By Mark Skertic
August 26, 2004
A plan to redefine nearly 900 banks nationwide as "small" lending institutions could mean a loss of millions of dollars in loans and services in poor areas, say critics of the proposed change.
The Federal Deposit Insurance Corp. wants all banks with less than $1 billion in assets to be considered small banks, putting them in a category with less stringent reviews of required lending to non-profit groups and others that serve the poor and develop low-income neighborhoods.
Current rules under the Community Reinvestment Act classify banks with less than $250 million as small. Bankers say the threshold is outdated and needs to be raised. In Illinois, there are 74 banks with more than $250 million in deposits that are subject to FDIC oversight. If the threshold is raised, only 13 would continue to be subject to the stricter lending review.
"We can't let that happen," said Trinita Logue, president of the non-profit Illinois Facilities Fund, which borrows money from banks that must meet the act's mandate and uses it to help community agencies. "These funds make an incredible difference to these non-profits to make a difference in their communities."
A few years ago, South Central Community Services was looking at a huge hole in its budget and the possibility of closing down because banks it turned to for help judged its financial situation too precarious. The non-profit South Side group, which helps poor families through children's programs in such areas as Englewood and Chatham, was able to stay open with help from the Illinois Facilities Fund.
Without that, "more than likely we would have had to end all our services, eventually," said Greg Amos, South Central's finance and operations officer. "If [the facilities fund] had not stepped in when they did ... it could have tumbled down into something pretty bad."
But groups like the Illinois Facilities Fund are worried that some financial institutions soon could be less willing to work with them because of the change.
"They make the loans because of the CRA incentive," said Logue.
The FDIC's proposal would replace a thorough review with a "wink and nod" test, according to the National Community Reinvestment Coalition, a Washington, D.C.-based group that promotes community reinvestment activism.
The Office of Thrift Supervision, which oversees savings and loans, announced this month that it also is changing the definition of a small bank to those with as much as $1 billion in assets. The rule change is effective Oct. 1.
The FDIC is seeking public comment on its plan before instituting the change, which could become effective this fall.
Both agencies have said that the changes would not eliminate the need for banks to serve and invest in the lower-income areas of their communities. Defining small banks as those with less than $1 billion, they say, accurately reflects the banking landscape in an era when the largest banks are $100 billion-plus institutions.
Some of the largest, including Citigroup Inc., J.P. Morgan Chase & Co. and Bank of America Corp., have more than $1 trillion in assets. Two other federal agencies that monitor banks for compliance--the Federal Reserve and the Office of the Comptroller of the Currency--recently withdrew proposals to change the regulations and will continue to define a small bank by the $250 million ceiling.
The banks the FDIC reviews are those that are state-chartered and not members of the Federal Reserve system. Although the majority of financial institutions fall into that category, they tend to be smaller banks that collectively hold about 20 percent of the total assets of institutions nationally, an FDIC spokesman said.
Groups like Illinois Facilities Fund work with larger banks that tend to be nationally chartered institutions regulated by the Federal Reserve. But if the change proposed by the FDIC takes place, other regulators might follow the same path, Logue said.
Losing an incentive
The concern is that if banks are not going to be watched as closely by regulators, some institutions may not work as hard to serve their communities, critics of the FDIC's plan say.
"There may be a growing reluctance or a disincentive to engage in creative investments and development of financial-services products, because it won't get as much scrutiny by examiners," said Marva Williams, senior vice president of the Woodstock Institute, a Chicago-based, not-for-profit group that analyzes lending practices.
"Branches won't be examined as closely," Williams said. "Savings products, outreach to lower-income consumers, financial literacy training--all those things are not subject to the same kind of scrutiny as a large bank exam." Such fears are unfounded, said Diane Casey-Landry, president of America's Community Bankers, an industry organization based in Washington, D.C. Smaller banks will serve their communities because it's good business, regardless of what kind of regulations they face, she said.
"The rule change is to minimize regulatory burdens," Casey-Landry said.
"It's not to do away with the CRA."
Too often, meeting community lending and service requirements becomes a race to meet mandated levels, she said.
Counting up points
David Bochnowski, former president of the bankers' group, said he has experienced that frustration in recent years. "The way the process works now, it's points on the board, it's how many loans have you made," he said.
Bochnowski, the president and chief executive of Peoples Bank in Munster, Ind., said he and other banks in the area have been part of an effort to boost development in nearby Gary. That has included a year long effort to bring in a retail shopping center, including a large grocery store, to serve a mostly low-income city that lacks such services.
The project is close to being developed and is intended as a way to spur other development, Bochnowski said. But the bank's work on the development counts as only one project for Community Reinvestment Act examination purposes, he said.
"There is a clear need. One thing the city has been crying out for is a grocery store," he said "So, in this case, we have only one point on the board as opposed to maybe 50 to 100 loans that would have been in a different type of development in a different community."
The decision to work on the effort in Gary was about serving the community, not meeting lending mandates, Bochnowski said. "Whether we have to respond to CRA exams at a $250 million level or a $1 billion level," he said, "we're still going into Gary."
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