The federal financial regulatory agencies convened an outreach meeting in Chicago on September 24^th.  The purpose of the session was to meet with representatives of consumer and community organizations.  As detailed elsewhere in this website, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires the federal financial regulatory agencies to ask the public to identify areas of regulations that are outdated, unnecessary, or unduly burdensome.  The agencies are soliciting the views of consumer and community groups to help identify opportunities to reduce regulatory burden while maintaining the protections provided to consumers under the various banking laws and regulations.  Representatives from consumer and community groups attending the Chicago meeting shared their concerns and insights during panel and roundtable discussions.   

FDIC Vice Chairman, John M. Reich, opened the meeting.  He  welcomed the audience and thanked them for participating in the forum.  He noted that it is critical to look at regulatory burden from the perspective of consumers as well as bankers and that he hoped the meeting would further the dialogue with consumer and community organizations.  Next, Claude A. Rollin, Special Assistant to the Vice Chairman and EGRPRA Project Manager, described the goals of the EGRPRA project and outreach meetings. 

Panel Discussion

FDIC Community Affairs Officer Michael A. Frias led a panel discussion.  The panelists were:  Mr. Dan Immergluck, Mr. Geoff Smith, and Ms. Dory Rand.

Panelist Dan Immergluck:

Mr. Immergluck is a Professor at Grand Valley State University, Allendale, Michigan.  He was formerly Senior Vice President of the Woodstock Institute in Chicago, and continues to work with the Woodstock Institute as a consultant.  He has worked and written extensively on CRA policy, fair housing, fair lending, and predatory lending issues, economic development patterns and policy, development finance, and related topics.  Mr. Immergluck holds a Master of Public Policy from the University of Michigan and a Ph.D. in Urban Planning and Policy from the University of Illinois at Chicago. 

Mr. Immergluck offered a critique of the EGRPRA initiative.  He advised that the benefits of existing regulations outweigh the costs.  The industry is not unduly burdened, he suggested.  For example, banks are as profitable as ever even though banks complain that the costs of regulatory compliance are excessive.  Moreover, he suggested, continuing and excessive efforts to deregulate the industry are already underway outside of the EGRPRA context. 

Mr. Immergluck then turned to a discussion of the Home Mortgage Disclosure Act (HMDA).  He suggested that HMDA data is useful and that the more the data set is expanded, the more useful the data becomes.  For example, the Department of Justice uses HMDA data for fair lending analyses and local governments use it to analyze impediments to fair housing.  He suggested the HMDA Loan Application Register (LAR) data is structured so as to make it harder for groups to analyze the data.  He also noted that small banks complain that LAR completion is burdensome.  He suggested outside sources could easily perform such data input for banks.  The necessity of the data becomes apparent, he indicated, when one considers that lenders’ performance in rural areas cannot be compared because they are not HMDA reporters.  He also questioned the reliability of Federal Reserve Board estimates regarding reporting costs.   

Mr. Immergluck then discussed the history and impact of the Community Reinvestment Act (CRA).  CRA was enacted as Title VIII of the Housing and Community Development Act of 1977.  At that time, lawmakers were concerned that banks accepted deposits in one neighborhood (often a low- or moderate-income area) and lent it elsewhere.  The purpose of CRA and its implementing regulations is to encourage financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with the bank’s safe and sound operation. 

Mr. Immergluck noted that CRA has been instrumental in increasing access to credit and homeownership and expanding small businesses in the nation's minority and low- and moderate-income communities.  He cautioned that, in recent years, there have been increasingly successful efforts to weaken CRA and fair lending laws.  He also faulted the regulatory agencies for a lack of political will to fully implement and enforce the law.  He warned that recent proposed changes to CRA would undermine the progress made in community reinvestment and suggested that large banks might deconsolidate to evade compliance with large-bank CRA requirements. 

Mr. Immergluck then discussed the right of rescission.  He opposed amending the law to permit borrowers to waive their right of rescission.  He expressed concern that borrowers would be pressured into waiving this important protection.   

Panelist Geoff Smith

Next, Mr. Geoff Smith shared his views concerning CRA and HMDA.  Mr. Smith is a Project Director with the Woodstock Institute of Chicago, Illinois.  Mr. Smith has conducted research and written policy analyses on numerous issues related to housing and community development including predatory mortgage lending, bank branching, housing market trends, small business finance, financial institution regulation, and general community reinvestment policy.  He has authored and co-authored several Woodstock publications and testified on predatory lending issues at hearings held by the U.S. House Financial Services Committee and the Illinois Office of Banks and Real Estate's Residential Mortgage Board.  Mr. Smith has an M.S. in Geography from the University of Wisconsin-Madison.

Mr. Smith stated that proposed CRA changes are particularly harmful to small and rural communities.  He opined that, if a proposal to raise the CRA threshold to a $1 billion asset size is enacted, the following would likely result: 

• 86 percent of banks that now fall under the large bank guidelines would qualify for streamlined procedures.
• 97 percent of FDIC supervised banks would qualify for streamlined procedures.
• 85 percent of Office of Thrift Supervision supervised banks would qualify for streamlined procedures.
• 84 percent of FRB supervised banks would qualify for streamlined procedures.
• 88 percent of Office of the Comptroller of the Currency supervised banks would qualify for streamlined procedures.
• 61 percent of banks in large Metropolitan Statistical Areas (MSAs) such as Chicago, San Francisco, and other cities would qualify for streamlined procedures.
• 74 percent of banks in small MSAs would qualify for streamlined procedures.
• 99 percent of banks in rural communities would qualify for streamlined procedures.

He noted that CRA deposits also facilitate the Community Development Financial Institution (CDFI) industry.  He concluded that raising the CRA threshold would be detrimental to communities. 

