I am delighted to have the
opportunity to speak to America's community bankers. This is an
era of rapid change in the world of finance, especially for
community bankers. Some of the impending changes in financial
markets may create tremendous opportunities; others may be
worrisome. But whatever the case, it makes sense to convene and
talk about the issues.
Today I would like to talk about
the impact of the landmark Gramm-Leach-Bliley Act (GLB) on
community reinvestment. GLB has, as you know, made significant
changes in the financial landscape, simultaneously generating new
opportunities and new challenges. In the process some changes have
been made affecting the Community Reinvestment Act (CRA), but
these changes were actually rather minor. Some members of the
Congress wanted a significant expansion of CRA, and others wanted
a significant contraction. After vigorous debate and negotiation,
the two sides compromised. In my view, the end result was not a
huge change in the span of CRA. But time will tell.
Just for background, CRA now
covers all insured depository institutions. The institution's
regulator examines the institution's low- and moderate-income
lending in low- and moderate-income areas at regular intervals,
approximately two years for large institutions and approximately
three years for smaller institutions. Institutions are rated on
this so-called lending test, along with an investment test
(looking at participation in equity-type projects) and a service
test (looking at other types of service to low- and
moderate-income individuals). About 20 percent of institutions
receive "outstanding" ratings, 75 percent receive
"satisfactory" ratings, and the rest receive either
"unsatisfactory" ratings or the even worse rating of
"substantial noncompliance." The Federal Reserve Board
takes these ratings into account in approving mergers.
Historically, mergers are disapproved on CRA grounds only in a
small minority of cases--approximately one denial for every 1,100
The new bill changes matters in
the following ways:
Bank holding companies cannot become financial holding companies
or engage in the new financial activities authorized by GLB unless
all of their subsidiaries and affiliates have CRA ratings of
satisfactory or better. Should any financial holding company
subsidiary or affiliate fail to maintain a satisfactory CRA
rating, the financial holding company would be prohibited from
commencing any new financial activities.
This GLB change for the first
time extends the review of CRA performance to transactions
involving nonbanking activities. It also provides incentives for
expansion-minded companies to achieve and maintain at least
satisfactory CRA ratings in their depository institutions'
subsidiaries. In this sense it could be viewed as slightly
strengthening CRA. At the same time, most depository institutions
already have a CRA rating of at least satisfactory and an
incentive to maintain such a rating if they want to engage in
mergers or acquisitions.
Currently small insured depository institutions with assets of
less than $250 million, about one-third above the median asset
size represented in your association, are examined on a three-year
cycle for their CRA performance. They are also examined on the
same three-year cycle for compliance with other laws, such as
Truth in Lending, Equal Credit Opportunity, and Real Estate
Settlement Procedures. For these small institutions only, GLB puts
the CRA examination on a four-year interval if the institution's
last CRA rating was "satisfactory" and on a five-year
interval if the institution's last CRA rating was
"outstanding." This change is intended to reduce
examination burdens on small institutions, and it may also be
viewed as providing another slight incentive to improve CRA
Because laws for other
compliance matters have not changed, the regulators are still
thinking about how to schedule the compliance exams for small
institutions. They are considering a variety of exam schedules.
Some fear that any changes in scheduling will represent a
loosening of CRA, but I do not believe this will be the case.
There are ways of making the full exam cycle, for CRA and for
other compliance matters, more effective and less costly. Our
regulators are working out these issues, and we will have new
guidance for our examiners soon.
Sometimes financial institutions make lending agreements with
community groups, in connection with merger applications or even
if a non-merging institution wants to farm out some of its CRA
activities. Under GLB, if these agreements entail loans of less
than $50,000 a year and payments of less than $10,000 a year,
nothing is changed. But above these thresholds, both the
institution and the community groups must publicly disclose the
agreements and make annual reports to the institution's regulator.
The institution must list the payments to community groups under
these agreements, other terms of the agreements, and the services
provided by the community group. The community group must record
the use of the money received under the agreements. As is the
present practice, regulators will not enforce these private
lending agreements per se, but they do enforce compliance with the
The sunshine provisions will
provide new data on lending agreements. The provisions could raise
the cost of making CRA agreements for community groups and
discourage involvement in the applications process, but they could
also calm fears about widespread extortion in the formation of CRA
loan agreements. We will have to see the data before we can better
predict their effect.
Studies. Both the Federal
Reserve and the Treasury are responsible for significant new
studies of CRA. The Fed is responsible for a comprehensive survey
of financial institution lending terms, default rates, and
profitability rates of CRA loans. We recently mailed a survey to
the 500 largest insured depository institutions on several types
of CRA lending and are now getting back responses.
The Treasury is responsible for
a study of the effect of CRA on financial services in low- and
moderate-income communities and to persons of modest financial
means. The Treasury is currently collecting and analyzing baseline
neighborhood data to make a first report very soon and a more
complete report toward the end of next year.
* * *
There are other, less significant,
provisions, but these are the main ones. In the end, it is
difficult to say whether GLB strengthens or weakens CRA. My own
tentative verdict is that the strength of CRA has not been changed
much, but this conclusion is tentative and could change as we gain
experience with the new law.
But one thing does seem clear.
The lending surveys and the new reporting requirements will
generate valuable new data for analysis of the CRA law. As so
often happens, in the end the new data may represent by far the
most significant impact of GLB on CRA.