Hearing of the Domestic Policy Subcommittee of the House Committee on Oversight and Government Reform - Upholding the Spirit of the CRA

Interview

Hearing of the Domestic Policy Subcommittee of the House Committee on Oversight and Government Reform - Upholding the Spirit of the CRA: Do CRA Ratings Accurately Reflect Bank Practices?

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REP. DANNY K. DAVIS (D-IL): Thank you very much, Mr. Chairman.

I want to thank the witnesses for being here and for participating.

The Department of Justice filed a complaint against First National Bank of Pontotoc, Mississippi in April 2006 alleging that First National's former vice president violated the Equal Credit Opportunity Act and that the bank is responsible for the discriminatory conduct during the vice president's tenure. The complaint alleged that while he was serving as the vice president at First National in 2003 and 2004, he had sought sexual favors in return for favorable loan decisions. He left the bank in May of 2004.

During this time between 1993 and 2003, the OCC gave First Bank (sic) passing scores even as the vice president in question was stepping down. In fact, the 2004 CRA exam of First National states that in the, and I quote, "fair lending or other illegal credit practices review," end of quote, an analysis of public comments and consumer complaint information was performed according to the OCC's risk-based fair lending approach.

Based on its analysis of the information, the OCC decided that a comprehensive fair lending examination would not need to be conducted in connection with the CRA evaluation this year. The latest comprehensive fair lending examination was performed in 1998.

I'd like to ask you, Ms. Jaedicke, you did not conduct a fair lending exam of First National because your agency felt that the risk- based approach that you use, as a result there was no need for an exam. Is that correct?

MS. JAEDICKE: Yes, sir, at the time, based on the information we had during our 2004 CRA exam.

Let me add that the issues at First National Bank of Pontotoc are quite disturbing to us, but the allegations surrounding the bank emerged contemporaneously with the exam that we were doing in 2004. Shortly thereafter, the Department of Justice opened up an investigation and asked us to stand down.

So when the Department of Justice finishes their investigation and we have their findings, we'll take them into account as part of the next CRA examination.

REP. DAVIS: Could you explain to us what your risk-based approach is?

MS. JAEDICKE: Certainly. Our fair lending supervision process really has three features.

The first is the knowledge and experience that our bank examiners have with the banks that they supervise, and that involves the bank's products and services, its customer base, the type of communities they operate in, the type of complaints they're receiving from consumers or community groups. The examiners process that information as they receive it, and if based on any of that information they decide that they're concerned about a fair lending issue, they could initiate a fair lending exam. That's the first feature.

The second feature of our fair lending supervisory process is really analytically based. We process information from the HMDA data submitted by banks each year and additional information that lets us screen the population of national banks to look for banks that may have disparate issues or issues that cause us concern, raise questions about fair lending.

If we find that, we'll put those banks on a list to be examined in the coming year.

And the third feature is a random sample. We select a group of banks to be examined in the coming year each year so that there are banks that, if we perhaps have no other reason to look at those banks for fair lending issues, are examined anyway.

REP. DAVIS: And is the fair lending exam meant to be complaint- based, that as a result of complaints you determine --

MS. JAEDICKE: It's not -- no, sir, it's not solely complaint- based, but certainly if we had complaints or information from community groups that caused us concern, it could initiate a fair lending exam.

REP. DAVIS: So the purpose of the exam to regulate the banks and ensure that they are in compliance with fair lending laws, like the FHA and the ECOA, if you wait for a consumer to tell you what they are in violation of those laws, then is your job just to follow up? I'm saying if you get complaints and the consumers are saying we think that they're violating thus and so, is it your task to just follow up?

MS. JAEDICKE: We certainly would follow up if we had complaints like that. But that's not the sole basis that might lead to a concern on our part around fair lending issues.

I'll give you another example. If a national bank were to choose to enter a new market that would involve lending to a Hispanic customer base or an African-American customer base and we had reasons to be concerned about the products they were offering, that might cause an examiner to initiate a fair lending exam.

Again, if we saw information in the HMDA data filed by national banks every year that caused us to be concerned and we analyze that information every year, that could cause us to initiate a fair lending exam.

There are a variety of different things that could occur that would cause us to initiate a fair lending exam.

REP. DAVIS: And finally, let me just ask you, is it possible that because there had not been a fair lending exam in six years for this particular bank before the case was brought to the Department of Justice's attention, that First National may be violating other lending laws but you just weren't aware of them because there was no examination of the bank?

