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Y 4.B3 23/3 : S.HRG.102-907 S. HRG . 102-904 CURRENT STATUS OF THE COMMUNITY REINVESTMENT ACT HEARING BEFORE THE SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS OF THE COMMITTEE ON BANKING , HOUSING, AND URBAN AFFAIRS ONE HUNDRED SECOND CONGRESS SECOND SESSION SEPTEMBER 15 , 1992 Printed for the use of the Committee on Banking, Housing, and Urban Affairs PENNSYLVANIA STATE FEB 2 6 1993 DOCUMENTS COLLECTION 59_308 CC For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington , DC 20402 03 COMMITTEE ON BANKING, HOUSING , AND URBAN AFFAIRS SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS ALAN CRANSTON , California , Chairman JIM SASSER, Tennessee CONTENTS TUESDAY, SEPTEMBER 15, 1992 Page Opening statement of Senator Cranston 3 WITNESSES 4 ... 9 214 11 90 94 95 .. Introduction ... 14 IV Page Gilda Haas, community organizer, Communities for Accountable Reinvest ment, LosAngeles, CĂ - Continued List of Figures: 101 102 103 104 105 108 109 110 111 113 114 117 118 120 121 33 146 34 149 37 180 181 186 190 198 199 203 203 208 V Page ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Woodstock Institute 233 332 CURRENT STATUS OF THE COMMUNITY TUESDAY, SEPTEMBER 15, 1992 U.S. SENATE , COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS, 2 We have the honor of having State Senator Joe Neal, of Nevada, here to discuss the problems in Las Vegas. 3 had agreed to cease these activities, the FDIC determined that no further action was required. OPENING REMARKS OF SENATOR RICHARD H. BRYAN Senator BRYAN . Mr. Chairman , let me preface my comment this morning by expressing my appreciation to you for your leadership on this issue and for convening this important hearing this morn ing. I have a statement which I would like to ask with unanimous consent be made a part of the record. 4 peppe PREPARED STATEMENT OF SENATOR RICHARD H. BRYAN 5 share for purchase loans zero to $ 1 million. In our home town of Los Angeles, we are also number one. 6 Self interest is a powerful motivator, Mr. Chairman . Our loan system illustrates how effectively it can work . 7 only be good for communities like South -Central Los Angeles. That is why we are here today. 8 We decided to approach local financial institutions with our com ments on their community reinvestment records at the earliest pos sible time, rather than wait to protest an application . We were guided in this decision by the 1989 Joint Statement of the Federal Financial Supervisory Agencies regarding the CRA, which encour ages communityorganizations to follow this procedure. me. Senator CRANSTON . You and the Senator from Nevada are fully in charge now . 9 onstrate, what reason is there to think that giving banks a safe harbor will benefit our communities? 10 allowed things such as minimum loan amounts of $250,000 and $ 350,000 within Los Angeles. This means that areas such as a large part of South -Central, and other areas of color do not qualify for those loans off the bat. 11 tigative Reporting and aired on Frontline, and it is entitled “ Your Loan is Denied .” It depicts exactly what has occurred over the last 15years with the financial regulatory agencies. 12 My concern about the actual provision of credit to communities is, of course, highlighted by the recent Los Angeles Times articles that have focused on the lack of home mortgage loans in South Los Angeles by major banking institutions in Los Angeles. Those arti cles, as you know, pointed out that major banking institutions in Los Angeles are not making home mortgage loans. We know this to be a fact, over the past 2 years. a 13 What the CRA needs to do is focus on that kind of activity as well as home loans, so we can get a broader picture of what's really happening 14 STATEMENT OF GILDA HAAS, COMMUNITY ORGANIZER , COM 15 quently use the more conveniently located 133 check cashing facili ties in the community. 16 tually it's very similar to what Mr. Bodaken was talking about, but we've developed a vehicle for doingit. ment. ” 17 PREPARED STATEMENT OF SENATOR DONALD W. RIEGLE, JR . 18 signed to replicate and form the basis of a new urban strategy for reinvestment in our neighborhoods and communities. 19 and moderate -income communities, we must make sure that all the players are using the same rules. PREPARED STATEMENT OF SENATOR JIM SASSER Senator SASSER. Mr. Chairman, I would like to thank you for or ganizing this valuable review of the Community Reinvestment Act . nesses . Il 20 segments of the city have been abandoned by the regulated finan cial institutions. 21 Senator CRANSTON . Are there other responses to that question ? Ms. Haas? - Thank you. Ms. WHITE. With respect to underwriting criteria, most of the un derwriting criterion is set in such a way that it's designed to re spond to the creditneeds of middle income persons. 22 ing amount that they can spend to 28 or 32 percent of their income is not reflective of the credit needs of low-income persons. 23 Just to Sharon Butler. You stated that Great Western's success was the result of fundamental business strategies that were in place before the CRA came into existence. 24 Senator D'AMATO. So you would view it as progress being made even by those financial institutions that have not met the same kind of standards that you have met? soon . 25 age major financial institutions to reexamine their lack of partici pation in these areas. Would you agree with that? areas . So I would say that even though , say, Fannie Mae's guidelines look like they are responsive to the needs of low- and moderate -in come areas, the practices are such that in fact they do not purchase from those areas. 26 Senator BRYAN . Another point that Ms. Butler made — and Mr. Bodaken, I didn't mean to interrupt you if you wanted to make a comment. Another observation Ms. Butler made with respect to Great Western is the decentralized lending authority. 27 possible with respect to increased access in banking in terms of a branch location in the low-income community. 59-308 - 92 - 2 28 They came in and met with the minority community, the busi ness community and asked essentially what they could do in terms of being able to be a good corporate citizen coming to our commu nity. We just merely suggested things that they could do. 1 29 munity which had the total of $94 million in assets in 1990, and they only loaned $59,000 to a predominantly black community. a areas . To that end, Great Western, in 1977 , was one of the founders for the Savings Association Mortgage Company. Savings Association Mortgage Company does provide financing for multifamily housing. 30 Mr. BODAKEN. Just very briefly, Senator, I want to point out that I agree totally with what Ms. White said . 31 bank targets 5 minority communities in Chicago's south and west sides for its development lending efforts. 32 New bank management recognized the value of solid, gracious homes in the area and established single family home mortgages as one of its lending priorities and opening strategy. 33 specialized financial institutions. This could include encouraging banks to invest capital in community development banks as one of the ways to make CRA responsible, and I will stop there, Senator. STATEMENT OF JULIA JOHNSON , VICE PRESIDENT FOR COM 34 ness lender accountable for how many credit card loans they made someplace . STATEMENT OF CALVIN BRADFORD , PRESIDENT, COMMUNITY 35 or almost any developing economy in the world than we do about our own inner -city communities in America . a 36 What remains a mystery is how newspapers, fair housing groups, community groups, and legislatorshave been able to find discrimi nation in the lending markets while the regulators have not. One case in the many I have given in my written statement serves to illustrate . 37 STATEMENT OF DEBORAH GOLDBERG , REINVESTMENT SPE 38 than I, includes both some of the biggest cities in the country and vast rural areas as well . 39 It doesn't surprise me that bankers claim that CRA is a head ache. 40 But if CRA were taken away, they feel that they would go back to square one in terms of their ability to get access to credit for their communities. 41 regulators come in and are asked to evaluate something that doesn't make any sense. 42 I keep a library of CRA agreements. Unfortunately the regulators do not. It seems to me if they were interested in reinvestment, they would want to know what those programs look like so they would know what success would look like . 43 Is that what causes in good part the paper burden? And what about the role of consultants ? Are they making the process more convoluted than direct ? Final comments on this point? a very much . We may have some further questions submitted for written re sponses for members of both this and the first panel . 44 TESTIMONY OF SHARON BUTLER Mr. Chairman , members of the subcommittee , thank you very much for the opportunity to testify today onthe Community Rein vestment Act. On behalf of Great Western Bank, I commend you, Mr. Chairman , as well as other members of the subcommittee for your willingness 45 eliminate the stereotypes that discourage lending in such commu nities. 46 ducement for lenders to “ do the right thing" than reams of paper work or the threat of punitive regulation . Thank you. TESTIMONY OF SENATOR JOSEPH M. NEAL , JR . SEPTEMBER 15, 1992 SUMMARY Scope of the Report 47 | • First Interstate's two branches close to the Westside had $94 48 8. The leading banks' market share of home purchase loans in low- and moderate -income neighborhoods. • Valley cameclose to having equal market shares, at about 8 per LAS VEGAS ALLIANCE FOR FAIR BANKING A REPORT ON HOME MORTGAGE LENDING TO MINORITIES AND LOW. AND JUNE 1992 " A few miles and a world away from the blazing neon and flash ing billboards where tourists stroll, this city's black neighborhoods have been wracked by mob violence almost every night since the riots began in Los Angeles.” -New York Times, May 19, 1992 49 " By midnight, police had cordoned off the area around the Gold en West and approximately 80 policemen remained in the area. Black community leaders had warned city officials last summer that trouble was brewing. . -Las Vegas Review - Journal, October 6, 1969 A. Introduction 50 6. Home purchase loans in neighborhoods with predominantly minority populations. 7. Home purchase loans in low- and moderate -income neighbor hoods. 8. The leading banks' market share of home purchase loans in 51 tively. Valley loaned $564,000 or about six -tenths of one percent of all its mortgage lending. on . For lenders in Las Vegas as a whole, and for the leading lenders in particular, the exclusion of the Westside has been as deliberate as the inclusion of other parts of Las Vegas, whether old or new . 52 Boulevard and Buffalo Drive ( census tract 30.02) , had a population in 1990 of some 11,000, of whom about 85 percent were white. Las Vegas's 60 lenders made 152 home loans, worth nearly $ 11.2 mil lion, to tract 30.02 in 1990. Recall that the five tracts of the Westside, combined, received only 59 loans, worth $3.1 million, from these same lenders . 53 One of the most consistent patterns disclosed by the data was the difference in the denial rates of applications from minority and white applicants. Across the nation , in institution after institution, applications from minorities were denied more often than for whites of similar income.6 ers . 54 prising. The city's history partakes of a national history of legal and informal racial segregation in every area of life, including the pursuit of domestic tranquility. That blacks are more likely, and often much more likely, than whites to be denied access to credit mirrors other differences experienced in daily life by the two races, such as the mortality of their infants, violence at the hands of po lice, unemployment, incarceration, and life expectancy. page 27 ) . Of the dominant bank lenders, only Valley and Primerit exceeded the aggregate share of loans to blacks, and in neither case by very much : Valley made 3.5 percent of its home loans to blacks, and Primerit made 3.2 percent. Citibank, on the other hand,made only 2.6 percent of its loans to African -Americans, while First Inter state, at a mere 1.6 percent ofall its home loans, was well below the aggregate pattern ( see Table 5, page 22 , and Figures 3.2–3.5 , page 28) . 55 • First Interstate's market share of loans to blacks is half its 56 These tracts also contain approximately 8.2 percent of the county's single family residences ( seeTable 6, page 22 ) . gage lenders.1 -- 57 teria on which financial institutions are evaluated when applying for deposit insurance, a branch or deposit facility, a merger or ac quisition, and other regulated activities. Low- and moderate- income neighborhoods, for HMDA reporting purposes, are those census tracts with a median family income below 80 percent of the area median . Vegas.12 Of the 8,581 home purchase loans made in Las Vegas in 1990, only 6.8 percent went to low- and moderate -income neighborhoods ( see Figure 6, page 31) . 1 58 slightly greater penetration of the market for loans to low- and moderate- income tracts than to middleand upper income tracts. 59 E. Recommendations Citibank Total Deposits Clark County ( $ '000) .... Loans to White Neighborhoods ( $ ,000) Amount Loaned per Dollar of Deposits Loans to Minority Neighborhoods ( $ , 000 ) Amount Loaned per Dollar of Deposits First Inter Valley 60 6. Summaries of the application denial patternsmay be found in several articles by Paulette Thomas in The Wall Street Journal: “ Mortgage Rejection Rate for Mi. norities Is Quadruple That of Whites,StudyFinds,” October 21 , 1991, A2; “ U.S. Ex aminers Will Scrutinize Banks With Poor Minority -Lending Histories,” October 22, 1991, A2; " Federal Data Detail Pervasive Racial Gap In Mortgage Lending,” March 31 , 1992 , A1. 61 TABLE 1 . HOME LOANS IN LAS VEGAS , 1990. ALL LENDERS. TYPES OF LOANS # OF LOANS S ( MILLIONS) Home Purchase FHA, FMHA, VA Conventional 3333 5248 279.0 532.0 Refinance 73.5 Home Improvement 37.7 TOTAL 10658 922.2 TABLE 2 . TOP MORTGAGE LENDERS IN LAS VEGAS, 1990 LENDER Weyerhaeuser Mtg Co Citibank NV Valley BankNalley Mtg Co # OF LOANS MKT SHARE ( % ) S ( MILLIONS) 1907 17.9 % 9.6 % 8.5 % 192.7 1020 908 73.0 91.9 First Interstate Bank NV 754 Primerit Bank Margaretten & Co 689 674 7.1 % 6.5 % 6.3 % 62.2 61.7 5952 55.8 % 547.1 TOTAL 20 65.6 62 TABLE 3. LOANS TO THE WESTSIDE,1990. ALL LENDERS AND FOUR LEADING BANKS. PRIMERIT LOANS 3.02 91 6 35 88 3.01 2.01 86 10 62 22 1135 WESTSIDE TOTAL AGGREGATE /BANK TOTAL 9 0 0 0 0 520 1 38 381 2 76 0 1 0 0 2 2 27 59 3075 3 114 3 59 10658 922114 1020 0.3 % 72988 754 62220 689 0.4 % 0.1 % 0.4 % WESTSIDE AS % OF TOTAL LOANS S ( '000 ) 3 3 188 83 32 0 3 ... 12 O N 96 ON O 738 301 37 VALLEY SC000 ) 1 51 12 564 908 91898 1.3% - NEAR THE WESTSIDE 3 59 12 564 3 114 23 1,172 17 925 13 1,693 38,125 56,021 North Las Vegas 50,130 46,365 15,249 NEAR TRACT 30.02 57,671 VALLEY BANK Rainbow -Westcliff 31,557 PRIMERIT BANK Rainbow 21 10 190 114 TABLE 4. BRANCH DEPOSITS AND HOME LOANS - FIRST INTERSTATE BANK AND VALLEY BANK THE WESTSIDE AND WESTERN TRACT 30.02 PRIMERIT BANK 62 1 4 61762 Note: Population percentage based on 1990 census. VALLEY BANK Rancho Lane North Las Vegas 114 0.6 % 63 TABLE 5. APPLICATIONS FROM BLACKS AND LOANS TO BLACKS - LAS VEGAS 1990 ALL LENDERS AND FOUR LEADING BANKS FIRST ALL LENDERS CITIBANK 16960 1433 10658 1020 ALL APPLICANTS INTERSTATE PRIMERIT VALLEY 1226 963 689 908 BLACK APPLICANTS % BLACK APPLICANTS 1 ALL LOANS LOANS TO BLACKS 308 % 2.9 % LOANS TO BLACKS 754 TABLE 6. HOME PURCHASE LOANS TO TRACTS WITH MORE THAN 50 % MINORITY POPULATION RANKED BY % MINORITY LAS VEGAS - 1990 3223 97 96 3992 96 95 3.02 4193 2458 3452 3865 2 996 9 503 5 266 510 349 937 1024 1155 94 37 36.02 91 4 93 88 6 8 90 86 75 39 5 36 2878 71 62 6023 66 51 8 21 16 12 5612 66 41 22 5637 66 18 18 6304 65 20 11 4867 62 45 4134 59 5.03 5478 51 6887 50 1619 9 2 15 6 38 25 12 32 13 TOTAL % TOTAL 22 64 TABLE 7. TRACTS RECEIVING MORE HOME PURCHASE LOANS IN 1990 THAN ALL PREDOMINANTLY MINORITY TRACTS COMBINED 1980 TRACT 1990 TRACTS 55 Tract 55.01-.02 -.03 -.04 29.02 Tract 29.08 -.09.11.12 Tract 49.01 -.02 -.03 Tract 29.05-07 Tract 36.01.02 * Tract 29.06-10 53 51 32 TOTAL HP LOANS # TOTAL HP 199 215 242 249 290 18392 15584 19193 31060 37782 49915 54007 47387 344 Tract 58.01-02 464 Tract 34.03-.04 -.05-06-07 Tract 28.03 -.04 505 Tract 53.01-02 Tract 51 Tract 32.01 -.02 TOTAL 512 618 725 1001 49049 62002 74169 98654 5354 557194 • Sr. Note 11 in text for treatment of Tracts 36.01 and 36.02 23 POP'N NON -HISP AVG % LOANS S 12567 22311 26394 13030 5.8 % 11840 16.8 % 22.0 13.2 22.7 13.7 18560 20594 % % 11307 % % 16.3% 15.4 % 12.2 % 10.7 % 11.9 % 10.3% 220295 14.5% 188353 R —EDLINING VEGAS LAS WESTSIDE THE Nevada of Bank Valley 划 ,refinance purchase of Number and :improvement loans home ,refinance purchase of Number and : loans improvement home VL 37 :to Westside loans of Number rValue , efinance purchase of HEN : loans improvement home and : Westside to loans of Number ,refinance purchase of Value and : loans improvement home : Westside to loans of Value : Westside to loans of Value 2:07 ELA KER .1.11 65 PRIMERIT ,refinanco purchaso of Number and home : loans improvement UHIMU CITIBANKO rand , efinance purchase of Number : loans improvement home RAZEW :to Westside loans of Number Westside : to loans of Number purchase ,rValue efinance home of improvement : loans home and Vegas Las in loans home 10,658 and ,Value rpurchase ofefinance : loans improvement home :to Westside loans Value of Westside : to loans of Value Vegas Las in loans of worth $ 22,100,000 9 Figure 1 24 66 Figure 2.1 Denial Rates for Home Loan Applications By Race and Income of Applicant 32.3 % 1111 25 ili Mortgage &Valley Bank Valley Company Nevada of Bank Interstate First Denlal Rates Home for Loan Applications Income and By Race Applicant of SOR Home Applications for Rates Denial Loan Income and Race By Applicant of 55.0 Applications :Total 180 Whio 20 Black % 50 Applications Total % Applications Denied 2016 % 40 34.6 206 % 30 200 % 20 7.7 White 794 34 Black 11.4 % 10 26 26 0 Bank Average Middla Income Upper M Income - od Low 0 0% Upper Income Middle -Mod Low Incomo 1White Applicants Bank Average Applicants Black 67 26 Citibank Bank Primerit Denial Rates Home for Loan Application s Denial Rates Home for Applications Loan Income and Race By Applicant of Race By Income and Applicant of % 30 628 27.3 Total Applications 20 % 20 Total Applications on % 40 17.4 367 363 31.4 161 ai 246 128 11.6 105 21 104 % 10 MLow - od Income Middle Upper Income Applicants White w Black Appleanta Bank Average Income -Mod Low Upper Income Middle Applicante Whhe Black Applicants Bank Average Figures 2.2-2.5 27.2 % 30 68 Figure 3.1 All Lenders in Clark County - 1990 O Home Loans to African -Americans - African - Americans: 308 loans ( 29 % ) 10658 Loans to all Residents Total Includes: Home purchase loans Refinances Home Improvement loans 1 27 VValley Mortgage & alley Bank Company Interstate First Bank Nevada of Home Loans African to -Americans ALoans African -to mericans Home 1Clark County - 990 County 1 -Clark 990 AAfrican loaps 2 )%1(1:- .6mericans = 08 loans 9Total Total 7loans = 54 million =$91.9 value Total Total value million 6=$ 22 69 28 Citibank Primerit Bank Loans A -Home African to mericans -AHome African to Loans mericans -1Clark County 990 Clark -1 County 990 African Americana loane %)(2276 AAfrican mericana 2loans 2 %)(3:- .2 =$61.8 value Total million value million =$7Total 2.0 Figures 3.2-3.5 689 loans Total Total 1loans = 020 70 Figure 4 Home Purchase Loans - Las Vegas 1990 12 % Total Loans Originated by Al Lenders in MSA: Share Market 10 % 8% 6% 2% 0% Citibank ul First Interstate White 29 Primerit Black Valley 71 Figure 5 Clark County Population by Racial Groups Total Population: 741,459 30 72 Figure 6 All Lenders and Leading Banks Distribution of Home Purchase Loans %of Loans 83.3 % 53.1 % 54.4 % 53.1 % wow 40.1 % 31 523 % 73 Figure 7 Home Purchase Loans - Las Vegas 1990 . Market Share by Income Characteristics of Census Tracts 12 % Share Market 10 % 8% vo2000 6 % 4% 2% 0% Citibank First Interstate Low -Moderate Income Primerit Middle Income Valley Upper Income 32 74 ' The Comptroller's letters of inquiry note specifically that the government isn't presuming that racial discrimination is behind the lending patterns it is scrutiniz areas . At Losofficial Alamossaid National Bank, his for example that because , an income areas. Many also are offering credit counseling programs through local customer population is 95 % white, he be community groups and churches . Others lieves his bank in factis doing a good job of 75 TUESDAY, MAY 19, 1992 U.S. Probing Banks With Lending Disparities Listed below are banks and mortgage companies where the rejection rate for Banks' Records black and Hispanic mortgage applicants was more than twice that for whites in 1990 . For Race Bias Group of Lenders Confirms A WALL STREET JOURNAL News Roundup The Wall Street Journal May 19, 1992, A2 76 TESTIMONY OF MICHELLE C. WHITE, EXECUTIVE DIRECTOR , FAIR HOUSING CONGRESS OF SOUTHERN CALIFORNIA RE GARDING COMMUNITY REINVESTMENT ACTIVITIES, REGU . LATORY SUPERVISION AND PAPERWORK RAMIFICATIONS OF REPORTING REQUIREMENTS RELATED TO THE FAIR HOUSING , EQUAL CREDIT OPPORTUNITY AND COMMUNITY REINVESTMENT ACTS Thank you for this opportunity to comment on the respective val ues of activities under the Community Reinvestment Act, regu latory responses to bank activities and the reporting produced pur suant to the Home Mortgage DisclosureAct ( HMDĂ] and Commu nity Reinvestment Act ( CRA ) . The Fair Housing Congress of South ern California [ The Congress” ) , presents this testimony from the prospective of a non -profit fair housing enforcement agency respon sible for investigating complaints under the California and Federal fair housing and fair lending laws. TheCongress is also responsible for advocating under the Community. Reinvestment Act on behalf of persons affected by illegal forms of discrimination. The Congress is a member of a number of local, regional and national agencies which advocate for the effectiveness enforcement of said laws . Among the organizations which the Congress is a member are: 1) Communities for Accountable Reinvestment ( CAR ) , a Southern California multi-racial and multi- ethnic coalition of advocates pro moting the banking, housing and economic development interests of low- and moderate- communities in Los Angeles, Riverside and Orange Counties; 2 ) the Southern California and California Civil Rights Coalitions, coalitions formed to restore California as a lead erin the protection of civil rights and to ensure that California comes into substantial equivalency with the Federal Government on housing and other issues; and 3) the California Reinvestment Committee, a statewide network of community reinvestment advo cates responsible for negotiating statewide agreements with large financial institutions, such as a $5 billion CRA commitment with Bank of America to invest in ventures designed to benefit low- and very low-income persons. - 77 The immigrant population in the City exploded during the last decade. In 1980, foreign born residents constituted 27 percent of the official census tally. In 1990, this number increased to 62 per cent of the census count. The impact on City and other social serv ices is compelling, for according to the 1990 census data : -Nearly one million City residents stated they did not speak Eng 78 Racial/national origin tension are exacerbated by the differential economic gains made by African -Americans and Latinos one hand, and Asians and Anglos on the other. As noted in a August 17, 1992 Los Angeles Times article: 79 fair housing organizations and community groups is essential in this effort. This is especially true in the Southern California region where there is much lender activity acquiring smaller institutions and opening lucrative branches. " 80 the instructional materials of the National Association of the Real Estate Brokers andthe American Institute of Real Estate Apprais ers. The Federal Housing Administration identified areas in the City where it would not insure, and lenders followed suit by refus ing to lend in the areas of high minority concentration . All of these practices have special relevance when poverty issues are coupled with race . 81 96 percent from $ 15,746 to $ 30,925. The number of families mak ingmore than $75,000 rose by 496 percent. 82 Housing Los Angeles — Affordable Housing for the Future. Report of the City of Los Angeles Blue Ribbon Committee for Affordable Housing, November, 1988. ( “ The Blue Ribbon Report” .] Units which are affordable to the poor are being demolished at the rate of 4,000 a year. Eighty percent of these units require earthquake retro fitting are the type affordable to the poor. 83 • Los Angeles financial institutions make fewer and smaller resi 84 • Excluding commercial areas, there are three times as many 85 regulatory agencies should receive and process complaints in a timely and consistent manner. Remedies for infractions should be handled in aa similar manner by all regulators. For example, the Of fice of Thrift Supervision should adopt an approach similar that which the Federal Reserve reportedly has i.e. one of making the victim of discrimination whole, where discrimination is found and not just correcting prospectively the policy or procedure which lead to the discrimination. Financial regulatory agencies must begin to take their obligations to consumers as seriously as they take their obligations to institutions to insure that these operations are “ safe » and secure . 86 sessments, the regulators apparently do not believe that the racial and national origin disparities set forth above require any correc tive action on their parts. 87 Commercial lenders and thrifts play an important role in this proc ess. If conversion is permitted to occur, the impact of such a con version on low - income and minority families would be a disaster in California . Such projects provide over 100,000 units of housing. 88 consumers to be protected, I believe the approach should be at tempted. Preemption of the field has not resulted in satisfactory performance by banks and thrifts. The States should be given the opportunity to adopt stronger fair lending enforcement measures, in the same way they are permitted to adopt stronger fair housing laws. Lending institutions have been given a " safe harbor " for many years . There seems to be little justification for continuing a system of Federal exclusivity which has not shown itself to be working. 89 ity and determining whetherthese patternsare discriminatory on a prohibited Fair Housing and Equal Credit Opportunity basis. 90 must be paid to the expression of low- and moderate - community needs by bankers. The recent turmoil in Los Angeles reflects what the continued failure to address-these needs will produce. TESTIMONY OF MICHAEL BODAKEN Good Morning. My name is Michael Bodaken. I serve as Housing Community Reinvestment Coordinator for Mayor Tom Bradley in Los Angeles, California. Today, I intend to discuss how the Com munity Reinvestment Act and the evaluation process can be strengthened to accomplish its original intent; and how Congress can make the CRA more useful for the credit needs in neglected communities, such as South Los Angeles. 91 cording to the Act, each financial institution must be assessed ac cording to the following criterion : 66 6 1 Community Reinvestment Act, Section 804 ( 1 ) ( emphasis added ) . 92 nationwide for the month of July, 1992. A total of 18 such institu tions, or 6.5 percent of those surveyed received “ Needs to Improve" or “ Substantial Noncompliance” ratings. Thus, 93.5 percent of those institutions surveyed received a satisfactory rating or better!? For the years July 1, 1990- July 31,1992, here is the following break down forevaluationsby the FDIC : Needs to Outstanding Total 493 9.3% 5288 100 Percent Satisfactory 4336 81.9% Subst. Nonc. Improve 419 8% 40 .7% 8 Thus, over the last 2 year period, the FDIC has judged that well over 90 percent of its institutions are actually meeting their Com munity Reinvestment Act responsibilities. This constitutes prima facie evidence that the current evaluation system skews favorably toward financial institutions and unfavorably toward low and mod erate income neighborhoods' credit needs. . » 10 ? The July, 1992 results are attached hereto as Exhibit “ A.” 8 Based on conversation with FDIC Office of Corporate Communications, September 8, 1992. 93 onstrated that such products have resulted in a significant benefit to low and moderate income communities that institution serves . This will help make the community reinvestment activity more " mainstream " and demonstrate much more clearly who in fact is lending in low and moderate income neighborhoods in this country. Beyond HMDA : The Need for Better and More Complete Data 11 The term " Geocode” refers to adding census tract, state, metropolitan statistical area , coun ty and block group codes to a customer's loan record. 94 area. All three were financed within a fairly short period of time and the financials in all three were similar. Banks mentioned neb ulous " risk ” in their assessment of the low income area. No men tion of such risk was mentioned for the markets in the middle in come areas . 13 See attached Exhibit " C." 95 The recent experience of the Bank of America /Security Pacific merger is a case in point. Prior to the merger, Bank of America had received an “ outstanding” rating from the Federal Reserve; Secu rity Pacific had received a “ satisfactory ” rating. Yet, as a con sequence of extensive negotiations between communities and local groups, Bank of America, whose community reinvestment record had previously been adjudged " outstanding," committed itself to an additional, unprecedented $ 12 billion community reinvestment pro gram over the next 10 years: a condition of its merger. Bofa also agreed to maintain all of Security Pacific's loan programs targeted for low and moderate income neighborhoods. If BofA or Security Pacific had a " safe harbor" provision, as suggested by some, I do not believe this would have taken place. How CRA Can Be Used More Effectively to Provide Access to Capital in Areas like South Los Angeles a 15 Rosenblatt, et al., “ Home Loan Gap, etc." , p . D9, Exhibit “ B” . 96 The company had an opportunity to increase its market share when two of its competitors ceased operations. The company want ed to acquire a new building in Watts to expand. A local major bank sent two middle market loan officers to inspect the company and the new site. The project was rejected immediately after the visit based on perception or risk due to the location and surround ing neighborhood . 97 TESTIMONY BY GILDA HAAS COMMUNITIES FOR ACCOUNTABLE REINVESTMENT SEPTEMBER 15, 1992 INTRODUCTION 98 will occur by vigorous and serious enforcement of the Community Reinvestment Act. 99 CAR uses aggregate HMDA data, the location of buildings, and census population demographics to create such a context. Major Banks and the Los Angeles Lending Market - 100 In thisstudy, a comparison was first made between the distribu tion of all lending to one to four unit buildings and the distribution of those buildings in census tracts categorized by racial and income characteristics. As indicated in Figures 4 and 5 there is a surpris ingly good fit between the location of buildings and the distribution of lending across census tracts classified by income, and to a some what lesser degree across census tracts classified by racial composi tion. The greatest gap is found in census tracts which are 80-100 percent minority. Approximately 19 percent of the one to four unit buildings are located in these census tracts which receive only about 12.5 percent of the loans. 101 Figure 1 L.A. MSA 1990 HMDA Home Purchase Loans Market Share by Income Characteristics of Census Tract Share Market MSA L.A. 25 % 20 % 15 % 10 % 5 % h 0 % B of A Upper Income Wells Middle Income 7 G.W. Low /Mod Income 102 Figure 2 L.A. MSA 1990 HMDA Home Purchase Loans Market Share by Racial Composition of Census Tracts Share Market MSA L.A. 30 % 25 % 20 % 15% 10 % 5 % 0% B of A < 10 % Minority 50-79% Minority Wells 10-19 % Minority 80-100 % Minority 8 G.W. 20-49 % Minority 103 Figure 3 L.A. County Population by Racial Groups Asian ( 10.2 % ) Other ( 0.2 % ) 21,327 Black ( 10.5 % ) 3,618,850 3,351,242 Hispanic ( 37.8 % ) Source: U.S. Census, 1990 9 -White ( 40.8 % ) 104 Figure 4 L.A. Home Loan Market Location of 1-4 Unit Buildings and Distribution of All Home Loans 50 % 40 % 30 % 20 % 10 % 0% Low /Mod Income Middle Income 1-4 Unit Bldgs Upper Income All LA . Home Loans 11 105 Figure 5 L.A. Home Loan Market Location of 1-4 Unit Bldgs and Distribution of All Home Loans 35 % 30 % 25 % 20 % 15% 10 % 5% 0 % + < 10 % Minority 10-19 % Minority 20-49 % Minority 50-79 % Minority 80-100 % Minority All LA Home Loans 1-4 Unit Bldgs 12 106 These inconsistencies are, however, negligiblewhen compared to the manner in which Bank of America andWells Fargo distribute loans across the market. Here, again , it is found that low- and moderate -income census tracts receive disproportionately small and upper income census tracts receive disproportionately large num bers of loans from these three banks. For example, while twenty seven percent of the one to four unit buildings are located in low and moderate -census tracts, these tracts receive only about 12 per cent of Bank of America's home loans and 7 percent of Wells Far go's ( See Figure 6 ) . At the other extreme, upper income census tracts, which contain 30 percent of the County's one to four unit buildings, receive about 45 percent of Bank of America's mortgages and 58 percent of Wells Fargo's. 107 origination of more, smaller loans in lower income communities. But this has not been the response of Bank of America and Wells Fargo. 108 Figure 6 L.A. Home Loan Market Location of 1-4 Unit Buildings and Distribution of B of A , Wells Fargo, and G.W. Loans 65 % 60 % 55 % 50 % 45 % 40 % 35 % 30 % 25 % 20% 15 % 10 % 5 % 0 % Hal Low /Mod Income 1-4 Unit Bldg Upper Income Wells Loans B of A Loans 14 M 3 G.W. Loans 109 Figure 7 L.A. Home Loan Market %ofome &H Buildings Unit 1-4 Loans Location of 1-4 Unit Bldgs and Distribution of B of A , Wells, and G.W. Loans 30 % 25 % 20 % 15 % 10 % 5 % 0 % < 10 % Minority AW1-4 Unit Bldg 80-100 % Minority B of A Loans Wells Loans 15 G.W. Loans 110 Loan $'s&H Buildings Unit %ofome 1-4 Figure 8 L.A. Home Loan Market Location of 1-4 Unit Bldgs and Distribution of B of A , Wells, and G.W. Loan $'s 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % 7 4 7 1 1, Low/Mod Income VIZ 1-4 Unit Bldg Upper Income Wells Loan $ B of A Loan $ 16 G.W. Loan $ 111 Loan $'s&H Buildings %ofome Unit 1-4 Figure 9 L.A. Home Loan Market Location of 1-4 Unit Bldgs and Distribution of B of A , Wells, and G.W. Loan $'s 45 % 40 % 35 % 30 % 25 % 20 % 15 % 11 10 % 5 % 0 % < WZ 1-4 Unit Bldg 10% Minority 80-100 % Minority B of A Loan $ Wells Loan $ G.W. Loan $ 17 112 And, in tracts with 80–100 percent minority populations, which contain 19 percent of the County's one to four unit buildings, Great Western has invested about 19 percent of its loan dollars. BRANCH CLOSURES AND OPENINGS ARE INEQUITABLY DISTRIBUTED 1 " Taking it to the Bank: Poverty, Race, and Credit in Los Angeles,” a report to the City of Los Angeles prepared by the Western Center on Law and Poverty, June, 1991. 113 Figure 10 City of Los Angeles, Branch Closures, 1980-1989 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % Security Pacific Upper Income Bank of America Middle Income 21 Low /Mod Income 114 Figure 11 City of Los Angeles , Branch Closures, 1980-1989 60 % 50% 40% 30 % 20% 10 % 0 % Security Pacific < 10% 50-79% Minority Minority Bank of America 10-19% Minority 80-100 % Minority 20-49 % Minority 22 115 Low - Income and Minority People Pay More for Financial Services 2 Rzepinski David. South - Central Home Loan Study. Masters Thesis. UCLA Graduate School of Architecture and Urban Planning. June 8, 1989. The study area is bounded by Martin Luther King Jr. Boulevard on the North , Imperial Highway on the South , Van Ness on the West, and Alameda on the East. This area has been most heavily impacted by historic redlining in L.A. as well as by the recent civil unrest in the City. 116 CAR has found that banks that are reticent to lend in low in come and minority communities are nevertheless willing to finance the companies 117 Figure 12 Banks and Savings & Loan Associations in the Los Angeles Community Reinvestment Committee's South Central Demonstration Project Area . Banks. Bank ofAmerica 1. Industhal Branch 6400 South Awaion Blvd. 10 LOMOMCA PWY 291.0530 10 2 Martin Luther King Jr. Branen i Co 10 10 e C T 1101 IC Ammmmmm 19 MABON WE o ma 110/5 SOUTH EAST COMMUNITY PLAN AREA 6 Savings & Loan Associationss CaliforniaFederal Service & LoanAmee. 18 South Central LosAngeres årenen 119 SOUTH CENTRAL COMMUNITY PLAN AREA 24 118 Figure 13 Check Cashing Facilities in the Los Angeles Community Reinvestment Committee's South Central Demonstration Project Area 0 ( 10 SANTA MONICA FW om mu i 0 SOUTH EAST COMMUNITY PLAN AREA 16100 25 119 CRA, COMMUNITY VIGILANCE , AND IMPROVED BANK PERFORMANCE 120 FIGURE 14 Bank of America Home Purchase Loans in CAR Communities Riverside, East Side Population : 9,887 15% White 85% Minority Total Home Purchase Loans: 0 Santa Ana, Civic Center Barrio Population : 8,158 3% 97% White Minority Total Home Purchase Loans: 0 Los Angeles, Ward EDC /Esperanza CHC Population : 35,348 16% White 84% Minority Total Home Purchase Loans: 0 Los Angeles, Concerned Citizens Population: 63,346 1% 99% White Minority Total Home Purchase Loans: 2 Sources: 1990 Census - Bank of America HMDA data $137,000 121 CAR members felt that it was important to have a standard of comparison of the data regarding CAR communities. For this rea son, Bank of America's mortgage lending in Encino, a large pre dominantly white, middle class neighborhood in the San Fernando Valley was also examined. The difference between Encino and CAR communities, shown in Figure 14, is substantial: FIGURE 15 Bank of America Home Purchase Loans in Encino Encino, Los Angeles Population : 56,945 87% White 13% Minority Total Home Purchase Loans : 61 Bank of America HMDA data Sources: 1990 Census Thus in CAR communities, Bank of America made .17 home loans per 10,000 residents. In Encino, the bank made 10.7 loans per 10,000 residents, a ratio of 69 to 1. 122 standing rating, the bank had a strong need to improve its lending performance, particularly in minority and low -income communities. 3 L.A. Times. 9/8/92. 123 with the make -up of L.A. communities. Yet, both banks have iden tical, “ outstanding Community Reinvestment ratings. - 59-308 - 92 - 5 - 124 other small businesses . This well -founded fear of reprisals by banks keeps many small businesses quiet regarding their experiences. 6 4 Federal Reserve Board Order of September 28, 1987. 125 counts of loan rejection rates and their relationship to the quality of life of many Americans. While Community Reinvestment has been growing as a profession made up of regulators, consultants, and banking officials , its basic principle may be diminishing. That principle is that all credit-worthy individuals should have access to loans regardless of their race or class or of the race of class which 1 predominates in the neighborhood where they live or own a busi ness. That principle includes the idea that basic banking services and credit products — checking and savings accounts, consumer loans, home loans, small business loans - are for everybody, and not just the well- to -do. 126 grounded in a common base of information . CAR's questions were often different than those that the bank asked of itself. Thus the bank's responses were sometimes as edifying to bank staff as to CAR . With this effective experience in mind, CAR has begun to re quest that discussions with other banks also be grounded in a com mon base of information . 127 process of a merger asan opportunity for a more equitable reorga nization of resources. Finally , in many cases, such as South -Central Los Angeles, communities which have been abandoned or ignored by banks have struggled to develop their own community controlled financial institution . Financial support to these institutions by banks might serve as an alternative form of restitution . 128 Appendix A CRA Performance Self- Examination 129 CRA Performance Self - Examination This form will assist us in establishing the extent to which your bank is meeting the commu nity credit needs of Communites for Accountable Reinvestment's grassroots constituen cies. Census tracts and zip codes which define the specific geographic areas referred to in this form are provided in the enclosed " Community Definition Guide: Census Tracts and Zip Codes. " 1. area. Please indicate the following information on the chart below by geographic Geographic Areas Number of branches Number of branches currently in the area Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 1 130 General Questions ( cont'd ) 2. Does your bank cash government checks for non -depositors at no cost ? No Yes Comments: 3. Has your bank invested in any community controlled and /or minority lending institu tions ? A community controlled lending institutions is one that has a democratic structure and non - profit structure, such as a community development credit union. A minority owned lending institution is one in which the majority of shares of the institution are owned by people of color. Yes No If yes, please specify the institution , type of investment, and amount of investment below: Please indicate on the chart below the number and percentage of women and people of color on your Board of Directors and in staff positions of Executive Vice Presi 4. dent and higher. Women African Asian Other Latinos ( please specify) # Board of Directors Staff positions: Executive V.P. and above 2 % # % # 131 5. Please indicate on the chart below the number and dollar amount of loans made directly to local congregations by area and year. Geographic Areas # 1991 1990 1989 # $ | Crenshaw East Los Angeles Encino Exposition Hollywood 1 Koreatown Northridge Pacoima Pico-Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 3 $ # $ 132 SPECIFIC QUESTIONS The following questions have been designed specifically for BANK OF AMERICA BANKING SERVICES 6. Please indicate on the chart below the number of Limited Checking Accounts which have been opened by geographic area and year. Geographic Areas 1989 1990 Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 4 1991 133 HOME LOANS 7. Please indicate on the chart below the number and dollar amount of Neighborhood Advantage loans originated by area and year. # 1991 1990 1989 Geographic Areas # $ Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 5 $ # $ 134 HOME IMPROVEMENT LOANS Please indicate on the chart below the number and dollar amount of home improve ment loans that have been originated by area and year. 8. # 1991 1990 1989 Geographic Areas # $ Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 6 $ # $ 135 1 CONSUMER LOANS 9. Please indicate on the chart below the number and dollar amount of BASIC loans that have been originated by area and year. # 1991 1990 1989 Geographic Areas # $ Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 7 $ # $ 136 STUDENT LOANS 10. Please indicate on the chart below the number and dollar amount of Student Loans made by area of the applicant's home or permanent residence and year. 1991 1990 1989 Geographic Areas # Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood $ # $ # $ 137 BUSINESS LOANS 11 . Please indicate on the chart below the number and amount of WORKING CAPITAL LOANS FOR MINORITY BUSINESSES that have been originated by area of the site where the loan is to be used and year. 1989 1991 1990 Geographic Areas # # $ Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 9 $ # $ 138 Business Loans ( cont'd ) 12 . Please indicate on the chart below the number and amount of SMALL BUSINESS ADMINISTRATION LOANS that have been originated by area of the site where the loan is to be used and by year. # 1991 1990 1989 Geographic Areas # $ Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 10 $ # $ 139 Business Loans ( cont'd) 13 . Please indicate on the charts below the number and amount of conventional small business loans that have been originated by area of the site where the loan is to be used, by size of loan , and by year.. 1989 $ < 10,000 $ 10,000 $ 24,999 Geographic Areas # $ # $ Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts WestHollywood 11 $ 25,000 $49,999 $ # $50,000 $ 99,999 > $ 100,000 $ 140 Business Loans ( cont'd) 1990 $ < 10,000 Geographic Areas # $ $ 10,000 $ 25,000 $ 24,999 $ 49,999 # $ # Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico-Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 12 > $ 100,000 $ 50,000 $ 99,999 $ # $ # $ 141 Business Loans ( cont'd ) 1991 $ < 10,000 Geographic Areas # $ $ 25,000 $ 49,999 # $ $ 10,000 $ 24,999 # $ Crenshaw East Los Angeles Encino Exposition Hollywood Koreatown Northridge Pacoima Pico -Union Riverside San Bernardino Santa Ana Vernon -Central Watts West Hollywood 13 $ 50,000 > $ 100,000 $ 99,999 # $ $ 142 TESTIMONY OF JAMES FLETCHER PRESIDENT OF THE SOUTH SHORE BANK OF CHICAGO SEPTEMBER 15, 1992 Honorable Chairman and Members of the Subcommittee : 143 With our sister organization in Arkansas, Southern Development Bancorporation organized in 1988 , we continue to define the com munity development bank model and to test its capacity as a vehi cle for the renewal of underinvested communities. To our knowl edge, the Self Help Credit Union in North Carolina is the other de velopment bank in the country attempting a comprehensive ap proach to this issue. At this point, we know that a community de velopment bank is a financially self-sustaining institution that is able to have broad community reinvestment impact. The success of South Shore Bank in the past two decades has demonstrated that community reinvestment lending is possible, profitable and effec tive in revitalizing underinvested communities and in igniting mar ket forces in those same communities ignored or abandoned by more conventional financiers. COMMUNITY REINVESTMENT & CRA į 144 gracious homes in the area and established single family home mortgages as one of its lending priorities. Between 1974 and 1980, South Shore Bank made approximately $32.7 million in homé mortgages in South Shore. As a result, home values increased fast er in South Shore during this decade than any other community in Chicago, and other lenders began to make home mortgages inthe area. a 145 to make loans in the neighborhoods we have targeted and in other underinvested neighborhoods in Chicago, as well as in urban and rural areas across the country. 