Full text of Statements and Speeches of Manuel H. Johnson : Statement before the Committee on Banking, Housing and Urban Affairs of the U.S. Senate

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For r e l e a s e on d e l i v e r y
10:00 a.m., E . D . T .
S e p t e m b e r 8, 1988

Statement

by

M a n u e l H. J o h n s o n

V i c e C h a i r m a n , Board of G o v e r n o r s

of the F e d e r a l Reserve System

b e f o r e the

C o m m i t t e e on B a n k i n g , H o u s i n g

of

and U r b a n A f f a i r s

the

U. S. S e n a t e

September

8, 1988

Mr.
before

the

Chairman,
Senate

I appreciate

Banking

Committee

c o n s u m e r p r o v i s i o n s of T i t l e
by

the H o u s e Banking

special
I will

focus

Committee.

to

giving

convey

this
any

a d d i t i o n to those
requirements

in

included

the

areas

accounts,

new p r o v i s i o n s

well

recently

testimony,

appear

reported

I will

of

place

1977, w h i c h

implemented,

these

banking

home

system,

to

our

testimony,

degree

of

concern

and

serious

at

also

loan

on

i m p o s e new
check

not

other
in

regulatory

cashing,

basic

the

about

Taken

as

a

a m a s s i v e new burden

smaller

regulatory

appendix.

about

requirements.

constitute

concerns

requirements

do

b a n k b r a n c h c l o s i n g s , equal credit

equity

these

I

IV of the bill w h i c h ,

government

particularly

handle

as in a staff

my

in T i t l e

of

whole,

regulatory

the

to

the C R A ,

and

address

various

how CRA has b e e n

lesser

affecting

services

resources

address
5094,

In m y

emphasis

opportunity,

the

to

on the C o m m u n i t y R e i n v e s t m e n t Act

p r o v i s i o n s that w e r e

financial

opportunity

i m p r o v e its a d m i n i s t r a t i o n .

In
intend

to

IV of H . R .

refer to as "the C R A " ,

h o w w e can

this

banks w i t h o u t

requirements.
these

conclusion

of

extensive
my

I

on

the

will
new

testimony,

as

THE CURRENT CRA FRAMEWORK

Before
revising
briefly

the

Board

to

believes

the

on

are

a

that

the

record
the

CRA

identify

with

and

the

CRA

agencies

sound

take

of

the

CRA

the

CRA
on
is

bill

for

revising

the

Federal

role

in

take

In

their

record

of

Federal
into

institution

financial

for

impose

CRA
must

entire

in

a deposit

any

provides
assess

in

the

meeting

consistent
In

addition,

supervisory

evaluating

an

facility.

specific

depository

needs

community,

institution.

institutions.

encourage

credit

supervision

account

programs

financial

the

financial

organizing

supervisory

neighborhoods,

the

Board

future.

the

agencies

the

a useful

other

that

meet

institution's

the

not

to

by

the

for

financial

particular,

under

operation

does

to

steps

that

in t h e

assuring

current

taken

and

for

outline

the

a guide

CRA

supervisory

the

that

this

application by

requirements

House

moderate-income

requires

The

the

to

made

provide

programs
as

institution

and

will

serve

of

and

of

This

will

financial

needs

steps

the

CRA

been

helpful

discuss

bank

communities.

each

low-

safe

and

be

have

under

of

significant

including

to

that

established

types

gives

Federal

credit

would

policies.

suggested

local

of

it

these

discussion

institutions
their

and

effective

The

of

the

have been

agencies

think

CRA

implement

meaningful

that

I

suggestions

responsibilities

of

perspective

a

CRA,

the

provisions

discussing

lending

Instead,

o»" o t h e r

the

institutions

to

purpose
make

- 3 -

meaningful
of

efforts to assure

that

available credit facilities

local communities are

aware

and to take steps to meet

local

credit needs in a nondiscriminatory manner compatible with safe
ana sound operation.
CRA,

and

strongly

The Board

believes

fully supports the purposes of

that

all

depository

institutions

should make meaningful efforts to meet these objectives.

THE BOARD'S IMPLEMENTATION OF THE CRA

The

Board

has

these CRA policies.

taken

three

broad

steps

a program for

their

the

responsibilities

under

applications

performance
involved.

records

that

of

CRA,

specialized

informing banks of

and

a

program

for

includes consideration of

the

banks

and

bank

holding

the CRA

companies

The Board's CRA performance examinations establish a

framework

for

regularly

member banks

in meeting

The

program

outreach

methods

for

methods

that

are

banks

expand and provides
of

the

increasingly

the credit

the

inform
needs

available

process

performance of

assessing

helps

assessing

applications

review

implement

These steps include conducting

CRA performance examinations,

reviewing

to

acts
and

bank

a vehicle

institution's

banks

meet

an

for

taken advantage of

of

regarding

their

state

those

needs.
check

companies

public

effective

communities

effective

holding

CRA

performance

needs of their communities.

of

to

as

the

The
on

that

the
seek

participation

performance.

The

and

to

in the

public

has

its ability to participate

in

- 4 -

the

applications

process,

CRA c o m m e n t s increasing

with

the

number

from o n l y 3

of

cases

involving

in 1984 to 35 in 1967.

The Board's CRA Examination Process

The
of

the

CRA

first

are

in

conducted

of our C R A p r o g r a m

performance

examinations
trained

part

records

carried

consumer

state

member

by e x a m i n e r s w h o

compliance

approximately

and m o r e f r e q u e n t l y

out

of

involves examination

every

and

CRA

eighteen

banks.

are

specifically

issues,

months

in the case of b a n k s w i t h

These

and

in

are

most

cases,

less s a t i s f a c t o r y

records.
CRA
number

of

examinations

factors,

framework

of

banks

must

needs

of

an

be

the

and

conducted

are

effective

permitted
community

designed
CRA

the
in

efforts
and
to

to

to

offered

low-

become

implement

inform

bank's

by

the

record
and

er:\.

to

a way

that

They

credit

marketing

and

special
of

bank.

In

addition,

the

loans w i t h i n

1 • • injured,

the

its

neighborhoods,

cor.^unity
•: :' * e

on

a

general

the

that

credit

with

the

of

r

its

credit

Board

community,

and

•

programs

services

examines

community,

osve'opment
, -

are the b a n k ' s

credit-related

community

local

meet

compatible

needs

the

in

the

recognize

by the B o a r d

the

ncderate-inccme

focus

and the c o m m u n i t y ' s n e e d s .

of

making

to

is

of

of

Board

identify

flexibility

factors e x a m i n e d
aware

members

participation
jovt-r

the

the

program.

bank's o v e r a l l b u s i n e s s strategy,
Among

by

the

the

including
bank's

projects,
loan

and
. , "in

-

The

examination

also

-

focuses

on

the

geographic

distribution of the bank's credit extensions, and the existence
of

any

evidence

practices

by

of

the

discriminatory

bank.

Finally,

or

other

the

illegal

examiners

credit

take

into

account other information that relates to the bank's record of
meeting

the

including

convenience

the bank's

and

needs of

its entire community,

record of opening

and

closing

offices.

These assessment factors have been incorporated in the Board's
Regulation BB governing CRA matters.
As
contact

part

members

examinations

--

of
of

the
the

examination process,
communities

including

local

in

which

government

our

examiners

they

conduct

agencies,

small

businesses, grassroots - community organizations, and others —
in an attempt to understand the needs of the community the bank
serves.

The examiners then discuss the performance of State

member banks under the CRA with the bank's management in light
of the examiner's contact with the community, and provide both
written and oral reports to the management.

These examination

reports are intended to inform the bank's management of both
the strengths and weaknesses of the financial institution's CRA
compliance

efforts

management

may

deficiencies
continues

and

take

to

are noted

supervisory

to

suggest

enhance

particular

that

steps

performance.

that
Where

in the examination, the Reserve Bank
attention

until

improvement

has

been

achieved.
The Board's continued attention to CRA perfcrr.ar.ee by
our tfxa'.niners has, 1 believf-, emphasized

":e-TiV:er banks

- 6 -

that w e

are serious

maintain
„rforts

about CRA

responsible
have

been

CPA p r o g r a m s

CRA

programs.

useful

and,

and that w e expect

to

the

therefore,

We

banks

have

also
in

t h e s e b a n k s to

believe

designing

resulted

these

effective

in b e n e f i t s

to

local

communities.

Community Outreach Programs

The
p o l i c i e s of

second

step

the CRA

taken

of

Community

about

community development
holding

System's

the credit
Federal
Once

needs

Reserve

having

officers

Affairs

companies,

community

affairs

of

the

Board

to

others.
program

through

these

One

construct

information

and

our

areas

those

community

programs

that

of

familiar

rural
to

to banks,

goals

become

outreach

needs,

the

the

the R e s e r v e

techniques
of

to

towns,

implement

provide

and

is

to

at e a c h of

who

strategies

cities,

districts

banks

Officers

and

identified

help

the

is the e s t a b l i s h m e n t

Banks

bank

by

the
with

in the
areas.

affairs

will

identify

and address c o m m u n i t y credit n e e d s .
For
the

program

has

opportunities
and

other

Affairs
seminars
related

example,

over

the

last

sponsored

1.20

conferences

and

related

Officers
and
to

techniques

for

subjects.

In

at

the

workshops

community

Reserve
that

three

community
1987

one-half

and

the

sponsored
a

variety

community

years

seminars

development

alone,

Banks

explored

investment,

and

on

lending

Community
over
of

60

topics

revitaiization,

and

-7rehabilitation
Banks

spoke

financing.

before

During

more

than

100

represented bankers, concerning
The
initiatives,

Banks

such

publishing

c o m m u n i t y lending,
community

development

participate,
education
techniques,

and

lenders

others

what

and

producing

resources

in

are

also

which

a

lenders

bank

deal

community

know what

what

programs

might

for

wish

opportunities

profiles

and

with

to

to p r o v i d e m u t u a l

community

available

which

additional

that

forums

development

the

of

undertaken

periodicals

in

community

community

most

the R e s e r v e

resource b o o k s on the

lending

forming

about

have

producing

groups,

at

the C R A .

Reserve
as

1987 the staff

designed
the

and
to

needs

contribution

help
are,

the v a r i o u s

participants might make.
One
like

to

activity

mention

corporations.
Reserve

and

is

the

banks

community

specific
special
business

work

other

community
community

that

with

of

b a n k holding

-- or
to

"CDCs"

have

and

projects.

CDCs

may

the

low-income

national

are called

for

-- are

financial

banker

focus,

and

Community

lending,

of

the F e d e r a l

allowed

companies

as they

the

talents

as

development

corporations.

bring

such

particularly

of C R A ,

Currency

special

needs

I would

community

the

development

chartered

and

area

b e f o r e the advent

c r e a t i o n by

corporations

corporations
packaging

our

Comptroller

the

development

this

Since well

encouraged
of

in

to

bear

on

example,

housing

m

on

small

revita 1ization.
These

corporations

importa. 'c c o n t r i b u t i o n s

to

have

the

community

r^'tentia?.

for

devitalization,

mar..ng
in

, -rt

because
take
and
of

they

equity
the

given

positions

dealing

bankers.

A

conference

with

was

of

encourage
their

an

national

real

which

and

of

as

The

authority

Federal

a conference

was

attended

the

proceedings

widely

deal

such

estate.

cosponsored

by

interest

Reserve

in A u g u s t

about
of

distributed.

to

200

that

Since

particularly

that
in

the

banks.

outreach

essential

financial

authority,

containing

a great

Community
believe,

CDCs,

produced

seen

own

office

pamphlet

have

formation

unusual
and

Comptroller's

1987

time we

are

efforts

element

of

institutions

such

our
to

as

charge
meet

these
under

the

are,
the

credit

we

CRA

to

needs

of

communities.