MS. JAEDICKE: I think in the situation of First National Pontotoc, which is a bit unusual because it involves sexual harassment, and sexual harassment by its very nature is surreptitious, it would be an issue that would be quite difficult for us to uncover as part of a bank examination.

Nonetheless, once the Department of Justice concludes its investigation, we'll review the findings of that investigation, take them into consideration in our next CRA examination, and if there are other indications in that investigation of something we feel like we need to look at at First National Bank of Pontotoc from a fair lending standpoint, we'll do that.

REP. DAVIS: So there may be others, but you just really wouldn't know because of the nature of the examination?

MS. JAEDICKE: Yes, sir.

REP. DAVIS: Thank you very much.

And Mr. Chairman, I want to thank you for your indulgence. I know that my time has ended.

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REP. DAVIS: Thank you very much, Mr. Chairman.

Ms. Braunstein, let me ask about voluntary corrective action. Does this regulation suggest that if a bank corrects its discriminatory behavior, then the regulator will not reflect the discriminatory practice in the CRA exam?

MS. BRAUNSTEIN: No, it does not suggest that at all. In fact, even if a bank corrects its behavior, if there was a pattern or practice of discrimination -- we have reason to believe that there was -- despite a correction, we will make a referral to Justice. We also will reflect the discrimination in the public evaluation of the CRA report.

REP. DAVIS: So you're not grading the bank based on its performance exactly, are you, or is it some performance and some of what it says it's going to do?

MS. BRAUNSTEIN: Well, there's a difference between -- I'm trying to -- I think -- I'm not sure I understood your question, but there's a difference between the CRA rating that is given and the public evaluation report.

The rating is part of the report, so I think what we're saying -- and this is true of all of us -- is that in some cases a finding of discrimination may not result in a downgrading of the rating. However, even if that happens, it will be reflected in the written report on CRA.

REP. DAVIS: Well, let me ask you, if a bank like Old Kent says in 2001 we're sorry. We'll open up a branch in the city of Detroit, even though we haven't done so as of yet -- were legally mandated to do for the past five years -- would this bank get a lower CRA rating or would this satisfy the requirement?

MS. BRAUNSTEIN: If we find a redlining violation, first of all, we would be mandated to refer that to Justice. And second of all, something that egregious would likely result in a downgrade in the CRA rating.

REP. DAVIS: And let me go to other members of the panel.

Of course we have data that reveal a disproportionate share of African-American assessments -- African-American and Latinos receiving higher-rate home loans notwithstanding location, income. We see nondisclosure of fair lending exams and lack of transparency, thereby compromising entire communities of their right to participate in public negotiations, and CRA's lack of uniform standards where reasonableness of assessment area as well as nature, extent and strength of evidence of discriminatory practices at the discretion of the examiner.

I guess what I'm really trying to arrive at is this business of when is enough enough, or how do you decide? The question then becomes, what level of evidence is sufficient to adversely impact an agency's CRA evaluation?

And Ms. Thompson, perhaps I would --

MS. THOMPSON: Well, a couple of things. At the FDIC, consumer protection is very important and not only do we look at access to credit -- which was very relevant 30 years ago and it's just as relevant today -- we look at cost of credit, because in many of the low-income and moderate-income neighborhoods, they are proliferated by high-cost credit products that may or may not be offered by financial regulated entities such as financial institutions.

At the FDIC, we're encouraging unbanked and underserved persons to come into the banking sector. And through our examination process we think one violation is one too many, and we always advise the bank to take corrective action.

To the extent that we find patterns and practices of either denial of credit or high-cost credit, we take action relatively quickly, and we take that information and we factor it into the rating for the compliance exam for that institution and also the CRA rating.

This year alone the FDIC has made 13 referrals to the Department of Justice for fair lending issues, and we've also downgraded two institutions in 2007 with respect to their CRA rating. This is something that is very important to the FDIC. It's important to our chairman, and we want to ensure that our examiners take corrective action where appropriate.

REP. DAVIS: Thank you.

Ms. Yakimov, how would you respond to that?

MS. YAKIMOV: We look at the fair lending record of our institutions very closely. We look at the HMDA data. We combine it with factors that aren't included in the HMDA data like loan to value, the broker compensation, credit score. And fair lending reviews take place at every comprehensive exam, every 12 to 18 months.

We do targeted reviews. We've, as I said, built some additional models and tools to kind of run the data through. And again, if we see evidence of discrimination or other illegal credit practices, that will have an impact -- not only will that be reflected in the fair lending evaluation, but it will also have an impact on the CRA rating.