146 TESTIMONY OF JULIA F. JOHNSON VICE PRESIDENT, CRA -BANC ONE CORPORATION SEPTEMBER 15, 1992 Chairman Cranston and members of the subcommittee, thank you for the opportunity to appear before you today. I am Julia Johnson, Vice President of Community Reinvestment for BANC ONE CORPORATION . BANC ONE is a multi -bank holding com pany with $48.4 billion in assets as of June 30, 1992. We operate 57 banks with 887 offices in Indiana, Illinois, Kentucky, Michigan, Ohio, Texas, and Wisconsin . I have the benefit of working to en courage and evaluate the Community Reinvestment Act ( “ CRA” ) programs in each of these 57 independently chartered banks and I have the good fortune to share my experience with this commit tee. Our banks range in asset size from $62.9 million to $ 13.1 bil lion. Some of our banks serve rural areas and some serve large metropolitan communities. Some BANC ONE communities have a wealth of resources and local community -based development exper tise. Others have little or none. 147 of discrimination. If these industry assertions aretrue, why do the HMDA data reflect disparities in lending patterns? 148 ratio reports are routinelygenerated and manipulated in the bank ing business. Prior to FIRREA this was not the case.The history of geocoding is a very brief one dating back to 1989. Today all banks are struggling to create statistical reports - many do so manually. Yet very few financial institutions utilize the data for strategic planning. CRA means using information to identify mar ket opportunity; to direct resources for the profitable exploitation of market opportunity and to measure success within the context of the bank's business environment. 149 It is difficult to determine the extent to which segments of the community may lack access to capital. Regulatory reports from banks may provide some information but there is no context within which to consider them . They certainly cannot and should not be used as the only yardstick to measure credit availability for low and moderate income people or minorities. What then is the role of CRA inproviding access to capital? CRA requires banks to lend money. CRA should provide the incentive to banks to work aggres sively and creatively to ensure that the lending is both safe and profitable. That is different than saying that all banks should be all things to all people. That is different from saying all banks must have branch facilities in low and moderate income neighbor hoods or that they must provide venture capital for small business start-ups. CRA means that a bank can't arbitrarily decide to offer some products to some people and delegate the rest of the business to another entity when they perceive profitability to be poor. STATEMENT OF CALVIN BRADFORD PRESIDENT, COMMUNITY REINVESTMENT ASSOCIATES “ WE TRUST OUR BANKS" - 15 YEARS AFTER THE CRA SEPTEMBER 15, 1992 My name is Calvin Bradford . I thank you for the invitation to ad dress the Subcommittee on Housing on issues that are critical to the future of lower -income, minority, rural, and inner - city commu nities in our country. Today we struggle to work our way out of a deep recession and to find the resources to rebuild from the riots in Los Angeles and to avoid the consequences of riots in many other communities teetering on the brink of financial collapse. In this context, we need to take this time here to reflect on the role of the Community Reinvestment Act and the larger policy state ment that it makes with regard to or response to the needs of these kinds of communities. 150 Access to capital and credit is the engine that drives our free and capitalistic economy. Indeed, it is the engine that drives all devel oping economies. But today, as Congress reviews bill after bill to strip the Community Reinvestment Act of its powers, we have to ask ourselves if we care more about the economies of Poland, the former Soviet Republics, our North and South American neighbors, or almost any developing nation of the world than we do about our own inner -city and rural communities in America. So fundamental is the role of capital and credit to the development of any economy that it is the first resource we put together after emergency relief for food , medical care and temporary shelter. The internationally recognized measure of our commitments to other nations is our willingness to participate in the provision of capital and credit though direct loans and loan guarantees and through efforts to support programs of the Work Bank and the International Mone tary Fund. When we seek to help Poland, for example, we encour age programs to provide capital, credit, and investment services from the World Bank to the services of the South Shore Bank in Chicago . 151 For all Americans, the hundreds of billions of dollars that have been and will be committed to this effort represent critical re sources lost to rebuilding our national economy, our health sys tems, and our educational systems, and our systems of safety nets. For the people who live in the inner-city, minority, and rural com munities which suffered from redlining and disinvestment while their personal savings were poured into these unconscionable get rich -quick schemes for overpaid banking and investment execu tives, there is a threefold penalty. They suffered once when their communities were disinvested. They suffer a second time as they have to pay for the bailout. They suffer a third time because the costs of the bailout limit the ability of the Government to respond to the present economic needs — some of which are caused by the original cycle of disinvestment itself. same : • The Community Reinvestment Act is the only law that places an 152 implementation of the Community Reinvestment Act. In the past two years, the bogus issue of regulatory burden has been used to advance efforts togut the CRA — to exempt over 80 percent of all lending institutions based on their asset size and to shelter the vast majority of all remaining institutions from challenges and other CŘA obligations by using the shoddy record of CRĂ public evaluations as a defense against community efforts to secure rea sonable and responsible access to credit from the Nation's larger lenders. 153 mitment to these conservative principles as a means of allowing people to save their own communities and rebuild their own lives. The reinvestment movement recasts the role of Government from one of maintenance programs to one of investment programs. While the movement would like to see more funding of Government in vestments to leverage private investments, the key resource of the movement is an act that costs the Federal Government not a single penny — the Community Reinvestment Act. The Act requires that in return for the market advantages of depository insurance and regu lation against over competition these institutions serve the " con venience and needs” of their local communities. It is, indeed, a cruel irony and a betrayal of the people in our inner- city, minority, and rural communitiesthat have accepted the private sector ideol ogy, that the Bush Administration now adds its own bill to gutthe CRA ( a bill with the sadly ironic title of “ The Credit Availability and Regulatory Relief Act” ) . 154 rallying point for industry opposition to the real goals of the CRA. Ironically, because the ratings still pass 90 percent of all lenders with flying colors, the ratings have provided a resource for legisla tive efforts to reward lenders that leave the best paper trails and plans with safe harbor from challenges and scrutiny for compliance with the full provisions of the CRA .Here, the poor enforcement re vealed in the ratings is used to exempt lenders from any real en forcement efforts from the community. 155 At meetings last spring between the National People's Action and the regulatory agencies, the agencies, and the Fed in particular, adopted the position that lenders cannot target programs to par ticular areas, but must provide identical services to all parts of their territory. This places an absurd penalty on programs that are the most likely to meet unmet credit needs in low -income commu nities — that is, programs that best meet the goals of the CRA. Thus, while some lenders are rewarded for disinvestment, others are punished for their successful reinvestment efforts to serve mi nority communities. 59-308 - 92 - 6 156 to private firms whose growth in sales are directly related to an in crease in regulatory requirements and the paperwork burdens im posed on the banking institutions. Interestingly , no outside organi zations involved in the community side of reinvestment or fair housing enforcement were notified of the potential contracts for such training services. Instead, they are offered occasional cameo appearances at seminars and conferences. Clearly, no one who is critical of the CRA regulatory process is sought out to provide bal ance and diversity to the processes by insuring that these organiza tions and individuals have access to such contractual services. Pub lic notices of contracts are not placed in the kinds of publications civil rights lawyers, fair housing groups, and community reinvest ment experts and researchers generally use. If banks marketed their CRA -related services the same way the FFIEC and the indi vidual regulatory agencies market their contracts for the review and development oftheir enforcement programs, they would surely 7 receive failing ratings. 157 This is all the paperwork that is required under the law. Lenders are required to review their CRA activities and to assess the credit needs of the local community on a timely basis. How this is done is not defined in the law or regulations. It is no wonder that the Office of Management and Budget indicated that it found the CRA to be at the bottom of regulatory burdens. 158 this performance ( urban or rural) there should be much less con cern with probing documents that define the activity that led to this performance. It is when the performance is lacking that regu lators need to probe the process to seek out reasons for the fail ure — whether internal or external to the activities of the lending institution . For the most part, these concepts are written into parts of the FFIEC's 1989 policy statement on the CRA — but they are not the concepts that rule the evaluation process. 159 jority of all their offices in these white city and high -income subur ban locations. So, Harris is taking some of its resources that it had so successfully allocated to providing low-income housing and hous ing rehabilitation in inner-city communities and it is dashing about in the high -income suburbs touting these programs in order to sat isfy the Madd Hatter CRA ordersof the Fed. This is what regu latory burden is really about. 3. Lending Disclosure 160 In 1989, the regulators developed a policy that they will not take community challenges seriouslyunless the group indicates that it has dealt with the lender about its service record prior to the time of the challenge. The main source of data that groups use to de velop a meeting with a lender is the HMDA data. By delaying the release of the AMDA data the regulators have created a Catch -22 where the regulators require community groups to review a lend er's record while the regulators take away thepublic data that the groups need to assess that record. By the time the data are re leased now, they are too old to havemuch meaning. Indeed, the data are so old that the statute of limitations for fair housing suits has run out on many of the loans included in the disclosure. In spite of letters to Alan Greenspan from the Chairman and other members of the Senate Banking Committee that this process vio lates the law, the Fed has refused to restore public disclosure to its proper time. B. Commercial Loan Disclosure 161 of public disclosure related to insider loans , portfolio lending, for eign investment, profits and losses, and nonperforming loans. The regulators know that they should review lending patterns because this is the best measure of real performance - as opposed to the paper trail of meetings, community contacts, and planning docu ments that now substitutes for performance in the CRA examina tions. The regulators, however much they have denied the need for commercial loan disclosure, recognize its value so much they have tried to coerce lenders into producing it internally for the regu lators — but not the public. 162 lender, Northern Trust, the focus on small business lending has opened up an active lendingprogram not only to established busi nesses, but to many new businesses as well . 163 it,” then it should be said of lending discrimination that “ they just can't find it.” I believe the answers lie in the low priority, negative incentives, poor training, and general disregard for existing inves tigation and evaluation procedures that are given to fair housing issues by both the regulatory agencies and HUD. A. The Performance of HUD 1 164 time to add marketing on lending discrimination, HUD did not re ward them for a job well done, but placed them at the bottom of the funding list and cut their allocation from $ 400,000 to $25,000. 165 plicants to screen their testing proposals with three regulatory agencies that have not developed any testing programs of their own and with the Fed whose Board of Governors unanimously rejected testing in part because they believed it to be unethical. In July, HUD had to publish amendments to the application process elimi nating the naming of the cities and changing the requirement to clear the applications with the regulatory agencies to a strong rec ommendation. Such confusion reveals a less than serious attitude toward enforcement by the Nation's lead fair housing agency. B. The Financial Regulatory Agencies 166 by her institution . While she stated that she used these records to review the institution's lending record , she was unable to explain what some of the categories and data entries meant. How could the largest home lender in the United States have such poor — and po tentially discriminatory - practices? Moreover, how could a regu latory agency that claimed to check the accuracy of these data have allowed such massive recordkeeping failures to occur? Amazingly , a week after leaving this institution , this previous branch manager went to work for J.S. Barefoot & Associates as a senior consultant. What is even more ironic is that after she joined the firm , the firm was hired to train the examiners of the Office of Thrift Supervision — the agency that regu lates Home Savings ofAmerica . Interestingly, when I asked ex aminers of the Chicago Office of the Comptroller of the Currency about the quality of their fair housing regulation, they responded that there could be no question about the aggressiveness of their examinations because they were monitored by Karen Godfrey, this very same senior consultant from Barefoot & Associates. 167 abuses. But, community development groups like Bethel New Life, The Neighborhood Institute and PRIDE have been rehabilitating the housing in this community and the neighboring community of Austin. In December of 1989, HUD Secretary Jack Kemp took a tour of this area to see what a difference these efforts of commu nity groups and lenders was making. The tour passed close to the home the Greens were applying to purchase. Here is a case that shows what happens when someone takes the initiative to com plain about discrimination to a regulatory agency charged with en forcing the law. 168 tion Center — the Nation's leading organization in enforcement of the Community Reinvestment Act. They sent information about their case to her and she asked me to review it. I reported on my findings to the Leadership Council for Metropolitan Open Commu nities , and the Greens are now in court with claims of discrimina tion against the bank . 169 file cases as victims must also sue the agencies that were supposed to protect them . 5. The Powerful but Dangerous Drug of FHA and VA Lend ing 170 could always sell the home for enough to pay off the loan , if nec essary . 171 to over 29 percent while foreclosure rates range from just under 10 percent to over 21 percent. For the Chicago suburb of Harvey, which has undergone a massive racial change, the level of defaults is 26 percent andthe level of foreclosures is over 9 percent. Some of the largest FHAlenders in Harvey haveforeclosure rates as high as 31 percent. Typically, the defaults will lead to foreclosures and foreclosures indicate an empty, boarded up, and abandoned property. These properties become drug houses, fire hazards, and havens for crime. Just twoweeks ago, Lindsey Murdock — a six year old child — was abducted, beaten , raped, and stabbed to death in the garage of an abandoned FHA home just two blocks from where he lived in the African -American Roseland community in Chicago. 172 Other work , such as the Institute analysis of the Chicago com mercial loan disclosure data , has been plagued by inaccuracies and errors and even an unwillingness to correct significant errors when they are identified .? In the analysis of the commercial loan data for Chicago, for example, the Institute lending data for one bank ( American National Bank) had been inflated by a factor of 10 due to an error in placing the decimal point. This was clearly evi dent in the Institute's own reporting of theasset size of the banks included in the analysis, where the level of loans for a 2 year pe riod were greater than the total assets listed for the bank. While this lenderaccounted for only a small fractionof all lending in re ality, this error resulted in 37 percent of all Chicago lending and 43 percent of all suburban lending being assigned improperly to this one institution . This contaminated the entire analysis — yet after the Institute had been informed of this major error it revised its report without correcting the lending level for this institution. 9 1 173 ination of mortgage bank residential lending in a major metropoli tan area .” 174 The table compares lending for the entire metropolitan area with lendingin 10of Chicago's black communities ( Austin , East Garfield Park , West GarfieldPark , South Shore , Chatham , Roseland,Pull man , West Pullman , Englewood, and West Englewood) . The first 10 lenders in the table are depositors institutions. All but 2 of these lenders have at least 1.0 percent of their loans in these black com munities. But for the 10 largest mortgage bankers, only 6 have more than 1.0 percent of their loans in these black communities. So, for the dominant lenders, the depository institutions have high er levels of service than the mortgage bankers. This is particularly significant since 8 of the 10 depository institutions make only con ventional loans while 7 of the mortgage bankers also originated FHA/VA loans — which mortgage companies argue are better for serving these types of communities. 175 lenders. The lender with the highest level of service to lower-in come tracts is FSB ( which is Citicorp Savings Bank) . Citicorp is a conventionallender ( self- insuring its loans) . Its level of service with only conventionallending is much greater than the levels of service of MB # 1 and MB # 2 ( which are Margaretten and Fleet) —which use both conventional and FHANVA lending. Indeed, other HMDA data show that while about half of Margaretten's loans are FHA / VA only , 20 percent of its total loans are to low - income people ( those with less than 80 percent of the area median income) . Citicorpmade 17 percentof its loans to this income group — without using FHA /VA loans at all. CONCLUSIONS AND RECOMMENDATIONS There needs to be a new commitment, and new effort to involve those with the skills and commitment to make reinvestment and fair housing work. This committee has the opportunity to raise its voice to initiate that new commitment. The time has come to sup port the thousands of existing and developing community-based ef forts, to overcome discrimination and rebuild inner- city commu nities. The missing partner is not the community — and not even the lender — but the Government that has failed utterly in its en forcement roles. There are many legislative proposals that could be made. What is most important is to intervene in ways that make reinvestment and fair housing serious issues — for all of the partici pants in the lending industry andfor the Federal agencies charged with enforcementof fairhousing laws. I have included a range of proposals for the CRA, disclosure, HUD, and the fair housing laws: THE CRA 176 5. Mandate that agency reviews of CRA records ( or com munity service obligations by mortgage companies or other lenders covered by the community service obligations of the Federal Home Loan Bank Board ) be based on the existing measures of the provision of lending and banking services to the communities and individuals defined in the CRA leg islation . DISCLOSURE 177 5. Investigate HUD's investigation and management of Title VIII complaints and cases. September 15, 1992 Data HMDA 1989 for Communities 10 in Black Lenders Major 20 by Lending Fireman's Fund Fleet Margaretten Midwest Funding Rand Investment Sears Mortgage Travelers Old Stone 895 1,609 702 760 205 2,995 1,579 1,177 2,671 3,793 1,773 1,667 4,225 1,216 40 194 12 % 100.00 %100.00 % 100.00 % 100.00 % 100.00 10 65 %0100.00 %0100.00 %0100.00 % 0.100.00 1%000.00 %2.60 %3.34 % 0.00 % 0.00 % 1.02 1% 00.00 0 100.00 %0 % 36 69.75 %4 69.23 % 0.06 %0.00 % 0.00 % 0.00 % 0.00 % 0.00 %0100.00 2,236 1,352 1,275 1,015 5,227 2,055 1,045 2,077 1,044 % 12 14.29 % 28.04 % 48.08 % 40.39 79.80 % % 42.70 %23.16 % 100.00 16 23 0 1 55 145 % 0.37 % 1.71 % 2.28 %2.10 % 2.60 % 3.34 %1.02 %0.37 % 1.71 % 0.06 % 2.28 %0.83 %2.46 %13.64 % 3.05 % 0.00 % 2.82 %1.07 %0.32 0.31 % %0.75 % 0.57 %0.63 % 0.44 % 0.97 % 4.87 % 3.29 %1.98 % 1.03 %20.98 % 4.07 %0.63 %0.00 % 0.06 % 5.27 %2.72 %0.00 % 0.23 % 19.86 %0.00 %0.00 % 2.46 % 5.81 %2.77 %2.24 % 0.00 %0.10 % 5.27 % 19.86 178 Crown Mortgage Kramer and Draper 0 264 131 Mu 。 United Savings America of First National of Chicago 2671 3793 1604 1667 3961 1085 1,540 5,811 Gunn Mid S&L Federal America Federal Paul St. S&L S&L Federal Talman 0 0 Communities Black Conventional Mortgages " We Trust Our Bankers " - 15 Years After the CRA Home America of Savings 1540 5811 1177 ooow Community Reinvestment Associates · 1744 East Wicke . Des Plaines, Illinois Avondale FSB FSB Citicorp FSB Cragin Household FSB Total #P Total All ercent w Calvin Bradford #F HANA .#Conv Mortgages Mortgages Lender Name ( 708) 803-4915 Page 29 September 15, 1992 Income Areas :Loans 1 Graph Low To % 25 % 10 5% % 0 Bank #1 &L S #1 MB FSB M2%< 0inority M20-49 % inority #2 MB 50-79 M% inority # &L 2S M%+80inority 179 " We Trust Our Bankers " - 15 Years After the CRA %15 Page 30 180 NOTES 1. See " Analysis of Banking Industry Consolidation Issues," staff report to the Committee on Banking, Finance and Urban Affairs of the House of Representatives, March 2, 1992 and the Statement of Jonathan Brown before the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives, Septem ber 26 , 1991. TESTIMONY OF DEBORAH GOLDBERG ACTING DIRECTOR , NEIGHBORHOOD REVITALIZATION Good morning, Mr. Chairman and members of the subcommittee. My name is Deborah Goldberg, and I am Acting Director of the Neighborhood Revitalization Project of the Center for Community Change. I am a member of the Federal Reserve Board's Consumer Advisory Council and I chair the Council's CRA Committee. The Center is a national , non -profit organization that provides technical assistance to low income, predominantly minority community groups around the country on housing and community development matters. CCC's Neighborhood Revitalization Project advises groups on community reinvestment and fair lending matters. In addition, we are a founding member and serve on the Board of the National Community Reinvestment Coalition . 181 sight provided by the Congress through hearings like this one. We are at a critical juncture with respect to CRA right now. The bank ing industry is mounting a major revolt against the law, and is supporting a series of legislative proposals that would effectively gut the Act. At the same time, community groups are gathering their forces in support of the law, which has been a lifeline to their neighborhoods in the face of massive cutbacks in resources for poor communities at all levels of government. How these cross currents will ultimately play out is unclear. But the evidence compiled by your subcommittee through this hearing will be extremely useful in guiding us all . THE ROLE OF CRA IN PROVIDING ACCESS TO CREDIT In places where community groups have made active use of the law, ČRA has proven to be a remarkably effective tool in providing access to credit for those previously shut out of the banking system . We estimate that, in the fourteen years since CRA went into effect, community groups have negotiated more than $7.5 billion in com mitments from lenders that are targeted to low income and minor ity communities across the country. In recent years , banks have made an additional $ 23 billion worth of unilateral commitments to community development lending. Thus, CRA has resulted in the commitment of over $30 billion to poor communities around the country. Key to Successful Programs 182 money is not a loan that needs to be repaid. But under the new underwriting standards that banks are using, they are allowing some amount of cash on hand to be used toward a downpayment. 183 A track record does exist for most low income people, but it's not at the credit bureau. Rather, it's with the landlord, the utility com panies, the phone company, etc. Poor people do have financial obli gations to manage, and if a banker looks at their record of doing so, even though the record is kept in a non -traditional place, he or she can predict the likelihood that the person will pay back the loan they're requesting. 184 money orders and the predatory practices of many check cashing outfits. 185 covered virtually all of the low income areas within Philadelphia . Fidelity's goals for the first year of its agreement with ENPIC were 115 mortgages, 200 home improvement loans, and an unspecified number of small business loans. The bank made 197 mortgages, 181 home improvement loans, and 76 small business loans. 186 and allows the lender to lower the interest rate by as much as 4 percent. THE NEED FOR BETTER INFORMATION ON BANK In order to persuade lenders to undertake new programs de signed to serve low income areas, community groups have to be come de facto bank examiners. They have to do their own research on the banks' lending records, and often have to show a bank how bad its performance is in order to convince that bank to make changes. To do this, groups must have access to information . The Home Mortgage Disclosure Act 187 of the borrower was reported. Income data is missing for 30 percent of the government-backed mortgages, and 28 percent of the conven tional loans, a total of 883,400 applications. The missing income figures are particularly shocking, since the only exemption allowed for reporting this information is if the lender did not rely on income to make a loan decision. It is difficult to believe that this was the case 30 percent of the time. 59-308 - 92 - 7 - 188 choice but to go to another blending institution or risk losing the home under contract. 189 to live. Without credit, the neighborhood business sector will stag nate and wither. 190 Data Also Useful For Examiners 191 little light on a rating process that had previously been conducted | in secretbehind closed doors, it would create a higher level of CRA accountability for both lenders and regulators. 192 cent have been rated needs to improve, and 1 percent are judged to be in substantial non -compliance. So, while 97 percent or more used to get a passing grade, now that number is 89 percent. This is movement in the right direction , but the movement hasn't gone far enough. I would hazard a guess that if you took a poll of com munity groups in this country and asked them to rate their local banks, you would find they would use the same four numbers as the regulators, but in a different order. They would probably find 1 percent of the banks to be outstanding, 10 percent to be satisfac tory, 79 percent that need to improve, and 10 percent in substan tial non-compliance. Their judgment would be based on their expe rience in their hometowns, where they see banks and regulators paying more attention to marketing and outreach , but not nec essarily to actual lending. The bottom line is that when it comes to giving grades on CRA performance, the regulators are still far too lenient. What Are The Standards ? 193 For example, under Assessment Factor A ( activities conducted to ascertain creditneeds) , the report says the following about the Rio Grande Valley Bank: 194 criminatory practices or possible effects test problems. Yet, under Assessment Factor F ( evidence of prohibited discriminatory or other illegal credit practices ) , the report states, “ The bank is in substantial compliance with all provisions of anti- discrimination laws and regulations. . This review disclosed no instance of dis criminatorypractices in the bank's delivery of its products and services. " 195 methods for determining community credit needs, that the Board of Directors has not played an active role in monitoring CRA per formance, that the bank has not evaluated the effectiveness of its marketing efforts, and perhaps not surprisingly, that the bank's special home improvement loan product for low and moderate in come people has notgenerated many applications. 196 the CRA evaluation ofSunwest Bank of Gallup, New Mexico, which does include part of the reservation within its delineated commu nity. In fact, the area on the reservation that falls within the bank's lending territory has about 78,000 people, some according to the estimates Navajo Nation. compares 19,000 of the ple in Gallup. This to » peo 197 For example, in the case of the recent merger between NCNB and C & S /Sovran that resulted in the creation of NationsBank, peo ple in Washington, DC , where Sovran had a presence, wanted to know how NCNB's banking subsidiaries had performed in places ranging from Baltimore to Houston. Getting the reports was no small task. Yet when they read them , the groups found those re ports were not very helpful, because they assumed the reader was familiar with the city where the bank was based. There are some exceptions to this rule, reports that provide a thumbnail descrip tion of the bank and the community in which it is located. Even for the reader familiar with the locale, this background provides useful insight into which aspects of the local market the examiner believed to besignificant. Among other benefits, this may prompt some readers to bring to the attention of the examiner significant factors that he or she may have overlooked. We recommend that the agencies make this standard practice. Reports Hard to Obtain 198 ever, this is hardly the system one would expect from agencies eager to get CRA evaluations out to the public. All of this isin stark contrast to the system for disseminating call reports. For these, there is a single 800number that one can call to order the reports for a nominal fee. We recommend that a similar system be set up for CRA evaluations. 199 5. CRA evaluation reports should contain information that pro vides the reader with hard data about the bank's lending activities. This information should be consistent across loan categories and types of lenders, so as to allow for meaningful comparisons. 200 thousands of applications annually, received a total of 207 CRA protests. In the overwhelming majority of cases, no CRA issues are raised by commentors, regardless of the bank's CRA rating. Imperfect Evaluation Process 201 flourishing, but it's not because they're serving their local commu nities. The staff of the House Banking Committee recently looked at the ratio of domestic loans to total assets of various sized banks . They found that the smaller the bank, the lower it's loan to asset ratio. For banks over $ 10 billion in assets, this ratio was 63 per cent. For banks under $ 100 million in assets, the ratio was only 55 percent. ( See Analysis of Banking Industry Consolidation Issues, Staff Reportto theCommittee on Banking,Finance and Urban Af fairs of the House of Representatives, March 12 , 1992.) 202 asked, “ Which of these gives you, as CEO , the most headaches ? ” One doesn't have to be a PhD to realize that this is not exactly un biased research. More important, the question didn't elicit any meaningful information about any purported burden associated with CRA compliance, merely the respondents' emotional reactions. 203 What the Agencies Have to Say About Documentation a PUBLIC DISCLOSURE COMMUNITY REINVESTMENT ACT PERFORMANCE TEXAS COMMERCE BANK - DALLAS, N.A. NOTE : This evaluation is not, nor should it be construed as , an assessment of the financial condition of this institution . The rating assigned to this institution does 204 not represent an analysis, conclusion, or opinion of the federal financial supervisory agency concerning the safety and soundness of this financialinstitution . 205 -Satisfactory record of meeting community credit needs. 206 credit needs assessment; review of CRA lending opportunities; and review of CRA training. 207 The bank's geographic distribution of credit extensions, applica tions, and denials 208 Assessment Factor L - Any other factors that, in the regulatory authority's judgment, reasonably bear upon the extent to which an institution is helping to meet the credit needs of its entire commu nity. PUBLIC DISCLOSURE COMMUNITY REINVESTMENT ACT PERFORMANCE TEXAS COMMERCE BANK - RIO GRANDE VALLEY, N.A. NOTE : This evaluation is not, nor should it be construed as, an assessment of the financial condition of this institution. The rating assigned to this institution does not represent an analysis, conclusion , or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution. 209 Basis for the Rating ASSIGNMENT OF RATING Identification of Ratings DISCUSSION OF INSTITUTION'S PERFORMANCE -Institution's Rating: 210 Assessment Factor A - Activities conducted by the institution to ascertain the credit needs of its community, including the extent of the institution's efforts to communicate with members of its com munity regarding the credit services being provided by the institu tion . 211 sures that banking products are responsive to identified community needs. Specific efforts are made to ensure that all segments of the community are reached through the bank's advertising efforts. Ad vertisements are designed to stimulate awareness of the products and services the bank offers throughout the community, including low- and moderate- income neighborhoods. 212 This kind of information is utilized by senior management in rat ing the effectiveness of the bank's marketing program and for the formulation of new marketing strategies. Management relies heav ily on this information when it develops new products and services. Thebank closely reviews the geographic distribution in relation to the lending policy. 213 institution is helping to meet the credit needs of its entire commu nity . 214 CENTER FOR INVESTIGATIVE YOUR LOAN IS DENIED, a report on the persistence of discrimi natory lending practices in the 1990's, is a co-production of the Center for Investigative Reporting and Frontline. It aired on PBS stations nationwide, June 23, 1997. 215 YOUR LOAN IS DENIED NARRATION : South Central Los Angeles, 1992: 1,044 buildings dam aged. Sixty people dead. More than $735 million in losses. SOT: Obviously you gentlemen know this is the Baldwin Hills/ Crenshaw shopping center ... NARRATION: After the fires died out a group of bankers came to look around . SOT: What was this here? NARRATION : There is an irony in all this. Community activists have long charged that South Central was underserved by banks . In fact, only 13 branches serve a population of over 250,000 resi dents. In nearby Melrose , 90 percent white, with one tenth the popu lation, there are 15 banks. The issue is race and credit . Do our financial institutions avoid lending because of color? sot: Music : " Sweet Home Chicago .” We went to Chicago where FRONTLINE has investigated race and credit for six months. Chicago - America's third largest city - home to one of the nation's largest black communities. NEWSPAPER BOY: Paper, paper ( unintelligible) . .. NARRATION : Eighty years ago they began coming here in search of the American dream . Today, blacks live in a Chicago at least as di vided as the South they left behind. BILL SCHECHNER : Who lives over here? BRELAND : Mostly this side, the German Irish. SCHECHNER : White ? BRELAND : White, ah , basically, east of California would be black. SCHECHNER: Ok, on this side of California is what? ALLEN : This side of California is basically, right now it is more black now. It's still a mixture . SCHECHNER : But over here , on the other side? ALLEN : On the other side it is basically white. NARRATION: On the blackside of one of Chicago's colorlines is Engle wood, a neighborhood on the south side of the city. There I met Henry Luellan , a retired homeowner. He's lived here half his life. LUELLAN SOT: I don't know what's wrong with the banks . NARRATION : Near his house he showed me how a lack of credit hurts a neighborhood. LUELLAN : The banks have redlined this area and the banks won't lend money into the area for the peoples to rehab and to take care of their property, so what peoples do, they walk out of the neigh borhood and they leave the house abandoned. This is a shell now . SCHECHNER : Mm-hmm. Can you see it, if we went around the back? LUELLAN : Go around the back , yeah. SCHECHNER : Yeah , come on. LUELLAN : Let's walk around the back and I can show you what I'm talking about. 216 SCHECHNER : Okay, yeah . You live right across the street right? LUELLAN : I live right in front of this house and this is a sore eye to me. I'm going to show you what I'm talking about here. This house was perfect. It, all of the back was closedin and it had nice windows up there . .. SCHECHNER : Well, how do you figure that, Mr. Luellan ? I mean here's a house and you are telling me that a year ago it was in good shape and it got wrecked, how come nobody just came along and, and bought it. SCHECHNER : Couldn't get a mortgage ? LUELLAN : Can't get a mortgage in this neighborhood to buy. There's nobody to lend money and if you can't get a mo — if you can't get money, you can't buy a house . SCHECHNER : Isn't it all over and done with here, I mean isn't it too late ? LUELLAN: No, it's not too late, because if we get money we will rehab these buildings and put them back, put them backs on the tax role. That's what it takes. SCHECHNER : Now you've lived here for how many years? LUELLAN : I lived here for 32 years. SCHECHNER: What goes through the middle of you when you look around and you see what happened ? LUELLAN : I cry . It tears the inside out of me. This was a beautiful neighborhood LUELLAN : I mean we need you to give our community services as you give other communities. This is what we asking you. Our prob lem is, we need banking in the low and moderate income area, where our community is 100 percent black, and everybody have redlined our community. NARRATION: Luellan fights for his neighborhood through the local chapter of ACORN , a housing advocacy group. Here, AČORN activ ists meet with representatives of Affiliated Bank of Chicago whose parent corporation is planning a merger with another bank, Comerica. But, mergers need federal approval and approval can be withheld because of local opposition . That gives ACORN a hammer. MAN'S VOICE: It's not up to us now, it's up to you. You're going to have to deal with us . LUELLAN : If you don't deal with us, we're going to hold up your merger. LUELLAN : We need your commitment that you gonna put some service in our community where we show you we are justas trust worthy as any other peoples on the face of the earth. This is all we asking for. We don't want you to give us anything. We, if you lend us money, we gonna pay you back like any other red -blooded American . WOMAN'S VOICE : You have all your banks's out in the rich part of the city. You have nothing for us. SCHNEIDER SOT: Does ACORN , do you have your outreach and your programs that you are operating , are you in certain parts of the city or... ? 217 NARRATION: Brenda Schneider is Director of Community Relations for the bank . SCHECHNER : Is it real. Is racial discrimination in mortgage lending real? SCHNEIDER : I would categorically say no. I think there are too many factors that go intomaking up whether or not an applicant does or does not get a mortgage. SCHECHNER: Is it possible that the people at the meeting were real ly angry, at the way they've been treated by the banking system ? SCHNEIDER: I would say that your assessment is absolutely right, angry is an accurate description of what I felt listening to them 218 was 35 percent below the citywide average. Austin's population is ninety -one percent minority. SOT SALDANA : Want to go to the park ? Come on . NARRATION : Maria Saldana and her husband, Donald Davidson, know just how hard it is to get a home loan here. SALDANA: I really thought that this was the house. I mean , I said . this is the house. I want a house where the kids will grow up in and it would have memories of our living in a house, and you know, and all the nooks and crannies of a house that only a kid can , can really appreciate. NARRATION : It would seem that Maria and Donald are good can didates for a loan . Donald is a real estate developer and mortgage banker. Maria earns $69,000 as a lawyer for the City of Chicago. She holds the couples' assets, which according to her attorney, top $ 1 million . But they did have trouble . When Maria Saldana, who had earlier received a smaller loan from Citibank, applied to the bank for a $ 191,000 mortgage/construction loan , her application was denied. SALDANA : They sent me aa letter saying you got turned down for two reasons; one, bad credit history, and two , too many outstanding loans. NARRATION : Citibank told FRONTLINE Maria Saldana was turned down “ due to her credit performance on her own personal loans.” Did the bank have a case? Maria Saldana's credit report included two late mortgage payments two years ago, some credit cards at their limit, and an unpaid six dollar fee on an old student loan. The rest of her credit report was clean . Maria didn't see where there should be a problem . SALDANA : and when I got the credit report and I looked at it, I really couldn't figure out what it was they were talking about cause you know my credit rating for the last 24 months was great. As far as I was concerned, they already made up their minds the minute we walked in . . . I don't think they ever planned to make that loan . DAVIDSON: Butoddly enough, Citicorp is probably the largest lender in black neighborhoods in the city of Chicago. And their average mortgage, if my memory serves me right, is about $45 or $50,000, and † think they've made a conscious decision that they don't like lending in black neighborhoods but they'll do it and they'll do it well because that's the law. But they have defined in their minds a risk level and I think what must have happened was we went beyond their definition of risk level . NARRATION : After the Citibank rejection , Maria Saldana did get a loan at another bank, First Chicago. Loan officer, Carol Yanowitz, reviewed the same credit report that Citibank had seen , and agreed to loan Saldana $ 147,000. YANOWITZ: It is a very common scenario that we see , and we typi cally ask for someone to qualify, give us reasons if they have slow payments why they happened and in some particular situations we 219 may actually ask for documentation that explains why that's hap pened. SCHECHNER : Are you comfortable with the fact that you gave here a mortgage and she will be able to pay it off ? YANOWITZ: Yes, I am . NARRATION : Yanowitz's boss is Richard Thomas , president of First Chicago. THOMAS: We are not in the business of knowingly making bad loans. So we have to satisfy ourselves that the loan has a reason able, more than a reasonable and very high probability of being re paid as scheduled . NARRATION : One bank says no, another bank says yes. What turns a decision a particular way is not easy to determine. Citibank said Saldana was a bad risk. But, she is considering suing Citibank to find out if there was another reason why her loan was denied . SALDANA: I went to Stanford undergrad, I got a Berkeley law de gree, I have a job that pays $69,000 , but somehow, I'm doing some thing wrong. Ithought I was doing all the right things, but I'm not. NARRATION : It would seem that Peter and Dolores Green are a cou ple who wouldn't have trouble getting a mortgage either. He's a state employee and she works for a publishing company. They are professional and well paid. The Greens live in a neighborhood that's on the edge--with board ups and fix -ups side by side. Keeping people like the Greens here is important. They want to stay, and in fact, invest here. The Green's had hoped to buy the six -unit apartment building that has been their only home since they were married. SCHECHNER : Was it an important step for you to buy the house? PETER GREEN : Yes, it was. I, for me , I will just speak for myself. I think that it was the fact that we had spoken so many times over, about owning that piece of property, and it is really nothing nec essarily so beautiful, or what have you, but it's still special in its own way . . SCHECHNER : What do you mean? GREEN : Well, that's where our roots were. We'd been living there for over 30 years so it had a lot of meaning in that regard. . SCHECHNER: Did you ever think about leaving the neighborhood ? PETER GREEN : God yes. DOLORES GREEN : Yes . PETER GREEN : That's the one thing that we could have done at any point of time. But we are not quitters, we are not runners. And I think really that's it. We just didn't feel that we had to run . NARRATION : The Greens earn approximately $60,000 a year be tween them . They list assets of over $ 100,000, and they say they are paying all their bills on time. SCHECHNER: So when you went to the banks to look for a mortgage, what did you think their reaction was going to be? PETER GREEN: I thought I was white, and let me just explain what I mean by that. I had all of my documents together, the kinds of 59-308 - 92 - 8 220 documents that I knew would be needed in making an application , such as tax returns, description of the property, record of, of where a 221 PETER GREEN : No. SCHECHNER : What did you say ? PETER GREEN : You will be putting that in writing, OK , and you will be indicating as to why. SCHECHNER : Why was Green turned down ? HILL: Because of the location of the area . If he were a long time client, or, you know , just a client of the bank for let's say a year or a couple of years, again, he probably would not have been turned down. SCHECHNER: What's the problem with lending money to someone you don't know if they have what it takes in terms of their assets and qualifications? HILL: Well, it's like , if he were stronger, you know, it's like, the case of like, a banker who really wants to loan the money to somebody who doesn't really need the money. That's a good client. Well he wasn't that strong. You know, but still he was very good. But, I And going out on a limb is going into a neighborhood that you don't mean, he wasn't that strong that you would go way out on a limb. typically go into . SCHECHNER: How will the bank ever get to know the neighborhood ? HILL: They don't have to. Why would the bank have to do that? They are setting up a service to help the community that in which they are in. Man, there are branches are everywhere. Those branches are supposed to know . I mean you can't go into, there's probably banks in the neighborhood that Mr. Green is concerned about. NARRATION : There used to be, but no more. In fact, the bank where the Greens were regular customers — the one bank' where they may have stood a better chance of getting a loan — that bank moved out. PETER GREEN : We were customers with this bank probably pretty close to ten years, more or less. SCHECHNER : What happened? PETER GREEN : One day we gotan announcement that the bank was going to be moving or closing down. SCHECHNER : Did you go to another one? PETER GREEN : Yes, same thing happened. That bank moved away. Bank by bank by bank, if you will, at one time serviced this whole area, they just all disappeared. NARRATION : When a written explanation from Avenue didn't arrive, Peter phoned the bank's president. Dolores took the return call. DOLORES GREEN : He immediately says to me, " Well, John Hill should never have accepted the application .” And I said, “ Why not? ” And he said, “ Well, we don't give commercial loans.” NARRATION : The bank president says Mrs. Green is wrong. He says he told the Greens only that John Hill wasn't authorized to make commercial loans. But when the bank sent the Greens a letter, it gave them no explanation for being turned down . Federal law 're quires the bank to give a reason for its rejection. Peter Green lost patience. He complained to the Federal Reserve Board in Washington. He expected a full investigation . 