31
Aug
2004
When Blackhawk State Bank had its most recent examination for the Community Reinvestment Act (CRA) last year, it took hundreds of staff hours: several people assisting the inspector three to four hours a day for nine weeks, plus a handful of people preparing reports before the actual evaluation.
"It's a massive job in paperwork, and it doesn't really accomplish what the CRA sets out to do," said W. Gerard Huiskamp, the bank's president.
Huiskamp explained that the Community Reinvestment Act - which took effect in 1977 and is meant to ensure that financial institutions serve the credit needs of underserved (low- and moderate-income) populations - does little except create paperwork for locally owned and operated banks such as his.
The reason? Those banks don't need the regulatory push, he claimed. "We have to cover our area," he said. "And if we don't cover our area, we won't have any customers."
The Community Reinvestment Act uses a series of tests in the areas of lending (50 percent of a score), investment (25 percent), and service (25 percent). Presently, banks with $250 million in assets are subject to a "large bank" examination every two years; those with less than that have a less rigorous "small bank" test less frequently.
Blackhawk State Bank is the type of company that's being targeted by new rules proposed by the Federal Deposit Insurance Corporation (FDIC). Under these rules, the FDIC would raise the ceiling for the "small banks" designation from assets of $250 million to assets of $1 billion. That would mean an easier examination for nearly 900 state-chartered banks across the country, including Blackhawk. Banks in this range would still be subject to exams every two years.
The proposal - which the FDIC board is scheduled to vote on October 14 - also changes the examination itself, stripping out investment and service components and making them options under the lending test, rather than separate requirements. The goal of the proposal is to reduce the regulatory burden on some banks.
This might sound arcane, but bank watchdogs disagree. Advocates for low- and moderate-income populations worry that the rule change will give many banks a free pass in terms of putting their money back into the neighborhoods that need it most. These banks will have an easier examination, for one thing, and they'll also be able to choose among lending, investment, and service, rather than being required to do all three in low- and moderate-income neighborhoods.
They fret that banks will turn down more people for loans, put less money in investments such as low-income-housing tax-credit projects, and have fewer branches and banking products in poorer neighborhoods.
Institutions under the "small bank" test are "not as likely to invest in underserved neighborhoods," said John Taylor, president of the National Community Reinvestment Coalition (NCRC).
The NCRC is adamantly opposed to the rule change. "It would be a catastrophe," Taylor said last week at a predatory-lending forum in Davenport. He noted that of the 297 Iowa banks examined by the FDIC, only one - Wells Fargo - would have to go through the large-bank examination under this proposed regulation.
The number of banks nationwide actually affected by the rule is 879, with $393 billion in assets. That represents roughly 17 percent of banks and 22 percent of assets overseen by the FDIC (which only monitors the compliance of state-chartered banks). Eleven Iowa banks and 70 Illinois banks, with more than $38 billion in assets, would change from "large" to "small" banks under the rule.
Milan-based Blackhawk State Bank, with roughly $570 million in assets, is one of the institutions that would switch from a "large bank" to "small bank" status. Huiskamp said he didn't expect his bank's paperwork to decrease. "I would hope it would, but I don't expect it to," he said.
Objections and Assumptions
The NCRC is an organization that was formed in 1990 in an effort to get more private capital into low- and moderate-income neighborhoods. One of its major activities is monitoring the Community Reinvestment Act and how well banks comply with it.
The CRA has been a challenge to enforce, but it has one key facet to force compliance: A failing grade on a CRA exam can keep banks from merging.
That's a major incentive for large banks to do well on their CRA exams. "Almost never does a large bank get a 'failed' CRA rating," Taylor said. "That almost always happens to small banks."
Taylor believes that the less-stringent test for small banks plays into their performance, as well, and that's a source of concern about the proposed FDIC rule. The NCRC believes that easier exams for banks with between $250 million and $1 billion in assets will result in institutions reducing their activities in low- and moderate-income communities. In an April comment letter on proposed CRA regulatory changes, Taylor predicted the rule would have a "profound" impact on banks' lending and investment patterns.
The major problem in evaluating the proposed rule change is that there are only guesses about what it would do. There is no doubt that the CRA has been effective in spurring investment and service to low- and moderate-income communities over the past quarter-century, but that's not the question here; what's at issue is which type of exam certain banks should be subject to.
Although organizations such as the NCRC have concerns about the proposed rule, they have suppositions more than evidence that it will have a negative effect. The NCRC's April comment letter, for example, boldly predicts that the proposed FDIC rule would "reduce ... investments in low- and moderate-income communities by at least half." But that's based on a logical leap: "It is reasonable to assume that banks with High Satisfactory ratings would invest at the level of banks with Low Satisfactory ratings."
What critics of the proposed FDIC rule do know is that changing the small-bank CRA exam gives banks an opportunity to get out of certain types of banking activities.
