Statement by Lawrence B. Lindsey, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Credit and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 18, 1993.
I appreciate the opportunity to provide the Federal Reserve's perspective on the current status of the Community Reinvestment Act (CRA). I will include a few comments on the Home Mortgage Disclosure Act (HMDA) and the fair lending laws, but they are extensive subjects in their own right.
The CRA continues to be the source of concern and frustration. Many members of the banking community consider the CRA as unnecessary, vague, burdensome, and unfair. Community and consumer groups often view enforcement as weak and have suggested several changes, including new disclosure provisions, to help ensure that banks and supervisory agencies effectively approach their CRA responsibilities.
We, as regulators, are often caught in the middle. Despite a dramatic increase in resources and efforts devoted to the CRA, we continue to receive brickbats from all sides. Bankers think that we grade too harshly and that we focus on process and paperwork instead of assessing "real" community lending. Community groups say that our grades are too high and that our effort is lax.
Over the years, critics have made many other charges about bank and supervisory agency performance, some of which have little foundation in the CRA's intent, actual provisions, or regulations. For example, some believe that an institution's record of making mortgage loans in minority areas should be the only CRA criteria, while others think that if a bank has a community development corporation (CDC), it should automatically get a "pass" on the CRA. But the CRA is more complex than the taking into account of home lending and CDCs.
Hearing this cacophony of divergent critiques, ideas, and proposals over the past few years, you would likely have concerns that the CRA may not be working as intended. In considering this point, I would like to cover several related areas in my testimony today. First, as a basis for my comments, I want to provide an overview of the act and its implementing regulation. Second, I would like to bring the subcommittee up to date on recent activities by the supervisory agencies to strengthen our CRA assessment programs. Third, I would like to touch on some of the recurring issues affecting the CRA that are of concern to bankers, community representatives, and the supervisor agencies. Finally, I want to share with you some thoughts on the CRA's impact - which we believe has been quite considerable.
I want to make it clear, however, that agencies other than the Federal Reserve are also deeply involved with the CRA. In fact, from an examination perspective we have by far the smallest number of supervised institutions - less than 10 percent of the total. I caution the subcommittee, therefore, that a serious exploration of the CRA would require testimony from others. This requirement, of course, would also be true with regard to HMDA and fair lending.
WHAT THE CRA SAYS AND REQUIRES
Let me begin by reviewing the act and its implementing regulations. Given what seems like a blizzard of recent proposals to change the CRA, increase its scope, provide safe harbors, or reduce its burden, it is especially important that the discussion be grounded in a clear understanding about the objectives of the act and its current requirements.
On its face, the CRA is a short, rather simple law, as banking laws go. It is only a few pages. It reminds financial institutions that they have a continuing obligation to help meet the credit needs of their entire community, including those of low- and moderate-income neighborhoods. These obligations stem from bank charters that state that banks should meet the convenience and needs of the communities they serve.
But the CRA also emphasizes that the obligation to help meet community credit needs, including those of low- and moderate-income areas, is an affirmative one. The CRA's fundamental message is simply that each financial institution should, as part of its day-to-day business functions, be as attentive to the credit needs of low- and moderate-income areas of its community as it is to other areas.
When considering the CRA's overall message, I think that it is important to recognize that the actual legislative language contains few directives and virtually no requirements that fall directly on financial institutions.
The CRA does not require that an institution make any specific types of loans, make any quantity of loans to particular types of persons or businesses, or make any specific number of loans in any targeted geographic area. The Congress has wisely avoided mandating credit allocation. The CRA does not require that institutions make housing loans, nor does it require that they make loans with below-market interest rates or loans with other terms and conditions that would be inconsistent with safe and sound lending. None of these items are required, or, in my view, even implied by the CRA.