222 PETER GREEN: Usually in an investigation of the persons who are making the complaint, usually that person is contacted to get their side of the story. SCHECHNER : But they didn't do that. PETER GREEN: No. So, ah , I thought that rather strange, ah , not having been contacted and then , yet they wrote back and said, “ Well, we don't see anything wrong. NARRATION: In a letter to the Greens, the agency that investigated, the Federal Deposit Insurance Corporation , FDIC said the problem was a low appraisal. Now there seem to be three reasons the Greens were turned down . Wrong kind of loan said the bank president. Wrong side of town said John Hill. Low appraisal said the FDIC . We wanted to ask the FDIC and Avenue Bank about the Greens. The FDIC refused to comment. Avenue Bank , in a letter to FRONTLINE, put the blame on their former loan officer John Hill , for not completing the loan application. PETER GREEN : I'm not Dr. King, I don't want to be thought of as a Rosa Parks, or anything like that, but it appears that there has been a serious problem in this area in dealing with banks for some time. And the FDIC and those other agencies which have been mandated to oversee these institutions, it seems that they are fall ing short. I'd like to think that there are persons out there who are going to develop enough courage to stand up and say no, not here . DOLORES GREEN: If it were a case of say, I spoke too loudly or some thing I could always soften my voice. If um , I dressed in a particu lar manner I could always buy different types of clothes and change that, but if it's the color of my skin . . PETER GREEN: We can't change that. DOLORES GREEN: I can't change that. NARRATION : Time and again, the U.S. Congress returns to the issue of race and credit. SOT HEARINGS: Good morning ladies and gentlemen. NARRATION : At hearings last month before a House Committee, community activists complained about lax enforcement of the law . CINCOTTA : The individual cases like I could bring up of the Peter and Dolores Green on the West Side of the city of Chicago, who were discriminated against by a lender . . . the people had impec cable credit . NARRATION : Gale Cincotta has testified before Congress more than a dozen times in the passed 20 years. She is part of an array of community groups, public interest watchdogs, and lawmakers who know this is an old story. The Federal Reserve is one of four federal regulatory agencies that oversee financial institutions. Last October, the Fed released the first comprehensive national study of loan discrimination. 223 SOT LAWARE AT PRESS CONFERENCE : The new data shows that loan approval rates differ among different ethnic, racial and income groups. NARRATION : The information was collected under the Home Mort gage Disclosure Act of 1975, known as Hum -Dah . The data base was all mortgage applications filed nationwide in 1990. The study included the following statistics on conventional mort gage rejection rates: For black Americans the rejection rate was more than twice as high as for whites. And even more troublesome: high -income blacks were being re jected more often than whites of much lower-income. The debate over what these numbers mean goes on . John LaWare is a governor of the Federal Reserve. LAWARE : The most recent HMDA -data which caused quite a stir when that came out last fall, are like a lot of smoke, ah, you got to believe there's some sort of fire down there creating the smoke , but it's hard at this stage of the game to tell just what that is. NARRATION: The problem, bankers say, is the study did not include information on credit histories and level of outstanding debt. They say further study is necessary to determine whether the numbers show racism or legitimate credit decisions. But retired Senator William Proxmire, who sponsored the Commu nity Reinvestment Act, says the data is clear PROXMIRE: Well, I make plenty of those numbers. Because what it shows was that people with the same income, rejection rate on blacks was more than twice as high. Furthermore, the really, bombshell here was the fact that the blacks who had the highest income were turned down more often than , whites who had the lowest income. Now that's a, that's just the cruelest, most direct , explicit, kind of discrimination on the basis of, of race. NARRATION : The Fed's numbers also showed that as the percentage of minorities in a community increases so too does the number of loan denial-regardless of income level of the neighborhood. As the debate about what these numbers mean has continued , this group, the Federal Reserve Consumer Advisory Council, has stud ied ways, to detect discrimination . SOT DEBORAH GOLDBERG AT CAC MEETING : we are at least alerted to a problem in the home mortgage lending field . And we can then take steps to address it. We can argue about what the na ture of that problem is, aid what the appropriate steps are, but at least we all agree that there's some kind of problem out there that we should be looking at. NARRATION : The council includes bankers, academics, and consumer advocates. Last year it considered using testers , paired black and white examiners posing as loan applicants. Cathy Cloud, a fair housing expert and new member of the council, supports testing. CLOUD : If you don't make an application there's no paper trail of your visit there so, there's no way to assess the percentage of peo 224 ple who are being turned away, without even having a chance to apply. So testing shows what happens at that stage. NARRATION : In 1990 , Cloud supervised an experimental testing pro gram in Chicago, which showed clear discriminatory behavior. CLOUD : At a couple of institutions the black testers were not given any information , were not assisted by the loan officer and were told that they would only be assisted when they had completed an ap plication and brought in their application fee as well, paid their money. That did not happen to the white counterpart of the, the minority tester. They were assisted, provided information and en couraged to apply. NARRATION : But, when the consumer council recommended testing as a way to detect discrimination, the Fed said no. LAWARE: Now, we have kind of backed off the testing. If you use it generally, to try to pinpoint the problems, the cost is just going to be phenomenal what we, and we have long had the authority for Federal Reserve examiners to use testing if they sense that there is a problem and they want to find out or they want to confirm their judgement. SCHECHNER : To what extent do they use it? LAWARE : So far it has not been used . SCHECHNER : Why not? LAWARE : Because we have not found evidence that leads us to be lieve that there is discrimination going on . SOT HOUSE DEBATE : Mr. Kennedy of Massachusetts. NARRATION : Last year, after the HMDA was released, a mandatory testing bill reached the House floor. Its sponsor was Congressman Joseph Kennedy of Massachusetts. KENNEDY: The problem is not bad laws , it's bad enforcement. Bank regulators are asleep at the switch . They treat banks like golfing partners not banks . NARRATION : But Kennedy's amendment immediately ran into trou ble . CHALMERS WYLIE : The testing program proposed by the Kennedy amendment is a half baked idea. It is a proposal that was rejected by the Federal Reserve Board because it would not guarantee accu rate findings, it would be very costly to administer and is unclear who will pay for the cost of the program . JIM LEACH : It may be the ultimate intrusion in the American sys tem. The problem is real, it's a secret police solution modeled more after the KGB than it is any part of the American model. sot: Will the gentleman yield! NARRATION : But the amendment's co-sponsor, Republican Robert Walker of Pennsylvania, pointed out, testing is routinely used by other government regulators. WALKER: That's exactly what we are talking about here. Regulators where they find massive violations being able to turn to device to assure that they are right and getting the job done. KWEISI MFUME: People talk about not being opposed to redlining, well what are we going to do ? This is the Congress of the United 225 States. Let's do something about it. But don't tell me as I've been told all my life and people of African ancestry and Hispanic ances try, to wait for the next tomorrow , and the next generation , and the next election . Wetoo were endowed with certain unalienable rights, they were life, liberty, and the pursuit of happiness. NARRATION: But, the support wasn't there. Even though the HMDA data had been releaseda month earlier, the amendment lost by 89 votes. KENNEDY : The only way to get at the truth as to whether or not there is discriminatory lending taking place in this country is to get the facts. MFUME : And as long as the Congress, or the banking institution doesn't really want to go out and find out what's wrong. We'll sim ply say as the bankers say, well please don't draw any conclusions from subjective data. Well 226 LAWARE : I don't know. If I knew the answer , you know, we wouldn't be trying to prove the answer with the investigation and the re search that we're doing. We'd be out there sending in special teams to look at areas where we thought it was going on. SCHECHNER : What can you tell people then that will reassure them ? LAWARE : Kind of like a blood hound without a scent you know. It just, he mills around he doesn't know what direction to go in. NARRATION : The Office of the Comptroller of the Currency, or the OCC , is another federal bank regulatory agency . It oversees nation ally chartered banks. A lawsuit forced the OCC to set up a fair lending enforcement of fice in 1978 . Zina Greene was the first director of that office. She says she came to an agency unwilling to change. ZINA GREENE: The first inclination came the first week. The first thing we had to do was write testimonies for the Hill. And we had to tell them what wonderful things we were now going to do to find discrimination. So, we were going to test, we were going to look for redlining, we were going to do these wonderful things — and at the end we said nothing. We had 10 pages and we said nothing. We didn't mention the word redlining. We didn't mention the word testing. We didn't say a word about what we were going to do, or how we were going to get there. NARRATION : That was 14 years ago. To learn if things had changed, we spoke to Susan Krause, a Senior Deputy Comptroller at OCC . KRAUSE : We as you probably know , don't have very many successful cases of discrimination actually brought to conclusion. Ah, so that can be either good news or bad news.We don't find much overt bla tant discrimination and we think, and nobody does, I think that, um, there probably isn't much overt, blatant discrimination , but there probably is subtle discrimination that we have a very difficult time finding, and therefore, we're not very far along on enforce ment. SOT GREENE: These are boxes, files I used . NARRATION: The OCC's lack of action doesn't surprise Zina Green and two other former fair lending specialists. All three quit in frus tration . Zina Green left in 1979. ZINA GREENE : I knew this was an organization that did not want to find discrimination . It was clear, it was eminently clear. I came there as a director of a division . Within a few months, it was rear ranged, and I was just off there by myself, with a secretary. And I think that the people who followed me didn't even have a sec retary. They were just director of civil rights, but director of noth ing. NARRATION : Michelle White took over the job when Zina Greene re signed. White stayed for 2 years. WHITE : Under the Bush and Reagan administrations we've seen an erosion of civil rights in general. An there was never a commitment to civil rights from my perspective in the area of either lending or insurance . 227 NARRATION: Ron Weink was next. He says the lack of interest in fair lending was still the case when he resigned in 1990. WEINK : I quit as a matter of principle. I though the interest, par ticularly by senior management in fair lending, had declined over the eight years I was at the comptrollers office . SCHECHNER: So you had had it? WEINK : I had had it. NARRATION : The head of the OCC at the time Weink resigned was Robert Clarke. SCHECHNER : You think you did a good job? CLARKE : I believe so . SCHECHNER: What would you say to people who say: " No, you didn't, sir ? ” I un CLARKE : I think they simply don't understand the facts. derstand why people feel the way they do. I just don't think they have a very good appreciation for what goes on in a bank super visory agency. And I think they rely too much on statistics without look at the, at what underlies those statistics. KRAUSE : It makes you wonder if over the years this agency has really been interested in enforcing those laws, in getting at dis crimination. Has it been? How could it be that those three people quit? KRAUSE : Well , I don't know all those people. I wasn't involved in this particular area for as far back as they go. I think this agency has always been interested in fair lending enforcement. Uh, I think it's a very difficult area to try to establish a definitive record in, and we have the same record as the other federal agencies in terms of how successful we've been at finding and proving unlawful dis crimination . SCHECHNER : Who's responsible for this situation taking so long to root out ? LAWARE : I don't know . I refuse to accept responsibility on the be half of the regulators. Because we conduct what we feel are respon sible level of examination procedures to observe compliance. And where we find any indications in the record of discrimination we take whatever steps are necessary to correct it. PROXMIRE: Regulators are doing a lousy job from any standpoint. A lousy job. Very poor. We have gross, demonstrable discrimination. Racial discrimination, gender discrimination , discrimination against people with low incomes. MFUME: If you understand this, you got to do something about it, cause it will eat at you. But if you say I don't understand it and maybe we should wait and study the data, and we should not draw subjective conclusions, it puts off the inevitable decision to act. NARRATION : FRONTLINE requested interviews with the cabinet level officers responsible for bank regulation and fair housinglaws. Both Nicholas Brady, Secretary of the Treasury, and Jack Kemp, Secretary of Housing and Urban Development, declined our re quests . SOT AT HEARINGS: These hearings could not be more timely. 228 NARRATION : One week after Los Angeles exploded, community groups were again on Capitol Hill. The urgency may have been new. The message remains familiar. GILDA HAAS: The recent Rodney King decision just lit the anger and frustration and despair that was rooted in a long experience of eco nomic injustice. DONALD MARTIN : There are many laws already on the books to see that these problems don't come about but we seem to come back here year after year, basically report the same numbers and we'll come back again next year and do this same thing again . CINCOTTA: I hear this debate after twenty years that these banks might be good folks and there isn't any discrimination it's like mind-blowing. I don't know when we're going to get on with the business of getting loans out to these communities. How many more Los Angeles have to blow up ? SOT ACORN PROTEST: ACORN , the peoples voice will rise again ... NARRATION : Back in Chicago, ACORN, theneighborhood advocacy group , continues its fight against Affiliated Bank. SOT WOMAN : We're working people and we deserve a fair share of whatever is going on. We need loans and we don't have to be red lined. We're not going to stand for it. We will be back. NARRATION : For four months, they've kept up pressure on the regu lators and the bank. Finally, last month the bank and ACORN reached an agreement. Affiliated agreed to grant more mortgages in all of Chicago's low income neighborhoods and gave ACOŘN a $25,000 grant. The Fed approved the bank's merger. SOT WOMAN : Redlining — we're tired of it! SOT : Rap music. NARRATION : But ACORN has won a small battle. Chicago's black neighborhoods are still far from receiving their fair share of finan cial services. We looked at what happens to the neighborhoods when banks are scarce. Without banks, all kinds of opportunists are free to operate here. It's another side of the redlining story. We looked at one of the mostcommon ripoffs, home improvement contractors offering ques tionable financing for shoddy work. LUELLAN : We cannot borrow money from the bank — but then the banks will turn around and let these shyster contractors have it and sell it to us for three times , or four times, or five times the money and they make a fortune of off us . WANDA GRIGSBY: We were told how much the monthly payments would be and how long it would take to pay the loan off, but we weren't told that the interest rate would be 17.98. NARRATION : Wanda Grigsby lives with her husband and children on Chicago's Southside. In 1989, she decided to refinish her basement. GRIGSBY: When there's a heavy rain we get maybe an inch or two of water in the basement, and we were told that that was no prob lem, they could dig a trench on the side of the house, on the north side of the house and fill in the cracks . 229 NARRATION : But two years after the work was done , after repeated requests for repairs to be made, the basement still floods after a hard rain . SOT DOUG ROBINSON : OK , I would like to show you this awning, this awning right here . SCHECHNER : Yeah . SOT ROBINSON : I had to have this replaced because the awning it fell down. So I had someone come out to put it back up. SCHECHNER : Uh -huh . NARRATION : Doug Robinson says he too was cheated . He wanted new awnings and storm windows. SOT ROBINSON : This particular window here,this was hung upside down. This window here, see that right there ? This came apart. ANNIE TRICE : It was a bad storm and our back porch of this old building where we live in, it blew down. NARRATION : And, finally, Annie Trice. She co-signed a loan for her mother so that their badly damaged porch could 230 BRADFORD : When the contractor comes to the consumer's house, he gets the consumer to agree to a contract. He takes credit informa tion from the customer at the point, and asks him to sign a stack of documents on a clipboard, whole stack of things, including the loan agreement, and the mortgage agreement which is buried under this pile of documents . PEIREZ: It's not just that we deny the charges, which we do, but the charges really deal, to the extent that there's any validity, to a small, small handful of dishonest contractors. NARRATION : Dartmouth's attorney is David Peirez. PEREZ: We monitored what was going on. We refused to do busi ness with contractors that we thought were dishonest. Whenever a homeowner complained, we sent people out to their homes . Did we make mistakes ? Sure, we're human, but very , very few . Nothing that approaches fraudulent conduct. BRADFORD : I think that the judge, hearing these people get on the stand time and again, essentially telling the same story about how they were not aware of mortgages. They had no idea they were paying that interest rate. They didn't even realize how long they were supposed to pay on the loan, will realize that this is not just a series of isolated problems, but an underlying problem with the way this company did business . NARRATION : According to the lawsuit filed in Illinois, Dartmouth enticed contractors with expensive vacations to hook homeowners into higher interest rates. These profitable, high -interest mortgages could then be sold to mainstream banks— the same banks often unwilling to make home improvement loans at conventional rates in minority neighbor hoods. One of Dartmouth's biggest customers was Citibank. PEIREZ: At the time, when Dartmouth purchased the paper, it would turn around and sell to Citibank, or other banks, and they would be the investor, the one that held this paper in order to make money. And Dartmouth would do that over and over again with many thousands of homeowners. To Citibank and other banks. NARRATION: In New York and Connecticut, Citibank was named along with other banks as a co-defendant with Dartmouth. In Con necticut, Dartmouth settled their case paying $ 3.5 million to 3,100 homeowners. The case against the banks was dismissed. In New York , the case against Dartmouth is still pending. Citibank has settled with a payment of $250,000 to consumers. Citibank of Chicago canceled a scheduled interview when we told them we would ask questions about the Dartmouth Plan . In a let ter to FRONTLINE the bank wrote that, in addition to their initial background check on Dartmouth in 1978, they did a second check : “ After the [ Connecticut) Attorney General brought suit” and “ ... found nothing that indicated any impropriety. . THE LETTER ADDS: “ Citibank was not involved in the origination of the consumer paper and did not know what specific practices the contractors used.” So, the letter says, Citibank stopped buying Dartmouth's loans in Connecticut. Citibank continued to do busi ness with Dartmouth in Illinois until 1989 . 231 BLUMENTHAL: In our complaint, we alleged that they knew or should have known that Dartmouth was not a licensed mortgage broker and that manyof those mortgages were illegally procured because of the extent of complaints that followed. PEIREZ: Citibank knew about the complaints that were made to Dartmouth. Citibank was regularly informed by Dartmouth . Citibank as I have mentioned, wasnot only a lending bank , a buy ing bank and a financial advisor. And as a result we were always giving them information - good information or bad information ; fi nancial information or any types of accusations that might affect our business. They were fullyinformed and, and nothing that was aimed at Dartmouth was withheld from Citibank and they know that. NARRATION : Meanwhile, homeowners continue to pay off second mortgages on homes, homes still in need of repair. SCHECHNER : Who are you paying ? ROBINSON : I'm paying Citibank in Hicksville, New York . SCHECHNER : Why don't you just stop ? ROBINSON : I'd lose my home, I can't. If I stopped paying 'em now, I have a second mortgage, which means if I stop paying they can take my home. SCHECHNER : Has this been hard on you ? TRICE: It put me far behind. And I was, when I first became a case worker, I was thinking about getting me a car. I couldn't get it. I couldn't get anything. BLUMENTHAL: There are human beings behind these pieces of paper. When those human beings file complaints with banks , our hope is that banks will be more careful and energetic in trying to follow those complaints and stop doing business with people re sponsible for them . JIM FLETCHER : There are still neighborhoods in this city in which the market economy doesn't work properly. NARRATION : Jim Fletcher is president of Southshore Bank, one of the few pioneers of community development on Chicago's south and west sides . FLETCHER : And part of the reason it does not work properly is that institutions that are active and can extend credit in those neighbor hoo don't do it. They extend it to other places. SCHECHNER : And why don't they do it in those neighborhoods? FLETCHER: As I said before, because their perception of that neigh borhood is that the risk is too great. SCHECHNER: And why would they perceive the risk as being too great in that neighborhood ? Is it race? Is it economics? What is it? FLETCHER: It's race, OK . And, and, and that gets tied to economics. And it's a perception that those people that aren't like me won't handle themselves properly. NARRATION : Other bankers see the issue somewhat differently. THOMAS: What we need to do isto have people become qualified to borrow money from a bank or from any other lender. But I think access to credit is somewhere down the line. We need to do all we 232 can to stimulate job creation , good education, good credit record, frankly those are the kind of things that are much moreimportant than access to credit. Access to credit comes as a result of other things. FLETCHER : Bankers manage risk. And they perceive that this is not the way to manage risk and to make maximum return on invested capital. And since they don't believe it, I don't know . And it is hard to convince them so they don't. This is not a business they want to be in . SOT: Fire -engine siren . MFUME: We didn't listen in Los Angeles and we are not listening in other urban areas and we are not listening as it relates to the lending practices which I believe in many respects are discrimina tory by, by some banks in this country. And I think that the same kind of hostility is growing and it is building up against the na tion's financial institutions. NARRATION : In the wake of the L.A. riots, bankers and regulators nationwide have pledged to do more to ensure fair lending. The Justice Department has told regulators they want fair lending cases Justice can prosecute. The Department of Housing and Urban Development says it will begin funding the testing of mort gage lenders for discrimination . NARRATION: In Chicago, Donald Davidson and Maria Saldana con tinue to rehab their home. It has helped their block , but they are still angry. DAVIDSON : I know how the game is played and I know how you can hide any reason any way you don't want to make a loan . I'm a real estate developer by trade. I'm a mortgage banker by trade. My wife is a lawyer. You can kid a lot of people, but you can't kid us. NARRATION : They are now considering a lawsuit against Citibank for discriminatory lending practices. SALDANA : I feel like I should do it, because who, how are you going to get change if somebody like myself who should know — who knows that something went on that shouldn't have gone on, doesn't get to the bottom of it ? NARRATION : Back in Inglewood, Henry Luellan is determined to see change. LUELLAN: I'm not gonna to leave this neighborhood until I dies . I'm going to stay in this neighborhood. No matter what happens. I'm going to fight, I'm going to meet, I'm going to talk to peoples. Soon er or later, I will win . NARRATION : And the Greens ? They finally got a mortgage and bought their apartment building. They are suing Avenue Bank. PETER GREEN : It just should not have happened, I'm sorry. That's all there is to it. Um, it's the law of the land. Born here, educated here, pay my taxes here, I'm entitled to a fair shake. Nothing spe cial, fair shake, under the law. 233 Woodstock Institute TOV 2 3 : 1.2 pega Dal . 11-30 Jean Polde President Kathryn Tholin October 5 , 1992 spis Vice President Emestine Jackson Assistant Vice President Board of Directors Chairman James Capraro Greater Southwest Derekspnient Corporation Vice-Chairman Sokoni Karanja Centers For New Horizons Secretary Dear Senator Cranston : David Ramase McCormick Theological Seminary Treasurer Elizabeth Hollender Government Assistance Project Members Ronald A. Grzywinski South Shore Bank Stanley J. Hallett Center for L'rbun Affairs We would appreciate the opportunity to clarify for the record certain aspecis of a repuri that was cited by Calvin Bradford in written testimory he submitted recently to your subcommittee . The report in questior., " The linknown beniers : The Role : f Muitgage Banks in the Chicago Metropolitan Area , " was written by cr . Constance R. Dunham of The broen and Policy Rescurch Northwestern l'niversity Richard Hartnack Union Bank Institute and was commissioned aná Woodstock Institute in 1991 . John L. McKnight 1 . Center for l'rban Affairs and Policy Rescurch Northwestern l'niversity R. Susan Motley RSM / Askvintes Mary Nelson Bethel New Life, Inc. Jean Podde published by the The Testi!nriy states that the Report found no differences in the levels of mortgage bank lending to minor : ty and wilice commurites . The Repost congarei predominantly black and white neighborhoods in Ca'n ways . First , te Report found that the rate of mortgage bank lending was quite different in black Woxxlstork Institute Alexander Polikoff and white neighborhoods , and clearly illustrated this simple Business and Professional comparison ( Table 3.9. p . 52 ) . People for the Public Interest Hipolito Roldan Hispanic Housing Development Corporation Lawrence B. Roster Chicago Capital Fund Sandra P. Scheinfeld Sylvit and Aaron Scheinfeld Foundation Second , a major finüing of the Report was the absence of significant disparities in mortgage bank lending rates among comparable black and white neighborhoods -- that is , after controlling for housing , demographic , and economic characteristics of census tracts that likely affect mortgage Beruum Capital, Inc. bank lending rates . The distinction between simple comparisons and comparisons that statistically control for Founder Sylvia R. Scheinfeld Report explained the distinction at length ( pp . 37 , 43 , Richard W. Shealey 1903-1920 other neighborhoud characteristics is important and the 46 , 48 , 52-4 , 65-6 , '91 , and 29 ) . 234 Senator Cranston October 5 , 1992 Page 2 2. The Testimony argues that the Report ignored its own findings that FHA/VA and conventional loans tend to be made in different types of communities . This allegation is not correct . One of the major findings in the Report, which it discussed in some detail , is that mortgage banks make FHA and VA mortgage loans in neighborhoods that tend to be quite different ( e.g. , in terms of racial change , income , and racial composition ) than those in which they make conventional mortgage loans ( pp . 66-70 ) . The Report noted that " FHA /VA and conventional mortgage lending patterns are strikingly different from each other " and that each " has a strong presence in distinctly different segments " of the metropolitan Chicago mortgage lending market ( p.66 ) . Furthermore , the Report compared FHA/VA and conventional lending patterns of mortgage banks with those of depository institutions ( pp . 81--84 ) . Together , these findings served as the basis for two of the six major recomendations of the Report ( pp . 91–2 ) . The type of statistical analysis used in this Report cannot identify which of several plausible reasons explain the differences in FHA/VA and conventional mortgage lending patterns noted above . The Report pointed out that these distinct lending patterns partly result from differences in the relative appeal each loan type holds for various types of households ( pp . 26-9 ) , an important point to consider when grappling with the puzzle of why depository institutions so rarely provide FHA / VA mortgage loans . The Report also cited a recent audit ( testing ) study of potential homebuyers , as well as interviews with Chicago realtors and statistical scudies , all of which support the view that " it is unlikely that borrower preferences alone explain FHA /VA and conventional mortgage usage " ( p . 29 ) . The report noted that the differences could result from realtor or mor - gage bank targeting of each of these types of mortgage loans to different parts of the market ( p . 70 ) . The Report recommended as a next step specific studies to generate the kind of information that would help resolve the question ( pp . 91-2 ) . 3. 1 1 The Testimony states that the Report found that mortgage banks ' use of 235 Senator Cranston October 5 , 1992 Page 3 The Report found that there were large disparities in depository institutions ' mortgage lending rates between comparable black and white neighborhoods, but no significant disparities in mortgage banks ' lending rates between comparable black and white neighborhoods. However , the Report did not analyze the reasons for those disparities . Therefore , we cannot conclude from this analysis either that these patterns were caused by mortgage discrimination by depositories or that there was an absence of lender discrimination by mortgage banks . of relevance to both mortgage banks and depositories is the Report's findings that aggregate mortgage lending rates ( of all Chicago-area lenders ) were significantly higher in white than in comparable black neighborhoods . The Report provides policymakers and the public with a great deal of new information on the operation of Chicago-area mortgage banks and their residential mortgage lending patterns. However , it is clear that other studies must be conducted before a clear picture emerges as to the extent to which Chicago-area mortgage lending patterns result from lender discrimination , from other kinds of lender behavior , from borrower behavior , and / or from the actions of other institutions . The Urban Institute , Woodstock Institute , and many other researchers around the country are now engaged in this next round of research . Thank you for the opportunity to clarify for the record the purpose and findings of this Report . Sincerely , Malcol Buh Malcolm Bush President Woodstock Institute Constance Dunkan Constance R. Dunham Author of the Report The Urban Institute 236 TESTIMONY SUBMITTED TO THE SENATE BANKING COMMITTEE, SUBCOMMITTEE ON HOUSING Kathryn Tholin ,Acting President Thank you for inviting Woodstock Institute to submit testimony to the committee on the implementation of the Community Reinvestment Act. The Woodstock Institute is a nonprofit organization which is based in Chicago and works nationally to bridge the gap between the needs of distressed urban and rural communities and the resources of financial institutions . During the last fifteen years, the Institute has conducted extensive studies of housing credit flows and has documented continuing patterns of disinvestment in poor, working class, and minority communities; it has monitored the community reinvestment performance of financial institutions ; it has worked with state and local government and community development financial institutions to develop and implement innovative financing programs; and it has provided technical assistance to community -based organizations in assessing their community credit needs and in designing and implementing financial programs for affordable housing and job creation. Since passage of the Community Reinvestment Act, the Institute has used the CRA as a tool for In response to the request of the Senate Banking Committee for testimony addressing the effectiveness and impact of the Community Reinvestment Act, we would like to focus on two primary issues: 1. The continuing need for the Community Reinvestment Act The Community Reinvestment Act has accomplished a great deal since its inception . That impact goes beyond the $30 billion in targeted lending Woodstock Institute, 407 S. Dearborn , Chicago, IL 60605 ( 312) 427-8070 237 Page 2 commitments made in response to community action , and substantial amount of additional lending to low-income and minority communities made unilaterally by banks. The result of these commitments and other compliance efforts is that more and more banks are actively looking for and finding lending opportunities in communities they previously ignored. These efforts have a long term effect on the marketing and lending activities of these institutions. Without the CRA, however, these institutions would not be as likely to seek out such market opportunities. The presence of the CRA in its current form , applying to all banks and savings and loans, is necessary to ensure that these institutions address the credit needs of low income communities. While these credit needs can be sound lending opportunities, they often require special guidelines and program elements that an institution might not explore and implement without the incentive of CRA. The Institute strongly opposes any attempt to limit enforcement of the Community Reinvestment Act, through small bank exemptions, safe harbor provisions, or other means. One of the primary arguments given by opponents of CRA is that many banks should be exempted from its provisions because of the high cost and effort of the paperwork required. We believe that this is a false issue, and certainly does not provide a justification to abandon the overall requirements of the CRA . We believe that some of the difficulty over documentation of CRA efforts is due to banks' uncertainties about what information regulators are looking for. Much of it is due to the emphasis of bank consultants and vendors on the production of paperwork to document CRA efforts. As a result of these, banks may be defensively compiling more paper than necessary . In addition, some of the problem is due to an overemphasis by some examiners on pieces of paper rather than concrete results. Resolving these issues does not require changing or limiting the Community Reinvestment Act. The appropriate emphasis of all of those involved in CRA implementation and enforcement should be concrete actions and results . Documentation should be a natural part of all of an institution's marketing and development efforts, and is important to help ensure the success of those efforts . On the other hand, a bank that places primary emphasis on generating an extensive paper trail is utilizing time that could be spend developing new outreach and lending programs . Any bank that is taking CRA seriously should not find it difficult to document their research , initiatives , and results. Some bankers are contending that rural community banks be exempted from compliance with CRA because those banks by nature must serve the needs of their communities. Our experience is , however, that no bank, urban or rural, inherently serves the credit needs of its community. Many banks, in fact, choose not to lend money at all, focusing instead on purchasing Treasury bills and other government Woodstock Institute, 407 S. Dearborn , Chicago, IL 60605, ( 312) 427-8070 238 Page 3 securities. Today, for the first time since 1951, banks have more government paper in their vaults than they do commercial and industrial loans ( Martin Mayer, Wall St. Journal, September, 1992) . Small banks , in fact, have received the bulk of the " Needs Improvement" and " Substantial Noncompliance" ratings . According to the Center for Community Change, between July 1 , 1990 and December 31 , 1991 , more than half of the banks receiving these ratings had assets under $250 million, and of those, 83 percent went to banks under $ 100 million in assets. Implementation of the Community Reinvestment Act requires a deliberate effort by any bank, urban or rural; any bank should be able to document those efforts and results. . 