Several months back, I wrote an article: Our Nation’s Ball-less Wonders in which I lambasted our Regulators for not enforcing Federal Reserve Regulation H that governs safety and soundness in lending. That regulation sets forth guidelines that banks must follow in evaluating mortgages. I proposed that it was our Regulators’ failure to enforce these guidelines that caused our nation’s economic crisis.
Over the last months, as I listened to various news interviews on our economy, I kept hearing commentary on how the CRA, the Community Reinvestment Act, played a large role in this crisis. For the most part, I discounted this as rhetoric.
Then, while clicking around various government sites, I accidentally came upon a “corrective action directive” put out by the Office of Thrift Supervision. Reading this document brought my focus to bear down on CRA’s possible effect on the state of our economy. Before I share my findings, I must first apologize to the now defunct Guaranty Bank of Austin, Texas. This bank is the winner of my web-surfing lottery.
Follow me on this:
The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low-moderate income neighborhoods, consistent with safe and sound banking operations. It was enacted by Congress in 1977.
It is a good Act that prevents banks from red-lining and discrimination. It ensures that low-income communities will be afforded access to banking services, including loans. The banks receive CRA ratings from their respective Regulatory agency: FDIC, OTS, FRB and OCC. If the bank receives a good report card, then the regulators support, for example, the bank’s applications to open or close branches or to merge with or acquire other financial institutions. Conversely, if a bank receives a bad report card, they are prohibited from merging with or acquiring other banks. Over the last fifteen years, with the birth of regional and national banks, getting a good CRA report became an ever-increasing priority within the banking industry as it was a key to their ability to expand through acquisition.
What the Regulating authorities fail to remember is that the Community Reinvestment Act was designed to ensure that low to moderate income neighborhoods, previously abandoned by most banking institutions, would have equal access to financial services. But at CRA’s core, in each pronouncement of its rules and intent, it states that the bank’s practices must be “consistent with safe and sound banking operations”.
Reflecting on this, CRA was to-be to lending in the low to moderate income communities what the SBA is to Small Business Lending. The SBA doesn’t allow banks to abandon all reasonable credit criteria. Quite the contrary. They relax certain standards to make it easier for the small business owner to obtain financing, perhaps extending repayment terms or providing lower rates. SBA borrowers still must be able to support their ability to repay these loans.
Likewise, CRA standards, as I remember them, provided for lower down-payments (10% instead of the conventional 20%), lower rates and lower closing costs. The borrower still needed to show their capacity to repay. It was never intended to be, by any stretch of the imagination of our dillusional regulators, a give-away program. It was designed to help a lot of worthy, qualified low to moderate income people buy their first home.
In fact, the regulation itself states,
“Banks are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals, only if consistent with safe and sound operations.”
It was the banks greed that morphed this excellent law into the disaster that occurred over the last years. Where were the regulators, the protectors of the public, in this equation? It remains my humble opinion that our Regulators WERE INDEED our nation’s ball-less wonders. They allowed the banks to take this perfectly sound and necessary program and bastardize it into a free-for-all by the greedy bankers.
Not only did our regulators fail to impose penalties on the banks that continually reduced all reasonable loan evaluation criteria in violation of Federal Reserve Regulation H, they praised them for it.
Take the CRA report, dated December 28, 2007 issued by the Office of Thrift Supervision for Guaranty Bank in Austin, Texas. The first interesting observation is the disclaimer that appears on the first page of the report:
“The rating assigned to this institution does not represent an analysis, conclusion, or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution.”
Come ON!!!!! Our regulator’s first priorty is to ensure the safety and soundness of our financial system. They can’t be out there writing reports on CRA compliance that issue disclaimers for themselves. How utterly ridiculous, not to mention dangerous.
In this CRA report, Guaranty Bank received the HIGHEST CRA rating. Overall rating: Outstanding. Lending test rating: Outstanding. Remember, this report covered the time period from January 1, 2005 to June 30, 2007 and was released on December 27, 2007.
We all know the financial world has changed dramatically. I just had to know how Guaranty Bank fared through this crisis after receiving such glowing CRA reports from the Office of Thrift Supervision. In August 2009, the OTS issued the sad-but-true “prompt corrective action directive”. Guaranty Bank was failing. They were prohibited from making most loans. One exception was that they could originate Qualifying Mortage loans underwritten in accordance with criteria established for residential loans eligible for purchase by the FHLMC or the FNMA. But they were prohibited from participating in any Sub-prime Lending Program.
This directive equates to closing the barn door after the horse already ran off. I understand the need for the regulators to have taken these steps. After all, this institution was FDIC insured and was clearly at risk. Still, it is my belief that, today, the regulators are being reactionary to the crisis they themselves created. Instead of always remaining centered on reasonable core practices that ensure safety and soundness in lending, they’ve swung the pendulum so far in the opposite direction that the banks are unable or unwilling to meet the credit needs of ANY community, never mind low and moderate income communities. It’ll be interesting to see the CRA ratings of the banks across our nation that cover the years 2008, 2009 and 2010. I’ll be watching for these reports.
“On Friday, August 21, 2009, Guaranty Bank, Austin, TX was closed by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.
All deposit accounts, excluding certain brokered deposits, have been transferred to BBVA Compass, Birmingham, AL (”assuming institution”).
I had to look further. I could not help myself. Interestingly, Compass Bank received a CRA rating of “Satisfactory” from their regulator, the Federal Reserve Board. This was one notch below the “Outstanding” rating received by the now defunct Guaranty Bank.
I’ll be doing more homework on this new theory I have: Perhaps the banks that received lower CRA ratings remain in a position to acquire the failing bank institutions that received the highest CRA ratings. Perhaps our regulators created a crisis that can be directly measured, even anticipated, by reviewing the CRA reports they themselves produced. The higher the CRA rating, the more likely the bank is to fail. The lower the CRA rating, the more opportunity a bank will have today of obtaining approval to merge and acquire other banks.
This would be a situation that is in direct conflict with what CRA intended. And it’s all the regulators’ fault!!! The ball-less wonders!