It is not surprising that a number of myths about the Community Reinvestment Act would develop, considering how misunderstood this law is by so many people and how unpopular it is with bankers.

Some of what we label as myths are really misunderstandings and misinterpretations, but others are nothing more than lore or outright mistruths.

Some myths about the reinvestment act are more widespread than others, and some are more shocking than others. None, however, are correctly based on research.

They are nonetheless used daily by opponents of the law and critics -- including many bankers, lobbyists, trade associations, some members of Congress, a few federal bank regulators, and even some major media, such as the editorial page of The Wall Street Journal:

1. The community Reinvestment Act is for poor people and minorities, especially African-Americans in tyhe inner cities.

The law is for the enttire community, including (not especially or exclusively) low-income and moderate-income areas. According to the 1990 census, households with low or moderate income represent 40% of America. Thus the reinvestment act is for 100% of America, including that 40%.

2. The act means "credit allocation" -- the government is trying to tell banks where to make loans.

The CRA is about ascertaining and helping to meet the credit needs of a bank's entire community. Since lending is the "basic business of banking," this law is just reaffirming what most banks have been doing all along.

The act was written, implemented, and enforced in such a way as to specifically avoid credit allocation, though critics probably will never accept this argument. They may view the idea of reinvesting deposits from a community back into it as credit allocation, but "reinvestment" is the CRA's middle name.

Because certain areas may have been redlined and unfairly denied credit in the past, the CRA intitiative to treat all areas fairly is often perceived as a government effort to "force" banks to lend in those affected areas.

3. The act is just more red tape by "big government" bureaucrats who are strangling bankers in endless regulations.

Banking always has been and probably always will be America's most heavily regulated business. But there are several good reasons for many of these regulations -- especially important consumer protection legislation such as the CRA.

4. The reinvestment act is anticapitalistic and borders on socialism.

All banks -- and nonbanks, for that matter -- should have a social consciene. This is especially true when they directly or indirectly benefit from the government in such areas as federal (and previously under-priced) deposit insurance, access to a "lender of last resort," and regulations that help insulate a bank from competition in certain areas.

Bank and nonbank companies should maximize profits -- but subject to some social constraint. Capitalism can have a social conscience and still be a far cry from socialism.

5. There was never a need for this law. It was an unprecedented government intrusion into an industry that was doing fine without it.

The problem was that the banking industry was not doing fine for everyone. Allegations of redlining and other discriminatory practices in banking resulted in various pro-cunsumer regulations and legislative measures in the mid-1970s, including the Community Reinvestment Act in 1977.

Whenever the market's invisible hand is perceived as inefficient or failing in its economic goals, government's heavy hand of regulation is not far behind.

6. Community activists and others who support the act are troublemakers looking for publicity, confrontation, and especially money for their cause if they can extort it from bankers.

The Community Reinvestment Act is the law and has been since 1977. Community groups are the most likely supporters of this pro-consumer law. There would be no reason for bankers or their lawyers, consultants, lobbyists, trade associations, or the like to defend it, when most of them probably feel the law is directed against banks.

Interestingly, though, the Independent Bankers Association of America attempted to use the law to its benefit when it requested a CRA investigation of NCNB Texas Nastional Bank in May 1991 on behalf of its members -- much as a community group would do.

Sure, there are probably some questionable community groups with separate agendas, just as there are some problem banks. But most community groups, like banks, probably act in the public interest.

7. Discrimination, like redlining, has been alleged but never proven in banking.

Discrimination, like redlining, is to a great extent in the eyes of the beholder. And it is not unexpected that someone with dark skin sees more discrimination that someone with light skin.

Bankers are unlikely to view any lending action or lack thereof as discrimination; a denied loan applicant will often take the opposite position.

Surprisingly, the American Bankers Association and the Office of the Comptroller of the Currency have taken the unprecedented step of admitting the existence of some types of discrimination in banking.

Also, several specific acts of lending discrimination have been identified in the performance evaluations and cease and desist orders of banks with below-average ratings.

The Federal Reserve Bank of Boston's landmark October 1992 study documented that racial discrimination in mortgage lending is widespread. Such a conclusion was also alleged in the Justice Department's investigation of the Decatur Federal case in Atlanta.

More studies will reach similar conclusions.

8. It's just a matter of time before the CRA goes away. The continued lobbying by the banking industry, which had the full support of the Bush administration, will ultimately gut this law.

First of all, the Bush anti-CRA policy has been replaced by what apepars to be a Clinton pro-CRA policy.

The consumer movement in banking is too strong to allow a repeal or significant weakening of this law, especially with a pro-consumer Democratic congress and administration. If banks and their lobbies can kill or handicap the least-liked law in banking, the removal or weakening of any other pro-consumer law or regulation would be relatively easy.

9. CRA loans are risky loans.

No bank ever failed because of the Community Reinvestment Act. In fact, the act specifically states that any activities should be consistent with the safe and sound operation of the institution.

