Discourse between regulators is usually genteel, but not in the case of New York Banking Superintendent Derrick Cephas' plan to revamp the state community reinvestment law.
In the April Federal Reserve Bulletin, the Fed's division of consumer and community affairs blasted portions of Mr. Cephas' plan for:
* Transferring of Community Reinvestment Act decision-making from banks to the government.
* Removing incentives for banks to be creative in designing qualifying investments.
* Leaving communities with unmet credit needs.
These criticisms deserve serious consideration if for no other reason than their source. Federal cooperation with the Cephas plan is essential, since each institution subject to New York's Community Reinvestment Act is also subject to the federal law.
Absent federal acquiescence, the plan's changes could produce inconsistent regulatory standards and concomitant headaches for banks chartered by New York State.
Mr. Cephas has stated that he will not place reinvestment-act burdens on state-regulated institutions that do not exist for those subject only to federal regulation.
Closer examination, however, reveals that the criticized proposals are not very different from current federal regulation, or at least may be viewed as logical extensions of the existing regulatory scheme.
The Fed's first criticism, that a list of qualifying activities would "inevitably" transfer decision-making to the government, is curious in light of the Fed's own published list of acceptable activities.
As set forth by the Federal Financial Institutions Examination Council, the Fed list is remarkably similar in substance and for to New York's.
Both are primarily intended for nonretail banks and are comprised of representative categories of qualified activities, including investments in community development corporations, Small Business Administration programs, and government housing loans.
No Limit on Creativity
Nor is there reason to believe that a New York list will hinder bank creativity any more than the federal list has. In fact, the lists are in large part products of bank creativity.
They are the regulators' way of sharing with the industry the many different means that individual banks have devised to fulfill reinvestment-act requirements.
Far from limiting creativity or transferring decision-making, the lists encourage banks to be creative by demonstrating that, particularly for wholesale banks, a wide range of investments qualify for credit under the act.
Lest the list evolve into the only source of eligible investments, the New York proposal takes the additional precaution of providing for a formal, written determination of a proposed undertaking's eligibility for credit.
If an investment is not on the list and a bank is otherwise unsure of its eligibility, it need only ask the State Banking Department for approval.
A Measure of Certainty
The Fed's final criticism, that New York's proposal to employ a quantitative formula to help determine a bank's reinvestment-act rating will leave communities with unmet credit needs, is its most serious.
The Fed is concerned that if a formula requires a specific dollar amount of investment to satisfy the act, then one "passive investment in one community
Mr. Traiger, a lawyer in New York City, is special counsel on Community Reinvestment Act matters to the New York State Banking Department. development organization" may be sufficient to satisfy all that institution's obligations.
This represents an overly narrow reading of the New York plan.
The purpose of a formula is to inject a measure of certainty into compliance with the act, but the plan specifically acknowledges the inherently subjective nature of the process.
There is nothing to suggest that one investment could satisfy all of a bank's obligation to its community, simply because a certain dollar amount of investment was obtained.
Indeed, rather than implying that limited community service could satisfy the act, the plan proposes to expand retail bank service areas to include adjacent underbanked neighborhoods.
In evaluating the reasonableness of an intitution's community delineation, New York proposes to survey the number of institutions located in adjoining areas. Where such neighborhoods are underserved, reinvestment act communities would be expanded and banks required to serve those areas.
Finally, the formula is chiefly a recognition that the heart of the Community Reinvestment Act is credit. Regardless of ascertainment efforts and documentation, no institution should receive a favorable evaluation unless it extends sufficient credit to its community.
This echoes the Fed's own belief, also set forth through the federal examinations council, that a reinvestment act evaluation should be based primarily on how well an institution meets credit needs.
Let It Be Tested
The components of the yet-to-be finalized New York plan are without question far-reaching. Even those who support it express their uneasiness with significant changes to a regulatory system with which they have finally come to grips.
Yet the New York plan is largely a sensible extension of recent changes to an already evolving Community Reinvestment Act. It deserves an opportunity to be tested.