the extent of the problem, whether the bank self-
identified the issue, and whether the bank has initiated
corrective action.
Let me assure you that the OCC treats evidence of fair
lending violations as a negative factor when assessing the CRA
performance of national banks, and we have lowered the CRA
ratings of national banks in several instances based on such
evidence. For example, ratings have been lowered from
``outstanding'' to ``satisfactory'' and from ``satisfactory''
to ``needs to improve'' based on discriminatory or other
illegal credit practices. In other instances, the OCC has
described the violations in the CRA PE and has taken them into
account in evaluating the CRA performance but has determined
that lowering a rating was not appropriate based on an
assessment of the applicable factors in the regulation.
In addition to conducting CRA examinations, the OCC has a
fair lending supervisory program designed to assess the level
of fair lending risk in every national bank. As part of this
process, the OCC assesses compliance with fair lending laws and
regulations; we obtain corrective action when significant
weaknesses or deficiencies are found in a bank's policies,
procedures and controls related to fair lending; and we ensure
that enforcement action is taken when warranted, including
referrals to the U.S. Department of Justice and notifications
to the U.S. Department of Housing and Urban Development.
Our fair lending supervisory process has several features
that, in combination, result in a risk-based approach to our
fair lending supervision. We combine our examiner's knowledge
of the bank and its products and markets with analytical
information about loans made by the bank and with information
from consumers and community groups. Using this information, we
focus our fair lending examinations on banks that show the
greatest potential for fair lending issues.
I appreciate the opportunity to discuss the important nexus
between fair lending and helping to meet community credit
needs. The OCC is committed to ensuring that our evaluation of
national bank CRA performance appropriately reflects any
evidence of unlawful discrimination consistent with the
interagency CRA regulations. Along with our robust fair lending
examination and enforcement process, the CRA process is an
important tool in Federal law that we use to address and to
prevent unlawful discrimination.
I will be pleased to answer any questions that you may
have.
[The prepared statement of Ms. Jaedicke follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you very much for your testimony, Ms.
Jaedicke.
We are pleased to be joined by Mr. Davis of Illinois. Thank
you for being here and for your participation.
I want to start off with Ms. Thompson.
Ms. Thompson, in a meeting, FDIC representatives told my
staff that they are not proud of their failure to note
Centier's discriminatory practices. Would you agree that this
is the FDIC's general attitude toward the Centier example?
Ms. Thompson. Mr. Chairman, as the head of supervision and
consumer protection, I can assure you that is the FDIC's
position on how we handled that particular situation.
Mr. Kucinich. And, Ms. Braunstein, my staff's experience
with the Fed was a lot different. During their meeting, a Fed
representative told my staff that the Fed did not make any
mistakes in their CRA examination of Old Kent Bank. This is
despite the Department of Justice prosecution against Old Kent
Bank for FHA and ECOA violations.
I was reading Bloomberg news accounts of this meeting
today, and you are quoted as saying, if this quote is accurate,
that banks can always do more.
Is your position that Old Kent Bank could have done more--
that is, by following the law--or that, in the Fed's view, Old
Kent Bank was compliant with the CRA?
Ms. Braunstein. Congressman, that incident took place 8
years ago, and the institution no longer exists. The people who
were involved in that matter at that time no longer work for
the Federal Reserve. And it is, frankly, impossible for me to
reconstruct what took place at that time to really opine one
way or another.
I will tell you that, based on the circumstances that
ensued, we find the situation to be very troubling. And we do
take redlining very seriously, and we have proven that with our
record of referrals to Justice for redlining cases. We are not
hesitant to pull the trigger when we identify redlining.
It is very difficult--it is basically impossible for me to
address the specific facts.
Mr. Kucinich. But you are familiar with the case?
Ms. Braunstein. I am familiar with what we know at this
time about the ratings. I don't have the benefit of talking to
the examiners to find out how they made their judgments.
Mr. Kucinich. Can you say that Old Kent Bank was misgraded?
Ms. Braunstein. I would have to try to reconstruct how they
came to that conclusion. And I don't think that I can
reconstruct their thought processes from 8 years ago.
Mr. Kucinich. Well, you said a moment ago it was troubling.
Ms. Braunstein. I also don't think that it is a fair
representation to take one case out of thousands of bank exams
we use and try to characterize our entire record.
Mr. Kucinich. This isn't about characterizing your entire
record, although your entire record is in question here. It is
about trying to see how the Fed responds when questioned about
a specific case which seems to be quite an egregious example of
a lack of oversight.
Now, I will take into consideration that this was 8 years
ago, that the institution is gone, that the players are gone.
But it would be instructive for this committee to be able to
learn from the Fed should it have been done differently, would
you do it differently, or don't you know enough about it to
make an assessment, which, to me, would mean that we still are
in the category of lessons to be learned. So help us out,
please.
Ms. Braunstein. Well, I don't think I know enough about
that specific case to make a determination. However, I will
tell you that we are constantly looking at ways to improve our
processes around examinations for Community Reinvestment Act as
well as fair lending. We constantly tweak our procedures. We
constantly try to find ways to improve. As I said this morning,
there is always room for banks to improve; there is certainly
always room for us to improve.
Mr. Kucinich. So the Fed can always do more?
Ms. Braunstein. And I will commit to you we will continue
doing that.
Mr. Kucinich. Would you then agree with the statement the
Fed could always do more?
Ms. Braunstein. Absolutely, absolutely.
Mr. Kucinich. Thank you.
My 5 minutes has expired. I want to go to Mr. Davis for the
next round of questions.
The Chair recognizes Mr. Davis. Thank you.
Mr. Davis. Thank you very much, Mr. Chairman.
And I want to thank the witnesses for being here and for
participating.
The Department of Justice filed a complaint against First
National Bank of Pontotoc, MS, in April 2006, alleging that
First National's former vice president violated the Equal
Credit Opportunity Act and that the bank is responsible for the
discriminatory conduct during the vice president's tenure. The
complaint alleged that while he was serving as the vice
president at First National in 2003 and 2004, he had sought
sexual favors in return for favorable loan decisions. He left
the bank in May 2004.
During this time between 1993 and 2003, the OCC gave First
Bank passing scores, even as the vice president in question was
stepping down. In fact, the 2004 CRA exam of First National
states that in the, ``fair lending or other illegal credit
practices review,'' an analysis of public comments and consumer
complaint information was performed according to the OCC's
risk-based fair lending approach. Based on its analysis of the
information, the OCC decided that a comprehensive fair lending
examination would not need to be conducted in connection with
the CRA evaluation this year. The latest comprehensive fair
lending examination was performed in 1998.
I would like to ask you, Ms. Jaedicke, you did not conduct
a fair lending exam of First National because your agency felt
that the risk-based approach that you use--as a result, there
was no need for an exam. Is that correct?
[The prepared statement of Hon. Danny K. Davis follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Ms. Jaedicke. Yes, sir, at the time, based on the
information we had during our 2004 CRA exam.
And let me add that the issues at First National Bank of
Pontotoc are quite disturbing to us, but the allegations
surrounding the bank emerged contemporaneously with the exam
that we were doing in 2004. Shortly thereafter, the Department
of Justice opened up an investigation and asked us to stand
down. So when the Department of Justice finishes their
investigation and we have their findings, we will take them
into account as part of the next CRA examination.
Mr. Davis. Could you explain to us what your risk-based
approach is?
Ms. Jaedicke. Certainly. Our fair lending supervision
process really has three features.
The first is the knowledge and experience that our bank
examiners have with the banks that they supervise. And that
involves the bank's products and services, its customer base,
the type of communities they operate in, the type of complaints
they are receiving from consumers or community groups.
Examiners process that information as they receive it. And if,
based on any of that information, they decide that they are
concerned about a fair lending issue, they can initiate a fair
lending exam. That is the first feature.
The second feature of our fair lending supervisory process
is really analytically based. We process information from the
HMDA data submitted by banks each year and additional
information that lets us screen the population of national
banks to look for banks that may have disparate issues or
issues that cause us concern, raise questions about fair
lending. If we find that, we will put those banks on a list to
be examined in the coming year.
And the third feature is a random sample. We select a group
of banks to be examined in the coming year each year, so that
there are banks that, if we perhaps have no other reason to
look at those banks for fair lending issues, are examined
anyway.
Mr. Davis. And is the fair lending exam meant to be
complaint-based, that, as a result of complaints, you
determine----
Ms. Jaedicke. No, sir, it is not solely complaint-based.
But, certainly, if we had complaints or information from
community groups that caused us concern, it could initiate a
fair lending exam.
Mr. Davis. So the purpose of the exam to regulate the banks
and ensure that they are in compliance with fair lending laws
like the FHA and the ECOA, if you wait for a consumer to tell
you that they are in violation of those laws, then it is your
job just to followup. I am saying, if you get complaints and
the consumers are saying, ``We think that they are violating
thus and so,'' is it your task to just followup?
Ms. Jaedicke. We certainly would followup if we had
complaints like that. But that is not the sole basis that might
lead to a concern on our part around fair lending issues.
I will give you another example. If a national bank were to
choose to enter a new market that would involve lending to a
Hispanic customer base or an African American customer base and
we had reasons to be concerned about the products they were
offering, that might cause an examiner to initiate a fair
lending exam.
Again, if we saw information in the HMDA data filed by
national banks every year that caused us to be concerned--and
we analyze that information every year--that could cause us to
initiate a fair lending exam.
So, a variety of different things could occur that would
cause us to initiate a fair lending exam.
Mr. Davis. And, finally, let me just ask you, is it
possible that because there has not been a fair lending exam in
6 years for this particular bank before the case was brought to
the Department of Justice's attention, that First National may
be violating other lending laws but you just weren't aware of
them because there was no examination of the bank?
Ms. Jaedicke. I think in the situation of First National-
Pontotoc--which is a bit unusual because it involves sexual
harassment, and sexual harassment, by its very nature, is
surreptitious--it would be an issue that would be quite
difficult for us to uncover as part of a bank examination.
Nonetheless, once the Department of Justice concludes its
investigation, we will review the findings of that
investigation, take them into consideration in our next CRA
exam. And if there are other indications in that investigation
of something we feel like we need to look at at First National
Bank of Pontotoc from a fair lending standpoint, we will do
that.
Mr. Davis. So there may be others, but you just really
wouldn't know, because of the nature of the examination.
Ms. Jaedicke. Yes, sir.
Mr. Davis. Thank you very much.
And, Mr. Chairman, I want to thank you for your indulgence.
I know that my time has ended.
Mr. Kucinich. We are going to go to another round of
questions.
I continue to be concerned about the Fed's approach to
enforcement. We have just reviewed the fact that the Old Kent
Bank case was 8 years old. The Fed has had 8 years, a lot of
time to learn from experience.
Now, the 1997, 1999 and 2001 exams had virtually the same
language on Old Kent's compliance with anti-discrimination
laws. Here is how it reads: ``the bank is in compliance with
the substantive provisions of anti-discrimination laws and
regulations, including the Equal Credit Opportunity Act [ECOA],
and the Fair Housing Act. No substantive violations were noted.
The bank is also in compliance with the technical requirements
of the Community Reinvestment Act. The public file and CRA
notices were reviewed and deemed to be in compliance.''
Ms. Braunstein, who oversaw the work of this CRA examiner?
Ms. Braunstein. The CRA examination was done by the Federal
Reserve Bank of Chicago. All the exam work is done by the
Reserve Banks. And there are various layers of management over
those examiners. There are certainly layers of management at
the Reserve Bank itself, as well as examinations are a
delegated function in the Federal Reserve System, so ultimately
reported to Washington, DC.
Mr. Kucinich. So the structure of oversight, you have the
examiner and then someone who reviews the work of the examiner.
Who would that be?
Ms. Braunstein. Correct. That would be probably a reviewing
person at the Reserve Bank.
Mr. Kucinich. And then who would check that work?
Ms. Braunstein. I would imagine their management, whether
it is a vice president of the Reserve Bank, a manager or
assistant vice president, depending--each Reserve Bank has a
different hierarchy.
Mr. Kucinich. So is there an oversight body involved here
in reviewing an examiner's conclusion?
Ms. Braunstein. Well, yes, absolutely, on every
examination. Also, I will add that the examinations ultimately
come into Washington and that people at the Board do review a
portion of those examinations, looking for consistency and
making sure policies are being enforced.
Mr. Kucinich. Now, in this particular case, the record
shows that the examiner's conclusion was not questioned by a
Federal oversight body and it basically concurred. Why was this
examiner's conclusion, which I had recited to you earlier, not
questioned by a Fed oversight body?
Ms. Braunstein. Well, I don't know that it wasn't. If a
conclusion is questioned, it doesn't mean that would
necessarily show up in the report. What you see in the report
is the final conclusion. That doesn't preclude that there was
some discussion. And there, again, it is nothing that I can
reconstruct, to tell you whether that happened or not.
But I also just want to add that our examiners undergo very
rigorous training, specifically in CRA and fair lending. That
is a specialty at the Fed. These examiners are doing consumer
compliance work. They are not doing safety and soundness work.
They are trained. There is always a degree of subjectivity and
judgment that goes into these examinations. And we train our
examiners. We continue to--we have continuing training for
them. And, at some point, we have to trust their judgment.
We do discuss--management does discuss conclusions with
them. And so, that would not necessarily show up in the report,
but it doesn't mean it didn't go on.
Mr. Kucinich. I would like you to look at this map now. And
we had described the map to you earlier. Would you call this
reasonable?
Ms. Braunstein. Well, I can't see what the legend is over
there, what the different colors mean.
Mr. Kucinich. The red area represents no branches. And it
also happens to be the city of Detroit.
Let me refresh your memory about the context of this, OK?
