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For Release on Delivery Statement by Philip C. Jackson, Jr. Member Board of Governors of the Federal Reserve System Before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance and Urban Affairs Washington, D. C. July 26, 1978 It is t pleasure to appear before this distinguished Subcom mittee to present the views of the Board of Governors on the Community Reinvestment Act, the Home Mortgage Disclosure Act, the extension of Regulation Q authority, and a central liquidity facility for credit unions. At the outset, let me say that the general intent of the Congress in enacting the Community Reinvestment Act (CRA) seems reason ably clear. The "convenience and needs" standard has been included for many years in Federal banking statutes, such as the Bank Merger and Bank Holding Company Acts, and this standard has been one of the factors taken into account by the Federal bank and thrift regulators in decisions on applications for expansion by regulated financial institutions. In enact ing the CRA, the Congress presumably wished to emphasize to insured finan cial institutions and their Federal regulators that the convenience and needs of the community include credit as well as deposit and other services. The timing of this emphasis coincides with greater concern over the economic well-being of the inner cities and the need for revitalization of inner city neighborhoods. Nonetheless, the statute created a number of issues that needed resolution by the agencies responsible for writing regulations to implement the CRA. As you knew, earlier this year the four Federal regulators of banks and thrift institutions held joint hearings to obtain public comments and suggestions on how we might best implement the CRA. To provide a focus for the hearings, a series of questions - 2 - dealing with ths issues that the statute raised were included with the public notice of the hearings. The response we received during testimony at the hearings and in written comments have been helpful to the agencies in developing regulations to implement the act. As those questions indicated, the four agencies have been particularly troubled by the absence of statutory definitions for such terms as "entire community," "credit needs," and "low- and moderateincome neighborhoods." The- comments received confirmed that the public too was concerned about how the agencies might deal with these terms in the regulations. Numerous definitions for these and other terms in the act were suggested by the witnesses, but no consensus on the definitions emerged at the hearings. What did emerge from the hearings, however, was the concern of the insured financial institutions that the regulatory agencies, in order to offset the vagueness of various parts of the statute, might impose a heavy reporting and recordkeeping burden on them. In particular, reser vations were expressed that the agencies' efforts to define community credit needs could result in an indirect form of credit allocation. These fears were not entirely without foundation because comments received from some of the community groups did indeed urge that the agencies impose substantial reporting and recordkeeping burdens and include in the regulation a requirement that financial institutions make specific types of credit available to certain parts of the community. Such views, in the Board's judgment, do not conform with Congressional intent. On the contrary, there is clear evidence in the legislative - 3 - history of the CRA that no significant reporting or recordkeeping require ments are to be inposed on the regulated financial institutions. It also appears to be the intent of the Congress to avoid any regulatory require ments that might result in credit allocation. More generally, a number of the witnesses at the hearings and in written submissions interpreted the CRA as placing rather specific requirements on financial institutions. Gur reading of the statute suggests that the intent of the CRA is to emphasize to covered financial institutions that they have an obligation to help meet the credit needs of all parts of the communities in which their depository facilities are located, giving special attention to low- and moderate-income neighbor hoods. To accomplish this purpose, the operative sections of the CRA place rather specific requirements on the four Federal regulatory agencies. First, they are to "encourage" financial institutions to help meet their local communities' credit needs, consistent with the safe and sound operation of those institutions (§802(b)). Second, they are required to "assess" financial institutions' records of meeting those credit needs (§804(1)). Third, the supervisory agencies are to "take such record fs] into account" in evaluating applications by insured financial institutions for charters, deposit insurance, branches, office relocations, mergers, and holding company acquisitions (§804(2)). Thus, given the approach called for by the CRA, the Board believes that it would be contrary to both the spirit and letter of the CRA to impose by regulation numerous or burdensome requirements on the financial institutions. - 4 - The proposed CRA regulations recently published for public comment by the four Federal financial supervisory agencies are designed to encourage banks and thrift institutions to increase their involvement in community affairs and to take actions, within their changing lending capacities, to help meet the credit needs of their communities. Although some requirements are imposed on the financial institutions in the proposed regulation, those requirements were thought to be the best means by which to provide a reasonable basis for communication among financial institu tions, members of Llieii: communities, and the regulatory agencies. Provid ing for that communication will help identify community credit needs and will increase the amount of information flowing to members of the community regarding the types of credit available from the financial institutions. The "assess" and "take into account" requirements of the statute also pose something of a dilemma for the agencies. (Aider the act, the regulators must determine after the fact how well a bank, bank holding company, or thrift institution submitting an application has served its community's credit needs. This could tempt the agencies to give the financial institutions elaborate guidelines on how they will be judged in order to help develop a detailed record to assess and to take into account at the time an