"The CRA Handbook" by Kenneth H. Thomas sharply criticizes enforcement of the Community Reinvestment Act, charging regulators with inflating grades and letting banks exploit loopholes.

Mr. Thomas, a Miami-based consultant and lecturer at the University of Pennsylvania's Wharton business school, discusses his findings and conclusions. His book is available from McGraw-Hill.

In "The CRA Handbook," you give regulators an overall grade of D-plus for their implementation of the Community Reinvestment Act. Why?

I rated each of the four goals set in 1993 by President Clinton. The first goal of promoting more consistency and evenhandedness got a D because there is relatively little consistency among the four regulators.

For the second, the goal was improved CRA public evaluations. I rated that a C-minus because there has been some improvement in the quality and quantity of data made available. For example, we have much more data available on low- and moderate-income lending.

The third is the implementation of more effective sanctions. That was the President's goal, but it could not be implemented because the Justice Department basically said the regulators did not have the authority to provide sanctions beyond merger applications. So the regulators got an F.

Fourth was to develop more objective, performance-based CRA assessment standards. I gave that a C. The new CRA is much more performance-based and more objective. But it is far from where it should be. For example, the originally proposed lending performance test had a 60% loan-to-deposit ratio. Now they have no requirement.

So what's the biggest problem?

Grade inflation. One out of every two ratings is inflated, but there are significant differences by region. The absolute worst is the Federal Reserve Bank of Minneapolis, with 91% grade inflation. Next are the Federal Reserve Bank of Dallas and the Federal Reserve Bank of St. Louis. The New York regional office of the Federal Deposit Insurance Corp. is absolutely the best, with only 10.5% inflation. Then there is the Office of Thrift Supervision Central and Midwest offices, with about 20% inflation.

Too many examiners are too friendly with banks. Also, the new CRA is not as objective and performance-based as it could be.

You direct much of your criticism at the Federal Reserve Board. What does it do wrong?

The grade inflation is the first thing. The second is the history of how they reacted during development of the new CRA. The Fed has always viewed it as unnecessary and credit allocation. The Fed is also more apt to find loopholes. If there is a gray area, the Fed is the most friendly regulator, especially when it comes to mergers.

You rate the Office of Thrift Supervision highest. Why?

They are the most realistic graders in terms of the inflation rates. Overall, their rate was only 30% compared to 45% to 52% for the other regulators. Secondly, historically and even today, they have taken a more pro-CRA view.

Also, OTS referrals to the Department of Justice for fair-lending violations stand out as the toughest of the agencies.

You charge that the strategic plan option-which lets banks in conjunction with community groups set their own CRA requirements-allows banks to avoid some of their CRA responsibilities. How?

Basically, strategic plans represent all that is bad with CRA. It is credit allocation. The whole concept is bad. It was a mistake.

The FDIC is attempting to resurrect strategic plans, but the bottom line is that 12,000 banks had a chance to do it and only 35 submitted plans and half of those withdrew them. Those that remained saw their lending requirements increased so much that they are no longer the plans of the bank but the plans of the regulators.

Also, if you are in an easy CRA area, where there are few effective community groups, you could get an easy plan through. That is compared to tough CRA areas, such as Chicago, where you could not get the same type of plan approved.

You mention community groups throughout the book. How important are these groups and what should they do differently to increase their effectiveness?

They are a key. The problem is that there are some community groups that are more effective than others and there are some community groups that don't serve their communities. This is a small proportion, but there are groups that will put their personal interest over the public interest. That is definitely a problem.

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