Hearing on Financial Services Modernization

Prepared Testimony of Ms. Deborah B. Goldberg
Neighborhood Reinvestment Specialist
Center for Community Change

4:00 p.m., Thursday, February 25, 1999

Good afternoon, Mr. Chairman and members of the Committee. My name is Deborah Goldberg, and I work for the Neighborhood Revitalization Project of the Center for Community Change (CCC). The Center is a national, not-for-profit organization established some 30 years ago to provide direct technical, research and other types of assistance to local, community-based organizations serving the needs of low and moderate income and predominately minority communities across the country. An important part of our work is building the capacity of these local citizens' groups to assess local needs and develop effective revitalization strategies using public and private sector resources. CCC also monitors the progress of the federal banking agencies' enforcement of the Community Reinvestment Act (CRA), the Home Mortgage Disclosure Act (HMDA) and the nation's fair lending laws. I appreciate the opportunity to present the Center's views on the financial modernization proposal under consideration by this Committee.

Last June, my organization testified before this Committee on the version of financial modernization that was then under consideration, HR 10. At that time, we laid out our concerns about the impact that HR 10 would have on the availability of credit and banking services for low and moderate income consumers. I have attached a copy of that statement to my testimony for the Committee's reference. (See Attachment 1). Today, I'd like to focus on three elements of the proposal currently before you that I believe will be detrimental to low and moderate income Americans and the communities in which they live. Two of these are changes in the Community Reinvestment Act (CRA). These are the safe harbor provision and the "anti-extortion" proposal. The third is the absence of a CRA performance standard for bank holding companies that want to expand across industry lines.

Importance of CRA

Enacted 22 years ago, the Community Reinvestment Act imposes on banks and thrifts an affirmative obligation to help meet the credit needs of their entire communities, including low and moderate income areas. This short and simple law has proven to be an indispensable tool for stimulating bank lending and investment to underserved communities and households all across the country, in both urban and rural communities. As Federal Reserve Board Chairman Alan Greenspan said in testimony before this Committee last year, CRA "has encouraged banks to develop credit products and services in response to identified needs of their communities."

In its 22 years of existence, CRA has proven its worth. Current estimates are that during these years CRA has resulted in commitments for approximately a trillion dollars targeted for affordable housing, small business development and expansion, and other types of community development efforts. It has fostered effective partnerships between banks, community groups and government agencies to address pressing local needs and open up new opportunities for people whose options were previously limited. This increased activity has occurred in ways that are both prudent and profitable for banks. And the latest CRA rules, developed a few years ago by the federal banking regulatory agencies with considerable input from lenders, community groups, local officials and others, place greater emphasis on the lending activities of banks and addressed the complaints that some lenders had about certain aspects of the law's administration.

Safe Harbor

Under Section 303 of the discussion draft released last week, any insured depository institution with a CRA rating of satisfactory or better on its most recent CRA exam and any other CRA exam conducted within the previous 36 months would be deemed to be in compliance with the Act. This section would bar the federal banking regulators from considering any public comments relating to the bank's CRA performance in connection with an application filed by that bank, unless the comments contain "substantial verifiable information" arising since the time of the bank's last examination. This provision would essentially shut off the public's ability to make comments on bank applications on issues related to CRA.

Historically, the public comment process has provided an important avenue through which members of the public - community groups, local officials, small businesses, civic organizations, other lenders and even members of Congress - have been able to voice their concerns, for consideration by the federal regulators, about the impact of expansion activity by banks that are chartered to serve the convenience and needs of their communities. These comments often describe the credit and banking needs that exist in the local community, and highlight weaknesses in the banks' records as assessed by members of that community. The comment process has been a useful means for focusing the attention of all of the parties involved - the bank, the public, and the regulators - on aspects of a bank's performance that need to be improved.

While the public comment process has proven to be extremely valuable, it is important to note that it is an option that is exercised fairly infrequently. Of the more than 72,000 applications processed by the federal banking regulatory agencies in the last 10 years, a mere 0.8% have received adverse comments on CRA-related issues. Clearly, filing comments is not something that the public does on a whim. Rather, comments are filed when an application raises issues of serious concern to members of the affected communities.

The public's ability to raise such concerns is particularly important given the limitations of the examination process and the CRA rating system. A few years ago, the regulators jointly adopted new CRA regulations that were intended to address many of the complaints that banks and community groups alike had with the old CRA regulations. The new regulations shifted the focus away from process and onto bottom line performance, and the regs have received a positive response all around. Even under the new regulations, however, the examination system is not perfect. The banking regulators are limited in the resources they have to devote to CRA and other exams, both in terms of time and staff. That means that they do not have the ability take an in-depth look at each market in which a given bank operates. Instead, they go on-site in a small number of locations, and rely on secondary information - much of it provided by the bank itself - to assess the bank's performance in the rest of its markets.

With such a system, it is almost inevitable that the examiners will fail to spot some problem aspects of a bank's performance. This is especially true for the largest banks with the most far-reaching market areas, which may cover many states, potentially the entire nation. These large banks are the very banks involved in most of the merger activity that we have seen in recent years. These are the banks filing the applications that most often cause the greatest concern to the public. The public comment process has allowed problems that have been overlooked by the examiners to be brought to the attention of the regulators. This, in turn, gives the regulators as complete a record as possible upon which to base their decision. The banking regulatory agencies have found public comments helpful to them in fulfilling their responsibilities, and in making informed decisions on the cases before them.