Consideration of CRA Performance in the Applications Process

The
involves

third

facet

consideration

in c o n n e c t i o n w i t h
Bank

Holding

performance
and

soundness,

Board

reviews

taken

with

these

of

the most

elements.

the

Act
into

and

CRA

implementing

performance

received
the

and

to

Bank
along

by

records

the

Merger
with

competitive

of

Board

banks

under

Act.

the

CRA

financial,
factors,

CRA

safety

when

the

applications.

its
banks,

effective

These

approach

account

managerial,

Through
performance

of

our

applications

Company
is

of

experience
the
CRA

Board

in
has

programs

institutions:

examining
found
share

that

the

CRA

institutions

a number

of

critical

-9-

1.

m a i n t a i n o u t r e a c h p r o g r a m s t h a t i n c l u d e p r o c e d u r e s to
permit regular, ongoing and m e a n i n g f u l c o m m u n i c a t i o n
b e t w e e n all l e v e l s of m a n a g e m e n t of t h e b a n k and
members
of
the
community,
community-based
o r g a n i z a t i o n s , b u s i n e s s e s , l o c a l a g e n c i e s and o t h e r s
for t h e p u r p o s e of a s c e r t a i n i n g
local credit
and
deposit needs,
including, particularly, the credit
n e e d s of l o w - a n d m o d e r a t e - i n c o m e n e i g h b o r h o o d s ;

2.

e s t a b l i s h f o r m a l i z e d m e t h o d s for i n c o r p o r a t i n g t h e
findings regarding community credit needs gathered
through these o u t r e a c h efforts into the institution's
d e v e l o p m e n t and d e l i v e r y of p r o d u c t s a n d s e r v i c e s to
a l l s e g m e n t s of t h e c o m m u n i t y ;

3.

s t u d y o p p o r t u n i t i e s for i n n o v a t i v e l e n d i n g p r o g r a m s
for low- and m o d e r a t e - i n c o m e n e i g h b o r h o o d s , including
home
mortgage
neighborhood
and
residential
rehabilitation lending;

4.

support
community
development
projects,
such
as
N e i g h b o r h o o d H o u s i n g S e r v i c e s P r o g r a m s , and d e v e l o p
p o l i c i e s to m e e t s p e c i f i c , i d e n t i f i e d n e e d s of l o w and m o d e r a t e - i n c o m e p e r s o n s ;

5.

through
specifically
designed
marketing
and
a d v e r t i s i n g p r o g r a m s , s t i m u l a t e p u b l i c a w a r e n e s s of
the
bank's
services
throughout
the
community,
i n c l u d i n g e f f o r t s t a r g e t e d to l o w - a n d m o d e r a t e - i n c o m e
n e i g h b o r h o o d s and g r o u p s ;

6.

e s t a b l i s h s y s t e m s for m o n i t o r i n g
the institution's
performance
at
senior
management
levels
and
p e r i o d i c a l l y a s s e s s i n g a r e a s for i m p r o v e m e n t ; a n d ,

7.

train employees
offered
through
availability
of
programs.

regarding the lending o p p o r t u n i t i e s
the
institution
as w e l l
as t h e
community
and
local
development

It

has

been

Board's

process,

as

a

general

improve

their

that

CRA

a significant

the

matter,

performance.
^nd

growing

to

practice
work

The

with

Board's

number

of

in

the

applications

institutions
experience

banks

and

bank

has

to
been

holding

- 1 0 -

companies
and

have

programs

adopted

to

address

Where
holding

the

company's

application

the

and

to

Usually

the

raised

expressed

by

the

While
on

the

needs

of

the

community
through
or

reviewing
cases,

and

in

its

that

that

the

or
was

Act

the
do

radio

intent

Community

of

of

had

reduce

for

nor

to

an

made
CRA

review

the

many

as

programs

of

those

relate

Board

the

to

credit

make

the

services
posters,

finally,

where

in

in

making

sometimes
or

anr"' the

some

record

identified

rates

for

the

active

itself

to

procedures

and,

Act

depending

brochures,

been

had

in e n a c t i n g

case

credit

internal

not

the

to

ascertaining

interest

does

of

have

well

case

lending

Reinvestment

of C o n g r e s s

as

protestants

the

bank

context

generally

policies;

applicant

authorize

loans,

from

improving

types

a

addressed

institution's

CRA

in

applications.

vary

Although

also

have

advertisements,

applicant
the

proceed

comments,

implementing

certain

the

to

commitments

the

the

the CRA.

institution's

commitments

implementing

not

Board

in

policies

under

institutions

the

programs

of

statement.

conditions
the

and

applicant

standards,
Company

facts,

areas where

CRA

the

programs;

improving

indicated

in

call

these

commitments

aware

program

in s i m i l a r

community;

newspaper

or

public

improving

more

officer

loans

the

or

by

internal

inadequacies

improve

these

Board

particular

establishing

found

Board,

permit

application.
concerns

has

to

detailed

responsibilities

performance

designed

performance

and

their

Board

before

commitments

formal

a need

request

relax

credit

Bank

Holding

to

establish

the

terms

Board

believe

that

this

the CRA.

-11-

An
steps

essential

that

the B o a r d

commitments

made

particular,
from

the

the

the

The

banks.

this p r o c e s s

takes

to

assure

Board

commitments

member

of

during

applicant

commitments.

part

the

often

periodic

addition,

to the c o m m i t m e n t s —
these commitments

and

—

CRA

next

into
time

In
reports

implementing

check

account

the

compliance with

examinations

the

fulfill

periodic

review

the Board w i l l

take

the

in

also

affirmative

process.

special

progress

examiners

during

In

requires

the

institutions

applications

regarding

Board

that

are

of

for

efforts

state
adherence

to

institution

fulfill

submits

an

application.
In fact, w e h a v e o b s e r v e d
attention

and

resources

devoted

communities,

including

For

home mortgage

example,

areas

has

decade.

Despite

service

in t h e

financial

Furthermore,
lenders

in

programs.
holding
formed
among

field

banks
the

Forty-four

company
since

the

primary

CRA

business
by

Business
of

the

was

lenders

enacted
for

during

other

in

predominant

lending,

outstripping

a

margin.

wide
the

predominant

national

1977.

lending

bank

corporations

projects

this

financial

Administration's

development

their

neighborhoods.

their

been

fifty-five

of

the

and m o d e r a t e - i n c o m e

by

maintained

consistently

community

the

low-

improved

needs

substantially

providers

have

Small

in

competition

small

service

credit

moderate-income

and

have

of

the

lending

steadily

banks

to

and

increasing

providers,

position
other

increased

low-

that b a n k s h a v e

Banks

undertaken

and

have
have
under

bank
been

been
the

Department
Action

of Housing

Grant

program,

contributors
around

to

implement

have

CRA

I

results

current

Viewed

that

the

the o u t s e t ,

take
all

substantial

financial

Housing

Services

achieved

t h r o u g h our

provisions

from the

outlined

steps to

of

the

programs

m e m b e r s of
manner.

the credit

and meet

all s e g m e n t s of

We

believe

that

CRA

the o b j e c t i v e s of
the

is to

needs

aware

of

of

Board's
As

I said

a s s u r e that

banks

the c o m m u n i t y , m a k e

the

the c r e d i t

efforts

are

as s u c c e s s f u l .

the C R A

community

by the bank,

the

morning,

be v i e w e d

p u r p o s e of

identify

segments

offered

the

of

p e r s p e c t i v e of

this

i m p l e m e n t a t i o n p r o g r a m must
at

been

Neighborhood

view,
the

substantial.
the

the

and

the c o u n t r y .
In our

to

and U r b a n D e v e l o p m e n t ' s U r b a n D e v e l o p m e n t

credit

facilities

n e e d s of c r e d i t w o r t h y

the c o m m u n i t y in a n o n d i s c r i m i n a t o r y
our

c o n t r i b u t i o n s to achieving

CRA

program

has

made

important

these g o a l s .

CRA

We
of

the

recognize

CRA

can

r e v i s i o n of
and

modification
upset
the

the
safe

be m a d e ,

the C R A .

framework
to

are

improvements

but

we

system must

between

sound

do

not

W e b e l i e v e that

fundamentally

that

balance
and

that

the

operation

see

needs
of

the

implementation

a need

the c u r r e n t

sound
be

in

and

local

banks,

major

CRA policies

workable.

carefully
of

for

or

tailored

Any
not

communities
to

raise

to
and

administrative
already

achieved
It

is

modifications
in m i n d ,
the

to

identify

believes
of

Board

model

the

be

the

and

programs

CRA,

has

to

current

and

establishment

sound

there

is

not

groups

to

have

met

approximately
institution's

by

could

a two

input
and

record

two
of

objectives

a staff
that

this y e a r
task

are

further

force

necessary

The

based

changes

Board

on

10 y e a r s

improvement

into
that

the

the

the

high
that

law

that

existing
for

in

CRA

that

changes
CRA

individuals

evaluation

of

CRA

examination

these

criticisms

that

assessment

would

of

the

permit
CRA

institutions.

effectively

accomplished

procedure.

years,

the

a mechanism

in

in

believe

opportunity

believe

supervisory

every

to

believes

earlier

is

of

We

stage

these

which

criticisms

financial
be

With

program.

We

providing

of

CRA

lead

enough

participate

Board

study

process.

institutions,

financial

gains

the C R A .

CRA
two

of

the

the

factors

considered

on

records

This

erase

established

will

also

commonplace.

fully

performance

the

a

focus

of

are

public

Federal

programs,

i m p l e m e n t a t i o n of

that

performance

could

be v i e w e d .

evaluation,

community

ratings

must

an o n g o i n g

self

Board

to

that

initiated

CRA

this

should

process:

perspective

that

improve

CRA

tend

of

The

and

CRA

may

implementation

the Board's

in

this

the CRA

experience with

would

that

the CRA.

from

Board's

the

by

of

the

of

for

obstacles

First,

agencies
an

evaluation

performance

under

through

the

appropriate

puMish,
of
the

each
CRA.

financial
This

-14evaluation

would

regulatory

agency's

financial
submit

performance

take

financial

public
of

Second,

regarding

record.

these

the

analysis

institution.

comments

Federal

provide

As

the

CRA

the

an

the p u b l i c

essential

comments

into

should be

the

of

each

invited

to

institution's

of

program,

this

would

account

for

and the

part

agencies

basis

performance

this e v a l u a t i o n

supervisory

public

with

in

be

the

required

reviewing

to

expansion

p r o p o s a l s by the i n s t i t u t i o n .
In our
and

highly

effective

communities,
the

view,

and

approach would

method

for

regulators

institution's

and the

this

CRA

institution's

plans

provide

communication

regarding

the

and

to

goals

a meaningful

among

banks,

community's
address

record of a c c o m p l i s h m e n t

needs,

those

needs,

in m e e t i n g

their

r e s p o n s i b i l i t i e s under the CRA on a regular b a s i s .
It w o u l d

also

assure the a d v a n t a g e of

participation without

establishing

on

or

credit

that

are

allocation
designed

possibility
advantage
existing

of

of

enforce

costly

delays.

simplicity,

framework

substitute

and

CRA

administrative
compliance

Moreover,
could

established

for m a n y of

a c o m p l e x system

intricate

to

by

increased

be
the

the p r o v i s i o n s

by

this

that

as

of T i t l e

relies

procedures

imposing

approach

incorporated
CRA

public

an

the

has

into

the

the

effective

IV of

the House

Bill.

A N A L Y S I S OF T I T L E IV O F H . R . 5094

I
current

CRA

have

tried

policy

and

to

paint

the

a

background

Board's

that

implementation

describes
of

that

-15policy and explains the areas that the Board believes could be
improved.

I would

like to turn now to a discussion of

provisions of Title IV of H.R.

the

5094 and the Board's concerns

regarding the likely effect of these provisions on the existing
CRA framework.
I hope the Committee will bear with me while I take a
few minutes

to explain

the complexities of

the House Bill,

because it is so important that Congress understand the full
ramifications
procedurally

of

the

Bill's

burdensome

exceedingly

framework

of

data

complex

and

collection,

CRA

performance evaluation, and new administrative requirements.
Summary of Title IV
Title

IV of

the House Bill establishes

that includes four basic parts.

a framework

These parts include:

1.

data collection
lending areas;

2.

a comparative evaluation of the resources devoted by
banks of comparable size to these three lending areas;

3.

limitations imposed on both banking and nonbanking
expansion proposals based on an institution's
numerical CRA rating; and

4.

the establishment of a number of complex and
protracted procedures for analyzing applications
submitted under the Bank Holding Company Act.
The

first

part

requirements

of

the

House

in

three

proposal

specified

requires

institutions to collect data regarding their bonding
lowand

and moderate-income
small

farm

loans,

neighborhoods,

as well

as

small

investments

loans in

business
in

loans

community

- 1 6 -

developrnent
specific

projects

areas.

burdensome,

expanding
directed

in

Second,

the

bill

supervisory

evaluations
the

on

requires
resources

includes
an

banking

companies

have

comparative

banking
policies

types

rating

will

system

community

rating

and

two

loans

toward

the

bill.