Certainly, if all loans to low-income and moderate-income areas are considered CRA loans, not all them are risky. After all, 40% of American households are in this income range, and loans to 40% of America can't all be risky.

All loans have some risk, and the risk inherent in CRA loans, like that in others, is manageable.

Also, there is some evidence that the risk experience on some CRA loans has been much more favorable than expected. This is especially true compared with loans involving lesser-developed countries, leveraged buyouts, commercial real estate, and the like.

Also, the favorable loan-loss experiences of the few community development banks in existence further support this claim.

10. The CRA can't be profitable. It can only cost a bank money.

The basic and most profitable business of banking is lending. This law is about a bank's affirmative obligation to helkp meet credit needs in its entire community, which is nothing more than basic business.

Ascretaining these credit needs, the other part of the reinvestment act, is a basic marketing function. The marketing concept is about understanding and satisfying customer needs in a manner consistent with corporate objectives. Yes, a proper interpretation of the law would indicate that it is not inconsistent with profitability.

Actually, some of our nation's most profitable small and large banks are truly outstanding CRA performers. And, as noted above, these banks, such as the few community development banks in existence, have survived and made money.

11. The disclosure of CRA evaluations and ratings only confuses the public. In fact, below-average ratings may be confused with safety and soundness ratings.

This myth, which the banking lobby pushed to prevent those FIRREA disclosures, was shattered shortly after the July 1, 1990, release of evaluations and ratings.

With over three years of experience under the new system, we have not documented one such instance of confusion between community-reinvestment and safety and soundness ratings.

To the contrary, the case of the Farmers and Merchants Bank of Long Beach, Calif. taught us that the public can not only discriminate between the two types of ratings, but actually make investment decisions based on this distinction.

The public disclosure of CRA ratings and evaluations since 1984 by the New York State Banking Department has likewise not resulted in any such major confusion, according to that department.

12. The act contributes to the "credit crunch."

The ABA has gone so far as to claim at the beginning of this year that there would be an additional $86 billion for credit if Congress reduced the regulatory burden of laws like the Community Reinvestment Act.

The act is about expanding credit, not contracting it. The recent credit crunch primarily has been an economic phenomenon associated with the 1990-91 recession and the very gradual recovery. We had many credit crunches before the 1977 the law, and we will certainly have more in the future.

To make CRA a "whipping boy" for economic or other maladies in unfair but no unexpected for banking's most intensely disliked law.

13. The act is not needed for community or other small banks. If they weren't adequately serving their community, they would be out of business.

Roughly three-fourths of all banks are small institutions. To exempt small banks from the CRA, as has been repeatedly proposed, would effectively "gut" this law.

Actually, small banks of $100 million or less (and especially $25 million or less) in assets have a disproportionately low percentage of above-average ratings. Just because a bank is a full-service one making a profit doesn't necessarily mean it's adequately ascertaining and helping to meet community credit needs.

Many small banks are in one-bank towns where there is little or no effective competition, which often reduces the incentive for such banks to be innovative and aggressive in serving customer needs. The law is needed for all banks and even some nonbanks.

14. Only big banks, with their sources to document and meet other paperwork requirements, can get outstanding ratings.

This myth was easily and quickly disproved with the earliest ratings distributions by size. Outstanding ratings have been fairly well distributed by size, with the exception of the smallest banks, which have received less than their expected share.

Many small banks that are part of and have access to the resources of the largest bank holding companies have received below-average ratings. Bank subsidiaries of Chemical Banking Corp., for example, have received all four ratings.

Also, our analysis of the CRA ratings of the 100 largest banks and 50 largest thrifts through yearend 1992 revealed that the proportion of outstanding ratings was only 33.0% and 45.9%, respectively.

15. Any bank can get an outstanding rating if it's willing to spend the money for "mega-pledges," consultants, surveys, geocoding software, and the like.

Many banks that banks that are part of giant bank holding companies (e.g., NationsBank) that have made mega-pledges have received only satisfactory ratings. Likewise, many banks that have expended substantial sums for consultants or other vendors have received average and below-average ratings.

It is not clear, however, whether or not those banks would have received even lower ratings without such outside assistance.

Conversely, many community banks with outstanding ratings earned them through internal efforts with nominal out-of-pocket expenses. These and other experiences suggest that an outstanding rating can't be bought.

16. Documentation doesn't matter. If a bank is an average or above-average performer, the examiners will determine this on their own without documentation.

Our research has verified the continued relevance and truth of CRA Survival Rule #1 - "If it wasn't documented, it wasn't done." Regardless of what regulators or examiners say, documentation always has and probably always will rule the day under the present system.

17. All banks strive for an outstanding rating.

There is a small fraction of banks that could not care less about any such evaluation or rating. Most banks that do care about their disclosed evaluation and rating would probably state their goal as an outstanding rating.

We believe, however, that an increasing number of banks are following a "satisficing" objective where their real unstated goal is just a satisfactory rating, which four out of five banks receive. Bell Federal of Chicago, which recived a "needs improvement" rating, reportedly made a satisfactory rating its goal.

