Community Reinvestment Act: Challenges Remain to Successfully Implement
CRA (Chapter Report, 11/28/95, GAO/GGD-96-23).
Pursuant to a congressional request, GAO reviewed the major problems in
implementing the Community Reinvestment Act (CRA), focusing on the: (1)
extent to which regulatory reforms address these problems; (2)
challenges regulators face in ensuring the success of CRA reforms; and
(3) initiatives taken to enhance lending opportunities in low-income
areas.
GAO found that: (1) bankers, community groups, and regulatory officials
generally agree that there is too much reliance on bank documentation
efforts and processes and CRA examinations are inconsistent and fail to
reflect the accuracy of a lending institution's performance; (2) the
revised CRA regulations clarify the data used to assess results against
performance-based standards, but the affected parties disagree about
whether the data collection requirements provide for meaningful
performance assessment or are unduly burdensome; (3) differences in
examiner training and experience, vague interpretations of CRA
standards, and inadequate information and time for implementing CRA
performance ratings will challenge regulators as they implement the
revised regulations; (4) bankers, regulators, and community groups are
taking part in a variety of individual and cooperative initiatives to
improve community lending and reduce related burdens; (5) barriers to
community lending and investment include the higher costs and risks
associated with community lending and the underwriting requirements of
major participants in secondary mortgage markets; and (6) Congress has
considered proposals to amend CRA that will reduce the compliance burden
and exempt small institutions from CRA requirements.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-96-23
TITLE: Community Reinvestment Act: Challenges Remain to
Successfully Implement CRA
DATE: 11/28/95
SUBJECT: Proposed legislation
Regulatory agencies
Bank examination
Banking law
Banking regulation
Community development programs
Reporting requirements
Lending institutions
Economically depressed areas
IDENTIFIER: Community Reinvestment Improvement Act of 1995
Microenterprise Opportunity Expansion Act
RTC Community Investment Program
RTC Affordable Housing Program
Community Banking and Economic Empowerment Act of 1993
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Cover
================================================================ COVER
Report to Congressional Requesters
November 1995
COMMUNITY REINVESTMENT ACT -
CHALLENGES REMAIN TO SUCCESSFULLY
IMPLEMENT CRA
GAO/GGD-96-23
Community Reinvestment
(233410)
Abbreviations
=============================================================== ABBREV
ATM - Automated Teller Machine
BEA - Bank Enterprise Act
BHC - Bank Holding Company
CA - Community Affairs
CAO - Community Affairs Office
CDB Act - Community Development Banking and Financial Institutions
Act
CDC - Community Development Corporation
CDD - Community Development Division
CDFI - Community Development Financial Institution
CRA - Community Reinvestment Act
ECOA - Equal Credit Opportunity Act
Fannie Mae - Federal National Mortgage Association
FHA - Fair Housing Act
FHFB - Federal Housing Finance Board
FHLB - Federal Home Loan Bank
FDIC - Federal Deposit Insurance Corporation
FDICIA - Federal Deposit Insurance Corporation Improvement Act
FIRREA - Financial Institutions Reform, Recovery, and Enforcement
Act
FRB - Federal Reserve Board
Freddie Mac - Federal Home Loan Mortgage Corporation
HMDA - Home Mortgage Disclosure Act
MSA - Metropolitan Statistical Area
OCC - Office of the Comptroller of the Currency
OTS - Office of Thrift Supervision
SBA - Small Business Administration
Letter
=============================================================== LETTER
B-259931
November 28, 1995
The Honorable Jim Leach
Chairman
The Honorable Henry B. Gonzalez
Ranking Minority Member
Committee on Banking and
Financial Services
House of Representatives
The Honorable Marge Roukema
Chairwoman
The Honorable Bruce F. Vento
Ranking Minority Member
Subcommittee on Financial
Institutions and Consumer Credit
Committee on Banking and
Financial Services
House of Representatives
The Honorable Joseph P. Kennedy II
House of Representatives
This report responds to requests concerning the effectiveness of the
Community Reinvestment Act. It discusses the major problems with the
implementation of the act identified by the affected parties, the
extent to which the recent regulatory reform efforts have addressed
those problems, and the challenges that regulators need to address as
they implement the new CRA regulations. It also discusses
initiatives that banks have taken independently or in partnership
with others to enhance community lending.
We are sending copies of this report to the Chairman of the Board of
Governors of the Federal Reserve System, the Chairman of the Federal
Deposit Insurance Corporation, the Comptroller of the Currency, and
the Acting Director of the Office of Thrift Supervision. We are also
sending copies to members of the House and Senate banking committees,
other interested committees and subcommittees, and other interested
parties.
This report was prepared under the direction of Mark J. Gillen,
Assistant Director. If you have any questions, please call me on
(202) 512-8678.
James L. Bothwell, Director
Financial Institutions
and Markets Issues
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
Concerns that banks and thrifts (institutions) were not responsive to
credit needs in low- and moderate-income areas prompted Congress to
enact the Community Reinvestment Act of 1977 (CRA). CRA requires the
federal bank and thrift regulatory agencies (regulators) to encourage
institutions to help meet credit needs in all areas of the
communities they serve, consistent with safe and sound operations.
CRA also requires the regulators to assess institutions' CRA
performance during examinations and to consider that performance in
their evaluations of institutions' applications for expanding or
relocating of their operations. Growing concern about the
effectiveness of CRA's implementation and its regulatory burden on
institutions recently led to the regulators' major reform effort,
which resulted in revised CRA regulations that were issued in May
1995.
The former Chairmen, House Committee on Banking, Finance and Urban
Affairs and its Subcommittee on Consumer Credit and Insurance, asked
GAO to address four questions: (1) What were the major problems in
implementing CRA, as identified by the affected parties--bankers,
regulators, and community groups? (2) To what extent do the
regulatory reforms address these problems? (3) What challenges do
the regulators face in ensuring the success of the reforms and what,
if any, actions would help the regulators in facing these challenges?
and (4) What initiatives have been taken or proposed to help bankers
overcome community lending barriers and enhance lending
opportunities, particularly in low- and moderate-income areas?
BACKGROUND
---------------------------------------------------------- Chapter 0:2
The debate preceding enactment of CRA was similar to the current
debate. Community groups urged its passage to curb what they
believed to be a lack of adequate lending in low- and moderate-income
areas. Bankers generally opposed CRA as an unnecessary measure that
could adversely affect business decisions by mandating credit
allocation and cause safety and soundness problems by forcing
institutions to make excessively risky loans. More recently,
changing market conditions along with increased public disclosure
have raised bankers' concerns about the issues of competition and
regulatory burden. More specifically, bankers have become concerned
about the competitive advantages for nonbank financial institutions,
such as mortgage companies, that compete with banks but are not
subject to CRA requirements. Bankers also objected that the cost and
paperwork burdens imposed by CRA are not offset by positive
incentives, such as protection against protests of expansion plans,
to encourage CRA compliance. However, community groups have raised
concerns about limited CRA enforcement and insufficient disclosure of
information on institutions' community lending performance.
As concerns about CRA increased from all affected parties, both the
administration and Congress looked for ways to make CRA more
effective and less burdensome. The stated goals of the regulators'
reform initiative, announced by the President in July 1993, were to
(1) base CRA examinations more on results than paperwork, (2) clarify
performance standards, (3) make examinations more consistent, (4)
improve enforcement to provide more effective sanctions, and (5)
reduce the cost and burden of compliance. Subsequently, the
regulators issued two notices of proposed rule-making and, after
receiving extensive public comments, promulgated the revised CRA
regulations in May 1995. Several legislative proposals have also
sought to reduce the burden associated with CRA compliance.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
Through interviews with bankers, community groups, and regulatory
officials, GAO identified four major problems with the regulators'
compliance examinations and enforcement of CRA that all the affected
parties agreed were problems: (1) too little reliance on lending
results and too much reliance on documentation of efforts and
processes, leading to an excessive paperwork burden; (2) inconsistent
CRA examinations by regulators resulting in uncertainty about how CRA
performance is to be rated; (3) examinations based on insufficient
information that may not reflect a complete and accurate measure of
institutions' performance; and (4) dissatisfaction with regulatory
enforcement of the act, which largely relies on protests of expansion
plans to ensure institutions are responsive to community credit
needs. However, the reasons they gave for why they believed the
problems adversely affected their interests--which form the basis for
their concerns--and the often contradictory solutions they offered to
address the problems, showed that the affected parties differed
considerably on how best to revise CRA.
The revised CRA regulations address some, but not all, of the major
problems. In response to the first problem, the regulations adopt a
results-based examination process. The regulators' success in
lessening problems related to inconsistent examinations largely
depends on how effectively examiners exercise their discretion when
implementing the reforms. To alleviate concerns about insufficient
information, the regulations clarify the data to be used to assess
results against performance-based standards. However, the affected
parties disagree about whether the data collection requirements
provide for meaningful performance assessment or are unduly
burdensome. The regulations do not address the different enforcement
concerns of bankers and community groups.
From its review, GAO believes that some of the difficulties that have
hindered past CRA implementation efforts will likely continue to
challenge the regulators as they implement the revised regulations.
These difficulties include (1) differences in examiner training and
experience levels as well as differences in how examiners interpret
vague CRA standards; (2) insufficient information to assess
institutions' CRA performance and inadequate disclosure in public
evaluation reports of the information and rationale used to determine
institutions' CRA performance ratings; and (3) insufficient time for
examiners to complete all of their responsibilities during CRA
examinations. In addition, some regulators were unable to complete
CRA examinations for all their banks within their proposed time
frames. Furthermore, the regulators estimate that the revised
regulations will increase examiner responsibilities, including
performing analyses previously required of institutions.
GAO also found from its review that, independent of the regulatory
and legislative reform efforts, many bankers, regulators, community
groups, and others have taken part in a variety of individual and
cooperative initiatives to improve institutions' community lending
and reduce related burdens. Through these initiatives, according to
participants, institutions have been able to overcome real or
perceived barriers to lending in low- and moderate-income areas
(community lending). Barriers to community lending and investment
may include a variety of economic factors, such as higher costs and
risks of community lending compared with other lending and
underwriting requirements of major participants in the secondary
mortgage markets.
Regulators, to varying degrees, have also played a key role in
facilitating cooperation and disseminating information to their
institutions about such initiatives through outreach efforts of their
community affairs programs. As they further develop these programs
and better coordinate their efforts, the regulators' role in this
respect should be enhanced.
Congress has considered proposals to amend CRA to reduce the
compliance burden and to exempt small institutions from its
requirements. In addition, Congress, in recently enacted
legislation, has encouraged community development lending. Further,
other legislation has been proposed to encourage community lending
through financial subsidies or other positive incentives.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
AFFECTED PARTIES AGREE ON
MAJOR PROBLEMS BUT CONCERNS
AND SOLUTIONS DIFFER
-------------------------------------------------------- Chapter 0:4.1
All of the affected parties that GAO spoke with--bankers, community
groups, and regulators--generally agreed on the problems with the
implementation of CRA. However, the reasons they gave for why they
believed the problems adversely affected their interests--which form
the basis for their concerns--and the often contradictory solutions
they offered to address the problems showed that the affected parties
differed considerably on how best to revise CRA. Bankers generally
analyzed problems in terms of regulatory burden and wanted regulatory
or legislative changes that would reduce the burden of paperwork and
data reporting. They also generally supported proposals to increase
certainty about performance ratings through regulatory guarantees
such as safe harbors that would protect highly rated institutions
from CRA-based protests of applications for expansion or relocation.
In addition, they believed that CRA performance standards should be
flexible enough to consider factors such as an institution's business
strategy, financial condition, and its community's credit needs.
Community groups, however, raised concerns about their ability to
hold institutions, as well as regulators, accountable for performance
and sought changes to increase that accountability. For example,
they wanted to improve the disclosure of information in public
evaluation reports so that they could assess institutions' community
lending performance more easily. Community groups also identified as
a problem the fact that enforcement of the act was limited to
regulatory denials of applications for expansion or relocations of
their operations. Their concern was that no sanctions were available
to penalize poor performers that did not have plans to expand or
move. To strengthen regulators' enforcement of the act, they
advocated use of additional enforcement actions, such as
cease-and-desist orders and civil money penalties. They strongly
opposed safe harbors.
REVISED REGULATIONS ADDRESS
SOME, BUT NOT ALL, MAJOR
PROBLEMS
-------------------------------------------------------- Chapter 0:4.2
Overall, the revised regulations address some of the major problems
of the affected parties but do not wholly satisfy the often
contradictory positions of bankers and community groups. The
regulations address the problem of overreliance on documentation of
an institution's compliance efforts and processes by shifting the
focus of assessment standards from compliance efforts to actual
results in three performance areas--lending, investment, and
services.
The potential effect of the regulations on some of the other problems
is not as clear. Effective implementation of the regulations is key
to addressing examination-related inconsistency because examiners are
to continue exercising considerable discretion in assessing an
institution's performance. In developing the regulations, the
regulators tried to balance the need for objective standards with the
need for flexibility in assessing different types of institutions
operating under differing financial conditions and serving widely
different types of communities. The revised regulations have
increased examiner responsibilities, created the need for related
comprehensive examiner training, and could affect the amount of
resources needed to effectively complete examinations.
The revised regulations may not entirely resolve the problem of
insufficient data for performing CRA examinations. Although the
regulations clarify the data collection requirements to assess
institutions' CRA performance, they do not directly address the
problems of inaccurate data provided by institutions or the
inadequate disclosure of information in the public evaluation
reports. Public evaluation reports are the public's primary source
of information about institutions' CRA performance and the
regulators' consistency in CRA examinations.
Also, the revised regulations do not resolve the widespread
dissatisfaction with regulatory enforcement of the act. The initial
reform proposals sought to strengthen enforcement by calling for
regulators to use existing formal enforcement actions set forth in
the banking laws, such as cease-and-desist orders and civil money
penalties. However, the Department of Justice issued an opinion in
late 1994 that such actions are not within the scope of CRA. The
reforms would also have addressed bankers' concerns by specifying how
CRA ratings would be considered in applications, i.e., a
"satisfactory" or better rating would generally result in the
approval of an application. However, many commentors to the proposed
rules objected to the perceived restriction on public protests of
banks' applications. Consequently, both proposed measures were
dropped from consideration by the regulators.
CHALLENGES TO SUCCESSFULLY
IMPLEMENTING REGULATIONS
-------------------------------------------------------- Chapter 0:4.3
From its review, GAO found several challenges that the regulators
face to successfully implement the revised regulations.
Inconsistency resulted in part from examiners (1) exercising
considerable discretion in interpreting vague CRA standards and (2)
rating institutions' performance differently by focusing on different
parts of the examination guidance. Frequent changes in the focus of
examinations within the past several years also contributed to
inconsistency. Insufficient examiner experience and training was
cited by bankers and community groups as further contributing to
inconsistency because it led to inadequate expertise on the part of
examiners knowing how to properly evaluate institutions' community
lending performance.
Some examiners told GAO that they had difficulty assessing compliance
when data provided by institutions were inaccurate or incomplete. In
addition, some of the regulators reported data quality problems with
home mortgage lending data submitted by institutions and used by the
regulators to assess performance. Further, the regulators' responses
to institutions with poor data quality have been inconsistent.
Information accessibility has been a concern of community groups that
monitor institutions' CRA performance and the regulators' CRA
examinations. Some of these groups were concerned that publicly
available evaluation reports do not provide enough information about
institutions' actual lending performance. In addition, inadequate
information about the regulators' rationale for how they rate
institutions has contributed to concerns by bankers and the public
about examination consistency.
Finally, some examiners told GAO that they lacked the time during
examinations to perform all of the data gathering and analysis tasks
that they are expected to do during CRA examinations, such as making
contacts in the community to assess community needs. Some regulatory
officials estimate that implementation of the revised regulations
will require examiners to do more during examinations. Recognizing
this possibility, the regulators are developing new techniques to
reduce examination time. If these efforts are not successful,
examiners may face situations where they either cannot perform
necessary analyses or must shift responsibility for conducting such
analyses back to the institutions. Such actions could reduce
examination quality as well as increase institutions' regulatory
burden.
INITIATIVES HAVE OVERCOME
SOME BARRIERS TO COMMUNITY
LENDING
-------------------------------------------------------- Chapter 0:4.4
Successful community lending initiatives have demonstrated that
having good communication and cooperation among regulators, bankers,
community groups, and others is key to overcoming lending barriers.
In such initiatives, institutions have made community lending an
integral part of their business strategies; involved community groups
in their plans and programs; and developed targeted underwriting
standards, programs, and products to meet community needs. From its
review, GAO learned of community lending initiatives that
participants believe may overcome perceived or actual barriers to
lending in low- and moderate-income areas. Barriers described by
bankers included higher transaction costs and credit risks as well as
restrictions related to secondary mortgage market underwriting
standards. Some bankers have found ways that may lower the
relatively high transaction costs and credit risks to individual
institutions of community reinvestment loans by sharing those costs
and risks through participations in multi-institution programs. In
addition, some major participants in the secondary markets have
recently undertaken initiatives intended to make them more responsive
to community development concerns. Furthermore, Congress has enacted
legislation to facilitate community lending through other means, such
as the recently enacted Riegle Community Development and Regulatory
Improvement Act of 1994, which authorized funds for community
partnerships to help finance revitalization projects, and the Bank
Enterprise Act, which authorized direct subsidies for certain
community lending activities.
GAO also found that banking regulators, to varying degrees, play a
key role in helping institutions enhance their community lending
programs. Using the available resources of their community affairs
programs, some regulators have helped facilitate community
development by disseminating information about various community
lending techniques and investment opportunities. The resources and
longevity of the regulators' community affairs programs differ. For
example, the Federal Reserve Board's (FRB) program has a full-time
staff of 70 and was established in the early 1980s, while the Office
of Thrift Supervision (OTS) and the Office of the Comptroller of the
Currency (OCC) each has fewer than 10 full-time staff in its recently
established program. Further development of these programs and
better coordination of efforts could enhance the regulators' role in
encouraging community development lending.
CONGRESS HAS CONSIDERED
PROPOSALS TO REDUCE BURDEN
AND ENCOURAGE COMMUNITY
LENDING
-------------------------------------------------------- Chapter 0:4.5
Congress has considered proposals that would reduce the burden of
complying with CRA and encourage banks to lend to all areas of their
community. Many bankers have supported proposals that would amend
CRA to exempt small banks from CRA examinations. Bankers and others
have also suggested that CRA be replaced or supplemented with
financial subsidies or other positive incentives. Some of their
suggested alternatives have included modifying or supplementing CRA
with incentives such as tax credits, deposit insurance credits,
streamlined or less frequent examinations, and revisions of safety
and soundness requirements for CRA lending. Community groups have
generally opposed proposals that would reduce CRA obligations for
financial institutions, but some groups have supported proposals that
would increase incentives for community lending.
The varied positions taken by the affected parties further
demonstrate that the debate about how best to achieve the goals of
community reinvestment is both complicated and contentious. The
approach embodied in the current CRA statute uses the levers of
compliance examinations and application aprovals to increase
community reinvestment lending. The new regulations are an attempt
to generate better results with less regulatory burden. However,
given the positions of the different parties, it is not clear that
the results will fully satisfy all of those parties.
MATTER FOR CONGRESSIONAL
CONSIDERATION
---------------------------------------------------------- Chapter 0:5
If the concerns raised by the affected parties should persist even
after the regulators have had sufficient time to implement the
revised regulations, Congress may want to consider revisiting and
revising the CRA statute to clarify its intent and scope, possibly
examining alternative strategies for reaching its goals. Such
strategies might include incentives to strengthen positive CRA
performance by bankers and additional enforcement authority for
regulators to discourage negative performance.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:6
GAO is also making recommendations to the heads of the federal bank
and thrift regulatory agencies related to the major challenges
identified by GAO that have hindered past CRA implementation efforts.
The recommendations on page 66 are intended to ensure the effective
implementation of the revised regulations and consistency of CRA
examinations.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:7
GAO received written comments on a draft of this report from the
Federal Deposit Insurance Corporation (FDIC), FRB, OCC, and OTS. A
discussion of the regulators' comments and GAO's evaluation appears
at the end of chapters 3 and 4. Overall, officials from the four
banking agencies generally agreed with the report's discussion of
major concerns and problems that the regulators and other affected
parties have faced as they sought to build into the revised
regulations an appropriate balance between flexibility and
consistency for CRA compliance examinations. In general, the
regulators acknowledged that GAO's recommendations were considered
and have been, or will be, useful to them as they seek to address CRA
compliance through the revised regulations. The regulators pointed
out actions they plan to take as they implement the revised
regulations, including interagency training and development of
uniform performance evaluations. These actions focus on ensuring
consistent interpretations of the revised regulations.
With regard to the "Matter for Congressional Consideration," FDIC and
OCC were concerned that congressional action before sufficient time
has passed for full implementation of the revised regulations may be
premature and that further revisions to CRA without feedback on the
effectiveness of the revised regulations could undermine their
implementation. OTS noted that the agencies have already agreed to
conduct a full review of the revised regulations 5 years after they
are fully implemented. GAO agrees that the regulators have made
extensive efforts in revising the regulations to address the diverse
concerns raised about the effectiveness of CRA. Consequently, GAO
modified the matter for congressional consideration to suggest that
Congress may want to consider the results from implementation of the
revised CRA regulation in its deliberation as to whether the
objectives of community reinvestment are being well served through
the CRA statute and regulations.
