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Superintendent Richard H. Neiman's Remarks Before the CRA & Fair Lending Colloquium,
Las Vegas, Nevada



CRA & Fair Lending Colloquium
Las Vegas, Nevada

November 9, 2010

A. Introduction

Thank for you the invitation to speak here this morning, and thank you Ed for that warm welcome- you have quite an event to MC. This room is full and the conference is booked to capacity.  I see that as another positive sign of how engaged the industry is on regulatory reform and consumer protection issues.  Today’s Community Impact Award winners also exemplify this kind of dedication to helping consumers. Families in Mississippi and Massachusetts are better off because of the small dollar loans, financial education, and other innovative resources they provide.

The conference agenda is like a fair lending/CRA boot camp- there is a lot packed into these three days, from the basics of compliance to the more esoteric topic of statistical modeling.  This is a great forum to hear from regulators and industry leaders, share expertise, and develop best practices. 

Just over a week ago I was at another national fair lending event in Cleveland, Ohio, a large gathering of consumer advocates.  It is clear that different areas of the country are facing unique challenges through the foreclosure crisis.  Here in Las Vegas, there is a huge problem with underwater mortgages. In Ohio, there never was the same degree of boom in property values, but predatory lending and unemployment have still wrecked havoc. It was sobering to hear that in some neighborhoods in Cleveland, thousands of vacant properties are slated to be demolished.  The impact on families and communities of this foreclosure crisis makes the mortgage reform agenda all the more urgent.

In my remarks this morning, I would like to add to this reform message by highlighting two additional steps that would complement the consumer reforms under Dodd-Frank:
  1. Modernizing of the CRA; and,
  2. Establishing a national mortgage performance database, which would be a valuable fair lending resource.

B. Modernization of CRA

The first step is to modernize the CRA, to restore what was and is a great legislative tool from the somewhat static approach to implementation that has inevitably developed over time.  Even with the best of intentions, the regulatory process and quantitative examination ratings can lead to a “check-the-box” compliance mindset.

The federal agencies are currently considering revising the CRA, and much of the debate has centered around whether the scope of institutions subject to the CRA should be expanded.  While this is an important question, it should not divert attention from other pressing efforts to reform the CRA. I see three main ways to revitalize our approach and make quality, rather than quantity, the focus of CRA examinations.
  1. Ratings
    The first place to start is with the CRA ratings process itself.  Year after year, 85 to 90% of banks receive a “Satisfactory” rating under the current system. This uniformity reduces the value of the CRA as a tool for meaningful comparison. A more precise ratings scale is needed, to differentiate between banks whose performance is very good and those who are not making a real impact.  CRA evaluations should take into account a variety of factors, such as whether the bank offers safe and affordable products, including deposit products, and outcomes-based financial education. Expanding the rating choices to include a Low and a High Satisfactory would provide a much clearer picture to the public and to the institution, increasing confidence in CRA evaluations.
  2. Incentives
    Second, the incentive for banks to achieve an “Outstanding” rating should also be enhanced.  The financial crisis has shown the close connection between consumer protection and safety and soundness.  I suggest formalizing this connection.  The CRA rating should become a factor in the evaluation of bank safety and soundness through the “CAMELS” rating system.   A low CRA rating should preclude a high rating for the management portion of the CAMELS rating.
  3. Geography
    Additionally, banks should be encouraged to serve a wider geographic range of underserved neighborhoods by expanding the focus of CRA evaluations beyond the physical locations of the bank’s branch network.   For example, rural areas with few bank branches may be orphaned under the existing rules.   In particular, wholesale banks should be encouraged to work nationwide, recognizing that office location does not drive their business strategy.  Similarly, larger banks should have the option to include neighborhoods beyond their branch network in the community development aspect of the CRA review, perhaps subject to caps on the amount of qualifying activity. This would better align the method for delineating the CRA assessment area with business strategy and local needs.
The financial markets in this country are deep and diverse, yet millions of responsible Americans still struggle to obtain safe and affordable financial products and services. We cannot look at the CRA as solely a compliance obligation.  With the right adjustments, the CRA can exceed its past achievements and be an even more effective means for restoring trust in the financial system.

