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UPHOLDING THE SPIRIT OF CRA: DO CRA RATINGS ACCURATELY REFLECT BANK PRACTICES?

HEARING

BEFORE THE

SUBCOMMITTEE ON DOMESTIC POLICY

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

OCTOBER 24, 2007

Serial No. 110–159

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

SUBCOMMITTEE ON DOMESTIC POLICY

DENNIS J. KUCINICH, Ohio, Chairman

TOM LANTOS, California

ELIJAH E. CUMMINGS, Maryland

DIANE E. WATSON, California

CHRISTOPHER S. MURPHY, Connecticut

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

BRIAN HIGGINS, New York

BRUCE L. BRALEY, Iowa

DARRELL E. ISSA, California

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

CHRIS CANNON, Utah

BRIAN P. BILBRAY, California

JARON R. BOURKE, Staff Director

(III)

C O N T E N T S

Page

Hearing held on October 24, 2007 .......................................................................... 1

Statement of:

Bradford, Calvin, Board member, National Training and Information

Center; James H. Carr, chief operating officer, National Community

Reinvestment Coalition; Dr. Richard Marsico, professor of law, New

York Law School, and director, Justice Action Center; and Hubert

Van Tol, director, Economic Justice, Rural Opportunities, Inc. ................ 113

Bradford, Calvin ........................................................................................ 113

Carr, James H. .......................................................................................... 161

Marsico, Richard ........................................................................................ 173

Van Tol, Hubert ......................................................................................... 188

Thompson, Sandra L., Director, Division of Supervision and Consumer

Protection, Federal Deposit Insurance Corporation; Sandra F.

Braunstein, Director, Division of Consumer and Community Affairs,

Board of Governors of the Federal Reserve System; Montrice Godard

Yakimov, Managing Director for Compliance and Consumer Protection,

Office of Thrift Supervision; and Ann F. Jaedicke, Deputy Comptroller

for Compliance Policy, Office of the Comptroller of the Currency ............ 16

Braunstein, Sandra F. .............................................................................. 35

Jaedicke, Ann F. ........................................................................................ 60

Thompson, Sandra L. ................................................................................ 16

Yakimov, Montrice Godard ....................................................................... 51

Letters, statements, etc., submitted for the record by:

Bradford, Calvin, Board member, National Training and Information

Center, prepared statement of ..................................................................... 116

Braunstein, Sandra F., Director, Division of Consumer and Community

Affairs, Board of Governors of the Federal Reserve System, prepared

statement of ................................................................................................... 37

Carr, James H., chief operating officer, National Community Reinvestment Coalition, prepared statement of ....................................................... 163

Davis, Hon. Danny K., a Representative in Congress from the State

of Illinois, prepared statement of ................................................................ 86

Jaedicke, Ann F.,Deputy Comptroller for Compliance Policy, Office of

the Comptroller of the Currency, prepared statement of .......................... 62

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio:

Prepared statement of ............................................................................... 6

Prepared statement of Mr. Irvin Henderson ........................................... 109

Marsico, Dr. Richard, professor of law, New York Law School, and director, Justice Action Center, prepared statement of ..................................... 175

Thompson, Sandra L., Director, Division of Supervision and Consumer

Protection, Federal Deposit Insurance Corporation, prepared statement

of ..................................................................................................................... 18

Van Tol, Hubert, director, Economic Justice, Rural Opportunities, Inc.,

prepared statement of ................................................................................... 190

Yakimov, Montrice Godard,Managing Director for Compliance and Consumer Protection, Office of Thrift Supervision, prepared statement of ... 53

(1)

UPHOLDING THE SPIRIT OF CRA: DO CRA

RATINGS ACCURATELY REFLECT BANK

PRACTICES?

WEDNESDAY, OCTOBER 24, 2007

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON DOMESTIC POLICY,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2154, Rayburn House Office Building, Hon. Dennis J. Kucinich

(chairman of the subcommittee) presiding.

Present: Representatives Kucinich, Cummings, and Davis.

Staff present: Jaron R. Bourke, staff director; Noura Erakat,

counsel; Jean Gosa, clerk; Natalie Laber, press secretary, Office of

Congressman Dennis J. Kucinich; Leneal Scott, information systems manager; Kristina Husar, minority counsel; and Larry Brady,

minority senior investigator and policy advisor.

Mr. KUCINICH. The committee will come to order. The Domestic

Policy Subcommittee of the Oversight and Government Reform

Committee will now come to order.

Today’s hearing will examine the Community Reinvestment Act’s

rating system. Specifically, this hearing will investigate how accurately CRA ratings reflect bank practices.

Now, without objection, the Chair and the ranking member will

have 5 minutes to make opening statements, followed by opening

statements not to exceed 3 minutes by any Member who seeks recognition.

And, without objection, Members and witnesses will have 5 legislative days to submit a written statement or extraneous materials

for the record.

At the outset, I want to point out that Mr. Issa has been called

to California concerning the fires that are devastating so much of

the south part of the State. And so, our thoughts and our prayers

are with the people of California and with Mr. Issa and his constituents as they endure this severe threat of fire.

I want to thank Mr. Issa’s staff for their cooperation. And, certainly, any Member from the Republican side who shows up will

be invited to fully participate.

I thank you.

And, with the consent of Mr. Issa and his office, we are going to

start this hearing.

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I want to welcome the witnesses. I am going to proceed with an

opening statement, and then we will invite you to join in the discussion.

This is the third in a series of hearings on subprime lending and

the response of regulators. Our first hearing in March examined

the subprime mortgage industry and the problem of foreclosure, the

pay-day lending industry and the enforcement of the Community

Reinvestment Act.

In our second hearing, the subcommittee took a closer look at the

foreclosure crisis in Cleveland and its relationship to the Federal

Reserve Board.

And in this hearing, ‘‘Upholding the Spirit of the Community Reinvestment Act: Do CRA Ratings Accurately Reflect Bank Practices?’’, we are exploring the coincidence of persistent discrimination in lending and a 98-percent passing rate among banks on their

CRA exams. We hope, by the end of this hearing, we can identify

a few solutions that will enhance the CRA and its enforcement by

the regulators so that it better reflects discriminatory practices by

regulated banks.

Congress enacted the Community Reinvestment Act in 1977 to

combat redlining practices by the banks. As Mayor of Cleveland at

the time, I was one of the first mayors to sign a Community Reinvestment Act agreement to hold banks to account for their history

of discrimination. CRA made illegal the banking practice of arbitrarily and systematically refusing service to low- and moderate-income and minority communities.

The CRA applies to federally insured depository institutions and

is enforced by regulatory review. Enforcement is delegated to four

Federal agencies: the Federal Deposit Insurance Corporation, the

Federal Reserve System, the Office of Thrift Supervision and the

Comptroller of the Currency.

The regulatory banking agencies have a powerful enforcement

tool: the authority to deny or approve a banking institution’s application for a new charter, a new branch, a merger or an acquisition.

Banking regulators exercise this authority based on an institution’s

CRA rating, which measures the bank’s performance to meet the

credit needs of its communities. Failure to meet the credit needs

of its communities can translate, via the CRA and its rating, into

a missed opportunity for the bank to acquire more wealth, making

the CRA rating a critical incentive for banks to serve its minority

and low- and moderate-income communities.

But, since 1990, the banking regulators gave failing grades in

just 225 of 60,194 CRA exams.

Take a look at the slide. The staff has put up a slide on the

board. I don’t know how your vision is, but if you can see that, you

are better than I am.

But, today, 98.4 percent of all regulated banks passed the CRA.

Compare this to 1990, when only 90.4 percent of regulated banks

received a passing CRA rating. Does this significant rise of the

number of banks that passed the CRA suggest that, in 2007, banks

are improving their lending practices? Does a passing grade accurately reflect bank lending practices? Well, not necessarily.

Let us look at slide two.

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According to a recent study conducted by the National Coalition

for Community Reinvestment, 24 of the 25 largest U.S. metropolitan municipalities and their surrounding areas have fewer banking

branches in densely populated urban centers than the less populated suburbs. Today, nearly 14 million households, or 21 percent

of all U.S. households, are unbanked, meaning they have no relationship to a bank or credit union. Other households are underbanked, in that they have deposit accounts but often seek services

from pay-day lenders and check cashers.

Not only do minority communities have less access to banks, but,

according to the 2004 HMDA data, when they do have access, African American and Latino populations receive a disproportionate

share of higher-rate home loans.

Slide three.

Even after accounting for differences in risk, borrowers of color

were more than 30 percent more likely to receive a higher-rate loan

than white borrowers.

So our question is this: How can banks be passing the CRA at

such high rates while the HMDA data shows statistically significant racial discriminatory lending practices and while bank services for low- and moderate-income communities are diminishing?

We invited Federal banking regulators here today to help us answer that question.

In exploring this conundrum, this subcommittee identified several regulatory and statutory issues that raised red flags. These include the discretionary latitude exercised by banking regulators,

the lack of transparency of the CRA exam process and

incongruency of the 1999 Gramm-Leach-Bliley Act and the CRA.

The regulations surrounding the review of banks are broad and

undefined. Although the regulations stipulate that evidence of discrimination adversely impacts a bank’s CRA rating, the regulators

do not stipulate a mandatory downgrade in the face of such evidence. As we dug deeper into the matter, we found cases where the

Department of Justice prosecuted a bank for Fair Housing and

Equal Credit Opportunity Act violations while simultaneously the

Federal regulator issued a bank a passing CRA rating.

Case in point: In 2006, the Department of Justice filed suit

against Old Kent Bank for violating the FHA and the ECOA. In

its complaint, the Department of Justice alleged that, in spite of

regulation, Old Kent Bank circumscribed its lending area in the

Detroit metropolitan statistical area to exclude—to exclude—most

of the majority-African American neighborhoods by excluding the

city of Detroit.

Between 1997 and 2001, the Federal Reserve Bank not only gave

Old Kent passing CRA ratings, but it also approved Old Kent’s significant branching activity. In January 1996, Old Kent had 18

branches in the Detroit MSA. Not a single one was in the city of

Detroit. By March 2000, it had expanded to 53 branches located in

every county of the Detroit MSA except for the city of Detroit,

which, at that point, was 81 percent African American.

Now, how can the Fed see this map, refer the case to the Department of Justice for prosecution and give Old Kent Bank a passing

CRA rating? We asked the Fed that question, and we were told, in

the Fed’s discretion, the bank’s practices were reasonable and legal.

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If discretionary latitude is broad enough to deem this donut hole

reasonable, then perhaps it is too broad.

But regulatory discretion does not explain everything. Something

in the regulations makes it possible for the CRA rating to not reflect discriminatory practices.

Now, in 1999, the Sixth Circuit Court of Appeals upheld a finding against Flagstar Bank for discrimination against minority borrowers. In 2001, a Federal court in Indianapolis found a written

pricing policy developed by Flagstar so overtly discriminatory that

it ruled against Flagstar on summary judgment. During the period

of Flagstar’s violations, the Federal regulator, the Office of Thrift

Supervision, conducted five CRA examinations. It awarded

Flagstar four satisfactory ratings and one outstanding rating. Significantly, the outstanding rating was awarded after the summary

judgment finding in 2003.

Now, how can Flagstar be awarded with passing CRA grades

while it is being prosecuted for its discriminatory practices?

We learned that one way a bank can mitigate a low CRA rating

is by agreeing to take corrective action to address its discriminatory practices. Discriminatory practices are found during a fair

lending exam, the findings of which are not made public, unlike the

CRA exam. Not only is the fair lending exam secret, but so, too,

are the negotiations on corrective actions between the regulatory

agency and the bank. This, I think, flies in the face of the CRA

spirit, which was borne out of public protest and sustained by public participation.

According to the Treasury Department, CRA-related home lending in low- to moderate-income communities increased in Metropolitan areas in which lending institutions and community groups

negotiated CRA agreements. An informed public and a participating public is a hallmark of the CRA. By negotiating corrective actions behind closed doors, banks and the regulators create generic

solutions that may not be appropriate for all. In exchange for generic solutions and the exclusion of public participation, banks like

Flagstar maintain their good reputations and are afforded the

privileges associated with passing CRA grades.

Then there is another problem that has nothing to do with the

regulations at all but instead is a problem with the law. In March

2000, the Gramm-Leach-Bliley Act effectively allowed financial institutions to merge with insurance companies, security underwriting firms and mortgage lending companies for the first time in history. But the CRA was not amended to reflect this financial development.

As a result, while a loan offered by a bank or thrift is subject

to CRA review, that same loan evades CRA scrutiny if it is offered

by that bank or thrift’s affiliated mortgage company, finance company or nondepository affiliate. This loophole enables banks to

move their financial assets to noncovered affiliates to reduce their

CRA obligations.

Subprime borrowers are especially vulnerable to these unregulated lenders. According to RealtyTrac, Inc., which compiles statistics on home ownership, last month foreclosures totaled 225,538,

double the number a year ago. Would the numbers be different if

these companies were the subject of CRA obligations? Has this

5

legal loophole enabled a surging foreclosure crisis? And if this is indeed the case, has Congress allowed the CRA to become obsolete

in certain respects?

We hope that, with the insight of Federal banking regulators as

well as community groups and advocates, we can answer some of

these questions and find a way to restore the Community Reinvestment Act and uphold its spirit.

With that, my opening statement is concluded.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. KUCINICH. And any Member who shows up will be given an

opportunity to participate in the questions.

The subcommittee is now going to receive testimony from the

witnesses before us. I want to start by introducing our first panel.

Ms. Sandra Thompson is director of the Federal Deposit Insurance Corporation’s Division of Supervision and Consumer Protection, where she directs risk management and consumer protection

examination activities relating to approximately 5,200 FDIC-supervised institutions. Ms. Thompson previously served as the FDIC’s

deputy to the vice chairman and led the Corporation’s Bank Secrecy Act and anti-money laundering supervisory activities. Prior to

joining the FDIC in 1970, Ms. Thompson was an associate at Goldman Sachs and Co. in New York City. She holds a degree in finance from Howard University.

Welcome. I appreciate your presence here.

Next, I would like to introduce Ms. Sandra Braunstein, who I

had the privilege of having come to Cleveland to participate.

And I appreciated your presence there, as well as here.

Ms. Braunstein is director of the Division of Consumer and Community Affairs for the Board of Governors for the Federal Reserve

System. She currently oversees the implementation of the Federal

Reservice System polices and programs regarding community and

economic development. Ms. Braunstein also serves as the board’s liaison to the Consumer Advisory Council and provides leadership to

various consumer education and research activities. Before joining

the Federal Reserve Board in 1987, Ms. Braunstein held positions

in economic and community development for nonprofit, Government and private-sector organizations. She is a graduate of American University.

Thank you, again, for being here.

Ms. Montrice Yakimov—is that correct?

Ms. YAKIMOV. Yakimov.

Mr. KUCINICH. Yakimov—is the managing director for compliance and consumer protection at the Office of Thrift Supervision.

Ms. Yakimov coordinates the agency-wide compliance and consumer protection programs at the Office of Thrift Supervision, including overseeing the agency’s Community Reinvestment Act program. Prior to becoming the FRB in 2005, Ms. Yakimov served as

senior vice president and director of regulatory affairs at the Conference of State Bank Supervisors. She has advised the Federal Financial Institutions Examination Council Supervision Task Force

on a broad range of State banking issues and has extensive knowledge of Federal and State consumer protection statutes and regulations.

I appreciate you being here.

Finally, Ms. Ann Jaedicke is the Deputy Comptroller for Compliance Policy for the Office of the Comptroller of the Currency. Ms.

Jaedicke is responsible for policy and examination procedures relating to consumer issues and anti-money laundering. She chairs the

FFIEC’s Consumer Compliance Task Force and sits on its Bank Secrecy Act Task Force. Earlier in her career, Ms. Jaedicke served as

the director for the OCC’s Large Bank Division and also managed

its Problem Bank Division. 2001 to 2002, she led projects to reVerDate 11-MAY-2000 11:12 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 U:\DOCS\49624.TXT KATIE PsN: KATIE
16

structure OCC’s six districts in OCC’s Washington, DC, headquarters.

Thank you for appearing.

I want to, again, thank all the witnesses.

Before we begin, it is the policy of the Committee on Oversight

and Government Reform to swear in our witnesses before they testify. I would ask that you would rise and raise your right hands.

[Witnesses sworn.]

Mr. KUCINICH. Let the record reflect that the witnesses have answered in the affirmative.

And you may be seated.

I ask that each of the witnesses now give a brief summary of

their testimony and keep the summary under 5 minutes in duration. I would like you to bear in mind that your written statement

will be included in the hearing record.

So, Ms. Thompson, let us begin with you.

STATEMENTS OF SANDRA L. THOMPSON, DIRECTOR, DIVISION

OF SUPERVISION AND CONSUMER PROTECTION, FEDERAL

DEPOSIT INSURANCE CORPORATION; SANDRA F.

BRAUNSTEIN, DIRECTOR, DIVISION OF CONSUMER AND

COMMUNITY AFFAIRS, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM; MONTRICE GODARD YAKIMOV,

MANAGING DIRECTOR FOR COMPLIANCE AND CONSUMER

PROTECTION, OFFICE OF THRIFT SUPERVISION; AND ANN F.

JAEDICKE, DEPUTY COMPTROLLER FOR COMPLIANCE POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

STATEMENT OF SANDRA L. THOMPSON

Ms. THOMPSON. Thank you.

Chairman Kucinich and members of the subcommittee, I am the

director of supervision and consumer protection for the Federal Deposit Insurance Corporation. In this role, I oversee the agency’s

bank supervision activities, including both safety and soundness

and compliance with consumer protection and fair lending laws.