One aspect of the rule that even the American Bankers Association acknowledges as unusual is that FDIC is acting unilaterally. In the past, all four agencies that regulate banks - the FDIC, the Federal Reserve Board, the Officer of the Comptroller of Currency, and the Office of Thrift Supervision - made changes to policy in unison.
On the issue of the "small bank" definition, the four had proposed raising the limit from $250 million to $500 million, but that was ultimately abandoned. The Federal Reserve Board released a statement that it was withdrawing the proposal because the potential for negative impacts on low- and moderate-income neighborhoods was greater than the benefit of reducing the regulatory burden on banks.
The Office of Thrift Supervision then raised its limit to $1 billion - that change takes effect October 1 - and the FDIC made its $1-billion rule-change proposal independent of its fellow regulators.
"That's actually unprecedented in bank-regulating history," said Josh Silver, the NCRC's vice president of research and policy.
And opponents of the proposal see a political - rather than a practical - agenda in the proposed rule change.
FDIC Chair Donald Powell was a community banker in Amarillo, Texas, before President George W. Bush appointed him to his current position in 2001. Powell gave $21,000 to Bush's gubernatorial campaigns and helped raise more than $100,000 for his presidential bid in 2000.
Major Damage or No Big Deal?
The NCRC believes that the FDIC rule will have a dramatic impact on communities, particularly those in rural areas. The organization notes the $393 billion in assets that would be covered by "small bank" rules instead of the current "large bank" exams.
But that describes the rule's scope rather than its impact.
Silver said that the question of the actual performance of banks under the "large" and "small bank" tests is not "well researched." He said, however, that banks under the more rigorous "large bank" evaluation receive a greater percentage of "outstanding" grades than those under the "small bank" exam. Silver suggested that the FDIC should hold off making a change until that issue can be properly explored.
He further said that those grade discrepancies are probably a function of both the thoroughness of the "large bank" exam and the greater resources of bigger banks.
Taylor conceded that there's no research studying the performance of banks under the "small" and "large" examinations. But he said there is evidence that banks considered "large" do better. "It's experience, it's anecdote, and it's logic," he said.
Other research suggests that active monitoring of banks improves their performance in terms of how well they serve the needs of low- and moderate-income populations. Silver noted, for example, that banks have a better record than credit unions - which are not covered by the CRA - when it comes to serving those people.
The NCRC is fearful that the less-thorough "small bank" exam will result in banks skirting the law. But of equal concern is the changing of the test.
Instead of having separate tests for lending, investment, and service, there will now be a "community development" criterion for banks between $250 million and $1 billion under the FDIC rule.
The result is that banks will be able to comply with this component without doing all three. "Maybe you do just one of them," Silver said. He suggested that this will result in "fewer branches and less investment in low- and moderate-income communities." Activities that might suffer are funding for affordable housing, tax credits, and financial literacy.
A prominent bankers organization disagrees. "What it does is make it more flexible," said Paul Smith, the American Bankers Association general counsel in the area of regulation. The investment and service elements "are being folded into a streamlined exam, but they are there. ... It lets you mix the parts better."
The banking industry strongly favors this new FDIC regulation, arguing - as Blackhawk's Huiskamp does - that community banks will always serve low- and moderate-income communities. "The CRA has often been viewed by them as a no-brainer," said Charlotte Birch, a spokesperson for the American Bankers Association. Community banks "have always been heavily invested" in their communities.
Davenport-based Northwest Bank & Trust wouldn't be affected by the FDIC rule; it's overseen by the Office of Thrift Supervision and only has assets of $175 million. But President Joe Slavens said he thinks community banks such as Blackhawk and Quad City Bank & Trust deserve to be considered "small" banks, even though they have enough assets to fall into the "large bank" category. "I don't think they behave like large banks," Slavens said. "Community banking does a good job of serving the community."
He noted that his bank had a market share of 2.7 percent in terms of home mortgages in 2000, 2001, and 2002, but a market share of 5.5 percent in low- and moderate-income census tracts.
Slavens added that the CRA is most useful in forcing the hand of large banks, and that raising the threshold for large banks is "probably not inappropriate at all. ... The value of the CRA is directly proportionate to the size of the organization."
Locally owned banks strongly support the intent of the law, Birch said, just not the regulatory burden it places on them.
She further notes that under the FDIC rule, all banks would still be examined for compliance with the CRA. "There's a misperception that it's an exemption from the CRA," she said. "It makes it easier on a community bank that would have fewer resources to comply."
Birch also said that concerns about less investment in communities are unfounded. "It should not affect the level of [community] investment at all," she said. "It's more the paperwork."
The NCRC's Taylor disagreed. Of course community banks are invested in their communities, he said, but "it's a matter of whom they lend to: big farmers versus small farmers, big business versus small business."
