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Community DIVIDEND Community Affairs Federal Reserve Bank of Minneapolis Reform proposed for Community Reinvestment Act Foremost in the minds ofmany banks and community organizations is the shape and character of the "new" regulations governing the enforcement of the Community Reinvestment Act (CRA). Even though the new regulations are not yet final, we thought it would be helpful to summarize what has happened and what the process is for completing the reform. A s you are probably aware, the reform effort came in response to the concerns that the Community Reinvestment Act of 1977 places too much emphasis on paperwork and procedure, that agency supervision is inconsistent, and that the burdens of compliance are excessive. President Clinton, in July 1993, asked the four regulatory agencies to develop new CRA regulations and examination procedures. The new procedures seek to provide more objective, performancebased assessment standards that minimize compliance burden while improving performance. To begin the reform process, the four agencies (Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thrift Supervision, and Federal Deposit Insurance Corporation) held seven hearings around the country during August and September, gathering the views of more than 250 witnesses about how CRA enforcement could be improved. An interagency proposal to strengthen the CRA that was released in midDecember is currently open for public comment until February 22, 1994. The CRA reform, continued on p.2 From the editor This is our fust issue of Community Dividend, a quarterly newsletter issued by the Community Affairs Section, Banking Supervision Department, of the Federal Reserve Bank of Minneapolis. This newsletter used to be called Ninth District Community. We want to hear from you! What do you want to read about in this newsletter? Please take a minute to fill out the enclosed survey and mail it back. December 1993 Extend the Community Reinvestment Act to nonbank financial institutions? Over the past few months there has been considerable discussion about extending the obligations under the Community Reinvestment Act (CRA) to socalled nonbank financial institutions. This article outlines the most recent activity behind the proposal. The fundamental rationale appears to be related to the changes that have taken place in banking over the past five years, particularly the decline in the relative market share of banks vis-a-vis such other nonbank financial institutions as mutual funds and securities firms. But the decline in market share is only part of the overall rationale. It relates also to fundamental changes in the way people behave as savers and borrowers. Extension, continued on p . 4 Contents "Ask the Fed" ................................ 2 Q &A on CRA Reserve Bank fosters volunteerism ....... ........................... 3 How Fed employees reach out to their community This is who we are ..... ........ ........... 5 Staff of Community Dividend Booklets/pamphlets ....................... 6 Publications available COMMUNITY DIVIDEND CRA reform, cont. from page 1 "Ask the Fed" Each issue we'll have a column devoted to your questions and a response from David Bland, manager of Community Affairs. We really do want to hear from you. Write: David Bland, Manager Community Affairs, BSD Federal Reserve Bank of Minneapolis P.O. Box 291 Minneapolis, MN 55480-0291 Please fill out the survey card included with this newsletter and return it to us. Thank you! draft regulation provides more direct guidance to banks on the nature and extent of their CRA responsibilities, and the means by which those responsibilities will be assessed and enforced. The proposal would replace 12 subjective factors now being used to assess an institution's CRA performance with three "tests" using objective, performance-based standards in the following areas: • A lending test The bank or thrift would be evaluated on loans made to low- and moderateincome areas as well as other areas. • A service test The institution's branch locations, their accessibility to low- and moderate-income areas, and the availability of credit and other services would be reviewed. • An investment test This analysis would cover investment in community development programs that benefit low- and moderate-income areas. The size or specialty of the institution being examined would affect the way these three tests are applied. The proposal calls for larger institutions (generally those with assets of $250 million or more) to begin reporting the geographic distribution of their applications, denials, and originations for consumer, small business, and small farm loans. Evaluations of these institutions would then be based on this data. Smaller institutions would be evaluated under a streamlined method that would not include additional data on the geographic distribution of loans. Limited-purpose institutions that do not make a significant amount of loans as part of their normal business would not be subject to the same tests as institutions that offer broad lending services to the public. 