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For the second time this year, the Federal Deposit Insurance Corporation is proposing to relax the obligations of a large number of financial institutions under the Community Reinvestment Act (CRA) of 1977. As the October 20 deadline for public comment approaches, banks on one side and community development organizations on the other are competing furiously to flood the FDIC with pleas for and against the changes.
The FDIC has jurisdiction over state-chartered financial institutions. Currently, all FDIC-insured banks with assets of more than $250 million must be evaluated under CRA, which requires them to lend, invest and offer retail services in low- and moderate-income neighborhoods within the areas they serve.
Under the proposal, issued in August, all FDIC institutions with assets between $250 million and $1 billion would be given a new streamlined CRA test. Instead of having to demonstrate they are making comprehensive efforts to reach their entire community, they can decide for themselves which efforts they want to be rated on, “based on the opportunities in the market and the banks’ own strengths.” In addition, it would expand the definition of “community development” to include all rural areas, regardless of income. Currently, only investments in low- and moderate-income census tracts count.
In New York State, 27 institutions would fall under the new rules, including 10 in New York City. Most of the urban banks are international enterprises with local operations, such as Habib American Bank, Chinese American Bank and Mitsubishi Trust. Industry leaders say the full CRA review threatens the viability of small institutions dedicated to business lending in a particular geographic area. “Community banks are not in a position to be investing resources in other places,” said William Crowell III of the Independent Bankers Association of New York State, which represents 70 locally run institutions. “They’re just trying to eliminate some of these regulatory requirements because they are already, by their nature, fulfilling them.”
Advocates for increased investment in low-income areas counter that the relaxation of CRA will deprive communities of badly needed investment. “It waters down the standard,” said Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project. “It reduces our ability to hold small banks accountable, to have strong lending programs, good account features, make meaningful investments in community development.”
Among the critics is Congressman James Walsh, a Syracuse Republican who chairs the House HUD/VA appropriations subcommitee. Last month, in a letter to FDIC Chairman Donald Powell, he called the measure a “serious threat to much-needed community development efforts in rural areas.” Walsh asserted that the proposed change “undermines the statutory intent of CRA to require banks to engage in community development activities that benefit low- and moderate-income families.”
The Office of Thrift Supervision, which regulates savings and loans, has already passed a parallel rule change. But don’t expect the Federal Reserve, which regulates nationally chartered banks, to join them. In July, the Fed announced it was withdrawing its support for a measure it had proposed earlier this year, which would have outright exempted all institutions with assets under $500 million. (The FDIC and OTS proposed similar measures.) “While community banks strongly favor raising the threshold,” the Fed announced in a statement, “the Board does not believe that the cost savings of the proposal clearly justify the potential adverse effects on certain rural communities.”