And we look again at the scope of the evidence. We look at the CRA performance of the institution in totality. But that's a significant factor, if we do find those concerns.

REP. DAVIS: Ms. Jaedicke?

MS. JAEDICKE: Congressman, findings of illegal credit practices or discrimination adversely affect the CRA ratings of national banks.

But equally important, a poor lending record by a national bank or a bank that is not serving the credit needs of its community, including low- and moderate-income areas, is equally likely to get an adverse CRA rating.

REP. DAVIS: You know, I'm always amazed that in spite of the fact that we've had CRA now for 30 years, and yet, when we look at certain communities in certain areas, we don't seem to get a tremendous amount of difference in some of those. I'm saying the same groups continue to have the most difficult time, still continue to pay the most for credit, still seem to not be able to acquire in many instances decent credit.

Is there something else that any of you might be able to think of that might be missing? I mean, I happen to actually live in the community that was a hotbed of the generation of activity that resulted in CRA. A woman named Gail Cincotta used to live in the same neighborhood where I live. As a matter of fact, I was a member of Gale Cincotta's first organization -- the Organization for a Better Austin -- before she left and came to Washington and organized the National Training and Information Center.

And so I've kind of seen this over the period of time. What else could perhaps -- if there's anything?

MS. THOMPSON: Congressman, I happened to be privileged to have born and raised on the South Side of Chicago, which is the home of CRA, as you well know.

But I can tell you that at the FDIC, we take a very proactive approach to economic inclusion. We have within our organization a concerted effort to try to bring the unbanked and underserved persons that the chairman referenced in his opening statement into the banking sector.

In eight of our territories, we have formed alliances with community groups, financial institutions and other regulators to try to find out why people are not coming into the banking system, and we're trying to figure out ways to encourage them to participate more fully in the financial services that are offered by regulated entities because, again, so often in these communities many of the occupants are subject to higher-cost products, whether it's financial services or not.

This is a very important initiative to our chairman, and we do take proactive steps to try to encourage the regulators to work with community groups and financial institutions to try to better address this issue.

REP. DAVIS: Ms. Braunstein?

MS. BRAUNSTEIN: Yeah. Congressman, I would also add to that that I don't think we should lose sight of the fact -- of the accomplishments of CRA over the last 30 years. It has been documented differently in different places, but I don't think anyone would argue that CRA has brought billions of dollars into neighborhoods that previously had very little, if any, bank investment or bank participation.

I do believe there is a lot more to be done and needs to be done, both on the part of the regulators as well as on the part of the financial institutions. I also think that unfortunately CRA is not the panacea or the answer to everything -- all the problems that exist economically in low-income communities, and it will never be able to solve all the problems.

MS. YAKIMOV: I'd add we've seen a real democratization in credit, and I think it's incumbent upon us for both sides of our houses to function effectively.

So we're talking a lot about CRA and the provision of credit, particularly to low- and moderate-income people. We want the types of credit that are sustainable, that allow people to stay in their homes, so we need to make sure that underwriting is what it ought to be.

That's another part of what we're called upon to do, and I think we've issued guidance in the last -- you know, more than a -- recently and going back to 2006 that really began to move the industry and to what our expectations were in terms of sound underwriting.

They're both important.

MS. JAEDICKE: I'd add to that I think it's very important for us as regulators to help keep the dialogue going between banks and community groups. I know at the OCC in the last five years we've held 1,000 meetings with different community groups around the country trying to understand what the needs are so that we can make better assessments in our CRA exams and we can help banks understand what communities need.

I also think financial literacy is always an important issue, and to the extent that we can contribute as regulators in those areas, I think we should. And I think we need to closely look at what's happening in the subprime market and in the environment we're working in now to see if we can learn how people are being affected by the current environment.

REP. DAVIS: Well, let me just thank you again, Mr. Chairman. Let me thank all of you. I'm going to have to dash away to something else, but I do want to say that I would certainly agree relative to some of the impact that CRA has actually had, even from a personal experience -- I actually sat on the board of a bank for 10 years as a result of my community being engaged to the extent that we held up the purchase of a bank until there was agreement with our reinvestment policy. And it has been a good experience, and I actually sat there with no personal interest in the bank. I didn't own any of the stock, and only left after I got elected to Congress because I wouldn't have time to go to the meetings and all.

And so, yeah, I think that CRA has had some impact. It can have even more. And I think an activated community is probably one of the best things that I really can think of to help make sure that the concepts really work.

And so I thank you all.

And I thank you, Mr. Chairman, again, for your indulgence.

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