WASHINGTON - Bankers are lining up behind a proposal that would make 16% more banks and thrifts eligible for review under a streamlined Community Reinvestment Act exam.
At the same time, though, activists are telling the federal banking regulators that the proposal would considerably weaken the impact of the quarter-century-old act, which is designed to steer banks toward investing in the communities they serve.
The four bank and thrift regulators have received nearly 200 letters commenting on their proposal. Most letters from bankers follow a template suggested by the Independent Community Bankers of America, which is urging regulators to adopt the proposal, while activists generally use a letter recommended by the National Community Reinvestment Coalition that asks the agencies to kill the plan.
The correspondents clearly stayed on message - at least half a dozen California activists stayed so close to the template they were provided that each made the same typographical error. The letters from bankers and community activists will probably continue pouring in until the agencies' April 6 deadline for comments.
Many bankers argued that small banks - those with less than $500 million of assets - must already comply with other costly regulations and should not face the same CRA exams as global rivals like Citibank or JPMorgan Chase Bank.
"The regulatory burden on small banks has only grown larger. . . . But the nature of community banks has not changed," wrote L. Thomas McNamara, the president and chief executive of the $400 million-asset Hinsbrook Bank and Trust in Willowbrook, Ill.
Under the regulators' proposed changes, banks with up to $500 million of assets would have their compliance with the Community Reinvestment Act of 1977 evaluated under the streamlined small-bank exam, which is currently limited to banks with assets of up to $250 million.
The proposal would also eliminate a requirement that banks with less than $250 million of assets be examined under the large-bank exam if they are part of a holding company whose assets top $1 billion.
The standard CRA exam considers a bank's lending activity, investments in the communities it serves, and service to those areas. But the small-bank exam considers only a bank's lending; it exempts smaller institutions from the investment and service tests that are at the heart of many bankers' complaints about CRA.
The proposal would add 1,104 banks and thrifts with $384 billion of assets to the 6,981 institutions with $630 billion of assets already subject to the streamlined exam. That would leave 1,098 banks and thrifts with $7.852 trillion of assets subject to the full exam, according to data from the Federal Deposit Insurance Corp.
Activists and academics told officials that exempting more banks from the investment and service tests would make less credit available in the poor neighborhoods that Congress hoped CRA would prod banks into serving better.
"The proposed changes would weaken what has proven to be a most valuable tool for increasing homeownership and community development in the nation's most distressed communities," wrote Gregory D. Squires, the chairman of the sociology department at George Washington University.
According to the Federal Financial Institutions Examination Council, 21 banks and thrifts with assets of $250 million to $500 million received grades of "needs to improve" between 2003 and 1999 and none got "substantial noncompliance" grades.
Activists also said that regulators should toughen CRA standards by requiring that banks' assessment areas include regions where they have a high number of loans but no branches. Several cited the main bank units of J.P. Morgan Chase & Co. and Countrywide Financial Corp. as two firms that escape CRA requirements in California, even though they make loans there, because they have no in-state branches.
"CRA gives ordinary citizens the opportunity to have a voice regarding a bank's lending, investment, and service components. CRA is too vital to be gutted by harmful regulatory changes and neglect," wrote Paul Ainger, the director of development at the Community Housing Opportunities Coalition in Davis, Calif.
But bankers argued that the small banks and thrifts that would be reviewed using the streamlined exam are already responsive to their communities and would have to continue to be if they hope to remain competitive.
Brian North, the senior vice president for lending and compliance at Fifth District Saving and Loan Association in New Orleans, told the Office of Thrift Supervision that the deposit-taking and mortgage-lending his $333 million-asset mutual S&L is primarily engaged in is precisely the type of business the CRA rules are designed to encourage.
"Our business is community reinvestment," Mr. North wrote. "We welcome examinations of our CRA activities. We are proud of our record."
Other bankers urged regulators to go even further with the changes, saying that $1 billion of assets should be the large-bank threshold for institutions and their holding companies.
Raymond O'Coner, the president and chief executive of Saratoga National Bank and Trust Co. in Saratoga Springs, N.Y., encouraged regulators to eliminate the CRA holding-company test. His bank has $176 million of assets but is part of Arrow Financial Corp. of Glens Falls, N.Y., a two-bank holding company with assets of $1.3 billion. That means that under current regulations, regulators must examine Saratoga National Bank using the large-bank CRA test.
"When a bank must comply with the requirements of the large-bank CRA evaluation process, the costs and burdens increase dramatically. And the resources devoted to CRA compliance are resources not available for meeting the credit demands of the community," Mr. O'Coner wrote.