INTRODUCTION
============================================================ Chapter 1
Congressional concerns that banks and thrifts (institutions) were not
adequately responsive to credit needs of the communities they served,
including low- and moderate-income areas, prompted the passage of the
Community Reinvestment Act (CRA) in 1977. The act requires each
federal bank and thrift regulator--the Federal Reserve Board (FRB),
the Office of the Comptroller of the Currency (OCC), and the Federal
Deposit Insurance Corporation (FDIC) for banks, and the Office of
Thrift Supervision (OTS) for thrifts--(regulators) to encourage
institutions under its jurisdiction to help meet the credit needs in
all areas of the community the institution is chartered to serve,
consistent with safe and sound operations. The act also requires the
regulators to periodically assess institutions' community lending
performance during examinations and to consider that performance in
their evaluations of institutions' applications for expansion or
relocation of their operations. Growing concern about the
effectiveness of CRA's implementation and its regulatory burden on
institutions led to the regulators' major reform effort, which
resulted in two major proposed CRA revisions, issued in December 1993
and October 1994, and a final revised CRA regulation in May 1995.
This report responds to a request from the former Chairmen, House
Committee on Banking, Finance and Urban Affairs and the Subcommittee
on Consumer Credit and Insurance asking us to evaluate whether the
regulators' reform efforts would improve compliance with the CRA,
encourage institutions' lending to their entire communities, and
reduce unnecessary burden. The former Chairmen also asked us to
evaluate the regulators' implementation of the fair lending laws--the
Fair Housing Act (FHA), the Equal Credit Opportunity Act (ECOA), and
the Home Mortgage Disclosure Act (HMDA). The result of our work on
fair lending will be discussed in a separate report.
BACKGROUND
---------------------------------------------------------- Chapter 1:1
The debate preceding enactment of CRA was similar to the current
debate. Community groups urged its passage to curb what they
believed to be a lack of adequate lending in low- and moderate-income
areas. Bank and thrift officials (bankers) generally opposed CRA as
an unnecessary measure that could, among other things, unduly affect
business decisions by mandating credit allocation and cause safety
and soundness problems by forcing institutions to make excessively
risky loans.
AMENDMENTS TO CRA
-------------------------------------------------------- Chapter 1:1.1
Since the passage of CRA, the regulatory, economic, and legislative
environments have changed. It is therefore useful to review the
history of, and substantive amendments to, CRA to understand its
origins and where emphasis has shifted. Table 1.1 briefly
illustrates the major amendments to CRA since its passage.
Table 1.1
Amendments to CRA
Year Amendments
-------- ------------------------------------------------------------
1977 Passed as title VIII of the Housing and Community
Development Act of 1977.
1989 Amended by the Financial Institution Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) to require that the CRA
examination rating and a written evaluation of each
assessment factor be made publicly available. FIRREA also
established a four-part qualitative rating scale.
1991 Amended by the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) to require public
discussion of data underlying the regulator's assessment of
an institution's CRA performance in the public portion of
the CRA evaluation.
1992 Amended by the Housing and Community Development Act of 1992
to provide that the regulators consider activities and
investments involving minority-and women-owned financial
institutions and low-income credit unions in assessing the
CRA performance records of institutions cooperating with
such institutions to meet local community credit needs.
1994 Amended by the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 to require that institutions with
interstate branching structures receive a separate rating
and written evaluation for each state in which they operate
and a separate written evaluation of their performance
within a multistate metropolitan area where they have
branches in two or more states within the area.
----------------------------------------------------------------------
Source: GAO's review of the laws.
CRA was passed as title VIII of the Housing and Community Development
Act of 1977 (12 U.S.C. 2901 et seq.). CRA requires each federal
banking regulator to use its authority, when examining institutions,
to encourage such institutions to help meet the credit needs of the
local communities in which they are chartered, consistent with the
institution's safe and sound operation.\1 In connection with these
examinations, the regulators are required to assess an institution's
record of lending in its community and take it into account when
evaluating any type of application by an institution for a deposit
facility.\2
CRA was amended by FIRREA to require that the regulator's examination
rating and a written evaluation of each assessment factor be made
publicly available. FIRREA also established a four-part qualitative
rating scale so that the publicly available CRA ratings would not be
confused with the five-part numerical ratings given to institutions
by the regulators on the basis of the safety and soundness of their
operations. These safety and soundness ratings are confidential. In
1991, FDICIA further amended CRA to require public discussion of data
underlying the regulators' assessment of an institution's CRA
performance in the public CRA evaluation. The Housing and Community
Development Act of 1992 amended CRA to require that the regulators
consider activities and investment involving minority- and
women-owned financial institutions and low-income credit unions in
assessing the CRA performance of institutions cooperating in these
efforts. The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 amended CRA to require that institutions with interstate
branching structures receive a separate rating and written evaluation
for each state in which they have branches and a separate written
evaluation of their performance within a multistate metropolitan area
where they have branches in two or more states within the area.
The principle contained in CRA, that institutions must serve the
"convenience and needs" of the communities in which they are
chartered to do business consistent with safe and sound operations,
is one that federal law governing deposit insurance, bank charters,
and bank mergers had embodied before CRA was enacted. The Banking
Act of 1935 declared that banks should serve the convenience and
needs of their communities. The Bank Holding Company Act, initially
passed in 1956, requires FRB, in acting on acquisitions by banks and
bank holding companies, to evaluate how well a bank meets the
convenience and needs of its communities within the limits of safety
and soundness. Under CRA, the concept of "convenience and needs" was
refined to explicitly include extensions of credit.
--------------------
\1 Although the regulations were developed on an interagency basis
and are virtually identical, each of the regulators has its own set
of CRA regulations. For FRB they can be found at 12 CFR part 228;
for OCC at 12 CFR part 25; for FDIC at 12 CFR part 345, and for OTS
at 12 CFR part 563e.
\2 An "application for deposit facility" is defined as an application
to the appropriate supervising regulator for (1) a charter for a
national bank or federal savings and loan (S&L); (2) deposit
insurance in connection with a newly chartered state bank, savings
bank, S&L, or similar institution; (3) the opening of a domestic
branch or other facility with the ability to accept insured bank or
S&L deposits; (4) the relocation of a home office or branch; (5) the
merger or consolidation with, or acquisition of the assets, or
assumption of the liabilities of an insured depository institution;
or (6) the acquisition of shares or assets of an insured depository
institution requiring approval under the Bank Holding Company Act or
the National Housing Act.
THE FAIR LENDING LAWS ARE
RELATED TO CRA
-------------------------------------------------------- Chapter 1:1.2
CRA and the fair lending laws, while separate, have related
objectives. The primary purpose of CRA was to prohibit
redlining--arbitrarily failing to provide credit to low- and
moderate-income neighborhoods. FHA and ECOA prohibit lending
discrimination based on certain characteristics of potential and
actual borrowers. The FHA, passed by Congress in 1968 as title VIII
of the Civil Rights Act of 1968, among other things prohibits
discrimination in residential real estate-related transactions on the
basis of an applicant's race, color, religion, gender, handicap,
familial status, or national origin. Such prohibited activities
include denying or fixing the terms and conditions of a loan based on
discriminatory criteria. The ECOA, passed in 1974, prohibits
discrimination with respect to any aspect of a credit transaction
based on race, color, religion, national origin, gender, marital
status, age, receipt of public assistance, or the exercise, in good
faith, of rights granted by the Consumer Credit Protection Act.
HMDA was enacted by Congress in 1975 to provide regulators and the
public with information so that both could determine whether
depository institutions were serving the credit needs of their
communities but was expanded over time to detect evidence of possible
discrimination based on the individual characteristics of applicants.
HMDA established a reporting obligation for depository institutions.
Initially, HMDA required depository institutions with total assets of
more than $10 million to compile data on the number and total dollar
amount of mortgage loans originated or for which the institution
received completed applications or purchased during each fiscal year
by geographic area and make that data available for public
inspection. In 1989, HMDA was amended to require collection and
reporting of data on race, gender, and income characteristics of
mortgage applicants to provide data to assist in identifying
discriminatory lending practices and enforcing fair lending statutes.
Amendments to HMDA in 1988 and 1991 expanded the reporting
requirements to most mortgage banking subsidiaries of bank and thrift
holding companies and independent mortgage companies not affiliated
with depository institutions. In 1992, HMDA was amended to require
affected financial institutions to make available to the public, upon
request, their loan application registers, which maintain data for
loans covered by HMDA.
Both HMDA and CRA were originally enacted to remedy a perceived lack
of lending by institutions to the communities in which they were
chartered to do business by the regulators. HMDA was amended in 1989
to include the collection of data on race, sex, and income of
applicants for credit to provide indications of possible lending
discrimination. In addition, 2 of the 12 assessment factors, factors
D and F, in the current CRA regulation address the issue of
discrimination to be considered in determining an institution's CRA
rating. Where available, HMDA data are to be used by examiners when
assessing compliance with CRA, FHA, and ECOA.
EXAMINATION AND ENFORCEMENT OF
CRA
---------------------------------------------------------- Chapter 1:2
The federal banking regulators have primary responsibility for the
examination of CRA performance and enforcement of the act. In
addition to their responsibilities for examining institutions for
financial condition and safe and sound operations, the regulators
have been, since the late 1960s, responsible for examining and
enforcing laws and regulations primarily related to matters other
than safety and soundness. These include various consumer protection
or civil rights laws and regulations intended to ensure that the
provision of banking services is consistent with legal and ethical
standards of fairness, corporate citizenship, and the public
interest. These laws include CRA, and the regulators monitor
compliance with them through compliance examinations.
THE REGULATORS HAVE
APPROACHED COMPLIANCE
PROGRAMS DIFFERENTLY
-------------------------------------------------------- Chapter 1:2.1
Since the late 1960s, the number of laws and regulations covered by
compliance examinations has increased to over 20. Believing that
bank operations had become too complex to be adequately covered by a
single group of examiners, the FRB established a special compliance
examiner program in 1977, which is responsible for performing
compliance examinations separately from safety and soundness
examinations. The FRB made the compliance examiner program permanent
in 1979. A distinct group of compliance examiners, initially
established by this program, has remained in place since 1979 and has
grown relative to the number of Federal Reserve member banks.
FDIC initiated a compliance examiner program in the late 1970s that
established a compliance specialty but did not represent a separate
career path and did not preclude examiners from also conducting
safety and soundness examinations. FDIC did not establish an
entirely separate compliance examiner force exclusively responsible
for compliance examinations until 1990. FDIC's compliance examiner
program was not fully staffed, however, until the end of 1993. The
compliance examiners remained part of FDIC's Division of Supervision
until an August 1994 reorganization that consolidated activities
formerly divided between the Division of Supervision and the Office
of Consumer Affairs into a single Division of Compliance and Consumer
Affairs.
Similar to FDIC, OCC established a compliance examination specialty
in the late 1970s. The specialty did not represent a separate career
path for examiners and often resulted in examiners spending only a
portion of their time doing compliance examinations. Junior
examiners were usually responsible for doing compliance examinations.
The perceived greater attractiveness of safety and soundness work
combined with the safety and soundness crisis in the banking industry
during the late 1980s and early 1990s rendered the compliance
specialty a low priority.
OCC began to develop a separate compliance program with a separate
compliance examiner career path in 1993. OCC currently has an
operating staff of compliance examiners composed of approximately 170
people. An additional 110 people are to be part-time compliance
examiners who will be expected to devote a minimum of 20 percent of
their time to compliance examinations. OCC believes that devoting at
least 20 percent of these examiners' time to compliance will ensure
that they maintain a sufficient level of expertise. This group is to
be responsible for compliance examinations of "program" banks, banks
with $1 billion or more in assets. Banks with less than $1 billion
in assets, approximately 70 percent of OCC's banks, are to continue
to be examined by OCC's nonspecialized examiners.
Although OTS supervises thrifts, as opposed to commercial banks, it
is responsible for assessing compliance with most of the same
compliance laws and regulations as the banking regulators. In 1989,
OTS established a separate compliance examiner program in which
compliance examinations are to be conducted by specially trained,
career professional staffs in the OTS regional offices. The original
mandate for establishing such a program came from the Federal Home
Loan Bank Board. The passage of FIRREA, which abolished the Federal
Home Loan Bank Board and established OTS, slowed the process of
establishing the compliance examiner program. The program was fully
implemented in 1990 and as of December 1994, OTS had 105 compliance
examiners on board.
Table 1.2 shows the number of institutions subject to examination and
the number of compliance examiners for each regulator at year end for
the period beginning in 1988.
Table 1.2
Number of Banks, Thrifts, and Compliance
Examiners per Regulator From Year-end
1988 to Year-end 1994
Ye Thrift
ar Banks Examiners Banks Examiners Banks Examiners s Examiners
-- ------ ---------- ------ ---------- ------ ---------- ------ ----------
19 1,063 116 8,207 22 4,435 N/A 2,970 N/A
88
19 1,047 124 7,975 22 4,170 N/A 2,898 N/A
89
19 1,014 137 7,838 22 3,973 N/A 2,541 N/A
90
19 982 164 7,630 89 3,801 N/A 2,208 82
91
19 957 201 7,431 151 3,598 N/A 1,954 92
92
19 968 198 7,206 265 3,321 94 1,730 105
93
19 979 246 7,031 300 3,078 170 1,543 105
94
----------------------------------------------------------------------------------
Note: Where a regulator did not maintain a separate compliance
examiner program or was unable to provide data, it is noted in the
table by an "N/A." For example, OTS was unable to provide the number
of compliance examiners before 1991.
Source: Data provided by FRB, FDIC, OCC, and OTS.
The regulators rely primarily on the examination process to ensure
that institutions comply with CRA. The CRA examination is a major
component of an institution's compliance examination and in some
cases, for example, where an application is pending, it is done
independently from the compliance examination. Although they have
approached their compliance programs differently, the regulators
jointly developed and issued the original regulations for CRA
examinations in 1978.
CURRENTLY, CRA EXAMINATIONS
ARE TO EVALUATE INSTITUTIONS
ON TECHNICAL AND QUALITATIVE
COMPLIANCE
-------------------------------------------------------- Chapter 1:2.2
When examining an institution's compliance with CRA, an examiner is
to evaluate its technical compliance with a set of specific rules,
such as recordkeeping requirements, and to qualitatively evaluate the
institution's efforts and performance in serving the credit needs of
its entire community.\3 The examiner is to do this in a variety of
ways, which include using a CRA "examination checklist," reviewing a
questionnaire filled out by the institution and returned to the
examiner prior to the examination, and reviewing a wide variety of
institution records and data. Table 1.3 lists the CRA regulation's
technical requirements.
Table 1.3
CRA Technical Regulatory Requirements
Requirements
----------------------------------------------------------------------
CRA statement
The board of directors of each institution must adopt, and at least
annually review, a CRA statement which the institution will make
available to members of the public upon request. The statement should
include a delineation on a map of each local community served by the
institution and a list of specific types of credit that the
institution is prepared to extend within each local community.
Additional information
The regulation also encourages each institution to include additional
information in its CRA statement such as how its current efforts help
meet community credit needs, a periodic report regarding its record of
helping to meet community credit needs, and a description of its
efforts to ascertain the credit needs of its community, including
efforts to communicate with members of its community regarding credit
services.
A copy of the CRA notice
An institution must provide in each office a CRA Notice, the exact
wording of which is prescribed in the regulation.
Public file
Each institution must keep a file that is readily available for public
inspection consisting of any CRA Statements in effect in the last 2
years, a copy of the public section of the institution's most recent
CRA Performance Evaluation, and any written comments, received from
the public within the last 2 years, relating to the CRA Statement,
Performance Evaluation, or the institution's record of helping to meet
community credit needs.
CRA performance evaluation
After a CRA examination, each institution will receive from its
regulator a written, public CRA evaluation. This evaluation must be
kept in the Public File. The institution must provide a copy of this
evaluation to the public upon request, charging a minimal fee.
----------------------------------------------------------------------
Source: FRB, FDIC, OCC, and OTS compliance examination manuals.
Assessing compliance with the technical requirements of CRA is
relatively straightforward. An institution either maintains its CRA
statement and file or it does not, and the examiner can determine
whether the institution complied with the technical requirements by
working through the CRA checklist. However, assessing qualitative
compliance with CRA is more difficult and subjective.
--------------------
\3 These rules are set forth at 12 CFR part 228 for FRB, 12 CFR part
345 for FDIC, 12 CFR part 25 for OCC, and 12 CFR part 563e for OTS.
These rules remain in effect until July 1, 1997, at which time the
new regulations concerning performance tests, standards, and ratings
become effective.
CRA COMPLIANCE IS CURRENTLY
ASSESSED USING 12 ASSESSMENT
FACTORS
-------------------------------------------------------- Chapter 1:2.3
In addition to the technical requirements of the CRA regulations, the
regulators are to evaluate each institution on the basis of its
efforts to ascertain community credit needs and its determination and
performance in helping to meet those needs. When examining an
institution, the examiner is instructed to apply the CRA procedures
on a case-by-case basis to accommodate institutions that vary in
size, type, expertise, and locale. Regulatory guidance indicates
that community credit needs will often differ with the specific
characteristics of each local community, and institutions may serve
these local credit needs in a variety of ways.
The qualitative aspect of an institution's performance is currently
to be assessed according to 12 factors. These factors were developed
as part of the original regulations implementing CRA and have not
changed. To allow the examiner sufficient flexibility necessary to
weigh the factors and categories consistent with their significance
in the context of a particular institution, the regulators have not
assigned a relative weighting to the factors. However, regulatory
guidance notes that compliance with antidiscrimination laws and
regulations, including ECOA and FHA, is a significant factor in
reaching the overall CRA rating. Moreover, regulatory guidance
issued in 1992 also stresses that examiners are to weigh CRA
performance over process, i.e., how well an institution helps meet
the credit needs of its community over documentation showing how the
institution ensures CRA compliance.
Financial institutions are to demonstrate their CRA performance under
various assessment factors in several ways. For example, an
institution is required to assess the credit needs of its community.
To show that an assessment was done an institution might document its
discussions with members of the community, such as community groups
or civic organizations, regarding credit needs of the community. To
show that it lends to all parts of its community, an institution
might plot its lending data onto a map to show the geographic
locations where the institution has extended credit. A sophisticated
form of coding loans according to their location is called
geocoding.\4
The CRA assessment factors are grouped under five performance
categories identified in guidance provided by the regulators and
published in the Federal Register on May 1, 1990. Table 1.4 lists
the assessment factors to be reviewed by compliance examiners during
a CRA examination.
Table 1.4
CRA Assessment Factors
Performance categories and related assessment factors
----------------------------------------------------------------------
Ascertainment of community credit needs
Assessment factor A
Activities to ascertain credit needs and efforts to communicate with
the community, including the extent of the institution's efforts to
communicate with members of its community regarding the credit
services being provided by the institution.
Assessment factor C
The extent of participation by the institution's board of directors in
formulating the institution's policies and reviewing its performance
related to CRA.
Marketing and types of credit offered and extended
Assessment factor B
The extent of the institution's marketing and special credit-related
programs to make members of the community aware of the credit services
offered by the institution.
Assessment factor I
The institution's origination of residential mortgage loans, housing
rehabilitation loans, home improvement loans, and small business or
small farm loans within its community, or the purchase of such loans
originated in its community.
Assessment factor J
The institution's participation in governmentally insured guaranteed
or subsidized loan programs for housing, small businesses, or small
farms.
Geographic distribution and record of opening and closing offices
Assessment factor E
The geographic distribution of the institution's credit extensions,
credit applications, and credit denials.
Assessment factor G
The institution's record of opening and closing offices and providing
services at offices.
Discrimination and other illegal credit practices
Assessment factor D
Any practices intended to discourage applications for types of credit
set forth in the institution's CRA Statement(s).
Assessment factor F
Evidence of prohibited discriminatory or other illegal credit
practices.
Community development
Assessment factor H
The institution's participation, including investments, in local
community development and redevelopment projects or programs.
Assessment factor K
The institution's ability to meet various community credit needs based
on its financial condition and size, legal impediments, local economic
conditions, and other factors.
Assessment factor L
Any other factors that, in the regulatory authority's judgment,
reasonably bear upon the extent to which an institution is helping to
meet the credit needs of its entire community.
----------------------------------------------------------------------
Source: FRB, FDIC, OCC, and OTS compliance examination manuals.
--------------------
\4 The location of a loan may be designated in several different ways
for the purposes of geocoding, including census tract, zip code, or
other designation of local areas.
COMPLIANCE EXAMINATIONS
GENERALLY RESULT IN TWO
RATINGS
-------------------------------------------------------- Chapter 1:2.4
A compliance examination generally results in two ratings: (1) a
compliance rating for an institution's overall compliance effort with
regard to various laws, other than CRA, covered by the compliance
examination and (2) a CRA rating for the institution's compliance
with CRA. Although the regulators may do a CRA examination
separately from a compliance examination, officials from all four
regulators said that they generally do them together. A compliance
rating is based on a numerical scale ranging from 1 for top rated
institutions to 5 for the lowest rated institutions. The CRA scale
is a four-part descriptive scale including "outstanding,"
"satisfactory," "needs to improve," and "substantial
noncompliance."\5
Although there have been fluctuations over time, approximately 90
percent of all institutions examined for CRA compliance have received
a "satisfactory" rating or better since July 1990 when, as a result
of amendments to CRA contained in FIRREA, ratings were made public,
and the rating scale was changed. Table 1.5 shows aggregate CRA
ratings and ratings for each regulator since July 1, 1990, when the
regulators began publicly disclosing CRA ratings.
