PAMELA J. MONTPELIER
Strained resources
As banks have begun to provide a greater variety of mortgage products for minorities and low- to moderate-income families, the question of whether the Community Reinvestment Act is still necessary arises, especially among small banks that tout their commitment to local communities.
CRA mandates that depository institutions reinvest money in the communities they serve, with an emphasis on providing loans to underserved populations. Some in the banking industry say the ideals behind CRA are important, but the regulatory burden that comes along with the measure is increasingly difficult for smaller banks, which, they argue, fulfill its precepts in their normal course of business.
“The idea of CRA is still important,” said Pamela J. Montpelier, president and chief executive officer of Medway-based Strata Bank.
However, Montpelier said smaller banks, with fewer resources, should not be placed under the burden to comply with complex CRA requirements.
Strata Bank, with approximately $300 million in assets, currently goes through the more complex examinations for CRA. Under the act, institutions with assets of up to $250 million are eligible for simpler CRA exams, but leaders at many community banks in the state that fall between the $250 million and $1 billion mark say institutions of that size also should qualify for the streamlined exams.
Recently, the Office of Thrift Supervision approved a rule effective Oct. 1 modifying the existing “small institution” test that determines whether thrifts must undergo the full or simplified CRA exams. The rule increases the small-institution threshold for savings associations from $250 million to $1 billion.
“The final rule will permit thrift institutions qualifying as small savings associations to benefit from streamlined CRA examinations, as well as reduced data collection and reporting burdens under the CRA,” according to an OTS press release on the change.
The Federal Deposit Insurance Corp. supports the initiative and solicited comments from the banking industry on its proposal to change the small institution test threshold. Montpelier is a supporter of the small-institution threshold change.
She notes that if the regulatory burden for smaller banks is lifted, those banks could spend more time and money on the exact areas on which CRA focuses, like banking seminars for minority communities.
Montpelier said the Strata Bank currently incurs added personnel costs for employees who must track CRA data for the institution. It is time and money, she says, that might be better spent reaching out to underserved populations in the bank’s service area.
At Mutual Federal Savings in Whitman, Glen White, president and chief executive officer, said establishing policies and procedures and using software to track information must be factored into the bank’s budget.
While there is some support from federal regulators to modify CRA test thresholds, not all are on board. The Federal Reserve and the Office of the Comptroller of the Currency have yet to follow the lead of OTS and the FDIC by moving forward with their own proposals to modify the CRA.
Last summer, the Federal Reserve withdrew its proposed amendments to CRA regulations. The original proposal had been to raise the small-bank asset threshold from $250 million to $500 million.
“While community banks strongly favor raising the threshold, it is uncertain that the cost savings to the average community bank of being ‘small’ rather than ‘large’ under the proposal would be significant,” the Fed’s statement read. “On the other side, the proposal’s cost in the form of a potential reduction in community development capital in a significant number of rural communities is also uncertain, but potentially large in at least some communities. On balance the board does not believe that the cost savings of the proposal clearly justify the potential adverse effects on certain rural communities.”
According to the Massachusetts Division of Banks’ Web site, the state banking commissioner supports the FDIC’s proposal to increase the threshold to $1 billion in assets, but points out areas needing clarification.
“Unfortunately, movement away from a single definition of ‘small bank’ by the federal regulators, including the proposed definition, have resulted in multiple and competing definitions of ‘small bank’ and multiple measures of performance depending on the charter of the institution. The division believes that such differences will only increase, rather than decrease, regulatory burden on the industry. An evaluation of a bank’s CRA lending performance should be based on the size and complexity of the institution, its product offerings and business strategy, and the community it serves – not on the basis of the bank’s charter. The best way to provide regulatory relief is to develop a uniform standard among the four federal regulators”
Compromise Sought
Daniel J. Forte, president and chief executive officer of the Massachusetts Bankers Association, said while the move by OTS, which regulates federally chartered and many state-chartered thrifts and savings banks, is a good one; it will only impact a small portion of banks in the state.
However, Forte said if the FDIC decides to change the small-institution threshold, approximately 80 percent of banks in Massachusetts banks would be affected.
“We have been supportive of that type of move,” said Forte.
Forte said it would be “nice” for the various federal regulators to come to a compromise on the CRA issue, but he added there is nothing wrong with regulators taking different approaches.
“This creates pressure for more efficiency down the road,” said Forte.
Montpelier said it would be good to see the regulators on the same page. However, as president of an FDIC member bank, she supports their proposal to change the small-institution threshold.
Forte said those changes to the small-institution test are not a change in law, but a change in regulation. He points out that since 1994, banks have dealt with a “rash” of new regulations in an already heavily regulated industry.
According to the OCC Web site, the CRA was enacted in 1977 to prevent redlining and to encourage banks and thrifts to help meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods. It extends and clarifies the longstanding expectation that banks will serve the convenience and credit needs of their local communities. The requirements of the CRA include federal financial institution regulators assessing the record of each bank and thrift in fulfilling their obligations to the community and to consider that record in evaluating applications for charters or for approval of bank mergers, acquisitions and branch openings.
“For smaller banks, we are not the ones the law was written for,” said White. “[Lending within the community] is the core of what we do.”
Montpelier agreed, saying Strata Bank has a community commitment program.
“It’s a corporate mission of mine,” said Montpelier. “Our [purpose] in the industry is to help nonprofits.”
CRA was meant to assure banks were giving back to their communities, Forte said.
“The original intent of CRA was to ensure the banking industry was doing a good job in returning money to the communities in which it was taking deposits,” Forte said.
Some consumer groups, such as the Association of Community Organizations for Reform Now, are opposed to the CRA changes, saying it will result in fewer home loans to underserved communities.
Forte said making changes that would give more banks a simpler CRA exam does not mean these banks will shirk their duties in the community.
“We have been trying to assure regulators that the banks’ behavior isn’t going to change,” Forte said.
As banks struggle to comply with each new regulation, some in the industry say there is another type of financial institution that should be under the same strict guidelines.
“Credit unions should be under the same regulatory burden as we are [if they offer the same services],” said Montpelier.
According to Forte, Massachusetts state-chartered credit unions do have a CRA responsibility. However, the requirements are not identical, he said.
Forte’s issue comes with federally chartered credit unions that have no CRA responsibility, he said.
“You would think these large institutions would have more responsibility instead of no responsibility,” said Forte.
Robert Kimmett, senior vice president of marketing and public relations at the Massachusetts Credit Union League, said credit unions are already “creatures” of the community.
“They invest back into the community every day,” Kimmett said.
Kimmett said while credit unions in the Bay State do comply with CRA, the measure wasn’t intended for the credit union industry in the first place.
“If we look at the genesis of CRA, it was designed to resolve a problem in the banking system,” said Kimmett. “It wasn’t the credit union’s problem to begin with.”
