It was only fitting that, throwing a Sweet Sixteen party for the Community Reinvestment Act (CRA) on July 15, 1993, President Clinton called for a revision of the 1977 law. Like any teenager making the transition from childhood to mature and responsible adulthood, CRA was struggling to identify itself.

    CRA's mission in life was to help bring credit to that 40% of our nation known as the low-and moderate-income (LMI) who want nothing more than their fair shot at a piece of the American Dream. Nothing in the Constitution grants a citizen's right to fair and equal access to credit, so CRA, in effect, became such an unofficial constitutional amendment.

    CRA's life has been anything but easy. Born with so much hope in Jimmy Carter's White House in 1977, tragedy befell CRA in 1980. The three-year old law became orphaned and was banished from Washington when Ronald Reagan came to town. The Federal Reserve System (FED), having failed in its efforts to prevent CRA’s birth, was ecstatic to see it exiled. For the next 12 years during the Reagan and Bush Administrations, this foster child was a Washington pariah. CRA survived on the streets, receiving nourishment and care from different grass- roots community groups around the country that took it in from time to time.

    Not until 1989, CRA's twelfth year, did anyone ask about this missing person. The nationwide search, spearheaded by community groups and a few pro-consumer Congresspersons like Joe Kennedy, successfully brought CRA home to Washington that year. That watershed year saw the first ever real CRA enforcement by various regulators, and, most importantly, the mandated disclosure of CRA ratings and public evaluations (PEs).



    As a budding teenager, CRA was getting stronger and better known. Still, CRA did not take its rightful place in the White House until 1992 when Bill Clinton came to Washington. His new Administration in place in 1993, he not only celebrated this expatriated American’s homecoming, but vowed to nurture it as never before.

    CRA's Sweet Sixteen party formally began the transformation of an itinerant and bureaucratically mishandled teenager into a mature, socially responsible, and contributing adult. CRA now would be judged on its Performance rather than on the three P's of Paperwork, Process and Procedures.

    The President promised CRA four things at that celebration: more consistent and even-handed enforcement through clearer, more objective, and performance-based regulations; improved public PEs from a well-trained corps of specialized CRA examiners; the implementation of more effective sanctions against perennial CRA-problem banks; and, more objective, performance-based assessment standards which are mindful of banks’ regulatory compliance burden.

    The latter standards specifically spell out the "LIBS" tests which form the basis of the new CRA, namely the Lending, Investment, and Banking Services tests. In this regard the President was most mindful of Senator William Proxmire’s intent as the "Father of CRA," as well as CRA’s dozen years spent wandering the nation's cities and small towns seeking shelter with whatever LMI community, person, business or farm that would help it survive. Each of the three LIBS tests specifically mentions LMI neighborhoods or individuals, small businesses, and farms. The "new" CRA would come into adulthood never once forgetting its specific mission as protector of the unwritten constitutional amendment for that 40 percent of America known as the LMIs.

    The CRA maturation process has not been easy. Starting with three years (and as many versions) of reform, it drew a record-setting number of battling bankers, community groups, and regulators into the debate. When, in 1995, everyone finally agreed on the future of CRA, the newly reformed teenager was ready to go back out into the real world under the "new" rules in 1996. As its first full year of operations as the new CRA is being carefully scrutinized, everyone wonders about its future, as 1998 represents its 21st birthday.



    This book is a "year in the life" of the new CRA, specifically 1996, the first full year of operations under the new procedures. The major conclusion of the present research is straightforward: There may be a new CRA, but there are still plenty of old CRA problems!

    Chief among these is rampant CRA grade inflation, defined as an unjustified upgrade of a bank's overall rating. The author's 1993 book on CRA, Community Reinvestment Performance - Making CRA Work for Banks, Communities and Regulators (CRP), first documented and analyzed on a wide scale grade inflation under the old CRA.