A comment period for the proposed FDIC rule ends September 20. For more information on the regulation, visit (http://www.fdic.gov/news/news/press/2004/pr8304.html).
"It's a massive job in paperwork, and it doesn't really accomplish what the CRA sets out to do," said W. Gerard Huiskamp, the bank's president.
Huiskamp explained that the Community Reinvestment Act - which took effect in 1977 and is meant to ensure that financial institutions serve the credit needs of underserved (low- and moderate-income) populations - does little except create paperwork for locally owned and operated banks such as his.
The reason? Those banks don't need the regulatory push, he claimed. "We have to cover our area," he said. "And if we don't cover our area, we won't have any customers."
The Community Reinvestment Act uses a series of tests in the areas of lending (50 percent of a score), investment (25 percent), and service (25 percent). Presently, banks with $250 million in assets are subject to a "large bank" examination every two years; those with less than that have a less rigorous "small bank" test less frequently.
Blackhawk State Bank is the type of company that's being targeted by new rules proposed by the Federal Deposit Insurance Corporation (FDIC). Under these rules, the FDIC would raise the ceiling for the "small banks" designation from assets of $250 million to assets of $1 billion. That would mean an easier examination for nearly 900 state-chartered banks across the country, including Blackhawk. Banks in this range would still be subject to exams every two years.
The proposal - which the FDIC board is scheduled to vote on October 14 - also changes the examination itself, stripping out investment and service components and making them options under the lending test, rather than separate requirements. The goal of the proposal is to reduce the regulatory burden on some banks.
This might sound arcane, but bank watchdogs disagree. Advocates for low- and moderate-income populations worry that the rule change will give many banks a free pass in terms of putting their money back into the neighborhoods that need it most. These banks will have an easier examination, for one thing, and they'll also be able to choose among lending, investment, and service, rather than being required to do all three in low- and moderate-income neighborhoods.
They fret that banks will turn down more people for loans, put less money in investments such as low-income-housing tax-credit projects, and have fewer branches and banking products in poorer neighborhoods.
Institutions under the "small bank" test are "not as likely to invest in underserved neighborhoods," said John Taylor, president of the National Community Reinvestment Coalition (NCRC).
The NCRC is adamantly opposed to the rule change. "It would be a catastrophe," Taylor said last week at a predatory-lending forum in Davenport. He noted that of the 297 Iowa banks examined by the FDIC, only one - Wells Fargo - would have to go through the large-bank examination under this proposed regulation.
The number of banks nationwide actually affected by the rule is 879, with $393 billion in assets. That represents roughly 17 percent of banks and 22 percent of assets overseen by the FDIC (which only monitors the compliance of state-chartered banks). Eleven Iowa banks and 70 Illinois banks, with more than $38 billion in assets, would change from "large" to "small" banks under the rule.
Milan-based Blackhawk State Bank, with roughly $570 million in assets, is one of the institutions that would switch from a "large bank" to "small bank" status. Huiskamp said he didn't expect his bank's paperwork to decrease. "I would hope it would, but I don't expect it to," he said.
Objections and Assumptions
The NCRC is an organization that was formed in 1990 in an effort to get more private capital into low- and moderate-income neighborhoods. One of its major activities is monitoring the Community Reinvestment Act and how well banks comply with it.
The CRA has been a challenge to enforce, but it has one key facet to force compliance: A failing grade on a CRA exam can keep banks from merging.
That's a major incentive for large banks to do well on their CRA exams. "Almost never does a large bank get a 'failed' CRA rating," Taylor said. "That almost always happens to small banks."
Taylor believes that the less-stringent test for small banks plays into their performance, as well, and that's a source of concern about the proposed FDIC rule. The NCRC believes that easier exams for banks with between $250 million and $1 billion in assets will result in institutions reducing their activities in low- and moderate-income communities. In an April comment letter on proposed CRA regulatory changes, Taylor predicted the rule would have a "profound" impact on banks' lending and investment patterns.
The major problem in evaluating the proposed rule change is that there are only guesses about what it would do. There is no doubt that the CRA has been effective in spurring investment and service to low- and moderate-income communities over the past quarter-century, but that's not the question here; what's at issue is which type of exam certain banks should be subject to.
Although organizations such as the NCRC have concerns about the proposed rule, they have suppositions more than evidence that it will have a negative effect. The NCRC's April comment letter, for example, boldly predicts that the proposed FDIC rule would "reduce ... investments in low- and moderate-income communities by at least half." But that's based on a logical leap: "It is reasonable to assume that banks with High Satisfactory ratings would invest at the level of banks with Low Satisfactory ratings."
What critics of the proposed FDIC rule do know is that changing the small-bank CRA exam gives banks an opportunity to get out of certain types of banking activities.