application is submitted. The danger is that such guidelines can easily become requirements or lead to the perception on the part of regulated institutions that specific types of lending and other community service actions must be conducted. While we do not favor the imposition of extensive and rigid guidelines, it is helpful to provide covered financial institutions - 5 - with suggested assessment factors as guidelines to enable them to conply with the act. In the proposed regulations, the agencies have provided a list of factors that may be considered in assessing the record of financial institutions in neeting the credit needs of their communities. Given the great variety of local conditions, the list of factors is intended to be illustrative. Considerable latitude is given to the banks and thrifts to choose the ways in which they will fulfill their obligations to their corrcnunities. Overall, the Board expects that the regulations that have been published for comment will meet the intent of the Congress in passing this statute, while avoiding the imposition of credit allocation or burdensome recordkeeping or reporting requirements on Federally-insured financial institutions. It should be recognized, however, that precise measures of per formance cannot be achieved in dealing with a matter as coirplex as a financial institution's record of service to its community. Rather, in making an assessment of this kind, a considerable element of judgment necessarily enters into an agency's deliberations. This kind of evalua tion is not capricious, however, and banks are accustomed to this type of regulatory review. It is based on years of experience in dealing with financial institutions and assessing their strengths, weaknesses, and capabilities. It is the same type of judgment that comes into play when financial regulatory agencies evaluate an institution's capital level, portfolio quality, and caliber of management. The necessity of making judgments becomes even more apparent when we consider that an institution's record under the CRA is only - 6 - one factor that must be weighed in evaluating an application. By law, the agencies must also take into account an institution's financial condition, future prospects, management, and any competitive inplications. The agencies, therefore, must balance these factors not only against each other, but against the newly enphasized CRA factor. In addition, the Board wishes to note that it plans to con sider any views expressed by State bank supervisors on the extent to which State-chartered, member banks involved in applications have been serving the credit needs of their communities. Also, since we routinely provide copies of our examination reports to State supervisors, the State authorities will be apprised of the Federal Reserve's assessments of the extent to which State member banks are meeting the credit needs of their communities. Hie second topic on which the Subcommittee requested comment is the Home Mortgage Disclosure Act of 1975 (HMDA). This act is an experiment to discover if public disclosure by depository institutions of mortgage and home inprovement lending patterns in metropolitan areas will, as the preamble to the act states, "provide . . . citizens and public officials . . . with sufficient information to enable them to deter mine whether depository institutions are filling their obligations to serve the housing needs of the communities and neighborhoods in which they are located . . . ." Midway through the experiment, no definitive judgment regarding the act's usefulness can be made since relevant evidence is still being collected and analyzed. Three studies are currently under way. The Federal - 7 - Home Loan Bank Board and the Federal Deposit Insurance Corporation are jointly sponsoring a study to determine the accuracy, completeness, cost, and usefulness of disclosure data based upon disclosures made in three metropolitan areas— Buffalo, Chicago, and San Diego. The Federal Reserve is conducting a study of the feasibility and usefulness of extending the act's disclosure requirements to non-metropolitan areas. Finally, the Department of Housing and Urban Development is funding a study of the uses to which disclosure information has been put by community groups and local governmental units. Hie results of these studies should be available by the end of the year and will greatly enhance our understanding of hew well the act serves its stated purpose. In the interim, however, several general observations can be offered based upon what is now known. The initial disclosures, which were available in September 1976, drew a flurry of interest. There were a number of media reports and analyses prepared by comnunity-consumer organizations across the country. Since then, from a national perspec tive, there has been a very limited degree of interest in disclosure statements. For example, the United States League of Savings Associations reported in May 1977 that, of 1,725 members out of 2,775 responding to a questionnaire, 1,039 (60 percent of the respondents) did not receive any requests to review their disclosure reports and another 369 (21 percent) received only one or two requests. The limited degree of interest also was confirmed in an informal survey of lenders in ten major cities in - 8 - January 1977 (American Banker, January 24, 1977, p.l). This conclusion was also reinforced by several members of the Board's Consumer Advisory Council at its recent meeting on June 1. There has been little use of disclosure data by the act's intended beneficiaries— public and private depositors who are deciding where to deposit their funds. Vfriile there have been isolated instances, we know of no concerted effort by non-governmental depositors to persuade banks or thrifts to change their credit policies through "greenlining", that is, shifting deposits based upon disclosure statements. The few State and municipal governments— for example, California and Chicago— that have instituted "greenlining”programs have adopted their own disclosure schemes tailored to meet their needs and have not relied upon the Federal act. Given the limited use of HMDA information to date, there remains the question whether the data will be helpful to the agencies in assessing a regulated institution's community investment efforts. TVo limitations in the HMDA reports suggest that these data may not be of significant help in that task. First, the CRA requires an assessment of the degree to which a bank or thrift is helping to meet the broad range of a community's