Puzzler: What's CRA Duty of an On-Line Bank

Most bankers know the Community Reinvestment Act requires financial institutions to meet the credit needs of the communities where they accept deposits.

But for a bank that serves customers by telephone or the Internet and accepts deposits from anyone in the country, what, exactly, does "community" mean?

The CRA perplexes the bankers who are providing such remote access. Even federal regulators, at least for the moment, confess to having more questions than answers.

Does extending credit to any consumer with a computer bring an obligation to "reinvest" in far-flung places? Does on-line banking for computer owners carry a whiff of exclusivity that is antithetical to the spirit of the 1977 law?

"This is pretty new stuff," said Timothy R. Burniston, director for compliance policy at the Office of Thrift Supervision. "We've identified the fact that there are certain issues out there, and we're looking at ways to try to deal with them. I'm not sure we even know what all the issues are yet."

To be sure, CRA compliance is something of a second-generation Internet banking issue, to be addressed after banks get established on the World Wide Web and figure out how to offer full-fledged transactional services.

Regulators are at a similarly early, exploratory stage. Representatives of several agencies meet regularly to discuss CRA and bat around the implications of electronic banking, but they are nowhere close to proposing a rule change or regulatory proposal. As with digital cash and other emerging electronic financial services, regulators have adopted a wait-and-see attitude.

"We are well aware that developments in information technology are changing the landscape of banking and may well impact the agency's consideration of compliance under the CRA," said Chris Lewis, special adviser for external relations at the Office of the Comptroller of the Currency.

"However, at this time, we are confident in the belief that no existing national bank has progressed so far into (on-line) banking that we have reached a threshold point with respect to compliance review."

About 40 banks and credit unions are handling transactions via the Internet. Most of them are accepting deposits from outside their nominal home markets. But so far the services have appealed mostly to existing customers who reside near bank offices.

Until deposits from elsewhere reach a critical mass, these banks' executives believe, there can be no additional or unusual CRA obligations.

"I can't say that we explored it or addressed (CRA) with regard to the Internet service," said William M. Randle, senior vice president of Huntington Bancshares of Columbus, Ohio, which began offering Internet banking last year.

"Our whole philosophy with regard to direct banking is that it makes the bank much more accessible. Ninety-eight percent of households in the country have telephones."

Since the CRA - which was revised last year, with no special provisions for Internet banking - defines a bank's market according to where the bulk of its deposits originate, it will be a while before compliance issues arise for the superregionals.

"If you have a real bank and an Internet bank, you don't have a problem yet, since you can define the community through the traditional bank," said Thomas P. Vartanian, head of the Washington office of the New York law firm Fried, Frank, Harris, Shriver & Jacobson.

As for the handful of banks that transact exclusively through remote channels, "the law doesn't fit," he said. "It's just one of the types of laws that don't make sense in cyberspace."

Mr. Vartanian said he advises nontraditional banks to "determine how best to satisfy the spirit of the law and sit with the regulators and negotiate how to define a community."

Henry Polmer, a Washington lawyer and counsel to the Electronic Funds Transfer Association, said legislation might one day be necessary to address the discrepancy.

"A bank that is located in cyberspace is still going to have someplace where it operates from, and today, at least as to a literal interpretation of the act, that would be the community to whom its obligations would be owed," Mr. Polmer said. But the virtual community is unlikely to overlap with the community where the bank provides loan and deposit services, he said.

The question has not been forced: Only two U.S. banks are doing business exclusively on the Internet.

One of them, Atlanta Internet Bank, operates for the time being as a subsidiary of a conventional financial institution, Carolina First of Greenville, S.C.

"To be honest, we haven't spent a lot of time thinking about (CRA)", said T. Stephen Johnson, one of the Atlanta bank's founders. "Our focus was on making the bank work."

Nor have its regulators asked questions about CRA obligations, Mr. Johnson said. The only CRA idea the bank has considered is posting public service announcements on its Web site, he said.