CRA

their

procedure

of

rating

their

that

two

for

as

proposal

to

devote
The

ratings.
a prerequisite

bank

above

similar
be

nonbanking

and

commit-

holding
average

on

a

size.
granted
interstate
implement

performance.

monitoring

data

above-average

could

they
CRA

is

which

a comparative

size

that

that

placing

activities.

require

expansion

expand

same

to

institutions

The

provide

the

would

available

for

below-average

rating

average

make

of

to

institutions

improve

on

financial

communities,

categories:

bill

provided

these

emphasis

depository

investment

to

a complex

under

and

to

imputed CRA

approval

bill,

Federal

of

nonbanking

activities

establishes

specific

or

an

of

their

set

the

institutions

with

the

three

only

opportunities

prepare

of

House

an

of

is

present

that

record

the

with

that

the

are

these

purposes.

requires

rating,

basis

Institutions
preliminary

five

average

Third,
any

CRA

its

granting

needs

the

current

that

comparable

to

credit

in

alone

parts

from

agencies

of

requirements

the

ratings,

credit

specific

collection

system

of

other

away

for

emphasis

revises

CRA

activities

collection

with

lending

meeting

system

the

awareness

public

special

data

combined

move

institutions
the

associated

While

when

requirements

and

The

bill

compliance

with

these

commitments.

rating

would

institutions
nonbanking
be

be

Institutions

prohibited

on

an

established

additional

from

interstate

activities.
to

A

basis

these

their

a

below

acquiring

detailed

permit

banks within

with

or

other

from

and

average

state

their

process

institutions

home

financial

expanding

extended

CRA

to

would

acquire

provided

they

commit

to i m p r o v e their C R A p e r f o r m a n c e .
Finally,
process

under

respects.
which

requiring
except

public
Board

bank

Bank

may

would

Holding
extend

submit

approval

to

the

reorganizations.

In

public

performance

comment,

hearing

companies

in

with

45

comments

under

public

holding

revise

Company

a formidable procedure

involving

mandatory

bill

bill w o u l d

simple

establish
and

the

The

the

the

an

in

several

days

the

period

regarding

Bank

key
during

proposal

Company

the

bill

Act

would

a c o u r s e of two y e a r s
of

Board

involving

average

any

Holding

addition,

stages

cases

applications

Act

spanning

two

the

or

review

and

acquisitions

below

average

a

by
CRA

rating.

M A J O R A R E A S OF CONCERN

Although
number

of

by

federal

the

that

the

improvements

a number

banking
of

the H o u s e b i l l .

House
to

Banking

Title

agencies

significant

IV
and

Committee
that

reflect

others,

problems

has

adopted

a

comments made

t-h<= pnarri believes

continue

to

exist

T h e r e are five areas of major c o n c e r n :

with

-18-

1.

T h e p r o v i s i o n s of
establish a system

2.

T h e e x t e n d e d c o m m e n t p e r i o d r e q u i r e d in t h e B i l l for
all applications, s u b m i t t e d u n d e r the B a n k H o l d i n g
C o m p a n y Act w i l l i m p o s e u n n e c e s s a r y c o s t s and b u r d e n s
on a p p l i c a n t s w i t h no p r a c t i c a l b e n e f i t to the p u b l i c .

3.

T h e c o m p a r a t i v e rating s y s t e m has the anamolous effect
of p u t t i n g b a n k s in an i n a p p r o p r i a t e c o m p e t i t i v e C R A
p e r f o r m a n c e r a c e , and b y c o m p l e x p r o c e d u r e s p r e v e n t s
s o - c a l l e d " a v e r a g e " p e r f o r m e r s f r o m u n d e r t a k i n g any
expansion.

4.

T h e p r o t r a c t e d p r e l i m i n a r y r e v i e w and p o s t - a p p r o v a l
hearing
procedures
established
by
the
Bill
are
excessively burdensome.

5.

In c o n t r a s t to e x i s t i n g C R A p r o v i s i o n s , m a n y p a r t s
the
new
statute
do
not
recognize
the
existing
obligation
of
banks
to
make
credit
decisions
c o n s i s t e n t w i t h s a f e and s o u n d b a n k i n g p r a c t i c e .
Our

discussing

a

staff

has

number

of

implementation
As
that

its

rating

I

programs

by

banks

whole,

have

devote

increasing

is

the

collected.

effect

House

bill,

an

above

average

institution

has

it

is
is

major

detailed
that

to

of

Appendix

we

on

the

holding

of

requiring
of

see

in

resources

impossible

for

committed

an

approval

an
above

to
the

the

Bill

CRA

taken

as

institutions
for

system

institution

is

expansionary

will,

areas

a bank

average

the

of

financial

under

to

of

requirements,

companies

because,

rating

defect

collection

bank

amounts

This

the

the

limitations
and

more

difficulties

information

and

a

will work together
allocation.

IV.

stressed,

proposed

system,

prepared
other

of T i t l e
have

the bill
of c r e d i t

which

unless
of'

to

to
data

contained

regulator

a

in

give

the
resources

-19to

three

specific

types

of

loans

for

which

data

is

to

be

collected.
By
three

specific

existing
of

tying

the

CRA

It

bonds

to

their

needs
by

areas

clearly

rating
the

banks

the

bill

will

of

flexibility

advantage

be

that

of

the

only

to

of

special

areas

banking

may
in

other

under

Thus,

have

identify

and

to

manner

the

the effect
mandated

remove
and

that

resources

that

these

and

a

consistent

largely

purposes

in

areas

go

Congressiona1ly

community
skills

financial

significance

to

low

minority

concerned

in the H o u s e b i l l .

currently

the

the needs

in a m a n n e r

commitments

minor

in

of

also

other

specific

their

the

are

establish

for

banks

in

loans

particular

responsibility

to

purchasing

ability

in c e r t a i n

resource

given

credit

needs

stifle

from

to meet

from

business

system

departs

banks

ways,

We

rating

bill

making

community

because
are

of

strategy.

system established

direction

special

to

the

and

permits

a variety

their C R A

of

unmet

which

thus,

business

collection

categories,

specialize

to s h o u l d e r

credit

in

will,

institutions

with

data

philosophy,

housing

areas.

of

loan

community

income

and

the

of

the
meet

takes

individual

banks.
This
comparative

CRA

institutions
bill

system

requires

is

rating

with
the

an

made

worse

system

average

agencies

to

that

CRA

by

limits

rating

grade

the

to

Bill's
the

of

ability

expand.

financial

use

The

a
of

House

institutions

by

-20-

comparing

the

investment
areas
by

for

which

similar

this

data

size

also

comparative

average

expanding
an

comparative

a

and

their

"average"
the

Bill

against

institutions

for

the

above

necessary

gain

approval

concerned

financial

principles

of

institution

that

to

in

sufficient

acquisitions
rating
all

the

meaningful

and

respects.

-- w h e t h e r

it

that

is

the
Any

for

financial

that

are

The

system

without
assure
to

to

a

financial

rating

to

below

of

force

proposals.

order

system

the

their

average

also

proposals
with

rating

rating
of

is

application

companies

a rating

or

Board
will

regard
that

to

the

Bill's
peer's

in

rating.

this

CRA

of

activities.

ratings

comparison

bill

holding

makes

in

average

credit

protracted

House

bank

effectively

average"

believes

complex

by

areas

ability

resources

an above; a v e r a g e C R A

Board

CRA

extend

to o b t a i n

by

"average"

of

sized

comparative

order

established

rating

centerpiece

expansion

lending

the

committed

effectively

soundness

devoted

the

specified

because

specified

nonbanking

similarly

of

this

and

as

three

The

community

resources

of

or

average

institutions

safety

has

to

three

the

rating

will

bid

force

the

limits

rating

to

very

the

a base

banking

institutions

is

to

establishes

performance

system,

to

institution

in

collected,

scale

with

setting

the

institutions.

Bill

from

by

particularly

is

institutions

By

devoted

activities,

The
on

resources

defective

process

involving

an

average

CRA

unsatisfactory

that

average

is
or

not
poor

in

"above
-- w i l l ,

in

practice,

from

have

taking

geographic

that

of

locations
Board

this

will

would

CRA

under

House

system
records
a

section

section

4 of
In

for

establish

an

in

permitted
CRA

review

CRA

the

rating

the
which

to

the

commit

to

the

proposal

re-reviev' p r o c e s s

of

by

also

specific

This

public.

excessively
and

considering

The

Bill

45

Board

days

to

would
for

all

acquire

activities

CRA

established

bank

holding

a

bank

to

banks

under

holding

and

would
In

approval

company

public
the

with

process.

designed

initial

House

companies

preliminary

and

the

complex

commitments,

acquisition

by

administrative

proposals

addition

and

unregulated

an

exceedingly

acquiring

the

the

institutions

services.

of

the

Company Act.

establishes

In

together,

consuming

period

protracted

Bill

the

procedures

are

and

nonbanking

applications

performance.
of

expand

new

financial

against

institutions.

to

into

financial

evaluating

comment

Bank Holding

taken

regulated

for

submitted

excessively

cases,

process

public

addition,

of

institution

expand

establishes

financial

reviewing

average

these

the

also

of

to

on

s e g m e n t s of

procedures

or

a tax

the

areas.

products

of

notices
3

as

similar
all

to

that,

effectively

Bill

minimum
or

concerned

ability

provide

preventing

nonbanking

act

compete

applications

its

will

ultimately hurt

establish

an

also

to

that

elaborate

Bill

is

of

opportunities
new

the

The

the

and

Bill

result

of

reduce

institutions
entities

same

advantage

The
impact

the

to

improve

comment:

Bill

commitments

is

and

imposes

a

six m o n t h s

- 2 2 -

after

the

public

acquisition

hearing

has

been

on the p r o p o s a l

consummated,
two y e a r s

and

after

mandates

the

a

acquisition

has been c o m p l e t e d .
The
of

cases

in

significant
reviewed
expense
Board

Board

does

which

CRA

increase

by

the

not

believe

comments

in the

Board,

and

burden

that

could

simply

be

that

are

public

received

comment

this

delay would

directed

to

use

the p u b l i c

on a p p l i c a t i o n s before the Board

and

Bill

introduces

process
beyond

and

permitting

time
the

performance
proposed

substantial

could

the

extend

the

earlier would

Title
streamlining
Act

and

process.

to

bank

public p a r t i c i p a t i o n
II

the

Senate bill.
the c o m p l e x

S.

1886

The
review

impose.

The

authority

time to c o m m e n t
commitments

established

into

the

review

investors.
in

company

a better

makes

review p r o c e s s
the

Board

added

that p r o c e s s are m e t .

participate

provide

a

all cases

the

to assure that

regulatory

holding

of

in

existing

procedure

most

number

process

In

the

vehicle

the

approval

our

assessing
in

by

far

view,

the

CRA

manner

for

I

permitting

in the e n f o r c e m e n t of CRA c o m m i t m e n t s .

of

reducing
The

of

its

uncertainty

that

horizon
public

of

re-review

view

additional

m a d e by bank holding c o m p a n i e s d u r i n g
protracted

period

in

extended

small

warrants

particularly

both to permit m e m b e r s of

The

the v e r y

costs

has

significant

under

the

associated

fully s u p p o r t e d

needless

extension

of

strides

Bank H o l d i n g

with
thesp

the

Company

applications

p r o v i s i o n s of

the c o m m e n t

procedures established

toward

period

the
and

for c e r t a i n e x p a n s i o n

-23proposals
would

that

have been

largely

vitiate

proposed

the

in

gains

procedures process established

the House bill,

made

by

the

however,

expedited

in S. 1886.

S u g g e s t i o n s for M o d i f i c a t i o n of T i t l e IV
Along

with

the

suggestions

public p a r t i c i p a t i o n in assessing
other

improvements are needed
the

First,

specific

the Bill

should be e l i m i n a t e d .

institutions
appropriate
needs

of

should
to

of

The

available

collection

lending
to

record

the

in summary form

for

of

meeting

of

format,

financial

whatever

institution has

institution could

rigid

flexibility,

collect

I have

requirements

In place of this

their

the c o m m u n i t y that

targeted.

data

permitted

demonstrate

increasing

the CRA p e r f o r m a n c e of banks,

limiting

be

for

to deal with the problems

raised.

w h i c h has the effect

I have m a d e

data

the

is

credit

identified

be required to make

and

this data

inspection by the public

as part

of the institution's CRA p r o g r a m .
Second,
system

proposed

as

a

substitute

in

the

Bill,

for

the

the

Bill

comparative
should

adopt

procedure for public p a r t i c i p a t i o n

in the process

the

institutions

CRA

performance

of

outlined.

Clearly,

defined

"average",

by

as

financial

Bill

must

obligation
sound

the

system

and on

institutions

be

changed

to

make

banking

financial

to

credit

practice

that

is

centered

a c o m p a r i s o n of

should
permit

decisions

and must

to

the

for examining

that
on

I
a

have
rating
devoted

Moreover,

roriiani?e

consistent

permit

the

resources

be e l i m i n a t e d .
banks

rating

with

federal

the

their
safe

and

agencies

to

-24take

these

principles

into

p e r f o r m a n c e of f i n a n c i a l
Third,
required
Board

be

case

and

public

instructed

a reasonable

evaluating

comment

reviewed

period w h e n e v e r

in

the

CRA

institutions.

a 45-day

every

could

comment
made

in

account

to

by

grant

a request

showing

the

should

Board.

of

additional

been

made

not

Instead,

extensions

for

has

period

the

be
the

public

time has been

that

an

extension

is a p p r o p r i a t e .
Finally,
requirements
companies

that

rating

should

to

its

use

holding

that

complex

the

Bill

would

achieve

an

do not
be

replaced

existing

companies

connection

the

with

to

by

and

impose

above

to

improve

their
and

bank

holding
performance

direction

enforce
CRA

on

procedural

average CRA

a specific

authority

applications

burdensome

to

commitments

performance

notices

the Board

submitted

by

bank

offered
under

in
the

Bank Holding C o m p a n y A c t .

