New York has enforced its own Community Reinvestment Act since 1978. It is modeled on the federal law and is similarly applicable to a range of institutions: retail and wholesale, foreign and domestic, urban and rural, money-center and community.

The issues of subjective standards, onerous paperwork, and inconsistent ratings are the focus of the state's effort to reform the act.

The New York Banking Board is expected to issue a plan to reform the state CRA.

The plan will be the product of a yearlong process, during which the state Banking Department considered more than 100 formal comments on a series of questions posed by Superintendent Derrick D. Cephas from representatives of the banking industry, community-based organizations, and national, state, and local governments.

Reluctance to Change

The comments, many delivered at two days of public hearings, reflected a great deal of dissatisfaction with CRA administration but also a reluctance to change.

Much of the reluctance stemmed from the considerable distrust among the industry, community groups, and regulators.

Some of the more sophisticated players essentially indicated that no matter how flawed the existing system, at least they understood how to operate effectively under it.

But the fact remains that the system is flawed. The lack of readily ascertainable standards has focused enforcement emphasis on the regulatory application process, instead of on continuing bank compliance and community group participation.

Too often, the result has been CRA protests in which bank applications are held hostage to demands of community groups.

Shifting Emphasis

Protests do not lend themselves to rational evaluation of such demands, and the lack of continuing compliance and participation means that bona fide community needs may not be addressed unless and until a bank files an application.

Consequently, the New York proposal will be designed to make community reinvestment an ongoing program, with enforcement emphasis shifted from the regulatory application process to the annual examination.

Its overriding goal will be to reduce the unpredictability and inconsistency of CRA evaluations by basing an institution's grade primarily on its aggregate CRA investments.

Mr. Cephas has indicated that the plan's centerpiece will be a quantitative rating system, that will employ a numerical formula to calculate a bank's preliminary CRA rating.

Weighted Assessment

The formula will determine the ratio of dollars an institution invests in CRA activities to its Federal Deposit-Insurance Corp. assessed deposits. Different categories of CRA activities will be afforded different weights.

For instance, housing and small-business loans in low-income census tracts will be weighted more heavily than the same loans made elsewhere in a bank's community.

The preliminary rating set by the numerical formula may be adjusted if warranted by the qualitative aspects of an institution's CRA program.

Safe Harbor Provision

An institution that discriminates or inadequately serves segments of its community will receive a lower rating than the formula dictates, while on that aggressively markets in low-income and moderate-income neighborhoods could have its rating increased.

The quantitative rating system will be coupled with a significant incentive for banks to achieve and maintain the highest rating. The New York plan will provide a safe harbor from CRA-based regulatory protests for banks with three consecutive "outstanding" ratings.

This safe harbor will serve to enhance the importance of the examination process and the value of the highest rating by exempting consistently highly rated banks from CRA protests.

The concept of a safe harbor was the subject of much opposition from community organizations, whose representatives contended that any restriction on their ability to protest would dilute CRA enforcement.

There was particular concern about the integrity of the examination and rating process that could lead to a safe harbor.

The New York plan will attempt to address this concern with the quantitative-based rating system, as well as through a formal community group comment period.

The comment period will provide community organizations with an explicit role in the department's evaluation of each institution.

The banking department will notify community organizations of those institutions scheduled for CRA examination and solicit their input on a specially developed questionnaire.

The plan is also expected to include a nonexclusive list of activities and a pre-clearance process to assist institutions in determining the CRA eligibility of proposed undertakings; separate standards of community delineation for wholesale and retail institutions, and an appeals process for banks wishing to dispute their preliminary CRA evaluations.

The New York plan will represent an attempt to improve CRA administration. We hope that it will be of some use in pursuing that same goal nationally.

Mr. Traiger is special counsel to the New York State Banking Department.

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