Invitation to Redlining? Obscure CRA Plan Assailed (American Banker)

By Hannah Bergman
American Banker
September 8, 2004

WASHINGTON - Though the fight over simplifying Community Reinvestment Act exams has gotten more attention, regulators are quietly weighing a change that would give banks more flexibility in defining the geographical area where their performance under the 1977 law is judged.

Under a July 8 interim rule, the current assessment-area units - metropolitan statistical areas - could be subdivided into "metropolitan divisions."

Critics claim this could let a bank define its CRA assessment area more narrowly and shun low-income areas.

"We feel this proposal threatens to facilitate redlining," Geoff Smith, the projects director for the Woodstock Institute in Chicago, wrote in a comment letter to regulators.

"Bank regulators will use metropolitan divisions to calculate median family income levels for CRA analysis, and financial institutions will be allowed to designate one or more metropolitan division, up to an entire MSA, as their assessment area."

But Robert G. Rowe 3d, the regulatory counsel of the Independent Community Bankers of America, said that is unlikely to happen.

"Theoretically a bank could try it, but they would be very ill advised to do so," Mr. Rowe said.

Existing CRA requirements forbid a bank from drawing its assessment area to deliberately exclude low- and moderate-income areas, and that would not change under the new rule, Mr. Rowe said.

Every 10 years or so the Office of Management and Budget issues standards for defining statistical areas, and the bank and thrift agencies' joint interim rule is designed to incorporate these. Comments closed Tuesday, and the agencies received just a handful of letters.

In the interim rule, the agencies used the Detroit metro area as an example, suggesting a bank could exclude the entire downtown from its assessment area and choose to serve only the more affluent suburbs.

The National Community Reinvestment Coalition decried the use of the median income of a metropolitan division rather than of an MSA when calculating low, moderate, middle, and upper levels of income.

"This will have the effect of converting some suburban middle-income tracts into moderate-income tracts and will have the effect of turning some urban moderate-income tracts into middle-income tracts," the group's president, John Taylor, wrote in its comment letter.

The letter cites Franklin Bank in Southfield, Mich., as an example. The bank has six branches in Detroit suburbs, none in low- to moderate-income areas. Though its current CRA assessment area includes the city of Detroit and therefore requires lending there, under the new rule the bank could exclude Wayne County from its assessment area and reduce lending in the city.

But James Ballentine, the director of community development for the American Bankers Association, said excluding areas with low to moderate income is not practical.

"That is the traditional line that the community groups use in this instance," Mr. Ballentine said. "The attempt to leave out an area which was deemed … an underserved area would not go over very well on a bank's CRA exam."

Few of the comment letters focused on the issue.

"It's a pretty significant issue, and it hasn't gotten a lot of publicity," Mr. Smith of Woodstock said in an interview.

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