COMMUNITY REVIEW BOARDS

The H o u s e Bill
areas.

I would

the bill w o u l d
community
depository
and

the

to

discuss

only

a few

of

these.

in other
First,

require each F e d e r a l R e s e r v e B a n k to e s t a b l i s h

review

board

institutions

communities

review

like

also m a k e s a n u m b e r of c h a n g e s

within

agencies'

that

would

advise

regulators
the

Reserve

performance

in

of

each

of

the

Bank

the

Federal

<~>f c o n s u m e r s
district

implementing

and
the

would
policies

a

-25of

the

well

CRA.

We

believe

suited

to

the

duplicate

work

these

mission

already

boards,

as c o n s t i t u t e d ,

assigned

done

by

the

to

them,

existing

and

are

not

would

Consumer

Advisory

Counci1.
The
narrow
and

to

regional

provide

practices,

believe
this

the

the

includes
Board

Board's

These

believes

programs

assessing

review

boards

on

the

functions

as

many

provide

creation

could

be

Council
are

local

the

too

standards

country.

already

also

issues,

is

We

serves

ill-suited

which

can

to

be

communities

as

possible.

that
The

its e x i s t i n g C o m m u n i t y A f f a i r s O f f i c e r s

these varied

avoid

examination

across

Advisory

the

needs.

most

of

new

performed

effective

In this

F e d e r a l A d v i s o r y C o m m i t t e e Act
to

on

boards

only by an e x t e n s i v e o u t r e a c h p r o g r a m

with

that

review

be u n i f o r m

Banks

surveyed

contact

outreach

must

these

advice

Consumer

Reserve

effectively

of

meaningful

which

function.

advise

focus

regard, w e

embodies
advisory

by

an

methods

of

note that

a congressional
committees

the

policy

where

advisory committee

and

the

already

in e x i s t e n c e .

GOVERNMENT CHECK CASHING

T h e H o u s e Bill w o u l d
establish
does

not,

mandates

a program
in
the

for

principle,
provision

require

cashing
favor
of

financial

government
a

statutory

certain

services

institutions

checks.

The

i eq.i i •. ernent
at

a

to

Board
that:

specified

- 2 6 -

price.
the

The Board recognizes that many of the changes made in

final version

potential

for

of

the Bill

fraud that

are helpful

in

is associated with

reducing

the

these programs.

But the risk of fraud remains a real concern in a situation in
which banks are required to provide immediate cash to where the
authentication of the check being offered may be difficult to
verify, and the identification procedures are subject to abuse.
The
exclusively
problem of
efficient

Board
on

questions,

check

delivering
manner.

cashing

however,
is

government

We

believe

the

whether

best

payments

that

focusing

approach

to

the

in a reliable and

electronic

alternatives

represent a much better long-term solution to problems in this
area.

Any legislation on the subject should provide some sort

of encouragement to develop more innovative ways of delivering
government payments.
For

example,

consideration

should .be given

to

the

development of arrangements whereby federal, state, and

local

benefit

to

payments

depository

could

be

electronically

transferred

institutions that have agreed to participate

voluntary program.

in a

The cost to the banking industry to process

an electronic payment is much lower, and, consequently the fee
charged to the individual would probably be considerably less
than the $2.00 charge now
cashing a government check.

permitted

in the House

bill

for

BASIC BANKING

Similarly,
to

require

accounts

depository

at

a given

arrangement

will

transaction
to

problems,

the

institutions

price.

Our

both

static

be

account

difficult

financial

the Board b e l i e v e s

fee

implement
Board

appropriate

response.

percent

of

financial

banking

services,

types

of

trend

will

and

programs

mandating

and

that

Surveys

that

more

and

is

can

be

that

The

transaction

any m a n d a t o r y

be

In

and

that

extremely

light

of

these

voluntary

efforts

low-cost

accounts

that

as

Board

encouraged

by
are the

many

voluntarily

institutions

year.

inappropriate

basic

will

indicate

institutions

is

inflexible

to offer b a s i c

every

increase

concern

regulations.

believes

it

offer

requirements

in

institutions

to

that

as

offer

basic

establish

believes
without

50

these

that

the

legislation

a s p e c i f i c p r o g r a m of s e r v i c e s and fees.

EXPEDITED FUNDS AVAILABILITY AMENDMENTS A N D OTHER PROVISIONS

The
Expedited

House

Funds

bill

Availability

amendments

facilitate

and

the

reduce

given

next-day

amendments,
quickly.

and

contains

risk of

Act.

compliance
fraud

in

availability.
believes

a n u m b e r of

that

For
with

the
the

accepting
The

Board

Congress

amendments
most

part,

Act's

these

requirements

checks

that

supports

should

to the

act

must
these

on

them

be

- 2 8 -

The
the

treatment

House

bill

recent
share
as

Board
of

drafts

union,

or

than

for

union

comply

the

drafts

for

that

to

that,

Congress

payable

by

a

whether

the

draft

of

With
home

equity

Act,

which

are

terms

their

for

is

drafts

of

or

be

of

union
treated

the

approach,
the

are

credit

payable

nonlocal

of

available

with

for

the

drafts

Board
the Act
that

determination

be based

on

to

accepting

clarifying

through
the

is

proceeds

Therefore,

amendment

it

institutions

associated

increased.
an

bank

a

the

are

of

location

bank.
the

provisions

credit,

for

deposit

substantive

this

depository

risk

codify

credit

location

when

institution,

discussed

need

share

The

bank.

under

for

case

to

of

the

through

adopt

local

through

lines

the

need

the

regard

supports
of

in

on

another

understand

is

depository

the p a y a b l e

that

through

about

Act.

Court

the

deposit

the

District

difficult
and

under

explicitly

that

to

however,

would

through

Act,

drafts

based

believes

is

recommends
provide

checks

consumers

it

with

U.S.

concerned,

that

payable

payable

be

through

the payable

Board

withdrawal,

these

are

to

amendment

the

nonlocal

The

credit

an

by

that

rather

difficult

payable

contains

decision

local

continues

in

full
and

and
the

the

limitations

Truth

Equal

attached

disclosure
credit

on

to

Credit

Savings,

Opportunity

Appendix,

the

consumers

about

accounts,
on

in

but

institutions

we

Board
the

question

piacHces.

the

-29CONCLUSION

Our criticism today of some of the provisions of Title
IV of the House Bill stems from our judgment that the policies
and

framework established by the CRA

The

Board

fully

supports

the

basic

are sound and workable.
purpose of

the

CRA

of

encouraging financial institutions to meet the credit needs of
all segments of their
nondiscriminatory

local communities in a manner that is

and consistent with the principles of safe

and sound banking practice.
of

We believe that our current system

examinations, community

applications

is well

outreach programs,

suited

for

this purpose

and

review of

and

has

been

successful in encouraging banks to increase their commitment of
resources to community needs including low- and moderate-income
neighborhoods.
The changes in the CRA that are proposed in the House
Bill

go

far

justified

beyond

by

our

compliance with

the

alterations

experience
the

CRA.

in

These

that we

believe can be

administering
changes

and

upset

reviewing

the

balance

established in the CRA between the responsibility of financial
institutions

to

serve

the

needs

of

all

segments

of

their

communities and the principles of safe and sound banking.

In

the process, the House Bill establishes a framework that tends
toward

credit

obstacles.

allocation

and

erects

formi^M?

pr'<<-«duva]

-30We recognize that some improvements can still be made
in

the

implementation

particular,

we

have

of

the

offered

policies
detailed

of

the

CRA.

recommendations

include a new system of public participation
bank's CRA performance, elimination of

the public

for

enforce

bank

objective

of

commitments
these

to

suggestions

is

to

CRA

requests by

the public

the Board's

improve

a

rigid data collection

extensions of

period on applications, and use of

that

in assessing

requirements, adoption of provisions for granting
members of

In

comment

authority to

performance.

improve

The

communication

between banks and all segments of the communities they serve,
and to assure that credit is available on a nondiscriminatory
basis to creditworthy customers.
We stand ready to provide any assistance that we can
in this area.

1

Appendix

the

Statement

Manuel

Vice Chairman,

Board

of G o v e r n o r s of

Banking,

by

H. Johnson

before

C o m m i t t e e on

to

the F e d e r a l

the

Housing

of

and

the

U.S. Senate

September

Reserve

8,

1988

Urban Affairs

System

September 8, 1988

APPENDIX TO GOVERNOR JOHNSON'S TESTIMONY
ON COMMUNITY REINVESTMENT ACT

Title
problems

and

IV

of

H.R.

provisions

complex, and,

5094

that

in several

contains numerous

are

cases,

cumbersome,

inconsistent.

technical

excessively
This appendix

attempts to identify these problem areas.

Subtitle A

1.

Section 11(a)(3)(B) in Section 403
A.

the

Board

factors

The provisions of this section of the bill require
to

that

issue

public

the Board

is

written

findings

required

to take

regarding

all

into account in

considering all applications under the Bank Holding Company Act
("BHC Act").

That provision would require the Board to make

these findings within 15 days following the close of the public
comment period on any application or notice in which no public
comments

are

received

by

the

Board

regarding

the

CRA

performance of the bank or bank holding company involved in the
acquisition.
cases

The

in which

performance

of

Bill permits additional processing time for

the Board receives comments regarding the CRA
banks

involved

in the

application or notice.

However,

the

involving

issues

Thus,

under
to

Act

spite

that

and

within

of

the

comments

on

the

other
days

of

fact

that

the

Board

issues

in a r e s p o n s i b l e

written
final
and

may

these

Board

period
for

of

The
the

holds

also

holding

the

hearing,
within

case would

also
of

of

require
as
45

and

consider

period

be

and

under

period

the
in

substantial

simply

cause

hearing
an

does

analyze

not
these

the

days.

as

the

on

CRA

unreasonably

Board
issue

its

Board
in

to

the

regarding

short

act

cases

order

within

in

which

T h i s 90 d a y

period

of

c o m m e n t s are
the

findings

time
often

provisions

investigate,

its

in

final

matters.

period,

to

statement

notice.

Because

comment

issue

litigation

issued
or

Board

needless duplication

comment

hearing.

the

well

has

public

the

written

untimely

requires

the

public

end

its

application

public

would

hearing,

a

to

the

a full

the

a

start

would

received

that

Board

only

at

hold

Bill

or

comment.

comment

consider

the

permits

received
Bill

the

of

the

have

requirement

addition

before

to

Board

must

of

short

time

disruptive

the m e r i t s

days

This

competitive

financial, managerial,

the B o a r d

may

cases

way.
a

regarding

findings

B.

the

in

encourage

deciding

90

addition,

the

the

close

for

substantial

Bill,

Board

sufficient

findings

order

the

issues.

the

of

regarding

15

exception

financial,

the

factors

permit

In

of

findings

these

similar

subject

section

make

no

managerial,

are

this

competitive
BHC

provides

significant

other

required

Bill

of

organize,

following

and

the

-3-

2.

Section 11(a)(1)
The

that

are

apply

provisions

subject

to

Title

the

acquisitions

Consequently,
through

to

a

merger

IV.

of

Bank

that

bank

may

without

The

the

Bill

apply

Holding

are

Company

subject

acquire

complying

only

the

of

to a p p l i c a t i o n s by any bank

of

bank,

would

mergers

are

Company Act.
event

that

do

not

bank

provisions

of

p r o v i s i o n s of section 1 1 ( a ) ( 1 ) ( A ) ( i i ) of section

apply

those

and

another

CRA

4 0 3 , which
another

Act,

to the Bank Merger A c t .

control
with

to a c q u i s i t i o n s

not

not

That

a bank

reach

subject

section
were

to

to a c q u i r e control

bank-to-bank

to

mergers

because

section 3 of the Bank H o l d i n g

of T i t l e

IV would

apply only

in the

itself become a bank h o l d i n g c o m p a n y

by acquiring s h a r e s of another b a n k .

3.

Section 11(a)(1)(B)
This

application
company
of

section

or

or

notice

engage

section

4(c)

inappropriately
proposals

but

provision
to
the

may

a request
BHC

acquired
would

in

Act

applies
by

reaches
other

be

BHC

not

to

as

apply

by a bank h o l d i n g
for

an

extension

require

the

Act."

in

This

the

CRA

For

"any

paragraph

provision

acquisitions
well.

IV to any

company to acquire any

described

only

matters

read

holding

activity

the

in s a t i s f a c t i o n

also

a bank

any

of

the p r o v i s i o n s of T i t l e

and

expansion

example,

provisions

this

of T i t l e IV

company under s e c t i o n 4 ( c ) ( 2 ) of

of time to retain shares of stock

of a debt p r e v i o u s l y c o n t r a c t e d .
Board

to

apply

the

CRA

provisions

This
to

proposals

by

investment
4 ( c ) (13)

a

domestic

entirely

of

the

application

of

the

Act.