You see a donut hole around the city of Detroit, which is 81
percent African American. The Department of Justice filed suit
against Old Kent Bank in 2004 for violating the Fair Housing
Act and the Equal Credit Opportunity Act. The Department of
Justice cited a Section 228 violation and said, ``Instead of
defining its assessment area in accordance with Regulation BB,
Old Kent Bank circumscribed its lending area in the Detroit MSA
to exclude most of the majority-African American neighborhoods
by excluding the city of Detroit. And as of March 2000, Old
Kent still did not have a single branch in the city of
Detroit.''
Now, I am contrasting that with the statement that the Fed
made with regard to Old Kent's compliance with anti-
discrimination laws. These are quotes from the 1997, 1999 and
2001 exams. ``The bank is in compliance with the substantive
provisions of anti-discrimination laws and regulations,
including the Equal Credit Opportunity Act and the Fair Housing
Act. No substantive violations were noted. The bank is also in
compliance with the technical requirements of the CRA.''
The public file and CRA notices were reviewed and deemed to
be in compliance. I am going to ask you again, look at the map.
Would you call it reasonable?
Ms. Braunstein. I find it very troubling, but, again, there
are other things that go into the consideration of an
assessment area, such as the banks, what is reasonable for the
bank to be serving, considering the location of its branches.
Like I say, I don't have----
Mr. Kucinich. I'm going to have to stop you a minute. I
want you to look with your eyes, OK? Then I want you to look
with your heart and see if you can tell me, when you look at
that, everything--you have an African American population there
in the city of Detroit. It corresponds neatly with what's in
red. Then you have the rest of the area in terms of
assessments. And you see where the CRA it said that they are in
compliance; and they are clearly not, if you look at the map.
Ms. Braunstein. Well, like I say, I find this very
troubling. And I will say this. If this were to come before me
today on an exam that we were doing, I would have serious
questions about it.
Mr. Kucinich. Would you say this is what red-lining looks
like?
Ms. Braunstein. It certainly could, yes.
Mr. Kucinich. Did the Fed refer the Old Kent case to the
Department of Justice?
Ms. Braunstein. No, it did not.
Mr. Kucinich. Why didn't the Fed take any of its
enforcement actions before then?
Ms. Braunstein. That I cannot answer.
Mr. Kucinich. And why didn't the Fed at least hold the
public hearing during any one of its CRA exams?
Ms. Braunstein. Well, are you talking about applications?
Mr. Kucinich. I'm talking about during the process of an
examination, review of the CRA.
Ms. Braunstein. We don't hold public hearings during
examinations.
Mr. Kucinich. That's the point.
Ms. Braunstein. We hold public meetings during
applications.
Mr. Kucinich. Well, OK, I am talking about applications.
Ms. Braunstein. OK. We hold--and I will tell you in that
sense I know in terms of the Fifth Third application.
Generally in any application we are looking most closely at
the record of the acquiring institution. Because especially if
there are problems with the target and the acquiring
institution has a good record, we have conversations with them
to make sure that they are going to bring the target
institution up to the standards that they currently have.
Mr. Kucinich. Now your enforcement authority under the CRA
is the ability to assign a low rating, which would impede a
banking institution's ability to expand by merging with other
banks, acquiring other companies and branching. You didn't
exercise that authority when you examined Old Kent, but you had
another chance to exercise your authority when Old Kent applied
to merge with Fifth Third Bank. Did you hold a public hearing
to discuss the merger?
Ms. Braunstein. No, we did not.
There are a couple of things there. One is, the Justice
Department investigation was still under way so we had
absolutely no idea of what their findings were at that time.
Also, as I said before, we are looking much more closely at the
acquiring institution rather than the target, and Fifth Third
was the acquiring institution.
Mr. Kucinich. Did you see the map, though? Did anybody look
at the map, and--I mean, let's set aside the Department of
Justice for a minute.
Ms. Braunstein. During an application, we generally look at
the exams. The exams figure into the process, the previous
examinations.
Mr. Kucinich. And so you didn't hold--you did or didn't
hold a public hearing?
Ms. Braunstein. We did not hold a public----
Mr. Kucinich. Did you condition Fifth Third's acquisition
on serving Detroit?
Ms. Braunstein. As far as I know, we did not.
Mr. Kucinich. Why didn't you do that?
Ms. Braunstein. I don't know. I can't answer that.
Mr. Kucinich. All right. You could have done that; is that
correct? You have the power to do that?
Ms. Braunstein. We do have the power to condition.
Mr. Kucinich. An acquisition. So you had the power to
condition an acquisition on serving a population, which, by
just a quick look at a map, you could tell that there was red-
lining going on and you didn't do it. Now did you solicit
feedback from the community to decide what the acquiring bank
would need to do to better serve the community?
Ms. Braunstein. With any application we have a public
comment process.
Mr. Kucinich. And what about the public comment process on
that particular case? Did you go out to the community? You
didn't hold hearings, you said, but how was the public able to
know that there was an opportunity to come?
Ms. Braunstein. Anytime there's an application, it is
advertised in community groups or anybody--citizens, whoever,
other financial institutions--anybody can file public comments
with us.
Mr. Kucinich. And how are people advised of that?
Ms. Braunstein. We--its--there's a newspaper notice. There
is--you know, generally, it's never been a problem for people
to know about that.
Mr. Kucinich. Did you take out newspaper ads in the African
American community to let people know that they could comment?
Ms. Braunstein. I am not aware of exactly where it was
advertised at that time. That was a number of years ago.
Mr. Kucinich. I think it would be instructive.
Let me make clear something for those who are in the
audience and may be watching, that staff has met with the Fed
and there really aren't any surprises, that we're going in-
depth here into talking about Old Kent. This is not something
that we're just pulling out of a hat. This is a very serious
question that is quite blatant.
And, of course--as a personal concern, I know Mr. Davis,
who represents Chicago, has a personal concern here; and I
share it. But we also have a situation in Cleveland where we
see people couldn't get loans. They are thrown into subprimes,
they end up not being able to meet the requirements, they lose
their homes, and we've got whole neighborhoods that are being
decimated.
And, you know, the public policy issue here, frankly, is
one where if banks are permitted to avoid the requirements of
the CRA and then people can't get the loans, they then get
thrown into the clutches of subprime lenders, the most
predatory of lenders out there; and then they are going to get
destroyed financially and lose their homes.
So, to go back to the Fed, do you understand why this
committee feels the Fed has not only a legal obligation here
but a moral obligation to the people of the United States to
exact oversight in a manner which insists on compliance with
the letter of the law? Do you understand why this committee has
a concern about the imperative of Fed enforcement here?
Ms. Braunstein. Congressman, we share that concern. We take
these matters extremely seriously, and we have shown that
through our fair lending record, our record of referrals to
Justice. Like I say, I cannot explain how this case happened,
but we have not hesitated to pull the trigger when we have
found red-lining in other financial institutions. It is not
like we have no record of pulling the trigger on cases like
this.
Mr. Kucinich. Well, you know, when you look at the wreckage
that subprime loans are leaving in neighborhoods across America
and when you look at the lack of the apparent lack of effective
oversight of CRA--because if people had the money, if they got
the loans from the prime lenders whose responsibility it is
under CRA, they wouldn't have been thrown into the arms of the
subprime lenders. That's the point.
With all due respect--and, again, I am very grateful that
you are here; we couldn't do this hearing without you--but we
also can't have an effective oversight without the Fed's active
participation. And at this point, notwithstanding your
profession of concern, a quantitative assessment does not rest
in your favor. And while the Fed and all the members of the Fed
can go home tonight and rest easy in their townhouses and their
apartments and in their homes, as they should be able to do,
there are millions of Americans who maybe are losing their
homes and are out of their homes and some of them on the
street. This is not a small matter.
The Chair recognizes Mr. Davis.
Mr. Davis. Thank you very much, Mr. Chairman.
Ms. Braunstein, let me ask about voluntary corrective
action. Does this regulation suggest that if a bank corrects
its discriminatory behavior, then the regulator will not
reflect the discriminatory practice in the CRA exam?
Ms. Braunstein. No, it does not suggest that at all. In
fact, even if a bank corrects its behavior, if there was a
pattern of practice of discrimination, we have reason to
believe that there was, despite a correction, we will make a
referral to Justice. We also will reflect the discrimination in
the public evaluation of the CRA report.
Mr. Davis. So you're not grading the bank based on its
performance exactly, are you? Or is it some performance and
some of what it says it's going to do?
Ms. Braunstein. Well, there's a difference between--I'm
trying to--I'm not sure I understood your question, but there's
a difference between the CRA rating that is given and the
public evaluation report. The rating is part of the report. So
I think what we're saying, and this is true of all of us, is
that in some cases a finding of discrimination may not result
in a downgrading of the rating. However, even if that happens,
it will be reflected in the written report on CRA.
Mr. Davis. Let me ask you, if a bank like Old Kent says, in
2001, we're sorry, we'll open up a branch in the city of
Detroit, even though we haven't done so as of yet, we're
legally mandated to do for the past 5 years, would this bank
get a lower CRA rating or would this satisfy the requirement?
Ms. Braunstein. If we find a red-lining violation, first of
all, we would be mandated to refer that to Justice; and, second
of all, something that egregious would likely result in a
downgrade in this hearing rating.
Mr. Davis. And let me go to other members of the panel.
Of course, we have data that reveals a disproportionate
share of African American assessments, African American and
Latinos receiving higher-rate home loans, notwithstanding
location, income. We see non-disclosure in fair lending exams
and lack of transparency, thereby compromising entire
communities of their right to participate in public
negotiations; and CRA's lack of uniform standards where
reasonableness of assessment areas, as well as nature, extent
and strength of evidence of discriminatory practices are at the
discretion of the examiner.
I guess what I'm really trying to arrive at is this
business of when is enough or how do you decide? The question
then becomes, what level of evidence is sufficient to adversely
impact an agency's CRA valuation?
Ms. Thompson, perhaps I would----
Ms. Thompson. Well, a couple of things. At the FDIC,
consumer protection is very important. Not only do we look at
access to credit, which was very relevant 30 years ago and it
is just as relevant today, we look at cost of credit. Because
in many of the low-income and moderate-income neighborhoods,
they are proliferated by high-cost credit products that may or
may not be offered by financial regulated entities such as
financial institutions.
At the FDIC, we are encouraging unbanked and underserved
persons to come into the banking sector. And through our
examination process we think one violation is one too many, and
we always advise the bank to take corrective action.
To the extent that we find patterns and practices of either
denial of credit or high-cost credit, we take action relatively
quickly; and we take that information and we factor it into the
rating for the compliance exam for that institution and also
the CRA rating. This year alone the FDIC has made 13 referrals
to the Department of Justice for fair lending issues, and we've
also downgraded two institutions in 2007 with respect to their
CRA rating. This is something very important to the FDIC, it is
important to our chairman, and we want to ensure that our
examiners take corrective action where appropriate.
Mr. Davis. Thank you.
Ms. Yakimov, how would you respond to that?
Ms. Yakimov. We look at the fair lending record of our
institutions very closely. We look at the HMDA data. We combine
it with factors that aren't included in the HMDA data like loan
to value, the broker compensation, credit score. And fair
lending reviews take place at every comprehensive exam, every
12 to 18 months. We do target reviews. We've, as I said, built
some additional models and tools to run the data through.
And, again, if we see evidence of discrimination or other
illegal credit practices, that will have an impact. Not only
will that be reflected in the fair lending evaluation, but it
will also have an impact on the CRA rating. And we look again
at the scope of the evidence, we look at the CRA performance of
the institution in its totality, but that's a significant
factor if we do find those concerns.
Mr. Davis. Ms. Jaedicke.
Ms. Jaedicke. Congressman, findings of illegal credit
practices of discrimination adversely affect the CRA ratings of
national banks. Equally important, a poor lending record by a
national bank or a bank that is not serving the credit needs of
its community, including low- and moderate-income areas, is
equally likely to get an adverse CRA rating.
Mr. Davis. You know, I'm always amazed that, in spite of
the fact that we've had CRA now for 30 years, and yet, when we
look at certain communities in certain areas, we don't seem to
get a tremendous amount of difference in some of those. The
same groups continue to have the most difficult time, still
continue to pay the most for credit, still seem to not be able
to acquire, in many instances, decent credit.
Is there something else that any of you might be able to
think of that might be missing? I mean, I happen to actually
live in the community that was a hotbed of the generation of
activity that resulted in CRA. A woman named Gail Cincotta used
to live in the same neighborhood where I lived. As a matter of
fact, I was a member of Gail Cincotta's first organization, the
Organization for a Better Austin, before she left and came to
Washington and organized the National Training and Information
Center. So I've kind of seen this over the period of time.
What else could perhaps--if there's anything?
Ms. Thompson. Congressman, I happen to have been privileged
to have been born and raised on the south side of Chicago,
which is the home of CRA, as you well know, but I can tell you
that at the FDIC we take a very proactive approach to economic
inclusion.
We have within our organization a concerted effort to try
to bring the unbanked and underserved persons that the chairman
referenced in his opening statements into the banking sector.
In eight territories we have formed alliances with community
groups, financial institutions and other regulators to try to
find out why people are not coming into the banking system, and
we are trying to figure out ways to encourage them to
participate more fully in the financial services that are
offered by regulated entities. Because, again, so often in
these communities many of the occupants are subject to higher-
cost products, whether it is financial services or not.
This is a very important initiative to our chairman, and we
do take proactive steps to try to encourage the regulators to
work with community groups and financial institutions to try to
better address this issue.
Mr. Davis. Ms. Braunstein.
Ms. Braunstein. Congressman, I would add to that we don't
lose sight of the fact of the accomplishments of CRA over the
last 30 years. It has been documented differently in different
places, but I don't think anyone would argue that CRA has
brought billions of dollars into neighborhoods that previously
had very little, if any, bank investment or bank participation.
