CRA's future.

Some amendments to the Community Reinvestment Act (CRA) proposed by Senate Banking Chairman Gramm represent modest revisions to a law that many still love to hate. The provisions are in the Senate banking reform legislation, and their fate awaits further legislative negotiations with the House.

A long time ago, when I first started writing about the Community Reinvestment Act (CRA), it was often referred to as the most despised of all banking regulations. Today, a decade later, CRA still attracts a disproportionate amount of attention. The latest legislative activity involving CRA resonates with the controversy that still dogs this law.

On May 6, the U.S. Senate passed banking reform legislation, S. 900, containing CRA provisions that have been described by activists as a rollback of the regulation, while others view the provisions as much-needed reforms. President Clinton has promised to veto any banking legislation with provisions that the White House sees as rolling back CRA. The House of Representatives passed its version of financial reform, H.R. 10, on June 24. The bill now will go before a Conference Committee. Conferees representing the Senate have already been appointed. House conferees had not yet been appointed as this went to press

The new CRA provisions in the banking reform package were authored by Senate Banking Committee Chairman Phil Gramm (R-Texas). In an interview for this article, Senator Gramm described his CRA-related terms as "my three little provisions." This article reviews Gramm's provisions and his rationale for supporting each one. Then it analyzes the merits and weaknesses of each provision.

Arguably, the most contentious provision in the Senate bill is the one exempting rural banks with less than $100 million in assets from having to adhere to CRA. Gramm is not the first legislator to try to establish a small-bank exemption. In 1995, Representative Doug Bereuter (R-Nebraska) sponsored a bill containing a CRA exemption that was approved by the House banking committee. Bereuter's bill would have exempted from CRA compliance banks with assets of less than $100 million that were located outside metropolitan statistical areas (MSAs).

Bereuter's bill was ultimately defeated, but the logic behind both proposed small-bank exemption provisions is similar. The argument suggests that small banks must serve their entire communities to survive, so there is no discernable utility in applying the CRA to these types of institutions. CRA requires time, money and manpower - and usually all three are in short supply at small banks. Gramm buttressed this argument when he cited statistics provided to his office by 480 banks that the small-bank CRA examination procedures have cost an estimated $1.3 billion since their implementation in 1996.

When I queried him on the underlying assumption that the small-bank examination procedures were responsible for the expenditure, Gramm responded that if so very little was required for small banks to comply under the current regulation, then there was obviously no need for its application.

The four federal bank and thrift agencies disclosed their own estimated CRA reporting burdens for both large and small banks in the May 28, 1999, Federal Register. According to the agencies' calculations, estimates range from less than 10 hours a year for banks under $250 million that do not belong to a holding company (i.e., small banks) to up to 634 hours a year for holding companies with more than $1 billion in assets. The agencies estimate that the banking industry's total reporting burden is 1.25 million hours per year. The agencies sought public comments on the accuracy of their estimates through July 27.

The second Gramm provision states that banks with a "satisfactory" or better CRA rating for three consecutive examination periods would be protected from community group protests of mergers on CRA grounds - unless there is substantial new evidence that the rating is invalid. Considering that most CRA examinations are on a three-year cycle, this provision would require banks to maintain a satisfactory or better CRA rating for up to nine years to qualify for "safe harbor."

This type of safe harbor provision is not new. In 1995, Senator Richard Shelby (R-Alabama) offered a safe harbor provision as part of a regulatory relief bill. Shelby's provision, like Bereuter's, was ultimately struck from the final version of the bill. The argument for its passage remains the same: Institutions should receive some type of reward for consistently complying with CRA. Gramm's provision offers such a reward for institutions that meet the CRA examination criteria for three consecutive examination cycles. The caveat in the Gramm provision is the allowance of protests if "substantial new evidence" can be presented demonstrating that the current satisfactory or better CRA rating is invalid. If passed in its current form, this provision will provide activists with an opportunity to define the meaning of "substantial new evidence."

