|COMMUNITY REINVESTMENT - Smaller US banks could become less accountable if rules of the CRA are relaxed for them. Society should know how and to whom banks lend.
|TIME FOR A RETHINK
(Mar 3rd 2005 from The Economist)
THE RULES REQUIRING BANKS TO SERVE LOW-INCOME AREAS ARE CHANGING
Banks, perhaps even more than other businesses, are almost certain to be keener on serving the rich than the poor. In America, however, the law makes them curb their instinct a little. Since the Community Reinvestment Act (CRA) was passed by Congress in 1977, federally insured banks and savings institutions have been obliged to meet the “credit needs” of low-income areas in the communities they serve. Now change is in the air. On February 25th the Federal Reserve became the last of America's four national bank regulators to propose relaxing the act's rules.
Under the CRA, banks with assets of more than $250m must show that they serve poorer communities adequately. They are tested on three grounds: lending, bank services and “community investments”—anything from soft loans for cheap housing to equity investment in small businesses. Small banks are tested mostly on lending and have looser reporting requirements.
The bank regulators are obliged to scrutinise the CRA every few years, and are now nearing the end of an examination they began in 2001. They all agree it is out of date. When the act was passed, banking was a local business, in part because of restrictions on interstate banking and even on branching within states. So the CRA's definition of a bank's community—essentially, where it has branches—made sense. Now, internet banks and mortgage firms offer credit anywhere; consolidation has spawned banks with customers (but not necessarily branches) across the country; and non-banks, such as credit unions and mortgage companies, which are not subject to the act, vie with banks to offer loans. “The concept of localised banking is fundamentally changing,” says John Hawke, a former Comptroller of the Currency, one of the national regulators.
The regulators are free to change some of the rules themselves. Last year the Office of Thrift Supervision (OTS), impatient with the slow pace of reform, unilaterally relaxed the rules for the banks it oversees. That prompted the other three—the Fed, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC)—to speed up their own reviews.
The changes proposed by the Fed are identical to those put forward earlier in February by the OCC and the FDIC, and similar to the OTS's. They would raise the threshold defining big banks for the purposes of the act from $250m to $1 billion and create a middle tier of banks with assets between these limits. These banks, like the smallest, would be exempt from many reporting requirements as well as from the rigid three-part test. Regulators would scrutinise their investment and services activities—but allow banks more flexibility to decide whether or not these activities made any sense. The OTS, however, said on February 28th that it will scrap the three-part test even for big banks. The proposals of the Fed, the OCC and the FDIC are now open to public comment.
According to the FDIC, at the end of last year 1,484 banks, with total assets of $584 billion, overseen by itself, the Fed or the OCC would have qualified for the new middle tier and thus be exempt from the three-part test. Critics see the looser rules as the first stage in the gutting of the CRA. “We are on our way to bifurcating access to capital in America,” says John Taylor of the National Community Reinvestment Coalition, a community-development group. Critics also fear that it will be hard to hold smaller banks to account without data on how and to whom they lend. Given the chance to invest less in their communities, they say, banks will do just that.
The smaller banks retort that documentation is too burdensome and that good community lending and investment opportunities are scarce, given competition from bigger lenders. Scott Zimbrick of Citizens Bank, an Oregon bank with $330m in assets, says that in three years of searching for a sound community-investment opportunity he managed to land only one, because of competition from “bigger banks with deeper pockets, more expertise and huge CRA departments.”
Both large and small banks grumble that the rules are too fiddly. Bankers can gain credit for the service test if they sit on the boards of non-profit organisations—but only if they are on the finance committee. One banker grouses that a small-business loan is defined as any loan to a company of $1m or less. “Are we not helping poorer communities attract jobs by lending a company there $1.5m?”
Most bankers claim they would do the bulk of what the act requires—mortgages and small-business lending—anyway, because it is profitable. “They are no different, in terms of profitability and standards, than our similar, non-CRA products,” says Doug Woodruff of Bank of America. No wonder that some believe a more thorough re-think of the CRA, not just an easing of reporting requirements, is needed.
Mark Willis, head of J.P. Morgan Chase's community-development group, believes the CRA has been “extremely” important so far and that in the future, the real “bang for the buck in our communities” will come with community-development investments and services, which tend to require more innovation and technical assistance than “mainstream” lending and mortgages. His bank has promised $35 billion for such projects (out of $800 billion in total CRA commitments) over ten years. Activists applaud, but doubt that other banks will look beyond lending if the rules are relaxed.
Created: 31/08/06. Last changed: 31/08/06.
Information concerning property and copy right of the content will be given by the Institut For Financial Services (IFF) on demand. A lack of explicit information on this web site does not imply any right for free usage of any content.