Today the Office of Thrift Supervision (OTS) announced a final Community Reinvestment Act (CRA) rule; last Friday afternoon the Federal Reserve put out a press release announcing that it was joining the Office of the Comptroller of the Currency and the FDIC in proposing a new rule that would be open for comments for the next 60 days. The FDIC and OCC had announced a proposed rule a few days before.  What is going on?

Why are there four different banking agencies that regulate banks and thus concern themselves with the CRA?

First you need a program so that you can tell the players.

Most Americans know of the Federal Reserve because of its role in monetary policy and the regular meetings of their Federal Open Market Committee that sets short term interest rates by buying and selling government securities. But the Fed also plays a role as a bank regulator -they conduct safety and soundness exams, fair lending exams and CRA exams on a limited sub-group of financial institutions, the state-chartered banks that are members of the Federal Reserve. In addition the Fed plays a special role during mergers and acquisitions because it regulates the holding companies of these financial institutions

The OCC plays the same function for national banks; generally speaking larger banks with the word "national" in their official name.  The OTS plays this role for thrifts and savings banks while the FDIC (in addition to its role of insuring the deposits in all depository institutions) regulates the "non-member state-chartered banks."  These four bodies attempt to coordinate their regulations and rules through the FFIEC or Federal Financial Institutions Examination Council and traditionally they have placed a real premium (as do the regulated banks) on having standard rules and regulations.

Now that you know the players you need to know how the CRA works: Current CRA regulation divides financial institutions into "large banks" with assets greater than $250 million and small banks with assets less than $250 million. For CRA purposes small banks are examined once every four to five year on several factors that focus on whether they lend money in the communities that they take deposits from and especially from the low and moderate income (LMI) communities, neighborhoods and people in their service area. The large banks have more complex CRA exams that happen every 2-3 years and focus on their lending, services and investments to LMI communities and people.

The institutions are given a CRA "performance evaluation" that is a public document which grades their CRA activities as "Outstanding", "Satisfactory", "Needs to Improve" or "Substantial Non-compliance." Although there is vigorous debate within the CRA movement about the meaningfulness of these CRA ratings, with many complaining of "grade inflation," the fact is that very few of the largest banks have less than an "Outstanding" rating.  Their motivation for having a high rating is that their CRA rating often becomes an issue during mergers and acquisitions because the bank regulators are required to review and take into account an institutions CRA record before approving any application to buy another bank, etc. If a bank is not prepared to adequately address questions about their CRA record, they can be forced into expensive delays during the merger process, so they try to do all they can to make these merger reviews occur smoothly.

Last year the wheels starting coming off this coordinated and well-oiled CRA regulatory train. The four agencies, which had last made major regulatory changes to the CRA in 1996 had promised to review those rules after five years and thus proposed a rule change in early 2004 that would have made negative but modest changes to the CRA.

Consumer groups were united and adamant in fighting against any roll back of CRA and weighed in during the comment process with large numbers of comments.  The net result was that the Federal Reserve and the OCC backed away from the proposed change while the OTS and the FDIC (with their Bush-appointed leaders) pushed for even more reduction of CRA requirements for the smaller banks. The result was months of deadlock until the OTS unilaterally broke the deadlock by announcing that it was changing the threshold for a "small bank" from $250 million to $1 billion for the thrifts that they regulate.

The OTS action created turmoil among the other bank agencies because the OTS took this action unilaterally and without following normal administrative rule-making process which involves making a proposed rule, giving time for comments and then modifying the proposed rule based on the comments received.

The FDIC then attempted to move towards the OTS position, but did it properly by putting out a proposed rule that would have changed and eased the CRA requirements for financial institutions in the $250 million to $1 billion in assets range. They received over 11,000 comments most of them opposed to their proposal and came under heavy pressure from Congressional Democrats to get back on the reservation with the OCC and Federal Reserve.

After some negotiation, it appears that the Fed, the OCC and the FDIC are back on the same page with a proposed change that will be a compromise between what the FDIC originally proposed and what we currently have.  But the OTS has decided to flaunt the reactionary views of its head, James Gilleran, by not only changing the threshold up to $1 billion in assets, but by also gutting the service and investment tests for large thrifts. This in spite of receiving many comments opposing this change and very few supporting it.

The National Community Reinvestment Coalition has called on Gilleran to resign because of his willful disregard for administrative process and for ignoring the overwhelming public comments he  received opposing the changes he proposed.

You can help turn up the heat on Gilleran by writing your Congressman, calling attention to the final CRA rule that they announced today, and asking your Congressman to protest the OTS' attack on CRA.   Focus on Gilleran's unprecedented go-it-alone behavior.

The actual details of what the other three agencies are proposing has not yet been published in the Federal Register, but it should be there later this week. At that point you will have 60 days to comment on their proposal, but the time to attack Gilleran and the OTS is now.

Originally posted to bankbane on Mon Feb 28, 2005 at 10:13 PM PST.

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