The CRA's actual requirements are really directives to the financial institution supervisory agencies. First, the CRA requires that these agencies encourage each financial institution they supervise to help meet the credit needs of its entire community, including the credit needs of low- and moderate-income neighborhoods, in a way that is consistent with safe and sound banking practices. Second, the CRA requires that the supervisory agencies assess the performance of financial institutions in meeting community credit needs. We do that primarily through CRA examinations that use twelve assessment factors outlined in the CRA regulation. Third, as a result of 1989 and 1991 amendments to the CRA, the supervisory agencies are required to prepare for each institution examined a public written CRA evaluation that includes the CRA rating and provides supporting facts and data. Finally, the CRA requires that the agencies consider the CRA performance of each financial institution when reviewing its applications for expansion of depository facilities through branching, mergers, or acquisitions.
In performing their responsibilities, the agencies have issued regulations that impose a few specific requirements on banks and thrift institutions, but these are essentially technical and procedural in nature. For example, each bank must develop and update a CRA statement that delineates its community with a map and describes services offered within that community. Institutions must also post CRA notices in the lobbies of depository facilities and maintain a public comment file that may be inspected by the public and the banking agencies.
Nature of the Law
I believe that virtually everyone who is affected by the CRA senses that this law is clearly unusual. It encourages but does not require action by financial institutions. It reminds banks and thrift institutions about their charter obligations but does not mandate any particular activities. It states that banks should be encouraged to "help" meet community credit needs but does not specify how such encouragement is to be provided or how much help in meeting credit needs in expected.
Further, the CRA directs the supervisory agencies to assess bank performance in helping meet community credit needs, but it does not define good CRA performance. The act also implies potential punishment for institutions with poor performance - in the form of denials of applications to expand - but provides no particular incentives to encourage institutions to seek outstanding performance. With the exception of requirements for such items as CRA statements or CRA notices, lack of action by institutions does not constitute a "violation" of the law.
And most important, the fundamental approach of the act, and perhaps the primary source of most concerns and issues, is that the CRA's focus is on assessments of performance. That is, the CRA, at its very heart, is "valuative." It requires judgments based on a set of facts and circumstances that vary greatly among communities and institutions.
Supervisory Agency Roles
Under the CRA, the supervisory agencies are charged with encouraging financial institutions to help meet community credit needs and with evaluating their performance. At the Federal Reserve, we provide "encouragement" in two primary ways: by conducting CRA examinations and by carrying out a comprehensive set of educational, technical assistance, and informational programs, primarily through our Community Affairs program.
Over the years, the Federal Reserve System has strengthened its CRA-related activities on several fronts. My impression is that, in all the talk about the problems with CRA, not enough information has been conveyed about the many positive happenings. Let me first talk about the examination side.
First, examiner training has been expanded and significantly enhanced. Our consumer compliance schools for examiners devote considerable time to the CRA and related regulations, such as those covering fair lending and home mortgage disclosure. A more advanced compliance school also includes, segments on community development. In addition, we regularly conduct a unique, one-week intensive course for examiners, called CRA Advanced Examination Techniques. Over the past three years, virtually all of our consumer compliance examiners have completed this course. We are also taking steps to help our safety and soundness examiners understand the essentials of the community development market so that they can fairly assess the quality of a bank's reinvestment loans.
Second, in addition to enhanced training for our examiners, we have been concerned about providing them with better tools to help them get the job done. To this end, on behalf of the Federal Financial Institutions Examination Council (FFIEC) the Federal Reserve has developed a computerized system for analyzing the expanded data collected under the Home Mortgage Disclosure Act (HMDA). The system is extremely versatile and allows the data to be segmented by demographic characteristics such as race, gender, and income levels, or geographic boundaries. Examiners can now sort through vast quantities of data to focus attention on specific lending markets and draw comparisons between an individual HMDA reporter's performance and of all lenders in the area. With these capabilities, examiners can more readily determine whether a bank is effectively serving all segments of its market, including low- and moderate-income and minority neighborhoods.
Third, in June 1992, the FFIEC issued revised, uniform CRA examination procedures that clarify CRA examination policies. For example, they emphasize the importance of using numerical data in the public CRA evaluation to the extent that they are used in the assessment process and support the conclusions reached. Our examiners now routinely factor into their CRA assessments "hard data" derived from HMDA tables, the supervisory Call Reports, bank lending records, and other sources.