2 Using CRA more effectively to promote community development Community Development Financial Institutions The Institute seeks programs and mechanisms to address a wide range of community credit needs . One of the things we have learned is that , despite successful CRA agreements and programs, disinvested communities have credit needs that will not be fully met by a traditional financial institution . Many of these have developed through long -term disinvestment and its impact on a community's resulting inability to function in the market economy. In many parts of the country, other lending institutions are seeking to address those deeper credit needs. Community development credit unions are making small loans to low income individuals for such purposes as buying a used car to travel to work, education and training, or home improvement. Equally important, they are offering low cost financial services to low income persons and providing the extensive consumer education necessary to bring people from the cash economy into mainstream financial services. Community development loan funds are providing low cost, higher risk loans to needed community development projects which will bring housing, jobs, and increased economic activity to a community. Microcredit programs, through both intensive training and financing, seek to bring individuals from dependency to self -sufficiency through self- employment and very small business initiatives. It is our view that addressing the credit needs of disadvantaged communities is a long term as well as a short term project. In this context, it is appropriate that financial institutions be encouraged to develop programs and take actions which can increase a community's capacity for credit over the long run . The New York Federal Reserve has taken that approach in determining that investment in and assistance to supportive services such as day care is an appropriate CRA activity. Woodstock Institute, 407 S. Dearborn, Chicago, IL 60605, ( 312) 427-8070 239 Page 4 Support of community development financial institutions should not substitute for efforts of financial institutions to lend directly in lower income communities. We have found, however, that financial institutions can provide valuable assistance -- in the form of grants, low interest loans , and technical assistance to such financial intermediaries. These partnerships can expand the reach of financial institutions in meeting the least bankable credit needs and should be encouraged. Expanded HMDA reporting Woodstock Institute has long supported the expansion of HMDA reporting to include small business lending disclosure. Business lending, and the resulting job creation and retention , is clearly critical to a community's financial viability. Many CRA agreements and programs include small business lending as an important component. For many financial institutions , business lending is their primary activity. But today, there is no public information on the business lending patterns of financial institutions. A local ordinance in Chicago requires all banks requesting city deposits to provide annual information on their commercial lending. A two-year analysis of that data showed that only 10 percent of commercial loan dollars reported were lent in Chicago's neighborhoods, with 90 percent lent downtown or in the suburbs . Expanded HMDA reporting which included the size , location , and type of commercial loans would provide valuable information to assess commercial reinvestment. Penalties for Noncompliance Despite the substantial successes of the CRA, large numbers of institutions have not responded in a meaningful way to its requirements, and have made no efforts to address the credit needs of low income communities. In the absence of a pending merger or acquisition , the poor public relations of a failing rating is the only effect on the institution. While public disclosure of ratings has led institutions to pay more attention to their ratings, this is not enough. Additional appropriate penalties for a finding, or a sustained finding, of " Substantial Noncompliance" should be considered . The new practice of the Federal Home Loan Bank of reviewing community records of its member institutions as a factor in approving access to its financial programs for members is an important action in this direction. Thank you again for the opportunity to submit testimony to the committee. We would be happy to work with you further in the development of policies and programs that can meet the credit needs of low and moderate income communities and households. Woodstock Institute, 407 S. Dearborn , Chicago, IL 60605, ( 312) 427-8070 240 September 25 , 1992 Ryan Conroy United states Senate Committee on Banking , Housing and Urban Artairs To : Housing Bubcommittee Roon 535 Dirkson Senate office Building Washington DC Fax : Fron : Re : ( 202 ) 20510 224-5137 Charles B. Finn Comments to be added to hearing testimony As per our phone conversation , I am sending comments of six issues I view as directly affecting the ability of the regulators , researchers and the public to assess the performance of financial institutions . While the 1990 HYDA data is a great step forward , it only partially addresses the need for comprehensive , reliable and timely information about this critical sector of our economy and its huge potential to contributo towards the failure or success of urban , rural , minority and low income communities in this country . I will address six areas of concern I have , based upon my accese . I do want to be clear from the onset of my comments research regarding communities , lenders , lending data quality and regarding the intent of my testinony : Namely , at this time , we do not have adequate data to assess the performance of the financial sector in rural , urban , minority and low income communities . Frankly it is premature to say the least , for a debate about whether certain institutions of a certain size , or certain communities should be exempted from dissemination of data when we cannot make reliable assessments based on the quality and availability of current data . It is ironic that the same groups that are currently raising the issue of liniting access are the sana organizations that have made it so diffiouit to obtain what data is actually needed . The larger issue that needs to be addressed is how does the very spirit of economic capitalism regarding equality of opportunity and access survive when the public and government lack the vital intornation necessary to make informed decisions about markete and regulation . I. Native American Communities The 1990 data sets allowed the first access to Information 241 regarding financial institutions activity within there While there are real questions regarding the comprehensiveness of this data in terms of roporting by other federal agencies , it is clear that what data we do have indicates this group has real problems accessing capital. communitie , There were about 19,000 loan applications that identified the primary applicant as native american . This is a very large number when one observes there are a little over 2 million native americans in the whole country . Of those applications , almost 7,600 ( 40% ) have no location variable assigned to them . This means we cannot tell which city , M8A , county or state these applications came from , which makes assassnent of any community Another example of problems of this sort is extremely difficult . that the NBA of Minneapolis - St . Paul has only one application listed with native american as primary applicant. This is very curious when the size of the native anarican conmunity is taken into account and one considers that Minnesota has one of the largest native american populations of any state . Another problem is the number of application denials , which are not quite as bad as comparable cohorts of black applicants , but far worse than comparable whites . This is especially puzzling when one take into account the plethora of BIA loan guarantee programs that romove a great deal of the risk and also gives Interest rate incentives to this group of applicants . II . Rural Landing There is very little information available regarding lending performance in rural communities due the HIDA loophole that does not require reporting of lending in enall communities. However , we do know that people in these areas are much more vulnerable to discriminatory landing practices and also lack the ability to do anything about the problem . People are more vulnerable due to the fact there is no reporting of the data for oversight and it is well documented that applicants that are turned down are reluctant to protest or even discuss the problem . In other lenders activities. The other , and even more compelling reason words , there is no " sunshine " in these communities regarding for careful oversight in these areas is that often times , there is only one financial institution available . Consumers who are denied access to the " only bank in town are simply out of luck , where even in small cities , borrowers at have the opportunity to shop around . Consuners that do travel to another community find bankers in that community unintormed about their area and therefore , not equipped to handle their business . I had a brief opportunity to use data from FDIC tapes that identified rural bank activity by loan category ( ie agricultural, home lending , small business, etc. ) . When i compared data from this tape to county boss nees ú :. ? garnerad ' rom other sources , I found some larga discrepanc. ec v ro'ng portfolio merformance of same local lendez's and the Jojor me they served . One wo! ) 242 posit that an institution's lending performance over time should mirror economic activity to a certain extent within the community it serves . While I can draw no conclusions from this observation due to lack of breadth of the work and comprehensiveness , I will comment that my observations argue for more investigation and better data in this area at the very least . III . small business lending- no data It is well documented that small boksiness lending is critical to the economy of any area . In fact this sector is often called the " engine of vitality and change " as it generates most of the new Jobs in the country . Yet there is no HMDA for small business . If small businesses cannot get a loan in a particular community due to discriminatory activity by lenders , how could we expect people within that community to have the ability or need to access financial markets for consumer and home loans? An observation nade by several institutions when asked to comment in front of this comnitte overtheyears ( I would sitemy research in Atlanta and Detroit ) , has been that they do not get any applications from the areas they have been accused of alecrimination in . Certainly a large part of this observed result is from attitudes , behaviors and actions of those institutions within their communities. But what part is due to the fact that institutions that not only do not offer home loans in certain communities , also do not offer small business loans that actually generate the incomes that allow citizens to thrive and apply for home , loans ? One phenonenon that has been observed over the last few years regarding agglomeration in the financial Industry is the new attitude these large institutions take toward financial " lines of credit . " These large institutions survive and flourish based upon their ability to balance the additional debt loading incurred for purchasing institutions with increased segmented market opportunity and application of cost savings through " economies of scale " management processes and technologies . These " special lines of credit" , which are critical to small business and communities are very difficult for large institutions to handle . They require a much higher level of knowledge about the lender , the market and the community than a business whose profit rationale requires wholesale practice of " economies of scale" can handle . Therefore , many large institutions have been terminating these loan types , which sounds the death knell " for small business in many communities . There is no data available regarding small business lending that would allow us to determine the behavior and impacts of this critical conding market in our communities . TU . goll Bessinesg Administration data a mata used to be available and I was able to access the data u 1989 for the country . This no longer appears to be the case . 3 243 While this data set does not represent anything other than the activity of lenders in this specific category, it is important that we know which Institutions are using these public subsidized lending opportunities and who they are lending to . v . Too big to regulate With the demise of local communities and states acting as the boundaries of financial institution activity in the country , we now have institutions that are active across whole regions and indeed , the country . One bank in Texas has storefronts in over 100 communities . A recent agglomeration in the southeast involved activities that not only comprised all of the banking activity in many communities, but actually set up an institution that controlled a large traction of banking activity in the whole region ! When these institutions get into financial trouble , it is well understood by most people who study bank failures , that they cannot be allowed to actually close down because the impact of such an action is so large as to actually destroy whole economies of areas . The sane rationale applies to CRA examinations . Institutions of this size , as a matter of policy cannot be evaluated in terms of their performance in communities . One only has to peruse decisions in the Federal Regerve Bulletin regarding Board of Governors decisions regarding CRA challenges to institutions of this type. These challenges are dismissed because while these banks may be operating poorly in one area , they are doing well overall . This successful argument is welí founded in that regulation must look at the Institution as a whole as any punishment will affect the institution in that manner . Therefore , it is difficult to impossible for regulators to address problems of this scope in the traditional manner as detailed in the act and regulations . New proscriptions to address institutions of this size must be developed not only in the area of safety and soundness , but in Community Reinvestment as well . It is altogether possible , if the banking lobby is successful in their attempt to exempt small and rural Institutions and large banks cannot be approached due the to big to regulate phenomenon , that the spirit and intent of Congress regarding CRA will be not partially , but completely negated . VI . North American Free Trade Agreement . Any comments regarding Community Reinvestment must also address the impact of NAFTA on financial institutions and insurance in communities , regions and states . The financial section of this agreement, which legally , is beyond state , federal and even constitutional law , in assence allow " carte blanc " access to all communities within the United States . These private sector institutions will operate without any guarantees of safety , soundness, security or be required to follow local, state or federal laws and regulations in these areas . . It would be hard to overestimate the eventual Impact of this treaty as it creates a " superclası " of investors that will not have to compete on the 1 244 same level playing field as local institutions . While the immediate impact of these changes is nitigated by the restrictions placed within the treaty in terms of percent of foreign ownership ( to protect Mexican business ) , the abrogation of ali local, state and federal regulations in these areas has to load to the eventual complete de - regulation of these industries . At the very least , this treaty will eliminate all sub - federal regulation of these industries and in the case of insurance industries, this is all regulation . The old proverb about the " camol's nose in the tent" again demonstrates as how old strategies can still be successful. And this part of NAFTA certainly is a demonstration of this truism . 245 FIRST NATIONS DEVELOPMENT INSTITUTE 69 Kelley Road • Falmouth , Virginia 22405 • ( 703) 371-5615 246 Mr. Chairman and members of the Senate Banking Committee: I wish to thank you for this opportunity to address the critical need of Indian Communities to have access to responsible financial banking facilities, which are sensitive to the culture of the individual Indians and tribes. First Nations Development Institute is oldest and largest American Indian reservation based economic development organization in the country . We began our work in 1980, with a strict mandate to work with tribes and individual Indians to help them become less dependent upon the federal government and to become more self-sufficient. This is accomplished through educational efforts and the provision of technical assistance to help Indian communities develop economic programs that are culturally appropriate . Our work over the past 12 years has shown us that there are no easy answers to our economic problems. Development is a lengthy process of both recognizing and building upon leadership skills of individual Indians and tribal organizations. Part of what we do is work with a community or tribal council to learn about that economy what community members are doing, what their interests are, and how their future goals might fit into the bigger economic and community picture. One of the obvious pieces ofour work is to study reservation economies, the spending and investment practices of the reservations, and generally to follow the flow of money in and out of the community. Working with bankers, responsible investors, and foundations, First Nations has constructed several pipelines for injecting capital into the reservations. Through our Oweesta ( Mohawk word for money) Program , First Nations places capital on the reservations and builds Indian people's financial capabilities and skills. First Nations' has received loans and seed capital grants of $1.8 million . That capital supplies matching loans to micro-enterprise loans funds, supports deposits in reservation -based credit unions and banks, provides partnership deposits in other financial institutions, and guarantees loans for field projects. Tribes select which commercial banks should receive the partnership deposits in recognition of their innovative lending in Indian Country. In addition, First Nations' has convinced other investors to deposit over three - quarters of a million dollars in Indian - owned institutions, thus helping capitalize Indian economic development while keeping their money safe and earning the fiar market-rate return . Thus, our work and interest in the Community Reinvestment Act, is obvious. I will start off by sharing with you a few examples of banking experiences of tribes. Not long ago, a lawyer representing the Fort Peck Tribal Housing Authority withdrew the agency's several million -dollar deposit from their local bank and placedit in several banks in Denver, Colorado. This was done because the local bank had been holding the Housing Authority's funds in a noninterest-bearing account for years, a not so uncommon scenario in tribal banking relationships. This action got results . Local banks began treating the tribes in the area as 247 preferred customers. Another tribe recently received a large judgement award from their local government. In studying their relationship with their local bank, it was found that approximately $400,000 was deposited into the bank, by the tribe monthly to cover administrative salaries and obligations yet with that leverage, that bank made no substantial business or financing loans to members of their tribe. This with the CRA in place. A portion of this award was distributed in the form of per- capita payments to the tribal members. The award money was deposited into the same local banking institution who then distributed the checks to tribal members. Included in this distribution was a notice from the bank notifying members that to enhance services, they had extended their hours. The chairman of the Salt River- Pima Maricopa Tribe had been turned down for business and personal loans several times by the local bank prior to becoming chairman . When he became chairman and realized that he had a responsibility to negotiate with this bank, he tried to put his personal experiences behind him . Upon entering the bank on tribal business, he could not see the bank president, until it was determined that he had sufficient financial leverage. After several months of negotiations, and educating the bank about his tribe, the bank has now guaranteed several loans and negotiated bonds for infrastructure projects on the reservation , and the tribe is now a preferred customer . The Northern Cheyenne people have tackled a corporate Goliath . In efforts to prevent mining on the reservation , tribal treasuries were drained and the poverty level of the tribal memlis did not improve. In 1984 , Native Action was formed to study econo! ...e alternatives to mining. By surveying the community, Native Action found that there was a tremendous interest to develop small businesses on the reservation , however, no one could find a bank willing to provide financing. A focus group was attended by more than 50 people attending in weather of 40 degrees belowzero. When the First Interstate banking system of Montana announced plans to merge with a Wyoming bank system , Native Action challenged the mergerunder the CRA. Only one day after receiving notice of the protest in January 1990, the bank board reduced its primary lending area from 30 miles to just 10 miles, thus excluding the entire reservation . The bank stonewalled even more successful reservation businessmen from access to financing, Tribal members found the local bank reluctant to finance young ranchers. But this is common to reservations across the nation , many who are 30 to 50 miles away from the nearest financial institution , to begin with . Mr. Chairman , all too often banks soak up the savings from a reservation and pump it into the border town economies or out of the regional economy entirely . The effects on the reservation or regional 248 economy are devastating. Without adequate banking relationships in terms of loans, interest and investments, money coming onto the reservation quickly drains away without contributing tothe tribal economy. In exchange for tribal and individual Indian monies being deposited into their banks, tribes are only asking for competitive interest bearing accounts, and loans to tribes and tribal members at competitive interest rates. These practices are readily available to you or I, but not to the Indian people living on reservations. Without access to reliable, competent banking and financial services, Indians not only fall pray to con artists, loan sharks and hustlers, but get charged exorbitant interest rates in the process. Even the Bureau of Indian Affairs, the trustee of Indian lands and natural resources, has lost Indian Trust fund monies to bank hustlers and embezzlers. There is the argument that banking regulation has caused the banking crisis because of required burdensome paper work . But current CRA regulations do not require banks to file any lengthly reports. Currently , they are required to file a CRA statement, a CRA notice and the CRA public file. In the statement, the bank needs to simply describe its lending area and the credit it offers. The notice merely requires the bank to display how community members can obtain a copy of their CRA statement and how to comment on the bank's performance. The CRA public file contains all comments received and the bank's responses. In many instances these rural banks produce far more paper work than is required by the law and the regulators. Further, a recent study indicated that smaller " community " banks are the worse offenders of the CRA . Between 1990 and 1992, 71 percent of the banks that received the lowest CRA ratings were smaller banks with assets of less than $ 100 million . Mr. Chairman , economic development capital has always been derived on reservations by large infusions of federal money, small- scale financing is virtually non - existent. Reservations need the financial vehicles to form capital for the right purpose, at the right time and in the right amount. First Nations will be requesting that the Senate Select Committee on Indian Affairs hold a hearing on focusing on Banking Services in Indian Country in the 103rd Congress. In closing, while much of the banking concerns among Indian reservations are not being resolved , without the protections contained in the CRA, our communities will be left completely to the mercy of con artists , and fly -by -night financing operations, and without access to reliable financing services . Mr. Chairman , again thank you for this opportunity. 249 The Community Reinvestment Act in Rural Arizona: AT After Five Years, a Light at the End of the Tunnel Submitted by: Frank Ballesteros, Executive Director Prepared by: James Farias, Resource Development Planner III 250 The Community Reinvestment Act in Rural Arizona: In the spring of 1987, a Planner for Portable Practical Educational Preparation, Inc. ( PPEP ) , a non profit social service organization serving rural Arizona read an article about a somewhat obscure pleco of legislation, the Community Reinvestment Act ( CRA - Title VIII of the Housing and Community Development Act of 1977) * which had been passed with little fanfare ten years earlier but which had recently been used by community groups to encourage banks to make credit available to previously rcd - lined arcas . This intrigued us since it had been our experience that the major banks of Arizona with offices in rural areas had not been making credit equally available throughout their lending territory. Anexdotal infomation from clients in rural areas suggested that deposits were being funncled from rural areas to invest in large-scale speculative developments in the major metropolitan areas of Phoenix and Tucson . Farmers, homeowners and small businessmen were complaining that they were not able to obtain credit in rural arcas. With the national and state economic slump the rural arcas had all but been written off. PPEP contacted a non - profit advocacy organization in Chicago which was funded to provide technical assistance to community groups who wanted to find out more about how to use the Community Reinvestment Act ( CRA.) They worked with us and explained what we would have to do to mount a challenge. ( At the tinie we were unaware that no CRA challenge has thus far been effective against a CRA muajor hank under CRA.) We decided to target Valley National Bank ( VNB) because, at the time, it was the largest bank in Arizona with branches in most rural areas. On July 28, 1987, PPEP sent a later of comment to William N. Wiles, Secretary of the Board of Governors of the Federal Reserve System , regarding the proposed acquisition of Califomia Valley Bank by Valley National Bank Corporation . We challenged VNB's performance in its rural service areas and requested a public hearing to discuss the following issues and concerns : 1. VNB's emphasis on its metropolitan service areas at the expense of rural communities. 1 Public Law 95-128 ( 12 U.S.C. 290 ) 1 251 2. VNB's failure to ascertain the credit nocds of low- and moderate- Income residents of it rural service arcas. 3. VNB's efforts to discourage inquiries about its CRA performance. 4. VNB's attempt to misinform the public about their rights under CRA . 5. VNB's reluctance to engage in mcaningful dialogue regarding VNB's lending criteria, policies and procedures in its rural service areas. PPF: P asscried that, first of all, VNB's CRA policies dealt only in vague gcncralitics and with activities in the two metropolitan arcas. No CRA plan was in place which addressed the specific and differing needs of rural arcas. On more than one occasion VNB had tried to discourage our pursuit of information regarding its CRA performance. Bank representatives , when informed that we intended to pursue a formal challenge and protest, responded with veiled threats, such as: 'I really hope this docs not backfire on you ," and " I hope it doesn't hurt you in the long run.' Also, VNB had tried to mislead us about our rights. Although the official comment period was still open , VNB officials endeavored to convince us that the proposed acquisition was a falt accompli; wc were told that the acquisition had already been approved by the board . The " board " referred to , however, was the bank's Board of Directors, not the Federal Reserve Board! As we developed data for a formal challenge, we found ourselves at a great disadvantage. The Home Mortgage Disclosure Act ( HMDA) applied only to urban arcas and only two of Arizona's fifteen ( 15) countics served by VNB -- Maricopa and Pima Counties – were required to maintain HMDA data. There was no way for us to obtain loan data on the thirteen ( 13) rural counties and VNB steadfastly refused to provide us with such data for the rural areas. Thus handicapped, and without any cooperation from the bank, we had to make due with what data we could obtain . We wese able to usc data from the 1980 U.$. Census and VNB's 1981-1986 HMDA reports for Pima and Maricopa Countics . In Maricopa County we had to compare throe rural acts and three urban tracts around Phoenix; in Pima County we compared a census tract in the rural community of Ajo with an urban tract in Tucson that had a similar housing and economic profile. In all comparisons, we were scrupulous to describe what housing, demographic and economic differences existed between the tracts being compared . 2 59-308 - 92 - 9 252 A disturbing pattern emerged. The rural tracts had a higher poverty rate and a higher number of Hispanics than comparable urban tracts, but simllar median Incomes and housing. Also there was a much greater competition from other banks for loans in the urban arcas than in the rural arcas ( where VNB was often the only bank in town) . Yet, the number and dollar amount of home purchase loans and home Improvement loans given in urban tracts compared to those in rural tracts ranged from 2 to 1 to almost 100 to 11 The only major differences between the rural areas and urban areas were gengraphy, race and economic status. Along with the statistical data compiled from VNB's own HMDA reports, we collected a number of letters documenting VNB's redlining practices in rural areas. San Luis, Arizona, Mayor Tony Reyes and a number of members of the Comite de Bienestar, an organization of migrant farmworkers, were prepared to testify to their experiences with VNB, the town's only bank. In 1981, the Comite de Bienestar purchased 100 acres of land from the State of Arizona for $ 672,00 with $ 110,000 of their own money down and the balance carried by the State. The land was to be used to develop low -income housing for farmworkers. It was not until 1984, after extensive negotiations with Valley National Bank, that the Comite was able to obtain a commercial line of credit for $420,000 to finish developing lots on 52 acres as Phase 1 of their housing development. In ordres to oblain this commercial credit line at a variable inicest rate of 2 points over prime 114.75 % at the tinis:) , the Comite had to give the bank a First Deed of Trust for the entire 100 acres of lang [ valued by then at $850.000. In effect, the bank demanded collateral for twice the value of the loan . Individual lots were released one at a time when fully paid off ( $6,100 each .) In October, 1985, with a balance of only $ 187,000 on the first loan , the Comite renegotiated, under similar terms, with the bank for a loan of $ 1,080,000 to develop the remaining 48 acres. In June, 1987, with an outstanding balance of $ 548,947, the Comite rencgotiated with the bank to complete the project. At the time the loan was made, the prime rate was 8.25 % but Vallcy National Bank charged them an interest rate of 12.5 % ( 4.25 % ovar primc) for a three -year loan secured by the 216 lots of Phase II. The Comite was concerned because VNB had made no effort to provide special credit programs to mert the unique nads and circumstances of the migrant farmworkers and other low - income residents of their community , nor had it made any cffort to ascertain the true credit needs of the community. 3 253 Despite the Comltc's admirable and ambitious grassroots housing development activitics, for example, ÙNB, the only bank in town.did not even have a part-time mortgage offices at the branch and limits the branch manager's loan docisions to loans of less than $ 20,000. In order to obtain mortgage loans on the homes that they are building, resident of San Luis must travel to Yuma. Further, the credit needs of this farmworker community of 3,000 were hugely impacted by the large number of people who , due to the lack of affordable housing in San Luis, live across the border in the Mexican city of San Luis Rio Colorado, a fast growing city with a population of more than 200,000, but who -- because of Mexico's skyrockaing Inflation and usurlous Interest rates -- come across the border to deposit this money at the VNB in San I vis. Although we were not able to obtain deposit figures for the San Luis branch, we have reason to believe that they are in the millions of dollars, far exceeding the apparent economic resources of the town. These monies are then funndled out of the community and into VNB's Investments in other arcas, usually highly speculative developments around Phoenix and Tucson. Despite dozens of letters testifying to various horror stories of dealing with VNB In San Luls and other rural arcas and the loan data which we were able to compile, the Board of Governors of the Federal Reserve Bank refused our request public hearing. That's when PPFP began a media campaign to draw attention to this issuc. In Scplember, 1987, PPEP staged demonstrations at the Tucson downtown branch of Valley National Bank and VNB's headquarters in Phoenix to protest thels ' redlining rural areas. Demonstrators, many of them farmworkers and rural residents bussed in from areas as fas away as San Luis, carried placards and posters and handed out flyers describing their complaints with VNB's lending practices in rural areas and the bank's reluctance to comply with its mandate under the Community Reinvestment Act. They hold a huge red ribbon to symbolize the bank's redlining practices and a number of them , dressed as mourners and carrying a coffin, claimed that VNB was killing rural arcas . The local television stations and ncwspaper in Phoenix and Tucson picked up the story and carried it. The Arizona Republic ( Phocnix ) published a story of how the bank was accused of snubbing rural arcas and refused to meet with us. The Arizona Dally Star ( Tucson) and Tucson Citizen ( Tucson) also carried storics about our protest and challenge under the CRA, but in November, 1987, the Federal Reserve Board approved the bank's acquisition. 4 254 Through the media blitz we were able to obtain some concessions for the farmworkers in San Luis but little else was accomplished . For the next several years our efforts were mainly focussed at educating the banks through letters and at CRA conference sponsored by the Federal Reserve Bank of San Francisco and thc Federal Home loan Bank of San Francisco . We maintained communication with VNB and with the other major banks in Arizona and their CRA Officers. PPE: P was very active in testimony to the President's Council on Rural America and at the Bank of America /Security Pacific margar hearings. PPEP has also been negotiating with First Interstate Bank of Arizona. Recently we joined the National Community Reinvestment Council ( NCRC) and continurs to advocate for Innovative ways that non -profits can help build partnerships with banks to meet their CRA mandate At last our efforts have shown the first major progress. Toward the end of 1991, PPEP presented concept papers to the three largest banks in Arizona -- Bank of America /Arizona, First Interstate Bank of Arizona and Valley National Bank -- setting forth outlines for a model program through which each bank, in partnership with our Micro Industry Credit Rural Organization ( MICRO ) award -winning microcnlcrprise development program , could improve their performance under CRA and FIRREA? by operating a pilot program in a specified target arca . - Although we are still negotiating with Bank of America and First Interstate Bank, we are happy to announce that we have just signed an agreement with Valley National Bank of Arizona to initiate an exciting and innovative partnership pilot program in Yuma County. Under the agreement MICRO will deposit $ 100,000 with VNB to guarantee a revolving loan fund for microenterprises in Yuma County. The program will use the bank's application packet and MICRO's underwriting criteria to provide loans of from $500 to $ 10,000 to small, family-owned businesses in Yuma County. The bank will process the applications but MICRO , as guarantor, will have final approval of the loan. MICRO and Valley National Bank are joining hands in a program to provide credit to small, family owned businesses that, if successful, could be replicated statewide and provide a solid national mode. We hope that other banks will look at our pilot program , monitor its success and consider replicating similar bank /non -profit partnerships to provide economic devdlopment initiatives through assistance to microenterprises. For further information, contact: Frank Ballesteros, Exccutive Director /MICRO at ( 602) 622-3553, FAX : ( 602) 622-1480 or via HandsNc at HN1952, Financlal Institutions Reform , Recovery and Enforcement Actof 1989 ( FIRREA) 5 1 255 1 THE NAVAJO NATION P. O. DRAWER 308 WINDOW ROCK , ARIZONA 86515 PETERSON ZAH ( 602) 871-6605 MARSHALL PLUMMER October 5, 1992 Honorable Alan Cranston , Chairman SUBCOMMITTEE ON HOUSING AND URBAN AFFAIRS COMMITTEE ON BANKING , HOUSING AND URBAN AFFAIRS U.S. Senate Washington, D.C. 20510 Dear Senator Cranston, We are very honored to have the opportunity to comment on the proposed amendments to the Community Reinvestment Act of 1977 as outlined in Senate Bill 2967. In view of the fact that the Navajo Nation is actively utilizing the CRA as a tool to improve our banking relationships, we view the proposed changes to the CRA with a great deal of skepticism . The proposed amendments will serve only to compound the present problems of disinvestment, the lack of depository facilities and the absence of other banking services on the Navajo Nation . We respectfully request that you take into consideration our following comments and attachments. Sincerely, THE NAVAJO NATION Och zu Peterson Zak, President 256 GENERAL COMMENTS OF THE NAVAJO NATION TO THE SENATE 1 257 nearest bank . This hardship effects not only the individual but also the over six hundred businesses which exist on the reservation . Despite the absence of a banking presence on the Navajo Nation and despite the lengthy trip to the banks and back , our communities continue to be the growth area for banks . Savings and checking deposits are on the rise , yet credit opportunities for Navajo communities are decreasing . The FED noted that : Federal law prohibits a lender fron obtaining a mortgage on real property held in trust by the United States government for a Native American tribe . 25 U.S.C 464 . They also noted that : Real property held in trust by the United States government for individual tribal members may be mortgaged with the approval of the Secretary of the Interior . 25 0.s.c. 483a . According to the Bureau of Indian Affairs ( " BIA " ) , substantially all land on the Reservation is held in trust by the federal government 2 258 for either the tribe or individual tribal members . It was also pointed out by the FED that : The BIA has procedures for perfecting and recording liens , employs appraisers , and issues title reports indicating recorded security interests . The point is that banks have established loan policy based on erroneous information and or non-researched false assumptions which the FED was unwilling to accept. In fact , the whole Navajo Nation is quite flexible in its efforts to create an environment conducive to increasing banking activities to its people , short of relinquishing its sovereignty . 3 259 SPECIFIC COM ENTS ON SENATE BILL 2967 1 1. Small bank exemption The legislation calls for exempting banks with absets of le88 than $100 million , ratings of satisfactory or better , and for those located in areas with a population of less than 20,000 from a CRA regulatory exam . The amendment calls for using the regulatory ratings of satisfactory or better in providing an exemption from the CRA This action is unacceptable because of the difficulty in applying the CRA performance rating8 consistently examinations . and because there is no abburance that those who received satisfactory or better ratings have earned them , or more importantly , that they will do a good job for their respective communities if they are exempted . The benefit of the doubt should go to the community , not to the bank . 2. SAFE HARBOR This legislation proposes to eliminate the ability of a community group to challenge a bank's application for expansion if that bank receives a rating of outstanding . This provision also calls upon regulators to consider the investments made outside a bank's community for evaluating purposes . 4 260 3. Elimination Evaluations . of Supporting Data and Geo - coding from The elimination of supporting data and geo - coding regulations from the CRA process would be devastating for the Navajo Nation because it would be difficult to show when a bank is engaged in redlining activities or other discriminatory practices . Banks would have less of an incentive to service the Navajo Nation . Presently , examiners review the geographic distribution of an institutions credit extension , applications , and denials . It is this geo - coding requirement that tests whether a depository institution 18 actually meeting the credit needs of it's lower- incone communities . Supporting data and geo coding requirements should instead be strengthened to the extent that data results are analyzed to insure that a certain level of loan origination is made from depressed areas and that barriers to loan origination ( 8 ) be identified and addressed by bank officials . Elimination of supporting data from evaluations is opposed by the Navajo Nation . Such information provides a checks and balance system to the extent that through it , banks are encouraged to be honest in their revelations as to who they list as meaningful community contacts . Banks which document most conversations to their advantage , do so according to how they " think " a meeting took place , must be regulated . Support data is an ethical tool with which banks should have no problem with . Again , we fully appreciate the opportunity to comment on Senate Bill 2967 . 5 261 ncil City Cou the of City of Los Angeles Mark Ridley- komus godiz Honorable Alan Cranston , Chairman and Members of the Subcommittee on Housing , Sonate Committo . on Banking , Housing and Urban Affairs Room 535 , Dirkson Sonate Office Building Washington , D.C. 20510 Dear Senator Cranston and Members of the Subcommittee on Housing : I am writing to strongly urge you to not weaken the Community Reinvestment Act of 1977 . The mandates of this Act are crucial to urban areas such as the City of Los Angeles . Requirements ruch as the obligations placed on financial institutions to serve the credit noods of the entire community , including low and moderate income neighborhoode , have allowed tho city of Los Angeles to Over the last few years we have successfully worked with MOOM 200, CITY HALL , LOS ANGELE , CALIFORNIA 30012 262 2 Evidence of the nood for the existing and even stronger Federal reinvestment policies are the local policies which the City of Los Angeles had to adopt to further encourage fair lending . The city Council and Mayor approved a Linked Deposit Banking Policy which I proposed that will place City banking business with financial institutions that have the best lending performance. The city's considerable amount of banking business will be used as leverage to foster stronger bank consumer services and lending in low and moderate income communities , I do have two suggestions on how Federal community reinvestment policy should be improved . First , a new system of publicly disclosing the number , type , and location of business loans should be implemonted similar to the Home Mortgage Disclosure Act system . It 18 vary difficult to accurately assess business loan needs and lending performance without such data . The lack of such information creates a vacuum of knowledge and makes it difficult to engage in serious work on financing economic development . Second , the publicly disclosed ratings of banks and thrifts should be made more readily available. Financial institutions should perhaps be required to post : notice of their community reinvestment rating in their lobbios for customers to view similar to the current requiremont on posting fair lending requirements and the availability of community roinvestment statements . These improvements would be valuable but the most important matter 18 to not retreat on the initial spirit and intent of the Community Reinvestmont Act . The City of Los Angeles 18 now engaged in a broad effort to recover from the civil disturbances of this past April . Resources are being drawn from many sectors of the local community towards efforts of rebuilding neighborhoods , and bringing Weakening back desperately needed businesses , services and jobs . the Community Reinvestment Act would only stifle these efforts since financing is ono essential ingredient that cannot be missing . The Act as 18 today and with the improvemonts I suggest will help ug succeed . sincerely , hand sidleing-theme Mark Ridley - Thomas Chairman , Community and Economic Development Committee Chairman , Ad Hoc Committee on Recovery and Rovitalization 263 NTIC National Training and Information Center 810 N.Milwaukee Avo . O Chicago, Illinois 60622-4103 ( 312) 243-3035 264 Thank you, Mr. Chairman, for the opportunity to testify before the Senate Housing Subcommittee. My name is Gale Cincotta and I am Executive Director of the National Training and Information Center . National Training and Information Center ( NTIC) was formed in 1972 to address the redlining that plagued minority and low income, inner city neighborhoods . The orientation was strictly grassroots, the role and purpose to assist grassroots organizations across the country in developing the necessary skills to fight redlining . Since its inception, NTIC has worked actively to develop and strengthen the capacity of grassroots organizations by directly providing training and technical assistance . NTIC was instrumental in the writing and passage of the Home Mortgage Disclosure Act ( HMDA) and the Community Reinvestment Act ( CRA) in the 1970s . These two pieces of legislation became important tools to ensure reinvestment in our nation's low income communities . The Community Reinvestment Act When traditional means of credit were cut off, HMDA and CRA became the vital tools for rebuilding our nation's inner city neighborhoods and rural communities . The Community Reinvestment Act has provided over 10 billion dollars in reinvestment agreements for communities across the country . NTIC, alone , has helped community groups across the nation to negotiate over $ 5 billion in reinvestment agreements . In addition , lending institutions have created special lending programs which have resulted in an additional $ 25 billion in lending agreements for our neighborhoods . The Community Reinvestment Act is a necessary incentive for lending institutions . With the advent of the Community Reinvestment Act, we have witnessed lending institutions forge new partnerships and create unique lending programs in neighborhoods that they had previously ignored . The Community Reinvestment Act has forced lenders to learn that community banking is good , profitable business . In the city of Chicago, the Community Reinvestment Act is responsible for bringing three of Chicago's largest lending institutions to the table to create a special program where over $ 353 million in lending agreements were made . In June of 1984, after a year of intense negotiation , the Chicago Reinvestment Alliance ( made up of grassroots neighborhood organizations and community development corporations) and First National Bank of Chicago, Harris Trust and Savings Bank, and the Northern Trust Company announced a $ 153 million reinvestment agreement. In 1988 and 1989 , all three banks announced that they would extend the agreements for even larger goals of $ 125 million , $ 50 million, and $ 25 million respectively , for an additional five-year commitment of $ 200 million . Along with this testimony, I have submitted a copy of the five year report of the Neighborhood Lending Program . 