Regulators to Review Consistency of Grades Given in CRA Exams

Stung by complaints of inconsistency, federal banking regulators have agreed to analyze how they determine Community Reinvestment Act ratings.

To gauge how CRA grades vary, examiners from each of the four agencies that issue the grades will be teamed up to conduct a limited number of joint CRA reviews.

Also, a sample of each agency's past exams will undergo a joint review to determine whether the rules were applied evenly. Examiners also will get additional training.

Stephen. M. Cross, deputy comptroller for community and consumer policy, said it is too early to say if there are problems.

"We want to find out if examiners are inconsistent in applying rules or if outside parties, banks and community activists alike, have conflicting interpretations."

But some experts say the need for change is obvious.

"Anytime there's a 98% pass rate, that should raise some eyebrows," said Kenneth H. Thomas, a Miami-based author on CRA compliance.

According to the agencies, the Federal Reserve Board awarded outstanding ratings to 23% of the 388 banks it examined under CRA during the first nine months of 1997, and 76% were found to be satisfactory.

The Federal Deposit Insurance Corp. handed the top rating to 23% of the 1,473 institutions it examined, and 73% earned satisfactory grades.

Of the 722 banks and 355 thrifts surveyed by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, the respective breakdown was 21% and 19% outstanding, and 78% and 76% satisfactory.

Mr. Thomas has reviewed 1,500 CRA exams by the various agencies and said he has uncovered conflicting procedures. For example, some examiners relied solely on auto loan data to determine whether banks were serving low-income borrowers. When Mr. Thomas included those banks' home mortgages, their CRA grades often dropped.

Industry officials and community group leaders have complained that the four banking agencies do not have consistent criteria for judging bank lending and investment in low-income areas.

Bankers say institutions receive different grades despite similar community lending records. Though nearly all banks pass the test, the line between "satisfactory" and "outstanding" performance is fuzzy.

Community activists, on the other hand, argue that without clearer standards, examiners give a bank the benefit of the doubt when its performance is borderline. Because of this "grade inflation," they say, 98% of the industry has passing CRA grades and nearly a quarter have earned "outstanding" ratings.

Industry officials applauded the new review, while community leaders were lukewarm.

"I think it's fantastic," said Agnes Bundy Scanlan, director of corporate community development for Fleet Financial Group.

Ms. Scanlan said examiners often are confused about how to apply the new CRA rules, which took effect for large banks on July 1. One recurring complaint from bankers, she said, is that officials frequently apply different standards for judging low-income housing and other community investment projects.

Ambiguous standards have community advocates concerned, too. "It's very important that 'outstanding' ratings be limited to top-flight performers," said Allen Fishbein, general counsel at the Center for Community Change. "Until the agencies set clear measures, it's premature to say who they are."

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