Table 1.5
CRA Ratings for All Banks and Thrifts
Examined From July 1, 1990 Through
December 31, 1994
Regulators Rating Number Percentage Number Percentage Number Percentage Number Percentage Number Percentage
-------------- ---------------------- ------ ---------- ------ ----------- -------- ----------- -------- ----------- -------- ------------
FRB Outstanding 35 11 75 11 80 13 127 20 123 22
Satisfactory 239 78 544 80 493 78 491 75 430 76
Needs to improve 30 10 52 8 49 8 27 4 9 2
Substantial 4 1 5 1 7 1 6 1 3 1
noncompliance
=====================================================================================================================================================
Total 388 100 676 100 629 100 651 100 565 100
FDIC Outstanding 78 6 240 9 452 14 529 14 587 17
Satisfactory 1,093 83 2,286 83 2,668 81 2,939 81 2,638 77
Needs to improve 144 11 215 8 165 5 168 5 182 5
Substantial 6 0 27 1 15 0 14 0 7 0
noncompliance
=====================================================================================================================================================
Total 1,321 100 2,768 100 3,300 100 3,650 100 3,414 100
OCC Outstanding 13 13 95 11 89 11 193 15 192 20
Satisfactory 73 71 674 76 614 77 988 77 736 76
Needs to improve 15 15 112 13 93 12 99 8 37 4
Substantial 2 2 9 1 2 0 2 0 3 0
noncompliance
=====================================================================================================================================================
Total 103 100 890 100 798 100 1,282 100 968 100
OTS Outstanding 19 5 67 8 90 10 162 15 105 16
Satisfactory 255 72 594 74 667 74 827 76 515 77
Needs to improve 74 21 128 16 141 16 90 8 46 7
Substantial 8 2 18 2 5 0 3 0 1 0
noncompliance
=====================================================================================================================================================
Total 356 100 807 100 903 100 1,082 100 667 100
All Regulators Outstanding 145 7 477 9 711 13 1,011 15 1,007 18
Satisfactory 1,660 80 4,098 80 4,442 79 5,245 79 4,319 77
Needs to improve 263 13 507 10 448 8 384 6 274 5
Substantial 20 1 59 1 29 1 25 0 14 0
noncompliance
=====================================================================================================================================================
Total 2,088 100 5,141 100 5,630 100 6,665 100 5,614 100
-----------------------------------------------------------------------------------------------------------------------------------------------------
Note: Ratings for the year 1990 include only those given by the
regulators from July 1, 1990, the effective date of public disclosure
of CRA ratings, to the end of the year.
Source: FRB, FDIC, OCC, and OTS.
--------------------
\5 The regulators also rate institutions on the safety and soundness
of their operations on the basis of the results of a separate safety
and soundness examination.
THE APPLICATIONS PROCESS IS
THE PRIMARY CRA ENFORCEMENT
MECHANISM
-------------------------------------------------------- Chapter 1:2.5
Federal regulators are to take an institution's CRA record into
account when considering certain types of applications from
depository institutions, including most applications for mergers and
acquisitions among depository institutions. This requirement is
written directly into the CRA. Although CRA compliance is not to be
the only issue the regulators consider when reviewing applications,
it may play a major role.
Community groups and some members of Congress have described the
applications approval process as not being an effective enforcement
mechanism for CRA because the regulators do not always deny
applications on the basis of an applicant's poor CRA performance.
Table 1.6 shows the number of applications denied on the basis of
poor CRA performance since 1989.
Table 1.6
Applications and CRA-Related Denials by
the Regulators From 1989 Through 1994
Applicatio Denia Applicatio Denia Applicatio Denia Applicatio Denia
Year ns ls ns ls ns ls ns ls
---- ---------- ----- ---------- ----- ---------- ----- ---------- -----
1989 761 1 2,056 0 2,782 2 939 1
1990 696 0 2,099 0 3,049 2 893 0
1991 551 1 1,839 0 2,630 0 573 0
1992 619 1 1,891 0 2,610 4 837 0
1993 821 2 2,181 0 3,612 0 785 0
1994 826 0 2,883 3 4,368 0 1,010 0
--------------------------------------------------------------------------------
Source: FRB, FDIC, OCC, and OTS.
Although they have been criticized for denying few applications on
the basis of CRA performance, the regulators defend their records by
stating that they consider the denial of an application to be a last
resort. FRB and FDIC also approve applications with commitments. An
example might include increased lending efforts in targeted
neighborhoods. This provides the regulators with better enforcement
leverage by explicitly tying an application's approval to tangible
improvement of the applicant's CRA performance. However, regulatory
guidance states that commitments can only remedy specific problems in
an otherwise satisfactory CRA record and cannot be the basis for the
approval of an application. OCC and OTS do not typically approve
applications with commitments but instead prefer to conditionally
approve applications, if deemed appropriate. The conditions for such
approvals may be similar to commitments; however, the applicant
institution must meet the conditions before consummation of the
transaction for which it has applied. An example of a condition
might be to require an applicant with a "needs to improve" CRA rating
who is seeking to open a branch office to upgrade its rating to
"satisfactory" before opening the branch. Table 1.7 shows the number
of applications approved with commitments since 1989 by FRB and FDIC
and shows the number of applications approved with conditions by OCC
and OTS.
Table 1.7
Number of Applications Approved With
CRA-Related Commitments or Conditions
From 1989 Through 1994
Approved Approved
with with Approved Approved
commitment commitment with with
Year s s conditions conditions
---------------------- ---------- ---------- ---------- ----------
1989 5 0 15 2
1990 6 0 26 1
1991 7 0 18 1
1992 4 0 20 0
1993 9 0 18 0
1994 22 1 11 1
----------------------------------------------------------------------
Source: FRB, FDIC, OCC, and OTS.
The regulators also pointed out that institutions considering
expansion plans are aware of the role CRA plays in the approval
process. An institution contemplating expansion would likely make
sure that its CRA performance is at least satisfactory or reconsider
submitting an application. Most institutions would prefer avoiding
the adverse publicity and needless expense of filing an application
only to be denied. If an institution perceives that its application
for expansion is likely to be denied, it may choose to withdraw the
application rather than have it formally denied.
PROTESTS HAVE PLAYED A MAJOR
ROLE IN THE APPLICATIONS
PROCESS
-------------------------------------------------------- Chapter 1:2.6
In addition to potentially having an application denied, institutions
wishing to expand must consider another element of the application
process--the potential for a protest by community groups or other
members of the public. Many bankers have complained that community
groups have used protests of applications and the threat of adverse
publicity, delay, possible public hearings--and their attendant
costs--to force lending commitments from institutions attempting to
expand. Because regulators must consider protests in their approval
process, these groups have exercised a measure of leverage over
institutions wishing to expand and have added an element to the
process beyond the potential for an application denial. In some
cases, agreements have been reached between bankers and community
groups and then protests have been withdrawn and applications
approved. In other cases, the regulators have approved the
application after evaluating the protest and determining that it did
not warrant a denial.
Table 1.8 shows the number of applications from 1989 to 1994 that had
protests lodged against them and the number of protested applications
that were denied.
Table 1.8
Number of Applications With CRA-Related
Protests and Denials, From 1989 Through
1994
Ye
ar Protested Denied Protested Denied Protested Denied Protested Denied
-- ---------- ------ ---------- ------ ---------- ------ ---------- ------
19 16 1 7 0 8 0 10 1
89
19 27 0 7 0 6 0 7 0
90
19 24 1 4 0 5 0 3 0
91
19 28 0 0 0 9 1 7 0
92
19 58 1 16 0 14 0 3 0
93
19 55 0 13 0 28 0 5 0
94
----------------------------------------------------------------------------------
Source: FRB, FDIC, OCC, and OTS.
To minimize disruptions to the applications process caused by
protests, it is the regulators' policy to encourage and sometimes
facilitate meetings between institutions wishing to expand and
protestants to help them clarify their areas of dispute and perhaps
come to an understanding. They encourage the parties at odds to come
together before an application is submitted to the regulator for
approval. However, the regulators do not broker agreements between
the parties, nor do they monitor or enforce the implementation of
such private agreements.
THE PUBLIC HAS PLAYED A KEY
ROLE IN CRA ENFORCEMENT
-------------------------------------------------------- Chapter 1:2.7
The public has played a key role in enforcing CRA in both the
applications review process and the CRA examination process. This
role was strengthened by amendments to CRA enacted by FIRREA in 1989
and FDICIA in 1991. Applications filed by institutions for expansion
are a matter of public record, and the regulators invite public
comment when they are considering them. Filing an application has
the potential for inviting public comment and possibly protest. CRA
examination guidance encourages examiners to contact community groups
and other members of the public during examinations, and the
regulators are expected to encourage interested parties to submit
written comments on an institution's CRA performance, which are to be
included in the institution's public CRA file. The CRA file is also
to be reviewed by examiners during examinations.
When FIRREA made CRA ratings public and FDICIA required more detail
in CRA evaluations, members of the public were provided with more
information to use in deciding whether to protest an application or
patronize an institution. For example, some local governments have
established programs in which they have required the deposit of
public funds to be made with only institutions having satisfactory or
better CRA ratings. Public disclosure of CRA ratings has also made
the regulators more accountable by allowing interested members of the
public to see how the regulators were rating various institutions.
THE REGULATORS HAVE USED
OTHER ENFORCEMENT MECHANISMS
FOR CRA VIOLATIONS
-------------------------------------------------------- Chapter 1:2.8
Each of the regulators has taken enforcement actions, such as
supervisory agreements, memorandums of understanding, and cease and
desist orders, to address CRA violations. Few such actions have been
taken to date, and those taken have only been with the consent of the
affected institutions. Those institutions were advised in the
consent actions that in the event they did not comply, the regulators
could take more stringent enforcement actions. The regulators have
not taken any more stringent actions thus far. Moreover, in a
December 1994 opinion, the Department of Justice determined that the
regulators lack authority to use any enforcement mechanism for CRA
other than measures taken in the context of an application.
The extent to which the regulators have used enforcement actions for
CRA purposes is unclear because such actions generally include a
variety of issues needing institution management attention in
addition to CRA issues. FRB reported that 14 of the enforcement
actions that it issued in 1993 included provisions related to
technical CRA violations. OCC reported that 9 actions it issued
included CRA provisions while OTS reported that it issued 8 such
actions. FDIC does not currently track this information but said
that it issues enforcement actions that include provisions for CRA
violations.
PERSISTENT CONTROVERSY OVER CRA
LED TO REFORM EFFORT
---------------------------------------------------------- Chapter 1:3
CRA has remained one of the most controversial banking laws. From
its beginning, bankers have generally said they disliked the law,
suggesting that it leads to credit allocation and imposes an
unreasonable regulatory burden. Community groups, however, have
maintained that the law is critical but has not been effectively
enforced by the regulators and that institutions could do more to
provide credit to underserved communities. Meanwhile, there has been
a renewed call by some in Congress for more effective enforcement of
CRA and less regulatory burden on institutions.
EARLY DEBATE PRECEDED
PASSAGE OF CRA AND HAS
CONTINUED SINCE
-------------------------------------------------------- Chapter 1:3.1
In the mid-1970s, many Members of Congress said that too many
institutions accepted deposits from households and small businesses
in inner cities while directing a disproportionate amount of lending
and investment elsewhere. They said that given this disinvestment,
credit needs for urban areas in decline were not being met by the
private sector. Moreover, they said the problem was worsening
because public resources were becoming increasingly scarce.
In January 1977, the original Senate bill on community reinvestment
was introduced. Opponents of that bill voiced serious concerns that
the bill could result in credit allocation based on the volume of
deposits coming from certain areas, without regard for credit demand
or the merits of loan applications. They argued that the law would
therefore disrupt the normal flow of capital from areas of excess
supply to areas of strong demand and undermine the safety and
soundness of depository institutions.
Proponents of the bill stated that it was meant to ensure only that
bankers did not ignore good borrowing prospects in their communities
and that they treated credit worthy borrowers even-handedly. Senator
William Proxmire, the bill's sponsor, said that it would neither
force high-risk lending nor substitute the views of regulators for
those of bankers. He said that safety and soundness should remain
the overriding factor when regulators evaluate applications for
corporate expansion. Meeting the credit needs of the community was
to be only one of the criteria for the regulators to evaluate when
considering applications.
Since enactment of CRA, the debate has continued. Many bankers still
regard CRA as an unwelcome statute that limits their flexibility in
business decisions and mandates relatively low-profit lending that
could cause safety and soundness problems. Bankers complain that CRA
regulations are unclear and burdensome, reducing their
competitiveness with other lenders who are not subject to CRA. CRA
was among the major complaints by bankers in all major studies of
regulatory burden, including our report.\6
We found that bankers' complaints included CRA-based documentation,
reporting, and geocoding requirements as well as lack of recognition
of banks' different characteristics, examination emphasis on form
over substance, and a variety of other examination-related issues.
In addition, bankers argued that other financial intermediaries, such
as insurance and securities firms and credit unions, compete with
banks for funds and loans but are not subject to CRA. Bankers said
this results in a double standard that puts them at a competitive
disadvantage.
Many community groups, however, have complained that too many
institutions are receiving satisfactory CRA ratings without actually
lending to their communities. They complained that CRA examinations
are more concerned with an institution's CRA process, while ignoring
whether it has engaged in actual lending to its community. In
addition, they have complained that while over 90 percent of all
institutions receive at least satisfactory CRA ratings, there
continue to be large geographic areas that suffer from an inability
to obtain credit from these institutions. These groups have called
for an examination process that stresses actual lending performance
over process. They have also called for better public disclosure of
the information and the rationale used to assess institutions'
lending performance.
Although arguments for and against CRA and various aspects of its
implementation have often been presented as belonging to bankers or
community groups, it is important to note that there have also been
disagreements among members of these groups, further complicating
efforts to satisfy all sides of the controversy. The interests of
large and small institutions have at times diverged. For example,
bankers from small institutions have often been more concerned with
regulatory burden associated with documentation requirements of CRA
while bankers from larger institutions, which can more easily absorb
the expense of documentation requirements, have been more concerned
with the role application protests have played in delaying their
expansion plans. There have also been instances where some community
groups have defended particular institutions that were accused of
poor performance by the regulators or other community groups. Some
community groups have said they prefer to work with institutions to
reach agreements on community needs and how those needs should be
met, while others said they rely more on protests to get institutions
to make commitments to the community. There have also been
differences among regulators about how to properly implement CRA,
with some advocating stronger enforcement and others raising concerns
about credit allocation.
--------------------
\6 Regulatory Burden: Recent Studies, Industry Issues, and Agency
Initiatives (GAO/GGD-94-24, Dec. 13, 1993).
CRA REFORM BECAME A TOP
ADMINISTRATION PRIORITY
-------------------------------------------------------- Chapter 1:3.2
On July 15, 1993, the President announced his initiative to
facilitate low- and moderate-income community economic development.
In addition to other measures, the President called for a revision to
the current CRA regulation that would move CRA examinations toward a
performance-based system focusing on results rather than process and
paperwork--especially results in low- and moderate-income areas of
institutions' communities. He instructed the regulators to make
examinations more consistent, improve enforcement to provide more
effective sanctions, and reduce the cost and burden of compliance.
The four regulators jointly released their proposed revision to the
current CRA regulation for comment on December 21, 1993. The
proposal would have replaced the current qualitative CRA examination
system, including the 12 assessment factors, with a more quantitative
system based on actual performance as measured through the use of
three tests: the lending, service, and investment tests. A key
element of the December 1993 proposal was the "market share test,"
which would, as part of the lending test, compare an institution's
lending relative to other lenders in low- and moderate-income
neighborhoods, with its lending in other parts of its service
community. Collectively, the regulators received over 6,700 comment
letters on the December 1993 proposal from representatives of the
banking industry, community groups, Congress, and state and local
governments. Reaction to the proposal was mixed and generally
polarized based on the interests of the individual or organization
commenting. On January 26, 1994, we submitted our analysis of the
regulators' proposal in a letter\7 to the former Chairmen, House
Committee on Banking, Finance and Urban Affairs and the Subcommittee
on Consumer Credit and Insurance.
In response to comments received on their first proposal, the
regulators released a second proposed CRA regulation that was
published in the Federal Register on October 7, 1994. This proposal
reflected comments received on the December 1993 proposal and the
regulators' further internal considerations. While still striving
for a system that measured performance and not efforts or processes,
the new proposal made revisions to the first proposal that would
increase the role of examiner discretion in CRA examinations. For
example, the lending test would no longer be based on the market
share test. Collectively, the regulators received over 7,200 comment
letters on the October proposal.
In May 1995, FRB, OCC, OTS, and FDIC released the new revised CRA
regulations. The final regulations retained, to a significant
extent, the principles and structure of the December 1993 and October
1994 proposals but made changes to some details to respond to
concerns raised in the comment letters and further regulator
consideration.
The final revised regulation eliminates the previously discussed 12
assessment factors and substitutes a three-part, performance-based
evaluation system for institutions that do not qualify as small
institutions. The regulation defines small institutions as
independent retail institutions with total assets of less than $250
million and holding company affiliates with total assets of less than
$1 billion. The revised regulation includes a streamlined
examination for small banks and the option for all institutions to
have their CRA performance examined according to a regulator-approved
strategic plan.
To take into account community characteristics and needs, the revised
CRA regulation makes explicit the performance context against which
the tests and standards set out in the proposed regulation are to be
applied. This performance context includes consideration of six
factors concerning the unique characteristics of the institution
under examination and the market in which it operates.\8 To determine
a performance context, the regulators are to request any information
that the institution has developed on lending, investment, and
service opportunities in its assessment area(s). The regulators have
stated that they will not expect more information than what the
institution normally would develop to prepare a business plan or to
identify potential markets and customers, including low- and
moderate-income persons and geographies in its assessment area(s).
The regulators are to consider this information from the institution
along with information from community, government, civic, and other
sources to enable the examiner to gain a working knowledge of the
institution's community. The revised CRA regulation gives particular
attention to the institution's record of helping to meet credit needs
of low- and moderate-income communities and individuals based on
community characteristics and needs.
In general, the regulators are to rate an institution's performance
under each of the tests, but the lending test rating is to carry more
weight than the others. An institution must receive a rating of at
least "low satisfactory" on the lending test to receive an overall
CRA rating of satisfactory. However, ratings on the other two tests
are still to have considerable effect on the overall rating as well.
The major elements of the regulators' revised CRA regulations are
described as follows:
Lending test: The lending test is to entail a review of an
institution's lending record, including originations and purchases of
home mortgage, small business, small farm, and, at the institution's
option, consumer loans throughout the institution's service area,
including the low- and moderate-income areas; the proportion of the
institution's lending in its service area(s); the distribution of
loans to borrowers of various income levels; the number of loans to
small businesses and farms; and the like. If the regulators
determine that a substantial majority of an institution's business is
consumer lending, then they are to evaluate this lending as part of
the lending test whether or not the institution elects to provide
consumer lending data. The regulators are to consider loans to
individuals of all incomes wherever they reside. The number, amount,
and complexity of an institution's community development loans are
also to be included in the lending examination. The regulators are
to consider the lending of affiliates at the election of the
institution or if an institution appears to be attempting to
inappropriately influence a CRA examination by conducting activities
that would be unfavorably evaluated by an examiner in an affiliate.
Investment test: The investment test is to evaluate an institution's
investments in community development activities. In reviewing these
investments, the examiner is to take into account the amount,
innovativeness, or complexity of the investment as well as the degree
to which it responds to community credit and economic development
needs. Institutions with limited investment authority, such as
thrifts, are to receive a low-satisfactory rating under the
investment test, even if they have made few or no qualified
investments, as long as they have a strong lending record. A
donation, sale on favorable terms, or rent-free occupancy of a branch
(in whole or in part) in a predominantly minority neighborhood to any
minority- or women-owned depository institution, or a financial
institution with a primary mission of promoting community
development, is to be considered a qualifying investment.
Service test: The service test is to require the examiner to analyze
an institution's systems for delivering retail banking services and
the extent and innovativeness of its community development services.
The examiner is to review, in addition to the branching information,
information regarding alternative service delivery mechanisms such as
banking by telephone, mobile branches, loan production offices,
automated teller machines (ATM), etc., in low- and moderate-income
areas and for low- and moderate-income individuals. The evaluation
is to also consider the range of services, including noncredit
services, available to, and the degree to which those services are
tailored for, the various income level areas. The focus of the test,
however, is to be on the institution's current distribution of
full-service branches. Alternative systems for delivering retail
banking services, such as ATMs, are to be considered only to the
extent that they are effective alternatives in providing needed
services to low- and moderate-income areas and individuals.
Data collection, reporting, and disclosure: Data reporting
requirements on institutions are to be expanded by requiring that
originations and purchases of all small business and small farm loans
be collected and reported to the regulator. Each institution is
required to collect and maintain for each loan in a standardized,
machine readable format; the amount at origination, location, and an
indicator whether the loan was to a business with $1 million or less
in gross annual revenues. The location of the loan is to be
maintained by census tract or block numbering area. Each institution
is to report in machine-readable form annually, aggregated for each
census tract/block numbering area in which the institution made at
least one small business or small farm loan during the prior calendar
year, the number and amount of loans with original amounts of
$100,000 or less, more than $100,000 but less than or equal to
$250,000, or more than $250,000, and the number and amount of loans
to businesses and farms with gross annual revenues of $1 million or
less. The regulators, rather than the institutions, are to annually
prepare individual CRA disclosure statements for each reporting
institution and aggregate disclosure statements for each metropolitan
statistical area (MSA) and the non-MSA portion of each state. The
regulators are to make both the individual and the aggregate
disclosure statements available to the public at central
depositories. The aggregate disclosure statements will indicate, for
each geography, the number and amount of small business and small
farm loans originated or purchased by all reporting institutions,
except that the regulators may adjust the form of the disclosure if
necessary, because of special circumstances, to protect the privacy
of a borrower or the competitive position of an institution.
Institutions are also to include the disclosure statements in their
public files. In keeping with the lending test, data collection and
maintenance are optional for consumer loans, and there are no
reporting requirements.
Streamlined examination for small institutions:\9 Independent banks
and thrifts with assets below $250 million and institutions with
assets below $250 million that are subsidiaries of holding companies
with less than $1 billion in assets are to be evaluated under a
streamlined examination method unless an institution affirmatively
requests an alternative examination method. The streamlined method
is to focus on an institution's loan-to-deposit ratio, degree of
local lending, record of lending to borrowers and geographies of
different income levels, and record of responding to complaints. An
institution's fair lending record is also to be taken into account in
assigning a final rating. The regulators are to consider an
institution's size, financial condition, and credit needs of its
service area in evaluating whether its loan-to-deposit ratio is
reasonable. The regulators are to further consider, as appropriate,
other lending-related activities, such as originations for sale on
the secondary market and community development lending and
investment.
