The New York State Bankers Association commended the state superintendent of banks, Derrick D. Cephas, for his proposal to correct flaws in the Community Reinvestment Act.

In our initial response to the superintendent last fall, and in testimony this spring, the association outlined fundamental problems:

* The act concentrates exclusively on credit activities and fails to take into account many other vital banking services.

* It emphasizes process over substance, with the result that the time and effort banks spend on paperwork has become the focus of the law.

* It fosters confrontation rather than cooperation between the banking industry and community groups.

Mr. Cephas has indicated his general agreement with these conclusions by arguing that "the focus of CRA compliance and enforcement centers too greatly on the regulatory application process, with too little emphasis on ongoing compliance by banks and ongoing participation by community groups."

The superintendent, rather than submitting a proposed regulation, has raised this issue through a series of questions -- a unique approach that has allowed for a vibrant discussion of the issues.

The commentary surrounding the department's questions made it clear that no element of current regulations under the reinvestment act would be immune from review during this process.

Moreover, it also was clear that the department was interested in developing a measure to provide an objective evaluation standard of bank performance in this area.

This latter point has received much of the public's attention while overshadowing the importance of the other issues raised by the superintendent's initiative.

Steps to Reform

We should first focus on revisions that our association supports. From our industry's perspective, adoption of these initiatives would be a significant step:

* The creation of a nonexclusive and representative list of CRA investments, services, and activities.

* A voluntary preapproval process for banks wishing to determine whether particular activities were entitled to credit under the act.

* Separate standards for wholesale and retail banks.

* A safe harbor for banks with "outstanding" CRA ratings over a three-year period.

* The inclusion of bank holding company activity when evaluating reinvestment-act performance of affiliated banks.

* A bank comment period on proposed examination report findings.

* The use of only current CRA ratings, generally, to judge a bank's performance under the act.

* The creation of a community advisory council to assist New York's banking department in identifying CRA needs.

* Acceptance of federal examination reports in lieu of the New York department's annual report requirements for all banks subject to the state Community Reinvestment Act.

One Size Does Not Fit All

We reject the suggestion for an externally developed evaluation standard. Reinvestment-act examinations are inherently subjective.

They hinge on a multitude of variable factors including credit and deposit mixes, community needs, the health of the economy, financial strength of the banking institution, and the

Mr. Smith is executive vice president of the New York State Bankers Association. point in the credit granting and the deposit-taking processes at which an exam takes place.

Rigid standards cannot reflect this diversity.

Custom-Fitted Plans

As an alternative to a quantitative test, the association encourages the N.Y. Banking Department to permit a bank to participate voluntarily in a pilot program that would establish an annual Community Reinvestment Act implementation plan at each bank.

Such a plan would take into account all the bank's community-related banking activities. It would be based on continuing dialogue between banks and community groups, and it would contain goals and objectives custom fitted to the bank's product mix and resources.

By involving community groups at the front end of the process, banks choosing to participate in this program would ensure that their plans were responsive to community needs.

In Sync with Regulator

By establishing goals and timetables, individuals banks would be providing the state banking department with the type of measuring stick that the superintendent has signaled he wants.

And by doing the planning consistently with other types of bank planning -- such as management by objective -- the proposal would make compliance with the act a bank activity identified with cetainty rather than surprise.

To encourage participation, the association suggests that a bank taht annually develops such a plan, sends it to the banking department for review, and implements it according to its terms receive at least a "satisfactory" at the next examination.

The new comptroller of the currency, Eugene Ludwig, has announced his intention to propose a substantial revision in federal CRA regulations.

The extensive work by the banking department, banking industry, and community groups in New York, a state whose economy mirrors in many respects the national mix of urban, suburban, and rural communities, could provide significant guidance to the comptroller and his staff in reviewing the federal Community Reinvestment Act.

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