I appreciate the opportunity to testify today on behalf of the

FDIC regarding the enforcement of the Equal Credit Opportunity

Act and the Fair Housing Act and how the FDIC considers compliance with the fair lending laws in assigning CRA ratings to financial institutions.

As you stated, the purpose of CRA is to encourage banks to serve

the credit needs of their entire communities. At the time CRA was

enacted, there was a severe shortage of credit available to low- and

moderate-income neighborhoods and concern about racial redlining

and discrimination. While CRA and the Federal fair lending laws

have had significant positive impact, there still remains much work

to be done.

This afternoon, I would like to focus my statement on a few key

points.

First, the FDIC is committed to protecting consumers and ensuring that the institutions under our supervision adhere to the letter

and spirit of the fair lending laws. When the FDIC finds practices

that violate these laws, we take action to ensure that the practices

cease and that harm to consumers is remedied, using a range of

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supervisory and enforcement tools. Where the violation appears to

involve a pattern or practice of discrimination, the FDIC refers the

case to the Department of Justice.

Second, from January 1, 2002, through September 30th of this

year, the FDIC cited banks for substantive fair lending violations

in 237 examinations. Although most fair lending violations cited

had already been corrected by the bank or were promptly corrected

at the direction of examiners, more serious violations were addressed through informal and formal enforcement actions. In all

cases, banks were required by the FDIC to remedy the harm experienced by affected consumers and to advise the consumers of their

right to pursue legal action. And they were ordered to stop engaging in discrimination. During the same 5-year period, the FDIC has

referred 181 findings of illegal discrimination to the Department of

Justice.

Third, in addition to performing fair lending reviews, as part of

every compliance exam FDIC examiners separately evaluate the

CRA performance of the approximately 5,200 institutions we supervise. Fair lending violations are one of the factors considered in determining CRA ratings. Since 2002, fair lending violations have resulted in several CRA rating downgrades.

In conclusion, CRA was adopted to address redlining and, over

its 30-year history, has made a significant contribution to the revitalization of many low- and moderate-income communities in both

urban and rural areas. Fair lending examinations are critical to

achieving complete and accurate CRA reviews. The FDIC is committed to using CRA and fair lending laws in the continuing effort

to address the credit needs of low- and moderate-income areas and

individuals.

That concludes my statement, and I would be happy to respond

to any questions the subcommittee might have.

[The prepared statement of Ms. Thompson follows:]

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Mr. KUCINICH. Thank you very much.

Ms. Braunstein.

STATEMENT OF SANDRA F. BRAUNSTEIN

Ms. BRAUNSTEIN. Thank you, Chairman Kucinich and members

of the subcommittee. I appreciate this opportunity to discuss the

implementation of the Community Reinvestment Act and the enforcement of fair lending laws by the Federal Reserve System.

The Federal Reserve has a longstanding commitment to ensuring

that every bank it supervises complies fully with Federal financial

consumer protection laws, including fair lending laws, and that

every bank meets its obligations under the CRA.

Consumer compliance supervision, which includes the administration of CRA and fair lending laws, has been a separate function

at the Board and the Federal Reserve Banks for more than 30

years. The Federal Reserve Banks are instrumental in carrying out

the Board’s mission of consumer protection through their supervision of the approximately 900 State member banks for which the

system has regulatory responsibility.

Federal Reserve consumer compliance examiners focus exclusively on consumer compliance supervision and are required to

complete a comprehensive training program that includes specialized intensive coursework on CRA and fair lending. A specialized

fair lending enforcement section at the Board works closely with

Reserve Bank staff to provide guidance on fair lending matters and

to ensure that the fair lending laws are enforced consistently and

rigorously throughout the system.

When conducting fair lending examinations, consumer compliance examiners perform two distinct functions. First, examiners

make sure that management is committed to fair lending and has

the appropriate system, policies and staff in place to prevent violations.

Second, examiners determine if the bank has, in fact, violated

the fair lending laws. Because the Federal Reserve requires the

banks we supervise to devote significant resources to fair lending

and because we examine them routinely for fair lending compliance, we expect fair lending violations to be rare among the banks

we supervise. Such violations are, indeed, rare. But when they do

occur, we do not hesitate to take strong action, including referrals

to the Department of Justice.

Our record of referrals to Justice demonstrates our firm commitment to enforcing the fair lending laws. In 2007, thus far we have

referred six institutions. These referrals included matters of ethnic

and racial discrimination in mortgage pricing, racial discrimination

in the pricing of automobile loans, restrictions on lending on Native

American lands, and restrictions on row-house lending that discriminated on the basis of race.

Discrimination and other illegal credit practices will adversely affect a bank’s CRA evaluation. In our evaluation of a bank’s CRA

performance, we take into account evidence that a bank engaged

in illegal lending discrimination or other illegal credit practices. At

the conclusion of CRA examinations, the examiners prepare a separate CRA public performance evaluation that describes a bank’s

36

record of helping to meet the lending service and investment needs

of their communities.

Examiners assign a CRA rating that reflects the institution’s

overall CRA performance. If examiners find fair lending violations

or find other illegal credit practices, examiners seriously consider

such findings when they determine the appropriate CRA rating.

Examiners consider the nature and extent of discriminatory practices, the policies and procedures in place to prevent such practices,

and corrective action taken by the bank.

Examiners may downgrade the rating otherwise earned to ‘‘needs

to improve’’ or ‘‘substantial noncompliance.’’ However, examiners

assess the totality of the bank’s record in the community in making

this determination. Whether or not the examiner lowers the rating,

they report their findings of discrimination in the public performance evaluation.

The Federal Reserve is committed to safeguarding consumer

rights in financial services. The key to this commitment is ensuring

that every bank that the Federal Reserve supervises meets the

credit needs of its community and complies fully with fair lending

laws. Our supervisory process evaluates each bank’s compliance

with the fair lending laws and takes that record into account when

evaluating its CRA performance.

Thank you very much.

[The prepared statement of Ms. Braunstein follows:]

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Mr. KUCINICH. Thank you, Ms. Braunstein.

Ms. Yakimov.

STATEMENT OF MONTRICE GODARD YAKIMOV

Ms. YAKIMOV. Good afternoon, Chairman Kucinich and members

of the subcommittee. Thank you for the opportunity to present information regarding the activities of the Office of Thrift Supervision on issues related to the Community Reinvestment Act and

fair lending enforcement.

In my testimony today, I will describe how OTS examines for

CRA compliance, compliance with fair lending laws, and how violations of fair lending laws and other illegal credit practices affect

the CRA ratings we assign to savings associations.

The Community Reinvestment Act calls for insured depository institutions covered by the act to help meet the credit needs of the

communities in which they operate. The Office of Thrift Supervision’s implementing regulation requires the agency to assess a

savings association’s record of helping to meet the credit needs of

its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation.

Additionally, the CRA requires OTS to consider each institution’s

record when evaluating an application for new branches or relocation of an existing branch, mergers, consolidations and other corporate activity. The regulations and examination procedures require examiners to consider such factors as the volume of mortgage

and small-business lending within the savings association’s designated assessment area, the volume in dollar of lending to lowand moderate-income people, small-business lending, small-farm

lending and mortgage lending in low- and moderate-income geographies. Additionally, in some instances, performance is based on

a savings association’s community development lending and investments, along with the ability to provide retail services to low- and

moderate-income individuals.

OTS assigns savings associations one of four ratings to meet the

credit needs of the communities they serve: outstanding, satisfactory, needs to improve, or substantial noncompliance.

So, through the CRA examination function, OTS reviews thrift

institutions’ record of meeting the financial needs of the communities they serve, including their record of lending to low- and moderate-income individuals.

Separately, fair lending reviews are an integral part of the OTS

supervision to determine compliance with consumer protection laws

and regulations. OTS examiners conduct a fair lending assessment

during each comprehensive exam, every 12 to 18 months. In addition to HMDA, data examiners also use other information in their

investigations, including consumer complaints, risks associated

with the savings association’s business channels, and the adequacy

of the institution’s compliance risk management system.

Through fair lending exams, OTS examiners seek to detect all

forms of discrimination, such as redlining, as well as discrimination

relating to pricing, marketing and underwriting. If unlawful discrimination is found, OTS will make a referral to the Department

of Justice or the Department of Housing and Urban Development

in accordance with Federal fair lending laws.

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Depending on the outcome of the referral and the nature of the

violation, OTS may also take other actions to fully resolve the matter. For example, when applicable, the OTS directs the institution

to cease violative activity, provide remedies to harmed parties, and

improve its fair lending compliance controls and policies.

Additionally, and notably for today’s hearing, the Office of Thrift

Supervision’s CRA regulations indicate that a finding of discrimination or other illegal credit practice will adversely affect the savings association’s CRA performance. Such evidence includes, for example, certain violations of Equal Credit Opportunity Act, Fair

Housing Act, Real Estate Government Procedures Act, Section 5 of

the FTC Act and the Homeowners Equity Protection Act. The extent to which the finding of discrimination or other illegal practice

affects the CRA rating is determined by factors such as the nature

and extent of the evidence, the policies and procedures that the

savings association has in place to prevent discrimination or other

illegal credit practices, and corrective action that the savings association has undertaken or has committed to take, including volunteers.

Since 1990, in 37 instances OTS has reduced the CRA rating of

an institution in response to evidence of discriminatory or other illegal credit practices. In five cases, the downgrade was from ‘‘outstanding’’ to ‘‘satisfactory.’’ In 29 cases, the rating declined from

‘‘satisfactory’’ to ‘‘needs to improve.’’ And in three cases, the rating

declined from ‘‘needs to improve’’ to ‘‘substantial noncompliance.’’

Both CRA and fair lending are critical parts of our compliance

examination function at OTS. While we believe the regulation examination procedures equip us to monitor both of these critical

areas, we note that refinements to our processes are certainly

something that we consider on an ongoing basis. We have taken

such steps as building new econometric models, adding additional

training and additional resources here in Washington to support

our subject-matter experts in the field.

Ensuring that CRA ratings accurately reflect not only how effectively thrifts serve the communities they serve but that they are

doing so in compliance with fair lending laws and in the spirit of

the Community Reinvestment Act are key priorities at OTS. Thank

you for raising this important issue, and I look forward to answering your questions.

[The prepared statement of Ms. Yakimov follows:]

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Mr. KUCINICH. Ms. Yakimov, thank you for your testimony.

I have been informed that there is a vote on, and so what we are

going to do is this. I am going to recess the committee for 20 minutes, and that would bring us to about 5 minutes before the hour.

We will begin with Ms. Jaedicke’s testimony, and then we will go

to questions of the witnesses.

So I would ask that you return in 20 minutes, and we will start

again. Thank you so much. And thank you for your testimony.

Thank you.

The committee is in recess.

[Recess.]

Mr. KUCINICH. The committee will now come to order.

I want to thank the witnesses for their patience. The House has

just completed its business for the day, so I don’t think we will

have any other interruptions.

We will hear from Ms. Jaedicke, and then we will go to questions

of the witnesses. And, again, I thank you for your indulgence.

The Chair recognizes Ms. Jaedicke.

STATEMENT OF ANN F. JAEDICKE

Ms. JAEDICKE. Chairman Kucinich, I am Ann Jaedicke, deputy

comptroller for compliance policy at the Office of the Comptroller

of the Currency. I am pleased to appear before you today to discuss

the OCC’s fair lending and Community Reinvestment Act examination processes. I will also discuss how a national bank’s CRA evaluation and rating can be adversely affected by evidence of unlawful

discrimination.

Let me begin by saying there is no room for unlawful lending discrimination in the national banking system, and the OCC fully expects banks to serve the credit needs of their communities, including needs in low- and moderate-income areas. The OCC has a comprehensive and rigorous fair lending oversight program, which is

the foundation for ensuring that national banks comply with fair

lending laws.

We also conduct examinations of national banks to evaluate

whether they are meeting the credit needs of their communities as

required by the Community Reinvestment Act. At each CRA examination of a national bank, the examiner not only evaluates the

manner in which the bank is meeting the credit needs of the community, but the examiner also considers the nature and extent of

any unlawful discrimination or other illegal credit practices in

which the bank may have engaged.

The joint CRA regulations of the Federal banking agencies provide that evidence of unlawful discrimination or other illegal credit

practices has an adverse effect on a bank’s CRA evaluation. Therefore, if there is evidence of unlawful discrimination, that information is taken into account in the bank’s CRA evaluation, and the

examiner’s findings are discussed in the public performance evaluation [PE].

The interagency CRA rules further provide guidance on the factors that will be considered in determining whether a bank’s CRA

rating should be adjusted as a result of such evidence. These factors include, among other things, the nature of the violation, the

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extent of the problem, whether the bank self-identified the issue,

and whether the bank has initiated corrective action.

Let me assure you that the OCC treats evidence of fair lending

violations as a negative factor when assessing the CRA performance of national banks, and we have lowered the CRA ratings of

national banks in several instances based on such evidence. For example, ratings have been lowered from ‘‘outstanding’’ to ‘‘satisfactory’’ and from ‘‘satisfactory’’ to ‘‘needs to improve’’ based on discriminatory or other illegal credit practices. In other instances, the

OCC has described the violations in the CRA PE and has taken

them into account in evaluating the CRA performance but has determined that lowering a rating was not appropriate based on an

assessment of the applicable factors in the regulation.

In addition to conducting CRA examinations, the OCC has a fair

lending supervisory program designed to assess the level of fair

lending risk in every national bank. As part of this process, the

OCC assesses compliance with fair lending laws and regulations;

we obtain corrective action when significant weaknesses or deficiencies are found in a bank’s policies, procedures and controls related to fair lending; and we ensure that enforcement action is

taken when warranted, including referrals to the U.S. Department

of Justice and notifications to the U.S. Department of Housing and

Urban Development.

Our fair lending supervisory process has several features that, in

combination, result in a risk-based approach to our fair lending supervision. We combine our examiner’s knowledge of the bank and

its products and markets with analytical information about loans

made by the bank and with information from consumers and community groups. Using this information, we focus our fair lending

examinations on banks that show the greatest potential for fair

lending issues.

I appreciate the opportunity to discuss the important nexus between fair lending and helping to meet community credit needs.

The OCC is committed to ensuring that our evaluation of national

bank CRA performance appropriately reflects any evidence of unlawful discrimination consistent with the interagency CRA regulations. Along with our robust fair lending examination and enforcement process, the CRA process is an important tool in Federal law

that we use to address and to prevent unlawful discrimination.

I will be pleased to answer any questions that you may have.

[The prepared statement of Ms. Jaedicke follows:]

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Mr. KUCINICH. Thank you very much for your testimony, Ms.

Jaedicke.

We are pleased to be joined by Mr. Davis of Illinois. Thank you

for being here and for your participation.

I want to start off with Ms. Thompson.

Ms. Thompson, in a meeting, FDIC representatives told my staff

that they are not proud of their failure to note Centier’s discriminatory practices. Would you agree that this is the FDIC’s general attitude toward the Centier example?

Ms. THOMPSON. Mr. Chairman, as the head of supervision and

consumer protection, I can assure you that is the FDIC’s position

on how we handled that particular situation.

Mr. KUCINICH. And, Ms. Braunstein, my staff’s experience with

the Fed was a lot different. During their meeting, a Fed representative told my staff that the Fed did not make any mistakes in their

CRA examination of Old Kent Bank. This is despite the Department of Justice prosecution against Old Kent Bank for FHA and

ECOA violations.

I was reading Bloomberg news accounts of this meeting today,

and you are quoted as saying, if this quote is accurate, that banks

can always do more.

Is your position that Old Kent Bank could have done more—that

is, by following the law—or that, in the Fed’s view, Old Kent Bank

was compliant with the CRA?

Ms. BRAUNSTEIN. Congressman, that incident took place 8 years

ago, and the institution no longer exists. The people who were involved in that matter at that time no longer work for the Federal

Reserve. And it is, frankly, impossible for me to reconstruct what

took place at that time to really opine one way or another.

I will tell you that, based on the circumstances that ensued, we

find the situation to be very troubling. And we do take redlining

very seriously, and we have proven that with our record of referrals

to Justice for redlining cases. We are not hesitant to pull the trigger when we identify redlining.

It is very difficult—it is basically impossible for me to address

the specific facts.

Mr. KUCINICH. But you are familiar with the case?

Ms. BRAUNSTEIN. I am familiar with what we know at this time

about the ratings. I don’t have the benefit of talking to the examiners to find out how they made their judgments.

Mr. KUCINICH. Can you say that Old Kent Bank was misgraded?

Ms. BRAUNSTEIN. I would have to try to reconstruct how they

came to that conclusion. And I don’t think that I can reconstruct

their thought processes from 8 years ago.

Mr. KUCINICH. Well, you said a moment ago it was troubling.

Ms. BRAUNSTEIN. I also don’t think that it is a fair representation to take one case out of thousands of bank exams we use and

try to characterize our entire record.

Mr. KUCINICH. This isn’t about characterizing your entire record,

although your entire record is in question here. It is about trying

to see how the Fed responds when questioned about a specific case

which seems to be quite an egregious example of a lack of oversight.

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Now, I will take into consideration that this was 8 years ago,

that the institution is gone, that the players are gone. But it would

be instructive for this committee to be able to learn from the Fed

should it have been done differently, would you do it differently, or

don’t you know enough about it to make an assessment, which, to

me, would mean that we still are in the category of lessons to be

learned. So help us out, please.

Ms. BRAUNSTEIN. Well, I don’t think I know enough about that

specific case to make a determination. However, I will tell you that

we are constantly looking at ways to improve our processes around

examinations for Community Reinvestment Act as well as fair

lending. We constantly tweak our procedures. We constantly try to

find ways to improve. As I said this morning, there is always room

for banks to improve; there is certainly always room for us to improve.