Strategic plan option: Every institution is to have the alternative
of submitting a strategic plan to its supervisory agency for approval
that was developed with community input detailing how the institution
proposes to meet its CRA obligation. The strategic plan option is
not to relieve an institution from any reporting obligations that it
otherwise has. However, small institutions do not subject themselves
to any data reporting responsibilities by electing the strategic plan
option.
Community development test for wholesale or limited purpose
institutions: The regulation is to replace the investment test with
a community development test for wholesale or limited purpose
institutions. The regulation incorporates into this community
development test both community development lending and community
development services in addition to qualified investments.
Therefore, under the regulation, wholesale or limited purpose
institutions are to be subject only to the community development
test. Wholesale or limited purpose institutions must be designated
as such by the regulators.
Institutions are to continue maintaining a public file that contains
(1) all written comments received from the public during the previous
3 years that comment on the institution's CRA performance; (2) a copy
of the public portion of the institution's most recent CRA
examination; (3) a list of the institution's branches, their street
addresses, and geographic areas to be served; (4) a list of branches
opened or closed by the institution during the previous 3 years,
their addresses, and geographic areas to be served; (5) a list of
services generally offered at the institution's branches and
descriptions of material differences in the availability or cost of
services at particular branches; (6) a map of each assessment area
showing the boundaries of the area and identifying the geographic
areas to be served within the area; (7) and any other information the
bank chooses. In addition, large banks are also to include in their
public file (1) any consumer loan data that the institution wishes to
have considered as part of its CRA examination; (2) the institution's
CRA disclosure statement that it receives from its regulator; and (3)
relevant HMDA disclosure statements for the previous 2 years. Small
banks are to include their loan-to-deposit ratio for each quarter of
the previous year and any additional information that they see fit,
including the information required for large institutions if they
elect to be evaluated under the lending, investment, and service
tests. Institutions that elect to be evaluated under the strategic
plan are to include the plan in the public file. An institution that
received a less than satisfactory rating during its most recent
examination is to include a description of its efforts to improve its
performance.
The revised CRA regulations are to amend the current CRA regulations
over time, eventually replacing the existing regulations in their
entirety by July 1, 1997. However, various elements of the new
regulations are to be phased in sooner, some as early as January 1,
1996. Until that time, the regulators will continue to follow the
current CRA regulations to examine institutions for CRA compliance.
--------------------
\7 Community Reinvestment Act (GAO/GGD-94-79R, Jan. 26, 1994).
\8 The six factors to be considered are information or data about (1)
the economic and demographic characteristics of the assessment areas;
(2) lending, investment, and service opportunities in the assessment
areas; (3) the institution's product offerings and business strategy;
(4) the institution's capacity and constraints; (5) the prior
performance of the institution and, in appropriate circumstances, the
performance of similarly situated institutions; and (6) information
contained in the institution's public CRA file, including written
public comments.
\9 According to FRB, the streamlined examination for small
institutions will cover approximately 81 percent of total banks in
the United States, however, it will cover less than 14 percent of
total bank assets.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:4
The objective of this report is to address four questions regarding
the federal regulators' implementation of CRA: (1) What were the
major problems in implementing CRA, as identified by the affected
parties--bankers, regulators, and community groups? (2) To what
extent do the regulatory reforms address these problems? (3) What
challenges do the regulators face in ensuring the success of the
reforms and what, if any, actions would help the regulators in facing
these challenges? and (4) What initiatives have been taken or
proposed to help bankers overcome community lending barriers and
enhance lending opportunities, particularly in low- and
moderate-income areas?
We interviewed regulatory officials responsible for bank or thrift
examinations to understand and identify the major problems with the
current regulatory system used in implementing CRA and to understand
the context in which the regulators examine and enforce the law. In
addition, we reviewed the legislative history of the CRA to discern
its original intent and to see how amendments have changed the law
over time. We also collected data from each of the regulators
relevant to various aspects of their CRA enforcement. In addition to
regulatory officials, we judgmentally selected and interviewed other
parties who were located in the areas where we did our work and who
are concerned with or active in CRA compliance issues, including
bankers, community groups, trade groups, consultants, representatives
of the secondary markets, and officials from other federal agencies,
including Justice. We also collected data from each of these groups
and from Justice regarding CRA examinations and enforcement. In
addition to our interviews, we reviewed testimonies and speeches by
representatives of the groups described above from a large number of
congressional hearings and other forums that have taken place since
enactment of CRA. Statements in this report representing the views
of the affected parties reflect all of the sources described above.
To identify the major problems in implementing CRA, determine to what
extent the regulatory reforms would address these problems, and
identify challenges the regulators would face in ensuring the success
of the reforms, we reviewed in detail compliance examinations at 40
banks and thrifts located in 4 regions, including the Northeast,
Midwest, West, and South Central parts of the United States. At each
of the 40 institutions, to the extent possible, we completed a case
study using standardized data collection instruments to gather the
impressions and experiences of the bankers and examiners.
For our case studies, we judgmentally selected institutions that
included a variety of asset sizes; business types; and a mix of
rural, suburban, and urban institutions. We selected institutions
regulated by each of the four regulators and attempted to select
institutions with a variety of good and bad CRA ratings. However, we
found that institutions that received low CRA ratings from their last
compliance examination were less willing to participate in the case
studies than those that had fared better. While 11 of the
institutions had received a "needs to improve" rating on their last
CRA examination, none had received a "substantial noncompliance." The
institutions we studied included 10 from each of the four regions; 6
were examined by FRB, 13 by FDIC, 9 by OCC, and 12 by OTS. Nine of
the institutions had assets over $1 billion, 13 had assets of less
than $1 billion but more than $100 million, and 18 had assets of $100
million or less.
We also talked to community groups known to be active in each region
about their involvement in CRA compliance. In this way, we could
identify the positive and negative aspects of the current examination
system and verify some of the anecdotal complaints surrounding it.
In addition, the case studies afforded us the opportunity to discuss
other related issues, such as CRA reform, with a large number of
individuals who worked with CRA compliance on a regular basis.
To determine the extent to which the regulators' reform proposals
would address the problems we identified from work previously
described and to identify the challenges the regulators would face in
ensuring the success of the reforms, we evaluated a number of
proposals for CRA reform that were put forward from several sources,
including the proposals released by the regulators on December 21,
1993, and October 7, 1994, and the final revised CRA regulation,
released in May 1995. In addition, we reviewed letters submitted by
bankers, community groups, and other concerned parties commenting on
the regulators' proposals. We discussed numerous suggestions for
improving the CRA examination and enforcement process with
participants in our case studies. We also reviewed the transcripts
from hearings held by the regulators around the country during their
development of the revised CRA regulation.
To identify the initiatives that had been taken to overcome lending
barriers and enhance community lending opportunities, (1) we
judgmentally selected, on the basis of availability, and interviewed
over 20 community group representatives; (2) held a roundtable
discussion involving representatives from the Association of
Community Organizations for Reform Now, the Center for Community
Change, and the Consumer Federation of America; and (3) attended
several workshops and conferences sponsored by a variety of industry
and community groups, in addition to the regulators covering CRA
compliance. We also identified the activities of the regulators'
consumer affairs programs and reviewed a large volume of material
generated by banks, community groups, and the regulators on their
activities to promote community lending.
We conducted work on our case studies in Chicago, San Francisco,
Boston, and Dallas, from July 1993 to March 1994 and our work in
Washington D.C. continued through June 1995 in accordance with
generally accepted government auditing standards.
We obtained written comments on a draft of the report from FDIC, the
Federal Reserve, OCC, and OTS. A discussion of these comments and
our responses appears at the end of chapters 3 and 4. In addition,
the agencies' comments and our additional responses are printed in
appendixes I through IV.
REVISED CRA REGULATIONS ADDRESS
SOME, BUT NOT ALL, PROBLEMS AND
CONCERNS
============================================================ Chapter 2
All of the affected parties that we spoke with--bankers, community
groups, and regulators--agreed on many of the problems with the
implementation of the Community Reinvestment Act (CRA). However, the
reasons they gave for why they believed the problems adversely
affected their interests--which form the basis of their concerns--and
the often contradictory solutions they offered to address the
problems showed that the affected parties differed considerably on
how best to revise CRA. The revised CRA regulation, if effectively
implemented, should focus examinations on results, thereby
eliminating a major problem that all parties identified--an
overreliance in the regulators' examinations upon an institution's
documentation of efforts and processes used to ascertain and meet
community needs. However, the revised regulations neither fully
address all identified problems nor wholly satisfy the often
conflicting concerns or contradictory solutions of bankers and
community groups. The success of the reform efforts will depend
largely upon how effectively the revised regulations are implemented.
The first section of this chapter discusses the similarities and
differences among the groups on the problems they identified as well
as their concerns with and solutions to the problems. The second
section presents our analysis of the extent to which the revised
regulations should address those problems and concerns.
AFFECTED PARTIES AGREE ON MAJOR
PROBLEMS, BUT CONCERNS AND
SOLUTIONS DIFFER
---------------------------------------------------------- Chapter 2:1
Bankers, community groups, and the regulators generally agreed in
interviews and in public testimonies on what they considered to be
major problems with the examination and enforcement of CRA. These
problems included
too little reliance on lending results and too much reliance on
documentation of efforts and processes, leading to an excessive
paperwork burden;
inconsistent CRA examinations by regulators resulting in
uncertainty about how CRA performance is to be rated;
examinations based on inadequate information that may not reflect a
complete and accurate measure of institutions' performance; and
dissatisfaction with regulatory enforcement of the act, which
largely relies on protests of expansion plans to ensure
institutions are responsive to community credit needs.
While the affected parties generally agreed on these four problems,
their underlying concerns differed significantly and the solutions
they offered were often contradictory or incompatible. Generally,
bankers' concerns about the problems focused on the regulatory burden
of compliance, and they sought to reduce that burden. For example,
they sought to increase certainty about examination ratings through
use of preapproved strategic plans and guarantees ("safe harbors")
that satisfactory and outstanding ratings would protect from CRA
protests institutions' applications to move or expand operations. In
contrast, community groups were generally concerned about the lack of
accountability on the part of institutions to ensure that they meet
their community lending obligations. These groups also sought
measures to increase regulators' accountability through more public
disclosure of institutions' CRA performance and tougher enforcement.
The differences in the concerns and solutions reflected bankers' and
community groups' different perspectives and constituencies and
broader philosophical differences, as discussed in chapter 1.
EXAMINATIONS' PERCEIVED
OVERRELIANCE ON
INSTITUTIONS' DOCUMENTATION
OF EFFORTS AND PROCESSES
-------------------------------------------------------- Chapter 2:1.1
Bankers, community groups, and the regulators we contacted generally
agreed that a major problem with CRA examinations was that examiners
relied too heavily during examinations upon an institution's
paperwork. This paperwork was to document the institution's efforts
and processes to ascertain and help meet community credit and service
needs. All parties also generally agreed that the examination should
be based on the results of those efforts and processes, with emphasis
on the institution's community lending performance. The parties
agreed that a single community lending standard or formula for
evaluating those results was unworkable because of the importance of
considering such factors as an institution's business strategy, its
financial condition, and the specific needs in different areas of the
community that the institution served.
Despite these areas of agreement, bankers and community groups had
different underlying concerns and offered different solutions.
Bankers were most concerned that the focus on their CRA efforts and
processes caused them to produce many documents that served no
purpose within the institution other than to satisfy the information
needs of examiners conducting CRA examinations. They advocated that
the CRA reform should eliminate this burden by focusing examinations
on performance or results.
However, community group representatives were most concerned that the
focus on documentation of efforts and processes had failed to hold
institutions accountable for their actual lending and service in
communities. They too favored a focus on results with examiners
evaluating data on actual lending and services that institutions
provided to their communities. In fact, they proposed that community
groups be given access to the data evaluated by examiners and be
permitted to provide input on an institution's performance.
Regulators supported a performance- or results-based evaluation
system to reduce institutions' documentation burden and improve CRA
compliance. They also suggested that a performance-based system
would promote improved consistency in examinations.
INCONSISTENT CRA
EXAMINATIONS
-------------------------------------------------------- Chapter 2:1.2
Bankers, community groups, and regulators all identified
inconsistency in performance examinations as a problem with the
implementation of the act. It was apparent from our case studies
that inconsistency was due in part to examiners using their
discretion and focusing on or emphasizing different aspects of the
CRA regulations. This inconsistency resulted in uncertainty among
the affected parties about how institutions' performance would be
evaluated during examinations. Although the affected parties'
underlying concerns and solutions tended to differ, the solutions
were all designed in one way or another to reduce, or more clearly
direct, examiner discretion to provide greater consistency to the
examination process.
Generally, bankers were concerned about inconsistency in performance
examinations because this led to confusion and uncertainty about what
actions were necessary to attain a positive rating. As a result of
the uncertainty, many bankers believed that institutions were
producing unneeded documentation of their efforts. Some bankers
sought to reduce this uncertainty through more specific instructions
or lending targets from the regulators, thereby getting more
definition to what actions count as CRA activities.
Community groups generally recognized inconsistency as a problem that
represented a failure of the regulators to hold institutions
accountable for adequately serving all areas of their delineated
communities. Some groups said they felt that examiners do little to
determine whether institutions are meeting community needs. Many
group representatives advocated more emphasis on performance
standards as well as increased disclosure of information about
institutions' community reinvestment results.
Regulators also recognized that inconsistency in examinations was a
problem. Many of the examiners we interviewed said that they thought
inconsistency resulted from the subjectivity inherent in examinations
due to vague standards, unclear guidance, and frequent changes in the
focus of examinations. The examiners' latitude in interpreting
standards, such as "the institution's ability to meet various
community credit needs based on its financial condition and size,
legal impediments, local economic conditions and other factors,"
resulted in examiners focusing on different parts of the guidance.
In addition, since 1989, changes to the guidance for CRA examinations
occurred more frequently than before and shifted emphasis from
institutions' programs for managing CRA as part of day-to-day
activities to the results of their CRA programs. We further discuss
the role of examiner discretion in chapter 3.
Another factor cited by the affected parties was insufficient
experience and training of examiners conducting CRA examinations.
Some community groups pointed out the need to improve the capacity of
the regulators for analyzing data in the context of community credit
needs and institutions' efforts to satisfy those needs. As discussed
in more detail in chapter 3, many examiners sought clearer guidance
and better training as a solution to their concern about
inconsistency in examinations.
EXAMINATIONS BASED ON
INFORMATION THAT MAY NOT
REFLECT A COMPLETE AND
ACCURATE MEASURE OF
INSTITUTIONS' PERFORMANCE
-------------------------------------------------------- Chapter 2:1.3
Bankers, community groups, and the regulators have identified
numerous concerns related to whether CRA examinations are based on
information that reflects a complete and accurate measure of
institutions' performance. Disagreements persist among the affected
parties as to what information should be collected and reported by
institutions and what information should be disclosed publicly.
Bankers generally view most data collection and reporting as
burdensome and its disclosure a potential violation of the
proprietary nature of their business. Community groups, however,
generally believe that information transparency--which includes both
obtaining the data and understanding how the examiners move from
applying performance data and other information against the standards
to arrive at the CRA rating--is key to ensuring accountability and
measuring CRA compliance.
Bankers complain that they are forced by the regulators to generate
data that (1) may not fully reflect their business activities, (2)
would not be produced without the regulatory requirement, and (3)
should be kept confidential. For example, some bankers were
concerned that data collected under the Home Mortgage Disclosure Act
(HMDA) may be misleading without an explanation, as in cases where
high loan rejection rates may result from aggressive marketing
efforts by institutions seeking low-income applicants. Many bankers
opposed existing and new reporting requirements as being burdensome.
They were particularly concerned about frequent changes in reporting
requirements that require costly changes to their data collection
systems. In addition, bankers expressed concern about publicly
disclosing information that they believe reveals too much about their
business practices and should be kept confidential.
Community groups told us that public availability of data is of great
value and that the transparency of institutions' lending performance
is what would make it useful. Community groups strongly opposed any
reduction in reporting requirements and advocated the collection,
reporting, and public disclosure of additional data to better
evaluate institutions' performance. These groups said they believe
that it is essential that they have access to the data used by CRA
examiners in determining regulatory ratings so that they can evaluate
both the institution's and the regulator's performance.
Examiners in our case studies said they generally believed that data
are necessary for them to examine institutions' compliance with CRA.
However, they said that data collected are useful only if they are
accurate and appropriately reflect the relevant activities of the
institution being examined. Some examiners we interviewed said HMDA
data are sometimes limited in their usefulness for a number of
reasons, including poor data quality and inconsistent reporting by
institutions. They also said that examiners may lack the time or
training to perform HMDA analyses. Finally, they said that other
information, involving the credit worthiness of the borrower or
property, had to be used in conjunction with HMDA data because the
data may not accurately or completely portray an institution's
lending activity, particularly for institutions that are not heavily
involved in home mortgage lending.
DISSATISFACTION WITH
REGULATORY ENFORCEMENT OF
CRA
-------------------------------------------------------- Chapter 2:1.4
Both bankers and community groups identified regulatory enforcement
of CRA as a problem, but members of the two groups generally had
different concerns. Most bankers commented that there is no
protection against application protests for institutions that
regulators have determined are in compliance with CRA and that
positive incentives are not in place to promote compliance with CRA.
For example, bankers complained that community groups have used
protests to needlessly delay the approval of applications. They
noted that a satisfactory or outstanding CRA rating means nothing
when a community group mounts a protest against expansion plans.
Bankers charged that these groups use protests to further their own
agendas regardless of an institution's lending record. Many bankers
advocate safe harbors that would protect institutions from protests
if the regulators have determined, through the examination process,
that their CRA compliance is outstanding. Another type of safe
harbor would reward good CRA performance with less frequent CRA
examinations. In practice, the regulators currently have policies
that consider an institution's CRA rating in determining the
frequency of examinations, with lower-rated institutions to be
examined more frequently.
In addition, bankers have contended that there should be positive
incentives in place to encourage CRA compliance in addition to what
they see as exclusively negative sanctions to punish noncompliance.
Some bankers have proposed that CRA be replaced by or supplemented
with direct financial subsidies to those willing to extend credit to
low- and moderate-income areas.
Community groups, however, identified as a problem the fact that
regulatory enforcement of CRA was limited to the denial of
applications by a depository institution for expansion (including
applications for a merger or acquisition) or negative publicity from
a low CRA rating. They pointed out that institutions with no plans
for expansion and no fear of adverse publicity from a low CRA rating
may not feel the need to commit significant resources to CRA
compliance. To strengthen enforcement of the act, community groups
have advocated regulator use of more stringent enforcement actions,
such as cease-and-desist orders and civil money penalties. Although
some cease-and-desist orders and formal agreements between regulators
and institutions have included CRA performance as one of many issues,
no such actions have been taken solely to address noncompliance with
the act or poor CRA performance.
The regulators have recognized the general dissatisfaction with CRA
enforcement by bankers and community groups as well as by some
Members of Congress.
REVISED CRA REGULATIONS FOCUS
EXAMINATIONS ON RESULTS BUT MAY
NOT FULLY ADDRESS OTHER
PROBLEMS
---------------------------------------------------------- Chapter 2:2
From our review of the reform proposals and the revised CRA
regulations, it appears that the regulators have thoroughly assessed
the problems related to CRA examinations and the revised regulations
attempt to address the problems and concerns raised to us by the
affected parties. However, the revised regulations will not wholly
satisfy the often contradictory concerns of bankers and community
groups. Bankers and community groups continue to have fundamentally
different expectations about institutions' CRA obligations.
If effectively implemented, we believe the revised regulations will
significantly reduce the first problem of overreliance on
documentation of community reinvestment efforts and processes by
focusing the examination standards on results. However, the
regulators success in addressing the second problem of examination
inconsistency and uncertainty will depend upon implementation,
especially how effectively examiners use their discretion. This, in
turn, will depend on the effectiveness of the guidance and training
examiners are provided. In response to the third problem of data
usefulness, the final regulations have clarified the information to
be used to evaluate performance, but the affected parties disagree
about whether the data to be collected under the revised regulations
will appropriately reflect lending results or be too burdensome. The
reform proposals related to the fourth problem of CRA enforcement
were dropped by the regulators (1) because of Justice's opinion
stating that the regulators do not have authority to take stronger
enforcement action for CRA and (2) because of community groups'
concerns that safe harbors would preclude them from protesting
applications of those institutions they determine to be poor
performers. Consequently, the revised regulations do not resolve the
affected parties' divergent concerns with CRA enforcement.
REVISED REGULATIONS FOCUS
EXAMINATIONS ON RESULTS,
THEREBY REDUCING
INSTITUTIONS' DOCUMENTATION
BURDEN
-------------------------------------------------------- Chapter 2:2.1
The revised regulations address the problem of overreliance on
documentation of efforts and processes by shifting the focus of
examination standards to an institution's community reinvestment
results. Under the revised regulations, an examiner is to analyze an
institution's community reinvestment results in three performance
areas--lending, investment, and services. Although all the affected
parties generally agreed with the shift to results-based
examinations, the revised regulations may not address community
groups' desire to hold institutions more accountable for the results
of their community lending activities. The regulators initially
proposed, and later dropped, the use of more quantifiable performance
measures in the first CRA proposal as part of the "market share test"
described in chapter 1. While community groups generally supported
this test, many bankers were concerned that it would not accurately
reflect their lending performance and could lead to unsafe and
unsound lending. Disagreements continue between the affected parties
about the use of quantifiable measures to examine CRA performance,
but they generally agreed that some flexibility is needed in CRA
examinations. In developing the revised regulations, the regulators
attempted to balance the need for objective standards with the need
for flexibility in examining different types of institutions
operating under differing financial conditions and serving widely
different types of communities.
