The Truth About CRA
Two agencies - the FDIC and Office of Thrift Supervision - are proposing to increase (or have increased) to $1 billion the asset size limit of banks that they examine for compliance with the Community Reinvestment Act using streamlined procedures. The streamlined procedures have already reduced regulatory burden on banks under $250 million in assets. But sky-is-falling rhetoric opposing expanded eligibility for the streamlined examinations greatly exaggerates their effects on banks' community development activities. It also ignores the examination and compliance costs that consume the community banks' human and financial resources that would be better devoted to serving consumers, small business and local communities.
Myth: The streamlined procedures are an "exemption" from CRA.
Fact: The streamlined CRA exam is not an exemption; all banks remain fully subject to CRA's requirement that they meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. Examiners still conduct a thorough CRA review and consider a bank's loan to deposit ratio; the percentage of loans made in the community; the distribution of loans to borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of loans across neighborhoods of different income levels; and the bank's responses to written complaints about its CRA performance.
The major differences from the large bank exam are that the exam is focused, like the CRA statute itself, on lending, and the burden of assessing compliance is shifted to examiners. Under the streamlined procedures, bankers would no longer be required to collect specific loan data for CRA. The examiners will simply look at the bank's lending record using existing bank files.
Myth: Communities will lose investments in projects that serve low- and moderate-income residents, particularly in rural areas, since the streamlined exam doesn't include the large-bank investment test.
Fact: The success and survival of community banks, particularly those in small towns and rural areas, depends on the success and viability of their communities. Those banks are often called upon to provide funding on crucial local projects, such as municipal infrastructure or community improvements, or to help create jobs by attracting businesses to their communities and providing small business credit. However, these activities do not qualify for CRA credit. Because of the dearth of "qualified investments" in their communities, many community banks must purchase investments to meet the CRA investment test that actually have little direct impact in their communities, such as state-wide housing bonds or mortgage backed securities. As a result, funds are actually diverted from the local community - not reinvested there.
The FDIC's proposal addresses this issue by adding a new community development test to the streamlined exam for banks between $250 million and $1 billion in assets that considers not only investments, but community development lending and services as well. In addition, for rural areas, activities as diverse as funding a local water project or school construction, rehabilitating a Main Street retail district, or offering a special program to bring the unbanked into the financial mainstream, would qualify. More important, it would help keep local funds invested locally - one of the key components of CRA.
Myth: The agencies' proposals will exempt large parts of the banking industry from CRA.
Fact: First, the streamlined exam is not an exemption. Second, the vast majority (85%) of industry assets would still be covered under the large bank test. Even with a $1 billion size limit, only about 15 percent of industry assets would be eligible for the streamlined CRA process-still less than the 17 percent of assets covered when the streamlined exam limit was set at $250 million nearly ten years ago. The dramatic change in industry demographics makes it increasingly illogical to examine a $1 billion bank using the same exam procedures as for a $100 billion or larger bank.
Myth: Community banks' regulatory burden stems from new regulations under the USA PATRIOT Act and the Sarbanes/Oxley Act. CRA shouldn't be changed to accommodate those regulations.
Fact: The regulatory burden stems from the steady accumulation of regulations, some old, and some new. Economists with the Federal Reserve Bank of Dallas have concluded that the regulatory burden threatens the economic viability of community banks. To protect community banks' ability to continue serving their communities, policy makers should seek every opportunity to reduce the regulatory burden. Without significant relief from regulatory burden, smaller community-based banks will be an endangered species.
Myth: The FDIC and OTS regulations were hastily developed.
Fact: The agencies have been considering modifications to their CRA regulations-including increasing the streamlined exam size limit-for nearly four years. An earlier joint agency proposal issued in February resulted in nearly 1,000 comments, which included recommendations for a streamlined exam limit as high as $2 billion. The FDIC and OTS efforts build on that process. The proposed increases are the result of extensive deliberation among the federal banking agencies in consultation with industry representatives and community activists.
Myth: Having different requirements for different institutions will be confusing.
Fact: While there are advantages to uniformity, the fact is that different institutions - national banks, state banks, and thrifts - are each under supervision systems that differ in many ways. But each bank has only one primary federal regulator. Unless an institution changes charters, it remains under the system developed by that regulator. It is possible that in this case the regulators may still be able to find common ground. The dual banking system, with both state and federal charters, has often been cited as one of the reasons for the dynamic financial system we have in the United States today. A difference between regulators in this area may be another instance that produces successful and innovative solutions to community reinvestment issues.