Banks seek change in lending law - Community Reinvestment Act of 1977

Nation's Business, Sept, 1992 by David Warner

Proving they meet their communities' credit needs is a paperwork tangle for lenders.

The Treynor State Bank in Treynor, Iowa, returns nearly 70 cents of every deposited dollar to its home community. The funds flow back as agricultural and small-business loans, lines of credit, investments in local financing bonds, and home mortgages. Bank officers are active in the community; one even serves as a volunteer firefighter.

"We put hours and hours every year into working for this community," says the bank's president, Michael "Mick" Guttau. All of Treynor State Bank's 18 employees "are involved in some way or another in economic development or community activities," he says. His own community contributions include service as chairman of the local economic-development corporation and as secretary for the Western Iowa Development Association.

But it's not enough that the bank demonstrate its community orientation where it counts the most--in the community itself. Treynor State Bank must also prove to the federal government that it takes its local responsibilities seriously--and that proof involves constantly updating massive amounts of paperwork.

The reporting is required by the Community Reinvestment Act (CRA), a federal statute that requires banks and savings-and-loan institutions to prove they are meeting the credit needs of their communities, including low- and moderate-income neighborhoods, and are otherwise helping to fill community needs.

In a recent American Bankers Association survey, the CRA was cited by seven of every 10 bankers who responded as the most troublesome of the more than 100 federal regulations with which banks must comply. The same survey found that the $10.7 billion that banks spent last year in complying with federal banking regulations was equal to 59 percent of the industry's profits.

Bankers across the country are complaining that documenting compliance with the CRA is costing time and money that could be invested directly in their communities. Says Michael Gauthier, president of Acadian Bank in Thibodaux, La.: "I've got a CRA file that's about three feet thick, and we work on it every day. It's just another regulation that adds to the total inefficiency of our business."

The CRA was adopted by Congress in 1977 to encourage financial institutions to meet community credit needs. But the encouragement turned to a mandate with the passage in 1989 of the Financial Institutions Reform, Recovery, and Enforcement Act. Among other requirements, the new law mandated that banks document their compliance with the CRA and directed bank regulators to examine and rate each institution on how well it serves its community.

Consumer groups and lawmakers were concerned that some banks were denying services to some segments of their communities and not reinvesting local deposits into the local economy. Excluding certain localities from loans or other services is called "redlining" because of one method used to designate such areas.

The CRA regulations require banks to specify the boundaries of their local communities on a map, write a CRA statement that includes a list of the services and products offered, and maintain a public-comment file. Banks also must post a notice in each branch explaining the CRA and how the public can comment on the institution's performance in complying with the law.

A bank's CRA record is examined and rated as "outstanding," "satisfactory," "needs to improve," or "substantial noncompliance." Community groups can challenge a bank's CRA compliance, holding up the opening of a new branch office or a merger or acquisition.

Despite its community efforts, Treynor State Bank was given only a "satisfactory" rating last year. While that grade doesn't reflect the bank's financial condition and won't hurt its standing in the community, bank president Guttau says he's not happy with it. "I prefer to have the |outstanding' in recognition of what we do for the community."

Although the examiners told Guttau he was doing a "great" job complying with the CRA, Guttau says, he believes the bank didn't get the higher rating because "we didn't have the pins [showing the geographic location of loans made in the community] in the map the right way. It seems that what's relevant [in determining ratings] is whether or not you've checked the little boxes correctly on the piece of paper that has to be sent to the regulators and not whether you've met the needs of the community."

Indeed, the law's vagueness is a problem for bankers, who don't know how well they are complying on paper with the reinvestment act until the regulators have examined the bank's CRA file.

But it's the documentation requirements of the CRA that bankers protest most. "What we are concerned about is the paperwork and the leverage that the regulators have with regard to that paper-work," says Alan R. Tubbs, president of the American Bankers Association (ABA) and the top executive of the Maquoketa State Bank in Maquoketa, Iowa. "It seems the focus is on the [CRA] file and not on the intent of the law."