Widen the Use of Streamlined Exam Include Other Kinds of Lenders Unholy Alliance Opposing Reform Changes Unwise and Unnecessary
Widen the Use of Streamlined Exam
To the Editor:
In a Dec. 5, 2003 Viewpoint ["
We respectfully disagree. At least one important change is needed that would greatly alleviate regulatory burden without undermining the purpose of CRA: an increase in the asset size limit (currently $250 million) for eligibility for the streamlined small-bank CRA exam.
An August 2002 ICBA/Grant Thornton study comparing CRA exam costs for "large" versus "small" community banks showed that time, expense, and effort increase dramatically for community banks subject to the large-bank exam. Over all, costs can more than double when a bank exceeds $250 million in assets.
The small-bank exam was the most successful innovation of the 1995 CRA reform. But industry consolidation since then warrants an increase in the small-bank size limit. Today, banks stretch from coast to coast. And the number of banks with assets in the hundreds of billions is growing. To examine a $251 million community bank, or even a $2 billion bank, in the same manner as a $100 billion bank is absurd.
An increase in the small-bank size limit to $2 billion would free larger community banks from unnecessary exam costs and let them allocate resources where they should be - meeting the credit needs of their communities.
Karen M. Thomas
Director of regulatory affairs
and senior regulatory counsel
Independent Community Bankers of America
Washington
Include Other Kinds of Lenders
To the Editor:
I was pleased to see CRA highlighted in Mr. Traiger's Viewpoint. I agree that no radical amendment to the regulation would be beneficial at this time.
The previous regulation was very paper-based and continued to be more fluff than substance. The CRA was revised to make it more performance-based, which was exactly what the industry needed.
Financial institutions have made the transition adequately and have revised their programs to ensure that loans are actually being extended to low- and moderate-income borrowers and businesses with revenues of less than $1 million. Financial institutions are investing resources and dollars to ensure they capitalize on this profitable emerging market, which has been a byproduct of the performance-based CRA regulation.
A study released by Kenneth H. Thomas found that 99% of all financial institutions examined received a "satisfactory" or better rating: 9% "outstanding" and 90% "satisfactory." My interpretation is financial institutions now make loans to all communities in which they receive deposits, fulfilling the primary purpose of recent CRA regulations.
Finally, as a result of better-defined performance standards, institutions now better understand how to meet regulatory obligations. They have figured out how to quantify performance and now are using technology to reduce the cost of compliance.
Even smaller institutions whose primary customers are small businesses and borrowers with low to moderate income can profit financially by pooling loans made to these markets and selling them at a higher price to institutions that need such loans. This enables smaller institutions to remain competitive and profitable in this highly competitive market.
If there could be one revision to CRA, it would be to extend compliance coverage to industries that do not have a requirement but benefit from deposits received from CRA-type borrowers - for example, insurance companies and other nontraditional lenders.
Leonard Ryan
President
QuestSoft
Laguna Hills, Calif.
Editor's Note: Mr. Ryan's firm is a vendor of HMDA and CRA compliance software.
Unholy Alliance Opposing Reform
To the Editor:
Mr. Traiger's Viewpoint argues against the promised 2002 CRA reform partly because "the industry and public seem comfortable with the current system." My independent analysis of the roughly 400 comments on CRA reform submitted in late 2001 suggest the opposite.
Most industry comments recommended eliminating or making optional the costly investment test and increasing the $250 million "small bank" cap. Most community groups disagreed, wanting to keep virtually everything in the current CRA as well as expand its coverage and scope.
Realizing the pitfalls of CRA reform with a Republican Congress and administration, the politically savvy community groups apparently decided on a stealth reform strategy. With a little help from their congressional friends, they have jawboned regulators to expand the scope of CRA exams to include fair lending, predatory lending, and now payday lending issues, even though they may have little to with CRA's focus of low- and moderate-income lending.
They are effectively reshaping CRA into a universal lending compliance law to cure all perceived evils. While the industry would be happy with reform, it is happier with the current 99% CRA exam pass rate, even if it means paying an investment-test "tax" to Wall Street. Also, these CRA profiteers would oppose any bank effort to cut back that test or the number of banks subject to it.
In fact, a CRA mutual fund recently established an investment-test lobby in Washington to defend and promote that test, in addition to apparently encouraging its attorneys and community group beneficiaries to do the same. Community groups likewise defend that test, partly because bank contributions to them count as qualified investments.
Thus, it appears that the banking industry, investment-test vendors, and community groups are all willing to maintain the status quo. By accommodating them, the banking agencies created the current CRA regulatory paralysis.
Their refusal to act on promised reform because of apparent special interests is not good public policy. Also, it is unfair not only to the 1,000 or more banks that deserve regulatory relief by increasing the $250 million "small-bank" cap but to all large banks struggling to comply with the expensive investment test.
The regulators must abandon their do-nothing CRA reform policy, driven by vocal community groups and the cash-flush investment test industry, and act in the public interest. This means CRA reform now.
Kenneth H. Thomas
Lecturer in finance
Wharton School
University of Pennsylvania
Changes Unwise and Unnecessary
To the Editor:
Karen Thomas and Ken Thomas disagree with my position that it is better to abandon the effort to amend the CRA rules than to perpetuate the uncertainty that has existed since the regulators asked for comment on the existing rules in July 2001. Each continues to advocate significant change.
However, the further delay that implementation of their proposals would require reinforces my argument that sticking with the current rules is better than continuing the uncertainty.
Ms. Thomas supports an eightfold increase in the asset size of banks eligible for a streamlined CRA examination, and Mr. Thomas would abandon the large-bank investment test. Merit aside, the proposals would be a sea change in CRA compliance. Assuming the four examining agencies agreed with either concept, they would need to draft new rules, publish them for comment, and evaluate the comments before deciding whether to adopt them, reject them, or publish a revised proposal.
The last time significant changes were made to the CRA rules, it took three and a half years from the time the first proposal was published until a new rule took effect.
Meantime, how can a bank plan its CRA compliance efforts? If Ms. Thomas' suggestion is published for comment, banks with assets between $250 million and $2 billion will not know if they will be examined as large or small institutions. And if Dr. Thomas' suggestion is published, no bank with over $250 million in assets will know what will be required at future examinations.
With all due respect, my colleagues overstate the problems with the existing CRA rules.
It is true that the rules technically subject a $251 million bank to the same examination standards as J.P. Morgan Chase and appear to impose the same standards for investment activity on all large banks. But in reality, regulators have construed and applied the CRA rules much more pragmatically. Examinations are tailored to a bank's size and routinely consider the availability of investments in a particular market.
Changes to the CRA rules are unwise because of the uncertainty that naturally flows from the rulemaking process; unnecessary because of the regulatory flexibility inherent in the existing examination process.
Warren W. Traiger
Traiger & Hinckley LLP
New York
