# O **NEWS RELEASE**

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| ## Comptroller of the Currency      | ##### NR 2001-49               |
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| Administrator of National Banks     |                                |
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FOR IMMEDIATE RELEASE Contact: Kevin Mukri

\(202\) 874-5770

Remarks by

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

Office of the Comptroller of the Currency

Before the

Consumer Bankers Association

Arlington, Virginia

May 21, 2001

It's a pleasure to join the Consumer Bankers Association and its
members, who have been the catalysts for so much of what's working in
American banking today. The banking industry's contribution over many
years to the rise in home ownership, the growth in small business
formation, and the improvement in material well being in the United
States is beyond calculation, and CBA's members have long been in the
forefront of progressive change in each of these crucial areas. I
appreciate the opportunity to participate in this CBA conference. Your
topic, the Community Reinvestment Act, is very timely.

The ability to anticipate and adapt to changing times has been one of
the keys to your success, and change is the theme of my remarks today.
In 1919, when CBA was founded, retail banking was still struggling to
overcome an unfortunate reputation as a specialization somehow beneath
the dignity of respectable bankers. Fortunately, that's a stigma that no
longer exists, due in large part to the high standards and technical
competence that CBA has effectively advocated and upheld. As with the
issues that absorbed it back then, the issues that are prominent for
retail bankers today \-- customer privacy, responsible lending
practices, and community development, to name a few, are fundamental to
the industry's credibility, and, therefore, to its profitability, both
today and into the future.

As regulators, we face a similar challenge \-- specifically, the
challenge of assuring that the regulations we're responsible for writing
and enforcing faithfully implement the statutes on which they are based
*and* continue to be relevant to the evolving requirements of a changing
industry \-- even if the statute is decades-old. This has never been
easy, in part because of the requirements of the regulation-writing
process itself. Much as we have tried to modernize our rules and
streamline our procedures and make them more efficient \-- and as OCC
Chief Counsel, I can tell you that few things have absorbed more of my
time and attention \-- producing timely and meaningful regulations
remains a complex and challenging process. Yet, outdated and obsolete
regulations are inherently burdensome and represent an unfair drag on
your ability to compete and effectively serve your customers \-- and we
must do what we can to change them.

The challenge of producing regulations today is greater than ever
before, because change is occurring faster than ever before; in other
words, the [velocity]{.underline} of change is steadily accelerating.
That places growing pressure on regulators to ensure that regulations
reflect the realities of the current financial marketplace,
[and]{.underline} embody some elasticity to be durable in the face of
constant changes in the industry. This balancing act also must be
coupled with the need to keep regulations appropriately tethered to
their underlying statutory authority.

Since CRA is what this conference is all about, let me use it as an
example of the challenge we face \-- and how we're responding to that
challenge.

It was only 24 years ago \-- still a living memory for most of us \--
that the Community Reinvestment Act became law. Yet one could argue that
the financial world of 1977 more closely resembled the world of more
than fifty years earlier, when CBA was founded, than it resembles the
one in which we operate today. When CRA became law, the typical
financial portfolio \-- even in well to do American families \--
consisted of one or more passbook accounts, a stack of savings bonds,
and a few shares of AT&T or something similar. Back then, American
households owned nearly three dollars in bank deposits and government
securities for every two dollars in stocks and mutual funds; today, the
ratio is roughly one to two.

There were only a tenth as many ATMs then as there are today, and they
were little more than rudimentary cash dispensers. Of necessity, then,
the great majority of banking transactions were conducted face to face,
during what were derisively \-- or enviously \-- referred to as
"banker's hours."

The industry itself \-- with more than 14,000 independent offices \--
was more fragmented in 1977 than at any time since the Great Depression.
In the absence of general authority to branch interstate, banks were
overwhelmingly local businesses, operating in local, largely sheltered
markets, facing limited competition. The balance sheet reflected this
structure: working with a big base of core deposits and generous
spreads, banks earned ten dollars in interest income for every dollar of
noninterest income; today, the ratio is more like two to one. Senator
Proxmire's statement in 1977 about the need for the CRA illustrates how
differently the world of banking was viewed: A reason for CRA, he said
then, was to "encourage bankers to get out of the office and walk around
the block and find loan opportunities here at home\...."