When discussing the "substantial new evidence" caveat, Gramm offered an olive branch to the Clinton administration, indicating a willingness to compromise somewhat over details. Gramm said, "I will sit down with the president and go over the provisions of the bill and expect a give-and-take process to unfold. I have been around here long enough to know that the legislative process is a give-and-take process. If the White House believes the standards for disclosure are too high, then we may consider lowering them. It is our intent to work with the Clinton administration if we can, but we will not pass a bad bill."

But he added, "Look, there will be a new president in 18 months, and I expect to know him well. I will work with the Clinton administration if I can, but if I can't, the world will not come to an end. If I have to wait 18 months for a new president, then I will wait 18 months."

The third provision deals with the public disclosure of agreements between financial institutions and other for-profit and nonprofit entities. These agreements are often described by participating banks as necessary procedural steps to prevent nonprofits and others from protesting on CRA grounds. Many people, including Gramm, believe these agreements are a form of blackmail. If banks pursuing merger or acquisition plans do not enter into such agreement, then the fear is their business goals may be delayed as a result of CRA protests. Senator Gramm has referred to this particular provision as the "sunshine provision," referring to the government rules that force federal agencies, for example, to make meetings and information accessible to the public. The idea is that whatever agreements are made between participating interests in a merger or acquisition activity, the terms of those agreements should be available to the public.

I asked Gramm why participating banks would not want to publicly reveal their agreements with local community activist and urban development groups, thereby ensuring positive publicity. He responded, "My office is looking at three agreements currently, where neither the nonprofit's [nor] bank's name were disclosed, but what I saw in those agreements was a $100,000 grant here, $100,000 grant there, and a 2.7 percent fee going to the nonprofit group where no clear service had been provided. This is what I want to get at... if the purpose of these cash transactions is to help people, then should the fact that the nonprofit is taking a 2.7 percent fee be disclosed to the borrowers? What is wrong with such a provision? Let the sunshine in."

Gramm was questioning whether the undisclosed nonprofit organizations, in these instances, weren't guilty of profiteering at the expense of the very people they were supposed to be trying to help.

Such practices, if proven, would clearly be damaging to the most vocal supporters of CRA. Alternatively, it is naive to think that people and organizations do not profit from the strict enforcement of CRA.

Gramm's support for his CRA provisions was evident in his interview comments. With support from such a powerful lawmaker, the provisions could ultimately make it into law. Thus, it makes sense to take a closer look at the issue of small banks and CRA compliance, safe harbors for banks or the need for public disclosure of agreements between banks and merger opponents. The following section of this article analyzes each Gramm provision and the likelihood of its passage. As a former federal bank examiner, a lawyer with specialization in banking law and a financial consultant who has advised more than 100 banks on CRA regulations, my experience enables me to comment on the merits and weaknesses of each provision.

The small-bank exemption

The small-bank exemption provision is the most vulnerable of Gramm's three provisions, in my view, because of its notoriety. Any legislation resulting in eliminating CRA adherence for a vast majority of banks and thrifts in this country invites controversy. Is there a need for a small-bank CRA exemption? Gramm certainly thinks so. He refers to eye catching statistics that small-bank CRA compliance has cost upward of $1.3 billion since 1996. His source is 480 small banks. I have not seen the specific compliance cost estimates or talked to those who collected the data, so there is little light I can shed on how the data was collected or what it represents. What I can do is discuss what the regulatory requirements are for banks that are considered small (assets of $250 million or less) under the regulation.

When adopted in January 1996, the small-bank examination procedures were referred to as the "streamline procedures." These procedures were designed to reduce the amount of CRA documentation record keeping. The present regulation requires maintenance of a public file. The maintenance of public files could never cover $1.3 million in costs, never mind $1.3 billion.

I referred to the fact that small banks already qualified for reduced compliance burdens and asked Gramm if that was not sufficient to ease the burden of CRA on small institutions. He said, "I have heard from over 480 small banks that have provided me with information that it cost over $1.3 billion to comply with CRA."