    The present book methodically documents and quantifies new CRA grade inflation down to its "DNA" source by regulator, region, and even examiner based on their PEs. This analysis, representing the most comprehensive such evaluation of bank exams undertaken in this country, isolates the equivalent of that defective gene resulting in the insidious grade inflation that threatens the health and integrity of the entire CRA structure.

    Unlike some genetic diseases, this one is curable; CRA can be rehabilitated back to a healthy and meaningful life. Chapter 16’s conclusions speak to CRA's real problems, and its recommendations will enable CRA to enter adulthood in 1998 with good prospects for a productive and successful life.



    During the July 15, 1993 Rose Garden ceremony, President Clinton named the four federal bank regulators (i.e., the FDIC, FED, OCC and OTS) as guardians to overlook the CRA reformation process. The following report card rates their cumulative performance relative to the President’s four main goals established in his call for a new CRA:

Goal # Goal Grade
1. Promote consistency and evenhandedness in CRA enforcement D
2. Improve public CRA performance evaluations C-
3. Implement more effective sanctions F
4. Develop more objective, performance-based CRA assessment standards C

    The cumulative grade of D+ is equivalent to a CRA rating of "Needs to Improve," precisely what the regulators must do to maintain CRA’s integrity. CRA has no future if the cancerous grade inflation documented here is not eliminated.

    The worst offender historically and in this study is the FED; the only agency with a somewhat respectable record, the OTS, verges on extinction. CRA’s own extinction is likely if immediate action is not taken to remove malignant old CRA-style inflation from the new CRA. The regulators are both the source of and solution to this problem. But, they will not change their ways without decisive action by President Clinton, who is ultimately responsible for the fate of this CRA teenager.



    This book’s focus is on alternative new CRA strategies for banks, community groups and regulators. These three key perspectives and their conflicting and cooperative relationships represent the "CRA Triangle." The interrelationships among industry, consumers and the government in this triangle represent most of American business, but this is a special case for at least three reasons. First, banking is the most heavily regulated industry in America. Second, CRA is far and away the most hated and controversial law in banking. And, third, the decidedly pro-CRA political climate in the White House (but not Congress) since 1992 will last at least through the end of this century under the Clinton Administration.

    Those bankers, Congresspersons, and even regulators who hope and pray that CRA will go away must live with the reality that CRA is here to stay. It survived the tough Reagan/Bush years, most of them admittedly spent in the equivalent of a coma, but, more recently, it survived a generally anti-CRA Republican Congress. The "smart money" says that CRA, especially in its new and improved form, will be around for the foreseeable future. Thus, the smart banker will redirect anti-CRA energy and resources into developing effective strategies to comply with the new CRA.



    The alternative CRA strategies discussed and analyzed in this book reflect three different perspectives stemming from the author's background and experience. The most important viewpoint is a truly independent and objective one, regardless of how the author's perspective is viewed from different corners of the CRA Triangle. In other words, the author's goal is to provide a balanced view of the CRA Triangle from outside of it rather than any one corner within it.


1. The Banker Perspective

    The author has been an independent consultant to hundreds of banks and thrifts since 1975 in the highly specialized areas of CRA compliance and delivery systems (e.g., branch and ATM location analysis). His former and current CRA consulting work with institutions, small and large alike throughout the nation, involves countless bank officer and board presentations of strategic reports. This work also encompasses meetings with CRA examiners and regulators on behalf of client banks, including formal and informal appeals of deflated CRA ratings.

    Although the author has never worked as a full-time employee of a bank, there is a first-hand appreciation of banks’ substantial CRA compliance regulatory burden as well as the frustrations of dealing with subjective CRA examiners and sometimes unreasonable community groups. Also during this period, the author was invited by numerous state and all of the largest bank and thrift trade associations to address various meetings and conventions on these and related topics.


2. The Regulator Perspective

    Repeatedly, each of the four federal financial institution regulators and the Department of Justice (DOJ) called upon the author for general and specific advice on CRA and fair lending issues and examiner training. This included an unusual opportunity to provide direct input to the Comptroller of Currency in various 1993 meetings on the content of the new CRA. Many of the author's recommendations, coming directly from CRP, are in the new regulations.