Fourth, we have been mindful of the widely shared perception, often vocalized by bankers, that the CRA entails an undue amount of paperwork. In developing the new examination procedures, we endeavored to help reduce the amount of paperwork and documentation by emphasizing that institutions should retain for examiners' review only information that is useful to the institution's own management needs. We have emphasized to our examiners that CRA documentation will generally be less formal and less extensive in small and rural banks than it is in larger, urban banks. We want to reduce as much as possible the paperwork burden on bankers so that they can focus on the lending side.
Fifth, personnel, resources allocated to CRA examinations have increased significantly since 1989. Our examiners and Reserve Bank staff also spend considerable time in follow-up to the examinations through correspondence, advisory visits, and educational activities directed to the industry as a whole. The frequency of CRA examinations by the Federal Reserve System has been maintained, despite the fact that CRA examinations have become a more demanding and time-consuming job for examiners. For more than a decade, we have examined state member banks with a satisfactory or better record of past CRA performance every eighteen to twenty-four months. "Problem banks," or those with demonstrations weaknesses, are examined every six to twelve months.
Sixth, the agencies have successfully implemented the public disclosure of CRA evalutions and ratings. Written, public evaluations of CRA performance have been a reality for well over two years. We and the other supervisory agencies have devoted substantial time and effort in developing the system and in training examiners for an unprecedented change in the way they do their jobs.
Since the disclosure provisions became effective, the Federal Reserve has examined for CRA purposes every bank it supervises at least once, and many twice, and has presented its findings to the public. We believe that this process has proceeded relatively smoothly and has had a positive impact on financial institutions and their responses to their CRA obligations.
Expanded Educational, Informational, and
In addition to examinations, a second key way that the supervisory agencies fulfill our CRA "encouragement" responsibilities is through educational, informational, and technical assistance activities. These activities are conducted jointly by the agencies and through programs administered in each agency. At the Federal Reserve, we provide these educational and informational services primarily through our Community Affairs program at each of the twelve Federal Reserve Banks.
To help educate the public and the banking community about CRA and community development lending, the Reserve Banks sponsor Community Affairs conferences, seminars, and workshops. Over the past four years, we have sponsored or cosponsored more than 400 conferences, seminars, and workshops for bankers and others focusing on such topics as CRA and HMDA compliance, options for bank participation in low- and moderate-income housing development, downtown and neighborhood revitalization, small and minority business lending, the formation of community development corporations, and housing finance in rural areas. During the past year, several Reserve Banks conducted workshops on the CRA targeted for members of bank boards of directors and for bank senior executives. Community Affairs staff members have developed community development lending curricula and have conducted numerous community development workshops for bankers.
In addition, during this same four-year period, Community Affairs staff members of both the Board and the Reserve Banks made more than 1,000 formal presentations at conferences, seminars, and meetings of banking, community, and other organizations on community developments, the CRA, and other related topics. They have responded to thousands of inquiries and requests for information about the CRA.
Community Affairs staff members also provide CRA-related technical assistance and advice to individual banks, and some are conducting special visitations to bank holding companies to discuss CRA issues and opportunities directly with senior management. Community Affairs staff members have helped several banks and banking groups structure lending consortia or community development between banks and community organizations. They produce a variety of publications, from community profiles that outline CRA-related opportunities for banks - such as one recently prepared on South Central Los Angeles - to compendiums of programs that banks can use to complement their CRA programs. Nine of the Reserve Banks publish their own community affairs newsletters, which reach a combined total of more than 40,000 bankers, community representatives, and others.
Increasingly, the Community Affairs program is providing direct support to our examination staff members, helping the identify community contacts to meet with during examinations, or helping examiners identify community programs in which banks could be involved.
Overall, we believe that the Federal Reserve's Community Affairs program has greatly strengthened our efforts to "encourage" and help institutions to meet their CRA obligations.
Effects on Applications
Applications that present CRA issues, which include those affected by poor CRA ratings as wells as by CRA protests, have grown more numerous in recent years. During 1992, adverse CRA ratings were an issue in forty-four applications received by the Federal Reserve from banks and bank holding companies, compared with thirty-one such applications in 1991. Protested applications also increased to thirty in 1992 from twenty-four in 1991.