One aspect of the rule that even the American Bankers Association acknowledges as unusual is that FDIC is acting unilaterally. In the past, all four agencies that regulate banks - the FDIC, the Federal Reserve Board, the Officer of the Comptroller of Currency, and the Office of Thrift Supervision - made changes to policy in unison.
On the issue of the "small bank" definition, the four had proposed raising the limit from $250 million to $500 million, but that was ultimately abandoned. The Federal Reserve Board released a statement that it was withdrawing the proposal because the potential for negative impacts on low- and moderate-income neighborhoods was greater than the benefit of reducing the regulatory burden on banks.
The Office of Thrift Supervision then raised its limit to $1 billion - that change takes effect October 1 - and the FDIC made its $1-billion rule-change proposal independent of its fellow regulators.
"That's actually unprecedented in bank-regulating history," said Josh Silver, the NCRC's vice president of research and policy.
And opponents of the proposal see a political - rather than a practical - agenda in the proposed rule change.
FDIC Chair Donald Powell was a community banker in Amarillo, Texas, before President George W. Bush appointed him to his current position in 2001. Powell gave $21,000 to Bush's gubernatorial campaigns and helped raise more than $100,000 for his presidential bid in 2000.
Major Damage or No Big Deal?
The NCRC believes that the FDIC rule will have a dramatic impact on communities, particularly those in rural areas. The organization notes the $393 billion in assets that would be covered by "small bank" rules instead of the current "large bank" exams.
But that describes the rule's scope rather than its impact.
Silver said that the question of the actual performance of banks under the "large" and "small bank" tests is not "well researched." He said, however, that banks under the more rigorous "large bank" evaluation receive a greater percentage of "outstanding" grades than those under the "small bank" exam. Silver suggested that the FDIC should hold off making a change until that issue can be properly explored.
He further said that those grade discrepancies are probably a function of both the thoroughness of the "large bank" exam and the greater resources of bigger banks.
Taylor conceded that there's no research studying the performance of banks under the "small" and "large" examinations. But he said there is evidence that banks considered "large" do better. "It's experience, it's anecdote, and it's logic," he said.
Other research suggests that active monitoring of banks improves their performance in terms of how well they serve the needs of low- and moderate-income populations. Silver noted, for example, that banks have a better record than credit unions - which are not covered by the CRA - when it comes to serving those people.
The NCRC is fearful that the less-thorough "small bank" exam will result in banks skirting the law. But of equal concern is the changing of the test.
Instead of having separate tests for lending, investment, and service, there will now be a "community development" criterion for banks between $250 million and $1 billion under the FDIC rule.
The result is that banks will be able to comply with this component without doing all three. "Maybe you do just one of them," Silver said. He suggested that this will result in "fewer branches and less investment in low- and moderate-income communities." Activities that might suffer are funding for affordable housing, tax credits, and financial literacy.
A prominent bankers organization disagrees. "What it does is make it more flexible," said Paul Smith, the American Bankers Association general counsel in the area of regulation. The investment and service elements "are being folded into a streamlined exam, but they are there. ... It lets you mix the parts better."
The banking industry strongly favors this new FDIC regulation, arguing - as Blackhawk's Huiskamp does - that community banks will always serve low- and moderate-income communities. "The CRA has often been viewed by them as a no-brainer," said Charlotte Birch, a spokesperson for the American Bankers Association. Community banks "have always been heavily invested" in their communities.
Davenport-based Northwest Bank & Trust wouldn't be affected by the FDIC rule; it's overseen by the Office of Thrift Supervision and only has assets of $175 million. But President Joe Slavens said he thinks community banks such as Blackhawk and Quad City Bank & Trust deserve to be considered "small" banks, even though they have enough assets to fall into the "large bank" category. "I don't think they behave like large banks," Slavens said. "Community banking does a good job of serving the community."
He noted that his bank had a market share of 2.7 percent in terms of home mortgages in 2000, 2001, and 2002, but a market share of 5.5 percent in low- and moderate-income census tracts.
Slavens added that the CRA is most useful in forcing the hand of large banks, and that raising the threshold for large banks is "probably not inappropriate at all. ... The value of the CRA is directly proportionate to the size of the organization."
Locally owned banks strongly support the intent of the law, Birch said, just not the regulatory burden it places on them.
She further notes that under the FDIC rule, all banks would still be examined for compliance with the CRA. "There's a misperception that it's an exemption from the CRA," she said. "It makes it easier on a community bank that would have fewer resources to comply."
Birch also said that concerns about less investment in communities are unfounded. "It should not affect the level of [community] investment at all," she said. "It's more the paperwork."
The NCRC's Taylor disagreed. Of course community banks are invested in their communities, he said, but "it's a matter of whom they lend to: big farmers versus small farmers, big business versus small business."
A comment period for the proposed FDIC rule ends September 20. For more information on the regulation, visit (http://www.fdic.gov/news/news/press/2004/pr8304.html).
