Examining Agencies Need to Fine-Tune CRA Standards
Community Reinvestment Act evaluations are typically prefaced with the following language: "Assessing the CRA performance is a process that does not rely on absolute standards."
This statement's candor has been repeatedly confirmed during the first year of public disclosures. Regrettably, its corollary seems to be "The results of this assessment will vary depending on the examining agency."
To no one's surprise, the ambiguous compliance standards of the CRA have resulted in inconsistent and unpredictable applications of the law. A bank's public performance evaluation is too dependent on which office of which regulator prepares it.
Too Much Guesswork
This situation runs counter to a key underpining of our legal system - certainty. Laws, especially those with substantial noncompliance penalties, must clearly delineate appropriate standards of conduct. Yet the CRA leaves much to chance and guesswork, making it hard for a bank to know how to comply.
The problem of uncertainty and inconsistency is keenly illustrated by efforts to expand eligible obligations beyond small business and consumer loans. The existing framework has been criticized as too limiting, especially for wholesale institutions that do not make these loans.
The Federal Reserve Bank of New York recently issued a paper endorsing a more expansive view. Titled "Considering Supportive Services in a CRA Examination," the essay speaks favorably about investments in child care, crime prevention, and job training. But no other federal regulator has endorsed the paper.
Mixed Signals
There have also been conflicting signals and an absence of regulatory guidance on community delineation, marketing methods, and qualifying grants.
The regulators do recognize the importance of uniform standards and evaluations. They have striven collectively through the Federal Financial Institutions Examination Council and individually through such programs as the Federal Deposit Insurance Corp.'s Community Affairs Officer program to achieve evenhanded examinations. As the agencies continue to gain experience in enforcement, there will presumably be greater uniformity at least in the technical compliance areas.
But enhancing consistency among four federal CRA enforcement agencies, each with numerous regional offices and individual examiners, will require a more concerted effort.
Joint Directive
The agencies should begin by issuing a joint directive, fine-tuning and overhauling CRA compliance standards where necessary.
A unified statement would be a logical follow-up to the March 1989 CRA statement, which ushered in the current era of CRA by suggesting ways to develop effective compliance programs.
A new statement is needed to set forth the types of investments and grants that are eligible, and help clarify other compliance issues that have arisen during the past 2 1/2 years. It would also help convince the industry that the examining agencies are doing everything possible to attain consistent ratings.
There is also significant benefit from the public comment period, which provides a forum for the industry and community groups to air grievances and suggestions.
The first year of public CRA ratings has reaffirmed the need for a formal appeal process.
Such a process was considered and rejected when the current CRA rules were implemented. The examination council stated then that the "present system of local, regional, or district-level review, along with oversight at the headquarters level, will continue to assure ... justified ratings."
Unfortunately, this informal system has not worked as planned. CRA officers cite examples of an activity that was noted with approval in one bank's evaluation and disparaged in another's, seemingly equivalent compliance programs that resulted in different ratings, and vastly unequal efforts that resulted in identical ratings.
All reasonable safeguards should be used to prevent unjustified ratings. Since the appropriateness of a rating is largely a function of how it compares with those of similar institutions, a forum to make this comparison is essential.
Mr. Traiger is a partner in the law firm of Traiger & Klarman in New York.