Mr. KUCINICH. So the Fed can always do more?

Ms. BRAUNSTEIN. And I will commit to you we will continue

doing that.

Mr. KUCINICH. Would you then agree with the statement the Fed

could always do more?

Ms. BRAUNSTEIN. Absolutely, absolutely.

Mr. KUCINICH. Thank you.

My 5 minutes has expired. I want to go to Mr. Davis for the next

round of questions.

The Chair recognizes Mr. Davis. Thank you.

Mr. DAVIS. Thank you very much, Mr. Chairman.

And I want to thank the witnesses for being here and for participating.

The Department of Justice filed a complaint against First National Bank of Pontotoc, MS, in April 2006, alleging that First National’s former vice president violated the Equal Credit Opportunity Act and that the bank is responsible for the discriminatory

conduct during the vice president’s tenure. The complaint alleged

that while he was serving as the vice president at First National

in 2003 and 2004, he had sought sexual favors in return for favorable loan decisions. He left the bank in May 2004.

During this time between 1993 and 2003, the OCC gave First

Bank passing scores, even as the vice president in question was

stepping down. In fact, the 2004 CRA exam of First National states

that in the, ‘‘fair lending or other illegal credit practices review,’’

an analysis of public comments and consumer complaint information was performed according to the OCC’s risk-based fair lending

approach. Based on its analysis of the information, the OCC decided that a comprehensive fair lending examination would not

need to be conducted in connection with the CRA evaluation this

year. The latest comprehensive fair lending examination was performed in 1998.

I would like to ask you, Ms. Jaedicke, you did not conduct a fair

lending exam of First National because your agency felt that the

risk-based approach that you use—as a result, there was no need

for an exam. Is that correct?

[The prepared statement of Hon. Danny K. Davis follows:]

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Ms. JAEDICKE. Yes, sir, at the time, based on the information we

had during our 2004 CRA exam.

And let me add that the issues at First National Bank of

Pontotoc are quite disturbing to us, but the allegations surrounding

the bank emerged contemporaneously with the exam that we were

doing in 2004. Shortly thereafter, the Department of Justice

opened up an investigation and asked us to stand down. So when

the Department of Justice finishes their investigation and we have

their findings, we will take them into account as part of the next

CRA examination.

Mr. DAVIS. Could you explain to us what your risk-based approach is?

Ms. JAEDICKE. Certainly. Our fair lending supervision process

really has three features.

The first is the knowledge and experience that our bank examiners have with the banks that they supervise. And that involves the

bank’s products and services, its customer base, the type of communities they operate in, the type of complaints they are receiving

from consumers or community groups. Examiners process that information as they receive it. And if, based on any of that information, they decide that they are concerned about a fair lending issue,

they can initiate a fair lending exam. That is the first feature.

The second feature of our fair lending supervisory process is really analytically based. We process information from the HMDA data

submitted by banks each year and additional information that lets

us screen the population of national banks to look for banks that

may have disparate issues or issues that cause us concern, raise

questions about fair lending. If we find that, we will put those

banks on a list to be examined in the coming year.

And the third feature is a random sample. We select a group of

banks to be examined in the coming year each year, so that there

are banks that, if we perhaps have no other reason to look at those

banks for fair lending issues, are examined anyway.

Mr. DAVIS. And is the fair lending exam meant to be complaintbased, that, as a result of complaints, you determine——

Ms. JAEDICKE. No, sir, it is not solely complaint-based. But, certainly, if we had complaints or information from community groups

that caused us concern, it could initiate a fair lending exam.

Mr. DAVIS. So the purpose of the exam to regulate the banks and

ensure that they are in compliance with fair lending laws like the

FHA and the ECOA, if you wait for a consumer to tell you that

they are in violation of those laws, then it is your job just to followup. I am saying, if you get complaints and the consumers are saying, ‘‘We think that they are violating thus and so,’’ is it your task

to just followup?

Ms. JAEDICKE. We certainly would followup if we had complaints

like that. But that is not the sole basis that might lead to a concern

on our part around fair lending issues.

I will give you another example. If a national bank were to

choose to enter a new market that would involve lending to a Hispanic customer base or an African American customer base and we

had reasons to be concerned about the products they were offering,

that might cause an examiner to initiate a fair lending exam.

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Again, if we saw information in the HMDA data filed by national

banks every year that caused us to be concerned—and we analyze

that information every year—that could cause us to initiate a fair

lending exam.

So, a variety of different things could occur that would cause us

to initiate a fair lending exam.

Mr. DAVIS. And, finally, let me just ask you, is it possible that

because there has not been a fair lending exam in 6 years for this

particular bank before the case was brought to the Department of

Justice’s attention, that First National may be violating other lending laws but you just weren’t aware of them because there was no

examination of the bank?

Ms. JAEDICKE. I think in the situation of First NationalPontotoc—which is a bit unusual because it involves sexual harassment, and sexual harassment, by its very nature, is surreptitious—

it would be an issue that would be quite difficult for us to uncover

as part of a bank examination.

Nonetheless, once the Department of Justice concludes its investigation, we will review the findings of that investigation, take

them into consideration in our next CRA exam. And if there are

other indications in that investigation of something we feel like we

need to look at at First National Bank of Pontotoc from a fair lending standpoint, we will do that.

Mr. DAVIS. So there may be others, but you just really wouldn’t

know, because of the nature of the examination.

Ms. JAEDICKE. Yes, sir.

Mr. DAVIS. Thank you very much.

And, Mr. Chairman, I want to thank you for your indulgence. I

know that my time has ended.

Mr. KUCINICH. We are going to go to another round of questions.

I continue to be concerned about the Fed’s approach to enforcement. We have just reviewed the fact that the Old Kent Bank case

was 8 years old. The Fed has had 8 years, a lot of time to learn

from experience.

Now, the 1997, 1999 and 2001 exams had virtually the same language on Old Kent’s compliance with anti-discrimination laws.

Here is how it reads: ‘‘the bank is in compliance with the substantive provisions of anti-discrimination laws and regulations, including the Equal Credit Opportunity Act [ECOA], and the Fair

Housing Act. No substantive violations were noted. The bank is

also in compliance with the technical requirements of the Community Reinvestment Act. The public file and CRA notices were reviewed and deemed to be in compliance.’’

Ms. Braunstein, who oversaw the work of this CRA examiner?

Ms. BRAUNSTEIN. The CRA examination was done by the Federal

Reserve Bank of Chicago. All the exam work is done by the Reserve

Banks. And there are various layers of management over those examiners. There are certainly layers of management at the Reserve

Bank itself, as well as examinations are a delegated function in the

Federal Reserve System, so ultimately reported to Washington, DC.

Mr. KUCINICH. So the structure of oversight, you have the examiner and then someone who reviews the work of the examiner. Who

would that be?

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Ms. BRAUNSTEIN. Correct. That would be probably a reviewing

person at the Reserve Bank.

Mr. KUCINICH. And then who would check that work?

Ms. BRAUNSTEIN. I would imagine their management, whether it

is a vice president of the Reserve Bank, a manager or assistant

vice president, depending—each Reserve Bank has a different hierarchy.

Mr. KUCINICH. So is there an oversight body involved here in reviewing an examiner’s conclusion?

Ms. BRAUNSTEIN. Well, yes, absolutely, on every examination.

Also, I will add that the examinations ultimately come into Washington and that people at the Board do review a portion of those

examinations, looking for consistency and making sure policies are

being enforced.

Mr. KUCINICH. Now, in this particular case, the record shows

that the examiner’s conclusion was not questioned by a Federal

oversight body and it basically concurred. Why was this examiner’s

conclusion, which I had recited to you earlier, not questioned by a

Fed oversight body?

Ms. BRAUNSTEIN. Well, I don’t know that it wasn’t. If a conclusion is questioned, it doesn’t mean that would necessarily show up

in the report. What you see in the report is the final conclusion.

That doesn’t preclude that there was some discussion. And there,

again, it is nothing that I can reconstruct, to tell you whether that

happened or not.

But I also just want to add that our examiners undergo very rigorous training, specifically in CRA and fair lending. That is a specialty at the Fed. These examiners are doing consumer compliance

work. They are not doing safety and soundness work. They are

trained. There is always a degree of subjectivity and judgment that

goes into these examinations. And we train our examiners. We continue to—we have continuing training for them. And, at some

point, we have to trust their judgment.

We do discuss—management does discuss conclusions with them.

And so, that would not necessarily show up in the report, but it

doesn’t mean it didn’t go on.

Mr. KUCINICH. I would like you to look at this map now. And we

had described the map to you earlier. Would you call this reasonable?

Ms. BRAUNSTEIN. Well, I can’t see what the legend is over there,

what the different colors mean.

Mr. KUCINICH. The red area represents no branches. And it also

happens to be the city of Detroit.

Let me refresh your memory about the context of this, OK? You

see a donut hole around the city of Detroit, which is 81 percent African American. The Department of Justice filed suit against Old

Kent Bank in 2004 for violating the Fair Housing Act and the

Equal Credit Opportunity Act. The Department of Justice cited a

Section 228 violation and said, ‘‘Instead of defining its assessment

area in accordance with Regulation BB, Old Kent Bank circumscribed its lending area in the Detroit MSA to exclude most of

the majority-African American neighborhoods by excluding the city

of Detroit. And as of March 2000, Old Kent still did not have a single branch in the city of Detroit.’’

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Now, I am contrasting that with the statement that the Fed

made with regard to Old Kent’s compliance with anti-discrimination laws. These are quotes from the 1997, 1999 and 2001 exams.

‘‘The bank is in compliance with the substantive provisions of antidiscrimination laws and regulations, including the Equal Credit

Opportunity Act and the Fair Housing Act. No substantive violations were noted. The bank is also in compliance with the technical

requirements of the CRA.’’

The public file and CRA notices were reviewed and deemed to be

in compliance. I am going to ask you again, look at the map. Would

you call it reasonable?

Ms. BRAUNSTEIN. I find it very troubling, but, again, there are

other things that go into the consideration of an assessment area,

such as the banks, what is reasonable for the bank to be serving,

considering the location of its branches. Like I say, I don’t have——

Mr. KUCINICH. I’m going to have to stop you a minute. I want

you to look with your eyes, OK? Then I want you to look with your

heart and see if you can tell me, when you look at that, everything—you have an African American population there in the city

of Detroit. It corresponds neatly with what’s in red. Then you have

the rest of the area in terms of assessments. And you see where

the CRA it said that they are in compliance; and they are clearly

not, if you look at the map.

Ms. BRAUNSTEIN. Well, like I say, I find this very troubling. And

I will say this. If this were to come before me today on an exam

that we were doing, I would have serious questions about it.

Mr. KUCINICH. Would you say this is what red-lining looks like?

Ms. BRAUNSTEIN. It certainly could, yes.

Mr. KUCINICH. Did the Fed refer the Old Kent case to the Department of Justice?

Ms. BRAUNSTEIN. No, it did not.

Mr. KUCINICH. Why didn’t the Fed take any of its enforcement

actions before then?

Ms. BRAUNSTEIN. That I cannot answer.

Mr. KUCINICH. And why didn’t the Fed at least hold the public

hearing during any one of its CRA exams?

Ms. BRAUNSTEIN. Well, are you talking about applications?

Mr. KUCINICH. I’m talking about during the process of an examination, review of the CRA.

Ms. BRAUNSTEIN. We don’t hold public hearings during examinations.

Mr. KUCINICH. That’s the point.

Ms. BRAUNSTEIN. We hold public meetings during applications.

Mr. KUCINICH. Well, OK, I am talking about applications.

Ms. BRAUNSTEIN. OK. We hold—and I will tell you in that sense

I know in terms of the Fifth Third application.

Generally in any application we are looking most closely at the

record of the acquiring institution. Because especially if there are

problems with the target and the acquiring institution has a good

record, we have conversations with them to make sure that they

are going to bring the target institution up to the standards that

they currently have.

Mr. KUCINICH. Now your enforcement authority under the CRA

is the ability to assign a low rating, which would impede a banking

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institution’s ability to expand by merging with other banks, acquiring other companies and branching. You didn’t exercise that authority when you examined Old Kent, but you had another chance

to exercise your authority when Old Kent applied to merge with

Fifth Third Bank. Did you hold a public hearing to discuss the

merger?

Ms. BRAUNSTEIN. No, we did not.

There are a couple of things there. One is, the Justice Department investigation was still under way so we had absolutely no

idea of what their findings were at that time. Also, as I said before,

we are looking much more closely at the acquiring institution rather than the target, and Fifth Third was the acquiring institution.

Mr. KUCINICH. Did you see the map, though? Did anybody look

at the map, and—I mean, let’s set aside the Department of Justice

for a minute.

Ms. BRAUNSTEIN. During an application, we generally look at the

exams. The exams figure into the process, the previous examinations.

Mr. KUCINICH. And so you didn’t hold—you did or didn’t hold a

public hearing?

Ms. BRAUNSTEIN. We did not hold a public——

Mr. KUCINICH. Did you condition Fifth Third’s acquisition on

serving Detroit?

Ms. BRAUNSTEIN. As far as I know, we did not.

Mr. KUCINICH. Why didn’t you do that?

Ms. BRAUNSTEIN. I don’t know. I can’t answer that.

Mr. KUCINICH. All right. You could have done that; is that correct? You have the power to do that?

Ms. BRAUNSTEIN. We do have the power to condition.

Mr. KUCINICH. An acquisition. So you had the power to condition

an acquisition on serving a population, which, by just a quick look

at a map, you could tell that there was red-lining going on and you

didn’t do it. Now did you solicit feedback from the community to

decide what the acquiring bank would need to do to better serve

the community?

Ms. BRAUNSTEIN. With any application we have a public comment process.

Mr. KUCINICH. And what about the public comment process on

that particular case? Did you go out to the community? You didn’t

hold hearings, you said, but how was the public able to know that

there was an opportunity to come?

Ms. BRAUNSTEIN. Anytime there’s an application, it is advertised

in community groups or anybody—citizens, whoever, other financial institutions—anybody can file public comments with us.

Mr. KUCINICH. And how are people advised of that?

Ms. BRAUNSTEIN. We—its—there’s a newspaper notice. There

is—you know, generally, it’s never been a problem for people to

know about that.

Mr. KUCINICH. Did you take out newspaper ads in the African

American community to let people know that they could comment?

Ms. BRAUNSTEIN. I am not aware of exactly where it was advertised at that time. That was a number of years ago.

Mr. KUCINICH. I think it would be instructive.

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Let me make clear something for those who are in the audience

and may be watching, that staff has met with the Fed and there

really aren’t any surprises, that we’re going in-depth here into talking about Old Kent. This is not something that we’re just pulling

out of a hat. This is a very serious question that is quite blatant.

And, of course—as a personal concern, I know Mr. Davis, who

represents Chicago, has a personal concern here; and I share it.

But we also have a situation in Cleveland where we see people

couldn’t get loans. They are thrown into subprimes, they end up

not being able to meet the requirements, they lose their homes, and

we’ve got whole neighborhoods that are being decimated.

And, you know, the public policy issue here, frankly, is one where

if banks are permitted to avoid the requirements of the CRA and

then people can’t get the loans, they then get thrown into the

clutches of subprime lenders, the most predatory of lenders out

there; and then they are going to get destroyed financially and lose

their homes.

So, to go back to the Fed, do you understand why this committee

feels the Fed has not only a legal obligation here but a moral obligation to the people of the United States to exact oversight in a

manner which insists on compliance with the letter of the law? Do

you understand why this committee has a concern about the imperative of Fed enforcement here?

Ms. BRAUNSTEIN. Congressman, we share that concern. We take

these matters extremely seriously, and we have shown that

through our fair lending record, our record of referrals to Justice.

Like I say, I cannot explain how this case happened, but we have

not hesitated to pull the trigger when we have found red-lining in

other financial institutions. It is not like we have no record of pulling the trigger on cases like this.

Mr. KUCINICH. Well, you know, when you look at the wreckage

that subprime loans are leaving in neighborhoods across America

and when you look at the lack of the apparent lack of effective

oversight of CRA—because if people had the money, if they got the

loans from the prime lenders whose responsibility it is under CRA,

they wouldn’t have been thrown into the arms of the subprime

lenders. That’s the point.

With all due respect—and, again, I am very grateful that you are

here; we couldn’t do this hearing without you—but we also can’t

have an effective oversight without the Fed’s active participation.

And at this point, notwithstanding your profession of concern, a

quantitative assessment does not rest in your favor. And while the

Fed and all the members of the Fed can go home tonight and rest

easy in their townhouses and their apartments and in their homes,

as they should be able to do, there are millions of Americans who

maybe are losing their homes and are out of their homes and some

of them on the street. This is not a small matter.

The Chair recognizes Mr. Davis.

Mr. DAVIS. Thank you very much, Mr. Chairman.

Ms. Braunstein, let me ask about voluntary corrective action.

Does this regulation suggest that if a bank corrects its discriminatory behavior, then the regulator will not reflect the discriminatory

practice in the CRA exam?

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Ms. BRAUNSTEIN. No, it does not suggest that at all. In fact, even

if a bank corrects its behavior, if there was a pattern of practice

of discrimination, we have reason to believe that there was, despite

a correction, we will make a referral to Justice. We also will reflect

the discrimination in the public evaluation of the CRA report.

Mr. DAVIS. So you’re not grading the bank based on its performance exactly, are you? Or is it some performance and some of what

it says it’s going to do?

Ms. BRAUNSTEIN. Well, there’s a difference between—I’m trying

to—I’m not sure I understood your question, but there’s a difference between the CRA rating that is given and the public evaluation report. The rating is part of the report. So I think what

we’re saying, and this is true of all of us, is that in some cases a

finding of discrimination may not result in a downgrading of the

rating. However, even if that happens, it will be reflected in the

written report on CRA.