I do believe there is a lot more to be done and needs to be
done both on the part of the regulators as well as on the part
of the financial institutions. I also think that,
unfortunately, CRA is not the panacea or the answer to
everything, all the problems that exist economically in low-
income communities, and it will never be able to solve all the
problems.
Ms. Yakimov. I would add we have seen a real
democratization in credit, and I think it is incumbent upon us
for both sides of our houses to function effectively. So we're
talking a lot about CRA and the provision of credit
particularly to low- and moderate-income people. We want the
types of credit that are sustainable, that allow people to stay
in their homes. So we need to make sure that underwriting is
what it ought to be. That's another part of what we're called
upon to do. And I think we issued guidance in the last--
recently going back to 2006 that really began to move the
industry to what our expectations were in terms of sound
underwriting. They are both important.
Ms. Jaedicke. I would add that I think it is very important
for us as regulators to help keep the dialog going between
banks and community groups. I know at the OCC in the last 5
years we've held a thousand meetings with different community
groups around the country, trying to understand what the needs
are so that we can make better assessments in our CRA exams and
we can help banks understand what communities need.
I also think financial literacy is always an important
issue, and to the extent that we can contribute as regulators
in those areas I think we should. And I think we need to
closely look at what's happening in the subprime market and the
environment we are working in now to see if we can learn how
people are being affected by the current environment.
Mr. Davis. Well, let me thank you again, Mr. Chairman. Let
me thank all of you. I will have to dash away to something
else.
But I do want to say that I would certainly agree, relative
to some of the impact that CRA has actually had, even from a
personal experience, I actually sat on the board of a bank for
10 years as a result of my community being engaged to the
extent that we held up the purchase of a bank until there was
an agreement with our reinvestment policy, and it has been a
good experience. And I actually sat there with no personal
interest in the bank, I didn't own any of the stock and only
left after I got elected to Congress because I wouldn't have
time to go to the meetings at all. So I think that CRA has had
some impact, can have even more; and I think an activated
community is probably one of the best things that I really can
think of to help make sure that the concepts really work.
So I thank you all; and I thank you, Mr. Chairman, again
for your indulgence.
Mr. Kucinich. Mr. Davis, it's an honor to have you on this
subcommittee, because you and I share a passionate commitment
to people in urban areas, and these economic issues are
fundamental to people's survival.
I just heard Ms. Jaedicke talk about financial literacy;
and, you know, it's a generally accepted provision in the
marketplace to say caveat emptor, let the buyer beware. People
buy credit. When you consider the fact that bankruptcies are at
an all-time high in the United States, that foreclosures are at
an all-time high, this isn't just a question of financial
literacy. This really goes to the heart of why we've asked the
regulators to come before this committee. This is a question of
your responsibility.
No one questions the efficacy of the Community Reinvestment
Act. I was one of the first mayors in the United States to use
the Community Reinvestment Act almost 30 years ago to benefit--
29 years ago--to benefit a neighborhood in the city of
Cleveland. You know the efficacy of the Community Reinvestment
Act is not at issue here.
We have a crisis in America with people getting tricked,
having their lives ruined by predatory lenders and by prime
lenders who are not fulfilling their obligations under the
Community Reinvestment Act because the regulators don't make
them do it.
Now, I just want to go down--so, thank you, Mr. Davis. I
just want to go down the panel. Ms. Thompson, when is it
discriminatory practice egregious enough to result in a CRA
failure? What does it take?
Ms. Thompson. Well, we think one discrimination is one too
many. And we do look at the institution's record with regard to
their lending practices to persons, and we try to determine
whether or not it is a pattern or practice, and we do require
institutions to take corrective action.
At the FDIC, we do have a number--we have four institutions
that are substantially not complying with regard to their CRA
rating, and we have about 31 are in the needs-to-improve
category.
Lending and discrimination is something that we take very
seriously at the FDIC. We have an extensive training program
where we train our examiners to look at fair lending issues, to
look at community reinvestment, to talk to people in
communities and get as much information as we can.
The CRA rating is a huge reputational issue for an
institution, and we want to make sure that we have all the
facts that we possibly can to make a decision. Again, we take
pride in our examination program, and even one violation is one
too many.
Mr. Kucinich. I appreciate your saying that.
I'm going to ask staff here in light of some of these
comments, and maybe you are already working on doing this, to
look at the issue of mergers and acquisitions, the growth of
the value of banks during the period that's under study here to
see how banks have been able to increase their wealth, their
holdings while we have seen a commensurate decline in the
ability of people in the inner cities to get credit. I want to
take a look at that.
I would like--I want to go back to Ms. Braunstein. What
takes an applicant to the point of failure? When is a
discriminatory practice egregious enough to result in a CRA
failure? What does it take?
Ms. Braunstein. Well, I can't--there is no specific
measurement of that, but I will tell you when we look at their
CRA evaluation, we are looking at the totality of them serving
the convenience and needs of their communities.
As part of that, we do look at whether or not there are
findings of discrimination. There are cases--we're talking here
in the case of a red-lining case where there is--that would be
a very egregious case. However, we find discrimination on
things like spousal signatures that were required that
shouldn't have been, which is also serious and we make
referrals to Justice on this, and that may show up in the
evaluation. But if it took place in a very small part of the
institution, maybe with a rogue loan officer, and it is a
larger institution and otherwise it is doing a good job of
serving its community, it could be that CRA rating is not
downgraded in that case.
Mr. Kucinich. Spousal signatures, OK. What about race?
Ms. Braunstein. Racial discrimination, we would look at
very closely and see--I would think that would result in a
downgrading. I can't sit here--I was sworn in--and say that
there was no other--there is no possibility of a case where
that would not--where that would not be----
Mr. Kucinich. Yeah. Students in class, sorry, your work is
not good enough. We can't give you a C. We are going to
downgrade you to a D. Or students in class, sorry, you fail.
There is a world of difference, is there not, between an
institution being downgraded and failed on a CRA examination?
Ms. Braunstein. There is absolutely a big difference.
Mr. Kucinich. Do you want to explain to the committee what
the difference is between being downgraded and failed?
Ms. Braunstein. You can be downgraded from an outstanding
to a satisfactory, and you are still getting a passing rating.
Mr. Kucinich. Right.
Ms. Braunstein. Like from an A to a B.
Mr. Kucinich. If you failed--somebody fails a test in a
school, they don't pass the grade, what happens when someone
fails a CRA examination?
Ms. Braunstein. Well, it is publicly available information,
so it causes, you know, a problem for them in that area.
Mr. Kucinich. Like for example?
Ms. Braunstein. Well, for one thing, it's an embarrassment
to the institution publicly. It also does cause them problems
in the application process, which I'm sure is what you're
getting at.
Mr. Kucinich. Right, right, right. So if it causes someone
a problem in their application process, what does that mean?
Spell that out a little bit. What would be the implications?
Ms. Braunstein. Well, the implications would be it would be
much more difficult for them to expand their operation.
Mr. Kucinich. To?
Ms. Braunstein. Expand their operations.
Mr. Kucinich. Right. And so really would limit their
growth, correct?
Ms. Braunstein. It would be a factor that would be
considered, and it make the hurdle rate much higher for them to
get an application approved.
Mr. Kucinich. Right. So what would it take, what would
someone have to do to really fail?
Ms. Braunstein. I--every bank is--for one thing, we don't
do CRA on a bell curve, so we look at each bank in and of
itself----
Mr. Kucinich. So it is pass/fail? Is it pass/fail?
Ms. Braunstein. No, it could be, as is the case, most
people pass. We're not guaranteeing that there are going to be
so many failures and so many As on the other end of the curve.
And it is--this is a rating that is done by looking at the
totality of the banks serving their community credit needs; and
depending on the size of the institution, that would also make
a big difference.
Mr. Kucinich. OK.
Ms. Braunstein. If you have one of these huge national
institutions and they have a problem in one little market and
then in the other 150 markets they are serving they are doing
just fine, how much do you weigh that? I mean, there are
subjective judgments.
Mr. Kucinich. That's very interesting. Because let's say an
institution had a little problem in Detroit, let's say, an 81
percent African American population in the city. All of a
sudden, the credit dries up. They are serving the rest of the
area very well nationally with interstate banking. Conceivable.
Someone could look at an inner city area and be out of it,
serve every place else very well. Well, we just move on.
This is what I'm concerned about because everyone on the
panel here, you only failed 225 banks out of 60,000 plus banks
evaluated in the past 17 years; and here we have a massive wave
of foreclosures going on. There's a connection. This committee
is determined to get to the connection, and someone has to take
responsibility here. We have all the regulators here.
Now, I want----
Ms. Braunstein. Taking discrimination out of it, it is not
surprising that most banks pass CRA, considering it has been
around for 30 years, and they know what it is that they are
supposed to do at this time. In that sense, that is not a
surprising statistic. When they are told the same thing over
and over again, most banks get it in terms of CRA at this point
in time.
Now, you could postulate that there is something inherently
wrong with CRAs that banks should, you know, could pass, but it
is what it is, and most banks do get it. And after 30 years, as
with most other parts of the examination, whether it is safety
and soundness or otherwise, banks know what they are supposed
to do.
Mr. Kucinich. We are going to move on, but I just want to
make a comment. This is a copy of the Constitution of the
United States. Now taking the 13th and 14th amendment out of
this, there is a lot of people that could pass muster in a lot
of reviews, but there's a reason why we have protection under
the law, there is a reason why the Department of Justice will
inevitably have to go after someone. Because the underpinnings
of someone's failing a review is a violation of someone's civil
rights.
So I want to go to Ms. Yakimov here. What is a
discriminatory practice? When is it egregious enough to result
in a CRA failure?
Ms. Yakimov. We would look at the institution's fair
lending record. We would look at whether or not we found a
pattern of practice for material fair lending concerns. That
would be assessed in our fair lending exam, which is kind of a
separate function from the CRA exam, but they connect at the
point we are looking at the institution's record of meeting the
credit needs, financial services needs of its community.
So we look at its lending performance, its penetration. How
much lending does it do in the assessment area, how many
investments and how many services, depending upon the size of
the institution. We look at the CRA performance within all of
that context and then look at whether or not we found problems
with fair lending and other illegal credit practices. And if we
find that, in 37 cases since 1990 at OTS we have had these
downgrades, many needs-to-improve or even worse. So it's----
Mr. Kucinich. You don't want to fail them, though, do you?
Ms. Yakimov. Well, no, I don't think that's the case. I
think our examiners, if they identify failure to meet the needs
of the community within the CRA context, failure to abide by
the fair lending laws, that absolutely is something that we
wouldn't hesitate to act upon and to downgrade the institution.
So we would look at their whole record and we try to take all
of that into context.
Mr. Kucinich. You know, see, what strikes me in this
testimony so far is that there seems to be an aversion to
talking about failure. That could be one of the underlying
reasons why we've ended up with so many foreclosures. With the
proliferation in the subprime market, with prime lenders not
having to abide by the letter of the CRA, that this all fits in
together. Because you just don't want to talk about failure.
Because there is some kind of a culture here that regulators
have.
And this isn't, by the way--this isn't to cast aspersions
on this group of regulators, because we know in many areas that
industries have enormous influence in the regulatory process
all across the economy. So it isn't just like there's a massive
disconnection here. In a sense, there is a consistency; and we
appreciate you being forthcoming as you are to try to help us
work it out.
Now, I would like to----
Ms. Braunstein. Congressman, we did downgrade First
American Bank for red-lining to substantial noncompliance,
which is the lowest rating.
Mr. Kucinich. There is a difference between downgrading and
failing, because what happens is----
Ms. Braunstein. That failed them. That's the failing grade.
Mr. Kucinich. OK, that was a failure. Thank you.
Ms. Braunstein. Yes, yes.
Mr. Kucinich. Thank you.
I want to go back to Ms. Yakimov. I want to ask you about
the Flagstar case. You had a CRA examiner award Flagstar a
satisfactory grade when a court found Flagstar liable for
discriminatory practices against minority borrowers. Now is
that true?
Ms. Yakimov. Yes.
Mr. Kucinich. How was your CRA examiner able to give a
satisfactory grade to Flagstar? How did that happen?
Ms. Yakimov. Right, it is a more than legitimate question.
I will share with you what I pieced together as we looked
through the exam reports and so forth. This is in the public
performance evaluation. I have a little feedback here.
Here--our examiners identified a strong record in Flagstar.
I will give you a couple of examples of the things that they
identified in the performance evaluation. One was, they
originated $23.6 million in community development loans. They
exceeded their peers in lending to low and moderate income
census tracks and low to moderate income individuals. They made
significant qualified investments, $2.3 million in 2001; $9.6
million in 2004. They expanded their branch network, including
in low and moderate income census tracks; 13 percent expanded
their branch--their footprint in low and moderate income census
tracks.
So we looked at all of that and still--we looked at all of
that; and our examiners felt that their record, because of--
those were just some examples--and looked at their peers based
on asset size and determined that normally that institution
would have been awarded an outstanding CRA rating but because
of the concern about the litigation we downgraded the rating in
2001 to satisfactory.
So our CRA reg--and we are sure the same reg is on this
point--is that a finding of discrimination or other illegal
credit practice has an adverse effect. It has an adverse
impact. It doesn't go as far as--it doesn't go as far as to put
parameters around there.
In other words, if you meet the overall spirit of CRA and
all in the lending, investment and services, the reg doesn't
take--from the statute doesn't take you from here, outstanding,
to all the way to substantial noncompliance. It does say it has
an adverse effect, impact; and that's what happened in this
instance.
Mr. Kucinich. And Flagstar was--appealed the decision,
right?
Ms. Yakimov. That's my understanding.