265 The Community Reinvestment Act has been the catalyst for lending institutions to become active players in low and moderate income, minority neighborhoods. Without CRA, many special programs would not occur . If the Community Reinvestment Act is taken away, many banks would withdraw from community lending programs, and our neighborhoods would be back to square one . We cannot afford to stop the revitalization process that has turned devastated neighborhoods into successful, thriving communities . If we are serious about saving our neighborhoods , then we must be serious about our commitment to community revitalization . This is no time to turn our backs on the progress made through community reinvestment. CRA and Small, Rural Lending Institutions The banking industry has been complaining that the Community Reinvestment Act is not necessary for small lending institutions. They believe that it is a waste of time and money because in order to survive, small institutions must meet the credit needs of its community. The Congressional response has been to attempt to institute a small bank exemption that would exempt institutions with assets under $ 100 million ( or in rural areas under $ 250 million ) from the anti-redlining CRA and HMDA laws . Each of these attempts would have excluded 90% of all banks and S & L's nationwide from their CRA obligations . Lending institutions discriminate and redline neighborhoods based on race , income and age of neighborhoods . The size of an institution is absolutely unrelated to whether an institution practices redlining or not. It is the location of institutions that matters, not their asset size . Many bankers claim that small banks should be exempt from the Community Reinvestment Act because small institutions serve their community anyway. They argue that cɔmmunity banks have no choice but to serve their communities fairly, as this is their only market. In fact, small lending institutions are some of the worst offenders of the Community Reinvestment Act as an analysis of loan deposit ratios show. Institutions with assets under $ 100 million have loan-to-deposit ratios that fall far below the average state loan to deposit ratio of 55-60% . Small lending institutions located in small cities and rural communities invest very little of their deposits back into the communities they serve . There are hundreds of small institutions with poor CRA ratings who fail to meet the credit needs of their community . Small bankers in lowa also maintain that CRA places an undue financial burden on them . And yet, small, rural banks in lowa made a record profit of $ 1.6 billion in 1991. In an article that appeared in the Des Moines Register, February 2, 1992, Alan Tubbs, President of The American Bankers Association, stated, " The country banks right now are as strong as they've ever been . " We fail to see how the cost of producing a 1-3 page CRA statement could cause an undue financial burden on small, rural banks with record profits . 266 Excluding any particular set of institutions from the Community Reinvestment Act is unfair and misguided . Excluding smaller lending institutions provides a privileged status to a particular group of lenders. Effects of a Small Bank Exemption Chicago, Illinois--Out of the 174 lending institutions in Chicago, 54 institutions have assets under $ 100 million , with their total assets equalling close to $ 5 billion . These institutions are located throughout Chicago's communities and they should no be exempt from CRA, when it is a known fact that they continue to redline low and moderate income , minority communities . lowa--Of 610 lending institutions in lowa , this amendment would leave only a handful of institutions covered by CRA. This would be disastrous . Community groups in lowa have negotiated with 19 financial institutions and have won over $ 60 million in CRA agreements . West Virginia--In many states, like West Virginia, a majority of the state's banks assets are held in small institutions . Nationally, while almost 18 % of bank assets are held in banks with less than $ 100 million, just over 50% of banks assets in West Virginia are held in small banks under $ 100 million . This means that one-half of the total banks assets in West Virginia would be exempt from CRA . These institutions have an obligation to return some of these assets to the communities . In some states , small banks represent the majority of bank assets . Small banks are sound and profitable, and some of the wealthiest in the country . Again , why should these small institutions be exempt from their CRA obligations ? CRA and Safe Harbor Enacting a safe harbor amendment would exempt banks that have outstanding or satisfactory CRA ratings from the Community Reinvestment Act . Currently , over 95 % of the lending institutions receive outstanding or satisfactory CRA ratings from the regulators. Banks that fall under a Safe Harbor rule would be exempt from any community challenges for two years after the rating was issued . Community challenges are the teeth behind CRA and to exempt banks from this process is to deny communities the opportunity to challenge a lending institution's actions. A Safe Harbor rule asks concerned community citizens to surrender their judgement and decision-making ability to the federal regulators who are responsible for evaluating all institutions across the country , large and small, for their responsiveness to community needs . It is not practical to imagine that they can perform this task thoroughly in every community. 267 We have witnessed many cases of CRA oversight from around the country. Regulators have given passing CRA ratings to lenders with serious problems in basic compliance and fair lending . Many of these institutions would be exempt from CRA challenges for two years. For example, Columbia National Bank of Chicago, is one of largest banks in the country, received a rating of " Outstanding " from the OCC in July of 1990, after a one day examination . The Outstanding rating was based largely on receiving excellent scores on extra efforts to meet minority and low-and moderate-income credit needs, on participation in government programs, and on special lending efforts. Finally, the bank got an excellent rating for non-discrimination . In fact, the bank was, at the time of evaluation, in substantial non-compliance with some of the basic provisions of the CRA. Dr. Calvin Bradford, of Community Reinvestment Associates, reviewed Columbia's CRA files. When he went to the bank to review its public CRA file, he was not able to find a single person who even knew what this, or the HMDA statement, were . He was denied access for over two days . The programs for which the Comptroller gave the bank credit for are phantom programs. The one small business lending program from the City of Chicago for which the bank got the most credit is a program which the bank isn't even eligible to participate in . A simple call to the City Treasurer's Office would have provided the Comptroller with this information . The banks delineated community covers a white area of Chicago and parts of several white suburbs , but draws its boundaries on the south and east along the racial boundaries of black and hispanic communities. In 1988, only 13 of its 118 mortgage loans and 7 of its 129 home improvement loans were in communities with as much as 20% minority concentrations. Only six loans were made in lower income black neighborhoods in 1988 and the average loan amount for those loans was over $ 200,000 and as high as $ 400,000 . This strongly indicates gentrification . Columbia's 1990 HMDA data shows that of the 5 loans made in minority areas , 4 of them were to whites, including one loan to a white in a community that is over 98 % black . Clearly, Columbia National Bank was in direct violation of the Community Reinvestment Act yet received an Outstanding CRA rating. We have many more examples of poor CRA oversight from around the country . In contrast, Harris Bank and Trust of Chicago, a member of the Chicago Neighborhood Lending Programs since 1984, has made tremendous contributions to Chicago revitalization through its extensive lending activity and leadership on the Board of Chicago's Neighborhood Services. ( The bank's Senior Vice President for Neighborhood Lending also serves as the President of the Chicago NHS) . From 1984 to 1989 Harris made $32.8 million in loans to produce 1,527 new units of housing. Both the pace of development and Harris's commitments are increasing; in the period 268 since 1989 , 618 more units of housing and 11 small businesses have been financed , and the bank has committed $ 85 million more in financing . Harris has made loans of every type for single-family and multi-family housing , as well as for mixed- use and commercial/industrial developments in the inner city . Harris received a CRA rating of " Needs to Improve" from the Federal Reserve . This damages the bank's good name, blocks their ability to so much as open a new ATM machine , and renders their model efforts in the area of CRA meaningless from a regulatory point of view. Regulators still have not learned how to review the records of lending institutions Clearly then , CRA ratings should not be used as the basis for exemptions from the Act . CRA and the Paperwork Burden The Community Reinvestment Act and Home Mortgage Disclosure Act have been under constant fire over the past year from Congress and the banking industry, due to complaints by lenders that they are overburdened with excessive amounts of paperwork . The paperwork burden and the uncertainty associated with CRA exams are both symptoms of an irrational and inconsistent enforcement policy . The regulators are creating an unnecessary burden for lending institutions by focusing on the institution's " plan" to meet CRA obligations rather than the results of CRA compliance ; that is, did any loans go out? By concentrating on a lending institution's plan , bankers busy themselves with phone logs, memos of meetings, and numerous files in an attempt to satisfy regulators in their quest for CRA plans . Creating this unnecessary burden for lending institutions has created a backlash against CRA and HMDA. If we are serious about CRA compliance then we must return to the original intent of the Community Reinvestment Act which is output not process . During the past year, CRA and HMDA have been attacked by the banking industry for the time spent on compliance with these two laws . However , in an article that appeared in the American Banker in June 1991 , CRA and HMDA were ranked at the bottom of time spent in compliance with Consumer Regulations . In an OMB review of 1,014 state banks regulated by The Federal Reserve Board , the Home Mortgage Disclosure Act " brought up the rear" in total number of hours spent on compliance . 1,014 Banks spent a total of only 130,020 hours at a cost of $ 2.6 million a year. the Community Reinvestment Act was " at the bottom " , with a mere 6,137 hours at a cost of $ 306,850 . Yet it is HMDA and CRA that the banking industry has attacked for being too burdensome and yet a substantial portion of the industry fails to meet CRA obligations . After this article appeared, The Federal Reserve Board was quick to point out that the 269 numbers for compliance with CRA were too low. According to The Federal Reserve Board , hours spent on compliance with CRA have gone from 6,137 hours to 68,952 hours annually, based on 1,000 institutions . Yet even when aggregate numbers for hours spent on compliance with CRA are given, the Community Reinvestment Act is not a significant burden to banks in comparison with other consumer regulations . And when broken down by individual institution , the amount of time spent on compliance with the Community Reinvestment Act fails to show that a significant burden is placed on lending institutions . Based on the Federal Reserve's estimate of work hours spent in compliance with the Community Reinvestment Act, a total of 68,952 hours per 1,000 institutions is spent annually . Based on a 2,000 hour work year per individual worker, according to these numbers, the average lending institution spends only 1.4 hours per week on CRA compliance . Clearly , the burden of compliance is not overwhelming for individual lending institutions . Evidently, there is a huge misconception of CRA Recordkeeping Requirements necessary to fulfill CRA obligations . What are the CRA recordkeeping requirements ? A CRA Statement defining a local community, providing a map of the community service area , reproducing the words of the public CRA notice as defined in the regulations, and listing the categories of loan products the lender is willing to make in its community . This is usually a statement that is no longer than 3 pages. Keeping a CRA Public File that has the CRA statements for the past two years, a copy of the Public Notice and any CRA related letters of comments sent to the lender . Posting a notice in the lobby informing the public of the CRA . This is a notice , ( usually less than a single sheet of paper in length ) whose words are precisely defined by the regulations for the Act . Once developed it is unlikely that any more then a few words would ever be changed . Neither by law, nor even by regulation, do CRA recordkeeping requirements include documents beyond those I just described . Lenders complain of an excessive paperwork burden and of their uncertainty about how to receive good CRA ratings . Regulators must abandon their requests for irrelevant documentation such as phone logs, lists of community meetings attended by bank staff, and analyses of marketing efforts. They must set clear, consistent, common-sense requirements for compliance so that lenders do not feel they have to produce file cabinets full of paper just to cover themselves . What the grassroots 270 community is interested in is fair access to credit. It is the regulators' job to examine HMDA data, and thereby to evaluate whether loans are being made in a fair and impartial manner , without bias due to race, gender, or income. Community groups have never been interested in the size of a lender's CRA cabinet or the weight of its reports, and we continue to be interested only in the bottom line: Are lenders making all the loans they should be making ? What does all this mean for a lending institution? It means that this burden of paperwork is an invention of the regulators who are more concerned with a lending institution's CRA process than with its CRA performance . It means that the real enemy of the lenders is not the CRA or HMDA law; we still need laws that protect us against redlining. The real enemy is the bureaucratic burden . CRA compliance must return to the simple, bottomline approach we began with . The Community Reinvestment Act and the Home Mortgage Disclosure Act are simple laws that work to insure that communities have access to the credit for which they are entitled . It seems that the financial institutions and the regulators have forgotten what the intent of these laws is. Instead of concentrating on the intent and the effects of the law, lenders and regulators are more concerned with the lenders' process for meeting CRA obligations . The purpose of CRA and HMDA is to insure that loans and banking services are available for the community in which a lending institution is located and which it serves. This is what the banking industry must focus on . If lending institutions are operating in a safe and sound manner, providing services, and making loans to all qualified persons in their communities, then they are meeting their CRA obligations . When assessing a lending institution's CRA performance we must return to the Bottom Line : Are loans being made in a fair manner ? Commercial Loan Disclosure In the same way in which HMDA and CRA have dramatically increased the availability of residential credit for inner-city and minority residents, disclosure of commercial lending in the inner city would increase access to business loans for neighborhood entrepreneurs and catalyze a much broader process of residential and commercial neighborhood reinvestment. Commercial Loan Disclosure is yet another tool communities could use to rebuild low and moderate income neighborhoods across the country . In 1975 when the Home Mortgage Disclosure Act was being considered, it was called the Financial Institutions Reporting Act. It included not only public disclosure of residential mortgage loans by census tract, but disclosure of commercial loans as well. Included with this testimony, you will find a suggested format for the geographic 271 analysis of commercial loans made by each lending institution by census tract . In order for this collection of data to be most effective, it should also include Small Business Administration loans and Sole Proprietorship Non-Real Estate Loans . These categories get to the heart of the kinds of credit needed to encourage inner-city entrepreneurship and create new jobs . In addition, in all categories , real estate and non - real estate loans are reported separately . In Chicago, we have had commercial and residential loan disclosure for institutions holding City deposits since 1974. Chicago bankers can attest to the feasibility and usefulness of commercial loan disclosure . Chicago is a perfect example of how this data was used to negotiate business loan agreements to revitalize inner- city neighborhoods . In the Partnerships For Reinvestment: An Evaluation of the Chicago Neighborhood Lending Programs, pages 15 , 18 and 20 show how this data was used to build a case for our negotiation with three major Chicago banks : First National Bank of Chicago , Harris Bank , and the Northern Trust Company . Chicago's commercial lending data showed that commercial loans were , without a doubt, being made only in the downtown area and not to low and moderate income neighborhoods . This data helped communities build a strong case for the initial reinvestment commitment of $ 153 million in 1984 from these three banks . Public disclosure of commercial lending should no longer be ignored . If we are serious about rebuilding our communities , then we must have public access to commercial lending data . Commercial loan disclosure will have the same effect as the Home Mortgage Disclosure Act. To date, over $ 10 billion in reinvestment agreements have been secured for our nation's low and moderate income neighborhoods . HMDA has been an effective tool for housing revitalization . True revitalization requires more than housing , it requires economic growth and stimulus provided by access to credit . We must make commercial loan disclosure our next tool for rebuilding our nation's cities and rural communities . HMDA Data Released By March 31st The Home Mortgage Disclosure Act was passed in 1975 and made permanent in 1987. Community groups all over the country fought hard for this law. The federal HMDA legislation was amended and strengthened as part of the Savings and Loan Bailout in 1989. Congress intended to strengthen HMDA and community reinvestment by requiring lenders to report race, income and gender of borrowers . In January 1990, the Federal Reserve Board issued regulations that violate the intent of the law by denying immediate public access to HMDA data . For the past 15 years the public could get HMDA data on March 31 , now the public must wait a year longer . Lending institutions no longer must make their HMDA data available to the public on March 31. Now, lending institutions have to submit their loan data to their federal regulators by March 1st of each year. The Federal Reserve Board now compiles HMDA statements for all lending institutions. 272 Iowa CCI 1607 East Grand Avenue Des Moines, Iowa 50316 IOWA CITIZENS FOR COMMUNITY IMPROVEMENT September 14, 1992 Ryan Conroy Dear Ryan : Enclosed you will find the testimony that lowa CCI is submitting to the Senate Banking Committee's Subcommittee on Housing. We have had a great deal of practical experience with the Community Reinvestment Act, especially in relation to farmers and the credit issues they struggle with on a day -to - day basis, and we are pleased to offer our thoughts and ideas on this topic as part of the Subcommittee's September 15 oversight hearing. We are interested in learning about the outcome of the hearing. Please keep us posted on any developments related to CRA. Sincerely , lagi topi Hugh Espey 273 Iowa CCI 1607 East Grand Avenue Des Moines, Iowa 50316 IOWA CITIZENS FOR COMMUNITY IMPROVEMENT TESTIMONY SUBMITTED BY IOWA CCI TO THE SENATE BANKING COMMITTEE'S We want to thank Senator Cranston for inviting lowa Citizens for Community Improvement ( Iowa CCI) to submit testimony to the Senate Banking Committee's Subcommittee on Housing. We have had a great deal of practical experience with the Community ReinvestmentAct in recent years, especially in relation tofarmers and the credit issues they struggle with on a day - to -day basis, and we are pleased to offer our thoughts and ideas on this topic as part of the Subcommittee's September 15 oversight hearing. In our testimony we will explain the nature and purpose of lowa CCI . We also will talk about the work we do in urban and rural areas, and then focus on how we have used CRA over the past 4 years to help family farmers. Finally, we will address three of the main arguments put forth by the banking lobby in its attack on CRA. These arguments are cast in a variety of forms, but the essential complaints are: CRA imposes a financial burden on banks; CRA imposes an onerous paperwork burden on banks; and CRA is unnecessary for small banks because they already serve their communities. Our testimony will refute these arguments. lowa CCI is a multi-issue, non - profit community organization that works in both urban and rural areas of lowa. We organize and empower low and moderate income people so that they have a strong voice in the decision -making processes which affect the quality of life in their neighborhoods, communities and on their farms. lowa CCI was founded in Waterloo , lowa in 1976. Since that time we have established a network of three urban chapters ( Waterloo, Des Moines and Council Blutts ) and a farm organizing project that operates in all parts of the state . Our urban chapters address issues related to housing, crime and drugs, and other neighborhood-based concerns. We started working with family farmers in 1981 on rural credit and reinvestment issues. These efforts, for the most part, have focused on the policies and practices of the Farmers Home Administration, Farm Credit Services, commercial banks and bank regulatory agencies. In 1986 lowa CCI ai: 0 n working to promote 8''s :ainable tarming practices ( i.e. farming with tenor d'itmicea) úmong gassroots farmers. During the past 11 years over 10,000 farnar a d other rural residents have participated in our activities and meetings related to credit reinvestment issues and sustainable agriculture. We started using CRA in our farm credit work in 1987. We held informational meetings in rural areas toexplain the law and answer questions, and to begin developing a list of credit needs that were applicable and relevant to family farmers. Our particular focus was on the needs of smaller farmers, young/beginning farmers and farmers who were rebuilding their operations as a result of the Farm Crisis. 274 page 2 As a result of these meetings, as well as others that we had held since 1984, we developed a list of farm credit needs that included the following: 1.) the need for affordable interest - this relates to a variety of situations, including the need for banks to participate more actively in various government-sponsored interest reduction programs such as the Farmers Home Administration's interest assistance program and the state of lowa's Beginning Farmer Loan Program ; 2.) the need for reasonable collateral terms – many banks will require a lien on all unincumbered property even if the loan is already fully secured or over-collateralized; 3.) the need for reasonable downpayment terms – it is not unusual for banks to require downpayments of 40 % to 50 % on farm real estate loans; 4.) the need for loan servicing and debt restructuring – banks are quick to encourage the liquidation of immediate assets, breeding livestock and machinery in cases involving overdue loan payments, rather than working with the borrower to develop revised cash flows and consider deferrals, reamoritzation , rescheduling, reduced interest and other servicing options; 5.) the need for banks to do more than just say " no " on loan requests -- it is not uncommon for banks to review and deny a loan request from a potential farm borrower very quickly, rather than working with the borrower to reach a feasible " middle ground “ ; 6.) the need for banks to make a special effort to serve the needs of smaller farmers. young beginning farmers and rebuilding farmers – these farmers are the ones that are most likely to be overlooked by banks on financing requests. In 1988 we used the Community Reinvestment Act and this list of credit needs to set up a series of negotiation meetings with Norwest Bank, lowa's largest banking company. The negotiations led to the establishment of our first family farm lending program in January 1989. Between the fall of 1989 and the spring of 1991 we used the CRA to hold negotiations with two other bank holding companies ( Firstar Corporation and Brenton Banks, Inc.) that resulted in two more farm lending programs. At the present time, our three farm loan programs cover 27 banks in 26 communities across lowe. Based on lending data that we review and discuss with Norwest, Firstar and Erenton officials every six months, we estimate that our three programs have neiped over 450 small and mid - sized family farmers obtain nearly $13.5 million in aroak for annual operating and crop input expenses, machinery and real estate Theses, and other agricultural needs. Beginning farmer and interest assistance loans are included in these totals. None of this would have been possible without CRA and the accountability that it provides. 275 page 3 Since CRA means so much to us in terms of our work with family farmers, we were very active with other community groups last year and this year in efforts to save the law . We fought against the Kanjorski amendments in the summer of 1991 and the Shelby Mack amendments in the fall of 1991. Earlier this year we sent a strong message to the American Bankers Association and ABA president Alan Tubbs, telling them to keep their hands off CRA . We will not let the banks take this law away from us! The remainder of our testimony will explore three of the main arguments put forth by the American Bankers Association in its attack on CRA. These arguments are: CRA imposes a financial burden on banks; CRA imposes an onerous paperwork burden on banks; CRA is unnecessary for small banks because they already serve their communities Does the CRA impose a financial burden on banks ? There are two major problems with the " financial burden " claims being made by the ABA and its lobbyists. The first relates to cost of compliance. In recent conversations that we have had with regulators, a point that is continually stressed is that some banks spend money unnecessarily on CRA consultants who promise to help the bank receive a satisfactory or outstanding rating. The regulators state that banks produce a great deal of extraneous material that serves no real purpose. Ironically, the regulators provide information and technical assistance to banks at no cost on matters related to CRA compliance. For example, the Federal Reserve Bank of Chicago includes a sheet in its CRA packet stating that its Community Affairs program " ...is dedicated to meeting the CRA information needs of the members banks... In its role as an educator, the Community Affairs staff provides, upon request, technical assistance to state member banks and bank holding companies...The Federal Reserve Bank of Chicago encourages inquiries from banks... regarding community reinvestment issues ." The second problem with the ABA's financial burden complaint is the fact that banks throughout the U.S. are making record profits. The picture that ABA officials paint of the financial health of its member banks changes dramatically when they are not attempting to gut the CRA. ABA president Alan Tubbs of Maquoketa, lowa said in a Des Moines Register article on February 2, 1992 that " the country banks right now , I would say, are as strong as they've ever been." The article goes on to mention that the nation's farm banks in 1991 earned a record $ 1.6 billion in profits. The sameis true of the banking community in general. It was recently reported that the nation's banks mado record profits during the first two quarters of 1992. If CRA is imposing such a financial burden on banks, why are banks ( and farm banks in particular) posting record profits ? 276 page 4 Does the CRA impose e paperwork burden on banks ? In a related argument, the ABA and its lobbyists have attacked CRA by claiming that it causes " onerous paperwork ." They say that CRA forces them to create an extensive paper trail for regulators, and that while they believe in the " idea “ of CRA, it is simply too difficult and time-consuming to produce the documents that the regulators require. This claim does not stand up to close examination, particularly in the case of small banks. Iowa CCI contacted officials at the Federal Reserve Bank, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to find out exactly what paperwork is required during a CRA examination . The answers were illuminating. In the first place, there are only three paperwork requirements. These are : 1. ) A CRA statement, which typically runs no more than 3 pages. 2.) Maintenance of a CRA public file , which contains CRA statements for the past two years, a copy of the CRA Public Notice and any CRA related comments sent to the lender 3. ) A CRA Public Notice, which is typically less than a single sheet of paper in length . Altogether the paperwork requirement is less than 10 pages, most of which is similar from year to year. The other paperwork is merely whatever documentation that the banks have to give regulators in support of their activities related to the five CRA performance categories. These five categories are: 277 page 5 Is the CRA unnecessary for small banks ? By far the most commonly voiced complaint from banks, however, is that the CRA is a waste of time and money for small banks, because these institutions must serve community credit needs or go out of business. The idea that all small banks automatically serve their community's credit needs is ridiculous. In lowa alone, 53 banks ( there are 562 banks in lowa) with assets under $ 100 million also have loan -to -deposit ratios ranging from nearly 0 % to 35% , well under the state average of 57 % . In other words, they loan no more than 35 cents of every dollar that is deposited. Moreover, these banks have made a total of only 14 Beginning Farmer Loans throughout the nine year life of the state loan program . The Des Moines Register also has written stories in recent months about 3 other small lowa banks that were cited by regulators for major violations, including inside trading, improper loan practices and other problems. Finally, the CRA process has itself identified other small banks that did not serve the needs of their communities. These banks were cited for items such as a 10 % loan - to deposit ratio , uncompetitive loan terms and down payments, non -participation in relevant governmental programs and apparent violations in the Equal Credit Opportunity Act and Fair Housing Act. Even a number of banks that received " Satisfactory" ratings were clearly not serving their community's credit needs. These banks were cited for low loan -to-deposit ratios, violations of the Equal Credit Opportunity Act and the Fair Housing Act, and lack of participation in Student Loan programs. Clearly, there is a need to regulate small rural banks as well as other banks. The CRA is particularly valuable in these towns, because there are few external standards to hold the banks accountable otherwise. Concluding Remarks We are opposed to any changes in CRA that would allow banks to side- step their responsibility to serve the public and help meet community credit needs. In particular, we oppose small bank exemptions, safe harbor provisions and self -certification. All of these ideas are smoke screens. The ABA and its lobbyists don't like CRA because it give grassroots people power. It enables groups like lowa CCI to hold banks accountable for their lending policies and practices, and it gives us a voice in decisions that affect the future of our communities . Every time since the summer of 1991 that we have asked the ABA or its member banks to provide tangible proof that CRA causes burdensome paperwork and unnecessary costs, we've received nothing. All we hear is unsubstantiated stories with no hard evidence. It's time that the ABA and its lobbyists stop complaining about CRA and start recognizing it for the contributions it has made to our rural and urban communities. 278 NCRC Testimony of John Taylor Executive Director National Community Reinvestment Coalition Washington, DC The Subcommittee on Housing of the Senate Committee on Banking, Housing and Urban Affairs September 15 , 1992 1 279 Thank you for the invitation to comment on the performance of financial institutions in fulfilling their obligation to help meet the credit needs of their local communities. NCRC The National Community Reinvestment Coalition ( NCRC) is well positioned to provide input on this subject, as the Coalition represents the largest and most comprehensive gathering of organizations involved in community reinvestment issues. To date , some 137 organizations comprise the membership of NCRC. These organizations collectively cover every state in the country and represent the single largest community voice on the subject of community reinvestment. A complete list of the NCRC membership is attached to this document. From this broad wealth of experience and knowledge, NCRC is able to provide empirical and irrefutable comment on low-income and minority people's experience with bank lending. 2 280 CRA WORKS The commendable work of Congress which resulted in the Home Mortgage Disclosure Act ( HMDA ) and the Community Reinvestment Act ( CRA ) and their subsequent achievement in passing the Financial Institutions Reform , Recovery and Enforcement Act of 1989 ( FIRREA) have produced positive and measurable results. Current estimates for bank commitments to low-income and minority communities and people total $ 30 billion . This figure represents an amount resulting from CRA challenges, where a local financial institution responds to community protests with 3 281 relied upon CRA as the leverage to have financial institutions finance their efforts to address homelessness and the lack of decent affordable housing for some 15 years. Since passage of CRA, community developers have produced over 300,000 units of affordable housing. In addition some 90,000 new jobs have also resulted from community based initiatives financed by CRA -driven bank investments. Financial institutions must provide the capital to address credit needs of the poor The production of decent affordable housing and quality employment opportunities requires an initial investment on someone's part. It is clear from any accurate historical analysis of the federal government's recent investment in affordable housing, one obvious conclusion can be made. During the past 12 years there has been a radical shift in the directing of federal support for housing to other areas of the federal budget. Let us 4 ) 282 result is the shifting of a significant portion of the burden and responsibility for the provision of affordable housing from the federal government to the private sector. It is this point that is of obvious importance to these hearings. The federal government has decided to not follow the example of many European countries, which have increasingly 'grant driven ' economies, where housing, job development, training and other social needs are increasingly financed by the public sector. Very few private initiatives, to address social and economic ills, are present in these countries. It is expected that the central ( federal) government is primarily responsible for providing solutions to such problems. The result of this policy is significantly higher taxes, and in certain European 5 283 increases and in the case of certain higher incomes and corporate incomes, decreases. It is within this framework and political structure that we hope to address our social and economic needs. Clearly CRA is not a substitute for government investments in affordable housing and other initiatives to help low-income and minority people. However it is equally clear that most low-income and minority people will not participate in the mainstream of the American economy without access to capital. Capital is in the hands of America's roughly 12,500 financial institutions. Absent their interest in a community's economic revitalization or the production of decent and affordable housing, only limited success will be witnessed. It is the Community Reinvestment Act which mandates the interest of these institutions in addressing these community needs. Without a strong CRA there would be few examples of financial institutions addressing the needs of America's distressed urban , suburban and rural communities. Indeed it was because of the lack of such attention to certain neighborhoods' credit needs that CRA became law in 1977. 6 59-308 - 92 - 10 O 284 Unless Congress is willing to reverse the notion of being a more and more 'capital driven' economy in favor of a 'grant driven ' economy then we will increasingly rely upon financial institutions to play a major role in financing initiatives and efforts to address this nation's shame of homelessness and our growing unemployment crisis. Is it fair to regulate the financial institutions and to require them to meet the convenience and needs of the communities they serve ? Indeed, it is not only fair, but just and sound policy as well. One argument of the government's right to regulate is that it charters these institutions 7 285 Consider the corporate advantage of financial institutions, how well would any private corporation do if investors were told that their stock purchases were insured by the federal government ? It is this now costly government guarantee of depositors' funds that requires the federal government to regulate the safety and soundness of these institutions and which also allows us to require these financial institutions to meet the credit needs of the communities they serve . It does not call for making poor or risky loans, but the law does require that 8 286 No single piece of federal legislation is as important in promoting the commitment of financial institutional involvement in addressing economic needs as is the Community Reinvestment Act of 1977. ARE THE BANKS COMMITTED TO CRA ? | purposely began this testimony with a discussion of the positive aspects of CRA, what has resulted from this legislation and why it remains a necessary and vital part of our economic well being. Unfortunately, the current experience of NCRC and its members is that low-income and minority people's access to credit continues to be a 9 287 In fact many lenders have long been under the mistaken impression that merely having a CRA plan and making an effort to fill their CRA file with outreach and marketing information was sufficient to merit a ' satisfactory' rating from a bank regulatory agency. At our own NCRC annual meeting in February, 1992 , a ranking officer of the Office of the Comptroller of the Currency confirmed what many of us feared when he noted that a financial institution could receive a 'satisfactory' rating with 10 288 attends a community meeting, politely introduces himself/herself to meeting participants, expresses interest in meeting community credit needs, but makes clear his/ her inability to make loans, since he/she is a CRA officer and not a lending officer. Financial institutions fail to recognize the need for all lenders, management staff and board members to become knowledgeable of the requirements and objectives of CRA. Our members continue to inform us that for most lenders CRA continues to be operated through their public relations department rather than their lending department. The recent record of ratings issued by the four bank regulatory agencies gives evidence to a reduced adherence to CRA by lenders. During the 1980's on the average between 1 % to 2 % of financial institutions received failing ratings from bank examiners. During 1990 and 1991 that figure has risen to an average of between 11 % - 12% ! This trend appears to be continuing into 1992. In the first half of 1992 , failing grades were 11 289 wasn't such a 'pro - lender' attitude on the part of most bank regulators. On the whole our experience nationwide continues to be that most financial institutions give CRA only minimal and peripheral treatment. Most lenders remain woefully ignorant of the objectives and requirements of CRA . Lenders spend little energy on assessing community credit needs, understanding the credit needs of low -income and minority borrowers and even less time lending actual dollars to these constituents. The alleged paperwork burden is really a ruse to weaken CRA The American Bankers Association ( ABA) and the Independent Bankers Association of America ( IBAA ) , trade associations for financial institutions, have been promoting the unsubstantiated argument that CRA creates a costly and overly burdensome task for local lenders. There is simply no documented hard evidence that substantiates this claim. Further, our own field experience tells us that the reporting requirements associated with CRA are, for the average lender, minimal 290 and inconsequential. The reporting requirements of CRA are clear and brief, requiring only the following. 1. The financial institution must maintain a public file, containing its two most recent CRA statements, its CRA rating and any comments received relative to its CRA performance. 2. Lenders must post a CRA notice ( the language of which is supplied by the regulators) . 3. Finally, the lender must develop a CRA statement which defines the area they will serve, the type of loans they will make and include some language about CRA. This is all the paperwork burden required by the Community Reinvestment Act of 1977. Beyond these requirements are the reporting requirements issued by the various bank regulatory agencies. According to the regulators these reporting requirements are hardly a burden and require only minimal amounts of reporting time from the lenders. 13 291 In fact in 1991 the Office of Management and Budget ( OMB) studied the various consumer compliance costs associated with the regulatory responsibilities of financial institutions and concluded that of the six different bank reporting requirements the CRA requirements were the least burdensome of all. It is revealing that in spite of OMB's conclusions which show that several other reporting requirements precede the CRA reporting requirements in actual burden, CRA remains at the top of the lenders 'hit list' for legislative review. NCRC has had members in various parts of the country visit their local institutions and they simply have not been successful in locating lenders who substantiated this paperwork burden claim. In the Milwaukee area one of our members specifically set out to examine CRA files of area financial institutions in order to get a clearer 14 292 this project reported that " while most lenders were polite and helpful, many indicated little if any understanding of CRA . " The group further concluded that many lenders simply did not take CRA very seriously. How can a paperwork burden be so onerous , so burdensome that on the average a bank requires only slightly more than 8 pages to write its CRA statement, the heart of any CRA examination . Lets consider this question from another perspective. Is it fair for the American public and Congress to ask lenders to provide about 8 pages of evidence per year to substantiate their community reinvestment activities in exchange for the continued financial guarantees ( already exceeding $400 billion) to insure that depositors will continue to do business with those institutions? People we talk to in nearly every state think it more than fair. The fact is that the CRA burden is minimal and always has been. The real story here is one of pure propaganda , promoted by those who wish to weaken CRA but who hide behind the sympathetic, but transparent shield of regulatory burden . OMB is not fooled, the Banking Regulatory agencies know the burden is minimal, the public knows, surely Congress knows as well . 