credit needs, not just housing credit needs. In the case of commercial banks, however, residential mortgage lending is oily one of many lending activities. Second, the required disclosures reveal nothing about effective loan demand by geographic area, and we know of no satisfactory way of accurately measuring that demand without expend ing esources. - 9 Assuming that the Federal bank and t h r i f t regulators encourage th e ir supervised lenders to develop outreach programs pursuant to the CRA, the focus w ill be on how well the lender s e lls it s cre d it services to the community and whether i t a c tiv e ly seeks to engage in a partnership with community residents, businessmen, and local public o ffic ia ls to help tackle the community's problems. Vie believe that fostering positive out reach on the part of financial in s titu tio n s , tailored to local circum stances, is a much better way to help the nation's communities than devoting resources to determining the significance of lim ited disclosure data or to collecting additional data. In our view, community investment programs and monitoring schemes, such as residential mortgage disclosure, are best developed at the local level, where they can be fashioned to meet local circum stances. In accord with this policy of fostering local solutions to community credit problems, the Board has granted exemptions under the Home Mortgage Disclosure Act in situations where State-chartered deposi tory institutions conply with State disclosure laws that are comparable in purpose to the Federal act, even if the details of disclosure vary. Similarly, the Board endorses the continuation and expansion of the Urban Reinvestment Task Force's Neighborhood Housing Services and Neighborhood Preservation programs. These programs, operating as of June in 56 neigh borhoods in 47 cities, owe their success to the broad-based cooperation of financial institutions, local government, and neighborhood residents. We believe that these localized services should serve as a model of the type of approach that should be taken in community investment endeavors. - 10 Turning to the extension of the current deposit c e ilin g rate authorityi the Board continues to believe that such rate c e ilin g s — and the mandated deposit rate d iffe re n tia ls between banks and t h r if t s — should be removed over the long run to promote equity for small savers and eco nomic e fficie n cy. Although in practice rate ce ilings probably can be removed only gradually, growing competitive inequities under the present rate structure make i t imperative that the process of removing a r t if ic a l rate and d iffe re n tia l re strictio n s begin soon. For example, more and more t h r i f t in stitu tio n s are offering some type of tn ird -p a rty payment services and are competing a c tiv e ly and e ffe c tive ly with commercial banks for these services. Mutual savings banks and otiier t h r if t s in New England, dew York, Pennsylvania, and elsewhere have been successful in offering checking or check-like transaction accounts. The c e ilin g rate u ifie re n tia l favoring nonbank depository in stitu tio n s with transactions account powers is lix e ly to produce further competitive d is to rtio n in our in s titu tio n a l structure . While the Board recommends that the current ftegul'.tion Q rate authority be extended for one year, the Board believes that ac'. ion also should be taken by the Congress^ to eliminate the competitive inequities that have developed as a re su lt of t h r if t s offering transactions-type accounts. The Board urges that le g is la tio n be adopted to require ra te - c e ilin g p a rity among a ll depository in s titu tio n s , including cre dit unions, on any interest-bearing transactions accounts and on savingstype accounts that ere tied to th ird -p a rty transfer accounts. The appro p ria te rate ce ilin g for such accounts at th is time would be the c e ilin g on commercial bank savings accounts. - 11 - Such an approach would oe similar to that in effect for NOW accounts in New England, and would also be similar to the proposal on rate ceilings in the nationwide NOW account bill approved by the Senate Banking Committee last year. With that modification to existing law, a one-year extension would provide time for the Congress to review other basic issues involved in deposit rate ceilings and the rate differential between commercial banks and thrifts. On the broader issue, the Board continues to believe that it would be desirable to restore to the agencies the flexibility to pre scribe an3 adjust deposit rate ceilings without Congressional approval of changes in differentials. Ihe Board believes that consideration of this basic issue by the Congress can await broad review of the deposit rate structure. However, steps should be taken now to eliminate the disparity in treatment that exists because of differentials among insti tutions that are offering comparable transactions account services. Finally, the Board supports the establishment of a credit union central liquidity facility. We believe that there is a need for a lend ing fund to deal with temporary liquidity problems experienced by credit unions. Ihe possibility of such difficulties arises partly because, under the common-bond principle, the membership of an individual credit union tends to be suoject to similar economic pressures. In many cases, the members of a credit union work for the same employer, so that a plant closing or seasonal swing in employment or hours can result in sizable deposit outflows at the san® time that loan demand rises and loan repay ments lag. - 12 - Ihe Board has discussed a few modifications and clarifications to the proposed legislation with the National Credit Union Administration. During those discussions, the Administrator of the NCUA indicated that he agrees that these changes would improve the bill. One amendment would clarify that the private borrowings of the facility would not have the U.S. Government's guarantee. Another would reduce the borrowing leverage on capital to ten times capital, which would make the facility's size more reasonable in relation to industry assets. We especially commend the very limited purpose of meeting liquidity needs for which funds may be advanced, but also believe that the bill should be clarified to reflect that limitation expressly. That concludes try statement. Thank you for this opportunity to appear before the Subcommittee on behalf of the Board.
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