Although there have been relatively few outright denials of applications on CRA grounds, we would urge caution in using this as a significant measure of CRA's impact. We have found that institutions are taking this aspect of CRA quite seriously. They do not want poor CRA examination results, which are afforded great weight in our consideration of applications, to reduce their expansion options or to impede the timing of their applications. This gives them added incentive to have good programs in place. Some undoubtedly avoid filing applications, or decide to withdraw them, when faced with potentially adverse findings. Through the years, many institutions have made substantial commitments to the agencies or to protestants during the application process.
Coupled with our examination and educational efforts, I think that the application procedures have also contributed to overall CRA performance.
As should be apparent from this summary of recent agency activities, the CRA continues to consume an increasing amount of our time and resource. Despite our belief that things are much better than many realize, we also recognize that several controversies continue to be related to the structure and administration of the CRA. Let me touch on a few.
One of the recurring issues involves the consistency, or lack thereof, in the way CRA evaluations are written and ratings assigned. Both community groups and bankers have alleged that the evaluations of the agencies not equally comprehensive and that in some cases the assigned. CRA ratings are not always the same for banks that appear to have similar performance.
Let me say that the supervisory agencies have spent much time and energy, both on an interagency basis, and within each agency, to deal with inconsistencies in evaluation write-up. We have an extensive program within the Federal Reserve to review reports across Federal Reserve Districts to promote uniformity. In May 1991, the FFIEC convened a working group of field examiners to review evaluations across agencies to help ensure a common approach. We have also received input from the Federal Reserve's Consumer Advisory Council, national community organizations, and many others on how we can enhance the quality and consistency of public information. We believe that these issues are being resolved.
It should be recognized, however, that it will probably always be somewhat difficult to make all ratings read consistently, simply because we are rarely comparing "apples to apples." Each financial institution is unique with respect to its business strategy, size, geographical market reach, product mix, and organizational structure. Even banks of the same size in the same communities may offer very different products and services. Each community is also different with respect to its economic condition, credit needs, organizations, and resources.
Process vs. Product
Both bankers and community groups continue to charge that the agencies appear more interested in ensuring that institutions have the appropriate CRA procedures and documentation than actual lending programs in their communities. I believe, however, that if that was the case at one point, it most certainly is not the case now. However, as I will indicate, this issue is not as simple as it may first appear.
In conducting CRA examinations, we do not focus on process to the exclusion of lending. We have cautioned our examiners about just this issue in our revised examination procedures, and we discuss it regularly in examiner training and other meetings. However, we do not consider certain basic business processes to be irrelevant to the CRA. Most successful institutions understand that, if they do not have a well-thought-out CRA program, they may be less effective in finding good lending opportunities in their communities or in being able to take credit for their lending activities at examination time.
We do not believe that most larger institutions, especially those with large branch networks, can reasonably claim to know the credit needs in their diverse communities unless they have an effective program in place to find out. Similarly, they probably cannot truly know whether they are meeting the credit needs with loans unless they have a process in place that would provide them with this information. But this process involves, after all, basic types of information that most bank managements regularly want to see for all products and services. For smaller institutions, the process is much simpler and usually should involve use of day-to-day information that bank management collects in any case.
However, this "process versus product" debate is not an easy one for one fundamental reason - the agencies were not given the task, nor have they assumed the role, of providing rules that allocate credit. Certainly, it would make everything much easier if we had lists of "blessed" loans and customers and mathematical ratios of loans by category that would match various ratings under the CRA - then we would simply count the product and be done with it. In fact, the CRA - wisely in my view - provides flexibility for institutions to meet their obligation in many different ways, depending on their strengths and the specialized needs of their community. Thus, there will always be considerable focus on having an adequate process in place which, in fact, delivers product.
The distribution of ratings is another recurring issue. Community groups say that the CRA grades are much too high, and they contend that the banking agencies are much too lenient. And roughly 90 percent of the institutions do get a satisfactory or better rating. Some bankers, argue, of course, that because an institution would be out of business if it did not meet the needs of its community, all should pass.
