Proposed rule change stirs debate over bank practices

If a proposed change in federal rules wins approval, mid-sized banks won’t have to meet the same stringent Community Reinvestment Act requirements they now do to serve their entire communities. The change could affect a third of the banks that do business in New Hampshire.

Supporters of the rule change, including the banks themselves, say that it will lessen their paperwork burden and allow community banks to better serve their communities.

“Paperwork and testing of the individual institution will be reduced, but that’s the point,” said Jerry Little, president of the New Hampshire Bankers Association. “It is to free banks from unnecessary regulatory compliance so they can focus on lending in their communities.”

But opponents argue that an easing of requirements will result in a reduction of lending to small businesses, moderate-income homeowners and community development projects.

“Most bank activities in low-income and moderate-income communities would not happen without the encouragement of the CRA regulations, so we are pretty nervous about the pullout of small and middle-sized banks,” said Alan Cantor, vice president of philanthropy and capitalization for the New Hampshire Community Loan Fund.

Despite the dispute, the rule is speeding — by Washington standards — through the regulatory process. It has already been changed for a few banks (federal savings banks). A decision on the rest is expected in the next few months.

Congress passed the Community Reinvestment Act, or CRA, in 1977 in response to community movements around the nation that accused banks of “redlining,” or refusing to lend or provide services in low-income communities. The CRA has long since grown into a complex regulatory apparatus that covers everything from home mortgage and small business lending to the language spoken by tellers in low-income communities.

The rules have been enforced by four agencies regulating banks: the Federal Deposit Insurance Corp. (FDIC), the Office of Thrift Supervision (OTS), the Office of the Comptroller of the Currency and the Federal Reserve Board. Despite such confusion, the agencies have managed for the last quarter of a century to agree on the same basic rules, for the sake of simplicity, or at least an attempt at avoiding another layer of confusion.

Changing threshold

Perhaps the most important principle involved in the CRA is that big banks (those with assets of $250 million or more) would be treated differently than smaller banks. But two things happened that forced a collision with the status quo.

First, due to inflation and consolidation and sheer growth, many smaller banks crossed the $250 million threshold to become big banks.

Second, the cry to further deregulate the banking industry has been heard by sympathetic ears in the Bush administration.

An attempt to lift the threshold, however, failed to pass muster in Congress, and the four aforementioned regulating bodies couldn’t agree on doubling the threshold to $500 million. That resulted in the Office of Thrift Supervision, which regulates federal savings banks, in lifting its threshold to $1 billion on its own.

That OTS change didn’t have an impact on many banks, however. In New Hampshire, for instance, it affected two — Mascoma Savings in Lebanon and Lake Sunapee in Newport — though it could eventually include two more.

The major impact was that the FDIC, which regulates a much larger number of state-chartered banks, proposed to follow in the OTS’ footsteps. But while the FDIC will raise the threshold to $1 billion, it also would change the requirements for mid-sized banks (those between $250 million and $1 billion). These banks (there are about a dozen in New Hampshire) would receive a simplified version of the big bank examination.

“It’s like ordering a coffee and they only have large and small,” summed up Jeffrey Hubbard, CRA officer for Merrimack County Savings Bank. “And now they are offering a medium.”

But that medium cup of coffee tastes very differently, depending on who is doing the sipping.

While the bankers association sees the change as simply a smooth “streamlined” version of the rules for large banks, critics see it as a bitter “wink and a nod.”

Mere hoopla?

The CRA requires that banks be reviewed in three areas: lending (mortgages and small business services), investments that benefit low-income and moderate income people and services (number of branches and their accessibility to all people in the community). If the rules pass, the mid-sized banks can chose to be tested in one area – the lending side.

They will have a community investment test, but it will be more subjective. In addition, community investment in rural areas won’t have the same strict income criteria. For banks, this means that there will be more flexibility in areas in New Hampshire where the number of low- and moderate-income investment opportunities are limited. For community groups, the concern is that money will go – in extreme examples – to non-profit groups that cater to the wealthy, like certain golf clubs.

Furthermore, mid-sized banks will no long have to report on the number of small-business loans they make, which, critics contend, will make it harder to judge whether banks are serving the small-business community.

To Little, all this is just hoopla.

“OTS already changed the federal charter banks’ CRA rules,” Little said. “Did you notice a difference? Neither did anybody else.”

Lebanon-based Mascoma Savings, with nearly $700 million in assets, is one of those banks that was suddenly classified as a small bank. But no practices will change, assured Terrie Donnell, a bank vice president who heads up its CRA effort, which she noted received an “outstanding” rating earlier this year.

That is partly because Mascoma is a fast-growing bank, and in five years – the interval in which small banks are examined – it will probably cross the $1 billion threshold, and have to submit to a large bank examination in any case.

“It doesn’t make sense not to keep track of the information and not have the information to show them,” Donnell said. “So we are not changing anything.”

Mascoma’s sentiments are echoed by Laconia Savings Bank, another bank nearing the $1 billion threshold and also has received an outstanding rating from its regulator, the FDIC.

“We are going to continue to invest in our community like we’ve done for the last 170 years,” said Marilyn Spearman, vice president and community development officer.

So if the banks aren’t going to do anything differently, why even bother lobbying for the change?

“It will enable us to tailor our activities to meet the community’s needs. We would have more choice and flexibility,” said Spearman.

Words of reassurance

Ron Wilbur, president of Merrimack County Savings Bank in Concord, also said he doesn’t see any major shifts in his bank’s behavior.

“Community banks tend to do what they should anyway,” he said.

On the other hand, he did stress that small banks are increasingly coming under a regulatory burden. It isn’t just the large bank CRA exam, which his bank faced for the first time in July after crossing the $250 million threshold. It’s the Patriot Act and new privacy laws, “and this is all taking a lot of time. We now have a full-time compliance officer, and for a small bank, this is eating into our cost structure.”

Community groups like hearing words of reassurance, but they aren’t completely reassured. It’s not like they are criticizing any bank’s CRA performance. The loan fund, for instance, praises New Hampshire banks for coughing up nearly $100 million for community development, said Cantor.

But Cantor also noted that banks seemed more interested in investing in the community once they passed that $250 million threshold and were subject to the large bank examination.

“They suddenly become more focused and more community-minded. I can’t believe that’s a pure coincidence. It really makes me worried about 90 percent of the banks that will now be left off the hook. I can’t help but think there is going to be a falloff,” he said.

Little stressed that banks aren’t going to be exempted from the CRA. They still will be tested, just not as rigorously.

“The position of some of these organizations baffles me,” Little said. “Community banks are very focused on small businesses and the citizens they serve. They have to be. It seems they want smaller banks to divert resources to examinations rather than investing in their communities.”

Critics, however, stress that a bank with more than a quarter of a billion dollars in assets isn’t exactly a small community bank. They often cover a number of communities, and the temptation to focus on more profitable ventures, to the detriment of low- and moderate-income people, will increase in an increasingly competitive financial service industry.

“CRA credit is an important source of capital to small businesses and working people,” said Martha Yager, housing and community development project coordinator for the New Hampshire American Friends Service Committee. “It does involve substantial work to fulfill these requirements, but that’s what comes with being a big boy now. If they don’t know how to play by the big-boy rules, we’ll be happy to teach them.”