2 The proposal also mentions, as an alternative to the three tests, an option that would allow institutions to formulate a strategic plan, outlining measurable goals for meeting its CRA requirements. The institution's strategic plan would be open for public comment and would be submitted for approval to the applicable regulatory agency. If the institution failed to meet or exceed the goals set forth in its approved strategic plan, its performance would be evaluated using the three-test method. Copies of the draft regulations are being mailed to financial institutions and community groups served by the Minneapolis Federal Reserve Bank. If you did not receive a copy but would like one, please call Vonnie Ness at (612) 340-2421. We encourage anyone with an interest in CRA to review the proposal and make their comments known to any or all financial regulators as noted in the regulations. After the comment period, final regulations will probably be released in the summer of 1994. BIi Community Dividend is published quarterly by the Community Affairs Section of the Banking Supervision Department of the Federal Reserve Bank of Minneapolis, P.O. Box 291, Minneapolis, MN 55480-0291 (612-340-2290). It is available without charge. To be put on the mailing list, to change name/address, or to order back issues, call Deb Stier, at 612-340-6935. Editor: Nettie Pignatello Contributing Editors: David W. Bland, Robert E. Willis, and Liz Wahlstrand COMMUNITY DIVIDEND • PAWS (Pets Are Wonderfully Supportive) • Emerson Elementary School partnership and supplies drive • Mississippi River Cleanup Volunteers paint a house in Minneapolis through Paint-a-Thon Reserve Bank fosters volunteerism Involvement in the affairs of the community is more than a trend at the Minneapolis Federal Reserve Bank-it's a growmg commitment from the employees themselves. he Federal Reserve Employee Action Team (FEAT) is a corporate employee volunteer program providing employees with a variety of ways to give of their time and talents to their communities. Launched in 1991 by Chairman of the Board ofDirectors Del Johnson, FEAT' s goal is to improve the quality of life for the community in general and individuals in particular. FEAT serves as a clearinghouse of opportunities and promotes new and better ways to reach out to those in need. Projects such as the annual Paint-aThon, in which volunteers paint homes of qualifying elderly, may require several hours on a weekend, while others may be as simple as dropping off a canned good for a food drive. Every act is considered a noteworthy effort and is appreciated. Some of the people who participate in FEAT's activities are drawn to helping others for the sense of family and to feel a part of the bigger picture, the bigger community. Others feel as if they're returning a favor perhaps for a time when they too needed help. Many people T feel that the gift of time is much more valuable than money, and you can see the results almost immediately. Currently almost twenty percent of the employees are involved in FEAT activities annually. FEAT's 1994 calendar is already packed with events such as: • Walk for the Cure: Juvenile Diabetes Foundation • Minnesota food share drive • Minnesota AIDS Project pledgewalk • Habitat for Humanity, in partnership with another company Whether helping one person or thousands, the result is the same: community involvement. Christine Power, one of the many driving forces behind FEAT' s success, is the administrative arm ofFEAT. She works closely with the Corporate Volunteerism Council (CVC) of the Minneapolis/St. Paul area to increase the pool of knowledge about ways to involve volunteers. Ideas and requests for projects come from employees themselves or the CVC to either Chris or the FEAT board. The board, made up of employees, votes on which events merit FEAT's assistance. Projects must display a genuine need that creates some form of hardship, but in general, recipients of FEAT' s attention are qualified by simply being in need. As FEAT expands, many of the goodwill activities already endorsed by the Fed, like food drives and holiday sharing, are coming under the FEAT umbrella. In building better relations with the people of the community, the Federal Reserve Bank firmly affirms that through involvement and interaction the idea of citizenship will begin to solidify in our community. Some activities revolve around helping others better themselves: • Minority mentorship with Afrocentric Academy • W.A.N.D. (Women Achieving New Directions) clothing drive • Special Olympics Summer games • United Negro College Fund walk While other activities maintain social consciousness: 3 "Wait at least an hour befere investigating a charge of <ilynamite that didn't go Cilff." -Rules of Thumb COMMUNITY DIVIDEND Extension, continued from p. 1 Until recently, there was a very direct physical relationship between where people saved money and where they borrowed. People lived and worked near where they deposited their paychecks and sought to borrow money from those same institutions. The institutions that took in those deposits sought to make loans to those depositors, and the amount they were able to lend was generally a function of how successful they were in seeking and collecting those deposits. The CRA was enacted to solidify the relationship between deposits and credit availability, linking compliance with the Act to each institution's willingness and capacity to meet the credit needs of the community from which deposits were taken. Now, however, that once solid relationship between place, people, deposits, and lending is becoming distant and, at times, tenuous. People are making deposits of many different sorts now to many different types ofinstitutions, and not necessarily with any "geographic" rationale. Many institutions are taking in deposits