Stephen J. Coukos – Markup forced a review

With proposed revisions to the Community Reinvestment Act being issued by federal regulators, Connecticut bankers and bank association members are anticipating a more streamlined CRA examination process and more protection for the consumer and the banking industry overall.

The Federal Deposit Insurance Corp., Federal Reserve Board, Office of the Comptroller of Currency and Office of Thrift Supervision have jointly issued proposed revisions to CRA regulations in an effort to streamline the bank examination process.

The proposed revisions would reduce the regulatory burden on smaller financial institutions by redefining the term “small bank” for CRA purposes by increasing the threshold asset size from $250 million in assets to $500 million, and would allow small banks held by large holding companies to be treated as small banks.

The proposal is a follow-up to an earlier one in which the banking agencies requested to comment on the current CRA regulations in July 2001.

The newly proposed revisions also would expand and clarify the provision that an institution’s CRA rating is adversely affected when it has engaged in abusive lending or discriminatory lending practices.

According to the American Bankers Association, defining illegal and abusive lending practices and giving banks a lower CRA score if abusive practices are identified will help prevent abusive lending by and large.

“No one wants abusive lending practices – it’s not good for business in general, and doesn’t help communities grow or business grow,” said Heather McElrath, spokeswoman for the ABA. “By defining abusive lending in CRA examinations, we are trying to define an area so that we can take more actions to stop abusive lending practices. We have found that most abusive lending practices are not done by banks that are regulated by federal laws, but we want to make sure that abusive lending practices don’t happen and there are guidelines that will decrease a bank’s rating if they are engaging in predatory or abusive lending.”

‘A Reputation Issue’

Since banks often engage in mortgage lending activity, which is subject to CRA requirements under the lending test, some bankers maintain that CRA regulations should be adopted by the state for all businesses engaging in any type of lending practices. Bankers say CRA regulations should apply to the mortgage industry, as well as depository institutions.

“The abusive lending proposal is a good thing,” said Donna Ramey, executive vice president and CRA officer at the Savings Bank of Danbury. “The mortgage industry dictates the lending test in the bank. We are always under scrutiny from so many regulations … as we spread and bring in more partners, it’s a reputation issue. I believe that if I’m going to bring a partner into this institution and they are going to do business for me, they need to have the same integrity that banks are under.”

At the Bank of Southern Connecticut, President Michael Ciaburri said his staff is “well schooled in CRA policies and we do a good job in meeting the requirements.”

Officials at the Connecticut Bankers Association said proposed predatory lending legislation is being debated at the state level, but in the meantime, protecting consumers and banks by implementing abusive lending protections in CRA requirements will help the industry as a whole.

“In the banking industry and in Connecticut, abusive lending controversy is not a new one. We had hearings on abusive lending six to seven years ago and most of the [predatory] lending was done by non-bank institutions,” said Gerald Noonan, president and chief executive officer of the CBA. “We didn’t want to invite legislation, but we weren’t opposed to it. We had a statute passed three years ago that [regulates] abusive lending practices for everyone. It was the non-bank lenders who had the most difficulty with the bill. I haven’t had a lot of complaints about it [recently], and I’m not sure who was doing it. Things happen on a broad-based, national scheme.”

The abusive lending section of the CRA markup proposes to clarify discriminatory, illegal and abusive practices within a bank’s footprint, and also takes into consideration illegal and abusive credit practices conducted with affiliate companies with whom the bank in question does lending business. Both instances will lower the bank’s CRA score.

Another aspect of the illegal abusive lending section includes the regulation of equity stripping – when a bank relies on the foreclosure or liquidation value of collateral instead of the borrower’s ability to repay the loan.

“You don’t want banks to get into usurious types of lending, and I think the new overall requirements put a safeguard against that and make it more difficult for banks to conduct this business,” said Ciaburri.

Of greatest approval from industry executives is the proposed revision to increase the definition of a “small bank” from $250 million to $500 million.

According to the ABA, the change in asset size for a small bank is a direct reflection on the changing economy.

“As the world has changed, the definition of ‘small’ has changed, so these regulations are keeping up with the times,” said McElrath. “Increasing the [bank size from] $250 million to $500 million in terms of small banks just keeps up with the times. It’s not a desire to exempt small banks … they will still have to prove they are meeting CRA guidelines.”

McElrath said the revision also helps to reduce regulatory burden on small banks.

“As the bank grows in size, the examination grows in size and there is more needed in terms of a broader scope and details in the exam requirements,” said McElrath.

The new asset threshold adds a competitiveness to the already cutthroat industry, added Ciaburri, but it also allows for banks to be become more attune with CRA requirements and rules.

“Once you go from $250 million to $500 million, you are in a new arena competitive-wise and the larger you get, the more competitive the environment gets,” said Ciaburri. “The larger you get, the higher the stakes.”

According to Ramey, the raised asset-size limitation helps smaller banks compete on a more equal playing field.

“Being compared to larger institutions [currently] puts [smaller banks] at a disadvantage because of the lack of resources available – larger banks can do more for the community,” said Ramey.

Ramey said when the Savings Bank of Danbury held assets under $500 million, “we could never generate the business the larger businesses enjoy. That is why we are in favor of the asset size going to $500 million, and allowing the ability of small banks to develop their infrastructure in order to compete.”

The initial markup of CRA legislation began in July 2001 and in response to the notice that the federal agencies were reviewing CRA requirements, the FDIC received more than 400 comments, said Stephen J. Coukos, a Boston-based corporate attorney at Edwards & Angell, which also has offices in Hartford and Stamford.

Coukos said that forced regulators to review the current CRA regulation and identify if CRA requirements were working to the advantage of banks and consumers.

“The community groups want to see more regulation and expansion of CRA principles to govern bank lending activities and affiliates. From their perspective, there are a lot of changes in the way banks do business, and we think the Fed should be evaluating activities anywhere they are doing business, and not just in their footprint, and use CRA to evaluate lending activities beyond their footprint. Essentially, community groups think CRA should apply across the board,” said Coukos. “Banks say they believe the framework does what it is supposed to do and is burdensome for smaller institutions.”