CRA Examined in Light of Housing, Financial Crises

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WASHINGTON — The Community Reinvestment Act is getting more attention than ever during the financial crisis, as lawmakers debate whether it spurred the housing collapse, bankers complain the current environment has made it harder to comply and consumer groups push to expand its reach.

All three conflicts have been front and center this month as regulators have announced more low ratings for institutions and some argue that the poor credit environment makes CRA compliance tougher.

"The CRA no longer works as it was originally intended to," said David Fynn, a senior vice president at National City Bank, during a conference last week on the topic. "The industry has fundamentally changed since 1977."

The 32-year-old law's biggest supporters, meanwhile, sense an opportunity to expand its reach, including to institutions such as insurers and credit unions and to expand the factors tested, including institutions' service to customers of different races.

"As more and more companies take" money from the Troubled Asset Relief Program, "it is an appropriate form of service to join regulated financial institutions to support community investment activity," David Berenbaum, the National Community Reinvestment Coalition's executive vice president, said at the CRA conference sponsored by the Consumer Bankers Association.

The strained economic environment has made it harder for banks to offer the services that typically raise their CRA grades. Tightened credit has limited new lending in targeted areas, and meeting community development requirements has been hampered while some third-party firms that help banks invest in local projects struggle with their own financial troubles.

Meanwhile, observers say CRA exams appear to have gotten tougher. On March 5 the Federal Deposit Insurance Corp. announced five subpar CRA ratings, including three "needs to improve" grades for institutions that each had more than $3 billion of assets.

CIT Bank, a $3.5 billion-asset institution in Salt Lake City, was cited for having bought a $3.1 billion portfolio of subprime loans with "predatory characteristics." The agency criticized $3.9 billion-asset Republic Bank and Trust Co. in Louisville for alleged violations involving tax refund anticipation loans and $3.1 billion-asset Advanta Bank Corp. for what the FDIC said were "unfair and deceptive practices" in a cash-back reward program.

"This sends the loud and clear message that CRA enforcement continues strong as ever and perhaps even stronger than before," said Ken Thomas, a banking consultant in Miami.

Thomas said he had never seen an instance like that of CIT whose rating suffered simply for buying loans — as opposed to originating them. "That was clearly a new development in terms of CRA enforcement," he said.

"This is the new precedent that's set, that if you buy a product that is deemed to be predatory, this can adversely affect your rating. … And [CIT] is not a little bank. This is a very big bank and a high-profile type of financial services company."

Luke Brown, an associate director of compliance policy at the FDIC, said in an interview that the agency is not drastically changing its CRA oversight and that exams remain within the scope of established regulation.

"I would not characterize it as a new initiative," he said. "Our actions are consistent with interagency regulatory guidance regarding fair lending laws and unfair acts or practices."

Yet he added that the current environment has led regulators to look more closely at compliance.

"Obviously this is a unique time, so we are, as everyone else is, looking at issues differently in different cases," Brown said.

The conference featured speakers discussing ways for institutions to maintain high CRA ratings despite the limitations on lending.

For example, panelists recommended that banks explore renewable-energy and small-business projects for CRA investments; provisions in the recent economic stimulus package passed by Congress opened opportunities in both sectors.

Andrew Ditton, the director of Citigroup Inc.'s Center for Community Development, said the advantage for banks in investing in certain types of renewable-energy projects is that they can be up and running relatively fast and, therefore, can quickly earn CRA credit.

"You receive" the credit "when the facility goes in service," he told the conference. "So for a photovoltaic cell, that's 90 days after the construction has begun."

But regulators warned banks that they should not simply entertain new services — hoping to pass an exam — without first ensuring they satisfy the law's requirements. For example, regulators said green-energy projects would not get CRA credit unless they specifically benefited low- and moderate-income communities.

"We don't want to see window dressing," said Karen Tucker, a national bank examiner for the Office of the Comptroller of the Currency.

Questions about CRA compliance come as lawmakers debate the law's future. Republicans assert the law pushed banks to offer the types of credits that worsened the crisis, while some Democrats want it expanded.

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