When haggling over the grade distribution, we should remember that the CRA ultimately involves performance evaluations. Disagreements will always occur over such assessments, whether they involve a teacher or a professor grading a paper, a music critic judging a recital, or an employer evaluating an employee. No matter how well the criteria are understood, different people - reasonable people - can often make different judgments based on the same information.
But, clearly, few institutions fail. I think there are several good reasons for the current distribution. First, all banks pledge to meet the "convenience and needs" of their communities when they are chartered. This pledge occurred long before the CRA came on the scene. Second, we have been examining banks for compliance since 1977, and one would expect this pledge to have had a positive effect. Third, it should be recognized that the "satisfactory" category, in which about 80 percent fall, is a very broad one - and it includes some with good performance and some with more marginal records.
Discrimination and Home Mortgage
Finally, a highly sensitive and recurring issue involves the relationship of the CRA to both the Home Mortgage Disclosure Act (HMDA) and the fair lending laws, such as the Equal Credit Opportunity Act. Although CRA assessment incorporate the objectives of these civil rights laws, the CRA is also much broader in scope.
It is well known that regulators have faced considerable difficulties in identifying instances of discrimination. It is extremely difficult to find conclusive evidence of discrimination through inspection of individual loan files during examinations. Lenders usually can demonstrate that the applicant was denied because certain credit standards, involving such elements as debt ratios or credit history, were not met.
But we have learned much from the intensive study on mortgage denials conducted by the Federal Reserve Bank of Boston and from the Justice Department's recent case involving Decatur Federal Savings and Loan. We are very concerned about the results of the Boston study and have taken several steps that we hope will help strengthen the capacity of our examiners to detect and deter discriminatory treatment of applicants. Fortunately, we are seeing a significant growth in affirmative marketing of mortgage and other loan products in minority areas as well as development of special mortgage products that meet the needs of low- and moderate-income persons. Institutions that are making positive efforts to offer and extend credit in minority communities are helping fulfill the CRA's aims.
The Impact of the CRA
How well is the CRA working? Frankly, I think it is working a lot better than is often recognized. By any measure it has had a major impact on reinvestment activity by financial institutions throughout the United States. In recent years, we have seen real momentum in financial institution responses to the needs of their communities,
V especially in lower-income areas. I believe that a good part of that momentum is because of the CRA.
The CRA has helped stimulate loans for home mortgages, housing construction and rehabilitation, and small minority business development in low- and moderate-income communities. More banks and thrift institutions are seeking and participating in public and private partnerships, in both urban and rural communities, than ever before. A growing number of bank-led community development corporations or multibank lending consortia are supporting projects that benefit low-and moderate-income areas. Included with my testimony is a sample of such activities gathered from across the nation by our Community Affairs officers.(2)
Although beginning are sometimes advesarial, bank and community groups in many cities have proved that they can work together to promote the goals of the CRA process. I think bankers are generally viewing the world a little differently because of the CRA, and the world views bankers a little differently as well. For many institution, the CRA is becoming increasingly important. Good CRA performance enchances their ability to take advantage of opportunities afforded by mergers and interstate banking. Many bankers are also discovering that good CRA performance also helps them complete for customers. Finally, a growing number of bankers are seeing that CRA-related activities can lead to just good, profitable business.
I would conclude from all of this despite its weakness, the CRA is indeed working and working quite well. The supervisory agencies stepped up their activities. we continue to strengthen our CRA examination, educational, and technical assistance programs. The banking community is responding positively, although certainly more can be done. The CRA is a simple and unusual law. Its lack of specificity - the source of many of its frustrations - may be its strength. In view of this, I would counsel that radical changes to the CRA be cautiously approached.
(1.) Griffith L. Garwood, Director of the Board's Division of Consumer and Community Affairs, presented this statement on behalf of Governor Lindsey. (2.) The attachment to this statement is available from the Board of Governors of the Federal Reserve System, Division of Consumer and Community Affairs, Washington, DC 20051.
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|Title Annotation:||Statements to Congress|
|Publication:||Federal Reserve Bulletin|
|Date:||Apr 1, 1993|
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