A Look at Coming Concerns In The CRA Arena

The Consumer Advisory Council (CAC) is comprised of representatives of diverse interests and points of view. The CAC membership includes consumer advocates, financial institutions, retailers, academics, and the occasional attorney. They meet to discuss issues of concern to consumers and advise the Board of Governors of the Federal Reserve System on consumer concerns about the credit industry trends. At its meeting on April 17, 1997, the CAC raised a number of issues and concerns on the CRA process that could have an impact on banks in the near future.

Impact of Mergers on Communities
Consumer advocates raised several concerns about the impact of mergers on the community and the services offered by the resulting bank. Francine Justa, Executive Director of Neighborhood Housing Services of New York, observed that in the wake of a merger, the products offered tend to be "plain vanilla" rather than tailored to the needs and interests of consumers in the community. She expressed concern that the impact of this trend would be to limit the usefulness and availability of services in low-income communities.

Ken Harney, a journalist with the Washington Post Writers Group stated that the resulting institution is more likely to sell loans to FNMA or FHLMC. Therefore, the underwriting standards of these two secondary market entities tend to dominate the product availability.

Raising concerns of a slightly different nature, Lisa Rice, Executive Director of the Fair Housing Center in Toledo, Ohio, observed that it now tends to be harder to get access to top management. Rather than meeting with the CEO of a bank or thrift, her group may only have access to a vice president in the larger institution. This means that it is more difficult to get her message heard at the top. Rice also expressed concern about branch closings in the wake of a merger. She stated that a branch can be a critical factor to economic development in a neighborhood. She would like to see regulatory agencies encourage branch construction in low-income areas to stimulate economic development.

Views on the New CRA Regulation
Some CAC members expressed concern about the new emphasis on loan production. They are concerned that emphasis on results may cause banks to ignore community input on credit needs. They argued that CRA evaluation should also take into account whether the products offered fit the community demand. This was based on the concern that bank mergers often result in offering generic products that do not meet specific community credit needs.

The CAC also discussed what services offered by banks should be recognized for CRA credit. The members divided over how recognition should be given to certain types of services such as check cashing, low-cost banking, and handling electronic benefit transfers.

Several consumer advocates argued that CRA recognition should only be given to banks that provide such services at no charge. They argued that if a bank imposed fees for these activities, it was not a service for purposes of CRA.

On the banker side of the discussion, Carol Parry, EVP at Chase Manhattan Bank, pointed out that Chase has found that check-cashing is often a desired service. Chase offers check-cashing because customers want the service and like being able to choose to cash checks in a bank rather than at a check-cashing service.

Parry observed that the assumptions made about check-cashing customers are not always accurate. Chase's surveys have revealed that 70% of its check cashing customers in fact have bank accounts.

Margot Saunders, Managing Attorney for the National Consumer Law Center, argued vehemently that the issue is whether a bank should get credit for a service when it is charging for the service. She argued that banks are free to charge for check-cashing and electronic benefits transfer but that this is different from providing a service for purposes of CRA.

Gail Hillebrand, Litigation Counsel for Consumer's Union, argued that banks could benefit from the check cashing service by using the service to bring customers into the banking system. She added that she has not yet seen a check casing program that is designed to do this. She also stated that banks should not get CRA credit if all they do is charge "a little less" than the check cashers. Parry observed that banks will probably impose charges for electronic benefits transfers. She stated that charges will be necessary to encourage banks to offer the services and that the fees should therefore be permitted.

Strategic Plan Procedures
Theodore Wysocki, Jr., Executive Director of CANDO in Chicago described objections to the public review and comment process in the development of a strategic plan. When Northern Trust published their draft strategic plan for public comment, he commented that the plan lacked specific geographic targets. He argued that banks should be required to include such specific targets before publication so that groups can make effective use of the comment period.

He also stated that the regulatory agency should contact groups commenting on the strategic plan to get their views on any changes made to the plan.

Central Data Repository
Gregory Squires, Professor of Sociology at the University of Wisconsin-Milwaukee, asked the FRB to provide a central data repository of CRA ratings for all institutions in a community. This, he pointed out, would make it much easier for interested persons to obtain current ratings for all covered institutions in their community. [editor's note: It's only a matter of time until community organizations ask for a central repository - on the Internet - for CRA data.]

Future CAC Issues
The CAC committees identified a number of issues for future consideration - and debate. They plan to look at the impact of appraisals on lending discrimination. Particular concerns here involve the extent to which appraisals cause or support lending discrimination by undervaluing properties based on characteristics that are typical of low-income or minority neighborhoods without fairly evaluating the marketability of the property.

In the arena of fair lending, the Community Affairs and Housing Committee also plans to look at HUD fair housing research and the upcoming FRB review of Regulation B. The committee has already identified targeted marketing and pre-screening as concerns.

Several other lending practices are on the committee's list. These include electronic disclosures and applications, practices and developing legislation involving private mortgage insurance, and the impact of welfare reform and underemployment on consumer lending. The committee will also look at Indian housing issues, particularly those involving sales by HUD to tribal governments.

The Bank Regulation Committee will study the activities encouraged and discouraged by CRA's investment and service tests, and what the relationship of these tests should be to the lending test. Results and uses of the small business data reporting are on the agenda.

This committee will also look at the issue of the "unbanked" population to identify ways that increases in banking services would have a positive impact. They expect to make recommendations on whether issues such as electronic benefits transfers and direct deposit should be considered for CRA purposes. The Consumer Affairs Committee plans to look at several practices that may affect fair lending and CRA. They plan to study credit scoring and risk based pricing.

ACTION STEPS

Make yourself look smart. Offer several predictions - taken from this article - on consumer and banking trends.
Consider ways to maintain contact with communities in your assessment area to be sure that credit and service needs are being met. Consider ways to meet needs and position your bank competitively.
Stay ahead of the advocacy groups. Analyze your bank's data - and that of your competitors - regularly.
Review the types, locations, and prices of services such as life-line banking and check-cashing.
Advise your management of the consumer advocates' concerns.