In

addition,

CRA

rules

for

Act

nonbanking

the

company

of

organization
from

holding

outside

BHC
the

bank

to

an e x e m p t i o n

United

an

it

section

restrictions

of

Two

applications
application
CRA

acquire

provisions

are
is

required

control

to

of

2(c)(2)

require

by

a foreign

4 ( c ) ( 9 ) of the BHC

the

BHC

Act

to engage

States.

section

2 ( c ) ( 2 ) of

of

section

3 of

section

acquire

these

institutions

the

3(a)

section

11(a)(1)(A),

to

"banks" subject

for

BHC

the

any

to

by

where

that

in fact

no

section

a bank

section

section

of

described

in

and no a p p l i c a t i o n
holding

company

acquisition

4 of the A c t .

implies

to s e c t i o n 3 of

the

"to

"banks" for p u r p o s e s

definition,
by

3(a)

Institutions defined

are not

Rather,

IV

under

. . . ."

acquisition

Title

Similarly,

imply

(other than a bank

Act

required

subject

exemption

exception

bank

the

is

11

BHC Act

application

BHC Act

express

B.

any

institutions.
is

the

the BHC A c t ]

in

under

section

F i r s t , section 1 1 ( a ) ( 1 ) ( A ) ( i ) applies

another

of

of

under

required.

provisions

[section

are

an

Section 11(a)(1) & (3)
A.

the

would

application

under

make

States under s e c t i o n

in n o n b a n k i n g a c t i v i t i e s o u t s i d e the United

4.

to

these

that

of

to

these

By giving an

institutions

these

in

institutions

the BHC A c t .

11(a)(3)(A)

notice by a bank holding

provides

an

company to engage

in

-5certain

bank

Board's

servicing

regulations.

authorized

by

activities

without

exemption
the

Board

should
fact

5.

should
the

Board

an

BHC Act

already

are

to

approval.

expressly

engage

in

Inclusion

these

of

an

these p r o v i s i o n s s u g g e s t s

application

other non-CRA f a c t o r s

provisions

preliminary

acquisitions
where

the

improve

by

bank

its

ratings.
end

of

and

must

provides

The

the

in

these

cases

that

and

in these cases, w h e n in

that

no

application

is

day

period

to

originally

applications

has

to

one

re-review

of

the

this

Board

to

involving

following

the

severe

burdens
There

Board

improve

to

and

and

the

complex

appears

to

re-review

approved

be
the

no

at

approval,

and

two

protracted,

into

the

useful p u r p o s e

sufficiency

180 days after
these

the

application

uncertainty

CRA p e r f o r m a n c e

reviewed

3

average

preliminary

approval.

is e x c e s s i v e l y

above

determination

the p r e l i m i n a r y

the

the

made c o m m i t m e n t s that would

regarding

process.

requiring

1 1 ( b ) permit

hearing

procedure

introduces

applications

performance

a public

This

of

company

must

180

section

h o l d i n g c o m p a n i e s with an imputed CRA of

Board

hold

commitments

bank

CRA

of

approval

holding

years following

has

the

companies

the

Section 11(b)

grant

for

of

box a c t i v i t i e s under

to e n g a g e in these a c t i v i t i e s .

The

and

prior

require

statute

required

4(c)

holding

the CRA title for

review

the

Bank

section

from

or safe d e p o s i t

of

the Board

commitments.

- 6 -

Moreover,

requiring

a public

two

following

its

years

interested
would

members

permit

denial

public

hearing

likely

to
to

of

implication

continued

this

The

reviewing
CRA

record

The

Board's

by

this

the

having

the

an

The

acquisition

the ability

introduce

extended

holding

that

the

evidence
prospect

period

of

companies

time

that

of

that
of

a

is also

would

be

transaction

believes

area.

ability

may

be

subject

to

a p r o t r a c t e d period of t i m e .
that

its

existing

procedures

are

F i r s t , the Board has long e x p e r i e n c e
of

commitments

organizations

two

to

application.

bank

adequacy

of

an

p r o c e s s from ever b e g i n n i n g the p r o c e s s b e c a u s e

Board

in

public

such

r e v i e w over

adequate

the

discourage

regarding

consummation eliminates

of

after

subject
the

of

hearing

involved

offered

in

to

improve

in

the

an e x p a n s i o n p r o p o s a l .

to review these c o m m i t m e n t s is not enhanced

opportunities,

180

days

apart,

to

review

these

commitments.
Second,

the

commitments

accepted

application

under

organizations
reports

to

commitments.
enforcement
that

These

has

the

BHC

make

Board

Board

Act.

CRA

ample

special
under

comply

authority

in

The

Board

their

reports,

to

connection

commitments

demonstrating

authority

organizations

the B o a r d .

by

the

that

the

Board

enforce
with

regularly
to

submit

compliance

coupled

with

an

requires
special
with

the

the

Board's

the BHC A c t , are a d e q u a t e to assure

with

commitments

they

have made with

6.

Section 11(a)(7)
A.

Section

11(a)(7)

establishes

a

procedure

certain acquisitions involving banks with CRA
than

3.

Paragraph

bank

holding

(B) of

company

for

ratings of less

this subsection would permit "any

[to acquire] control of any bank with a

community reinvestment rating of less than 3", if the acquiring
bank

holding

the CRA

company provides commitments

rating of

the

organization.

that would improve

This provision, by its

literal terms, would permit a bank holding company with a CRA
rating

that

is below average

to acquire a bank

with

a CRA

rating that is below average, while prohibiting that same bank
holding

company

from acquiring

a bank

with an excellent CRA

rating.

It would also penalize bank holding companies with the

highest

CRA

rating

administrative

by

subjecting

procedures,

them

including

to

protracted

preliminary

review,

re-review by the Board and public hearing at the end of a two
year period,

if that bank holding company seeks to acquire a

bank with a CRA rating less than 3.
B.

The provisions of subsection

holding companies with a CRA

(7) also permit bank

rating of less than 3 to acquire

banks under section 3 of the BHC Act, but do not permit these
institutions

to

section 4

the Act.

Institutions should

nonbanking

activities if appropriate commitments

expand
are

of

their

made

approved

to

expand

improve

nonbanking

their

their

nonbanking

CRA

activities,

activities

performance.
such

as

under

be permitted

Many

mortgage

of

to

the

banking,

- 8 -

consumer

lending,

activities,

may

provide

holding company

C.

rating

of

federal

Board

by

a

bank

than

regulator

in

Imposing

these

in

administrative

its CRA

holding

with

approval

process

to

the

similar

assist

provides

with
by

subject

primary

process

and

(7)

a

bank

bank's

by

to

that

imputed

the

greatly

an
CRA

primary

Board.

approval

federal

will

increase

an

the

approval

are

and

record.

approved

addition

leasing

would

company

be

applications

dual

that

subsection

3 must

consultation
a

vehicles

addition,

less

Currently,

development,

in improving

In

application

community

by

regulator.
lengthen

application

the

the

costs, without

any p e r c e i v a b l e b e n e f i t .

7.

Section 11(c)(1)
A.

This

applications
applicant

and

or

institutions,

in

activities
significant

a

of

devote
at

a

amount

the c o m m u n i t y .

pattern

of

or

manner

single
of

that

under

the

opening

tends
This
by

resources
location

retail

Board

or

chartering

applications
their

the

submitted

neighborhoods.

denial

that

a

requires

acquiring

moderate-income

banks

notices

exhibits

facilities,

automatic

section

BHC Act
closing

insured

to

disapprove

bank
to

if

the

deposit

depository

exclude

p r o v i s i o n may

and

banking

to

low-

and

require

the

holding c o m p a n i e s and
commercial

do

not

services

banking

provide

a

to any sector

of

- 9 -

These
meet

their
in

housing

bonds

single

or

shares

because

only

deemed

that

to

have

This

permits

the

Board

account

when

is

justified
before

limit

retail

they

in

to

a

draft
to

of

take

may

not

closing
threaten

safety
an

go

bill,

these
of

enough,

the

or

and

district

a
and

to o p e n

areas.

its

record

however.

unprofitable

safety

to

institutions may

a bank or bank h o l d i n g

costly

corporations
community.

soundness

applicant's

far

to

acquiring

refusing

unlike

and

able

activities

commercial

a pattern

the

by

the

banking

operations,

established

clear whether
in

often

and

development

credit

their

are

by p r o v i d i n g business

loans,

community
other

considering

This

not

companies

in low- and m o d e r a t e - i n c o m e

B.

closings.

business

of

is

holding

under the CRA

and

they

limited

branch o f f i c e s

it

bank

small

housing

location

provide
be

particular

provide

However,

and

responsibilities

credit,

that

banks

predecessor,
issues
of

branch

For

example,

company would
branches

soundness

into

of

the

be

even
bank

or

parent h o l d i n g c o m p a n y .
Finally,
absolute

bar

institution
This

fact

consider

to
that

would
under

c o m p e t i t i v e , and

this

provision

approval
has
thus

the

of

an

appears

to

establish

application

involving

exhibited

a pattern

supercede

factors

BHC

Act,

such

legal f a c t o r s .

as

of

that

branch
the

financial,

an
an

closings.

Board

must

managerial,

-10-

8.

Section 11(f)
A.

bank

This

holding

section defines the imputed CRA

companies.

Under

this

provision,

holding companies would receive the CRA
bank

subsidiary

with

the

least

rating for
most

bank

rating assigned to the

favorable

CRA

rating.

An

exception is made for bank holding companies with five or more
depository
companies

institutions in a single state.
receive

a CRA

These bank holding

rating that is one grade higher than

the lowest rating of their subsidiary banks, provided that not
less than 80 percent of all the bank subsidiaries have a higher
CRA

rating

and

that

the

company has a higher CRA

largest bank
rating.

in the bank

holding

Bank holding companies with

five or more bank subsidiaries in several states also receive a
CRA
by

rating that is one grade above the lowest rating received
any

of

the

bank

subsidiaries,

provided

that

the

bank

subsidiaries representing 93 1/2 percent of the assets of the
holding

company have CRA

ratings

that

are greater

than the

lowest CRA rating of any of their bank subsidiaries.
It
rating

is

inherently

received

holding company.
that have
rewards
banks.

unfair

by a multi-bank

to attribute the lowest CRA
holding

company to the bank

This system penalizes bank holding companies

a majority of banks with excellent CRA

banks

that have

an average

rating

at

ratings and

all of

their

-11-

B.
holding
bank

companies

holding

states.
in

There

most

acquisitions.

single
in
and

to

the

own

banking

penalizes

to

several

that

own

system

is

states

number

gives

acquisitions

reason

distinguish
banks

several

banks

permitting

of

between

in

several

becoming

national

interstate

between

bank

in a s i n g l e state and

increasingly

Distinguishing

state

unit

that

banking

with

according

no

companies

Our

scope

is

holding

subsidiaries

that

bank

companies

they

own

in a

p r e f e r e n c e to bank h o l d i n g c o m p a n i e s located

states w h e r e bank b r a n c h i n g has been prohibited

bank
are

holding

less

companies

prevalent

located

in states

where

because s t a t e - w i d e b r a n c h i n g

is

permitted.

9.

Section 11(f)(4)(B)
This

rating

section

system

for

provides

transactions,

less,

for

available
plan

to

such

an

receive

only

the

purpose.

if

novo
the

a

for

community
the

and

banks

banks.

In

acquiring

Board, within

institution,

Permitting
approval

de

exemption

thrifts acquired

emergency
and

an

that

90

consummation

with

a camel

each

case,

bank

of

a plan

of

the

in

c o m p a n i e s in

rating

of

4 or
is

the a c q u i s i t i o n of

of

these

transaction

imputed

company s u b m i t s a

the

rating

the

the e x e m p t i o n

holding

permit

reinvestment

submission

by bank h o l d i n g

days following

will

from

institution
one

or

cases

to

two.

following

is of very

little

10.

Section 11(f)(5)
This

provision

would

exclude

the

rating

of

agricultural banks under $50,000,000 in assets and the rating
of

all banks with less than $25,000,000 in assets from being

taken into account
parent holding
definition

in determining

company.

of

the

imputed rating of the

This provision would include in the

"agricultural

bank"

any

bank

that

makes

25

percent of its loans in real estate loans in its market area.
Consequently, it would define as "agricultural" any bank that
meets the 25 percent criteria even if it is located in a major
metropolitan area.

11.

Section 11(g)
This provision requires the Board to publish notice of

the submission of an application or notice under the BHC Act
"in

the

Board

manner

as

prescribed

in regulations prescribed

in affect on June

provision

is

to adopt

newspaper

notice

5, 1985."