That was a snapshot of the financial world of 1977, when CRA
implementation began. The rules written back then were probably right
for their time. They established basic procedures and requirements, and
defined the standards for CRA compliance. But within ten years, many
found flaws in those rules \-- principally that the
[process]{.underline} aspects of the rules did not seem to be producing
the tangible results that were the goal of the law. Some have referred
to the old rules as producing a "paper chase." And so in 1995, the CRA
regulations were revised, shifting the focus away from process toward
the achievement of results, as measured by actual loans made, services
performed, and investments consummated. In management jargon, this could
be characterized as a shift from "inputs" to "outcomes." Many
institutions found that, properly managed, community development lending
and investment could make a positive addition to the communities they
served and to their own bottom line.

Some would say that we should now leave well enough alone. But, when the
current rules were adopted, the banking agencies pledged to review how
they were working after five years in effect \-- 2002. And, even if the
agencies had not made that promise, the extent of the changes that have
taken place in the banking system since then make a case for reviewing
the regulations anew, to ensure that they retain their relevance and
effectiveness.

The changes that have occurred in the industry since 1995 would be no
less startling if they had occurred over a much longer period of time.
Industry consolidation is perhaps the most visible of these changes:
there are some 6000 fewer banks today than there were in 1977, and 1500
fewer than just six years ago.

Even more significant for purposes of our discussion today is the reach
of the institutions that remain. The Riegle-Neal Interstate Banking Act
of 1994 swept away most interstate banking restrictions and has given
rise to national financial institutions that operate from coast to
coast. This, in turn, has raised questions about the way they are
evaluated under CRA. For example, how do we define, for CRA purposes,
the "assessment area" of institutions whose name brand and products \--
whether delivered through traditional brick-and-mortar outlets or, as is
increasingly the case, over the Web \-- now extend into every corner and
community, and potentially every computer, in America? The language of
the statute, with its references to "local communities," could begin to
sound anachronistic in the future if facility-based delivery systems
tied to particular geographies are overtaken by boundless
technology-based systems. It's even been argued that the current CRA
definition creates a [disincentive]{.underline} for institutions to
extend credit in low- and moderate-income communities where there are
market opportunities, if they happen not to have branches there. That's
led to suggestions that institutions be permitted to designate
non-branch based assessment areas.

Additional examples abound of how a changing industry throws CRA into a
new light. The revolution in retail bank delivery systems has reduced
some costs, increased convenience, and expanded access to banking
services for millions of Americans. About 13 million U.S. households
banked online by the end of 2000 \-- twice as many as in the previous
year \-- and the outlook is for that number to double again in the next
year. Millions more bank by phone, and take advantage of direct deposit,
full featured ATMs, and debit cards. For example, between 1990 and 2000,
the number of purchase transactions using debit cards in this country
increased by an astonishing two [thousand]{.underline} percent, and the
forecasts call for another tripling in the volume of transactions by the
year 2010.

With all of this new and improving technology, it's possible for a
typical bank customer to go months \-- even years \-- without setting
foot in a branch or speaking to a teller. And even where banks today do
maintain a physical presence, it is often a nontraditional presence \--
a loan production office, for example, which is not a branch and does
not accept deposits.

How do we square this new reality with the emphasis in the CRA rule's
service test on branch outlets? Would the goals of CRA be better served
by encouraging financial institutions to focus on developing innovative
non-traditional means to address financial services needs? Or, as some
tell us, should financial institutions continue to be encouraged to
deliver banking services through traditional physical facilities because
they are necessary, especially in low- and moderate-income neighborhoods
where consumers may not have access to electronic banking services? And
finally, we must remember that efforts to regulate this new reality must
be squared with the "old reality" reflected in the statute itself.

In reviewing the CRA regulation, we seek answers \-- from you and all
other affected parties \-- to these types of thorny questions.