REVISED REGULATIONS MAY NOT
FULLY ADDRESS THE PROBLEM OF
INCONSISTENT EXAMINATIONS
-------------------------------------------------------- Chapter 2:2.2
We believe that the success of the revised regulations in addressing
the problem of inconsistent examinations will depend upon how
effectively the examiners exercise their discretion when implementing
the new regulations. This problem has been, and may continue to be,
difficult for examiners to overcome because examinations involve
subjective, case-by-case judgments about an institution's
performance. For example, examiners will still be required to judge
the "innovativeness" of loans and investments and differentiate
between "excellent" and "good" responsiveness to credit needs.
The regulators recognized the need to improve examination consistency
in the revised regulations and indicated that they intend to improve
guidance and training for examiners before implementing the new
regulations. While it is too soon to evaluate their progress in
these areas, we agree that clear guidance and comprehensive training
in community development techniques are critical for consistency in
examinations. Chapter 3 further discusses the issues that need to be
addressed to ensure successful implementation of the revised
regulations.
The revised regulations also include an option that responds to
bankers' concerns that inconsistency in examinations contributes to
uncertainty about what is needed to ensure a positive rating.
Institutions may submit to regulators a strategic plan for community
reinvestment that sets standards of performance. Although
institutions could experience some uncertainty when the plan is
submitted to the regulator for approval, this option may help
alleviate uncertainty at the time of an examination. This "strategic
plan" option includes a requirement that institutions make public
their plans for comment prior to the plans being approved by the
regulators. For this reason, this option has not been favorably
received by all institutions. Many bankers have raised concerns that
making the plan public may have anticompetitive effects, since they
would have to disclose their strategic business objectives and goals.
However, banks would not have to publicly disclose proprietary
information.
REVISED REGULATIONS HEIGHTEN
THE NEED FOR A COMPLETE AND
ACCURATE MEASURE OF BANK
PERFORMANCE
-------------------------------------------------------- Chapter 2:2.3
To fulfill their examination responsibilities, the regulators have
explained that assessing performance against results-oriented CRA
examination standards will require complete and accurate measures of
performance in the areas of lending, investment, and service to
delineated communities. The issue of what data should be collected
and reported to the regulators and disclosed publicly has been among
the most controversial issues surrounding the CRA reform efforts.
The regulators have tried to balance the contradictory calls by
bankers to reduce regulatory burden with the community groups' call
for additional data reporting and public disclosure to increase
institutions' accountability.
The regulators' attempt to strike a balance in the revised
regulations among the competing points of view has led to (1)
exempting small institutions from additional data reporting
requirements, (2) increasing data collection and reporting
requirements for large institutions, and (3) shifting data analysis
responsibilities to the examiners. The regulators also increased
public disclosure of aggregate loan information for small business,
small farm, or community development lending but not information on
individual loans. In addition, the revised regulations permit
voluntary collection and disclosure of consumer loans, although
reporting is not required. The revised regulations will not
completely satisfy all parties, some of whom continue to disagree
about whether the data collection requirements are appropriate or
burdensome.
Although the revised regulations address the issues of what
information will be collected to examine CRA performance under the
new standards and what information must be disclosed, they do not
address the other information problems identified in our case studies
related to data inaccuracies and the need for clearer explanations of
how performance ratings are determined. To fully respond to the
problems raised by the affected parties, these remaining issues will
need to be addressed as the regulators implement the new regulations.
Chapter 3 discusses the actions that the regulators have taken thus
far to improve data reliability, specifically related to HMDA data
accuracy.
REFORMS INCLUDED MEASURES TO
ADDRESS REGULATORY
ENFORCEMENT, BUT WERE
DROPPED FROM THE REVISED
REGULATION
-------------------------------------------------------- Chapter 2:2.4
The proposed reforms included measures to address concerns of both
bankers and community groups regarding CRA enforcement. However,
those measures are not included in the revised regulation. Both the
December 1993 and the October 1994 reform proposals would have
addressed the community groups' call for stricter enforcement by
clarifying institutions' CRA obligations and providing that a bank
that receives a rating of "substantial non-compliance" would be
subject to enforcement actions authorized by the Federal Deposit
Insurance Act.\10 However, Justice opined in December 1994 that CRA
did not provide the regulators with the legal authority to use such
enforcement actions to enforce CRA.
The regulators also tried to address the bankers' interest in
positive incentives or protection against protests in the application
process in their December 1993 proposal. The regulators attempted to
clarify how various CRA ratings would affect decisions on
applications filed by institutions for expansion or relocation of
their deposit facilities. In particular, absent other information
regarding CRA performance, the proposal stated that
an "outstanding" rating would be given extra weight in reviewing
applications;
a "satisfactory" rating would generally be consistent with approval
of the application;
a "needs to improve" rating would generally be an adverse factor
and, absent demonstrated improvement in the institution's CRA
performance or other countervailing factors, would result in
denial or conditional approval of the application; and
a "substantial noncompliance" rating generally would be so adverse
as to result in denial of the application.
However, community group comments submitted to the regulators on this
measure strongly protested that it constituted a safe harbor, and it
was dropped in the October 1994 proposal. Because the regulators'
proposed measures to resolve the enforcement concerns of both bankers
and community groups have been unsuccessful, these concerns will
likely continue.
--------------------
\10 Section 8 of the Federal Deposit Insurance Act provides
enforcement mechanisms to the regulators for violations of banking
law. Among the mechanisms are cease and desist orders and civil
money penalties.
CONCLUSIONS
---------------------------------------------------------- Chapter 2:3
Although the regulators have attempted to address the major problems
with the implementation of CRA identified by the affected parties,
the revised regulations will not satisfy all of the sometimes
conflicting concerns of these parties. For example, the revised
regulations do not require the level of data reporting or disclosure
that has been called for by community groups, nor do they provide for
more stringent enforcement actions for CRA. Although many community
groups see the revised CRA regulations as an improvement over the
current system, many also believe that they do not go far enough in
compelling institutions to fulfill their community lending
obligations. Some concerns of bankers also will likely continue.
Although the burden associated with documenting efforts and processes
is to be eliminated, many bankers consider additional data reporting
requirements to be burdensome.
In addition, the regulators' success in addressing the problem of
examination inconsistency will depend upon how effectively they
implement the revised regulations. The regulators have recognized
the need to improve examination consistency and plan to improve
guidance and training for examiners as they implement the new
regulations. The regulators also attempted to strengthen enforcement
and introduce a level of certainty into the enforcement process, by
clarifying how CRA ratings would be considered in application
decisions and for enforcement actions, but the effort was
unsuccessful.
THE REGULATORS FACE MAJOR
CHALLENGES IN IMPLEMENTING CRA
REGULATORY REFORMS
============================================================ Chapter 3
The regulators face significant challenges in successfully
implementing the revised Community Reinvestment Act (CRA) regulatory
reforms, many of which they have had difficulty addressing in the
past. From our case studies, we identified several areas that are
key to implementing the revised CRA regulations. To minimize the
problems of uncertainty and inconsistency associated with CRA
assessments, the regulators will need to (1) provide clear guidance
and comprehensive examiner training that address how examiners should
conduct performance-based assessments, (2) ensure that data used to
assess performance is accurate by increasing the priority and
consistency of actions taken to ensure data accuracy, and (3) improve
disclosure in public evaluation reports on how examiners determined
institutions' performance ratings. In addition, the regulators
acknowledge that the revised regulations will increase examiner
responsibilities and may thereby require additional examination
techniques and resources.
REGULATORS HAVE PREVIOUSLY
TRIED TO REDUCE UNCERTAINTY AND
INCONSISTENCY
---------------------------------------------------------- Chapter 3:1
The regulators have previously tried to address the challenges of
achieving greater certainty and consistency in compliance
examinations. Some of the difficulties that have hindered past
efforts will likely continue to challenge the regulators as they
implement the regulatory reforms. These difficulties have included
the subjectivity inherent in examiners' interpretation of vague CRA
standards, frequent shifts in the regulatory focus of examinations,
and differences in the levels of examiners' CRA compliance evaluation
experience and training. In addition, inadequate information and
disclosure about institutions' CRA performance and the basis for
their ratings have contributed to concerns about examination
consistency.
Although the revised CRA regulations are more objective and
performance-based, examiners will have to continue to exercise
discretion in interpreting the CRA standards. Differences in levels
of examiner experience will also continue because of the recent
hiring of additional CRA examiners by some regulators over the past 2
years. Training will be particularly important during
implementation, as all CRA examiners will need comprehensive training
in new examination standards and procedures that regulators will be
issuing. Moreover, accurate and accessible data will continue to be
critical for effective results-based assessments. Finally,
examination consistency will be judged by the public through the
information on institutions' performance provided in the evaluation
reports. The success of the CRA regulatory reforms will ultimately
depend on how effectively these issues are addressed by regulators in
implementing the revised regulations.
EXAMINATION GUIDANCE AND
TRAINING COULD ADDRESS
CAUSES OF INCONSISTENCY
-------------------------------------------------------- Chapter 3:1.1
The regulators stated in the revised regulations that they intend to
ensure consistency in assessments by providing more guidance in
minimizing unnecessary subjectivity, improving examiner training, and
increasing interagency coordination. These goals are consistent with
the suggestions made by bankers and examiners in our case studies and
in public comments to the proposed regulations before they were
finalized. However, we also found that the regulators' previous
attempts to ensure consistency by revising their examination guidance
and training programs have not achieved consistent implementation.
We found from our case studies that inconsistency resulted in part
from examiners having had considerable discretion and assessing
institutions differently because they focused on different parts of
the examination guidance. These differences were particularly
evident in examiners' assessment of factors that involved the most
discretion, such as the factors relating to ascertainment of
community credit needs and development of marketing and advertising
programs. To illustrate, one of the more problematic factors has
been judging the reasonableness of institutions' delineation of their
service communities. Some bankers have been confused about how they
should define their service community because they received
conflicting direction from examiners. One banker said that he was
told by one examiner not to include loan production offices in the
bank's delineated community, but the next examiner told him that the
offices should be included. Other bankers were asked by examiners to
change the size of their delineated communities and were confused
about whether the service area delineation should be based on
definitive geographic boundaries, location of deposit facilities, or
where the preponderance of loans were located. Under the revised
regulations, examiners will spend less time assessing the
reasonableness of an institution's delineated service community.
However, examiners will continue to use discretion in determining
whether an institution arbitrarily excludes areas, particularly low-
and moderate-income areas.
Both bankers and examiners have cited frequent changes in the focus
of examinations as a reason for inconsistency. From the time CRA was
enacted in 1977 to 1989, there were not many changes in the way CRA
was implemented by the regulators. However, during the period 1989
through 1992, the regulators issued several policy statements with
new guidance regarding CRA examinations.
Among other things, a March 1989 statement focused examinations on
the processes and efforts needed by institutions for a
well-managed CRA program.
Guidelines issued in May 1990 focused on implementation of
requirements for public disclosure of CRA ratings, written
examiner evaluations of institutions' CRA performance, and
examiner use of a new four-tiered descriptive rating system
mandated by the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA).
A December 1991 policy statement established the need for
institutions to analyze the geographic distribution of their
lending patterns as a part of their CRA planning process.
In March 1992, in an effort to achieve consistency in CRA
evaluations, the regulators provided guidance on the inclusion
of numerical data in public CRA evaluations, consistent with the
Federal Deposit Insurance Corporation Improvement Act (FDICIA).
Additional guidance provided in June 1992 shifted the focus of CRA
examinations to performance or results, rather than the
documentation of efforts. Despite the emphasis on performance
over efforts, however, the same 12 assessment factors, which
were largely process-oriented mixed with some lending measures,
continued to be used as tools for measuring performance.
Although the recent regulatory reforms will once again change the
focus of examinations, the comprehensiveness of the reform's detailed
review of the problems in CRA examinations and the overall agreement
to focus on performance should help to improve consistency and reduce
the need for major changes in the near future.
Another frequently cited reason for inconsistency in CRA examinations
has been insufficient examiner experience and training. Some
community groups commented that there is not a sufficient level of
expertise within the regulatory community about what constitutes an
analysis of a community's credit needs, what constitutes a loan
program that would actually meet credit needs, how time-consuming an
analysis would be, and what is adequate performance. Some bankers
also commented that examiners need to understand how credit needs can
vary based on the characteristics of a specific community,
particularly between urban and rural communities, and how
institutions may meet community credit needs and their CRA
obligations in different ways.
The experience levels of the examiners have varied considerably among
regulators. The Federal Reserve Board (FRB) has had a separate core
of CRA compliance examiners since 1979, while the Office of Thrift
Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC),
and the Office of the Comptroller of the Currency (OCC) established
such cores in 1989, 1990, and 1993, respectively. From 1992 to 1994,
FDIC significantly expanded its compliance examination staff to about
300 examiners. From 1993 to 1994, OCC increased its examiner staff
dedicated to compliance examinations from 94 to approximately 170
examiners, while about 110 OCC examiners will continue to perform
both safety and soundness and compliance examinations. In addition,
from 1991 to 1993, OTS increased its separate compliance examination
staff from 82 to 105 compliance examiners.
The amount of examiner training also has varied among regulators and
by experience level--ranging from none to advanced training specific
to CRA and the Home Mortgage Disclosure Act (HMDA). Even within
regulators, we were told that training availability differed by
region or district and that some regulators supplemented classroom
training through newsletters or self-study, computer-based courses.
Although most examiners in our case studies said they have had
instruction on CRA assessments as part of general entry-level
training, many examiners commented that much of their training was on
the job. Training needs that examiners identified included
additional training in the use of HMDA and census data;
regular seminars or refresher courses to provide updates and
guidance on regulatory changes;
more advanced training for experienced examiners;
more training on fair lending laws and new discrimination detection
techniques;
more focused training on skills such as data collection, computer
analysis, and reading property appraisals;
training with a focus on lenders' communities, safety and soundness
issues, and new examination techniques;
regular conferences or seminars where new and experienced examiners
from different agencies can exchange information on examination
techniques and experiences; and
external training that includes perspectives of lenders' and
community groups.
The regulators have acknowledged that training is important to the
success of the reforms and have indicated their intention to work
together to improve examiner training. Some examiners told us that
they would welcome more interagency training, which could help
improve consistency among regulators. Past attempts to develop
interagency training programs have had mixed success. Some
regulators explained that interagency training did not always meet
their different training needs because some regulators had examiners
strictly devoted to CRA compliance examinations, while others had
examiners perform both safety and soundness and compliance
examinations. Recently, FRB's interagency training has included the
specialized course on HMDA data analysis. Generally, however, each
of the regulators has developed its own core CRA examination training
programs.
The magnitude of the changes in the CRA reforms, as well as the
resulting increase in examiner responsibilities, created the need for
clear guidance and comprehensive training for all examiners
performing CRA examinations and thereby implementing the revised CRA
regulations. Consistency in training would help to improve
examination consistency among all regulators. Under the revised
regulations, examiners will have additional responsibilities in areas
such as analyzing performance information. Further, examiners will
have to make judgments relating to various types of community
development lending and investment activities. Community groups have
said these areas need better examiner understanding.
DATA ACCURACY REMAINS A
PROBLEM
-------------------------------------------------------- Chapter 3:1.2
The recent shift to performance-based examinations should increase
the reliance on quantified data to assess institutions' performance.
Inaccurate data used by various affected parties may lead them to
inappropriate conclusions about an institution's CRA performance.
Bankers, regulators, and community groups interviewed in our case
studies identified concerns about data quality that resulted in
limiting the usefulness of some data collected. Some of the
regulators have also acknowledged data quality problems, particularly
with HMDA data, and have taken steps to improve the accuracy of HMDA
data. However, while examination guidelines include procedures to
assess HMDA data accuracy, they do not address the quality of other
kinds of data used to assess performance, like other lending data or
financial statistics. Moreover, the regulators do not have a uniform
policy on what actions should be taken against institutions with poor
data quality, and they have not been consistent in the actions they
have taken to date.
Bank management is primarily responsible for ensuring that data
provided by the institution are accurate, and examiners are
responsible for verifying data accuracy during examinations. Bankers
and examiners in our case studies commented that some data problems
are due to unclear reporting requirements, difficulties in
determining correct geographic codes, incomplete data, and human and
technical errors. Among the four regulators, FRB has done the most
detailed analysis of HMDA data quality. From March 1993 to February
1994, the Federal Reserve District Banks participated in a survey to
determine the quality of HMDA data submitted by state member banks
for the year 1992 by cross checking each institution's HMDA Loan
Application Register with its 1992 HMDA data submission. This survey
confirmed FRB's long-standing concerns about HMDA data accuracy
during this time period. As a result, FRB required one out of every
five banks to resubmit its HMDA data for 1992. The most significant
errors found in these examinations involved the loan applicant's
reported income. Over half of all income-related errors were the
result of banks reporting income figures from unverified application
information. The other half consisted mostly of clerical errors.
FRB staff said these high error rates are because, in most
institutions, HMDA reporting is done by insufficiently trained
clerks, with little review from more senior management. FRB amended
the HMDA regulation (regulation C) in December 1994 to help improve
HMDA data quality by clarifying and simplifying the reporting
requirements.
OTS officials said they have also taken action to address HMDA data
quality problems. For 1992 data, the directors of OTS regional
offices sent letters of reprimand to institutions with the worst data
quality. For 1993 data, the Financial Reporting Division sent
detailed logs of reporting accuracy and timeliness to the regional
compliance managers for use in examinations. In addition, an OTS
official noted that the regulators' interagency examination council,
through its HMDA Subcommittee, has made recommendations to improve
the examination of data quality, which are likely to be reflected in
forthcoming revised HMDA examination procedures.
Poor HMDA data quality was mentioned in some of the examination
reports from our case studies. Some of these institutions were
required to resubmit their data, while others were not. FRB
officials stated that they generally require institutions with a 10
percent or greater error rate to resubmit their HMDA data. Other
regulators did not have a specific policy on when resubmissions would
be required. The FRB also recently announced that the institutions
it supervises will be subject to the same monitoring and enforcement
rules that are currently in place for other types of reports, such as
Call Reports.\11 Similarly, OTS stated in its comments to this report
that it recently adopted guidelines for the assessment of civil money
penalties against institutions that submit late or inaccurate HMDA
data. Only FDIC has actually penalized institutions for not
submitting their HMDA data on time.\12 While these types of actions
taken by regulators have helped to increase HMDA data reliability for
the affected institutions, they do not ensure uniform or consistent
reliability across the industry.
Current compliance examination procedures include steps to check the
accuracy and completeness of HMDA data. Similar data quality checks
for any other data used to assess performance would, if effectively
implemented, help to ensure that data used in assessments are
accurate. For example, procedures could be established that require
examiners to check for data deficiencies during examinations.
However, some examiners told us they did not always have time to
complete the required procedures and such additional procedures may
increase examination time. Notwithstanding the possible issue of
timeliness, if data accuracy is not checked by the regulators during
examinations, it may not be viewed as important by the institutions.
--------------------
\11 Such penalties would include civil money penalties for
institutions that repeatedly submit late, incomplete, illegible, or
inaccurate data.
\12 In June 1994, FDIC announced that it had fined six institutions
for late submissions of 1992 and 1993 HMDA data. The fines ranged
from $2,000 to $4,000. It also announced that other institutions may
have fines imposed for late or inaccurate reports as its review
process continues.
BETTER DISCLOSURE IN PUBLIC
EVALUATION REPORTS WOULD
ENHANCE THEIR CREDIBILITY
-------------------------------------------------------- Chapter 3:1.3
The credibility of the revised CRA examinations will also depend upon
the explanations provided in the public evaluation reports about how
ratings are determined. Community groups cited their perception that
examiners were inconsistent and that the bases for ratings were
unclear from the information provided in past evaluation reports.
They emphasized the importance of the public evaluation reports,
because these reports are the groups' primary source of information
about institutions' CRA performance, and they viewed transparency
about institutions' lending performance as the best form of
regulation. More specifically, they cited the need to provide more
information in the public evaluation reports about institutions'
actual lending performance including the data used to support
conclusions and clear explanations about how an institution's
performance was assessed. Bankers have also stated that they do not
always understand the bases for their ratings. The regulators have
acknowledged that bankers and the public will learn what is expected
under the regulations and judge whether examination consistency has
improved on the basis of the rationale provided by the regulators on
how the revised regulatory standards have been applied to determine
institutions' ratings.
Although the revised CRA regulations included specific instructions
to institutions on what information must be included in the public
CRA files, they did not address the contents of the public evaluation
reports. We recognize that the regulators have taken steps to
include more performance data in public evaluation reports, as
required by FDICIA. However, we believe the regulators can better
demonstrate their move towards performance-based CRA examinations by
designing and submitting public CRA reports that establish a basis
for the given evaluations supported by objective data analysis and
indicators. Some regulatory officials have indicated that they would
like to develop a uniform interagency report format, but past
interagency efforts to develop uniform evaluation reports have not
succeeded.
INSUFFICIENT RESOURCES TO
IMPLEMENT REVISED CRA
REGULATIONS COULD POSE A
PROBLEM
---------------------------------------------------------- Chapter 3:2
The regulators have indicated in the revised regulations that
examiners will relieve some of the burden on institutions by assuming
greater responsibility for areas such as analyzing data collected.
Even without the additional responsibilities under the current
system, some of the regulators have had difficulty meeting their goal
of conducting CRA examinations for all institutions at least once
every 2 years. In addition, some examiners in our case studies told
us that they have not had sufficient time to complete all of their
responsibilities during examinations. They said that this generally
resulted in one of three outcomes: (1) the time needed to complete
examinations was lengthened; (2) the institutions were asked to
provide more information or analyses; or (3) some activities, such as
making community contacts to assess community needs, were not
completed.