Another limitation of the CRA rating system is the way that weak links in a bank's performance are treated even when they are spotted by examiners. If a bank serves a large geographic area, performs well in some parts of that area but performs poorly in others, it may well receive a satisfactory or better rating. This is especially true if it performs well in communities with large populations and poorly in smaller communities and rural areas. The examiners may even note the problem aspects of the institution's performance in the exam report. Since examiners tend to place greater weight on bank performance in areas with large populations, this kind of spotty pattern may not result in a less than satisfactory rating for the institution. Yet, at the time of an exam, there is nothing the regulators can do to compel the bank to improve its performance in those areas where it is lacking. The application process, and the regulators' ability to condition approval of applications on improvement in performance, is the only enforcement mechanism available under CRA. Section 303 of the draft legislation would eliminate that enforcement mechanism. In doing so, it jeopardizes the continued availability of banking services in many communities across the country, and particularly in rural areas and states with small populations, like those represented by many of the members of this Committee.


The "Antiextortion and Antibribery" section of the "Undecided Issues" draft would make it a crime for anyone associated with a bank to attempt to motivate the testimony of any interested party on an application from that bank pending before a federal regulatory agency by providing something of value to that interested party. The item of value could take many forms: cash payments, grants, donations, in-kind contributions, reductions in or elimination of indebtedness, set-asides for employment, sales, purchases or contracts. Severe penalties would attach to such activity; punishment could include up to a year in prison and/or up to $1 million in fines for each violation. Both the bank representative and the outside party would face criminal liability, and the outside party would be required to turn over any payment they received to the U.S. Treasury.

The language of the provision is highly problematic. It is not clear what the definition of intent would be. Thus, legitimate activity that occurred close to the time of a bank application might run the risk of being labeled criminal. The activity covered, including "quota or set-aside with respect to employment, sales, purchase, or other business activity" is too broad and ambiguous to serve as the basis for criminal liability. The definition of interested party is extremely broad. Would it cover a member of a community group who subsequently obtained a mortgage loan through a program negotiated by the group? What about a housing counselor providing pre-purchase homeownership counseling under a program negotiated by his or her organization? The time period covered by the provision is unclear. How long before or after an application was filed and considered could any financial arrangement between bank officials and outside parties be subject to criminal penalty? And the penalty is extremely severe. Both the million dollar fine and the potential imprisonment are excessive, and would have an extremely chilling effect on completely legitimate activity involving banks and members of their local communities.

This provision appears to attempt to inhibit extortionate activity occurring in conjunction with bank applications. Yet, there is no evidence that any such activity occurs. In the twenty some years that my organization has been helping community groups work with banks to increase access to capital, credit and banking services in their communities, we have never heard either a community group or a bank voice a complaint about extortionate activity and recommend that it be subjected to criminal penalty.

Despite the lack of evidence of any problem requiring such an extreme legislative solution, this provision would have a severe negative effect on the partnerships that have grown up among banks, community groups, and public officials all around the country in the twenty-two years since CRA's enactment. These partnerships have led to the development of effective programs to increase access to homeownership for low and moderate income people, expand credit availability for small businesses, and address pressing community development needs.

Partnerships with key stakeholders in low income communities have been held up by the regulators as effective ways to address the credit needs that exist in those communities. Banks have found them to be effective tools for identifying, understanding, and serving markets in which they had little previous experience. Yet, under this provision, such partnerships would run the risk of being labeled as criminal activity. There is no question that this provision would have a severe chilling effect on much community development activity in this country, and impede the flow of capital, credit and banking services into urban and rural communities that have traditionally been underserved.

CRA Standard for Cross-Industry Affiliations

The final area of concern that I would like to highlight today is not a provision of the bill being proposed, but rather a provision that is absent from this legislative proposal. The missing piece is a provision that would require that the banking subsidiaries of any bank holding company that wants to take advantage of the new powers being granted by this legislation and merge across industry lines to have a satisfactory or better CRA rating. This is a concept that has broad Congressional support, as well as the support of the Clinton Administration. Such a provision was in the legislation enacted by the House Banking Committee and the full House of Representatives last year, as well as in the bill that was passed out of this Committee in the last Congress.

For Congress to require banks to achieve a satisfactory or better CRA rating is not to set a very high hurdle. 97% or more of the banks in the country receive satisfactory or better CRA ratings. I would venture to suggest that there is not a single bank in this country that would want to take advantage of the new powers proposed in this bill that doesn't currently meet this standard.

At the same time, such a standard sends a very important message to the banking industry. Just like the capital and management requirements set out for the subsidiary banks of bank holding companies merging across industry lines, it says that before entering new areas of business, the company must be taking care of the business it was originally set up to do. The goal is to insure that allowing bank holding companies to enter new fields does not jeopardize the safety and soundness of insured depository institutions or the continued availability of credit and banking services for all Americans. This is an important goal, and one that must not be sacrificed. We urge you to include a provision to accomplish this goal in the bill that is brought before the Committee next week. And we urge all of the members of the Committee to vote against any bill that does not establish this modest standard as a prerequisite for allowing banks to engage in expanded powers.

Thank you, Mr. Chairman. That concludes my testimony.

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