Mr. DAVIS. Let me ask you, if a bank like Old Kent says, in 2001,

we’re sorry, we’ll open up a branch in the city of Detroit, even

though we haven’t done so as of yet, we’re legally mandated to do

for the past 5 years, would this bank get a lower CRA rating or

would this satisfy the requirement?

Ms. BRAUNSTEIN. If we find a red-lining violation, first of all, we

would be mandated to refer that to Justice; and, second of all,

something that egregious would likely result in a downgrade in this

hearing rating.

Mr. DAVIS. And let me go to other members of the panel.

Of course, we have data that reveals a disproportionate share of

African American assessments, African American and Latinos receiving higher-rate home loans, notwithstanding location, income.

We see non-disclosure in fair lending exams and lack of transparency, thereby compromising entire communities of their right to

participate in public negotiations; and CRA’s lack of uniform standards where reasonableness of assessment areas, as well as nature,

extent and strength of evidence of discriminatory practices are at

the discretion of the examiner.

I guess what I’m really trying to arrive at is this business of

when is enough or how do you decide? The question then becomes,

what level of evidence is sufficient to adversely impact an agency’s

CRA valuation?

Ms. Thompson, perhaps I would——

Ms. THOMPSON. Well, a couple of things. At the FDIC, consumer

protection is very important. Not only do we look at access to credit, which was very relevant 30 years ago and it is just as relevant

today, we look at cost of credit. Because in many of the low-income

and moderate-income neighborhoods, they are proliferated by highcost credit products that may or may not be offered by financial

regulated entities such as financial institutions.

At the FDIC, we are encouraging unbanked and underserved

persons to come into the banking sector. And through our examination process we think one violation is one too many, and we always

advise the bank to take corrective action.

To the extent that we find patterns and practices of either denial

of credit or high-cost credit, we take action relatively quickly; and

we take that information and we factor it into the rating for the

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compliance exam for that institution and also the CRA rating. This

year alone the FDIC has made 13 referrals to the Department of

Justice for fair lending issues, and we’ve also downgraded two institutions in 2007 with respect to their CRA rating. This is something very important to the FDIC, it is important to our chairman,

and we want to ensure that our examiners take corrective action

where appropriate.

Mr. DAVIS. Thank you.

Ms. Yakimov, how would you respond to that?

Ms. YAKIMOV. We look at the fair lending record of our institutions very closely. We look at the HMDA data. We combine it with

factors that aren’t included in the HMDA data like loan to value,

the broker compensation, credit score. And fair lending reviews

take place at every comprehensive exam, every 12 to 18 months.

We do target reviews. We’ve, as I said, built some additional models and tools to run the data through.

And, again, if we see evidence of discrimination or other illegal

credit practices, that will have an impact. Not only will that be reflected in the fair lending evaluation, but it will also have an impact on the CRA rating. And we look again at the scope of the evidence, we look at the CRA performance of the institution in its totality, but that’s a significant factor if we do find those concerns.

Mr. DAVIS. Ms. Jaedicke.

Ms. JAEDICKE. Congressman, findings of illegal credit practices of

discrimination adversely affect the CRA ratings of national banks.

Equally important, a poor lending record by a national bank or a

bank that is not serving the credit needs of its community, including low- and moderate-income areas, is equally likely to get an adverse CRA rating.

Mr. DAVIS. You know, I’m always amazed that, in spite of the

fact that we’ve had CRA now for 30 years, and yet, when we look

at certain communities in certain areas, we don’t seem to get a tremendous amount of difference in some of those. The same groups

continue to have the most difficult time, still continue to pay the

most for credit, still seem to not be able to acquire, in many instances, decent credit.

Is there something else that any of you might be able to think

of that might be missing? I mean, I happen to actually live in the

community that was a hotbed of the generation of activity that resulted in CRA. A woman named Gail Cincotta used to live in the

same neighborhood where I lived. As a matter of fact, I was a

member of Gail Cincotta’s first organization, the Organization for

a Better Austin, before she left and came to Washington and organized the National Training and Information Center. So I’ve kind

of seen this over the period of time.

What else could perhaps—if there’s anything?

Ms. THOMPSON. Congressman, I happen to have been privileged

to have been born and raised on the south side of Chicago, which

is the home of CRA, as you well know, but I can tell you that at

the FDIC we take a very proactive approach to economic inclusion.

We have within our organization a concerted effort to try to bring

the unbanked and underserved persons that the chairman referenced in his opening statements into the banking sector. In eight

territories we have formed alliances with community groups, finanVerDate 11-MAY-2000 11:12 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 U:\DOCS\49624.TXT KATIE PsN: KATIE
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cial institutions and other regulators to try to find out why people

are not coming into the banking system, and we are trying to figure out ways to encourage them to participate more fully in the financial services that are offered by regulated entities. Because,

again, so often in these communities many of the occupants are

subject to higher-cost products, whether it is financial services or

not.

This is a very important initiative to our chairman, and we do

take proactive steps to try to encourage the regulators to work with

community groups and financial institutions to try to better address this issue.

Mr. DAVIS. Ms. Braunstein.

Ms. BRAUNSTEIN. Congressman, I would add to that we don’t lose

sight of the fact of the accomplishments of CRA over the last 30

years. It has been documented differently in different places, but

I don’t think anyone would argue that CRA has brought billions of

dollars into neighborhoods that previously had very little, if any,

bank investment or bank participation.

I do believe there is a lot more to be done and needs to be done

both on the part of the regulators as well as on the part of the financial institutions. I also think that, unfortunately, CRA is not

the panacea or the answer to everything, all the problems that

exist economically in low-income communities, and it will never be

able to solve all the problems.

Ms. YAKIMOV. I would add we have seen a real democratization

in credit, and I think it is incumbent upon us for both sides of our

houses to function effectively. So we’re talking a lot about CRA and

the provision of credit particularly to low- and moderate-income

people. We want the types of credit that are sustainable, that allow

people to stay in their homes. So we need to make sure that underwriting is what it ought to be. That’s another part of what we’re

called upon to do. And I think we issued guidance in the last—recently going back to 2006 that really began to move the industry

to what our expectations were in terms of sound underwriting.

They are both important.

Ms. JAEDICKE. I would add that I think it is very important for

us as regulators to help keep the dialog going between banks and

community groups. I know at the OCC in the last 5 years we’ve

held a thousand meetings with different community groups around

the country, trying to understand what the needs are so that we

can make better assessments in our CRA exams and we can help

banks understand what communities need.

I also think financial literacy is always an important issue, and

to the extent that we can contribute as regulators in those areas

I think we should. And I think we need to closely look at what’s

happening in the subprime market and the environment we are

working in now to see if we can learn how people are being affected

by the current environment.

Mr. DAVIS. Well, let me thank you again, Mr. Chairman. Let me

thank all of you. I will have to dash away to something else.

But I do want to say that I would certainly agree, relative to

some of the impact that CRA has actually had, even from a personal experience, I actually sat on the board of a bank for 10 years

as a result of my community being engaged to the extent that we

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held up the purchase of a bank until there was an agreement with

our reinvestment policy, and it has been a good experience. And I

actually sat there with no personal interest in the bank, I didn’t

own any of the stock and only left after I got elected to Congress

because I wouldn’t have time to go to the meetings at all. So I

think that CRA has had some impact, can have even more; and I

think an activated community is probably one of the best things

that I really can think of to help make sure that the concepts really

work.

So I thank you all; and I thank you, Mr. Chairman, again for

your indulgence.

Mr. KUCINICH. Mr. Davis, it’s an honor to have you on this subcommittee, because you and I share a passionate commitment to

people in urban areas, and these economic issues are fundamental

to people’s survival.

I just heard Ms. Jaedicke talk about financial literacy; and, you

know, it’s a generally accepted provision in the marketplace to say

caveat emptor, let the buyer beware. People buy credit. When you

consider the fact that bankruptcies are at an all-time high in the

United States, that foreclosures are at an all-time high, this isn’t

just a question of financial literacy. This really goes to the heart

of why we’ve asked the regulators to come before this committee.

This is a question of your responsibility.

No one questions the efficacy of the Community Reinvestment

Act. I was one of the first mayors in the United States to use the

Community Reinvestment Act almost 30 years ago to benefit—29

years ago—to benefit a neighborhood in the city of Cleveland. You

know the efficacy of the Community Reinvestment Act is not at

issue here.

We have a crisis in America with people getting tricked, having

their lives ruined by predatory lenders and by prime lenders who

are not fulfilling their obligations under the Community Reinvestment Act because the regulators don’t make them do it.

Now, I just want to go down—so, thank you, Mr. Davis. I just

want to go down the panel. Ms. Thompson, when is it discriminatory practice egregious enough to result in a CRA failure? What

does it take?

Ms. THOMPSON. Well, we think one discrimination is one too

many. And we do look at the institution’s record with regard to

their lending practices to persons, and we try to determine whether

or not it is a pattern or practice, and we do require institutions to

take corrective action.

At the FDIC, we do have a number—we have four institutions

that are substantially not complying with regard to their CRA rating, and we have about 31 are in the needs-to-improve category.

Lending and discrimination is something that we take very seriously at the FDIC. We have an extensive training program where

we train our examiners to look at fair lending issues, to look at

community reinvestment, to talk to people in communities and get

as much information as we can.

The CRA rating is a huge reputational issue for an institution,

and we want to make sure that we have all the facts that we possibly can to make a decision. Again, we take pride in our examination program, and even one violation is one too many.

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Mr. KUCINICH. I appreciate your saying that.

I’m going to ask staff here in light of some of these comments,

and maybe you are already working on doing this, to look at the

issue of mergers and acquisitions, the growth of the value of banks

during the period that’s under study here to see how banks have

been able to increase their wealth, their holdings while we have

seen a commensurate decline in the ability of people in the inner

cities to get credit. I want to take a look at that.

I would like—I want to go back to Ms. Braunstein. What takes

an applicant to the point of failure? When is a discriminatory practice egregious enough to result in a CRA failure? What does it

take?

Ms. BRAUNSTEIN. Well, I can’t—there is no specific measurement

of that, but I will tell you when we look at their CRA evaluation,

we are looking at the totality of them serving the convenience and

needs of their communities.

As part of that, we do look at whether or not there are findings

of discrimination. There are cases—we’re talking here in the case

of a red-lining case where there is—that would be a very egregious

case. However, we find discrimination on things like spousal signatures that were required that shouldn’t have been, which is also serious and we make referrals to Justice on this, and that may show

up in the evaluation. But if it took place in a very small part of

the institution, maybe with a rogue loan officer, and it is a larger

institution and otherwise it is doing a good job of serving its community, it could be that CRA rating is not downgraded in that case.

Mr. KUCINICH. Spousal signatures, OK. What about race?

Ms. BRAUNSTEIN. Racial discrimination, we would look at very

closely and see—I would think that would result in a downgrading.

I can’t sit here—I was sworn in—and say that there was no other—

there is no possibility of a case where that would not—where that

would not be——

Mr. KUCINICH. Yeah. Students in class, sorry, your work is not

good enough. We can’t give you a C. We are going to downgrade

you to a D. Or students in class, sorry, you fail. There is a world

of difference, is there not, between an institution being downgraded

and failed on a CRA examination?

Ms. BRAUNSTEIN. There is absolutely a big difference.

Mr. KUCINICH. Do you want to explain to the committee what the

difference is between being downgraded and failed?

Ms. BRAUNSTEIN. You can be downgraded from an outstanding to

a satisfactory, and you are still getting a passing rating.

Mr. KUCINICH. Right.

Ms. BRAUNSTEIN. Like from an A to a B.

Mr. KUCINICH. If you failed—somebody fails a test in a school,

they don’t pass the grade, what happens when someone fails a CRA

examination?

Ms. BRAUNSTEIN. Well, it is publicly available information, so it

causes, you know, a problem for them in that area.

Mr. KUCINICH. Like for example?

Ms. BRAUNSTEIN. Well, for one thing, it’s an embarrassment to

the institution publicly. It also does cause them problems in the application process, which I’m sure is what you’re getting at.

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Mr. KUCINICH. Right, right, right. So if it causes someone a problem in their application process, what does that mean? Spell that

out a little bit. What would be the implications?

Ms. BRAUNSTEIN. Well, the implications would be it would be

much more difficult for them to expand their operation.

Mr. KUCINICH. To?

Ms. BRAUNSTEIN. Expand their operations.

Mr. KUCINICH. Right. And so really would limit their growth, correct?

Ms. BRAUNSTEIN. It would be a factor that would be considered,

and it make the hurdle rate much higher for them to get an application approved.

Mr. KUCINICH. Right. So what would it take, what would someone have to do to really fail?

Ms. BRAUNSTEIN. I—every bank is—for one thing, we don’t do

CRA on a bell curve, so we look at each bank in and of itself——

Mr. KUCINICH. So it is pass/fail? Is it pass/fail?

Ms. BRAUNSTEIN. No, it could be, as is the case, most people

pass. We’re not guaranteeing that there are going to be so many

failures and so many As on the other end of the curve. And it is—

this is a rating that is done by looking at the totality of the banks

serving their community credit needs; and depending on the size of

the institution, that would also make a big difference.

Mr. KUCINICH. OK.

Ms. BRAUNSTEIN. If you have one of these huge national institutions and they have a problem in one little market and then in the

other 150 markets they are serving they are doing just fine, how

much do you weigh that? I mean, there are subjective judgments.

Mr. KUCINICH. That’s very interesting. Because let’s say an institution had a little problem in Detroit, let’s say, an 81 percent African American population in the city. All of a sudden, the credit

dries up. They are serving the rest of the area very well nationally

with interstate banking. Conceivable. Someone could look at an

inner city area and be out of it, serve every place else very well.

Well, we just move on.

This is what I’m concerned about because everyone on the panel

here, you only failed 225 banks out of 60,000 plus banks evaluated

in the past 17 years; and here we have a massive wave of foreclosures going on. There’s a connection. This committee is determined to get to the connection, and someone has to take responsibility here. We have all the regulators here.

Now, I want——

Ms. BRAUNSTEIN. Taking discrimination out of it, it is not surprising that most banks pass CRA, considering it has been around

for 30 years, and they know what it is that they are supposed to

do at this time. In that sense, that is not a surprising statistic.

When they are told the same thing over and over again, most

banks get it in terms of CRA at this point in time.

Now, you could postulate that there is something inherently

wrong with CRAs that banks should, you know, could pass, but it

is what it is, and most banks do get it. And after 30 years, as with

most other parts of the examination, whether it is safety and

soundness or otherwise, banks know what they are supposed to do.

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Mr. KUCINICH. We are going to move on, but I just want to make

a comment. This is a copy of the Constitution of the United States.

Now taking the 13th and 14th amendment out of this, there is a

lot of people that could pass muster in a lot of reviews, but there’s

a reason why we have protection under the law, there is a reason

why the Department of Justice will inevitably have to go after

someone. Because the underpinnings of someone’s failing a review

is a violation of someone’s civil rights.

So I want to go to Ms. Yakimov here. What is a discriminatory

practice? When is it egregious enough to result in a CRA failure?

Ms. YAKIMOV. We would look at the institution’s fair lending

record. We would look at whether or not we found a pattern of

practice for material fair lending concerns. That would be assessed

in our fair lending exam, which is kind of a separate function from

the CRA exam, but they connect at the point we are looking at the

institution’s record of meeting the credit needs, financial services

needs of its community.

So we look at its lending performance, its penetration. How much

lending does it do in the assessment area, how many investments

and how many services, depending upon the size of the institution.

We look at the CRA performance within all of that context and

then look at whether or not we found problems with fair lending

and other illegal credit practices. And if we find that, in 37 cases

since 1990 at OTS we have had these downgrades, many needs-toimprove or even worse. So it’s——

Mr. KUCINICH. You don’t want to fail them, though, do you?

Ms. YAKIMOV. Well, no, I don’t think that’s the case. I think our

examiners, if they identify failure to meet the needs of the community within the CRA context, failure to abide by the fair lending

laws, that absolutely is something that we wouldn’t hesitate to act

upon and to downgrade the institution. So we would look at their

whole record and we try to take all of that into context.

Mr. KUCINICH. You know, see, what strikes me in this testimony

so far is that there seems to be an aversion to talking about failure.

That could be one of the underlying reasons why we’ve ended up

with so many foreclosures. With the proliferation in the subprime

market, with prime lenders not having to abide by the letter of the

CRA, that this all fits in together. Because you just don’t want to

talk about failure. Because there is some kind of a culture here

that regulators have.

And this isn’t, by the way—this isn’t to cast aspersions on this

group of regulators, because we know in many areas that industries have enormous influence in the regulatory process all across

the economy. So it isn’t just like there’s a massive disconnection

here. In a sense, there is a consistency; and we appreciate you

being forthcoming as you are to try to help us work it out.

Now, I would like to——

Ms. BRAUNSTEIN. Congressman, we did downgrade First American Bank for red-lining to substantial noncompliance, which is the

lowest rating.

Mr. KUCINICH. There is a difference between downgrading and

failing, because what happens is——

Ms. BRAUNSTEIN. That failed them. That’s the failing grade.

Mr. KUCINICH. OK, that was a failure. Thank you.

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Ms. BRAUNSTEIN. Yes, yes.

Mr. KUCINICH. Thank you.

I want to go back to Ms. Yakimov. I want to ask you about the

Flagstar case. You had a CRA examiner award Flagstar a satisfactory grade when a court found Flagstar liable for discriminatory

practices against minority borrowers. Now is that true?

Ms. YAKIMOV. Yes.

Mr. KUCINICH. How was your CRA examiner able to give a satisfactory grade to Flagstar? How did that happen?

