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 Washington Notebook

September 29, 2004
Vol. 1, No. 35

Joe Feuerherd, NCR Washington correspondent


"Families in these [low- and moderate-income] communities would lose access to affordable banking services."

John Carr, the U.S. bishops' secretary for Social Development and World Peace,
reacting to proposed changes in federal banking regulations


Bishops' conference among critics of banking proposal

By Joe Feuerherd

It's not on the radar screen of the presidential candidates or the news media, but federal regulators (backed by key members of Congress) are about to take a step that could dramatically reduce private investment in local communities. The arcane and largely unnoticed proposed changes would reverse a 27-year federally-mandated commitment to community reinvestment by both state and federally-chartered banks.

Under a proposed regulation floated by the Federal Deposit Insurance Corporation (FDIC), between 800 and 1000 "big banks" -- those with at least $250 million in assets -- will be reclassified as "small banks." As a result of the new classification ("small banks" could have up to $1 billion in assets) these financial institutions will largely escape regulations designed to encourage investment in the cities and towns where they are based.

Under the 1977 Community Reinvestment Act (CRA), banks "have continuing and affirmative obligations to help meet the credit needs of the local communities in which they are chartered." If they fail to do so, federal regulators can halt their ability to offer additional products or expand into new markets.

CRA mandates a two-tiered system of federal scrutiny to ensure that banks meet that obligation. Small banks face "streamlined" exams that test their lending practices in local "assessment areas." Bigger institutions face more rigorous reviews. In addition to reviewing lending practices, the larger banks are judged on the services they provide (the number of branches, for example, in low and moderate income neighborhoods) and, significantly, the nature of their investments.

To meet their CRA obligations, the larger banks typically invest in community development projects, such as affordable housing. It is just this sort of investment, say critics of the proposed regulation, that will disappear if the FDIC moves forward. More than 90 percent of the nation's banks would be exempt from the tougher standards if the FDIC proposal (and similar initiatives from the Office of Thrift Supervision and the Comptroller of the Currency) are adopted.

In a Sept. 16 letter to the FDIC, John Carr, the U.S. bishops' secretary for Social Development and World Peace, said that under the FDIC plan "community service facilities and economic development projects would falter from lack of financial support, as mid-size banks no longer maintain or build branches in low- and moderate-income communities. Families in these communities would lose access to affordable banking services."

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"This is the gutting of CRA," Judy Kennedy, president of the National Association of Affordable Housing Lenders told Regulatory Risk Monitor, the banking industry's leading regulatory affairs trade publication. "This is a subtle way to exempt 800 institutions from the [CRA] investment and service tests."

And there's more. The FDIC proposal would also eliminate, in rural areas, the specific CRA criteria (investment, services and lending) by which large banks are judged. Any banking activity in these areas would qualify for CRA credit, whether it served a millionaire gentleman farmer or a migrant worker.

"This would allow banks to focus on affluent residents of rural areas, diverting community development activities away from the low- and moderate-income communities and consumers that CRA is designed to help," said Carr.

Kennedy was more direct. "Anything that benefits a rural community can get you credit. So if the bank CEO sits on the local chamber of commerce, you get credit."

The banking industry, as one might imagine, backs the FDIC plan and says it can use the savings it achieves from regulatory relief to invest more, not less, in worthy community projects.

"We believe that raising the threshold for the definition of small bank will reduce the regulatory burden for those institutions between $250 million in assets and $1 billion in assets without diminishing the activities of community banks or their CRA obligations," Mark E. Macomber, President and CEO of Connecticut-based Litchfield Bancorp, told Oxley's committee. "The goals of the Community Reinvestment Act are laudable and I take them seriously, but as a community banker I would not be in business if I did not meet the credit needs of all aspects of my community. I do not need costly record keeping or a lengthy examination to tell me if I am doing the job."

Support for the proposal is strong among Republican members of the House Financial Services Committee. Last May, when regulators proposed doubling the small bank threshold to $500 million in assets, committee chairman Mike Oxley (R-OH) urged that it be increased to $1 billion. The regulators subsequently made Oxley's suggestion their own.

Here's one thing you can bet on: The FDIC won't take final action on the proposed regulation until after the November elections.

The e-mail address for Joe Feuerherd is

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