The effect

the Board's procedures for

by the

of this
requiring

in local areas as well as federal register

notice for each case involving the acquisition of a bank or the
establishment of a nonbanking activity under the BHC Act.
This

reference

in the

statute does not permit the

public to be certain of what procedures should be followed for
applications
addition,

it

adjusting

its

processing

and

notices

removes

submitted

all

procedures

flexibility
to

applications and

particular cases.

under

conform

the BHC Act.

from
to

its

the

Board

experience

in
in
in

to exengencies that may arise in

12.

Section 11(h)
This section requires the Board to provide the public

at least forty-five days in which to submit comments regarding
any

application

or

notice

under

the

BHC Act.

This public

comment period would begin following the later of the date that
notice is published
date

regarding the application or notice, or the

the Board publishes

application
period

or

notice.

its weekly bulletin identifying the
imposing

a

forty-five

day

comment

in every case under section 3 and section 4 of the BHC

Act would impose costly and arbitrary time delays on the vast
majority of applications with no public benefit.
The

Board's experience has been that public comments

are received in less than five percent of all applications and
notices considered by the Board.
has

expressed

notice

interest

in

Where a member of the public

commenting

on an

application or

and provided a reasonable showing that additional time

in which to comment on that application is warranted, the Board
has granted additional time in which to submit comments.
procedure

permits

commenters

in

the

cases

Board

where

to

grant

there

otherwise to process efficiently

is

additional

a public

This

time

to

interest

and

the vast majority of cases in

which no public comment is expressed.

13.

Section 405
Section

Community

405

of Title

Reinvestment

Act

of

IV

involves amendments

1977.

In

particular,

to the
this

-14section

requires

establishes
must

a

follow

institution

public

rating
in

under

that

its

publish

on

same

the

presents

logistical

agencies

and

participating
the
of

Board

to

newspaper

areas

where

in

to

agencies

both

may

that

examination

give

of

is

the

examination

to

begin.

This

banking

interested
is

in

difficult

with

to

regulatory

federal

it

CRA

for

the e x a c t

day

the e x a m , p a r t i c u l a r l y
circulated.

the

the

relevant

of

the

are

day

not

on

information
be

the

First,

notice

CRA

scheduled

public

notice
not

807(a)

same

public

day

to

Most

that

adequate

regarding

the

in

the

notice

or

institution's

the e x a m i n a t i o n .

Section 808
A.

collection

This
by

performance
resources

farm

and

financial

institutions

is

for

newspaper

does

that

banking

each

Section

examination.

assemble

performance

for

contemplated

the

publishing

opportunity

and

of

of

daily

rating

examination

publication

begins

14.

any

the

examination

CRA

of

coordinate

a

importantly,

the

examinations

federal

depository

problems

members

CRA

the

amend

Federal

that

that

the

would

notice

day

of

supervision.

405

the

agency

system

setting

Section
provide

notice

data

the

moderate
loans,

the

section
banks

that

income
well

has

at

a

financial

framework

banks

to

minimum,

committed

neighborhoods,
as

a

requires

demonstrating,

institution

as

establishes

the

business

investments

data

maintain

to h o u s i n g

small

for

in

CRA

amount
loans
and

of

in low
small

community

-15development
required

projects

to

place

institution's
community
for

in

the

with

record
these

by

of

a base

business
perhaps

with

BHC

a

in

amounts

three

areas

institution
approval

by

This
interest.
result

In

of

to

This
account

safety

system

is

addition,

of

an

rating

of

is

the

CRA

rating

based
in

of

housing

on

these

a
three

similar

a

base

exceed
of

size,

above

of

requirements
coupled

average

in

these

amounts devoted
size,

and

in o r d e r

necessary

would
three

in

these

that

to

the

gain

plans.
and

system

not

the C R A

credit

rating

undesirable
this

perferred,

rating

that

small

requirements

similar

CRA

loans,

the

meeting

allocate

the

the

as

collection

to

banks

proposals

and

of

its e x p a n s i o n

needs

the

devoted

loans

with

will

obtain

obtain

expansion

data

banks

that

farm

means

rating

encouraging

legitimate

attempt
has

These

to c o n d u c t

needs

also

institutions

entrench

institutions

may

is

Board

depository

establishing

resources

will
small

require

the

credit

rating

with

acceptable,

comparative

areas

to

and

Act.

effectively

of

the

in

CRA

on

The

average.

system

loans,
only

the

The

of

areas.

emphasis

areas

amount

rating

three

serving

institution

This

of

of

three

the

the

these

special

institution.

comparison
areas

in

to

may

have

devote

community
average

counter

the

the

rating

public

perverse

financial

in o t h e r

CRA

to

resources

areas

and

unless

not

the

to

bank

in m i n d .

system

soundness

does

not

permit

principles

in

banks
serving

to take
the

into

credit

-16-

needs

of

their

principles
financial

c o m m u n i t i e s or allow the Board

in

evaluating

distinction

This

section

between

large

collection

burden.

respects.

The

banks

systems."

"maintain

It

is

not

that

is

to

unlikely
by

standards
business

Mortgage

and

location

such

to

Analysis

and

of

Act

in

make
data

is

true.

data

several
that

Even

in

those

the

the

data

data

is

to

to

be

uniform

constitutes

a

data

that

most

computer

systems,

format

that

have

useful
costs

the

cost

regarding
very

in

retrieve

what

a

the

expensive.

in

small
making

for
to

be

the

Home

banks

in

geographic
For

example,

$7 to 9 m i l l i o n .

Section 809
This

examination
often

a

make

assertion

collection

data

HMDA data c o l l e c t i o n costs about

15.

is

the

the

suggests

loans

mark

ultimately

(e.g.,

to

sophisticated

easily

will

maintaining

individual

on

this

to

or

to

by

in imposing this data

the

computerized

there

resources

attempts

the

makes

data

organized

imposed

Bill

miss

that

provision

Disclosure

of

seems

definitions

loan)

collecting

the

and small banks

clear

Further,

comparisons.

of

do have

be

this

developed.

It

of

these

in these areas.

Committee Report

institutions

required

commitment

institution to loans

B.

larger

the

to consider

section

reports

contain

would

and

require

ratings

confidential

the

public.

financial

agencies

to make their

Examination

information

reports

regarding

the

-17company

and

individuals

recommendation
Chairman
which
the

access

would

to

CRA

violating

in

Chairman

be made

public.

Greenspan's

The

letter

to

a s u m m a r y of this i n f o r m a t i o n , available to

accommodate

performance

the

not

of July 21, 1988, for m a k i n g an a s s e s s m e n t ,

include

public

should

contained

St G e r m a i n

would

that

principles

the

same

evaluation

of

interest

for

information

confidentiality

public
without

of

examination

to

submit annual

materials.

16.

Section 812
This

reports

to

collected
reports

been

Congress
under

at

detailed

provision
by

the

examined

for

since

the
the

that

had

under

this

bill

these

years

have

passed

and

Before

two

question
reason

regarding

for

typically

not
be

that

number
date

This

of

of

only

if

years

year

section

has

not

are

and

seems,

relevant

passed,
always

some

of

data

requires

other
that
the

things,
had

only

have

two

not

been
the

answer

to

be

"none"

and

examinations

yet due to be completed —

will not be "late" until two years has p a s s e d .

of

that

after

the

the

not

number

however,

institutions

will

completed

it

the

also

among

enactment

all

on

institutions

granted.

questions

are

each

containing,

extensions

they

agencies

of

Bill.

been

having

the

1

intervals

extensions

examined.

March

House

6 month

reasons

requires

the
will
they

-18-

17.

Section 411
This section would require the establishment by each

agency of a division to be known as the "consumer division" and
would

stipulate

specific

responsibilities for

this division.

The charge to all the agencies to "develop proposed regulations
to

implement

protection"

all

applicable

laws

relating

to

consumer

is inappropriate given the Board's responsibility

for writing rules for Truth in Lending, ECOA, EFTA, HMDA, etc.
This section would prescribe an examination frequency
for consumer examinations.
judgment

of

the

Such subjects seem best left to the

agencies

as

opposed

to

being

inflexibly

codified in a federal statute.

Finally, this section permits a

holding

examination before

company

scheduled

to

request

application

to

an

expedite

an

the next

application.

This

provision has the potential to seriously impair the agencies'
ability to schedule examinations in an orderly way to meet the
bills

two

year

examination frequency

requirement.

Further,

should a large holding company request an examination of some
or

all of its banks, the request may simply be impossible to

accommodate due to resource constraints.

18.

Section 106 of Title I
A.

should
section

be

There are a number of technical amendments that
made

106

procedures

of
for

in

other

Title
bank

areas

1 of
holding

of

the Bill.

For

example,

the Bill establishes expedited
companies

seeking

approval

to

-19engage

in

106(a)

would

provides
or

nonbanking
amend

that

"no

indirectly,

company
requires

an

paragraph
the

has

Paragraph

would

any

company

qualified

de

in

holding

establishing
the

days

form

a

shall

BHC

section

the

to

the
an

of

Section
to
or

102

acquire
of

the

than
unless

notice.

shares
of

provide

purpose
unless

other

written

any

which

acquisition,"

prior

Act

of

(c)

Board

that

directly

shares

subsection

by

Section

engage,

acquisition

the

of

an

paragraph
102

must

(15)

has

subsequently

securities

company

securities

company.

additional

acquisitions

or

and

the

of

Title

that
any

1

"no bank

shares

establishing
Board

the

if

acquires

These
of

of
a

approves

section

limited
of

a

require

of

assets

securities

but

qualified

shares

do

an
of

not

for

application

providing

subsidiary,

the

106

Board's approval

provisions

concerns

the

that

acquires

in

affect

security

approval

subsidiary

exclusion

obtain

qualified

going

new

of

company,

for

a

Act.

. . . ."

section

Board's

of

60
the

BHC

acquire

or

subsidiary

company
a

or

novo

the

company,

under

company

notice

5 of

the

adding

subsidiaries.

combination

requirement

companies

or

authorizes

may

by

paragraph

given

application

applications

obtain

any

either

security

The

bank

activity

section

existing

written

any

securities

amend

holding

holding

to

under

Act

bank

been

(15)

qualified

BHC

application

(15),

Board

the

in

pursuant

activities

that
prior

need

a
to

not

security
additional

an

additional

make

clear

that

c o m p a n i e s by b a n k h o l d i n g
prior

Board

approval

and

-20-

are

subject

safety

and

to

the

concentration

soundness

a n a l y s i s that

the p r o v i s i o n s of Title

B.
notice

to

activities

4

of

list

of

include

consideration

holding

company

involved

in

the

or

of

its

proposed

Title

requesting

CRA

performance

expansion
which

to

of

proposal
consider

that a p p l i c a t i o n .

the

the
or
CRA

that

Act

the

106

the

and

conduct under

with

to

in

also

Board

amend

may

in

is

submitted

nonbanking

relevant

to

in p a r a g r a p h

paragraph

the

request

a notice

engage

information

criteria

under

from

section

of criteria s p e c i f i e d

is p r o h i b i t e d
I

competitive

the Board must

connection
BHC

that

least one of the list
The

in

the

provided

of

provide

information

section

resources

1.

provisions

procedures

additional
under

The

of

(i)(6)

at

(i)(6).

does

not

the CRA p e r f o r m a n c e of the parent bank
bank

subsidiaries

acquisition.
amendments

from

obtaining

company
an

than

result,

the

Board

regarding

involved

extension

provided

those

in section 106 of

information

holding

information

a

contained

additional
bank

As

other

of

in

the
the

time

in

in c o n n e c t i o n with

-

21

-

C O M M E N T S ON G O V E R N M E N T CHECK C A S H I N G
(Subtitle C of T i t l e IV of H . R . 5 0 9 4 )

The H o u s e bill
and

credit

$1,500

unions

or

less

individual
These
of

is

government
cashing

are

often

alternative

government

with

in

not

unfair

or

House

no m o r e

approach

recipients

that

do

The

that

checks

in

an

to

amount

provided

depository
concerns

that

excessive
would

$2.00.

would

of

the

institution.
that

recipients

have an e s t a b l i s h e d

bill

than

insured banks, S&Ls,

holders,

response

that

pay

checks.
to

federally

non-account

payments

charge

that

cash

registered

government

Bill

for

requirements

relationship

an

to

requires

fees

limit

banking

to
the

cash
check

C o n g r e s s could c o n s i d e r

meet

the

objective

of

the

of g o v e r n m e n t p a y m e n t s be able to r e a d i l y ,

and at r e a s o n a b l e c o s t , cash their p a y m e n t s .
The
with

the

agencies

Congress

banking
to

voluntarily
could

provide

local

government

account

at

non-interest
would

be

a

model

bank.

bearing

considerably

to

The

account

Federal

groups,

program

deposit

payments

the

consumer

to p a r t i c i p a t e .

a direct

the

direct

industry,

develop
agree

could

in

Under

service

and

less than

which
such

government

banks

could

a program, banks

that

would

banks

and

for f e d e r a l , state, and

individuals
deposit

R e s e r v e to work

would

do

be

not

made

hold
to

an

a

charge a fee that

the $2.00 m a x i m u m fee p e r m i t t e d

-

under
to

the

House

withdraw

staffed

no

of

mailing

a

assures
and

to

the

on

receiving

checks

Treasury
made

by

payments

the

check,

likelihood

in

one
by

that

deposit

are

deposit

payments

Problems

at an A T M

the

provide

check

or

many
by

holding
benefits.

check

lost,

would

s t o l e n , or

electronically

are

far

fewer

information

deposited

has

reported
will

at

than

from

virtually

the

to

be

in

much

will

correct

check

payments

contrast,

not

uncommon

be

that

bank

for

9,000
In

are

delays
and

stolen

reported

or

every

in

there

lost.