15 293 Home Mortgage Disclosure Act needs to be improved The Home Mortgage Disclosure Act of 1975 ( HMDA) has been an invaluable tool in allowing community groups, public officials, regulators and citizens the opportunity to measure a bank's commitment to a given community or neighborhood. However a major shortcoming of this legislation is that it failed to include all Americans and in particular many rural communities are not currently covered by this law since it is limited to banks with $ 10 million or more in assets and in a Metropolitan Statistical Area. NCRC hears frequently of the many difficulties people in rural communities have in obtaining credit. Having access to HMDA would help clarify the lending picture in many of these small communities. This HMDA limitation should be corrected immediately. The absence of the reporting of small business and commercial loans reveals yet another major shortcoming of HMDA . In all fair lending 16 294 information which demonstrates a lender's record of performance in business and commercial lending then we shall continue to have only a partial picture of a lenders record of community reinvestment. The rising national unemployment rates should be a strong indicator of many communities' critical needs for financing of small business and commercial enterprises to respond and alleviate high unemployment rates. There exists little or no sources available to community people to allow them to learn of a particular lender's loans to businesses. Unlike the housing market which requires recorded deeds and other records of housing transactions and loans, there is no such vehicle for business lending . It remains nearly impossible for communities to ascertain an accurate picture of a lenders business lending activities in a given community . With such an accurate picture , public officials , community people, business people and others would benefit. HMDA would be strengthened and more valuable to all citizens if such reporting was made available to the public. Equally important is the need to increase the accessibility of the HMDA data . Currently the data collected by the Federal Reserve Board is 17 295 provided to interested parties, including community groups, in a format which requires either expensive computer equipment ( e.g. mainframe computer) or a complicated and convoluted transcription process. In either case the HMDA data continues to be inaccessible and not usable to the average consumer. In a meeting in spring, 1992 with Fed Governors LaWare and Lindsey, NCRC presented a suggested model for simplifying the dissemination of the HMDA data, along with several sources of potential private funding to assist in the data distribution. As of this date the HMDA data format remains identical and as inaccessible as in previous years. This must be rectified if the intent and spirit of HMDA is to ever be realized . Similarly, it is important within the HMDA data to have accurate information on loan application processing time. One method to discourage and deny borrowers has been to respond slowly to their loan requests. This is particularly true for those seeking residential property loans, where commonly a date is set for purchase and sale. A good example of this problem is the experience of NCRC member Mary Compton, from Unidos Para La Gente in San Marcos, Texas. This organization helps working class Mexican -Americans gain access to credit for their various 18 296 needs. This past year Ms. Compton approached officials in a local branch of Nation's Bank. After explaining to the lender her role was to assist the borrowers, unfamiliar with the loan application process, the borrowers and Ms. Compton began a long and arduous journey of telephone calls, paperwork and disappointments. The outcome of their experience was that the process for obtaining a home mortgage took over twelve months and still no bank commitments were made. Finally, the borrowers gave up and no longer pursued Nations Bank for financing . While this bank did not actually deny a loan , it was clear from those involved in this experience that the process had the de facto result of loan denial. NCRC believes such occurrences are common and it is therefore imperative that the HMDA data made available include information on processing time. This requirement would add no extra time to the work of the reporting bank since such information is collected when a borrower fills out an application. Finally, the accuracy of the HMDA data being released must be questioned. The Center for Community Change , an NCRC member, reported widespread reporting deficiencies in the 1990 HMDA data , citing missing 19 297 information in various required reporting categories. Another NCRC member, the Pittsburgh Community Reinvestment Group studied the HMDA data reports of most of the financial institutions in the Pittsburgh , PA area. Their findings were astounding . PCRG matched the county records with the HMDA data reported to the Fed and found that at a minimum lenders erred at least 20% of the time and at a maximum one lender was more than 50 % inaccurate in their HMDA reporting . Without the availability of accurate and complete information about a lender's performance it will remain a difficult and haphazard task for those involved in assessing any lenders community reinvestment performance. The record on rural banks The CRA record of rural banks is dismal. CRA consultant Ken Thomas, from Florida revealed in his research that small banks ( under $ 100 million in assets ) received 71 % of all the failed ratings issued by the various bank regulators. The 1992 statistics for the first six months show our strong agricultural states, Florida and California leading all other states in garnering poor ratings. 20 298 Of all our 50 states it is lowa which leads the nation in having the most CRA agreements, these resulting from community challenges. If rural lenders adhered to CRA why would a predominately rural state lead the rest of the country in this unwanted statistic? NCRC has a cadre of organizations representing rural communities and people, like First Nations Development Institute, National Rural Development and Finance Corporation , NY State Rural Housing Coalition, Rural Opportunities Inc. , lowa Citizens for Community Improvement, North Carolina Low Income Housing Coalition, Community Reinvestment Alliance of North Carolina, Florida Federation of Community Development Corporations, and several other organizations. Their experiences with lenders in rural America is consistent. Fewer financial institutions 21 299 someone is highly critical of a lender's performance, few people, if any , in his /her own community even know of the criticism. Furthermore, that same person could approach any number of other lenders if dissatisfied with one lender's performance. Additionally, rural lenders, in contrast to larger lenders, loan out a lower percentage of their funds. The loan to asset ratio for larger banks is nearly two-thirds, while their smaller counterpart lends at a ratio closer to only 50 % . The competition in rural America , including and in particular on Native American Reservations, is not comparable to that of suburban and urban America . Bank products and services are established with little or no competition present. The consumer has few options to shop around. It is because of this fact that rural banks are enjoying unprecedented profits and success. This fact prompted ABA President Alan Tubbs to note at this year's Agri-Bank Conference that the rural banks were in the best shape he had even seen them in. Exacerbating the credit problems in rural America are the changes taking place in the banking industry as a whole. The concept of 'Bigger is Better' has taken hold and mergers and consolidations are providing even 22 300 fewer and fewer choices to the rural consumer. Recent studies, including a study from the House Banking, Finance & Urban Affairs Committee, released in April, 1992 , ( Analysis of Banking Industry Consolidation issues) shows that such mergers and consolidations have produced none of the streamlined and reduced costs promised in consolidation. Instead, tens of thousands of bank-related jobs have been lost, rural consumers are left without basic banking services or the choice to travel great distances. And NCRC members report increasing ignorance and insensitivity from lenders who neither live nor work in, or even near, the borrower's community. The larger financial institutions have board trustees who are unfamiliar, inexperienced and uncommitted to meeting the needs of the family farmer, rural entrepreneur and rural community as a whole . While these may be boom times for rural lenders, they are bust times for rural borrowers. The notion that CRA reporting requirements for rural banks is a burden is simply inconsistent with current known experiences. NCRC members have been asked to speak with bankers about this alleged burden and have found no evidence of such a burden. We have attempted to locate 23 301 lenders who are used as examples of having suffered through an alleged over- regulation process, but have been unsuccessful in getting any specific names of banks for this effort. The fact is, a careful look at this alleged paperwork burden shows a complete lack of hard evidence to support this claim. Further, any examination of the Community Reinvestment Act disputes allegations that CRA requires extensive reporting. The paperwork burden argument is presented by self-serving bank trade associations desirous of continued federal government support and guarantees, but without any regulation or requirements relating to meeting the credit needs of all Americans. Summary The Community Reinvestment Act and the Home Mortgage Disclosure Act have been vital pieces of legislation which have produced measurable positive results. However, widespread unfair lending practices permeate our landscape . Most financial institutions continue to give only peripheral attention to the spirit and substance of the fair lending laws. This situation particularly worse in minority, low -income and rural 24 302 communities. Unless the private financial community accepts its responsibilities relating to providing the needed capital to reverse distressed neighborhoods and deteriorating family farms, then America's economic problems will continue to worsen . Instead of meeting these challenges the bank trade associations are seeking to abandon CRA by hiding behind the false claim of paperwork burden. The bank regulatory and enforcement process is in need of substantial changes in order to effectuate a fairer and more equal lending environment. Further NCRC would like to offer its organizational resources to work together with Congress and others to develop policies and programs which will result in a more equal system of lending, with more useful and accurate reporting 25 303 ASSOCIATION FOR ENTERPRISE OPPORTUNITY September 24, 1992 The Honorable Senator Alan Cranston Subcommittee on Housing and Urban Affairs Board ofDirectors Committee on Banking United States Senate 535 Dirksen Senate Office Building Washington , D.C. 20510 Dear Senator Cranston : The Association for Enterprise Opportunity respectfully submits the following testimony as part of therecord for the oversight hearings on the Community Reinvestment Act, held September 15, 1992. We would like to state our opposition to any changes in the CRA that would weaken the provisions as they relate to rural banks. The Association for Enterprise Opportunity represents over 150 microenterprise and self-employment programs in 41 states working to assist low -income individuals, minorities, and women to start and expand their own businesses. We exist, in large part, because these individuals and communities face a credit gap. Banks are reluctant to lend to microenterprises without linkages to an intermediary because of concerns about risk, excessive transaction cost, and investment in low income neighborhoods. Ourprograms have emerged to meet needs unmet by banks and to develop partnerships withbanks to serve these needs. These financial institutions are important partners. They provide us with assistance and capital for our lending activities, and in some cases provide our clients with low - cost bankingservices. But their willingness to work as partners with us is largely a result of the obligations theyface to comply with the CRA. In fact, in seeking to move toward our goal of providing credit to people and communities with limited means, we would like to see a strengthening of the CRA to more explicitly recognize the importance of bankinvestment in economic development initiatives such as microenterprise programs, not a weakening of the Act. Thank you for the opportunity topresent our position to the Committee. Please donot hesitate tocontact the Association should you or your staff have further questions about our statement. Sincerely, Beverly L Smith Bunyd fout RobertStrinda Executive Director Chair, Board of Directors Enclosure 320 N. Michlean · Suite 804 • Chicago, Mlinois 60611 . 1312 ) 357-0177 • 1312 ) 357-0180 Fax . 304 Statement of the Association for Enterprise Opportunity Submitted to Subcommittee on Housing and Urban Affairs Committee on Banking, Housing and Urban Affairs As part of the Oversight Hearings on the Community Reinvestment Act Senator Cranston and Members of the Committee: the Association for Enterprise Opportunity is submitting this testimony to state its opposition to any weakening of the current provisions of the Community Reinvestment Act as they pertain to rural banks. The Association for Enterprise Opportunity ( AEO ) is a membership organization representing 150 organizations across the nation who are engaged in assisting people and communities with limited access to economic resources to start businesses. Our member organizations are located in 41 of the 50 states. A great many of these operate in rural areas. Typically, the services that these nonprofit or public agencies provide include training, management assistance, and importantly, access to credit for entrepreneurs who cannot gain access to traditional credit sources. Many of our clients are low -income individuals; some of them are recipients of public assistance . In some cases, our clients have been operating their business when they come to us for assistance, but on a very marginal level. They seek our assistance in securing the capital to expand their activities. Other clients are seeking to start new ventures, but although they have skills in their chosen industry, they lack both management skills and access to capital that can allow them to create their own jobs and to add to our nation's economic activity. Our members vary the exact nature of their services according to the 1 305 needs of their particular clients and communities; but access to financing is always a critical piece of the services they offer to both existing and potential business owners . The microenterprise field is relatively new in this country , although decades old in the developing world. The oldest U.S. microenterprise programs are about 10 years old; most of the programs operating in the U.S. have been in existence only a few years. However, the size of the field has expanded rapidly in recent years. From a handful of programs ten years ago , we estimate that the field has grown to include about 200 programs today. In addition, as our programs and association receive media attention , we continually receive requests for information from new groups interested in starting a microenterprise program , and from low -income individuals seeking the services of such organizations. Among the key challenges currently facing our field are the needs to secure financing for microenterprises, and funding to support the provision of technical assistance, training, and general operations of microenterprise intermediaries. Banks have increasingly played a role in helping to finance microenterprises and microenterprise intermediaries, as well as in providing other needed financial services to our clients. However, their support has been driven almost exclusively by their obligation to satisfy the requirements of the Community Reinvestment Act. Without those provisions, we believe that it is highly unlikely that banks will continue to support our programs, which play a critical role in meeting the capital needs of individuals and businesses to whom banks are unwilling to lend . A variety of models have emerged for bank participation with microenterprise intermediaries. We would like to provide you with a few examples of roles that banks have played to date. In Iowa, banks provide loans to the clients of the Institute for Social and Economic Development ( ISED ) , a microenterprise program operating throughout lowa. Some loans are provided to clients with the back -up of a guarantee from the ISED program ; other banks loan without the guarantee ite self-employmenit program provides the 2 306 training and technical assistance that enable its clients to develop the business plans and skills required to obtain bank loans. The Working Capital program , which operates in rural areas in western Massachusetts, Vermont and New Hampshire, secures funding for its capital pool through loans from area banks. Private institutions lend the money to Working Capital, which in turn lends the funds to its clients through a peer-lending mechanism . The Womens' Self-Employment Project in Chicago has succeeded in getting banks to provide checking accounts to their program participants at a very reduced cost. This is important because entrepreneurs clearly need checking accounts -- and preferably separate business accounts -- to operate their businesses. However, for many small scale, start - up businesses, the regular monthly costs of maintaining a business checking account are simply too high . The Detroit Self - Employment Project ( DSEP) has two different arrangements with local banks. In the first, DSEP has deposited a foundation grant as a loan loss reserve with an area bank, which then makes loans directly to clients. In addition , four other area banks have formed a consortia to make loans to program clients. In their case , they also make loans directly to the clients, but with a 30% the DSEP program . guarantee from Although each of these programs has developed different arrangements with local banks, each attest that the existence of the Community Reinvestment Act played a key role in the decision of the banking institutions to work with their program . The banks themselves acknowledge that they consider these loans too risky and too costly to undertake on their own , and that only with the existence of intermediaries which can provide technical assistance, loan loss reserves or guarantees to offset risk, and pressure in the form of the Community Reinvestment Act will they choose to work with and support microenterprises. 3 307 Finally, perhaps the most important role that banks can play is to make loans directly to our customers, without the intervention of our programs. Microenterprise programs are built upon the concept of graduation. We envision that after a period of working with a client, they will have the expertise and the business track record that will enable them to obtain a traditional business loan . But our experience thus far has taught us that too many banks remain unwilling to make loans to these commercial customers. As a result, both economic growth and economic opportunity are impaired. As we have noted above, at the present time the primary incentive that banks have to work with our programs is the requirement that they comply with the Community Reinvestment Act. Trends within the banking industry have tightened the availability of credit for all small businesses. Bank acquisitions and consolidation of the industry have led to a pattern of centralization of commercial lending functions in headquarters cities, often far from small rural businesses. Bank failures and the economic recession have made smaller banks even less willing to take on the risk of small commercial loans. In the face of such trends, it is highly unlikely that banks would consider participation with microenterprise programs without the offsetting force of the CRA requirements. Therefore, from the Association's perspective, the Community Reinvestment Act is critical to our ability to serve our clients. Rather than weakening the provisions as they relate to rural banks, we recommend clarifying and perhaps tightening current provisions. One specific step that we recommend is to clarify the law to state that participation in economic development activities such as microenterprise programs clearly counts toward fulfilling the requirements of the CRA. Many microenterprise programs currently face difficulties in securing local bank participation because banks are unsure whether they will receive CRA credit for such activities. Clarification of that point would be a simple, low - cost way of improving the chances that banks will become active participants in this growing number of development programs. 4 308 The microenterprise field has emerged in larger part because low -income individuals, minorities, women, and others residing in low -income communities cannot secure business financing from banking institutions. We have stepped in where banks will not tread alone. But the growth and survival of our alternative financial institutions depends in part on the degree to which banks work with us as partners. Any weakening of the current CRA requirements will remove the primary incentive that banks -- whether in rural or urban areas -- have to provide microenterprise programs with needed financial support. As a result, we strongly oppose any steps that would reduce the CRA requirements faced by banks in rural areas. Thank you for allowing us to submit our statement. For further information on the Association for Enterprise Opportunity's position , please contact one of the following individuals: Beverly Smith Executive Director John Else Chair, Policy Committee Association for Enterprise Opportunity 320 N. Michigan Ave. Suite 804 c/o Institute for Social and Chicago , IL 60601 ( 312 ) 357-0177 Joyce Klein Co -Chair, Policy Committee Robert E. Friedman Chair of the Board c / o Corporation for Enterprise Development clo CFED West 777 North Capitol St. , NE Washington , D.C. 20002 ( 202) 408-9788 San Francisco , CA 94105 ( 415 ) 495-2333 353 Folsom Street Suite 801 5 309 Testimony Presented to the Subcommittee on Housing and Urban Affairs of the Committee on Banking , Housing and Urban Affairs by the Association of Community Organizations for Reform Now 310 Introduction ACORN appreciates the opportunity to submit testimony to the Subcommittee on Housing and Urban Affairs on the enforcement of the Community Reinvestment Act ( CRA ) , and ways of increasing the flow of credit to underserved urban and rural communities . We wish to especially commend Chairman Cranston , who has a long and distinguished record of working to promote affordable housing , for holding these crucial oversight hearings . We appreciate Chairman Cranston's leadership role in ensuring that important consumer protections were included in last year's banking bill , the Federal Deposit Insurance Corporation Improvement Act ( FDICIA ) . Your leadership and advocacy on behalf of low- and moderate - income families will be sorely missed . ACORN ACORN , the Association of Community Organizations for Reform Now , is the country's largest grassroots organization of low- and moderate - income families . Founded in Little Rock in 1970 , ACORN has grown to a membership of 100,000 member families in 26 states and the District of Columbia . ACORN members work on a wide range of issues that affect the everyday quailty of life in their neighborhoods, including access to affordable health care , neighborhood safety , and drug prevention . ACORN Housing Corporation develops affordable housing in a dozen cities , and performs loan counseling for thousands of low - income families every year . ACORN was the first community group to challenge a bank merger application , and the first to secure a CRA agreement. Since 1980, ACORN has secured over two dozen CRA agreements with lenders from Phoenix to Flatbush that have resulted in nearly $ 800 million in loans in underserved neighborhoods . 2. 311 Summary of Testimony Our testimony today has 7 principal points : ( 2 ) The CRA has proved to be a remarkably potent tool for lessening poverty and promoting economic development , and has leveraged billions of dollars in private investment in underserved urban and rural areas through partnerships between lenders and low and moderate - income communities ; ( 4 ) Problems of credit availability remain the principal obstacle to job creation , neighborhood revitzalization , and community development in low- and moderate - income communities in underserved urban and rural communities , and public policy is unlikely to be able to solve problems of poverty without a concerted effort to increase credit availability in distressed areas ; ( 6 ) Proposals to exempt depository institutions from the CRA based on their size , location , most recent CRA rating, special purpose , or other criteria are misguided and unjustified and would exacerbate the acute distress experienced by poor urban and rural communities ; ( 7 ) Congress can take several steps to increase the availability of credit in low- and moderate - income communities , but in lieu of better enforcement and strengthened laws , we are likely to see more dramatic and sweeping attempts to get depository institutions to meet the credit needs of communities . 3 312 Summary of Recommendations While ACORN believes that many of the necessary reforms must occur at the regulatory , rather than the statutory level, there are several important steps Congress could take to enhance the flow of capital to underserved communities . Specifically , Congress should : ( 2 ) Expand Community Support Requirements to Non - Bank players in the Mortgage Lending Chain , Including Mortgage Companies , Appraisers , the Secondary Mortgage Market Entities , and the Private Mortgage Insurance Insdustry ; ( 3 ) Level the Playing Field Upwards By Imposing Community Support Requirements on Non - Bank Financial Intermediaries , Including Finance Companies , Insurance Companies , Money Market Mutual Funds ( MMMFS ) , and Securities Firms ; ( 4 ) Increase Disclosures of Lending Activity by Depository Institutions , Including Disclosures of Small Business and Consumer Credit ; ( 5 ) Increase Opportunities for Participation by the Public in the Regulatory Process ; ( 6 ) Require Regulators to Make Greater Use of CRA Performance Data in conducting a CRA Examination , and Specify What Data Should Be Disclosed in the Publicly -Available Portion of CRA Evaluations ; and ( 7 ) Punish Violators of the CRA , Possibly Through the Imposition of Civil Money Penalties , or Through a Budget - Neutral System of Fines and Rebates . ? 313 I. The Community Reinvestment Act : History & Policy Background The Community Reinvestment Act ( CRA ) was enacted in 1977 in response to widespread evidence of neighborhood " redlining " --the bank practice of denying credit to whole portions of a city based on stereotypes about the creditworthiness of people residing there . In crafting the CRA , Congress recognized that a wide array of public benefits conferred on the banking industry mean that depository institutions have a unique responsibility to promote neighborhood economic health . Banks are publicly-chartered corporations which benefit from the public guarantee of deposit insurance, and access to the Federal Reserve's discount window . In the Bank Holding Company Act , Congress explicitly required the regulatory agencies to take into account the impact of bank mergers on the " convenience and needs" of affected communities when considering merger applications . . A study by the Securities and Exchange Commission last year revealed that deposit insurance is significantly underpriced -with premiums between 30 and 70 basis points below estimated market rates-- and represents a massive annual subsidy to the industry amounting to nearly $ 20 billion . The huge contingent liability incurred by taxpayers in the form of deposit insurance has been made painfully obvious in the last decade , with bailout 5 1 1 314 costs for the S& L industry expected to reach $ 1.4 trillion , and a $ 30 billion loan to recapitalize the depleted Bank Insurance Fund . There is considerable anecdotal evidence that depoitory institutions are responding to projected increases in premiums by " passing through " the costs to consumers, particularly low- and moderate - income consumers , who have the least market clout . II . The CRA : An Anti - Poverty Program That Works CRA has played a major role in the revitalization of thousands of neighborhoods around the country . In the face of declining government support for economic development in the 1980's , CRA has fostered many productive and profitable partnerships between lenders and low- and moderate - income communities that have helped bridge the gap . These partnerships have in turn resulted in the development of thousands of rental and owner - occupied units of affordable housing , the start-up of thousands of small businesses , including many minority -owned businesses , and the creation of thousands of new jobs. We have appended testimony delivered to the House Subcommittee on Economic Stablization at a Field Hearing in Philadelphia last year , which describes in detail ACORN'S community reinvestment model and the success of partnerships 6 315 developed over the past decade with several area lenders . ( Appendix 1 ] Also attached is a New York Times article which describes ACORN's community reinvestment model . [ Appendix 2 ] III . Continuing Problems of Credit Access in Low- and Moderate - Income and Minority Communities Despite steady progress and impressive achievements , abundant anecdotal and statistical evidence points to massive problems of credit access in many communities around the country , and the devastating effects of redlining on the economic and social health of low- and moderate - income neighborhoods. The widely publicized analysis of the " new" 1990 HMDA data by the Federal Reserve revealed shocking disparities in the treatment of minority and white applicants for home loans . In general , the study found , minority applicants were rejected between two and four times as often as white applicants of comparable income . upper - income African - Americans were actually rejected more frequently than low- and moderate - income white applicants . And A subsequent ACORN study , Take the Money and Run : Deposit Siphoning from Minority Neighborhoods in 14 Cities , revealed that in all but one city examined , banks reinvest deposits taken in white communities at a far higher rate than deposits taken in minority neighborhoods . For every dollar on deposit in white communities, banks reinvested 8 cents for housing related loans , compared to only 4 cents in minority communities. In New Orleans , banks reinvested 16 cents of every dollar on deposit in white neighborhoods , compared to only one cent for every dollar on deposit in minority neighborhoods. Only in Philadelphia , where ACORN and other groups have built longstanding and successful partnerships with area lenders, was the pattern exceptional . While the availability of credit for single - family home loans 7 59-308 - 92 - 11 316 is clearly inadequate , credit availability for other classes of loans is far worse . Bank financing of multi-family affordable housing is minimal as a percentage of assets , and declining . An analysis of the reports of condition filed by the 10 largest banks reveals that multi - family loans --low - income or otherwisecomprise less than 1 % of the gross assets held by these institutions in any given year . At the same time , unregulated , " fringe " bankers have stepped into the void left by mainstream lenders . The number of pawnbrokers nationwide has increased by 60 % in the last 4 years , while lease - to - own stores , check cashing stores , and second mortgage companies have also proliferated . These lenders offer terms far less favorable than mainstream banks , sometimes charging 8 317 interest rates of 200 % per year for what amount to low -balance, collateralized personal loans . Unscrupulous fly-by-night second mortgage companies were the subject of exposes in several cities last year that revealed a pattern of financing by mainstream lenders themselves unwilling to engage in the inner - city market , coupled with usurious rates and terms, and vulture - like foreclosures on vulnerable homeowners . In the broadest sense , problems of access to credit remain at the heart of the dilemmas of inner-city economic development . And while a portion of the banking industry has " gotten the religion " about CRA , and a deccade of experience with community lending has allayed fears about the risk and return associated with lending in underserved areas , such institutions remain the exception , rather than the rule . Consequences of Redlining for Community Economic Development Historical patterns of disinvestment have set in motion a spiral of urban decline and decay that has proven difficult to reverse . Redlining has resulted in widespread abandonment , urban flight of working- and middle -class families, and the erosion of municipal tax bases . As Mayor Raymond L. Flynn of Boston has pointed out on several occassions, the availability of credit for economic development impinges directly on the ability of local governments to collect revenue , and thereby on the ability of localities to provide necessary city services . Lack of access to credit has a " ripple " effect , impacting on the viability of whole communities . The inability of anyone in a community to get a mortgage often leads to abandonment , which in turn leads banks to shun small businesses and other borrowers in an area . The abandoned property is taken off the city's tax rolls, and frequently becomes a haven for drug abuse and crime , thereby lessening the quality of life for everyone . And the individual denied the loan is barred from accumulating assets , which could have been used to leverage other opportunities , such as starting a business , or financing an education . 9 318 Enforcement of CRA by Federal Banking Agencies The bank regulatory agencies charged with enforcing the CRA constitute the principal obstacle to a more vital and effective Community Reinvestment Act . From the Act's enactment , the agencies have refused vigorously to enforce the Act . Indeed , the regulators frequently appear to regard themselves as management consultants to the institutions that they are charged with regulating . Perhaps the most compelling case for regulatory non-feasance in enforcement is the distribution of CRA ratings issed by the regulatory agencies since July , 1990 , when ratings first became public . Despite overwhelming statistical and anecdotal information that the bulk of the industry is doing a poor job of meeting its community reinvestment obligations, 87 % of all institutions rated between July , 1990 and June 30 , 1992 have received " satisfactory " or better ratings . In addition , only a handful of applications have ever been denied by any of the agencies on the grounds of poor community lending performance . Since 1988 , the Federal Reserve has only rejected 2 applications, and the FDIC none , on CRA grounds . TO our knowledge , the regulators have collectively used their authority to issue cease and desist orders to institutions in flagrant violation of the Act on only two occassions . 10 319 of a bank's penentration of the low- and moderate - income market , rarely is supporting statistical evidence --for example , the number of applications received , the number and dollar volume of loans originaed , and the number rejected , for various loan types- included in the publicly available portion of the evaluations . Apart from corroborating bank statements , contacts with community groups can be a vital source of information on bank performance . Many non-profit developers and community -based organizations have a excellent sense of which lenders are aggressively participating in community development initiatives , and which are not . In addition , it is hard to conceive how an examiner would come to a conclusion about the nature and extent of community credit needs without contact with residents of low- and moderate - income communities . ACORN notes that there appears to be some discrepancy between regulatory efforts in this regard . The Ots , in response to questions posed by the Subcommittee , stated that it required examiners to make contact with community groups , while the occ appeared to suggest that this is an exceptional practice , and is only done " if substantive CRA concerns are raised and not adequately addressed by the bank ." ( response to question 13.d , p 16 ] . We should stress that most community groups in low- and moderate - income neighborhoods are strapped for time and resources , and are unlikely to write up comments for an examiner's convenience on a lender's performance. Indeed, barring active solicitation of comments , the examiner is unlikely to get the views of low- and moderate - income residents at all . 11 320 partnerships it has fostered between diverse agents --lenders and community organizations . Yet , the regulators seem to go out of their way to minimize public input . In only a handful of cases have the regulators granted public hearings on merger applications -even those " mega-mergers" that aroused widespread community alarm in 8 or 10 states . And despite the agencies ' knowledge of the resource constraints of community groups --low - income organizations do not have sophisticated computers or high-priced analysts-- the regulators have rarely granted extentions of the public comment period on significant merger applications . VI . Comments on Proposals to Exempt certain Institutions from the Requirements of the CRA The Community Reinvestment Act requires depository institutions to meet the credit needs of all the communities they are chartered to serve , including low- and moderate - income neighborhoods . While the CRA has been the subject of a massive disinfomation campaign over the past several years , its intent and requirements are straightforward . Congress has recognized since the 1930's that banks are not like any other commercial enterprises . They are publicly chartered to meet the " convenience and needs " of their communities, and are the beneficiaries of a wide array of public benefits . Furthermore , Congress has recognized that access to credit is the lifeblood of any community --urban , suburban , or rural . Recognizing that credit needs vary greatly between communities , Congress did not attempt to specify particular kinds or volumes of credit that would constitute compliance with the Act . Instead , the CRA was designed to engage the ingenuity of banks themselves to ascertain and meet credit needs in their communities . In this context , the bankers ' assaults on the CRA are seriously misguided . If the CRA is ever weakened or repealed , Congress will undoubtedly devise --and community groups will lobby for-- a far more elaborate system of credit allocation to meet the needs of small businessmen , farmers , and low- and moderate - income families that will make CRA seem tame indeed by comparison . And 12 321 the bankers may be assured that any such alternative system would be far less market -oriented , and leave institutions with far less discretion in their lending policies , than does the CRA . Compliance Requirements The Community Reinvestment Act has drawn considerable fire from the banking industry over the past several years , under the And the idea that banks are invaded at examination time is equally farcical . provided by Glenn Loney , examiners spent actually inside an institution regulated when conducting a CRA exam in 1990 . by armies of regulators According to figures only 24 hours on average by the Federal Reserve --post a notice in the lobby of each branch ; --maintain a public comment file ; and --prepare and update a statement that includes a map defining 13 322 Part of the problem is generated by the various " consultants " to the industry who have generated thousands of pages in the form of compliance guides , the sum of whose advice to bankers is to deluge examiners with more paperwork than they would ever hope to corroborate independently . Organizations like Barefoot & Associates , and the bank trade groups , have done more damage to the compliance process than any individual bank or community group could ever do . CRA was designed to make community lending an integral feature of the overall business strategy of depository institutions , rather than a " special program" that is peripheral to the main business of banks . In our view , the regulators and the consultants have encouraged the " ghettoization " of community lending by focussing on the development of elaborate internal procedures and processes , rather than actual performance . Comments on Certain Proposals to Exempt Small Banks from CRA In our view , CRA is best viewed as part of the charter obligation on all depository institutions to meet the " convenience and needs " of the communities they are chartered to serve . Thus , We would only be prepared to support proposals to exempt small institutions from CRA if these same institutions were required to turn in their charters , give up taxpayer - backed deposit insurance , and denied access to the Federal Reserve's discount window . If the banks are so concerned about regulation , we should seriously consider stripping away the institutional support of the industry , and let them compete in a truly free market . One of the principal objections that some small banks make to CRA is that they do not have the capacity to perform community development activities --or to document their efforts-- that their larger counterparts possess . And examiners do in fact spend far less time examining small 14 323 banks than large banks . The Fed reported spending more than 10 times as many hours on average examining banks with assets of greater than $ 1 billion as banks with assets of less than $ 25 million ( 223 hours versus 22 hours ) . Indeed , all the regulators devote far more hours to each compliance exam for larger institutions than for smaller ones . ( 1 ) According to figures supplied by bank analyst Ken Thomas , 88 % of the lowest possible CRA ratings issued since 1990 have been to banks with assets of less than $ 100 million , while such institutions comprise only 77 % of the industry . ( 3 ) Even those small banks that extend credit solely within their community --or a bank with a loan - to - deposit ratio of 100 % -- may " redline " predominantly minority or low- and moderate - income neighborhoods . There is no reason to expect that smaller institutions would --purely as a result of their asset size-- be any more or less likely to meet the credit needs of low- and moderate - income areas within their service area . The fact that the ownership of a bank may be local does not imply that decision makers run in social circle wider than the local Rotary Club or country club . In fact , owners and managers of small institutions are likely to come into contact mostly with the business elite of the city and town , and many be utterly unfamiliar with credit needs in the low - income, minority areas . Comments on certain Proposals to Exempt Institutions Serving Rural Areas from CRA While the nature of credit needs in rural and urban areas may differ significantly, proposals to exempt institutions from the CRA on the basis of the size of the communities they serve are likely to exacerbate the problems of population loss, unemployment, and a lack of suitable and affordable housing that plague many rural communities . There are several reasons why 15 324 exempting rural institutions would be poor public policy : ( 1 ) The agencies have at least formally recognized the different nature of credit needs in rural communities . An article by James Pilkington , an FDIC official , has written a good guide to compliance with CRA for rural institutions, which is sensitive to the relative lack of community development initiatives and community groups in rural areas . There may be individual instances where examiners have applied an " urban " CRA model to rural communities, but this is the result of poor supervision and training , and does not warrant wholesale exemptions from the statutory requirements of CRA . ( 2 ) Community reinvestment may take on added significance in rural areas because in many rural communities, the banking market is dominated by a handful of small institutions . The refusal of a single bank to extend credit , therefore , has even more devastating consequences than in a large metropolitan area , where consumers of credit have more options . The farm crisis in the midewest in the early 1980's was precipitated in part by the monopoly of area institutions who kept their deposit windows up , but shut their loan windows down . ( 3 ) In addition , problems of rural poverty are frequently as severe --if not as visible-- as in urban areas . There is a desperate need in many parts of rural America for affordable housing --both single- and multi - family-- and a need for the development of job-creating enterprises to help stabilize withering communities. The " hidden " nature of rural poverty increases the need for local bankers to visit the local trailer park or drive down the back roads . And the lack of community organizations in many areas only accentuates the need for the regulatory agencies to act as a watchdog over banking practices . Comments on Certain Proposals to Give Certain Institutions a " Safe Harbor " from CRA Challenges of all the proposals to make statutory changes to CRA , proposals to give banks a " safe harbor " from CRA challenges are by 16 325 far the most bizarre and the least meritorious. There are several reasons why this proposal for regulatory forbearance should by rejected by the Congress out of hand : ( 5 ) Public comments on merger applications impose no significant delays on merger applications. Data supplied by the Federal Reserve indicates that it takes 75 days on average to process a non - challenged application , compared to 73 days for a challenged applications . If anything, this underscores the problem of regulatory inattention to community input . Why All the Fuss Over CRA ? 