Twenty-three years ago, when the Community Reinvestment Act was enacted, few could have foreseen the inroads that non-brick-and-mortar Internet banks are making today.

The CRA directs regulators to ensure that insured depository institutions meet the credit needs of their communities, particularly low- and moderate-income neighborhoods. Each bank's "community" (or delineated assessment area in which the bank's performance would be judged) was defined as an area around its deposit-taking branches, because this was the way deposits were collected in 1977.

The definition of assessment area was later expanded to include the communities where a bank's deposit-taking automated teller machines are located.

The use of the Internet to solicit deposits and offer credit products, however, leaves those notions of a bank's community outdated. A non-brick-and-mortar bank needs only a single headquarters office, the location of which has little relation to the communities from which it can draw deposits. Nevertheless, many Internet banks seek to limit their CRA assessment areas to the city in which they place their headquarters office.

How have the regulators been dealing with this issue? In short, haltingly, even irrationally.

In 1996 the Internet brokerage Waterhouse Securities set up a deposit-taking bank, Waterhouse National Bank. Waterhouse Securities, which has its headquarters on Wall Street, placed the headquarters of its bank in the affluent suburb of White Plains, N.Y., and got the Office of the Comptroller of the Currency to agree to limit its CRA assessment area to White Plains.

When Toronto-Dominion Bank applied to acquire Waterhouse and its bank, Inner City Press filed objections with the Federal Reserve Board and the OCC. The OCC did very little. The Federal Reserve Board did inquire into the deal, but went on a tangent, focusing on the Canadian acquirer's lack of experience with the CRA. The Fed ended up requiring Toronto-Dominion to make a three- to five-year CRA plan, but did not meaningfully address the CRA responsibilities of this Internet bank.

In 1998 Royal Bank of Canada applied to the Fed to acquire one of the first all-Internet banks, Security First Network Bank in Atlanta. The Fed approved the deal, stating in a footnote that the OTS was in the early stages of a rulemaking proceeding on the issue of Internet banks. This proceeding has yet to result in any final rule.

An interesting hybrid proposal was submitted to the OCC in 1999: Canadian Imperial Bank of Commerce wanted to set up a "direct bank" in Florida, using kiosks in Winn Dixie supermarkets that would have direct Internet and phone access to CIBC.

When Inner City Press raised CRA assessment-area issues, CIBC made a commitment that all substantial business would have to be done from the kiosks. From a home computer, a consumer could not even apply for a loan. On that basis, the OCC defined CIBC's MarketPlace Bank's assessment area as the communities around its kiosks.

On a policy issue like this, one might assume that each administrative decision is a precedent, a sort of mark in the sand. Not so.

In late 1999 the Dutch insurer ING applied to the OTS to set up a "direct bank" to be headquartered in Wilmington, Del., but which would target consumers from Delaware to New York City.

ING proposes that its assessment area be limited to the Wilmington metropolitan statistical area. Astoundingly, ING's application states that it "will establish one or more marketing offices in its assessment area or adjoining areas that will house phone lines dedicated to the savings bank's call center, as well as computers with dedicated access to the savings bank's transactional Web site." ING's proposal does not even comply with the OCC's CIBC ruling that assessment areas must include facilities offering dedicated access to an Internet bank's Web site.

Inner City Press and the Delaware Community Reinvestment Action Council submitted a timely comment to the OTS on ING's application. On Dec. 29 the OTS informed Inner City Press that it has asked questions to ING that were based on the comment, and will grant Inner City Press and the Delaware Community Reinvestment Action Council the requested hearing, once ING has answered.

These issues are being argued on a case-by-case basis. It would make sense for the regulators to amend the CRA regulation to address the issue of Internet banks' assessment areas. Each regulator, however, has its own motives for ignoring this issue.

The Fed, for example, seems happy to defer on the issue, or to delegate it to other agencies (as it did with Royal Bank of Canada's deal to buy Security First). The Fed's focus right now is on quickly making regulations to allow banks to acquire insurance companies.

The OTS and OCC are apparently concerned that Republicans in Congress, led by Sen. Phil Gramm of Texas, would attack any attempt to write regulations on this issue. Sen. Gramm publicly attacked OTS Director Ellen Seidman in the summer of 1999 after she gave a speech noting that CRA and assessment areas must keep up with industry changes.

On Jan. 10 the OTS approved E-Trade's deal to acquire Telebank, a deal that has since closed. The OTS has indicated that meaningful consideration of the CRA duties of Internet banks will have to wait until 2002, when the CRA regulation itself is reviewed. By then, the horse will be out of the barn. Holding companies with regional branch networks now set up new Internet banking operations, soliciting deposits nationwide, without expanding their assessment areas. For example, Bank One in 1999 set up WingspanBank.com, using an existing First Chicago bank charter, without expanding its CRA assessment area beyond the states where Bank One has branches.

More and more activities, including those that could put the FDIC insurance fund at risk, are begun without any formal review by regulators or the public. But for the reasons explained above, the regulators are either uninterested in addressing this issue, or afraid to. And so the issues are argued on a case-by-case basis, and will become increasingly prominent. Mr. Lee is executive director of Inner City Press/Community on the move and the Inner City Public Interest Law Center in the Bronx, New York City.

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