Knowing that small banks are not required to do any up-front analysis other than technical compliance, I noted that the compliance burden on small institutions is significantly less than for larger institutions. Gramm stated that he did not know whether it was required, but stood by the compliance cost information he had received. The senator added, "What difference would it make if these small banks were exempt?"

Because small banks already have reduced CRA compliance requirements, it seems like a waste of political capital to try to reduce it further, in my view. Knowing a little bit about how the legislative process works, it makes me wonder if this initiative may become a bargaining chip to negotiate down more expansive measures in the House's version of financial reform legislation.

The current legislative debate is very likely to be framed in terms of big guys versus little guys. The little guys are the small banks that share a disproportionate CRA burden. The problem with this scenario is that the facts suggest the opposite: Small banks are subjected to a streamlined examination procedure that requires only technical compliance. If the agency analysis is to be believed, small banks spend approximately one day each year on CRA compliance. Gramm would counter that those days add up to an extremely large financial expenditure.

It is my view that Gramm's small-bank exemption probably won't become law. What his small-bank exemption provision is likely to do, though, is become a bargaining chip when the House and Senate merge their bills. Gramm may end up compromising this more controversial amendment in exchange for a safe harbor and/or public disclosure provision.

Edward L. Yingling, deputy executive vice president and executive director of government relations - chief lobbyist - for the American Bankers Association, was quoted in the May 6, 1999, issue of American Banker when the Senate financial reforms legislation passed on a 54-44 vote. Yingling said Gramm "purposely gave up potential Democratic votes so that he could have a strong hand to play" when House and Senate versions are reconciled in the conference committee.

More importantly, I believe the provision should be challenged on the grounds that currently there is insufficient evidence of the need for such a blanket exemption. The regulation does not require an excessive level of financial commitment to comply, based on my understanding of the requirements for smaller institutions. My opinion is based on 10 years of experience involving CRA. Gramm has a vast amount of responsibilities, knowledge and experience, and included in these is the chairmanship of the Senate Banking Committee. But Gramm has not written a 600-page book detailing how banks successfully comply with CRA, has never been a federal bank examiner responsible for evaluating a bank's CRA performance, and does not advise banks across the country on CRA compliance. I have done all these things and, therefore, know first-hand how the industry is dealing with CRA compliance.

The safe harbor

The second initiative involves the safe-harbor provision for banks that have received three satisfactory or better CRA ratings in three consecutive examination cycles. After the passage of the Senate financial reform bill, the Treasury Department released a barrage of statistics showing that activists rarely succeed in stopping bank mergers.

According to the information released by Treasury officials May 12, 1999, less than 1 percent of more than 86,000 bank applications filed since 1985 were protests on CRA grounds. Of those 755, which made up the 1 percent, 690 were rejected by federal regulators, according to the Treasury report.

The report also disclosed the time frame in which regulators are handling CRA protests - from the beginning of 1996, when the changes in CRA rules became effective, to the end of 1998, 42 percent of CRA challenges were resolved in 60 days. These statistics would indicate that the need for a safe harbor from CRA protests may not be that pressing because the protests are rarely successful. At least one could make that argument. But if you are among the 1 percent of banks affected, most likely you would feel different.

What the Treasury statistics don't reveal is that most bank applications do not involve large conglomerate institutions. Of the 86,000 bank applications since 1985, not many involved megamergers like the one recently announced between Fleet Bank and BankBoston. The point is, most CRA challenges involve megamergers because these types of mergers have the largest impact on the urban centers in this country. So the fact that only 1 percent of bank applications have been challenged does not get at the heart of the issue. The real statistic not disclosed in the Treasury report was the percentage of large megamergers that were subjected to CRA protests. I believe that most of those types of deals have been challenged on CRA grounds.

I raise this issue to demonstrate how misleading statistics can be when used to support a particular viewpoint. Most bank applications involve small or midsize institutions, not large money-center banks located in major urban centers.

