House Democrats Launch Bill For Tougher CRA Standards

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American Banker
By: Stacy Kaper
September 30, 2010

WASHINGTON - House Financial Services Committee Democratic leaders introduced a bill Wednesday to expand the Community Reinvestment Act and impose stricter standards on banks.

The bill from Rep. Luis Gutierrez would make it tougher for banks to receive an "outstanding" rating on their CRA exams, add a new "sufficient" rating and require bank affiliates and subsidiaries to be included in evaluations.

"This is an important first step on the road to reforming and modernizing the CRA to better meets the needs of our communities and address the new financial marketplace," said the Illinois Democrat in a press release. "We are laying the groundwork for next year, identifying priorities, and evaluating what we have been able to fix and what remains to be fixed in our financial markets."

Expanding the CRA - which requires institutions to meet the needs of all borrowers in their communities, particularly those of lower and moderate incomes - has long been a top goal of community and consumer groups who argue that strengthening the CRA is necessary to ensure lower-income borrowers have sufficient access to credit.

"This bill is the great equalizer," said David Bernenbaum, the chief program officer for the National Community Reinvestment Coalition. "It's going to ensure that the entire financial services industry is responsible for meeting the credit needs of both our consumers and our communities as well as ensuring that the table is set for treating each institution, meaning all the different types of financial services companies, similarly."

The bill would extend CRA requirements to independent mortgage companies, investment banks and hedge funds with the Consumer Financial Protection Bureau tasked with promulgating rules to enforce the standards for mortgage brokers and originators and the Securities and Exchange Commission promulgating regulations to cover investment banks, securities firms and hedge funds. The CRA would be extended to insurance companies, with the Federal Reserve Board in consultation with the newly established Office of National Insurance, writing such rules. The bill would not extend the CRA to credit unions, which banks have sought for years.

The bill's introduction comes late in the congressional year and although it could move through the Financial Services Committee and even the House after the elections in a lame-duck session of Congress, it faces long odds in the Senate, which has no plans to take up the matter this year.

Its prospects for a legislative victory are further dwarfed by expectations Republicans will pick up considerable seats in the elections and possibly take control of the House next year.

Some observers were instantly critical of the bill. "There's so much wrong with this, it's really hard to understand what they're thinking," said William Isaac, a former Federal Deposit Insurance Corp. chairman, who is now the chairman of LECG Global Financial Services and of Fifth Third Bancorp.

"So insurance companies get a pass essentially and credit unions get a pass and how do you enforce it against an investment banking firm that does not have a banking charter?"

But many bank representatives were more focused on proposed changes to the enforcement system. Under the CRA bill, it would be compulsory for the affiliates and subsidiaries of banks to be included in CRA exams, instead of leaving whether to include them to the discretion of individual institutions, as the system currently works.

Ratings would also be adjusted by adding a new "C" equivalent midlevel grade of "sufficient," which is intended to add more detail to performance evaluations. The new rating would come in addition to the current ones: "outstanding," "satisfactory," "needs improvement" or "substantial noncompliance."

Institutions would also have to jump through additional hoops to receive an outstanding rating by applying to its regulatory agency to receive such a score. It would need to receive at least three satisfactory ratings in a row before it could apply for an outstanding rating.

The bill would also require public input while the exam is in process and require regulators to publish and receive comments on an institution's preliminary exam results. "In many ways it's expanding the role for consumer comments in the merger area," Berenbaum said. "It's mandating a much clearer roadmap as far as what is outstanding, what is satisfactory and the other categories that are created."

For banks at the lower end of the spectrum, they would be required to submit an improvement plan to their regulator, which would be subject to public comment, when receiving a needs-to-improve or substantial noncompliance rating overall or in any assessment area.

But Isaac said it was a mistake to change the ratings system, and said the bill did not explain the difference between satisfactory and sufficient. "For the life of me I don't understand the difference between satisfactory and sufficient," he said.

The push to reform the CRA comes as regulators finalized a joint rule this week requiring examiners to consider CRA credit for banks that make low-cost student loans to low-income borrowers. The change, which was proposed in June, was a requirement of the Higher Education Opportunity Act enacted in 2008.

Under the new rule, credit for education loans only applies to a loan originator, not those acquiring a loan. The regulators defined "low-cost" loans as private loans with rates and fees no greater than those in the federal government's direct student lending program.

The rule also clarified that an institution providing support for a minority- or women-owned financial institution could get credit for the support even if the two institutions were in different assessment areas.

Joe Adler contributed to this story.

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