The changes in the industry's corporate structure have been accompanied
by equally far reaching changes in the composition of bank portfolios,
and these changes also have important CRA implications. Specialization
is increasingly the rule in the industry, as financial institutions, of
all sizes, drop or outsource product lines in which they lack resources
or critical mass, choosing to focus instead on those product lines in
which they command significant market share. In keeping with the growing
emphasis on fee income, banks are also holding fewer and fewer of the
loans they originate and securitizing more of them to others.

The mortgage business is one example of this change. Many banks are
leaving the mortgage business, and some of those that remain are
originating fewer loans through their own offices, turning increasingly
to mortgage brokers.

Credit cards offer perhaps the most vivid illustration of the trend
toward product concentration. Eighty percent of all Americans now carry
at least one bank card, and increasingly, the cards they're carrying are
from the same banks. In just the last ten years, the top ten issuers of
Visa and MasterCard saw their market share increase from 51 percent to
82 percent, with the top five accounting for nearly 57 percent of the
total market. Last year alone, more than four percent of all credit card
receivables were sold by smaller issuers to larger ones, with the top
two issuers taking almost 80 percent of that business. While the big
keep getting bigger, many of the others are dropping out of the race
altogether.

What ramifications do these changes pose for CRA? Under the current
framework, the CRA lending test is weighted most heavily in formulating
a large retail institution's summary rating. But that puts banks that
have chosen to curtail their retail lending activities at what some say
is an unfair disadvantage. In such cases, they argue, the investment and
service tests ought to rank higher. Others still insist, however, that
deposits derived from the community should be invested back in those
communities through loans.

The prevalence of loan securitization creates a similar dilemma. The
regulations allow equal consideration for loan originations and
purchases. Some have asserted that only loans originated by an
institution should be considered. Supporters of this position maintain
that consideration of purchased loans does not encourage institutions to
increase capital in their communities and places too much emphasis on
generating reportable "numbers."

Others believe that loan purchases free up capital to the selling
institution, and enable it to make additional loans. Therefore,
purchasing loans may be valuable in helping to meet the credit needs of
a community. As such, they argue that both purchases and originations
should be considered, although some ague that originations should be
weighted more heavily because they require more involvement by the
institution with the borrower. Still others propose that all secondary
market activity, whether evidenced by purchased loans or purchased
asset-backed securities, should be captured under the lending test
because they both involve loans.

The types of questions I've raised here today \-- and others I have not
touched upon \-- will be presented in an Advance Notice of Public
Rulemaking, which the banking agencies are now developing. We welcome
\-- and need \-- need your comments to ensure that any changes we
eventually undertake make sense, and make the CRA rule both more
effective and efficient.

On that score, let me emphasize one final point. It is relatively easy
for commenters to address a single dimension of the current regulation,
to suggest, on the one hand, that the agencies should eliminate
provisions from the current rule, in order to make it less burdensome,
or, on the other hand, to urge that new measures and new recordkeeping
requirements be added in order to show institutions' performance more
precisely and comprehensively. But, the challenge is actually
three-dimensional: to achieve a CRA regulation that effectively furthers
the Community Reinvestment Act, without imposing unnecessary or
artificial regulatory requirements, and which is framed so that it
reflects and can accommodate change of the type impacting the banking
industry.

So I offer a suggestion to prospective commenters: Your thoughts and
recommendations will be most helpful to us if they take into account not
just one, but all three perspectives.

We \-- and you \-- face a considerable challenge. Consolidation,
commoditization, and securitization have transformed the way the
financial services industry is structured and the way products and
services are delivered. CRA has played an important role in highlighting
the variety of marketplace opportunities that exist for banks in their
communities. But there's still work to be done to ensure that all of our
communities are able to share in the benefits that the modern financial
industry has to offer. For the foreseeable future, the Community
Reinvestment Act will play a part in that effort. We at the OCC look
forward to working with CBA and its members \-- and all interested
parties \-- to ensure that the regulations implementing the CRA provide
a workable framework to meet these new challenges.

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  The OCC charters, regulates and examines approximately 2,300 national
  banks and 56 federal branches of foreign banks in the U.S., accounting
  for more than 56 percent of the nation's banking assets. Its mission is
  to ensure a safe and sound and competitive national banking system that
  supports the citizens, communities and economy of the United States.
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