1,000

The

by a b e n e f i c i a r y .

payments

is

addition

Problems

resolved

is

payments

to

reported

related

within

payments, however,

five

In

for

reducing

be d e l a y e d , p r o b l e m s w i t h

faster.

generally

that

In

to

deposit.

a payment

are

are

checks

problem

direct

assures

date.

mail

for

corrected

related

be

non-account

from

routing

also

a problem

only

a

payment

will

payment

potential

made

period

individual

account.

Department

contrast,

the

payments

having

deposit

deposit

available

would

problems

payment

for

receive

about

Accurate

correct

the

payments

potential

Direct

always

worry

check.

in the

allow

payment

alternative

currently

a direct

that

would

o n c e per

deposit

that

The

transmitting

service

least

government

have

delayed.

The

-

station.

recipients
longer

at

direct

recipients
The

funds

teller
A

bill.

22

the

direct

to d i r e c t
days.

t a k e an a v e r a g e

of

- 23 -

two
up

weeks
to

to

resolve,

three m o n t h s

if

to

the

check

resolve,

has

if

not

the

yet

check

been p a i d , and

has

already

been

paid.
Depository
the

direct

deposit

program

more

reduces

operational

shown

that

less

if

the

government

using

check

to

the

motivated

cashing.

to

cashing

checks

make

Direct

institution.

deposit

may

to p a r t i c i p a t e

payments

the

deposit

Studies
is

in

have

considerably

over-the-counter.

also realize an increase

The

in d e p o s i t s

p r o c e e d s of the p a y m e n t s are not w i t h d r a w n on the

date.

direct

direct

be

direct

institution

The
with

than

volunteering

would

than

costs

processing

entire

payment

program

attractive

expensive

depository

institutions

government
deposit.

about

deposit
direct

dependable

also

It

$0.34

and

to

issue
The

due

reliable

operational

is estimated

payment.

deposit

realizes

to

that

a check

the

payment

fact

only

also

that

method,

it c o s t s

and

government

cost

the federal

$0.03

for

benefits

it p r o v i d e s

and

savings

problems

a

from
a more

are

more

q u i c k l y and e a s i l y r e s o l v e d .
Direct
acceptance.
individuals

Since

63

payments

continues

1981,

receiving

approximately
Security

deposit

the

Social

percent.
are

made

use

to
of

direct

Security
Today,
by

46

gain

benefits
percent

direct

increased
deposit
has

for

increased

of

all

deposit.

If

Social
the

- 24 -

government
deposit

agencies

to

and

depository

non-account

holders,

institutions

participation

promote
in

the

direct

program

should be quite h i g h .
Individuals
through
be

the

sent

Federal

agency

to

a

making

bank

Reserve

could

that

would

initiate
the

payments

participates

provide

each

the area that are p a r t i c i p a t i n g
The
governments
currently

Board

offer

compensation
available
plan

to

a

deposit

of

states

to e m p l o y e e s

or

retirees

this p a y m e n t
work

deposit

deposit

and direct
in

the

agency

not

deposit.

39

could

direct

direct

that

benefits,

offer

Treasury

direct

direct

option

the p a y m e n t s

program.

a list

of

The

banks

in

in the p r o g r a m .

recognizes

offer

the

all

state

Although
welfare

and

option.

few

and

currently

and

make

local

states

unemployment
direct

deposit

three additional states

The Federal R e s e r v e and the

w i t h state and local g o v e r n m e n t s to develop

option

for

the

recipients

of

these

benefit

payments.
There
suggested

stamp

over

program
benefits

recipients.

Transfer

direct

currently

successful
Resources

are

System

500,000

transactions

in
is

deposit

operation.

the

1986,

(EPFT) had
recipients,

per

New

York

distribution
In

month

programs

the

The

and

valued

for

welfare

over

and

of H u m a n
and

Payments

food

Funds

l o c a t i o n s , 850 t e r m i n a l s ,

processed
at

notable

Department

Electronic

350 outlet

the n a t u r e being

most

city

system

of

over

1,000,000

$2 billion a n n u a l l y .

In

- 25 the

EPFT

System,

a magnetically
is

inserted

recipients

encoded,

in

a

The
Social

Security

program.
New

York

In

fact,

in

Recipients

of

funds at A T M s .

plans

one

will

these

to their

by

a

cash

in non-bank

to

start

similar

pilot

Under

Baltimore,

be d e p o s i t e d

operated

located

payments

program.

conducted
will

Treasury

access

funds using

signed photo i d e n t i f i c a t i o n c a r d , which

terminal

m a c h i n e s are g e n e r a l l y

obtain

to

program

The

locations.

two
the

teller.

pilot
New York

will

programs
City's

piggyback

for
EPFT

onto

the

the other pilot p r o g r a m , which will be
master

accounts

be e s t a b l i s h e d

payments

will

be

at

into

which

payments

participating

able

to w i t h d r a w

banks.
their

-

26

-

Comments on the Truth in Savings Bills
(Title VI of S. 1886; Subtitle E of Title IV of H.R. 5094)
1.

Section 608(a) of the Senate bill provides that depository

institutions (except credit unions) shall calculate interest
using the average daily balance method.
deleted.

This provision should be

Substantive regulation of deposit accounts, such as

mandating the method of determining the balance on which interest
is calculated, is an area best suited to the states.
Furthermore, the balance calculation method is but one of several
features consumers may examine in comparing accounts, and
disclosure of the particular method used by an institution will
permit consumers to shop for the account which best meets their
needs.

2.

Section 443(a)(3) of the House bill and section 604(a)(3)

of the Senate bill should be amended to delete the references to
more than one annual percentage yield (APY).

As written, these

advertising provisions require providing a second APY for
accounts that pay a lower rate of interest if a minimum balance
requirement is not met.

These provisions also require a second

APY if a time requirement is not met.

Requiring multiple APYs is

likely to confuse consumers since a single figure is the best
means of comparison shopping for deposit accounts.
Similarly, with regard to disclosures, the reference to
paragraph "1" in sections 444(c)(7) and 444(c)(9) of the House
bill and the reference to paragraph "1" in sections 605(c)(6) and

- 31 Comments on the Home Equity Loan Bills
(Title VII of S. 1886; Subtitle F of Title IV of H.R. 5094)*

1.

Section 127A(d) in the Senate version and section 137 in

the House version would substantively regulate aspects of home
equity lines dealing with a creditor's choice of an index for
rate changes, the ability of a creditor to terminate an account
and require immediate payment of any outstanding balance, and the
ability of a creditor to change the terms of the plan.

The Board

strongly opposes these provisions and asks that they be deleted
from the bill.

In the absence of abuse in these areas, these

matters should not be the subject of federal regulation.

States

have responsibility for, and have taken an active role in,
regulating substantive aspects of credit transactions, and we
believe this arrangement is appropriate.

Furthermore, under the

disclosure provisions of the bill consumers would be made aware
of any provisions dealing with these issues.

2.

Sections 127A(a)(1)(B) and 127(A)(d)(3) in the Senate

version and sections 127A(a)(6)(B) and 137(d) in the House
version give the consumer a new right of cancellation with a

•

References in the following comments, unless otherwise
indicated, are to sections of the Truth in Lending Act as it
would be amended by the Senate and House versions of the Home
Equity Loan Consumer Protection Act of 1988.

-

32 -

refund of fees if the terms offered change after the early
disclosures have been given.
the new right of cancellation.

The Board questions the need for
Under current law, the consumer

already has a right to cancel with a full refund for three days
after opening the account.

3.

Section 703 of the Senate Home Equity Act and section 467

of the House Home Equity Act do not provide the Board with
sufficient time to adopt regulations implementing the new
provisions.

The substantive limitations on certain terms and

conditions are to become effective 90 days after the date of
enactment under the Senate version.

The House version gives the

Board only 60 days to adopt regulations implementing the act.

We

urge that the Board be given six months to promulgate regulations
implementing the provisions of any new home equity law, and that
creditors then be required to comply with the new regulations six
months after regulations are adopted.

4.

Section 127A(a)(2)(F) in the Senate version and section

127A(a)(2)(G) in the House version provide that the minimum
periodic payment amount shall be provided for each year in the
15-year historical table.

This requirement should be deleted

since it would be of little value to consumers.

Open-end credit

plans, such as home equity lines, contemplate repeated advances
which will change the applicable minimum periodic payment amount.
Furthermore, other provisions of both the Senate and House

versions call for disclosure of the minimum periodic payment
based on a $10,000 balance and a recent annual percentage rate as
well as the payment that corresponds to the maximum annual
percentage rate that may be imposed under the plan.

These

payment disclosures should adequately alert the consumer to the
possibility of payment fluctuations under the plan due to rate
changes.

5.

Section 127A(a)(1)(B) in the Senate version and section

127A(a)(6)(C) in the House version require a disclosure that the
consumer should make or retain a copy of the disclosures.

It is

our understanding that this disclosure is required since the
creditor is not required to give the new, early home equity
disclosures in a form that the consumer may keep.

The bills

should be modified to provide that the creditor must give the
disclosures to the consumer in a form that the consumer may keep.
This would be consistent with the other similar disclosure
requirements currently in the Truth in Lending law.

If the law

does not ensure that the consumer will have a copy of the
required disclosures, it is questionable how much value the
extensive disclosures will be to consumers.

6.

Section 127A(a)(9) in the House version requires creditors

to disclose an example, based on a $10,000 outstanding balance
and an interest rate recently in effect under the plan, showing
the minimum monthly or periodic payment required under the plan

-

-

and the time it would take for the consumer to repay the entire
$10,000 by making the minimum payments.

This requirement

should be deleted since it may be confusing or misleading.
Open-end credit plans, such as home equity lines, contemplate
repeated advances which will change the applicable minimum
periodic payment amount and the balance outstanding on the plan.
In addition, the consumer is free to pay more than the minimum
payment at any time.

7.

Section 127A(b)(2)(B) in the House version requires

segregation of the disclosures from all other information.

This

standard should be modified to permit elaboration of any of the
disclosed items.

For example, section 127A(a)(7) requires a

statement that, under certain circumstances, the creditor may
terminate the account.

Creditors should be permitted to list,

with the disclosures, the circumstances under which they may
terminate the account.
such elaboration.

The current provision would not permit

The language in section 127A(b)(3) in the

Senate version is preferable.

8.

Section 127A(c) in the House version and section

127A(b)(1)(C) in the Senate version appear to require third
parties to make disclosures, in addition to those provided by the
creditor.

This provision seems unnecessary in light of the

requirement that the creditor must give the same disclosures
generally under the same timing rules.

- 35 -

9.

Section 462(d) of the House Home Equity Act should refer

to section "127A(b)(2)" rather than section "127A(b)(3)."

In

addition, the Senate version should contain a similar provision
amending section 122(b), which deals with inclusion of additional
information in Truth in Lending disclosures.

10.

Both the Senate and the House versions impose new

disclosure requirements for advertisements.

These extensive

disclosures may discourage advertising of home equity programs
and should be deleted.

The new disclosure scheme for home equity

lines of credit should ensure that consumers receive full
disclosure of the terms and conditions of home equity plans very
early in the credit process.

- 36 -

Expedited Funds Availability Act Amendments
Payable Through Draft Amendment
Section 471 of the House bill would amend the Expedited
Funds Availability Act

(the Act) to require depository

institutions to treat credit union share drafts that are payable
through another bank as local or nonlocal checks based on the
location of the credit union, rather than the payable through
bank, for a three year period.

Regulation CC, which implements

the Act, originally provided that the determination of whether a
payable through draft is local or nonlocal be based on the
location of the payable through bank

(where the check is actually

sent for collection), rather than the location of the credit
union.
The Credit Union National Association

(CUNA) brought

suit against the Board regarding this provision of the Board's
regulation, arguing that institutions should look to the location
of the credit union, and not the payable through bank, to
determine whether a share draft is local or nonlocal.
District Court ruled in CUNA's favor.

The U.S.

In mid-August, the Board

adopted interim amendments to Regulation CC implementing the
court order.