The regulators have varied in the resources devoted to conducting CRA
examinations, as shown in chapter 1, table 1.2. Until 1993, the FRB
had the largest CRA examination force and the fewest number of
institutions to examine. It has generally been able to examine all
of its institutions within a 2-year time frame. FDIC has the largest
number of institutions and increased its CRA examination force by 75
percent from 1992 to 1993. FDIC, OTS, and OCC have not been able to
examine all of their institutions within a 2-year time frame. OCC
does not anticipate beginning a 2-year examination schedule until
1997, when it plans to have a sufficient number of trained examiners.
Also, examiners told us that they did not always have time to
complete all required procedures or analyses. Some examiners
mentioned that, for various reasons, making community contact was not
always accomplished. Examiners were generally encouraged to make
contacts during each examination but said they often relied on
previously gathered information. Under the revised regulations, the
examiners' responsibilities for consulting community sources will be
increased. Another area in which examiners will be expected to do
more is the analysis of institutions' lending performance data. Our
case studies indicated that responsibilities in this area were not
always clear and were sometimes shifted back and forth between
institutions and examiners.
Another related resource issue involves the implementation of the
recently passed legislation, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, that may involve changes to CRA
examinations for institutions with interstate branches. The act
requires that an interstate institution's public CRA evaluation
report include a state-by-state summary evaluation of the CRA
performance for its branches in each state. In addition, the report
is also to include an evaluation of a bank's performance within a
multistate metropolitan area where the banks have branches in two or
more states within the area. The regulators are not certain if they
would be required to review all of an institution's branches at the
same time to complete the CRA examination. If so, the resource
requirements could be problematic for examining large institutions
located in many states with many branches. The regulators have not
yet fully implemented the provisions of the act but said they are
considering their potential implications as they develop examination
procedures for the revised CRA regulations.
To address their CRA responsibilities, the regulators, for the most
part, have increased the number of CRA compliance examiners in the
last 2 years. They have fewer institutions to examine due to
mergers, acquisitions, failures, or other industry consolidation.
Moreover, some of the regulators have begun testing new procedures to
streamline CRA examinations and reduce examination time. While the
revised CRA regulations have a goal to reduce bankers' regulatory
burden, they will also clearly increase examiners' responsibilities.
Currently, it is difficult to determine exactly what resources will
be needed and how the regulators' current resources will change over
the next 2 fiscal years. Therefore, the regulators will need to
closely monitor implementation of the revised regulations and
determine if further actions are needed to ensure that examiners can
meet their responsibilities within the appropriate time frames. If
regulatory efforts are not successful, examiners may be faced with
the situation of not performing necessary data analyses or shifting
the responsibility for conducting such analyses back to institutions.
Such examiner behavior could reduce CRA examination quality or
increase institutions' regulatory burden.
FDIC, OCC, and OTS officials believe that efficiencies will be gained
by both bankers and regulators in implementing the revised regulation
through, among other things, the elimination of process oriented
factors and use of more sophisticated software in examinations. They
believe that such efficiencies, in the long run, may actually reduce
the overall time needed for CRA examinations. FRB, on the other
hand, suggested that the regulators' costs may increase in assessing
CRA compliance under the revised regulations.
CONCLUSIONS
---------------------------------------------------------- Chapter 3:3
The success of the newly adopted CRA reforms will likely be judged
largely by whether the regulators can address lingering concerns
about the certainty and consistency of CRA examinations. The
regulators have had difficulties in meeting these challenges in the
past. Some of the challenges will likely continue as the regulators
implement the revised CRA regulations-- including examiners' use of
discretion, differences in examiner experience and training, data
quality, ratings justifications provided in public evaluation
reports, and regulatory resource limitations. The regulators have
indicated in the revised regulations that they intend to work
together on improving examination guidance and training to ensure
that examiners consistently interpret and apply the new CRA
standards. In addition, examiners cannot adequately conduct
performance-based evaluations without accurate data. Long-standing
concerns about data quality will likely be reduced only if the
regulators identify and ensure that the institutions correct
inadequate data for future CRA examinations. Examination consistency
will ultimately be judged by the information and explanations
provided in public evaluation reports on how performance ratings have
been determined. Finally, by closely monitoring their resource needs
and their ability to accommodate their increased CRA
responsibilities, the regulators may be better able to ensure that
the requirements of the revised CRA regulations will be met.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:4
We recommend that the heads of FRB, FDIC, OCC, and OTS work together
to take the following actions to better ensure the effective
implementation of the revised regulations and consistency of CRA
examinations:
Develop or revise regulatory guidance and training programs by
clarifying how examiners should interpret the performance
standards, and require that all examiners receive comprehensive
training necessary to implement the new regulations.
Improve data accuracy by (1) requiring examiners to assess the
accuracy of data used in performance evaluations and (2)
developing a uniform policy on what actions will be taken
against institutions with poor data quality.
Improve disclosures in publicly available evaluation reports by
clearly presenting performance information and the rationale
used to assess institutions' performance against the revised
performance-based examination standards.
Assess agency resources and examination techniques to determine
what resources and techniques are needed to meet the
requirements of the revised CRA regulations.
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 3:5
Generally, agency officials agreed with our report message and
recommendations to help ensure effective implementation of the
revised CRA regulations. FDIC commented that while it agrees that
examination consistency is a major priority for the regulators, which
it is pursuing through enhanced interagency training, examiner
judgment is still critical to implementation of the revised
regulations as each community and each institution has unique
characteristics that must be considered. OTS commented that although
the revised regulations still call for examiner judgment, they
provide for reasoned conclusions to be drawn from objective data
under a clearer set of performance standards. FRB acknowledged that
one of the biggest challenges faced by the agencies in the
implementation of CRA is the ongoing challenge to achieve the
appropriate balance between desired certainty and the need for
flexibility in implementation to reflect unique community banking
circumstances.
With regard to resource needs for the regulators to implement the
revised regulations, FDIC, OCC, and OTS suggested that the revised
regulations should reduce the overall time devoted to CRA evaluations
in the long run due to the elimination of process oriented factors,
coupled with use of enhanced, more sophisticated software that they
are currently introducing. OTS also suggested that the small bank
and strategic plan options may further reduce examination resource
requirements. FRB, on the other hand, has publicly recognized in its
impact analysis of the revised regulations that implementation of the
regulations may increase regulators' costs in assessing CRA
compliance.\13
FRB and OTS responded to our recommendations by describing what they
are doing or plan to do. Some of the actions include revised
guidance and initiation of training programs (which covers
interagency training begun in September 1995), measures to improve
data accuracy, better supported conclusions in public CRA
evaluations, and monitoring of compliance examination resources. In
its efforts to improve data accuracy, FRB commented that it is
establishing enforcement mechanisms. In addition, FDIC and OCC
acknowledged that interagency training and other efforts would
further regulators' plans to improve disclosures in public CRA
evaluation reports by developing uniform and accurate CRA performance
evaluations and emphasizing the need to fully support related
conclusions. These actions, if effectively implemented, should be
helpful in enabling the regulators to fulfill the intent of our
recommendations.
--------------------
\13 "Final Regulator Impact Analysis of Proposed CRA Regulations,"
Glenn Canner, Division of Research and Statistics, Board of Governors
of the Federal Reserve System, April 13, 1995.
VARIOUS INITIATIVES HAVE ADDRESSED
BARRIERS TO LENDING IN LOW- AND
MODERATE-INCOME AREAS
============================================================ Chapter 4
Many public and private sector efforts have reduced various barriers
to community lending in low- and moderate-income areas. Through
individual activities and cooperative efforts, institutions and
community groups have used the flexibility of the CRA statute and
addressed important cost-related barriers and market impediments to
enhance community lending opportunities. While we did not assess
individual initiatives as a part of this review, we present examples
that bankers, regulators, and community groups we contacted
considered to be successful techniques in helping to lower costs and
risks for institutions participating in community development lending
strategies. The secondary mortgage markets have also taken steps to
broaden opportunities for institutions to sell community loans on
those markets. In addition to bankers calling for certain compliance
incentives, local, state, and federal governments have provided
incentives for lending in low- and moderate-income communities.
The federal bank regulators have also been able to play a key role in
facilitating institutions' community lending activities by providing
forums for educating bankers and disseminating information about
successful initiatives. Each of the regulators has established a
community affairs program to encourage and promote community lending
and investment initiatives among bankers. As they further develop
these programs and better coordinate their efforts, the regulators
could enhance their role in this respect.
BARRIERS MAY INHIBIT COMMUNITY
LENDING
---------------------------------------------------------- Chapter 4:1
Comments from some of the bankers we interviewed confirmed the
contention of some industry observers that private sector efforts to
meet the credit needs of low- and moderate-income communities may be
limited by the perception that such lending is likely to entail
relatively high credit risk and relatively small potential returns.
Many bankers tended to believe that the profits of such activities
are lowered by relatively high credit risk--that is, the risk of
financial loss due to the possibility of borrower default--and high
transaction costs. The transaction costs for community lending may
be higher than for other commercial or consumer lending because of,
among other factors, additional time and effort necessary to
ascertain the creditworthiness of the borrower or the related
property in certain low- or moderate-income areas. Another
significant barrier faced by bankers is the opportunity cost of
community lending. The primary objective of a bank is to maximize
profits for its shareholders. To the extent that community lending
is believed to be inconsistent with that objective, community lending
expenditures represent lost opportunities to achieve greater returns
through more profitable activities. Closely aligned with the cost
factors is the issue of safety and soundness policies and
regulations, which some bankers we interviewed believe are inherently
in conflict with community lending because of the perceived greater
risks involved in such lending.
THE PERCEPTION OF HIGH
CREDIT RISK CAN BE A BARRIER
TO COMMUNITY LENDING
-------------------------------------------------------- Chapter 4:1.1
As evidenced by our case studies, a matter of concern frequently
mentioned by bankers about community lending is the issue of high
credit risk, which represents one element in the cost of lending.
When a banker extends a loan, some possibility exists that the
borrower will not repay the loan or will delay payment. Bankers
making a large number of loans expect a small percentage to be
nonperforming. To cover expected losses, they may structure their
loan rates accordingly and also voluntarily set aside loan loss
reserves.\14
The concern about credit risk is understandable in that community
lending is made to low- and moderate-income borrowers who may not
meet normal creditworthiness standards such as debt-to-income ratio.
However, according to a 1993 Federal Reserve report to Congress,\15
available evidence was insufficient to determine the extent to which
credit risk is associated with different income, racial, or ethnic
characteristics across neighborhoods.
--------------------
\14 An amount of capital held back from investment by a bank
considered to be adequate to cover estimated losses in the loan
portfolio.
\15 Report to the Congress on Community Development Lending by
Depository Institutions, the Board of Governors of the Federal
Reserve System, (Washington, D.C.: Oct. 1993).
TRANSACTION COSTS CAN CREATE
A BARRIER TO COMMUNITY
LENDING
-------------------------------------------------------- Chapter 4:1.2
A significant cost element in any type of lending by an institution
is the cost of originating, processing, and servicing loans, also
known as transaction costs. Transaction costs rise and fall with the
volume of lending. They include, among other costs, expenses related
to evaluating an applicant's credit history and ability to pay off
the debt as scheduled; obtaining appraisals and surveys of properties
offered as collateral; and processing loan payments, including
monitoring borrowers who have fallen behind on their payments. The
amount of time and effort expended on these activities may vary
considerably from loan to loan, depending upon the type and
complexity of the loan and characteristics of the borrower.
Generally, the larger the loan amount and the smaller the transaction
costs, the more profitable the loan for the institution. More
specifically, since transaction costs do not usually rise in
proportion to the loan amount, larger loans are generally more
profitable.
According to bankers we interviewed, community loans are less
profitable for institutions than many other types of loans because
the loan amounts are relatively low, while loan transaction costs are
relatively high. High transaction costs may be due to greater time
and care required to qualify borrowers for loans by gathering
additional information to help better identify the lender's credit
risk. According to a banker from a medium-sized Texas bank, loans to
low- and moderate-income individuals are not profitable because their
small size nets a low return to the bank's fixed costs.
REGULATORY SAFETY AND
SOUNDNESS POLICIES CAN BE A
BARRIER TO COMMUNITY LENDING
-------------------------------------------------------- Chapter 4:1.3
One of the perceived issues surrounding CRA is whether community
lending reduces an institution's safety and soundness. There are
those who believe that CRA regulations encourage "high loan-to-value
ratio" mortgage loans\16 in local communities, which could also lead
to incurring greater risk. According to some bankers we interviewed,
community lending has added costs resulting from loss reserves
required by safety and soundness examiners. Both bankers and
community groups have said that safety and soundness examiners do not
understand many of the techniques institutions use to reduce credit
risk of community loans--such as, for example, the "layering of loans
with state and city financing."\17 As a result, they require
institutions to set aside loan loss reserves that bankers, community
groups, and even compliance examiners may view as unnecessary. Two
examples illustrate noted concerns about the perceived problem
pertaining to safety and soundness.
The Chairman of the California League of Savings Institutions
testified at the public CRA hearings that members of the League
support strong capital regulations, but Congress and the
regulatory agencies must recognize that current risk-based
capital regulations have an unavoidable impact on an
institution's ability to fulfill community needs. The treatment
of (capital requirements for) rehabilitation loans, apartment
loans, and equity participations makes them too "expensive" in
capital costs for many institutions.
During CRA hearings in 1993, an official of a large nationwide bank
stated that over time her bank has learned that community
development lending is not unsafe and that the bank's community
development lending portfolios perform as well or better than
its general market loans. The banker pointed out that community
development loans look different from so-called traditional
loans in that the sources of equity and debt-to-income or
loan-to-value ratios are different, and the appraised value is
often no measure of real value. Recognizing that these
variables do not make for unsafe community development loans,
the banker noted that such loans are viewed adversely from a
safety and soundness perspective, and, thus, are more heavily
reserved against, more heavily monitored, and, at best, more
expensive to make.
During our review, we frequently heard concerns or complaints from
bankers about possible or perceived safety and soundness risks in the
implementation of CRA. We did not independently verify the accuracy
of these claims.
--------------------
\16 A loan in which the amount advanced by the lender is close to the
appraised value of the property. Generally, any mortgage loan with a
loan-to-value ratio above 80 percent is considered high and may
require mortgage insurance.
\17 State and city subsidy loans, grants, or other equity financing
that are used in conjunction with bank loans to provide the right mix
of financing needed as an economic stimulus for a particular
business.
INNOVATIVE AND COOPERATIVE
INITIATIVES HAVE OVERCOME SOME
LENDING BARRIERS
---------------------------------------------------------- Chapter 4:2
Various individual and cooperative efforts among institutions,
community groups, and others have provided the means to lower credit
risk and reduce transaction costs in community lending. Although the
lack of specific performance criteria in CRA has complicated
compliance and enforcement of the law, it has allowed institutions
flexibility in designing and implementing programs to better serve
the credit needs in low- and moderate-income areas. Bankers taking a
proactive approach have used the law's flexibility to create
innovative programs and strategies that allow them to expand lending
opportunities and increase or cultivate new markets. Also, those
bankers who gain experience or develop expertise in community lending
and make it a part of their normal business operations find that CRA
obligations need not be perceived as a regulatory burden. Many
cooperative ventures have also permitted community groups to play an
important role in reducing barriers to community lending.
CRA FLEXIBILITY ALLOWS
BANKERS TO ENHANCE COMMUNITY
LENDING
-------------------------------------------------------- Chapter 4:2.1
Bankers who are committed to serving the credit needs of their
communities have taken advantage of CRA's flexibility and carved out
ways to make loans that other bankers might not find attractive.
Regulators have found, and our case studies revealed, that a more
effective CRA program was generally evident when bank management
exhibited certain types of proactive approaches to CRA
implementation. These bankers took action to get their board members
involved, reached out to members of the community to determine the
needs of their communities, developed marketing and advertising
strategies, and established sound CRA plans designed to address
community needs. The types of initiatives implemented by bankers and
found by regulators to have effective CRA performance included
education and counseling seminars, community outreach efforts,
flexible underwriting standards or policies, participation in
government-sponsored lending programs, and implementation of special
programs offering unique products or using specialized staff to
better meet the needs of customers. Also, some banking associations
have developed programs to inform bankers of these different types of
initiatives.\18
In some cases, greater financial and staff resources of larger
institutions have allowed them to create designated CRA departments
that can devote time to developing and promoting various unique
product lines to attract consumers. However, some smaller or rural
bankers who serve predominantly low- and moderate-income areas, by
necessity, have succeeded in meeting CRA goals during their normal
course of business with customers. Considering their clientele and
the special needs that many require, these bankers have found that to
make a profit and satisfy community needs, it was necessary for them
to create specialized programs and develop flexible policies. Some
examples of the types of programs or initiatives that bankers have
implemented to meet their CRA goals are presented in table 4.1.
Table 4.1
Examples of Community Lending
Initiatives
Type of institution Type of community lending initiative
---------------------- ----------------------------------------------
Large, urban Boston Initiated a leadership role in programs that
bank provide affordable housing and rehabilitation
projects in low-and moderate-income areas.
Bank's chairman was one of the founders of the
Massachusetts Bankers Housing Partnership,
which has provided millions of dollars for
affordable housing in its 10-year history.
Suburban, medium- Developed a "second look" program, which
sized Illinois bank provides that any denied application from an
individual within its delineated community
receives a loan officer review the next day.
Small, urban Dallas Developed products aimed at the low-and
bank moderate-income market. The deposit product is
a low cost (minimal balance/service charge),
low-volume checking account designed to help
individuals establish a credit history by
enabling them to write a few checks a month. A
loan product was developed in conjunction with
some local groups, and it enables individuals
with no prior credit history to obtain secured
consumer loans.
Small, rural Promoted fair and increased access to credit
California bank within the community by: advertising in
Spanish, having a flexible (no minimum) loan
amount, expanding the types of products
offered (i.e., credit cards, special equity
lines, Small Business Administration (SBA)
loans) and evaluating loans so that seasonal
employees were not disadvantaged.
Large, urban Promoted credit access through its loan agent
California bank operations. For example, it has special agents
soliciting 95 percent loans (5 percent down
payment). Bank also has outreach coordinators
in the community who uniformly try to
determine the needs and how they can be met.
----------------------------------------------------------------------
Source: Information obtained from GAO case studies.
--------------------
\18 For example, the increased emphasis on CRA has prompted the
American Bankers Association, a national trade association of
commercial banks, to establish a Center for Community Development.
The primary purpose of the center is to provide information and
technical assistance to its members to help them achieve their CRA
goals. Most of the center's activities have focused on educational
efforts, such as publishing an educational guide and a compendium of
community lending agencies and organizational contacts.
INITIATIVES TAKEN TO REDUCE
CREDIT RISK AND TRANSACTION
COSTS FOR COMMUNITY LENDING
-------------------------------------------------------- Chapter 4:2.2
Bankers use various mechanisms to lower credit risk and transaction
costs on community loans. They have found that losses can be reduced
by screening out the riskiest applicants and by supporting successful
applicants before and after loans are extended. Two approaches that
bankers use to help keep credit losses on community development
lending to a minimum include (1) screening, counseling, and
monitoring borrowers and (2) risk-sharing arrangements. Cooperative
efforts also help to share costs, so costs for individual bankers may
be reduced.
SCREENING, COUNSELING,
AND MONITORING
------------------------------------------------------ Chapter 4:2.2.1
Based on roundtable discussions, many bankers agree that thorough
applicant screening, applicant education and counseling prior to loan
extension, and diligent monitoring of borrowers after loans are
granted help lower the risks of lending in low-income areas and to
low-income borrowers. Bankers and other organizations that support
lending use various techniques to screen potential borrowers,
including home buyer and small business education, credit counseling,
and extensive direct contact with loan officers.\19 Many institutions
provide technical assistance and grants to nonprofit housing
counseling groups and community groups that help with loan packaging.
The groups screen potential borrowers, help assemble documentation,
and make sure that applicants meet the institution's underwriting
criteria.\20
They also help market and promote loan programs and minimize
institution processing costs. These activities are done to allow the
bankers to become familiar with the applicants and their communities.
--------------------
\19 As an example, completion of a prepurchase home-buyer education
program is a requirement for loan applicants who wish to participate
in the Federal National Mortgage Association (Fannie Mae) and Federal
Home Loan Mortgage Corporation (Freddie Mac) community home-buyer
programs. The sessions, which are conducted by either a mortgage
lender or a nonprofit group, cover information, such as applying for
a mortgage, budgeting household expenses, and shopping for,
inspecting, and maintaining a home. The purpose of the requirement
is to mitigate the risks of lending within the community home-buyer
programs.
\20 Some community groups with whom we spoke have been active in
providing credit counseling to help low- and moderate-income
consumers prequalify for loans and show them how to effectively
maintain their loan payments. During our study we learned that the
Association of Community Organizations for Reform Now, a community
group, was given a grant by a large, urban thrift to service and
counsel loans financed through a property rehabilitation program
initiative.
SPREADING RISKS THROUGH
CONSORTIA
------------------------------------------------------ Chapter 4:2.2.2
Lending consortia may be either formal or informal, for profit or
nonprofit. Consortia often consist of institutions that pool lending
money or collect equity stakes for low- and moderate-income housing
and community development. The types of participants, bankers, and
funding involved vary from program to program. In all cases,
consortia allow institutions to spread risk and transaction costs to
avoid high concentrations of credit risk in individual projects or in
limited geographic areas. Risk sharing allows institutions the
opportunity to expand lending through various means to nontraditional
borrowers whose risk characteristics are difficult to quantify or
assess. For example, they can save member institutions time and
money by gathering information and developing expertise about public
and private subsidy programs, the past performance of real estate
developers and property management companies, and the characteristics
of targeted communities and local community groups. They can attract
staffs that are knowledgeable about matters such as underwriting and
property appraisal. Loan consortia also provide an opportunity for
smaller institutions to participate more in community development
lending, because such institutions, on their own, are less able to
bear the cost and develop the expertise for community development
lending.