Some bankers may feel an outstanding rating is "impossible" to obtain or at least not worth the effort.

Even if they get that rating, some bankers may believe that the positive publicity associated with it may require a bank to do too much to maintain that rating for the next examination. And, why risk a publicly embarrassing downgrading from an outstanding rating?

18. The best way for a bank to perform a good deed is to do it by itself.

CRA credit may be maximized when a bank takes on a project by itself, but the risks and costs of the project are borne totally by the bank. The ideal approach from both a private and public perspective is to share projects with other banks.

Those banks acting in an originating or leadership role should receive more credit than other participants. Shared loan consortiums are quite common today, but other shared arrangements such as credit needs ascertainment surveys, loan counseling centers, and even shared branches are much less common.

19. The subjectivities, inconsistencies, and other problems with examination procedures mean the law isn't working and should be scrapped.

The law is working, but it can be improved. This is especially true in the area or examination procedures, which must become more objective and consistent. We don't need less enforcement; we need better enforcement.

20. "The reason our bank got a below-average rating was because of documentation problems. Government bureaucrats felt we didn't dot our i's or cross our t's."

This myth represents the most common rationalization by far for a below-average rating. Few banks will accept all of the criticisms in the public evaluation. Many, therefore, conveniently shift the blame for their low rating to the evaluation and rating process itself.

Because the documentation factor is the most common, well known, and easily understood criticism, it is the excuse of choice for bankers with low ratings.

21. CRA examiners are young, inexperienced, and only in compliance because they "couldn't handle" safety and soundness exams.

Bankers displeased with their evaluations or ratings may not only use the documentation excuse but also blame their examiners. After all, any subjective evaluation or rating can easily be criticized by anyone, but especially those who feel victimized by a below-average rating.

Public evaluations and ratings are a first in banking, and there was bound to be a long learning curve. Compliance is a real growth area in banking regulation, and new compliance examiners are being continuously hired and trained.

Many new CRA examiners are young and inexperienced, but so is the idea od public evaluations and ratings. Yes, the current system needs to be improved, but this will take time.

We believe most examiners likely have chosen compliance as a long-term career path because they believe it is a vitally important area, not because they weren't safety and soundness types.

It is likely that bankers displeased with their safety and soundness evaluations and ratings privately voice and a similar criticism against those examiners, but there is much less at stake when the government's veil of secrecy prevents any disclosure.

22. Bankers are the only ones opposed to the public disclosure confidential bank examiners and ratings.

The disclosure of CRA evaluations and ratings has taught us that regulators have as much if not more vested interest in discouraging further disclosure of confidential bank examinations and ratings as do the bankers themselves. We have documented specific cases of grade inflation and deflation as well as a case of apparent regulatory favoritism.

We have to wonder if these subjective and inconsistent examination procedures are unique to CRA or also the case with safety and soundness examinations and ratings. We will never know the answer to this question without the positive power of public disclosure.

23. Banking is a private business. The government has already made too much bank information public, like CRA ratings and evaluations and cease and desist orders. All of this publicity is bad for banking.

Public disclosure is bad for bad banks but good for the others. We need more, not less, disclosure. not just in CRA but in other areas like safety and soundness. Our research has shown that the discipline of public disclosure makes good bankers better and bad bankers mad.

Likewise, good regulators become better and bad regulators, who are too "friendly" with or protective of banks, are forced to changed for the better.

24. The Fed plays the smallest role in CRA enforcement of the four federal regulators because only 7% of all banks and thrifts are Fed-regulated member banks.

The Fed was the first regulator to have specialized compliance examiners, some 12 years before the other regulators. The Fed has the smallest number of member banks of any regulator but the largest compliance examination force relative to member banks, with only six banks per compliance examiner compared with a national average of 22 for all regulators.

The Fed has a unique role as overseer of all bank holding company activities, which account for the bulk of the banking industry. It therefore has the opportunity to use its regulatory muscle to pressure and effectively override CRA enforcement efforts of the other regulators.

This opportunity apparently became a reality in March 1993 when the Fed effectively overruled a November 1992 OCC merger denial involving the First Commercial Bank of Memphis. Thus, the Fed, the CRA enforcer of last resort, actually plays the biggest role in enforcement of the four federal bank regulators.

25. The Fed always has and always will be the "toughest" of the four federal banking regulators, whether in safety and soundness or in compliance.

While the Fed has always been thought of as the toughest regulator, our research has shown that this would apply only to safety and soundness and certainly not to compliance, especially the CRA.

In fact, we have determined that the Fed is the most lax CRA enforcer of all banking regulators, based on past and present relative ratings and the infrequency and near-rarity of true enforcement activities.

The Fed's primary enforcement tools are jawboning, policy statements, and conditional approvals. Thus, the Fed, like the many of the banks it criticizes, is itself long on process and short on performance when it comes to true enforcement of the Community Reinvestment Act.

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