Mr. Kucinich. Even if Flagstar was appealing the decision,
didn't your examiners find the discriminatory practices we are
talking about during the CRA examination?
Ms. Yakimov. The evaluation of fair lending would have been
dealt with in a fair lending exam, as opposed to a CRA exam per
se where we bring all the tools and the models to bear in
assessing fair lending.
Mr. Kucinich. If I may, wasn't it true that OTS found it?
It is just a different division.
Ms. Yakimov. Oh, yes. Oh, yes, absolutely. That's right.
Mr. Kucinich. So what I'm wondering, if you could help this
subcommittee, how could your examiners overlook this
discriminatory practice? Was there deficiency in the
examination process itself? Was your CRA examiner
underqualified? Could you let this committee know?
Ms. Yakimov. Sure. The reg calls upon us to look at the
extent of the evidence, the quality of the evidence, the
corrective actions that were taken, the policies and procedures
to prevent illegal discrimination. Those are all the factors
that we consider when we determine the extent of a downgrade,
and so our examiners looked at all that.
I'm not an attorney, and I especially don't want to say
anything that's not quite right. But my understanding of the
litigation in Flagstar's case was that there were two cases,
one fairly small in terms of a class action, a fairly small
number of litigants. Most of those litigants were dismissed in
the first area of litigation. I believe it was 1994.
The second case again resulted in--resulted from a policy
that Flagstar put in place to prevent charging minorities more
than nonminorities. So they had a policy in place that said, to
my understanding--I am happy to firm this up more, if you like,
after the hearing, but my understanding in looking at this was
they said, you know, we want to make sure that we don't charge
minorities more than nonminorities. So we have a policy where
we're going to cap the overage, the amount that can go into
broker compensation, basically, the overall cost of the loan
for nonminorities at--they are going to potentially be paying
more than minorities. So it was a case of reverse
discrimination.
And so the second case was about reverse discrimination,
where I think a Caucasian couple had alleged this problem.
And so, in some instances, you have an institution that has
maybe made a judgment to change their policy to make sure that
they didn't discriminate against in minorities and it resulted
in this policy.
But to your broader point, we did look at the litigation,
we looked at the scope of it, we examined their fair lending
policies, procedures, their HMDA data, and, based on all that,
we determined that a downgrade was called for, and it did take
place.
Mr. Kucinich. I want to ask something. Because we are right
on this case, and this is somewhat mystifying, and perhaps you
could help explain it to the subcommittee. Instead of
downgrading Flagstar, you gave it an outstanding rating. You
actually gave them a higher grade after a court ruled on
summary judgment that its written policy was discriminatory.
Ms. Yakimov. The policy I just mentioned of reverse
discrimination?
Mr. Kucinich. I want to know how could that happen? Could
you explain how that could happen, that they actually failed,
but they passed?
Ms. Yakimov. I'll attempt to. We downgraded in the prior
CRA exam. The 2004 CRA exam did not reflect the 2003 class
action suit, again a fairly limited scope of affected
borrowers. What we did look at was the corrective action the
institution had took, we looked at their overall CRA
performance, their loan penetration and low moderate income
census tracks, their service activities, their investments; and
based on all of that, some of the data that I mentioned
earlier, we----
Mr. Kucinich. So you're saying the written vio--their
written policy was not enough of a violation, is that what
you're saying?
Ms. Yakimov. I'm saying that the examiners looked at the
totality of Flagstar's CRA performance and determined in this
instance there wasn't a second downgrade. You are right. It
was--an outstanding rating was given. I would say, Chairman
Kucinich, that in our examination process there is a level of
judgment where well-intended, skilled and trained people may
arrive at different conclusions. I wasn't privy to this case.
Mr. Kucinich. I understand.
Ms. Yakimov. But----
Mr. Kucinich. In retrospect, what does it look like to you?
You've got someone who--you have a summary judgment, written
policy was discriminatory. Instead of a downgrade they got an
upgrade, an outstanding.
Ms. Yakimov. Right.
Mr. Kucinich. How does--what does that say?
Ms. Yakimov. I think it is a legitimate question that
you've asked.
My read of the exam reports and talking with the examiners,
the reason they arrived at the conclusion to award an
outstanding rating was based on totality of how----
Mr. Kucinich. And that they promised to take corrective
action.
Ms. Yakimov. Well, it was a rendering of their--for
example, an expansion of their branch network, their overall
lending activity, their service activity. The sense was that
this institution, based on its asset size, had an outstanding
CRA performance. A matter of judgment, given the litigation,
should there have been a second downgrade? You know, it's--I
think it's a fair question.
Mr. Kucinich. Well, do you think that it's a fair
observation to say that, in this case, the bank wasn't graded
on its performance; instead, it was graded on what it promised
to do?
Ms. Yakimov. No, I don't. I think we looked at their
performance leading up to that examination cycle. We looked at
the data, not a promise, but we looked at the data.
The correction action--corrective action had taken place
prior to that exam report, the second CRA exam rating.
Mr. Kucinich. Didn't Flagstar expand its banking operations
to an additional State as well as to an added metropolitan area
in the States it was in at this time? And shouldn't Flagstar
lose its privilege to open new branches, to acquire other
holdings or merge with other banks, given their record?
Ms. Yakimov. The CRA rule says a noncompliance needs to
improve. A failing CRA rating is the trigger point for impact
with respect to applications. The assessment of Flagstar CRA
performance did not rise to that level. It was downgraded once.
It wasn't downgraded a second time.
And, yes, they had taken corrective actions. For example,
they eliminated that policy. They made--they reimbursed
borrowers that were impacted by that reverse discrimination
policy. And, again, they looked at--our examiners looked at the
institution's full record with respect to CRA, and that's the
determination that we came to.
You mentioned--you asked before about levels. And, yes, the
examination comes in, there's a review at the regional office,
there was a determination made that, looking at the totality of
the performance, that was the appropriate rating.
Mr. Kucinich. So Flagstar gets an upgrade. Are you ever
concerned that a case like this could send a signal to the rest
of the industry: Don't worry, practice discrimination, the
worst thing that can happen is you get caught, get a slap on
the hand, higher grade maybe. Does that concern you?
Ms. Yakimov. What concerns me is that we carry out our
responsibility with respect to fair lending, with respect to
CRA and compliance across the board in an effective way that
looks at the totality of the circumstances. In 37 cases, we
have made downgrades to our institutions' CRA rating.
Again, I take your point, though. I don't want to sound
overly defensive. I think----
Mr. Kucinich. What we're trying to do is to look at the
relationship between the role of the regulators, the
enforcement of the CRA or lack thereof, its implications for
access to credit, for people in low- and moderate-income
areas----
Ms. Yakimov. Right.
Mr. Kucinich [continuing]. The impact of discriminatory
lending----
Ms. Yakimov. Uh-huh.
Mr. Kucinich [continuing]. The growth of subprime loan
products----
Ms. Yakimov. Uh-huh, uh-huh.
Mr. Kucinich [continuing]. In those same areas,
implications for predatory lending, the rise in bankruptcies
and foreclosures.
Ms. Yakimov. Uh-huh.
Mr. Kucinich. This is all part of the whole, and we have
regulators here who I think could play a role in starting to
give the public a little bit more protection.
So I'm looking, for example, Ms. Yakimov, between 1999----
Ms. Yakimov. Right.
Mr. Kucinich [continuing]. And 2006, according to the
information the committee has----
Ms. Yakimov. Uh-huh.
Mr. Kucinich [continuing]. You only referred two cases to
the Department of Justice, once in 2001 and once in 2004. Now,
this could on one hand suggest that the banks that you regulate
are fair lenders, which is clearly not the case in light of the
Flagstar case, or it could suggest you are enforcing sanctions
left and right, or it might suggest that your threshold for
discrimination is very high and perhaps inconsistent with the
Fair Housing Act and the Equal Credit Opportunity Act. Which
one is it?
Ms. Yakimov. Well, if I may, I'm happy to address that, but
I did want to go back to----
Mr. Kucinich. You know what? First answer my question. Then
go back to what you want to talk about.
Ms. Yakimov. Sure, that's fine.
You asked about our record of referring fair lending
violations to the Department of Justice. The Director, John
Reich, has been on board at OTS for about 2 years and has made
it a real commitment in bringing on a team, including myself,
to take a robust look at how we examine compliance. We've made
some changes to further strengthen our compliance examination
program, including a recent action to make sure that our
compliance examiners are focusing on compliance, making sure
that we do--we add more tools to look at fair lending, more
models, more data to manipulation.
I believe that those actions will result in even more
robust fair lending assessments, and we have communicated that
throughout our agency.
I would say that our examination force is not reluctant to
refer, but I do believe that OTS, I think for all agencies, is
the process of continually looking at how to strengthen your
training, your tools and your focus is important; and that's
something that we've taken very seriously, including a robust
look at top to bottom in compliance over the last 14 months.
We've made a series of changes.
So I take your point. The data kind of speaks for itself. I
believe with some additional actions that we've taken that
there may be more activity in that area.
Mr. Kucinich. What I would like you to do, since you
mentioned that you made some changes, and I would ask that each
of the regulators represented here provide to the committee
what steps--specific steps that you have taken in light of what
we've learned over the last few years with the dynamics that
we're discussing here, the dynamics being questions about CRA,
the level of CRA enforcement, the access to credit in low- and
moderate-income areas, foreclosure rates, factoring in subprime
lending to come up with a--both what you can do from this point
on to further strengthen the enforcement of the Community
Investment Act and, based on your experience with that act, to
inform this committee if there's any changes in the CRA that
the Congress could make that would make it easier for you to be
able to perform your regulatory functions.
Now, if you could do that in our--because the committee is
going to continue to pursue this matter. And we're not--I'm not
interested in ``gotcha''. I'm interested in trying to see what
we can do as a matter of public policy to go from this point on
to provide some protection for American families who are trying
desperately to get access to credit. We still--you know, even
with all the foreclosures, the problem remains. It's
intensified.
I just want to go to Ms. Jaedicke here, and this will be
the last question that I'm going to pose to the members of the
panel. I want to thank you for your patience here. This is one
of the most critical opportunities that we have to see if we
can make any changes that would provide some additional
protection to American consumers who want to be homeowners.
According to a 2003 National Training and Information
Center Study, which looked at the year 2001, 15 of the top 25
lenders or 60 percent of the top 25 lenders in the United
States were not strictly regulated by the Community
Reinvestment Act. Since Gramm-Leach-Bliley, which was 1999,
depository institutions can acquire a number of financial
institutions, including insurance companies, security firms,
mortgage companies. These companies are exempt from the CRA
because they are nondepository institutions. That means that a
depository institution which is subject to the CRA can have a
failure instead, can evade CRA scrutiny. This demonstrates an
incongruency between the CRA and Gramm-Leach-Bliley. As a
result, there is no law mandating the majority of most
significant lenders have to meet the credit needs of their
communities, and currently no regulatory agency has the
authority to investigate the lending practices.
Ms. Jaedicke, who regulates insurance companies, mortgage
lending companies, security firms and other nondepository
financial institutions?
Ms. Jaedicke. There are a lot of different regulators for
those entities. Depending on if it is a mortgage company, they
may be regulated by HUD; if they are subsidiaries of national
banks, they are regulated by us.
Mr. Kucinich. Now, that is--see, I just pointed out about
Gramm-Leach-Bliley, that there are nondepository institutions
that are exempt.
Ms. Jaedicke. That are exempt from CRA, sir?
Mr. Kucinich. Yeah. A depository institution which is
subject to CRA can have affiliates that evade CRA because of
Gramm-Leach-Bliley, which includes insurance companies,
security firms, mortgage companies. These are, by definition,
nondepository institutions.
So I want to go back to the question. In light of the CRA,
which is what we're talking about, these firms essentially in
terms of CRA aren't regulated, right?
Ms. Jaedicke. CRA applies to depository institutions,
that's correct.
Mr. Kucinich. That's the point. Unless somehow they are
selected to be included in the exam by some, which is unlikely.
Would everyone agree with that? OK.
So the affiliates' lending practices if--really don't get
reviewed if their depository affiliates don't elect to include
them in the CRA exam; is that correct?
Ms. Jaedicke. Yes, sir. If the depository institution
decides to include loans made by an affiliate because they are
in their assessment area to get positive CRA credit, then we
also attribute any illegal or discriminatory practices that we
find.
Mr. Kucinich. But if they are not going to include them,
they are not going to be looked at right?
Ms. Jaedicke. That's correct.
Mr. Kucinich. So isn't it possible that a CRA-regulated
bank can move its financial assets to noncovered affiliates to
reduce its CRA obligations?
Ms. Jaedicke. It is possible for them to move their assets
into other affiliate organizations, yes. And it might affect
the CRA questions and issues. But you have to understand there
are other regulatory agencies who could enforce the fair
lending issues or deal with illegal discrimination issues.
Mr. Kucinich. Isn't it possible for a CRA-regulated bank to
build wealth in its community while its non-CRA-regulated
affiliates can strip that same community through predatory
lending or predatory practices; is that possible?
Ms. Jaedicke. If the affiliate loans are not included in
the bank's CRA rating in terms of getting credit for CRA, then
the illegal practices, discriminatory practices, don't carry
over.
Mr. Kucinich. This goes back to the challenge that I posed
to all the members of the panel, and that is, does the CRA
adequately reflect today's financial markets? And what I would
like to hear from you--in writing, really--is whether you think
the CRA should be revised to better reflect today's financial
markets. It would be good to hear from you on that.
Does anyone else on the panel want to respond to that
question or the underlying spirit of the question? Does anyone
have anything to say on the record before we move on? Anyone?
I want to thank this panel. You've spent a lot of time.
We've been here a few hours now and more than that. And you are
each individuals who do have an in-depth knowledge of your
institutions, which favors the work of this committee greatly.
And I look forward to working together with you on this.