Ms. YAKIMOV. Right, it is a more than legitimate question. I will

share with you what I pieced together as we looked through the

exam reports and so forth. This is in the public performance evaluation. I have a little feedback here.

Here—our examiners identified a strong record in Flagstar. I will

give you a couple of examples of the things that they identified in

the performance evaluation. One was, they originated $23.6 million

in community development loans. They exceeded their peers in

lending to low and moderate income census tracks and low to moderate income individuals. They made significant qualified investments, $2.3 million in 2001; $9.6 million in 2004. They expanded

their branch network, including in low and moderate income census tracks; 13 percent expanded their branch—their footprint in

low and moderate income census tracks.

So we looked at all of that and still—we looked at all of that; and

our examiners felt that their record, because of—those were just

some examples—and looked at their peers based on asset size and

determined that normally that institution would have been awarded an outstanding CRA rating but because of the concern about the

litigation we downgraded the rating in 2001 to satisfactory.

So our CRA reg—and we are sure the same reg is on this point—

is that a finding of discrimination or other illegal credit practice

has an adverse effect. It has an adverse impact. It doesn’t go as far

as—it doesn’t go as far as to put parameters around there.

In other words, if you meet the overall spirit of CRA and all in

the lending, investment and services, the reg doesn’t take—from

the statute doesn’t take you from here, outstanding, to all the way

to substantial noncompliance. It does say it has an adverse effect,

impact; and that’s what happened in this instance.

Mr. KUCINICH. And Flagstar was—appealed the decision, right?

Ms. YAKIMOV. That’s my understanding.

Mr. KUCINICH. Even if Flagstar was appealing the decision,

didn’t your examiners find the discriminatory practices we are talking about during the CRA examination?

Ms. YAKIMOV. The evaluation of fair lending would have been

dealt with in a fair lending exam, as opposed to a CRA exam per

se where we bring all the tools and the models to bear in assessing

fair lending.

Mr. KUCINICH. If I may, wasn’t it true that OTS found it? It is

just a different division.

Ms. YAKIMOV. Oh, yes. Oh, yes, absolutely. That’s right.

Mr. KUCINICH. So what I’m wondering, if you could help this subcommittee, how could your examiners overlook this discriminatory

practice? Was there deficiency in the examination process itself?

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Was your CRA examiner underqualified? Could you let this committee know?

Ms. YAKIMOV. Sure. The reg calls upon us to look at the extent

of the evidence, the quality of the evidence, the corrective actions

that were taken, the policies and procedures to prevent illegal discrimination. Those are all the factors that we consider when we determine the extent of a downgrade, and so our examiners looked

at all that.

I’m not an attorney, and I especially don’t want to say anything

that’s not quite right. But my understanding of the litigation in

Flagstar’s case was that there were two cases, one fairly small in

terms of a class action, a fairly small number of litigants. Most of

those litigants were dismissed in the first area of litigation. I believe it was 1994.

The second case again resulted in—resulted from a policy that

Flagstar put in place to prevent charging minorities more than

nonminorities. So they had a policy in place that said, to my understanding—I am happy to firm this up more, if you like, after the

hearing, but my understanding in looking at this was they said,

you know, we want to make sure that we don’t charge minorities

more than nonminorities. So we have a policy where we’re going to

cap the overage, the amount that can go into broker compensation,

basically, the overall cost of the loan for nonminorities at—they are

going to potentially be paying more than minorities. So it was a

case of reverse discrimination.

And so the second case was about reverse discrimination, where

I think a Caucasian couple had alleged this problem.

And so, in some instances, you have an institution that has

maybe made a judgment to change their policy to make sure that

they didn’t discriminate against in minorities and it resulted in

this policy.

But to your broader point, we did look at the litigation, we looked

at the scope of it, we examined their fair lending policies, procedures, their HMDA data, and, based on all that, we determined

that a downgrade was called for, and it did take place.

Mr. KUCINICH. I want to ask something. Because we are right on

this case, and this is somewhat mystifying, and perhaps you could

help explain it to the subcommittee. Instead of downgrading

Flagstar, you gave it an outstanding rating. You actually gave

them a higher grade after a court ruled on summary judgment that

its written policy was discriminatory.

Ms. YAKIMOV. The policy I just mentioned of reverse discrimination?

Mr. KUCINICH. I want to know how could that happen? Could you

explain how that could happen, that they actually failed, but they

passed?

Ms. YAKIMOV. I’ll attempt to. We downgraded in the prior CRA

exam. The 2004 CRA exam did not reflect the 2003 class action

suit, again a fairly limited scope of affected borrowers. What we did

look at was the corrective action the institution had took, we looked

at their overall CRA performance, their loan penetration and low

moderate income census tracks, their service activities, their investments; and based on all of that, some of the data that I mentioned earlier, we——

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Mr. KUCINICH. So you’re saying the written vio—their written

policy was not enough of a violation, is that what you’re saying?

Ms. YAKIMOV. I’m saying that the examiners looked at the totality of Flagstar’s CRA performance and determined in this instance

there wasn’t a second downgrade. You are right. It was—an outstanding rating was given. I would say, Chairman Kucinich, that

in our examination process there is a level of judgment where wellintended, skilled and trained people may arrive at different conclusions. I wasn’t privy to this case.

Mr. KUCINICH. I understand.

Ms. YAKIMOV. But——

Mr. KUCINICH. In retrospect, what does it look like to you?

You’ve got someone who—you have a summary judgment, written

policy was discriminatory. Instead of a downgrade they got an upgrade, an outstanding.

Ms. YAKIMOV. Right.

Mr. KUCINICH. How does—what does that say?

Ms. YAKIMOV. I think it is a legitimate question that you’ve

asked.

My read of the exam reports and talking with the examiners, the

reason they arrived at the conclusion to award an outstanding rating was based on totality of how——

Mr. KUCINICH. And that they promised to take corrective action.

Ms. YAKIMOV. Well, it was a rendering of their—for example, an

expansion of their branch network, their overall lending activity,

their service activity. The sense was that this institution, based on

its asset size, had an outstanding CRA performance. A matter of

judgment, given the litigation, should there have been a second

downgrade? You know, it’s—I think it’s a fair question.

Mr. KUCINICH. Well, do you think that it’s a fair observation to

say that, in this case, the bank wasn’t graded on its performance;

instead, it was graded on what it promised to do?

Ms. YAKIMOV. No, I don’t. I think we looked at their performance

leading up to that examination cycle. We looked at the data, not

a promise, but we looked at the data.

The correction action—corrective action had taken place prior to

that exam report, the second CRA exam rating.

Mr. KUCINICH. Didn’t Flagstar expand its banking operations to

an additional State as well as to an added metropolitan area in the

States it was in at this time? And shouldn’t Flagstar lose its privilege to open new branches, to acquire other holdings or merge with

other banks, given their record?

Ms. YAKIMOV. The CRA rule says a noncompliance needs to improve. A failing CRA rating is the trigger point for impact with respect to applications. The assessment of Flagstar CRA performance

did not rise to that level. It was downgraded once. It wasn’t downgraded a second time.

And, yes, they had taken corrective actions. For example, they

eliminated that policy. They made—they reimbursed borrowers

that were impacted by that reverse discrimination policy. And,

again, they looked at—our examiners looked at the institution’s full

record with respect to CRA, and that’s the determination that we

came to.

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You mentioned—you asked before about levels. And, yes, the examination comes in, there’s a review at the regional office, there

was a determination made that, looking at the totality of the performance, that was the appropriate rating.

Mr. KUCINICH. So Flagstar gets an upgrade. Are you ever concerned that a case like this could send a signal to the rest of the

industry: Don’t worry, practice discrimination, the worst thing that

can happen is you get caught, get a slap on the hand, higher grade

maybe. Does that concern you?

Ms. YAKIMOV. What concerns me is that we carry out our responsibility with respect to fair lending, with respect to CRA and compliance across the board in an effective way that looks at the totality of the circumstances. In 37 cases, we have made downgrades to

our institutions’ CRA rating.

Again, I take your point, though. I don’t want to sound overly defensive. I think——

Mr. KUCINICH. What we’re trying to do is to look at the relationship between the role of the regulators, the enforcement of the CRA

or lack thereof, its implications for access to credit, for people in

low- and moderate-income areas——

Ms. YAKIMOV. Right.

Mr. KUCINICH [continuing]. The impact of discriminatory

lending——

Ms. YAKIMOV. Uh-huh.

Mr. KUCINICH [continuing]. The growth of subprime loan

products——

Ms. YAKIMOV. Uh-huh, uh-huh.

Mr. KUCINICH [continuing]. In those same areas, implications for

predatory lending, the rise in bankruptcies and foreclosures.

Ms. YAKIMOV. Uh-huh.

Mr. KUCINICH. This is all part of the whole, and we have regulators here who I think could play a role in starting to give the

public a little bit more protection.

So I’m looking, for example, Ms. Yakimov, between 1999——

Ms. YAKIMOV. Right.

Mr. KUCINICH [continuing]. And 2006, according to the information the committee has——

Ms. YAKIMOV. Uh-huh.

Mr. KUCINICH [continuing]. You only referred two cases to the

Department of Justice, once in 2001 and once in 2004. Now, this

could on one hand suggest that the banks that you regulate are fair

lenders, which is clearly not the case in light of the Flagstar case,

or it could suggest you are enforcing sanctions left and right, or it

might suggest that your threshold for discrimination is very high

and perhaps inconsistent with the Fair Housing Act and the Equal

Credit Opportunity Act. Which one is it?

Ms. YAKIMOV. Well, if I may, I’m happy to address that, but I did

want to go back to——

Mr. KUCINICH. You know what? First answer my question. Then

go back to what you want to talk about.

Ms. YAKIMOV. Sure, that’s fine.

You asked about our record of referring fair lending violations to

the Department of Justice. The Director, John Reich, has been on

board at OTS for about 2 years and has made it a real commitment

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in bringing on a team, including myself, to take a robust look at

how we examine compliance. We’ve made some changes to further

strengthen our compliance examination program, including a recent action to make sure that our compliance examiners are focusing on compliance, making sure that we do—we add more tools to

look at fair lending, more models, more data to manipulation.

I believe that those actions will result in even more robust fair

lending assessments, and we have communicated that throughout

our agency.

I would say that our examination force is not reluctant to refer,

but I do believe that OTS, I think for all agencies, is the process

of continually looking at how to strengthen your training, your

tools and your focus is important; and that’s something that we’ve

taken very seriously, including a robust look at top to bottom in

compliance over the last 14 months. We’ve made a series of

changes.

So I take your point. The data kind of speaks for itself. I believe

with some additional actions that we’ve taken that there may be

more activity in that area.

Mr. KUCINICH. What I would like you to do, since you mentioned

that you made some changes, and I would ask that each of the regulators represented here provide to the committee what steps—specific steps that you have taken in light of what we’ve learned over

the last few years with the dynamics that we’re discussing here,

the dynamics being questions about CRA, the level of CRA enforcement, the access to credit in low- and moderate-income areas, foreclosure rates, factoring in subprime lending to come up with a—

both what you can do from this point on to further strengthen the

enforcement of the Community Investment Act and, based on your

experience with that act, to inform this committee if there’s any

changes in the CRA that the Congress could make that would

make it easier for you to be able to perform your regulatory functions.

Now, if you could do that in our—because the committee is going

to continue to pursue this matter. And we’re not—I’m not interested in ‘‘gotcha’’. I’m interested in trying to see what we can do

as a matter of public policy to go from this point on to provide some

protection for American families who are trying desperately to get

access to credit. We still—you know, even with all the foreclosures,

the problem remains. It’s intensified.

I just want to go to Ms. Jaedicke here, and this will be the last

question that I’m going to pose to the members of the panel. I want

to thank you for your patience here. This is one of the most critical

opportunities that we have to see if we can make any changes that

would provide some additional protection to American consumers

who want to be homeowners.

According to a 2003 National Training and Information Center

Study, which looked at the year 2001, 15 of the top 25 lenders or

60 percent of the top 25 lenders in the United States were not

strictly regulated by the Community Reinvestment Act. Since

Gramm-Leach-Bliley, which was 1999, depository institutions can

acquire a number of financial institutions, including insurance

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tions. That means that a depository institution which is subject to

the CRA can have a failure instead, can evade CRA scrutiny. This

demonstrates an incongruency between the CRA and GrammLeach-Bliley. As a result, there is no law mandating the majority

of most significant lenders have to meet the credit needs of their

communities, and currently no regulatory agency has the authority

to investigate the lending practices.

Ms. Jaedicke, who regulates insurance companies, mortgage

lending companies, security firms and other nondepository financial institutions?

Ms. JAEDICKE. There are a lot of different regulators for those entities. Depending on if it is a mortgage company, they may be regulated by HUD; if they are subsidiaries of national banks, they are

regulated by us.

Mr. KUCINICH. Now, that is—see, I just pointed out about

Gramm-Leach-Bliley, that there are nondepository institutions that

are exempt.

Ms. JAEDICKE. That are exempt from CRA, sir?

Mr. KUCINICH. Yeah. A depository institution which is subject to

CRA can have affiliates that evade CRA because of Gramm-LeachBliley, which includes insurance companies, security firms, mortgage companies. These are, by definition, nondepository institutions.

So I want to go back to the question. In light of the CRA, which

is what we’re talking about, these firms essentially in terms of

CRA aren’t regulated, right?

Ms. JAEDICKE. CRA applies to depository institutions, that’s correct.

Mr. KUCINICH. That’s the point. Unless somehow they are selected to be included in the exam by some, which is unlikely. Would

everyone agree with that? OK.

So the affiliates’ lending practices if—really don’t get reviewed if

their depository affiliates don’t elect to include them in the CRA

exam; is that correct?

Ms. JAEDICKE. Yes, sir. If the depository institution decides to include loans made by an affiliate because they are in their assessment area to get positive CRA credit, then we also attribute any

illegal or discriminatory practices that we find.

Mr. KUCINICH. But if they are not going to include them, they

are not going to be looked at right?

Ms. JAEDICKE. That’s correct.

Mr. KUCINICH. So isn’t it possible that a CRA-regulated bank can

move its financial assets to noncovered affiliates to reduce its CRA

obligations?

Ms. JAEDICKE. It is possible for them to move their assets into

other affiliate organizations, yes. And it might affect the CRA questions and issues. But you have to understand there are other regulatory agencies who could enforce the fair lending issues or deal

with illegal discrimination issues.

Mr. KUCINICH. Isn’t it possible for a CRA-regulated bank to build

wealth in its community while its non-CRA-regulated affiliates can

strip that same community through predatory lending or predatory

practices; is that possible?

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Ms. JAEDICKE. If the affiliate loans are not included in the bank’s

CRA rating in terms of getting credit for CRA, then the illegal

practices, discriminatory practices, don’t carry over.

Mr. KUCINICH. This goes back to the challenge that I posed to all

the members of the panel, and that is, does the CRA adequately

reflect today’s financial markets? And what I would like to hear

from you—in writing, really—is whether you think the CRA should

be revised to better reflect today’s financial markets. It would be

good to hear from you on that.

Does anyone else on the panel want to respond to that question

or the underlying spirit of the question? Does anyone have anything to say on the record before we move on? Anyone?

I want to thank this panel. You’ve spent a lot of time. We’ve been

here a few hours now and more than that. And you are each individuals who do have an in-depth knowledge of your institutions,

which favors the work of this committee greatly. And I look forward to working together with you on this.

I appreciate that you’re really making an effort here. And each

one of us represents some face of institutional power and responsibility, finds ourselves sometimes at a loss to be able to account

for the deficiencies in the institutions that we represent.

And so I appreciate your willingness to work with this committee, and I want to thank you for the time that you’ve spent. And

we’ll remain in communication on these issues. This panel is dismissed.

We’re going to call the next panel. And again I want to thank

you so much. Just a very important panel. Thank you.

We will be calling the next panel to come forward. As the panel

comes forward, I want everyone to know that this is the Domestic

Policy Subcommittee. We’re continuing our investigation of regulatory enforcement of the Community Reinvestment Act, and we’ve

had an excellent panel from various regulators who assist this committee in its ongoing probe.

I want to thank the second panel here for its participation and

for their patience, because we certainly have gone to great lengths

with the first panel. I thank the members of the second panel for

their patience in waiting to hear the testimony of the regulators.

In the interest of time, what we are going to do is, I am going

to make a brief introduction of each member of the panel, swear

in the witnesses and then go directly to their testimony.

Mr. Calvin Bradford is a Board member of the National Training

and Information Center, founded in 1973 as a research and technical support provider to National People’s Action and other community organizations. This is a group that builds grass-roots leadership, spearheaded the Community Reinvestment Act; and their

efforts have resulted in over $1 trillion to low- and moderate-income families across the United States through their aggressive advocacy on behalf of the public.

And this is a group that has been involved in more community

reinvestment agreements than any other organization in the country.

Thank you, Mr. Bradford.

Mr. Carr. Mr. James Carr is the chief operating officer for National Community Reinvestment Coalition, advisory member of the

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Federal Reserve Bank of San Francisco, Center for Community Development Investments. He has been with Fannie Mae Foundation,

director for Tax Policy, assistant director of the U.S. Senate Budget

Committee, has done work in various scholarly journals.

We appreciate you being here, Mr. Carr.

Dr. Richard Marsico.

Mr. MARSICO. Mister. I am not a doctor. My mother wishes I

was, but I am not.

Mr. KUCINICH. I had that same thing for a while too.

OK, Professor Marsico.

Mr. MARSICO. Marsico.

Mr. KUCINICH. Marsico, professor of law, New York Law School

and director of the Justice Action Center. Professor Marsico’s specialty is community reinvestment and fair lending. He has authored a book, Democratizing Capital, the History, Law and Reform of the Community Investment Act.

