Acting Comptroller Praises Progress in Community Development Lending, But Warns that the Financial Services Legislation Threatens Further CRA Gains

WASHINGTON, D.C. — Acting Comptroller of the Currency Julie L. Williams today praised banks for "thinking outside the box" in their approach to community development lending and cited securitization of affordable mortgages as an example of an innovation that could increase the flow of funds to affordable housing.

Although skeptics initially thought that securities backed by affordable mortgages would not find a market, those securities have proven attractive to investors, Ms. Williams said. One reason they have found a market is because the mortgage loans tend to have low pre-payment rates and therefore offer a reliable income stream for the life of the loan. In addition, low and moderate-income borrowers have proven to be as responsible in their mortgage obligations as users of conventional mortgages.

"Not only are banks major players in the affordable mortgage market, but they are increasingly market innovators," she said. "Low down-payment and second-look mortgage programs, housing counseling and home repair programs, and other new products and services introduced by financial institutions in recent years reflect their determination to make these loans and make them work — not simply as a compliance activity, but as part of a broad marketing strategy with real potential for mutually profitable relationships.

"I like to refer to this as a domestic emerging market," Ms. Williams added in a speech today before the annual policy meeting of the National Housing Conference.

Ms. Williams also told the Conference meeting that recent Community Reinvestment Act reforms have shifted the focus of bank compliance examiners to results — loans and investments actually made — rather than paperwork. The reform effort has been responsible for major increases in bank lending to low and moderate-income communities.

"We are proud of this progress, but by no means satisfied," she said. The OCC is now attempting to improve consistency in this area, both by working with the other regulatory agencies and through a number of internal programs. Among other actions, the OCC is attempting to improve the clarity of CRA performance evaluations so they will be more useful as a public document, and revisiting the measures used for assessing a bank's performance under CRA.

In addition, the OCC is considering a new strategy for supervising the CRA activities of large banks with multi-state operations. The "continuous supervision" approach under study would involve the establishment of a cadre of examiners who would, over a two-year period, evaluate a bank's CRA performance in each state or multi-state region in which the institution has operations. The continuous-supervision strategy is being field tested now, Ms. Williams said.

Ms. Williams also warned that legislation passed by the House and awaiting consideration in the Senate could undermine prospects for further progress under CRA.

"In my view," said Ms. Williams, " it would be a shame if the enormous progress we have made so far under CRA — and the possibilities that await us to do more for all bank customers — were sacrificed in a rush to pass legislation designed to benefit basically a handful of large financial firms."

H.R. 10, the Financial Services Act of 1998, would force banks to conduct new types of activities in affiliates that are separate from the bank and therefore not subject to CRA.

"If this law is enacted, a growing base of financial assets would not be available to enhance the ability of banks and thrifts to perform under CRA or to be considered in evaluating an institution's CRA performance compared to its financial capacity," Ms. Williams said.

"And, a growing base of financial institution assets would not be subject to comprehensive enforcement — including routine, on-site CRA examinations — currently applied to banks and thrifts," she added.

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