I appreciate that you're really making an effort here. And
each one of us represents some face of institutional power and
responsibility, finds ourselves sometimes at a loss to be able
to account for the deficiencies in the institutions that we
represent.
And so I appreciate your willingness to work with this
committee, and I want to thank you for the time that you've
spent. And we'll remain in communication on these issues. This
panel is dismissed.
We're going to call the next panel. And again I want to
thank you so much. Just a very important panel. Thank you.
We will be calling the next panel to come forward. As the
panel comes forward, I want everyone to know that this is the
Domestic Policy Subcommittee. We're continuing our
investigation of regulatory enforcement of the Community
Reinvestment Act, and we've had an excellent panel from various
regulators who assist this committee in its ongoing probe.
I want to thank the second panel here for its participation
and for their patience, because we certainly have gone to great
lengths with the first panel. I thank the members of the second
panel for their patience in waiting to hear the testimony of
the regulators.
In the interest of time, what we are going to do is, I am
going to make a brief introduction of each member of the panel,
swear in the witnesses and then go directly to their testimony.
Mr. Calvin Bradford is a Board member of the National
Training and Information Center, founded in 1973 as a research
and technical support provider to National People's Action and
other community organizations. This is a group that builds
grass-roots leadership, spearheaded the Community Reinvestment
Act; and their efforts have resulted in over $1 trillion to
low- and moderate-income families across the United States
through their aggressive advocacy on behalf of the public.
And this is a group that has been involved in more
community reinvestment agreements than any other organization
in the country.
Thank you, Mr. Bradford.
Mr. Carr. Mr. James Carr is the chief operating officer for
National Community Reinvestment Coalition, advisory member of
the Federal Reserve Bank of San Francisco, Center for Community
Development Investments. He has been with Fannie Mae
Foundation, director for Tax Policy, assistant director of the
U.S. Senate Budget Committee, has done work in various
scholarly journals.
We appreciate you being here, Mr. Carr.
Dr. Richard Marsico.
Mr. Marsico. Mister. I am not a doctor. My mother wishes I
was, but I am not.
Mr. Kucinich. I had that same thing for a while too.
OK, Professor Marsico.
Mr. Marsico. Marsico.
Mr. Kucinich. Marsico, professor of law, New York Law
School and director of the Justice Action Center. Professor
Marsico's specialty is community reinvestment and fair lending.
He has authored a book, Democratizing Capital, the History, Law
and Reform of the Community Investment Act.
He is a graduate of Fordham and Harvard Law. Thank you.
Mr. Van Tol--is that correct--director of economic justice
for Rural Opportunities. It is a nonprofit. It works on
building assets and providing services for underserved
individuals in communities in seven States and Puerto Rico, the
Rural Opportunities, Inc., one of the largest nonprofit, first-
time homebuyer programs in rural United States.
Mr. Van Tol has been active on the National Community
Reinvestment Coalition, was president of Fairness and Rural
Lending which works out of Wisconsin.
I want to thank you, by the way, for replacing Mr. Irvin
Henderson, who couldn't join us because of circumstances beyond
his control. Mr. Henderson did submit his testimony; we are
going to include it for the record.
[The prepared statement of Mr. Henderson follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. But I want to thank Mr. Van Tol for joining
us on such a short notice and coming in from New York.
I would ask the witnesses to please stand and raise your
right hands.
[Witnesses sworn.]
Mr. Kucinich. Thank you.
Let the record reflect that the witnesses have answered in
the affirmative.
As with panel I, I am going to ask each witness to give an
oral summary of your testimony and keep the summary under 5
minutes in duration. Your complete written statement will be
included in the hearing record.
Mr. Bradford, let us begin with you. Thank you.
STATEMENTS OF CALVIN BRADFORD, BOARD MEMBER, NATIONAL TRAINING
AND INFORMATION CENTER; JAMES H. CARR, CHIEF OPERATING OFFICER,
NATIONAL COMMUNITY REINVESTMENT COALITION; DR. RICHARD MARSICO,
PROFESSOR OF LAW, NEW YORK LAW SCHOOL, AND DIRECTOR, JUSTICE
ACTION CENTER; AND HUBERT VAN TOL, DIRECTOR, ECONOMIC JUSTICE,
RURAL OPPORTUNITIES, INC.
STATEMENT OF CALVIN BRADFORD
Mr. Bradford. Thank you Mr. Chairman. My oral statement is
actually in my written statement as well, so I would like to
take my 5 minutes to address a couple of issues that didn't
come up before that I think need some attention.
First, I guess I would like to respond to some of the
Flagstar issues, because I was an expert in both of the
Flagstar cases that came up. And I'm kind of disappointed that
at this point, after the OTS has been asked about this since
2002, that they still don't seem to understand the case.
The first case wasn't just a couple of applicants. There
was also a suit filed against them, based on testing, the
Pattern and Practice case that they settled out of court. And
the reinvestment activities that the bank was given credit for,
that you mention, to compensate them for their record, were
actually things they had to do because of the settlement in
Detroit--opening branches and doingreinvestment that they
wouldn't have done on their own.
And, second, the Written Policy Statement case. In the 30
years that I've been doing fair lending work, I've never seen a
case or an institution manage to make a plaintiff out of ever
single person who applied for a loan, but that's actually what
they did.
It wasn't a small case. It involved the entire Nation. It
was a written policy for their entire mortgage operation. And
what happened was, applicants had a case because they were
charged too much for loans.
It also turned out that the African American applicants had
a case. Because the brokers couldn't charge them as much for a
loan, they didn't make as many black loans as they did before,
and so they were discriminated against too. And for the OTS not
to understand what a fundamental violation that is of the Fair
Housing Act and to come here, I think, and to try and defend it
as something positive the bank was doing is so fundamentally
wrong that it makes you concerned about whether they even
understand what the Fair Housing Act is all about.
The second issue, I guess I think we could spend a little
moment on, is talking about the affiliate issues because we
could cover that a little more.
For one thing, if you look in the CRA process, a lender can
choose to include the affiliates in the analysis, so they would
be included. But then when you look at the fair lending record,
the regulators look at the fair lending exam, the fair lending
exam specifically excludes anything about the affiliates. In
fact, they are prohibited from even talking to the affiliate as
part of the exam process. So you've got another incongruity
there about these things matching up.
Now, in my own testimony, I realize that, just using
Citicorp as an example and not claiming there's something wrong
with their lending, you see some issues about the affiliates
that relate to the representative of the Comptroller's
comments. Just because the affiliate is included in the CRA
exam doesn't mean that it got a fair lending review.
Because of the way they look at it--for example, there's a
Citigroup company called Citicorp Trust. Citicorp Trust makes
thousands of only subprime loans across the United States; its
only community reinvestment area is Wilmington, DE, but it
operates nationwide. So its CRA exam only covers Wilmington,
DE. It works through Primerica, the largest financial services
company in the country, which is part of Citigroup. And it only
makes refinanced loan consolidation, debt consolidation,
refinanced loans; and it has a special office which is
mentioned in the CRA exam by the OTS, whose sole purpose is to
solicit existing customers, essentially flip the loans.
I'm not saying they did something wrong on these loans, but
they give them an outstanding rating because they had more
loans in low-income neighborhoods than any other lender. But
that's precisely the concern we have had about subprime loans;
there are too many of them in low-to-moderate-income
neighborhoods.
So in the CRA exam process they make no effort to look at
the nature of these loans and the way they were marketed and
the substance of these loans. So even when the affiliate loans
are included, they may be included in this process in a way
that's really detrimental to the community.
And the other issue I discovered was that even though this
company makes thousands of loans, one of the largest subprime
lenders Citibank has around the country, when other Citigroup
subsidiaries, savings and loans and banks, elected to include
all their affiliates, neither the OCC or the OTS ever included
the loans of Cititrust, this big, major subprime lender, it
seems to me, a clear violation of the rule that you are
supposed to include them.
In Chicago, for Chicago's Citicorp Savings bank, that
actually meant that in their CRA areas, in 1 year, 85 percent
of the subprime loans were not included; and for the next year,
it would have increased the level of subprime loans by over 600
percent had they included this affiliate. So they are just
plain not included, and it seems to me we should be concerned
about that.
So I would have those issues.
The other issue I'll mention just before I stop is that if
you look at the CRA exams, in the fair lending part it says
that you're supposed to look at the fair lending exam. If you
look at the fair lending exam, it tells you to go look at the
CRA exam. The CRA exam you're supposed to look at because it is
going to tell you if there's racial discrimination.
But under the CRA, there's no analysis done by race, so it
couldn't possibly tell you about race discrimination. And these
have been on the books now for over a decade. And you would
think that agencies that seriously were concerned about fair
lending would have eliminated this obvious and clear
incongruity in these kinds of things.
So I'll just end there because I know you have the whole
written statement. Thank you.
Mr. Kucinich. Thank you, Mr. Bradford.
[The prepared statement of Mr. Bradford follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Mr. Carr.
STATEMENT OF JAMES H. CARR
Mr. Carr. Good afternoon, Chairman Kucinich. On behalf of
the National Community Reinvestment Coalition and our 600
community nonprofit members across the country, we are honored
to have the opportunity to speak to you today about this
important act.
Since its enactment in the late 1970's, the Community
Reinvestment Act has leveraged more than $4.5 trillion of loans
and investments to families and individuals in the communities
that have been most challenged in accessing credit. And lots of
organizations, including Harvard University, and key Federal
agencies, including the Treasury Department and the Federal
Reserve, have concluded that those loans were done in a safe
and sound manner.
Those investments have helped to build homes, launch or
expand small businesses, build important community facilities
and grow the wealth of otherwise financially vulnerable
families. Yet despite all of its success, the goals of CRA have
yet to be fulfilled.
Between 9 to 22 million households do not have a
relationship with a major bank or savings institution. At the
same time, millions more only have tenuous ties. And over the
past decade and a half, high-cost lending has grown
exponentially, disproportionately in moderate-income and
minority communities.
Since 1993, for example, payday lending has grown from a
modest 300 establishments to more than 25,000 to date. And we
all know the story of subprime lending and, particularly,
predatory lending and the disproportionate impact it has on
minority and low-and-moderate-income communities.
In my written testimony, I highlight six recommendations
that, if enacted, could greatly enhance the effectiveness of
CRA to increase credit and capital and other banking services
to disadvantaged communities; and they include such things as
mandatory inclusion of nondepository affiliates and CRA exams,
as well as the inclusion of institutions such as credit unions
and mortgage companies under CRA. We recommend a series of
provisions related to fair lending examinations, specifically,
as well as a number of recommendations related to the
assessment areas and how those procedures are developed.
In conclusion, let me just say, the consumers that function
outside of the financial mainstream often operate in a cash or
informal economy. A large and growing informal economy is not
in the best interest of America. Financially stifling
homeowners with unfair, unreasonable or otherwise deceptive and
costly mortgage products is not in the interest of America.
Families with negative savings rates are not in the interest of
America. Communities unable to tap the credit markets for
responsible and critical community facilities is not in the
interest of America.
In 1960, Mr. Chairman, we put a man on the moon. It is hard
to believe that 40 years later we can't put a consumer in a
bank. In many respects, it is not a lack of will; rather, it is
a lack of want, and that is a want to achieve on this important
goal. It is not a dearth of financial expertise; rather, it is
a lack of appreciation for the value of achieving that goal.
Achieving the goals of CRA are in the best, long-term,
future interest of America, of our economy, of our society. But
those interests cannot be measured by quarterly earnings, the
principal gauge which businesses use to determine opportunity.
As a result, in addition to repairing the fabric of CRA so
that it can achieve its important mission, we also turn to you
and encourage you and ask that you work with us to help inspire
the business community to do what currently it is not doing.
And that is inspiring them to reach out and affirmatively want
to help to improve markets that don't function effectively in
this country.
At the end of the day, we know that when America is
inspired, it will achieve. We put a person on the moon because
we decided we needed to do that, and we were committed to it,
and we did it. There is nothing stopping us from succeeding in
our goals on CRA except the will and the want and the
understanding that it is in the national interest.
And with that, I'll conclude; and I'm prepared to answer
any questions you might ask.
Mr. Kucinich. I thank the gentleman.
[The prepared statement of Mr. Carr follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Professor Marsico.
STATEMENT OF RICHARD MARSICO
Mr. Marsico. Thank you. As I was listening to the
testimony, I found myself writing and rewriting my own oral
testimony until finally I've thrown it out, and I have really
two points that I would like to make.
And the first point is that one of the problems with the
CRA performance evaluations not reflecting bank performance is
that the agencies have too much discretion in evaluating banks
and generally tend to exercise it in a way that overstates or
overrates bank performance.
No two CRA performance evaluations look alike. The agencies
have discretion about the criteria they will use to evaluate
bank lending, the benchmarks they will use to measure whether
the banks have satisfied the criteria, and how to evaluate
whether the banks have satisfied the criteria or not.
So, for example, a performance evaluation might state it is
going to look at the percentage of loans that the bank made to
low-and-moderate-income neighborhoods. It will compare that,
for example, to the percent of such loans by all lenders in the
community. And then it will sort of say, the bank is closed,
the bank didn't quite make it, the bank didn't quite reach or
maybe the bank did do a little better than the benchmark.
But there's no sort of definitive statement of whether the
bank has satisfied the criteria or not; and as a result, the
agencies tend to ignore bank performance that does not meet the
criteria that the performance evaluations have established. So
they have this discretion to decide not only what criteria to
look at and what the benchmarks will be, but then when the bank
doesn't meet the benchmark, they have the discretion to say,
well, that's OK we're not going to hold that against the bank
and it will get passing grades on the performance evaluation
anyway.