He is a graduate of Fordham and Harvard Law. Thank you.

Mr. Van Tol—is that correct—director of economic justice for

Rural Opportunities. It is a nonprofit. It works on building assets

and providing services for underserved individuals in communities

in seven States and Puerto Rico, the Rural Opportunities, Inc., one

of the largest nonprofit, first-time homebuyer programs in rural

United States.

Mr. Van Tol has been active on the National Community Reinvestment Coalition, was president of Fairness and Rural Lending

which works out of Wisconsin.

I want to thank you, by the way, for replacing Mr. Irvin Henderson, who couldn’t join us because of circumstances beyond his control. Mr. Henderson did submit his testimony; we are going to include it for the record.

[The prepared statement of Mr. Henderson follows:]

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Mr. KUCINICH. But I want to thank Mr. Van Tol for joining us

on such a short notice and coming in from New York.

I would ask the witnesses to please stand and raise your right

hands.

[Witnesses sworn.]

Mr. KUCINICH. Thank you.

Let the record reflect that the witnesses have answered in the

affirmative.

As with panel I, I am going to ask each witness to give an oral

summary of your testimony and keep the summary under 5 minutes in duration. Your complete written statement will be included

in the hearing record.

Mr. Bradford, let us begin with you. Thank you.

STATEMENTS OF CALVIN BRADFORD, BOARD MEMBER, NATIONAL TRAINING AND INFORMATION CENTER; JAMES H.

CARR, CHIEF OPERATING OFFICER, NATIONAL COMMUNITY

REINVESTMENT COALITION; DR. RICHARD MARSICO, PROFESSOR OF LAW, NEW YORK LAW SCHOOL, AND DIRECTOR,

JUSTICE ACTION CENTER; AND HUBERT VAN TOL, DIRECTOR, ECONOMIC JUSTICE, RURAL OPPORTUNITIES, INC.

STATEMENT OF CALVIN BRADFORD

Mr. BRADFORD. Thank you Mr. Chairman. My oral statement is

actually in my written statement as well, so I would like to take

my 5 minutes to address a couple of issues that didn’t come up before that I think need some attention.

First, I guess I would like to respond to some of the Flagstar

issues, because I was an expert in both of the Flagstar cases that

came up. And I’m kind of disappointed that at this point, after the

OTS has been asked about this since 2002, that they still don’t

seem to understand the case.

The first case wasn’t just a couple of applicants. There was also

a suit filed against them, based on testing, the Pattern and Practice case that they settled out of court. And the reinvestment activities that the bank was given credit for, that you mention, to compensate them for their record, were actually things they had to do

because of the settlement in Detroit—opening branches and

doingreinvestment that they wouldn’t have done on their own.

And, second, the Written Policy Statement case. In the 30 years

that I’ve been doing fair lending work, I’ve never seen a case or an

institution manage to make a plaintiff out of ever single person

who applied for a loan, but that’s actually what they did.

It wasn’t a small case. It involved the entire Nation. It was a

written policy for their entire mortgage operation. And what happened was, applicants had a case because they were charged too

much for loans.

It also turned out that the African American applicants had a

case. Because the brokers couldn’t charge them as much for a loan,

they didn’t make as many black loans as they did before, and so

they were discriminated against too. And for the OTS not to understand what a fundamental violation that is of the Fair Housing Act

and to come here, I think, and to try and defend it as something

positive the bank was doing is so fundamentally wrong that it

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makes you concerned about whether they even understand what

the Fair Housing Act is all about.

The second issue, I guess I think we could spend a little moment

on, is talking about the affiliate issues because we could cover that

a little more.

For one thing, if you look in the CRA process, a lender can

choose to include the affiliates in the analysis, so they would be included. But then when you look at the fair lending record, the regulators look at the fair lending exam, the fair lending exam specifically excludes anything about the affiliates. In fact, they are prohibited from even talking to the affiliate as part of the exam process. So you’ve got another incongruity there about these things

matching up.

Now, in my own testimony, I realize that, just using Citicorp as

an example and not claiming there’s something wrong with their

lending, you see some issues about the affiliates that relate to the

representative of the Comptroller’s comments. Just because the affiliate is included in the CRA exam doesn’t mean that it got a fair

lending review.

Because of the way they look at it—for example, there’s a

Citigroup company called Citicorp Trust. Citicorp Trust makes

thousands of only subprime loans across the United States; its only

community reinvestment area is Wilmington, DE, but it operates

nationwide. So its CRA exam only covers Wilmington, DE. It works

through Primerica, the largest financial services company in the

country, which is part of Citigroup. And it only makes refinanced

loan consolidation, debt consolidation, refinanced loans; and it has

a special office which is mentioned in the CRA exam by the OTS,

whose sole purpose is to solicit existing customers, essentially flip

the loans.

I’m not saying they did something wrong on these loans, but they

give them an outstanding rating because they had more loans in

low-income neighborhoods than any other lender. But that’s precisely the concern we have had about subprime loans; there are too

many of them in low-to-moderate-income neighborhoods.

So in the CRA exam process they make no effort to look at the

nature of these loans and the way they were marketed and the

substance of these loans. So even when the affiliate loans are included, they may be included in this process in a way that’s really

detrimental to the community.

And the other issue I discovered was that even though this company makes thousands of loans, one of the largest subprime lenders Citibank has around the country, when other Citigroup subsidiaries, savings and loans and banks, elected to include all their affiliates, neither the OCC or the OTS ever included the loans of

Cititrust, this big, major subprime lender, it seems to me, a clear

violation of the rule that you are supposed to include them.

In Chicago, for Chicago’s Citicorp Savings bank, that actually

meant that in their CRA areas, in 1 year, 85 percent of the

subprime loans were not included; and for the next year, it would

have increased the level of subprime loans by over 600 percent had

they included this affiliate. So they are just plain not included, and

it seems to me we should be concerned about that.

So I would have those issues.

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The other issue I’ll mention just before I stop is that if you look

at the CRA exams, in the fair lending part it says that you’re supposed to look at the fair lending exam. If you look at the fair lending exam, it tells you to go look at the CRA exam. The CRA exam

you’re supposed to look at because it is going to tell you if there’s

racial discrimination.

But under the CRA, there’s no analysis done by race, so it

couldn’t possibly tell you about race discrimination. And these have

been on the books now for over a decade. And you would think that

agencies that seriously were concerned about fair lending would

have eliminated this obvious and clear incongruity in these kinds

of things.

So I’ll just end there because I know you have the whole written

statement. Thank you.

Mr. KUCINICH. Thank you, Mr. Bradford.

[The prepared statement of Mr. Bradford follows:]

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Mr. KUCINICH. Mr. Carr.

STATEMENT OF JAMES H. CARR

Mr. CARR. Good afternoon, Chairman Kucinich. On behalf of the

National Community Reinvestment Coalition and our 600 community nonprofit members across the country, we are honored to have

the opportunity to speak to you today about this important act.

Since its enactment in the late 1970’s, the Community Reinvestment Act has leveraged more than $4.5 trillion of loans and investments to families and individuals in the communities that have

been most challenged in accessing credit. And lots of organizations,

including Harvard University, and key Federal agencies, including

the Treasury Department and the Federal Reserve, have concluded

that those loans were done in a safe and sound manner.

Those investments have helped to build homes, launch or expand

small businesses, build important community facilities and grow

the wealth of otherwise financially vulnerable families. Yet despite

all of its success, the goals of CRA have yet to be fulfilled.

Between 9 to 22 million households do not have a relationship

with a major bank or savings institution. At the same time, millions more only have tenuous ties. And over the past decade and

a half, high-cost lending has grown exponentially, disproportionately in moderate-income and minority communities.

Since 1993, for example, payday lending has grown from a modest 300 establishments to more than 25,000 to date. And we all

know the story of subprime lending and, particularly, predatory

lending and the disproportionate impact it has on minority and

low-and-moderate-income communities.

In my written testimony, I highlight six recommendations that,

if enacted, could greatly enhance the effectiveness of CRA to increase credit and capital and other banking services to disadvantaged communities; and they include such things as mandatory inclusion of nondepository affiliates and CRA exams, as well as the

inclusion of institutions such as credit unions and mortgage companies under CRA. We recommend a series of provisions related to

fair lending examinations, specifically, as well as a number of recommendations related to the assessment areas and how those procedures are developed.

In conclusion, let me just say, the consumers that function outside of the financial mainstream often operate in a cash or informal

economy. A large and growing informal economy is not in the best

interest of America. Financially stifling homeowners with unfair,

unreasonable or otherwise deceptive and costly mortgage products

is not in the interest of America. Families with negative savings

rates are not in the interest of America. Communities unable to tap

the credit markets for responsible and critical community facilities

is not in the interest of America.

In 1960, Mr. Chairman, we put a man on the moon. It is hard

to believe that 40 years later we can’t put a consumer in a bank.

In many respects, it is not a lack of will; rather, it is a lack of

want, and that is a want to achieve on this important goal. It is

not a dearth of financial expertise; rather, it is a lack of appreciation for the value of achieving that goal.

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Achieving the goals of CRA are in the best, long-term, future interest of America, of our economy, of our society. But those interests cannot be measured by quarterly earnings, the principal gauge

which businesses use to determine opportunity.

As a result, in addition to repairing the fabric of CRA so that it

can achieve its important mission, we also turn to you and encourage you and ask that you work with us to help inspire the business

community to do what currently it is not doing. And that is inspiring them to reach out and affirmatively want to help to improve

markets that don’t function effectively in this country.

At the end of the day, we know that when America is inspired,

it will achieve. We put a person on the moon because we decided

we needed to do that, and we were committed to it, and we did it.

There is nothing stopping us from succeeding in our goals on CRA

except the will and the want and the understanding that it is in

the national interest.

And with that, I’ll conclude; and I’m prepared to answer any

questions you might ask.

Mr. KUCINICH. I thank the gentleman.

[The prepared statement of Mr. Carr follows:]

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Mr. KUCINICH. Professor Marsico.

STATEMENT OF RICHARD MARSICO

Mr. MARSICO. Thank you. As I was listening to the testimony, I

found myself writing and rewriting my own oral testimony until finally I’ve thrown it out, and I have really two points that I would

like to make.

And the first point is that one of the problems with the CRA performance evaluations not reflecting bank performance is that the

agencies have too much discretion in evaluating banks and generally tend to exercise it in a way that overstates or overrates bank

performance.

No two CRA performance evaluations look alike. The agencies

have discretion about the criteria they will use to evaluate bank

lending, the benchmarks they will use to measure whether the

banks have satisfied the criteria, and how to evaluate whether the

banks have satisfied the criteria or not.

So, for example, a performance evaluation might state it is going

to look at the percentage of loans that the bank made to low-andmoderate-income neighborhoods. It will compare that, for example,

to the percent of such loans by all lenders in the community. And

then it will sort of say, the bank is closed, the bank didn’t quite

make it, the bank didn’t quite reach or maybe the bank did do a

little better than the benchmark.

But there’s no sort of definitive statement of whether the bank

has satisfied the criteria or not; and as a result, the agencies tend

to ignore bank performance that does not meet the criteria that the

performance evaluations have established. So they have this discretion to decide not only what criteria to look at and what the benchmarks will be, but then when the bank doesn’t meet the benchmark, they have the discretion to say, well, that’s OK we’re not

going to hold that against the bank and it will get passing grades

on the performance evaluation anyway.

So one thing I would urge the subcommittee to consider is whether there should be a standard set of criteria to use to look at bank

lending, a standard set of benchmarks; and then requiring the

agencies to make definitive conclusions about what happens when

a bank does not meet those benchmarks.

The second point I would like to make is that there has been a

lot of discussion about the fact that the agencies may not be taking

into account in the CRA evaluations the results of the fair housing

and equal credit evaluations that go on separately from the CRA

evaluation. And I want to make another related point, which is, the

agencies do not evaluate lending by race in their own CRA evaluations.

They evaluate lending by income, but they do not evaluate lending by race, the justification for this being that the community reinvestment statute says the banks have an obligation to meet the

credit needs of their entire communities including low-and-moderate-income neighborhoods.

The agencies have apparently seized on that to say, therefore, we

don’t look at race when we do these reports. I tend to disagree with

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ing, not just income redlining, and therefore the agencies should

take race into account when doing their CRA evaluations.

And the failure to take race into account has some very significant consequences. For example, you won’t see in a CRA performance evaluation report, generally, any statistics that would compare a bank’s subprime lending on the basis of race. You won’t find

what we might call ‘‘disparity ratios’’ in there that compare the

percentage of African Americans who receive subprime loans or the

percentage of whites who receive subprime loans, because they

don’t look at race.

So the evaluation report can show a lot of lending in low-andmoderate-income neighborhoods, but might not show that lending

might be because they are making a lot of subprime loans and that

those subprime loans may be disparately distributed based on race.

So my two points would be, simply create some more accountability in the CRA exams by establishing set criteria and benchmarks

and what will happen if the banks don’t reach the benchmarks, and

require the agencies to consider lending by race when they do their

performance evaluations.

Thank you very much.

[The prepared statement of Mr. Marsico follows:]

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Mr. KUCINICH. Before we go to Mr. Van Tol, I would just like the

committee to take note of something that Professor Marsico just

said. I think it would be helpful if we put some statistics side by

side: the number of subprime loans, the number of loans generated

in an area, the percentage of those loans that went to minorities

as prime loans, the number of subprime loans that were generated,

the percentage that went to minorities.

Now, we’ve done half the equation, I think, already for this committee. But I think it would be helpful if we put them side by side

because that would then get to your question. And then, of course,

you look at the number of CRA reviews and the number of favorable reviews, number of unfavorable reviews, and then we know

where it goes from there.

So I just wanted to just stop the music for a second. Let’s go back

to Mr. Van Tol.

You are recognized. Please proceed.

STATEMENT OF HUBERT VAN TOL

Mr. VAN TOL. Good afternoon Chairman Kucinich and Congressman Cummings. My name is Hubert Van Tol, and I’m the Director

for Economic Justice for Rural Opportunities, Inc., in Rochester,

New York. Thanks for the opportunity.

Our organization is a member of the National Community Reinvestment Coalition, and we support the comments and written

statement of Jim Carr on NCRC’s behalf. Today, I want to speak,

however, as a long-time grass-roots CRA activist who has found

and still finds the CRA law an enormously powerful tool for individuals and organizations that do grass-roots community development work.

In my limited time today, I’ll just touch on the way that discrimination in lending has become more subtle and more damaging, and

the failure of the regulators with their use of the fair lending exam

and the CRA exam to keep up with the changes in lending.

I first became aware of the Community Reinvestment Act in

1985 while working for a local community development corporation

in Memphis, TN. At that time, discrimination in access to credit

was raw and blatant. For instance, we found lenders whose mortgage underwriting guidelines explicitly stated that they would not

lend in areas of incipient decline. Their guidelines specified minimum loan amounts that excluded most of the houses in the African

American neighborhoods in Memphis.

Mr. KUCINICH. Would you state that again?

Mr. VAN TOL. Their guidelines specified minimum loan amounts

that would exclude by their size. There were $35,000 and $50,000

minimums, and in effect, the houses in the African American

neighborhoods were selling for less than that at that time. So they

would not lend to those areas because they didn’t meet their minimum loan guidelines.

There was bad home mortgage disclosure data. For instance, in

the case of one company, they showed the loans in inner-city Memphis averaging $1 million apiece. This is 8 years after the passage

of the CRA and 10 years after the passage of the Home Mortgage

Disclosure Act. And the regulators on their own had not come to

the conclusion that there were any problems with that.

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So it took community organizations like us really pounding on

them and using the bully pulpit and tool of public relations for a

year before the regulators began asking questions. And I think

you’re seeing an aspect of the same phenomenon now. It depends

on the leadership at the top and how their attitude toward consumer regulation happens.

In 1986, our organization attempted dialog with the banks, but

we didn’t really have dialog until the regulators got in there and

failed—well, they didn’t fail them on their CRA exam, but in two

cases we had them deny mergers and a new bank branch application, and that created the impetus for real change to happen.

But today, the discrimination for the most part doesn’t involve

access to credit, which was the issue then, but rather the fact that

minority neighborhoods are really targeted with inferior loan products, high fees, high interest rates, unfavorable terms. They are

targeted regardless of the credit scores of the individual borrowers

within those neighborhoods. And when a group of people are targeted for bad financial products, it creates a cascading effect, a selffulfilling prophecy, if you will, as they are so risky loan products

which, over time, put stress on their financial situations and have

the practical effect of driving down their individual credit scores

and making them, ‘‘riskier borrowers.’’

And the banks have really facilitated this shift by doing a poor

job of marketing in those neighborhoods, removing their branches

from neighborhoods. They provide the lines of credit used by the

brokers and the mortgage lenders. Some of them service those

subprime loans. The investment bank cited, the bank often is

securitizing those loans even while they are proudly saying that

the retail division doesn’t do subprime lending. So when a bank’s

fair lending examination is done, there’s no public indication that

this entire range of bank involvement in a subprime market that

targeted at minority borrowers is looked at. And in spite of the efforts of community activists, it is rare that a bank service an investment test, and the CRA exam itself looks at all of these issues

in a comprehensive way.

This has been the single most egregious area of discrimination

in lending over the past decade, this targeting of inferior loan products to minority neighborhoods, and it has really been the marketing that’s been a tremendous problem.

In the 21⁄2 years that I have been working for Rural Opportunities which, as you said, does work in seven States and Puerto Rico

and is one of the largest rural operators of the first-time homebuyer program, there have been no visits to me by a CRA examiner, or to my organization, to ask us what our opinion is of the

banks that they are about to do CRA exams on. And I think it just

reflects the fact that they have become much more lackadaisical

about this.