He then summarized recent research on trends in small business lending in Chicago.  Since 1996, large banks have reported small business lending data to federal bank regulators under CRA, with a small business loan deemed to be a loan less than $1 million to a business of any size.  He noted that small banks do not have to report small business data.  The data that was available revealed that a disparity exists in access to small business finance based on race, he advised.  He emphasized the need for mandatory data-collection, made publicly available, to better gauge access to small business finance based on race.  Such data would further effective enforcement of fair lending laws in small business finance.  Turning to HMDA, he advised that discriminatory patterns can be detected with the expanded reporting of HMDA data and, therefore, it is important to continue data reporting requirements.  It is not burdensome to collect the data, he advised.  He concluded that the effectiveness of both HMDA and CRA are tied to the regulations that implement them and urged the agencies to work more effectively to further the protections granted by the laws.

Panelist Dory Rand
 

Next, Ms. Dory Rand discussed efforts to assist individuals with low-incomes.  Ms. Rand is a Supervising Attorney specializing in Community Investment at the Sargent Shriver National Center on Poverty Law, Chicago, Illinois.  The mission of the community investment unit, which she supervises, is to help low-income individuals and communities achieve economic prosperity.

Ms. Rand stated that the CRA service test is important to low-income individuals.  She advised that the service test should be strengthened, not diluted.  She then explained the work of the Financial Links for Low Income People Coalition (FLLIP).  FLLIP is a statewide coalition of banks, credit unions, advocates, government agencies, bank regulators, adult educators, private industry, and sponsors of Individual Development Account (IDA) programs.  Its mission is to expand financial education and asset-building opportunities for low-income people in Illinois.  Isolation from the economic mainstream, disinvestment of financial and commercial institutions, and discriminatory and predatory consumer practices make it difficult for low-income families to establish economic security for themselves, their children, and their communities.  The goal, then, of the National Center on Poverty Law is to help expand access to financial education, asset-building opportunities, and mainstream financial services; increase individuals’ financial knowledge, skills, savings, and assets; promote greater investments in and mainstream financial services for underserved low-income communities; and protect consumers from unfair, deceptive, predatory, and discriminatory practices.

Ms. Rand stressed that banks should open low cost accounts for low-income individuals; these individuals will eventually become profitable customers for the banks.  Ms. Rand then outlined The ASPIRE Act (Americans Savings for Personal Investment, Retirement, and Education), representing an agreement by Senators Santorum and Corzine regarding the importance of financial education and the importance of introducing people to the financial mainstream. 

Ms. Rand commented that keeping the CRA credit for providing low cost remittances serves as an incentive to banks.  This is another reason to maintain and strengthen the service test, she noted.  Difficulties meeting the investment test should not serve as a reason to weaken the service test, she advised.  Changes in CRA would affect FLLIP in many ways, to the detriment of the community, she indicated.  She closed by noting that regulators were instrumental in establishing building opportunities through an IDA program and hoped that such collaborative efforts would continue. 

Participant Comments

The panelists and individuals participating in the Roundtable Discussion Groups singled out a number of issues for discussion.  Highlights of their concerns and comments are summarized below.

Community Reinvestment Act

Participants questioned whether the asset size threshold should be increased.  They also wondered whether it should be indexed for inflation on a yearly basis.  They worried that if the FDIC changes its regulations, other oversight agencies will follow suit.  Thus, more banks will undergo streamlined CRA examinations.  The only reason some communities obtain services is because of banks that comply with the large bank test.  If the threshold is increased, bank services will disappear from low-income communities they suggested.  The community development criterion will make services optional; but services should not be elective.  Also, the investment test is confusing and needs to be simplified.  It should be easier for banks to invest locally.  The investment test is extremely important to CDFIs; their management should be polled on these issues.

Participants doubt that it’s difficult for banks to find CRA related opportunities.  FDIC and other regulators’ Community Affairs staffs are to be commended for their work in bringing banks’ attention to community development efforts.   Regulators need to more aggressively seek comments on CRA from community groups.

Predatory Lending

Participants indicated that predatory lending is a real problem because bank services are not available.  The existing banks should develop appropriate products.  More banks should populate certain neighborhoods.  Banks need more information on opportunities to provide financial education.  Consumers need both financial education and consumer protection. 

Payroll Cards and Stored Value Cards

Participants stated the trend to offering second class products such as payroll cards, stored value cards, and other fringe vehicles is an alarming one.  These are expensive and do not have the same protection as traditional bank services.  A recent paper published by The Fannie Mae Foundation indicates that lower income individuals do business with alternative financial institutions because banks do not offer needed products and services.

Education and Financial Literacy

Participants stressed that banks need education on how to design appropriate products.  They also need guidance on operating hours.  Banks need to show that their efforts in rural areas are directed to low- and moderate-income individuals.  Lack of innovation by a bank can be tied to the lack of commitment by the CRA Officer.  Participants felt the effectiveness of a bank’s CRA program depends on the CRA Officer and the support he/she receives.  Participants further stressed that financial literacy needs more presence in low- and moderate-income communities.   Examiners need to include the percentage of unbanked individuals in the performance context. 

General Disclosures:  Participants indicated disclosures are hard to understand.  Disclosures should be translated into Spanish.  There is a need to focus on services in disclosures.

Truth-in-Lending (Reg. Z) and RESPA-Mortgage Disclosures:  These are not given in time; borrowers see them at closing.  Adjustable Rate Mortgage disclosures need improvement.

Truth-in-Lending - Right of Rescission:  A waiver would make the right meaningless.  The importance of the rescission period lies in the accuracy of disclosures.  If the disclosures are found to be inaccurate, the rescission period should be extended accordingly.