So one thing I would urge the subcommittee to consider is
whether there should be a standard set of criteria to use to
look at bank lending, a standard set of benchmarks; and then
requiring the agencies to make definitive conclusions about
what happens when a bank does not meet those benchmarks.
The second point I would like to make is that there has
been a lot of discussion about the fact that the agencies may
not be taking into account in the CRA evaluations the results
of the fair housing and equal credit evaluations that go on
separately from the CRA evaluation. And I want to make another
related point, which is, the agencies do not evaluate lending
by race in their own CRA evaluations.
They evaluate lending by income, but they do not evaluate
lending by race, the justification for this being that the
community reinvestment statute says the banks have an
obligation to meet the credit needs of their entire communities
including low-and-moderate-income neighborhoods.
The agencies have apparently seized on that to say,
therefore, we don't look at race when we do these reports. I
tend to disagree with that. I believe there is sufficient
legislative history that would support a showing that Congress
was also worried about racial redlining, not just income
redlining, and therefore the agencies should take race into
account when doing their CRA evaluations.
And the failure to take race into account has some very
significant consequences. For example, you won't see in a CRA
performance evaluation report, generally, any statistics that
would compare a bank's subprime lending on the basis of race.
You won't find what we might call ``disparity ratios'' in there
that compare the percentage of African Americans who receive
subprime loans or the percentage of whites who receive subprime
loans, because they don't look at race.
So the evaluation report can show a lot of lending in low-
and-moderate-income neighborhoods, but might not show that
lending might be because they are making a lot of subprime
loans and that those subprime loans may be disparately
distributed based on race.
So my two points would be, simply create some more
accountability in the CRA exams by establishing set criteria
and benchmarks and what will happen if the banks don't reach
the benchmarks, and require the agencies to consider lending by
race when they do their performance evaluations.
Thank you very much.
[The prepared statement of Mr. Marsico follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Before we go to Mr. Van Tol, I would just
like the committee to take note of something that Professor
Marsico just said. I think it would be helpful if we put some
statistics side by side: the number of subprime loans, the
number of loans generated in an area, the percentage of those
loans that went to minorities as prime loans, the number of
subprime loans that were generated, the percentage that went to
minorities.
Now, we've done half the equation, I think, already for
this committee. But I think it would be helpful if we put them
side by side because that would then get to your question. And
then, of course, you look at the number of CRA reviews and the
number of favorable reviews, number of unfavorable reviews, and
then we know where it goes from there.
So I just wanted to just stop the music for a second. Let's
go back to Mr. Van Tol.
You are recognized. Please proceed.
STATEMENT OF HUBERT VAN TOL
Mr. Van Tol. Good afternoon Chairman Kucinich and
Congressman Cummings. My name is Hubert Van Tol, and I'm the
Director for Economic Justice for Rural Opportunities, Inc., in
Rochester, New York. Thanks for the opportunity.
Our organization is a member of the National Community
Reinvestment Coalition, and we support the comments and written
statement of Jim Carr on NCRC's behalf. Today, I want to speak,
however, as a long-time grass-roots CRA activist who has found
and still finds the CRA law an enormously powerful tool for
individuals and organizations that do grass-roots community
development work.
In my limited time today, I'll just touch on the way that
discrimination in lending has become more subtle and more
damaging, and the failure of the regulators with their use of
the fair lending exam and the CRA exam to keep up with the
changes in lending.
I first became aware of the Community Reinvestment Act in
1985 while working for a local community development
corporation in Memphis, TN. At that time, discrimination in
access to credit was raw and blatant. For instance, we found
lenders whose mortgage underwriting guidelines explicitly
stated that they would not lend in areas of incipient decline.
Their guidelines specified minimum loan amounts that excluded
most of the houses in the African American neighborhoods in
Memphis.
Mr. Kucinich. Would you state that again?
Mr. Van Tol. Their guidelines specified minimum loan
amounts that would exclude by their size. There were $35,000
and $50,000 minimums, and in effect, the houses in the African
American neighborhoods were selling for less than that at that
time. So they would not lend to those areas because they didn't
meet their minimum loan guidelines.
There was bad home mortgage disclosure data. For instance,
in the case of one company, they showed the loans in inner-city
Memphis averaging $1 million apiece. This is 8 years after the
passage of the CRA and 10 years after the passage of the Home
Mortgage Disclosure Act. And the regulators on their own had
not come to the conclusion that there were any problems with
that.
So it took community organizations like us really pounding
on them and using the bully pulpit and tool of public relations
for a year before the regulators began asking questions. And I
think you're seeing an aspect of the same phenomenon now. It
depends on the leadership at the top and how their attitude
toward consumer regulation happens.
In 1986, our organization attempted dialog with the banks,
but we didn't really have dialog until the regulators got in
there and failed--well, they didn't fail them on their CRA
exam, but in two cases we had them deny mergers and a new bank
branch application, and that created the impetus for real
change to happen.
But today, the discrimination for the most part doesn't
involve access to credit, which was the issue then, but rather
the fact that minority neighborhoods are really targeted with
inferior loan products, high fees, high interest rates,
unfavorable terms. They are targeted regardless of the credit
scores of the individual borrowers within those neighborhoods.
And when a group of people are targeted for bad financial
products, it creates a cascading effect, a self-fulfilling
prophecy, if you will, as they are so risky loan products
which, over time, put stress on their financial situations and
have the practical effect of driving down their individual
credit scores and making them, ``riskier borrowers.''
And the banks have really facilitated this shift by doing a
poor job of marketing in those neighborhoods, removing their
branches from neighborhoods. They provide the lines of credit
used by the brokers and the mortgage lenders. Some of them
service those subprime loans. The investment bank cited, the
bank often is securitizing those loans even while they are
proudly saying that the retail division doesn't do subprime
lending. So when a bank's fair lending examination is done,
there's no public indication that this entire range of bank
involvement in a subprime market that targeted at minority
borrowers is looked at. And in spite of the efforts of
community activists, it is rare that a bank service an
investment test, and the CRA exam itself looks at all of these
issues in a comprehensive way.
This has been the single most egregious area of
discrimination in lending over the past decade, this targeting
of inferior loan products to minority neighborhoods, and it has
really been the marketing that's been a tremendous problem.
In the 2\1/2\ years that I have been working for Rural
Opportunities which, as you said, does work in seven States and
Puerto Rico and is one of the largest rural operators of the
first-time homebuyer program, there have been no visits to me
by a CRA examiner, or to my organization, to ask us what our
opinion is of the banks that they are about to do CRA exams on.
And I think it just reflects the fact that they have become
much more lackadaisical about this.
There is this attitude that works its way through the
bureaucracy and the banks quickly lower their standards to the
minimum needed to get a passing grade.
Thank you very much.
[The prepared statement of Mr. Van Tol follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Kucinich. Thank you.
Just to put this in context, I happen to be the Chair of
the Domestic Policy Subcommittee. It is a committee that has a
pretty broad reach in every area in the government with the
exception of affairs governing the military and most of the
State Department.
Years ago, 30 years ago, I was mayor of a city; I was
elected mayor of the city of Cleveland. I could see the kind of
effects, beginning to percolate back then, of people not having
access to credit, which is why when at the first opportunity
the city of Cleveland, under my administration, pursued an
action under the CRA against an institution in a neighborhood
known as the Kinsman neighborhood in Cleveland, Kinsman/Mount
Pleasant. And we saw community groups participating because
they were the first ones that had the information about what
the lack of access to credit was doing.
And it wasn't just for credit for the purposes of home
ownership; it was credit for small businesses, because people
are trying to engage in some commerce in a community.
So I just want you to know that what you brought here, just
as individuals, is highly respected in terms of the commitment
that you make with your life in looking at these issues which
are so devastating on a personal level. Because we sometimes
get lost in the minutia and broad, quantitative assessments
that can be very devastating.
But when you take it down to an individual level, somebody
has great hopes: They are finally going to get a chance to own
a home, and somebody markets a loan that turns out to be
predatory. OK, no documents? Wow, we're going to have our home.
And we know what happens from there. I mean, this thing is so
broad it has caused a shakeout on Wall Street--not a small
matter. You know, from Main Street to Wall Street we see what
happens.
And, Mr. Bradford, deliberate subversion of the CRA,
deliberate effort to circumvent Federal fair lending laws, what
do you think?
Mr. Bradford. I'm not so sure. I don't know if it is
deliberate, but--it is more inconceivable, I guess, from my
point of view. These agencies have the regulations in the
examination procedures that say, you should look for redlining.
They tell you how to do it. They say to look outside the
assessment area to see if they include them, and then they
don't do that.
I think another example--again, from the OTS--that is of
concern, I think people have been suggesting that if there's
any kind of concern about discrimination, it shows up in the
public evaluations. And that's not true. The agencies are very
protective of the internal examinations they give them. And I
know in a couple cases I've been involved in, where attorneys
have asked the agencies for copies of those, they've not only
not given them to them, but threatened to go to court if they
tried to use them.
Mr. Kucinich. So the agencies protect the lenders?
Mr. Bradford. They do.
But in the Flagstar case, the internal exam was submitted
as part of the trial record, so I can talk about that because
it wasn't my responsibility.
Mr. Kucinich. Please do.
Mr. Bradford. And at that examination the OTS identified an
appraisal practice that Flagstar had that had a minimal
appraisal amount, and they wouldn't make any loans to anybody
below the appraisal amount, which is pretty much like what you
were saying before. It is the classic kind of discriminatory-
effect policy, not only that the OTS had done a systematic
analysis of the HMDA data and the census data to show the bank
that this had a disparate impact on minority neighborhoods; and
yet when it came to the public evaluation, they had that
standard little clause that they could find no violations of
the Fair Housing Act.
Well, that just wasn't correct because they had in great
detail shown these to the bank and required the bank to do
something about it.
So there's always that. And I've seen it in other cases I
can't talk about, because they weren't a public trial record;
but I've seen it over and over again, that there are issues
like that come up that the public doesn't know about. And so
that gives me concerns.
I think, as I said in my testimony, they sort of treat the
regulations like a kind of regulatory signing statement; that
we don't care what the Justice Department thinks fair lending
is, we get to reinterpret it ourselves.
And in the case of Old Kent that you were going through,
for them to say, well, it is a reasonable area because now,
after 1995 when we changed the definition of ``delineation of
service area,'' we said you could keep defining these little
areas where you made your loans around all your offices and
that would be OK. And so, in the case of Old Kent, you just
kept opening offices in the suburbs and making your little
circles around them; and when you put them all together you
grieve the city of Detroit, but you didn't serve the city of
Detroit.
And they said, well, that's an OK business practice for the
bank. But in their fair lending examination, they say that
would be a disparate impact; and the only defense for a
disparate impact is a business necessity, a compelling business
necessity. The OCC says it can't be hypothetical, it has to be
real, it has to be impending.
South Shore Bank's only assessment area--it is called Shore
Bank now--in the city of Detroit, whatever bank is the city of
Detroit. They make lots of money, they get outstanding ratings.
So evidently you can do business in Detroit in a profitable
way. So what would the business necessity defense be for Old
Kent or anyone else; or in America Bank in Chicago or First
Bank in Chicago, both of whom had these amoeba-shaped areas in
the suburbs? It is inconceivable to me that the regulatory
people don't understand their own regulations and don't
understand the fair lending laws.
So I guess they feel they are above the civil rights laws.
Mr. Kucinich. Because in your written statement you said
that the CRA intended to prohibit discriminatory practices
based on race as well as income, but today only expressly
prohibits discrimination based on income.
Mr. Bradford. That's right. That's because at the time when
Proxmire was proposing it and we were working on the language,
ECOA had just been passed the year before and the Fair Housing
Act had been in effect for a while and there had already been
all these redlinings. HMDA was just passed the year before
that. We were told by the congressional aides and by the people
drafting the legislation that it would be just redundant to put
that in the act, everybody understood that was there.
But there's no Federal protection by income, so they said,
we'd better put that in the legislation because even though
race is clearly already covered, income wasn't. So that's why
that survived in the act.
Mr. Kucinich. So how would the CRA be enhanced if
regulatory agencies automatically failed banks that have
discriminatory and other illegal practices?
Mr. Bradford. Well, I'll give you an example. If you looked
at Flagstar Bank during the period these violations were taking
place, they went from an institution of $500 million to an
institution of $13 billion; that is, they increased their size
by 26fold because they had the privilege of inquiring and
branching and merging with people during this time.
And if they'd failed the CRA, they probably wouldn't have
had that privilege. So that's a pretty serious issue for a
lending institution.
Mr. Kucinich. That's actually the same question, sensitive
question, I asked the representative of the Fed. Because if you
get failed at that first level when your worth is $500 million,
you don't get to $13 billion.
Mr. Bradford. Well, that would be, what we all believe
would be the case.
Mr. Kucinich. Well, but the point is, that is, if there is
an active regulation and people are failed or something else
happens.
And that is that the volume of access increases to people
in an underserved population, low-and-moderate-income areas, as
well as by virtue of definition, people of color.
Mr. Bradford. Right. But the intention of the act at that
time, which I think still holds true, was to increase the
access to prime lending and to target prime lending, not to
just increase the access to FHA loans or subprime loans.
Mr. Kucinich. No. I understand that. Good point,
absolutely. I'm glad you pointed that out.
But since today people of color end up, more often than
not, being in that low-and-moderate-income area, they have a
disproportionate--a disproportionate burden if the CRA is not
enforced.
And so, Mr. Carr, I wanted to talk about your testimony.
You discussed how banks make a significant amount of loans
outside of their assessment areas and therefore go undetected
by Federal regulatory agencies. How can that be legally
possible? Could you explain that?
Mr. Carr. Yes. In fact, because the procedures that define
assessment areas generally require that a bank report within
the areas, which are defined as its assessment areas in which
it has CRA-covered institutions that have locations, the
general location around their bank branches, and so to the
extent that institutions are allowed to, they have affiliates
that are not covered.