There is this attitude that works its way through the bureaucracy and the banks quickly lower their standards to the minimum

needed to get a passing grade.

Thank you very much.

[The prepared statement of Mr. Van Tol follows:]

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Mr. KUCINICH. Thank you.

Just to put this in context, I happen to be the Chair of the Domestic Policy Subcommittee. It is a committee that has a pretty

broad reach in every area in the government with the exception of

affairs governing the military and most of the State Department.

Years ago, 30 years ago, I was mayor of a city; I was elected

mayor of the city of Cleveland. I could see the kind of effects, beginning to percolate back then, of people not having access to credit,

which is why when at the first opportunity the city of Cleveland,

under my administration, pursued an action under the CRA

against an institution in a neighborhood known as the Kinsman

neighborhood in Cleveland, Kinsman/Mount Pleasant. And we saw

community groups participating because they were the first ones

that had the information about what the lack of access to credit

was doing.

And it wasn’t just for credit for the purposes of home ownership;

it was credit for small businesses, because people are trying to engage in some commerce in a community.

So I just want you to know that what you brought here, just as

individuals, is highly respected in terms of the commitment that

you make with your life in looking at these issues which are so devastating on a personal level. Because we sometimes get lost in the

minutia and broad, quantitative assessments that can be very devastating.

But when you take it down to an individual level, somebody has

great hopes: They are finally going to get a chance to own a home,

and somebody markets a loan that turns out to be predatory. OK,

no documents? Wow, we’re going to have our home. And we know

what happens from there. I mean, this thing is so broad it has

caused a shakeout on Wall Street—not a small matter. You know,

from Main Street to Wall Street we see what happens.

And, Mr. Bradford, deliberate subversion of the CRA, deliberate

effort to circumvent Federal fair lending laws, what do you think?

Mr. BRADFORD. I’m not so sure. I don’t know if it is deliberate,

but—it is more inconceivable, I guess, from my point of view. These

agencies have the regulations in the examination procedures that

say, you should look for redlining. They tell you how to do it. They

say to look outside the assessment area to see if they include them,

and then they don’t do that.

I think another example—again, from the OTS—that is of concern, I think people have been suggesting that if there’s any kind

of concern about discrimination, it shows up in the public evaluations. And that’s not true. The agencies are very protective of the

internal examinations they give them. And I know in a couple

cases I’ve been involved in, where attorneys have asked the agencies for copies of those, they’ve not only not given them to them,

but threatened to go to court if they tried to use them.

Mr. KUCINICH. So the agencies protect the lenders?

Mr. BRADFORD. They do.

But in the Flagstar case, the internal exam was submitted as

part of the trial record, so I can talk about that because it wasn’t

my responsibility.

Mr. KUCINICH. Please do.

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Mr. BRADFORD. And at that examination the OTS identified an

appraisal practice that Flagstar had that had a minimal appraisal

amount, and they wouldn’t make any loans to anybody below the

appraisal amount, which is pretty much like what you were saying

before. It is the classic kind of discriminatory-effect policy, not only

that the OTS had done a systematic analysis of the HMDA data

and the census data to show the bank that this had a disparate impact on minority neighborhoods; and yet when it came to the public

evaluation, they had that standard little clause that they could find

no violations of the Fair Housing Act.

Well, that just wasn’t correct because they had in great detail

shown these to the bank and required the bank to do something

about it.

So there’s always that. And I’ve seen it in other cases I can’t talk

about, because they weren’t a public trial record; but I’ve seen it

over and over again, that there are issues like that come up that

the public doesn’t know about. And so that gives me concerns.

I think, as I said in my testimony, they sort of treat the regulations like a kind of regulatory signing statement; that we don’t care

what the Justice Department thinks fair lending is, we get to reinterpret it ourselves.

And in the case of Old Kent that you were going through, for

them to say, well, it is a reasonable area because now, after 1995

when we changed the definition of ‘‘delineation of service area,’’ we

said you could keep defining these little areas where you made

your loans around all your offices and that would be OK. And so,

in the case of Old Kent, you just kept opening offices in the suburbs and making your little circles around them; and when you put

them all together you grieve the city of Detroit, but you didn’t

serve the city of Detroit.

And they said, well, that’s an OK business practice for the bank.

But in their fair lending examination, they say that would be a disparate impact; and the only defense for a disparate impact is a

business necessity, a compelling business necessity. The OCC says

it can’t be hypothetical, it has to be real, it has to be impending.

South Shore Bank’s only assessment area—it is called Shore

Bank now—in the city of Detroit, whatever bank is the city of Detroit. They make lots of money, they get outstanding ratings. So

evidently you can do business in Detroit in a profitable way. So

what would the business necessity defense be for Old Kent or anyone else; or in America Bank in Chicago or First Bank in Chicago,

both of whom had these amoeba-shaped areas in the suburbs? It

is inconceivable to me that the regulatory people don’t understand

their own regulations and don’t understand the fair lending laws.

So I guess they feel they are above the civil rights laws.

Mr. KUCINICH. Because in your written statement you said that

the CRA intended to prohibit discriminatory practices based on

race as well as income, but today only expressly prohibits discrimination based on income.

Mr. BRADFORD. That’s right. That’s because at the time when

Proxmire was proposing it and we were working on the language,

ECOA had just been passed the year before and the Fair Housing

Act had been in effect for a while and there had already been all

these redlinings. HMDA was just passed the year before that. We

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were told by the congressional aides and by the people drafting the

legislation that it would be just redundant to put that in the act,

everybody understood that was there.

But there’s no Federal protection by income, so they said, we’d

better put that in the legislation because even though race is clearly already covered, income wasn’t. So that’s why that survived in

the act.

Mr. KUCINICH. So how would the CRA be enhanced if regulatory

agencies automatically failed banks that have discriminatory and

other illegal practices?

Mr. BRADFORD. Well, I’ll give you an example. If you looked at

Flagstar Bank during the period these violations were taking place,

they went from an institution of $500 million to an institution of

$13 billion; that is, they increased their size by 26fold because they

had the privilege of inquiring and branching and merging with people during this time.

And if they’d failed the CRA, they probably wouldn’t have had

that privilege. So that’s a pretty serious issue for a lending institution.

Mr. KUCINICH. That’s actually the same question, sensitive question, I asked the representative of the Fed. Because if you get

failed at that first level when your worth is $500 million, you don’t

get to $13 billion.

Mr. BRADFORD. Well, that would be, what we all believe would

be the case.

Mr. KUCINICH. Well, but the point is, that is, if there is an active

regulation and people are failed or something else happens.

And that is that the volume of access increases to people in an

underserved population, low-and-moderate-income areas, as well as

by virtue of definition, people of color.

Mr. BRADFORD. Right. But the intention of the act at that time,

which I think still holds true, was to increase the access to prime

lending and to target prime lending, not to just increase the access

to FHA loans or subprime loans.

Mr. KUCINICH. No. I understand that. Good point, absolutely. I’m

glad you pointed that out.

But since today people of color end up, more often than not,

being in that low-and-moderate-income area, they have a disproportionate—a disproportionate burden if the CRA is not enforced.

And so, Mr. Carr, I wanted to talk about your testimony. You

discussed how banks make a significant amount of loans outside of

their assessment areas and therefore go undetected by Federal regulatory agencies. How can that be legally possible? Could you explain that?

Mr. CARR. Yes. In fact, because the procedures that define assessment areas generally require that a bank report within the

areas, which are defined as its assessment areas in which it has

CRA-covered institutions that have locations, the general location

around their bank branches, and so to the extent that institutions

are allowed to, they have affiliates that are not covered.

In one particular study which we examined, four major banks,

we found that as little as 11 to 13 percent of the total lending actually was covered, was concluded to be covered, because the instituVerDate 11-MAY-2000 11:12 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00202 Fmt 6633 Sfmt 6633 U:\DOCS\49624.TXT KATIE PsN: KATIE
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tions were not included in the review, the mortgage lending institutions were not included in the review. And what that does is greatly undermine any effectiveness of CRA enforcement for that lending activity.

Mr. KUCINICH. Mr. Carr, presently, banks, regulatory agencies

are only describing banking lending activities in one to three sentences.

How can community groups benefit from a more detailed description of the fair lending review in the CRA exam?

Mr. CARR. Well, that is one of the more odd and unusual circumstances in a major change from the 1990’s in which, in fact, the

Federal agencies used to provide detailed information about the

types of statistical tests that were employed. Was it matched, peer

testing, etc.; what types of statistical models were used, and on.

Today, the reviews are often in a sentence that just simply says

that a bank has passed its fair lending test. And what that does

is, it disallows community organizations and civil rights attorneys

and others who might have an interest in the act to actually explore what exactly was done, to comment as to whether there are

things that were clear omissions or where improvements in those

examinations could take place.

Mr. KUCINICH. Thank you.

Professor Marsico, in your written testimony, you mention that

community groups and banks can enter into CRA agreements

which are designed to redress weaknesses in the bank’s CRA lending records. In your opinion, do corrective actions agreed on by the

banks and their Federal regulators achieve the same goals?

Mr. MARSICO. I have not seen any of those corrective agreements.

I don’t believe that they are made public. And I think one of the

people today referred to those agreements, and I don’t think mentioned that they are made public, which, if true, is a problem. Because one of the reasons that the agreements between the lenders

and banks and community groups work is that they are publicly

made and they are agreed upon, and they have monitoring reports

that are issued publicly and periodic meetings with the community

groups to show what they are doing.

Mr. KUCINICH. So you’re saying the very lack of transparency on

agreements between banks and Federal regulators can constitute a

subversion of the principles of the Community Reinvestment Act.

Mr. MARSICO. Yes, I believe it should all be transparent. I don’t

why the results of the fair lending exams are not made public. The

CRA performance evaluations are made public.

Frankly, it is very odd when you get to the fair lending portion,

when it says the results of the exam showed no violation yet, they

don’t show you the results when they’ve just gone through 100

pages of information about the CRA record of the bank.

Mr. KUCINICH. I’m going to come back to you, but I want to introduce a member of our panel who has been an outstanding representative on so many economic issues affecting urban America.

Mr. Cummings and I have worked on a broad range of social and

economic concerns relating to access to credit, health care infrastructure. I want to introduce the distinguished gentleman from

Baltimore, Maryland, Elijah Cummings.

Thank you, Mr. Cummings.

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Mr. CUMMINGS. Thank you, Mr. Chairman. I have only a few

questions.

As I was sitting here, gentlemen, I was thinking when you’re an

African American in the position that I’m in and you talk about

race, or even if you’re white and talk about race, and you say that

people are being discriminated against and suffering, do you know

what people usually say? They usually say, Here they go again,

here they go again, it is all their fault. And when you come with

the kind of evidence that you presented here today, I mean, you’re

actually laying it out there. This is it.

And I was thinking to myself, a few years back we had a woman

who is now a bishop in the AME Church, Bishop Vashti McKenzie.

In Baltimore, one of the things that she did is, she began to look

at what the banks were doing. And she, I think, saw, for example,

that maybe African Americans were not getting the loans that they

were rightfully due, and started looking at a number of issues.

And so what she did was bring the churches together; and they

said, basically, if you want to do business with us—and they had

about, I can’t remember how many churches; probably 15 to 20

churches, thousands of people—you’ve got to come right.

This is where I’m going with this. I’m trying to figure out, how

does the—first of all, most people who are being victimized don’t

even know they are being victimized. And I’m trying to figure out

a two-track solution.

One track is, how do people come together and do things similar

to what, say, the church did; that is, try to come up with a remedy

where they force these banks to pay attention? Because I can tell

you, I live in the inner, inner, inner city of Baltimore, and there

are no banks. I mean, to get to a bank, I have to go at least a mile,

about 2 miles to get to a bank; and that’s not unusual.

I’m trying to figure out—you know, I really want to believe in

government, and I do to a degree. But government takes so long

to get stuff done. And I’m trying to figure out, if I’m talking to my

community people and they want to organize and figure out ways

to make the whole purpose of CRA do what it is supposed to do,

what do they do?

And then, on the other hand, what do we do in trying to tighten

it up on this end? Anybody? Do you all understand the question?

Mr. BRADFORD. I’ll give a couple stabs at it.

One of the things that’s discouraging is, the regulators, in 1995,

they took out some of the assessment factors that included the

community. They essentially cut the community out of the CRA

process, because they eliminated looking at how the lenders assessed credit needs. And so they made this a kind of a private deal

between the regulators and the banks.

And then, in 1999, as part of Gramm-Leach-Bliley, you got the

‘‘sunshine’’—what we refer to as the ‘‘sunstroke’’—provision, which

was really designed to intimidate community groups to say, if you

participate in making any comments and then you make an agreement with the bank, we’re going to hold all these sanctions against

you; but we’re not going to make the bank do anything or enforce

anything, we don’t even recognize the agreement as existing, but

we could take the money away from you and prohibit you from the

CRA stuff for 10 years.

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I don’t even know if that fits the equal protection clause in the

Constitution, but—that provision of Gramm-Leach-Bliley.

And then the Federal Reserve expanded that in the regulations,

and they said the definition of ‘‘agreement’’ is, if you go and talk

to a bank and say, We want these four types of loans; and then,

later on, without ever talking to you again, the bank has a press

conference—and this is an example they actually used in the regulations—and they identify those four types of loans. Even though

they are not going to do them the way you want it, the regulators

and the banks can declare that an ‘‘agreement,’’ and they can impose all these sanctions against you even though you not only

didn’t sign it, but you probably don’t even like it.

I mean, this is sort of congressionally mandated harassment of

the community people who are supposed to be involved, and it has

scared a lot of people off. There are a lot of brave people on this

panel and in Cleveland and Massachusetts who have stood up

against it, but it is a threatening tactic.

It is embarrassing to have my government do that to the very

people who have created the agreements. And these agreements

have been the basis of the most creative forms of reinvestment in

our country. That’s where—outside something like South Shore

Bank, that’s where all the best programs came from, the most creative programs.

In Baltimore, you’ve got to have mixed-use stuff because you’ve

got businesses and residential together. Banks didn’t want to do

that, so you had to create special programs. And neighborhoods did

that. They wanted to have stuff for side-by-sides and duplexes because a lot of housing was that way, and banks only wanted to do

single family; and so they had to create those programs themselves.

I don’t have to tell you about it, because Baltimore has one of the

strongest histories of this kind of development activity that we ever

had.

The first study that led to the HMDA Act was actually the study

in 1973 in Baltimore. So I understand what you’re coming to.

I think we’ve gotten to the point where you have to amend the

Community Reinvestment Act, to tell the regulators some of the

things that they have to do, because their discretion is never going

to work. I think, as the chairman found out before, they can’t pull

the trigger. No matter what you do to violate the fair lending laws,

they just can’t bring themselves to pull the trigger and give you a

failing grade.

So the law has to be changed to say, you have to include the assessment of whether there’s a disparate minority impact; you have

to decide, if people violate the law or do that, they fail. You have

to include all the affiliates and what they are doing in your assessment. If any affiliate discriminates, then the entire bank fails at

CRA, even if that affiliate is in California. We don’t care where

they are. You violate Federal laws in this country, you lose your

banking privileges, period.

You’ve got to lay it all out to them because they just don’t get

it. And then that will give the community people the chance to do

these things because I’ve been in it for almost 40 years.

Mr. CUMMINGS. How long?

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Mr. BRADFORD. Almost 40 years, before there was a CRA working with these things.

And nobody has figured out how to serve community needs like

the community. And I’ve evaluated these reinvestment agreements,

and I know other people on the panel have looked at these too.

And this is the most creative kind of stuff. We intended, when

we passed the CRA to create a development banking industry. And

it was only going to happen if the community people came into it

because the banks had no idea how to do it.

We’ve got the World Bank and everything else to help other

countries. We had nothing for the United States.

And we had South Shore Bank, and we had pretty impressive

agreements early on, but if the regulatory agencies just sort of

abandon this thing, we are losing the strength, and it has all come

from the community people.

Mr. CUMMINGS. Let me just ask you this. What part does the

Federal Reserve play in all of this? If any, I mean.

Mr. BRADFORD. They are the key. They write the regulations.

Mr. CUMMINGS. And they have a lot of say?

Let me tell you why I’m asking this. When we—I also serve on

the Joint Economic Committee, and when we were dealing with

subprime—we are still dealing with the subprime market and the

abuse. We wrote to Bernanke and asked him to lay out some guidelines with regard to avoiding making—we were trying to make sure

that people were protected as best the Reserve could do with regard to these subprimes. And I am just wondering—you know, I

am trying to think of all of the different kinds of methods that we

can go at this thing.

Because you know what I am afraid of is that—I can almost fast

forward—in 20 years a whole different set of people will be here.

Some of us will be in rocking chairs. And it will be people who have

been denied what the law said they should have gotten, and then

it will also have hit another generation, and we will be going

through the same stuff.

And I am just trying to figure out how do we—I hear you, but

how do we put brakes on this—and, actually, you know—cause this

gets kind of complicated, you know. And so, people—they lose their

attention with regard to this kind of thing, because a lot of people

don’t have a clue of what CRA is.

So—but, you know, just—and I will turn it back over to you, Mr.

Chairman. I am just trying to figure out how do we move from

square one so that we can actually have some impact—I just want

to finish this—so that we actually have kind of impact? Because I

mean we can wrestle and wrestle and wrestle and the only thing

we’ve done is, you know, messed up the wrestling mat a little bit

and that’s it. And the beat goes on. And I think people depend on

the beat going on. They depend on people not paying attention

while they get—while folk are getting rich.

