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Friday, Aug 12, 2022

Required to Do Good While Managing Risks

Cathay Bank volunteers teach financial literacy classes to kids in El Monte. Farmers and Merchants Bank of Long Beach donates to an Orange County charter school. City National Bank gives money to food banks and homeless shelters.

And not solely to be generous. A federal law, the Community Reinvestment Act, requires banks to participate in such activities to help poor communities.

The act, passed in 1977, aimed to prevent banks from so-called redlining – denying loans and other bank services to poor or minority communities – and to encourage banks to do more lending in poor communities.

Today, the act, known as the CRA, requires banks to serve small businesses and low- and moderate-income residents in their communities by granting loans, offering retail banking services and helping communities through local investments and work with non-profits.

Lending is perhaps the most straightforward part of the act. Banks get CRA credit for making loans to small businesses and to low- and moderate-income homebuyers. They also get credit for loans to non-profit organizations, developers building affordable housing or to companies investing in low-income neighborhoods.

They can even get credit for lending to minority-owned banks or banks that specialize in community development loans. That was the case of Broadway Federal Bank and its loan from Nara Bank, a predecessor of BBCN Bank.

Critics of the CRA say the act contributed to the housing and financial crises by encouraging banks to loosen lending standards for low-income homebuyers. A report last year from the National Bureau of Economic Research in Washington stated that banks issued risky loans, especially mortgages, to meet CRA requirements. Those findings, however, were contested by some bankers, regulators and academics.

John Hampton, CRA officer for BBCN, said it’s not too difficult to find safe borrowers that help the bank meet its CRA requirements and that the act does not ask banks to make bad or risky loans.

“The CRA is not a law that asks the bank to make poor-quality loans,” he said. “CRA shouldn’t be a deciding factor in making a loan.”

Rather, the act requires banks to look for qualified borrowers in neighborhoods they might not otherwise serve, said Alan Fisher, executive director of the California Reinvestment Coalition, a San Francisco group that advocates for more banking services and lending in poor and minority communities.

“It forces banks to look at communities, at businesses, at borrowers that they’d be much happier ignoring,” Fisher said. “They’re making loans they wouldn’t have, but loans that are still safe and sound.”

Regulators also look at investments banks make to help low-income people and neighborhoods. Those investments come in many forms, from equity investments in minority-owned banks to purchases of securities backed by mortgages to low-income borrowers.

Regulators also look at how banks serve their communities, both in terms of banking services – the availability of branches and ATMs, for instance – and community development services. To get credit for the latter, banks often ask employees to volunteer with groups that teach financial literacy or help low-income customers file income taxes.

One common criticism of the CRA is that complying with the act is labor intensive.

“There are a lot of administrative things that have to happen on the back end,” said BBCN’s Hampton, who once worked as a bank examiner. “You have to have a committee. There’s a lot of planning. Anything regulatory is always going to be a problem for a bank.”

How to comply

Rather than looking for specific levels of loans to low-income borrowers or a certain number of volunteer hours, regulators compare banks with similar institutions.

But Fisher at the California Reinvestment Coalition said comparing banks with their peers can lead to a kind of grade inflation – everyone passes, but no one works too hard.

“If you’re in an area that’s 30 percent Asian and Pacific Islanders, and you do no loans to that community, you should get dinged for that,” Fisher said. “If none of your peers lent to Asian and Pacific Islanders, does that mean it’s OK?”

He points out that banks rarely fall short on CRA examinations. In all of California, just four banks have received anything short of a “satisfactory” rating over the past three years.

If a bank has a rating of “needs to improve” or “substantial noncompliance,” regulators might prevent the bank from opening branches or even ATMs. Regulators might also hold up a merger or acquisition if one of the institutions involved has a bad rating.

Barry Wides, deputy comptroller for community affairs at Washington regulatory agency Office of the Comptroller of the Currency, said the small number of noncompliant banks shows that banks want to help their communities and that regulators want to help in that process.

“We work with banks to keep that from happening,” he said of handing out bad CRA ratings. “We don’t want to see institutions fail.”


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