The Gramm-Leach-Bliley Act of 1999: CRA PROVISIONS
Editor's Note: This is the fourth in a series of articles on selected parts of the Gramm-Leach- Bliley Act of 1999. This article deals with CRA issues. For a more complete history of this Act, including a summary of the unitary thrift loophole issue, please see the December issue of Independent Banker magazine.
While the Gramm-Leach-Bliley Act (GLBA) was working its way through the Congress during 1999, provisions relating to the Community Reinvestment Act (CRA) were among the most controversial issues addressed.
In the end, after intense negotiations (including a lengthy late-night, closed-door meeting of the conferees, Fed and Treasury officials and community group representatives), a compromise on CRA was reached. Thanks to Senate Banking Committee Chairman Gramm, the final CRA provisions contained some limited community bank regulatory relief. Below is a synopsis.
The GLBA includes provisions reducing the frequency of CRA exams for banks under $250 million in assets. Any such institution, rural or urban, receiving an "outstanding" rating in its current CRA exam, may not be examined more than once every 5 years. Those receiving a "satisfactory" rating may not be examined more than once every 4 years. This improves on the current 2-3 year exam schedule, although community banks may still be subject to CRA exams in connection with applications for a deposit facility at the agency's discretion.
"Satisfactory" CRA Rating for Affiliations and Expanded Activities
A bank holding company cannot make an election to become a Financial Holding Company (FHC), the new financial structure created by the GLBA, unless each affiliated insured depository institution of the holding company had at least a "satisfactory" rating in its most recent CRA exam. The same requirement will apply to any FHC seeking to engage in expanded activities under the new law, as well as to any national bank undertaking activities in a financial subsidiary. While there are no penalties for any FHC whose affiliated depository institution(s) fail to maintain a satisfactory CRA rating after expanded activities are begun, the FHC will not be allowed to enter into any other expanded activities as long as the CRA noncompliance continues.
Disclosure of CRA-Related Agreements
The GLBA adds a new Section 48 to the Federal Deposit Insurance Act requiring full disclosure, including public availability of the text, of CRA-related agreements between depository institutions and non- governmental groups entered into after 11/12/1999. These so-called "sunshine" provisions were doggedly sought by Chairman Gramm, who wanted community groups to account publicly for financial resources from CRA agreements with banks.
Federal banking regulators have been given authority to develop regulations aimed at balancing the disclosure and reporting requirements with their compliance burden on banks and community groups. The regulations must not impose an undue burden on the parties and must protect proprietary and confidential information.
- Covered Agreements: Covered agreements include any written agreement involving cash payments or other consideration valued above $10,000, or loans with an aggregate principal amount above $50,000 annually. The agreement must be made in relation to "fulfillment of the CRA," and one party must be a depository institution or its affiliate, whether or not that party is a for-profit or a not-for-profit organization.
- Non-Covered Agreements: The disclosure requirements do not apply to: (1) any individual mortgage loan; (2) any agreement concerning a loan or credit commitment "at rates not substantially below market rates," and where there is no relending of borrowed funds; and (3) any agreement with a party that "has not commented on, testified about, or discussed with the institution or otherwise contacted the institution" about CRA.
- Annual Reports: For any covered agreement entered into after 5/12/2000, the bank or its affiliate that is a party to the agreement must report annually to its primary federal regulator regarding: (1) payments, fees or loans made to or received from any party to the agreement and the terms and conditions of such; (2) aggregate data on loans, investments and services provided by each party to the agreement; and (3) other "pertinent matters" required by the regulator. Each non-bank party must report annually to the bank's primary federal regulator on how it used funds received from the bank, including an itemized list noting compensation, administrative expenses (e.g., travel), professional fees and any other information required by regulation. This report can be sent directly to the federal regulator or given to the bank for prompt transmission to the regulator.
- Unenforceability: Any willful failure by the non-bank party to comply with the disclosure and reporting requirements will result in the agreement being unenforceable, after notice and a reasonable period to comply. There are no penalties for inadvertent or de minimis reporting errors. If any agreement is unenforceable, the federal regulator may help the bank find a successor party. The federal regulator is not authorized to enforce provisions of the agreement.
The new law also calls for studies by both the Federal Reserve and the Treasury Department. The Fed study, due by 3/15/2000, will examine the default and delinquency rate, as well as the profitability, of loans made under CRA. The Treasury study, to be conducted over two years, will assess the effectiveness of CRA in providing services to low- and moderate-income neighborhoods and people.