3/20/97 Response by Allen J. Fishbein, General Counsel, Center for Community Change, to Questions submitted by Rep. Vento from the 2/25/97 hearing on H.R. 268 and Financial Services Modernization Question 1. You suggest that the time has come for CRA reviews to be extended along product lines. What other products besides mortgage lending would you suggest? Should banking regulators be responsible for CRA review of affiliates or should each entities' lead regulator have a similar law to follow? In my written testimony before the Subcommittee, I indicated that more and more large financial conglomerates are using their various bank and non-bank affiliates to sell and otherwise cross market what are essentially the same loan products. In addition to mortgages, consumer and small business loans can be made either through banks or non-bank affiliates of BHCs, or more typically, through both types of entities. About one-third (209) of the 631 BHCs have consumer finance affiliates and 162 own mortgage banking companies, according to data compiled by the Office of the Comptroller of the Currency. Many BHCs also own small business investment and lending affiliates. The lending activity of these non-bank affiliates should be covered by CRAtype considerations. At the same time, other non-bank like activities are conducted by non-bank affiliates, such as Section 20 underwriting affiliates. We recommend that these affiliates be covered by some community reinvestment obligations that are similar, although not exactly the same as CRA. For example, these companies could be required to help to capitalize a community reinvestment funding mechanism. The Federal Home Loan Bank System or another public or quasi-public entity could be designated as the agent for administering the investment of these targeted funds. The lending records of non-bank affiliates selling bank-like products should be encompassed as part of the CRA review that federal banking supervisory agencies conduct for the insured depository institutions of these holding companies. The records of these non-bank affiliates could then be factored into the overall CRA rating and evaluation that the bank affiliates of the BHC receive. Thus, no new federal regulatory entity would be needed for this type of extension of CRA. 2. Could the new performance based CRA regulations be easier to transpose onto other affiliates than the old regulations? What about just creating strategic plans for affiliates and rating them on their performance under those plans. Yes, the new performance based CRA regulations lend themselves to calculating investments as well as lending activity. Under the new rules, large banks (more than $250 million in assets) are evaluated based on the level of their lending and investment activities. Investment activities need not be confined to a bank's local assessment area, but may encompass state-level and even Strategic plan approach might be an option, but there is very limited experience with the usefulness of this approach, even as they apply to banks covered by CRA under the new rules. Accordingly, we urge that other regulatory options not be foreclosed. First Nations Development Institute Benson & Roberts Local Initiatives Support Corporation Arts Nighn The Enterprise Foundation Hubert Nan Fol Mid-South Peace and Justice Center Debm Warren Southern Rural Development Imuaave Barton there. III. Churperson Emeritus For release upon delivery TESTIMONY OF JOHN E. TAYLOR PRESIDENT AND CEO OF THE NATIONAL COMMUNITY REINVESTMENT before the SUBCOMMITTEE ON FINANCIAL INSTITUTIONS and CONSUMER CREDIT of the HOUSE COMMITTEE ON BANKING AND of the U.S. HOUSE OF REPRESENTATIVES FEBRUARY 25, 1997 The remarks expressed herein represent those of the 600 neighborhood organizations that comprise the membership of NCRC. 33 15th Street. W Sane 540 Fax 202 628.9800 E-Mai HNI 48 handsnet org Internet http www.essential org nere Introduction Good morning Chairwomen Roukema and distinguished members of the House Subcommittee on Financial Institutions and Consumer Credit. My name is John Taylor, and I am the President and CEO of the National Community Reinvestment Coalition or NCRC. NCRC is the nation's largest CRA trade association composed of 600 community-based organizations from inner city neighborhoods and many rural areas. NCRC's philosophy promotes pro-active partnerships among banks and low-income and minority communities dedicated to increasing access to capital and credit. As a trade association of neighborhood organizations, NCRC represents the community's perspective in numerous legislative and regulatory settings. For example, I have been privileged to serve on the Consumer Advisory Council of the Federal Reserve Board and Fannie Mae's Housing Impact Advisory Council. I request that my written testimony be included as part of the official record in the Congressional Record. NCRC thanks you for the opportunity to testify before you today on a subject, bank modernization, that carries profound impacts on access to capital and credit for this nation's underserved communities. Access to banking products and services is fundamental. With access, our communities thrive and create wealth through expanded homeownership opportunities and small business creation. Without access to capital and credit, our neighborhoods die. The contrast is that simple and stark among communities with bank branches and those lacking them. And the contrast will become even more apparent because of federal budget cuts to housing and economic development programs. Private capital is the only true hope for revitalizing our needy urban and rural areas. That's why NCRC has strongly endorsed and promoted bipartisan initiatives such as Empowerment Zones and the Community Development Financial Institutions Loan Fund that leverage private capital for comprehensive neighborhood development. Legislative and regulatory changes can even have more profound impacts on access to capital and credit than subsidies for private sector investment. For example, since its passage in 1977, the Community Reinvestment Act (CRA) has leveraged over $160 billion in reinvestment dollars for home loans, small business development, and community facilities in minority and low-income neighborhoods across the country. Bank modernization legislation in general, and H.R. 268 specifically, have the potential to either intensify the gains in community reinvestment or wipe them out. On the one hand, H.R. 268 or the Depository Institution Affiliation and Thrift Conversion Act can increase access to capital and credit for the underserved by allowing financial institutions to profit from technological advances while at the same time it needs to expand coverage of the Community Reinvestment Act to the new institutions contemplated by the bill. On the other hand, H.R. 268 can amount to a huge windfall for the financial industry but devastate low-income neighborhoods by facilitating the flow of capital out of institutions covered by CRA into new nationally chartered behemoths exempt from community reinvestment obligations. In addition, H.R. 268 would exacerbate disinvestment if it does not expand CRA coverage to existing financial institutions such as securities firms that would be allowed to affiliate with financial services holding companies. Wholesale Financial Institutions and National Market Funded Institutions H.R. 268 would allow for the creation of two uninsured financial institutions, wholesale financial institutions and national market funded institutions, that would be exempt from the Community Reinvestment Act. A national wholesale financial institution would not have access to federal insurance, but would have all the "powers and privileges of a national banking association." Likewise, a national market funded institution could not obtain federal insurance, but it could be owned by a non-financial company for the purpose of offering credit anywhere in the country. Wholesale financial institutions would greatly benefit the financial services holding companies sanctioned by H.R. 268 since these institutions would not have firewalls and thus could directly |