In one particular study which we examined, four major
banks, we found that as little as 11 to 13 percent of the total
lending actually was covered, was concluded to be covered,
because the institutions were not included in the review, the
mortgage lending institutions were not included in the review.
And what that does is greatly undermine any effectiveness of
CRA enforcement for that lending activity.
Mr. Kucinich. Mr. Carr, presently, banks, regulatory
agencies are only describing banking lending activities in one
to three sentences.
How can community groups benefit from a more detailed
description of the fair lending review in the CRA exam?
Mr. Carr. Well, that is one of the more odd and unusual
circumstances in a major change from the 1990's in which, in
fact, the Federal agencies used to provide detailed information
about the types of statistical tests that were employed. Was it
matched, peer testing, etc.; what types of statistical models
were used, and on.
Today, the reviews are often in a sentence that just simply
says that a bank has passed its fair lending test. And what
that does is, it disallows community organizations and civil
rights attorneys and others who might have an interest in the
act to actually explore what exactly was done, to comment as to
whether there are things that were clear omissions or where
improvements in those examinations could take place.
Mr. Kucinich. Thank you.
Professor Marsico, in your written testimony, you mention
that community groups and banks can enter into CRA agreements
which are designed to redress weaknesses in the bank's CRA
lending records. In your opinion, do corrective actions agreed
on by the banks and their Federal regulators achieve the same
goals?
Mr. Marsico. I have not seen any of those corrective
agreements. I don't believe that they are made public. And I
think one of the people today referred to those agreements, and
I don't think mentioned that they are made public, which, if
true, is a problem. Because one of the reasons that the
agreements between the lenders and banks and community groups
work is that they are publicly made and they are agreed upon,
and they have monitoring reports that are issued publicly and
periodic meetings with the community groups to show what they
are doing.
Mr. Kucinich. So you're saying the very lack of
transparency on agreements between banks and Federal regulators
can constitute a subversion of the principles of the Community
Reinvestment Act.
Mr. Marsico. Yes, I believe it should all be transparent. I
don't why the results of the fair lending exams are not made
public. The CRA performance evaluations are made public.
Frankly, it is very odd when you get to the fair lending
portion, when it says the results of the exam showed no
violation yet, they don't show you the results when they've
just gone through 100 pages of information about the CRA record
of the bank.
Mr. Kucinich. I'm going to come back to you, but I want to
introduce a member of our panel who has been an outstanding
representative on so many economic issues affecting urban
America.
Mr. Cummings and I have worked on a broad range of social
and economic concerns relating to access to credit, health care
infrastructure. I want to introduce the distinguished gentleman
from Baltimore, Maryland, Elijah Cummings.
Thank you, Mr. Cummings.
Mr. Cummings. Thank you, Mr. Chairman. I have only a few
questions.
As I was sitting here, gentlemen, I was thinking when
you're an African American in the position that I'm in and you
talk about race, or even if you're white and talk about race,
and you say that people are being discriminated against and
suffering, do you know what people usually say? They usually
say, Here they go again, here they go again, it is all their
fault. And when you come with the kind of evidence that you
presented here today, I mean, you're actually laying it out
there. This is it.
And I was thinking to myself, a few years back we had a
woman who is now a bishop in the AME Church, Bishop Vashti
McKenzie. In Baltimore, one of the things that she did is, she
began to look at what the banks were doing. And she, I think,
saw, for example, that maybe African Americans were not getting
the loans that they were rightfully due, and started looking at
a number of issues.
And so what she did was bring the churches together; and
they said, basically, if you want to do business with us--and
they had about, I can't remember how many churches; probably 15
to 20 churches, thousands of people--you've got to come right.
This is where I'm going with this. I'm trying to figure
out, how does the--first of all, most people who are being
victimized don't even know they are being victimized. And I'm
trying to figure out a two-track solution.
One track is, how do people come together and do things
similar to what, say, the church did; that is, try to come up
with a remedy where they force these banks to pay attention?
Because I can tell you, I live in the inner, inner, inner city
of Baltimore, and there are no banks. I mean, to get to a bank,
I have to go at least a mile, about 2 miles to get to a bank;
and that's not unusual.
I'm trying to figure out--you know, I really want to
believe in government, and I do to a degree. But government
takes so long to get stuff done. And I'm trying to figure out,
if I'm talking to my community people and they want to organize
and figure out ways to make the whole purpose of CRA do what it
is supposed to do, what do they do?
And then, on the other hand, what do we do in trying to
tighten it up on this end? Anybody? Do you all understand the
question?
Mr. Bradford. I'll give a couple stabs at it.
One of the things that's discouraging is, the regulators,
in 1995, they took out some of the assessment factors that
included the community. They essentially cut the community out
of the CRA process, because they eliminated looking at how the
lenders assessed credit needs. And so they made this a kind of
a private deal between the regulators and the banks.
And then, in 1999, as part of Gramm-Leach-Bliley, you got
the ``sunshine''--what we refer to as the ``sunstroke''--
provision, which was really designed to intimidate community
groups to say, if you participate in making any comments and
then you make an agreement with the bank, we're going to hold
all these sanctions against you; but we're not going to make
the bank do anything or enforce anything, we don't even
recognize the agreement as existing, but we could take the
money away from you and prohibit you from the CRA stuff for 10
years.
I don't even know if that fits the equal protection clause
in the Constitution, but--that provision of Gramm-Leach-Bliley.
And then the Federal Reserve expanded that in the
regulations, and they said the definition of ``agreement'' is,
if you go and talk to a bank and say, We want these four types
of loans; and then, later on, without ever talking to you
again, the bank has a press conference--and this is an example
they actually used in the regulations--and they identify those
four types of loans. Even though they are not going to do them
the way you want it, the regulators and the banks can declare
that an ``agreement,'' and they can impose all these sanctions
against you even though you not only didn't sign it, but you
probably don't even like it.
I mean, this is sort of congressionally mandated harassment
of the community people who are supposed to be involved, and it
has scared a lot of people off. There are a lot of brave people
on this panel and in Cleveland and Massachusetts who have stood
up against it, but it is a threatening tactic.
It is embarrassing to have my government do that to the
very people who have created the agreements. And these
agreements have been the basis of the most creative forms of
reinvestment in our country. That's where--outside something
like South Shore Bank, that's where all the best programs came
from, the most creative programs.
In Baltimore, you've got to have mixed-use stuff because
you've got businesses and residential together. Banks didn't
want to do that, so you had to create special programs. And
neighborhoods did that. They wanted to have stuff for side-by-
sides and duplexes because a lot of housing was that way, and
banks only wanted to do single family; and so they had to
create those programs themselves. I don't have to tell you
about it, because Baltimore has one of the strongest histories
of this kind of development activity that we ever had.
The first study that led to the HMDA Act was actually the
study in 1973 in Baltimore. So I understand what you're coming
to.
I think we've gotten to the point where you have to amend
the Community Reinvestment Act, to tell the regulators some of
the things that they have to do, because their discretion is
never going to work. I think, as the chairman found out before,
they can't pull the trigger. No matter what you do to violate
the fair lending laws, they just can't bring themselves to pull
the trigger and give you a failing grade.
So the law has to be changed to say, you have to include
the assessment of whether there's a disparate minority impact;
you have to decide, if people violate the law or do that, they
fail. You have to include all the affiliates and what they are
doing in your assessment. If any affiliate discriminates, then
the entire bank fails at CRA, even if that affiliate is in
California. We don't care where they are. You violate Federal
laws in this country, you lose your banking privileges, period.
You've got to lay it all out to them because they just
don't get it. And then that will give the community people the
chance to do these things because I've been in it for almost 40
years.
Mr. Cummings. How long?
Mr. Bradford. Almost 40 years, before there was a CRA
working with these things.
And nobody has figured out how to serve community needs
like the community. And I've evaluated these reinvestment
agreements, and I know other people on the panel have looked at
these too.
And this is the most creative kind of stuff. We intended,
when we passed the CRA to create a development banking
industry. And it was only going to happen if the community
people came into it because the banks had no idea how to do it.
We've got the World Bank and everything else to help other
countries. We had nothing for the United States.
And we had South Shore Bank, and we had pretty impressive
agreements early on, but if the regulatory agencies just sort
of abandon this thing, we are losing the strength, and it has
all come from the community people.
Mr. Cummings. Let me just ask you this. What part does the
Federal Reserve play in all of this? If any, I mean.
Mr. Bradford. They are the key. They write the regulations.
Mr. Cummings. And they have a lot of say?
Let me tell you why I'm asking this. When we--I also serve
on the Joint Economic Committee, and when we were dealing with
subprime--we are still dealing with the subprime market and the
abuse. We wrote to Bernanke and asked him to lay out some
guidelines with regard to avoiding making--we were trying to
make sure that people were protected as best the Reserve could
do with regard to these subprimes. And I am just wondering--you
know, I am trying to think of all of the different kinds of
methods that we can go at this thing.
Because you know what I am afraid of is that--I can almost
fast forward--in 20 years a whole different set of people will
be here. Some of us will be in rocking chairs. And it will be
people who have been denied what the law said they should have
gotten, and then it will also have hit another generation, and
we will be going through the same stuff.
And I am just trying to figure out how do we--I hear you,
but how do we put brakes on this--and, actually, you know--
cause this gets kind of complicated, you know. And so, people--
they lose their attention with regard to this kind of thing,
because a lot of people don't have a clue of what CRA is.
So--but, you know, just--and I will turn it back over to
you, Mr. Chairman. I am just trying to figure out how do we
move from square one so that we can actually have some impact--
I just want to finish this--so that we actually have kind of
impact? Because I mean we can wrestle and wrestle and wrestle
and the only thing we've done is, you know, messed up the
wrestling mat a little bit and that's it. And the beat goes on.
And I think people depend on the beat going on. They depend on
people not paying attention while they get--while folk are
getting rich.
And my last question is, you know, when I was a little boy,
I remember specifically we would go downtown in Baltimore.
There were two stores in all of downtown Baltimore that would
sell clothes to black folks, and I was just a little kid about
5 years old, and I will never forget standing in the long
lines. And I asked my mom, I said, ``Mom, I don't understand
this. All of those stores out there and there is like 300 black
people standing in line getting school clothes from the one
store.'' I said, ``Don't those others stores want to make some
money?'' I was just a little kid.
And so, I mean, and I am trying to figure out, do you all
see this as just blatant discrimination? Do you think people
just have a negative view of minorities? Do you think that
they--there is some kind of grand scheme to keep certain
neighborhoods in a certain state?
I mean, you know, going back to my example, there are
people who have great credit, they so happen to be African
American, they are whites, they are all kinds. But do you kind
of just blanket out a whole group of people and say, OK, later
for you. I mean, is it--are we that mean in this society? Do
you think--you must have an opinion.
Mr. Carr. I was going to say, if you look at most
distressed neighborhoods, you probably see a combination of
things happening. One is financial vulnerability that
predisposes people to being taken advantage of, and then
compounding that is active discrimination in the markets.
And one of the things that is just interesting is to see
how regulation is often upside down, where the people who are
most financially vulnerable receive the least protection from
financial services industry, from the regulatory agencies.
So, for example, if you look at the subprime lenders, the
predatory lenders, in fact they were the least regulated
entities. And so why does that happen? It shouldn't happen. And
the reality of it is that, for all of the weaknesses of CRA,
there were a lot of things that could have been done directly
to better regulate the subprime market, and it wasn't. And so
that is probably the greatest source of damage to African
American wealth at least for this half century, maybe for the
entire century. The African American home ownership rate is
falling fast.
So to get to your question about what do you do, I think,
first of all, independent of CRA, we need to put into law
effective regulations for those entities that are nevertheless
serving those communities. You know, pay-day lenders, rent-to-
own title lenders, subprime lenders need better national
regulations, specifically.
In our testimony, we say to some extent we bring those
institutions under CRA umbrella, but that will only be good to
the extent that CRA is actually enforced. Which leads me to a
comment that I made at the opening of my statement which
sometimes is considered or thought to be a throwaway line, but
I don't mean it to be so at all.
I don't think that there is a good appreciation for the
value of consumers who live in places like Baltimore and
Philadelphia and Cleveland and other distressed communities
across this country. I don't know that there is a real
understanding about the money that flows through those
neighborhoods and how in dysfunctional ways it doesn't, in
fact, accrue to the national economic GDP the way that it
could.
And as minority households grow as a share of the U.S.
population, one thing that would be interesting, I think, for
the Federal Reserve to do is take a look at the growing
participation of minorities in the labor market and sort of
ask, you know, sort of scenarios: How much better could the
country be off if we were in fact empowering them economically?
And then maybe Congress might have to do some exceptional
things like to empower and/or create financial institutions
that aim at those markets that have been historically
discriminated against for which there is enormous market
failure and really experiment, do some financial experiment, do
some financial engineering and bring those consumers into the
21st century of financial services access.
I will just conclude by saying my real belief in talking
about these issues, just like the last panel, you can't
understand the rationale. It is unconceivable, and I wouldn't
have an answer as to why we don't just simply enforce the laws
as effectively as we can. So I would conclude that the value of
doing it does not outweigh all of the political challenges that
are perceived to be faced by those who must enforce it. I don't
know. Those are my own personal comments, not those of NCRC,
but I share your frustration.
Mr. Cummings. Just one last thing. As you were talking, I
couldn't help but think about we used to--we just started
getting these Targets, and it is interesting that when you go
to the Target stores, they are packed with black people. I
mean, before, Target wouldn't even come to these neighborhoods.
But now they are packed.