Several of the bankers included in our review said that they have
participated in various consortia or multibank activities in meeting
their CRA goals. Examples of some of the consortia organizations
named by institutions in our sample review are included in table 4.2.
Table 4.2
Examples of Lending Consortia
Organization Purpose of organization
---------------------- ----------------------------------------------
California Community A nonprofit mortgage banking consortium, which
Reinvestment was created in 1989 by California banks to
Corporation (San increase quality affordable housing in
Francisco, CA) California. Since its creation, the 58 member
banks have pooled over $100 million for
community lending.
Community Investment An organization composed primarily of savings
Corporation (Chicago, associations, which provides mortgage funding
IL) to rehabilitate and purchase multifamily
housing.
Savings Associations A company that consists primarily of numerous
Mortgage Company, Inc. savings associations which pool their
(Santa Clara, CA) resources to fund a variety of housing
projects for the poor.
Southern California A multibank community development corporation
Business Development that was organized to operate in South Central
Corporation (Los Los Angeles for the purpose of making loans
Angeles, CA) and equity investments in small businesses
that do not qualify for conventional bank
financing.
----------------------------------------------------------------------
Source: GAO case studies and the Consumer Bankers Association.
INITIATIVES TO ADDRESS
BANKERS' CONCERNS ABOUT
SAFETY AND SOUNDNESS
REGULATIONS
-------------------------------------------------------- Chapter 4:2.3
Regulators and bankers have taken steps to address potential
conflicts with regulations designed to help ensure safe and sound
operations. In January 1994, the Federal Deposit Insurance
Corporation (FDIC) adopted changes to its risk-based capital
standards that were intended to facilitate prudent lending for
multifamily housing purposes. Similar action was also taken by the
other federal regulators. The risk-based capital final rule lowered
from 100 percent to 50 percent the "risk weight" accorded loans
secured by multifamily residential properties that meet certain
criteria as well as securities collateralized by such loans. The
effect of this ruling is that an institution making or acquiring
these loans or securities can hold less capital than required in the
past under the risk-based capital standards. However, to be eligible
for the lower risk weight, the loans must satisfy certain
loan-to-value and debt service coverage requirements.
To ensure that appropriate and affordable financing can be provided
for community development projects, institutions have often found it
necessary to depart from traditional standards of credit extension.
We found bankers who created ways to make secure, profitable loans
while sharing costs and risks through their own individual
initiatives or by employing such techniques as government loan
guarantees, interest rate subsidies, or blended-rate loans with
participation from public and private lenders. Examples of
individual policy initiatives used by institutions are included in
table 4.3.
Table 4.3
Examples of Flexible Underwriting
Policies
Type of Institution Type of underwriting flexibility
---------------------- ----------------------------------------------
Large, urban Illinois Decided that instead of selling loans to the
bank secondary market, it would hold more loans in
portfolio in an effort to reach more low-and
moderate-income applicants.
Medium, suburban Texas Reviewed and changed underwriting standards as
thrift necessary to ensure maximum flexibility in
approving loans. Also, a minimum loan amount
is not required.
Small, urban Worked with borrowers in making loans by
California thrift considering "mattress" money, income from
renting a room, or minimal down payment and no
mortgage insurance.
----------------------------------------------------------------------
Source: Information obtained from GAO case studies.
BARRIERS POSED BY SECONDARY
MARKET STANDARDS AND SOME
INITIATIVES DESIGNED TO ADDRESS
THEM
---------------------------------------------------------- Chapter 4:3
During our review, we often heard complaints that secondary market
standards made it difficult for institutions to sell some of their
more nontraditional loans that did not meet normal underwriting
standards. Similar complaints have been made at focus group meetings
sponsored by secondary market entities. The secondary market
provides the mechanism for existing loans, marketable securities, and
other assets to be sold to investors, either directly or through an
intermediary. More specifically, the secondary mortgage market
represents the national market where residential mortgages are
assembled into pools and sold to investors. This market, which
originated with such corporations as Fannie Mae and Freddie Mac,
supplies additional liquidity to mortgage lenders.
The single most important contribution of the secondary mortgage
market is the creation of a national market for resale of residential
mortgages. This ensures that mortgage originators, regardless of
where they are located, have access to pools of capital managed by
pension funds, insurance companies, and other institutional buyers of
mortgage-backed securities. Home buyers are assured an adequate
supply of mortgage financing as the secondary market sales provide
lending institutions with a constant source of new funds to make more
home loans. Banks receive CRA credit for originating loans to
particular low-income communities or individuals whether they sell
the loans in the secondary market or hold them in their portfolio.
Our interviews with bankers disclosed several concerns pertaining to
the secondary market underwriting standards that some bankers
believed pose a barrier and tend to restrict lending in low- and
moderate-income areas. One primary concern was that institutions do
not want to deviate from the secondary market standards because they
want to be able to sell all their loans to the secondary markets. As
one of the regulatory officials noted, if the secondary markets will
not accept a loan, an institution is forced to keep the loan in its
portfolio and assume the market and interest rate risk for the full
life of the loan. Therefore, some institutions look for loans that
do not have any nonconforming provisions or any questions about
collateral. Other concerns raised included the following:
A thrift regulatory official noted that one of the secondary market
standards that can reduce flexibility is the requirement that no
more than 36 percent of the borrower's salary can be used for
loan payments. In an area with high housing costs, such as the
San Francisco Bay area, these standards are very limiting. He
said many people already pay 40 to 50 percent of their salary
for rent and are probably able to continue to pay a high
percentage in house payments.
A bank management official of a large urban Chicago thrift said
that Fannie Mae formulas or ratios represent the industry
standard; however, he noted that he was not aware of empirical
evidence that an applicant who does not meet these ratios cannot
service the debt.
INITIATIVES DESIGNED TO
ADDRESS SECONDARY MARKET
BARRIERS
-------------------------------------------------------- Chapter 4:3.1
Some of the players in the secondary market have begun to recognize
the problems associated with the underwriting standards and have
initiatives under way that are intended to help alleviate some of
these problems. We did not assess the effect of these initiatives as
part of this review. Fannie Mae and Freddie Mac have both announced
initiatives in recent years to purchase loans with underwriting
guidelines or payment terms that do not meet their more traditional
loan purchase programs. Congress has encouraged these corporations
to support low- and moderate-income loans by setting specific volume
goals over a 2-year period, which began in 1993. For example, for
all the loans they purchase, 30 percent of the units financed must be
for low- and moderate-income borrowers, 30 percent must be located in
central cities, and $3.5 billion ($1.5 billion for Freddie Mac, $2
billion for Fannie Mae) must finance loans to low-income and very
low-income home buyers.\21
In announcing its initiatives in February 1994, Freddie Mac cited the
potential effect of these initiatives on mortgage lending in inner
cities as well as its efforts to broadly redefine creditworthiness.
Officials of Freddie Mac stressed the fact that the clarifications do
not represent a lowering of its standards but an effort to dispel
misconceptions among originators of mortgage loans. Through meetings
with lenders, appraisers, mortgage insurers, and others, the
corporation was able to identify more than a dozen underwriting
issues that were causing originators to needlessly deny credit in the
belief that some particular factor would make a loan ineligible for a
Freddie Mac pool. For example, numerous people thought that Freddie
Mac did not want to purchase any loans extended to borrowers with one
or two 30- or 60-day delinquencies in their credit histories. While
recognizing that such a history could indicate a bad risk, Freddie
Mac officials said that they now tell lenders that they may focus on
the borrower's history of housing payments as well as consider
explanations for the delinquencies. Acknowledging that the
initiatives could reduce the quality of loans in its pools, Freddie
Mac officials plan to vigilantly monitor the performance of the
loans.
In March 1994, Fannie Mae announced its $1 trillion plan to help
finance affordable housing loans by the year 2000. Significant among
the 11-initiative program were 2 initiatives, 1 involving the
clarification of guidelines and the other testing an approach for
underwriting loans, which were intended to help break down the
barriers pertaining to secondary market criteria. In clarifying the
guidance, Fannie Mae officials tried to ensure that the underwriting
guidelines are clear and flexible and are applied equally to
everyone. To ensure appropriate use by lenders, Fannie Mae plans to
maintain a constant dialogue with mortgage lenders to identify the
loan characteristics and underwriting procedures it thinks need
clarification;
develop a comprehensive training program for mortgage industry
underwriters;
develop easy-to-use reference tools for underwriters, including
on-line access to Fannie Mae guidelines;
establish regional hotlines that lenders can call for instant
guidance on underwriting;
establish an internal Fannie Mae loan review board to review loans
initially rejected by its underwriters; and
make an automated underwriting system available to lenders that
will use artificial intelligence to analyze loans, ensure
consistency, and free up time for underwriters to work on
complex applications.
Additionally, through a separate initiative, Fannie Mae announced its
commitment of $5 billion to conduct experiments in new underwriting
approaches designed to probe and test ways to underwrite loans to
make credit more accessible to minorities, low- and moderate-income
families, central city and rural residents, and people with special
housing needs.
--------------------
\21 The Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 established the 30-percent target goals and called for
the Secretary of Housing and Urban Development to establish interim
goals for each enterprise for the 2-year transition period, which
began in 1993 and 1994.
GOVERNMENTS HAVE PROVIDED
INCENTIVES TO ENCOURAGE
COMMUNITY LENDING
---------------------------------------------------------- Chapter 4:4
In line with the administration's emphasis on reforming CRA and
improving community development, several governmental agencies or
entities have initiated activities, or revised guidance governing
ongoing programs, to enhance community investment in low- and
moderate-income areas. Many of these program activities are geared
towards rebuilding communities within inner cities and small, rural
areas by providing affordable housing and facilitating small business
lending.
STATE AND LOCAL EFFORTS TO
ENCOURAGE COMMUNITY
DEVELOPMENT LENDING
-------------------------------------------------------- Chapter 4:4.1
Some local governments have sought to encourage community lending in
underserved areas by recognizing and rewarding institutions that
demonstrate performance and commitment in helping to meet the needs
of residents in these areas. Such rewards might result in better
service delivery through branch expansions or increased investments
or deposits. Some state governments require commitments to community
reinvestments before out-of-state institutions can operate in their
localities. They premise entry on a standard of net new benefits to
the state, such as increased in-state lending and investments. A
California County Board of Supervisors approved a community
reinvestment policy that would rank institutions on the basis of
their performance in making loans to minorities and in depressed
neighborhoods. Those ranked in the top half would then reap the
benefits of the county's investment business.
To encourage community reinvestment and development, some
municipalities condition their placement of deposits upon the
institution making specific types of loans. For example, in Chicago,
institutions must file reports on their residential and commercial
lending in the Chicago metropolitan area before they can qualify for
the city's deposits. Similarly, during our case studies, we learned
that the city of Boston has a Linkage Program that ties deposit of
city funds to an institution's CRA rating. A Boston national bank
branch located in a depressed area of the city was rewarded with a $5
million deposit by the city.
States also encourage community development through deposit
subsidies. For example, Iowa's State Treasurer's Office offers
several "linked deposit" programs that support below-market rate and
small business and agricultural loans. Below-market rate deposits
are placed with institutions that, in turn, use them to match fund
lower rate loans, with a spread over the deposit rate. This approach
provides two unique, highly targeted programs through participating
Iowa institutions. One is targeted for minority- and women-owned
small businesses and provides below-market rate financing for a
variety of business purposes. The other is focused on helping
diversify Iowa's rural economy and increasing employment. It offers
linked deposits as incentives for institutions to fund below-market
rate loans for horticultural and agricultural projects that involve
products not typically found on Iowa farms.
FEDERAL EFFORTS AND
SUGGESTED INCENTIVES HAVE
HELPED INFLUENCE COMMUNITY
DEVELOPMENT LENDING
-------------------------------------------------------- Chapter 4:4.2
Federal efforts to encourage community development lending have
included government subsidized programs, changes in regulatory
requirements, and legislation promoting investment incentives, some
of which correspond with the suggested incentives offered by bankers.
Government subsidies, such as those provided by Small Business
Administration (SBA), can significantly affect the profitability of
lending by making it easier for the borrower to qualify for a loan
or, through a guarantee, cushion anticipated losses from a loan,
allowing the lender to set aside a smaller amount of funds against
this contingency. In accordance with the Financial Institutions
Reform, Recovery, and Enforcement Act (FIRREA), the Federal Housing
Finance Board (FHFB)--which regulates the credit advance (loan)
activities of the Federal Home Loan Banks (FHLB)--was required to
develop regulations establishing standards of community investment or
service for member institutions to maintain continued access to
long-term FHLB advances.\22 Through the Bank Enterprise Act (BEA,
P.L. 101-242) and the Riegle Community Development and Regulatory
Improvement Act of 1994, (P. L. 103-325), Congress took action to
increase financial services provided to underserved and distressed
areas and to low- and moderate-income individuals.
--------------------
\22 The primary credit mission of the FHLBs is to enhance the
availability of residential mortgage credit by providing a readily
available, economical, and affordable source of funds, in the form of
advances, to their member institutions.
SMALL BUSINESS
ADMINISTRATION
------------------------------------------------------ Chapter 4:4.2.1
SBA is an independent federal agency chartered in 1953 to provide
financial assistance to small businesses. SBA makes direct loans to
borrowers who are unable to obtain conventional financing,
participates in loans originated by financial institutions, and also
guarantees loans (typically, a guarantee of 85 percent of a small
business loan) made by institutions. This agency has efforts under
way to foster small business community lending through various pilot
programs or initiatives.
SBA has initiated a pilot program in several southwestern states to
test a new short-form loan application, which should benefit both
bankers and borrowers. Under this pilot, for loans under $50,000,
bankers must now provide SBA with only a one-page document. Loans
between $50,000 and $100,000 require the one-page summary document
plus the applicant's business tax returns for the previous 3 years, a
personal financial statement, and the institution's internal credit
memorandum. A national bank official said the shorter form decreases
the time it takes to finalize the loan from as long as 6 weeks to 1
or 2 weeks. Also, he said the shorter form makes borrowers feel more
comfortable about the application process and bankers more willing to
make smaller loans because the previous paperwork made small loans
unprofitable.
The Rhode Island Area SBA Program has $13.1 million in initial
commitments for business loans of up to $50,000 with maturities of 1
to 7 years. The program was developed by SBA's Providence office and
the Ocean State Economic Development Authority, a private entity.
Besides offering SBA guarantees, the program virtually eliminates
paperwork and "hand holding" burdens for institutions.
FEDERAL HOME LOAN BANK
SYSTEM
------------------------------------------------------ Chapter 4:4.2.2
While the FHLB System\23 has sponsored special community development
initiatives in the past, the passage of FIRREA in 1989 has
contributed to the system taking on a more active leadership role in
the development of community lending programs. To encourage the flow
of funds into low- and moderate-income areas, FIRREA required the
FHFB to develop regulations that condition access to long-term FHLB
advances on member institutions meeting certain standards of
community support. Congress specified that the regulations were to
take two factors into account--an institution's CRA performance and
its record of lending to first-time home buyers. This provision
thereby created an additional CRA enforcement mechanism by tying an
FHLB member's access to long-term advances used to finance
residential mortgage lending to the institution's CRA performance.
FIRREA also established an Affordable Housing Advisory Council at
each of the FHLBs. The councils are to meet periodically to advise
the FHLBs on low-income housing needs in each region.
Through its Affordable Housing Program and Community Investment
Program, the FHLB system is to provide assistance to its member
institutions by supporting their CRA activities. It is to advance
funds or subsidize below-market-rate loans originated for low-and
moderate-income families and for businesses in low- and
moderate-income areas. The Affordable Housing Program is to provide
home lending funds to support housing for people whose income does
not exceed 80 percent of an area's median income, and rental housing
funds where at least 20 percent of the units are occupied by
low-income tenants. Its Community Investment Program is to provide
home lending funds to projects aimed at individuals with incomes of
up to 115 percent of an area's median income.
--------------------
\23 A system of 12 regional banks established by the Federal Home
Loan Bank Act of 1932 which acts as a central credit system for
savings and loan institutions.
POSITIVE INCENTIVES HAVE
BEEN SUGGESTED TO
ENCOURAGE COMMUNITY
LENDING
------------------------------------------------------ Chapter 4:4.2.3
To encourage institutions to lend to all parts of their community,
some bankers have suggested that CRA be replaced or supplemented with
financial subsidies or other positive incentives. Others have called
for modifying or supplementing CRA with incentives such as (1) tax
credits, (2) deposit insurance credits, (3) streamlined or less
frequent examinations, (4) revisions of safety and soundness
requirements for CRA lending and (5) broadening the base of
institutions and organizations that can buy low-income housing tax
credits, and (6) permitting below market financing for community
development lending programs with supporting funds coming from FDIC
or other regulatory premiums. Past, as well as current legislative
matters for congressional consideration have included some of these
proposals, as described in the next section.
RECENT LEGISLATIVE
PROPOSALS
------------------------------------------------------ Chapter 4:4.2.4
Over the years, Congress has been concerned about how to provide
adequate financial services to distressed rural and urban areas
throughout the country. In the past, to address the problem,
Congress has enacted numerous legislative provisions, such as those
included in FIRREA, which created the Community Investment Program
under the FHLB system described earlier. However, because this is a
complex and far-reaching problem, Congress has continued to seek
workable solutions and recently enacted legislative provisions aimed
at enhancing community development in underserved areas. In 1991,
Congress enacted BEA, and, in September 1994, the Riegle Community
Development and Regulatory Improvement Act was passed.\24
BEA was designed to provide banking institutions with incentives to
offer more services to low-income communities. Originally, it was to
provide for reductions in the deposit insurance premiums that
institutions pay on deposits placed in lifeline accounts--checking
accounts for low-income individuals. In addition to encouraging
lending in poor communities, the act was to establish a deposit
insurance premium credit system for lending or establishing branches
in these communities. Institutions engaged in such activities would
have their deposit insurance premiums reduced. Although BEA was
enacted in 1991, funds were not authorized until passage of the
Community Development Banking and Financial Institutions Act of 1994
(CDB Act) in September 1994. Along with the funding came
modifications to BEA. Instead of institutions receiving deposit
insurance rebates as provided under the original BEA, the CDB Act
calls for money to be paid directly to institutions to provide
financial incentives for lending in low-income communities. The
funding level for BEA was eliminated in the recently passed fiscal
year 1995 rescissions act (P.L. 104-19).
Serving as the umbrella legislation, the Riegle Community Development
and Regulatory Improvement Act of 1994, H.R. 3474, includes a number
of separate legislative proposals that were added as it proceeded
through the legislative process. The CDB Act (known as title I of
the Riegle Community Development and Regulatory Improvement Act)
creates a fund for forming and expanding community development
financial institutions (CDFI) by providing financial and technical
assistance for development services, lending, and investment in
distressed urban and rural areas. The act authorizes $382 million to
be distributed over a 4-year period, under the administration of an
independent board. One-third of this amount has been earmarked to
fund BEA. Financial assistance may be provided as loans, grants,
equity investments, deposits, or credit union shares on a
competitive, matching basis. Institutions, local and state
governments, and other community organizations may form community
partnerships with CDFIs to work cooperatively to revitalize
communities. Assistance must be matched dollar for dollar (allowing
a reduced match for CDFIs with severe constraints on available
matching funds). Selection for assistance is to be based on several
factors, including community need and representation, ability to
leverage private funds, extent of targeting to low-income
individuals, and strength of the revitalization plan.
During the past several years, other legislative proposals have been
introduced (but not enacted), which offered various approaches to
supporting development in economically disadvantaged communities.
Although the proposals shared the primary goal of revitalizing
low-income areas, they varied in the type and scope of assistance
provided, administration of programs created, and other areas. For
example, the proposed Community Banking and Economic Empowerment Act
of 1993 (H.R. 1699), which was to provide money for loans and
technical assistance, had a goal of making credit and credit-related
services available to low-income families and others not adequately
served by traditional lending institutions. More recently proposed
legislation would encourage community development or reinvestment by
amending CRA. In a proposed amendment to CRA, the Community
Reinvestment Improvement Act of 1995 (H.R. 1211) seeks to enhance
the availability of investment capital for low- and moderate-income
housing in low- and moderate-income neighborhoods. The proposed
Microenterprise Opportunity Expansion Act (H. R. 1019, February
1995) sets forth criteria and describes how microenterprise loans\25
and grants would be treated as an investment in a regulated financial
institution's community.
--------------------
\24 Also, Congress has debated numerous legislative proposals to
amend CRA in an effort to reduce the compliance burden.
\25 Described by the act to mean a loan (1) to a commercial
enterprise with five or fewer employees, with one or more of those
employees owning the enterprise; (2) in amounts not less than $100
and not more than $10,000; and (3) the interest rate on which is
comparable with the interest rate charged on secured commercial loans
offered by financial institutions to their most preferred commercial
customers.
REGULATORS HAVE PLAYED A KEY
ROLE IN FACILITATING
INITIATIVES TO IMPROVE
COMMUNITY LENDING
---------------------------------------------------------- Chapter 4:5
Through their various consumer affairs offices or outreach programs,
regulators have established a mechanism to encourage and support
community development. Many of their responsibilities and
promotional efforts are carried out primarily through guidance,
educational forums, information dissemination, and technical
assistance activities.
The experience levels and the amount of resources the regulators have
devoted to their respective community affairs programs and operations
vary. The Federal Reserve Board (FRB) and FDIC established programs
in 1980 and 1990, respectively, while the Office of Thrift
Supervision (OTS) and the Office of the Comptroller of the Currency
(OCC) began staffing their programs as recently as 1994. Despite the
different levels of operation, development, and resources, all of the
regulatory programs have a general goal of encouraging financial
institutions to increase the flow of credit to low- and
moderate-income applicants and areas. However, the effectiveness of
the regulators' programs in providing community affairs activities or
participating in community outreach efforts is largely dependent upon
the availability of resources.