C. Mortgage performance data

Restoring the trust and confidence that has been badly shaken by the financial crisis also requires a new degree of transparency around mortgage servicing and loss mitigation efforts.  This is a huge topic, running the gamut from the disappointing results to date under the Treasury’s HAMP modification program to the foreclosure documentation scandal.  So in my time remaining, I would like to focus on just one part of the solution to this mortgage mess, but one I believe would bring multiple positive effects.  And that is the development of a national mortgage performance data reporting requirement both for banks and non-banks. 

Consider what HMDA data achieved in the world of new loan originations, as well CRA and fair lending compliance.  HMDA inaugurated a new era of openness and spurred the development of best practices and peer review. The same could be true for mortgage performance data.  For example, in fair lending, performance data would reveal whether there are disparities by race or geography in servicers’ decision whether to modify or proceed with foreclosure.  An institution’s record in responsible loss mitigation could also be considered when conducting a CRA exam.

A consistent concern expressed by all stakeholders- including industry, government, community groups, academics, and other policy makers- is that complete information on existing mortgage loans is simply not available.  The TARP Congressional Oversight Panel of which I’m a member held a housing hearing last month with the Treasury Department, and we hammered home our frustration as well. Especially since Treasury uses the high rate of proprietary modifications as a factor to offset the low rate of modifications under its own HAMP program.  We need enough information to evaluate whether those alternate modifications will really provide sustainable outcomes. 

Once a new mortgage has been reported on HMDA, however, it drops off the radar screen.  There are other sources of performance data, but each has some drawback. The HOPE NOW data is from a survey. The OCC/OTS mortgage metrics report is missing data for a third of the market and is aggregated at a high level due to its confidential status as supervisory material.  The State Foreclosure Prevention Working Group, composed of state attorneys general and state banking commissioners, also has valuable but partial performance data.  In this instance, federal preemption continues to be a roadblock to fuller information access. 

What this unfinished business shows at least is that diverse public and private interests have all recognized the need for complete performance data.  There is a real consensus forming, and the next step is to move from these provisional approaches into a formal and consistent data reporting requirement.

In 2009, we passed legislation in New York that required servicers to register with the state, and in 2010 we followed up with detailed business conduct regulations.  In these ways states that have been first movers can offer a template for national standards.   Our new rules in New York include provide the Superintendent with authority to require servicers to report vital data on delinquencies and loss mitigation to the Banking Department.  This could be a model for similar rules by the new Consumer Financial Protection Bureau or for Congressional action.  I am sympathetic to industry concerns that reporting data to scores of states could be overwhelming.  That practical concern is another reason why performance data should be required to be reported at the federal level and in a standardized format. 

D. Conclusion

In many ways, I think of fair lending and credit access under the CRA as twin issues that have defined my term as Superintendent.  The subprime crisis began to explode just as I took office in March of 2007.  I saw up close the devastating impact of irresponsible lending practices, which were disproportionately concentrated and often targeted specific minority neighborhoods, as in Brooklyn and Queens.  And the situation was made more tragic by the irony. These are neighborhoods that were historically redlined, then later became subject to steering or “reverse redlining” by predatory lenders.

And now these communities are concerned that the pendulum will swing back too far in the opposite direction, leaving them shut out of credit choices and victimized once again. This yo-yo treatment leaves many people understandably skeptical of financial institutions, and could lead to a reversion to the kind of credit vacuum that existed in the 1970s before CRA was adopted.

We should not accept a false choice between predatory credit and no credit.  Fair lending and CRA professionals working together and combining the insights of their respective disciplines can help ensure we have access to credit that is safe and affordable.  My hope is that constructive regulatory reforms can be an aid to this process, by bringing the clarity consumers and financial markets need to restore stability.  That includes more meaningful ratings systems for CRA and a public repository of data on existing mortgages.  Perhaps that sounds like tough medicine, but greater transparency is needed to better hold institutions accountable for their fair lending compliance. 

Thank you for your engagement in building a better consumer finance system, including through your participation in this conference.


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