without any lending role whatsoever, but rather to make investments and provide a return for their depositors. This trend has been accelerated by technological innovations, allowing, for example, someone in a remote U.S. town to make investments in any number of financial instruments worldwide, with a high degree of safety. Historically, banks and thrift institutions have enjoyed a very large share of the total deposits in the country. In fact, until recently, banks and thrifts had a market share approaching 80% of all deposits. With the growth of mutual funds and money market funds, however, banks and thrifts now have only about 20% to 25% of total deposits. And while the CRA has historically been based upon banks having a geographic relationship between deposits and credit, the CRA linkage of deposits and lending and other related CRA-type obligations has not changed to reflect either this declining market share of banks or the declining relationship between geography and deposits. Several of the larger banks in the country, as well as the American Bankers Association, The National Community Reinvestment Coalition, and the Center for Community Change, among others, have proposed, in essence, to broaden the focus of CRA to, in their view, better reflect the changing face of banking. Aside from the current effort to "reform" CRA from the regulatory ,, __________ The CRA has not changed to reflect either the declining market share of banks or the declining relationship between geography and deposits. '' and compliance perspective, the most visible refocusing has been to extend coverage under CRA to nonbank financial institutions. Five categories of nonbank financial institutions have generally been included in proposals to extend CRA coverage: • Credit Unions Some believe that since credit unions behave much like banks and thrift institutions, including taking in deposits, making loans, and enjoying deposit insurance, they should fall under CRA. Opponents of this opinion contend that credit unions cannot make loans to nonmembers, cannot make commercial loans at all (with some limited exceptions), and cannot take deposits from nonmembers (with some limited exceptions). • Mortgage Companies The significant share of the home mortgage market held by mortgage companies makes it vulnerable to fall under the CRA umbrella. Also, these institutions benefit indirectly from FDIC insurance, just as banks benefit directly. However, some believe that it 4 is not reasonable to saddle mortgage bankers with CRA obligations when they have none of the advantages enjoyed by banks, particularly access to funds, i.e., deposits, Federal Reserve discount window, Federal Home Loan Bank borrowing, and most importantly, deposit insurance. • Finance Companies Overall, the arguments for including finance companies under the CRA mirror the arguments for including credit unions and mortgage companies, with the added incentive of a realization that finance companies are currently attempting significant new market penetration. Because they are such a pervasive source of credit in the community, finance companies could be seen as having an obligation to better serve the credit needs of the communities from which they derive their business. Like mortgage companies, however, they do not have access to deposit insurance or the Fed discount window, and they only have their own sources of capital. • Insurance Companies Insurance companies do not take deposits, but life insurance is commonly viewed as a savings vehicle and many policies pay interest on the premium as a way of increasing equity. Life insurance companies make loans that are more analogous to commercial and consumer loans made by banks and seem to be uniquely suited, with their vast resources, to make equity investments in community development banks and community development corporations. However, neither life underwriters nor property and casualty insurance companies have a defined community to serve. • Securities Dealers, Investment Bankers, Mutual Funds and Pension Funds Arguments for including this category are the same as for other kinds of financial institutions. Some believe bluntly that any institution that derives benefit from a community in the form of deposits has an obligation to Extension, continued on p. 5 COMMUNITY DIVIDEND This is who we are David Bland, Manager Before coming to Minnesota in August, David founded and was the executive director of a nonprofit housing development corporation in Winchester, Virginia. Started in 1988, the award-winning City Light Development Corporation is David's brainchild, in response to the substandard housing in Winchester, particularly in minority areas. While at City Light, David also set up multibank community development corporations. David views the role of Community Affairs as threefold: students of the banking environment with respect to CRA; educators to convey information about the economy; and enablers to help banks creatively meet their CRA obligations. David is looking forward to his first midwestem blizzard. Karen Grandstrand, Vice President Karen is the managing officer of the Banking Supervision Department, where Community Affairs resides. Karen joined the Fed in 1985 as an attorney in the law department. She has a juris doctor degree from Loyola University of Chicago School of Law. Karen believes "that one of the challenges for Community Affairs in 1994 will be working with bankers and community groups on issues related