INTERAGENCY REGULATORY
GUIDANCE HIGHLIGHTS
EFFECTIVE CRA PROGRAMS
-------------------------------------------------------- Chapter 4:5.1
One mechanism used by regulators to facilitate community lending is
through guidance highlighting "best practices" that are
characteristic of effective CRA programs. The regulators issued
interagency guidance in March 1989, acknowledging that an institution
that has (1) ongoing programs or methods to identify community needs,
(2) the ability to develop and extend products and services to meet
the credit needs identified through the ascertainment process, and
(3) a comprehensive marketing program that reaches all segments of
its delineated community will generally be in compliance with CRA.
The guidance further acknowledges regulators' belief that to secure
an effective CRA program, an institution's management should be
actively involved, maintain policy oversight, and regularly review
the community reinvestment compliance program. Such actions can help
to ensure that the products and services offered and extended by an
institution (1) will meet community credit needs, (2) can be modified
when those needs change, and (3) will be available to all segments of
the community. The regulators also are to use the expertise of their
community affairs staff to counsel and assist institutions that do
not have good compliance programs.
FRB HAS THE MOST DEVELOPED
COMMUNITY AFFAIRS PROGRAM
-------------------------------------------------------- Chapter 4:5.2
FRB, which has the most developed outreach program, operates a
community affairs office (CAO) in each of its 12 Federal Reserve
districts. The staffing level for this program has grown from 14 in
the mid-1980s to a current level of approximately 70 employees.
According to an FRB official, the staff hired often have some
background in housing or the community development area. The
principal responsibility of the CAO is to perform outreach work
wherein staff contact people in local governments and community
organizations to find out what types of unmet needs exist in
different communities. The CAO staff develops education and
information programs to help meet the community needs identified.
Through interviews with FRB officials, we learned that CAO staff are
involved in various types of activities that promote community
outreach and provide support to examiners. All 12 Federal Reserve
regions publish newsletters that discuss different programs and
various community development issues. In addition to sponsoring
conferences and publishing newsletters, some CAO staff conduct
research and issue community profiles (which provide bankers with
information on perceived credit needs, existing community development
initiatives, and programs within regions that might be duplicated on
a local level). Furthermore, they provide assistance to examiners by
maintaining a database of community group contacts and may help to
analyze home mortgage data. When an institution receives a less than
satisfactory rating, the examiner is to refer the institution to the
CAO staff for consultation and guidance. The CAO staff may transmit
information on community needs through examiner training or by
circulating written reports.
Being locally based, the administration of the CAO program is left to
the discretion of the individual reserve banks. Consequently,
although all of the reserve banks are involved in community outreach
activities, the methods used for disseminating information may vary.
For example, a FRB official told us that an approach used by the
Kansas City CAO is to develop a road show presentation and travel to
designated areas and present the show. This approach allows
institutions and community organizations (which may be located in
small, rural areas with limited budgets) to take advantage of the
FRB's outreach efforts. The San Francisco CAO helped to develop a
state-wide lending consortia by convening bankers and experts. The
CAO in Dallas encouraged community lending by sponsoring geocoding
seminars and small business lending workshops. These sessions are
designed to teach institutions how to analyze geographic data to help
ensure that the institution serves all areas of its community. The
Philadelphia CAO established bankers' councils, which are to meet
three or four times a year. By organizing a network of bankers into
Community Affairs Officers Councils, the Philadelphia CAO has not
only provided a forum for its staff to disseminate CRA information
and offer education but also provided a means for encouraging bankers
to come together to discuss issues and opportunities for reinvestment
in their communities. A FRB official pointed out that the primary
strength of CAOs is that they are effective in providing
communication forums.
FDIC ENHANCES STAFFING FOR
COMMUNITY AFFAIRS
-------------------------------------------------------- Chapter 4:5.3
FDIC has reached its goal of having at least three community affairs
(CA) positions (CA officer, CA assistant, and fair lending
specialist), in each of its eight regions. FDIC operates its
regional community affairs activities with a staff of 26 who report
to regional management with program oversight being provided by
headquarters. Similar to FRB, FDIC's staff has some background
experience in housing and community development, and although the
program staff's operations may vary by region, they perform a variety
of functions, which are coordinated centrally. For example, the CA
officers provide training and information to examiners and develop
community reports similar to, but less detailed than, the FRB's
community profiles. The fair lending specialist analyzes
home-mortgage data and handles consumer complaints. FDIC
headquarters office coordinates functions with community affairs
staff through quarterly meetings. Also, centrally coordinated
projects, such as a recently published paper on Native-American
issues, may be directed by the Washington, D.C. office. FDIC
anticipates that its newly created division of compliance and
consumer affairs will allow the agency to broaden its outreach
initiatives and be more responsive to consumers and bankers.
EMERGING COMMUNITY AFFAIRS
PROGRAMS OF OCC AND OTS
-------------------------------------------------------- Chapter 4:5.4
OCC plans to have 12 community affairs staff working in conjunction
with its new compliance program. As part of this staffing goal, OCC
intends to have one community affairs officer located in each of its
district offices. The officers are to be responsible for outreach
and communication with community groups and other members of the
public. As of February 1995, staffing of these positions had not
been completed.
Although its community affairs program is in the early stages of
development, OCC has had a Community Development Division (CDD) to
(1) oversee community development corporations (CDC) and investment
programs and (2) approve applications by national banks to invest in
CDCs\26 in accordance with the National Bank Act. The role of the
CDD is to provide policy guidance to the OCC on community development
issues that affect national banks, their customers, and banking
community and consumer organizations. The division is responsible
for (1) developing initiatives related to the creation of affordable
housing for low- and moderate-income individuals; (2) the provision
of technical assistance and financing for small, minority, and
women-owned businesses; and (3) the economic redevelopment of low-
and moderate-income areas.
In February 1993, the CDD published the 1992 National Bank Community
Development Survey Report, which highlighted the types of community
development activities in which national banks participate. The
report was distributed to more than 7,500 national banks, community
representatives, and other interested parties. The CDD also
publishes a quarterly newsletter, Community Developments, which is
designed to provide national banks and others with information on
innovative bank community development programs, regulatory updates on
community issues, and news of federal and state programs that might
be of interest to national banks.
In February 1994, OTS announced the appointment of five experienced
senior staff members to fill positions in the consumer affairs area.
In making the announcement, OTS said that the appointments are part
of agency initiatives emphasizing community reinvestment,
nondiscrimination in lending, and other consumer-oriented goals for
thrift institutions.
According to OTS officials, during 1994, the community affairs
liaison officers in each of its five regions were actively involved
in outreach and support efforts related to affordable housing,
community development, and related fair lending and CRA matters. For
example, these activities included (1) training programs for industry
and staff, (2) assistance to institutions with poor CRA ratings, (3)
the establishment of a community contact database for examiners, (4)
meetings with local government agencies and community organizations
to ascertain community credit needs and community development
programs, (5) forums for thrift institutions and local community
organizations to discuss local credit needs and community development
programs for thrift participation, and (6) policy work on regulatory
barrier and safety and soundness issues related to community
development and affordable housing. A National Community Affairs
Coordinator was appointed in February 1995, in Washington, D.C., to
oversee the function of and coordinate the activities among the
regional community affairs liaisons.
OTS officials also noted that in 1994, they issued a guide on the
federal laws and regulations governing community development
activities of savings associations, entitled Community Development
Investment Authority. In addition, OTS officials said they began a
new training program for safety and soundness examiners on
understanding and evaluating multifamily affordable housing
loans/projects.
--------------------
\26 CDCs are organizations funded by banks and bank holding companies
(BHC) which are authorized to make investments that may not otherwise
be permitted for banks or BHCs. For example, CDCs may make equity
investments in local real estate and business projects if such
investments result in public benefits, such as economic development,
jobs for low- and moderate-income individuals, affordable housing,
and capital for small businesses.
INTERAGENCY COORDINATION
COULD BE ENHANCED THROUGH A
MORE SYSTEMATIC APPROACH
-------------------------------------------------------- Chapter 4:5.5
Coordination of community affairs activities among the regulatory
agencies is not something that is required by regulations or mandated
by legislation. In practice, however, much of the interagency
coordination of the regulators' community affairs activities that
occurs is done through joint training and meetings or established
councils. According to an FRB official, FRB holds many conferences
jointly with the FHLB Board and has cosponsored conferences with
FDIC. Now that OCC and OTS have separate compliance offices, FRB
anticipates working more closely with these two agencies. On a
regional level, FRB and other government agencies sponsor joint
interagency programs, such as training or conferences dealing with
community affairs issues.
Information is also shared through regulatory publications, such as
newsletters or community reports and community contact forms. Upon
request, newsletters and community reports containing information
such as community lending techniques and investment opportunities are
generally disseminated to the public and shared among the regulators.
During the examination process, if examiners find that recent contact
has been made with community representatives and the results
documented, examiners who are assigned to assess an institution's CRA
performance in identifying and/or addressing community needs in that
same general neighborhood or community can save time by taking
advantage of information obtained from shared community contact
forms. These methods of information sharing are generally done on an
ad hoc basis. Consequently, the overall benefits to be gained by the
regulators as well as the community may not be as far reaching as
they could be under a more systematic, coordinated approach to
information sharing.
Interagency coordination in the use of regulators' resources can
expand or broaden the effectiveness of these resources in helping
bankers to understand and implement various initiatives that have
proven successful in meeting CRA goals, while providing much needed
credit assistance to communities that may require revitalization or
redevelopment. To the extent that regulators can apply a systematic,
coordinated interagency approach to providing community outreach
services that are commonly provided by all regulators--such as
community contact information or databases--institutions, community
groups, government entities, and others who benefit from such
services could be more efficiently served despite the limited
resources of regulators.
CONCLUSIONS
---------------------------------------------------------- Chapter 4:6
While some bankers perceive an inherent conflict between safety and
soundness and CRA goals and are concerned about the secondary market
requirements and/or higher transaction costs and smaller loan amounts
associated with CRA lending, others have worked to overcome such
barriers through individual and/or collective innovative and creative
initiatives. Because lending and community development in low- and
moderate-income areas often involve different and more complex
methods of financing, successful initiatives tend to require the
cooperative efforts and expertise of multiple financial partners.
Given the recent emphasis on CRA reform and sparked by the need to
remove perceived barriers and provide additional compliance
incentives, program initiatives have been taken by the secondary
market, governments, and Congress to provide financial and other
incentives to promote community development and revitalization. The
banking regulators have also played a key role in facilitating
community lending by providing educational forums and disseminating
information to encourage cooperative working relationships among
banks and thrifts, other financial entities, community groups, and
various government agencies. In this current climate of CRA reform
and limited government resources, the regulators' role of encouraging
institutions to meet the needs of all segments of their delineated
communities will be a key factor in continuing and expanding upon
workable and successful CRA initiatives. Given the differences in
resource availability among the regulators, more systematic
coordination could help to better utilize limited resources and
enhance the regulators' role in encouraging community development
lending.
The varied positions taken by the affected parties further
demonstrate that the debate about how best to achieve the goals of
community reinvestment is both complicated and contentious. The
approach embodied in the current CRA statute uses the levers of
compliance examinations and application approvals to increase
community reinvestment lending. The new regulations are an attempt
to generate better results with less regulatory burden. However,
given the positions of the different parties, it is not clear that
the results will fully satisfy all of those parties.
MATTER FOR CONGRESSIONAL
CONSIDERATION
---------------------------------------------------------- Chapter 4:7
If the concerns raised by the affected parties should persist even
after the regulators have had sufficient time to implement the
revised regulations, Congress may want to consider revisiting and
revising the CRA statute to clarify its intent and scope, possibly
examining alternative strategies for reaching its goals. Such
strategies might include incentives to strengthen positive CRA
performance by bankers and additional enforcement authority for
regulators to discourage negative performance.
AGENCY COMMENTS AND OUR
EVALUATION
---------------------------------------------------------- Chapter 4:8
With regard to the "Matter for Congressional Consideration" FDIC and
OCC were concerned that congressional action before sufficient time
has passed for full implementation of the revised regulations may be
premature, and that further revisions to CRA without feedback on the
effectiveness of the revised regulations could undermine their
implementation. OTS noted that the agencies have already agreed to
conduct a full review of the revised regulations 5 years after they
are fully implemented. We agree that the regulators have made
extensive efforts in revising the regulations to address the diverse
concerns raised about the effectiveness of CRA. Consequently, we
modified the matter for congressional consideration to suggest that
Congress may want to consider the results from implementation of the
revised CRA regulations in its deliberations as to whether the
objectives of community reinvestment are being well served through
the CRA statute and regulations.
(See figure in printed edition.)Appendix I
COMMENTS FROM THE FEDERAL RESERVE
SYSTEM
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)Appendix II
COMMENTS FROM THE FEDERAL DEPOSIT
INSURANCE CORPORATION
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)Appendix III
COMMENTS FROM THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on OCC's letter dated September 29,
1995.
GAO COMMENTS
---------------------------------------------------------- Chapter 4:9
1. OCC concurs with us that Congress defer revisiting or revising
the CRA statute until after the regulators have fully implemented the
revised regulations, but OCC points out that we are not specific
about how much time is sufficient for full implementation. We agree
with the regulators that they have made extensive efforts to address
the diverse concerns raised about the effectiveness of CRA, but also
recognize that if Congress identifies issues of concern, it may want
to revisit CRA to determine whether community reinvestment objectives
are being satisfied. We believe that the results of the regulators'
planned evaluation of the revised regulations 5 years after their
implementation could be useful for any reconsideration of CRA issues
by Congress, but also agree with OCC that the completion of a full
examination cycle would be needed for Congress to objectively assess
the adequacy of the revised regulations to address industry concerns
and Congress' mandate for community reinvestment. We have,
therefore, modified our matter for Congressional consideration to
reflect the need for a sufficient amount of time to implement the
revised CRA regulations.
2. OCC suggested that we acknowledge the value of properly exercised
examiners' discretion and expressed the belief that the need for
training has not been heightened as we report. On page 60 of our
report, we recognize the fact that examiner judgment will continue to
play an important role in CRA evaluations, and we call for clear
guidance and comprehensive examiner training to achieve consistency
in examinations. Also on page 60, we changed our discussion on
training from its need being "heightened" to "created" to ensure the
revised CRA regulations are consistently implemented. Unless
examiners understand how to interpret and apply the guidance, given
differences in banking activities and community needs, examination
consistency may not otherwise be achieved.
3. On performance information, OCC pointed out that only FRB
received and checked HMDA data accuracy but that under new joint CRA
examination procedures all agencies will check data accuracy. Our
discussion of the regulators' efforts to ensure that the institutions
they supervise maintain and submit accurate HMDA data is based on our
understanding that the regulators are required to do this during
compliance examinations. We believe that the regulators' experience
in this area suggests a need to establish clear guidance to examiners
for ensuring accurate data maintenance and reporting by institutions,
which OCC suggests will be provided for in the new joint CRA
examination procedures.
4. OCC does not, at present, expect increased examiner resource
requirements to be needed to implement the revised regulations due to
various efficiencies being introduced to the examination process. We
believe that more sophisticated CRA analysis software and training
are examples of the resources required to assist agencies in
successfully implementing an efficient CRA examination process. We
also agree that over time, experience with the revised regulations
could result in some reduction in the time required to do CRA
examinations, but at this time it is unclear what effect this will
have on total resources dedicated to CRA examinations, compared with
what is required under the current regulations and considering the
additional responsibilities placed on examiners.
5. OCC indicated in its comments that we overstate the impact of the
Department of Justice opinion on CRA's enforceability. Our
discussion describes the Justice opinion, which resulted in the
regulators removing from the revised regulations provisions to use
formal enforcement actions for CRA compliance.
6. OCC pointed out that transaction costs and profitability for
community lending require sophisticated models that take into account
all financial factors. We agree with OCC and deleted our statement
on page 70 about transaction costs and profitability since it did not
reflect all relevant financial factors. The primary purpose of our
discussion of transaction costs is to present some bankers' concerns
that such costs affect institutions' profitability and, thereby,
serve as a barrier to community reinvestment lending. We believe a
sophisticated model that takes into account all financial factors
affecting the profitability of community loans can best be developed
by a bank that knows the facts and circumstances specific to the
products and services it offers to prospective borrowers.
7. OCC questioned the basis for our claim that bankers are required
to set aside additional loan loss reserves for community lending
based on examiners' assessment of the safety and soundness of such
loans without fully understanding the related credit risk. The
discussion pertaining to loan loss reserves as it relates to credit
risk management represents the opinions or views of some bankers and
community groups. On pages 70 and 71 of this report, we attribute
this discussion to these parties as a safety and soundness concern
about CRA lending, and on page 71 we state that we did not
independently verify the accuracy of these claims.
(See figure in printed edition.)Appendix IV
COMMENTS FROM THE OFFICE OF THRIFT
SUPERVISION
============================================================ Chapter 4
(See figure in printed edition.)
See comment 1.
(See figure in printed edition.)
(See figure in printed edition.)
See comment 8.
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on OTS' letter dated September 12,
1995.
GAO COMMENTS
--------------------------------------------------------- Chapter 4:10
1. OTS suggested we add a statement to round out the discussion on
page 3 of the executive summary that the regulators acknowledge these
three challenges and are working together to address them. We
believe OTS' point is made through the agency responses and our
comments to those responses.
2. OTS pointed out that various sections of the draft report
indicate that not all industry problems can be addressed through
regulations and suggested we provide a clearer explanation of the
problems addressed and not addressed in the revised regulations. We
acknowledge, on page 54 of the report, that the regulators' draft
regulations included provisions to use formal enforcement actions,
such as cease and desist orders, to enforce CRA compliance. However,
we also point out that in December 1994, the Department of Justice
issued an opinion that CRA did not give regulators legal authority to
use formal enforcement actions to enforce CRA. We do not take issue
with the regulators' proposal nor do we take issue with Justice's
opinion. The result, however, is that the bankers and community
groups concerns about CRA enforcement were not addressed in the final
regulations.
3. OTS suggested that our statement that the revised regulations
have increased examiner responsibilities, heightened the need for
comprehensive examiner training, and increased the amount of
resources needed to effectively complete examinations may be
premature due to the efforts OTS is undertaking to address those
issues. In our discussion of resource requirements under the revised
regulations, we point out that examiners have additional
responsibilities which may increase OTS' examiner resource needs. We
believe that more sophisticated software, training, and other similar
tools are examples of the additional resources that will be required
if regulators are to successfully achieve the anticipated
efficiencies in CRA examinations. The regulators are initiating
action to implement new procedures and make their CRA compliance
systems more efficient. However, it is not clear what impact such
action will have on examination time and resource needs.
4. OTS pointed out that the regulators have agreed to conduct a full
review of the revised regulations in the year 2002, 5 years after
they are fully implemented. We believe that the regulators' plan to
conduct a full review of the revised regulations is a positive step.
The results of this review could be useful for any reconsideration of
the CRA by Congress.
5. OTS expressed concern over our statement on page 19 that the fair
lending laws overlap with CRA. Our discussion of the fair lending
laws and their relationship to CRA has been modified. We determined
that the use of the term "overlap" may distract the reader from the
major point of the subsection, which is to point out that the
objectives of the laws and some of the tools used to evaluate
compliance with them are similar.
6. OTS stated that our discussion of the OTS specialized compliance
examination program did not accurately reflect the development of
that program. Discussion of the OTS compliance program on page 21
has been changed to reflect the suggested clarification of the
program's development.
7. OTS suggested that our discussion on page 33 of the regulators'
use of enforcement actions for CRA violations implies that the
regulators should have taken more stringent actions. The purpose of
our discussion of enforcement actions is to objectively present the
facts. It does not attempt to make an assessment of what regulators
should do.
8. OTS pointed out that we incorrectly stated that it does not track
information on enforcement actions that include CRA violations. We
changed our discussion of OTS' use of enforcement actions for CRA to
reflect the information provided.
9. OTS was concerned that our discussion, on page 63, of the
regulators' success in examining their institutions for CRA
compliance was misleading and did not sufficiently differentiate the
performance of the regulators in the same way as was done in other
sections of the report. Our discussion of the regulators' success in
examining institutions within a 2-year time frame was meant to make
the point that they have not been successful in examining all of
their institutions within their established time frames under the
current CRA regulations and that this problem could worsen under the
revised regulations in light of increased examiner responsibilities.
The figures provided by OTS in its comments, that it completed 96
percent of its required examinations in 1992, 91 percent in 1993, and
89 percent in 1994, in our view, support this point.
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
--------------------------------------------------------- Appendix V:1
Teresa L. Anderson, Assistant Director
Thomas L. Conahan, Senior Evaluator
Marion L. Pitts, Senior Evaluator
Kristi A. Peterson, Evaluator
Desiree W. Whipple, Reports Analyst
BOSTON REGIONAL OFFICE
--------------------------------------------------------- Appendix V:2
Lester P. Slater, Senior Evaluator
Thomas S. Taydus, Evaluator
CHICAGO REGIONAL OFFICE
--------------------------------------------------------- Appendix V:3
Roger E. Kolar, Senior Evaluator
Susan R. Bradshaw, Evaluator
Daniel K. Lee, Evaluator
DALLAS REGIONAL OFFICE
--------------------------------------------------------- Appendix V:4
Elena L. Boshier, Senior Evaluator
Ellen G. Thompson, Evaluator
David W. Bennett, Evaluator
SAN FRANCISCO REGIONAL OFFICE
--------------------------------------------------------- Appendix V:5
Alexandra Martin Arseneau, Senior Evaluator
Julie M. Devault, Evaluator
Jose R. Pena, Evaluator
OFFICE OF GENERAL COUNSEL,
WASHINGTON, D.C.
--------------------------------------------------------- Appendix V:6
Paul G. Thompson, Attorney Advisor
*** End of document. ***