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Consumer Advisory Council Faces Hot Issues

The Consumer Advisory Council ("CAC") met on June 28, 2001 to discuss current consumer concerns and give advice to the Federal Reserve Board. The CAC membership includes bankers, other creditors, consumer advocates, community investment specialists, academics, and attorneys. Discussions are usually as diverse as the membership, and usually predictive of the near future for compliance.

This meeting included topics such as the upcoming review of CRA and proposed rules to provide greater information about predatory and sub-prime lending.

CRA's Investment Test
The two aspects of CRA that the CAC considered as needing change were the investment test and some aspects of the service test. The CRA committee, chaired by Malcolm Bush of the Woodstock Institute, gave most of their attention to investment test issues. The committee both supported the need for investment recognition under CRA but also raised a variety of shortcomings in the current measurement system.

On the positive side, several members described ways in which the investment test has a needed and positive impact on community development activities. Willie Jones, SVP of The Community Builders, Inc., in Boston, gave the example of investments needed to rehabilitate housing in neighborhoods where housing is undervalued. The investment or subsidy helps to make the market more attractive and bring the property values up. When the improved area meets a critical mass, the value becomes self sustaining. Investments are also critical in the redevelopment of commercial areas. CRA investments allow businesses to leverage debt. Investments can also be used to attract other businesses.

In the face of value described, the CAC members did not directly support eliminating the investment test, but many members - both industry and consumer activist - recommended putting more flexibility into the test and how investments are considered.Most of the banker members raised the serious concern that competition for investments is driving the viability of these investments under water. Gary Washington, an SVP with ABN AMRO, stated that he believes we need to get away from competition for investments. He supports evaluation of the quality of investment. The great effort that it usually takes to put together a community development investment goes unrecognized. The whole emphasis is on dollars. Other industry members agreed, stating that the quality and effort of work is a throw-away.

Another concern discussed by both community reinvestment specialists and bankers was the difficulty of finding and competing for appropriate investments in smaller communities. In particular, smaller banks have difficulty competing for investments. Earl Jarolimek, VP of Community First Bankshares in Fargo, ND, said that in some geographic areas with limited opportunity, the investment test results in the exportation of capital. He stated that as much as 75% of his bank's investments are in areas where the bank does not have a branch.

Consumer activists showed little sympathy for these concerns, stating that tax incentives provide adequate return. Others suggested that banks should pressure intermediaries, such as state-wide organizations, to work harder in the bank's market to provide appropriate local investment opportunities. However, the general consensus of those specializing in community redevelopment such as Neighborhood Housing Services, was that investments are needed to get redevelopment started and to provide momentum by providing capital.

There were suggestions such as folding the investment test into a community development category. Another suggestion, raised by Anthony Abbate, CEO of Interchange State Bank in Saddle Brook, NJ, was to convert the investment test from a mandatory measurement into a true carrot by providing bonus consideration. Such consideration would serve as an incentive to find appropriate investments but would not force banks into making inappropriate or out-of-community investments.

The Service Test
There was more agreement between industry members and consumer activists regarding the Service Test. Frank Torres, Jr., Legislative Counsel for the Consumers Union, opined that savings is an area that should be emphasized. In the long haul, it is important to emphasize savings and financial education.

This view was supported by Lauren Anderson, Chair of the CAC and Executive Director of NHS of New Orleans, Inc. She said her organization is now working with people who are a year or more away from being ready for home ownership. They deal with people who pay their fees with money orders and have worked to design a savings plan to motivate people to switch from money orders to low-cost banking.

Industry members supported the need for financial education - especially at an early age. However, some raised the caution that offering such opportunities only makes a difference if consumers use them.

Predatory Lending Measures
The discussions about the FRB's proposed amendments to Regulations Z and C went all over the idea map and failed to arrive at any consensus. Industry members objected to the proposals based on a significant increase in regulatory burden to provide possible protections for a very small percentage of loans.

The group discussed several ways of providing protections for borrowers. One idea - put forward by consumer activists - was to require the new lender to compare loan terms to the applicant's existing loan before allowing the borrower to proceed. These suggestions were based on the belief that low-cost lenders such as Habitat for Humanity should not have the burden of protecting their borrowers or reviewing the new loan.

Industry members strongly opposed this idea and pointed out that it can be very difficult to determine loan term information. Often, borrowers don't know what their current rate is. They suggested the reverse method, by suggesting that the first lender provide information about rate and terms with the payoff information sent to the new lender. Earl Jarolimek supported this concept, stating that the borrower's interests should be paramount and the first lender is in the better position to compare terms and counsel the borrower.

On the HMDA front, there was even more disagreement, with consumer representatives wanting more information on the LAR and financial institutions concerned about the burden of additional reporting and the probable misuse of information reported.According to the bankers on the CAC, reporting the APR of a loan is an accident waiting to happen. Reported without the context of credit risk, the APR could be an incendiary device. There were concerns that the rates would be used only to identify the possibility of discrimination.

Consumer advocates claimed that the use of such information would be responsible, that the information would merely serve the function of a canary in a mine shaft - an early warning of possible trouble. And following the principle that more is better, several representatives suggested reporting the total costs and finance charge as well as the APR, believing that this would give more clarity to the information. One member supported this idea by pointing out that loan pricing can be a substitute for denial.Industry members pointed out that with examiners functioning as "cops on the beat," predatory lending is not a serious problem for financial institutions. But these institutions are the primary HMDA reporters. The actions of the real predatory lenders, who either are not subject to HMDA or don't face enforcement, will be invisible no matter what is changed in HMDA.


  • Discuss the ideas raised by the CAC with your management and lenders - in preparation for writing a comment letter.
  • Check out the FDIC's new financial education program and mention the importance of financial education in your comment letter.
  • Look closely at your mortgage refinancing process and consider how some of these ideas could or could not be implemented.
  • Think one more time about whether the HMDA LAR could or should contain more useful information.

Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 7, 7/01

First published on 07/01/2001

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