    Also, the FED arranged for the author to make the keynote presentation about the first comprehensive analysis of CRA public PEs before several hundred CRA examiners from all four agencies at the first major Consumer Compliance Conference of the Federal Financial Institutions Examination Council (FFIEC). The purpose of that 1993 address, which was highly critical of the CRA examination process, was to attempt to improve the quality of CRA examinations, public PEs and the ultimate ratings.

    The author has also testified before Congress on CRA and been called upon frequently for advice on CRA regulations by representatives of both the House and Senate. The author's main function from the regulatory perspective is encompassed in the title to the FFIEC presentation mentioned earlier: "Examining CRA Examinations."


3. The Community Group Perspective

    Everyone is a consumer and, yes, even a "consumerist" in one area or another at some point when a position is taken about some purchase, product, industry or government action or inaction. Depending upon one's interests, motivations, and, of course, available time and resources, this benign consumerism can gradually be transformed into the role of "consumer activist."

    That is the term that has been applied to the author on more than a few occasions following the release of the CRP book which was highly critical of many federal bank regulators (especially the FED) and some bankers regarding CRA performance. The author received an "Award of Excellence" for that book from the National Community Reinvestment Coalition (NCRC), the umbrella organization for hundreds of grass roots and other community organizations around the country .

    Because many of the author's views were shared by the largest CRA and community groups, the author began sharing information and working closely with many of them. Although the author was asked to work in a more formal capacity (including board membership) with some of those groups, it was most important to maintain an independent role by working on an informal and unstructured basis. In this latter regard the author has helped numerous large and small community, fair housing and related advocacy groups file protests to branch and merger applications, including fair-lending suits and legal challenges to merger approvals by the FED.

    The author has submitted extensive comments to the FED under his own name on most of the largest megamergers as well as direct challenges protesting other bank applications. Moreover, countless comments or requests by the author for CRA or related documents have found their way into the CRA public files of banks and thrifts around the country.



    CRP contained an evaluation of the 6,706 CRA exams made from July 1, 1990 to December 31, 1991, the first time any portion of bank exams were ever made public in this country. That book contains detailed analyses of 260 of the highest-and lowest-rated PEs, the most comprehensive research ever undertaken on CRA exams. CRP was first not only in documenting widespread CRA grade inflation, but also in setting forth and accepting the "friendly regulator," "selective enforcement" and "CRA examiner subjectivity range" hypotheses, among others.

    This book continues to break new ground in CRA research by presenting the results of the most comprehensive analysis of bank exams ever undertaken in this country. A painstaking review of all publicly available regulatory records plus several hundred FOIA requests led to the identification of all new CRA exams that were completed in 1996.

    The largest portion of these were 1,407 small bank exams completed through September 1996 and made available to the author by regulators. Additionally, all large and wholesale or limited purpose bank exams completed under the new CRA procedures in 1996 made available by the regulators through the first half of 1997 are also evaluated. Furthermore, every strategic plan submitted in 1996 is analyzed (there will be no such CRA exams on them for some time).

    This means a 100% sample of all publicly available new CRA exams and filings for 1996 (except for small bank exams after September 1996) are utilized for this project. Counting other new CRA exams that became available after this time, over 1,500 PEs are analyzed in this research project.

    The analysis of these new CRA exams resulted in the most comprehensive effort ever undertaken to quantify the extent of the above-mentioned grade inflation phenomenon, whether under the old or new CRA. The findings of this detailed and objective analysis are stunning in terms of the pervasive nature of grade inflation.



    Chapter 1 describes alternative strategies for banks, community groups and regulators under the new CRA, with an explanation of how this book will be useful in the development of those strategies.

    Chapter 2 discusses the strategic aspects of the CRA Triangle in terms of an evaluation of the best and worst aspects of each corner of the triangle, namely banks, community groups and regulators. The friends and enemies of CRA are identified.

