What's Great About CRA?
Dr. Lawrence Lindsey, best known to the bank compliance world as a former governor of the Federal Reserve System, spoke recently at a community development lending conference jointly sponsored by BAI and the Federal Reserve Bank of Richmond. Now a consultant and no longer the Governor leading the Federal Reserve's enforcement and policy making on CRA, Lindsey now shares a new perspective on CRA. He recommends four rules for survival.
- You are in it for the long term
Lindsey advises that banks should not expect CRA to go away. In fact, he states, CRA is the only way a bank will be successful. CRA is designed to deal with economic problems that took decades to develop. Solutions for these problems will also take a long time. But doing so is vital to the success of banking.
Lindsey particularly warns against a short-sighted approach to solutions. He acknowledges that banks are tempted to focus on the examination process. However, if the bank commits resources only to get through the next examination, the resources will be wasted. This is a long term process and the bank must focus on the long term to make effective use of resources - and to make a difference.
- Be a straight shooter
See the situation with clear eyes and leave any preconceived notions behind, Lindsey advises. In order to develop solutions, it will be necessary to innovate. And innovation requires clarity of vision, trust, and good information. You get good information by giving good information - by being a straight shooter. Lindsey advises that you not be reluctant to speak the truth as you see it - including "that project won't work."
By being straightforward and honest, you will discover the opportunities that do exist. The needs for development and the pressures from community development groups will not always be the same. Lindsey also acknowledges that you need to learn to tell the difference between the talkers and the groups that do sound work.
You can't do this alone. Lindsey recommends developing viable, longstanding partnerships in your community. Good starting places include churches, housing groups, civic associations, and the local Federal Reserve Bank. Lindsey put in a plug for the FRB staff dedicated to CRA work. They are available (and free) to help you. They are also separate from the examinations team. Never stop looking for partners. This is really what CRA is all about. The most successful projects have been based on partnerships. Neighborhood Housing Services is one of the earliest and best examples of successful partnerships. It worked primarily because it was an effective partnership.
- It takes more than money
Lindsey stated that the biggest mistake the country has made in the last 30 years is to think that problems can be solved by having money thrown at them. For example, he explained that the money that has been put into government housing programs (and the agencies that run them) during those years could have put 60% of the nation's poor into typical middle income homes. Instead, we still have serious housing problems for our low-income population.
Lindsey argues that money won't be the solution at the local level either. Time and expertise are at least as important. Successful endeavors need technical knowledge. He therefore advises that banks should be aware that they bring more than money to the table. They bring expertise that is essential to successful undertakings. Lindsey has some concern that the new regulation fails to take this into account. He believes that the new criteria are so based in the measurement of loan dollars that they fail to take into account the time and expertise that are needed to make a project successful. As he put it, counting dots on a map doesn't convey any sense of how difficult it was to get the dots there.
Can banks make a difference?
Lindsey believes that the banking industry has always been innovative. In fact, products that we now view as "traditional" were developed in response to social and economic evolution. He traced the history of mortgage lending, from the early five-year balloon loans, through the 30-year mortgage, and the variable rate mortgage. These were all innovations of the private sector in response to needs.
What about the future?
Lindsey referred to the "next version of CRA" that will result from a pendulum swing. He expects that we will reach a point when banks are stretched to make more loans. He expects that at some point in the future we will see a decline in qualified borrowers. When that happens, the current method of measurement by numbers won't work.
He also recommends that banks closely watch their portfolios to be sure that they are in fact making viable loans. If you see a rise in delinquencies, probe to find the cause.
- Look closely at Lindsey's advice. These four principles are interactive.
- Talk regularly to your examiner about your CRA program. This is a means of letting them know how much work has gone into the measurable lending activity. It is also a way of telling them that your bank is trying and committed to the Goals of CRA.
- Work regularly on partnerships. Evaluate who your bank's partners are. Also consider whether you have enough partners and the right partners. If you come up short, go back to the old 12 assessment factors and use the outreach steps to identify new partners.
- Evaluate your bank's performance in the context of trust. Is your bank a "straight shooter"? Can community groups trust and rely on your bank? If you find shortcomings here, start an action plan to correct them and build a stronger reputation for your bank.
- Monitor your portfolio. How are loans actually performing? If your portfolio has rising delinquencies, study the underwriting to find out why. Adjust your underwriting - or products - accordingly.
- Maintain movement. CRA is not static; it is about change and it should be change for the better.
Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 12 & 13, 10/97
First published on 10/01/1997