And my last question is, you know, when I was a little boy, I remember specifically we would go downtown in Baltimore. There

were two stores in all of downtown Baltimore that would sell

clothes to black folks, and I was just a little kid about 5 years old,

and I will never forget standing in the long lines. And I asked my

mom, I said, ‘‘Mom, I don’t understand this. All of those stores out

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there and there is like 300 black people standing in line getting

school clothes from the one store.’’ I said, ‘‘Don’t those others stores

want to make some money?’’ I was just a little kid.

And so, I mean, and I am trying to figure out, do you all see this

as just blatant discrimination? Do you think people just have a

negative view of minorities? Do you think that they—there is some

kind of grand scheme to keep certain neighborhoods in a certain

state?

I mean, you know, going back to my example, there are people

who have great credit, they so happen to be African American, they

are whites, they are all kinds. But do you kind of just blanket out

a whole group of people and say, OK, later for you. I mean, is it—

are we that mean in this society? Do you think—you must have an

opinion.

Mr. CARR. I was going to say, if you look at most distressed

neighborhoods, you probably see a combination of things happening. One is financial vulnerability that predisposes people to being

taken advantage of, and then compounding that is active discrimination in the markets.

And one of the things that is just interesting is to see how regulation is often upside down, where the people who are most financially vulnerable receive the least protection from financial services

industry, from the regulatory agencies.

So, for example, if you look at the subprime lenders, the predatory lenders, in fact they were the least regulated entities. And so

why does that happen? It shouldn’t happen. And the reality of it

is that, for all of the weaknesses of CRA, there were a lot of things

that could have been done directly to better regulate the subprime

market, and it wasn’t. And so that is probably the greatest source

of damage to African American wealth at least for this half century, maybe for the entire century. The African American home

ownership rate is falling fast.

So to get to your question about what do you do, I think, first

of all, independent of CRA, we need to put into law effective regulations for those entities that are nevertheless serving those communities. You know, pay-day lenders, rent-to-own title lenders,

subprime lenders need better national regulations, specifically.

In our testimony, we say to some extent we bring those institutions under CRA umbrella, but that will only be good to the extent

that CRA is actually enforced. Which leads me to a comment that

I made at the opening of my statement which sometimes is considered or thought to be a throwaway line, but I don’t mean it to be

so at all.

I don’t think that there is a good appreciation for the value of

consumers who live in places like Baltimore and Philadelphia and

Cleveland and other distressed communities across this country. I

don’t know that there is a real understanding about the money

that flows through those neighborhoods and how in dysfunctional

ways it doesn’t, in fact, accrue to the national economic GDP the

way that it could.

And as minority households grow as a share of the U.S. population, one thing that would be interesting, I think, for the Federal

Reserve to do is take a look at the growing participation of minorities in the labor market and sort of ask, you know, sort of sceVerDate 11-MAY-2000 11:12 Jun 05, 2009 Jkt 000000 PO 00000 Frm 00207 Fmt 6633 Sfmt 6633 U:\DOCS\49624.TXT KATIE PsN: KATIE
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narios: How much better could the country be off if we were in fact

empowering them economically?

And then maybe Congress might have to do some exceptional

things like to empower and/or create financial institutions that aim

at those markets that have been historically discriminated against

for which there is enormous market failure and really experiment,

do some financial experiment, do some financial engineering and

bring those consumers into the 21st century of financial services

access.

I will just conclude by saying my real belief in talking about

these issues, just like the last panel, you can’t understand the rationale. It is unconceivable, and I wouldn’t have an answer as to

why we don’t just simply enforce the laws as effectively as we can.

So I would conclude that the value of doing it does not outweigh

all of the political challenges that are perceived to be faced by those

who must enforce it. I don’t know. Those are my own personal comments, not those of NCRC, but I share your frustration.

Mr. CUMMINGS. Just one last thing. As you were talking, I

couldn’t help but think about we used to—we just started getting

these Targets, and it is interesting that when you go to the Target

stores, they are packed with black people. I mean, before, Target

wouldn’t even come to these neighborhoods. But now they are

packed.

You know, usually Target’s claim to fame is that you don’t have

lines. Did you know that, Mr. Chairman? In other words, their

claim to fame is they want to appeal to people and they have

enough check-out counters. That is part of their scheme so that you

feel comfortable coming in so you can get in and get out. I mean,

they have all kinds of checkers in the black community, and they

still got lines.

What my point is is that something—somebody woke up to what

you just said and said, wait a minute, hold it. Oh, there are black

people. They do need trash cans. They do need, you know, diapers.

They do need—so let’s go there.

What took them years to even get there? Which is to me incredible.

Mr. Chairman, I know I have gone longer than you, and you

have been very kind.

Mr. BRADFORD. On the Target issue, it is interesting, because I

used to work in Minneapolis, which is where they are located,

where they are from. And in Minneapolis, nobody would build a

store in the inner city, and the neighborhood people demanded they

build a store, and they finally got K-Mart to open a store, and it

was the largest-selling K-mart store in their entire network. And

Target looked at that and realized that they had been avoiding

these neighborhoods.

And Minneapolis is not a, inner city place, let me tell you. But

then they began to realize there was market there.

It is like the community people have done the same thing. They

like to take the bankers and people on tours and say come out to

my neighborhood. You have never been to my neighborhood. You

drive by it in your car to get to work, but you have never been in

this neighborhood. And it has been like a conversion experience for

a lot of the really good bankers we worked with who come out

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there and realize what potential there was in those neighborhoods,

who never had actually been there before.

And I probably shouldn’t say this about a colleague, economic colleagues, but we need fewer economists making these decisions. I

mean, economists don’t even believe there could be discrimination

because it violates the rational man theory. You gotta have people

trying to make these decisions who have seen the world, who go

out there and talk to people and realize the potential. Because you

are right. It is there. And over and over again I have seen businesses find it, bankers find it, people go out in the neighborhoods.

They have to get their feet on the ground in the neighborhoods and

see what the potential is.

Mr. CUMMINGS. Thank you, Mr. Chairman.

Mr. KUCINICH. Mr. Cummings, this committee holds your participation in highest regard because, as you state, you come from the

inner city, the ‘‘inner’’ inner city. I still live in the city and have

for most have my life in the city of Cleveland; and I would imagine

that this Congress has changed dramatically over the last hundred

years, that there is probably not a lot of Members that live in the

inner city. And so, you know, we might have an eye that is trained

a little bit differently.

I represented the inner city in the city council. Mayor of Cleveland, State Senate, Congress, have an inner city district or district

that includes the inner city.

When you get into issues like this that have a powerful economic

underpinning, given the history of the United States, you cannot

separate the economic realities from race. Of course, we understand

that doesn’t mean that poor white folks aren’t dealing with the

same problems, essentially, in terms of lack of access to credit.

Matter of fact, the neighborhood that we looked at in Cleveland

that had over 50 percent of failure of loans and, of course, a rapid

rate of foreclosures, happened to be predominantly Caucasian. And

so there was a lot of poor people and moderate income people in

the same boat whether they were white or black. The point—and,

you know, we understand that.

As Mr. Cummings is talking about Target, here is what I am

thinking about. I am thinking about all of these people going to

Target, because that is the only place that might be available, and

I am thinking that all of these—most of these goods are made in

China. Think about it. You know, buy a washing machine, a bicycle, textiles, plants closing in the United States. Not work here.

Unemployment rises, particularly in inner city areas.

I mean, there is a cycle here. You can’t—it is interesting how you

can get into an issue like CRA and suddenly you can go back to

where is the money and where is it going. Because what is happening, what is happening and what we are seeing here is the wealth

being distributed to the top in this country.

Banks are engines for the redistribution of the wealth, and the

wealth goes upwards. CRA is an engine for a more equitable distribution. That’s what it’s about at its inception. The CRA doesn’t

work that well, it still goes up, and not only that but it will accelerate upward if the cop is off the beat, which is what happened with

the subprime loan and people were just—basically had their financial positions ransacked.

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So this committee, which is a domestic policy oversight subcommittee, understands the linkages and—because there are.

I want to conclude with a question to Mr. Van Tol and then see

if we can—if there is any final comments by any of the panelists.

Mr. Van Tol, how has your participation in the CRA process decreased in the past 7 years?

Mr. VAN TOL. Well, I think what we see happening with a lot of

community groups—we very actively work to keep involved in the

process, but among many of our peer groups and particularly in

smaller community development sort of groups, if they don’t see

that their efforts are having an effect with the regulators, they naturally drop off in their participation.

Mr. KUCINICH. So is the participation process different today

than it was in 1997, 1987?

Mr. VAN TOL. Well, I think during the Clinton years there was—

for a time, there was an increase in people who or banks who were

referred to the Justice Department. There was a feeling that taking

action at the local level had real effects and that you were doing

something good for your community.

When you start feeling—not seeing that happen any more, if you

are a busy person working for a community group, your natural inclination is to stop taking that action. If you—I mean, it is a

counter—it’s not a good thing to do, but it is just a natural thing

for people to do.

Mr. KUCINICH. So if you had access to fair lending review of

banks conducted by regulatory agencies, would that change participation?

Mr. VAN TOL. I think there is a whole series of ways. If Congress

would look at how to make the Community Reinvestment Act more

friendly to the consumer groups, more friendly to people in the

neighborhoods, to make sure that it was mandated, that during

mergers there had to be a public meeting—I mean, you could—the

groups, you know, represented on this table and nationally could

come up with a whole series of ways to make, to empower communities in the process. And, you know, that would be one.

You know, you could—right now, if there is a negative community reinvestment rating that a bank disagrees with, they have a

right to appeal that within the process. We, as community groups,

don’t get to see positive ratings and have a right to appeal them

downward. So the deck is stacked in a lot of ways in favor of the

lending institutions and against the community groups.

So I think if Congress could look at all of the ways that happens

and restack the deck so that there is a more level playing field, we

would feel more empowered, we would get more involved in the

process, and I think benefits would accrue to everyone.

Mr. KUCINICH. Each of the panelists has experience on this and

some of you, in your written testimony, have outlined improvements that you would recommend be made in the Community Reinvestment Act; and in light of the Gramm-Leach-Bliley, it would

be good to—and some of you have done that, but I think it is good

to inspect the implications of that and what might be able to be

done to strengthen the Community Investment Act or to change

that law as well.

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I would ask each of you if there is, based on what you have heard

today from the regulators, if there is anything that you would like

to submit for the record in terms of followup comment or analysis

or recommendations for legislative initiatives or reforms or any

area for further inquiry that this committee might look into. Because, again, this committee has a very broad reach, and there has

not been any regulatory enforcement in broad areas of our economy

for quite a while. This subcommittee intends to change that.

So you can be of continued assistance in our work, and we are

open to hearing your suggestions about what we might be able to

do with respect to the Community Reinvestment Act, to GrammLeach-Bliley, to any area that relates to your expertise in housing

and access to credit or anything else that might touch on the areas

that you have familiarity with.

So I would let each of you know I would invite you to continue

to stay in touch with the subcommittee and to give us the opportunity of your expertise in this and to thank you for your commitment to community. This is—each of you have reflected a long-term

commitment. When you—I am sure when you see the staggering

toll that it has taken on families in the subprime mortgage failure

and you see the lack of enforcement of the CRA, it can be very discouraging. But I think we can change that, and that is actually

what the work of this committee is about, by bringing the truth to

light and giving people a chance to, you know, look at what’s happening.

Are there any—before I conclude the work of this committee for

the day, do any of you have any final comments that you want to

make and, you know, feel free to right now. Anything? Anybody

want to say anything?

Mr. VAN TOL. I would just like to emphasize one point. I hope

as you look at CRA reform, this whole issue of assessment areas

desperately needs review. Because that system is currently broken.

You know, you heard some of the statistics from Jim about lending.

In terms of business lending, the same thing is happening. I look

at the rural counties of upstate New York, and about 75 percent

of the loans going into those rural counties now are credit card

loans from the urban center credit card lenders with no assessment

areas in those counties.

That same donut that you saw for Detroit, you could take—for

many lenders, you could look at the cities across America and all

of the rural areas in between that are left out of assessment areas

because they get jumped over.

Mr. KUCINICH. So there you could take the amount of credit card

loans that are going into rural areas and you could probably juxtapose it with bankruptcy statistics.

Mr. VAN TOL. I am sure you could. And it is just a problem of

having assessment areas tied to deposit-taking branches rather

than to where the institutions are actually doing it.

Mr. KUCINICH. So if the institutions aren’t out there to loan, then

what happens is that the next line of credit is a credit card, and

you also have—the staff and I were talking earlier about the issue

of marketing—you also have the extraordinary aggressive marketing of credit card companies, just extraordinary.

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I cut up most of my credit cards years ago because I started to

see the impact that it can quickly have on somebody’s budget. But

if that is the only way you can get access to money, you are stuck.

So that is an interesting area that the subcommittee could go

into, and I would like—again, I would invite your comments on

that and any guidance that you have on the issue of assessment,

how might we strengthen that.

Anyone else on the panel before—and thank you.

Mr. MARSICO. Just one quick comment, which is I think that the

Community Reinvestment Act works best when it empowers communities, and that has been most seen through community CRA

challenges to bank merger applications, and that resulted in the

most sort of innovative, affordable lending programs.

But, in recent years, the number of CRA challenges seems to

have diminished dramatically; and I think there are two reasons

for that. One is that rather than—the regulators actually during

the 1990’s used to push banks to reach these agreements with

groups, and it would let negotiations proceed while the communities were negotiating with the banks, and agreements would

emerge, and they were terrific. They included monitoring provisions and reporting requirements.

But banks then started to make these unilateral commitments,

and the agencies accepted them. So, you know, they weren’t negotiated, they don’t have monitoring, they just sort of say this is what

we will do, and then they report on their progress, and that really

takes the steam out of CRA challenges.

And the second point is the national scope of banks. It is very

hard to make a challenge when there are 150 metropolitan areas

that the bank serves. It is overwhelming. And, actually, you heard

before, you know, one of the comments was, well, if a bank is discriminating in one assessment area but not the others, well, what

are we going to do about that? Well, you know, that is the same

kind of attitude I find with CRA challenges. It might not be lending

well in one area but, well, it has 150 areas, so what can we do?

So I think putting some power back in these CRA challenges, it

would be a very important way to make the CRA work better.

Mr. CARR. I would just say very quickly the inclusion of nondepository affiliates of banks being covered under CRA is a mandatory necessity as well as reforming the assessment area. And then

also requiring that there be a direct focus on lending to minority

households and communities would go a long way toward, if not enforcing, certainly providing the kind of information that would

make it very difficult to hide and run away from the reality of what

is happening through major financial institutions as it respects

disenfranchised communities and households.

Mr. BRADFORD. I would just add, I think you have to review the

fair lending exam process itself. We do a lot of consulting with

lenders, and we look at their own lending regulations and guidelines, and I can tell you if any lender showed me the Federal guidelines, they would be in a heap of trouble in terms of their ability

to actually control discrimination. They are really kind of disgraceful.

Mr. KUCINICH. They are kind of?

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Mr. BRADFORD. Disgraceful. They don’t really cover marketing,

which is the main way in which subprime lending deceives people.

They don’t cover underwriting practices. They just say look at underwriting, but they don’t describe to people how they are supposed

to look at that and what to do.

Their statistical analysis only works if you have a lot of actual

minorities who applied. So if you are good enough to get no minorities to apply, you are exempt from their statistical analysis. It is

an absurd system of target.

And, also, they only target one focal point, they call it, or two

focal points. So even though they examine a bank, they will sort

of pick, well, this year we will look at marketing, next year we will

look at loans to single family homes, instead of looking at the entire package. There is no way in the world that a decent lender

who was trying to do their own internal process would ever set up

a set of guidelines like that.

Mr. KUCINICH. Well, this has been a very informative hearing of

this Domestic Policy Subcommittee, and I want to thank the members of the panel for their participation.

I want to note, as I did at the beginning of the hearing, that the

gentleman from California, the ranking member, Mr. Issa, was

called to California because of the very serious matter of the fires

in that State and in proximity to his district; and with his generous

consent we were able to move forward. Because our rules, unless

we have cooperative participation here, it doesn’t work. But he

made that possible, and I want to thank him and wish the people

of California, his constituents, well as they contend with this outbreak of fires.

This is the Domestic Policy Subcommittee of the Oversight and

Government Reform Committee. Our hearing today began at 2

o’clock—it is nearing 6 o’clock—on the issue of Upholding the Spirit

of the Community Reinvestment Act: Do Community Reinvestment

Act Ratings Accurately Reflect Bank Practices.

Our first panel had Ms. Sandra Thompson, who was the Director

of the Division of Supervision and Consumer Protection of the Federal Deposit Insurance Corporation; Ms. Sandra Braunstein, who

was the Director of the Division of Consumer and Community Affairs Board of Governors of the Federal Reserve System; Ms.

Montrice Yakimov, Managing Director for Compliance and Consumer Protection, Office of Thrift Supervision; Ms. Ann Jaedicke,

Deputy Comptroller for Compliance Policy, Comptroller of the Currency; and, of course, the distinguished gentlemen who are in front

of us, panel II: Calvin Bradford, Board member, National Training

and Information Center; Mr. James Carr, chief operating officer,

National Community Reinvestment Coalition; Professor Richard

Marsico, professor of law, New York Law School, director of the

Justice Action Center; and Mr. Hubert Van Tol, director of Economic Justice, Rural Opportunities, Inc.

This has been a very meaningful hearing. I want to thank Congressman Davis and Congressman Cummings for their participation. This committee will continue to delve deeply into this issue

and the economic implications for millions of families.

Again, thank you to members of the panel.

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This committee is adjourned. And thank the staff, too, very

much.

Thank you.

[Whereupon, at 5:52 p.m., the subcommittee was adjourned.

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