    Chapter 3 tracks the development of the new CRA through its different versions, which set a new record for the number of public comment letters on any proposed banking regulation. The author's direct and indirect involvement in the development of the new CRA is also discussed in that chapter.

    Chapter 4 contains an analysis of alternative CRA rating strategies with data updating the historic CRA ratings analysis contained in CRP. The best and worst CRA states and banks are identified in that chapter.

    Chapter 5 evaluates the most recent and relevant data the regulators made available on different types of enforcement actions. The contrasting views of the four bank regulators are highlighted in that chapter.

    The next three chapters contain detailed case studies involving different interrelationships among the elements of the CRA Triangle, with specific emphasis on the role of the regulators. These case studies are about situations where the regulators were involved too little, too much and just enough.

    Chapter 6 reports a case study where a regulator (i.e., the FED) does too little to enforce alleged fee discrimination at one of the nation's ten largest bank holding companies.

   Chapter 7 looks at the other extreme by recounting a highly controversial but little understood case study of a regulator (i.e., the DOJ) that does too much in its over-zealous and innovative attempts to prove racial discrimination at one of the nation's largest thrifts.

    Chapter 8 recites the facts of an unusual case study of a regulator (i.e., the OCC) using just the right amount of involvement in an innovative shared branch pilot study in Miami, Florida.

    Chapter 9 provides a summary of the new CRA exam procedures and identifies the most useful tools for banks, community groups and regulators working in this area. Several tables of previously unpublished data presented in that chapter will be quite helpful to strategists involved with CRA on a day-to-day basis.

    Chapters 10 through 15 represent a detailed analysis of strategies for banks, community groups and regulators for each of the four types of new CRA exam procedures, namely small banks (Chapters 10-12), large retail banks (Chapter 13), banks with strategic plans (Chapter 14) and special purpose banks (Chapter 15).

    Chapters 10-12 contain the most lengthy analysis of new CRA small bank examinations ever as each one of 1,407 PEs that were available by the regulators as of September 1996 was reviewed and evaluated in terms of possible grade inflation or deflation. Chapter 10 emphasizes new CRA ratings and exam procedures. Chapter 11 zeroes in on the results of the performance test ratio analyses. Chapter 12 unveils the grade inflation methodology developed here and cites the findings of the new CRA grade inflation and regression analyses.

    Chapter 13 includes an analysis of 31 large retail bank new CRA examinations that were conducted in 1996 and made available by the regulators during t he first half of 1997. These banks elected to opt in early (i.e., before July 1, 1997) under the new CRA procedures. The complete contents of the three performance tests of 15 of those PEs are summarized in a series of detailed tables. The author interviewed representatives of most of those banks and even some of their regulators regarding these exams.

    Chapter 14 identifies each of the 170 wholesale and limited purpose designation requests at the four regulators in 1996 under the new CRA. The author interviewed representatives of several of the banks submitting such designation requests, including most of the 31 that were actually examined in 1996 under the new CRA. A detailed analysis, with a tabulation of the complete contents of 16 limited purpose and 6 wholesale bank exams, is included in that chapter.

    Chapter 15 analyzes each of the 27 strategic plans that were submitted in 1996, including those that were withdrawn or denied, as well as additional plans submitted in the beginning of 1997. The complete contents of the 27 plans submitted in 1996 are summarized in a detailed tabulation. The author interviewed representatives of each of the banks that submitted a strategic plan as well as their regulators.

    Chapter 16 summarizes the book's major conclusions and recommendations. Specific recommendations for banks, community groups and regulators under each of the new CRA exam procedures are listed, along with an enumeration of the "Top Ten" new CRA mistakes for each of those three corners of the CRA Triangle.

    The Appendices to this book contain several maps and documents, including some previously unpublished tables, that will be useful to banks, community groups and regulators in their CRA functions. A glossary of CRA- related acronyms is also included.

ISBN 0-7-7863-1114-2

Copyright © by Kenneth H. Thomas, Ph.D.  All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication or website may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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Copyright © by Kenneth H. Thomas, Ph.D.