to CRA reform." Off the job, Karen likes to spend time with her two preschool children, play piano, travel, and read. JoAnne Lewellen, Assistant Vice President JoAnne started her banking career as an examiner at the Kansas City Fed. In 1988 she transferred to Minneapolis. In 1990 she became the manager of the Consumer Affairsffrust division, and in 1993 she assumed the role of Community Affairs Officer. She provides overall policy guidance and acts as liaison to the Board of Governors. Community Dividend staff: (L-R) Seated: Liz Wah/strand, Karen Grandstrand, David Bland. Standing: Nettie Pignatello, Deb Stier, JoAnne Lewellen JoAnne believes "the exciting part of community affairs is seeing the impact on the community." JoAnne has a music background and continues to study piano. She likes cooking, reading, and traveling. Nettie Pignatello, Technical Writer Nettie writes user guides for computer systems and edits newsletters. She's worked at the Fed for ten years. When she's not driving her middle school age kids around, she finds a few minutes here and there to read novels, write short fiction, knit, and study yoga. Nettie's goals are to live in a hot climate and be a famous, and warm, writer. for what they are. What she doesn't like is winter in Minneapolis. Elizabeth Wah/strand, Assistant Analyst Liz, who has been in her position two years, works on all the projects thrown to her, like our recent Indian lending seminars. She has a degree in French and studied for a year in Aix-enProvence, France. Liz likes winter, computers, and walking to work. She is from Minneapolis. ma Deb Stier, Administrative Specialist Deb has been at the Federal Reserve seven years in Consumer Affairsffrust and now Community Affairs. She handles details for seminars and juggles the many administrative tasks of her position. Deb will direct your calls or help you sort out your concerns. Outside the Fed, Deb's a voracious reader of"just about anything." Her life is filled with parenting, singing in a choir, sewing, and listening to music. She aims to the standards of her grandmother, who taught her to accept others Extension, continued from p. 4 meet the development, investment, and credit needs of the community from which the deposits are derived. However, unlike banks, mutual funds generally have not been perceived to have engaged in the discriminatory practices CRA was designed to address. In all likelihood, the effort to extend the CRA to nonbank financial institutions will not become a realistic policy option until well after the current CRA reform effort is completed. raD 5 COMMUNITY DIVIDEND Booklets/pamphlets available from us Copies of these publications are available by calling Deb Stier of the Community Affairs section at (612) 340-6935. Closing the Gap, A Guide to Equal Opportunity Lending is a guide to help lenders avoid bias in minority loan decisions. Federal Reserve Bank of Boston. April 1993 . 27pp. Home Mortgage Lending and Equal Treatment, A Guide for Financial Institutions highlights some lending standards and practices that may have discriminatory effects. Federal Financial Institutions Examination Council. Nov. 1991. 16pp. Principles & Practices of Community Development Lending, a five-step investment model to strengthen bank community development lending programs. Federal Reserve Bank of Minneapolis and First Bank System. 1989. 14lpp. Community Development Investments provides guidance to bank holding companies about the formation of CDCs and other uses of equity investments for community development. Federal Reserve Board. l 9pp. Bank Holding Company Community Development Investments Directory, a revised directory providing descriptions of all community development corporations approved by the Federal Reserve System. Federal Reserve Board. June 1993. 79pp. Processing an Application Through the Federal Reserve System is a guide for financial institutions. Federal Reserve Board. Aug. 1985. 30pp. A Guide to Business Credit for Women, Minorities, and Small Businesses. Federal Reserve Board. 12pp. Enterprising Communities, Community-Based Development in America, 1990, by Neal R. Peirce and Carol F. Steinbach, Council for Community-Based Development, Washington D.C., 80pp. Home Mortgages : Understanding the Process and Your Rights to Fair Lending, a brochure that tells where to look, what to look for, and what takes place when applying for a mortgage. Federal Reserve Board. 6pp. A Citizen's Guide to the CRA, for those who want to know more about the Community Reinvestment Act, the regulatory process, and the role the public can play. Federal Financial Institutions Examination Council. June 1992. 25pp. Is My Bank Meeting Its Community Reinvestment Obligation? Federal Reserve Bank of Atlanta. Aug. 1990. 6pp. Community Dividendcovers topics on community reinvestment and neighborhood lending . It reaches financial institutions, community-based organizations, development organizations, and government units throughout the Ninth Federal Reserve District. We welcome your questions and concerns. Please write or call: David Bland, Manager Community Affairs , BSD Federal Reserve Bank of Minneapolis P.O. Box 291 , Minneapolis, MN 55480-0291 (612) 340-2067 Articles may be reprinted if the source is credited and we are provided with copies of reprints . Views expressed do not necessarily represent those of the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Minneapolis. 6
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