17 326 There are several reasons , but by far the most important is the requirement that banks disclose their CRA ratings to the public , enacted as part of FIRREA . Prior to public disclosure , most banks had little to fear from CRA , unless they were about to file an application to merge or expand. This was especially true of the smaller institutions , which rarely if ever have applications pending . Now , however , all depositors , large or small , may place their money based on the CRA performance of a lender . So , while banks have little to fear from the regulators , they have a great deal to fear from the market . Few bankers will publicly admit that what they fear most is adverse publicity or depositor selection based on CRA performance . However , it is interesting to note that many banks with high ratings are actually publicizing their performance to attract depositors . A recent guide to CRA published by the American Bankers Association noted that : " if your rating is high , your bank's reputation is enhanced in the local market area . As such a high rating may be a useful marketing tool ... By the same token , a low rating can be detrimental to your bank's image and can hurt business as a result . " 18 1 327 VII . Recommendations for Reform While ACORN believes that many of the reforms that are needed must take place at the regulatory and supervisory level, there are several steps Congress can take to increase the flow of capital to underserved communities nationwide . ( 1 ) Significantly Strengthen Community Lending Requirements as a Condition of New Bank Powers We have argued repeatedly that trends in community reinvestment are influenced greatly by broader structural changes in the industry , and public policy decisions about these issues . Yet Congress has persisted in contemplating broad reforms of the industry -- including interstate branching , repeal of Glass Steagali , etc .-- without serious consideration of the impact of - such changes on the availability of credit in low- and moderate income neighborhoods . In particular , interstate branching raises grave concerns about increasing economic concentration , standardization of loan products and centralization of loan decision making processes . While ACORN remains opposed to interstate branching, we strongly urge the Congress to consider modernizing community reinvestment laws if branching legislation is contemplated . In particular , we suggest that Congress require regulators to : demonstrate that applicant banks have not engaged in a pattern or practice of branch openings or closings that has the effect of excluding low- or moderate - income or minority communities before approving an application . ACORN has been concerned for several years that many banks are attempting to avoid their community lending obligations by closing or refusing to open branches in underserved areas . And interstate branching offers ominous opportunities for banks to selectively purchase or " cherry pick" branch networks in wealthy communities , while closing branches in poor communities . collect more information about deposit - taking and loan origination activity on a state - by - state basis , for a variety of loan types , to allow monitoring of deposit flows , and identify cases of deposit siphoning . Because call report data is currently collected for each bank susbidary , interstate branching will entail a massive loss of data as Bank Holding Companies with several subsidiaries convert to single institutions . ( 2 ) Expand Community Support Requirements to Other Players in the Mortgage Lending Chain Depository institutions have long argued that other players in the mortgage lending chain play some part in the phenomenon of mortgage discrimination . We agree , and believe that all these 19 328 players must be brought under effective federal regulation . recommend that the Congress : Subject Private Mortgage Insurance ( PMI ) companies to HMDA , and require them to affirmatively market and write policies in underserved communities • Tighten regulation of the appraisal industry to address the problem of " low - balling . " • Require HUD to develop a process for recertifying mortgage banks that are FHA lenders , to ensure that mortgage bankers are not " creaming " the high end of the market ( a problem which is exacerbated by increases in the FHA loan limits ) . Such a " community support recertification" process would require HUD to ensure that individual mortgage companies are not discriminating , and are meeting the housing credit needs of all the neighborhoods --including low- and moderate - income neighborhoods-- in metropolitan areas where they originate a significant volume of mortgages. The process should allow for public comment and public hearings on the community support performance of mortgage banks applying for recertification . FHA is a federal program which confers substantial benefits to mortgage companies , and Congress can reasonably expect mortgage companies to support the needs of low- and moderate - income households . ( 3) Level the Playing Field Upwards By Imposing Community Support Requirements on Non - Bank Financial Intermediaries Depository institutions have long complained that regulation of the industry places them at a competitive disadvantage as regards other financial intermediaries. We agree , but firmly believe that the playing field should be levelled up , to impose community support and disclosure requirements on non-bank intermediaries , rather than levelled down , to reduce the existing obligations on depository institutions . While there are a variety of mechanisms that might be employed , financial intermediaries that could be subject to federal community support requirements include : insurance companies , money market mutual funds , securities firms , and finance companies ( e.g. , GMAC , GE Capital ) . 20 329 ( 4) Increase Disclosures of Lending Activity by Depository Institutions Given the poor performance of the bank regulatory agencies at enforcing CRA , the strongest tool available for increasing community lending has historically been the disclosure of loan originations on a census tract basis . Such disclosures allow lenders , government , and community groups to identify weaknesses in bank performance , and to identify underserved markets . • Amending HMDA to include data on the number and dollar volume of loans originated to small businesses on a geographic basis ; • Requiring lenders to report marketing and origination of consumer credit products on a zip code basis . ( 5) Increase Opportunities for Participation by the Public in the Regulatory Process ( 6 ) Require Regulators to Make Greater Use of CRA Performance Data in conducting a CRA Examination 21 330 of regulatory burdens on the industry , we have noticed no comparable buzz of activity around Section 222 , which requires the inclusion of data on the performance of insured depositories in the publicly available portions of CRA evaluations . Inclusion of actual lending data in evaluations would have two principal advantages . First, it would discourage depository institutions from collecting endless documentation about irrelevant activities . Second , it will result in a more standardized and fair system of assigning CRA ratings . ( 7) Punish violators of the CRA The regulators have rarely exercised their authority to issue cease and desist orders to recalcitrant poor performers under CRA . There is a sizable portion of the industry that has not even paid lip service to compliance . · We believe that it may be necessary to impose civil and monetary penalties on poor performers , or to 22 331 1 institute a budget neutral system which rewards banks in compliance and penalizes institutions with poor records . Conclusion In our view , it is frankly astounding that given the massive levels of taxpayer support of the banking industry in recent years , the trade groups have the nerve to pursue an agenda of further deregulation in general , and weakening CRA in particular . To put the matter rather starkly , if " workfare " is appropriate for families on AFDC , workfare is equally appropriate for the banking industry , whose tenure on the public dole will be of far greater cost to the taxpayers . We are also somewhat discouraged by a never - ending cycle of neglect that seems to characterize public policy with regard to issues of poverty . The events on Los Angeles focussed the attention of the country on the hard realities of life for millions of Americans . We believe there is broad public support for an aggressive and activist response to the urban crisis , and are frustrated by the lack of a coherent Congressional response . These hearings are an excellent first step toward that end . 23 332 Testimony Submitted by George Butts on Mortgage Credit Access in Philadelphia to Subcommittee on Economic Stabilization 333 Mr. Chairman , Members of the Subcommittee , I am George Butts , President of the ACORN Housing Corporation of Philadelphia , PA . ACORN sincerely appreciates the opportunity to testify today at this hearing on economic conditions in the greater Philadelphia area , and I am chosen to hold Philadelphia . the challenges particularly grateful that you , Mr. Chairman, have this hearing in my own community of North There is nothing like getting a first hand view of that face us here in Philadelphia . 3 ) effective regulation of non- lender participants in the extension of mortgage credit , including the private mortgage insurance industry , the appraisal industry , and the secondary mortgage market , to remove barriers in the initiation of local partnerships to revitalize neighborhoods ; and 4 ) a substantially increased federal commitment to assist non profit loan counseling directed at low- and moderate - income homebuyers . ACORN ACORN , the Association of Community Organizations for Reform Now , is the country's largest grassroots organization of low- and moderate - income people . Founded by a group of welfare mothers in Arkansas in 1970 in pursuit of social justice , ACORN has grown to spawn over 400 neighborhood chapters in 35 cities and 26 states across the nation . Here in Philadelphia , we have a half -dozen reighborhood chapters located in the southwest and northern parts of the city . ACORN members work on a broad range of issues that affect their everyday quality of life , including affordable housing , neighborhood safety, unemployment, and environmental degredation . 2 334 For well over a decade , though , ACORN has been at the forefront of community -based efforts to ensure that low- and moderate - income neighborhoods obtain life sustaining credit from private federally -chartered banks and savings and loan associations . These efforts have led to over 30 agreements with private lenders that have resulted in commitments for billions of dollars in loans to underserved and historically redlined communities from Philadelphia to Phoenix and from St. Paul to Dallas . Introduction : Capital Investment in the Inner City The story of urban decline is the story of capital disinvestment , public and private . Frankly , Mr. Chairman , the federal government must also share in the blame for what has transpired in our communities . Public capital support for community revitalization has virtually evaporated . The effects of draconian cuts in support for affordable housing are now being felt in increased abandonment and homelessness . Empowerment is a noble idea , put into practice by ACORN members everyday in their neighborhoods, but it is immoral for the government to preach empowerment while slashing support to communities and families in need . And , while community groups have grave reservations about the manner in which some Community Development Block Grant ( CDBG ) monies have been spent by local governments over the years , the reduction in federal funding of CDBG has eroded the quality of life in this community . Many of our streets are best described as potholes separated by patches of pavement . Curbs are crumbling. Street lights go unlit. And , children can no longer play in safe city parks . 3 335 Redlining and Urban Decline Philadelphia currently has more than 21,000 abandoned houses . At the same time, the city has tens of thousands of families living in overcrowded and substandard housing . The roots of this contradiction lie in the practice of " redlining " --literally the practice whereby bankers draw bold red lines around certain parts of a city map , and refuse to lend to anyone living there . Urban flight , in turn , has eroded the tax bases of municipalities , leaving them less well equipped to provide the basic services necessary for community economic development. In addition , access to credit is ultimately a question of access to jobs in inner -city neighborhoods . When job -creating mortgage and small business loans are not available , local youth are condemned to the welfare rolls , placing further strains on all levels of government . ACORN Banking Model The good message is that it is possible to turn neighborhoods around block by block . Working with the Community Reinvestment Act ( CRA ) , we have developed successful and innovative strategies to stem urban decline , foster low - income homeownership and help banks meet their obligations to communities where they draw deposits . The innovative and successful programs we have developed here in Philadelphia would not have been possible without the CRA . Over its 15 year history the CRA has fostered creative partnerships between lenders and community -based organizations to assist financial institutions in tapping underserved banking markets , to 4 336 promote low - income homeownership and affordable rental opportunities and to pump stabilizing and desperately needed capital into communities like North Philadelphia . These success stories have not been created over night . It has been a painstaking process with often reluctant and entrenched bank management . The willingness of lenders to tool up and make the internal bank commitment to meeting credit demand in underserved communities is dependent on senior bank management acknowledging first that communities like North Philadelphia are legitimate banking markets . It is ironic that a most conservative , market oriented law , the CRA , has been called by so many other names by banking trade associations in Washington . Second , lending to low- and moderate - income people is actually less --not more-- risky than lending to upper- income , suburban families. Data supplied by the Private Mortgage Insurance industry shows that low -balance mortgages --generally held by low- or moderate - income families-- are actually less risky than high- balance mortgages --generally held by higher- income families . ( See Appendix A ) . When you think about it , this fact should come as no surprise . For low - income families, homes are not investments. They are the principle place of residence for low - income people , and , in many neighborhoods , a home is the only asset that can be used to leverage future wealth , educational opportunities , and employment . ACORN'S Three Point Program for Community Reinvestment 5 337 ( 1 ) Underwriting reform Bank commitments and promises to do better will have little impact if an institution offers only mortgage products that are suited to suburban markets , not to an inner-city mortgage market characterized not by new tract homes but existing and aging housing stock . To do business in our neighborhoods , a lender must have suitable products to sell . Abandonment Here in Philadelphia , a critical underwriting reform focuses on relaxation in what is commonly known as the " abandonment rule . " In fact , one of the greatest shortcomings of the Deleware Valley Mortgage Plan --a bank constorium effort of area lenders-- is its continued subscription to a prohibition on granting credit to applicants who seek to finance a home on a residential block with more than 10 % abandonment . This rule essentailly institutionalizes a practice of neighborhood credit denial --or , redlining . Appraisals " Low -balled " appraisals , or understated valuations of property , have prevented thousands of low - income families from obtaining credit in North Philadelphia. Many lenders will not make loans with a Loan - TO -Value ratio of preater than 50% or 95% . So , a low -balled appriasal , by underestimating the value of -be property, limits the ability of 1.2 berrower to get the necessary financing. 6 338 Accurate , property - specific appraisals that take into account the condition of a home and its resale value in the context of a viable local market is a necessary component of mortgage credit access in our communities . Appraisal assessments must reflect market value --not the bias of suburban real estate perspectives and prejudice . An accurate property specific - appraisal will ensure that a bank is able to recoup its investment should default occur without the imposition of income and racially discriminatory ' neighborhood factors ' too often employed by the appraisal industry . Income continuity Credit History When the Federal Reserve released the HMDA data last year , which showed a shocking record of discrimination in the banking industry , we were outraged that the first response of both the banking trade groups and the Fed itself was not to work constructively for solutions , but to allege through wild speculations on human nature that minorities are less creditworthy than Americans in general . That is a pernicious and even racist sterotype with no basis There is no statistical evidence to support the claim that minorities are less creditworthy than other borrowers . Once again , the resort to such explanations reveals a great deal about in fact . the prejudices that continue to bedevil bankers and regulators . 7 339 solicitation if your mailbox is in a minority neighborhood . put this another way , the historical pattern of redlining has ensured a lack of developed credit histories in minority neighborhoods . Food Stamps Many low - income households get by by combining a wide variety of income sources , including food stamps , unemployment , or even public assistance . Given the extensive unemployment in our neighborhoods, this should come as no surprise . 8 1 340 distrust and apathy that separates our neighborhoods from bankers . A low - income family is far more comfortable coming to the ACORN office to hear about how to get a loan , than to a bank branch , where they feel unwelcome . --community meetings in low - income neighborhoods , held at schools or churches ; ( 3 ) Loan Counseling 9 341 Banks can't do it on their own and we don't have access to the capital without banks . And , the performance of loan portfolios of banks we work with shows that prudently underwriten ioans in the inner-city can and do perform well , in many cases better than standard suburban mortgages . Many have objected to the ongoing conflict between minority communities and lenders . We are here to tell you that --given the intransigence and prejudice that pervades most of the industrythat conflict is necessary and inevitable. What we must ensure , however , is that that conflict results in lasting , and mutually beneficial partnerships , as it has done here in Philadelphia . Recommendations ACORN recomends a number of federal initiatives that could assist in the development of partnerships like those I have described today . These recommendations are modest and are directed at maximizing resources of the public and private sectors to fostering economic development and opportunity . ( 1 ) Enhanced Enforcement of Fair Lending Law . ( 2 ) Promote Incentives for Community Lending 10 342 federal regulators . Through the CRA , they are told meet the banking needs of their entire community , on the one hand , and , on the other , they are told to hold significantly higher reserves against mortgage loans than over non - loan security investments . This crazy - quiit patchwork of inconsistent regulation hampers community lending like we have outlined today . Reforming risk based capital requirments to remove unnecessary barriers to mortgage capital provision is an agenda ACORN shares with the banking industry . On the other hand , efforts like Congressman Ridge's Bank Enterprise Act , which will provide financial incentives to lenders who engage in community banking efforts , are equally important . However, the structure of incentives must be carefully crafted to ensure both efficiency and the fostering of the very partnerships we have described today. It is a bank's long -term engagement with the community that is the key to success . Additionally , such incentives should not be seen as a substitute for adequate enforcement of existing fair lending law . The proper balance will include a little carrot and a little stick . ( 3) Regulating Other players in the Mortgage Market Secondary Mortgage Market Fannie Mae and Freddie Mac continue to present major obstacles to community lending. At this point , we daresay that banks are being held back in their efforts to do business in our neighborhoods by the policies of these federally-chartered corporations. I would point out that the Fed's analysis of HMDA data shows that while abysmal, the banking industry is making more mortgages to low - income and minority consumers than Fannie and Freddie are willing to buy . As a consequence, lenders must portfolio their CRA loans , and eventually they come up against a liquidity problem . If banks and communuity groups can make community iending happen , the least that we can expect from federal agencies , that receive billions of dollars of annual taxpayer subsidy , is that they get out the way , and let us do it . Appraisal and PMI Industries Similarly , the appraisal industry and the private mortgage insurance industry impact on mortgage lending in low - income and minority communities remains relatively unexplored by the Congress . But , on the street , as I have pointed out today , these 11 343 industries play a critical role in determining who gets a loan and what neighborhoods can be ignored by mortgage capital . Both industries remain poorly regulated at the federal and state level . ( 4 ) Establish a Home Owners Counseling Fund CONCLUSION I thank you for the opportunity to testify today . 12 Amounts Loan Higher Of Risk tal Incremen ase )-( .00 B 1Total To Indexed 1.38 344 40 20 60 40 1 .120 100 80 160 Thousands Dollar in Amounts Loan M : ICA Sourco ;-iFixod on ,Nnvestor Rato 6/89 Of ,A79-87 ora yo3 180 200+ 345 MEMORANDUM Date : TO : 6/19/92 Joe M. Cleaver Executive Secretary Federal Financial Institutions Examination Council 2100 Pennsylvania Ave. , NW Suite 200 Washington , DC 20037 From : Association of Community Organizations for Reform Now ( ACORN ) re : Reporting of Information on Small Business and Small Farm Lending by Banks , Thrifts , and U.S. Branches and Agencies of Foreign Banks . ( FR Docket No. 92-11766 ) Thank you for the opportunity to comment on proposed changes to the Reports of Condition and Income filed by insured commercial banks and FDIC - supervised savings banks , to the Thrift Financial Report filed by savings associations, and to the Report of Assets and Liabilities of u.s. Branches and Agencies of Foreign Banks filed by u.s. branches and agencies of foreign banks . Chris Lewis or Deepak Bhargava are available at ( 202 ) 547-9292 to answer any questions you may have or provide additional information on the comments and recommendations made in this memorandum . 1 346 I. Introduction . We believe the proposed changes --with revision-- to the Reports of Condition and Income will be a key to effective monitoring of depository institution credit extension to the small business sector . It is imperative that the ultimate reporting changes reflect the public need for detailed information on the flow of capital to small businesses , particularly micro enterprises and minority - owned small businesses . II . Background . In including Section 122 in the Federal Deposit Insurance Corporation Improvement Act of 1991 , the Congress responded to long standing concerns of the accessibility of bank credit for small business development and expansion . The 1989 survey also highlights the particular vulnerability of smaller sized businesses who lack access to non-bank sources of credit . Small business with annual sales of less $ 100,000 are 5 times more likely to lack access to credit from non -depository sources . This data underscores these firms dependency on local depository institutions as a source of credit for day-to-day business operations, capital investment , expansion and start-up funding . 2 347 Concerns about small business credit accessibility have risen dramatically over the last decade as small businesses and small farms have adapted to dramatic structural transformation and consolidation in the banking industry . These ongoing changes -particularly mergers and acquisitions-- combined with allegations of ' credit constriction ' during the current recession have sparked new assertions and anecdotes of credit inaccessibility for small businesses . In drafting this legislation , the Congress specifically highlighted the need for data collection on small businesses that face particular barriers to credit access . These small businesses were identified in the legislative history as start-up businesses and minority -owned small businesses . III . Specific Comments . A. Minority -Owned Businesses . The proposal does not require reporting of lending to minority - owned small businesses . This omission conflicts with the legislative history of the provision and ensures that the Federal Reserve Board will be unable to carry out obligations under separate Section 477 of FDICIA . The need for a separate breakdown for lending to minority owned businesses could not be more evident today . The Congress has long recognized the difficulty that minority -owned small businesses have had in obtaining credit . This public policy demand is reflected in a number of federal initiatives designed to facilitate capital provision to minority - owned businesses . These efforts respond to the clear public need for assurances that depository institutions are operating in a non -discriminatory manner and that equal access to small business credit , irrespective of the race of the borrower , is guaranteed by the market . FDICIA clearly sought to improve the availability of data on credit flow to minority -owned small businesses . The final rule implementing Section 122 should require separate reporting for minority -owned small businesses in each size category . 3 59-308 - 92 - 12 - 348 B. Definition of Small Business and Small Farm . The proposed changes would require separate reporting by three different size categories of small business . We believe that this stratification is insufficient and should be expanded to include information on loans to businesses with annual sales of less $ 100,000 and to start-up small businesses ( See paragraph C ) . The final rule implementing Section 122 should require separate reporting for businesses with annual sales of less than $ 100,000 . c . Lending to Start-Up Small Businesses . 4 349 Urban minority start-up businesses face the double burden of seeking debt financing in more concentrated bank markets where larger institutions dominate and with limited personal collateral --due to lower rates of urban minority homeownership . D. Geographic Distribution . The proposed changes do not include collecting information on the geographic extension of small business credit . In fact , the request for comment suggests that the ' geographic location of the lending institution could be a ' suitable proxy ' for the geographic location of small business borrowers . The final rule implementing Section 122 should require separate reporting of small business lending on a SMSA by SMSA basis for each individual depository reporter . E. Interest and Fee Income . The proposed changes include information on ' estimated amounts ' of interest and fee income on loans to small business as required by Section 122. This information is critical to determine the relative profitability and risk of small business lending and to identify if depositories --particularly larger banks-- are cross - subsidizing their wholesale lending with usurious profits from their retail small business customers who often do not have the benefit of alternative sources of credit --both depository and non - depository . The proposed interest and fee income is not broken down by size of small business category . We strongly recommend that all reported information on interest and fee income should be broken down by each size of small business category . We are opposed to the proposal that interest and fee income data be ' estimated ' . The public and bank examiners have no less of an interest in accurate financial data than the shareholders of insured depositories --shareholders who do not accept estimates of income and expense . 5 350 F. Effective Date . Thank you for this opportunity to comment . 3 6 351 QWERM OO wa OWA mu Meco nonon MANOL ROURUN OY NOMY I. CONZALEZ TOUS, CU Run NWUNSTO, NON DOUG NORTOR NISMA DOWNS OGL roun U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, MINAHCE AND URBAN AFFAIRS TOCY Ron WICONSN HUNCTA MEME CAUTA RAMON W LUS CUR SIW MODA PAUL OLLA OKO MU PAOK EW YORK O nam DUMCM TOU CAN R02) 726-4707 June 9 , 1992 Mr. Joe M. Cleaver Executive Director Federal Financial Institutions Dear Mr. Cleaver : TUNESSE . CAUTORKA MA Manicoa , Missour name NOAI CALON 352 Federal Reserve obtain minority - owned small business loan information be obtained from other sources , such as existing or new surveys . If it is feasible to require the rumuser and amount outstanding of loans to small businesses ba reported in three size categories to permit the Federal Reserve to use this adůitional information to satisfy their publishiriy requirenents , it seems reasonable that minority business loan information be inciuded in the call report requirements . Another concern is the assumption that the geographic location of a lending institution is a " suitable proxy ' to assess the availability of credit in specific regions of the country . While I recognize the problems associated with using the call reports to determine the geographic distribution of loans , I cannot accept the bland statement that the adgress of an institution is sufficient to assess the availability of credit 11 specific areas . Studies conducted by the Banking Comnittee and data collected under the Home Mortgage Disclosure Act indicate that banks and branches of banks can and do exist in areas essentially devoid of credit . It would not be burdensore if the call report , at a minimum , indicated whether the small business and minority loans were in- state or out of - state . It is also disturbing that the proposed regulations do not address collecting data on loans to " start up businesses " - small businesses in existence for less than year . One of the persistent criticisms reaching this committee has centered on the lack of funds for new businesses . In both urban and rural areas , development depends heavily on start up businesses . If the nation is to depend on credit flowing only to existing enterprises , economic activity will be sasly diminished. Data on credit for start up businesses is critical if the intent of Congress is to be met . Regarding the effective date , the proposed date of June 30 , 1993 is much too extended . If this time fraxe remains in the final regulations, it will mean that more than nineteen months will have lapsed between Congressional action and a reporting of the required data - an unacceptable delay . 353 In conclusion , I cannot stress the importance of the information which must be collected . I have long held that commercial lending , particularly to small businesses , is a most vital component of the total picture of credit availability in the United States . It is my purpose to ensure that the information we are to receive and review will guarantee that fair opportunities for credit all available to all who qualify . Sincerely kury Ingeles Kenry B. GonzaYez Chairman HBG : rlm 354 WRITTEN TESTIMONY of the INDEPENDENT BANKERS ASSOCIATION OF AMERICA regarding COMMUNITY REINVESTMENT ACT ( CRA ) before the SUBCOMMITTEE ON HOUSING of the COMMITTEE ON BANKING , HOUSING AND URBAN AFFAIRS UNITED STATES SENATE SEPTEMBER 15, 1992 355 The Independent Bankers Association of America ( IBAA ) is pleased to submit testimony to the Senate Banking Subcommittee on Housing as part of its oversight hearing on the Community Reinvestment Act ( CRA) . The IBAA is the only national trade association which exclusively represents the interests of the nation's community banks. We hope that today's hearing is an indication of recognition that CRA, like many other recent laws, is well-intended but is the wrong solution . We hope that this is the beginning of a dialogue which will lead to an effort to identify the dangers to consumers from the tremendous regulatory burden facing bankers today from laws like CRA . It is our belief that working together, consumers and bankers can redesign CRA so that it becomes both meaningful to consumers and less painful to bankers. For years, bankers have complained that CRA is one of the most onerous regulations they have to comply with and offers little benefit to their customers. Community bankers have pointed out that they are lenders with knowledge of local communities, businesses, and economic conditions. As a result, they serve the credit needs of the local community exceptionally well . On behalf of its members, the IBAA has urged Congress to consider the contribution this nation's community bankers make to their communities. We have made the case that all banks are not the same and that the rules applying to big and small , rural and urban, should reflect these differences to the extent possible. To that end, we have supported legislation to reduce the burden associated with CRA by providing for exemptions, self-certification, and safe harbor protection. The IBAA also has consistently encouraged the agencies to find ways to reduce the burden imposed by CRA regulations and examinations. Many community banks lack the staff required to create the extensive paper trail that has become necessary to document their CRA activities. CRA has become a true regulatory burden as a result of unnecessary documentation requirements. We have urged examiners to focus on actual community service rather than documentation of these services. IBAA remains opposed to laws imposing public disclosure of examination results. These disclosures weaken consumers' privacy protection and can unjustly jeopardize community confidence in a bank. Public disclosures of CRA are an ineffective supervisory tool. We will vigorously oppose any additional public disclosure requirements. We have also protested over the unfairness of penalizing banks under CRA for not engaging in mortgage lending or other particular types of lending that, by charter or policy, the bank has elected not to do. It has been the IBAA position that CRA evaluations should consider the credit programs that the bank offers to its community and how those programs meet existing credit needs. Foremost among IBAA's positions, we have strongly advocated that any CRA programs or reqi ments satisfy the requirements of safety and soundness. 356 The first step toward reducing the burden of CRA while making it meaningful, however, must be a recognition of the problem . In fact, it appears that there is a growing recognition by all parties -- Congress, regulators, bankers, and consumers --that there is a problem with CRA. Many believe that CRA has not accomplished its goal of ensuring that the credit needs of communities are being met. Others have observed that CRA has merely generated a race to produce the greatest papertrail. Documentation has become the goal of CRA, not performance. According to a 1991 study by the Community Reinvestment Institute, documentation is the biggest factor in determining a bank's CRA rating. The Institute concluded that a bank's lending record was practically irrelevant in determining its performance. The study also found that the largest banks have disproportionately higher CRA ratings than smaller banks because they have greater resources to devote to record keeping. In response to this a cottage industry has sprouted up around the country , as several " experts " are teaching bankers how to document banks' CRA activities. Like SAT or bar exam cram courses, the goal is to train bankers on how to pass their exams, not on how to meet the real goals of CRA. Even the consumer groups are observing problems with CRA . At a recent House Banking Committee hearing, Peggy Miller of the Consumer Federation of America testified " that a number of the consumer and community groups that have stood behind CRA over many years have felt that since regulations were drafted ... it appears that it depends upon the examiners but some of the examiners are requiring virtually the same thing out of small banks as they require out of Citibank, and that was never the intent, at least our intent ." Regardless of intent, it is a tragic fact that CRA and overregulation in effect are threatening to regulate many community banks out of existence. Many are no longer to carry the regulatory burden , provide their customers with the same level of service that they have been accustomed to , and still charge a competitive interest rate or service charge which would allow the bank to remain profitable. Consolidation of the industry is being forced through regulation, and the ones who will suffer are the consumers, farmers, and small businesses. And according to a July 30, 1992 Wall Street Journal article titled " Regulations Drive Lending to Non -Banks ," the regulatory squeeze " is driving commercial lending into the Commercial Credits and Prudential Capitals of the world." The author cites not only the regulatory pressures on commercial banks, but the fact that its competitors are not subject not similar regulatory treatment, thus affording them a considerable competitive advantage. Fact Versus Fiction With a recognition by all parties that CRA , for whatever reasons, is not accomplishing its goal, it is also important to discuss some of the recent initiatives -2 357 to change CRA . For example, as recently as last week, the Banking Superintendent of New York State promoted his recommendations for revisions to CRA. During the 102nd Congress, several bills to redesign CRA have been introduced by Senators Dole, Kassebaum , Mack, Shelby, Cochran, and on behalf of the Administration . These bills would provide exemptions, safe harbors, self certification , or alternative evaluations for small banks. CRA proponents have characterized the bills as gutting CRA. Instead, the exams for the thousands of smaller banks take up much valuable examiner time that would be better focused on large institutions. During the debate over FDICIA in the House Banking Committee in 1991, CRA received considerable attention. Rep. Paul Kanjorksi ( D-PA) sponsored an One of the more popular approaches this Congress to revising CRA is to provide small banks, which by their very nature serve their communities, with an exemption from CRA . It has been asserted that the small bank exemption will " gut" CRA. Nothing could be further from the truth , however. Even though such a provision would exempt the majority of institutions, these institutions only account for 10 percent to 20 percent of all the banking assets in the nation . The proposal to provide a " safe harbor" has drawn similar criticism. But all of the safe harbor proposals would not allow institutions to qualify unless they have been examined recently and found to be in full compliance with CRA . Should an institution's CRA rating drop, and it is then no longer in compliance, it would lose its safe harbor. The safe harbor would in fact strengthen CRA by providing banks added incentives to encourage compliance and additional penalties for non compliance. It has also been asserted that CRA exemptions will lead to rampant redlining and other forms of discrimination in lending. This is a baseless argument. CRA by itself does not prohibit redlining or discrimination. It does prevent an institution from establishing or acquiring a branch or other institution if it is not meeting its community's needs. Other federal laws, such as the Equal Credit Opportunity Act and the Fair Housing Act, prohibit discrimination . All depository institutions are subject to the ECOA and other federal consumer protection laws designed to prevent discrimination . Finally, because most small banks already are actively involved in community lending, it is a waste of time and money to continue to require them to comply with -3 358 its provisions. It is well recognized that most of the problems that CRA were meant to address are in urban areas with diverse populations with varying income levels. Rural and smalltown bankers should not be penalized for problems existing for the most part in metropolitan areas . Furthermore, CRA is completely unnecessary when applied to community banks. For decades, bank examiners have insisted that smaller banks not make loans outside their " trade area ." This policy prevents banks from making loans in unfamiliar markets. The natural result of this policy, which was firmly in place long before CRA , is that to prosper a community bank has had to make local loans--in CRA terms, " reinvest in its community." Grant Thornton Survey To document what had heretofore been anecdotal evidence of the degree to which bankers felt about CRA, as only one of several elements contributing to the regulatory burden , IBAA contracted with the nationally respected firm of Grant Thorntc ., to conduct a survey aimed at quantifying the extent of the feeling and the burden itself. The IBAA Regulatory Burden Survey involves three phases. Phase One, an opinion survey of community bankers across the country, has been completed, with responses from 2,000 bankers from all 50 states. The results of Phase 1 were used to develop the field tests which are the basis of Phase 2. Phase 3, a statistical survey, will be launched following the field tests with the goal of developing sound , quantifiable cost data from all community banks. Phase One results show that community bankers overwhelmingly consider the Community Reinvestment Act the most burdensome and aggravating regulation. ( Following CRA , in order of the most burdensome, are: Truth in Lending; appraisal requirements; call reports; formal policies; and the Real Estate Settlement Procedures Act. The attitudes of bank examiners also was ranked often by survey respondents as burdensome.) The survey results indicate that there are some differences among the agencies in their enforcement of particular regulations, including CRA. Regardless of regulator, however, banks in all categories --those regulated by the FDIC, the Fed, and the OCC - agreed that CRA is the most burdensome of the regulations they must comply with. Federal Reserve-regulated community banks had the strongest response to CRA, with 79.5 percent of those respondents noting it as the most burdensome regulation. Between 74 percent and 75 percent of the banks regulated by the FDIC and the OCC ranked CRA as the most burdensome. The survey results also varied among banks of different asset sizes. For example, 77.5 percent of banks between $ 100 million and $ 149 million in assets ranked CRA as most burdensome, compared to 71.67 percent ofbanks with assets less -4 . 359 than $25 million, 67.16 percent of banks with assets between $150 million and $ 199 million and 63.4 percent of banks with assets greater than $500 million. The ranking of CRA as the most burdensome regulation is not surprising. After Congress in 1989 ordered the results of CRA examinations to be made public, a signal was sent to the regulators to " get tough " in their CRA exams. Unfortunately, the pendulum has swung too far and community banks are suffering from " CRA overkill. " Phase 3 of the survey should be complete by the end of the year . At that time we will have figures to document the actual cost of the regulatory burden. Access to Capital Among the issues being explored in this hearing is whether there are particular problems that rural communities confront in obtaining access to capital. There is certainly more difficulty than in the past. The reasons are many -- among them are consolidation of the industry which results in bigger banks that do not service most rural populations; and, increased regulations which result in inhibiting the ability of banks to make loans. The recently -passed FDICIA includes many new provisions which will make lending even more difficult. Chief among them is Section 304, pertaining to real estate lending standards. In reaction to abusive practices of some banks, the regulatory agencies have overreacted by proposing highly restrictive loan -to -value criteria --lending ratios that will hamstring real estate and agricultural lending. The problem with this unfortunate provision is that it will shut the door to housing and real estate lending except for well-capitalized institutions. Adequately capitalized institutions need not apply under the proposed regulations. This will hurt the thousands of American communities served by only one bank or savings and loan. The impact of this harmful provision would be somewhat softened by S. 2967 , the " Credit Availability and Regulatory Relief Act of 1992 ( CARRA) ," which would extend the effective date of Section 304. Outright repeal would be even more welcome. Conclusion The Community Reinvestment Act is symbolic of a larger problem both in banking and business in general. While Congress has passed laws with the best of intentions, it has often failed to consider that the regulations which follow may cause businesses to shrink , close, or cut back on benefits- or banks to make fewer loans, which in itself results in fewer jobs for Main Street " America . -5. 