JULIE RAPOSA
CRA for mortgage firms
With revisions to the Community Reinvestment Act being proposed by federal regulators, Bay State bankers say they are pleased that more small banks would be eligible for a streamlined regulatory examination process and understand the need for more consumer protections.
The Federal Deposit Insurance Corp., Federal Reserve Board, Office of the Comptroller of Currency and Office of Thrift Supervision jointly issued proposed revisions to CRA regulations – a federal mandate that depository institutions must meet certain credit needs in the communities they serve – in an effort to streamline the bank examination process.
The proposed revisions would reduce the regulatory burden on smaller financial institutions by redefining the term “small bank” for CRA examinations by increasing the threshold asset size from $250 million to $500 million and would allow small banks held by large holding companies to be treated as small banks.
The proposal also would expand and clarify the provision that an institution’s CRA rating is adversely affected when it has engaged in abusive lending or discriminatory lending practices.
The abusive lending section of the CRA markup proposes to clarify what constitutes discriminatory, illegal and abusive practices within the bank’s footprint, and also takes into consideration illegal and abusive credit practices conducted with affiliate companies with which bank does lending business. Violations in either instance would lower the bank’s CRA score. Regulators may reject applications for mergers, charter changes and expansions from banks with low CRA ratings.
According to the American Bankers Association, defining illegal and abusive lending practices and giving banks a lower CRA score if abusive practices are identified will help prevent abusive lending throughout the industry.
“No one wants abusive lending practices – it’s not good for business in general and doesn’t help communities grow or business grow,” said Heather McElrath, spokeswoman for the ABA. “By defining abusive lending in CRA examinations, we are trying to define an area so that we can take more actions to stop abusive lending practices. We have found that most abusive lending practices are not done by banks that are regulated by federal laws, but we want to make sure that abusive lending practices don’t happen and there are guidelines that will decrease a bank’s rating if they are engaging in predatory or abusive lending.”
Cindy Merkle, senior vice president and chief officer of mortgage banking and community reinvestment at the $4.5 billion-asset Eastern Bank in Lynn, said addressing abusive lending practices in CRA requirements protects consumers, banks and the banking industry as a whole.
“By addressing abusive lending practices you would take into consideration violations to [the] Truth in Lending [Act], to RESPA [Real Estate Settlement Procedure Act], Fair Housing Act and Equal Credit Opportunity Act, and any violations to those regulations will impact CRA performance,” said Merkle. “Those acts protect the consumer. [Banks are] governed by those regulations to begin with and … for the first time [regulators] are going to take the way [banks] perform in the industry and overlap that with the CRA exam.”
Up With the Times
While most bankers have no objections to the proposed amendments, some suggest state legislators follow the federal lead and impose CRA requirements on non-bank entities, specifically in the area of abusive lending practices by mortgage firms.
Since banks often engage in mortgage lending activity, which is subject to CRA requirements under the lending test, some bankers maintain that CRA regulations should be adopted by the state for all businesses engaging in any type of lending practices, regardless of whether it is a depository institution.
“We would like to believe that we don’t do any abusive lending practices,” said Julie Raposa, senior vice president of $525 million-asset Citizens-Union Savings Bank in Fall River. “These proposed rules are good for the consumer because you do want these practices identified and we hope and expect that this won’t impact us in any way. One concern is that sometimes illegal and abusive lending practices can apply to mortgage companies and they do not come under federal CRA regulations. So, how is this going to protect the consumer against possibly abusive practices by those types of lenders? The hope is that the state will follow suit with what the federal [regulators have] proposed for the ultimate protection of the consumer.”
Officials at the Massachusetts Bankers Association said they believe that the predatory lending portion of the CRA revisions will not greatly affect banks in the Bay State, but rather will remind banks to be careful of other institutions with whom they conduct business.
“The illegal lending section is not a huge issue because we have state regulations that address the issue. But banks have to be vigilant in who they do business with,” said Tanya Duncan, director of federal legislative and housing policy for the MBA.
Another aspect of the illegal abusive lending section includes the regulation of equity stripping – when a bank relies on the foreclosure or liquidation value of collateral instead of the ability of the borrower to repay the loan.
According to Merkle, when underwriting loans a bank should be looking at the qualification of the homebuyer and their ability to repay the loan. Federal regulating bodies have deemed equity stripping a form of abusive lending, and Merkle said she agrees that banks should be subject to bad CRA ratings in such cases.
Receiving widespread approval from those in the banking industry is the proposed revision to change the definition of a “small bank” from an institution with less than $250 million in assets to one with less than $500 million.
According to the American Bankers Association, the change in asset size for a small bank is a direct reflection on the changing economy.
“As the world has changed, the definition of ‘small’ has changed, so these regulations are keeping up with the times,” said McElrath. “Increasing the [bank size from] $250 million to $500 million in terms of small banks just keeps up with the times. It’s not a desire to exempt small banks … they will still have to prove they are meeting CRA guidelines.”
McElrath said that revision also helps to reduce regulatory burden on small banks.
“As the bank grows in size, the examination grows in size and there is more needed in terms of a broader scope and details in the exam requirements,” said McElrath.
In the Bay State, Duncan said banks overall are pleased with the proposed revisions, especially because 75 percent of MBA-affiliated banks in Massachusetts fall under the new definition of “small bank.”
Duncan said that 169 banks out of 226 MBA bank members hold assets under $500 million and are now eligible for a more streamlined examination.
“Our banks are extremely excited about the proposal because it will mean a decreased regulatory burden because more will qualify for a more streamlined test,” said Duncan.
While banks designated as “small” are still subject to CRA regulations, examinations of small banks by regulators are less frequent and more streamlined.
The process of revamping CRA rules began in July 2001 and in response to the notice that the federal agencies were reviewing CRA requirements, the FDIC received over 400 comments, said Stephen J. Coukos, corporate attorney at Edwards & Angell LLP in Boston.
Coukos said that forced regulators to review the current CRA regulation and identify whether CRA requirements were working to the advantage of banks and consumers.
“The community groups want to see more regulation and expansion of CRA principles to govern bank lending activities and affiliates. From their perspective, there are a lot of changes in the way banks do business and we think the Fed should be evaluating activities anywhere they are doing business and not just in their [business] footprint and use CRA to evaluate lending activities beyond the footprint,” said Coukos.
The final comment period for the CRA legislation ends April 6 and, according to Duncan, the MBA supports the proposed revisions. However, the association will submit a suggestion during the comment period to raise the small bank threshold to $1 billion rather than $500 million.
