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Affordable Housing Threatened
The Federal Deposit Insurance Corp. wants to relax reporting requirements for banks.
January 14, 2005
By Frank Norton, Staff Writer, The News and Observer
Low-cost rental housing is not something Donna Augustono, 47, takes for granted.
"God blessed me with where I am," she said of the modest but comfortable three-bedroom apartment she shares with her three daughters.
The single mother said she saves at least $200 a month in rent by living at Madison Glen apartments. The 120-unit complex in northwest Raleigh is partly designated for low-income tenants.
"If not for here, I'm not sure where I'd be living," said Augustono, a former teacher who now manages a group home for mentally disabled adults.
"This place has allowed me to purchase things to upgrade our lifestyle, and that is absolutely good for my children. I'm even looking at buying a house pretty soon," she said.
Community development advocates worry that changes to federal rules being considered could make it harder for people in Augustono's position to afford housing.
The Community Reinvestment Act requires lenders with more than $250 million in assets to prove they put money in poor and moderate-income communities. Community development lending under the act was $131 billion from 1999 through 2003.
A series of tests scrutinize a bank's level of lending, investing and service to such communities and scores indicate compliance level for each bank.
But the Federal Deposit Insurance Corp. wants to relax those reporting requirements. They are proposing that only banks with assets of $1 billion or more will have to meet the most stringent tests. They also want to let those banks -- about 96 percent of all FDIC-regulated lenders -- choose one of the three community development tests, rather than satisfy all three.
That would simplify reporting requirements for 25 North Carolina banks with a combined $14 billion assets. It also could make it harder for developers of low-income housing to get financing, according to activists with the Community Reinvestment Association of North Carolina.
The FDIC, which received more than 12,000 comment letters on the proposal, said it intends to act in concert with the Federal Reserve and the Office of the Comptroller of the Currency.
"But if those talks go nowhere, we will pick back up on our proposal and move forward solo," said FDIC spokesman David Barr.
The FDIC has not said when it would announce changes, but many observers believe it will do so in the first quarter.
The FDIC is following changes undertaken late last year by James E. Gilleran, a former banker who now leads the Office of Thrift Supervision. Without seeking the consent of fellow depository regulators, Gilleran raised the threshold for savings and loan institutions to opt out of CRA requirements. The threshold had been $250 million and is now $1 billion.
If the change carries over to the banking industry, lenders would be relieved of onerous and costly reporting tasks that drain resources without providing significant benefits, bankers and regulators say.
"If we're doing our jobs as bankers, we're already serving the needs of all of our communities. So to have to complete these exams that focus specifically on us doing that becomes a redundant effort," said Michael Carlton of Crescent State Bank in Cary. He said Crescent State will not diminish its community development activity, regardless of changes in federal regulations.
Advocacy groups disagree, and argue that millions of Americans depend on those rules to enforce community development and fair treatment from the financial service industry.
"By weakening the test, you effectively lower the bar for performance and pave the way for a drop-off in community lending, investment and services," said Peter Skillern, executive director of the Community Reinvestment Association of North Carolina.
That would result in fewer loans and investment initiatives in low-income and rural areas, he said.
"Virtually everything we do is funded through CRA," said Gregg Warren, president of DHIC Inc., the nonprofit developer that built Madison Glen.
Warren said the roughly $4 million in community development money DHIC recently secured for Madison Glen might not have come through under the proposed change. About 30 banks, including Raleigh's Capital Bank and North State, participated in the loan.
He also said money for DHIC's homeownership counseling program could fall into jeopardy if more lenders are relieved of their stringent reporting duties, which shed light on loans, investments and grants.
Abdul Rasheed, president of the N.C. Community Development Initiative, a group that funds community development corporations, said relaxed reporting requirements could signal a return to a darker era in lending to poor and minority groups.
"For decades, low-income areas predominated by people of color had no access to capital, because banks redlined their districts and simply said they were too risky. But the Community Reinvestment Act helped force them to come up with ways to put dollars in. Now we may lose that," Rasheed said. "If it's not broken, then why mess with it?"
Indeed, Michael Stegman, a professor at UNC-Chapel Hill who has studied the act, said that changes passed in the mid-1990s streamlined the processing work that banks are complaining about.
But bankers, especially at small institutions, say the CRA's reporting requirements unfairly burden lenders.
"We think this change is a very good idea, that has been misunderstood by those who object to it," said Paul Stock, chief counsel for the N.C. Bankers Association.
He said that in many areas, banks have a hard time finding the right community investment opportunities to satisfy their CRA requirements. Loosening the definition of compliance would free them to spend more time serving their communities and actually increase community development, Stock said. "We're honoring form over substance," he said.
He added that small institutions have limited regulatory expertise and often get bogged down trying to execute complex investments that earn CRA credit.
Proponents also argue that the law's current reporting threshold of $250 million needs to be updated to reflect the changing size of U.S. financial institutions.
"A billion-dollar bank today is not very big at all. It's clearly a community-based company," Stock said.
WHAT IS CRA?
Congress enacted the Community Reinvestment Act in 1977 to encourage lending institutions to make credit available in all areas of their communities, regardless of income levels. The act requires federally insured lenders to record their community development activities, which should include loans, grants and investments in low-income communities. Lenders must also periodically satisfy stringent exams designed to test for fair and equitable lending practices.
PROPOSED CHANGES
- Raise the threshold that determines which banks must fulfill all CRA reporting requirements. Banks with assets of $250 million to $1 billion would have lighter requirements.
- Expand the definition of community development to include a broader range of activities in rural areas.
- Reduce the number of tests from three to one.
AFFECTED BANKS
Due to the amount of their assets, six Triangle banks would benefit. Their most recent ratings for compliance under the act are:
- Outstanding -- Four Oaks Bank and Trust in Four Oaks, Mechanics and Farmers Bank in Durham.
- Satisfactory -- Crescent State Bank in Cary; Capital Bank, North State Bank and Paragon Commercial Bank in Raleigh.
Note: Possible scores also include Needs to Improve and Substantial Noncompliance. No other banks would be affected in Chatham, Durham, Franklin, Johnston, Orange, Person and Wake counties.
TRIANGLE CRA PROJECTS
- Food Lion grocery store, Fayetteville Street in Durham (2004)
- Madison Glen, a 120-unit apartment complex, partly designated for low-income tenants, in northwest Raleigh (2001)
- Weston Trace, a 48-unit low- and mixed-income development in Garner (1998)
OTHERS ALSO AFFECTED
- Meadow Creek, a 68-unit apartment complex, partly designated for low-income tenants, in Southeast Raleigh (under construction)
- St. Joseph's Place, a 32-unit apartment complex for seniors in Durham (under construction)
- UDI Business Resource Center, a 25,000 square-foot renovation project in north Durham (under construction)
- UDI Industrial Park, a 91-acre industrial park in Durham (expanding)
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