Gary H. Stern - President, 1985-2009
Published December 1, 1989 | December 1989 issue
The following comments are excerpted from a presentation to 180 lenders and community developers at a September conference sponsored by the Federal Home Loan Bank Board of Des Moines and the Federal Reserve Bank of Minneapolis.
In 1977, following increasing pressure from consumer groups, Congress passed the Community Reinvestment Act (CRA) to ensure that financial institutions meet the credit needs of their communities, including low- to moderate-income neighborhoods. The Act requires the Federal Reserve System, along with other federal supervisory agencies, "to encourage such institutions to help meet the credit needs of the local communities in which they are chartered." At the same time the supervisors are required to see that those institutions conduct their business in a safe and sound manner.
In other words: Make riskier loans, but don't risk the bank.
For a bank supervisor with a responsibility to encourage safe lending practices, the above notion creates the possibility that, from time to time, the supervisor may be faced with conflicting responsibilities. The principal issue I want to explore is how this conflict may get resolved within the CRA framework.
As an economist, my bias is that the marketplace is an effective means of allocating resources. I believe that countervailing forces in the marketplace generally lead to the best solution. Consistent with that I would probably assert that the marketplace is the vehicle for resolving conflicts such as this. Of course, I would add the economist's customary caveatsall things being equal and in the long run. An immediate response might be: "All things ain't equal, and I'm not going to be around in the long run." I would have to acknowledge that there are some things that don't get resolved in the marketplace. Community development may be one of them.
I assume that Congress, in enacting CRA, has determined that indeed "all things ain't equal" and the natural market forces don't work to achieve some aspects of community development. I believe what Congress has done to help me with my conflict is devise a sort of three-legged stool of regulator, lender and community activist to create competing tensions that will help bring about a resolution.
As a bank supervisor, the Fed has three responsibilities under CRA:
It rates each state member bank's compliance with CRA. The Banking Supervision Department examines each state member bank as part of a broad-based community affairs examination to determine its compliance with a number of consumer laws and regulations, including the bank's compliance with the objectives of CRA. In that process the Fed gives the bank an overall consumer compliance rating, specifically rating the bank's compliance with the CRA.
The Fed is required to take into consideration CRA compliance when deciding whether to recommend approval or denial of certain applications. The risk of having such an application being denied for failure to comply with the CRA is the principal tool to enforce compliance. In addition, the public has the opportunity to play a role in enforcing CRA compliance by protesting an application on the grounds that the applicant does not fulfill its CRA obligations. The public's role has been enhanced by the recently passed Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Under FIRREA, supervisors such as the Fed will have to publish their CRA ratings as well as certain portions of their examination reports.
Finally, the CRA requires that the Fed designate a community affairs officer to facilitate CRA compliance by providing information to lenders and the public. The community affairs officer also acts as the Fed's representative in the application protest process. That includes determining whether a communication constitutes a protest and attempting to bring applicant and protestors together in an effort to settle their differences.
In addition to the safety and soundness provision of the CRA, a number of other laws mandate that the Fed concern itself with the safety and soundness of the business of state member banks and bank holding companies. The Fed implements those mandates through financial examinations of state member banks and bank holding companies, as well as through the course of considering whether to approve many of the applications, particularly bank holding company applications.
Thus, the possibility for conflict between the Fed's CRA safety and soundness and community development responsibilities is compounded by other safety and soundness mandates. One way the Fed addresses that conflict is by having community affairs compliance exams and financial exams performed by different personnel. That is not to say that CRA examiners ignore safety and soundness.
Many might argue that a lender should be able to fulfill its CRA obligations without violating safety and soundness standards. That may be so, but persuading lenders operating in areas where there are serious economic problemsthe very areas that often call for community redevelopmentmay not be easy. That may be even more difficult in the face of the hundreds of bank and thrift failures that have occurred in the 1980s and the existence of hundreds of thrifts that would have been closed but for the absence of FSLIC resources. I think no one would dispute that many, if not most, of the failures in the past nine years, in large measure, resulted from a disregard of traditional safety and soundness standards.
Given the apparent conflicts in the supervisors' responsibilities and the sometime conflict between the concerns of lender and community developers, how does the Fed resolve these conflicts and get on about the business of CRA? For one thing, the legal rights and duties of each of the participants under CRAregulator, lender and community developershould help.
Each player in community development lending probably would like to be able to influence the attitude of others to achieve what they regard to be important in community development. Many lenders and community developers probably believe attitudes are critical. For example, many would assert that the objectives of CRA cannot be fully achieved unless the attitude of lenders is one of commitment to CRA objectives.
I'm of a different view. For one thing, I wouldn't delude myself into thinking I could change anyone's attitude. Nor do I believe I should spend my resources with the hope of doing that. Although in some respects vague, Congress has imposed legal obligations upon supervisors and lenders that are intended to achieve the CRA community development objectives. Congress has also put in place measures to enforce those obligations, including ones that may be taken by those interested in community development.
I believe my job as a supervisor is to make sure that lenders fully understand their CRA responsibilities and behave accordingly. It is also the job of the supervisor to be certain the rights of those whom CRA is intended to benefit are protected. If, in carrying out my job, I revealed an attitude that favors community development interests over those of the lender or vice versa, I believe my credibility, and in turn my effectiveness, would be undermined.
All of that is not to say that the Fed, community developers and lenders should not be communicating ideas, information and even biases to one another. To the contrary, the CRA contemplates that the exchange of information will contribute to the success of CRA. As a facilitator of CRA, an important role of the Fed is to provide information that will contribute to the CRA objectives. In fact, that may be the Fed's most important function and the best way to deal with the safety and soundness conflict.
The Minneapolis Fed provides information in a number of ways. For example, the bank publishes a newsletter to provide lenders and community groups current information on community development issues. Also, this bank and First Bank System recently prepared and published a handbook called "Principles and Practices of Community Lending" that is distributed to lenders and interested community development groups.
That book provides important information to facilitate community development by helping lenders work through the process of community development lending. It also provides information on the various local, state and federal programs that are available to enhance safety and soundness in a community development loan. In addition, the Minneapolis Fed conducts educational forums throughout the Ninth District.
Those educational forums are perhaps the Fed's single most important information tool. I believe that what is learned in the course of discussion between lenders and community developers is most rewarding and contributes substantially to the interest we all have in the purposes of the CRA. Both lenders and community developers benefit from a mutual interaction. And who knows, it may even be possible to change someone's attitude.