You know, usually Target's claim to fame is that you don't
have lines. Did you know that, Mr. Chairman? In other words,
their claim to fame is they want to appeal to people and they
have enough check-out counters. That is part of their scheme so
that you feel comfortable coming in so you can get in and get
out. I mean, they have all kinds of checkers in the black
community, and they still got lines.
What my point is is that something--somebody woke up to
what you just said and said, wait a minute, hold it. Oh, there
are black people. They do need trash cans. They do need, you
know, diapers. They do need--so let's go there.
What took them years to even get there? Which is to me
incredible.
Mr. Chairman, I know I have gone longer than you, and you
have been very kind.
Mr. Bradford. On the Target issue, it is interesting,
because I used to work in Minneapolis, which is where they are
located, where they are from. And in Minneapolis, nobody would
build a store in the inner city, and the neighborhood people
demanded they build a store, and they finally got K-Mart to
open a store, and it was the largest-selling K-mart store in
their entire network. And Target looked at that and realized
that they had been avoiding these neighborhoods.
And Minneapolis is not a, inner city place, let me tell
you. But then they began to realize there was market there.
It is like the community people have done the same thing.
They like to take the bankers and people on tours and say come
out to my neighborhood. You have never been to my neighborhood.
You drive by it in your car to get to work, but you have never
been in this neighborhood. And it has been like a conversion
experience for a lot of the really good bankers we worked with
who come out there and realize what potential there was in
those neighborhoods, who never had actually been there before.
And I probably shouldn't say this about a colleague,
economic colleagues, but we need fewer economists making these
decisions. I mean, economists don't even believe there could be
discrimination because it violates the rational man theory. You
gotta have people trying to make these decisions who have seen
the world, who go out there and talk to people and realize the
potential. Because you are right. It is there. And over and
over again I have seen businesses find it, bankers find it,
people go out in the neighborhoods. They have to get their feet
on the ground in the neighborhoods and see what the potential
is.
Mr. Cummings. Thank you, Mr. Chairman.
Mr. Kucinich. Mr. Cummings, this committee holds your
participation in highest regard because, as you state, you come
from the inner city, the ``inner'' inner city. I still live in
the city and have for most have my life in the city of
Cleveland; and I would imagine that this Congress has changed
dramatically over the last hundred years, that there is
probably not a lot of Members that live in the inner city. And
so, you know, we might have an eye that is trained a little bit
differently.
I represented the inner city in the city council. Mayor of
Cleveland, State Senate, Congress, have an inner city district
or district that includes the inner city.
When you get into issues like this that have a powerful
economic underpinning, given the history of the United States,
you cannot separate the economic realities from race. Of
course, we understand that doesn't mean that poor white folks
aren't dealing with the same problems, essentially, in terms of
lack of access to credit. Matter of fact, the neighborhood that
we looked at in Cleveland that had over 50 percent of failure
of loans and, of course, a rapid rate of foreclosures, happened
to be predominantly Caucasian. And so there was a lot of poor
people and moderate income people in the same boat whether they
were white or black. The point--and, you know, we understand
that.
As Mr. Cummings is talking about Target, here is what I am
thinking about. I am thinking about all of these people going
to Target, because that is the only place that might be
available, and I am thinking that all of these--most of these
goods are made in China. Think about it. You know, buy a
washing machine, a bicycle, textiles, plants closing in the
United States. Not work here. Unemployment rises, particularly
in inner city areas.
I mean, there is a cycle here. You can't--it is interesting
how you can get into an issue like CRA and suddenly you can go
back to where is the money and where is it going. Because what
is happening, what is happening and what we are seeing here is
the wealth being distributed to the top in this country.
Banks are engines for the redistribution of the wealth, and
the wealth goes upwards. CRA is an engine for a more equitable
distribution. That's what it's about at its inception. The CRA
doesn't work that well, it still goes up, and not only that but
it will accelerate upward if the cop is off the beat, which is
what happened with the subprime loan and people were just--
basically had their financial positions ransacked.
So this committee, which is a domestic policy oversight
subcommittee, understands the linkages and--because there are.
I want to conclude with a question to Mr. Van Tol and then
see if we can--if there is any final comments by any of the
panelists. Mr. Van Tol, how has your participation in the CRA
process decreased in the past 7 years?
Mr. Van Tol. Well, I think what we see happening with a lot
of community groups--we very actively work to keep involved in
the process, but among many of our peer groups and particularly
in smaller community development sort of groups, if they don't
see that their efforts are having an effect with the
regulators, they naturally drop off in their participation.
Mr. Kucinich. So is the participation process different
today than it was in 1997, 1987?
Mr. Van Tol. Well, I think during the Clinton years there
was--for a time, there was an increase in people who or banks
who were referred to the Justice Department. There was a
feeling that taking action at the local level had real effects
and that you were doing something good for your community.
When you start feeling--not seeing that happen any more, if
you are a busy person working for a community group, your
natural inclination is to stop taking that action. If you--I
mean, it is a counter--it's not a good thing to do, but it is
just a natural thing for people to do.
Mr. Kucinich. So if you had access to fair lending review
of banks conducted by regulatory agencies, would that change
participation?
Mr. Van Tol. I think there is a whole series of ways. If
Congress would look at how to make the Community Reinvestment
Act more friendly to the consumer groups, more friendly to
people in the neighborhoods, to make sure that it was mandated,
that during mergers there had to be a public meeting--I mean,
you could--the groups, you know, represented on this table and
nationally could come up with a whole series of ways to make,
to empower communities in the process. And, you know, that
would be one.
You know, you could--right now, if there is a negative
community reinvestment rating that a bank disagrees with, they
have a right to appeal that within the process. We, as
community groups, don't get to see positive ratings and have a
right to appeal them downward. So the deck is stacked in a lot
of ways in favor of the lending institutions and against the
community groups.
So I think if Congress could look at all of the ways that
happens and restack the deck so that there is a more level
playing field, we would feel more empowered, we would get more
involved in the process, and I think benefits would accrue to
everyone.
Mr. Kucinich. Each of the panelists has experience on this
and some of you, in your written testimony, have outlined
improvements that you would recommend be made in the Community
Reinvestment Act; and in light of the Gramm-Leach-Bliley, it
would be good to--and some of you have done that, but I think
it is good to inspect the implications of that and what might
be able to be done to strengthen the Community Investment Act
or to change that law as well.
I would ask each of you if there is, based on what you have
heard today from the regulators, if there is anything that you
would like to submit for the record in terms of followup
comment or analysis or recommendations for legislative
initiatives or reforms or any area for further inquiry that
this committee might look into. Because, again, this committee
has a very broad reach, and there has not been any regulatory
enforcement in broad areas of our economy for quite a while.
This subcommittee intends to change that.
So you can be of continued assistance in our work, and we
are open to hearing your suggestions about what we might be
able to do with respect to the Community Reinvestment Act, to
Gramm-Leach-Bliley, to any area that relates to your expertise
in housing and access to credit or anything else that might
touch on the areas that you have familiarity with.
So I would let each of you know I would invite you to
continue to stay in touch with the subcommittee and to give us
the opportunity of your expertise in this and to thank you for
your commitment to community. This is--each of you have
reflected a long-term commitment. When you--I am sure when you
see the staggering toll that it has taken on families in the
subprime mortgage failure and you see the lack of enforcement
of the CRA, it can be very discouraging. But I think we can
change that, and that is actually what the work of this
committee is about, by bringing the truth to light and giving
people a chance to, you know, look at what's happening.
Are there any--before I conclude the work of this committee
for the day, do any of you have any final comments that you
want to make and, you know, feel free to right now. Anything?
Anybody want to say anything?
Mr. Van Tol. I would just like to emphasize one point. I
hope as you look at CRA reform, this whole issue of assessment
areas desperately needs review. Because that system is
currently broken. You know, you heard some of the statistics
from Jim about lending. In terms of business lending, the same
thing is happening. I look at the rural counties of upstate New
York, and about 75 percent of the loans going into those rural
counties now are credit card loans from the urban center credit
card lenders with no assessment areas in those counties.
That same donut that you saw for Detroit, you could take--
for many lenders, you could look at the cities across America
and all of the rural areas in between that are left out of
assessment areas because they get jumped over.
Mr. Kucinich. So there you could take the amount of credit
card loans that are going into rural areas and you could
probably juxtapose it with bankruptcy statistics.
Mr. Van Tol. I am sure you could. And it is just a problem
of having assessment areas tied to deposit-taking branches
rather than to where the institutions are actually doing it.
Mr. Kucinich. So if the institutions aren't out there to
loan, then what happens is that the next line of credit is a
credit card, and you also have--the staff and I were talking
earlier about the issue of marketing--you also have the
extraordinary aggressive marketing of credit card companies,
just extraordinary.
I cut up most of my credit cards years ago because I
started to see the impact that it can quickly have on
somebody's budget. But if that is the only way you can get
access to money, you are stuck.
So that is an interesting area that the subcommittee could
go into, and I would like--again, I would invite your comments
on that and any guidance that you have on the issue of
assessment, how might we strengthen that.
Anyone else on the panel before--and thank you.
Mr. Marsico. Just one quick comment, which is I think that
the Community Reinvestment Act works best when it empowers
communities, and that has been most seen through community CRA
challenges to bank merger applications, and that resulted in
the most sort of innovative, affordable lending programs.
But, in recent years, the number of CRA challenges seems to
have diminished dramatically; and I think there are two reasons
for that. One is that rather than--the regulators actually
during the 1990's used to push banks to reach these agreements
with groups, and it would let negotiations proceed while the
communities were negotiating with the banks, and agreements
would emerge, and they were terrific. They included monitoring
provisions and reporting requirements.
But banks then started to make these unilateral
commitments, and the agencies accepted them. So, you know, they
weren't negotiated, they don't have monitoring, they just sort
of say this is what we will do, and then they report on their
progress, and that really takes the steam out of CRA
challenges.
And the second point is the national scope of banks. It is
very hard to make a challenge when there are 150 metropolitan
areas that the bank serves. It is overwhelming. And, actually,
you heard before, you know, one of the comments was, well, if a
bank is discriminating in one assessment area but not the
others, well, what are we going to do about that? Well, you
know, that is the same kind of attitude I find with CRA
challenges. It might not be lending well in one area but, well,
it has 150 areas, so what can we do?
So I think putting some power back in these CRA challenges,
it would be a very important way to make the CRA work better.
Mr. Carr. I would just say very quickly the inclusion of
nondepository affiliates of banks being covered under CRA is a
mandatory necessity as well as reforming the assessment area.
And then also requiring that there be a direct focus on lending
to minority households and communities would go a long way
toward, if not enforcing, certainly providing the kind of
information that would make it very difficult to hide and run
away from the reality of what is happening through major
financial institutions as it respects disenfranchised
communities and households.
Mr. Bradford. I would just add, I think you have to review
the fair lending exam process itself. We do a lot of consulting
with lenders, and we look at their own lending regulations and
guidelines, and I can tell you if any lender showed me the
Federal guidelines, they would be in a heap of trouble in terms
of their ability to actually control discrimination. They are
really kind of disgraceful.
Mr. Kucinich. They are kind of?
Mr. Bradford. Disgraceful. They don't really cover
marketing, which is the main way in which subprime lending
deceives people. They don't cover underwriting practices. They
just say look at underwriting, but they don't describe to
people how they are supposed to look at that and what to do.
Their statistical analysis only works if you have a lot of
actual minorities who applied. So if you are good enough to get
no minorities to apply, you are exempt from their statistical
analysis. It is an absurd system of target.
And, also, they only target one focal point, they call it,
or two focal points. So even though they examine a bank, they
will sort of pick, well, this year we will look at marketing,
next year we will look at loans to single family homes, instead
of looking at the entire package. There is no way in the world
that a decent lender who was trying to do their own internal
process would ever set up a set of guidelines like that.
Mr. Kucinich. Well, this has been a very informative
hearing of this Domestic Policy Subcommittee, and I want to
thank the members of the panel for their participation.
I want to note, as I did at the beginning of the hearing,
that the gentleman from California, the ranking member, Mr.
Issa, was called to California because of the very serious
matter of the fires in that State and in proximity to his
district; and with his generous consent we were able to move
forward. Because our rules, unless we have cooperative
participation here, it doesn't work. But he made that possible,
and I want to thank him and wish the people of California, his
constituents, well as they contend with this outbreak of fires.
This is the Domestic Policy Subcommittee of the Oversight
and Government Reform Committee. Our hearing today began at 2
o'clock--it is nearing 6 o'clock--on the issue of Upholding the
Spirit of the Community Reinvestment Act: Do Community
Reinvestment Act Ratings Accurately Reflect Bank Practices.
Our first panel had Ms. Sandra Thompson, who was the
Director of the Division of Supervision and Consumer Protection
of the Federal Deposit Insurance Corporation; Ms. Sandra
Braunstein, who was the Director of the Division of Consumer
and Community Affairs Board of Governors of the Federal Reserve
System; Ms. Montrice Yakimov, Managing Director for Compliance
and Consumer Protection, Office of Thrift Supervision; Ms. Ann
Jaedicke, Deputy Comptroller for Compliance Policy, Comptroller
of the Currency; and, of course, the distinguished gentlemen
who are in front of us, panel II: Calvin Bradford, Board
member, National Training and Information Center; Mr. James
Carr, chief operating officer, National Community Reinvestment
Coalition; Professor Richard Marsico, professor of law, New
York Law School, director of the Justice Action Center; and Mr.
Hubert Van Tol, director of Economic Justice, Rural
Opportunities, Inc.
This has been a very meaningful hearing. I want to thank
Congressman Davis and Congressman Cummings for their
participation. This committee will continue to delve deeply
into this issue and the economic implications for millions of
families.
Again, thank you to members of the panel.
This committee is adjourned. And thank the staff, too, very
much.
Thank you.
[Whereupon, at 5:52 p.m., the subcommittee was adjourned.