The amendments require institutions to determine

whether a check is local or nonlocal based on the location of the
credit union, and not the payable through bank, for the purposes
of the determining the permissible hold that may be placed on the
check.

In addition, the amendments address the disclosure of

- 37 -

bank availability policies with respect to these payable through
drafts.

Institutions that place holds on checks based on whether

the checks are local or nonlocal must either describe how to
determine whether a payable through draft is local or nonlocal,
or inform their customers that they may inquire regarding the
availability of particular checks that are payable through
another bank.
The Board recognized that this approach does not
provide customers with a ready means to determine the
availability of payable through drafts they deposit to their
accounts.

The Board considered alternative disclosure schemes,

but concluded that the alternative schemes would not be workable.
Under the rule required by the court order and the House
amendment, it is impractical to disclose to customers how to
determine whether payable through share drafts and other checks
written on an account at one institution and payable through
another depository institution are local or nonlocal, and
consequently the time those funds will be available for
withdrawal.

The Act defines local and nonlocal based on Federal

Reserve check processing regions.

The only practical way to

determine whether a particular check is local or nonlocal is by
referring to the routing number on the check, which indicates the
check processing region to which the check is sent for payment.
Because the routing number on payable through share
drafts is that of the payable through bank, and not the credit

- 38 -

union, customers cannot rely on the routing number to determine
whether the check is local or nonlocal, and thus cannot determine
the hold applicable to that check.

There are no other practical

methods of disclosing whether a check is local or nonlocal.

An

institution cannot simply disclose which states are contained in
its check processing region, because 44 of the 48 regions include
only portions of particular states.

In order to disclose the

locations in a particular region, the institution would have to
list not only the states in its region, but also all the cities
and towns in states only partially contained in the region.

For

some regions, this would entail the listing of hundreds of
different municipalities.

This disclosure alternative is made

even more unworkable by the fact that some credit unions do not
include their location on the face of their share drafts.
The benefits of expedited availability are greatly
diminished if customers are unable to determine when they may
withdraw their funds.

The court order and the House amendment

make it difficult to fashion disclosures that fully and clearly
inform customers of their rights under the Act.

In addition to

the disclosure difficulties, both the court order and the House
amendment make it difficult for many depository institutions to
comply with the Act, and increase the risk inherent in accepting
certain payable through drafts.
The approach taken in the court ruling and House
amendment cause operational difficulties for depository

- 39 -

institutions in their efforts to comply with the availability
requirements of the Act, because reliance on the routing number
is the only mechanism that can be used to determine whether a
check is local or nonlocal in an automated manner, and is thus
the only efficient means for institutions to ascertain the length
of the permissible hold under the Act.

If an institution that

places holds on its customers' check deposits were not able to
rely on the routing number to determine the length of the
permissible hold, determination of the hold that may be placed on
a check would have to be made manually, rather than on an
automated basis.
The institution would have to first separate the
payable through share drafts, and certain other payable through
drafts, from all other checks for which the routing number can
still be used to determine availability.

This is a manual,

time-consuming procedure, since other checks written on accounts
at the payable through bank may bear the same routing number as
credit union share drafts payable through that bank.

In

addition, certain payable through drafts do not indicate on the
face of the draft that it is payable through another bank, adding
to the complexity of this task.

Moreover, the information on the

payable through share drafts will often not be sufficient for a
person to determine whether the credit union is local or nonlocal
to the receiving institution; the institution's employees may
have to refer to. a list of municipalities to determine whether

- 40 the credit union is located in the receiving institution's check
processing region.
The requirement that credit union payable through share
drafts be considered local or nonlocal based on the location of
the credit union, rather than the payable through bank to which
the draft is sent for collection, may increase the risk to the
receiving institution.

Today, payable through share drafts are

often treated as nonlocal checks, due to the fact they must be
sent to a distant bank for collection, and thus generally take
longer to collect and return to the receiving institution if
unpaid.

Since payable through share drafts deposited in most

receiving institutions are not returned within the availability
schedules for local checks, they may become attractive vehicles
for check fraud.
For these reasons, the Board urges the Congress to not
adopt the amendment contained in the House bill (section 471),
but instead adopt an amendment to the Expedited Funds
Availability Act overturning the decision of the U.S. District
Court.

Such an amendment should provide that:
The term "originating depository institution' means the
branch of a depository institution on which a check is
drawn or through or at which a check is payable, as
prescribed by regulations of the Board.

Other Amendments to the Act
Section 472 of the House bill contains several
important amendments to the Expedited Funds Availability Act.
These amendments:

- 41 -

(a)

Expand the applicability of the exceptions to the

availability schedules to checks that must be given next-day
availability.

Under the Act, a depository institution must make

the entire proceeds of certain check deposits available for
withdrawal at the start of the next business day following
deposit, irrespective of the amount of the deposit, the fact that
the check being deposited had previously been returned unpaid, or
(except in the case of depository checks) the fact that the
institution has reasonable cause to believe the check is
uncollectible.

The Board believes that the exceptions to the

schedules, which are available for other check deposits, should
also apply to next-day checks in order to control the risks of
fraud that may result from the unavailability of these
exceptions.
(b)

Limit the next-day availability requirement for

Treasury checks and "on us" checks to checks deposited at a
staffed teller facility.

Congress required cash and most other

deposits be deposited at staffed teller facilities in order to
receive next-day availability, because it recognized the
difficulties in ascertaining the contents of deposits at ATMs and
other unstaffed facilities in time to update a depository
institution's books so that it can make funds available for
withdrawal at the start of the next business day.

These same

considerations should apply to Treasury checks and "on us"
checks.

- 42 (c)

Provide greater flexibility in the manner of
t

giving notice to the depositor that an exception has been
invoked.

The Act requires notice to be provided to the customer

each time an exception is invoked.

In certain cases, it would be

more efficient and less costly to depository institutions, as
well as more useful to the customer, if the Board had the
flexibility to tailor the notice requirement to the exception
invoked.

For example, under the amendment a single notice to

repeated overdrafters describing the special schedules applicable
to the account for the time that the exception is in effect may
be appropriate.
(d)

Explicitly subject state and local governments on

which checks are drawn to liability rules for violations of the
Board's check collection and return requirements.

State and

local governments often issue warrants drawn directly on
themselves to pay employees, vendors, pensioners, and those
receiving public assistance.

However, the Act does not clearly

authorize the Board to allocate liability for losses, such as
those resulting from the mishandling of a returned check, among
entities such as states or local governments.
(e)

Defer civil liability for violations of the Act's

disclosure and notice requirements from September 1, 1988 to
January 1, 1989.

Given the relatively short lead time from the

adoption of the final regulations in May to the effective day of
the Act on September 1, and the complexity of the availability

- 43 requirements that must be disclosed, the Board believes it is
appropriate to provide a several month grace period from civil
liability for depository institutions, to provide them additional
time needed to ensure that they are in compliance with the
requirements of the Act and Regulation.
The Board supports the adoption of these amendments,
contained in section 472 of the House bill.

Section 907 of the

Senate bill contains an amendment similar to amendment

(a) of the

House bill, expanding the applicability of the exceptions to the
schedules to checks that must be given next-day availability.
The Senate amendment, however, does not fully expand the use of
all of the exceptions to every check deposit subject to next-day
availability.

The Board believes that all of the exceptions to

the schedules should be available to all check deposits that are
subject to next-day availability.

In addition, the Senate

amendment provides an additional notice requirement to the
purchaser

(who is often not the depositor) of a depository check,

disclosing the fact that the amount of the check in excess of
$5,000 may be subject to a longer hold period.

The Board

believes that this additional notice will be of little benefit to
the depositors of these checks.

For these reasons, the Board

prefers the House version of this amendment.

- 44 -

Comments on Amendments to the Equal Credit Opportunity Act
(Title IV, Subtitle H, and Title VIII of H.R. 5094)
1.

The Equal Credit Opportunity Act (ECOA) makes it unlawful

for creditors to discriminate against an applicant in a credit
transaction on the basis of race, sex, and other prescribed
factors.

Section 703(a) of the ECOA establishes the Board's

rulewriting authority for implementing the act, and authorizes
the Board to provide for exceptions from the act's coverage.
In particular, the Board may exempt from the ECOA any class of
transactions not primarily for consumer purposes, if the Board
makes an express finding that the application of a provision or
provisions of the act would not contribute substantially to
carrying out its purposes.

Pursuant to that authority, the Board

has provided limited exemptions from some of the ECOA's
requirements for business credit and certain other transactions.
Subtitle H, §481, of Title IV would modify the Board's
rulewriting authority under section 703(a).

The proposed

amendment provides that the Board could continue to exempt
certain transactions from the act's requirements; however, the
Board would have to hold a public hearing in accordance with the
Administrative Procedures Act (APA) prior to granting an
exemption applicable to consumer credit transactions or business
purpose loans.

(In the absence of a statutory requirement for a

hearing, a notice and comment period ordinarily satisfies the APA
requirements.)

An exemption would end after five years and the

- 45 Board could extend it only after conducting another public
hearing.
The proposed amendments also would establish two specific
requirements for business loan transactions not exempted by the
Board.

Creditors would have to maintain records on business loan

applications for a minimum period of one year and would have to
give rejected loan applicants a written notice of their right to
receive a written statement of the reasons for a credit denial.
The Board opposes the procedural requirement of a public
hearing as a prerequisite to the granting of an exemption for a
number of reasons.

First, while a hearing might focus attention

on small business lending generally -- the area of primary
concern to the sponsors of the proposed amendments -- a hearing
is not likely to serve any rulemaking purpose that cannot be
satisfied just as well by the APA's written notice and public
comment procedures.

Second, although the bill sponsors' area of

concern relates to business credit, the hearing requirement (as
the bill is drafted) also would affect other existing exemptions
in Regulation B for securities credit, public-utilities credit
and incidental consumer credit (credit extended by a doctor or a
dentist, for example).

These are categories whose treatment

under the current regulatory exceptions has never been at issue.
Third, the sunset provision -- requiring another public hearing
after five years to determine the need for a continued exemption
-- is an unnecessary procedure given that the Board already has

- 46 -

in place a policy for the reevaluation of regulations at fiveyear intervals.
And finally, if Congress enacts the proposed record
retention and notification requirements for certain business
transactions, little would remain to be addressed in a hearing.
The two other regulatory exceptions now applicable to business
credit -- the rules on furnishing credit information to third
parties (which are not relevant in the business context) and the
rule concerning marital status inquiries -- can be eliminated by
the Board under the notice and comment procedures customarily
followed in the rulemaking process.

In light of all this, it

appears even more unlikely that administrative procedures in the
form of public hearings would add in any significant way to an
evaluation of exemptions for business purpose loans, or that they
would provide for a more effective rulemaking process.

The Board

therefore strongly recommends the elimination of the public
hearing requirement from the bill.
On the other hand, the Board has no particular objection
to the substantive provisions of the bill relative to record
retention and notification requirements, so long as an
appropriate exemption can be provided for transactions in which
the application of these provisions would not contribute
substantially to effecting the purposes of the ECOA.

For

example, an exemption from the record retention and notification
requirements could be provided for business loans based on dollar
amounts.

The Congress could establish a statutory limitation of

- 47 a certain dollar amount (such as loans under $100,000), or it
could set a cutoff based on the size of the borrower.

If instead

the Congress chooses to leave that determination to be made by
the Board through implementing regulations, it would be helpful
for the legislative record to delineate clearly the factors to be
taken into account in setting the cutoff.
Finally, the Board believes that, as a technical matter,
some redrafting of the proposed amendments is needed.

For

example, the substantive requirements dealing with record
retention and written notice more appropriately belong as part of
section 701 of the ECOA rather than in the provision on
rulemaking authority.

2.

Title VIII of H.R. 5094 would expand the coverage of the

ECOA.

Currently, Section 701(a) of the ECOA makes it unlawful

for a creditor to discriminate in a credit transaction on the
basis of race, color, national origin, religion, age, sex,
marital status, and certain other bases.

Section 804 of the

House bill would amend the Act to also make it unlawful for a
creditor to discriminate "on the basis of any course of study
pursued or intended to be pursued by the applicant."
The Board does not support this amendment.

The ECOA, in

the tradition of other civil rights legislation, outlaws credit
discrimination that as a matter of national policy the Congress
has found to be offensive because it is based on factors such as
race and religion.

In the Board's view, "course of study" does

- 48 -

not rise to this level of significance; indeed, its inclusion
among the "prohibited bases" would in a sense belittle the
importance of the existing factors.
The Board also believes the amendment is unnecessary.
Last spring a great deal of media attention was given to one card
issuer's practice of taking a student's course of study into
account.

Stories about the creditor's rejection of liberal arts

students received wide circulation.

Based on the negative

publicity the creditor soon announced the abandonment of this
policy, and the Board believes it is unlikely that other
creditors would now adopt it.