The Treasury Department statistics are less than useful in this debate, as are comments that are misleading or one-sided. One such comment came from John Taylor, president and chief executive officer of the National Reinvestment Coalition, a Washington-based association of community organizations. Taylor, in an American Banker interview, challenged the seriousness of CRA protests on bank applications when he said, "Protests by community groups do not hamper bank mergers and should not be used as an 'excuse' to scale back CRA requirements." Taylor knows that CRA protests delay bank mergers - by more than 60 days - 58 percent of the time, according to the Treasury Department's own statistics. A delay of two months costs the merging institutions in terms of time and money. The loss of time and money is always a hindrance to for-profit businesses.

As I see it, there are two issues involved in the safe-harbor provision. The first is the question of whether banks should be rewarded for obeying the law. If I refrain from speeding, the police department and my insurance company do not reward me; what they both do is not penalize me. This provision rewards for compliance. Is it justified? Without consideration of the second issue, in my view there should not be a reward for obeying the law.

But if the ultimate goal is to encourage compliance, which translates into dollars invested in local communities, then the means by which we achieve the goal should not distract us from that goal. Gramm's provision provides for additional analysis with its caveat allowing protests if substantial new evidence can be presented demonstrating that the current satisfactory or better CRA rating is invalid.

This, along with the knowledge that any time an institution fails to maintain its satisfactory CRA rating it will lose its safe-harbor protection, is enough for me to be in favor of its ultimate passage.

Gramm told us in the interview that he did not want to get rid of CRA. This safe harbor provision is limited in terms of what some might consider a rollback of CRA. In the spirit of negotiations, this offering might offset future efforts to completely nullify CRA.

Making CRA agreements public

The final CRA-related provision authored by Gramm in the Senate financial reform legislation attempts to make public agreements between financial institutions and for-profit and nonprofit organizations. The controversy about these agreements centers on the amount of money organizations were receiving from insured institutions as part of some agreement in which the organization agreed not to protest in exchange for some monetary benefit. Gramm says he has three agreements showing unearned fees. If bankers are being blackmailed, as Gramm believes, then further evidence must be collected to provide details on the scope and nature of the misdeeds.

I support disclosing all agreements between banks and for-profit and nonprofit organizations. Banks hold a special place in our society. They are a significant source of revenue to all segments of our society, or at least should be. Agreements involving CRA entered into to quell protests to pending bank mergers, in particular, should be made public. Both political parties in the Senate agree on this amendment, which should translate into legislation.

The challenging aspect of this provision is the question of how these agreements should be made public. Should it be an additional disclosure requirement for banks in their CRA public file? Should the organization involved provide access to the public upon request? Should the agreement be available through the Federal Reserve, since the agreement pertains to cash payments to merger opponents? In my opinion, it should be available in all three locations. The idea is to make it publicly available - which means accessible.

Gramm's proposals taken together represent a modified change in CRA. His small-bank exemption is likely to become a negotiating tool with the House of Representatives as the final version of banking reform gets hammered out between the two legislative bodies. However, its loss will not doom the ultimate passage of banking reform legislation. The inclusion of both a safe-harbor provision and public disclosure provision does not, in my opinion, roll back CRA.

I believe public disclosure of these CRA-related agreements is a positive development. I also do not consider the awarding of a safe harbor against community group protests unreasonable, considering the "substantial new evidence" caveat. If there is evidence that a bank that has consistently received passing CRA ratings is actually in violation of the law, then the "substantial new evidence" clause permits an opportunity for redress.

Supporters of CRA would do well to remember Gramm's comments about waiting for the next president, if necessary. The future political landscape is uncertain. Everyone with a stake in this debate should appreciate the volatility. The year 2000 could bring significant changes in the power structure. Democrats and Republicans alike should work toward a compromise bill now - while the opportunity still exists.

Kevin Kane is managing director of the New York office of Professional Bank Services, Inc., New York, New York, He is the author of A Banker's Guide to the Community Reinvestment Act.