59-308 - 92 - 13 360 This point was eloquently made recently in a June 1 , 1992 Wall Street Journal article by former presidential candidate and Senator George McGovern entitled " A Politician's Dream Is A Businessman's Nightmare ." Reflecting on his years in Congress, followed by a shattered dream when he declared bankruptcy on his Connecticut hotel, McGovern observed the following: ...my business associates and I also lived with federal, state and local rules that were all passed with the objective of helping employees, protecting the environment, raising tax dollars for schools, protecting our customers from fire hazards, etc. While I never doubted the worthiness of any of these goals, the concept that most often eludes legislators is: " Can we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape." It is a simple concern that is nonetheless often ignored by legislators. ...In short, " one- size-fits-all " rules for business ignore the reality of the market place. And setting thresholds for regulatory guidelines at artificial levels ...takes no account of other realities , such as profit margins, labor intensive vs. capital intensive businesses, and local market economics . The problem we face as legislators is: Where do we set the bar so that it is not too high to clear ? I don't have the answer . I do know that we need to start raising these questions more often . We are grateful that some in Congress and the Administration have begun to ask these questions. The most immediate way to lower the bar would be to pass S. 2967, the " Credit Availability and Regulatory Relief Act of 1992 ( CARRA ) ." -6 Burden Regulatory IBAA Analysis Survey A : SSET.WQI Name Fik SIZE ASSET BANK'S 100-149 150-199 200-499 77.16 % 77.50 % 67.16 % % 75.58 % 37.04 % 35.00 37.31 % % 30.23 25.51 % % 20.63 % 22.39 26.34 % %! 24.38 % 22.39 50-99 % 27.16 26.2594 26.7594 % 34.38 15.4394 20.63 18.7294 % 15.02 % 14.38 ! 12.509 12.5596 %! 12.50 11.9394 % 11.88 % 8.02 10.0094 63.649 TOTAL % 74.39 % 27.27 % 30.55 % 11.63 % 9.09 % 26.94 % 23.26 % 18.18 % 25.45 % 26.74 18.1899 % 25.08 % 46.27 % 45.35 54.5599 % 23.43 22.3994 % 14.93 !% 13.95 % 9.09 % 16.74 % 11.94 %! 4.65 % 9.09 % 19.93 % 11.94 % 16.28 % 16.42 %! 19.77 % 27.27 % 12.75 % 13.43 %, 9.30 27.27 % 12.27 % 4.65 %! 0.00 % 11.05 % 2.999 % 10.45 % 3.49 % 4.53 % 5.00 % 5.97 % 2.33 % 5.76 % 8.75 % 13.43 % 3.49 9.099 0.009 % 9.09 9.0992 16.31 7.86 % 6.70 % 6.80 % 361 16.4694 13.1391 O & VER 500 362 Community ReinvestmentAct - Reg BB % Of Times ListedinThe Top Five IBAA Regulatory Burden Survey Analysis PFlle :Name OP.WQI Size Population 15,000-24,999 25,000-49,999 50,000-99,999 100,000 O & ver TOTAL % 72.11 72.99 % % 85.57 68.53 % % 74.37 % 30.61 % 34.31 % 27.84 % 25.89 % 30.58 % 17.69 % 18.98 % 19.59 %! 9.64 % 27.01 % 17.53 % 19.80 25.1794 27.21 % 27.2199 % 17.01 % 23.13 12.9394 % 25.77 % 31.39 % 41.24 % 31.98 % 23.28 15.46 % % 16.24 % 16.78 10.2292 % 12.37 % 10.15 % 20.09 % 17.52 % 10.95 10.9594 % 10.20 14.6094 6.80 !% 6.1294 % 25.52 2%' 5.20 17.5294 % 14.29 % 5.41 24.8794 5.8-190 %! 7.30 !% 8.76 14.439 % 19.59 11.3494 % 10.31 % 16.75 19.809 9.64 12.1894 16.30 % %1273 1220 .% % 11.03 % 5 5.1 8.63 % % 4.12 %4.57 % 6.61 8.12 % 6.82 6.1992 % 7.94 363 % 15.65 26.28 %94 % 19.71 364 Community Reinvestment Act -Reg BB % Of Times Listed in The Top Five Regulatory IBAA Analysis Survey Burden File Name C W QI .: omm Description Community Suburban 0 % 76.33 % 17.19 % 10.47 % 20.31 %! 8.85 %I2.71 % 10.54 'Allllude Examiners Credit Opporunity Equal (Re B)Act External Firm CPA by Audit % 7.87 % 10.42 4.699 % 74.48 % 30.47 %! 18.00 % 27.06 % 22.67 % 25.57 % 25.00 % 25.09 31.3394 % 23.34 16.6794 % 16.68 16.0094 % 18.33 12.6794 % 14.00 10.3399 % 20.03 % 16.30 % 12.73 % 12.31 % 11.08 % 7.94 % 7.22 % 5.73 % 5.33 6.77 % % 6.35 % 7.29 % 8.67 6.82 % 1 &Soundness Salety Exams Regulatory 365 Exams Regulatory Compliance Consumer % 16.25 TOTAL 29.67 % 12.33 loInsiders Limllations -LLoans :O).(Rending e Act Disclosure Mortgage (IIMDA )llome Ó 366 Community ReinvestmentAct - Reg BB Description Iunity ..... Co By Respondents O 76.50 % 76.00 % 75.50 % 75.00 % 74.50 % 74.00 % 72.50 % 73.00 % 7250 % 7200 % 71.50 % Rural Urban Community Description Suburban -- -- Survey Burden Regulatory IBAA Analysis Name R :File EGU.WQI edere ! Primary Regulator Federal Description Regulator RsB Act Reinvestment B .Communlly FDIC FED % 78.88 OTS OCC % 74.15 74.6494 TOTAL % 60.87 % 74.53 O Truth Lending In R )( og2 % 39.13 R ( ESPA Act Procedures Settlement Estate ).Real Requirements Appraisal Avallabilly Funds (Expedited Act 18.6394 30.859 % 30.24 26.09 % 47.83 !% % 30.38 % 23.18 % 13.04 % 26.96 % 17.39 % 25.57 % 22.36 % 25.59 .35.40 % % 22.96 27.01 % 17.39 % 25.15 % 20.42 % 29.38 % 13.04 % 23.22 % 16.91 % 17.15 % 0.00 % 16.71 % 20.07 % 30.43 % 20.02 23.6094 % 16.15 % 16.15 18.8-19 % 11.68 0.0094 % 16.28 % 1276 % 12.18 % 13.87 % 21.74 % 11.66 % 13.50 % 0.00 %12.28 % 8.70 % 8.85 % 15.88 % 8.70 % 10.89 % 13.04 % 8.06 % 6.39 % 0.00 7.90 % % 4.35 % 7.89 % 5.29 % 4.35 6.78 % % 21.74 %6.83 % 11.80 14.2994 8.0791 % 6.66 6.2094 367 % 16.15 20.3394 26.8292 368 Regulator Federal Primary By Respondents Community Reinvestment Act - Reg BB 80.00 % 78.00 % 78.00 % 74.00 % i 7200 % 70.00 % 62.00 % 60.00 % 64.00 % 62007 60.00 % FED FDIC OTS 369 GrantThornton JPMA E Acountna na ASSOCIATION OFAMERICA MeregementContent TheU.S. Memberfima Grant Thornton Intometend Regulatory Burden : A National Opinion Survey of Community Banks In June 1992, the IBAA begana three-partcomprehensive study on regulatory burden . Almost 10,000 banks received the Phase 1 Opinion Survey on regulatory burden and 1,915 responses were tabulated. ( Over 2100 responses were receivedin total.) The 20 percent responserateprovides astatistically soundbasis to make conclusionsoncommunity banks'opinions on regulatory burden. aggravatingregulatoryburdens not considered in the top 10most burdensome regulations Include Satety and . Soundness Exams, Geographic Loan Coding 1099 .Reporting and Examiners Attitudes. The results of the Phase 1 survey were used to develop Phase 2of the IBAA study - field tests. Currently, Grant Regulatory Reports 2 3. 4. 5. 6. Bank Holding Company Reports ( FRY -6, Y -9C , Y -9LP) Consolidated Reports of Condition and Income ( Call Reports) Home Mortgage Disclosure Act ( HMDA) Report of Transaction Accounts ,Other Deposits and Vault Cash ( FR 2900) Shareholder Reporting Aggravation 1813/314181 2181913/2$ 1. Applications ( All Types) 7. Other Examinations & Audits Cost Aggravation 2181718/ 8. Consumer Compliance Regulatory Exams 1,076 9. EDP Regulatory Exams 10. External Audit by CPA Firm 891 45 90 11. Holding Company Regulatory Exams 12 Safety & Soundness Regulatory Exams 560 13. Other [ མ།ཨོ[ 315 562 SEPTEMBER 4, 1992 370 Lending-Related Regulations Cost 16. 17. 18. 19. Aggravation 914 14. Community Reinvestment Act ( Reg BB) 15. Equal Credit Opportunity Act ( Reg B) Fair Housing Act Flood Disaster Protection Act Real Estate Settlement Procedures Act ( RESPA) Truth in Lending Act ( Reg Z 20. Other 1.341 13 294 518 9 ” Other Consumer Protection Regulations Cost 21. Americans With Disabilities Act: ATM Access 22. Electronic Funds Transfer Act ( Reg E ) 23. Expedited Funds Availability Act ( Reg CC) 801 Fair Credit Reporting Act Fair Debt Collection Practices Act Right to Financial Privacy Act Unfair and Deceptive Practices Act ( Reg AA) Other 114 33 31 리히 24. 25. 26. 27. 28. Aggravation 454 258 313 195 936 171 45 42 12 30 29 33 Supervisory Policies Cost 29. Disaster Recovery Plan 30. Documentation of Adequacy of Loan Loss Reserves 31. Federal Reserve Policy on Daylight Overdrafts 32. Funds Management Aggravation 533 318 18 218 33. Generally Accepted Accounting Principles ( GAAP) 275 34. Geocoding/Geographic Loan Coding 35. Selection of Securities Dealers and Brokers 373 36. Other 13 3 Informational Reporting Cost 37. 1099 Reporting 1,287 38. Asset Growth 11 39. Backup Withholding 40. Bank Secrecy Act 41. Market-Value Disclosure Occupational Safety and Health Administration 73 43. Other Aggravation 678 18 261 592 189 37 7 371 Safety & Soundness Aggravation 118188:3/8= Cost 46 44. Affiliate Transactions 1,229 45. Appraisal Requirements 46. Brokered Deposits 47. Concentrations of Credit 48. Dividend Restrictions 49. Limits on Loans to One Borrower 50. Loans to Insiders-Lending Limitations ( Reg 0 ) 51. Risk-Based Capital/Equity Capital 52. Other Other Regulatory Constraints Cost 139 263 191 142 53. Capital and Strategic Plans 54. Environmental Lender Liability 55. Examiners' Attitudes 56. FASB Statements 57. Formal Written Policies 58. Informal Regulatory Directives 806 Aggravation 77 210 556 170 615 43 146 5 59. Regulatory Enforcement Actions 60. Other MostBurdensome Regulations Regardless ofcategory,which of thepreceding regulatory items are the most costly and the most aggravating to your bank? The top tenvaried slightly based on demographicfactors. However, cost was most burdensome regardless of how it was cut. 1. Community Reinvestment Act -Reg BB 2 1 Home Mortgage Disclosure Act 372 Demographic Data To helpin our analysis of aggregated responses, please answer the following questions. All individual responses will be held in strict confidence. 1. Which ONE of the following terms best describes your community ? 1,385 Rural 2 What is the approximate population of your community ? 957 Under 5,000 192 Urban - 160 $ 100 million - $149 million 5. Where is your bank headquartered ? State responses received from all 50 states 300 Suburban 373 STATEMENT OF ALAN R. TUBBS on behalf of THE AMERICAN BANKERS ASSOCIATION submitted to the HOUSING AND URBAN AFFAIRS SUBCOMMITTEE of the SENATE BANKING , HOUSING AND URBAN AFFAIRS COMMITTEE SEPTEMBER 15, 1992 Mr. Chairman and members of the Subcommittee, I am Alan R. Tubbs, president of the Maquoketa State Bank in Maquoketa, Iowa, and president of the American Bankers Association . The American Bankers Association is the national trade and professional association of America's commercial banks, from the smallest to the largest. ABA's member banks represent about 90 percent of the industry's total assets; about 94 percent of our members are community banks with assets of less than $ 500 million. The American Bankers Association ( ABA) commends this Subcommittee for holding hearings on the impact of the Community Reinvestment Act and appreciates this opportunity to submit a statement for the record presenting the views of our members on the very important issues of local credit availability and community involvement. Bankers have a strong commitment to their communities. You need only look at the rapid response of bankers in Florida to the needs of the residents hard hit by hurricane Andrew to see that bankers take this commitment very seriously, and that they recognize the important role they play in local economies in towns and cities across the country. Banks have pledged millions of dollars in loans to help the residents of south Florida rebuild homes and businesses that were devastated by the storm, and local bank employees worked around the clock to restore access to financial services for their customers. Another illustration of bankers' long -term commitment to serve their communities is the industry's positive actions in the area of minority and low /moderate income mortgage lending. As I will discuss in more detail later in this statement, the American Bankers Association has undertaken a comprehensive program which we believe will make the complex process of buying and financing a home fairer, less intimidating and more accessible to all creditworthy Americans. The ABA has established a Center for Community Development within the association for the sole purpose of facilitating the flow of mortgage funds to minorities and low /moderate income neighborhoods. 374 The Community Reinvestment Act The Community Reinvestment Act says that each bank should help to meet the credit needs of its community -- including the low and moderate income areas. I am in complete agreement with this philosophy, and I am willing to bet that virtually all bankers feel the same. The profitability of every bank, especially community banks like mine, rests squarely on the health and vitality of our local residents and local businesses. We recognize that there is a strong link between the availability of all types of credit -be it for mortgages, businesses or consumers -- and healthy communities. The problem with CRA is not that it " requires" bankers to invest in the community -- they do that anyway. The problem is that CRA has grown into a such a compliance nightmare for banks that it is robbing time and resources that could otherwise have been invested in the community. Bankers have been accused of trying to " gut" CRA by asking for regulatory relief. Let me assure you that it is not our intent to " gut" CRA, nor to excuse banks from the spirit of community reinvestment -- but we do believe that it will be in everyone's best interest look for ways to eliminate the tremendous and largely unnecessary paperwork burden that has grown out of CRA. Ironically, the legislative history of CRA clearly indicates that it was not intended to impose any new record keeping requirements on the industry. But in fact,record keeping is now what CRA is all about. What a bank is actually doing in its community is almost irrelevant -- what counts is the thickness and neatness of the CRA files and whether or not they contain the right documentation. The result is that over the years, CRA has become bogged down in red tape. Even worse, rather than fostering a cooperative spirit among lenders and the communities they serve, it has become a vehicle for confrontation and mistrust between community groups and banks. Community banks like mine are particularly hard hit by the excessive paperwork and documentation requirements of CRA compliance. In an institution with only a handful of loan officers, and a total staff of perhaps 10 to 15 employees, the necessity to geo - code each loan and to document all community lending activities presents substantial problems. Compliance with these regulations absorbs real resources and costs real money. Mr. Chairman, in your letter of invitation you asked if there were ways to improve the enforcement of CRA . My answer is that we must find a better way -because the road we are on now is too expensive, too time consuming, and is simply wasting too many precious community resources. Banks, particularly large banks, are also distressed by the fact that even a satisfactory or outstanding CRA rating does not protect them from a community group protest against a merger or acquisition application. This clearly sends the wrong 2 375 message. What incentive is there to work hard to achieve a high rating and to establish a superior record in community lending? Surely it is reasonable to expect that good performance would protect an institution from CRA protests for some length of time. The way the system works now , a community group can delay a proposed merger or acquisition for an institution that received a satisfactory or even an outstanding CRA rating the day before. Bankers across the country are clearly frustrated and angry at what they perceive as regulatory overkill in the area of CRA. There are many bankers out there working hard to serve their communities -- they are civic -minded citizens and good businessmen trying to do their job. They are far more eloquent in their pleas for a return to rational and reasonable regulation than I am, so let me take this opportunity to share with you some of their words on how CRA regulations are affecting their operations and their ability to serve their communities. A $22 million bank in the West writes : Our bank has always prided itself in lending out between 65 and 80 percent of its deposits in our small town and the immediately surrounding area ( farm loans, etc.) . In addition, we participate in most civic endeavors in our community. While we did receive a " Satisfactory" rating at our most recent compliance examination, the examiner pointed out several areas where we need to improve our documentation. She stated that there are banks that lend out a smaller percentage of their deposits in their communities but receive higher ratings because of immaculate CRA files. If that isn't putting paperwork ahead of the consumer I don't know what is. A $ 113 million bank in the Southwest writes: One of our biggest problems is the Community Reinvestment Act ( CRA) . The Community Reinvestment Act is virtually meaningless to banks in communities the size of mine... we cannot afford to discriminate. There are not enough good loans to go around. Believe me, no matter what part of town an individual lives in, his race, color, religion, etc., if he has good credit and a meaningful request, it will be funded . The Community Reinvestment Act adds absolutelynothing, but requires hours upon hours of time and thousands of dollars in documentation expenses to comply with . This bank underwent a Community Reinvestment Act examination a few months ago. We had two national bank examiners spend three weeks with us to examine all of our paperwork, plans, etc. Of course, we were found to be satisfactory, but think of the cost it entailed to have our policies, procedures, action plans, etc., all documented according to the regulations, not to mention the cost of sending two full -time people away from their homes to this bank to examine our CRA file. 3 1 376 This is ludicrous and a waste of taxpayers' money, not to mention a waste of our money and efforts. A $ 25 million bank in the West writes: One of the reasons ( the economy] is suffering is because bankers no longer have time to be bankers. Instead, we must study, train and supervise our officers and staff for unnecessary regulations. A case in point is the Community Reinvestment Act. CRA examiners pay no attention to the actual lending that a bank does. Instead, they focus exclusively on pretty files full of surveys, news clippings and demographics. Most community banks know their community intimately and they eagerly serve the lending needs of the community. They don't need reams of paper and sophisticated studies to do their job. What they need is the time to solicit loans, make loans and properly supervise loans. A $7 billion bank in the West writes: [ My bank] supports the spirit and intent of CRA and endeavors to provide banking services to all sectors of the communities it serves. However, CRA compliance has taken on a life of its own, with burdens, including answering to consumer groups, which far exceed the benefits. For example, Section 804 of the Community Reinvestment Act requires financial institution supervisory agencies to assess an institution's record of meeting the credit needs of its community. The combination of the regulations promulgated, the various policy statements, and most recently the expectations of the examiners, have shifted responsibility for documenting this assessment process from the agency the bank. In the absence of the bank generating substantial and convincing paper trails evidencing detailed activity, a bank is considered in non compliance with CRA regardless of actual compliance efforts. While the examiner's assessment process should include all evidence, often an examiner will disallow or substantially discount any evidence of compliance outside the so called " CRA documentation file." There appears to be a prevalent presumption ( not supported in law, policy or regulation) that if the bank does not write it down and put the memorandum in the CRA file, an event did not occur -- a difficult presumption to overcome. The tremendous amount of paper work associated with documenting CRA activities and the need to develop and analyze community demographics, geo analysis and other related data, has diverted management's time from actually serving the community and has greatly increased the cost of those services that do result. We recommend that the responsibility for documenting this assessment 4 377 process be returned to the agency where the statute originally placed it and that CRA activities be refocused away from compliance nitpicking to providing services to all consumers. A $ 140 million bank in the West writes: I am writing to you to express my concern over the excessive paperwork and red tape that is obstructing both the economic growth of banks today, as well as the burden it places on our ability to serve ourcustomers and the communities therein . The success of our bank depends upon its ability to serve the communities surrounding us and with all of the CRA regulations now in effect and the paperwork that must be done, we spend more time " proving" that we are serving the communities. It is extremely frustrating to spend so much time and money executing the necessary paperwork that could be better spent meeting the needs of our customers and promoting economic growth. 31 % of our bank's profits this year alone have gone to CRA staff salaries, training, materials, etc. A $ 28 million bank in the Mid -west writes : Because I am a small bank I will not be successful if I do not serve the community in which I operate. However, because of the documentation guidelines of the CRA I estimate that I spend approximately 200 hours per year in documenting compliance with this particular regulation. It certainly seems that an examiner wanting to review my compliance with CRA could just as easily review all applications and determine if those ſloans that are turned down are turned down for valid reasons in view of similar type loans that were approved. As a community bank, the employees and I do a significant amount of work in our community. We assist charitable organizations in raising funds, we lend a helping hand in many organizations and have a true interest in serving those living and/or doing business in our community. If we could somehow reduce the paperwork and red tape necessary to operate our small bank we would have additional money and time to use in benefiting the community in a much greater way . A $ 1.5 billion bank in the Southwest writes: One of the most difficult and exasperating areas of regulation is CRA -Community Reinvestment Act. The documentation burden that this Act has created rivals the New York City telephone book. The banks are required to document all areas of their community involvement, compile detailed statistical analyses to prove their actions, dedicate staff resources to developing, 5 378 understanding and maintaining the records. The really sad reality of all this work is that the only people who have ever looked at our CRA records have been bank examiners. I could go on, Mr. Chairman, but I'm sure you get the idea. Bankers are upset with the way CRA is being interpreted and enforced. These comments make it clear that there is no problem complying with the spirit of CRA -- bankers understand their communities' need for credit and are dedicated to serving those needs. As I said at the beginning of this statement, the problem with CRA is the complex and often confusing web of regulations which have grown up around it. The Competitive Impact The regulatory costs of complying with CRA raise the operating costs of banks; however, other financial firms offering virtually identical products are free to compete for bank customers without the same regulatory impediments and costs. As competition in financial markets continues to grow , the banking industry is finding the burden of regulation an increasingly heavy load to carry. We cannot continue to provide services to communities across the country if we remain shackled to the regulatory block while our competition is free to respond to new opportunities and to operate without the compliance burden placed on banks. Let me give you an example. While I am spending time documenting my community lending activities, my non-bank competitors such as Edward D. Jones are out there selling my customers money market funds and CDs. The same is true for the local credit union, the insurance agency, and the farm credit system , all of whom are free from the costs involved in documenting compliance with CRA. Furthermore, because CRA compliance drives up my costs relative to these competitors, funds are being pulled out of banks and flowing to these financial service providers who are not required to reinvest money back into the community. Let me quote a few banker letters on the subject of the competitive impact of CRA. A $675 million bank in the Southwest writes: We have always felt strongly that a financial organization must maintain an active role in the communities it serves. After all, a bank can only do as well economically as the community in which it is located. Under CRA we now have the cost of creating mountains of paperwork to document our performance. Nonetheless, that is acceptable as long as ALL financial institutions are required to do so. There are many types of financial organizations vying for consumer deposits these days. It is time that brokerage firms, money fund management firms and insurance companies be required to invest in the communities from which they receive funds. It is laughable that banking, with its long record of 6 379 community stewardship, is the only financial industry subject to CRA. These other financial institutions control a greater portion of our nation's investment capital today than ever before. A $50 million bank in the Mid -west writes: During the next three months, I estimate that 50% of my time will be spent on regulatory compliance issues. What is really sad and ironic is that my time will not be spent on regulations which affect the safety and soundness of the bank's loans and other assets. Rather, it will be spent on regulations such as the Community Reinvestment Act ... What would I normally be doing with this lost 50% of my work week? I would be calling on existing and prospective customers, making loans or working to develop new deposit and loan products to more effectively compete in the marketplace the real heart and soul of banking. Isn't that what banking is all about ? This scenario is especially discouraging when I consider that many of my competitors - insurance companies, mutual funds, stock brokers - are not ( subject to CRA ) ... they happily suck an increasing share of the deposit base out of my community, never to return in the form of loans or other investments. The Burden of CRA Documentation and Other Regulatory Red Tape is Not Just a Banker Issue The banker comments cited above regarding the time and expense involved in documenting compliance with CRA and the implications of competing with financial service providers who are not subject to the same rules are illustrative of a broader problem with the growing burden of regulatory red tape. Should anyone other than bankers be concerned about this burden? The answer is a resounding yes -- all bank customers should care. In fact, anyone interested in the health of their local economy should care. Simple economics tells us that, other things being equal, reducing the paperwork burden will free up bank resources for lending and reduce the cost of bank credit. The reverse is also true. If the regulatory burden -- including the red tape involved in documenting compliance with CRA -- continues to rise, more and more real resources will be devoted to non -productive paperwork. This will leave fewer resources for the core business of banking, which is making loans and providing high quality financial services to our customers. Ultimately, a good portion of the cost of unnecessary paperwork must be paid by the consumers of bank products. The resulting higher price of bank products will make 7 380 them less competitive, and some customers, particularly more sophisticated customers, will shift their business to financial service providers who are not subject to the costs imposed on banks. Others, like consumers and small businesses who have less access to alternative sources of credit, will find bank loans more expensive and more difficult to obtain. Clearly this is not a desirable result, and it is certainly not what CRA was intended to accomplish . In today's economic environment, the impact of the growing burden of regulatory red tape on the cost and availability of bank credit is masked by weak loan demand in many parts of the country . But when the economy strengthens and loan demand picks up, the costs and constraints imposed on banks by the tangled web of regulatory paperwork will certainly be felt in the economy. In the long run, the paperwork burden will erode bankings' ability to support the economic growth of towns and cities across the country. These are important issues that should concern us all -- bankers, bank customers, and policymakers alike. Collecting Data on Small Business and Small Farm Loans Will Not Increase Credit Availability There has been a lot of controversy lately over whether there is a lack of credit -especially for small businesses and small farms -- and whether it is inhibiting the recovery. In an effort to calculate the amount of credit currently outstanding to these types of entities, Congress included two provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991 ( FDICIA) which direct financial institutions to provide bank regulators with information on their small business and small farm lending practices. However well-intentioned, these provisions will not provide policymakers with useful information on credit availability. But they will impose another layer of unnecessary red tape on both banks and their small businesses/small farm customers. The provisions direct banks to categorize their small business/small farm loan portfolios based on annual sales of the business, and requires banks to estimate interest and fee income and net charge -offs for various categories of these loans. In many cases, compliance with these regulations will necessitate new computer systems; in all cases, significant personnel costs will be incurred to compile the data. And in the end, the required disclosures will provide little, if any, useful information on credit availability. Again, let me quote some bankers on this issue. A $50 million bank in the central region writes: 8 381 The small business and loan data ( Section 122) of the FDIC Improvement Act of 1991 requires that data concerning loans to small business and small farms be collected with the Call Report. There is not enough room here to detail what is required except to say that it is lengthy. The only way for me to comply with the provisions of Section 122 would be to go through every loan file in the bank and check the financial statements of every farm orbusiness borrower. I estimate that this would take ( two people) at least one day apiece each quarter. The burden ( of preparing the Call Report) will increase dramatically if Section 122 is allowed to go into effect as scheduled. Please vote to repeal Section 122 of the FDIC Improvement Act of 1991 so that a banker can spend more time meeting the needs of his community and less time meeting the needs of the government. A $ 26 million bank in the West writes: The proposed regulation requiring us to track loans made to small businesses and small farms is another unnecessary burden. Again, we make all these types of loans that we can prudently make. To monitor and track these credits to comply with the proposed regulations will be very costly to our bank. When one compares the benefit that is derived from imposing these regulations to what the cost of monitoring and tracking, it is simply a big waste of time and effort, especially for the smaller sized banks. As these two bankers pointed out, heaping additional reporting requirements on banks will not increase credit availability. In fact, it is likely to have the opposite effect - - the added costs of collecting and reporting this data will tend to decrease the availability of bank credit and increase its cost. This burden will be in the millions of dollars and will produce information that is almost worthless, since it will pick up only part of small business lending. Clearly there are more efficient, less costly ways to determine the credit environment for small business lending than increasing the reporting burden on banks and their customers. In fact, several sources of meaningful information on credit availability to small businesses and small farms already exist. For example, the National Federation of Small Business Foundation publishes a quarterly economic report on small business which includes information on credit conditions and on the general economic activities of small businesses. In addition, the Federal Reserve currently conducts a number of surveys on credit extensions and the credit climate. Both of these sources provide timely data on the terms and conditions of small business lending and the availability of credit, and may well provide adequate data to address policymakers needs in this area . 9 382 The Impact of the Regulatory Burden on the Availability of Credit There are steps Congress and the regulators can take that will improve the climate for bank lending. In particular, reducing the crushing burden of regulatory red tape will go a long way toward freeing up real resources to support the provision of financial services to bank customers. Based on a survey of about 1,000 banks, we estimate that the industry spent approximately $ 10.7 billion last year on compliance. This is a very big number -- it amounts to about 12 percent of total industry operating costs and nearly 59 percent of total industry profits last year. Clearly imposing costs of this magnitude on the industry has a negative impact on the availability and cost of bank credit. To make matters worse, there is clearly a bias against lending in the recently passed FDIC Improvement Act. Whether intended or not, the loud and clear message bankers are receiving from the regulators and the Congress is that only minimal levels of lending risk will be tolerated. On the surface, this certainly seems reasonable -- there is little doubt that economic consequences of a banking system with too much risk are not acceptable. But just as too much risk is undesirable, a regulatory policy that discourages banks from making loans also has serious economic consequences. Wringing out every risk from bank loan portfolios means that fewer loans will be made, and that only the very best credits will be funded. All others -- especially small businesses, which are among the riskiest of all bank loans -- will face higher prices and reduced availability of credit. The marginal borrower may not find funding at all. The lending environment has also been affected by an emphasis on higher and higher capital levels. Over the last several years, banks have been adjusting to higher, risk -based capital requirements. Even before these new standards are fully phased in, there is pressure to meet even higher standards. This pressure is clearly evident in the avalanche of regulations that have been adopted or proposed, including those related to brokered deposits, prompt corrective action, interbank liabilities, state bank activities and investments, and even loan -to -value ratios which are pushing banks toward a new " minimum " standard called " well-capitalized." While all bankers support solid capital levels, the question is what is the right balance and over what time period. We need to take a close look at how higher de facto minimum capital levels reallocate credit away from lending toward securities and raise the price of credit for bank borrowers. I emphasize " de facto" because the combination of various new regulations is, as a practical matter, raising the de facto level well above the " adequate" standard. In this context it is important to realize that bank capital, despite well -known problems in the industry, is at an all time high -- $ 248 billion. 10 383 The American Bankers Association's Center for Community Development As I mentioned at the beginning of this statement, the ABA is undertaking a major initiative to facilitate increased mortgage and small business credit availability to minorities and low /moderate income neighborhoods. Last May, the American Bankers Association announced plans to establish a Center for Community Development within ABA. The Center is now up and running, and is actively working with bankers, secondary market agencies, appraisal groups, and community groups to find ways to make the home financing process fairer, less intimidating and more accessible to all creditworthy Americans. The Center grew out of recommendations by ABA's Mortgage Lending Task Force that I appointed last year. The Task Force was comprised of bankers representing all regions of the country and including CEOs and community lending specialists. These bankers were charged with finding constructive ways to promote sound lending minority and low /moderate income communities in order to better meet the needs of the people of these communities. The Task Force began by taking a top - to -bottom look at the mortgage lending process. They talked with others who play critical roles in the housing finance process including realtors, appraisers, private mortgage insurers, and secondary mortgage market agencies to see how to work together to make the process of buying and financing a home fairer, less complex and less intimidating. Community and fair housing groups also play an important role in these issues. These groups work in the communities and with the people we are trying to reach -their insights into neighborhood dynamics and social trends are a very important element in designing practical programs that will actually be successful in increasing the flow of mortgage funds to minority and low /moderate income areas. Because using the resources of community /fair housing groups to bring potential applicants and lenders together is clearly a productive approach, the task force met with six of the major consumer/ fair housing organizations, including the Center for Community Change, Association of Community Organizations for Reform Now ( ACORN ) , Consumer Federation of America, National Fair Housing Alliance, Neighborhood Reinvestment Corporation, and National Center for Neighborhood Enterprise. ABA's Center for Community Development intends to continue the dialogue with these and other community groups and to solicit their input as we search for solutions that will increase credit availability to minority and low /moderate income borrowers. The task force also met with representatives from the Federal Reserve, the FDIC , the Comptroller, and the Department of Housing and Urban Development to discuss how they see the problem , and look at some of the difficulties in interpreting and enforcing the HMDA and CRA statutes. 11 384 These discussions with other participants in the " housing chain" revealed several very important areas of agreement among us. Most importantly, we all agree that there is a need to increase the availability of mortgage funds to minorities and to people in low/moderate income neighborhoods. We agree that an inter - industry initiative involving all members of the housing chain including realtors, appraisers, lenders, private mortgage insurers, and secondary mortgage market agencies is necessary if we areto be successful. We agree that lenders, private mortgage insurers and secondary mortgage market agencies need to guard against inadvertent policies that may act as barriers to minority and low /moderate income borrowers, and to carefully review their underwriting criteria to make it as flexible as possible. And lastly, we agree that borrowers need a better understanding of how to make the home financing process work for them -- things like what size mortgage they can afford, how to document their creditworthiness, and what to do if they feel they have been discriminated against. These three areas -- inter-industry cooperation, lender education, and borrower education -- form the basis for the efforts of ABA's Center for Community Development. Some of the Center's goals in these areas are: Inter-Industry Cooperation Expand work with secondary market agencies and others in the housing finance chain to revise underwriting criteria that discourage lending to minorities and low /moderate income neighborhoods Work with the appraisal industry to increase the pool of appraisers with expertise in appraising properties in low /moderate income neighborhoods, especially in inner cities Enhance the communication and working relationship between banks and national and local community and fair housing groups to encourage constructive and effective joint efforts → Lender Education Increase lender awareness of secondary market education and lending programs targeted to low /moderate income markets Collect and analyze performance data on low /moderate income mortgage portfolios Identify non-standard approaches to determining credit worthiness and loan documentation to eliminate factors that have the effect of discriminating against low/moderate income and minority applicants 12 385 Provide guidelines and additional training materials to enhance fair lending compliance and evaluation of anti -discrimination efforts Borrower Education Provide information on current borrower education programs available nationwide in which banks may participate Develop materials that will help banks establish their own borrower / consumer education efforts The Center for Community Development is an expression of ABA's commitment to promote sound, non -discriminatory mortgage and small business lending and to increase the availability of credit in minority and low/moderate income communities. The investment of time and energy required to carry out this commitment will reap tangible rewards for home-buyers, for large and small communities across the country, and for all participants in the housing and housing finance industry. I have attached a copy of the Center's mission statement to this testimony. Conclusion Bankers believe in community lending -- lending for housing, small business growth, farm operations. And we believe in doing our share to revitalize low-income neighborhoods with sound, non -discriminatory lending programs. We believe in community development because these are our communities. We live and work in them, and we want them to be as strong and vital as possible. But over the past decade, the amount of paperwork involved in complying with regulations such as CRA has reached crisis proportions. In fact, the over-all burden of unnecessary red tape that each bank must deal with on a daily basis has grown so large that it is undermining the ability of banks to serve their customers and to meet the credit needs of their communities. The cost of unnecessary paperwork and red tape is a serious long-term problem that will continue to eat away at the competitiveness of the industry and erode its ability to support the economic growth of towns and cities across the country. I cannot emphasize too strongly that unless something is done to reduce the burden, bank customers - particularly consumers and small businesses who have few alternative sources of credit -- will find bank credit increasingly expensive and difficult to obtain in all phases of the business cycle. A program for reducing paperwork and red tape has been developed by the American Bankers Association and the state bankers associations. This program would 13 386 significantly reduce the burden of unnecessary paperwork without eliminating such safety and soundness provisions as risk -based premiums, annual supervisory exams, strong capital rules, annual audits, enhanced authority to restrict or close troubled institutions, strong supervisory and criminal sanctions, federal oversight of state-granted powers, restrictions on brokered deposits, FDIC back -up enforcement authority or appraisal reform . The retention of these provisions, as well as a whole host of other supervisory tools held by the regulatory agencies, ensure that passage of the proposed program will pose no additional risk to the deposit insurance fund. In fact, the program would help protect the deposit insurance fund by enabling the banking industry to compete without the dead weight of excessive compliance costs; only a competitive industry can hold and attract capital, which is the first line of protection for the insurance fund. At the same time, the program will substantially reduce the extensive paperwork costs imposed on banks, allowing the industry to better meet the needs of its customers and the economy. The American Bankers Association is willing and anxious to work with this Subcommittee, the Congress and the regulators to scale back the paperwork burden. 14 387 MISSION STATEMENT The creation of the Center for Community Development Lending is an expression of the ABA's commitment to find constructive ways to promote sound mortgage lending to people in minority and low- and moderate - income communities. The Center will be designed to function as a clearinghouse for a wide variety of information and products designed to help bankers better serve the credit needs of their minority and low /moderate income communities. In doing so, the Center will draw upon the resources of the entire housing chain, from the homebuilders, realtors, and appraisers to the mortgage lenders, mortgage insurers and secondary mortgage market agencies to find innovative ways to increase the availability of mortgage loans to all creditworthy applicants. Our goals include: Educating lenders about the types of products and programs available to help them design sound minority and low /moderate income mortgage lending programs suited to their particular community's needs. Acting as a liaison between lenders and other key players in the housing finance chain to eliminate obstacles that may be present in these areas. Provide a clearinghouse of information on borrower education and outreach programs developed by ABA and /or a variety of agencies and community groups. The Center will continue to work to fill the gaps in the available materials and as the ABA gains more insight into how we can best help member banks, the Center will expand it's activities to provide more " hands on" assistance . 59-308 ( 396 )
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