Security First Network Bank, renowned as the first Internet-only bank, is chartered as a thrift. While its depositors come from all 50 states and tend to be concentrated in cities distant from its Atlanta base, the bank's CRA obligations have been construed to fall in the Atlanta area, where the bank just opened its first brick-and- mortar branch.

"The regulators are looking at, 'Are you chinning up to what you said you would do in Atlanta?' " said James S. "Chip" Mahan, chief executive officer of Security First.

Telebank, a telephone-based bank based in Arlington, Va., also fulfills some of its social commitment locally. The eight-year-old bank, with fewer than 50 employees, offers internships to Arlington-area high school students and conducts clothing drives for charities.

But $600 million-asset Telebank has defined its CRA obligations nationally.

"We purchase loans from all over the country and we have a large number in low- and moderate-income census tracts nationally," said Sang-Hee Yi, chief operating officer at Telebank.

Telebank president Mitchell H. Caplan said buying secondary mortgages and making investments in secondary markets has been his primary compliance tool.

CRA examinations for Telebank are "like trying to fit a round peg in a square hole," Mr. Caplan said. "We're not attempting to take deposits locally any more than from anywhere else in the country."

Still, telephone banking is easier to grapple with because it is a common phenomenon with few barriers to entry. Internet banking, by contrast, still requires a computing device that most Americans do not have or cannot afford.

Security First does not deny its customers are wealthier and better-educated than average. But Mr. Mahan predicted that would change. He said he envisions a day when most public telephones and households are equipped with Internet browsers.

"If someone challenged me and said, 'Golly, nobody can bank at your bank unless they have $3,000 to buy a PC,' I would say, 'I really don't think that's where the world is headed.' " Mr. Mahan said.

"You can buy WebTV for $300 - no more than the cost of a VCR. One day, you'll be able to go to channel 71 and find all your balances and a summary of recent activity. If I'm a channel click away, am I not serving the whole community instantaneously?"

There is some debate over whether the personal computer is inherently discriminatory. Some advocates argue that transacting business by telephone, automated kiosk, or computer minimizes the possibility of racial or other discrimination.

Matthew Lawlor, president of Online Resources and Communications Corp., a McLean, Va., vendor of interactive banking systems, said "the idea of alternative banking (promotes) the objectives of CRA."

"You've got to have many different access points," he said. "If you can remotely request a loan, it will provide access. This discrimination stuff in a self-service world is easier to manage."

James Brown, director of the University of Wisconsin's Center for Consumer Affairs, agrees that universal electronic access to loans and deposits might be a boon for the unbanked and the traditionally underserved.

"Conceptually, Internet availability makes banks more accessible to dispersed communities, be they dispersed geographically, socially, or culturally," he said. "But the important word there is 'conceptually.' "

Jo Ann Barefoot of KPMG Barefoot Marrinan in Columbus, Ohio, called the fair-access issue "massive."

The consultant cited the example of Chevy Chase of Maryland, which was sued by the Justice Department for failing to place branches in minority neighborhoods in Washington. "The government argued it was just as illegal to make your services unavailable to everyone as it was to treat people unequally when they walked into your lobby," Ms. Barefoot said.

Bankers have few clues about how the regulators might approach such issues in cyberspace. Some worry that CRA obligations will hinder them in competition against nonbanks.

"The regulators at this point are fairly clear that Internet banking can present a CRA challenge," said Nessa Feddis, senior federal counsel in the regulatory and trust affairs division of the American Bankers Association. "They're all signaling that any bank planning or doing business on the Internet has to be aware of their CRA responsibilities and the purposes of CRA."

Warren W. Traiger, a New York lawyer and CRA authority, said when he asked for a show of hands at an ABA compliance meeting last June, no one had given any thought to the CRA's applicability to Internet banking.

"Everybody loves technology but it strikes at the heart of the Community Reinvestment Act," Mr. Traiger said. "All the notions of the law are challenged" by on-line banking.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER